Suggestion: on any kind of business relationship, take a step back, open your eyes, and look for compatible goals.
For example, one variety of hell is a startup with founders and investors having different goals. Differences on how to achieve goals are hard enough. You can talk out those differences. But when investors want one thing, and founders something else entirely, there’s trouble brewing. Companies can aim for growth, profits, or cash flow independence. Everybody involved should agree.
Use the framework of compatible goals to look at small business team members and compensation. That can be as simple as targets for gross margin (price less direct cost) instead of just sales. Years ago I hired an honest, ambitious, hard-working salesman with a compensation package tied to sales. He hit the sales targets by pricing deals so close to below cost that we didn’t have enough money to cover overhead. That was my fault, not his.
Use creative compensation schemes and bonuses. How can you make the goals of the customer service people compatible with the overall company goals? What do you do about targets, metrics, and bonuses? What about product development, as in programming? Editing? The more thought to compatible goals, the more likely to succeed.
You should also use the framework of compatible goals to look at business alliances. Do you want the same thing as those people from the other company? Can you both find a win? Are your goals for this deal compatible with theirs? Asking deeper questions about goals can lead to better, more useful negotiations.
(Note: I posted this Wednesday on the Small Business Administration’s Industry Word blog, where I am a guest expert. I’m reposting it here because it seems appropriate. Click here for the original.)
It’s a shame that so many people think business plans are just for startups, or to back up loan applications, or for getting investors. The truth is that business planning offers serious benefits for everybody in business.
And I’d like to point out that none of these benefits require a big formal business plan document. A lean business plan (as in What Business Plan Type is Best for Me) is usually enough. It takes an hour or two to do the first plan, then just an hour or two to review and revise monthly.
Here are those top ten benefits.
See the whole business. Business planning done right connects the dots in your business so you get a better picture of the whole. Strategy is supposed to relate to tactics with strategic alignment. Does that show up in your plan? Do your sales connect to your sales and marketing expenses? Are your products right for your target market? Are you covering costs including long-term fixed costs, product development, and working capital needs as well? Take a step back and look at the larger picture.
Strategic Focus. Startups and small business need to focus on their special identities, their target markets, and their products or services tailored to match.
Set priorities. You can’t do everything. Business planning helps you keep track of the right things, and the most important things. Allocate your time, effort, and resources strategically.
Manage change. With good planning process you regularly review assumptions, track progress, and catch new developments so you can adjust. Plan vs. actual analysis is a dashboard, and adjusting the plan is steering.
Develop accountability. Good planning process sets expectations and tracks results. It’s a tool for regular review of what’s expected and what happened. Good work shows up. Disappointments show up too. A well-run monthly plan review with plan vs. actual included becomes an impromptu review of tasks and accomplishments.
Manage cash. Good business planning connects the dots in cash flow. Sometimes just watching profits is enough. But when sales on account, physical products, purchasing assets, or repaying debts are involved, cash flow takes planning and management. Profitable businesses suffer when slow-paying clients or too much inventory constipate cash flow. A plan helps you see the problem and adjust to it.
Strategic alignment. Does your day-to-day work fit with your main business tactics? Do those tactics match your strategy? If so, you have strategic alignment. If not, the business planning will bring up the hidden mismatches. For example, if you run a gourmet restaurant that has a drive-through window, you’re out of alignment.
Milestones. Good business planning sets milestones you can work towards. These are key goals you want to achieve, like reaching a defined sales level, hiring that sales manager, or opening the new location. We’re human. We work better when we have visible goals we can work towards.
Metrics. Put your performance indicators and numbers to track into a business plan where you can see them monthly in the plan review meeting. Figure out the numbers that matter. Sales and expenses usually do, but there are also calls, trips, seminars, web traffic, conversion rates, returns, and so forth. Use your business planning to define and track the key metrics.
Realistic regular reminders to keep on track. We all want to do everything for our customers, but sometimes we need to push back to maintain quality and strategic focus. It’s hard, during the heat of the everyday routine, to remember the priorities and focus. The business planning process becomes a regular reminder.
Are you a small business owner? Are you looking to start your own business? The politicians can misunderstand profits, and so can the general public, but you’d better not. Profits are good, not bad; but your business runs on cash, not just profits.
