Monday, June 28, 2010

Lessons Learned from a Lemonade Stand

As my children split the earnings from their first lemonade stand just a few days ago, I couldn't help but take the opportunity to teach them a little about entrepreneurship.  Here is their grade in 5 critical areas of running a business, with some application for all business owners and entrepreneurs to consider:

Not only was it a sunny and hot Saturday afternoon, but several people in the neighborhood (including me) were also just returning from a 12-hour, 14-mile hike to a peak of over 11,000 feet.  They were tired and thirsty as were many of the other neighbors.  I bought a few glasses myself as I pulled into the neighborhood, and it was a welcome refreshment.  But then I started wondering why I was paying for lemonade a second time....

Yes, they get an "F" for this critical business discipline because they failed to consider how much they needed to "reimburse" their supplier for their material inputs - primarily lemonade mix.  The surprised look on their faces was priceless when I asked: "How much are you going to pay me for purchasing and storing your supplies, allowing you to 'rent' my pitcher and cups, covering  the maintenance costs to clean what you have made dirty, and so on?"  Somehow they thought that everything they needed to run their business would magically appear.  We settled on a payment that was very much in their favor (I am their father after all).  Although the example is somewhat simple and may even seem immature, you would be surprised at how many entrepreneurs and business owners really don't know what it costs to run their business.

Since they didn't understand their costs, let alone the difference between their variable and fixed costs, they had no idea how many cups they needed to sell per pitcher to break-even on the pitcher.  As I helped them figure this out, they realized that one of their pricing options would possibly make them lose money...

Their price for one cup, $0.25, was well-researched.  They had seen competing lemonade stands charge about this much, and they felt confident their product was at least as good as the competition.  Where they fell short was their pricing strategy for customers who bought two cups.  They would charge only $0.30 for 2 cups, a great deal for their customers - in fact, most upgraded to the two cup option.  However, once they learned about their break-even point, they realized that the number of cups per pitcher they would need to sell just to cover their costs was dangerously close to the total number of cups each pitcher would generate.  Pricing can be a tricky thing, always trying to balance between offering a good value and trying to be more profitable than the market will allow.

Perhaps the most entertaining part of this experience was hearing a conversation between two of the kids.  One said to the other: "You don't deserve to make as much as me because I sat out in the hot sun selling the lemonade."  The other kid responded: "Yes I do.  I've been handling the money and that's just as important as what you are doing."  It took them a while to work out their differences, but they eventually did.  And we need to learn two things from this - first, partnerships usually don't get into trouble until there is money or something else of value to fight over.  Second, compensation, equity, and contributions need to be clearly defined and all parties need to be held accountable to them from the commencement of the business.  Simple to say, very difficult for most to implement - but it goes a long way toward creating a framework within which all can succeed.

If the saying that you learn more from your mistakes and failures than your successes is true, then what my kids learned was well worth an "A" for effort and humility.  One son commented: "I'll never make those mistakes again."  Perfect - let's hope he lives up to that.

Saturday, June 19, 2010

Experience is the Best Teacher

Confucius taught: "I hear and I forget.  I see and I remember.  I do and I understand."

I was reminded of this quote while recently reading a blog post by Mark MacLeod of startupCFO.  In Traits of Successful Founders Mark suggests that one of the common traits of Founders who are finding success are the ones who don't just know their industry - they understand it from years of experience.

Not only do I think his assessment is correct, but I also struggle to get excited about a new venture when the Founder has little or no experience in the space he/she is trying to occupy.  For example, several years ago I met an entrepreneur who wanted to create a certain kind of vitamin supplement that could be injected into a home's tap water - supposedly improving absorption and utilization.  As I inquired into his idea, he explained that he had no experience in vitamin supplements, water supply, or distributing such products.  He sensed my concern over this and tried to assure me that he was a fast learner and that it wouldn't take him long to get up-to-speed.  He was confident he did not need any help and that he could do it all himself.

His effort to subside my concern only fueled its flame.  And that's where Confucius comes in - I do and I understand.  My recommendation to him was to go and get some industry experience by working in the space, attending trade shows and conferences, subscribing to industry periodicals and newsletters, and doing anything else to immerse his thoughts into the space.  Even with just a couple of years under his belt he could vastly improve the chances of success for his idea.

He ending up struggling for several years to gain traction, and finally gave up on his idea and commented that he couldn't seem to break-into the industry and make the right connections to get his venture off the ground.

For fear someone may misunderstand what I am saying, I am not suggesting that a Founder must have gray hair in a particular industry.  I'm only suggesting that even a couple of years will make a huge impact on the viability of the idea and hopeful venture.  It is always easy to sit on the "outside" of an industry and think how easy it is.  The reality is that no business is easy, every industry has its unique challenges, and the thought leaders for each industry are grounded in the day-to-day challenges of that space.

When Confucius says I hear and I forget, I think back to the last seminar I attended.  I remember less than 15% of what I heard.  When Confucius says I see and I remember, I think back to hearing my father teach me about the importance of hard work and then seeing him live his life in congruence with his teaching.  When Confucius says I do and I understand, a flood of memories and lessons-learned come to mind, with particularly acute attention to the failures and mistakes in my past.  There is just no replacement for experience.

Monday, June 14, 2010

The Two Biggest Problems with Dashboards

There seems to be a lot of buzz around businesses having a dashboard.  Even Intuit has jumped on board and tried to provide this functionality in QuickBooks with its Snapshot Center.  For those unfamiliar with this concept, a dashboard is one place a business owner should be able to look to see all of the key metrics and performance indicators of their business.  To learn more about this concept, please visit my blog post: The Key Business Metrics Every Entrepreneur Must Know.

