More Lessons Learned Starting a Business

A while ago I wrote about starting my own small business. It’s a really small business. Just me in the garage evenings and occasionally on the weekend. It’s now about eight weeks in and it might be a good time to go through some of the simple lessons that I have learned and, in some cases, relearned during this process. I have to admit that many things I knew, learned before and even suspected, still hold true.

The first thing that was reinforced was the decision as to whether or not this was to be a real business, or what I would call a “hobby”. The baseline for this decision is how Cash Flow is treated. A hobby is something where you are aware of your expenses, but do not fully track them, as the difference between personal and business expenses can be somewhat blurry. In a hobby you know you are spending the money, but you’re not so worried about it as it has an entertainment value as opposed to a baseline for profitability.

For the business, I chose the tactic of keeping all receipts and tracking them (and revenues) via a spreadsheet. I set aside my initial cash investment for equipment (saws, sanders, grinders, etc.), as well as the initial payments for the raw materials that I would need to make the product. I viewed this as my Class “A” funding, to use entrepreneurial lingo. I didn’t want to have to go back to my investor (me) and explain to myself how my initial business case was flawed, if I in fact ran out of cash.

Fortunately, actually not fortunately, it was according to plan – orders did start to come in quickly.

Now came the balancing act of trying to grow. That meant ramping up production, which in this case meant making a couple more game boards than I actually needed each week, in order to build a little inventory. It is October, and the gift giving season will be here soon. It does take some time to build the products, and I am planning on a continued sales ramp through the end of the quarter. I would like to have some products on hand to turn into revenue as quickly as possible.

I don’t however have the ready cash, as part of my plan, to be able to just start producing fully in anticipation of such demand. Such is the balancing associated with cash flow. How much can you spend and how quickly can you get it back.

Another topic was quality. As I continue to produce the boards, I get better at it. I not only get better, I also get faster. I have gained confidence. I began to think I had it figured out. It took one inferior product produced to bring me back down to reality.

I am my own best, or in this case worst critic when it comes to what I produce. If it is not good enough for me, then it doesn’t get sold or shipped to a customer. Those resources, time and materials spent on making that inferior product were wasted. I will not get them back. It brought home the cost of quality, or in this case non-quality very quickly.

Speaking of manufacturing, as I mentioned I continue to learn how to manufacture better and faster. The old adage “practice makes perfect” does have some application here. I have gotten faster and more accurate at the measurement and cutting aspects of the process. I have learned that it is faster and easier to cut, and recut a straight line, than it is to try and sand a straight line. I have refined, changed and in some cased reduced the amount of raw materials required to manufacture. As might be expected it has had a beneficial effect on my bottom line.

As an aside, I have also learned that as soon as you bend what was once a straight piece of metal, it will never be straight again, no matter how long or hard you work at straightening it. Just a tip for those who may also decide to try and work with metals.

The value of having some inventory, as opposed to only starting to build when an order came in has shown its value. I have already mentioned the balancing act between tying up a lot of cash in inventory versus having it available for other expenditures. But it turns out that customers are actually pleased when they get their desired product faster than when it is promised to them. I recently had my first return customer (he originally bought a small board, and he came back to buy a large one). He mentioned that it was both product quality and the fast shipment that brought him back.

Imagine that.

Next comes looking for opportunities to expand both the market for the existing products and looking for new types of products to create. As I said, I am making metal game boards (and game pieces) for Chess, Checkers, Go, Pente and the like games. They seem to be pretty well accepted, at least initially by my go to market channels (in this case on-line purchasing sites eBay and Etsy).

The questions are:

Are there other board games that may be readily adapted to a metal platform?

And

Are there other channels to market for the existing and potentially new metal boards?

I am currently working on a potential backgammon board as a product platform expansion. Backgammon is an older and widely played game. I will not make many boards to start as it will be a much more involved manufacturing process (involving much more difficult angle cuts as opposed to the current right angles I use now). It may actually require outsourcing to a machine or cutting shop, at least initially to get it done. I will see how this goes.

As to expanding channels to market, on-line still appears the way to go for now. It continues to provide the broadest market coverage, while still providing the lowest investment associated with merchant systems and the like. I will continue to look at other artisan and mercantile type sites to see what it may cost to put my products up on those sites. That way I will be able (hopefully) to continue to expand the number of people who can see and purchase my products.

