Monday, March 19, 2018

Three Factors of Risk Management (Tradecraft)

I'm meticulous about vehicle maintenance and that's because I believe most accidents and mishaps happen when three negative factors are involved. For example, a vehicle in poor mechanical shape could be one factor, such as the overburdened shocks I just replaced. Weather or road conditions might be the second factor. The third factor could be a lapse of judgment or another driver making a dumb mistake. I've found when those three factors come together, events out of my control ensue and people get hurt. Since I have a Jeep with a solid front axle that tends to wander if I don't pay close attention, I'm always driving at the speed limit with great care, with one factor in effect at all times. So what does this have to do with business?

You can apply the three factors of risk management to businesses as well. I was reminded of this with the Toys R Us bankruptcy and immediately did a quick risk assessment of my own business. Now, to be fair, if you've got three factors on your mind, you're always looking for those three factors, which is both a strength and weakness. In the case of Toys R Us, their three factors were: Unsustainable debt, failure to cultivate and maintain a Unique/Useful Value Proposition (UVP), and a failure to prepare for coming demographic changes.

Any one of these three factors could kill a small business. Two of these factors can be survived by a market leader like Toys R Us. But all three of these? That's death and I'll tell you why. If you aren't doing your job now (UVP), and you aren't positioned to do your job in the future (coming demographic changes), why in the world would I want to invest in your debt ridden business to keep it going?  Toys R Us is a classic example of sunk costs with no future, a hole you find yourself at the bottom of with a shovel. Stop digging. But whatever, I'm really not qualified to analyze Toys R Us, but I do see how their case applies to my small business.

I've got debt from expansion, much like a Toys R Us at a smaller scale. I have a Useful Value Proposition I wish were more Unique, but I acquired debt to better my UVP. I feel I have strength in meeting future demographic changes, as we're able to pivot and invest towards the future of experiential retail.*

I could rate each of these issues on a scale of one to ten and decide if my business is worth saving, or in my actual case right now, re-investing. That's actually what I did recently before deciding if I should personally re-invest. I've got one factor in play and two moderately risky factors.

I would call my current risk moderate if it were someone else's business but as I believe in the management, I consider the risk low. I certainly have way more going for me than the $460 million dollar a year behemoth that was Toys R Us. Let that sink in a moment. Now, driving my Jeep back from the GAMA Trade Show in a blizzard? That was three factors of white knuckle driving all day long.

* The most important factor is I'm still profitable, unlike TRU with their debt load, but let's ignore that for now. 

Saturday, March 17, 2018

Subjective Decisions on Existential Matters (Tradecraft)

"Russians don't take a dump without a plan. And senior captains don't start something this dangerous without having thought the matter through."

--Admiral Josh Painter, Hunt for Red October

Policies and procedures are the heart of my business. It's what keeps it going the 85 hours a week the store is open, while I'm only there 24. We have policies and procedures about everything, which results in safety, quality (consistency of experience), and a focus on our Unique Value Proposition. So when a new law went into effect in California in January, forbidding me to have a policy, I raised an eyebrow. We have policies forbidding employees from wearing shorts, but I can't have a policy about hiring dangerous felons.

This came about because of our flawed criminal justice system and the fact those who have paid their debt to society were being screened out of jobs. With increased transparency in all aspects of life, we now know our criminal justice system is rather flawed, racist, classist and generally a brutal regime. I used to want to be part of it (dodged a bullet). With the unemployment rate at around 4%, non college grads are often screened from getting a job, so you can imagine what happens with applications where the "Have You Been Convicted of a Felony" box has been checked. This is a justified attempt to fix the bias against those who have paid their debt to society. However, not surprising with the government, the implementation is flawed.

While I support reintegrating ex felons back into society, how we went about doing it in California was a bit ham fisted. Here's how it now works when I try to hire a new employee:

  • The candidate goes through an extensive hiring process.
  • The candidate is presented with a conditional job offer. 
  • Only then can I run a background check on the candidate (now required by Wizards of the Coast, but most employers don't do this at all -- which makes this a perfect crap storm for us).
  • If a criminal record is indicated, everything stops. We are forbidden from having a policy on what happens at this stage, forbidden from a policy on what constitutes a danger to our staff and customers. We're not allowed to say we can't have sex offenders in a room full of children, although businesses dealing with drugs can have a specific policy (they must have had stronger lobbyists).
  • We now have to make a subjective analysis of that candidate. We have to look at their criminal record on a case by case basis, despite having no experience in law, and decide if they should be disqualified from the job. We can't have a policy that says sexual predators won't be hired here. We have to look closer than that ... somehow. As my attorney wife asked, "What if a woman is convicted of murdering her abusive husband?" I'm somehow being asked to untangle questions like this.
  • Now we provide the candidate with a letter stating why we can't hire them with a copy of their background check within five days. Or, if there's no policy about what happens next, the junior person in the organization is given the ability to decide themselves if the candidate is a clear and present danger.  
  • The candidate can respond back within five days, with more information, and it goes round and round.
The result of this policy is hiring managers are now making life or death, subjective decisions on existential matters. Of course, this is not satisfactory to any business, so although you can't have a policy on what criminal convictions aren't acceptable in your organization, more than likely businesses will have a policy that the hiring train screeches to a halt when a conviction pops up. 

