Rick's Small Business Blog

Moving On

2011-06-16T19:51:00.000-04:00

I am leaving the North Country SBDC to accept a position at a similar position in Grants Pass, Oregon. Since this URL refers to the North Country, I've created a new blog and migrated my old posts to:

http://smallbizrick.blogspot.com

For my few friends that follow this blog, please bookmark this new site. Get me some more readers and I may post more often!

Adopt a Family Business

2011-04-03T11:37:00.000-04:00

I wrote this article for Strictly Business magazine -

Adopt a Family Business

I have to admit, it has my entrepreneurial spirit has been fired up again and I have been thinking about my next "family business." What, when and where are questions that still need be answered, but I have a few draft plans in the works - stay tuned!!!

Show Some Love

2011-01-16T16:36:00.005-05:00

My office keeps a Facebook Page. We would love for you to "like" us, but more importantly, I recently posted a YouTube video that I would like you to watch, called "The Break Up." This humorous little skit speaks volumes about marketing and the power that social media can play in your efforts.

It is not my goal in this post is not to talk about how to use Facebook, Twitter, YouTube or other social media sites to market your business. There are plenty of social media wonks out there with blogs and articles on how to effectively utilized these tools. Dr. Jonathan Slater, a colleague at SUNY Plattsburgh, keeps this Google Bookmark that he continually updates with fresh articles about social media.

The intention of my post today is to help you think about the foundation of your marketing strategy. Whenever I discuss marketing strategy, I remind people that developing a message is not about sharing what you have; rather it is your ability to communicate what you have for the customer. As that YouTube video demonstrates, the consumer doesn't want a one way conversation. They want the opportunity to share and be involved in the dialog. Consumers want the producers to understand their wants and needs.

I can't stress enough the importance of emotion when it comes to purchasing decisions. We don't buy things because we need that particular item or service; we buy things because of emotions that convince us we want these things. Those who think low price is the only thing consumers care about are outright wrong. Don't believe me? Try to think about every financial transaction you made last month. Were there other lower cost options? If you really think about, the answer would be yes (choosing not to buy is a lower cost option); and if I asked you to justify why you purchase the things you do, my guess is there would be some emotional reasons that would be part of your answer.

As you develop your marketing strategy, my suggestion is that you start by thinking about why your customers would love to do business with you. Come up with all the reasons why you are more special then your competitors. To help you along, think about the 4 P's of marketing:

Product/service (perceived quality and friendliness)
Place (ease of possession)
Promotion (familiarity/trust)
Price (value)

Once you come up with some reasons why you are better, work on crafting your emotional message. What can you do to make your customers feel better about your business? There is nothing wrong with embellishing, as that as how you can develop a better emotional response; but you also want to be honest and sincere.

Most importantly, you want to monitor feedback and listen to your customers. Are they understanding your message? Are they telling you that they want something different?

This is where social media can really add value. Not too long ago, it would take significant market research efforts to find out what your customers think about your products or services. Now with Facebook, Twitter, Foursquare and YouTube, you have the power to quickly learn what your customers are saying about your business.

The business/consumer relationship, like any lasting relationship, should be based on communication and mutual benefits. It is much easier to build a bond with someone if you show them you care. Take that to the next level by showing your customers that you really listen...if you really want to stand out against the competition, use powerful emotional language and show some love.

How Do I Get a Government Grant for My Business?

2010-12-11T14:43:00.002-05:00

I decided to have some fun today. This is a question that I get asked quite often at work, so I created this little video:

Business Plan To Get a Government Grant

Navigating Uncertainty

2010-11-28T10:09:00.008-05:00

I am back from my self imposed sabbatical on blogging. I recently put together a presentation on growth strategies for small business and I have recently developed a forecasting template that analyzes past financial performance and allows a business to forecast different scenarios for the future based on managerial decisions business owners can make to increase profitability. It begins with the basics:

Increase Margin (raise prices, reduce supplier costs, increase productivity)
Increase Volume (get more customers or get each existing customer to purchase a bit more)
Decrease Expenses (reduce operating expenses by eliminating waste and negotiating cost savings)

There is a simple law of business management that holds true as strategies are developed to increase profitability - Every decision will have a consequence. Unfortunately, forecasting the results of decisions are based on numerous variables and unknowns. There is no certainty in the future and developing business projections involves taking the logic and facts of past performance and stepping into an abstract world of possibilities and uncertainty.

I stress this fact because anytime I present growth strategies that involve raising prices or increasing volume to clients, the most common response I get is, "Are you kidding? In this economy?" No, I am not kidding; whether times may seem good or bad at the present time, there will always be an uncertain future.

Our economy is a fluid that flows with the individual pricing decisions of producers and the purchasing decisions of consumers. It changes constantly based on a sum total of a series of small decisions made by business owners of all sizes; it is not a year to year change, but literally an hour to hour change. In the world market place there are many entrepreneurs who seek to chart a course to maximize their earnings in this great ocean of activity and there are others who just go where the currents take them.

Obviously, I support setting a course for action. Still, some will say that the tempest of today's economy leaves too much uncertainty. I struggle to understand that rationalization for inaction in business development. When was the future ever certain? Predicting the future will always be uncertain. We can't control the consequences, but we certainly have the power to influence them with our actions.

Business planning is about developing strategies to influence market share, and at some point an entrepreneur is going to have to take some risk and make decisions to increase market share and maximize profits. Getting more customers to purchase from your business may involve investing in more marketing. Perhaps there are more product/service lines that you can add to get more customers to purchase from your business, or you can increase your inventory to make sure you can have what your clients want, when they want it. Or maybe your product and services are slightly under priced and you have the opportunity to get a bit more value from each transaction.

Business is holistic process of decision making where you the producer develops a product or service that offers value to the marketplace. Consumers make decisions based on value comparisons that include quality, trust, service and ease of possession; while price certainly figures into that equation, it is not the be all end all determining factor. This past article in Bloomberg Businessweek sites an example of a combination of pricing strategies, marketing and quality propositions that have contributed to one businesses' continued success in making them a market leader, even in the gloom and doom world economy represented by our media. While I don't agree with all of the strategies noted in this article, it makes some interesting points about consumer behavior to stress that price is not the only influencer in purchasing.

As you develop your set of growth strategies, be mindful that what you hope to happen may differ from what actually happens. Any decision can have negative consequences if efforts made to increase profit come at too great of an expense. Pricing strategies need to account for a potential loss of sales volume, marketing plans need to produce results and production efficiencies need to be properly managed. No growth action plan is bullet proof.

So how do you control your businesses' destiny with so much uncertainty? Setting a course of action with clearly defined expectations of performance is the heart to any successful plan. Measure those results and make adjustments if the market reacts differently than expected. While this may sound too simple to be effective, I have found that few small business owners actually go through this process. When I ran my own businesses, many of my decisions were based on intuition and my judgment on effectiveness of decisions were often based on rationalizing success (who wants to be wrong?), rather than a fair analysis of actual net profit performance efficiencies.

I've since learned that a more frequent review of your P&L Statements and Balance Sheets will provide indications of whether your strategies are working effectively. Growth strategies should be based on a combination of profitability and return on investment efficiencies. Your financial statements tell a story of the past and improving performance is an exercise of replicating those successes and repairing any inefficiencies found. I can't stress enough the need to review return on investment in your growth strategies, as well as profitability. There are many tools at your disposal to increase growth and if you take a small net profit increase and look at that as a complete success, you may be missing other opportunities for growth that can give a larger net return on your efforts.

Another point I would like to stress is that profit growth strategies are as fleeting as the future; once realized, they are past history and the future will bring new challenges and opportunities. Business planning is a never ending process and it's never wise to fall asleep at the helm.

Vincent Van Gogh once said, “For my part I know nothing with any certainty, but the sight of the stars makes me dream.” Most business owners see a prosperous future in the stars, but it those who make a plan to reach for them who are more likely to achieve success.

In Memory

2010-09-10T23:58:00.003-04:00

I have spent my last three Septembers in Plattsburgh, NY. Each year during the second weekend in September, we remember the Battle of Plattsburgh, a pivotal battle that ended the final invasion by British troops in the northern states during the War of 1812. Each year we have a battle reenactment, a parade and a weekend full of festive events in Downtown Plattsburgh. The actual battle took place on September 11, 1814.

So tomorrow I will be out with fellow members of my Rotary Club at a series of events. I just got back from decorating our parade float. Tomorrow we will be preparing the track for our Roducky Derby and then sponsoring a Bed Race, both fundraisers that raise money for various local community service projects.

Of course, tomorrow is a day that is more nationally recognized for something else and my guess is that most people outside of Upstate NY know very little about the Battle of Plattsburgh. It is a day that will forever live in infamy and I still am personally haunted by the horror we experienced nine years ago.

For the rest of my life, I will never forget what happened on that day. We all have our own ways of dealing with that tragedy and I can't help but to get emotional on this day every year. I still feel sadness and vulnerability. Mostly, I still feel confused. I cannot fathom that there were people that would take such sophisticated measures to senselessly murder so many innocent and wonderful people.

Another thing that confuses me is how our society has responded to this. There is so much that I have heard over the past nine years that just doesn't make sense. Everyone is entitled to their opinion and their own way of dealing with a tragedy such as this, but that doesn't mean that I have to understand or approve of it.

There is always quite a bit of noise in the media this time each year and most of it just annoys me or makes me sad. What can I do about it? It is out of my control. Still, the phrase "Nine Eleven" makes me cringe every time I hear it. It has become too much of a catch phrase and I personally have a hard time with that.

I believe it should be a day to honor those who lives were ended prematurely. It is a day to remember how special those people were and and a day to comfort those who are still struggling to deal with such a tragic loss.

I choose on this day to remember one man who perished. He was not someone I knew very well. He was just a nice person who used to visit my place of business on occasion and who had some nice conversations with us while there. I happen to remember one conversation in particular, because it was shortly after the birth of my daughter. He took the time to congratulate me when he noticed the birth announcement by our cash register. He told me about his two daughters and how special they made him feel.

This man, Vic Saracini, passed away on September 11, 2001. He was a special person who shared a kind thought and I will always remember the way he spoke of how he loved his family. How can someone senselessly take the life of a person who had so much kindness in his voice, such a friendly smile and the sparkle of love in his eyes when he spoke of his beautiful children? Of course there is no answer to this, yet it happened. That is why I will always be confused.

There is a Garden of Reflection in Yardley, PA where people can go and remember Vic Saracini and some of the seventeen other loving people from Bucks County who perished on September 11, 2001.

"The events of this day cause every thinking person to stop their daily lives, whatever is going on in them, and to ponder deeply the larger questions of life. We search again for not only the meaning of life, but the purpose of our individual and collective experience as we have created it - and we look earnestly for ways in which we might recreate ourselves anew as a human species, so that we will never treat each other this way again." Dalai Lama

Priceless Opportunities

2010-08-31T10:02:00.000-04:00

This is an edited version of an article I wrote for the July issue of Strictly Business magazine:

Recently, our family had the good fortune of sharing a wonderful dinner with some friends who have a beautiful house on Cumberland Head in Plattsburgh. It was a gorgeous evening with the clouds shaded hues that ranged from bright orange to pink in contrast with the dark, blue water of Lake Champlain. From our location, Clinton Community College, the former Champlain Hotel, looked majestic sitting on top of the hill on the other side of the lake from Valcour Island.

Our gracious hosts grilled some sesame-encrusted tuna and served it with a nutty, Caribbean style rice and some blanched green beans in seasoned garlic butter sauce. With our meal, we enjoyed a glass of a full bodied, Lodi Zinfandel and spent some time sharing stories of our history, travels and children’s follies. To paraphrase the popular MasterCard commercial, Groceries - $40.00; Cookbooks - $40.00; bottle of wine - $18.00; a memorable evening – Priceless.

Why am I sharing this experience? Because there is a price that we are willing to pay for memorable experiences and this fuels a major driver to our economy. In New York State, the hospitality industry generates of $50.9 Billion in direct revenues. It employs over 650,000 workers and pays over $26.4 Billion in salaries. It is estimated that over $3.2 Billion in State and $3.5 Billion in local taxes are generated from this industry. According to a NY Department of Labor report releases in 2008, the tourism industry accounted for 4.9% of local jobs in the North Country and 12.8% and 15.4% of the employment in Essex and Hamilton Counties respectively. Similar ratios of what the hospitality industry contributes to the economy can be found in many other locales.

From an entrepreneur’s perspective, the attraction to the food and beverage, accommodation and recreation industries is very appealing. The reason behind this is that many prospective small business owners believe that they have the culinary talents or they have built accommodations in a beautiful setting that any visitor would appreciate. They may have detailed knowledge in their favorite recreational hobby and think they can be a guide or run a retail store selling and renting the supplies visiting enthusiasts need. The thought of profiting from doing something we love in a beautiful setting is a very enticing draw to self employment in the tourism, hospitality and recreational industries.

Unfortunately, these industries also tend to have some very high failure rates. There is much more to running a successful business than knowing how to cook, make up a room or providing recreational support. Successful business models require significant planning to develop effective pricing strategies, detailed market and competitive analyses and focused advertising strategies.

Adding to the difficulty of successfully operating tourism related businesses is the fact that many of the experiences can be effected by unpredictable variables such as the weather, natural disaster, human disasters (oil spill) and even disease outbreaks (Alaska lost a huge chunk of visitor traffic with the SARS epidemic in 2003). Tourists also tend to travel in groups, bringing different personalities, abilities and interests; many would agree with Jerry Seinfeld’s sentiment that, “There is no such thing as fun for the whole family.”

Despite these challenges, the opportunity remains for businesses to prosper from the wealth of hospitality and recreational opportunities in this country. The key to developing a plan that leads to sustainable success is to remain focused on creating exceptional guest experiences. Looking at some of the more successful restaurants, lodges and outfitters in the travel industry, there tends to be a bit more to success than just providing quality. It takes some talent and thought to develop something that provides the intangible value to make a guest experience special.

I can think of no person who best embodies the core to success in the hospitality industry than the great Walt Disney. There are certainly theme parks with better amusement rides, hotels with more comfortable accommodations and restaurants with higher quality food than what you can get at Disneyland and Disneyworld. Still, the vision and imagination of Mr. Disney created a brand that revolves around delivering memorable family experiences.

Walt Disney once said, “The era we are living in today is a dream of coming true.” For small business owners, opportunity has no boundaries for those who can imagine ways to provide guests with priceless and indelible memories.

Intangible Productivity

2010-08-22T09:19:00.009-04:00

I posted an interview the other day the Becky McRay had with Bob Phibbs, the Retail Doctor. Becky McRay is one of the contributors to Small Business Survival, a great rural and small town business resource website. One of the questions Ms. McRay asked was, "Limited workforce is another big issue in small towns. Are there special techniques retailers can use to manage their smaller workforce?"

I would like to take an unsolicited opportunity at share my thoughts on this question. I think many small business owners in rural regions often look at their labor pools as being a challenge due to the limited number of workers. I prefer to look at this as more of an opportunity.

There is an old saying used by HR professionals to "hire for talent, train for skills." In rural regions, there may be some limits to the number of workers to choose from, but there is a tremendous amount of talent to be found in remote regions. Talents include things like being polite, taking initiative and determination to exceed expectations.

In small towns, talents are often easier to recognize. As it is difficult to judge whether someone has talents from just a quick interview, the benefit of knowing a little background on a candidate prior the interview provides a huge benefit. Talents are often best recognized by some level of familiarity with the person and small business owners in rural communities should always keep their eyes open for those who display talents. Sometimes the best way to recognize talent is to notice that special teammate on a sporting team who may not have had the been the best athlete, but who always gave 100% effort and tried to be a helpful contributor to the team. Talent can be found in that Boy/Girl Scout, 4H club member or Key Club member who took the initiative to develop a special project for the county fair. Maybe you will recognize talent in that special volunteer at the local picnic who was cleaning up long after most others left. If you are not familiar with a particular employee candidate, it's not hard to find someone who is in a small community.

Once you recognize talent, making your company the employer of choice is the next task. While larger employers often have access to more resources and better comprehensive benefit plans, the intangible benefits of working for an employer that cares will often attract the best employees. You may not be able to offer all of the benefits that they offer, but by creating more pleasant worker friendly atmosphere, offering flexible scheduling and more personalized training your company stands a good chance of attracting that talent. Of course, should you attract that talent, personal recognition for a job well done and offering opportunities for growth within your organization may be necessary to retain those talented individuals.

I can't emphasize enough the dividends that talented employees offer an organization. Another competitive advantage small employers often have is that they don't manage by just the numbers. There is a recognition of what I refer to as intangible productivity.

With the five businesses that my wife and I have owned, we have had the pleasure to have many very talented employees and the success of our businesses was greatly attributed to their efforts. Productivity is something that can be measured fairly easily. At our bagel stores or taco restaurant, we could measure production times for various kitchen duties or sales per labor hour for our cashiers like other large corporations do.

Yet, beyond those measures, there are many intangible levels of productivity. How do you quantify the value of that worker that is willing to go the extra mile to make a customer feel special? Hidden in the gross sales of your income statement may be the sales from that one customer who patronizes your business over and over again because they like that special employee. The financial statements can't accurately measure opportunity lost when a customer walks out of a store simply because they found the atmosphere cold and impersonal. Small businesses have the competitive advantage in paying attention to these details and in training their workers to utilize those talents to help grow the business.

Furthermore, there is a team dynamic that often can't be measured. I compliment my wife for her ability to recognize the strengths of her workers and adjust the roles within the organization to get the most out who she has available for a more productive day. Large companies make the employees do the task at hand and rarely flex the tasks that need to be done to build a base of loyal customers around the strengths of the employees available at a given time.

As with many of my posts, the onus is on the small business owner to take responsibility for the leadership of their own company. Building a team that gives tangible results from the intangible productivity takes effort to coordinate the talents available and give them a clear direction. As H. Jackson Brown, Jr. once said, “Talent without discipline is like an octopus on roller skates. There's plenty of movement, but you never know if it's going to be forward, backwards, or sideways.”

Move your company forward by finding the the best workers and giving them the guidance necessary to enhance the profitability of your business.

Hometown Retailers

2010-08-20T08:13:00.004-04:00

I just want to repost this interview with Bob Phibbs, as I think he offers some excellent advice - http://bit.ly/d2v0C8

I will be adding a follow up response to one of the interviewer's questions in a later post, as it really made me think about some past experiences I have had with my small town businesses. I promise to write sooner!

Fool Me Once

2010-08-11T20:18:00.003-04:00

I made a very expensive mistake in helping my wife with her business. It is embarrassing to admit my foolishness, but hopefully my lesson learned may benefit some other small business owners out who will heed my advice to be very selective when choosing a merchant service provider.

Last year, I helped my wife choose her merchant service provider for her business. Unfortunately, I did not read our agreement carefully enough and recently had to pay some unexpected fees when she closed her account upon selling the business.

The reason I say unexpected, is because I thought I carefully questioned the salesperson on the phone about the terms of their merchant services. I asked very specific questions about discount rates, monthly fees and terms of service. He verbally told me that it was only a one year agreement (which we fulfilled), he clearly outlined the monthly fee for service, provided the discount rates and assured me that there would no fee for cancellation if we completed one full year of service. Unfortunately, what he said and what was written in the contract that my wife signed did not match up.

The reality is that I was not thorough enough in reading all the documents that he sent to my wife to sign after our discussion. I have no legal recourse and I have no one to blame but myself for not paying attention to the details in this merchant agreement.

If your business is considering choosing merchant services, I suggest reading this article of some fees you can expect to encounter when choosing a merchant service. 7 Merchant Fees to Look Out For. I provide the disclaimer that this is not an endorsement of any particular merchant account service provider.

Remember that a merchant service agreement is a legal contract and no legal document should be signed without some due diligence. When choosing merchant services, you should never feel pressured to make a quick decision. While not all salespeople are disingenuous, the reality is that most merchant service representatives get paid to sell services, not to help you understand the details in the contracts that you sign.

In my case, by not thoroughly reviewing the details in our merchant agreement, I cost my wife and I our planned summer vacation for this year. It was expensive, but this fool learned one more important life lesson. Sacha Guitry once said, "Our wisdom comes from our experience, and our experience comes from our foolishness." At least I can say that I gained some more wisdom.

It's The Value, Stupid!

2010-07-21T13:56:00.013-04:00

It was during the 1992 election, when Bill Clinton's campaign staff coined the phrase, "It's the economy stupid!" While this refrain has earned its place in our pop culture, it is more than just catchy slogan. It contains a valuable lesson, to not forget what the populace really wants.

This lesson transcends politics and could easily be applied to small business management and, more specifically, it relates to the core to developing a successful marketing strategy. Marketing is a complex subject and a single blog post could not come near to covering all the intricacies in developing a successful marketing plan.

As I work with my clients on their marketing, I often listen to them tell me about their ad campaigns and how they are going to market their businesses via brochures, newspapers, radio, television, social media and various other channels. Often they will talk more about their media rather than focusing on their message. When it comes to developing an effective marketing campaign, to paraphrase the political quote, "It's the value, stupid."

If a company hopes to be successful, it simply must provide some value to the marketplace. It doesn't matter how creative you may be or how much you spend, if the customers don't find value in your products or services, you won't have success with marketing.

I recently read an interesting article about the Old Spice Ad with the actor saying, "I'm on a horse." Despite the exposure this ad has had on national television, and the fact that this ad has resurfaced on YouTube and received an additional 2.9 million views, sales of the actual product being promoted have dropped by 7%.

Why hasn't the success in the number of views and popularity of the ad not been reflected in the sales of the product being promoted? While I certainly don't speak for every male who purchases body wash, I just don't find anything in that commercial that shows me the value of Old Spice body wash.

I find the commercial to be silly and perhaps there is some entertainment value in the ad. Yet after watching the commercial a couple of times, I noticed that the actual "Old Spice" product or logo is only visually displayed for 13 seconds of the 30 second commercial. The name "Old Spice" is only mentioned twice. While I didn't do scientific research on this, my guess is that more people refer to this commercial as the "I'm On a Horse" ad rather than the "Old Spice" ad.

Perhaps the ad is clever and memorable enough to get past the lack of product placement, but it still does not give me the desire to go out and buy this body wash. Maybe it is because he is addressing the ad to women and I happen to be a man. Let's assume for a moment that it was my wife who made the body wash purchases in our household (which is not the case) and she was swayed by the line, "sadly, he's isn't me...but he could smell like me." How do you think her insecure husband would feel about this? Even if I was secure, do you think I would appreciate getting this body wash from her? Does the advertising agency not get this?

