EXCERPTS FROM WARREN BUFFET’S ANNUAL LETTER

Warren Buffet“Investment is most intelligent when it is most businesslike.” –Benjamin Graham, The Intelligent Investor

This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders. Five times as many Iowa and Nebraska banks failed in that bubble’s aftermath as in our recent Great Recession.

In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.

In 1993, I made another small investment. Larry Silverstein, Salomon’s landlord when I was the company’s CEO, told me about a New York retail property adjacent to New York University that the Resolution Trust Corp. was selling. Again, a bubble had popped — this one involving commercial real estate — and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.

Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been under-managed by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant — who occupied around 20% of the project’s space — was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere.

Fundamentals of Investing:

  • You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
  • Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
  • If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
  • With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
  • Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?

Summary

When Charlie Munger and I buy stocks — which we think of as small portions of businesses — our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings — which is usually the case — we simply move on to other prospects. In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.

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WHAT THE RICH DO . . .

Are rich people just good with money or is there something a little deeper contributing to their success? Most people would agree that certain lifestyle choices and daily habits are as valuable in the quest for wealth as a sound understanding of finances.

A recent study indicated that a whopping 21 percent of Americans see winning the lottery as an important wealth-building strategy. A similar study of Canadians showed that about 12 percent were counting on winning a big lottery so they could have enough retirement income to retire in style.

There are many things you should never do if financial security is one of your main goals.  So what do the rich do every day that the poor don’t do?  Tom Corley, RichHabitsInstitute.com, outlines a few of the differences between the habits of the rich and the poor.

  1. 70% of wealthy eat less than 300 junk food calories per day. 97% of poor people eat more than 300 junk food calories per day.
  2. 23% of wealthy gamble versus 52% of poor people.
  3. 80% of wealthy are focused on accomplishing a single goal. Only 12% of the poor do this.
  4. 76% of wealthy exercise aerobically four days a week. Only 23% of the poor exercise.
  5. 63% of wealthy listen to audio books during commute to work versus 5% of poor people.
  6. 81% of wealthy maintain a to-do list versus 19% of poor.
  7. 63% of wealthy parents make their children read two or more non-fiction books a month versus 3% of poor.
  8. 70% of wealthy parents make their children volunteer 10 hours or more a month versus 3% of poor
  9. 80% of wealthy make Happy Birthday calls versus 11% of poor.
  10. 67% of wealthy write down their goals versus 17% of poor.
  11. 88% of wealthy read 30 minutes or more each day for education or career reasons versus 2% of poor.
  12. 6% of wealthy say what’s on their mind versus 69% of poor. (Are you a Victim or Victor?)13.
  13. 79% of wealthy network five hours or more each month versus 16% of poor.
  14. 67% of wealthy watch one hour or less of TV every day versus 23% of poor.
  15. 6% of wealthy watch reality TV versus 78% of poor.
  16. 44% of wealthy wake up three hours before work starts versus 3% of poor.
  17. 74% of wealthy teach good daily success habits to their children versus 1% of poor.
  18. 84% of wealthy believe good habits create opportunity versus 4% of poor.
  19. 76% of wealthy believe bad habits create detrimental luck versus 9% of poor.
  20. 86% of wealthy believe in lifelong educational self-improvement versus 5% of poor.
  21. 86% of wealthy love to read vs. 26% of poor.

SUMMARY

  1. EAT RIGHT
  2. KEEP YOUR CARDS CLOSE TO YOUR CHEST
  3. SET GOALS
  4. KEEP FIT
  5. BE ORGANISED
  6. READ
  7. RING GRANDMA
  8. DON’T WATCH BIG BROTHER
  9. DON’T PUNT
  10. RUN YOUR OWN RACE
  11. AND ONE LAST THOUGHT . . .

There is a firm belief that a lot of poor people are simply too busy or disadvantaged one way or another to change their situation. Not everyone has the luxury of being able to pick themselves up. This is best explained from Dave Ramsey’s blog “Poornomore”:  “I was born poor, raised in poverty and watched my parents die that way. I worked hard, eliminated my bad habits, started doing what the wealthy did. Mostly, I stopped blaming others for my lack of wealth. Now I am wealthy, and help others who want to be helped.”

