photo credit: Jim Frazier

 For every person who starts a business of their own, or has a small business, Michael E. Gerber’s book, “The E Myth Revisited” should be a required read. I’m going to post once a week on ideas from this book. For those who have never read it, I’ll boil it down for you, although you should get a copy anyway, I’m only going to talk about the lessons, yet there is much more. Gerber is a wonderful story-teller. For those who have read it, this will be a refresher of a wonderful business-self-help classic that stands the test of time, and it is one of those few books that you find yourself reading over and over…

The difference when a small business starts out like a mature company is that they start with the entrepreneurial perspective. They have a vision of what the company will look like when it’s finished, when it is done, when it is ready to be sold. They act the way that a big company would act, from day one. In order to become a great company, you have to act the way that a great company would act, right from the start. They know that unless they act mature right from the beginning, they will never get that way.

The entrepreneurial perspective dictates; that what is more important than the product, commodity, or service that a company offers, is the WAY it offers those things, the way it looks, the way it acts. It sees the business as a system for producing certain results for the customer. The typical small business technician-oriented perspective looks only at the work of the business, and how the work is done. The entrepreneur sees the business like a product sitting on a shelf, competing with other products that are other companies. The commodity is not important, the way it is delivered is! 

What is the product your small business delivers? Most people instinctively answer with the product or service they sell, “we make widgets”, “we do plumbing”, whatever. Always the commodity, never the product.

The entrepreneur looks at the world and asks, “what is the opportunity”? The entrepreneur then goes out and invents a solution to a perceived need out there in the marketplace. The entrepreneur asks, “how will my business stand out from all the rest of the businesses that offer that commodity solution”? And so the entrepreneur does not start with a vision of the business, but with a vision of the customer solution. The technician started with what he wanted to do for work and asks, “how can I sell what I am offering”? 

Next time we’ll look at how the concept of a franchise created the turn-key revolution…

For every person who starts a business of their own, or has a small business, Michael E. Gerber’s book, “The E Myth Revisited” should be a required read. I’m going to post once a week on ideas from this book. For those who have never read it, I’ll boil it down for you, although you should get a copy anyway, I’m only going to talk about the lessons, yet there is much more. Gerber is a wonderful story-teller. For those who have read it, this will be a refresher of a wonderful business-self-help classic that stands the test of time, and it is one of those few books that you find yourself reading over and over…

Systems to run the business so that low skill people can run the systems. Let’s take a look at how Gerber came to this brilliant method for small businesses to finally work. Most small businesses start out in what Gerber calls the Infancy stage, where the technician creates a business based on what he or she wants to do, which is not necessarily what the business needs. You can recognize a business in infancy because it’s named after the owner, just like I named my business, Van Cleve Payroll. We infants leave little to the imagination, you know who does what. You-work. And you work and you work and you work. You ARE the business.

After the initial freedom euphoria wears off, things begin to change, gradually. You begin dropping the ball, things are being overlooked, it’s becoming more of a pain to keep it all up. At this point, some give up, quit the self-imposed rat race and go back to a job. Others start letting go of responsibilities and hire people to fill jobs. That next stage is called Adolescence.

In Adolescence, the overwhelmed owner starts hiring people to fill roles formerly done by him/her. Naturally, what are needed are skilled people to fill the skills done by you! Gerber says this may actually be the worst thing to happen to a business. Why? Because skilled workers will be the bain of your existence. Hiring highly trained technicians is expensive and they never quite have your enthusiasm, do they? The relief is nice at first but this is no way to grow a small business into a bigger business. Some adolescent companies fall back to infancy, scaling back the chaos until it’s manageable. Others just keep growing despite the pitfalls. Keep in mind very, very few ever make it this far, to maturity. That does not by definition make them great companies. The great ones did things differently.

The third stage that an adolescent company can grow to is Maturity. A mature business is what we all think of as a really successful business, Apple, Exxon, Crispy Creme, Toyota. But here is Gerber’s brilliant insight, great companies didn’t grow into great companies, they STARTED OUT as mature companies. They built a business out of developing systems, models if you will, and figured out how to be able to duplicate the systems. A system that can be duplicated over and over again cannot be dependent on super-skilled technicians to make it work. No, a system must be able to be done by anyone, with a little training. Gerber saw that the very best and clearest example of this is McDonalds. Next time I’ll talk about this idea of a “turn-key” business, otherwise known as a franchise, and how you might apply it to your own business.

