Business Start-Ups

The full title of this book by Walker Deibel is

Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game

In my review posted on Amazon.co.uk, I gave the book a Four Stars rating. This means it is Good to Very Good.

Here is my book review.

Very well written guide to being an acquisition entrepreneur

Can you succeed by buying a business? [continue reading…]

The full title of this book by Eric Ries is

The Lean Startup: How Constant Innovation Creates Radically Successful Businesses

In my review posted on Amazon.co.uk, I gave the book a 5 Stars rating. This means it is Excellent.

Here is my book review.

An essential essential book for start-up entrepreneurs

I read this book years ago but never got around to reviewing it. I’ve just read it two more times in the last year. It is that good.

I see it as an essential book for start-up entrepreneurs. It is packed with important truths. [continue reading…]

The full title of this book by Bafs Folarni is

The Golden Rule For Start Ups: A Guide For Emerging Business Owner

In my review on Amazon.co.uk, I gave it One Star.

Don’t bother with this one, the clue is in the careless way its on Amazon without any capital letters

It takes effort to write a book, even an extremely short book like this and I don’t like to be too critical.

However this isn’t close to the standard that you’d expect from a book selling for close to £7. [continue reading…]

Here is a video that’s just under 10 minutes long which explains the Business Model Canvas in a reasonable level of detail. It’s been produced by The Business Channel.

The Business Model Canvas was explained in the book Business Model Generation by Alexander Osterwalder and Yves Pigneur. (I gave it a Four Star rating.)

It brings together nine components of a business in a one page form:

1. Key Activities
2. Key Resources
3. Partner Network
4. Value Propositions
5. Customer Segments
6. Channel
7. Customer Relationships
8. Cost Structure
9. Revenue Streams

Why I Like This Video

1. The business model canvas is a very useful way to think about the logic of a business. It doesn’t matter whether it’s a new start-up or whether it’s an established business which has got stuck and needs a turnaround in performance.
2. It gives you more details than the 2 Minute Business Model Canvas Video without overwhelming you or requiring too much investment of your time before you decide to dig in deeper.

Get To Know Me

[sos]

[6Steps]

Here is a short video from the developers of the Business Model Canvas and the Value Proposition Canvas. It’s less than 5 minutes long.

I’ve always felt that the value proposition is at the core of a business and often a great place to focus if the business needs to get unstuck or have a performance turnaround.

What is a value proposition? There are lots of definitions but, at the moment, let’s go with…

How you meet customers needs and differentiate your business away from competitors with an advantage that’s better, cheaper or different.

The logic behind the Business Model Canvas was introduced in the book Business Model Generation. The authors followed it up with a more detailed look at the connection between two of the nine elements in the Business Model Canvas in a book called Value Proposition Design. The two segments were the Products & Services and the Customer Segments.

I’ve been critical of the books for having more style than substance. They look great but they don’t provide enough information and guidance. The underlying concepts are sound, even if they use slightly different language than I prefer.

I also worry that the exercise can be reduced to form filling rather than deep thinking. It’s the old analogy that you can lead a horse to water but you can’t make it drink.” You can provide a useful framework but you can’t make business managers and owners consider all the implications. Too many are intellectually lazy but hopefully you’re different.

Why I Like The Video

1. Value Propositions are poorly understood at the strategic/marketing levels. The Value Proposition Canvas can help you to focus on important issues.
2. The video is very short so it gives you a chance to watch it and decide for yourself whether you like the approach.

Get To Know Me

[sos]

[6Steps]

Here is a two minute video quickly explaining the Business Model Canvas from Strategyzer, the consulting firm of the creators.

The Business Model Canvas has gained great popularity after it was introduced to me in the book Business Model Generation by Alexander Osterwalder and Yves Pigneur. (Click on the link to read my thoughts about why I gave it a Four Star rating.)

Its purpose is to help a business owner/senior manager to design their business model to satisfy customers and make a profit. It requires you to be specific about nine elements in the business.

Why I Like This Video

1. It is super quick.
2. It’s a good introduction of how the 9 elements fit together logically.
3. It’s useful to get you enthusiastic about the Business Model Canvas before asking you to watch a longer video.

Who Is The Business Model Canvas For?

