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Here the tips from Norm Brodsky he is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, will be published by Portfolio this month.
Norm Brodsky believes that these are the 10 most important lessons This is 29 years of experience:
1. Numbers run a business. If you don't know how to read them, you are flying blind.
You do have to know enough accounting, however, to figure out which numbers are most important in your particular business, and then you should develop the habit of watching them like a hawk.
2. A sale isn't a sale until you collect.
There's a common assumption that when somebody buys something from you, it's like money in the bank. Sooner or later, you are going to get paid. That's not always true, of course, and just how much sooner or later the payment arrives can make a big difference. But most people don't think about that when they first go into business. The term bad debt doesn't enter their vocabulary until they suddenly find themselves with a receivable they can't collect. By the same token, the concept of collection time doesn't become meaningful until they discover they don't have enough cash to pay their bills despite having made a lot of sales.
3. When your short-term liabilities exceed your short-term assets, you are bankrupt.
The vast majority of people in small business, I suspect, have no idea what a balance sheet is or how it differs from an income statement (also known as a P&L). The balance sheet certainly doesn't figure into their decision making. It didn't figure into mine until I wound up in bankruptcy court with my first company, Perfect Courier. There I learned that a company is bankrupt -- at least technically -- when its current liabilities (that is, the ones that have to be paid within the next 12 months) are greater than its current assets (the ones that will turn into cash within the next 12 months). That information comes straight off the balance sheet. I could have saved myself a lot of grief and pain if I had gotten into the habit of looking at it on a regular basis and keeping track of the most important ratio derived from it -- the current ratio, which measures a company's ability to meet its short-term debt obligations. You calculate it by dividing your current assets by your current liabilities. If the ratio is 1.25 or higher, you are in fairly good shape. If it's less than 1.00, you could be headed for trouble. Yes, you may be able to juggle your payables and other short-term debts for a while, but you should move quickly to restore your liquidity. Otherwise, you are taking a risk of one day finding yourself with no cash to pay your bills -- a potentially fatal condition.
4. Forget about shortcuts. Run a business as if it's forever.
Building a business is a lot of hard work. Everything that a great company needs takes a long time to develop -- a diversified base of loyal customers, experienced managers, a vibrant culture, efficient systems throughout the business, a sales force that works as a team, a great reputation in the industry -- everything. Of course, we all look for shortcuts. That's only natural, especially when you are on your first venture. You constantly search for easier ways to make your company grow faster, and sometimes you find them. Unfortunately, they almost always come back to haunt you.
5. Cash is hard to get and easy to spend. Make it before you spend it.
Most people don't understand the value of cash when they go into business. If they did, they wouldn't waste it by purchasing brand-new furniture, paying designers to produce logos, ordering fancy business cards and stationery, or spending money on dozens of other things that they don't really need and that deplete their start-up capital without getting the business any closer to viability -- that is, the point at which the company can sustain itself on its internally generated cash flow. If the cash runs out before you get there, the ball game's over. The business dies.
But it's not just start-up entrepreneurs who waste cash. The corporate landscape is littered with the corpses of companies whose leaders thought the good times would last forever and spent money they hadn't yet made on luxuries they didn't need. I made that mistake myself once and paid the consequences. One of the lessons I learned was: Make the money first. If you are smart, you will put some of it aside for a rainy day. Whatever is left over, you can spend as you please. You can pay big bonuses to your employees. You can make big donations to charity. You can buy a corporate jet. You can run for President. Whatever. But first you must earn it.
6. You have no friends in business, only associates.
Some habits are more difficult to maintain than others, and I constantly struggle with a really important one: Don't do business with friends. I have broken this rule several times and always lived to regret it. In the early days, I didn't hesitate to buy products or services from friends. I couldn't imagine why I shouldn't help someone with whom I had a close, personal relationship. But friends, I learned, inevitably make assumptions that hinder your ability to do what's best for the business. Even though I would tell them up front that they would be treated like any other vendor, they still expected me to make exceptions for them. When I wouldn't, the relationship went sour, and I lost a friend as well as a supplier.
