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The Path To Success: Keep It Simple in Entrepreneurship and Leadership

5 Mins read

The first time I started a company, I encountered a common entrepreneurial problem. There was no one around to help. I had previously been a senior executive at a large, established company, where I had nearly endless resources. Now, on my own with my fellow co-founder and a minimal staff, I came face to face with the task limitations that all entrepreneurs on a tight budget encounter. There was much to be done, few of us to do it and only so many hours in a day.

Entrepreneurs are, by nature, optimists. They are also full of ideas. A downside to this creativity is that they can often fall prey to “scope creep.” They can be easily distracted by the latest shiny objects, adding unessential elements and features to early business ideas that can hurt execution. With limited resources, it is essential to set your priorities up front.

“What is important is seldom urgent and what is urgent is seldom important.”

— Dwight Eisenhower

Setting Priorities

The Eisenhower Matrix

Source: ImperfectInspiration.com

As a US Army general, Dwight Eisenhower devised a simple means of priority organization that helped him address the demands of his job. Later, he would use this life hack as he rose to Supreme Allied Commander of NATO Forces during World War II and ultimately as our 34th President. I liked it so much that I had his hack put onto refrigerator magnets and passed them out to our staff at an employee meeting. But I am not alone. The Eisenhower Matrix has been cited or adopted by numerous business writers in the years since its creation.

One of the many things I love about this matrix is that it creates an organizational framework so simple that it can generally be done in your head. Do you have something…

  • Important and urgent that needs doing? Personally engage and do it now.
  • Important, but not urgent that needs doing? Keep it on your list for later.
  • Urgent, but not important that needs doing? Delegate it.
  • Unimportant and not urgent that needs doing? Broom it.

The matrix is simple. The art form lies in making the determinations of what is important and unimportant and what is urgent and not urgent. The art form lies in understanding your priorities.

If you are an entrepreneur, starting a business with minimal staff and resources, setting your priorities up front is essential. Distraction is not an option.

“When you have too many top priorities, you effectively have no top priorities.”

– Stephen Covey

Core Entrepreneurial Priorities

The most urgent and important items for entrepreneurs tend to be centered in four areas:

  1. Customer offering conception
  2. Sales
  3. Business model development
  4. Capital stack fulfillment

I have guided the formation of two companies that eventually would go public. The first step for each was to understand what we would be offering our customers. All companies exist to solve customer problems and to create customer value by ably solving those problems. Newer companies may not have the size of more established competitors, yet they nearly always have competitive advantages when it comes to customer solution delivery.

Customer solution design is closely tied to the second entrepreneurial priority: Determining expected customer count and average customer spend. These are the two variables behind the second priority deliverable: Expected revenues.

The third step in business creation is to envelop your customer offerings within an optimally potent business model. Getting to the right customer count and spend may entail losses for some period, but no one can start a business without expectations of eventual profitability.

Essential business model ingredients include sales, operating profit margin, business investment and annual maintenance capital costs. You want to maximize the first two, while minimizing the second two. A description of the four ingredients is located nearby.

The four business model ingredients are behind the determination of current and total equity returns. They are what lies behind an entrepreneur’s ability to raise capital.

The Four Business Model Ingredients

Sales: Anticipated Revenues
Operating Profit Margin: Earnings before non-cash expenses, interest costs and rents on things you could own if you chose to.
Business Investment: The amount that needed to be funded by capital (equity, borrowings or lease proceeds) seeking a return. Examples include real estate, equipment, inventory, cash, accounts receivable, start-up losses and other cash uses net of provided cash not seeking a return (examples include trade payables, accruals, deposits).
Maintenance CapEx: The amount, on average, that needs to be annually invested in the business to maintain revenues.
_________________________
And the formula for determining unleveraged current equity returns:
Sales/Business Investment x Operating Profit Margin – Maintenance CapEx/Business Investment

These four business model ingredients are behind the determination of current and total equity returns. As a result, business models enable entrepreneurs to raise capital.

Ultimately, entrepreneurs will add two more components to their business model. The first variable will be the portion of business investment funded with borrowing and lease proceeds. The second will be the annual cost of those proceeds. Of course, there can be no borrowing or lease proceeds without first having unlevered equity returns derived from the first four variables. No creditor will finance a business having negative or weak unlevered equity returns.

The final two business model variables are associated with the entrepreneurial fourth priority: Capital stack fulfillment. Typically, a capital stack mix begins with determining lease and borrowing proceed availability. Once you know the amount of lease and borrowing availability, you can back into the equity requirement needed to fund your business investment. When it comes to equity, less is more. The aim is to maximize expected current and total expected equity returns, which lie at the heart of shareholder wealth creation.

No company has ever gone out of business because it had too many sales. But many businesses have been shuttered because they ran out of liquidity. The capital stack determines where that essential liquidity comes from. And it is the entrepreneur’s fourth priority to optimally source and balance the mix of borrowings, lease proceeds and equity.

Make everything as simple as possible, but not simpler.

Albert Einstein

What’s Works for the Entrepreneur Works for the Leader

The essential entrepreneurial priorities never go away. They simply transition to less important leadership priorities. In this process, they most often shift from the top left quadrant of the Eisenhower Matrix to the lower lefthand quadrant, with leaders electing to delegate priority execution. The four priorities forever remain urgent and they remain important, just not for the chief executive officer. Priority ownership transfers to other senior executives, where it is firmly situated in their top left Eisenhower Matrix quadrant.

One of the most important things I did as a CEO was to move top left quadrant priorities to my lower left quadrant. At the conclusion of each year, I would plan for the personal priorities that I would delegate to others. And I would then create new top left quadrant priorities to move our company forward.

What starts out as entrepreneurial priorities upon corporate formation becomes essential to the leadership toolkit. In virtually every attempt at corporate reengineering that I can recall over my career, one or more of the four entrepreneurial priorities were front and center. The same goes for corporate incentive plans and process improvement discussions. In such instances, the entrepreneurship priorities can periodically gravitate to where they started at the top lefthand quadrant of the CEO’s Eisenhower matrix.

My observation has been that, as successful companies grow, leaders are wisest to borrow pages from entrepreneurs, not losing sight of the priorities that got them to where they are. This can prove a challenge. As companies grow, once-broad overarching priorities can be lost in narrower departmental goals. Leaders can be subjected to the dreaded “S” word (Silo), whereas the biggest challenges always traverse the enterprise. Invariably, the biggest challenges leaders face reside in the same place: the four founding entrepreneurial priorities universal to business success.

Christopher Volk, author of The Value Equation: A Business Guide To Creating Wealth For Entrepreneurs, Investors And Leaders, has been instrumental in leading and publicly listing three successful companies, two of which he co-founded. The most recent is STORE Capital (NYSE: “STOR”) where he served as founding chief executive officer and then as executive chairman. Volk, who has written about corporate finance since early in his career and has created an award-winning video series about the topic, is a regional winner of EYs’ Entrepreneur of the Year award. He is on the Board of Banner Health and is the Chairman of the Board of Tenet Equity. He resides in Paradise Valley, Arizona, and Huntsville, Alabama. You can learn more at http://www.thevalueequation.com/

Entrepreneur stock image by bleakstar/Shutterstock

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