Wednesday, August 28, 2013

Point of Sale Rabbit Hole (tradecraft)

Two weeks ago today, we deployed a new point-of-sale system called Lightspeed. It has been quite a ride, as we adapt to a completely new POS, which can best be described as the operating system for our business. It's critical in everything we do. You see it as a customer as a glorified cash register, but the real power is in inventory and ordering product.

With 17,000 items in our system, there is a hard won business intelligence in knowing what we have, what to order, and when. The POS handles all that, but only by our constant monitoring of every transaction. Do I still want this item? Can I tweak the quantity based on popularity? Can I infer a turn rate based on sales history that allows me to order an optimum quantity for the shelf? Inventory is a zero sum game, so every new item must have a corresponding item (or value) that goes away, and the POS is the tool to acquire that knowledge. In many ways, we're starting over with a new system, as our sales history starts the day of implementation. Budgeting will be guesswork for a while.

So how is it going? It turns out that just about everyone who has switched to a new POS has the same problem: database imports. We're no exception here, as we struggle with missing entries, corrupt entries, and the biggest issue, translating the ordering values from the old system to the new system.

For example, in our old system, there's a logic that says, "When you reach quantity X, buy up to quantity Y." When Settlers of Catan reaches 2 copies, buy up to 5  (X=2, Y=3). The default for the new system is "When you reach quantity X, buy an additional Y." "X" and "Y" still have the same numbers, but they mean different things. It now means, when Settlers of Catan reaches 2 copies, buy 5 more copies. That puts 7 on the shelf instead of 5. You can see how those are different, with one system saying purchase three copies and the new one attempting to buy five. It seems like a small issue, until it's system wide and you're staring at a $20,000 purchase order for things you don't need (with all the things you do need hidden within).

So the database transition has been maddening. The imports often take overnight and the tweaking has taken days of man hours. On top of that, everyone is learning to use a Mac. Geeky doesn't always translate to technical, so there's some frustration in even the simple things, like navigating the countless windows that seem to arrange themselves willy nilly on the desktop. Then there are things like printing, which we knew going in was going to be an issue. The Mac doesn't quite print properly through the Windows server and putting the ancient printer directly on the network has been troublesome. In many cases, I confess, we bought our way out of our problems, with a new Time Vault for local backups and a new laser printer in the cash wrap area.

As for Lightspeed itself, the issue with an existing business is translating how you used to do things into a new system; business process. How can I force this piece of technology to do my bidding and comply with my work flow? Well, that work flow is often very much a function of previous tools, and it became apparent on "training day" that to take full advantage of the new system, we would have to adapt our processes to it. That right there is the main reason businesses don't proceed on a new POS deployment. Changing your business process is not something most owners are willing to do for anyone, at least if they're successful.

On the positive side, there are things that Lightspeed has greatly improved for us. For example, special orders are much improved. Rather than our work around for the old system, where we sold you an item that didn't exist, creating a negative quantity in our system, and typing your name in an Excel spreadsheet (that always seemed to lose data), we have an actual Order system. We take your order, hand you a full page order receipt (with that new printer), and the system informs us special order items are ready to be generated into a purchase order. Then it conveniently tells us what orders have arrived, are outstanding or haven't been dealt with. It's a beautiful system and we've almost learned to trust it. There's a notebook nearby with some printed order sheets, because only half the staff has discovered the beauty of this system. Training will be a topic for discussion at our next meeting.

Special orders are the Holy Grail of game stores. Doing them properly is maddeningly complex because it's essentially an interrupt in the ordering system. Many game stores won't take them, while most stores do them poorly.  Doing them right consistently is pretty hard, and my guess is we did them right about 90% of the time with our old process. Although my son's school thinks 90% is a great rate of success for educating children (Only 10% of children left behind), I consider it a failure in anything I do that's business related. This new system should bump that number up.

