Times Are Rough, So Think Smart and Profit

Chances are, you don’t need a reminder from me to know that the economy is suffering, financial institutions are collapsing, the real estate bubble is popping, people have lost their jobs, getting access to loans and other credit is stiffening, and federal bailouts are occurring. There are those that choose to live in a world of ignorance devised of pretending that our situation is not as bad as it is now, nor will it get worse. “The worst has come!” they say, and “Now is the best time to buy!” These super-optimists slow down the inevitable crash of our economy so that those of us that are paying attention can take the action necessary to protect our assets and thrive during hard times. Take a minute and try to decide which person you are; seriously, think about it.

If you believe that the worst has come to the US and world economies, then perhaps you believe the next 5 years is filled with a joyful rise in the stock market, endless consumer purchasing, extreme real estate speculation — you should stop reading this article right now. I’m not going to try to convince you otherwise!

Otherwise, if you believe that we’re in bad times, and headed for something nastier, I invite you to take this time to identify what things you need to change in your life to thrive during this time. Here are a few things you can do to help your business survive (or even start) during a period of duress:

  • Spend less.
    This may sound obvious, but you need to stop spending so much. You may think you’re frugal now, but there are always things you don’t need that you keep buying. Was it necessary that you brought on all those extra consultants? Do you really believe that those fringe benefits are directly contributing to your profitability? Make some needed cuts, and start developing a “Do I really need this?” mentality.
  • Start saving money.
    Cash is king in a world that is suffering. If you can manage to save up extra money now, you’ll be able to buy up assets and resources when things hit rock bottom. There won’t be much (if any) financing when everything is down! You’re going to need cash. Imagine when you have an opportunity to buy that $950,000 3-bedroom house that will eventually drop to $350,000. Or, when BMW and Mercedes starts to offer extremely steep discounts to clear their inventory because no one else is buying. If you don’t have cash when the deals come knocking, you’re missing out.
  • Use lower cost alternatives to services.
    In many cases, we’ve standardized on using nothing but the best when it comes to services and products for our businesses. But there are a tremendous amount of alternatives to everything we use, many of which offer similar (if not superior) quality, but for a drastically lower cost. Seek them out, because you might just be surprised to find out that you can barter a little more with someone else.
  • Bank with a reputable bank.
    Banks like Wells Fargo and Bank of America will not go under. Why? Because they take on a much lower quantity of high risk debt. Seek out banks that have a track record of taking on less risk, but provide higher interest rates. If you look carefully, you’ll find banks offering 3.5% and above for savings accounts (ING Direct), and considerably more for money market accounts. Why do you have tens of thousands of dollars sitting in a traditional savings account earning less than the historical average of inflation?
  • Avoid rising above FDIC limits in your accounts.
    I don’t care who you are, but putting more than $100,000 in a checking, savings, or money market account is just asking for trouble. The FDIC insures accounts up to $100,000 per account type per bank. Anything over that, you risk losing (and at a minimum, at pennies on the dollar) when the bank fails and needs to be bailed out. There are billions of dollars in accounts that go uninsured because they’re over the limits. Take the time to setup additional accounts and split your capital up across them. Like the cliche says, “Don’t put all your eggs in one basket.”
  • Always put 20% or more down when buying property.
    I know it seems appealing to buy that car for 0 down, or that piece of property for only 5% out of pocket. Unless your payments are considerably less than 20% of your monthly cash flow, you’re making a huge mistake. Should your cash flow come down, you’re going to be living in hell. Putting 20% or more down makes you truly think about what it is you are buying, and it increases your chances of financing. Some lenders are actually requiring 20% down now.
  • Help others save money.
    If you build in the ability for people to save money into your products, they’ll buy your product, even during a recession or time of economic stress! Would you pay $5 for an iPhone application that helps you find the cheapest gas nearby? What if your services were all by phone and the Internet, instead of continually requiring your clients to come into your office? Perhaps you can even offer your product for 50% cheaper than your best competitor, and spin it as saving 50% to your clients.
  • Telecommute more often, even with your clients.
    Work with your clients, vendors, employees, and consultants to telecommute more often. Everyone benefits. There are a few hurdles with it, but the benefits outweigh the problems. Your top performing staff will think twice about going to your competitors if you offer them perks that benefit them, but without costing you.
  • Strengthen your network.
    Now is the best time to start revitalizing your network. Do it before the situation gets worse, because when times are rough, you’re going to want to lean on your network. I’d be willing to bet that most of the people in your network are not yet prepared for what is coming. This means, when that time comes, they’ll be asking you for favor, and returning them in exchange. Take the current moment to reach out to the people in your current network, and offer them a hand. Additionally, spend some time meeting new people at local business groups, on Twitter, and LinkedIn. Offer your new friends something to show your level of commitment.
  • Increase your cash flow.
    Last but not least, find ways to increase your cash flow. You should be striving to grow your revenue every month. New streams of income are hiding all over the place. Put advertisements on that newsletter that you send out every month. Start a blog. Create simple side products that reuse some of what you’ve already built — a simplified version of it. Share a piece of what you’re good at in a PDF and sell it.

Many of these may seem incredibly obvious, but I’m willing to bet you don’t even try to do most of them. Give it a shot, focus on them, and see where you stand in 6 months. Come back and let us know how you did.

You won’t be bought by Google, so Quit Fooling Yourself; you need a sound financial model!

