What is the number one rule of business?
If you ask entrepreneurs this question — and I have asked many — the most common answer you will get is to make money.
This answer is not wrong, but it is also not the answer you get from textbooks and business studies. When I studied business, the general rule was that the number one rule of business was always “to increase shareholder value.”
The response I usually get next is, “Isn’t making money the same thing?”
You also need to understand who your shareholders are, which include but certainly are not limited to employees, vendors, suppliers, the community at large, banks, and even the municipalities in which you operate (taxes). All of these entities have a vested interest in your business and benefit from your business staying open and succeeding.
When you study business, however, you will learn that the most important shareholders are your investors, the group of people who have provided you with the necessary capital to start and grow your business. Many believe investors should be prioritized, and when setting strategies, our duty is to make sure that we are increasing the value of their investment.
Even this explanation can be confusing, because how we achieve this end has drastically evolved.
First and foremost, profitability needs to be in your company goals. Again, no oxygen, no fire. Profitability comes from generating enough revenue to cover your expenses and, hopefully, to reinvest in your business as it grows. Your strategy should, therefore, always include goals that focus on 1) increasing revenues and 2) decreasing costs.
Decreasing costs, however, gets a little more tricky. For instance, many entrepreneurs interpret “cutting costs” as reducing the number of employees or cutting back on important services. Obviously, this will cut costs, but it can also create anxiety and resentment and have a significantly negative impact on productivity.
I always advise entrepreneurs to put profitability front and center in a strategy. Each goal set should answer the question, “Does this help me increase the profitability of the company?” If it does not, then we do not scrap the goal immediately, but rather ask how this goal can help increase value to the shareholders.
In the end, these discussions are always productive and really help entrepreneurs balance meaning and passion with making money — which actually should be the number one rule of business.