Thrive, don't just survive, in difficult times

When a business faces difficult times such as today’s economic environment, management is almost always operating with limited resources and one of those is limited financial management expertise. The Controller of a business is often capable of preparing the essential compliance reports, but may not have the experience to effectively manage the financial needs of a business during difficult periods as well as navigate it through more complex challenges to ensure continued success.

Success inhibitors … and what you need to do to overcome them

There are eight identified major challenges that a company must overcome as it grows. Here is where the problems lie and what you can do to resolve them.

1. Lack of capitalLack of capital is often the most critical challenge that a successful business faces as its very success creates the shortage which is accentuated during difficult times.

   Without exceptionally diligent cash flow management and/or raising more capital, a business is often constrained by capital as it grows. The profit in one operating cycle is often insufficient to fund the extra working capital required for the next operating cycle. This might occur when a business is either inventory or receivables intensive and/or the operating cycle is a long one. (The operating cycle is the average time from the first receipt of inventory to payment by the customer.) The situation could worsen if capital assets are required to process the goods and the company cannot finance the acquisition of these requirements. Many capable entrepreneurs cannot overcome the obstacles of the cash flow cycle and fail to understand why bankers and other lenders cannot provide the financing. A business often does not have the security or track record to support the debt.

   Solutions are often easier than most entrepreneurs realize. It may start with a plan to determine your cash needs and when these needs usually arise. In this way, you are then in a position to manage it by understanding which factors are influencing the cycle and focus on the cash management techniques most likely to be successful. Examples include speeding up manufacturing, minimizing inventory and receivables and extending the payment terms with suppliers.

2. Lack of management skillsLack of management skills is very difficult to deal with in most businesses, as the size of the senior management team is necessarily limited. Areas of weakness could be in finance, human resources, marketing … any area where the current management team does not have the expertise, or the time to deal with issues.

   The solution is to determine what those areas of weakness are and then to develop an effective plan. Once you recognize a weakness — it often can be compensated for without a lot of time, effort or money.

   Solutions can be as simple as assigning the responsibility to an existing manager to hiring a person part-time or a working with a consultant. The solutions become obvious if one spends a little time planning and assigning responsibility. And yes, it often is effective to personally take on that responsibility – an efficient way of being aware of potential issues before they become a real problem.

3. Lack of information about… what is – and isn’t – workingOften companies do not measure their results and when something specific causes a blip (positive or negative) in results they do not know what has caused the success or problem.

   Implementing a process for measuring and tracking key performance indicators (KPIs) on a weekly, or at least monthly, basis is vital to enabling management to react to challenges and opportunities alike. The saying that you cannot manage what you do not measure holds true. If nothing else, it often alerts you to a change from the norm much sooner than waiting until you otherwise become aware of it. Once awareness is established, solutions are easier to find.

4. Lack of a plan
   A fundamental problem often arises when the focus is more on the numbers than the strategies and action steps. The arguments for planning are many and irrefutable and yet this is a very common failing for many businesses. In my opinion there are three very fundamental reasons for implementing a planning process:
   1. If your plan sets out certain objectives you are much more likely to achieve – or exceed – them than if you just keep barreling along. Research has often shown this to be true and it stands to reason that having a plan will enable you to often think through and implement the steps necessary to achieve that plan;
   2. Most businesses spend so much time dealing with the “alligators” that are snapping at their backs that it is difficult to recognize the steps necessary to achieve your long-term objectives. A plan disciplines you to look “beyond the weeds” from time to time; and
   3. A plan can often alert you to inconsistencies that need to be managed such as a lack of capital or other resources necessary to fund the projected growth. Once recognized, you are in a position to better manage the limiting factor.
5. Poor proceduresMost entrepreneurs do not realize that the procedures in place for managing the business need to be well designed to reduce the incidence of errors. Error correction is often a major waste of time and particularly management time.

   Good procedures with a little time and effort invested up front will usually pay enormous dividends in time and cost savings on an ongoing basis. Included in this is the entire area of quality and standards. The cost of correcting an error in many areas of a business far exceeds the profit that could have been earned from the transaction.

6. Ignoring risks in their assessment of alternatives and opportunitiesA business is about taking managed risks and one cannot insure for or avoid risk if one is in business. However in my experience, once a course of action has been chosen or taken, it is important to consciously reflect on the ways to manage risk and determine procedures regarding risk reduction or the opportunity to increase potential success.

   Often, this is as simple as “diarizing” to follow-up on an issue or having a second person review a process to reduce the risk of error. In difficult times it’s important to re-evaluate your exposure to large and slower paying customers. There is a much greater likelihood that payment will be delayed or stopped. Avoid exceeding your borrowing limits by managing your credit exposure. Risks cannot be eliminated but they can be managed and reduced by careful management.

   I recently reviewed a contract for an event where the client’s service provider had requested payment in two installments, with the second installment due seven days after the event. I suggested to my client that they make the second payment to the service provider contingent on the measurable success of the event at which the services would be delivered and for which these services would be the major determinant of success. This reduced my client’s risk and incidentally provides an additional motivator for the service provider.

7. Lack of focus
   Constant changes in priorities, issues that need attention and other fires to be extinguished could cause a business to lose focus. Often opportunities present themselves and it is difficult to say “no” to a short-term opportunity that will distract you from your long-term goals.
   Your long-term objectives must be clear, as should the opportunities that will facilitate your achieving them. Then evaluate other prospects by the extent to which they draw resources away from your ability to achieve those long-term goals. Consider the more limited resources available in difficult times and allocate them wisely to where you will achieve the greatest return.
8. Failure to plan for issues absorbing the majority of your timeEach of the previous seven potential issues are common, however, the greatest failing that I encounter occurs when an owner/manager does not pause to plan for the issues and solutions that are absorbing so much of his/her time and energy.

   Time is likely the most scarce resource in most businesses, especially that of the owner/president. Spending a little time developing a strategy to focus on real priorities is vital. Too many owners do not force themselves (because no one else will) to spend time where it is most necessary, rather than where they are most comfortable. It’s human nature to focus attention on areas where the comfort level is highest, but concentrated focus on areas of weakness will not only improve a situation/process, but can motivate staff and/or clients and suppliers

This commentary is based on an article “Overcoming Challenges that Prevent Small Business Growth” that appeared in CanadaOne in April 2007 in which Julie King interviewed James Phillipson, the author of this article.

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