Toilet Paper Blogs

Bestselling author and business start-up champion Mike Michalowicz, author of The Toilet Paper Entrepreneur and The Toilet Paper Entrepreneur blog paid me a tremendous honor last week by including me in a recent blog entry.  He was writing a blog entry about celebrating entrepreneurial success and included my suggestion as entry #7, check it out. 

Mike has a unique style of presenting his material.  Some find it a little sophomoric, but that's just his shtick, and it has worked.  People are reading his blog and his book and booking him for TV interviews and speaking engagements.  His real value come from helping entrepreneurs identify their unique value proposition, their values, identifying the customer and providing a product or service in a narrow niche.  Sound familiar?  If you're a client or use our coaching services you've heard this before. 

How can you possibly hope to deliver the best of you to your customers, if you don't know what that is?  And even after you figure that part out, you can't offer it to the world, most of the world could care less.  Clearly identifying your customer is one of the most important aspects of your business success.  From knowing where to physically locate to running an effective marketing campaign, you can't do that without knowing your customer.

If you have a chance, check out Mike's blog.  It's entertaining and packed full of resources for the small business entrepreneur.

Break Even Analysis

Break-even is one of the most commonly used methods for evaluating a new business enterprise or new product line or manufacturing facility.  It’s a tool for analyzing how sales revenue, profit and expenses vary with changes in one of the variables.  The break-even point is an equalibrium where sales revenue is equal to costs.  At the break-even point, no profits are earned and no losses are incurred.  Break-even is a cash flow tool (so we will not consider non-cash expenses in the calculation) that is easy to calculate.  It is widely used in production management and by cost and management accountants and can prove useful in determining whether to make an investment in a new plant, a specific piece of equipment or a whole business entity.

One of the drawbacks of the break-even analysis is the assumption that nothing changes.  That is, the model assumes that the conditions that were present during the calculation do not change.  Of course, everything changes constantly.  Sales prices are affected by overall sale volumes and costs of raw materials, labor and transportation costs.  The relationship between Therefore, the break-even must be recalculated on a regular basis in order to keep the information relevant and useful.

In order to compute the break-even point, we need to know the following variables:

• Annual Sales Revenue
• Gross Profit Margin
• Operating Expenses (less depreciation)
• Annual Debt Service

 With these figures in hand, we can caluate the various components of break-even.

Break-Even Sales:  (Operating Expenses + Annual Debt Service) 

                Gross Pofit Margin %

Break-Even Gross Margin:  (Operating Expenses + Annual Debt Service) 

                                                                            Sales

Break-Even Operating Exp.:  Sales × Gross Pofit Margin %

6 Tips for Happy Employees

You’ve got a great idea for a technical service or logistics business, your business license is in place and you’re hunting your first contract.  How do you get employees and then keep them engaged?

In most part of the country, anyone with a job is fair game for a deluge of job applications from prospective employees who are grossly over qualified, hundreds who are qualified, and probably thousands who are underqualified.  In other words, finding employees for real jobs is not a difficult prospect.  But here in Huntsville, Alabama, we have lots of good paying jobs with great companies going unfilled.  Why?  There aren’t enough qualified engineers and contract management employees in town to fill all the open jobs.  Some of these jobs are a result of the 2005 BRAC where many armed services jobs were consolidated from different places into a more local/regional arrangement.  Some of the openings are a result of small company growth.  Whatever the reason, the end result is that we have more jobs than we have qualified applicants. (NOTE:  If you’re reading this and want to move to Huntsville, shoot me an email and I’ll put you in touch with the proper folks in the Workforce Development group at the Chamber of Commerce.  They would love to discuss jobs and the Huntsville area with you.)

Employers in this part of the country tend to trade employees as contracts expire and new companies assume responsibilities, or they raid from each other or the Army or vise versa.  So what’s a small company to do against the giants in town like Lockheed-Martin, Ratheon and Northrop Grumman?  In order to compete with the giants in the contracts world, you’ll need really good people who are engaged in the company, their work and want to succeed.  So how do you find these people? 

1. Don’t pay too much.  

Pay a competitive rate for the job at hand.  Jacking up the pay rate will only lower your profitability over the term of your contracts and won’t necessarily get you the best people.  It will mostly get you people who are motivated by money.  While that’s not necessarily bad, it’s certainly not necessarily good.  Wanting more money is a trait found in every worker, not just good workers.

