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The 4 reasons you have started your own business, the 7 main factors of success and the 7 ways to ensure success through digitisation.

People will start their own business for 4 key reasons:

 

  • They want to solve a big problem and care about something so much.
  • People often start businesses because they want to build an Asset to sell or a Legacy to leave to their children
  • People start new businesses because they want potential to earn more money
  • They start their own business because they see a benefit in “being their own Boss”

They want to solve a big problem and care about something so much

Some of the World’s most successful companies were started by people that just “Care”.  They care so much about one issue in their World that they start a company to make a difference.  In a recent post the well-known entrepreneur, author and motivational speaker Daniel Priestley explains how most businesses try to solve problems that are too small.  He goes on to explain why every business should have a big picture in mind. The one great reason for its existence.  In my experience this is not something that happens every day.  In order to create a profitable business, it is often necessary to take part in activities that are not at all core, or even related, to your passion.  Sometimes the company itself is started in order to fight for the specific global goal so treasured by the Founder.  But oftentimes the company is just a vehicle to create enough wealth so that the Founder can begin to treat the problem using some of that wealth.  A great example of this is the “Forest of Dennis”. Otherwise known as: The Heart of England Forest is a charity committed to helping reverse centuries of woodland decline by planting a 30,000 acre (122 km2) joined up forest of entirely native broadleaf trees. At 12% of their planting goal, they have already planted England’s largest new native forest. The charity was started using the huge wealth of Founder Felix Dennis.  Dennis made his fortune in the magazine publishing industry but gave up most of his activities in order to “write poetry and plant trees”.   If you have started your own business to make a big difference to the World, does your mission statement reflect this aim? 

 

People often start businesses because they want an asset to sell or leave to their children

A successful business is made up of a collection of assets. Some of these assets you will have from day one. Others you will need to build yourself over time. An asset is simply any part of your business that would still be valuable if you or your management team were not around.  Income follows Assets.  In other words, your business cannot create any income if it has no assets.  Assets come in many classes and in different shapes and sizes.  An obvious example of a business asset is a property that you want to rent.  If your business owns (or has access to) that property, then somebody may want to rent that property from you and pay you money. Another example of a business asset is piece of machinery:  Your business owns the machinery, and, using it, you may be able to create work that a client would pay for.  Other assets are less tangible:  For example, if your business is able to build up a large following on social media or on an electronic information distribution network, you may be able to use that asset to create enquiries and find new customers.  Customers that will pay for the products and services your business produces.  Other assets include patents, trademarks, intellectual property and goodwill. Financial support arrangements, trained staff, documents, leaflets and business systems. When analysed, many businesses grow in accordance to the number of assets they have produced.  The aforementioned Daniel Priestley has written a book about the 24 assets every business needs to develop in order to grow.

 

People start new businesses because they want potential to earn more money

The management and on-going manipulation and use of the assets owned by a business drives the income a business can earn.  Many people that see owning a business as a way to earn more money are disappointed.  It may be true that disintermediation of the middleman (your old employer) may make you more money if you are able to contract directly with clients yourself, however, this is oftentimes not the case.  It is true that owning your own business has the potential to allow you to earn more money, but in order for you to meet that potential, you must create a business and free yourself up to undertake the work required that will create income. Many people that start a new business with the sole aim of earning more money quickly find that the daily drudge of finding clients, working and invoicing is harder than the job they used to do.  One way to create an environment in which you are free to earn money is to develop business systems and processes that save time and money.  These systems become assets to you. Assets that save you time. Time you need to work to create more money.

