In my previous post, part one of building a business, we examined a restaurateur who had visualized a new approach to home delivery. In that example there was scant mention of building a model for profitability prior to implementing that vision. Such an approach was not problematic in the example since we were dealing with an existing business where low risk experiments such as the one described can in fact be used as the basis for building a profitability model. The same can be true of entirely new businesses, provided that the level of investment to perform the first experiment is manageable. In fact, it is generally preferable to test a vision under real-life circumstances in order to ensure that the idea not only resonates but that people are willing to pay an adequate amount for the product or service. Let’s use an example of an individual who decides to start an online store for selling sunglasses. This individual has a vision for selling a product that not only blocks harmful UVA and UVB rays, but also believes eye wear should block more light from the top and sides of the frames and designs a product accordingly. Given the ease of offering such products for sale on the Internet, this individual launches an informative website and a supporting store on Amazon along with a blog explaining the virtues of their product. The cost for all of these components is very modest, totaling only several hundred dollars ($300 for our example). The larger investment is in the individual’s time as well as in an initial production run of the envisioned sunglasses. Let’s say the initial production run for 1,000 pairs of glasses costs $5,000 – $5.00 per pair. If the fledgling business owner subsequently spends $4,000 promoting and eventually selling all 1000 units then the profit is $700 excluding the value of the individuals time. This is a great start, as the initial experiment has demonstrated demand for the product, a willingness of buyers to pay a certain price, and a level of profitability. At this point it is possible to build a model reflecting the experienced costs and revenue expected as selling efforts continued. It may also be beneficial for the seller to experiment with different price points to determine if profit margin is being left on the table.
Up next: Scaling up.
Well, you had to know it was just a matter of time before we explored the simultaneously exhilarating, frightening, and potentially extremely rewarding matter of starting a brand-new company. There are many different reasons people start companies, including to follow a passion, monetize a hobby, achieve financial independence, or to accumulate wealth, among many other reasons. Rather than focus on administrative questions such as what type of the company to establish (C corp, S corp, sole proprietorship, etc), let’s tackle the most important question of all – can the company make money? Unless you’re independently wealthy and money simply doesn’t matter, your business must make money in order to continue to exist. This is a cold hard irrefutable fact. You may only need to make a small amount of money to suit your purposes or may be willing to sustain significant losses for a period of time, but if you can’t sustain losses indefinitely, even modestly unprofitable business will cease to exist at some point. Thus, step one in starting a new business is to build a model of how it becomes profitable.
Up next: Building a model for profitability.
The unfortunate reality of the recent corporate tax code revamp is that the issue is largely supported by members of both political parties, yet it passed with only the support of one. Regardless, there is no question this reform is a tremendous positive for American businesses and workers. While much of the media coverage has focused squarely on the idea that reducing the marginal rate from 35% to 21% is simply a bonanza for already profitable companies, there are several reasons why this legislation is a firm step in the right direction.
First and foremost, the marginal rate reduction of 14% will undoubtedly encourage business investment and formation in America. Simply put, anyone considering starting a business that is wholly or partially unrestricted by physical location is faced with the challenge of determining where to locate. If tax rates are sufficiently higher in one country versus another (enough to offset other potential benefits) most rational investors and business owners will select the lower cost venue. The rate reduction will also encourage individuals who might not ordinarily start a business organized as a C Corp to do so rather than operate as a sole proprietorship or even as an LLC as the new law includes tax benefits to such entities as well. The same applies to investors, more of whom will be encouraged to invest in businesses that can now return more money to shareholders.
As for the notion that already profitable companies will simply retain the tax benefit or distribute the ball to shareholders, such a circumstance is unlikely. This is not to say that certain companies will not employ such an approach, but companies looking to grow, which is the primary driver of enterprise value, will have the incentive and means to invest in existing employees through higher wages, better training, improved benefits, etc. as well as to expand hiring in general. As for shareholders participating in the benefits of lower corporate taxation though higher dividends or buybacks, this should also be a net benefit as there will be additional capital available for other investment as well as discretionary spending.
