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You’re the Boss Blog: Can I Afford to Be Optimistic?

January 9, 2013 by Leave a Comment
Thinking Entrepreneur

An owner’s dispatches from the front lines.

It is time to complete the budget for 2013. I now have the final numbers from 2012 to help in the planning/forecasting/guessing game that I have been playing for 35 years. My comptroller reminds me that every year, for as long as she can remember, she has had to reduce my projections by midyear. Great. Is it a shortcoming to be optimistic if you own a company? The answer is yes, and no. At the moment, more yes.

This year did not turn out as I had planned, or perhaps as I had hoped. There was no big recovery in either the economy or in my industry (home furnishings). We did make some progress, but I had budgeted and spent money as if we were going to be in a recovery or growth mode: more people, more inventory, more advertising.

I have lived and navigated through many recessions, and I can tell you that this has not been a normal one. In the good, old recessions, you would have a down year and then recuperate slowly over the next one or two. We are now in year five, and while things have clearly gotten better, we are hardly back to where we were in 2008. The unemployment rate is still high, and most small-business owners I know are still struggling.

And it’s not just the economy. The whole business environment is constantly changing, and it can be especially difficult for a small business to keep up. It is harder to borrow money, Web sites demand attention and dollars to keep them up, inexpensive imports continue to change the dynamics of the marketplace, and the government sideshow of perpetual crises – election, fiscal cliff, debt ceiling — continues to make people nervous. And none of it helps the unemployment rate, which should be of concern to everyone.

Still, it is hard to get anywhere as an entrepreneur without being optimistic. If you’re like me, you eventually begin to develop something of a split personality. When I am playing sales manager, I have to encourage my employees to shoot for ambitious but realistic numbers. I told one of my managers that I feel good about our prospects for next year, and she reminded me that I say that every year. Oops. Another colleague has seen through my rosy glasses. But what am I supposed to do? Ask people to strive mightily for mediocre results? On the other hand, it is also my responsibility to sign off on budgets and then make sure that the numbers are reached. That job is not nearly as much fun, and that’s where the split personality comes in.

So here is my conclusion. We need to make two budgets: one that is reasonably optimistic and another that is reasonably pessimistic. The optimistic one is for sales meetings. But, human nature being what it is, it is important not to surround yourself with yes-men who will sign off on whatever you say when you are feeling good. Send in the accountants! The second budget is the one to use for financial planning and spending.

This year, in my reality-based budget, I’m not factoring in any big turnaround in the economy, and I have reduced expenses in an attempt to ensure an acceptable profit. To me, this represents one of the most important things I have learned from the many ups and downs of building small businesses: the difference between setting goals and making a plan. Goals mean nothing without a plan.

I have also learned that whining and pity parties have no place in entrepreneurship. Misery might like company, but it does nothing to help build a company. Yes, the business environment has gotten more difficult for many small businesses, but that just means that we all need to pay more attention. In sports, when you finish a disappointing season and go home, you have six months or so to ruminate about what went wrong.

When you run a small business, you don’t get time off to think, but you also don’t go home a loser. Instead, you get to hit a reset button on Jan. 1. You get to start the new year with new wisdom, a clean slate, a new plan, perhaps even a new sense of optimism (but mostly a new plan!).

So, my fellow entrepreneurs, I encourage you to do a 360-degree analysis of what you could and should be doing better — and then make a plan to do it. No goals. A plan.

Jay Goltz owns five small businesses in Chicago.

Article source: http://boss.blogs.nytimes.com/2013/01/08/can-i-afford-to-be-optimistic/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: , ,

You’re the Boss: A 10-Step Diagnostic for Your Small Business

January 19, 2012 by Leave a Comment

Thinking Entrepreneur

An owner’s dispatches from the front lines.

Over the years, I have met a lot of entrepreneurs who have been frustrated by low profits, lack of growth, or the stress of the never-ending demands. Many struggle with all three. While every business is different, there are common denominators. In fact, I believe there are 10. The tricky part is that failing to have a handle on just one of these areas can result in mediocre performance, a stressful existence, or ultimate and intimate failure. That is one reason the failure rate for small businesses is so high (here are some others).

This is the checklist I review when I’m not satisfied with my company’s performance.

Marketing

1. Targeting. Do you have a strategy to reach your best potential customers with your sales and marketing efforts? A shotgun approach is too expensive and inefficient for any company, especially a small one. What percentage of the people you approach actually buy a product or service like yours?

2. Advertising and Public Relations. There are many choices for where to place an ad and how to execute a public relations campaign. The problem with many small businesses is that their marketing activities are driven primarily by which salespeople happen to call on them. Ineffective advertising or public relations can be not only a tremendous waste of money but a tremendous waste of opportunity. If you are doing things the same way you did them 10 years ago, you are probably getting less response.

