WHAT DO I HAVE TO MANAGE? 

Most small business owners find it difficult to manage every aspect of their businesses, just because of the time it takes. 

There’s so much to do, and so little time – usually!  However, there are a few basics that simply have to be done – and regularly – if you want your business to succeed.

Before we look at what is included under the heading of “management”, we need to be clear on exactly what “management” really is. 

I like the way Stephen Covey draws the distinction between ‘management’ and ‘leadership’ because I believe it helps us to understand more clearly what those terms actually mean.  Covey says this:

“To differentiate, Peter Drucker has this to say: “Management is doing things right; leadership is doing the right things.”  So, Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning against the right wall...” (Emphasis: mine!)

However, in most small businesses there is no clear distinction between management and leadership – the two functions are usually in the hands of one person; – in most small businesses, you have to be a bit of both. 

You have make sure you do the right things, and that you do them right as well.

In today’s economy, this is becoming more and more necessary, and this issue of management or leadership is blurred. The problem most small businesses face is that good leaders do not always make good managers (and vice versa) and this is something they will have to face up to. 

Good management skills are essential to the ongoing well-being of any business, so if your business is lacking in this area you will need to make some changes. 

Fortunately, certain management skills can be outsourced (and for a reasonable cost) so don’t put it off if you need it!  As the business owner you don’t need to do everything – and no doubt, you will not be competent at everything. 

The three key areas, which are easily outsourced, are

• financial,
• marketing and
• Human resources management. 

Doing it this way means that you can acquire highly professional skills at a fraction of the normal full-time cost.

Michael Gerber, in his acclaimed book, “The E-Myth”, says that most small businesses are started by one of three different types of business owner – the Technician, the Manager and the Entrepreneur.  He goes on to reveal that over 70% of small businesses in the USA are started by Technicians. This is probably true in South Africa as well.  

 This revelation tells us a lot about the problems many of us face in business.

 Technicians, according to him, are usually highly competent in their own particular field of expertise and fully capable of manufacturing a high quality product for sale into the marketplace.  Generally, however, they tend to make poor managers.  Technicians – generally – don’t like paperwork and structure.    All Technicians want to do is be left alone to make the product!  The Technician is one you will hear say, “if you want a job done properly, it’s best to do it yourself!”

As a result, when Technician-owned businesses get into trouble, the owners can’t even spend time doing what they love because their time is taken up putting out fires that break out because of poor management – and they’re usually not equipped to put them out!

Managers are, according to Gerber, also generally not very good entrepreneurs because they tend to spend too much time ‘managing’ and can even lack the technical  (technician) skills and vision (entrepreneurial) to grow the business. Give a good manager something to manage and he will spend all his time doing a great job of it, even if it produces nothing and goes nowhere!  I have come across excellent managers who would manage a business into oblivion and do a damn good job at it!

Entrepreneurs, says Gerber, are the visionaries, the ideas-men!  They too have limitations in that they can lack the management skills so necessary to take their newly formed businesses to sustainable levels. They can see the next challenge so clearly, but often have no desire to get involved in the process that will get the show on the road. Very often, they confuse management with control, being reluctant to release control.  They can also lack the technical skills necessary for the job.  However, Entrepreneurs are more likely to outsource those skills they lack, and in this way, are more likely to get the job done.

So what does it take?      Well, – the ideal situation would be to have a nice balance of all three but that would be a fairly unique individual, and highly unlikely.

Gerber suggests that the key lies in setting up a business management system that is simple yet efficient, and which will enable the business to operate even if the owner wasn’t there.   As Gerber puts it, spend time working ON your business and not just IN it!      

Almost without exception, whenever I have been called in to help someone who is in trouble, I have discovered that the single most common complaint they have is – “I can never leave the business for a moment, I’m working myself to a standstill, and all I ever seem to do is put out fires!”    This paints an entirely different picture to the one Gerber envisages doesn’t it?

