Dependent Relationships

A risky business model is one that is one that is based on a dependent relationship with just a handful or even just one main customer. Inc.com has a good case in point from the auto industry in which GM is looking to cut its costs on the backs of its suppliers. Many of these companies are small businesses that are completely dependent on GM for their survival.
My rule of thumb is this: never let a single customer represent a percentage of your sales that is larger than your profit margin. That way if you lose one customer, even your largest customer, you can stay in business.
While this may not always be possible to achieve, it should be a goal that drives your growth. If you are heavily dependent on one or two customers, work hard to grow your business with new customers that can lessen this dependence.
It also allows you to fire any customer, if necessary. If a big customer makes it impossible to do business with them due to shrinking profit margins or impossible terms, you can tell them to take a walk. We did this twice with very large managed care companies in our business. Did it hurt? You bet it did, but we had enough other business to survive. We focused our efforts on replacing these customers with new ones that were more profitable and easier to work with.

Small Business Facts for 2005

Small businesses continue to drive the U.S. economy, according to the updated 2005 Small Business FAQ, released by the Office of Advocacy at the U.S. Small Business Administration.
Small business statistics highlighted in the 2005 Small Business FAQ include:
– Small businesses represent 99.7 percent of all employer firms.
– Over the past decade, small business net job creation fluctuated between 60 and 80 percent.
– Small businesses generate more than 50 percent of the nonfarm private gross domestic product (GDP).
– Two-thirds of new employer establishments survive at least two years after start-up, and 44 percent survive at least four years.
– Small businesses employ half of all private sector employees.
– Very small firms with fewer than 20 employees spend 45 percent more per employee than the largest firms to comply with federal regulations.
– Minorities own 4.1 million firms that generate $694.1 billion in revenues and employ 4.8 million workers.
– Women own 6.5 million businesses that generate $950.6 billion in revenues, and employ 7.2 million workers.
– In 2004, an estimated 580,900 employer firms opened while an estimated 576,200 closed.

Entrepreneurial Cities in the US

Well, fall is here and that is the season of rankings. The latest is from Entrepreneur magazine with its rankings of top cities for entrepreneurial development. Here is their top ten:
1 Phoenix-Mesa, AZ
2 Charlotte-Gastonia-Rock Hill, NC-SC
3 Raleigh-Durham-Chapel Hill, NC
4 Las Vegas, NV-AZ
5 Indianapolis, IN
6 Washington-Baltimore, DC-MD-VA-WV
7 Atlanta, GA
8 Nashville, TN
9 Austin-San Marcos, TX
10 Memphis, TN-AR-MS
As always, it is important to look behind the rankings and see what is actually being measured.
In this ranking they look at the percentage of businesses that are 4-14 years old and that employ at least 5 people. This is a measure of newness of businesses in the area. The reason that the businesses must be at least four years old is to capture only those that seem to be surviving.
This ranking then looks at growth rate of these businesses and creates an index of entrepreneurial activity.
This seems to be a pretty good measure of entrepreneurial activity. However, care must be taken when interpreting any study based on percentage data. For example, if a state or city had a very bad economic climate in the 1980s and 1990s, the odds are good that most of their businesses will be newer and it will rank higher.
An interesting case from this ranking is Hawaii, which ranked 10th overall in this study.
Hawaii was devastated by the collapse of the sugar and to a lesser degree the pineapple industries. Both had been propped up by failed governmental policies. Unemployment skyrocketed during this time. Very little of their traditional economic base, other than tourism, remained.
Eventually, entrepreneurial activity began to fill the void and the Hawaiian economy began to be rebuilt. This new entrepreneurial economy is, in fact, working remarkably well. Hawaii now has relatively low unemployment (2.6% compared to 4.9% nationally) due to the growth of new businesses.

401-k? We Don’t Need No Stinkin’ 401k!

A recent study issued by the outplacement firm Challenger, Gray, & Christmas has been making the rounds the past couple of weeks in the newspaper business sections. The study reports that baby boomers are looking in large numbers to make entrepreneurship part of their retirement plans.
One of the reasons stated by boomers for choosing this path relates to a lack of retirement planning. It seems many in my generation lived it up from the 1960s through the 1990s and have little wealth to show for their efforts. Many seemed to carry the “live for today” mentality throughout their entire working lives.
However, the problem with viewing entrepreneurship as the Holy Grail for their sunset years is that it may not help them achieve wealth.
Many are choosing a self-employment, consulting route to entrepreneurship. They gained significant expertise within some specific area, and they become a “free agent” selling their service to a variety of clients. While this can create an income flow, it is not a business model that generally creates a path to wealth.
There is often nothing to “sell” when the boomer entrepreneur really wants or needs to retire. A consulting business is tied to the activity of the owner and has no residual value that someone will be able to buy. A business has value to a buyer if it creates on-going cash flow into the future. If the boomer entrepreneur/consultant retires, the cash flow from his/her consulting activities ends.
There seems to be a myth that entrepreneurship and self-employment are secret paths to wealth. If these boomers didn’t prepare in their working years, they can start a business when they reach retirement age and it will magically create wealth. It just doesn’t work that way.
Wealth takes time, effort and careful planning to build, whether it be through a job or through your own business. Creating wealth from an entrepreneurial venture is something that has to be engineered into the business model. That is why many experts recommend having your exit plan in mind from the very beginning of the business.
You need be able to build a business that will generate cash flow into the future long after you leave the scene. That is what has value to a buyer more than anything else. They don’t care about assets or reputation unless these things can continue to generate income after they buy your business.

