Imagine you’re climbing a mountain and the fog rolls in. You can’t see the trail as far as you’d like, but you know you’re trying to reach the top. So you figure as long as each step takes you higher than the one before, you’re headed in the right direction. So you slog on. Moving higher each time. Sooner or later you reach the top. You know this is the top because in each direction the next step takes you lower, ergo, it’s the top. So you make camp (hard to do in the fog) and settle in for the night.
The next morning, the fog is gone, the sun shines bright and you see where you really are. You are indeed on top of the mountain, just not the mountain you wanted to be on. Off to the north is a higher mountain – the one you really wanted to reach. But between here and there is a valley. You have to go down to reach the higher peak.
You focused on making every step count, but the fog kept you from seeing where you were truly headed. You never took a step down but ended up on the little peak.
This is called the “Local Maximization Trap” And entrepreneurs fall into it all the time without even knowing it. Why?
Entrepreneurs are smart, thrifty and opportunistic. That means we’re “scrappy.” We can make it where others can’t. And it leads us to take maximum advantage of our situation. That usually means making sure each step is a step up. We cut costs, work longer, drive harder, and surround ourselves with a team that does the same. We squeak out every bit of production from our equipment, our facilities, and our people. We have our eye on the bottom line and it works. Then one day, the fog lifts and we find we’ve reach a local maximum.
Let me give you an example of one of my clients. We’ll call him Rick. He runs a manufacturing operation, started by his Dad 50 years ago. He’s been at the helm for a number of years, but still calls on Dad for advice on a regular basis. They get along very well. The company actually grew in the past few years despite the recession. They did $5.8 million in business last year and are closing in on 6.5 million this year. 12% growth. Profit is climbing as well.
Rick wants to build his company to $10Million in sales and he thought he was on track. At 6.5 million he thought he was two thirds of the way up a $10 Million dollar mountain peak, with nothing but climbing ahead. That’s where the green star is in the picture. But he was wrong. He’s really on top of a localized peak – where the pink star is.
He’s actually such a good entrepreneur, that in fact he’s floating in the air above that peak. What I mean is he’s on top of a hill that’s maybe 6.3 million high and he’s milking almost 6.5 out of it. He’s that good. He can jump but he can’t fly. He’s going to have to go down to go up.
I recently did an Orchestra Analysis of Rick’s company. What’s an Orchestra Analysis? It’s where we consider the company as an orchestra, with the CEO as conductor. We look at all the “instruments” in the company and see what notes they’re playing. There are a set number of instruments every company needs. What’s surprising to many people is that every company no matter how big or small needs all the same instruments. They just play louder or softer, or faster or slower in some companies than others.
To do an Orchestra Analysis we plot what notes all the instruments are really playing against the notes they should be playing to make the music the conductor wants, and see where the differences lie. Here’s some of what we found in Rick’s company.
When we looked at his sales operation we found most of the instruments were sitting idle. Rick doesn’t have any outgoing sales operation. He’s doing some advertising and giving quotes as the RFP’s come in. That’s how he’s growing. This is one reason he’s optimized his profit – his local maximum – because his sales costs are very low. But that has two serious ramifications. One is he’ll need to spend money building a real sales organization, one that reaches out, if he wants to grow. It also explains why even though the past few years have been good, profit in years before that has been erratic. He’s been at the whim of the market and not able to see changes coming in time to adapt.
There were other indications of a local maximum as well. His manufacturing space is maxed out. This also increases profit but limits growth.
Most critically, there is no in-house training program to develop line employees or
managers. This lowers his costs in the short term, but it keeps Rick trapped on the shop floor and not able to get out and move the company to the next level. That’s probably the biggest thing keeping him from growing the company the way he wants.
And the final indicator of a local maximum? Rick is turning down business, because he can’t fit it into the production schedule. This is a direct result of lack of investment in floor space, and developing employees.