We live in a world with a fickle marketplace, where emotion often trumps logic when it comes to studying the results of past marketing successes. While some marketing success stories may seem baffling, one can usually find a value proposition behind every successful campaign. Here is a link to an article on the top 100 advertising campaigns - Top 100 Ads. While I'm not familiar with all the ads, in most cases these ads clearly define some form of value proposition to go along with the creativity of the campaign.

When marketing a product, the heart of your endeavor is to convince the consumers that your product or service has some benefit to them that is better than what the competition has to offer. Looking at the successful campaigns, you can usually define what is special about the product. Sometimes, it is blatantly obvious such as Campbell Soup's, "Mmmm, Mmmm Good," which is clearly promoting that their soup tastes good. Other times, the value proposition may be a bit more abstract, such as Nike's "Just Do It" campaign. While this ad campaign did not spend much time highlighting anything special about a specific Nike product, their is no denying that clear intent to associate the brand with athletics, fun, style and achievement.

As you search for a value proposition for your products or services, it is best to keep in mind the 4 P's of marketing. They are:

* Product (product/service quality)
* Price (fiscal value)
* Place (ease of possession/convenience)
* Promotion (branding and consumer recognition)

In one or more of the areas above, you should be able to differentiate what makes your product better than the competition. So before putting together an ad campaign that may achieve the viral success, make sure you have a message that will convert the views into sales. The market planning may not be easy, but the goal is simple - it's the value!

Going back to the Old Spice commercial, my guess from viewing that commercial is that they were trying to differentiate Old Spice as the brand for a "man's scent." Click on this link to an older Old Spice Ad. It says the same message, with a similar sense of humor. Yet at the same time, it would be inoffensive for either a man or woman to buy an Old Spice product after viewing this ad. Unfortunately, the "I'm on the horse" commercial sends mixed messages and both men or women could find reason to feel uncomfortable about buying that product after viewing that ad.

As I noted earlier, marketing is a complex topic and there is quite a bit involved in developing a successful marketing campaign. Winston Churchill once said, "However beautiful the strategy, you should occasionally look at the results." If your marketing is not producing the desired results, revise your strategy. But start with the basics - define the value!

Need Money?

2010-06-19T08:30:00.009-04:00

A short time ago, we had a small get together and two local lenders gave some "Straight Talk" about what it takes to get bank financing for your small business. We had some great questions from the audience and Lisa Roberts from Champlain National Bank and Allen Racine from Glens Falls National Bank provided some information on fostering better relationships with your banking partners.

One of the items that we discussed included dispelling the myth that "Banks only want to lend you money when you don't need it and they don't want to lend to people who need money." This is not a new sentiment, nor does it relate to the so-called "credit crisis" of the past few years. Mark Twain is reported to have said, back in the 19th Century, "A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain."

Banks need to lend money to make money and my guess is that most commercial lenders out there would welcome an increase to their business loan portfolios. Yet at the same time, we have to remember that bankers only make money on their loans if the customer can make the loan payments.

Both bankers noted that what banks do is "manage risk." They lend, using resources from customer deposits, money their clients require today and expect to be able to pay back in the future. For the privilege of getting this money in advance, the borrower pays interest to the banks.

Of course, there are no guarantees of future performance, so the banks are assuming risk in using their assets. Bankers want to help their small business clients, but they also have a responsibility to their depositors to carefully assess risk and ensure those loans are paid back. They manage this risk by using what is often referred to as the five C's of financing:

* Character - the borrower's credit history and demonstrated ability to manage financial responsibilities
* Capital - the borrower's willingness to invest their own funds as a part of the project (banks don't want to own 100% of a venture)
* Capacity - the borrower's earning history. Should a deal not go as planned, does the borrower have the ability to still service loan payments?
* Conditions - does the local economy or borrower's knowledge of their industry demonstrate a likelihood of success? Like most intelligent investors, banks also tend to manage diversified portfolios and try not have too many loans in one particular industry.
* Collateral - does the borrower have something of value to guarantee the payback of the loan?

The best way to show banks that you are worth the risk of financing is to develop a clear business plan. An effective business plan will address not only why you need money, but also that you have developed a course of action to be able to make payments on the loan. As Allen Racine said, "Cash flow makes loan payments," so any good business plan will have a detailed cash flow analysis demonstrating that you have developed a plan to keep your business operating and the ability to still make loan payments.

Quite some time ago, I referenced Robert Kiyosaki's book, "Rich Dad, Poor Dad." In this book he references a simple process for cash flow that shows investing in assets that generate income. It is this process that every borrower should keep in mind when they approach a lender for financing. Income generation and cash flow analysis must be clearly identified.

Think of the typical proceeds of financing. Maybe the borrower needs money to purchase production equipment, to purchase more inventory, to cover accounts receivable for an interim period or just to have working capital for operations.

While it seems like I am stating the obvious, that equipment, inventory, accounts receivable and operating expenses must generate a profit above the cost of financing to justify the need for that money. An effective business will not only show how the funds will be spent, but specific benefits that will be achieved from the use of those proceeds.

So if you are purchasing equipment, there should be some analysis of the productivity that will be gained from that purchase. If you need inventory, there should be some analysis of your mark-up percentage and your expected turn rate on that inventory. If you need money for accounts receivables, you should show your average days receivables, along with your profit margin on those receivables.

The most difficult financing is for working capital, as this is the most unsecured level of financing. If your businesses' income can't cover operating expenses, there should be a clear reason why, but more importantly, a detailed timeline explaining the temporary nature of this and a plan of when the profit from operations will no longer require this level of working capital. If you can't do this, borrowing money will only create more expenses, and therefore, more trouble.

There is nothing wrong with going to a bank and presenting a plan that shows that you need money. That is as long as you are prepared to show that you figured out a way to generate even more income from the use of those funds. My clients often tell me they could make more money if they had access to money. Yet telling me and showing me are to different things. For those who need money, be prepared to show a plan that quantifies how you plan to generate more profit from those funds. If you need assistance, stop by your local SBDC and we would be glad to help you in those efforts.

Social Media Symphony

2010-06-15T21:50:00.008-04:00

Today we sponsored a half day conference entitled "Demystifying Social Media." Our feature speakers included Joe Schaefer of Overit Media and SUNY Plattsburgh Communications Department Professors, Colleen Lemza & Dr. Jonathan Slater. We had 23 small business owners in attendance and some great information was shared by all.

I am by no means a social media maven and my lack of consistency posting to this site is one of the cardinal sins of blogging. Still, on occasion, I come up with a new posting and decide to share some information with my few faithful followers (thanks, Mom!) and those who happen to search the web for some business advice.

During my introduction to this event, I compared social media to a musical instrument. It is just a tool and what you get out of it is directly related to how skilled you are at using it. There are those people who use sites likes Facebook, Twitter and Linked In for fun or recreation. In their use of these social media tools, they have fun and make a lot of noise. Sometimes there is something catchy and entertaining, but more often than not, there is just noise. Sometimes, if it is out of tune, it can be downright annoying.

For small businesses who want to utilize social media as a tool to grow their revenues, they have to be careful to learn the proper techniques of using these instruments. Just using social media will not result in extra sales. Even though it can be a revolutionary marketing tool, the fundamentals of marketing remain the same.
You have to emotionally convince your potential customers that you have something that they value enough to purchase from your business. Those who effectively use social media, study the techniques to use these tools with care and continually refine their efforts to create beautiful messages that are harmonious with their customer's needs.

With social media, you are given tools to share messages about your business to the masses. If used effectively, you can create beautiful music that your customers can share with their networks of friends; sales can exponentially increase as they share your message with their friends. They may also take that extra step provide a testimonial that reinforces your message and provides instant credibility to your business. That's beautiful music.

Still, if used ineffectively, social media will not benefit your business. Social media is viral, which is good if your business message is catchy, like that #1 hit people want to hear over and over again. On the other hand, the viral nature of social media can be devastating if someone shares negative information about your business.

I don't want to scare you, the social media tools out there are fairly easy to use effectively. Some of you will be naturals at using these tools and others may need some instruction. I invite you to visit Dr. Slater's Google bookmark with some great articles on the effective use of social media.

Seth Godin, one of my favorite marketing gurus, once said, “Conversations among the members of your marketplace happen whether you like it or not. Good marketing encourages the right sort of conversations.” Like playing a musical instrument, there is an art to creating a good conversation about your business. If it doesn't come easy to you, consider working with some marketing professionals to help you craft that magic story. Then grab your social media instruments and create a symphony of success.

The Numbers Tell You What, Not Why

2010-06-08T06:53:00.007-04:00

Financial management of a small business is a challenging endeavor. For any business to succeed, cash must flow and profitability must increase at a rate that provides a reasonable return on investment. Yet the fluid nature of a business sometimes makes keeping track of performance as easy as nailing Jello to a wall.

I often remind my clients that "you have to keep score if you want to win the game." Good financial management of a business begins with keeping good financial records. Knowing what to track is the most important part of developing an effective bookkeeping system. Most businesses only have a few "key performance indicators" that will provide the vital signs for success. Reviewing these indicators on a regular basis will help assess the true health of your business.

For those who do not have a strong accounting background, I would suggest a little bit of independent study with some industry reports of financial ratios you should watch pertaining to you specific business. Ratios tend to be a good measure to compare your business against industry standards and any good financial analysis would consider measures of liquidity, profitability and return on investment. If you are not familiar with these terms, no worries, there is always time to do a little self study, talk to your accounting professional or you can visit your local SBDC.

As someone who had no accounting background before going into business for myself, I often made decisions based on intuition of performance, not the facts. It is amazing how many small business owners are guilty of making that same mistake. Sometimes, a quick review of financial performance will help you recognize that your intuition may have been wrong.

The numbers don't lie and if you are keeping good financial records, the vital signs of your business will become glaringly apparent; and for many small business owners, it is not uncommon to find these vital signs conflict with the owner's intuitive measures of performance (which is usually the checkbook balance).

I often tell my clients that checking account balances and profit & loss statements only tell a partial picture of their businesses' well being. The balance sheet is the only financial document that tells the complete story of financial performance. Because of this, I strongly suggest you maintain a bookkeeping that allows you to review a fairly accurate balance sheet on a monthly basis. By paying attention to some trends of key performance indicators on your balance sheet, you will have a better idea of the true health of your business.

At a minimum, the review should include:

Liquidity - is your cash balance in your checking account increasing? Are inventory levels and accounts receivables increasing or decreasing?

Profitability - did you have more income than expenses for this period?

Return on Investment - is the percentage of profitability divided by your assets increasing or decreasing? You may also want to measure this against just your fixed assets.

Again, there is no need to worry if you do not understand some of the financial terms and ratios being discussed. There is always time to improve your financial knowledge and I guarantee that a better understanding of finance will help you make better business decisions.

Keep in mind that the numbers will only tell you the story of what has happened to your business to date. The numbers can't tell you why your performance has improved or declined. Knowing why your business has arrived at its current financial state is always going to be a challenge. Sometimes the reasons are very apparent, but other times, it may be a combination of factors. In some cases, the causes may be mismanagement and an honest assessment of your management decisions should be part of the process.

No matter what the reasons may be for your performance to date, there is always hope for a better future. Tomorrow's balance sheet is always going to differ from today's if you are conducting business. By learning the lessons of how your business has performed to date you can develop plans to improve for the future.

Once you have honestly addressed why your business is where it is, you will be better positioned to develop plans to grow and prosper in the future. Any effective plan should have a scorecard of what you intuitively think will happen. This way you can measure success and make adjustments if things don't go as planned.

Growing a successful business is a balance of measuring performance to date and developing new possibilities for a better future. As you study your performance, don't dwell only on the results; also think about what you are going to do better in the future. As Robert Kennedy once said, “There are those who look at things the way they are, and ask why... I dream of things that never were, and ask why not?”

Opportunity is on Will's Team

2010-05-22T06:09:00.005-04:00

Henry Ford once said, "If you think you can do a thing or think you can't do a thing, you're right." This simple little quote speaks volumes about optimism and pessimism.

On a macro level, pessimism is a huge threat to innovation. Dwelling on limitations rather than exploring possibilities will inevitably result in situations of lost opportunity. Yet on a microlevel, it is the pessimism of others that offers a market full of consumers to purchase the products and services from the great entrepreneurs who continually prove that things, once thought impossible, can be done.

Nothing in our economy is the be all, end all solution to problems we face in this world. Our solutions of today will never be the answer to all of the challenges we may face tomorrow. As long as there are problems, our free market economy will allow us to profit from generating new and better solutions to meet the needs of the marketplace. Thomas Edison once said, "There is way to do it better. Find it."

For innovation to reach the marketplace, there is a step beyond what can be done. Possibilities don't become realities until someone takes that bold action step and implements the action plan.

I would like to paraphrase Mr. Ford and say, "Whether you think you will, or think you won't - you're right." Imagining possibilities is no small task. Still, taking action and making those possibilities a reality is even a greater challenge.

Nothing can be more crippling to a business owner than inaction. Every day there are new challenges to face and new opportunities for growth. Each day there is a need for the leadership team to implement decisions to keep the business on the right course. While rash decisions can harm a business, so can a passive approach to business growth; or even worse, not responding to problems that demand attention.

In any organization there are those people who will only talk about what they won't do. A successful organization will always be led by someone who identifies what they will do. Not every action will produce positive results, but by taking action and monitoring results, the opportunities for success will be exponentially increased.

For What It's Worth

2010-01-20T19:43:00.006-05:00

I remember one time debating whether I should continue a job I had or pursue one of my self employment ventures. I was talking to a prominent business owner in Ketchikan, Alaska one day while mulling over my options.

He looked at me and said, "I've found that the only person who will pay me what I'm worth is myself." I took that as a battle cry to pursue my self employment venture. And while that business was eventually profitable, the reality was that the dollars per hour weren't adding up to what I was making at my previous position.

One of the things I like to remind my clients is to take stock of your earnings. Is your business giving you what your worth?

This is not a strict dollar and cents analysis. Sometimes intangibles come into play in this decision making process. When analyzing what you are receiving from your business, think about:

* Flexibility - do you dictate your schedule or does your business dictate your schedule
* Stress - can you manage the responsibility of managing your business or does it create a level of stress that consumes you.
* Creativity - can you bring your ideas from concept to reality. Sometimes self employment enables this. Yet on the other hand, sometimes the lack of resources of having your own small business pales to the resources you may have had access to at another company.
* Team building - this is not a "cumbaya" moment here. For many small business owners, it is very empowering to be able to build your own team to meet the needs of your organization. When you work for someone else, having the level of success that can be borne from a synergistic relationship is often hampered by the fact that you usually don't have control over the choice of all of your team members. On the other hand, the resource issue comes into play here, as well. You may have better access to quality team members with a large organization that has already attracted some of the best and the brightest, while you may not have the resources to recruit those people with your own small business.

There is no way around it, determining value is a very subjective process. As you take stock of your what it's worth to own your own business, think of the intangibles. No matter what you assessment is today, remember you have the power to make tomorrow change for the better.

Challenges Everyday

2010-01-13T06:58:00.003-05:00

Today I will be joining the Pfizer Transition Council as we work on our response to the Pfizer closings that will result in the reduction of over 600 workers up here in the North Country. The team I am working with is tasked with two major duties:
* Be prepared to assist workers looking for new opportunities for employment, with self employment being one of their options
* Assist existing businesses prepare for the market changes that are likely to occur due to this dramatic workforce reduction

While I am certainly concerned about the economic impacts of this closing, the reality is that this is just one challenge that existing small business owners have to face. As Garry Douglas, Executive Director of the Plattsburgh-North Country Chamber of Commerce, said at our first meeting, "Unfortunately, this is an area where we have some experience."

These market blips have happened before and, unfortunately, they are likely to happen again. Every day in business is a challenge and small business owners have an ongoing responsibility to prepare for contingencies in market changes. There will always be those business owners that are reactive; that is, they only deal with a problem when it arises. Many of them will come up with great strategies to deal with those situations and our office is prepared to provide them with assistance as they develop their plans.

I've written before that there is a certain Darwinian aspect to business survival. As he said, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” The same holds true for small businesses.

Still, the best strategy is to follow the key advice that Stephen Covey identifies in his best selling book, "The Seven Habits of Highly Effective People." The small business owners that are proactive, that continually take measures to grow their markets and develop contingency plans so they are prepared for market changes are likely to be more successful. It is much easier to adapt to change if you are prepared for change.

The reality is that there will be new challenges everyday, so be prepared to adapt. Yet there will also be new opportunities for growth, so plan for that, as well!

Building Doors

2010-01-09T08:09:00.004-05:00

When addressing the attendees at our open house yesterday, I used one of my favorite quotes from Milton Berle, "If opportunity doesn't knock, build a door." Many of the small business owners in that room have already started the construction of new doors in the North Country of NY.

While our clients in attendance were part of a very diverse group of small business owners, they all share a common trait of accepting responsibility for their own income generation. They aren't looking to the government or "the economy" to create their jobs, they are going out and creating their own opportunities.

It is this acceptance of responsibility for self determination that truly drives our economy. Furthermore, it is much more likely that these businesses will generate the innovation that will seed the opportunities of the future.

Each day as they operate, these small business owners are faced with many challenges as they try to sustain success. Yet they keep opening the doors to new opportunities every time it comes knocking and when it doesn't, they will be the first to start building new doors.

During my comments, I don't think I recognized them enough for what they contribute to our community. They are the engine that drives our economy. No matter how tough things may get, they keep on moving forward and developing new strategies to keep commerce in the North Country. Thanks for what you bring to our community and thanks for sharing your stories of success.

Open House at North Country SBDC

2010-01-08T08:51:00.004-05:00

Today we are having an open house at the North Country Small Business Development Center (SBDC). We have invited our clients who are willing to share some insight on our counseling services so local stakeholders can get a better understanding of the depth of counseling that we provide to small businesses.

For those not familiar with what an SBDC does, the core to our services it to provide:

* Free and confidential, one on one business counseling
* Business training seminars
* Research assistance

We are part of a network of over 23 centers in the state of NY and over 1,000 centers in the United States. To find the center nearest to you, you can go to this website.

Association of Small Business Development Centers Website

As a former small business owner, it is easy to recognize the value of our services. While it is probably not the best thing to say that I made so many mistakes operating my businesses, the reality is that is true.

Yet the value we provide is that we can help our client from making the same mistakes we have made. We also share best practices to help small business owners from making mistakes and can be there to help any business owner troubleshoot specific business challenges. Of course, we don't make the decisions, that is the responsibility of the small business owner; but we certainly have a strong network of resources to provide the tools for our clients to make better informed decisions.

So if you happen to be in the Plattsburgh vicinity today, stop by our open house from 1:00 - 4:00 and join us. If you happen to be in business, get to know your local SBDC counselor and see what they can do to help your prosper!

Holiday Rush

2009-11-23T08:24:00.004-05:00

The holidays are approaching and many businesses are gearing up for their busiest time of the year. For some retailers, this is a make or break season. Obviously, I hope most make it!

With my previous bagel stores in NJ and Pennsylvania, the day before Thanksgiving and Christmas Eve were our two biggest sales days of the year. It is something that I never quite understood, as we never really set out to be busy on those days. During my tenure as a part owner, we didn't really develop any holiday themed specials, with the exception of making a red bagel dough and a green bagel dough and creating red/green marbled bagels for sale during the Christmas season.

In hindsight, I was guilty of not properly planning for the holiday season and I let some opportunities for profit maximization slip away. It would have been easy to develop some better holiday themed specials to garner more sales and profits out of the 500 or so customers that would come into our store each of those days. Sales were always good on those days, but could they have been better?

Why did I squander this opportunity? It is truly a lame excuse, but it stems from the first day before Thanksgiving that I experienced. We kept running out of bagels. I had my oven filled to capacity from 4:00 AM until 10:00 AM and I still kept running out of bagels. Some customers wouldn't wait and they would leave the store early. So the following years, my only focus was making sure that I didn't run out of bagels again. I was focusing too much on my operations and forgetting my responsibilities as a business owner to maximize our marketing efforts and set financial benchmarks for success.

It is this tunnel vision of focusing on one area of business development that often keeps small business owners from maximizing success during the holidays. Business owners need to be holistic in their management if they really want to have a successful holiday season. Keep a balance between developing marketing plans to get more customers, the operational plans to maximize your productivity during this season and measure the financial performance to ensure you are achieving financial success.

My hope is that more small business will reap the benefits of the holiday rush this year. It can be a hectic period for retailers, but it can also be very profitable. Make the best of it and have a joyful season!

Back to the Future

2009-10-01T07:24:00.007-04:00

We plan to present a series of business training seminars in late October and early November in partnership with the Plattsburgh-North Country Chamber of Commerce and TD Bank. I was given the task to come up with four business development topics, so we had a discussion at a recent staff meeting.

We narrowed down our four topics down to:

* Writing an Effective Business Plan
* Financial Finesse
* Shout it Out Marketing
* Increasing Your Bottom Line

In our discussion, we talked about the need to focus on the basics of operating a sound business. There are certain fundamentals that can be applied to any business, at any point in time. We were all in agreement that all business owners should be able to benefit from attending this series, whether they are just starting out or have been in business for years. We believe these topics can be applied to any business, at an point in their life cycle.

I thought that coming up with a title was going to be a challenge. I explained that we want to be all inclusive, yet we want to show that this isn't just a "business basics" class. This series is geared towards those business owners who want to strive to be the best in their respective industries. Our goal is to have our attendees be the business leaders of tomorrow. Those who seize the opportunities of today and excel in making their businesses a little better each day.

One of our staff members, Andy Allison, suggested "Back to the Future." It is a very catchy title made popular by Universal Pictures movie series starring Michael J. Fox, Lea Thompson and Christopher Lloyd. Yet to me, this title succinctly captures what our series is really all about.

Sometimes in business we need to go back to the drawing board and look at what our goals are for the future. Time and time again I work with business owners who get so wrapped up dealing with the operational challenges of today that they lose focus of what they set out to achieve in their original business plans.

Business planning is not a one time exercise; it is a process that should continue into the future. If things are going as planned, it does no benefit to complain about what is wrong. Find new opportunities and set a course for your business to thrive. Establish specific goals and revisit your planning process on a regular basis to see if you are meeting the benchmarks you have set for your business.

Yet no planning process would be effective without looking at past trends. Yes, there are new opportunities for tomorrow, but past behavior tends to be a good predictor of future operations. There is a popular saying that the definition of insanity is "doing the same thing and expecting different results." Part of the planning process is to look at past trends, both in business financial performance and consumer spending habits to recognize the best opportunities to develop a more profitable future.

