Essential Management Principles for Every Small Business

Essential Management Principles for Every Small Business

I have read, over my business career, well over 10,000 different articles and lists about how anyone can be successful with a small business be it an independent business or a contract. Many well intentioned and intelligent consultants I have come across professionally believe that a fantastic thought with a fantastic marketing scheme and superior desire can make anyone successful. Do yourself a favor and caution the next person spewing this nonsense that they are unquestionably incorrect!

The success or failure of the vast majority of all small businesses has small to do with the desire, marketing scheme or the fantastic thought that made the business. While these three items must be present in every successful business, solid fundamental management principles will allow a small business to prosper and succeed. Every successful company, be it a small, medium or large business, uses the same set of management principals. The size of the business determines the individuals principals used and the sophistication of the principle. As an example, a small business normally has informal and I don’t know even unwritten worker hiring guidelines. A medium sized company has a legally approved, comprehensive worker manual with worker hiring guidelines as a separate section. A large global business has an entire department writing several worker manuals in several languages with worker hiring guidelines based upon legal and social issues in each country. But, the common sense management principal that all companies should have a honest, consistent and applicable employment program must be used by every company.

As I have spent the vast majority of my career with small and medium sized businesses, here is a simple and select set of management principles that every small and medium business should follow to ensure success and profitability:

A excellent accounting department with timely monthly financial statements provides the basis for all management decisions. Any business owner or officer who believes purely in his or her “gut” feel, is running what will be a failed business. Regardless of the business size, every owner and senior executive must have valid data to confirm the decisions their “gut” tells them to make. Your financial statements are a factual record of your business description and we must all clearly know our description so we do not repeat the mistakes of the past. How can you determine whether your recent marketing campaign is a success unless you see and evaluate the financial results? We have all heard tales about the marketing campaign that brought many new customers to the company but killed the company because the publicity expense was greater than the profit margin on the new sales. A business owner does not need an accounting point but should know enough to know and participate in the financial information review.

Running a small business based on the cash balance in the business checking account also violates this management principle and will severely inhibit the growth and success of the business. Unless you want to remain a “mom and pop” business forever, excellent accounting information is a requirement.

Standardize and automate all routine functions. Have you ever noticed that most successful business people have a routine for most of their daily functions? They have staff meetings at the same time, they want all reports in a specific format, they want all PC’s and software to be the same in the office and they want the external phone calls to be answered with a specific greeting. By standardizing all routine functions, successful business people do not have to reckon about or manage these functions. They can concentrate their time and efforts on managing non routine situations.

This same principle also applies to your business. I personally know a company that, 10 years ago, had a credit department with 15 employees and 3 managers who made many decisions daily. Today, that company has doubled its sales and now has a credit department consisting of 5 employees, one administrator and a set of software programs that manages electronic payments and even sends out reminder letters and emails to customers.

Review and analyze the Balance Sheet before the Profit and Loss Statement. Your monthly P & L tells you whether you were successful last month from your operations but your Balance Sheet tells you what shape your business is in and what you can do in the future. I have seen a company that doubled sales one year and closed their doors less than six months later. I have also seen a business that went bankrupt even even if their P & L’s showed reasonable success. The company Balance Sheet shows how the company uses its daily operations to fund the long term success of the business. Analyzing Fixed Assets, Accounts Receivable, Long Term Debt and Retained Earnings will give us the long term view for our company. It is not as exciting as analyzing our new customers and product offerings but is necessary for the long term.

Business Plotting and Budgeting will allow you to gradual down the daily business fires and take advantage of opportunities. There are an unusual number of small and medium businesses that do not work hard at either annual or strategic plotting and budgeting. Most are too busy fighting fires and struggling to keep up with daily business activity. There is no time for plotting and budgeting in their 80 hours work weeks. We have all been in this position. The unfortunate issue here is that the fire fighting and long weeks will never gradual down or stop until some plotting and budgeting is place in house. The need for plotting and budgeting becomes more intense as a business grows due to your inability to “manage by walking around.” The plotting and budgeting can initiation simple and will grow naturally as the business expands. This management principle will allow all employees to see the vision and the focus of the business which will initiation to reduce the daily fires that pop up.

The greatest advantage of plotting and budgeting is that it allows every business owner to evaluate quickly and easily how an unexpected opportunity might be of subsidy to the business. I have talked to many business owners who stumbled across a sudden and potentially fantastic opportunity such as a competitor for sale, a excellent supplier needing a partner, a potential new customer that would immediately double sales or a potential new product that would require an completely new set of tools and equipment. These opportunities happen to all business owners regularly but many also go away quickly. Those companies that have a excellent plot and budget in house can evaluate these opportunities quickly and easily to determine if the new opportunity fits into the company’s long term plans. These companies also have the skill to quickly approach a bank with solid financial proformas if additional capital is needed. 

It isn’t a sale unless you collect. Most small and medium businesses spend way too much time in the sales administer and far too small time with the collection administer. Most companies are willing to pay a six figure salary to a salesman who can generate tremendous sales for the company and, at the same time, place an entry level accounting clerk in charge of collection with small or no oversight and procedures. The company borrows more and more money to boost sales while an accounting clerk with no customer service experience struggles to collect. The sales department in every business must have a section in the collection administer and the company must have a strong, honest and customer oriented collection administer to ensure that a sale really means money in the bank.

This administer must always initiation before the sale is made. Collecting information up front to determine whether the potential customer is able to pay and ensuring the potential customer clearly understands the credit terms and payment requirement will subsidy all parties. All excellent potential customers will appreciate this administer because we all delight in dealing with quality companies. I have never found any company that was unwilling to pay for quality products and services when everyone understood the terms and requirements.