At first he was turning down business he didn’t really want – C and D level customers. Loosing C and D customers is always a good thing. But he’s turning away some A’s as well. He estimates he turned away $200,000 in sales and $50,000 in profit so far this year. That’s a local maximum.
They can be – if you’re maximizing the right things and that’s where you want to be. But you can reach a maximum that feels like a pit if you’re maximizing the wrong things. You can maximize profit, for example, at the expense of cash flow; or market share at the expense of profit. That’s why before you do an Orchestra Analysis, figure out what song you want the orchestra to play.
In Rick’s case, he’s been closing in on this maximum for a while. Right now he’s maximizing profit, but that hasn’t always been the case. His frustration is that he’s maximizing his short term situation but sacrificing the sense of accomplishment and the money he sees in having a $10Million dollar organization.
Local maximums happen when you’re good at what you do and you move ahead one step at a time, without a good map of the territory. It’s not necessarily a bad thing if that’s the peak you want to be on. But in Rick’s case it’s not high enough. Here’s what I recommend if you’re in a similar situation.
Instead of moving ahead one step at a time, develop a map of where you are and where you want to be. Figure out how deep the valley is between the two. In Rick’s case that means figure out what kind of sales force he needs and what it will cost to develop one. Define what his training program should look like for managers and line employees. Understand how long will it take before he sees results from this. And decide what he should do about the lack of space, machinery and room in the schedule.
These things will all take investment. That’s what I mean by going down before you go up. He needs to have the resources, and the will, to cross that entire valley. If you don’t know how big it is, you can’t be sure you’ll make it to the other side. That’s why a good map is so important.
I came across this in a letter by Jim Womack, author of Lean Thinking and, to hear him tell it, one of the developers of the Toyota Way. The graphics are mine – which is why I’m not a graphic designer.
All value created in any organization is the end result of a lengthy sequence of steps – a value stream.
These steps must be conducted properly in the proper sequence at the proper time.
The flow of value toward the customer is horizontal, across the organization.
All organizations … are organized vertically by department … because this is the best way to create and store knowledge and the most practical way to channel careers.
He goes on to say that managers are judged by metrics that apply within their departments. But no one is actually responsible for the horizontal flow of value [toward the customer]. This is the problem big companies face.
So why are small companies better than big ones?
Because you have your hand in everything. YOU (the owner/founder/entrepreneur) are responsible for the horizontal flow of value.
So why are small companies worse than big ones?
Because you have your hand in everything. When the company grows to the point where some organization by department is useful, the owner/founder/entrepreneur is better at building the product than building the company. So emergencies, inefficiencies, and other stuff happens which takes you away from managing the value flow. So you end up with the worst of both worlds. No departmental support and a poorly managed value flow.
Takeaway:
[tags]Lean Thinking, Small Business, Entrepreneur, Management, CEO Skills[/tags]
I promised myself when I started this blog that I’d not write about politics unless I took the time to show the direct link to your business. But last weekend I rented a dumpster because we’re putting the house on the market [www.seiffer.org - make me an offer before we list it with a realtor]. And when the bill came there was a $15 gas surcharge (4%). Our company pays UPS about 5 grand a week. I don’t even look at how much they’re charging us in gas surcharges. And of course we charge customers a gas surcharge too. We get about 1,000 a month that way.
This hurts business in two ways – the added costs we have to charge make it harder to sell but don’t profit us any. And the added costs we have to pay decrease our bottom line. And who benefits? Not you, not your customer. Exxon is the one with record profits last quarter. But I don’t blame them (at least not for that). This is a problem with political roots. The world system of depending on oil has to change. And this kind of thing has happened before. Europe was powered (or at least heated) by wood hundreds of years ago till they burned all the forests down. So they figured out how to use coal till oil was put to use.
We knew this was coming and decided to go for short term, immediate comfort/profit rather than long term gain. Some of you are old enough to remember gas lines and no-gas-on-Sundays back in 1973. Then President Carter proposed we allocate some resources to developing alternative fuels and to conservation. As a country we didn’t really give it anything but lip service.
