Thursday, January 29, 2009

Three Rules Every Family Business Should Live By

If you own or operate a family business, you should consider living by the following three rules as you carefully try to lead your company:

RULE #1 - NEVER HIRE FAMILY
. OK, I know you have to hire family because it is the family business. But if you have to, hire them like you would anyone else. Interview them and make them go through the hiring process just like any other employee. Hire them into a position they deserve because of their background, education, experience, and ability. Failure to follow these simple but very often disregarded guidelines result in overpaid and under-productive family employees and frustrated and sometimes disgruntled non-family employees.

RULE #2 - NEVER PROMOTE FAMILY
. Yes, it is actually OK to promote your family, but you better only promote them if they deserve it. Being related to you does not merit their promotion just as not being related to you merits anyone else's promotion. You will lose your best employees if you do not approach this with great care and concern.

RULE #3 - NEVER FIRE FAMILY
. If you would have obeyed rule #1, this never would have been an issue. If times are tough, everybody knows that family will be the last to go, or will they? A well run family business will leave family out of the equation in its evaluation of and overall contribution from each employee. I have seen family businesses lay off their own flesh and blood, and the business was always better off for it.

The underlying theme is this - try and treat everyone, even family members, equally and fairly.

Wednesday, January 28, 2009

The One Thing Entrepreneurs Forget

When we dream of what we are going to do with our new business, we sometimes forget the first requirement that the business or some other resource must fulfill. We have to cover our monthly bills to truly make progress on our venture.

I know this may seem very simple and logical, but you might be surprised to realize how many times this is forgotten in the business formation process. If the objective is to make this new business our full-time priority, the first phase of any business is to get it to a point where it can sustain itself and the founding team.

Regardless of how much investment capital or loan money you may have raised to start your business (BTW, those who raise external funds to start their businesses are an overwhelming minority), your business has got to have a solid plan to get to break even for both the business and the founder(s). The longer it takes to get there, the bigger the whole is from which you must climb before you can ever progress into a sustainable and successful business. In fact, it is always the most difficult and most expensive to raise money for your business before you have shown you can at least cover your monthly expenses.

An inability to meet the monthly bills of the business and the founder(s), or "cover the nut" as it is called, puts the entrepreneur into a tough spot. The focus changes from doing the things that will build a long-term business to putting food on the table for the family tomorrow. If an entrepreneur knows the business and his/her personal expenses are covered, they are free to focus on developing and growing their business. This one point will make all the difference in the success of the company.

Tuesday, January 27, 2009

Collections is Key to Good Cash Flow

Is your cash tied up in accounts receivable?  If you collected your receivables would you be able to make payroll and buy the inventory you need?  For financial help for small business there are some important considerations for cleaning up your old receivables and making sure you collect your receivables before they get old.

First, we need to understand how long it is taking you to collect.  The most commonly used ratio to determine this is Days Sales Outstanding (DSO).  The calculation is not difficult:

(Accounts Receivable Balance / Estimated Annual Sales) X 356 = DSO

This will tell you how many days, on average, it is taking you to collect.  Is your number too high or too low?  First, what terms do offer your customers.  If you offer net 30 terms and your DSO is 45 days, you may have some problems.  Second, what is your industry's average DSO?  Are you higher or lower?  These two factors will give you a benchmark for how you are currently doing.

There are many initiatives a company can implement to improve, or reduce, its DSO - which will result in better cash flow for the company.

Tuesday, January 20, 2009

How Much Should I Pay Myself?

Entrepreneurs and business owners often ask and wrestle with this question. We need to consider your replacement income, your monthly "nut," and your entity's tax structure to begin to answer the question.

The first factor to consider is the cost to replace your position in the company. It is very important to not confuse business ownership with business employment. If you are the President and CEO of the company, then what are Presidents and CEOs of other companies like yours earning as a salary/wage every year. Again, please separate ownership from wage. In most companies the entrepreneurs tend to under compensate themselves relative to their peers, mainly because they are in what is called "cheap labor, high productivity" mode.

Next we need to consider what you need personally to survive. I listened to a successful entrepreneur give a 30-minute speech about 6 months ago and I had one major take-away. He articulated that entrepreneur's need to make sure they are making enough to pay their personal bills and cover their personal expenses in order to be the most effective at growing their companies. If all we are ever concerned with is how are we going to feed our family next week, the business suffers.

With these two factors under consideration, we should be able to arrive at a reasonable and fair compensation plan. Maybe it is $50,000 per year, or maybe $100, 000, or more. If the number is higher than the company can afford, then we need to figure out how to get the company to where it can afford to fairly compensate the entrepreneurs and owners. If the business will never be able to feasibly afford them, then we may need to consider drastic alternatives - like starting another business or re-entering the workforce where we can receive compensation commensurate with our contributions to a company.