Every flagged candidate will have to be vetted by someone in the business authorized to make subjective decisions on existential matters, most likely officers of the corporation or at least senior directors. These are people who can stand behind a decision that could result in either a very thorny legal liability or the possibility of great harm coming to employees or customers. This decision must come within a very narrow window of time.

Should we hire this murderer? You've got five days to consult with a VP, an attorney, draft a letter and get everything squared away so your dishwasher or retail clerk can be hired, not hired or if you're late, bring a lawsuit. Or maybe just don't hire right now if the attorney is not in the budget. Or maybe hire in another state, if you've got multiple branches. I know this is hard for anyone not running a business to understand, but the risk of this being handled poorly is great physical harm or a lawsuit that could drive a company out of business.

As the quote says, "senior captains don't start something this dangerous without having thought the matter through." One does not simply hire someone in California without the entire organization prepared for battle. Whether you're a mega corporation or a corner store with five employees, you better be ready for battle with every new hire. So no shorts allowed, but murderers? Let's hear what they have to say.

Finally, this is another example of a law that small organizations will likely ignore, big companies will absorb as the cost of business in California, but medium sized companies will have difficulty with the implementation. Don't get stuck in the middle.

Thursday, March 15, 2018

The Magic Market

Imagine a stock market where companies regularly leaked financial information right before the announcement of quarterly results. Imagine individuals who sell questionable, unconfirmed rumors to investors in attempts to manipulate stock prices, while simultaneously offering to buy that same stock from them. Imagine investors who are told their stocks are just for entertainment purposes while investing in a market that knowingly manipulates stocks to increase or decrease value.

Imagine a market where conflict of interest is the ideal business model. Imagine an industry of brokers who know all this is happening, but also know it's vitally important to maintain the fiction of this model. Pointing out the inconsistencies and what would be obvious fraud in a regulated market, is inherent to the profit margin of this unregulated market. It's also a system where pointing out the fraud to investors only results in rebukes from investors. The Kool-Aid is strong with this crowd.

I'm not talking about Bitcoin, I'm talking about Magic: The Gathering, a game considered an investment by many of its players and the cornerstone of the billion dollar hobby game industry.  Most everyone in the industry relies on this game to keep the system afloat. Even Martin Shkreli. convicted of securities fraud once considered investing in the Magic market.

What eventually got Bitcoin and other crypto currencies on regulators radar was the sheer amount of money involved. It wasn't the rampant embezzlement, corruption, and money laundering, it was that there was beginning to be an awful lot of money being made without government oversight. Before regulation, Bitcoin buyers were called "enthusiasts," rather than investors. Sound familiar?

With venture capital money flowing into Magic related companies, you might think enthusiasts might be on the brink of becoming investors. I doubt tens of millions of dollars is enough to get on the radar, with Bitcoin currently valued at 41 billion dollars. What's more likely, I think, is questioning this whole model as the Magic "market" declines. Nobody wants to kill the golden goose, but when it starts looking like a ragged chicken that poops on your front steps (I may have personal experience here), it might be time for some introspection.

Wednesday, March 7, 2018

Pathfinder: The Jeep of RPGs

Paizo just announced their playtest for version 2.0 of Pathfinder, their role playing game. As a retailer, I can say it's about time. I was against it before I was for it, but eventually I became a big Pathfinder supporter after not only becoming disenchanted with D&D 4 as a player, but I also realized the Pathfinder release cycle was going to blow D&D out of the water.

As a retailer, the Pathfinder formula was undeniably good, provided you could overcome the drag of Paizo direct to consumer subscriptions and the deep discounting all RPGs face online (many couldn't and there's animosity there). Paizo even sponsored me to teach other retailers how to stock Pathfinder. So I like Pathfinder and I'm glad we're finally getting a long awaited 2.0, and I will support the playtest at a deep level. But why is it like the Jeep?

