In building a business, there are Four Cornerstones that represent the foundation of a successful and sustainable business.
To build the business that is right for you, the following elements must be in place:
Strategy is the clear plan of action to achieve your objectives. We define strategy as the alignment of outputs/objectives, capabilities and resources and the opportunities and challenges the environment provides. Your Business Plan is the articulation of your strategy. In it, you describe your Model and Methods to build the business. A model is a Theory in Use. It is the conceptualization of how you will build a viable business, assure return on equity and create shareholder value. The methods are what you will do to ensure the success of your business.
Structure is the system of roles, role relationships and policies that define accountability and authority. There are three questions every entrepreneur has to answer: What role do you want to play?; How big do you want to become?; and based upon the answer to these questions, What is the Required Organization in terms of capabilities and resources to address the first two questions.
Systems and Processes provide the framework for running the business. “A system is defined as a set of detailed methods, procedures and routines created to carry out a specific activity, perform a duty or solve a problem.” (Source: BusinessDictionary.com}. Successful businesses are built upon replicable processes. A process is a pattern or methodology that is distinguishable, repeatable and transferable.
Financial Management is critical to the ongoing health and vitality of a business. Financial statements are the vital life signs that tell you how the business is doing. There are two basic models for financial statements: 1. Historical & 2. Pro-forma. Historical statements measure what happened and where you’ve been. Pro-forma statements are plans for the future, outlining where you want to go and what you need to do to get there.
With regard to financial projections, there are three fundamental axioms:
- The higher the quality of the assumptions, the more valid the forecast.
- The more detailed the forecast, the better its analytical value.
- The greater the grounding in historical reality, the more reliable the forecast.
As entrepreneurs, you use the same financial statements for both historical and pro-forma analysis. The financial statements allow you to assess both the reasonableness of your projections and actual performance vis-à-vis your expectations.
This assessment requires you to consider all of the following concepts:
Profitability
A business must earn more than it spends or it won’t be around long enough to see its vision materialize.
Liquidity
A business must be able to pay its obligations on time or risk losing the resources needed to accomplish its mission.
Finance-ability
Money is one resource every business needs. Therefore, you must satisfy the requirements of lenders, or risk their withdrawing that all-important resource.
Investment in operational assets
You must plan for and make available those assets that allow you to operate a business such as accounts receivable, business equipment such as furniture, computers, printers and other operational assets that require an investment.
Knowing what you need to operate the business allows you to segregate and, perhaps, withdraw non-operational assets to accumulate personal wealth for yourself.
Value creation
When you move from being an income producer to a business builder, you gradually transfer the income-generating responsibilities from yourself to the business. This is how you create value in the business independent of you, personally.
The Five Financial Levers
Your business plan aligns your strategy with regard to controlling five financial levers:
- Product & Service Mix
- Size of Sale
- Number of Sales
- Seasonality
- Cyclicality
The key is to align the five financial levers with your marketing, sales and service initiatives.
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