GET EMPLOYEES ACCOUNTABLE

One of the most common complaints I hear from business leaders is about a “lack of accountability” in their company. They claim to have the “Vision” identified – they know where they are going (even if their people don’t). They claim to have a Strategic Plan (more likely a set of projections and goals – but unfortunately goal setting is not strategy). And they think they have the right people on their team (sort of). But what really frustrates the business leader is the struggle to get their employees to do what needs to get done – and do it faster!

So I’ll give you the benefit of the doubt. Let’s say you do have a well-articulated vision of what your company can become. You have crafted a winning strategy to get there, and you have made your plan visible to all your staff using a One Page Strategic Plan. You have followed a rigorous recruitment process and have hired a team full of high performing “A” Players.  So, now what?

Business Execution is still the #1 Challenge

Even with all these elements in place, execution is still the #1 challenge for business leaders. A good starting point to drive execution and accountability is to clearly document the performance standards for each role:

1. The key duties and outcomes that each role and employee is accountable for

2. The Key Performance Indicator (KPI) number(s) that will be used to measure successful performance in the role

3. Every role should have at least one tangible measure of successful performance – that can be tracked every week (or at least monthly).

YOU drive Accountability

Assuming you have recruited the right person for each role who; (a) “fits” with your company Core Values; and (b) has the necessary competencies to succeed in the role – the onus is on YOU the manager to provide the necessary training and support – AND you must hold the person accountable for meeting the required performance standards.

This is where many managers struggle. Accountability requires the discipline of giving your people regular feedback on their performance. We recommend this feedback is given every week.

What are the consequences?

Every week, when your employee completes their tasks, moves their projects forward, and meets their KPI targets – the consequence should be that they receive genuine praise from their manager. Good performance must be recognized and reinforced.

Poor performance must also be confronted immediately. If there are no consequences, the manager is implying that poor performance and lack of accountability is acceptable. The consequence should be that both the manager and the employee discuss the poor performance, identify the cause, and agree the specific actions that both parties will take to improve the results before the next weekly meeting.

Increase Employee Accountability

1-    Time and Attendance Software  –  Once an employee clocks-in, the information is recorded and can then be uploaded onto the time and attendance software allowing for accurate tracking of employee attendance. This software can also be incorporated into the billing software, allowing the track of hours by client or project.

2-    SMART Goals  –  Empower your employees to set their own SMART Goals  SMART goals are specific, measurable, achievable, results-oriented and time-bound. Note that all individual SMART Goals drive the Strategic Plan.

3-    Team Incentive Programs: Team incentive programs will allow employees to reach their highest accountability and potential. Employees will work together towards completing common goals, and will be compensated for going above and beyond the goals set out for them.

4-    Prioritization: Employees often struggle to balance tasks and goals and eventually become overwhelmed and unable to complete their tasks on time. It is important to help your employees prioritize their responsibilities in relation to your company’s overall goals. Helping to prioritize will allow your employees to feel more organized and competent in the tasks they are assigned.

5-    Monitor Progress: Monitoring your employees’ progress will help motivate them to be more productive and accountable. It is only natural that when we know someone is watching our progress that we will try to perform to our best abilities. Along with monitoring employee progress, it is equally important to share progress reports with them so they may learn what areas need more attention and what areas they are excelling in.

SUCCESSFUL BUSINESSES DO THIS

Success.2What are the reasons that some companies (and people) reach their goals, while others never seem to fulfill their potential.

Playing to your companies’ natural strengths and talents is one of the major keys to success.  In other words, doing those things that comes naturally and easy – things that are enjoyable and fulfilling.  In addition, successful companies achieve their goals not only because of who they are, but more often because of “what they do.”  Here is our take on what successful companies (and people) really do:

Be Specific

When you set a goal, make it obvious exactly what you want to achieve and by when.  Just expressing an outcome (e.g. sell 100 widgets this quarter) is not as powerful as expressing your goal as a specific, tangible project that will achieve the desired outcome when successfully implemented.  Your goal should not be that easy ‘reachable’ goal; rather it should be that goal that you have never been able to achieve even when it may seem a little uncomfortable.  So how much ‘stretching’ outside your comfort zone are you willing to do, in order to achieve that goal?  Remember, change never happens until your drive yourself out of your comfort zone.

