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Four Reasons Why Small Businesses Succeed (or Fail)
The American system of business management has been admired and
emulated around the world. This system is characteristic of two traits
in the American psyche: (1) enthusiasm for the future and making things
better, and (2) an openness and willingness to change in order to
achieve that end.
No society in the world is better or more
prolific at creating new businesses than the United States capitalistic
system but often we are so busy commercializing ideas and starting new
ventures that we don’t take the time to learn basic, successful
management principles that have been developed by our larger companies.
Many entrepreneurs are technical experts in what they do but
start a business without any formal training or experience in
management practices and principles. By “management” here we mean the
business of successfully managing the non-technical side of the
business, the “back room” activities. As a result of inadequate
management, many small businesses fail in the early years. They fail
not because of a weakness in the product or service concept they have,
but because the business was not properly managed in the back office.
Once
a business has emerged or grown to a certain level, management
techniques must change or the business will run into trouble. For many
small businesses this level is -3 million in annual sales or 5-15
employees. Sometimes the critical point is smaller and sometimes it is
larger, however, when it occurs, the owner or manager of a small
business must evolve, morph or otherwise change from a manager of
things to a manager of people and from a technical expert to a
strategic thinker.
This is often a difficult task because of
ingrained habits developed over time but failure to grow as a manager
is a major, perhaps the major reason why a business will falter,
stagnate or even collapse under its own weight.
But what do
successful businesses have that troubled businesses don’t? First of
all, owners of successful businesses have developed personal
characteristics that exhibit themselves in their businesses:
•Invariably they have a positive attitude towards their business and life in general.
“Twenty
years from now you will be more disappointed by the things you didn't
do than by the ones you did do. So throw off the bowlines. Sail away
from the safe harbor. Catch the trade winds in your sails. Explore.
Dream. Discover.” Mark Twain
•They are committed to their effort.
“The only place you’ll find success before work is in the dictionary.”
May B. Smith
•They are patient.
“Entrepreneurs
are simply those who understand that there is little difference between
obstacle and opportunity and are able to turn both to their advantage."
Victor Kiam
•They are persistent.
“Many of life's failures are people who did not realize how close they were to success when they gave up.” Thomas Edison
Secondly,
the owners of successful businesses have developed a business blueprint
called a Strategic Business Plan that clearly describes their business
concept, their mission and their philosophy of business. In this
document, they have set personal and corporate goals and set out
specific time lines and strategies to achieve them.
Thirdly, the
owners of successful businesses have developed an Organizational
Structure that functions as a well-oiled machine. This structure,
including all its policies and procedures, encourages all associates to
perform to their utmost capabilities. It rewards those who excel in
proportion to their contributions. It also disciplines those who
deviate from acceptable behavior. Positions, tasks, duties and
responsibilities are defined and communicated and performance is
routinely measured. Training, job enrichment programs and incentive
compensation plans are designed to encourage each associate to excel.
Successful owners view their associates as their most valuable asset
and resource.
Fourth and last, the owners of successful
businesses have developed Operational Support Systems. These may be
financial or non-financial, manual or automated. The objective of these
systems is to support and make efficient all the activities of the
organization. Well structured, they also relieve management of many day
to day routine activities, giving owners more time to be strategic
thinkers. The information provided by these tracking systems provide
critical information on sales, cash flow and other financial
performance data so that senior management can take timely action as
change occurs. Red flags appear early, before problems become
unmanageable.
IN SUMMARY, THE FOUR KEYS TO SUCCESSFUL SMALL
BUSINESS MANAGEMENT ARE: (1) Owners have developed habits and traits
that are Positive, Committed, Patient and Persistent. (2) A living
Strategic Business Plan is in place. (3) An Organizational Structure
has been developed that encourages people to be their best and helps
them do so. (4) Operational Support Systems are used that track
performance and relieve senior management of daily detail yet supply
them with critical data to manage the business.
Let’s go a littler deeper into what is meant by a Strategic Business Plan.
Successful
businesses operate within a planned framework. A Strategic Business
Plan is written for a minimum of three years or two years beyond the
current budget year. The plan describes the company’s mission to serve
its customers. It analyzes its corporate and marketing strengths and
how they will be exploited. It addresses its weaknesses and how they
will be overcome. It identifies its target markets and pricing
strategies and it identifies and describes strategic alliances or
business partners that may be crucial to success during the planning
period. The plan describes positions on any other issues seen as
critical to the long term health or viability of the business.
With
a current and meaningful business plan the company stands its best
chance of continued success and achievement. Without a viable business
plan the company runs the risk best described in the old adage:
“Failing to Plan is Planning to Fail”.
Now let’s look a little deeper at what we mean by Organizational Structure.
The basic building blocks of organizational structure for a business are:
•An Organizational Chart depicting key functions of company operations and reporting relationships between the functions
•Job
Descriptions for managers, supervisors and professionals that detail
reporting relationships, physical/mental/special job requirements,
skills, duties and responsibilities and standards of performance for
each function
•Task and Duty Lists for plant workers, utility
personnel and other laborers that detail reporting relationships,
physical/mental/special job requirements, skills, duties and
responsibilities and standards of performance
•An objective Job Performance Evaluation System that measures performance of all employees and encourages continuous improvement
•Information
Guidelines including an Employee Handbook and a Policies &
Procedures Manual that communicate acceptable boundaries and the
preferred methods by which employees are expected to operate
•An
Incentive Compensation System for all employees that rewards employees
for performing above the standard or budget and does so by sharing a
portion of the increased profits.