It's even more important to understand that you can't be friends with your employees. I'm not saying you shouldn't treat them with respect and affection. You can laugh with them, cry with them, be happy and sad with them, but neither you nor they should ever forget that it's a business relationship. I had seven employees when I started my first business and became social friends with six of them. All six of those friendships became a problem for the business. And the seventh person? He now runs CitiStorage.
7. Don't focus on the top line. Gross margin is the most important number on the income statement.
In the early days of a business, everybody obsesses about sales. We want to see them increasing every month, every day, and every hour -- the faster, the better. I know that's how I felt. The first thing I would check each morning was the report of the previous day's sales. My investors were the same way. Not once did they ask about the company's profitability. They cared only about sales, and most of them were accountants! But focusing exclusively on sales is very dangerous, especially when you are starting a business with a limited amount of capital. Why? Because sales do not necessarily result in cash flow, and cash is what you need to survive. You run out of cash, you go out of business. End of story.
Instead, you should be focusing on your gross margin -- that is, the percentage of profit you make after covering the direct cost of whatever it is that you are selling. In my opinion, gross margin is one of the two or three most important numbers in any business and by far the most important one in a new business. You have to pay all your expenses out of gross profit -- your salary, your rent, the phone bill, gas, electricity, photocopying, and so on. If your gross margin is 10 percent, you need $10 in sales for every $1 of overhead just to break even. If your gross margin is 40 percent, you need only $2.50 in sales for every $1 of overhead. So you will have more to show for the same amount of work with a high gross margin than with a low one. And if you are just starting out and have limited capital, that could be the difference between failure and success.
8. Identify your true competitors, and treat them with respect.
Here's something else I didn't know starting out: Not everyone who does what you do is your competitor. Rather, you compete against only those suppliers that offer the same services, are more or less equally reliable, and charge prices similar to yours. That doesn't mean you won't meet other types in the marketplace. In every business I started, there were people around who claimed to provide a service like ours at a fraction of the price. Invariably, they had tiny operations with little, if any, overhead. If the owner-operator got sick, or if a truck broke down, the customer would be stuck. Customers willing to put up with that risk were not good candidates for us. Conversely, customers that demanded reliability -- and were willing to pay for it -- were not good candidates for the mom-and-pop operations.
As for our real competitors, I came to see that they were extremely important to our long-term success. They played a critical role in shaping our reputation in the industry -- which was our most valuable asset -- if only because their opinion carried more weight than that of any other group. When they spoke well of us, everybody listened. So I made a habit of treating them with the respect I hoped they would show us, and I insisted that our salespeople do the same.
9. Culture drives a company. In the long run, the boss's most important job is to define and enforce it.
When I started my first business, it never crossed my mind that I was creating a culture as well as a company. I didn't even realize that companies had cultures, let alone that the cultures might actually affect the businesses' performance. It was only 15 years later -- when my wife, Elaine, joined CitiStorage -- that I began to think seriously about the matter. She introduced programs that fundamentally changed our culture, making it much more employee friendly, with business games, contests, educational programs, new employee benefits, and group activities of various sorts. I couldn't help noticing how much better the company functioned as a result.
Along the way, it dawned on me that setting the culture was ultimately the CEO's responsibility. Although Elaine was doing the heavy lifting, she couldn't have succeeded without my support. Not only did I have to give her the resources she needed, but I also had to modify my behavior to fit in with the new regime and make sure that everyone else went along. Among other things, I had to learn how to hold my tongue and respect the chain of command. That was probably the most difficult new habit I have ever had to develop -- and certainly one of the most important.
10. The life plan has to come before the business plan.
It took a major whack on the head for me to get my priorities straight. For my first eight years as an entrepreneur, I always put my business goals first. As a result, I missed my first daughter's childhood. I spent too little time with my wife and friends. I didn't do any of the reading or traveling or gardening that I enjoy. My life was one full-bore, supercharged, nonstop, 24/7 rush to create a high-growth business. You know how that turned out.
Source Inc Magazine ( I enforce you toy buy it)
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