The 5 Essential Elements To Guarantee A Successful Company

Having the smartest people in a company does not guarantee success. The best most defendable product in the world does not guarantee success. Being the first to market in any industry does not guarantee success. What will guarantee success is understanding the basic elements of a successful business system. It requires the most important asset in your organization, your people, to understand and embrace the 5 essential ingredients in business.

Ram Charan, author of "What the CEO wants you to know" explains the principles thusly:

Cash No business survives long without it. You should know how much cash your business generates and how much cash it consumes. What are the sources of it? What drains it? What's the timing of the inflows and outflows and how is it changing? More revenues (sales) often means more cash. But growing a business consumes cash. How fast can the company expand without straining its cash flow?

Margin When people talk about the bottom line, they generally mean net profit margin -- the money the company earns after paying all its expenses, interest, and taxes. But gross margin is important, too. You have to know how changes inside or outside the business affect gross margin. Are there new entrants in the market who are winning customers? A competitor who's found a clever way to reduce costs and prices? A change in the pricing power of suppliers?

Velocity Velocity refers to speed, turnover, or movement. How much revenue do you turn over, or generate, for each dollar of inventory? If you have $1 million in inventory for the year and revenues of $10 million, your inventory velocity is 10. This tells you how fast you're moving raw materials through the factory, turning them into finished products, and moving those products off the shelf to customers. The faster, the better. Service businesses can track velocity, too. For banks, velocity of equity -- how much revenue is generated per dollar of equity -- is a useful measure. The concept applies to every business.

Customers Satisfied happy customers are key to your business. Educate them patiently when they need it, they will trust you more. Challenge them when appropriate, they will consider you a partner more than a vendor.

Growth Every business needs to grow to stay in business. How do you grow in a way that keeps the other aspects of moneymaking in balance? (Watch Ram Charan speak about these principles here - During our weekly brown bag brunch, we played a game of business acumen to help the full team -- including sales, HR, developers, designers, project managers and our office administrator -- grasp these essential concepts. We organized the company into five competing teams to play this small business simulation: The game (and the discussion that followed) helped align our team's goals so everyone from the CEO to the developer intern can work in unison to keep our success mounting.

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