Do You Worship at the Altar of the Right Business Gods?

Economies like this don't suffer fools gladly and there's nothing more foolish then trying to juggle 2 balls at once - especially when it can sometimes feel like your Han Solo getting chased by Darth Vader through an asteroid field. Under the best of circumstances it's almost impossible to do two things at the same time well; these days you're flirting with disaster.

The primary objective of any business is to earn the highest return-on-invested capital (ROIC) for the longest period of time. That's why I believe the "ZEUS" of the BUSINESS GODS is - and always will be...

"THE EQUATION."

Return on Investment. How much money you make in relation to how much money you spend to make it.

"Return" divided by "investment." The amount you make in relation to what you spend. Sounds simple doesn't it?....

The numerator of the equation is the "Return" or the Net Profit. The denominator of the equation is the "Investment" or the amount you had to spend to get the return. Of course you have to consider risk when looking at your potential return. And you have to consider opportunity cost when judging whether to make the investment...

But for me it's that easy: Whenever I debate any allocation of resources I ask myself is if the decision honors "The Equation." Whenever I'm asked to help a friend think through a business issue the first question I respond with is, "How does it honor 'The Equation'"?

Literally each and every decision I make - down to the paperclips - has to serve "The Equation" first. Far too often in my life I've seen businesspeople suffer tremendous financial pain when they forgot this simple but often overlooked fact of business.

Here's one way I put the "Equation" into practice:

How to Honor the "Return-side" of The Equation by "Right-Sizeing" your cost structure ASAFP:

For every $1 in Revenue your company generated last year you had certain costs built in. For example your "Cost of Goods Sold" (COGS) may have accounted for .20 cents or 20% of every $1 in sales. Or your "Selling, General and Administrative Expenses" (SGA) may have accounted for .30 cents in costs for every $1 in sales, or 30%.

The first move you have to make in a declining revenue environment is to make sure that you trim enough from your costs so that - at the very least - they represent the same % of sales as they did, on average, for the past several years. It's called "DEFENDING YOUR MARGINS" and if you don't make it a priority you are at SERIOUS RISK of trading short-term inaction for much tougher long-term pain.

Start by putting tremendous pressure on all of your suppliers to reduce their costs to you. And make sure you negotiate hard - during the recent credit bubble, they had no problem pushing inflationary price increases to you. Just make sure you do the same. Letting go of employees is much tougher then muscling a supplier (which should provide extra incentive for you to negotiate them down).

I was 22 years old (believe it or not) when I started my own brokerage firm and 26 when I had my first round of layoffs. Letting go of good people - especially ones older then more - was among the most difficult times of my life. But then I read a book by Alfred Sloan titled, "My Years With General Motors" and in it he said something that forever changed my life. He said that, although he was the CEO and President of the company, he always looked at General Motors as his "CLIENT." And his sole job was to do what was in the best interest of his "CLIENT" without pride or prejudice. While it's NEVER easy to let go of people you enjoy working with you have to do as I do and pretend you're a lawyer who has to do what is in the best interest of his "CLIENT." Indeed, letting go of "credit bubble" hires will save the rest of the people who still work at your firm and depend on you.

But don't ever forget - EVER - that you have to treat the people you are letting go with the same dignity and respect you would want in their shoes. My grandfather had his share of problems in life but one thing he taught me was to leave a relationship with as much - IF NOT MORE - class then you entered it with. Whenever I hear stories of employees who were let go with little or no severance after years of faithful service I almost always just get sick. Unless the layoff was the by-product of a dire, unexpected emergency (think Lehman Brothers) I think to myself that the boss must either be stupid or petty. "Stupid" because he didn't confront the issue months earlier with a strong severance package (full pay + health benefits for AT LEAST 3 months if at all possible). "Petty" if he or she is just that type who cares about nobody but themselves. Sickening.

(For those of us who've been on the other side of the layoff coin I can only offer some advice Teeka Tiwari offered me 15 years ago when he said, "REJECTION IS GOD'S PROTECTION." As corny as I thought it was when I first heard that I must admit - whenever one business door has closed, the one that subsequently opened was so much better that I often find myself stunned at the opportunities that open up. As hard/depressing/embarassing as going broke in my late 20's was, I wouldn't trade it for anything today. I wouldn't be half as successful had I not learned some very valuable lessons from that experience).

