Starting a small business is relatively simple. It's a mechanical process - for example, deciding on the structure (individual, partnership, corporation), obtaining a location, applying for a business license, securing several types of insurance, buying equipment, opening bank accounts, hiring a staff and ...
The product side of a small business is relatively simple. This assumes the entrepreneur has a strong knowledge of the product or service that is being offered (through personal experience or franchisee training and support), which is usually the case. However, product knowledge alone will not make a business profitable over a prolonged period of time. Profit with a well structured balance sheet is the only measure of success.
New businesses are simple. Small business owners normally do an excellent job when their business is new and small and they can control all the aspects of their business. They create sales, price products or services, monitor a small number of jobs requiring minimum production, have few receivables, small inventories, a small number of payables, few expenses and a limited staff to manage.
Growing businesses are not simple. Running a business is not a piece of cake under any circumstances. As businesses grow, weaknesses become more evident.
Staying in business is not simple. The record number of business failures attest to this.
I have found in both my banking and consulting careers a consistent pattern of seven weaknesses that cause small businesses to fail. The following seven keys will help any business overcome these basic weaknesses and help the small business and its owner(s) achieve success.
For some unknown reason many small businesses don't feel the need to plan. This is an important and critical element of any business. It is also critical that planning is an ongoing process (not an annual project) and coordinated at all levels. Everyone must be pulling on the same rope and in the same direction.
The elements of planning are the:
Mission Statement
The mission statement is a one page document which simply spells out what and how, in broad terms, what the business wants to generally accomplish over the next ten years as a minimum. How it wants to be perceived by its customers, owners (if a corporation), its employees, the community, its creditors and lenders. It may also include as a theme the very long term vision of the business. A vision is an almost unreachable goal. This document must be communicated to the staff and become part of the culture of the business.
Business Plan
A five or six page document as a minimum, double spaced, that outlines how the business is going to accomplish the mission statement over the next five years. It must include the business strengths and weaknesses. The internal and external environment, such as available capital, is critical. It must also contain comments about products or services, delivery systems, financial goals and the staff. People are the most important asset any business possesses. An excellent "tool" when preparing a business plan is to pretend you are asking someone for a loan and you must convey everything about your business and how you will create the sales, and convert those sales to profits to repay the loan.
Individual Goals
Key staff members must prepare individual goals that are fully coordinated with the business plan. A maximum of five or six specific goals, with brief activities that outline how the goals will be accomplished. All the goals should be on one page, no exceptions. Each goal must meet five criteria. SMART.. Specific, Measurable, Actionable, Realistic and Timely. If goals do not meet these criteria, they should be scrapped. The goals must be reviewed quarterly at a minimum. If a subordinate fails to meet goals, the supervisor is clearly part of that failure. Supervisors should assure that the subordinate's goals meet the SMART criteria and that the subordinate has the guidance, tools and training to accomplish goals.
To comprehend financial statements one must first understand the "art" and "mathematical" interaction between the balance sheet and the earnings statement. In addition, one cannot review stand-alone financial statements and make any sense of changes or trends without "spreading" them.
What must be spread, preferably on a monthly basis:
The Balance Sheet. Trends in all accounts can be observed and with the definitive changes highlighted within the Cash from Operations statement below.
The Accrual Earnings Statement. Sales and expense trends can easily be reviewed and with year to date numbers annualized and compared to the previous year. Percentage changes from previous years will quickly highlight good and poor trends. Expenses as a percentage of sales are also useful.
Cash from Operations (Integrating the Accrual Earnings Statement and the Balance Sheet). This schedule is important as it highlights the flow of cash by considering profits, non cash expenditures, and changes in all the balance sheet accounts. It reconciles cash from period to period. Cash is "KING" in any business.
Financial Ratios and Productivity Indicators. Financial ratios such as working capital, debt to worth and turnover of receivables. Productivity indicators as labor to sales, overhead to sales and gross profit margins. Any number of ratios and indicators can be tailored for any business... and they must be watched monthly.
Aging of Accounts Receivable, Accounts Payable and Inventory. The overall account balances are important, but understanding the details of these accounts are critical to avoid disasters. One can determine if receivables are aging simply by watching receivables and sales levels. However, only a good aging, which is spread, will reveal to you clear data and the concise trends. Spreading will indicate seasonal trends by comparing current agings to previous years. The breakdown includes the dollar amount and percentage to the total for current accounts, past due 30-59 days, past due 60-89 days and those accounts over 90 past due. Inventory breakdowns may cover a longer period of time, Current, 90-180 day, 181-270 days, 271-365 and that inventory over one year.
