Hired Guns

May 14th, 2009 Chris

As I said last week, I’m getting back into software. And to answer the question I got from several of you, I’m not yet disclosing what it is going to do. We’re still a few months away from launch and I don’t want to tip any potential competitors…

One of the biggest fears I had in getting into all of this was the tremendous investment I feared would be required to actually develop the code. I came from the world of big enterprise software where development is slow and expensive.

Not that the developers weren’t fantastic – they were talented and opinionated, very opinionated It’s just that the paradigm was different. Big software releases happened every year or two, had tons of new features, had to run on multiple platforms and had to be bulletproof.

So when I first developed the concept on the app we’re developing, I assumed that it was going to cost a lot to build – originally I assumed at least $50k – $100k. What I soon discovered gave me the encouragement and cash to go ahead with the project…

Two key aspects of our project substantially reduced the development cost:

1. Software as a Service. We wanted to build this app as a service versus the old fashioned download-install-run model. That meant no multiple platform requirements, no installer, etc… All the stuff that adds tremendous cost without value for the customer.

2. Built in Product Manager. We were not looking for a full-service development house that had project managers and extra layers of overhead. I wanted the type of relationship I was used to: me as the product manager and our hired development guns as the development team. That eliminates a lot of overhead cost.

So I did up my specification (more on that in a later post) and went out to collect a couple of bids… And was blown away by how little this was going to cost!

I should note, that I didn’t go off-shore as I wanted to see the white’s of the team’s eyes. I wanted to sit down over a beer and make sure we all understood the requirements. I want to sit down over a coffee and make sure that the schedule is one I can count on. I was worried that remote development would add a bunch of barriers to communication that would counter-act any cost benefits.

In the end, I found a great team right here in Ottawa who gave me an aggressive but credible bid. And we’re off to the races.

Of course, this is software development so schedule and requirements churn is to be anticipated. But because I’ve got the right team and the right price – I know we’ll get there in the end.

In fact, this model is quite liberating. With the barrier to develop so low, the consequences of failure (from a sunk cost perspective) is also quite low. Which means that if one project doesn’t succeed for one reason or another, you can always try again with your next great idea…

Although that won’t be the case for us – this one’s a winner!

C.

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Money for Nothing, and the T4s for Free

October 22nd, 2008 Chris

As I’ve mentioned (ad passim, ad nauseum), I am not a big fan of blinding outsourcing everything. I find too often that you lose critical control of pieces that are key to the business and it’s just doesn’t make financial sense much of the time.

There is one operation in our business that I’ve recently become an outsourcing convert to, though.

The other day, our book-keeper came to us and said that ADP (the payroll giant) was making a big drive into the small business market and had a good deal. I was skeptical – we were managing payroll in a largely manual fashion which was time consuming, but cheap.

It was painful though – cutting cheques, tracking payroll tax, etc. And the only other service we’d looked at for payroll was through Quickbooks – which was not cheap and still required a lot of manual gyrations.

But ADP made us an offer we couldn’t refuse: for $12 an employee per month, they’d do it all. Calculate all the right deductions, calculate the payroll taxes, withdraw the money from our corporate bank account, make the direct deposits to employees, pay our tax with-holdings and payroll taxes and generate pay statements. The whole 9 yards. Here are the details…

In fact, I was originally quite skeptical – how could they make money from us? Well it turns out they have an interesting business model. They withdraw the money from our corporate account three business days before pay-day. Aggregate that over all the businesses, and that’s a lot of cash. Cash that can be leveraged. So, even if they don’t make money on us, they make money on our float.

So, chalk this one up to an outsourcing win. Doesn’t happen very often…

C.

P. S. Unfortunately the T4s aren’t free. There is a small charge for those ones… Still cheap though!

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Crap – We Made Money

October 9th, 2008 Chris

We just closed out our fiscal year last week. We had a good year thanks to my uber-saleschick partner.

I was feeling great, purusing our Quickbooks-generated income statement showing some profit and a healthy increase in sales year-over-year. The one last thing to do to wrap a bow on things was to figure out how much we owed in taxes.

