Tuesday, June 30, 2015

The Question (Tradecraft)

Prudent prospective small business owners inevitably come to this core question:

How do I predict my revenue numbers?

In other words,  how do I know if people will come, if I can successfully advertise, if my business plan makes any sense at all? How do I know if it will work? This is a critical question that separates the entrepreneurs and small business owners from those who don't have the stomach for it. The answer, of course, is you don't know.

It's a leap of faith. You can research this leap, calculate the distance, the acceleration required to make it up your variously sized capital ramp, but in the end, it's a leap. Those who crash and burn sometimes have miscalculated but others were victims of variables that were unknown or changed faster than they could adapt. The public will call those people fools, public including your friends and family who might snicker behind your back.

Those who succeed at the leap are not applauded for having balls of steel or predictive powers. Nope. They got lucky. Perhaps they tapped into some American business cabal that allows them into the upper echelons of society. Because small business owners are rich, right? People don't know anything about your leap because they've never contemplated The Question. They also don't know you make more leaps, more calculated risks, all the time. After the first couple of volatile years, your chance of failure is level, but it's just as high in year four as it is in year fourteen.

Once you start a business, successful or not, people will see you as a cow to be milked, an ever present source of money to be given back to society, since you didn't really earn it anyway, due to your lucky stunt ramp. Every school will see you as a potential donor, the state will insist on fees and taxes the public is unaware of, some of which they just created, and the federal government will hold you to a tax rate big business would scoff at. Especially in the beginning, every one of the people asking you for money probably makes more money than you do, including government employees, teachers and enlisted military personnel. All of them.

My original point though, is there are those who will have a crazed glee in calculating the ramp angle and those who will shake their head, dismissing the insanity. Know which one you are. Crazy ramp angle calculators need people to help construct ramps too. If you're stuck in a job, doodling ramp calculations, make the jump. You'll never stop doodling, ever, even if you fail.  If you're working a job and just can't wrap your brain around the lunacy of these people, let it go. It's as crazy as you think.

Sunday, June 14, 2015

The Problem (Tradecraft)

You know what the problem is. As a business owner, you know.

Yet we're inundated with customer feedback forms, requests to speak about our "incident." Tell us where the bad company touched you on this doll. Initially this strategy felt like people were listening. Companies were being pro-active in tackling customer complaints. They really cared.

Nowadays, absolutely everybody does it and most requests for customer feedback are ignored.  It feels like they just want us to touch their creepy doll. They're going through the motions. They know what the problem is and: a) don't want to fix it, b) lack the power internally to fix it, or c) they're measuring whether their bad behavior is annoying enough people to have a financial impact, like General Motors with dead customers. But not knowing? They know what the problem is. They know.

The helpful part:

If you don't know, find out. Before you go out and annoy your customers with one more survey, do some house cleaning. Make a list of all the problems you know about in-house. Lines too long. Clutter and cleanliness, your windows clogged with old Pokemon posters, That Rude Guy (TRD), the things that have kind of bothered you but not enough to impede operations or keep you up at night. Work on all those things first. Then ask the question and ask it publicly.

Open it up to mass criticism and accept your suckitude. At this point, in stage two, you've already decided you're about fixing what's broke, you've already done a lot of work to improve your business, as opposed to willful neglect, the usual small business approach to problems. After you've completed all your known improvement projects, you should welcome customer feedback and more projects for improving your business. Also, customers will notice your efforts and will be more likely to add problems into the hopper, because they know you'll do the work. But don't ask just to ask.

Add all these things to your list and never stop improving. Eventually these "dumb" things that weren't big enough to annoy you will go away and you'll be working on process improvements that delight customers and make you money. But you'll never get there until you take down those old Pokemon posters first.

Tuesday, June 2, 2015

Credit (Tradecraft)

This is a bit of a rambling post about credit.

We are told early on to make sure our personal finances and our business finances are separate. Commingling is the term to describe the grave offense of mixing your personal monies with those of your business. The basic advice for building business credit applies to us: incorporate (including LLCs), acquire an EIN number, a business bank account, and business credit cards.

After these basic steps, I highly recommend you draw a business salary so you can separate your personal day-to-day finances from the worries of the business. I can tell you there have been several personal financial crises over the years that would have been far worse if the business was in trouble, and the reverse as well. However, when it comes to credit, separating out personal from business is much harder.

There is the myth that once you establish your business and form a corporation, your business will be on the hook for future debts and not you personally. The truth is there is no creditor that I know of who will allow your small business to take on risk without your personal guarantee. This means your personal credit is always a factor with business credit. If you have personal credit problems, you have business credit problems. Worse, it's a double standard, which I'll get to a little later.

Working with creditors in the game trade will help your business, but there is no building up of a business credit history as with your personal credit. Alliance and ACD don't report to Experian that you paid your bills on time in May. My business credit report (yes, that exists) has three creditors on it, despite having over a dozen actual accounts open that would show payment histories of many hundreds of thousands of dollars a year.

This formal credit report is generally ignored by everyone, and in the game trade, your Dun & Bradstreet (DUNS) number is also not considered.  The information on my business credit report is vastly incomplete with the data about annual sales and employees probably reported at various times through our history, the income when I first opened and the number of employees probably seven years ago (we have six now).

My incredibly incomplete and inaccurate business credit report from Experian 

The reason to open business specific accounts is really for separation purposes from your personal credit. Although they'll all require you co-sign on a loan or line of credit, you want to quickly establish business specific lines to keep your personal credit clean. These won't show up on your personal credit report. In fact, they often don't show up anywhere, at least while they're current. The double standard I mentioned is that often your business debts, if they're on your personal credit report, will be judged against your personal ability to pay them back, impacting your personal ability to take out credit.

For example, I have a construction loan that landed on my personal credit report. It's about the size of my mortgage payment and based on my personal income alone, it's impossible for me to make all my payments. I'm an average income individual with essentially two mortgages! Logic plays no role in this, banks just assume that I'm hyper leveraged, since they won't include the businesses ability to make payments. When you've commingled your credit like this, you've done yourself a grave disservice (I'm working to fix this).

Likewise, when I was disputing a fraudulent equipment lease with a credit card processor, my personal credit was dragged through the mud while we came to a settlement. A $45 lease payment by my business grossing hundreds of thousands of dollars a year was hurting my personal credit. The stupidity of that is how many big companies get small businesses to put up with their shenanigans.

The only time I've been asked for my business incomes ability to repay a loan was during the mortgage crisis, when the bank wanted me to have a larger income than I was reporting so they didn't have to consider me for a government sponsored repayment program. They took my business statements and tax forms and showed they had absolutely no idea how to value a business or what a reasonable profit margin looked like. I was wealthy in their eyes, making about three times my actual income. Three times my income wasn't a bad guess if I were working in financial services, as they were. This lack of even a basic understanding of how small business works is probably why banks rarely consider your business success when you're looking for credit.

This puts you in the incredibly frustrating place of having a business income in the hundred of thousands of dollars, yet when you apply for a loan, being treated like you've got the income of a store manager schmo.

It's a common complaint across all small business, and my guess is it has a lot to do with small business default rates. According to my credit report,  the late payment rate in my industry is roughly 20%. That construction loan I mentioned is from a community funding non profit with a default rate of a staggering 10%. That is an enormous number! Credit cards, in general, average 2-3%.

So keep your personal and business credit separate. Keep your nose clean or both will be impacted. Your best bet if you need money is to amass the cash.