Surviving in today’s business world is more difficult than we have witnessed ever before. Small- and mid-sized businesses are failing at a rate that has not occurred in more than 60 years. An analysis of the reasons for this high rate of failure quickly points to the following fundamental errors made by business owners.
A passive sales process.
Business owners rely on their existing relationships—usually one or two customers—to provide them with enough business to pay their bills, make payroll and perhaps realize a small profit. Then, when the economy goes south and these few customers cut back on their spending, the passively acquired sales dry up and the company’s revenues diminish proportionally. For companies to truly survive the brutal economic swings, they need a proactive sales process—a sales force that goes knocking on doors, aggressively soliciting business.
Lack of organizational structure.
Even companies that use a proactive sales process and are seeing some growth in these difficult times can still fail if they lack a functional organizational structure. From startup through approximately $1 million in annual revenues, companies usually take on a structure that resembles a pinwheel. The owner is the hub, surrounded by the employees on the outside of the wheel. They all contribute to turning the wheel, but every time one wants to make a move, he or she has to check in with the center of the wheel, the owner, to get a decision made. That may work while the company is small, but as the business grows above $800,000 to $1 million in annual revenues and adds more employees, it overburdens the owner. He or she becomes consumed with keeping track of every detail and making sure all the employees are doing their jobs. No time remains to act as chief executive of a growing company.
A simple measure a business owner can use to determine if the company’s organizational structure is still functional is to compare sales revenue growth to bottomline profitability. If the sales revenue growth is not proportional to bottom-line profitability growth, then the owner needs to take a step back and focus on realigning key employees with the company’s major functional areas.
Failure to appoint a strong management team.
Among companies that have a proactive sales process and are transitioning from a pinwheel structure to a functional organizational structure, a common mistake is the failure to establish a strong management team that is accountable for results.
At this stage, the owner has to identify key employees within the company (or possibly outside the company) to be directly responsible for the sale, operations and finance processes—both from an operational and financial viewpoint. Depending on the size of the company, the owner may accept responsibility for one of those slots, usually sales. Above this annual revenue level, a company needs an owner who is truly the president of the company.
Lack of management skills by the owner or company president.
Owners who have established a proactive sales process, a functional organizational structure and a management team that is held accountable for results sometimes make the mistake of thinking they can now step back and be an absentee owner. In reality, they need to become even more involved in the management of the company.
However, their job responsibilities will change from day-to-day organization and process control tasks to more strategic planning and leadership. At this point it becomes extremely important for the business owner to focus on growing the business and coaching people on how to achieve the growth rather than micromanaging. To use a sports analogy, the business owner is transitioning from the player on the field to the coach on the sidelines.
Not using leading operational metrics.
In most businesses, either the bookkeeper or outside CPA provides the business owner with a copy of the financial reports— income statement and balance sheet—once a month. On receipt, the owner reviews the key areas of the reports and tries to think of ways to improve the numbers—except the numbers aren’t providing much of a “grassroots” clue as to which area of the business should be the primary focus of improvement. To make matters worse, there is a four-week lag time associated with these reports, and in today’s economic environment, time can be a business owner’s worst enemy.
Rather than relying on retrospective monthly reports, the most effective way to manage a business is to establish a company “scorecard” consisting of “leading” metrics for each of the functional business processes—sales, operations and finance.
Examples of leading metrics in the sales process are number of sales calls/contacts per day, per week; number of sales appointments set per day/per week; number of sales proposals or job bids developed per week; number of sales orders signed per week; and number of days from the sales call to signed customer order.
Examples of leading metrics in the operations process are the number of hours worked per week vs. hours quoted on a job; number of overtime hours; quality metrics used in inspection at the conclusion of a job; number of days from the time sales orders are received to the time the field/shop work orders are completed; and the number of days it takes to get a completed work order from the field/shop to the finance department for customer invoicing.
Examples of leading metrics in the finance process are weekly cash on hand; days receivable outstanding; days payable outstanding; and number of days from the receipt of a completed work order to the date of customer invoicing.
Lack of weekly management accountability meetings.
Even owners who have leading operational metrics sometimes forget to drive accountability through the use of weekly management accountability meetings. Some companies have management meetings with a lack of focus and nothing ever gets accomplished. In other businesses, owners try to rely on daily verbal one-on-one communication with each member of the management team, which brings the risk of sending different messages to different members of the team.
The courage to change
So where do you start? Sales. If sales revenues are declining, revisit the company’s current market and re-evaluate the target market strategy. If both are still viable, focus all available resources on the sales process. Reallocate excess capacity or excess labor from finance or operations to sales, or reduce the finance and operations workforce and hire more salespeople.
A shrinking market, on the other hand, calls for some serious innovation in product and/or process. For example, a residential plumbing contractor in Florida increased annual revenues from $1.4 million to $3 million within two years by training his plumbing technicians to double as salespeople. When they notice windows with faulty seals, cracked concrete in the driveway, leaky ceilings, torn carpeting or a broken furnace, they refer the customer to repair shops with which the owner has established relationships. For each referral, the plumbing contractor receives a five- to 10-percent commission. This owner was not afraid to try something new, get out from behind his desk and build relationships with other trades. Today’s economy calls for courage and innovative methods.