Author Archives: Aron Brajtman

How To Make A Business Case For Starting the Business

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How To Make A Business Case For Starting the Business

Businesses get started for many reasons. Some of them are not very valid. Far too often it’s to provide a job for the owner. At other times it is an entrepreneurial seizure (see M Gerber ,”The E Myth”). The future owner simply decides that enough is enough. The scenario may look like this:

  • The owner has a skill, a trade , or a profession and thinks this is enough to go into business on their own
  • The individual wants to be independent and not have a boss to deal with
  • The individual sees how much money the owner makes and wants the same. Why be an employee? Have it all.
  • The individual is unable to hold down a job. Constantly getting fired or quitting
  • The individual is unable to find a job so being self employed becomes a necessity
  • It may search for a better lifestyle with more free time
  • There is the personal satisfaction of taking on a challenge
  • It may be an attempt to build a future for the family

Some of the above are tempting to most of us and we may have all been there at one time. However the above are all the wrong reasons for starting a business.

They all center on the business owners and their needs. Instead valid reasons should be concerned with the customers that the business owner wants to serve.

What are valid reasons for starting a business? The focus must be on the customer and not on the owner. By this I mean that the business must provide value for the prospective customers.

There are only 2 valid reasons for starting a business:

  1. We have identified a market need not being filled and we can fill that need
  2. We can provide a solution that is more effective than what currently exists in the market place. We are faster, cheaper, in general better in some way.

It must never be that of satisfying the owner’s needs.

Take a self diagnostic and assess the viability of starting your business

Pricing Your Wine

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If only the wine sold itself.

You want to create it and share it with friends and visitors to your winery. If only someone would take the bulk of the production from you at a great profit to you wouldn’t life be great?
Unfortunately, you must sell your wine, and to sell it the wine must be correctly priced.
Price the wine too low, and you don’t make enough to cover the costs. You also feel like an amateur (chose your own word) for not reading your market correctly.

Price the wine too high, and you will be storing it in inventory.

Correct pricing is not guesswork.

It is the result of selecting your market segment, knowing what your customers like, why they buy from you, and assessing competitive offerings. Your own costs come last.

So how well do you know your market? Are you selling

  • directly to the consumer,
  • to restaurants,
  • and/or to the LCBO?

If you said all of them then you may want to reconsider.
The table below illustrates four broad segments related to wineries that require different strengths and provide different rewards. Not all wineries need to play in all arenas.

Segment Why They Buy Pricing Considerations and Challenges
Tasting Room Entertainment.People visit the County and a winery visit is part of the experience, and it
it is usually a fun filled time		 Customers are willing to pay a premium for the experience.
On holidays one always pays more.		 You control the experience.
You must manage the tastings.
Calculate waste vs. revenue per tasting.
Select staff for selling ability.
Wine Club Customers love the price point of the wine.
It saves running out to buy wine at the LCBO.
They feel special and privileged.		 Willing to pay a premium price for a premium wine.
However, the experience must be perceived as providing great value for the price		 To secure loyalty
must offer some deal such as a free gift or meal coupon.
Requires continuous reinforcement to maintain loyalty.
Expect high turnover among members.
Requires recruiting and monitoring by dedicated staff.
Restaurants To make a high markup on resale.
To carry the type of wine their customers demand.
Because they have a relationship with you		 To entice the restaurant to select your wine among many competitors, the price must be low enough to make margins attractive for the restaurant. You have little control.
Substantial investment in sales force.
No volume advantage.
Remote inventory management.
LCBO Politics.
Ontario shelf space.		 Competitive pricing depending on how badly one wants shelf space. They hold the power.
No control by winery.
Very low margins

 

In which segment do you offer the best value proposition? I would argue that in most cases it’s the one where you have control i.e., the experience and where the customers are primed to purchase. This of course means direct sales via the tasting room. It’s up to you to create the right environment, have the right staff, and market yourself successfully.

Restaurants control the price at which your wine sells, and the way they chose to recommend your wine.

The LCBO holds all the cards and the margins are tiny.

It’s up to each grower to decide where they are best positioned to meet the demands of the various segments. Ultimately it’s a matter of weighing the costs against the expected revenues.

Making Great Wine and Great Money

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I stand in awe of the individuals I have met that established and operate a vineyard and a winery here in the County. They had a dream and the strength to carry it out.
Having a dream, a vision and passion are necessary ingredients of creation. They permit a dream to become reality. These visionaries have talents and energy that the rest of us can only dream about.

However, once the vision has become reality a different skill set may be required. The ship builder needs a captain to pilot the ship. The winemaker needs someone to sell their wine.

  • Few of us are blessed with the ability to visualize the dream and then continue on to create an enterprise that is self-sustaining, grows over time and produces the financial and psychic satisfaction to reward the efforts that have been invested.
  • Most of us are good at some things and less strong in other areas. So once the dream has become real we often need a team to help carry on and build a healthy and vibrant enterprise. The early building blocks of that team are the right kind of accountant and the right kind of banker. They will form the start of an advisory board to the CEO (that’s you).
  • They will want to know whether the business is profitable. If not, when will it be?
    • Can you explain your business plan?
    • Are you covering your administrative costs and your financial expenses?
    • What about cash flow forecasts?

To answer these questions we require a measurement system.

  • The system must measure the cost per bottle and the gross profit on each bottle.
  • The system must identify the direct production costs as well as the overhead.
    • It must gather together the costs of labour, packaging, labelling, bottling etc. and then appropriately cost them for each bottle.
    • The system must differentiate among the various products and allocate overhead correctly.
    • The system must also correctly cost the inventory, and distinguish between raw materials, work in process and finished goods.

 

An accurate costing system allows the business to decide which wines to focus on, which to drop and which to expand. If you are losing on each bottle then increasing volume will ruin you that much quicker.

Giving life to a business and making great wine require passion. Keeping the dream alive requires understanding the customer, pricing the wine correctly, marketing and selling skills. It always requires having a measurement system to know whether you’re making money on the great wine you produce.

Opportunities not Problems

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Opportunities not Problems

 

Too many of my clients and prospects reach out to me for help only when their problems become overwhelming. As long as there are no problems they think that all is good. Well, it’s not true.

We are all in business to achieve results. A business does not achieve results by solving problems; it does so by exploiting opportunities. Solving problems brings the business back to a normal state. Solving problems enables the business to function as it was meant to do.

Results come from exploiting opportunities. Consequently, resources must be allocated to opportunities, and not to problems.

Any new and existing business must focus on opportunities. Often, listening to our customers will point to these opportunities. Sometimes we can find opportunities by studying our competitors, and other times by studying those who are not consumers of our industry.

Searching out and finding an opportunity comes from being attentive to the market’s needs.  Making a meaningful contribution to that select market will lead to profits.

Supervisory Styles

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Supervisory Styles

 

How is it that coaches succeed with some teams and fail with others? Why do players succeed with a team after failing with previous teams? Why do successful executives fail at their next position?

There are obviously many models that endeavour to explain why this happens, but I particularly like the notion that the style adopted by a supervisor must match the competence of the employees supervised.

For instance, managers used to delegating responsibilities to their reports will do well with a well trained and competent team. These managers will provide the necessary resources to the team, come to an agreement as to what it means to succeed, and stay out of the team’s way.

The same style will fail dismally if the team is composed of newcomers with a low skill set who need to be taught the fundamentals. The team will require a supervisor with a very controlling and directing style. Allowing the team independence is allowing the team and the manger to fail. Similarly, a directing style will fail with a team composed of competent and self motivated professionals capable of directing themselves.

Far too frequently managers rely on their default style and make no adjustment for the staff they are supervising. When things turn bad, these managers may resort to criticism, temper tantrums or threats in an effort to achieve different results.

Consider adjusting your style to the capabilities of the people you are supervising. Sometimes different people on the team will require a different style until their competence level changes.

Making a Case for Your New Business

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Making a Case for Your New Business

 

Creating a business case prior to actually starting a business may help prevent a disastrous venture doomed to failure. All of us are prone to falling in love with an idea and thinking that the world will embrace it. It won’t. Too often businesses are built on wishful thinking. Instead, an idea for a business must be examined and tested for validity.

Here are the steps that need to be taken:

  1. Crunch the numbers of your idea
  • Develop a forecast showing your best and worst scenarios.
  • When will you break even?
  • Develop a cash flow projection. Will there be adequate financing to pay for it all?
  • Develop individual projections for various pricing environments.
  • Develop individual projections for each competitive reaction.

 

  1. Examine user needs

Ask prospective customers   whether they like, want and need your business. Will they receive value and benefits from your offerings? This step is often skipped because we think we know best. The goal is to hear from customers what they want, need and will be delighted by.

 You need to answer the following questions:

  • How are the prospects currently solving their problem?
  • What problems are left unsolved?
  • Where is the competition failing in providing solutions?
  • What trade off will the customers make?

 Your business should deliver a unique benefit not currently available.

 

  1. Competitive Analysis.

Analyzing the competition requires an understanding of the competition’s business model and its strengths and weaknesses. Consider the following:

  1. Who is the competition?
  2. How strong are their sales force, customer service and marketing?
  3. Are you targeting the same customers?
  4. Is price a major factor in customers’ choice?

 You also need to understand how the competition competes and where their customers are coming from. Finally, assess the competition’s reaction to your business.


