To Thrive In The Recession, Be A Cockroach

To Thrive In The Recession, Be A Cockroach - Forbes.com

Why should a recession be good for start-up leaders?

First, since a recession weeds out weaklings, it's a time for the stronger to get underway. During a boom, you don't need as much talent to succeed; the environment helps you along. Even the mediocre do well because the market is flooded with opportunity. A downturn offers particular opportunity for especially smart people willing to work harder. They're the ones who discover their full potential and find ways to solve the toughest problems.

Second, bad times, just like good times, never last forever. A recession is as much a part of the economic cycle as is a boom. Nevertheless, in tough times people tend to let their emotions and judgment be colored by the uncertainty they feel. They end up behaving as if the world will always remain the way it is right now. But good leaders don't get stuck that way. They know how to take their eyes off the short term and try to see how things will shape up in the future. And then they don't just sit there gazing; they go ahead and start the process of building that future.

Third, a recession is a time when you know the environment is hazardous, so you remain cautious and tread slowly. Good leaders and entrepreneurs run their start-ups on the thinnest budgets possible, making sure they remain agile at all times. In the words of Paul Graham, programmer and start-up guru, recession offers you a chance to be the cockroach of the corporate world. The immediate cause of death for a start-up is always running out of money. The cheaper your company is to operate, the harder it will be to kill. A recession forces you to be as thrifty as possible and that helps it thrive even in the worst of times.

Outcome Based Thinking

Imagine that you're fairly new in business - maybe even five years in business - and you haven't quite 'made it' yet. Why is this?

There are a million books that say, "Here's what this successful person did, and here's the model. You go and do this. You start a software company and you get on everybody's computer in the world. If you can just get on everybody's computer in the world and make them all give you a dollar, you'll be a billionaire."

Of course, this is true, right?

You go out there and you try to sell your product, your idea, your patent, your trademark, or your invention and you do all the things exactly like the books say. It's like you have it in your mind and you do all this stuff.

You work hard, you're up all night, you're sweating, and nothing happens. You think, "That can't be possible because I did exactly what I was supposed to."

Are you familiar with the books like Built to Last, Good to Great, and some of those titles? Do they sound familiar?

I started to read stuff like that. The good thing was that the books are actually a few years old, so I was reading these books about companies, what things these companies had in common, what made them great, and how they got there. An interesting thing happened; over the following three to four years those companies, after the books were published, turned out to actually not perform as well as the rest of the companies in the United States did.

They actually tended to under-perform. Here I had all these companies-including companies that had been great for 25 to 50 years, like GE, General Electric, Johnson & Johnson, Proctor & Gamble, tons of companies - and all of a sudden they under-perform. They had all the attributes of being excellent and amazing. They were doing everything right, and then everything went to heck.

Why?

Why is it that these companies are now actually showing losses on their statements? What is going on here?

Importance of Random Events

You can actually go to the dice table in Vegas, throw seven passes in a row, and "believe" you're doing really well, that you're amazing all by yourself.

The fact is that the eighth roll could just as easily be a loser as it is a winner.

The incredibly important question to ask is,

"Do you have all your money on that bet, or did you have a small percentage?"

Realize there's some randomness in life. That's a really good thing to know. Here, I'll recommend somebody else's book because I want you to learn about the things that go wrong in life. It's a really important thing to know. There is The Black Swan by Nicholas Taleb.

Pick up that book; that's a really cool book. It sort of gives you cause to understand that you aren't in total control of everything. When you do everything right, there's still stuff that can go wrong. That's number one.

Number two is that just because you have somebody's success formula doesn't mean you've got their recipe for success. I don't know if you've had this experience, but my mom made a couple of great dishes when I was a kid.

She used to make this great carrot cake; it had this right flavor and all that. It was perfect. It was the perfect food. She would tell other people how to make it. It's not like mom held anything back, but it didn't taste the same when anybody else made it.

The fact is that it tasted downright bad sometimes with almost the same exact recipe, if not the what APPEARS TO BE THE exact same recipe. How can that be?

The short and first answer is that food tastes different cooked in a microwave vs. in the oven vs. on the grill. Same exact recipe, very, very different taste, and perhaps very different nutritional value as well.

