by Bert Shlensky | Oct 27, 2020 | Finance Articles
Get More Reward from Risk
Risk is a critical part of every decision. And, frankly, I think we all need more of it. We tend to think of risk as a taboo concept and it’s really not—once you understand it.
In order to benefit from risk, you need to define what risk is to you. Some people view risk as the “potential for harm or hazard” (think bungee jumping). I view risk as an “uncertain circumstance in which one manages to maximize the gains.” But, how do you maximize the probability of success?
Here are some key parameters that affect risk-based decisions:
- Consider conditions. For example, you have almost certain probability that, in general, October will be cooler than September. However, forecasting a certain day adds risk and uncertainty.
- Reduce risk where you can to allow even more risk in other areas. For example, more analytics in sports is creating opportunities to assess strengths/weaknesses and create new winning strategies. It has enabled athletes to take more three-point shots, hit more home runs and longer golf drives, and score more touchdowns. Similarly, surfers used to ride 29-30 waves and now they are comfortable in 50 to 80-foot waves. Jet Ski rescues, inflatable vests, and leashes are among the tools that reduce uncertainty and increase potential.
- Know the value and probability of the reward. Winning the lottery has an extremely high reward, but also has low probability. Purchasing investment bonds has lower return than buying stocks, but the risk and volatility of buying stocks is higher.
Value is also affected by the law of diminishing returns, which states that: as the input or value increases, the incremental changes become less important. It is easily summarized by the old saying, “Too many cooks spoil the broth.” Other examples include adding superfluous benefits to an offer, endless presentations, annoying excessive service, or just making the reward dramatically above what is needed or desired. Let’s say you love pie, but only have it once in a while as a treat. In this instance, the value is higher. But, if you eat it every day, it becomes less special and the value decreases. The same goes for a visit with your in-laws: Once a month is good, one a week might be less good, and every day might really be pushing it…
- Understand the perceived importance of the reward. People generally regret losses more than they appreciate gains—and that is a key factor to consider when making any decision. When choosing a college to attend, decisions depend on area of course study, school size, location, tuition, the school’s reputation, etc. Are some of these factors more important than others? It varies depending on the individual.
The benefits from risk are a result of integrating the above examples to maximize results. Let’s look at the game of craps as an example: When you roll two dice, there is over a 40% probability you will roll a 6, 7, or 8 and about a 6% probability you will roll a 2 or a 12. So, if you’re placing a bet, knowing the odds (i.e. the probability of the reward) will reduce the risk. Betting is based on your willingness to risk in order to earn higher or lower rewards. The most forgotten aspect of craps (and all betting, for that matter) is that, over the long run, the house wins which is why casinos are so profitable.
Risk needs to managed rather than feared. Understanding the risk, the rewards, and the importance of each can help you improve outcomes. Don’t allow fear, uncertainty, or tradition to lower your potential and prevent you from trying something new. Only those who dare to risk going too far can find out how far one can go.
Key factors to consider to increase the benefits from risk:
- Understand all the information. Knowing background, probabilities, and parameters can greatly enhance outcomes. For instance, investment decisions are greatly influenced by history and trends. However, because there is so much change due to the pandemic, the risk is now more volatile and opportunistic. Knowing the circumstances around your decisions is key.
- Psychology. Assessing risk has a number of psychological constraints: a) People tend to take more risks to win back losses and less risks to follow up on winnings. b) Marketers love to push fear. When you are buying a car, appliance etc., they push its safety, reliability, and excellence. After you commit, they try selling a warranty. They induce fear by citing all the things that can go wrong. c) We overestimate our skills and luck. Tons of profits are made at casinos and in sports betting based on countless people believing that they can beat the odds.
- Think about your decisions and the outcomes. We often perceive decisions as win-lose situations where one-party wins and another loses, but there are different types of decisions. Changing that mentality to “win-win” can have dramatic benefits and we tend to underestimate the opportunities we have to achieve this. For example, who would have believed decades ago that the mergers of Vietnam and Germany would be so successful? So, when making a choice, brainstorm ways to maximize benefits all around.
