Saturday, November 28, 2009

How to save money the expensive way...

I see small business owners who will spend $5,000 making sure their pick-up truck has the best sound system and wheels. Expenses that are, in all probability, money down the drain.

Then I see the same business owner sign an important contract without having their attorney even look at it. Now I'm not an attorney and I don't like spending money on an attorney any more than the next person but here's what I do know, for certain:

1. I like to sleep well
2. I buy insurance for a car wreck, hail storm, hurricane, boat sinking, etc

Why should you have your attorney review all your material contracts?

1. You'll sleep better. At least if you have any sense you will. If you sleep fine now and don't have a good attorney reviewing your contracts then you don't know what you don't know.

2. Having an attorney review your contracts (oh yea, did I mention the attorney should review them BEFORE you sign it... attorneys right now are nodding their heads. They see more contracts from clients with the request .."get me out of this contract", than they see contracts where client a says "should I enter into this contract"?) is like buying insurance. I buy insurance because I want to spend some money now to protect me if there is something that really, really goes wrong.

I had a client once who was having some significant business problems. Problems like ...she was losing her shirt. It was a mall based business. When I started asking her about the situation I got to the lease. Here's how the conversation went:

Me, "what's your lease like?"
Her, "I can't remember, the leasing agent said they didn't make changes to their leases so I needed to take it or leave it. I took it."
Me: Do you have the lease?
Her: Yep here it is.
Me: Whoa this is pretty tough.
Her: I don't know why you say that, it's only $6,500 per month
Me: "Well, it's $6,500 per month now and it goes up every 2 years and it's for 10 years and you have personally guaranteed the lease. By my quick back of the envelop calculation the value of this lease is about $1,000,000"
Her: What????????????
Me : You didn't know this?
Her: No, they said that what they gave me was the standard lease and they didn't make changes, so I signed it.
Me: They didn't make changes or they didn't like to make changes?
Her: Uhhhh........
Me: I have another client in this mall and their lease is much more favorable.
Her: Oh no.

When she signed the lease she saw $6,500/month, and said toe herself "sure I can swing that." When I saw the lease I saw $1,000,000 contingent liability and she's on the hook for $1,000,000 personally if things in the biz go badly.

How do you know which contracts you should have your attorney look at? Figure out what the costs or damages are if something (or everything) goes wrong. For some people the threshold is a few hundred dollars, for others a few thousand. However, if your practice has been not to have your attorney review all contracts then I suggest you start now with basically every contract. Especially those that are recurring contracts like contracts with customers or vendors.

Stop looking at attorney review of contracts as an expense and start looking at it as insurance.

Monday, November 23, 2009

Should I find a job or I buy a job? Eight important questions.

Many people get fed up with working for someone else and consider starting a small business or buying a small business. If you are considering being your own boss please give consideration to the following questions. Can you ask yourself these questions and answer them honestly? I'm serious, can you answer them honestly?
1. Are you really as smart as you think you are?
2. Are you willing to work harder for yourself than you do for someone else?
3. Can you live with a high risk/high reward life?
4. Can you make good decisions with limited information?
5. When you're wrong can you admit it, correct it and move on?
6. Can you resist the urge to spend like a fool in good times so you'll have reserves for the bad times?
7. If the toilet needs to be cleaned will you do it?
8. Which would you rather have, a big image or a big bank account?

If you answered yes to at least 7 you have a chance to succeed. Now go back and take the test again. Remember be honest with yourself, it could make you wealthy or it could make you broke.

Saturday, November 21, 2009

Steps to Starting a Small Business in a Difficult Economy

It seems obvious but unfortunately it's rarely considered by people starting a small business. Here's my pearl of obvious wisdom: "The key to having a successful small business is surviving long enough to be successful."

The key word...survival. Below are the Big 6 list of items that you have to consider and plan for. The lists assumes you are actually in the serious planning stages and you've done some basic research. Here's my list:

1) Know for certain how much liquid cash you have to dedicate to starting your small business. Not how much you think you can borrow from a bank nor how much you think your aunt Mary, who thinks you're perfect, will give you. Your money! If it's $0 it's $0 but know this number for certain.

2) Decide if your business will be something you want to "have fun" with or if your small business is a tool for you to achieve your goal of financial security and control.

3) Find at least 2 small business owners who run successful businesses and ask them the mistakes they wish they hadn't made. This step is more helpful if you interview relative strangers.

4)Know for certain how much money you or your family needs to live on each week, month, year. Your plan needs to assume your business will not generate a profit (free cash flow you can use) for at least 9 months.

5) If you've never worked in a small business go get a part time job in one or even work for free if you can't find a paying part time job. Do this for at least 3 months.

6) Don't read any books about starting or running a small business that aren't recommended to you by a successful small business owner. Here's my recommendation Click here

You didn't really think there were ONLY 6 things did you???

I'll post soon on how you can figure out what kind business might work for you.

Thursday, November 19, 2009

Hidden Costs of Doing Things You Shouldn't Be Doing

Outsourcing is a much discussed topic but I rarely see it focused on the primary strategic issues facing a small business owner. What I too often see is "Outsource and save money". This is rarely true. However, what I think the outsourcing industry should market is...."Outsourcing = spend more money and make even more money."

