THIS IS MY 155TH BLOG ON UNDERSTANDING MONEY
TOOLS
January, 2019
In this blog we are going to have some fun. This idea came to me in the night while
struggling for sleep. I am going
to present real business situations and problems, and you see if you can
resolve the issues.
The first one came to me this past week. While at Starbucks with a friend we
ventured into his part-time business.
He retired from a successful financial background with international
companies...no dummy! He either
bought into or is a consultant for a closed middle school in our town, which
has been converted into a private “tech” school. We both agree that for the future generation having a
bachelor’s or master’s degree is not much help, unless you are in the medical
or technology fields. If you
develop a “fine skill” that is needed you will make a decent, or perhaps a very
good living.
The parallels to my background in real estate development
are very similar. The main
stumbling blocks are conquering the need for “destination” type of businesses,
realistic market expectancies and “economy of scale” for build-out or
improvements. This is a “Catch
22”. How do you attract good,
experienced teachers to a smaller town, when the student (younger generation)
is 15-25 miles away? People drive toward more density and opportunity not away
from. Economy of scale comes into
the equation as it costs money to convert a school into dynamic classrooms,
modernizing and re-doing a lot of the infrastructure to meet the needs of a
“tech” classroom (examples being electrical, plumbing, layout, etc.). Most of the time it is more cost
efficient to do all the work at one time. This school concept is a great use for a closed middle
school, but will it succeed? What
would you do?
If you are going to attempt something like this, know how
far you need to reach out with population density and market share, before you
enter into a business. An example
here is movie theaters. The major
players in the Phoenix, where I live, use a population of 100,000 before
entering the market. Fun test
here: Do you remember from junior
high school how to draw the circumference around the ideal location to see if
you have market share? Your answer
could be to take the center point and from there go out a reasonable distance
on a map (called the radius, or 1/2 circle, a semi-circle). With your string or “protractor” make a
circle. That is your area of
interest for market share.
For those of you who are really smart, and want to go
further with this dimension you could figure the whole “area” of the circle
using, once again, your junior high school math of: Area equals Pi times Radius
Squared. Pi is 3.14159 to infinity.
Using the above formula let’s together use it in a very
practical sense so that you realize the application where it could be
used. I want to start a
destination retail store in a urban city center. I figure people will drive up to 2 miles to patronize my
store; the radius. I also know
that to get a bank loan they will most likely want to know if I have done a
market study, to see if there is a demand for my goods/services, and how many
people live in that area. I will
contract this market study to a consulting company. Both the bank and consulting firm will want to know what
“area” I am covering to hopefully succeed.
Let’s apply our handy formula. A=3.14159 X 2 squared, or to the second power. (To square a
number just multiply it by the same number, in this case 2 times 2, equaling
4.) Therefore, to get to the
“area” in miles around my intended store location we simply multiply 3.14159
times 4 that will give us 12.56636 miles exactly. Round it down to 12.6 miles. I know you knew this!
Let’s move on to another business problem. This one involves me so I know it all
too well. I own a large real
estate interchange development project in a city just outside Milwaukee,
Wisconsin. I have many years and a
ton of money into land development. The project was intended for certain uses which are no longer economically viable
because of changes in consumer’s buying habits. This is seen all over the country with on-line purchasing
becoming stronger and shopping malls going to pasture. I didn’t do anything wrong, however it
takes years to develop land, along with government, county and city approvals,
and then building. This project is
now “mothballed”. How do you exit
from this type of situation, and yet with money?
The above is an example of a market change. Let’s look at government regulation
changes affecting “your” business.
Again, I will use my own experiences, however they are similar to
thousands of other companies caught in change. In the late 1970s the Feds and government raised interest
rates sky high to the 18-20% range killing real estate. Then, President Carter came in with the
premise of protecting independent oil companies, and skirt OPEC as much as
possible. He instituted guaranteed
pricing on natural gas and oil to assist the American oil companies. Subsequent
to this era, President Reagan did the opposite, abolishing all price
regulations and the independent oil and gas companies failed. What would you have done with a company
during these times?
In 2008-2010, as most of you can remember, the government
stepped in and aided our failing banking industry permitting banks to foreclose
on homes and real estate developments.
You might have had bank loans and contracts in place, but they no longer
remained enforceable. Banks won,
private companies and homeowners lost.
Did the majority of homeowners do anything wrong to warrant this? No. What would you have done?
I have another friend who retired from Nestle Foods. He joined a company with a consulting
contract to take the company’s product,
freeze-dried yogurt cubes, into the China market. Great product, reputation and
idea. Chinese people are very
concerned about the health of their children these days, after being
constrained with the “one child policy” for years. The Chinese frankly do not trust their own dairy products
with chemicals, contaminants and bacteria as much as they do products from the
USA. Everything was going fine
until recently when China eliminated many US companies from selling in
China. We will see how this plays
out with President Trump and the trade and tariff disputes. My friend had nothing to do with the
demise of this international market situation, but the effect has been
financially terrible for the company as they no longer can sell there. What would you have done?
In my eyes, I watch the evening news relating to and
empathizing with the US Government workers not getting paid. The same banks we assisted and kept
alive in 2008 are not helping these 800,000 workers, and from what I understand
will foreclose on their home mortgages unless paid each month. If not that, any bill, such as a credit
card statement not paid on time will lower the credit scores of these people,
and it will take a long time for them to re-build credit. What would you do?
I hope you related to some of these illustrations I went
through. It points out that
variables pop up, many you can’t control.
Changes in government regulations can be unexpected and disastrous to
your financial planning. Also,
think through each endeavor before you start to eliminate the variables that
could “bite you” down the road.
Could you solve the problems and issues above?
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