The Business House

Running a business has become more challenging in these times, as the funding winter is still in full swing. Many startups have had to pivot, shut down, or seek profitability.

I often get asked, “How do you build a profitable business?” The truth is, it comes down to scaling — scaling margins, increasing outputs (volumes), and reducing inefficiencies (waste). However, there are some fundamental aspects of scaling that I refer to as The Business House.

A house is a building that functions as accommodation and shelter. Similarly, building a business is like constructing a house. It has essential elements like a “roof, pillars, foundations, and fences”.

The Roof (Margins)

The roof, which covers all aspects of a house, can be likened to margins in a business. Margin refers to the remaining revenue after deducting the variable costs of producing a product or service. It determines how much each sale contributes to covering fixed costs and ultimately, the business’s profit. The more output sold per dollar, the better the margins. This raises the question, “Which is more important: higher volumes with lesser margins, or higher margins with lesser volumes?” While I lean towards the former, understanding your business is crucial in making this decision.

The Pillars

Pillars in a building serve two main functions: they provide structural support and enhance its aesthetic appeal.

Similarly, in business, pillars refer to core areas that a company identifies as crucial for its success. These include:

• Management Team: A strong management team allows for sound decision-making and efficient execution.
• People: Employees are the lifeblood of an organization. They build policies, procedures, and processes that allow for efficient execution.
• Technology: It improves work efficiency and allows operations to scale beyond physical limitations, reaching remote locations.
• Customer Focus: Prioritizing customer needs, just like prioritizing the king in chess, can lead to success. Always build for your customers, not just for what you prefer.
• Operations: The way you run your business is essential. Solid operations allow quick service to your customers. They are not interested in your company’s inner workings; they want reliable products or services.
• Pricing: The process of setting prices for your products and services can enhance your competitiveness.
• Working Capital: Cash is important, but cash flow is crucial. Remember, the queen is the most versatile piece on a chess board. Even a profitable business can fail if it runs out of cash.

Fences (Moats)

A moat is a deep, wide ditch that surrounds a castle, fort, or town. It’s typically filled with water and serves as a defense against attack. In business, moats are defenses that protect you from competition and new entrants. They give you a competitive edge and help maintain profitability. Moats include:

• Partnerships
• Distribution
• Scale efficiency
• Network effects
• High switching costs
• Cost advantage
• intangible assets

When planning to start a business, consider the aforementioned components and how each one can contribute to your business’s profitability.