Basics of doing business. What a New Entrepreneur Needs to Know

In this article, we will look at the basics of doing business , such as profits, customers, resources, and organization of production. Consider the importance of human connections in the modern business world, linking a company to customers, employees, and suppliers.

Learn how the most innovative companies use cross-functional teams that 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 modern business world. After reading this material, you will learn what makes bad companies bad and good companies good, and how to make your company interesting, innovative and profitable.

Fundamentals of modern business

When we think about business, business culture, or business goals, we think of 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 do not be mistaken. Business, of course, is all about making money, but you can't make that money without customers, employees, and business partners.

To be successful in business, you need to understand people. What do clients want? How do they want to get it? How can I get more from my staff? You have to understand the infrastructure: the favorable location of buildings, the accessibility of roads, the Internet, the legal system. You have to understand resources, materials, raw materials, energy. You need quality resources at a good price.

Now let's list the important directions in the non-material sphere. You must understand what happened yesterday, what is occurring right now, and how you can use data, information, and knowledge to make better decisions tomorrow if you want to succeed in business.Finance, accounting, sales and marketing, supply chain management, human resources, information technology will all help you understand the essence of money and the value 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 foundations of running a business and will allow you to start managing your own company.

Every business is built to make a profit, but most companies can go years without it. But how can a company unable to make a profit stay in business? To attempt 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 of its bills. That is, revenue minus costs is equal to profit. It looks simple, but it really isn't. This simple formula has many nuances. But we will not dwell on the theoretical part in much detail, but consider briefly the two variables of our formula:

Revenue (income) is the amount of money a company receives from its customers for its products or services;
Costs are the sum of all the expenses a company spends on producing a product or creating a service.

Every company tries its best to tilt this balance in the direction of income in order to make a profit. It could be:

tough competition to increase sales;
tight cost controls, like cutting wages or using lower quality materials, but this can alienate customers;
increase in production area, open a branch, increase stock or train employees.

Making money, being profitable is what business is all about. These are important decisions that business leaders face on a daily basis.

Any business planning begins with the definition of an idea , where, in turn, the value of an idea lies in the resources you have. It could be:

your knowledge, skills and experience;
excellent relationships with customers and suppliers;
connections with smart and influential people;
production 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 sets your company apart from the competition? 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.

Basic forms of business ownership

In the process of planning a business, it should be determined who will own and manage it. Let's briefly go through the main forms of business ownership:

Individual entrepreneur (IP). One person is the owner of the business, who receives all the profits and bears 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 company's tangible assets, and sell part of them to future investors. This form of ownership already entitles the company to be called a corporation. The JSC is owned by its shareholders, who elect the board of directors, who, in turn, elect the top managers of the company. It is the top managers who run the corporation, not the shareholders.
Cooperative. It is an organization run by the people who use its services. Most often created for the joint conduct of economic activities or the joint consumption of goods and services. A striking example is credit unions - cooperatives in the world of banking, which belong to non-profit organizations. Credit unions not only focus on profits, but also provide excellent opportunities for their members to save and borrow money.

We briefly reviewed the main ownership models that you can use as you grow your own business .

Definition of your product or service

Perhaps you already produce or have decided on the production of the main product or service. But every business needs to create a range of products or services in order to be commercially profitable.

Make sure you take into account the strengths and weaknesses of your company and listen to the opinions of your employees. They can see mistakes at different stages of the business that you are unable to account for, as well as open opportunities for you that you would never know about.

Western companies usually create cross-functional teams to search for new products or services. Such teams are made up of leaders from all departments in the company who are able to consider the entire production process, logistics and distribution. Most often, two or three such teams are created to search for different ideas for a new range.

If your company is looking for new products or services, then make sure that development teams are given specific instructions that address design, finance, marketing, engineering, and supply chain issues.

When you think of a new product, consider variability. Many product options can:

expand the sales market;
help compete with other manufacturers;
extract additional 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;
reducing the cost of storing the product and placing it on the trading floor.

As your company develops new products and services, consider all possible options. Which options will the client value the most? Is the client willing to pay more for individuality? Will you increase the size of the market with multiple product types? Will offering such an option be profitable? What kind of future product are customers willing to accept as a standard? Standard product types are easy to mass produce.

Production and delivery of goods or services

Any production of a product begins with the use of raw materials and materials purchased from suppliers. Each purchase of material from a supplier is an opportunity to improve the product or service provided. Purchasing management is an area of business where a company searches for suppliers, purchases raw materials and makes sure that everything is stored securely and effectively used.

