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51. David Rapp on Harnessing Accounting To Your Purpose

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Accounting is a tool for entrepreneurs to achieve their business goals. There are plenty of options for you in how you use it to serve your purpose. In this episode, Dr. David Rapp, who teaches Accounting and Management Control in the elite Grandes Ecoles system in France, takes us inside the “purpose orientation” approach to accounting.

Key Takeaways & Actionable Insights

When we asked international technology entrepreneur Paul Tenney (episode #49) about the pre-requisites to entrepreneurial business success, he said, “Learn accounting”.

Accounting – or economic calculation – is one of the four pillars of entrepreneurship. And when it’s viewed through Austrian eyes, it becomes a more powerful business tool than, perhaps, you might have realized.

Whether we are talking about retrospective accounting (P&L accounting and financial reporting) or commercial pre-calculation to plan future actions (management accounting or cost accounting), how you use the tool makes a difference to the results you get.

Dr. David Rapp is an international leader in the field of Accounting And Management Control, a subject he teaches at one of Europe’s top business schools. Below are some key takeaways from the podcast, and we’ve also compiled a Free PDF Download of Dr. David Rapp’s technical analysis of accounting from an Austrian Economics viewpoint.

Accounting is a means to help you achieve your desired ends – apply judgment when using the tool.

Austrian economics teaches us to subjectively choose goals and then select the best means to achieve those goals. Accounting is just another tool to help the entrepreneur. There are plenty of explicit and implicit options in how to use it. David calls this attitude “purpose orientation” – one of the most important aspects in the field of accounting. Any computation should be shaped by its underlying purpose.

Financial reporting is subject to local rules – but there are always options in applying them.

If the purpose is to pay as little tax as possible, for example, a firm may apply depreciation or amortization rules in such a way as to reduce taxable profits. If the purpose is to present the firm in the best possible light to secure external funding, the same rules might be applied in a different way to display a different calculation of profit. There are options available for valuation of assets and of inventory that can materially affect the balance sheet.

Entrepreneurs should be rigorous in ensuring that their own managerial accounting does not mislead them.

Some modern finance theories and models are unrealistic – such as the standardized Capital Asset Pricing Model and the Weighted Average Cost Of Capital approach. The entrepreneur’s task is to apply real world judgement in deciding on future actions. Austrian Economics guides us towards realism not models, and the insights from Austrian Economics are the best ones to integrate into managerial accounting.

Entrepreneurs should bear in mind core Austrian Economics principles to guide their options in accounting.

Dr. Rapp mentioned these principles:

  • Subjective value
  • The importance of opportunity costs
  • Distinguishing between value and price
  • Understanding that prices determine costs rather than vice versa,
  • Differentiating between uncertainty and risk

Does accounting send reliable signals of business health to the entrepreneur? Not necessarily. Entrepreneurs should be on their guard.

Dr. Rapp advises us that general guidance to the firm’s owners and management is not possible via accounting. Accounting is not neutral and not a perfect tool for measurement or reporting.  Again, the choice of reports comes down to the goal the entrepreneur is pursuing.

If the goal is a sale to an external buyer, then an accounting focus on EBIT might be the best channel for the most relevant business health monitoring. If the goal is external financing from a bank, a more appropriate signal might be found in a solvency measure such as debt-to-equity ratio.

Can accounting accommodate the Austrian Economics mandate for dynamic flexibility – continuous adjustment to changing customer preferences in the marketplace?

Yes says Dr Rapp: by emphasizing the P&L to reflect the profit-and-loss outcomes of entrepreneurial actions and to reflect how well changing allocation of resources serves customers. Sub-dividing accounts into shorter time periods and different lines of business can more accurately reflect the dynamism of a business. And extensive use of notes to accounts in reports can provide a qualitative flexibility in reporting.

Accounting plays a primary and noble role in the advance of civilization.

Our complex market economy could not have evolved without accounting. It’s an important part of the system that allocated capital to its highest and most profitable use. Accounting is not boring, dry or dispensable. Rather, it’s a mainstay of human progress.

Free Downloads & Extras

Accounting From An Austrian (Misesian) Perspective: Download HERE
Understanding The Mind of The Customer: Our Free E-Book

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

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48. Chris Casey’s Journey To A Distinctively Austrian Financial Services Business

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Learn how directly Austrian Economics can be applied in entrepreneurial business design. A creative founder of a financial services firm demonstrates to customers how an understanding of business cycle theory and monetary theory can be applied to investment portfolio design.

