Plan for visibility

My first “grown-up” job was for a company that designed accounting, inventory, and point-of-sale software for tire stores. We worked hard to make a package that gave business owners everything they needed to know how their business was doing. While we could design custom reporting for clients, we ensured our reporting and bookkeeping were complete and correct from the very beginning.

Somehow I thought other companies had the same level of commitment, so I probably wasn’t as thorough about checking out that part of the software when my own business bought a Point-of-Sale system. My two partners, who had worked in similar stores for many years, seemed to like it. The owner/salesman claimed it had a good interface with QuickBooks. So we bought it.

It didn’t take long to discover that what I thought was a good interface differed dramatically from that of the software company. It did little more than dump a total of the day’s profit or loss into a journal entry. Its onboard daily detail report was also seriously lacking in visibility. It provided totals for each payment type, and could show you a list of everything sold or traded in for the day, but was very sketchy on other details.

Before long I realized that I was going to need to do my own reporting by hand if we were to gain even the basic level of visibility into our business. Every day I comb through the report and a separate screen to determine our total sales in four basic categories, total trade-ins for the day, money in and money out in each payment type, and the cost of goods sold in up to three categories. These are then entered by hand into QuickBooks.

I don’t mind doing it, but I mind that the software doesn’t do that for me. How anyone can successfully run their business with so little information as the system provides is beyond me. In hindsight I wish I’d examined the system more closely before making our purchase.

Don’t make the same mistake. Before you even start looking for a POS system determine what information you are going to need in order to understand what is going on in your business. Make sure the vendor can show you where each bit of information can be found–and if it can be found on a report. If you can’t find any system that provides you everything you want, then–and only then–you can determine which system gives you the most of what you need and adjust accordingly.

Information is critical in running a business. You need to know what is going on so you can make adjustments–perhaps not instant, real-time information, but at least on a daily basis. Plan for what you need and how to get it before you ever open your doors. You’ll be grateful you did.

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Book Review: The Accounting Game

I first encountered “The Accounting Game”, by Darrell Mullis and Judith Orloff about ten years ago when I was a software developer for a firm that sold point-of-sale/inventory/accounting software for tire stores. I don’t even remember who first recommended this book, but soon my manager bought a copy for the development group to use in coming up to speed on accounting principles, terminology, and concepts.

The book teaches accounting from the point of view of a kid opening a lemonade stand for the summer. You start out simply enough, but as the summer progresses you start handling more and more complex situations. All the while you track the stand’s progress through Balance Sheets, Income Statements, and Cash Statements. These statements start out simply and then increase in complexity as new concepts are introduced and as the business becomes more complex.

I found the book quite entertaining and educational the first time through. The concepts stuck with me, and now that I have my own business I bought my own copy of the book to help train my partners and our employees should we need a backup bookkeeper. There is a newer edition out now, with I believe a new chapter on how service businesses differ from businesses that sell goods.

There are a few drawbacks to the book. For one, it gets repetitive. They try to keep it light and cutesy, but by the time they’ve asked you the same question three different ways on the same page you start to get a little annoyed. Yes, repetition is key to learning, but this book sometimes goes too far.

The other problem is that it’s supposed to be hands-on. Every few pages you are supposed to fill out a new copy of the various accounting forms to reflect the new changes to the business. That’s fine if you–and only you–are going through this book for the first time. But once you’ve written in the book no one else can use it, nor can you come back and review. And since the forms morph as the complexity increases, you can’t just photocopy a bunch of blank forms to use throughout the book. What would be ideal is if they included some laminated forms you could use a whiteboard pen on and wipe clean for another time.

But for the most part, this book will leave you with a good idea of the main areas of accounting reporting. You should be able to pick up a company’s balance sheet and make sense of what you see. You should know what the balance sheet does and does not show, and where you need to go to find out the rest of the picture.

I’m pretty sure (and I’m tempted to test this theory) that my ten-year-old daughter could understand this book. The book is fun and engaging, so you don’t like you’re being talked down to too much. The examples are fairly concrete and easy to grasp, tapping into a fairly common experience from childhood. Even if you never sold lemonade as a child, you can understand what is going on.

I recommend this book for anyone who would like to understand accounting from a high level. Most would-be business owners really should understand the principles taught in this book in order to be successful. This book is a fairly enjoyable and inexpensive way to learn those basic accounting principles.