We leave the metaphor...

What Don't You Want?

The deal is that we always talk about the things that we want in life, "I want to be successful,"; "I want to be earning $100,000 a year,"; and "I want to be helping 500 people a month." If you're in relationships, "I want a gal, and I want her to be really pretty, sweet, nice, and not yell at me," and all those good things.

We have all these things, but we don't specifically itemize the things that we don't want to happen.

Seems kind of silly.

Except it's not.

What the books all miss and what the gurus miss when they're communicating is they're telling stories from their perspective of what they did to succeed, all of which are legitimately cool and valuable things. They're neglecting to say the things that you should not do, the mistakes that they avoided or overcame and those kinds of things.

In other words, what things don't you want to have happen in your business? Those are actually some of the things that cause you to be really successful.

Imagine, that you're saying, "I want the perfect wife. I want somebody who's funny and happy and somebody who's strong and good looking."

Great! There's your model. Now that same girl could be a terrible mother. She could be completely unkind in many other ways to your children or maybe your relatives.

You didn't say you wanted her to be kind to your relatives; you only said you wanted her to be nice, seemingly to you as if that would generalize to the world.

There are all kinds of other terrible things that this person will do in life, and this is what happens in everyday life. We don't itemize the things that we don't want to happen.

We don't create ways to get over the obstacles that are going to come up in life, so what happens is people accidentally get out of a success path.

It's very easy to do this in any business: real estate, investing, anything. They fall apart and they don't succeed because they don't know what they don't want.

If you live in coastal Kolkotta or Orrisa, you don't want a hurricane to come by and destroy your home, so you buy hurricane or some kind catastrophe insurance. If you don't, you have recognized what you don't want, but have failed to act upon that driver, either by insuring against it financially or leaving the physical area.

So the next question becomes, how do you know what you don't want? We'll go back to the relationship for just a second. The woman doesn't want somebody who's going to hit her, right? Does that make sense?

Yet we know that with one out of 20 that happens. The woman doesn't want somebody who's going to hit her children, let's say. Let's go there. All of a sudden a door opens in your mind, "...didn't think of that..."

She would like somebody who actually has proven income potential, not like he just got out of college and he could get a really good job; he's really smart.

That's nice, but does he have proven income potential? Does this person have a track record of bringing in $50,000 or $100,000 a year?

This would've saved a lot of problems along the way, too. As people look at the downside, the drawbacks, and things that can go wrong in life and they find out ways to solve those problems ahead of time, then it's much easier to build wealth and cause success in whatever area you choose.

Discouragement Leads to Failure

Otherwise, what happens is we get discouraged.

I talk to people all over the world, and they say, "I started this business, and I read Think and Grow Rich," as an example.

And, I'm not picking on Napoleon Hill. That book was so huge. I must have read that thing I can't even tell you how many times, maybe 50 to 100 times that it went in my mind.

Then The Law of Success, that other beautiful book that he wrote. Without that, I don't know if I would've had the motivation early on to go through those discouraging things.

The fact is that most people, when they get discouraged, inertia sets in and they tend to not continue to work as hard, to do as much, to achieve the goal, to go for the goal.

Expect Discouragement and Push On to Success.

You want people to know that a lot of stuff can and will go wrong, and we call this Outcome-based Thinking. This turned out to be one of the core factors of success.

Outcome-based thinking works like this:

What is it that you want?

Oh, write this down.

• What is it that you want, specifically?

• What are the things you don't want in this business? What don't you want to happen?

• What are the obstacles that are going to happen along the way?

What else? You just list all of the possible things that can go wrong in this business.

Feel free to get fantastic and wild in what can go wrong.

These are the 'black swans'. Earthquakes happen. Weird things happen in people's lives. Write down all of those things. Now you think, "I'm prepared now."

Now you have to create the map, and a real map has obstacles that are overcome.

How specifically would you go about overcoming each of these obstacles?

Make Your Motto "Be Prepared"

How Do We Learn to Succeed?

kids get bigger and we get more efficient at learning what people need is because we watched other people fail.

