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Reference Desk

Four Reasons Why Small Businesses Succeed (or Fail)
By Bob Normand

The four key factors found in successful businesses are presented and discussed. Detailed components are presented for executive motivation, a working business plan, organizational structure and motivation and operational support systems.

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 $1-3 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.

(c) 2004 The Profit Management Institute, Inc. All Rights Reserved

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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