5 Key Business Fundamentals

5 Key Business Fundamentals What every successful business

owner needs to know

By James Price, BBM, FAIM

2 jpabusiness.com.au +61 2 6360 0360

Table of Contents

Introduction ........................................................................................................... 3 1. Plan before you act ....................................................................................................................................... 4 2. Ready for action ............................................................................................................................................. 6 3. Key business fundamentals: Development ........................................................................................ 7 4. Key business fundamentals: Creation .................................................................................................. 8 5. Key business fundamentals: Delivery ................................................................................................ 11 6. Key business fundamentals: Value ...................................................................................................... 12 7. Key business fundamentals: Relationship ....................................................................................... 15

Disclaimer: The information contained in this eBook is general in nature

and should not be taken as personal, professional advice.

jpabusiness.com.au +61 2 6360 0360 3

Introduction By James Price, BBM, FAIM

In this eBook we examine 5 Key Business Fundamentals.

These are the key things you need to focus on – to measure, to think about and to spend time on – to have a strong and successful business.

When helping clients assess how their business is operating, where it is headed and what they want from it, there are two things we emphasise:

1) Direction, 2) followed by Performance.

Unfortunately a lot of businesses, large and small, fall into the trap of focusing on performance without thinking about their business’s direction.

We tell our clients: forget about performance until you’ve nailed your position on direction.


1. Plan before you act

Whether you’re going into business for the first time, or you’ve been in business for 30 years, you must have it crystal clear in your mind, at least, where you want the business to head.

If you don’t know your direction or have strong justification for the direction you’re taking, your path may be fraught with danger.

Of course, direction can be refined over time, but it’s hard to refine it if you don’t have a starting point.

This brings us to the issue of having a strategic plan, or business plan.

Do I really need a business plan? Our view is that a business plan can be a formal document, it can be in your head or it can be written on the back of an envelope, but you must have one.

A business plan is simply a means to an end and that end is to ensure you know where you’re taking your business this year, next year and in five years’ time.

A plan means you have confidence to say: “I know what I’m working towards, I have a plan for what I want out of this business and how I’m going to manage the risks and opportunities associated with it.”

So why do I have to write it down? Some business owners will say “we don’t have a documented plan, we just do what we do, and we’re successful”, and that’s true for many of our clients, and business people more generally.


However, there are some key instances when having a documented plan becomes important:

1) In a succession situation where the owner is looking to pass on the business to family members. Those family members will want clarity about the direction, risks, opportunities and the position of the business.

2) When devolving responsibility for some activities to a management team or a key person employed in the business. A document will help provide a clear indication of the business owner’s expectations.

3) When a business needs the confidence of a financier or equity investor. They will want to know where the owner plans to take the business and the rationale behind that direction.

4) When selling the business, a documented plan will provide value to the incoming purchaser.

5) For making you accountable to YOU! Writing down your direction will help you get clear in your head what you want from the business, and then make you accountable for sticking to the plan. It’s a benchmark to check progress against.

What should my business plan look like? Plans don’t need to be long documents – many of the plans we prepare for clients are no more than five pages.

It’s more important to know what’s in the plan.

In private and family businesses, key topics covered by the plan will relate to:

• the business’s strategic direction; • the point of difference (POD) which the business has and is

developing; • the projections for the business and benchmarks to measure success,

and • the risks and opportunities the business can expect to face.

So get the direction straight, then you can focus on the action and the doing.


2. Ready for action

You’ve created a plan for your business and now you’re ready to take action. But what do you spend your time on? Where’s your focus as a business owner?

Whatever business you’re in, there is a lot that can crowd an owner’s day. So get clear in your mind what your priorities are and what things you can influence the most.

5 fundamentals of running a business for performance The information contained in the following chapters is a distillation of the things many of our best clients do on any given day of the week – it is simply second nature to good business owners.

These are the 5 key business fundamentals you need to grasp in order to run your business for performance:

• Development • Creation • Delivery • Value • Relationship

These fundamentals are not necessarily sequential, instead they often overlap and run in parallel, and also inform and interact.

Let’s take a look at them one by one.


3. Key business fundamentals: Development Development is all about what is coming in the door:

• What does your pipeline of clients, potential clients and customers look like?

• How solid is your referral base? • How much profile does your business have? • Does it naturally attract customers? • Does it have a good profile online, as well as offline? • What is the make-up of prospects versus leads versus quotes versus

tenders pending acceptance versus jobs won?

The development fundamental challenges you to consider how vibrant your business is in driving new business with new clients, or additional business with existing clients.

Building your customer portfolio Back in our first eBook – Business Value Drivers – we discussed building portfolios of customers. Readers will remember that we talked about the value of a portfolio that had existing clients, but also a regular supply of new clients.

A dynamic portfolio is one that contains customers of different sizes and shapes and from different markets, that can offer a portfolio of different revenue streams.

So the development fundamental of business is about developing a customer portfolio that is dynamic, growing and continues to be fed over time.


4. Key business fundamentals: Creation

The creation fundamental refers to ‘what it is you actually do that gains the interest of the customers you sell to’.

The creation process is the engine room of what a business does and how it makes money.

Creation has a number of components, including:

• Innovation • Product and service sourcing • Quality control • Packaging • Work in Progress

Innovation Innovation is about the small refinements that may change the game in terms of how you go about doing what you do.

As a business owner, innovation challenges you to think: “I’m doing this a certain way, but is that the best, most efficient, value-added way from a client’s perspective and from my business’s perspective? How can I innovate to make the creation process better, more efficient, more effective? How do I produce a product that will give me a competitive advantage in the market?”

Product and service sourcing This refers to the simple “manufacture” of what you do. It may be that you source and/or coordinate a product or service. It may be that you build it from scratch.

