Monday, 27 October 2014

Billy's Thirty-Third Law Transition Four: From Familial to Structural

There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success than to take the lead in the introduction of a new order of things.
Niccolo Maciavelli, The Prince (1532)
The fourth transition is often the most difficult…and for a variety of reasons.  When a business grows it transitions through a number of sizes…from the one person ‘solopreneur’, to a 100+ large organization.  Each of these sizes changes the company’s nature and culture. Revenue growth inevitably results in increases in staff sizes and employment structures. Managing this change is a daunting task for the most experienced managers, never mind the entrepreneur whose expertise is in his or her chosen field, and not in managing people and organizations.

Micro Employers Up to Five Employees

Many people love for working at a ‘micro’ firm.  Everybody knows each other, eats lunch together and, importantly, it is easy to keep track of what everybody else is doing.  This ensures accountability as there is really, ‘no place to hide’.  There is less specialization, except in professional services, as everybody does a little bit of everything.  This situation requires the least amount of structure and the least amount of management.  Recruiting is more ‘fit’ based than qualification bases.  This generates a great deal of ‘sameness’ amongst the employees. 

Small Employers Five to Twenty Employees

Something happens to a firm at as low as six or seven employees.  Communications begin to breakdown as people don’t necessarily know where everybody is.  A new receptionist may not ‘know’ that the boss is always at a breakfast meeting the third Tuesday of every month simply because nobody told her. 
As a company grows through the next stage, communications must become more formal.  This includes who manages and assigns tasks.  When a company is small, people are assigned tasks from a number of different people.  As the company grows, you become formal to prevent everybody from getting in each other’s way.  The result is a change in culture…a change that is not necessarily welcome by everybody.
Company growth often results in more complex tasks and processes.  Jobs outgrow the incumbent candidate.  A bookkeeper, adequate for a micro business, may not have the accounting skills required for a larger firm.  Tasks are often specialized as the company grows, leaving some employees left out.  Addressing this can cause strain on the organization, especially with long time employees who are used to a more familial style.

Medium Employers Twenty to Fifty Employees

As your business continues growing, the working environment changes dramatically.  This is the point at which the organization becomes hierarchical.  Suppose you have a small chain of stores.  With one store, you have a store manager.  With five stores may require five store managers and an area manager.  At twenty-five stores, you may have twenty-five store managers, five area managers and a regional manager.   
The specialization continues, as does the knowledge level of those holding positions.  In the micro enterprise, a bookkeeper has sufficient knowledge to keep the company running financially.  In the medium sized firm, a financial administrator is required.  In a larger firm, a CPA may be required.  As an enterprise grows, it becomes far more complex requiring more sophisticated management structures.  
Before your firm grows, run through the following checklist and then plan for the changes:
·         Develop a Human Resources forecast and a recruiting plan to ensure you have the number of people you need when you need them.
·         Develop formal job descriptions for the employees in the firm.  Along with the job descriptions, develop measurable goals for each employee in each role.
·         Develop formal management structures.  People need to know to whom they are reporting. Develop and implement a formal review process based on the goals people must achieve.
·         Develop a formal compensation scheme.  This must include regularly scheduled wage reviews that relate to job performance.
This sounds so 'big business' doesn't it.  You can achieve these goals without a company becoming overly bureaucratic or impersonal.  Think of these measures as measures of fairness...fair to the the company...and fair to the customers they serve.  If this is your guiding light while developing your Human Resources strategies, you will never go wrong even as your company grows.

Thursday, 16 October 2014

Billy's Thirty-Third Law Transition Three: Finance goes from Internal to External and From Income Statement focused to Balance Sheet focused

When my accountant reviews my year end statements with me, all I see are dancing cows!

Finance for most entrepreneurs is difficult.  Most entrepreneurs' strengths are in the areas of Marketing or Operations and they have to pick up Finance as they go.  There are two transitions in growing businesses of which owners must be aware.  They are internal to external and income statement to balance sheet.

Internal to External

When you start a business, the financial focus is on the internal needs of the financial statements.  Most people simply want to know if the business is profitable.  Sometimes, it is helpful to have an idea of who owes you money, however; it is amazing how many business owners know exactly who owes them how much at any given time. 

That is the first challenge as a business grows.  The entrepreneur who kept track of things in his or her head is now in a situation where he or she cannot possibly keep track of these vast amounts of information.  Keeping track of five customers is one thing...keeping track of twenty is quite another. 

Financial systems develop to keep track of the internal needs of the business.  They usually begin for tax and compliance reasons, and morph to management information reasons.  (OK Sometimes they don't...Some owners only do bookkeeping for tax reasons, but I again digress.)