Test

Goals and projects should be expressed in a way that it is obvious what the finish line is that you intend to hit by the due date.  For long term projects – what are the desired milestones that you must reach by the end of this quarter?  Is it clear to everyone at which point they can pop the champagne cork to celebrate achieving a specific milestone?

Optimism with Realism

Just when you set yourself up to succeed, ‘stuff’ happens and fires need fighting.  By setting SMART (Specific, Measureable, Attainable, Realistic, Timely) goals and due dates that take into account that you will also may need to deal with any fires (or Chaos) that normally comes along in the process – yet can still achieve your milestones.  Don’t underestimate the difficulties and challenges you will face along the way, rather allow for these as a business variable in your plan and for the opportunity to identify and fix a weak link. Don’t forget to DWYSYWD (Do What You Say You Will Do).

Make Time

“Business as usual” must keep happening in the meantime. You still need to create opportunities, make sales, deliver products and services, and collect money – the stuff you do every day to pay the bills.  But you still need to manage your own time to work on the strategic plan– we suggest a half-day every week. Then, you must take specific meaningful actions on a regular basis that will move your strategic priorities forward.

Specific

What number one action can you “complete” by the end of the week that is going to move your progress forward another step?  Be specific.  It needs to be a binary (yes/no) action that is within your control that you can check off and be held accountable for saying, “Yes, I completed that action this week.”  Also, build an accountability system designed for all key persons involved in execution of the strategic plan, with a weekly action chart to track the activities and accomplishment of the key milestones.

Measure Progress

You can only measure, by tracking exactly how far you have come and know exactly how far you have left to go.  Measure your progress every week.  Are you on schedule?  Or do you need help?  Are you behind schedule and in danger of missing your due date?  Be honest and confront the brutal facts.  Don’t wait until the near the due date to signal that you are running behind.

Man Up!  (or the female equivalent)

Show that you have whatever is necessary to overcome the obstacles and get it done.  The more you exercise your courage muscle, the stronger it becomes.  There are things we have to do that we don’t particularly enjoy doing in order to achieve success – but everyone has to “eat your veggies” before you get to have any dessert.

Celebrate

Pop the cork when project goals are reached.  The bigger the achievement the bigger the celebration.  Hard work, commitment and vision needs to be recognized and praised on a regular basis. So, put away “the whip” and enjoy those moments of success!

ARE YOU A BAD BOSS?

NormanLeadership traditionally begins with Position. Someone joins the Army, and he or she becomes a recruit, working to earn the rank of private. A person gets a job, and along with it usually comes a title or job description. It is the bottom floor and the foundation upon which leadership must be built. Now the Upside and Downside of Leadership and Position (or Rights)

THE UPSIDE:

1. They Have Leadership Potential

Most of the time when people enter a leadership position, they do so because it was granted or appointed by some other person in authority. It usually means that the person in authority believes that the new leader has some degree of potential for leading.

2. Authority Is Recognized

When an individual receives a position and title, some level of authority or power usually comes with them. Often in the beginning that power is very limited, because most leaders need to prove themselves. As the Infantryman’s Journal (1954) says, “No man is a leader until his appointment is ratified in the minds and the hearts of his men.”

3. An Invitation to Grow as a Leader

There should always be a relationship between receiving a leadership position and fulfilling the requirements demanded by it. One of the main requirements is personal growth, we all have a responsibility to learn and grow so that we could make the most of it.

4. Shape and Define Their Leadership

The greatest upside potential for people invited to take a leadership position is that it affords them the opportunity to decide what kind of leader they want to be.  However, the position they receive may be defined, but they are not.

THE DOWNSIDE:

1. Having a Leadership Position Is Often Misleading

The easiest way to define leadership is by position. Once you have a position or title, people will identify you with it. However, positions and titles are very misleading. A position always promises more than it can deliver.

2. Devaluation of  People

People who rely on position for their leadership almost always place a very high value on holding onto their position—often above everything else they do. Their position is more important to them than the work they do, the value they add to their subordinates, or their contribution to the organization. As a result, departments, teams, or organizations that have positional leaders suffer terrible morale.

