Awakening the Beast

I have been concerned about inflation for some time.  While the day-to-day signs have not supported my view, public policy decisions that include massive deficits have kept the nagging worry about inflation with me even while others have been talking about inflation being “permanently” under control.

But the talk over the past few weeks from the Fed is that they are going to use inflationary policy as an intentional “cure” for our economic woes has affirmed my worst fears. 

Clearly, those in power in Washington do not believe that market forces will be what re-energizes our economy.  What they are telling entrepreneurs is this:  “You are irrelevant in economic recovery.”  Given that it has been entrepreneurs who have led us out of almost every past recession, this is an alarming shift in policy.

So what are the entrepreneurs to do?  What will this all mean for your businesses over the coming years?  Get ready for an even rockier road than you have suffered through up to this point in the recession.  That’s right — things are about to get worse.  Much worse.

The problem for smaller businesses during inflationary times is that they are less able to adjust prices as quickly to
adjust to inflationary pressures.  There is never a smooth and orderly increase in
prices for every business in the economy and small businesses often suffer the most.

If you have big suppliers and/or customers they can tie your hands. 
Your costs go up, but you are unable to pass along these costs with
higher prices.  You already fragile profit margins will quickly begin to vanish.

So
what can a small business do in terms of pricing strategies to try and weather this
impending inflationary storm? 

The
recession has made entrepreneurs leery of doing anything but cut prices
to keep their businesses afloat during the recession.  While that may
still seem like the best course over the short-run, pay very close attention
to pricing from your suppliers, increasing
interest rates, and pricing moves from the big boys in your industry. 
These are the metrics that should be on your inflationary dashboard.

When inflation heats up even a little, be aggressive with frequent
small price increases rather than waiting and trying to catch up at
some point with one big jump. Don’t let yourself get behind, as small businesses can almost never play catch-up with their prices.

This
can
be tough to implement for some businesses, particularly if you publicly
list your prices.  For example, it can get very costly to
print up new menus each month for a restaurant owner who wants to
follow this strategy.

But customers are less likely to pay
attention to price increases if they are small, so it is essential to
find creative ways to communicate your pricing to allow for you to
implement this strategy during inflationary times.  For a restaurant it
may require using menu inserts that can inexpensively be replaced. 
This was actually very commonly used in restaurants during the 1970s
and 1980s when we had high inflation.

Continue the prudent management of expenses that helped you survive the recession:

– Continue to keep overhead low.  It has paid off during the recession and will serve you well during inflation.

– Continue to build cash reserves to buffer short term price increases that precede your ability to get higher prices from your customers.  I
know this sounds contrary to the investment advice about holding cash during inflation.  Don’t think of this cash as
investment — it is your levy to hold back the rising tide of
inflation. 

– Watch your margins carefully. Worry about growing profits, not sales.

– Don’t lock into long-term contracts large customers that have narrow margins.  These contacts will quickly become money losers when inflation spikes.

– Pay down variable interest loans ASAP, especially now that
interest rates are temporarily relatively low. As soon as inflation
heats up, interest rates will continue to rise.  And given the
stubbornness that the Fed is now showing with interest rates, we may
soon see huge spikes in rates over just a few quarters as inflation
takes hold.

Job Engine Continues Weak

Entrepreneurs are the job engine in our economy during good times and bad.  They are the primary creators of new jobs leading our growth during booms, and they lead job creation coming out of recessions.

The latest job creation figures from the Intuit Small Business Index suggest that while job growth is somewhat better than last year this time, job creation among small businesses is not at the levels we need to spur a recovery.

This index showed modest job creation in August, with at estimated 39,000 new jobs created.  However, September data showed only 27,000 new jobs created.  Additionally, there was no increase in hours worked or compensation.  If these figures had improved we could hold out hope that small  businesses were growing through increased productivity.  But, this is not the case. 

These figures mirror the drop in intention to hire new employees found in other surveys of small business owners over the past few weeks.

There is no sign that small businesses are ready to lead a recovery any time in the foreseeable future.

All of this is evidence that supports the growing consensus that we are in for a prolonged period of high unemployment.

Adapting the Business Model Takes Entrepreneur Full Cirle

When entrepreneurs enter the market, it is often with a very clear vision for their business. They know what they want to sell and to whom they want to sell it.

Alecia Venkataraman, who is completing her master of business administration degree at Belmont University, where I teach, launched her nonprofit, Make It Beautiful, to serve a very specific group of people.

Based on her own experience as a young adult who overcame great personal adversity, Alecia wanted to create an organization that would help others facing similar life circumstances. Make It Beautiful would offer services to help inspire these people to pursue their own dreams.

MIB developed programs for children facing terminal illnesses, as well as their families; for single parents and their children; for families trying to start over after tragedies; and for others facing significant adversities.

MIB had a team that offered services in life coaching, wellness counseling, legal issues, career planning and connecting with community resources. From its very beginning, MIB was overwhelmed with potential clients seeking help. Alecia had appeared to identify a need and a solution among her target population.

However, as successful as its programs were, the business model of MIB had a flaw. It relied on donations and sponsorships to fund the revenues it needed for its operations, and Alecia was not able to secure enough funding to sustain the idea.

Alecia had been supplementing operations from her own savings, but that money was running out. It became painfully clear that she’d have to cease operations at MIB.

Along the way, Alecia had sought advice from many different people about the problems she was having with the company. They all believed that the concept she was offering had value — and that people would be willing to pay for it.

Then it dawned on Alecia.

It was time to try to take the services offered at MIB and offer them to a different market that had the ability to pay. Like most entrepreneurs, she had to adapt her business model.