There also needs to be a self assessment that certain things in a business are not working as planned. Sometime your operations, pricing strategies and marketing need to change. Maybe you made an investment in inventory or plant equipment that is not generating the return on investment that was expected.

Of course, developing a more profitable future is not a passive exercise. You have to actively let your customers know about your business and it is within your realm of responsibility to develop a profitable business model for your operations. If something is not working as planned, create a new plan and actively work towards making things better.

Whether or not you plan to attend our training series, consider taking your business "Back to the Future." There are always opportunities to thrive in any economy. It just takes a good plan that recognizes the story of your past and focused vision for what you expect to see in the future.

Do No Harm

2009-09-24T07:50:00.014-04:00

I was at a business hearing yesterday sponsored by the North Country-Plattsburgh Chamber of Commerce and Unshackle Upstate. At this hearing, business owners were able to share their perspectives on challenges their businesses have been facing over the past year. Listening were State Senator Betty Little, Assemblywoman Janet Duprey and Meg Wood, representing Assemblywoman Teresa Sayward.

It was interesting that none of the businesses complained about "the economy" or the challenges of dealing with a recession. None of them asked their State representatives for bailouts to help them through these troubling times. Instead, every speaker talked about the new fees, taxes and regulations that the State imposed over the past year that are crippling their businesses.

Included in the list is:

- Requirement to renew the Certificate of Authority to collect sales tax (that for the first time, includes a fee)
- Increase in the LLC filing fees for companies that have achieved a certain gross sales figure
- Increase in tobacco license fees
- Increase in liquor license fees
- Increase in motor vehicle fees

One of the more compelling stories related to the changing of the Empire Zone tax credits. A few businesses that made huge capital investments into their business under an Empire Zone program that provided tax credits now have to reapply for those tax credits. One company present completed the application six months ago and they still have not received their credit refunds. These amount to tens of thousands dollars of operating capital owed to them. If you are just one month late in paying NY State Sales taxes, you will be assessed penalties and interest that can exceed 20% of the tax owed, yet the State can withhold monies owed to a small business for six months without any penalties and interest?

Most of the States operating revenue comes from the income and sales taxes generated by private enterprise. Small businesses owned and operated by NY State residents provide even more of an economic impact, as they cycle more of their profits into the State economy. Not only are these fees and regulations creating a burden on businesses, they are also providing an inequitable burden on small businesses.

According to an SBA study in 2005, the average regulatory cost per employee of a firm of less than 20 employees is $7,647. The average regulatory cost for a firm of greater than 20 employees is $5,411. No doubt the amount of time small business owners have in completing new Certificates of Authority, Empire Zone re-certifications and the costs of new fees is going to a much more significant impact on small businesses than the larger businesses.

For example, the license to sell tobacco was increased from $100 to $1,000 this year for small retailers generating revenues under $1,000,000 in annual revenues (note, this is combined revenues, not just tobacco sales). Those businesses that do up to $10,000,000 in gross revenues pay $2,500. Let's do a little math.

I have a convenience store that does $500,000 in gross sales. I sell about $50,000 of cigarettes per year. My gross profit on cigarettes is about 15%, so I clear about $7,500. My cost of licensing is 13% of my gross profit.

A few blocks away is a supermarket(which happens to be owned by a company in Maine). They do $5,000,000 in gross revenues and sell $500,000 in cigarettes. They clear $75,000 on cigarette sales. Their license fees are 3% of their gross profit.

I decide it is not worth my while to sell cigarettes anymore for $1,000/year. In a perfect world, we would assume all my cigarette customers would kick this habit. The reality is that most are just going to the supermarket to buy cigarettes and that profit is going to leak to that larger, out-of-state competitor. The significant amount of that $7,500 that would have cycled into the NY State economy with my spending most of my income in NY will now go to Maine.

Most of these fee increases will most likely have an economic impact of unintended consequences to the State, but that is often the case when government increases fees and taxes. There are only so many slices of pie in a particular pan, if you keep going after a bigger slice, eventually there will be no pie left. The fact that quite a few of our pie pans are smaller in these difficult economic times compounds the problem.

Quite a few of the speakers at the hearing noted that "we are preaching to the choir," as all of the government officials were opposed to the budget that proposed all these fee increases. Needless to say, we have to get our choir to sing louder.

This is not an endorsement or critique of any particular government official. When it comes to developing a State budget that makes sense, it should not be a party line issue. We need all government officials to think of the consequences of their actions. The livelihood of some small businesses are at stake here and that is an issue that every legislature should take seriously. Certainly this small business counselor takes these issues seriously, as I am often working with the business owner that is deciding whether this new fee or paperwork requirements are the proverbial straws that will break the camel's back. There are some businesses that are struggling to survive and these fees and to many, the State isn't putting straws, but rather shoveling lead weights on their backs.

In his introduction, Garry Douglas, Executive Director of the Plattsburgh-North Country Chamber of Commerce talked about the core principle of the Hippocratic Oath, which is "Do no harm." He pointed out that if our government officials were doctors and the business owners were patients, "boy, would there be a malpractice suit."

At some point, we need our leaders to develop a proactive strategy to make it easier for more small businesses to succeed in New York State. There are ways to do no harm and facilitate a more business friendly environment; the choir just has to sing a little louder and it would help if we could get more of our government officials to join us in singing the same tune when it comes to the principles that foster business development.

Health Care Paradigm

2009-09-22T10:31:00.004-04:00

The buzz in the world of politics is health care reform. Different proposals have been shared, proposed legislation has been presented and “town hall” meetings have shown we can’t agree on a solution. Not only can we not find a form of compromise, but we also can’t disagree with some semblance of civility.

The emotions on this issue are so powerful and our nation is so polarized when it comes to finding a solution to this health care mess. Unfortunately, no solution will come to pass until there is some common ground found among our lawmakers. Yet instead of working together to find a solution, our lawmakers are drawing lines in the sand and using rhetoric to attack the flaws of others, completely ignoring the flaws with their own proposals.

I’ve used this Albert Einstein quote before and I will keep using it: “The problems we face today cannot be solved by the minds that created them.” Aside from the dysfunctional working relationship of our lawmakers, the major problem with our current system is that health care does not lend itself to insurance. Yet no one is addressing this issue. Our nation has created a for-profit, behemoth of a health insurance industry and all of the proposals currently on the table refuse to recognize that this needs to change.

Health care is something that every individual needs in some form or another. Of course, some need health care more than others, but the basic fact is that if we want to live, we need to care for our health.

Insurance is an industry that is based on managing risk. You get insurance to protect you from an unlikely event. The way the industry stays profitable is by assessing premiums based on the amount of claims and the cost of the payout. Premiums are established by analyzing that, and of course, including some margin for administration and profits. Obviously, if too many claims are made, the cost of insurance goes up. Sometimes the cost goes up to a level where there is really no value in purchasing a policy. At this point, consumers will usually see no benefit in that insurance and just come up with a better way to manage their risk.

Think of it this way. We need to eat every day. Should we buy food insurance to ensure that there is food on the table tomorrow? Imagine what that would do to the costs of groceries if most of us decided that we need to purchase insurance to have food on the table and then filed claims to purchase our groceries every week. Then compound that by the fact that some people in this pool of grocery shoppers need to eat significantly more than others or have special diets that require very exotic and expensive foods. Before long, we are paying significantly more for our groceries than what they are worth, because we are supporting both a for-profit insurance industry and a group of people who spend more on food than we do. This is pretty much what has happened to the health care industry.

Not only are most of us paying insurance premiums on something that most of use on a regular basis, we are also faced with the dilemma that some health care users are going to have expensive health care needs, some of which for conditions that will require some level of ongoing care. These needs for health care services tend to be exponentially higher than what an average user would spend for health care. Yet these costs need to be spread in the pool of users for health insurance companies to remain profitable.

According to the 2009 Milliman Medical Index, the average family of four spends over $16,000 for direct health care services. Yet the problem with averages is that a few exponential highs can really skew an average cost. If you think about what a typical family needs in a given year, $16,000 is a pretty high figure. What would it cost for 4 checkups and maybe four typical childhood incidents in year, such as a sprained ankle or sore throat that requires a doctor visit and some prescription medication?

It is hard to quantify what is an average health care cost for a healthy family, but it would obviously not be near $16,000/year. According the Henry J. Kaiser Foundation publication, Trends in Health Care Spending:

While discussions about the costs of health care often focus on the average amount spent per person, spending on health services is actually quite skewed. About ten percent of people account for 63% of spending on health services; 21% of health spending is for only 1% of the population.

Each person who buys healthcare is paying for not only their care, but also the care of others. Using my food example, why should I pay for grocery insurance so others can have truffles and Dom Perignon when I am only eating Cheerios and milk? Well, when it comes to health care, those who get the truffles and Dom Perignon often aren’t choosing such an expensive service. I dare say that most would rather not need such levels of treatment. Should I begrudge paying for someone who needs dialysis, an organ transplant or acute cancer treatments for a chance to survive?

We all need health care; so much so, that if we have a health care need, we will seek those services without much regard to costs. Yet the health care industry consists of businesses that have competing needs. They need profit, and to maintain profitability, they need to control their expenses. This creates a dichotomy where the insured wants health care at all costs and your insurer wants to limit payment of claims at all costs. This does not lend itself to a positive consumer/service provider relationship.

In this health care debate, we are talking about all the costs, but are we really addressing the core issue? Yes, finances need to be considered in any debate that discusses the use of public funds, but how do you quantify the value of pain relief, comfort or survival? At what point do we say that a life is not worth the cost?

Unfortunately this brings us to a huge philosophical question. Should health care be an individual responsibility or societal responsibility? It's a tough question that goes beyond black and white and their are infinite shades of gray. "Socialism" is a dirty word being thrown around in this debate, but we use our taxes for national defense, why not for national health? I am not yet sold on the so called "public option," but at the same point, I find the "socialism" rhetoric to be very counterproductive towards us coming to some form of improvement on health care.

No doubt, coming up with a solution that makes sense is going to be tough. I personally do not mind paying into a pool to ensure those who are in need have access to health care, but I obviously have limits into what I can pay. I will add that I have a serious problem being mandated to pay into an industry that gains profit by avoiding the provision of services that may be in the best interests of someone’s health.

The challenges we face with health care are significant. Somehow we have to change our level of thinking to solve this problem we created. Who will take the first step?

In Memory

2009-09-11T10:06:00.005-04:00

As you read the news today, there is no escaping the significance of this day. Like many monumental days in history, we tend to reflect and remember where we were on that particular day of infamy.

I was living in Wasilla, Alaska at the time and it was one of those days when I felt being that far away from my family and friends in NJ and Pennsylvania was particularly difficult. I was also scheduled to have my very first surgery in two days and the thought of going under general anesthesia, something that was creating huge anxiety for me the days leading up to September 11th, now seemed to be an insignificant concern.

I remember watching the television over the next few days and hearing the individual stories of some of the beautiful people whose lives prematurely ended on that day. I couldn't help but think of the pain and grief the families of the those who lost their lives. I couldn't help but to feel guilty for worrying about something so mundane on a day when others had to deal with such a major tragedy.

Over the next few days I received the phone calls from family and friends and learned how some people I had known were included among those who passed on that day. Too many people perished and we do live in a small world; it is hard to think of anyone who was not touched in some manner by this tragedy.

Like many Americans, I still feel anger that a few uncaring individuals were willing to senselessly murder so many good souls on this day. I still cringe how people throw out the term “nine eleven” as a buzz word or remember this as a day of terrorism. It was a tragic day, but there was no terror, because I will never cower to a misguided ideology that justifies senseless murder. I didn't on September 11, 2001 and I still feel no terror today. I hope most other Americans share that sentiment.

Still, today is a significant day because we should remember the beautiful people who passed away on September 11, 2001. There will be many opportunities for remembrance and below is a link to one special location that I am aware of:

Garden of Reflection

I write this blog post in memory of Vic Saracini. He was a person who I did not know very well, but Vic Saracini would visit my bagel store on occasion and share some kind conversation with us.

He was a man who I know deeply cherished his family. He happened to share a story with me about the feeling of returning to his daughters after a trip. The smile on his face as he talked about his family told me more than the words he said.

We all have different memories and emotions about this day. I only hope you take the time in your thoughts to think of the wonderful people like Vic Saracini. They will be dearly missed.

What If Government Stopped and Nobody Cared

2009-06-21T20:00:00.010-04:00

In a previous post, I quoted P.J. O'Rourke, who once wrote, “The mystery of government is not how Washington works but how to make it stop.”

On the state level, we recently found out just how to do that here in New York. For those not familiar with NY politics, there is what is considered the holy trinity of power brokers in state government; the Governor, the Senate majority leader and the Assembly majority leader. A few weeks ago, that included Governor David Paterson, Assembly Majority Leader Sheldon Silver and Senate majority Leader Malcolm Smith.

That was until last week, when two Democratic Senators switched their allegiance to form a coalition with the Republicans to oust Malcolm Smith as Senate Majority Leader. Since this little coup has take place, the remaining Democrats refuse to work with the new leadership. As if this didn’t sound silly enough already, the secretary of the Senate actually refused to turn over the keys to the Senate chamber to the new Republican leaders.

So since June 9th, the legislative branch of NY State Government has ceased operations. The effects of this government stoppage have been monumentally insignificant. Life has continued to go on in the Empire State. It is amazing how we have managed to survive with this huge void in leadership in State government.

To give you a sampling of what New Yorkers are missing, I randomly pulled three pending bills proposed recently in the State Senate. I started with Senate Bill S05700, proposed by Senator Klein, which prohibits issuing a credit card to anyone under the age of 21 unless that person has had parental consent and has completed a course or instruction in financial responsibility and liability. I wish I could propose a bill requiring a course of instruction in financial responsibility and liability for our elected officials.

Then there is S05701, proposed by Senator Schneiderman, that “requires licensure for instructors in religion, dancing, music, painting, drawing, sculpture, poetry, dramatic art, languages, reading comprehension, mathematics, recreation and athletics.” Luckily, my past work as a disc jockey was in NJ, not NY, or I may have been arrested for instructing the guests at the Weinstein Bar Mitzvah how to do the Electric Slide without proper credentials.

Next up is S05702, proposed by Senator Johnson, which “authorizes the metropolitan transportation authority to create a regional bus authority.” After all, we can just never have enough authority.

I will stop there. While this was just a small sampling, in my more in depth search, I was hard pressed to find any bills that appeared to provide any significant action.

My belief is that in regards to small business, the stoppage of the NY State Senate is one of the best things that could have happened. Aside from giving us a break from some pretty silly proposed legislation, the recent stoppage of government is preventing our lawmakers from further raising taxes, imposing new fees or creating a greater regulatory burden. While lawmakers don't like to admit it, New York ranks 49th out of 50 states, topping only New Jersey in the taxes and fee burdens placed on businesses. Here is a link to that study by the Tax Foundation: Tax Foundation

In a previous magazine article, I quoted Governor Mitch Daniels of Indiana, who once said, "It's essential to remember that government does not create jobs or wealth. At its best, it creates the conditions in which men and women of imagination and enterprise create wealth for each other. At its worst, it drives away such people and the jobs they create."

Unfortunately, since the Legislative session started last January, there were no indications that the New York government was doing anything to create better conditions for entrepreneurs in this State. In fact, in the first few months of session, the Legislature was seriously considering raising a number of taxes and fees. I was at a meeting last week and one business leader, whom I hold in high regard, said, "At least now that the State Senate is completely dysfunctional, they aren't doing any more damage."

It is hard to tell whether it will be days, weeks or months until the NY Senate fixes this leadership issue and gets back into session. Inevitably, they will return, but will business owners really care?

Over Stimulated

2009-06-08T14:52:00.005-04:00

It has been too long since my last post and I apologize for my absence. I’ve been real busy at work and much of my time hasn’t been as productive as I would like it to be. A major reason is because of the American Recovery and Reinvestment Act passed by Congress last February, which is often referred to as the “Stimulus Bill.”

My problem is not with the American Recovery and Reinvestment Act. The President of the United States and the members of Congress should be given kudos for their efforts to take an active role in trying to get our economy on the right course. While no legislation is perfect, I am not going to waste one ounce of energy noting where this bill falls short of meeting the needs of small businesses. There are still plenty of positive programs that are coming out of this piece of legislation; some have already been implemented and some programs are still under development.

My challenge has been the volume of phone calls that have been coming to my office from both existing and aspiring small business owners who want to know what is in the stimulus package for them. More specifically, I have been getting a number of requests for grants that may be available to businesses from the “stimulus money.” Frankly, I am over stimulated with these requests!

I’ve actually taken the time to read the portion of the American Recovery and Reinvestment Act that relates to the Small Business Administration (it is just one section of a very large piece of legislation). No where in that legislation does it say that grants are being made available directly to for profit businesses. It has been a long standing policy of the US Small Business Administration not to offer grants to for profit enterprises. See this link: http://www.sba.gov/services/financialassistance/grants/index.html

Unfortunately for me, this gets lost on many existing and prospective small business owners. They still call up our office seeking their “stimulus money.” I then explain the programs of which I have been informed. When they find out that there is no free money available, some just hang up, while others give me an explanation why they are more deserving of government money than those “big investment banks that were bailed out.” While I may not disagree with them, I didn't write this legislation. Still, I try to be tactful in my responses and I can honestly say that the same courtesy has not been extended to me.

I understand that many small businesses are facing challenges in this economy. Yet I have said this before and I will say it again; no matter what the state of the economy may be, there will always be challenges for small businesses. The responsibility of dealing with those challenges falls squarely on the shoulders of the small business owner who chose to enter the world of self employment. If a business owner is not prepared to accept accountability for the risks of owning a small business, then they should not enter the field of self employment.

The rationale behind the American Recovery and Reinvestment Act is to spur the economy. Business owners who wish to be candidates for some of the programs available need to put together a strong business plan showing likelihood that they can contribute to economic recovery. This simply entails showing a profitable business model. Yet most of the inquiries I am getting are from people who have yet to think through the business planning process. When I tell people that a business plan showing profitability is going to be a requirement to funding, I am often told that “I just don’t have time to do that.”

Many people forget that most of the troubles with our economy stemmed from lenders who did not do proper diligence in ensuring their customers could service their loans. Part of that is not assessing whether clients had contingency plans to pay back their debts, which is a component of any good business plan.

All of the government programs still require working with lenders and whether they received TARP (bailout) money or not, lenders are not going to approve loans without responsible underwriting practices. In other words, banks cannot afford to make more bad loans. So most lenders are paying closer attention to contingencies, or second form of repayment, should the business model not satisfy the debt paymnets. That is where our economy is faced with a slight dilemma. Banks need to make more credit available if our economy is to grow, but banks can't afford to take too much risk.

There are provisions in the American Recovery and Reinvestment Act that will help loosen these credit markets and allow for more investment in small businesses. Still, there is a fine line between loosening credit and irresponsible lending. That is why any loan application that utilizes government resources needs to include a well thought out business plan making a strong case that the business is likely to generate profit, no matter what the state of the economy may be. Like it or not, our government can't take too much risk. The onus is still on the business owner to assume the lion share of risk.

As more small business owners use their creativity to find ways to be more profitable despite the challenges in the marketplace, we will quickly see a recovery. These successes will create a ripple effect on our economy. Spending will increase, more jobs will be created and our economy will become more vibrant.

There are opportunities for those who wish to be a part of the solution to the current economic challenges. All it takes is a good plan and an unending dedication towards profitability. Now is not the time for small business owners to be looking for the government for solutions, but rather to show the government that they can succeed despite any challenges. Perhaps it would help if more people thought about the American Recovery and Reinvestment Act from the perspective of what they will provide in return for the government's assistance. I think of the inspiring words that John F. Kennedy spoke at his inauguration, “And so, my fellow Americans, ask not what your country can do for you; ask what you can do for your country.”

Tax Payer Soliloquy

2009-04-16T23:11:00.002-04:00

Yesterday was tax day. I belong to a Rotary Club here in Plattsburgh, and one of my fellow Rotarians (who happens to be a prosecutor) made this joke during the meeting: “Remember that tax evasion is a crime; tax avoidance is a duty.”

While that statement was said in jest, it brings to point a reality of civic responsibility. We obviously need tax dollars if we are going to provide governmental services, but it is hard to sustain services if everyone is trying to avoid paying taxes. Taxpayer avoidance is not something new. The philosopher Plato wrote, “When there is an income tax, the just man will pay more and the unjust less on the same amount of income.” I concur with Plato that there is a certain civic duty in paying taxes; but I also agree with Arthur Godfrey, who once said, “I'm proud to pay taxes in the United States; the only thing is I could be just as proud for half the money.”

Part of my job as a business counselor is to help my clients get financing for their businesses. A key component of their loan application is a recent history of tax returns. The problem is that many of my clients have taken on the position that tax avoidance is their primary duty, so their businesses show little or no income. That may be well and good when it comes to tax time, but it certainly limits the prospects of getting financing based on the strength of the business.

To defend my banker friends, I need to add that if you really think about an enterprise, the tell tale sign of success is profit. So why should a bank lend money to a business that has not shown the fiscal ability to generate profit from their efforts? Yet I have had numerous bankers tell me about their loan applicants who wink at them and say, “Our tax returns don’t provide a true portrayal of our financial situation.” Let me add that making such a statement will not contribute to the chances of getting a favorable lending decision.

It’s a point to ponder. Yes, it is good to show profit to position a business for growth. Yet at what point is there so much being taken in taxes that business owners doesn’t see enough reward for their risk and hard work?

I am not taking a position either for or against tax avoidance. I was not part of any of the "Tea Parties" yesterday. Yet the discussion of taxes, civic responsibility and economic development should be revisited by our lawmakers with an understanding of what it takes to start and run a business.

With apologies to William Shakespeare, I offer this “Taxpayer Soliloquy”:

To pay or not to pay: that is the question.
Whether 'tis nobler in business to suffer
The slings and arrows of outrageous tax burden,
Or to take arms against a sea of taxing agencies,
And by opposing not pay them? To hide: to deduct;
No more; and by deducting to say we end
The heart-ache and the overly taxed income
That earnings, 'tis financial summation
Devoutly to be kept! To hide, to deduct;
To hide: perchance to go too far: ay, there's the rub;
For in not paying taxes what consequences may come
When we have overcooked the books and get caught,
Must give us pause: there's the IRS
That makes calamity of our accounting;
For who would bear the whips and scorns of their audit?
The tax agency is wrong, our accounting is reasonable,
The complex changes to tax code, the laws confusing,
The insolence of tax collectors and the interest and penalties!
That patient merit in trying to understand the rules,
When the business might have to pay taxes
Even without making money? Who would be so foolish,
To grunt and sweat running a business,
To give all the earnings to the IRS,
The unforgiving agency from whose wrath
No business can survive, puzzles the will
And makes us rather bear paying tax bills we have
Rather than pay the vendors, at least we won't go to jail if they are unpaid?
Thus conscience does make cowards of us all;
And thus to run a successful business
Is sick with the thought of paying all earnings to the government,
And enterprises of great growth potential,
With regard to taxation and regulation, see no benefits for their risks and toils,
So lose the opportunity for economic development.

