The Rules of the Game

There are few, if any, situations in life which do not have rules. Sometimes the rules are vague, others are very specific. But there are always rules, although a new inductee into the field may not be able to discern them.

Business has its own set of rules. Some govern how we advertise our business – what we can and cannot say (for example, you aren’t allowed to make false claims about yourself). Others govern how we earn money – records that must be kept, files that must be submitted. Still others deal with the environment in which we can act – as a sole proprietor, a partnership, or a corporation.

What is common to all of these rules is that as new inductees to the field, we are not familiar with all the rules. We are, however, liable for failing to follow them. If you don’t file your taxes correctly, you can face significant fines, for example, despite the fact that you were not aware of the error in your filing at the time of reporting.

As a small business owner, we face significant risk on a daily basis. We have expenses to pay, clients to talk to, prospects to woo. Often, especially at the early stages, we’re worried about the success or failure of our business as a whole, and just how long and hard the crash and burn might be.

For this reason, we need to mitigate risk as much as possible, especially for the things we know we don’t know about. So, if you’re starting a business, make sure you have the following resources available to you:

  1. Lawyer: Every business has paperwork that needs to be drafted, filings that need to be made, and, if you’re successful, complex negotiations with investors. You need someone who knows and understands the law as it relates to your business, and who works with other businesses of your size and type. (Divorce lawyers are out unless your business deals with breaking up relationships.)
  2. Accountant: You will have to file income returns every year. You will have to pay taxes – certainly income taxes, but if you have employees, you may be required to withhold tax, or you may have to submit sales tax at regular intervals. You will want to structure your revenue and expenses in such a way to keep your taxes down.

Ideally, your accountant and lawyer should be in touch with one another, to set up your company in the most strategic way possible. Naturally, they both have fees which may make such coordination prohibitively expensive, but you should certainly dedicate part of your budget to planning with both. At a minimum, you should have their phone numbers available when you need them – and they should know who you are when you call.

Trust is Earned when Given

I was reading about a company, I believe it was in The Tipping Point by Malcolm Gladwell (Amazon Affiliate link), in which the owner of a company discovered a locked cabinet in one of the offices which contained office supplies. He immediately cut the lock, stating something to the effect of that in a company, we have to trust the employees. (The company might have been HP, but I’m not sure. Please inform me if you know the correct origin of this story.)

There are, in general, two attitudes that can be taken toward trust. The first is that you don’t trust anyone until they’ve earned it. The second is that you trust everyone until they lose it. Which attitude is correct?

There is, of course, the third attitude best expressed in the Italian Job: “I trust everyone. It’s the devil inside them I don’t trust.” It is this attitude that I believe best reflects reality in the workplace.

Ideally, an employer should trust the employees, and vice versa. Employees should trust their boss to tell them what they need to know, and to keep them informed about the environment in which they are working. On the other side, employers should trust their workers to do their jobs, not steal from the employers, and so on.

In reality, we’re dealing with people, and therefore with human nature. Not everyone is trustworthy, but in an environment in which we work together, there must be some level of trust. How you define that level of trust is a personal issue, but it must exist.

In a healthy work environment, people trust one another, but also look out for the bottom line. An employer will trust his employees, but he will also be careful balancing his books to ensure he is not being stolen from. This isn’t an issue in regard to a particular employee, but in regard to all employees as a whole.

Likewise, workers may express trust in their managers to keep them informed, but that doesn’t excuse them from keeping their eyes and ears open about changes that they have not been told about.

The issue of trust should not exist on a personal basis, but on an environment basis. When asked if you trust a particular individual in the workplace, the answer should be yes. (If the answer is no, questions should then be raised regarding why that person is still in the workplace.) When asked if you trust the organization as a whole, however, the answer should be along the lines of as far as I can see them.

Project versus Hourly Pricing

When working on a large project, there are generally two ways to bill for the project – by the hour, or by the project. In an earlier article, I discussed the system I use to determine a price for a project. My hourly rate is determined based on how much I want to earn, and how much I can charge and still get a sufficient quantity of work.

Ideally, as a contractor, I would prefer to work by the hour. While I need to keep track of exactly how much time I spend on the project, I can also earn significantly more at the end of the project, since all time spent working on the project is billable.

On the other hand, billing by the project allows me to budget going forward – I know that I will be paid $1,000 per month by a given client for each of the next 6 months.

