Book Errata

I may have mentioned this before, but there's an error in the Open to Buy table on page 143 of Friendly Local Game Store. The calculations are wonky starting on the second line. Here's what it should look like, based on the data in that table:

The important calculation on each day is the Balance column.

2-27, is $1,000 (starting balance), plus COGS on 2/27, minus Purchases on 2/27.
2-28 is the Balance from 2/27, plus COGS on 2/28, minus Purchases on 2/28.
2-29 and on, just copy the formula from the Balance on 2/28.

Zen and Small Retail Management

I don't throw the term "Zen" around too often, as I've been a Zen Buddhist practitioner for a long while. However, there are some parallels with specialty retail management and I wanted to share them. When you're running a specialty retail business, there is a lot of confusion. I get questions all the time from new store owners about the minutiae of running a store, which is endless, idiosyncratic and practically unknowable. There are stores that have predictable sales patterns, but for the most part every month has been an adventure for me, without a lot of obvious patterns to help plan through the chaos. 

The same is true with Zen meditation, with a lot of working through chaos with no idea if there will be positive results. The faith in Buddhism is the faith there will be results to the work. The tree will bear fruit, one of an infinite number of agrarian metaphors. Sometimes you have a breakthrough and learn it was indicative but not important. One of my teachers referred to that as "walking by the garden." You're not in the garden, but you're garden adjacent. Good effort. Business can be the same way. You think you have success, but then the next month the whole thing falls apart. In Zen that's pretty typical, in business it makes you want to cry, especially when you see friends and families, employees, have a simple, predictable lifestyle. Life will never be simple or predictable again.

Eventually you have a legitimate breakthrough in business as in meditation, and how are you rewarded? That's right, with more work. You struggle again, thinking you'll never make it, you've hit your peak. You know what? You might be right. There's no guarantee you'll get anywhere, and it's a combination of effort and wisdom that gets you to the next level. If you have effort and no wisdom? You'll be there a long time, languishing. The good news is pain can provide wisdom, so there's always hope. I remember several years where I wished my business would just fail already, since it couldn't seem to plateau to the next level. But eventually it did, through persistent effort and continuing to try different things until I found success (wisdom).

If you are struggling now, more than likely you're working your way to that next plateau. If you think the work will be over soon, you're mistaken. You can certainly decide not to continue the climb, but everyone, at every level, is working to get a little further up that mountain. Even multi million dollar businesses are faced with plateaus and what to do next. The higher up you climb, the more costly the mistakes too.

The "beach house in Maui" is the example a Harvard Business School report described that final ascent. You have three options as you approach the summit: you can plug away, content in your success, you can risk it all on that final ascent, or you can distract yourself because you're clearly not one to be content. You plan to build a beach house in Maui. Or build a Jeep to travel the world. Or whatever else smart people with money do to distract themselves. The beach house in Maui is true at every level, although you might decide to stop because you finally bought a house or finally have a steady income for retirement savings.  It's up to you to decide when you've had enough. You could work until the day you die, and increasingly I know those folks. Much of what's written about meditation practice is getting you to break through that complacent plateau. In business, you can always decide you're at a comfortable altitude.

Age is a big factor, as you spend ten, twenty, thirty years climbing that business peak, do you really have time to fix a mistake if it all crumbles? You're probably unemployable, either because you have no marketable skills or you're incapable of working for someone else. You have a mortgage and kids and college funds and retirement plans. You can do this until you've had enough. When is enough? Age and income is the answer. Do you have time to start another climb? Does it sound appealing? Without money, you gotta do something. Maybe just visit Maui and see if there are any lots for sale. I'm sure it won't lead to anything.

Finally, the "how do I know?" question, of whether you're in the garden or garden adjacent. A teacher as guide is helpful with a meditation practice. In business it's much easier to see the results. It's not hard. It's money in the bank. If you're sitting on a pile of money and wondering where you're at, you've probably plateaued. If you don't have a big pile of money, you're probably walking by the garden.

From https://www.internationalyoga.com

Cleaning Up the Books (Tradecraft)

I am not an accountant. I can barely keep up during my annual conversation with my accountant. I had a year of accounting in high school, probably to avoid some nastier math requirement. I know just enough to understand double entry and the difference between receivables and payables. From talking with my accountant and a business broker, there are a few areas I'm now a bit more cognizant about, things that show value or indicate problems that are often about something simple, like categorization of expenses in your accounting software. That's the exciting topic for today. Let's clean up your books.

Cost of Goods used to be my dump stat. If you have a high cost of goods, it shows your business is not very efficient. It indicates maybe you don't have a handle on shrink, or you haven't negotiated good terms with your suppliers. It might mean you're a bad buyer. A high cost of goods may indicate an industry problem, which is bad if you're trying to sell your hobby game store to someone uninitiated as a kind of toy store thingy with tables.

