Aaron Hoos

Old school capitalists succeeded because they were well-connected in an exclusive “old boys network”. Whether they succeeded in business or in the capital or real estate markets, it was largely because of who they knew.

But the internet changed everything. It levelled the playing field, making it possible for anyone to start a business or make money in the stock market or real estate market. True: Not everyone who tries WILL succeed, but the possibility didn’t exist and now it does.

There are still obstacles and unknowns but that doesn’t stop today’s scrappy capitalists from rolling up their sleeves and fighting for success.

The ones who will succeed will apply a specific set of rules to become successful. There are six rules of the scrappy capitalist. So far, I’ve covered five of them.

Here’s the sixth and final rule that a scrappy capitalists follow to be successful.

SCRAPPY CAPITALIST RULE #6: BE RELENTLESS

If success in business or the markets were simple, everyone would achieve it. But it’s not simple. It takes effort, guts, persistence, patience, confidence and an internal fortitude. Those who lack these things (and can’t acquire them) will never become scrappy capitalists.

Like hammering a nail, success takes relentless effort to make it happen. Here are some ways that the scrappy capitalist can be relentless…

• Starting a new project that takes an initial push to get into.
• Working through the middle of the project in spite of the temptation to quit when the details become too detailed or the work becomes too arduous.
• Finishing well even when other people have gone home.
• Consciously focusing on the desired end-state to help reduce distractions or project-bloat.
• Acting (i.e., working or investing or moving forward) when trusted colleagues and experts tell you you’re wrong.

Being relentless isn’t easy, and I think there are two huge reasons why:

1. It seems to go against what everyone else is doing. That’s hard because sometimes scrappy capitalists need to go with the grain and other times they need to go against the grain. It’s not easy to know the difference. (And if you’re waiting for me to tell you, you’re going to be sorely disappointed… because I don’t think there’s a formula).
2. Sometimes the smartest decision is to keep going when everyone else has stopped, and sometimes the smartest decision is to stop. It’s not easy to know the difference. (And if you’re waiting for me to tell you, you’re going to be sorely disappointed… because I don’t think there’s a formula).

The key here is to find something you believe in and stick with it through thick and thin. Push. Sell. Build. Convince. Learn. Struggle.

That effort will pay off. It might take years of toil and there will probably be times when the cost seems too high and the reward too low, but if you believe in it, keep moving forward.

Click here to view all six rules of the scrappy capitalist.

What a great start to the week! I have a ton of work and a full cup of coffee. So awesome. Oh, and I reconfigured the office in my house so my wife can work in it too. (She’s launching her business next month). So here’s what I’m working on this week…

• Wrapping up some ebooks for clients — they’re mostly done and need some finishing touches.
• Doing some sales page copywriting.
• Writing stock picks for a bunch of clients.
• Writing articles for a debt repair consultant and a mortgage loan broker.
• Writing 3 articles for a credit union members’ magazine.
• Unrelated to writing: I finally found a showerbase that fits perfectly into my downstairs bathroom (part of a remodel that seems to have no end). Believe me, that is GREAT news at our house!

Businesses need to be liquid. They need cash to pay vendors and staff so they can sell their stuff; they need cash to make strategic investments in growth.

Liquidity is huge. It doesn’t matter what kind of business you run. For example…

• A big business (like a manufacturer) needs to pay for its raw materials and marketing before it sells its first product.
• A small business (like a freelance writer) needs to pay his or her bills so they have a computer, word processing app, and internet connection to run their business.
• A real estate investor needs to be able to pursue new deals and to service debt or pay for repairs on a property.
• A capital markets investor needs to be able to invest in that great stock when the price is right.

In some ways (and especially in the early days of running a business), liquidity is more important than profitability. Yes, profitability is important but it doesn’t help if you’re not liquid.

MEASURE YOUR LIQUIDITY WITH THE CURRENT RATIO

So, how can you tell how liquid your business is? The current ratio is a great ratio to use. The current ratio is useful to help you monitor the liquidity of your business, the liquidity of any potential investment you’re going to invest in, and your own personal liquidity.

I should tell you that there are other measure of liquidity — the working capital ratio and the acid test ratio — but the current ratio is my favorite because it’s the easiest to remember while also being pretty accurate. (The other ratios are either less accurate or too complicated or time consuming to be useful).

The ratio goes like this:

Here’s how to understand the ratio:

The two components in the ratio…

• Current assets include anything the business owns that can be converted into cash or used up in the short term — such as cash, short term investments, and accounts receivables. Assets that cannot be quickly converted to cash (such as land and buildings) are not included.
• Current liabilities include anything that needs to be paid within the coming year — such as loans, accounts payables, and income taxes. Liabilities that are longer term (such as mortgages) are not included.

The ratio is derived by dividing current liabilities into current assets.

