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.
Pitfall No. 1: Downgrading the need for experience
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.
Pitfall No. 2: Sloppy record keeping
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.
Many companies are burdened by slow-moving, out-dated or excessive stock. Bargain-hunting managers sometimes make quantity purchases that cannot be sold quickly. Warehousing slow-moving items not only adds to costs but ties up funds which could be used more effectively elsewhere. Deadweight inventory should be sold off and stock control methods revised to maximise high-return stock and minimise cash investment. If these methods work your gross profit will rise.
Often businesspeople waste time and capital on products, services or customers that contribute little to company success. Instead, you should concentrate only on those facets of the enterprise that promise to yield the highest returns. Prune product lines or services to eliminate those which are unprofitable and have little potential: put slow-paying customers on a cash-only basis, or drop them.
You should never purchase anything if a better means exists to achieve the same result. For example, it is usually more economical to lease computers or to employ a business services firm than to purchase costly data processing equipment. Non-essential purchases should be postponed until the company is in vigorous health. Expensive machinery, premature building or land investment, luxurious cars and other equipment are all cash drains that can jeopardise a firm’s financial stability.
When people go into business, they must be prepared to lower their standard of living and make personal sacrifices until the company begins to prosper. The same is true of established operators who are caught in a money bind – the top person must be willing to put the survival and growth of the venture above the desire for an immediate high income.
Some suppliers offer a small percentage discount on bills paid within a certain period. Take advantage of such opportunities where they exist, to save money and to build good relations with suppliers.
Some operators get into hot water because, eager to make sales, they grant credit too leniently, offer overly generous terms, or become lax in their collection efforts. If a company is to pay its own bills and improve its profits, it must receive prompt payment for the goods it sells or the services it renders. A business owner entangled in credit and collection troubles needs a firm, well-reasoned policy concerning credit extension, limits, terms and collection.
You should consider introducing an appropriate credit application form to be completed and signed by potential new customers. Customers should be informed of the new system, overdue accounts should be pressed for immediate payment, and further credit or extensions to slow payers should be stopped.
Pitfall No. 4: Failure to plan
Ask business advisers what they consider to be the most predominant failing among struggling entrepreneurs and they will undoubtedly choose lack of planning. In fact, business trouble shooters cite this drawback with unending repetition.
Planning is critically important to the small firm because it lacks the staff and finances to compete on all fronts simultaneously, and a rapidly changing marketplace demands forward-looking strategies. In years past, a business owner could wait until a competitor’s new product or process was proven before ‘jumping on the band wagon’. Today, trends must be detected early in their development and followed up with aggressive action.
Many businesspeople believe they plan because they acknowledge the future. They often vaguely aspire to ‘do better next year’, or contemplate activities they might perform ‘when business improves’. However, thinking ahead is not planning. Planning is a process that involves the establishment of objectives and the determination of methods for reaching them. Without these elements, the businessperson is merely indulging in wishful thinking, not in planning.
Planned action is always more accurate than a wild shot in the dark. While no-one can control the future, well-laid plans allow the businessperson to take better advantage of opportunities that arise and to prevent possible difficulties.
Finding the time to plan raises problems for busy executives, who, more than not, are swamped with ‘yesterday’s’ crisis. One approach is the scheduling of blocks of time for just this purpose, usually on weekends or in the evening hours. During these periods, you can avoid distractions and interruptions and concentrate on thinking about the firm and its problems.
The most difficult part of plan preparation is getting started. To trigger ideas, many businesspeople undertake a step-by-step analysis of their present situation and their goals for the firm’s operation. The following questions are useful devices in stimulating planning ideas:
Basically, this type of session helps identify current problems and long-range goals. From this point, the planning process progresses through six steps:
Your ideas, questions and proposals should be put in writing at every stage. Even if the first draft may look unimpressive, ideas tend to develop and improve once they are down in black and white.
Once your strategy has been mapped out, it has to be implemented. Plans have no life force of their own. Human attention is required if desired results are to be accomplished.
Pitfall No. 5: Misuse of time
Typically, the small businessperson has too much to do and too little time in which to do it. Most owner-managers work fifty or even sixty hours per week, with some tallying up over seventy hours a week.
Much of this activity may well be wasted, if, as is often the case, executives are spending more than half their time on trivial matters. Valuable minutes and hours are often frittered away on insignificant chores while vital jobs are left undone.
Frequently a manager’s working week could be reduced, and better results achieved, by sensitive time management. Small businesspeople must learn to control the job rather than letting the job control them. The objective is to work ‘smarter’, not harder.
