My first introduction and interest in business started while I was in Boy Scouts working on a Merit Badge on my way to Eagle Scout. I was about 12 year old and it was while reading the Personal Management merit badge book that I learned about the time value of money. The idea that you could flip the traditional model of trading your time for money completely upside down and have your money work for you was extremely compelling to me. I was fascinated with the idea and pursued everything I could find that would help me understand how to implement it in my life. I read every book I could get my hands on that covered making money, investing, or running a business. I setup meetings and lunches with people who seemed to be where I wanted to be and were willing to talk to me about it. 

I decided to focus my efforts on business and investing. I sought to learn all that I could toward that end. I read more books than I can even remember. I started to put together a vision and a plan for what I wanted to build in my career. Eventually, I started my first business when I was 19. 

Looking back now, I feel like I viewed life and business as a type of game. I don’t think that is all wrong and I’ve recently been learning that viewing life and decisions as separate from yourself is actually extremely vital and yet very difficult. I do feel like I didn’t really take things seriously enough. Which is ironic because most people I know would say they view me as extremely driven and very serious. I guess what I’m trying to say is I didn’t take it seriously in the sense of understanding the full gravity or stakes around the decisions I was making. 

When I really started to take my career seriously it took me awhile to really identify the practical purpose of business and feel like I had a clear vision for myself in that vein. I had the general idea, to make money, but there are so many ways to generate income and that definition just seemed too rudimentary. I felt like there needed to be more focus around how the money was made. Specifically, how to make the most money with the minimum amount of time and effort. I finally settled on the idea that the ultimate goal of any business is to establish a consistent source of passive cashflow for the owners. The idea is to bring together the systems, people, and resources necessary to make money with minimal input from myself. 

With more clarity around exactly what I was shooting for and where I wanted to go in life, I set out to build relationships with people that were heading the same direction and who were a little farther down the road. My hope was to learn what these people were doing in an effort to evaluate their habits, viewpoints, perspectives, and strategies to get closer to my ultimate goal. I had the privilege of meeting and being mentored in a variety of capacities by a number of businessmen that helped me focus my efforts and bring clarity of purpose to my efforts.   
One of the most impactful businessmen I had the privilege of spending some time with is one of the most successful businessmen in Alaska. He was successful not just in the traditional financial sense, but also because he had led his business through multiple economic downturns and recessions. With his experience through some economic ups and downs, I really put a lot of weight on his perspective. Of all the other definitions of business, his was one of the simplest and most complete definitions of business. 

When you look at it in the simplest form, business is made up of three primary components:

• Product or Service – What is being sold?
• Finance – How does the business produce a profit?
• Management – What oversight is necessary to deliver the product and achieve profitability?

Each of these three functions must be implemented in the correct portion for any business to be successful. They are interconnected and rely on the optimum combination of each other business component. The real secret here is understanding the business you are in enough to establish and maintain the appropriate combination of each component.

Each of these three functions also includes a selection of key subcomponents. These are the next level of details and considerations you must factor into building a healthy business.

Product or Service

The Product or Service starts with the idea. The quality of the idea shapes how the product or service is designed and delivered. All kinds of other factors are involved in a successful product beyond the idea. Things like the look and feel, the brand, pricing, delivery, logistics, and the overall customer experience with the product or service.

There are some fundamental differences between a business built around a Product vs a business build around a Service. We will look at them separately. First, we will look at a product based business.

Product

A product business starts with design. Product design incorporates all the factors that go into determining exactly what the product looks like, how the product is delivered, and customer perceptions of the product. Manufacturing determines what raw materials are required, quality of the product, logistics for getting the product from manufacturing to a sales location, among other things. Packaging plays a role in how the product is perceived in the market. Warehousing and shipping play a role in the sales process. When it comes to the delivery model, Some businesses sell direct to consumer, others utilize wholesalers and retailers. The distribution channel and associated costs and structures determine the most appropriate kind of pricing model for each product.

Service

Services involve combining some type of inputs to achieve a desired result. This result could be something like a remodeled kitchen, a clean house, tending a hotel room, or producing a new website. Each one of these functions requires some kind of inputs (i.e. Cabinets, countertops, cleaning supplies, web hosting, design files, etc) and the service is arranging those inputs to achieve the result.

The critical elements to performing a service well include a much larger emphasis on the customer experience. This includes things like how employees interact with customers (customer service), the attention to detail and quality of the service rendered, how long it takes to perform the service, and the cost. Fundamentally, for a service based business, selling is really an opportunity cost for the customer. How much time would it take me to perform the service? Is the cost of my time greater or less than the cost of hiring someone to perform the service? Those two questions must be factored into the equation when establishing how to price the service.

A service based business comes down to building and using repeatable systems to achieve the desired result. Focusing on systems allows the business owner to easily delegate functional responsibilities and create a source of passive cashflow.

Finance

The finance component of the business is the allocation of money to establish profitability. This involves compensation for employees and managers, funding for research and development, overhead expenses like rent and utilities, and budgets for other functions of the business.

The most important aspect of the finance component cashflow. Cashflow is one of the most fundamental make or break functions of any business and, as a founder or owner, it is essential to have a firm grasp on the perspectives related to cashflow and on understanding the mechanics of cashflow.

Cashflow is the timing of how money is received, spent, borrowed, and saved. Cashflow is the route that money takes through a business. Timing and priority are  two significant factors when managing cashflow. Especially when money is tight.

One of the best resources that I have come across when it comes to understanding cashflows is Rich Dad, Poor Dad. The book does an excellent job presenting a concise definition and perspective on Assets and Liabilites and the influence they play on cashflows. The traditional definition of an asset js swim thing that has intrinsic value (car, house, boat, etc) and a liability as something that is owed (loan, mortgage, etc).  In the book, Rich Dad defines an Asset as something that puts money into your pocket and a Liability as something that takes money out of your pocket. This difference is huge. Looking at an asset as something that puts money into your pocket and a liability as something that takes money out of your pocket is the fundamental base of solid cashflow management.

This “Rich Dad” definition of Assets and Liabilities can be applied to every aspect of business. Things such as product selection (does this product generate income, or does it just have a large carry cost?), employees (does this person/role produce income or is it an ongoing cost?), and every other aspect of business by simply evaluating and identifying wether the item assists in generating income or if it is simply an unnecessary cost.

Management

What oversight is necessary to deliver the product and achieve profitability?

Management is the skill in which the leadership of a business addresses the balance and allocation of resources. These resources are the Product, Finances, and include additional items such as employees, morale, culture, execution, and bottom line results. Skilled management has the ability to look at the bigger picture of a business and take decisive steps to ensure that objectives are met. Skilled managers are able to translate the urgency of the daily situations that always arise and make decisions by stepping out of a reactionary mode and into responsive action. They understand that systems are only part of the picture and they factor incentives, accountability, and decisive action into the daily operation of the business.

Skilled managers understand the details of their business. They have a clear understand of all of the ins and outs of the business. They know which things make the biggest impact on achieving long term results. They operate in their highest effectiveness by focusing on the critical few things that, when managed correctly, allow the rest of the business to operate with excellence. Skilled managers understand the way the pieces of the business interconnect and create a chain reaction. They avoid getting pulled into unnecessary activities and focus their energies on conversations and contributions that translate to optimum results.

Conclusion

A good business requires the appropriate balance of these three components. Every business requires different amounts of skill and talents in each of these areas and there is not a “one-size-fits-all” approach that works for every business. That is the piece you need to figure out.