Explanation of Current Credit Markets

If anyone is interested, marketplace.com has an excellent primer on what exactly is going on with bank money right now.  If you’re a small business owner or even someone in business wondering why people are talking about how tight commercial money is right now, then this video is for you:

A Company’s Magic Formula

Can I hire another employee?  Can I afford a new computer?  Questions like these come up frequently with small business owners, and the answers are often staring them in the face.  Rather than just tell them yes or no, however, I like to sit down with them and give them the tools of decision-making–in a sense, teach them to fish.

What I help them determine is a formula that they can use to determine whether or not to make almost any major business decision.  Although it’s a much more simplified version of the kinds of planning that would go into similar decisions for a larger client, for small clients, it is a very useful “rule of thumb”.

For accountant types, the analysis is a very straightforward one called a “cost-volume-profit” analysis.  But for non-accounting types, I call it a “Company’s Magic Formula”.

First, whether they’re a product or service type company, we have to determine the expense items that vary with sales.  By adding these together and determining how much they average as a percentage of sales over a specific time frame (i.e. 13 months), we can determine a gross margin (even for a service business).

These expenses aren’t necessarily just cost of goods sold, as other selling expenses should usually be factored in as well.  Then, by subtracting these from sales, we can determine the company’s typical gross margin.  Let’s assume it’s 25% of sales.

Then, we determine what their other, indirect expenses are and whether they fluctuate (variable) or are somewhat static (fixed).  By dividing their gross margin (25%) into this number, we can then determine their break-even sales for whatever time period they find helpful (monthly, weekly, etc.).

Now, how does this affect decision-making?  Quite simply, if a business owner is considering a purchase that is a one-time event, it’s really up to whether or not they have the cash on hand.  if, however, the decision will result additional ongoing monthly expenses, such as a new employee or an equipment lease, then you have to add this expense into the fixed expenses when calculating their break-even.  The shortcut, then, it to once again divide the gross margin percentage into the recurring monthly expense amount of their decision, and you have a rough estimate of the additional sales they need to generate to justify the new expense.  Voila, done.

From that point forward, the business owner has a simple calculation that they can get their hands around in order to determine whether they can “afford” a certain course of action they may be contemplating (ceteris paribus).

As an example, let’s say a company would like to hire an additional administrative employee at a cost to the company of $36K per year of additional expense (note: this would not be merely their base salary, but rather all benefits and employer-paid payroll taxes factored in).  With a 25% gross margin, they need to maintain an additional $144K of sales income per year more than they do currently in order to generate the same net income.

Of course, there are many assumptions that go into such a figure, but as a ballpark estimate, it works quite well.  Also, you can’t quite use this same technique for employees or equipment that would increase sales or reduce expenses elsewhere, otherwise those changes must be factored in.  More on that to come, but for now, this is a good rule of thumb that every business owner, at a minimum, should understand before they make any large, ongoing decisions.

“So… what do you do?”

This question comes up all the time.  Ah, the elusive “elevator pitch”–it can make or break an introduction.  So much to convey, so little time.  What’s a person to do?

Well, I’ve been tweaking and working on mine for some time.  There are all kinds of resources out there to help someone tweak and mold their into something workable and profound.  I think the terribly difficult thing about an elevator pitch is not to sound trite, banal, run-of-the-mill.  Everyone has one, but very few stand out.

One article that helped me begin to rethink mine is an old article from another blog called Dumb Little Man.  It lists several ways that elevator speeches should stand out.  Among those recommendations are that an elevator pitch should be clear, concise, powerful, tell a story, and have a hook.  That may sound well and good, but accomplishing those things in thirty seconds can actually be an exercise in mental and verbal acrobatics.

The most difficult part is probably that last part, the “hook”.  You want to capture their imagination and attention so that they want to learn more about what you do.  The objective is important, but getting the other person to take action is where the rubber meets the road.

All I know now is that I have a ways to go until I’m more comfortable with mine… now, back to work.

Effective Business Communication Workshop

I recently  had the pleasure of spending two days with Rick Fornoff of Message Clarity, and I can just say that I felt immensely rewarded for the time I spent discussing and learning about communication.

I will confess that my inital reaction upon hearing word of the class was one of “I’ve had speech class before…”, but to tell the truth, it’s not like I remember everything I learned in those classes these many years later.  Refreshing my memory proved immensely helpful.

Among other things, part of the class was  practicing giving short speeches while being recorded, so the class could review the speech afterward to assess the “performance”.   Gestures, vocal clarity, “Umms” and “Ahs” — these things all become glaringly obvious.  Yes, the camera doesn’t lie.  While this may sound intimidating, I’m now a firm believer in the importance of watching oneself.  How else am I supposed to know that I sound like the guy from MicroMachines when I spit out a thousand words a minute?

Beyond just the traditional speech-giving though, we had time to work directly on our elevator speeches and how we portray our respective businesses.  If for nothing else, it was immediately helpful to hear from others some very honest feedback of how I have traditionally been communicating what I do.  Though I thought my message was as clear as day, after someone immediately reiterated what they thought I did, I realized that I wasn’t getting my point across–not even close! I really needed a wake-up call.

I greatly appreciated Rick for his clarity of focus and the benefit of his message.

Anyone considering a refresher in business communication, both speech giving and just in genuinely communicating your message in an effective and concise way, I would wholeheartedly recommend Rick.

You can visit his website here, but I would recommend simply contacting him directly.