Do more with less

Perhaps the most powerful aspect of e-commerce is the ability of web entrepreneurs to create major business using almost no assets.

Consider one of the great retailers of yesteryear: Sears Roebuck. To generate tremendous sales, Sears built a chain of department stores across the country, printed a fat catalog every year, and then mailed it to every American. To generate its sales, Sears had to build stores and print and mail catalogs.

Today, e-commerce has rendered that business model obsolete. One of the great retailers of today – Amazon.com – can generate Sears-busting sales without stores and without catalogs. Just a website and a few distribution centers. And we can all use Amazon’s own selling software to create our own stores.  Size is no limit.

Many e-commerce businesses also utilize make-to-order models. For example, Lulu permits you to upload a “book” online, and then, as customers order it, will print the book for each of them. This avoids inventory investments and therefore will keep your assets down.

The Internet creates almost infinite possibilities in the area of productivity. But what is productivity?
Simply divide revenues by total assets.

To increase your productivity, either increase revenues or try to make do with less assets.  Increasing revenue is a no-brainer.  But the other trick to improving productivity to is to make do with less assets.  Don’t over-invest in long-term assets, such as computers and servers that you don’t need, and avoid buying inventory that you might not be able to sell quickly.

 

Step costs explained

arne jacobsen, rødovre town hall, 1952-1956To run a business, you must understand how your business’s costs behave.  A fixed cost is any cost that will remain the same, regardless of changes in your sales volume.  Variable costs are costs that change with sales volume.  The greater your sales, the greater your variable costs.

Step costs change only at certain intervals.  For example, suppose that you run a delivery service.  A typical truck and driver can make 40 deliveries in a day.  The cost of that truck and driver would be a step cost.  Whether you need to make 20, 30, 39 or even 40 deliveries in a day, then you need to pay for just one truck and driver.  However, if you need to make 41 deliveries in a day, you will need to buy a second truck and hire a second driver – that 41st deliver will double your costs..

Likewise, when you grow your business up to 81 deliveries.  You’ll need a third truck and driver.

Step costs create interesting incentives for your business. Suppose that you make 80 deliveries a day.  A new customer (who will need two deliveries a day) approaches you.  Maybe you should turn away the customer in order to avoid buying another truck and hiring another driver?  After all, will the contribution margin from this customer exceed the cost of another truck and driver?  Maybe not.  Or perhaps you are likely to draw even more customers that will generate sufficient contribution margin to pay for your new truck and driver?  Or perhaps you should pay an existing truck driver a little overtime.

To properly make these decisions, you should know how your costs behave, and how your decisions will affect your total costs and your profitability.

[Image: arne jacobsen, rødovre town hall, 1952-1956 by seier+seier, on Flickr]

 

Using OmniFocus

I’m a big fan of OmniFocus for iPad.  Teaching classes, running an academic department, performing research, blogging, not to mention leading a large family and being active in my community, I keep busy.  And I’ve tried a lot of different organizers.  I’ve tried hand organizers (I had two Palms), cell-phone organizers (terrible), Windows programs (I like Outlook), online organizers, and too many iPad organizer apps to count.  In my humble opinion, OmniFocus is by far the best.

OmniFocus accommodates almost every part of my FTF/GTD system.  I can sort my tasks by project, by due date, or by something called context – when or where I can complete a task.  I can also sort my tasks geographically.  (This feature should be helpful for a delivery man, but not for a college professor.)

I can flag tasks that are especially important, or that need to be identified in a certain way.

I usually work from the “Forecast” page.  This sorts tasks by their due date.

One of my favorite features of OmniFocus is the “focus.”  I can limit my screen to just a specific project that I am working on right now.  This keeps me from getting distracted or overwhelmed by other tasks.

Another great feature is “review.”  I can systematically go through my entire to do list, project by project, identify tasks that I completed, reprioritize unfinished tasks, and change due-dates (so I can to procrastinate).  At the same time, I can mark projects as “active,” “on hold,” “completed,” or “dropped.”  Funny, the icon for “review” is a coffee cup, and I quite enjoy sitting down for a cup of coffee, listening to music while “reviewing” all of my projects and tasks each week.

