28 December, 2013

1-5-21 finance: Sunk cost

What if you invested in a thing and it just didn't work out? What will you do?
You've already spend too much money, time, effort in your idea. It is very sad but you have to accept the fact that:
What you have spent has already gone, sunk. And you have to be very objective about this

You need to step back a little bit, be very objective and detach yourself emotionally from your business before taking any decision regarding the business

Any resource of any type invested in the process, no matter how much or how long- MUST have no influence on any future financial decision 
-          The only thing that should affect that decision is whether the potential return of that investment worth the cost or not

We are attached to our ideas emotionally, and although all the facts and numbers may indicate that this idea doesn't worth any invest any more we just keep gambling and pumping more money hoping that we might get our money, effort, time back. SAAAAAAAD :S isn't it?

I know we all hate to lose, but we just have to accept the fact: what has gone has gone, and the only thing we got from that is the experience. There is  no need to waste any more resources on it :(
So don't gamble, saying "If I keep playing may be can get is back". Go home, you aren't thinking rationally. And always remember


1-5-20 finance: Incremental degradation

The accumulation of small changes of "decreasing the product quality" over time for the purpose of "decreasing the costs"

-          You have every right to look at the costs from the financial point of view > try to cut down the unnecessary costs > so that you can increase the profit margin > and keep more money
-          But in the process > you forget the primary purpose; that is maintaining the quality of the value you are creating (that is the only reason people choose to buy from you) >
So you come to a point that you cross the line between 'cutting down the costs' and 'making a crappy product' > the value is decreased to a point that customers stop buying from you  

So, look for cost saving but make your primary concern: maintaining the premium quality of your product.

Always think twice before any cost-saving decision you are making 

27 December, 2013

1-5-19 finance: Return-on investment

That is basically a financial concept relating to investment:
How much do I expect to make based on the investment that we have made?

That is a question every investor and every entrepreneur ask himself. It is kind of "opportunity cost" concept:
Is the investment I am making/the money I am taking is the best place/solution, or there is something better I can do with it

It is awesome to think about everything you are making for the business this way, for example;
-          Equipment you buy
-          People you are hiring
-          Money you are putting
-          Time taken
-          Energy spent
-          Enjoyment sacrificed  
How much do you put in vs. how much do you get out? Is it the best efficient use of this resource, or there is something better to do with that?

Return-on investment is a kind of "opportunity cost" question that is applicable to anything you put in your business, and a very good way to assess the choices you are making regarding your business

1-5 finance: Tip, Slow sufficiency or fast fund?

Many naïve entrepreneurs think it is all about creating a good business, get a venture capital and then be rich and happy, ignoring that they have A LOT to pay back in return. That will lead to the devastating consequences of not being able to pay the investors back

The core of any successful business is reaching the point of sufficiency. Sufficiency will free you from any real obligations, from the feeling of obligation, even from being obligated to follow your customers' wishes and needs and just have that psychological stress that you are not doing what the people really want   

1-5-19 finance: Bootstrapping

The idea of creating the value yourself, consuming as little money as possible so that when you start it will be all yours and you have no obligations towards anyone even toward your own business (on the financial level I mean)
-          Bootstrapping is a way of thinking about the hierarchy of funding
The business may be slower at first, running on a very small scale. But at first, this is a huge benefit; having the chance to quit at any time, shift your business at any time without any obligations

-          Pivoting: a term indicated stopping the current business and very quickly shifting to something else  

So if you can manage the business yourself without a lot of outside help or financing, DO IT. Just bootstrap your idea until you reach sufficiency

-          The more you do for your business at first, the more you will learn about your business and the more experience you will of what you are doing. Don’t just hurry for outside funding and hiring teams to do things for you. Things that have come easily, go easily too.

Getting hands dirty is the only way masters and Gurus are made

There is a quote of Steve Wozniak:
"All the things that I have made for Apple came from 1) Not having any money. 2) Not having done it ever before"
And remember that proverb:

"Happy is he who owes nothing"  

1-5-18 finance: Financing

For businesses that need A LOT of money that you don't have, you need to get capitals
But funding comes with a price. Financing is not just a financial transaction. It is kind of a double-edged sword. It makes you achieve things that you couldn’t have been able to do without it. But in the same time you have now interests over your shoulders, you may lose control over your business, sell your business or be kicked out of it.