Efficient budgeting of work periods is a matter of self-discipline. You will come to realise that progress is making better use of time. Put urgent jobs before less pressing ones, or ‘first things first’. Rank duties according to importance. For instance you might have to decide which is more urgent: planning a new advertising campaign or hiring a new assistant.
The best approach for tackling both routine duties and ongoing projects is the preparation of daily, weekly and monthly schedules. Deadlines can be adjusted as interruptions or emergencies occur. Such systematic arrangement of tasks allows sufficient lead time for preparation of due-date material and eliminates disagreeable last-minute rushes which find you trying simultaneously to help customers and cope with yesterday’s paperwork.
Pitfall No. 6: Inattention to marketing
The first concern of every business is to get, and keep, customers. The best products, services, equipment, facilities and personnel are worth nothing unless they stimulate sales.
Some misguided ‘technicians’ dislike selling and resent the time marketing takes away from production or research. Other independent businesspeople are lackadaisical or overly optimistic about sales, expecting their merchandise or skills to sell themselves.
Few products are electrifying, however, and rarely is the old myth true about a better mousetrap bringing the world to one’s door. Unless revolutionary inventions or services are brought to the attention of the public, they have little chance of being sold. To build customer awareness and demand, an organised and vigorous marketing campaign is essential. A complete marketing strategy includes not only personal selling skills but also a saleable line of products or services, appropriate pricing, effective advertising and promotion and a good business location.
Many small businesspeople see poor sales as an isolated problem rather than a symptom of a poorly developed and poorly coordinated marketing effort. For example, when sales are disappointing, a panicky manager may endeavour to reverse the trend through price cutting, aggressive sales tactics or splashy advertising. However stopgap gimmicks won’t work unless the solution fits the specific marketing problem. Price cutting rarely compensates for poor location, increased sales calls or advertising cannot sell an obsolete product.
To combat sales difficulties, the businessperson must make an objective analysis of the venture’s products and services, its marketing effort, its competitive situation and its efforts to determine the real needs of buyers. Some of the more troublesome errors may be uncovered by a thorough investigation.
Pitfall No. 7: Ignoring the human factor
Small firms enjoy a favourable reputation for good employer-employee relationships. In reality, a great many face serious personnel problems. Even proprietors with only one employee complain about misunderstood directions, half-hearted work, frequent absences and long lunch or coffee breaks.
Salaries paid to poor producers are precious dollars lost, and discontented workers not only waste time and materials, they often chase customers away.
At the root of most employee difficulties is inept personnel administration. Typically, the business manager worries about production, sales and finance and neglects the matter of personnel needs until a crisis develops. To build a loyal and efficient staff, the manager of any business must devote considerable time and effort to hiring, training and managing employees.
Pitfall No. 8: Failure to assume the proper role
The fate of any enterprise depends upon the kind of manager in charge. The same money, materials, machinery and people can produce dazzling success for one businessperson and dismal failure for another. The difference lies in the quality of their individual management methods.
The precise skills required to be a good manager vary and change as the company grows. The managerial knowledge needed to direct a company in its infancy – when it is primarily a one-person operation – is different from what a growing concern needs five, ten or twenty years later.
As a company reaches new stages in its development, its chief policy maker’s role must adapt in concert with growth and development. The owner must plan for and carefully make the transition from operator to manager and then on to chief executive, assuming the responsibilities that each role demands. If the owner clings to comfortable and familiar jobs organisation growth and personal development will be obstructed.
Stage One: The Operator
In the beginning, the company is often a one-person operation with the head of the business both owner-manager and worker. Initial business success will depend upon the versatility of the owner-manager who must be able to do most of the operations reasonably well and to employ others to handle the remaining tasks. These operations include the following areas:
Stage Two: The Manager
At this juncture, the infant firm has developed to its youthful stage. Paperwork has multiplied, personnel and equipment have been added and facilities have mushroomed – all altering and complicating the role of the top person. Whilst remaining cognisant of the technical, commercial, monetary, accounting and protective aspects of the business, the owner can no longer perform, or even directly supervise, the actual work. The owner must now concentrate on administrative and supervisory facets which have been enlarged to include:
Stage Three: The Executive
When a company has achieved reasonable internal and financial stability, it has ‘arrived’ at its mature stage. Formerly the top person was absorbed in keeping ‘the wolf at bay’ or handling rapid expansion. Now the goal is more subtle: constant improvement of an organisation to make full use of its capabilities and the acquisition of public respect. At this point, the owner must step back from the everyday operations of the firm and concentrate on creative thinking and planning. Primary activities include: