Most people believe pursuing a new idea means building a business. For many people the idea is exciting, even romantic. You start thinking about your business culture and how you'll be different- dogs in the office, casual dress every day and totally free health care. Everyone will love working for your company and love you for building it.
The reality of building a business is quite different than the romantic notions. Hiring and managing employees is expensive and difficult. Lots of time it's just plain messy. What are you going to do if you hit a rough patch? Lay off employees. Been there and done that. It's no fun at all. In fact it's the opposite of your ideals in building a business.
In building a business I don't want to raise a cow. I'd rather focus on how fast I can eat a steak. Building a business is a lot like animal husbandry. You have this little delicate thing that needs care and feeding. You pour money and time into the needs of that struggling new born business and ultimately down the road what do you do? It's off to the slaughter to cash out your effort. Most people are in it for the steak. So why wouldn't you focus your business structure and your business plan to get you there as fast as possible.
The steak is free cash flow. It's the money left over after your revenues are balanced against your business costs. It's the money you can put in your pocket or plow back into the business. Ultimately, for most companies, free cash flow will be the basis of their business valuation whether people invest or buy you out. Streamlining your business model puts more free cash flow into your pocket sooner. You will have a smaller business but you will be generating more free cash flow. That's how you eat the steak and avoid raising the cow.
For most new ventures the less you have to directly hire people, and the less you have to invest in capital outlay expenses, the faster you'll grow and the greater your free cash flow. This is your business efficiency. You take in a dollar, process it through your business and what's left over is the fruits of your labor. It's the flour from the wheat, the gold in the pan and, yes, the steak on the table.
When thinking about turning an idea into a business here are the top things to consider in your business model to help you focus on building cash flow instead of building up the business. You want to focus on identifying those functions and processes that are critical to generating AND keeping cash in the business. Any functions and processes you'd be inefficient with you want to hand over to others that have those core competencies you lack.
Identify your core business value and keep that in-house.
In most businesses you have several overall functions that need to occur in order to operate. You need to have a product or service. That product or service needs to be sold. You need to collect revenues and pay bills. Pretty much every business needs to fill these functions. More complicated businesses could have lots of other functions that need to occur such as research and development, marketing, manufacturing, distribution, packaging, etc. When you think about your business ask yourself what are the 1 to 3 functions you'd trust to no one outside your internal company? Your staffing and your capital expenditures should be focused on those few things.
I had the privelage of starting a company with a very experienced venture capitalist. We were bringing out a company that had a complex mix of proprietary hardware, software and services all bundled together into a solution. We couldn't buy the solutions from others. It had to be our own. At the end of the day if you draw an organizational chart and identify functions and internal full-time employees that company was a sales and marketing company. There was not an engineer, manufacturer or installer within the organization directly. The company's salary load was mostly for sales and marketing personnel. It was by design and it allowed the company to move much faster with less money outlay.
Use contractors before employees and part-timers before full-timers.
Employees are expensive and unless they are very talented too, they can't fill all the myriad needs your company is going to have in its early stages. You also have big risks in hiring the wrong personnel when you're getting started. Contractors may seem expensive but usually you are able to hire very seasoned and professional employees and use them for only those things you need. When you're ready for internal people, hire the contractors or cut them lose. They will understand.
For some positions, especially those that have specialty skills (i.e. engineers, programmers, designers, etc.) you will be constantly challenged keeping full-time employees utilized 100 percent of the time. They often go through cycles of peak demand and then very little as you build products, address issues, support clients, etc. Contractors can be an ideal fit for the situations in which you need very skilled and knowledgeable people but not all the time.
I was working with a "dot bomb". It was a well funded dot com that found itself in the wrong timing of the dot com blow out. The company was in a reverse cycle, shedding costs and therefore shedding employees. The entire IT department was turned over to me. The department had already been cut in half. There were three full-time employees left. What did we do? We outsourced the department to one half-time contracted IT person. He cost $150/hour which seemed like a fortune at the time of cost cutting BUT he did the job of the last three IT persons and then some. We saved over $25,000 a month in salaries and benefits and paid the contractor $12,000 a month. The net savings was $13,000 and we got more done. Why? Because we had too many of the wrong people with too narrow of skill sets. They mostly sat idle. We paid a premium for a very talented person with very broad skill sets and we became more efficient with our money.
If you must hire then hire someone part-time. You will save on benefits and you will be able to scale up their work as you need it. It saves money in the short run and it allows you to prove out your need for full-time work. Many small business owners can't afford the benefits these days so they are hiring multiple persons part-time instead of one full-time person. Welcome to the new economy.
Outsource any non-core business functions.
Most companies use outside tax accountants. Why? Because unless you are a consultancy its just not that important to have a full-time tax accountant in-house. The same can hold true for lots of other kinds of positions. If you are a manufacturer at your core then having direct sales people may not make a lot of sense when it's strategically better to use other companies to distribute your products. If you are a sales company at your core then why do you want to research and develop your own products? It can make more sense to be distribution for a manufacturer. Accounting, engineering, distribution, warehousing, manufacturing, accounting, administration, customer service and on, and on, and on can be outsourced to great partners for a reasonable cost.
As mentioned above, pick your top 1 to 3 core business functions. Keep those in-house and outsource the rest.
Partner with the best.
When you outsource, partner with the best. Pick the best companies and sell them on partnering with your business. They should be tops in their field and have more than enough resources to work with your business as it grows. It will take more effort and a bit more money to get the relationship established but if you partner with the best they will bring their efficient processes, systems and people into your business. This is critical and allows you to have a long term partnership as you grow.
I have found long running partnerships integrated tightly into your company to be invaluable. Let them know your financial status, operational triumphs and challenges and your growth pace and they can work tightly with you bringing you great insight and guidance cheaply. I've gone so far as to take partner employees and make them part of the internal management team participating in on-going management meetings.
Pay overtime before hiring someone new.
Very few companies run perfect growth curves. Usually businesses are "lumpy". Sales are up and then down. Inventories are up and then down. You have peaks in people resource needs and then there is less demand. You should keep everyone in the business almost painfully busy before you hire someone new. Pay people overtime, give them bonuses or raises and keep them working hard. A new hire needs time to learn your industry, company and culture. They become efficient over time but can be a hindrance in the short term. Chances are you don't need that person, really. You just think you do. Use your existing resources (employees, contractors and partners) more before you bring someone else on.
Purge the bottom 10 percent of performers.
This is tough but if people aren't performing then you need to give them notice, give them a chance and then let them go. This all needs to be done in short order. Jack Welch, former CEO of GE, made this phrase famous. It holds largely true. Most people think there will be major pain if someone leaves. In most circumstances you'd be surprised at how little negative impact that actually has.
This assessment is for any resource so your contractors and partners (or partner employees) are included in the assessment.
License before you build.
Before you decide to build software or products from scratch ask yourself if you can partner and license others technology and products first. Research and development is expensive and has lots of risks for timelines and for costs. Licensing some or all of another person's or company's products can be the safest way to go. Sometimes you'll find a great partner by looking in a different market of the world. There are companies there that would love to partner and get their products into your part of the world. If after you're established and grow as a company you feel you need to go the proprietary product route then you'll have much better resources to handle the shift to your own intellectual property.
You'd be surprised how readily many companies will license what they own. Give it a shot.