I'm a Jeep fan, and Jeep fans have the same authenticity issues as Pathfinder fans. Pathfinder is essentially a 17 year old role playing game that's been updated a few times. At its core is the D20 system, which went through a 3.0, a 3.5, Pathfinder 1.0 and now Pathfinder 2.0 (it lives on in D&D 5, but that's another story). Fans love their D20 and are loathe to jump ship. If they haven't at this point, they've found their True System. Jeep also goes through versions, with die hard fans as well. Jeep fans are a bit nuts, with their slogan "It's a Jeep thing, you wouldn't understand" as their excuse for the completely irrational decision to own such an impractical, unsafe, uneconomical, and uncomfortable vehicle. But the heart wants what it wants.

With Jeep safety and economy improvements, fans lament the brand has lost its soul and authenticity, often despite it's ever improving off road prowess. Slant the windshield slightly or use aluminum where there was once steel and the sky will surely be falling with callbacks to the previous versions as the Last True Jeep. For Pathfinder, a new edition promises to be faster and more efficient, and of course, there are already those complaining about changes to the new edition. The similarities in fan bases is uncanny.

Of course, the reason why Jeep builds a new model are similar to why Paizo needs a Pathfinder 2.0. Everyone already has the old product. No matter how much you love it, use it every day, and swear you'll never change, a company can't continue making a product after ten years and hope to survive.  Paizo is in year 10 of Pathfinder 1.0 and likewise, Jeep is just now phasing out their JK Wrangler model introduced in 2007. Both were wildly successful, despite naysayers, and their new versions should remain so. Of course Paizo doesn't have government safety and economy standards to deal with, but they do have competitive forces that require they develop a faster, more streamlined system with modern design sensibilities (you know, like D&D 5).

So there you have it, an odd comparison nobody asked for, but one that's on my mind. You can expect a Pathfinder 2.0 to be very much like the new Jeep Wrangler JL. It should be evolutionary, not revolutionary. It should change where it needs to and not where it doesn't. It should be true to the spirit of the original, D20 to its core, and better where it can be. If you want a revolution, the door is on your right. It's a Pathfinder thing, you wouldn't understand.

Sunday, March 4, 2018

The Most Boring Blog Post In The World (Tradecraft)

Laziness? Fear? Arrogance? The fact this was a pain in the ass to make? Your pick of why I haven't posted the formulas for Open to Buy before now. There's an example in my book without formulas too, so I thought, what the heck, how hard could this be? Do the thing. I'll even name it The Most Boring Blog Post In The World so people can easily find it when they ask.

I once talked about Open to Buy at a trade show and a guy came up afterwards with a bunch of people surrounding me, and told me my example numbers were off. He was roundly criticized for bothering me with minor discrepancies from an example, but hey, examples should be correct. But that also meant I've been reluctant to start throwing around C2s-E2s because they would inevitably be wrong somewhere. If you do find a discrepancy, please let me know.

This example assumes you're starting with no money in your purchasing budget. On day one you have only your cost of goods to start with and your purchases to subtract from. Then we just add that balance going forward and voila, you've got a spreadsheet you'll live with for the rest of your professional life. Create a shortcut. Back that puppy up.

Here's a link to this example file.

You can copy and insert lines like this forever, especially once I discovered that +1 trick with the date. Mine is nearly 5,000 lines long and has a ton of columns, along with many financial charts that use this data (which I prefer to Quickbooks).

Wednesday, February 28, 2018

Business Ethics

I used to believe the purpose of a corporation, my corporation, was to maximize shareholder value. It sounded good when I read it first in Neal Stephenson and when you're dealing with a single digit net profit in a typical retail store with hundreds of thousands of dollars in sales, it's important to keep your eye on the ball. Maximizing shareholder value was a survival tactic. Later it became a way to avoid buying unnecessary stuff, what my investors referred to as "pimp value." I could justify a pinball machine or a van with a dragon on it through various logical gymnastics, but they eventually went away as they did not maximize shareholder value.

I don't believe my job is to maximize shareholder value now. Things have changed. This maximization was a tactic to obtain profitability, and with profitability, you discover strategy. My strategy, when I'm profitable, is when I have the chance, to make things better. It's amazing what happens when I'm not refreshing the checking account balance twice a day. There is time to think about long term goals.

Making things better might mean supporting a veterans group or giving vast amounts of games to Toys for Tots. It means having a zero tolerance stance on bullying and socially unacceptable behavior, even if it means banning long term customers. It means we have a succession plan in place to keep the community alive if I get hit by a truck. I can think of a dozen things I should be doing, but I'm not due to our just alright financial position. This is not to say I'm some great leader in the community, as I've spent most of my time hurtling towards the ground and just barely missing.  If I can do more, I will, and the reasoning is if I don't, who will?

