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“Most companies grow themselves out of business. They either can’t finance (the growth), or they can’t manage it.”

Sadly, when a business fails, it is often not because it was founded on a bad idea.  It’s because it simply runs out of money.  Even if the business is profitable, it can still be cash-starved out of business.  How does that happen?

Several ways.

If the business is a brand new startup, the entrepreneur at the controls will often underestimate his or her expenses.  It might be that s/he misunderstood the labor market and ended up having to pay more than expected for key positions.  Or, the cost of raw materials or inventory might have spiked unexpectedly.  Or maybe sales just didn’t ramp up as quickly as expected.  The bottom line is, too many startups try to get their doors open on a shoestring.  If their sales forecasts and expense projections are right on target, they may get away with it.  But more often, something is overlooked or something unanticipated occurs, and before the fledgling business knows it, it’s awash in red ink. 

The second problem small business owners tend to bring on themselves is trying to grow the business too quickly.  In almost every case, growth is expensive.  A business may need to add people or inventory or equipment or office space to handle the additional volume.  An owner may try to handle growth expenses out of earnings (rather than borrowing from a bank or a private investor), but like his startup counterpart, this owner may fall victim to an overly optimistic sales forecast.  When sales don’t explode as planned, we suddenly have some significant extra expenses (people, inventory, equipment or office space) without sufficient new sales to cover those expenses.

The problem in both cases is the natural optimism of the entrepreneur . . . the expectation that everything will work out somehow.  The “can do” spirit and “full speed ahead” determination is what makes them unique and successful.  But it can also get them in trouble if they don’t correctly anticipate their cash requirements.

The answer, of course, is to keep a cash reserve beyond what you believe you’ll need so that when you hit an unexpected bump in the road, it doesn’t put you out of the game.  And the bigger the reserve, the better.  The bigger the reserve, the bigger the bump you can hit.

 
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“Planning is bringing the future into the present so that you can do something about it now.”

For most small business owners, the business is their single largest asset and the one they are counting upon to fund their retirement.  So wouldn’t it make sense for them to plan when and how they expect to exit the business?  You would think so, but many don’t . . . at least not in a disciplined, structured way.  They may have a vague notion in their head that they will sell the business for X dollars, but to whom?  To an investor?  To a competitor?  To the employees?  And how do they know they can get the price they want for the business?  In many cases, they don’t know.  There is often a disconnect between what the owner wants for the business and what the business is actually worth.

For example, the owner of the ABC Company has worked hard for many years to build his enterprise, and now he’s ready to put it up for sale.  He already has visions of golf, fishing, traveling the world, and living out his days in comfort.  But he is shocked when an offer from a prospective buyer comes in at half of what he counted on.  He is further shocked when his advisors (lawyers and accountants) advise him that it is a good offer and he should take it.  Everyone is sorry that the market price for the business isn’t what he hoped, but it is what it is.  What’s he to do?  Postpone retirement in hopes that he can get a better price later?  Or proceed with the sale and scale back his retirement plans . . . fewer creature comforts, fewer rounds of golf, and less travel?  Neither choice is very appealing, but the real sad part of the story is this: he didn’t have to be in this predicament if only he had done some intelligent exit planning.

First, understand who is the most likely buyer for your type of business.  Then educate yourself about how that buyer will value your business.  The buyer will, of course, be interested in any hard assets owned by the business . . . real estate, inventory, equipment, and the like.  He will also be interested in profitability over the past three to five years.  Have earnings been growing, flat, or in decline?  He will be critically interested in cash flow, and he will want to know how well your people can keep the business moving when you are no longer there.  All these factors enter into placing a value on your business, and depending on the industry, there are probably many other factors as well.

The point is, if you know how the various factors combine to place a value on your business, you can work to optimize those factors so as to maximize the value of the business.  And you’ll know what those factors have to be to command the price you expect for your retirement.

It’s never too early to map out your exit strategy.  If you’re not planning on exiting the business for 30 years, that’s great!  That means you have plenty of time to work your plan and have it producing the results you want for your exit.  Don’t wait.  Do it now or you risk ending up like the ABC Company.

 
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“No organization can make good decisions without conflict.”

“No organization can make good decisions without conflict.”

“If everyone is thinking alike, someone’s not thinking.”

We tend to veer away from conflict.  It can make us feel uncomfortable, or even downright shaken.  It can inspire anger, anxiety, hurt feelings, and a lot of other negative outcomes.  So we avoid it.  We try to play nice and hope everybody else does the same.  If we can’t say something nice, our mothers taught us, don’t say anything at all.