At the same time, let me say this: Business is all about people! 

No matter how good your systems are, if your people lack capacity, or vision, or are poorly led, even the best systems are going to struggle to cope.  I believe that every business owner should strive to have efficient systems in place, and then spend time leading their people!

There are hundreds and perhaps thousands of very good books written on the subject of management.  I am not going to even try and replicate them.  All I hope to achieve is get small business owners to focus on their core competencies – their strengths, – and outsource the skills they need in the areas where they are deficient.

Since Management is essential to the wellbeing of every business, I believe that there are seven key areas that small business owners – even if they’re not good managers – need to focus on: (and in no particular order of importance).  The first one – the most important one, I believe – is Cash Flow Management – and I’ll address that in the next newsletter.

If you had R100,000 to invest and I offered you a risk-free, 15% guaranteed per annum return on an investment option, you would be quite happy to hand over your money to me – wouldn’t you?

After all, you won’t have to work for the money and the capital is guaranteed. Most people who have the capital of their own would be relaxed about investing in something like that.

Why then, do so many people who don’t have the money, go out and borrow it, usually from friends and family, to invest in business ventures that provide no guarantees, either of getting their money back, or of providing them with an income?

And don’t laugh! The business world is full of people like this!

Well, there are a few reasons why someone would do this:

• He might have lost his job and starting up his "own" business means some form of employment security for him.
• He would rather make money for himself than for his former employers, believing he can probably do it better anyway.
• He is confident in his own abilities and technical expertise to make a go of it, or -
• He’s just desperate!

Quite often, then, – its just ‘a wish and a prayer’ thinking that gets them started!

The number of people I have met who sincerely believe that their dreams are reality is staggering.

One lady came in to register a Close Corporation for her new business. When I asked her what her business was, she said that she hadn’t started it yet. (To start with, you don’t go registering corporate entities, at great cost, without first establishing which one is right for your business.) Then she told me that her friends and family had told her that because she was such a great cook, she should start up her own restaurant. That was the basis on which she willing to float her new business!

Many of these sincere dreamers have actually lost touch with reality, and once we unpack all that goes into a business start-up, they come back to earth with a bump!

Now, I don’t want to rain on everyone’s parade, and its certainly not my intention to blow every business idea out of the water, but based on my own experience, and what I have observed over the past 35 years, I believe I have a responsibility to point out some of the problems I see from time to time.

So, – how do we go about it – the right way?

THE FIRST THING!

The first thing we must do is look at the potential venture from an investment point of view. So, using the example I started this chapter with, the question every would-be entrepreneur should ask is this -

- Is this new business I want to start likely to be a good investment? Would I invest in it? Would others?

In other words, I need to be reasonably sure that the return is commensurate with the risk.

In business there are no guarantees – right? So, if the risk is high we will then want a return that is also high – wouldn’t we? What, after all, would be the point of going into a risky business venture where the potential returns are small?

As a general guide therefore, I believe that the potential return on such an investment, before interest on borrowings, and tax, should be equal to at least three times what we would get from a risk-free, interest-bearing investment.

And, – that is after paying ourselves a salary for the work we will do in this business. I say this because very often, business owners don’t bother to separate their investment in the business, from their employment in the business. If you’re going to be working hard, you need to be paid a salary that is commensurate with your skills and the work you produce.

So, – if we could get a 10% per annum return on a risk-free investment, we would expect to generate a return from our business of 30% per annum, or more, on the amount of money we originally invested in it.

Another reasonable test would be to see that the business has the capacity to generate sufficient income to repay your investment within a period of 18 to 36 months. This is called the Payback Period.

These guides are not cast in stone, and not always applicable, but are a simple and quick way of helping you to make a decision.

THE SECOND THING

Once we’ve settled on that yardstick, the second thing to do is put together a well-researched, professional business plan. It is important that we participate fully in the plan ourselves – because it’s our plan!

