A Matter of Choice

I attended a lecture this week in which the speaker was discussing the concept of choices. His conclusion, based on a variety of arguments, is that the fundamental difference between people is the choices we make.

I then reflected on a conversation I had with an entrepreneur last week, in which we were discussing the concept of luck when it comes to developing a successful business. My opinion, which is certainly not universal, is that there is limited amounts of luck when it comes to success.

To be more precise, looking at success stories in hindsight, there is rarely a critical moment in the story that the subject was “lucky” to have encountered which defined their success. In fact, the stories will often be filled with failures, hard work, contributions from other people, and eventually, success (according to your preferred definition of the word).

When appraising a new idea for a business, I therefore combine these two concepts. As an entrepreneur, you have a choice to make – and you are likely making these choices all the time. You need to decide which idea to pursue as a business, who to partner with, how to go about achieving success.

On top of that, you need to act to remove luck from the equation. If you work hard, you will, at the least, learn something from your endeavors. You will be giving yourself the best chance possible for success.

It is, naturally, your choice. You can choose to rely on luck, and hope that your luck is good (but then why don’t you just buy lottery tickets and hope for the winning numbers). Alternatively, you can choose to work hard, and to learn from your experiences, and you’ll find that luck is not really a factor in success.

I Hope People Hate My Product

I’m a bit strange, I know, but this sounds weird even for me. Yet it’s true – I really do hope that people hate my product, despise my services. I find it encouraging when someone tells me how awful something I’ve done is.

Why?

When I hear someone tell me I did something wrong, I take in a lot more than what that person is saying out loud. I’m listening to the subtle message that perhaps that person isn’t aware they’re sending. It’s a message that they want to like my product.

How does that work? Simple – they care enough about what I’ve done to tell me that it’s wrong. As an example, think about going to a restaurant. If the food and service are passable, then you won’t say much about it. If it’s really bad, you’ll complain to your friends. But if you care about the owner of the restaurant, then you would tell him how awful the experience was, with the hope that he’ll listen to you and make some changes.

Yes, sometimes people will criticize without wanting to help. They’ll complain because that’s the type of person they are. They’ll be vocal in a non-constructive manner.

But people who complain to me about me are the people who want me to do something about it. They might want me to stop completely. But they also might want me to fix the problem. By telling me what a bad job I’m doing, they’re also telling me how I can improve. That is, if I choose to listen to them.

The people who are complacent about my products and services don’t help me sell more. They don’t assist me in improving my offerings, because they don’t tell me what’s wrong. The same can be said for those who love me – in their eyes, I can do no wrong (okay, that’s a bit of an exaggeration, but you get the idea). Those who complain, though, the ones who tell me how badly I do things, they are the ones who are telling me how to make it better.

If you want to get a great product or a fantastic service, you should, like me, hope some people hate it. Only that will help you remove the flaws and improve it to the point of perfection.

A Matter of Perspective

Sometimes, a situation needs to be viewed from another perspective. Often, though, it’s only someone who isn’t in that situation who can see the other side of the coin.

As people, we have a tendency to believe ourselves to be correct. A common complaint of teenagers, for example, is that others don’t understand them. Years later, however, it will often be acknowledged that their parents and teachers did, in fact, understand them quite well.

As adults, though, we are not immune to this. There are countless examples where people have stood firm to their opinions regardless of the myriad of arguments presented to demonstrate the flaw in their thinking. One of the sites in my RSS Reader, The Daily WTF, is built on such examples. Readers of the Dilbert cartoon will also be able to relate to this concept.

Perhaps, then, the real issue is not so much an ability to see other perspectives, but a true desire to. How many of us can honestly state that we welcome all debates, and would fully reconsider our position on any issue if presented with alternative thoughts?

No, you don’t need to convince me that you would – you need to convince yourself.

The second half of the issue is the fact that many of the people who delude themselves that they are infallible are also under the impression that they are able to honestly analyze every situation (but they just happen to always be right). How do you deal with someone who is always convinced of their infallibility and accuracy?

