Sports teams compete against each other and they keep track of the score. They know who wins and who loses, and each player on the team has more statistics on their performance than they know what to do with. Individual sports athletes, like golfers and runners, meticulously measure their performance against themselves and others and use their numbers to find ways to improve.
Is running a business any different? Is there a way to know if you win or lose each day? Each week? Each month? Each year? The answer to all of these questions is yes, and I write about how to accomplish this in my recent American Express OPEN Forum Article: 4 Reports that will Keep Your Business Thriving.
Every business should project its cash flow at least 90 days into the future. It should be broken down weekly and should be reviewed and updated weekly. Microsoft Excel is often an adequate tool for this important weekly report.
2 weeks ago I was one of 26 14-18 year-old boys, youth leaders, and fathers that embarked on a 63-mile 5-day backpacking trip in the Uinta mountains. King’s Peak, the highest mountain in the state at over 13,500 feet in elevation, was just one of the many challenges of the week. Here are some important lessons we learned, and how they apply to our businesses:
Lightweight Business Model
When I prepared my pack for this grueling adventure, every ounce counted. And trust me, by the last day I felt every fraction of an ounce. I started with the staple needs – tent, sleeping bag, stove, water filter, headlamp, etc. Regardless how many days I would be gone, I would need the same amount of these items (one tent, one sleeping bag, etc.). These are like the fixed costs in your business. We want them to be as light as possible, because we will be adding more weight to them per day we are gone – changes of clothing, food, fuel, and more. A lightweight business model is one that does not over-burden the business with heavy fixed costs and tries to structure itself to function, as much as possible, on variable costs. The lighter the fixed costs, the lower the break-even point and the more flexible the business will be to change its course and take advantage of the right opportunities as they come along.
Foundation Determines Success
I quickly learned that feet, the foundation of the body, were the most important part of the body on this trip. One person bought a new pair of shoes 2 weeks before the trip and had several blisters after just the first day of hiking. He was plagued by these and the rest of the blisters that appeared thereafter throughout the duration of the trip! He had to go much slower than the rest of his body wanted because of the pain from these blisters. Those who experienced the least amount of pain and enjoyed the most comfortable experience were those with the right shoes and socks and they worked to keep their feet dry while hiking (we were rained on every day, with the worst torrential downpour I’ve ever experienced on Friday) and warm at night (temperatures dropped into the thirties each night). In business, we have to strengthen and take-care of our foundation, which is usually a combination of working capital, the best employees, and our customers. Without these three things we are in for a very painful business experience.
Difficulty is in the Eye of the Beholder
We hiked 12 miles on Monday, 15 miles on Tuesday, 7 miles on Wednesday, 13 miles on Thursday, and 16 miles on Friday. Before Monday, the youth would complain before a 5 mile hike. By Wednesday morning, after days of 12 and 15 miles, respectively, 7 miles was the easiest thing they had ever heard of. Comments like, “Oh, we only have to go 7 miles today,” and “Today is going to be a piece of cake,” became the opinion. The business application – what may look difficult today is likely not nearly as difficult when put into context. You may be going somewhere you and your team have never been, but few challenges end up as hard as they might initially appear.
Snapshots are Less Valuable than Overall Perspective
Kings Peak is not all that intimidating when you are next to it. On Wednesday night we camped just south of Kings Peak in Painters Basin, only about 2,400 feet lower elevation than the peak – it would take a hike of just over 3 miles to summit the next morning. What was interesting was the reaction of the youth. “That doesn’t look like the tallest mountain in Utah,” one young man offered. How quickly they forgot how far and how high we had to hike just to arrive at that point. Just two days later we would finish our adventure at 7,800 feet. The point is this – our perspective is often limited to the immediate surroundings of that at which we look. We need to broaden our perspective so we can see the whole picture of our business.
Conclusion
One of the leaders on this trip frequently said that it would not be an adventure if we knew the outcome. Starting, owning, and running a business is, therefore, an adventure. With these four lessons learned, we can hopefully create the outcomes we desire!
We are experiencing a never-before-seen phenomenon. The first version of the video below was powerful, but this second version really drives the point home – the ROI of Social Media is that you will still be in business in 5 years.
I recently saw this video and enjoyed its message. I think its message is clear – entrepreneurs are changing and improving the world. Many people incorrectly think that entrepreneurs start businesses for money. Money is a means to an end, while the challenge of building something that makes a difference is the reason they get up in the morning to pursue their passion. Kudos to the entrepreneurs of the world – enjoy this video!
