A Solid Financial Foundation - myhappyassets.com

Bottom line - starting a business is risky. Eight out of 10 fail within the first 5 years. One way to mitigate this risk is by having a solid personal, financial foundation in place.

You can do this by reducing your personal debt, getting on a budget and by developing and reviewing your balance sheet on a monthly basis. This solid plan will hedge the risk of going into business (you will have a financial cushion to fall back on) and it will make you a better money manager.

Remember - you take it with you. If you are a bad money manager in your personal life, you will be a bad money manager in business. Learn the ropes and prepare yourself and build a solid foundation before taking the leap.

I write about this plan in Chapter 2 of My Happy Assets. Check it out at www.myhappyassets.com, also available on Amazon kindle. Click now!

Have a great day,

myhappyassets

Business Plans are Important Too!

A Discussion About Turning Capital Gains Into Cash Flow

As long as you have a way to systematically withdrawal money in order to pay the bills then this is cash flow. Warren Buffett likes the companies he invests in to reinvest earnings instead of paying out dividends since they can generate a better return on equity (20% or greater) than other investments. Although it would follow that one should leave capital gains in the holding as well, it seems that you could cash out a portion on a regular basis to generate cash flow while the company still reinvests earnings.

Again, you could still classify this as captial gain move if you wanted to leave the gains in place to continue compounding (again, a Buffett-style investment is not like a mutual fund investment. Over the long-term, the business fundamentals, earnings, management and consumer monopoly will win out over the casino-like Mr. Market and provide a consistent rate of return.)

I still say the definition of cash flow is the ability to generate cash flow on a short term basis in order to pay expenses. Not to discredit capital gains, you need both, but there is a difference ... unless of course you can make the argument that you can let a gain grow and compound for up to ... say, 5 years and then cash out the gain for cash flow. This of course means you need living expenses for 5 years until you can receive the cash flow.

As far as the role Berkshire Hathaway plays in the Buffettology system ... to be honest, I am in the middle of Buffettology Buffetology **ISBN: 9780684871714**
.. it is a great book and a must read for any business person or investor ... but I am not 100% sure what role Berkshire plays. From what I know, it is a holding company for the businesses Warren owns. So I would assume he has tax advantages by using Berkshire as the holding company, etc.

As to why Warren Buffet is not in Real Estate and yet made it to top 3 position of world richest man I would have to counter that neither is Bill Gates ... both are in businesses ... but I believe the Sam Walton clan has significant real estate holdings!

Also, don't forget to order My Happy Assets the Book here!

The eMyth Revisited Wrap-Up

Systematizing Your Business for Success

In his book The eMyth Revisited, Michael Gerber presents us with valuable information that every entrepreneur should take to heart before and after going into business. In the second half of his book he details the Business Development Process - a method to systematize your business.

Seven Steps of the Business Development Process

1. Primary Aim
2. Strategic Objective
3. Organizational Strategy
4. Management Strategy
5. People Strategy
6. Marketing Strategy
7. Systems Strategy

Your Primary Aim is simply your personal Mission Statement. Gerber argues that your business is not the end all purpose to your life, it is merely a piece and thus, your business should faciltate your Primary Aim or Mission Statement.

Your Strategic Objective is a very clear statement of what your business has to ultimately do for you to achieve your Primary Aim. Your business strategy and plan provide the structure within which your business is enabled over time to fulfill your Life Plan. This objective also includes a set of standards that starts defining the standard operating procedure within your business. The first two that Gerber includes are the money (how much revenue do you want to generate, how much do you want to sell the business for eventually) and the question - is it an opportunity worth pursuing? (does it meet your primary aim? Is there market demand for this business?)

Additional standards in this business are open ended to your paticular business but can include; when will the prototype be finished, where will you be located, what type of business (retail, wholesale?), what standards are you going to insist upon regarding reporting, cleanliness, management, etc.?

In simple terms, your Organizational Strategy is your organizational chart but it is much more than a group of boxes with the CEO's name at the top. This organizational chart should also spell out roles and responsibilities and you should institute position contracts which also spell out guidelines, resources, desired results and consequences both positive and negative.

Once you have your organizational chart in place, which includes the necessary roles the business needs to complete the org. tasks, you need to prototype each position. What this means is that you work in the sales role, documenting all of the work efficiencies and ways of doing things, hire out the role explaining the company strategic objective and presenting the standard operating procedure manual for this role you have created based on your work, and then you move up the ladder into the sales manager role and begin prototyping that position.

Gerber defines the Management Strategy as a system designed into your prototype to deliver a marketing result. The example he uses is a hotel in which personnel captured his personal preferences for coffee and newspaper in a database and delivered these preferences to him throughout his visit. Once they had him in their system they continually catered to him upon each subsequent visit.