You may be a financial planner managing a customer’s financial portfolio. In that case, your needs analysis process is critical to the way you deliver your service.


If you’re in the retail sector then it’s all about supplier links and how you source your product and get consistency of supply of quality products.

Businesses sometimes fall into the trap of “this is what we sell, so this is all we’re going to sell and we just package it up and sell it”.

Hold on! There’s a changing market out there. Are you tapped into that, are you thinking about that?

Packaging How is your product or service presented?

What makes it stand out in the market and which markets is it targeted to?

Packaging can be the physical material and form that your product is delivered in, for example:

• colour; • shape; • configuration, and • branding.

Alternatively, it can be service orientated, for example:

• wait times; • order confirmation; • delivery charging; • guarantees; • warranties, and • other commitments and add-ons.


Quality control Successful business owners focus on their quality management systems (QMS). How consistent is my “creation process” in delivering what my business is offering?

Faults, rework, returns and claims are all important symptoms to monitor. However a true focus on QMS acts as a preventative mechanism before a product or service is delivered.

Work in Progress Do you as a business owner have a clear understanding of your Work in Progress (WIP) pipeline?

Do you have confidence your jobs are working through the pipeline in a way that is going to deliver to the promises you’ve made to your customer?

Contract and job-related businesses can have significant risks, opportunities and value tied up in their WIP – it’s critical to have an ongoing and close management and focus on these.


5. Key business fundamentals: Delivery So you’ve created the product or service you’re known for.

But that’s not enough. The job’s not done!

There must also be a focus on the next business fundamental – delivery – and ensure the experience (including both product and service) is seamless and effective for customers. To achieve this you must ask:

• How is my product or service delivered to the client?

• What is the level of customer interaction through that process?

• How is shipping, freight and transport managed and maintained?

• How, in particular, are time and customer expectations managed, met and maintained?

A smart business owner will peer into the delivery processes within their business on a periodic basis to get a sense of how that process is going.

Often an average product, if delivery is done well, can surprise and delight a customer.

Often an above-average product, if delivery is done poorly, can annoy and frustrate a customer.

And remember, it’s often the little things that will most annoy. Left undone or not rectified, these can ultimately lead to loss of a customer.


6. Key business fundamentals: Value A business owner needs to constantly consider: “What is my strategy and how do I provide and extract value from the things I do in my business?”

5 key determinants of value are:

• Product pricing and margin strategy • Cash flow • Funding • Sustainable earnings • Your people and your culture

Product pricing and margin strategy Sometimes business owners fall into the trap of focusing on sales. They may say: “I’m achieving several million dollars in sales this year. That’s an X% increase on last year; that’s a good thing.”

It’s only a ‘good thing’ if the margin you’re deriving from those sales (i.e. surplus income after the direct costs associated with the sales), is positive, is holding or improving, because sales with little margin are likely to demonstrate little or no value.

Keep the cash flowing What is the state of cash flow in your business? How positive is your cash flow today? What does the cash flow look like moving forward?

Things that influence cash flow include payment performance, i.e. managing the timing of the cash flow with debtors and creditors, stock purchases and inventory levels.


Ensure adequate funding Another key issue is funding which, like cash flow, allows a business to drive value for a customer and extract value for the business.

Funding is working capital to support the development, creation and delivery processes. You can have a number of sound business components but if you don’t have funding and a fluid, liquid business, it’s difficult to create value.

Sustainable earnings a major value driver We talked at length about sustainable earnings in our previous eBook, How to Assess Business Value in Small- to Medium-Sized Businesses.

A business owner needs to think: “If I was to stop the development fundamental – no more new business – and let the business run for 12 months, what would be my earnings result? Does this business have sustainable earnings moving forward? Is there an opportunity to drive earnings beyond a certain point in time?”

People – your most valuable asset Value is determined by the strength of your business culture and how well your key employees understand and live your direction as a business owner, and your plans for success.

In fact, the issue of business culture and shared understanding of business direction is probably the single most important determinant of value within a business.


Role play – what’s in it for me as an owner, an employee and a customer? It can be lonely at the top. As a business owner, sometimes the best form of monitoring and reviewing performance is to role play and put yourself in the position of an employee or customer.

A successful business owner can move from an employee’s perspective, to the owner’s, to imagining themselves as a customer and to reflecting on the delivery process.

That mental play is a key skill and it’s about having a good long look in the mirror.

It comes with experience, but it also comes with a philosophy of open-mindedness and wanting to learn, while being directed by the plans already established for the business’s direction.


7. Key business fundamentals: Relationship The last fundamental a business owner needs to focus on is relationship.

This involves constantly thinking about the business and brand you’ve built, and the aspects of your business that are plain to see in the market place, and asking:

• What relationship do I have with my people, my team, my suppliers, my customers and other major influencers in my market?

• How is my brand perceived by those key audiences? • Is it cherished, trashed, known, unknown? • What is it known for? • Does that perception fit with my direction?

Building and maintaining relationships is up to you I hear a lot of business owners says “there’s no loyalty anymore”, “customers move from one supplier to the next with no compulsion”.

I don’t believe that. In fact I believe today’s market is more about loyalty than perhaps ever before.

The complexity is that there is greater competition.

So your brand and your business needs to manage its portfolio of relationships with its customers, suppliers, internal team, influencers, likely referral sources and advocates for your business.

Advocacy a measure of relationship success We work with a few national companies that have hundreds of retail businesses run by independent owners in their portfolios.

One of the ways they measure the performance of these individual business owners in promoting their national brand is to measure customer advocacy.


This is the extent to which a customer is prepared to advocate your business value proposition to others.

Whether your business is a one-person business or has several thousand employees, it’s important to consider whether the people your business interacts with would advocate for your business, and just what you need to do to strengthen that advocacy.