And we went back to business as usual. We justified it by taking comfort in those intervening years when oil was $10 a barrel. But that just allowed us to wallow in our denial. Even at $10 a barrel, oil pollutes the atmosphere. We enjoyed our denial about the environmental effect of oil addiction. And our denial about the control over our economy we were giving to foreign leaders who weren’t (and aren’t) exactly working in our bests interests – either economically or in terms of our values: freedom, democracy, human rights etc.
So we played along, ignoring the obvious consequences of our action (or inaction) and now we’re shocked, SHOCKED! that we have to pay 75% of what the rest of the world pays for gas instead of the 50% we’re used to paying. Just wait till we have to pay as much as Europe has been paying for years. And I’m just counting the pump price – not the price in lives lost to air pollution, or war, or _____________ (you fill in the blank).
But it’s human nature to go for short term solutions instead of long term ones. Somehow we believe that going for the long haul makes it less pleasant in the present. And it’s true in many areas (weight loss, quitting smoking, saving for a car instead of borrowing for one). But here’s the real tragedy. It’s not always true in business.
We’ve all read about companies that were forced to put restrictions on their pollution output only to find they could make a profit from chemicals they recovered. Or that were forced to treat employees better only to find they got improved productivity or lower turn over. Is it really so hard to believe that had we put as much effort into energy conservation and alternative fuels in the 1970′s as we did toward the moon shot in the 1960′s that not only would we be better off now, but we’d have been better off by 1976 (say) and the 1980′s and 90′s would have been even better than they were? Carter of course wasn’t as personable as JFK so it was harder for him to get support. Jimmy seemed more of a wimp to us than Jack (or Ronald). And it’s un-American to follow wimps – even when they’re right.
Can you imagine the new products and technologies American ingenuity would have developed? How many high paying jobs that we would have created? How much better our air and water and global warming situation would be? How much it would have affected our trade balance to be exporting that kind of stuff all over the world? Not to mention the effect on peace, if the oil producers had been made as economically and politically impotent as say the buggy whip industry?
Instead we took the short term route and look at the fine mess we’ve gotten ourselves into. It doesn’t take much to figure out which politicians are trying to prolong the status quo when it comes to oil, the environment etc. Unfortunately the ones who want to change things don’t show enough balls or leadership as I’d like to see. But let’s support them anyway. It may be too late, but our only hope is to vote and work as if it’s not.
Takeaways: The political takeways are the same as the business takeaways.
Robert Scobel put up a post about how to reinvent Microsoft. If any company needs it they must be in the top three, along with GM and … maybe your company?
I’ve distilled his ideas into suggestions that will work for any company of any size. Scobel’s post will give you some context and explanation. For that reason I’m listing my ideas in the same order as his. One other note, my use of the word “public” may be interpreted to mean, just internally (or not) depending on your situation.
Takeaways:
What’s considered “newsworthy” by the business press is either about trends that have a very broad appeal, or what Hugh McLeod calls business porn. The reason any kind of porn has any appeal at all is that it’s a fantasy. So that kind of business news is obviously irrelevant. As for the trends – they usually don’t apply to a small company. One can make a very successful company flying under the radar, or exploiting niches that have nothing to do with larger trends.
However, there are times when the larger issues do have an impact, but small companies don’t usually take time to consider them. Here is an exercise to solve that problem.
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Financial Impact Grid
From The Star Bulletin by Ralph Perrine,
SOMETIMES I sit with business decision-makers and draw what I call an Impact Grid. In the middle square we put the company. In the next square we put the company’s clients. In another, the client’s customers.
In adjacent squares we put the company’s partners and vendors. We talk about what impacts these squares. It helps business leaders think about the impact of economic factors: employment, interest rates, and so forth.
