The Facts of Business Life (45 page)

Here's a good way to look at product innovation. It might seem that a shot of Jack Daniels is the same at any bar, a Toyota Camry is the same from one dealer to the next, and watching a movie is the same regardless of which movie theater you go to. The fact is, though, they're not. That's because product isn't just about what a customer buys, it's about how his or her needs are served. A shot of “Jack” tastes a lot better if it's served in a clean glass and delivered by a friendly bartender, as opposed to one who hasn't shaved or combed his hair in days and looks like he's been up all night sampling “Jack.” The point is that customers have expectations, and when these expectations are met, it separates the winners from the losers. That's why some businesses selling the same product excel, some do just all right, and others fail. The key to product innovation lies in your creativity, your willingness to compete, and your not letting the thought of constant innovation and changes intimidate you. But unless you understand the importance of knowing business, you may never appreciate the importance of product innovation and the role it plays in opportunity.

Since at Level 1 the business doesn't exist yet, it might not seem like people or employees are an important factor. The fact is, though, that considering your potential staff and the type of talent you will need is something you need to do because it speaks to your ability to manage them, which in turn speaks to your ownership ability. This is an important point because if you're starting a new business or expanding one, you will have to recruit some experienced people, and both your knowledge and ability will be evaluated by those you recruit. Similarly, if you're buying a business, the current employees will be judging your every move and every statement. The question you have to ask yourself, then, is whether or not you're ready for this challenge and/or scrutiny. If, as an owner, you can't lead, market the business, and “motivate, educate, and entertain” your employees, the strength of the opportunity will be of little importance because you'll never get there.

One of your responsibilities as an owner is to tell your employees how you want them to execute their jobs. But you also have to be able to back it up through determination, persistence, and a willingness to discipline those employees who don't do what you want. In regard to the question of ownership, then, you have to honestly evaluate whether you will be able to do this consistently.
Consistency
is a key word because owners and managers often have a different view of how things should be done than their employees do. That means conflicts are going to occur, and they will need to be settled. And it's the willingness to address those conflicts that separates the good owners from the poor ones. In other words, the tail can't wag the dog, and if you're not willing to mix it up with employees on occasion, you shouldn't become an owner. So your ability—or inability—to deal with people is something you need to take into consideration in making the ownership decision at Level 1.

Up until now, I have not singled out accounting and finance as a subject of its own, although I have made numerous references to it, because I wanted to make it clear that it doesn't represent a separate discipline but one that is woven into the fabric of your business. Unfortunately, despite its importance, it's one of the subjects owners and entrepreneurs understand the least. As a result, there are many owners who should have been successful but never were because they didn't understand how important it is.

At Level 1, accounting and finance come into play in the opportunity analysis in two areas, cash and profits. We all know the saying “cash is king,” but the reality is that some owners don't really understand why it is so important, particularly at this level. One of the reasons is that cash—or more correctly, the lack of it—can keep you from becoming an owner in the first place. Unless you have it, or have access to it, the likelihood of fulfilling your dream of starting or buying your own business is pretty remote. Moreover, the larger the business you want to buy, the more cash you will need to buy it.

In addition, even if you have enough cash to start or buy a business, you will need still more cash to operate it until the business is bringing in enough money to cover your expenses and provide a profit. In other words, “cash is king” means more than just having cash available. It also means having a solid understanding of how much overall cash will be needed to operate the business on a day-to-day basis, and of the positive and negative effects cash can have. Let's say, for example, that you believe there is sufficient market demand for you to buy an expensive piece of equipment that will create more sales and gross profit. The question, then, is whether you should buy the equipment outright, finance it through your lender, or lease it. This is a “cash is king” decision. If you buy the equipment outright, the cash drain on your business could be severe, but if you combined cash with some financing, while it would increase the breakeven point, it would also enable you to keep more of your hard-earned cash. The point is that you have to take these considerations into account in making such decisions, because not understanding their impact can create serious financial difficulties.

Most business owners actually understand this concept, but making it work in the real world is a different story. In order to do so at Level 1, you need to familiarize yourself with the use of three essential financial tools: the cash flow analysis, the income (or profit-and-loss) statement, and the balance sheet. The cash flow analysis is a tool that tells you how much money has come into the business, how much has been spent, and how much remains. Without the cash flow analysis you would be operating in the dark in terms of what you should and shouldn't do as far as using cash is concerned, and that's a dangerous spot to be in even for a successful owner.

The second tool, the income (or profit-and-loss) statement, shows you sales revenue, cost of sales, gross profit, expenses, and net profit. This tool is essential because it enables you to see how much net profit you've made. In addition, when you are looking at an opportunity, it can show you how lucrative the opportunity may be based on certain facts, such as normal expenses, or educated assumptions, such as sales revenue and gross profit, and tell how much money drops to the bottom line. That is, by “playing with the numbers,” you can get a feel for various levels of sales revenue, gross profits generated from those sales, and expense levels, to determine where your breakeven point is. Without this knowledge every scenario becomes a surprise, and that's not the way successful businesses operate.

