MUSIC BIZ INSIGHT #16

Power Reading for Busy Music Professionals

Hope you're hungry!

MUSIC BIZ INSIGHT is published for musicians, songwriters, managers, label reps, booking agents, entertainment attorneys, studio owners, music publishers, and all others involved in the music business. Its purpose is to help boost your business, find new markets, make the right connections, develop professionally, work smarter and improve your bottom line.

"As a general rule, the most successful people in life are those who have the best information." Benjamin Disraeli

Published bi-monthly by Peter Spellman, Director MUSIC BUSINESS SOLUTIONS: Turning Music Business Data into Useful Knowledge. Career and Business-building books, articles, consulting and more.

P.O. Box 230266, Astor Station, Boston, MA 02123-0266, USA Phone: 978-887-8041 Email: success@mbsolutions.com

Website: www.mbsolutions.com

© 1997 - 2003, Peter Spellman, Music Business Solutions

NEW FORMATS - "Music Biz Insight" keeps growing (and getting behind schedule!) so I've decided to spin off a piece of it into a separate issue, beginning with the current one. This way you'll be getting something from me every month instead of just every two months. Part 1 will remain pretty much as is, except for the "READS & RESOURCES" section. This will now be expanded and become "MUSIC CAREER JUICE." It will feature the best of print, software and web resources to help grow successful music careers and businesses. So you'll get your solid food in part one and your liquids in part two, one month after. Feed on!

NEW MBS RESOURCE - MBS Business Media now makes available a RECORD COMPANY BUSINESS PLAN, complete with mission statement, executive summary, company description, industry analysis, marketing & promotion plan, management description, complete financials and tips for hunting down financing. This particular plan is for a multi-genre label that puts out a broad spectrum of music, from jazz to contemporary Christian, to rock, but you'll find it applicable and relevant to any label venture. $25 postpaid to MUSIC BUSINESS SOLUTIONS, P.O. Box 230266, Boston, MA 02123-0266. Credit card orders (MC, VISA or AmEx) call 978-887-8041. Please leave full acct. number, expiration date and address you would like the plan shipped to.

And don't forget about our other resources: HOW TO START & GROW YOUR OWN RECORD LABEL OR MUSIC PRODUCTION COMPANY, PROMOTING & MARKETING MUSIC TOWARD THE YEAR 2000 and MUSIC BIZ KNOW-HOW -- three books packed with strategy and resources to help you suceed in the commercial world of music. You can get full info on these here.

FOR THE LOVE OF LIFE. By now you've probably heard about THE Y2K PROBLEM. A lot of the problem goes way beyond fixing PCs and mainframes to "legacy software" and "embedded micro-processers." It's already an accepted fact that a large percentage of the world's computer-controlled devices, switches, locks, controls, etc. will NOT be millennium-ready. At the very least, this will result in disrupted services and utilities (read, "electricity, heat and decent water to drink"). For how long? Most theories range from one week to several months. Regardless, it's going to be a stressful time for us all. One of the most non-alarmist manuals available to help us cope with this impending crisis has been prepared by the folks at the Utne Reader and can be downloaded for free at www.utne.com/y2k/html . I highly recommend you put at least one hour aside each week this year to prepare. It will be time well-invested.

M A R K Y O U R C A L E N D A R S !

))) UPCOMING ENTERTAINMENT INDUSTRY EVENTS 1999 (((

April 22-24 NEMO Music Showcase & Conference and the Kahlua Boston Music Awards, Swissotel Boston, the Orpheum Theatre, and various other venues, Boston. 781-306-0441.

May 8-11 Audio Engineering Society Convention , MOC Center, Munich. 212-661-8528.

May 12-15 E3Expo (Electronic Entertainment Expo), Los Angeles Convention Center Los Angeles, California 90015.

