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People start and grow organizations for a myriad of reasons. One of the often stated reasons is to “make more money” and, in the case of nonprofits, “to grow and perpetuate the cause.” Financially-savvy sounding people might state “to improve ROE (Return on Equity)” or “ROI” (Return on Investment), yet a majority of these people have only a vague understanding of what this truly means.

The essence of my work with clients revolves around ROE by phrasing the question in simple terms: How do we get more out of what we have?

While each industry possesses its own ROE nuances, there are parallels with every organization whether it’s a retail store chain, educational institution, widget manufacturer or fitness club.

The Basics
Technically, ROE is simply net income divided by Equity (or investment). But do you know how it is derived? Basically, there are three elements that drive ROE:

Total Asset Turnover – the amount of sales derived from the company’s assets.
Net Profit Margin – how much the company keeps out of what it sells.
Equity Multiplier – how much debt the organization uses relative to owners’ investment in the company (equity).

I will address the first two drivers. I will take on the Equity Multiplier in a later issue since this is driven by funding choices more than anything else.

Total Asset Turnover
Total Asset Turnover is what finance people call an efficiency ratio, measuring how much production (revenue) an organization derives from its assets. While every industry has its own benchmark for success, the higher the ratio, the better.

To increase your total asset turnover, measure the effectiveness of your largest assets. For retailers, the goal is to rapidly sell inventory over and over again. For companies with investments in equipment and real estate, the idea is to maximize revenue from these fixed assets.
Another, less used method for maximizing total asset turnover is to actually decrease total assets while maintaining or increasing sales. For retailers, it means carrying less inventory in smaller locations. For manufacturers, it’s outsourcing certain production capacity to other companies with underutilized facilities. For restaurants, it’s opening less expensive locations or finding low-cost venues for selling food.

During these economically challenged times, this is becoming a popular strategy. A recent Wall Street Journal article even featured high-end chefs who are operating “lunch trucks” (you know, the ones that usually sell donuts, soda and old sandwiches) to sell their gourmet food. Whether by choice or not, there’s little doubt that this business model enjoys a higher ROE with the emphasis on reduce initial investment requirements. Another benefit of reducing assets is that the sale of assets can be used to increase cash flow or reduce outstanding debt.

The Masters of Total Asset Turnover – Some Examples
The master of total asset turnover is Trader Joe’s. Not only do their stores turn their inventory over an unheard of 7 days, their store’s small footprint requires less investment on a unit by unit basis.

Walmart takes it a step further. They don’t even own much of the inventory they keep in stock. Instead, the vendors own the inventory. This reduces Wal-Marts store investment and risk. They get the same sales with less investment in assets.

Southwest Airlines turns their airplanes rapidly, flying each plane full of passengers, several times per day. Planes don’t make money sitting on the tarmac.

Net Profit Margin
The second element of ROE is net profit margin, which is in essence, is what you keep out of what you sell.

Again, each industry is different. Consumers are often shocked to hear that the average grocery store only keeps $1.50 from each $100 sale. Most companies operate on razor thin margins.

Yet, for all its simplicity, many people lose focus here. No one goes out of business by increasing their profit margin, but many have gone under from increasing sales. Again, it’s what you keep, not what you sell.  Business leaders often obsess over total sales while giving little concern to the bottom line. The media is no help. During the holiday shopping season, all one hears is “sales are up over last year”. How about profits?

The Balancing Act – ROE Nirvana
Here’s where ROE gets challenging. Total asset turnover and net profit margin are often at war with each other. An easy way to increase total asset turnover is by lowering your prices. Great! The only problem is that you run the risk of hurting net profit margin.

So how do we find ROE nirvana? The answer is simple: Sell high-margin products at high volumes. Sounds simple, but the execution is far more difficult. It’s relatively easy to increase sales by lowering prices to increase total asset turnover, but then one’s margins get destroyed. The trick is finding the optimal balance between the two.

While there are no easy answers or secret formulas to maximizing ROE, the following tips should help bring your company a few steps closer to ROE nirvana.

