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Small business management; ensuring your client's success.

In the past few years, the United States has experienced a major trend that promises to leave a permanent impact on American business and industry, that is, the tremendous number of people creating new, individually-owned small businesses. Coming at a time when large corporations are streamlining operations by laying off thousands of employees, this small business boom is good news indeed. The bad news, however, is that managing these small companies is no easy trick, and about 80% of them will fail within five years! The focus of the following discussion, then, will be on how to successfully manage a small company The characteristics of successful entrepreneurs, common reasons for company failures, and general rules for smart business operations will be examined.

The small business area, as mentioned earlier, is becoming increasingly important as an employer. Government statistics show that over one-third of our gross national product and over one-half of all non-government jobs are now in the small business sector. Significantly, several studies have shown that all of the net employment increase in the past 10 years has been caused by companies outside the Fortune 500. With more than 600,000 new businesses being created by entrepreneurs each year, however, there is also a startling failure rate. The 80% failure rate described earlier is caused in an overwhelming number of cases by a basic lack of management skills. The successful entrepreneur becomes the exception to this grim statistic by learning the basics of small business management and by studying the winners and losers.

The entrepreneur is described as one who organizes, manages and assumes the risks of a business or enterprise. Those who fit this description do so for a variety of reasons. Many people start a business to seek greater fulfillment and to build self-worth. Others desire more independence than they have as an employee. Some people want to be rewarded for their determination and guts to see results for their personal efforts. This same attitude is reflected by others who start businesses because they feel frustrated or dissatisfied with big corporate America. A similar opinion is expressed by some as feeling victimized, used, or unappreciated by their employers. The desire to make more money is also cited as a reason, though not by as many as popular theory holds. Finally, some entrepreneurs are motivated to start businesses simply because they can't find a job they like; so they custom create their own.

The successful small business managers also shared a number of personal characteritics, some of which show up in almost all entrepreneurs. Common characteristics found in these managers include high energy and good health (to work long hours), strong self-confidence (to survive repeated rejections! ), optimism, initiative and self-motivation. other characteristics shared included flexibility, good "people skills", creativity and a problem-solving ability, emotional maturity and a realistic view toward risk-taking. For all small business leaders, the need for substantial managerial know-how is indisputable; one study showed that the average manager faces two major decisions and 10 minor decisions each and every day ! To prepare for the demanding task of managing a small business, a number of suggestions are commonly recommended. First, a potential entrepreneur should learn as much about the general business world as possible through newspapers, business periodicals, lectures and educational programs (ranging from a half-day seminar to a full MBA program). This same approach should also be applied to the more specific business area that the company will be dealing with. Many people also got a valuable "education" while still working for someone else, by closely examining different management approaches. Another common recommendation is to try running a small, low risk, existing business to gain "hands-on" experience. This is often a part-time job held while still employed. A third learning step is to get familiar with important small business players, such as bankers, accountants, lawyers and other entrepreneurs. They can be used as contacts later on and can give you a feel for the small business "culture" just by being around. A fourth and vitally important learning step is the development of a well thought-out business plan. This critical document is a blueprint for the small business, and can alone make or break many enterprises. Although business plans may vary in length and content depending on the authoring company and intended use, they all share some common sections (see "Developing a Business Plan for Your Clients," National Public Accountant, january 1990.) This business plan, once completed, acts both as a guide for the entrepreneur and as a measure of credibility to show perspective lenders, partners, etc.

Once the entrepreneur has a business plan in hand, the business can hopefully be started. As the firm comes to life, the manager then must begin to demonstrate multiple operating skills. A number of important guidelines are often quoted by entrepreneurs in this area. A small business manager must always be honest with employees, suppliers, customers and himself. This is important to give the business both credibility and a positive reputation, internally as well as externally. Secondly, a manager should retain quality employees by treating them with respect and paying them as much as affordable. Third, a manager must learn to listen aggressively to employees, vendors, competitors and (especially) customers. The wise entrepreneur realizes that at times some expert advice is required, and a good consultant must be hired. The wiser entrepreneur pays attention to how the consultant solves the problem and fixes it personally the next time.

Another guideline that successful managers stick to is a willingness to use outside sources for information and self-improvement in business areas. The entrepreneur must overcome the common urge to want to do it all and learn to trust qualified outside help. joining local business associations, Chambers of Commerce, and groups such as Toastmasters is usually very helpful. Other particularly valuable sources of information for small business managers are the U.S. Government Small Business Administration, which organizes Small Business Development Centers and oversees guaranteed bank loans. SCORE (the Service Corporation of Retired Executives) is another source of knowledge, gained through years of experience, that the businessman can tap.