I will conclude this post with a little humor from Will Rogers:
"Be thankful we're not getting all the government we're paying for."

If Opportunity Doesn't Knock, Build a Door!

2009-03-31T19:17:00.003-04:00

A famous comedian, Milton Berle, once said, “If opportunity doesn’t knock, build a door.” Maybe this was said in jest, but there is a deep philosophical meaning to this statement that I think can be applied to today’s business environment. We can't just sit here waiting for things to get better. We have to make things get better through our actions.

There is no doubt that the markets, both globally and locally, have changed dramatically over the past few months. Retail sales in many sectors are falling and we’ve seen an increase in unemployment and cost of living indexes; especially in the volatile food, energy and health care markets, costs have increased significantly.

Yet despite these challenges, I would like to jump up on my soap box and scream, “Seize the opportunities.” There is still so much that is needed by people in this world, both globally and locally.

When people talk about “today’s economy,” most are referring to the macroeconomics of trends in gross domestic product, retail sales figures, inventory, industrial averages or some other economic indicators. No matter how dire these indicators may seem, there are always going to be business opportunities on a microeconomic level.

Capitalizing on those opportunities is the challenge. Many business owners are focusing too much on reacting to market changes rather than focusing on growing their businesses. I continually hear the refrain, “we will think about growth once the economy gets better.” The reality is that businesses can create their own economies by being proactive and building the doors to welcome opportunity.

Sure businesses may have to make adjustments to deal with the current market changes, but proactive business owners will always continue to seek areas for new business development. The following are areas to consider:

Grow Market Share – Now is an especially good time to pay closer attention to the competition. Some competitors may be offering less favorable credit terms, reducing inventory, providing less services or even closing their doors during this recession. All of these areas leave room for businesses to position themselves to gain more market share.

Add Product Service Lines – One of the new buzz words for small businesses is “diversity.” This refers to adding more product or service lines to meet other demands of an existing customer base. It is just a matter of paying attention to the needs of existing customers and finding product or service lines that meet these demands. Just make sure that new additions compliment, rather than replace existing product/service lines.

Innovation – Wherever there are problems, there remains opportunities to develop new solutions. Innovation is the seed to entrepreneurism. Since everyone is bemoaning their problems, be the solution finder! Innovation comes in different forms and scales, whether it is product improvement, service improvement or a completely new product/service entry into the marketplace. There are no bounds to innovation except feasibility – will this innovation generate a profitable business model?

Now is not a good time to be passive and wait for things to get better. Business growth is a function of developing a good plan and taking action to achieve specific goals. History has proven that it is those who create their own opportunities who sustain success. I think it is only fitting to conclude with a quote from another comedian, Jonathan Winters, who said, “If your ship doesn’t come in, swim out to it.”

Roller Coaster Story with a Tom Robbins Twist

2009-03-24T20:52:00.005-04:00

I remember vividly my first date as with my high school sweetheart. I was sixteen years old and a beautiful girl in my French class asked me to join her at Six Flags Great Adventure in Jackson, NJ. I quickly accepted, looking forward to getting to know a little more about this girl that I had been admiring for sometime.

There was a slight problem with this venue for a first date. At that point in my life I had never been on a roller coaster and she kept talking about her two favorite rides at Great Adventure – “Rolling Thunder” and “Lightning Loops.” The anxiety of being on a first date is tough enough, but for me, the larger anxiety was that I would have to either experience a roller coaster for the first time and risk hurling next to the girl of my dreams; or I could be a wimp and explain to her that I was too scared to go on the roller coaster.

As silly as this sounds today, this over dramatic teenager seriously thought about canceling the date, fearing that I was in a no win situation. Luckily for me, what little testosterone I had at that age (I was a real late bloomer) kicked in and convinced me to just go for it.

As soon as we paid our admission to the park, my date high tailed it right to the line to get onto “Rolling Thunder.” The anxiety kicked in again as we waited in line. This psychosomatic nausea started as I was able to see the roller coaster go creeping up so slowly and then hurtling down at great speeds. Would I be able to handle that speed?

We made some small talk while waiting in line and I did my best to hide my fears. Once our turn came to get on, I was relieved that we did not end up in the front seat. Small victory, but I was still pretty anxious about the first impending drop. Once they locked the restraining bar there was no turning back.

I quickly turned to my date and told her that this was my first time on a roller coaster. She just laughed and told me to enjoy the ride. I guess I was hoping that she would tell that there was nothing to worry about, but she didn’t give me that satisfaction. As the coaster went on the first climb, I started to get a bit scared watching us get up to about 8 stories high, so I chose to focus my gaze on my date. I don’t know why, but as we reached that apex and the split second before our drop, I was overcome with a feeling that this was an awesome experience. It is amazing how sometimes your mind can process so many thoughts in such a short time. In that split second, I felt exhilarated. I was sitting next to a beautiful girl, I was having a fun day at Great Adventure, the sun was shining and the park just looked so beautiful from that vantage point. My date hooked her arm under mine, drawing me close to her, which just added to the moment.

As we began our descent, I was thrilled by the speed. My date and I were laughing, enjoying the ride as she snuggled close to me. After that, we held hands, hit every ride in the park and the perfect day ended up with me getting on my tiptoes (like I said, I was late bloomer) for my first kiss with my new girlfriend as she dropped me off at home.

So Rick, what’s the point? Feeling nostalgic? Maybe, it’s just that my head has been in a bit of a fog lately and I can’t help but think of roller coasters when thinking about the economy. Most people who are discussing the economy act as if we are in a free fall right now. Well if that’s the case, let’s enjoy the ride.

We all have our own set of unique problems. Right now, I am still trying to get over a real bad head cold and it has given me a quick break from thinking of this roller coaster ride. It is amazing how unimportant the economic news becomes as you think about trying to breathe clearly once again.

More than anything, I would love to put my big nose to proper use and savor the aroma of my morning coffee (roasted at Lakeside Coffee in Rouses Point) or the fresh, North Country air. I can’t right now, but wallowing in self pity won’t make me feel any better. I just have to take better care of myself and hopefully my immune system will do the rest of the work.

So I have been using all my free time to rest and enjoy one of my great pleasures, which is reading good fiction. I find that reading fiction allows my mind to wander and provides useful escape from the challenging realities of life. Right now, I happen to be reading “Skinny Legs and All” by Tom Robbins. I first read this book right after it was published in 1990. Tom Robbins has this magical way of spinning words and making serious social commentary on some pretty controversial themes, yet in a very light-hearted manner. This particular novel gets into some pretty taboo stuff that really belongs nowhere in a business blog or a commentary about the economy. At least that is what I thought until I came upon this little excerpt that made me think of this roller coaster economy yet again(and inspired me to add one more blog post):

“During periods of so-called economic depression, societies suffer for want of all manner of essential goods, yet investigation almost invariably discloses that there are plenty of goods available. Plenty of coal in the ground, corn in the fields, wool on the sheep. What is missing is not materials but an abstract unit of measurement called 'money.' It is akin to a starving woman with a sweet tooth lamenting that she can't bake a cake because she doesn't have any ounces. She has butter, flour, eggs, milk, and sugar, she just doesn't have any ounces, any pinches, any pints.”

Basically, we are paying attention to the units of measure, like the Dow Jones Average, rather than the actual supply and demand of products/services and the never ending competition to find our proper place in the market. Business owners that focus on the resources they have available can still find the means to bake that cake and measure their success.

Tom Robbins also wrote:

“The introduction of money, with its seductive, if largely ambiguous promises, added a fresh measure of zip to the sport of life, but the zip turned to zap when the players, stupefied by ever-shifting intangibles, began to confuse the markers with the game.”

Even though this book was written over 19 years ago, I find this passage to be so relevant to small business and the current economy. If you focus on the game, small business can be an exciting and profitable game. You just have to pay attention to the task at hand and the real indicators of success, not some outside market news.

One final excerpt from this book:

“The ones who’re so upset about everybody not being the same, about competition, about standards of quality…they’re usually people with average abilities and average minds. And below average senses of humor. Whether it’s a matter of lifting the deprived up or dragging the gifted down, they want everybody to function on their level. Some fun that would be.”

So continue to compete with your business. It may be a roller coaster, but it is a fun ride if you possess the right attitude. As Hugh Downs once said, “A happy person is not a person in a certain set of circumstances, but rather a person with a certain set of attitudes.” If we want to savor life, we have to choose to accept our circumstances with a positive attitude and proper perspective. We should also compete, not so much with each other, but with ourselves to achieve greater things.

Focus on what matters. Is it the game or the price of admission? We all have our own answers.

A Fish Story

2009-03-11T19:39:00.001-04:00

I originally went to Alaska back in 1997 to help friends of mine, Jill Ramiel and Ken Alper, open up a bagel store -- The Silverbow Inn, in Juneau. One day, after helping build their bagel oven, I went fishing with the oven installation guy. He had a little skiff with an outboard motor and we were trolling for king salmon. This was my very first time salmon fishing and he helped be cut my herring bait at a bias so I could get that “sexy twirl” that drives the salmon crazy.

After fishing for about an hour, our outboard gave out. The oven guy, Randy, went to work on it while I just kept casting my line out and reeling it in slowly; trying to mimic the speed we were traveling at while trolling. Our skiff was drifting near the shore, which was fine by me, considering our motor wasn’t working. Meanwhile, Randy was getting frustrated that he couldn’t get the motor started. I guess he took it out on me a bit when he said, “Why the hell are you still fishing you idiot? The water is only about foot deep over here.”

I am a pretty stubborn guy and I threw my line in the water again; as I was reeling my line back in I got a huge strike. The line started screaming out of my reel and Randy started yelling instructions to me as I fought to land my very first salmon. Luckily, I hooked this fish pretty good, as I probably didn’t score many style points in landing this salmon. Randy netted it for me, and luckily, he got the motor started shortly thereafter so we could head back to the shop.

When we got back to the Silverbow Inn, we weighed in my prized king salmon at 38 pounds. Once the weigh in was completed, Chef Stefani Feller (now Marnon), who was helping open up the restaurant at the Silverbow, cleaned and marinated this fish. A group of friends then joined us on the rooftop picnic area that Jill and Ken had set up at their cool establishment and Chef Stefani grilled us the salmon. She handed me the first plate of fish. I declined, saying that I am not a big salmon fan. Well, I soon learned that when Chef Stefani hands you a plate of food, you don’t decline!

I then proceeded to savor one of the most delicious meals of my lifetime. There is just nothing better than grilled king salmon, especially if it was caught just a few hours prior. It was an amazing experience that I just had to share one more time (many of my friends have heard this story ad nauseum…sorry)!

Still, this is my small business blog and I need to relate this story to business. There are some subtle lessons that can be learned from this experience. First, be careful about listening to the naysayers. Maybe conventional wisdom was that not many salmon are caught that close to the shoreline. You obviously don’t see the big name fishing charters trolling for salmon in that part of Auke Bay. Yet you can go to the Silverbow Inn and look at the photo album they keep in the bagel shop and you will see a picture of me with my prized salmon.

Another lesson is to always accept a gift with proper respect. Luckily for me, Chef Stefani was kind enough to force me to eat what would be one of the best meals of my life. She could have easily been offended and dished out my portion to our other friends dining on the roof. Yet she just looked at me and sternly said, “You caught it and you are going to be the first to eat it.” In hindsight, I wish I would have accepted her offer with graciousness and with respect immediately after she handed me the plate. She used her amazing culinary talents and offered me a gift; to this day I am so embarrassed that I was that foolish to initially decline such generosity. My apologies to Chef Stefani and thanks again for giving me a second chance.

That second chance is another lesson to be learned. Sometimes we make mistakes the first time, but we are often given another opportunity to get it right. Luckily, I got back in her good graces by complimenting her culinary prowess enough that she even let me have a second helping when I asked.

The final lesson to be learned from Rick’s fish story is what was said to me as we were winding down the evening. I can’t remember which friend said this, but as we started talking about our next fishing day, someone chimed in with Lao Tzu’s maxim, “Give someone a fish and they are fed for a day, teach someone how to fish and you feed them for a lifetime.”

This is probably the best way to describe what business is all about. Some people think the secret to success in business is all about capital or access to funding. This is a huge misconception. There are plenty of businesses that have had access funding and they still fail. You can give someone all the money in the world; it may feed a business for a while, but it’s not invested in a sound business model, it will eventually be lost.

Business is about learning to be self sufficient. To be successful, it only takes the willingness to learn how to “fish.” There are various methods and some may work better than others. Yet it all boils down to learning how to most effectively use the skills you have to operate your business towards generating a profit. There needs to be some bait; something that has that “sexy twirl” to attract customers. Another important skill is learning how to budget your resources wisely, as some days the “fish” may not be biting.

Business requires a certain amount of skill, some trial and error, some patience and a little luck is always welcome. There are some good days and some bad days, just like fishing. I will conclude this fish story by paraphrasing a popular bumper sticker: “A bad day in business is still better than a good day at work.”

Responsibility and Accountability

2009-02-20T15:56:00.006-05:00

I had a very difficult day at work yesterday and I am going to use this post as an opportunity to vent some frustrations. One of my fellow counselors received a phone call from a very irate client. In a nutshell, this person used quite a few expletives in explaining that we ruined their business and the advice we provided is driving their company to bankruptcy.

This happens every so often in our field of work. We have clients who want to start businesses, or who are already in business, and they expect us to tell them everything they need to know to be successful. We do our best to help, but sometimes things don’t work out. While we can provide technical assistance and offer best practices clients should consider, we cannot guarantee success. We also can’t conceivably think of everything a business must know before beginning their business. Every business is different and has different needs.

Yet when things go wrong, the blame game begins and sometimes we become the chief culprit. It’s certainly not a pleasant position to be in, but I can live with the fact that I am sometimes going to be a scapegoat if things don’t go well for a client who sought advice from our Center.

Still, every time there is a problem, I look for the lesson learned in the situation. In this particular case, I believe the lesson learned is something that I have already discussed in a previous post – small business owners need to learn to accept responsibility and accountability for what happens to their businesses.

I remember a time back when I owned my first two bagel stores. I was at my Pennsylvania store and I was having a really bad day. My baker messed up our wholesale deliveries and I had to deal with a very good, but very irate customer. On top of this, I really didn’t like the way our bagels were looking. Some bagels were too light, some were too flat and some were too wrinkly.

I was in a foul mood and I was complaining to Anthony, one of my partners in the business. “Dave really sucks,” I said, “he can’t follow simple instructions, he doesn’t pay attention to detail and he just doesn’t care about the quality of his work.”

Anthony just smiled at me and said, “Who was the idiot who would hire someone that bad?” Needless to say, that shut me up quickly. I mentioned in an earlier post how I learned to take responsibility and accept blame for everything that went wrong with my business. On this particular day, I forgot that lesson learned for a moment. With just one simple, not so rhetorical question, Anthony reminded me about the true root of the problem; I was placing blame rather than accepting responsibility for a problem that I, myself, created.

For the most part, I have been much better at accepting responsibility, but I have to admit there are times that I have fallen off the proverbial wagon. I try to catch myself, but I guess it is just human nature to try to avoid accepting responsibility at times. Well, maybe it is just Rick nature, but in any case, I know that little gets accomplished when we place blame, and quite a bit gets achieved when we accept responsibility and start focusing on solutions.

I truly am sorry for all the mistakes I have made and it hurts to know that I may have been responsible for other's misfortunes. I know my regrets are not going to fix the problem, so all I can do is ask for another opportunity to be part of the solution.

Theologian Reinhold Niebuhr is attributed with authoring the “Serenity Prayer” which has been adopted by Alcoholics Anonymous. I cannot think of a better way to conclude this posting:

“God grant me the serenity to accept the things I cannot change; the courage to change the things I can; and the wisdom to know the difference.”

One Size Does Not Fit All

2009-02-09T07:17:00.005-05:00

I head off to Albany today for a meeting with my colleagues from all over the State of New York. On our agenda at this meeting includes a discussion on the current economic conditions and how we can best counsel our small business clients to deal with the changes in the marketplace.

In previous posts, I keep telling my clients not to pay too close attention to the news, as the negativity about the state of our economy is influencing a sense of panic that my lead to poor decisions. As I meet with my colleagues, I plan to share a similar message, that despite the challenges, there are always opportunities.

Yet we also need to be cautious and realistic. No matter what counseling we provide, we are going to be faced with clients who may not be able to survive the economic downturn.

Both my fellow counselors and small business owners need to realize that there is not one "catch all" solution to the challenges in this marketplace. If something is working today, it may not work as well tomorrow. As Will Rogers used to say, "even if you are on the right track, if you just sit there you are going to get hit by a train." Operating a business is a dynamic process that requires continued attention and different courses of action at different times.

We can counsel clients to keep better track of market trends, to manage their inventories better, get on top of receivables, develop more effective marketing plans and many other best practices. But each individual business owner has their own particular economy that they have to watch. Even in the same region, some sectors may be poised for great opportunities, while others are more susceptible to the changes in consumer spending habits. And what is happening today will surely be different tomorrow, so business owners have to be poised for change.

The best thing we can do is help our clients keep focused on their own particular markets. Our main task as counselors is to help clients deal realistically with their specific challenges they face and remind them to continue to look for areas for new business development. This is something that applies always, whether times are good or bad.

Before I head out on the road, I wanted to contradict my previous advice and share a link to this article from our local newspaper. Please pay close attention to this story!

Clinton County Sales Tax Way Up

As I've been saying, every economy is different and opportunities remain for small business owners. Seize the day and look for ways to grow your business.

Keeping Score to Win

2009-02-01T10:50:00.003-05:00

Today I will be watching the Super Bowl along with millions of others. I thought it is only fitting to add a little sports analogy to my business blog.

The Cardinals take on the Steelers tonight and the team that scores the most points will win. It's pretty simple, we tally up all the touchdowns, field goals, point after touchdowns (1 or 2 point conversions) and safeties. The team that ends up with the most points in the one hour of playing time will win (unless it goes to overtime).

In business, there are also scorecards. These are what I refer to as the holy trinity of financial statements -- the cash flow sheet, the profit & loss statement and the balance sheet. Unfortunately, too many small business owners do not pay close enough attention to these scorecards.

The problem is that too many small business owners try to operate their businesses on an intuitive basis. I was certainly guilty of this in the past, and that is the reason why I did not maximize my the performance of some very successful businesses. Some business owners tend to focus on only their cash balance in their checking account or their year end profitability. Others may track their inventory levels or accounts receivable balances or maybe they judge performance by how much they still owe to the bank.

Still the fact remains that business owners would be more successful if they developed a more holistic understanding of financial statements, and more importantly, some of the key performance indicators that dictate success for their particular industries. Sometimes, cash flow decisions can hurt profitability or vice versa and business owners should think about both aspects when making business decisions.

Forecasting successful operations means keeping score and establishing specific measures of success. Business is definitely a competitive enterprise and with competition their needs to be some performance measures. Keeping score means tracking transactions, whether it is through a manual ledger or a computer accounting system.

I encourage all small business owners to revisit their business plans and set up specific financial goals for the next few months. Keep score and try to exceed those goals.

One of the benefits of keeping score in your business vs. the sports world is that you can establish your own goals for winning. You can set the profitability measures, the cash flow balances and the net worth you hope to achieve. Still, you have to keep score to win.

Beyond Hope is Action

2009-01-21T07:02:00.002-05:00

Like so many Americans, I was inspired by the inauguration of our new President, Barack Obama. My initial impression is that he is an eloquent speaker, a caring soul and a thoughtful leader. His comprehension of the complex issues related to governing this great nation appears to be strong and he seems poised to foster an improved level of cooperation and bipartisanship among our lawmakers.

Millions of Americans flocked to Washington, D.C. for one of the greatest celebrations of the 21rst century. In Barack Obama's inaugural address, he said, “We have chosen hope over fear,” yet he was also sobering in reminding us of the challenges that remain, both from an economic and a national security standpoint.

It was a historic day on January 20, 2009 and it was a great day for the United States of America. “Hope” was a word that was used quite a bit throughout the day. It is a beautiful word that spurs dreams of promise and opportunity. It can be used as a noun or a verb. We can possess hope or we can hope something will happen (thanks Ms. Lierni, Oak Tree Elementary School).

President Obama can inspire us with hope the noun, but if we utilize hope the verb too much, nothing will get accomplished. Hope is not an action verb; it is a passive verb (thanks Ms. Ward, John Adams Junior High). I can hope I don't get hit by a train, but I will if I just sit on the tracks and hope. I have to move, jump, run, walk or take some other action beyond hope if I am going to survive.

As we take to heart the inspiring words of our new President, the reality is that if we expect things to change we have to take action and not just hope for change. Barack Obama also added, “Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America - they will be met.”

While some people may have listened to his words and heard a promise, I heard a call to action. He went further to remind us of the words that George Washington spoke during the Revolutionary War, before his famous crossing of the Delaware River, "Let it be told to the future world...that in the depth of winter, when nothing but hope and virtue could survive...that the city and the country, alarmed at one common danger, came forth to meet (it)."

It was a historical day for our nation, yesterday and many of us were inspired and filled with hope. Yet President Obama alone will not solve our problems. We can hold on to the hope from his message, but beyond that we all need to use our minds, our strengths and our passions to meet the challenges facing our nation. There is nothing stopping us from making tomorrow another historical day with a new accomplishment of grand scale.

How does this relate to small business? Well, I have to admit I am slightly off topic again. Yet our economy is driven by small businesses and I am tasked with helping our clients operate more successful businesses. To me, President Obama's call to action has only inspired me further to do my part and help our clients bring their dreams to a successful business reality. It starts with hope, but the achievement only comes with a good plan and a commitment to action.

I Refuse to Participate in This Recession

2009-01-15T21:34:00.002-05:00

I was at a very inspiring meeting in Lake Placid this morning. At the meeting, Jim Williams, from radio station WSLP, gave me a button that said, “I refuse to participate in a recession.” I quickly put the badge on and wore it with pride!

