Wealth and Wisdom

My wife and I tend to be non-conformists. Don’t get me wrong, we don’t do things just to be different. We just tend to question group think and the common dogma that most people use to place their life on autopilot. Recently we’ve taken this to a new level. There were several areas of our life that were not to our standards. To make these changes we needed to examine several core beliefs.

An interesting side effect is that we are also examining other areas of our lives. What we’ve been finding is that some of our beliefs are not based on fact.

If you want to get ahead you must make your own decisions

It makes sense if you look at it. The only way to be exceptional is to be better than average. The average man (or woman) lets other people decide what what he believes. He also lives a mediocre life.

One key is to look at the facts that your beliefs are based on. Look at all sides. Look at the source of info. Do they have an ulterior motive? Are they truly experts? Does the information make sense? Can you confirm the information from another source?

You also have to know what you want out of life and what you believe in. For example, I discount most of the advice from nutritionists. Why? Because it has been proven scientifically that the food pyramid is wrong. The fat free craze has been proven wrong. I have seen the studies showing that it isn’t just a case of calories in vs. calories out.

In other words, I can’t trust their advice. Anything they say is suspect. I’d rather get my information from sources that are reliable.

Look no further than a cup of coffee…

First we saw a shift from cream to half and half. Then we saw a shift from half and half to milk or non-dairy creamer. The premise was that the fat in cream (or half and half) added empty calories and too much fat to your diet.

I decided to do an experiment. First I used cream in a cup of coffee. Next I tried it with half and half. My basis was to identify how much of each was needed to optimally flavor my coffee and which tasted better. What I found was that I required twice as much half and half. I also determined that cream tasted ~33% better.

Ultimately it nutritionaly made no difference. I was saving 3 calories (9 per day) and 1 gram of fat (3 per day) at the expense of 1 gram (3 per day) of carbs. All this for a less enjoyable cup of coffee.

Most people know the importance of cash flow. There are many businesses that look good on their income statement. It is only when you look at their cash flow that problems become clear. As a mentor often tells me

Cash is king.

Part of velocity is how quickly you get paid. How quickly do you invoice? What are your payment terms? How effective is your collections process?

Even more important is how quickly you turn your inventory. The best explanation I’ve heard comes from What the CEO Wants You to Know. This great book is a quick read and covers financial statements in a down to earth manner.

The author tells a story of street vendors in India. The vendors borrow money at 2.5% per month and sell items on a slim – 5% – margin. How can this work? Velocity. By turning the goods several times a day they pay for their product, pay off their loan, and still make a profit. The more times she turns her inventory the more money she makes.

Dell has turned velocity into an art form. Between their payment terms and JIT manufacturing they make a better profit. How does this work? A customer places an order and they receive payment from VISA (less than a week). The parts for the computer sit on a shelf for a short time (often days) and they pay for them on favorable terms (often net 45). This gap between getting paid and paying their bills is free money for Dell. They only earn a little interest on the money but that difference is big when you look at their volume.  It also has several other benefits:

• Improved profit
• Evens out their cash flow
• Leverage their profits. Since they have minimal Dell money tied up in the sale it increases their ROI.

I was going to write a post today but several articles popped up that I wanted to get to you.

Small Business Trends had a great article 5 Key Microbusiness Trends for 2009 that should give entrepreneurs hope. The big things I took out of it are:

• Microbusinesses (few or no employees) are going to increase in number. Part of this is due to layoffs. Part is due to needing additional money.
• Companies are going to outsource instead of hire new employees. This should be an opportunity for entrepreneurs who see the gap and fill it.
• Look to health care and fuels / alternative energy for growth. I also want to include education and infrastructure as I see the new administration spending big time in these areas.

At the Total Package (a great copywriting / marketing blog) Drayton Bird wrote a great article Yes, friends, it’s déjà vu all over again – five pieces of advice for the recession. In it he validates my position that it is in times of economic crisis that the greatest fortunes are made. In a nutshell:

• The economy doesn’t matter. What matters is your economy.
• Cher up: There are so many twits around that even moderate competence should see you through the gloomy times ahead.
• Cut the inessential costs that creep into your business. My <!– /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:”"; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:”Times New Roman”; mso-fareast-font-family:”Times New Roman”;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} –> corollary is that you need to make sure you are not making your living on those inessentials!
• Spend a lot of time on your website. It needs to accomplish its intended purpose. Are you looking to sell your product? Is it supposed to drive customers into your sales funnel? Lead generation? Newsletter subscription?
• Study: keep spending time and money on your (and employees) education. You will no longer be able to coast along as average.

Finally, Young Entrepreneur wrote The Entrepreneur’s Guide To Venture Capital – Recap. While I am not a big fan of VC for most companies I know some of you are looking at it. My personal view is to start small and grow using cash flow. That works in most cases but there are business models that are capitol intensive.