3. Feed on Politics

When leaders value position over the ability to influence others, the environment of the organization usually becomes very political. Positional leaders focus on control instead of contribution. They do what they can to get the largest staff and the biggest budget they can—not for the sake of the organization’s mission, but for the sake of expanding and defending their turf.

4. Placing Rights Over Responsibilities

Poet T.S. Eliot asserted, “Half of the harm that is done in this world is due to people who want to feel important…they do not mean to do harm…they are absorbed in the endless struggle to think well of themselves.” That’s what positional leaders do: they do things to make themselves look and feel important. Inevitably, positional leaders who rely on their rights develop a sense of entitlement.

5. Often Lonely

Positional leaders can become lonely if they misunderstand the functions and purpose of leadership. Good leadership is about walking beside people and helping them to climb up the hill with you. If you’re atop the hill alone, you get lonely.

6. Branded and Stranded

Whenever people use their position to lead others for a long time and fail to develop genuine influence, they become branded as positional leaders, and they rarely get further opportunities for advancement in that organization. They usually move laterally, but rarely move up.

7. High Turnover

When people rely on their positions for leadership, the result is almost always high turnover. Remember that . . . . People Quit People, Not Companies.

8. People’s Least, Not Their Best

People who rely on their positions and titles are the weakest of all leaders. They give their least. They expect their position to do the hard work for them in leadership. As a result, their people also give their least.

From:  The Five Levels of Leadership by John Maxwell

WHY 90% OF ALL LEADERS FAIL

General George Armstrong Custer

General George Armstrong Custer

Economic events and major shifts in the competitive marketplace caused many companies (including whole industries) to completely rethink their business models and strategic plans. To their peril, many businesses let their strategic planning efforts lapse into a meaningless exercise in goal setting, or worse yet budgeting, only to discover that the underlying assumptions they were operating their business are no longer valid or are obsolete.

Today, it is crucial to use a disciplined process to assess how economic and industry dynamics are likely to play out, and then create an effective strategic plan to confront these realities.  It is now important to make strategic planning an ongoing quarterly process, not an annual event.

Business leaders routinely acknowledge that they need to make changes to their company’s strategy, however some become incredibly frustrated when they share their vision for the future with their employees, only to find that the implementation breaks down or the plan never gets any traction.   Remember just one thing . . . Execution is the primary job of the Business Leader.

Suppose that a company has gone through a Strategic Planning Process.  They have involved all the key managers and team members in the process and obtained their complete commitment.  Then, they carefully craft an effective strategic plan to properly position the business for the future success in their industry.   So what happens next, or better yet what doesn’t happen next?  Often, the plan simply fades away when managers go back to being “busy” in the business with routine day-to-day demands.

Harvard Business School professor Robert Kaplan, say, “90% of strategies fail due to poor execution”.  But how do successful companies align their daily activities to achieve their long term strategic priorities?  What is interesting is that . . . .

– Only 27% of employees have access to the company’s strategic plan.

– Only 5% of employees fully understand and embrace the company strategy.

– And, 92% of organizations do not measure Key Performance Indicators (KPI’s).

Don’t focus here, Business Leaders still need to oversee the day-to-day operations, make certain products/services are sold and delivered, satisfy customer’s needs and fighting fires.  But that is simply known as “just doing the job”.  Effective leadership is the ability to simultaneously devote sufficient time and attention to implementing the key action priorities identified in the strategic plan.

Just Three Things:

Business leaders need the ability to clearly articulate the top 3 things strategies in the strategic plan and the ‘rocks’ that need to be work on.  Therefore, everyone in the company should know:

1-  What are the top 3 strategic moves the company needs to make over the next 3-5 years in order to properly position the company for the future success in the industry?

2- What are the top 3 actions the company must execute in the current quarter?

3- What are the top 3 actions each key person must personally implement in the next quarter?

The priority here is that business leaders need to clearly communicate strategic action priorities and then align key persons to the achievement of this plan.  This action is considered a major accomplishment and a critical first step for execution of the plan.  The next step is for individual managers to ensure these actions are carried out on a quarter, weekly and daily basis, by consistent management of KPI’s.  Business Execution Professionals, reveal that one or more additional success habits (see below) drive the execution of the strategic plan.