Mr. Williams also sent me a link to a video by Dr. Ivan Misner, who is the founder and chairman of Business Networking International. Here is that same link:

http://www.youtube.com/watch?v=9266NvfUHrk

While I give my usual disclaimer that this is not an endorsement of any particular product or service, I will not hide my feeling that that Dr. Misner is a kindred spirit. His message resonated and clearly articulated so much that I have been trying to communicate in previous posts.

I hope you listen to his message, but if not, at least let me share this quote that came out of his inspiring monologue, “Don't let a bad economy be your excuse for failure; instead, make it your opportunity to succeed!”

I think back to that last article I referred to in my previous post. Some of those businesses interviewed claimed the economy was forcing them to close. Looking at some of the businesses and the reasons given for their difficulties, I just had a hard time accepting that the economy was the root cause of the problem. I obviously don't have access to all the details from these businesses and I don't want to diminish any of the challenges they have faced. Yet, I still refuse to believe all opportunities were exhausted.

Opportunity comes in many forms. Adding product or service lines, expanding markets and, the granddaddy of all opportunity, developing innovation -- finding new solutions to meet market demands.

As Dr. Misner said, this is not an attempt to ignore reality. There are real problems in so many areas of our economy. But we can't pull a magic blanket over heads and hide. Rather than dwelling on all the problems, we can choose to seize the opportunity to be a part of the solution.

I welcome you to join Dr. Misner, myself and all the others who refuse to participate in a recession. Choose instead to be a part of a recovery.

Since I was a young child, I have admired the writings of Shel Silverstein, author of the “The Giving Tree.” I share this poem of his:

Listen to the mustn'ts child.
Listen to the don'ts.
Listen to the shouldn't haves, the impossibles, the won'ts.
Listen to the never haves, then listen close to me.
Anything can happen child.
Anything can be.

Survival of the Fittest

2009-01-12T22:10:00.004-05:00

Another gloom and doom story about small businesses in this economy has somehow managed to make its way into the mainstream media. I found this Associated Press (AP) article on the homepage of MSNBC.com before heading to work this morning. The title, Small Businesses Struggle to Survive Downturn obviously caught my eye.

First and foremost, the struggle to survive is a daily consideration for most small businesses. At any time, in any economy, there are factors that threaten every businesses' very survival. Natural disasters, new entry of competition, the health of the leadership team; there are so many other possible factors that could extinguish the livelihood of a small business, it is a wonder that so many people still consider it the American Dream to pursue business ownership.

Like in nature, business mortality is an unfortunate reality. Survival is reserved for those businesses that are poised to grow and adapt. The businesses that can evolve and meet the changing demands of the marketplace will ultimately succeed and those that can't will not survive.

If you could indulge me, I would like to address some specific claims in this article. The following bullet points are contained in just one paragraph of this article:

* Financing is hard, if not impossible, to come by
* Vendors are being skittish about extending credit for inventory
* Rents are rising
* And profits are falling — or vanishing altogether as sales slip

First of all, I know a number of lenders in my area who are trying to fight this misconception that financing is impossible to come by. The credit markets are not frozen and credit is quite available. Of course banks are learning their lessons from some of the looser underwriting practices that allowed defaults to increase. They are paying closer attention to the borrower's capacity to service any new financing. Yet banks can't succeed without lending out money. Lending money is still an income source for them and I know of a number of financial institutions that are still quite eager to extend credit.

And banks are not the sole source of financing. For ventures that require a little bit more risk than what banks may be comfortable in underwriting, now is a perfect time to consider private equity. There are investors out there who have money sitting on the sidelines waiting for that right deal to come along. The prospect of having a more intimate review of a business model may be enticing in these days of corporate greed and mismanagement. The key is to craft an investment deal that provides a win/win situation. More flexibility to the business owner and a good prospect for return on investment to the investor.

To address the comment about vendors being skittish about extending credit for inventory, I would like to know when have vendors not been skittish about extending credit? Nothing has changed here. Vendors are always enticing their customers to pay quicker, but if they don't want to experience their own drop in sales, they are going to make some deals and extend credit terms. Maybe not for those businesses that have abused credit terms in the past, but again, that is another form of business Darwinism. Vendors are looking for the right partners to bring their products to the marketplace and they are going to pair up with the stronger businesses who have show a commitment to making timely payments.

The comment that rents are rising baffles me to a certain extent and contradicts so much that I have been hearing with all the gloom and doom economic data on the fall of property values. Yes, I know there have been some property tax issues in various communities, but with the fall of property values, the increased tax rates will eventually be offset by the decrease in property values. Now is a great time to consider negotiating lease terms. Many landlords that I know have been rewarding their long term tenants with discounted lease extensions and it is up to each individual business owner to negotiate the best terms to meet their needs. Of course, it has to be reasonable and beneficial to the landlord, as well. But just because the MSNBC article says rents are rising, don't believe it until you get the bill. And if rents are indeed rising, decide what you are going to do to adapt to this change.

The final claim from the MSNBC article that I will address in this post is that profits are falling or vanishing altogether as sales dip. I am absolutely astounded by this astute financial observation. If I may be as bold, I offer my own prognostication that if you jump into Lake Champlain, you are bound to get wet.

I apologize for being so flip, but sometimes stating the obvious just isn't the answer. Survival in operating a small business is definitely a challenging prospect, no matter what state of our economy. Yet there are plenty of resources for those who wish to find solutions. Our NYSSBDC Research Network has published some good articles on their blog. Here is a link to one:

http://sbdcrn.blogspot.com/2008/12/recession-survival-guide.html

While searching for other resoources to help business owners, I came upon this excellent article by Christine Corelli:

http://www.creativeimpactgroup.com/PDF/Generatingbizchallengingeconomy.pdf

I am also a big fan of these two retail blogs:

http://www.ricksegel.com/blog/

http://bobphibbs.wordpress.com/

As I noted in other posts, your business can also contact a local Small Business Development Center counselor to help you develop specific strategies to deal with challenges or to explore new opportunities to grow your business.

W. Edwards Deming is known for developing the management training that was shunned by many American companies and often attributed with leading the revolutionary improvement of Japanese manufacturing practices. The author of the great management book, Out of Crisis, Mr. Deming once said, “Learning is not compulsory... neither is survival.”

Work the Plan, Not the Idea

2009-01-11T21:24:00.008-05:00

I've often commented that my clients like to ask me what I think of their ideas. My standard response is, “you have a great idea, now let me see your plan.” Here is where my clients reactions to this will vary, as some clients will show me their drafts and others will ask how to go about writing a plan. Unfortunately, a good number of others will tell me that they don't have the time to be bothered with this process. My feeling is that if you don't have time to plan, then you don't have the time to achieve success.

I don't care how great the idea may be, the actual process of developing a business should involve a planning process. And planning is not just an exercise of putting your idea on paper. It is a process where you think about how you are going to make your business work.

It is actually a fairly simple process and I like to refer to what I call “the four cornerstones of success” that are the foundation of any successful business. This includes:

* Marketing
* Operations
* Financials
* Leadership

The planning stage should encompass a process that will bring your vision into reality. From the marketing perspective, this involves thinking about who will be your customers, what is your competition for those customers and what message will you send to effectively entice enough of them to purchase your product or service.

On the operations side, this is envisioning the process of everything it takes to produce your product or service and effectively deliver it to your customers. It should also involve contingency planning for things that can interrupt this process.

The financial side of planning involves thinking about how much it will cost to start or expand your business and the holy trinity of financial documents: cash flow statements, profit and loss statements (or income statements) and the balance sheet. Since you are in the planning process, you should plan what they will look like in the future. Usually a three year period is a good starting point (projections are sometimes referred to as pro formas)

Leadership is identifying the direction and goals for your business. It also identifies who will be responsible for the different roles in managing the business and should include some accountability for what dictates success. I've written in a previous post that everyone should own a number. The business plan is a great starting point to identify who owns which numbers.

Probably the most frequent question I get about the business plan is, “How long should it be?” My answer is always, “As long as it needs to be.” Ask a good question, get a good answer!

First of all, as long as the business is going, the planning process never ends. It is something that should be revisited and refined over and over again. I refer to a great book by James D. Murphy, entitled Flawless Execution. Mr. Murphy is a retired Top Gun pilot from the U.S. Air Force who runs a business consulting firm, named Afterburner. In his book, he refers to a cyclical process that involves the Plan, the Briefing, the Execution of the Plan, the Debriefing and then the process begins over again. I highly recommend this book to those who are serious about improving their businesses.

While the business planning process never ends, there are obviously times when your business plan will need to be presented. Usually, it is because financing is needed for the business and any reputable investor, whether it is a banker or a private investor, will want to see a business plan before making an investment decision.

Of course, if you want to get a positive response from a potential investor, you have to think about what they want to see in a your business plan. The key in the business plan is to sell your plan for success, not the idea. The biggest mistake I see in most business plans is it focuses too much on what is wonderful about the proposed product or service, rather than focusing on how the business will be successful and, more importantly, why this is a wise investment decision for the potential investors.

While I am not going to speak for bankers and say that they could care less about your business proposal, certainly they are more concerned with how they are going to be paid back rather than consider how wonderful your business idea may be. So think about risk and reward analysis in your business planning process.

Speaking of risks and rewards, I can't stress enough the importance of the business planning process to assess feasibility of your proposed business start-up or expansion. Think about the risks and rewards as they relate to your particular situation. While the your business plan may have a good chance of providing you the opportunity to do something you love, it may not provide enough financial rewards to justify the financial (as well as time) investment you may have to make.

There are a number of great resources for providing assistance in writing business plans. Consider visiting your local SBDC as a good starting point (go to the "Find Your Nearest Small Business Development Center" and search by zip code or State).

I also provide a caution about paying someone to write your business plan for you. While you may use a consultant to provide advice for you in assessing market potential, develop operating systems or to help you format financial documents, the business plan has to come from you.

“Setting a goal is not the main thing. It is deciding how you will go about achieving it and staying with that plan.” Tom Landry

Spinning This Economy

2008-12-27T11:23:00.003-05:00

I have to admit that I have an addiction to reading online news stories. Every night, I come home from work and surf between MSNBC.com, CNN.com & FoxNews.com to read the same stories and the different spins from each news organization. At first, I thought this was a relatively safe habit, not nearly as dangerous as being hooked on drugs, alcohol or some other vice. Yet I am starting to worry that my mental health is at risk and before long I will actually start believing the negative blather populated in those headlines rather than taking the time to understand the true story of what is happening in our economy.

Here is a perfect example of what I am blogging about. The below link is to a story on CNN.com with the title, For Stores, a Very Unmerry Holiday.

http://money.cnn.com/2008/12/26/news/economy/holidaysales_finalnumbers/index.htm?postversion=2008122611

I will let my readers peruse this link on their own time and make their own judgment whether these sales figures really represent a reason to be unhappy, or worse yet, whether this is a sign of Economic Armageddon. I'm sorry, I take that back. I can't let this one slide by without some commentary.

$470 Billion in projected sales for a holiday season and we are upset? In a nation of about 305 million people, that equates to about $1,540 per person. That's not yearly, that is just for the holidays. Hey Mom and Dad, I know I am over 18, but you gave me less than average gifts this year. Luckily, my children don't pay attention to my blog, because I am also below average in gift giving. Thanks CNN for highlighting another one of my inadequacies!

It really is all about spin. But when it comes down to it, there is no denying the statistics show that reality is not nearly as dire as what the headlines implicate. People are still earning money and people are still spending money. Our economy is a fast moving animal and trying to take a snapshot of where it stands now requires some high speed analysis that will be outdated the moment it makes it to the presses.

Here is a little thought that I would like to throw out there. Every year consumer buying habits will fluctuate. And while the spinmeisters will give global economic theories on what is happening, the basic fact is that they just don't have a clear understanding of the emotions of the American consumer as a whole. Furthermore, what our emotions were yesterday, will change tomorrow. We are all complex individuals with complicated and fickle emotions that influence us to make purchasing decisions.

Don't believe me. Explain to me the past fervor over Atari? Cabbage Patch Dolls? Tickle Me Elmo? Wii? Every year there are hot items that consumers want that defy all logic for the mass demand and often includes pricing that just defies economic theories on demand elasticity. Remember the bidding wars for some of these items? Those events also defy logic, but it happened in the past and some new magic item will warrant this type of spending frenzy in the future.

In the aforementioned CNN article, I found a line that just shows how little the experts understand the psyche of the American public. The reporter refers to a discussion with a consumer strategist with Global Hunter Securities. She notes in her article that Richard Hasting said, “there's no enthusiasm to shop if you really don't need anything.” I dare anyone to take an inventory of all our holiday gifts that we actually needed. Insert your own fruitcake or soap on a rope joke here! With apologies to Mr. Hastings, his comment was probably one line taken out of context from a discussion, but it still shows how the media chooses to spin their understanding of our consumer's psychology.

To all the small business owners who are looking for a ray of hope to weather this economic storm, remember that purchasing is not about needing. It is about wanting! Find out how to deliver at a profit what everyone wants and you can rule the world. Excuse the hyperbole, but obviously, this is impossible. Still, we can aspire to sell at a profit what some of the market wants.

Every year during the holiday season consumers buy things that are not necessary staples of sustenance. This season was no exception. I still encountered throngs of holiday shoppers as I defiantly ignored the gloom and doom prognosis for our economic future and went to the mall to get my daughter the purple, Chuck Connor's Converse sneakers that she absolutely needed. (I was all for spending that money on a practical pair of snow boots, but hey, we really don't need that in the North Country according to the logic of my daughter).

To all the small business owners out there who are reading the news, I encourage you to get past the negative spin and figure out what you can do to be more successful next year. You can spin this economy any way you want, but spin is reactionary. Demand will change all the time and there may be no logical reason. Ultimately, you will only succeed if you think about your existing and potential customers and fulfilling their wants. Be proactive and position your business to meet the fluctuating market demands.

People will always want things. Those wants are based on the emotional state of the consumer. That also changes over time. It is obvious that all the spin in the media is sparking some fears in consumers and this in itself is changing demand. Can you figure out how to fight this?

So the challenge is how can you convince your customers that they still want what you sell? Can you create an emotional message to help maintain the demand for your products or services? Can you sell something else that they want if you your demand falters with existing product or service lines? I'm asking more questions and my answers are sparse. But I am not the one running your business and it is your responsibility to find the path to success.

I do add this bit of advice. People talk about bear and bull markets. Now is not the time to feed the bears! If a product or service line is not producing, consider making a change.

It's obviously easier said than done, but in a competitive marketplace, those who move to meet the demand will ultimately succeed. Just remember that in our marketplace, emotion will always trump logic. Now, more than ever, you have to develop a compelling marketing strategy. I would love to tell you what the marketplace will want in the coming months or years, but I refer you to this Bertrand Russell quote, “The demand for certainty is one which is natural to humans, but is nevertheless an intellectual vice.”

The Bravery of Being Out of Range

2008-12-12T15:52:00.009-05:00

Everybody seems to be weighing in with their opinion of what went wrong with the economy. We all have our opinions, but focusing on what went wrong won’t necessarily fix the problem. That is not to say that we can’t learn lessons from our mistakes, but the solutions to improving our economy will not come from placing blame or pointing fingers. We have to roll up out sleeves and get to work to make things better.

I’ve stated in numerous posts that I am against all of the bailout plans. They are too complex and they utilize the resources derived our tax dollars for the benefit of a few select businesses. Another issue with the bailouts is that they do not address solutions to one of the key fundamental problems with our economy.

This problem is that too many people are making key financial decisions with the “bravery of being out of range.” What I mean by that is that those who are running these companies into bankruptcy are not suffering the consequences for their failures. These executives have the so called “golden parachutes” in their compensation packages to ensure they can live a life of luxury well into the future, whether their companies succeed or fail. Meanwhile their employees get laid off, usually with minimal severance packages and a complete loss of health benefits.

Entrepreneurism, whether on a large scale or small scale, refers to a very simple concept of running enterprises to be profitable. By definition, entrepreneurs are people who have possession over companies, enterprises, or ventures, and assume significant accountability for the inherent risks and the outcome. (http://en.wikipedia.org/wiki/Entrepreneur, target="wikipedia"). Yet if we look at the leaders of the companies at the forefront in this economic crisis, you will see compensation packages that eschew all risk and accountability. How else does a CEO fly a luxury jet to Washington to ask the government to help them from failing? How else does an executive ask for a $10 million bonus after losing billions of dollars and laying off thousands of workers (yes, I am referring to John Thain from Merrill Lynch, who has since come to his senses and withdrew that request).

I have to admit that I feel quite a bit of anger that people who don’t get it, somehow got placed in these positions of great power. But anger won’t solve the problem, so I’ll get over it.

Now comes the solutions part. I am a firm believer in Occam’s Razor, which refers to a principle that basically states, “All other things being equal, the simple solution is the best.”

So I’ve come up with 3 simple steps we could take to help fix our economy:

1. Invest in assets that will generate revenue. I wrote quite some time ago about the simple genius of this strategy that is covered in Robert Kiyosaki’s book, Rich Dad, Poor Dad. If government wants to invest in turning the economy around, then government has to put more thought into the development of its assets and how it derives income from those assets. Things like our highways, ports, our military and our national parks are all assets that could be generating more income. We have to change the paradigm of how our government invests so we continue to be innovative in developing these assets to provide more lucrative revenue opportunities. For our government, that means using the development of our assets to generate jobs and income opportunities (user fees at National Parks, resource development on government owned lands, selling of government funded technology, etc.). As for the private sector, this step will happen out of necessity. There is an old saying that cream rises to the top. Eventually the last investors standing will be those who are wise enough to follow this basic strategy.
2.Make accountability a part of all financing and investment decisions. Everybody talks about regulation, whether we should increase it or decrease it to spur the economy. To me, there is no need for this debate if accountability is included in all investment decisions. Consequence is an amazing regulator. Our problem is that we have allowed too many people to be insulated from the consequences of their poor decisions. We could change this by having shareholders demand that executive compensation be tied to company performance. There could also be an insistence by all lenders that there is some form of personal investment made in any financial investment deal to make sure decision makers have some “skin in the game.” If I had my say with our Congress, I would make sure that all executives who are making decision with bailout money have some of their personal assets pledged as collateral. Then we would find out how confident they are in their ability to properly utilize that public investment. Those who are not willing to be accountable should not ask for handouts and should wait this crisis out on the sidelines.
3. Increase financial education. William Durant wrote, “Education is a progressive discovery of our own ignorance.” One of the things that we have learned in this economic crisis is that quite a few people had losses in the marketplace and they really had no clue in regards to the level of risk they were taking with their investments. The use of mutual funds and IRAs as an investment tool really didn’t gain traction until the late 80’s and early 90’s. It brought millions of new investors into the marketplace, with many of them not having a clear understanding of what they stood to lose. Most people didn't realize what they should be researching or even have a clue as to whether their investments were high risk or safe. That is because times were good and they believed their advisers as long as they were making money. But now that people are watching their values dwindle, all of a sudden they are starting to take notice and ask questions. Well, let’s not forget this progressive discovery of our ignorance and insure that we learned our lesson and teach others what we have learned. The fundamentals of business and investment should be taught in all secondary schools and community colleges should make financial educational more accessible as a non-credit curriculum so anyone who wants to learn more can.

I remain optimistic about our economic situation. I am obviously over simplifying some complex issues, but this is where we have to begin. We live in a big world with quite a bit of consumers who need products or services. Eventually more entrepreneurs will recognize this and profit from their ventures. That is if they maintain the bravery to be accountable for their actions and work responsibly towards achieving success.

Too Big To Succeed

2008-11-22T11:10:00.005-05:00

There is quite a bit of talk about the proposed “bailout” of the auto industry. Like many Americans, I have very strong reservations about some of the proposals being considered. Our nation's leaders are spending our money without enough thought in regards to what we will get in return for that spending. Let's think about this. GM and Ford are both publicly traded companies that that had billions of dollars of investor's monies available for them to operate their companies and they have not been able to develop a fiscal contingency plan to weather these tough times.

One of my favorite sayings is in a little book of wisdom by Texas “Bix” Bender entitled, Don't Squat With Yer Spurs On! A Cowboy's Guide to Life. In his little book of philosophical musings, Mr. Binder offers this bit of advice, “The first thing to do when you find yourself in a hole is to stop digging.” My question is, will the automakers stop if we give them the resources to keep digging?

I also like to use this little nautical analogy to describe the term “bailout.” Think of a person with a cup feverishly scooping water out of a boat to keep it from sinking. Well, that works if it is a little rowboat and there is a small, slow leak. Yet when the Titanic hit that iceberg, do you think a bailout plan would have helped keep that behemoth from sinking?

The pundits who support this bailout are using fear tactics to scare the public in believing this is an absolute necessity for our economy to survive. A common phrase thrown out is “too big to fail.” They like to scare us of the prospect of all the lost jobs and the local economies that will be crushed by the collapse of the US auto big three. As someone who owned a business that was directly across the street from a General Motors plant that closed in 1993, I will say that life goes on. My younger brother still owns that same business and he is thriving. The town is not a ghost town by any means and has been growing as new and different industries eventually resurrected the community. Of course there were some difficult times for some people, but the reality of life is that we have not discovered Utopia yet and there will always be difficult times for some people.

If our auto industry collapses, obviously, thousands of people will lose their jobs. Some will find other employment and some will need government assistance. Yet, as a taxpayer, I would like to know that $25 billion is available for these people to put food on their table and keep their homes while they seek new employment opportunities. Those of use with some semblance of intelligence know that if the $25 billion goes to the auto industry, only some of that money will trickle down to the employees and quite a bit of it will be spent foolishly, as they will continue making the same mistakes they have been making over the past few years.

GM had $178,199 million dollars in sales in 2007. Their cost of sales was $166,259 million dollars. That is a gross profit of $11,940 million dollars. Is there anybody but me who doesn't recognize the gross incompetence of not being able to operate a company profitably that has $11,940 million in gross profit? GM lost $4,390 million from operations on those sales. By the way, during that same period, the top 5 executives of GM who oversaw this debacle took $20.7 million in 2007 compensation (this does not include stock awards and option awards). For an executive to have the audacity to get paid $4 million dollars/year and request government assistance so they can continue operating chills my heart. Hey Congress, I will run GM for a year at a $100,000 annual salary. And I provide the guarantee that I will do better than have $4,390 million in losses (heck, I just saved $3.9 million to the bottom line with just one proposal, imagine what I could do with a little bit of time to sort out some of their other wastes of operating capital).