3. The Message. Lots of companies still use this line: “We will exceed your expectations.” I even saw it on the back of an ambulance. (I don’t know about you, but I have pretty high expectations when I call an ambulance! Are the technicians going to give me a haircut after they bring me back to life?) It was a good line when someone first thought of it. Now, it is old. It is tired. It needs to retire. You need to exceed people’s expectations by coming up with your own line. Maybe it is not a line at all. Maybe it is a message. Whatever it is, it should say something about your company that means something to potential customers.

Management

4. Hiring. I can’t think of anything more important than hiring the right people. Great hiring is a skill, one that frequently is not the strong suit of the typical entrepreneur. Do you have a hiring process? Hiring by trial and error is a very expensive and painful way to build a staff. I have found that hiring the right people is 75 percent of management. What percentage of the people you hire work out great? It should be 80 percent or 90 percent, and perhaps less in a low-wage environment.

5. Firing. This is never a popular subject, and it’s especially uncomfortable these days. But it is a harsh reality of business that some people are just not suited for some jobs. Many bosses avoid firing at all costs, including going broke, because they want to see themselves as being “nice.” In reality, customers and other employees just see them as irresponsible. Here is a simple test: Are there people who work for you who you would be relieved to have come in tomorrow and quit? If the answer is yes, that is not a good sign. Especially if the employee is a relative.

6. Operations. Training, standards, support, recognition, systems, key performance indicators, follow-up, etc. Is your company getting the job done? Are customers happy? Do you know? How is employee turnover? Are employees happy? Would they tell you if they weren’t? Do you have people who tell you the truth? Do you yell? (I know. You’re passionate.) Have good people left your company for more money? That is frequently an indication of other problems.

Accounting and Finance

7. Basic Accounting. Many seemingly successful companies have gotten into big trouble by neglecting accounting until it is too late. Accounting is not just about paying taxes. It is about information, insight, and control. Great accounting will not make a business successful, but bad accounting can destroy a business. Is someone staying on top of receivables, being careful about opening new accounts and making sure the existing ones are current? Could you walk someone through your financial statements and explain each part?

8. Pricing. This is probably the sleeper on this list. I can’t tell you how many times I have seen entrepreneurs either put themselves out of business, or never make the money they should have, because of bad pricing models. They charge prices that bear no relation to the costs or to the value proposition. This is just one of the reasons a company needs accurate accounting — so it can determine the true cost of a product or service. Do your salespeople have control of the pricing for jobs that they quote? If so, are they selling at a price that allows you to make a profit?

9. Financing. Most businesses need some kind of financing. Whether it comes from investors, banks, credit unions, factoring or even credit cards, there is a lot to know and understand. This is another place where a good accountant can be of great help. Or not. If you have one of the many accountants who just do tax returns and are not really experienced at helping businesses grow, you can find lots of information in books and online. Or you can hire a better accountant. Here is a test: Do you know your debt-to-equity ratio?

Leadership

10. Any one of these topics could fill a book, and leadership is no exception. Let me count the ways: vision, direction, inspiration, support. It is similar to management, but they are not the same thing. As my company has gotten larger, I have found that leadership gets easier because I now have managers managing. When a company is smaller, the boss has to manage and lead. One minute you are writing someone up for violating the late policy, and the next you are trying to inspire the troops. Perhaps management is pushing, and leadership is pulling. It’s not easy doing both at the same time.

Whether you score well or poorly on this list, keep in mind that it is an ongoing struggle. Personally, I’ve been doing this for 30 years, and I can assure you that I am constantly wrestling with almost every item on the list.

So how did you do?

Jay Goltz owns five small businesses in Chicago.

Article source: http://feeds.nytimes.com/click.phdo?i=8a80155d50b879d5bb7b5292458d9676

Filed Under: Small Business Tagged With: , ,

Thinking Entrepreneur: 10 Things Job Applicants Should Know

December 22, 2011 by Leave a Comment

Thinking Entrepreneur

An owner’s dispatches from the front lines.

While there clearly are not enough jobs to go around, some people are getting hired. Every day, every hour, thousands of people are selected from thousands more who are ready, willing and able to work. The question is, why is it that some people get hired and some don’t?

I have an unusual perspective on this. I read several résumés a week. My human resources person reads hundreds. There are some obvious answers like education, connections, experience and even enthusiasm. But there is another reason that may be just as significant: bad résumé and interview skills, especially for applicants right out of school or someone who hasn’t interviewed in a long time. I can’t tell you how many times we have interviewed a recent college graduate who would surely get an F in Job Hunting 101.

As a parent of a soon-to-graduate student (last one, yippee!), I am thinking about the students and their parents as they enter the real world. I can easily imagine what these grads tell their parents when they can’t find a job: “No one is hiring!” “You don’t understand how competitive it is out there!” “I’m thinking of going to grad school!”

