The Lemonade Stand - Part III...

"I believe that if life hands you lemons you should make lemonade... then try to find another person whose life has handed them vodka and have a real party" 

                                       ~Ron White - Comedian
 

This week is the last part of a 3-part series about a fictitious small-business venture run by 5th graders.  (Link to Part I and Part II) 
 

The story began while I was speaking to my son’s 5th-grade class several years ago about what it is that I do for a living. 

At first I thought that explaining what an entrepreneur does is a bit too theoretical for a 10-year old to comprehend... so I decided to bring it down a notch or two to the level that they could definitely understand... a lemonade stand.
 

As described in the first two parts of this story... most, if not all, businesses are comprised of only 6 basic functions.
 

These 6 functions are:

1. You make something or provide some type of service
2. You locate potential customers and/or help them to find your business
3. You sell whatever it is that you make or do to those potential customers
4. You hire and train other people to help you
5. You measure things and keep records
6. You acquire capital to help start and/or grow your business

During the course of the last two weeks, I’ve already discussed the first 3 items on the list...

Today I’ll cover the final 3 topics.
 

You hire and train people to help you
 

An old friend of mine used to say that there were only 3 ways to earn money

• Sell your time
• Leverage your money
• Leverage your time

Most of us sell our time... usually to our employer (or directly to clients if you’re a self-employed individual).

The entrepreneur understands that great wealth is not created by doing everything yourself... but rather by buying other people’s time (hiring them)... and then selling the productivity of that employee... at a profit.  
 

Simply selling your time is not scalable and if something were to happen to you... the business is no more.
 

The key to making that profit is to choose employees who provide their employer with a greater amount of productivity relative to their pay.
 

The best way to maximize productivity is to carefully determine what needs to be done and hire the smart and motivated people, train them well, and give them the proper tools to do the work efficiently.
 

At our lemonade stand we are a smashing success and there is too much work for one person to do.  Therefore we have hired two additional workers, one to make the lemonade, one to sell the lemonade, and one serve the lemonade and take charge of the money. 
 

Each person is good at their job and we are able to sell 5 times as much lemonade as one person could do alone.  
 

Even by paying our employees a better wage, we are able to produce higher profits because our productivity is 5 times higher than if we did all the work ourselves.
 

You measure things and keep records
 

At any business, it is important to keep accurate measurements and keep historical records. 
 

These duties are typically shouldered by the accounting department, whose job it is to make sure all of the critical components of a business are accurately tracked.
 

These measured items may be:

• Sales
• Cost of goods / services sold
• Expenses
• Profitability
• Cash on hand
• Accounts receivable
• Inventory
• Fixed assets
• Accounts payable
• Loans

Most of the time, these elements are described on an income statement, balance sheet, or cash-flow statement.

Sometimes these numbers are grouped together into complex formulas allowing easy visibility into the health of a company with one or two critical numbers.
 

Historical record keeping is equally important.  It is from the historical numbers that we can determine trends that will help us to make projections, which in turn, allows us to plan for future sustainability and growth.
 

At our lemonade stand, we keep track of our sales, how much it cost us to produce our lemonade, what our expenses were and how much profit we made at the end of the day.
 

Additionally, because we kept good records, we could see that on weekends, we sold more glasses of lemonade than on weekdays, so we ended up purchasing more supplies on Friday knowing that we wouldn’t want to run out of lemonade or cups before the end of the day on Saturday.  We also learned from our historical data that we sold more lemonade in August than we did in April due to the warmer weather.
 

You acquire capital to help start and/or grow your business
 

Starting a business is a financial riddle.
 

How do you acquire money to start the business when there are no sales or profits?
 

All you have is an idea and perhaps a business plan...
 

A business needs capital to open its doors and to keep the doors open until which time sales and subsequent profitability will eventually provide enough cash-flow to keep the business going.
 

Expenses typically start on day one... but sales don’t usually happen right away... and even if they do, depending on your type of business... the cash from those sales might not pass into your hands for several weeks or months.
 

So where does the money to actually start the business come from?
 

