This post is abstracts of a chapter from a book What the CEO wants you to know? Understanding business in today’s times has been a myth and this book ensures that for being a successful businessperson you know what it takes to conduct a business. The fundamentals of business understanding stands true in every environment and economy.
Business acumen requires understanding the building blocks of money making. Think back to how you learned physics or chemistry. First you had to understand the parts of an atom: electrons, protons and neutrons. Once you understood the parts and how they interact, you were ready to develop your knowledge. It’s the same in business.
When 2 business people talk, whether or not they are in the same industry, whether or not they talk openly, they always try to gauge: Is her business making money? How is her business making money? Business people have an insatiable desire to cut through the complexity to the fundamental building blocks of money making.
Money making in business has three parts: cash generation, return on assets (a combination of margin and velocity) and growth. True businesspeople understand them individually as well as the relationships between them. Add consumers to these 3 parts of money making – cash generation, return on assets and growth – and you have the core, or nucleus, of any business.
Cash generation, margin, velocity, and return on assets, growth and customers: Everything else about a business emanates from this nucleus. Does the business generate cash and earn a good return on assets? Are we retaining customers? Is the business growing? If so, common sense tells you that the business is doing well. A large, complex company will eventually falter if core is not right.
Don’t let your formal education or the size of your company obscure the simplicity of your business. Cut through the nucleus of the business. If your business shows deterioration in one or more of the basic components of money making, use common sense to fix it. If you do, you are on your way to thinking and acting like a true businessperson and a successful CEO!
Cash generation: cash gives you the ability to stay in business. It is a company’s oxygen supply. Lack of cash, decreasing cash or consumption of cash spells trouble, even if the other elements of money making – such as margin and velocity – look good. Most people understand cash on a small scale, in their own everyday life. If the bills are due before the salary arrives, what happens? In a large company, however some people loose sight of cash. Many think that’s the responsibility of the finance department. But everybody in the company must be aware that his actions use cash or generate cash. A sales rep that negotiates for a 30 day payment from a customer versus 45 days is cash wise. A plant manager whose poor scheduling results in the accumulation of a lot of inventory consumes cash. Smart businesspeople know that generating cash can help grow the business. Invested wisely, cash improves the company’s money making ability. There’s a psychological component to cash: when a company has its own cash rather than borrowed money, senior managers are more inclined to make bold investments that have greater potential for rewards.
The latter part on margin, velocity, return on assets, growth and customers will follow in my next article.
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