Now, I’m sure our tax regime is different in many ways from other places, but there are some constants. We pay business income tax and do so in installments throughout the year. So at the end of the year, you’ve being paying income taxes all along so everything will be OK. Right?

Well, it turns out that you are paying your tax installments based on your previous year’s results. So at the end of a given fiscal year, you look at what you paid in installments and compare that to your final tax bill based on your actual results.

If things don’t change that much, then life is good. You may have to pay a bit or get a bit back. But if things change – especially for the better – you are in for a rude surprise.

So I popped off a preliminary view of our results to our accountant and asked him what our tax bill was going to be. He wrote a very nice note back, congratulating us on our results and indicating that our tax bill had risen by 1000% from last year. Yes, dear reader, my finger did not get stuck on the “0″ key.

Turns out we had gone from breaking even to making some profit. And of course, I had failed to consider that when the cash was coming in. So, here we are at the end of the year with a big tax bill that we hadn’t been saving for.

Now, luckily, our tax bill doesn’t have to be paid for another couple of months so we have some time to scrape together the cash so we’ll be fine.

And we also have a great accountant, Nick. He’s helped us with strategies to deal with our lack of planning. Things like how to defer revenue – that is to not count sales you make in one year when you’re delivering the product or service until the next. And how to increase your expenses in one fiscal year by paying yourself a bonus in the next. Note: every one’s situation is different – speak to your accountant.

The real lesson learned is that you need to look at your financial progress along the way, at least once a quarter, and do an ongoing assessment of your tax situation. If sales and profits are up, stash away cash for your tax liability so you don’t get surprised by a big bill.

C.

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What Have You Done for Me Lately

September 4th, 2008 Chris

In class last night, I was discussing how critical it is for organizations to strive to achieve an on-going relationship with customers. Not for some airy-fairy reason but because it’s the only way to survive these days in business.

Why? Well, basically it’s a heck of a lot cheaper and faster to sell to a current customer than a new customer. That improves profits. And if you keep customers for multiple transactions, then you can afford to lose money on the first. That means you can out-spend the competition to get that first customer and then keep them to turn it into a profitable relationship.

In many industries, it’s all about who can spend more to win the customer.

And that reminded me that on the flip side – in our business – I need to fire a few more suppliers for whom I am a repeat customer.

Ok, not fire per se, but check to make sure that we continue to get the best deal possible. Once you start to do business with a supplier there is a fair bit of impedance to switching. You may have a personal relationship and as long as you’re getting good service, you don’t question their prices. It’s convenient to go back to someone you know – they understand your business and give you what you.

And there in lies the rub – they’ve won your business and don’t need to be aggressive with pricing going forward. And in a micro business, cash is king – it’s your salary.

Our process is that every year or so we look at alternative suppliers for everything we do. I’ve written before about how changes in technology providers’ business models really help micro businesses. It applies to all your suppliers.

For each supplier, we typically look at two or three alternative – getting quotes for what we need. As long as we’re happy with our current service, we give the current supplier the opportunity to match the pricing. They usually do. And if they won’t – you need to switch.

Just last week, we cut our CD reproduction costs in half, just by giving a couple of other shops a quick call and getting a quote.

Sometimes it’s a tough conversation with your supplier and people can even be offended. But remember – if they aren’t giving you their best price, they are taking salary out of your pocket. Are you so concerned about their feelings that you’d take money out of your own pocket and give it to them? That’s called charity and has no place in a business relationship.

Make it a point each year to get a couple of competitive quotes for every supplier in your business. They are making their profit on your repeat business. Make sure they deserve it.

C.

Posted in Financial | 2 Comments »

Hold the Gin. Pass the Spreadsheet.

September 2nd, 2008 Chris

I spent a bit of time over the long weekend prepping for my first class tonight. I am teaching this term at the University of Ottawa’s MBA program – specifically on Strategic Marketing.

