BUILDING BLOCKS FOR BUSINESS SUCCESS – PART B

Welcome to this second part of our blog on Building Blocks for Business Success. In the first part, I covered three fundamental foundations that I have built my businesses on. If you have not read it, I encourage you to start here. In summary the three areas discussed were:

1. Strategic Planning
2. Marketing
3. Survey Your Customers

Let us now look at an additional five fundamental foundations for business success:

INVEST IN GOOD ACCOUNTING

Take a moment to assess your organization’s current accounting system. Would you say it is good, average, or below average?

I would encourage you to spend the money and have someone with experience handle your accounting so that your base numbers and all related information is accurate and well done.

When I started my first significant business, this is one area I overlooked. I did not value accounting and, therefore, did not spend a lot of money on it. I ran the business out of a checkbook, and it cost me dearly. I was so focused on growing the company that I failed to invest in the accounting. When my borrowing got to a certain level, the bank required an audit, and I remembered questioning how we would be able to audit when I did not have standardized accounting at the time.

I ended up hiring two graduated fraternity brothers who worked at an accounting firm. They worked nights and put my accounts together to create an audit. I eventually got the increase in the loan I needed, but it took us three entire months to go back five years and rebuild. It would have been much easier to do it correctly from the beginning. 

Through the exercise, I learned hard lessons. Where I anticipated on making a profit on certain projects, I had loss. I couldn’t detect it while it was happening because I lacked solid accounting to show me where I was going.

Maintaining accurate and timely accounts forms the basis for your regular reports. As the CEO there are approximately fifteen key indicators for your business you should be paying attention to monthly. Typically, we tend to focus on two to five indicators. However, this is not enough to alert you on challenges or changes that may arise. Focusing on such few indicators can have a devastating impact on your business. I share more details of these key indicators on my blog titled, CEO Dashboard, which will be in a future post.

It starts with being willing to spend the money you need to have good management of your numbers. It’s better to have a clear picture of your reality than to believe things are better or worse than they really are.

COST ACCOUNTING TO CONFIRM MARGINS AND SPECIFIC PROFITABILITY

As the CEO, it’s important to think about the history of your organization and to see the trends the moment they start. This is not only the financial side but having fundamental information available in one place is highly valuable.

When it comes to margins and profitability, start with the expectations and goals you have set. Then prove what you are doing is helpful and show you are reaching those goals. It’s important to track your variable expenses and know where you are with them. I have also found it helpful to allocate all my fixed overhead in a formula that displays each profit center and transactions made, giving a full overview of cost and not a partial one.

HAVING SOUND ACCOUNTING AND MANAGEMENT REPORTS

Have you taken the time to identify what’s critical to the company’s success or failure and what information you need to be seeing on a regular basis? As the CEO, it’s you must regularly track and have information accessible that will considerably affect your business. To the best of your ability, you want to see the moment a trend might change or be aware of a factor affecting the market, and you want to see it as early as possible. If it’s something negative, you are able to anticipate and get ahead of the impact as soon as you can; if it’s positive you are able to maximize and optimize on the opportunity.

The temptation may be to look at too much information, resulting in you not really focusing on anything. Take sufficient time to identify and write down areas and indicators within your business that make the most difference. Each business is unique, so the elements required will also be unique. 

Develop a report based on these areas and track the information weekly, monthly or quarterly based on the regularity needed. Every so often, go back to your report, and identify if there is any information you are missing that you should be seeing, or if you missed something significant. Is there a way you could have anticipated it? Could you have been looking at something that would have given you an indication of the impact to come?

This practice requires going beyond the standard reporting you already know or may be readily available to you. Think about your unique situation and what report would be optimal for you to receive. Once you have identified the key indicators, keep a history of it.  As you look at the current numbers, be sure to also look back at the history. Being able to do this will provide you with a rich perspective that will inform your decisions as you move forward.

 Establishing and developing reliable reports all relates back to investing in accurate, detailed accounting.

TAKING ON INVESTORS OR LENDERS

At some point in your business (if you haven’t already) you will either borrow money for your business or take in investors. When that point comes, I encourage you to maintain the mentality of outperforming your lender.

Typically, we work hard to get a loan or investors on board, and then we relax on the relationship and move on to other things within the business. This ends up doing a disservice to them. Your lenders and investors are valuable, and it will work in your best interests to maintain and build on the relationship you worked hard to establish.

Your lender or investors will have certain requirements that they need you to provide them with on a regular basis. Whatever the requirements are, put a system in place that allows you to deliver on your promise. This is the easier part, and it will make a difference on how they view you and what they will decide when you eventually require more. 

Don’t cause them to need to hold you accountable or follow up with you. Take note of all details, documents, or contracts required, stay on top of them, and make sure it gets to them before it’s due. If you’re not able to deliver the requirements on time, communicate with them on the revised date, and be sure to send it to them before the revised date. This habit has served me well. I once received an email from the senior vice president of the bank stating that he appreciated how I always delivered on time and didn’t need reminding like the rest of his clients. This is an area you can delegate to your assistant but be sure to stay on top of it. 

I encourage you to take it one step further and anticipate what additional information they would need. If you can anticipate their needs and provide something before they ask for it, you will set yourself far above anybody else they are working with.  

The key with your investors and lenders is to always outperform them. Your goal is to stand out in the most positive way. Go above and beyond what is expected as it sets the right mindset to them as to how you run your business, which will prove you are worth lending to or investing in. It is simple but will be valuable to your relationship in the long run. I’ve always found that I get great return for that little extra time that I put in.

AVOID WHEN POSSIBLE PERSONALLY SIGNING ON ANY DEBT

If debt is involved, I would encourage you work hard to reach a point where you don’t sign personally on any debt. When business owners initially start a business, they often have to personally guarantee a loan. As the business grows, they usually can get to the point where they don’t have to personally guarantee the loan any further. This could be dependent on how much equity they have in a deal, their experience in the business or even their relationship with your bank.

Factors may differ, but the goal for you is to remain sensitive to how much you personally guarantee and develop the mindset over time to have less and less exposure to a personal guarantee. It’s impossible to start debt free, but it’s possible to move there over time. I’ve seen personal guarantees come back to bite people.

When I started my business, I had to personally guarantee my first line of credit as a mortgage banker, and I continued to do this up to several million dollars. After five years, I met with my banker and told them I wanted to get out of personal guaranteeing. Based on my prior performance and retained earnings, the business could stand on its own, and I was no longer required to sign personally. The business line of credit continued to grow exponentially.  Bottomline, don’t ever sign personally for any loan where you don’t have complete control over the investment.

ACTION STEPS

There are eleven foundational building blocks that I’ve found have built a successful business, eight of them which I’ve covered. Please take time to review them and apply what you require to your business. In the next post I will be sharing my final three building blocks.

I would like to hear what other building blocks you believe contribute to business success. Please share them with me in the comments section. Your perspective will help others grow too.