Poor dad. Poor mom. And I do mean poor. With the cost of college, parents can be forgiven for expecting their grads to be able to land a job. There’s no question that this has been as tough an economy as we’ve had in a long time, but again, even in the worst economy, some people do land jobs. Here’s my top 10 list of what you can do to improve your odds.

  1. Review the résumé. Review it again. Have a grown-up review it. Would it surprise you to learn that a third of the résumés we get have misspellings? I just looked at one that listed the person’s address as Chicago, Ohio. She was from Ohio.  An honest mistake? Sure. But it shows a lack of attention to detail, and it was the first of five careless mistakes. This was for a job that requires communicating with customers and putting proposals together. I don’t understand. Have these college graduates really not heard of spell check?  If you have a pretty good idea that you can’t spell, why wouldn’t you have someone else look it over? Or do bad spellers only hang out with other bad spellers?
  2. Show up on time for the interview. That means plan on getting there early. Look around. Look friendly.
  3. Dress appropriately. O.K. This one is going to require some judgment. Don’t wear jeans (unless you’re applying at the Gap). Don’t look like you are on the way to the beach unless you are applying for a lifeguard job. You get the idea.
  4. Know something about the company. Or, better yet, know a lot about the company. With the advent of the Internet and Web sites, many companies expect you to be familiar with what it is they do. They also expect that you will speak convincingly about why you would love to work at their company. You can do it.
  5. Take internships seriously. It isn’t easy to find an internship. Many companies use them to develop a pool for prospective employees. We hired a paid intern to work in our gallery. She had a degree in art, was very outgoing and seemed to have an ability to sell. But she kept coming in late, even though she lived five minutes away. After several conversations, she still kept coming in late. We rode out the internship and wished her well. We hired someone else.  There are very few art jobs out there. My new employee is very thankful. She has never been late.
  6. Don’t just look for job postings. Target companies that you would like to work for and send them a résumé. Follow up. Send one to the H.R. person, the manager, the president. Include a beautifully written cover letter. Follow up. If you do this enough, you will find someone who just happens to be thinking about placing a job ad, and calling you may make this person’s life a little easier. Timing is everything, although persistence is important, too. Talk to friends and relatives about companies they know.
  7. Think about things you have done in school, in a previous job, in a volunteer position that speak to your commitment, your ability to solve problems, your ability to deal with difficult customer situations, your ability to get a job done. Work it into your résumé and your interview responses.
  8. Ask questions, especially when interviewers ask if you have any questions. If you don’t, you look unengaged, afraid or uninterested. And make them good questions about what you’ll be doing on the job. Don’t ask how much vacation time you get. The primary goal of the questions you ask is to get the job, not to decide if you want the job.
  9. Think before you speak. This is a skill that most of us could improve. During one interview, I asked a young woman why a reference she had listed hadn’t had much to say about her. She immediately blurted out, “I’m difficult to work with!” Of course, I hired her immediately, because everyone wants to work with difficult people! (No, actually, I didn’t.)
  10. Stay in touch. If you get to be a finalist for a position but don’t get it, suck it up. Don’t take it personally. The company clearly liked you, but you were edged out. It is not easy to pick between finalists, and many times it is very close. Ask if you can stay in touch. If you get an enthusiastic yes, be sure to do so. There is a good chance that the new hire won’t work out or that another position will open up. You are close!
  11. Bonus! I can’t tell you how many times I have seen people burn bridges for no reason. That doesn’t necessarily mean telling off your boss on the way out. It is usually more subtle, like not giving notice, making disparaging remarks about the company to co-workers (who can’t wait to tell the boss) or exhibiting an I-don’t-care-anymore attitude. Be smart: if you give notice and the company chooses to keep you around, stay on your best behavior. Say good-bye to everyone. It will speak well of you, and it will be remembered. It can be the difference between getting a lukewarm reference or an enthusiastic one. That could easily make the difference in getting your next job.

It is more competitive than ever. Rise to the challenge. This may not help the unemployment rate, but it could  help you. In Real World 101, that is the goal.

Jay Goltz owns five small businesses in Chicago.

Article source: http://feeds.nytimes.com/click.phdo?i=50a28b3615fa31c19669eaec58b70d25

Filed Under: Small Business Tagged With: , ,

You’re the Boss Blog: Why I Swore Off Debt (for a While)

December 7, 2011 by Leave a Comment

Thinking Entrepreneur

An owner’s dispatches from the front lines.

Breakups are never pretty. It was September 2008, and the economy, the stock market, real estate, and my business were all crashing (as did many businesses). Like an engineer figuring out how much oxygen is left in a mine tunnel after a collapse, I turned quickly to cash analysis.

Fortunately, it wasn’t too bad. Accounts payable were under control, there was plenty of inventory to live off, and there seemed to be enough cash to weather the storm — at least for a while. Then, after reading and watching the news for a few days, a little paranoia set in. It mixed with a little battle fatigue, actually 33 years of battle fatigue, and it produced a new mind-set.

