Small Business 2013 – Saving Money Idea #3

Make better use of outsourcing. Outsourcing and off-shoring have bad reputations perpetuated by folks who have no factual idea about either concept. Outsourcing is simply delegating necessary tasks to people or companies outside of your business. Off-shoring is buying goods or services from lower cost regions. Yes, both concepts can cost people their jobs but your job/business should always be your priority.

Does it make sense for you to manage your books, build your website, create your own logo, etc? You may need to perform a cost/benefit analysis to answer the question but generally speaking the answer is no. Isn’t your time better spent with your customers or growing your business or innovating.

Here’s an example. There’s a one person business in my building. He is a craftsman who works 10+ hours a day building things with his hands. Then he spends a few more hours at night and on weekends managing his books, filing tax returns and dealing with other paperwork. Maybe he needs a break from actually being productive. I’d like to think that his time would be better served making things that he can sell. He can find a decent bookkeeper for $12/hour. His tax returns would cost him less than $1,000 a year and he could probably get by at about $400 a year. I’m discouraged to think that he couldn’t find the extra business or cost savings to pay for these services.

Look to outsource any activity that does not serve your customers or grow your business. A short list includes:

accounting, taxes, and payroll
web design and maintenance
social media and blog maintenance
personal assistants
lead generation (maybe)
cleaning and maintenance, and
IT services

Some businesses have also begun to off-shore these tasks. I watched a brilliant webinar where one business owner off-shored his personal assistant duties to the Philippines. I don’t have personal experience with these services so I don’t want to endorse them just yet. I get inundated with proposals to have firms in India prepare tax returns for me. They aren’t cost effective yet for me but the idea is tempting.

The whole idea of outsourcing is based on old economic principles of scale and specialization. If you find the right partners, you’ll definitely save time and money.

Protected: The Biggest Tax Mistake All New Business Owners Make (Contact for Password)

Free Business Plan Review Offer

I must be crazy. On April 16th, I posted an offer on Craigslist for a free business plan review. I wouldn’t write it for you but give you creative criticism from the point of view of a potential investor or loan officer while also testing the feasibility of the plan. There were NO takers. I didn’t promote it and Northwest CT doesn’t get much traffic.

So, as part of my goal to help 1000 businesses in 2013, I’m reopening my offer to review your business plan for free. I will sign any confidentiality agreement that you’d like. I will review it for both feasibility – do the numbers make sense – and the likelihood of getting funding for your business.

This isn’t an offer to write a plan. It isn’t an offer for funding. I just want to help you be successful. I won’t try yo sell you anything. Email me at 2013smbizsuccess@gmail.com for more info.

Starting a small business Part 9

How much money do you need to start a business?

How do you make a small fortune in the restaurant business? Start with a large fortune. That one kills at most CPA gatherings.

Lots, to answer my first question. When starting a business, you need to figure out what you need including capital equipment, start up costs, working capital, safety margin.

Capital equipment includes all of the tangible assets that you need – machines, furniture, computers, phone systems, copiers, resource material, and so on. Don’t forget Leasehold Improvements if you plan to rent space.

Start up costs include things like professional fees to get your business going, building a website, branding, first round marketing and anything else to get the business off the ground. It can also include deposits for rent, utilities, etc.

Working capital in this sense means having enough cash to pay 3 months worth of expenses without any revenue. You’ll need to plan out monthly expenses in your business plan financials. You should have at least three months worth of expenses in cash. It may take a while to get customers to buy from you and pay you. Working capital also includes opening inventory and supplies. You can’t fix a transmission if you can’t afford the parts.

Safety margin. Things go wrong all the time. Survival may rely of having a few more bucks put away to handle the problems or pay for things that you didn’t originally plan.

Make a list and get prices for each. Add it all up. Can you find the money to pay for this?

Embrace the Executive Summary – The Accelerators – WSJ

Embrace the Executive Summary – The Accelerators – WSJ.

This is horrible advice for 99% of small business startups. If you’re blessed with coding skills and an incubator, go ahead and follow this advice. If you are starting any other kind of business, with YOUR money on the line, you need to build a budget/plan. Check out the 3rd paragraph. He admits his advice is for a very narrow range of businesses. Except, skip SCORE. These guys are retired for a reason and starting a successful business isn’t it.

