How to Run a Business – A Guide for Managers and Operators
For most business managers the goal is to grow your business, but others may be thinking of only sustaining the business so that you can continue to do the work you love. However, as admirable as it may be to enjoy, love, and live for the work that you do in your business, you still need growth otherwise your business will not be sustainable. Growth is important, not just to make more profit, but also for the survival of your business long term.
So, what are the best practices to run a growing business?
It all starts with two very important principles. The first is, spend less than you make. It is amazing how this principle is violated more than any other mistake in business; however, there are two ways to track it. The first is to track it in short-term increments, such as monthly or quarterly. For example, take a month of time, and add up all your revenue, and compare to the sum of all your expenses in that same month – pretty basic math. If you spend less than you made in that timeframe, then you are on track. However, there are times, such as when you start your business, when you have major expenses in a time frame that can skew the result. In this case you need to take longer period, preferably by going back in time, but you can measure the principle by going forward in time; that is, forecast your expenses and revenue for the next few months or over a year. In this way you learn how long it will take to get back to the point of spending less than you make, as you track it carefully against your forecast. In business, this is called a P/L (profit and loss.)
Okay, you may be thinking that you have to spend a bunch of money up-front to get your business started or for another reason, and it may take many years to spend less than you make. You may have had to take out a loan to pay for startup expenses, and plan to make payments to repay the loan. The first principle still applies except in this case you don’t include the loan as an expense, but you do need to consider your principal and interest payment as part of the expense side of the equation. Additionally, you may also want to consider managing your business using a second principle, which is, your business value must stay greater than your liabilities. This is also a very simple calculation, which is the sum total of all assets in your business, compared to all your liabilities. Also known as a balance sheet, you want to make sure that your assets are always greater than your liability. The difference between them is your net value, which is the number you need to track over time because it needs to get larger every month or quarter for your business to be a growing business.
Well, those are the numbers that will help tell you how your business is doing, but how do you run your business to help achieve good numbers?
It all starts with your products…
- Know the cost of your products to maintain optimum margin. Margin is a number that you need to track carefully. It is the difference between your cost and the price you actually sell your products. If you get your margins too small it will be difficult to pay your expenses. If you get your margin too high, it may be difficult to sell your products. Getting the right balance, or margin, on your products is critically important, so that you can achieve the first principle, of making more money than you spend.
- Manage your inventory. Keeping the right level of inventory of products is a balance between having available what your customers want, but to avoid buying too much products to stock. The optimum level of inventory is the balance of buying product that stays on your shelf or in your kitchen the shortest period of time, without running out. In other words, you want to continually buy product based on what is purchased. This applies to retail as well as food services.
- The placement of your products on shelves or on your menu can also can impact your business significantly. The idea is to put your most popular products in the place within your business that helps expose other products, to create an opportunity to sell more. For example, popular products could be in the back of store to expose more products to your customer, or you can put your most popular food items in the menus so that other, perhaps more expense options, are read first.
- Creating exposure of your product offerings is called promotion. There are many, many new ways to promote your products without big spending. Using social networking channels, email, and your website are ways are available to promote your business to increase foot traffic at very low cost. Additionally, you can create incentives to bring customers to your business through gift cards, events, and discounts (subject to keeping an eye on your margin.)
- Lastly, have some extra cash, called a cash float, available. There will be times when either a business opportunity or unexpected expense hits your business, so having cash available without the need for a loan when an event occurs is a great way to keep your business momentum strong.
With these guidelines in mind, there are still some important cost controls to also monitor and manage. They fall into three groups:
- The first cost is to keep an eye on is your cost of goods. Often noted in P/L charts as COGS, these costs are the ones associated with costs directly attributed to doing business. This would include the costs for parts for manufacturing, or inventory or product. It also can be your food costs for restaurants or quick serve food service business. The reason for tracking COGS is because you cannot do business without COGS; in other words, you don’t have a business unless you spend this money. So tracking your COGS as a percentage of all your costs is important to keep as low as possible.
- The second cost to keep an eye on is your payment processing fees. In most businesses, the large majority of payments are through credit cards, which come with a credit card processing fee by your payment processor. You do have a choice of payment processor and it is always possible to lower this cost every so often. There is much to learn on how to do this as the payment processing business can be a little complicated.
- The last cost to keep an eye on is your supplier prices. If you don’t have an agreement for guaranteed pricing for your products or food goods, then you do need to keep track of what you are paying for your products. Detecting supplier price anomalies early can save you lots of money, as well as headaches and time associated to find a new supplier quickly.
There are other costs to track as well, but we can only touch on them. People costs can be your highest expense depending on the type of business that you have. Also, planning an organizing shifts, the number of employees working during the same time, and simply tracking actual hours worked can ensure that everyone is treated fairly, including your business. Use clock management systems, which most point-of-sales systems offer, and review your payroll numbers each pay period. Lastly, choose technology wisely, with the help of a trustworthy technical source, using just what you need, and not necessarily what you have to have.