A business is a linked sequence of activities that transforms inputs into sellable outputs. In order to build a valuable business, you need very defined inputs, processes and outputs. The more specific you are about what you do, the easier it is to scale and the more profitable you are. If you know exactly what your customers expect from you, then you know how to compute your targeted profitability. You do this by:

• Determining the cost of acquiring the inputs
  
• Determining the cost of processing the input to the desired output
  
• Determine the cost of serving the output
  
  
  

The total cost of providing a service of product= cost of input + cost of conversion.

There is also the cost of providing customer service for after the sale, but this is not discussed in this article.

The difference between what your customer is willing to pay and what it cost you to provide the service or product, is called profit. Thinking about cost from a process prospective helps you streamline your process.

Input

Input consists of the resources that are put into a business, also called raw materials. Let us use a dry-cleaning business as an example: In the case of the dry-cleaning business, the process, will include using a chemical solvent to clean the clothes. This chemical solvent is material directly needed to get the clothes clean.

Processes

Processes are the resources needed to convert the input into the output desired by the customer. Processes require investments in labor and overhead. In the case of the dry-cleaning business, the process, will require an employee and investment in a facility to get the clothes clean. The cost of paying the employee is known as labor cost and the cost in running the facility is known as overhead cost.

Output

Once the clothes go through the process, the customer gets his or clothes clean. The clean clothes are the results of taking the input through the process.

The input, processes, output in a dry-cleaning business are quite easy. This makes it very easy for a dry-cleaning business to explain what it does, which makes it easier to grow.

Suggestions

It is hard to grow a business when there are no defined inputs and processes. Be sure to:

Define what you do:
Be very clear about what customers can come to expect from you. Be sure to address the 5 W’s: what, why, when, who and where. Without these specifics, the customer determines the direction your business goes and you are forever playing catch up. While you should get input from your customers, they should not run your business.

Define how you do what you do: Once you address what you do, the next step will be how to do it. To stay competitive, you should take a look at how your competitors currently execute, and then see how you can improve upon it to gain a competitive advantage.

Define what you will need from your customer: the last step is to define what you will need from the customer to get the given output.

Summary

Building a valuable business could be a long ride. But be persistent and seek help when stuck. The question ultimately come to this: What exactly do your customers want and how can you best deliver it to them. Being a jack of all trade is the best way to stunt your growth. By giving your customers what they most desire, actually makes you a more desirable provider.

On the other hand, being a jack of all trade, decreases your overall business value. You are good for everything but best for nothing.

Here is a free spreadsheet to help quickly compute profitability