Monthly Archive for April, 2017

Managing the three clocks of small business

“Time Is On My Side,” is the title of one of the classic rock ’n’ roll songs performed by Mick Jagger and the legendary English band, The Rolling Stones.

This bold statement works in a song, but for small businesses – not so much. The reason is because of the complicated dynamic between our most limited resource, time, and three of our most important business factors, expenses, sales and cash.

In the marketplace, there are actually three different clocks at work that every business uses: one for operating expenses, one for sales and one for cash. Let’s take a look at how these three clocks impact your small business.

Operating Expense Clock
Every month like clockwork, regardless of sales volume, cash collections or profitability, payroll must be met, rent must be paid, taxes must be remitted, plus phone, utilities, insurance bills, etc., must also be paid. The Operating Expense Clock is hardwired to Greenwich, England for accuracy within a nanosecond per millennium, and nothing stops it short of a global, thermonuclear holocaust coinciding with a direct hit from Haley’s comet.

The only way to influence this clock is through operating efficiencies – you won’t be billed for what you don’t buy.

Sales Clock
This clock is powered by the prospect and customer relationships you’ve created so sales result each month. You project when each sale will occur by qualifying prospects and attributing a clock to each potential transaction so that you can budget future sales volume, which delivers gross profit to pay expenses.

How the Sales Clock operates is completely logical and intuitive, but it only works in your favor when meet all of the expectations and requirements of customers.

Cash Clock
What is not logical or intuitive is the Cash Clock and its relationship with the other two. Think of it like this: Cash is to sales as snow is to cold. You can have cold weather without snow, but you can’t have snow without cold weather. You can have sales without receiving cash, but you can’t receive cash without making sales. And expenses are like weather: you get some every day.

But what hits small business owners hard is that for every glitch in the mainspring of the Sales Clock, there are 1,000 potential sprocket failures that slow or stop the Cash Clock. Consequently, the Cash Clock requires constant maintenance.

Surely, Murphy was a small business owner, because his law lives inside the Cash and Sales Clocks. But the Operating Expense Clock is immune to this insidious law and keeps on rockin’, just like The Rolling Stones.

Write this on a rock … Your success requires a full understanding of the three clocks of small business.


Welcome to Amazonia – third rock from the sun

Eeep—Eeep—Eeep —Eee

“Uh! Yes, Echo. I’m awake.” Walter’s answer stopped the noise and prompted this message from inside his pillow:

“Good morning, Walter. It’s 6:30am in Amazone 3, Monday, March 8, 2087.  Current temperature is a crisp 11 degrees Ama-Cius. Have a nice day.”

Walter Wallace had received the same wake-up notice every morning of his life since 2060, the year he turned eight. That was the year planet Earth, third rock from the sun, became Amazonia, wholly owned by Amazon.com.

By the middle of the 21st century, the world economy became dominated by Amazon and a few other online retailers and tech giants, like Google, Microsoft, Facebook, etc. For decades the megalomaniacs of those firms pursued shared goals of influence over sectors such as the global consumer goods supply chain, the content origination and curation universe, the global 24/7 news cycle, big data mining/consumer manipulation, etc. Ultimately, planetary control was complete as their long-held geo-economic dominance coalesced with their nascent global political influence.

In 2053, Amazon moved its headquarters from Seattle to occupy the entire lower third of the island formerly known as Manhattan — now called New Bezos, after the company’s late founder. By then, most Earthlings received whatever they needed in life – including employment – from some combination of the tech giants. By 2057, a final merger resulted in absorption of the other tech behemoths by the ultimate powerhouse, as Amazon controlled every function of society, commerce and governance.

Walking to his job as an Amazonia community planner, Walter no longer noticed the constant buzzing of the Amadrones, the iconic device for how the company gained global control, as they delivered goods. The internal nomenclature was “unmanned delivery and surveillance platform,” or UDASP, because they doubled as aerial spies. Everybody knew that. But Amazonians had long since suspended any expectation of personal privacy or self-determination.

Walter’s parents had told him stories about a diverse marketplace that included something called small businesses. But the same year the planet became Amazonia, the last one closed in what was once Lake Station, Indiana, now part of Amazone 4. Louis Lukedic, Jr. finally gave up the fight against the UDASPs and closed Louie’s Dry Cleaning, the 60-year business his father founded as the new millennia dawned. Besides, Louie Jr.’s children had all been assimilated by Amazon.

Walking to work in what was once Cincinnati, Ohio, all around Walter were Amazon branded buildings, including commercial structures for doing the corporation’s business, and high rises, to house Amazonians. Just last year, Walter, his wife and two children moved into one of the newest buildings. His parent’s generation were the last to experience home-ownership.