To me, our automakers are not too big to fail, they are too big to succeed. Yes, the automakers are faced with a changing economy with fuel costs rising, green initiatives taking hold and numerous other factors. Still, they are too big to respond quickly to these market changes. And what is the incentive to change course when those at the helm have no recourse if they do not react to market changes?

Small business owners do not get the luxury of government bailouts. When they are headed for disaster, the successful small business owners will change course. Of course, sometimes the situation is insurmountable and even a change in direction cannot avert disaster. Still, if their boat is sinking, they jump ship, swim to safety and then look for the opportunity to build a new and better boat to set sail in the dangerous ocean called the marketplace. Sometimes the new boats fail, as well, but the successful entrepreneurs always find a way to eventually build better boats as they navigate the marketplace. They are quick to respond to changes and dangers out of necessity.

That is what happens in a free market society. There are no guarantees for safe passage. Yet we do not develop great captains by rewarding them for navigating their ships into trouble. They must either learn from their mistakes or from the more experienced captains who have already survived such challenges.

I say let the auto industry get themselves out of this jam. Necessity will require them to find a better way to operate or they will fail. Even if they fail, eventually, some wise entrepreneurs will find some value in the infrastructure that remains and rebuild better companies that provide vehicles to get our great population across this great nation. These vehicles will be innovative and profitable. That is what the market demands and that is what the wise entrepreneur will develop.

I would like to conclude by saying that we are not in a great economic crisis. There is an old Chinese proverb that states, "A crisis is an opportunity riding the dangerous wind." We are in dangerous times, but opportunity abounds for those who can ride the winds of innovation.

An Election of Hope and Opportunity

2008-11-04T09:09:00.004-05:00

Early this morning, I exercised my privilege to vote. It is a right that I did not earn, as I was fortunate enough to have been born in the United States of America. Still, I am forever grateful that I was bestowed this right to exercise my opinion in a free society.

Every election, I step into the voting booth and hope that my vote will make a difference. I’ve lived all over this great country and have had the opportunity to cast my votes in places as metropolitan as Central New Jersey and in areas as remote as Wasilla, Alaska. I’ve watched as my votes represented more than one half of a percentage point in a local election to less than one hundred millionths of the electorate. Yet in each case, that vote held equal importance to me.

Every vote is an opportunity to be part of a great societal process. Whether my candidates of choice win or lose, I was able to bring my opinion and influence to the governance of my town, county, state and country. It is a great honor.

The tally of our votes will be counted and we will have some changes in leadership of our governmental entities. Some of my preferred candidates will win, some will lose. I will not mourn my losses, because no matter who gets elected, they are still required to govern all their constituents, not just those who voted for them.

So I plan to keep a dialogue with the leaders who have earned the privilege to serve in public office. The rights bestowed to me in this great society do not whither the day after the election. Whoever gets elected can expect to hear my opinions outside of the voting booth. Of course, most of those opinions will relate to entrepreneurship, innovation and small business development, as that is an area that holds great importance to me.

I will also say that I am one of the many who is glad the campaign is coming to a close. Now the rhetoric will end and the action will begin. We all know that not all of the seeds of promise planted during the campaign will bear fruit. Still, we can nurture the rooting of good ideas by sharing either our support or better perspectives.

The great warrior Sun Tzu once said, “Opportunities multiply as they are seized.” I will add that opportunities are easier seized if there is an army of support. At some point, necessity will bring those with differing opinions together towards a common cause. As we have found at numerous times during our history, our great nation has united in the face of national and international challenges. I expect no difference in the future, no matter who we elect.

Small Business and the Presidential Election

2008-10-28T10:16:00.006-04:00

The role of small business in the presidential elections was brought into the national spotlight with the mention of “Joe the Plumber” during the last presidential debate. Mr. Wurzelbacher was referred to 26 times during the discussion that evening. You would think that small business would become a major component of the economic policies of each candidate based on that debate and the follow up references thereafter.

Below are links to the websites for John McCain and Barack Obama that refer to their positions on small businesses.

http://www.johnmccain.com/Issues/JobsforAmerica/smallbusiness.htm

http://www.barackobama.com/issues/economy/#small-business

I am going to let their own words speak for their positions. I will add my editorial opinion that both websites seem to be lacking in substance. There are some in depth issues that concern many small business owners that are not being addressed sufficiently.

I will also add my opinion that both campaigns spend more time talking about the other candidate’s economic policies rather than their own. I am sorry, but I don’t want to hear from John McCain what is wrong with Barack Obama and I don’t want to hear from Barack Obama what is wrong with John McCain. I want to hear what substantial policies each candidate will implement to help small businesses bring innovation to the marketplace.

Yet I am getting off topic and I want to focus more on what our leadership should be doing for small businesses. If I were given the opportunity to help either campaign, my positions on small business would focus on these issues:

• Capital Access – Making sure small businesses can get funding to implement a solid business plan. Almost all innovation in the marketplace comes from small business and innovation has risk. Banks can’t shoulder the burden of too much risk and maintain profitability. I will compliment the government, especially the SBA, for developing some good programs to make financing more available to some businesses. Still, there are flaws in the system and it is time for the US government to develop a 21rst century plan that provides not only more access to capital, but a better due diligence system that limits the risk..
• Technical Assistance – I am not saying this because I am one of the government’s technical assistance providers. I am saying this because we still have not done a good enough job of helping early stage entrepreneurs understand that developing a successful business goes beyond having a good idea and vision. It requires operational expertise, marketing expertise and financial management skills. We still have businesses getting government backed financing that do not have effective business plans with functional budgets and forecasts. These business owners need to be partnered with better mentors who can help them develop the best practices that have been utilized by those who have achieved success. Our resources have been too focused on theory and we need to get more practical technical assistance programs out there for small businesses. This would include developing a more involved direct mentoring of small business owners receiving government backed financing.
• Procurement – The government, at Federal, State and Local levels, spends trillions of dollars each year to operate. While small business owners do have the opportunity to bid on some contracts, the processes in place are archaic and do not provide a level playing field for the average small business owner. If I had the opportunity, I would develop a more streamlined process for bidding and managing procurements to provide greater access to small businesses.
• Regulatory Streamlining – Regulations are a necessity and I am not talking about deregulation here. The problem is that we have not been strong enough in providing the technical assistance for small businesses to get the answers on how to follow regulations properly or cost effectively. If the government is going to develop regulations, they should also develop the technical assistance to make it easier for businesses to comply with those regulations. Talk to just about any small business owner and you will find a disdain for some government agency because of their confusing regulations or permitting requirements. Most of these agencies have been guilty of creating a culture of non-compliance by being ambiguous in what they want and ruthless in their pursuit of perceived offenders. By creating regulations with clearer instructions and better technical assistance, we can foster better compliance. We need to change the government paradigm from being a regulatory police force to a compliance enabling force.
• Healthcare – Most small business owners want to get healthcare for themselves and for their employees. The problem is that the costs of healthcare are not only prohibitive, they are unpredictable. It is impossible to budget for the steep increases in healthcare costs each year. I know this is an area where both presidential candidates have offered very different solutions. Unfortunately, neither solution addresses the true problem (in my opinion). I wish I could offer an alternative solution, but I just don’t have one. I will say that the common denominator in both plans presented, and the major flaw in my opinion, is they see the problem as making healthcare plans more accessible. That solution will fail, as it will only drive up the cost of healthcare, because demand will become higher. Economics states that as demand increases, so do prices (if supply stays constant). And it is the same simple economics that is the problem we have to address. Healthcare has an inelastic demand. That is, people want to live, so they pursue healthcare. Here in is the problem. The demand is so powerful, people will pursue it whether they can afford it or not. So the suppliers (healthcare companies and healthcare providers) don't get paid in those situations. If this goes unchecked, it will effect their ability to stay profitable and continue supplying healthcare. Our society needs healthcare. Demand is growing, because our population is growing (not to mention, living longer) and that demand is inelastic. Like it or not, capitalism and inelastic demand don’t work very well together and that is something that a lot of people have trouble reconciling.

So I’ve identified my concerns for small business. I would invite other small business owners to comment and address issues that concern them. I would really like to stay away from getting into a debate between candidates. Let’s make a decision for who we want and accept the fact that other people are entitled to have differing opinions.

In regards to my opinion, I obviously have some social leanings that can't be hidden in the editorial contents of my posts. I also used to own a bagel store just outside of Wasilla, AK where Sarah Palin would stop by on occasion. She really is a quality person who is intelligent, charitable and dedicated to public service.

Unlike most people who offer their opinions, I find both candidates and both of their running mates to be quality individuals who have shown dedication to serving this great nation. I don't agree with all of their opinions, but I appreciate their commitment to make this country a better place. I will conclude with the true gem that came from Joe the Plumber when asked about his presidential choice. He said, “It's between me and the button I push.”

Increasing Your Bottom Line

2008-10-14T22:03:00.004-04:00

I am teaching a class this Thursday entitled, “Increasing Your Bottom Line” in partnership with the Plattsburgh-North Country Chamber of Commerce and our local SCORE chapter. For those who are unable to attend, I will give a little preview of this presentation.

As I have said in some previous posts, there are only three things you can do to increase the profitability of your business:

* Increase Prices
* Increase Volume
* Decrease Expenses

The simplicity of focusing on these three strategies would seem to make business management a relatively easy task. Unfortunately, the implementation of these strategies is complicated by the huge range of variables that may result from any decision.

For example, if you increase your prices and maintain your current volume of customer transactions, you will certainly increase your profitability. Yet we know that if you raise your prices, you become more susceptible to losing volume. What if the competition doesn't raise their prices? You run the risk of losing customers to them. That is not the only variable that comes into play. What if your customers can no longer afford your prices?

To increase volume, I like to refer to your strategy options as a two step dance. The first step is to get your existing customers to purchase more each time they make a transaction. It is no joke why fast food establishments train their workers to ask, “You want fries with that?” Every time you can add an item to a transaction, you will increase your volume and your ability to increase profit. So train your employees to offer more products or services to your customer. Don't have any more products or services to offer? Maybe that's the problem and may be missing out on an opportunity to grow your business.

The second step to this dance is to get more customers. That is also easier said than done, but we'll do some postings in the future to help seed some ideas in this area. Basically, it boils down to marketing your business. Jay Conrad Levinson, the celebrated author of Guerilla Marketing, says, “marketing is everything you do to promote your business, from the moment you conceive of it to the point at which customers buy your product.” So keep doing everything, but try to do more of it!!!

Like with raising prices, there are risks to your attempts to increase volume. By adding product lines, you may incur the costs associated with the increase of inventories. You also run the risk of “cannibalism.” Cannibalism refers to the sales of one product line eating away the sales from other areas of your own business. Adding services may increase your labor costs, decrease your productivity or carry other unforeseen costs. Another concern is the costs associated with marketing your business. While there are some great books on saving money on marketing, any plan will at the least require your time; and there is a value to your time.

The final option is to decrease your expenses. I will again reference one of my favorite humorists, P.J. O'Rourke. In his book, Parliament of Whores, he introduces the P.J. O'Rourke Circumcision Principle which simply states, “you can take 10% off the top of everything.” Can you cut some fat off of your operating budget?

You need only to go back to my first post on this blog, “You Can't Cut Your Way to the Bottom Line” to get my opinion on your prospects in this area. Still, if you can cut some expenses off your budget without that sting that I felt by just typing the word “circumcision,” you will increase your profitability.

The purpose of this posting is not to get you to make rash decisions, but rather, to encourage you to explore the possibilities. Your main responsibility as a business owner is to maximize profitability. When was the last time you reviewed your options? Can you come up with a plan of action with a forecast of the expected results? Have you done a risk/reward analysis?

If you want to join our discussion this Thursday, here is the link to more information on this event:

http://www.northcountrychamber.com/MBTP/eventspage.cfm?ID=150

Another "Main Street" Opinion

2008-10-01T08:29:00.012-04:00

I feel compelled to weigh in with my “Main Street” opinion on our current fiscal crisis. I welcome comments with contrary opinions; I just ask that you please keep them courteous. I also give two disclaimers. One is that this is my personal opinion and it doesn't reflect the opinions of my place of work or any affiliated organization. The second disclaimer is that I am not an economic expert, nor am I in any position to make a decision on what happens with the bail out process (except with my personal vote this November and I address that later in this posting).

Recently, I have been telling anyone who will listen to remember the words of Albert Einstein, "We cannot solve the problems we face at the same level of thinking as when we created them."

The issues I have with the "bail out" plan, as proposed, is not that I am against investment in our economy. There is no doubt that our tax dollars are a contributing factor in our economy and there is no way around that. My problem with the plan is that it does not appear as if our tax dollars are being invested. As proposed, our dollars are being used to purchase worthless assets from private companies who made poor decisions so they have capital to continue investment in wiser opportunities. The principal behind that is that the taxpayers need to do this to insure there is capital available for future investment. That is fine by me, but if the taxpayers are going to put up money to ensure the continuing flow of credit, shouldn't the taxpayers reap the rewards of that investment?

The "bail out" plan relies too much on a good faith assumption that a successful economy created by private firms making money will reward the taxpayers. Well, in my opinion, past performance is the best predictor of future behavior. Over $126 billion was pledged to bail out the Savings and Loans in the late 80s and early 90s and we watched that industry recreate itself, develop amazing wealth and then squander it through poor judgment to lead us back to where we stand today.

I remind you that just two years ago, some of the same companies that are seeking a taxpayer bailout were handing out huge bonuses. See this link to some of the corporate bonuses that were doled out in 2006 by some major players in this industry:

http://www.bankersball.com/2006/11/06/2006-bonuses/

How much of that wealth trickled down to the average taxpayer? Why wasn't that money socked away for a rainy day such as today?

So I've stated the problem, but what is the solution? Unfortunately, I don't have the answer. I am spinning my wheels trying to help come up with a good suggestion. But I am not an economics expert and I tend not to make decisions of this magnitude without some thought and research. Yet here in lies another problem; everyone seems to think we need to fix this by next week. To be frank, for the President, the taxpayers or the press to expect Congress to just turn over $700 Billion of taxpayer monies in one week to an industry that created a financial mess that was years in the making is just an unreasonable expectation. Even more ludicrous is the belief that Congress can make an educated decision in this time frame that carefully projects likely outcomes of of this appropriation. I’m not very comfortable with the odds for success.

Still, I am going to try to throw something out there and the best suggestion I can make is that we could follow Robert Kiyosaki's advice for a best practice of investment strategy, as outlined in his book, “Rich Dad, Poor Dad.” As noted in a previous post, he suggests that investment should be in assets that are likely to generate income. So let’s invest taxpayers dollars in those types of assets instead of the worthless junk that we are proposed to be buying. At least with this model, the taxpayer’s investment will stand a chance to yield the taxpayer some rewards.

Unfortunately, there is no mechanism in place to make decisions on investing so much public dollars into private industry wisely and prudently. So many people will throw out my suggestion because the world is on the verge of collapse and it is just not timely enough of a solution.

Keeping that in mind, I feel that we are faced with these alternatives:

1. Congress can act now and throw taxpayer dollars at a poorly conceived, reactionary bail out plan
2. Congress can actually work on a bipartisan, proactive plan that ensures the flow of credit is available after developing a mechanism to wisely invest public capital into private industry
3. We do nothing and let the private sector continue with its fascinating, Darwinian “survival of the fittest” economy

Here is what I foresee to be the results of each alternative:

1. Come November, the largest number of incumbents who lose Congressional elections is realized due to people like me who can't see the benefit of Congress bailing out Wall St. (especially when no government solutions were offered to me when I made poor investment decisions)
2. The Devils win the Stanley Cup since home ice advantage is obviously in hell because it just froze over.
3. Some people will lose a lot of money; some people will make a lot of money. Credit will tighten in some markets; credit will loosen in other markets. Some people will lose opportunities, some will gain opportunities. In other words, on a macro level, nothing will change.

For those who need me to be more literal about my editorial opinion, I am obviously in favor of letting the market sort things out. I am a bit cynical with my belief that our government is not capable of pulling politics and favoritism out of their decision making process. I am even more fearful that too many Congressional leaders do not have a strong enough understanding of finance to be making such a large “investment” decision, especially with other people's money.

I do not buy in to the global economic meltdown theory. In my opinion, it is like a law of thermodynamics: "The economy cannot be created or destroyed." The economy is still there, it just gets moved around in different ways.

I am well aware of the fact that there will be tragic stories of loss should government not act and I can empathize with those who stand to lose so much. But some of us have already had tragic stories of loss and the government left us to pull ourselves up by our own bootstraps. And can anyone think of a solution in our economy where everyone wins? Our competitive marketplace does not allow for that, which is the main reason why I stand firm in my belief that government should keep as much distance from this mess as possible. For the government to choose who wins in this game is too dangerous.

As P.J. O’Rourke once wrote, “The mystery of government is not how Washington works but how to make it stop.”

Where's the Value?

2008-09-26T11:32:00.003-04:00

This week, I have received over five inquiries from people interested in buying existing businesses. Each inquiry was related to getting bank financing and, in my opinion, none of the inquirers did enough research to justify whether the businesses were even worth the amount of money they wanted to borrow.

Human behavior has always baffled me. Why would someone buy a business without an in depth review in regards to the legitimacy of the asking price or a feasibility analysis of whether this will provide a reasonable rate of return on the investment? Sometimes I think people will put more thought into finding a gas station that can provide a $0.05/gallon savings on gasoline than they do in making a business purchase. I say this because I’ve had too many unfortunate counseling sessions with people who have made bad business purchases. The common denominator in most of those instances is that no proper research or planning was done during the purchase process.

In my opinion, the first step in purchasing a business should be assessing feasibility. A feasibility analysis will answer the following questions:
• Do you have the capital to invest into the purchase of this business?
• Do you have the skills to manage and operate a particular business (this is especially important for those who are considering purchasing a business in an industry in which they have no prior experience)?
• Do you have the time to commit to this business?
• Does this business have the potential to provide a return on investment that meets your financial goals?

Some people will argue with me that these questions can’t be answered without assessing value. The point I want to make is that before assessing value of a business you intend to purchase, you should assess the amount of money you can afford to invest. Why bother wasting your time or the seller’s time if there is such a huge gap between what you can afford and the asking price for a business? Also, anyone who purchases a business should have a reasonable expectation of earnings based on how the business will operate after the purchase. You can’t just look at the past performance, there needs to be a forecast of what will change once ownership changes hands.

After you assess feasibility, then you should begin a valuation analysis of the business you want to purchase. The most important thing to understand in doing a valuation analysis is that there is no subjective method for assessing value. There are formulas you can use to make estimates, but the value is ultimately determined by what the seller is willing to accept and what the buyer is willing to pay.

Below is a link to an article with detailed explanations of some of the different business valuation methods you can use as a guide, but I caution you not to consider any formula as an absolute indicator of a value of a particular business.

http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P11_2240

If you have already done your feasibility analysis and you have arrived at an agreed upon value, the next step in the process is a due diligence review. Due diligence is the verification of information presented to you during negotiations. It is also researching more detailed information about the history of the business. The link below contains a fairly extensive checklist of things you may wish to investigate.

http://smallbusiness.findlaw.com/business-forms-contracts/be3_8_1.html

I also strongly suggest that before a purchase is made, you ask the seller for references from some vendors and customers. While the due diligence checklist addresses getting information on customers and vendors, I suggest you take it a step further and actually script some questions on issues such as consistency in service, challenges they may have had with the company and their opinions on operations.

You should also remember that the best due diligence is your own direct observation of how the business operates. While you have to be cognizant of confidentiality issues, if at all possible, try to witness as many details as possible to ensure that you truly understand how this business functions.

As someone who is both purchased and sold businesses, I will add that it is very common to have buyer’s remorse and seller’s remorse. You always wish you negotiated a lower price when buying a business and a higher price when selling a business. As Mary Pickford once said, “The past cannot be changed. The future is yet in your power.”

Be Like Mike

2008-09-19T08:23:00.002-04:00

A good friend wrote a comment to my last posting and I wanted to feature it in this posting.

Mike Loiacono and I have known each other since 1973. Together, we started our very first business in 1984 (Spectrum Mobile Disc Jockey Service). He taught me many great lessons about business, while I showed him that people really will dance to “Crocodile Rock” (he almost killed me when I cued that song up at a wedding reception...surprisingly, it didn't clear the dance floor!). Mike has gone on to become a big shot CFO (chief financial officer) for a publicly traded company and I can attribute much of my accounting knowledge to discussions I have had with him. Thanks Mike!

Here's some of what he wrote in his comment:

“I would like to add to your blog if I may. Not only is it important for the business owner to 'learn not to be there' it is equally as important for the business owner to plan for one or more of their employees to 'not be there'. And what I am referring to is the importance of cross-training. A well-oiled machine works as well as the sum of all of its parts. What an organization does not want is for its operations to stumble when one part is missing.

As CFO, I have created and implemented a TCE (Train, Cross-train and Empower) program. Each of my employees are not only trained to perform their functions, but are also able to fill in when someone else in the department is out. This type of program satisfies two of my concerns as a manager:
1.) Enabling the department to run effectively even when there is absenteeism (or 'what happens if you get hit by a bus')
2.) I am NEVER backed into a corner by a potentially disgruntled employee who has a gun to my head because he/she is the only one who knows the job.

While smaller (and some larger) businesses may not have the wherewithal to produce training videos similar to those of the major fast food establishment you referred to in your post, it is indeed vital for all organizations to invest the time to develop detailed training manuals for all of the functions of the organization.

An organization cannot allow employee turnover (or absenteeism) to impact customer satisfaction. The best investments a business owner (or manager) can make are the investment of time in the hiring process and the investment of time in training and cross-training.”

Mike's advice is exceptional and I appreciate his sharing of these philosophies. The development of detailed training manuals and “cross training” are best practices that more companies should embrace.

His comment about “the only one who knows the job” is one that particularly strikes a nerve with me, as I have actually seen previously successful businesses fail when a key member of the organization leaves. Management should accept the responsibility to develop contingencies for the absences or departure of each member of their staff. If not, the odds for long term business survival are greatly diminished.

Life happens. Employees are going to miss shifts, sometimes for legitimate reasons and sometimes do to poor judgment. Employees are going to eventually leave your organization. Sometimes it will be by their choice, sometimes it will be your choice and, unfortunately, sometimes it may be due to circumstances beyond the control of either party. While you can continue to value your employees for what they offer your organization, reality dictates that they will not be there forever and your business should be prepared for the temporary or permanent absence of every member of the staff. As Charles De Gaulle once said, “The graveyard is filled with indispensable men.”