1. Profits are an accounting concept, not actual money.
Yes, they lead to money, in most cases. But profits are sales less direct costs less expenses, three concepts that are all subject to detailed accounting definitions and general principles. Timing can make a huge difference. I can book a sale today and not get paid for six months, so no money yet. And I might have paid the direct costs months ago. And I might pay the expenses months ago or in months to come.
2. Profits don’t guarantee cash.
Again, profits are likely to mean cash at some point, but not always. There are those timing issues built in. And businesses pay out money that doesn’t affect the profits at all, such as buying assets, repaying debts, and paying dividends. Lots of profitable companies go under for lack of cash flow.
3. Profits Aren’t Necessarily More is Better
There’s an inherent tradeoff between profits and growth. You as business owner decide whether to spend more on marketing to generate growth, or less on marketing to generate profits. I think real businesses need to find a point of balance. We need enough profits to sustain growth ( extra credit: “sustainable growth rate”) and keep ownership compensated for risk. But on the long term, growth is better than profits. And cash flow peace is better than growth.
Bonus Point: Most Newbies Overestimate Profits
The most common mistake in business plan financials from first-time entrepreneurs is overestimating profits. Occasionally there is a high-tech wonder business that yields extraordinary profitability, but that’s almost always just a short-term phenomenon. Real businesses make 5-10% profits on sales. When a business plan shows huge profitability, that’s a sign of not understanding the business, not of an exceptionally profitable business.
For several decades now I’ve been back and forth between working on and building my own business, helping others build theirs, helping people manage small business, and, occasionally, helping larger businesses understand and presumably sell to smaller businesses.
So I watch and listen. And I see how big businesses try to reach the solopreneur, home office, and small businesses. And the mistakes they make. So here’s my list of 10 mistakes big businesses make with small business.
We’re not a market segment. Sorry, that would be nice, but no. Go back to your fundamentals and consider what makes a market segment useful for your marketing. Some factors in common, right? Same gender, same economic level, same town, same activities, same something. And what business owners have in common is only that we own a business; which probably means we’re more likely to be different than the same. Treating us as a group is like trying to organize anarchists. We’re solopreneurs, entrepreneurs, accidental or pushed entrepreneurs, and millions of us don’t even think of themselves as entrepreneurs; they’re just self employed.
We’re short on time and patience. We have a business to run. We don’t have time to research and study, much less to listen to you. Get to the point fast.
We care about quick and easy. Convenience really matters. See point #2.
We’re unpredictable about reading, media, and political preferences. Somebody told me once, in pontificating mode, that “to reach small business you have to advertise in the Wall Street Journal.” That’s not what I see. I think only a few of us read about business. Our politics is as diverse (and polarized) as the rest of the country.
We hate red tape except when we love it. Give us a chance and we’ll complain like hell about government red tape and restrictions. There are large lobbying groups that supposedly represent us that constantly whine about red tape and regulations (I think they actually represent various political interests mostly, and use small business as a platform). But give us a chance to jump onto red tape to prevent competition, and we will. And give us easy ways to deal with red tape (like payroll services, for example) and we’ll love you.
We don’t sweat tax rates, but we really care what’s deductible. The whole tax rate thing is politics, lobbyists, and whining. Tax rates affect profits only, and profits are what’s left over after the deductions. So well love deductible expenses. If you want to unite us, put in more red tape on deductions, like they did with meal expenses a few years ago. Or crack down on travel expenses and conferences and cars. We’ll hate you.
We’re unpredictable about technology. Some of us love computers, smart phones, tablets, and office equipment. Some of us haven’t discovered social media and barely email. We’re about as diverse on that point as any random group of adults.
We don’t divide by generations. You can’t effectively divide us into millennials vs. generation x vs. baby boomers. I’m a baby boomer and I know some millennials who think more like I do about business than some baby boomers.
We like variable costs way better than fixed. Charge us more later after we’ve made the sale and have the money and we’ll pay it. Charge us fixed costs up front, whether we sell or not, and we’ll hate it.
We’re online. Point #7 notwithstanding, business owners want more revenue and that’s mostly online. Some of us love it, some of us hate it, but business owners who aren’t online are endangered species.
Do you want to go to the research and check out my data, to see if it’s valid. Don’t bother. I’m a business owner. I don’t need to show you no stink’n data.
Have you noticed this? Businesses that sell to small business want to sell to enterprises. Businesses that sell to enterprises want small business. I’ve seen it for 30 years now.
