Sunday, March 1, 2009

Sandbags...

I've been trying to figure out a simple analogy to explain why I think businesses survive or fail.

I think most people think of it like a 'light switch,' a business is viable one day, not viable the next. There is a clean cause and effect thinking process here; this business failed because it didn't have good service, because it had lousy product, no wonder they went out of business...

But it doesn't quite hold up, does it? Which is reflected in comments like, "I don't understand it; they were always busy, they had the best stuff, I loved that place."

And equally reflected by comments like, "I can't understand how they stay in business; the owner is a jerk, they never have what I want."

But instead of seeing business as an on and off switch, try to see it more as an hour glass, with the sand running out, but you don't see it fail until the last grain of sand has drained.

Keep that image in mind, while I reach for another analogy.

Try to see downtown as an Old West movie lot with lots of facades, but behind the facades you have sandbags propping up them up. All most people see is the facades in front, they don't see the sandbags in back.

Some facades are huge and need lots and lots of sandbags, others are much more modest and need only a few sandbags.

What you can't see until the whole edifice falls over is if there are an appropriate number of sandbags. Some of those giant facades have only a few strategically placed sandbags left, some of those smaller facades have piles and piles of sandbags behind them.

You don't know.

To stretch the analogy a little further, the sand represents not only capital, not only the cash flow, not only the profitability of the business, but also intangibles like motivation and perseverance and experience and sheer cussedness.

The economy lately has been blowing holes in those sandbags, and a whole lot of sand is falling to the ground.

We don't know how each individual facade is doing, but we can be pretty certain that most are weaker than they were before, and some are losing sand quicker than others.

Finally, it takes a lot of drainage for most facades to fall off. Even if they don't tip over, you have to realized that much of the wealth (sand) has disappeared, and some of these facades are becoming stressed and frayed around the edges.

Fair enough?

5 comments:

BENDBUST said...

Why does some biz fail, and other survive.

DEBT

Why they survive or fail?

It's funny dunc, a naive MORON fed shit in SCHOOL.

He would tell you the secret of biz is...

1.) Borrow
2.) Look good, get a nice office, place drive a good car.
3.) Hire employees, help the community, create jobs

CALL ME MUSSOLINI DUNC, me don't care but its ALL FUCKING BULLSHIT.

DEBT is the #1 killer in small biz, never borrow a fucking DIME, I know dunc, you float your biz with credit-cards, you have been DAMN lucky

Live like a dog, old car, minimal building, no fancy office shit, which means its all paid for NEVER BORROW to buy shit, NO FUCKING DEBT.

EMPLOYEES biggest fucking killer there is to small biz, when you first start you work 12-18 hrs/day for years, build a biz, and sure you might get an employee or lots, but then you payroll/taxes is 90% of sales, your making a ton of money but keeping NONE.

The sweet spot of biz, is minimal-employees, yet society, the press always lionizes places and MEN who have the most warm bodies.

WHAT REALLY KILLED MERENDA?? TOO BIG, and TOO MANY EMPLOYEES.

MOST biz in BEND is dying today cuz of DEBT, they got into biz with HELOC, which is now gone, and its NOT FUN ANYMORE.

DEBT is is the KILLER, if YOU HAVE NO FUCKING DEBT you can always survive.

Duncan McGeary said...

I agree that debt is a huge hole i the sandbags.

I'm not sure you can start a viable business without some kind of debt, or capital infusion. Pulling yourself up by bootstraps sounds really good, but it's nearly impossible to get to a viable level within a span of time that makes it worth while.

My credit card debt is about 9.9% right now, but that less than the 10% I was paying on business loans twenty years ago.

Of course that was fixed, with fixed payments.

I'm only using my credit cards within the month, usually...

I did, as I've said, order 5k worth of new books in January, and I'm still not sure if that is a smart move or a dumb move. I've paid off 1000.00 in Feb. and I'll pay off 1k in each of the next four months.

I wish I never had to borrow, but I also think holding onto cash isn't a terrible idea either.

Jeff said...

The analogy should capture the fact that most businesses are ALWAYS somewhat fragile, and there are many different ways that they could unravel. It's not easy to predict WHICH mechanism will ultimately be the "straw that broke the camel's back."

The hourglass implies that every business is slowly dying -- we're just uncertain about WHEN it will happen.

But I'm not convinced that EVERY business will eventually die.

Think of a business like a ship -- they are built for certain conditions. They can't handle every conceivable outcome. Some might be designed to handle rogue waves and powerful winds, but eventually they get eaten away by rust . . . .

Who could have guessed? Who would have known?

Of course, sometimes it's easy to anticipate the result -- opening a high priced eatery on 97 right now might be like trying to sail a dinghy out the mouth of the Columbia during winter storm.

Maybe Pegasus is like a tugboat -- spare, functional, and unsinkable, so long as it stays true to its purpose and does not venture out into unknown waters.

Duncan McGeary said...

"The hourglass implies that every business is slowly dying -- we're just uncertain about WHEN it will happen."

I figured you catch that. What I sort of left out my already involved analogy is a way to replenish the sandbags.

In a sense, much like people, most businesses are slowly dying, at the very least going through life changes....

To be replaced, either by a new owner or a new business.

BENDBUST said...

Why do some biz die, and others live??

Sure but let's remember the odd's most new biz fails the first 3 years, most new food joints the first year entry, most people its just too easy to enter food, they think "I can boil spaghetti, I'll open a food joint",...

Dunc re-invents himself, he calls himself 'comic' but its really one of the last downtown book stores.

Survival is what we're talking about here, going 5, 10, 15, 20, 25, 50, ... years,...

Look today on this NOTE Monaco Coach made the finest RV's in the world, cost about $500k each, and today they're TOAST everybody is getting laid off.

"END OF THE WORLD?" For the people of Coburg, OR, hell yes.

Breedlove Guitar, so they say make some of the finest wood acoustic guitars in the world, family biz, survive? Who knows, building a legacy biz is largely about the patriarch, but even in the best cases say Evergreen Aviation in McMinnville the founders groomed well-bred son died in tragic accident. I think the same for the heirs of Les-Schwab, he out lived most of his children.

I think what we're talking about today, is why they fail in the first 1-3 years, of course there is a book written on it, and maybe DUNC can tell us where to find it for those who have not read it, it got me through the 60's as a naive young businessman, the book is called "What ever happened to the woolly mammoth", a book written by a CPA in plain english on most small biz fails in first few years.

I think guys like dunc, just get used the cycles, the ebb&flow, the good and the bad. Early on I noted, that in GOOD times I hired employees and traveled the globe, nobody can fuck things in a good econ, but in a bad time, you lay everybody off and work your ass off, of course it helps to have NO debt in the bad times, cuz you just don't know about burn rate.

They used to say six months cash on hand, but now its more like six years is what you should have on hand.

[ dunc, I have the book, its out of print, I have not seen it anywhere for years, but I always felt it was one of the best. ]

Another good book is Robert Townsends 'up the organization' about business, how he rescued Avis in the 60's, and of course contains my favorite quote of biz, "If you ain't doing it for money or fun, then what the FUCK are you doing it for?"

I think just the other day dunc asked this question, called the Townsend-Question, but he didn't attribute it,