I always get a bit frustrated when talking to people about marketing as most assume it’s pretty much the same as advertising. The image many have is a bunch of people in a conference room engaging in random right-brain exercises. It almost sounds like a party. In fact, back in my former job, we actually used icons of stick men with martinis (shown here for your enjoyment) as a representation of marketing.

The reality, of course, is much different. Marketing is a discipline and the objective of my first class this week is to ensure that the myth is put to rest.

One of the simplest ways of doing that is to ask: What is the most important tool a marketeer must master?

My answer is the spreadsheet. Especially in a micro business, you cannot effectively market if you can’t master Excel. You simply can’t manage what you can’t measure.

And what is one of the most important things you need to manage: your Return on Investment (ROI). In other words, your job is to maximize the revenue you get from your marketing investment.

A real life example from our business is Google AdWords. We use AdWords to advertise on a bunch of sales-related key words. What we do is we advertise a free ten day eCourse with ten of Colleen’s best sales tips. Then we offer folks that take the eCourse, a membership in Colleen’s monthly sales coaching program (where we start making money).

So we need to determine our investment:

     = Click throughs  x  click through cost

And we need to determine our return, first with the number of customers we get:

     = Number that click through  x  % who sign up for the eCourse  x  % who purchase the coaching program

And multiply that by how much revenue each customer is worth. In our case:

     = Average number of months a customer stays in the coaching program  x  per month charge.

That is a fair bit of math, but it’s critical to determining if the investment in AdWords is worth the return.

First of all, it’s critical to ensure you’re getting more revenue back than you are investing. I took us literally months to determine the best strategy for our use of AdWords. For example, originally, we tried to get people to purchase the coaching program right from the ads but the conversion rate was too low – we were losing money. We then moved to the multi-stage conversion with the eCourse and voila – we made money.

There is definitely a right-brain part to marketing and that makes this measurement stuff even more critical. In our example, prospects will respond differently to different Adword ad wordings. So we have a couple of ad variations and we measure to see who each one performs. So now we’re doing the math above twice.

And we have different landing pages from the Ad with different text for the eCourse sign-up. So now that’s 2 x 2 = 4 different sets of numbers.

In other words, we continually test and refine our marketing to discover what works best, implement it, and do another test. You can only figure this out by running the numbers.

This applies to all your marketing. Every marketing effort needs to be likewise tracked. Every article and ad we use has a unique tracking code so that we can determine how many people click and if they ever buy something. Otherwise, we’d literally be guessing if we were making or losing money (aka gambling).

Are you measuring your marketing? If not, then you’re not managing it. Write down a list of all your marketing investments in descending level of investment. Start at the top, fire up Excel and start measuring. I bet you’ll be surprised at the results.

C.

Posted in Financial, Marketing | No Comments »

Walking the Fine Line

August 12th, 2008 Chris

I’m not sure what you’re like, but we are notorious for taking pictures on vacation, uploading them onto the computer, and never looking at them again. We rarely even go through and purge all the extra shots we take to make sure one is perfect (’cause with digital they’re free!).

So the other day I was going through my amorphous pile of photos from the past ten years, thinking that I really should do a purge. I have to admit I did a quick calculation of the value of my time versus just buying a bigger hard drive. The latter won.

One thing I did do is take note of our trip in ’05 to Hawaii when we went to Kauai and saw the spectacular Waimea Canyon. But it was the sudden flashback of panic that really got my attention. As some may know, I am deathly afraid of heights.

In the Waimea Canyon, one hikes for 10K along very, very, very steep cliffs. In fact, I still remember following a particularly narrow path with 3,000 foot drops on either side (see photo). My panic was peaked to a near “Sir Robin” level when Colleen, who was following me, stepped on the back of my shoe, tripping me (when I got home, I did check for any unusually insurance purchases). Never has the expression, walking a fine line, been so viscerally real.

Often in our business, I feel like I’m walking a fine line between revenue and expenses. That’s not that dramatic, but what I always forget in that process is actually there is a third factor that is even more critical to manage related and seems much less deterministic – cash!

I’m definitely spoiled from my big corporate experience. While the CFO and his team constantly worried about cash, the business decisions were largely made on generating the right return on investment in the right time frame.

