Friday, July 25, 2014

The Lemonade Stand - Part III...

"I believe that if life hands you lemons you should make lemonade... then try to find another person whose life has handed them vodka and have a real party" 

                                       ~Ron White - Comedian

This week is the last part of a 3-part series about a fictitious small-business venture run by 5th graders.  (Link to Part I and Part II
The story began while I was speaking to my son’s 5th-grade class several years ago about what it is that I do for a living. 
At first I thought that explaining what an entrepreneur does lemonadeis a bit too theoretical for a 10-year old to comprehend... so I decided to bring it down a notch or two to the level that they could definitely understand... a lemonade stand.
As described in the first two parts of this story... most, if not all, businesses are comprised of only 6 basic functions.
These 6 functions are:
  1. You make something or provide some type of service
  2. You locate potential customers and/or help them to find your business
  3. You sell whatever it is that you make or do to those potential customers
  4. You hire and train other people to help you
  5. You measure things and keep records
  6. You acquire capital to help start and/or grow your business

During the course of the last two weeks, I’ve already discussed the first 3 items on the list...

Today I’ll cover the final 3 topics.
You hire and train people to help you
An old friend of mine used to say that there were only 3 ways to earn money
  • Sell your time
  • Leverage your money
  • Leverage your time

Most of us sell our time... usually to our employer (or directly to clients if you’re a self-employed individual).

The entrepreneur understands that great wealth is not created by doing everything yourself... but rather by buying other people’s time (hiring them)... and then selling the productivity of that employee... at a profit.  
Simply selling your time is not scalable and if something were to happen to you... the business is no more.
The key to making that profit is to choose employees who provide their employer with a greater amount of productivity relative to their pay.
The best way to maximize productivity is to carefully determine what needs to be done and hire the smart and motivated people, train them well, and give them the proper tools to do the work efficiently.
At our lemonade stand we are a smashing success and there is too much work for one person to do.  Therefore we have hired two additional workers, one to make the lemonade, one to sell the lemonade, and one serve the lemonade and take charge of the money. 
Each person is good at their job and we are able to sell 5 times as much lemonade as one person could do alone.  
Even by paying our employees a better wage, we are able to produce higher profits because our productivity is 5 times higher than if we did all the work ourselves.
You measure things and keep records
At any business, it is important to keep accurate measurements and keep historical records. 
These duties are typically shouldered by the accounting department, whose job it is to make sure all of the critical components of a business are accurately tracked.
These measured items may be:
  • Sales
  • Cost of goods / services sold
  • Expenses
  • Profitability
  • Cash on hand
  • Accounts receivable
  • Inventory
  • Fixed assets
  • Accounts payable
  • Loans

Most of the time, these elements are described on an income statement, balance sheet, or cash-flow statement.

Sometimes these numbers are grouped together into complex formulas allowing easy visibility into the health of a company with one or two critical numbers.
Historical record keeping is equally important.  It is from the historical numbers that we can determine trends that will help us to make projections, which in turn, allows us to plan for future sustainability and growth.
At our lemonade stand, we keep track of our sales, how much it cost us to produce our lemonade, what our expenses were and how much profit we made at the end of the day.
Additionally, because we kept good records, we could see that on weekends, we sold more glasses of lemonade than on weekdays, so we ended up purchasing more supplies on Friday knowing that we wouldn’t want to run out of lemonade or cups before the end of the day on Saturday.  We also learned from our historical data that we sold more lemonade in August than we did in April due to the warmer weather.
You acquire capital to help start and/or grow your business
Starting a business is a financial riddle.
How do you acquire money to start the business when there are no sales or profits?
All you have is an idea and perhaps a business plan...
A business needs capital to open its doors and to keep the doors open until which time sales and subsequent profitability will eventually provide enough cash-flow to keep the business going.
Expenses typically start on day one... but sales don’t usually happen right away... and even if they do, depending on your type of business... the cash from those sales might not pass into your hands for several weeks or months.
So where does the money to actually start the business come from?
There are typically two sources of start-up capital:
  1. Loans - from you in the form of your personal savings - from family, friends, and well-wishers - from banks or credit cards (with your personal guarantee to repay those loans regardless of what happens to the business)
  1. Investors - people who think that your idea is great and want to share in the success of your business when you make it big someday.
This might be self-evident... but a business must be able to generate cash to stay in business.  If it runs dry of cash, the company cannot effectively operate and is bankrupt.

In our lemonade business, we started with very little cash.   The seed money came from our own savings and a small loan from our parents.
We used this cash to purchase supplies to produce our first batches of lemonade, cups, and some art materials in order to make signs advertising our lemonade.
During our first day, we sold enough lemonade to purchase additional supplies as well as pay back some of our loan money.  After a few weeks, we had created enough profits to build a portable stand, hire two additional workers, and pay back the original loan.
Although, the lemonade stand is over simplified, it is no different than any other type of business venture.
The 6 core functions are the same whether we are Apple Computer, Marie’s Beauty Shop, or Kyle’s Lemonade stand.
Many of us have dreams of owning our own business one day...
It’s important to recognize the elements of a successful business and what we can do to make sure that all of the core competencies are being addressed.  These six functions are requirements... not suggestions... to operating a successful business enterprise.
Thank you for your support of OptiFuse where we encourage the entrepreneurial spirit and believe that small business is the backbone of any great economy...  

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