Tag Archive for 'Adam Smith'

The kinship of private equity and small business

Mitt Romney’s record in the private equity industry has become part of the election year political debate. The Romney campaign offers it as a positive credential and the Obama campaign has disparaged the industry as a way of casting a negative on Romney’s record.

Recently, a former leader in the private equity sector and President Obama’s former “car czar” and loyal supporter, Steven Rattner, weighed in with support for private equity by allowing that these firms are completely legitimate and add value to our economic system. But, as if to throw a bone to his former boss, Rattner also pointed out that private equity firms are founded to create wealth, not jobs. Here is one of Rattner’s quotes on this issue:

“Bain Capital — like other private equity firms — was founded and managed for profit … earned legally and legitimately. Any job creation was a welcome but a secondary byproduct.”

With this pronouncement, Mr. Rattner finds himself in historic company.

In his seminal work, “The Wealth of Nations” (1776), Adam Smith, introduced his now immortal “invisible hand” theory, which proposes that an individual, “led by an invisible hand” in pursuit of “his own interest, frequently promotes that of society more than when he really intends to promote it.”

For Smith, who is considered the father of economics, there was no chicken/egg quandary. The chicken – individual self-interest – comes first, followed by the egg – benefit to society. Mr. Rattner, perhaps without intending it, is singing Smith’s song in 21st century English: profit first, jobs second.

Nor is there a chicken/egg quandary today. In our capitalist, free-market economic system, the chicken is profit and the egg is jobs. It’s superfluous to say that jobs are the secondary byproduct of private equity; jobs are the byproduct of capitalism – period. In fact, the only economic system that has job creation as a founding imperative is communism.

From the very first small business created in America to the millions that have been formed since, from the sole proprietor to the 499-employee high-growth enterprise, all were founded with the nuclear notion of generating profits that will ultimately create wealth. And as essential as employees are to accomplishing a business founder’s wealth-creation goal, no pre-start-up entrepreneurial dreamer ever thought, “I want to commit all of my time, energy and resources – and risk everything – so I can create jobs.”

Like any venture that takes risks, private equity firms have to make tough business decisions and they make mistakes, which are fair game for critics. But if you’re going to malign private equity firms because their founding principle is to create profit and wealth, then you would have to extend that indictment to all 26 million American small businesses.

Led by an invisible hand in pursuit of their own wealth-creation self-interests, America’s small businesses benefit society by producing over half of U.S. GDP, creating most of America’s new jobs and delivering tens-of-millions of paychecks to their productive and grateful employees every month.

For small business, the chicken is profit and the egg is jobs.

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I talked more about the “Profit first - jobs second” business motivation on The Small Business Advocate Show. Click here to listen or download.

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Is barter right for your small business?

In his landmark 1776 book, Wealth of Nations, Adam Smith called money one of the three great inventions, including the written word and mathematics. Money has helped businesses grow more efficiently, markets expand more dynamically and nations trade more effectively.

But there is something still in use in the marketplace today that humans used for millennia before money: barter. Indeed, barter birthed the marketplace.

In simple terms, barter is the direct and mutual exchange of goods and/or services between two parties. The Latin term, quid pro quo, “something for something,” is the original definition of barter. Think of the frontier doctor who took a chicken and a sack of potatoes for delivering a baby.

Over the past hundred years or so, a combination of the ubiquity of money and the growth of financial tools and resources has relegated barter to the marketplace minor leagues. Nevertheless, barter is still being conducted, primarily between businesses that know each other and have a mutual need for what the other offers. For example, a printer barters a brochure job for food from a local restaurant. Or a lawyer accepts personal and/or real assets from a client in barter for legal representation.

Small business should look for barter opportunities. For example, with too much inventory and too little cash, barter can be part of a survival strategy in a bad economy. Slow-turning goods become the equivalent of cash to pay for something that in a better economy would have been covered by the cash flow and profits from customer sales. Plus, there are tax advantages with barter, but also tax reporting requirements. So consult a tax professional before bartering.