2. Engage people in the work process.  

Good employees want to feel like they are making a difference in their company.  In a giant company, it will never happen.  But in a small company, you can create an environment where your employees can be part of the process, not just a cog in the process wheel.  As you discuss the work your company and its different departments do, get your employees involved in designing the work, the systems and the improvement process.  Create a feedback or suggestion system that actually considers employee ideas.  You don’t have to implement every idea that an employee has, but if you give ideas careful consideration and involve the employee in the feedback and discussion loop, they’ll be thrilled.  All employees have ideas.  Find a system to get them up the ladder to department heads and management so they may be considered.  

3. Get the right people in the job and get out of their way.

You’ve spent several months hiring just the right project manager for the new contract you just won.  You even pay a signing bonus and moving expenses to get the employee to town and settled in.  You have complete faith in their ability to properly manage the new contract.  So get out of their way and let them do their job.  Don’t look over their shoulder and second guess every decision.  Don’t micromanage a good employee into submission.  If you didn’t think they could do the job, why did you hire them in the first place?  As an employee, nothing is more frustrating than being micromanaged by an owner or other manager who doesn’t have a clue how to do the job you were hired to do.  Don’t be one of those managers or owners.

4. Communicate your plan.

Nothing is worse for an employee than to be completely in the dark about the company goals and objectives and plans for getting somewhere.  They don’t have to know every detail, but do inform them about your latest strategic planning and how it will affect the direction of the company.  Employees know when you’re working on plans and they just want to know wha’s going on.  

Make sure every employee has a physical copy or at the very least access to your mission and value statement.  Explain to every new employee how this moral and business directive should affect how the engage the customer, how they interact with vendors and how it affects the way they do their job.  This core company value statement is a powerful tool for communication with your employees.  Your people want to be part of something grand and visionary.  Make sure they behave according to your core values and reward excellence in achieving those values.

5.  Git rid of ridiculous hiring practices.

If you want to compete with the giants for the very best employees, streamline your hiring process and make it employee friendly.  Most employee hiring systems are fraught with ridiculous requirements and cumbersome steps.  While huge companies need a robust software system for sorting out the thousand of applications they get daily, small companies don’t.  Think of potential employees as potential customers.  How would you manage this system if these were customers rather than employees?  I’ll bet you wouldn’t create a system with 28 steps just to make an application.  I’ll bet you wouldn’t have them come in for an interview and then not communicate with them again for 30 or 45 days.  Whoever created the systems in use by most large companies today clearly wasn’t interested in recruiting the best people.  What excellent employee prospect, with lots of opportunities and plenty of competition would pick your company with this stupid system?  If you treat them as mindless robots before you hire them, how much worse will it be once they become actual employees?

Create an application system that’s convenient for the applicant.  I heard a college admissions administrator tell of high school students trying to fill out 12-page admissions applications on an iPhone.  Your systems should be easy to operate and simple to complete.  Set a realistic resume acceptance time and stick to it.  As you cull applicants, let them know they are not being considered.  As soon as the time expires, pick the ones you want to interview and get them in.  If you need a second interview, schedule it within a week of completing the first interview process.  Don’t tell me that your people are busy and we can’t seem to get the interviews scheduled.  Do you need employees or not?  If you do, make it a priority.  Make a decision and extend the offer.  The entire process shouldn’t take more than 75 days and in many cases can be done in 30 – 45 days.  If you don’t find a suitable candidate, tell them so and start over. 

6. Allow your employees to take pride in their work.

While this may sound simplistic, it’s difficult to achieve, especially in a contract or manufacturing environment.   Create employee project teams to consider new ideas and how they might be implemented to reduce costs, improve quality or increase sales.  If new ideas pan out, implement them in your company.

In survey after survey, employees tell researchers that money is not the most important aspect of their motivation in the workplace.  Employees want to do work that matters and feel good about what they do for a living.  While everyone wants to feel that they are fairly paid, it’s meaningful and contributory work that makes people happy.  In a now famous quote from William Manchester describing his experiences as a foot soldier during World War II, he said “A man wouldn’t sell his life to you, but he would give it to you for a piece of colored ribbon.”

Git rid of meaningless processes and procedures that don’t add value to your company.  Create an environment where your employees can take pride in their work and they’ll never leave. 

Weathering the Economic Storm - Part 5 - Business Relationships

This is the fifth and final entry in the series.  To review, we’ve covered:

1. Corporate Dashboards

2. Review Profitability

3. Review Costs

4. Cash

5. Business Relationships

Now in part five, I’ll discuss improving your business relationships and why you should care.