I have looked into attending trade and other types of craft shows, as another channel to market. These may be viable channels in the future, but I am not so sure right now. Almost all of these events require a registration fee of some type. Applying this fee against the margin I get from each product sale tells me how many boards I must sell during the course of the show (usually two days over a weekend) in order to just break even. It also means that I would have to probably invest a little more heavily in inventory as customers who attend these shows normally like to go home with the products that they buy at these shows. Not having available product to deliver would probably limit sales success here.

Most importantly, the weather is still nice, and I would like to golf at least once on the weekends as I continue to work at my chosen career during the week. Once the weather changes and it begins to get a little colder and a little less desirable to play golf, I will probably revisit the trade and craft show decision.

Did I mention that priorities are a must when starting your own business?

Finally, I come to marketing. I have the website up. It can be viewed at https://metalgames.biz/. I have the purchase and merchant systems working on Etsy at https://www.etsy.com/shop/MetalGames?ref=seller-platform-mcnav. I have started to get customer reviews (all positive so far) and am making sure that they are visible on both sites.

The next step was to create a site and presence on Facebook. It seems to be the granddaddy of all social networks at this point. Again, this is a relatively simple process. Facebook has all the required information to quickly lead you through how to set up a page for a business. Mine can be viewed at fb.me/MetalEnterprises. It seems that “Metal Games” was already taken by someone. Such is life.

I am looking into other media sites such as pinterest. I was actually just out there looking and trying to quickly understand their process and methodologies for getting “pins” out there. I will see if I can get that social media capability up and working in the next day or so.

Several things are similar for a one-person garage shop and a ten-thousand-person multi-national company. Knowing where your cash is and how quickly you can get back what you have spent dictates what your cash flow is. Profitability is great and will ultimately dictate longer term success, but cash flow is what allows you to keep the doors open. Product quality is a premium. “Good Enough” is not anywhere near good enough. Set your personal thresholds high and do not compromise. It matters. Continuing to seek out new customers and being as responsive as is possible to those you find will always be the keystone for business success.

And, as is the case for me at Metal Games (as in most of the work I do) have fun.

Budgets and Quotas

It seems to me that too many times I have heard the words “budget” and “quota” used interchangeably. I don’t know why, but this really concerns me. Perhaps I am over reacting. It doesn’t seem to bother others. At least if it does, they aren’t showing it. Perhaps it is just my recent dealing with budget-oriented groups that are acting like quota-oriented groups that is making me more sensitive to this phenomenon. In any event, I’ll do a little comparing and contrasting of budgets and quotas and see what the rest of you think.

First, let’s put a couple of definitions out there. It is always good for everyone to start from the same baseline. First off, do not Google “budget”. You will get far more than you ever wanted to know about some care rental company. But, as you might guess, let’s start with:

Budget

Budgeting for a business is a process of expressing a detailed quantification of resource requirements (capital, material or people) that are expected for given time period in future. Budgeting can be done for any person, business, government or anything that makes and spends money. Restricting in this definition to financial results for business firms we can explain budgeting as process of preparing a detailed statement of financial results that are expected in the future period of time.

https://www.mbaskool.com/business-concepts/finance-accounting-economics-terms/8632-budgeting.html

As you can see it primarily deals with the amount of money (or resources) needed or available for a purpose in a future period of time. This means it is a definition of how much you can spend on, or the expense for something. Let’s keep this “spending” idea in mind when we talk further about budgets.

Now we will move on to quotas. Hopefully this one will be a little more straight forward.

Quota

Sales Quota is the sales goal or figure set for a product line, company division or sales representative. It helps the managers to define and stimulate sales effort. Sales quota is the minimum sales goal for a set time span. Sales Quota can be individual, or group based e.g. for a business unit or a team.

https://www.mbaskool.com/business-concepts/marketing-and-strategy-terms/1919-sales-quota.html

Again, we have a financial goal for a future or set amount of time. Only this time it is focused on sales (orders and revenue) as income to the business, not the expenses of the business.

Now admittedly there are other definitions for both budget and quota, but these are also for utilizations of the terms for applications far outside the normal business usage. When you start discussing immigration, college acceptance and items such as those the line can become somewhat murkier. However, we will not go there, or anywhere near there today.

So here we have what I consider the crux of the issue. Budgets are associated with expenses for a set period of time and quotas are associated with sales for a period of time. This seems like a pretty simple set of definitions and differences. So why are people using them interchangeably?

I think some of my confusion may stem from the observation regarding “which side of the fence” people are speaking from. The example I will use here involves the government and everybody’s favorite topic, taxes.