 

They start their own business because they see a benefit in "being their own boss"

This can often be quite ironic.  You start your own business to “be your own Boss” and you find all you have done is found a new Boss. One much more demanding than the last one. Many people having started a new business name the Tax man and customers as some of the most demanding bosses they ever had.  One way to avoid this irony is to develop a business where you are able to work “ON” the business not just “IN” the business.  As a Founder of multiple small companies, I know that there are times when only you can undertake a specific task.  Only you have the knowledge and skills required to do this thing or that thing. The client wants YOU not somebody else. However, it should be your number one aim when starting your own enterprise, to plan ways in which others can undertake these tasks and you will train and instruct and motivate them.  This frees you up to undertake work ON your business. Working on your business rather than in it is much more rewarding.  Designing ways to reduce cost from supplies, creating new products and services, considering how to reduce friction during your delivery process or implementing systems that others can use and follow is always the most profitable way to work on your business.  The result of these activities is the production of assets.  The documents, training manuals, product descriptions, leaflets and business systems that will be used over and over again.  These assets cost almost nothing to own but create enormous wealth.  You will quickly be earning more as the boss of your own business than you ever did whilst working for others, but, only if you work on your business, not just in it.

 Reasons Businesses fail

Whatever your motivation to start a new business, you owe it to yourself and to your staff to ensure the business succeeds.  Everyone has heard the horror stories of the 9 out of 10 small businesses that fail in the first 3 years.  But many of these failures would have been unavoidable.  The business may have been started for the wrong reasons, with insufficient capital or without a clear need being present for whatever products or services it supplies.  The Owners may have insufficient skills, or the business may lack enough assets to survive. However, many businesses thrive when they have success factors on their side:

 What does success look like?

Before anyone starts a new company or any small business, one must ask what success will look like?  For the meaningful citizens that started their business to make a big difference to the World, success will either be seeing those changes taking place or creating enough wealth to be able to make the changes yourself.  But for most of the others, success generally has a price tag attached.   The price tag based on how much your enterprise is worth (if you sold it) after all those years of tears, toil and trouble.

In many cases, the value of any business for sale is derived from an applied “Multiplier” These multipliers are easily found in any on-line business post such as this one by Viking Mergers https://www.vikingmergers.com/valuations-by-industry/  and they range greatly based on the industry your business operates in.  For the purpose of this document, I will not go into the differences between industries, but rather take a more generalist view in order to make a point.  That point being as follows:

Your business is only going to be worth what somebody is prepared to pay for it and that number will depend on how high you can push the multiplier applied.

As you read this, you are probably commenting to yourself that the multiplier is a subjective number that the buyer or seller pulls out of thin air.  There is plenty of room for judgement, but by and large, a profitable, healthy, small business will often sell for between 2 and 6 times its’ annual earnings (before interest and taxes).  This can be a huge range and your success depends on where you will sit on this scale. So, for a small business that has built up £400k of earning per year, the sale price could differ between far less than £1m up to more than £2m.  That is a huge difference and it is vastly affected by the following seven issues:

 The seven factors to small business success

 

1.    Your products and services

Of course, the quality and uniqueness of the products and services you sell will have a great impact on the value of your business. However, it is even more important to consider the mix and range of products or services you supply.  It is an unwritten rule in all business that one specific product should not account for more than 20% of your annual sales.  The risk, when buying a business with just one main product is too great.  Instead, it is recommended to create an eco-system of products and services using an ascending transaction model. (ATM). This would indicate four or more products or services that increase in cost and value.  Something along these lines:

  1.  A free or low-cost product that you can give away without any reward being sought.  This can be used to seed the market for interested suspects that just want to know more about your industry.  An example of this is the Youtube content and search engine applications provided by Google. Other examples of free content / gifts would be white papers and research documentation.
  2. A very Low-cost entry product that any one of your clients can afford that gives them a good flavour of your service and quality. An example of this is the free tyre checking and 6-point winter checks and oil changes provided by Quick-fit Tyres.
  3. A main product or service that fits directly to your main area of business and where buyers pay full price for a quality product or service
  4. A next-step product or service for clients that are completely satisfied by your main product range and want to avail themselves of more.  Great examples of this is the Financial Services and Leasing or extended service plans provided by car dealerships or the executive box provided at your local football club. These products and services are often very high in margin and easy to sell.

None of the above products or services are designed to be sold in isolation.  They are designed to be an eco-system that feeds the whole client lifecycle and splits the income across several key products thus reducing risk.

