People use to be paid based on their daily physical output. How many widgets could they build? How many trenches could they dig? How many calls could they answer and reroute. There was a time not long ago when people were the machines that made a business work – actually work. Today life is quite different. Technology continues to erode the physical work that people do and has left a void that only people can fill. In the past people were paid based on using their body to undertake physical or manual labour but in the future people will be paid based on using their brain to think and manage outcomes. The real question is: how is your business doing more with people?
If can happen to a large company (see story here) it most certainly can happen to your company. Surprisingly, many businesses that have never been through a tough moment fail to appreciate how often this happens. I am referring to a company not really knowing its costs and finding themselves in a position where they have to work out of a tough position because they didn’t realize what they didn’t know. Understanding the costs for your business is one of the most important things to know outside of understanding how to generate revenue. It seems simple but in practise can be a challenge many businesses struggle with.
Answers are easy. Asking the right question is hard. Over twenty years I have developed a skill for asking questions (to the dismay of my wife and family but that’s for another post). Many businesses get really good at delivering their particular product or service to the market but can experience challenges or problems that end up redirecting their efforts and sometimes causing them to lose sight of what they were trying to achieve in the first place. This past week I had the chance to have a coffee with an individual have known for many years who has had his fair share of challenges but like any good entrepreneur he used his lemons (bad circumstances) to create lemonade. Now that the moments of desperation are somewhat behind him he was looking to get himself on better financial footing and wanted some input from me. I asked him #OneQuestion that changed the rest of our conversation and ended with him sending me a lengthy email with all of his answers. I asked him:
“How much money does your business need for it to do more?”
Do you know what your business owns and owes? Do you know what your business makes and spends? More importantly – do you know what the equity is in your business or what it might be worth? It’s typical for an entrepreneur or for someone running a business to say “yes I know what we make and spend” but unlikely that they know what they own/owe and what the equity in their business is or what the value might be. Small and medium sized businesses can be so focused on surviving that they often don’t take time to see if the needle is moving in the right direction with respect to the equity or value of their business. This is unfortunate because one of the very reason businesses are started is to build value and one day be able to cash in or have that value recognized.
So where is the best place to start if you can relate to this?
“…the loss of potential gain from other alternatives when one alternative is chosen.”
Running a business comes with an never ending series of trade offs and there are times when critical decisions need to be made that seem to have greater trade offs than what you may be accustom to. This can be particularly agonizing when a decision involves needing expertise that you may not have access to – like financing. When given an opportunity to profit from a decision that involves needing to find capital, often times entrepreneurs and business owners will either lean in and commit or miss the opportunity as a result of their lack of knowledge. Opportunity cost is a real concept that impacts many businesses but here are some things that might help you if you find yourself in a position where a gain to your business will involve being creative with how you find the capital to take advantage of it. Continue reading “What is opportunity cost?”→
If you have ever been confused about what net profit is you can take comfort in knowing that even the great Sir Richard Branson admits that understanding net profit can be tricky (click here to read more). I have had numerous conversations over the years with entrepreneurs and individuals running businesses that have done a great job explaining how their business generates gross revenue from the products they sell or the services they provide but can’t easily sketch out how the business earns net profit. It can be tricky but it can also be the difference between having a great business and a business that barely gets by or seems to never have enough cash.
Let’s face it. Entrepreneurs and business owners are always looking for money. I find it interesting that many folks running a business who need money don’t take the time to really understand how much money is actually out there and available to them. When words like “money, financing and capital” are used they can cause someone’s eyes to glaze over as these terms are associated with confusing and uninteresting concepts. The truth is that money can be complicated and boring to understand but it doesn’t have to be.