The important business about Your Own Business (Part 3)

I don't care what a business is, what it sells, who it markets to, what country it is in and how big it is. Whether your business revenues are $200,000 per year or $200,000,000 per year - the same principles still apply!

Things that must be considered when setting up and running a business are as follows:

1. Your "Edge" - In order to be successful, a business needs to have an "edge". An "edge" is a competetive advantage that few or no other competitors have. An "edge" can be (for example), a niche product, a patented technology or product, a niche target market, new technology. What is your competetive edge? If you have no "edge", then you will be a "me too" business that will be unlikely to succeed and will be lost amongst all the other competitors. You NEED to stand out.

2. Sales and Marketing - Without a sales transaction, there is no business. Whether your business supplies equipment to farmers, cars to the public, electrical services to people, stationary to businesses, legal services to everyone, you MUST sell whatever it is that you offer, in order for a transaction to take place and hence a profit be made. You need to consider how you will reach your target market, and once contact is made, how will you sell to them? How will you communicate your "edge" to the market? How will you sell what you are offering?

3. Logistics - Once you have the sale, you then have to deliver it to the customer. If it is a physical product, then you need to work out an efficient, reliable and trackable method of delivery. If you think that you will deliver the goods yourself - your business will fail. Delivering goods (unless that is your business and you are a logistics company), is inefficient with regards cost, inefficient with regards time, inefficient with regards effort. Logistics also involves the stocking and packing of the goods. How much stock to you need to hold? Where will you store it? What packing materials will you need?

4. Administration - This includes, but is not limited to:

   1. How do you receive an order from a customer?

   2. How do you process an order from a customer?

   3. How do you pick and ship a customer order?

   4. How do you invoice a customer?

   5. How do you manage and order your supplies of stock, stationary, and other business items?

   6. How do you process your tax obligations and pay those?

   7. How do you follow up bad debts?

   8. How do you follow up lost orders?

   9. How do you process complaints?

   10. How do you manage compliance requirements?

   11. Who oversees the business accounts to ensure all is in order and up-to-date?

   12. How does the business manage all the insurances?

5. Manage the cashflow of the business - You are the business owner, so it is YOUR responsibility to manage the cashflow and understand the business "breakeven point". That is the point where a business covers ALL costs, including your desired salary, and then starts to make a profit after that point. I designed a spreadsheet that took in all my business income, fixed and variable costs and then both on a graph and a table showed me what I had to produce in monthly sales to break even - that is, what I needed to sell each month to cover ALL costs including my wifes salary and my salary. Then any sales above that would produce a "profit" within the business that could either be retained or given out as dividends to shareholders (my wife and I). It was a basic spreadsheet designed 25 years ago and still works today - though it has had a few tweaks and improvements as things have changed over the years. If you don't have such a tool, you will need to create one. How else will you target your breakeven point if you don't know what it is? How else will you target a 20% profit after all costs and taxes, if you don't know what that target is? You cannot hit a target you cannot see!

As you can see, ALL five points above need attention in EVERY business, no matter where it is located. True, not all sub-points are applicable - so if you have a lawn mowing business, you will not likely need to worry about Point 4 a, b & c. However, all the other Admin issues will likely be relevant.

There is no successful and profitable business I know that fails to make sure they have all five of the above under control.

Neglect one or more of the above points, and your business will either fail completely, become a zombie business or just a "job" that you are tied to forever.

It will quickly become evident that this becomes an impossible task for just one person - I found this out the hard way early on when the business was turning over less than $150,000 per year and I nearly broke the business.

Stick to your strengths. My strengths were in dealing with people, marketing and selling, it was not in managing or administration. Stick with what you know and are good at, and get someone else to manage the rest. Once I figured that out, and focussed on the sales and marketing side of the business (the part that makes the money) and had my wife oversee the Admin and logistics, we bacame so much more profitable!

If you are in business, you will know where your strengths are.

If you are about to start a business, you are doing so because you see an "edge" - that edge is your strength.

Your strengths are what will make or break the business, it is what should set you apart from the competition. Focus on these strengths and delegate the rest.

I have seen many businesses fail because the owner(s) try to do and be everything in that business, and in doing so, spread themselves too thin and do a poor job across the board.

I have also seen failures in business where the owner focussed on his strengths and did an excellent job. One such case was a computer technician I knew. He had a small business - just him and his business partner. He was the loveliest person with great knowledge and skill. However, he and his business partner were really hopeless at invoicing customers and billing for work they had done. They just to "cheap" to employ a bookkeeper to manage their accounts! Rather than paying someone to do their invoicing, they chose the cheap alternative of doing it themselves and in doing so, failed to bill out hundreds of thousands of dollars in completed work and equipment that they supplied. It was a case of burning dollars to save pennies - just stupid!

Remember: The sole purpose of a business is to make a profit

Finally, if you doubt the above statement, consider this example.......

Let's say you are a manufacturer, and in order to expand your business, you need to purchase some capital equipment valued at $250,000. You decide to approach your lending institution for a loan. The first thing the lender will ask, is, "how will your company repay the loan?". Of course, the ONLY way is via the businesses profits! No profit - no loan. Not enough profit - still no loan!!!

One more scenario for you....

Let's say I want to increase my passive income buy buying a business. I see that your business is for sale, so I make an enquiry. When buying a business, I would look at the accounts to see the profitability of that business - since I do not want to buy a "loser".

Your accounts show me that you earn a reasonably good salary in the business, as does your wife. However, there are no profits available as the business does not generate any.

However, I am looking for an investment and not a job, and hence, if I was to buy your business, I would have to then employ someone to do your job and your wife's job. Since there are no profits from the business, I have no dividend income from it and hence no payback! I assume that by now, you have now figured out that you would NEVER be able sell such a business to someone looking to invest in businesses. That's just another reason why you MUST be able to generate a profit ABOVE your salary.

Never forget: The sole purpose of a business is to make a profit

If all your business does is cover all costs and pays you a salary, then you have created a job for yourself, not a business, and that's OK, if that is what you ultimately wanted. But then, if that's what you wanted, why not just get a job as an employee and avoid all the business stresses and regulations?

Make sure you cover the five points above in your business. If you don't know how, search through resources such as books, podcasts, seminars etc. Better still, ask someone that's successfully done what you want to do.

Final thought: Business Plans - No doubt, if you do look up various resources for ideas on how to create and run a business, you will see many references and suggestions that you produce a "Business Plan". I personally have never produced a formal business plan. Yes, I have made planning notes for various parts of the business, but never saw the need for a structured business plan. Yet, this is standard amongst "business coaches" and other "experts". Look, unless you have a big idea that you need to pitch to investors, and are looking for funding, then a business plan is necessary.

However, in reality, many business plans have been written in the past, and I would be quite certain that not a single one of those business plans would have stated that the business would be broke in 5 years time - yet around 65% of businesses fail completely after 5 years, others become zombie businesses, and sadly, very few actually succeed in becoming profitable businesses.

If you want to produce a business plan, feel free to do so. It certainly will not hurt, but often they are unrealistic and way off target because they attempt to project too far into the future, hindered by a lack of adequate data and often by a lack of skill of the business owner.