by Bill McBean
There is also, however, one more reality you have to face in regard to the ownership decision. Some decisions in our lives are not based on facts but driven by some unfilled need. This need is what pushes you toward the success you have defined for yourself, mixed in with some pride and a bit of ego. At times it can be overpowering and therefore dangerous. Would-be or current owners wanting to grow or expand their businesses have to recognize this drive for what it is, hold it in check until all the facts are in, and control it when analyzing their circumstances because it can make a questionable opportunity look attractive. And finally, if after you’ve done all the analysis, you continue to see the risk side, walk away because you might be right.
Level 2: Creating Your Company’s DNA
Every successful business has goals and objectives they want to achieve. The trick, of course, is to make these goals and objectives a reality, which is a formidable challenge. One of the things that makes it such a challenge is that in order to get your company to where you want it to be, you have to get your employees to do what you want them to. In other words, although your employees are an integral part of your achieving your goals, it is still up to you to determine how your business operates, and you can’t leave it to chance or to your employees’ interpretation.
As I discussed earlier, in successful companies, processes operate the business and employees operate the processes. That is, processes tell employees the “what” and “how” of their jobs, as well as help coordinate the activities of the overall business. But there is a rub, which is what makes this fact so important at Level 2. The rub is that the more you know about business, its principles, and concepts, the better the processes you develop will be, and the better your business will operate. But the opposite is equally true, so if you want to run your business as effectively and efficiently as possible, it’s important that you have a good overall understanding of all the various facets of business.
As I’ve also said before, very little in business operates in isolation, which means that virtually anything that happens in one part of your business will have an effect on some or all of the other parts. For example, if you don’t watch your accounts receivable you can quickly find yourself short of cash to pay your employees or suppliers. Similarly, if the individual responsible for ordering your stock doesn’t order sufficient quantities for the demand, your sales will be affected. In other words, a problem in one department can create additional problems not only in another department but throughout the company. We’ve all heard the expression “the left hand doesn’t know what the right hand is doing.” When that’s said of a business, it means the owner does not understand that business principles are interrelated and that, in fact, success depends on knowing what both hands are doing.
The Benefits of Knowing Business at Level 2
Knowing business helps you develop a stronger appreciation of the importance of goals and objectives in the development of processes.
Knowing business enables you to understand that the most effective processes are those developed by combining industry knowledge, overall business knowledge, and experience.
Knowing business shows you the benefit of analyzing both mistakes and successes because both add to your understanding of how best to operate a business.
Knowing business shows you the importance of continually upgrading your business knowledge as well as understanding how it applies to your business.
Knowing business enables you to understand the importance of having a good basic understanding of accounting and finance as well as of its influence throughout the levels.
Knowing business provides you with a deeper appreciation of how the three “P’s”—process, product, and people—are interrelated, and how this interrelationship develops the fourth “P”—profit.
The point of this Fact of Business Life is a simple one—the more you know about business, the better your business will operate. However, a lot of owners do not appreciate its importance, and it’s primarily because most of them know their businesses well. I know that on the surface this doesn’t seem to make sense, but it’s true nevertheless. These owners confuse knowing what they do well with knowing how to run a business and, as a result, are totally unprepared for the decisions and problems they have to face as owners. Owners in situations like this often become frustrated and disillusioned with their decision to become owners, but are nevertheless reluctant to walk away from their investments. It’s a tough situation to be in and one with few options. If, however, you understand the significance of the four elements of knowing business—product, people, accounting and finance, and you—your chances of success will increase several-fold.
Product at Level 2
Although it’s seldom understood as such, how your employees act and perform their jobs is an extension of the products you sell, manufacture, or service. The reason it’s so rarely understood is that many owners don’t realize product is tied to two important overall success goals: to create sales and generate your desired gross and net profit, and to make sure your customers are sufficiently satisfied with the product and its delivery to come back and buy from you again.
Product plays a key role in achieving both of these company goals, but in order for it to do so, you must draw on the other Facts of Business Life to maximize its sales and gross profit potential. For example, you have to draw on the defensive side of marketing (that is, your internal processes) to support the offensive side (that is, attracting and selling customers) to make sure the product is delivered the way you want—and the customer expects—it to be. Similarly, it falls on accounting to guarantee that your products’ sales will be accounted for accurately. You also have to draw on leadership to make sure your employees are trained to do their jobs properly. And you must rely on several facts, including those concerning marketing, controls, and the war zone, to see to it that slow-selling inventory will be minimized and not tie up cash that the company needs to grow. All of these issues relate to product, and all of them rely on effective and efficient processes.
