I chose to read this book because I hope to gain insights into starting a small business and making it grow.
The Knack was a great, filled with practical wisdom in the form of anecdotes, and very clear do’s and don’ts of starting a new business. The Authors explain that when starting a business it’s a good idea to start with a YOU plan before you do a business plan. Find out what you want out of the experience. Business is a means to an end after all. Decide what you want in life and work backwards from there. Once that’s clear, it’s time to do your first business plan. The first one should be for yourself, not for investors. Basically a simple income statement and cash flow statement, where you can determine your gross profit margin. Gross profit is the most important number in any new business, because it determines the capital you need, the volume of sales, the overhead you can afford, and the time it will take to determine viability. They stress to be wary of what they call the sales mentality. Sales do not equal cash, and sales are nothing if the gross margin is too low. Viability is the critical mass where you become sustainable, so always stay on the numbers. This process can be an emotional rollercoaster, staying on the numbers will save you from acting on emotion. Making mistakes is inevitable. Remember that every mistake is an opportunity but you have to look for it. Those who persevere win. Refuse to make excuses and take responsibility when things go wrong.
It’s important to have a clear understanding of your concept. Figure out how you’re going to market it, and how much you think it’s going to cost to produce and deliver what you’re selling. Work through what you expect to happen when you go out and start making sales. Personally, I think putting yourself in the customers shoes helps with this part, so you can anticipate what your customer expects out of their experience with your company. And then think of ways to exceed that expectation.
They explain that having a lot of competitors is a good thing, as educating a market on a new product is time consuming and expensive. And time is more valuable than money.
When putting together your final business plan and thinking about investors, it’s important to research them the same way you research your business plan. Find out what they’re looking for. Investors need to see how much they can make on their money, or how they can eventually cash out. If those things aren’t clear, they’ll pass you up.
When dealing with the bank there are some rules you should always follow to keep you out of trouble.
1. Don’t submit financial statements late.
2. Don’t run on uncollected funds.
3. Don’t be unresponsive
4. Don’t neglect the relationship
5. Keep the bank adequately informed
6. Don’t ignore the rules
7. Don’t argue when you’re wrong
Remember, your banker has his or her own boss whose job it is to hold them accountable. Make your bankers life easy and yours will be easier as a result of your efforts.
When you’re first starting out especially, track all your numbers by hand. Going through each item will get you a feel for your business you won’t get with a computer. There will be key numbers that pop up when you’re doing business that might not be immediately obvious in how they relate to your business’s health, but they are there and they are important to identify. One example used was the correlation between shipping weight and sales volume projection. A business owner knew how good his month was going to be just based on average shipping weight. Identify these metrics and keep track of them.
Over time there will be new business coming in, and there are a few important questions to ask.
How much is it, and over what time frame?
What’s the gross margin?
How much overhead will you have to add?
How long will you have to wait to get paid?
Remember that more sales usually means less cash flow. Figure out future cash needs while you still have time to address them. If the time comes that you are ready to sell your company, you’re going to need to valuate it. It’s best to get a clear understanding of EBITDA (earnings before interest, depreciation, and amortization) and use multiples of that instead of sales to determine value. Potential buyers are going to be looking at these numbers.
You’re going to have to negotiate in your business dealings and there are a few important things to remember in order to be successful. For one, listening is by far the most important part of any negotiation. The more information you have the better things will go. Also, go into a negotiation with no preconceptions and always assume the other side is smarter than you. This will keep you on your toes in meetings. Always question what you see of the surface, what you see is never what you get so get as much information as you can. In an adversarial negotiation, usually the best outcome is one that leaves both sides a little unhappy. Most of the time this will save you money and headache in the long run.
Competition in industry is a fact of life. Never bad-mouth a competitor! Trying to make someone look bad does not make you look good. When you do lose out to a competitor, don’t be a sore loser. You could always gain that customer back in the future, so lose gracefully and make an impression that way. Be accommodating with your competition. Be professional and courteous. And remember that no niche lasts forever, be ready to pivot.
When it comes to your customers, never look down on the small ones. Small customers are the backbone of any solid, profitable business. Small customers necessarily have higher gross margins, and a broad base of them makes your business less vulnerable to the loss of any single customer. If you do more than 30% of sales with any one customer, they actually have more control over your business than you do. A good rule of thumb is that until your biggest customer represents no more than 10% of your business, you’re not secure.
Business people have a tendency to fall into what’s call the capacity trap, which is discounting service to avoid unused capacity. It’s tempting to get a little more revenue by selling unused space or service, even if the margin is low. But what happens is you’re competing with yourself at that point. If other customers find out you’re charging less for the same service it will drive prices down, or you’ll lose customers outright. It is much better and much cheaper to keep customers than to gain lots of them but frequently lose them. Customer retention is the key to growth, and you retain customers by building strong relationships with them. Treat old customers like new prospects and they’ll never leave. Build face-time with your customers into your schedule, and remember that if you want to keep them, they have to like you, trust you, and want to do business with you.
Price increases are going to occur one way or another, because certain costs always rise over time. What the authors call “creeping costs”. If you don’t raise prices gradually, eventually you will have to have a big price increase which will lead to lost customers.