The canvas can be applied to business start-ups as part of the initial planning and design stage of the business.

It can also be used by an established business that is looking to either:

• Go from being stuck and under-performing to identifying what needs to change for the business to be turned around.
• Enter a new market or niche. Even if the new market is closely related to the existing market, using the canvas helps you to identify the thi

Get To Know Me

[sos]

[6Steps]

Every business is different but there are at least five essential components to entrepreneurship:

1. Ideas – a clear vision of the future and ideas for turning the dream into reality
   
2. Management skills – the ideas need to be implemented effectively and efficiently
   
3. Time and commitment – the focused time the entrepreneur is prepared to invest in the business.
   
4. Money – it often requires an initial investment to build a business to a level where it can generate cash on an ongoing basis and the entrepreneur needs to be able to provide or raise the cash. Other tangible assets might also be used to support a business like a property.
   
5. Relationships and reputation

You may be tired of hearing that 50% of small businesses fail within the first two years and 80% within five years (source Michael Gerber) but each of these factors play a role in contributing to the failure rates.

The Power Of Ideas

If the idea is not good the business will not get off the ground. In the UK, the BBC has a TV show called “The Apprentice” as a group of wannabees compete to have a £100k a year job with entrepreneur Sir Alan Sugar.

Last week’s show featured a terrible idea. The two teams were asked to create a new celebration day for the greetings card industry and one team came up with the Environmental Awareness day when we were also supposed to send people we know a paper card encouraging them to conserve the world’s natural resources.

The Apprentice team thought we should use resources to encourage people not to use resources!

Not exactly sensible and not fun either with the lecturing tone of the cards they designed.

But other ideas are great.

For example, who cannot admire the idea of Starbucks which totally changed the concept of coffee and has swept across the globe. I don’t get the Starbucks concept myself but I admire the idea which has inspired so many people to spend a small fortune on coffee.

Management Skills

In Business Failure and Bad Management, I explained that insolvency experts believe the overwhelming cause for business failure is that the management team is just not up to the task. Too much talk, too little action. Too many bad decisions and not enough good ideas.

Management skills make a huge difference and that’s why the business management support industry is thriving from the thousands of books through to extensive ongoing coaching and consultancy programs.

Time and Commitment

Many business owners I talk to are amazed just how much there is to do when you are starting a new business and how many hours it needs to do everything that must be done.

Better management skills and experience can make life easier (you waste less timing making mistakes and then having to recover) but clear goals, prioritisation and time management discipline are essential.

But you can outsource tasks which are outside your strengths and you should delegate to any staff you have so that your hours are kept within reasonable limits.

Money

It seems that you need money to make money and it is certainly much easier to spend than it is to earn.

Many businesses make a loss in their first year although it is a concept I am not keen to encourage. If you plan for a loss, it creates a ready-made reason for you to lose money.

More justifiable is that a growing business usually needs cash to finance the business. You may need to buy equipment and stock and your customers are probably going to expect to pay you after your suppliers expect to be paid. The bigger your business gets, the more “working capital” is needed and that’s why fast growing businesses are often profitable but need to keep raising extra finance. (See Secrets Of Getting Your Bank Manager To Say Yes if you need a bank loan).

Entrepreneurs may bring other resources and tangible assets to the business to lower the start-up barriers. For example the entrepreneur may own a property where the business can operate. At the lowest level, this is working from home which millions of people do but the entrepreneur could own an office building, a warehouse or factory unit as an investment.

Since property usually requires signing a formal agreement, often with a significant commitment into the future, the chance to avoid these risks can give the business a significant advantage over competitors who are starting up.

Relationships and Reputation

I thought about separating out relationships and reputation but your reputation is at the very centre of your ability to build strong relationships with customers, suppliers and other people who can help you to build your business.

One of the nice things about being a business owner is that, as your own boss, you’ll never need to ask for a pay rise.

You’ll have to answer the question…

How Much Should I Pay Myself As The Business Owner?

You will have conflicting feelings as you wear both the hats of the employee and the employer.

As the employee, the salary and benefits package you receive will determine your standard of living.

Benefits include things that you could buy as a private individual but the business pays on your behalf. In the UK this includes costs like company cars and medical insurance.