The last consideration is how to receive the compensation. Your company's tax classification will best determine this. Please check with your tax adviser before implementing any of these strategies. If you are a sole-proprietorship or a dis-regarded entity filing on schedule C of the 1040 form, then you just pull money out of the business at regular intervals, or you can pay yourself as an employee, or some combination of both. All of your earnings will be subject to self-employment tax. If you are taxed as a partnership (Form 1065) then you will most likely have to pay self-employment tax on all of your earnings. Hence, you can select any of the forms of payment mentioned for sole proprietors, the only difference being that profit distributions will most likely be treated as guaranteed payments. If you are taxed as a C-Corporation, then you must take a w-2 wage and you may be able to loan yourself some of your compensation. If you are taxed as an S-Corporation, then you will most likely receive a portion of your compensation as an employee and a portion as a distribution (which is not subject to self-employment tax).

In conclusion, a fair and reasonable wage for the entrepreneurs is a critical part of the business plan and should be reviewed regularly.

Saturday, January 10, 2009

Pay Sales Staff for Gross Profit, Not Sales

Top-line sales are much less important than gross profit - so pay your sales staff accordingly. Most businesses struggle with how to structure the compensation for sales reps. We don't want it to be so complicated that no one can understand it. But we also need it to incent the behaviors that will most help the business achieve its objectives.

If a sales rep is paid just to bring business in the door with no other qualifying criteria in place, the sales rep will eventually bring in a lot of unprofitable business. In fact, I watched an entire company drop into insolvency and then permanently close its doors because one sales rep was paid very well to bring in very unprofitable business.

We are in business to generate sales, from which we subtract our direct costs (also referred to as cost of goods sold and cost of sales). The amount left over is called gross profit. Our gross profit needs to exceed our fixed and overhead costs, or we will be in trouble in a hurry. So, we need sales reps who create gross profit for the company, not sales. Start changing the focus of the sales reps now. The competing theme to this is the desire to bring in more sales.

A good sales manager and CEO will define the parameters within which sales reps may work to get business, and they will give the largest rewards to sales reps who help the company achieve its desired gross margin.

Friday, January 2, 2009

Innovate to Survive and Thrive

Every business owner can learn from and improve their business from the example of the US economy. Please allow me to explain: When an economy is in a recession, it experiences negative growth. In other words, it gets smaller instead of bigger. Even just a little bit of negative growth can cause significant turmoil, as we are seeing in today’s economic environment. The same thing will happen to your business if you shrink.

When a company’s revenues start to decrease, it quickly finds its Break Even point – which means that the gross margin is barely enough to cover the fixed costs of the company. For smaller firms, this often means the owner no longer can take home enough compensation to pay their personal bills.

In order to survive its shrinkage, the company has to look at cutting back its fixed costs, but that will usually be expensive and often disruptive enough to hurt the firm dramatically. Usually the five most common fixed costs in a business are payroll, rent, advertising/marketing, fixed asset costs (depreciation, interest, repairs maintenance), and insurance. There may be some excess in these areas, but any major cut-backs in these areas often cause a lot of problems and can hinder the company’s chance for survival. I will avoid discussing each of these fixed costs now, but that may be the topic of a future blog.

So what does all of this mean? Rather than accept shrinkage, it is time to find new ways to grow. The companies that thrive through this recession and then position themselves to really grow when the economy turns are those who aggressively innovate through this time. Is it painful? Yes. Could it cost some money? Yes. Will it consume time and resources? Yes. Will it be worth it? Don’t take my word for it – do it and then let’s see what your financial statements say when the economy turns.

Thursday, January 1, 2009

What Every Entrepreneur Should Learn from the Emergency Landing in the Hudson River

As I watched the footage from the Hudson River of US Airways flight 1549 emergency landing and rescue, I couldn't help but make a few comparisons to the journey of every entrepreneur. Here are just a few of the lessons we should all take very seriously.

First Lesson
You want Chelsey Sullenberger flying the plane. This guy is as seasoned as they come, and he knew exactly what to do when the double-bird strike occurred. He had trained his entire life for an emergency like this, and he handled it masterfully. Even if you do not have Chelsey Sullenberger running your company, you need to surround yourself with people like him. People with the experience, training, and background to advise you at every critical point in your business.

Second Lesson
The leader is the last one off the plane. The pilot walked the plane twice to make sure everyone else was safe before he exited. Most entrepreneurs know how this feels. They are the first to forgo a paycheck if cash is tight, and they are the first to make sacrifices of time and resources for the sake of the entire business. Do not become an entrepreneur unless you are completely comfortable with this.

Third Lesson
A motivational focus brings people together and creates synergy. Few of the 155 people on this flight knew each other before they boarded this plane. They are all now friends for life along with all who helped in the rescue efforts. The human spirit is powerful, and we catch a glimpse of it when we see such emergencies. Successful leaders understand this principle and they bring people together to a common "rallying" cry. With everyone motivated on a common purpose, much more good is accomplished than each person working independently with varying motives and incentives.

Conclusion
These and other lessons helped avert a disaster and saved 155 lives. When applied to your entrepreneurial efforts, they can also help you avert disaster and successfully grow.