The following is for those who have, do, or want to own a business. You just may find a gem herein to help you find your acre of diamonds and keep them.
Premise: It is my observation during my business lifetime that those who successfully choose to own their own business are confident, creative, some what disciplined, persistent, optimistic and typically genuinely unaware that 90% of their business and personal problems are usually self induced.
If that seems harsh to you, then the following tips may remind you of some basics of business life that often get overlooked while meeting your responsibilities to yourself, your family and others who may care in seeing you succeed.
An entrepreneur, with a great business vision, a modicum of capital, a dogged determination and a learning attitude, can build a business by the seat of his/her pants until he/she achieves a personal comfort level, at which time the entrepreneur must transition to being a professional manager to reach higher heights.
The key element of building a long time successful business is learning to plan, organize, delegate and manage the successes and stresses of being — the boss.
2. Every successful business will eventually be sold or closed.
Understanding the above fact is essential to remaining in control of your business destiny.
Sickness, disablement, divorce, death, retirement and a myriad of other reasons to move on are all reasons a business may have to be sold. Therefore, operating your business to be salable, at any time, will provide you with the best long term outcome, whenever a sale is necessary.
Operating a business with the prime objective of tax minimization is short sighted, as it will then take three years on average to prepare your business for a top dollar sale.
If time and circumstances do not allow the tax minimizer to reposition his business for sale, a life time of building business “market value” will can quickly turn to pennies on the dollar and may go to zero. Business buyers purchase a reliable stream of adjusted discretionary cash flow and rely solely on the past three years tax returns to determine market value.
3. Availability of capital is the life blood of a stable and growing business.
The best and least expensive capital is cash earned and saved.
The profits generated by owning and operating a successful business are the just compensation for the sacrifices made to build an stream of continuing income from your enterprise.
Separate your rewards into two baskets, one to maintain a comfortable life for you and yours and one to meet, and beat, Murphy’s Law and/or provide the seeds from which more rewards can grow.
4. You can not borrow your way to riches.
Business debt should be avoided like the plaque, unless the use of borrowed funds will generate at least 25% more cash flow than expenses and the principal and interest on the incurred debt.
Purchased business assets depreciate with time and incur additional overhead and required maintenance. Part of graduating from entrepreneur to a professional manager is learning, and mastering, how to figure return on investment (ROI). An asset is generally only worth the value of a provable, risk free, stream of of bottom line income. It is that excess earning power that will justify a cash and/or financed purchase.
5. Sales vs Gross Profit
It is true that nothing happens until something is sold. However, purchasing at the proper price, whether it be materials, products or labor will determine ultimate profitability.
The concept of buying low and selling high is simple, but like poker, the game is simple to learn but takes a lifetime to master. Entrepreneurs typically spent more time controlling fixed and variable overhead and not enough time on gross margins.
Professional managers learn that a dollar increase in their gross profit margin goes straight to the bottom line and into the owners pocket.
6. Customer diversification
It’s a no brainer to say that there is safety in numbers when it comes to your customers.
In the life time of a business, there invariably will come a time when a very profitable customer will fall in love with your company and bless you with ever increasing business. Beware of the fact that as that customer grows to be a larger and larger percentage of your total sales, the risk to your business increases dramatically.
Large customers, over time, will use their sales volume to erode your pricing power. More businesses have failed from allowing their largest volume customer to eventually hold them at ransom by forcing them to choose to produce at zero profit or lose the largest part of their sales volume.
The general rule is to not to allow one customer become more than 20% of your sales.
7. Accounts Receivable
If you extend credit by giving customer payment terms, you become a banker.
Entrepreneurs can grow their business by extending favorable terms, if their margins are high enough to cover the opportunity costs as opposed to cash sales. Professional business managers understand the costs of credit terms and pass them on in higher prices. Needless to say, managing credit sales is a complicated subject and is subject to common practice in the type of product, service or industry within which your business falls.
As a general rule, from a safety point of view, cash sales are preferred, credit card sales are the next best option but if you have to extend credit, operate it like a profit center not as a service. In addition, there is safety in many customers. If you only have a handful of customers and you extend them credit, it only takes one to go belly up to seriously damage or sink your business.
8. Accounts payable
If your suppler offers net 30 billing, ask for a 5% or 6% discount, if paid within 5 to 10 days. If you have followed the advice in number 3 above and have set aside a basket of cash for growth and emergencies, the ability to take that discount will go straight to your bottom line.
Unfortunately this is a sore subject with me, as typically many entrepreneurs and professional managers are notoriously weak in this area.
Too many business people think of keeping the books as a necessary evil to be pushed off to a bookkeeper or an accountant until tax time. The truth is the keeping of financial records, checking them daily and learning to interpret them is probably the most vital aspect of becoming and staying a successful business owner. In short, your “books” are the best management tool an owner has at his/her disposal, if kept meticulously, understood and used properly.
A monthly Profit & Loss Statement (P & L) and a personally checked balanced bank statement that is read and understood is an absolute minimum survival requirement for every business owner.
Businesses are complicated, no mater how simple they may seem. Running a business and living out of a checkbook doesn’t cut it. An accurate and frequent P & L statement is a must for an owner to know if things are going well or to recognize when things are getting get out of whack.
Do you know that 1 out 10 small businesses get ripped off by the trusted in house bookkeeper, because the owner wasn’t paying attention with good financial controls? How will you get a loan from a lender, if you can’t quickly produce a P & L to prove you deserve one. I could go on and on.
Every business owner, who isn’t an accountant, should take a few accounting courses or at least read up and understand the concepts. Your financial records are like having an X-Ray picture of your business at your beck and call. Becoming versed in the the financial aspects of your business can be the most valuable asset you will ever own.