It is already becoming clear that quality procurement management can improve customer satisfaction with the product being released. By cooperating with reliable suppliers, the company can produce quality products in a timely manner. Consider the importance of what has been said with a short example. To do this, take a mobile phone company and an integral part of the phone - a battery or accumulator.

People appreciate high-quality phones, and in such a product, the battery must be durable, safe, light and not overheat. If all these qualities of the battery have a phone produced by us, then we can count on good sales. But it is worth remembering that sales revenue alone will not bring us profit. The demands of our business must be taken into account. The company must control costs.

While we are purchasing great batteries for our phone, we need to know what the total cost of buying these batteries will be. This is not about the price per unit, it is important to consider the total cost of the batteries supplied:

battery storage costs;
costs associated with 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 of the product, but on the other hand, he is also able to influence our storage costs. If the supplier is able to fulfill orders quickly, we can keep inventory levels low, thereby reducing inventory costs.

What if, in the future, we plan to release new phone designs and need new, improved batteries that fit our design and don't add to our costs? In modern business, suppliers and manufacturing companies are business partners. They sell more batteries when we sell more phones. On the other hand, if they make better batteries, we can sell more phones. Therefore, suppliers and innovative companies must work together to identify demand, develop new technologies, and develop manufacturing and logistics strategies.

No matter what raw materials your company purchases, you should always consider consumer interest, choose a profitable supplier, and keep an eye on the company's costs for the purchase and storage of raw materials.

Now that we've covered the cost of acquiring and shipping raw materials, it's time to talk about logistics. When we talk about logistics, we must find answers to the following questions:

How to keep inventory low?
How to quickly and cost-effectively move goods to distribution centers or end customers?
What type of transport to use at different stages of production and delivery of goods?
What type of packaging should be used to safely ship the product?
What are the tariffs and required documentation in the countries to which you plan to export the goods?

Out-of-control inventory, missed deadlines, or errors in product delivery can permanently deprive a company of a customer. Therefore, logistics managers must make all sorts of decisions that balance cost, speed, and customer satisfaction.

And don't forget about reverse logistics, which deals with returned goods, items in need of repair, reusable packaging and recycling of various kinds of components for reuse.

Sale of goods or services

Any sales planning for a company's products or services begins with identifying potential customers and a target market. The target market should include people whose needs the company can satisfy and still make a profit.

To determine the target market, companies consider the following indicators, such as differences in customers by gender, the age of potential customers, the geography of their residence, and their hobbies. What do they do for a living, how much do they earn, and even better, how much money do they spend? Perhaps the target market consists not of people, but of 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 is predominantly women aged 25-40 in the northwestern part of the country who are married and have children aged 4 to 10 living in in their homes or apartments, where these women are the main buyers and their annual clothing budget is between $300 and $1,500 per child.

This information will give you an idea of where to locate stores, how to design them, what kind of customer service staff to hire, and perhaps what kind of in-store activities to plan. Where to send catalogs and advertisements, and what the website should look like. Knowing your customers, their preferences, and where they are makes you more likely to connect with them, which leads to more sales. In this way, the company not only increases sales, it creates a target market loyal to their brand.

After identifying your target market, it's important to create an emotional connection that will make a person buy your product or service. There are three main questions to consider here: Whom will the company target? What does the company want to say? How will the message be delivered?

First of all, the marketing department must identify the people they would like to call potential customers. These customers are easy to pick out if the target market is fairly narrow. In the case of large and diverse markets, which include people with very different lifestyles, it creates problems to accurately determine the target audience. In this case, you need to break the market into small segments and only then deliver the right messages and use an effective medium.

Once companies have defined their market, they need to know exactly what they want to say to their customers and how to get them interested. What emotions do they want to evoke in 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 the development of the message, the client must know that the product already exists. The client must understand that he will receive some value for his money, which means he will be forced to look for a product and purchase it.

Developing a message that can quickly inform, inspire and move someone to action is a complex process that requires creativity 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, TV, car radio, various events, perhaps customers will hear your message from their friends or learn about it in the store. It is worth considering that each of the methods has its own specific audience, so the marketing department must be able to send the same message using different means.

So, customers are interested and are considering buying. They found a representative of the company or came to the store, or went to the company's website. What should businesses be thinking about at times like these? To do this, let's identify some of the key issues to consider when making a first sale and then a repurchase from a company.