The balance sheet, the third tool, shows current and long-term assets on the left side of the statement and the business's liabilities and net worth on the right side. The reason it's called a balance sheet is that the asset side of the page has to balance with the liability and net worth side. This tool essentially provides a picture in time that shows you, at the time it's prepared, where your cash is located in terms of current and fixed assets, your working capital, net worth, and retained earnings. Having this information is important because it provides you with basic facts about the business's operation, such as the amount of cash on hand, receivables, business liability (including payables owed), and others. In addition, it's a good tool to understand because most lenders rely heavily on the balance sheet for their lending criteria. In fact, it's a more important document than most owners realize, because it can be the determining factor in a lender's decision to give you money to buy or expand a business.

The bottom line, figuratively and literally, is this: if you don't use these financial tools at Level 1 to analyze an opportunity in terms of how much cash is needed and how much profit is available, you haven't done an adequate job in analyzing your opportunity decision. And in that case, you will be operating more on the “I hope this happens” theory than on the one that suggests “opportunity is there, I just have to make it happen.”

By now, you may have made up your mind about ownership and opportunity, or at least have a pretty good idea of what your decision will be. I do, though, have a further word of advice: this is not the time to be impatient and hurry your decision. If you don't take all the various considerations into account, and rush toward either starting a business or giving up on the idea, you will more than likely have neglected to take into account one of the most important elements in the ownership and opportunity decision process—you. This is because of all the many questions you have asked yourself in trying to make the ownership decision, it really comes down to one overriding question: “have I really been honest with myself?”

This is not the time to let the fear of the unknown get in your way. It is, however, the time to reanalyze and question your abilities, your determination to succeed, and your commitment to compete every day. Entrepreneurship is serious business played by serious people, and if you want to be an owner or expand your business, you need to consider that you will eventually come up against owners like me who don't want you to be successful and are committed to growing their business at your expense. And if you can't honestly say that you feel up to the challenge, ownership is not for you.

There is also, however, one more reality you have to face in regard to the ownership decision. Some decisions in our lives are not based on facts but driven by some unfilled need. This need is what pushes you toward the success you have defined for yourself, mixed in with some pride and a bit of ego. At times it can be overpowering and therefore dangerous. Would-be or current owners wanting to grow or expand their businesses have to recognize this drive for what it is, hold it in check until all the facts are in, and control it when analyzing their circumstances because it can make a questionable opportunity look attractive. And finally, if after you've done all the analysis, you continue to see the risk side, walk away because you might be right.

Every successful business has goals and objectives they want to achieve. The trick, of course, is to make these goals and objectives a reality, which is a formidable challenge. One of the things that makes it such a challenge is that in order to get your company to where you want it to be, you have to get your employees to do what you want them to. In other words, although your employees are an integral part of your achieving your goals, it is still up to you to determine how your business operates, and you can't leave it to chance or to your employees' interpretation.

As I discussed earlier, in successful companies, processes operate the business and employees operate the processes. That is, processes tell employees the “what” and “how” of their jobs, as well as help coordinate the activities of the overall business. But there is a rub, which is what makes this fact so important at Level 2. The rub is that the more you know about business, its principles, and concepts, the better the processes you develop will be, and the better your business will operate. But the opposite is equally true, so if you want to run your business as effectively and efficiently as possible, it's important that you have a good overall understanding of all the various facets of business.

As I've also said before, very little in business operates in isolation, which means that virtually anything that happens in one part of your business will have an effect on some or all of the other parts. For example, if you don't watch your accounts receivable you can quickly find yourself short of cash to pay your employees or suppliers. Similarly, if the individual responsible for ordering your stock doesn't order sufficient quantities for the demand, your sales will be affected. In other words, a problem in one department can create additional problems not only in another department but throughout the company. We've all heard the expression “the left hand doesn't know what the right hand is doing.” When that's said of a business, it means the owner does not understand that business principles are interrelated and that, in fact, success depends on knowing what both hands are doing.

The Benefits of Knowing Business at Level 2

• Knowing business helps you develop a stronger appreciation of the importance of goals and objectives in the development of processes.
  
• Knowing business enables you to understand that the most effective processes are those developed by combining industry knowledge, overall business knowledge, and experience.
  
• Knowing business shows you the benefit of analyzing both mistakes and successes because both add to your understanding of how best to operate a business.
  
• Knowing business shows you the importance of continually upgrading your business knowledge as well as understanding how it applies to your business.
  
• Knowing business enables you to understand the importance of having a good basic understanding of accounting and finance as well as of its influence throughout the levels.
  
• Knowing business provides you with a deeper appreciation of how the three “P's”—process, product, and people—are interrelated, and how this interrelationship develops the fourth “P”—profit.