This was about the fifth time I had been through the recession drill since I started the business in my parents’ basement. But this one was worse, and it brought a revelation that resulted in a new edict. I told myself that I was done with debt. I was breaking it off. I would go it alone in the future — no more bank loans, no more equipment leases, and certainly no more credit card balances.

Fortunately, I was already pretty close to debt free. My bank line was almost paid off, and I hadn’t carried a balance on a credit card for many years. This was really about setting some new rules for the future. I was very relieved that I hadn’t been carrying a lot of debt when the crisis struck, and I wanted to make sure that would be true the next time. I have come to expect a financial meltdown every eight or 10 years. Call it business cycles, call it adjustments, call it reality — a reality I had been slow to accept.

It is now three years later. I have made progress in realigning my business with all of the changes in the marketplace. Put much more attention and money into the Internet. Bought a bigger, more efficient and cheaper warehouse/factory building. Sought out and found many new vendors that offer products that are more interesting, better designed and better priced. Have been more strategic in avoiding commodity products and going after markets where we have stronger “core competencies.”

And it is working. Sales are up, expenses are down, profits are up, and I am hiring some new people. After three long years of playing defense, we are finally playing offense again. It has been possible to start playing offense in a slowly rebounding economy in part because of tax laws (section 179) that are meant to stimulate business, but this does raise a question: How smart is my now three-year-old edict against borrowing money?

If I borrowed some money, I could buy equipment that would lower my labor costs. I could overhaul my computer system, which would give me better information and operate more efficiently. There are improvements that could be made to my Web sites that should generate sales. And I still haven’t pulled the trigger on about 500 LED spotlights for my showrooms that will save about $18,000 a year in electricity costs. It’s all about return on investment. There would be a good R.O.I. on all of the items I mentioned even if I had to borrow money at normal interest rates. At today’s rates, the R.O.I. is even better.

The R.O.I. for borrowing money can be more effective and efficient than improving your R.O.W., a metric you probably have never heard of. It stands for return on work. You haven’t heard of it because I just made it up. But it’s what allowed me to get through the last three years and to reach the point where I can consider playing offense again. We have done it all with the idea of not borrowing any more money from the bank, except for a mortgage, and the hard work has allowed me to increase my bottom line and to hire more people. It felt right for a long time. But things have changed. Sometimes, an approach that seems conservative can turn out to be surprisingly risky.

So I have decided to rescind my edict, start dating debt again and make some new investments. This should improve my bottom line, which would get me past where I was when the recession started — assuming nothing happens, like Europe blowing up, to throw our economy back into crisis. That would, of course, significantly increase my R.O.S.N., or return of sleepless nights (yes, I made that up, too.) But I think can handle it. To be clear, I feel comfortable doing this for two important reasons: I am nowhere close to being highly leveraged, and I’m confident the money will have a very good R.O.I.

This may not make sense to those of you who are still swearing off debt (and for many people that remains a good policy, especially if they have nothing smart to do with the money). But saying debt is bad because of the recent meltdown is like saying fire is bad because of the Chicago fire. Used properly, fire is good — and so is debt. It can help build capacity, increase efficiency, increase quality and expand a business much faster.

Using it properly means not letting yourself get over-leveraged, even if the bank will allow you to borrow more. We already saw that movie. There is a big difference between borrowing money to invest in a business and borrowing money to gamble on a business — knowing the difference between the two is where the magic is. The government has helped give debt a bad name, but the words debt and crisis do not have to go together like soup and sandwich.

Debt has been my friend. It has helped me expand my business and provide livelihoods for more than 100 families. We are dating again. We just had a lovers’ quarrel.

Jay Goltz owns five small businesses in Chicago.

Article source: http://feeds.nytimes.com/click.phdo?i=98335ce66557d227a1da73935a0aab51

Filed Under: Small Business Tagged With: , ,

You’re the Boss Blog: Occupy Wall Street? Who Will Occupy Main Street?

October 26, 2011 by Leave a Comment

Thinking Entrepreneur

An owner’s dispatches from the front lines.

Lots of people enjoy saving money by shopping online. The prices are often lower, and in many cases there is no sales tax and little or no shipping charge. But while free market forces prevail, there are growing problems with the after-effects of this market shift to Internet sales.

It is becoming commonplace for customers to go into a store, examine a product, get educated by a sales clerk, and go home to order the product online. Instead of feeling bad for taking the time of someone who is trying to make a living, many people feel righteous about it. They say things like, “I’m not going to get ripped off.” Or they simply don’t think about it at all. I have a friend who owns a shoe store, and he tells me that people come in all of the time, try on some shoes, spend half an hour with a member of the sales staff, and when they have made a choice they announce that they are going to order the shoes online — as if it is something to boast about. Boasting to your friends is one thing; boasting to someone who has just spent time trying to help you is rude at best.

