The 2 Questions Every Business Owner Needs to Know How to Answer
Owning your own business is one of the great American dreams. Those of us who own a business know that it comes with headaches and problems, but we cherish the good we can do as well as the people we meet and the freedom that our business can provide, both in time and money.
None of us who owns a business is in it just for fun. We want to profit – both now and in the future, which leads to the 2 questions every business owner needs to know how to answer:
Question #1 How can you maximize the profits in your business now?
Question #2 How can you maximize the value of your business in the future so that you can sell it at the highest price possible when you are ready to move on?
The Answers Very few business owners know the answer to the first question. Even fewer know the answer to the second. It can be a challenge to focus on these questions when you are a business owner – there are a lot of distractions!
There are two keys to building a business for the greatest profit and value.
Key #1 First, you must build a business that can run without you. If you have to be there everyday, how will a new owner take over? Many business owners are their business. They are the face, the name, the production, sales and marketing of their business. Businesses like this struggle to produce much income because there is very little leverage.
Leverage in a business comes from many sources. But the most important source is the business systems. The first key to building a profitable and valuable business is to create the proper systems to run the business. Then, the owner can spend his or her time managing the systems instead of managing the people. Managing systems is not only more efficient then managing people, it also takes less time and effort and produces greater profit.
Take McDonald’s as an example. This is a multi-billion dollar company that is effectively run by teenagers! How? Through very intricate business systems.
At the center of all successful business systems are internal controls. The thought of internal controls can be overwhelming. What are they exactly? How do you use them in your business? What will they really do for you?
Internal controls are simply precautions you set up to prevent or detect errors. With fewer errors, your business runs more efficiently and effectively, which increases profitability and value.
Key #2 Systems are critical, but they are only the first key to building a profitable and valuable business. The second key is to understand how your business is valued.
I can’t count the number of times I’ve met with business owners who wanted to sell their business but had no idea what the value of their business was – other than a number they had in their head (and the actual value was usually 50% less than that number).
Every industry has its own valuation techniques. Of course, it matters whether you are planning to sell to employees, another business, a public company or whether you plan an IPO (“initial public offering”). But there are fundamental rules in every industry.
This is where reporting comes in.
Take the time now to find out what the rules for valuation are in your industry. General rules of thumb can be found through industry associations, business brokers or on the internet. For more precise information, you can hire a qualified business appraiser to do a business valuation of your business.
Once you know how your business is valued, you can focus on the specific factors that positively impact the value of your business. Reporting can help you do this on a regularly basis – without having to spend a lot of time on it. Simply design a set of reports that tell you how each factor is progressing and the impact on the value of your business.
Focus on Profit and Value As a business owner, I know first hand the hundreds of distractions that come up daily. This is why it is so important to stay focused on only those things that maximize the profit and value of our business. Internal controls and reporting are great tools to help you do this efficiently and effectively.