The concept of setting goals aligned with nothing more than a desire for higher sales and profits is a fools errand. Rather, businesses, in particular young businesses, should focus on setting goals in line with their vision. This means that instead of simply assigning your sales team a 50% higher quota than in the prior year based on nothing more than a desire to grow at such a pace, think about your vision and how it should drive opportunities and ultimately sales. Let’s go back to an example I used in a previous post. The example given was one of a restaurant owner visualizing an entirely new approach to take out dining. The owner’s vision was to connect with perspective customers and repeat buyers in close proximity to when they would be leaving for the evening, or would be staying at work for extended time beyond normal hours. By stimulating demand on a location by location basis, she reasoned that the number of deliveries could be reduced dramatically, thus reducing costs and making such a service even more cost-effective to the consumer, in turn stimulating demand even further. As she continued to think through how such a service would work, what was once simply an idea became a hardened business practice in her mind that could be easily communicated to her employees as well as prospective customers. From there, she tested her ideas, made appropriate modifications, and launched what quickly became a highly profitable and rapidly growing business extension. Once she had gathered initial site by site metrics for a handful of early trials, it was simply a mathematical exercise to plot a growth rate based on the resources she had available now and in the future.
This example clearly illustrates the value of first visualizing your idea for a new business or in this case service extension to an existing business, turning the idea around in your mind, and etching its reality virtually rather than physically. Once the vision has sufficiently hardened, implementing, measuring, and goal setting become relatively easy.
The greatest golfer of all time, Jack Nicklaus, (apologies to Tiger followers) practiced each shot in his mind prior to actually striking the ball. What he likely didn’t know was that many scientists believe “practicing” in your mind has a significant impact on actual performance, in fact eliciting nervous system responses not dissimilar to those recorded during physical execution of the same action. In one specific study appearing in the North American Journal of Psychology in 2007, athletes who mentally practiced a hip-flexor exercise had strength gains that were almost as significant as those in people who actually did the exercise (five times a week for 15 minutes) on a weight machine.
So what does this have to do with business? Perhaps much more than you would have imagined. Visualizing can carve a groove in your mind that promotes actions in support of what has been visualized. The more you visualize, the deeper the groove, fostering motivation and confidence in your actions – or intended actions.
Take for example a local restaurant owner who envisions a new kind of takeout service for people who don’t like to plan ahead or whose day has become so filled with things to do that the thought of scrounging up dinner is unappealing. By offering definitive choices (12 pack of spicy sushi rolls with miso soup) at the moment in time when someone might be susceptible to such a suggestion, the savvy restaurateur envisions a “move the needle” event in the growth and profitability of their business. The more she thinks about the idea, the more refined it becomes. The more she describes the idea to her employees, the more suggestions help in its honing. Excellent execution of the idea will certainly position it for optimal success, but the visualization, cerebral replay, discussion of the vision, etc. are the key elements for its potential success.
As we motor past the start of another new year, you should be energized and ready to face the challenges ahead. This is a time for optimism, but only if you have visualized and communicated a plan for growth. Note that the emphasis is on visualizing a plan rather than on the form and content. We make the distinction because the degree to which such a plan is memorialized varies widely from person to person and business to business. Some people operate best with a 20 page detailed description of how their vision will be realized, while others focus instead on constant, consistent communication of a broad vision that they trust will be operationalized by the people they entrust (including themselves!). Either end of the visualization spectrum and every point in-between also requires clear goals that will define success, failure, and the need for adjustments along the way. In upcoming posts we will further examine visualization and goal setting.
Welcome to 2018!!
This site is for business owners, future business owners, managers, or anyone else looking for practical, actionable advice and concrete examples of how to build a better business and life. The two (life and business) are inseparable. Just about everyone will spend the vast majority of their day and life “working”, so you may as well succeed and have some fun along the way. On the topic of fun, sometimes work is fun in the sense that you have a great time with co-workers, something funny happened during the day, etc. But most of the time, work can be fun on a much higher level – by enjoying what you are doing, setting targets and accomplishing goals, building a business that helps others in the most profound way – allowing them to earn enough to care for themselves and/or a family. Now, that’s fun! We’re happy to have you aboard and hope you become a frequent visitor and contributor!