Episode #149: Free-Rider Friday, June 2017

Ed’s Topics

The VeraSage Symposium and Art of Value Conference

We are excited to announce the Art of Value Conference and VeraSage Symposium being held in Allen, Texas on November 8-12, 2017. You can attend one or the other, or both. Find out more about these two events, the agendas, and register.

Marketing to confuse the competition

Article by Rory Sutherland in Ranconteur, May 25, 2017. Listen to his appearance on The Soul of Enterprise.

Uses the 1980 movie Airplane! as an analogy. Most businesses are run like air traffic control: there’s rules, routines, regulations, standards, metrics, targets; optimize, copy, repeat.

Other parts of a business don’t work this way: marketing is one of them. It can never be standardized. Truly efficient marketing is not marketing at all, it’s merely noise.

Remember, a flower is a weed with a marketing budget

EasyJet’s and British Airways’ approach to safety are similar, but the marketing of their brands are diametrically different.

Rory Sutherland

Grand strategist Edward Luttwak argues against obsession with efficiency.

Strategy demands doing the least efficient thing possible to gain the upper hand over your enemy by confusing them.

In our aspergic age, it’s easier to get fired for being illogical than for being unimaginative. By dressing marketing up as a science, your protected from the CFO, but you’re using statistics as a drunk uses a lamp post: for support, rather than illumination.

Competition or anti-competition

Amazon’s patent that blocks shopping bots while in store.

Amazon Prime exclusive show: The Man in the High Castle was discussed. First two seasons are out, and the show is just excellent!

Say what!

A new phrase for our lexicon: Stylized fact: “A simplified presentation of an empirical finding.”

Russ Roberts’ podcast, Econtalk, on emergent order from June 12, 2017 is excellent. Russ has written a poem, It’s A Wonderful Loaf.

Here’s the money quote from the show, from economist Michael Munger

Fundamental insight: If you and I disagree about the value of something, we can probably agree on a price. So all prices that are agreed on probably result from a disagreement about value.

 Prices reconcile disagreements on value.

Ron’s Topics

“Rules of the road,” The Economist, May 6, 2017

In 2008, an unemployed Los Angeles chef, Roy Choi, started a business, which led to a reality TV show, a hit movie (Chef), and jump-started a $1.2B industry: Food trucks.

Portland, Oregon has had them for decades, over 500. But Chicago, with over 7,000 restaurants and 144 breweries, has only 70 food trucks. The regulations in Chicago are onerous:

• Food trucks can’t be within 200 feet of an eatery

• They can’t park for longer than two hours

• They are required to carry GPS or face heavy fines

New York and Boston are little better, with a 15-year waiting list to get a license, or $25,000 to rent one on the black market.

One of trucks in Portland’s is named: Kim Jong Grillin’.

Brick and mortar - Amazon 

“Amazon Just Invented the Bookstore,” Foundation for Economic Education, M.G. Siegler, June 8, 2017

Amazon Books, opened in New York City and looks like a Borders.

The pricing is innovative: you pay the online price if you’re an Amazon Prime member, or the jacket price if you’re not.

More on the suckiness of Performance Reviews 

“Performance Reviews Suck, Here’s What We Do Instead,” Matt Rissell, Forbes, May 26, 2017

The co-founder and CEO of TSheets, Matt Rissell, wrote:

Your typical performance review is an inaccurate representation of how your employees are performing, and more often than not, they're a giant waste of time for you and your team. Let's call them what they really are: a massive distraction and worst of all, a demotivator.

It surveyed employees and found they hated annual performance appraisals, rankings, but wanted more feedback. Here’s what they do instead

1. Hold consistent one-on-ones with your employees

2. Ask employees how they think they’re doing

3. Make it go both ways (how you doing as a leader)

4. Don’t tie feedback to compensation

5. Encourage employees to be proactive

I would only add that the first paragraph above also applies to keeping timesheets in professional firms. 

The Adaptive Capacity Model for Supermarkets

 “Surge pricing comes to the supermarket,” Tim Adams, The Guardian, June 4, 2017

In 1861 Philadelphia shopkeeper John Wanamaker introduced price tags, with the slogan, “If everyone was equal before God, then everyone would be equal before price.”

Before this, haggling was common. The fixed price changed the relationship (business model) between the store and the customer and led to price wars, loss leaders, promotions, etc.

It’s said that Facebook has over 100 data points on every user. Orbitz was charging Mac users 20-30% more to book a trip, and Uber allegedly looks at a user’s battery life to help determine price.

French, German, and Scandinavia retailers are changing prices 90,000 times per day.

