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Monday, March 29, 2010

A Bad Business Model CANNOT be Fixed by Working Harder or Working Faster!




The first quarter of 2010 is almost over.  Are you feeling economic pain yet?  Financial stress is going to be unavoidable for many crafty retailers as the year unfolds.  I subscribe to countless craft retail store newsletters and have noticed a marked increase in "going out of business" announcements in recent months.  I am saddened, but not surprised.  We are facing a wicked economy, high unemployment, and grave uncertainty as to what the future holds for us.  In addition to all of THAT, the internet has changed the way  that business is done.  Commodity items that are a staple to the craft community can be purchased for a real savings from your online competitor.  More significant, I think, is the manner in which crafters are connecting.  Internet communities are springing up which threaten to take the place of the local shop, in terms of education, inspiration, and friendship.

What is the  Crafty Retailer to do?

If what you are doing is not working, it might be time to think about "Doing Different."

When I got in the retail craft  business, a completely inept shopkeeper could survive and a barely competent retailer could thrive.  The economy was booming and beading was experiencing a huge resurgence.  It was easy to import previously "hard to get" product for the DIYer and every woman in my town wanted to make a necklace for each outfit. Mommies everywhere wore bracelets proudly proclaiming the names of their progeny and Grandma was going to get a similar bracelet for Mother's Day.  Times were good.   The internet was in its infancy and not yet competing for my customer base. We were virtually the only game in town and life was grand.  Our class calendar consisted of whatever project I was working on at the time and customers were anxious to learn.  We rarely held promotional events---frankly, no retail businesses in my community did anything outside of the box.  I drove to the store, unlocked the door, and flipped over the "Open" sign.  There.  That was it.   I knew nothing about business---I fell into the "Barely Competent" category---and yet, the economy was strong enough to make up for my shortcomings and I was blissfully unaware of the danger ahead.


I sold the store and moved into B2B---selling Swarovski crystal beads to brick and mortar stores.  The business boomed.  Of course, I was still barely competent because I did not perceive a need for change.   I was great at marketing, I gave "good phone," and the business moved a heck of a lot of product.  Unfortunately, I neglected the balance sheet.  I didn't understand the accounting side of my world and I did not have the time (or the inclination) to learn.    My Quickbooks system was inaccurate because my record keeping was awful.  Garbage in, garbage out...you know the drill.   Nevertheless, our cash flow was impressive and it took me a dangerously long time to realize that I was in trouble.  I had an accountant who laughed and joked about my lousy bookkeeping, but never said much else about it, so I just went full steam ahead toward the edge of the cliff.

I eventually managed to amass unsecured debt that was more than what we paid for our house.  We have a really nice house.  On a lake.  With acreage.  Yup, I had accumulated a helluva lot of debt.  WTF?  Shock!  Dismay!  How did THAT happen?  I really, truly didn't get it. [OMG...how embarrassing!  Oh well..this journey is all about growth, right?  What is a little humiliation for the greater public good?]    Yup, I acted stupidly, but I had the power to change.  I got "un-stupid" and I became a business person.

Initially, I tried to deal with the debt by working even harder.  I was already putting in about 50 hours a week, so I set the alarm even earlier, stayed up even later.  I was sick to my stomach all of the time.   Anxiety attacks became a constant in my life.  It was a very tough time.   Since only a tiny portion of the debt was personally guaranteed, every single person who is important to me urged me to go into bankruptcy...you know...to simply walk away from it all.
I couldn't do it.  I wouldn't do it---it is not my style.   That decision became my pivot point and I have never looked back.  I realized that working harder and working faster IN THE SAME MANNER wasn't going to save a sinking ship from going down.  The only thing that could possibly change the course of my business was to change the way I did business.  Completely.  It was very, very difficult and incredibly scary.

 I started reading business books.  I hooked up with a business mentor.  I vowed to make decisions with my head instead of my heart.  My mentor convinced me that dropping a portion of the line we carried was critical to our turnaround.  I was terrified---the item she insisted we drop is considered an industry staple and had been responsible for all of the wonderful cash flow.  Unfortunately, it was also the product that was bringing us to ruin.   The profit margin was abysmal because my competitors were using it as a loss leader.  Our product line was not expansive enough to make up for selling crystal at cost.  Crystal WAS our  product line. What to do?  What to do?

