The Fundamentals of Business

I’m always shocked when I hear business owners discuss how little they know about what is happening inside their own business. For many owners, they started out as a soloprenuer and could more or less gauge the business based on how their bank account looked. While this may work fine for the first few months of a business’ life, it’s a dangerous and silly way to run a company that you base your livelihood on.

If you currently do this, just admit to yourself that this is foolish and then commit to doing better. For some owners, they’ve been removed from the minutiae for years and so the thought of re-engaging in the details of the business can seem absolutely daunting. Where do you start? What’s a meaningful metric? How do you get started? First, let’s tackle what you should do if you’re brand new or starting from scratch and then we’ll move on to how to untangle the rat’s nest of an older business (in the next post).

Fresh Start

For those of you just starting out or recently incorporated, start here and then move on to the cautionary tale in the next post. There will never be an easier time to run your business than when you first start out. Why? Because the number of variables that you’re trying to manage is at an all-time low. Sure, you’re likely panicked at the prospect of getting enough sales to actually justify being in business, but you’re always going to have that struggle. When you’re a one man show and you’re making the sales, taking the deposit to the bank, writing the checks, etc., it’s very easy to eye ball everything. You’ll remember all the checks and card swipes. You’ll remember the sale number and the amount. Give it a year or two and this will all become a blur. Plus, you’ll likely have made your first hire to handle some of this for you which means they need a system to follow.

A smart first step is to lay out what is easy for you to understand from a balance sheet and profit and loss (PL) perspective. What I mean is you should label accounts in a way that is meaningful to you and your business. You’re likely going to be using QuickBooks (QB) or a similar piece of software and they allow you to code things the way that you want them. This is really important because in the event you hand this off to an employee or a book keeper later, you need to be able to explain what you’ve done and then you need to audit what they’ve done. Be disciplined in your approach to handling sales and expenses. Treat them the same month in and month out. Provide as much detail as possible and avoid the temptation of lumping all income into one account and all expenses into another account. It makes reviewing your business for the purposes of improving later nearly impossible. And whatever you do, do NOT allow yourself to say “I don’t understand the numbers, I just take what my book keeper gives me.” That’s a recipe for fraud/embezzlement and you’re chances of being successful are significantly reduced. Have the intestinal fortitude to understand the numbers and make sure that your business is on track. Trust me, I know how awful it is to look at losses. Losses month in and month out. Losses that are scary and sickening. I know. But, you must analyze the numbers and understand why you’re hurting and what you can do to solve the problem. Almost without exception, increasing sales activity and sales will be your number one solution.

The next critical step (among many critical steps) is to truly understand the cash flow of your business. Again, this will never be easier than it is now. Start with your fixed expenses. The things you must pay every month no matter what. This will be rent, employee salaries, your salary (if you’re lucky), a bank note, etc. Starting with these amounts is easy because you must cover this. Next, move to your variable costs. These are going to be estimates based on past production and future estimates. Variable costs will include flyers that you send out, meetings that you attend and pay for, product that you must purchase in advance, etc. The more business you generate, the higher your variable costs. This is normal and good. But, make sure you don’t leave out a critical aspect of a variable cost or your projections are going to be sorely lacking and you’re going to wander why you aren’t nearly as profitable as you expected. Make sure you account for everything. Rosy booking keeping and projections does no one any good, so don’t fall into the temptation of inflating your projections. Finally, end with your sales and income. Track and reconcile EVERYTHING. This is most easily accomplished through your bank account and your accounts receivable. Sales will increase your bank account. If you logged a sale, but didn’t see the cash, then it must be sitting in your accounts receivable (AR) which you now need to collect. If a sale is not sitting in the bank or in an AR, you’ve got a problem. I refer to this as “leakage”. Too much leakage and you’re business has an expiration date.

Summary

Out of the gate, if you’ll just focus on those two items above, you’ll be shocked at how easy business can be. That’s not to say generating sales isn’t difficult, because it can be. But business is really not that difficult. If your income exceeds your expenses, then you’re winning. Tracking this carefully is crucial.

As a final point that will be explored later, track everything. Track your sales activities, track your expenses, track your website traffic, track it all. When you carefully examine your business’s performance and metrics, you begin to see patterns. You notice what you should start and stop. This method of business is called the Hawthorne Effect. You can read up on it here. Essentially, what gets monitored, improves. Become a disciple of the Hawthorne Effect. You’ll be amazed at the results.

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