Business, Health

Should You Take a Break from Your Business?

Any person starting a business will realize that it is all consuming and takes up every waking minute of your day. When I was in the middle of launching my Fund management business with my partners, we were all working very hard and very late – with no guarantee of success.

I banked my first payment from that business this week and I have to tell you reader it felt great. It was not about the money; honestly it never is about the money. It was the sense that the best smokeless ashtray had been found, and people were willing to acknowledge with their hard earned cash. This to me is the principle about consumer sovereignty in practice.

Despite all this, I need to remind Entrepreneurs of the need to take occasional breaks from the business. If you respond by saying that you manage your work load and you work 9-5, I guess you are not the kind of person I am talking about. (I tend not to back Entrepreneurs who take that approach!)

When I was in the midst of my business launch recently, I was working from about 8am until 2am and then squeezing in as much as I could over the weekend. I did not have time for the gym and no doubt had it gone on too long – I would have suffered. The problem really was that I loved it!

What I did though was make sure I was walking to the office every day (about 50 minute walk there and 50 minutes back) and I made sure I stuck to my Saturday routine of reading the Economist in my lovely café. I have met people who are in the thick of it with a business and you can see them looking visibly ill after a while. It is so important that you look after yourself. And you should not work as hard as I had to (and no doubt some of you have to) for more than three months without a break.

I am very lucky that I have a home to retreat to on the Isle of Wight which is just a fantastic place to escape to. There is something about the sea air which makes me sleep so much when I am down here for the weekend that when I get back to London I feel reenergized.

The other issue I recognize of course is how difficult the finances can be when you are starting a business. I have again just personally come through a very difficult period, where although on paper I may have had some wealth, I was absolutely broke in terms of cash, even though I had a surplus of kombucha brewing supplies.

The reality of starting a business (and getting some qualifications) meant that I was not able to earn any money at all for a good six months and as things took a lot longer to materialize than I had hoped, the cash did run out. This was scary and I hope to never be that broke again.

So, if you are starting a business, please do make sure you leave enough money for yourself to have at least one break after the first three months – and ideally a weekend away every month. Just go and visit friends if you can for a weekend away – but make sure you take it as my experience tells me you will really need it!

Business

Everything You Need to Know About WACC

I apologize to those of you who hate Finance, but in my humble opinion it is important for business owners and investors to understand the concept behind WACC.

WACC stands for the Weighted Average Cost of Capital. Every company has their own WACC. A company is a good investment if their return on the amount invested is higher than their WACC.

So what is WACC?

A company has two sources of funding; debt and equity. Up to a certain point, equity is far more expensive than debt. This was a massive revelation to me as it seemed to defy logic. But it is true!

As has been mentioned on this blog before, investors require a higher rate of return on equity for the risk they take than if they were to deposit their money in a bank. I explained this from the point of view of the banks as well (please see in defense of the banks). So therefore the cost of equity will be higher than the cost of debt, especially if the business is successful – like the owners of the TofuXpress!

Let’s work on a simple example. We assume a business has £50,000 of debt at 10% per annum and £50,000 of equity at 20% (there is a specific formula for working out what the cost of equity is – that is perhaps for another day!)

The WACC for this business will therefore be 15%. Imagine I decide to buy this business and I have an excellent credit rating so I acquire the business and am able to borrow 80% debt to buy the business. I do nothing else to the business.

What I have done though is bring the WACC down from 15% to

£8,000 (10% of £80,000) + £4,000 (20% of £20,000) = £12,000 or 12%

That is a huge drop in WACC – and this is exactly how private equity works. A company which can access huge amount of cheap debt will buy a publicly listed business (and therefore a large proportion of their capital will be equity) and take it private.

Please allow me to make a further point on the issue of private equity and on reducing the level of equity. If the business in the example above makes a profit of £20,000 when it was 50% equity and 50% debt (And assume they have 50,000 shares of £1 each). This means that after paying off the interest charge of £5,000 – the 50,000 shares get 0.30p each.