It also reveals lines of impact for specific scenarios: If client A’s customers are hit with a shock (hurricane, bird flu, rising energy costs), then client A is going to experience a downturn in sales. That in turn will have other implications.Â
I saw a commercial last night on TV. A guy was pasting up billboards of women dressed in swanky clothes. As he turned away to get the next poster, the women in the ones he’d already posted winked and waved and moved around. The posters had a single word across the top (I believe it said “Transform”). I was thinking: I know this is about women’s clothes, but who paid for it and what do they want me to buy? Neither the visuals nor the audio gave me a clue. Till the last few seconds when the word KOHLS came on the screen. [Raise your hand if you knew that Kohls is a department store with 749 stores in 43 states catering to suburban women]. I said to my wife that if you didn’t know what Kohls is, the commercial would be a waste of money. My wife replied with two words: “Women know.”
Far be it from me to doubt the veracity of that statement. The problem was I was thinking of the commercial as a way to get new customers when actually it was a way to communicate with their existing ones – Preaching to The Choir. It all came together this morning as I put on a tee shirt to run (OK walk) on the treadmill. The shirt said, in big letters “I LOVE YOU MAN” and had a Budweiser logo. Remember that ad campaign? I doubt that it, or the talking frogs (or was it lizards?) got anyone to order a Bud for the first time. But it probably gave those already in the Bud flock something to feel good about and a reason not to stray.
Leaving aside the question of why women feel good about clothes and men about grunting amphibians, let’s look at the concept of Preaching to The Choir. Seth Goodin would probably argue that if your product is so bland that you have to resort to an animated swamp to differentiate it then commercials are a horribly wasteful way to do this. I don’t disagree. However, the need remains to connect with your customers after the sale. Another way to say it is, give your customers some reason to have a relationship with you that goes beyond the product.
Relationship beyond the Sale
This is why companies give out hats with their logo on them, why companies invite their best customers to an annual golf outing or such. If you think the relationship ends with the sale, you’re being very short sighted. For two reasons. First, it’s usually cheaper and easier to make your next sale to an existing customer than to a new one. Second, some percentage of those customers will become promoters for you if you give them a reason to.
Harley’s got it’s HOGS – Apple computer has evangelists – Jimmy Buffet has his Parrot Heads. Who do you have? I know, you’re going to tell me that you make ball bearings, which don’t exactly lend themselves to a lifestyle choice; or that you install wood floors and your customers only buy from you once; or that all this hoopla is too expensive. Well OK if you say so – let your competition get all the goodwill and referral business.
Personalize it
With a little imagination, and personalization, preaching to the choir can reap huge rewards. None of these ideas will appeal to all your customers. You can’t do a mass media thing. But that’s the beauty of a small company – you can get to know your customers and develop ideas that may only apply to some of them.
Takeaways:
You’ve heard that before right? Well, it’s not always so easy.
I think one thing that sets big companies apart from small companies are how they use measurement in their decisions. Big companies get it wrong because:
Small companies get it wrong because measuring things is expensive and time consuming so they just don’t. I think this is one of the leading causes of small company failure.
Seth Godin had a couple of posts on the subject: Measure that and don’t measure this.
To which I respond: Effort (and results) skew toward what you measure and often they skew away from something else.
If you measure widgets per hour you’ll likely get more efficient – more widgets per hour. But perhaps you’ll be sacrificing quality. If you measure quality (say defects per batch) you’ll get better quality but perhaps you’ll be sacrificing efficiency.
The trick is to put in place the right set of complimentary measurements. Measure both efficiency and quality understanding that they are both important but may tend to be mutually exclusive. So you want to hit that sweet spot in the middle.
I learned this from Andy Grove’s book “High Output Management.” It may be a partial solution to the dilema shown by Robert Austin in his book “Measuring and Managing Performance in Organizations” His point (I’m paraphrasing here) is that it’s impossible to actually define, let alone measure, all the important things in an organization. Hence whatever measurements you make will be an imperfect representation of what you want (like a blue print is a representation of a house, but you can’t live in the blue print.) And whenever you measure performance, people learn to game the system and do more of what’s measured at the expense of something that may not be measureable but is important.