Perhaps the best way to see the difference that understanding the interrelationship between the Facts of Business Life makes is to show how two different individuals might create processes for their products. The first, someone with years of experience in the same industry but with little training outside his or her specialty, might design a process like this:
1. Order the product.
2. Accept delivery and set up an inventory stocking system.
3. Sell the product.
4. Reorder the product.
It’s a simple process, and it would work. However, an owner who has a deeper understanding of the various aspects of business and how they are connected to each other would probably set up a process like this:
1. Determine the dollars available for inventory and products.
2. Order products with a sales plan in mind based on the money that’s available and the anticipated gross profit from sales.
3. Receive the products, balance them against what you ordered and were charged for, and fix any discrepancy.
4. Set up an internal system to determine both fast- and slow-turning inventory, as well as to track gross profit from actual sales.
5. Continuously compare actual sales to forecasted sales and gross profit.
6. Sell inventory from a predetermined step-by-step sales process covering everything from greeting a customer to closing the sale.
7. Proactively attack the problem of slower-selling inventory in order to minimize its potential loss rather than waiting until it becomes stale and creates a drain on gross profits and cash.
8. Readjust the inventory value based on actual sales, and readjust the inventory itself to concentrate on what sells and delivers gross profits.
I can go on, but I’m sure the point is clear. If you have any doubt, just ask yourself which business you would like to invest in, or which business you think will perform better and attain success first. It should be obvious tha
t the second process has definite advantages over the first in that it not only takes into account a wide range of the Facts of Business Life but also guarantees that both the right and the left hands know what the other is doing. In fact, a lot of businesses have failed or underperformed, not because their products weren’t in demand, but because their products were not coordinated with other important operations, including selling, accounting and finance, control, and others. This example also speaks to the goals of Level 2, that is, to create sales and generate your desired gross and net profit, and to make sure your customers are sufficiently satisfied with the product and its delivery to come back and buy from you again.
People at Level 2
In the introduction of this chapter, I said that employees are both one of your biggest concerns and one of your biggest opportunities. In fact, there are two respects in which they must be a concern. The first has to do with what can happen if you rely on a few key employees for your success. Putting all your eggs, so to speak, in one basket is never a good idea. In this particular case, those eggs can quit, go to a competitor, or tell you to stuff it when you tell them how you want your customers handled. In other words, if you count very heavily on a small group of employees, they can put you in a box that you can’t allow yourself to be put in. That is, you can wind up giving them the run of the business at the expense of the processes you’ve established, your beliefs, your control, your goals, and ultimately your success. This may seem unlikely to you, but the fact is that the problem is much more prevalent than you would think.
The second issue, to my mind, is at least as serious as the first. It concerns how employees react when owners exhibit what appears to be a double standard in regard to how they treat those who don’t follow the processes the owner has established. When an owner behaves like this, it makes him or her look weak in the eyes of others, including those he or she is favoring. Moreover, it makes others employees question the owners’ commitment to follow through with any serious penalties for not doing what they are expected to do. And if this isn’t bad enough, even in the best of circumstances, such behavior can only lead to frustration and constant complaints among the staff.
While it is certainly true, as I mentioned earlier, that owners have to “motivate, educate, and entertain” their employees, when attitudes are corrupted like this, little motivation or education will occur, and the entertainment you provide will be exactly that—entertainment without substance. If you’re a one-dimensional owner, that is, if your knowledge is confined to your industry and/or to your specialty within the industry, it will be impossible for you to understand the consequences of your decisions or how they will affect your employees until you get blinded with a sucker punch.
Of course, since at Level 2 your business is still in the planning stages—that is, you are just starting to develop the processes under which your company will operate—it would seem that you needn’t concern yourself with issues like these. In fact, though, if at this level you remember that very little in business takes place in isolation, and that whatever decisions you make will have ramifications, you will be able to recognize in your own mind that behaviors like this can create problems, and make sure that you do not allow such problems to surface when the business is actually in operation.
Accounting and Finance at Level 2
The “office,” as I think of it, is the place from which, and to which, all your business’s information flows. In other words, your “office” is the heart of your business. As an owner, it’s your responsibility to determine how to use the office and what demands will be made on it. However, if you don’t have a good understanding of business in general, you won’t know what’s needed to help operate the business and won’t be able to make the appropriate demands. And if you don’t know what demands must be made, you will not be able to exercise control over your business, and will find yourself facing unpleasant surprises month after month.
