I haven’t posted here yet this week in part because I’ve been distracted with posts elsewhere. One of them is about the value of saying no in sales, one is a refresher on fundamentals of lean planning, one is looking at the future of brand marketing and content, and the fourth is a pure fiction riff on current events.
My post Why Saying no can be a Great Sales Tool appeared today on the American Express OPEN forum. With a wave at “flim-flam” sales, long-term success in sales is about listening and matching what the customer needs to what you offer. The secret is that sometimes you have to say no because you don’t really have something to sell that will solve the problem; and in that case, saying no is better than trying to win the sale that will produce a disappointed customer.
My post Adobe’s Loni Stark on the Future of Brands appeared yesterday on the Rebelmouse blog. Stark is senior director of strategy & product marketing at Adobe. She talked about the future of brands as content marketing becomes faster, better, and much more competitive.
I posted It’s Only Twitter: What Could Happen on Medium yesterday. This one is off my beaten track, not the kind of thing I post on this blog. It’s a pure-fiction imagination of a moment that might have happened seven years ago, related to the current presidential election.
(Note: this is reposted from my post Monday on Amex OPEN forum. It had a different illustration there, and I’ve changed it to the hockey stick here in honor of so many sales forecast charts that looked like hockey sticks)
Every spring, I read and review dozens of business plans as a member of an angel investment group and a judge at several business plan contests. I love it. The plans I’ve seen are better than ever this year. But, for some reason, their financial projections are the worst I’ve seen.
How can the plans be better while their financials are worse? I think product/market fit, defensibility, scalability, market need and management experience are much harder to fix than bad financials. A good business with poor financial projections will survive and grow.
Still, it’s a damn shame. The worst, and by far the most common mistake, is absurdly high profitability. So, in honor of this epidemic of bad financials, here’s my five-step plan for better financial projections.
1. Start with a sales forecast
Make it bottoms-up, always; never tops-down. This means that you start with unit and price details and build up to sales from specific, concrete assumptions. For example, if it’s a website, base your forecast on metrics you and others can compare to other websites, such as unique visits, page views and conversions. If it’s a product going through distributors to retail stores, then look at the number of stores you can reach and the distributors required to reach them, and forecast units per store per month.
Never get caught forecasting a market by assuming the total market size and then projecting your market share. That doesn’t work. Nobody who matters believes it.
Do it monthly for 12 months, then annually for the second and third year. Think of it as a spreadsheet with months and years horizontally across the top and category names vertically along the left-hand side.
Your sales forecast should include your direct costs (also called unit costs) and costs of goods sold (or COGS). This is how much it costs you in direct costs, unit costs, per units sold. These are costs you don’t pay if you don’t sell. They go up and down as sales go up and down.
If you have no idea, don’t throw your arms up in frustration; don’t say “but it’s a new business, how could I know?” Break it into unit economics and unit assumptions. Get some comparisons from similar industries to show you what gross margin (sales less costs of sales) might be, and average profitability. Google “standard financial ratios” for leads, and don’t expect to pay more than $100 for one industry profile.
And if you still have no idea, then: 1. keep your day job; or 2. find some partners who know the industry.
2. Forecast running expenses
We call these operating expenses, such as rent, utilities, payroll, advertising, websites, travel and so forth. Here again, if you have no idea, you need to find financial profiles, take in a partner, talk to somebody who’s done it before, or maybe keep your day job. You don’t want to have no idea.
This is also a spreadsheet, with the same months and years as in the Sales Forecast horizontally across the top, and the categories vertically down the left side.
By the time you’re done with expenses, you’ve got everything you need to do an estimated profit or loss analysis. The standard format starts with sales, then subtracts direct costs to calculate gross margin. Then you subtract operating expenses to calculate profit before interest and taxes (called EBIT, with the E standing for “earnings.”)
If your projections have profits higher than 10 or so percent of sales, you’re not done. Either you have underestimated your costs or expenses, or you have an unusually strong business. It’s almost always the former.