I’m frequently heard lamenting about small businesses that are not “run like a business”. What do I mean by that? In many years I’ve seen very successful businesses and I’ve seen the miserable failures too. Here is a list of traits of people and small business subjects that I think directly contribute to a businesses success. Part 2…

Know your costs. Get a pencil and a calculator and your bills out. Go to work! This is YOUR business! You should know EXACTLY every penny of what goes into your product or service. Figure out the exact costs of everything you do, down to the penny. When quoting work, you will know, with precision, exctly what you need to get to make a profit.

Do not believe your own PR. You are probably not as good in the eyes of your customer as you think you are. You are not the greatest thing since the iPhone. People in meetings within a company tend to engage in a kind of groupthink that sees only the good PR about themselves.

Do not try to do everything yourself.  You can only be good at maybe 3-4 things out of the possible 15 hats a business owner has to wear. At some point you must hire people smarter than you are in certain areas. Be humble. You are not always the smartest person in the room.

Do not abdicate responsibility for the money.  I’ve seen and heard of many instances of fraud that occurred because the owner allowed an employee, usually a bookkeeper/receptionist, or anyone that handles money and and/or accounting, free rein. You have to learn how to implement what accountants call “internal controls”. It’s not a matter of not trusting someone, it’s a matter of not placing temptation in front of someone.

You can’t out-sell your stupidity. Salespeople who go into business usually make bad businesspeople. The reason is that, being sales oriented, they are eternally optimistic, and not very realistic or pragmatic. They typically do not pay as close attention to things other than the prospect of the next sale. Always the next big sale coming next month. Spend a little less time in the future and join us in the here and now.

I’m frequently heard lamenting about small businesses that are not “run like a business”. What do I mean by that? In many years I’ve seen very successful businesses and I’ve seen the miserable failures too. Here is a list of traits of people and small business subjects that I think directly contribute to a businesses success. 

Don’t just operate out of a checkbook. Just gauging the level of cash does not tell you much. You could be paying way too much for certain types of expenses and never realize it and your checkbook won’t tell you that. You must get feedback on the activity of your business in order to run it right. The presence or absence of cash alone tells you virtually nothing about whether your business is successful or is headed for disaster. By the time you notice cash dwindling, it could be too late. Cash could be building while you are missing opportunities. A check register is not a substitute for a P&L.

Have a real location. You can’t run a business from under a bridge or from a park bench. Customers and potential customers have to have some level of trust in you. You have to have a real presence. Having said that, if your business absolutely does not need a physical location, then you better have a kick-butt online presence. You are either serious or you are just playing.

Accounting we will go. You must have a proper accounting system so your business talks back to you. A proper accounting system tells you exactly what kind of income comes in and from where, and exactly what your expenses are and in what category they fall. It is the only way you will ever be able to tell if one part of your business is out of whack. 

Don’t specialize in everything. Don’t be like the car repair place that says, “we specialize in all makes, foreign and domestic.” Huh? How can you specialize in everything? Do the opposite of this. It is tempting to want to include more lines of work to broaden your appeal but resist this temptation. Do the opposite. Specialize. Find a niche that only you do. Be the best damn one there is in that one thing.

Learn to market it right. Don’t just spend money, do the free stuff first. Employ the 3 feet rule. If someone gets within 3 feet of you, tell them about what you do. Be shameless. If you are reluctant to sell yourself, what does that say about you? Don’t you believe in yourself? 

Keep business and personal expenses separate. Don’t mix it up. You have to keep things separate to know your true costs. If you’ve incorporated, your CPA will tell you to do this anyway. 