There are typically two sources of start-up capital:

1. Loans - from you in the form of your personal savings - from family, friends, and well-wishers - from banks or credit cards (with your personal guarantee to repay those loans regardless of what happens to the business)

2. Investors - people who think that your idea is great and want to share in the success of your business when you make it big someday.

This might be self-evident... but a business must be able to generate cash to stay in business.  If it runs dry of cash, the company cannot effectively operate and is bankrupt.

In our lemonade business, we started with very little cash.   The seed money came from our own savings and a small loan from our parents.
 

We used this cash to purchase supplies to produce our first batches of lemonade, cups, and some art materials in order to make signs advertising our lemonade.
 

During our first day, we sold enough lemonade to purchase additional supplies as well as pay back some of our loan money.  After a few weeks, we had created enough profits to build a portable stand, hire two additional workers, and pay back the original loan.
 

Although, the lemonade stand is over simplified, it is no different than any other type of business venture.
 

The 6 core functions are the same whether we are Apple Computer, Marie’s Beauty Shop, or Kyle’s Lemonade stand.
 

Many of us have dreams of owning our own business one day...
 

It’s important to recognize the elements of a successful business and what we can do to make sure that all of the core competencies are being addressed.  These six functions are requirements... not suggestions... to operating a successful business enterprise.
 

Thank you for your support of OptiFuse where we encourage the entrepreneurial spirit and believe that small business is the backbone of any great economy...  

Business for 5th Graders Part II...

"People rarely buy what they need... they buy what they want" 

                                              ~ Seth Godin

 

Last week I wrote about speaking to my son’s 5th grade class several years ago regarding what it is that I do during their career month (click HERE to re-read last week’s blog).

 

After much thought and deliberation (but mostly fear), I determined that what I do is, for the most part, really boring and hard to describe...

 

It was then I decided to try and teach these 10-year old kids about the general nature of business in terms that they could readily understand... a lemonade stand business...

 

For the most part, business is really simple (at least in theory... as we all know... it is MUCH harder in practice). 

 

There are 6 basic core competencies in any successful business:

1. You make something or provide some type of service
2. You locate potential customers and/or help them to find your business
3. You sell whatever it is that you make or do to those potential customers
4. You hire and train other people to help you
5. You measure things and keep records
6. You acquire capital to help start and/or grow your business 

In last week’s blog... I discussed the concept of making something or providing a service.

 

This week, I want to talk about the next two items on the list - Marketing and Sales (items 2 and 3 on the above list).

 

Marketing and sales are indeed related, but for the most part, they are two separate and distinct concepts (although a lot of companies will make the mistake of lumping both of these jobs together... in the same way that they believe that sales and sales managers use the same skill sets).

 

You locate potential customers and/or help them to find your business

 

Although there are many different facets of marketing, marketing is essentially about locating customer and/or helping potential customers find you.

 

The first thing that needs to be established is to readily determine who your potential customer is. 

 

You make a product or offer a service.  Now you need to figure out why someone might want/need this particular product or service.  

 

Does your product or service fill this want/need and what benefits/value does it offer your potential customers?

 

At our lemonade stand, we are 5th graders who manufacture and serve lemonade.  We have two distinct types of potential customers: 

1. People who are thirsty
2. People who want to support a business venture of a 10-year old entrepreneur 

Our lemonade stand provides products and services that might meet the needs of both groups of potential customers.

 

Once we established who our prospective customer is, we then need to find a way for our prospect to easily find us.

 

This could be through media advertising, catalogs and mailings, social media, finding a location that is easily accessible (if the business is a retail "brick and mortar" business), search engine optimization (SEO) and/or key word searches.

 

The key is finding a method that works for your business model.  Try one approach and then another... see which one works best... keep the one that works best... then try yet another and see how it compares to the winner.

 

In any business, there are multiple channels to reach out to potential customers... the important thing is not so much the channel but rather the message.  

 

Remember... these are customers you’ve identified that have a need for your product or service... your message needs to convey to the customer that you have a solution to satisfy their needs.

 

Once again at our lemonade stand, we decide that in order to allow potential customers to easily find us is to locate our stand near thirsty people and people who would want to encourage a small business enterprise by a 5th grader. 

