International Business Staying Power Enhanced with Collapsible Overheads


International business success is the ultimate way to protect against inflation.

This message is the third in a series that reviews how to continuously succeed in a global business. The series answers this question a reader asked:

“Gary, How do Gary/ Merri Scott continuously continue to produce uniquely insightful information for readers? How could I model just a small slice of Gary’s success online? I truly do not understand how you have been able to continuously grow for decades while evolving from print to internet/online, covering totally new locations, new businesses and completely new subject matter (not only investing, but health, language, Real Estate Retreats, Import/Export, Publishing, Country- UK, US, Ecuador, etc). What angle on marketing (small secrets) has allowed you to continuously succeed? I realize there are no miracles other than hard work, but any pointers to leverage?”

Before we review specific internet marketing and business strategies, this series is reviewing fundamental business steps to assure staying power.

Fundamental #1 is do a business that you love.
Fundamental #2 is to live within your means.

This message reviews fundamental #3: use collapsible overheads in your business.

An excellent book to study about business is titled “Peterman Rides Again”, by John Peterman published by Prentice Hall. You can order it from Amazon.com

You may know of Peterman from the Jerry Seinfeld show or you may have been one of the 18 million people who received his mail order catalogue each year. As a marketing oriented person, Peterman has long been one of my heroes. However as good as he was at marketing, as well known as he was from the publicity he received on Seinfeld and despite the fact that he sold hundreds of millions worth of goods, the J. Peterman Company went broke! His book goes a long way to revealing why he had success and why he ran in to trouble.

One (in my humble opinion) of his problems was described on page 180 of this book when he wrote, “There are two theories of growth. One is to let your organization development lag behind business growth; the danger with that is you get too much business and your company crumbles from within because you don’t have the systems and staff to handle it. The other approach is to build an organization that can handle the business you expect to get; that’s what our investors favored.”

In Peterman’s case, his business had grown from nothing in 1986 to $64 million in sales in 1994! But growth (not surprisingly) had slowed. He tried to stimulate more growth from a weak understanding of his market and staffed up for that growth at the same time. His losses became monumental and he went broke.

He followed his investors’ advice (one reason to not have investors) and it cost him his business.

I believe there is a third alternative to dealing with the rises and falls of business, called Collapsible Overheads. This approach has helped my business stay afloat and profitable through thick and thin (though never in Peterman’s league) over the years. This system has kept my business up-to-date when business boomed and has saved me from huge losses when business has been slow.

The problem of fixed overheads is that when business slows down, one is forced to increase marketing to keep income up. This means one has to take the greatest marketing risks at the worst possible time. With Collapsible Overheads when business drops, so to can marketing expenditure. Reserves can be saved so marketing can be increased when times are good and chances of success are increased.

Collapsible Overheads have one more added benefit for small businesses (such as Merri’s and mine). They can help the business avoid having employees.

Generally collapsible overheads are attained by using independent subcontractors to do work the business requires for low (or non-existent) fixed amounts and a per piece or volume basis. In Merri’s and my case our phone answering, printing, art work, list management, accounting, maintenance, product fulfillment, even filing and office administration were subcontracted in this way.

This saves a lot of paper work and cost not having employees, plus creates several tax benefits (for example one can have a much more efficient pension plan if only family members are employees). Plus a no employee system increases flexibility.

However, there are two downsides to collapsible overheads.

First, collapsible overheads require more work from a business owner to maintain quality control. One has to really spend time selecting and training the right sub-contractors to make sure they know what is expected of them and how the system works. When this is done though, the subcontractors will actually want you to have success (so their income rises). The difficulty is that you have less control over your sub than an employee and may not (if they don’t work directly at your place of business) have immediate access. You need to work out systems that deal with this different approach to getting things done. You need to create a smooth communications and follow up system to make sure your sub knows what to do and to make sure that it is done in a correct and timely way.

There is a secondary benefit to this system though if you create and maintain good systems. If you have employees during slow times and they get used to a low volume of work, they can resist or resent a flood of extra orders coming in. More business for employees means extra work without additional pay. Sometimes employees want business to be slow. And it is amazing how when you surround yourself with those who are wanting less volume, that is exactly what you get. Subs on the other hand want more work because it means more pay!

The second problem with collapsible overheads is that they increase costs when times are good.

For example if a business has ten employees that cost a total $1,000 a day that handle 200 orders a day, the handling costs per order is $5.

If 400 orders come in and the ten people can still handle this, the cost per order drops to $2.50. This is an alluring proposition for a business to have ever increasing volume with ever improving margins. But this rarely works.

If you have contractors that you pay $5 per order for processing then your variable costs remain the same with increased volume.

