The Facts of Business Life (29 page)

Processes are designed with these questions in mind, and on the basis of those processes, expectations are determined and responsibility given to employees. Successful owners explain through designed processes how they want their employees to act, grow the business, and protect the business from unpleasant surprises. Far too many business failures can be traced to owners who did not dictate how they wanted their employees to execute their jobs and protect the company. That's why DNA creation at Level 2 is so important.

For example, let's say that you've done an analysis and determined that there has been a very high level of inventory write-offs after inventory counts. You've also discovered that a considerable portion of the write-offs are of common inventory transactions, a large percentage of which are cash sales, and that only one person counts and balances both the sales slips and the cash from sales. The obvious question you have to ask yourself, then, would be “Are the write-offs mismanagement, theft, or both?” And since write-offs are both a cash drain and a net profit issue, not only do these questions have to be answered, but a process must be designed to put in checks and balances so that theft can be ruled out. A simple plan that could be implemented immediately would be to have the cash counted at least twice, by different people, one of whom is outside of the selling department, and both of whom are spot checked for accuracy. You could also balance the sales slips against inventory by spot checks and more frequent inventory counts.

Your analysis might, however, show that inventory write-offs are due to inventory aging and having far too much money tied up in inventory based on current sales. A situation like this would obviously be a result of mismanagement, and the immediate plan would be to identify the aged and overstocked inventory and find a way to turn it into cash within a certain time frame. At the same time, though, you would be working to develop an inventory process that would include capping the dollar amount in inventory based on current, 30-, 60-, or 90-day sales revenue; inventorying products based on past sales history; and keeping track of what your competitors are selling at your expense, as well as the products you're experimenting with to see if there is a market for them.

The important thing to remember is that, when it comes to information and its analysis, it's one owner's talent against the other owner's talent. And the owner who understands the importance of analysis and how it affects DNA usually comes out on top. That's because DNA creation—its processes, disciplines, and accountability—is what make a business run all day, every day. DNA enables employees to understand what they have been hired to do and how they're supposed to do it. Just as important, though, it also enables them to understand what they're not supposed to do, and why they're not supposed to do it.

In the beginning, every entrepreneur's objective is to survive. And because of that, the first months of any new business are driven by adrenalin, fear of failure, optimism, and the nagging question, “What the hell have I done?” In fact, as long as a business is in the survival mode, managing the company is largely about controlling the chaos. However, as the company makes gains and matures, it begins to go through a transition from one level to the next, that is, from survival to success.

Perhaps not surprisingly, it's been proven time and time again that owners who have planned at Levels 1 and 2 are not only more likely to attain Level 3, but also to attain it sooner. And there are good reasons for that. For example, owners who have done sales and profit forecasts at Level 1 and understand their expense parameters know what they need to achieve to be successful and are able to measure their results against forecast. That means they will know if they are heading into trouble and be able to pinpoint it immediately. But it also means that if business is better than expected, they will know why and be able to quickly take advantage of the situation. Similarly, at Level 2, owners who have planned, that is, developed the business's DNA, have established processes, job accountability, expectations, and a solid base on which to make decisions. If you were to compare this to an owner who has ignored planning at Levels 1 and 2 and is “winging it,” the advantages of planning should be obvious. And although planning at this level is different than on the earlier levels, it's no less important.

The Benefits of Planning at Level 3

• Planning enables you to understand the path you're on, where you are headed, and what you need to do to get there.
  
• Planning gives you added confidence in your decisions because you know they are based on facts.
  
• Planning makes it possible for you to better identify and fix whatever is not working.
  
• Planning helps you recognize opportunities.
  
• Planning enables you to better determine key job functions, the skill levels needed by your employees, and which employees can handle responsibility and accountability.
  
• Planning helps you develop an understanding of the leadership style you have to adopt, and determine the training and motivating that needs to be done.
  
• Planning makes it possible for you to prioritize information, which keeps you and their staff from being overrun with it.
  

Once your business becomes “live,” that is, once it gets going, internal information starts to flow, and it's up to you to make sure that processes are in place so the necessary information can be captured. There are, however, two basic facts about information at this level that apply to every company. The first is that during the survival period the information you need is broader in nature. Examples of this kind of information include actual sales dollars versus forecast, gross profit as a dollar amount and as a percentage versus forecast, actual expenses versus forecast, net profit versus forecast, and cash usage and cash in the bank versus forecast. This key information will give you some tools to accurately judge how your company is performing, and where problems or opportunities may be.

The second fact is that as the business starts moving toward success, the kind of information you need becomes more detailed and focused. At this point, it's no longer just about expenses being too high but about pinpointing exactly which expenses are too high and which are not. In other words, as your business moves toward success, your focus has to be on the inner workings of the company. In order to accomplish this, you might, for example, reclassify your expenses into three categories—personnel expenses, fixed expenses, and semifixed expenses. Doing this would help you determine which expense groups need attention. You might also break down sales and gross profits into subaccounts for every product and service category, which would make it easier for you to identify exactly where your sales are coming from, how to improve them, and how to expand your gross profit margins.

Of course, the financial area is not the only one in which you need to gather information. When you are planning at this level, it's also necessary for you to review such things as inventory ordering and stocking processes, customer credit policies, scheduling or dispatching the workflow, customer contacts versus actual sales, employees not performing up to expectations, lost sales opportunities, and others. And in each case, problems have to be investigated, analyzed, and dealt with.

