I’ve been in business more years than I’d care to remember, but on the way there have been some lessons that have just stuck and seem to be relevant to clients because they come up time and time again.
Business Owner vs Entrepreneur
The first one is the difference between a business owner and an entrepreneur. Most people, if you think about it, (go back to the e-myth) are technicians who think they can do something better than the person they’re working for so they go off and start a business by themselves. They tend to equate success with busyness. Typically those people don’t want to grow their business anymore because they’re already too busy so they’re self-limiting.
The problem is that any of those technician business owners will tend to find a job that needs doing and then think the best person to do that job is themselves. At any one time they never have any available capacity because they’re always busy. They don’t realise it but they are condemning themselves to a lifetime as a hamster where the degree of busyness equates to wheel speed!
The entrepreneur, on the other hand, has a different view. The entrepreneur will find a job that needs doing and then find somebody to go and do it for them. Now that’s not necessarily an employee. It may be an employee, it could be a subcontractor, it could be a supplier, but they’ll find a way to get that job done so they don’t have to do it themselves.
That’s not laziness that’s keeping capacity available. At any instant in time the entrepreneur always has time, because they’ve not filled themselves and their capacity with being or having a busy job.
As Brad Sugars says, J.O.B stands for Just Over Broke. If you’re going to grow a business you need to have the capacity to work on your business. If you are just being busy in your J.O.B. all you’ll own as a business owner is your own job.
Getting paid Twice
Another lesson is the idea that as a business owner you’re really aiming to be paid twice. You’re paid through your salary, through your dividends from the profit of the business. That’s the first time you get paid.
The second time you get paid is when you sell that business. Too many people retire by selling their premises and closing the business down. They have nothing else to sell because the business was all in their heads.
They didn’t actually ask themselves, “How do I prepare my business so that I can actually sell it to someone?”. It has to be of some value to somebody. Somebody who then doesn’t have to start from scratch. They can take what I’ve built and take it forward and I can add more to my own retirement fund.
It’s something to think about in advance. Don’t leave it until the year you’re thinking of retiring. You probably need three to five years to prepare a business properly for that. But again, it’s a lesson that some people don’t learn until it’s too late and actually if they only had the time to think about it in the past life would be a lot easier in the present.
Spouses, Kids and Piggy Banks
Another common challenge I see, particularly where you’ve got spouses in the business, is the bizarre competition to spend the money that comes into the business. People completely lose sight of the value they add to the business and focus solely on how much money they can take – because someone else is taking some. Everyone treats the business as a piggy bank to be raided.
People think they all have to take equally for it to be fair but no one’s actually thinking about value given or about the money needed to grow the business. What we should be doing is restricting our income, and therefore the tax we pay, and reinvesting that money back into the business, to grow the business for future gain.
This is the simple test they did with children and marshmallows— can you actually have a marshmallow for 15 minutes without eating it? If you can manage that, you’re going to get a second marshmallow. Too many people are choosing to eat the first marshmallow and forgoing the second one. If you do that in business you’ll never ever grow.
Because you’re too busy taking the money out and you’re not doing enough to live more frugally, you can’t reinvest the money in people to help grow the business. I’ve seen a business where the sons of the business owner want to get married, they want a house, they want a car, they want nice holidays, they want all these things so all the money’s being pulled out, easily amounting to wages for a couple of employees to take some of the workload to allow them to focus on growth.
In an extreme case, I’ve seen a business where the cost to the business of one of the sons was in excess of a quarter of a million pounds a year. Yet if that son actually did the job he was supposed to be doing competently, the business would only be paying about £30,000 to £40,000 a year on the open market. The business was paying a huge penalty, where it could have had a bigger and more competent team to drive its day-to-day operations but it squandered that money and of course once it’s gone it’s gone. That business has been limping along because of the family itself being unable to resolve its own bad habits.
This lesson is not so obvious. Metrics need to change with time or, more accurately, with the stage of evolution of your business. When you start you need to know that you’re making a profit; that’s really important. But when you get out of that phase, that focus on profit can be a real danger because actually what you need to focus on when you’re growing is your cash flow. You need to know that you’re actually getting money into your bank account, that you’re getting paid. Your cash cycle is really important. As you grow further it’s then not just about profit and cash, but about your gross margin. Too many businesses tend to give away margin in exchange for volume.
I know of one that was turning over £50 million in revenue but was only making barely a hundred thousand in profit! A lot of very busy people not actually earning very much money are completely pointless. Don’t be one of those businesses!
As the business gets bigger still and you’re starting to use external funds, you’ve got other investors, then you need to be looking at your return on investment much more carefully.
Remember, your financial metrics, the things you focus on, change depending on the stage of development and the size of your business, so it’s really important to get that right.
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