This second problem is not as acute as it could be because boom times are when your business can most afford increased costs. Many businesses receive their income in spurts. During these spurts you can afford to give up a little profit to save losses during down times.

Most businesses dream of making a big hit. Beware! Sudden financial success creates disaster as often as not because of two mistakes. The first mistake is the belief that this is the only time there will be such an influx of cash. This tightens the business view and stops expansion when it makes most sense, which is during bad times when labor is more available and costs most likely to be low.

The other mistake is to think that large chunks of cash will come easily all the time. This thinking creates unrealistic work ethics and management practices that can lead to disaster.

I have seen example after example of businesses where a sudden chunk of income destroyed a company. This is the riskiest time for a small business. Start-up is a dangerous time but the time when a business really begins to take off creates even more risk. The proud owner with his new found wealth, buys new cars, hires new staff, moves into a bigger home, spends more, works less, and creates overhead and debt. If there is a single reversal, he can be wiped out.

The reason spurts create problems is because they disrupt discipline. Money is discipline and financial affairs create a form of economic routine, either self imposed or not.

We develop a set of mental standards that causes us to think. I can afford this, but can’t have that, etc. Spurts of wealth demolish these standards. Suddenly we can have many things we previously could not. We become, once again, kids in the proverbial candy shop and lose our ability to decide what we can and cannot spend.

Never-ending wealth is a process, (not a state) of taking a continual series of reasonable risks, making mistakes, doing refinements, learning lessons and taking actions that culminates in getting it right. When success arrives there may be a huge income (or capital) spurt. So a long term business goes through series after series of these spurts. The trick is to make profits and build up reserves during the spurts and then hang on during the times between.

Collapsible overheads impose an automatic discipline that helps surviving through the tough times.

The key to setting up contractors is to find good people and give them good deals. Peterman pointed out how one of the problems that led to his bankruptcy was caused by pushing one of his contractors too hard.

Quality, speed and low price. Every businessman always wants all three. We can only have two. In Peterman’s case he always made a point of paying his printer top dollar and always had great results. As the business grew and he delegated this job, his staff squeezed the printer to reduce losses. This led to the printer missing a big mailing at the worst possible time.

Collapsible overheads can help your business meet peak demands and reduce costs during lags.

To this day Merri and my businesses here in the US do not have single employee. All of our help is in the form of independent sub contractors or joint ventures. This helps provide staying power.

Staff in Ecuador

Our business in Ecuador is quite different. The hotel our foundation bought inherited a staff of ten. What great people they are as well. This is different though. The hotel is owned by a foundation to help the poor by encouraging more and better employment. So the foundation does not have a profit incentive. See more on the foundation at www.landofthesun.org

A recent USA Today article about the second richest man in the world, Carlos Slim, says that Slim now has more money than Warren Buffet and is approaching the wealth of Bill Gates.

In the article Slim is quoted and says that Gates’ and Buffets’ charitable works need help because giving away wealth does not work well. The article says: “Money that leaves the company evaporates. The fact that [Bill Gates] and [Warren Buffett] … are channeling the majority of their fortunes to philanthropy exposes Slim’s passivity, wrote Jorge Zepeda Patterson, a Mexican columnist. Instead, we Mexicans continue donating ‘philanthropically’ to Telmex’s finances, thanks to its extraordinary rates and profit margins.”

We are proud of what our staff and encourage them to expand themselves. Our chef has responded extremely well so far and is now a regular on radio and TV. Steve, our man in Ecuador just sent this note:

“Gary and Merri, I wanted to let you know that chef Santiago is going from strength to strength. He is his own best publicity agent and has rapidly made the step from being a radio guest to being a guest on not one but TWO television shows.

“I guess this does not harm Quinoa Café to have its chef on the TV giving a plug. His first appearance was a week ago – live! I saw a bit of it and the presenter seemed more nervous than Santiago; Santiago said the time flew by – I bet it did! Here he is below.

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“Then he was on TV again this week on a different show, same channel but different presenter.”

So a business like a hotel needs employees, but this is a step after business is well established or only when absolutely required. Even then we keep the staff to the necessary minimum and handle peak times with temporary employees.

Until then, good global business and investing!

Gary

Learn about healthy eating and how to live a fuller more vibrant life through ancient lifestyle patterns of the ancients. Join Steve, our man in Ecuador, June 19 – 21, 2007 Tues. Thurs. Shamanic Mingo. See Ecuador Shaman Mingo Tour

Join Steve for our next Ecuador Export Course July 17 – July 22, 2007 Tues. – Sun. See Ecuador Exports Tour


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