Therefore, employees, website, store or office interior of the company must demonstrate that it is committed to the client and his needs. The signage, the furniture, the cleanliness, the way the company representatives look and act, the words they use, the paperwork that customers have to fill out and sign, they all carry a message.

Consider the issue of delivery. Even when a customer is ready to make a purchase from a company, they would like to know when the product or service will be delivered. Fast delivery, free shipping, easy checkout in the store, installation? It's important to know what your target market needs and it's important to understand what your competitors are offering.

Business financing

Starting a business, developing a new product, or launching a company into new markets always comes with a cost.

The company purchases raw materials and equipment, buys or leases offices and factories, hires and trains staff, and then opens the business. Note that the company has not yet made the sale. Therefore, it is important to make sure that you have enough money to start running a business.

When a company makes its first sales, many may think that the business is starting to be profitable. In fact, this is not so, the company does not receive profit until it pays off for what was acquired earlier. It may take months or years before the business starts to be profitable.

Even if the business owner expects to make a profit through increased sales, he needs to consider the costs of increasing space, hiring more people, using more energy (water, electricity, etc.), buying more machines and materials. Therefore, the owner must have enough financial resources to expand, even when incomes are just starting to grow.

If all the calculations are done, 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 repay the debt within a specified period of time. The lender can be a bank, a credit company, a friend or family member.

Bonds are essentially small loans from investors. So if you buy $500 worth of bonds from Coca-Cola, you are lending them $500. In turn, they will pay you as if you were 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 high-interest bonds risks not getting enough funding.

But what if the company doesn't 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 turn to venture capital funds. These funds will give money, but in return they will want to own the company. For example, a company can sell them 25% of the business for a $5 million 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 of the classic ways companies raise funds, but don't forget crowdsourcing, business competitions, and government grants.

Now consider a situation where a business starts to become profitable. How to effectively use the profit received from entrepreneurial activity?

If a share in the profits has been promised to investors, then care should be taken that each investor receives a share of it.
All income taxes prescribed in the legislation of the country should be paid.
Payment of bonuses to employees of the company. You can use part of the profits to raise salaries or to promote some employees in a position. Often companies pay for the education of their employees in colleges or universities.
Updating the workplace of the company's employees (new office, equipment, etc.).
Business expansion costs (new facilities, people, raw materials).
Investment in research and development of a new product or service.
Investing in the commercial activities of other businesses 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 upheaval.

Human resources management

If a company has made a hiring decision, it must be able to describe the position to be filled as well as its cost. After hiring the necessary employees, the company needs to identify the strengths and weaknesses of subordinates, provide an opportunity for developing their skills and career growth. This will help the campaign grow and meet the needs of the employees.

Knowing the strengths of the company's employees helps it identify leaders who can quickly develop and train new employees . Identifying weaknesses makes it clear what types of education or training people need to effectively perform their duties.

Motivation is an effective method of professional development of employees. Sure, good performance can temporarily motivate employees, but they won't stay motivated unless they're rewarded for that performance. Therefore, employees involved in the company's success will expect financial rewards, promotions, bonuses or job security.

Companies face all sorts of challenges in measuring employee performance and motivation, as metrics such as attitude, customer service, and work ethic are hard to measure. In addition, sometimes it is difficult to evaluate individual employees when they work in a team. Do not forget that it is necessary to motivate not only team leaders, but also inefficient employees, providing feedback, helping with advice and providing training.

To keep employees in the company, it is necessary to understand their psychological comfort from the labor process. Employees should understand that the company is constantly working to improve working conditions and working atmosphere: lighting, furniture, appliances, office location, restaurants, modes of transport, dining, and health insurance.

There are other ways to keep employees loyal. It can be help with education expenses, the ability to work from home, additional vacation days, free food and drinks at the office, transportation to work or parking, a free fitness center in the building, etc.

It is also worth noting that the company must have a strategy for retaining promising staff. Through training and mentoring, exposing employees to new projects, and through promotions, a company wins the trust of its best employees.

All procedures for the dismissal of an employee and his retirement should be clearly spelled out in the contract that the employee signed when he was hired. The dismissal of an employee is a rather complicated process, but it should not be unexpected or incomprehensible to the employee, because. he was familiarized with it in advance when signing the contract.

If a valuable employee leaves the company, it will be very useful to arrange a final interview with him in order to hear his feedback on working in this company. With this information, businesses can improve the work environment to minimize employee layoffs.