Wasting a sales representative’s time with no intention of buying is a problem that goes back hundreds or thousands of years. I mentioned this to my scholarly friend, Robert — I have only one scholarly friend; if you have two, they argue all the time — and he told me that this is covered in the Talmud. I did a little research and found that, according to the book “Values, Prosperity, and the Talmud: Business Lessons from the Ancient Rabbis,” by Larry Kahaner: “One of the most important rules prohibits customers from showing interest in a product if they have no intention of buying. The practical aspect was that it wasted the sellers time when he could have been spending it with a customer who was truly in the market.”

O.K. I understand that this appeal to guilt — Jewish guilt, Catholic guilt, any brand — is not going to convince a lot of people to behave differently. Many will simply say it’s not their problem, even though they would not like people visiting them on the job and wasting their time. But it is their problem, or it will be.

What happens if your local retail stores become a showroom for online stores to such an extent that it forces them out of business? Are you perfectly happy not touching and trying out products? It has already happened with the closing of hundreds of Borders book stores. This is not a level playing field — and I say this as someone who has both retail outlets and substantial online sales. And it’s not just the retailers that get hurt. Think of all the sales tax that those stores used to generate.

Zappos does about $1 billion in sales every year. If Chicago represents 2 percent of the company’s business, that would be $20 million in annual sales. That represents about $2 million dollars of sales tax that the city no longer gets — and no longer gets to use to pay for police, firefighters, teachers and street repairs (with a few dollars left over for graft and corruption, of course). And Zappos is only one company. How much more is being lost on sales by Amazon (which owns Zappos) and all of the other online retailers?

The loss of sales tax, as well as the loss of the real estate and payroll taxes that those closed stores used to pay, is damaging your city and state. This is a zero-sum game. You may think that if a local store can’t compete with Zappos or Amazon, that’s the store’s problem. And you may be right. But why do the rules favor Zappos and Amazon? Not forcing them to collect sales tax has given them an unfair advantage that ultimately will force all of us to pay higher taxes to local governments.

Right now, the problem is being masked by the fact that we are coming out of a recession (I think! I hope!). There is an assumption that this is the main reason sales tax revenue is off. But I would bet that there is more revenue being lost from the Internet sales tax loophole than from the soft economy. This is a simple problem with no simple solution. But I would like to offer some insight into the beat-the-retailer mentality.

Saving money online can be a pleasure. But these local stores employ your friends and neighbors, spend millions of dollars in your community, and are hardly taking advantage of anyone. Have you ever seen the bottom lines of most large retailers? Five or 6 percent is probably about the average. And the small local store? I laugh when people tell me what a “gold mine” a particular store must be. I always ask, “Are you the store’s accountant?” I talk to small-business groups all of the time. Whether it is the local frame shop, furniture store, luggage store, florist, shoe store, bicycle shop, or eyeglass store, many are struggling. If they are doing well, they are not doing that well. Most stores are not ripping people off. They are trying to make a living, give service, support employees and pay taxes — and they are getting challenged by large companies that can buy cheaper but don’t necessarily provide better value.

Here is the bottom line: The sales tax loophole is going to have to be fixed, whether you like it or not. The cities need the revenue. And people will continue to shop at stores with no intention of buying, whether the store owners like it or not. Perhaps some people will start to think twice about it. At least, they don’t need to rub it in the face of the store staff. It’s nothing to brag about, really.

Jay Goltz owns five small businesses in Chicago.

Article source: http://feeds.nytimes.com/click.phdo?i=de83e825cd58c363eac20ec7345750eb

Filed Under: Small Business Tagged With: , ,

You’re the Boss Blog: A Small-Business Owner Tries to Overcome the Fear Factor in Pricing

October 6, 2011 by Leave a Comment

Thinking Entrepreneur

An owner’s dispatches from the front lines.

My fellow blogger Paul Downs recently wrote an interesting post that described his ongoing struggle with developing a pricing strategy. He is hardly alone.

Figuring out how much to charge is part art and part science. We start our businesses, focus on delivering a better product or service, and price it in a way that we believe will win us some customers. Inevitably, we underestimate how long it will take to make or do something. No problem! In the beginning, when you do everything yourself, there is more room for error since you can make it up with your own labor and chalk it up to experience. As you grow, you might pay someone overtime to compensate for a bad estimate. Maybe you will even lose some money.

But it gets more complicated when the company gets bigger and has some success. Eventually, you have to develop a pricing strategy that will allow the company to grow profitably while you are paying people to do everything from sales to production to accounting to purchasing. It may require you to increase prices. For an entrepreneur, this introduces a new element: fear. Fear that you are going to ruin the magic formula that has made you successful. Fear that your customers will flee. And fear that new competition is going to move in on you the way you moved in others when you started the business.

