What does the financial crisis mean to small business?

Small business owners ask me “should I be worried for my business?”. The fact is that as a result of the news of the past few weeks, and in particular yesterday, we all have reason for financial concern, as we see markets drop and inter-bank credit tightening.

Now, more than ever, a small business owner needs to “work on the business”, evaluating strategy and monitoring sales, cash flow, productivity, costs, and profitability. With 300 million consumers in the United States, the majority of whom are working, there remains a high demand of every type of product and service. So, business owners need to examine their strategies to ascertain that they are offering viable products and services and selling them at a fair price. Strategy adjustments need to be made as needed to really be competitive.

This is a time to do necessary belt-tightening by eliminating marginally profitable products, helping employees improve productivity, and cutting non-productive employees. Cash flow should be monitored daily with initiatives to improve collections, and negotiate longer payment terms with suppliers.

The major challenge that small businesses have been experiencing in recent months, and which will only get worse in the short term, is availability of credit from banks. This may mean that expansions will need to wait, and perhaps even large orders will have to be turned away. There will also be customers who will not be able to purchase due to their inability to borrow. However, business owners who need cash should be tenacious – some banks are better capitalized than others and consequently willingness to lend money varies by financial institution. There are also alternative funding sources that are still working with small businesses.

The main advice I can give is to stay the course. Be honest about your market and demand for your products and services. Provide excellent customer service. Keep an eye on cash.

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com

Hiring your first employee

Many businesses start with no employees except for the owner, often operating out of the house to minimize overhead. For the newly minted entrepreneur, especially one who came from corporate America, it is a difficult adjustment to wear all the hats with no one available for delegation.

It may be very tempting to go out and hire an employee, and there often does come a crucial decision point where the owner is overwhelmed with work, has a real need for a staff, or decides to grow the business, and determines it is time to hire the first employee.

This is a momentous time in the life of a business. Up to this point there have been minimal government forms to fill out and file, no concerns about unemployment insurance or workers compensation, and no interpersonal or management issues. But now the entrepreneur will be faced with all of these.

The sad fact is that often a sole practitioner who has had a comfortable income, starts seeing the income drop after starting to build a staff. So, here are some things to do before putting an ad in the help wanted section.

1. Write a job description for each job that you are doing. Now, review the job descriptions of each task that you least like to handle yourself, or for which you believe you are in most need of assistance.

2. Determine if some or all of these jobs can be outsourced. For example, if one of these job descriptions is for bookkeeping, you may be able to find a freelance bookkeeper whose services you can retain for a few hours a week.

3. If tasks can not be outsourced, does the amount of work justify a full time person, or could one or more part time people do the work?

4. Will the new employees actually perform revenue generating work, or free you up to generate more income? It is key that for each employee hired, there is sufficient additional revenue generated to MORE than cover the wages, taxes, and other financial benefits of the employee. If a hiring analysis fails this test, you need to tread very cautiously!

5. Create a cash flow forecast for the next year to verify that your analysis in step 4 is correct.

6. If you do decide to hire, create a detailed job description for the job you want to fill, starting with the descriptions you created in step 1. From the job description create a list of requirements for a person to fill the job. Use the description and requirements document to drive the recruiting and hiring process. Do not hire a relative, friend, or prior associate just because you like them if they don’t have the requisite abilities to fill the job you need to have performed.

In the next few posts I’ll talk more about the hiring process, and discuss the issues to be aware of in hiring full time, part time, and contract employees.

I need to add a word of caution – this post does not purport to offer legal or tax advice. When hiring the first employee, make sure to seek advice from your attorney and tax adviser.

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com

Teamwork

Well, last night’s blow-up of the economic recovery plan brought to mind how important teamwork is – even in running small businesses.

Several years ago I consulted with a small business of about 50 employees with a seven person management team. The CEO, a very dominant individual, complained the departments did not co-operate with each other, and consequently schedules were missed, quality was poor, and customers were continually upset.

Investigation revealed that the engineering manager lived in a vacuum – he did not communicate well with sales and had virtually no communication with manufacturing. The folks in manufacturing would modify designs and never pass the changes back to engineering. Parts designated for one machine would be switched to another machine, delaying completion of the first machine. The problems went on and on.

I got all the managers in a room for a full day and got them talking with each other, and enabled them to understand the impact of their isolationism on the rest of the company.

Of course, a one day meeting (like a three hour conference in the white house) did not solve the problems, but it got the problems on the table and began the process of team building and co-operation.

Ultimately, the engineering manager was replaced, as was the operations director, and with continued team building exercises, the overal morale within the company was improved as was productivity and quality.

Let’s hope that the congress and administration can all begin to work together in like manner to bring a healthy solution to our present economic woes.

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com
will@limkemann.net

Small Business Conference

I am using today’s post to shamelessly plug the third annual COSE Small Business Conference. While this is an event of the Council Of Smaller Enterprises (COSE), I say shamelessly because I am chairing the conference this year. The Small Business Conference is a conference actually designed by small business owners for small business owners, and will be held October 22 and 23 at Cleveland’s IX Center.

