"Try not to become a man of success, but rather try to become a man of value" - Albert Einstein
The first step in building value is to maximize the net income of the business.
A business can accomplish an incredible amount of good in a society. The money that flows into the community from the sales provides commerce, jobs, pays taxes, funds charities, and indirectly funds all sorts of other businesses. But it can do so only if it makes a profit. If it does not make a profit, it begins the slow spiral downward into oblivion. If it turns a profit, though, then it can remain operating and accomplish all of the good things a business can accomplish.
From an entrepreneur's perspective, the goal to build a profit is a subset to the overarching goal of building value into the business. And simply put, building value is the process of taking steps to increase the market value of the business.
Step one: Create a product that has a market. This is trickier than you think. In doing this, you have to ask yourself whether your product is unique in the marketplace, or whether your product is a better version of an existing product. If it is not unique, there has to be a reason customers will choose your product. Better quality? Cheaper? More features? What makes it a better choice over the competition?
Step two: Create a production process. Do you produce it yourself? Do you contract out the production? What is your quality control process? How do you design the production facility? What effect do your decisions in this step have on the core value of the business?
Step three: Create a system that distributes the product. Who do you distribute to? Wholesalers? Retailers? The end-user? Do you sell via the internet? Or a combination of all?
Step four: Implement a plan to market the product. Find a way to target your ideal customer as directly as possible. Ask yourself - Am I like the hunter who carefully surveys the land, choosing the most likely place for his prey, quietly tracking and then setting himself up for the shot? Or, am I like the hunter who was driving by the forest shooting into the bushes hoping to hit something he could eat for dinner (hint: one of them will go hungry)?
Step five: create a system to collect the money from the sales. Cash and cash equivalents are king. My father-in-law used to say "receivables don't feed the pit-bull. And nobody wants a hungry pit-bull in their house."
Step six: Create a system to pay the business' bills - i.e. Feed the pit-bull. A business that can't pay it's bills has no value.
Step seven: Implement a system to account for each of the business' activities. If you have a clean accounting system, you are more likely to survive an audit by any of the various taxing authorities that could come knocking at your door, you will have better information to run your business with, and your accountant will be very happy. Not to mention that the money you spend with your accountant will go toward things like business planning, tax planning and asset-protection planning, as opposed to cleaning up your books.
Step eight: Through a thoughtful and complete cash-flow budgeting process, make a determination of how much of the excess cash-flow can be distributed to the entrepreneur and how much has to remain in the business. I see his as the biggest stumbling block to a huge number of entrepreneurs. Not knowing how much of their income should remain in the business can cause them to artificially inflate their lifestyle and inhibit the ability of the business to grow. Planning is the key. Decide ahead of time how much you can take as opposed to how much you want.
Step nine: Allocate enough time to each system to minimize failures. See my previous blog. Monitoring and regularly adjusting all of your systems will help you to make sure everything remains working and viable.
Step 10: Do it all again. This is a cycle that will repeat until you sell your business. Each area is necessary and each area is important.
Combined together, the cycle represents a spiral upward toward maximizing the value of the business. Each should be consciously created, faithfully monitored and regularly adjusted.