As handy as barter can be, it does have three inherent challenges that money was invented to address:

  1. Party familiarity
  2. Timing
  3. Relative value

But a few entrepreneurs have created something to overcome these limitations in much the same way that money does, while keeping the advantages of barter. They’re called barter networks or exchanges.

A barter network becomes the nexus between parties by offering services that address the challenges mentioned, including:

  1. barter credits that can be used any time in exchange for
  2. a variety of goods and services from a catalog the networks has aggregated from and for its members.

Before using a barter network, remember you may be exchanging assets today for future redemption. So conduct the due diligence to make sure the barter network has experience and a good track record.

Consider barter in your economic recovery plans.

On my small business radio program, The Small Business Advocate Show, I interviewed Steve Bolles, founder and president of Merchants Barter Exchange. In this interview, Steve talked about some of the reasons that barter could be just the right tool for small businesses experiencing cash flow challenges or other issues in this recovering economy. Plus, we talked about some of the details that are required to pull off a successful barter, including through a barter network and, of course, the tax details. Take a few minutes to listen to this conversation and, as always, be sure to leave your own thoughts. Listen Live! Download, Too!

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Let customers read about your authentic side

Adam Smith, the father of modern economics and author of The Wealth of Nations (1776), identified writing as one of the three most important inventions of mankind – the other two being money and economic tables.

More than two centuries later, the Internet has powered the written word to levels unimagined only a generation ago, let alone during Smith’s era. Indeed, it is the driving force behind a handy new-media maxim, “Content is King.”

Today we’re consumers of many kinds of online content, including streaming audio and video. But even in the face of such multi-media majesty as iTunes and YouTube, most of the kingly content is still in the graphic form so highly regarded by Smith.

So what does all of this mean for small business owners? It’s simple: In an era when content is king, if you want to connect with customers competitively and stay connected, you have to produce more written words than ever before. But not just any words – authentic words.

Since 1999 – long before blogs and social media – two of the things I’ve encouraged small business owners to do is: 1) develop better writing skills and 2) publish more of their own words online that communicate to and connect with customers.

In the 2nd decade of the 21st century, prospects and customers want to read about the stuff you sell before they meet you. But they want more than marketing messaging; they want authentic, straight-from-the-horse’s-mouth information that delivers three things that are increasingly a big deal to customers: the voice, vision and values of the human beings behind the stuff, as unartful and unscripted as they may be.

So don’t worry if you’re not a professional wordsmith. When you need fancy words for strategic marketing messaging, online or otherwise, hire a pro. But you must become comfortable with conveying your vision and values online, in your own words – the voice – about a variety of issues from explaining how to use a product you sell to a local cause you care about to your philosophy on serving customers. And it’s just fine if some of these authentic words come from employees.

In the Age of the Customer™, now armed with as much information as the businesses they patronize, customers expect to be treated more like insiders. The good news is that no one makes this connection as effectively and authentically as a small business.

Recently on The Small Business Advocate Show, I talked more about using language to reach and connect with your customers. Take a few minutes to listen and leave some ideas on how you connect with your customers.  Authenticity through the written word

The 3/50 Project meets the small business “invisible hand”

In Wealth of Nations, the 1776 book that essentially launched modern economics, Adam Smith introduced a concept he called the “invisible hand.”  Please, allow me to put Smith’s 18th century Scottish words into 21st century context: When a business owner works on her business, with the single-minded purpose of only benefiting herself and no one else, that very free market activity actually benefits society, as if by an invisible hand, even when no such benefit was intended.

So, if Smith’s idea about business activity is correct, and I think it is, wouldn’t it be a good thing to make more of that “invisible hand” stuff happen?  Of course, but how do we do that?

Well, duh!! Just do more business with a small business. And if you agree with me that many little invisible hands will benefit society more than a few great big invisible hands, compare this invisible hand leverage opportunity: Big companies in the U.S. are identified as the Fortune 1000, but there are approx. 26 MILLION small businesses in America.  Pardon me, but, again - duh!!!

So, next time you have the option of doing business with a small firm, of course, make them earn your business; but add into your consideration the invisible hand effect which proposes that the more local small businesses are successful, the more the local community will be successful.  And, as I’ve always said, what’s good for small business is good for the world.

