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The Fundamentals of Running a Small Business Are Well Known
Running a business isn't easy.  The statistics prove that.  Half of all companies don't survive past five years, and for a lot of the ones that do make survive there is often a huge gap between the founder's dreams in the honeymoon stage compared to the reality of anxiety and underperformance.

According to data from the Census Bureau’s Annual Survey of Entrepreneurs, there were 5.6 million employer firms in the United States in 2016, plus another 24.8 non-employer businesses, combining to indicate that a whopping 98% of companies in the United States have less than 20 employees.  Being a successful business owner of a company with a few employees or less doesn't require an MBA, and the principles to follow aren't complex or intricate.  The fundamentals for how to run a small company are well established and well known.  You still have to follow them, though.  Following the fundamental principles will carry almost any one-owner business to a certain milestone of success and sustainability - of course, assuming the business is in an industry with demand, the offering is priced reasonably, etc...

These might not exactly match whatever top fundamental business principles you can find on the internet, but they are our team's experience working with hundreds of businesses, and are the foundation for most of the guidance in The Numbers Edge.

1. The First Priority Is To Pay The Business Owner

A business isn't a charity (except for those organizations that were created specifically for the purpose of being a charity).  So when times are tight, or the company is new, the whole purpose of the business should be to generate income for the founder.  

A lot of businesses just start as a job for the founder - a yoga instructor, a consultant, a small-time manufacturer of products in their garage.  If you're thinking about expanding your yoga practice into a studio or adding people to your consulting team or adding helpers to your small manufacturing process, you need to make sure you aren't giving up all of your income to go towards new expenses.  One of your key considerations may need to be to protect your own income first, and to have other people paid for out of the margin generated by being a larger business with their help.  If your one-person company is generating $60,000 in income, but you have no overhead or employees, you can put the business at risk if you take too big of a leap by adding $30,000 or $40,000 in yearly expenses before the revenue is there to support it.

Particularly in times of early-growth or when times are tight, a business owner may need to be selfish.  The business is here for the owner.  I've seen too many businesses where everyone else is getting paid for the time they work leaving essentially zero take-home pay remaining for the business owner at the end of the month.  It doesn't make sense to give everyone else a paying job, only to have nothing left at the end of the day to pay yourself.  That might require a tough decision to let a person go so that the owner can jump in on the front lines, do that job, and take home the wage that person was making.  

If the business isn't paying the owner the minimum amount the owner needs to sustain, then some kind of change needs to be made.

2. Keep Your Revenue Up and Expenses Down

A lot of business owners have a source of pride to be able to tell others how many employees they have.  No doubt about it, that's great if a company's revenue is driving the required expense growth to keep up with demand.  Revenue should always precede expenses, except for deliberate decisions ("bets") a business owner might make to invest in expected growth ahead of that revenue.

Having a sense of pride in the level of expenses or number of employees is kind of akin to having a nice car.  If someone has a Mercedes, and they're having such success that they can easily afford it while meeting their other financial and personal goals, then that's certainly a reason to be pleased and proud.  However, the goal isn't to have a Mercedes.  Plenty of people have a Mercedes in this world that can barely afford it and shouldn't have made the decision to buy one.

When running a successful a small business, the goal isn't to have employees, or an office, or overhead or an actual Mercedes.  The goal should be to have a successful business.  What is success?  In this context, I'll argue that it is when revenue, expense and income are in-balance.

Perhaps the most well-known fundamental to a successful business is to keep your revenue up and your expenses down.  

I once worked with a rather large business that was having a lot of trouble in this area.  This company had a multi-year history of success, so had built up a cash reserve from those times, but now they were on a two-year run of tearing through it.  The owner couldn't figure out how to get the recipe right to at least break even.  It was really stressful.

I turned to one of my mentors for advice.  He made it really simple.

"They either need to get their revenues up higher to cover their level of expense, or they need to cut expenses to match the level of revenue."

Running a small business to a certain level of success doesn't require fancy strategy.  The fundamentals will carry you a long way.  Keep your revenue up and your expenses down.

3. Don't Fly Blind.  It's Risky and Expensive.

Imagine you're a pilot of a small plane.  You know the basics of taking off, landing, and the actual flying in between well enough that you've done it a few times.  You're surrounded by gauges and measurements, but you don't know what any of them mean.  That's okay because this is just a small plane, right?  You keep it under the clouds so you can see where you're going.  You only fly during the daytime.  You're aware that more experienced pilots use their gauges - heck, experienced pilots can actually fly an entire flight on gauges alone.  But you're don't have time for flight school, and even though you're a bit nervous about it, you seem to have a system going for flying your own way, using your style, and you haven't crashed yet!