[Author's Note: This post is not about the Twilight Series' release of its third movie. I do, however, admit that my wife took me to the first two and will likely take me to the third soon.]
At 4:17am on Saturday, June 26th 2010 I saw the beginning of a lunar eclipse. I was on an early-morning (or more like a middle of the night) hiking trip and we stopped to watch this rare occurrence (this was the first of only two this year). What we initially saw was unimpressive. At first, a dark cloud seemed to cover the upper arc of the moon. The earth’s shadow was barely beginning to interfere with what appeared to otherwise be a full moon.
As the morning carried on, the eclipse continued to black-out a quarter and then an entire half of the moon. I have never seen anything like this before – it was amazing to watch. If I was not aware that we were expecting a lunar eclipse, I may not have even noticed this phenomenon. I wondered how many people, not knowing it was supposed to be a full moon, might have looked at the moon in those early morning hours without realizing what they were seeing.
Then, I couldn’t help but relate this to one of the common business problems I see. Many businesses will occasionally look at their numbers (in the form of financial statements or some other form of dashboard/KPI data) but the data and information they are looking at is not meaningful and is not helping them improve their business. Why? Because they lack context and comparison. I took several “snapshots” of this event throughout the morning and ultimately I could comprehend what was happening.
Just as I grew to appreciate the eclipse as I saw it progress, others who perhaps only briefly looked at the moon once at any time that morning likely missed out on the eclipse altogether. So, how do we solve this? We have to put the numbers of the business into context against where we have been, where we are going, and what our competitors and industry are doing.
We refer to this as comparative analysis, and it works as simply as this. If we generated $250,000 of sales this month, is that good or bad and what can we do to improve it? First, we should understand what we have done in the past (last month, last year, same month last year, etc.) to understand if we are growing or shrinking. Then we should compare it to what we were hoping to accomplish that month and if those sales are helping us to or hindering us from getting where we are headed. Here’s an example: if we had sales in the same month of the prior year of $200,000, and last month we had sales of $230,000, and we were planning on $240,000 to achieve our goals for the year, then we can call $250,000 in sales a very good month.
While this revenue example may seem very simple and like most businesses do some type of similar analysis, we need to consider if they are doing the same analysis on their lead generation, conversions, operational efficiencies, and other financial metrics. This will truly put the entire month into perspective in terms of our performance with one exception – industry benchmarks.
How are we doing relative to others in our industry? As much as we may claim to have an innovative business model, the truth is that business models have been around a long time and there is very little innovation possible (although there is at least a little). Even if we feel we are better than our competitors, we can still learn from their numbers and we can use them effectively as benchmarks for our own performance.
Are your numbers deceptive like a lunar eclipse? Avoid the deception with comparative techniques that will make your numbers more meaningful. Ultimately, the more meaningful your numbers are the better decisions you will be able to make, which will help you improve your cash flow and profitability!
As my children split the earnings from their first lemonade stand just a few days ago, I couldn’t help but take the opportunity to teach them a little about entrepreneurship. Here is their grade in 5 critical areas of running a business, with some application for all business owners and entrepreneurs to consider:
I recently read John Warrillow’s book Built to Sell: Turn Your Business Into One You Can Sell. It is a great resource for anyone that is building a business that they plan to exit by selling it. The book focuses on 8 steps for helping business owners maximize the value of their businesses when they sell.
A few weeks ago I came across a blog post that mentioned all of the blogger’s favorite blogs and online resources for his passion. This sparked an idea for me – why not list and give a little commentary on some of the blogs and other websites I frequent to fuel my passion for helping start-up, emerging, and medium-sized businesses. Here it goes, in no particular order:
When a business first starts, the founder is focused on getting customers. Once that starts to happen and cash-in starts to exceed cash-out each month, the founder is quick to shed bookkeeping, cash management, and other administrative tasks to someone else.
The person hired to take all of this on quickly begins to wear many hats – receptionist, bookkeeper, accounting clerk, data entry clerk, assistant to the founder, customer service support, marketing support, human resources, sales support, and sometimes they even come in and clean the office on the weekends for a little extra money. I have found that women are more often hired than men in this position because there seems to be an over-arching stereotype that women manage details better than men. I neither subscribe to or deny the stereotype – I am merely acknowledging that it exists. This person will end up with a title like office manager, meaning they handle a lot of the details no one else wants or has time for and they become a critical element of keeping the business running from an administrative stand-point.