Learn to Not Be There

2008-09-14T20:53:00.004-04:00

I was at a local business the other day and had a bad experience. I've always had good service at this business on previous occasions, but this time, I was very disappointed with my service. One of the reasons why this experience was bad is because the owner was not there on this particular day.

This is an endemic problem with many small businesses. The business has a good model for success, as long as the ownership team is present, but once unsupervised, things fall apart. It gets to the point that where the ownership team feels they need to be there during every hour of operation.

The stories of small business owners working 80 – 100 hours per week are true, no doubt, because sometimes that’s what it takes to get the job done. I have to admit that not only did I do that, but I was guilty of wearing that as a badge of pride in my early days as a small business owner.

Yet working that many hours is often a sign of poor operations management and could be a tell tale sign that a business is not investing enough time in training their employees. Small business owners who have employees and still work that many hours should question whether they could delegate more of their duties.

It wasn’t long after working the countless hours in my stores that I learned that nothing I did was really that specialized of a skill. I was always the guy who made the bagel dough and baked the bagels in the first few years of operation. On the days I did turn it over to my partner or an employee, I would have this foolish pride in the fact that a few regular customers would notice that someone besides me made the product, because it wasn’t as good as when I made it.

It didn’t take long for me to have the epiphany that if I wanted my business to improve, as well as my quality of life, I could not make myself so mission critical to success. Rather, I should invest the time in training my employees to be as good, if not better, than me in helping out with operations.

I referenced the fact that I worked for a major fast food establishment in a previous post. One of the things that I remember from my experience there is that I had to watch 30 minute training videos before working in any of the stations. Whether it was working the grill, the fryer, the cash register or on janitorial duty, there was a video of how to properly work that station. I still remember how all the employees hated janitorial duty (it was called “lot and lobby”) where we had to change ashtrays, take out the garbage, sweep/mop and clean the bathrooms. Still, we watched a video on how to properly perform all those tasks to this company’s standards.

The realization that these videos were pure genius struck me years later when I told one of my employees at my bagel store to mop the front area floor. I went to do something in the back and returned to the horror of a floor that looked much worse after the mopping than before. You see, I forgot to tell this employee that before you mop a floor, you have to sweep up all the loose dirt. While that may seem like common sense to some, those of us who have had employees learn quickly that for there to be common sense, there needs to be common experiences and training. This particular employee never had to mop a floor before and this was his first experience. I may have made the same mistake the first time I mopped a floor had I not watched that training video at my first job.

Of course, you may have in mind delegating significantly more responsibility to your employees than just a mopping a floor. That is fine as long as you are committed to training your employees to accept those responsibilities.

When approaching training, keep in mind the old maxim to “hire for attitude, train for skill.” Especially when delegating management responsibilities. You can train your employees to develop certain skills, but you can’t change their temperament.

Developing a training program is not easy and it will take an investment of time. Just remember that every minute invested in an effective training program will return countless minutes of your own future productivity.

Remembering Vic Saracini

2008-09-10T23:37:00.004-04:00

In my 17 years as the owner of bagel stores, I have had the opportunity to meet so many wonderful people. Being in retail, I've been blessed to have thousands of customers who would share more than just a business transaction with me. In this post, I am not going to talk about business, but rather, I would like to share a personal story about a customer.

Today I am thinking about a customer who came into my Pennsylvania store back in early May of 1996 and started a conversation with me. The conversation starter was a little sign that I put up announcing the arrival of my daughter, Sarah. Sarah was my second child and first girl. The customer, an airline pilot, noticed the sign and congratulated me. I made a comment how I wasn't prepared to be the father of a girl. He smiled and told me about his two young girls and how they make it so easy. “They are little princesses,” he said, “they are so loving, they are so devoted to their Daddy. It's such a great feeling coming home to them.” It was quite some time ago and I am going from memory, but I am pretty sure he used “princess” and “devoted” when describing his daughters. I think he may have said “beautiful,” as well, but I'm not sure. I really wish I could remember the conversation better.

Why do I want to remember his exact words? Because I want to share the love I heard in this man's voice for his family. I want people to know about this special person, who just came to my store for a quick snack and took the time to share a kind thought and a smile.

September 11, 2001 was a tragic day; not because an infamous event occurred, but because this kind gentleman, Vic Saracini, passed away on that day. While many people refer to that day as “Nine Eleven,” it was more than just a catch phrase, event in our history. It was a day when over 3,000 loving and caring people were senselessly murdered by cowards. I am sure there is probably a more effective way to express my emotions about that horrific day, but the words escape me.

I did not know Vic Saracini well enough for me to be able to write much more. There is a “Garden of Reflection” in Lower Makefield, PA that provides tribute to the lives forever changed on that tragic day.

Garden of Reflection

There will be various remembrances on September 11th this year and for years to come. I hope we not only unite as Americans in remembering the day, but also take the time to think of the people who perished. Their lives may have been taken, but they will never be lost if they remain in our memories.

Everyone Owns a Number

2008-09-06T20:23:00.012-04:00

The title of this post comes from a portion of a presentation I attended in Chicago made by Roger Pell, SVP of Inmatrix. Mr. Pell's company distributes a great financial diagnostic program called Optimist. I've used this software and I am offering an unabashed testimonial for its functionality in helping businesses forecast and improve financial performance.

Below is a link with some information on this software for those who are interested in learning more about it.

Optimist Information

I consider Mr. Pell a kindred spirit. Mainly because the tag-line for his company, Inmatrix, is “making business simple.” You need to look no further than a few past posts to see my claim that business success is as simple as having more income than expenses and I believe that too many businesses struggle because they lose focus and forget to pay attention to some simple financial indicators. The story is always there in the numbers, you just have to know what to look for.

One of the suggestions that Mr. Pell made during his presentation was that businesses should create a culture where “everyone owns a number.” He was referring to open book accounting, which basically encourages businesses owners to share portions of their financial information with their personnel. I have always been a strong proponent of this practice and believe that more businesses would increase their productivity if they shared financial information with their front line employees.

Before you respond with comments that question my sanity, I suggest that you read two books. The first is called The Great Game of Business by Jack Stack with Bo Burlingham. Jack Stack helped turn Springfield Remanufacturing Corporation, a nearly bankrupt division of International Harvester, into a very successful operation using an open book management system that encouraged employees to play the “game” and understand the profit centers that dictate success in their organization (A Stake in the Outcome is another great book written by Mr. Stack).

The other suggested reading is Nuts! by Kevin and Jackie Frieberg. This book is the story of Southwest Airlines and shares some of the interesting business philosophies of Herb Kelleher and his management team in developing a corporate culture that is unrivaled in the airline industry. While open book management is not the focus of this book, there are some great excerpts of how they incorporated this practice and the positive results that were generated because employees were given a stake in profitability and access to key data on performance.

Open book management gives employees incentive to perform and achieve goals, it allows for easier delegation and helps discipline an organization to pay attention to key financial data. There are many variations to implementing this process, from limited short term bonus incentives for employees to full disclosure and offering options for employee ownership (Employee Stock Ownership Plans or ESOPs).

I had my first exposure to open book management when I worked at a fast food franchise in NJ back in 1982. I was working on the cash register for minimum wage, which was $3.35/hour at the time. One night, my manager called a pre-shift meeting with the four register operators and told us we were going to have a “register race.” Whoever rang up the most sales between 5:00 and 9:00 PM would make an extra $1.00/hour for that shift; we worked a 6 hour shift, so this would be a whopping $6.00 bonus. I was up for the challenge and I remembered to ask “you want fries with that?” and to upsell the from fountain sodas to milkshakes.

My sales topped out at $800 for the period and I won the race that night. The fact that I still take pride in this silly little accomplishment evidences the power of a adding a little competition to the workplace (I will add here that part of the incentive to succeed was that I also had a silly little crush on my manager, Kathy).

Let's look at the results of that performance in a different light. I found out that night that I had usually generated $650 in sales per evening. So for an additional $6.00 cost, this corporation got an extra $150 in sales. The average food cost at this franchise in 1982 was around 22%. So when considering that all their other operating remained the same, they made an extra $111 that night ($150 - $33 food cost - $6 Rick bonus) by creating this incentive. Actually, they probably made even more, as my coworkers also were likely to have performed a little bit better than normal.

When implementing an open book management system, management still holds the keys to the amount of information that they share with their employees. You may not want to share everything, but at the least, I suggest keeping employees in the loop in regards to productivity benchmarks that you use to measure their performance.

If you don't have measures in place, now would be a good time to start. Accountants love when they hear, “you can't win the game if you don't keep score.” As part of any continuous improvement process, you should have some way to gauge productivity and efficiencies. These are often called “key performance indicators” (KPI) and they can be based on operating, marketing or financial benchmarks. An acronym often used when considering a KPI is SMART. This stands for: Specific, Measurable, Achievable, Relevant, Time bound.

Most KPIs are industry specific, so if you are not sure what measures to use, I suggest that you start reading some industry publications. You can also give our office a call and we can put our NYS SBDC Research Network to task in helping you out! I've added a link to their blog in my sidebar and suggest that you check out some of their great links to resources, as well as their interesting posts.

Contingency Planning

2008-09-02T07:22:00.004-04:00

(note: I posted this before finding out that September is "National Preparedness Month"...seems even more appropriate now!)

I am heading off to Chicago later today for the Association of Small Business Development Centers (ASBDC) annual conference. I have worked in three other SBDC networks and this conference provides the opportunity for me to visit with some old friends from Alaska, Arizona and Indiana. I also look forward to reconnecting and sharing war stories with some friends I met while doing relief work coordinated by the ASBDC after Hurricane Katrina. The ASBDC recruited this effort and I was joined by personnel from Florida, Maryland, Massachusetts, Nebraska, New Mexico and Tennessee to serve in Hattiesburg, Mississippi to help some small business owners deal with the aftermath of that storm (http://cccsbdc.blogspot.com has some details on that experience).

With Hurricane Gustav currently pounding away at the Gulf Coast, it provides a stark reminder on how the forces of nature can wreak havoc on our livelihoods. Millions of people were evacuated over the past few days and it is unfortunate that many will return to bear witness to the powerful damage that wind and water can do to homes and businesses.

As the sun shines here in Plattsburgh today, and in many other areas of the country, the storm that is pounding the Gulf Coast is also providing us the opportunity to learn a valuable lesson. As John F. Kennedy once said, “the time to repair the roof is when the sun is shining.”

In business planning, we talk about market analysis, marketing strategy, financial forecasting and operational management. Usually, risk management is just an insurance quote that goes on our profit and loss projections. Many business owners go no further than getting their insurance policy and putting it into the filing cabinet. Yet, I learned how important my insurance agents were to my businesses in short order as they helped me through a series of difficult issues ranging from wind damage, lightning strikes, worker injuries, earthquakes, theft and vandalism (thanks Dennis Regan & Norm Tyler).

With the power of hindsight, I wish I had given risk management and contingency planning more thought. As an eternal optimist, I think more about what can go right than what can go wrong. Reality is that life happens and things do not always go as planned.

While I have faced some challenges that resulted in some fairly significant financial loss, I count myself fortunate that the results of both the natural and man-made disasters I faced were minimal relative to what others have encountered. While I am no expert in disaster preparedness, I became better over time, learning from my mistakes and developing contingencies for future events.

It became common practice for my wife and I to add to our employee manual what we would do in the case of future events. We covered things such as power outages, equipment damage, earthquakes, windstorms and snow/ice events. Another thing that we did was to prepare for economic issues. We derived our family income from our businesses, so we always had a plan to whittle down our living expenses and to earn income outside of our businesses if sales slowed or stopped due to any series of events.

All businesses could benefit from developing their own contingency plans. Hopefully, your plan will be more well thought out than the haphazard and reactionary documents that I created. Think about natural events, mechanical issues, utility issues and what it takes to keep your business running (and your family fed!). Of course, your priority should include planning to promote the safety and welfare of you and your employees.

Below is a link to a helpful website.

http://www.ready.gov

I also encourage you to spend more time with your insurance agents. They have experience in dealing with these types of issues and the have real solutions to help your business. One of the powerful images that I remember from visiting Mississippi in the aftermath of Hurricane Katrina is in the photo below. I am not promoting this one insurance company, but it sends a clear message that life goes on as long as life goes on. Being prepared for these events just makes it a little easier.

I wish those in the Gulf Coast the best as they ride out this storm.

Discounts, Coupons and Customer Service

2008-08-27T16:38:00.003-04:00

Below is a paraphrase of a friend’s issue with her business:

“I started accepting coupons from my competitor (large National chain). I have rules about minimum purchase and people want me to honor those coupons without minimum purchase and they are also bringing in outdated coupons. I also run a promotion where I give a discount of 10% off a future purchase if a customer spends over $100. They need to bring in their receipt that has a coupon. I have customers demanding the discount from my workers without the coupon, expecting them to just remember. I would rather these customers spend their money with my business, but I feel I am being taken advantage of. How do I set the rules? What boundaries should I set?”

I will start by posting a link to a great article by Bob Phibbs:

7 Reasons Coupons Don't Work

While I don’t agree 100% with doing away with coupons and/or discounts, they should be used judiciously and they should be self created. My opinion is that accepting a competitor’s coupons is not a good strategy. You have to remember that your competitors may have better buying power to get their inventory at lower rates than your business. You are also giving your competitors control over your pricing strategy by accepting their coupons. Your pricing strategy is critical to the profitability of your business and should never be put in the hands of a competitor.

I used to accept competitors coupons at my bagel stores. Some other stores in our area ran similar promotions as us, such as “buy a dozen bagels, get 6 free,” so we accepted their coupons. However, our second year into running our store, a large national chain opened up within a mile of our location. They had a big media blitz and ran a coupon giving away a baker’s dozen with no purchase necessary.

My partners and I talked it over and we were all in agreement that it would kill our business to honor that coupon. So we stopped that practice immediately, recognizing that we would probably lose some customers for changing that policy. Our rationale was that if they came to our business expecting something for free, they weren’t really customers and we could stand to lose them.

I value customers and believe in developing customer loyalty. I am also aware of the fact that I have to convince my customers that I am better than my competitors to develop that loyalty. The reality of the situation is that I can only be better than the competition in a few ways. I can have better quality, better service, more convenience and perhaps a selection that is more tailored to my local market. I recognize that I probably can’t compete on price alone, as I just don’t have the resources to be a low cost competitor. If that is all that is important to a particular customer, then I know that this will never be a loyal customer to my business.

Yet here lies the conundrum. Isn’t it better to make a discounted sale than no sale at all? It is tough running a business and every dollar of gross profit contributes to covering the overhead. If a customer has $50 worth of merchandise that cost me $30, wouldn’t it be better giving them that purchase for $45 and take a $15 profit rather than letting them walk out with nothing and no profit?

It is difficult for me to say this, but I still will. As a business owner, I have to stand firm on my pricing and not give in to discounts that are customer driven. Discounts should be driven by my decisions. If we choose to let customers dictate our pricing, we are turning over our business plan to our customers. I love my customers and recognize that I need them to make my business successful; yet they don’t understand enough about what it takes to run my business to dictate their own pricing. They are thinking only of themselves, whereas when I set my pricing structure, it was with the intent that I could give my customers a benefit and maintain profitability.

Are you still not buying my advice? Let’s project that previous scenario a bit into the future. You give that customer her 10% discount and she buys that item for $45. It is the last one on the shelf. Your next customer comes into the store and wants that same item. She is a loyal customer who has never asked for a discount. You just lost $5 in profit potential and probably a bit of good will. Or let’s say you did have another item and you sell it to that loyal customer for $50 and she finds out someone else got the same item for $45. You just lost some more good will.

Discounts and coupons can still be a tool to help promote your business, but be selective and have a clear game plan. Are you trying to speed up the turn of slow moving inventory, trying to eliminate waste of perishable inventory or are you trying to introduce a new product line? Are you trying to increase the average ticket per customer or do you want to reward customer loyalty for reaching a certain benchmark in spending? If you have a legitimate reason, discounting and/or coupons may be a good tool for your business.

To directly answer my friend’s question, I suggest that you set clear rules for pricing based on what you feel is best for your business and stick to your guns. If you are going to discount, make sure it is a means to an end, not a reaction to a customer request. Nobody can take advantage of you unless you allow it. I refer you to my previous post.

Your customers are a precious commodity to your business and you should focus on developing a service policy that makes you stand out from the competition. Don’t confuse providing discounts with providing good customer service. After all, if your business is not profitable, you won’t be able to provide great service to any customers in the future.

Entrepreneurial Education

2008-08-25T13:11:00.002-04:00

I am often asked what dictates success in small business. Normally I respond that you have to have more income than expenses. Business is really that simple. That does not mean that it is easy. Income doesn’t just happen. Not only do you have to provide a market solution, you also have to let the market know, in terms they can understand, that you are the best choice for that market solution.

Managing expenses can be equally difficult. Getting the biggest bang for your buck out of marketing dollars is just one of the challenges. There are operating costs, productivity issues and distribution costs that can easily get out of control if the business is not tightly managed. Needless to say, small business owners have quite a lot to learn if they are going to be successful.

Personally, I’ve learned a lot about small business ownership over the years as the owner and operator of my own bagel stores. I also learned quite a bit by working as a food and beverage executive for some large corporations. Most large businesses started as small businesses and their larger scale success can be attributed to the best practices they implemented and trained their managers to follow.

I started my first bagel store when I was 23 years old, along with brother, who was 21 at the time. We made our share of mistakes and our lack of business aptitude was pretty apparent in the first few months of our operations. I still remember my grandmother calling me up to ask me how the business was doing. I told her I thought we were doing pretty well.

“What are your monthly sales?” she asked. I couldn’t come up with a number. After giving her my sales from the day before, she projected it out for me. Then she started asking about my expenses. “Food costs, rent, insurance, payroll, advertising?” she asked. I gave her some figures and before the conversation was over she computed a basic profit and loss analysis for me. The whole process opened my eyes to the fact that I was not paying attention to some critical data. Believe me, the next time she called, I was more prepared with answers.

Probably the most important lesson I learned as a small business owner stems from some frustration that I was having with my younger brother. He was complaining about a worker. “She’s horrible. She’s ruining our business,” he said. “You should fire her.”

I thought about this for a moment. Why was he putting this on my shoulders? He was a partner in this business. He should fire her. He is the one who hired her. I also thought that maybe she was horrible because he expected too much from her without giving her the proper training. But then I thought about it some more. Using that same rationale, I was guilty of making my brother a partner in the business without training him as a manager. He was only 21 and just graduated college. How was he supposed to know how to do these things?

That’s when I had an epiphany. If something goes wrong, it is probably my own fault. I started to use this train of thought every time our business was faced with a problem. I chose the path of self employment. No one forced me to open up bagel stores and it was my responsibility to face the challenges that go along with small business ownership.

The responsibility of owning a small business became a very humbling experience for me. It is tough to accept blame for everything that goes wrong. Over the years, I’ve had employees steal from us, seen my store get struck by lightning, had a windstorm blow out our drive thru window and dealt with a number of serious challenges in the aftermath of the terrorist attacks on September 11th. There were so many issues that seemed beyond my control when I was running my businesses. Yet, I kept telling myself, if I were to succeed, I had no choice but to accept the challenges and find the best solutions.

I do have to admit here that it was not always an immediate realization or Zen-like approach to problem solving. I would lose my temper, get frustrated or wallow in self pity just like many others when faced with difficult situations. But eventually I would remind myself (or have my wife remind me) to calm down, accept responsibility and just deal with it.

I found the key to my own entrepreneurial education – you have to develop the solution to every problem. Blame and self pity yield no results. If you are not prepared to accept responsibility, you are not prepared for self employment.

The road to business success is simple. Get more income than expenses. Just be prepared to drive around, jump over or crash through some obstacles along the way. Erica Jong once wrote, “Take your life in your own hands, and what happens? A terrible thing: no one to blame.”

It can be humbling being a small business owner, but it is also liberating. I choose to change Ms. Jong’s quote to, “Take your life in your own hands, and what happens? A beautiful thing: there is no one to blame.”

Pricing Strategies in an Inflationary Market

2008-08-20T15:54:00.004-04:00

Note: This was written last March, while I was working for the East Central Indiana SBDC...even though some supply costs have leveled a bit, I think this information is still relevant.

As supply costs in the food and beverage industry are inflating at alarming rates, now is a good time for effective food service managers to revisit their menus and develop some pricing strategies to position them for continued success in the marketplace. Quite a few operators are rightfully concerned about recent price increases. Still, this actually provides a nice window of opportunity to make some changes to menu prices and actually increase profit.

While I would like to provide a tried and proven formula food service managers could use for pricing their menus, the fact is that menu pricing is more of an art than a science. There are just too many different factors that come in to play and probably one of the biggest mistakes managers make is to price their menu offerings based on formula rather than thinking about some of these factors.Any business that is considering their menu prices should not only consider their supplier costs, but also a competitive analysis and some form of consumer price sensitivity research.

Having spent over 18 years as a manager in the food and beverage industry, I have heard so many of my colleagues make this erroneous statement – “You have to maintain a food cost of 33% or less or you can’t make it in this business.” Many food service managers take this to heart so much that they figure out their ingredient costs for an item and then multiply times 3 to get their menu price. This is a foolish pricing strategy, as there is significantly more involved in developing a successful menu.

The first thing to remember in pricing strategy is that it there is a difference between food cost/gross margins and gross profit. Gross margin is the percentage of the difference between your selling price and your supplier cost divided by the selling price (food cost is simply 100% – gross margin %)

Gross Margin = (Selling Price – Supplier Cost)/Selling Price

Gross profit is the dollar amount difference between the selling price and the supplier cost.

Gross Profit = Selling Price – Supplier Cost

The most important thing to remember is that gross profit is what pays the bills, not gross margin!

Below is an example of two restaurant managers with a company that owns a small chain of fine dining establishments. In this scenario, their supplier raised the cost of a bottle of their most popular wine from $6.00/bottle to $9.00/bottle. Each manager has a different strategy for dealing with the price increase.

	Original Pricing	Restaurant 1	Restaurant 2
Supplier Cost	$6.00	$9.00	$9.00
Menu Price	$20.00	$30.00	$24.00
Food Cost %	30%	30%	37.5%
Gross Margin %	70%	70%	63.5%
Gross Profit	$14.00	$21.00	$15.00

In Restaurant 1, the manager believes in maintaining his margin, so he raises his price to $30.00 per bottle. All is good in his world, as he is now making $7.00 more per bottle of wine than he was before and he is still maintaining his 30% food cost.