May 18-23 A.F.I.M.(Association for Independent Music) Annual Convention & Trade ShowAtlanta Marriott North Central Atlanta, Georgia 30345

May 19-22 Emerging Artists & Talent In Music Conference, Showcase & Festival, Mirage Hotel and Casino, Las Vegas. 702-837-3636.

F E A T U R E

FOURTEEN FINANCIAL GUIDELINES

FOR EVERY MUSIC ENTREPRENEUR, PART 2 of 2

by Peter Spellman, Director, Music Business Solutions

Sooner or later you will have to engage the finer points of getting money to work for you instead of you always working for the money. With this in mind, what follows is the second of a two-part traipse through the often dry world of financial planning. Some of these guidelines may not immediately apply to your particular venture, but remember them, they probably will someday.

As I already said in part one, rather than get bogged down in the details of a finances (see your accountant for this), I thought I'd present some of the more "global" aspects of money and business planning &endash; principles to help guide you on the way to effective and efficient financial management. You can use these guidelines as you assemble your own business plan in preparation for a loan or investment formation. I'd encourage you to file this info and pull it out every couple months for another look.

To review, the guidelines from Part 1 were:

#1: Set Realistic Goals

#2: Nail Down Start-up Costs

#3: Put the Money Where it Counts

#4: Financing is the Sum of its Parts

#5: Building the Best Financial Pyramid

#6: Navigate by the Numbers

And now onto the rest...

Guideline #7: Test the Timing (especially applicable to retailers)

There's a right time and a wrong time to open a business. This is particularly true when the venture is cyclical in nature or in a seasonal location. And not surprisingly, many shoestring start-ups are small ventures in tourist areas or selling goods of a seasonal demand.

The ideal opening date is about one month before the peak selling season begins. The month's lag gives you time to work out operational problems before the bustle of the season, yet the launch coincides with the positive cash flow to get you through the dry seasons.

While it may be common sense, many entrepreneurs overlook its importance and begin the business based on their own convenience or when a location becomes available. Bob Braunstein, a bankruptcy attorney practicing on Cape Cod, reports, "Any business can make it through a Cape Cod summer. But come October half the businesses are gone. It's amazing to see how many new bootstrap ventures quickly take their place and fold before they even reach the summer season."

I share the same observation. Many of the ventures that withered on the vine with an ill-timed start might have had the staying power if they started strong with a strong beginning cash flow. "Momentum" is the best word for it, and when you don't have the cash to play the waiting game you wait until you can bring in the cash.

Handling a cyclical business requires both planning and discipline to reap the harvest and save it for the off-season. Even squirrels know that much. It's a point overlooked by too many entrepreneurs. For this reason I suggest structuring note payments and other fixed obligations to parallel income. Few lenders will refuse and it can keep your cash flow on a steady course.

Guideline #8: Prime the Pump

Since your venture faces a cash drain from the moment you open your doors, make it a goal to build sales as rapidly as possible before you open as well as after you open.

Many ventures have exceptionally slow sales curve. How long it will take to reach respectable (if not profitable) sales depends on the nature of your business, location, competition, and your own ability to prime the pump through promotion.

Of course, every sensible business person wants the fastest increase in sales. The difference with the shoestring entrepreneur is in what he or she will do to achieve it. More than an objective, it becomes a business-saving necessity.

When a friend opened a retail pharmacy he estimated the business needed $6000 a week to break even and cover note payments. He couldn't wait the eight months or a year to gradually build sales. Up to his neck in debt, he had to quickly turn dollars. Every week was another promotion. Flyers advertised "specials" at his net cash price and coupons for a $5 savings on prescriptions. He probably lost 5% on sales, but he quickly grossed $10,000 to 12,000 a week. He could afford a paper loss of $500 a week, but what we couldn't afford was an income of $4000 a week while he was obligated to pay out $6ooo a week. So his objective was to turn dollars.