ROE Tips

1.    The main driver for ROE? Always work to increase perceived value on the part of the customer. New Ferraris represent a good value because customers perceive them as containing superior exotic experience and prestige.
2.    A higher profit margin may be a good thing. Or not. If you’re a restaurant with a food cost of 25% while your industry average is 32%, how did you do it? If you did it by simply increasing prices, you may get into trouble if consumers perceive you as a poor value (see tip #1) and will say (to paraphrase Arnold) “I won’t be back”.
3.    Your core strategy should drive your ROE decisions. Trader Joe’s ROE strategy is to turn over inventory quickly by selling unique private-label food items at a small markup in small (low investment) locations. As of this writing, Apple Computer’s cheapest notebook computer is $1,000. They don’t care about market share; they care about higher gross profits for each sliver of market share.
4.    An easy way to increase ROE is to improve service quality. This increases customer purchase frequency, retention, gross sales and allows you to increase profit margins by raising prices. One of the reasons Apple is so profitable is that one gets the feeling that if you get into trouble with your iPod or MacBook, you can have one of the “geniuses” in their stores help you with a problem.
5.    Differentiate yourself. What can you provide that others can’t? Or, what can you do well that others will gladly pay a premium for?
6.    What assets should be liquidated (even at a loss) that could free up capital which could be invested more efficiently?
7.    Provide incentives for performance. Frederick Winslow Taylor, the original management consultant and author of Scientific Management in 1911, developed systems that would provide 60% more compensation to superior-performing workers.
8.    Analyze every product/service you sell against percentage of total sales, gross profit margin per item and synergy between items. Keep the best, dump the rest.
9.    Excess inventory reduces total asset turnover and leads to carrying assets that are depreciating before your eyes, thereby forcing the company to sell at a lower price later (and hence, lower profit margin).
10.    Conversely, little inventory (or immediate access to it) means your customer will go elsewhere, which means no sale at all.
11.    Carefully consider adding new products or services to your existing mix. Adding new items can increase operational complexity resulting in increased training costs, higher errors rates and potential degradation of your brand.

Getting Things Done by David Allen, first published in 2001, has been a slow moving phenomena as it has taken nearly 6 years to enter the NY Times Business Best Sellers list. Yet, when I speak to groups of executives at emerging companies, fewer than 5% of even heard of the book.

Allen’s seminal work is a summary of his productivity management practice with Fortune 500 companies. His work put the traditional to do list and priority coding productivity systems to shame (including Covey’s 7 Habits).

After successfully implementing GTD (as it’s called) into my own practice after my second child was born, I began recommending the process to my time-frazzled clients who often complained that they lacked the time to successfully move their companies forward.

A great thing about GTD is that you don’t have to follow the system religiously to gain benefits. Using bits and pieces can make a difference in your life. In addition, the processes are really common sense and intuitive.

Like any system, there are limitations. I’ve yet to meet anyone able to successfully implement the book in earnest without outside support. Ironically, it’s the time-tested entrepreneurs that need it most yet don’t make the time to read the book.

In addition, in reading David’s work, I get the distinct impression that he never had kids. While he does acknowledge an executive’s home life, I get the sense that kids don’t enter into his equation. While GTD brilliantly integrates your personal and professional life, time with family is an important point that receives short shift.

Regardless of any shortcomings, I recommend using GTD without hesitation.

Here are several ideas for my time-challenged clients.

1.    Conduct high power work when your brain is freshest. I tend to write important drafts early in the morning (as a “morning person”) and surf the web conducting research when my brain is tired (low energy required).

2.    Make sure your to do list contains items that have actions associated with them. You can only take certain actions based on context. Most of what we do can be done on the phone, at the computer, in one’s office, at home (think honey-do list), out on the road (errands) or agendas (meetings) with certain people.

3.    Your daily calendar is full of two types of work, either formal appointments or no appointments. It’s what you do when you don’t have an appointment that determines your productivity.

4.    For entrepreneurs and executives, delegate your $10 per hour work to someone else. Instead, focus on the $300 per hour work.

5.    Your personal life and professional life are inseparable. Get used to it. If you have a personal commitment outstanding, it will nag at you at work. Work commitments will nag you at home. Deal with both.