The manager of any ambitious business is also urged to create a board of advisers to give objective advice on company matters. These board members can be recruited from other business owners, college faculties, bankers and other professional business types. Failure to use this outside board can be suicidal to a small business manager, who is often blinded by internal concerns.

Once in this operating stage, the manager who uses the previous techniques should have a fighting chance to survive at least for a year or two. At this point it is wise to update the original business plan. A new milestone" plan can be laid out, reflecting the latest goals for the company or product in a broad fashion.

To measure how well the business is following this path and to check the company's health in general, the manager must learn another skill: recognizing and using some basic business ratios. The ratios are numerical measures of vital business statistics and show the manager the health of the business in a simple and straightforward manner. These ratios show strengths and weaknesses in so-called liquidity, profitability, and financial position. Some of the most common ratios are return-on-investment, sales per employee, current ratio, inventory turnover, gross profit, sales per square foot and average collection period (see Table 1).

Once the ratios are calculated for a specific business, they are then compared against averages for that industry to provide a meaningful "scorecard." The entrepreneur must be careful not to be overwhelmed by all these numbers, however, and to trust his own intuition. Instead of analyzing problems to death, the successful managers are not afraid to try out their hunches without a paralyzing fear of failure or mistakes. The value of intuitive flashes to solve tough problems is sometimes ignored but should probably be encouraged more in small business managers because of its surprising potential. The right combination of intuitive and analytical thinking can provide the manager with a powerful tool for innovative problem-solving decisions.

When looking at successful characteristics of small business, it is helpful to examine major causes of small business failure as well. Certain evidence shows in many business failures the most damaging characteristic is poor managerial expertise. other specific causes include a poorly written, underdeveloped business plan and unclear goals. Bad sales strategies and too much reliance on any one customer were also cited as causes. Money-related reasons include troubles on both ends of the financing spectrum-undercapitalization (causing a young firm to starve) and assuming debt too early (causing large interest payments to be due too early). Also, on the money side, poor relations with the company's venture capitalists were also blamed. Some firms failed because their timing was bad-releasing a product with inappropriate design at the wrong time. Failure to use outside experts, as discussed earlier, was also considered a factor. Finally, an important factor was the failure of some management teams to work effectively together, even though individually the people were quite capable.

A guiding rule for the small business is to maintain good customer relations. To a small business, the customer is king and the lifeblood of the firm and must be treated as such. An important early warning sign of financial trouble for many companies is customer complaints that are ignored. Remember, most dissatisfied customers don't complain but rather take their business elsewhere. Treating the customer with as much attention and care possible should be a primary goal for any small business manager.

When looking at small business management from a distance, many are inclined to dismiss it as simply a minor league version of a large corporate management. The truth is, however, that being a small business manager requires a much more well-rounded repertoire of skills to choose from and is definitely more difficult in certain respects.

In comparing the requirements of small vs. big business managers, several differences are noticeable. The small business manager is usually more people-oriented, making daily contacts with employees, suppliers, customers, etc., instead of meeting only with fellow corporate managers. The entrepreneur also has to be a little of an expert about everything, being at least marginally competent at accounting, finance, marketing, leading, etc. The old joke describing an expert as someone who knows a great deal about very little definitely does not apply to entrepreneurs. They rarely come across as an expert at any one skill or task but instead command a broad range of capabilities. A good final description of the differences between a big business and a small business from a manager's standpoint is that a big business manager is skilled at protecting resources, while a small business manager is skilled at creating resources.

A small business manager trying to build a profitable enterprise will be fighting strong odds; but if approached with reason and determination, chances of success get much better By following some of the common guidelines for operational techniques and by analyzing the success and failure of other entrepreneurs, the manager can build a winning organization. For all the effort and attention that a new business demands, the process can be quite satisfying, since an entrepreneur is a person who creates an on-going enterprise out of nothing. with the right mix of background and ambition, managing a small company can be a very rewarding experience.
 Table 1
Return-on Investment = (Gross Sales - All Costs, Taxes)/
 (R.O.I.) Invested Capital
Sales per Employee = Total Sales/Total Number of Employees
Sales per Square Foot = Total Annual Sales/
 Square Foot Selling Space
 Current Assets
Current Ratio = (Cash + Inventory + Accounts Rec.)/
 Current Liabilities
 (payroll + Property Tax + 1 Year Loans)
Inventory Turnover = Cost To Go Of Goods Sold/
 Value Inventory
Gross Profit = Gross Sales - Costs of Goods Sold
Average Collectible = Accounts Receivable/Average Daily Sales
Period
COPYRIGHT 1990 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Kleiner, Brian H.
Publication:The National Public Accountant
Date:Feb 1, 1990
Words:1974
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