Eventually, your head splits in two. A little accountant stands on one shoulder and says, “Your costs have gone up because you have had to hire more people. You need to charge more to cover the costs of your good people. Being busier does not necessarily mean you are making more money. Get control. You can’t fight the math!” On your other shoulder is the hungry, customer-driven, take-no-prisoners and lose-no-customers salesperson who says, “You have been successful because you are providing a great value. There is an old saying, ‘Quality, service, and price — pick two.’ But anyone can do that. You can provide all three! You are SUPER ENTREPRENEUR! Don’t raise prices, just work harder and smarter!”

Ahhhhhh! What to do?

As usual, doing nothing is a bad option. A good pricing formula is a critical component of a successful business. For some businesses, it is not that complicated. If you own a bike shop, for instance, there is a list price for the bikes, but you have some flexibility in how much to charge for accessories and repairs. If you make custom products like Paul Downs, and you are bidding to get business, it is far more tricky. My custom-framing business falls somewhere in between.

The process starts with cost accounting. When you buy a finished product that you resell, you know what your cost of goods sold is. Kind of. You still have to factor in whether the items will have to be discounted, whether any will be stolen (shrinkage), and whether a percentage of the products will end up in the trash (bananas, for example). Estimates of how long it should take to make something can vary greatly from how long it does take. Every year at the national picture-frame trade show — yes, there is such a thing — I do a pricing class. I always ask the group how long it takes to do the average frame job, and I give specific criteria in “framer language.” I always get answers that range from 15 minutes to an hour and a half. You simply can’t do intelligent pricing if you don’t understand your costs. And that’s true even if you are making money. You may have profitable products or services that are subsidizing unprofitable products or services.

Business owners attempt to compensate for this problem in various ways. You might keep telling yourself that because you are covering your fixed costs, any gross profit you make on incremental sales will fall right to the bottom line. And maybe it will — but only if you are not operating at capacity, and it’s not always easy to tell. Will you need more salespeople? Another delivery truck? More space for storage? I have learned that there are few costs that are truly fixed. When you increase sales volume, there is the opportunity for increased profits, but there is also the danger of unexpected expenses. Seller beware.

Some owners simply price to competition. If you have the exact same expense structure as your competitor and if your competitor is profitable, this may work. But in the real world, many low-price competitors are pricing themselves out of business. We recently had a customer tell us that our prices are higher than those offered by the framing shop she used to use — a shop, she went on to say, that went out of business. My sales consultant helped the customer connect the dots between those two facts.

At my frame shop, we provide great value, great service (my average framer has been here over nine years), and a one-week turnaround. We import frames from all over the world, and we have a rigorous quality-control process. Most of the companies that have tried to go after us by being 10-percent cheaper have gone broke trying because the 10-percent has to come from somewhere — some from profit, some from loss. If we dropped our prices 10 percent, we would get a little busier — and then we would go broke.

Do you sell a product or service that is especially sensitive price changes? This is at the heart of the fear factor. Doing some math can help you make an intelligent decision. Let’s say you sell a product for $1,000 that costs $600, including the cost of goods sold, packaging, sales commission, and charge-card expenses. Let’s also say that your company does $1 million in sales and only has a 1-percent net profit, or $10,000. You consider increasing prices 5 percent. If you do — and this surprises a lot of owners who don’t do the math — you could lose 11 percent of your business and still make more money with the price hike.

Here’s the math. Before the hike, you sold 1,000 units and had $400 on each one left to cover all of the other fixed costs and whatever profit is left. That produces $400,000 ($400 x 1,000) that we can call the contribution margin. Now — taking into account the 5-percent price hike and an 11-percent decline in sales — you sell 890 units with a $450 contribution margin on each one. That produces a total contribution margin of $400,500 ($890 x 450). That extra $500 will add to your net profit, taking it from $10,000 to $10,500. Still not good.

But suppose that, instead of falling 11 percent, your sales were to fall only 4 percent. That would mean you would sell 960 units at $450, which produces $432,000 in total contribution margin (960 x 450). This increases your net profit by $32,000, which means that it will go from $10,000 to $42,000, or 4.2 percent. Much better than 1 percent.

It is, of course, impossible to know exactly what will happen when you increase prices, but doing the math can help you can make an intelligent decision instead of a fearful guess.

There is at least one more factor in pricing, one I call market reality. Suppose, for example, your company makes jackets out of beautiful leather. Very expensive leather. You use good cost accounting. The extra large jackets take far more leather to make than the small jackets, especially because you have to use larger pieces that are perfect. These are luxurious jackets. But, as you probably know, the standard in the industry is to charge the same amount for both large jackets and small ones — even though one costs considerably more. When it comes to clothes, the larger sizes are effectively subsidized by the smaller ones. Go figure.

A business owner has to wear a lot of hats. For many, analyzing pricing is at the bottom of a long list of things to do, but I can’t think of anything that is more critical. Just do it.

Jay Goltz owns five small businesses in Chicago.

