Back in 1970 I started a small business with 2 of my work colleagues. Here’s the story about how it changed my life forever.
We all worked in the Wool Marketing Section of the Bureau of Agricultural Economics in Canberra (the Capital of Australia for the information of my friends abroad.) Through this employment connection we had close contact with the sheep industry and in particular wool marketing. One of my partners was a Kiwi (aka a New Zealander) and over a glass of beer he mentioned that sheepskin shops were popping up all over NZ to cater to the exploding Japanese tourism market — they loved sheepskin floor mats as gifts to take home. He suggested that we open a shop in Canberra. We thought that was a great idea (everything sounds great after a few beers – have you noticed that?) and with no real plan in mind we each contributed $300 to start the venture. By the way, we were economists not business graduates so we really had no idea about business at all. I had taken one class in Accounting and that was the sum total of our collective business wisdom and that qualified me to ne the General Manager.
Now $900 was quite a lot of money in 1970 but we quickly discovered it’s not really enough to start a business. By far our biggest challenge was the cost of carrying inventory. Most of our initial funding was invested in setting up the shop – which we did on a shoestring by the way. But we sweet-talked one of Australia’s best sheepskin tanneries to supply us on a cash-for-product basis. That is, we gave him $200 up front and he delivered us about 50 skins overnight. We took out an advertisement in a cheap tourism brochure that simply said “The Perfect Gift: Authentic Australian Sheepskins from an Australian Shearing Shed”. We stretched the truth a small bit in that it was not an authentic Australian shearing shed but The Shearing Shed was the name of the business. That ad got some attention and we sold all our stock in the first week.
We parlayed $200 into $300, a GP of $100, in our first week which annualizes to revenue of about $21,000. That was scarcely enough to make us rich but what the heck, we had another job and it was fun and at least we were in a position to buy some more stock with our next order which we did. The next week we also sold most of our stock again. This continued for several weeks and we kept buying more stock but then a chance meeting, again over a few beers, with a guy changed everything. With beer in hand he said to me what do you do? I told him I was research officer with the BAE but my real passion was our business. I then asked him what he did and he said he was an accountant. I said “really! we need a ‘good’ accountant [how many times have you heard that inane statement!], do you work with new businesses? Our sheepskin business is going great (truth stretching again).” He said “of course we do!” His name was Tim by the way.
Then Tim said, “tell me about the business.” So I did and he listened as he asked a few more probing questions that told me he was genuinely interested! Then he said “so you’re saying that you turn your stock every 5 days.” Correct I replied. He said “that’s a stock turn of 70 times a year–amazing!” I had no idea what stock turn meant let alone considered it to be amazing – would any of your clients be in the same boat? All I knew was that every dollar we made went straight out the door to pay for inventory, wages, rent etc. But I digress. He went on, “you’re telling me that when Japanese tourists come into your shop they never leave without buying something?” “Correct.” I replied again. Then he said, “let’s sit down and take a look at this” as he led me to a vacant table and flipped over a drink coaster and took a pen out of his pocket.
On the coaster (it turned out to be several of them actually) he showed me that our GP was just $33 out of every $100 of revenue and that was all we had available to cover all of our expenses and finance additional stock. Then he pointed out that if we were able to sell virtually everything in the store each week we are not charging enough for our product. He then suggested that I do, or at least try by testing for a month, two things. First he said to apply a 100% mark-up on cost to get our GP% up to 50% — this did happen and as we all now know it’s the first way to grow a business i.e. average transaction value (price effect) and secondly, he suggested we quadruple our order size and negotiate 7 day payment terms, or better if we can, with our sheepskin supplier on the strength of our past track record (even though it was short). He continued, “not only will this give you a gross margin of 50% but I suspect with the obvious demand for your product you will sell more because you have greater availability [which did happen] and you can increase that even more by adding other related product lines that fit with the sheepskin-Australian-shearing shed theme. This as we all know is the second variation of the first way to grow a business – i.e. average transaction value (volume effect). And he continued, “your additional revenue will be generated with very little additional cost other than the cost of product so your net margin will increase as you utilize your facilites more productively” this, as we all know is the fourth way to grow a business i.e. resource expense productivity and it did happen.