I actually track my cost of goods daily, so when I saw the difference between my real, spreadsheet cost of goods, and my fake, Quickbooks cost of goods, I had to figure this out (also Quickbooks is always realler). When I presented my income statement, my business broker gave me a disapproving look with my high COGS. What happened? What happened was I was dumping miscellaneous charges into cost of goods, which is a major no no. Be extra careful about what goes in this category, since it indicates so many possible problems with your business. If you have to dump something into a category, do it into a discretionary one like office supplies.

Office Supplies are pretty discretionary. Everyone thinks they could come in as a new owner and reduce waste of office supplies. My accountant encourages me to put anything consumable, anything not clearly durable, into office supplies. Office supplies also gets depreciated immediately, unlike durable goods, which are depreciated over years. so if it's in a gray area, it's office supplies. Not sure what it is? Office supply. Never use miscellaneous. Miscellaneous is a question mark. You don't want questions in your books. Answer the question!

Payroll should be broken into multiple categories. Payroll expense, taxes, payroll processing and insurance. Each of these have different tax consequences. Each expense can be attacked to drive them down in a different way. Speaking of payroll, have you given yourself a raise recently? Your pay is a discretionary expense so brokers don't care. It reduces your end of year tax burden and saves for your retirement with social security payments. It forces your business to compensate you first, unlike profit distributions which happen last, when it's convenient. You deserve a raise. You're welcome.

Rent is one category that should only ever include rent expenses. Your business value is backstopped or dragged down by your lease. No successful business can predict continued success if it has to make a costly and unpredictable move, and if your rent expense is dragging you down, there's likely nothing to be done about it. Personally, I can't imagine any business would sell with a month to month lease. I would insist on a lease as long as your earnings multiple from the valuation. If your business is valued at 3x your earnings, I would want to see at least three years left on the years. I wouldn't invest in a business until I saw a copy of the lease. Someone believed in you to be around for years. I want to see that. Heck, I want to at least see your name on that contract, especially if I have to approach the landlord to assume it.

The main take aways here are be meticulous with your books. Make sure fixed expenses and discretionary expenses are not mixed. It's easy to get sloppy. My credit card bill averages around $15,000 a month and it's painstaking to make sure every line item is categorized properly. I download reports, try to figure out each charge, and I'm especially careful with those cost of goods, since they can look like other things. It doesn't really matter if it's just you in the business, if you ever want to sell or bring on partners, you'll want to be meticulous and you'll wish you had done it years before.

Tumultuous with a T

My store has had a tumultuous year so far. Our sales are up 23%, with net income up 230%, which is easy to do when we were at a negative net income a year ago at this time. The San Francisco Bay Area is on fire, thankfully only figuratively. The Bay Area would be the world’s 19th largest economy, if it were tracked that way. I just want to crow about how well we’re doing, how well everyone here is doing, so this post doesn’t sound like a pity party.

We have transitioned nearly our entire staff this year, a staff that averages a turnover every three years. It has been a huge hit to our institutional knowledge, which means training has been a huge expense. Training means overlapping, unproductive shifts, and it’s is our single largest expense this year, when you also include the tremendous wage inflation we've got here in California (at the bottom tier of employment). Starting wages for part timers are going up a dollar a year, but it’s not fast enough for many, who criticize us for not having every job starting at a living wage (likely in the $20+ range). We’ll get there Felicia, just give it a minute. Enthusiastic new staff are a strong reason for that 23% growth, most of it really, so you get what you pay for.

I will refer to 2019 as my Year of Entropy, assuming my store makes it out alive. Besides expensive staff transitions, our drink cooler died ($2,000). One of our two, multi ton air conditioning units gave up the ghost a couple weeks ago, requiring a new compressor ($3,000). By the end of the year, we’ll need two new computers, including a replacement of our six year old POS system which will need the POS software and hardware reinstalled ($5,000). Overall, add these expenses to the usual entropy of plumbing problems and CAM increase and it’s about $20,000 out of pocket.

We’re still a profitable business. About half that profit goes towards construction loans, so I feel we’re investing in the business each month when those checks get processed, even if nothing new arrives. I’m thankful to have windfall profits in a year with crazy high expenses. Imagine having flat sales and all these expenses start beating you down. It’s why the threat of failure never goes away for small businesses, never reduces the chance of closing no matter how many years you’ve been in business. 

Are new expenses hitting us while we’re on an upward trajectory or downward? It becomes a simple calculation. Should we cut bait or cast out again? Some of our competitors disappeared this year after doing that calculation. This has added a lot of unexpected energy to our store as the displaced seek new homes. Thankfully there’s light at the end of the tunnel. We haven’t really been walking in darkness, since it's a profitable business. Having debt while encountering the usual entropy is like walking through a dim tunnel while bats fly overhead and muss your hair. You’ll make it, it’s just disconcerting.

Meanwhile we’ll enjoy a little money thrown at re-branding and selling our updated image. We’ve had enthusiasm for our new logo, sold some stickers, and talked with people who were unaware of our previous brand identity, which is currently limited to our website and business cards.