 

For our stand, we choose a location near a tee box of a public golf course where business men and women might play golf on the weekends.  In the heat, they most likely would be thirsty (meeting criteria #1) and being business minded people, would most likely encourage sprouting entrepreneurs.

 

We paint a series of bright signs asking the question "Thirsty... Ice cold lemonade at hole 13" and place them strategically at holes 11 and 12 so they can be easily seen by our potential customers...

 

Lastly, a price needs to be established for your product or service.

 

Pricing is determined by how much competition there may be for those same potential customers and how much value does your product or service provide to your customers.

 

The greater the perceived value delivered... the higher the price you can ask for your product or service.

 

Conversely, if your product or service is widely available by lots of competitors with little or no perceived value for your particular product or service, then the less are you able to charge your customers.

 

At our lemonade stand, there isn’t another opportunity for golfers to buy a cold drink for several more holes.  Your lemonade is high quality (fresh lemons) and is ice cold.  Your competition (the snack stand at the clubhouse) charges $1.50 for a glass of lemonade.  You decide that you can charge $2.00 since your lemonade is a better quality and is conveniently available.

 

You sell whatever it is that you make or do to those potential customers

 

Although selling is closely related to marketing, they are not the same things. 

 

If marketing is about finding potential customers and helping those potential customers find the business, then sales is about helping to convert prospects into customers and then customers into clients by establishing a relationship of need gathering and solution provision.

 

Sales opportunities are established by asking probing questions of the prospect to determine what particular needs, wants, and/or desires the prospect may have.

 

It is only after establishing what the prospects needs are, does a salesperson describe a potential solution to the prospect.

 

Sometimes, the prospects may have certain needs that cannot be met by the company.  By establishing a trust relationship, the professional sales person will always act in the best interest of the customer by recommending solutions that meet the prospects needs... whether or not those solutions can currently be provided by the company. 

 

These lost opportunities could potentially lead the company to offer additional products or services.

 

At our lemonade stand, our 5th-grader, after exchanging pleasantries, asks the golfers a few simply questions: 

• Are you thirsty?
• Do you like lemonade?
• Would you be willing to help a young entrepreneur?
• Did you know that there are no opportunities to purchase a cold drink for several more holes? 

If the golfers responded positively to any of the above questions, then our young lemonade stand operator will describe their product and the corresponding value to the prospect. 

• My name is Brandon and I’m in the 5th grade at Washington Elementary.
• I’m raising money to go to camp this summer.
• I am selling home-made lemonade that I’m sure that you will agree tastes great
• It is ice-cold and is guaranteed to satisfy your thirst
• It is available now instead of having to wait several holes. 

At this point, the golfer will either buy a glass of lemonade, ask for additional information (such as the price or inquire about other types of products), or offer an objection (such as the price being too high or the prospect wanting another solution - perhaps a cup of coffee).

 

The value is long established with the prospect before price is even mentioned.  The lemonade isn’t the lowest price drink on the golf course but it solves the greatest need at the time.

 

Sales is also understanding objections and helping the customer to find solutions.

 

Whereas marketing is about bringing prospects to the lemonade stand (or in this case... bringing the lemonade stand to the prospect)... selling is about making sure that the prospect buys a glass of lemonade.

 

Both marketing and sales are essential for a successful business enterprise to work but are comprised of very different components. 

 

Thank you for your support of OptiFuse where we believe that knowledge is power...  

Business Fundamentals for 5th Graders...

"Remind people that profit is the difference between revenue and expense... this makes you look smart... " 

                    ~ Scott Adams - Dilbert Creator 

Several years ago, my son Ben asked me to be a guest speaker in his 5th grade class during career month at his school.

I thought the idea of talking about what I actually do to a bunch of impressionable 10-year old boys and girls would be fun.  But as the date approached, I began to panic as I thought more about it. 

These young kids didn’t want to know what the unique features and benefits were for products that we sell... how marketing works... who is our target customer... what our cash-flow projections were... how much competition did we have... or what our corporate structure and governance looked like...

Although these are exactly the type of important questions a possible investor or a banker might ask... to the average 5th grader... these are absolutely meaningless topics...

