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Friday, December 23, 2011

Four steps for profit in 2012

During research for a recently released book, Let Go to Grow; why some businesses thrive and others fail to reach their potential (Palari Publishing, 2011), the authors spoke with more than 100 small and midsize business owners. They discovered that it is possible to have a profitable, growing business in this economy, but you need to be willing to take a close look at how you are managing your business.

  1. Adventure is just bad planning. Have you had enough of the rollercoaster, fly-by-the-seat-of-your-pants method?  Try planning instead, there is a simple three-step process.  First, you have to set written goals. What do you want to achieve in 2012?  It seems like such a simple question, but many business people go year after year without ever deciding exactly what they want to achieve.  Amazingly, these business owners are often surprised when results are disappointing. What are your revenue goals?  What profit percentages do you want and need to make?  Do you want to expand operations or launch a new product line?  Commit your specific goals to writing.

Second, develop a plan to achieve your business objectives. What do you need to do differently in 2012 to meet these goals?  Map out a step-by-step process that will result in achieving the goals you set.  The plan should consist of a clear set of action items, completion dates and the name of the one person responsible for each action step. When more than one person is responsible, no one is accountable.  Resist the temptation to assign more than one person to any single action step.

Finally, execute your plan and review progress periodically. These reviews must be scheduled and they must be a priority.  Executing your plan and holding people accountable for results is very important, but it may not be considered urgent.  Without discipline, the urgent will always overtake the important.  Don t fall into this trap.

   2. Start with good people. It has become a cliche to say that our people are our greatest asset.  While perhaps cliche, it is also true.  You need good people with great skills to serve your customers and/or make your products. One hurdle we see small business people struggle with is acting on difficult employee issues.  These can include underperformance, poor attitudes and mismatched skills.  It is especially difficult when a loyal employee can no longer perform well because the job has outgrown his or her abilities.  We have seen entrepreneurs reluctant to remove or layer a long-term employee, or worse, a family member or friend who is struggling to perform in a job to which they are not well suited.  The situation is bad for all concerned.  The employer, the employee and customers suffer. 

In 2012, first review your goals and action steps.  Next, imagine the roles, skills sets, behaviors and cognitive capabilities you will need to achieve your goals successfully. Finally, take a hard look at the individuals on your team.  Be brutally honest when you consider whether they have or could reasonably acquire the skills and other attributes necessary to help you complete your plan.  If not, you will need to make some difficult decisions.  

Don't delay.  We have never heard anyone say,  I think I fired Mary too soon.  I should have given her several more chances. On the other hand, we have often heard small business people lament,  I wasted so much time giving Mary chance after chance. Why did I wait so long to make that change? You need good people to execute your plan. You must help your folks develop the skills they need or get folks that already have them.

   3. Don't fall into the insanity trap. You have probably heard the quote that the definition of insanity is doing the same thing over and over again, expecting a different result. The truth is that poor processes breed poor results and the results won't change until the processes are improved.  If you want to do things faster, at a lower cost, and with better quality in 2012 you will need to develop better processes.

The first step is to document your existing processes.  Write them down.  It's not sexy and no one is going to pay you an extra nickel because you have documented processes, but this is the only way to ensure consistency across the organization and it's the only way to launch a process improvement initiative. You can't improve a process until there is agreement on how things are currently done.

Once processes are documented, look for ways to streamline the operation. Can waiting time be removed?  Generally, this is where most of the opportunity lies. Can steps currently performed in series be done in parallel? Can steps be eliminated altogether because they are simply unnecessary? Is it possible to automate pieces of the operation?  Answering these questions will help you identify ways to do things more quickly and at a lower cost.

Finally, when a problem arises, first fix the immediate situation. Make it right for the customer. This has to be the priority.  But, your work isn't done when the customer is satisfied. Don't miss the opportunity to fix the underlying cause. Ask the question, what do we have to do to ensure that this problem never happens again?  Fixing the root cause of the problem will improve quality in the future.

   4. Measure more than once. When we begin working with an entrepreneur one of the first things we do is review their financials and other metrics. Frequently, we notice two opportunities for improvement: the financial statements can be enhanced to enable more effective management decision making and metrics other than financial statements can be developed.

First, for management decision making, financial statements should generally be prepared on an accrual basis rather than on a cash basis (small businesses may well choose the cash method for taxes). The reason is that accrual accounting does a better job of matching expenses with the revenue they generated. Second, P&Ls that simply have revenue, a number of cost categories and a bottom line profit are generally less useful for management decision making than they could be. It is often useful to separate the cost of delivering a product or service from overhead. Third, if the company has managers that are responsible for expenses and/or revenue, the specific areas of responsibility for each manager should be broken out separately. This allows clear accountability. Finally, to be useful for management decision making, financial statements must be completed in a timely manner.  Many small businesses go months without producing financials. This is a huge mistake because problems can go unnoticed.  At most, the books should be closed within two weeks of the end of the month.

When a business reaches the size that the owner can no longer be involved in every transaction, additional metrics, beyond financial statements, will be required. When the owner isn't involved in every transaction, he or she can't possibly know everything that is going on in the business. By the time problems turn up in the financial statements, it can be too late.  Consider a business that ships products to customers. If shipments start to go out late, this will eventually show up in the financials in the form of lower revenue because customers have become frustrated and taken their business elsewhere. Unfortunately, the damage is done. The customers are gone. What's needed is a metric that alerts the owner to late shipments while there is still time to correct the problem.

Doug and Polly White are Principals at Whitestone Partners; a management-consulting firm that helps small businesses build the infrastructure they need to grow profitably. They are also coauthors of the groundbreaking new book, Let Go to GROW; why some businesses thrive and others fail to reach their potential (Palari Publishing 2011). The book explains how entrepreneurs can avoid the most common pitfalls as their businesses grow and is available at

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