When I talk to business owners I ask them "what does your business do best?" I get all kinds of answers, some make absolutely no sense. I once had a guy who owns a auto repair shop say "I have a great website". My reaction... what??? I may look at things differently but I'd prefer that my auto repair shop was best at...well, I know you see this coming, I'd like my auto repair shop to be best at auto repair.

But in other instances I get business owners with the right answer but....

For example, I asked a staffing business owner what her company does best and she says "we're really good at matching the right person to the right job." That makes sense. So then I ask... "In what area does your business need the most improvement?" Her answer, "sales". Makes sense, so then I ask, "What area of your business do you spend most of your time in?" Her answer "bookkeeping and accounting". What???? I see this all the time, all the time. The business owner knows what they are good at and what they need to improve but they spend a very scarce resource, their time, doing things that don't contribute to the improvement of the business in any strategic sense.

Business owners who spend time on "non core" activities think they are saving money but they aren't. What they're doing is making themselves feel good by being busy.

The reason to outsource is not solely to save money because often times it's hard to see a dollar for dollar return on peoples time when outsourcing. But what outsourcing does is a) provide more professional, complete and reliable task accomplishment and b) frees up the scare resource of owner time so that the small business owner can concentrate on perfecting what the business does best and improving on the core areas that need improvement.

Want to have a better business that is more focused, more profitable and easier to operate? Try smart outsourcing.

Soon I'll add a post on how to begin the analysis of what you should outsource and what you should control directly.

Tuesday, November 17, 2009

Should you have your small business books audited?

For the vast majority of businesses with revenues under $2,000,000 the answer is no. Unless, you have external requirements from bonding company, shareholders, finance companies, etc.

However, even if you don't have those direct external requirements for Audited financials you should have your books at least "Reviewed" by an independent CPA. A Review is not just "hey, take a look". A Review is a formal process that is less expensive than an audit but with many of the same benefits. What are the direct benefits to the business owner?

1. A look at your business through the eyes of business experts not involved in your small business day to day. These fresh eyes can show you how to improve profits, better manage cash, reduce risk, etc.

2. A reviewed statement will reduce the impact of "on the fly" accounting treatments that are often made by internal bookkeeping staffs. The review will add discipline which will make the financials more useful. For instance, do you now account for your cost of goods sold the same way every year, every month so that you can compare the information and make decisions accordingly?

3. It is much, much less expensive to get reviewed statements if you've committed to the review BEFORE the year begins. Going backwards is more work, much more work.

4. You may not think you need Reviewed books now but what if 18 months from now you are approached by a buyer who is willing to make you a great deal to buy your business but they only buy businesses with at least reviewed financials for 3 years. You could miss the opportunity of a lifetime. You need to commit to accurate reviewed books before you have any idea you will need them.

5. I assure you that a bank will be more likely to approve a loan to a business with reviewed books than a business without reviewed books. And what if having reviewed books means you don't have to sign a personal guarantee for the loan? Big advantage there!!

If you want a small business that is easier to run, more profitable to own and more valuable to sell then start NOW to get your books reviewed by a qualified CPA.

Thursday, November 12, 2009

Run your business like you'll own it forever..and remember it's always for sale..

Sounds like a contradiction right? Well it isn't.

You never know when the opportunity to sell will present itself. The best course of action is to run your small business like a a buyer will determine how much they are willing to pay you for your business tomorrow. Run it well, do the right things and have all your books and records in excellent condition.

But...... then why run it like you'll own it forever?

Because you can't out guess what a particular buyer will value. The best you can do is, as always, do what's best for your business.

Your decisions and actions as a business owner will determine what your business is worth, tomorrow or 5 years from now.

Tuesday, November 10, 2009

List of Common Problems We See in Small Businesses

Below is a list compiled from talking to and evaluating hundreds of small businesses. Small business opportunities to improve are often very easy and inexpensive, it just takes a little attention to detail and a commitment to improvement. Here is my list:

1. Detailed written procedures for critical or repetitive tasks. Most small business owners struggle with "finding good employees" the problem is usually not that the employees are not "good" it's that new employees learn differently and written instructions can get new employees productive faster and less likely to get frustrated and give up.

2. No system to follow up on sales opportunities. It's incredible how often we see this. Customer calls, asks a few questions then says "I'll call back", business doesn't even ask for a phone number much less check back with the customer.

3. Poor accounting makes the financial statements essentially useless for operating the business. The lack of accurate financials makes budgeting very difficult and consequently we often ask the question "How's the business doing?" The answer, "Seems pretty good, I guess my accountant will tell me in March." Not good.

4. The small business owner really has no idea how his pricing is compared to competitors. They don't do any "research". Their only feedback is when their customers tell them "Your price is too high!" Duh, most customers will tell them that even if it's the lowest price they received!

5. Failure to seek expert advice until they have a problem. You know the saying, an ounce of prevention....... Often small business owners do not want to pay an attorney, CPA, financial planner because they think the issue won't be a problem....but when it is a problem... it costs them 10 times as much as it would have if they had done a little up front work.