I do believe, however, that once we have collated all the information we need for the plan, we should use the services of a professional to put it together in a way that we will be able to use on a daily basis.

It needs to be used rather like an instruction manual. The cost will be well worthwhile in the long run and may even save us the loss of all our capital in a venture that may be doomed from the outset! I often tell people that I would rather spend R10,000 on a good business plan, – and never start the business as a result – than lose R300,000 (which I might have borrowed!) on a poorly-planned business venture.

The plan will be used, -

• firstly, – to convince ourselves that we’re on the right track.
• Secondly, it will be invaluable if we decide to borrow funds to buy equipment, and for working capital.
• Thirdly, it will give us an operating budget for at least the first year of trading, that we can monitor against our actual income and expenses, on a regular basis.

It must include absolutely everything we can think about in respect of our potential business – things like,

• where are we going to operate from?
• What are we going to sell?
• Who are we going to sell it to?
• Who is our competition?
• How much labour will we need?
• Is it readily available and sufficiently skilled?
• Where will we get our major supplies?
• What terms will we get? – And many more!

(At Finserv, the coaching and financial management practice that I run, we facilitate workshops to design these Business Plans. We find it’s helpful to have someone who can facilitate this: gather all the thoughts into a meaningful summary of where the business should be headed.)

Even businesses that have been established for a number of years need an updated business plan each year. If for nothing else, it shows that you have been thinking about your business and where it is going. If you’ve never done one, now is the time!

THE THIRD THING!

Once the plan is complete, and we assume that the financial component of the plan tells us that the business is viable, the third thing we must do is determine whether we have access to sufficient capital to get it started.

There are essentially two types of capital in a business -

• own capital and
• borrowed capital.

The ratio of the one type to the other is referred to as ‘gearing’. A business that has borrowed a lot of money; much more than what the owners have invested, is referred to as a highly geared business.

Financial institutions generally do not like to lend more money to a business than the owner is prepared to do. So, – in spite of our sentiments that we can make the business work, we should be guided by the fact that if lenders are not willing to risk the necessary capital, the venture probably has little chance of success. Self-belief sometimes simply will not carry the day, on its own.

Strangely enough, I have also heard a number of business owners complain that the reason their businesses struggle is because the bank won’t advance them any more money! While that is true to a certain extent, it is more than likely that the business started off with insufficient own capital and has never managed to catch up. In addition, it probably means that unless something drastic is done, and soon, the business may not survive anyway. Remember, – banks do have access to all sorts of information which enables them to make reasonably sound lending decisions!

In all honesty, would you be prepared to lend money to someone for an investment, if he is not prepared to match it with a similar amount? After all, if you believe in your business enough – and you’re prepared to back yourself in running it – you should be willing to give everything you’ve got to make it work!

So, if your current business is suffering from under-capitalisation, you need to urgently take steps to improve that situation, preferably using own capital to avoid the increased cost of borrowing. Before you do that, however, you will definitely need to review your operation to make sure you’re not chucking good money after bad!

Some handy tips are explained under the heading of ‘excessive spending’ further on in the book about managing costs. Otherwise, get some wise counsel from a professional!

Paddling upstream against the current all the time, you will soon notice two things – you’re going nowhere, and you’re getting tired. Spending some money on the right counsel could well save you the journey and the exhaustion – and your investment to date as well!

IF I DON’T HAVE ENOUGH CAPITAL OF MY OWN, WHERE CAN I GET SOME?

Well, there are lots of informational web sites which will help you. In South Africa there are also lending institutions like "Business Partners", who specialise in venture capital, even though it does come at a cost. Some links worth investigating are at:

http://www.ventureworthy.com/Grants-for-starting-a-small-business.asp
http://www.southafrica.info/business/trends/newbusiness/credit-060307.htm
http://www.businessowner.co.za/Article.aspx?Page=23&type=30&Item=1850

The last link may prove to be the most helpful, but in case you cant access it, I have copied the pertinent details of "Where to get Finance" in APPENDIX 1, and their "Comprehensive Directory of national small business services" in APPENDIX 2 at the end of this book.