Somehow, countless startups are still getting funded by investors without financial business models that are sound, proven, or even make sense. Even a couple of my colleagues have questionable businesses that have received infusions from angels and VCs (although, the products they’ve built seem brilliantly designed). Don’t get me wrong, I’m happy that all of these entrepreneurs are able to get funding. In some ways, it seems reminiscent of the dot-com-bomb days — lots of money flowing on interesting ideas, but no way to capitalize on them. I’m sure that many entrepreneurs say that they’ve got a well developed set of models that have been approved by their venture backers and would be crazy to share it with the public, in fear that their competition would capitalize on it. If that’s true, why does the performance of the business show no proof of one (think, YouTube, Twitter, and Yelp)? I mean, it doesn’t take a genius to see that Twitter is currently not able to generate more revenue than their implementing is actually costing them (research, design, development, graphics, legal, management, server scaling, code base refactoring, etc). Let’s be honest… everyone thinks they are going to make their fortune with each of their startups by being bought by Google or Yahoo!

For some, maybe that’s a realistic exit strategy. And for even a subset of those, perhaps that’s also a realistic revenue generator (i.e. the exit strategy IS the model). But for most entrepreneurs, this is unrealistic. You need a fallback plan, because, chances are, even if you plan your business like a perfect game of chess with the hopes of being purchased by a giant, it’s not going to work out. Even if it does, it’s likely to not be as lucrative as some of the deals that have already happened. What do we do then? We develop a financial model with realistic projections to create a cash flow that actually makes sense (uberly simplified: profit = revenue – expenses, not profit = 0 – expenses).

Before you get frightened by the idea of actually building a real business instead of one of these socially driven flukes, think about what we’re talking about here. We’re talking about building a business on a reasonably small number of investment/capital dollars, having one or more legitimate revenue streams, and eventually, a profit. As intimidating as some people think this is, it’s not rocket science (and it surprises me how many people “claim ignorance” by saying “I’m just a tech person, not a business guy” in order to avoid this basic concept). Having some idea of how you’re going to make money is a vital path to success.

Here’s how you start:

  1. Find and review example financial models, including forecast and cash flow examples.
  2. Think about your market and your products.
  3. Gather details about what you think it will cost for your research, parts, labor, prototypes, and other expenses.
  4. Gather details about what you think you will charge for your products and services, or how much you will be able to monetize from other forms of revenue.
  5. Build your financial model!

Find and review example financial models.

Before you can even start to begin building your own models, you should probably look at what other people have done (or, actually consider enrolling in a business course at a university). Examples can give you a lot of great ideas, and are a quick way to get introduced to the concepts of what a financial model really is. Just keep one thing in mind: it’s your money-making recipe from a financial perspective.

Here are some examples (and a few other introductions):

Think about your market and your products.

How can you build something for the people you haven’t even yet identified? You need to figure out who you’re trying to target; who you’re trying to sell your product or service to. This can be a little difficult, but it’s best to start with what you actually know. As you grow, you may be able to use some unique strategies of discovering what your market wants (market research reports, surveys, email questionnaires, and contests come to mind quickly).

Once you know what your market wants, you can consider what is consumable. Blindly building products that you think your community is demanding might not be the best idea. Keep yourself in it, because a large piece of your product is actually you (you can really mean the spirit of your company, morals, or views). Stay true to your vision, but don’t ignore what the reality of the market is telling you. Selling out to the demand may actually destroy the foundation you spent so long to build. Think about how to make money while delivering a product that is able to drive your client base wild.

Gather details about what you think it will cost for your research, parts, labor, prototypes, and other expenses.

In the beginning, you’re going to wing this one. But, you need to be conservative, and as thorough as possible. Ask what consultants are charging for research or labor activities. Look on the job boards to get an idea of what a full time employee will cost. There are too many questions to ask and consider, and they will be unique to your particular business. How many different components do you need for your device? What are the price points for various tiers of bulk purchasing of one component? How much time and labor do you expect you’ll need for your first prototype? What will it cost to form the business legally? How many administrators will I need on launch day? How many will grow over 3, 6, and 12 months? How about 3 years?

Write these out in the form of a FAQ or research paper if you’d like. But at a minimum, write it out in written language. This will make it easy to translate to attributes/variables in a financial model, but will provide the train of thought you had when you first sat down to put it all together. Trust me, you’ll find it valuable when you’re trying to figure out what “%vol / num. visitors” really meant, and how it was related to your project.

Gather details about what you think you will charge for your products and services, or how much you will be able to monetize from other forms of revenue.

This is the meat and potatoes of your financial model. Think of it as the framework of how you’ll make money with your business, but not the blueprint or implementation of it. For some, this is really challenging. For a born-to-be-an-entrepreneur, this might come very naturally (after all, you had a lot of experience with that lemonade stand; don’t lie, I had one too).

Ethan Zuckerman posted recently with a really useful enumeration of some of the ways you can make money. He focuses on the news industry (specifically journalism), but I think a lot of it applies to other industries too. He goes beyond the traditional ‘advertising’ and ‘premium services’ models too. This is a valuable way to get a start right now.

Build your financial model!</h3

No better time than to start building it right now. This really should be one of the first things you think about when you start evaluating your genius ideas. But don’t worry, this thing needs to evolve. It will change over a conversation with a colleague, and most definitely change over a time period of 6-12 months. And that’s good, so don’t get too stressed out if you think it’ll be too time consuming to do it all in one sitting. Get the basics down. Try to quickly prove that your idea will actually make a positive balance!

And if you already have an established business, building a real financial model for the first time can be extremely revealing! It can quickly show you what your real future holds (perhaps not as aggressive as you thought), and give you some ideas on how to refine your business so that you can actually target making progress towards that goal of early retirement.

If you’re in the sharing mood and would like to help other entrepreneurs develop their models, please feel free to link us to your model (or perhaps a model-in-progress) in a comment on this article and tell us what has really worked for you.