I thought to myself, "why couldn’t you have been a fireman or an astronaut?... that would have made this presentation so much easier".

Unfortunately for me... I am not a fireman or astronaut... but rather an entrepreneur... I start, operate, and build businesses.

It’s a profession I love and over the past 25 years I’ve become fairly proficient at it... albeit after many years of tuition payments to the "school of hard-knocks"...

I decided then to use what I had and try my best to relate it to the world of a 10-year old.  They don’t quite understand the business of electronic components... but they do understand the business of lemonade stands.

So with that in mind, I developed a model of business that is simple enough that it is easily understood by a class of 5th graders.  Yet complex enough to accurately describe any business enterprise.

This might seem like a stretch but a lemonade stand business is not all that different from any other business... once you break it down into the 6 basic components.

All businesses consist of these 6 basic core competencies: 

1. You make something and/or provide some type of service
2. You locate potential customers (or help potential customers to find you)
3. You sell whatever it is you make or do to those potential customers
4. You hire and train other people to help you
5. You measure things and keep records
6. You acquire access to capital to help you get started and to grow the business 

Each of the above items are essential to the overall health, well-being, and success of any company be it large or small.

This includes Apple (the world’s most valuable company) or our lemonade stand.

Any person wanting to be an entrepreneur, now or in the future, needs to fully understand these basic business components, and if they do not possess the skills to be competent in each area, they should then seriously think about having partners or trusted advisers who do.

Starting or running a business shouldn’t be that complicated and it isn’t if you understand the fundamental concepts.

Over the course of the next 3 weeks, I hope to discuss each of the 6 basic core components of business listed above in great detail.

Make something and/or provide a service

Every business has a product and/or service that they must be able to sell for more money than it costs.  This is the very essence of any business.

Price - Cost = Profit

There are two sides to this equation:  The price and the cost.

The price of the product or service is typically determined by the marketplace. 

If your product or service is unique, you will create a higher market demand due to limited availability which means that you can subsequently demand a higher price from your customers.  Typically, this higher demand is short-lived as competition, seeing the limited supply, will eventually enter your market and attempt to convert your customers to become their customers.

If your product or service is simply a commodity, then you might have lower market demand for your particular product or service meaning you must charge a lower price unless you can somehow create a benefit offering higher value to your customer.

Just because your product or service is widely available, doesn’t necessarily mean that it is a true commodity. 

For example, restaurants sell prepared food to people.  There are tens of millions of restaurants throughout the world.  Some of these restaurants are very successful selling meals at a relatively low price, such as fast-food restaurants or take-away food stands/trucks while other restaurants are very successful selling food at extremely high prices such as those operated by celebrity chefs in Manhattan and Las Vegas.

At their core, all restaurants are essentially offering the same service, prepared food for sale.  But within that broad definition, there are thousands of differentiators that create uniqueness to a particular restaurant (or perhaps consistency in the case of fast-food). These differentiators might include location, quality of the ingredients, type of cuisine, ambiance and decor, reputation of the chef, and/or customer service.  The price of the food is determined by those differentiating factors. 

The other side of the equation is the cost.  If you have a unique product or service, then you may be tempted to not worry about the product or service costs.  People will pay whatever price you ask so why does costs matter?

The difference between your price and your cost is your profit (or loss if the number is negative).  All companies should be in the business of maximizing profits whenever possible (in the case of non-profit companies... its goals should be to maximize benefits by delivering the highest value to it constituents... )

In most cases, the market is efficient and will set the pricing of your product or service. Therefore the only thing that you can control is the cost it takes to produce this product or service.  Driving cost out of your product or service is absolutely essential in most businesses regardless of what your prices might be.

The 3 fundamental goals of any business providing products and/or services should be: 

• Better - more innovative, higher quality, more customer benefits - allowing for higher prices.
• Faster - more convenient, better response, better delivery
• Less expensive (not cheaper) - more value to the customer and higher profits to the company

At our lemonade stand, we sell lemonade.  We use a recipe consisting of water, lemons, and sugar.  We prepare the lemonade in an insulated dispenser filled with ice and give the customer disposable plastic cups that they can keep.  

