The basics of doing business
13 / April / 20 Visitors: 296 ★★★★★
In this article we will consider the basics of doing business, such as profit, customers, resources and organization of production. Consider the importance of human connections in the world of modern business, connecting the company with customers, employees and suppliers. We will see how the most innovative companies use multifunctional teams, which include not only traditional business functions such as finance, marketing, accounting and manufacturing, but also designers and engineers. In addition, we will discuss the importance of data in the world of modern business. After reading this material, you will learn what makes bad companies bad, good companies good, and how to make your company interesting, innovative, and profitable.
Fundamentals of conducting a modern business
When we think about business, business culture, or business goals, we imagine money, profit, power, or competition. Of course, these things are a direct part of the basics of doing business, but this should not be the goal. The main goal of the business is to create useful things for our customers. It also includes meeting the needs of our employees and our business partners. But make no mistake, business, of course, is making money, but you cannot make that money without customers, employees and business partners.
To be successful in business, you need to understand people. What do customers want? How do they want to get this? How can I achieve greater results from my employees? You must understand the infrastructure: the favorable location of buildings, accessibility of roads, the Internet, the legal system. You must understand resources, materials, raw materials, energy. You need quality resources at a good price.
Now we list the important areas in the intangible sphere. To succeed in business, you need to know what happened yesterday, what is happening now and how you can use data, information and knowledge to make better decisions tomorrow. Finance, accounting, sales and marketing, supply chain management, personnel management, information technology - all this will help you understand the essence of money and the usefulness of working with people. Understanding money, people, information, resources and infrastructure, as well as knowing how to create a useful product or service, are the main principles of doing business and will allow you to start managing your own company.
Each business is created for profit, but most companies can work without it for years. But how can a company that is unable to make a profit stay in business? To try to answer this question, you must first understand the basics of profit.
Profit is the amount of money left after the company has paid all its bills. That is, revenue minus costs is equal to profit. It looks simple, but actually it is not. This simple formula has many nuances. But we will not dwell much on the theoretical part, but consider briefly two variables of our formula:
Revenue (income) is the amount of money that a company receives from its customers for its goods or services;
Costs are the sum of all expenses a company has in producing a product or creating a service.
Each company tries its best to tilt this balance in the direction of income in order to make a profit. It could be:
Fierce competition to increase sales;
tight cost control, such as reducing wage costs or using materials of lower quality, but this can push customers away;
increase in production area, opening of a branch, increase in stocks or employee training.
Making money, being profitable is what the business does. These are important decisions that business leaders face daily.
Any business planning begins with defining an idea, where, in turn, the value of the idea lies in the resources that you possess. It could be:
Your knowledge, skills and experience;
Excellent communications with customers and suppliers;
connections with smart and influential people;
industrial building, minibus or other material resources.
In business, knowing your resources is vital to understanding what you have and what you need. What makes you special or distinguish your company from competitors? What will you use in developing new products or attracting new customers?
Knowing your resources is also very important for presenting your company to potential investors. Of course, a good idea may be attractive to a future investor, but without the accompanying resources, it has no value.
Defining your product or service
Perhaps you are already producing or have decided on the production of the main product or service. But every business needs to create an assortment of products or services in order to profit from commercial activities.
Make sure that you take into account the strengths and weaknesses of your company and listen to the opinions of your employees. They can see errors at different stages of the business that you are not able to take into account, and also open up opportunities for you that you would never know.
Western companies usually create multi-functional teams to search for new products or services. Such teams are created from the leaders of all departments in the company, who are able to consider the entire production process, logistics and sales. Most often, two or three such teams are created to search for different ideas for a new assortment.
If your company is in search of new products or services, then make sure that the development teams are given specific instructions that relate to issues of design, finance, marketing, design and the supply chain.
When you think about a new product, consider its variability. Many product options can:
Expand the market;
help compete with other manufacturers;
make extra profit on the rarity or individuality of the product, etc.
On the other hand, the limited variety of the product contributes to:
Cost reduction due to bulk purchases of raw materials or parts;
reduce costs for storing the product and placing it on the trading floor;
As your company develops new products and services, consider all possible options. What options will the client value most? Is the client willing to pay more for an individual? Will you increase your market size with many types of products? Will the proposal of such an option be profitable? What kind of future product are customers ready to accept as a standard? Standard product types are easy to mass produce.
