“On Running a Business Smoothly” Wiser Next Week for Business #3

Supply Chain - Overview, Importance, and Examples

Wiser Next Week for Business is a follow up to the original Wiser Next Week. Similar to its predecessor, it takes the knowledge of many and condenses it into one categorized book. This time, rather than focusing on the reader’s personal life, the matters of work and career are discussed in greater detail.

Wiser Next Week for Business will be released chapter by chapter.

‘Tis the business of little minds to shrink, but they whose heart is firm, and whose conscience approves their conduct, will pursue their principles unto death.” -Leonardo da Vinci

Why it Matters: In a free and open society, there is a very unequal distribution of success in every aspect of life which includes the businesses that support the wants and needs of its communities. Most businesses fail within a very short time of opening their doors. Those that survive the initial culling are in a far more favorable position to survive and thrive in their market.

People First

Take care of people, products, profits in that order: Taking care of the people is the most difficult of the three by far and if you don’t do it, the other two won’t matter. Put another way, here are a few questions: who buys your products, who makes your products, who makes your products known to a wider audience? The answer is people, people and people. The products in turn, flow to your profits, any monetary reward is derived from people willingly making, marketing and buying your products or services in the first place. People created the company, people work for the company and people buy from the company.

Taking care of the people means that your company is a good place to work. Most workplaces are far from good. As organizations grow large, important work can go unnoticed, the hardest workers can get passed over by the best politicians, and bureaucratic processes can choke out the creativity and remove all the joy. It is your workforce that produces the products that customers want to buy, and it is both the people and the products that bring money in to produce a profit.

In good organizations, people can focus on their work and have confidence that if they get their work done, good things will happen for both the company and themselves. It becomes a true pleasure to work in such an organization. Money is good as well, and up to a certain point, more and more money does not lead to greater and greater satisfaction. A good company must provide a greater overarching purpose beyond stacking more and more paper. In an effective organization, every person wakes up knowing that the work they do will be efficient, effective, and make a difference for the organization and themselves. These things make their jobs both motivating and fulfilling.

During times when record profits are being set, the economy booming and employees being paid large bonuses, being a good company that takes care of people, then products then profits doesn’t seem to be worth all the extra effort. But during times when things go south, and payroll becomes a stressful event, that is when being a good company makes all the difference. The former scenario attracts “fair weather friends” who will hop on for the ride for selfish gain, the latter retains individuals who truly believe in what the company does.1

Finding good people that believe in the company’s mission starts by being a good company in the first place. All companies start out honest, even those companies you think are inherently bad. Even Enron and Lehman Brothers started out with very few people and had to hustle hard to make ends meet in the beginning. At the time of their inception, these companies were nobodies, and no nobody company can afford dishonesty from the get go. Dishonesty isn’t an attitude or company inherent value from the start, it slowly grows over time, but only if corporations are forced into it. Even the worse companies were once honest small businesses.

 Many companies such as Enron become victims of their own success. They grew so large and became so successful that they lost the focus that brought them that success to begin with. As a result they attracted more and more “fat”, that is, people who aren’t vital to the companies success and are there more to be a groupie who mooches off the success of others rather than trying to make a meaningful impact on the organization. Such an organization begins by rotting from the inside. A common beginning is bringing in people that will sacrifice the long-term of the company in favor of a short-term boost in performance. These sorts of individuals use a variety of methods to take from the organization rather than contribute. This often involves cutting the quality of the product where they sell at the same price but at a lower standard. This hurts the company’s reputation and dilutes the fan base, negatively impacting profits, and it’s a downward spiral from there.

Focus on being a straight arrow instead, anything less is detrimental in the long run. A highly related aspect of honesty is transparency. Don’t try to avoid transparency, it’s a fool’s game. Intentional deceit is bound to come out somehow, some time. Even if you run the biggest hush-up campaign, transparency always wins. Great companies know this. That’s why they embrace transparency right from the beginning. They’re an open book, fully transparent, all numbers, standard procedures and practices for the world to see. For any company that is consistently in the spotlight, they can’t afford anything but to be transparent. Success attracts attention and attention attracts scrutiny. Is it conceivable to think a successful company like Apple can stay 100% on the ball of trying to cover up something scandalous? One slip up could mean going the way of Enron.

    What does your company or employer do? Can you encourage them to be more transparent?2 This can take shape in many forms, such as taking the initiative and starting open and frank discussions with customers/clients or building out standard operating procedures into written form to submit to management for review.

Focus on What You Keep, Not What You Earn

“Revenue is vanity, profit is sanity, and cash is king”

You must figure out the things that make profit and dump the things that don’t. Sustained profitability depends on efficiency. This is especially true when an organization is just starting out, if you do a careful observation of small businesses in your community tend to run a tight ship. They know that cash is the fuel that keeps their organization’s running and more often than not there never seems to be enough. Developing and producing your product requires cash, paying employees requires cash and paying back loans requires cash. There is little room for error, so effective cashflow management is key.

When less money is available to run your business, you will find ways to get the same or better results with less. By taking your profit first, you will be forced to think smarter and innovate more. (Pay yourself first for business, now you’ll be forced to come up with a way to make up the difference.) We place more significance on whatever we encounter first. What we do first tends to subconsciously signal that it is a priority. When profit comes first, it is the focus, and it is never forgotten.