Hint: No matter what industry you’re in, if your pretax profits are more than 15 percent, then I suggest you subtract 15 percent from your projected profits and add that amount back into operating expenses as marketing expense. Having profits too high usually means you aren’t projecting all your expenses. And marketing is where most people underestimate expenses. And besides, in a real business, well-spent marketing expenses are better than profits because they grow your business, which makes it more valuable over the long term.
3. Startup costs
Make a list of expenses you’ll have to pay before you start. Common startup expenses are legal expenses, website development, logos, signage, fixing up a location, computers and so on. Then make a list of assets you’ll need. Those are things like vehicles, equipment, furniture, startup inventory and starting cash in the bank.
The cash in the bank is the toughest. If you go back and look at your running profit and loss, that will give you an idea. You have to have money to support your early losses. Read the next step and then revisit it.
4. Understand cash flow
Unfortunately, making a profit doesn’t mean you have cash in the bank. The biggest problems here are the business-to-business sales, which typically mean you get paid a month later; and product businesses, because normally they have to buy things to sell before they sell them. If you’re a business that paid two months ago for what you sell today, and is going to get paid for that three months from now, then cash flow is both critical and unintuitive. You’re going to need money in the bank (you can call that working capital) to handle running expenses while you wait to sell stuff and get paid for it.
On the other hand, If you’re selling to people who pay immediately in cash, check, or credit card, especially if you’re not putting money into buying and keeping products, then cash flow is more predictable.
If you have no idea, and you do have business-to-business sales and inventory, then look at templates, or software, or books, or tutorials, or somebody who can help you. Don’t take cash flow for granted, even if you expect to be profitable. Ironically, some of the worst cash-flow problems come with high growth rates.
5. Review and revise regularly
Yes, you should forecast for 12 months and the two following years; but no, don’t expect your forecast to be accurate. They never are. You do the financial forecasts so you can set expectations and link spending to sales, but that’s just the start. Review your results every month. Compare actual results to what you had planned. And make corrections.
Final thought: all financial projections are wrong, by definition. We’re human and we don’t predict the future accurately. So don’t expect accuracy. Go for plausibility, and then follow up with regular plan versus actual analysis, review and revisions. We call that management.
(Note: I posted this last Thursday on American Express OPEN Forum. I’m reposting here.)
I’m not a baseball fan and I try to avoid sports metaphors, but there are some things I love about baseball that I treasure for their relevance in entrepreneurship and business management.
Baseball doesn’t pretend perfection. Pitchers get to miss their target three times free for every batter. Batters get to miss the target two times free. The best batter in history hit just a bit over .400, meaning six outs per every 10 times at bat. Anybody who batter better than .300 (three hits out of ten at bats) is highly regarded, if not a star. And people make errors on defense — and they call them errors, record them, and keep stats on them.
Small business owners should have it so good.
I’ve been running my own business for several decades now, which is long enough, I have to admit, to learn to live with mistakes. So now I want to give back, a bit, and share these five vital truths about mistakes:
1. You make mistakes
What worries me most about how much we all make mistakes is the whole mystique about excellence that leads to denial and distortions. I think of the song by Shaggy, ‘It Wasn’t Me.’ Reflect on your own work: do you make mistakes? If you don’t answer that with an immediate ‘Yes,’ then you’re in danger of being one of those delusional managers who blames others.
Don’t kid yourself. The longer you survive in business, the more mistakes you’ll make. It comes with the territory. Like in baseball, if you get up to bat you’re going to make those outs. If you’re the pitcher, you’re going to throw some pitches that weren’t strikes. And out on the field, you’re going to make some errors. You have to recognize it to deal with it.
If you’ve been at business for a while, then anybody close to you — like friends and family and especially team members in the business — can quickly point to a mistake you’ve made to fit any context. Be aware that it’s true for anybody in your position. Remind them, if you feel it’s appropriate, that you’re in the business of making mistakes, and if it weren’t for what you’ve done right, you wouldn’t still be in the game.