Recently, Cinda Baxter joined me on my radio program, The Small Business Advocate Show, to update us on a great program that promotes business locally, The 3/50 Project.  A member of my Brain Trust, Cinda founded the 3/50 Project in 2009 to help strengthen independent brick and mortar small businesses, and it’s saving Main Street one small business at a time.  Cinda is a former retail store owner turned retail consultant and coach at Always Upward. Take a few minutes to listen to our conversation and, as always, leave your thoughts. Listen Live! Download, Too!

The small business connection to Veterans’ Day

Veterans Day has its origins in Armistice Day, which was first acknowledged by President Wilson in 1919, on the first anniversary of the signing of the Treaty of Versailles, that took place “in the eleventh hour of the eleventh day of the eleventh month.” Congress made Armistice Day a national holiday on November 11, 1938.

Alvin King a small business owner in Emporia, Kansas, had a problem with Armistice Day. Al was so moved by the death of his nephew who was killed in World War II, that he, along with the Emporia Chamber of Commerce, started a movement to rename and redefine Armistice Day as Veterans Day. His goal was to expand the recognition beyond those who served in WWI. President Eisenhower made the change official in 1954.

But who should be recognized on Veterans Day? If you’re looking for the definition of a military veteran, good luck. There are several variations on that theme, and for good reason. The “veteran” universe is associated with significant financial benefits issues, so the sanctioning bodies have a lot at stake in, “Who qualifies as a veteran?”

But the most common technical definition of a veteran is someone who served on active duty while assigned to a U.S. armed services unit. But is there a case to be made for a practical definition of a veteran, especially on Veterans Day?

Perhaps Adam Smith offered the first practical definition of a veteran when he described in his 1776 book, “Wealth of Nations,” America’s “Minuteman” militia as those who “. . . turn from their primary citizen character into a standing army.” This militia, like all those that followed, were well represented by America’s small businesses.

So should our modern militia – Reserves and National Guard – be recognized on Veterans Day? Perhaps this justification can be found in Al King’s original motivation. The unit his nephew served in was Company B, 137th Infantry, Kansas National Guard, Emporia, Kansas.

On this Veterans Day, let’s honor all those who served in defense of our freedom by considering this definition of a veteran from an anonymous author: “A Veteran - whether active duty, retired, National Guard or Reserve - is someone who, at one point in their life, wrote a check made payable to The United States of America, for an amount of: ‘Up to and including my life.’”

America has received this “check” from many different kinds of patriots who prepared themselves to be called to protect and defend their country.

Happy Veterans Day to all who made themselves available to their country.

Is barter a good option for your small business?

In his landmark 1776 book, Wealth of Nations, Adam Smith called money one of the three great inventions, including the written word and mathematics. Smith’s assessment of currency was, and still is correct because the use of money has helped markets grow and expand more efficiently. But there is something still in use in the marketplace today that humans used for millennia before there was money: barter.

In its simplest form, barter is the exchange of goods and/or services between two parties without the involvement of money. Think of the prairie doctor who took a chicken home after delivering the baby. A modern-day example would be a business consultant who barters part of his fee for something a client sells.

Clearly, in the past hundred years the proliferation of money and financial tools and resources has relegated barter to the minor leagues of the marketplace. Nevertheless, it has been going on, primarily between parties who know each other and have a mutual need for what the other sells.

There are three things that have prevented barter from being more prevalent than it is: 1) that “know each other” thing, 2) the timing of the parties’ requirements, and 3) the relational value of what each party has to offer in barter. Enter a few entrepreneurs who created barter networks which become the transactional nexus between parties in order to minimize or eliminate these three barter constraints.

Recently, on my small business radio program, The Small Business Advocate Show, I interviewed such an entrepreneur, Steve Bolles, founder and president of Merchants Barter Exchange. In this interview, Steve talked about some of the reasons that barter could be just the right tool for small businesses experiencing cash flow challenges or other issues in this recovering economy. Plus, we talked about some of the details that are required to pull off a successful barter, including through a barter network and, of course, the tax details. Take a few minutes to listen to this conversation and, as always, be sure to leave your own thoughts. Listen Live! Download, Too!




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