Weekly Action Priorities

Strategic leaders ask their direct reports every week, “What is the #1 thing you are going to do this week that will contribute toward your strategic action priorities for the quarter?”  The intention is for staff to publicly articulate, commit and reaffirm their #1 strategic action priority on a regular basis.

Business Execution Software

Simple software solutions are available that communicates strategic plans that team members can understand.  The software breaks down strategic plans down into quarterly and weekly action priorities and individual staff accountability.  Some software drive the execution via email reminders, SMS texts and outlook synchronization.  This empowers management to have better control and drive the focus and effectiveness of the teams.

External Accountability

External parties, like Coaches and Mentors, are better at challenging the leader’s assumptions, holding the key members accountable, facilitating the accountability of KPI’s, providing alternative options and giving an impartial 10,000 foot perspective that cannot be obtained from colleagues and subordinates. By using external sources, leaders get a vital perspective on the objectives and implications of the strategic decisions.

 

 

THE WOW FACTOR AND CRITICAL NON-ESSENTIALS IN YOUR BUSINESS

happy dentistThe WOW Factor and Critical Non-Essential Factors are about systematizing the ‘Little Things’ in your business and deliver an incredible customer experience that will make your customers Raving Fans! Imagine your customers describing your business in glowing terms to their friends and help you grow your customer base. This service concept changes your perception of the customer experience.  For example, Dr. Paddi Lund is known around the world as the crazy Australian dentist who:

– Ripped up his front reception desk with a chainsaw

– Fired all of his C and D patients

– Built his lobby around a kitchen so you smell fresh baking instead of dental smells

Critical Non-Essentials

In Dr. Lund’s dental practice the little things make all the difference.   During the ramp-up of his new dental practice, he did a variety of the proven and tried methods. After years of struggling with the usual methods of what was expected in building a dental practice, he found is that most people had no idea what the standard of quality of care really is. Instead, he found that the finer aspects of dentistry and the patient atmosphere were the items that truly impacted his patients. Why? Well that’s because:

  • All patients are served tea impeccably in fine china.
  • Each patient’s names and their photographs are actually on the door of their own personal lounge.
  • Each patient is greeted by name by their own Care Nurse when they ring the doorbell.
  • Each patient is served ‘Dental Buns’ (freshly baked buns) when served with their tea.
  • If the patient doesn’t want tea, he also has a cappuccino machine.
  • The lobby is full of fresh flowers.
  • There is also an array of dried fruits and nuts.

Do Your Customers Perceive Your Quality?

When you begin to understand what customers remember about your business, you will realize that it is rarely associated with the core part of what you do. The WOW Factors and Critical Non-Essentials are the little things in business that are so important in determining how clients or patients judge your product or service even though they have very little to do with the product or service itself.

Creating the WOW

Marketing the WOW Factor is all about doing something that makes others smack their foreheads and say, “WOW why didn’t I think of that?!”  It’s about taking something ordinary in one place and re-purposing it another place and making it extra-ordinary. Home staging consultants do this all the time when they are asked for their expertise in marketing a home that has been difficult to sell.  So for example, if you move an old piece of furniture into a different room and restage the room, you give a new environment to the room and the furniture.

When you implement existing marketing tactics in unexpected areas, you offer a new perspective of your products that could potentially pay off.  Marketing the WOW is a new twist that could have your customers saying WOW long after you’ve cashed their checks

To Do List:

Take a look at what your competition is doing? Yes, you’ve heard this before and yes you might say you’ve done it, but did you research it as far as you needed to go? This means talking to customers, watching the competition, do research about others in your respective field, and discover why some businesses are seemingly on the ‘cutting edge’.

1- Make it a point to offer one product or service that can add real bottom-line dollars to your business.  A uniform company out of Arkansas added deodorizers to their already-full trucks realizing that the deodorizers were an opportunity to brand themselves differently from their competitors. Other uniform businesses have followed suit with profitable results.

2- Throw away pre-conceived ideas such as “customers don’t want it that way.” How do you know? Have you asked the customers you currently have or have you asked those who don’t purchase from you?

3- Group some of the products you offer by solution, not by type or vice versa. Catalogs like Victoria’s Secret often will run the same product in several places. This is meant to increase the odds of purchasing, since the viewer now is in another state of mind. In addition, they might not see the item when it’s on Claudia Schiffer, but notice it on another model in another color.