Small Business Trends published a post this week on entrepreneurial data. Some New Data on Entrepreneurial Finance is a great overview of a paper written by researchers Alicia Robb of the University of California at Santa Cruz and David Robinson of Duke University. The Capital Structure Decisions of New Firms is actually an easy read once you ignore the methodology and get right to the facts that this paper brings to light.

What I found most interesting is:

• Only 35% have multiple owners.
• 35% are sole proprietorships, 31% LLC’s, and less than 30% incorporated (8% are C corporations).
• Over 50% are operated out of the owner’s home.
• 86% are service businesses. 51% offer products.
• 60% have no employees (less than 8% had five or more employees).
• Only 45% had more than $10k in revenue their first year. 17% of new businesses had more than $100k. Almost 1 in 4 had no profit or lost money.
• 25% have more than $25k in profit in the first year of operation. 19% made zero or less.
• 33% worked 56 hours or more a week. 14% worked a normal work week. 19% worked less than 20 hours a week.
• The funding sources: only 25% take on personal debt (mostly credit cards). Only 5% go to family and friends for funding. Very few use equity (think venture capitol) as funding.

On the surface this may be discouraging. Few startups make enough money to feed the family. Half required a normal workweek (or more) to run.

Take a step back and consider the facts

It is only when you take a few minutes and consider the facts that you get a clear picture. Of course most startups make little or no money. They often have large initial investments to get operational that kill first year profits. You also have to look at how few businesses are started in an intelligent manner.

I’ve always asserted that most businesses fail because of poor planning and execution. I don’t know how many people I’ve seen start up without a plan, not knowing their customer base, and knowing little about their business itself. Many have no sales experience. This is a recipe for failure.

A telling statistic is that 80% of businesses fail, but 80% of businesses started by people with strong industry experience succeed.

A smarter way

The vast majority of businesses can be started up on a shoestring and in your spare time. This has several benefits, most of which are based on reduced risk:

• By putting minimal capitol at risk you have very little downside. It just adds insult to injury when your business fails and you lose your home!
• Starting part time allows you to keep your day job to pay the bills while you get up and going.
• Mistakes are less costly. It is easier to make mistakes-and learn vital skills-when you don’t have to worry about putting food on the table.
• Try out different ideas and businesses until you find one that works. This is much easier if each is a micro venture!
• Ability to scale up when you have a customer base, product / service, and you have proven the viability of your business idea.

What I wish was in the report

The report did not show the correlation between hours worked and revenue. It is too easy for a business to take over your life.

It also does not look at the entrepreneurial ability of the owners. Wait a second, isn’t any business owner an entrepreneur? Not even close. Most businesses are owned by someone who just created a job working for themselves. Entrepreneurship is a mindset. It is finding opportunity in chaos. It is finding gaps between your customer’s needs and the current marketplace. In that gap great opportunities lie.

I’m in a unique position to see the economy. I talk to everyone from product engineers to CEOs to salesmen to technicians. I call on everything from large engineering firms to chemical plants to refineries to small businesses. You could say I hit a pretty good cross section of society. Most of the work I do is forward looking and is for orders a year or more in the future.

One interesting thing I’ve noticed is the increase in fear and uncertainty. This is most apparent in employees-especially employees of large companies. Contrast this with my entrepreneur friends. They are remarkably calm.

I talked to a friend who started his own company back in 2003. For those of you who are not familiar with the oil and gas industry, this was the last major downturn. Business dried up and companies were laying people off left and right. His business grew 50% while everyone else lost half their business.

Mark had an interesting perspective that meshes well with my experience. His attitude is that this is a time of opportunity. Don’t get me wrong he doesn’t enjoy these downturns. Business is harder to come by, margins are tighter, and sales are slower. It is more stressful.

It just gives the small guy a decided advantage.

An entrepreneur can move and shift with changes much quicker than the competition. They can focus on the customer’s needs and mold their service to be an exact fit. The industry leaders-the 800 pound gorillas-are slow to adapt.

What can I do?

In June I wrote Recessionproof your Sales in response to rising concerns of an economic downturn. The advice is still valid today. Read it again and apply the principles.

Most companies immediately tighten up expense control and try to cost cut their way to safety. Cost control is always important-now more than ever-but it can’t be your only answer. It needs to be intelligently implemented.

The real answer is to go on the attack. You need to be aggressive and go after business. Spend more time listening to your customers. Note: I didn’t say talking, I said listening. Use their words to fine tune your product or service. Read between the lines and provide them what they need not what you want to supply. Make sure you have your own house in order and your top customers are not vulnerable!

It is also a good time to go after the competition. Look for customers that aren’t being taken care of. Look at their top customers who are frustrated by reduced service (remember, they are laying people off and can’t provide the same level of service). Now is the time to grow your market share.

What if I’m still an employee?

This advice still is applicable. Now is the time to listen to your customer and make sure the service they receive is impecable. Now is the time to grow your market share. If you sit back you will find yourself unemployed. If you become the rainmaker you will be the last person walked out the door-often after the owner himself! You also make yourself more desirable if you do need to find another job. People always want to hire top performers.