All this shows (to me anyway) how important is the job of management – not just leadership - in an organization. It’s the job of management to develop systems whereby people are encouraged and supported to do their best in the direction of the organization doing more as a unit than people can do independently. What to measure and what to do with those measurements is a big part of this.
Takeaways:
Many moons ago a buddy and I got a sub-contracting gig putting roofing shingles on a building. It was our first and last roofing job – we were terrible. And not because we only had old fashioned hammers instead of the (then) new-fangled air guns. No, it was because we didn’t know what we were doing - didn’t line things up right, didn’t use the right kind of nails etc. An air gun would have only helped us makes mistakes quicker.
Technology is like that. Besides knowing how to use it, you have to know what to use it for. For most businesses that means you’re going to have to change the way you work in order to get the benefit of new technology. And you’re going to have to change your mind set. Buying the newest technology won’t do that for you. Ten years ago, many small companies didn’t adopt new technology for that reason. Today that would be a death sentence.
Put Data in Only Once -Use it Often
Here’s a small example in the field of IT – information technology. One of the principles of ideal IT design is that you only have to capture data one time in one place, then you can use it everywhere. This means its much cheaper and easier to use the information you have than it would be if it were only captured on paper.
For example, I know a guy who owns several title companies that do real estate closings. Each time they get a new file, they capture a lot of info including the name of the person who sent the file. In the real olden days, those files were paper. so even though each file had a source, there was no easy way to aggregate that information and learn who had been sending over the most files every month. Or who was sending over the most profitable files, or if there was a pattern of whose files tended to have more problems.
That was the olden days. Putting that information on a computer helped a bit. But unless you changed how people put that information in, you still couldn’t get it out right. Some would put it in a spreadsheet, some in a word processing document. different people might get business from the same source but spell the name differently or one would use a first name and last name and one would use the last name and the company name.
But when the operating procedures (ie the ways people work) are adapted to use the tools, then data goes in the system correctly. Once that data is in the system it’s relatively easy to get it out for all kinds of new uses. This makes it cheap and easy to do things like:
However, the owner of the companies that I was telling you about is from the old school. He wasn’t raised on technology, and while he does use it, he’s never been shown how to get the best use out of it. So he didn’t think of all the things he should be able to do with it.
But if you want to survive you’d better get with the program – your competition is, and your customers demand it. Back when I did my one and only roofing job, many knowledgeable roofers still used a hammer, not an air gun. None do today.
Takeaways:
When work is physical you need time & motion studies. Frederick Taylor pioneered this around 1900. He found out, for example, that a guy (it was always a guy then) could shovel more stuff in a day if he didn’t overload the shovel.
When work is a process you need process design and proper automated tools. Check out The Goal by Eliyahu Goldratt and Lean Thinking by Womack and Jones.
Your work is probably neither. It’s probably knowledge work and often interrupted. That needs a time management system. Not every system works for every person. Some people need piles and have to see all their stuff or they loose track. Some need a clean desk and properly labled files. Some use cards or paper, some electronics, and some all of the above. I can’t even recommend one system from experience because I work best after I’ve just started a new one. A few months later it all goes to hell and I wait a while – then find another and restart the cycle. At my age (or actually once you’re past 30) it’s time to stop trying to improve your weaknesses and learn how to prevent them from causing catastrophies. Then play to your strengths. That saves a lot of time.
I can tell you that time management is a misnomer. You can’t manage time – you can’t save it or allocate it or spend it the way you can with anything else we “manage”. You can only manage yourself within the time we all have. But it has a nice ring to it so we’ll keep using that term.
I can also tell you the single best read on the subject is Getting Things Done by David Allen. His system, called GTD for short, has inspired countless web sites. Google it when you have some time.
