Financial Foundations, Part 5 – Managing the Business

30 June 2015 Categories: Dollars & Sense

This is the fifth installment in a series on the foundations of finance. If you haven’t already, I suggest that you start with the first post at this link.

As we continue to look at the essentials of business from a financial perspective, I now want to look at optimally managing the business.  The question in my book is “How do we manage the business to improve the bottom line?”  It’s not about the product offering, marketing, or platform, but the principles of management.  In some ways, this is tough, because there are many types of businesses run in different ways.  Yet as I have been thinking about it, I believe there are universal principles that apply to all businesses.

  1. Identify the business functions we need.
  2. Outline the steps to executing each function quickly and accurately.
  3. Document, in detail, the steps.
  4. Implement the steps.
  5. Delegate if possible / necessary

Start by identifying your business systems.  They will vary from business to business, depending on what the business does and how it operates.  In principle, I’ve found four primary business functions:

  • Product development: How does the business develop products? Typically this is through brainstorming, researching competitors, surveying customers, and surveying prices.  Some businesses do these more formally than others, but the result is the same: new products are developed and brought to market.
  • Production: This is the giving the product to the customers, and where the money is made—something of value is given to the customer, and they give you something in return. This looks different depending on whether or not the business is a manufacturer, a retail / wholesale operation, or a service business, because each has a different way of producing goods or services.  For manufacturing, factory, machinery, and delivery are part of production.  For retail / wholesale, it’s about purchasing, receiving, warehousing, inventory management, and delivery.  For services, it’s about recruiting, training, scheduling, and managing personnel.
  • Promotion: How does the business get the word out and acquire customers? Advertising (print, radio, internet), marketing, one-on-one networking are all part of this function.
  • Platform: How does the business coordinate all of its activities? What technologies does ituse?  How is money collected from customers?  How is accounting and financial reporting done?

After identifying the system, then it’s time to figure out how to quickly and accurately execute each function by outlining how they are done.  I would start by looking at the list of functions, and then figuring out which function, when systemized, would provide me the greatest benefit, either by putting more money in the bank or making life easier.  When I know which one, then I ask myself the following questions:

  • What is the end goal that I need to achieve or the output(s) I need to have?
  • What are the constraints or parameters affecting how I can do this?
  • What are the steps to get to that goal given the constraints and parameters?

For example, let’s say that I’m starting to hire people, and want to make sure that everything is compliant with tax and labor laws.  The end goal is to have all the necessary paperwork, the parameters are tax and labor laws, so the steps would be, at a minimum:

  1. Find out what the legal requirements are for paperwork,
  2. Get copies of necessary tax forms to give to employees,
  3. Make anew hire checklist, and
  4. Develop an employee guide outlining to the employee and company what the rules are.

The next step is to document the process.  For a lot of my clients, I create both checklists and video training to explain how to perform financial functions.  By doing this, we standardize the process and we memorialize it so that the process is always done correctly, regardless of who does it.  To do this, we start with the outline, since it’s easy to remember, but then we have detailed instructions.  This way anyone can get a quick overview, but if necessary, they can see what needs to be done, step by step.

Once we have documented the steps, it’s time to implement.  Even if working alone, or mostly alone, having these guides is very helpful.  There’s a lot to remember as a small business owner, and having them available saves time from having to figure out how something should be done.

Finally, as we build our businesses, we can take these processes and delegate them to junior staff, thereby freeing us to invest our time in more ambitious activities that will provide even greater financial return for our effort.  It frees us from the tyranny of day-to-day production, giving our minds the space to imagine and create new and exciting products and services for our clients.  It gives us the reward of living the entrepreneurial lifestyle, where we can have the freedom to travel, to see the world, to engage deeper in life-giving relationships and avocations.  And it allows us to increase the value of the business, which ultimately will allow us to either pass it on as a valuable legacy to our progeny or to sell it at a premium when we want to retire.