Tune in tomorrow for more…

Onto the P&L accounts. The goal with the income (4000) and COGS (5000) accounts is to create a matching wherever possible; a Manufacturing Income account should have a corresponding Manufactured COGS account to allow for easy gross profit analysis. In general, all COGS accounts should be direct expenses, expenses direct to the products and services that the entity produces. Anything that is either purely overhead or not directly attributable to a particular product or service produced by the facility should be classified under the SG&A (6000) sections.

Given this basic structure, the next objective was to build into the chart of accounts the ability to group expenses, mostly in the SG&A sections, into logical groupings which allow for both detail and consolidation. This is accomplished on 2 levels. First, expenses are grouped into large categories such as “Selling” and also within a larger heading, there are general categories such as “Utilities” For instance, there are separate accounts for local phone and long distance, but they “roll up” into one account called “Telephone”, which, in turn, “rolls up” into “Admin”. If a concise P&L is needed or if detail is needed, both needs are accommodated. 

In a properly structured Chart of Accounts, the goal of simplicity is balanced with the desire for detail. A poorly designed COA can be either a simple list of G/L accounts, where new ones are just added without regard to existing accounts wherever they will fit, or, on the other extreme, dis-similar things coded to accounts which makes meaningful management difficult and confusing. Ultimately, our primary concern is being able to obtain useful and meaningful and consistent reporting for management as well as outside users

A proper chart of accounts has a numbering scheme where the number series have meaning, usefulness, logic, structure, and room for growth, for instance; 1000 Asset accounts, 2000 Liability accounts, 3000 Equity accounts, 4000 Income accounts, 5000 Cost of Goods Sold accounts, 6000 S.G. & A. accounts, 7000 to 9999 for miscellaneous and below the line accounts.

This structure not only creates consistency, as in, a 2000 series account is always a liability type account, but also allows for expansion and addition of accounts as warranted, as well as accounts unique to a specific business.

One of the basic rules for 1000-3999, the Balance Sheet accounts, is that the order of accounts should be from the most current, or nearness to cash, to the least. For the total assets of each entity, cash and checking accounts are listed first, followed by inventory, followed by equipment, the least liquid of the assets.

The liability side presents who has a claim on those assets, short term, or current liabilities are listed first, long term liabilities last, the reasoning is that current is due first, and to allow a comparison of current (less than 1 year) liabilities verses current assets. 

Equity should reflect the nature of the residual value (Assets minus Liabilities) by showing opening equities, additions of capital, distributions, retained earnings of previous years, and the current year’s earnings.

User Review: CheckMark’s MuliLedger accounting software. List price $399

Everyone is familiar with QuickBooks, myself included, I used it for 10 years. I went from novice to expert to being in their professional advisors program. That’s when things began to change in the relationship with Intuit. QuickBooks began to actively compete with it’s advisors by offering its own support program while charging a small fortune for the privilege of being competed with. Support became not very supportive. The company grew so large, service suffered. I had very bad experiences when installing software and not being able to use it and going round and round with some moron on the telephone. Features that were not particularly useful were added just to create a new version, not for genuine improvements. And they started forcing you to upgrade in order to get their increasingly pricey tax tables. The payroll feature became very expensive, especially as my payroll client base grew. The company and its software and the even the data files were bloated. I was ready for a new software, a simpler one, a better company to work with.

QuickBooks payroll was the impetus to find a replacement for everything- the payroll and the accounting, even the computer and the OS. I had migrated to Apple computer around this time, I found CheckMark payroll software, I could run as many client’s payroll with the same software and tax table. It was as simple and straightforward a program as I had ever used. Relatively, the company behind th software was small, responsive and extremely helpful. I was hooked by the payroll, yet there was more…