Priming the pump before you open can pay dividends. It was handled the right way by another friend of mine who planned a music lessons studio. Before he set up a shop he had over 100 sign-ups guaranteeing him a fast income over $3,000. His cash flow began to roll the moment he opened his doors. Sure it was smarter than opening his doors and chasing his first dollars while the bills began to mount.

Creating fast sales is so important that many start-ups allocate twice as many dollars to a launch promotion as is standard in their industry. Make your own commitment to go get those fast nickels- particularly when you can't afford to wait for the slow dimes.

Guideline #9: Plan on a Lean Year

Since cash flow projection are only a "guesstimate" of what you think will come in, measured against what you know will be going out, it's wise to hedge by planning on a lean year.

Any cash flow statement can look rosy on paper if you want to be a confirmed optimist expecting to start with a boom. That's typically the anatomy of a failure.

The entrepreneur says to himself, "The business will gross $200,000 the first year and $500,000 the second". With these self-deluding numbers in mind he takes on financing to match. One year later the venture sputters to a stop, grossing $50,000. Nine out of ten entrepreneurs are optimists, which explains why there are so many entrepreneurial ventures and so many entrepreneurial failures.

The right way to project sales is to ask yourself, "what's the least the venture can gross?" Make it a worst-case situation. Check industry averages and comparable businesses. You may be a better butcher, baker, or candlestick maker, but few of us are the geniuses to defy the odds.

Underestimating sales has a pleasant cure. You can always take surplus cash and reinvest for faster growth. The process is not reversible. Locked in with excess financing and expenses predicated on higher sales requires either very understanding creditors or a journey to the Bankruptcy Court. Since the first is improbable and the latter unthinkable, plan a very lean year.

Guideline #10: Don't Choke on Receivables

Few shoestring firms are sufficiently capitalized to sell on terms and wait for their money while watching accounts receivable build. It's the fastest way to strangle cash flow.

If your business is in an industry that typically sells on credit (as music's does), this puts you at a decided competitive disadvantage. It may even be the controlling factor in not selecting a particular type business - with plenty of justification.

Fortunately, most shoestring ventures are retail or service firms that can limit sales to cash. Manufacturing and distributing start-ups are another story. Their ability to finance the launch depends on their ability to either operate without extending credit - or make arrangements to finance the receivables.

The common method to finance receivables is by "factoring" the receivables to a factor who will pay you up front, while holding back a reserve for bad debts. Despite the liquidity the arrangement does offer, it still places an added strain on the thinly capitalized firm. Factoring receivables can be expensive both in terms of interest charges and bad debts that you eventually have to absorb. Cash receipts can still be delayed for 30 - 60 days while you wait for the factor to take over the receivables and pay you. And even a "hold-back" on 20% of the receivables as the factor's cushion for bad debts puts a sizable crimp in cash flow.

Guideline #11: Keep Fixed Costs Down

For the small start-up, fixed costs are dead weight. You can't afford it. To the extent possible, every dollar in expense should be directly tied to income. It's only when income and expenses follow parallel paths that the business escapes a cash drain.

Commission sales people are safer than salaried. Direct ads with measurable dollar pull are better than institutional ads that only add to good will. A rent based on a percentage of sales can preserve more capital during the survival stage than will a fixed rent. Every expense item has its own possibilities.

David Dube of Silverman & Co., a Boston CPA firm specializing in small business finance counsels says, "The strategy is always to open with the smallest committed overhead. From that point expenses can grow only when you have a favorable cost-volume relationship."

Whenever I'm called in to review a start-up venture my first step is to evaluate whether there's enough gross profit for the business to be viable. Assuming it has the right margin, the next step is to see how it's dissipating the difference. What I normally find is a venture pregnant with needless overhead expenses eating more dollars than the business can produce.

Above all, the one common characteristic of successful shoestring entrepreneurs is their "lean and mean" attitude. They seldom spend a nickel unless they're sure it will quickly produce a dime.

