I recently took on a small client. They were expressing concer about certain expenditures and had some doubts as to how they could be relevant or necessary to their organization.
I listened patiently and then I asked, "Could you humor me and tell me the purpose of your organization?" The client told me the purpose of their organization. I told them that that is their mission, or purpose and that any decision that is made needs to answer the question, how does this support or fulfill the mission?
Larger organizations and companies have missions statements or other phrases. For some it's a bunch of words, but it is the foundation and the compass for your business. All businesses were founded with a purpose in mind beyond making profit. I once met a real estate agent who didn't sell houses, they told me that they help families realize the American dream. Car dealers do not sell cars, they sell a means of transportation that reflects the owners status or style and allows a person to earn a living or run a business to support themselves and their family.
No matter how large your organization grows or how many years later it may be, your purpose will be your guiding principle and will help keep your business from going too far from its intended purpose.
Profit will insure that you open the doors to your business tomorrow, purpose will insure that you open the doors to your business years from now.
I recently went on a family vacation to Seattle, Washington. One of the challenges for small business owners is taking time off. There is no vacation pay, no backup for work while you're out of office. In some cases there may not even be a weekend.
This economy is also contributing to a feeling of reluctance in closing the business for any length of time. But it is important for small business owners to take time off to recharge themselves and reconnect with family and friends. Small business owners more than anyone need to be able to have that balance and be able to "go home" at the end of the day and not be preoccupied with work while with family. It can be difficult but it is important to be where you are both physically and mentally. When you are in your small business all of your focus and energy should be on your clients and your small business. But when you are done for the day, you should also have the same focus and energy on your family. Being home thinking about business or being in your business thinking about family is not good and impacts your effectiveness.
Mini vacations may be a good way to recharge and have time with family, even if it is a staycation or a day trip to a small town nearby. Schedule potential and current clients a few days out and wrap up projects before time off to minimize the impact to your small business. If you do get a call from a new client schedule them after your time off. This can help keep the balance that small business owners need to be able to continue to run their small business without their small business running them down.
"We are in the people business and happen to use money as a way to serve the needs of the people" - former Frost CEO Joe Frost as retold by Tom Frost chairman emeritus.
This was a statement that Tom Frost's great uncle made to him many years ago. What a fascinating way for a leader to see their business. Mr. Frost's great uncle did not say they were in the banking business, or the lending business, they are in the people business. Money is not the object or goal, it was a way to serve the needs of people.
People may say this is from a time that has long since passed, that the emphasis is on money, productivity, the bottom line, shareholder value.
As small business owners, we are more wary of the bottom line because of our size. But the truth is all small business owners are in the people business. Clients do business with us because they are not an account number, they are John or Jane. Clients don't speak with a customer service representative or a sales agent, they speak to us, the owners. In some cases we can talk about how our families are doing because we have that connection.
I have read articles from marketing and sales consultants that emphasize that people don't want to do business with a company, they want to do business with people. They want to connect with the person they are working with or getting services from. This is why Joe Frost's statement may be even more valid today than it was then, and an important lesson for small business owners as well.
Some people assume that technology can improve any process that is inefficient or broken. While technology can be a great tool it is not always a silver bullet. The process has to be effective. If the process is producing errors or poor quality end products, technology may only help you make errors faster.
Take a power saw. A power saw will allow me to cut boards in less time with less effort on my part as compared to a hand saw. But the power saw will not prevent me from cutting a board short. I have to understand what the board is for, how long it has to be, and the angle of the cut. If not I will waste a lot of time and lumber trying to make one cut.
To improve a process you can follow the DMAIC model.
Penn States recent events present a cautionary tale for any leader. Knowing about a situation and not doing anything about it can be as bad as committing the act itself. Having a mission statement, core values or talking about values based leadership is all good, but as leaders it is up to us to uphold these values.
Our employees and teams turn to us and look to us for direction and guidance, but also to see are we living our values and leading our organizations by its values?
In the case of the Penn State matter, leaders either knew and did little or did nothing. Regardless of the reason, the result was the firing of the university president, the ouster of a legendary coach and adverse action from the NCAA. None of these leaders were directly involved with the incidents. But they were aware that something might be wrong. This reminds us that as leaders we can be held accountable not only for doing wrong but also for doing nothing to right a wrong. How many large businesses have lost litigation because an executive had knowledge about retribution against a whistle blower or knowledge of a hostile working environment?