A Budget. A good planning process includes a budget which is based on the environment, i. e. real world, used in the planning process. It will include goals for sales and expenses, improvement in productivity ratios, etc. The actual results must be compared to the budget.
A "good" spread sheet includes the following headings left to right.
The months January through December (for those on a calendar tax year) -Current Year to Date -Annualized This Year -Last Year to Date -Previous Actual Full Year - Percentage change Current Year to Date vs Last Year to Date.
The documents that should be spread are:
There are a significant number of excellent, easy to use accounting software packages and inexpensive computers. There is no excuse not to prepare monthly statements in any business. It may take an extra hour each week to keep the books current, but in the long run it's a good investment. Failure to do so may well result in the failure of the business. Don't be penny wise and pound foolish.
Spread sheets are simple to execute and design on Lotus, Quatro-Pro, Excel or any number of commercial spread sheet programs. After the initial design set-up one only needs to input the balance sheet and earnings statement and the software package automatically calculates the YTD numbers, annualizing, percent changes, the Cash from Operations, Financial and Productivity Ratios, and the actual results for the Budget.
When a business is "very" small and costs are low - pricing of products and services are easier. As the business and costs grow it is paramount that there is a strong coordination between pricing and the earnings statement. Pricing MUST utilize the current earnings statement. The in-depth understanding of your financial statements is paramount in pricing.
Pricing is not something you pick out of the air or use some industry average, because more than likely your business is not the industry average. Understanding productivity ratios provides the decision maker in a small business the tools to tighten up costs and expenses to stay competitive. It is extremely important that a small business takes the time to "shop" its competitors to compare the price of their products or services. Pricing in many cases is based on perception and other values rather than costs and competition. A 39 cent BIC pen writes as well as a Cross pen, but a Cross pen is priced way beyond its gold plated cost. Something to think about.
Selling is the "glue" that bonds a well run small business to the marketplace. The marketplace is the arena where every organization's product or service (and its quality) is finally judged winner or loser.
No sales... no chance to manage those revenues into profits.
In addition to dollar or unit goals the goals must include the number of cold and current customer calls... reviewed weekly. It is amazing at how many business fail to maintain a strong calling program.
Owners of small businesses need to provide leadership and communicate with their employees, regardless of the number of employees. Explain the mission statement, hang it in sight of not only the employees but in sight of your customers.
The end result of motivation is productivity whose end result is increased profit, the bottom line for any organization.
Motivation works! 99% of motivating others is motivating yourself first.
Some common sense motivators:
Too many small businesses fail to utilize an advisor(s) who truly understands the overall workings of a business.
No man (or woman) is an island. Everyone needs to bounce ideas off of others and to accept constructive external views of their business. This is critical in small businesses. All businesses must set aside adequate time to communicate and listen to their staff and outside advisors and professionals.
Owners must review their business on a consistent basis with someone who is knowledgeable in all aspects of the business process. All businesses deal with lawyers and accountants. While they may posses expertise in their specific field, I would not automatically assume they have the skills to provide professional management and business advice. A good advisor will possess management experience, understand the business process and will know when to seek out specific help (attorneys, tax advisors, human resource specialists) and most important will know when to question specific professionals.
An ongoing relationship with one or two advisors, is the preferred method. Similar to a board director, advisor(s) will come to know your business extremely well, which will benefit your business in the long term.
Our environment is changing every second... competition, government, society, technology, customer preferences, just to name a few. Many of these changes affect your business. Ineffective internal operating procedures, policies, pricing are, again, just a few items that negatively affect your success. The failure to recognize these changes or weaknesses may be fatal to your business.
If the marketplace is not responding to your business, perhaps you need a "make-over." That is restructuring your product or service, your marketing, your business name or a host of other aspects of your business.
If profits are poor or the business is in a loss mode, then internal changes may be required.
It is management's responsibility to guide the forces of change. However, for most people, change is difficult. Some people fail to see the problem, some are simply stubborn.
If owners do not feel comfortable with an advisor's suggestions, it is simple a task to acquire a second opinion.
These seven keys are not the entire spectrum of management or financial skills needed to run a business, but the failure to understand these seven or a preponderance of them seem to reoccur over and over in failing and failed businesses - it is true.
