Hiring Great People Reduces New Biz Risk

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New businesses owners need to execute exceptionally well, otherwise they are increasing their risk of failure. Exceptional execution is usually the outcome of hiring exceptional people. As Dan Geller, founder of Gate Guru described it at a Wharton Entrepreneurship panel discussion I recently attended: “10% of start-ups are successful; those are the ones that hire really great people.” Savvy entrepreneurs who lack the funds to hire top people can at least identify their intended team members to potential investors, to reassure them that a strong team will coalesce once they invest.

 

For certain businesses, securing the right people talent is a case of hiring the right service provider.   The most outstanding example of this I ever witnessed was when helping Richard Ellenson with the financial model and competitor analysis for the launch of Blink Twice: he engaged Frog Design, Flextronics and some of the leading linguists in the U.S. for the design and development of the Yakk, a ground breaking alternative augmentative communications device.

 

Strong execution also is the outcome of sequencing the business growth wisely. A second Wharton panelist mentioned the approach at HopStop, where the founder decided he was going to prove the business “in one market, and one use case, before going broad.”   Starting in a single market is the best way to prove that the demand for your product or service is at the level you believe, and that you will have the capacity to meet it at a service level your customers expect and at a cost where you can make a profit as you expand. With those kinds of in-market results to point to, you will have a better chance to raise outside capital for your new business.

Five Keys to Success for a Seasonal Businesses

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On our family vacation over Labor Day weekend, we went hiking with friends along the shore of Lake Tahoe’s Emerald Bay, and afterward stopped by the Sunnyside Restaurant in Tahoe City for a late-afternoon snack.   There was a very large noisy party inside in the bar area, but fortunately plenty of empty tables on the deck with a wonderful view of Lake Tahoe.  So we were both dismayed to learn from the hostess that they could not seat us, as the kitchen could not keep up with the customers they already had.   “Come back next weekend, we’ll have plenty of room to fit you in,” we were told as we left for another restaurant down the road.

Then this past weekend, we took an hour long drive north to Stuart’s Farm in Granite Springs, NY to pick up some apple cider, apples and pumpkins.  The Stuart Family has had this farm since 1828, and I’ve been taking my family there since 1986.   They are a bit off the beaten track, and used to be mainly a destination for school groups and Yorktown locals, but word seems to have gotten out.   On a crisp fall day, their visitor count is well up from anything I can recall, but easily accommodated by their expanded parking.  The prices are a lot higher then I remember too:  $9 for a gallon of apple cider, the same price charged by Fairway Markets in NY City, and $.79/lb for pumpkins.

All of which got me thinking that the folks at Stuart’s Farm seem to know a whole lot more about running a seasonal business than the owners of the Sunnyside Restaurant.

But what exactly are the keys to success for running a seasonal business?  Based on my experience, I would boil it down to these five things:

  1. Understand both your peak season and off-season demand – Stuart’s Farm seemed to have this well understood, while Sunnyside Restaurant did not.
  2. Service as much of the peak season demand as you can do economically – temporary labor is often a good solution, provided you don’t damage the brand, due to poor quality or service.
  3. Avoid price discounting during the peak season – once we had made the drive to Stuart’s Farm, I was pretty well committed to buy the cider, and to buy the pumpkins, regardless of the price. And if I had decided not to, there was someone else right behind me in line who would have.  So there was no reason for Stuart’s to be offering any discounts, the cider and pumpkins were sure to sell out.
  4. Avoid advertising in peak season – it only exacerbates the seasonality of the business.  This was a lesson I learned earlier in my career, as financial manager on the team that successfully launched  Jell-O Pudding Snacks.  The plant in Mason City, Iowa could not keep up with demand in the fall, yet the marketing team insisted on back-to-school advertising.  I convinced the marketing team to stop doing this, as it made no economic sense to whip up demand beyond the point at which we could service it.
  5. Plan your cash flows carefully – the money you make in peak season has to last you through the off season.  After nearly 200 years of continuous ownership of the farm, it seems as thought the Stuart family has this one mastered!

Some Mid-Year Tune-Up Questions for Your Business

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Two years ago my article: “Time For That Mid-Year Budget Tune-Up” was published by the New York Enterprise Report, pointing out to their readers that mid-year provides a unique opportunity for business owners to get a better grasp on how their business performing.

Assuming they created a budget at the start of the year, and take the time to compare actual results to budget.

Recently, I’ve had a few good chances to “walk the walk” with some of my clients, and it’s been an interesting experience on a few counts:

  • Used second quarter actual results to gain a clearer understanding of packaging costs and direct labor costs per case for an early stage snack manufacturer.   I had estimated both too aggressively in my business plan financial projections.  To catch this required that this client’s bookkeeper be very accurate in booking actual cost of goods sold to each individual element, which she was.
  • One difficulty in doing this analysis was the client’s inattention to actual case sales.  This data was not captured at the time of sale, and was too difficult for them to pull together at quarter end.  We backed into estimated case sales using actual revenue, and a general understanding of what average revenue per case should be.  Don’t let this happen to you.  All business owners should do their best to define a unit of sale, and track these units.  It is invaluable information for doing revenue and cost analysis.
  • I was called into a company I had never done work for before to give a point of view on what was their break-even point, as they were confused by gross margin which fluctuated by 10 percentage points up and down from month to month.   I’ve seen this at other companies that don’t have a mature cost accounting system, and don’t make a monthly entry for change in inventory.   This company was overvaluing their finished good inventory at the expected future sales price, which meant that the more they produced, the better it made their gross margin appear in that month.  Don’t let this happen to you!
  • Got a more established client back on track analyzing and acting on material usage at their factory.  Their production team members had gotten in the bad habit of blaming nearly all off-standard material yield results on bad cycle inventory counts.  The solution: told the production team they had to get one of their people to participate in the monthly inventory count, and sign off on the physical count of raw and package material at the time it happened.

