Creating Functional Entrepreneurs

As I tell my small business clients, thankfully most of their employees do not want to be small business owners.  Repeatedly training your future competitor can become very costly and ultimately prove to be fatal for any business.  However, leveraging the entrepreneurial spirit that lies, at least in part, in each of us is a key component to everlasting business performance.  The "Occupy Wall Street" movement, as misguided and failed as it was, had an underlying point that has largely been missed.  Nobody wants to feel like they are working hard every day in order to make the life of someone else exponentially better than their own.  Fair point, but the proposed solution of arbitrarily raising wages can result in disastrous consequences for the entire operation.  Coincidentally, that is also the flaw in the current "income equality" mantra being advanced by President Obama.

The point I want to make in this blog is not political.  It goes to the very heart of individual human nature.  The best way for any organization to succeed is to have each and every member of that organization fully in tune with the goals and direction of the organization, and a reason to pitch in and keep it heading that way.  Small business in particular goes through a start-up phase where everyone seems to be working together for the common good.  Typically during this period, the owner is taking an inordinate level of risk, and limited if any pay to keep the doors open and keep the business moving toward self sufficiency.  Once a level of success is reached in terms of the business becoming profitable, the psychology of the employees and that of ownership transitions, creating a gap that is the beginning of a dangerous process for the business.  As the employees see their wages go from $10/hour to $18/hour over time, their lifestyle gets more comfortable and they are in a generally better place than they were when the business started.  But, when they see the owner transitioning from driving a car similar to their own in the beginning to pulling up in a Cadillac Escalade, the imbalance starts to register. 

A business with a stark imbalance between the employees and the owners will not experience everlasting business performance.  This is not to say that the owner needs to work for minimum wage, or that the employees need to get all of the perks of ownership without the risk and investment.  In an ideal situation, if the business has hired the right people, placed them in the right positions and are rewarding them in a meaningful way, the business will unleash the entrepreneurial spirit within each and every employee.  There are three things that create bad employees.  1.) They were hired wrong.  2.) They are being managed and incented the wrong way.  3.) They are just bad employees.  The first two fall on the shoulders of management/ownership and are almost always the reason for the bad employee. 

A properly structured business financial plan identifies the goals and direction of the business, as well as the role and function of each person within the business.  In that scenario, there are clear expectations set forth for everyone and a pay structure to reward employees for that level of performance.  When those expectations are exceeded, then the business can afford to further enrich the lives of its employees.  Bonus programs almost always fail for the same reason, they were improperly structured.  When a business identifies its revenue and expense goals, there are financial certainties within those goals in terms of employee pay structures and employee expectations relative to their paycheck.  That establishes the foundation or the benchmark signifying the point at which those expectations have been exceeded.  Sharing dollars with employees beyond that point not only doesn't damage the financial integrity of the organization, it strengthens it and makes it more likely that employees will be on board for bigger and better things going forward. 

Properly hired, managed, informed and incented employees will provide better ideas and actions within a business than the best outside consultants ever could.  The key to unlocking that entrepreneurial spirit within each of them is as simple as answering the question "what's in it for them"?

Business Value Is In The Eye Of The Beholder

A business, like anything of value, is worth what someone is willing to pay for it the day the owner decides to sell it.  Small single owner owned, partner owned or family owned businesses have unique value indicators and value drivers that differentiate them from larger, more formally structured businesses.  It is important for the owners of these small companies to be in tune with the value of their businesses on an on-going basis, in a way that can be explained to a prospective buyer.  Although this may sound blasphemous to business valuation professionals, the true small business owner must have simplistic tools that help him/her to run the business, increase the value of the business (to the extent possible) and articulate that value to someone when the time comes to sell. 

Value is the foundation of capitalism and capitalism is the lifeblood of business.  Developing, defining and marketing the value of a product or service sets in motion a chain of events that drive economies.  The perceived value of an item or service is the sum total of what the buyer has decided to trade or give up in order to get a particular product or service.  On the sellers side, the asking or negotiated price is the sum total that it took, or will take to make and or delivery what is being sold.  In terms of a business sale, the sum total of years of hard work, dedication, commitment and financial investment is taken into consideration when determining a selling price.  To the buyer, the past is irrelevant other than the value of a name brand, customer loyalty and other items of good will.  The future holds the real value in the eyes of the buyer.  What can they do with the business and how much of the past will go away and need to be replaced the day they buy the business?  A business owner who has been able to drive a business to a specific value with specific control tools can relate those things to the buyer in order to sell the buyer on their asking price.  The buyer then tries to see the future and predict how, or if they will be ale to recoup their investment.

The Legacy Alpha Program defines a benchmark business value and creates simplistic tools for the business owner to use to drive the value of the business to a specific level at a specific point in time, like a retirement date.  These tools are best used in a 3-5 year period before the business owner wants to sell.  This allows enough time to drive the business value and create a story with examples of how the business value drivers actually work.  The buyer gets a clear picture of how the business was run successfully, and more importantly, how the value of the business is fair and recoverable if he/she decides to buy.  For a comprehensive business analysis that includes a benchmark business value, contact Dan Kurth at Human Performance, LLC  (612) 213-2888 or dankurth@legacyalpha.com

Becoming The Best By Process of Elimination

NCAA National Champion football coach Lou Holtz once said "Motivation is simple.  You eliminate those who are not motivated".  By process of elimination, any organization or business can become its best.  The methods used to do that are simple, but require a commitment to excellence and consistency of effort within the organization.  The two areas of continuous improvement that have the greatest impact on businesses are employees and customers. That is not to say that systems and processes cannot be improved as well, but those improvements typically happen as a byproduct of improving your employees and your customer or client base.

