Monthly Bookkeeping and Accounting
Posted on January 30, 2015 @ 07:47:00 AM by Paul Meagher
For many small businesses and startups this is a critical time of the year to establish good bookkeeping habits. The end of the first month of the year is when you should make sure that your books for the first month of 2015 are up to date. Your "books" don't have to be entered into a professional accounting package although that would be nice if you can manage it. As long as you are keeping track of all your business related income and expenses for the month, filing all of your receipts by month and/or by bill type, recording the beginning mileage for your vehicle, etc... so that when tax time comes next year you are not scrambling through a disorganized mass of receipts, statements, invoices, and emails to figure out your income and expenses for 2015. You can also have multiple folders per month to organize things a bit more.
The end of each month is a natural time to take stock of what you've done business wise that month. You can record your income and expenses in a scribbler, in a text file, in a spreadsheet, in a database, in an online book keeping service, or in an accounting program. It doesn't matter at this point, the important thing is to create a record of some form that journals all the important business transactions from January 2015. If you wait until next month, your memory for what you did in January
2015 will begin fade, your pile of receipts will build up more, and the task of bookkeeping will become increasingly uninviting. I'm talking from experience here and this advice is as much to myself as it is to you.
Getting into a monthly habit of making sure your business bookkeeping is up to date, even if your transactions are recorded in a scribbler, sets the stage for making ongoing improvements to your bookkeeping systems as each month goes by this year. It is also not too late to register a business to make filing your income taxes more
logical next year.
The simplest thing you can do to get started is to create a folder (or folders) for all your statements and receipts that is titled "January 2015" (add extra labelling if you have multiple folders). Put a copy of all relevant transactions, statements, invoices, receipts and so on for January in this folder. You can arrange your system differently later on but at least this is a start. I'm no guru on accounting but there are guru's online who can give you ideas about how to setup various expense and income accounts that you might to record your transactions under. There is no single right way to do your accounting, whatever works for you and makes tracking your business expenses and income over the year possible and also makes doing your taxes in 2016 less painful. You don't have to set the bar too high for yourself because you can keep improving your bookkeeping and accounting systems each year, however, the foundation for all of it is getting into a habit of spending some time trying to get your books are up to date at the end of each month. Fail this task now and you are setting yourself up for another year of financial chaos that only gets straightened out when income tax season rolls around again next year.
So enjoy the Superbowl this weekend, but make sure that you also put aside some time to get your books for January 2015 in some type of order, even if that just means putting all your transactions in a folder, figuring out your starting mileage for 2015, and perhaps printing off some bank statements and bills if you ultimately end up printing these off for your records or when doing your income taxes for the 2015 tax year. Get on top of it now, and get into the habit of doing your bookkeeping
and accounting at the end of each month, and you will master a critical business skill that will reward you with a better sense of your ongoing financial situation throughout the year and will make doing your income taxes next year relatively pain free. You will also be in a better position to optimize the taxes you pay out each year if you know where you are financially, what expenses you have to claim so far, what sales taxes you currently owe to the government, what sales taxes you can claim, and so on. Better bookkeeping is power when it comes to figuring out how to optimize your tax situation.
In conclusion, if your resolution for 2015 was to improve your bookkeeping and accounting systems, the end of January 2015 is the critical time to set yourself up to accomplish that by doing some month end bookkeeping and accounting (the latter implies that you have some income and expense categories setup to record transactions under).
Startup Weekend Experiences
Posted on January 21, 2015 @ 10:23:00 AM by Paul Meagher
Last weekend I participated in a "Startup Weekend" event for the first time. You can find out more about startup weekends and upcoming startup weekends at StartupWeekend.org.
Our particular version of it started on Friday at 4:30 pm and involved around 80 participants, mostly from local universities which included students in business, computer sciences, and agriculture programs. I say agriculture programs because this particular startup weekend had an agricultural bias as it took place on an agriculture campus. We began with networking games so that the people in the room could begin getting familiar with each other. This took place for around 45 minutes. After that there was rapid fire pitching where everyone who wanted to was given a minute to pitch their idea. The quality of the pitches was frankly not that good but some stood out more than others.
As the pitches were going on a title was given to each pitch (by a facilitator) on a large sheet of paper that was eventually taped to the wall. There were several such papers taped to the wall. We were all given three stickers that we could put on the three pitches we deemed the best. The top 8 pitches were asked to pitch again so that people could decide which pitch they wanted to work on over the weekend. I picked a local food startup and worked on that startup idea with 7 others over the weekend. We began working on the startup idea on Friday evening until 9 pm, then from 9 am to 9 pm on Saturday (when the bulk of the work gets done), and finally from 9 am until 2:30 pm on Sunday when we started pitching the 8 startup ideas to judges.