The new system also allows us to have store credit. We use a voucher system where you pay $5 for an event and get a $5 gift certificate. To do this, we print out little serialized vouchers that get handed to customers. It's a fiddly little system that's time consuming and results in hassle when the customer redeems them, often in a stack from a month or two of saving them up. It's about as time consuming as if they had paid with pennies, and it was our idea, so we can hardly complain. Now we can do away with paper and instead apply a credit directly to their account record, which they can redeem at any time. There's no loss of paper vouchers and the process is much faster.

Customer loyalty programs exist for Lightspeed, and we'll be looking at them going forward, once the system is stable. There are systems that replicate exactly what we had before, as well as nationalized, subscription based systems like Five Stars, which allows for customer loyalty across businesses. Whatever we choose, we have to avoid the pitfalls of the last system, namely, eating into the profits of the business at an unhealthy level. It will also require that actual targeted marketing occur with POS generated sales data. Users will have to agree to participate, if they want the benefit.

Monday, August 19, 2013

Wei Wu Wei (Tradecraft)

Wu Wei is a Taoist term meaning "non action," or being in harmony with the universe. Wei Wu Wei then is action through non action, which means all your actions are in harmony. You maintain harmony, doing no more and no less. Applying this to business, an established business has a natural rhythm and pattern, it has a harmony all its own. The nice thing about this is, although you still work hard, you work happier with less stress.

What we're often told to do as business owners is apply disruptive ideas and concepts to our businesses, in hopes of jiggering it into performing. In reality, it turns out, doing less is more. Applying a little action through non action, a better strategy is to find things to do that enhance that rhythm and harmony, rather than disrupting it. That's essentially what I try to do as my management style and it's often about what feels right, as opposed to what might work. I don't think that makes me a mystical guru, it's just how I define my gut. If you don't feel the rhythm, you often won't understand the decision.

When my business is in harmony, when the employees needs are met, when the coordination of events comes off well, when we're focused on the customers, down to the cleanliness of the carpets, then sales will absolutely go up. The business succeeds. We've implemented management meetings for the first time this year, and although we have some big projects, a lot of what we discuss is wei wu wei stuff. Acting to promote harmony in the business and ruling out things that disrupt it.

At times this means I make what appear to be illogical decisions. I'll honestly declare that I don't want products like Modern Masters because it disrupts my business process and angers customers, regardless of what we do. Sell it? Don't sell it? Mark it up? Don't mark it up? It's a massively popular product that will still only comprise half a percent of my sales this year that I swear was half my headaches. It means I'll fire product lines, distributors, the rare customer and even events. We've stopped doing Yugioh twice, for example, and only through some strict controls to maintain harmony does it continue. It's not love and flowers harmony; our maintaining harmony is a notch below draconian. You know, like public schools.

There are mistakes I'll admit making that go against wei wu wei, that disrupted the harmony of the business. Toys and used video games, for example. Most diversification attempts rarely work if they don't fit with the natural patterns of our business. An online store is something we've considered but it doesn't really fit us. It feels wrong, out of sync with what we try to do. Whatever that is, it wouldn't translate online. There have been employees that have had to go, sometimes very quickly, when it was clear there was no harmony, or as we used to say in college, "You're disturbing my wa (harmony)." A lot of ideas will get bounced back to me, especially from my manager, as "I thought you were trying to run a business like X, why are you asking for a Y thing?" This assumes you've strongly defined X. Defining X and sticking to the plan is step one.

Saturday, August 17, 2013

The Third Bucket (Tradecraft)

After the big bucket expenses of payroll and rent, we come to the third bucket, best described as "other." It contains the huge amount of money we spend on advertising (a little less than 2% of our gross sales), the enormous credit card processing fees (the highest in the industrialized world), the lightly regulated world of business utilities, (a larger small business concern than healthcare),  and being in California, sky high insurance premiums. Our insurance category includes  business insurance, workers comp insurance, and auto insurance for our spiffy van. Note the distinct lack of health insurance. I don't see that changing anytime soon with the Affordable Care Act, which pretty much bypasses us.

