It was no surprise that over-valuations ran rampant, but what I was really glad to see was the care that the sharks took in determining the percent of ownership they would accept.  It was really quite simple.  If the shark thought the concept was profitable enough and the entrepreneur had a good grasp of the critical variables that need to be controlled for the business to succeed, then the shark would accept a 50% ownership share.  If the entrepreneur did not understand their critical variables, the sharks required at least 51% ownership before they would invest.  Obviously, they wanted the controlling interest to protect their investment from the entrepreneur they were partnering with.

In the worst cases, the entrepreneur was not only lacking insight into how their own business would function, but they vigorously defended their ignorance.  In these cases, there was no middle ground for the sharks.  They either wanted nothing to do with the business, or, if the concept had enough value, they would offer to buy 100%, take it or leave it.

So, if you went in front of the shark tank today, with your current business, how would you fare?  Would the sharks be comfortable investing in your business with you calling all the shots?

Maybe they would, maybe not.  If not, it’s because you’re missing some key components that are critical to your level of profitability.  If it’s not good enough for the sharks, don’t let it be good enough for you.

Use these simple steps to gain control of the profits in your business:

1. Identify the critical variables in your business
2. Implement a system to measure those variables
3. Track those measurements
4. Use that information in your decision making

4) I Know Everything I Need by Looking at my Bank Account Balance

It’s amazing how many times I’ve heard this!  Sure, your bank account balance is important, but you can’t manage your business effectively without additional information.  If your balance is getting higher, does that mean you’re more profitable?  Maybe it just means more of your bills are going unpaid, or you’re collecting on more of your past due receivables.  Maybe it’s just a reflection of better payment terms extended from some of your bigger suppliers, or maybe a vendor misplaced a large check you wrote, and you’ll be in deep trouble when they find it and cash it.  A declining bank balance could mean declining sales, but could happen just as easily during strong growth, when you’re spending more on materials to meet increasing demand.  The bottom line is that the bank balance by itself means very little.  To make effective decisions, it must be considered in conjunction with the changes shown in your other assets, liabilities, sales, and projected cash flows at a minimum.  Spend some time getting to know your balance sheet – it’s got your bank balance on it, as well as information on all of your other assets and liabilities.  Once you get comfortable with it, you’ll find it’s twenty times more helpful than your bank balance alone.

5) Watch All My Expenses, I Don’t Need a Budget

When it comes to budgeting, there are only two types of business executives.  One type uses self-adjusting budgets and regular budget variance reports to manage profits at a peak level, and the other type doesn’t understand exactly what this type of budgeting is or what it can do for your bottom line.  Which type are you?

6)      I Can Fix Anything By Increasing My Sales

This is the BIG ONE.  It incorrectly assumes that all sales are profitable, and that all financial problems are related to income.  Think about this for a minute: In the US, most people that win a lottery are broke before they win, and they’re even more broke after they win!  If being broke was an income problem, then the additional income provided by winning the lottery would fix the problem, but it never does.

Don’t get me wrong, increasing sales is usually a great thing.  But if your sales are driving revenue to increase by 20% per year, and your costs are increasing by 40% per year, you’re on the fast track to financial disaster.  Increasing sales will not help production issues, quality control problems, logistical errors, customer satisfaction issues, or a host of other problems, and in most cases, increasing your sales will make these problems worse.

Don’t put the cart before the horse.  As long as you have a reasonable level of sales (maybe not enough to reach your current break-even point, but enough to reach a reasonable break-even point) you need to work on your profitability first.   It’s a lot easier, and less expensive, to do this now and increase sales later than the other way around.

Link to part 1 of this post

If you’re in business for yourself, whether you’re planning your grand opening or a 25 year veteran, I wanted to take a few moments to discuss your expectations.  Science has shown that our expectations can have a significant effect on the outcome of an experiment, which is why scientists prefer double blind testing.  That’s every bit as true for the entrepreneur as well.

