While I’m 100% behind self sufficiency, I have to wonder about a dairy.  There’s not a single career I’m aware of where one is more “married” to the job than dairymen are.  And even worse than that, when the price of milk rises and you can feed your kids.   When it drops, you starve to death until the next time it rises (which hopefully occurs before you starve all the way out of the business.)

I told my friend that I would be more interested in buying the creamery.  Not that having a herd of milk cows would be such a bad idea (if you owned the creamery,) but the focus for me would be on adding value.  The creamery makes money regardless of the price of milk.  They buy milk at whatever the prevailing price is, make it into butter, cheese, ice cream, etc. and charge whatever the market will bear.

Selling milk to a creamery puts you at the whim of the market.  You have no control whatsoever over the price of your product.  The creamery, on the other hand, can choose to be the BMW of butter or the yugo of yogurt.  They are only limited by the effectiveness of their marketing.

Look at Hagen Daas for example.  Do you think they’re worried about the price dairymen are receiving for milk?  Of course not.  They’re Hagen Daas.  They can price their product at whatever they choose and people will line up to pay it.  They’ve taken the milk, added some value, done some outrageously effective marketing, and they make money.  Never mind that dairies are dropping like flies.

This is true with any commodity.  You make a lot more as a furniture manufacturer than a lumber yard owner.  Why?  Because you take the wood and add value — value that can’t be regulated, pre-priced, or whatever.   The value is whatever you can convince people it is.  Hagen Daas is no better than any other high-fat product.  But they’ve convinced the public — through great marketing — that it’s somehow worth more.

So when you start your next business, ask yourself if you’re adding value or if you’re too close to the source to make the real money.  When you add value, you give your marketing department something to work with.  If you’re not currently adding value, see if there’s not some way to begin doing so.  Adding value separates you from the crowd and gives you the opportunity to be different (read in worth more.)

This was an article from the St. Petersburg Times Newspaper on Sunday. The Business Section asked readers for ideas on
“How Would You Fix the Economy?” I thought this was the BEST idea….I think this guy nailed it!

Dear Mr.President,

Patriotic retirement:

There’s about 40 million people over 50 in the work
force-pay them $1 million apiece severance with stipulations.

They leave their jobs. Forty million job openings – Unemployment fixed.

They buy NEW American cars. Forty million cars ordered
Auto Industry fixed..

They either buy a house/pay off their mortgage -
Housing Crisis fixed.

Was $800 unreasonable for this company?  The answer is, it's all relative.  If you've been paying $300 a month, then yes, it's totally out of the acceptable range.  If you've been paying $1,200 congratulations.  You're doing great.  When we review financial statements (to look at our various costs to determine whether they seem normal) we never look at just one month.  Every expense needs to be taken in context.  It's impossible to tell what's “normal” or what's acceptable without that context.  That's why you keep monthly financials, even if you're a small company.  It gives you a chance to review 3 – 6 months worth of data at a time, where you'll be able to spot the anomalies immediately.

It's true that an income statement is just a snapshot of one moment in time.  But when that snapshot is taken at the same time every month (usually the last day) a series of those snapshots makes a movie.  Watching that movie carefully, month after month, will make it easy to spot negative trends, or other aberrations.  You are keeping financial statements, aren't you?  And you are reading them carefully each month, aren't you?  Because after all, it's all relatve.

At some point, almost everyone will tire of the day-to-day grind and
yearn for retirement (or at least for a change of pace.)  Whether
you’re an entrepreneur with some experience selling businesses someone
who is traveling this road for the first time, a broker will be a big
help (as Anita points out in the aforementioned article.)

Brokers will help you establish a fair price, help you understand
all the ins and outs of the buyer’s due diligence, help you with the
negotiations, and generally shepherd you through the whole process. 
Now this help doesn’t come without a price.  They often charge 8% – 15%
of the total transaction amount.  That may sound like a lot of money
(and it could easily be in the hundreds of thousands of dollars,
depending on the size of the business,) but this is one area where it’s
easy to be “penny wise and dollar foolish.”  If you don’t have
significant experience navigating these waters, this will be the best
money you ever spent.

You don’t do your own business taxes (do you?)  Don’t try to sell
your company without the help of a professional.  There’s so much you
don’t know — could never know — that it’s worth whatever it costs to
have a professional in your corner.

Jeff Cornwall, over at The Entrepreneurial Mind Blog has a great post on debt for small businesses entitled, “Reducing Your Need For Debt.”
He explains the need for restraint in taking on debt, and the risks of
doing so in an unwise manner. Take a minute and read this one. It’s
worth your time.

