How the Tennessee - Alabama Game Proves that Management Failure is Business Failure

As I continued to cringe the auto updates I was receiving on my ESPN app on the Tennessee - Alabama football, I began to think about the many readings and experiences I've had in dealing with businesses that have gone out of business. Crazy to think that a college football game can inspire such thinking, but what can I say, Tennessee hurt me deep. 

In spite of hiring a new coach a little over a couple of years ago (Coach Jeremy Pruitt) from the SEC King himself, Nick Saban, there came a time of refreshing and hope. Hey, maybe we would live up to our legacy of being in the top tier of SEC football and no longer being bottom feeders... at least I thought. After watching yesterday's beating and thinking about the why and how business's fail, something became crystal clear to me. 

The Number One Cause of Management Failure in Business

One of my favorite books, The Business Doctor by Dr. Arnold Goldstein, talks a lot about what causes businesses to fail. To me, he's the goat on this topic. Going back to the TN-Ala game, I asked myself: is it the quality of players? is it the schemes and game plan? Heck, is it the mascots? It's easy to say it's the coach or the players, but I believe it goes deeper than these things. According to Dr. AG, the number one cause of management failure in a business is the failure to have the foresight to recognize the seeds of one's own destruction and to ultimately do something about them before it's too late!!! How does this relate to the game? Well, it goes all the way back to how we did Phil Fulmer in his last few seasons as head coach. Rather than help him into making a smooth transition by identifying a successor and allowing him to groom and mold him, we just dropped him like a bad habit. Because of this, we've been on the coaching merry go round and haven't even gotten close to experiencing true TN football. 

One of the glaring voids I've noticed with many small business owners is the lack of having a succession plan in place or even an emergency plan in case something terminal or at worst fatal happens to them. We get excited about starting and operating a business, but we hardly ever consider the possibility that we may not get the chance to see the business achieve the heights that we may have experienced in our dreams. Don't wait until it's too late... start with the end in mind. Plan for the end while at the beginning: are you envisioning a sale of the business or transferring the business to an heir? Do you have the proper commercial insurance packages in place especially key person life insurance? 

 

How to Avoid Chaos as a Small Business Owner

After watching the Lakers completely destroy the Heat in Game 1 of the NBA Finals, I was laying in bed before dozing off thinking about some of the small business owners that I've worked with in the past and how I could see that there were two very distinct types of owners: doers and thinkers. Very rarely have I encountered individuals that can both do and think at high levels. Let me clean this up a bit because I don't profess to be a high functioning doer AND thinker myself. You let my wife tell you, she'd say all I do is think and don't DO ENOUGH. And yes, I'd agree with her for the most part. 

Oddly, when we're coming up in age, the difference in being a doer and thinker impacts us in a sneaky way and before you know it, you're either labeled a doer or thinker but rarely both. In the arena of being a small business owner, you will often discover that you need to be both a doer and thinker or at least have the wherewithal to grow into these skill sets if you desire to have a business worth having.   

Action With A Purpose

While playing college basketball, my coach would often tell me to practice 'at game speed'. I was like, what do you mean, Coach? It wasn't until after my playing days were over (and after 2 ruptured patella tendons!!!) that I realized the deeper meaning of Coach's encouragement: don't just practice just to practice, practice with a purpose!!! In other words, I failed to realize at the time that I was practicing with the purpose of doing my role to help the team achieve our short and long term goals. It wasn't only about me and the improvement of my game only, but ultimately it was about the bigger picture. Again, I've observed over the last 20 years how the small business owners that worked with a purpose, with a bigger picture mindset, were the ones that not only survived, but thrived.

When you first get into running a business, you have no choice but to be a doer. Things have to get done and usually, you as the owner are the only person available to do them. As your business grows though you'll begin noticing that you have to start thinking things through before just jumping in to do them. This is when strategy and planning become important (asking yourself, why am I doing what I'm doing and to what end am I doing it?) and the charge of getting things done soon follows. 