As this person absorbs all of these activities their perceived value contribution to the business is high, although they wear so many hats and have to cover so many areas of the business that they really don’t master any of them. In addition, they usually lack the experience and education to handle certain tasks they’re expected to do, especially when it comes to accounting and finance.
As a business progresses in its life-cycle this person does their best to keep the books in a spreadsheet or a low-cost off-the-shelf accounting software package, like QuickBooks. While they have done their absolute best to make this effective, their lack of education and experience in accounting means that even with all their effort they are not able to provide much meaningful, timely, or accurate information/data to the people running the business.
This person becomes frustrated because they sense they are not doing enough, even though, considering the circumstances, they work long hours and care a great deal for the company. Nobody likes a job where they feel inadequate or incompetent. They may even try to get some training in accounting or the software package the company uses, but the training is usually so generic that it is hard to apply to the actual day-to-day operations and functions of the software in the business.
At this point the business owner is not getting the information he needs to run the business. So he continues to trust his gut and makes far too many decisions based on the balance in his bank account instead of his actual business performance. This leads to some bad decisions and the business struggles to grow as a result. Yes, bad accounting can actually hinder the growth of a company!
The collapse of the Office Manager position comes as parts and pieces of the their responsibilities are peeled off and given to newly hired employees with more experience and expertise in those respective fields. As this happens, the only work left is the low-paying duties like receptionist and data entry, and they are far over-paid for those functions. Their position is ultimately eliminated, and very few of the people initially in the role survive with the company. They were hired to be a “jack” of many trades, but the growth of the company has facilitated specialization and their master-of-none skills leave them without a job.
I have looked at a lot of financial statements over the last five years from at least 250 different companies in almost every industry imaginable. They all had one thing in common – they were, in some way, wrong. This is a major challenge of most start-up, emerging, and medium-sized businesses.
Entrepreneurs, by their very nature, are usually very skilled at figuring out how to create opportunities out of even the most dire of circumstances. They regard health care reform no differently.
Now that the dust has settled on this new legislation and employers are waiting to see what else transpires between now and 2014, let me shed a little perspective on how small business owners and entrepreneurs are planning to comply with the reforms. Interestingly, the people that will feel the brunt of this impact are the employees, not the employers.
OVER 50 EMPLOYEES
Businesses with over 50 employees will be subject to a penalty of over $2,000 per year for not covering their employees. This is steep, and amounts to a 5% increase in labor costs for an employee that makes $40,000/year. In a recession in which double-digit percent margins have almost become extinct, how will these businesses survive such an increase?
The answer is quite simple. The objective is to render the increased health care costs neutral to the firm’s overall labor cost structure. I have heard many employers that will be impacted by this explain that it will have to be the employees who pay for it, primarily through wage and other benefit decreases. So, it ultimately comes out of the employee’s pocket, not the employer.
UNDER 50 EMPLOYEES
Although businesses with fewer than 50 employees will not be subject to a penalty in 2014, they will be eligible for significant tax credits for covering their employees with health insurance. Certainly the tax credits pale in their monetary benefit when compared to the cost for small employers to cover their employees, which means the business owners and entrepreneurs will figure out how to make the employees pay for at least the difference.
ONE-SIDED EFFECT
My point is that the average hard-working American will pay for this health care reform, not businesses. We will see wages and other benefits decrease to offset the costs of health care. I doubt this is the result legislators wanted, but it will certainly be the reality.
WILL PUTTING THE BURDEN ON EMPLOYERS WORK?
There are two common reasons these employers are not offering health insurance. First, their industry’s business model does not have enough room in it. Second, the employees do not value health insurance offerings from their employers.
By forcing employers who have operated their businesses without offering health care to their employees, this legislation is trying to tinker with proven business models and employee compensation packages that were not broken. As we approach 2014, most businesses will prepare for implementing health care reform by “tweaking” their overall compensation programs to create a zero-sum result for the company rather than trying to absorb the costs into their business model with no additional value perceived by their employees.
I was recently asked this question – “What is your definition of success?” I thought back to a few conversations I had with an entrepreneur a few years ago and his issues with the word “success.”
