There are more factors to a successful business than having a good product

About 3-4 years ago my family and I paid a low six figure amount to attend a course on how to run a successful business. My share was $35K of my hard earned savings, and the course provided me with the biggest learning experience I have ever faced.
You see we invested in a start-up education company that is now basically worthless. Not because of an inferior product, far from it, but because of the way the business was run. It’s a classic story of greed in business left un-moderated.
It opened my eyes that a business is more than just a product, it is the sum total of every aspect of it. This is contrary to the usual main focus of business plan activities that place a lot of emphasis on the company’s product and its delivery to the customer.
I won’t name this company as it’s currently embroiled in a legal battle with its minority shareholders like me. Suffice to say when we invested in the company, the due diligence I did only considered the product and its prospective sales. Even though the company was making an operational loss then, the product was a cash cow, and the forecasted cash receivables of jobs done that would have put it in the black at the end of financial year. Together with some prominent investors, it looked to be a good long term investment with a yearly increase in valuation and dividend payouts.
1) Cash Flow Management
Things started to go down hill as the company’s cash flow was managed poorly. The CEO basically spent more than the company could earn. He made many poor business decisions, for example, splurging on a fringe CBD corporate premises in access of 4,000 Square Feet (the staff counts hovered at 2-8 at any one time), paid himself an obnoxious 5 figure monthly salary, bought an expensive luxury car for the company directors to use, etc.
All these payments were made in lieu to more important things like business and product licensing, and contractor fees.
The irony is this was happening at the same time as the NKF fiasco!
You would be surprised how this could happen, but the cash generated by the core product was actually supporting such expenditures. This was how good the core product was.
However things came to light when he decided to alter the business plan without consulting the shareholders. He decided to stop managing the business cash cow, and focus on “global expansion” and “corporate acquisition” so as to IPO the company.
2) Good Accounting practices
This was the start of the end. Companies that wanted to buy us out would laugh at our accounts and accounting procedures.
There were no 3 quotation purchasing practices, no petty cash locker, the purchasing and bank signatory was the same person, a single executive director initiating and approving motions. Often business and personal purchases were made on the same corporate credit card, with no effort of repayment towards the company.
What was worst, the corporate accounts have been repeatedly submitted more than 2 years late and never signed off by the accountants. Till date the shareholders have not seen the audited 2004 accounts.
The company was run like a sole proprietor and never in the best interests of the shareholders that numbered 20+ persons and institutions.
3) Developing a management team.
One of the huge problems was after more than 6 years of operations, there was really only 1 employee running the show, the CEO. There was no one in Administration / Finance / Product Development / Logistics / Operations Management.
As a result there were many systems such as accounting and operations practices that were never set-up or developed. Often in the first few years of a start-up things do get messy and very horizontal. It’s often the entrepreneur or founder that has to do it all and get his/her hands dirty in every aspect of the business. But once you hit the 3 year mark and especially if you have large shareholders, such systems and management team needs to be in place. This is especially important if you want to grow the business in to a global enterprise.
4) Integrity of the Staff
Actually the company could survive if the company went quickly into cost cutting measures.
Suddenly the integrity of the CEO came into sharp focus. What I did not tell you dear readers, was that the large corporate premises and luxury car actually belongs to the CEO.
He had put it into the books as a “director’s loan” to the company and in return for the use of the asset, the company was paying of the bank loans for him. Furthermore he refused to take a pay cut citing that it was salary entitled to him. The problem was that the exact amount the company was in the red was the same amount as his yearly salary…
The story goes on and on, and I could continue talking about this matter for a whole day. But this little narrative does show, running a successful business is not easy, as there are many pitfalls and aspects to consider. However I must take my hat off at the CEO’s creative accounting practices I have learnt from this situation! .
I hope this article has helped you as much as it did me, as I will never run my business in this way.

4 Comments
  • wannapreneur

    October 10, 2006 at 12:49 pm Reply

    Thanks for the good read!
    Really highlights a lot of the pitfalls a startup faces but the crux of it all should be the integrity of the CEO / core team. Without that, the firm may enjoy perhaps short term growth but never succeed in the long haul.
    And yes, product isn’t everything…

  • Design Translator

    October 10, 2006 at 8:34 pm Reply

    Hey Wannapreneur,
    Thanks for stopping by and leaving your comments.

  • csven

    October 10, 2006 at 8:57 pm Reply

    It’s always reassuring to know that some designers understand more about business than just the product (and just the ID aspects of it). I’d say we need more of this sort of discussion, but truthfully I don’t see the design profession moving up the ladder as so many recent articles discussing “design innovation” seem to suggest. Until business becomes as integral to the design education (and designer mindset) as at least manufacturing processes are today, what you’ve written here will continue to be the exception.
    But thanks for being that exception. I’m not one for following the crowd.

  • Design Translator

    October 10, 2006 at 9:06 pm Reply

    Thank you very much for that kind comment.
    I knew from the start, if I wanted to be at the top of the design game I needed to have a good understanding of the business aspects of design.
    In fact if you look at the most sucessful designers out there they are actually sucessful business men/women as well.
    As you can see this was an expensive lesson for me as my business skills are currently learnt “on the job”, and still have a long way to go.
    But I must attest, understanding the business mindset has helped me make a lot better design decisions overall.

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