Profile Of The Perfect Business: Part 3

#3 in this series on my “List Of 16” — the 16 elements of what I would consider the “ideal” business. This article will make a LOT more sense if you’ve already Article #1 and Article #2 in the series, so if you haven’t already, please do that. Assuming you have, then great – let’s dig in.

Area #3:  Financial Elements

The group of elements we’re going to look at in this article relate to the financial drivers of your business.  A lot of entrepreneurs don’t think much about financing and capitalization when they start a business, only to hit a wall at some point because they never considered them. Like it or not, cash is the equivalent of oxygen to a business — run out and you die.  That’s why thinking about these financial-oriented keys gives you a huge advantage if you think about them in advance, rather than waiting for capital or financing to sneak up behind you and strangle you. Note:  I should remind you that I’m not saying that a good business has to have EVERY ONE of these 16 elements .. but the more of them that your business has (or that you can incorporate), the stronger, better and more profitable your business will be.  It’s that simple. So what are these 4 critical financial elements?  Let’s go through them. Element 1:  Market Size This element relates back to my analogy in a previous article about choosing the right pond to fish in.  As an entrepreneur or business owner, it’s virtually impossible for you to change the size of the market in which you decide to compete and focus on.  Therefore, it makes sense to think about the best market for you to focus your attention on.  If you don’t choose a market that offers the potential of growing your business to the size you want, it becomes almost impossible to ever fulfill your business vision. A big mistake that entrepreneurs make is choosing a market that is so small that it would require them to gain a disproportionate share of the market in order to build a truly great business.  I’m not saying this is impossible — but I do prefer to put the odds on my side, and therefore it makes sense to try and focus on a market that has a decent size to it. This of course will really depend on what it is that you do or offer to the market place.  However, it’s still important for you to think about how you can best create value in a market with what you do or offer .. as opposed to just assuming you have to do what everyone else does. In other words — try to figure out the highest value place to do what you do, instead of just accepting that you have to go into the obvious market.  Put another way – think about creatively creating your OWN market or category, which many of the most innovative companies in the world have done! A quick example:  A young boy named Wyland decided early on he wanted to paint marine life.  Specifically, whales.  Now the world probably didn’t need another whale painter, selling their $20 paintings on the side of the road.  So instead of doing what every other artist did that painted whales, Wyland thought differently.  He decided to create value that no one else was. He realized that many cities and towns had ugly buildings that didn’t add to the culture of the area.  He decided to start painting life-sized (or larger) murals of marine life on the sides (and tops) of major public buildings and landmarks.  Long story short, Wyland has become as far as I know the world’s most commercially successful painter (with revenues of over $100 MILLION dollars per year). If you’ve never heard of him, Google the name ‘Wyland‘ and learn more about him.  Just a guy with a passion who decided not to sell into the existing market, and to think bigger. For me, I want to think about the market I’m going into and how large it is.  If my goal is to build a company that has alot of the other characteristics in my List of 16 (such as being sellable and scalable), then that market needs to be large enough.  I typically am looking for a market that is at least $1-2 billion dollars in revenue per year. Element 2:  Low/Limited Capital Requirements  This one’s pretty simple – is the business model you’re looking at going to require a lot of capital to get started and keep running?  The more capital intensive your business is, the higher the level of risk for you. Obviously there are a lot of business that require significant capital investment and expenditures — but all things being equal, I’d rather invest in a business that doesn’t eat a lot of cash to survive or get started if I can avoid it. The more cash your venture needs to get started and to stay alive, the more time you’ll need to spend focused on trying to raise and cycle your cash in the business, as opposed to spending time focused on creating value for your client (which is how you ultimately make money).  I’ve seen a lot of entrepreneurs spend almost all of their time trying to figure out how to keep more investment capital flowing in that they all but neglect the actual business itself. Related to this is another thing to consider – when you’re thinking about your return on investment (ROI) in a business, you have to consider not only the actual cash that you’ve invested but also the total amount of money and credit you’ve tied up as well.  Alot of entrepreneurs think of debt capital or loans as someone else’s money .. but it’s gotta be paid back so it has to be factored into your calculations. Capital restraints often become a bottleneck in a successful business, because the business model requires more capital in order to generate more sales.  This can be dangerous, and explains how even great business ideas can go broke when the money side of things isn’t handled properly.  For example, your new product is a hit and out of nowhere, you suddenly get an order for 100,000 units — what do you do? If you can’t finance the cost of producing that order in advance, you can’t take the order.  The business models I love the most are the ones that can grow and scale quickly, and where a lot of the growth can be financed out of the company’s cash flow.  