  1. Concept Testing

Before starting the business do a concept test. It’s a low cost and low risk step and it may save you a lot of money down the road, and. This will confirm or negate your hypothesis that you will satisfy customer needs better than others and that prospects will leave their current providers and switch to you. The idea here is to gauge market acceptance, what features are meeting with customer delight and what prices customers are willing to pay. This step can involve:

  1. Running test ads
  2. Developing a website with offers
  3. Collaborating with an existing business

 

Make sure that you’ve done your homework before investing your money. Anything else is a gamble.

Competitive Advantage through Differentiation

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Competitive Advantage through Differentiation

 

For a business to achieve earnings superior to the average in the industry it must have a competitive advantage. Without possessing a competitive advantage a business is doomed to depend on the economic fluctuations in the markets. When the economic conditions are favourable it does well, and when the economy is poor it suffers. I suggest that depending the economy is looking for scapegoats. The real weakness is commoditization of the business. In good times and in bad times having a competitive advantage will earn superior returns.

 Last month I discussed the importance of achieving a competitive advantage through having a low cost advantage. In today’s post I discuss differentiation as the source of competitive advantage.

 Without differentiating a business we will earn the average income in its industry. For some high paying industries like cardiac surgery or specialized dentistry the average industry income may be satisfactory, however that is not the case for most businesses. The average lawyer, accountant, dry cleaner, renovator, wine grower, or graphic designer will make an average living for their industry. Their income may be at times satisfactory but is never spectacular, unless they possess a competitive advantage achieved through differentiation.

 Differentiation means providing a unique benefit to customers. Being unique means the benefit is not available elsewhere. If we do not differentiate our business then we are commoditized and no different from others, and the customer will search out the cheapest alternative.

 Differentiation allows for superior pricing, larger sales and stronger loyalty. The last item is particularly important to professional service businesses, where customers don’t really understand and trust the services being provided and frequently skip from one provider to another.

 Differentiation is the result of the value chain activities that we provide. It does not have to be about our product being better or our service being more competent. It may occur at any point in the value chain. It could be a result of our human resource policies concerning recruitment and compensation, incentives and training. It could be because of our infrastructure dealing with response time to customers, our having proprietary knowledge and software, or our financial strength and the ability to provide special terms to customers.

 Selecting where to differentiate should be based on creating value for our customers, and understanding buyer value means understanding the buyer value chain. Our products /services are an input to their value chain. A business creates value for a buyer that justifies their paying a premium price, or it creates value through lowering buyer cost or raising performance, thus creating a competitive advantage for the buyer.

 The buyer then acquires their competitive advantage through:

  • achieving a lower cost position
  • achieving a lower financing cost
  • our providing installation and support
  • our providing training
  • achieving a lower overhead
  • reducing direct labour
  • reducing failure rate

 Providing a competitive advantage for our customers provides our business with a strong competitive advantage. This competitive advantage will keep our business thriving in good times and healthy in lean years.

Running a Business for Cash

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Running a Business for Cash

 

When faced by a financial crisis a business owner must focus on the following three important areas:

 Reassessing the business model.

  1. Changing operations to reflect the new environment.
  2. Ensuring that enough cash is available.

In my last two posts I discussed the importance of a business model, and addressed the need for a business to make operational changes. Today I will focus on the topic of running the business for cash.

 No matter how profitable a business, running out cash will lead to insolvency. Keep in mind that unless you have a successful business model and the business is run effectively the business will eventually fail. Assuming the first two criteria exist, how do we manage a business from a cash perspective?

 Understanding the various elements of a balance sheet may be helpful.

 

  • If we carry debt it may be wise to convert debt to equity. Equity is more expensive but does not require repayment and is therefore cash saving. This is easier said than done because a bank will not ordinarily agree to this arrangement, but another type of lender might.
  • The proper use of debt may save cash. Long term debt should be used to acquire capital assets and short term debt should be used to finance working capital such as receivables, inventory and trade payables. Often business owners improperly use short term debt to finance capital acquisitions.
  • Consider refinancing short term debt into long term debt to conserve cash.
  • Examine your cash cycle. A cash cycle begins with your purchase of raw materials, storing the goods in inventory, processing them into finished products and selling them. At sale time we have a receivable but only when we are paid can we pay for our purchases. Until we collect from the buyer we don’t have the cash, and so the cycle resumes.
  •  Shorten the cash cycle. The sooner we collect the receivables the sooner we pay off our debts. The lower our inventory, the lower our cash requirements.
  • Shorten the sales cycle. Speed up the time from acquiring leads to converting them into paying clients.
  • Shorten the marketing campaign cycles. Speed up the sequences from marketing decisions to advertising to leads and ultimately to customers.
  • Shorten the finance cycle. Shorten the time for finance approval, or the time from when an order is received to the time of merchandise delivery.
  • Speed up the credit approval cycle.
  • Speed up the billing cycle. Send out an invoice the same day the work is done or goods shipped.
  • Shorten the collection cycle. Review the terms of sale. Call the customer as soon as the bill is past due.
  • Deposit all payments daily.
  • Delay paying select suppliers.
  • Minimize the inventory on hand.
  • Consider deferring planned capital expenditures.

