Working on the business equals business success
Surveys from Gallup show that owning a small business is quite a bit harder than many expected when they started. Often an owner will work 30 to 50% more than any of their employees.
According to Bureau of Labor and Statistic in the first five years of operation over 50% of small businesses will fail.
Why?
Because most small business owners tend to work harder instead of smarter. To keep a business growing the owner has to work on the business instead of in the business.
6 Success Skills
The Common Thread
A common thread among small business owners is they struggle to move from working in the business to working on the business. This just means if you are completely focused on the day to day work, working in the business, you will miss the opportunities that will enable you to grow to sustainable profitability.
Most successful businesses owners have found a way to work on the business instead of in the business. Successful business means they have the cash flow and resources to grow and still remain profitable.
You have started the business, and like most new businesses owners did not have loads of cash, but intended to make it on blood sweat and tears, then it is difficult to let go of the day to day and focus on the bigger picture.
Most studies show that an owner who can’t get out of the day to day will get to a certain size and simply stop growing. They just won’t have the time or energy to do that next thing that will make the difference.
If you are ready to get out of the day to day grind you will need to change your focus to the six success skills that when done right can drive growth, profitability and success.
What is the plan
Are you treading water or are you going someplace?
Do you have a plan?
The best approach here is to create and maintain a formalized business plan. That might sound like a lot of work, but it does not have to be. To be effective it does not have to be something that you turn in for an A in a business class, it needs to be something you can work off of.
The great thing about business plans is that they provide a structure. How deep you go into each area is up to you and what will be useful at any given time.
What part of the plan is important to you
The key to making this important and useful is to focus on developing the goals that go into each of the areas of the business plan. The structure of the plan is there to help you stay organized but each area requires you to set goals. The goal setting is part of your strategy.
What are you aiming to accomplish?
Start with the big goals and then drill down to the goals that support the big goals. What is important is to make sure the goals you set are measurable and achievable; they should also be time bound.
Many times businesses make a big effort to create the goals but they never follow up and so their effort was wasted and they end up feeling there was no point in doing the work.
SMART Goals
For all of the goals you set they should be SMART goals.
SMART stands for:
- Specific (simple, sensible, significant).
- Measurable (meaningful, motivating).
- Achievable (agreed, attainable).
- Relevant (reasonable, realistic and resourced, results-based).
- Time bound (time-based, time limited, time/cost limited, timely, time-sensitive)
Is it Specific ? Many times goals are set that are too general, instead of specific. An example would be our company will have the best customer service. A nice goal but how do you measure it. A famous quote from the God of management said “What gets measured gets done.” So if you can’t measure it, highly unlikely you will achieve it.
Is it measurable? The goal should be meaningful and motivate the business to move in the desired direction. Looking at the goal of best customer service, would first need to be broken down to what is important to your business for good customer service. It might be that responses to customer requests are all handled within 24 hours. Now you have something you can measure and track how it affects overall performance.
Achievable, can you get there? How do you have the best customer service? How would you know? So it is not achievable. Customer service requests handled in 24 hours is achievable, you can set aside resources to get it done, and you can track progress.
How relevant is the goal? If getting great customer service will not move the business forward, then what is the point? So you should have an overarching goal that all other goals when achieved will get you to that main goal.
Time to get it done. How long will it take to reach your goal? If you don’t have this component then it will be difficult to measure progress. Along with not being able to measure progress you will have a difficult time figuring out what resources will be needed to make it all happen.
Financial Ratios Stay On Track
Do you know how much you made?
Do you know how much you should have made?
Many small businesses owners can figure out how much they made the previous year. A lot of them do it by looking in their bank accounts at the end of the year.
There is a better way, understanding the key performance indicators help you to manage your performance along the way. It is always important to know how your operations are doing, but it is just as important to know what is the best they could be doing.
11 key financial ratios to learn:
- Gross Profit Margin
- Net profit margin
- Working capital
- Current ratio
- Quick ratio
- Leverage
- Debt to equity ratio
- Inventory turnover
- Total Asset turnover ratio
- Return on equity
- Return on assets
Gross Profit Margin is a measure of profitability, specifically for a product or item line, without accounting for overheads.
Gross Profit Margin = (Revenue – Cost of Sales) / Revenue * 100
Net Profit Margin differs from gross profit margin as a measure of profitability for the business in general, taking into account not only the cost of goods sold, but all other related expenses.
