Financial Systems

Small Business is about many things – sales, marketing, customer service, employees, but invariably it all comes down to finance. You can make it, sell it, and ship it, but if you don’t collect the payment, manage your cash well and document all your transactions such that you don’t run afoul of the tax man, then you won’t be successful in business (in point of fact, you won’t be in business very long). Good financial systems are important, but they are often undervalued in a small business.

The irony is that it is not difficult to set up good financial systems. It starts with a good accounting program, of which there are many to choose from. Quickbooks, for example, will work fine for many small businesses. Then, it’s important to set up a workable system. You want to make sure every business transaction gets entered into your accounting system. This includes all sales invoices, all deposits and all expenses by cash, check or credit card. All cash, checking and credit card accounts need to be reconciled monthly. This is crucial. If you don’t timely reconcile your cash, checking and credit card accounts then you don’t really know what could be transpiring with your finances.

If possible, the person reconciling your accounts should be different from the person entering the data. And the person signing the checks should not be responsible for reconciling or entering data. You may have heard of the term “Internal Controls.” This division of tasks is a form of Internal Control – a system of checks and balances that assures accuracy and make it difficult for someone to embezzle. Hiring people you can trust is important, but so is setting up a system that will keep everyone honest.

Reviewing your financials monthly is another type of Internal Control that is easy to do and helps connect your financials to your business planning. As a business owner, you need to know how to read and understand a profit and loss statement and a balance sheet. You don’t need to be an accountant, but you do need to know enough to understand what is going on in your business. Finance does go hand in hand with running a business, and as an owner you will always play a crucial role in your business’s financial system.

Achieving Business Goals

Goals. In business planning you set goals, assess how far you are from your goals, come up with strategies to reach your goals and set up mechanisms to measure how much progress you’ve made towards achieving your goals. Then, you periodically review your goals to see if they need to be revised. It’s a straight forward process that, if implemented, will go a long way towards making your business successful.

But setting goals is one thing, achieving them is quite another. A captain can point the boat in a certain direction, but if each of the crew members is rowing in a different direction, then the boat isn’t going to go anywhere. It’s the same in business. You can set a goal for your company, but if your employees, vendors and customers don’t support that goal, then your business will be dead in the water, too. And while increasing profits, for example, may be a goal that motivates you, it may just mean increased work and stress to some of your employees. To increase the chance of obtaining your goal, you need to communicate that goal to your crew in terms they can understand and that will motivate them.

As an employee, a vendor or a customer, my goal is to look out for my welfare first. Increasing the profits of your company may or may not make my life better. And if I don’t perceive it as making my life better, I am not likely to put much energy into helping you achieve your goal. Worse yet, if I perceive it as making my life worse, I may try and keep you from achieving your goal! What you need to do is to communicate your goal, increasing profits, to me in a way that it becomes a goal that I can really sink my teeth into. Ask yourself, what do I need others to do that will result in increased profits for my company? How can I motivate them to do these things? How can I communicate it to them in a way they will understand?

For example, sales people will be receptive to increasing sales if they feel the added effort is within reason and the increased sales are possible. Start by asking your salespeople “what would help increase sales?” and work with them to develop a strategy. You have now translated your goal of “increasing profits” into a goal of “increasing sales” that the salespeople can get into (assuming it increases their income).

Similarly, operations people will often be receptive to streamlining processes and costs if they feel their input is considered and if they feel it makes their work-life easier. Ask your operations people “how could we do things more efficiently?” and you will be creating a goal of “efficient operations” that supports your goal of “increasing profits”.

Customers? Vendors? The approach is no different. Work with your customers to find ways of creating additional value for them and you will driving your own profits. Work with your vendors, let them know what you need and listen to what they need and you can work towards a relationship which benefits everyone’s bottom line.

Working Hard Versus Working Smart

There may have been a time when an honest days hard work paid off in and of itself, but as we have progressed from the Industrial Age to the Information Age working hard without working smart is now a quick path to ruin for a small business. Imagine keeping your books or doing your tax return by hand. You could work plenty hard and skillfully and spend many hours more on the tasks than you would by working with a computer. We are now in the “Lazy Man’s” era of business where it pays to try and offload as much of your work as you can to all the wonderful technology that is currently available. Labor is expensive, be it your employee’s or your own. Let’s say an hour of labor is worth $40 (including overhead and benefits) and you can save 10 hours of labor a month with a new piece of software. If that software costs less than $4,800 a year ($40 x 10 hours/month x 12 months) then you are coming out ahead on the deal. Say the software costs $800. That’s a potential yearly savings of $4,000 or 40 hours of labor a year. If you make a 100% mark up on your sales, you would have to increase revenue by $8,000 to have the same impact.

You should use a similar logic to evaluate your productivity or that of your employees. Don’t just look at how hard you or your employee’s are working, look at how productive you (or they) are. You can create a simple productivity metric for your organization by taking total revenues divided by total labor hours worked. Now look for ways to increase that number – can you make a system more efficient, add a piece of equipment or software, change the type of product/service you are working, better train your people, change your working space… you get the idea. Ask each of the people in your business to think of how they could make their job go faster and easier and you are likely to come up with some ideas which will help the business do more with less.

Pain is the body’s way of telling you that you need to do something to take the stress off. Working the painful part even harder isn’t the solution to the pain. Similarly, feeling stressed in business is a signal you need to work smarter, not harder.

The Value Proposition

What value do you deliver to your customers?

Sometimes, as business owners, we get so caught up in trying to get the day-to-day things done that we lose sight of this simple question. In order to justify high margins, you need to provide good value for your customers. If you don’t, you can bet someone else will. So as you review your business model, ask yourself these questions:

What problems/needs do our customers have?
Which of their problems/needs are we helping to solve? Which of their problems/needs are we not addressing?
What value do our competitors offer? How do they differ from us?
How could we be offering better value to our customers and differentiate ourselves from our competitors?