Dynamic pricing in Britain, at Spar stores, for bread created a 2.5% uplift to profit, while waste dropped 30%.

This puts under threat Oscar Wilde’s famous quip: The cynic knows the price of everything, and the value of nothing.

Today, the price may be changing. Pricing the customer continues.

Episode #148: Interview with Mike Michalowicz

Biography

By his 35th birthday Mike Michalowicz (pronounced mi-‘kal-o-wits) had founded and sold two multi-million dollar companies. Confident that he had the formula to success, he became an angel investor…and proceeded to lose his entire fortune. Then he started all over again, driven to find better ways to grow healthy, strong companies.

Among other innovative strategies, Mike created the “Profit First Formula”, a way for businesses to ensure profitability from their very next deposit forward. Mike is now running his third million dollar venture, is a former small business columnist for The Wall Street Journal; is the former MSNBC business make-over expert; is a popular keynote speaker on innovative entrepreneurial topics; and is the author of Profit First, Surge, The Pumpkin Plan and The Toilet Paper Entrepreneur, which BusinessWeek deemed “the entrepreneur’s cult classic.”

From the Profit First Professionals Website: Everyone on the planet knew it. It was a cold, hard fact. The world was flat. Until it wasn’t. That’s when everything changed. Society is addicted to axioms: beliefs that have become so entrenched in our global culture that they are never challenged. These axioms are simply considered to be true, because everyone says it is. Then one day, someone calls bullshit. Sales – Expenses = Profit is one of those axioms. For centuries entrepreneurs have followed the “profit comes last” formula off the proverbial financial cliff. Now everything has changed… In his globally acclaimed, paradigm shifting book, Profit First, business author Mike Michalowicz explains why the Sales – Expenses = Profit formula actually prohibits profitability and keeps the vast majority of businesses, throughout the world, struggling to survive check-by-check. Michalowicz teaches us to a new formula: Sales – Profit = Expenses. This seemingly subtle change, empowers you to grow your profitability immediately and permanently. Join Ed and Ron for this dynamic interview with Mike.

Questions/Topics We Discussed with Mike

The first edition of Profit First came out in 2014? Revised and Expanded edition came out earlier this year, 2017.

Your life’s purpose is to eradicate entrepreneurial poverty. Explain.

The Small Business Administration reports there are 28 million small business (< $25m in revenue):

• 125 million businesses globally

• 8/10 business fail; #1 reason: lack of profitability

• 50% fail in first 5 years

GAAP: Sales – Expenses = Profit

Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine

$17.55

By Mike Michalowicz

Buy on Amazon

This equation doesn’t make human sense because it goes against human nature. Explain.

Primacy Effect: we focus on what comes first, so the Profit First formula changes the equation:

Profit First: Sales – Profit = Expenses

GAAP does not model cash.

Profit First works because it doesn’t try to fix you. It’s designed to work with who you are already. Profit not an event; it’s a habit!

This revised equation requires you to reverse engineer your business:

• Are all expenses necessary? Who knows? Most are too busy chasing sales

• It’s the same with pricing:

• Customer > Value > Price > Cost > Product/Service

• Reminds me of Henry Ford: “No one knows what a cost should be.”

• There’s a difference between being Frugal vs. Cheap

Shouldn’t some of these businesses fail? Isn’t that the market saying this business is not a good idea?

If we can increase the probability of success of small businesses, society would be better off, which is why you’re so passionate about this topic, isn’t it?

When do you suggest you start Profit First in your business, from day one?

You’re working a lot with accountants now, right? And do accountants have this same challenge in their businesses?

Do you notice a difference between CPAs and bookkeepers (e.g., bookkeepers are more proactive and CPAs are more reactive)?

In how many languages have your books been translated?

You recommend five checking accounts: Income/Profit/Owners Comp/Tax/Opex + 2 no-temptation accounts. What’s the logic and mechanics of all these accounts?

Explain TAPs: Target Allocation Percentages.

You equate PF with the Granny Shot in basketball. Explain.

You talk about the eight Mistakes business owners make with Profit First:

1. Going it alone

2. Too much too soon

3. Grow first and profit later (#1 objection; not substitutes, complements)

4. Cutting the wrong costs

5. Plowing back and reinvesting

6. Raiding the tax account (stealing)

7. Adding complexity

8. Skipping the bank accounts

Do you ever bring the Profit First business owners together, not just the accountants who consult on the system?

Have you found any banks willing to work with you?

Other than succumbing to the lies of GAAP, what are other issues facing small businesses?

What’s the #1 issue/problem facing the accounting profession?

Are you optimistic or pessimistic with respect to Artificial Intelligence?

