Running a business: 3 key management imperatives

Business operations is the running of a business. The whole point of business operations is the harvesting of value from assets owned by a business. Assets can be either physical or intangible. An example of value derived from a physical asset like a building is rent. An example of value derived from an intangible asset like an idea are royalties. The effort involved in “harvesting” this value is what constitutes business operations.

Business operations encompasses three fundamental management imperatives that collectively aim to maximise value harvested from business assets (this has often been referred to as “sweating the assets”):

1. Generate recurring income.
2. Increase the value of the business (i.e. its equity).
3. Secure the income and value of the business.

Just about every function and role taken by people and groups of people within a business can be classified under one or more of the above three imperatives. The above are exhaustive in their coverage of essential business operations activities so much so that any activity undertaken by an enterprise that cannot be classified under any of the above three can be considered to be non-value-adding. All three imperatives are mutually dependent and, as the following basic tenets demonstrate:

The more recurring income an asset generates, the more valuable it becomes. For example, the products that sell at the highest volumes and prices are usually considered to be the most valuable products in a business’s product portfolio.

The more valuable a product becomes the more recurring income it generates. For example, a Mercedes Benz can be leased out at a higher rate than a Toyota Corolla.

The intrinsic value and income-generating potential of an asset cannot be realised without a way to secure it. For example, petroleum deposits are worthless unless processes and equipment are developed and employed to extract, refine, and distribute it profitably.

The business model of a business describes the means by which the three management imperatives are achieved. In this sense, business operations is the execution of the business model.

Generating recurring income

This is the most straightforward and well-understood management imperative of business operations. The primary goal of this imperative is to implement a sustained delivery of goods and services to the business’s customers at a cost that is less than the funds acquired in exchange for said goods and services — in short, making a profit.

The funds directly acquired by the business in exchange for the goods and services it delivers is the business’s revenue.

The cost of developing, producing, and delivering these goods and services is the business’s expenses.

A business whose revenues are greater than its expenses makes a profit. Such a business is profitable.

Increasing the value of the business

The more profitable a business is, the more valuable it is. A business’s profitability is measured on the following bases:

– How much income it generates for the amount of assets its business operations employ — its business return.

– How much income it generates for the amount of revenue it realises — its business margin.

An example of a wide contrast in business return and margin can be found in art. The same materials and amount of work can be spent and the same facilities and equipment invested in the production of a work of art. However, some works of art can be sold for millions of dollars while others sell for nothing more than a few hundred. Individuals or organisations that can produce works of art that command high prices (and therefore higher returns and larger margins) are the more valuable business entities.

Securing the income and value of the business

Businesses stability rests on how successfully a business ensures its on-going ability to harvest value from its assets (i.e. protect its income generating capability and retain its value as a business). This on-going ability may depend on a number of or all of the following factors:

– Desirability or demand for its goods and services

– Ability of its customers to pay for its goods and services

– Uniqueness and competitiveness of its business model

– Control exerted over the quality and efficiency of production activities

– Public regard for the business as a member of the community

A business that can harvest a significant amount of value from its assets but cannot demonstrate an ability to sustain this effort cannot be considered a viable business.

[Note: This article is an adaptation of the Wikipedia.org article “Business Operations” in a way compliant with the terms outlined in the Creative Commons Attribution-ShareAlike 3.0 Unported (CC BY-SA 3.0) license with which Wikipedia.org itself makes its content available for public re-use.]