The process can be very intense as groups work to acquire enough conviction in the idea to want to develop business models, financial spreadsheets, customer validation data, powerpoints, websites, and social media accounts for the startup idea. In our case we made very little progress until Saturday afternoon and then in about 10 minutes the pieces started to fall into place as we made a small pivot on the idea. After that it was a matter of working out the details.
During the process various mentors would come into the room and give you their 2 cents on the idea. Teams that were intensely divided on the direction an idea should take began to jell over the weekend.
The final pitch event took place on Sunday at 2:30 pm. We had a panel of 6 judges come in to judge the 8 pitches and select the top 2. The participants at the event had the opportunity to select the 3rd place finisher. The judges were recognized leaders in the local business community so had some credibility in being able to select the best startup ideas.
What impressed me about the final pitches was how far the startup ideas progressed over the weekend from rough ideas to pitches with polished powerpoints, financial analysis, customer validation data, websites, and
more. It is really quite amazing what can be accomplished in the span of a startup weekend.
I'm happy to report that the startup project I worked on won first place. The originator of the idea got to take home $6500 to help start up his business. The credit goes to the team that had a variety of skills that resulted in a startup idea that was deemed the most ready to hit the ground running (other projects were deemed to have too many elements that were outside of the startups near term control so would be delayed in starting up).
I would encourage anyone who hasn't participated in a startup weekend to try it out at least once. A few caveats: The attendees are mostly university students, often taking business degrees or degrees that have some entrepreneurship or "starting lean" elements to it and this event if often promoted as an adjunct to such courses. I would personally like to see more of a mix of ages so there is more business experience in the room but the enthusiasm of youth is a plus. The process is susceptible to block voting as participants come with friends and may choose pitches more on the basis of friendship than merit. Also, one minute is not a long time to pitch your initial idea so it will tend to favor ideas that are simple to express and relate to. Trying to explain a niche opportunity might be difficult with no props and 8 sentences to do so. Finally the process was a bit too indoctrinating in some respects for me in that the lean startup approach might be preached as gospel at these events. I think there are some good ideas in the starting lean philosophy but it scares me when I see students thinking there is a simple recipe to starting a business. The starting lean approach, however, has produced the startup weekend concept and format and should definitely be congratulated for that achievement.
Even though the process is imperfect, I do recommend that you try it out at least once as there is much to learn from the process, the enthusiasm, and the camaraderie that develops over an intense 54 hours. It is an opportunity to experience the power of teamwork as people with a variety of skills and experiences come together to work on a startup idea.
Posted on January 14, 2015 @ 12:37:00 PM by Paul Meagher
This will be the third blog in my series on Ecological Business Design. In my first blog, Ecological Business Design, I introduced the idea and it's possible benefits. In my second blog, Find Your Niche, I tried to demonstrate that the ecological concept of a "Niche" might be useful for thinking about how to design a business. The ecological concept of a niche is more evolved than the business use of that term and provides a cluster of
useful concepts for thinking about the market for your business and how to manage it over time.
In today's blog I want to explore another central concept in ecology called tropism, which is also related to the concept of a food web, which in turn is central to defining what an ecosystem consists of. Many business writers and academics like to talk about the startup ecosystem, an innovation ecosystem, or simply a business ecosystem. It is quite sexy and accepted to do so. The problem I have with many of these articles and papers is that concepts from ecology actually play very little role in their theoretical approach so the authors should have simply used the term "system" instead of "ecosystem" (or no reference to "system" at all). One recent example, is
White Paper: Announcing 5 Ingredients For Fostering A Thriving Startup Ecosystem. In this paper the author argues for the importance of 5 ingredients for creating an environment for startup success: talent, density, culture, capital, and regulatory environment. I have no issues with any of these suggested ingredients or their importance, however, I fail to see the motivation for using the term "ecosystem" to characterize this list of ingredients.
What more do we need in order to legitimately use the phrase business ecosystem (or startup ecosystem or innovation ecosystem)?