In our micro business, even if revenues equal expenses – they are lumpy. Which means cash can float negative and positive throughout the course of affairs, even if the business is breaking even. And some expenses can’t be dodged or delayed – like employee payroll or taxes.

The tool that I’ve seem most often used to address this is the line of credit. We had one in the business that could be tapped in case of those negative cash swings. Interest rates are quite low so the borrowing costs from interest weren’t that bad. What ticked me off, though, was the non-interest fees.

I dug into our banking charges one day, only to find that we were paying something like $30 a month just to have the line of credit and another $200 a year for an annual credit reassessment. So, even in the last year when we didn’t use the line of credit at all, we paid over $500 in fees. Screw that.

We were very fortunate over the last year and Colleen, our selling machine, managed to generate a very healthy revenue flow. Rather than ramp up expenses, we put the extra cash into our own contingency fund and eventually built up the equivalent of three months of operating expenses.

That way, pretty much anything short of a full disaster could befall us and we’d be OK for cash. And we don’t need that expensive line of credit any more. Even our banker couldn’t argue with the strategy (our banker from RBC, by the way, is fantastic).

So, do a couple of things regularly:

• Review your bank records to see exactly what fees you are paying and for what.
• When you do your revenue and expense planning (you do that already, right?), plot your cash impact.
• If your revenue is healthy, think about managing expenses so you can throw off some profit and build your own war chest over time.

By doing those things, we’ve been able to get our cash situation under control. Except for the meeting we just had with our accountant who pointed out our huge tax liability because of the profit that allowed us to build our contingency fund. Now – where do we get the cash for that. D’Oh!

C.

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Give Me Some Credit

August 5th, 2008 Chris

Every few months, a few buddies and I head off to a city for a couple days of good food, drink and (no comments please) shopping. This time, we were off to Montreal – just a couple of hours down the road. If you’ve never been – it’s a fantastic city with some of the best food and most fun nightlife in North America.

One of the logistical challenges of such an outing is figuring out who owes what. We have long given up trying to “split” the bill every time we have a drink or something to eat. At 1am when the bar bill comes, it’s simply too complicated for us to haul out our credit cards and calculate the split. And it’s cruel and unusual punishment to ask the bartender/waitress/waiter to do it.

So we have a system, we all randomly pay for things throughout the weekend and keep our receipts. Taxi’s don’t count but hotels, meals and drinks do. We make sure we use credit cards so we have a record of our expense.

At the end, we simply assemble our credit card receipts and figure out who owes what. In the past, it’s just been a big spreadsheet that we enter data into although recently we found a really cool tool. OK, my friend Eric (the MacGyver of high tech – remember the iPhone?) found a really cool tool that does all the heavy lifting for you. Everyone just enters your expenses at expensure.com.

Of course, none of this would be possible if it weren’t for the credit card. Cash is just too complicated and too easy to lose track of. And of course, you don’t get travel points for cash.

Credit cards are, likewise, critical for our business too. It is what really makes continuity programs (aka subscription services aka membership programs) possible. A small monthly charge each month to participate in Colleen’s sales coaching program is convenient for the client and convenient for…not so fast!

Credit cards, while a key enabling technology because they are convenient for the client, are a huge pain in the butt. There are many reasons for me to make sure a bold statement:

• Pain to set up as a merchant – especially if you are not an American company yet have half you business in the U.S. You need a PhD in payment systems to sort it all out. More on that some other time…
• Pain to manage – with the advent of PCI regulations from the credit card companies, data security has reached new heights and it makes it very difficult to manage. Want to know what credit card number you have on file? I give up – cause I can’t tell… More on that later too.
• The one that really has got me frustrated is the ongoing management required to deal with declined and expired credit cards. It is expensive and time consuming. Allow me to elaborate…

We use a the typical collection of shopping cart, merchant account and payment gateway – nothing too exotic. Clients who sign up for Colleen’s sales coaching program pay a very reasonable fee each month via credit card. At the time of enrolment, we check the credit card for validity and off we go. Each month a very reasonable membership fee (surely an under-priced and amazing value!) is charged.