As a business grows, it often needs outside financing.  This is usually from banks, however; it can also come from investors.  Now the financial systems must serve the needs of the outside user. This often means that the bookkeeper must now take on more complex financial tasks.  Secondly, businesses may consider financial forecasting as a part of controlling their business during growing times.  Forecasting, both cash flow and revenue & expense forecasts, are an important tool for any business, but are essential for a growing business.  The forecasts are required for business loans and for potential investors.  Checking your plan vs. actual is an essential part of financial managements, yet few smaller businesses have formal forecasting or budgeting sessions.  Get into the habit of forecasting annually and monitoring monthly!

Income Statement to Balance Sheet

The second transition is managing the balance sheet.  Most people intuitively understand the income statement...the revenue less expenses for the business for a period such as a month, quarter or year.  The balance sheet has two critical pieces of information.  Assets, the things the business owns, Liabilities, debts a business owes, and Equity, the owners stake in the company.  Simply put Assets are the 'tools' and Liabilities & Equity represent how the business financed those assets.  That is why Assets = Liabilities + Equity...also known as the balance sheet equation.

Now this has important implications for a growing business.  If the business is growing (revenue growth) then the business needs additional tools.  It may have higher accounts receivable, as more money is outstanding due to increased sales. You may need more inventory to support the growing sales.  You may need to purchase new equipment or add additional outlets.  All of these represent increases in your assets. 

We know that all assets are financed.  The question is, "What is the source of the additional funding?"  This can only come from two sources, debt (borrowing) or equity (usually retained earnings.)

If your change in asset growth is greater than your change in profit / retained earnings growth, then you are going to finance a disproportionate aspect of your business with debt.  This is unsustainable in the end, and your business may well hit a ceiling preventing your business from growth or causing a severe cash flow problem. 

This is complex, so I developed a tool to help.  It allows you to calculate the change in working capital required for every dollar in sales growth.  If you would like a copy of this spread sheet, which I have bundled in a work book called 'Dr. Profit's Took Kit just send me a comment and an email address and I will send you a copy.  Don't worry, it is free and there are no strings attached. 

Finance is hard.  If you don't get it, or don't want to get it, please seek advice.  Your accountant is a good starting point.  Take courses from your local business development centre or your local colleges' Continuing Education department.  Your investment in finance is valuable, especially as you grow and develop your business 

Thursday, 9 October 2014

Billy's Thirty Third Law - Transition Two: Operations must become systematic

The biggest challenge to scaling your business is to move away from the chaotic and towards the systematic.
When we start our businesses, there are usually no business processes.  Everything is new...everything is custom...and everything is often made up 'on the fly'  Business is improv theatre or  jazz.  For some, these free wheeling forms are a means of expressing creativity and uniqueness.  Just as many marketing entrepreneurs love customer acquisition, or hunting, many technically oriented entrepreneurs love the challenge of developing something new.  For them, routine is boring!

In the previous blog, I talked about capability-- the different things a business can do with its existing resources.  This week, I want to introduce a second term...capacity. Capacity represents how much your business is capable of producing or providing.  In a service business, it may be represented by 'billable hours'.  In a production business it is the number of units you can produce.  A restaurant's capacity is limited by the seating.  Growing a business inevitably means managing capacity growth.  The wise entrepreneur knows how to get the most with what he or she has before hiring more people or purchasing additional assets.  The starting point means developing a business process.

The business process takes the guesswork out of producing or providing products or services.  It is the difference between playing off of a musical score, and jazz improvisation or the difference between adding a pinch of this or that until you like it and cooking from a receipt.  Developing systems allow you to duplicate and scale your business.  Michael Gerber's The E-Myth and Hammer & Champy's Reengineering the Corporation effectively address the issue business systems and documentation.
The Limits to Systems
Many entrepreneurs resist systems.  We believe that each situation is unique and that each situation has a unique solution.  Gerber takes the opposite approach, believing that everything is as systematic as making a McDonald's Big Mac.  Gerber is wrong.  There are many parts of a business process that involve creativity, special skills or scientific knowledge.  This is the ‘missing link’ in process development. Some of these include: creativity, special knowledge, special skills & abilities and judgement. 
A bank may have a process for a business loan application.  Sometimes, the answer is an obvious yes, or an obvious no.  These are decisions made by the system.  Some situations are somewhere in between.  The bank may default to saying no, to those ‘in between’ situations.  A better process would include having a specialist evaluate these situations and making a decision based on judgement. 
A manufacturing client of mine had a request for a lower cost for a particular part.  The owner could not produce the part for less, and was unwilling to reduce the price without reducing the cost.  The solution was to re-design the product and the process, creating a less expensive part to produce thus reducing the cost of the part to the customer.  The solution was a combination of both creativity and special knowledge.
The challenge is to develop flexible systems.  These systems allow you to combine structure with creative and specialty skills and knowledge to affect growth without compromising the uniqueness your enterprise provides.   
Remember...think systematically but never forget the importance of creativity, knowledge and judgement!