- Rethink your strategy: Zero sum game versus non zero-sum game. Which are you employing? The best negotiations result in both parties winning. This takes collaboration, assessing varying (or even opposing) goals, and increasing the metaphorical “pie.” In particular, try to understand what is important and unimportant for each party involved. For example, many traditional retailers viewed online shopping as a liability in terms of disrupting their regular business. Now, they’re viewing it as a savior, recognizing it’s a safe and effective way to meet the needs of their consumers.
- Risk mitigation. The best, simplest, inexpensive, and most effective way to mitigate risk is to gather more information. The more you know about making a decision, the less risk it will involve. Other tools include: insurance, diversification, and leverage. One of the challenges of mitigation is that people often use it to take even more risk and that defeats the purpose.
- Listen to your gut. Sometimes you just have to ignore some of the information and go for it. We tend to overthink things or we let fear stop us from taking risks, but there is no gain without trying and no reward without risk. If your intuition is telling you something, it’s usually worth listening.
Risk needs to managed rather than feared. Understanding the risk, the rewards, and the importance of each can help you improve outcomes. Don’t allow fear, uncertainty, or tradition to lower your potential and prevent you from trying something new. Only those who dare to risk going too far can find out how far one can go.
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Do You Have a Marketing Plan?
How to Write a Successful Business Plan
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by Bert Shlensky | Apr 17, 2020 | Finance Articles
The coronavirus crisis has caused a plethora of financial issues that businesses must now face. All of my clients are dealing with dilemmas concerning customers, credit, future sales, financing, planning cash flow, forecasting, etc. when it comes resolving financial stress.
For the most part, we still live in a world with an old system of small business financing. Most financing (including institutions like banks and the SBA) is based on antiquated businesses, such as manufacturing and retailing, where financing was handled mostly through asset loans, guaranteeing debt via family assets, and personal savings.
However, things are very different today. Most new businesses are service or technology-based, and require much less investment.
Many clients start the financing process by asking the age-old question, “How do I raise money?” That’s an outdated way to start and I believe it’s a mindset that needs to be changed in order to be more successful. For example, traditional style advisors often recommend raising as much money as possible. In contrast, I suggest minimizing to reduce costs and risk, keep equity, and avoid excessive financing charges.
Some of the biggest changes that need to take place involve utilizing alternative techniques to minimize financing needs and marketing opportunities to accelerate growth. I recommend a more comprehensive and flexible approach to the process which focuses on key issues like: How much money do you need? How and when will you pay it back? Why should someone invest or partner with you?
Additionally, we live in an environment with low interest and inflation rates, and lots of capital to invest. The rest of this article will discuss financing suggestions that take into consideration new trends and current events. For example, the government has instituted $2 trillion of relief programs for salary, unemployment, and investment that must be considered.
Operational Financial Resources
The simplest source of funds is to reduce the need for funds through regular business tactics. This can be accomplished with strategies such as outsourcing, contracting services, utilizing sharing resources, and testing. While not all of these strategies may be appropriate for every business, consider the ones that have most potential to save cash:
- Plan and manage inventory to maximize return: focus on the 80-20% rule that states: 80% of your sales will come from 20% of your products. Additionally, manage inventory and services for seasonal and market changes.
- Consider direct shipping from your facilities or organizations like Amazon.
- Minimize investment through strategies like renting or sharing. For example, warehouses, cooking facilities, and manufacturing can all be outsourced. One caution: doing things in your home will frequently result in long-term, operational, and legal issues.
- If asked, suppliers are often willing to help a business with things like financing, holding inventory, reducing production times, and direct shipping.
- Use services for internet management, warehousing, and programming.
- Understand and minimize complexity. For example, there’s a big difference between selling a shoe (with various sizes, colors, widths, and styles) versus selling food products (which have a few ingredients that can made into a number of items.)
- Analyze why you are really spending and what you will get from it.
