Virtuoso Team Consulting, Inc.

What constitutes a cost for your business?

For such a simple question, there is a beast of an answer and it all starts with, “it depends.”

Different businesses, different monetary policies, different objectives and methods of accounting all play into the answer which makes it somewhat difficult to say. Additionally, there are two kinds of costs, fixed and variable, that further complicate matters.

A short definition of each type:

Fixed Costs (also known as sunk costs) can be thought of as costs that stay pretty close to the same regardless of how slow or busy your business is. Examples would include rent, salaries, and insurance.

Variable Costs change based on how much work is being done. Examples would be COGS (cost of goods sold), and payroll.

I will give two examples that demonstrate the range of views, the first was a prospective client, and the latter is my own method.

This example can be defined as the straight costs of goods. This was a widget manufacturing business operating as an unofficial partnership. When pricing an order of widgets, they knew how much the individual components cost, how many would give them an economy of scale, and believed that any amount over that would be “profit”. This is actually referred to as COGS, or Cost of Goods Sold, and is only one cost associated with the actual expense. In this case, the “profit” was needed to cover rent, utilities, expenses, upkeep on equipment, and what was left was considered payroll.

A simple solution to this would be to recognize their costs, make the necessary adjustments to their billing prices, and fix the problem. They felt that by raising their rates, clients would go to other vendors where they can get widgets for less. Note: When competing on price, you can only be as smart as your dumbest competitor.

I count every expense I have, first personally, then for the business. My personal expenses are my payroll expense for the business. For the business, I again count every expense I can foresee, including new equipment I will want in the future. By using this method, I have retained earnings (left over money or profit) so when I need a new computer or printer, I do not have to go into debt for it. While this method is more time consuming to setup initially, it is a far better system, in my opinion. I know all of my bills will be paid, and anything left over is actually profit I can reinvest in the business.

So I bring to your attention this, the U.S. Postal Service is posting a $2.4 Billion loss in 2009Q3 (third quarter). What are they doing wrong? If this were your company, what methods would you use to solve the problem? Yes, this is really the stuff I think about in my down time…

Ethics may be one of the more overlooked aspects of business, yet one of the most important. Unethical business practices have far-reaching effects throughout the entire community, economy, ultimately stretching into personal lives. While I know most people understand it intellectually, I feel compelled to address it anyway.

Laws, in most cases, represent the lowest common denominator of ethics. Simply because something is legal, does not make it right, and making it illegal does not make it wrong. Situations and motivations have nuance that need to be weighed against the ends.

Let this question serve as a warning sign:

I wonder if <insert idea here> is legal?

If this question is being asked about an action to be taken, you can bet that the ethical line has long since been crossed.

There are times when those of us who are not lawyers need to know what actions legally need to be taken. That is what a responsible business owner should do, and this is not the situation I am talking about, nor am I trying to bash lawyers (truth be told I’m related to a few). I am addressing the issue of people who are willing to do things that may be legal, but are in no way ethical. These same people disregard how their actions affect others.

As children we all learn the Golden Rule, and at least attempt to do unto others as we would have them do to us. This should remain the goal throughout life, including in business practices, but as adults, let’s step it up a notch. I introduce to you John Rawls and two terms he coined, original position and veil of ignorance. Original position is the idea that a group of rational individuals will be tasked with creating a society based upon moral principles they accept. The veil of ignorance prevents this group from knowing what role (religious, racial, social, gender, or abilities) they will possess, and therefore the expectation is they will be fair to everyone regardless of these differences. This is one of many different philosophies on ethics, and I challenge you to do some research on the topic.

If philosophy isn’t your cup of tea, then I suggest two other litmus tests that do not get so bogged down:

1.)    Would you want your family members or friends to be on the other end of the action you are about to take?

2.)    Would you want it to be published as the headline for all to see, or to be how you are remembered?

In any case, be kind to one another. Primum non nocere – First, do no harm.

I recently spoke to a prospective client about his business, and when I asked who his competition was he informed me he had none. Now, I don’t claim to know everything about business, but I do feel reasonably certain about some things. Here is a little tip, if you truly don’t have any competition, expect some soon.

Every industry with a company turning a profit demonstrates that there is money to be made. This goes without saying. The issue is that the only limiting factors to other people coming in and competing for that income are entry barriers. Some industries have larger barriers than others, and some barriers are pure illusions, but in any case, the only reason anyone can honestly claim they have no competition is because someone else hasn’t figured out a way in yet.

Let’s look at a couple of big examples I like to call, Mistakenly believing you have no competition:

1.) The Apple iPhone has become one of the most ubiquitous tech gadgets of recent years and because of the licensing and exclusivity agreements Apple and AT&T have only had competition with other phones and services. Within weeks of release people were “jailbreaking” (hacking the iPhone to allow applications from sources other than iTunes) and “unlocking” (allowing the iPhone to be used on the T-Mobile network, which uses the same GSM network for transmission). While these violate EULA (End User License Agreements) they also provide a new level of options for customers, i.e. Competition.

To make matters worse, Apple’s strict control over its App Store and AT&T’s lack of responding to customer desires has incited more and more people to use these avenues.

2.) Blockbuster was buying out or annihilating smaller video stores as it grew into the nation’s largest video rental company. They felt they had no real competition, or reason for concern from regional rental stores, since they owned so much of the market share. Then, a small upstart dot com comes along and allows users to create a queue of films they want to see online, and the movies are mailed both directions with no late fees. Later this company adds movies that stream to customer’s computers, and then directly to their televisions. Netflix also has competition from cable providers, legally, and torrents, illegally, but they realize this and work with that knowledge. That is the important lesson, knowing who or what your competition is can be more valuable to the long term success of your business than not have any. P.S. Replace Blockbuster with Circuit City, and make the lesson about electronics stores, and you have the success of Best Buy.

Who or what is your competition? Or where will it come from?