I also use the “inbox.”  Here you can quickly enter new tasks, without worrying about sorting them into projects, due dates, etc.

If you have a Mac (I don’t), you can sync between your iPad and Mac.

You can forward web links from Safari to OmniTask.

OmniFocus has its shortcomings.

Overall, I have to admit that it is quite complicated.  It took me several weeks to figure out, and after a year, I’m still trying to figure out the difference between “projects” and “folders.”

OmniFocus doesn’t have a separate field for assigning priorities to tasks.  For example, early in my accounting career, I learned the “ABC” system.  Assign every task a letter.  “A” means to do it as soon as possible.  “B” means do it when you have a chance, and “C” means put it in a drawer and wait for someone to ask for it.  If you are meticulous, you can also use A+’s, A-‘s, etc. I don’t use this system anymore, but still keep “C Drawers” all over my office and home study.  You can use the “context” field for these priorities.

First Things First Four-Quadrant technique
Wikimedia Commons

OmniFocus isn’t designed for First Things First.  I’ve adopted some of this technique into OmniFocus by simply flagging Quadrant I activities (Important and Urgent).  However, OmniFocus does not easily accommodate the full four-quadrant technique, or even the more important goal-setting process that helps you identify what is important.  (Maybe I should flag Quandrant II activities instead of Quadrant I’s.)

I haven’t mastered backups of OmniFocus yet. I think there is a way to back up to the Mac.  (I wish I had a Mac.)

I wish I could print out multiple tasks, so I can see them on a sheet of paper.

I also wish I could somehow forward e-mails to OmniTask.  I can cut and paste them, but it would be much more convenient to be able to simply forward some tasks directly from iPad Mail to OmniFocus.

A big drawback is the price.  It costs $39.99, probably the most expensive planner/organizer for the iPad.

That said, OmniFocus is a remarkably flexible organizer, that will give you more use out of your iPad.

If you’re interested in OmniFocus, or other personal productivity tips, visit my new blog, http://www.freakingimportant.com.

 

What is net income?

Net income is the difference between revenues and expenses.

Revenues – expenses = net income

We use net income to measure profitability.  (Net income and net profit are synonyms.)   A good basic goal for your business should be to maximize net income, the “bottom line.”

Maximize your net income by increasing the difference between your revenues and expenses.  Three ways to do this:

  1. Raise your prices.
  2. Reduce your costs.
  3. Increase your sales volume.
Don’t confuse net income with cash flow.  You need both and one doesn’t necessarily imply the other.  For example, if you pay for an expensive asset, that will hurt your cash flow, but not affect your profit – it might even improve your profit.

Furthermore, you cannot judge income just by looking at the balance in your bank account.  Keep accurate books and records so that you can measure your profitability (following the above formula), and try out different strategies to maximize it.

 

How many eggs are in your basket: Diversification

The proverb goes like this: “Don’t put all your eggs in one basket.”

In stock-picking, they call it “diversification.”  You should own 6-10 different stocks, in different industries, rather than focusing on a single company, industry or sector.
The same rule applies to running your own business.  To build and grow a secure business, diversify.
eggs of many colors
eggs of many colors
by woodleywonderworks, on Flickr
Diversify your products.  Don’t sell just one product, no matter how wildly successful it is.  As you profit from one product, add more to your portfolio.

Consider crocs.  The company makes colorful rubber sandals that last forever.  The only problem with crocs’ products is that they last forever.  Consumers only need one pair.  After everyone has purchased one pair (which they love and wear all of the time), now what will crocs sell them?  Good question.  The company came out with many different colors and styles to attract more consumers.  Before you know it, consumers purchased many pairs, even though they only needed one.

lila crocs
lila crocs
by loop_oh, on Flickr

Diversify your customers.  If you only have one customer, what would you ever do if you lost that one customer?  This is a huge challenge for consultants, who might have only one or a handful of clients.  Anything happens to that one client and a huge chunk of revenue (or even all of their revenue) disappears.  Again, take crocs.  If crocs sold 20% of its shoes to Wal-Mart, and Wal-Mart decided to stop selling crocs, then crocs would immediately lose 20% of its sales.