The main forms of business ownership
The business planning process should determine who will own and manage it. Briefly go through the main forms of business ownership:
Individual Entrepreneur (IP). One person is the owner of a business that receives all the profits and carries all the economic risks.
Limited Liability Company (LLC). If the business is planned to be created together with partners, then the initial form of ownership will be LLC. Each participant of this form contributes financial or material resources to the authorized capital and risks only his share in it. Not all partners are required to manage the business, but only the one who is the CEO.
Joint Stock Company (JSC). If the partnership wants to grow and financial resources are required for expansion, then the owners can issue their shares, backed by the material assets of the company, and sell part of them to future investors. This form of ownership already gives the company the right to be called a corporation.
The AO owner is its shareholders, who elect the board of directors, and those, in turn, choose the top managers of the company. It is the top managers who manage the corporation, not the shareholders.
Cooperative. This is an organization run by people who use its services. Most often it is created for joint business activities or joint consumption of goods and services. A striking example is credit unions - cooperatives in the world of banking, which are related to non-profit organizations. Credit unions not only concentrate on profits, but also provide their members with excellent opportunities for accumulating and borrowing money.
We briefly reviewed the basic property models that you can use as you develop your own business.
Production and delivery of goods or services
Any production of a product begins with the use of raw materials purchased from suppliers. Each purchase of material from a supplier is an opportunity to improve the product or service provided. Procurement management is an area of commercial activity where the company is engaged in the search for suppliers, procurement of raw materials and ensures that all this is safely stored and effectively used.
It is already becoming clear that good procurement management can improve customer satisfaction with a product. Cooperating with reliable suppliers, the company can timely produce quality products. The importance of what is said will be considered in a short example. To do this, take a company for the production of mobile phones and an integral part of the phone - a battery or battery.
People appreciate high-quality phones, and in such a product, the battery should be durable, safe, light and not overheat. If all these qualities of the battery are produced by our telephone, then we can count on good sales. But it is worth remembering that sales revenue alone will not bring us profit. We need to consider the needs of our company. The company must control costs.
While we are buying great batteries for our phone, we need to know what the total cost of buying these batteries will be. This is not a unit price, it is important to consider the total cost of the supplied batteries:
Storage costs for batteries;
expenses related to theft and damage;
costs of negotiating and placing orders from battery companies.
It is also important to consider whose side pays for the delivery of batteries.
On the one hand, the supplier is responsible for determining the unit price and quality, but on the other, he is also able to influence our costs associated with storing batteries. If the supplier is able to fulfill orders quickly, we can keep inventory levels low, thereby reducing material storage costs.
What if in the future, we plan to release a new design of phones, and we need new, improved batteries that match our design and do not increase our costs? In modern business, suppliers and manufacturing companies are business partners. When we sell more phones, they sell more batteries. On the other hand, if they make the batteries better, we can sell more phones. Therefore, suppliers and innovative companies must work together to determine demand, develop new technologies, and develop production and logistics strategies.
No matter what raw materials your company buys, you should always take into account consumer interest, choose a profitable supplier and monitor the company's expenses for the purchase and storage of raw materials.
Now that we have considered the costs of purchasing and delivering raw materials, it's time to talk about logistics. When we talk about logistics, we need to find answers to the following questions:
How to keep stocks low?
How to quickly and cost-effectively move goods to sales centers or end customers?
What type of transport to use at different stages of production and delivery of goods?
What type of packaging to use for safe product delivery?
What are the tariffs and required documentation in the countries to which the export of goods is planned?
Uncontrolled stocks, violation of deadlines or errors in the delivery of goods can forever deprive the company of the client. Therefore, logistics managers must make all kinds of decisions that balance cost, speed and customer satisfaction.
Do not forget about reverse logistics, which deals with returned goods, items requiring repair, reusable packaging and recycling of various kinds of components for reuse.
Sale of goods or services
Any planning for the sale of goods or services of a company begins with identifying potential customers and the target market. The target market should include people whose needs the company is able to satisfy while making a profit.
To determine the target market, companies consider the following indicators, such as gender differences of clients, age of potential customers, geography of their residence, their hobbies. How do they earn their living, how much do they earn, and even better, how much money do they spend? Perhaps the target market is not made up of people, but companies?
