by Bill McBean
Knowing business makes you better prepared for the road ahead, better able to analyze what happened when something does goes wrong, and better able to permanently fix it.
Knowing business helps you focus on moving your business forward rather than dwelling on what went wrong in the past.
Knowing business helps you understand that when you realize your success goal, more opportunities will appear due to the maturity of the business and your increased knowledge and experience in using all seven Facts of Business Life.
Product at Level 3
As your business goes “live” at Level 3, you will inevitably come face to face with two inescapable—and related—truths about product. The first of these is that at times it feels like you have very little control over your product and its sales. And, unfortunately, sometimes it’s true. For example, you can’t control how your competitors market their products, or how aggressively they attack the market and promote themselves against you. In addition, since competition usually dictates the selling price of products, your gross profit margins are also essentially controlled by competitive pressures.
The second inescapable truth is that products are rarely successful unless the owner understands and applies all the Facts of Business Life to them. In other words, products cannot stand on their own, and even good products die without internal help. For example, how your business advertises and markets your products and how effectively it’s done will have an effect on sales. Similarly, if you have few controls in place for supporting your product, you will probably experience shortages of your faster-selling products and inventory overages on your slower selling ones, both of which cost the business money.
So while it’s true that as far as product is concerned your control of the competitive marketplace is limited, what isn’t limited is how you can control your product internally. And, in fact, if you do it right, this internal control—that is, applying the Facts of Business Life to your products—can be used as a very effective competitive weapon. For example, if you have a Wal-Mart-type competitor that has lower product costs and can therefore charge lower prices, you can use what you control—expenses, internal processes, product knowledge, and training—to fight back. Unfortunately, if you don’t realize that product, its sales, and its gross profit depend on other business principles, you’ll find out the hard way—while you’re competing in the war zone, and hopefully before it’s too late.
People at Level 3
There is no more important time in a business to constantly “motivate, educate, and entertain” your employees than when you are starting a business, taking over an existing one, or changing the way your business is operated. The reasons for this should be obvious: it’s the difference between teaching employees how to do their jobs and what you expect of them, and just telling them what you want and leaving them to figure the rest out for themselves. At Level 3, then, in regard to people, there are two things it is essential you do as an owner.
The first of these is creating an atmosphere of success. You do this by finding ways to remove, or at least limit, the kinds of things that employees feel get in the way of their doing their jobs well. Let’s say, for example, you have a saleswoman who feels her sales are low because of the business’s lack of marketing and advertising—in other words, providing herself with an excuse for her lack of productivity. By simply pointing out that other salespeople are doing well and that your business spends as much on marketing and advertising as your comparably sized competitors, you can eliminate the excuse and get to whatever the real problem is. Similarly, you might have a service technician who complains about the type of work he’s being given compared to other technicians. If, however, you point out that the other technicians have more training than he does, as well as greater knowledge of the proper use of certain tools, you can make it clear that it’s his own lack of initiative that’s holding him back and disqualifying him from getting better-paying work. By doing this you can eliminate any—or at least most—excuses employees may have for not performing up to your expectations and focus them on making sure they do.
The second thing you have to do is be courageous. If there are people in your company who are not doing what you expect of them, it’s actually fairly easy to ignore them. Being an owner, though, is not about being easy, it’s about constantly improving your business. Even so, it does take courage to stand up for yourself, especially when, as is normally the case, there are more of them—that is, your employee—than there are you. Of course, most of us like to avoid confrontations when we can, but if you do so in this kind of situation, you will be neglecting to provide the leadership your company needs. And without leadership, it’s unlikely that your business will improve, which in turn means it will probably underperform, if not fail altogether.
There are also times, though, when owners don’t act courageously not because they want to avoid confrontations but because they don’t understand the importance of leadership and how not applying all the Facts of Business Life can have a negative effect on their entire business. For example, if you allow your employees to perform their jobs the way they want to rather than the way you want them to, you’re going to have the “tail wagging the dog,” and you can’t allow that to happen. However, if you don’t understand all the various areas of business, you may not even realize it’s happening, and you can’t fix what you don’t recognize is a problem. Generally speaking, the more experience—and the more knowledge of business—you have, the more courageous you become, because you have a clearer understanding of the ramifications of neglecting to act when you should.
More of Them than You
It was in the fifth or sixth year of our ownership of a business in Texas that we began getting disturbing news from the informal employee grapevine about some possible thefts in a department that employed about 10 people. Two of our managers took it upon themselves to investigate and set up a minor sting operation. The results of the sting showed that the employees and their manager were from time to time bringing unauthorized vehicles into our service department, using company equipment and products to repair them, getting paid in cash, and then pocketing the money for themselves. It was clear I had to take some action.