From the perspective of a client, there are pros and cons to each system as well. When billed by the project, the price tends to be inflated because the contractor is absorbing the risk of overruns, so the project could end up costing more than it needs to. On the other hand, when billing by the hour, it’s close to impossible to budget accurately for the cost of the project.

The other factor to consider is changes to scope, and how that’s handled. With hourly billing, it’s not relevant to the contractor, and the client saves times discussing whether a change request is required and if the price is going to change. The contractor simply bills for another hour (or 10, or 100). With project based billing, this can be an endless source of frustration as various items are declared to be out of scope (and therefore not covered by the original quote).

As a small business owner, I am in general willing to absorb more risk  on each project in terms of scope and price. Giving a larger bid for a project helps alleviate the risk, and with changes to scope, I can choose if it’s worth negotiating the point or not. I suspect, however, that as the size of the projects I work on grows, I will become less willing to bill a flat rate, since it will become harder to estimate the real cost of the project.

Perhaps not, though, and that can help other businesses save their money to grow their business instead of their IT bill.

Invest in the Little Guy

In a previous article, I wrote that most people work for small businesses, and that such businesses are the source of most new jobs in pretty much any economy. As such, it is amazing how short-sighted some governments can be when it comes to spending stimulus dollars.

I’ll illustrate this with an example that I can relate to based on the industry that I’m in, but I’m sure you can find other examples (and please feel free to share in the comments below).

I work in technology, specifically in the area of software development. Currently operating as a corporation with a single regular employee (myself), most of the contracts I work on can be done by myself. For example, if I’m hired to build a program to parse and analyze some data, I’ll build that application myself.

If I were to land a larger contract, however, which was beyond the scope of my abilities, whether from a time commitment or because I lacked certain skills, I could still get the job done. I would simply go out and hire someone, which would give that person a job. If I got a really big contract, then I might hire several people, most of whom would have been unemployed until I gave them the job.

If that same contract were given to a large company, however, it is unlikely that a new job would be created. More likely is that an existing employee would be assigned to that project, perhaps allowing him to keep his job. So giving contracts to big companies doesn’t create jobs, it maintains jobs.

As such, because the giving of contracts to small businesses is more likely to create additional jobs, you would think that the various governments, when trying to stimulate the economy, would go out of their way to make it easier for small businesses to be considered for such projects.

It hasn’t happened.

As a small business, I find it much more difficult to bid on government projects than on private sector projects.

The government requires specific forms to be filled out, which is a time-consuming process. They have complicated rating rules for evaluating proposals. Last, but certainly not least, there’s the political element which could bias the entire bidding process from the start.

As a small business, I don’t have the resources to spend hours on each proposal unless I can be sure that my bid will be evaluated fairly, and that I have a reasonable chance of being selected. For me to be able to bid on government projects, the initial bidding process needs to be simple.

The one subject that I haven’t touched on here, but will in a future article, is that of cost. Using smaller companies can bring down the cost of larger projects – and help put limits on the cost of the projects. Yes, the risk may be higher with an untested company that few people have heard of. But the payoff can be higher as well, sometimes by significant amounts of taxpayers’ dollars.

Are Your Customers Happy?

In businesses of all size, keeping your customers happy is important, but measuring that can be quite difficult for some businesses. In past articles, I’ve discussed the handling of negative image incidents, such as how the Toronto Transit Commission handled the picture of a sleeping collector agent, and how Toyota handled the safety flaw in the design of the accelerator on some of their cars. In both cases, however, the companies are responding, while in truth, they need to be proactive.

Enter Adele Berenstein, a Customer Satisfaction Executive with almost 20 years of experience with IBM. Now she’s the author of Satisfaction Secrets, a blog which discusses ways in which you can keep your customers happy. She brings her experience and insight to current problems facing companies looking to keep their customers happy. Additionally, she discusses changes that are happening in this field, for example, looking at the same TTC incident I mentioned above.

Customer satisfaction has been increasing in importance over the last few years, as consumers have found it easier to get and share information. Considering that such information may or may not be accurate, it is incredibly important to ensure that your consumers have accurate information, and you don’t give them reason to be unhappy with your company.

But how do you know when a customer isn’t happy, if they aren’t telling you, or don’t realize it yet?

You need someone like Adele to look at your business, and help you figure out how to get feedback from your customers. You need to be listening, and you need to know what you’re listening for. And when your customers start talking, you need to be ready to answer.