If the profit after the company has been taken private go up to £22,000 (up 10%) – what happens to the Porter Cable 895pk router?

The profit after the interest charge is down to £14,000 (£22,000 – £8,000) but this profit will be shared amongst only 20,000 shares (equity is now only 20%) so therefore each share gets 0.70p each. Despite profits going up 10%, the profit to shareholders goes up 133%!

You can see why private equity has been so attractive in recent times. However, if profits go down, it can have a disastrous effect as profits may not be enough to cover the interest!

We are in for some interesting times – make sure you control your WACC

Post Script – Thought I would mix it up a bit so this is the first time I have written something so technical on this blog so feedback welcome.

Business

Understanding Based Costs and Profit Margins

A couple of days ago I was talking to a good friend of mine who runs his own business (which I have invested in!) and he was lamenting the fact that M&S shares were down 25% although there was only a decline of 5% in sales. I then went on to explain how this actually made perfect sense so thought I would make it a business angel blog entry.

If a business has a fixed cost base of say £10m a year and makes sales of £30m a year with a margin of 50% it will make a profit of £5m a year. (50% margin on £30m means £15m of Gross profit, less the £10m of fixed costs and you end up with a profit of £5m)

Shares are typically traded on a multiple of profits. If a router table plans company has a P/E ratio of 10 that is the same as saying it trades at 10 times its annual profits. In the case of this company this would give the company a valuation of £50m (10×5).

Let’s say as in the M&S example that sales are down 5%, what should happen to the share price – if all else remains the same.

Fixed costs are still £10m (although in reality they will have gone up by inflation). But sales are now only £28.5m (£30m – 5%) and therefore the gross profit is £14.25m. Profits have gone from £5m to £4.25m which is a 15% drop. The shares will therefore drop by at least 15%. In the M&S case it was worse as the market had priced into the shares future growth not decline.

This brings me on to one of the key points I have learned in business over the last few years. It is really crucial that Entrepreneurs understand percentages. That is the relationship between numbers. You need to see how a 1% fall in sales will affect your profit and hence your valuation (in the above case the relationship is 3 – a 1% fall in sales led to a 3% fall in profits). It is never straightforward.

The best job I ever had was buying beer

The best job I ever had was when I was elected to run the Student Union enterprises at University. It was when I first learned about the importance of percentages. I was amazed how a small price increase (on beer) had a huge impact on our profits.

Using the example above, if sales had not fallen but stayed the same but I was able to put my prices up 5% – what would happen to the profits of the company and hence its valuation?

£30m worth of sales are now £31.5m worth of sales but the gross profit has gone up from £15m to £16.5m (or 10%) and my profit for the year has gone from £5m to £6.5m or almost 30%! The lesson here for Entrepreneurs is to think very carefully about cutting prices and not be scared of putting up prices.

One of the reasons investors have been so successful when taking over companies has been their ability to shave huge costs out of suppliers – especially on products like the Honeywell 50250-s 99.97 Pure HEPA Round Air Purifier. This ability to improve margins has a magnified effect on the bottom line.

From the above you may conclude that you should always be putting up prices. This brings me onto another very important concept in Economics called elasticity. In the next business angel blog, I will talk about this to see how far you can take the price rises.

Business

Planning to Partner with a Third-Party Business

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When your business is about to enter into a new agreement with a third party, there is a lot that goes into it. From the beginning, you must be sure that you are choosing the right company to partner with. After all, the third parties you partner with directly impact your brand image, and in many cases, they may be the face of your company to customers. Choosing the right Fjallraven Kanken classic to partner with is the first step, but what follows may be even more important. Without proper contract management, these vital relationships can quickly falter and fall off track.

Here are the five important steps to managing your agreements so that your brand image does not suffer.