That's the equivalent of running a business without understanding financial statements.  You have a sense for whether your company is getting a little too close to the ground by watching the sales activity and the cash balance in your bank account.

The right way to fly is to understand your key gauges, and to look at them regularly.  Just because you can see the ground below you doesn't mean you shouldn't check your altimeter.  Just because you filled up for gas before you left doesn't mean you shouldn't be watching your gas gauge.

At your business, your income statement will tell you whether you're making any money.  Your balance sheet will tell you the level of safety vs. risk in the financial health of your business.  The fundamentals for how to run a small business to a reasonable level of success are well known, and one of them is that you need to read an income statement and balance sheet for your business every month, and make a deliberate effort towards trying to understand what they are telling you.  (Don't worry, we teach that at The Numbers Edge!).

Receiving, reading, and understanding your financial statements gives you a true picture of what level of success your business is having and where the areas of concern are, which allows you to create goals and make decisions to improve the areas that need to be improved.  Financial statements, when prepared the right way, will be a leading indicator of where the business will be in the future.  They will show you whether your plane is dropping 100 feet every few minutes even though it looks like you're holding steady based on the view out the windshield.

If you're flying a plane, that means you're a pilot whether you wanted to be one or not.  If you're a pilot, you need to learn how to read and use your gauges to keep your plane in the sky.

If you have a business, you're a business owner whether you wanted to be one or not.  If you're a business owner, you need to implement processes that result in you receiving financial statements every month, and you need to learn how to read and use your financial statements to keep your business in the right position.  Don't know where to start?  Email us and we'll tell you what the first steps should be:

4. Don't Practice The Ostrich Theory

Question: What does an Ostrich do when it gets scared?

Answer: Bury his head in the sand!

The wise business owner is a planner and a project manager... always candidly assessing the threats and risks to the business, planning actions to mitigate those potential problems, and working the priority list diligently to attend to those actions.

● What are the risks to your business that you've been ignoring?

● How's your insurance coverage?

● How's your accounting and financial health? Do you have your books in order?

● Do you call your tax expert in the middle of the year for tax planning guidance?

● Are you putting at least a little something into retirement (which would reduce taxes for most business owners)?

● Are you mindful of your shortcomings in your knowledge and experience as a business owner, and do you work to eliminate those from your list of weaknesses?  

Don't practice the ostrich theory... be better than that. Confront your threats, risk and weaknesses head on and turn them into strengths. That'll make you a better business owner than the vast majority of your peers.

5. Play the Long Game

I often speak to the comparison between a business and a snowball rolling down the hill. Usually the progress starts slowly and then picks up speed over time. At first it takes considerable effort for minimal results.  Over time, it generates some of its own momentum.  With a business, if you continue to put one foot in front of the other down a well-thought-out path, most of the time you’ll end up in a desirable position.

To use a baseball analogy, if hitting a home run in your business were easy, you'd do it all the time and have exponential growth.  The more likely option for most businesses is to consistently hit singles - year after year, month after month.  A business that is successful over the long term is often one that plans to hit singles, thrives on hitting singles, and takes steps regularly to incrementally improve its batting average with each passing quarter and year.  Swinging for the fences comes with a much higher risk of striking out.  The successful, steady, safe businesses strive to take out the highs and lows that come with hitting a home run one quarter and striking out the next.  A steady business is predictable, which is much easier to manage and comes with much less anxiety.  

Spoken like a true accountant right?

Here's another way to look at it.

As a business owner - particularly a new one - your goal shouldn't be solely focus on having a great year this year as much as it should be to 1) have ever-increasing success with each passing year in the future and 2) to protect your business to make sure it is still here in 10 years.

How do you do that?

● Save a little bit of your income, no matter how hard that feels.

● Focus on long term relationships, recurring revenue, and quality.

● Build a good reputation, even at the expense of a quick buck.

● Consider the lifetime value of your customer more than the profit from the first transaction.

● Keep in touch with your customers.  Treat them well.

● Don't compromise your ethics.  

● Genuinely love everyone around you.  Your team, your customers and your vendors.  If you do, it will show and good things will come back to you.

Approach your business, and your life, like it is a marathon, not a sprint.  With each step you take, you'll learn something and improve for the next one.  The future always seems to become the present faster than expected.  If you set yourself up to be more successful down the road, you'll look back and thank your younger self when you get there.

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