What is the purpose of Business?

 

The obvious answer is "to make money."  That is clearly true but is really short sighted.  A business cannot accomplish any of its purpose unless it makes money and an enlightened self interested entrepreneur understands that their business' purpose is very different for different stakeholders. The different stakeholder's success may at first glance appear to be incongruent.   For example, a business provides an opportunity for an employee to earn the money to take care of their family, it provides a customer a place to get goods or services to consume or resell, and it provides a vendor a place to sell its goods or services.  The continued health of all of these stakeholders is imperative for the success of a business. If any of these stakeholders can't get what they need from the business it will fail. 

A business can ignore any of the stakeholders'  interest for some time and it may make more money during that time but I believe that is really short sighted. Sure you can find employees for a time that will work for less than they need to prosper but any that are truly useful will find somewhere else to work.  If you overcharge your customer or provide substandard products or services, you might make more money in the short term but in the long term they will find a better place to trade.  Some large retailers have developed a reputation for abusing their suppliers.  This only seems to work because more suppliers keep appearing to fill the void.  It cannot go on forever, and what a terrible atmosphere to work in, watching the folks that you do business with fail because of your predatory buying practices.  I think they fail at serving the secondary if not the primary purpose of business which I believe is to provide a place and purpose for people to spend their time and be happy.

Making money is clearly the easy goal to identify but if it were the only goal people would behave very differently.  Business also provides a component of self actualization that is very difficult to measure and because it means such different things to different people we tend to ignore that goal and focus on the money.  Continually focusing on the bottom line is like playing tennis and always watching the score board.  I suggest that it is more fun and we will ultimately be more successful of  you "keep your eye on the ball."

What is a Business?

The simple definition of business is an organization that brings together people, capital, and activity to produce a profit.

This doesn't really work for me because it is too broad. I don't want to trivialize some peoples efforts especially in the businesses formative years so I think we need another word.  When the Buddhists reach their goal they use the term self-actualized. For want of a better term I think the goal of the small business owner should be to be an actualized business.

An "actualized business" (that I will call a business henceforth) has certain characteristics. The most important of these is that it does not require the daily efforts of its owner.  The next three all follow from this important concept and they are profit, growth, and transferability. 

When I say that a business does not require the daily efforts of its owner I mean that without the owner doing anything products are produced or services are delivered, new sales are arranged, new customers are engaged, expenses and payroll are met, and sales are invoiced and collected.

If a business cannot operate without its owner then it cannot accomplish its most important role and that is to provide opportunity for its employees. A business that cannot operate without the daily efforts of its owner can only grow to a limited size based on the owners capacity.  This means that the employees are stuck. There is no place for them to go. They do their job but if they want anything more they must go somewhere else.

Certainly there are business of all sorts that depend almost entirely on the efforts of their owner.  And their are employees that make careers supporting those owners and their is absolutely nothing wrong with that.  Its just that for me as an advisor they are not as much fun to play with as an "actualized business." And for me they because they fail to provide an opportunity for people to grow beyond their current potential they cannot fulfill the most important purposes of business,

Next time I think we will explore just what is the purpose of business.

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Welcome

This is my first post. I hope to share my experiences and random thoughts about growing a closely held business. I have been working with closely held businesses for a couple of decades now and my clients and their teams have taught me a lot of stuff.

Businesses are made up of people. Every business is different just like every person is different. People go though definite life cycles and their businesses do as well.

The first cycle is birth. This is a very high risk time for people and for businesses. Baby people have obstetricians and pediatricians, baby businesses have neither. Most new businesses are profoundly undercapitalized and cannot afford the team of consultants they really need. I charge almost $300 per hour and a baby business can almost never afford that kind of cost. However, with this powerful communication and knowledge storage device call the Internet new business builders can find out all kinds of stuff. The first cycle lasts about two years. During this time everyone is careful not to commit too much to the new business, bankers don't even want to talk to you unless you can personally secure the loan beyond any of the business assets.

The next business cycle are the formative years. Bankers will talk to you now. They still want you to tie up all of your assets with them if you need to finance your accounts receivable. During this part of a businesses life key employees are developed. Some times they are offered ownership positions. This is often a big mistake and becomes a major hurdle toward taking the business to the next level. This is also a stage where many businesses get stuck and fail to reach the next level. The owners are so busy running the business because they have customers and employees to serve that they forget to work on their business like they did when it was a baby.

Surviving the formative years, would could include puberty and merging or admitting other owners, a business reaches maturity or adulthood. The business is properly capitalized and cranking along as a cash cow without anymore effort from its owners than they want to contribute. Most businesses never reach this stage, and those who do are usually run by people who are not satisfied with the cash cow and want to continue to grow.

What happens next depends on whether the company sells to a larger company, fails to keep up with technology or the market changes and slowly dies, or sometimes the owner just quits and closes the business.

I am going to focus on the last three cycles because that what I like to do. Next time I am going to try to define just what is a business. there are a lot of folks working for them selves out there who really don't have a viable business.