5 Essential Activites of Successful Business Management

Anyone can start a business but how many can make that business thrive and grow over the long term? The foundation of any successful business starts with the right mission, team and leader.  But prudent management is always ongoing.  Activities that not only fulfill the company’s mission but yield a profit and raise your level of income.

Here are five essential principles or activities as I have learned them, for operating and developing a successful business.

 1. Cash Flow Management. Making sense of financial statements is essential. This means knowing the difference between cash flow and profit. If you don’t know how to analyze business statements to extract vitally important information about a company’s strengths and weaknesses hire someone who does.  Then learn all you can to become financially literate. This is the most important principle. 

2.  Communications Management.  There are two ways that communications are important to a company’s success.   Communications that are devoted to activities outside the company.   These activities include raising capital, sales, marketing, customer service and public relations.  Speaking the language of the investors is essential if one needs to raise capital.  Good public communications or PR means good company image and creditability.  And getting feedback from your customers to find out what they like and don’t like can be critical to increasing your sales or service.  Then there are communications  that are devoted to activities within the company. These activities include, keeping in touch with your advisors, managers and employees to keep abreast of possible weakness that need to be corrected.  While the employees or managers may only communicate about their specific activity or department, the leader, employer, business entrepreneur must speak the language of all.

3.  Systems Management.  Like a pilot in the cockpit of a plane, the director of systems management must know how to read the “gauges”, making sure all of the plane’s systems are operating normally. The director of systems management oversees or supervises the various systems for the growth of the company. These systems include but are not limited to product development, office operations, order processing, billing and accounts receivables, account payable, inventory management, human resources and computer systems.

4.  Legal Management. Legal management is too often neglects.  Many businesses fail because they neglect to protect their intellectual property. Initial legal fees may seem expensive but  being locked in litigation can be even more expensive when trying to protect your  property  after the fact.  The power of patents, trademarks, names copy rights and contracts should not be underestimated.   A single legal document can launch the beginning of successful a worldwide business, like Aristotle Onassis who became a shipping mogul with a single document  A contract from a large manufacturer giving him ”exclusive rights” to  transport their goods all over the world.

5.  Product Management.  Product management is important because it embodies the company’s mission.  Success in selling the product depends on all the other management  principles operating in agreement. Take away one of the principles and the product has little value. Mc Donald’s does not make the best hamburger in the world, but their business model is one of the most successful in the world.  It doesn’t matter what your product is. It could be a widget, service or an idea. Whether you own a pretzel stand or a large corporation, if all of these elements are present, managed properly and working together your business venture will ultimately succeed.

Understanding Capital Management

Money. Every business needs it. It is required for start up and continues to be required throughout its operation. Without money or the equivalent a business can not get started and any existing business dies.

 

Companies must obtain the needed money primarily by borrowing it or by insuring a debt investment such as a note or a bond. Banks and bondholders expect to be repaid and typically on a fixed date.  Therefore a company’s survival may hinge on meeting such obligations.

 

There are good and bad reasons to borrow. If every borrowed dollar earns a positive return over and above the cost and interest payments than the reason is likely good. If it originates from greed, ego or a desire to breathe life to a poorly planned project than the reason is likely to be a bad one.

 

Financial analysts for corporations distinguish between business risk and financial risk. While business risk is the uncertain income that originates from the companies, cost of production and customer base, financial risk represents the additional uncertainty imposed on the shareholder because the company uses fixed debt securities to pay for its productive assets.

 

Not so long ago, people realized that lending and borrowing were potentially hazardous activities and should be undertaken cautiously and even then only to finance productive investment that provides a means of repayment. This idea is not as popular today with a generation of people being taught to believe that business success results from the use of other people’s money and borrowing is a necessity to make money and stay ahead of inflation.

Although there is some truth to this, the important matter of financial risk is still generally disregarded.

 

If there is any question about this, one can easily recall the recent financial crises and well publicized companies that failed ultimately due to their inability to meet their debt obligations.

 

Even companies that don’t have to borrow long term notes must still exercise tight controls on all income and expenses to achieve long term and lasting success in the market place.

 

Here are few important management formulas for the business owner to consider.

 

Working Capital

 

[i]Liquidity is the ability of a company to pay its debt as they come due. As you might expect, lenders and others are interested in the working capital of a company which is essentially the difference between the current asses and current liabilities.

Current Assets – Current Liabilities = Working Capital

 

Current Ratio

 

The current ratio allows us to compare the liquidity of a company over time. The popular rule of thumb is 2:1 to generate adequate cash flow however many types of businesses have traditionally operated at lower figures. Liquidity is examined monthly or more often if the ratio is low. 

Current Assets / Current Liabilities = Current Ratio.

 

Debt to Assets

 

Also called the Debt Ratio compares what is owed to the value of the assets used by a company. This ratio tells lenders what percentage of a company’s assets are financed or leveraged. As long as some equity exists, the debt ratio is below 100%. If debt is greater than 100% than from a practical standpoint the business is bankrupt.

Debt to Assests = 100 x Total Liabilities / Total  Assets

 

Turnover of  Working Capital

 

This ratio measures the complex relationship between buying and selling. Maintaining a low value insures availability of cash to sustain operations. A ratio that is allowed to grow too high on the other hand could make the company vulnerable if the business climate becomes adverse.

Turnover of Working Capital = Net Sales / Working Capital

 

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[i] Source: 101 Business Rations, McLane Publications, Sheldon Gates, 1993