2. Accepting mistakes is good, but analyzing them is better
Much as I admire the general principles of Zen (as I understand them), just accepting the fact that you’re making all those mistakes isn’t good enough. Grab them, bring them into your head, and twist them around a bit to see what they can teach you about yourself, your business, and people in general. Keep an inventory of mistakes you can use to apply to future problems. They’re food for thought, eye openers, and reminders. Don’t forget them. Analyze them. Understand them.
It’s about vision. Humility does a lot more for business vision than corrective lenses.
Some people say amnesia is good for thinking and process and mental health; I disagree. Don’t dwell on your mistakes. Don’t beat yourself up over them. But keep them close enough to help with the future.
3. Beware of the quicksand mistakes
I’ve written about quicksand problems before. Life is full of them, which means business is full of them, too. When you’re trapped in quicksand, struggling makes it worse (or so I’m told; I haven’t had the experience). The quicker you struggle, the faster you sink. You relax and accept your fate and you’ll last longer, and maybe get rescued.
Some kinds of mistakes are quicksand problems: if you acknowledge them and change direction, you’re way better off than if you try to fix them or hide them. Call out the mistake, file it, analyze it, and use it. Don’t pretend you didn’t make it.
4. Understand uncertainty
We need to remind each other that we walk a perpetual treadmill of uncertainty. We never once make a decision knowing the future, but we are all the time discovering we guessed wrong, in the past, about what was going to be happening in the future. You have to always keep in mind that when you made that mistake you didn’t know what was going to happen. You were guessing, then, about what you know now. Ease up on yourself.
5. Mismanaged mistakes are team killers
Those of us in command must always remember that our people make mistakes, too, just like we do. Leadership and management come together on this point. When you give a task to somebody on your team you have to recognize that they make mistakes just like you do. You have to help them deal with mistakes, leading by example, and collaborating. You can’t pretending these mistakes didn’t happen. But you can’t grind people’s faces into them either.
Think of this concrete example: You want somebody to reserve hotels for your business travel. You don’t like the hotel they reserved. What, and how, do you tell them so that they reserve you one you like better next time? If you do this one wrong, they’ll never reserve a hotel for you again without giving you so much information and making you make so many choices that it would be easier to just do it yourself. When that happens, it’s not their fault, it’s yours; it’s your reaction to some past mistake.
Hard to have a more successful or more high-profile entrepreneur/winner than Richard Branson, so I clicked quickly this morning from email to the Amex OPEN forum to look at his Top 5 Tips for Entrepreneurial Success .
Lots of people have opinions, lots of people have expertise, but he has Virgin Airlines, Virgin Records, and all of that. His five tips are pretty good reminders:
Find good people
Realize that the employees are the business
Always look for the best in your people. Lavish praise. Never criticize.
Don’t take yourself too seriously.
Screw it, just do it.
I say this is maybe only 4.5 tips because of the “never criticize” part of his third tip. In more than 20 years of building and running a company, one of the hardest things to do, but most important, is managing mistakes.
Richard Branson says:
When mistakes happen – which is inevitable – I always take the position that you have to learn from them and try not to dwell on what went wrong. It’s almost always better not to go over the obvious with the people involved. They know exactly what happened.
I agree with the first sentence there, but I’m afraid that you do have to “go over” what happened, because it’s not always obvious. And I don’t think they always “know exactly what happened.” You and they need to review it at least once, so everybody is on the same page. It’s business, not fun, and you’re supposedly running it. It’s only normal that without the right kind of follow up on poor results, some people will rationalize or gloss over or fail to learn from mistakes. If you, the boss, never acknowledge the mistakes, you don’t optimize the business.
Obviously I mean good constructive criticism. Not back-biting or second guessing when it doesn’t matter. But there’s that tendency to want to be friend rather than boss, and ultimately if you’re running a business, somebody has to have the backbone required to set expectations and track results, and, the hardest part, deal with results that are less than expected.