The People Strategy is having your people understand the idea behind the work they are being asked to do. According to Gerber, your employees "want to work for people who have created a clearly defined structure for acting in the world. A structure through which they can test themselves and be tested." He calls this structure a game. In the hotel example the employees are constantly testing themselves to deliver on great customer service. Part of this game comes from the overall goals of the company and the specific job duties as detailed in the organizational strategy.

Your Marketing Strategy is identifying what your customer wants through Demographics and Psychographics or Marketing Research. (folks, we are having a free workshop on marketing research this Thursday at noon in Garrret Conference Center. Click here for details and to register). Chiefly, the marketing strategy should answer who the customer is and why does she buy?

The Systems Strategy is a set of things, actions and ideas that interact with each other. For example, a selling system would be an example of a soft system within the business. The database from the hotel example would be an example of an information system, and signs within the business would be an example of a hard system.

At the end of the day, each of the prececeeding strategies along with your Strategic Objective and how it relates to your Primary Aim, should be documented within a Standard Operating Procedures Manual. This manual should be implemented into the business throughout meetings and day to day follow-up and create consistency throughout.

This Thursday at noon we will be hosting a free workshop in Garrett Conference Center room 100 that covers the Marketing Research portion detailed in the eMyth Revisited. Click here to register and see the side-bar for details. The following week Thom Crimans of FranNet will be here to discuss purchasing a franchise. He offers a free service to see what franchise model you are best fit for.

Also, if you would like free one-on-one counseling and wish to implement the systems discussed here, register

here for free coaching.

Thanks,

Adam

The Engine for a Better Business Model

The Business Plan - Well Yeah There is an Outline But This is Not War and Peace

If you perform a web search on the term “business plan outline” or peruse your local book warehouse, you will inevitably come across a half a dozen, varying outlines. My motto is – find one that you are comfortable with and then get very comfortable with that outline - quite similar to Warren Buffet’s “put all of your eggs in one basket and then watch that basket closely,” except he has a billion dollars. If you are dusting off the old business plan or starting from scratch then you need to familiarize yourself with a good outline. And remember, this is not an Ayn Rand novel.

Here’s the one I use:

Executive Summary

The Business

Vision and Mission

Strengths and Weaknesses

Legal Structure

Business Description

Product or Service Description

IP Property Description

Location

Management Personnel

Records

Insurance

Security

Litigation

Risk Factors

Major Forecasted Achievements – Milestones and Goals

The Marketing

Markets

Competition

Distribution and Sales

Marketing

Industry and Market Trends

Strategy

The Operational Plan

Organizational Structure

Management and Personnel

Legal Structure

Equipment and supplies

Accounting and Legal

Daily Operations and Processes

The Financials

Uses of Funds

Income Statement

Cash Flow Statement

Balance Sheet

Income Projections

Breakeven Analysis

The Supporting Documents

A Living, Breathing, Implementable Document

In a perfect world, your business plan would sprout arms and operate the cash register but the truth is it is probably dead in a drawer somewhere next to an old Kenny Roger’s CD you keep around for “me” time. Your mission now is to find that drawer, open drawer, grab feather duster and get to work. Your business plan in part contains your hopes and dreams for your business as well as how to operate the whole thing. It sure as heck deserves a better fate than Kenny.

As far as the living, breathing and implementing part, your business plan should be wired into your business. At a minimum, you should do this by reviewing the key elements of the plan in bi-weekly team meetings and quarterly strategic meetings and tracking progress. According to Dr. Matt Marvel, Professor of Entrepreneurship at Western Kentucky University, “the bane of most entrepreneurs is the lack of business plan implementation. For the most part, business owners find it difficult to integrate the plan into the business. This is a critical failure point for most small businesses.”

Let’s examine specific sections and see how you are stacking up:

The Vision and Mission – sometimes viewed as the enlightening, blue sky statement that hangs on the manager’s wood paneling – it sounds idealistic and cute but the real world says otherwise. The real world says to hell with your idyllic view of how you think your business should run, I’m in charge. But isn’t the Mission why you went into business in the first place? The Vision and Mission at a minimum is the driving force of the business, the fountainhead the business is chasing after. The whole point of having one is to use it to drive through the daily onslaught of reality. It should be kept at the forefront and reviewed daily. If you haven’t developed an overall mission or vision stop now, do not pass go, do not collect $200. Get to work putting one together by asking who do we serve, why do we serve them and how do we serve them? What is our overall purpose for being in business? What should our business look like now and in the future? Write it down and read it at every meeting.

Business Description and Product or Service Description – this is the section that says “we will deliver quality service and products in a unique and outstanding environment. Our customers will be wowed by us until they explode.” Great! Now the question is, how is this glorious statement tied into the business? What is your standard for checking up on customer satisfaction and product quality? Do you survey the customer on a regular basis, bring up the results in team meetings and pow-wow on solutions to the situation? You should be.

