Engine Room Blog

Contrarian - a person who takes up a position opposed to that of the majority, no matter how unpopular.

We all need a contrarian – a person to challenge our thinking, a devil’s advocate to propose a different point of view.   They may be older or younger, more experience or naïve, their job is to make you think.

A contrarian is not the well-meaning person who tells you it won’t work or your own “lizard brain” telling you it will fail.  They are the person who asks the questions that make you think it through and extend your thinking or open your eyes to even more possibilities.

To often we fail to challenge the status quo assuming the way we have always done it is OK, whereas we need to constantly be reviewing our thoughts and processes to see whether there is a better way.

Some years ago at the Engine Room we made the leap to becoming a “cloud based” accounting firm – this was a significant change in the way we worked ourselves and they way we worked with our clients.  We consider it to be a better way to work with our clients.  It hasn’t always been easy, but it has given us many other benefits in data security and access,  and ultimately lead us to having a “less paper” office.  We are now focused on opportunities to leverage the changes we have already made.

What changes have you made recently?  The change going on around us is one constant in our lives, and in this technological age, it is moving even faster.

So back to my original question – who do you use to challenge your thinking?

Many business owners are technicians who go out to work for themselves… When does it become a real business?

In the words of Michael Gerber – Business owners have an “entrepreneurial seizure”.  They look at their boss and think if he (or she) can do it then so can I.  What they don’t think about is the investment in plant, premises and staff that the Boss has made, or all the other work they do outside of the technical stuff – payroll, sales, marketing, debt collection, accounts payable….

In a small business the owner becomes a “Jack of all trades” and often at little recompense for those extra hours they have to spend doing the “administrivia” for the business.  If you take the income you earn and divide it by the real hours you work in your business – what is your hourly rate?  I have seen some owners where this calculation has them earning less than the minimum wage – often their employees are earning more than they are.

So is it a business or a job?

A business is something that earns you a return on investment over and above fair recompense for the hours you work.  The business makes a profit of $150,000 before owner’s earnings, a fair salary is $120,000, you have a business.  

It should also allow you to live the life you want – taking the leisure time you would like, doing the work you want to do.  Otherwise you have a job – and probably a poorly paid one at that.

How do you turn it in to a business?

Have a really good look at what you are doing - talk to your accountant about how you can improve the performance of your business. 

Be brutally honest about whether you can grow your business to generate the profits and cash flow to allow you to live the life you want to lead.

Then make sure you have the right team to achieve what you want, up-skill yourself and your team, create an action plan and go for it.. or make the hard decision – sell or close your business, get a job and live the life you want.

                                                  

There are a few principles small business owners need to understand if they want their business to last:

1.  It is not what you make it is what you keep (cash is king).

80% of businesses fail in the first 5 years - most of these are profitable, they just run out of cash.  No matter how good your sales are it is the profit that counts most - and more importantly the the cash you retain.

A sale is not a sale until the cash is in your hands - whether you sell furniture, property or time it is not a sale until you get paid.

And the cash that is left after you have paid manufacturing costs, overheads and taxes is yours to live on or re-invest in your business.

2. Borrow only to buy assets.

As our grandparents and parents who lived through the 1930's depression will tell you, never spend money you don't have.

An asset is something that either generates income over a period of time or goes up in value.  A car is an asset if the person driving it is earning you an income or saving you money. Stock is an assets if you turn it over regularly otherwise it is  a liability

A holiday is not an asset, neither is furniture or shoes or a computer,.

3. Reduce debt as quickly possible.

They only personal who benefits from long term borrowing is the lender.  To understand this calculate the total payments over the life of your loan and deduct the principal.  Banks want you to extend your loan, and add to it if possible.

4. Always understand your financial position.

Seeing your accountant once a year to see how much tax to pay is not enough financial information to run a  successful  business.  A good business owner knows what their monthly operating costs are and checks each month to ensure they are not exceeded.  They also know what sales they have to do to meet their costs and monitor this throughout the month.  

Poor debt collection and stock management is the downfall of many businesses. If your cash is tied up in stock and debtors careful management is required.