Really, when you watch people fail, you learn a lot more than when you watch people succeed. Everybody watches people who succeed. We watch the Olympians who are going to be in the Olympics coming up here. I know people will be listening to this probably forever, but think about your Olympians; they're great stories. They're very focused and single minded; that is their life.

I'll promise you one thing; that won't be your life in business. If it is, you'll probably fail miserably.

Why?

I'll tell you next week.

Cash Flow Management

Many entrepreneurs and small business owners have great business ideas and this is reflected in their products and services. These great business ideas are mostly sound but lack one very important element of good business strategy — Cash Flow. Many businesses fail not because their ideas are flawed but they just could not maintain their Cash Flow well.

Cash flow management is a problem for almost any firm, large or small. The worst symptom of the problem: the business runs out of cash. Watching a business floundering, running out of cash even as it makes great sales and profits is painful. Painful though it may be, it is common and repeatedly the cause of business failure.

Small businesses are especially vulnerable to cash flow problems since they frequently operate with inadequate cash reserves or none at all and, worse, tend to miss the implications of a negative cash flow until it's too late.

Any good business plan must provide you with a reasonable forecast or estimation of the breakeven point. Even it may take time before breakeven point can be met you should at least ensure that you have available cash on hand to sustain the business throughout its life. Cash Flow must be maintained at a comfortable level at all times. By comfortable, I mean it should be at least more than 2 to 3 months of your total expenses and sales costs.

For financing purposes, cash flow projections are generally the most crucial aspect of the business plan. Bankers and other outside financing intermediaries will almost always look for a cash flow analysis in preference to any other financial statement, because this will show how the loan can be repaid. In larger companies, the cash budget for a new project or expansion is critical to the overall decision to commit funds and move forward.

Timing and cash flow are inseparable. Payments to suppliers are typically expected often even before customers of the business pay their bills. As a result, the operation is very likely to have a negative cash flow when it grows dramatically. Periods of change are always reflected in an altered cash flow. If sales fall off, the cash flow slows down. Interestingly enough even if sales increase, the cash flow may stop completely or even become negative (more out than in). Think of the impact of credit sales on cash flow, for example. One-time events such as population shifts or changes in competition could trigger such consequences. More commonly, seasonal fluctuations of the business may also pose cash flow problems where a build-up of inventories must precede the sales cycle (such as a toy business prior to the Christmas holidays).

Whatever the cause, the underlying message is simple: Run out of cash and the business is in trouble. Even if it is possible to raise more money from other sources, sooner or later the timing of cash inflows must match the outflows if the business is to survive.

Why is cash flow so important? If the cash inflows exceed the cash outflows, the business can continue operations. If the cash outflows exceed the inflows, the business RUNS OUT OF CASH and grinds to a halt. Even if the imbalance is only for a short period, it can spell disaster.

Cash flow management does not need to be mysterious or complex. Managing cash is all about timing the inflows and outflows. Cash Flow Analysis starts the process. This can be as simple as going to your check book or accounting system and analyzing your receipts and disbursements over the past few months. A pattern is likely to emerge. What are the revenue sources, and how consistent are they from month to month? As well, what are the expenditures, and how repeatable are they from month to month? Next, look at the incoming revenue stream (Accounts Receivable) or your sales forecast to confirm and further predict cash inflows, and your Accounts Payables to build a pattern of required future disbursements. Match the two. Is there a positive or negative cash flow?

If there is a negative cash flow, the deficit needs to be covered from somewhere. There are two options. Spend less, or get more revenues. Even it the cash flow is positive, inspecting the individual elements may further improve operations. Are there cash inflows or outflows that can be changed?

Cash inflows can be increased by adding new outside cash (usually a limited or one-time option) or, more commonly, by offering a discount for cash payments or for accelerated payments on regular accounts receivable (so-called "quick pays"). Another option for businesses normally offering open account credit (which become the Accounts Receivable), is to offer credit cards instead. Today, even many corporate customers, including many agencies of the federal government, utilize credit cards for purchases to eliminate much internal paper work for themselves.

