Tips on managing your margins, surviving Chapter 11, developing an E-commerce strategy, and dealing with the things that hold you back
There are a million stories out here in the business world, and I'm lucky to be able to hear more than my fair share, thanks to the wonderful E-mail messages I receive every week from readers like you. I apologize that I can't respond to all of them, but rest assured that I read them, think about them, and use them to decide what issues I should address in this column. Here are some of the interesting queries I've received lately.
The obstacle within
I've been in the executive-recruiting business for 15 years, the first 13 of them on my own. Two years ago, I formed an alliance with one of my clients, and it's working out great. I've had to hire two new recruiters to keep up with the demand. My annual revenues have already gone from $150,000 to $800,000, and we're barely scraping the surface. I see only one thing that can stop us from building a substantial organization: me. I've come to realize that I don't have the ability, the patience, or the know-how to manage and grow this franchise. What should I do? --Bruce
Dear Bruce: First, don't be too hard on yourself. You're lucky you came to this realization before getting your company in trouble. It took some very tough experiences to teach me that I didn't have the qualities required to manage a business, patience being perhaps the most important one. I eventually learned that I can take a company only so far and that I don't enjoy running it beyond that point. I need to bring in real managers -- patient, detail-oriented people. They don't like to start businesses, and I don't like to manage them. We get along just fine.
Where do you find those people? They may already be working for you. The president of my company started out as one of my clerks. If you have to go outside, I'd look for a manager who's willing to listen and learn. I think it's fine, by the way, to recruit from within your industry for this type of position, but don't hire a know-it-all. You're still going to be in charge, after all, even if you aren't managing the day-to-day operations. You'll need to have a good working relationship with the person you bring in. That means both of you have to be open to learning from each other.
How much margin?
My home-based design business sells store fixtures and related equipment to the retailers we work with. I try to operate on a 25% to 30% gross margin, but I don't know if that's appropriate for a business like mine. I always wonder how much more revenue we could get if we charged less. --Norbert
Dear Norbert: You're wondering about the wrong thing. You should be asking yourself how much less revenue you'd get if you charged more. I understand that most people focus on the top line when they start out in business, but sooner or later they learn that the gross- and net-profit lines are more important. I'd greatly prefer to have $20,000 in gross profit on $50,000 in sales than to have the same gross profit on $100,000 in sales. Why? Because I'd have fewer headaches, fewer shipments, fewer people, and so on.
If you're able to make sales at your current prices, I'd just keep on selling. I'd also look for ways to increase your margins, not reduce them. Maybe you could get better deals on the products. Maybe you could cut your shipping costs. Maybe you could even raise your prices. Yes, there are circumstances when it makes sense to cut prices, but I wouldn't do it unless you're certain that you'll get the additional sales -- and that they'll be worth it.
When I was in high school, my father and I made furniture pieces that we sold at craft shows, earning enough to feed our family. The business could easily have grown, but my father didn't want it to get bigger. Now my brother-in-law and I are talking about starting a furniture business that we'd build into a substantial company. Our problem is that we have trouble imagining ourselves doing it. We know how to beat out a living, but it's hard to think about running a factory where other people would be working and making good money. How can two men from poor backgrounds get over the difficulty of visualizing themselves in a situation that's so different from anything they've ever experienced? --Jace
Dear Jace: It sounds as though you've already visualized the company you want to build. I think you actually have two other problems. First, you're not giving yourself enough credit. You know more about business in general, and the furniture-making business in particular, than you realize. Second, you're looking too far ahead. Before you can have a factory, you need to have a business, and almost every business starts small.
My advice is, first, to put together a plan outlining where you and your brother-in-law want to be in five years. Then figure out a good short-term goal. (See " The First Step," August 2000). You might follow in your father's footsteps, selling your furniture at craft shows. As you're selling, you'll make contacts. Tell people you're thinking of starting a company. Some of them may be interested in helping you.
You should also look for a mentor who has built a business before, preferably someone who started with nothing. Believe me, there are a lot of us around. Being poor as a child is not an obstacle in business. I come from a poor background; my father was a custom peddler. What he taught me helped me to be successful later on. I'm sure you can be successful, too. Just take it a step at a time.
The E-commerce challenge
We are a $40-million manufacturer, and we distribute our products through 250 independent dealers in North America and Europe. How can we use the Internet to sell products to the end user without upsetting our loyal dealers? --Chris
Dear Chris: I doubt your dealers will be upset as long as you sell at the same price they charge and give them a commission on any sales in their area. In fact, they'll probably encourage you. It's trickier if you're planning to sell your products for less. You're going to need the dealers' permission to do that, and you may have to agree to pay them their normal commission on the sales in their area. That changes the economic equation, of course. You'll have to look at the numbers and decide how to proceed.
In any case, the key here is communication. I'd start by sending out a questionnaire to the dealers. Tell them you want to give them an opportunity to make a lot more money by earning commissions on sales over the Internet. Explain how the system would work, and ask them what they think. As long as you communicate properly, you should be all right. If you don't, you'll have a problem no matter what you do, because the dealers will find out secondhand and assume they're being shut out.
Against the wall
We have a great retail product that people love, but we're being sued by a litigious Goliath for alleged copyright infringement -- a charge we vehemently reject. We have reason to believe Goliath is trying to put us out of business. Although we've won the little battles so far, our money is running low. We can't afford the onerous settlement terms Goliath has proposed, and we can't afford another year of litigation. On the advice of our attorney and our accountant, we're considering filing for protection under Chapter 11 of the bankruptcy code. You've been there. What issues should we be thinking about? --Name withheld
Dear friend: I assume your lawyer has good reasons for urging you to go into Chapter 11. Maybe it's the only way to speed up consideration of the patent-infringement case. But don't underestimate the challenge of operating in Chapter 11. Your employees will be worried about their jobs, and your customers will wonder whether they can count on you as a vendor. You can explain to them why you had to file, and you can reassure them about the future, but you'll have to talk to each one individually. That will take a lot of time and energy.