4- Look across industry lines to see what has brought success to others. Schwan’s food company sells high-quality groceries, not vacuums or encyclopedias, door-to-door. Again, implementing a tactic that you wouldn’t normally see in your industry can yield surprisingly good results.

Conclusion

Start thinking outside the box and think about the WOW Factors and Critical Non-Essentials that you can create with minimal expense, but with maximum impact.  What three things can you start doing this week?

ARE YOU READY FOR YOUR TSUNAMI?

TsunamiOn March 11, 2011 an earthquake and subsequent tsunami destroyed Tokyo Electric Power Co.’s, Fukushima Dai-ichi nuclear power plant and crucial cooling systems, causing three reactor cores to melt and causing a release of radioactive material.

A new report says the tsunami-ravaged nuclear plant was so unprepared for the disaster that workers had to bring protective gear and an emergency manual from distant buildings and borrow equipment from a contractor.  The report shows that workers struggled with unfamiliar equipment and fear of radiation exposure.

The report revealed insufficient preparations at the nuclear plant that had not been previously acknowledged. It said plant workers had a disaster drill just a week before the tsunami and “everyone was familiar with emergency exits,” but it apparently did not help them cope with the crisis.

A fire engine at the plant couldn’t reach the unit because the tsunami left a huge tank blocking the driveway. Workers destroyed a power-operated gate to bring in the engine that arrived at the unit hours later. It was early morning when they finally started pumping water into the reactor, but the core had already melted by then.

Other workers were tasked with releasing pressure from Unit 1’s containment vessel to avoid an explosion. But first they had to get the manual, which was not in the control room but in a separate office building at the plant.  To activate an air-operated part of the vent, workers had to borrow a compressor from a contractor. And the workers, who had to get close to the unit for the venting, had to get protective gear from the offsite crisis management center, five kilometers away from the plant.

The report also said workers borrowed batteries and cables from a subcontractor on the compound to set up a backup system to gauge water levels and other key readings.

What are Systems?

Systems are a structured way of doing something that can be replicated time and time again, has proven to be efficient and maximizes production.  But as evidenced by the Japanese earthquake and tsunami, ALL systems need to be consistently tested and monitored. They are not an end in themselves; they are a means. So, can you see what happens on a massive scale with regards to a systems failure in a nuclear power plant?

When Systems Fail!

Most well-intentioned systems when put in a stressful situation fail.  The frustration for business owners is when one systems failure contributes to another systems failure– just like the Japanese nuclear plans.

For example . . . A failure at the initial production level happens when the installation instructions were not followed and where quality control and oversight was not accomplished. What this means is a massive failure at the management level.  At the management level is where the oversight should have occurred, and a high level of accountability should have been instilled in the technician charged with the installation.

The ultimate impact to any systems failure is a customer service failure, a typical frustration for business owners. If the company cannot get the customer experience right, what level of confidence should the customers have in the company and their customer experience?

Customer Care

What happens when systems do not work? Worse yet, what if NO ONE CARED?  What if someone made a mistake, but no one cared enough about the problem to fix it? So, when did apathy become the norm in your business? How could this happen to you?

Let’s face it; mistakes can and will happen. We are all human, and it’s perfectly natural to make mistakes. But we have to do something about our mistakes. We need to take ownership of our actions and take responsibility for our work. Accountability breeds competence. The root of competence is care. If you’re responsive, you express that care.

Reject Systems Failures!

– Do not allow systems failures to happen in your business.

– If systems failures occur, take it to the highest level and fix the system permanently.

– Systems failures are a way to learn more about your systems, employees and clients.

– Do not allow systems failures to permeate your culture as being ‘acceptable’.

– Systems are vehicles to express how much you care about your customers and their customer service experience.

– Systems are never a be-all end-all.

– If you see something wrong with a system in your business, change the system.

– Systems exist to serve people, not the other way around.

– Systems are a means of growth.

RULES TO LIVE BY . . .

Coaching sportsI remember my twin sons just learning to play the game of baseball when they were just eight years old.  The laughter of the parents when a child who finally hit the baseball and ran down the wrong base line– directly to third base instead of first base.