On the one hand, it’s good business. Expand. Go from where you are to where there’s more market waiting.
On the other hand, damn, I think there’s a DNA problem for most of us. I, for example, have always been comfortable with small business and startups. Companies I’ve started focused on small business and startups. And much as I’ve tried, repeatedly, I never really figured out how to sell to the big business, alias enterprise.
Ideas are a dime a dozen. Opportunities are much more important. An opportunity is an idea that’s passed the test of planning. It has potential. You can implement it. An opportunity has some of the following elements:
Industry and market potential: look at market structure, industry structure, growth rate, margins, costs, etc.
Economics: capital requirements, fixed costs, cash flow, return on investment, risk.
Competitive advantage: degree of control, barriers to entry, availability of sufficient resources.
Management team: people who know the industry, the market, the operations, the logistics, the road to market.
The business planning process is about filtering the opportunities — a precious few, requiring focus, and planning — from the ideas.
Whether you’re working on a new start-up business or growing an existing business, you need to encourage lots of ideas and then use your planning to filter them down into the real opportunities.
Remember displacement … recognize that you can’t do everything. You want your plan to help you focus in on the best opportunities among your longer list of ideas.
There is no external meter of good and bad opportunities. What you’re looking for is the right mix between business potential and your ability to reach that potential, given your position, core competence, strengths, weaknesses, and resources.
Yesterday I discovered, to my surprise, that a good friend who does licensed massage therapy said she doesn’t think of herself as an entrepreneur. In her mind, entrepreneurs want to get outside investment, hire employees, and grow their businesses fast. People like her think of themselves as self employed, sole proprietor maybe, small business owners probably. And those professionals, the doctors, lawyers, accountants and such, they don’t think of themselves as entrepreneurs either. I think of them all as entrepreneurs. But what if they don’t?
Business mistake: What if you want to reach that larger group, and you address them as entrepreneurs in your marketing, but they don’t think of themselves that way? So most of the people you want to reach don’t ever realize you’re talking to them?
What about you? Official stats say there are about 27 million businesses in the United States and about 21 million of them have no employees. What’s an entrepreneur to you? There are only a handful, a few thousand, that meet that stiffer definition. What matters is whether the target potential customer self identifies into the group. If a business is aiming at one group and using a word that stands for the other, that’s a big mistake.
This isn’t just semantics. It’s not about language or definitions. It’s about the fundamentals of marketing.
In human communication, the listener assigns the meanings to the words. Not the speaker. You don’t get to tell the audience what your word means. They tell themselves.
That’s why so many marketing images show an arrow hitting a target. This kind of meaning mismatch is one really powerful way to miss.
Have you heard this? It’s not mine, I think it’s sort of common knowledge:
If the decisions were made by consensus, every wall would be painted beige.
As my business grew up from entrepreneurial to stable, we had to redo our decision process. Early on, we sat around, a few of us, discussed and decided. That was when there were 10 or 12 of us. I guess I made a lot of the final decisions, because it was my work, my product, and my company. But it often felt like consensus. And it seemed to work.
But it didn’t work forever. After a while — a few years, really, but it seemed like a blink of the eye — we were 30-40 people. And we had programmers and bookkeepers not just chiming in on decisions about, say, packaging and web designs … but feeling alienated if their opinions weren’t given enough weight. And here’s what I learned:
Good business decisions aren’t done by votes
Ultimately, we had to learn that we’d evolved into a structure based on functional expertise, and we wanted our financial people minding cash flow and taxes, our development people writing code, and our marketing people deciding on packaging, web strategies, and social media. And that hurt some feelings. But it improved the business.
(I posted this about two years ago on Small Business Trends. I’m reposting it here today because this is a good time of year for this kind of reflection. And maybe also for not writing a new post. Tim )
Last week a group of students interviewed me, as part of a class project, looking for secrets and keys to success. They were asking me because after 22 years of bootstrapping, my wife Vange and I own a business that has 45 employees now, multimillion dollar sales, market leadership in its segment, no outside investors, and no debt. And a second generation is running it now.
Frankly, during that interview I felt bad for not having better answers. Like the classic cobbler’s children example, I analyze lots of other businesses, but not so much my own. As I stumbled through my answers, most of what I was saying sounded trite and self serving, like “giving value to customers” and “treating employees fairly,” things that everybody always says.
