Jeremy J at 37signals says when writing computer code, he writes the tests first. Then he knows that the code he writes will have to pass the tests. He says it wastes less effort and keeps him happier and more productive.
I sometimes do the same thing when trouble shooting. I write down what I’m looking for and what should happen. Then check it off. If I don’t find the problem at least I know what not to try again. And the list of failed tests helps me narrow in on what the cause of the problem is.
I’ve never done it when trying a new project, but I suppose it could work. Next time someone comes up with an idea you’d like to try, do this: before you roll it out, design the tests. That means specifiy what you expect to change, by when and how you’ll measure it. Define what measurements will constitute success, and failure. Then see what happens.
What do you call a person who speaks two languages? Bi-lingual. What do you call a person who speaks three languages? Tri-lingual. What do you call a person who speaks only one language? An American. – Old Joke
Numbers are the language of business, yet many business owners don’t really know that language. They survive, but not as well as they could. My learning of this language has been completely self-taught, as a result, my understanding is less than orthodox. In some ways that’s better.
You’ll see the ideas above in the numbers below. Advice for MBA’s and accountants: You are schooled in numbers: the language of business. But knowing the language doesn’t mean you have anything to say. If you want to help entrepreneurs, you have to learn to use that language in the context of what a small company needs.
#1. Your COGS – Cost of Goods Sold. As a percent, this is how much of every sales dollar goes to buy the material and make it into a form that it will generate that sales dollar. If you sell only a few things, you should know your COGS for every product. If you sell a lot of items, perhaps you can group them and figure your COGS by product line or market. If you do a lot of custom work, you may need to figure out your COGS for each sale.
#2 Your Gross Profit in dollars per month. This is what’s left after you subtract COGS from your sales. This dollar amount has to cover overhead, payback and profits. It’s also the lowest price you can sell your next widget for without actually paying the customer to take it. Obviously you can’t sell them all at this price or you’d never cover overhead. But if you hit a dry spell and want to keep your crew busy, or if you want to entice a new customer with a loss leader, this is as low as you can go without really taking a loss. Gross Profit as a percentage of sales is called Gross Margin. You’ll need the margin for the next one.
#3 Value of your next customer. Here’s how it works. You take the dollar amount of your average sale TIMES the number of sales the average customer makes over their lifetime as a customer TIMES the Gross Margin. This is how much money your next customer will put in your pocket.
EXAMPLE: Let’s say you run a country club. Your average member stays a member for 5 years (60 months) and spends $1,000 a month in dues, green fees and restaurant meals. Your COGS for all that is $600 a month. So your gross margin is 40%. Your next average customer is worth $24,000: $1,000 per month sale TIMES 60 months TIMES 40%
CAVEAT: This is only true for your NEXT customer. Or the next number of customers you can serve without adding to your overhead, or making some capital expense. But in that context it can be useful to determine ways to increase the value of each customer (“You want fries with that?”) and you use it to compare to #4
#4 Cost of acquiring the next customer. This is money spent on marketing, advertising and sales DIVIDED BY the number of new customers that effort brings. Effort that brings in more value than it costs is worth it.
#5 The Magic number. Every business has one number that summarizes the health of the whole business – usually on a daily basis. Sometimes it’s obvious: a hotel uses % occupancy, a restaurant, the # of meals sold per night. But sometimes it helps to get creative. One manufacturer used the weight of all the items they shipped out in a day. It turns out for them, pounds on the shipping dock did a good aggregation of profit margins in different product lines. One restaurant owner used the number of people in line at 8:30 PM. If there were a lot of people waiting, his staff turned tables quicker to sell more meals. If not, they encouraged dessert and after dinner drinks to sell more that way.
The Magic number for a start-up is always your break even point. You must know that. When you hit it consistently you’re not a start-up anymore.
Takeaways:
I have a problem with this test of your Entrepreneurial Quotient posted by Guy Kawasaki. My problem is that while I agree with all the questions and answers save one [more on that in a minute] I don’t think it’s about entrepreneurial quotient.
It’s about the hyped up buzz about what is an entrepreneur: Someone starting a company making some sort of software and who needs venture capital to take their company public.
Sure there are entrepreneurs like that. But it’s a small sub-set of all entrepreneurs. Of course it’s the flashy newsworth sub-set. And given Guy is from the high tech world, and a VC it’s no wonder he’s made this mistake.
And I must say, for the record, I like what I’ve read of Guy’s approach to building companies. There’s a lot right with it – I just wish people wouldn’t limit the concept of entrepreneurship in this way.
As for the test itself #11 is a very good point. But #6 I have a big disagreement with. I guess it depends on your definition of success. But I’d choose answer A.
I actually didn’t make this mistake. We’re only remodeling two but I thought of it because the third one is downstairs in the cold part of the house, poor me [sniff].
Anyway, this thought is relevant here because of why we’re remodeling. We’re getting ready to sell the house. So now we’ll have two bath rooms with a nice modern look instead of that “what were they thinking?” wallpaper that I’ve lived with for eight years!
The point is, why didn’t we do this seven years ago? Then we could have enjoyed them all this time and still have the house in shape to sell.
My friend, John Hyde is in the business of “work outs” – making closely held companies look good for suitors. Either they’re growing so fast they need alternative financing, or they’re selling, or something like that. It usually involves cutting some expenses and rejiggering three years of financials. Nothing illegal mind you, but making them more accurately reflect what it really costs to run the place. The goal is to show as much profit or cash flow as possible because that results in a multiple for a sales price, or lower financing costs.
He told me that if people would hire him at the start of those three years instead of the end, two things would happen. One is his fee would be smaller, and the other is there would be more profit or cash flow for all that time. In other words, the owners would get to enjoy that remodeled bathroom all that time.
Takeaways:
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