But here’s what all the systems I’ve looked at have in common:
Some things I’ve not seen any system recommend:
Empower your employees to manage your time. Regular meetings on certain subjects are one way to do this. It clumps all the work on that topic to just before and during the meeting. Another is to empower an assistant to demand certain things of you at certain times. One client, an attorney, stopped working with me after a couple sessions. I told him to have his secretary come in at the end of the day and insist on getting his time sheets, before she went home. She then gave them to the person who did the invoices and he started getting paid a lot quicker, and a lot more. (It’s hard to bill someone for all the work you’ve really done after weeks have gone by). It made such a difference in his life that he didn’t need me anymore.
Stop managing your employee’s time. That means when you give them more stuff to do, they can not assume you know what’s on their plate and that you know if they have the time to do it all. Instead they are required to assess if they can fit it in by the deadline you give them (you do give deadlines don’t you?) and if not, they are to immediately tell you this and discuss your priorities for what they should postpone.
Takeaways:
Not all your customers are good to have. Some are great. Some actually cost you money. Some are just so-so. Dharmesh Shah has some good ideas on ranking your customers. His post is geared toward software companies. For other types of companies, I would add things like
There is no set list of what makes a customer valuable – a lot depends on your goals and your business style. A client who might be great for one law firm, may be terrible for another.
Obviously a lot of this involves judgement – it’s not all quantifiable – but that doesn’t mean you shouldn’t track it. Before you tell me that’s too much work, let me toss this into the mix. When I wrote the 5 numbers a business owner needs to know, I left one out. Here’s the 6th. How many customers do you need to meet your goals? The fewer you need the less daunting the task of tracking and ranking your customers.
Some service companies need less than 50 clients. They could start from zero and hit that number in a year by making one sale a week. How many does a hair salon need? A lot fewer than a supermarket. Figuring out what that number is, helps you get that many. Ranking them helps you have the right number of the best customers. That will make your business more profitable and more fun. Isn’t that what it’s all about?
Jeremy J at 37signals says when writing computer code, he writes the tests first. Then he knows that the code he writes will have to pass the tests. He says it wastes less effort and keeps him happier and more productive.
I sometimes do the same thing when trouble shooting. I write down what I’m looking for and what should happen. Then check it off. If I don’t find the problem at least I know what not to try again. And the list of failed tests helps me narrow in on what the cause of the problem is.
I’ve never done it when trying a new project, but I suppose it could work. Next time someone comes up with an idea you’d like to try, do this: before you roll it out, design the tests. That means specifiy what you expect to change, by when and how you’ll measure it. Define what measurements will constitute success, and failure. Then see what happens.
What do you call a person who speaks two languages? Bi-lingual. What do you call a person who speaks three languages? Tri-lingual. What do you call a person who speaks only one language? An American. – Old Joke
Numbers are the language of business, yet many business owners don’t really know that language. They survive, but not as well as they could. My learning of this language has been completely self-taught, as a result, my understanding is less than orthodox. In some ways that’s better.
You’ll see the ideas above in the numbers below. Advice for MBA’s and accountants: You are schooled in numbers: the language of business. But knowing the language doesn’t mean you have anything to say. If you want to help entrepreneurs, you have to learn to use that language in the context of what a small company needs.
#1. Your COGS – Cost of Goods Sold. As a percent, this is how much of every sales dollar goes to buy the material and make it into a form that it will generate that sales dollar. If you sell only a few things, you should know your COGS for every product. If you sell a lot of items, perhaps you can group them and figure your COGS by product line or market. If you do a lot of custom work, you may need to figure out your COGS for each sale.
#2 Your Gross Profit in dollars per month. This is what’s left after you subtract COGS from your sales. This dollar amount has to cover overhead, payback and profits. It’s also the lowest price you can sell your next widget for without actually paying the customer to take it. Obviously you can’t sell them all at this price or you’d never cover overhead. But if you hit a dry spell and want to keep your crew busy, or if you want to entice a new customer with a loss leader, this is as low as you can go without really taking a loss. Gross Profit as a percentage of sales is called Gross Margin. You’ll need the margin for the next one.
