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Part three of my look at some of the jargon words I use and hear other people use, with plain English definitions. This time, discounted cashflow and return on investment.
Discounted Cashflow
This is a complicated one. There’s even an equation:
But in basic terms, it means working out what money will come to you eventually from a business or investment and comparing how much that money will be worth to you in future years compared with now.
If you’re running a small business, the important thing to know about discounted cashflow is that it is completely irrelevant, because you have no way of accurately predicting the future. You don’t know what shape your business is going to take in 6 months’ time, let alone planning detailed spreadsheets for the next 3 years.
Return On Investment – ROI
ROI is a much more useful and more widely used term. In general use, it means making money from what you put into the business. I often use the metaphor of a business as a machine, where you put in time, effort, skill, money and resources, crank the handle of the machine and out pours profit and enjoyment. It’s my Joy of Business metaphor, and the profit and enjoyment is your return on investment.
 Photo by mag3737 More technically, ROI is the amount you make from your business compared to the money you’ve put in, or the amount of gross profit you generate from a specific marketing activity. For example, if an online shop spent £1000 on Google Adwords, and made back £2000 of gross profit, that would be a 200% ROI.
I hope that helps you cut through the jungle of business jargon – if you need any help clearing your strategic path, and you need some business advice, then you know who to call.
Business jargon Part 1 – Sensitivity analysis and KPI’s
Business jargon part 2 – Opportunity cost, scaleability and marketing collateral
Many of my business advice clients come to me saying that they’ve never learnt how to do business, and they’re not sure if they’re doing the right thing. Mostly, they don’t have an MBA or other business qualification.
I do have an MBA, but I’m pretty sure that’s not why they’re coming to me. In fact, I’m not sure that most of my clients would even know that I have an MBA. They come to me because they think that I do know what I’m doing, or rather, what they should be doing with their businesses.
So, is an MBA a help or a hindrance?
An MBA will not teach you how to run a successful small business. Most of the concepts and case studies are about corporate businesses, and cannot be directly applied to small businesses. I do have some goodies from the MBA which I regularly apply to my thinking about my clients’ businesses, but you don’t have to do the whole course to get these – most of them are on my website.
An MBA will make you think. It will make your brain bigger and stronger. Most of the stuff in there is way more difficult than any other Master’s degree, and it teaches you to think in a very rigorous way. It teaches you some great ways of making decisions – I drew up a decision matrix this morning to decide which format of business cards to buy for my new business, Tender Winner, and it’s only now I’m thinking about it that I even recognised that this was a decision matrix based on payback period versus discounted cashflow.
It helps you to understand the business jargon, and not to be intimidated by someone going on about discounted cashflow.
And it gives you some great recipes to follow – the BCG matrix tells you about how to plan a range of products, and I have a version of this for small business which I probably draw for every client I see. Remind me to write about this one and draw it here. But you do have to remember that these recipes and rules have to be adapted and quite often contorted to be useful for the smaller business.
Has it been useful for me?
The main things I’ve got from doing an MBA are:
- Confidence – I know I can hold my own and that I’m clever enough to think through the difficult problems.
- Enjoyment – the MBA taught me to enjoy the intellectual challenge of the difficult problems.
- Recognising bullshit – when someone tries to pull the wool over my eyes with jargon or complex spreadsheets, I can see what’s going on, and be confident enough to say, “What exactly is this on row 12?”
Actually, the main thing I learnt was not to watch TV. When I started my MBA I realised that I would have to do 10 hours a week of studying on top of a 50-60 hour a week job. I cut out TV rather than cutting out going to the pub, and I still don’t have a TV habit.
Was it worth 12k and 5 years’ of extremely hard work on top of a demanding job? Probably not. With hindsight, I could probably have read the FT to understand the jargon and the case studies. And a bunch of business books aimed at small businesses which I had to read anyway to be able to work with the small businesses I really love.
What would you recommend instead?
If you really want to know how to run a small business – go and work in one, or set one up, and commit yourself to learning something new every day. Read everything you can about small business, take notes, get yourself a business advisor who has done it before, and be prepared to make huge mistakes and then learn from them.
Absorb knowledge and skills like a great big sponge. Be prepared to look dumb when you ask questions, and just be really, really interested in learning how to do this stuff.
Lots of my business support clients are busy people. We’re all busy people. But sometimes being busy stops us getting things done. There are lots of resources out there for managing your time better and I don’t want to just duplicate those, but to encourage you to do something other than work on your business for a change.
Rejuvenate yourself
What I see a lot of business owners doing is working very long hours to keep up, becoming very tired and then going home and only having the energy to slump in front of the TV. Why not do something with your leisure time which will bring you pleasure and rejuvenate you?
Go out with friends; have some human contact and some interesting conversations. When you’ve done your work for the day, why not go home and read one of the many business books which can inspire you? You’ll get ideas and a new lease of life for your business.
When you’re tired
 Photo by Amy Messere If you are just too knackered to think properly, or you want to switch off for a while and watch TV, you’ll probably enjoy it more if you’re watching something you recorded because you’re interested in it, rather than being drawn into the latest EastEnders because it happens to be on TV at the time.
Treat yourself to some proper relaxation, so you’ll bounce back in the morning. I asked some friends what they do to relax, and they suggested, a good novel, Star Trek, folding towels, jumping up and down on a mini trampoline. I guess that sums up my friends, but why not have a go?
Instead of seeing attendance at networking events in the evening as a necessary evil, why not see it as part of your social life? Get involved in running one of the events, or get active in politics or your kid’s school. Most business owners think that they don’t have time to do these things because they want to prioritise their business and don’t feel they have the energy for anything else, but my experience is that you get a lot back from being involved.