Disclaimer: I will occasionally link to a product or service that may result in my receiving some tangible benefit if you click on the link or buy that offering. I hope you don’t mind.

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Why the bank wants to see your business plan

A few posts ago I mentioned that a business plan may not be necessary unless you plan to pursue financing.If you do plan to go for a business loan or venture capital, however, you should make sure you’ve done your homework. Here are some of the key components of a business plan lenders will be looking for, and why:

A clear description of your business – You would be surprised how many businesses get started without really defining this. You should discuss your product/service, how you plan to make money from it, where you intend to locate your business, and who you expect to buy from you. Lenders will use this to determine not only how clearly you can describe your business, but how logical or feasible it sounds.

Who are you? – Describe what experience you and/or your partners may have that would help the business be successful. A complete lack of experience is not always a deal-breaker, but certainly showing, for example, 20+ years experience in that particular industry, coupled with a partner with a strong financial background, could go a long way to helping ease a lender’s fears.

A plan for marketing your business – How do you plan to make your customers aware of you? While your marketing plan does not necessarily have to be aggressive, it does need to show cohesiveness with the rest of your plan. For example, if your projections have your business showing a profit in its first month, and yet you have no plans to advertise, it’s likely the bank is not going feel you are a credible business.

Sales projections for a year – You will need to be able to show how much money your business can make its first year. You should probably give some indication as to what those estimates are based on. While a lender will not expect you to be precise–how can anyone know exactly what will happen–they do want to see that you’ve thought through your projections, and they are based on sound reasoning.

Competition analysis – It is important to show that you not only are aware of your competition (and unless you are a true revolutionary, chances are there will be competition), but that you know something about their strengths and weaknesses, and that you have a plan for competing against them.

Startup and Operating Cost Estimates – You should be able to provide at least a fair estimate of how much money you will need to get started in business, and how much you will need to stay in operation for a year. You may have the most credible plan ever up to this point, but if your startup costs alone will exceed the amount of funding you have available (even assuming you get the loan), to say nothing of staying in business long enough to turn a profit, why would the lender take a chance on you? Prove that you have a good idea of the costs–and that you will have enough to cover it–and you’ll have a much better chance of a “yes”.

The oft-quoted statistic is that over half of all businesses fail in their first five years. That makes lending to new businesses a risky proposition at best. Yet banks make their money by accepting some moderate risk and extending loans. If you can show the bank that you have thought things through, know what you’re doing, and are basing your request for funding on solid, logical estimates, your chances of getting funding increase dramatically because the bank sees their chances of getting paid increase dramatically.

When my partners and I started our business we had a private investor helps fund our venture. Still, being no fool, our investor wanted some reassurances that we knew what we were doing. That two of the partners had over 15 years of experience in the industry, and that the third partner had an MBA was a good start. We were also able to show him that we had evaluated all the local competition and identified where we could capitalize on their weaknesses.

Finally, we were able to put together projections showing both our startup costs and our projections for a year and a half. We had based those projections on first-hand data from my partners’ experience. We accounted for the probability that customers would not find us for awhile, and that our inventory would take time to build up. We had three different sets of projections; an optimistic scenario, a pessimistic scenario, and the scenario we felt most probable. We had identified potential trouble-spots and plans for getting around them.

Our investor came away feeling confident that we would not only succeed in our plans, but that his money was in good hands. We got our funding, and our business got under way. I won’t say it’s been a runaway success–we’ve barely been open four months now–but I will say we’ve exceeded “likely” scenario projections every month so far, and while we overran our startup costs a bit, our planning helped us recognize it quickly and compensate accordingly.

In hindsight, while we didn’t draft a formal business plan, the planning we did was invaluable. Even had we been able to finance the entire venture ourselves, the discipline of planning helped us recognize the essential elements of getting our business going and the limitations we were operating under. We had goals in place to help us gauge critical factors early on. I feel the confidence and focus we gained has been the key factor in our success thus far.

So is a business plan necessary? No, but if you want funding you’ll want one. And if you want to succeed in business, you should at least take some time to consider all the key elements in a business plan. You’ll be glad you did.