Then, there was the experience of my twins learning the fine game of soccer.  At this age, there was no real offense or for that matter defense, rather it was an entire swarm of small bodies chasing the ball, with the only player staying in their respective position being the goalie.

Finally, the basketball game when a child got so excited that he got the ball and forgot to dribble on the way to the basket, but he was so proud that he made the basket.

I have coached a number of my children’s sports teams, and learned the importance of learning the simple rules of the game. Initially, coaching involved managing the level of chaos and confusion as children learned the rules of the game.  But over time, it was profound that the once-confusing rules become second nature, and I finally watched children play together as a team without a second thought about the rules.

MY RULES TO LIVE BY:

If you are playing a sport without knowing the rules leads to chaos, confusion, and even injury to the players and also the Coach. Likewise, in your life and in your business, without clearly defined rules, the result is disorder, dissatisfaction, and even harm. Here are some simple rules that can help you navigate life and your business. I hope they provide you with thoughts to ponder and reevaluate the rules in your life and your business.

RULE #1: Family is always first

Many leaders give lip service to putting family first, but they don’t actually practice this concept by giving their spouse or kids top priority. What does it mean to put family first? It involves redefining success. Do not measure success in terms of career accomplishments, money, cars, or a big house.  Rather, success is when those closest to you truly respect you and refer to you as a good example. Practically speaking, make sure to schedule family time before setting your work time. It is far more important to have quality family time than to have work demands that result in the continuous 60 hours per week.

RULE #2: Follow the Golden Rule

We continually ask three questions of our leaders:

1) Do they care for me?

2) Can they help me?

3) Can I trust them?

As a leader, ask these same questions of yourself: Am I caring? Am I helping? Am I reliable?  Set the example to those under you to begin treating others the way you would like to treated.

RULE #3 Take care of yourself

Doing things for just yourself is not a selfish act; it’s a critical and important act. Brian Dyson, CEO of Coca Cola said, “Imagine life as a game in which you are juggling some five balls in the air. You name them- work, family, health, friends and spirit and you’re keeping all of these in the air. You will soon understand that work is a rubber ball. If you drop it, it will bounce back. But the other four balls- family, health, friends and spirit are made of glass. If you drop one of these, they will be irrevocably scuffed, marked, nicked, damaged or even shattered. They will never be the same. You must understand that and strive for balance in your life.”

A very dear friend and mentor of mine learned the importance of this rule the hard way, through the trauma of a heart attack and a quadruple bypass. If you are not managing the necessary time to rest, replenish, exercise, and monitor your mental facilities, then eventually you and your body will breakdown. When happens then is you have no value to anyone around you.

RULE #4 Choose a positive attitude

Happiness cannot be won, bought, or brought to you by another person. Rather, it results from a conscious choice to be grateful and to make the best of life’s challenges. Whatever happens to us, we always have control of one thing: our attitude. Yes, attitudes are contagious and it is your conscious decision to chose your attitude.

RULE #5 Have a personal growth plan

The key to personal growth is to have a beginner’s mindset– remembering when you first started your business. Beginners admit they do not know everything and proceed accordingly. As a general rule beginners admit that they are open, humble, willing to learn and grow, willing to make the necessary changes, and are noticeably lacking in the rigidity that accompanies experience, success and ego.

RULE #6 Give more than you receive

Looking back over your career, make a list of those that served as your mentor.  Everyone at many points in their career reach out and ask those around them for help, but not everyone has the capacity or willingness to give and mentor others. When you stop trying to ‘use’ people around you, only then can you learn ways to add real value to your personal relationship with others and only then can your influence truly soar.

ADVANTAGES OF A DEBT-FREE BUSINESS

?????????????????Venture capital, business loans, and lines of credit: all this and more exists for businesses that need to grow, to purchase equipment and inventory, or expand their facilities. Much of the initial growth for small businesses is funded on borrowed money. But this leverage comes at a very high cost.

In the last few years, businesses have begun to move away from acquiring additional business debt either by choice or by circumstance. The tightening of credit, loss of access to capital, and the general tightening among potential investors, bankers and lenders have made the prospect of boot-strapping a business a much more attractive option. Sometimes it is the only viable option.

But is running and growing a debt-free business practical? What are the downsides? And more importantly, what are the advantages of building a business without borrowed money?