A For Profit Non-Profit

John Sage, the co-founder of Pura Vida Coffee, spent the day at Belmont University yesterday. John has created a for profit coffee company with a mission that mandates they donate all of their profits back to help the children of the countries that supply their coffee.

Pura Vida is 100% charitably owned. All of our resources go to help at-risk children in coffee-growing countries who suffer from the damaging effects of poverty.

An interesting business model to say the least! They offer any investors only the possibility of a modest financial return (at best) capped at about a T-Bill rate. They believe that the good that they can do through the capitalistic system more than makes up for any shortfall in profit returns to their investors.

EPA Urged to Offer More Flexibility for Small Business

While the U.S. Environmental Protection Agency (EPA) has made progress on reducing the burdens small manufacturing businesses face, testimony from Thomas Sullivan of the SBA asserts that there is room for even more flexibility for smaller companies without sacrificing environmental protection.
America’s small manufacturers face a disproportionate regulatory compliance burden. Small firms spend four and half times as much per employee on environmental compliance as their larger counterparts do.

Partners Squared

I ran a post earlier this year on the challenges of spouses also being business partners. It was based on a very insightful interview from Inc.com.
StartupJournal offers some additional thoughts into what helps make being marriage partners together with being business partners a positive combination. There are over 13 million married couples in business together in the US, so it can work.
And that is the key word: work. A good marriage takes hard work and a good business partnership takes hard work. Putting the two together and making them both work creates the need for a tremendous amount of effort and planning. It rarely just “happens.”
Think it through very carefully. The interview from Inc.com offered this caution:

Though there are no accurate statistics about what happens when spouses try to run a business together, expert estimates are grim: “Only 5% of couples can make all-in partnership work,” says Azriela Jaffe, a frequent reporter on the phenomenon of entrepreneurial couples….

The challenges of being both types of partners at once are not just twice as many; the challenges can feel like they go up exponentially. That is why I call it a partnership squared.

Looking at Life Through the Rearview Mirror

While it has gotten so much easier to get monthly financial statements using off-the-shelf accounting software, these numbers are not all that is needed to effectively manage a business.
First, the income statement, balance sheet and cash flow statement are all based on historic data. They tell you where you have been, but not necessarily where you are headed. A professor from the east coast tells of an exercise he uses to bring this point home. He takes his students to a big open parking lot, where an old car sits with all of its windows blackened out with paper except the rear window.
He sets up a simple course to follow with orange cones. The trick is this. His students must navigate the orange cones driving forward by looking only through their rearview mirror. The cars careen all over the lot as the students try to master this almost impossible task.
The moral of this lesson is to illustrate the challenge of trying to go forward while only able to look in the past.
The challenge for the entrepreneur is to develop a set of numbers that lets them see ahead for their specific businesses. These measures tend to be unique for each situation. For example, it may be the steps that are taken in the sales cycle. If measured and used to manage, these numbers can help predict future sales and improve the steps taken to secure new business.
Here are a few key steps that can assure that you have these numbers and that they are there when you need them:
– First, identify those specific activities that, when taken together, are critical for building sales and growing profitability.
Keep number of measures to the critical few that matter most. Limit to 5-8 measures to assure that managers keep focused.
– Link compensation to these performance measures, placing emphasis on quality rather than just quantity.
– Create a list of numbers you would like to see on your desk each day, each week, each month, and each quarter that will help you see where your business is headed. Focus on those numbers that are critical to guide and navigate the company to desired sales and profits objectives.
– Sit down with your bookkeeper or accountant and see what other suggestions they might have. They can add to your list, but not delete. If you need to, upgrade your information systems and staff if needed to get these numbers. Growing profitably should easily pay for these costs.
– Be Assertive. Do not accept gaps in information or unnecessary information in reports you receive. Make sure that everyone understands the importance of these numbers for the future of the business and knows the part they play in not only providing this information, but in using it to help move the business ahead. Use the key numbers to motivate your employees, so they are working with you to grow the business.
Find the key processes that help make your business grow and find a way to measure them. Don’t ever try to move your business ahead while only looking in your rearview mirror.
(Note: Some of these ideas come from a 1999 article in the Journal of Accountancy and from a 1990 article in Inc magazine).

Time for a Change in Strategy

Small business owners, trade association representatives, think tank scholars, congressional staff, and elected officials came together to celebrate 25 years of the Regulatory Flexibility Act (RFA). The RFA, designed to make sure that small businesses are considered during the regulatory process, was signed into law on September 19, 1980.
But, as I wrote last week, there is a long way to go. Firms with fewer than 20 employees annually still must spend $7,647 per employee to comply with federal regulations, compared with the $5,282 spent by firms with more than 500 employees. Small businesses face a 45 percent greater burden than their larger counterparts.
The RFA requires federal rule writers to consider alternatives that will lessen a proposed rule’s impact on small business. Perhaps this it is no longer enough to “consider” alternatives for small business when it comes to drafting legislation aimed at commerce in this country.
Given the importance of entrepreneurship in today’s economy, a new paradigm is in order. Rather than make a bureaucratic pass at “alternatives” for small business it may be time to view all legislation through the lens of small business.
Most new regulations that impact commerce in this country are big hammers aimed at large corporations. But, given the smaller and smaller role that large employers play in our current economy it is like we are trying to kill squirrels with nuclear bombs.
Here is my proposal. Let’s pass laws that consciously foster small business development, while considering alternatives to specifically regulate the largest of employers as needed. We have been trying the reverse for decades, with only limited success.