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The three people to have in your business’ corner

I was talking business with a dentist friend of mine the other day, and we got on the topic of starting a business. In my case I started one from scratch. In his case he bought an existing practice. But we both quickly agreed that regardless of how you approach owning your own business, there are three people you should probably have in your corner before you start: a banker, an accountant, and a lawyer.

Even if you aren’t looking for business credit right away (and unless you are willing to front some serious collateral, you probably won’t, even if you want to), it is always a good idea to speak to a bank. You will need means of storing and managing your funds, at the very least. A bank will also be able to help you plan ahead so you will know what will be needed to secure credit later on.

An accountant can help you find the best way to track the flow of money and inventory in and out of your business so that you’ll have the information you need to make critical decisions. They can help you determine the best business entity to choose. They will know all the appropriate government and tax regulations and can help you avoid certain pitfalls as well as take advantage of opportunities.

Lawyers can also be helpful in helping choose a business entity, especially if there will be more than one owner. They can help draft an operating agreement that will keep things fair and equitable, as well as making sure each partner understands what is expected. They can also help protect you and your business in any agreements you sign.

Far too often the natural tendency is to avoid speaking to these people until absolutely necessary. Sometimes it may be a simple lack of trust. In some cases it may be in an effort to minimize start-up costs, but sometimes it may be from a subconscious fear that they may notice problems with your business idea that you’d rather not know about. If the latter two cases, take time to meet with several of each profession in order to get to know them. You may find that you trust some over others, and trust will be important in choosing who to take on as an adviser. Check references.

Sooner or later you’ll likely need all three of these people to help you with your business. It is better to already have someone you know and trust on your side than to try and find one in a hurry when things are going wrong. It may cost a bit more up front, but it will likely be money well spent.

Are there other professionals you would recommend that new business-owners contact before launching their business ventures? Leave a comment!

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The danger of inflexibility

I try not to get too political in this blog, but occasionally there is no escaping it. The more I read about the situation in Wisconsin, where the state government is facing a vote to eliminate collective bargaining rights for public workers, the more I wonder if unions aren’t going to push themselves into obsolescence.

The recession has hit everyone hard, and local and state governments are faced with some very tough budgetary decisions. Business people already know that if the money is not coming in, something has to give. As employees are a significant source of overhead, they’re often one of the first things looked at to cut. Sacrifices must be made, whether it’s everyone taking a cut, or a few being let go in order to keep the rest employed. No businessman likes doing it, but it has to be done.

Obviously government is no exception. If the money isn’t there, it isn’t there, and even states can only borrow money for so long. Cuts eventually must be made, and that means some employees may lose their jobs, or most will need to take a cut in pay.

Unfortunately, too many unions seem determined to play a nasty game of chicken with both business and government. They seem unwilling to give even a little, somehow figuring the decision-makers can find other places to cut. While this may make them look momentarily popular with their members, what good does it do them if the company then goes bankrupt and everyone loses their job?

The inflexibility of unions is hurting their members and hurting the national economy. Now is not a time to fight change. Now is the time to acknowledge the problems businesses and governments face and work together to solve those problems. But far too many unions seem unwilling to do that, afraid that giving even an inch is showing weakness that will lead to a loss of power.

Governments are starting to fight back. They, at least, have the power to override the unions’ collective bargaining power. In Wisconsin they appear poised to do so. Other states, such as Tennessee, are taking notice and considering similar measures. If Wisconsin is able to do it, you can bet it will start a chain reaction of states.

What is more, once the trend gets started, you can count on businesses to lobby for the states to at least temporarily extend that power to them as well. State governments, recognizing where their tax revenues come from, will likely do just that. Unions, in attempting to win the battle, may find themselves losing the war. Heaven knows with unemployment as high as it is, scabs won’t be hard to find, should unions insist on pushing things too far.

I’m not necessarily against unions, though I do think lately the unions have been guilty of putting themselves above their own members by being willing to let companies go under rather than cooperate. I’m afraid that if they don’t start being part of the solution instead of part of the problem they may very well find themselves not only without a seat at the table, but banished to the wilderness.

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Is your business plan “just right?”

I read an article by C. Norman Beckert, district director for SCORE, in the Idaho Statesman’s business magazine Business Insider (I’d link to it, but it’s subscription only), in which he discusses whether or not you need a formal business plan for your business idea.

His answer was spot-on: It depends.

