Business Risk

How to Control Business Risk

Business expenses can be categorized as either fixed expenses or variable expenses.

  • Fixed expenses are expenses that your business must pay regardless of any sales it makes. For example, fixed expenses include the monthly rent you pay on your equipment, building, phone bills, as well as any indirect staff such as a manager or cashier. So, fixed expenses are the expenses that the business incurs each month regardless if the business makes $0 or $1,000,000 in sales.
  • In contrast, variable expenses are expenses that are incurred only if you make a sale. For example, if you sell a product, your wholesale cost of the product is a variable expense. Also, direct employees or contractors hired to deliver a service and who could be cut loose if the work is not there are examples of a variable expense. So, variable expenses are the expenses you would not incur if you never made a sale.

A business with low fixed expenses but high variable expenses has less risk. If sales during the month are poor, the business incurs most of its expenses only when the business make sales. Therefore, a business with low fixed expenses but high variable expense business has less downside risk. However, these same businesses are generally less scalable because if the business makes lots of sales, profits will be small because each sale incurs a high variable cost.

On the other hand, a business with high fixed expenses but low variable expenses will suffer greatly if it experiences lower than expected sales volumes. However, because its variable expenses are low, profits will be higher if sales are higher than expected. Therefore, business with higher fixed and lower variable expense are far more scalable than businesses with low fixed expenses and higher variable expenses.

Would your business benefit from lower downside risk with higher variable expenses or higher upside with greater fixed expenses?

This article originally appeared at www.SteveBizBlog.com.

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Exit Strategy

Exit Planning – Five Chapters to Include In Your Company Success Story

A 2015 survey by CNBC and the Financial Planning Association found that while 78 percent of small-business owners intend to sell their businesses to fund their retirements, fewer than 30 percent have a written succession plan.

To maximize the value of their business, owners must look ahead, with plenty of time to plan for a successful exit, and they must tell a compelling story to attract high quality buyers.

Begin by writing your company’s success story. Sit down and write a paragraph for each of the five areas below.

1. Good Growth Prospects

2. Unique Products or Services with Operational Strengths

3. Proven Trends & Profitability

4. Good Management Team and High Employee Retention

5. Repeat Customers w/ Low Concentration

Sell-Side Due Diligence

In addition to telling a compelling story, a key to getting the entire transaction to a successful conclusion is to perform due diligence on yourself before taking the company to market. The goal is to uncover anything that may be perceived as a negative surprise. Include the following items in your due diligence work.

1. Examine Your Financial Records and Controls

2. Review External and Internal Agreements

3. Document Policies and Processes

4. Mitigate Employee, Litigation or Environmental Issues

5. Comply with Applicable Government and Industry Regulations

If you are planning to sell your business within the next five years, begin the planning process now. It leads to a higher valuation, makes the process easier, and allows you to sell the company when you are ready.

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Note: this post originally appeared at www.PoeWolfPartners.com

Crowdfunding – Community Building

Now is the time to send the influencers on your list an email and asked them for advice about your campaign. Be sure to mention that you read their post/article/book. If you mention that you enjoyed reading it, you will increase the likelihood they will reply to your request. Prioritize your list of influencers and focus on sites and people that are the most active. Read and share information in your topic area to build trust with them before also asking them to support your campaign. Even if you do all the right things, expect about a 10% return rate on your cold contacts. However, with a few good social shares, some campaigns have been able to boost their return rates to 15-20%.

Start sending out emails to your list as you count down to the launch to build momentum. Now is the time to try to get committed backer support prior to your launch date. If necessary, make their pledge contingent on reaching a specific funding level. For example, you might say, “Can I count on you to support us at the platinum level if we raise 20% percent of our goal?” If they are not receptive, ask, “How about supporting us at the gold level?” If necessary, go all the way and ask, “Will you at least support us at the $10 High-Five level?” If you don’t ask, most people will not pledge because this is the point in the campaign where you begin to ask for their pledges. Based on successful campaigns, your goal should be to get about 20% of your target amount in pre-launch pledges from your network.

Another effective way to build a community is to have a launch party. The best launch parties build enthusiasm for the campaign and have a creative twist to make them memorable. Perhaps you can buy a canvas and some paint from an art supply company and encourage everyone at the launch party to contribute to a painting you will post on the blog and giver away as a reward after the campaign. Don’t be afraid to be creative and don’t forget to ask for pledges at the launch party.

Your list of committed backers is different from the ideal backer since your committed backers at this point likely include family and friends. Drew Johnson, a colleague of mine that ran a successful reward-based crowdfunding campaign for TechWears shared the following advice. If he had it all to go over again, he would have scrubbed his look-a-like list when he used a Facebook ad campaign to find backers. Drew had collected a list of about 500 people who signed up at his various demos and craft fairs where he demonstrated and sold his unique TechWears products. His initial thinking was that since the 500 on his list stopped by his booth, engaged with him in a discussion about his product, and were willing to sign-up for his mailing list that they were all potential backers. Unfortunately, many on the list were “tire kickers” who signed his list more out of politeness rather than genuine interest. When he used his list in a Facebook look-a-like ad campaign, the demographic he targeted was not the audience that was actually looking to buy geek-wear as he calls it. In the end, it cost him more money and did not get him the conversion rate he was hoping for from the ad campaign. Therefore, if you plan to use a Facebook ad campaign and use look-a-like list, you should scrub your list to remove those people not likely to be your ideal backer.

What are your plans for building a community for your next campaign?

Note: this post originally appeared at www.SteveBizBlog.com.