The Facts of Business Life

by Bill McBean

  Protecting People at Level 2

  One of the more interesting things about the customer–employee–owner dynamic is that while all three represent assets, none of them show up as such on your company’s balance sheet. Because of that, they are rarely considered as an important asset group, and even when they are, it’s not as a group that needs to be protected. But they do need to be protected because they are all important individually and because, as a group, they need protection from each other. And Level 2 is where you first develop and prepare to implement that protection.

  Customers are important because your business needs their money, which they give you because they need or want what you have. As an owner, you need your employees to operate your company’s processes and serve your customers. And your business needs you to lead and contribute your expertise and money. Of course, none of this is news, but what may be news is why these three groups need to be protected from each other. The reason is that, outside of the relationships described above, there is no particular reason for there to be synergy among them. What each one wants is essentially incompatible with what the others want. So there are inevitably going to be disagreements and, as a result, conflicts among them. As an owner, it’s your responsibility to minimize these conflicts as much as possible, and that can be done largely through the DNA creation process.

  The first step in doing so is identifying the major conflicts among these three groups. Customers, the first group, want what you have to sell, but they want to pay as little for it as possible. In addition, they usually want it sooner rather than later, and may feel inconvenienced by having to wait. One of the reasons the Kindle and other e-book products are so successful is certainly because they focus on these two desires and not only give customers a new book in 60 seconds, but do so at a lower price than traditional books.

  Regardless of how happy the second group—employees—may be, they would all like to get paid more, know that their future is secure, and have great working conditions (although exactly what that means is difficult, at best, to define). They also frequently perceive of the owner or boss as being in their way, and often see customers as interfering with whatever their superiors want them to do.

  Finally, there is you, the owner. You want to charge as much as you can for your products or services so you can make more money, pay off your debts faster, and lessen your exposure and risk. You would also, and let’s be honest about this, like to have your payroll on the low side of your competitors because it can give you additional pricing or marketing flexibility, as well as greater profits. In addition, it’s these employees who create the problems and situations that give you heartburn, high blood pressure, and sleepless nights.

  How do you avoid problems like this? Whether you are starting a business or adjusting the DNA in an existing one, the answer is the same—it’s about planning and executing the plan. In other words, you can build things into your company’s DNA that can help at least alleviate, if not eliminate, these problems. For example, if your processes are more efficient than your competitors’, you can have fewer employees, which in turn enables you to pay them at least the industry norm and still have lower payroll costs, which is to everyone’s benefit. Similarly, if your staff is sufficiently trained and follows the processes you’ve established, it will help eliminate some of their “bad days,” as well as the likelihood of their exhibiting a negative attitude when dealing with customers, which will certainly make your customers happier. And as far as your bottom line is concerned, if instead of focusing on just the dollar amount you look at all the variables that go into making it up, and look for ways to increase it without penalizing one group over another, you, your staff, and your customers will all be happy.

  As I have said before, none of this happens by accident. Establishing and maintaining a balance among these three assets is more of an art than a science, and it’s an effort that requires a healthy dose of ownership skill. You have to not only make sure this balance is built into your company’s DNA but, once your business is up and running, make sure it continues working as you intended it to. It’s making efforts like these, particularly with intangible assets, that are crucial in protecting your overall assets and making your business successful, which is the greatest asset protection of all.

  Level 3: From Survival to Success

  Everyone understands that life is a lot easier and more secure when a parent, family member, or trusted friend has his or her back, and it’s no different for a business owner or entrepreneur. It’s a lot easier to sleep knowing someone or something is looking out for you and that you’re not alone. And being human, all owners would like to believe that their employees are looking out for them. The problem, though, is that owners generally don’t tell their managers or their staff exactly how they want their backs covered. They tell them their sales and gross profit objectives, and provide policies and procedures manuals, but they rarely talk about exactly how their employees can provide them with the kind of support they’d like to have, that is, how they can help protect the business’s assets.

  It is, however, important that owners do so because asset erosion can destroy an otherwise successful business. This is especially true when a company is first getting started, when it’s expanding or investing in new facilities, and whenever the owner’s liquidity and resources are stretched, because it’s at those times that the business is most vulnerable. And this is the precarious position owners normally find themselves in when they get to Level 3. Perhaps even more important, while every owner hopes that his or her company will move smoothly and rapidly along the spectrum from survival to success, things don’t always happen that way. Sometimes, instead of moving forward, businesses move backward from success to survival. And nothing will move a business backward faster than having its assets disappear or losing a significant amount of its value.