- If the business is profitable and growing, you can frequently finance the growth with working capital from profits. This also means giving up less equity.
Expanding Marketing Efforts
Don’t wait for business to come to you, but consider the rule: you have to spend money to make money. Analytics, internet marketing, and outsourcing programs provide numerous opportunities to grow and make money faster:
- A website and a simple marketing statement provide basic information for potential customers. These can be inexpensive through programming tools like WordPress.
- Amazon is the fastest growing retailer in the country and controls about 30-50% of most internet sales. It is easy to set up and relatively inexpensive.
- Paid search through organizations like Google and Facebook are underestimated. These options can be inexpensive and fast, and the results can be measured.
- There is nothing as productive as Networking, Networking, Networking!
These tactics must be tested and measured. Kill or modify the ones that fail and expand the ones that succeed.
Non-traditional Sources of Capital
- Crowdfunding was initially used by “social entrepreneurs” to fund their projects, films, books, and social ventures. It’s becoming more popular as it allows small investors to back your business through organizations like Kickstarter.
- While credit card interest can accrue (at a high rate) if not paid off right away, some credit cards do offer a 30-day free program, or zero interest (for sometimes up to 18 months) with a new account.
- Bartering, alliances, and exchanges are viable methods to get both excellent services and save cash.
- Community based lenders (such as non-profit, independently financed, or private organizations) often make loans to small businesses or entrepreneurs who do not qualify for traditional commercial bank loans.
Traditional Sources of Capital
- Equity from yourself, friends, and family. This is the amount of money you can put into the business on your own, and you don’t have to pay it back until you see profits. It may include sweat equity or contributed assets. It also provides other investors with more confidence in your commitment.
- Outside equity has the same properties except it involves giving up at least some of your own equity in the company. It can come from a variety of places such as partners, venture capitalists, private equity dealers, private offerings, and private investors.
- Traditional banks and loan institutions are focused on reducing risk and making certain they get paid back. These are usually asset-based loans or are combined with equity contributions.
- Raising capital is a two-way street that requires honesty, understanding, and communication. Understand your needs and the risks involved in order to find the right type of investors.
- Don’t overestimate your potential or what is needed to meet your goals.
- Develop plans, measure results, and satisfy investor requirements.
Significant changes are occurring in financing. There will be more risk, more volatility, more uncertainty, and more focus on profit and cash flow. Thankfully, there are numerous tactics to manage these shifts. As these changes progress, consider including more alternative methods—especially cost reduction, analyzing goals and strategies, and focusing on the dynamics of the financing rather than just how much money you can raise.
Dr. Bert Shlensky has an MBA and a PhD from the Sloan School of Management at MIT. He is the President of the New York-based consulting firm The Startup Connection, where he uses his 30 years of high-level business experience to guide his clients toward maximum sales and profit. For a free consultation, please visit www.startupconnections.net.
by Bert Shlensky | May 3, 2018 | Planning
Creating a business plan is a lot like forecasting the weather… those who are in charge of predicting a storm get blamed if they are not 100% accurate. The same logic applies to business planning in terms of timing, expediency, and execution. This can lead many business owners to abandon ship, rather than seeing it as an opportunity to change course. Always remember, business planning is a process.
Carl Schram, former head of the Kauffman Foundation for Entrepreneurship, recently wrote Burn the Business Plan, which echoes a similar strategy for a streamlining the planning process. Reis and Schram are mostly right to criticize excessively lengthy business plans. At Startup Connection, we argue that business plans are necessary, but that they need to flexible and dynamic (and meant primarily for yourself, not others.) As the saying goes, “If you don’t know where you are going, any road will get you there.” Making plans for others (especially venture capital firms) and following specific rules almost guarantees the process will not be useful to you. In addition, venture capital firms account for a very small segment of business financing, especially in the beginning. A business plan is not just a document to be stored on a shelf; it should establish parameters and be developed, tested, and be continuously revised. Even with a “perfect” business plan, there will be failures along the way. In particular, failing and learning from failure are critical components of the ongoing planning process. Business planning is a process.