Mike’s Books and Websites

• Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine,  Revised and Expanded, 2017, (2014)

• The Pumpkin Plan

• The Toilet Paper Entrepreneur

• Surge

• Profit First Professionals

• Mike’s Speaking Schedule

Episode #147: Changing Your Mind

There’s a crucial principle for coming to know the truth, according to philosopher Amélie Oksenberg Rorty, namely, “Our ability to engage in continuous conversation, testing one another, discovering our hidden presuppositions, changing our minds because we have listened to the voices of our fellows. Lunatics also change their minds, but their minds change with the tides of the moon and not because they have listened, really listened, to their friends’ questions and objections.”

I read this line from Rorty in Deirdre McCloskey’s paper, “Economic Liberty as Anti-Flourishing: Marx and Especially His Followers,” published by the American Enterprise Institute.

I opened my session at Scaling New Heights 2017 in Orlando, Florida last week with this quote, and asked the audience if they have ever changed their mind on a significant issue?

What was the process you went through? How long did it take? Everyone has changed his or her mind on something. If you’re not changing your mind, you’re not using it.

As Nobel laureate economist Paul A. Samuelson wrote, “I’m willing to be occasionally wrong. But what I hate most in life is to stay wrong.”

Partial list of stuff about which we changed our minds 

• In high school Ron was all for the Chrysler bail out (1979)

• Offering three options for pricing the customer, supported by insights from behavioral economics and customer psychology

• Hourly billing

• Timesheets

• Measurements and “what you can measure, you can manage.”

• Generally Accepted Accounting Principles (not a theory, and useless with respect to intellectual capital)

• Myers-Briggs and other personality profiles

• Abortion, each of us in a slight different direction

Wealth and Poverty: A New Edition for the Twenty-First Century

$21.97

By George Gilder

Buy on Amazon

Also, reading George Gilder’s book, Wealth and Poverty, back in 1982 made Ron change his mind on:

• Keynesian economics

• Milton Friedman and monetary economics

• Ayn Rand and Objectivism [her last public talk bashed Gilder and his concept that capitalism was really based on altruism]

• The importance of the entrepreneur for a dynamic economy

Thoughts on changing your mind

Changing your mind does support that notion that knowledge is only ignorance postponed.

Are people who won’t change their mind dangerous?

Ron is currently reading Pixar founder Ed Catmull’s book: Creativity, Inc.: Overcoming the Unseen Forces That Stand in the Way of True Inspiration.

Catmull worked with Steve Jobs for over 25 years, and said Jobs would change his mind, and that the reputation he has acquired after his death is often not justified.

We all suffer from confirmation bias, articulated in the 1960s by Peter Wason, a British psychologist, that is: We give lesser weight to data that contradicts what we think is true.

But our mental models are not reality, they are tools. They should be our servant, not our master.

Philosopher Arthur Schopenhauer wrote: All truth passes through three stages:

• First, it is ridiculed.

• Second, it is violently opposed.

• Third, it is accepted as being self-evident.

Ron would add: Fourth, I told you it was a good idea all along!

Listener Shout Out

Mark Gandy, Free Agent CFO, Loves The Soul of Enterprise Podcast so much he wrote this blog post.

Thank you so much, Mark. This means more to us than we can express in mere words. Definitely an HSD - High Satisfaction Day!

Episode #146: Accounting Innovation: It's not an oxymoron - Part 2

Ron and Ed were at Sage Summit 2017 in Atlanta and recorded an episode (Part two) featuring a great panel discussion on the premise that accounting and innovation are not opposites (i.e. not an oxymoron). While the job description for accounting professionals has largely stayed the same, technologies and laws have come into play to change the way business is done. It is time that accountants alter the way they do business to keep up with the shifting tide.

Panelist biographies

• Jodie Padar is CEO and Principal of the New Vision CPA Group, a public accounting firm based in the Chicago area. Jody joined her father’s firm a decade ago, bringing her expertise in the areas of taxation, QuickBooks, and small business accounting. As one of the profession’s emerging thought leaders, Jody has transitioned New Vision to New Firm status—adopting advanced technologies and best practices that support web-based client services. This allows Jody to manage her firm at peak efficiency with transparency at the heart of all engagements. Jody and her team provide financial insight and practical strategies to their clients in real-time, not just at tax season.

