Sunday, February 27, 2011

Many Firms Lack Infrastructure Necessaary to Support Their Growth

"Do you know what amazes me more than anything else? The impotence of force to organize anything." ~Napoleon Bonaparte

Infrastructure — the people, things and money that support a business — is a vital consideration for every entrepreneur. Determining what is adequate for your business requires careful planning and a balance between the infrastructure needed to support growth and available funds.

Adding infrastructure is a significant investment. Many entrepreneurs are tempted to "make do" with what they have instead of putting up the cash to support their growth. However, it is absolutely necessary to have the infrastructure or support system in place before attempting to grow.

Nothing makes me angrier than calling a customer service representative and being put on hold for 30 minutes because "call waiting times are longer than ordinary due to unanticipated call volume." When I hear this same message week after week (I have many technology challenges), I know the firm has not made the requisite investment in infrastructure.

Too often I see firms trying to grow before they have hired the staff they will need to handle the increased business. Sales can only grow as fast as the infrastructure allows, and trying to grow without the necessary support always yields traumatic results.

We assisted an entrepreneur whose business was helping disabled workers find employment. He had hired more than 600 of these individuals as independent contractors, but he only had three full-time employees. He had more than 2,700 e-mails in his in-box that he had been unable to answer for weeks. The firm was also suffering from other significant problems, each arising from that lack of infrastructure.

When I asked this entrepreneur why he had not answered the e-mails, he said, "I just do not have the time, and if there is an issue, they can always call me." I asked why he did not have more people to help him through this morass, and he responded that he did not have the money since he had to invest any idle cash into growing his business.

I tried to get him to slow the growth until he could bring his infrastructure up to speed, but he continues to plow ahead. If he continues on this course, his stress will become overwhelming and the quality of service will decline beyond repair.

When considering adding infrastructure, first decide what level of sales is attainable and then determine the resources necessary to support it. The best way to do this is to forecast your sales, then estimate how much infrastructure in dollars you need for this growth. Ask yourself whether you have the funds necessary to support this sales level. If you do not, you will need to slow the growth rate until you have the funds needed.

Now go out and make sure that you have adequate infrastructure in place to support your current and future growth.

You can do this!

Sunday, February 20, 2011

Understanding Your Business Financials

“Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.” ~John Quincy Adams

Running a business requires many skills, such as marketing, management and purchasing, to name a few. All of these are important, but in my opinion, the most critical of all is finance.

Finance is the information machine that allows you to see much about your business very quickly. Truthfully, entrepreneurs who do not delve very deeply into their finances really inhibit their business’ growth and risk its financial health as well.

I can get a quick handle on an entrepreneur’s knowledge when I ask them what their total assets and total liabilities are. It never ceases to shock me how many do not know these two numbers, which are so critical.

So why is finance so important? Just about every decision you make has a financial consequence. If you are buying a product, you have to consider your cash flow both in terms of how you will pay for the item and what price you can charge for it. Additionally, if you need to obtain financing, you will have to understand how the interest rate will affect the income statement and how the principal repayment will impact both the balance sheet and cash flow.

Your finances also help you determine how much the services you provide are costing you. If you are providing a service, you must know whether you are making money on each job (job costing). If you are not, then you need to either increase prices or reduce costs. Even if you’re indeed making money on each job, you will need to continue monitoring future jobs to ensure necessary adjustments are made down the road.

Many entrepreneurs say they do not need to understand finance or financial statements because they have an accountant. Unfortunately, most accountants are not going to take the time to guide you through day-to-day or month-to-month financial decisions. There is no escaping it — you must know and understand your financial statements.

I think many entrepreneurs are intimidated by the numbers the same way they would be by a foreign language because it really is like a foreign language to them. However, there is help available.

When I typed “understanding finance” into Google, I got more than seven million hits. Obviously, there is a ton of information out there. Still, if it were that easy to go on the web and glean the information you need, everyone would be experts. Understanding financial statements really requires more than that.

Entrepreneurs can attend a seminar or have someone review their statements with them more than once and explain how each item relates to their business. When I give these seminars, entrepreneurs always come up to me afterward and say they never knew financial statements contained that much information.

Now go out and make a commitment to learning your financial statements. It is vital that you understand both their meaning and their impact on your business.

You can do this!

Sunday, February 13, 2011

Problems Arise When Employees are Friends

“You can close more business in two months by becoming interested in other people than you can in two years by trying to get people interested in you”. ~Dale Carnegie

You work so closely with your staff and it is very easy for them to become your very close friends. However, this can cost you much, even your marriage.

We are helping a couple that runs a motorcycle shop in northeastern Florida. They have been in business for over 10 years. Four years ago they hired an employee named Sandy to be in charge of the accessory department. She was great at selling these products and after awhile took over the purchasing of all the merchandise for this department.

For the last three years this department of the company was doing great and sales climbed steadily under the wife's leadership. Then for a variety of reasons, the husband took over her department last year.

The wife and Sandy played a lot together and socialized as well. They had become great friends. As long as the wife was in charge, the husband did not say anything about Sandy. However, now he is in charge. Because the business is now losing money, he had to tighten up the operation to make it profitable again.

The past two years, Sandy was responsible for buying the merchandise and the wife trusted her to make great decisions. She would frequently go out and spend money for new goods for the store on the store's credit card without any authorization. However, this had to stop. Sandy was spending money on inventory without any concern of whether there was adequate cash to cover the bills. In all fairness, this behavior was tolerated and rewarded as long as the wife was running things and the business was making money.

The husband, who's the new CEO replacing his wife, gave Sandy numerous suggestions, which went unheeded. His direct orders are ignored because Sandy's friendship with his wife is so strong.

When I asked the wife why she keeps Sandy working, she said Sandy is "loyal and faithful" to the business. She really believes that Sandy does not have any bad intentions, but her bad habits are affecting the business. Still, the wife is unwilling to let her go.

The problem between this husband and wife started small and now has escalated to become a threat to the business and their marriage. They frequently stop talking to one another and take time away from the business just to get away from the arguing about Sandy.

When they asked me what to do, I said they needed to let her go because it was affecting so much their business and marriage. I explained that their marriage was teetering on the edge of a breakup, and they agreed. Sandy was driving a wedge into their business and marriage, and loyalty just was not worth it. While it was tough getting the wife to see the problem, once she understood all of the ramifications it was easier to agree to a dismissal.

Now go out and make sure that you prevent your staff from becoming your good friends.

You can do this!