When I was a kid, I loved getting shiny new pennies. Today, people aren’t using cash much and children certainly don’t stop to collect pennies they find on the ground. However, looking for a shiny penny still survives as an expression for chasing the new idea or toy. Sometimes it’s because you are bored with your day-to-day operations of your business. Sometimes, it turns out to be the next big thing.
One of the things I learned first in my MBA program many years ago and working with successful business owners over my career is the term “working in your core competencies.” It’s about recognizing what the core business is that you are in and focusing on the main thing about that. What is it that you do? Do you sell a product? What does it do for someone? Does it solve a problem? Do you have an elevator speech that can explain what your benefit is to someone who doesn’t know your business? Do you wake up in the morning excited about the positive impact you may have on a person’s life because you do or provide a certain service?
What makes you the most money? If you are a business owner, it’s likely to be the consistent customer who brings you repeated business without a tremendous amount of demands on your team. It may not be your highest volume customer or the one-time elephant who asked for something customized.
I’ve had a few conversations that reminded me that this is not always so obvious. When we are talking with business owners in my practice, we are looking at the entire process. We talk to them about their personal goals and lifestyle expenses as well as what they are doing in their business operations. Sometimes, we have to point out to them that it’s their business that can bring them the greatest return on their efforts. We had one owner who was spending time day-trading. He had made a little money but admitted that he also loses some money in the process. I don’t recommend day-trading for anyone as it takes a lot of time and energy and is so speculative and dependent on a ton of factors outside your control. Another owner had some success with a real estate venture and wondered if he should be seeking out more opportunities to make money on the side in real estate. After a few subsequent meetings, it turned out that he was spending too much of his time on things that brought him little satisfaction.
One owner who just hadn’t thought about it was pleased about the growth in her 401(k) plan for retirement. It hadn’t really dawned on her that she was saving pre-tax dollars and matching them herself as the owner. It’s like moving money from one pocket to the other. It didn’t take long to convince her that there were other avenues to save for retirement and maintain her liquidity for herself and her business. Taxes are generally your largest transaction cost. For an owner to defer money today that may not be available for an attractive business opportunity that would likely be taxed at a capital gains rate instead of ordinary income is counterproductive. Historically, capital gains rates have been lower than ordinary (W-2 type) income.
Another issue is time. Once, my wife and I were house hunting and came across a property in a fantastic neighborhood that needed a complete overhaul. It had been a corporate property where executives stayed when they were here from out-of-town. Needless to say, it was showing a lot of wear from these transient visitors who stayed for short stints. They did not take care of upkeep or basic housekeeping. We were so drawn to the potential of creating a beautiful property that we could live in and also potentially make some significant appreciation money, it was hard for us to step back and consider the amount of money and distraction that a full remodel would require. We wanted to be in before the start of the next school year to start our last child in the desired school. We also had a lot going on in our business at the time. When I was honest with myself, I realized I could not turn it over to a contractor. I was going to want to run by and be a part of the day-to-day. Thankfully, we moved on to a more turnkey solution and I stayed focused on those things I could control “working in my core competencies.”
When a business buys a new company or adds a new product, it can be accretive or it can be detrimental. You have to be prepared for some costs of transition or in the case of a new product, ramp-up and roll-out. Do you have the funds to support the marketing effort? Is it fully operational? Look at Tesla. How many times have they missed their projected production goals? They are burning cash at a rapid rate. Do you have cash to burn?
Another example is processed food companies that are struggling with the customer shift to fresh foods and organic items. They are trying to reinvent themselves with acquisitions or new products. Campbell’s Soup bought Pacific Foods for its organic soup line. Makes sense. The mega acquisition of Kraft Foods by H.J. Heinz started out with some initial success and now is challenged by slowing sales growth. Cost cutting from a merger can only go so far. When these types of mega mergers are announced, the cost savings are the “shiny penny” that draws attention.
It will be interesting to see who wins at the grocery store. Even the chains are trying to create experiences with more food sampling and a wine bar. The pharmacies are becoming proactive in their patient consultation and mini-clinics. Will your local grocery store become your “third place” instead of Starbucks? If I evaluate my total expenditures, my neighborhood Kroger wins. If I base it on frequency of my wife’s stops for lattes, Starbucks would be the winner.
It’s important to step back and analyze your initiatives periodically to make sure that you aren’t chasing something that is not adding value. It may be stimulating to you and the staff in solving a problem or trying something new, but if the perceived value to the client doesn’t materialize, somewhere along the way, you’ll have to switch course. Our brains are more comfortable chasing a dream, remaining in pain, rather than accepting the pain of the unknown by admitting that my current shiny penny is costing me money.