Actually Making Money

Actually Getting Big Things Done is a series of guests posts on how to make things happen from those who know how to… well… actually get big things done. Today’s post comes from Andrew Carroll. Andrew, who is also known as CPA Andrew, has this terrible habit of being one of the most sensible people I know who talks about the seemingly impossible topic of business (which as you will see in a moment, he swears is simple). I learn a ton every time he starts talking and thankfully (as you’ll also see), the man likes to talk…

Business is Simple.

It is also brutal. I get to see lots of great businesses and help them with their problems. I also have the unfortunate job of sometimes having to tell people that their dream either won’t fly, or is dead. In fact, you would be surprised how many people are working for themselves, thinking they are living the dream and fooling themselves. The reality is, they are going to get to retirement and have no chance. So many self-employed people are running businesses that are not profitable enough to be worth their time. A business has to generate not just enough profit for you to live on, but also for you to save so that when you want to quit, you have a nest egg to generate income from. Also, don’toverestimatewhat your business is worth, if you think you are going to try and sell it and retire on that.

What makes the difference between a successful business and someone who is stuck in a pipe dream?

How does someone actually make a business work?

Well, it’s simple.

No, really, it is! But let’s start with what does not make a business a successful. People like to think thatbusinessis complex and they are different or their idea is unique. The reality is, itisn’t. Very few brand new ideas and products are in the market right now. And believe me when I say that your business “model”isn’tunique either. People have this vision of businesses as these magical entities that make money out of thin air. Or that some complex structure of entities and financing can make then rich, or can solve their problem. Going public won’t make you rich. It never has, it never will. Building a business that can create value will make you rich. Don’t confuse these two. Going public is just one way to cash in on the value you already built. But if yourcompanysucks, taking it public won’t make it suck any less and it won’t make you rich.

Businesses that add value make money.

How much value you add is directly proportional to how much profityoumake. After you have built a business that makes money, you can look at exit options. One of which isgoingpublic. Another is just saving the excess cash flow from the business. It reallydoesn’tmatter what exit strategy you choose. If you have a valuable business, you are already rich. How you choose to convert that wealth to cash is a personal preference. I talk a lot about how to exit businesses at the end of “So You Want To Run Your OwnBusiness” series. If you want more info on how to evaluate your exit options, check out that post. But this post is about what it takes to actually have a successful business.

Add value, make money. Repeat asnecessary.

Whatconstitutesadding valuethough? That can be simple as well. Let’s start with an example. I am a pencil maker. I buy some wood, some lead (or whatever the writing part of the pencil is made from these days), and some rubber for an eraser. I paid 25 cents for those raw materials. I put them all together into pencil form. I sell the pencil for 50 cents. Why would someone pay 50 cents for wood, rubber and lead when they can buy the same raw materials for 25 cents? Because Iadded valueto the materials by making them a pencil. By putting it into a form that can be used as writing utensil, I made those materials more valuable than they were before. And what happens when we add value? That’s right, we make money.

This basic formula is true for every single business on Earth. Most peopleintuitivelyunderstand that basic example. But they get lost when you start extrapolating it up to other businesses,especiallybranded and service businesses. So, more examples! I am a CPA. People pay me to fill out their tax form. Why would they pay me to put numbers on a form when they could just as easily put numbers on a page? Because when I do it, the form is worth more, because I know how to put those numbers on the page in very special ways. So my filled out form is morevaluablethan their filled out form. I addedvalue, so I make money.

This isn’t only a matter of money saved; perceived value can also be just as valuable as hard dollar value. Think about online businesses. Maybe you sell an eBook. I would be willing to bet that most of the eBooks out there don’t have “new” information in them. The messages are all verysimilar.Sure, you could look up all the information in my eBook for free. But that would take time.By combining the information in a unique, easy to understand, and easy to use manner I can save you time and make that information easier to use, thereby making it more valuable. And since most people perceive value in their time, that can be a very profitable business model!

Make sense? Take raw materials, add value to them, make money. Raw materials can be anything from pencil lead to information. It’s that simple folks.

How to apply this all to your own business

I help clients to understand if and how their business is going to make money by doing the VGP process. VGP = Vision, Goals, Projects.

Start with your Vision. What makes your business special? What are you in business to do? Most important:How does your business add value?

If you are struggling at this point, your dream probably won’t fly. I don’t care what Tony Robbins says, you cannot have anything you want. Visualizing it will not make it happen. If you have a way to add value, you can make money. If you don’t, you can’t make money.

There is aninterimstep here that I sometimes add depending on how new you are.If you add value by selling widgets, how much value can you add? This means, how much profit can you make per widget? Compare that to your budget (you made one of those right? Of course you did). That should be your first goal: “Sell enough widgets to produce enough profit to cover my living expenses”. When I say to make goals, I pretty much assume that you have already figured out if your business is viable. But, if you are just starting out, this is a good first goal. For those that have been in a business for some time, and doing this annually, your goals should be moreambitiousthan “make enough to live”.

After we define, or refine, ourvision, we make goals. Goals basically fall into four categories:

  1. Improve my business so I can sell MORE widgets (increase volume).
  2. Make an improvement that makes my widgets more valuable (increase profit per widget).
  3. Improve the efficiency of my business (keep more profit from each widget).
  4. Expand the business to includecomplementaryofferings or new offerings (create new widget lines, increasing the value of the enterprise as a whole).

I usually don’t like to get more specific than that, because goals should beuniqueto each and every business. There are amillioncombinations of these and ways to look at them. But at its core, goal setting is all about actively thinking about how to improve your business along one of those four lines.

Projects are where the rubber meets the road. If your goal is “make my widget have TWO cameras instead of one” then the project needs to be all the tasks andactivitiesthat it will take to get that feature added. There are so many places that talk about project planning on theInternet, I’m not going to waste your time beating that dead horse.

So, how do you actually get things done? Simple:

  • Figure out how you can add value to someone or something.
  • Decide if you can add enough value to support yourself and your goals.
  • Make some goals to keep growing and improving thevalueyou add.
  • Figure out how to accomplish those goals.

Then add value, make money, rinse and repeat!

Business is Simple, Folks.

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