 None of the above strategies alone may be the answer to the cash flow problem, however when combined their cumulative result may make the difference between survival and insolvency.

Value Chain -Cost Advantage

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Value Chain -Cost Advantage

 

Last month I introduced the concept of the value chain. I emphasized that a successful value chain can provide a competitive advantage by creating either cost advantage or a differentiation advantage.

Today’s post focuses on the importance of creating a cost advantage.

At the outset let me say that creating a cost advantage is not merely about charging lower prices than the competition. Any price reduction is likely to be matched by others in the industry, and unless a business has a real lower cost position then lowering prices has merely created a benefit for the consumers but lower profits for the industry. Consequently, it makes little sense to lower prices unless the competition is unable to match the reduction or will be unable to match the lower price for a long period. However assessing the competitors’ value chain is definitely not a trivial matter, and I will address it in a future post.

A firm’s cost position derives from the activities that the firm performs to provide value for its customers. Provide these activities more efficiently and you have a cost advantage. For most businesses that I’m familiar with, few have a cost advantage. They all have similar activities; they purchase the same raw materials from the same suppliers at the same price and have similar staff paid at the same rate. We do not see a real cost advantage.

However, a cost advantage may be secured through making different choices. A business may choose who it wants to sell to, how it wants to market its products or services, what products or services it wants to provide and which it does not.

For example, my own firm provides advisory services as opposed to compliance services. We service business owners that need assistance with their business. We do not provide tax services or bookkeeping although we collaborate on behalf of our clients with those that do. Similarly, Wal Mart targets customers who have a hard time making their paycheck last. This is not the clientele that patronizes high end department stores.

Choices don’t need to focus only on customers. Choices may be made as to the process in creating a product or to what extent to automate a process. A choice may be made between direct and indirect sales and the advertising media used. These choices create an individual value chain with specific costs.

Other choices may involve which product features to include or do without. A choice concerning the level of service one wants to provide will impact on the level of costs. It could be a decision concerning delivery or the level of wages to pay.

A cost advantage is also obtained by performing activities more efficiently than others. However, anyone with a cost advantage will soon have imitators, so a sustainable cost advantage can only be maintained if it cannot be imitated by others.

Some of the strengths possessed by incumbents that may deter new entrants from attempting to dislodge an existing low cost provider include:

  • Economies of scale- The incumbent has a scale advantage that is not easily replicable.
  • Learning- The incumbent possesses proprietary knowledge or rights not widely available, and/or a strong business intelligence capability.
  • Integration- The incumbent has high vertical integration and thus lower costs than a competitor that must use outside vendors, manufacturers and salespeople.
  • Discretionary policies- It may be a choice of location of the manufacturing facilities.

 

To determine whether one has a real cost advantage that can be sustained a proper analysis of the drivers and their impact on costs is necessary. The analysis will determine one’s cost position and that of its competitors.

 

Threats to Accounting Practices

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Threats to Accounting Practices

I recently attended a webinar run by the Proactive Accountant’s Network that reflected my thoughts concerning accounting services.

Fundamentally, they contend that standard accounting compliance work provided by CA firms is being threatened.

They list 3 threats:

  • Cloud accounting
  • Globalization
  • Commoditization of compliance services

Their premise is that the world has changed in the way services are being delivered, which has resulted in the demise of organisational giants. For example:

Formerly Replaced by
Kodak Digital photography
Blockbuster Netflix
Bonders Amazon
Yellow pages Google
Travel agents Expedia

 

 

What is the likely impact of these changes on accounting and bookkeeping work?

Cloud services are taking over and they will do to the practice of accounting what Netflix did to Bonders and Google to Yellow Pages. See http://www.nicksinclair.com.au/2013/05/why-your-accounting-costs-will-decrease-by-30-and-why-your-accountant-doesnt-want-you-to-know-about-cloud-accounting/

Globalization is here and services are being off shored. For instance:

  • Repetitive tasks can be performed anywhere in the world at lower costs.
  • Bookkeepers and overseas accountants will offer their services for less

Commoditization of compliance services is here. Clients are more transient and more price resistant. Among other things:

  • Clients want and expect answers to their business problems
  • Coaches are providing some answers and competition
  • Young clients want an accountant who is technologically aware
  • Clients don’t like time based billing
  • Clients want value added services

 

A 2013 CCH survey reported that:

 

 

 

I think their premises are worth considering. Any thoughts?