Net Profit Margin = Net Profit / Revenue * 100
Working Capital is a measure of the business’s available operating liquidity, which can be used to fund day-to-day operations.
Working Capital = Current Assets – Current Liabilities
Current ratio is a liquidity ratio that helps you understand whether the business can pay its short-term obligations—that is, obligations due within one year— with its current assets and liabilities.
Current Ratio = Current Assets / Current Liabilities
The Quick Ratio, uses only highly liquid current assets, such as cash, marketable securities, and accounts receivables, in its numerator. The assumption is that certain current assets, like inventory, are not necessarily easy to turn into cash.
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Financial Leverage, refers to the use of debt to buy assets. If all the assets are financed by equity, the multiplier is one. As debt increases, the multiplier increases from one, demonstrating the leverage impact of the debt and, ultimately, increasing the risk of the business.
Leverage = Total Assets / Total Equity
Debt-to-Equity Ratio measures how much a company finances itself using equity versus debt. It provides insight into the solvency of the business by reflecting the ability of equity to cover all debt in the event of a business downturn.
Debt to Equity Ratio = Total Debt / Total Equity
Inventory Turnover helps to determine if the business is carrying too much inventory. It measures how many times per period the company sold the entire inventory.
Inventory Turnover = Cost of Sales / (Beginning Inventory + Ending Inventory / 2)
Total Asset Turnover measures how efficiently a company uses its assets to generate revenue. The higher the turnover ratio, the better the performance of the company.
Total Asset Turnover = Revenue / (Beginning Total Assets + Ending Total Assets / 2)
Return on Equity, known as ROE, measured by dividing net profit over shareholders’ equity. It indicates how well the business can utilize equity investments to earn profit for investors.
ROE = Net Profit / (Beginning Equity + Ending Equity) / 2
Return on Assets, or ROA, similar to ROE, an indicator of how well the company is managing its available resources and assets to net higher profits.
ROA = Net Profit / (Beginning Total Assets + Ending Total Assets) / 2
Strategic HR
Are you hiring strategically?
Or are you hiring to fill a low level need?
Many small business owners focus on the lowest level positions that require more of the tedious day to day effort and also tend to be the lowest paying positions.
They tend to think that getting someone to work on the low level tasks will free up the owner for more important things. Also because cash is always short, spending less on an employee can keep cash available for other opportunities. The challenge is often a low paid employee can end up taking as much time to manage as if you just did the job yourself.
Moving to a more strategic approach would be to look at what gaps do you have as the owner in the management of the business. Spending more on an employee to fill these gaps can really free up time to get to work on the important areas of the business to promote growth. This higher paid person is also likely someone you won’t have to manage. They can be a self starter and can help identify problems with solutions.
Get R Done
Are you reaching your day to day goals?
Have you set daily, weekly, monthly, quarterly, yearly goals?
Each business is different and you need to decide what will work the best for you to keep the business going. Good operations management is what helps you set and reach your goals.
A good definition of operations management is managing all of the inputs to get to the desired outputs.
There is a lot that goes into operations management, and this is where a lot of small business owners get sucked in to working in the business instead of on the business. It makes sense this is where it all happens, so to let someone else do it requires a lot of trust.
Setting good goals that you communicate and track will go a long way to getting you out of the day to day so that you can focus on what matters.
Where Is The Next Dollar Coming From
Is the pipeline empty or full?
Are you sitting by the phone waiting for that order or are you actively going out and getting it? Until the business grows to a point where you have a sales and marketing team, focusing here and on your customers is probably the best place to put your efforts.
Obviously, if you don’t have sales nothing else matters. It is up to you to determine how best to promote your business. Well it be online, print, face to face, or word of mouth? The mistake many make is they hear Facebook is key to your success. Then they go out and hire a marketing group that focuses on Facebook ads, they spend lots of money and time getting it to work only to find none of their customers are on Facebook.
It is worth the effort to complete a good customer profile so that you can understand where best to meet your prospective customers.
What Do Your Customers Say and Do
Are they coming back?
For most businesses the cost of acquiring a new customer is always higher than keeping an existing one. Often this is somewhere between ¼ to ½ the cost of acquiring a new customer.
Do you know what matters to your customers and what keeps them coming back?
What goals can you set that move your business towards improving customer satisfaction and retention.
For many businesses, improving their customer retention is the single most important thing they can do to grow their business in terms of profitability and market share.
This has been an overview of the key success factors that help and keep a business growing.