Starting a small business – Restaurants – UPDATED

Just don’t. “When I save some money (or inherit it or win the lottery), I want to start a little Uzbek restaurant where all my friends can come and hang out. It will be like a party every night.” How about: “I can cook so I can open a restaurant.”

A successful restaurant might be the toughest business. King crab fishing seems easier. I’ve had many restaurant clients. None of them made made any money and most of them failed within a year. It is hard 24/7/365 work. Here’s why:

It takes a special, learned skill to plan a menu. Food spoils, quickly. People’s tastes are fickle. There is plenty of competition out there. Math skills are necessary to determine the proper inventory of food – constantly. You need business planning skills to guesstimate how much food is needed each and every day. This is daunting and amateurs are guaranteed to fail at it.

Margins suck. You will be lucky to break even on food – very lucky. Do you think McDonald’s makes any money on its Dollar Menu? The price of your plate barely covers the food and prep costs let alone the service cost and overhead. I used to recommend that aspiring restauranteers calculate how many plates they need to serve each hour to reach break even. I don’t think anyone heeded that advice. Liquor sales are used to offset poor margin on food, plus it doesn’t spoil as quickly. That’s why a $15 bottle of wine costs you $45 at your favorite restaurant. Even McDonald’s can make up for its Dollar Menu losses by marking up soda and McCafe drinks by 300-500% of cost.

People suck. Restaurants need to reinvent themselves constantly to stay on top. Restaurants are a form of entertainment. People’s tastes in food and entertainment are constantly changing. It takes money to constantly change the look, feel and taste of a restaurant. If you can’t break even on food, you’ll never generate enough capital to keep up with your customers changing tastes.

Friends suck. Don’t count on them to carry your business. They expect discounts, especially on booze. They know you’re marking up the Chardonnay so they expect a special price from you. They may not realize that you’re losing money on their calamari or casually forget the last time you told them.

Competition will crush you. There is usually room for only a few successful restaurants in any area. Smaller towns may only be able to have one. That local restaurant that everyone goes to all the time shouldn’t be held up as an example for success. They have years of gut wrenching experience under their belts and low overhead that you can’t compete with. Large chains have economies of scale, distribution systems, and planning systems to beat you on the cost of everything. (Even with the advantages, are any of your local Quizno’s still open?)

You suck. Maybe, I don’t know you. But are you willing to put in the work to make a successful restaurant. There are no off hours let alone off days. You need to work every day and watch everything. I couldn’t do it. I like the occasional hike or Sunday morning soccer matches. You won’t get to enjoy anything until your restaurant starts making money. By then, you’ll need to worry about how to keep it making money.

Franchises suck. Look up Quizno’s. I used to love their bourbon chicken (for no other reason than I really like bourbon). I’d eat at my local Quizno’s a few times a week. It always seemed packed at lunchtime. Then it was less packed. Then it closed down. Franchises don’t guarantee success. They take a whole lot of money upfront to purchase and start. They also get a cut of every single sale so you have a higher break even point. You’ll have high capital requirements, a vig, and many of the same headaches as a private restaurant.

So, still want to open a restaurant? Sign here ____________________ acknowledging the fact that you’ve been warned. Better yet, here’s a link to a sample business plan P&L for a restaurant.

Starting a small business Part 8

What business should I start?

Harking back to one of my early posts, does the world really need another __________? Fill in that blank with the type of business that you are thinking of starting. I now know that the world really didn’t another CPA firm specializing in individual tax preparation and small business accounting. If you’re thinking about opening a “common” business, look around first. Drive through the area where you want to open it. Search for similar businesses on the web and in the yellow pages. These are your competitors. How are you going to take business from them? Offer lower prices? Why do you want to race to bottom of profitability? Offer better service? How will your potential customers know that?

Do we really need any more apps or social media products? Here’s a Wall Street Journal blog all about software developers. Even these guys are having a hard time finding funding as potential investors are asking themselves that question.

My original idea was to focus exclusively on consulting to manufacturers in the hopes of finding manufacturing companies that I could buy and make more profitable. I ended up doing taxes and bookkeeping. Again, the world didn’t need another one of those.