Every morning Walter stopped at an AmaMac SDD (sustenance delivery device) to procure a green breakfast wafer that tasted better than it looked, and coffee-flavored liquid. As a holographic scan confirmed whose personal Amaccount to debit, a strange noise came out of the SDD.

Eeep—Eeep—Ee —

“Wazzat?”  Walter grunted loudly, as he slapped the snooze button. “Where am I?”

“Honey, are you okay?” Walter’s wife, Wilma asked. “I think you had a nightmare.”

“Boy, I’ll say,” Walter exclaimed, wiping the sweat from the back of his neck.  “I dreamed Amazon had taken over the world. I tell you, Wilma, it was awful — they owned everything. There were no small businesses anywhere. All the people had blank stares on their faces as they went about their lives. Even me.”

Opening the morning paper at breakfast, Walter felt a chill as he read this very real headline, “Retail Ice Age advances as Amazon and other e-tail giants transform Main Street.”

In his small business later that day, Walter thought about his nightmare, the newspaper headline and another dream of his — the one about passing his business on to his children. In a meeting that morning, Walter vowed to fight back harder than ever as he encouraged his staff.

“We must stay focused on what customers expect from us,” Walter continued, “which is our special sauce of combining a certain level of high tech AND the high touch only we can deliver. We’ll combine both to achieve higher margins with what customers want – customization, and leave the commodities – what customers need – to Amazon.”

“And here’s Breaking News: Amazon is 100% digital, but customers are 100% analog. Amazon may deliver dozens of different back scratchers, but it can’t scratch one back. Only a Main Street business like ours can reach that analog itch that’s unique for every customer. Amazon can’t beat us if we keep customers focused on that advantage.”

Write this on a rock … Deliver the small business special sauce and you’ll have nothing to fear from Amazon.

Wall Street’s sour grapes shouldn’t set Main Street’s teeth on edge

“The fathers have eaten sour grapes and the children’s teeth are set on edge.”

When Jeremiah and Ezekiel so prophesied 2600 years ago, it was to offer hope for a time when the Children of Israel would stop having the sins of their fathers visited on them. As a student of the evolution of American capitalism over the past half century, recent observations have moved me to paraphrase the ancients with a new marketplace maxim that I pray will not become prophetic:

“Wall Street has eaten sour grapes and Main Street’s teeth are set on edge.”

Alas, my passage is not about hope for a sweeter time, but rather, a lament of concern for the opposite.  My perspective is informed by three periods of time: The Reagan Boom, post 2008 financial crisis, and post 2016 election. I’ll split the latter into bookends around the other two.

Post 2016 Election
When we awoke on Wednesday, November 9, 2016 to the shocking Electoral College tally showing Donald Trump had preempted the anointing of Hillary Clinton as president, the Dow Jones was already in record territory at 18,323.  By closing bell that day, the Index was up 265 points. Since then, the “Trump Bounce” has driven the Dow Jones through the once-mythical 20,000 level on the way to 21,000, the fastest 1,000 point run in history.

Meanwhile, out here on Main Street, the 44-year-old NFIB Index of Small Business Optimism reported its own historic spike in that sentiment since the election. But a small business can’t eat optimism, and my recent online polling indicates less than a third of our respondents are seeing customer enthusiasm actually ringing a cash register. After a tough decade, unlike investors, consumers are more measured than manic, so it’s likely to take months of sustained optimism to manifest as Main Street sales growth.

The Reagan Boom
Once upon a time, small businesses benefited from an exuberant stock market.

Beginning in the third quarter 1982, the Dow Jones caught a rocket to a 52% increase over the next four quarters, to 3071. And with the exception of a correction or two along the way, including the 1987 “Black Monday” crash, Wall Street didn’t look back until the turn of the new millennium when it closed at a record high of 11,722 on January 14, 2000.

Main Street businesses had much to be excited about because in those days it was an article of faith that “the stock market was a leading indicator of the national economy.” During that same period, as it had always done, the rising Wall Street tide raised Main Street boats too. Indeed, in that 18-year economic expansion, plus a shorter one from about 2002 to 2007, the old “leading indicator” dynamic between Wall Street and Main Street was made manifest during what has been called the “Reagan Boom.” As Wall Street reached new records, annual GDP growth, the favored indicator for small firms planted in the ground, averaged a beautiful 3.5%.

