How Covid-19 Changed Business Principles
Business During Coronavirus
Because of the economic uncertainties of the pandemic, understanding business principles has become even more critical to business strategy.
Covid-19 hasn’t changed business principles but has made them even more critical to understand. With this pandemic causing so much uncertainty, businesspeople want to feel like the work they do every day makes a difference and secures their own and company’s future. But when what worked yesterday isn’t working today, it’s difficult to secure anything.
The key to finding success today is to stay focused on the principles of cash, profit, assets, growth, and people. These 5 Business Drivers® define every decisions and strategy inside of a company and are the foundation to building your credibility, career, and company — especially during a pandemic.
From giants like Walmart, Citibank, or Microsoft to the small neighborhood flower shops or mom-and-pop diners, all businesses need cash to pay their bills and other obligations. Cash is the fuel that drives business. Run out of it, and a company can’t pay its debts or employees, can’t generate revenue or profit, and you can only run on empty for so long. Eventually your business will stall, and you’ll be closed for good.
But with ongoing Cash in the tank, a company can weather economic storms, invest in new equipment, expand into new markets, and hire top talent. In short, businesses with cash have options and opportunities. And what business leader doesn’t want options and opportunities? None that I know. In your role, how do you impact cash? You don’t have to be an accountant. Anything you can reduce costs and increase revenues will have an impact on cash.
Profitability is the primary measure that Wall Street uses to determine the value of a company, yet it’s amazing how many companies lose track of the simple rule of selling products for more than they cost! To learn how to gauge the success of your company’s profitability, there are two measure to consider found in the income statement: gross profit and net profit. If the first principle is cash, and cash is the fuel of business, then profit is the engine.
On March 10th 2000, the NASDAQ hit an all-time high – the dot-coms had taken the market by storm. But by the end of that same year, the market had crashed. Why? You could say that their engines were inefficient. They burned up a record amount of cash from investors but couldn’t turn a profit. When the investors realized there was no profit, they stopped giving the dot-coms fuel. And without cash or an engine to generate cash – you’re out of business. The principle of profit is the same today as it was 20 years ago.
Profit is simply the difference between the amount earned (revenues) and the amount spent in buying, operating, or producing something (expenses). Obviously, you want to sell your products for more than they cost! Ultimately, a company’s future is determined by how much cash it generates from profits, where that cash comes from, and how rapidly and consistently it’s produced. In other words, your company’s health is measured primarily by how you conduct your core business to create profit. Given the unprecedented times, this has become the focus of every CEO.
Jim Collins put it best, “Profit is like oxygen, food, water, and blood for the body; they are not the point of life, but without them there is no life.”
Anything a company owns, or controls, is an asset, and companies’ asset strength is being scrutinized like never before. Asset strength refers to a company’s ability to stay viable during marketplace ups and downs. Let’s examine it from three angles:
(1) Leaders will look at total assets and subtract the total liabilities, or financial obligations, to see what’s left over. Hopefully this is a positive number. This is called equity and represents a reserve for possibly raising cash.
(2) Leaders and accountants also study the company’s ability to cover its debts in the short term. They compare cash, and other liquid assets to bills that have to be paid in the next 12 months. Stronger companies can pay their bills and still have liquid assets left over.
(3) Leaders take into account the nature of your company assets, particularly those used to generate revenue versus those that aren’t. If you have more assets that don’t generate revenue, you’d look financially weak. What’s your makeup like? Does your company have a lot of money in assets that aren’t generating revenue? Or are you pickier in your asset selection as a means to generate cash flow?
The phrase “grow or die” reflects the brutal realities of the business world and present dangers. If your company doesn’t grow — expanding its product and service lines, cultivating new customers and markets, increasing its financial strength and ability to attract new capital for further growth — your competitors will. As Steven M.R. Covey’s wrote, “In businesses today, we’re still trying to leverage our past successes to solve new problems. It didn’t work for Rome, and it won’t work for us.”
Some companies have already figured that out. They’ve focused less on sales pitches and more on empathy, increased their online footprint, and emphasized strategies that retain customers.
Investors expect growth, employees are energized by it, customers are attracted to it, and executives are measured by it. What value do you bring, especially in this economic climate, to your role?
The fifth driver is quite simple: without good employees making good decisions and providing value to paying customers, the other four drivers cease to exist. Whether for the external customers that buy your products or the internal customers, aka your colleagues, you have the ability to provide great service.
You can be the foundation on which people can rely. Is there anything you can do to improve your company’s culture within, and anticipate the needs of your customers throughout? Understanding how your company benefits from its relationship with its most crucial asset — people — can help you impact stakeholder satisfaction and the bottom line, regardless of whether you’re the CEO or a new hire.
Making a Difference
These 5 business drivers will help you understand and visualize how even the most complicated business can be analyzed and improved. Like the twenty-six characters of the English alphabet, the 5 business drivers combine in a multitude of ways to form the foundation of organization, products, market position, financing, human resources, and every other strategy or decision in a company. Leaders must set and achieve goals and obtain results in these five areas in order to achieve the most important objective for any company: long-term, sustainable profitability to support its mission. Now that you’ve learned them, where do you start to make a difference?
Become financially literate. Those who don’t understand the language of their company’s business can’t contribute to discussions, make meaningful suggestions, or measure the financial health of their next employer. When an executive speaks on her concerns about a certain underperforming metric, you should know the levers you impact. The 5 Business Drivers are a simple jumping point you can use to navigate the language of business.
Listen to your executives. Quarterly earnings calls aren’t just for the benefit of investors but are your lens into the agenda of your CEO. If you want to perform like an owner, understand the goals of your company. What drivers are your CEO highlighting? What expectations does she list and emphasize? Your ability to improve these objectives will prove your value.
Make an action plan. Now that you understand the financial interests of your company, decide what changes you’re going to make. What impact can you make on your day-to-day business activities to improve your company’s footing? Make changes that can benefit your company now during these tumultuous times and learn to not just be a leader but a business leader.
Regardless of whether your company is public or private, the 5 Business Drivers should be the foundation of the decisions you make to keep your company on the path to profitable, sustainable growth — the goal of every CEO. We find ourselves in unprecedented times when business as usual is not that. As the pandemic worsens in some parts of the country and improves in others, smart employees use the 5 Business Drivers to make faster and bolder business decisions. That’s what your CEO needs now more than ever.