Monday, 25 November 2013
Billy's Seventh Law: There are two ways to go broke. No profit is the slow painful way – no cash flow is the fast painful way!
Financial Statements are the blinds drawn by accountants to keep the mangers in the dark.
John Cleese: The Balance Sheet Barrier
Of all the concepts I have taught and consulted on over the years, the most important is Cash Flow. Now I know what many of you are thinking…I don’t like ‘financial stuff’…I don’t understand ‘financial stuff’ … I don’t do financial stuff. As John Cleese said in the Video Arts production The Balance Sheet Barrier “We leave the financial arrangements to the financial people just as we leave the catering arrangements to the canteen people…We believe in trusting people.”
As an entrepreneur, you need to understand all aspects of your business. As your business grows and develops, this concept becomes increasingly important. Cash flow is one such area. Just because a business is profitable, doesn’t mean it has positive cash flow…and you need to have positive cash flow, or the ability to finance negative cash flow to keep your business running.
There are two places cash hides in a profitable business. (It doesn’t take a PhD in finance to see that a non-profitable business will eventually have a cash flow problem.) The first is Accounts Receivable and the second is Inventory.
The reason for the problem is that of simple timing. With an Account Receivable, you make a sale, send the invoice and then later (sometimes much later) you get the cash. The Collection Period is he time taken between sending the invoice and receiving payment. You often incur cash expenses and other costs as a result of making the sale but before the subsequent collection. This creates a shortfall; the cash collections have not yet caught up to the cash outlays. The period, between the cash expenditure running the business and the time taken to collect the cash creates a cash shortfall. You must either have sufficient cash to survive this temporary shortfall, or you must have sufficient borrowing capacity to finance the shortfall.
I have a short video on the effects of collection period on your cash flow found by selecting the link below:
The second common place cash hides is in inventory. Inventory is the cholesterol of business...it clogs up your cash flow arteries and kills your business. In most cases, you don't sell your inventory before you pay for it. This again creates a time lag between payment for inventory and sale of inventory.
When too much cash is absorbed in inventory and accounts receivable, there is not sufficient cash to pay the bills. Since you recognize sales on sending the invoice, and not on collection, and since you do not recognize purchases of inventory as and expense until you make the sale, the business may have a profit, and at the same time, no cash.
Every business, especially a growing business, must manage cash and measure working capital regularly. As your business grows, take time to plan. Forecast your revenues and expenses and then, for goodness sake, please, do a cash flow. It might well be the difference between success and failure. If you don’t know how, you can go to the Small Business BC website and take my cash flow workshop. These are now offered as a ‘Webinar Option’ so it doesn’t matter where you are, the seminar comes to you. Go to http://www.smallbusinessbc.ca/seminars and search for Cash Flow, part of the Business Viability Series.
A final thought, from Charles Dickens’s novel David Copperfield:
Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six…result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six…result misery.
Tuesday, 19 November 2013
Your Greatest Strength may be Your Greatest Weakness
Consider the following description of a potential new employee:
She is a self-starter...She is a loose cannon.
- She is detail oriented...She is 'hung-up' on minutiae.
- She works independently...She keeps important information to herself.
The greatest strengths are the greatest weaknesses. This dichotomy comes to light as entrepreneurs grow and develop their businesses. Sometimes the personal characteristics that make an entrepreneur great while starting a business are the same characteristics that prevent them from operating the business.
Sometimes in a job interview we hear the question, "What are your strengths and weaknesses?" Well they are often the same. Those same characteristics which are strengths are also weaknesses. I recently read an article in Bloomberg Business week about Jeff Bezos of Amazon. He is demanding, smart and constantly driving his company forward. He is also mercurial, condescending and harsh. He was once quoted in a meeting rhetorically asking “Did you take your stupid pills this morning?"
I am working with a company where the implications of this law are revealing difficulties today. The owner and founder of the company is a great guy. He believes in providing the best products, the best service, the best terms and the best prices. He is always willing to help out, even helping competitors who get into a jam.
These very strengths and strongly held beliefs have drawbacks. He had a slow paying customer who was having trouble paying. He gave my client the line "I just need to wait until I get paid." and "Don't worry, it's just a temporary problem." and later on "If you cut off supply the company won't survive and all these people will be out of work." The result was my client wrote off a $400,000 account receivable.
Customers often ask for rush jobs. Since service is a core company value, he incurred an additional overtime cost to deliver the rush. You would think that people would be grateful, but many of his customers began to ignore agreed upon lead times and the rush job became the norm.
I would never want to change this entrepreneur. He is truly one of the finest men I have ever met. He must, as we all must, look at ourselves and ask, "Are my strengths weaknesses?" A strong sense of self-awareness is an essential component of success in life and success in business. Sometimes we need help seeing the weakness in our strength. The self-starter sometimes needs guidance...the hard worker sometimes needs help ... the extravert needs to realize that not everybody will like him and highly driven entrepreneur must be careful not to ride roughshod over his or her employees.
I have read and heard many people pontificating on the characteristics of a successful entrepreneur. I have also seen many different kinds of people, with different skill sets, different cultural backgrounds, genders and levels of education both succeed and fail. In all that time I have only noticed two common themes. Successful people tend to have a high level of self-awareness and successful people take responsibility. Less successful people have little self-awareness and spend a disproportionate time making excuses.
So the next time you are thinking about your strengths you bring to the world of entrepreneurship, remember that you are also bring a weakness which may very well be exactly the same.