Some Planning Suggestions
There is no cookie-cutter approach to writing a business plan. Get your ideas on paper before stressing about the organization of information. Don’t stifle yourself. Write it in your own words, as simply and concisely as possible.
Focus on your passion. A successful business plan should express why you think your business is a good idea and why you will succeed. If you need to dress it up in a suit and tie to show to investors, do that later. A business plan should be YOUR vision.
Common Parts of a Business Plan
Every business plan is different because every business is different. However, there are some common elements to consider, such as:
- Mission statement
- Goals
- A description of products and services
- Ideal customer
- Analysis of the industry and your competitors
- Marketing and sales tactics
- Operational plans
- Manufacturing and delivery logistics
- Resources necessary (this includes labor, equipment, and facilities)
- Financial budget
Also, focus on the components that are most important and challenging, rather than worrying about making every section perfect.
Some Further Tips
- Don’t be too verbose: A formal business plan must focus on the needs of the audience and the entrepreneur. Business plans must be on point and clear. Typically, plans should be 15-30 pages. If additional details are required, put them in a short appendix.
- Think it through: You might have a great idea, but have you carefully mapped out the steps you’ll need to make the business a reality? It’s worth investing your time in the planning phase to ensure you might make money in the long run.
- Do your research: Investigate everything you can about your proposed business. Google and Amazon are great and easy tools to understand the market and your competition.
- Be realistic about your competition: Is your product or service something people really want or need, or is it just “cool?” Why do you think people will buy your product or service?
- Get feedback: Obtain as much feedback as you can from trusted friends, colleagues, nonprofit organizations, and potential investors or lenders. You’ll know when you’re done when you’ve heard the same questions and criticisms again and again. The goal is to have a good answer to almost everything that can be thrown at you.
Completing the business planning process can be challenging, but it should also be interesting, productive, and satisfying. The hardest part is developing a clear picture of the business that makes sense, is appealing to others, and provides a reasonable road map for the future. Another challenging aspect is integrating your products, services, customers, marketing, operations, management, and financial projections seamlessly together. However, these pieces should not dilute your enthusiasm to succeed.
Dr. Bert Shlensky, president of Startup Connection ( www.startupconection.net ) has an MBA and PhD from the Sloan School of Management at MIT. He served as the president of West Point Pepperell’s apparel fabrics business & President and CEO of Sure Fit Products. Having provided counseling to over 2,000 clients, he focuses on working with select start-up companies and small businesses. Call today for a free consultation, so we can use our business plan templates to take your business to the next level.
by Bert Shlensky | Apr 11, 2018 | Finance Articles
We all know that new strategies and technologies such as the internet, social media, Smartphones, and major online retailers are rapidly disrupting organizations. However, financing and the financial industry have been very slow to adapt. The purpose of this article is to recommend a number of tactics to take advantage of new (and sometimes disruptive) financing opportunities. At the Startup Connection (www.startupconnection.net), we believe that a very important (but often overlooked) opportunity is that operating and marketing processes should also be viewed as financing tools.
We still mostly live with an old world of small business financing. Most financing (including institutions like banks and the SBA) are based on antiquated businesses, such as manufacturing and retailing. In the old business model, you quit your job, built a building, bought inventory, hired lots of people, paid high interest rates, gave away lots of equity, and then waited 1-2 years to make any money. This was financed through asset loans, guaranteeing debt with family assets and your own savings.
Fortunately, the reality today is very different. Most new business are service or technology businesses, and they require much less investment. Another very important factor is that you can now quit your job much closer to actually starting the business.
The biggest changes may be finding marketing opportunities to accelerate growth and using techniques to minimize financing needs. At the Startup Connection, we recommend a more comprehensive and flexible approach to the process. This approach puts a slightly different perspective on key issues, such as: How much money do you need? How and when will you pay it back? Why should someone invest or partner with you?