Here are some ideas:

Solve a problem – find a common problem and come up with an affordable solution for it. As a misanthropic curmudgeon, I tend to drink alone but don’t always want to finish a bottle of wine on a school night. I have not found a reliable way to preserve a bottle of red wine for more than 36 hours. Come up with a decent solution to a common problem, whether a product or service, and you may be on your way to a business.

Increase productivity – employees suck and they’re expensive. Find a way to eliminate employees through automation or process reduction. PCs and Microsoft Office killed off the secretary, ATMs killed off bank tellers and automated check-out is killing off cashiers. In my last manufacturing gig, I would have loved to find a way to automate the inspection process. It could have saved the company hundred of thousands of dollars while shortening the amount of time needed to complete an order. Find a cost effective way to provide products or services more quickly and cheaper.

Play to greed or fear – Greed and fear are the too best motivators. Black Friday shoppers suffer from both – greed to feed their consumerist appetites and fear of losing out. Find a product that plays to common greed or fear and you may have a winner.

I’m not softening my stance in these last few posts. I still don’t recommend starting a business. Become a school teacher or a senior finance analyst at your state government. But you’ve read this far so you must be serious.

Starting a small business Part 7

Do what you love and the money will follow.

Excuse me while I wretch. I love sleeping and drinking beer. I don’t think following either of those loves will result in any success. Unless…

You should be passionate about your business idea. Don’t let the passion blind you to the obvious necessities of finding customers, managing employees, marketing, etc. But you’ll need that passion to help you deal with all of the stresses of the business. If you’re not passionate about selling cars, don’t open a car dealership. The mundane will kill you if you an’t fall back on your passion. But if you love cars and working on cars, should you open an auto mechanic shop?

Probably not. Use the discipline of creating a business plan to determine if following your passion, in this particular way, will actually work. You may not be able to share your passion with other people willing to give you money (customers). Without customers, there is no business.

On the optimistic side, once you’ve identified your passion and started a business plan, maybe you will an alternative business. Maybe you don’t need a full mechanic shop with all of the overhead and employees. How many oil changes at $29.95 do you need to do just to pay rent? Are there enough hours in the day for that. Maybe you find a niche that lets you follow you passion, like auto detailing, dent repair, a car shopping comparison website and so on.

Don’t necessarily let your passions drive your decision. Let them be a spark but follow your discipline.

Starting a small business Part 6

Everything that I learned about marketing in college and before starting a business was WRONG. Marketing is the most important responsibility of a business owner. Read that again. You may think that you’re a mechanic, software developer, hairdresser, CPA, etc, but you’re not. You are a marketer. I didn’t understand this until I wasted a ton of money. I wish that I’d read Dan Kennedy‘s books before 1) starting my business and 2) before spending any money on advertising.

Dan Kennedy is a marketing guru who upends everything that you’ll ever learn about marketing in school (or in working with advertisers.) I’ve read most of his books and subscribe to his monthly newsletter. I’m not making a cent from my endorsement. Start your real marketing education by visiting his website.

I started my business as a consultancy and probably should have stuck with that. Instead, I decided to enter the highly competitive market of tax return preparation and bookkeeping. I spent thousands of dollars on advertising. This is what I had learned – get your message out and new customers will just show up. I would have made a better investment by sponsoring an open bar for a night while handing out a refrigerator magnet with each drink. The advertising didn’t work and even if it had, I had no way to measure it.

Marketing is the task of acquiring new customers and retaining existing customers. Advertising is a tactic used in marketing. Marketing should be a holistic exercise in your business. This is one of the reasons for creating the customer list recommended in Part 1. Everything that your business does must include an element of marketing as it will help you acquire new customers while retaining current ones.

Dan Kennedy’s methods and opinions are 180 degrees different from the current marketing curriculum. You may disagree methods with his methods. If you disagree with his message – you are in the marketing business – you will fail in your business.

If you can’t handle the marketing or a energy consuming involvement in marketing, don’t start a business. You’ll fail.

Starting a small business Part 4

Should I hire employees?

NO! NEVER! People suck. Quote me on this. The majority are fat, stupid and lazy. Don’t believe me. Check out the Black Friday videos on the web of people brutalizing each other to save $20 on a flat screen TV that they don’t really need. This is probably your pool of potential employees for most service businesses (restaurants, spas, daycare, etc.)