As the employer, you’ll be aware that there are many other calls on the money a business has at its disposal:

• Your staff want to be paid more.
• Your suppliers want to be paid faster and they want higher prices.
• Your customers want you to reduce prices and add more free services or better service.
• And of course, the taxman will want his fair share.

The Opportunity Cost Approach Of A Business Owner’s Salary And Benefits Package

I’ve discussed the opportunity cost approach in the article

How Much Should An Entrepreneur Or Small Business Owner Earn?

I’ve also had a much deeper look at it in my free report, The Profit Tipping Point.

The gist is that there are two market rates available to act as your guide when thinking about how high (or low) your salary should be:

• How much you can earn doing something else. It doesn’t really make much sense that you should build a business that pays you a lot less than you could earn if you worked for someone else.
• How much you would have to pay a general manager or chief executive to manage your business if you weren’t there.

As you can see, the twin hats of employee and employer are coming together here to give you an approximate range of how much you should pay yourself.

There is also the issue of how much is the work you are doing really worth. I mentioned earlier paying yourself as a chief executive but what if you’re doing much of the work of an administrative assistant.

It’s hard to justify a salary the equivalent of £100 per hour if you spend much of your time photocopying and filing!

The Three Big Questions To Answer When Deciding Your Own Pay

The three questions to focus on are:

• How much do you want?
• How much can the business afford to pay you?
• How much are you worth?

That third question is not a particular problem if you own your own business 100%.

It becomes much more of an issue if you have one or more other partners or investors in your business.

Suppose you find yourself involved in a management buyout. One person has been the CEO earning £100k p.a. and there are three other senior managers who used to earn between £40k and £60k p.a.

You have provided different amounts of the finance based on your own personal financial situations and to cover the inequity, you’ve agreed that any profit above the base salary and agreed bonus will be paid as dividends back to the people who provided the finance.

Since you’re all working full time in the business, do you all receive an equal salary or do you recognise the market assessment of your previous worth?

I suspect your answer and assessment of fairness depends on whether you are the CEO or one of the other managers.

Do You Pay Your Salary First Or Earn The Profit First?

This is a controversial issue and you will read different views on the best approach. I’ll try to present a fair summary and give you my own particular solution.

If I could think of clever names, I’d create a 2 x 2 matrix to show the main four situations with Profitability Before Owners Salaries on the one axis and Owners Salaries and Benefits on the other.

There are four basic situations:

• High Profit – High Salary
  
• High Profit – Low Salary
  
• Low Profit – Low Salary
• Low Profit – Profit Salary

Let’s take a look at each in turn.

Situation 1 – The Business Earns A High Profit And The Business Owners Earns A High Salary

Here the business is performing very well and the business owner deserves the rewards of the success.

Taking a generous but affordable salary and benefits package out of the business is the ideal situation.

The format of the profit extraction is best agreed with your tax advisor to minimise the overall tax paid by the business owner and the business. Anything else damages your overall wealth.

Situation 2 – The Business Earns A High Profit But The Owner Pays A Low Salary

Some business owners don’t want lavish lifestyles with big houses and fancy sports cars and may not see any need to pay themselves a big chunk of the profit.

This makes sense if the business has third party borrowings that can be reduced or if the business needs the money to expand.

It’s also OK to have some rainy day money in the business that protects its future.

However, it is unwise to leave too much money in the business. Basic wealth management principles emphasise the need to spread risk with a diversified portfolio of investments.

Businesses can suddenly run into financial trouble because of changes in the wider political, economic, social and technological environment.

If you take money out, you always have the choice of investing it back in the business.

Situation 3 – The Business Earns A Low Profit And The Owners Earns A Small Salary

The business owner has adjusted the salary to reflect how the business is performing by not taking out any more than it can afford.

Many will argue that this is responsible ownership, cutting the cloth to make sure that the business remains viable while steps are taken to improve profitability.

Others say that the business owner should pay themselves first. Before employees, before suppliers, before the government. They argue that the owner didn’t go into business to live on a subsistence wage.

Situation 4 – The Business Earns A Low Profit And The Owners Earns A Large Salary

In this situation, despite the fact that the business is struggling, the owner continues to take out a high salary that the business cannot afford.