2.    Your client base

For exactly the same reason your products and services need to be diversified, your client base needs the same treatment.  In general, it is not acceptable to have any one client that would supply more than 20% of your annual income.  It is better to create a larger client base through diversified products or industry niche deals.  The role of business systems and analytical reports is vital here.  You must be able to demonstrate that you hold a single point of truth about your clients’ details and that information must be held in a secure place, readily available to be accessed at any stage of your business client lifecycle.  Some people consider the client base to be the “goodwill” that makes up one of your company’s key assets.  This is quite true. However, even if your company has thousands of clients, if they are not held in a secure, easily accessible database and you do not have sufficient research into your client’s history, future requirements and habits, then your client base may become an area of weakness.

3.    Reliance on you and quality of your management team

Every business needs a strong and highly experienced management team in order to thrive.  However, inside your team, if you see any over-reliance on one or two individuals you will need to deal with this as an innate weakness.  Additionally, but far more importantly, reliance on your own decision making and your own input to key processes is also seen as a major weakness and one you will need to address before thinking about selling your business. You should attempt to document every business process your business runs.  Whether it is ordering supplies or paying invoices or fulfilling sales, you must be able to fully articulate the whole process and itemise who can do which tasks.  It is then quite easy to automate key tasks so that they run without your involvement. Obviously, every process can have exceptions that you must deal with, but it is vital that any business being put up for sale has a digitised business process ready-mapped-out and available for inspection. Any potential buyer will want to see how the business runs without your involvement and how many key staff are overly involved in any one process.

4.    How you manage your competition

Your position in the overall marketplace is key.  If you suffer from a diminishing or weak marketplace but see strong competition, this can be an issue that will drive down perceived value.  On the other hand, if your general marketplace is seen as on the up and your main competitors are perceived as weaker, then it is all good news.  “Managing” competition is a different issue though. There is actually no such thing as “the marketplace”.  Only “your marketplace”.  You can decide where and when you meet competitors. As you design your market offerings (your products and services) pay attention to where competition is strong and position your products differently.  The music charts is a great way to explain this approach.  In the 60’s and 70’s and to some extent the 80,s and 90’s as well, there was one main music chart.  The “BBC top 20” was known to almost everyone in the UK as the place where the most successful music products could be found.  At these times, if you are releasing new music to the World, this is the main marketplace where you would compete for sales.  In such an environment it was quite normal for the number 1 chart topper of the week to sell more copies than the rest of the top 10 put together.  The top 2 records might easily outsell the entire top 20.

Today, the music charts are arranged completely differently. Indeed, the main marketplace “the top 20” has become so marginalised, to be almost irrelevant. Music now has a “long tail” of genres and outputs, sold in many different places in different formats. Business today is the same. There is no such thing as the market. Just your market. The place you decide to put your products and services.  Differentiation can be made on grounds of price, performance, reliability, delivery or service.  Every single market in business now has niche markets that support multiple companies. You must decide what you do best and then control your market.  Your products and services must fit clearly into your marketplace.  An extra note on this subject about the importance of business systems in the role of delivery:  Even if your product is a “me-too” with no differentiating factors and even if your product is the same price as others, you can still lead your market by offering what is known as “Frictionless Delivery”.  A great example of frictionless delivery is Amazon prime.  You can still lead your competition if you use technology to ensure that dealing with your company is quicker and easier and doesn’t take one second longer than it needs to.

5.    Your financial ratios and KPI’s

This can be a specialist subject and I do not want to weaken the points here by being too generalist.  The ways in which you determine the health of your business will largely depend on the industry your business performs in.  KPI’s are Key Performance Indicators.  They are the metrics by which you decide how your company is performing.  KPI’s can be very wide-ranging from profit levels per transaction to annual churn or attrition results.  The 136 ways in which you monitor the health of your business can be taken from any of the KPI or ratios at the end of this document.  You may only need to monitor about 20 of these depending on what your business does and how you do it. These KPI’s will generally fall into one of four categories:

