Business Alchemy Lesson 5–Making Your Business Go Places

What is under the hood of your business?

Freedom is without argument the foundation for the American Dream.  The easy access to capital has led many Americans to achieve their greatest dreams here in America.

Capital is the private financing of a business and, in essence, the whole reason that businesses exist.  Without the lure of profit, there would be little reason to begin a business.  Altruism can only carry a person so far because at some point a person’s efforts to improve the world must feed, clothe and shelter him or her or else that person will not make it very far with the business.

So, in step the capitalists with their bags of money.  Okay, so if you started your own business without anyone else’s money, you may not have bags of money, but you have certainly invested your money and time into something you are hoping will turn a profit.

This investment, whether from you or from other individuals, is called your Capital or Equity.  This Equity is the engine that runs your whole company.

So back to our car analogy, you hopefully have the shiny exterior, you may or may not have all the fancy innovations of a luxury car in the interior, but what is under your hood?

You want your engine to be the premier in getting people places.  You want your car to be able to get you there safely, efficiently and in the quickest way possible.

The same can be said for your business.  The phrase that it ‘takes money to make money’ is perhaps overused and is not necessarily true, but access to capital to invest in your business sure can help you reach your goals sooner.

So if you have the opportunity to expand the capital for your business, consider the consequences carefully and discuss them with your Accountant, Business Coach, Lawyer and Financial Advisor.  But realize that capital used wisely will help you reach your goals sooner.

The second aspect to consider with your capital is your efficiency.  A large engine is great, but is likely to use up more gas as well.  You want to make sure your engine is as efficient as possible, so that you can get where you are going as quickly as possible, but also so it costs you as little as possible.

The profit of the business falls under the Equity category.  Consequently, all expenses fall under this category also.  Naturally, as you cut expenses, your profit increases and your business operates more efficiently.

The big engine is great and I recommend increasing your capital in most situations, just remember to operate efficiently also.  Keep good records and, as always remember…

Without Foundation, your business fails!

Business Alchemy Lesson 4–Heated Leather Seats

What are the negatives of your business?

Your Assets are, for the most part, your positives and your Liabilities are, for the most part, your negatives.  Your Liabilities are basically what you owe.

Back to the car analogy, your shiny exterior is your Assets and the interior components are your Liabilities.   A luxury car is going to go to extreme lengths to make sure your interior is very comfortable and convenient for your travel time.

The image of heated, leather seats and built-in GPS that are requisite in a luxury car summarizes your Liabilities.  These items are like your business debt.  Your debt can be revolving lines of credit, mortgages for property, credit cards, etc.

Arguably, these things are not necessary for your car.  Your car would function just as well if you were sitting on a plastic bucket with a dinner plate for a steering wheel and a couple of large potatoes for the gas and brake pedals.

Likewise, you do not need debt to operate your business; it just makes it more comfortable to travel from point A to point B.

Debt is a tricky topic.  I think everyone would agree that debt has been abused and, as a result has inspired many people, like Dave Ramsey,  to take up the standard against all forms of debt, regardless of the type of debt and the use for the debt.

Though I agree with Dave Ramsey that being shackled by debt is an awful way to live, I tend to ascribe more to Robert Kiyosaki’s philosophy in Rich Dad, Poor Dad that there is good debt and bad debt.

Kiyosaki explains that purchasing a pair of fancy shoes on a credit card is typically bad debt—you receive nothing in return.  However, if purchasing those shoes was somehow going to land you your next big job, which would provide additional income for you and then pay off the shoes as quickly as possible, perhaps you would agree that the debt incurred in this situation would be classified as good debt.

So bad debt you pay for and good debt pays for itself.  There is always risk involved in incurring this kind of debt, but that is the very nature of being an entrepreneur.  My belief is that being responsible about the debt you incur is most important.

Any way that you look at the philosophy of incurring debt, it equates with the interior of the car and increases the comfort of your business travels.  So do you really want the luxury interior?  You can decide on that with help from your Business Coach, Financial Advisor and Accountant, but make sure to consult this team before acquiring more debt.

Either way you go,

Without Foundation, your business fails!

Business Alchemy Lesson 3–Does My Asset Look Good in This?

What are the positives of your business?

I say positives because with the exception of some Capital accounts, the accounts that add positive value to your company are asset accounts.  Assets are things that you own and are valuable to your company and its operations.

Assets can be tangible items like a computer, car, salon chair or cash.  They can also be intangible like accounts receivable and goodwill.  Goodwill includes things like ideas, market branding, a unique purchase appeal and the fact that you have been in business for forty years.  These are hard to value and sometimes hard to define or recognize, but frequently are a major contributor to your success.

Your Assets appear on the Balance Sheet and are in balance with the Liabilities and Capital.  In other words, if you were to stick all of your assets into one side of a giant balance scale, then Liabilities and Capital would go into the other side of the scale and the two would weigh the same.

The reason for this is because of double-entry bookkeeping, for which we can thank some Italian gentleman from the 1400’s.

Also important to note is the fact that Assets, for the most part, are taxable.  Some Assets, like land, buildings and vehicles are taxed on a recurring basis.  So naturally you want to get rid of Assets to spare you from taxes, right?

This is not necessarily true.  The correct answer here is to have a good relationship with your Accountant to help you decide the best ways to reduce taxes and yet keep a healthy amount of Assets, especially since when you go to the bank for a loan the banker wants to see as much value in your Assets as possible.

So to continue with the car analogy from last lesson, if the balance sheet is a car then the Assets could perhaps be compared to the body of the car—the shiny nice packaging for all of the other components of the car.

Just like the body of the car contributes less to the overall comfort of your ride, so do the Assets contribute less to the health of the company.  The body has to be large enough to accommodate all of the necessary components for the smooth operation, but outside of that it is mostly for appearing good to others who are looking at your car.

As mentioned earlier, some of those people who might be looking at your business might be the banker offering you the loan or the investor who wants to invest his or her money in your business.  So make sure to keep those Assets waxed and shiny!

As always…

Without Foundation, your business fails!

Business Alchemy Lesson 2–Upgrading from a Compact Car to a Luxury Car

Why are numbers important outside of requesting loans from banks and preparing taxes?

The answer to this question is vast, but I would like to use an analogy to summarize the answer to this question.  Would you rather travel across the country in a compact car or a luxury vehicle?

I certainly hope your answer is the luxury vehicle, because if not, I wonder if you are being honest with yourself.  Your balance sheet is your business vehicle and you will be driving that vehicle for countless hours each week, month, and year upon year.  So what kind of vehicle do you want to spend that much time driving?

Naturally you will want to be in the luxury vehicle equivalent for business.  This requires a healthy balance sheet.

In the lessons to follow I will explain the different major components of the balance sheet—Assets, Liabilities and Capital— and go over some basic philosophies for upgrading your vehicle from a compact car to that coveted luxury vehicle.  For now I will end with the basic equation of the balance sheet which is that Assets equal Liabilities plus Capital (A = L + C ).

I like to end each lesson with the reminder that:

Without Foundation, your business fails!