It’s August and your firm’s CPA might be on vacation at Cape Cod, the Hamptons or the Jersey Shore.  But it’s still a great time to use the first half year actual accounting results to gain a sharper understanding of what is really happening at your business, both good and bad.

 

 

 

When Cost Accounting (Almost) Killed the Sale

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I was walking by C.P. Yang Korean grocery at 73rd and Columbus earlier this afternoon, and saw a delivery truck drop off some spectacular looking lilacs from Sharon, CT.   They literally dropped them on the sidewalk in front of the entrance to the store, and drove off.

I went to do another errand, and then circled back to ask the man tending to the flower stand how much for a bunch of lilacs, which at this point were lying by his feet, but not yet divided into bunches.

“They are not ready for sale yet, I paid $200 for all of them, but I have to count them, to find out how many bunches, so I know how much to charge” he told me.

“Aah, a cost accountant, I do cost accounting too,” I related, hoping to make a connection, and close the deal.   “How about if I pay you $10 for one bunch?”  This is the price I saw for a bunch of lilacs being sold at a nearby store, but I wanted my bunch from this fresh delivery.

“No I have to count them first, they are not ready for sale,” came the terse reply, with no indication of when these particular lilacs might be on the market.

I guess this story is an example of why Cost Accountants usually don’t get promoted into Sales I thought to myself, as I shrugged my shoulders and walked off, lilac-less.

I always advise my clients to only pursue Cost Accounting studies when the investment of time can pay back through better understanding of potential cost savings, or better informed pricing strategy.   But enough of that, I’m off to try to buy a bunch of freshly picked lilacs, which hopefully have been both costed and priced by now, and ready for sale.

 

 

 

Yelp vs. Angie’s List Represents Battle of Conflicting Business Models

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Business model is a term with multiple meanings, depending on the context.

In its broadest sense, it describes the way a company has chosen to conduct business:  what revenue sources does it aspire to, which markets, segments, channels, and how does it fulfill that business when it gets it?

In a more specific sense, a business model is an analytical tool that allows business managers to test the financial outcome of various business strategies or decisions described above, by mathematically modeling the cause and effect of each decision, individually and collectively.  If the models are skillfully built and used, they can provide huge informational benefit, and at a fraction of the cost of actually going to market.

As such, a business model is a way to identify the most profitable set of business decisions, while avoiding a painful “trial-and-error” approach.

The Internet is still so new, we can see companies with starkly different business models battling each other in the same space.  For example, Angie’s List and Yelp both went public within the last five months.  Both are forums for consumer feedback on goods and services, but their business models actually could not be more different.

Yelp’s reviews are freely available on the internet, while Angie’s List reviews are only available to paid members, after a free introductory period in new markets.  Angie’s List feels that a loyal membership base and strong service provider loyalty are the strengths of its business model.  Yelp cited its attractive business model in its S-1 document, prior to its 3/2/2012 initial public offering, and in particular it ability “to attract a large audience of consumers with almost no traffic acquisition costs and a diverse customer base of local business and national brand advertiser.”

So far, neither company has distinguished itself as having a clearly advantageous  business model.  Working on the premise that its member reviews are valuable information worth paying for, Angie’s List was able to raise $114 million from investors in November of 2011, despite having been consistently unprofitable since its founding in 1995.

Embracing the spirit that reviews should be made freely available to build internet traffic, which is coveted by its advertisers, Yelp raised $96 million in early March of 2012, giving it a market cap of approximately $1.3 billion.  This is a pretty rich valuation for a company which had losses of $7.4 million on revenues of $58.4 million for the first nine months of 2011.  Maybe this is a market segment where the best business model is yet to be found.

The same debate between free and gated access to content is being played out by newspaper and magazine publishers.  Recently I’ve been noticing that content is freely available once I find the location of the “click through this ad” button on my screen.   Often it is on the upper-right hand corner of the screen, but now always.  I have a sneaky suspicion that every second it takes me to find the button that lets me move on from the ad to the content is being counted by the publisher, and sold to his advertisers.  This is a business model I can live with.

My wife and I recently attended a seminar on the impact of digital media on newspaper and magazine publishers, and the panelists collectively agreed that they need a better way to monetize content they put on the web.  One of the ideas put forward was compensating journalists whose content is put on the web based on the amount of traffic it generates.  My wife raised a concern that this is not what she is looking for from the “New York Times” and others, and the attendees burst into applause.

These days, it is harder to come up with a new business model in food retailing, but people keep trying.  A few years ago, Really Cool Foods opened a store on the Upper East Side, selling only their own product – convenient, ready-to-eat, high quality – which apparently was manufactured somewhere out on Long Island.    They attracted a few consumers, confused a few others, or as one Yelp respondent posted:  “It looks like a market from the outside…but where is the produce section? And the kitty litter aisle? And the butcher case? “  Retail rents are so high in Manhattan that store owners have to make use of every available square foot, and this store simply didn’t.  Now a couple of years later, I see a store selling prepared organic and raw foods opened up on Amsterdam Avenue in the Upper West Side, using the same approach, and again exclusively selling food made in their parent company’s factory.  Is their food good enough to make this business model work for them better than it did for Really Cool Foods?  Time will tell. For now, I can check out their reviews on Yelp…..for free.