#3 Value of your next customer. Here’s how it works. You take the dollar amount of your average sale TIMES the number of sales the average customer makes over their lifetime as a customer TIMES the Gross Margin. This is how much money your next customer will put in your pocket.
EXAMPLE: Let’s say you run a country club. Your average member stays a member for 5 years (60 months) and spends $1,000 a month in dues, green fees and restaurant meals. Your COGS for all that is $600 a month. So your gross margin is 40%. Your next average customer is worth $24,000: $1,000 per month sale TIMES 60 months TIMES 40%
CAVEAT: This is only true for your NEXT customer. Or the next number of customers you can serve without adding to your overhead, or making some capital expense. But in that context it can be useful to determine ways to increase the value of each customer (“You want fries with that?”) and you use it to compare to #4
#4 Cost of acquiring the next customer. This is money spent on marketing, advertising and sales DIVIDED BY the number of new customers that effort brings. Effort that brings in more value than it costs is worth it.
#5 The Magic number. Every business has one number that summarizes the health of the whole business – usually on a daily basis. Sometimes it’s obvious: a hotel uses % occupancy, a restaurant, the # of meals sold per night. But sometimes it helps to get creative. One manufacturer used the weight of all the items they shipped out in a day. It turns out for them, pounds on the shipping dock did a good aggregation of profit margins in different product lines. One restaurant owner used the number of people in line at 8:30 PM. If there were a lot of people waiting, his staff turned tables quicker to sell more meals. If not, they encouraged dessert and after dinner drinks to sell more that way.
The Magic number for a start-up is always your break even point. You must know that. When you hit it consistently you’re not a start-up anymore.
Takeaways:
I have a problem with this test of your Entrepreneurial Quotient posted by Guy Kawasaki. My problem is that while I agree with all the questions and answers save one [more on that in a minute] I don’t think it’s about entrepreneurial quotient.
It’s about the hyped up buzz about what is an entrepreneur: Someone starting a company making some sort of software and who needs venture capital to take their company public.
Sure there are entrepreneurs like that. But it’s a small sub-set of all entrepreneurs. Of course it’s the flashy newsworth sub-set. And given Guy is from the high tech world, and a VC it’s no wonder he’s made this mistake.
And I must say, for the record, I like what I’ve read of Guy’s approach to building companies. There’s a lot right with it – I just wish people wouldn’t limit the concept of entrepreneurship in this way.
As for the test itself #11 is a very good point. But #6 I have a big disagreement with. I guess it depends on your definition of success. But I’d choose answer A.
I actually didn’t make this mistake. We’re only remodeling two but I thought of it because the third one is downstairs in the cold part of the house, poor me [sniff].
Anyway, this thought is relevant here because of why we’re remodeling. We’re getting ready to sell the house. So now we’ll have two bath rooms with a nice modern look instead of that “what were they thinking?” wallpaper that I’ve lived with for eight years!
The point is, why didn’t we do this seven years ago? Then we could have enjoyed them all this time and still have the house in shape to sell.
My friend, John Hyde is in the business of “work outs” – making closely held companies look good for suitors. Either they’re growing so fast they need alternative financing, or they’re selling, or something like that. It usually involves cutting some expenses and rejiggering three years of financials. Nothing illegal mind you, but making them more accurately reflect what it really costs to run the place. The goal is to show as much profit or cash flow as possible because that results in a multiple for a sales price, or lower financing costs.
He told me that if people would hire him at the start of those three years instead of the end, two things would happen. One is his fee would be smaller, and the other is there would be more profit or cash flow for all that time. In other words, the owners would get to enjoy that remodeled bathroom all that time.
Takeaways:
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