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Thinking Like An Entrepreneur

Thinking Like An Entrepreneur
Table of Contents

Chapter 3
Men Are Cheaper Than Guns

Chapter 4
Intellectual Capital And Bootstrapping

Thinking Like An Entrepreneur


Measuring Success In Small Business and Entrepreneurship

How do you know if you are successful as an entrepreneur? How do you measure your personal business success?

The most common method people use to measure business success is financial worth. The more the entrepreneur and business are worth, the more successful the entrepreneur is considered to be.

The extreme of this would be the valuation of an entrepreneurís publicly traded company. The entrepreneurís companyís market value is recorded daily in the newspaper. The entrepreneur could look at the stock quote and compute his financial value each day, if he so desired.

This measure of worth is given great weight by society. We see this from the popularity of the Forbesí list, which records the wealthiest people in the world. We see this by the desire of so many young people to make such a list someday.

But, consider the case of two entrepreneurs. The first entrepreneur forms a new company which goes public. In a short time, the entrepreneur sells many of his shares. He becomes worth tens or hundreds of millions of dollars, now held in cash. Then a few years later, his public company fails and goes bankrupt.

The other entrepreneur starts a far more modest endeavor. Her company grows to $5 million in sales over eight years and maintains decent profitability along the way. She has satisfied customers and enjoys her business.

The traditional measure of success says the first entrepreneur is more successful than the second. But, that has always seemed incorrect to me! Iíd say the second person is the more successful businessperson. The person who runs a solid company should outrank someone who spun straw into gold. Financial shrewdness is not necessarily successful entrepreneurship.

I doubt few, if any, entrepreneurs behind successful, publicly traded companies actually evaluate their worth according to the stock market. The stock market having a good day doesnít make them any more successful as a businessperson. The stock market having a bad day doesnít make them any less successful in their business. They are too busy running their companies to worry about fluctuations in market valuation. Any way you look at it, financial worth alone is by no means an adequate measure of entrepreneurial success.

Many intelligent people, business owners and non-business people alike, measure their success by how much money they save from their annual earnings. This way, someone earning $100,000 a year, but saving $20,000 might feel they have done a better job than someone earning twice the amount but only saving $25,000.

Savings measures both offense (earning power) and defense (frugality). The popular book, The Millionaire Next Door, points out that both offense and defense are necessary to building wealth for most people. Further, reasonable frugality is a desirable trait for an entrepreneur, as it shows responsibility. Frugal businesses are often successful businesses.

Yet, someone will argue that a person who earns money should be able to spend it as they wish. So, they bought a few new toys? So what? They still ran their business profitably and should be considered successful. Harry, the miser, who eats porridge and doesnít heat his home in the winter, shouldnít be considered more successful just because he has a somewhat more modest lifestyle!

The financial success of a business is best measured by focusing upon the company profits for the year. Some allowance might be made for the level of investment the company makes toward future growth and future profits, so as not to penalize a company for investing in the future. What the entrepreneur does with the money is another issue entirely!

Again, for publicly traded companies, Wall Street is most concerned with profits or earnings. Analysts constantly try to predict how much a company is expected to earn. CEOs are very concerned about earnings. Often the CEO's bonus is tied to the companyís earnings. This can lead to CEOs making decisions which enhance current accounting profits at the expense of the future.

Seldom do small business owners play such financial accounting shenanigans. They want an accurate measurement of how much money their business really earned. This is why knowledge of accounting is so important to small business owners.

However, if entrepreneurs become too earnings focused, they may cut corners leading to less customer satisfaction. They may not reinvest enough in their companyís future. They may compromise their relationship with their employees. This can lead to less success in the future.

There are many other measures of success, besides profits, which can be evaluated by looking at the companyís financial statements. Increasing profit margins, paying down debt, increasing the effectiveness of advertising are some examples.

In each case, the entrepreneur should compare this yearís performance to the year before. The entrepreneur should look at growth in sales, the number of new clients, etc. Ed Martin, of About.comís Guide to Small Business, points out that growth is one key factor indicating survivability of a business. Businesses which grow can survive.

Some business owners measure their success by their company's position within the greater industry. Yet, for most small businesses, industry position, even if meaningful, is difficult to ferret out. But, if you are one of the industry leaders, your company is probably successful!

The above are the more conventional measures of business success. However, they are far from the only measures entrepreneurs use.

One of the best measures of success is the quality of the products you provide. Being proud of your products, sincerely feeling their usefulness, and making meaningful improvements in your companyís products or services are big factors making many entrepreneurs feel truly successful.

Some fly-by-night gadget, seen on late night TV, might generate that company more profits and even better operating ratios than your company has. Yet, many entrepreneurs will feel they are inherently more successful. Itís success as measured by pride in the quality of their product.

Customer satisfaction, whether measured by customer surveys or repeat business, is another measure of success. If customers find your products useful and enjoy doing business with your company, your companyís future success, no matter how you measure it, is more likely assured.

Employee satisfaction is another measure of success. The great companies tend to have employees who pride themselves in working for their company. Consider what your company has done for its employees throughout the year. If you added a 401(k) plan or improved the level of employee feedback and recognition, for example, you should deem your company more successful than last year. You own a better company.

In fact, any internal improvements youíve made within your company makes your company more successful and is reason for celebration. Most successful entrepreneurs take pride in these day-to-day operating improvements.

Iíve listed some measures of success from the top down. Most non-entrepreneurs would measure the success of a business by those at the top of the list. They are more money focused. Those at the bottom are more company specific, and many would consider ho-hum.

Yet, the measures at the bottom of the list, like improving your product, your customer satisfaction, your employee relations, and internal operating improvements are often things the entrepreneur or small business person can directly focus upon. Further, they are often the key to business success, measured in financial terms.

Itís like playing tennis. Even if the goal is to win the match, contemplating the match overall wonít lead to successful play. Focusing upon each shot as it happens will lead to success. Success is measured by each individual serve or return. The match follows the points. Winning small business points means focusing upon what really matters. Success is measured by what you do within your company.