November 2011
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Small Business Blog

Brought to you by Steve Strauss

November 2011

Cutting Back the Smart Way

That cost-cutting fever is in the air there is no doubt. Businesses large and small are looking for ways to trim the fat (if there is in fact any fat left) so as to keep costs under control. That is a smart thing to do. With cash tighter right now and deals tougher to get, we have to be especially smart with our money.

But one thing is also certain, cutting back can also be one of the dumbest things you can do. If your cost cutting cuts into your ability to get customers, then you have gone too far. So yes, there are both good and bad ways to cut back. For example:

Smart way: Cutting your overhead. Maybe that means getting cheaper insurance or having employees pay a higher deductible (sorry, sad, but true), or whether it means finding cheaper rent, or getting a virtual office, or letting some people go, or letting them become independent contractors, keeping your overhead low is not easy, but it is smart, especially these days.

Dumb way: Cutting back on your advertising and marketing. This is the most common mistake I see entrepreneurs make when times get tough. Sure I could give you plenty of examples, but just consider the conclusion of a survey done by the consulting firm Meldrum & Fewsmith:

"Sales and profits can be maintained and increased in recession years and in the years immediately following by those who are willing to maintain an aggressive marketing posture."

Notice they didn't just say that you need to maintain a marketing posture, but rather that you need to maintain, "an aggressive marketing posture." Aggressive means aggressive. It doesn't mean the same old thing. That means you have to get the word out, have a sale, have another, and get the word out.

Here's why:

First, in challenging economies, customer loyalty is an oxymoron. Customers leave. Marketing and advertising aggressively allows you to replenish your roster.

Second, what do people want right now? Yep, you know – cheaper prices. Well give them some then. Discounts, sales, coupons, twitter specials – anything you can do to let people know that they can get a deal at your place is probably a good idea right about now. Cut some prices. And then advertise those lower prices. I can almost guarantee that people will beat a path to your door. So the bottom line is this: Be smart about your money, realize that other people are being smart about their money, and then give them a reason to be smart about their money at your business. You will end up with more money to be smart with.

Key Person Insurance for Your Business

Let's say that your business has several outlets and you have a general manager who is critical to your profitability – someone who is firmly entrenched and important. Someone who is integral and critical to the business. It might even be a top salesperson.

Now, what would happen to your business if that employee were to pass away? If that employee is indeed "key", that is, he or she creates significant revenue, revenue that would take a while to replace, then their loss would likely trigger an economic crisis in your business.

Enter key person insurance. Think of it as life insurance for your small business.

If you do lose a key employee, the policy will pay you for your lost profits, thereby buying you some time to replace the individual and get things back up to speed.

Key person insurance can also serve as an incentive to retain vital employees. Because you can divvy-up the benefits under the policy any way you wish, you can offer part of any proceeds to the employee's family. In that manner, key person insurance can become part of your benefits package.

How much should you buy? The typical benefits run between $250,000 and $1 million. There are two ways to determine the right amount of key person insurance to buy. The first rule of thumb is to buy 8-10 times the employee's salary. A second method is better: Look at the economic value of an employee to your business and ask yourself, "How much money would I lose if something happened to this person?" The answer to that question tells you how much insurance to buy.

I know, you are probably thinking that this all sounds well and good, but buying that much insurance is likely cost-prohibitive. Nope. Rates for key person insurance are dirt cheap right now. In fact, rates are 60% less than they were 10 years ago. Back then, to insure a 40 year-old employee with an average 20 year, term key person policy, it would run you about $995. Today, that same policy would run you less than $400 a year.

Two more tips: Be sure to buy the right amount. Your broker can also help with this determination. Second, don't overpay. What you want is a broker that works with multiple carriers and can shop your needs around. That will ensure that you are getting the best deal. What is your most powerful business asset? Most employers say that it is their employees. With key person insurance rates as low as they are these days, it would be shortsighted not to insure your most important business assets.

Turning Failure into Success

One thing I know is that business failure can lead to business success – if the right lessons are learned:

  • Ray Kroc never finished high school, was a musician, a salesman, a district manager for a paper cup company, and a promoter of a milk shake machines - before starting McDonald's at the age of 52
  • P.T. Barnum filed for bankruptcy, and then he started his circus
  • John Henry Heinz's company filed for bankruptcy in 1875. The next year he invented a nice little condiment - known as ketchup
  • Henry Ford's first car company filed for bankruptcy, and his second car company failed. His third business was the Ford Motor Company.