How to Honor the "Investment-side" of The Equation by Staying Laser-Focused on Your Core Business:

Like a long-time employee, getting rid of a business you've spent a ton of money nurturing the past few years can be a very emotional decision. I remember back on Wall Street being confronted with an issue that still haunts me to this day. After investing almost $1 million over 3 years to set up, launch and nurture a money-management firm to compliment our brokerage arm I had to make the decision to kill it. Boy was that a tough one. Not only was I absolutely convinced that we were finally getting some traction but a good personal friend of mine was running it and I had to lay him - and his hard working staff - off. Talk about demoralizing. It's one thing to let go of an obvious candidate - quite another to let go of a group that worked their tails off for a couple of years.

But the numbers told me I had no choice and if theirs one thing I NEVER ignore in business it's the numbers. I would have been lucky to break even in another year and maybe - JUST MAYBE - earn 5% on my investment the following year. If I had billions in capital of staying power I would have played my hand as long as possible. But in a world of finite resources I had to make a decision: focus all of our energy on improving our main business that was earning us - even during the recession - 15% on our invested capital. So focus on your core business because that's proven to be the best investment you can make.

Of course, you can't work on two sides of the same equation seperately because they're both in relation to each other. But it's been an important part of my process because it helps me focus on bite-sized pieces of the business issues in front of me.

We'd love to hear from you: What Business Gods Do You Worship?

*****

This Site is Dedicated to:
The Entrepreneur/Business Owners Of America Who Are the True Engine Of Our Economic Future. Since You Are Responsible for 70% of All Jobs Created in America You Are Truly The Backbone of Our Economy. Because The Decisions You Make Today Will Determine the American Our Children Live in We'd Like To (A) Share Our Experiences As Real Veterans Who've Waged This Kind of War Before and; (B) Share Lessons We've Learned About How Tough It Is To Start a Business When the Economy is Good, Let Alone When Everyone Else is Terrified. Conversely, We Know Many of You Can Open Our Minds As Also By Teaching Us As Much As We Can Teach You So We Look Forward to Your Insight As Well.

PLEASE Be Considerate of Our Community Rules:
1. Honesty: We Encourage You to Criticize, Comment, Agree or Disagree on Any Posting Whatsoever.
2. Editorial Respect: As Long As Your Post Is Relevant to Our Discussion It's Welcomed. But If You Enjoy Writing Long-Winded "World is Coming to an End" Rants This Community is Probably Not a Right Fit For You.
3. Exchange Knowledge: The People Reading this Are Not Only Friends and Business Associates of Mine But Some of the Most Successful People in Business. Do Not Feel Shy Using a Fake Name or an Alias When You Ask/Answer a Question.
4. Last But Not Least: Please Remember That We're Not Doing This for the Money. There Will Be ZERO Outside Advertising Nor Will We Collect ANY Information To Try to Sell You Anything. So Please Be Discreet About Who You Invite Because The Easiest Thing For Us to Do is Make the Site A Private, Invitation-Only Site for Members Only.

How Do You Want Your Business to Look When this Downturn is Over?

Nobody who runs his or her own business needs to read a newspaper to know that the economy is weak. Some firms have seen sales and/or profits decline directly due to an exhausted American consumer. Others, presumably lucky to avoid falling with the first or second wave of dominoes, have seen their cash flow dry up as vendors keep stalling for time.

I don't time things I price them. So I'm the last person to predict when this will all get better. What I do know is that as far as credit bubbles have played out throughout history, this one was as typical as any of them. So typical in fact that the only thing that ever changes are just the names they give the loans. All of the rest ingredients - cheap money, misperception of risk, hubris, and inflated future expectations - we're all there.

But, like each and every credit bubble "movie" replayed throughout history, we're in the 3rd Act of the play - the deleveraging act - and that means we're closer to the end of the movie then we are to the beginning. Sure, they'll be some new regulation and government involvement in private business. But the world as we know it will not end. This is a cyclical process and it just has to work itself out.

Like I said I don't predict the direction of the markets. The only market "prediction" you'll ever get from me is the only one I believe wholeheartedly: one day, probably sooner then most people think, the economy will turn around again. How can I be so certain? Because I'm really not making a bet on the economy, the market, interest rates or currencies at all. I'm making a bet on human nature - a bet that human nature will stay virtually the same it's been for the past 25,000 years.

That's why I'm as bullish as I've ever been on America's future. If our system of government has proven anything this year it's that it's remarkably healthy and it works. And in a functioning meritocracy, nothing could stop money from seeking opportunities for high returns. As long as humans are designed to compete for resources and our meritocracy enables that to happen you could bet the farm we'll be fine.