The more money you get, the more you will have to give away in exchange of that amount of money  

There is a certain hierarchy of funding:

-          You pay for the entire business in cash.
-          You pay for it via credit card.
In these two cases, you have total ownership and control over your business

-          You go to a bank to get small uncollateralized loan (the bank will not collect anything from you if you couldn't payback)
-          For larger amounts of money, the loan will be collateralized
The more money you ask for, the more value of collateral the bank will ask for

-          Another kind of collaterals with larger loans, receivables: the bank will have control over the people who owe you money and has the right to collect the money from them

-          Individual investors: now we go to the ownership giving-away side.
You will have to give away a part of your business ownership to them.
Yet with small amounts of money, they will be partial, silent owners without any kind of managerial decisions
-          Venture capitals: very large amount of money that you will get. The more you will accept, the more control they will have over your business

-          Note: giving away a part of your business ownership for someone very important for your business who will add a GREAT value and reputation to the business 

-          Taking the company to the stock market will be a great shift for your business.

Selling a part of the share to the stock market and making your company public is a very good way to get money. But don’t get immersed in SHOWING that you are doing good (in the quarters' reports and stuff) than actually DOING or developing anything

But always remember:

-          DO NOT accept finance of any type for things you can do for yourself.
-          Seek finance when you are sure it will be a force multiplier, and for things you cannot do without financing


26 December, 2013

1-5 finance: Tip, The rule number 7

"Don’t work with borrowed money. When someone goes completely broke, it is almost always because he used borrowed money ....

In many cases the individual was already quite rich but he wanted to pyramid his fortune with borrowed money ....

Using margin accounts and mortgages rather than your own puts you at risk to lose more than your original investment ....

If you handle all your investments on a cash basis, it is virtually impossible to lose everything no matter what might happen in the world." 

1-5-17 finance: Leverage

Instead of invest small amount of money and get a small profit margin, you borrow large amount of money, get bigger profits … and be rich fast. This is "Leverage"

Leverage is another good strategy to be rich fast, even much faster than compounding. But the difference from compounding that leverage magnifies losses as well as gains. If your investment fails, you will probably go to jail

_ "If you wanna play that game, play it very safe, study it very well, and treat it like you have stepped on a land mine that could explode at any time for the smallest mistake"_ 

1-5-16 finance: Compounding = Accumulation

The accumulation of financial gains over a certain period of time. This is a very good strategy to make a lot of money in relatively a short period

-          You invest some money, you gain, you reinvest the gains …. Etc.
-          This is like the snow ball effect

-          The best thing about compounding is that it doesn’t have to be a lot at all
The only 2 factors in that are:

1-     How much of gain in 1 time periods?
2-     How many time periods do you have?
For example; if you improve by 1% a day, you will be twice as good in 70 days :)

1-5-15 finance: Time value of money

"Time increases the amount of money"

Actually, anything get mixed with time in a good way is supposed to ripe more and be more of value, whether it is money, effort, or anything
So, a dollar today is more of worth than the same dollar tomorrow because you are supposed to

-          Invest it so it gives you more in the future
-          Put it in a bank and get interest (your next best alternative)
That is kind of an opportunity cost question here:

What is the best thing to do with a dollar?

Here you have to put in consideration two things when you are reviewing all your options. These two issues are:
-          I will NOT have this amount of money money for the next (certain amount of time)
-          If I spend this amount of money, I expect to get compensated in a satisfying way after (certain amount of time)

Of course, this is the financial point of view. You have to consider the other views we have talked about before 

1-5-14 finance: Opportunity cost

In everything in life, when you make a choice you give up A LOT of choices that you can take using the money, time, effort that you are going to dedicate for that particular choice. You just see that it is worth it to sacrifice all the other choice in favor of that choice

-          It is about the value of the "next best alternative".
-          We don't tend to thinks about the things that aren't there in front of your eyes, things that may be too important to ignore
-          There are always choices and alternatives:
-          Take time to look for every choice out there.
-          Study the value of each choice you have in terms of time, effort, likeness, resources … etc. The more you incorporate factors in the comparison, the better choice you are gonna make
-          The financial look gives you the only real logical, non-doubtful measure that would greatly help you to make the rational decision. It is a very important side to consider in the business, if not the MOST important, considering that we are talking business here

Sadly, you can't take all available options. You have to make a choice. Study your options well and take the best thing out there for you 

1-5-13 finance: Cash flow cycle

The first 4 business core processes have an arrangement: value creation then marketing then sales then value delivery. Every one of there is related to the 5th process; finance. You need to know what your cash is doing in these 4 processes.

