The Facts of Business Life

by Bill McBean

  The Benefits of Protecting Your Company’s Assets

  Protecting your assets can reduce the amount of overall capital needed to operate your business.

  Protecting your assets can enable you to increase output and decrease your operating costs.

  Protecting your assets can help you reduce obsolescence, improve maintenance, and instill in employees an overall appreciation of the importance of both tangible and intangible assets.

  Protecting your assets enables you to minimize potential problems and optimize potential opportunities.

  Protecting your assets helps you and your employees to better match what is produced or inventoried to customer demand.

  Protecting your assets enables you to develop better plans and implement them more efficiently and effectively.

  Protecting your assets helps you develop and focus attention on making the right investments in equipment, systems, and infrastructure that you need to maximize those assets.

  Protecting your assets adds to the overall value of the business because it forces you and your employees to identify what is working well and what isn’t, and make whatever changes are necessary.

  The Realities of Protecting Your Company’s Assets

  Understanding the importance of your company’s assets is difficult to make habit forming, and accordingly should be part of every job description and, in some cases, in employees’ pay plans.

  Since asset protection lacks the sex appeal and flair of selling or producing a product, your assets’ value and the purpose of maximizing them can be easily forgotten in the day-to-day activity of a business.

  You can protect your assets by controlling them through systems and procedures, but you still need to rely on your employees to alert you to problems.

  Asset protection requires discipline on your part and attention to detail by your employees.

  Assets will mean little to your employees if you don’t identify the assets and focus your staff on them by connecting performance to rewards or consequences.

  Protecting and maximizing assets must be part of your company’s DNA, including processes indicating how well they are being managed and used.

  The issue of protecting your company’s assets encompasses essentially three elements, including the tangible and intangible assets themselves, products or services, and people. These three elements are the ones you need to continuously focus on in order for asset protection to have the most impact on your bottom line and with your customers.

  Protecting Tangible and Intangible Assets

  As I mentioned earlier, as a rule tangible assets are those you can see and touch, and intangible assets are those that are unseen, like your company’s DNA or customer relationships. Both have value, and both should be protected from abuse as well as maximized for the greatest benefit. But in order to do so, you first have to be able to control them and measure their results. I mentioned in the last chapter, on Fact 2: If You Don’t Control It, You Don’t Own It, that measurement is a key component. For example, if you buy a new piece of equipment, you will want to measure the sales and gross profit it generates over a period of time, as well as keep track of the hours it is used in relationship to the gross profit it generates, and how long it accordingly takes to recoup its cost. The first steps in accomplishing this goal are to (1) list your tangible and intangible assets, (2) describe what they are meant to do, (3) determine if they support the goals and objectives of the company and its current operating plan, and (4) measure the results.

  If you’ve never done this kind of analysis before, or you haven’t done it for a long time, you may be surprised by the results. You might, for example, find that your tangible assets are more valuable than you thought, or that they are much less valuable and limiting your potential for growth and reaching your goal. You may also find that the same is true of your intangible assets, that is, that you have more efficient processes in place than you expected, or that the processes you have are too few in number and uncoordinated with each other. This is actually an effort you should make at every one of the five levels, because it helps you analyze the strengths and weaknesses of your assets using realistic and factual data.

  Where do you go from here? Depending on which level your business is on at the time you do this analysis, you will have a variety of options available to you. Generally speaking, if you are at Level 1, you can use the information you’ve gathered to help determine which of the opportunities available to you would be most appropriate in terms of the assets you have at the moment. If you’re at Level 2, it would be a perfect time to look at your intangible assets and see how they do, or don’t, measure up to the DNA you have created or hope to create for your company. At Levels 3 and 4, you will be able to implement whatever changes the analysis has suggested would be appropriate. And, finally, at Level 5, you can use the analysis to determine the value of the company’s assets as you make plans to exit the business.

  Protecting Products or Services

  Products or services are a tangible asset that requires extra attention for the simple reason that you count on them for so much. Ultimately, your business’s success depends on the products or services you sell and how you sell them. And for that reason, they are important elements in every one of the Facts of Business Life, whether the fact concerns leadership, marketing, control, or any other issue. For the most part, these are management issues, but as this particular fact suggests, protecting a product has the same importance as managing one does, and for the same good reason—the business’s success depends on it.

