How to Generate Wealth: Step 1 (Start-Up Phase)

October 24th, 2013

When you start a business, the start-up phase is about getting what I call “The Value Equation” correct.

Here you are in your business.  You’ve got the value equation right.  You’ve made it predictable, repeatable, and replenishable.

Now, this is where your leadership comes in.  Your leadership is like the center of gravity in the middle.  You’re adding that energy that allows you to really push those lines, push into the outer ring in order to generate wealth.
Ask yourself, “Are you creating a product or service that’s more valuable to your customers than what you are charging and costs you less to produce?”

 

Value Equation = Value > Price > Cost

If you are going out there trying to market your products or services and the value equation isn’t right you shouldn’t move on to any other part of your business.

Until you have this figured out, don’t spend your hard earned dollars on that new automation system or begin by painstakingly upgrading your product to perfection or even hiring that award winning web firm to create a fancy website.

What you really need to do first is go out there and see if more than one person would pay for your product and feel like they got the better end of the deal.

If you’re getting a positive thumbs-up when you go out and sell your products and services you’ve likely got the value equation right.

Understand the Cost Structure of your business.

There are a few numbers that every entrepreneur need to know.

For every dollar of revenue your business is making, you need to allocate that revenue into the major activities of your business.

How much of every dollar by percentage is allocated to:
Marketing?  Sales?  Fulfillment?  Profit?  Overhead?

The line between overhead and profit is a lifestyle choice and is fairly arbitrary given that you can decide to have your office in a palace and your leer jet taking you where you need to go, or you can be super lean and work from home with remote teams and cousin Phil running the show. That’s up to you (thus the dotted line in the diagram).

So how do you do this right? First, find out what’s standard in your particular industry and create a model that as closely as possible approximates that standard.

For our coaching business, for instance, we’d allocate our revenue like this:

Coaching Business (Service Based)
Fulfillment 50%  |  Sales 10 – 15%  |  Marketing 5 – 10% |  Overhead 10%  |  Profit 20%

So that means if we were going to pay another coach to handle fulfillment on our clients we’d give him 50% of that revenue. Furthermore, if we also outsourced sales we’d pay 10% for handling all those activities, 10% for marketing, and so on. In other words this is the amount you’d budget to replace yourself in each of these roles.

If the business was a car company the numbers would look quite a bit different with the lion’s share of the revenue (80-90%) allocated to the car itself with the remaining 20% going towards sales, marketing, and profit.

So why is this important?

There’s a hidden magic unlocked by knowing these numbers.

If you are approached by a potential partner who says, ‘Hey, I’m going to take this percentage of the revenue and you’re going to take that percentage.’ Instead of trying to figure out whether that feels like a good deal or wondering if you can trust that person, you can refer to the percentages in your model and look at how much you’ve allocated for the activities your partner is doing, add it up and you know right away whether it’s a good deal or not.

Otherwise if you give 1/3 of your company away to 4 people….well, let’s just say, I’ve seen that more than once.

So let’s replay the conversation again and someone comes up to you and says, ‘Hey, wanna partner?….You would say Hmmm, ‘Here’s what makes sense.” And you go through your model together.

It is crucially important to know whether you can enter with confidence into partnership and that the deals you strike will ultimately be sustainable long term because you cannot scale a business without partnerships and a working business ecosystem.

So even if you are wearing many hats in your business currently, the point is to have the discipline of noticing what kinds of activities have your time, resources, and attention. Are you generating a new lead or are you turning them into a customer or are you working on your product or fulfillment? Just start to notice the different types of activities that you’re doing, how much of your time they are taking, and whether you are investing in them. Keep track and make sure it all makes sense given your model.

You really get to see what is the range of what you can afford to play with and you can play within that range as much as possible. It’s a powerful thing to understand about your business

Once you have your model and are thinking of these activities separately, you are ready to take the next step – which is making your business predictable, repeatable and replenishable in the Sustainability Phase, which I’ll share with you next week.

Or you can learn all about it right now (plus learn some great strategies to stop procrastinating and building your business by going to Mind, Money and Meaning. Get immediate access to exclusive free content from the most advanced entrepreneurial education system available. Or join us at the Rapid Growth Summit.  (You can take advantage of the 80% discount for my readers.)

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