There are two options, really. On the one hand, you can choose to ignore such people. This works if you aren’t forced to interact with that person, and their decisions do not impact you directly. If you are able to take this route, it is certainly the easier path.

The second option is if you will be affected by the deluded decisions, or gross incompetence. In that case, you truly do have to deal with the person and their decisions. Again, you have a few options:

  • You can ignore their decisions, and do things your way, and hope that in hindsight, it will become apparent that your way was the correct way. The risk, of course, is that if you fail, you will be blamed for not following the instruction, and if you succeed, you are unlikely to be awarded the credit.
  • You can work with the decision. In that case, make sure that any caveats, or arguments in opposition to the decision, are clearly documented. That way, you can protect yourself from taking the blame for the failure toward which you believe you’re headed.

How about you? What methods do you use to convince those who have difficulty seeing the other side of an argument?

Watch Your Back

I’m much too young to remember this, but there was a time when a man’s word was as good as done. A handshake was worth more than a contract written by a team of top lawyers. This was mentioned in the play Jersey Boys when Frankie Valli and Bob Gaudio seal a deal with a handshake, and it was enough for both of them to trust.

Sadly, for many people, those days are gone. While not everyone is lying consistently through their teeth, that honor to keep a promise is much rarer today than before. Undesirable contracts can be fought to be avoided. Deals can be written off because a verbal promise was conveniently forgotten. In fact, many contracts clearly state that all verbal agreements are null and void as relating to the content of the contract.

However, to get around in the world, one must still have an element of trust. Even where the law might help you, it is often insufficient to implement. For example, a bad debt can be collected, and for small amounts, you can go to small claims court. But the cost in terms of time might be more than the debt itself, and so you would have to write it off. You, however, trust your clients to some extent to pay their bills, even if from a practical point of view you could not force them to.

For that reason, many contractors require deposits, installments, final payment on delivery. All of these are ways to protect yourself as much as possible from not being paid. However, they do not fully accomplish that task.

Take, for example, a company hired to do some work. They can create whatever payment structure they want, but if they don’t formally arrange for changes to the scope of work, they can end up doing work with no way of collecting. If the project takes 50% more time than originally planned because of changes to the requirements, but the only agreement to pay for those changes was verbal, there may be no way to recoup that cost.

For this reason, anyone running a business needs to learn the lesson to always watch your back.

Any deal, or arrangement, needs to be in writing. It needs to be acknowledged by all parties. It needs to be enforceable, though even an informal email can often suffice.

Most of all, it needs to make clear the rights and expectations of all parties. It is not safe to assume that verbal agreements will be honored, and it only takes one occurrence of someone violating such an agreement for someone to understand why.

But why should you have to learn the hard way, when it’s so straight-forward to simply protect yourself in the first place?

Mixing Family and Business

There’s a well known saying, which is expressed in a variety of ways, but essentially boils down to the simple statement:

Family and business don’t mix.

However, in recent months, I’ve witnessed cases where family and business truly don’t mix, and other cases where it was perhaps because of family involvement that the business was such a success. Certainly, no two cases are exactly alike, but perhaps with this article, some of the issues will become clear, and you can judge for yourself.

Why should you mix?

Perhaps before dealing with the reasons to avoid going into business with members of the family, it is necessary to understand why people might choose to go into business with family members.

  • You already know the people, so it’s unlikely that you’ll be surprised by unexpected behavior. This predictability can help hold a business together when two random people might have fallen apart.
  • You’re all in it together – there is often with family members a desire to succeed as a family unit, as opposed to each partner being in it for themselves (whether or not they act that way is a completely different story).
  • They’re available – families will often stick up for one another, so raising capital, or getting a critical introduction can often be facilitated through members of the family.
  • Your family will stick up for you, often even when you haven’t earned it yet.

Why you should stay away?