Key Takeaways & Actionable Insights

Chris Casey's Entrepreneurial Journey

Click to Download The Full Version

Innovation often emerges from the combination of existing components in new ways. 

In Chris’s case, the new combination was his knowledge of Austrian Economics – specifically Business Cycle Theory and Monetary Theory – and of Finance. He invested a great deal of time and effort in mastering both parts of this knowledge combination.

Chris Identified An Unmet Customer Need, A Dearth Of Available Solutions, And A Potential for Market Growth. 

There were a few – probably a very few – customers for a financial services offering designed with recognition of the relevant principles of Austrian economics in mind. But the fact that there was at least some customer need provided evidence of potential. Then external stimuli such as the 2008 financial crisis and the Ron Paul Presidential Campaigns caused a growth in demand.

A value proposition naturally emerged. 

For a narrow but highly receptive target audience, the value proposition that “Austrian Economics is vitally important to designing investment portfolios” proved to be very effective in generating a value anticipation.

Communication skill is a critical element. 

A value proposition doesn’t sell itself. Chris utilized – and continuously polished – his communications skills to help customers fully appreciate the direct link to their desired value: a feeling of improved financial security because the uncertainties identified by Austrian Economics are accounted for in portfolio design.

Chris’s implementation was consistent with the value proposition, and capable of delivering. 

In portfolio design, the product of Chris’s service firm, the inputs from business cycle theory and monetary theory are top-down elements. Chris added the bottom-up element of personalization of the design process to the individual customer. This is classical Austrian entrepreneurship: understand the customer’s needs, empathize with them, and customize the service so they feel individual satisfaction of idiosyncratic needs. In subjective value analysis, portfolio performance is not the sole criterion for the value experience. Customer feelings are far more significant.

Chris keeps an eye on the competitive frame of reference to maintain the uniqueness of his offering. 

Chris’s competition is not other investment advisors. It’s the general demeanor of Wall Street sales-focused firms. “Stay fully invested” and “Don’t try to time the market” are typical sales communications of these firms that don’t truly have customers’ best interests in mind. He can always utilize this contrast as a value frame of reference.

Chris’s success exemplifies the clarity that results from candid entrepreneurial self-assessment and the embrace of the entrepreneurial process. 

Self-assessment = In what field am I best resourced to enter and do business?

Entrepreneurial process = Identify opportunity by identifying customer dissatisfactions in that field.

Visit WindRock Wealth Management at https://windrockwealth.com

Free Downloads & Extras

Chris Casey’s Entrepreneurial Journey: Our Free E4E Knowledge Graphic
Understanding The Mind of The Customer: Our Free E-Book

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

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47. John Chisholm’s Tools And Techniques For Success In The Entrepreneurial Process

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In this episode, Hunter Hastings talks to John Chisholm, author of Unleash Your Inner Company: Use Passion And Perseverance To Build Your Ideal Business.

John is a very successful repeat entrepreneur (he founded and grew multiple businesses in multiple fields and had multiple successful exits). He looked back on his successes and formulated a 10-step process that all entrepreneurs can follow, with a full suite of tools we can all use.

This beats the business school case study method!

Key Takeaways & Actionable Insights

Entrepreneurship is a process. Taking this view enables successful navigation over time, whatever the interim ups and downs. 

Sometimes the process can feel like stumbling through a jungle, tripping over rocks and vines, always picking yourself up again and marching onwards. Don’t expect the process map you start with to be the one you continue with. Don’t plan too far ahead. Do be adaptive. Nonetheless, the process view is a source of support during the journey.

Processes require operating tools. John Chisholm’s toolset starts at Need and Advantage. 

“All you need is a Need and Advantage.”

Need = “A real, unsatisfied customer need in an area about which you are passionate.” 

He defines Need in an Austrian way: a subjective value sought or anticipated by a customer. He defines Customer as a living breathing person (or group of people, as with a corporate customer) rather than an abstract “market need”. Unsatisfied means that the need is not addressed by currently available products and services (requiring the entrepreneur to understand customer dissatisfaction). And Real means shared by a sufficient number of customers or sufficiently intense in one or more customers to make it worthy of you to satisfy. 
 
The entrepreneur must have an advantage for satisfying that need. John’s process is aimed at establishing and extending that advantage, in spite of the fact that existing businesses will have more and better resources than you.

