Important lesson in owning a small business
Posted on May 08, 2017 by Faiyaz Farouk, One of Thousands of Business Coaches on Noomii.
An Executive Consultants observations and suggestions for any small business on things to be aware of.
Several years ago, I ran an experiment by working with small businesses with revenues of $2M to $10M. This experiment taught me more about running my own business while humbling me at the same time. Below are some lessons I wanted to share with everyone that I felt were valuable business lessons that you won’t get in an MBA.
Lesson 1: Don’t spend on fancy office space, especially your own.
“Cash flow’ is one of the biggest challenges to a small business operation. This is outside of attracting and retaining key talent and managing growth. In my several years as an Executive, I am used to walking into fancy office buildings with under-paid employees who wear suits from thrifty shops. What surprised me is that most small business owners on most occasions have nicer and more lavish offices than most big companies. I worked with a small food manufacturing company in Los Angeles. They had a 10,000 square foot corporate office with beautiful Brazilian hardwood floors, state of the art televisions everywhere yet making payroll every month was a major struggle for this company. Which is why I was hired in the first place; to help the company restructure, balance a budget and create sustainable systems to help the company scale. After going over numerous spreadsheets, P&L for each category, and holding several focus groups, I noticed the CEO and founder didn’t believe in expense management; while his company was steadily growing, there was no expense control for cash flow. They had a line item named after him which had one of the biggest budgets in his organization. When I asked the controller, she mentioned that is not able to tell the owner how to spend his money. I approached the owner and asked him the same questions. He answered that he’s philosophy was to make more money so he can spend more on side projects. I knew this was going to be a major pitfall and changing this behavior was going to take time and I had to get him to understand how it was hurting he’s company every month. Other’s have tried convincing him by showing him the balance sheets which he didn’t care to look at nor hear about. As a seasoned Executive Consultant, I have found that most Executives are always blaming other departments and people for the shortfalls when instead they really should look inwards. I came up with a strategy that supported his projects only after the companies immediate priorities were met. Together, the owner and I created a plan for sustainable growth and all the details it would take to get to certain revenue. With this new level of insight, vision, the CEO and I created framework that everyone in his company could follow. We got ‘buy-in” from the company’s staff of the new changes and road map we designed. Within 60 days we executed a smooth roll-out of the new program. The results lead to a reduction of expenses by 21% and increase of revenue of 50% within the nine months. Smart leaders spend more money and energy on driving revenue instead of spending it to enhance their egos.Lesson 2: If you’re great at sales, this doesn’t mean you can own a business.
If you have ever worked with sales people, especially really good ones, chances are you’ve overheard them making statements like “I have brought in all the money and have built this company, I can run my own and get paid more”. Unfortunately, this statement couldn’t be further than the reality. While it is very true, business owners need to know how to sell; this doesn’t qualify a great salesman to run a company. Another major misconception is that great sales people make great managers. But that is another subject that I have a strong opinion on which goes against most practices of corporate America today. A client who ran an advertising firm doing approximately $8M in annual revenue struggled to grow her business. When I started working with her, it seemed from a systems stand-point, she had most of the areas covered and really understood her market. Examining her company using the five forces strategy by Michael Porter, her biggest threat was her employee’s and the culture she created. She generated most of the revenue by herself and before she hired most of her team. The revenue represented only three clients and her growth rate was less than 1%. After some investigation, it turned out that the reason her team didn’t perform as expected was because she lacked proper management thinking and practice to create a culture of behaviors needed to scale her company. She was still behaving like an independent entity focused on her own production instead of running a company as a manager. I am a believer in leaders leading; however, you won’t find a General in the battle zone. I do believe the smartest executives keep the lines of engagement open with their employees, but there is a major difference between doing the work with them and for them, versus running of an organization. Owners run the company, by managing people which includes selling, marketing, accounting. When you own a business, you technically become a manager of managers, managing individual contributors unless you have no employees or flat management structure. Regardless, there’s a lot of detail and skills including mindset shifts that a business owner needs to make in order to run and grow their company.Lesson 3: Nepotism is your greatest strategic threat.
Of all the threats that hinder any start-ups success is the threat of hiring friends and family. Hiring family members can be a major morale buster. On most occasions this tends to send a message to your employees who have earned the opportunity; that it’s a family run business and that there’s no real opportunity for growth within the company for them. Another reason is often times people tend to discuss their pay with one another. Imagine the look on the face of your MBA employee when he finds out he’s making less than the high school graduate nephew who works in the warehouse as a manager. I have run into this discussion a lot with small business owners over the last few years and it’s never a pretty conversation. Hiring family members who don’t work out can have negative consequences. Regardless of the reason for being let go, a family member is still a human with feelings and will have a similar reaction to being terminated as any other employee would. I have noticed it’s usually a family member of close friend who doesn’t feel the “pressure to shine” and therefore often does sub-par work for their employer. There are exceptions, but I have often noticed family members generally will not work as hard and/or as long as your employees. My general observation has always been that the family members aren’t academically qualified for the role and they also don’t work as hard to prove their value to the organization. After all, their dad built the company so they know they have a guaranteed job. Be smart with your finances and always hire the best people that your capital can get. Hiring an average team from the start will only create an average company with average to low results.Last lesson for now: Spend more money on PR than any other marketing
As a small business owner, I am sure you think your product or services are the best in the world. You have figured out what differentiates you from your competitors. Whatever your differentiation strategies are, one area I have personally fallen short and have done nothing around is public relations. Small businesses largest hurdle in hiring, and gaining new business, is the lack of “big company” or “credible company” image that larger companies have. There is a fix for this: spend a large percentage of your marketing/sales budget on hiring an awesome public relations firm. Hiring a PR firm that has contacts, experienced in your industry can get you exposure that hard work and good products will not get you. I worked with a small business that generated $700,000 in revenues in their first year but were trending towards double-digit growth. One of the key things the CEO did was invest most of his marketing dollars into hiring a large PR firm from New York to create a national brand presence even though he was based in California. Having spent over $150,000 in one year on PR, he’s company was featured in many respected journals and on cable news stations. He was literally just as popular in he’s industry as Donald Trump for President campaign is today. I was often amazed by what people said about he’s brand, despite all the challenges they had internally that I was hired to help resolve. After my project was completed, he’s companies annual revenue was $6M and he had doubled his company size; having hired some of the best and talented workers in his industry. I can’t take all the credit, it was the brilliance of this business owners big New York PR firm who worked their magic. I am definitely looking forward to being written about in Forbes and other mediums in the near future. Lastly, the most important lesson learned from small businesses is they remain small due to their lack of mindshifts and skill sets. Several coaching organizations are out there helping solve this challenge but not enough small business owners are involved. In the end, to grow the leader has to grow first. Small businesses make up a major portion of the US economy and for that I thank every business owner for contributing to the economy of this great nation.