Opportunity Costs

Take Control Of Your (Business's) Money

Has it been a month already?! Well, I'm back and you're going to see some new and interesting (I hope interesting) formats coming your way. 

Late summer is an interesting time of year. Lots of business owners will tell you that August and December are their worst months because their customers disappear. While I have a whole bunch of problems with that kind of thinking the one counter I want to offer in today’s post is that this time of year (and in December) is a great time for a  little reflection in your business.

It’s important to pick your head up from working on deliverables to make sure you're making decisions that keep your business moving forward - in the way that you want. That means taking a look at how your managing your money everyday. Whether you’re just starting out or running a 7-figure business, understanding your budget will help you make better decisions when it comes to making bigger time, monetary or relationship based investments. And yes, even if you feel like you don’t have any money you still need to think in terms of a budget.

In today’s post I am going to walk you through the concepts, tips, and tactics that go into organizing your cost structure so you can price as strategically as possible. This post is going to explore the major cost questions and concepts that you should be considering when you are bringing your good or service to market. The goal is to avoid what I’ve seen so many other entrepreneurs do and just use mental math to think about the costs of doing business – and ultimately get themselves into a lot of trouble.

To start you need to understand that there are two kinds of costs, well there are more than two but, let’s start with the two big overlying arches of costs. There are explicit costs and implicit costs. Explicit costs are costs relating to money that is used to purchase your resources. That can be inventory, wages, works in progress, and even the packaging your products or service go into. They are probably the costs that you are the most familiar with because the money comes right out of your pocket.

The other category of cost that is a little sneakier to nail down is the implicit cost. An implicit costs is the cost associated with the opportunity either lost or gained in choosing how to use your resources. It’s also known as opportunity cost. Think of it as the cost of what you give up to gain something. It’s these two broad concepts that are at the hinge of every business decision you will make. You have to decide not only is the money your spending worth the resource you're spending it on but, what else could you spend that money on – could that money be best utilized in some other part of your business?

In answering the “what if” cost questions you have to break out your costs a little more to get a better understanding of how money is flowing out of your business. You do this by breaking your costs down into two major categories. I know another pair of terms but these are costs that you can put directly into the cost analysis worksheet that goes along with this post.

The first are variable costs.

Variable costs are costs that vary with your level of output or production. These are costs that are either growing or shrinking based on how busy you are. If you’re a restaurant owner it might be the produce you purchase that week and if you are a small service provider like an attorney it might be the amount of letter head you print. As you need more stuff to bring your product or service to market you need to spend a little more money. It’s crucial to keep track of these costs over time as they will not only help you keep your pricing competitive and profitable but they provide some insight on how your business is doing in the long term. You might be able to discover your busier times of the year or get some insight on how successful your advertising is for example.

To best track your variable expenses think about them in small groups. You don’t have to list every single purchase you have but think about the types of purchases you make regularly that may change over time. Are they office supplies, perishable food, wages, manufacturing costs, etc? Based on your level of activity you may even be able to negotiate lower costs per unit/purchase with your suppliers. Trying to discover ways to create strategic relationships with the people or businesses you buy from is a great way to keep those variable costs as low as possible and to protect that profit margin of yours.

The second type of costs to isolate are the fixed costs.

And, just like their name sake these are costs that remain relatively the same over time. These are the costs that you might not have input in and just have to pay as part of operating your business. They might be costs associated with rents, utilities, bank loans or notes, business or property taxes, mortgages, interest payments…I think you are getting the idea. Again these are costs will not change with your level of output. These types of costs are usually set by contract and can be revisited periodically.

If don’t have many fixed costs now I would encourage you to think carefully about the contracts or agreements you get into as you ramp up your business. Incurring overhead costs aren’t 100% avoidable but you can try to insulate yourself by doing your own due diligence and even just having open conversations with your providers about the type and stage of your business. Just like your variable costs, don’t lump them up into one number. Go through each month and pick out the groups of costs you are responsible to keep track of. It’s important to drill down a bit with these because you can revisit them periodically to negotiate rates and payment terms as you develop a history with your creditors.

When you add up all your variable costs and fixed costs you get to see your total costs. I encourage you to break these costs out over a monthly time span because that’s naturally when you’ll be paying for them and it’s a little easier to visualize how money is flowing in and out of your business. That monthly cost figure you arrive is called your cost of production and you can do a few neat things with it.

First you can divide it by say the number of hours you worked or the number of products you sold that month to get an idea of the average cost per unit. Remember, this isn’t how you should be directly pricing your product or service but it is a good idea to see how your costs are spread out over your business each month.