This department was not only important to customers and other departments on a daily basis, it also impacted significantly on our gross profit. At first, hoping to find an easy way out, I tried to figure out some way to minimize fallout. But I realized taking such a tack would conflict with the DNA we’d created for the company, and as my past experience had shown me, not following my own rules would lead to a loss of respect and have a negative effect on how my managers would act or react if they were faced with a similar situation. Plus, I would miss an opportunity to send a strong message throughout the company.
I made a decision and called a meeting for the department’s employee’s one Friday evening right after closing time. I took the department’s manager into my office, told him he was fired, and turned him over to the police, who were also present. At the same time, three other managers told the department’s employees their jobs were terminated and why.
Doing that was not easy, but it enabled me to let everyone in the company know where I stood on certain issues. The message was clear. And in the end, we barely missed a beat. We got the department up and running very quickly because we were swamped with applications from our competitors’ employees. And it was a good lesson for all of us—one I might not have been able to provide if I’d had less experience and less overall knowledge of business.
Accounting and Finance at Level 3
Since at Level 3 the business is “live,” there is a lot of activity going on, particularly around your company’s accounting department in trying to get its processes up and running. A mistake many owners make at this level is neglecting to take advantage of the financial tools I mentioned earlier in this chapter—the cash flow analysis, the income (or profit-and-loss) statement, and the balance sheet—to keep track of their f
inancial condition. In fact, this mistake is one of the leading causes of early business failure. If for no other reason, it just makes sense to use these tools because they can alert you to possible problems before they blow up in your face. They can also help you make decisions because they provide the kind of information you need to make those decisions.
Specifically, the balance sheet helps you understand where your cash is located—that is, inventory, receivables, and fixed assets—as well as the effect your decisions will have on your cash position. In other words, the balance sheet gives you important information about your internal operation. The income (or profit-and-loss) statement shows you where you are in terms of sales dollars, gross profits, expenses, and overall profit or loss at a particular point in time. The benefit of having this information is that it enables you to see whether you’ve made money and, if so, how much. It also helps you determine what you can do to improve your company’s revenues. The bottom line, then, is really the bottom line. That is, eventually everything flows through your business’s financial statements, and if you know how to use them, it will significantly increase your chances of success.
You at Level 3
When your business is operating at Level 3, there are two situations in which you particularly do not want to find yourself, as least not for long. The first is operating at a pace at which your knowledge and talents can’t keep up with your business’s growth. Being in a situation like this may not seem all that bad at first, but it opens up the possibility of the wheels eventually falling off the bus, most likely due to poor decisions made as a result of inexperience and lack of knowledge. The second is not knowing how to “jump start” your business, that is, fix a problem when you have one. This problem, too, is a result of an owner’s having only a limited knowledge and/or understanding of business. Unless you take action quickly to remedy this lack of experience and knowledge, the fate of your business will be fairly predictable, especially when you consider that the marketplace if full of owners who have more business knowledge than you do.
The point here is that, ultimately, it’s your business, and how well it performs falls on your shoulders. No one is going to force you to do anything about improving your overall business skills. But unless you take steps to do so, it’s unlikely that you will be able to move your company along the spectrum from survival to success. At Level 3, things can hit you fast, like an important employee quitting, a large customer refusing to pay its bill, or a sexual harassment suit being filed by an employee. And how you react to this kind of pressure sends a message throughout your company. If you react calmly, it boosts the confidence of all those around you. But if you “blow your top,” particularly if you do it on a regular basis, your staff is going to start wondering what they’ve gotten themselves into. Ultimately, how you react is a result of how much experience and knowledge you have about business because when you have this knowledge, you know you have more options than getting upset, and you are more likely to stay calm, analyze whatever problems may arise, and gain control over them.
If you have any doubt about why it’s beneficial to have this knowledge, you might think about it in terms of how your employees might describe you. How they do so not only says a lot about your business to their friends, relatives, coworkers, suppliers, and others, it also has an enormous effect on how they react to you and your ownership style. For example, I’ve always wanted my staff to see me as a fun-loving guy but one who is deadly serious about his business and the processes that run it. I also want them to see me as honest, fair, a motivator and educator, aggressive in the war zone, and unrelenting in demanding accurate information and delivering on expectations. Whether or not I achieved this is something only my employees can say. What I can tell you, though, is the more you know about business in general, the more your employees will recognize and appreciate it, and the more they will be not only willing but anxious to help you achieve your goals.
