Wednesday, October 27, 2010


It's my birthday today, which usually leads to grim thoughts of mortality, net worth and life focus. It's just how I'm wired. What I wanted to touch on in this post is entropy in business. The main theoretical concern of a new business is return on investment. You put in $100,000 to start a new business, not an insane amount of money, and you expect that money back in a reasonable amount of time. Your first goal is to become "profitable," meaning you stop hemorrhaging cash. That might take 12-18 months. Your next goal is to pay back that $100,000. A reasonable expectation might be 3-5 years. For a game store, it might be far, far longer than that, if ever. It really depends.

After that 3-5 years, you should be hitting profits, but you'll also start hitting some entropy points that will put additional financial pressure on your business, especially if your profits are low or non-existent or you've got longer term debt. For example, we're in our sixth year now, and we're on our second POS machine, second office server, fifth (or so) vacuum cleaner, and we're beginning to look at replacing some of our worn out store fixtures. Tomorrow we're re-painting our game center and having the carpets deep cleaned. Most of my thoughts about the future seem to be about re-focusing on the next thing. If keeping up with the current stuff doesn't bury you, getting clocked by the future can do you in.

This is normal. It's your typical retail "two steps forward, one step back" approach. However, if you're barely hanging on, entropy, and the stress it brings on, is what's most likely to kill your business. It's not slow sales, bad health or customer theft, it's just the inability to keep up with the inevitable breaking down of what you've built or the changing times you can't keep up with. It's evident in once great stores that look tattered and ragged, unable to afford to keep up with the image desired with their initial investment. It shows up often in stores with dead inventory on the shelf and broken promises to bring in the new stuff soon. They've got problems with their distributors or UPS keeps messing up, or so they claim. On the positive side, if you've hit entropy, it means you're probably experienced enough to recognize it and you've got a bag of tricks to combat it, including simplifying and cost cutting. Dealing with entropy, therefore, is also a kind of badge of honor. You've made it! Now do it again.

In my previous business, which was, believe it or not, a mildly profitable BBS system in the 90's, it was the Internet that killed us. Some successful BBS systems transitioned to ISP's (Internet Service Providers) back in the day, but that took a ton of money and foresight. It meant your BBS had a stockpile of cash for that transition, and most were hobbies at best. We were able to transition to a kind of Internet hybrid gateway, but lacked the resources to take the next step, so we realized early on that we were finished. We hadn't paid off the debt from the previous transition, so transitioning a second time was out of the question. That's where a lot of businesses are right now. They're hanging on, not really able to grow or expand due to the poor economy and staggered by existing debt. They hope to avoid the inevitable entropy: a dead POS system, a broken air conditioner, or the landlords devastating common area maintenance bill for replacing the roof (or in my case, continually re-painting the poles in the parking lot or mowing non-existent grass). These businesses are in a two steps back, one step forward mode.

Two steps back, one step forward is how I feel we're operating most of the year and the retail metaphors seem to reflect that with such favorites as death spirals and circling the drain. This just reflects the instability of such endeavors, and hopefully it sorts itself out during better times. I try to combat it much like how I fix my aging car. I try to fix things as they arise for fear of getting buried by entropy. I can live with one broken thing on my car and in my business, but there's a sense of hopelessness that arises when they begin to pile up.

That said, I'm waiting for my credit card period to close next week to bulk up on my holiday inventory and buy a new store fixture or two. I'm also planning a trip to the New York Toy Fair in February in hopes of finding new areas to expand the store. Most of my profits this year will go towards debt, but I can't imagine not focusing some of my energies on the future. Two steps forward, one step back.

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