Restaurant 2 features a savvier manager. She knows her customers and is afraid that with such a steep increase, more of her customers will skip the wine to keep their dinner bills down. She still raises her prices to increase her gross profit, but her increase is not nearly as much as her counterpart at Restaurant 1 and she is losing a bit of her margin.

Chances are that Restaurant 1 will lose some sales because their price increase is so steep. Restaurant 2 is more likely to maintain the same volume of units sold. They compare notes at the end of the following month and find the following results:

	Restaurant 1 Last Month	Restaurant 1 This Month	Restaurant 2 Last Month	Restaurant 2 This Month
Wine Bottles Sold	100	50	100	100
Food Cost %	30%	30%	30%	37.5%
Gross Margin %	70%	70%	70%	63.5%
Gross Profit	$1,400.00	$1,050.00	$1,400.00	$1,500.00

By keeping her price increase at a lower level, Restaurant 2 did not lose any units sold and made $100 more dollars than the previous month even though her gross margin decreased. Restaurant 2 made $350 less than the previous month, even though he maintained his margin.

This is obviously an oversimplification of what can happen in these difficult times, but as prices go up from suppliers, menu prices will have to go up, as well. If not, an establishment will have to get a lot more customers to make the same amount of money that was being earned prior to the supplier increases. At the same time, an overreaction and too much of a price increase may make it easier to lose customer loyalty to competitors who are not as aggressive with their price increases.

In developing a strategy to deal with higher supplier costs, food service managers should remember to focus more on profit than on margin. For many establishments that have a loyal customer base, it is fairly easy to site articles that are showing 200% - 300% increases in supplier costs and then tell customers that a price increase was necessary, but that the increases were kept to a bare minimum.

With a bit of attention to consumer spending habits, the competition and supplier costs, smart operators have the opportunity to turn the proverbial lemons into lemonade.

The Sky Is Not Falling!

2008-08-19T11:19:00.002-04:00

“The sky is falling,” Chicken Little said to anyone who would listen. For those not familiar with this fable (this is not the Disney version), Chicken Little came to this conclusion when an acorn fell on her head. She then went and told this to anyone who would listen. Her friends all joined in this refrain until they came upon Foxy Loxy who agreed to help them. The animals were so scared of the impending doom that they let down their guard and followed Foxy Loxy, who said she was leading them to help. Chicken Little and her friends were never seen again.

To listen to some small business owners, you would think the sky is falling. High oil prices, commodity prices and the credit crises are a series of issues that are like the acorns that bonked Chicken Little on the noggin. These are real issues and they should concern small business owners. Still, “the economy” is the proverbial sky that is falling and entrepreneurs would be the wiser if they paid less attention to the gloom and doom hype in the media and more attention to the market conditions relating to their particular businesses. Too many small business owners who bemoan the economy are not paying enough attention to their economies.

On a macroeconomics level, the economy may be taking some hits. I am not an economic expert, so I am not going to define or analyze recession indicators, stock market trends or Federal Reserve issues. Instead, I am going to use the basics that I learned at Rutgers University in my freshman year Microeconomics class (see Dad, I did put my education to use!). By definition, the noun economy refers to “the system of production, distribution and consumption.” Every business has a unique economy. Each has its own system of producing products/services, means of distributing their products/services and customers who utilize their products/services.

Maybe on a macro level, trends are showing that we are producing less, distribution costs are higher and consumer spending is down. But is that really the case for your business? What have you done to analyze your production capacities, supply costs, your operating expenses and your pricing strategies? Has your business really seen a decline in customers over the past few months and have your really expended all options in identifying new customers?

I think of Steven Covey's bestseller, The Seven Habit of Highly Effective People and his discussion of two concentric circles. The outer circle is the “circle of concern” and the inner circle is the “circle of influence.” His sage advice is to urge people to live within their circle of influence.

Gather data on trends that are happening to your economy and come up with a game plan to best prepare your business for the future. Think on a micro level and start with the basics. What products/services can you bring to the marketplace? Can you expand your areas of distribution? What does the marketplace need that you can provide?

In other words, stop worrying about the sky falling; you can’t do anything about that. Instead, focus the problems you can solve. So an acorn fell and knocked your head. Put some ice on the bump, plant that acorn and start an oak tree nursery (by the way, I also studied Landscape Plants at Rutgers…oak trees are genus, Quercus, but I digress).

I found this article by Mindy Charski to be particularly on the money:

Starting a Small Business in a Bad Economy

I like the closing quote attributed to Rufus Frost, "There is business out there; it's just who's going to get it, really." You can either spend your time worrying about what’s not there anymore or you can spend your time getting some of what is there. I dare to say the latter is the only option.

2008-08-14T08:23:00.003-04:00

Magic Story

As a new resident of the North Country, I am doing what most people who relocate to a community do…I am exploring the area. I have the opportunity to meet wonderful people and visit exciting new places.

With this exploration, comes the exposure to many business owners, both large and small. After all, our family is filled with consumers. We need groceries, clothes, sporting equipment, toys, haircuts, medical check-ups, dental work, eyeglasses, restaurants, etc…well, the list goes on and the purpose of this post is not to make me cringe at my household budget expenditures; The point is that I am a potential new customer for many small businesses and this is an opportunity for me to share some perspectives on marketing.

Whenever I talk about marketing, I use a quote from Dale Carnegie, “human beings are not creatures of logic; they are creatures of emotion.” To get a customer to purchase from your business, you have to appeal to their emotions. In my initial contacts with some businesses, I am actually quite surprised at how many businesses don't seem to care whether they make a sale to me or not. I've actually gone to a few places with every intention of making a purchase, only to change my mind because there was no effort from the sales staff to provides some attention or even acknowledgment of my presence.

Marketing is not just putting an advertisement in the newspaper, on the radio or creating a business card. That may be a component of it, but there is more to marketing then sending out a message. The goal of your marketing efforts should be to generate sales. To be more effective in generating sales, your business should have a “Magic Story.”

A magic story is a short description of what your business has to offer. It should be focused on how your business can benefit the customer. You are on the supply side of the economic chart, but unless there is demand, you are not going to make a sale. Your magic story should help enhance the demand.

Consumers have a choice of where they spend their money. Your goal as the business owner is to give them a compelling reason why they should spend their money at your business rather than at a competitor’s business. So if I were to walk into your establishment, what would you tell me to make me a customer?

Touch on emotions. What descriptors will you use to describe what makes your products or services special? You would be amazed at how a few well chosen words can make the difference between getting someone to know about you and someone wanting to do business with you. Love, delicious, savory, safe, beautiful, artisan, handmade, crafted, comfortable, sleek, smooth, passion are just a few examples of “power words” that tend to garner an emotional response from people.

You also want to be a good editor in creating your magic story. Can you tell me what is special about your business in two sentences or less? Most customers have a short attention span. Be concise and to the point. And remember, the point is to be customer focused.

With everything in marketing, it is important to test your choices with a sampling of potential customers. After all, you don’t succeed in business by making sales to yourself. How do others respond to your message?

I encourage you to work on your magic story. Create excitement, desire and sales!

“Advertising is the “wonder” in Wonder Bread.” Jef I. Richards

Rich Business, Poor Business Part III

2008-08-11T21:30:00.003-04:00

In my last post, I talked about ways to use Assets as a tool to make better business decisions. On the other side of the balance sheet are Liabilities and despite the negative connotation that is often assigned to them, they can be a friend to your business.

Below are definitions of the most common liabilities:

Current Liabilities

Current liabilities are obligations your business has to pay in a current period of time (usually within one year). Typical current liabilities include:

Notes payable (12 months of loan payments)
Accounts payable/trade credit
Sales tax payable
Accrued payroll
Payroll taxes payable
Gift Certificates/Gift Card Redemptions

Long Term Liabilities

Long term liabilities are simply obligations that mature in greater than a year’s time, such as term loans (greater than a year) and mortgages. For some larger corporations, bonds would also be considered a long term liability.

You may have noted that both definitions contain the term “obligations.” I have heard quite a few different sources refer to liabilities as “other people's money” or “OPM.” I don't think that is an appropriate descriptor. Liabilities are funds that are supposed to be paid back; borrowers are using their own money, they are just receiving it ahead time from other sources. Those who do not pay back their liabilities on agreed terms could end up with a poor credit history or even in bankruptcy court, making it much more difficult to get access to liabilities at a future time.

Through my position as a business counselor, I have obviously come across people who have bruised or damaged credit and there are often extenuating circumstances that attributed to those issues. While I can sympathize with such clients and try to help in anyway possible, such clients should also understand the lender’s position that it is difficult to extend credit to those who have failed to meet obligations in the past.

Another thing to remember about liabilities is they are usually extended to businesses at a cost. Whether that cost is interest, finance charges, late fees or penalties, financing activity usually generates expenses. Any plans to borrow money should include an analysis of whether the business model will generate profitability at levels that exceeds the financing costs.

In a previous post, I made the statement, “the goal in building wealth is to have a higher net worth, which means to have more assets than liabilities.” Please do not interpret this to mean that you should try to eliminate liabilities from your balance sheet. Again, the key to building wealth is to have more assets than liabilities, but sometimes you need to utilize liabilities to get more assets onto your balance sheet.

“Rich” business owners are apt to utilize liabilities quite often to grow their businesses. Their key to success is that they are very judicious in how they leverage their capital and have a good understanding of the difference between current liabilities and long term liabilities. They do their best to utilize current liabilities to preserve cash and finance inventory and accounts receivable. They utilize long term liabilities to finance fixed assets.

Another thing successful business owners do before taking on debt is to analyze some key ratios before making their decisions. The three tools they used most often are a debt ratio, a current ratio and an acid test analysis. The purpose of all of these ratios is to measure how much of their business is leveraged to obligations.

The debt ratio is simply your total liabilities divided by your total assets.

Debt Ratio = Total Liabilities ÷ Total Assets

Anything greater than one is a sign that your business is over leveraged with financing. It also means that your business has a negative net worth (“poor business”). In his book, Don’t Squat with Your Spurs On, Texas Bix Bender writes, “if you find yourself in hole, the first thing to do is stop digging.” Any business that has a negative net worth should do some serious evaluating of profitability potential before taking on more obligations, as this may be a sign that the business does not have enough earning power to meet their obligations.

The current ratio looks at just your current assets and liabilities.

Current Ratio = Current Assets ÷ Current Liabilities

This ratio indicates a businesses’ ability to satisfy obligations in the next year. For this ratio, any number less than one is an indicator that your business is leaning towards being over leveraged with too many current liabilities. It is not necessarily an indicator that a business will fail, but it does mean that it is in a position where your business could not meet all current obligations, even if all inventory was liquidated and accounts receivable collected. Should this be the situation, a business would have to have projected profitability, or access to some other capital source, within a year to cover those obligations.

The acid test is another tool that is used. It is the same as the current ratio, except inventory is taken out of the sum of current assets. The reason this is done is because wise investors recognize that most inventory is not always easy to convert into cash. So the acid test is:

Acid Test = (Cash and Cash Equivalents + Accounts Receivable) ÷ Current Liabilities

Like with the current ratio, a ratio greater than one is desired. Should a business have a lower percentage ratio, it may be difficult to access short term capital.

As business counselor, I have often come across balance sheets (including for my own business) that have had debt ratios greater than one and current ratios/acid tests with ratio numbers significantly lower than one. Why does this happen? The reasons vary. There could be legitimate, temporary challenges, catastrophic single events or just a history of small mistakes in judgment. It is critical to remember that a balance sheet is a snapshot of a given point in time and circumstances may change dramatically in the future.

Again, I provide the reminder to forecast what could happen before making rash decisions. Look for ways to match long term liabilities to your fixed assets and increase liquidity. If you are going to tap into a credit line for some short term liabilities, hopefully you have assessed that you are going to make quick sales, turn more inventory or collect on receivables before the debt matures. There are often quite a few options available to better manage your financial position, if you invest the time to gauge the impact of your decisions.

In all cases, the key to success is to utilize liabilities only to finance assets that will generate net income. Leveraging financed money to cover operating expenses is what gets most small business owners into trouble. Once that money is spent, it is gone and the borrowed money will probably generate more expenses. The hole will keep getting deeper unless there is something on the asset side of the balance sheet generating income. Whether it is a current asset like inventory that will turn, a fixed asset that produces a product, or even an intangible asset like intellectual property relating to services you sell, your assets will have to generate profitability if you are going to increase net worth.

Feel free to post comments with questions or suggestions and remember to pay attention to your balance sheets when making business decisions. Risk is inherent in all business decisions, but the more you calculate those risks, the more likely you will achieve success.

Rich Business, Poor Business Part II

2008-08-07T10:43:00.000-04:00

As noted in my previous post, the balance sheet can be a management tool, not just a snapshot of your net worth. Not only should you look at your business balance sheet today, but you should forecast what you want it to look like one month from now and take active steps toward achieving those goals.

To do that, let’s start by looking at the asset side of the balance sheet. Assets can be broken down into the following components:

Current Assets

Current Assets are considered assets that have a tangible value and can be converted into cash fairly easily. They are used to measure the “liquidity” of a business, in most cases by comparing them to current liabilities (debt obligations within a fiscal year). Current assets include:

Cash in Banks
Inventory
Accounts Receivables
Stocks/Bonds/Securities

Fixed Assets (Long Term Assets)

Fixed assets have a tangible value and are generally considered assets that will not be converted into cash in the next fiscal year. Some examples of fixed assets include:

Real Estate
Building Improvements/Leasehold Improvements
Operating Equipment
Furniture and Fixtures
Vehicles (sometimes this is considered a current asset)

Intangible Assets

Intangible assets have value, but cannot be touched. Some examples of intangible assets include:

Trademarks/Copyrights/Patents
Goodwill (Usually value derived from profitable operations, but can also be assigned for customer lists or market research data regardless of profitability of operations)
Franchise Rights/Non-Compete Agreements/Sales Contracts/Letters of Intent

“Rich” business owners will pay attention to all asset lines on their balance sheets and ask two key questions:

1.Is this asset producing income?

2.Is this asset appreciating value?

If the answer is “no” to both of those questions, then the successful business owner will look to convert that asset into another type of asset that will produce a positive and measured result.

In looking at current assets, successful business owners recognize that the only truly liquid asset is their cash. So they continually strive to maintain a good handle on accounts receivable by collecting monies owed diligently and keeping their receivables to an absolute minimum. The same goes for inventory. The less inventory on hand, the more liquid their current assets remain.

Of course, some businesses will require having inventory and accounts receivable. The key is to ensure that they are at acceptable levels in relation to the business. Each industry varies with regards to acceptable levels and it is worth it to study comparative ratios. Excuse the self-gratuitous plug, but your local SBDC can be a great resource in helping with this type of analysis!

Still, the key to managing inventories and accounts receivable is the same. Pay attention to age and value. With regards to accounts receivables, forecast whether a 90-day invoice will be converted into a deposit next month or whether it is more likely to become a bad debt or require that it be written off. Also consider charging finance fees, so you are at least generating some income on that asset.

With inventory, think about how often it turns. Unless you hold an inventory that appreciates in value, you may benefit yourself by selling it at cost or below cost and using the proceeds for items that will turnover quicker. I know a lot of retailers who have this huge aversion to discounting, but inventory that doesn’t move is costing your business money instead of fulfilling the purpose of generating income.

What you do with cash in the banks, stocks, bonds and other securities depends on the advice of your wealth management advisor, so I defer to their expertise. Still, think about maximizing appreciation, income and liquidity!

As with your current assets, your fixed assets still relate to an analysis of whether they are generating income or appreciating in value. The main difference is that is much more difficult to convert a fixed asset into cash, so your return on investment analysis needs to take that into account. If you have fixed assets that are not performing and generating enough income, you may be faced with the difficult decision of either developing alternative uses for those assets or, in some cases, doing an analysis of whether you should cut your losses by not operating that asset, rather than operating at limited capacity. The key is to forecast the results and do a cost/benefit analysis.

In my opinion, intangible assets are the most difficult asset to deal with. That is because their value is, well…intangible. It is a perceived value. Gaining a return on investment, on goodwill and intellectual property is complicated because it is so difficult to assess value to creative thinking, sweat equity, and/or the past buying habits of customers in a fickle marketplace. I will say, however, that there are some successful business people who have benefited from selling intangible assets that exponentially appreciated in value, but unfortunately, there are probably just as many less successful business owners who paid the price for overvaluing the market potential of intangible assets. The dot.com boom and bust is a perfect example of this.

My hope is that I am not boring readers with these posts on accounting principles, as I still have to get into the liability side of a balance sheet in a future post.

As David Letterman once said, “There is no business like show business, but there are several businesses that are like accounting.” I dare to say all businesses relate to accounting, as you have to know how to keep score if you are going to play the game.

Rich Business, Poor Business

2008-08-07T10:40:00.001-04:00

I've titled this posting based on the bestseller by Robert Kiyosaki, “Rich Dad, Poor Dad.” If you have not read this book yet, I suggest you take a trip to your local library or book retailer and get a copy. Pardon the pun, but it provides a wealth of good advice on finance that I am going to apply to small business operations.

A good deal of this book focuses on understanding the concept of a balance sheet. I have to admit, as a young small business owner, I made the mistake of not paying enough attention to my balance sheet. To be honest, I did not truly understand the concept of a balance sheet until about 5 years into my career as a business owner.

For those who are not familiar with a balance sheet, it is based on the basic accounting principle that:

Assets = Liabilities + Net Worth

Using an arithmetic formula, this also equates into:

Net Worth = Assets – Liabilities

The goal in building wealth is to have a higher net worth, which means to have more assets than liabilities. The most important thing to remember about the balance sheet is that it is a snapshot of a given point in time. Every single business transaction you make will change your balance sheet in two places, hence the term “double entry accounting.”

Obviously, your goal in business is to increase the amount of assets on your balance sheet without increasing your liabilities. But new assets don't just appear magically onto your balance sheet. They can be introduced in three ways:

New investment from ownership
Appreciation in value of assets (i.e.: you have gold in inventory that you bought at $700/ounce and gold is now worth $900/ounce)
Net income from business operations

There in lies the key to using the balance sheet as a tool to make better informed business decisions. Something needs to happen to increase your businesses' assets. While it is true that some assets can appreciate in value, the reality is that most assets tend to lose value over time. Things like vehicles and operating equipment will depreciate in value. Inventory tends to “leak” over time and the older your accounts receivables get, the more likely that they are going to be converted into bad debt. The “rich business” owners know that the key to success is to invest in assets that will generate more net income.

Here is a simple example. After opening my second bagel store, we did pretty well. Aside from my salary that I was taking from the business, at the end of the year, there was an additional $20,000 in my share of the profits. Having been the driver of the company minivan for the past few years, I decided to use this opportunity to put a down payment on a brand new Mustang GT.

A little more than a year later, my wife and I were expecting our second child and the Mustang just wasn't looking like the smartest of decisions. I was schooled quickly on the concept of depreciation when I traded the Mustang in for a new mini van and only received $10,000 trade equity.

Had I reinvested this $20,000 into new revenue generating assets or even into an interest bearing account, our business would have had more revenue and more liquidity the following year. I would have been in a better position to support my growing family with this business. By taking that $20,000 distribution for personal use, I removed the new asset that my business had generated to my balance sheet from operations. The other assets we had depreciated in value, so even though my business did well, we actually lost total net worth compared to our starting point once we distributed those earnings. That put us at a disadvantage once we started making better decisions and tried to expand our business. We didn't have enough net worth available to grow our business.

Don't get me wrong, I am not trying to make business owners feel guilty about enjoying the fruits of their labor. I am just encouraging them to think before they act. At the least, a business should pay attention to their balance sheet and have a small gain in net worth every year. If not, the long term success of the business will be jeopardized.

I will continue with another post soon that will discuss some more details of what “rich business” owners pay attention to on their balance sheets to make better informed business decisions.

You Can't Cut Your Way to the Bottom Line

2008-08-07T10:38:00.000-04:00

With all the talk about the economic slowdown in the news, businesses are scrambling to find the best strategies to deal with the challenges of increases operating costs (mostly due to inflation in the energy & commodities markets) and anticipated decreases in consumer spending. Business articles talk about how now is a good time for small business owners to tighten their belts and watch their discretionary spending.

I’ve personally read a number of articles that suggest cutting advertising budgets and hours of operation as a means to cost savings. However, I caution all small business owners to think carefully about the consequences of cost cutting before you take action.

Developing a contingency to deal with the economic slowdown is a very smart strategy for every small business owner, but the key to a good plan is to dedicate time to forecast the expected results of each decision. Another thing to keep in mind is that it is highly unlikely that your business can maintain profitability levels strictly through cost savings.

Unless you have been a completely inefficient manager of operations for your business, your expense lines are there for a purpose, which is mainly to help you generate revenue. You need to understand that the rash reactions of cutting expenses may result in cutting revenues that might have remained with your businesses had you not made those expense cuts.

To help highlight this point, there is a well-known story that relates to a chain of quick oil change services. It is said that a corporate financial officer noticed that an average service center spent $5,000/year on coffee and donuts for customers in the waiting area. The corporate officer sent a memo to all the retailers telling them to stop offering free coffee and donuts to give a quick $5,000 per year increase in their bottom line performance. The retailers who complied with this advice averaged about a 10% reduction in sales performance. Apparently some customers valued getting free coffee and donuts while waiting for their vehicles more than this financial officer thought and the customers either reduced the frequency of their visits or went to a competitor instead. With the average business unit doing $500,000/year in sales and making a 30% margin on sales, the average retailer would have realized a $10,000/year net loss in profit by following this advice.

I once served on an executive committee for a large corporation in the hospitality industry and we discussed similar cost savings strategies at our monthly forecasting meetings. As ideas for expense reductions were brought up, our wise general manager would always say, “You can’t cut your way to the bottom line.” She would always encourage us to be creative in looking for new revenue opportunities.

So as you proceed with a strategy to deal with the economic slow down, remember, there are only three things you can do to increase your bottom line performance:

• Decrease expenses

• Increase prices

• Increase volume

There are implications to applying each strategy, and the intelligent business owner will think about each opportunity.

I wish I could offer a catch-all strategy that would work for every small business, but life is just not that simple. Each enterprise has a unique business model that is affected differently by the changes in the economy.

The one common suggestion I can offer is to research customer spending habits, come up with a plan for your business and project expected outcomes before taking any action. And remember to think about adding to your revenues, not just decreasing your expenses.

As Winston Churchill once said, “Let our advanced worrying become advanced thinking and planning.”