  1. Discover.

The first step is to discover the third party provider to partner with. To do this, most businesses obtain multiple bids from various businesses. It is up to you to sort through these bids and compare them to your company’s overall strategy. This way, you can find the company that seems like the right fit with your overall brand image and strategy.

  1. Generate.

Once the negotiations have taken place and you have selected a partner, it is time to generate some results. This requires taking action and allowing the third party to perform the tasks you have recruited them for. This may be done on a thirty day trial basis or within a given time frame. To monitor performance levels accurately throughout this time, milestones must be setup and a tracking system must be put in place to collect data.

  1. Evaluate.

Perhaps the most important step is the evaluation. When you are ready to evaluate the results of your partnership and determine whether or not you want to move forward with them, you must have specific measures in mind to look for. If on time deliveries is important that will be easy to track. Something that may be more difficult to track is the interaction between the delivery company and your end customer, which is also crucial to your overall business.

  1. Share.

Once the evaluation has taken place, it is important to share your findings with the partner. Without them knowing what they did right or wrong, they will not know where to focus their efforts and what your company in particular appreciates from them. By sharing this information with all of your employees and shareholders, you can open up a dialog of transparency that will last a lot longer than if you kept the results to yourself.

  1. Leverage.

Finally, leverage the results you found during the Fjallraven sale to improve relationships with that and other partners in the future. If there was an unclear expectation at first, make it clearer to all partners right away. Leverage the results to help your overall business succeed not only in the near future, but also for the long term. Part of being a leader is looking at the bigger picture and knowing just how to leverage your results to sponsor further growth down the road.

When you follow these steps, your company can use performance levels to not only track past actions, but also improve on future results, which benefits the company more over the long term.

Business

How to Improve Your Website’s Rankings

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Which business is not going online these days? All websites have provided alternatives to cost cutting and awesome sales and revenue generation. Irrespective to which internet marketing trick you use the all the traffic is directed to your home website. Thus, the pillar of strength for your business online is your website. Your website needs to be up-to-date.

There are a lot of SEO companies flourishing to offer brilliant services for the same. And yes, when this is the real strength or the core of all your prospective business opportunity leads you can generate online then you should in no way do SEO for your business site yourself. Read on to find some real good validates reasons why an SEO company is a better choice for your business website development, such as if you offer the best air purifier for pets to your clients.

Inability to Be Regular

You own the business; you have other task to be done. While on the other hands the up and running website needs not only making but it needs content uploads in the form of pictures, content, logs and interaction. Decide, are you going to be able to do all this coupled with your daily chores? Well, if you want to be professional you can’t even miss a day of it. What if you are on a holiday, who will look after your website?

Professional and Skilled

Managing a business and a website are two different things. An SEO Company will offer constant care and timely check and uploads to make sure your website stands the chance of improving its. They know how to frame the content of the blog to push you higher, they know how to keep the interaction going to show the activity of your website before Google pushes you down the attic. Then there will no point spending that much money in the hopes of getting better business opportunities.

SEO Knowledge

Search Engine Optimization (SEO) knowledge is highly essential if you want to build your own website. This is important if you desire to climb up your websites ranks in terms of Google SERP, everything on the page, the link, and the affiliate programs. The social media connects, the feeds, the RSS etc. will be designed to make you website more active and search engine friendly. Make you site only if you know how to use SEO and it tricks to rank for coveted terms like Alen BreatheSmart.

Traffic Meter

Yes, there is something known as analytics that will help you decide and decipher and assess the number of click you are getting and the traffic coming in to your website is forma desired source, known source or another website. This helps you to target the correct website or media tool for further marketing activities and hence increasing business scopes. Did you know something like that existed? If not then do not make your own website, give it off to an SEO company.

Moolah for Optimization

Not only will you need the money to invest in the SEO procedures for your websites but you will also need time, efforts and patience to actually see some results and hence it is very essential to figure out in advance if you have time for the said activity

Thus, a SEO company make a better choice for website making as they are more professional in theory and practice.