And that’s where all the problems begin. I am amazed at the number of declined and expired credit cards we get. No exaggeration – every month 5% of cards we have on file bounce. Every month!

For every problem card, we start calling. And calling. And calling. Everyone’s busy and returning a call about a declined or expired credit card just isn’t at the top of anyone’s radar. My guess is that for those that eventually we do speak with, it takes an average of five calls to get a hold of them. That is a lot of time and effort.

We’ve actually have begun to automate some of the processing of these declined transactions:

• If it’s declined, we try a client’s card another four times, waiting three days in between. The rationale being that sometimes people max out their credit cards and need a bit of time to pay them off.
• With each decline, our system automatically sends the client a note asking that they contact us with updated card information. The notes get a bit more insistent each time.
• After the third decline, we start calling three times a week.
• After a month, we don’t have any choice but to stop their membership.

For expired cards, we actually start sending notes every week starting four week prior to their card’s expiry, along with phone calls starting a week before it expires.

We’re also trying to figure out a self-serve card update capability but with the PCI security requirements, it’s quite painful as we can’t access customer credit card information in our own system!

All in all – a major pain. But what are you going to do? As I’ve often said, business would be much simpler if we could somehow get rid of the customer…very simple.

C.

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All You Can Eat

July 31st, 2008 Chris

For those who don’t know me very well, I have a dangerous combination of deadly or near-deadly sins: gluttony and cheapness. First, I love food – ranging from chicken wings to foie gras – and I love them in quantity. And I am cheap – I love getting good value for money. That’s why “all you can eat” always appeals to me in theory. Unfortunately, in practice I usually find the product sorely lacking.

For example, I’ve never found an all-you-can-eat sushi meal that I like. It’s always a bunch of kappa maki and no tuna or salmon to be seen. And God help you if you get between the big overweight guy and the shrimp tempura roll…

While I can’t always find satisfaction with the all you can eat buffet, I am increasingly finding great all you can eat deals in service offerings for our micro business, especially in telecommunications. Much of it happening in the last 12 months.

Here’s a couple of examples:

• Long Distance. In the past, we’ve paid per minute charges for our long distance and toll-free lines. In the last few months, different vendors have introduced flat rate or bulk minute plans. At home where I sometimes work, we have a $20 a month, all you can call 24 x 7 in Canada and the U.S. At the office, we just switched to a bulk minute package that meets our needs and is cheaper than what we were paying before.
• Teleconferencing. Again, we’ve been paying per minute per participant in teleconferences. We recently switched to a vendor who gives us unlimited use of teleconferencing up to a certain number of phone lines for a monthly rate. This is really cool – we can have as many teleconferences each month and we just pay one rate.
• Web conferencing. Here is an area that has seen substantial pricing changes over the last six months. It started with Microsoft changing their web conferencing package to an unlimited use, per month charge. Adobe has also entered the fray with similar pricing. There are some restrictions on the number of participants at different service levels, but regardless, the price difference is substantial (I mean like 80% less than conventional plans).

If you’ve not re-examined all your vendors and their price plans in the last year you should. Ever year virtually every market gets more competitive and you can reduce or even slash costs which, for the micro business, means more direct money in your pocket.

And it’s not just saving money that makes these all-you-can-eat plans attractive. It’s the change of behavior that results when you know you have essentially eliminated variable costs.

For example, if you’re paying flat rate for web conferencing, why would you ever do a customer presentation with only a teleconference? (OK, there are probably some examples but bear with me as I make my point). If you’re paying flat rate long distance, why would you ever hesitate to contact a prospect via email when you can give them a phone call. Etc…

By shifting to fixed service costs and eliminating variable costs, you put yourself in the position to expand marketing efforts, to increase customer touches and improve the professional look of your company.

So make a list of your top 5 service costs (start with telecom) and go see if there are better deals out there. It is time well spent.

C.

P. S. Bonus points if you can identify where this post’s image is taken from.

Posted in Financial, Telecom | 2 Comments »