Work on Your Relationships

During difficult economic times, it’s especially important to try to improve your business relationships.  Pay attention to the needs of your larger customers.  Schedule face-to-face meetings to review their needs and your ability to solve their problems.  If you can find ways to cut costs on your side and serve them more efficiently, you both win and they’ll appreciate your being proactive in the relationship.  Your customers are probably doing the same kinds of analysis and reviews of their situations as you are doing in your business.  They want to find ways to cut costs and improve cash flow.  Don’t let them go away because you didn’t take the time to talk with them.  Even if you only have a face-to-face status update or take them to lunch for a friendly chat.  They’ll appreciate your concern and attention.   

But don’t stop with your customers, talk with your vendors.  Letting your vendors know that you’re looking for ways to improve delivery reliability and reduce on-hand inventory and costs will open up discussions for way to improve your working relationships.  It could be that they’re doing all they can do with what they have to work with.  However, maybe a slight change in the rules by which you operate give them flexibility to work with you on some items that are important for your business in exchange for your helping them with items that help them in their business.  You’ll never know where there are even possibilities unless you talk.  Don’t assume that they aren’t interested in working with you to find way to be more efficient together.  On the other hand, if they’re not interested in finding way to work together more efficiently, you probably need to look for another vendor.  

 Finally, talk with your financial partners.  Banker, insurance brokers, regulatory agencies and other business partners are all interested in your long-term survival.  Most of these groups will share information about the industry and ways to improve your operations to achieve more profitability, lower costs and higher efficiencies and safety ratings.  A higher quality business is a more profitable business.

Summary

Running a business is tough, even more so during harsh economic times.  Engage your employees and management to look at every aspect of your operations to make improvements, increase efficiencies and raise quality.  Measure your progress as you make changes to achieve continuous improvement.  Focus your financial eyes towards the cash and constantly strive to bring your customer and vendors closer by adding value to your relationships.

If you need help in any of these areas, give me a call.

Weathering the Economic Storm - Part 4 - Cash

In part one of the series on Weathering the Economic Storm, I discussed using dashboards to identify the most important performance measures of your business and keeping them in front of you and your management team.  In part two, I spoke about managing your business to improve profitability.  While you should be doing these things all the time, you should pay even more attention to them during a period of economic distress.  Part three discussed reviewing your costs.  Now, in part four we’ll talk about the king of all concerns for small businesses: Cash.

It’s the Cash, Stupid!

In the verbeage of the 90s and the lesson painfully learned by President Bush (41), “it’s the economy, stupid!”  Times have changed and for the worse, but the theme for small business stays the same.  It’s not the economy, it’s the cash.  It’s always been the cash.  It’ll always be the cash.  For small business success, CASH IS KING.  A small business can survive a period of less-than-optimal profitability.  But as soon as a small business runs out of cash, it’s out of business.  If you can’t make payroll on Friday, how many of those employees will show up on Monday and keep working?  If you can’t pay for that last load of raw materials, do you think you’ll get another?  What if you don’t make your loan payment to the bank?  I’ll tell you what, you’re done!

Cash is important for small business success in all times, but especially so during times of economic turmoil.  Look for ways to collect your cash faster and conserve it once in your possession.   A few options to consider might include:

• Collect your accounts receivable faster
• Review your credit policies
• Consider shortening your payment terms or offering a larger cash discount for quick payment
• Postpone expansion plans until the market is stronger
• Don’t build new buildings or add more office space
• Postpone any risky projects
• Delay hiring new employees unless they will directly improve cash flow
• Reconsider expanding into new sales territories

In some cases, your business will need to do new things and expand in some ways.  The key is to postpone any risky ventures until times are better.  Those ventures that you consider worthwile need a rock-solid and fast ROI to prevent excessive cash drains.  When you do dicide to try new things, make sure you have ample cash reserves in case your time-frames lengthen and cash doesn’t flow as you anticipated.  Remember, iIt’s difficult enough to profitably expand and conserve cash during good times, much less during bad times.

NEXT AND FINAL INSTALLMENT:  Relationships

Weathering the Economic Storm - Part 3 - Review Costs

In part one of the series on Weathering the Economic Storm, I discussed using dashboards to identify the most important performance measures of your business and keeping them in front of you and your management team.  In part two, I spoke about managing your business to improve profitability.  While you should be doing these things all the time, you should pay even more attention to them during a period of economic distress.  Here in part three, I'll discuss reviewing your costs.  Yes, I know it's another 'Duh', but....

