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.

Reduce Risk and Increase Investing Success

Reducing risk or exposure when investing can save you from future financial headaches and keep you from becoming that owner who is suddenly motivated to sell. Looking at the mortgage or note instrument used in connection with the real estate investment can help you determine if your purchase is a good buy. Ratios are good indicators that can help you determine if your purchase decision is a stop or a go.

You have found a property that looks like it might be a possible good investment. The home is in fairly good condition and is located in a neighborhood that is stable to increasing. You have discovered that after speaking to the owner, the first loan is $30,000 and the second loan is $10,000. The owner is asking $70,000 but your rough estimate (after doing your homework) is closer to $60,000 with the home in its present condition.

The Total Loans-to-Value Ratio

The total loans to value ratio is derived by dividing the total amount of loans by the estimated value of the property. The loan to value ratio for our property is $40,000/$60,000 = 67%. The percentage of loans relative to the estimated value of the property should always be less than 75%. Even if you are purchasing in a fast moving market, the percentage should not exceed 85%. By not exceeding the 85% rule you give yourself a cushion and better chance of reducing your risk.

The Equity-to-Debt Ratio 

Dividing the equity in the property by the total amount of debt yields this important ratio. The equity in our property is $60,000- $40,000 = $20,000. The Equity to Debt Ratio is $20,000/$40,000 = 50%. The general consensus is, the higher the ratio, the more secure the financial position. Mortgages with an equity to debt ratio lower than 25% percentage means you will likely have to hold the property for a longer term to wait for your equity to increase to recapture a profit.

 The Discount-to-Debt Ratio

In our example, the seller is further willing to discount his second mortgage of $10,000 to $7,000 if he can receive cash. The discount to debt ratio is used to measure mortgage risk and is found by dividing the amount discounted by the equity or $3,000/$20,000 = 15%. This percentage represents the cost necessary to bring the underlying loan, in this case, the second mortgage current if it should ever go into default. Mortgages are not always discounted but when they are, a ratio of more than 15%, indicates that your loan is in a good position and is “covered” at least on paper anyway.

If all three ratios meet your criteria – low debt, high equity and mortgage risk covered, then you may want to proceed. But before you do, make sure your real estate has the right location. Ask yourself, would I like to own this property? Would I live here? If not, why? Are there any features you absolutely do not like? Too close to a busy road? Low lying area- possibly flood prone? Too close to commercial plant or constant noise? Don’t select properties that are good deals but may be hard to sell or you may have to discount your asking price heavily because of adverse location factors which in some cases may be incurable.