If you have to borrow money from somewhere every time you bring a new client on or make a sale, that’s a danger sign. Element 3:  Low Credit / Financial Risk Here’s another element that most entrepreneurs never really consider, yet can absolutely crush a business out of nowhere. It’s no surprise that the entire credit system around the world has undergone a massive amount of change and contraction in the past 5 years.  Without question, it has become more difficult to get financing, credit and debt for almost any business owner.  This is especially true for small business owners, and those who are just starting out. But here’s the important thing to understand — this doesn’t just mean that it’s harder to get bank loans or working capital lines of credit (which it has). This increased level of challenge has also impacted every element of business financing, and a major one is the world of credit cards — and in particular, your ability to accept credit cards as a small business. I’ve literally watched friends of mine go out of business because of this little-known yet fatally dangerous risk that most entrepreneurs don’t even realize they’re taking. This has been something that has painfully affected some of our businesses in the past few years, and it is not getting any better. Depending on the type of business you are in, credit cards may simply be a convenient option for your clients (if you deal with a lot of business to business).  But if you deal with individuals and consumers, chances are credit and debit cards are a major method of payment for your clients. The problem is that there’s a HUGE gap for services that allow business to accept credit cards.  Yes, there are new innovative models like Square and Payd, and a lot of major online services like PayPal and Amazon are out there.  If you’re looking to accept a couple thousand dollars per month in credit cards, then these may work for you. But if you’re trying to run a 6 or 7 figure business and relying heavily on credit card acceptance, there is a LOT more risk doing so than you probably imagine.  Aside from how painful it is to actually get a credit card merchant account set up to begin with, they can choose to shut your account off for ANY reason they want (or no reason at all). If they do that, not only can you not accept credit cards any more, they also have the right to HOLD any of the funds you have put through for as long as they like.  Ask me how I know this. Now, you have to still provide whatever product or service your customer has paid for, yet you don’t get access to the funds they’ve paid for it (because the credit card company is holding it). And that’s for any regular type of business accepting credit cards. If you accept credit cards for payment online (such as for online training, coaching or selling other products or services through the Internet) your risk factor just multiplied by about 10 times. Simply put, the credit card companies HATE online companies and merchants.  They’ll do everything they can NOT to deal with you if possible.  And if you do deal with you, you’ll never be able to trust them to deal with you fairly or with integrity. Ok, you say – I’ll just set up multiple credit card merchant accounts to spread my risk.  If one gets shut down, I’ll just use another. Great idea.  Only, it’s against their terms of service.  So if you do that, you’re giving them yet another reason to shut you down and put you out of business. As you can probably tell this is a hot button of mine that’s created a LOT of frustration and wasted time inside our businesses. Back to the point: you need to think carefully about where in your business you are (blindly) relying on financial services and not seeing the risks to your cash flow and your very business.  And the more you relying on any kind of bank or financial institution, the higher your risk. Element 4:  High Margin Let me summarize this element with this advice:  never sell commodities.  Period. Never sell things that your client can go across the street and buy from someone else cheaper. Don’t get into (or stay in) businesses that force you to compete on price.  There is literally only ONE company in the world that has been able to make competing on price a winning strategy, and that’s why you already know who I’m talking about. I look for businesses with HIGH margins, which means there is a solid profit margin on all the sales made. What many of those businesses often have in common include ..

• Authority / Leader Position – When you’re recognized as the best in the market, you typically are able to charge higher prices as a result.
• Unique Offering / Positioning – Whatever the business sells is purposely built and designed so that it can’t be compared directly against any other product or service (ie: unique services bundled around products).
• An Outrageous Guarantee – By offering a crazy guarantee that literally eliminates the risk of a new prospect buying what you offer, you massively decrease the initial buying resistance and don’t have to resort to cheap pricing to ‘buy’ new customers.

If you’re in a low margin business, the problem with that is that you have very little flexibility in your market.  You can’t afford to increase spending to acquire clients, you can’t offer incentives or other pricing inducements, and you can’t invest in better people and technology.  Your only growth model is to increase volume, which is an exhausting model when it’s the only option you’ve got. So there you have it. I jabbered on too long on Element 3 so my apologies for that — but this wraps up the 4 Financial Elements you need to think about in your business. You’ve now seen 12 of the 16 elements, and in the next article I’ll wrap up the List of 16 with the final 4 elements (which happen to be my favorite) — Marketing Elements. I hope this series is sparking some thoughts and maybe even some “ahas” in your brain. As always if you have any questions or comments, please post them below!    ]]>