That is, of course, unless human nature does fundamentally change in coming years. In that case all bets are off - I'd need to find an intergalactic real estate agent pronto!

So...given what we know. Given the fact that the same movie with the same ending is on again the question I think business owners should be asking themselves isn't How do I survive this downturn? It should be How do I capitalize on the greatest opportunity since the great depression?

We'd love to hear from you: Have You Thought About How You Want Your Business to Look When this Downturn is Over?

*****

This Site is Dedicated to:
The Entrepreneur/Business Owners Of America Who Are the True Engine Of Our Economic Future. Since You Are Responsible for 70% of All Jobs Created in America You Are Truly The Backbone of Our Economy. Because The Decisions You Make Today Will Determine the American Our Children Live in We'd Like To (A) Share Our Experiences As Real Veterans Who've Waged This Kind of War Before and; (B) Share Lessons We've Learned About How Tough It Is To Start a Business When the Economy is Good, Let Alone When Everyone Else is Terrified. Conversely, We Know Many of You Can Open Our Minds As Also By Teaching Us As Much As We Can Teach You So We Look Forward to Your Insight As Well.

PLEASE Be Considerate of Our Community Rules:
1. Honesty: We Encourage You to Criticize, Comment, Agree or Disagree on Any Posting Whatsoever.
2. Editorial Respect: As Long As Your Post Is Relevant to Our Discussion It's Welcomed. But If You Enjoy Writing Long-Winded "World is Coming to an End" Rants This Community is Probably Not a Right Fit For You.
3. Exchange Knowledge: The People Reading this Are Not Only Friends and Business Associates of Mine But Some of the Most Successful People in Business. Do Not Feel Shy Using a Fake Name or an Alias When You Ask/Answer a Question.
4. Last But Not Least: Please Remember That We're Not Doing This for the Money. There Will Be ZERO Outside Advertising Nor Will We Collect ANY Information To Try to Sell You Anything. So Please Be Discreet About Who You Invite Because The Easiest Thing For Us to Do is Make the Site A Private, Invitation-Only Site for Members Only.

This Site is Dedicated to the Backbone of the American Economy

Some folks love math. Others love great books, making movies or painting. I happen to love the subject of business. In that way I consider myself lucky. I get as much pleasure from my work as I do from reading classical history, studying philosophy or any other hobby I have.

I own small pieces of a lot of different companies and some large pieces of a few. But one company I co-founded a few years ago, www.TheTycoonReport.com, has brought out a new enjoyment in my life - a passion for writing. Each week I write an article that's published in our free daily market letter that reaches hundreds of thousands of people each and every single day. Far greater then the qualitative reward I get from writing for The Tycoon Report each week is the qualitative reward. The dozens of letters I receive each month from people who say they've benefited a bit or may have learned something from my writing is intensely gratifying.

I am also fortunate in that I have many friends in my "network" who also own and operate both small and large businesses or who are investors in many asset classes. As you can probably imagine, the past year we've been speaking quite a bit about how to do more then just "survive" this "crisis" but to THRIVE in it.

As a self-styled student of business that means this is THE most exciting time in my professional career. Not only are the opportunities in front of me exciting but many of my friends either own and/or operate business with exciting opportunities in front of them also.

As you can imagine, that means I've spent quite a few hours on the phone these days strategizing with an ever-expanding list of people who I can trade knowledge with. And while many of those conversations are confidential I do believe much of what's discussed can be shared on this blog.

So here's why I'm writing this blog:

1. To share and learn from some of my experience with my existing network of business friends and investors at a time and place convenient for all of us. Not only will this save all of us time, but we won't have to miss half of all our phone calls.

2. To invite other business owners and/or investors to join in the conversation with us and share their experiences.

3. To (hopefully) help younger business owners navigate their way through this.

At first I was going to make this a private community.

Or I considered doing it on a network like LinkedIn or something like that. But I don't want to become a "target" for someone who wants something from me and those networks have a way of making me feel that way sometimes. Supplicants do nothing for my ego.

It wasn't until I reminded myself of what a friend said to me some time ago that I decided to actually set up this blog. He said, "Game always recognizes game."

In other words, this blog will attract the audience that best reflects the level its participants exchange on. And since I'm not doing this for the money and have no intention of marketing it that means our "audience" will never be big. Nor will it grow quickly.

And that's exactly what I'm hoping for...