"All the truth is found in cash account"

You may analyze or predict stuff related to each of the processes. But frankly, the only real thing that will never lie to you is your cash account. In businesses; MONEY TALKS

The thing about knowing where your money flows in and out is that you can keep your purchasing power. Running out of liquid money is JUST DEVASTATING

-          Think of your liquid assets like water in a sink, you have to increase the flow-in and decrease the flow-out as much as possible. That would Be possible by:
1-     Get more sales
2-     Get paid as quickly as possible. And DO NOT extend credits, you are running a business not a bank.
The best way is to get paid up-front and in cash and use\secure the money that you use to make\deliver the value
3-     Spend less money
4-     In\near to critical situations: pay bills as late as possible and in credit
-          And I am saying "in critical situations only" because on the long term, that would give you a very bad image\reputation. If you have the money to pay, don't put yourself in debt at all, or just pay back as soon as possible and in cast to gain trust and to have access to this money source without any questions raised about your honesty or abilities to pay back
-          An exception to the previous talk is the money used for marketing. Pay them as late as possible, sooo late that the money you pay for it is the money you get thanks to that marketing you did using the owed money

The long story short: study your cash flow cycle, know where you can keen the sink always full of money and figure out ways to maximize and secure a certain level of purchasing power 

1-5 finance: Tip, Top 3 reasons why startup businesses die

In order:
1-     Never make it to the sufficiency point. Your business keeps bleeding money with no compensation
-          Indicator: not knowing/setting the breakeven point

2-     Running out of purchasing power. Have no liquid assets when you need them is a KO to your business

3-     Continuous unresolved disputes between business founders, especially regarding the financial issues. So choose your partners wisely 

1-5-12 finance: Purchasing power

It is the amount/level of cash, liquid assets (anything that is easily convertible to business) or credit debt that business has in disposal

-          The moment when your business is running out of purchasing power and it is time to pay bills, the game is over. So you must consider your purchasing power very wisely 

1-5-11 finance: Amortization

It means: dividing the cost of the business (value creation and value delivery costs) over the number of units you intend to create over a certain period of time

-          That is a way of treating huge investments as variable costs
-          That is very easy way to determine the initial cost of the single unit
-          It helps also to make an initial prediction when you will reach the breakeven point

-          Amortization relies on the ability to predict the production rate and the demand. Well, Prediction is a very tricky business. Your prediction must be as close to reality as possible:
-          You must provide enough capacity to fill the demand
And not provide tooo much capacity and waste money to fulfill orders that aren’t there 

17 December, 2013

1-5-10 finance: Breakeven

Is when: Total cumulative revenue – total cumulative expenses = Zero

-          At the start of every business, from the point of value creation, you are bleeding money without any revenue. Then after a while after launching, you start to gain some revenue, but the monthly income is still below the costs.

-          Then you reach the point where the cumulative revenue from the business = the cumulative costs you pay to keep the business running to that point of time
That is your breakeven point, the point after which you start (cumulatively) making profits 

-          Reaching the breakeven point is not a goal in itself. The most important thing about reaching breakeven point is that
-          After this point, you start to feel that you world is paying back the favor :)
-          You will enter a complete different zone of being comfortable that your business is actually wanted and desired by customers

-          And the most important: You will start aiming to achieve sufficiency; the real indicator of a successful self-sufficient business and a successful you AT LAST :)

1-5 finance: Tip, Target monthly income equation

Target monthly income desirable= overhead "fixed costs" + variable costs + profit margin targeted '"the compensation for your money and effort"   

1-5-9 finance: Fixed and variable costs

Fixed costs

 The fixed amount of money your business need just by existing, no matter what you gain or lose from it
Think of it as the pills that will come no matter what you do