  1. ·     Sales
  2. ·     Financial
  3. ·     Projects
  4. ·     Marketing

These KPI’s and ratios can only be accurately managed and measured if you have reliable information to hand.  Collecting and collating this information could be a full-time task if your business is not properly automated.  You must spend time and money to decide how you are going to measure your firm’s health and then ensure that your business systems automatically collate this information as you trade.  Some of this information will come from your accounting platforms, some will come from your projects management and some from CRM systems.  It is your job as the business lead to create a holistic business system environment where your metrics are measured from day one.  It is far too late to try and collect historical information if you decide to sell. Putting the correct business systems in place from day one will allow you the luxury of measuring your progress and being able to talk real business when the time comes.  Pick a business management system that spans your whole business and brings information from all sources into easy to read reports, or, even better, graphical widgets that display real-time information.  In short, as a business owner, you want your own business health dashboard that displays accurate information.  Information of this sort is king, and it will enable you to make quick decisions as you continue to work on your business.

6.    The value and condition of your assets

As stated earlier in this paper, your business income will increase exponentially as you increase the value of your assets.  “Income follows assets”.  However, each asset you own must be maintained.  Out of date product brochures and price lists are not an asset.  If your business performs building tasks and your key machinery is badly maintained or of insufficient size to undertake your current contract commitments, this would be a large negative against the resale value of your business.  Another example of an asset is your relationships with banks.  If your overdraft facility (an asset) is about to expire and will not be renewed, this asset is valueless.  It would be a great idea for any small business to make a list of all of their assets in each class and monitor their health and availability.  Your business systems should be capable of listing your business assets and monitoring when and if they need to be updated, increased or maintained.  Starting an asset register from day one of your business start-up is a great idea and will take only limited time to set up.  Then, as your business grows, you can keep these systems up to date with accurate information.  Maintaining asset condition is a key part of any business owner’s responsibility.  A good quality asset register will enable you to automatically be notified as and when assets need your attention.

7.    Your Business systems

Your business systems are your money tree.  If properly planted at day one and properly watered and fed, these systems will enable you to consistently increase the value of your business.  Today it is entirely possible to digitise an entire business and to create a business process management system that enables you to work on your business, not just in it. The system helps the business organisations to achieve their goals. A business system is a combination of policies, personnel, equipment and computer facilities to co-ordinate the activities of your business.

Consider a business process that uses paper forms to collect information from clients.  You may need to post these forms and provide postage to get them back.  You will almost certainly want to read them after you receive them back and maybe input the key information on each form onto a digital record.  This transition from paper to digital is where errors always occur.  As a business owner it is your responsibility to make sure the accuracy of information you use is always protected and to reduce any factors of human error.  When you set up your business, take some time to decide how each process will work. Look for ways to use electronic forms that can be transferred for signature in seconds with 100% accuracy. Consider ways to give your clients, partners, suppliers and staff access to digital systems that look up and use the most recent, up to date and accurate information possible.  Avoid the use of printing and paper wherever possible and choose a business system that will span your entire business, not just parts of it.  Trying to integrate disparate systems is a pain and an unnecessary expense. Disparate systems destroy the notion of single point of truth and add nothing when you attempt to create cross department business processes to save time and money.

Modern business systems will enable you to consider every business process your company uses to run its day to day business.  It will allow you to consider and adapt the exact workflow for each person in your business and (most important) to ensure that when a person is in the process of working a task, the information they need (all of it) is available there and then.  A high-quality business system is absolutely key to the way you will bring people, processes and technology together.

A word finally on the role of technology (Digitisation) and business opportunity:  With luck your business will thrive. With luck you will always be in the perfect position to take advantage of every business opportunity that comes your way. However, Luck Is What Happens When Preparation Meets Opportunity" This quote, attributed to Roman philosopher Seneca is as old as business itself. In those days Seneca was speaking about preparing one’s self to receive opportunity.  Today, if your business does not have the ability to react quickly when opportunity comes your way, you may well be unlucky.  In the 21stCentury business preparation is called Digitisation.

Digitalisation is the process of converting material or information into a digital form. Many businesses are now transitioning online in a bid to streamline the management and day to day running of operations.  This is done through the selection of a holistic business system.