Diversify your markets.  A market is basically a group of customers.  You should try to satisfy more than one market.  For example, crocs sells styles appealing to men, women and children, and many different types of consumer – rich, middle-class and poor – in many countries.  Even though some markets will strengthen and some weaken, demand for your product will never cease.

 

How much do your products cost?

This post explains how to determine the cost of your products.  Properly costing your products will help you set prices that maximize your profits.  If you are in a service business that doesn’t sell physical products (such as a law practice or a dog-walker), I will write a separate post for you sometime in the future.
For purposes of product costing, there are two types of businesses: retailers and manufacturers.  Retailers buy finished products from other companies.  (This category includes so-called “wholesalers” who buy finished products from other companies and then resell them to other businesses.)  On the other hand, manufacturers create products to sell to their customers.
Older Citizens, Retired Persons and Those Unable to Care for Themselves Physically Are Cared for in Two Community Centers...
by The U.S. National Archives, on Flickr
Product costing for retailers is easy.  The cost is usually whatever you paid your supplier.  Add any shipping costs you paid and subtract any discounts received from your supplier.
For manufacturers, product costs include three elements:
  1. Direct materials – the costs of raw materials used to make a product.  For example, suppose that your company makes and sells hand-knitted sweaters.  This is the cost of the yarn.
  2. Direct labor – the costs of paying workers to make your products.  For your sweater-knitting operation, this is how much you pay grandmothers to knit the sweaters.
  3. Manufacturing overhead – these are other costs necessary to produce your products.  For example, this may include the cost of supplying grandmothers with proper knitting needles and rocking chairs.

Make sure you include all relevant costs of your products.  Include any costs necessary to sell the product.  Failure to do so could cause you to underprice your products – and sometimes even to sell products at a loss.

 

What you can learn from Dropbox

New York Mets Citi Field, Flushing, New York CLS_5315.JPG

I love Dropbox. Dropbox backs up all of my files and makes them available everywhere I work – on my iPad and on both my PC’s. No carrying around thumb drives, no forgetting to back up. Everything is everywhere all of the time. Sometimes I e-mail links to my files directly from my iPad. I’ve even I logged into Dropbox on another person’s computer and then immediately e-mailed them links to a needed file. It’s a great app.

My heart is breaking because I’m preparing to switch over to Google Drive as soon as its iPad app is ready. I’m not thrilled about this – I feel like Dropbox and I have built a friendship. Dropbox has been 100% reliable and (bonus) has ever sent me any spam. However, that friendship is hardly worth the $15/month difference between the two services. Sorry Dropbox. (Plus, I’m a longtime user of Google Docs, which is being merged into Google Drive. I’m a big fan of any program that will let several people simultaneously edit the same document.)

Anyway, Google vs. Dropbox is somewhat like the Dodgers vs. the Mets. I’m a life-long Mets fan, but when they play the Dodgers, I pretty much understand and accept that the Dodgers are probably going to win. I regret to admit that Dropbox will probably go the way of MySpace and the Commodore 64.

What can we learn from Dropbox?

  1. Dropbox has a great revenue model. People sign up and make monthly payments, unless they cancel. As long as you keep your customers happy, their constant stream of revenue keeps flowing. This can breed complacency.
  2. But whatever you do, don’t get complacent. Profits attract competition. The more profitable that you become, the more value that you must provide to keep and continue to grow your revenue base. While Dropbox has increased its features, its basic prices for storage capacity have remained the same.

Now consider Apple. Apple continues to upgrade its iPad series, even though it is already far ahead of the competition. In light of the iPad’s astronomical profits, a number of hungry competitors are licking their chops, preparing to attack. Apple is ready.