We are constantly testing new recipes to add to or replace our current product offering.  

Our future plans include opening new stands close to schools, parks, and golf courses making it more convenient for thirsty people.  

As we grow, we hope to be able to purchase our raw materials in bulk, helping to lower our production costs.

Better - Faster - Less Expensive

The person typically in charge of this core competency in most businesses is the Chief Operating Officer.

Next week, I’ll discuss two areas that are related but still very different.  For many people, sales and marketing are one in the same, but as we will soon discover, they are two completely separate concepts each needing a different set of talents and skills.

Thank you for your support of OptiFuse where we hope to encourage and foster entrepreneurship around the world...  

5 Books For Your Summer Vacation...

"Isn’t it amazing how much stuff we get done the day before our vacation"

                                                             ~ Zig Zigler 

So it’s now summer and with summer comes the thought of a well-deserved vacation. 

Some people enjoy adventure vacations whereas they are constantly on the move trying to see and do as much as possible in one or two weeks.

For others, their vacation is spent creating memories for their kids and families, often centered around theme parks and other loud children.

Then there are those who look at a vacation as a time to rest... relax... and unwind.  These are the people who like getting lost in a good book for a few hours while forgetting about the news of the world and the beehive of activity that it often brings.

This week is devoted to the third group... those who want to stop the world for a few precious days while taking the opportunity to recharge their batteries.

It is for them... I offer up my summer reading list... a few books that I highly recommend and have personally read over the past several months...

To the others I offer my thoughts and prayers as you navigate through Main Street USA and the monorail or perhaps the train stations of Europe on your way to see yet another cathedral...

Hyper Sales Growth 
Jack Daly

Those in the entrepreneurial circle have long known about Jack Daly, his intense energy, personal achievements, and incredible insights into sales and sales management.  Long-time readers of the OptiFuse Blog know that I am a personal disciple of Jack and his sales and sales management philosophies.  

Jack has been selling for over 50 years, when at 14 years old, he took over a paper route and built it to one of the most successful routes in Philadelphia.  Using the same basic principles that he learned at an early age, he has hired, trained and led sales forces numbering in the thousands not once but twice in his career.

Over the years he has developed one of the most comprehensive and successful sales training program in the world. 

Up until the release of his long awaited book, the only way you could learn his proven methodology was to attend one of his multi-day seminars.  Now all of those closely-held secrets of growing sales and sales people are yours in his long-awaited book.

Hyper Sales Growth is a step-by-step instruction guide for three critical areas of any business:

• Building a winning sales culture
• Sales Management
• Sales

It is a widely known fact that nothing happens in business until a sale is made so learning these easy-to-understand lessons can be invaluable to a company or salesperson that wants to grow their sales.

Jack Daly is simply the best sales coach in America.  Following his powerful proven message will help you to increase your sales and create a winning sales team.

How Life Works
Andrew Matthews

I was a little hesitant to include this book on my summer reading list... not because it isn’t brilliant... which it is... but rather due to its scarcity in the U.S. (it has only been released in Asia and Australia thus far... but can be ordered directly from the publisher... see link above).

In this latest book, Andrew Matthews has summed up perfectly what life is all about (in a nutshell).

Andrew Matthews takes us on a journey helping us to understand that each of us is a living spirit here on earth having a physical experience.  We are individuals, a part of a greater one.

We learn that throughout our lives things happen... good and bad... regardless of who we are... what we do... or how we prepare ourselves... these are somewhat random acts and can’t be explained in any rational way... meaning that we are not totally in control of what happens.   

We are in control, however, of certain aspects... mostly in how we react to the things that occur.

Living a full and rich life... with meaning and purpose... requires that we live our lives with a set of rules.

These rules include: 

• Acceptance - of yourself, of others, and your current situation
• Forgiveness - of yourself and others
• Always being grateful for what you have... not despondent for what you don’t have
• Live in the present... not the past (you can’t change the past) or the future (if things aren’t right in the present... they won’t be right in the future either)
• Replace fear with love and kindness
• Always strive to be happy

The choice is yours and yours alone... you are totally responsible for your own reality.

