Let’s play “What’s wrong with this picture?”
DATELINE: New York – December 11, 2020: Millions of small businesses hanging on by a thread after being shut down by state and local politicians reacting to the coronavirus pandemic.
DATELINE: Chicago – December 11, 2020: Thousands of small businesses closing for good after being shut down by state and local politicians reacting to the coronavirus pandemic.
DATELINE: Washington – December 11, 2020: “There’s a business startup boom. The third quarter of 2020 records the highest new business applications we’ve ever seen.” (U.S. Census Bureau).
That was a softball, wasn’t it? Next time I’ll throw you a real curve.
In the middle of a stubborn, economy-disrupting pandemic, there’s a boom in new businesses. Only in America, right? But why is there so much apparent opportunity in such a destructive environment?
When describing the wages of innovation, economists have coined the term, “creative destruction.” But in 2020, innovation for its own sake isn’t the destructive energy; it’s the political response to an attack by an invisible invader. If necessity is the mother of invention, in 2020, the political response to the coronavirus caused a survival response which then spawned invention. I’ve coined a new term for that: “perverse destruction.” I know – my attitude is showing.
Of course, survival, regardless of the reason, isn’t perverse – it’s primal. And in the 2020 marketplace, survival energy has manifested in at least two forms:
- Existing companies pivoting to a new marketplace reality, always shaped by customers and sometimes by public policy.
- Thousands of the unemployed focusing on seizing creative destruction opportunities.
With millions of businesses in both categories launching into the 2021 New Regular economic reality, this is a good time to discuss the fact that every small business owner – from startup to veteran – has to move back and forth between two universes every day: the Marketplace and what I call the Diaper Changing Stuff (DCS).
The Marketplace is the fun place, where you buy and sell stuff. Playing in the backyard of this universe is why you become a business owner in the first place. And the good news is many entrepreneurs are pretty good at the rules and expectations of the fun universe even before they start their business.
The DCS represents mostly backroom operating tasks (read: not much fun) that must be done in order to sustain the business operationally and deliver products to the Marketplace. These are things like accounting, cash management, banking, capital allocation, payroll, regulations – you get the picture.
Just as no one wants a baby because they like to change diapers, no one ever went into business because they’re passionate about inventory management or accounts payable. But the Marketplace and the DCS are two sides of the same coin. In business, there is no dimension where one exists without the other.
If you’re thinking of starting a business, don’t do it until you’ve compared this short DCS checklist to your abilities. If you’re a business veteran, road test your DCS skills against this list to see where you could use some improvement.
1. Cash and Accounting
Do you know the difference between cash and accounting? Gain this understanding before you hock the house to start your business because you’ll face this financial dynamic every day. In fact, when your business wakes you up at 2:00 a.m., more times than not this will be the dream-breaker. Remember, debits and credits don’t make payroll – only cash does.
2. Capital Allocation
Do you have a capitalization strategy? Do you know how to properly allocate operating and non-operating capital? Don’t use operating cash to buy long-term assets and don’t borrow money to operate with. Create a capital source and allocation strategy before you crank up your corporation.
3.The Language of Banks
Do you speak banker? If you need a loan, can you explain what you’re going to accomplish with the money AND how you’re going to pay the bank back? If you make a loan request without answering these questions before they’re asked, you’ll just burn a banking bridge. Bankers are easily frightened, and no one ever got a loan from a scared banker.
4. A/R Days – A/P Days
Do you understand the relationship between Accounts Receivable Days and Accounts Payable Days? If you extend credit to customers, you have to fund those accounts until they’re received – which usually happens later than when you have to pay vendors. And the first indication you’re in jeopardy will be a call from your banker saying you need to make a deposit, or a vendor putting you on C.O.D. If you don’t understand this relationship, these two calls could come in on Line 1 and Line 2 at the same time. Remember this about growth:
a. If you don’t track AR/AP days, you could succeed yourself out of business.
b. For most businesses, growth is not self-funding.
5. Quality Process
Do you know the difference between Quality Service (QS) and Quality Process (QP)? QP is management. QS is crisis management. QS is always making the customer happy, no matter what it takes. QP means getting it right the first time. QS is a recurring, profit-eating expense. QP shifts customers from complaining to buying more stuff. In online reviews, QP is five stars, QS isn’t.
Bonus question: Can you operate the business you had the entrepreneurial vision to create? Not everyone can. Don’t start your business unless you’re ready to change the diapers on your baby.
Write this on a rock … Blasingame’s Fourth Law of Small Business: “Successful small business owners have the spirit of an entrepreneur AND the heart of an operator.”