For the longest time taxes were just that, taxes. Taxes were the amount that citizens paid the government. Taxes went up. Taxes went down. Periodically there was an attempt at tax reform when things go too complicated and it appeared that special interest groups were getting away with too much. By and large we all paid taxes.

But somewhere along the line this changed. From the government’s point of view (their side of the fence) taxes started to be referred to as “revenue”. Since taxes were, in the truest definition, the income that the government received, it did not seem like such a stretch or leap to go there. Soon the statement was no longer that the government was going to raise taxes (which was sure to irritate all citizens), they were going to raise revenue.

This is a much more palatable statement. Raising revenue. Everybody wants to raise revenue. Why should the government be any different? They should want to raise revenue too. The only slight difference might be that there is not another government around competing for our tax dollars. They can just vote themselves more revenue.

What doesn’t change is that from the citizen’s point of view, taxes are always an expense. Something that is paid. So, while it sounds more acceptable to raise government revenues, we need to remember that it is always raising the citizen’s expense.

This same governmental evolution occurred (in the US) when the Department of War thought it best to change its name to the Department of Defense, but that might be a discussion for a later date.

In business it appears that a similar evolution is occurring. In the past those organizations that had to live and work within budgets were called “cost centers”. They were associated with costs and expenditures. As such they were occasionally subject to reductions as most companies seemed to think that reducing costs was always a good idea.

It only goes to assume that these cost centers started to realize that the business’s expense budget was their revenue. This quantity was how much money was going to come into their piece of the business.

This was a master stroke.

No one ever wants to cut a revenue. They will cut, hack, chop and slash budgets all day long, but they will steadfastly refuse to cut a revenue.

I also think that some of the issue stems from business’s drive to remove as much overhead, or indirect cost from the business as is possible. There are essentially two way to do this. One is to actually reduce the number of resources associated with these indirect functions. The other is to try and translate these indirect cost functions into direct cost functions.

Below is a refresher on the difference between direct and indirect costs:

“The essential difference between direct costs and indirect costs is that only direct costs can be traced to specific cost objects.

A cost object is something for which a cost is compiled, such as a product, service, customer, project, or activity. These costs are usually only classified as direct or indirect costs if they are for production activities, not for administrative activities (which are considered period costs).

Examples of direct costs are direct labor, direct materials, commissions, piece rate wages, and manufacturing supplies. Examples of indirect costs are production supervision salaries, quality control costs, insurance, and depreciation.

Direct costs tend to be variable costs, while indirect costs are more likely to be either fixed costs or period costs.”

https://www.accountingtools.com/articles/the-difference-between-direct-costs-and-indirect-costs.html

The idea here is that when everything is associated with direct costs, everything is now directly associated with the sale and the generation of revenue. When that happens, almost all of those cost justifications for those groups now get aligned with sales and more importantly sales quotas. Now all budgets for those groups are supposedly aligned with sales, which in turn are aligned with, you guessed it, quotas.

And everybody likes to achieve their quotas.

In this way what were once cost centers have now aligned themselves with the sales function. Likewise, budgets which were once limits that were not to be exceeded became quotas that were to be achieved. This is a subtle but important difference.

Beating a budget meant that you came in with an expense that was lower than the budget. Success was reducing expenses below the targeted level. Efficiency and cost reduction were key targets. In short, the costs associated with the process were separated from the sales and prices associated with the process.

By now aligning everything with the sales and revenue process, costs now in effect do become quotas.

If sales do not achieve its quota, well then obviously costs will not be affected as they have a set cost quota. As long as they are on target for their quota of costs, they are achieving their goal, regardless of what the overall profitability of the process appears to be. This engenders a strange situation.

These cost groups are now of the opinion that as long as there is cost “quota” left to spend, they have the right to continue to spend it, regardless of sales performance. It in effect becomes the sales function’s responsibility to bring sales back into alignment with the sales quotas, instead of the cost function’s responsibility to bring cost “quotas” back into alignment with the sales function’s performance.

Costs “quotas” are really nothing more than verbal sophistry.

As business continues to look for ways to improve, some of the age-old axioms still do apply. Its always a good thing to achieve or exceed sales quotas. Cost budgets are an upper limit. It is always a good thing to “come in under budget” and return unused budgets back to the business in the form of bottom line profits. And, if you hear someone claiming that they are on target to achieve their cost quota, either they are not trying hard enough, or their cost “quota” needs to be reduced.