No one is holding you back except yourself... you don’t need anyone’s permission to be happy...

How Life Works is a step-by-step understanding of why things happen and what we can do to avoid the trappings of self-delusion and self-pity and to bring love, joy and happiness into our lives.

It is a must read not only for those who need a new direction in life... but also for those who are truly interested in learning how life actually works...

Great By Choice
Jim Collins

Jim Collins is the best-selling author of Built to Last and Good to Great. This is his latest book based on asking the question, "Why do some companies thrive during times of uncertainty and even chaos... while other don’t?"

Using the same basic approach found in his earlier books, Jim Collin and his research staff have found that similar companies, in similar industries, during the same time periods have found themselves on divergent paths.

After 12 years of study, the author has concluded that the most successful companies operating in turbulent times exhibit three underlying traits that allowed them to outperform their respective comparison company as well as all other companies in their respective industries.

These three traits are: 

• A strict adherence to disciple as characterized by the "20-mile march".  Great companies use empirical data to create a plan and then stay true to the plan never marching too fast (in the good times) or marching too slow (in the bad times). 

• Test new ideas using small trials collecting know-how and critical information along the way as characterized by "Fire bullets... then cannonballs".  The great companies weren’t necessarily more innovative than their counterparts... but they took many smaller risks upfront... saving their gunpowder once the idea had been proven out using smaller bullets.  Only after they found their target did they launch a cannonball. 

• Always have more reserves than what was required as characterized by "Leading above the death line".  The companies that excelled during times of chaos were those with ample reserves due to conservative spending and an excess of cash.  Along the way, every company will experience certain changing conditions and bad-luck circumstances.  Those who have rich reserves are those who will be in the best position to ride out the storms and spates of misfortune. 

Good By Choice shows that even in the most turbulent times, a well-managed company (or by extension - household) can thrive if they are well-disciplines, high-risk averse, and financially conservative.

Getting Naked
Pat Lencioni

This book, like all of Lencioni’s books, is written in parable form.  This format makes the reading easy, interesting and entertaining while still using the underlying principles to teach the reader valuable lessons.

Getting Naked is no exception.

The premise of Getting Naked is overcoming the basic fears of business including the fear of losing the business... being embarrassed... and being inferior.  The way to overcome these fears is by transforming the organization into one that is completely transparent and honest with its employees, vendors and clients at all levels.

The transparent company isn’t afraid of telling the truth, being vulnerable, and/or admitting that they simply do not have the answer to every question.

Getting Naked is a must read for people believing that substance always trumps image.

I’m Proud of You
Tim Madigan

I am not the easiest person to buy a gift for.  I lead a very simple and austere lifestyle.  I have everything I need and want for almost nothing.

This year for Father’s Day, my son and daughter found the perfect gift, a book about one of my life-long heroes, Fred Rogers (Mr. Roger’s Neighborhood) written by Tim Madigan, a reporter for the Fort Worth Star-Telegram newspaper.

Ever since I was 6-years old, I had idolized and adored a man who challenged me to explore the world, discover new secrets, told me that I was special and unique, and allowed me to express feelings that somehow made me vulnerable. 

In 1995, Tim Madigan was asked by his editor to go to Pittsburgh to interview Fred Rogers for a feature article.  That chance meeting ultimately became a deep and enduring personal friendship between Madigan and Mr. Rogers, until Fred Roger’s death in 2003.

Tim Madigan’s book is highly insightful and spiritual but it isn’t "preachy".  It speaks of love, compassion, forgiveness, and redemption.

There is a deep respect, love and affection for two men born in different era but who both understood about the demons which might inhabit our inner souls and perhaps ways to exorcise these demons by sharing a part of ourselves with another human being ("anything mentionable is manageable" is one of Fred Rogers’ favorite saying).

I expected this book to be a factual accounting of the life and times of Fred Rogers... and although there is some interesting narratives... the book isn’t about life on the set of Mr. Rogers’ Neighborhood... but rather the effect of a profound friendship on two men confronting the "furies" of life.

This book will move you to think about your own life and your relationships with others.

Thank you for your support of OptiFuse where we hope you take time to enjoy your summer regardless of where you go or what you do...