This same company had an accounting software called MultiLedger. Both these products are so easy to learn and use that when I look back, I realized that I had hardly touched the manuals. This is not “bloatware”. It does what you need it to do, without a lot of jazzy fanfare. When the company brought out newer versions, there were actual improvements! The data files are absolutely tiny, and as a result, backups happen in a split second. MultiLedger is multi-user, can have up to 10 users. It can be used for cash-basis accounting or accrual. It does quotes and P.O.’s, which can be turned into invoices and bills. It does sales taxes and commissions, it does profit centers and jobs. It imports and exports. It has a built in 1099 utility. Run multiple companies and print all your own checks on blank check stock with it’s MICR printing. Print your own deposit slips. Everything is customizable, right down to the layout of the financials, customizable, yet not a bell or whistle in site. Lock months, have 30 open at a time, password protect different users. It runs on Mac and Windows, even in a mixed network. Setup of a new company is the easiest I’ve ever seen. It is so simple to use it is minimalist yet fully capable- it’s as if you take a fine program like QuickBooks, strip it down to the basics, strip out all the “bloatware” nonsense and you are left with something that is so efficient and easy to use, it is a joy and pleasure. Bringing in payroll data from CheckMark is so quick you will think it didn’t really happen. Schedule recurring transactions very simply. I joined their consultants program and am very glad I did. The couple of times I needed technical help they were very fast in responding and very helpful. This is about the most straightforward software and company you will find anywhere. 

You can download a trial version and they offer a full 60 day money back guarantee if it does not work for you. It will. Go to www.CheckMark.com and check them out.

Understanding Debits and Credits once and for all.

 Why do most people get debits and credits confused? You’ll be happy to learn it’s not your fault. More on that later. Here’s the easy way to remember debits and credits.    Hint: think Balance Sheet. (To get my article on Balance Sheets, drop me an email).

Draw a huge “T” on a sheet of paper. Write “Balance Sheet” on top of the “T”. First, the left side of the vertical line is for Assets which are debit balances normally. In fact, debit really only means “the left side”, nothing more, and is the home of the Assets on the Balance Sheet. On the right side are normally credit (credit only means “the right side”) balances and is the Balance Sheet home of Liabilities and the Equity. For every debit there must be a credit. If cash, an asset, increases, then it must be a debit to cash. Now, since there are two sides to every transaction, and since we already have the debit, now we must find the credit. (Hint: an easy way to figure this stuff out is by process of elimination; find one and you will know what the other must be.) If cash increased because we collected on A/R (reducing A/R–also an asset), then we know that we must be crediting A/R. This makes sense because we decreased A/R, an asset. If cash increased because we borrowed the money from the bank, then the credit goes to the bank loan liability, which makes sense because we increased a (right side) liability, which are normally credits.

Asset increases are debits, decreases are credits. Liability and Equity (opposite side of the “Balance” Sheet) increases are the opposite, so their increases are credits and decrease with debits. Now, was that so bad?

What about the Profit and Loss or Income Statement? Now that you know the basic rule, you know what to do here as well. If the P&L has a positive bottom line, a profit, then profit is going to increase the value of the company, right? If profit increases the value, it will increase the equity of the company, right? And we already know that means a credit to the equity. Since profit comes from having more income than expense, incomes must be credits and expenses must be debits. Spend cash to buy pens; debit supplies expense and credit the asset cash. Bill a customer; debit A/R, credit Income.

So, who’s fault is it anyway for all the confusion? Blame your bank! People have learned that the bank “credits” their account and it goes up, so they think increasing cash must be a credit. Wrong! In reality, from your perspective, they are actually debiting your account, what they really mean is they are crediting their account, from their perspective, specifically, their liability account that has your name on it. They are holding your money, so they owe it to you! So, they are crediting their account! Now you know the greatest accounting secret!

In some circles, profit is a dirty word. Profits are maligned as being theft from the public good, the end result of greedy business, taking advantage of the poor working stiffs. Give me a break! Over in the eastern bloc, they tried to operate a society free of profit, it had the name of communism, and it was the most miserably failed economic system ever created. It kept people destitutely poor, scared, miserable, and essentially in a prison. Yet there are those today, and most vestiges of socialistic thinking reside in academia, they’re called tenured professors, that actually believe that socialism just needed to be done better, more purely, to have worked. It does not work, it never did work, it will never work. It is contrary to human nature, and as such, it must be imposed by a dictatorial state. It cannot exist on it’s own without a heavy hand. Ask the average Cuban if he is delighted with the new rice cookers that Raul and Fidel gratiously allowed them to buy. Dang, now if they only could get electricity….