Some argue this is the right thing to do. It shows the business is making a loss and that should motivate the business owner-manager to take corrective action.

Others say this is irresponsible and threatens the future of the business because the owner refuses to recognise the real situation and is blindly continually to live a lavish lifestyle despite the business problems.

I want to delve into this debate much deeper.

First I’ll declare my own position so that you can allow for any bias.

I believe a business owner should cut back salaries and benefits. In fact, I go further. I think the business owner should take out a small amount to live and then take a bonus when the business is doing well. This way, the rewards automatically adjust for the performance of the business.

Does Your Salary And Benefits Package Make Sense Financially?

I’ve seen business owners do two strange things to fund their salary payments when the business is just starting or struggling:

1. Invest a significant amount at the start and then pay a generous salary in the early months before the business gets into profitability.
2. Make regular loans back to the business to top up the cash flow and to keep the business within its bank overdraft limits while drawing a big salary and large benefits.

This doesn’t make sense financially.

In the UK, when a person earns a wage or salary above a low level, it has to pay PAYE (income tax) and national insurance (social security costs). The business also has to pay employers national insurance.

While rates vary depending on the value of salary, you can find the business owner trapped in a situation where it lends the company 100% and receives back as salary 50% to 60% and pays the remainder to the government.

This is crazy.

It’s wealth destruction and financial suicide.

What Will Cause The Most Pain To Help You To Focus On Fixing The Underlying Performance Problems?

This sounds masochistic but the best solution to the “how much should you pay yourself as a business owner” question, if your business isn’t doing very well, is whatever the salary that will motivate you enough to take the right actions.

The downsides of the issues with solutions 3 and 4 are obvious.

If you pay yourself a high salary while profits are low, you are eating into the time you have to turn your business around by consuming valuable resources. Worse, you may not know you’re doing it if you don’t have regular financial information or perhaps you’re in denial about the situation and you don’t care because you believe the business will get back to profitability on its own.

If you pay yourself a low salary and your business trades just above the break even point after paying you a pittance, you may put up with the situation for years.

That’s exactly the trap many business owners find themselves in.

They believe they are being financial responsible by cutting back on their own pay and benefits but they don’t find the motivation to make changes. Instead, they get used to the struggle.

Saving money, in their personal and business lives, becomes the norm. They refuse to speculate to accumulate.

It’s one of the reasons Why Don’t Business Owners Buy More Business Advice.

It’s well established that the desire to move away from pain motivates people to action. If it doesn’t, then the problem isn’t painful enough.

People tolerate all kinds of problems until they reach the time when they say “enough’s enough.”

Nearly every business can be improved if you’re motivated, if you diagnose the problems correctly and you find the right ideas yourself or you get help.

To help you make the right diagnosis, please read 21 Reasons Why Your Business Isn’t As Successful As You Want It To Be

What Do You Think?

Do you have a policy for how much you should pay yourself?

When Jeff Walker created and popularised the Product Launch Formula, he turned Internet marketing on its head.

Here is a video of Joe Polish interviewing Jeff. It’s over 80 minutes long.

It’s easy to get a bit too cynical about the product launch process if you’ve experienced it plenty of times in the Internet marketing “make money online” niche.

It can get very hyped up when there are hundreds or perhaps even thousands of affiliates promoting the product launch and everyone’s email inbox is being saturated with news of the launch.

The process of building up expectation and excitement before the product is released and then removed from the market isn’t too much different from the way films are promoted.

First there is the cinema launch, then its released on DVD and then makes its way to paid for cable and then free TV. Each time squeezing more money out of the market.

Even as company as wholesome as Disney release a DVD to a great fanfare and then withdraw it from the market, ready to go through a big launch again sometime in the future.

Jeff talks about the effect of the launch as the equivalent of a sideways sales letter. Instead of receiving the entire sales pitch in one go, you get it sliced into more palatable segments.

You also share valuable content to give people a chance to buy into the ideas. Perhaps to even get results in advance.

This is a great example of pre-selling a product or service and building up desire before it can be purchased.

The Product Launch Formula gains a lot from the ideas of influence and persuasion developed and popularised by Robert Cialdini.