In my opinion you need to incorporate the concepts of tropism and food chains into your discussion. An ecosystem is not just a juxtaposition of elements (or ingredients) existing within an environment. Those elements have specific types of energetic relationships to each other. These energetic relationships are often hierarchical and are referred to as the tropic levels of the ecosystem. At the base level there are "producers" such as plants which provide the foundation for all the tropic levels of the system. The next tropic level is a "consumer" of these
plants, namely, a herbivore of some sort. That herbivore in turn may be consumed by an omnivore or carnivore called a "secondary consumer" which in turn may be consumed by another carnivore higher up in the food chain. Each level in the food chain involves a loss of energy as only a fraction of the biomass from the level below it is converted into the biomass of a consumer occupying the next level up in the food chain. The hierarchy is not strict because an omnivore, for example, can feed both from the base level of the food chain (the producer level) and
some level of consumer organism below it. Because the hierarchy is not strict we might be inclined to call it a food web rather than a food chain. Nevertheless, there is still some notion of tropic levels in a food web as
we can analyze each organism in terms of what it eats and what eats it.
The top level species in the food chain is called the apex predator, however, we need to be careful here because ecosystems do not tend to have neat linear orderings like the levels of a hierarchy in a government organization. Ecosystems are more likely to have a circular or cyclic arrangement and the way ecosystems do this is by having another type of component in them called "decomposers". So the apex predator dies, or is killed by some unfortunate accident, and is in turn eaten by a host of micro-organisms from bacteria, to larvae, to beetles. Although we can talk about some organism as being the top of the food chain, that organism eventually gets recycled into the food web through the action of decomposers who might be viewed as occupying the top of the food chain if they weren't so tiny. The notion of their being a "top" of the food chain can be problematic depending on how you view the role of "decomposers".
To summarize so far, my claim is that if you want to use the term "ecosystem" as a metaphor to think about how your business might fit within the larger business environment, then you need to think about where you fit within a chain of producers, consumers, and decomposers. Furthermore, you should consider what level you are at with respect
to the base level of the system (the producers) and what that might entail in terms of how much energy/profit you can extract out of the system. There are usually not more than 5 tropic levels in a food chain as there is progressively less energy available at each higher level. The quality of the energy at higher levels in the food chain is more concentrated so supplies more energy per unit consumed, however, there are fewer units at higher levels. To use the term "ecosystem" to characterize the landscape of a business entails, in my opinion, identification of analogues for producers, consumers, and decomposers in the system and the tropic levels each of these entities occupies in the system. It might also involve thinking in terms of circular arrangements rather than just linear arrangements of these entities. Most business writers don't go this far when they use the term "ecosystem" which makes me wonder whether they are justified in using the term as these types of relationships are foundational when thinking about what an ecosystem consists of. The species (or biotic) elements of an ecosystem are not simply juxtaposed next to each other but have specific energetic (or tropic) relationships to each other.
In 1942, the theoretical ecologist Raymond Lindeman died before his last and most influential paper was published (he died tragically young at 27) called
The Tropic-Dynamic Aspect of Ecology. It had a huge impact on ecology and highlighted the importance of using energetic relationships, or tropic levels, to organize thinking about what an ecosystem consists of. One of the reasons the paper is still worth reading is because it contains a very interesting and useful diagram that summarized his understanding of what a lake ecosystem consists off. It illustrates all the ideas that are discussed in this blog - producers, consumers, decomposers, circular (or cycling) arrangements, and tropic levels. The tropic levels in this diagram are indicated by the upside down "v" beside the different levels which denotes the efficiency of the energy conversion at each level (how much of the consumed food is converted to biomass). Depictions of food webs in today's textbooks are somewhat dumbed down compared to Lindeman's own representation of what a food web in a lake ecosystem consists off. Lindeman's own diagram was an evolution from other diagrams he referenced in his thesis (each one trying to capture what an ecosystem consisted of).
In conclusion, ecological business design involves analyzing the big picture of where your business will fit within the context of other businesses and the environment. There are many ways to formulate the "big picture" but if you want to do it using ecological concepts and ideas, then that arguably involves thinking in terms of consumers, producers,
decomposers, tropic levels, and cycling arrangements. Lindeman's diagram of a lake ecosystem is suggestive of the type of understanding you might want to strive for when thinking about how your business fits into the big picture, the business ecosystem. I'm not claiming that this is easy to do, but I am suggesting that if want to use the term ecosystem to characterize your business environment it should include some of these ideas otherwise there is not much benefit in using the term ecosystem to describe it. This exercise in defining your business ecosystem is not guaranteed to make your business more money, but it might produce some useful insights because it offers a technique for thinking about the bigger picture of your business in a different and unique way, a way that is grounded in and guided by ecological theory, ideas, and observations.
Note: An entity called "Ooze" appears in the center of Lindeman's diagram. Ooze actually has a scientific meaning and there are several different types of ooze. Lindeman wasn't being mystical here although the central role of ooze in lake ecosystems seems somewhat counterintuitive. Ooze might be similiar to soil in land-based ecosystems.