For example, for a chain of stores selling stylish clothes for children, it is important for the marketing department to know that their target market consists mainly of women 25–40 years old in the northwestern part of the country who are married and have children aged 4 to 10 years living in their homes or apartments, where these women are the main buyers, and their annual clothing budget ranges from 300 to 1,500 dollars per child.
Such information will make it clear where to place stores, how to arrange them, which customer service staff should be hired, and possibly what events in the store should be planned. Where to send catalogs and advertisements, and how the website should look. Knowing customers, their preferences and where they are, gives you a better chance of getting in touch with them, which leads to increased sales. In this way, the company not only increases sales, it creates a target market loyal to their brand.
After determining the target market, it is important to create an emotional connection that will make a person buy your product or service. There are three main questions to consider: Who will the company focus on? What does the company want to say? How will the message be delivered?
First, the marketing department should identify the people whom they would like to call potential customers. It is easy to distinguish such customers if the target market is rather narrow. In the case of large and diverse markets, which include people with very different lifestyles, it creates problems for accurately determining the target audience. In this case, you need to break the market into small segments and only then convey the necessary messages and use an effective medium.
After the companies have decided on the market, they should know exactly what they want to tell their customers and how to interest them. What emotions do they want to evoke from the client: excitement, inspiration, fear or trust? In any case, the client must be called to action: make a purchase, join our club, visit our website. During message development, the client should know that the product already exists. The client must understand that for his money he will receive some kind of value, which means he will be forced to look for a product and purchase it.
Developing a message that can quickly inform, inspire and motivate someone to act is a rather complex process, requiring a creative approach and a deep understanding of human behavior.
After creating the desired message, the company should think about ways to deliver it. Delivery can go through the Internet, television, car radio, various events, perhaps customers will hear your message from their friends or find out about it in the store. It is worth considering that each of the methods has its own specific audience, so the marketing department should be able to send the same message using different means.
So, customers are interested and are considering buying. They found a company representative or arrived at the store, or went to the company’s website. What should a business think about at such times? To do this, we identify some key issues that must be considered when making the first sale, and then re-purchase from the company.
Therefore, employees, the website, the interior of the store or office of the company must demonstrate that it is committed to the client and his needs. Signs, furniture, cleanliness, how company representatives look and act, words that are used, documents that customers must fill out and sign, they all carry the message.
Consider the issue of delivery. Even when the customer is ready to make a purchase from the company, he would like to know when the product or service will be delivered. Fast delivery, free delivery, simplified checkout in the store, installation? It is important to know what your target market needs, and it is important to understand what your competitors are offering.
Starting a business, developing a new product, or initiating a company’s entry into new markets is always costly.
The company buys raw materials and equipment, buys or rents offices and factories, hires and trains staff, and then opens a business. Please note that the company has not completed the sale. Therefore, it is important to make sure that you have enough money to start a business.
When a company makes its first sales, much may think that the business is starting to be profitable. In fact, this is not so, the company does not make a profit until it pays for what was purchased earlier. It may take months or years before a business begins to be profitable.
Even if the business owner expects to make a profit due to sales growth, he needs to take into account the costs of increasing space, hiring more people, using more energy (water, electricity, etc.), and buying more cars and materials. Therefore, the owner should have enough financial resources to expand, even when incomes are just starting to grow.
If all the calculations are made, and you expect a quick return on investment, consider some options for borrowing money. This is called debt financing. Common types of debt financing include loans and bonds.
A loan is a transaction in which a borrower receives money from a lender and agrees to pay off the debt over a period of time. The lender may be a bank, credit company, friend or family member.
Bonds are, in fact, small loans from investors. Thus, if you buy $ 500 bonds from Coca-Cola, you lend them $ 500. In turn, they will pay you as if you are a bank, and just like a bank, they will pay you interest. But Coca-Cola can issue a low interest bond and still raise a lot of money, while a startup, issuing bonds at a high interest rate, risks not getting enough funding.
But what if the company does not want to borrow money and pay interest? In this case, the owner can give the investor a share in the company by issuing shares. With the help of shares, corporations attract a sufficient amount of financial resources.
Small private companies can go to venture capital funds. These funds will give money, but will want to own a company in return. For example, a company could sell them 25% of the business for $ 5 million in investment. Now she has 5 million, but in return the investor will require the company to expand it so that their 25% stake in it grows as it develops.