“When failure or loss happens in business, it isn’t necessarily the business model that needs to be revisited, but the market in which the business model is being used,” she says.

So, she launched a new company, Dream It Make It, which offers similar services to aspiring musicians, models, actresses, athletes, authors and entrepreneurs. The new company — such as Alecia’s former one — found immediate success in the market.

But this concept is based on a business model that is able to generate fees from the clients it serves.

“In trying to meet the challenges of an ever-changing economy and business environment, I’ve learned to not only accept but welcome what these changes might require of my business model,” Alecia said.

The epilogue to this story is that Dream It Make It’s success now offers Alecia the chance to reopen the nonprofit Make It Beautiful. Alecia will be using a percentage of the profits of her new company to fund operations of MIB when it reopens next month.

Both of her ventures can now become successful. This became possible only after Alecia adapted and changed her basic business model.

Lighting the Fire Early

Some of us were just raised to be entrepreneurs.  I think that is definitely true for me.  And yet, not all of my brothers who were raised in the same environment chose the entrepreneurial career path in life.

There is a good story about how the entrepreneurial spirit gets instilled in our children at the NY Times (via NFIB Smartbrief).  It is a reflection by a small business owner, Barbara Taylor, about raising kids in an entrepreneurial environment:

People love to argue about whether entrepreneurs are born or made, with many
feeling that success in small business is somehow genetic. My husband has five
siblings. An entrepreneur raised all six kids, yet only one became a
small-business owner. I had no exposure to business growing up, yet here I am on
my second venture. Rather than calling it genetics, I think it has more to do
with children of entrepreneurs being the beneficiaries of an early education in
business.

One of my MBA students here at Belmont, Shawn Sweeney, is certainly exposing his young son Gunner to small business at an early age:

(Video is from theeastsidestory.com)

History Lessons Needed

“In the end, we are always doomed to repeat history because there aren’t enough people who know it well enough to see when repetition is imminent, mostly because it will always be cloaked in the terminology and propaganda of the modern age instead of the plain and clear language describing what factually occurred in the past.”

From a post at The Natural Aristocrat blog sent along by blogger and Belmont alum Dan Oliver.

Borrowing Still a Risky Bet

The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, rose 2 percent in July compared to the same month last year.

My advice to entrepreneurs is to continue to be very cautious about expanding their use of debt. The use of debt brings added risks.

New debt will add to the
overhead of a business. This means that additional sales and profits — more importantly additional cash flow — will be necessary to cover the additional monthly expense associated with
repaying new loans.  Just like all small business debt, any new debt
will add to the risk from having to personally guarantee business loans with personal assets, such as the owner’s home.

I am still concerned with long term interest rate risk.  Higher interest rates are still one possible scenario in our intermediate future.  Be aware that this will add to the pressures on your monthly cash flow.

My advice to
entrepreneurs continues to be to minimize the use of any new debt. You can do this by getting back to
your startup roots and turning to your bootstrapping strategies once again.

One More Quote for the Long Weekend

Given the tenor of the comments here at the blog this week, I could not resist a second quote of the week before the long weekend:

“So let us begin anew – remembering on both sides that civility is not a sign of weakness, and sincerity is always subject to proof”  (John F. Kennedy). 

Effective Pitch Helps you Stand Out

With a growing number of people seeking entrepreneurship as an alternative path in this rough economy, there is increasing competition for the key resources that can make or break the startup venture.

New entrepreneurs are competing for essential resources, such as the funding, the customers and the staff they need to build a successful business. Attracting these resources often relies on how well the entrepreneur can deliver “the pitch” for his new business.

An effective pitch starts with a hook — something that grabs the attention of the person one is talking to about a business. The most effective hook lays the groundwork to show the underlying need in the market for what the new business aims to offer.

A common mistake we see in pitches is that the entrepreneur waits much too long to tell what the business does. I had my students watch some examples of pitches the other night in class. You can find lots of good ones and bad ones on YouTube.

We were amazed that some of the people making a pitch waited more than halfway through their pitch to tell what their product or service is and what it does.
Answer key questions

Remember this: Early in a pitch the entrepreneur should present a clear mission statement. Who are you? What do you offer? Who is it for? What makes you unique?

The pitch must also show that there is “pain in the market” — that there are people who are in need of what you are offering and are willing to give you their hard-earned money to pay for it.

Who needs your product? Why do they need it? How many of them need it? What are you doing differently from your competitors?

The pitch needs to be presented clearly. It should be an unambiguous answer to some key questions that a skeptical listener is likely to have about the business. How will you make money?

The presentation of the pitch needs to be compelling. The entrepreneur should show his enthusiasm. Make it a personal message to those listening, and make eye contact. Never use note cards — this tells the world that you are not confident and that you don’t know what you are talking about.

While it is important to be enthusiastic, you still must be authentic. Putting on an act rarely gets an entrepreneur very far. Be yourself in how you talk, in how you dress and in how you interact with others.

Finally, a strong pitch always ends with a clear message. What is the one thing that you want them to remember? What do you need from them? What do you want your target audience to do for you?

In this economy, entrepreneurs face competition on every front as they launch a new business. An effective pitch can help distinguish you from all the others trying to grab the attention of investors and customers.

What Makes Entrepreneurs Tick

Those who side with Scott Shane’s view that entrepreneurship is generally an economically irrational act (i.e., why start a business when you could make more money working for someone else) really don’t understand what makes entrepreneurs tick.

One of my undergraduate students sent along this video that sheds some light on why entrepreneurs do what we do.  While profits matter, there is something much stronger that drives us to start new ventures….