Finding Your Niche
Posted on January 9, 2015 @ 08:49:00 AM by Paul Meagher
In my last blog, Ecological Business Design, I promised more blogs to explore the idea of using ecology to inform business design. One point I should make first is that by "Ecological" I do not mean Green Business Design or Environmentally Friendly Business Design. You can find books that explore energy saving and low-impact business practices, but that is not what I mean when I use the term "Ecological". I use the term ecological to mean that we are designing a business using central concepts, ideas and observations from ecology to help guide us. If you google "Ecological Business Design" you will find that it is used to mean green or environmentally friendly ways to run a business. I'm not using it in this sense, although the outcome of ecological business design might produce that result.
One central concept in ecology that has spilled over into business is the concept of a niche. We have all heard the advice that you have to find your niche in business in order to survive and thrive. In ecology,
the concept of a niche is defined by referencing it to the competitive exclusion principle which Joseph Grinell formulated in 1904 as "Two species of approximately the same food habits are not likely to remain
long evenly balanced in numbers in the same region. One will crowd out the other". This principle was given experimental validation by Russian ecologist Georgy Gause who raised two types of Parameciem micro-organisms in a dish and gave both organisms the same water and nutrients. Eventually only one of type of Parameciem micro-organism remained leading to the conclusion that two species can't simultaneously occupy the the same niche in the same place at the same time. One will be competitively excluded by the other based on factors such
as differential reproduction rates, growth rates, etc...
So when designing a business one of the first things you need to do is make sure you have the potential to occupy a niche, that you won't be competitively excluded by another business focused on the same customers or the same resources as you are who might have a competitive advantage, otherwise you will be competitively excluded from entering that niche.
If you are looking for inspiration on how niches are defined then the best thing you can do is study birds. Theoretical development of the niche concept has been most heavily influenced by studying bird behavior and
a classic study was by Robert MacArthur on different species of warblers in northern forests. MacAurthur observed 5 species of warblers in a plot of white spruce on Mt. Desert Island in Maine. He observed their feeding behavior and recorded what part of the tree they spent their time feeding upon. He found clear differences in which part of the tree the different species of warbler fed from and he used this to explain why competitive exclusion didn't cause one type of warbler to wipe out the others. Each type of warbler feed from a different part of the tree, they partitioned the resource in such a way that there was less potential for a competitive interaction.
The niche concept is important because it helps to define what we mean by competition. We compete because we are trying to occupy the same niche. We avoid competition by creating a niche were there is less overlap in the resources we feed off. When two businesses try to occupy the same niche at the same time is when the need for competition arises which leads to the need to develop competitive abilities to remain in that niche.
The niche concept was formalized by one of the most important theoretical ecologists, G. Evelyn Hutchinson, who talked about n-dimensional niches. Although this involves a bit of math notation, I think it is worth reproducing a bit of his writings on this matter because they have been so influential in formalizing the concept for ecologists.
Consider two independent environmental variables x1 and x2 which can be measured along ordinary rectangular coordinates. Let the limiting values permitting a species, S1 to survive and reproduce be respectively x'1, x''1 for x1 and x'2, x''2 for x2. An area is thus defined, each point of which corresponds to a possible environmental state permitting the species to exist indefinitely. If the variables are independent in their action on the species we may regard this area as the rectangle (x1=x'1, x1=x''1,x2=x'2, x2=x''2)
but failing such independence the area will exist whatever the shape of its sides.
We may now introduce another variable x3 and obtain a volume, and then further variables x4....
xn until all of the ecological factors relative to S1 have been considered. In this way an n-dimensional
hypervolume is defined, every point in which corresponds to a state of the environment which would permit the species
S1 to exist indefinitely. For any species S1, this hypervolume N1 will be called the
fundamental niche of S1. Similarly for a second species S2 the fundamental niche will be a similarly
defined hypervolume N2.
So finding a niche according to Hutchinson involves defining the limits for each of the N environmental factors which would permit your business to exist and making sure that another business does not substantially overlap in the same hypervolume area with respect to those N environmental factors and their limits. If there is overlap your choices are to add a new dimension, adjust the preferred range on one or more of the dimensions, or develop competitive abilities so as to occupy the space better than your competition.
Hutchinson distinguished between the fundamental and realized niche. When designing a business we will often be defining the fundamental niche we would like to exist within, a niche that does not overlap with our competitors perceived fundamental niche. The reality, however, is that there will be some overlap and some interactions with competitors that lead to your realized niche. This could be construed as a warning that your business plan will likely need to be altered in light of overlap and competition so that the niche you might have wanted to occupy is different that the one you will find yourself occupying. This does not mean that the niche concept is useless, but it does help to warn you to expect divergence and perhaps anticipate it a bit better so you can
react better, perhaps by adding another dimension to your niche, occupying a different range on a dimension, or anticipating some of the competitive abilities you might need to develop.