The hiring of employees requires more math just like the math in Part 3. A full time minimum wage employee in Connecticut will cost you a minimum of about $20,000 each year. There are roughly 2000 business hour in a year and the total includes minimum wages, employment taxes, and workers compensation insurance. It doesn’t include the expense of training, oversight, compliance, occupancy or capital needed to hire and maintain employees. At a minimum, will your employee generate Gross Profit of at least $20,000 each year? If not, DON’T HIRE THE EMPLOYEE! Use the calculation of annual earnings multiplied by 1.2 to determine the real employment cost of each employee. If they can’t provide at least that much in Gross Profit each year, you CAN NOT hire them. They will lead you to bankruptcy if you don’t perform this simple calculation.

Let’s extend my example from Part 3. If the owner wanted to hire a full time, minimum wage employee, she would have to sell about 5 snow globes each and every hour to be able to pay rent, pay the employee and buy more inventory.

There are more problems with employees than just paying them:

My town has an unemployment rate over 15%. There are plenty of low skill jobs available in light manufacturing and service businesses like restaurants and retail. There are also plenty of local manufacturers who can’t find skilled labor at much better pay. Some of these businesses have to import workers from 20 or more miles away to fill open positions. Why? Because almost all people have a sense of entitlement. Why should they have to be productive and responsible for 8 hours each day when the government will give them food stamps, healthcare, housing, phones and disability pay to do nothing? Our minimum wage is $8.25 per hour. These benefits, if eligible will definitely exceed that per hour for doing nothing. Slightly more industrious people will work just enough to make some extra cash and qualify for the Earned Income Tax Credit. Do you honestly think these people will work hard enough for you to be profitable?

If you hire employees, you need to be the asshole! Nice bosses will be bankrupt employees. Seriously, watch those Black Friday videos again. Do you think Steve Jobs, Bill Gates or Gordon Ramsay were nice bosses? Don’t be an idiot. They were/are assholes. They had enough experience to know that people will take advantage of you whenever they can. They knew that in order to be successful, they had to be assholes. Good employees will recognize the necessity of this, work hard, and rarely need to see the asshole come out. These people are few and far between. Most people will hate you but just fear you enough to be productive. BE THE ASSHOLE. You’ll be much happier and successful over the long run.

I’ve hired people but fired many more. I enjoy the firing, except when regretting the hiring. Fire quickly and hire very, very slowly. Do the math. If the potential employee will not produce enough Gross Profit, don’t hire them. If the employee stops producing the required Gross Profit, fire them. All of the restructurings that I’ve been responsible for were undertaken to save the company. I’ve never laid off a person and then missed them later. It is NOT PERSONAL, just business. Businesses can’t stay in business if its employees are not productive.

NEVER HIRE FAMILY! I used to go to a family owned diner where 3 generations owned and operated it. It seemed to work for them. It might be because each generation grew up in the business and understood the need to work hard and collaborate. Odds are that family employees will be your worst employees. Family members may have a deeper sense of entitlement than strangers. They may feel that you owe them because they’re family How would you feel about firing your brother, mother or father-in-law. The hassle probably isn’t worth the money. Avoid hiring family members.

Consider outsourcing. Rarely will you find a business that needs an employee for exactly 40 hours each week, Only non-experienced government technocrats believe in the 40 hour work week, If you have more business than you can handle (bully for you), or need specialties and services that you can’t provide, consider outsourcing. You should end up only paying for what you need without the burden of employees. Maybe restaurants can’t outsource french fry flippers but there’s no reason why I can’t outsource bookkeeping or simple tax return preparation. I always recommend outsourcing before hiring employees. You will still have to manage outsourced activities but you’ll have more flexibility and end up spending less money than having employees. My biggest regret in business is not following my own advice on this. I never should have hired employees.

If I sound sarcastic, I’m not. My advice is based on more than 20 years of experience with over 100 business including my own. If I sound angry, I’m not. I’ve learned to separate emotion from business decisions – you should too. If I sound cynical, good. Healthy doses of cynicism and skepticism will save you money and sanity.