Eliyahu M. Goldratt was an Israeli physicist who studied business management and manufacturing operations. He built his reputation as a manager on the importance of identifying and adapting to the operational bottleneck, which he described using the auspicious name the Theory of Constraints. But this isn’t an article on manufacturing operations. Nor is it an article on bottleneck constraints. This is an article on what Eliyahu Goldratt said comes first. Making money.
From his book The Goal, “Adopting ‘making money’ as the goal of [an]…organization looks like a pretty good assumption. Because…there isn’t one item…that’s worth a damn if the company isn’t making money.”
When remedial concepts are forgotten, they become revolutionary. And we challenge anyone who’s been in management more than a year to claim they have never once caught themselves pontificating in management speak, spinning their wheels in circular strategies, or wasting time in suboptimal optimizing. May he who has never sounded like a Dilbert cartoon cast the first complaint that this article’s point is an unnecessary reminder.
Don’t let work get in the way of making money.
This is the first of four articles on Making Money. This article will explore how you can stop working and start making money. The following articles will explore the three basic financial statements, identifying errors and fictions that can obscure reality, making it difficult to know whether or not your company needs to stop working and start making money.
Do ‘Cost of Good Sold’ Activities First
Corporations may have the luxury of assigning a productions crew to work full-time on the production line, but entrepreneurs certainly don’t. Juggling various management functions (sales, marketing, accounting, finance, operations, research, development, personnel, strategic management) increases the risk that more time goes to management than to money.
Working in your production line (and sometimes selling) is how you make money. Don’t let work come between you and your money. Do ‘Cost of Goods Sold’ activities first.
When looking at the future, it can be tempting to invest as quickly and deeply as possible. But remember that today’s solvency trumps tomorrow’s fortune. Reinvestment can be a form of avoidance; it is easier to consider tomorrow than it is to face today. Rather than live a life of rich-but-unfulfilled dreams, make do with a solvent business until your reinvestment poses no threat to your production of goods (or services) sold.
Earning a return on yesterday’s investment comes before earning a return on tomorrow’s investment. Don’t let reinvestment come between you and your money. Make today’s money first.
Capital expenses are not the only reinvestment to avoid. Common expenses can be every bit as costly. Small expenses can accumulate to surprising levels, and every one of them is money out of your pocket. Remember the depression-era advice to “Use it up, wear it out, make it do, or do without.”
Saving money means as much (or more) to your bottom line as making money. Don’t let expenses come between you and your money. Keep your money in your pocket first.
The problem with avoidance is that it’s a form of fraud. We lie (rationalize) to ourselves that other work is as important as our COGS, money-making, or hardest work. Let’s face it; COGS work is repetitive, stressful, less fun, frequently more difficult, and less creative. And since entrepreneurs have control of their schedule, the opportunity for avoidance is ever present. The Fraud Triangle presents a constant temptation.
Recognizing avoidance as a constant temptation keeps you from falling into it unaware. Don’t let fraud come between you and your money. Stay focused on doing ‘Cost of Goods Sold’ work first.
A good way to avoid avoidance is to use time blocks. Schedule time on your calendar for specific activities, just like you would schedule a meeting. During that time, dedicate yourself to the scheduled task and avoid all other avoidance. Shut your door. Turn off your phone. Wear noise-cancelling or instrumental headphones if you can. As a bonus, at the end of the day you’ll have a clear layout of the major tasks you completed and the time it took you to do them.
Blocking out your time keeps you focused on money instead of work. Don’t let distractions come between you and your money. Block out your time first.
Do ‘Cost of Good Sold’ Activities Only
This article has hammered on the idea that staying focused on your production activities will make you more money. Another important idea is hiring out your non-production activities to other specialists. Hiring a human resources company to manage insurance, legal paperwork, and salary work will save you headache, time, and money. The same is at least as true for your accounting and finance work.
Hiring out your non-production work can frequently be more profitable than doing it yourself. Don’t let back-office work come between you and your money. Hire Preferred CFO.
Look for Part Two on Profit and Loss (Income) Statements, Part Three on Balance Sheets, and Part Four on Statement of Cash Flows. Not only are these the basic financial statements every entrepreneur should understand, they are also the most important financial statements Goldratt understood.
“So this is the goal: To make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow.” –Eliyahu M. Goldratt, The Goal