So failure in one business does not necessarily mean that all subsequent endeavors will fail. The key as I see it is perseverance, and that the right lessons be learned from the failure.

In the early 90s I graduated law school. I worked for a while at a great law firm, and then went to work for what turned out to be a not-so-great law firm. My boss at the second firm was a very difficult, impatient, hard to please person, and being the novice that I was, I didn't please him. Though it sounds like something out of a Dickens novel, a few days before Christmas, with a baby at home and my wife pregnant with our second child, the firm fired me (ostensibly because I didn't write well enough – ha!)

It was the best thing that ever happened to me.

My lesson was that I wasn't meant to work for other people. Has my entrepreneurial road always been easy since then? No, but I wouldn't trade it for the world. Discovering that my mistake was that I was not cut out to be an employee has made all the difference.

The secret of turning business lemons into lemonade is proportional to one's ability to persevere in the face of adversity, figure out what is going wrong, and then go out there again and do things differently.

That is just what David Neelman did.

A college dropout, but a natural entrepreneur, Neelman started his first discount travel business at the age of 23. By the age of 24, he was out of business, filed bankruptcy and got a job at a travel agency. 10 years later, he started a small discount airline out of Salt Lake City known as Morris Air. Southwest bought him out soon thereafter and he went to work for Southwest.

Southwest fired Neelman five months later.

What did Neelman do? He kept going. Neelman learned his business lessons, and decided to start a new airline, one he would call Jet Blue. Though now is a terrible time for most airlines, Jet Blue is not most airlines. The company continues to grow, offers discount travel on a fleet of new planes, and still gets high rankings for customer satisfaction, despite some issues.

No, owning a business is not for everyone. But by the same token, don't conclude that failure in one venture necessitates failure in all subsequent ventures. The experiences of some of our best entrepreneurs dictate otherwise.

Should You Stay or Should You Go?

How do you know when a business problem is so big that it is time to turn the page versus riding out the rough waters. It's often not an easy thing to discern because business, like life, is cyclical. The challenge is knowing whether the down cycle is just that – a down cycle – or instead represents something more permanent.

The answer requires both a business analysis, as well as a more "visionary" analysis. Here is what I mean: In Buddhism, bodhi means "awakened wisdom," and it is under the bodhi tree that the Buddha is said to have become enlightened. I think that there is meaning and purpose and power in a business crisis. True business enlightenment comes when one realizes that the problem might be a manifestation of something that was requiring attention for some time. Giving it the attention it needs may allow you to turn things around.

Here's an example: In the best-selling business book Fish, authors Stephen C. Lundin, Harry Paul, John Christensen tell the tale of Mary Jane Ramierez, recently widowed and the mother of two, who is asked to turnaround her company's problematic operations department; the so-called "toxic energy dump."

Ms. Ramierez was at first puzzled, but then (coming from her perspective of living in the Pacific Northwest) she took her cue from the fun-loving, fish-throwing employees at Seattle's Pike Place Market. For those of you who haven't been there, part of the experience of the place is watching the fish market employees happily and loudly toss huge fish back and forth in front of the place.

Seeing the fish-tossers work, Ms. Ramierez decided that was missing in the operations department at her place of work was that sense of fun; of enjoying work. So she decided to get her co-workers to take a cue from the happy fish throwers, they did, and in the process, their workplace became a lighter, more playful, more fun-loving, better place to work.

Ms. Ramierez's Fish crew learned their lessons and changed their ways. That's what happens when you correctly identify a problem.

So here is the process:

  1. Crisis: We have a problem! When a problem arises, the natural tendency for most people or organizations is to avoid it, pass the buck, hope it will go away, or deal with it quickly and move on. The secret however is to look at the problem as the potential seed for greater renewal.
  2. Analysis: After confronting the painful reality of the situation, the next task is to correctly analyze what has gone wrong. Here is where the expertise and experience of your franchisor may come in handy. So what is the real problem?
  3. Gestation: A plan of action that deals with root problems is formulated, explained to the team, and implemented.
  4. Renewal: The plan is carried out, and things change, hopefully for the better.

There is a fundamental difference between seeing a problem as a problem and seeing a problem as a hint. The enlightened business master will know that finding the opportunity in the problem is not just rhetoric, it is in fact what works.