Build a profitable business-the baby steps part 22

Get hold of some play money. We often get asked whether it´s true that getting hold of the first million is the hardest and why that is? We have found that this statement is quite accurate. There are several reasons for this. First of all if you pass the 1 million mark it is likely you have done so by starting and operating a business. Saving up to a million is a lot more uncommon (although that may  not be the case in the future). And if you are only able to make a million by running an enterprise it´s often just a matter of time before you make your next million and so on: Just continue doing what you are doing, in fact try to do even more of it and the results will follow. The reason that the saying goes “the first million is the hardest” is that in order to make a million you very often need to have a profitable business in place in the  first place. But once you do have a successful enterprise in place making a million is to some extent a matter of time. By being a successful entrepreneur you have increased your chances immensely. You are playing the game, after all, and once you are a player of the game anything is possible. Even things that may sound impossible to most people.

Another important aspect of running a profitable business and getting the first million under your belt is that it brings with it the courage and financial means to reach out for even greater goals. From our personal experience there is a  big diffference between having a reasonable amount of money in your bank account and trying to get to that initial amount of money. There will be opportunities coming your waay from time to time and when those opportunities come it´s important to have the necessary firepower to capitalize on them. You see the best opportunites all require the ability to cover some intial expenses. Making money in most cases will cost some money to begin with. Once you´ve reached that first million it will be so much easier to grab all those opportunities coming your way.

There is another concept at play here, one that we like to call “real money vs play money”. What this means is that it is a lot more difficult to risk money that you can´t really afford to lose. And if you are afraid of losing your money your are not going to be able to approach your business decisions in the same undetached manner that is required of you if you want to succeed as an entrepreneur. Scared money neve wins. On the other hand, if you have all the basic expenses of your lifestyle covered. If you have enough money to swing and miss once, or a few times, everything is that much easier. Íf you can stand some pain, the irony is that that pain has a lot less chance of materializing. Only when you act in a rational unemotional and distict manner do you have the best chances of succeeding. If you are thinking too much about the money, you will probably end up making the wrong decision or end up turning down the business opportunity altogether. That´s the real difference between “real money” and “play money”. “Real money” is something you don´t want to lose. It is money that makes you feel safe and enables you to roll with some punches for a while. “Real money” is your safety net. “Play money” on the other hand is money that you have in excess of your “real money” stash. It is money you could afford to lose, although you would obviously like not to. Once you get some “play money” in place you are going to be that more much comfortable with being a little looser and more aggressive. You can afford to throw a lot more punches, and not having to worry too much about getting hit. After all, you have a solid defense in place, so you can´t really get that hurt. You can sometimes even afford to go for the option-styled business opportunites where there´s a small investment but a large potential profit at the end of the road.

Getting hold of that “play-money” will be one of the most important steps of reaching for true wealth that you can ever take. This is one of the main reasons for the saying “making the first million is always the hardest”. Once they get hold of their first milion many entrepreneurs feel that they have a cushion in place , or some “play money” if you will. And that makes the next million (s) that much easier. It is important to understand that the amount that makes people feel safe can vary quite a bit. Some people are happy with a hundred thousand as “real money” and are keen on betting anything above that amount. We have known some investors who are risk avert to the point that they feelt they needed at least a couple of millions in place before they felt they could loosen up a little and begin thinking about comitting part of their cash as “play money”. It is in the end a personal decision, one that you should take alone. But whatever you do, try to get hold of that initial “real money” as soon as possible, and after that use the excess cash (“play money”) to go for the jugular once the right opportunity presents itself.

 

Risk takers. Great entrepreneurs are risk takers. Now that does not mean that they like to bet the house. It merely means that if they see an opportunity they are not afraid to pounce. To put it another way; great entrepreneurs are willing to take calculated risks when circumstances warrant them to do so. They can stand on the sideliens for lengthy periods of time, plying their trade. but once they see opportunity, they do not let the discomfort of risk deter them from capitalizing on whatever chance comes their way. In general you will find the richest entrepreneurs to be some of the biggest risk-takers. That doesn´t mean that taking big risks is the magical ticket to massive wealth. For each major risk-taker that strikes gold there are a couple that crash and burn. Unless you are looking to become one of the richest men in the world you don´t really need to be a big risk taker to become a successful and wealthy entrepreneur. If you are looking to be financially independent but not necessarily a mega-rich man, success is less about the ability to take risk and more about the ability to take smart risks. So what´s the definition of smart risk? We see smart risks as situations where there is an assymetrical relationship between risk and reward. What this means is that you don´t have to risk that much in order to be able to gain a lot. Put another way, it means that for every Euro that you risk you are standing to make a large multiple of Euros if everything pans out according to plan. Indeed there are situations where you can risk nothing at all and yet stand to gain a lot. In situations where you are able to cut your losses short or even abandon a bet if it seems to be working out poorly you have an excellent opportunity to take on some risk. After all, it doesn´t matter if you are wrong since you can just choose to terminate your position. If it turns out to be a winner though you can just let it ride and go collect your paycheck.