Every business that employs more than one person can rank their employees.  This is not an exercise in opinion, rather a ranking of aptitude, experience and performance that exposes the strengths and weaknesses of each employee within the company.  It then becomes the action portion of a regular performance review.  As businesses grow, the reality is that they may have employees who were brought in to fill a need due to the shear volume increase of the business, but they were not really the right fit.  As companies continue to grow and hang on to those employees, they become a drag on the performance of the entire operation.  This is a key fact that must be understood by managers or business owners when deciding how to deal with poor performing employees.  The choice isn't just whether or not to eliminate a bad employee, it is also a choice to improve the overall performance of the business or put everyone, including the owners, at risk of losing what they have worked to develop.  The Legacy Alpha employee ranking system works on a five point scale of five job related indicators.  The employee and his/her direct manager rank each category as a part of the regular employee review process.  Action items are identified by low scores, and improvement or elimination are the two choices for the course of action going forward.

Ranking customer/client performance may seem more complex than ranking employees, but it can be very simple once the proper metrics are applied.  The ranking components for your customer base include pay, profits and problems.  How does the customer pay their bills?  How profitable are they overall for your business?  And, how many problems do they create in the process of selling your product/service to them?  Some types of businesses, like service companies, might have recurring business that can identify specific customers when asking these questions.  Other types of businesses can rank by classification of customers or product/service types to determine the same thing.  Elimination of problem customers, slow payers or customers who are difficult to deal with is the beginning of a process that creates a culture of excellence for the business.  But, this is only one half of the equation.  The elimination of a "poor" customer with out replacing them with a "good" customer is simply an exercise in slow death for the business.

The Legacy Alpha program helps you define your culture by showing you how to continuously improve your employees and your customer base in a purposeful and ongoing way.  Imagine a world where you have the best, most productive employees and the best, most profitable customers.  Then imagine what that leaves for your competitors.

5 Reasons Why Small Businesses Fail

5.) Being Undercapitalized

            Businesses that are undercapitalized have owners who are constantly in a state of stress.  Where will I come up with payroll on Friday?  Which bills do I pay first?  These types of questions take the focus of the business away from positive development and growth, and the business owner gets caught in a cycle of emergency management.  The solution to this problem is to identify the proper level of capitalization for the business and work toward developing a good lending relationship while building financial reserves and rainy day funds that will cash flow the business through down cycles.  As with most things in business, this is easier said than done.  A cash management strategy not just a good idea, it is a plan that ends the cash crisis cycle.

4.) Failure to Develop a Management Team

            Small business owners have a tendency to do things themselves rather than rely on the people around them to help with the management of the business.  This is the primary reason why businesses stay small, and ultimately the reason why many fail when the founder retires or is no longer in the business.  The solution is to delegate key responsibilities to key employees.  A key employee is one who has direct decision making control over budgeted parts of the business.  The key employee is involved with the budget process, is responsible for controlling the budget in part, or all of the business, and is held accountable for financial performance.

3.) Balancing Tactics and Strategies

            Tactics are daily activities that lead to a higher level of sales revenues, cost controls or performance within the business.  Strategies are long range plans and ideas that guide the business into the future.  Long range plans without daily actions simply become a wish list that never comes true in reality.  Daily tactics without a long range goal or purpose become unproductive or pointless and eventually are abandoned by the business and its staff.  The solution is to understand the difference between the two and strike a balance that keeps the daily activities fresh while constantly working toward longer range goals.

2.) Development of a Pull-Back Position

            Most businesses do very well when they are growing, or so it seems.  Healthy cash flow can cover up a lot of sins.  As soon as the business experiences a slowdown, or a retraction in sales for a month, a quarter or even a year, all of the problems that were being covered up come to the forefront.  A pull-back position is a formal part of the budget process that defines when and where cuts need to be made when revenues drop to pre-determined levels.  The goal of any successful pull back position would be to preserve profitability and owner return without damaging the overall integrity of the business.  It is a part of a comprehensive strategic plan.

1.)    Lack of a Formal Budget Driven By a Plan

            Budgets are like diets, everyone is on one, but many people are not on the right one.  A budget for a business is a working tool that identifies the expected performance of the business in very specific terms.  It establishes the daily, weekly, monthly, quarterly and annual financial requirements of the business and then becomes a measuring stick to determine the health and wellbeing of the business throughout the course of the year.  When the budget numbers are organized properly and reported regularly, the business management team can make decisions based on simple, straightforward facts rather than on gut instinct.  A properly designed budget defines performance benchmarks for sales, productivity, overhead, profit and owner return.  The business plan then becomes simply a narrative written to explain how each of these areas are expected to perform and how they will be controlled.  The business plan and the budget need to be functional, meaning that they are both used as tools throughout the year to manage the business more specifically.  A properly structured budget tool can help to identify the cost of every decision and activity that takes place within a business, before and after the fact. 

            The Legαcy Alpha program is designed to control every aspect of the business with financial benchmarks and incentives for everyone within an organization.   When expectations are clear, and everyone has the motivation to meet or exceed them, you achieve EVERLASTING BUSINESS PERFORMANCE™.