Post Financial Crisis
American macro-capitalism changed significantly beginning in 2007 with the Great Recession, which overlapped the financial crisis of 2008. In the process of surviving those two gut-punches, Corporate America and Wall Street shifted their business practices by focusing inward more than ever before. Inward, meaning investing less in the Main Street economy, to the extent that the once-dependable maxim, “Wall Street is a leading indicator of the economy,” morphed into my observation that Wall Street is now merely a leading indicator of itself – Main Street is on its own. Here’s my evidence:

  • While the U.S. economy was experiencing essentially a lost decade (2007-2016), with GDP growth averaging 1.4%, including barely 2% annually for the seven years following the end of the recession, the stock market spent the last five years setting new records.
  • For three years running, in the first quarters of 2014, 2015, and 2016, two things happened simultaneously that had only happened before in Bizarro World:
    • GDP went perilously negative in 2014 (-2.9%), 2015 (-2%), and achieved only .5% growth in 2016 (U.S. Dept. of Commerce).
    • The Dow Jones reached new record highs in all three first quarters.

Again I ask, what’s wrong with this picture?

Back to the future
There’s been no corporate earnings performance since November 8 to justify spikes of 15% for the Dow Jones and 11% for the S&P. Where’s the fundamentals evidence one would expect to cause equities to wander into unicorn territory? It’s true: The hope of a more business-friendly government is raising optimism in all sectors of the marketplace. But unlike Wall Street, a small business can only spend what it takes in by serving customers. Our top line manna falls from customers, not mania or manipulation.

Smarter people than I are forecasting a stock market correction if, for example, there’s no tax reform this year. My “sour grapes” concern is that having already “clipped its coupons” on the post-election exuberance, a correction this year for any reason it will set the economy back abruptly, derailing Main Street’s bounce before it ever happens.

No one on Main Street begrudges the success of Wall Street. But right now the disconnect between the two once-symbiotic sectors is at once illogical and unsustainable. When the irrational exuberance of Wall Street ultimately reconciles with reality, that event should not cause Main Street to become collateral damage before the latter ever gets to play in the game.

Write this on a rock … When Wall Street eats sour grapes, it should not set Main Street’s teeth on edge.

Take on the law of numbers with grit and fundamentals

A rabbit was being chased by a hungry fox. Running for his life, he hopped over a turtle as he made haste across a small stream. Tucking himself safely inside his shell — not wanting to become collateral damage in the rabbit’s emergency — the turtle inquired about his anxious neighbor’s prospects, “Hey, Mr. Rabbit. You gonna make it?” To which Mr. Rabbit replied over his shoulder, “I GOTTA make it.”

When small business owners wake up in the morning, they often feel like Mr. Rabbit. But why are so many operating so close to the edge of survival? Why is every challenge or opportunity so momentous? Why are their circumstances so much more dramatic than for their Big Business cousins? The answer is found in the law of numbers. Let’s look at just three key examples:

Customers
Big businesses have lots of customers, so losing one is usually not a big percentage of their customer universe. A small business’s customer universe looks more like a list, on which each name represents a much larger percentage of the total. Losing a sale or customer takes a bigger mathematical bite out of the future viability of any small business.

Employees
When an employee leaves a big business, there are probably three replacements ready to be promoted off the bench to that single assignment. But even if there is a bench on a small business team, it isn’t deep. And since there are more jobs to do in a small business than people to do them, every employee is a key employee who’s difficult to replace.

Capital
Big businesses are blessed with multiple capital options, including the equity and debt (bonds) markets. A small business is the stepchild of the capital markets – sometimes more like an orphan. Other than bank loans and whatever retained earnings that can be held onto after taxes, the best way to describe other capital acquisition options is found in the names of the twin brothers of desperation, Slim and None. And even when outside capital is found, it often comes at a prohibitive premium.

With the law of numbers and perilous percentages against them, translating into limited options, small business owners survive by calling on a special kind of “I GOTTA make it” resolve. But, alas, resolve alone isn’t enough. To overcome the reality of their numbers and operate with less desperation they have to combine their grit with a focus on operating fundamentals that address the exposures. For instance:

  • Customers: Know what each expects from you and deliver that within an inch of their lives. This is part of your special sauce and one of your advantages over a big business.
  • Employees: Hire only those who could one day be promotable off of your bench.
  • Capital: Build and maintain good relationships with at least two banks, and retain earnings like your business’ life depends on it. It does.

During The Second Punic War (218 BC), Hannibal crossed the Alps with 35,000 men and a squadron of elephants. When snow blocked their progress, scouts reported the way forward was impossible. Sensing disaster in the eyes of his men, and realizing that this was a test of his leadership, the great Carthaginian general is said to have uttered those words that small business owners say to themselves, and their people, every day: “We must either find a way – or make one.”

Write this on a rock … Like rabbits and generals, small business owners GOTTA make it with a combination of grit and fundamentals.




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