These four categories are two-thirds of our miscellaneous bucket, and if you're going to worry about expenses or try to hammer them down, you want to start there. Beyond these categories, there is a lot of discretion. When times are tough, the discretionary expenses are where I tend to cut, assuming I've already been doing my job on the top four.

This is were you'll see us diverge from many stores, as the remaining expenses include a lot of specific line items related to our business, or in the case of our most current year, high categories like outside services. Outside services for us included our accountant, a team of architectural consultants and IT people for our new POS system. We've been busy preparing for the future.

Lodging, meals and travel including my trip to the GAMA Trade Show, something I recommend doing every couple of years, along with the three game conventions we attend each year. As they say, you have to spend money to make money. Meals also includes the occasional employee spiff, like when I have staff work all day getting our POS up and running (this week). The least I can do is buy them a sammich, right?

So when times are tough, I sweat the small stuff. Otherwise, focus on the big expenses.

Wednesday, August 7, 2013

Paying the Rent (Tradecraft)

The second bucket in my three bucket expense model is rent. Rent is really about the lease, and there are two classes of leases. The first type of lease is the down market lease and the second type is a professional lease. Perhaps the world of real estate has better terms for these, but that's how I see them.

The down market lease is much like renting a mediocre apartment. Some guy has a space, you agree to pay month to month, and your financial exposure is limited. These leases appeal to shaky or under capitalized businesses and they're almost always in undesirable areas. Many game stores end up here either because the owners don't know any better, they have bad credit, they have strict, low budget rent requirements or their idea of a business plan to show a property manager is some scribbles on a napkin.

Once you've chosen a down market location, you've limited yourself severely. Parents will not want to drop off their children. Your neighbors may cause you problems. Your landlord is likely unresponsive. Crime is high and the area is dumpy. Primarily though, the location is just plain bad and geographically undesirable. You have created a gamer pit, mostly for older gamers and your chance at strong diversification, the key to a successful professional store, has been eliminated. You can run a store like this, a shaky fantasy den, but why would you want to? Why are so many game stores low market? This.

The professional lease is a serious commitment that requires much consideration on everyone's part. These are leases you'll usually encounter in good locations. They specify a number of years you're on the hook, and when I say you, I mean you personally. You'll sign a lease as both the business and as yourself, putting your personal assets on the line. The idea that a small business person can avoid personal financial obligation by forming a corporation is a myth.

To give you an example, our $2/square foot/month lease is for three years. As soon as I sign that lease, I'm on the hook for over $275,000. So put yourself in the position of a property manager and ask yourself, who am I going to trust to sign on the dotted line? Whose going to get to drive the Ferrari? It certainly won't be gamer den guy with his napkin business plan.

If my business fails, it now means I must personally declare bankruptcy or find a way to pay back a lease worth more than the average house. In fact, that number is what freaked me out when we moved to our larger location. It was a lease payment that I could no longer pay by going back to work. The business paid it with its revenue or I was toast.

With such a professional lease, you should now have the opportunity to build a solid business in a good location. It should be safe and clean enough where parents will bring their children and employees won't be afraid to walk to their car at closing time. It should have standards of cleanliness and repair. It should not tolerate shenanigans from your neighbors that are not specified. Our property managers can be hard asses sometimes, but I know it also works in our favor.

What Does a Lease Cover?
Leases are highly variable but they include what you have normally experienced as "rent," along with CAM charges. CAM, or Common Area Maintenance, means you're paying for the electricity in the parking lot, emptying the trash cans, and repairs to the roof or air conditioning. All of these things are negotiable in a lease, but negotiating will depend on your property manager.

Ours are all lawyers and won't play ball in most of these areas (but will in others) as they want standardized leases. However, most leases will have a bunch of junk that you'll not want to include, which means you'll want a lawyer to help you out with this. Before signing, carefully check CAM expenses and if you're serious, ask other tenants about past expenses.

Sometimes property managers pad their own compensation with these expenses. Ours owns their own maintenance company, pays themselves a management fee for managing their maintenance company and an administrative fee for administrating this management. Wow. Not surprisingly, our CAM is extremely high, probably 50% higher than it should be, but our rent is below market, so it evens out for us.