When all of these
organizational components are in place and being utilized routinely,
the organization will have structure and purpose. Employees will feel
they know where the company is going and what their role is in helping
it get there. They will know the boundaries of what is expected as
acceptable behavior and they will be aware that outstanding performance
will be rewarded.
Now let’s look a little deeper at what we mean by Operating Support Systems.
The
simplest type of system is a form, such as employment or credit
applications, a product return authorization or a shipping release
document. More involved examples of systems include cash forecasting
and management, budgeting, variance reporting and incentive
distributions. These more involved systems usually include some method
of automated assistance such as a Microsoft Excel® worksheet or even
more specialized software.
Usually the most involved system
for a small business is the Accounting System. This may be a relatively
simple system such as QuickBooks® or Peachtree®. These canned systems
are particularly good for non-manufacturing businesses that simply buy
and resell items. Also, they manage customers, vendors, accounts
receivable and accounts payable very well. Finally, they have the
capability of generating excellent managerial reports.
For
manufacturing or other businesses that modify (add value to) the
product after purchasing materials or for larger scale Point of Sale
retail businesses, software that is more specific to the industry may
be more appropriate. Great care should be taken before purchasing these
systems, however, as they (1) often are much more expensive in the long
run than simpler systems, (2) provide superior product cost accounting
but often inferior general accounting reports and (3) have rigid
reporting formats that are difficult to modify or adapt.
No
matter what the type of business, some type of accounting software
package that can capture daily transactions in a real-time environment
and be easily operated by in-house personnel is needed. In today’s fast
paced business world, relying on an accountant to provide periodic
statements of company performance several weeks or even months after
the fact is not an acceptable strategy.
Other systems small businesses should have in place:
•Cash
Management. This should be a forecasting system (spreadsheet) that
projects accounts receivable and other inflows against accounts payable
and other outflows and allows management to anticipate shortages and
take action before a crisis occurs or to improve the utilization of
excess cash during periods of relative abundance. The projection should
be for at least six weeks forward. Properly automated, this system
should take no more than 15-30 minutes per week for an administrative
person to generate for management review.
•Budget. This is the
one-year profit plan and critical to management control. This system
should relate to the company’s historical cost structure but allow for
zero-based budgeting (justifying all costs by line item). The system
should be automated to produce monthly budgets that directly relate to
whatever sales volume was, in fact, generated. Properly automated, this
system should require only a few hours per year of management input.
•Variance
Report. This system is complementary to the budget system. It should be
automated to produce a comparison of actual results against budget and
should report monthly and year-to-date totals by line item. The report
should indicate trouble areas, by exception, for management to take
action upon. Properly automated, this system should take 10-15 minutes
per month for an administrative person to generate the report.
•Key
Indicator Flash Report. This report summarizes on one page the key
weekly changes in cash position, accounts receivable, accounts payable,
sales and inventories. Requires 10-15 minutes per week for an
administrative person.
•Labor Burden Worksheet. This spreadsheet
keeps track of the costs of benefits and other employee related
expenses by employee and department. The full cost per hour or year for
each employee is reported, which can and should be used in pricing
strategy and pricing calculations. A complementary Employee Benefits
Sheet repackages the information for communication to the employee as
their full-benefits compensation package. Requires 15-30 minutes per
quarter for an administrative employee to update information.
•Job
or Product Pricing System. This system automates the calculation of
pricing required to meet overhead absorption requirements and budgeted
profit goals or it can report net profit margin before tax on any
proposed pricing scheme. This system is used as needed.
•Incentive
Plan Worksheet. This is a system for equitably distributing profit
sharing monies to employees based on loyalty, performance and the
extent of employee responsibilities. Properly constructed, it requires
only 10-15 minutes per quarter to input updated information.
•Break-Even
Calculator. This system calculates the company’s break-even sales
volume by day, week, month or year. Also provides “what-if” capability
to analyze major decisions that potentially and significantly affect
the company’s cost structure before the decision is implemented. This
system is used as needed.
•Weekly Sales Reporter. This is a
reporting system that keeps track of sales by product group and
salesman on a weekly, monthly and year-to-date basis. Requires 15-30
minutes per week for updating by the sales manager or designated
subordinate.
If you have none of these developed, the task is
not as daunting as it may seem at first. Plug-in systems are available
from a number of sources at modest cost and include backup training and
support (one such source can be found at
profitmanagementinstitute.com).
In summary, the management
principles discussed above can be visualized as a stool with four legs.
One and two legged stools are totally unstable. Three legged stools are
more stable but can tip if too much weight is shifted from one side to
another. Four legged stools are the most stable.
The four legs supporting our profitable business stool model are, again:
1.Positive, Committed, Persistent and Patient senior management.
2.A Defined Business Concept and current Strategic Business Plan.
3.A Structured and Functional Organization.
4.Basic, Automated Tracking Systems to support the organization and make it efficient.
A
business with these four critical components in place stands a much
higher probability of success than businesses that are not so equipped.
© 2004 The Profit Management Institute, Inc. All Rights Reserved
About the Author: Robert A. Normand is Executive Director of the Profit Management Institute located
in Sarasota, Florida. The Institute is dedicated to providing small business management
guidance and rehabilitation of businesses exhibiting sub-standard performance.
The Institute’s website can be viewed at profitmanagementinstitute.com
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