Thursday, March 26, 2009

Thinking Net

I had dinner with an old friend and business partner last night and we discussed our businesses. We both own our own businesses, and we've both been smacked around pretty good by the faltering economy. As we got talking, we had similar stories about how we recently changed our thinking about our businesses. We both have growing businesses, but that's kind of a misnomer. I think that most successful businesses see themselves as growing, because the alternative is running a dying business. That's how we've been taught to think. It's a grow or die mentality, but that's changing.

We both came to the conclusion that our growth spurts are over. There is no longer easy money from our modern financing sources, home equity and credit cards. I was not surprised to learn recently that 50% of small businesses (500 employee or less) rely heavily on credit cards for financing. The banks, which used to provide business financing in the past through lines of credit, SBA loans and the like, are atrophied from disuse. Why fill out a metric buttload of paperwork for an SBA loan when in the end it's secured by your house? Just get a home equity loan. Why get a line of credit from a bank when credit card rates are half the cost? Just fill out the short form online or one of the dozens send to you each month. Credit in the future will be harder to get and more expensive and the credit we have now is on shaky ground.

The days of easy credit are over and eventually we'll see a shift towards traditional small business financing, but until that happens, there is little money for small business investing, and what lines of credit we have are drying up or are at risk. The advice I'm reading from the credit blog I read is to avoid talking to your credit card company at all cost. My goal for this year is to pay off debt as quickly as possible and preserve my lines of credit. I also want to do more community banking, starting with a credit card from my local, responsible, business oriented bank (Mechanics Bank).

The bad economy has also spurred us to save money and has challenged traditional ideas about expenses. For example, I've always advertised based on a rule of thumb, about 2-3% of gross sales. I read it in a book and other retailers have nodded their approval, so that's how I've done it, and for the most part it has worked ... I think. While focusing on the bottom line, advertising seems like a big discretionary expense. The new question: What if I don't do this? What if I don't spend this money? What's the worst that can happen?

It's always been a balancing act between rent and advertising. If you pay low rent for an obscure location, offset it with advertising. What's low rent? There's no such thing in California. I've slashed my advertising budget and my new thinking is that I'm more willing to be reactive to slowing sales by advertising than pro-active by throwing money at questionable marketing. All advertising is questionable, by the way. Advertising rarely gives you the feedback that it works, so it seems ripe for the cutting.

Even the way we talk about our businesses is different. I've always reported sales numbers and increases using gross sales. I no longer care about gross. I care about net. A net profit of one dollar is far better than gross sales of $60,000. The gross is smoke, while the net is fire. I'm finding tools I've created for reporting are too gross focused, with net rarely playing a role other than to calculate cost of goods, the only nod that the net is in there somewhere. Large activities like game conventions suddenly become folly when you actively focus on net. The days of saying "It's a marketing expense" or "It's a merchandising expense" to justify unprofitable activities that seem vaguely relevant are over. That thinking is so 2007.

Now I know what you're thinking: Yes, but are you being penny wise, pound foolish? Are you throwing the baby out with the bathwater? Are you losing some quality wheat with your chaff? First, sometimes you need to lose a little wheat when you're learning how to identify chaff. Second, there are areas that we are spending more money on. For example, although we're both cutting expenses, we both just hired a new employee.

When you start cutting expenses, you're looking closely at your core operation and noticing shortcomings. I think if you're being honest with yourself, and not being a knee jerk employer, like large companies we all know, you end up seeing there are needs going unfilled. Needs that would improve your bottom line. For us it was about things like cleaning, organizing and fill in hours. Our labor schedule was too brittle and too dependent on down time to get things done. Our fill in guy was under trained and improperly compensated. It's like planning to fail. When will these core activities get accomplished? How can you maintain a quality business when you essentially have an untrained person working your store on a random basis? It's Russian roulette. When you think that you're growing, these problems are growing pains. When you're focused on the bottom line, they become unacceptable inefficiencies.

Advertising isn't getting entirely dumped either. We're both focusing on advertising opportunities. For example, my friend just took advantage of a free print ad, while I just booked a years worth of cheap TV spots. At $1 per spot (one showing of our commercial), it's hard to turn down. In comparison, one spot on Battlestar Galactica is $8. The $1 spots are fairly random, and at 150 spots a month it's a shotgun approach, but shotguns have a reputation for a reason.

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