John offers a 10-step process for entrepreneurs to follow. 

You’ll find John’s process pretty complete, cogent, and consistent with Austrianism. We didn’t cover every step of the process in the podcast, but we did pick out two tools and one principle.

Make a STARS inventory of your resources and strengths and turn them to your advantage. 

John recommends making and continuously updating an inventory of your individual strengths. The STARS acronym stands for Skills, Technologies that you know and can use, Assets and Achievements, Relationships and Reputation, and Inner Strengths. He has wise advice on each one of these subjects, and he suggests multiple uses for the completed STARS inventory:

  • Use it to assess the fit of your strengths with the customer needs you have identified.
  • Use it to identify strengths gaps you’ll need to fill.
  • Use it to build your own self-confidence (most people under-estimate their own strengths).
  • Use it to innovate by making new combinations by pairing STARS elements in new ways.

We provide a template with directional examples here. 

Map out a logical and sequential growth path with John’s “bowling pins” methodology. 

John’s advice is to avoid tackling too large a market and too large a target customer group at the outset. Focus on a best fit intersection between your resources and customer needs. Label it. Then identify the next most logical adjacent customer need you can fill, ideally leveraging your learning from the first market. Keep on building up the map of adjacent needs to fill. When you’ve got to 10, think of them as bowling pins. Knock them down one by one, starting with the first – that’s your early focus – and ultimately completing them all. That’s your vision – the largest set of customer needs you can possibly fill.

John calls this process Upsizing A Customer Need, and notes that this bowling pin strategy is particularly persuasive to venture capitalists – they like it that you are focused, and also that you have a map to growth.

We reproduce John’s bowling pin map here.

Make the most of limited resources: Different is better than better. 

How do you overcome the fact that existing businesses in a market you are trying to enter have greater resources than you? John’s answer: focus on being different rather than better. If you can identify how to be different – with a different solution, for a different target audience (even if it is small to begin with) you’ll evade competition.

John has additional advice about scalability, network effects, partnering and other tools for growth. Listen to the complete podcast for a rich reward of process tools and methods.

Free Downloads & Extras

STARS – Your Resources: Our Free E4E Knowledge Graphic
Upsizing A Customer Need: Our Free E4E Knowledge Graphic
Understanding The Mind of The Customer: Our Free E-Book

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44. Mark Packard on The Value Learning Process

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Entrepreneurs are redrawing the Customer Journey Map. Based on the latest knowledge from both economics and neuroscience, Dr. Mark Packard explains the five stages of the Value Learning Process on today’s episode.

Key Takeaways and Actionable Insights

To be able to adopt new ideas and successfully apply new techniques, it is sometimes necessary to discard old ones that are barriers to clear thinking. The theory and vocabulary of value illustrate one such barrier.

The language of business schools and many business books is that firms and entrepreneurs create value. That terminology implies that value is somehow embedded in the product or service the firm designs and markets, and that value is formed in the firm’s domain.

The business world has made a little progress in the last few years by opening up to the idea that value is somehow co-created by the provider and the customer. In co-creation, customers’ own usage of the service causes the value to be realized, and their comments, criticisms and suggestions become useful feedback to the provider to further improve the offering.

But we have known since 1871 that value actually lies entirely in the customer’s domain. Carl Menger wrote:

“Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.”

Now, Mark Packard sheds more light on exactly how value forms and develops “in the consciousness of men” – or, as we would say today, in the customer’s experience.

Mark introduces the concept of value learning. This is the mental process through which the customer advances in response to a value proposition from an entrepreneur or a brand. It’s important for entrepreneurs to understand, monitor and measure the customer’s value learning. There are five stages, illustrated by our Knowledge Map Graphic below.

Predicted Value

Customers evaluate an offering that’s available to them with a mental prediction: I think that this offering might be valuable to me (i.e. make me feel I am improving my circumstances / make me feel better / help me towards my goal). Predictive value is translated into a price one is willing to pay for that experience. This willingness to pay is then compared to the price of the product. It’s a yes or a no.

Entrepreneurial action: Manage predictions strategically. Persuade customers that the predicted value is worth the cost, but don’t overhype your product. Identify those customers whose predicted value relative to your price is positive. These are your only current target (unless or until you redesign your value proposition).