If we could create such a place . . . a place free of conflict . . . would you want to work there?  Probably not because it would also be a place free of passion, free of divergent points of view, and free of lively debate.  It would be pretty boring.  And it wouldn’t be an industry leader, it would be at the back of the pack.

The fact is, properly managed, conflict moves a business forward.  New ideas are vetted in the heat of debate.  Ideas that survive the heat give us confidence that we may actually be onto something here.  Ideas that wilt under a robust discussion probably don’t deserve to see the light of day.  It’s the rite of passage that separates the good ideas from the not-so-good.

So how do we manage conflict so that it’s a positive force and not a detrimental one?

It starts with the simple notion that we can disagree without being disagreeable, and we build that simple notion into our culture.  Mostly that means we have to make it “safe” for people to disagree or to take opposite points of view.  So we vigorously defend our own position, but we don’t assign unworthy motives to our opponent.  We assume that everyone is well-intentioned and honestly motivated.  When people know they can stand up and say what they believe without being castigated or impugned, guess what?  They will!

As part of any good decision-making process, we need to hear a variety of opinions.  We need healthy, robust debate that brings out divergent thoughts without getting personal.  If we manage that well, we get everyone’s best thinking, and when the smoke clears, we’re still friends, colleagues, and members of the same team.

 
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“Today’s decision makers are reassessing every spending and investment decision they make. They are looking for ways to reduce delay or cancel purchases and investment decisions, and they are seeking certainty that desired results will be achieved as planned.”

At a recent business meeting, one of the participants complained, “I’ve never seen so much indecision.  Our customers just won’t pull the trigger.  They get right up to the point of buying then back away, putting off the buying decision until next month or next quarter or longer.”  That drew a lot of “me too” responses around the room, so it became a lengthy discussion topic.  Why is this happening?

In these tough economic times, with budgets screwed down to the last dime, people are fearful.  One poor buying decision could shake the whole organization and may cost jobs . . . including the job of the person who made the poor choice.  So buyers are looking for safety . . . assurances that the product will perform as promised, that the expected ROI will be achieved, or that the anticipated cost savings will be realized.  That’s not new.  Sales people have always had to convince skeptical buyers that their product or service will perform as advertised.  It’s the degree that has changed . . . buyers no longer want assurances, they want guarantees.  They want their buying decisions to be bullet proof, and until they are, those decisions will be delayed, delayed, delayed.

So we need to make it “safe” for our customers to buy from us.  How do we do that?  The answer is probably different for every business, but the best example of an industry that really bent over backwards to attract skittish buyers is the auto industry.  People weren’t even coming into showrooms because they were afraid of losing their jobs and of being saddled with big car payments.  So what did some car companies do to make it “safe” to buy?  They said, “No problem.  If you lose your job, you can give us the car back.”  Pretty radical stuff.

Iron clad guarantees of specific outcomes can be difficult if not impossible.  There are too many variables that are outside the control of the seller.  So focus on those things that are under your control and that you can guarantee.  For instance, you may not be able to guarantee that a market research assignment will deliver the answers the client hopes for, but you can guarantee that you will assign your best, most senior researcher to the project, and that the answers will be accurate, validated, and above reproach.  You can also guarantee the methodology that will be used to conduct the research and the controls that are in place to assure the quality of the data.

Traditionally, we probe buyers to discover where their pain is.  Now it’s a little different.  Now we also have to probe to discover where their fear is and find ways to overcome it.  The success of our sales effort depends on it.

 
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“If there is no change, there’s no need to manage.”

What would happen in your business if one day your managers just didn’t show up?  What would their subordinates do?  Well, they would probably just do what they did yesterday.  And if the managers still didn’t show up the following day, the subordinates would just continue doing what they had done all along.  This could go on for quite awhile, and actually, things would probably run pretty smoothly.

Until something would change.

It might be a new technology, turnover of personnel, something different in the marketplace, or a new competitor . . . it could be a lot of things.  But something changes and suddenly we can’t simply continue to do what we’ve been doing.  We’ve got to adapt to the change, and that’s the job of management.

It’s tempting to blame outside factors when a company doesn’t perform as it should.  We say, “It’s the economy,” or “It’s the high cost of energy,” or “It’s unfair competition from China,” or we make some other excuse that our company’s poor performance is somehow not our fault.  But it is our fault.  As business owners and  managers, it’s our job to anticipate, respond to, and adapt to change.  It’s what we’re paid to do.