Immigrate to the USA and Start a Company

I was introduced yesterday to a group of people who are looking to assist in reforms to the US Immigration Legislation – to make it easier for people to immigrate to the US and start companies. For my Canadian readers, I’m not sure what the situation is here, but it’s definitely something worth considering as to how it may impact us.

Startup Visa and its various founders know how hard it can be to move to the US in order to start a company. Immigrating to a new country, regardless of the situation, can be difficult. Add in complex legislation that requires you to provide information about future sources of income, and using the explanation of entrepreneur just won’t cut it.

At the same time, the largest growth factors in the economy are from such businesses. Most businesses in Canada and the US are what we would think of as small companies – mostly less than 5 employees, but including up to about 25 employees. It’s these companies that the average person can relate to – the dry cleaners, the corner vegetable stand, the small design company down the street.

In order to facilitate changes to legislation, the founders of Startup Visa are collecting stories and experiences of immigrating to the US, and the difficulties encountered. These will be presented to various members of Congress when they travel to Washington to meet them. If you want to support this endeavor, please click the link to Tweet a short message about your story, or visit their site and leave your story there.

When Time Runs Out

I came to a realization last night that my various commitments will eventually cause time to run out if I’m not careful, and I suspect that I am not alone in this situation. In fact, anyone who is working a full-time job alongside some moon-lighting, factor in a family, and some time for friends, not to mention some relaxation time, and your day becomes filled up pretty quickly.

This is nothing new, and in truth, I’ve discussed this issue in the past several times. However, last night some parts of my personal schedule slipped, and in hindsight, there was no reason for it.

When relaxation takes priority over responsibility, trouble is in the making.

If you find yourself spending time relaxing when you could be completing a chore, and find this habit repeating, you need to take a step back and evaluate your behavior. When you find yourself spending time that could be spent with family with your nose stuck in a book, or eyes glued to a screen, you need to stop and think about what you’re doing, about what opportunities are being wasted.

Success is more than just making money. Success is when you achieve happiness in your life as a whole (and yes, money might be  a part of that). The best way to be happy is to be around happy people, and to interact with them. If that means that other aspects of your day need to be compromised, then so be it.

The sooner you come to this realization, the sooner you can re-evaluate your days. How much time do you spend doing each of your daily tasks? Is your time being used as effectively as possible? Could you possibly save some time by being better organized?

For this reason, no matter how simple your day is, try to keep an agenda of what you need to do. Include tasks such as spend time with your family, or spend time relaxing by watching TV or reading a book. But try to stick to your schedule, or you may find that it’s those things which are most valuable in the long run which suffer the most in the short term.

Economy of Scale and a Bad Idea

Most people are well aware of the concept of economy of scale – it’s cheaper to buy the huge box of cereal that could feed a family of 10 for a month than to buy the small box that could feed you and your spouse for two weeks. When you buy a lot, the price per unit is less.

This can apply to business as well. If you have a product that you sell for $10 with a margin of $6, then selling 10 at once would give you a higher margin, since some of your costs would overlap. So your margin might be $65 or $70 in that case.

Unfortunately, it also works in the other direction, and I’ll illustrate with an example (I heard this on a tape of a Jackie Mason show):

My friend bought a new watch, and I asked him how much he paid for it.

“Below cost!” he exclaimed triumphantly.

“Below cost? How does the guy make any money?”

“He sells a lot of watches…”

Sometimes in business this makes sense. A store might offer a product for a price at which they lose money. But the objective there is to get you into the store, where you’ll buy other products at a higher profit.

Sometimes in business this is a sad reality. Take Dale Barker from Hamilton, Ontario, who renovated a building to be a beautiful movie theater. He came on Dragons’ Den last week looking for an investment to add a second screen to his theater. The problem, however, is that he was losing money on the existing theater.

This is a classic case of throwing good money after bad. He had a large debt acquired in order to make the renovations, and was dealing with delinquent tenants. His theater was one of the cheapest in town, despite the extra decor. If he spent more money on adding another screen, he would find himself losing money twice as fast. In other words, his business model was losing him money.

In such cases, where the business is losing money, before acquiring additional investments, you need to take a reality check to see if the model itself is sound. If the model itself is not sound, you need to fix it before giving away part of your business and prolonging the agony.