The conference is a wonderful opportunity to network with other business owners (about 1500 are expected); to hear inspiring keynote talks by Michael Simon – noted Cleveland chef, Debbie Fields – of Mrs. Fields Cookies, and John Moore – mastermind behind the marketing of Starbucks; to learn about almost any business issue at over 45 workshops; and to see the latest in small business products and services among the 75 exhibitors.

Best of all, the conference is free – to COSE members. Others are welcome to attend for the bargain price of $495. For more information, please click on www.cose.org/sbc.

To end my shameless plug, I will be leading a workshop called “Protecting Yourself From Employee Fraud and Theft”.

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com
will@limkemann.net

Bringing on a partner

Yesterday I wrote about the difficulty that small businesses have today in borrowing money, and how this presents an opportunity for cost cutting and better management. Of course, even if costs are cut to the bone and the business is well managed, additional cash is often need for growth, or to fund inventory for a large order.

When the banks can’t or will not help, one temptation is to bring on a partner. While tempting, I caution owners to tread cautiously. Here are some things to consider.

1. How much equity will you need to give up in return for money invested in the business?

2. How will be business valuation be performed to determine equity percentage?

3. What else will the partner bring to the table? If the person has skills or capabilities that compliment those of the owner, the value of the partner may be much more than just the money.

4. Is the partner just interested in investing, or in being active in the business? Can the business afford an equitable salary for the partner? Will the owner’s pay and partner’s be proportional to their ownership share?

5. What are the long-term goals and expectations of the new partner? Of the owner?

6. Are the personalities of the owner and partner compatible?

7. Will the cash influx carry the business, or will more cash be required?

8. Is there a business plan with realistic financial projections?

Assuming a partnership makes sense, then an attorney should draw up papers that:

1. Spell out the terms of the partnership.

2. Include a buy/sell agreement in case the partnership does not work out.

3. Include a confidentiality agreement and a non-compete agreement in case the partnership ends.

At the end of the day a partnership might be good for the business and its owner, but should be approached with careful analysis, thought, and preparation.

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com

Business Credit

This morning I listened with great interest to a local show on WCPN discussing, what else, the current financial meltdown. Several listeners called in saying that banks had terminated their home equity lines of credit; others called in saying that even with FICO scores of 720 and 750 they were unable to get new loans approved.

The tight credit is both a challenge and opportunity for the small business owner. In my experience consulting with small troubled companies, most of their problems can be traced back to wreckless use of credit which has, up until recently, been so easy to obtain. OK – maybe large debt is really the symptom and not the problem – the inability to control costs is one of the real problems.

So now that credit is tight, business owners are being confronted with not only being forced to repay loans, but to improve profitability and cash flow. This is good. If the business is to survive, the owner will have to start paying attention to the business and exercise best business practices.

One of the first places to look is cost of goods sold. Many business owners do not really know their total labor and material costs, and therefore cannot control them. In one recent case, I noticed that cost of goods was about 65% of sales, leaving very little left to cover fixed costs and profit. A bit of quick research revealed that the industry average was 47%. By reviewing production process, loss reduction, and better purchasing, we we able to significantly reduce cost of goods. Now profitability has increased, cash flow has improved, and there is less reliance on borrowed money.

I’m afraid that businesses that do not reduce their reliance on lines of credit, credit card debt, and other credit to meet short term needs, are not going to fare well in this troubled time. The key to survival is better management of the resources that are available.

WIll Limkemann
Limkemann Buiness Advisors
440-871-0976
www.neobizadvisor.com

Customer Service

According to today’s Wall Street Journal report on customer service, while all businesses can expect customer complaints, many organizations respond poorly to them poorly. The article goes on to say that customers not only want their problem solved, but want to know what caused it, and that the systems that caused the failure be fixed so they and other customers are not subjected to the problem in the future. Customers, the article says, have more tolerance for poor service than for poor problem resolution.

In past posts I have written of excellent customer service at the Minneapolis Hilton, and poor service from my lawn care company. What separates good service from poor, is a service oriented corporate culture. When top management understands the value to the bottom line of excellence in customer service, a culture will be established with procedures to deal with complaints and empowerment to employees who come in contact with customers. It is also important to track customer complaints in the interest of seeing that systems causing the complaints in the first place are fixed. Incentives should be provided to employees who provide outstanding service.

I think that today consumers are so conditioned to poor service, that companies that provide excellent customer service really stand out.

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com

Brainstorming

There comes a time that the well seems dry. We are so close to problems that we simply run out of solutions. Sales are stagnant and we can’t seem to figure how to increase the size of the sales funnel. We need new products or services but can’t get the creative juices flowing to come up with fresh ideas.

Perhaps it is time to do some structured brainstorming.