An illustrative example might be opening a crossfit gym. If you are the only crossfit gym in town then you might not consider other types of gyms as competition because you occupy different niches. This is a nice position to be in if the resource base is there to support multiple fitness outlets. Likewise, many startups are potentially free to grow rapidly because they occupy a niche that no other business as currently occupying but for which there is a need. What happens, however, when another crossfit
gym opens up across town motivated perhaps by your success? The niche you envisioned occupying may now need to change to deal with the competition or you may need to develop better competitive abilities or you may not need to adjust your gameplan very much because there is enough resource for two crossfit gyms to exist in the different locations they occupy. It might be useful to do market analysis at this point to determine how many crossfit gyms are able to serve a population of size N in other cities to determine how worried you should be and how you might want to react given the size of your city or resource base.
In ecology, species entering a new territory are often referred to as being 'r-selected' and have fast growth attributes to take over the resource quickly, however, there might come a time when that resource is becoming more scarce and the species that survive need to develop other attributes associated more with efficiency than growth. These successional species are often referred to as being 'K-selected'. This might be another concept to keep in mind when designing your business - the niche might be wide open at first for a startup and you need r-selected attributes to exploit it but you will eventually need to plan for a time when the niche becomes filled with potential competitors and how your business will have to change as a result. Your realized niche can change over time as competitors come in and different sets of business attributes become more important to remain in that niche.
So my objective in today's blog was to begin to demonstate that ecological concepts might be useful in designing a business. One such ecological concept is the concept of a niche. The concept of a niche helps you to reason about your market, about your competitors, and about how you might maneuver your business over time to survive and thrive. The associated concepts of competitive exclusion, n-dimensional niche, fundamental niche, realized niche, resource partitioning, r-selection, K-selection are all potentially useful in designing your business and in managing it over time. If reading business books is not your thing, you can learn more about the niche concept by reading about and observing how different species of birds coexist. Nature, in particular the study of bird behavior, has something to tell us about we might think about and find a niche.
Ecological Business Design
Posted on January 5, 2015 @ 02:45:00 PM by Paul Meagher
Over the holidays, the main book I've been reading is Principles of Ecological Landscape Design (2013) by Travis
The basic idea is to design landscapes according to ecological principles because such landscapes are more resilient, less costly to manage, provide more ecosystem services, are more attuned to local environmental conditions, and are more sustainable. Each chapter of the book examines major ecological principles and uses those principles to suggest ways to design a landscape. What I like about the book is that it takes the idea of "learning from nature" and makes it makes it very concrete by discussing different ecological principles along with the relevant research to back up those principles and then goes about suggesting how these principles might inspire us to design landscapes in ways that might be different from the ways we currently designed landscapes.
The idea of designing landscapes in a way that obeys ecological principles is an idea that is becoming increasingly
accepted in urban planning and landscape design. The way in which we manage stormwater in cities, for example, is often to run pipes underground to carry surface runoff away to some ultimate discharge point. We are building the equivalent of streams underground
to deal with surface runoff and often these systems can be easily overwhelmed by larger rain events that are happening more frequently (in some parts of the world) as climate change expresses itself in increased climatic variability (i.e, larger rainfall events). Under normal circumstances a wetland would handle surface runoff for us and would also handle many of the pollutants coming from surface runoff better (i.e., capture and filtration) than a simple stormwater system (i.e., capture only). So a better way to design stormwater systems would be to use ecological design to construct the equivalent of wetlands to handle surface runoff. The diagram below is from the acclaimed Menomonee Valley Stormwater Park project in Milwaukee, Wisconsin and gives you an idea of how ecological design principles can be used to better handle stormwater. Their ecological design approach also created a great visual attraction for the city, namely, the Stormwater Park area.
So the topic I want to explore in some upcoming blogs is whether there is any benefit to using ecological concepts to think about business design. Can concepts from ecology provide a useful perspective for designing not just landscapes but also businesses? Are ecological concepts such as tropic levels, succession, biodiversity, resource partitioning, and so on useful for thinking not just about how to design a landscape, but also how to design a business? One reason for thinking these ecological concepts might be useful is because they are terms for characterizing the workings of whole systems rather than how individual parts of a system work in isolation from each other. Systems thinking is often useful in business and one way to potentially develop more systems thinking expertise is to try to apply concepts from ecology to business.