There are seven main benefits of digitizing a small business:

  1. 1.   Efficiency gains
  2. 2.   Ability to capture data and analyse it
  3. 3.   Reduction of Operational costs
  4. 4.   Reduces human error
  5. 5.   Data storage safety / Disaster planning / business continuity
  6. 6.   Ability to Disrupt and take advantage of new opportunities
  7. 7.   Increased re-sale value of the business

The importance of digital systems cannot be overstated when it comes to the valuation of your business.  Your business system is your showcase for the business.

 

Appendix one – KPI’s

 

Examples of sales key performance indicators:

Monthly sales growth

Monthly sales/new customers

Monthly new leads/prospects

Number of qualified leads

Resources spent on one non-paying client

Resources spent on one paying client

Customer lifetime value/customer profitability

Lead-to-sale conversion rate

Cost per lead by each channel

Cost of a new client by each channel

Hourly, daily, weekly, monthly, quarterly, and annual sales

Average conversion time

Lead-to-close rate: all channels

Customer turnover rate

Number of monthly sales demos

Customer engagement level

Number of abandoned shopping carts

Shopping cart abandonment rate

Number of monthly quotes/orders

Average purchase value

Average order value

Sales per representative

Sales by lead source

Inbound calls handled per representative

Outbound calls handled per representative

Average annual sales volume per customer

Average monthly sales volume per customer

Relative market share

Product/service usage every day

Value of returned goods and warranties

Asset turnover ratio (sales to assets)

Percentage of total sales from existing customers

Sales reps per $100k revenue

Monthly sales quota attainment

Sales quota attainment by sales representative

Number of client accounts per account manager

Days sales outstanding

 

Examples of financial key performance indicators:

Net profit margin

Operating cash flow (OCF)

Current ratio

Quick ratio / Acid test

Net profit margin

Working capital

Current accounts receivable

Current accounts payable

Accounts payable turnover

Accounts receivable turnover

Accounts payable process cost

Accounts receivable turnover

Budget variance

Budget creation cycle time

Line items in budget

Number of budget iterations

Payroll headcount ratio

Vendor expenses

Payment error rate

Internal audit cycle time

Finance error report

Debt to equity ratio

Return on equity

Cost of managing business

Resource utilization

Total cost of the finance function

 Examples of project management key performance indicators:

Planned value (PV)

Actual cost (AC)

Earned value (EV)

Cost variance (CV) (planned budget vs. actual budget)

Schedule variance (SV)

Schedule performance index (SPI)

Cost performance index (CPI)

Planned hours of work vs. actual situation

Overdue project tasks / crossed deadlines

% of overdue project tasks

Missed milestones

Percentage of projects completed on time

Percentage of cancelled projects

Percentage of projects on budget

Number of budget iterations

Percentage of tasks completed

Project resource utilization

Cost of managing processes

Return on investment (ROI)

 

Examples of marketing key performance indicators:

Monthly new leads/prospects

Qualified leads per month

Marketing qualified leads (MQL)

Sales-accepted leads (SAL)

Sales qualified leads (SQL)

Cost per lead generated

Net promoter score

Cost per conversion

Cost per conversion by channel

Average time of conversion

Retention rate

Attrition rate

Monthly website traffic

Traffic from organic search

Returning vs. new visitors

Visits per channel

Average time on page

Click-through rate on web pages

Pages per visit

Conversion rate for call-to-action content

Inbound links to website

Traffic from organic search

New leads from organic search

New leads from organic search

Number of unique keywords that drive traffic

Keywords in top 10 SERP

Rank increase of target keywords

Conversion rate per keyword

Page authority

Google PageRank

Volume of traffic from video content

Leads & conversions from paid advertising

Number of monthly PPC campaigns

Cost per acquisition (CPA) & cost per conversion (CPC)

Click-through rate on PPC advertising

Traffic from social media

Number of leads from social media

Number of conversions from social media

Conversion rate for social media leads

Managed audience size

Engagement rate

Social media mentions

Social media ROI

Content quality on blog

Number of monthly blog visits

Blog articles published this month

E-books published this month

Infographics published this month

ROI per content type

Web traffic from PR campaigns

Number of clippings

Calls from PR campaigns

Media impressions from PR campaigns

PR ROI

 

 

 

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