You can also use the worksheet. This worksheet is a great tool as not only does create a visual for your biggest cost drivers but it also maps it against a Pareto Curve. If you’ve ever heard of the 80-20 principle, this is the same guy. That curve is a guideline for efficiency. Guideline not a law and it might not always be appropriate for you.

It’s a starting point.

What this curve shows is where you might be able to find efficiencies in your costs. Costs that are consistently outside of this curve should be explored and attempted to be reduced. Now in some cases you might not be able to with say a rent cost if you are already signed into a year long lease but, that’s not to say you shouldn’t be thinking about a possible move or negotiation later on.

Use this worksheet along with your financial statements to develop as deep an understanding as possible in your costs. Keeping them as efficient as possible will help you keep you profitable in good economic times and even not so good economic times.

Here's Why You Can't Fake Agility In Your Business

What does it mean when an entrepreneur or business owners says that their business is agile?

Does it mean anything?

It does.

Business agility is a way of describing how quickly and efficiently your business adapts to changes in tastes, expectations, and needs in your market. It also describes your ability to create change in your market. The fervor over agility started in tech/software companies and is being applied to businesses in almost every industry and sector.

Being agile, in my opinion, is as important as focusing on being cost effective, delivering the most value and constantly creating an awesome experience for your customers. As an entrepreneur at heart, you have a natural inclination to being agile - it’s how you keep your business moving forward.

If you’ve been following me for a bit you know that I am not a fan of buzzwords. When it comes to business agility I turn down my jargon-filter a bit because being able to change in your market and make good decisions in your business is a big part of good strategy.

Sadly, just like any good business concept this too gets butchered in the corporate world. Faking agility is probably the worst thing your organization can do.

Here are 5 tips to help you spot an agility faking organization or team.

1. No real buy-in from your team or staff.

This is where everyone is on board in public and when an opportunity to change comes up there’s nothing but static. How can you be agile when you’re support staff is constantly complaining about the constraints of their roles? Change is hard. It’s easier to just keep your head down and work like you always have. It’s that familial force that impedes your agility. Watch for the overly enthusiastic in person that show signs of underperformance on the front lines. It’s up to you as a leader to create an environment where the people you count on are invested in you or your business’ value to get to real buy-in.

2. Calling yourself agile but not adopting the agile mindset.

Being agile in your business means that your mindset and your business model shifts a bit. Being agile means you are spending time developing communication, collaboration, feedback and even incremental delivery processes. Pro-Tip: It’s focusing on the process that matters here - lip service = no real buy-in. (See #1.) Seriously, focus on the process.

3. Always serving up the same product or service.

Competitive advantage is a fickle muse. It’s not something that you get once and then you’re done. For your business to be agile you need to be able to take time and evaluate what your market is doing. A big question to answer is: “Is my business still solving a relevant problem?” It can be tough though, there’s always a little resistance when you’re standing on a precipice of change. Don’t fear change and don’t fear failure. It’s in both change and failure that you will keep figuring out how to best serve your customers and most importantly how to keep creating value for them.

4. No active leadership.

A big term in agile business principles is the idea of the scrum. Since I’ve been playing rugby for so long this is one of my favorite parts of being agile. An agile scrum represents your team or the project you’re working on. Part of being in a scrum means that there is a designated leader or owner for the scrum. It doesn’t have to be the same person all the time and the person in charge of the scrum is really more of a facilitator. The benefit to having a lead in the scrum is that someone owns the project. It’s the accountability that helps drive your business or projects forward. Without a facilitator you have the potential to have projects make little to no progress and eventually fall off the face of the planet. Leadership should be rotated and it’s leadership that will continue to support everyone’s buy-in.

5. Killing creativity.

Being agile includes giving people permission to explore. To do that in your business it’s important you don’t create too many processes or systems to get permission or consensus at every single step in the process. While I totally support process and systems - too much of it can be a really bad thing. There has to be a balance. Don’t fall into the trap of getting so caught up in designing how you are going to be/measure/implement your business agility that you forget about applying the core principles of giving people freedom to go out and look for opportunities. The more logistical hoops you create the slower the innovation, the more opportunities you miss, and you are creating an environment for change to be really hard.

If you do the opposite of these 5 tips you’ll be in good shape. Agility is about helping people share a mindset and nurturing your business so that you can continue to make great stuff for people. An implied part of being agile is your willingness to never stop learning. It’s being open to new things that will help you see opportunities to better for your customers and clients.

Find More Money Inside Your Business

Do you really need that wireless credit card payment processing subscription? 

