Growth in any business, though a sign of health, is a painful process with many obstacles along the way. Ultimately, the successful company is one that can surmount these difficulties and survive profitably in today’s challenging environment.
Many businesses do not survive. Slow sales, heavy operating expenses, inventory problems and poor location may be just a few of the conditions blamed for a company’s downfall, but a closer post mortem examination usually reveals a trail of management blunders that were responsible for the ultimate demise of the firm. In fact, managerial incompetence or inexperience is the greatest single cause of business failure.
Too many businesspeople think extra cash will solve almost every problem. But good management, as well as money, is the key to whether a company flourishes or dies.
Management concepts are not pie-in-the-sky theories; they have evolved from what businesspeople have learned by struggling with their own mistakes. And the same types of management errors are made repeatedly by executives in every variety of business, large or small. The difference is that the costly mistake which can be absorbed by a large corporation may prove fatal for a small or medium-sized enterprise.
One of the best ways for a smaller businessperson to learn management skills is by studying the mistakes of others. Management experts have identified those errors most often made by managers. They include downgrading the need for experience, sloppy record keeping, reckless money management, failure to plan, misuse of time, ineffectual marketing programs, personnel mismanagement, and the failure to assume the proper role as the company grows.
In larger companies, major functions of the business – such as finance, marketing, personnel, research, engineering, purchasing and production – are general departmentalised, with a person experienced in the function assuming responsibility for its accomplishment. Small concerns usually rely on one person, the owner-manager to supervise or perform most of all of these tasks. If that person lacks the necessary skill and versatility, the company is doomed.
Sole proprietors especially must be able to wear many different hats. Superior knowledge of a few facets of business is not sufficient. For instance, even outstanding success as a sales person does not guarantee success as a manger in the same line of business. Lack of experience in accounting, purchasing, pricing, advertising, budgeting and other aspects of management can lead all too easily to business failure.
Problems arising from inexperience are not limited to new enterprises. Founders often discover, after several or many years have elapsed, that they have been pushed out of their depth by the increasing complexity of the expanding venture. To stay in business, they need to learn new skills.
The obvious solution for lack of experience is to obtain ample training prior to launching anew enterprise. Just how much training is needed will depend on the type of business conducted. Some management authorities recommend a minimum of three years’ experience in a given line of business, with some time spent in a managerial or decision-making capacity.
For operators already in business the only remedy is to acquire some experience – and fast. First, the top people should review their own backgrounds and current problems to discover their weak points, the missing parts of their experience. Then, concentrating on closing those gaps, they may acquire knowledgeable employees or partners, hire outside business consultants or undertaken an emergency or partners, hire outside business consultants or undertake an emergency self-development program.
Misleading financial records cause more havoc than any other management mistake. A poor accounting system leads to serious problems in every aspect of business, from sales to insurance, from taxes to inventory control.
Yet the need for an effective bookkeeping system is frequently overlooked. Without proper accounting, costly errors occur. What the businessperson doesn’t know can, and does, hurt. For example, Bob James, the owner-driver of a truck, may spend long hours at the wheel, often without getting a normal amount of rest. When he finally gets home, he may be too tired to bother with bookkeeping or records. Yet, if he is in fact making losses on his trips, the longer he drives the greater these losses will become. When he finally discovers them it may be too late to avoid serious financial difficulties or bankruptcy.
Other reasons for keeping adequate records include the following:
Unless your operation is extremely small or unusually simple, you cannot possibly keep everything in your head. You must rely on a system that provides up-to-date information upon which to base daily decisions. Goals for any method should include:
Remember that your management accounts (prepared monthly or quarterly) only indicate whether you have made a profit or a loss if you have completed a stocktake and at the same time added up the total of trade creditors and debtors.Stocktakes can be done quickly on pre-recorded stock sheets and at your selling price. With accurate accounts your percentage gross profit is the key indicator for efficiency, ideal sales mix and possible theft. A knowledgeable accountant can help set up a workable system. However, you cannot expect and accountant to shoulder the entire burden of financial analysis. You, too, should understand – and be able to use – the financial information derived from company records; know how to project sales and expenses, be aware of the break-even point and the return on net assets, and learn to make decisions based on financial knowledge rather than guesswork. Pitfall No. 3: Reckless money management Losing sight of the importance of maintaining a healthy financial position is a grave management error. When a shortage of funds afflicts a company, the owner has little time for anything but the struggle to appease creditors. Many businesspeople allow capital to dip to dangerously low levels. They forget that cash and cash alone – inventory, shiny equipment or accounts receivable – pays the bills and provides funds in an emergency. Cash crises due to undercapitalisation are common in new enterprises. But they can also arise in long-established firms if too much capital is tied up in fixed assets and inventories, if credit is not controlled or if growth is not properly paced. Costly improvements to the shop or warehouse, purchases of equipment and so on should be postponed until the business is more profitable. For example, it is not uncommon for the new owner of a used car business to pick the most attractive car which comes into the yard for personal use. This car should be sold, thus increasing turnover and profit.