Now the trick is to find ways to increase the value you offer without reducing your margins. Can you solve customer problems that you aren’t currently dealing with? Can you revamp your systems so that you are providing better service? How about providing a customized solution for your customers – even if it is at a higher cost?

Offering good value is what will allow you to get margins that your business can thrive with and also keep customers happy. And that will help keep you happy too!

The Business Model

The biggest reason that small businesses fail is that the owner or owners give up and throw in the towel. Persistence doesn’t always pay off, but lack of persistence is a sure recipe for small business failure. There will be crises. Count on it.

Still, I have seen many small businesses plug along when they probably shouldn’t have. The reason? Their business model was flawed to begin with. There is no use in throwing good energy at a bad business model. The sad fact is that many small business owners have never taken a step back to see if their business model is viable. Looked at from the perspective I talked about in an earlier post, that entrepreneurs have a strong artistic/creative component, the dilemma becomes clear. Many small business owners have starving artist syndrome! Their profit margins are too low for the amount of time and resources they put into their work.

Don Debelak wrote an excellent book about business models called “Business Models Made Easy”. It’s the best book on business models for the small business owner that I have seen on the market, and I highly recommend it. One of the key points made in the book deals with margins. A business has a better chance at long term success if it has healthy margins! It’s common sense really, but you might be surprised at how many business owners don’t have a clear idea (OK, any idea) of what their margins are. Can a business succeed without high margins? Sure, but that requires an efficient operation with high volume sales. Most small businesses don’t have their act together enough to live on high volume. If the business is not capable of generating a good margin – it’s likely that the business will spin its wheels and burn lots of energy for little gain.

So, what constitutes a “high margin”? And what makes the difference between a good business model and a bad model? Put together a financial model of the business. Run a best case and a worse case scenario. What do you see? If the business can’t make an acceptable profit even in the best case scenario – well then – that’s not such a great model, is it? Try upping the margins in the model until that changes. Now you are on the road to a “high margin”. Oh, and don’t forget the worst case scenario. Let’s try to minimize the risk while we are at it, shall we. What can you do – up the margin, lower the expenses? How can you change the model?

It’s an art and that’s a good thing for us entrepreneur artists.

More on business modeling to come….

Small Business Planning

Business planning for a small business is not all about writing a business plan. Many small businesses have never written a business plan and get along just fine without one. That doesn’t mean that written business plans aren’t helpful or sometimes even necessary (potential investors and banks will want to see a business plan, for example). But a written business plan only reflects conditions at the time it was written. And these days, things change fast (as all small business owners know). So the business plan that was written today, starts becoming out of date tomorrow.

Small business planning is a dynamic process. Boiled down to its simplest elements it goes like this “Where am I now – where do I want to go – how do I get there”? It doesn’t take a written plan to work that process, it doesn’t even require conscious knowledge or effort. What it does require is a clear idea of what you want from your business. Knowing where you want to go and having the desire to get there is a powerful combination. If you know where you want to go, you can take stock of where you are now and formulate a plan to get there.
That is what business planning is all about.

The beauty of the planning process is that it can be applied to your business as a whole or to any part of your business (sales, marketing, operations….). You can write things down, or not, do a detailed study or work from the back of a paper napkin. You can allocate regular time for planning, or do it when it feels necessary. There is no best case – it all depends on the business and the people involved. Of course, it does really help to have good information about your business, because it gives you a clearer idea of where you are and where you are headed. Timely, accurate, financials for example, make planning a whole lot easier as does good knowledge of your industry, your clients and your suppliers.

Then comes the real fun part. Strategy. How do I get from here to there? How do I get where I want to go? How many failures did Edison have before he got a working light bulb? Not all strategies work. But you can learn from each attempt. That is part of the process. So, you execute your strategy, then see where you are and the cycle begins again. Where am I, where do I want to go, how do I get there.

That is small business planning in a nutshell. Every business owner does it in some way or another. There is no right way. As for myself, I prefer some structure and regularity – a small, nimble planning document, periodic plan reviews, measurable metrics tied to key goals and occasional retreats to re-examine overall goals.

The Art of Small Business

I recently finished reading Small Giants – Companies That Choose to Be Great Instead of Big by Bo Burlingham. If you haven’t read the book, I highly recommend it. Mr. Burlingham an editor at large with Inc. magazine, gives us a look at 14 small businesses of various sizes that choose to follow a path of quality and ideals rather than all out growth. Each of the businesses has a different story, a different approach a different set of goals and ideals. There are no formulas to be found in the book, but that in itself is inspiring. As business owners, we can be who we are and be successful by our own definition. Business success can mean more than just financial success.

And what was the epiphany for me from reading this book was in the Chapter titled The Art of Business. Burlingham quotes his former boss Bernard Goldhirsh, the founder of Inc. “You’re not just writing for a rational person. You are writing for someone who has the soul of an artist and his expression is business”. Of course! That is the difference between a small business owner and a large corporation CEO.  Both are out to create value, but for the small business owner value is more broadly defined. For a small business owner, the business is a reflection of who they are as a person and it reflects their need to express their own values. Running a small business is a balancing act between art and science. Wonderful! It explains why I love small business so (and why small business owners can sometimes be difficult to work with). Each small business a unique and wonderful work of art painted on the canvas of business.

Like a good painter, you don’t always want to capture every detail when you look at a business. In fact, it is very helpful in both painting and business management to distill the mass of available information to the minimum necessary to capture the essence of the subject. So start with a clean canvas.  Ask yourself  “What is my definition of success? What do I want out of my business? What do I want to create?