Article source: http://feeds.nytimes.com/click.phdo?i=0b7433d7f2c56762c59bc5d8780f79ad

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You’re the Boss Blog: What the President’s Job Plan Means to My Business

September 13, 2011 by Leave a Comment

Thinking Entrepreneur

An owner’s dispatches from the front lines.

I am trying to decide when exactly small businesses became the official poster child of the latest economic disaster. This is a relatively new phenomenon, but it’s been building for a few years. Sometimes, the attention feels good. I didn’t know everyone cared! Sometimes it feels like pandering. I have a suspicion that some of the people who are always arguing that we will destroy small businesses if we raise income taxes on the wealthy don’t really care that much about small businesses, but it sounds noble.

Over the last 33 years, my business and I have been through numerous recessions, and this is the first time I have seen so much attention given to small businesses. It feels both flattering and insulting, comforting and unsettling, honest and disingenuous. Sometimes it feels like a mother talking about her troubled teenager. “He’s a good kid, just misunderstood.” For all the attention and good intentions and well-meaning efforts to help, I do think small businesses are often misunderstood.

Running a small business can be very simple and very complicated. The simple part is how to be successful. Deliver a good product or service, price it properly and learn how to market it effectively. The hard part is avoiding all of the pitfalls along the way. Even in the best of times, we small-business owners run into and create plenty of our own pitfalls, but these last three years have been a pitfallapolooza. Many business owners, including some I’ve known very well, have taken pay cuts, lost lots of money or gone out of business. Too many have done all three.

For a long time, many people didn’t seem to care or even notice. Then somebody proclaimed that small businesses are the engine of job growth in this country. All of a sudden, the spotlight is on helping small businesses recover so they can create jobs. Why aren’t we talking more about getting big businesses to hire more people. After all, I keep reading that big businesses have generally recuperated quite nicely, and many are making record profits. Oh, but they aren’t the engine of job growth. We need small businesses to do that.

Enter President Obama, with his jobs plan. Here’s my take on what I, as a small businessman, heard in his speech: He recognizes that the politics of Washington have made the problem worse. Good. He says he’s going to try to help people who are struggling with mortgage problems. That’s good, too. He knows that the solutions to these problems can’t wait until the 2012 election. That’s certainly true. He wants to close a few tax loopholes for big corporations. I think I could live with that. He wants to rebuild schools and roads and bridges. That’s probably a good idea. And he says he wants to cut more unnecessary spending. Hallelujah.

You hear a lot of people talking about how taxes and regulation are choking small businesses, but many of these people are always talking about taxes and regulation, regardless of whether the economy is good or bad. Right now, my picture-frame and home-furnishing businesses employ 110 people, and they have certainly felt the effects of the recession and the housing meltdown, but if I have a problem it’s not with taxes and regulation. It is that I don’t have enough customers with money to spend. That’s why the most important aspect of the president’s plan is that it would inject $450 billion into the economy.

At a time like this, it’s hard not to be a little nervous about the government spending that kind of money. I am not an economist, but it does appear that many economists think this kind of stimulus makes sense. I noticed that Paul Krugman, a liberal, and Mark Zandi, who was John McCain’s economic adviser, seem to like the plan. I know a lot of people think the last round of stimulus didn’t work, but I’m not so sure. Has everyone forgotten how bad things were? Does anyone know how much worse things might be? I used some of the stimulus tax breaks to free up cash in my business. I invested in new machines, and I hired new people, carefully. Obviously, unemployment is still way too high, but there has been improvement.

Still, there are a few details that concern me. Once again, I have the sense that not everyone in Washington understands how small businesses work. Part of the plan involves an across-the-board cut in payroll taxes, for employees and employers. I think that will help. It will get money into the system. Perhaps some of it will be spent on picture frames and home furnishings. That combined with the break on depreciation may well allow me, for example, to replace my incandescent light bulbs with LED bulbs, which could cost $50,000 but be far less expensive to operate. The tax breaks may also allow me to expand my market, which will result in my hiring more people. Mission accomplished.

There are additional tax breaks in the plan that are meant to encourage the hiring of new employees. An employer can get a $4,000 credit for hiring someone who has been unemployed for more than six months. It’s a little hard for me to imagine not feeling sympathy for people who fall into this category. There are additional breaks for hiring veterans, and I don’t know how anyone could oppose giving an advantage to someone who left the work force to go to war. And yet, I wonder if, in general, these kinds of targeted breaks really work. Or are they better politics than business.

I guess I would need to see more details, but I have my doubts. Will paying a bonus for the hiring of someone who has been out of work six months be fair to someone who has been out of work for only four months? What incentive does this offer a person who has been laid off for five months? Is this fair to an employer who managed to make it through the last three years with minimal layoffs, but now has to watch a competing company be rewarded for hiring back the people it let go? How long will the person have to remain employed for the employer to get the $4,000? There will probably be a whole industry started on how to game the system.

