Back To Business
Every business owner is confronted at some point during their business life with defining what is most important to them in running their business. The deeper we contemplate how to define success, the more we realize that success is a three pronged process.
The first and most important prong in defining success is how we reach the point of maximizing our cash flow in order to manage our business for profit, rather than manage for cash flow. Too many business owners spend the majority of their time worrying about how they are going to pay their bills rather than being concerned with how they can maximize their profit.
The negative to managing your business for cash flow, rather than profit, is that it is impossible to ever reach the point where you maximize your profitability. You then put yourself in the merry-go-round wherein profitability is always in the background and cash flow is in the foreground.
In order to properly maximize your cash flow, you must have the requisite methodologies, systems, and controls in place to minimize your accounts receivables. You must optimize your inventory, your accounts payable, and your long and short term debt. All of these tools, if properly utilized, can restrain the utilization of your cash flow even as your business continues to grow. During periods of rapid growth it may be necessary that you use some of your now available positive cash in order to fund your growth. But during periods of stabilization or entrenchment, you should easily be capable of adding to your cash position.
The second prong of success is profit. Profit is defined by having more revenue than expenses. It sounds so easy. However in order to ensure your profitability, the following must take place. Firstly, you must be absolutely sure that you are producing profitable sales. This means that you have total control over all of the true costs associated with your sales. Variable costs include, but are not limited to, labor, overtime, benefits, materials, waste, pilferage, theft, downtime, lack of product, sickness, vacation, utilities and fuel.
The second facet of producing profit is controlling your cost of goods sold. The cost of goods sold in every business is made up of four possible components: labor, material, subcontractors and any other expense directly related to the production of your product. In order to control these costs you must not only know what your costs are, but you need to know what they should be. You then have to define a strategy in order that the critical variables associated with each of these components are known, controlled, and minimized for the benefit of the entire business, including all of the people who come into contact and benefit from your company.
After we have assessed what a profitable sale is, we must now document, control and maintain our cost of goods sold. We must next attack our only other source of business cost; overhead. In order to control overhead, we must again know what it is and establish what it should be. Then, define a strategy to control it within the bounds of a reasonable margin of error.
The third prong for business success is that the entrepreneur must make abundantly sure that he does not allow the business to consume him. He must make sure that the day to day trials and tribulations of the business are managed so that he can have a life outside of his business. Only those of us that have ever tried to run a business fully understand how consuming a business can be. In order to dramatically modify their course of conduct, it is first necessary that the business owner push away the menial and mundane work that does not have a direct impact on profit or cash flow. He must refocus his energy and his time on the business of the business, which is producing profitable revenue, controlling cash flow and maximizing his profit. Daily trials and tribulations should be delegated to employees. Then and only then does the person become a business person rather than a person in business.
The key components of success are producing a positive cash flow, maximizing and developing a system wherein the business person truly manages their business, rather than the business managing them. In order to achieve these goals, it is abundantly clear that every business owner must convert from being a person in business to being a business person. In order to accomplish this, it has been proven that you must focus on these three prongs of success.
Entrepreneurial spirit in America is as strong as it has ever been. The average American grows up being extraordinarily competitive with a zeal for victory around every turn. In order to achieve this success he must aspire to greatness. First you must define your short and long term objectives and even more importantly, strategize how to obtain them.