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How Small Business Owners Should Use a Profit and Loss Report - Gross Margins

Often you hear that one of the key ways that small business owners keep 'score' of their success is to observe how much cash reserve is generated. To a certain degree, I believe this to be true, but there's a pre-step though. How does one go about creating this cash reserve from business operations. Do we just close our eyes and hope that with each sale made we are able to earn a little profit to cover other operating expenses? If you like living on the edge and dancing around the fire, then by all means, please continue to operate your small business this way. However, if you're operating a small business in order to build a valuable asset, then you must become more calculated and focused in building and growing a cash reserve from business operations. How do you go about doing this, you ask? Glad you asked because that's the topic of today's post. Let's dig in.

I'm Making Sales, But I'm Not Making Any Money???

I've seen this scene far too many times while consulting small business owners. Sales are moderate to robust, but there's hardly no money in the bank in terms of a cash reserve. Why and how did this happen? We've been talking about the importance of learning how to use the profit and loss report to actively manage your small business to become more profitable and sustainable. The section we're talking about today is understanding and putting to use the information from the gross margin section of the profit and loss report. Let's get this idea of looking at this section of the report from a 'backwards perspective' out of our thinking. Here's what I mean. Don't make the mistake of waiting to receive this report a week or month too late because by then it's far too late to do anything about it. Instead, use projections rooted and derived from previous periods to develop a forecast of this section of the profit and loss report because the very existence of your small business depends on it.

Let's Hit the Bull's Eye!!!

Gross margins quite simply let you know if you're making money over and above the cost of sales for the products and / or services that your small business markets and sales. Of course, this assumes that you've done a decent job in understanding the cost of sales for your small business. What is it that makes the gross margin section so important, though? This section of the profit and loss report earns its weight in gold when you apply a minimum standard for achievement based on industry or market norms. Here's what I mean. You don't want to shoot in the dark for setting a minimum standard for gross margins because there's no significant basis to it other than your 'wishful thinking' For example, if you're operating a restaurant, you should know on average that overall gross margins should fall no lower than 50% to 60%. From here, you can continue to get specific with various product and service offerings to really discover the gross margins for each and every offering that your small business provides. Now here come's the magic. Once you've experienced a period of operations and have a pretty good set of data to generate projections (no less than a month factoring in seasonality, if it pertains to your industry) in combination to the minimum standards based on industry or market norms, you can gain a pretty solid picture of the cash reserves you'll be able to generate for up to a month or two. Here's the other key observation of conducting this type of gross margin analysis: you'll understand that you're in control (aside from the macro market factors that you or anybody can't control) of DRIVING THE ACTIVITIES that will manifest the increase in cash reserves by MONITORING GROSS MARGINS. Don't you see it now? By taking an active approach to managing and monitoring the gross margin section of the profit and loss report, you are able to drive both the sales and cost of sales sections with a eagle's eye approach. Remember, the devil is always in the details my friend.

I hope that this series on using a profit and loss report to help your small business become more profitable and sustainable has been more than helpful because we're pushing on to the next section, putting to use the information found in the operating expenses of the profit and loss report. Till then, stay tuned... 

How Small Business Owners Should Use a Profit and Loss Report - Cost of Sales

We Made A Sale... That's A Good Thing, Right? 

Yes... and no. In continuing our conversation on how small business owners should use the profit and loss report as a key tool for operating their business, we're talking about the cost of sales section today. Sometimes, this section of the report is called the Cost of Goods Sold. Not to get too technical with the accounting terms here, but there are several ways to value the cost of what a business sells. Here's the important take away for this section of the profit and loss report: are you making a profitable (and hopefully sustainable) margin on the products and / or services you are selling? How do you know if you are or not? Remember, business's live or die on margin. 

What's All This Talk About Margin? 

