There are many things that you need to know to start your business and keep it going. It’s impossible to state everything you need to know for your particular business, but the following seven are things to stay on top of, regardless of the type of business you start.
1) Know Your Profit Potential
What will someone pay for your product or service? You need to know this before you start spending time and money on starting your business. This will give you an idea of what your profit potential is. Your profit potential is the amount of money your customer will pay for the product or service, less all of the costs of the product and your overhead. How do you know what someone will pay for your product or service? Don’t try to reinvent the wheel. Chances are, someone is selling the same product or service in your area or someplace close by. What is his price? This is a starting point. You then need to decide if your price will be higher to reflect better quality or service, or lower to entice customers who may be price sensitive. This analysis is up to you and your particular company. But what if you really have invented a new product or service? How do you price a product or service that has not existed before? Although this seems like a tremendous challenge (and it can be), you can analogize. Most likely, the new invention will provide a better, more efficient or more economical alternative to something that is on the market right now. If it’s an entirely new product, you will need to do some serious market research. One tip is to see if you can get a local college or university professor to make your market research an assignment for his or her class. The results may be enlightening and the process economical. However, you should keep in mind that this strategy may take as long as one semester. If money is no object, there are plenty of market research consultants that will do the same thing for a hefty price, but possibly much more quickly.
2) Know and Develop Your Systems
Whatever you decide to do in your business, you should strive to establish a system. Even when you are the one who does everything in your company, it’s important to write down the steps involved to provide your service or make or sell your product. When you have a written system, you have a document you can tweak as you find better ways of doing things. Aside from something to base your improvements upon, this written system of procedures will be the instruction book for future employees who will take over your jobs. Remember, you only have twenty-four hours a day, just like the rest of us. Once you have created written procedures based on your experiences and knowledge, you can hire employees and rest assured they have a good plan to follow. A system will allow you to leverage your time and grow your business to be something greater than your individual efforts.
3) Know Your Customer
Knowing what your customer wants may be the difference between a decent business and an excellent business. This is especially true in any highly competitive business. I have a client in the office supply business. Even with nationwide office supply companies in town, she’s able to retain her customer base by providing excellent customer service. I have used her services for years and will continue to do so well into the future because of her company’s high level of service. All I have to do is make a call and tell them what I need. If it’s in stock, I will have it that afternoon, even if it’s just a box of paperclips. That kind of service elicits strong customer loyalty. My client knows that her customers want the convenience of delivery service for all of their office supply needs. With your particular business, you need to ask, “What do my potential clients want?” Do they want a high-quality product or service, or an inexpensive one? Knowing what they want is key. Who are your customers or potential customers? Are they the general public, or do you have a target group? Are your customers located in a specific geographic area, such as your city, county, or state? The more focused your target market, the more effectively you can determine what your customers want and also how to improve your product or service to fit their changing needs. Knowing your customer will allow you to react quickly because you can anticipate these changes. You will also be able to focus your marketing more directly and get the most bang for your marketing buck. Remember that there are others who will be trying to get your customers, so you need to keep them happy.
4) Know Your Competition
Almost as important as knowing your customer is knowing your competition. You need to know what the other guy does differently. Although you should not shift your focus from what you’re doing to what the competition is doing, being aware of it can be useful for several reasons. As I’ve mentioned, there’s no need to reinvent the wheel. If you are not starting with a brand-new product or service, you can save a lot of time and money by seeing what the other person has done. If you know the way your competition’s system works, even if you don’t know all the details, you have a starting point for your system. And because it will be your system, you can make any improvements you like. I’m not advocating stealing trade secrets or customer lists. But knowing how someone else does it may help you avoid some of the mistakes others have made in the same field. Don’t reinvent the wheel, just make it better. Seeing trends in your industry and market can be difficult. None of us has a crystal ball that can tell what the future holds. Along with keeping your finger on the pulse of your customers, be aware of what your competition is doing and be prepared to react, even if it’s to do nothing but see what plays out. Sometimes this is the best course of action. There are times that you have to follow suit and meet the competition’s challenge. Airlines get wrapped up in reacting to competition every so often. One airline will slash fares. Within a few days most major airlines have followed suit. When there is elasticity of demand in flights, the low price will win out when everything else is the same. So, if Delta cuts its price, it will get more customers than the competition. But the advantage usually doesn’t last long. Other airlines will cut prices just to keep the customers they have. Your industry may not be this competitive, but you should be aware of changes because when they come, they usually come fast. Be ready. Remember that your competition will be looking to see what you do, as well. You may have the opportunity to be an industry leader. If you’re the one setting the trends, the competition will have to follow your lead, or they’ll fall by the wayside. It takes time to become the leader. You need to earn that position in market share by level of quality or innovation. Take this opportunity if you can. Get in the driver’s seat. Microsoft, Intel, and Dell are great examples of industry leaders who basically write their own tickets.