Review Costs

The small business owner should review cost structures and operating efficiencies and make improvement plans.  Start with your product costs.  Look for ways to reduce costs in every phase of operations.  If you can save a few pennies of cost in each operation, you’ll make your whole business more profitable.  Some of the more obvious ways to reduce your product costs are:

Inventory Management:

• Better manage your inventories
• Improve your purchasing efficiencies
• Review your min-max order points to reduce costs
• Work with vendors to improve delivery lead times
• Consider bulk purchase contracts to reduce costs
• Use vendors to warehouse raw material inventories
• Use just in time deliveries where possible
• Evaluate employee counts and efficiencies

Review Operating Costs of:

• Employee workloads and counts
• Benefits coverage and costs with your insurance agent and make changes as appropriate
• Your energy usage; on plant equipment, warehouses, offices - everywhere you use it
• Operating costs of in-plant vehicles
• Fleet efficiencies; track # of deliveries, % of truck full, speed, idling

Review Costs of Services:

• Telephone
• Internet 
• Waste disposal
• Electricity, natural gas, water
• Confidential shredding
• Temp employee contracts
• Office equipment service contracts

Financial Costs:

• Insurance coverages
• Bank line interest rates
• Credit card fees
• Merchant account fees

The lists can go on and on, but I think you get the picture.  With your management team, divide and conquer.  Split the company operating costs in to categories and assign each to the manager most able to attack costs in that part of the company.  Take each category and apply a simple Pareto analysis to the costs and start with the biggest.  Don't be afraid to think outside the box either.  If the only way to decrease fleet costs is to design and implement a fleet safety policy, then do it.  Generally speaking, the safer and more well trained your fleet, the less accidents they'll have.  Fewer accidents mean lower insurance cost, lower deductible costs and lower damage to leased delivery vehicles.  You win all around, plus your employees behave more safely, and that's always a good thing.

Once you've reduced costs as far as possible on the first item, start working on the second item.  On the other hand, if you find that you can save money on an item further down the list by making a simple change, do it.  Take whatever approach works for you and your company.  As those shoe guys say, "Just Do It!"

NEXT:  It's the Cash!

Weathering the Economic Storm - Part 2 - Review Profitability

In part one of the series on Weathering the Economic Storm, I discussed using dashboards to identify the most important performance measures of your business and keeping them in front of you and your management team.  In part two, I'll talk about profitability.  I know, many of you are saying "duh!"  But my experience in nearly three decades of business, large and small, is that things that go without saying, should be said.

Review Profitability

While a dashboard is the first place to start, it’s only the beginning.  In difficult economic times, you need to re-evaluate your whole business model and squeeze out every penny of cost and every measure of efficiency in your systems.  Begin by looking at the big picture, but on a smaller basis.  Create weekly income statements and cash flow reports to discover faster if you have problems.  If something doesn’t look right, dig deeper into the numbers to see what’s happening and hopefully be in a position to take action quickly.  Don't wait for a whole month to go by and then wait a couple of weeks more to prepare official statements before you look at something.  Use the basic output from your accounting system and call it 'close enough' and take a look every week at your performance.  You'll know which accrual items are missing and which month-end entries are not included.  Don't get hung up on those details.  Look at the basic performance of the business units and hunt for abnormalities.  If you find them, go to the source department and try to determine the root cause of the issue.

Also look at the profitability of your major product lines and customers.  Do you have products that aren’t carrying their weight?  Evaluate the possibility of raising prices, changing the cost structure or physical makeup or whether to quit making the product or service all together.  It does you no good to produce products at a loss unless a very small real dollar loss is creating big profits or dramatically reducing costs in another product line.

If you have customers that aren’t profitable, evaluate them in the same way you would a loss-producing product.  Do you really need a customer that causes you to loose money?  Unless they provide some other benefit far in excess of the losses they produce, you need to discuss price increases to make them somewhat profitable or help them find another supplier so you can stop your bleeding.  While getting rid o a customer flies in the face of conventional wisdom, you don't need to keep a customer who's putting you in the red.  In some cases, customers who know their accounts are not profitable will be willing to work with you to find solutions so they don’t have to find another supplier.  However, if they don’t care about your mutual profitability, it’s time to send them packing.

NEXT:  Reviewing Costs