Which brings us to our next area of planning and integration …

Management and Personnel

If you really brought your “A” game to this section then you developed an organizational chart. If you brought your “A” game, a cup of coffee and a knack for delegating, then you fleshed out roles, responsibilities and accountability for each position listed in your org chart. In keeping with the previous product and service example, if you show up at a meeting and don’t know who is responsible for improving customer service, then chances are you have some unhappy customers. If the org chart indicates that Joe is responsible for customer satisfaction then the meeting script would go something like this … “Joe, we are receiving a fair amount of customer complaints. Any insight into this?” or “Joe, our customers are raving happy, how’d you do this?” Joe would ideally wake up from his nap and respond “are you talking to me?”

If everyone knows their roles and responsibilities and accountability, then there should be no big surprises.

Marketing

In the marketing section you literally listed out the varying channels that you would employ to market the business – web, print, radio, blimps, wacky waving inflatable arm flailing tube men, etc. Hopefully you also included a measure on how to grade the effectiveness of each channel. How are you doing? If the newspaper ads are providing a rate of return of 150% but the radio spots are barely breaking even, perhaps it is time to kick the radio channel and beef up the print ads … or invest in half a dozen more wacky waving inflatable arm flailing tube men.

Finally, Financials

No matter how you slice it, it typically boils down to the money. You should be preparing a monthly budget and reconciling actuals back to the budget. If not, then again, do not pass go, do not collect $200, go directly to your local book warehouse or search on “budgeting”. This is all important – in your business plan you prepared forecasts. Those forecasts need to be revisited – there may be opportunities for improvement.

You also need to be fairly familiar with the balance sheet and cash flow statement. Ideally, the business is building an asset and increasing equity over time, not metastasizing into a raging spiral of death. If you are continually throwing good money after bad into a black hole of debt, it is time for radical improvement or time to cut your losses.

Goals and Milestones – You Said You Were Going to Live up to Them, How’d you do?

Although by all appearances the “Secret” was a profitable attempt to repackage motivational material from the 80s and market it into an international bestselling book and DVD, the real secret is to set meaningful goals and milestones for your business and keep them in front of you at all times. They will serve as the engine that will drive your entrepreneurial spirit even when you don’t want to go into work for the day. They should answer the question where is the business headed and prompt you to take the steps to get there.

In the existing business plan you want to review the goals that were created and check to see if in fact you hit those goals. If not, why not? Keep the business goals in front of you and the staff at all times and remember, be specific: It is much better to say “I want to weigh 171 by December, 25^th 2011 at 7pm” than “I want to lose weight.” In the second example you can take off a sock and then cheer “mission accomplished.”

Some goals and milestones you may want to think about:

1) An exit strategy is not a planned fire escape route. It is the ultimate goal for your business. Are you going to work until you hit the ripe old age of 110, hand it off to the kids, or sell it for a nice sum of cash? Michael Gerber, author of eMyth Revisited, asserts that the goal of every business owner is to eventually sell the business. How much will you sell it for?

2) When will you be financially independent? You didn’t start the business to have a hobby. At what point will your passive income be equal to or greater than your expenses?

3) What will sales levels look like in the next 3 and 5 years?

4) Do you wish to expand and open additional stores this year, create a new strategic alliance, or perhaps diversify your product offerings? Sometimes though it is best to remember that many business opportunities will come your way and it is best at times to be selective and focus.

The Times They are A’Changin

According to Matt Whitaker, Business Consultant with the Small Business Development Center, “most business owners do not accommodate for change in their business plans. They remain rigid and hope that everything will roll out exactly as planned. If it doesn’t, they are typically at a loss and cannot adjust.”

The point is, plan for change. Your budget should have a miscellaneous category for unforeseen expenses and you should project a best, worst case and most likely scenario in your sales projection.

Implementation – It’s a Pretty Document … So What?

Again, as I previously indicated, if you have a great plan chock full of financially literate terms such as “nominal rate of return” and “net present value” then good for you … you have a great vocabulary. If you actually use the plan in the business then you have great follow-through and a solid business model in addition to a fancy vocabulary. I can’t emphasis this enough: the plan needs to be integrated into the business on a strategic and tactical level via company meetings and day to day operations. The individuals responsible for facilitating the key functions of the business need roles and responsibilities spelled out and a standard they are held accountable to. The mission, vision and goals should be at the forefront of the business. The cash flow projection should be reconciled monthly.

In summary, the business plan is typically gathering dust in a drawer next to a fork stashed away for lunch. More than likely the initial development process was haphazard, painstaking and a relief to finish. In reality the plan, if done correctly and implemented, provides a great vision and map for your business to succeed as well as a consistent experience for both the customer and employees. It provides a standard of operation in your business and delivers a consistent value proposition to your customers. It creates the future by laying out goals and milestones, and builds rail-road tracks to take you there. It is a cliché to say it is a “living document” but the fact is the business plan can be a multi-cylindered engine that drives you to a better business model.