Relative Value

The customer’s next cognitive action is to identify whether the predicted value is high or low relative to alternatives. These alternatives include not just other products in your industry (if any), but all other ways your customer might also satisfy the need that your product addresses. For example, one alternative is to keep their dollars in their wallet, if they think they can satisfy their own need for themselves at a lower cost (all in). The predicted value of your offering must be greater than all alternatives in their perception.

Entrepreneurial action: Calibrate your offering to the customer’s relative value calculation using price, features and benefits.

Exchange Value

If the customer’s Relative Value perception is sufficiently positive, they’ll exchange dollars with you. But remember to account for the customer’s uncertainty. If the relative value is comparable between alternatives, customers will generally prefer the more familiar (certain) value over your uncertain offering.

Entrepreneurial action: Use price discovery techniques to align price and relative value.

Value Experience

The customer uses or consumes the product or service. They’re generating feelings and perceptions as they do so, either positive or negative. Many of these are in response to a mental comparison with Predicted Value – is the experience better or worse than predicted?

Entrepreneurial action: Monitor the customer’s perceived experience. Be aware of variables in circumstances (time, place, mood, competitive environment) that can change their perceptions. You may need to guide the customer’s first consumption experience(s) to ensure proper use and optimal experience.

Value Assessment

The customer, either concurrently or subsequently, makes a mental value assessment based on their experience. Good or bad? Better or worse than predicted? Does my assessment result in predicted value for a repeat purchase or subscription?

Entrepreneurial action: Measure. This is the stage where measurement becomes useful. Find a measurement that works for you. It could be in sales dollars, purchase volume trends, or customer satisfaction metrics. Such metrics are mere approximations, however, and are neither precise nor set in stone. Be careful how you interpret measured results.

This value learning process is mutual. The customer is always evaluating and re-evaluating and the entrepreneur must keep pace in service, relationship management and innovation. It’s a never-ending cycle of value.

In future podcast episodes, Mark will share some of the new tools he has developed to help entrepreneurs master the cycle. Follow Mark on Twitter to keep updated between now and then!

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Value Is A Learning Process PDF: Download

39 Rick Rule: Deep Understanding of Markets Opens a Pathway to Entrepreneurial Leadership

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Rick Rule is CEO at Sprott US Holdings. His lifetime focus on natural resources finance enabled him to carve a unique pathway to entrepreneurial success. Like many entrepreneurial journeys, Rick’s had some twists and turns. Here are some of the key stages.

Key Takeaways and Actionable Insights

Find out early what you love. Rick enjoyed the outdoors, nature and therefore natural resources, the associated science of efficient and effective use of natural resources, and finance. All of us have a combination of likes and preferences that may stimulate us but may not initially appear to present us with an entrepreneurial recipe. But as Curt Carlson explained in episode #34, combining knowledge from different people and fields can result in compounding insights.

Rick Rule's Entrepreneurial Leadership

Click the image to download the Full PDF

Combine Knowledge In New Ways. Rick combined natural resource science with principles of corporate finance, specifically debt and equity finance for extractive industries. As a result of the special properties of natural resource markets, and firms’ needs for customized financing, an opportunity niche emerged. Rick’s application of his special combination of knowledge placed him in a competitively advantaged position.

Learn By (Hard) Experience. Rick learned not to confuse a bull market with brains, as he puts it. He did business through a complete commodity market cycle in the 1970’s through the early 80’s, experiencing volatility and ups and downs first hand. Theory is no substitute for experience. Nevertheless, his knowledge of Austrian Business Cycle Theory, Austrian Price Theory (“the cure for high prices is high prices, and the cure for low prices is low prices”) granted him a superior perspective in interpreting market signals.

Develop Deep Market And Customer Understanding. In his focus market, Rick developed a business segmentation that focused on participant firms of a defined size (<$250MM market cap). He studied those customers and understood their circumstances. The consequence of limited information flow (data about these firms did not flow easily between conventional market analysts), was that the firms had limited access to capital. Rick was able to overcome these information gaps, making him a preferred supplier of scarce finance.

Identify A Need You Can Fill For Your Carefully Selected Audience In Your Carefully Selected Market Segment. The business model came together in a way that Rick describes as “lender of last resort to high-quality management teams in high-quality companies that were not popular” and were therefore capital constrained. In addition, Rick’s understanding of business cycles and commodity prices further strengthened his confidence in lending when others would not, the market rewards for which turned out to be high.