Many people are just looking for an income, and the concept of business seems so simple – buy low, sell high.  The purpose of a business is to generate a profit, and most people, especially business owners, think they understand that.  But there are a few assumptions, or traps, that get in the way of far too many business owners.  They really seem like common sense, which makes it so easy to fall prey to them.  Don’t let them destroy your profits.

1) I’m the owner, I don’t need a salary.

This cuts right to the core of what it really means to own a profitable business.  The successful business owner deserves to get paid for investing in the business, taking the business risks and being the creative force behind the business, whether she or he actually works in the business or not.  In addition, all employees of a business deserve to get paid a fair wage for the work they produce.  You would not expect an employee to continue working for your business if you stopped paying them, would you?  If you’re a business owner and you work for your business, you should get paid just like all of your other employees.  Conversely, if you do get paid a fair salary, and there are no profits at the end of the year, you don’t own a profitable business.   You might own a good job, but that’s not the same thing as a profitable business.  It is far easier to sell a business than a job when the time comes, and often selling “the job you own” is downright impossible.

2) Gross Profit is still profit.

I prefer the term “Gross Margin” over “Gross Profit” because I’ve seen too many business owners confuse gross profits and net profits.  “Gross Margin” is your revenue minus your direct expenses.  “Net Profit”, or simply “Profit”, is your revenue minus all of your expenses.  If you’ve paid your direct expenses, but you have not paid your overhead, it’s not profit!  I understand that it’s a whole lot easier to tell a business analyst that you’re making a 30% profit instead of showing a 2% loss, but you’re not fooling anyone but yourself.  If you haven’t factored in ALL of your expenses, it might be gross profit, but it is not profit.  You cannot fix a problem until you acknowledge there is a problem.

3) Cash Flow just means Profit, right?

Wrong.  Profit means your total expenses were less than your total income, but remember that profit is not always in cash.  Profit is sometimes visible as an increase in your bank account balance, but it can also be seen in other areas, such as an increase in your accounts receivable, an increase in your long term assets, or a decrease in your debts.  Cash Flow is all about when the money comes in, and when it goes out.  They are two separate things.  A profitable business that does not have the cash it needs to pay its bills can go just as bankrupt as a company with steady losses.  That’s why it is so important to manage both your profits and your cash flows.

Click to go to part 2 of this post

The Professional Hobbyist: This person started out doing something they love as a hobby, and then they opened a business so they could get paid to do it.  They take great pride in their work.  You can recognize this person because they have all the newest and best tools and materials, and they love to show you.  They have invested quite a bit of money into their operation, and anytime the business has extra cash that could be profit, they use it to buy even newer and better stuff, even though they’re not using half the equipment they already own.  After all, they think that the capacity to do even more and even better work will eventually lead to bigger and better profits.  However, no matter how long they have been at it, their business has never shown a profit.

The Professional Hobbyist will tell me “But Dan, look at all this great, expensive equipment I own!”  Yeah, that’s great.  If the purpose of your business is to own a bunch of equipment that hardly gets used and declines in value year after year, then you’re quite a success.  If the purpose of your business is to make a profit, and it should be, then something needs to change.

The Job Owner: The Job Owner used to work for somebody else, and is now self-employed.  They usually keep costs down, have few employees, and buy equipment only when it is really needed.  Unlike the Professional Hobbyist, anytime the business has extra cash, the Job Owner takes it home, usually in the form of a paycheck.  Successful Job Owners make a fair wage for the type of work they do, but rarely, if ever, make much more than that.  The Job Owner and the business are inseparable.  If the Job Owner left the company, even for a month or two, there is no way for the business to survive.  In addition, if the Job Owner hired somebody else to do his or her work, there would be no money left for the Job Owner to take home.  The major difference between the successful Job Owner and an employee is the Job Owner takes on all the risk and all the stress with no additional compensation, and when things get tight, the Job Owner stops paying himself, while most employees would not tolerate being treated like that.

