The Real Question is “Why?”
I was talking to Cory Long recently. He’s been around small business since he was seven. As an adult, he took over the family firm (selling industrial paint) and tripled it in four years. Then he went into missionary work for a while. More recently he has turned around his brother-in-law’s computer company. He’s also taken over marketing for a naturopathic doctor who has greatly improved the health of his (Cory’s) wife who has MS. In four months they’re up to about 300K in sales.

His brother-in-law just offered to give him full reign at the computer company and the doctor has dreams of launching DVDs and other products nationally. With so many opportunities staring him in the face, he told me: “I know I could grow any of these companies. What I don’t know is why I should.”

I complimented him on coming to such a powerful question at such an early age. He’s just 31 – an age when so many people are in the midst of careers and family that they just plow ahead and don’t consider if they’re plowing the right field.
A lot of my work is about how: how to run your business better, how to make more money and have less stress, how to systemize and grow. But that’s just a prelude. The real question is why.

The Power of Money
And the answer is never money. Because money is neutral. By itself it means nothing. If you think about it – it’s just colored paper. It only has power when you do something with it. And that power comes from us and how we use it: power to provide for us, power to give security, to provide freedom, power to prove ourselves to our dead relatives, or the power to lord it over others.

I’ll reserve comments on whether that power is real or illusory, beneficial or harmful. But let me say two things.

Takeaways:

• As fungible as money is, the power each of us ascribes to it is a unique blend.
• And when we don’t have what we consider “enough” we often forget that it is a means to an end and just focus on getting more.

That is a pretty good definition of the rat race.

This is a longer article, so I’ll post it in sections. Part 1 – Part 2 – Part 3 – Part 4
It’s conventional wisdom that companies die because they run out of money. One reason they do is that if you’ve never learned to look at why you spend money, you make all money decisions the same way: Urgency. In this series of posts, I’ll try to show you some other options.

Where does the money go?
Actually it only goes 4 places. Or more correctly said, a business spends money for only 4 reasons. One of the problems with traditional accounting methods is they only tell you what you spent money on but not why. This is a problem because you can make better decisions if you think about why. The good news is there are only four reasons. We’ll cover the first one here.

It all comes from the customer.
Where does the money come from? The only place is sales. From Customers. The only place. Investors and lenders may supply cash but that’s not “real money” it’s only a temporary fix, because you have to pay it back [hate it when that happens].

COGS
The first reason to spend money is to have something to sell. Accountants call this COGS (Cost Of Goods Sold) or Variable Costs because they vary with the number of units you sell. Double your sales and COGS will double. Sell zero and COGS will be zero. COGS includes the actual stuff you sell (like the burger and the bun) plus packaging & shipping costs (plate and napkin) garnishes (ketchup and mustard) and relevant labor.

The first way to think about managing COGS is percentage. Your COGS should be a certain percentage of your sales. The actual percentage varies with your product and your industry. Food costs at a restaurant are typically around 35% liquor costs are around 20%. [Now you know why the first thing the waiter says is "Can I take your drink order?"] I imagine COGS at Starbucks are much lower and those at a car dealership much higher. If you don’t know what’s standard in your situation you should find out and try and beat those numbers. You can improve your percentage by lowering costs or by raising prices. Try both and find the happy medium.

The internet stunned everyone back in the 1990′s because it looked like COGS would go to zero. Compared to a book or newspaper there is no cost of paper, printing, or distribution. One problem was there were no sales either. But the other problem was in some situations it makes sense to count the cost of sales as a COG. Commissions, for example, vary directly with sales and should be counted as such. Of course, if sales are zero then any COGS at all makes for a very high percentage.

Timing
The other trick in managing COGS is timing. Usually you need to pay for stuff before you can sell it, otherwise you have nothing to sell. If your customers pay on terms, it takes a while for you to get paid while you have to lay out more money to have something to sell your next customer. This is one reason distributors often give their customers terms – in effect acting like their bank. Where’s the interest on those loans? In the price. You get a discount if you pay COD or within 10 days.

Many companies use lines of credit to deal with the timing issues of COGS. If their sales are seasonal, they’ll need cash to buy more before they sell, and will have cash after the season to pay it back. A growing company needs cash as well because they have to stock the shelves to keep the growth on track.

Obviously if something sells more quickly, you’ll get your profit faster than if something sells more slowly. Timing of this sort is measured in inventory turns. Either how many days does it take to turn your inventory, or how many turns do you get in a year. Given a fixed percentage of COGS, more turns will lower the cost of cash you have to borrow to fund COGS and will toss off more money each month to be used for the other reasons you spend money. Again there are standards for your industry and product. Learn them and try to beat them

To think about COGs spending you have to consider the percentage (mark-up) you’ll be able to sell it for as well as the timing and turns.

