Here’s a beautiful piece by Daniel Priestley, the author of two great books – Entrepreneur Revolution and Become A Key Person of Influence. Having read those books, I think Daniel is worth listening to. So, this is what he says…
Today I spoke with Darren Shirlaw (Founder of Shirlaws – one of the largest and most valuable business coaching firms in the world). I walked away with a big nugget of great information that I really must share with you.
Darren used to be an investment analyst for a big bank. He was responsible for placing billions worth of funds into companies that represented a good risk and had growth potential.
As an investor, he was more concerned with the balance sheet of a company than the P&L. His belief is that the income is a function of the assets … Great assets produce great income whereas poor assets produce poor income.
When he started Shirlaws and worked with hundreds of businesses around the world (they are in 9 countries) he noticed that most small businesses are focused on the Profit and Loss and very few pay any attention to the things that show up on a balance sheet (assets).
Ironically, focusing on the P/L eventually erodes the income producing assets, whereas focusing on developing assets of a business generates better income and more value as well.
He gave a great analogy:
“Imagine an owner of a run down house tries to bump up the rent and cut costs on maintenance … It’s likely that the tenant will want to leave and the value of the property will diminish as it’s poorly maintained.
Imagine that landlord instead focused on strategically developing the asset and ensures that it is well maintained. It’s likely that the asset will attract more income and go up in value.”
This demonstrates the difference between P/L thinking and Balance Sheet thinking. Examples of quality assets that show up on a small business balance sheet can be things like:
- A Database of Loyal Clients
- A Proprietary System
- Protected Intellectual Property
- Contractual Agreements
- Real Property (Office Buildings, Houses, Land)
- A Brand
- Exclusive Rights To Distribute/Produce A Product
When I thought about the big companies that seem to focus on developing great assets I think of Apple, Virgin, BMW, Ted Baker, Google, Amazon, Facebook, Twitter, Aston Martin, Coutts & Co, Westfield’s, Jack Daniel’s etc
Over the long term, it’s impossible to market a poor product (asset). Conversely, it gets easier and easier to market a great asset.
Consider for a moment that “income follows assets”. What is the asset that creates your income (if you are in a job, the asset is your skills)? … And what could you do in the next 30 days to improve the quantity and quality of your assets?