  Protecting your products or services begins the same way as protecting other assets does, that is, by recognizing that they have life cycles. Manufacturing equipment, for example, lasts longer if it’s maintained and used as it’s intended to be used. Products or services are similar, except that owners often have very little control over their products’ life cycles, and for the most part those life cycles are an unknown. For example, if your business manufactures brake pedals used in farm equipment, the strength of your product depends on the sales of the farm equipment. Similarly, if you own an electronics company, your products’ life cycles depend not only on how innovative your suppliers are but, possibly even more important, how innovative your competitors are. In other words, because you don’t have control over your products’ or services’ life cycles, they represent an inherent risk. It’s a tough way to do business, but it’s the way it is, and it’s why protecting your products is so important.

  Protecting your products or services is also a proactive activity, both offensively and defensively. From an offensive perspective, you have to anticipate what’s coming at you and make plans so you can leverage and excite your current customer base to improve sales and your bottom line. On the defensive side, there are two ways to protect your products or services. First, you can decide which of them will be affected by new products or services and find a way to sell them before the market crumbles or find ways to prolong their life cycle. Second, you can create ways to protect your customer base by developing alternative products or services for those of your customers who are “orphaned” when a product or service is discontinued.

  Finally, making proactive efforts to protect your products or services is something that continuously brings you back to each of the five levels of business. For example, in order to determine how long a product or service will last, and to analyze the opportunities new products or services will provide, you have to reach back to Level 1. In addition, when and if you introduce new products into the market, the DNA you developed at Level 2 will in all likelihood have to be adapted. Similarly, if a product comes to the end of its life cycle, or a new product is added, success at Levels 3 and 4 may have to be redefined, and new goals and objectives put in place. And, finally, at Level 5, how and when you choose to exit the company may be affected by your efforts to protect assets. If, for example, your business’s market is expanding (an intangible asset), then the value of your business will
expand as well. However, if your market is shrinking, you will have to decide if you want to ride it out until another new product or another way is created to grow and stabilize your business, or sell before the impact of the shrinking market erodes the value of your company. In other words, the need to continuously protect your assets affects and is affected by all five levels of business.

  Protecting People

  When we talk about protecting the “people” element of this fact, we are talking about a group that includes your customers, your employees, and, last but not least, yourself. Although none of these show up as assets on the company’s balance sheet, the reality is that without any one of them a business simply can’t exist (unless the owner is the only employee). This statement is hardly breaking news, but far too often, businesses become tilted toward one part of this group or another, which is not a healthy situation for any company. For example, if you were to insist that your employees do what you want them to do without regard for them or your customers, you would in all likelihood have a problem going forward. However, if you aren’t strong enough and your employees dictate how the business is operated, neither your nor your customers’ goals are likely to be satisfied. The point is that, as an owner, it’s your responsibility to maintain and protect the balance so all three of these assets are in harmony with each other. Doing so takes both talent and experience, and in my opinion requires a skill set that is underrated in its importance.

  Sometimes maintaining that balance means you have to step in and take control of a situation. For example, as important as customers are, the truth is that they are not always right or well behaved. And because of this, at times you may have to protect one or more of your employees from an unreasonable customer. In other words, while customers are valuable assets, employees are, too, and you can’t allow either one to abuse the other. Besides being the right thing to do, this kind of action on your part builds morale because it shows employees you are prepared to step in and protect them when necessary.

  It’s also your responsibility to protect your employees from being bullied or abused by other employees, supervisors, or managers. Unfortunately, this type of behavior is not always noticeable from an owner’s standpoint. However, every company has an unofficial internal communication system, and it is up to you to tap into it from time to time by asking informal or apparently innocent questions and carefully listening to the responses. Alternatively, you can encourage your employees to communicate informally with you via e-mail or through other employees.

  These are, of course, not the only kinds of difficult situations you might encounter. They do, however, point out that, although these three assets are seldom grouped together in the owner’s mind, the way they interact can have a very substantial impact on your business. And that’s why, for everyone’s benefit, they have to be controlled, managed, and protected.

  Level 1: Ownership and Opportunity

  One might reasonably ask how asset protection can be an issue at this level when there is technically no business or new opportunity selected, and therefore no assets to protect. And, in fact, if you are just starting to think about becoming an owner, since the only asset you are likely to have at this point is yourself, asset protection doesn’t have very much significance. However, as noted earlier, the best way to protect assets is to maximize them, and Level 1 is where you analyze opportunities to determine how they can be maximized. What that means is that when you get to Levels 3, 4, and 5, and want to evaluate opportunities before pursuing them, you will have to come back to Level 1 to do so. In addition, sometimes decisions made at Level 1 require creating processes at Level 2, which means those decisions can have an impact on the development of your company’s DNA. In other words, while asset protection does not play a role in determining whether you should become an owner or what kind of business you should be in, it does play a significant supporting role once the business is operating.