5.  Know what you are good at (and what you are not)

Nobody is good at everything - well not many of us - and limited time generally means you cannot do them all.

Focus on the few things that you do best for the business and employ or contract out the rest. Never abrogate responsibility - you may not be good at finance but you still need know that the job is being done right and what the results are to use that information for decision making. (Your accountant should be able to tell you the key numbers to watch in your business)

6.  Put something away for a rainy day..

There are two types of business - those you can sell and those you can't.

A business that sells well doesn't need the owner working in it every day and generally has physical assets and/or stock or a process to sell. Everything else is just a job by another name.

If your business falls into the former category to maximise your sell price your emphasis needs to be on having a well run systemised business in a good market.

If you really just have a job by another name - for example you are a self employed contractor, your only asset is really your customer base and this is likely to have a limited value to anyone else.  Your earnings are generally restricted to e number of hours you are available to work.  The secret with this type of business is to maximize your earnings and invest those in assets that generate passive income such as dividends, interest and rent.

I have just returned from India, one of the fastest growing economies in the world.  Since the my last visit two years ago the increase in infrastructure development has been huge.  As we left Agra and hit the first of the road toll booths our Guide explained that they were happy to pay as the new highway had reduced the travel time to Jaipur by three hours. The people of India clearly see development from a much more positive perspective than us and realize that their Government cannot afford to pay for everything.

Development is not hampered by the complex regulation of the west - some of which is a bad thing as there isn't even a minimum health and safety standard. But it also means things happen much quicker.  In the last 20 years the living standards for the lowest classes has moved to where the middle class were, and it is moving faster all the time.

Unemployed are offered work on a day by day basis.  If they register as unemployed and turn up at their local meeting place they are guaranteed a miminum wage of 220 rupees ($5.10) per day. If they are not offered a job as a day labourer at a better rate they are assigned jobs for the council working on roads, gardens and other developments.  

Much of the economy runs on cottage industry but as they become more urbanized the biggest problem will be managing demand for higher wages.

There is a significant emphasis on education and health with new educational facilities being built everywhere to cater for the needs of the lower and middle classes.

Sadly in New Zealand we no longer seem hungry to improve ourselves - now we think it is someone else's job to do it for us.  For all our talk of being entrepreneurial and number 8 fencing wire, we would rather go to the beach an earn the minimum we can for the maximum lifestyle.  It is time we raised our goals before we are taken over by the ambitions of countries like India.

Co-operative marketing is a great way to increase business. It gives you access to a ready-made market of ideal potential customers; customers you otherwise may have missed.  Co-operative marketing is where two or more non-competing businesses join together to save time, money, and increase their access to their ideal potential customers at very little cost.

How much has it cost to grow your customer base? The answer is hard to define.  It has cost you every single dollar you have spent on marketing and other areas of your business, like training your team. Now, think about another business—a non-competing business, whose ideal customer or client is very similar to yours.  They have invested a similar amount of time and money to build their customer base.

At this point, both businesses have a choice. You can go out and spend all that money and take all that time to build your client base and double its size again, OR you can access each other’s and in an instant double your client base. There a many non competing businesses who have the same customer demographics - hairdressers and cafes, panelbeaters and mechanics.... whom might you market with?

Clients often ask “How do I grow my business?” There are lots of different techniques and tactics that different types of businesses might use to do this but in fact there are only 4 ways to grow your business.  These are:

 1             Increase the number of customers – but only the ones you want. 

2             Increase the transaction frequency – this means getting your customers to come back and buy more often than they currently do.

3             Increase the average value – this could mean increasing the quantity customers buy or increasing the price you charge for your product or service.

4             Reducing the cost of making your product or delivering your service - this is often achieved by making the process more efficient.

Start with these four ways and think about what you could be doing in your business to address each one.

 

Running a business without a budget is like navigating a ship without a compass. As the financial year end approaches you need to set aside time to examine and revise your budget and cash flow to know where your business is now going and what challenges lay ahead.