In addition to the excellent points he made, I’d add this: debt
never sleeps. It never takes a vacation. It never has a sick day. Debt
is relentless and unforgiving. It is a harsh task master. While it’s
true you can form an uneasy alliance with debt, it can quickly turn on
you. It can be a friend (of sorts,) but it much more likely to be your
enemy.

I am reminded of a business I worked with years ago. They had funded
almost their entire startup with borrowed money. They were underfunded
from the beginning, and struggled to service their debt from day one.
By the time I got there they were drowning in interest payments (they
weren’t even in a position to think about principal payments.) The
owners wanted to know how to get out from under the huge debt burden.

“Sell some of your interest in the company to other investors and
pay off the bank,” I told them. “But in order to get enough to come
close to satisfying the bank, we’d have to sell the majority of our
ownership,” they countered. And therein lies the problem.

Debt is easy to incur and hard to discharge. Used judiciously, it
can get you through a tight spot. Used to excess it can rob you of
everything. Your business will be much more healthy if you finance your
growth out of your own cash flow. You may have to grow slower, but what
you have will be yours.

We tend to think of things we “own” as ours — like our homes, for
example. But the truth is that until you make that last payment, the
bank owns the home. No matter that you’ve paid the payments on time for
twenty nine and a half years. If you stop paying before that final
payment is made, the bank can (and will) come in and exercise their
ownership by taking possession of your home.

It’s the same in business. The only way you protect yourself if to
be wise about the debts you incur and be sure the reasons for doing so
are valid and justifiable. Just as interest expense never sleeps,
interest income also never sleeps. You can be making money when you’re
at the beach, on the golf course, or in your bed sleeping. Your
personal relationship with interest is dependent upon whether or not
you understand money. Because after all, those who understand money. . .

When my son came to me a few weeks back asking if he should take on a partner here is the advice I gave him:

One good reason to take on a partner:

1.    Take a partner only when they bring something to the table you absolutely can’t or won’t bring. 
This often takes the form of money.  If you don’t have the cash to do
what you want (and the bank won’t help,) you won’t get far without a
money man.  The problem with that is the money man often takes control
of the business (obviously, to protect his investment.)  At that point,
you are no longer in control of your own destiny, nor can you direct
the business without considering partners.

Another thing that partners bring (besides money,) is expertise. 
For example maybe you’re bringing on a financial person, so you can
focus on marketing (or vice-versa.)  Sometimes those things work.  But
often times you end up saying, “Wow.  I’m on the road 80 hours a week,
and you’re sitting at your desk 8 hours a day, and sleeping in your own
bed, how come we’re equal here?”  Then things start to deteriorate.

A bad reason to take on a partner:

1.    We’re buddies and we provide each other a lot of mutual support. 
From my experience, the best way to ruin a friendship is to form a
partnership with your friends.  Of course  there are many cases where
friends go into partnership and do great.  But in the majority of the
partnerships I’ve seen (and I’ve seen many) friendships are more often
destroyed by partnerships gone bad than made stronger.

A good exit strategy:

1.    The best partnerships have a well-defined exit strategy for everyone concerned.  What
does that mean?  Well, what happens if, “this town ain’t big enough for
the both of us?”  Who leaves, and how is the price determined?  While
there are as many exit strategies and means of determining a fair price
as there are businesses out there, here is the one I particularly
like.  If you offer me a price for my shares, and I don’t want to sell,
I have to be willing to pay you that price to buy you out.

For example, if you offer me $10 per share for my shares, you have
to be willing to sell your shares for $10 each.  What that does is keep
one partner from offering a low-ball figure to another.  It ensures
that you start the negotiations at what is more likely a fair price.

This is a complicated issue (ask any attorney,) so this isn’t
intended as the definitive treatise on partnerships.  Rather, it’s just
a few random thoughts, that will hopefully get you thinking.  The more
things you negotiate up-front in a partnership, the less grief you have
on the back end.

 Production Rate:   If you run a
manufacturing business, you need to know much it costs you to produce
your products.  While standard costs will help, they don’t show
trends.  Your standard cost might be too low, or too high.  The only
way to know for sure is to capture data on how many dollars of product
you produce for each dollar spent.  The metric looks like this:  Total
direct labor payroll (including taxes, benefits, etc.) divided by total
output.  That will tell you that for every labor dollar we spent we
produced “X” dollars of product.  Checking this metric each month (or
each day, or each week,) will help you spot problems before they get
out of hand.

Indirect Labor Rate:  One of the expenses that
always creeps up (usually insidiously and often without our being
aware) is the indirect labor.  I like to include admin labor in
indirect labor.  Basically, for the purposes of this metric, indirect
labor means every employee that isn’t directly involved in the
manufacturing process.  The formula is the same as above.  Indirect
labor divided by total production for the month.