This is actually the easier question to answer:

  • You have to deal with these people all the time, so it makes it hard to turn off the business and turn on the family life, and the same applies in reverse.
  • Failures will likely haunt you for the rest of your life, especially if a family member loses money on your venture.
  • Customers will find that if they have an issue with one member of the family, they are less likely (though still possible) to get a satisfactory resolution from another member of the family.
  • Conflict resolution can be nearly impossible.
  • Dealing with a member of the family slacking off can often destroy a business by either creating too much fighting within the business, or allowing the slacker to stay because they’re family.
  • Nepotism is rampant in family-based businesses, as the name implies.

Which should you do?

If you’re debating working with a family member, make sure that you would want that person as a partner even if they were not related to you. Also, ensure that you can maintain a division between work life and family life, and that you have in place a means to resolve conflicts, which will arise (it’s not a question of if, but when, and over what).

Mathematics of Hiring

At what point does it make sense to hire someone for your business?

How much should you pay your new employee?

These are questions that are asked on both sides of the table – the business owner expanding the size of their business, and on the side of the prospective employee, trying to get paid their fair share.

First, in order to hire someone, your business must be able to afford that employee. While this sounds simple, the reality is that often a business will need to hire someone but cannot afford to do so – the payment for the new employee has not yet been received.

As an example, John owns a lawn care business. He accepts 10 new customers, but does not have the time to do all the work for them. Because he is only paid after doing the work, the cash to pay another employee is not yet available, but without the new employee, he may not be able to earn the money from the additional contracts.

The solution, in John’s case, might be to take out a short-term loan, or make use of an operating line of credit at his bank. The mathematics of borrowing money will be explained in a moment, once we discuss the second part of the equation.

An employee is not worth the amount of work they do. For example, a lawyer might be billing at $300 per hour, but that does not mean the lawyer is earning $600,000 per year. Even if the lawyer managed to bill 2000 hours in a year, they would not be paid that amount. He might earn about a third of that, or $200,000 based on those numbers. He might earn even less.

The reasoning for this is simple. The company does not need to bring along another employee who exactly earns his keep. An employee who costs $50,000 and only does $50,000 worth of work is not worth keeping around. They do not bring value to the company. While there are times when such an expensive employee is justified, those times are few and far between.

In order to be worth hiring, an employee must therefore do more work than they are being paid for – their billings must out-weigh their cost. So an employee earning $50,000 has to do work that can be billed outside the company for more than that. One of the common multiples is 3, so that employee would have to do $150,000 worth of work.

Getting back to John’s case, the reason he’ll be able to borrow money to cover the cost of hiring an employee is because that employee will be doing more work than they’re being paid. If they bring in twice their salary, then the cost of borrowing their salary (that is, the interest on the loan) is offset by the additional income they bring in.

The problem, of course, is that many employees don’t see this side of the equation. They see themselves working on projects where their work is being billed at $50 per hour, or $75 per hour, and yet they’re earning only $45,000 or $50,000 per year. Since they know their value to the company, they don’t understand why they aren’t being paid more.

However, there is, of course, additional costs to having an employee. Some companies will regularly provide their employees with their adjusted salary – factoring in all benefits, the rent on the space they occupy, the equipment they use, the software licenses they require, the food and drinks available. Once all these costs are added in, the employees will usually see that they are earning significantly more of their billings. The employee doing $200,000 worth of work might actually be costing the company $125,000 or more once these items are considered.

Secondly, the company can also create a profit-sharing system based on billable hours and the rates for those hours. An employee who manages to generate 2000 billable hours in a year at $50 per hour would get a bonus relative to the fact that they managed to generate $100,000 in revenue for the company.

The amount of the bonus? That would depend on how much money is actually available at the end of the year, and how the various employees performed in relation to each other and in relation to their function.

Hunting for Space

Having recently gone on a search for office space, I realized that I had not the faintest idea of what I should be looking for, or at. I knew what the space was going to be used for, but not what kind of space I would want, nor what types of terms and conditions would accompany the space.

Area

The first question I therefore had to answer was about the amount of space required. This question was actually fairly easy for me to answer, and then I got it wrong, and learned something in the process. The space was to be used by 3 people, so I add together the size of 3 standard cubicles (64 square feet each) plus a little extra, working it out to 225 square feet.