Do you really need that wireless credit card payment processing subscription? 

Lately, every business owner I’ve been running into has been talking about needing more money. That’s usually a bait to have me ask them about their business and most of the time I bite. When I ask them about what’s going on in their business they are quick to tell me all about how they’d love to do more marketing, hiring or <insert generic growth term> (sometimes that even means hiring me) but their budgets are anemic.

Every business owner (or person alive really) has to face opportunity costs. Making choices is all about giving something up to gain something. “Not having enough money,” is an excuse to avoid making hard choices and just complaining about it shows me that there’s probably more to the story. So, I ask about more qualitative stuff. How happy are their customers? Their employees? Do they work on weekends? Then when they are feeling good about talking about themselves, and a little less defensive about money, I ask more quantitative questions and one of two things always happens.

Either they are growing and revenues/clients/customers are increasing or they aren’t. I give a little more leeway to the businesses that are struggling because they’re immediate opportunity costs probably sting a little more and the choices are a little harder. For both kinds of businesses I offer the same kind of starting advice - looking for more revenue or outside financing is not going to make all your internal financial problems go away. You need to take a hard look on what’s going on inside your business first, that’s where you’re going to find some liquidity the fastest.

Here are 3 places you can start to look for money right now.  

1. What kind of subscription are you paying for every month?

This sounds like a no brainer but some business owners hoard monthly subscriptions like people hoard apps on their phone or porcelain cats. When business is good it’s easy to rationalize away a $10/month subscription here or a $29/month membership there because you set them up once and make the buying decision once based on your financial situation at the moment of the purchase. Those small monthly cash-outflows add up though! You need to look at each of those monthly expenses as an investment. What kind or return are you getting every month? Would you invest in something that earned you negative, zero, or less than one percent on the life of the investment? NO! So if you haven’t used that gym membership in 3 months it’s either time to find some way to hold yourself accountable or get rid of it.

The same goes for monthly subscriptions to anything else. If you signed up for some customer relationship management, podcast hosting, email management or cloud storage service that you don’t use or isn’t actually helping you move your business forward it’s time to get rid of it. If you are looking for more money in your business start by getting clear and objective about where money is going automatically every month.

2. What are you doing with your time?

Time is money right? This isn’t a plea for you to go out and hustle more it’s a plea for you to spend your time evaluating looking at the billables or billable projects you have on the table. If you aren’t a point-of-sale kind of business you should be looking at tightening the payment terms or the time it takes people to pay you. If you are keeping busy with lots of billable work you can start to up the money that’s coming into the business by asking the people you serve to pay you quicker.

You can even offer some kind of small percentage off for paying early. If you are more of a retail or point-of-sale kind of business maybe give your suppliers a call and ask about either extending terms or asking for some preferential early pay terms. A few percent off a bill might not sound like a lot but in the long term it adds up. It adds up in the short term too if you’re at a point where you are trying to stretch the dollar of every dollar in the business. The same goes for calling credit accounts you have and asking for lower rates. Every. Dollar. Saved. Counts.

3. Watch your driving.

If you’re a small business owner you might be doing a ton of driving. Not thinking that every time you hit the pump it’s money that’s coming out of your business. As a management consultant I know this pain all too well. Yes gas prices are falling and yes eventually you can claim mileage on a tax return but that doesn’t stop the sting of hurting for cash now. Setting some kind or parameters around your driving can make a big difference every month. Think about how you can use more technology if you need to meet people face to face, things like Skype and Google Hangouts are my new favorites.

Planning ahead and batching your schedule with meetings or networking based stuff by location is helpful too in controlling the fuel cost bleed. Professional truck drivers and delivery companies do it, you should too. Lastly, if you can have your people come to you. Personally I used to insist on being on site with clients and for a select few I still do but if you have a professional space or a favorite coffee shop that’s close try to load your schedule such that there are big chunks of time where you get to be in one place.

You can start to work on these three right now! 

These three tips sound really simple in theory but you’d be surprised how much static you give yourself when you start to trim away the unnecessary. As a business owner you have to make choices and if you’re goal is to stay in business you can’t let any decision about money slip unseen into the murky fog of rationalization.

When it comes to the money in your business (and your life really) it’s about building good habits. No one wakes up a perfectly rational decision making maching but you have to actively try to be clear about what you expect in terms of return on those dollars you're spending. Otherwise, you’ll just be the person no one likes to talk to because no matter how good times are you’re always going to be talking about how there’s never enough money. That person get’s hard to listen to, or take seriously, after a while.