-          "Overhead" many other acronyms; "basic level of expenditure", "fixed costs", "burn rate" [it is called that when your money is a borrowed by any form. E.g. loan, venture capital …etc.]
Of course the lower the overhead, the better, the longer your business can survive without any revenue
Overhead is also a step in a very important operation; converting your financial resources into time calculations

-             Overhead comes first on your list of the things you have to pay for every month
-          To make your overhead calculations make a list of everything with a fixed price you have to pay o regular basis. For example: the Internet service, the house rent, the electricity, the domain rent, the employees' fixed salaries.
-          You may want to control some variable costs to be fixed costs. You will find that is more beneficial to you and less stressing

Variable costs 
The costs directly related to your business. Costs that you can adjust, cut down, increase and has an effect on your business
-          For example, resources costs, hourly paid employees' advertising costs,

This is the second item on your list to pay for, after the fixed costs 

1-5-8 finance: Allowable acquisition cost

How much will you be willing to spend to get a new customer?

-          The higher the lifetime value, the higher you can spend
-          You can spend like A LOT to acquire a customer, and that would be a GREAT financial decision on the long run
-          On the initial sale you will be definitely losing money (= going negative). But the thing here is that your customers by buying from you, they would be singing up for a 'continuity' program

  • An important note here:
You have to keep them for the speculated lifetime with them for the acquisition cost to be worth it, or else it wouldn't be worth it 

15 December, 2013

1-5-7 finance: Lifetime value

It is the cumulative value of the customers that stay with you for a long time

-          These customers worth initially the entire series of purchases they have made over time
-          Plus that they will bring you more customers, acting as a mobile marketing station for you
-          Plus that they are so easy to be brought back again if they drift away for some time

So, you need to know the lifetime value of your lifetime customers be answering these questions

-          How much does it cost to acquire a customer?
-          How much does it cost to keep him?
-          How much does he pay you over his staying?
-          What is the average period they tend to stay with you?
-          How many customers come to you based on their recommendation?

If you find that their value is high enough, it is totally worth it to give away some money to keep them around 

1-5-6 finance: Pricing power

It is the ability to raise the prices you are charging for the value that you are offering & the effect of that on your customers

It answers the question: how much can I increase the prices before customers feel that the value isn’t worth that money and start to flee away

-          For example: if I double the pricing, will I lose half or more of my customers so that the net total is financial loss?
-          Notice that it is not always about money, you may lose the exact half (in the previous question, and that would be profitable to you in terms of time, energy and employees' salaries

The more pricing power you have, the more flexible you can be and the more you can maintain sufficient and resilient to market changes.

Also it is a great indicator of your weight in the market among your competitors 

1-5-5 finance: Core revenue growth

Assuming that the product price is fixed, there are only two ways to increase revenue

1-     Increase the number of transactions
Whether from the same customers (increase transactions frequency) or from new customers
-          Examples: targeting new customers, new market segment

2-     Increase the average transaction size
Make them pay for more products, services, special offers

-          Examples: offer new products, services and provide what your customers are asking for

1-5-4 finance: Target monthly revenue

So the question is:

How much money do we need to make to be sufficient?

"Target monthly revenue" is a financial goal. You need to answer some questions first:

-          How much are we spending on the business?
-          How much money needed to pay the pills?
-          How much do we need to compensate for the effort and time?
Then you can determine how much money you need from the business over a certain, short period of time (month, week, quarter)

-          If you are achieving that or above that goal… GREAT
-          If you are achieving below that then you have issues that need working on
That question is never static, always changes with every regular period. So it must be answered regularly

Also, that will help you answer a very important question: whether you are on track of what you are hoping for or not 

1-5-3 finance: Sufficiency

Simple enough and a common sense term:

If your business is not capable of bringing in enough money to keep going + extra profit that SATISFIES you, it is not sufficient YET

Some notes here:

-           That what determines every successful business. A business that can't pay pills & make it worth for you is not "successful"  yet
-          What is "enough" is a subjective decision. If you are making 3 million dollars and that doesn’t satisfy you then you are not successful yet

Once you have launched your business, it would be a struggle on every level till you reach that "sufficiency point". You cut down costs and expenditures till u reach the "breakeven point" first:

The point where your business stops sucking money from you and just every Penney you spend on it is coming from the business itself

Then you reach that "sufficiency point" where you make enough profit for you to live

And then, you will be standing in a very comforting zone knowing that everything you make from now on will just make everything better 

1-5 finance: Tip, What people value the most

Two things:

1-     Things that give them the most value

2-     Things that they pay the most for (they feel very important and professional and worth paying for, even if it is just bullshit. Think of the strange paintings that people pay millions of dollars for !!!)