Anyway, here is the simple truth about profit. If you are in business doing anything, it is essential that the business is profitable. If it can not be made profitable, it should be changed, re-structured, or closed down. And I mean it earns a profit above and beyond paying yourself a realistic wage for your work in the business. If your business only pays you a wage and that’s it, you do not have a real business, you have yourself a job at best and a hobby at worst.  A real business makes profit. Equipment has to be replaced because it gets used up. If you are not provisioning for replacement of assets, you are “eating the equipment”. Facilities have to be upgraded and maintained. It is irresponsible to not make provision for the continuation of the business’s assets. That takes profits, retained earnings to be accumulated. That has about as much to do with greed as saving for retirement is “greedy”. 

I hope you don’t think the purpose of business is to provide jobs. Providing jobs is a benefit of business to society, a by-product, not it’s purpose. It’s purpose is to generate profit for it’s owners, a return on the money invested.

Another way to look at profit is this; being in business is very difficult. It requires a great deal of effort, talent, and persistence to make it viable. It is risky, you could lose serious money. That risk is worth something. You could take zero risk by sticking your money in T-Bills, earn 3% or whatever the going rate is, and be completely safe. So assuming the risk of business requires that you require a premium above and beyond the safe rate of return. That risk premium is profit. You put your assets at risk, and need a better return to justify it, otherwise, what’s the point? Many beginning business people make the error of not charging enough. They price their services at a wage rate. They are thinking like an employee still.

The first rule of business is KNOW YOUR COSTS. You need a good accounting system right from the beginning to capture the activity that is going on in your business, and tell you in a timely fashion whether or not you are making profit, from where, and what needs to be addressed to fix it, if you are not.  

It’s Monday. You gather up the timecards from the rack and toss them aside. What a pain! Let’s face it, calculating a bunch of timecards is not up there with our favorite things to do every week! Relax, I’ll show you the simplest system I have ever found. 

First comes the hardest change. Military time. I hear you groaning out there but trust me, you’ll learn to love it. Military time is based on the 24 hours of a day, a “regular” clock spins twice around the same 12 hour face, and forces us to specify either “AM” or “PM” all the time so people know what we’re talking about. The AM time in military time works exactly the same. The part that is different is the after-noon time; the fact that 1:00 PM is now called 13.0 (pronounced thirteen hundred, or thirteen, point-zero).

You will need to either get a new time clock if yours is mechanical or have re-programmed the one you have if it’s electronic, to punch out military time. Cost? Please don’t get all “cheap-skate” on me here! How much time are you wasting now? How many errors do you have to go back and correct? How much does that cost? It’s time to simplify your life! There’s one more thing.

The next change simplifies further by using the decimal system for the fractions of an hour. Instead of the exact time in minutes, which are of coarse, 1/60th of an hour, and  makes figuring the time-elapsed very confusing, make your time clock use 10^th’s of an hour instead. The clock will round down to the nearest tenth of an hour. A tenth of an hour is 6 minutes, so 0.1 equals 6 minutes, 0.2 (or two-tenths) equals 12 minutes, 0.5 is 30 minutes or a half hour, and so forth. Examples: 7:00 AM becomes 7.0,  10:18 AM becomes 10.3,  3:30 PM becomes 15.5,  5:07 PM becomes 17.1,  8:46 PM becomes 20.7. Since all you need to remember is that each 10^th equals 6 minutes, you will know that 9.9 must be 6 minutes before 10 and 9.8 must be about 12 minutes before 10. It’s easier for you when everything is expressed in tenths (6 minute increments).      

Pitfall: It is a very common mistake for people to confuse the minutes with tenths when they attempt to convert in their head, manually. This is why you should get a time clock and let it do the work! People think 9:45 AM, and convert that to 9.45. Wrong! 0.45 is a little less than a half an hour. The correct answer is 9.75, or three-fourths of an hour.

Now we get to the good part that makes your life a breeze. To figure time, all you have to do is subtract the little number from the big number. If someone worked 7:36 AM until 3:30 PM with ½ hour for lunch, you are doing this; 15.5 – 7.6 = 7.9, then deduct lunch,    -0.5 = 7.4. You see? It become almost effortless and it also becomes error-free.