  This is because asset erosion reduces the overall net worth, or value, of a business, even if the business is profitable. Assets represent the foundation that successful businesses are built on, and if and when those assets start to crumble the chances for success become much slimmer. Look at lending institutions, like banks or credit unions. They don’t base their lending decisions on just the hope of future profits—they rely on the net worth and asset value of the business on the day they’re asked to make the loan. In other words, assets represent the value of a business, and without them there will be no business. That’s why asset protection has to be foremost in your mind.

  Generally speaking, Level 3, the first action level, is where you begin implementing all the plans and processes you developed at Levels 1 and 2. That is, having identified your assets, devised processes to protect them, and satisfied yourself that you understand what and how much those processes should accomplish, you have to put them in place so they are ready to begin operating. In addition, by this time your employees should have received whatever training they need to make sure they know what asset protection is as it relates to them and their jobs, as well as how you want the assets protected. It’s important to bear in mind, however, that not all asset protection processes can be rolled out at the same time. Some processes have to be put in place first because they must be operating in order for other processes to work effectively. The general rule here is the more macro a process, the earlier it has to be in place, and the more micro a process, the longer you can wait before it starts to operate.

  There is, however, one additional task that must be performed at this point. That is, you and your key people must continuously watch and exercise control over how these processes are being implemented, how effectively they are working, and what can be done to make them work better. This is essential because, at the end of the day, while asset protection is about protecting or guarding the “machine,” that is, your entire operation, including all your tangible and intangible assets, it is also about making sure all those processes are operating in a coordinated way so the final result will be what you want it to be. />
  Of course, every entrepreneur hopes and believes his or her venture is going to be a successful one. Unfortunately, that’s not always the case. In fact, once your business is up and running, there are essentially four possible outcomes—it will be successful, it will be successful initially and then fail, it will be profitable but you will have to struggle before it is, or it will fail. Sometimes which of these scenarios will play out is obvious from the beginning, while sometimes it takes longer to determine what will happen. But regardless of which of these possibilities eventually comes to pass, asset protection inevitably plays an important role.

  For example, you can tell early on if you have a good shot at being successful if your sales and net and gross profits are close to what you’d planned. In a situation like this, the best way to protect your assets is to make sure everything continues to operate efficiently and effectively and to look for new ways to maximize your assets. Sometimes, however, an owner can be successful at the start but, after a period of time, see sales and net and gross profit start to slide and losses begin to stack up. In this situation, there are likely to be many problems, but most of them will be centered on the owner’s lack of leadership and the company’s DNA. To make matters worse, as the business slides backward, the options available to fix it become fewer because the value of your assets and net worth are eroding as the losses pile up. Asset protection in this scenario requires the owner to take quick action to define the major problems and fix them.

  However, when a business has a lack of sales, and losses begin to mount right from the start, but the owner still believes firmly in the opportunity, it should be clear that he or she simply executed some important things very badly. The company may have missed the market with its advertising and marketing message, wasn’t ready internally to begin operations, was using the wrong pitch to sell the product, or had other problems. Regardless of the exact nature of these problems, in cases like this, cash becomes the issue—that is, whether the company has enough available to wait for the business to turn around—which means that cash will need to be protected above all other assets. Finally, some businesses start out poorly for any number of reasons, and despite the owner’s best efforts are never able to be turned around. In situations like this, the best thing to do is to face the facts and bail out as soon as you can. Doing so will enable you to sell whatever assets you have at a higher value than you might at some time in the future, and you will be preserving cash you will need to pay off debt, both of which represent asset protection.

  The Benefits of Protecting Your Assets at Level 3

  Understanding the need to protect your assets enables you to realize that you must continuously revisit Levels 1 and 2 in order to find opportunities through which you can maximize those assets.

  Understanding the need to protect your assets helps you appreciate the importance of doing so regardless of your situation.

  Understanding the need to protect your assets enables you to recognize that you cannot focus entirely on sales and profits at the expense of those assets.

  Understanding the need to protect your assets helps you realize that when you begin to maximize their usage, opportunities you may not have considered will present themselves.

  Understanding the need to protect your assets will help if you get off to a bad start by allowing you to hang on longer and either “right the ship” or, at the very least, get the maximum value for those assets if you have to close the business.

  Understanding the need to protect your assets enables you to recognize that changes in the market or changes in your tangible assets will require you to revise your intangible assets if you want to maximize them.