Cash outflows can often be reduced and/or delayed. They can be reduced by eliminating certain costs (Do you really need a …?) They can frequently be delayed by negotiating or taking longer payment times than you have observed in the past. Many smaller businesses pay their monthly bills (their Accounts Payable) more quickly than they need to in an effort to maintain a good credit rating. The primary criterion here, however, is not necessarily how quickly you pay, but the consistency with which you pay. If you are inclined to pay bills at the end of the month in which they were received, instead, establish a policy to pay 30 or 40 days after receipt. You will automatically gain the equivalent of one to three weeks spending as a one-time improvement in your cash balances, and may be better able to align outflows (expenditures) with inflows (receipts).

If you are coming from a finance background, this is definitely nothing new to you but if you are not, then here are some simple steps that you can take in order to start managing your Cash Flow with your business plan:

1. Set a period of 24 months as your scope of planning. If you can not breakeven within 24 months, I would recommend you to really reconsider whether you want to proceed with the business idea.
   
   
2. Forecast your monthly regular expenses with enough headroom for all unforeseeable items. You may just include an item called “Miscellaneous” if you do not have a clue for the time being.
   
   
3. Forecast your monthly sales with a progressive growth rate. You need to be extremely conservative in order to ensure you are not over promising yourself the sales revenue before you have real data to support these forecasts. You can always revise it up and evaluate when the plan seems to be working or after running the business for a period of time. One thing to note is that even you have sales orders in each month; you may only receive payment after 30 days (or more) depending on credit terms you give to your customers. Accounts Payables always tests a company’s finances.
   
   
4. Forecast your monthly sales cost in relation to the forecast sales. You have to bear in mind that sometimes higher sales volume means you have to increase labor; so labor costs or salaries have to rise proportionately.
   
   
5. Calculate monthly profit (or loss) by totaling up sales and subtract expenses and sales costs. You will instantly see on which month you start making profits. The initial months will mostly be negative figures (i.e. losses) until total sales are higher than the sum of expenses and sales costs (including cost of goods).

After doing the above steps, you now can probably answer the most important question before you start any new business. That is, how much cash or capital should you invest in order keeping your business running until profit starts to build up? It is a relatively simple calculation as you just need to add all your losses in the initial months together plus two to three months of regular expenses (and sales costs) to make up the total capital required for your new business investment.

For example, you estimate it will take eight months before you can make a profit from your new business and the total loss is Rs. 700,000 during this period. You also calculate your monthly expenses and sales costs to total Rs. 100,000. Then your minimum cash required to invest at the beginning should be no less than Rs. 700,000 + (Rs. 100,000 x 3) or Rs. 1,000,000.

It may sound very simple but as others will tell you, business is very dynamic and no two companies will experience exactly the same conditions. What is certain though is that dynamics of the market are the same and so be prepared for uncertainties. Still, it is extremely useful to do such exercise in order to have a quick reality check of your business idea. This is the very reason why I did not start up my business early in the process as I could not shorten the loss period to minimize my investment risk!

Understand what your own cash flow cycle is. This process will take time and thought - otherwise it won't work. It is essential to take time to experiment with combinations of different alternatives. A controlled cash flow, the end result of this process, will more than repay the time and effort given to it. In fact, it may save the life of the business - and the future of the owner/managers as well.

Run your business - don't let it run you. This is COMMON SENSE.

Related articles by Zemanta

• Quick Books Managing Your Business Finances (slideshare.net)

The First 90 Days of an Entrepreneur

Ever wondered what being an entrepreneur is like? Go to this blog post at Yu-Kai Chou to see the "The First 90 Days of an Entrepreneur". It has a really funny video and some great tips on how to start your venture.

Excerpts from the post:

In most people’s minds, the hardest part about being an entrepreneur is starting. That’s actually not true. Starting is the easiest part and it just requires you to get off your butt and start doing things. You only think it’s the hardest part because that’s the part YOU are stuck on.

For that reason, here’s a little guide to help you get over that “but I don’t know how to start!” hurdle, so you will have no excuse not knowing how to start your company.

How Do You Find Your Passion and How Do You Pursue It?

Instead of thinking about the passion, expalins Komisar, free yourself to think of a portfolio of passions. Marry this portfolio with the opportunities in front of you, he says. Think of it as a quest towards which you are moving in the right direction, he adds.