Giving Back for August

IAC-EZ believes in giving back to the community. Each month, a portion of the revenues earned from sign-ups in that month are contributed to a featured charitable organization that does some good in the world.

In August, that organization is the Children’s Health Fund. Health care is a very sensitive issue in our political climate today but there’s one thing that most of us can agree upon: Children are our future and healthy children will mean a healthy future. In fact, the founder of Children’s Health Fund said as much when he said: “America’s future is inexorably bound to the health, education, and well-being of its children. Right now too many children main outside the system, simply not getting the basic care they need.”

The Children’s Health Fund was founded in 1987 by pediatrician Irwin Redlener, MD, and by Paul Simon (yes, THAT Paul Simon).

They provide programs for children all over the country to provide them with the health, nutrition, and well-being services they need. There is a particular emphasis on children who might not receive care in hospitals (i.e., homeless children), but their mandate really does extend to all children. They also do public policy lobbying and advocacy to speak for this group of people who do not have a voice.

IAC-EZ is excited about this program. We believe in investing for a positive return, which is why we’re focused on helping businesses; but we also believe that investing in the future will have a huge return for all of us.

Jessica Routier, IAC-EZ

Inflation

Inflation is the rising cost of goods. Economists use the idea of the imaginary basket of goods and services that people can purchase. When they compare the prices of the same basket of goods over time, the rate of inflation can be calculated. So when grandma bought butter for a nickel a pound (or whatever) and we’re dropping a $5 bill for the same pound of butter (well, not exactly the same pound of butter… hopefully one made more recently) then some smart economists somewhere will crunch those numbers and compare it with the timespan between grandma’s shopping trip and our shopping trip to determine the rate of inflation.

The average inflation rate is…

[drum-roll please]…

… not easy to find.

I was on the Bureau of Labor Statistics  which is supposed to tell me. I was hoping for a great big ticker that gave the number. But no. Instead there was a lot of confusing statistics that might be an actuary’s idea of heaven but not mine. I guess the theory is that there are different indexes for whether we’re talking about inflation in consumer goods or inflation in health care purchases or inflation in residential purchases.

So I did what all good amateur researchers do: I went to Wikipeda.  There, they said that inflation in 2007 was 4.28%. That means that prices rose 4.28% between 2007 and 2008. I’d heard that inflation was typically between 3% and 4% (and the economy was pretty good then and since inflation tends to be higher during good economies the 4.28% number makes sense).

Why does this matter?

It matters to you for a couple of reasons:

First, it matters because when you’re investing your money you need to make sure that your investments at least outpace inflation. There are lots of investments that claim to be safe but don’t even keep up with inflation. So an investment that looks like it will earn 2.5% sounds okay but you’ll end up with less money. Investing in your business might not give you a sense of an “assured return” but it’s likely going to be better than inflation! (Disclaimer: Our trusty troupe of high-paid lawyers tells me that I need to mention the following: IAC-EZ is not in the business of giving investment advice and that the above paragraph should not be construed in any way as anything other than my own observations and feelings and actual advice that anyone should follow and if you’ve read this far you acknowledge that we are an awesome bookkeeping service and not financial advisors).

Second, and probably more important for you as a business owner, it matters because you will need to increase your prices from time to time and you need to make sure that you’re at least keeping up with inflation. A 10% price increase is, in reality, a lower increase. In 2007 a 10% increase would have really only increased your revenue by 5.72% because the rest would have been sucked away by inflation. Remember that when adjusting your prices! And remember, too, that different industries have different inflationary rates to consider.

Jessica Routier, IAC-EZ

You gotta keep things moving

Some turnover is not so good: Employee turnover that is too high or customer turnover above the normal amount. And, some turnover is good: inventory turnover, the turnover of sales, and those sweet little pastry turnovers (which have nothing to do with this blog post).

When a small business owner is pricing their products, it can be tempting to price those products at the upper limit of customer’s perceived value. The thinking is, why charge $300 for this product if a customer will pay as much as $500?

It makes sense. Unfortunately, it can be dangerous. That’s because of the important concept of cash flow. Earning revenue is good, and earning high revenue is even better, but having cash flow is the best. Cash flow, even if it is less than your ideal revenue range, makes business a lot easier. You’ll be able to keep your debts current, you’ll be able to meet your obligations when they arise (and not get saddled with debt or late fees), and you’ll have capital to operate while minimizing your need for loans.