If we can’t compete with the Chinese on mass-produced products, maybe we change our focus to short-run, custom-made products.  If the high cost of energy is hurting us, we look for conservation opportunities or introduce more energy-efficient equipment or come up with a pricing strategy to pass that cost through to our customers.  The point is, it doesn’t matter whether change-induced problems are caused by external forces or not, it’s still our job as managers to solve them.

We can’t complain that it’s unfair this is happening to us and say, “Woe is us.  We’re doomed!”  That’s a recipe for going out of business.  We need to accept change as a constant in our business lives, acknowledge our responsibility for dealing with it, and welcome it as a challenge.

 
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Running a company is easy when you don’t know how, but very difficult when you do.

Running a company is easy when you don’t know how, but very difficult when you do.

Below are some activities that, when performed rigorously and consistently, tend to separate strong small business operators from those who are struggling. It is not intended to be a comprehensive list, and the list is not in any particular order. It is intended to provoke some self-analysis . . . to make you ask yourself if you are handling these activities as well as you should or if you might need to refocus on some of them.

Facing Your Problems – Do you accept responsibility for guiding your company through a changing competitive landscape, or do you blame your problems on external factors (the Chinese, the cost of energy, the economy, etc.)?

Focusing on Profit – Do you focus on top line sales growth to the detriment of bottom line profit margins? Do you excuse an erosion of your pricing with, “We’ll make it up on volume,” or “We’re doing this to gain market share,” or “We just need to get a foot in the door,” or “At least we’re covering a little overhead?”

Managing Cash – Is it King in your business? Do you carefully manage payables, receivables, and inventory to keep as much cash as possible in the business? Do your people understand the importance of managing cash and are they trained to do it effectively?

Planning – Do you have an annual plan? Do you use it throughout the year as an essential tool for managing your business?

Managing Profitability – Do you know which products (or services) are the most profitable and which are the least? Do you know which customers make you money and which do not?

Delegating Effectively – Do you surround yourself with talented people? Do you give them important responsibilities and the authority to exercise those responsibilities?

Making Decisions – Is there a decision making process in place that prevents “analysis paralysis” and assures that important decisions will be made without needless delay?

Studying Financial Statements – Do you study your financial statements each month and thoroughly understand the story they are telling? Do you share appropriate financial information with your key managers?

Using Key Performance Indicators (KPIs) – Do you use them to keep a daily/weekly hand on the pulse of the business? Do your key managers know and understand the KPIs you’re watching, and are they watching them as well? Do you chart them using a 12-month trailing average?

Communicating Effectively – Do you hold weekly 1-to-1 meetings with your key managers? Do you regularly communicate with the rest of your organization through memos or newsletters, all-company meetings, individual department meetings, or “brown bag lunches?”

 
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“There is no point in doing well that which you should not be doing at all.”

It’s not unusual.  We just continue to do certain things in the business because we always have done them.  Or we continue to do them because it would be a pain in the neck to train someone else to do them.  Either way, we end up doing things that are not the highest and best use of our time.  As a result, the business doesn’t get as much of our real talents as it should.

For each of your daily activities, you should ask yourself, “Am I the only person capable of doing this?”  If someone else could do it (or could be trained to do it), then someone else should do it.  And that someone else should be going through the same self-examination, and shedding lower level activities to someone else.  In the end, all activities should be pushed down in the organization until they reach the lowest level where they can be competently done.

Or maybe there are some activities that should be scrapped altogether . . . activities that no one should be doing.  Our sole reason for being in business is to serve customers, right?  So for any given activity or expense, it would be reasonable to ask, “How does this benefit our customers?”  If there is no customer benefit, direct or indirect, then it’s also reasonable to ask, “Why are we doing this?”  Try an interesting audit.  For every activity and every expense in the business, look for a corresponding customer benefit.  If you find some that don’t pass the test, you will be able to save time, energy, and expense in ways that won’t affect customers.

Whether you push activities further down in the organization or discontinue them completely, it’s all about the effective use of time.  It’s about making sure everyone in the organization is unburdened of work that should be accomplished at a lower level, freeing them to fully leverage their highest talents and skills.

 
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“A good leader inspires other people with confidence in the leader. A great leader inspires them with confidence in themselves.”