 

Financial literacy. As you embark on the entrepreneurial road you will soon find that the language of business is something completely different from what you are probably accustomed to. Investor great Warren Buffet used to say that the language of business is accounting. We agree to a certain point, but we believe there is a lot more to it than that. It´s understanding all the numbers, and learning to read the story that they are telling. To be able to aquire a quick understanding of the underlying health of a business quickly one needs to have a certain degree of financial literacy. The numbers are there. All you need to do is to learn what to look at, how to decipher it and what questions are the relevant ones you need to ask before you move any further. There are many situations where it is important to be able to read the financial story being told and understand it. First of all it will hjelp you gain a good understanding of how your own business is doing. And by the way, your own business is the perfect ground floor of your financial literacy learning experience. Start by going over all aspects of your own enterprise. You should be able to understand it fairly quickly and this will proive to be immensely helpful once you start looking at the financials of other companies. If you understand the financial story that your own company is telling you can use that information as a reference when you look at other companies. We have found that this is a very effective learning methodology for those who are new to accounting and financial reports.

Why is it so important to understand the financials of an enterprise. It´s important for a number of reasons. First of all the message of a financial report is telling it like it is, providing that the facts are all correct. It´s the truth. No matter what somebody else is telling you or trying to convince you about, the better part of the real story is to be found in the financial statements of the last few years. There is no lying in financial statements (at least not if they are done according to the law, and are read by someone who understands their language). They can help you making rational, unemotional decisions. They can shed light on the health of the enterprise. They can explain in all honesty what many employees, partners or competitors would not tell you to your face. They speak the truth, as long as you learn how to tune in to listen to them. Get some financial literacy under your belt. Don´t be another of those persons throwing big numbers around that have no meaning to the. Understand business on a deeper level, commit to being able to tell a winner from a loser just by looking at the numbers. Just like a doctor needs to be able to read and understand the symptoms of a patient before he prescribes a treatment, you must lear to read and understand the symptoms of an enterprise in order to be able to take the most rational and logical course of action. There´s more to the numbers than meets the eye. Learn it. Otherwise you will be just another scmuck fumbling around in the dark. Ok, we have to acknowledge that we do know successful entrepreneurs that are not that into numbers and financial literacy. But the majority know their numbers by heart. In fact we know one entrepreneur that can give you any number in a blink of an eye concerning his business for the last decade. What´s more is that he does it with surprising accuracy, we have never caught him on the wrong side of a call. Needless to say this has come in handy for him on more than one occassion. You don´t have to know it all by heart straight away. Just get the basics in place as soon as possible and the rest will come naturally after a while. Learn about your balance sheet. Know your P and L statement. And understand your cash flow. These things are really the fundamentals of your business, and you had better understand them thoroughly.

 

Bring the fight to them. How does small beat big? Bring the fight to them. Specialize in guerilla warfare. Strike where they are unprepared. Find a niche which they are not covering and be best in that niche. Offer something that the bigger companies are unable to. Some of the strengths of the big enterprises are also their major weaknesses. They are large. They are organized. They are plentiful. But a large army cannot turn on a dime. A group of guerrilla warriors can. Where the large army is slow, structured down the the last details and has many steps in their hierarchy- the group of guerilla warriors can react quicly, adapt with speed to any situation and improvise on the go. Where the big army needs to run any action through an endless chain of command, the small guerilla group can decide then and there. Small does not beat big in a head-on charge. That would result in a blood bath. There are simply too many of them, they have an endless supply of resources and theír cost-effective “assembly line”-approach to doing business would inevitably grind the smaller group down.

But in a guerilla type of battle the small group can emerge victorious. Choose your battle field carefully. Only fight on your own back yard where you know every inch like the back of your hand. Be quick to adapt and change direction, and be swift in everything you do. The customer wants a tailor-made service? Give it to thee. Quickly and efficiently. The customer wants something the big companies don´t have on their menue. Provide it to them if possible. Be personal. Let the customers understand that you care about them. Let them know that you will not treat them like just another face in the crowd. Be keen on adopting new technologies and learn about new trends in your business area. Try beating the big companies to the punch line. Be a leader, not a follower. While they are marching slowly in a disciplined line, you must be on your toes, constantly looking for ways to exploit the fact that they must move to the drumbeat.