6.    The mind is a terrible place to store something you are trying to remember. Keep a pad and pen handy at all times.  Write down your thoughts and place them into a system that you will review regularly (like GTD).

7.    To plan larger projects, figure out first what success would look like. Then, brainstorm for ideas. Ideas will naturally come forward once you’ve seen the end result.

Several years ago, I worked with a founder of a growing, local pizza chain. He absolutely prided himself on working with the tiling contractor on weekends even though he was already working 70-80 hours per week and had a newborn at home (and two more followed shortly thereafter). Today, he still has the same number of locations. I’m not surprised. He never took the time to work on growing his chain (even though that’s what he said he wanted). He was too busy tiling.

10 Smart, Effective and Frugal Ways to Recruit the Right Franchisees

Reducing franchise recruiting costs is an increasingly difficult issue facing most franchise systems. In Part II, we explored the pros and cons of traditional methods used to recruit franchisees such as the Internet, franchise brokers, trade shows and publication advertising. In Part III of this series, we explore alternative recruitment methods to find solid franchise candidates at relatively low cost.

Whether good times or bad, smart franchisors continually find novel ways to stand out from the pack to find the best franchise candidates. Not every one of these 10 strategies will apply to every system; however, incorporating 1-2 ideas into the recruitment process will put you far ahead of the competition.

Write About It - If you are looking to recruit people within your industry, write an article about your company’s novel operations in an industry trade publication. You can also submit op-ed pieces or articles and casually mention franchising. Be sure to obtain reprinting permission to give out articles to potential franchisees.

Become Active in Professional/Trade Associations – Take a leadership role in industry associations where potential franchisees are likely to roam. Not only will you meet prospective franchise candidates, you’ll make a difference and gain valuable credentials.

Speak - Speak at events where the type of franchise candidates you are trying to attract will be in attendance. You’ll be seen as an expert in your industry, which can subtly change the dynamics when meeting with potential franchisees.

Expose Yourself – Get PR - If you have a compelling story, someone within the media might be interested in hearing about it. I’ve had clients featured in industry publications and on TV, speaking about their franchise concept. The media is always looking for something new and different. Do you have an interesting story to tell?

Advertise at Non-Franchise Trade Shows - Advertise at prospective franchisee’s industry trade shows where the main purpose has nothing to do with the sale of franchises. You will likely have the place to yourself because few franchisors think this way. (They’d rather advertise at business opportunity shows with 400 other like-minded exhibitors).  

Sell To Employees/Managers – Franchise concepts that are labor and management intensive are perfect for this strategy. In these instances, the franchisor offers franchises to their corporate managers as an incentive to keep them in the fold and not lose them to another competitor or career opportunity.  Domino’s Pizza has employed this method effectively for years.

Market To Life Changers/Contracting Industries - Position your brand to employees in shrinking industries such as construction, airlines, financial services, autos, etc. Some of these qualified people are leaving industries with a pool of money and bleak future career prospects. Show them another way to put their experience and talents to work.

Along the same lines, it might be worthwhile to target outplacement agencies, college alumni offices and veterans.
 
Go After the Independents/The Rollup - Franchisors in fragmented industries with few regional or national competitors can recruit independent business owners to join the system (assuming these independent business owners would make good franchisees).

Market To Non-Competing Franchise Owners - Many franchisees of mature systems desiring to expand often can’t because of lack of available territories. Mary Tomzack, President of FranchiseHelp, works with her clients to target existing franchise owners in systems sharing similar attributes.

Get Pre-Approved - Some systems have joined SBA’s pre-approved vendor list. You have to jump through some hoops and it’s pricey, but given today’s credit crunch, it’s a smart idea.

Conclusion
In this highly competitive market, to effectively and efficiently find franchisees, you have to pursue alternative methods to get the results you desire.

 

I’ve noticed a disturbing trend: We’ve all have become slaves to our smart phones.

As the gadget du jour, smart phones are supposed to increase productivity and reduce stress. And for 20% of you, this is true. Unfortunately, for the remainder, it’s only made your life spin more out of control.

It’s not Steve Job’s fault, it’s the operator. Without rules of engagement, a smart phone only further exasperates existing challenges. The following are several tips that will allow you to better harness the power of any smart phone:

Use a System. If you think your smart phone will get you organized, you’re sadly mistaken. Begin with a productivity or organizational system. There are plenty of ways to organize your “stuff”. For me, David Allen’s, Getting Things Done methodology has worked best.

Get Off the Pipe. Don’t feel the need to be in immediate and constant touch with the rest of the world. Respond during preset times in the day that make sense for your energy level.

Be In the Moment. This has become endemic issue for many of my clients. Don’t let the phone distract you from your current commitment, be it a meeting, lunch date, or simply a peaceful walk on the beach.

Make Time for Free Thinking. Along the same lime, set time everyday for “email/phone free” time for free thinking or strategic planning.

Use on Vacation Sparingly. While on vacation, let others know you’ll have limited access. Check your mail or phone 2x per day and stick to it. If customers, employers or colleagues demand you respond right away, save your money and stay home because you’re not “on vacation”.

What are your real objectives? If this email or phone call doesn’t help with your strategic goals, get rid of it fast.

Learn Key Features. Many of these phones offer features that dramatically increase the phone’s capabilities. Take the time to learn them.

Do you have any tips that work for you? Email me your ideas and I’ll post them.

Do you want to make sense of all the recent turmoil in the financial markets? Check out Burton Malkiel’s A Random Walk Down Wall Street, my favorite book on investing, hands down.

Now in it’s 9th edition, Malkiel does a thorough job explaining past events in the stock market along with some of the behavioral issues that have impacted financial markets throughout history. One of my favorite chapters is on speculative bubbles, ranging from the Dutch Tulip Mania of the 1500’s to the dot-com, dot-bomb of the late 90’s.

Read this book and you’ll gain a stronger understanding and perspective on the stock market than 95% of the so-called “experts” expounding their predictions and commentary in the media.

While normally I’m a half-glass-full kind of guy, I thought with the end of the economy as we know it, I’d mix things up just a bit with 9 things that need to change.

1. Order taking employees asking “is THAT it?”
Try “does that complete your order?” or “what else can I get for you today?”

2. Overhearing inappropriate conversations between employees. I don’t need to hear about somebody’s boyfriend being arrested last night or you trash-talking a previous customer.

3. Outdated notices on the front door of retail establishments. I recently saw a notice on the front door of a well-known restaurant chain that expired two weeks earlier. No employees were awake enough to see it and take it down?

4. Employees telling customers they care when their body language and tone of voice clearly state otherwise (flight attendants on some of the legacy airlines are classic for this one).
If your company is having this problem, solve it. At the very least, stop requiring employees to say scripted lines such as “we really appreciate your business” when they clearly don’t.

5. The multitasking customer talking on his/her cell phone at the checkout line. Would it be asking too much for you to put your phone down for just a minute to politely converse with the checkout clerk?

6. The “Legend-In-His-Own-Mind” guy in row 14 of your flight. As soon as the landing gear touches down, he shouts into his phone to tell the person on the line (and the rest of the plane) that he’s landed.

7. Jim Cramer. He’s entertaining and knowledgeable, no doubt, but his circus-show won’t make you “mad money” as proven earlier this year by the Wall Street Journal. If you want to become an expert investor, check out this month’s Random Review.

8. Economic statistics and the economists behind them. Now, you’re telling us we’re finally in a recession? I’ve got news for you. We’ve been in a recession for the last 9-12 months. I’ll prove it in a future commentary.

9. “Fresh” donuts made 8 hours ago in a central commissary 30 miles away are anything but fresh.

8 Things You Can Do Now To Survive and Prosper

Last month, using history as a guide, I made the argument that the best time to invest is during the worst economic times. The feedback I received from business leaders was essentially one of agreement followed by the question, “how do I survive and prosper in this environment?” Most cited the triple threat of customer belt-tightening, limited resources and tight capital markets.

And that’s the paradox. Great opportunities currently exist because of the dearth of reasonable capital. Case in point: Multi-family home prices in Providence, RI recently dropped 47% from a year ago. The contributing factor? Financing for these properties has essentially dried up for all but the most qualified buyers. With the most recent turmoil, this lack of available capital is spreading to additional sectors of the debt market.

Barring a suitcase of cash magically appearing, what can business leaders do to persevere and take advantage of today’s challenging business climate? The following list offers eight suggestions.

1. Service, service, service – Any company considering outside financing must demonstrate that management consistently addresses critical operational issues. Service quality is a great place to start.

Many companies let service quality erode over time, often imperceptibly. An outside perspective is critical. Ask others to shop your services (or better yet, hire an outside secret-shopper firm) and provide feedback. Don’t give your customers an easy excuse to no longer conduct business with you.

2. Streamline offerings – During good times, most companies tend to expand product and service offerings to build sales.
 
Attempting to be things to all people isn’t always the best strategy. Not only does added complexity sometimes hurt quality, but it can impact the bottom line through increased indirect overhead. Audit profit margins on individual products and services.

3. Review and rerun the numbers – For companies eyeing potential expansion, recalculate breakeven based off today’s economic conditions. Certain expenses have increased dramatically in recent years, but recessionary periods often bring lower costs. Retail space is dropping in certain markets, reducing breakeven for many companies.

4. Update/tweak your brand – Is your brand holding your company back?

Whole Foods is currently struggling with consumers’ “whole paycheck” perception even though their “365” house brand items are price-competitive against mass-market grocers’ offerings. Not a good place to be in these frugal times.

Make changes carefully. Markets can (and will) shift again. Just ask any company that added the letter “i” to their name back in 1999. It worked fine for Big Party’s transition to iParty, but where are the rest of “i-Companies” now?

5. Open communication channels – Sticking one’s head in the sand hoping the problems go away is not an effective strategy. Open a dialog with employees (and in some cases, customers) about the current environment. Most good ideas come from the trenches. Mine them.

6. Pump up the marketing – Most companies cut marketing budgets during bad times to cut costs. Not always the smartest move. Even if your company is running a lean marketing budget, dig for alternative, cost-effective marketing strategies to get the story out. Do you have a success story that contrasts with the doom and gloom permeating our lives? Grab some PR on it.

7. Ignore the negative chatter –The media has a tendency to dwell on negative stories. It’s what sells.

Take the beleaguered restaurant industry where the combination of rising food and energy costs and reduced consumers spending are battering many chains.

What has gained little attention is the increasing availability of affordable attractive restaurant space in some markets. The ability to find competent help, the bane of nearly every one of my clients, has eased a bit. Yet, these current “benefits” were reported as the worst problems three years ago when the restaurant industry was far healthier.

Is the glass is half full or half empty? You decide.

8. Network for money – If you have a profitable business model, the money will follow. It just might take a bit of legwork to find the alternative financing sources that are sitting on the sidelines waiting for the right opportunities.
 
Conclusion
When driving, we’re most out of control at the top of a hill looking down, versus at the bottom of the hill driving upward. We’re near the bottom of that hill. For those people willing to take calculated risks, now is the time to step on the gas and climb that mountain.

Reducing franchise recruiting costs is an increasingly difficult issue facing most franchise systems. In Part I, we reviewed what management can do to tweak internal operations to make their system more attractive to prospective franchisees. In Part II, we turn our attention to the traditional methods most franchise systems use to recruit franchisees such as the Internet, franchise brokers, trade shows and publication advertising.

While each method has its advantages, each possesses challenges for franchise systems with finite resources and limited brand recognition.

Franchise Opportunity Portals
Nowadays, most franchise leads come from the Internet either through franchise opportunity portals or search engine ad-words.

Some franchise executives swear by franchise opportunity portals. I’ve even heard other franchise consultants swear that this is the only form of advertising worth conducting.

Like any method, they have limitations. The shear volume of competing franchise systems on many sites can create a “cast of thousands” problem where it is easy to get lost (especially if management didn’t work on creating a unique enough brand as pointed out in Part I). In addition, using multiple sites can quickly consume a limited advertising budget.

Search Engine Ad Words/Pay Per Click
Buying search engine ad words can be effective, unless well capitalized competitors are bidding for the same words. In these situations, the cost of acquiring popular key words can prove prohibitive. Lead quality is often inferior to other methods. Finally, recent research also suggests that some consumers are growing weary and suspicious of sponsored links.