What your lease covers for repairs is also highly negotiable. It might cover interior repairs or it might not. Our last lease was like an apartment lease and when the plumbing broke, someone came to fix it. It was owned by a retired guy who was always lying on the beach in Hawaii. He would tell me to send him the bill. Our current lease leaves us responsible for everything inside the unit, and we've had to replace the toilets and fixtures along with repairs of doors and the like.

The key is to read your lease and know what you're dealing with, deciding if that will work or not. If you stay long term, which is what we're doing, it's clear in my mind that eventually I will have to fix absolutely everything. If you don't think this is fair, negotiate or find another location. When it came time to renew, we couldn't get them to cover plumbing, but we did get our base rent reduced by 25%.

I recommend you go for the professional lease. If you're going to put yourself out there and spend $50,000-$100,000 on a retail store, you should swing for the fence. Expect bankruptcy if you fail, but plan to succeed. Get your business plan sorted and expect to make a presentation to the property manager to win your case. Make sure you have money in hand to do this. They may not believe in your plan, but they'll be happy to entertain what they consider madness if you've got a fat bank account.

Thursday, August 1, 2013

The Cost of Payroll (Tradecraft)

Last August I wrote about the three buckets that comprise expenses for my store operation. All stores are going to have these three buckets, with some larger than others, and the sizes changing over time. The bucket I want to look at today is payroll. This is probably of no interest to most people, but if you want to start a small business, you need to understand the various parts.

First, nobody in their right mind does their own payroll. You use a service. It's not that it's ridiculously complicated, because it's conceivable you could keep up with and figure out all the state and federal regulations. The real reason is liability. If you screw up your payroll taxes, you're boned. The same is true with sales taxes, but payroll is far more complicated and the likelihood of you screwing up is pretty good (for me it's a certainty). My payroll companies have screwed up a couple of times, racking up fines with the state in the process. I call them up and tell them and they take care of it, eating the fines and apologizing for the mistakes.

So for $70/month, I have a GAMA recommended payroll company deal with everything. They remind me to submit my hours. They keep track of employee rates, calculate bonuses and advances, collect taxes, and I even use them to collect my workers comp insurance. They file quarterly paperwork and provide me the forms to hand to my accountant during tax time. It's money well spent and when they called yesterday to see if I was looking to switch, I laughed. It's far too much hassle for far too little savings. Keep up the good work.

Typical pay period

Workers compensation insurance adds another 3% or so to payroll costs. What you pay will vary dramatically by state. It's also important to make sure you're classified properly by the insurance company. They have wiggle room, since there's not likely to be a game store classification. I know with standard business insurance, there are significant cost differences between hobby store and book store, for example.

The California default is Workers Compensation Insurance Fund, a quasi governmental organization that will likely have the lowest rate, but they will make you crazy, as you would expect from a quasi governmental organization (I used to work as an IT contractor for them; oh the stories).

Wages include the taxes shown in the chart. It's employee gross pay, minus taxes, which all comes out of your pot, of course. We require (or at least strongly suggest) direct deposit for employees so we don't have to pay the costs of cutting and shipping physical checks.

How much you pay your employees depends on a lot of issues, but I generally don't want compensation to be a reason they leave. I often find myself competing with large retail chains, who can pay better and with benefits, but I'm not terribly far off. The California minimum wage is currently $8/hour, and we pay well above that. In good times, I tend to give bonuses during record periods and try to avoid raises. Raises are great, but when times are tough, you've painted yourself into a corner. It would be horrible to have to let an employee go because you, the business owner, let your wage growth get out of control.

We are very low tech with payroll. We use paper time sheets. We send them an email of our hours. There is no time clock or technology involved. It's also, as you see, a fairly cheap service. If I were to look for a new service, I might check out the various "cloud based" payroll companies, like Paycom. If I were an absentee or part-time owner, I would insist on it.