I learned that the hard way, by not giving negative feedback. People don’t always correct themselves.
(Note: I posted this yesterday on the Amex OPEN forum. I’m reposting here for your convenience. Click here if you prefer the original.)
Looking back now at more than 20 years of running my own business, it was rarely about anything as simple as just making money. Money mattered, no doubt; in fact we had a lot of debt resulting from the business during bad years, and no outside investment until much later, so money was the critical resource. But it was also about doing what I liked, building a place I liked to arrive at Monday morning, working with people I like and respect, and avoiding boredom.
I don’t think anybody builds a business without hard work. But it doesn’t have to be all blood, sweat and tears. I’ve always hated micromanagement, and I’ve never been good at negative feedback, so I’ve had to come up with some extra help to get through it without being a tyrant, but still building a business.
Sure, everybody always says it’s about building a team, but there are teams that work together by pitching in, teams that work in fear, and of course teams that don’t work at all. I can’t say that I’ve figured any of this out for sure, but these five rules seem to have worked pretty well for me:
1. Build your business around believable values
People naturally rally around things they can believe in. Is there anything in business as powerful as believing that what you’re selling is good for your customers? It takes people to grow a company, and people work better when they believe in what they’re doing. Do they walk out the door at the end of the day feeling like they’ve made people’s lives better? It doesn’t have to be natural cosmetics or clean energy or organic food, necessarily; you can even sell used cars in a way that makes your customers’ lives better.
Think of how much shared values can empower your team and motivate your people. Think how much they can liven your marketing. Think about credibility and authenticity.
2. Empower your people
Micromanagement is a real drag. It’s hard to do and annoying as hell. Hire smart people who share your business values, give them ownership of what they do, and trust them. The idea of owning tasks and functions and specific areas of the business is really important. Wherever possible make sure a single person, with a name and a face, is responsible for things — not a group.
Then you have to trust them. Offer them help, collaborate, and empower, but without second guessing.
The real test is when they get bad results or do things differently than you would have. If your team is going to work for the long term, you don’t second-guess or take potshots. Do that once and you’ll have somebody coming to you forever after, always making you, instead of them, make the decisions. And that will be your fault, not theirs.
3. Live the metrics
People love metrics: scores, statistics, grades, and so on. In business it’s not just the money in the accounting reports (although that’s good, believe me) but also the visits, trips, presentations, calls, support incidents, emails processed, minutes per call, and so on. It might seem very un-hippie of me, but that’s actually what we meant, back then, when we were saying everybody should dance to their own beat. That’s metrics.
People who own their own metrics have something they can work toward, that you and they and their peers can see. People who succeed love it. And people who don’t succeed need to know they didn’t.
By the way, this is about the business planning process, setting metrics collaboratively, and reviewing results. Your business planning should also be your management dashboard.
4. Make feedback a constant habit, not an occasional event
I could call this one “tell the damned truth.” And that’s often hard. I hate those annual and semi-annual review processes that serve to fossilize feedback in formality.
Negative feedback is hard. Unpleasant with people you work with, your team members. Doing it easily, honestly, and without delays is one of the better ways to ease the pain. The metrics themselves, in my point 3 above, can make this infinitely easier.
When things go badly, talk about it. Don’t pontificate from above; recognize the pain, bring it up, talk about it, collaborate in finding a solution. Move people around if you have to, give them different jobs, and if that’s not possible, then let them go. Hiding failure is bad karma for everybody.
5. Use mistakes as fertilizer
Yeah, fertilizer smells like excrement, and so do mistakes. But if you’re going to survive long term in your own business, you need to expect those mistakes, acknowledge them, and feed the future with them. This whole feedback thing isn’t about getting the goods on people so you can use it against them later. It’s about building a better team, working on knowing strengths and weaknesses, and using that knowledge to grow slowly better instead of just stagnating.
We make mistakes. Everybody does. Get on with the business.