By now you ought to know it doesn't mean a whole lot just to make a sale. Don't get me wrong; selling is a vital foundation of building and growing a great business, but it doesn't mean a whole lot when you're selling at a loss. In order for the sale to mean something, it has to come at a profit meaning that it has to cover its own cost in addition to leaving a cushion or margin for covering other expenses, growing a reserve for reinvestment, or at least a modest return on the invested capital of the owner(s) and / or investors. For example, when consulting restaurants, I've noticed that food costs (which are the primary costs in operating a restaurant) are typically marked up by a certain amount depending on the section of the menu the food item is found. Here's the key difference between a restaurant that thrives and the one that dies: thriving restaurants know their margins intimately incorporating this knowledge into their advertising and marketing plans while dying ones only guess at it. This key in understanding and knowing margins applies to every business no matter the industry. If you don't know your margins, you're doomed to fail BIG!!!

So, How Do You I Use the Cost of Sales Section to Operate My Business More Efficiently 

Similar to the Sales section of the profit and loss report, you have to ask several questions when observing the detail of the cost of sales section. First, let's start with the total amount reported. It's not enough to know the total amount sold for the period whether it's a day, week, month, quarter, or year. You need to know specifically what products and / or services sold and from whom or where these products and / or services were purchased? Were they made internally or externally? At what degree were they made internally or externally? Were purchase discounts given or earned and if so, why and how? Maybe not available on this section of the profit and loss report, but you could investigate a little deeper and be aware of the methods or processes of how the business goes about purchasing the products and / or services it sells. Ultimately, whenever you're analyzing the cost of sales section of the profit and loss report, you are conducting a cost analysis to ensure the business isn't losing any unnecessary money from having loose controls and a lack of monitoring just because hey, we're making sales, right? 

For our next post, we'll talk about gross margins and why when used in comparison to previous periods and even budget plans, can become a great indicator of your small business's future profitability and sustainability. Stay tuned... 

Why are Business Financial Models Important for Small Business Owners

Why Are Business Financial Models Important?

Significant Pain Points of Not Having and Comprehending the Business Financial Model

• Lack of Direction
• Sales and Marketing Efforts are Not Fully Maximized
• Business Owners / Principals Have No Focus on Building or Extracting Wealth for Retirement or Family Estate

Benefits of Having A Business Financial Model

• Yields a Logical Thought Process for the Business
• Provides a Comprehensive Model for Planning and Executing the Operational and Financial Components of the Business
• Gives Investors and Bankers a Way to Quickly Evaluate and Assess the Value of the Business

What is A Business Model? Laying the Ground Work...

Business Model Definition - "A business model (also called a business design) is the instrument by which a business intends to generate revenue and profits. It is a summary of how a company means to serve it employees and customers, and involves both strategy (what a business intends to do) as well as implementation (how the business will carry out its plans)" Source: Wikipedia


Business Financial Model Definition - "Financial models are not about absolute values; they are about relationships. A good financial model demonstrates the relationships and the business tradeoffs that compose the profitability potential of the business idea. If you understand the relationships, the drivers of revenue, drivers of cost, and the critical success factors, you understand the core of the business." Source: Pro Excel Financial Modeling by Tom Y. Sawyer


Major Components of a Business Financial Model

• The Staffing Model
• Sales and Revenue Model
• Cost of Goods Sold and Inventory Model
• Cost of Sales and Marketing Model
• Operating and Capital Expenditures Model
• Statements of Profit and Loss and Cash Flow

Who Needs A Business Financial Model? 

Start up and early stage entrepreneurs and business owners (1 to 5 years of operations) use Business Financial Models as a tool to create a dynamic business; it is a building block that leads him or her to a strong, profitable business.

The Purpose for Staffing Models

In order to create the oppotunities for continued sales growth, profitability, and market penetration, small businesses need to create and implement a strategy for recruiting, training, and retaining key positions. The sad reality of many small businesses (firms employing 2 to 5 employees) is that the owner typically attempts to perform all of the duties needed to keep the business operational in addition to growing. Honestly, this is damn near impossible. Even with the advent and growth of online businesses, there still exists the need to employ others to aid in the business's growth and stability. It's quite true that 'no man (or woman) is an island". Until the business owner realizes, accepts, and implements an action plan to hire, train, and retain key personnel, the business will eventually hit a ceiling that can't be penetrated until personnel is added.

