The Philosopher’s Stone
Commentary On Wealth Issue #4
QUOTE FOR THIS WEEK:
"The single hardest thing you do as an entrepreneur is 1) create order out of chaos and 2) maintain that order in the face of the natural law of the universe: entropy."
- Brad Gibb
KEY TAKEAWAYS:
As an entrepreneur, your primary role is to create order out of chaos and maintain that order, constantly pushing against the natural tendency towards disorder (entropy). This requires continually prodding and motivating employees, customers, and other stakeholders.
To generate profits, which are unnatural, you must figure out how to add more value for customers while minimizing your inputs. Building valuable business assets allows you to deliver more value in a leveraged way.
Driving profits requires knowing your key numbers, assigning clear responsibility for those numbers to individuals, and holding people accountable. As the entrepreneur, you must maintain relentless pressure on profits until you have a strong team that can do this.
ENTROPY
All systems trend to a state of disorder.
Objects tend to like to stay where they are, typically at rest. This is why businesses are so hard to start. Everything wants to stay put. Employees. Customers. Capital.
You have to be willing to be the force that puts everything in motion.
Then, once you do get things organized and moving, you have to keep it there while everything and everyone wants to stop your momentum: Employees. Customers. The IRS. Government Regulators. Capital (in the form of wanting it returned), etc.
It's not uncommon that as much as 50% of your time will be spent prodding people. Agitating people. Stirring the pot. Because if you don’t, your business will degrade back to its natural state.
PROFITS ARE NOT NATURAL
Profits are an enigma. They are abhorred by nature. In short, they are not natural.
Profits are the result of unnatural pressure. The unnatural force is you willing them into existence.
Michael Masterson said it this way:
"Consider this: The primary goal of most of your customers is to get the most from you and pay the least amount for it. The primary goal of the average employee is to get the highest salary and do the least amount of work. The primary goal of your suppliers is to give you the lowest quality item for the highest possible price. The primary goal of your competitors is to give your customers the impression that they can get more and pay less by buying from them instead."
So what is the antidote? What is the Philosopher’s Stone? (No, this is not a Harry Potter book.)
The philosopher's stone is a mythic alchemical substance capable of turning base metals such as mercury into gold or silver.
It is also called the elixir of life, useful for rejuvenation and for achieving immortality; for many centuries, it was the most sought-after goal in alchemy.
The philosopher's stone was the central symbol of the mystical terminology of alchemy, symbolizing perfection at its finest, divine illumination, and heavenly bliss.
Efforts to discover the philosopher's stone were known as the Magnum Opus ("Great Work").
Your Philosopher’s Stone in business is simple, but not easy. It is the key to taking the ordinary (employees, products, time, etc) and turning it into the extraordinary (e.g. profits).
Your job as the Alchemist (the Entrepreneur) is to figure out how to add more value with fewer inputs. Simple, but not easy.
PART I: MORE VALUE
There are three possible outcomes as you scale your business: Profits, Losses or Wages.
This sounds obvious, but like most things in business it’s not as obvious as it may seem at first.
Businesses that produce losses eventually (sooner than later) go out of business. Losses cannot be supported. Businesses that produce profits are ground upon by the forces of entropy until their profits are reduced to mere wages.
There is a minimum level at which you and your product must perform just to be viable. This minimum level will avoid losses but it will not produce profits, it simply pays wages - covers the bills.
This is where most businesses stop innovating. They settle for earning wages, barely keeping their nose above water to avoid drowning in losses.
In order to move from wages (your product performing the function expected of it) into profits, you have to figure out what additional value you can create beyond baseline functionality.
INCOME FOLLOWS ASSETS
I know I said this already, but this is a good place to bring it up again. The ultimate way to create MORE value with LESS inputs is via building assets.
I go in-depth on building assets in Issue 2 of commentary and touch on it again in issue 3 of commentary (which is currently our most praised & popular issue).
I talked about an asset being something that is valuable independent of any individual person. Allowing assets to create value for your customers and clients is the only way you can add more value while doing less.