Ouch, that’s cramped.

I forgot that in an office which uses cubicles, there’s usually some larger space available for when you need to spread out. 225 square feet just wouldn’t cut it – the three of us would be driving each other nuts after a very short while.

In attempt 2, I just added a fourth space as the boundary space, and decided to look for a 300 square foot office. That would be a little more comfortable, and, if necessary, could allow us to bring in a fourth (or even a fifth if absolutely necessary) person for short periods of time.

Furniture

When shopping for space, you need to remember that you don’t have any furniture, so you need to consider that when looking at offices. Is the type of desk you want suited for a wall? A window? Center of the room? All this makes a big difference in terms of the shape of room that you need.

Facilities

Something to ask about is the location of a washroom relative to your space (is it inside your space, or down the hall?) and the location of a kitchen. You’ll want to be able to get fresh water, and ideally a small fridge. If you have to set aside some of your office for the fridge, then that will add to the amount of space needed.

Hydro, Internet

Make sure you find out if the rent includes the utility bill. When comparing spaces, you need to know what the included and excluded extras are, because there is no standard set of inclusions. As well, if you know that you’ll need something special (for example, you’ll require a dedicated high speed internet connection), then make sure that the terms of the lease allow for that. In the example given, since you’ll be arranging for your own internet connection, be sure that you aren’t paying for one that comes with the space.

Pricing

There are two pricing schemes used when it comes to office space – total fee, or per square foot fee. In any given neighborhood, you can see both systems used, so you need to be able to convert quickly between the two. Also, when looking at a price in square feet, make sure you find out what’s included – and measure the space yourself. If you aren’t careful, you could find yourself paying more than your share of some common areas of the building.

Second, look at the terms of the lease, if there is one. You may be required to stay for a minimum of a year. You may be able to transfer to another space in the same building during the term. Look at what the penalties are for leaving early – it may not be possible (that is, you may be charged the balance of the lease regardless of whether or not you use the space). Are you allowed to sublet parts of the office? This might be a good option if you find a place that’s larger than what you need at the moment.

My Story

What did I do? I went to a commercial real estate agent, who walked me through the process. He helped me find the type of space I was looking for, in an area that worked for me, at a price I was willing to pay. Most of all, though, he made me think about what I was using the space for to ensure that I ended up with what I needed. Too often, you will only realize after using the space for a little while that the place you have is not the place you need, and you’re now stuck there until the end of your 12 month lease.

Where to Splurge, Where to Save

In any business, there are things you try to save money on, others, you spend what it costs. For example, you might try to pick up your desks on clearance sale, but spend what it takes to get good lighting. Or, you might buy refurbished computers for your workstations, but have the top-of-the-line servers for your website.

However, in looking at a business, you can tell a lot about the people running the business from how they spend money. The miser spends not a penny more than the minimum on everything. The irresponsible never shops for a deal.

The wise owner? She is the subject of this article.

The wise owner will sometimes ignore the cost, because it’s either irrelevant (for example, saving a few dollars on a lamp that took an extra hour of your time and a few dollars worth of gas driving to pick it up) or because having the right item is more important (for example, anyone sitting at a desk for long hours must have a proper chair regardless of the cost).

Other times, however, she’ll look for savings, because the effort to save is minimal (for example, ordering books online from one of several retailers takes seconds to look up and can save dollars each time), or because the dollar figures are significant (for example, spending thousands of dollars on a new server can have savings worth several hundred dollars by shopping around), or because the item itself is not relevant, and therefore not worth the expense (for example, the foosball table for your employees to mess around with doesn’t need to be brand new).

In any business, what falls into each category is important. Some business owners, though, when asked about a particular item they are purchasing, can immediately tell you if they’ll look for savings. Others will make a comment about waiting for a sale (which is, of course, saving money by waiting). But there are many who will just make the purchase immediately, regardless of the item.

So which type of owner are you? Do you try to be frugal, at least at times? Are you always frugal? Or do you spend freely, and hope that the money to pay for everything will always be around?