He feels that unless you are applying for financing you only need to draft as much of a plan as necessary to keep you on track and prove you’ve done some basic homework. The two most essential pieces that you should address no matter what are your 12-month financial projections, and how you plan to attract customers.

The financial projections (start-up cost plus one- year operating costs vs. monthly sales) are important as a reality check. While it’s quite easy to lie to yourself and throw some numbers together that look good, those who take the time to put together the best projections they can will find it helps them a) have goals to reach for and measure against, b) helps them identify potential pitfalls, and c) make sure they have enough capital to reach the profitability stage.

Taking time to identify your core customers, where they are, and how to attract them is also important. This bit of knowledge has helped us, if nothing else, avoid wasting advertising dollars with every account manager that walked in our door claiming to have the key to reaching our customers. A simple look at their demographics and market share excluded most of them right away, because we knew who we were targeting–and that they didn’t reach those people. The bottom line is that if you don’t know who you want to reach you’ll have no idea how to reach them. Hoping people find you is no way to run a business.

But having much more than that can actually get in the way, according to Beckert: “Taking the time to develop a formal plan could result in the opportunity passing you by, while a plan as simple as a ‘to-do’ list may be adequate. If your forecasted income exceeds forecasted expenses, it may be best just to plunge in and start the business.”

In my case we at least discussed amongst the partners all the points involved in a business plan, but wrote very little of it down formally. We have considered applying for financing, and if we do it won’t be very hard to put together a plan. But just the exercise of putting together our projections has proven invaluable. And gratifying, considering that we have consistently beaten our projections, and will achieve profitability two months early at our current rate.

Not to brag or anything.

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Life is like kindergarten

My brother has an interesting post about time management over at his website on what we can learn from five-year-olds. He reminds us that multi-tasking is a myth, and that our brains are not designed to handle incompleteness well. I also like the term “learned ADD” he mentions.

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Planning for success

I remember a line from the movie “It’s a Wonderful Life” when Mr. Potter tries to ruin the Building & Loan by hiring George Bailey away from it. George resists his generous offer at first, to which Mr. Potter complains, “Confound it, man! Are you afraid of success?!” As my business moves away from being a brand-new business toward becoming a successful business I find that I may indeed be afraid of success.

I worry for a couple of reasons. For one, what if the company is only mildly successful? What if we get stuck at a point where we’re making money, but not enough to really make it lucrative for all the partners involved? Is their a ceiling to how large the business can grow? We just don’t know.

Another point of concern is what we should do if we do become successful and don’t see any real ceiling to how far the company can grow. Should we expand our existing store, or should we consider opening a second one? Should we diversify and start a second separate but complimentary business? Do we do some combination of the above?

Some entrepreneurs have the foresight to include such deliberations on either possibility in their initial business plan. Many don’t plan any farther ahead than defining what success looks like for their immediate business. It may be a good idea to devote some thought and research toward answering the following questions:

  • How will we determine/recognize if our particular business has a ceiling to how much revenue it can generate at a given location?
  • What should we do if we reach that ceiling before we reach a level of revenues satisfactory to all partners?
  • How much business can we support at our current location?
  • What options are there for expanding the existing location?
  • What would be required in order to open a second location?
  • What would happen to the initial location’s revenues if a second location were opened?
  • Does the company have enough cash flow and reserves to support a second location or business while it reaches profitability?
  • What would a “complimentary business” be in your current type of business?
  • What would be the ideal management/personnel structure for a second location/business?

These are just a start to the number of questions that should be considered when planning a business venture, or at least before attempting to expand an existing one. Expansion takes time, and reaching the point where a business must expand to survive without a plan for doing so could be devastating to the business. At the very least one should not push forward on expanding the business without having an idea of the cost involved and the level of revenue needed for the expansion to be a success.

Planning is not usually considered the “fun part” of starting a business. But it’s one of the most essential parts. Take time soon to consider whether or not you’re afraid of success–and whether you should be.

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Modeling for business

When my partners and I sat down to determine if we could start a business on what we had to work with it ultimately fell to me to figure it out the answer. This is probably because I love spreadsheets, numbers, and models. But creating a model to forecast business income and expenditures is no easy task. Quality models require quality data, and unless you are buying an existing business there is often little hard data to go from.

In our case, however, my partners had previous experience in similar businesses and were able to provide me with some generalized data. Coupling that with my own business training and experience I was able to piece together projections based on several key variables.