We've got a federal government captured by crony capitalism who wishes to pretend the system isn't rigged, while rigging the system. We've got state government that wishes to legislate prosperity, even though they have no idea how prosperity occurs. They're happy to let the chips fall where they may, because they'll still be there, along with their high value donors. In other words, I've lost faith in our leaders, and the last leadership pillar left, the last ones not captured and corrupted entirely in this country, are small business leaders, who have their finger on the pulse of the community. I've essentially lost faith in humanity, lost the ability to believe that collectively, through government, we will act in our own best interests. Those who can make positive change, should make positive change.

I also can't handle the reality that if corporations are deemed to be people, with their own voice, and their purpose is to maximize shareholder value, then all corporations are essentially rapacious assholes. I suppose the key for a larger corporation is to express values and make sure leadership, including boards of directors, are on board with not being rapacious assholes. If you're just starting out, perhaps have this conversation. Thankfully, we know pursuing a strategy of ethical behavior, both in investing and business management, pays off quite well. It's just hard to put that strategy in place when you've spent years contorting yourself, trying not to hit the ground.

Sunday, February 25, 2018

Your Financial Success (Tradecraft)

I've got a good friend whose an author and wealth manager and we were talking about my new book. He said, "You've done a great job creating a successful store, but you've completely failed to plan for your financial future. We should do a writing project about that." Ouch! As most of what I've learned from small business comes from failing, before succeeding, it sounded like a good idea. In the short term, I wanted to write something that might be helpful to new and existing store owners. If the book were still in progress (it's at the printers), this might be a final chapter.

As a small business owner, there is no "best time" to save for your financial future. I'm referring to retirement. Investopedia gives the advice of how much you should have saved as a multiple of your salary. At 40, you should have saved two times your annual salary, at 50 four times, and it goes on. The reality of starting a small business is something is always taking your financial attention away from the critical job of saving for the future.

When I started out, I was on a basic survival, shoestring budget for quite a long time. I nearly halved my income to start the store, going as far as placing my house on an interest only mortgage, just to make it work. My salary was still well above market. I had the luxury of a house and a small retirement fund already because I had a good paying career before. Because I re-invested after three years, building out a larger store, this survival salary lasted me five full years. During that time we adopted a child and my wife left her job on disability. This put great strain on our finances. Then the housing crisis hit and finances went into a tailspin for a few years and I nearly lost the house (but came out well ahead, which I talk about in the book).

When my fortunes improved, I spent money on the store once again, buying a pinball machine and a van and basically all the things I had put off. My notes from our annual Board of Directors meeting had a directive written on the top: "NO MORE PIMP VALUE." Personally, I had also engaged in adding pimp value. I had an indulgent spending period after a fasting period. I bought a new car. I indulged heavily in hobbies. I went a little nuts. In the future, I've got not only construction loans for another three years sucking all my spare money, but a white board with about $20,000 worth of projects. I've also got a dream of doubling my inventory. There is no good time to save and there won't ever be one, if I wait for it.

The best time to save for retirement, as a store owner, is right now. Besides life's financial demands, the store will never stop requiring your money and attention. A small business has often been described as a mistress (manstress?), with strong demands of time and money that never cease. If I were starting over, I would have taken my subsistence salary, and built in retirement savings. My meager salary would have been maybe 10% higher. Perhaps I would have to save 10% more money before I started. I advise new store owners to build their store around the salary they need, but I never discussed the meaning of need. You will give up years of strong earning potential to start a store, as my father warned me. You'll be voluntarily putting yourself in a hole. If you can come out at the other end with some retirement savings, that hole won't have been nearly so deep.

My book won't be making a lot of money, but I'm thinking of dedicating all the proceeds to the retirement savings I've missed out on. Pro tip: try to find multiple income streams. Strangely, I've saved for years for my son's college fund, but as I've told my wealth management friend, that's because I'm more afraid of being a bad father than living in a cardboard box. If you're reading this and have a store, start saving now. If you're creating your business plan, bump up your salary requirements to include retirement savings so you can avoid the mistakes I've made.

Finally, realize the business will always demand every spare penny you have. Always. It's up to you to manage your Return on Investment (ROI), which means taking money out as part of the process of putting money in. I've made ROI a critical part of the planning process in my book. Anyone can make an amazing store and overspend on the build out. A good retailer understands the value of capital and sees a long ROI as wasteful and failure of sorts.

There is such thing in small business as enough. There is modest business growth without constant reinvestment. You most definitely need to grow or die, but it doesn't always mean reinvestment. Part of your dreams for your store should include a strong financial future for yourself. Planning to ride into retirement with a retail store earning income in an unknown retail environment 20 years from now is a very dangerous plan. Think about how retail has changed in the last 20 years: malls were hot, ecommerce and Amazon were in their infancy, Magic was just a card game and no the economic driver for just about every hobby game store. As small business owners, we are constantly changing and evolving to meet new demands. When you're 85 years old in a retirement home, you will not be in a good position to pivot your store to meet such demands. Start saving now.