44: Business Adventures: Part 1
What I learned operating a real business
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Mead Firewood:
During high school and into my college years I had a small business selling firewood. It was my first real experience as an operator. And while very small—one might even say micro—the lessons it taught me were invaluable as I moved on and began my career as a practicing capital allocator.
My tiny little enterprise taught me about accounting, operations, labor challenges, and more.
The beginnings of an enterprise…
My venture began because I had access to very cheap (nearly free) hardwood trees and saw a business opportunity. These were the go-go years of the mid-2000s when the housing boom created a surplus supply of trees from clearing lots.
In studying economics later in college I could look back and see that the increased supply (and therefore depressed price) of grapple loads of logs were a secondary effect of the primary housing market.
I started off as basic as you can imagine: me, a chainsaw for cutting the logs down to size, and a maul for splitting. This was backbreaking work but it involved minimal capital investment. My overhead expenses were nil since I operated out of my backyard, and my marginal costs consisted of fuel for the saw and my pickup truck (and a little wear/tear on it if I’m accounting for things appropriately).
It wasn’t a bad gig, I thought. Probably $5 in fuel and I could make $150 a day. This was going to make me rich!
Increasing productivity…
After a lot of sweat and frustration splitting one cord the old-fashioned way, I looked for a better solution. I found it in the Supersplitter. This ingenious little device differed from hydraulic splitters in that it used heavy flywheels to propel a pushing shaft toward the splitting head. Needless to say, it was dangerous but efficient.
I’d learned another lesson from economics: the tradeoff between capital and labor. I bought the Supersplitter used for a few hundred dollars. It was a relatively large investment for me at the time but it saved hours and hours of toil. My labor productivity soared from perhaps one cord a day (maybe 6-8 hours) to a cord every two hours depending on how efficient I was with my log cutting.
A lesson on commodity prices…
Now that I had a finished product I had to sell it. I had no control over prices, which taught me about selling a uniform commodity product. I advertised my prices right about where my competitors listed theirs.
I also learned another lesson. Markets weren’t perfectly efficient. Sometimes I’d list my prices and other times just a phone number. When I used just the phone number I found I could throw out a higher price and see if it stuck. If people had done their homework they pushed back and negotiated a bit. If not, I got a higher price.
A lesson on inventories…
I also learned that I could get higher prices by selling seasoned firewood that I’d cut/split/covered to dry earlier in the season for 50% more than “green” (freshly cut) firewood. I found it utterly fascinating how people would wait until fall to buy the same firewood they could have purchased from me in the spring far cheaper.
On my part, I had to decide whether to sell my product early and pocket the cash or build inventories. If I built an inventory I could sell my finished product for more. But it also meant risking a change in the market price for firewood. The pricing differential between green and seasoned wood usually made waiting until fall a no-brainer. I also found the later in the season I sold my product the higher the price I could obtain. Some customers were willing to pay a premium to get firewood immediately. In other words, they were somewhat price-insensitive.
My first employees…
Now that I had an established business I decided to take it to the next level. I hired a friend to work alongside me, and later a couple of my brother’s friends. This cut down the time needed to produce a single cord of firewood. It also brought challenges.
I had to deal with coordinating our time, tracking hours, and paying my help at the end of the week. This last part taught me a lesson on cash flow. My expenses, while low, were all upfront. I had to get the raw material, pay for gas, and pay for my friend’s time in advance of selling the finished product. Demands on my cash flow meant I would need to sell at least a few green cords to “prime the pump” for the season and get enough cash for upfront costs.
From reality to theory…
This entrepreneurial venture coincided with my first years in college. It provided invaluable real-world lessons to hang on the theory I learned in my business courses.
For example, when I learned about inventory accounting it only took about 2.5 seconds to understand how laying out cash upfront for raw materials and labor could be put on the balance sheet as an asset under accrual accounting. My classmates, many of whom lacked the real-world experience to solidify what we learned, found it more difficult to get past a more intuitive cash-based system.
I immediately grasped the notion that growth meant capital investment and cash flow strains. I could also point to my saw or splitter needing repair to understand that depreciation was a real expense.
As I moved through college and later into an MBA program, I continued to draw on this experience to guide my learning. I’d make Excel models to track and model profit scenarios under different assumptions, create basic economic supply/demand curves to see how far I could push pricing, and I also taught myself to use Quickbooks.
A better investor…
All of this set me on a collision course with value investing and my intellectual grandfathers, Warren Buffett and Charlie Munger. While very small, my firewood business was a real business that taught me much more than I could have anticipated at the outset. To use a phrase from Buffett, this early business experience made me a better investor because I was a businessman.
If you enjoyed this post or think of a student or someone else who might benefit from reading it, I’d appreciate you taking a moment to share it. Thank you!
Stay rational! —Adam
Cover Photo by Miguel Henriques on Unsplash
Adam, great post. Your simple explanation of a straightforward business, is clear and elegant! Well done! I shared it with my son who is a finance major at university.