Our business was to be a retail store, so I chose as primary variables the amount of inventory we had, our expected turn, and our profit margins. I was also able to speak to other business owners and do some basic research to predict what expenses we were likely to have and how much they would likely run.

Knowing that we were essentially starting from scratch, I set up a model wherein we started with a small amount of inventory and built up from there. I chose to be pessimistic with my variables, figuring both our turns and our margins would be low for the first several months. I then ran the model for a year and a half into the future to see how things worked out.

The result was that we needed to rethink our plans. We agreed that the model was probably too pessimistic, but it showed us where our problems lay. We were able to focus in on those areas in our next round of research to refine our estimates. Even then, however, we ended up with three scenarios rather than one model; a “pessimistic” model, a “probable” model, and an “optimistic” model.

Two of the three models showed we could make it. Armed with that information we deliberated and decided to move forward. The model showed what was possible, and it showed the key areas we needed to watch closely. Five months later our business is three months old, and the model is holding up amazingly well, even though there was no way it could capture the interplay of all the real variables we’ve encountered.

I highly recommend modeling to support business decision-making. Some of the key advantages I have seen include:

  • Helping you focus in on the core elements of your business.
  • Identifying restrictions in time and resources.
  • Uncovering areas where your business information or data may be lacking.
  • Revealing the interplay of variables over time.
  • Providing goals in your execution phase to keep you motivated–and identify trouble early on.
  • Giving something to measure against to assess progress and make corrections.
  • Identifying potential areas of give and take–if you overrun your budget in one area, where can you cut back some to compensate, for example.
  • Providing a common language and/or frame of reference for all key players in the business.
  • Uncovering what variables you just can’t know, and may even be unable to guess with any real confidence. For example, we knew we needed to spend money on advertising, but recognized that there was no way to quantify its effect in terms of our model. Similarly, we decided not to try to predict the results of any “Christmas Surge.”
  • Providing a launching point for in-depth discussions about the business, its operation, and any expectations partners may have.

And that’s just the beginning. Creating our model was about as close as my partners and I came to drafting a formal business plan, but the exercise of brainstorming the elements to be represented in the model, discussing the interplay of variables, and refining the model took us over much of the same ground a business plan would have. It made us face the unpleasant realities, and while we eventually rejected the initial indications that we didn’t have sufficient funds to make the business work, it helped us recognize the risks and accept them.

Three months in, I’m pleased to say our model indicates we’re on track. We’re actually beating our projections, and that is encouraging. We’ve needed encouragement more than a few times along the way. We’ll probably need a few more before we’re solidly in the black. Opening a new business is stressful, but I can’t imagine how much more stressed we would be if we were just “winging it” and had no real way of determining where we were and how we were doing. I remain a firm believer in models.

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Never con a con

I’m continually amazed by the number of people who come to this site to build their links by posting unrelated material in the comments. Remember, I’m a social media specialist. There are few link-building strategies, legitimate or shady, I haven’t heard of. When I leave comments I make sure they are relevant, add to the conversation, keep the self-promotion to a minimum. Usually I limit my self-promotion to putting my site’s URL in the field specifically for providing your URL.

The idea behind “link spamming” is to get as many links to your own website as you can get. This can convince search engines your site is more important because you are so actively involved in commenting.

Now, if someone really does spend time reading other blogs and leaving legitimate comments then they should be rewarded in the search engines. Unfortunately, far too many others have caught on to this and take “short cuts” to put out as many links as they can without  wasting time even reading your posts. I get so many link spammers that I very nearly round-file legitimate comments by mistake. Some common less-than-ethical tactics include:

  • Leaving vague compliments like “I love this post! I couldn’t agree more! I’m so glad I found this site! Keep posting!”
  • leaving gibberish, like: sMxfo1 aaqdaajzwccb, [url=]xurxhkxhjsmj[/url], [link=]jahdbanbwwmp[/link],
  • Commenting in a foreign language hoping I’ll just assume it’s for real.
  • Copying and pasting text from some other source, laced with links.

Because of this I’ve taken to personally moderating all my comments, at least for now. I’m hoping some of you comment spammers out there will read this post and abandon hope. But if not, I hope a few more bloggers will learn to recognize this behavior and help put a stop to it. These people are messing things up for all of us.

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