Guideline #12: Protect Gross Profits

Strategizing gross profits for the bootstrap firm must of necessity follow a different route than with the well-financed counterpart who can afford to buy on better terms and price lower.

What it comes down to is being smart enough to know you can't stand head-to-toe with the big boys and slug it out. You need a counter strategy to corner a niche of your market that allows for higher prices and leaner inventories.

Many entrepreneurs go after increased sales - always a worthwhile objective - but give away too many profit points in the process. The business that should operate on a 35% profit structure finds itself crippled with a 20% profit on sales. Usually it's an entrepreneur who thinks he'll set the world on fire with the lowest prices in town. While one eye is on sales the other isn't focused on gross profit. The profit given away seldom matches the sales increases.

There's always the temptation to recapture margins on discount prices by buying deals to save an extra 5 %-10%. The shoestring operation can't afford it, because it only builds inventory and further strangles cash flow already strained by a leveraged beginning inventory.

The priority must be on turnover and buying lean quantities so the goods move fast enough to pay for themselves. Set a minimum price spread that not only insures reasonable sales, but also reasonable profits to cover overhead and note payments. Industry averages can show what your right numbers should be. Try to maintain gross profits at least equal to the industry averages and improve turnover by 20-30% to give the business the best balance between profitability and turnover needed for cash flow.

Guideline #13: Cultivate Creditors

The shoestring enterprise rarely fails because it starts out with too much debt. It fails because the entrepreneurs couldn't cultivate the creditors and put them on hold until the venture gained a financial foothold.

The undercapitalized firm has remarkable staying power. And it can stay alive with beginning debt that would have the financial experts shaking in their boots if it follows common sense strategies.

1. Intelligently structure debt from the beginning. The secret of the leveraged start-up is not the amount of debt you take on, but how long you have to pay it down. Financing an opening inventory on 100% trade credit terms becomes a problem only if the payback period isn't logically tied to a cash flow projection.

2. Don't let debt panic you. No matter how carefully you plan, you'll journey through the survival stage with desktops heaped with unpaid bills. It's the price you pay for using creditor money instead of your own to finance the start-up. The cure for your sleepless nights is the reality that the stack of bills is dwindling as cash flow and profits take hold.

3. Communicate with your creditors. Creditors will remain patient, provided you keep them abreast of the venture's progress. If you can't stay on schedule let them know about it BEFORE you default. You may begin the venture with one idea on how the debts can be liquidated and be forced to renegotiate several times before the reality of the situation dictates how you can pay.

4. Future business and even a dribble of cash toward older bills can keep a creditor satisfied. Creditor problems become serious when you buy on credit only to shut them off and ignore what's owed.

5. When you lay your problems on the line with creditors, you'll have to accept the risk that one or more nervous creditors will go for the jugular and try to push you over the brink. Try to get your major creditors behind you. They can be very persuasive in controlling the smaller creditors who are likely to be more troublesome.

6. Set up a pecking order to give certain creditors priority. Essential overhead -- rent, payroll, and utilities - always comes first. Next come payroll taxes. The IRS plays rough. Suppliers selling the essential lifeline merchandise for your business also stand at the head of the line. Banks and other lenders holding security also require priority because they do have the immediate remedy of foreclosure. Cash-flow problems are invariably handled by delaying payments to secondary suppliers.

The goal of the shoestring entrepreneur is to make it through the survival stage, albeit under considerable pressure of trying to make ends meet. Many don't succeed because they can't find the path to a profitable business. Others manage to create a company heading in the right direction, but give up too easily under mounting creditor pressure.

Staying power is the realization that drastic problems demand drastic solutions. Thousands of small struggling start-ups have made the grade only through a major restructuring of their debt. It may be an out-of-court composition settlement or a Chapter 11 reorganization through the Bankruptcy Court, but saving the business may be a logical sequel to starting the business. Are you the type who can comfortably exist in the twilight world or too little cash and too many creditors?

