It’s not unusual for an entrepreneur to remind me that they are not experts at financial “stuff” and simply know their product or service really well. The brave and confident ones tell me that they may not even know their product or service really well but that they can sell. Whatever the case may be I have discovered there is really only one formula that matters when it comes to business:
This question seems to be a conversation piece that is coming up a lot in recent meetings with entrepreneurs. It’s a funny question because most entrepreneurs think they are building a business but spend their days working in their business in an actual role that they could hire out. By working in the business as an employee, the owner of a business is not being paid for the risks being taken and there is no real value being created. Generally speaking, employers look to leverage the cost of an employee to produce a return. For example, if your business pays an employee $1 you would expect to earn back the $1 plus some amount of profit to compensate you for the risk you assume running the business. The risks you assume should line up with the value you believe you can build. If your product or service is priced right and you have a stable customer base, then a business owner should be able to generate money and value without needing to do any of the work themselves. So why do business owners get stuck being employees?
“We are not going to make payroll this week” says someone from the accounting team to the entrepreneur(s) running the business. “WHAT! How the #$*! did that happen?” is the response followed by a series of emotionally charged words that would make anyone listening feel very awkward 😳.
Believe it or not this conversation is not unusual. In fact, any company that is growing and reaching new levels of revenue will most likely have a conversation like this a few times on their journey. Conversations like this usually lead to more conversations about the broken parts of a business that result in cash not being available to meet obligations.
Many entrepreneurs and business owners dream of growing their business and generating massive amounts of profit but few actually achieve this. There are probably thousands of content pieces available to inspire, educate and provide instruction on how to successfully grow your business and yet many businesses fail, hit a peak or never really get traction. The few that do are success cases that prove it can be done but somehow seem to be just out of reach for the every day entrepreneur working away at their dream. Why is this? I believe its because what seems to be a simple question can’t be answered and isn’t even contemplated by many individuals running a business.
Growing a business means different things to different people. Some businesses grow unintentionally due to demand for their product or service while others grow intentionally a result of executing on a plan. In either case a business needs money to grow and its not always obvious where the money can be found. There is money available from numerous sources to help you grow your business but you have to understand where to find it and what the trade offs are.
“If you don’t know where you are going you’ll end up some place else” as said by Yogi Berra and used in different variations in almost every business book or self help book. There can be truth in common sayings and any quote or wisdom about getting where you plan to be even if you have no plan is more than half true. It is 100% true. Every business will end up exactly where it plans to be. In the face of no plan a business will do fine during a good market and will be in trouble during bad market. To the extent that a business knows what its goal or destination is, it will be able to grow and survive during good and bad times. For many small and medium sized businesses the “goal” can often be one of survival with no long term hopes or expectations. This is unfortunate because I believe many businesses fail due to their lack of planning and goal setting. My own experience teaches me this as does twenty years of working with entrepreneurs and business owners that have found themselves in need of financial help.
They say interest is a silent killer in any business. This is because you don’t really notice the impact it has on your profitability until you can look at an accumulated amount over a period a time to see how much of your profit actually goes to interest. It turns out that the money taken out of a business by an entrepreneur or the owners can also be an unnoticeable drain on profitability. Many small and medium sized business owners treat their business finances as an extension of their personal finances instead of treating their business like an investment. What many fail to realize is that without a policy or process around how owners take money from their business they may be doing more harm than good to their bottom line.