Combine Empathy, Trust and Courage. Rick confirmed the E4E emphasis on empathy as an important skill for entrepreneurs – primarily, in his case, empathy for the customers whom he financed. He sought to combine empathy with trust: in a market where information is scarce, it is imperative to have trust in the sources. “Without trust,” says Rick, “I have no information, and therefore I can not make decisions.” The third emotional attribute he identified is courage – the courage to have the conviction that your model indicating a future upcycle or price rise is well constructed, and not to second-guess it during the time that the trade is underwater.

We’ve summarized these journey milestones – and the Austrian foundations underlying them – in this free PDF download. 

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The Rick Rule’s Path to Entrepreneurial Leadership PDF: Our Free E4E Knowledge Graphic

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35. Chris Wilton’s Recipe for Success

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Is there a recipe for entrepreneurial success? Chris Wilton has established a successful and growing catering business, and the recipe he developed has some ingredients that every entrepreneur can utilize.

Key Takeaways and Actionable Insights

Economists (e.g. Murray Rothbard in Man Economy and State) often talk about the recipe that entrepreneurs develop for business growth and success. They don’t quite mean it literally — a fixed proportion of ingredients combined in the same way and the same sequence every time for the same result — but the analogy is nevertheless useful. Recipes are plans entrepreneurs utilize to advance from one step to the next in pursuing their goals.

A recipe is intellectual property — software if you will. Sometimes it’s opensource, sometimes it’s proprietary. When a chef utilizes a recipe, even one that is well known, both the chef and the customer anticipate something unique: Mary makes the best chocolate cake! Lots of people make chocolate cake, and they might use the same ingredients as Mary, but, in the subjective view of a customer, no one’s result is as good as Mary’s.

To get a result, Mary has to combine hardware with the software, and perhaps there is an edge there. We might call that the capital structure that is perfectly tuned to Mary’s purpose and matches her skills. Perhaps it’s even possible to assemble superior ingredients — a special and better kind of chocolate for example.

Mary might also need collaborators. She certainly needs customers to subjectively evaluate her cake.

We’ve probably tortured the analogy enough at this point. But hopefully, we got you thinking about the role of the entrepreneur in assembling resources in order to produce something that the customer values.

In this week’s podcast, Chris Wilton of Wilton’s Catering gave us his recipe for a successful and growing business. We’ve captured it in the accompanying PDF, linked below.

Chris Wilton Recipe for Entrepreneurial Success

Click the image for the full PDF

Here are some of the headlines:

Start with self-assessment: The one universal attribute of entrepreneurship that everyone seems to agree on is: it’s hard. It requires creativity but also discipline, determination and grit. It’s important to have examined your own disposition before you embark on the entrepreneur’s journey. Passion and drive are mandatory. (There’s a self-assessment tool, and a journey map.)

Identify a market and a customer: Chris Wilton knew his industry, and worked hard to pick the right beachhead customer. The beachhead customer is the first adopter who will be your customer-partner in getting your business off to a good start. Chris chose a nearby university with a highly developed and diverse set of catering needs, where he could develop his unique style of food and service.

Plan, plan, plan: Prior to launch, Chris spent months developing a detailed plan. Working from the customer (what are their needs — identified by multiple, frequent, in-depth customer conversations) backward through on-site service and set-up, delivery, capital equipment, real estate, raw material procurement, recipes, hiring and training and operating manuals. Chris’s time allocation and effort in planning was intensive. And it paid off.

Develop a customer experience, not just a service: Chris is totally focused on delivering a delightful customer experience, which entails a lot of empathic listening to the customer to understand what they expect, and then disciplined and detailed execution at every event and every meal, including the customer experience orientation and training of staff. After the event, always ask and listen for customer reactions. Was the experience good? How could it be better?

Innovate, innovate, innovate: You evaluate so that you can innovate. Innovation is continuous improvement — always looking for something new and better that will create new value for customers. A new or improved recipe, better preparation methods, improved staff training — it’s all innovation when it’s done to elevate the customer experience. One of Chris’s technique’s is sampling events where he can try new things, give away his food for free, and get feedback that he can use to perfect the innovation.

What’s the end-result? For Chris, it’s happiness. He loves and enjoys what he is doing, and he brings happiness to customers, to the attendees at customer events, and to his employees. That’s the great fulfillment of entrepreneurship.

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