Guideline #14: Take Total Control

Most entrepreneurs, being creative types, dislike accounting and finances, preferring to make "seat of pants" decisions, instead of from the cerebral cortex. Nobody who has been in business will suggest you can run a business entirely by slide rule or computer, but when your margin of error is somewhere between slim and non-existent -- as it is with the shoestring enterprise --you hedge your decisions with numbers, numbers, and more numbers.

It's all part of taking control - Knowing where you've been - where you're going, and how fast you're getting there. What controls do you need?

1. Cash flow statements head the list. Break it down by month, and project ahead at least a year in advance. These "proforma" predictions are even more important than past performance records because they help you plan, spot problems, and devise solutions in advance.

2. Work up a tight budget for purchases and your controllable expenses. Without budgeting you're likely to overspend in these areas, destroying the validity of your cash flow projections and profit planning. Don't hesitate to adjust budget as the conditions change. A new start-up may go through many "ups" and "downs" within a brief period, and you need a budget to control outgo, not restrict growth.

3. Calculate your break-even point. That's the magic number that tells you when the venture crossed the line and is making money. Your accountant can approximate your break-even point with very little work, and it then becomes your target. Plot your growth toward break-even. Monitor the sales curve. It's the easiest way to see if your business is heading in the right direction - and moving fast enough.

4. Profit and loss statements should be published monthly. You can't afford to wait for semi-annual or end-of-the-year reports. The start-up needs immediate corrective action to cure excess expenditures, sluggish margins, or weak sales. Only up-to-date and timely statements can tell you where you've been and the steps necessary to keep you on track. Software like QuickBooksPro will take the pain out of producing these monthly reports and those below.

5. You should get a readable warning flag report. Program it into the sensitive areas of operations. At a minimum you want constant readouts on working capital, inventory levels, accounts receivable, accounts payable, orders on hand, slow collections, out-of-stock situations, and customer complaints. Keep your finger on the daily pulse of the venture to detect dangerous changes from the norm.

Having the right information is only one part of the equation. It has value only when turned into action. You'll make your mistakes, and the best reporting system won't change that. What it will do is keep your errors down to a manageable minimum.

Check out any small start-up that grows and thrives and pays its bills, and somewhere within you'll find someone who's something more than a creative entrepreneur with an idea. He or she may be one part Scrooge and one part Simon Legree, but it's someone who can keep a cold, calculated eye on the numbers and squeeze every nickel for all it's worth. It's intrinsic to all money management. When you're a shoestring entrepreneur and understand the economics of the situation you squeeze harder.

END

)))))) ILLUMINATING TRIVIA ((((((

Did you know...

If we were to grow at the same rate for our first twenty years as in our first year of life, we would be roughly 360 feet tall and weigh over 6300 tons by age 20!

(I figured this out on a napkin while marveling at the amazing growth of my son one night during dinner).

GENRE SPOTLIGHT:
J A Z Z

INTRODUCTION

In 1987, a congressional resolution sponsored by Rep. John Conyers Jr. (Democrat, Michigan) was passed, codifying jazz as a unique American art form. Like "classical" music, a number of different types of music are linked under the name "jazz." The roots of jazz go back to New Orleans and a sound described today as "Dixieland." Today jazz includes such sounds as this traditional music, "big band" from the 1940s, "bebop" from the post-World War II era, "cool" jazz led by Miles Davis from the 1950s, experimental jazz, fusion jazz, and the very popular "smooth" jazz of today.

In the last 100 years jazz, as a musical form, has come into the American social milieu and permeated many institutions via spoken language, books, films, radio, and television. There are hundreds of jazz clubs, nightclubs, and concert halls throughout the United States - and over 1,000 around the world. More than 1,200 jazz festivals are held internationally each year, with approximately 400 taking place during the summer in Europe and nearly 230 festivals in the United States. Approximately 147 U.S. colleges and universities offer degree programs in jazz performance or studies.