Starting From Scratch Or Changing Course

Financing a new business without borrowed money is challenging and it takes time. This is probably the first reality an entrepreneur has to come to grips with if you choose this route: you have to start relatively small and be prepared to take a longer period of time to reach your goals.

Another downside is the potential for seeing competitors gain market-share and grow revenues much more quickly as they take on borrowed capital to fund their capital acquisitions, marketing and production projects.  But be patient, the tables will turn down the road, and in the meantime avoid discouragement and second thoughts about maintaining a debt-free strategy.

Traditionally, businesses that use debt from borrowed capital have a completely different set of challenges when making the move to become debt-free.  For one thing, the business owner must be intimately familiar with the company’s finances. You will need to know exactly where the money goes and the business’ real profitability at all times in the business operations. The business must operate using an operations budget, and another strategic tool is a comprehensive cash flow management plan. Diligence is required as well as a total rethinking of “how we do business” if the company is going to decrease expenditures, increase cash flow and pay off the existing debt.

While business owners may find this to be an intimidating prospect, evidence proves that during economic downturns the less debt a business holds, the greater the odds of the business surviving. And when the economy is looking much brighter, the debt-free business is in the strongest position to leverage their advantages and seize many opportunities.

It’s Possible

A few years ago, an investor noticed that among a relatively random selection of stocks from high-debt companies the average year-to-date return was -6.9%. An equally random selection of debt-free companies tallied up an average return of +18%. While this was not a scientific study by any means, it does serve to illustrate the fact that companies without debt can be more profitable than those carrying a significant debt load.

One company operated from a no-debt perspective since going into business over ten years ago.  More recently, he began to diligently and consistently reinvest a portion of his monthly earnings into a “cash reserve” fund with the goal of having at least a year’s worth of operating capital liquid and available. This fund served him well during the recent economic downturn when he needed to invest in added staff and equipment in order to take advantage of new opportunities that he would not have been capable of taking on at his previous size.

His competitors, on the other hand, were in the middle of downsizing and cost-cutting while still servicing the debt they had incurred during the previous “boom” years. As their overall profitability declined so did their flexibility – they were not in a position to compete for the opportunities this business owner was able to secure for his own company.

Another tactic that has served him well is to maintain a “cash-only” policy with his customers. While he does require one-half payment on acceptance of a project and the second half upon completion, this arrangement allows him to operate in a positive cash flow throughout the duration of the projects. Furthermore, he can offer his clients a slightly lower fee since he does not have to finance receivables for 30 or 45 days like his competitors do.

The upside of all this is that business owners who are operating without business debt have a greater degree of financial freedom and flexibility, and a much lower degree of risk in the face of economic downturns and declines in business.

Sacrificing the Fast Track for Slow Growth

For the majority of businesses that opt for a debt-free model, business growth tends to be slow. Jay Steinfeld, CEO of Blinds.com, made it a point to get – and stay – debt-free. “It’s been our goal to grow inch by inch, never spending beyond our means,” Steinfeld said. “We’ve done it all debt-free!”

While it is true that borrowing capital enables a business to take actions or grow at a pace that would not be sustainable otherwise, it also causes that business to be less flexible and incur higher risk. The more the business borrows, the more it spends towards repayment of debt and interest– cash flow is directly impacted as well as net profit. It is a sobering reality that many companies have failed from the lack of cash and cash flow more than anything else.

Five Points to Consider

Becoming a debt-free business, or building one from the ground up, is a lengthy process. But there are some strategic points that must be embraced if you want to succeed:

1- You need to know the true cost of delivering your service or product.

2- Become crystal clear as to where the money goes and the money comes from– in other words your Cash Flow.

3- Develop and use an operating budget, and cash flow budget as a daily decision making tool.

4- Daily, know your KPI’s (Key Performance Indicators) for your financial condition– like cash, accounts receivable, and accounts payable. Operate your business with this knowledge in mind.

5- Consistently measure revenue, gross profit, and cash.

Conclusion:

While there are no guarantees in life, it is certain that as a business owner you will sleep better at night knowing that your business is stronger and more secure in these uncertain times as a debt-free operation.  Furthermore, with a secure cash position in the business, when opportunity knocks you are able to quickly pull the trigger on an acquisition or opportunity.