As leaders we must ensure that we have mechanisms in place to help uphold our core values:
Do the right thing
Encourage others to do the right thing
Ensure there are channels for feedback
Make sue to fully understand the feedback and its implications.
The sad part of this is that some people forgot that they were not just a football program; they were an institution of higher learning. They prepare the leaders of tomorrow, which was part of their mission. It would appear that the university's leaders wanted to protect the money and fame they received from the football program instead of protecting the institution or the victims. Core values were never designed to protect wealth or fame; they were designed to protect institutions from the negative effects of wealth or fame.
How many of you have seen the story of the lessons of the square watermelon? It is difficult to trace the original author of the article but I have seen this several times on various blogs and websites.
The article does bring to mind my own experiences in providing solutions when I was a staff employee for large businesses. It is very relevant and provides a methodology and thinking that is critical to creating solutions to business questions or needs.
The story goes as follows; Japanese grocery stores had a problem, they are smaller and do not have large amounts of real estate. You would be hard pressed to find the large super stores that the U.S. has throughout the country. Watermelons took up a great deal of space, space that the Japanese grocery stores did not have. Most individuals would tell the stores that watermelons are round and there is nothing that can be done about it. But a few Japanese farmers asked the question, if stores want a square watermelon, How can we provide one?
The answer came from out of the box thinking….or shall we say into a box thinking. It turned out the solution was a simple one, grow the watermelon inside of a square box. When the watermelon was still small they were placed inside of a box and as they grew they took the shape of the square box.
The solution not only made the grocers happy but it made consumers happy. It became easier and cost effective for grocers to ship watermelons and consumers found that the square watermelons took less space in their refrigerators which are smaller than ones in the U.S.But if we look very carefully, there are lessons in the story and some simple takeaways that anyone can apply to any part of their lives, not just business.
Don’t assume: Because people have seen watermelons in only one shape they automatically assumed that you cannot make a square watermelon. How many things do we do in our lives because we assume that there is no other way to do it or that it is impossible to do it any other way? How many things could be accomplished in your business if you did not assume that they are impossible?
Question habits: The best way to deal with assumptions is to question your habits. Why are we doing it this way? What if….? How can we….? If we begin to question the reasons and processes behind what we do or what we carry out it is the first steps to finding a better solution or a creative solution.
Be creative: This takes some work. Some individuals don’t have time or don’t understand the creative process. Look at the question from all angles. In the story above, some people viewed the question as one of how to genetically grow a square watermelon. Don’t over think the question or solution and no matter how off the wall a thought for a solution may be throw it out there. How many people would have thought that placing a growing watermelon into a square box and letting it grow that way was way out there?
Look for a better way: You should always have a mind set of how can things be improved. Are there better options? Is there a better solution? Improvements and innovation cannot happen if you’re not always looking for better ways of doing things.
Impossibilities often aren’t: IF you assume something is impossible you will most likely not question it or question if there is a better way. This is the first road block that people usually run into. Yes, there will be trial and error and consistent learning. But never assume that anything is impossible.
As you can see, innovation and improvements come from never assuming that anything is impossible or that anything cannot be improved upon. Applying the above principles to any or all aspects of your life (business or personal) can constantly improve all aspects of your life.
So holidays have been celebrated and we are in the New Year. Now, it’s time to get back to work with your small business or micro business, But in what direction? This is where your budget comes into play. Hopefully your assumptions are directionally correct. But how do you measure how you are doing against your budget?
The way to measure is to have an actual to budget statement. This will allow you to see where you are compared to what you budgeted. A detailed statement with each account will help you focus in on the line items that are over budget. Now, do not assume that your small business spent when it shouldn’t. There needs to be some analysis of the transactions in the accounts that were over budget. Where these transactions necessary but out of the ordinary? These would be ok if they were unexpected but necessary expenses for your business such as a repair to a business vehicle or your office. Now if one of the business assumptions was incorrect this may cause the variance to the budget. If so this may carry out throughout the year. Sometimes what comes out of the analysis is that sometimes transactions were posted to the incorrect account and this may explain the discrepancy.
But is there a way to know which direction you are going financially before the month is over and there is no chance to correct? One would have to be proactive and even implement certain financial processes to stay on track. One thing you can do is run your actual to budget financial statement mid month to see how close you are to your budgeted amounts.
