Generating Revenue

Over the last couple of weeks, I've been talking about the impact of automation for small business. I've been talking about being an owner and making rational decisions that help to either reduce expenses or contain expenses associated with the growth of a business. But today, I'm going to talk about a strategy that rarely applies to small business ... makin' money with technology investments.

Generating Revenue

What I'm referring to here is to use technology to create technology products. Technology products could be things like hardware or software. Example: your company makes cell phones or software apps that can be installed on cell phones. You make the products and sell them, making a little money off of each unit sold. 

You can also make money off of intellectual property: patents, trademarks, trade secrets, or even books. Example: your company could have a patent on a critical business process that it licenses to other companies. You could have written a piece of software that gets licensed to other companies. Either way, you make money off of the licensing. Also, maybe you wrote a very successful book. Every time a book is sold, you're making a little bit of a royalty. That's money earned from intellectual property. 

Why This Traditionally Doesn't Matter to Small Business ...

Usually, the generating revenue strategy isn't a good fit for small business because they're not making technology products, or, they don't own any intellectual property. It's a great idea it's usually not applicable. The small business is too busy doing small business things - things that matter to it and its customers - than focusing on making technology products.

... But Why It's So Cool!

The cool thing about this strategy is that it doesn't suffer from diminished returns as the previous two strategies.

On the one hand, when reducing expenses, you can never get expenses down to zero, and the closer you get to zero, the harder it is to earn any kind of return. Using the reducing expenses strategy, the earliest returns are the largest returns, and it's not a viable long-term approach to competitive advantage.

On the other hand, when containing expenses, you're dealing with the net present value of money. The money you earn in the future by investing in technology won't be worth as much as it is today. So relying on containing expenses also isn't the best strategy for long-term competitive advantage either.

Then there's making money! You can generate as much money as you want and there's no diminished return - with one exception: you'll pay more taxes, but still! Everyone likes making money. It's just kind of hard to do for small businesses because very often they're not a technology company in the first place.

Can Tech Pay for Itself?

The small business, though, isn't entirely out of this poker game. Let's say, for example, your company develops an app for a mobile device. There's nothing else like it out there. And in your commission agreement with the developer, you've retained the copyright IP (intellectual property) on that app. 

With a slight modification to the app, not only could it fulfill your purposes, but it could be resold to other companies with similar problems, and your firm can earn money back from the IP investment. It's a residual revenue flow that helps to both offset the R&D (Research and Development) cost of the app, plus, it earns the company a little bit of pocket change over time. 

Of course, the small business will eventually have to ask itself: are we a technology company? Are will going to continue to develop, distribute, and maintain software products for other companies in the future? That's where new ventures can be spun-off or sold to help pay for the risk taken when developing the IP. 

Think about it: has your firm created unique pieces of software that it could market to others? Have you developed proprietary business processes that nobody else can easily emulate? Do you own patents, copyrights, or other forms of intellectual property that can be exercised to earn a residual income stream for your business?

Next time: what technology should be doing for you in the first place.

R

Effects of Automation on a Small Business

In a previous post, I was talking about how you might be trading your time for money. That's how an employee thinks, and not how an owner thinks.

An owner is a person who is in charge of their own labor, production, and output cycle. They are the boss.

Maybe they are the owner of their own work (they're a freelancer). Maybe they own the work of others (they're a boss). Maybe they own their own small business. Regardless, an owner is a person who can make rational decisions that change a business process.

So an owner - recognizing that they've created a business model that trades their time for money, and that they want something more than just a job - attempts to invest in technology. Technology, they presume, will make them more productive and reduce their hands-on time with the business. That's a fairly reasonable assumption:

Investment in technology will increase automation, improving the owner's efficiency and productivity. An example: instead of writing out invoices and timecards and expenses, they subscribe to an online cloud service that automates capturing their time and expenses, prepares their invoices, sends them, and facilitates payment. That, indeed, improves productivity for the owner and increases how effectively they use their time.