Maybe it seems like an oxymoron to combine “structure” with “brainstorming”, but the best results come about with some rules and a process. Let’s look at some of them.

First and foremost, have an objective in mind. Be specific. A new product? Improved customer service? Quality? More sales? Recruiting?

Second, reserve a time, at least an hour, for the session, and invite all stakeholders who may have input and be directly involved in the brainstorming outcome. When inviting participants, make clear the objective, and ask everyone to come with ideas.

Third. At the start of the meeting lay down these ground rules:

a) There are no bad ideas. Wild and crazy ideas are good
b) No criticism is allowed
c) The more ideas the better
d) Make sure each person has a chance to present ideas
e) Write each idea on a whiteboard or chart paper for everyone to see

Four. One person, preferably an outsider, should moderate the meeting, and write the ideas on the whiteboard or chart paper. The moderator should keep the meeting on topic to the stated objective. The moderator should assure that each person presents ideas.

Five. At the end of the meeting, a discussion can be held to determine if a few ideas have bubbled up to high importance. (Note, no ideas will be outright rejected at this point). If so, then they can be prioritized for future discussion.

Six. After the close of the meeting, the moderator should type up all of the ideas, highlighting the prioritized ones, and deliver the notes to each participant.

Seven. Participants should “vote” on the ideas with their first, second, and third choice, and explain why they like the idea and how they would see it implemented.

Eight. Follow-up action should be taken, or meeting should be held, to lay out a course of action based upon the top one or two idea.

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com
will@limkemann.net

Working on the Business

I believe that it was Michael Gerber, author of the E-Myth books, who coined the phrase that business owners should “work on the business, not in the business”.

In virtually every business that I have ever consulted with that has poor performance, the problems can be traced back to the fact that the owner has not spent time “working on the business”. The owners get so wrapped up in daily events of dealing with personnel, trying to sell, fending off vendors wanting payment, that they spend no time thinking about how to be more efficient, how to better market and sell, and how to more effective managing the scarce resources of time and money.

For example, if the business truly needs to get more sales, the only solution that comes to the mind of the owner is to simply spend more time on the phone and on the road. It seldoms occurs to the owner to create a sales strategy to ensure that the right prospects are being approached in the right way; or laying strategy that will win more sales over an extended period time; or to track sales and marketing activities to determine effectiveness; or to even understand the sales process. Without a strategy, it is all too easy to blame the comapany’s woes on the market, or the economy, or competition, or ….

Of course, the same principles apply to every aspect of the business. Every owner needs to step aside from day-to-day activities and ask questions about what can be done better, how things can be done more efficiently, planning for the future, and how employees can be best used and empowered.

The point is, that with just a very rare exception, there are always some direct competitors that are doing well, because the owners of those businesses are, indeed, “working on the business”.

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com
will@limkemann.net

Disaster Planning

It appears that, after leaving a trail of disaster, Ike has finally run his course.

I won’t pretend to understand or appreciate the heartaches, trauma, and loss being suffered by people who got the brunt of the storm. In my own little corner of the world here in Bay Village OH we had sixty mile per hour winds come through on Sunday night blowing over trees and knocking out power and communications services througout the area. By some published accounts over 300,000 electric customers were without power.

What was not publicized was the number of subscribers who lost cable or other communications service.

Sunday night our lights flickered for a few minutes, but power stayed on. I thought we were home free until the lights went out Tuesday night and stayed off until about 5:30 AM. So, power-wise, we fared better than many.

Communications was another matter all together. In a previous blog I mentioned that I had transferred my telephone service from “ma bell” to Vonage Voice Over IP (VOIP), using my broadband cable connection.

Well, just as the Browns/Steelers game was beginning, the cable went out. Not only did we not have television, but lost Internet access (which is why no blogs for the past two days) and telephone service. Fortunately my cell phone service still worked and I had pre-arranged to have all Vonage calls automatically routed to my cell phone whenever an outage occurs.

Our cable service provider is Time Warner. Several times I called the Time Warner number to ascertain when service might be restored. The consistent response was that Time Warner service was interrupted throughout north east Ohio and western Pennsylvania due to POWER OUTAGES. In other words, the giant Time Warner (TW) company, which provides critical communications services to homes and businesses, was at the mercy of the power companies!

I find this situation deplorable! Apparently TW is not prepared for disasters. People with land lines had no wide spread interruption – I understand that all telephone exchange buildings have emergeny power. My cell phone was working no matter where in town I travelled the past two days, so the cellular folks apparantly have emergency power provisions.

Why would not TW be prepared for massive power failures as well?

Bay Village will soon be getting a competing cable company, WOW!. Other communities will also have the option of competing cable services. Perhaps a question we need to ask all cable companies before we sign the dotted line is what kind of emergeny preparedness they have.

Well, after two days of frustration over communications problems, it appears that TW has things back to normal. But, I should be grateful – as the folks in Galveston and Houston are really suffering in so many ways.

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com
will@limkemann.net