I wasn’t happy with platitudes and generalizations, so I went home that day and talked to Vange about it. Together, we came up with these 10 lessons.
And it’s important to us that we’re not saying our way is the right way to do anything in business; all businesses are unique, and what we did might not apply to anybody else. But it worked for us.
1. We made lots of mistakes.
Not that we liked it. At one point, about midway through this journey, Vange looked at me and said: “I’m sick of learning by experience. Let’s just do things right.” And we tried, but we still made lots of mistakes. We’d fuss about them, analyze them, label them and categorize them and save them somewhere to be referred to as necessary. You put them away where you can find them in your mind when you need them again.
2. We built it around ourselves.
Our business was and is a reflection of us, what we like to do, what we do well. It didn’t come off of a list of hot businesses.
3. We offered something other people wanted …
… and in many cases needed, even more than wanted. You don’t just follow your passion unless your passion produces something other people will pay for. In our case it was business planning software.
4. We planned.
We kept a business plan alive and at our fingertips, never finishing it, often changing it, never forgetting it.
5. We spent our own money. We never spent money we didn’t have.
We hate debt. We never got into debt on purpose, and we didn’t go looking for other people’s money until we didn’t need it (in 2000 we took in a minority investment from Silicon Valley venture capitalists; we bought them out again in 2002). We never purposely spent money we didn’t have to make money. (And in this one I have to admit: that was the theory, at least, but not always the practice. We did have three mortgages at one point, and $65,000 in credit card debt at another. Do as we say, not as we did.)
6. We used service revenues to invest in products.
In the formative years, we lived on about half of what I collected as fees for business plan consulting, and invested the other half on the product business.
7. We minded cash flow first, before growth.
This was critical, and we always understood it, and we were always on the same page. See lesson number 5, above. We rejected ways we might have spurred growth by spending first to generate sales later.
8. We put growth ahead of profits.
Profitability wasn’t really the goal. We traded profits for growth, investing in product quality and branding and marketing, when possible, although always as long as the cash flow came first.
9. We hired people slowly and carefully.
We did everything ourselves in the beginning, then hired people to take tasks off of our plate. We hired a bookkeeper who gave us back the time we spent bookkeeping. A technical support person gave us back the time we spent on the phone explaining software products to customers. And so on.
10. We did for employees’ families as we did for ourselves.
Family members — not just our own family, but employee family members too — have always been welcome as long as they’re qualified and they do the work. At different times, aside from our own family members, we’ve had two brother-sister combinations, an aunt and her niece, father and daughter, and husband and wife.
And in conclusion…
Bootstrapping is underrated. It took us longer than it might have, but after having reached critical mass, it’s really good to own our own business outright. It might have taken longer, and maybe it was harder — although who knows if we could have done it with investors as partners — but it seems like a good ending.
Family business is underrated. There are some special problems, but there are also special advantages too.
Once upon a time, I had an interesting problem, the kind most small business owners want to have, but nonetheless, still a problem. We were growing too fast. Our sales tripled one year, and doubled the next.
We didn’t want to stunt our growth. But we were having trouble getting everything done. We’d outgrown the management style of a dozen or so people doing what needed done, pretty much like mice gathered around a piece of cheese, eating away where they could. Not that we didn’t have jobs and functions; we did. We divided ourselves into web programming, customer service, admin, marketing, and product development. But even so, lines kept crossing and the mice-and-cheese style wasn’t working.
We took half a day. First, we brainstormed a list of tasks. These were the things that had to get done. We mixed different time frames, long term and short term, and different functions. Phones had to be answered, books had to be kept, and so on.
Then we organized the tasks into logical groups. We came up with tracking and measurement for most of the main tasks, and, more important, we agreed on who was responsible. We discovered some overlaps, like the customer service people were just a short step away from entering customer data during a call. And the sales people were close to completing a regular customer survey. We put it all up on a white board and talked about commitment and responsibility, compared to involvement. In the classic bacon and egg breakfast, the chicken is involved, but the pig is committed. We wanted commitment. We ended up with teams, and committed team leaders.
That half-day reorganization became a new component of our ongoing business plan. It took us past the first big management hump, around 15 people, and got us all the way to the next one, which was about 30 people.
Not all problems were solved. Metrics, accountability, and tracking were critical components of ongoing management. Still, by the end of the day, we were way more organized than we’d been.