Small Business Coffee Hour

“Bottom line John, business is risky. And I’m not saying this to discourage you from starting a business, I just want the blinders off and any misconceptions out of the way. Seven out of ten fail within the first five years. This is not a made up statistic.

“Now, what should you do about this? Mitigate the risk.”

“Miss-a-what-za?”

“Chunk down the risk into smaller parts.”

“Oh.”

“If you want to start a small manufacturing facility, before you first jump in and invest in the equipment, how about getting someone else to make the product for you, see if it sells and then invest in the equipment. The last thing you want is a bunch of expensive machinery sitting around the garage taking up space.”

“Taking up space where the treadmill could go.”

“Mitigate the risk as much as possible, John. Remember what I said about figurative and literal insurance in business. The literal insurance is the property, content, casualty and several liability insurance that you need from an insurance agent. The figurative insurance is the steps you take as a business owner to reduce the risk of starting a business. One of the big steps is marketing research.

“In small business, if you do not perform some sort of marketing research before going into business, you might as well be stepping up to a craps table in Vegas and putting all of your chips in. Business is risky period so why get a million from the bank without first checking if it will work or not?

“The market research you should conduct primarily boils down to polling or surveying the target market and asking: how much will you spend and how often will you frequent my business? These answers should result in a revenue projection but also, can lead to valuable input in order to refine the business. Questions for improvement center around questions such as ‘what do you like about this product or offering and what do you not like?’

“Also, you can leverage technology such as Google Adwords to perform some marketing research. If you own a brick and mortar business that is focused on local customers, you can set up an AdWords ad to target local folks only. The methodology involves having a website in place in order to capture e-mails in order to open the communication lines and again ask ‘how much, how often, what do you think about some of my ideas, business name, product offering, etcetera.’ All of this is valuable information needed before going into business. You can also use a Facebook Page in a similar manner in order to open the lines of communication and ask.

“Remember also, marketing research does not stop once you get the doors open or the website up and running. It is imperative to continually keep a finger on the pulse of your customers. The net-net is that you can tick off customers at anytime and need a way to catch if this has happened and then apply a remedy.

“Also, don’t forget the paradigm of cash flow and assets and why it is better to build a system and not a bucket.”

1) Build Systems, Not Buckets

Figure 12-1

“I want you to build a business system that provides systemic leverage, not necessarily financial leverage, and potentially delivers passive cash flow and a high rate of return down the road. Within the business, the owner should be as much of an interchangeable cog as possible for two reasons. One, if the business is owner reliant, then the owner will never be able to take a vacation or have a night off and two, the greatest chance for success lies in creating a system that delivers a consistent product or service and customer experience time and again. If the customers don’t experience a consistent, quality experience, they will stop coming back.

“This standard operating procedure is detailed in Michael Gerber’s book, The eMyth Revisited. Start with a personal mission statement first, then develop the business mission statement, set specific goals in the business and then move down into the organization chart, the management strategy, the people strategy, the marketing strategy and the systems strategy.”

“First make sure your personal financial house is in order because you will take it with you. If it is not, then get on a budget, read a good personal financial book, pay off bad debt, get savings in place. Next, make sure there is demand for the business by conducting marketing research; poll your target market and ask, how much and how often and remember, the marketing research does not stop once the doors are open. Continue to communicate with the customers.

“Remember also, the business plan should be an implementable document.”

“Imple-pa-mento-ble!”

“It should not be a sugar-coated, blue-sky document that lives in a drawer. It has key pieces and sections such as the mission, vision and goals and the marketing and operations sections that can play a key part in what you are doing. Review your plan often and ask, what has changed? If you are negatively deviating, find out why and make course corrections.

“Do the same with the financials. Projections are necessary and again, those projections should not just be put in a drawer. Insert an extra column next to the monthly income statement and cash flow projections. Label it ‘actuals.’ Next to this, insert another column and label it ‘variance.’ The projection number minus the actual divided by the projection results in the variance. For example, if $10,000 are projected for sales in November and the actual number ends up being $8,000, $10,000 minus $8,000 equals $2,000, and $2,000 divided by $10,000 is 205. Thus, you deviated by 20% … what the hell happened? Bad projections? A winter storm? It is imperative to track and answer the deviation questions.

“In the end John, you are the CEO of your business. You are responsible for the marketing, operations, financials, accounting, HR, legal, product and technology of the business. If you do not have a well-defined system for handling all of this, more than likely, you will end up doing all of the jobs yourself and ultimately, the ball will get dropped at some point. This is why I strongly urge you to build a system and not a bucket, both as a defensive measure and an offensive measure.

“Well, what do you think John?”

“I think I don’t want to start a business,” he said.

I laughed but also told him, “One step at a time. Remember, it is not necessary to jump all in at once; a building effort is not a wasted effort. If you start developing an operations manual, a website, a mission statement and a business plan, then a strong foundation is being built, relatively for free. It can be used down the road whether you start next month or next year. So, just get started. The effort is not being wasted and you now have many methods to help mitigate the risk.”

“Makes sense,” he said, “but what if I need income now. What if I just lost my job and need income.”

“Then definitely make sure you take the steps I have outlined and one-thousand percent make sure to conduct marketing research. Just because you are desperate and motivated does not mean that you can sell surfboards in the middle of the desert.”

“I think I am ready then,” he said. “When should I start,” he asked.

“Start now.”