There will be times when you have to spend money on your business. To understand how much additional revenue you need to generate to cover these costs, you add the expenses up over a period of time, then divide that number by your gross margin. For example, if you’re hiring a new employee for 50k a year, you take 50k/40% margin= 125k in increased annual sales to cover the cost of the new employee and retain gross margin. Do everything you can not to erode margins. Your business is probably your most valuable asset, and you’re devaluing it when you reduce your margins. But beware of the rules you set, you may inadvertently force your employees to provide bad service. This is an important reason to make sure your employees know how your business makes money, so they can make good decisions when dealing with customers.
At some point you’re going to have to make a decision to grow or not. Never grow your business just for the sake of growing. You must have a strong “Why”. Bigger is not always better. Small companies have several advantages over large ones. But if you’re going to try to move to the next level of sales, don’t assume you know all the factors that led to your success. Some of them could be quite abstract, like culture or exclusivity.
Next the authors discuss employees and business relationships. Business relationships should remain just that. Working with friends only leads to problems and tough decisions down the road. To run smoothly, recognize what you’re good at, and hire people for what you’re not good at. You don’t have to be a manager. If you have issues with theft, deal with it by improving your systems, not by not trusting people. Lack of trust will lead to a toxic work environment. There will come a time when it becomes necessary to turn the day to day operations over to your managers. Make sure to get someone you trust to help you with the transition and find other ways you can contribute to the business. This might be more difficult than it sounds. When you’ve built your business from scratch you’re going to tend to want to control everything. Letting go is an important part of the building process. I would imagine this must be what it feels like when your kids grow up.
When hiring employees, it’s very hard to tell in advance who your best people will be. You have to watch how they grow and perform over time. Some people will let you down and others will surprise you with how great they become. The most powerful recruitment tool you have is your business’ culture. Every day you have opportunities to shape that culture, and it’s important not to let them slip by. Some ways to build culture are having mutual trust, which requires clarity about the rules. People need to know what is expected of them and what they can expect in return. Also, appreciate the contributions that employees make. All good things you get from business come as a result of the efforts of your people, and you need them to know that you know that. Finally, remind your employees that they are valued members of a community, that they are a part of something bigger than themselves and that their work has a higher purpose. The culture in your business needs to be consistent throughout your company, not differ from department to department. And if you run into cash-flow problems, layoffs are the costliest way of dealing with them. It’s better to fight against creeping expenses and unnecessary luxuries regularly. Creating an environment where people care about the company’s welfare goes a long way in keeping costs under control, so people need to know that the company cares about them.
When it comes to hiring salespeople, hire salespeople, not entrepreneurs. Entrepreneurs will eventually leave you, it’s in their nature to want to start a business of their own. You want people that are going to stay with you forever. Be mindful that hiring salespeople from competitors can have its problems. They often have bad habits, and are untrainable. Hiring new salespeople right out of school is not advised because they almost never last. No one is ever happy with their first sales job. I can confirm this in my own experience. With nothing to compare your current job to, you seek greener pastures, usually not knowing how good you have it. Another thing to watch out for is hot shot salesmen. The do a lot of business, but closing sales is usually the only thing they think about, which can be bad for the business as a whole. Your salespeople represent you in the marketplace, so it can be a better model to pay your salespeople a salary rather than commission. Many salespeople will resist this, but it gets people to work better as a team. One strategy that the author used to achieve this was to make the transition from commission to salary over time. Another way to bring people together as a team is to have continued training with the departments mixed together. The departments get to know each other better, and they also get to understand what they need to succeed.
I am out of characters in this email, so I’ll be sending another one with Book Report continued in the subject field.
The book begins its close with some good advice about getting good advice. Sometimes being too close to a problem makes you lose perspective, and the best way to solve it is to get someone from the outside to take a look. Someone not from one of your departments who can look at the issue objectively. The people in your departments are going to look at the problem from the perspective of those departments. An accountant is great for looking at things that already happened. And a lawyer will look at things with liability in mind. But they often don’t see the big picture.
Another good bid of advice we’re given is that you can do almost anything you want if you have steady income. It doesn’t necessarily have to be as much as you need for whatever you’re planning, but you need that steady income month after month to take on new ventures.
It’s good to keep in mind also, that there are plenty of cashed out company owners and business people out there that are looking for ways to work because they have fun doing it. If you can provide a place for them within your business so they can make some money and do what they love, they can have a huge impact on your business and you can learn a great deal from them. You can and should be learning from all the people you meet. Regard everyone you meet as a potential source of tips to improve your business.
Don’t ever assume you know what’s in a contract unless you’ve gone back and read it.
Be prepared to carry new sales people for a year before they produce enough to justify bringing them on. Teach your salespeople how the business makes money.
Finally, watch your numbers carefully, and when they change figure out why. I’ll close with the last line from the introduction. A smart person learns from his or her mistakes. A wise person learns from other peoples mistakes.
I enjoyed this book and I look foreword to other books by these authors. Bo Burlingham co-authored The Great Game of Business, and A Stake in the Outcome, and wrote Small Giants.