Takeaways:

• Know what percentage of sales your COGS should be for each product (or relevant product line). Industry trade groups should be able to tell you what’s normal. Then adjust that for your specific situation. Lower is better – makes you more profitable and less vulnerable to competition.
• You can lower your percentage by lowering the cost of COGS or raising your prices. Try both.
• Timing is a factor. You’ll need cash to pay for inventory before you can sell it. This can vary by month if your sales are seasonal or be a constant need if your sales are growing.
• If the rest of your company is sound, getting cash for COGS because your seasonal, or your growing should be a no-brainer. If distributiors aren’t willing to give you terms and banks won’t give you a line of credit, maybe they know something you don’t about the health of your company. Clean that up first.
• Accounting terms: COGS are also called variable costs. The amount left from a sale after you deduct COGS is called Gross Profit. The % of sales that is your Gross Profit is called Gross Margin and the amount you charge above your COGS is called markup. So let’s say you pay $10 for an item that you sell for $15. Your Mark-up is $5 or 50%.[More than you need to know: a 100% markup used to be typical in retail - it's called a keystone.] Your Gross Profit on each sale is $5 your Gross Margin is 33.3%. Your COGS is $10 or 66.6% of sales.

If you build it, they WON’T come.

Build a better mousetrap and ….[fill in the blank]

If you answered the world will beat a path to your door, you’ve been infected with the Myth of the Mousetrap. I say infected because myths are stories we believe about how the world works that turn out not to be true. The good feeling we get from believing the story outweighs the pain of the reality check. So the myth persists. Perhaps it’s related to the desire for a CERTAIN button

The Myth of the Mousetrap is perhaps the most damaging myth about business. It gives the impression that building a product (no, make that building a good product, or even just a better product than the other guy) is the majority of what it takes to build a business. That’s just not true. Yet the comfort of believing it forces countless business owners to endure the pain of failure despite having a good, or great, or superior product.

It seems that this problem plagued the inventors of the television, the shopping cart, and the more recently the shootAndstar Rebounder. [**Disclaimer – free advice is worth what you pay for it, and in the case of the rebounder inventor, it’s unsolicited to boot. Not that that has stopped me before.]

Click here and scroll down to the section called HE SHOOTS – HE SCORES! You can see from his comment he’s focused on the product. Unlike his web site which seems to be focused on large colored letters. There is only one picture of the device, and I can’t tell how it works without some study. There’s some mention of a video, but it doesn’t link to anything – not in my browser (Firefox).

These mistakes are typical of people who build a product and hope to turn it into a business. Think how different if this were invented by folks at Spaulding or Nike – people who built a business that they hoped to improve with a new product. I suspect they’d be thinking price point, marketing costs and distribution channels way before the prototype was built. There’d probably be licensing deals with hoop manufacturers and almost certainly a patent application. Not that this would guarantee success, they’d obviously have a larger cost structure to satisfy – but they’d start knowing it takes more than a great idea.

And yet, the rebounder inventor is doing better than many I’ve known about. Sales in 30 states and other countries in about a year? Not bad. New technology makes it easier and cheaper for a solo practitioner to do some of the good things a big company would do. If he does that, while still keeping his cost low (and don’t quit the day job) he could have the best of both, and end up with a real successful business.

Here’s a business based around the idea that people would prefer a CERTAIN button to an EASY button. Seth Godin makes the comment regarding the Staples Easy Button promo.

If you offer a promotion, rebate, coupon or something where you don’t know for sure how many people will respond (and hence) don’t know what it will cost you. This company will asses the risk and “certaintize” it for you. They’ll give you a fixed cost and pay all the prizes, rebates etc over an agreed upon amount.

Folks must love the certainty – according to this post on Andrew Tobias’ website they’ve been in business for 20 years and doing well.

Getting to “NO” is better than nothing.

Sure getting to YES is the best (if it’s a genuine yes) but the worst is a NO that people won’t tell you. Instead they string you along – ask for more info, tell you they need to check with their boss, or just don’t take your calls. If it’s really a NO you want to hear as soon as possible so you can focus your time and energy on others who are at a different place in the buying cycle.
My wife just found that people who won’t tell you no on the phone (or won’t return your calls) will tell you by email.

She was following up with people who had stopped by the Video Rental Services booth at a trade show and said they were interested! This is key. So when she called, she left a voice mail. In the voice mail she said she’d be sending an email with the same info if that was easier for them. Then she send an email mentioning that this was the one she referred to in the voicemail.

When she’s done this before without the accompanying email, no one called back to say they were no longer interested. But with the email several did.

Takeaways:

• Follow up a voicemail with an email (mention each in the other) – gives the customer more choice.
• If it’s going to be no, you want to hear it sooner rather than later.

UPDATE: In the continuing effort to provide my readers with the most accurate info (not to mention marital harmony) I asked my wife if this post was a good reflection of what she told me.  Her response:

Yes it is accurate. I find that more people respond to the email + voicemail than to just an email also. The combination seems to get the request some validity.