  The general rule for asset protection can be stated very simply: being proactive protects your assets’ value, and being reactive erodes it. That is, you are much more likely to be successful if you make an active effort to seek out and/or create opportunities than if you sit back and allow your business’s future to be exposed to threats you could control or minimize. In fact, if you choose to be reactive in asset protection, you are likely to encounter four very serious problems:

  Your business will lose the most lucrative market action at the beginning of your product’s life cycle because you reacted slowly to a market opportunity.

  Your customer base will be eroded because your customers will move to businesses that meet their new needs and wants.

  As your competitors offer new products in the market, your products can become worth less than you paid for them because the demand for them has decreased.

  Because of shifts in the market, some of your tangible assets—such as equipment, inventory, and others—may become irrelevant and therefore worthless.

  These four situations underscore the importance of asset protection beginning at Level 1. In every case, not only are your assets eroded, which lessens the value of and weakens your business, but your competitors who take advantage of the new opportunities gain strength. In addition, pursuing and/or creating opportunities is likely to be even more important going forward because trends suggest that in the future products will have shorter and shorter life cycles. Just look, for example, at the electronics market, whether it’s computers, TVs, or cell phones. What this means is that you will have to be even more zealous in protecting your assets than you are today. It also means owners who don’t proactively embrace asset protection could see their businesses suffer and eventually disappear as their assets, including their customer base, continuously erode.

  The Benefits of Protecting Your Assets at Level 1

  Understanding the need to protect your assets keeps you on top of the market and alert to where the market is going.

  Understanding the need to protect your assets allows you to develop an understanding of the customer–employee–owner relationship, its limitations and opportunities, and why it must be protected.

  Understanding the need to protect your assets means realizing that the key to doing so is being proactive and using facts to prepare for the future.

  Understanding the need to protect your assets enables you to recognize that adding or changing the use of tangible assets usually affects intangible assets, and vice versa.

  Understanding the need to protect your assets helps you realize that you can’t take advantage of every opportunity that’s available because both your tangible and intangible assets put limitations on what you can do.

  Protecting Tangible and Intangible Assets at Level 1

  Level 1 is a preparation level where opportunities are evaluated and risk versus reward decisions are made prior to implementation. The overall goal at Level 1 is to match your assets, both tangible and intangible, to today’s market, with an eye on the future. As I mentioned earlier, this is not a one-time activity but, rather, a continuous effort supporting the business at Levels 3, 4, and 5. As I also mentioned, you begin this effort by taking four steps: (1) list your tangible and intangible assets, (2) describe what they are meant to do, (3) determine if they support the goals and objectives of the company and its current operating plan, and (4) measure the results.

  Taking these steps will enable you to visualize and realize which assets are being underutilized, which have the capacity to be maximized, and which put limitations on your business. Doing so will also make it possible for you to make better asset decisions because they will be based on facts and current market realities. For example, you might discover that some of your manufacturing equipment is being underutilized and that adding another piece of equipment will eliminate a bottleneck and allow the underutilized machines to operate at their full capacity. Similarly, you might realize that you are getting very little productivity out of a particular piece of equipment, that it has limited potential
, and that selling it could create space for a different machine that could be significantly more productive. This is a particularly good example of an ownership–opportunity–asset protection decision, because it highlights the fact that most such decisions should not be made based on a single asset but on what is best for the business overall.

  It’s important to bear in mind, though, that protecting a business’s assets and asset maximization sometimes conflict with each other, such as when an owner wants to invest in something that will maximize assets but doesn’t have the cash or credit to pay for it. In a situation like this, you have to balance the potential for increased revenue with the ability of the business to handle increased debt. In fact, it’s a rare asset decision that doesn’t affect some other asset. And it is always, for better or worse, the owner who has to make those decisions based on what he or she wants for the company. What that means in practice is that a timid owner can substantially undermine a company’s ability to grow and prosper, essentially becoming his or her company’s worst enemy. The opposite, however, is also true.

  Protecting Products or Services at Level 1

  Considering how important your products or services are to your business, it is obviously essential that you protect them. Of course, what you are actually protecting is not the products or services themselves but the revenue they generate for your company. And the best way to do that is to make sure that what you are offering is what the marketplace wants. That may sound simple, but it’s not that easy to do. It requires you and your key employees to continually revisit Level 1 in search of new opportunities and market trends. That is, you need to watch for anything that might mean an increase in business—one of your products suddenly becomes hot, there is an industry promotion, one of your competitors closes down, and others.