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Can You Really Make an Honest Living on the Net?
I was thinking about business the other night, which is not a surprise, since I think about business all the time! However, I was remembering my Dad telling me about starting his business. He decided to go into the automotive parts business right...
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Motorola E360 data cable
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VoIP Telephony: Is It the Right Fit for You?
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Your Best Tool - Your Business Card
Instant communication? Palm Pilots, laptops, cell phones,
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Are Hidden Flaws in Your Business Preventing Your Success?
Ah, the joys of self employment...Good pay, flexible hours,
excellent benefits, a wise and business savvy boss...And
profitability, lots of profitability! If you're self employed,
chances are your own company is missing some of the features
that you might consider to be ideal. It's a good thing being a
business owner can have other benefits that are not as
quantifiable. Things like satisfaction, loving what you do, not
dancing to someone else's tune and charting your own course. But
no matter how satisfying self employment is, the truth of the
matter is this. If your business is to be sustainable, it has to
sustain you financially in a way that makes you feel all the
trials and tribulations of business ownership are worth the trip.
For one of my consulting clients, that trip has gradually become
less and less sustainable and sustaining. They grew tired of the
constant battle, the struggle to create enough cash flow to make
payroll every week, and the toll the lack of cash was taking on
their own lives. They made the difficult decision to sell their
business and go back to work for someone else. In the end, the
business did not work in one very important way. Their personal
financial needs were not being met. For them, that was an
insurmountable challenge.
When I spoke of my clients' difficulties involving the constant
struggle to make payroll and have enough left over to pay
themselves, you may think the underlying problem is cash flow.
But poor cash flow is only a symptom. The underlying problem is
generally a business model that is not well thought out or well
executed.
Before you get hung up on the phrase "business model", let me
tell you what it means in real world small business terms. Your
business model is basically what you do and how you get paid to
do it. For an example, let's look at eBay. eBay's basic model is
that it makes money by serving as a go between bringing buyers
and sellers together. In exchange for providing the meeting
ground and facilitating the sale, eBay receives fees. It isn't a
complicated business model at its core, the difficulty is in
executing the model in a way that satisfies customers and makes
a profit for eBay at the same time. If the customers are
unhappy, the model fails. If eBay can't operate at a profit, the
model fails.
The second half of that equation is where my clients ran into
problems. They provide a valuable service to a growing market
but providing the service carries a high payroll and a high rate
of liability and workers compensation insurances. For every
dollar in sales, they pay out about 65 cents in payroll and
insurance. That leaves 35 cents of every dollar for rent,
utilities, telephone, marketing, advertising, etc. Trying to
wring out enough money for the owners to get paid a living wage
was usually impossible.
The owners were able to keep their heads firmly buried in the
sand for only so long. We sat down one day and had a very in
depth conversation about what the business could potentially
produce for income for the owners in the short and long term. We
weighed all the benefits, the costs, and the risks. The bottom
line was that the business could not realistically support the
owners in a way that would allow them to support their families
in even a modest way.
Normally, this type of a hard look at a business reveals any
number of opportunities for improving the business. In this
case, it simply was not possible to make the changes necessary
to make things work better for all involved. Let's explore why...
My client's were first time business owners. They are both
professionals with years of experience in their own fields who
both found themselves laid off by their respective companies.
They knew each other through church and had been friends for
some time. Working with agencies set in place to help them find
new work, they were introduced to a program set up to help
displaced workers start their own businesses. The program
provided advice, resources, and structure for new business
owners.
The friends decided to explore opening a business as partners.
They began exploring different businesses and were drawn to
franchising because of the remarkably high percentage of success
for franchise outfits. Their interest in franchises led them to
investigate a local operation that was selling franchises. The
franchiser was new to the franchising business and had sold only
one franchise to an employee so the model was largely untested.
The franchiser led the partners to believe that all was rosy
with the original business that spawned the franchising.
Although the potential business owners didn't know it at the
time, this was not the case. The original business and the
first
franchise were actually operating at a deficit and were being
propped up by continued investments of personal funds by the
owners. The original owner was far more interested in selling
franchises than in giving a realistic view of expected results.
The business model had some flaws that made it difficult to do
well in this business even though the service was a very
valuable one to the target market.
Flaw #1--Slim Margins make Slim Pickin's.
As I mentioned before, every dollar in sales cost 65 cents in
payroll and insurances. An additional 3-7% (depending on the
price structure they chose in buying the franchise) went for
royalties. Once you subtract out rent, utilities, office
supplies, and so forth, there was little if any left over for
advertising and marketing. And the owners were left without a
paycheck most weeks.
Flaw #2--Built in Cash Flow Issues.
Employees were paid every two weeks for work performed.
Customers were billed every two weeks for services already
rendered. So the cash leaves the bank account before it is
received. Naturally the customers often took 30 days to pay so
the cash flow for every transaction ran as much as six weeks
behind the expenditure for payroll for the work performed.
Flaw #3--Pricing Inflexibility.
Franchisees could not lower or increase their pricing based on
the market they were serving. In the State of Maine, where this
business is headquartered (and this is true of most areas of our
country), there is a wide disparity of resources. The southern
part of the state has higher income levels than the northern
part of the state. The seacoast tends to have higher income
levels than the western mountains. Depending on where your
franchise is located you could find yourself priced out of the
market.
Flaw #4--No Name Recognition.
When you think fast food, you think McDonald's. When you think
McDonald's you picture the golden arches. You have an
expectation of what you will get--the restaurant will look a
certain way, the food will be universally awful. You know
exactly what to expect. The same is true of every other
successful franchise--Dunkin' Donuts, Olive Garden, Hardee's,
H&R Block, etc. With the business my clients entered, there were
no strongly defined franchises so the expectation had not yet
been created. This means they had to explain what the business
was all about. It wasn't a case of being able to say, "I own an
H&R Block franchise" and everyone knows what you are talking
about. This makes it an uphill battle.
Flaw #5--No Strong Marketing Program to Build Name Recognition.
Part of the responsibility of the franchiser organization is to
do the legwork to build name recognition. The franchiser did
some local advertising through events and radio advertisements
which was a good start. I have to say, though, that if I am
going to consider buying a franchise I want to see some serious
commitment to building name recognition before I sign on the
dotted line. When you mention the name of the franchise, I want
to be able to immediately know exactly what you are talking
about. That kind of familiarity takes a very concerted, and
usually expensive, effort on the part of the franchiser.
Flaw #6--Where Are My Step by Step Business Building Techniques?
The glory of a franchise is that for any task or challenge I can
simply flip open the operations manual and see step by step
exactly what to do. With this franchise, the most important
piece was missing...How do I build the business? What specific
steps do I take to create buzz before the grand opening? What
steps do I take to attract the attention of my target market?
How do I get the business to a point where I can make a living?
In addressing these issues with the franchiser, it became
increasingly apparent to my clients that their grand dream of
making minimum wage for themselves was far off in the distant
(and very uncertain) future, hence their decision to sell.
Regardless of whether your business is a franchise or a stand
alone entity, hidden flaws in your business model can create any
number of obstacles and pitfalls for your business. A carefully
thought out and well executed business model is a critical
success factor for every business large or small. By rooting out
the flaws in your business model, you increase your odds for
building a business that is both sustainable and sustaining.
About the author:
Caroline Jordan, MBA helps self employed professionals build
successful businesses, attract clients they enjoy working with,
improve cash flow, and develop additional sources of revenue. To
find out how visit: http://www.TheJordanResult.com
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