If I have two customers who will pay $500 in the month for my product (from the example above, I’ll earn $1000. But as long as each item is profitable, it’s potentially wiser to lower your price to $300 if it means that you’ll get 3 customers buying. That’s 3 payments in the month. Yes, they will total only $900 but you’ve got the magical cash flow.

It’s actually similar on a larger scale in the global economy. During healthy economic times, money is flowing all around and that’s good. But during lean times (recessions, depressions, etc.) there is a lack of money in the marketplace and it doesn’t move around very quickly.

The same idea goes for inventory. Stocking too much inventory creates risks: For example, you might think that you’re preparing for busier times but there are ongoing inventory costs and the threat of theft and fire (and the reality of associated insurance costs), and wastage (in the case of perishable inventory). Not only that, what happens if your product is suddenly made obsolete in the marketplace? You’ll end up with a warehouse full of old items.

This is a huge topic and there is barely room to scratch the surface in this blog. But the most important thing to know is this: You gotta keep things moving!

Jessica Routier, IAC-EZ

The small business to large business challenge

In a recent conversation with a small business owner, they were relating to me a problem that they didn’t realize was far more common than they had expected. It’s the problem of funding operations during a period of growth.

This is a common problem for businesses because they earn enough to pay the bills and put some profit away… but what happens if they get an influx of orders? Let’s look at an example:

Grandma’s Home-Baked Cookies Inc. makes delicious mail order cookie baskets. They cost a total of $8 dollars to make (for ingredients, a basket, and utilities), they sell for a total of $10 and grandma earns a $2 profit. Grandma can make 20 baskets a day and she ships them all over the world, earning revenues of $200 per day and profits of $40 per day. Then one day grandma decides to send some cookies to her son’s troop stationed overseas and the international media picks up the story and suddenly Grandma’s Home-Baked Cookies Inc. is flooded with orders. She goes from making 100 baskets a week (20 per day for 5 days) to having orders of 1000 baskets a week – 200 baskets to be made every day!

Most business people would jump for joy at that prospect because more business theoretically means more revenue and more profit. There are benefits that grandma would enjoy: She could buy her ingredients in larger bulk amounts to drive down costs (potentially earning $3 per basket instead of 2). But even with higher revenues and profits, she still has one major problem: How will she make all of these cookies? Her own kitchen is nice but insufficient for that task. She could go out and buy more equipment but that will take thousands of dollars of investment.

And this is a classic small business conundrum and one of the leading reasons that businesses fail in the first 5 years. Yes, many fail because of poor planning or poor leadership, but an astonishing number fail because the owner couldn’t afford to scale.

So, what can you do?

If you’re not right in the middle of this problem then think about what you’d do. You have the benefit of time to consider the possibilities! Perhaps you can put a little money away. Maybe when you upgrade equipment, you can upgrade to a model that can handle more output. Perhaps you need the name of a handy staffing agency and virtual assistant firm on speed dial. Maybe you can examine your credit score and consider the possibility of borrowing should you ever need to. Find some trusted colleagues who might be interested in investing. If you don’t think that you will have the option of waiting for a loan if the time ever came that you needed it, consider opening a borrowing account right now and letting it sit idle. Most importantly, have a plan in place so that if you have to scale really fast, you aren’t just panicking and throwing money at the situation without any specific order in mind.

And what do you do if you’re right in the middle of it? It depends on how serious it is. Here are a few ways that I’ve actually seen people handle the situation:

• Smaller “blips” might be funded by a credit card (but make sure that these aren’t ongoing situations or it could get costly very, very fast!
• Involve your family and friends to help you out (again, only if it’s a short term blip).
• Buy from your competitor. This might not be a great solution, and it can be a money-loser in the short term, but I’ve seen businesses that want to solve a huge scaling problem fast might take the short term financial burden.
• If you’re in manufacturing, consider finding someone else who might have the same production facilities as you, but also some available downtime, and see if you can outsource some of your work to them. Again, this isn’t a great solution for the long term but I’ve seen it work in the short term.

Jessica Routier, IAC-EZ