By Ron Beilin and Paul DelFino
When discussing small business and entrepreneurial behavior, the phrase “been there – done that” may be a perfect summation of what we have encountered. Over the course of 15 years of consulting with small businesses, we have seen much. However, we have stopped being amazed at the consistency of cause and effect in business performance and the entrepreneur’s ability to execute on the basics of small business management.
While bookstore racks are filled with titles promoting the latest and greatest technique or latest spin, we still find that the basics are often missing. Possibly, it is a vocabulary problem caused by too many books on the same subject with no common vocabulary and too much spin.
Should we be surprised by the fact that every entrepreneur who starts a business does not know all the basics of running and growing a business? Probably not. Above all, we must remember the following:
- Entrepreneurs are human.
- Entrepreneurs gravitate to what they like and do well and normally avoid or procrastinate on what they do not like or do not know.
- Chances are the entrepreneur knows his/her product/service/industry extremely well because of education and experience. But they may be totally unfamiliar with the basics of running a business.
We keep the above in mind when we are asked to enter a company to address a particular need. Over time, we have compiled a list of the most common errors made by, and pitfalls facing, entrepreneurs:
- Why am I doing this? When asked this question, entrepreneurs often reply with blank stares. The obvious answer, “To make money,” is just the tip of the iceberg. Are you building a business to sell? Are you building a business for transition to your heirs? Often, the plan beyond next month has not been considered. So, when major decisions on capital investment are made, the most significant considerations may not even be on the radar screen.
- Growth for the sake of growth – It is easy to grow a business. It is not always easy to grow a business and sustain comparable profitability for the longer term. Too often growth for growth’s sake is the goal. A compounded growth ratio is often a source of entrepreneurial pride. But to enjoy the financial rewards of a profitable business, the entrepreneur must invest time and effort to build ROI and gross margins.
- I don’t need a budget -We estimate that half the businesses with sales under $5 million have no budget. That is, they have no plan. When asked why, entrepreneurs often say it’s because budgets are stifling, burdensome, and constraining. But we believe budgets are tools to illuminate goals that may or may not be met, but that are set as benchmarks to help you evaluate how far you’ve come — and how far you still need to go.
- No pricing philosophy, or pricing too low – Margin management is one of the most important responsibilities of the entrepreneur. But often, too little time is spent on an ongoing and disciplined formal competitive analysis and on consideration of pricing philosophy, including cost plus perceived value. Instead, the natural inclination is to match competitors, which discounts any investment in differentiation made over time.
- Failure to develop a “number two” – Having a go-to person is different from having a “number two” person. The conscious and disciplined development of a manager to support and serve as a backup to the owner is often essential as enterprises turn the $5 million sales mark. Without that person, you may struggle to turn the $10 million sales mark. If you tell someone your company cannot run without you, you may be failing or about to fail.
- Never forget you are the best sales person – Here is a typical story: An entrepreneur starts a business and personally does everything, selling himself or herself to a level of profitability, ultimately becoming able to bifurcate roles. The decision is made to hire a salesperson so that the owner can sit back and “run the business.” But what is the best application of the entrepreneur’s skills? Is it business management or sales?
- No out of the box thinking – One of our clients described himself as “someone who is either so far in his box he cannot find the walls or so far out of the box he cannot see the box.” Entrepreneurs must be both out and in. If you are not spending two hours per week learning about your industry, you are probably missing the future. And if you have not tried some new process, product, or method in your business in the last 12 months, check your pulse quickly.
- Anticipating the effects of business level and scale – Every business in every industry reaches a point where change and investment are required to compete and remain profitable. Anticipating these levels and planning for funding of capital investment in technology, people; physical plant and equipment, restructuring, and distribution changes is essential. When asked how you’re planning upcoming investments in these areas, what would you answer? On what would your answer be based?
- Paying, managing, and measuring human assets – A remarkably low percentage of small businesses have leveraged compensation systems and productivity monitoring systems for staff other than the sales staff. Even fewer deploy formal compensation programs with benchmark salary surveys as a foundation. These omissions introduce the potential for employee turnover, quality deficiency, and management time waste that are dramatic dampeners of growth and profitability. All too often more attention is given to relatively minor expenses while compensation, which often makes up half of all expenses, is ignored.
- Underestimating time commitment – As noted earlier, entrepreneurs are human. They have families and, although most enjoy their work, they aspire to a balanced life. Failure to allocate enough time for the management responsibilities detailed above too often forces them to devote to work time they’d rather spend with their families. Over time, this is a formula for frustration, conflict and anxiety.
It’s no surprise that a small business failed every 30 seconds in 2002. Being an entrepreneur can be more challenging than being a ringmaster in a three-ring circus. The list above does not speak to undercapitalization, cash flow deficiency, and performance failure on contracts, but rather to the root causes of each of those outcomes.
Ron Beilin & Paul DelFino are the principals of the consulting firm Opportunity Inc. For nearly 15 years, they have assisted entrepreneurs in growing their businesses, responding to economic downturns, and merger and acquisition activity. Visit www.opportunity-inc.com to contact them or learn more about their services.
[From Connection Magazine – November 2002]