If you get a $1,000 deposit, then starting today, transfer $10 into your profit account. No matter what happens, even if the sky is falling, you’re not allowed to use that $10 as operating funds. If you could run your business off $1,000, you can run it off $990. If you get $20,000 in deposits, you transfer $200 into your profit account. If you can run your business off $20,000 you absolutely can run it off $19,800. You’ll never miss that 1 percent. Within circles of personal finance enthusiasts, this is called “paying yourself first” and its application in the personal and business realm are highly correlated. A portion of every dollar you earn is yours to keep. It is a low bar. But something magical will happen. You will start proving the system to yourself. You won’t get rich overnight this way, but you will gain a wealth of confidence. This is a cash management system. Instead of paying all your vendors, taking a cut off the top forces you to focus on what expenditures are actually necessary and which ones are frivolous. You started a business venture with monetary gain being at least part of the picture right? Right, so put your wants/needs first and trim down the fat.

Run your business based on what you can afford to do today, not what you hope to be able to afford someday. You’ll never get to someday until you start acting to get there today. Think of it this way, everyone no matter how great their accomplishments are, started just like everyone else. We were all babies to begin with. That was the starting line, where your finish line is up to you. So keep in mind that “someday” begins with taking the right course of action today.3

Think of your venture as akin to running a marathon, sooner or later you’ll hit “the wall” and begin questioning everything you’ve done up to this point. The same thing happens when you take on a pursuit you believe worthy of your efforts. A commonly asked question is: “What is the worst thing that can happen?” When facing such a question, some common answers include, “We will go bankrupt, I’ll lose everybody’s money including my mother’s, I’ll have to lay off all the people who have been working so hard, all of the customers who trusted me will be screwed, and my reputation will be ruined. I’ll have a tough time looking anyone in the eye. I’ll have debt collectors banging on my door chomping at the bit to sell my organs and break my legs to boot.” Feel better (sarcasm)?

Instead, ask yourself a different question: “What would I do if we went bankrupt?” Building on the previous example: “I’ll sell everything I have to offer within reason, including my plasma in order to raise capital to rebuild. I’ll work any job that will take me and I’ll work 100 hours a week, shunning all other aspects of my life to get my financial house in order. To save on living costs, I’ll sleep on park benches and homeless shelters. I’ll eat in soup kitchens and apply for unemployment benefits, anything it takes to get back up on my feet.” The key difference between the two questions is that one focuses on how terrible things will be if your world obliterates into complete and utter catastrophe. The latter focuses on what is within your control and restores order among chaos. Then comes the follow up question: “Can I activate my doomsday plan without doomsday occurring?” Instead of reacting if the worst-case scenario happens, focus on being proactive and make things better now. No matter how you cut personal or business finances, it all comes down to two key factors: money coming in, and money coming out. Whether or not times are feast or famine, finances can always potentially look stronger by cutting costs (i.e. stemming the outflow of money) and increasing revenue (i.e. widening the inflow of cash).

Rephrasing the worst-case scenario to actions plans is a much better alternative than just accepting your worst case scenario. Focus on what you can control, and new inspiration will gradually take shape. The simple existence of an alternative, plausible scenario is often all that is needed to keep hope and your company alive.4

Forming a plan involves knowing where you and your organization currently is and where you want it to be. Use Key Performance Indicators (KPIs) to keep a pulse on the health of your company. This goes back to having hard numbers based on what has actually happened and using that information to make an informed decision. KPI’s are measurements of the critical parts of a business system. Here are a few questions to identify a business’s KPIs:

Marketing: How many people are paying attention to your offer? How many prospects are giving you permission to provide more information?

Sales: How many prospects are becoming paying customers? What is the average customer’s lifetime value?

Value Delivery: How quickly can you serve each customer?

Finance: What is your Profit Margin?

     Here are a few examples along with explanations to go along with:

  1. Profit: This goes without saying, but it is still important to note, as this is one of the most important performance indicators out there. Don’t forget to analyze both gross and net profit margin to better understand how successful your organization is at generating a high return.
  2. Employee Turnover Rate (ETR): To determine your ETR, take the number of employees who have departed the company and divide it by the average number of employees. If you have a high ETR, spend some time examining your workplace culture, employment packages, and work environment.
  3. Customer Lifetime Value (CLV): Minimizing cost isn’t the only (or the best) way to optimize your customer acquisition. CLV helps you look at the value your organization is getting from a long-term customer relationship. Use this performance indicator to narrow down which channel helps you gain the best customers for the best price.
  4. Customer Acquisition Cost (CAC): Divide your total acquisition costs by the number of new customers in the time frame you’re examining. Voila! You have found your CAC. This is considered one of the most important metrics in e-commerce because it can help you evaluate the cost effectiveness of your marketing campaigns.
  5. Cost of Goods Sold (COGS): By tallying all production costs for the product your company is selling, you can get a better idea of both what your product markup should look like and your actual profit margin. This information is key in determining how to outsell your competition.

In order to optimize a system’s performance, pick one important metric and focus your efforts on it, it can either be to maximize or minimize. Maximizing can be in the form of selling more product to increase profits or serving more customers. Minimizing can refer to cutting costs to decrease your overall cost of goods sold.5

Takeaway: Earnings, profits, products, these indicators that are associated with an organization’s success start first with people. A long-term sustainable business model must put people first, followed by products and profits. People can further be divided into employees and customers. Find the employees that share the same goals as you do, and find raging fans to be your customers. Once you have your employees down, focus on the products that will draw the raging fans, followed by the numbers. Whatever revenue you bring in, pay yourself first. That will motivate you to find a way to cover your expenses. 

  1. “The Hard Thing about Hard Things” Ben Horowitz
  2. “People over Profit” Dale Partridge
  3. “Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine” Mike Michalowicz
  4. “The Hard Thing about Hard Things” Ben Horowitz
  5. “The Personal MBA: A World-Class Business Education” Josh Kaufman

2 thoughts on ““On Running a Business Smoothly” Wiser Next Week for Business #3

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