The Businessman: The businessman (male or female) understands that business is all about producing profit.  The business simply cannot survive without making a profit.  They also understand that the business owner gets paid for taking the risks, investing in the business, and being the creative force behind the business.  The business has work that needs to be done, and therefore, the business must hire people and pay them a fair wage to do that work.  If the business owner works as an employee of the business, as is the case in most small businesses and many larger ones, the businessman deserves to get paid a fair wage for the work he or she produces.  This is a necessary business expense that needs to be paid to somebody, and has nothing to do with the profits the businessman earns for owning the business.

Now, I’m not talking about how money is taken out of the business.  For example, assume that the businessman makes $75,000 per year, which is a fair wage for a certain type of work, and the business produces a $50,000 profit each year.  If the business is incorporated, the businessman could choose to take home the $75,000 through payroll, and the $50,000 through profit distributions, or she could choose to take the entire $125,000 via payroll.  Either way, the owner makes $125,000 per year, but the business only makes $50,000.  If the owner makes a fair salary, with no profits above that, then the owner is not a successful businessman at all – they are just a Job Owner, and they’re taking all the risks that go along with owning a business without being paid any more than an employee with zero risks.

So, what type of business owner are you?  Whichever type you currently fall into, the first and most important step to becoming a successful Businessman is getting crystal clear on your expectations.  Decide exactly what you want out of your business, decide that you deserve it, and fully expect it to happen.  Only then will you be in a position to make it happen.

After looking at dozens of businesses and talking with their owners, I saw a particular “economic” situation far too frequently. These businesses were struggling with reduced profits, or in some cases serious losses, due in part to a steep decline in sales. In every case, the owners told me this decline in sales was due to the economy. That’s where they’re missing the boat. What’s more, it’s the unspoken implications of this statement that make it so dangerous.

Let me ask you this. If your business has, say, a 3% market share in your region, and you maintain that same market share while the overall economy declines, then you would expect your business to decline, right? If the economy in your region, and in your industry, declined by 22%, and you maintained the same 3% market share, then I would expect your business to decline by 22%. And if the business in this example did decline by 22%, then it’s fair to say that is due to the economy. It’s fair, but still dangerous. More on that in a minute.

So what if your business, in this example, declined by 48%? It’s very simple. If the sector of the economy that your business serves declined by 22%, and your sales declined by 48%, then you did not maintain your market share. That means that more consumers are choosing to buy from your competitors instead of buying from you. You lost more business than the overall economic decline, while at least some of your competitors lost less. As the economy got worse, they offset all, or at least some of their losses by increasing their market share, and they accomplished that by taking it away from you.

That’s why blaming the economy is so dangerous. “It’s the economy” means that this situation is not your fault, and implies that there is nothing you can do about it. It’s a great excuse, but oftentimes hides the real problem – your declining market share. Your 48% lost sales breaks down to 22% due to the shrinking economy, and 26% due to lost market share. Lost market share is always a competition problem, not an “economy” problem. And you can ALWAYS do something about a competition problem.

So what can you do about it?

• First of all, stick to the facts. If you don’t know what your market share is, and you don’t have any facts about the economy in your industry for your business’ region, then admit that you have no clue regarding how much the recession is actually affecting your business.

• Recognize that some things, like the economy, are not under your control, and stop worrying about them.

• Recognize all of the things in your business that are within your control. Take some time out, and brainstorm a list. Write them down. What is under your control, or at least subject to your influence? Your attitude. Your work ethic. Your marketing message. Your position in the marketplace. Your branding. Your market share. Your product line. Your diversity. (You can take it from here, right?)

• Take an honest look at why you’re losing market share, and fix it. If you can’t be competitive, in any economy, then you won’t be in business for long.

• Being competitive doesn’t mean simply lowering prices, although that may be a part of your strategy. Don’t forget about lowering costs, renegotiating or partnering with suppliers, adding value, diversifying, etc. You still need to make a profit.

• Recognize that there is always opportunity in the marketplace. It might not be the same opportunity you’re used to serving, but its still opportunity. There were more millionaires created during the great depression in the US than during any other 12 year period in our history. Your job is to be open to it.