Wednesday, 1 April 2015

Billy's Forty-fifth Law: The greatest founders value Enterprise over Entrepreneur

Joseph collected all the food produced in those seven years of abundance in Egypt and stored it in the cities. In each city he put the food grown in the fields surrounding it.          
The seven years of abundance in Egypt came to an end, and the seven years of famine began, just as Joseph had said. There was famine in all the other lands, but in the whole land of Egypt there was food.
Genesis 41
This law, comes back to repeatedly smack me in the head. In my years of being in the ‘business of business’ I have seen many businesses come and go.  Some were not viable to begin with.  Some ran their ‘natural course’ and faded into the sunset.  Some were perfectly good businesses which failed due the greed of the owners.
Many business owners, especially of mature businesses, treat their businesses as ‘cash cows’ …using the business as a personal ATM.  When times are good, they take money out of the business without any problem what so ever.  The problem is that once you start taking money out of a business at a certain rate, you get used to it and it is difficult to go back. 
I have some tough love for all of you entrepreneurs so pay attention, it just might save your business.
Business is cyclic:  This is probably the single most important concept in business and in economics.  Things go up, and they go down.  Sometimes they go up and down due to our own efforts.  Sometimes they go up and down and we are not in control.  We are in a business-to-business type of business.  When a client decides to retire, as several seemed to do in the same year, our business was off substantially.  We had no indication this would happen, but none the less, it did.  Although you could argue that we should have been looking for new customers (and in hindsight we should have) the reality was that we were at capacity and had no room for additional clientele. 
Some businesses are resource / commodity based.  It amazes me that these businesses do not know that commodity prices, such as oil, copper, pork etc., go up and down.  The Oil & Gas business is notorious for making huge money, and paying huge salaries when times are good; then cutting like mad when prices drop.  To be fair, when the industry is booming, there is upward pressure on wages, creating wage inflation in the industry.  Recognise the business cycle and plan accordingly.
Sometimes, we are masters of our own demise.  I had a client who had not re-calculated some of the costs for his clients.  His business was profitable, for a time, but when things turned down, and we did some investigation, we determined that he was actually subsidising some of his clients. Turning this around has taken more time than we had hoped but the legacy clientele is still less profitable than the new clients he is bringing into the business.  When times were good, he ‘took his eyes off of the ball.’  This created problems when we later discovered that his largest client was carrying the business and when that customer reduced his orders, the company began to lose money.
I recommend that entrepreneurs do three things:
·       Take a modest wage out of your business.  Take the opportunity to build your retained earnings and your cash reserves to allow you to ride through the inevitable tough times.
·       When you have a good year, pay yourself a bonus.  This is your present to yourself for a job well done.  You should never assume that this is part of your regular earnings, nor should you adjust your lifestyle.  Live off your wage and use bonuses to treat yourself, and build your personal wealth.
·       As an entrepreneur, you are self-reliant…especially when it comes to retirement. You must build wealth either inside or outside of the enterprise.  Do not assume that you can sell your business as a business.  You may need to use the wealth built in the business (at a lower tax rate if you are incorporated) and draw it down later.
Always remember that businesses, industries and economies are cyclic.  The companies with strong balance sheets, created with solid retained earnings, have the foundation that enable them to withstand the slow times.

No comments:

Post a Comment