But there's several ancillary benefits here. Primary, they've started a process of systemizing their business.  Systems are repeatable business processes and can be sold, and through this investment, they're actually building an asset out of their business rather than relying upon it for a job.  Greater systems reduces the friction of a business - that is to say the number of touch-points the owner has to run through to keep the business operating. Think about it: if the owner is able to automate a majority of their billing processes, then it takes less touch (less effort, less friction) to keep the business going and the money coming in. 

That allows them to scale: take on more clients and to become more profitable over time. And more profits leads to spending money with the highest potential of return - probably re-investing in more technology. So it becomes a virtuous circle: investments in technology produce a visible, meaningful return that increases the value of the business as an asset, and, pushes profitability up.

That's probably going to be a lot different in terms of a strategic outcome than somebody else who didn't invest in technology - rather, let's pretend they spent their money on marketing. They got the word out about their businesses and attracted more clients, and find themselves more busy than they've ever been. They're working like a great employee of the job they've created for themselves.

They didn't invest in technology which means they don't have an ability to automate, and that pushes up the cost of their labor. They've got to pay attention to the little things like time capture, invoicing, and receivables, and they aren't spending time on their work product. That pushes their productivity and efficiency down. Further, they haven't systemized the business. They haven't built an asset ... it's just their job that they continue to toil away at, touching more and more things (creating more friction), reducing their profitability and their ability to reinvest their profits in the business.

Do you see their mistake here? They spent money on marketing and attracted a bunch of new business, working harder instead of smarter, which made them less of a return and didn't bolster their business as an asset. They did, however, perform well under the stress of a job. 

More investment in technology creates more automation and more systems. In turn, that transforms the business into an asset - something that can be resold and repeated by anyone over time. 

So, okay. Next time around, let's talk about how businesses can confront the problems of investing in technology or labor. We'll talk about the options small business. In the meantime, take a look at your small business. Where are you automating? Where's the low-hanging fruit that would systemize your business and transform it from a job and into an asset? How is the lack of technology reducing your capability to grow, expand, and scale?

R

Trading Your Time for Money: Thinking Like an Employee

Hey there.

You are a small business owner. You own your own business. Yet even still, you're probably thinking like you still worked in a job. That's to say that you've patterned your business model after trading your time for money. So your business model looks something like this:

You land some work. You declare your hourly rate. You produce some form of output over time. You receive money in trade for your time. Hey, not a bad deal, and you start marketing yourself to more clients. Your first client is happy to give you recommendations, and leveraging their trust, more people sign on the dotted line for your services. Sounds great, eh?

Well, there's an unfortunate reality happening in the background that's actually hurting you - a negative system based off of your business model. That pattern looks like this:

You see, the more work you obtain, the less time you have - because there's only one of you. You're only capable of so much output (you can only work forty, sixty, eighty, or even a hundred hours in a week), and eventually, you make a diminishing return on money.

You flat-line. You can only work so hard, with so many clients and projects, and make so much money. And system is part of what's hurting you. You're thinking like an employee.

Employees trade their time for money. It's the only revenue stream they have. But trading time for money isn't a business. It's a job. Their work isn't scaleable, which means, you can never add more time and you can never add more labor. Meanwhile, some of the ancillary effects of the system should be pretty obvious to you. The more clients you obtain:

1. The more work you're contracted to perform.
2. The less time that you have, diminishing your ability to take on new work.
3. Tardiness increases; deliverables become more and more late; quality slides and you make more errors; you over-commit and under-perform.
4. That diminishes perception and confidence. Fewer people can recommend you. You aren't paid top billing for your services. You're working as hard as you can for little benefit.
5. Your business develops a bad reputation; you burn out; cash flow becomes constrained.
6. You're out of business.

One of the first things to recognize when owning your own business is that you're not an employee. You've got to stop thinking like one. You're creating a great job for yourself but not a great business. 

Next time, I'll talk more about thinking like an entrepreneur or a business owner, and address potential solutions to this problem. Until then, think about your business. Where are you trading your time for money? How isn't your business able to scale because of your model? That'd be a great place to start thinking about how to transform your business and change your thinking.

R