[Image: New York Mets Citi Field, Flushing, New York CLS_5315.JPG by smith_cl9, on Flickr]

 

The income statement explained

Apple EarthThe income statement is a financial statement that measures a company’s profitability.  It is sometimes called:

  • Statement of income
  • Statement of earnings
  • Statement of operations
  • Profit and loss statement

The basic formula for the income statement is:

Revenuesexpenses = net income

Income statements are usually prepared using the accrual basis.  The largest expense on an income statement is usually cost of goods sold.  Other typical expenses include:

  • selling, general and administrative expense
  • research and development expense
  • depreciation expense
  • interest expense
  • provision for income taxes (i.e. income tax expense)

A corporation reports earnings per share at the bottom of its income statement.

Here is Apple’s most recent income statement: http://files.shareholder.com/downloads/AAPL/1666563929x0xS1193125-11-282113/320193/filing.pdf (Go to page 43.)

[Image: Apple Earth by JD Hancock, on Flickr]

 

Assets vs. Expenses

Many Crates, One DrinkPeople often confuse assets with expenses.  This is because both assets and expenses use up your funds – these are things you can spend money on.

Assets provide a future benefit to your business.  They help bring in future revenues and profits.  Assets appear on the balance sheet.

For example, inventory is an asset.

Expenses are the cost of bringing in revenues.  They were needed to bring in the revenues and profits that you reported this year.  Expenses appear on the income statement.

For example, just as inventory is an asset, “cost of goods sold” is an expense.  This is the cost of inventory that was sold during the year.

The difference is really one of timing.  An asset is expected to bring in a benefit sometime in the future.  When the benefit comes in, then the asset becomes an expense.

As it is sold, inventory is moved out of the inventory account on the balance sheet, and into the cost of goods sold account on the balance sheet.

Sometimes, an asset can lose value without ever providing a benefit.  This would be considered a loss, which is, like an expense, deducted in the income statement.

Suppose inventory is somehow damaged or rendered obsolete.  Then it would be recorded as a loss on the income statement.

Please note that definitions of assets and expenses for financial accounting often differ from their definitions for taxation purposes.  A legitimate expense on your income statement might not be deductible on your tax return.

 

Your accounting system

Your online business must have an accounting system.  It can be sophisticated, or it can be very simple, but you need one.  Your accounting system will:

  • keep track of critical tax information
  • provide a scorecard of useful information to help you track your performance
  • prevent errors and fraud.
If I’ve not persuaded you so far, this should do it:  The IRS requires you to have one.  ’nuff said.
What kind of system should you have?  It depends on several factors:
  • How many transactions you have a year.  (A transaction is either a payment received from a customer or a payment made to a supplier/employer.)
  • How many different suppliers, customers and employees that you have.
  • If your business keeps one or more separate bank accounts.
  • Size of your business, measured in revenues.
The number of transactions, the number of different suppliers, use of one or more separate bank accounts, and the amount of revenues all determine how sophisticated your business is.  The more sophisticated your business, the more sophisticated of the accounting system you need.
Suppose your business is like a consulting business I used to operate a few years ago.  I had one customer and received 4-6 checks a year.  I kept a simple spreadsheet of the checks received.  That worked just fine.  Even with a few different business expenses, a simple spreadsheet, like my Google Docs template, should suffice.
More sophisticated businesses will need dedicated accounting software.  I’ve advocated for GnuCash project, which would meet many users’ needs. If you’re ready to pay for commercial software, Quickbooks and Sage-Peachtree offers more sophisticated options, with significantly more functionality.  I recently found other “cloud” options, free agent and  kashoo, which looks great (I haven’t tried it).
When buying commercial software, you are usually best off buying the minimal program (which might even be free) and then upgrading if and when you need additional functionality.  Cloud options may require monthly payments.  I don’t like monthly payments.  However, they will not charge you for annual upgrades.
What accounting program do you use for your business?
[Image: Wikimedia Commons]