  Understanding the need to protect your assets helps you recognize when you have to change some of the processes by which you operate your business.

  Protecting Tangible and Intangible Assets at Level 3

  Staying on top of your business at Level 3 is a considerable challenge. You are putting your tangible assets to work, implementing your intangible assets as your customers and employees interact with each other, testing your product, analyzing information, and doing all the other things that must be done when a company is just starting out, expanding, or being reengineered. In other words, there is a lot going on at the same time—some expected and some unexpected—and for a period of time there is no “normal.” As the business begins to move along the spectrum from survival to success, staying ahead of the game takes ownership skill, discipline, and leadership. Given everything that’s going on, you have to make an effort to keep asset protection in the front of your mind because it can easily get lost in the shuffle. That’s largely because, important as it is, it’s not as much fun as selling and making money.

  Once the business is operating, proactively protecting assets centers on three efforts, all of which ultimately lead owners to reviewing Levels 1 and 2:

  Making sure the tangible assets you have are doing what you want them to do, and finding ways to maximize their capacity.

  Confirming that the tangible assets on your balance sheet are worth what the numbers say they are because it’s very hard to manage assets if you don’t have accurate information.

  Ensuring that your intangible assets are meeting the customers’ expectations, not restricting sales or interfering with the business’s internal efficiency, and being used to take advantage of appropriate market opportunities.

  Where protecting tangible assets is concerned, your company’s balance sheet and cash flow statements are the best friends you can have, as long as they are accurate. Cash flow statements are particularly useful tools for owners whose businesses are new, growing, or being reengineered. Cash availability is always important, but knowing how much there is, and how it has been used, is a critical tool when making decisions. For example, even if your business is successful and meeting your objectives you can still go broke by spending more money than your net profits. If, however, you check your cash flow statement, you can avoid taking too much money out of the business or spending it on things that don’t produce immediate profits.

  Intangible assets—such as the processes you developed at Level 2—can also play an important role in asset protection. If, for example, you have a customer who hasn’t paid you for 60 days when he was supposed to pay you within 30, a properly designed process would let you know about it before you sold him anything else and exposed yourself to additional risk. Similarly, you can set up a process in which any cash received is counted twice at day’s end, once in the department and then again in the office to confirm it’s correct, and take action if it isn’t. Because intangible assets like these protect the tangible assets and alert owners and key employees to potential problems, it’s particularly important at Level 3 that they be continuously inspected for accuracy and to make sure they are doing what they were designed to do.

  Protecting Products or Services at Level 3

  Neither the importance of products or services nor the importance of protecting them can be understated. However, at Level 3, product protection isn’t necessarily what most people would think it is—that is, making sure the product is available and ready when a customer wants it and that it’s never exposed to theft. Rather, protecting products and services is primarily offensive in that it centers and focuses the owner on protecting the product or service’s market share and enlarging it. In other words, the best way to protect your product or service is to sell it and then protect its market position. This is essentially a proactive effort based on the concept that the best defense is a good offense, which is consistent with overall asset protection.

  Since whatever you sell is integral to your company’s success, your business as well as your products or services have to stake a claim in the market and then defend it. For example, if you own a family restaurant, the neighborhood it’s in is your primary market because of its location. And if you want to become successful and continue to be, you have to have a strong market presence there. Then, if you
want to expand your sales and profits, using your base you can begin to widen your turf to draw more customers from neighboring areas. If, however, a direct competitor were to open a restaurant close to yours, you would not be able to ignore the challenge. You would have to attack, drawing on your creative skills of marketing and advertising, and developing a very aggressive war zone mentality to compete with this new restaurant on every possible level. This could include things like hiring their best cook or waiters, providing larger portions, developing specials, and on and on. Assuming you are successful in defending your turf, you will eventually reach a point where your location is a concern for only some of your customers, while others will make the trip to the restaurant regardless of where it is. If and when that happens, you will have maximized your product and more than likely a lot of your assets, which is a good thing, as long as it meets your profit and career goals.

  So at Level 3, product protection begins with defining a market turf, owning it, expanding it, and then protecting it from those who want to take it from you. Some of the battles that take place as a business expands are harder than others to win. But when it comes to market battles, the one you cannot lose is the battle for your turf. Losing this, or letting a competitor overpower you and take some of your market away, weakens you and your business. The bottom line for product protection is that once you establish a market that makes the business profitable, you can’t give it up because it’s too hard to get back.