What you must constantly bear in mind though is that lenders will need to be convinced that your business idea is worth backing. If the business plan has been professionally prepared, and the numbers work, they’ll back you!

If you find that the recognized lending institutions are reluctant to fund your new venture, try and avoid going to more dubious sources. It may be that you need to shelve the idea for a time – at least until you have been able to raise some capital of your own.

Whatever you do, DON’T launch your new business without sufficient capital! It will be like trying to run the Comrades Marathon with just a few days training. You won’t make it!

IF I CAN’T RAISE THE CAPITAL, DOES THIS MEAN I’LL NEVER HAVE MY OWN BUSINESS?

Absolutely not!  Some of you might have seen an advert on TV some time back – Rand Merchant Bank – I think it was!  Their aim was to show how like to employ innovative people, so the one they used was a young black who came across a disabled old man in the street, busking for a living.  Starting small, he starts trading various items like apples, cups of coffee and eventually works up towards a wheel chair, which he then presents to the old man.  The ‘moral’ of the story is ‘use what you’ve got’!  The small fruit vendor on the side of the road could eventually own a string of fruit and vegetable shops.

2010 has only just begun and already I’ve noticed that the number of businesses in trouble seems to be on the increase.  Although the world economy is supposedly on the rebound, it’s clear that South Africa is lagging behind. I’m in the process of completing a book on the subject called "Business Blues- Why youve got them and what to do about them" and I’m hoping to release this in published form and as an e-book shortly.  However, I’ve had a number of requests from clients to help out recently and I thought I would start the process by releasing parts of it as regular newsletters, entitled "Is your Business in trouble?"  I’ll start with the introduction to the book to give you a taste…..

INTRODUCTION

This book is not meant to be yet another book on ‘management’ or ‘business leadership’. It is not meant to support one form of business structure over another. Its also not a "how-to" kind of book, offering some sort of recipe for success in the diverse world of business.

My fervent hope is that those who read the book will be helped, first of all, to get out there and start something worth doing because they want to do it; secondly, to make a success of it, and lastly, that whatever they do will leave a legacy for all those they worked with and for.

I believe that everything we do should have some sort of purpose to it, otherwise why do it at all?

Let’s not kid ourselves; we generally go into business to make money. Making a profit is the goal of all business – that’s a given, since no one is going to go into business aiming to lose money, are they?

The issue for all of us, however, is how we go about doing this. I’m not going to try and tell you, the reader, what kind of business you should set up!

I am, however, going to say that whatever the kind of business, there is a right way to do it, and a wrong way to do it. And I’m not just talking about ethics here!

The book is also for everyone who believes they can start and run a business – for everyone with an entrepreneurial spirit. I’m not going get into detail on complex administrative structures, or sophisticated computerised systems. I’m also not going to fill this book with fancy business terminology and "accounting-speak" – much of which today even confuses accountants. I just want to get down to the basics – where the rubber hits the road, in the trenches! I’m hoping it will be read by business owners who will witness with some of the real-life stories; and I’m also hoping its going to create a lot of ‘Aha!’ moments at the same time.

It will probably be glossed over by high power execs in large corporations who think it’s not relevant to big business. But, it is and it will be! Because the principles in the book are relevant to people who make decisions, no matter how big those decisions will be in terms of the amount of money or people they involve. Because when you drill it down, business is all about people! Nothing else!

Larger businesses usually have access to highly qualified employees who can guide them through some of the troubled waters businesses face from time to time. Small-to-medium sized businesses don’t usually have that luxury. Its my hope that this book will help to fill that gap.

So, what is a "Small-to-medium-sized" business?

Well, it could be……….

