Rather than burying my thoughts in the comments of last week’s post on MWI’s 2006 financials I decided to create a new post because I think there are some things that may be of interest to other entrepreneurs. As I’ve had a chance to reflect on the MWI experience of 2006 there are a few things I’ve realized:
1. It wouldn’t have been that hard for me to have ended the year with a decent net income.
2. Nothing risked nothing gained, but take smart risks.
3. $5K in the red vs. $5K in the black feels like a much bigger difference than $10K.
A positive net income might be easier than you think. In looking over the financials for the last year, I started thinking to myself “Ok, if I hadn’t done that, I could have saved $20K, and if I hadn’t hired that person I could have saved another $50K and we probably would have gotten by ok…” etc. When I totalled everything up, there was probably $120K worth of expenses that were a total loss as far as return on investment, or could at least be debated as being a total loss. What else could I have done with that $120K? I could have paid off debt, paid myself, bought a nice steak dinner, or what have you. Or I could have invested back in my company.
Feeling risky? Yeah, I would say I’m fairly non-adverse to risk. I’m willing to try just about anything when it comes to improving my business. So where did that $120K go? Some of it went towards experimentation, and some of that experimentation went towards hiring people. But some of the people I hired didn’t need to be hired. In one case I hired two developers when in reality I probably could have gotten by with one. In another case I hired an employee but a month later found a contractor who could handle the same amount of work for a fraction of the price.
I believe it was Yogi Berra who said something about the difficulty of making predictions, especially about the future. The challenge of being in business, or taking any sort of risk in life, is that you don’t know what’s going to happen to the environment in which you operate that may nullify the effectiveness of the actions you are taking today. From my perspective at the time, the decisions I made which resulted in a net loss for the year were the wisest decisions that could be made, and even in retrospect there are some decisions I made that, even with the knowledge I have now, I would probably make again if I were in the same situation, because the risk of not being ready for certain opportunities is larger than the risk of gearing up and having the opportunity not work out in spite of being ready for it.
But there are risks I took which, in retrospect, weren’t the smartest and I should have known better. Those are the lessons I try to learn from so that I don’t repeat the error in the future. My mom keeps telling me there are only 120 cold viruses in the world and once you get them all you won’t get colds any more. I figure with running a business there are only so many mistakes you can make and so once you’ve made them all you’ll always be successful, right? Except there are a lot more mistakes to make than colds to catch.
Patient for growth, impatient for profit. I recently finished reading The Innovator’s Solution by Clayton M. Christensen
MWI is in much better shape than it was a year ago for producing profits, and while I wish I could say that was due to my foresight and genius, it has more to do with being forced into it by circumstances. But now that I’m here, I realize how much better of a place it is to be. Instead of hiring a lot of full time employees and a few contractors we’ve switched to using more and more contractors, and we’ve been lucky enough to find some who are incredibly talented. This has cut our monthly costs by 20% or more. We’re also working on new internal projects that appear likely to provide a level of stability, profitability, and scalability I’ve never known before.
It doesn’t hurt to have a little luck as well. Right now it looks as though we may end up doing collecting almost 20% of the total revenue we had in 2006 by the end of this month, and the trend appears ready to continue for the next few months at least. Expenses down, profits up…I wonder what experimentation I could do with all that money. I think I might experiment with paying off debts and creating a healthy bank account this year.
Josh,
You continue to amaze me with your candor. I couldn’t help but wonder (from one of your previous posts) if the Class “A” office space was necessary? That is a pretty big number that most, if not all, could go to the bottom line. Doesn’t your industry support “virtual” offices? I guess if you have covered that nut this long, perhaps the worst is over. However, there is no shame in “downgrading” to more reasonable office space or getting rid of it altogether.
I learned long ago that sales do not equal profits and neither do offices, PR or fancy cars. Profits do matter, particularly to the self-made entrepreneur, of which you clearly are classified as.
I think it is impressive and exciting that you are turning the corner. Keep it up and consider looking at other ways to reduce expenses other then ridding yourself of risk. It won’t happen
I have been interested on all of the varied responses to the posting of your financials recently. In any business setting an entrepreneur is compelled to go where not to many people have gone before. Thus the title entrepreneur! However no matter what the circumstances of the operation are any success acheived will come from a well thought out and well executed business strategy.
I am always amazed at the colateral damage caused and money lost by well meaning and enthusiastic business start-ups. Like the guy who decides to put a restaurant in a location that 5 previous restaurants have failed in. I am sure his thoughts were that his food was so good and so unique that his restaurant would be successful even though everyone else’s had failed.
The completion of a businesses financials should be a road map to opportunity and improvement for the future. I too am in the Web Design business and before we engage any new idea or concept, I will send up a trial balloon to guage the viability of the idea. Once it has been confirmed then we go for it, if it goes over like a “turd in a punch bowl” then we fold it up and go in another direction. This process has kept us from getting hurt financially in any new venture.
Our biggest hit was at the 2001 COMDEX show in Las Vegas. We had a client with 10,000 sq. ft. of floor space and invited us to join them. We had designed a site for Antoine Carr ( a former Utah Jazz player) and because of our relationship hired him to come with us to the show. We put in a sport court and he actually played one on one basketball with the media and guests. It was fun and we got written up in Black Entertainment and the Wall Street Journal but it did absolutely nothing for us as a company.
It was fun but we took a $30,000 hit in the process. Your renewed emphasis on profits for MWI is the right approach. I may also suggest that you consider a modest salary as you clear the deck of uncecessary expenses. The value of your business is based on your leadership and intuition which should have a price tag in any financial equation.
Good business too you in a market that continues to expand and grow for all of us.
Steve Hansen
CEO
Utah Web Services
We doubted whether the office space was necessary ourselves, so in addition to putting the question out here on the blog, I also sent out a survey to existing, past, and past potential clients. Before the survey I was pretty much decided on ditching the office space. I figured whatever good it had done me in the past would stick even if we left it. But the response from the survey prompted me to hold on, at least for now. Essentially what we found out was that a number of our higher spending clients stated that although they have never visited our office, if they had known we didn’t have an office they wouldn’t have hired us. When added together, the margin from the clients who had that response was greater than the cost of the office space, and so the office space stays for the time being.
In addition, within the next few months we’ll launch a new service that we hope will require the hiring of a few new people, and I’d hate to get rid of what is quite affordable space for how nice it is and the location only to need to get more three months down the road and have to go through the hassle of moving again and then have to pay more per sq ft on top of the hassle. If it weren’t for the survey and the changes taking place with the business model then I probably would get rid of the space or at least downsize.
We’re also trying to sublease part of it out to defray the cost, and we’re getting some interest there, although we haven’t found the right fit yet.
Interesting and particularly insightful post and comments. For some time I have been reading your entries but have not taken the time to post a comment that is short and to the point, grammatically and stylistically correct or adheres to the rules of parallel construction.
Oh the challenges of starting a small business. For example, office space (I wasn’t aware that office space had a class system), overhead, moving and setup. Employees vs. contractors, this one is especially important if your company is a Federal grant recipient and lest I forget, payroll (the big one).
I for one, reflect on our 2006 financials and the nagging questions “where did all the money go”? After grueling discussions with the accountant (contractor) and the tax accountant (contractor) I worked with the administrative staff (part time employees) to get the books closed for 2006 and start on 2007. Thanks to the rigid classification scheme developed by the accountants, I can track every cent. The only problem, I have to track over 67 classes for each contract, grant and R&D project.
I now know where all the money went and no, we were not even close to profitable. I expect that I will learn even more in 2007 about sales, revenue and profits. My next lesson with the accountants is forecasting…that should be fun.