The Physics of Business
While creativity and uniqueness are wonderful things, especially in business because it separates you from your competition, it sometimes leads us to believe that normal or standard business principles do not apply because of that uniqueness.
Think of business as you would think of Physics. In Physics we have simple laws of gravity, motion, mass, thermodynamics and others that cannot or should not be violated. For example:
- For every action there is an equal and opposite reaction.
- A body in motion tends to stay in motion.
- The speed of light is constant.
In today’s crazy world we have observed that many businesses seem to be making up their own rules, and some of them fly in the face of conventional business concepts. For example:
- Profits don’t matter, only the number of eyeballs is important.
- We (the country) don’t need to manufacture anything; we can become a service economy.
- You can sell your business for millions even if it has never made a profit.
- The conventional thinking that outsourcing is a great idea.
- I built this business for the customers (or the employees).
- I don’t care about growth.
- The only way to improve my business is to get more sales.
- Someone should give me money for my business because it is a good idea.
- If I build it, they will come.
In the 1970’s, I heard Rich Devos give a speech that he called Material Welfare, about the creation of wealth both Private wealth as well as National wealth. It changed my life. And if you are interested you can find it on YouTube. In that speech he said that:
MMW (man’s material welfare) = NR (natural resources) + HE (human energy) x T (tools)
Meaning, if you give up any one of these things, or give up the control of one of these things, then you cannot create wealth. To be clear, there are a lot of businesses, where owners may get rich, that redistribute wealth without creating wealth, but even those businesses will eventually fail if they are not serving businesses that do create wealth.
Today I would like to offer some of my own laws of business:
- There are only two legitimate reasons to borrow money.
- If that money can reduce expenses
- If that money can increase revenues
- If you focus on net profit you won’t need to chase cashflow.
- Both businesses, and economies have cycles, and you must be prepared for both the up and down cycles.
- It is better to end in pain than pain without end.
- It is not how much you make (sales); it is how much you keep (profit).
- Efficiency is not as important as throughput.
- If you treasure it, you should measure it.
- Control the tools, supplies, and the labor, or they will control you.
- Create a win-win, by understanding what is in it for the other guy.
- If you have to gamble, bet on the other person’s “self-interest”.
- Don’t pay the ferryman until he gets you to the other side.
- Jesus may want you to feed the poor, but your banker wants you to make a profit first.
- Whenever possible, smooth out business fluctuation.
- Analyze and adjust, rinse and repeat.
- Always be humble and people will wish for your success.
- We always hear stories about those who gambled and won, but there are far more who gambled and lost.
- The last person in on any deal gets to set the rules.
- With enough volume you can almost produce it for free.
And my favorite:
- You can’t be altruistic if you are out of business.
In some careers it is important to know Physics, but for a business owner it is critical to understand the Physics of Business.
- How knowing your breakeven point and contribution margin is important to setting your daily, weekly, or monthly goals.
- How the conversion equation is essential to good ROI on all your marketing.
- How to plan to get from where you are to where you want to be.
- How to negotiate with vendors and employees.
- How to add perceived value for your customers.
- How to pivot and take advantage as markets change.
- How to find the right employee for the right position.
- How to create Joint Ventures.
- How to expand your sales through upsell, down sell, and cross sell.
- How to survive a lack of resources and/or price wars.
- How prices are set by what you can afford to sell it for in combination with what the market will bear.
- How to plan for profit rather than HOPE it will be there at the end of the day.
It isn’t enough to build a better mousetrap, it is essential to know where you are going, and how to get there without violating the Physics of Business.
Skip Williams
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