• A business owned by an individual!
• A business owned by a number of people.
• Business with small and large volumes of sales.
• Best defined as one that is managed, or owned by a single person (or a partnership) who is actively involved in the day-to-day running of the operation.
• The privately owned business in which the owner or owners have the responsibility for its direction and destiny.

They may be manufacturers, wholesalers, distributors, contractors, retailers and even professional service firms.

They may be involved in the food industry, transport, engineering, construction, fashion and even advertising. (or any one of a host of others)

Small businesses make up a substantial portion of the world’s economy and employ more people, in total, than any other type of business. Therefore, it is important that they be healthy and profitable!

A large number of them are not!

In fact, as much as eighty percent of all new small business start-ups will fail within the first two years!

All of my working life has been in the small-to-medium business environment. I have worked for smaller businesses, as an employee. I have owned smaller businesses. I have also been in partnership with others in small and medium-sized business ventures. The businesses have ranged in size from the typical ‘one-man-show’ to a private company employing over 400 people and turning over in excess of R500 million (in today’s terms) in sales in a year.

When the economy is pumping, firms of every size (including tiny privately held concerns), and in every industry, tend to borrow money to expand. For some, growing their businesses means bigger capital expenditures in both staff and technology. It’s exciting stuff, and the promises of success can easily carry us away.

Today, with sales down and the banks tougher on credit, debt burdens are crushing many firms–especially small businesses. Many of them are in distress – to put it mildly! And, they don’t know what to do about it much of the time – going through the motions, waiting, and hoping that somehow, someone is going to step in and help – that a miracle is just around the corner. Much of the time it’s not, and the inevitable happens.

If you’ve never been there, it’s important to understand that when this happens, everything becomes a problem. Nothing seems to go right! The light at the end of the tunnel just seems to be the train bearing down on you from the other end.

But I do have good news for all those in business who feel they’re never going to come right. You can change, and what seems like imminent failure can be turned around. But, it’s going to require a lot from you.

The first thing it’s going to require is a firm commitment to change, and the first thing that will have to change is YOU!  

If you don’t change the ways you run your business, don’t expect it to get better.  It’s like trying to lose wieght by sticking to the same diet.  Guess what – you’ll stay fat!  In the same way that we make lifestyle changes to reduce our weight and get fitter, we need to make business lifestyle changes – to get more efficient and more profitable!

It will mean changing some of your old management/leadership habits and introducing new, more effective ones. And, it will mean adopting these changes in a new business lifestyle. Many of you fail to see just how important this is. I hope to change that kind of thinking in this book.

The last twelve years, for me, have been spent building up a Business Coaching practice, by direct consultation and indirectly through our web-based e-service.

In this time, I have come to agree with the general view that the reasons over 80% of small businesses fail within the first two years of their existence is one or more, or a combination of, the following:

• Insufficient start-up capital
• Poor management
• Inadequate or non-existent financial control.
• Excessive spending
• Inadequate marketing
• Major "project" failure.

It is also generally accepted that 90% of small businesses fail because of a lack of knowledge. This "lack" of knowledge is in the area of business and financial management, not within their chosen field of expertise.
You may be the most amazing cabinetmaker in the world, but if you don’t know how to manage the financial side of your business, it will fail! A great plumber doesn’t necessarily run a great plumbing business.

I also know that most small business owners have very little time to read anything! They spend inordinate amounts of time trying to run their businesses and end up working so hard they don’t always work smart! Sadly, lot’s of the business books available to them out there are also not that easily applicable.

This book will, I hope, attempt to address each of these issues in the simplest way possible, providing some key ‘checks and balances’, that will introduce the ‘smarts’ into the operation.

If you’ve bought this book it’s either because you already recognise some of the shortcomings in your own business and you want to take steps to avoid disaster, or you’re about to embark on a new venture and you want to make sure you do the basics right.

It’s probably the cheapest, yet most effective insurance policy you’ll ever take out! I’m hoping it will prove to be one of the best decisions you will ever make too!