Many clients start the entrepreneurial process asking the age-old question, “How do I raise money?” I argue that is the old way to start, and this mindset needs to be changed to be more successful. Old style advisors often recommend raising as much money as possible. In contrast, I believe in minimizing to reduce costs and risk, and to keep equity and avoid excessive financing charges.
There are other new perspectives to financing your business. We live in an environment with low interest and inflation rates, and lots of capital to invest. This article identifies financing suggestions, organized into operational, marketing, new, and traditional methods.
Operational Financial Resources
The simplest source of funds is to reduce the need for funds through regular business tactics. This can be accomplished with strategies of outsourcing, contracting services, using sharing resources, and testing. While not all of these strategies may be appropriate for every business, consider the ones that have most potential to save cash:
- Use services for internet management, warehousing, and programming,
- Plan and manage inventory to maximize return: focus on the 80-20 % rule that 80 % of your sales will come from 20 % of your products. In addition, manage inventory and services for seasonal and market changes.
- Minimize investment through strategies like renting or sharing. For example, warehouses, cooking facilities, and manufacturing can all be outsourced. One caution: doing things in of your home has long term, operational and frequently legal implications.
- If asked, suppliers are frequently willing to help a business through things like financing, holding inventory, reducing production times, and shipping direct.
- Consider direct shipping from your facilities, or organizations like Amazon.
- Understand and minimize complexity. For example, there is a big difference between selling a shoe (with various sizes, colors, widths and styles) versus selling food products (that have a few ingredients that can made into a number of items.)
- Analyze why you are really spending and what you will get from it.
- If the business is profitable and growing, you can frequently finance the growth with working capital from profits. This also means giving up less equity.
Expanding Marketing Efforts
Don’t wait for business to come to you but consider the rule: you have to spend money to make money. Analytics, internet marketing, and outsourcing programs provide numerous opportunities to grow and make money faster:
- A website and simple marketing statement provides basic information for potential customers. These can be inexpensive through programming tools like WordPress.
- Amazon is the fastest growing retailer in the country and controls about 30-50% of most category internet sales. It is easy to set up and relatively inexpensive.
- Paid search through organizations like Google and Facebook are underestimated. These options can be inexpensive and fast, and the results can be measured.
- There is nothing as productive as Networking, Networking, Networking!
- These tactics need to be tested and measured. Kill or modify the ones that fail and expand the ones that succeed.
Non-traditional Sources of Financing
Crowdfunding was initially used by “social entrepreneurs” to fund their projects, films, books, and social ventures. It consists of offering to small investors in your business, through organizations like KickStarter.- While credit card interest can accrue (at a high interest rate) if not paid off right away, some credit cards do offer a startup business a 30-day free program, or zero interest (for sometimes up to 18 months) with a new account.
- Bartering, alliances and exchanges are viable methods to get both excellent services and save cash.
- Community based lenders (such as non-profit, independently financed, or private organizations) often make loans to small businesses or entrepreneurs who do not qualify for traditional commercial bank loans.
Traditional Sources of Financing
- Equity from yourself, friends and family. This is the amount of money you can put into the business on your own, and you don’t have to pay it back until you see profits. It can come from a variety of forms and can include sweat equity and contributed assets. It also provides other investors with more confidence in your commitment
- Outside equity had the same properties, except it involves giving up at least some equity in the company. It can come from a variety of places like partners, venture capitalists, private equity dealers, private offerings, and private investors.
- Traditional banks and loan institutions are focused on reducing risk and making certain they get paid back. These are usually asset-based loans or combined with equity contributions.
Raising financing is a two-way street that requires honesty, understanding and communication. Understand your needs and risks to find the right kind and type of investors. Don’t overestimate your potential or what is needed to meet your goals. Develop plans, measure results, and satisfy investor requirements.
Dr. Bert Shlensky has an MBA and a PhD from the Sloan School of Management at MIT. He is the President of the New York-based consulting firm The Startup Connection, where he uses his 30 years of high-level business experience to guide his clients towards maximum sales and profit. For a free consultation, please visit www.startupconnection.net.