Development and management of customer relationships

Any business tries to keep its customers and it is important for it not what happened yesterday, but what the client needs today and what he will need in the future. Now more than ever, companies are relying on data from customers to uncover 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 customer to create an account and then, using online services, they can track all of the activities that the customer takes using their account. The collected data may show changes in the structure of purchases of the company's customers.

Successful companies look at their data very carefully. They can show important statistics and provide answers to very important questions for the further development of business. For example, Starbucks can find out how much coffee is consumed on a cloudy day. Should Amazon consider delivering food to metropolitan areas? Or should Netflix invest in programs targeted at Spanish speakers?

Understanding customers, who they are, what they like when they want it, how their preferences change is the most important detail in the fundamentals of running a company.

As companies grow, they must consider their logo and colors, their people and equipment, their website and advertisements, their product and service offerings, and where they will be sold. If a company has formed a certain circle of customers loyal to it, then it is always useful not to go beyond the scope of your business.

For example, Coca-Cola's customers had mixed reactions if the company decided to make electric cars. Or Ikea would start releasing laptops. It is always worth considering the company's role in a particular line of business and its recognition in the market before planning a new line of business or product range.

Try to develop your company within your brand. You need to understand what your company associates with your customers? Reliability, quality, service or speed? Information of this kind will give you an idea in which direction to develop in order to meet the expectations of your customers.

Understanding your finances

Finances deal with money, but their job is not to keep track of cash flow. Their task is to receive funds as well as their investment. Keeping track of cash flow is an accounting task. He monitors receipts from the company's customers, settlements with suppliers, payment of salaries to employees and the movement of cash flows between departments of the enterprise.

Consider two types of accounting in the enterprise: management accounting and financial.

Management accounting helps the leaders of the organization to correctly measure the costs of production, marketing and other departments within the company. He also assists in developing the next year's budget as well as budgets for new projects. In addition, management accountants are finding ways to minimize taxes.
Financial accounting develops reports for people outside the organization. It shows the financial condition of the company. This is important for those who are considering investing in a company and for organizations that can provide loan funds. Financial accountants also work on the preparation of the annual financial report. The financial statements must take full account of all financial figures when developing an annual report that complies with the laws of trade and does not mislead all parties both inside and outside the organization.

Now is the time to consider the assets of the company. A company's tangible assets can be cash and investments, vehicles and equipment, building and land, furniture, etc. Intangible assets include patents, trademarks and copyrights, as well as corporate obligations. Those accounts on which the company pays funds on loans or interest on bonds are classified as corporate liabilities. Then the capital of the company is calculated as follows:

Equity = corporate assets - corporate liabilities.

In order to measure and report their annual profit, companies prepare an income statement. It totals all sales and then subtracts all types of costs and taxes. The income statement is an annual report, but companies set the beginning and end of the financial year.

Let's try to create an example of an annual income statement.

Let's start by counting the funds we received from the sale of our products. We had $500,000 in sales, but the customers returned $50,000 in merchandise. So our net sales were $450,000 last year. Next, we move on to cost of goods sold.

How much did it cost us to produce and deliver the products we sold? First, we need to add the products that we have inherited from last year. Let's say we had $100,000 from last year's inventory. Now look at spending this year: we spent $75,000 on raw materials and $25,000 on storage and shipping.

Thus, the value of the available goods for sale, including the balance from last year, was $200,000. But if we do not sell all of our goods this year, we will carry forward the value of our inventory to the next year. Let's say we have 50,000 worth of inventory left over, which we roll over to next year. So our cost of goods sold is $200,000 minus the remaining $50,000, which gives us a cost of goods sold of $150,000.

We can now calculate Gross Margin - Revenue minus Total Cost of Goods Sold. $450,000 in revenue minus $150,000 for products sold, our gross profit for last year was $300,000.

Looks good, but we haven't factored in a lot of other costs, like operating expenses, for example. This includes the costs of selling the product: sales commissions, advertising costs, etc., as well as general expenses, which include salaries, insurance, rent, energy, depreciation, etc. Let's assume that the cost of selling the product was $110,000, and total expenses $160,000. Then total operating expenses for that year were $270,000.

Now we subtract our $270,000 expenses from our $300,000 gross income and get a net income before taxes of $30,000. Taxes were $7,000 and our net income after taxes is $23,000. Thus, with a sales volume of $500,000, we received $23,000 in net profit, i.e. 4.6%.