A sound staffing model gives the business owner a tactical plan to use in fulfill the positions needed to grow the business. It consists primarily of the following:

• Position Title and Purpose - gives clarity to the business owner of the why and how of the business in terms of the overall business model
• Brief Job Description - aids in the hiring and evaluation processes
• Required Tools and Materials to Perform the Work - aids in the optimal performance of the work planned
• Total Costs - helps the business owner gain an understanding of the projected costs (and returns) for employing the position. 

One of the best and easiest methods for developing a staffing model is to create an Organizational Chart. Simply, the owner sits down with a blank sheet of paper and plots out how the business worksk from time a lead for work is produced all the way to the end when the service and / or product is delivered to the client or end user. Also client or end user retention for recurring purchases is added into this planning process. Now that the owner has an schematic of how the business process, he or she can extract out the key components of the process and tie these to positions. Typically, these positions will come in the following categories: 

• Marketing and Sales (responsible for lead generation and customer acquistion | retention)
• Production (responsible for producing the product and / or service for distribution to clients or end users)
• Administration (responsible for keeping track of the numbers for Sales and Marketing and Production) for feedback and improvement purposes in addition to safeguarding the money earned and assets created and retained. 

In closing, it's also best to realize that staffing models change and grow as the business grows. The business owner and his or her team needs to always be in a mode of revision, updating, and improvement when it comes to staffing and personnel management. Remember, the most important assets in any business are the people tasked with ensuring the business survives and thrives on a daily basis. 

The Right Business Mind Set

As the first post on this blog about creating, comprehending, and presenting Business Financial Models, it's only right to set a solid foundation and talk about having the 'right mindset'. Too many times in listening to start up or even early stage business owners, you get the notion that no thought was given during the concept stage of the business to truly give direction and focus. Nothing pays off like having a well thought strategy to help you navigate tough times as the business expands and grows. I recommend to business owners that they have a balance between taking action and taking time to think and create an effective plan of action. At times I even have to remind myself that you can get sucked into the never-ending abyss of analysis and research. Don't get me wrong, there's nothing wrong with doing an appropriate amount of analysis and research, but not to the point where it begins to hinder and impede action. To help you find the proper balance between conducting research and taking action, use the following 3 steps to give you guidance. Also check out my other blog, jerichobizfinance.com, for more info:

Step One: Consider the Costs

There's nothing worse than moving forward in a business venture and you or your team did not count the costs of going into and operating a business. This applies to both part and full time ventures. Time is a valuable resource that we all have a restricted amount of. Think about it... there are only so many hours in a day and this even gets reduced due to getting an adequate amount of rest and investing of quality time with family and friends. So, when you make the decision to start or operate a business, you need to ask yourself, "How will I do a better job of managing my time?" or "What am I willing to sacrifice?" Trust me, you will either do one or both.

Step Two: Find another Motivation Other Than $$$

I confess that I've fallen victim to the 'easy money' syndrome when it comes to starting and operating a business. It's nothing like experiencing your full earning potential as a business owner or principal when there's a direct connection to your activity and the dollars you earn. There's a caveat though: never allow yourself to become captivated and sold out to the dollar. Remember the truth that in order to gain something, something else must be released. In other words, if (and I hope you don't) you make money your all consuming passion for being in business, you will lose BIG TIME in life especially if you have a family. Keep your business in its proper place and learn to manage it as opposed to it consuming and managing you.

Step Three: Become a Info Sponge

Again I confess that I was a late comer to the party on this one. I thought that since I achieved a graduate degree in business and knew how to read and interpret business financial reports that I was certified to become a business owner. NOT TRUE AT ALL!!!! Some of the best info sources of practical and valuable business advise comes from the oddest of places and people. What I'm saying here is that you must train your mind to become enlightened to soaking up 'solid' wisdom all the time, every day. Truly, a wealth of resources exist in various forms especially now with the proliferation of the internet and the emphasis on sharing and connectivity. Take advantage and explore. Seek advice from those that have gone before you and can give you sound guidance and advice. Thank GOD for Amazon and the local bookstore!!!