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.
Saturday, November 22, 2008
Tuesday, November 4, 2008
An Election of Hope and Opportunity
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.
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.
Tuesday, October 28, 2008
Small Business and the Presidential Election
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.”
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.”
Tuesday, October 14, 2008
Increasing Your Bottom Line
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
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
Wednesday, October 1, 2008
Another "Main Street" Opinion
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.”
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.”
Friday, September 26, 2008
Where's the Value?
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.”
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.”
Friday, September 19, 2008
Be Like Mike
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.”
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.”
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