Company reports are useful both for the company itself and for investors. They show what happens to the money within the company. They measure things like assets, liabilities, sales, expenses, inventories and tell us about a company's profitability.

Let's look at a few profitability ratios. Earnings per share equals net income divided by the total share of shares. Knowing this metric can be useful for a mature company with solid profits, but for new companies that are likely to grow in the next few years, they are less concerned with current earnings and more with projected earnings.

The next factor is the return on sales. Return on sales is net income divided by net sales. In our example, a profit of $23,000 and sales of $450,000 means we have about a 5% profit on sales.

Now consider the formula for return on equity (ROE), which is the best indicator of company management:

ROE= (Net Profit)/(Average Equity)

In turn, the amount of share capital is the difference between the total amount of assets and the total amount of liabilities.

These ratios not only show you the financial health of a company, but also help you understand where your company stands relative to industry competitors.

Information Systems

In this chapter, we will briefly touch on business processes that are useful for companies of different levels of development. Any business process must be measurable and manageable. In other words, the manager must be able to view data on the work of a particular department and respond to changes in a timely manner.

Let's start with a business process that many people encounter when ordering goods online. What data is important for the company here? First of all, this is the product that the buyer orders, the name of the buyer, address and payment information. In addition, the process must be quick and easy for the client and inexpensive for the company. Also, this process should be easily reproducible. So if a company plans to take orders over the phone, they need to create a process that is easy for the operator to follow.

From an initial point of view, business processes may seem small and rather insignificant, but the largest corporations have long understood that business processes are the building blocks of any growing organization.

One of the main tools used by companies to collect and store data about their resources is called ERP (Enterprise Resource Planning) - corporate resource management systems. ERP systems are connected to almost every process in an organization: material purchases, employees and their wages, company movable property and its maintenance, as well as customer accounts, and much more. All this information is collected and stored by the ERP system.

This information can be accessed by anyone in the organization: sales department, production departments, human resources department, etc. This data helps the company make informed decisions about future purchases, the number and type of employees to hire, and more.

In the world of data management, any company is required to have an IT system that is linked to their processes and resources. And it's critical to know what to measure, how to use those metrics, how to communicate that information effectively, and how to improve the behavior of your employees, your managers, and even your customers.

Economy

Economics is about understanding human behavior, knowing what incentives drive this or that type of behavior. What makes them buy, what makes them sell? How do companies set prices? By understanding the economy, the business owner understands how buyers and suppliers behave.

This type of knowledge will help you develop strategies, close business deals, and make day-to-day decisions about resource efficiency and the right price for a product or service.

Supply and demand is one of the most basic concepts in the world of economics. It helps us explain the prices companies charge, the prices customers will pay, and the amount of product that is produced and ultimately purchased. This tells us that in a competitive market where a few companies are able to satisfy a customer, suppliers will create enough products to meet customer demand at a certain price.

The concept itself states that when supply exceeds demand, prices are likely to decline. Conversely, when demand exceeds supply, prices can rise. It should also not be forgotten that the lack of supply in the market provokes the formation of a competing business to meet the unfilled demand. Therefore, the owner of the company should correctly calculate the amount of output.

Now consider such an indicator of the economy as a market index. Each country has its own commodity exchange (Nasdaq, RTS, TOCOM) through which business people track the state of the economy based on popular indices (Dow Jones, SP 500, MICEX 10, etc.). On each exchange, you can find indexes for industry sectors, which also helps companies assess the state of affairs in different sectors of the economy.

Inflation is another indicator worth monitoring. It indicates the possibility of rising prices and a fall in the purchasing power of the national currency. If inflation rises, then raw material prices and wages must rise, leading to higher costs. As prices rise, customers can buy fewer items as their money loses purchasing power.

Economists often refer to the relationship between bank interest rates and inflation rates. When interest rates go down, money is easier to borrow. This means there will be more money in the economy. As a result, inflation could rise as all that money competes 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 higher salaries and company costs.

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 properly prepare for it.

Conclusion

The information in this resource will help you understand the links within a company between marketing, finance, design and everything else, as well as the links between a company and its suppliers and, of course, a company and its customers. Becoming a true business professional does not mean being an expert in every field. It's about seeing how every little piece of a business plays an important role in delivering value to its customers.

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Basics of doing business. What a New Entrepreneur Needs to Know