Chapter One: Introduction
Managing Your Nest Eggs
Trade is the foundation of business and money is the medium of trade. Money permits us to exchange goods and services with each other without restriction by giving “value” a life of its own. It permits a barber to trade with a bald lawyer by giving the barber something of value to offer the lawyer, other than a haircut. Money levels the playing field, permitting anyone with something of value to join in this game we call business.
Business and society are interconnected to such a degree that without money our society would cease to exist as we know it. Why then, is it surrounded by such mystery and fear? Why do we have sayings such as “money is the root of all evil,” “the best things in life are free,” or “money can't buy happiness?”
Is money really the cause of our social problems? Of course not. By itself, money is neither good nor evil. It is the misuse or misunderstanding of money that gives it a bad reputation. Certainly there is a connection between money and power. Money leverages your ability to take action by letting you share in the knowledge, effort and production of others. Whether this is a good thing or a bad thing, however, depends entirely on those involved. Power is only bad in the hands of the wrong person.
- Money is the fuel that powers your business.
- It keeps your doors open by paying for your facility.
- It helps leverage your work through employees, consultants and so forth.
- It buys tools and resources for developing your products.
- It helps promote and sell those products to your customers.
In short, money allows you to act more swiftly, and on a larger scale than you could without it. From this perspective, money can be thought of as “stored energy.” It is “potential” waiting to be released by your ingenuity. Whether that energy is used to help or hinder has nothing to do with money itself and everything to do with how you use it.
The Connection Between Added Value and Profit
Every good transaction results in both parties ending up with more than they started. What makes this seemingly impossible equation work is the often-misunderstood relationship between “added value” and “profit.”
“Added value” is anything your business adds to your products or services to make them worth more to your customers than the price they pay. “Profit” is the financial result of the “added value” generated by your business. It is the amount of money your customer pays you, over and above your costs. Once the transaction has been completed, the “added value” belongs to your customer and the “profit” belongs to you. Both of you have come out ahead.
Within reason, the more value you are able to add, the more your customers will be willing to pay. For example, when you go out for dinner at your favourite restaurant, you willingly pay for more than your share of the business expenses. You consciously permit the owner to make a profit from you. Why are you willing to do this? Why do you freely give your money away? Because the “added value” you receive when you are there makes it worth your while. The restaurant's pleasant atmosphere adds value, the friendly attitude of the servers adds value, the look, smell, texture and taste of the food adds value, even the convenience of not having to cook adds value. All of these details, and more, make the experience of eating at your favourite restaurant worth more to you than the price you pay for it, and in that regard, both you and the business come out ahead.
Profit isn't just a nice idea. It's essential. Profit is, and should be, of vital importance to every business. Without profit there is no growth and without growth there is no future. It doesn't matter how altruistic you are; without profit your business will eventually die. In order to remain competitive your business must constantly evolve, a state that can only be maintained over the long-term by reinvesting profits. Certainly an infusion of external capital can support growth for the short term, but sooner or later your business needs to turn a profit.
As obvious as all of this may seem, the accountability for managing their finances is one of the first things many business owners pass on to someone else. They hire someone to manage their finances and then they forget about them. But hiring a bookkeeper or an accountant does not mean you can ignore your finances. Certainly some of the work can (and should) be delegated, but the accountability for the financial success of your business must never be given away completely. At the very least, you must stay informed about your finances.
Peter Legge, CEO of Canada Wide Communications, Western Canada's largest publishing company, once stated that one of the keys to his success was keeping on top of his numbers on a daily basis. You may or may not find it necessary to be as diligent as Mr. Legge, but the message is clear. Financial Management is simply too important an activity to abdicate.