This may let you know that you are about to hit your budgets but do you still have a handle on your finances? The best way to get a good handle is to implement a purchase order system with a declining balance worksheet. You can use Excel to do this. Set up a template, enter your budgeted amount and with every purchase assign a purchase order, estimate the cost and reduce the balance. The benefit is that this allows for a control of purchases and allows you to see how much of your budget is left. When you have a tool like this it makes you more mindful of what you budgeted for these expenses and how your spending your small businesses money.
Some additional processes that may also be beneficial are to have one point of contact that is responsible for the purchase of items such as materials, office supplies and any other business needs. Also designate one day per week or per month that you purchase items such as office supplies. That way you compile your lists of items to purchase and you can eliminate shipping costs either because you have a large purchase order or you only get charged for the limited times that items are shipped per month as opposed to every time you order a couple of items.
These are some things that you can implement that can help you to stay in line with your budget and will help you better understand what is happening with your small business or micro enterprise.
Most people don’t plan to fail, they fail to plan. – John L. Beckley
Have you or your business put together a budget for next year? For larger businesses the budget process is under full swing with meetings, analysis, calculations and submissions. Larger businesses and organizations have a formalized, mature budget process that they usually begin at the start of the fourth quarter or earlier in some cases.
But what about smaller businesses? Some businesses do not put a budget together at all. But a budget is critical for a business, especially a small business. The first thing to realize is that budgets are your roadmap for the coming year. No one has to have a crystal ball or needs to be psychic and budgets are not chiseled in stone. If you have a good understanding of your business and industry you can put together a good budget.
Beyond having a template to enter numbers, how do you build a budget? You can estimate a number and enter it every month but this may not help you build an accurate budget. Also, how do you measure the success of your budgeting? Is your business going in the right direction?
The first thing you need to do is ask where you want your business to be in five years. It does not have to be specific or detailed. This will help you frame your budget for the following year. Think of your budget as the first steps in a five year journey.
Next, there are expenses that are consistent and will never change or fluctuate with business activity such as non-business utilities, membership renewals, rent or leases. These are your fixed costs. Keep in mind that some costs will fluctuate. For example here in south Texas we know that our electricity costs increase in the summer because we will use our ac more due to the high summer heat. Businesses in the north may want to adjust for fuel for the winter in the same fashion. Also make sure to exclude any one time costs that were out of the ordinary that you will not see in the next year. Some budgets are built off of last year’s numbers and sometimes include onetime costs.
Next item is to look at your variable costs. These are costs that are impacted by business activity. One of the best ways is to forecast sales volumes and multiply by the costs of producing/providing the goods or services. The quickest way to calculate this is take the cost divided by products produced or services provided. You may want to make this calculation for each month of the current year to see if there were any trends. Your production costs may have increased during the year and you would be using an average as opposed to the new production cost. If you perform this calculation during the year you will know this number beforehand and will help you to be proactive in addressing costs.
Now you may feel unsure about forecasting your sales volumes. What you can do is look at the previous three years, is there some seasonality in your numbers? In other words, are there months where you do more business than others? Some businesses provide goods or services that are in demand in the summer and others see their demand during the holidays. If volume growth has been small you may be able to take the current years volumes and add the average increase in your year over year activity. If not take your current years volumes and enter them. You can then take the volumes and multiply them by the costs to provide the good or service, for example, this task requires so many hours from my employees at this pay.
The best part about forecasting out volumes is now this will drive your sales revenue numbers. It is best to break out products or service volumes and apply the dollar figures item to provide a more accurate budget number, for example, dollars for product a times volumes for product a, and then the same methodology for product b. Trying to create one sales revenue budget number may not be accurate and may skew your budget.The next step is to review any projects or improvements you may make during the year. Large businesses usually have initiatives for either streamlining processes or carrying out major marketing initiatives or any other major project. Large businesses will usually calculate the impact and adjust their budgets accordingly. You may not carry out any major projects but if you know that in the coming year that you will purchase tools and equipment that will make work easier or allow for more products to be produced you need to adjust your budget for this. Also, if you know you want to market your business in the following year get a reasonable estimate and add it to the month or months that you will market for both the expense and the increase in sales volumes. Here historical costs based on previous efforts are helpful. Even though this may be difficult to know the impact (if any) but just be conservative in your expectations.
The items above are, at a high level, some of the most important things to keep in mind when developing your budget. Again, this will not be held against you, as long as you know what the variances are due and realizing that some variances will carry out through the year.Next blog: How do you measure the success of your budgeting?