 

Over the years, I’ve been on a lot of “plant tours.”  Usually, our guide is the owner or CEO or plant manager, and the focus is usually on the systems and equipment being used in each step of the manufacturing process.  But awhile ago, I was on a tour that was fundamentally different in that the focus was on the people doing the work.  In this case, the owner was our tour guide, and at each work station, he introduced us to whoever was operating that station.  He would always introduce that person as a consummate professional saying something like, “I’d like you all to meet Harry James.  Harry has been with the company for 15 years, and not only can he take this machine apart and put it back together blindfolded, he can make it do things it was never designed to do.”  Then he would ask Harry to explain his work and how it fit into the overall manufacturing process.  This routine was repeated again and again at each work station, and in each case, the employee spoke with authority and easy competence.

It was obvious that the company had invested a lot in training its people well.  But it was also obvious that the culture in that company made people feel important, honored, and trusted.  Of course, the owner was leading our tour, but I have no doubt that his people would have performed just as efficiently and effectively whether he was present or not.

If you make people understand the importance of what they do, train them to do it well, and give them positive feedback so they know they are performing at a high level (and that their performance is noticed), self-confidence inevitably follows.  Self-confidence plays a huge role, not only in the employee’s effectiveness, but also in the employee’s job satisfaction.  It seems to me that if the result is a more effective, content employee, then the effort to promote self-confidence in your work force is well worth the investment.

 
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“People can’t see it your way until you first see it their way.”

 

Listening is an essential skill whether you’re at work or at home, whether you’re the CEO or an hourly worker.  Yet it’s a skill that many of us either never acquired, or have allowed to lapse.  In a conversation, do you find yourself crafting your next statement of brilliant insight rather than listening to what your discussion partner is saying?  Or if your discussion partner is saying something with which you strongly disagree, do you try to interrupt without letting him or her finish the thought?  When your discussion partner is speaking, do you allow your gaze to drift away from him or her?

Your friends, family, co-workers, customers . . . everyone wants to be heard.  And not heard in a superficial way, but genuinely heard and understood.  Hearing and understanding someone does not mean you agree with them.  It simply means you’re paying attention and allowing them to get their thoughts fully formed and on the table.  If you don’t listen closely and you don’t allow them to fully express themselves, then what do you think happens when you speak?  They don’t listen.  They’re too busy thinking about how they can get your attention and complete the thoughts they believe you didn’t hear.

There’s another reason to hone our listening skills.  Despite our brilliance, insightfulness, and superior intellect, people may surprise us with ideas we hadn’t considered or points of view we hadn’t appreciated.  Really.  It can happen, but you have to begin with an open mind.

So turn off all those other voices in your head, ignore any other distractions, and listen, truly listen and try to understand.  Ask questions and test your understanding by paraphrasing what you’ve heard so your discussion partner knows you’re paying close attention.  Then and only then will you be heard and understood.

 
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“A goal without a plan is just a wish.”

I have talked about planning here before, but I continue to run into small business owners who seemingly just don’t get it.  They don’t plan because they don’t see the value in it.  So I continue to hammer away at it in hopes that the lights will come on and they will finally “get it.”

Think of a driving vacation.  You can get in the car and start driving, hoping you end up someplace you’ll enjoy.  Or, you can plan your trip, deciding where you want to be at the end of each day, what you want to see and do, and what your ultimate destination will be.  If your goal is to have a fun vacation, which method is more likely get that result?  Jump in the car and hope for the best, or plan it out?

Does a plan guarantee you’ll hit your goal?  Of course not.  But it does guarantee you’ll come a lot closer to your goal than you will if you just try to wing it.

We used to talk about 3-year and 5-year plans, but business conditions are changing so fast that it’s questionable how useful those longer term plans are.  However, you should have some over-arching goal (i.e., we’re a $5 million company and we want to become a $20 million company).  Then each annual plan should move you down that growth path at a pace that gets you there within an acceptable time frame.

Many companies refer to their annual plan as a budget.  I suggest you lose that term in your corporate culture and substitute “profit plan.”  “Budget” sounds confining, restrictive, and it’s there to restrain our spending.  “Profit plan” is more positive, and it’s more descriptive of what we’re doing.  It’s saying, “Here is the profit we expect to make this year, and here is how we intend to do it.”

If you’re not already doing it, start building annual profit plans that move you toward your long-term goal(s).  If you embrace each year’s plan and really work it as a management tool, your company will move more sure-footedly and more profitably down the road you have chosen for it.  Guaranteed.

 
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