Franchise Brokers
Many franchise systems use brokers to sell franchises, some exclusively. Just like any profession, there are some great brokers with impeccable reputations with a long term focus on partnering to bring long term success to the system.

Ideally, most brokers want to work with systems that have a business development team that can effectively close the hot prospects they send the franchisor’s way. Most brokers prefer systems they can easily sell in high volume (which begs the question, if they are easy to sell, then why hire them in the first place?). Fewer will have an interest in a system that would max out with 100 units nationwide.

Some limitations present themselves. Some of the largest broker firms are constantly inundated by emerging franchise systems looking for representation. Even if they do agree to take you on, unless you’re one of their “top 20 favorites”, you’ll end up in the “extras” pile with little to show for it.

Compensation brings two additional challenges. Brokers do extract their pound of flesh, typically taking the greater of 40% of the franchise fee or $12,000 on up.  Because many brokers are paid for a consummated deal, the less scrupulous brokers are sometimes swayed more by the deal than worrying about building the best long-term franchise candidates for a particular system.

Find the best brokers with a proven track record for long-term success and you’ll do fine.

Franchise Opportunity Publications
Franchise opportunity magazines share the same challenge as the Internet, with hundreds of opportunities vying for attention. Flip through some of these publications and you’ll see many tired franchise advertisers pitch get-rich-quick schemes that look like rejects from “That 70’s Show”. Many promote “top franchise systems” lists. A more appropriate name should be “the top advertisers” list.

If you have something real to offer, use these publications sparingly.

Newspaper Advertising
Franchise opportunity advertising in reputable national newspapers and their associated portals are a step up from franchise opportunity publications; however, they present two challenges. First, in order to gain positive results, you must advertise repeatedly, which can quickly overload ad budgets for smaller systems. Second, emerging franchise systems looking to grow in particular regions will generate leads that are unusable.

Business Opportunity Trade Shows
Most “business opportunity” shows are a waste of time for legitimate franchise systems. The only franchise opportunity shows worth considering are the three national Franchise Expo shows put on by MFV Expositions.

The Franchise Expo shows are best for systems looking to generate leads from potential international buyers or local buyers in the host city. These shows are less effective at finding candidates throughout the U.S.
There are a host of problems with even the best shows. Advertising in these shows is both expensive and time consuming. They often yield limited results for emerging franchise systems with limited brand differentiation as there are literally hundreds of other systems vying for attendees’ attention. For smaller systems, the timing may be premature to start talking to representatives from other countries.

Between the cost, long hours and untimely prospects, exercise caution with trade shows.

Conclusion
Traditional methods can work. Unfortunately, they get costly and are best suited for larger franchise systems. While each method has its advantages and disadvantages, collectively, they pose challenges for franchise systems with limited budgets, regional brand recognition or specific area expansion goals.

Next month, we’ll wrap up this series with a review of cost-effective, alternative methods for recruiting franchisees.

Ask anyone about air travel, and you’ll likely gain an earful about a most recent debacle.

While I’m no “road warrior”, I do fly about once per month, so I am always searching for ways to make air travel a bit more palatable. I’ve mitigated some of these challenges by flying JetBlue whenever possible and wearing noise canceling headphones.

When I first starting shopping for headphones, I found it difficult to justify the $350 that the Bose Corporation was looking to vacate from my wallet for a fine set of headphones. So, I started with a $50 pair, which seemed to work out just fine.

Then, on one flight, I caught a video from David Pogue, the technology writer for the New York Times, comparing 5 noise canceling headphones against the Bose. The result? David found two competitors that compared very favorably to the Bose at less than half the price, one by Panasonic, the other by Audiotechnica.

Following his recommendation, I purchased the Audiotechnica headphones on Amazon ($106 as of this writing) and found them to be a significant improvement over my previous pair. They worked as advertised, significantly mitigating the dull roar of jet engines and passengers’ conversations.

Unless you’re in the million mile club and absolutely must own the best, the Audiotechnica’s Noise Canceling Headphones represent an excellent value for anyone looking to make their air travel experience a bit more tolerable.

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