The successful business owners I know are people who are very active in their communities. Anything which widens your social circle is good networking; you never know what will come from your involvement with your local Amnesty group, or book group. At the very least, you’ll get a fresh approach which you’ll be able to take back to your business.
Friends and family
If you have a partner or family, then you’ll probably be focussed on making money in your business to provide for them financially. Which is great – it gives you an enormous incentive to develop your business. But, what about the time you spend with them? What about that quality time where you actually go out and do interesting and exciting things with your kids? If you did more of that, is it possible that you might feel more motivated in your business and see the point of all that hard work?
See this as investment
See all the wonderful things you do outside of work as an investment in yourself and your business and your business will thank you for it.
One of the charming commentators on my blog in the Brighton Argus said that I was jargon ridden. I looked over some of my blog posts and couldn’t see any business jargon, so I thought I’d put some in here to keep him happy.
So here are some of the juicy jargon words I’ve noticed myself using recently with my business advice clients, with definitions of what they mean in plain English for real people who happen to run businesses.
Opportunity Cost
This is the cost of choosing to do one thing over another. If you spend 5k on making a new website to promote your business that’s 5k you don’t have to spend on other opportunities. Maybe you’ve decided to do the website rather than a direct mail campaign (usually the right decision) but doing one thing can often mean you can’t do something else.
Opportunity costs don’t have to be financial – maybe you’ve committed to spending 30 minutes per day on Twitter to build relationships with potential clients. The opportunity cost is all the other things on which you might have spent that 30 minutes per day.
Often in business, we make decisions based on weighing up the pros and cons of different things to do. The opportunity cost, or what you’re missing out on, can be a big part of that decision.
Scalability
 Image by Vicky Townshend I use this one all the time. I look at businesses in terms of whether they are scalable, and in what way.
Scalability means the ability to make the business into something much bigger. If you are a one person business which needs you to make the thing that you sell, such as many consultancy or craft based businesses, scalability can be quite difficult. On the other hand, if you can teach other people quite easily how to make the thing you sell, you can grow your business much more easily just by bringing in more people. You’re scalable.
As I work with businesses to help them to grow and make more money, one of my first jobs is to work out how a company can be made to be more scalable, as this is one of the key success factors you need to be a winner.
Here are some other articles where I talk about scalability issues for small businesses:
Key success factors
From freelancer to grown up business
Scaling up your business
Marketing Collateral
Fancy name for all the things you use to get your marketing name across, such as business cards, website, leaflets. We think of collateral mainly as security for a loan, but it also means “in support of” in this version.
Your Favourites
What are your favourite business jargon terms?
Part 2 of business jargon definitions covers sensitivity analysis, KPI’s
Part 3 gives definitions of discounted cashflow and return on investment (ROI)
Many of the business owners I advise are sponges – and I encourage you all to mop up less.
 Photo by tonipieleanu What are you going on about Julia?
What I find myself and other owners of small businesses doing is mopping up after everyone else. Your employees do their thing, and then go home at 5.30, whether they’ve finished their to do list or not. While you stay on, or come in at the weekend to make sure that everything is finished off.
And the spongy business owner does all the things that it’s not clear whose job it is. Mrs Sponge notices when we’re out of post it notes, and picks some up in Sainsbury’s when she does her food shopping. Mr Sponge will also do everyone else’s expenses, empty the bins and sweep the snow away in the car park.
Sound familiar?
Business owners are leaders
Now all of this is just you stepping up and taking responsibility for sorting things out. Getting into action is a sign of a leader; followers expect someone else (maybe a magic elf?) to take care of all of these things.
Which is good. But is doing this stuff actually the best use of your time? Might you be better concentrating on all the things you’re really good at, such as sales, product development, looking after your top customers? You’ll notice that these are the things which will add value to your company. Emptying the bins does not increase turnover.
And of course what you’re probably doing is emptying the bins in the evening in addition to everything else, so you spend too much time at work doing the dull things and not enough time enjoying the fruits of your labours and relaxing.
How to stop being a sponge
 Draw up a job description for yourself. What is your role in the company? This is a very revealing exercise, as most of us have started from a position where we had to do everything, and we continue to do everything.
Decide who else should do all those little things which eat up your time. You can spread this round the team, e.g. everyone empties their own bin, Sonia does the expenses and Simon is in charge of stationery ordering. Or you can make one person office manager, on top of their usual role.
One successful entrepreneur I worked with had a no touch policy. He was determined to concentrate on what he was good at (in his case, sales) so he gave absolutely everything he could to everyone else, even if it was just photocopying a sheet of paper. He loved to sell, so he just wanted to get out there and meet potential customers.
While this might seem extreme, and of course, needs a good team around you, there are some lessons for the rest of us. Often we fail to delegate because it seems like too much trouble, or because we don’t like to boss people around. Or because we’re afraid to ask. Or we’re afraid to be seen as the boss at the top of the hierarchy.
My advice here would be to ask people nicely, say thank you , and remember that even if you have a very flat structure, and want to empower everyone around you, you are the boss and people will expect you to tell them what to do. That’s part of being a leader as well.
If you liked this article, I bet you’d like to stay in touch for more goodies. You can follow me on twitter, get this blog on RSS (see the big orange button at the side of this page) or sign up to my newsletter for the gossip and tips.
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Julia Chanteray at The Joy of Business helps small businesses to develop and grow. She uses her years of experience of running successful businesses to advise, support and mentor businesses in Brighton, Sussex and London.
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