In simple language, what you’re trying to find out is: How many times does our assets cover our debts?. This tells you how much soon-to-be-cash will pay for your soon-to-be-debts. If you have enough soon-to-be-cash covering your soon-to-be-debts, you’re liquid.

If you don’t have enough soon-to-be-cash to cover your soon-to-be-debts, you’re illiquid. That means, you don’t have enough money to pay your supplies, you don’t have enough money to pay your staff, and you don’t have enough money to market your products. Businesses shut their doors because of liquidity problems!

So let’s look at some examples:

Let’s say you have a lemonade stand and you borrowed $5.00 from your mom to buy lemonade and disposable cups. And let’s say that you sold all of your lemonade and were either paid cash for it or you sold it on account and you’ll send over Bruno your ugly step-cousin to collect if they don’t pay. And in total, you sold $10.00 worth of lemonade.

Your current assets (cash and receivables) are $10.00 and your current liabilities (payables) are $5.00.

Here’s the equation…

And we’ll plug in our numbers…

So our equation looks like this…

To make this equation useful (and as you probably remember from math class), you need to know reduce it down to the lowest reducable denominator:

Now let’s express this equation as a ratio:

2:1

Congratulations! You’ve just discovered that the current ratio of your lemonade stand is 2:1.

That means your assets are worth TWICE what your liabilities are worth. It means for every dollar that you owe, you have $2.00. Good… you want to have more assets than liabilities.

But it does happen sometimes that your liabilities are worth more than your assets.

Let’s consider another situation — one that is all too common right now. Let’s say that you have a wallet full of credit cards and each one has a limit of $10,000. Over time, you end up maxing out each card. You only have a $250 in the bank account to get you through to next payday.

Plugging these numbers into the equation…

That reduces down to:

Or…

.0062:1

In other words, for every just-over-half-a-cent of current assets, you have a dollar of current liabilities. Yikes! I just threw up a little in my mouth. And if your brother-in-law calls you up and needs bail money fast, you won’t be able to help him.

Current ratio is important so valuable no matter whether you’re a business owner or investor or someone who wants to manage your finances a bit better.

If you are a business owner, this is an easy metric to calculate to monitor your liquidity. Just find out what your current assets are (that’s easy because you probably know what your cash on hand and your accounts receivables are) and divide that by your current liabilities (probably all of your payables and maybe any other short term loans you have).

Let’s look at a few business’ balance sheets to get some numbers and make our calculations. (I’m using some numbers from the balance sheets published in Yahoo Finance).

Apple (APPL) (From their annual balance sheet, published September 23, 2011)

So their current ratio is: 1.61:1

Therefore, Apple has 1.61 dollars of current assets (soon-to-be-cash) to cover every dollar of current liabilities (soon-to-be-debts).

Here’s another one:

Everyone loves to hate Research In Motion (RIMM) (From their annual balance sheet, filed March 2, 2012)

Their current ratio is 2.02:1. Even though they are much smaller and more repulsive than Apple, they can cover each dollar of short-term debt with $2.02 of current assets, which is better than Apple’s ratio of 1.61:1.

Or, let’s take Berkshire Hathaway (BRK-A) (From their annual balance sheet, published December 30, 2011)

So their current ratio is 2.42:1. In other words, for every dollar that they owe in the coming year (debt obligations, income tax, etc.), they can cover it with $2.42 in easy-to-convert-to-cash current assets.

Here’s one more that you might find interesting:

American Electric Power Company (AEP) (From their annual balance sheet published December 31, 2011)

Their current ratio is 0.63:1.

That’s right! For every dollar of current liability (of short term loans) they have only $0.63 of current assets. Now, it might not be the end of the world (and with utilities, people are pretty reliant on them so they’re pretty entrenched even if the owe money).

Want to learn even more? Here’s a useful video that lays it out nicely for you. This one is good if you’re a business…

… and this video is good if you’re an investor…

If you’re a business owner, your current ratio is easy to measure and will help you to see if you have the liquidity to pay your financial obligations.

If you’re an investor, you can use the current ratio of potential investments to make sure that they are liquid enough to stay in business and continue selling stuff.

A FEW MORE THINGS TO NOTE

• There are many ratios to use. Current ratio is just one of them and you shouldn’t use it as the ONLY measure.
• I’ve given numerous examples above from different industries. But it’s important to remember that if you want to compare businesses, you should really compare businesses from the same industry. It’s not useful to compare a company from one industry to a company from another industry because what’s healthy in one industry might not be healthy in another.

Until recently, business owners and investors had a deep, wide moat around their castle of success. They made money and then their money made money, and they sat around in mahogany-paneled rooms, smoking cigars. The internet changed everything.