1-5-2 finance: Value capture

-          Every "value form" creates value for people who pay for it, and that value can be converted to a certain amount of money
-          Usually, for every "value form" to be created and ready; a certain amount of money must be spent on it. Except for some "value forms" that depends mainly on mere human skills
-          Almost all the time the value that a "value form" creates –translated into money- is more than the amount of money used in its creation

Value capture means that: every business must keep some money of what it makes- a percent of what it makes in form of sales

-          That is related directly to the profit margin: the more you can capture from a "value form" and the less you spend on it to create, the more your profit margin is, the better :)

A general rule of thumb:

Capture 10% ± of the value you create.

Of course that is changed according to a lot of factors, for example the scarcity of the "value form", the segment of customers you are targeting …. Etc. 

1-5-1 finance: Profit

WOOOOW, a Very hard term indeed :)

Profit= what you make – what you spend

-          "Business isn’t about what u make, it is about what you keep"
-          The more profit you make, the more u can save,
the more you can pump back in the business,
the more the chance of the business to keep going

the more buffer capacity you have to respond to the drastic sudden changes that may happen to the business  

1-5 finance

The fifth and the last core business process

It is not exactly a step or a process in the cycle. It is more like an overall way to analyze what/how you are doing through each of the 4 processes on the financial level

-          Basically, you are spending money in all the 4 processes: value creation, marketing, sales, value delivery. The only part where you are gaining money is in the sales process
The "Finance" part answers very important questions like:

-          Where are you spending money?
-          When are you spending money?
-          How much money you are spending?
-          How much money is enough?
-          What has to be changed to continue what you are doing?

It is the part at which you figure out what if you can keep doing that & continue to operate that business cycle or not. 

13 December, 2013

1-4-12 value delivery: Notice the pattern

This one is about systemization:
The art of making some processes explicit and repeatable
-          You do things more than once
-          You pay very good attention to what you are doing
-          You notice the pattern that occurs every time the process occurs
-          You create the method = the system

You can't duplicate, multiplicate, automate, use tools …etc. for a things that is not systemized

You can systemize anything with a pattern, the trick here and the real art and gift is noticing the pattern 

1-4-11 value delivery: We were apes. Then we use tools :)

Using tools is one of the very fundamental things that differentiate us from other creatures living with us

We use tools to increase and multiplicate our production, to amplify the effect, force, energy, added-value to levels we would have never reached it with our mere bodies and minds

-          The applications of sciences (= "Technology") allow us to create such tools
-          Think of hammers, riding horses, cars, machines, electricity, factories, computers,

Use the best tools to amplify your production. Even if acquiring such tools may be expensive, you will find that taking a loan to have them would be more beneficial and more productive to you on the long run than working without them 

1-4-10 value delivery: Compete with yourself

The best way to come over competitors is to ignore them. Well, not completely. Of course you should keep an eye on what they are doing. But I am saying that if you just build your entire development system on what your competitors are doing, you will always be a Re-Action not an initiative, you will spend your entire life trying to keep up with them

So let us say: semi-ignore them and work your own way to develop yourself and they will never keep up with you. What you are building and your iterations over the years is your real competition you are giving them  

1-4-9 value delivery: There are no "little things"

Call it what you call it; the butterfly effect, accumulation, Kaizen.. etc.

 The thing is: the tiny teeny things you do- good or bad- add up on the long run to make huge results

We all know the term "Kaizen": a Japanese philosophy that means continuous improvements; millions of tiny improvements over decades to make massive consequences

"Sometimes when I consider what tremendous consequences come from little things, I am tempted to think there are no little things"

Amplification is accumulation but in a scalable system, so that one small improvement is multiplied over time and over a large scale – like the ripple effect (in algorithmic way)

= Making small modification to a duplicable/multiplicated system over time