Payroll Percentage:  This is an old one, but if
you’re not using  it, you should be.  Payroll percentage is calculated
by dividing the total payroll (including taxes, benefits, etc.) by the
total sales.  This is good information, but the two metrics above will
give you a better feel for exactly where in your payroll your problems
(or successes) are occurring.

Sales / Marketing Rate:   This is a great way to
find out how many dollars you take in for each dollar you spend on
sales and marketing functions.  There are two ways to calculate this: 
first, you can use just pure marketing dollars, meaning the dollars
spent on ad campaigns, mailings, etc.  Second, you can include all
marketing costs, including sales and marketing salaries, travel and
phone expenses, etc.  I like doing it both ways.  Doing it the first
way  tells you if your advertising and marketing efforts themselves are
successful.  Including all the other costs tells you if you’re getting
an appropriate bang for your buck out of your staff and their
associated expenses.  To calculate this metric take the marketing
expenses (however you decide to define them) and divide by the total
sales.

Obviously there are hundreds of different ways to measure your
business.  If you are going to reach your full potential, you’re going
to have to find the metrics that are most meaningful to you and what
you do.  The important thing is that you are measuring yourself.

The other thing that almost goes without saying, is that the numbers
you generate from these metrics will be meaningless if you take them in
a vacuum.  They only have value when you compare them against what was
happening last month and last year.  You’re looking for trends here! 
If you’re going to see trends you have to see as many months at a time
as will fit on a page.  I like to show at least 12 to 18 months worth
at a time.  This will show you what’s really going on.

The other thing I always do is give the metrics to the department
heads.  They are the ones who are ultimately going to have the most
direct impact these costs.  Once they’ve been quizzed a time or two
about what you’ve found by taking these measurements, they’ll start to
watch during the month to head-off problems before they get to your
desk.  Or, in those cases where they can’t head them off, they’ll be in
your office explaining the problems before you even get the month-end
results.  That’s exactly what you want.  By having the people who are
in direct control concentrating on keeping things under control,  you
are unlikely to have a big surprise somewhere.

Gather your management team around you today and talk about what
metrics (or additional metrics) might help you manage your business
more effectively.  There’s probably nothing you could do today that
will pay bigger dividends in the months to come.

While it may be true that nothing happens until
the sale is made, it’s more true that the world doesn’t really start to
turn until a profitable sale is made.  I remember going into one company where they had a handful of big customers and a multitude of little ones.  As you can imagine, the big customers got most – if not all – the attention.

 There was a big disparity between the biggest and the smallest customer.  In this business, the biggest customer was over a million dollars (and 10% of the total business).  The smallest customer was around $500 annually.

 Mr. Big demanded all kinds of concessions.  He was the biggest and he knew how to play that card.  He
demanded (and got) volume discounts, free shipping, 2% early payment
terms (which he took whether he paid early or not), and other things.  He
also demanded that the SKU’s he ordered be kept on the shelf at all
time, so his orders could be processed and shipped the same day (this
in an industry where 4 weeks is the standard wait.)  In order to do all that, the smaller customers got bumped, plain and simple.  Some smaller customers were waiting as much as eight weeks for their product.

 The first thing I did was a profit analysis by customer.  I took everything into account, when determining profitability.  It was amazing that as a percentage, the profit picture was completely different than everyone assumed.  For
example, the small customer that was waiting eight weeks for product
was contributing nearly 43% of the total sale to gross profit. 

 How much do you think Mr. Big contributed?  I was shocked to see that Mr. Big was contributing less than one percent to gross profit.  How much did that amount to in dollars?  Right at $2,000 gross profit per year on sales of over $1 million.  I
told the VP Sales and Marketing we had to call Mr. Big immediately and
tell him we could no longer hold his product on the shelf.  We would also no longer be able offer payment terms and all the other discounts.  The VP looked me in the eye and said, “He’ll never tolerate that for a minute.  Are you willing to walk away from a million dollars?”  I replied, “No. I’m not.  But I am willing to walk away from two thousand dollars.”  Long
story short, Mr. Big indeed walked away, and we started caring for the
little guy and while we were able to maintain our sales steady, profits
went up dramatically.

 Now by telling this story I’m not suggesting you get rid of your biggest customer.  What I am suggesting is that you know exactly where your money comes from.  Sales is only half (or less) of the story.  While
you need to know what sales are in order to be able to see where you’re
going, you also have to know how much you make off each sale to bring
the sales picture into perspective.

 When it comes to evaluating your best customer, you need to take
more than sales into consideration.  Your best customer is the one who
pays your bills.  You’re not paying your bills if your sales aren’t
profitable.  So be aware of what’s really going on with all your
customers.  I’ve said it before and I’ll say it again: Knowing where
your money comes from is the key to success in your business.