Level 4: Maintaining Success
It may actually be impossible to maintain success without understanding all seven Facts of Business Life and how they depend on each other. Without leadership, for example, a company won’t have direction, and without direction, controls and management mean very little. Without planning, there will be no destination, and without a destination, any road will take you there. Similarly, instead of having a war zone mentality, your employees may develop its opposite, an “I couldn’t care less” attitude, toward customers. And customers, in turn, will in all likelihood start staying away in droves. If you do understand business and its important concepts, however, while Level 4 will be a challenge, it will be no more of a challenge than what you have overcome in Level 3. As a matter of fact, the more you understand about business, the quicker you will discover the easiest path to maintaining success, and the sooner you will get there.
The first step in setting up your business to maintain success is to reevaluate both your internal and external environments. By the time you get to Level 4, since your business knowledge and experience will have expanded, your views on business and how it operates will have expanded as well. As a result of this increased knowledge and experience, you will see some of the decisions you made previously may not have been as good as they could have been. These decisions may have been made in leadership, control, asset protection, planning, marketing, the war zone, or any of the remaining areas of business, that is, in any and/or all the Facts of Business Life. For example, some of the processes you first created may actually be hurting the business in that they were not created with the customer and the company’s goals sufficiently in mind. Alternately, an opportunity that you judged to be questionable in the past may now look both good and doable when viewed through the prism of your expanded knowledge and ownership experience. In other words, in reviewing your situation you are more than likely to find errors to correct, better ways to do things, and new opportunities to explore.
As I mentioned earlier, if on arriving at your success destination you decide to stay there and rest on your laurels, you will not be able to maintain success. Not only won’t your competitors allow you to maintain your position, your customers’ wants, needs, and expectations will change over time, which in turn will impact on your marketing, products, and war zone strategy, among other things. In other words, there is no standing still in the market. Whether you like it or not, it’s the way it is, and it’s out of your control. But there are things you can control, and if you want to maintain success, you must know what they are and how you can use them to your advantage.
There are basically two things you can do in order to maintain success, and all of them require you to exercise all of your knowledge of business. The first is to develop a market share strategy focused on small but continuous market share gains. This might include visiting an industry peer in another market to look for sales you may be missing in your own or testing the price sensitivity of a product by finding a way to lower your cost, then lowering your price accordingly to see if sales increases match the lowered pricing. You might also attack a particular segment of the market or look for a way to overpower one of your weaker competitors. This is a conservative approach to maintaining success in that it’s focused on moving the business forward in a way that minimizes risk to the overall business. The downside to this approach is that it can feel like you’re swimming against the current because your progress is slow when compared to the energy you are devoting to it. And, in fact, it’s not your imagination. This is an example of what economists call the “law of diminishing returns,” that is, as your market share increases, it takes more and more effort to move your business noticeably forward.
The second strategy you can use is to purchase a competitor or competitors, or expand your business to a significantly new level so you can permanently shift market share in your favor. Unlike the first strategy, this one can enable you to increase your market share immediately. However, using it also exposes your business to added risk because it generally requi
res you to take on more debt, which can become a company-wide problem if the expansion doesn’t work. But if the expansion plan does work, the rewards are considerably greater, including increased market dominance, increased profits, and additional cash flow. If you are considering such a move, however, you must essentially go back to Level 2, Opportunity and Ownership, and do the same kind of evaluation you did when you were just starting your business. And if after that evaluation you find that the opportunity meets your goals and makes sense financially, you have to begin working your way through the levels again, one at a time, because if you expand your business or buy a competitor, you will not only have to redefine what success means but also determine how you will get there.
The Benefits of Knowing Business at Level 4
Knowing business helps you understand and evaluate how best to maintain success and/or expand your business.
Knowing business enables you to focus your new knowledge and turn it into added profits and market share.
Knowing business helps you understand the numerous barriers to maintaining success, such as the law of diminishing returns.
Knowing business helps you realize that market growth—or slippage—depends on the accumulated knowledge gained, and that the better you pass that knowledge on to your employees, the more likely you are to maintain success.
Knowing business helps you recognize that some of the employees you have counted on may begin to disappoint you at this level, while others surprise you by stepping up their performances.
Product at Level 4
Whichever strategy you choose to maintain your company’s success, product will inevitably lead the way. As I have pointed out before, the more natural demand a product has, the better the chances you have of succeeding. And it’s no different in maintaining success. That is, the greater the demand, the easier it will be to maintain success because a great product and the gross profit it generates cover a host of sins.