With respect to television, jazz now resides within the programming and the pecuniary force that serves as a primary driver of the medium: the television commercial. This has occurred because of a direct connection between advertisers' perception of the audience for these television commercials and the audience for jazz as a musical form.

Various jazz styles - ragtime, blues, swing, bebop, Latin, cool, fusion, and abstract - have found their way into television commercials on an increasing level since the early 1990s. This represents a significant change in the manner in which jazz is perceived in American culture. As part of the television commercial, jazz now represents sophistication, intelligence, the well-educated, the upscale. In 100 years, jazz has moved from disdain, suspicion, and a connection with sordidness to larger acceptance and greater respect.

JAZZ HUBS ON THE WEB

All-Jazz Clearinghouse

Good jump site but lots of scrolling and a few dead links.

Jazz Central Station

Site includes featured artists, recommended listening, a global jazz poll, gig board, classifieds, chat rooms, Jazz track and jazz Times back issues, jazz history, jazz record labels, contests, festivals and more. Produced by N2K (by the way, did you know that this acronym means "need to know"?--gotta love that trivia!).

WNUR-FM JazzWeb

Explains styles of jazz, profiles artists and instruments, education and musicianship, and has links to related resources.

Europe Jazz Network

EJN is a non-profit association of promoters, musicians' associations, artistic directors, consultants of music programs in Europe working mainly in the field of jazz and improvised music.

JAZZ MARKETING & PROMOTION DATABASES

The Best --

Jazz World Society

For years I've been using JSW's printed databases in my work at Berklee College of Music. They have databases for Talent / ArtistsBooking Opportunities / Presenters, Festivals, Education / Educational Institutions, Recording (Labels/Video), Distribution, Media, Service Organizations, Producers, Marketers / Public Relations, and Internet Sites/Associations. And now they are online, accessible through membership subscription (annual dues are $60/yr. for individuals; $120/yr. for companies). You won't find a more current database of jazz-related contacts and resources than here.

Some Other Good Databases --

InterJazz Yellow Pages

Great directory of clubs, musicians, labels, venues, instruments and other topics of interest to the professional jazz musician.

Jazz Clubs Worldwide

Global directory of jazz clubs and venues. Also festivals, labels, agents, promoters and more.

Best Hardcopy Jazz Directory:

Euro Jazz Book 98/99 1st Edition - $50

8,000 Jazz Contacts in 30 European Countries, including:

Hundreds of venues, clubs and festivals w/ styles, dates, locations, capacities, etc., Promoters and booking agents w/ artist, references, types of activities involved in Major and independent record companies w/ main artists and distribution, Record label distributors w/ styles and key labels, Artist management w/ key artists, Freelance jazz journalists w/styles they cover and who they write for and much more.

Great jazz quote: "I'll play it first, and tell you what it is later." --Miles Davis

TO SUBSCRIBE to MUSIC BIZ INSIGHT: send email with the message in the body, "subscribe" to success@mbsolutions.com

It's not an autoresponder so feel free to include any other comments, ideas, suggestions, etc. you may have.

PETER SPELLMAN is Director of MUSIC BUSINESS SOLUTIONS, a business and marketing consultancy to the music industry, and Director of Career Development at Berklee College of Music, Boston. He is the author of several books for music entrepreneurs and teaches music industry courses at Northeastern University (Boston) and the University of Massachusetts (Lowell).

A musician since he was ten, Peter continues to spin riddims in the improvisational collective, Friend Planet and sing Cat Stevens' songs to his kids every night before bed.

BLOOM WHERE YOU'RE PLANTED!

Quote of the Month--

E-mail: success@mbsolutions.com

© 1997 - 2003, Peter Spellman, MBS Business Media, www.mbsolutions.com

MUSIC BUSINESS SOLUTIONS

P.O. Box 230266, Boston MA 02123-0266

978-887-8041

Rise up!