I need to preface what I am about to say with the disclaimer that I think every business should have a dashboard that outlines the key business metrics every business should measure, with some customization by industry and company, in a timely and accurate fashion.  I take no issue with the concept of dashboards - in fact, I fully endorse it.  My issue is related to programs and tools that are built to fulfill the dashboard function and how they are deployed.  Most dashboard programs and tools are totally ineffective and fall far short of the sales pitch that caused them to be purchased in the first place.  Why?  Here are the two main reasons, as well as my suggestion for how to get the most value out of the "dashboarding" process.

Regardless of how well you think you know your business, your model, or your key metrics, I guarantee you will not get the needs of your dashboard right the first time.  An inevitable part of the "dashboarding" process is you quickly learn what information is helpful and what information is not.  It also forces you to ask additional questions that leads to better and more effective metrics.  The challenge with most SaaS and off-the-shelf "dashboarding" programs is that they all require time, effort, and energy to set them up so they will work.  It is hard to make any changes without feeling like you have to start all over again.  Yes, I hope there will be some dashboard companies that will dispute this statement, but I have yet to see any of them fulfill on the commitment that the dashboards are easy to change once they get up and working.

Once you know what you need to track, the next challenge is getting the information into the dashboard in a timely and accurate manner.  Most dashboards pull data from the accounting or ERP system the businesses uses, and that information is usually only updated and reconciled monthly, and that information is usually not completely accurate until the 10th of the following month or later.  The purpose of the dashboard is to get real-time feedback, so 10 days late is the equivalent of a year late in dashboard time.  If the information is not right, then the dashboard will not be right, which will lead to bad decisions.  If it is not timely (meaning pretty much real-time), it is useless.

The solution to these challenges is really quite simple, but it takes a little thought, discipline, and effort.  Here are the steps to get an effective dashboard up and running for your company:

First, don't buy a dashboard.  This step needs to wait - remember, software does not solve problems.  People and intelligence solve problems, then software automates and simplifies the solution.

Second, make a list of what you think will be important to track each week.  There should be key metrics from marketing, sales, operations, and finance on your list.

Third, create and excel spreadsheet, or a google doc spreadsheet for those of you living in the cloud, and list each of the things you want to track across the top to create several columns.  Then, list the Friday of each of the following 52 weeks down the left-hand column titled "Week Ending."

Fourth, coordinate with your team where all of the information will come from for this document.  It may need to come from several people, so commit them to get the information to you on time and in the format that will work best for you.

Fifth, start tracking for four weeks and see what everyone thinks.  What information do they like?  What information do they still wish they had.  Then repeat this process for the next three months.

Sixth, once you feel you have your list of items you want on your dashboard pretty well-defined, start to investigate the best ways to automate the collection of this information into your weekly dashboard.  The information will likely come from many different software application, including your accounting system, your CRM, and more.

Seven, start to investigate dashboard SaaS tools based on their ability to pull data from all of your sources (which may include some manual input).

Eight, purchase a dashboard that solves the highest number of issues in terms of automation, timeliness, and accuracy.

Nine, spend the time and resources it takes to get your new system set up the right way.

Ten, sit back and enjoy the fruits of your labors with the critical information you need to run your business right at your fingertips.

I could give countless examples of the benefits that companies reap when they have the right information on time.  The point of this blog post is that business owners should refrain from making any type of "dashboarding" purpose until they get to step 8 of this process.  If you don't wait, you will likely end up with the wrong solution giving you inaccurate information that will be useless and waste the company's resources in terms of the procurement, set-up, training, implementation, and ongoing support.

*Author's Note: Please note that for the purposes of this post I chose to step out on a liberal limb and turn dashboard, which is usually only used as noun, into the verb "dashboarding."  I have surrounded each occurrence of this with quotation marks as a sign that I realize "dashboarding" is not a word, but it helps me communicate my point.  Thanks for understanding!

Tuesday, June 8, 2010

Getting Your Business Ready to Sell

I recently read John Warrillow's book Built to Sell: Turn Your Business Into One You Can Sell.  It is a great resource for anyone that is building a business that they plan to exit by selling it. The book focuses on 8 steps for helping business owners maximize the value of their businesses when they sell.

There is obviously a lot that goes into getting a business ready to sell and maximizing its value in the process.  In my opinion, the first four steps are the hardest for most entrepreneurs and business owners that I know.  Here is why:

Step 1 involves determining which service is the most 'scalable' and creating a replicable process for it.  This is an exercise that most entrepreneurs fight, primarily because they struggle to be objective about selecting and then building a system to replicate one of their services.  Sometimes it is driven by fear that the service will lose its value, and sometimes entrepreneurs just don't want to figure out how everything works and create a system around it.  This requires a lot of mental energy, and most entrepreneurs refuse to engage in this activity - and it costs them a lot of time and money in the short-term and a poor exit as a result.

Step 2 involves charging in advance for this "Standard Service Offering."  Most business owners and entrepreneurs like the sound of this but hesitate to change this delicate part of their relationship with their clients.

Step 3 involves hiring a sales team to sell it.  This presents several challenges, including figuring out the model and compensation program for sales reps and cash-flowing the sales cycle.  This requires a leap of faith, and even when most entrepreneurs take it, they often do not hire the right sales reps who end up costing a lot of money but do not produce desirable results.  These challenges can certainly be overcome, but most either avoid this step or have lost money trying to do it in the past.

Step 4 requires the business to stop doing all other services except the one included in the "Standard Service Offering."  This is a very large leap of faith.  This means saying goodbye to some long-time good-paying clients and it means cutting the revenue of the firm in the short-term to hopefully come back bigger, stronger, and more scalable.

Mr. Warrillow's book is worth reading, and I especially enjoyed the realistic fiction setting that seemed to make the 8 steps more real and applicable.