That conversation lasted less than 1 hour because we had a serious amount of beer to consume. But the impact on our business was amazing. In our first full year, the business did a few pennies under $1 million and threw off a gross margin of about 52%. We ended up manufacturing powder puffs for Elizabeth Arden, and in addition to selling thousands of skins we made sheepskin carpets, ugg boots, coats, mittens, underblankets for hospitals and the elderly, car seat and steering wheel covers. All of this came from a conversation and a single but simple question: “tell me about your business.”
Tim became our accountant and he continued to give us really valuable business advice, he visited us frequently and took obvious delight in our success. On one of his visits we were talking about the fact that one tourist bus operator had been bringing visitors to the store on their way back from a local tour of Parliament House and Tim said “it would be interesting to contact all the tour operators and see if they would do likewise.” This as we all know is the second way to grow a business i.e. attract more customers of the type you want. Isn’t this a BFO – why didn’t we think of this? Most of the people we approached were not interested but a couple were and what happened is simply amazing: after a couple of months at least one bus (sometimes 3-4) would park at the back of the shop 5 days a week. Between 20-30 people would get off each bus and by mid afternoon we were frequently close to being out of stock.
Because of the high margin and tight cash control we were able to grow the business really quickly, we secured 30 day credit terms, rented a warehouse to carry our inventory and serve as a manufacturing facility and the rest as they say is history. This would not have happend had I not had a chance meeting and conversation with an accountant who was willing to listen and smart enough to ask a couple of dead simple questions.
Interestingly after Tim moved back to Adelaide we were passed on to another guy (I have forgotten his name – that’s how impactful he was) who took no interest in us or the business other than to tell us when we had to get our books to him for our taxes. Needless to say, we left that firm in the fullness of time and he probably didn’t even notice and will never know what fees he walked away from as a result of his indifference. But there’s more to this story. As a result of this experience I decided that I wanted to learn more about business and in particular the role that accountants can play and the profound impact they can have on their clients. I left my “secure” government job and enrolled in graduate school and took as many accounting classes as I could to qualify and do the sort of things Tim did for us. The business also made it financially possible for me to do that. That one conversation that lasted less than 1 hour changed the direction of my life completely.
As I look back on this event in my life and the subsequent path it took me on I think about it quite differently than I did at the time. Here are the lessons I have learned that you might like to reflect on during the Christmas Holiday.
- Everything good and bad starts with a conversation.
- Listen and not only might you learn something but you will develop trust with the other person. Once you have that you can become an agent of change.
- A pen and the back of a drink coaster or envelop is all the technology you really need to change people’s lives which is why we created concept models to help you engage in concept model grass-roots conversation.
- Accountants have the ability and positioning to make a huge difference to the lives of people.
- Visiting with your clients is what really shows how interested you are in them and their business.
- People outside a business (i.e. you) are far more likely to come up with ideas on how to improve it than the people in the business especially the owners. And I would add to that, I found I came up with a lot more ideas when I was at a client’s business than I ever did at my desk. The reason for this is what I call environmental immersion which is akin to experience we have had with our Mastermind Alliance – the collective wisdom of a group of people talking, thinking about and focusing on an issue is far more powerful than a person thinking alone.
- Perhaps the biggest lesson of all …. this is not rocket science, conversing about the 4 ways to grow a business large, or small, is a no-brainer framework for a robust conversation. So with that in mind go back to bullet point 1.
During the Holidays you might like to think about the conversations you’ve had with clients this past year. How many of those conversations may have, or will, change lives? How many conversations could you have had that might have change lives? How many conversations will you have this coming year that could change lives? And if someone asks you what you’d like for Christmas suggest they give you a pack of envelopes then spend some time practicing your conversation on the back of them. Never leave home or your office without an envelop and a pen in your pocket. Finally, never forget that there are just 4 ways to grow a business, any business, and when you master a conversation around those 4 ways you’ll grow you own business.