The 4 Moments of Truth in Business

The 4 Moments of Truth in Business

Greg Davidson and Roger Andrus - 18 January 2018

In his book, Death in The Afternoon, Ernest Hemingway was the first to use the term “moment of truth.” He used it to describe the point in a bullfight at which the matador needs to put away the pomp and swagger that has entertained the crowd and dispatch the dangerous animal. Over the last century, the phrase has come to be used to describe the moment when you can no longer fake it or talk your way out of a jam. It is the moment that either makes you or breaks you.

For those entrepreneurs willing to risk entering the arena of business, there are four of these moments of truth - four points at which either you have what it takes… or you don’t.

Moment #1 - Either you know how to win customers…or you don’t.

There is no faking customers. Both winning and keeping customers are essential. Real customers are those who are willing to pay you a fair price for what you do. Those who pay less than what you’re worth are not real customers. Those who give you a “thumbs up” on your Facebook page or follow you on LinkedIn or Twitter are not customers. A large potential user base doesn’t automatically translate into a large customer base. The size of the market doesn’t matter if none of them are real customers. And no matter how “cool” or “innovative” the product is if no one is willing to pay a fair price, you don’t have a customer and you don’t have a business. You have an expensive hobby!

You know if you have real customers by looking at the gross margins of the business. If sales generate enough gross margins to sustain the business, there are real customers. If gross margins are not sufficient, then it doesn’t matter how much you sell, you’re going out of business. If you’re in trouble, fix profits first, then sales. Understand your real customers, how they define value, and how to capture that value.

Moment #2 - Either you have cash…or you don’t.

In every new enterprise, cash is king. The business owner must understand how money flows through the business and adjust expenses and financial commitments accordingly. Many companies have started with good customers only to spend or even grow their way out of business.

The best indication of a good cash position is a 2-month reserve of working capital on hand plus enough cash to zero out any balance on lines of credit. Structure your business to operate on 90% of revenue for a 10% pre-tax profit every year.

Moment #3 - Either you have the talent…or you don’t.

The first indication of a successful business leader is how they manage talent: their own and their team’s talent. Talent is defined as the ability to create value in the business. In particular, those who can:

1. increase output,
2. lower cost,
3. increase quality, or can
4. move things faster

… are the ones who are creating business value. Managing talent is about designing activities and managing time in a way that maximizes the business value of each employee.

The best measure of talent in a business is the net profit per employee (PPE). Hiring, firing, compensation, delegation, training and job design are all decisions that should increase or at least hold steady the PPE. The recruiter’s maxim should ring true throughout the organization: “Hire to elevate, not delegate.”

Moment #4 - Either you know your business…or you don’t.

One of the keys to a good business is to have a predictable business model. Even a bad business can get lucky on occasion. But over time, luck runs out and only those who have a crystal clear understanding of the buying cycle and a consistent way to create and keep customers will stay on their feet. You can’t manage what you can’t predict.

Measure the gap between projected and actual sales. Then measure the gap between projected and actual net profits. Understanding those two gaps －the sales gap and profitability gap－ is the key to knowing your business. Closing those gaps with creativity and resourcefulness is what separates the winners from the losers.

Bringing it all together

To survive in business, you must have a deep understanding of who your real customers are and how to keep them. Get cash under control and build up a reserve for emergencies and opportunities as they come. Make sure you are making talent decisions and managing time in ways that create business value. And finally, the ability to do what you say you’re going to do depends on your ability to create a consistent and predictable way of finding and keeping real customers.

There are lots of people who study, analyze and write about business. But only the entrepreneur, the person willing to step into the ring and risk market rejection, knows both the fear and exhilaration of a new business. They relish winning a customer because they know the bitterness of losing a sale. And in the end, the entrepreneurs who build successful businesses are the ones who － in the moment of truth － can deliver.

Greg Davidson is President of TNOST - a strategic consulting firm focused on using metrics and analytics to solve business problems.

Roger Andrus is the Founder and Managing Partner of TechX and Park City Partners Group and is a member of the UA2 Angel Group, each formed to help entrepreneurs fund and scale their businesses.

Photo Attribution: Nathan Dappen