Loans, bonds, and equity investments are some classic ways in which companies receive funds, but do not forget about crowdsourcing, business contests and grants from the government.
Now consider the situation when a business begins to become profitable. How to effectively use the profit received from entrepreneurial activity?
If a share in the profit was promised to investors, then care should be taken to ensure that each investor receives his part from it.
All income taxes prescribed in the legislation of the country should be paid.
Bonus payment to company employees. You can spend part of the profit on raising salaries or on raising some employees in the post. Often companies pay for the training of their employees in colleges or universities.
Updating the workplace of company employees (new office, equipment, etc.).
Expenses for business expansion (new facilities, people, raw materials).
Investing in research and development of a new product or service.
Investing in commercial activities of other enterprises or charity.
In addition to distributing their profits, companies can transfer part of it to a stabilization fund in the event of an economic crisis, adverse business conditions or political upheavals.
Customer Relationship Development and Management
Any business tries to keep its customers and it is important for him not what happened yesterday, but what the client needs today and what he needs in the future. Now more than ever, companies rely on data from customers to discover the mistakes they made in the past and help them shape the business decisions they face today.
The first hurdle in using data to make better decisions is data collection. Some companies require the client to create an account, and then using online services they can track all of his actions that he performs using his account. The data collected may indicate changes in the structure of purchases of company customers.
Successful companies look very carefully at the data received. They can show important statistics and provide answers to very important questions for the further development of commercial activities. For example, Starbucks can find out how much coffee is consumed during cloudy times. Should Amazon consider delivering food in cities? Or should Netflix invest in Hispanic-oriented programming?
Understanding customers, who they are, what they like, when they want it, how their preferences change - this is the most important detail in the basics of running a company.
As they grow, companies must consider their logo and colors, their employees and equipment, their website and advertisements, the offer of their products and services, and where they will be sold. If the company has formed a certain circle of customers loyal to it, it is always useful not to go beyond the scope of its business. For example, Coca-Cola customers have mixed reactions if the company decided to produce electric cars. Or Ikea would start producing laptops. It is always worth considering the role of the company in a specific direction of doing business and its recognition in the market before planning a new line of business or an assortment of goods.
Try to develop your company within your brand. Do you need to understand what your company associates with your customers? Reliability, quality, service or speed? This kind of information will let you know in which direction to develop in order to meet the expectations of your customers.
The economy consists in understanding human behavior, knowing what incentives drive a particular type of behavior. What makes them buy, what makes them sell? How do companies set prices? Understanding the economy, the business owner understands how buyers and suppliers behave.
This type of knowledge will help in developing strategies, entering into business transactions and making everyday decisions in the direction of efficient use of resources and the correct determination of the price of goods or services.
Supply and demand is one of the most basic concepts in the world of economics. It helps us explain the prices that companies set, the prices that customers will pay, and the amount of product that is produced and ultimately bought. This tells us that in a competitive market where several companies are able to satisfy the customer, suppliers will create enough products to meet consumer demand at a certain price.
The concept itself says that when supply exceeds demand, prices are likely to decline. Conversely, when demand exceeds supply, prices can rise. Do not forget that the lack of supply in the market provokes the formation of a competing business to satisfy unfilled demand. Therefore, the owner of the company should correctly calculate the number of products.
Now we will consider such an indicator of the economy as the market index. Each country has its own commodity exchange (Nasdaq, RTS, TOCOM) according to which business people monitor the state of the economy based on popular indices (Dow Jones, SP 500, MICEX 10, etc.). On each exchange, you can find indices by industry sector, which also helps companies assess the situation in different sectors of the economy.
Inflation is another indicator worth tracking. It indicates the possibility of rising prices and falling purchasing power of the national currency. If inflation is rising, then commodity prices and wages should increase, which will lead to higher costs. As prices rise, customers can buy fewer products because their money is losing their purchasing power.
Economists often cite the relationship between bank interest rates and inflation. When interest rates go down, money is easier to borrow. This means that the economy will have more money. As a result, inflation may increase as all this money will compete for a limited supply of goods.
Another indicator of the economy is unemployment. High unemployment allows companies to hire people for lower wages and vice versa, low unemployment leads to increased salaries and expenses of the company.
All of these indicators should help businesses navigate the global or national economy. The ability to read them correctly enables companies to predict what will happen in the future and prepare for it correctly.