A few days ago a discussion on LinkedIn’s “Small Business Accelerator” group asked “What are the three things a small business owner should focus on?” As challenging as any business is, the basics remain the same for everyone. We provide goods or services, get someone to buy and pay for them, and keep score. The “rules” I contributed were very simple, and involve employees, customers and reporting.
Rule #1: Develop a process by which good employees are given the opportunity to grow, and poor ones are allowed to find opportunities elsewhere.
Of course, this is much more complicated than it sounds. Small business owners often consider a paycheck and benefits to be investment enough. That isn’t true. Good employees are precious, and they are becoming more difficult to find every year. If you can’t give them chances to grow, to add to their market value, then the best of them will find a company that can.
When an employee shows the behaviors you value: a solid work ethic, dependability, problem solving and initiative; supporting additional training or education is a must. Ironically, the result is that they are worth more, and you can’t expect their gratitude for your investment to offset their expectation of market compensation commensurate with their increased skills. If they are really worth developing, then your investments will pay off on the bottom line.
On the other hand, too many small businesses settle for employees who are merely “good enough,” often because their pay rate is more manageable. You aren’t saving money as much as you’re filling a space that could be used for a top performer. Set goals with realistic time frames, and expecting each employee to know, track and reach those goals. If they can’t, then you have to find someone who can. It’s uncomfortable, but you owe it to your good performers. They deserve to be on a team where everyone shares their values.
Rule #2: Understand why, really why, your customers do business with you.
Few small business owners dig into their customers’ motivations. They are usually too happy just to have the customer. The owner tells himself “We give good service, we are fairly priced, and we stand behind our products.”
Those are merely the basics that every customer expects. Unless you have a unique differentiation, they are probably choosing you for another reason. Customers seldom say that they choose a vendor based on an ability to satisfy their minimum requirements.
The other claim I hear is “We are in a relationship business.” I’m not denying that customer relations are key, but…Duh! Everyone is in a relationship business. Unless you can clearly enunciate what benefits the customer receives from the relationship, you are in danger of the next “nice guy” taking the business away.
Rule #3: Know what the key measurements of your business are, and track them exhaustively.
Financial statements are historical records. While profitability is essential, it’s hard to correct retroactively. True performance indicators are measurements that indicate how you are generating profit, and why. “Indicate” is the important word here. You don’t want numbers that merely show a fact. You are seeking measures that show a trend, a change, or a place to dig deeper for causes.
Are your employees as productive as they were last month or last year? Are your customers spending more or less per transaction than they in the past? Are buyers gravitating to products or services that have lower margins? Are you deviating from a reasonable return, defect or complaint rate?
The best measurements take what you are doing now, and put it against what you did before. Any measurement is useless unless you can determine whether it is better or worse than another.
Running a successful business is never easy, but if you focus on these three rules, it becomes a lot easier.
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John, The beauty of this article is its simplicity. Rule #3 is of particular interest to me because I recommend another simple tactic that helps in identifying the priority of actions to improve the generation of profit. I am referring to the 80/20 Pareto Principle that approximates to “80% of your profit comes from 20% of your customers” or “80% of your costs come from 20% of your operations.” This is an oversimplification but applying the thought process across a company does reveal where to apply resources. Richard Koch’s book The 80/20 Principle is the reference work on the subject.
Another comment is more controversial. I like to see business owners measure the value that they are creating in their company and track its change year over year. This is preparation for the day when they will depart, but it is also a check on the health of the company and the industry it is in. The measurement includes a standardized process of a three year forward projection and calculation of the Net Present Value of the cash flow, plus a simple terminal valuation at the end of the third year, discounted to the present. If this valuation is growing, the owner has added comfort in his/her commitment to the company and supports making suitable investments. If it is declining, it is time for a serious look at future plans.