Easier access to markets and an ability to start profit-generating businesses in minutes (instead of months) has created a new breed of business owner and investor. I call them scrappy capitalists. Starting and running a business or investing in equities or real estate is now available to anyone. That doesn’t mean success is guaranteed, but it is available to more people and the scrappy capitalists are the ones who pursue success in business or the markets.

There are six rules that a scrappy capitalist follows to be successful. Here’s the fifth one:

SCRAPPY CAPITALIST RULE #5: TAKE SMART RISKS

Scrappy capitalists know that success doesn’t come automatically. Although more people can start businesses or investing in the capital or real estate markets, it doesn’t guarantee that they will be successful at it.

Scrappy capitalists know that today’s risks are different than the risks that yesterday’s “old school” capitalists understood. And they know that opportunities and risks are often tied together. For example, faster speed to market is a modern opportunity but it’s also a risk. Greater access to capital is a modern opportunity but it’s also a risk. Social media is a modern opportunity but it’s also a risk.

For this reason, scrappy capitalists are not risk averse. They embrace risk thoughtfully and intentionally, perhaps even using risk to their advantage. For example:

• They are aware of changes in risks and use that awareness to trigger action
• They mitigate risks in a way that others cannot, building a moat around their success
• They solve risks that other entrepreneurs/investors cannot solve, monetizing this new ability

Scrappy capitalists don’t avoid risks. They accept that risk is always present and they act anyway when it makes sense to do so.

1. Identify what the risks are: Scrappy capitalists use technology and tools to research potential risks and find out the experiences of other entrepreneurs/investors who have gone before them.
2. Evaluate the level of danger and potential loss: Scrappy capitalists thoughtfully and creatively consider how the “cost” of each risk will impact them. Some risks are worth the cost, others are not.
3. Act anyway (if appropriate): Scrappy capitalists will embrace risk as part of being in the game. That’s what makes them scrappy!
4. Aggressively mitigate risks: Scrappy capitalists build a network of contacts and a library of knowledge and a resource of technology to help them reduce as much risk as possible.
5. Repeat this process every single day: Scrappy capitalists make risk reduction a key part of their daily activity.

Running a business or investing in the capital or real estate markets is now available to anyone. But success isn’t guaranteed and the challenges skill scare many people away. Scrappy capitalists, on the other hand, embrace the risks and act anyway.

Stay tuned. I’ll reveal the next rule of the scrappy capitalist soon.

There are 7 basic human emotions: Anger, Fear, Disgust, Contempt, Joy, Sadness, Surprise.

These are root emotions from which all other emotions spring. (Read more about them here). These 7 emotions are at the core of what drives our decision-making.

If you understand these emotions and build your sales funnel around them, you can sell more.

HOW TO USE SURPRISE IN YOUR SALES FUNNEL

I really like that surprise is one of the 7 basic human emotions. It’s so effective when used in the sales funnel. Ironically, it’s not used often enough.

There are two ways that sales funnels can use surprise and both of these ways can have a very positive or very negative result.

Surprise in marketing: When businesses use surprise in marketing, they capture the fleeting, hard-to-get attention of their target audience. Used well, surprise can rivet the attention of an audience member so they stay engaged throughout the entire marketing message.

This truth in marketing was highlighted for me when I got my PVR. I would watch my shows and just fast-forward through the commercials. But sometimes a commercial (even at a high speed) will appear funny and shocking — surprising! — and I’ll stop and watch the commercial.

Unfortunately, surprise is so rare in marketing. Too often, marketing might start out as a great idea but it is pushed through various corporate departments — each with competing agendas — and what comes out on the other side is a mediocre result.

Surprise in sales: This is another area that has huge opportunity for many businesses but they fall short. When selling, businesses barely live up to expectations. They promise all kinds of things when selling and then meet (or almost meet) those expectations. Consumers are left feeling like they got what they paid for… and nothing else. Is it any wonder that businesses can’t figure out why consumers aren’t “extremely satisfied” when polled?

When I bought my furnace/air-conditioner, I was promised all kinds of things. When the company delivered and installed it, the installers told me that what was promised during the sale couldn’t be done because the salesperson wasn’t an installer and wasn’t aware of the peculiarities of my house. We got the issue resolved after A LOT of frustrating negotiation (and after I contacted the consumer affairs ombudsman). And then I pay every year for a 5 minute inspection. Ultimately, I got what I was promised, but nothing more. So, I’ve never recommended their service to anyone else.

On the other hand, they could have surprised me by delivering what they promised… and more. Even with a little extra courteous service and some proactive follow-up.

Consumers who are surprised by the value of their purchase and the company that sold it to them creates a wow factor that people will remember and return to again and again.

If you want to surprise people in your sales funnel, surprise them in your marketing with clever, unexpected, daring, push-the-envelope marketing that they aren’t expecting. And, surprise them in your sales by delivering more than you promised and providing higher value than they were expecting.