• Gail Perry is the editor-in-chief of CPA Practice Advisor. She also speaks at many accounting events, trade shows, and webinars. She is the author of over 30 books (including Mint.com For Dummies and QuickBooks 2014 On Demand), and she maintains a small tax practice. Gail is a graduate of Indiana University where she earned a bachelors degree in journalism. She returned to school to study accounting at Illinois State University, earned her CPA, and worked for Deloitte in the firm's Chicago tax department. She has taught college-level accounting principles and personal finance, and was on staff for 10 years at the Indiana CPA Society as a computer applications instructor. Gail was the publisher and editor-in-chief of AccountingWEB before joining the CPA Practice Advisor team.

• Gary Boomer, Visionary & Strategist of Boomer Consulting, Inc., is recognized in the accounting profession as the leading authority on technology and firm management. He consults and speaks around the globe on several topics including strategic and technology planning; mindset, skillsets and toolsets for the future; change management and developing a training and learning culture. He also acts as a planning facilitator and coach to some of the accounting profession's top firms.

• Tom Hood has been executive director and CEO of the Maryland Association of CPAs since January 1997. Armed with a passion for the profession and the drive to move it forward, he manages a staff of more than 30, works closely with the Executive Committee and Board of Directors and oversees the work of numerous committees to promote and protect the CPA brand in Maryland.

Episode #145: VeraSage Fellow Adrian Simmons, CPA, On Value

Adrian's Biography

Adrian enjoys the creativity behind helping each entrepreneur envision what motivates them, and being a part of bringing that to life. He is deeply convinced about the dynamism of the small business economy, and it’s ability to create value in the lives of owners, customers, team members, and communities — a value that matters not just for the short-term, but for the long-term.

Adrian graduated from Loyola University Maryland in 1999 with a bachelor’s degree in accounting, and then went on to complete his MBA with a concentration in finance in 2000. He began his career as an auditor for one of the Big Four public accounting firms, and transitioned to working with small business owners with his father in 2002, eventually purchasing the firm in 2014. He both speaks at conferences and writes pieces for the accounting profession, is a Practicing Fellow with the VeraSage Institute, and is happy to call Laurel his lifelong home.

In the final analysis, I find nothing as intellectually satisfying as the history of ideas.

Great theories, in economics as in other subjects, are path-dependent . . . ; that is, it is not possible to explain their occurrence without considering the corpus of received ideas which led to the development of that particular new theory. . . .

without the history of economics, economic theories just drop from the sky; you have to take them on faith. The moment you wish to judge a theory, you have to ask how they came to be produced in the first place and that is a question that can only be answered by the history of ideas. —Mark Blaug, Not Only an Economist

This interview with Adrian was inspired by a book he’s been reading: An Austrian Perspective on the History of Economic Thought Before Adam Smith (Vol I), and Classical Economics (Vol II), by Murray N. Rothbard.

Ron’s Questions

What got you interested in wanting to study the history of the theory of value?

What struck you about the early portions of Rothbard’s book?

The Greeks were attuned to the concept of scarcity, which makes us talk about tradeoffs, not solutions. The word “Economics,” is from the Greek oikonomia, meaning “household management.”

Democritus (a contemporary of Socrates) [c.460-c.370BC], had three important ideas:

1. founder of subjective theory of value!

2. rudimentary notion of time preference (prefer a good today rather than tomorrow) “it is not sure whether the young man will ever attain old age; hence, the good on hand is superior to the one still to come.”

3. advocated private property (thou shall not steal)

Did that strike you?

Rothbard points out that leaving out religious thought from the history of economics would disastrously skew our understanding of how these ideas came about. After all, the early economists called themselves “moral philosophers,” not economists. You can’t separate ethics and morality from economics, can you?

Business is about humans, perhaps we should have anthropologists on our teams. Ed Kless says, “Business ain’t science.” The history of the theory of value is long, and includes many errors. Why do you think cost-plus pricing is so endemic in the business world, even though it’s a flawed theory?

Accountants have foisted that idea that debits equal credits. But exchanges take place because of the inequality of the items being traded, and because we don’t book the customers’ profit from the exchange, in the real world debits don’t equal credits!

Do you have a specific metaphor to explain the win-win nature of voluntary exchanges?

What’s your response to the argument that “value pricing is hard”?

What is the number issue facing the CPA profession in your opinion?

Ed’s Questions

The three laws of thought: Law of identity; Law of non-contradiction; and the Law of the excluded middle.

You would think most people in business today could grasp these laws, but how often do our customers in business ask for things that are contradictory, and why don’t we professionals call them out on it? Any thoughts on that?

The notion of causality is part of natural law. The confusion between causality and correlation is endemic, however (wet streets don’t cause rain). Do you see this misunderstanding in the business world or among your customers?

Economists, media, commentators, etc., all seem to miss the vital role of the entrepreneur in the economy. Comment on that for us.