The credit department must also have a excellent set of processes and procedures to ensure that the payment administer flows smoothly and efficiently. Supplier worker turnover, cash tide issues and other unexpected issues stop or gradual down the payment administer. The credit department must, in a customer oriented fashion, work to keep our cash flowing.

Run the business as if it your grandchildren will take it over.  Every business is a living and vibrant organization that has many similarities to our children. Your business starts out as an infant and learns to crawl and eventually walk. We would never make a choice for our child that does not take into account the child’s future and we should not do this with our business either.

Working with a supplier who has inferior quality but the cheapest price might be a fantastic fleeting term cash solution for our company but will eventually run off our customers and ruin our business. How many times has a business lost all its minutes because it chose it couldn’t afford computer backups or a fire alarm system on its warehouse? Have you hired an worker before you had them take a drug test? I even once jumped at the chance to hire a salesman from a competitor because I thought he would be able to bring over many customers. Unfortunately, he cost too much and didn’t bring over any excellent paying customers at all. There is no such thing as a excellent fleeting cut for efficient management principals and the long term success of your organization.

Hire the smartest and preeminent people. How many of us have hired our friends, the salesman we thought was a bargain, the bookkeeper who spoke the preeminent during the interview or the administrator we thought was most like us? Many small and medium sized businesses are littered with employees who were hired for these reasons because small businesses can’t afford high wages and all the fringe subsidy packages that large companies can afford. We tend to hire the preeminent we reckon we can make.

We need to set our expectations higher and use our plotting administer to find exact employees. The initially issue is that your company must have a excellent annual plot as well as a logical 5 year plot on where the company will be. Your company can then lay out what employees will be needed during this 5 year period. Now that we have defined what employees and what responsibilities are required, we need to find the individuals who meet these requirements and not just who we can afford today.

I have always tried to hire people who are smarter and have more experience than I have at the specific position. Any owner who believes he is the smartest individual in every area will never be able to hire the aptly people. A company will never be greater than its weakest worker so we must always hire the preeminent.

The last company I worked with laid out a plot showing they were going to need their initially CPA in 5 years. After 3 years, they told me they hired this CPA and were very surprised because this individual had other job opportunities with large inhabitant firms who were offering huge benefits. But, this small firm could offer professional growth and responsibility not available at the larger company. The vast majority of excellent employees rather to have a more responsible position with a smaller company with a grand future than a less responsible position with a large company.

You can grow yourself out of business. Cash is king in business and those who admit this detail will succeed and prosper. I have seen far more businesses that grow too quick with no excellent business plot and are forced to close their doors or find a quick buyer. Companies that are struggling watch their cash daily and doing what they need to keep the doors open. But, those companies doubling their sales see huge profits on their monthly financial statements and make caught up in the emotion and success. They watch their Accounts Receivable double, their Inventory double because they must buy much more product, their employees double because they must take care of these sales and suddenly they do not have the skill to make this week’s payroll because they have no cash in their checking account. Their company literally grew itself out of business which many small and medium business owners have distress understanding until they have lived through it.

The culture of every business is as valuable as its mission. As mentioned earlier, a business is a living and breathing organization. The culture of every business is as valuable to the overall success of the company as the products and services offered. The owner of the business cannot delegate this function and must be involved. There is no aptly or incorrect here as the business culture is a reflection of the quality, morals and ethics of its owner. A successful company’s culture is not a constantly changing but evolves based upon the growth and extension of the organization. Constantly changing a company’s culture is a sure way to close a business.

A company with a strict dress code, time clocks that are strictly enforced, and many processes and procedures is no better than another company with no dress code, few processes, and telecommuting for employees. The only difference is the type of employees they retain and the way they do business.

Your quality competitors are essential to your long term success. You can stop laughing now because this is really a detail that every successful company understands. This is an unusual thought but one that fantastic businessmen and women all embrace. Competition is a wonderful thought in every emancipated market economy and quality competition makes us all better. Quality competitors push us to come up with quality improvements, quality products and services and ensure that we have a quality customer oriented operation. We have all seen businesses spring up offering a 50% price reduction for a cheap knock off of our products. Our sales drop and we spend time and try away from our core business chasing this situation. They stay in business for a fleeting period of time and accomplish nothing more than causing our customers to question our industry. Quality competitors push us all toward greatness and there is bounty of room in every industry for multiple organizations.

Outsourcing reduces costs and improves your weaknesses. Many individuals hear the jokes about the language issues at large company call centers in India or the Philippines and caution themselves they will never make that mistake. But, that might be one situation that is not really a mistake. A excellent IT programmer in the U.S. can cost upwards of 0,000 annually with payroll taxes, fringe benefits, etc. That worker in India with the exact same intelligence, skills and experience can cost as small as ,000 annually.

The management principle here is that we should all concentrate on our strengths and outsource everything else where feasible. No business person thinks twice about using an outside tariff accountant to do our Federal and State taxes. This is a highly technical area that changes constantly. Most of us also have an outside legal firm. Why do we primarily limit our use of outsourcing to those two areas?? Today, there are professional payroll firms, worker leasing firms, credit and collection firms, IT and Web programming firms and marketing firms. These companies work with many business organizations, stay on top of industry preeminent practices and can better stay on top of the technical changes in their area of expertise.

The only area of any company that I advise against outsourcing is the area that is crucial to the success of your company. Never allow the core of your success to make outside your control. As an example, if your company has a proprietary marketing scheme or a customer list or an engineering method or a production administer that is key to your success, do not let it out of your control.

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