As always, once you've identified the key information, the next step is to analyze and then act on it. If, for example, you discover that sales are above forecast but cash is significantly lower than expected, it should be clear that there is a problem that needs correction right away. It could have been that more inventory was ordered than was sold, or that the majority of the sales were charged rather than paid in cash, which created a cash flow problem. In this situation, it may be necessary to redesign the ordering process so that ordering too much, too soon doesn't happen again. You may also have to review your credit policy and start putting immediate emphasis on collecting those receivables. The point is that regardless of what the analysis reveals, you will be able to respond to the problem or opportunity.

Unfortunately, very few plans go exactly as expected, which makes implementation challenging, although not impossible. As mentioned earlier, a short-term plan essentially consists of a series of steps, all of which add up to a long-term plan. What that means in most cases is that the two plans are joined at the hip. This is particularly important to understand when designing or implementing a plan at this level. For example, in the survival mode, an owner's lack of confidence in his or her decision-making ability might lead to a reluctance to put in processes that might result in push-back from employees. But if those processes aren't implemented it can put the entire short-term plan in jeopardy, which in turn can impact on the long-term plan and put the transition from survival to success very much into question.

It's very difficult for most owners to pinpoint exactly when their businesses have made the transformation from survival to success, primarily because it's more of a gradual transition than a single event. However, if you have been planning appropriately at each level, it's a lot easier to recognize the transition when it happens. That's because when you establish plans and monitor your success, you always know where you are, where you're going, how far you have to go, and when you've gotten there.

What makes a business successful? Who decides whether a business has achieved success? Is success the point at which the owner's fear of going broke disappears? Can an owner ever relax and take it easy? These are common questions most owners ask themselves, and planning can help answer them. The answers you get may not be the ones you want or expect, but they will bring reality into sharper focus, as well as destroy the long-believed myth that once a business becomes successful it can run on its own.

Having this sharper focus is important because at Level 4 there is a cruel trap awaiting the unsuspecting owner: success today does not guarantee success tomorrow. Owning a successful business and not actively watching over it, or not operating it with the same vigor you did to make it successful, can be the initial step on the road to failure. This reality is all around us. If you need any proof, as I mentioned earlier, look at General Motors and Fannie Mae. If large and successful businesses like these can collapse, as both did in the late 2000s, the same thing can certainly happen to any smaller, privately owned company. Planning can play a vital role in keeping that from happening.

The Benefits of Planning at Level 4

• Planning reenergizes you and focuses you on new challenges, possibilities, and threats.
  
• Planning protects your company from the overconfidence and apathy that sometimes comes with success.
  
• Planning keeps the company fresh, aggressive, and on the hunt for opportunities.
  
• Planning forces the company to improve and reinvent processes that enable it to continue being a dominant competitor.
  
• Planning starts you thinking about succession or developing a personal exit strategy that coincides with and complements the business's future goals.
  
• Planning helps you begin thinking about adding value to the business so that it will become more attractive to a potential buyer or make it easier for your succession candidate.
  

Of course, if you're successful, competitors will run at your customers and try to take what you've earned. Giving it back without a fight is not only bad business, it also shows you didn't deserve those customers in the first place. To avoid this, owners need to create and design processes that will enable them to answer questions in four critical areas:

• Customers:
  
  • How can we keep all our customers?
    
  • How can the business attract new customers, and what do we have to do to keep them?
    
  • Which of our competitors are weak and how can we take advantage of that?
    
  • Will the market continue to expand and attract new customers, and how can we capture the majority of these new customers?
    
• Product, process, and people:
  
  • Are our competitors offering any new products or services?
    
  • Are there any new products or services on the horizon in our industry, and how can we dominate the market with these new products or services?
    
  • Which processes are fully mature and can be reworked for even better results?
    
  • Which processes are outdated and need to be replaced with new ones?
    
  • What new training methods will we need to keep our employees' product knowledge and professionalism at a high level?
    
  • Will the quality of our employees have to be improved?
    
• Conquering the competition:
  
  • Can we acquire any of our competitors, and would such an acquisition put our company into a dominant market position?
    
  • How can we create an “unfair” competitive advantage that would drive customers to our business?
    
• Added value:
  
  • What can we do to make our business more attractive and worth more to a possible buyer?
    
  • What are the positive aspects of our business, and what can we do to improve on them?
    
  • What aspects of our business represent negatives to someone considering buying our business, and how can we eliminate them?
    

When you're a success, everybody wants a piece of you. This is true in sports, in life, and in business. It's also true that competitors tend to get better, so you must get better, too, if you are going to maintain that success. There's little time to relax, and you need to find an edge. One way of finding that edge is to work “smarter” than you have in the past. Smarter, in this instance, can mean two things. First, you can become a student of business as well as an industry expert. Doing so will enable you to learn how the best owners—particularly those within your industry—operate their businesses, and then implement their best practices. Second, you can become the best at understanding how customers; product, process, and people; conquering the competition; and added worth connect and support each other, and use this knowledge in your analyzing, planning, and implementation. This in turn makes your business better, and even further out of reach of your competitors.