Although I initially resisted dropping  the item from the line because I feared losing a big portion of our customer base, I ultimately followed the advice of my mentor.   I was clued in enough by that point to see the folly of doing otherwise.   The reality is that we did lose a big portion of our customer base and it scared the heck out of me.   However, I soon became a believer----we became profitable almost immediately.  It was wonderful!

Of course, when we stopped selling the low margin basics, we had to refine our niche.  I finally understood that putting lots of  cash into low margin inventory is a bad business model, so we focused instead on the luxury portion of the line.  We added some incredible fibers to complement the crystal.  We battened down the hatches and were merciless in cutting every single expense we could cut.    We laid off staff members who were under performing----I will never, ever pay for a mediocre employee again.  We thought of innovative ways to unload inventory we were heavy on.  We marketed like crazy with a budget of zero.  We called customers we hadn't heard from in a while, sending out free samples of the new product to entice them to give us a try again.   We threw every spare penny at the debt.   I became a believer in the importance of THE PROCESS.

Ready for the exciting part?  The plan worked.  The debt has diminished  to a totally manageable level (think nice car instead of nice house!!!) and I can breathe again.  I am still working hard, but now I am working smart.  I have time to blog, I have time to create.  Life is good even if the economy is not.  I have been humbled but I have been blessed.   I am empowered.  Can you hear me roaring?  Oh....and I know how to read a balance sheet.

YOU CAN DO IT, TOO!   Your challenge might be much different then my own, but the point is this....if what you are doing is no longer working for you, it might be time for you to "do different."  Once your reach a point where the pain of not changing is greater than the pain of change, change will come, one way or the other!



So...tell me...what are you going to 'DO DIFFERENT' in the coming months?   Your survival may depend upon it and inquiring minds want to know!

4 comments:

  1. Hi Pat,

    I found myself in a very similar situation. By last fall I found that I had amassed a large debt (half of my house). After a lot of listening to my accountant and husband I decided to do the unthinkable something I always said I would never do. I refinanced my house to secure the debt. I, too could not just walk away from my responsiblity (bankrupcy). I wasn't brought up that way.

    By doing this I was able to focus my energy on making my business more efficent and lean rather than worring constantly.

    It hasn't been an easy road since last fall and it seems like I am getting out of the fog just within the last couple of weeks. It feels good and my focus is great, something I was lacking for awhile. I have a new view on where I want to go and I am always looking at ideas as to whether they are good for the business or are just fun. That is an important question for me, because I love to try everything. This bump in the road (pothole) has taught me to become a smarter and wiser businesswoman.

    Thank you Pat for sharing, it is comforting.

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  2. I'd be interested in knowing how you found a business advisor? I'm in the retail textile trade and it is a very specific kind of marketplace (I have done a lot of educating myself about business principles in general already). How do I find someone truly qualified to help me?

    Linda

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  3. You go, girl! Business savvy CAN be learned...we just need to FOCUS, FOCUS, FOCUS! I can never take my eye off the ball because I am too easily distracted. One thing I have learned....NO CREDIT CARDS! Aren't you proud of yourself? I know I am!

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  4. Linda:
    Finding a good business advisor was almost harder than getting out of debt. Seriously. I wasted several thousand dollars with various "experts" before I hit the jackpot. My advisor is someone that I knew socially. She had retired and was willing to help me...for free! I met with her for weekly lunch dates where we mapped out my strategy. She also took phone calls from me as needed. The key is that I was willing to be TOTALLY HONEST about my shortcomings----not easy to do because it was so darn embarrassing to admit to having been so inept. My challenges were almost all related to a failure to establish processes, so it was not really necessary for her to have any understanding of my business. She was ruthless, but kind. She hardly ever pointed and laughed at my mistakes! :>)

    You have piqued my curiosity....what sort of guidance are you looking for? Where is your weak spot?

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