1 principle every entrepreneur can use to make better decisions

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“A business will make money in a down market and collect it in an up market”

Running a business isn’t easy. Every day there are challenges, opportunities, tasks and issues that all contribute to where a business finds itself at any given time. To help get through the daily grind an entrepreneur will use business coaches, consultants, webinars, training sessions and many other tools to ensure they are building their business properly. While these tools are very helpful there are certain principles that an entrepreneur can follow to guide their efforts each day. One of those principles is understanding what your business is fundamentally trying to do each day – is it learning how to make money or is it collecting money and reinvesting the results? This may seem like a strange concept but your ability to understand it can have a profound change in how you approach the daily grind of your business.

“What is the difference between a business that makes money and a business that collects money?”

To help guide your thinking, consider the following:

Characteristics of a business

that is learning how to

make money

Characteristics of a business

that is learning how to

collect money

  • A balance sheet that has very little cash
  • A balance sheet that has a lot of debt
  • 80% of revenue comes from new customers
  • 20% of revenue comes from existing customers
  • Pressure to survive
  • Uncertain rate of return on capital
  • Employees tend to be generalists
  • Unclear feedback loops for performance
  • A balance sheet that shows a lot of cash
  • A balance sheet that has very little debt
  • 20% of revenue comes from new customers
  • 80% of revenue comes from existing customers
  • Pressure to stay relevant
  • Very specific rate of return on capital
  • Employees tend to be specialists
  • Clear feedback loops for performance

A simple example that will change how you react based on what your business is trying to achieve involves people. A business is only as good as the people that are managing the processes that deliver products or services to customers who pays for them. If a business is learning how to make money it will attract people that are good at many different job tasks versus a business that is collecting money which will attract people who are specialists. What type of people is your business attracting? Making money means being able to experiment and make fluid decisions. Collecting money means perfecting your business model and making it as efficient and effective as possible. Different types of people will bring different skill sets to a business and its important to know which ones your business needs.

Another example that will change how you react based on what your business is trying to achieve has to do with financing or how your business uses cash. If someone were to give your business ten times its annual revenue as an investment, what would your business do with it to get an above average market return? Is your business performing strongly enough that an investment would be simple arithmetic for the investor? If your business is still trying to figure out how to make money then chances are that an investment would be used to fund overhead, clean-up your balance sheet and provide some capital for experimentation in new initiatives. If your business is collecting money, then an investment would be used to scale up top line revenue and bottom line profits. Your business will need access to different types of financing and will have different uses for its cash as it moves from learning how to make money into collecting money.

It’s important to note that there is no right or wrong stage for your business to be in – they are different. A business trying to make money is focused on surviving where a business that is collecting money is focused on thriving and trying to stay relevant. An entrepreneur needs to understand what they are trying to achieve each day inside of their business so they know which people to hire, what investments of time and money are needed and how to pursue the right opportunities.

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