Think about the key business assumptions and drivers and whether they have changed - in particular, your sales expectations and margins based on your current pricing.  Analyse your spending trends and plans for purchasing and overheads over the remainder of the financial year.  Identify and cost special projects that will take place, consider the impact on sales and costs of seasonal fluctuations.

How will the Canterbury disaster and the unrest in the Middle East impact your business?

Now that you have a realistic budget and cash flow do you know what it means?  What are the implications on your cash reserves or lending facilities?  Do you need to revise expenditure and projects to a time when there is improved cash flow from customer receipts?

It’s important to stay on course and stick to it, and compare it to what actually happens.  Sharing it with your team, financial advisors and accountant can help you ensure greater success in achieving it.

Running a business without a business plan is like rock climbing blindfolded. Your chances of making it successfully to the top are slim. And the process will surely be a death-defying one.

A business plan is a step-by-step guide to running your business and creating a product or service that will make it in the marketplace. Now is a great time to review your business and plan forward.

Whether it’s formal or informal, every business has a plan. The smart owner of a local hair salon would have assessed the need for a shop in that area of town, the ability to attract clients there, the appropriate amount of chairs, etc. The owner who waits to figure things out using trial and mostly error will be lucky to be left with his/her wits, much less any customers.

Writing your business plan down:

1. Helps you identify all aspects of business operations
2. Increases your chances of considering all the important factors in your business
3. Increases your chances of success
4. Provides a means to analyze and determine how to boost your business out of the doldrums

We would all love to be able to retire when we want, holiday when we want and buy what we want.  The GFC has certainly made it clear a large part of the population can’t. 

Many years ago I read that most people are two pay periods away from bankruptcy – I very much doubt that this has changed.  For a large number of wage earners if they lost their job through redundancy, ill health or accident they could not survive.  Without an income do you have sufficient savings to pay the mortgage, credit cards, hire purchase payments, and regular living expenses?

Now is the time to make a change:

1.                              Have a plan – work out what you need to live on and start saving to have at least a months living expenses set aside.

2.                            Don’t finance your life with borrowings – if you can’t pay cash for it you don’t need it.  A new lounge suite on 50 months interest free terms may sound like a good deal, but nothing is truly free – it is already built into the price.  Your existing furniture may not be the latest and greatest, but if its not falling to pieces it will probably do for another couple of years.

3.                           De-clutter your life – Trademe and Ebay are a wonderful way to get cash for those things you no longer need or want. Otherwise donate to one of the many charities who will re-home it for you.

4.                           Reduce debt – credit card debt is exorbitantly expensive.  Pay the most expensive off first or get a debt consolidation loan.

5.                           Review insurances – are you over or underinsured?  I’m not a great fan of insurance but in the short term if you need cover to pay expenses it is easier to get while you are well than if you are ill.  Accident Compensation will cover you for an accident and pay 80% of you income, but if you become ill income replacement insurance is your only options if you have no other income or savings.

 

To paraphrase Rachel Hunter – you can’t do it overnight but you can do it.  The sooner - the better.

If you listen to the “experts” 2011 will be a slow shallow recovery, a healthy recovery helped by the Rugby World Cup, or more of the same as 2010. Does anybody really know... It's a bit like the weather really.

One thing is certain – if we don’t help ourselves no-one will.  Conversations I’m having with business owners show some pockets of good recovery, those who are just maintaining the status quo and those who cannot struggle on any longer and want out. 

Admitting defeat is a difficult thing to do, but is sometimes the only option and a great relief once the decision is made.  If you have already depleted all your reserves and need cash to re-stock for improving times your options are to borrow from your bank, negotiate longer payment terms with your suppliers or bring in an investor.   If the business has already tried all these it may be time to cut your losses.

Those that are doing well in this economy really understand their customers and make regular changes to match customer buying patterns.  You can’t do this from your office – you need to be face to face with customers, no matter what your industry, to be able to anticipate their needs. 

One thing is certain is that if you continue to do the same thing you are unlikely to get a different result.

Take time out to think about what you want to achieve – even half a day - and plan some thing new to make it happen.

Make sure that 2011 is better for you…