Rewarding someone for hiring is playing with nature. There really are only two possibilities: either you are rewarding employers to do something they would have done any way, or you are rewarding employers to do something they weren’t sure they wanted to do. Do you remember my comment about avoiding pitfalls? Bad hiring decisions rate right up there with the most serious. A business should hire because of demand, not because of an incentive. Think about this: If a kid’s father offered you $4,000 to hire his kid, would that have any bearing on your decision? Of course not. Why should it be any different if the money comes from the government?

Some people suggest that this credit might help if a business owner is “on the fence” about hiring someone. Here is what I have learned: If you are on the fence about hiring someone, DON’T. Get off the fence. Call more references, interview the person again, make sure you really need someone. Hiring is serious business. If it turns out that you don’t really need someone, you eventually will have to lay off this person. You will be the bad guy, the responsible guy, the guy who pays all of the unemployment insurance. You will have done no one any good. An incentive to hire might not be an oxymoron, but the word moron may enter the equation. Sorry. It has been a long three years.

So, yes, the incentives to hire new employees make me nervous. If we’re going to inject money into the system, I’d much prefer to do it across the board. Don’t try to pick winners. Don’t play with nature, especially human nature. But maybe this is just politics. Maybe this is the price we have to pay to get the boost that the president’s plan offers. I don’t know – and I don’t want to know – the politics.

On balance, I hope the plan passes. But I think I liked things better when small businesses were ignored but did well. This too shall pass.

Jay Goltz owns five small businesses in Chicago.

Article source: http://feeds.nytimes.com/click.phdo?i=f1481a7ded27b279f6825f7ed4aa8682

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You’re the Boss: Am I Focusing on the Wrong Part of My Business?

July 19, 2011 by Leave a Comment

Thinking Entrepreneur

An owner’s dispatches from the front lines.

It is now more than three years since the economy took a nosedive. For most small businesses, this has been even more challenging than previous recessions because we have also had to deal with the real estate collapse, a credit crisis and changes in the marketplace brought on by the Internet and other forces. Not an easy time. And I don’t see much evidence of a bounce back coming soon. I have come to the conclusion that it is time to reassess.

First of all, Einstein had it wrong. Not his theory of relativity. That seems to be holding up quite well (not that I would know). But he’s also the guy who said that the definition of insanity was doing the same thing over and over again and expecting different results. Actually, I think that’s frequently the definition of small business.

I don’t think that doing the same thing over and over and expecting different results is necessarily insane; conditions change and business is not a perfect science. That said, this is the way a lot of small-business owners, including me, tend to operate. Whether it is continuing to hire the wrong people because of a bad hiring protocol, sticking with the same marketing plan even though it isn’t working or thinking we are going to become more profitable by underpricing our competition, many business owners stick to what they have gotten comfortable doing and hope it will start producing better results. Why? No doubt it has something to do with the perseverance and optimism that got us into this in the first place. No doubt it has something to do with our willingness to work hard. But sometimes working smart is more important than working hard.

My revelation started with a conversation among the owners in my business group. There are 10 members, and their businesses range from a software company to an auto body repair shop. We meet once a month, and at each meeting we do a “deep dive” of the business that hosts the meeting and a quick update on the other businesses.

After listening to the progress and plans for my five different but related businesses, several owners made an observation. They told me I need to go where the money is, instead of doing business as usual. That’s because there is no such thing any more as business as usual. My custom frame business is not growing the way it used to, and the entire industry is in a major slump that I believe is related to the housing market, changing demographics and competition from chain stores. But my furniture store is picking up steam, and we are doing more business on the Internet because of our unusual products and the attention we regularly get from home design magazines.

It took me a couple of days to process their points and to start thinking about a new strategy. They couldn’t give me specific suggestions because they were not in my industry, but the overall gist was that my home store was hot and they could tell from presentation that it was not my primary focus.

I need to spend more time on new opportunities and what’s working and less time trying to push things that are stuck. I talk to business owners all of the time, and I frequently hear comments like “we are holding our own” or “things are slowly getting better.” Most people I know are not making expansion plans. Avoiding risk is the new black. It has been a very sobering and scary three years.

And that’s way it is tempting to stay with a bunker mentality, especially if you follow the economic news. Every day, it seems, there is another crisis. But if your business is stable, and your debt is under control, and you can afford to take some calculated risks, this might be the time to get out of the bunker and try to get ahead of the pack. I am completely redoing the Website for my home store, and we are buying in bigger quantities — I purchased a bigger warehouse — in order to get better prices. In 2009, I was decreasing inventories.

Now might be the time to plant new seeds for future crops. Carefully.

Jay Goltz owns five small businesses in Chicago.

Article source: http://feeds.nytimes.com/click.phdo?i=5f839680e6c0f636ddda4b3872b2a277

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