Assets like a YouTube channel, a podcast or a book can go get you more eyeballs without a person being involved or spending money on advertising. Property, capital equipment, technology and automations all become leverage to you and your team to deliver more while controlling inputs of time and money.
Highly refined systems can allow you to delegate lower impact, more repeatable tasks to a VA or even AI. That will free up your higher value labor to improve the level of customer support or personalization (value) without having to hire more full time, expensive labor (inputs).
Notice I didn’t say AI was an asset. It’s not. Remember that garbage in is also garbage out. The asset is your highly refined system that you can now leverage via AI or robots.
You get it. Be creative. Spend time thinking on this. Like really thinking on it.
You cannot expect this level of thinking out of the members of your team until you have engrained this in them. This will be a topic for another time, but you should have several hours blocked out each month to think on problems like this.
PART II: FEWER INPUTS
Back to Masterson:
If the pressure to preserve profits doesn’t come from you, it may not come at all. The moment you let up on the pressure to produce, sell, save and improve, your bottom line will begin to shrink. Make a formal personal commitment to double the pressure on profits.
This cannot be achieved without 1) knowing your numbers, 2) assigning responsibility of numbers and 3) holding those responsible accountable for those numbers.
Knowing Your Numbers
Every business is different, but also every business is the same.
No matter how it's measured, there are two numbers that matter. Market and Margins. Those are the two great drivers of growth and profits.
It goes without saying that you’ll need to pay attention to more than two numbers in your business, but if you don’t know how those two numbers affect your Market or Margin, then you may as well be flying blind.
Since you as the entrepreneur are the one responsible for profits, you have to be the one that knows where they come from. Power comes from distilling your business into numbers. The abstract becomes objective. The arbitrary becomes definite. Chaos becomes order.
But numbers do not dehumanize a business. Quite the opposite. Numbers empower the humans in your business.
Numbers measure results and activities and as long as you tie the numbers (and by extension results and activities) to humans, then they magnify the impact you can have on people.
The right numbers will guide the collective focus of your organization and yoke the efforts of everyone on your team.
Assigning Responsibility
I have a good friend who’s first career was in the Navy.
He rose to accomplish some pretty amazing things, one of which was to become a Navy test pilot. This is given to, I believe, less than 5 active pilots at any time.
A saying that apparently the Navy lives by is “one throat to choke.”
While I don’t condone physical violence in the work place, the idea is a valuable one to adopt. Every department should be boiled down to ONE key number that ONE person owns.
Here are some suggestions:
Bottom line profits should be owned by your operations seat.
Marketing should own the cost to acquire a customer or client.
Delivery should own either LTV (Lifetime Value) or your churn rate depending on what type of business you are in.
Sales should own cash collected in most organizations, but that could also be any person in a seat of production.
Your Chief Revenue Officer (CRO) should own the top line. The top line is likely the last number you should let go of (if ever).
Holding Those Accountable
Holding those accountable cannot be delegated. At least not until you have a superstar team in 5 or 6 seats in your organization.
You’ll need to keep the pressure on until you have a superstar in marketing, sales, operations and finance.
You’ll need to keep the pressure until you have at least 6 who can keep the pressure in each of their departments, who each can then keep pressure on 36, who can keep it on 216, and so on…
RETURN ON ATTENTION
If you are worrying that all this paying attention to profits cuts into the time and attention you can give to working in your business, you are right to be worried.
Additionally, all this attention makes it difficult to date your spouse, build a family, raise productive kids, deepen your relationship with God, and pursue your hobbies.
And to add insult to injury, on top of all this attention you are somehow supposed to also pay attention to your investments.
Well, lucky for you, that is one job you can outsource.
At Sovereign, hiring us to be your CWO is the only hire you can make who will be 100% dedicated to making you wealthy thus allowing you the maximum return on your attention.
Your business needs you to be the driving force for profits, we’ll have your back to protect and grow those profits.
Reach out to me at brad@sovereignentrepreneur.com if you want more details.
Brad Gibb
The Sovereign Entrepreneur
P.S. I'm rooting for you. Live rich. Finish wealthy.