5) Know Your Cash Flow
Cash flow is the lifeblood of your business and it needs to keep moving in the right direction. It will take time for most businesses to develop a steady cash flow. The best thing you can do is have a good accounting program, which can give you reports about different cash flow aspects. Customer balances, profit and loss reports, accounts receivable (aging) reports, and others provide important information about the condition of your business. When it comes to cash flow, you need to have updated and reliable information close at hand. You need to be aware of the areas that are most profitable. What work makes you the most profit in proportion to the expenses incurred? Sometimes the biggest customer in gross revenue may not be the most profitable customer. Know how much money you make for each thing you do, whether it is providing a product or a service. Then you can focus your attention on selling the highest profit products or services. You can also improve your efficiencies and thereby increase the profit. Some customers will cut your check the day they get your bill, and others will pay in sixty to ninety days, simply as a policy. Knowing your customers helps you know who fits into each of these categories. When you will be paid is important, because that money is often used to pay your business expenses. Just as important as knowing when your cash is flowing in, you need to know where the cash is flowing out. Keep control of your expenses. By this, I don’t just mean what you spend or commit to spend, but the timing of the payments. It’s clear that lower expenses leave more money for profit, but don’t be afraid to spend. Just spend wisely for the maximum return on your investment. Timing is key in comedy and also in cash flow. How you pay for things may be as important as how much they cost, especially for cash flow analysis. If you pay for something over time, instead of all at once, you may be able to keep some monthly cash flow in your pocket to use in your business. Although there is a cost associated with having debt, you should include this option in your profitability evaluation. As most of your bills come in on a monthly basis, your invoices should likewise go out at least on a monthly basis. Time your income with your expenses. Keep the cash flowing but be sure you are taking some home each month.
6) Know Your Industry
Keep track of trends in your industry. Is it growing, contracting, or moving in a new direction? There are usually niches in any industry that you can focus on. If you can see the trends, you may be able anticipate changes and react appropriately to improve your position. Reading trade journals is an excellent way to keep an eye on what your industry is doing. And don’t forget about your local newspaper and general news sources. They can and will provide information about outside influences that will affect you and your business. Information from all sources can help you stay on top of your industry. Suppose you own a hardware store and you find out that Home Depot or Lowe’s is coming to your town. The more information you can get about this, regardless of the source, the better you can strategize your reactions. Will they be located near you or on the other side of town? Do you have products or services you can provide better than the big chains? Will your customers remain loyal to you? You may choose to compete head to head on some items, or you may choose to specialize in items that you know you have customers for. In our example, you should remember that the big chains are usually geared to individual consumers, not contractors. This may be an opportunity you can seize and use to beat the big chains.
Part of knowing your industry is knowing where it is in its life cycle. This life cycle can be divided into four parts: introduction, growth, maturity, and decline. During the introduction, sales are minimal because no one knows what the industry is. This is true for new businesses, products, or services. You will need to focus on educating customers that your industry exists and how it can help their lives. If you get in at this stage, you are getting in on the ground floor of something new. This could be a great opportunity, but there is also the risk that you could lose if the industry doesn’t take off. Growth is the period when your industry becomes popular and competitors enter the picture. There can be a synergy from the competition when the market is growing and expanding its sales. Next you arrive at maturity, the point at which sales level out. At this time people are comfortable with your product and own it. The final stage in this life cycle is decline. People have enough of your product and don’t need to replace it as quickly. Businesses are starting to move away from this product, opting for something new. Sales begin to decrease. This is the end for this product, although there may be some company that will continue with just enough business to get by. You never know how long any stage will last. Obviously, you need to know at what stage you are getting into the game. Although there isn’t a best time to get in, you usually don’t want to get in during the decline, which should not be confused with a low period in a business cycle. Knowing the stage your industry is in guides you in creating your marketing plan and business strategy. You would not focus your marketing message on education when your industry is in its maturity stage. Likewise, your strategy for attracting customers in the growth stage would be different from the one you would use when the industry is in decline. Knowledge of your industry will give you the advantage you need to succeed.
7) Be Aware of the Culture Developing in Your Business
Culture in a business has to do with the way your employees interact with you and each other. It’s important to have control of the development of your company’s culture; after all, it’s your company. The culture should fit your style and personality. Some people are very formal. They want to be called “Mister” and wear suits and ties every day. Other people are more laid back; they are on a first name basis, wear jeans, and refuse to wear ties. There is no right or wrong answer here. However, there are some parameters to keep in mind. When I started my law practice, I made it a point to wear a suit and tie each workday. I was a young attorney starting out. I wanted to put forth the image of professionalism and authority and it worked for me. I earned my colleagues’ respect and my clients got past the issue of my age and realized that I was very competent. I’m a creature of habit, so I still wear suits and ties every day, but I have loosened up a bit, thanks to my wife. Nowadays, Fridays are Casual Fridays, so I skip the suit and tie. One of my business partners has a very laid-back style. He wears jeans and no tie to work every day.
Sometimes your employees will pick up on your style. If they fit in with your style and the personalities click, then your operation will run smoothly. On the other hand, when personalities don’t click, things may not work right — or they may. Remember, this is business; it’s not personal. Make sure your employees remember they need to work together, not be best friends. It is important to keep personalities in check. Personality conflicts between employees, management, or owners can destroy a business in short order.
This article is an excerpt from my book, The Road Map to Rich: a Lawyer’s Perspective on Getting and Staying Rich. If you would like your own hard copy for free, please call us at 956-791-5422 and we will deliver to your preferred mail box.