For example, owners who don’t have strong business experience tend to be unsure of how to control expenses, which is as important as sales and gross profits because of the effect expenses have on net profit. The key to control in this instance is to start thinking of expenses as occurring when you approve them rather than when you pay them. In other words, you should set up a process that covers all the business’s purchases and funnels them through the office for your—or one of your trusted employee’s—approval before the purchase is made. Of course, this is just one example of the kind of controls that need to be put in place. The point, though, is that unless you have a good overall grasp of business and understand how the various parts of your business interrelate, you will not be able to set up such controls.
You at Level 2
In one way or another, your business and the way it operates is a reflection of you. If your business is disorganized, it will reflect on you. If your employees act in an unprofessional way, it will reflect on you. And if you allow any kind of questionable activities to take place in your business, that will reflect on you as well. But if you, as an owner, don’t understand how the various Facts of Business Life work and depend on each other, you will be helpless when it comes to operating and overseeing your business. The problem essentially is that on a certain level, it all comes down to you.
At the same time, a business can’t be a one-person show. You can’t work all day bringing in sales revenue, then work to all hours of the night purchasing supplies, doing the accounting, and so on. Well, actually, you can, but that’s not owning a business—it’s being a slave to it. To become successful you have to rely on others to do their jobs, and that’s the catch. In order to know what their jobs are, you have to be able to define them, and before you can define them, you have to understand their importance to your business and your success. For example, you may know everything about selling your product or service, but that means you have to rely on others to make sure they order what you want to sell, inventory it, account for it when it’s delivered to your business, track it as it moves from your stock to your customers, and so on. But unless you understand how important all those functions are to the successful operation of your business, you will not be able to oversee them effectively.
The bottom line is that in order to create your company’s DNA, that is, set up the processes you will need to operate the business successfully, it is essential that you have as broad a background in business as possible. If you don’t, your tenure as an owner may be short lived. And even if you manage to survive, it certainly will be extremely frustrating and painful as you try to solve issues that you are unequipped to deal with.
Level 3: From Survival to Success
Whether you’re starting, buying, or expanding a business, or reinventing the way your business is run, Level 3 is the point at which you start implementing all the plans you made at Levels 1 and 2. In other words, it’s where you switch from theory to reality. But no matter how well you have planned and prepared for the reality of entering the market, there is a catch. And the catch is that the market will stay the way it is only for a short time. The reason, of course, is that things change. And it’s these changes that make it so important for you to not only understand all seven of the Facts of Business Life but, even more important, how they relate to and support each other. The better you understand this, and the more you operate your business accordingly, the stronger your company will become, and the quicker it will move from the survival to the success end of the spectrum.
In fact, unless you do understand this, you will inevitably run into problems. Let’s say, for example, that your business has a great product, but you don’t really appreciate the importance of Fact 1, If You Don’t Lead, No One Will Follow. And because of that, you haven’t emphasized the importance of product to your employees, so they have little sense of purpose or understanding of the product, and it doesn’t get very much internal attention. The result, of course, is that the business’s product takes a secondary position to other, less important acti
vities, such as a manager having a conversation with an employee while customers are waiting and phones are ringing. Similarly, if you have a poor sense of Fact 5, If You Don’t Market Your Business, You Won’t Have One, and as a result don’t market the company aggressively, few people will be attracted to it. But even if your marketing is great and you’re attracting thousands of potential customers, if you don’t understand Fact 6, The Marketplace Is a War Zone, and make sure your employees understand it, too, you will never be truly successful. In fact, the real secret of success, and the one that every successful owner knows, is understanding the importance of these facts both individually and as an interrelated and interdependent group.
It’s also important to remember, though, that any group is only as strong as its weakest link, and when pressure is applied to that weakest link, it will give out. This concept applies to ownership as well as it does to everything else. What this means for an owner is that problems are most likely to occur in the facts where they are their weakest because they are restricted by their knowledge and are unable to see the problems developing. The results of this can vary from being a continuous and annoying problem to creating a catastrophe. However, when owners have a good understanding of all the facts and of how they are connected, the strength of the facts becomes greater than the sum of their parts.
Benefits of Knowing Business at Level 3
Knowing business enables you to understand how all seven of the Facts of Business Life are interdependent and interconnected and how you can use their combined strength to build your business.
Knowing business helps you recognize problems as they arise and take steps to stop them before they become more serious.