Tuesday, 12 November 2013
The First Immutable Law of Price...Prices are comparative.
The only people who care about your costs are you, me and your mother...and if you are from a dysfunctional family, it's just you and me!
Price is one of the most important and at the same time least understood concepts in all of business. On the one hand, you may know your costs cold...in fact it is crucial you know your costs, however, your customer neither knows nor cares about your costs. The customer cares about the price they pay for your goods or services.
To truly understand price (besides taking my pricing seminar or hiring me to advise you on price strategy) begin with the single most important concept in pricing:
Price is always comparative, never absolute.
In order to form an opinion of your pricing, your customers are comparing your prices to something. Sometimes it is a direct comparison with a competitor. Sometimes it is with alternatives you offer the customer or with a previous price. Sometimes it relates to some level of affordability or even a false notion of what the price should be, but in any event, too expensive or too inexpensive is compared to something.
In a restaurant, people tend to order from the central price points of the menu. It is amazing how often the modal price point is very near the median price point. The comparison moves the customer towards a central price...neither too expensive nor too cheap. The wine list is another matter all together. The modal wine price point is the second cheapest bottle on the wine list.
This has implications to menu design and price mix. You can move your customers knowing where they are most likely too look. Another tidbit, this one from William Poundstone's book Priceless. Price plays a greater role in decision making when the prices are right justified on the menu. (The price is more distinguishable and easier to compare to other prices.)
The pricing principle of price lining is based on customers choice. The notion of three price points representing good, better or best, tends to move the customer towards the centre, unless you move the middle price point. Moving the middle price point can affect buying behaviour, as good can look like better or better can look like best depending on where you have centred the middle price point.
Even a sale uses the notion of price comparison. This price is 25% off of the regular price.
I once taught a youth entrepreneurship here in British Columbia. We did a special version of the program at the Emily Carr University of Art + Design. As a part of the program, we applied classic pricing theory to art marketing. One of the participants held a gallery show about six months after the program and invited me to the opening. As the artists entered, she enquired how they liked the art...I got, "So Bill, what do you think of my pricing?" It was perfect. She offered a good price range, multiple items in the middle and one item at a very high price in order to frame her other paintings. In short, she applied classic price theory to her gallery showing.
So ask yourself, can you provide your customers with choice. In marketing, this is affected through your product mix... in sales it can be done using your sales presentation. (A mortgage broker may not affect interest rates, but can show the customers the rate, a price for money, )
Remember, if you do not offer your customers with choice, they will seek to find a price frame through comparative price. Create price within, and you can keep the customer from 'shopping around' as they feel they have shopped around within your 'store'. This provides your customer a sense of control meeting one of the most crucial needs in customer psychology.
Tuesday, 5 November 2013
Love what you do and love those for whom you do it
You've got to be able to see the beauty in a hamburger bun!
Ray Krok McDonalds
What I have just written may not seem consistent with the previous law. The truth is that there is a time for love, and a time for objectivity. (Wasn’t that in an old Byrds song?) The key to succeeding in business is truly believing in what you do – and truly believing that your customers get their money’s worth. Without this, it is hard to look yourself in the mirror in the morning.
Passion is powerful. Passion often drives behaviour. I read Steve Jobs biography by Walter Issacson. The book is filled with example of behaviour, often inappropriate, exhibited by Jobs in order to get the exact product he wanted. Passion is not rational, but drives us to greater things. Sports fans are...well fanatics. Their passion for their home teams can lead to riots in the streets, as they did in Vancouver in 2010 after the home town Canucks lost game seven of the Stanley Cup final. Passion is powerful, and successful entrepreneurs are passionate about what they do and harness that passion.
What you do can be great or humble – but you need to see the value in it before you can sell that value to the customer. Do you clean houses? Then know that cleaning has huge value to the customer. If you make computer games, then make sure that they are the most fun and challenging on the market. If you are in consulting, you must truly believe that your customer gets their money’s worth from your counsel and advice. The first person who must be sold is you!
JJ Bean is a coffee retailer and roaster based in the Metro Vancouver Area. Unlike many of the West Coast coffee shops, JJ Bean is a little different. John Neate, the founder of JJ Bean is a third generation 'coffee-man'. John's Grandfather founded Neate’s Coffee. John's Dad (John Neate Senior) helped build the company in to one of the two major restaurant coffee suppliers in the Vancouver Area. I knew John back in my university days you will never meet a more passionate guy. John is not only passionate about coffee, he is knowledgeable about coffee. He grew up with coffee, understands beans, roasting processing and all of the other things that make coffee great. He learned from his Dad, who I am convinced knew everything about both coffee and the restaurant industry he served. This is a perfect example of the passionate meeting the rational. The result...a highly successful business.
Sometimes you will fail. Somebody won’t like your store, your product, your service, or your advice. When I started doing seminars, I poured over the evaluations. I looked for the negative things. I didn’t care about those who loved the seminar, but rather I got upset about those who did not. I wanted everybody to like my “product”.
The truth is that not everybody will like your products. Successful entrepreneurs listen and learn...they anticipate customer needs before the customer knows they know they have a need and rationally and profitably meet that need.
This week’s quote comes from Business Week magazine:
I love children. They are my customers. I have to be informed about what they want to nibble, what they think and what language they speak.
Owner of Gummi bear maker Haribo, Who died on October 15, 2010
Posted by Unknown at 08:39