While a business rescue advisor usually enters the picture at the point where a business is struggling often they can trace financial problems back to its early days.
Setting up a business is not easy, even for the formerly successful executive coming out of a big business, and often the advisor will identify structural problems that have been there since the beginning.
For a start-up, a major problem is the number of documents that have to be prepared, checked and approved, from the terms and conditions for clients, suppliers and a website, to the documents like a shareholders agreement, employment contracts and a staff handbook in addition to establishing robust back office with admin, record keeping and accounting systems.
Where the executive may have been able to call on both in-house HR and legal help and will have been backed by ample resources the start-up has no such in-house help. How does a new business owner assess the validity and worth of any advice, especially when he or she has to be careful about the cost of advice?
Then there is the problem of selling the business product or service. Some entrepreneurs are brilliant sales people, who give little thought to systems and accounts, while others are systems or financially oriented but with little experience of business development and selling.
While everyone encourages you to jump, if you are coming out of a big business intending to set up your own company you need to pause, reflect and find out what needs to be done before taking the plunge.
Our next blog will focus on how to find the right advice.
Asked to name famous entrepreneurs and perhaps most people would list Steve Jobs (Apple), Bill Gates (Microsoft), Richard Branson (Virgin) and Mark Zuckerberg (Facebook)
But what are the characteristics of a successful entrepreneur?
According to research published by Forbes magazine effective entrepreneurs show drive, resilience, self confidence, flexibility and vision.
These are not necessarily exclusive to the famous examples quoted above.
Anyone who thinks they may have the makings of an entrepreneur should consider whether they are driven by the heart and by an unshakable sense of purpose. Also, do they have resilience; to quote Sir Winston Churchill, “Success is the ability to go from one failure to another with no loss of enthusiasm.”
While self confidence is important the successful entrepreneur needs to be flexible and open-minded to the possibility that what seemed like a brilliant idea may not be effective in reality without making significant adjustments.
Perhaps the one distinguishing characteristic common to entrepreneurs is their ability to see opportunity everywhere and to be always looking for new ideas.
Finally, an analysis of 23 research studies published under the title “The Big Five Personality Dimensions and Entrepreneurial Status” recently comparing entrepreneurs to corporate managers found that the entrepreneurs scored far more highly on traits such as openness to experience and conscientiousness but significantly lower on neuroticism making them much better able to cope with stress.
Very few people have been taught how to deal with or manage staff so it is not only staff on the receiving end who are terrified of appraisals, they can also be an ordeal for the managers who have to conduct them.
But effective communication and staff management are skills that can make all the difference to the growth potential of a small business.
In our view a properly constructed staff appraisal system is an essential tool for both staff and for business growth.
So what are the key elements?
When setting up an appraisal system there are a number of things to consider.
Most importantly, what is the required outcome: staff motivation? Setting goals? Staff development? Identifying training needs and skills gaps? Planning the development of the business? An opportunity for staff to give feedback? An opportunity for management to give feedback?
Identifying the goals of an appraisal will help to set it up in the right way to meet them and may also identify who should carry them out and how frequently.
But the basics of any appraisal system are that the outcome for all involved should be a positive experience and not an intimidating one that causes fear for all concerned.
And finally, appraisal ought to be carried out by line managers as it is a matter of leadership. It is not an HR function although HR may be useful for advice on how to conduct the interview and support with technical matters.
I am astonished at how may SMEs have no formal staff appraisal system such that management and staff are surprised when a performance or behaviour problem escalates to the point when it needs to be dealt with.
Very few managers make notes about their staff and information is therefore lacking when it is needed as the basis of a discussion. All that is needed is a simple form to record the details.
When reviewing such things as performance, timekeeping and absences from work and the reasons, holiday periods taken or training needs and employee ambitions there needs to be some written record on which further discussion and action can be based.
Most crucially employees want to know where they stand, what managers think about them and their prospects for a future in the business. They want to feel as though the company is generally interested in them.
There are many ways of setting up a meaningful appraisal system, and that will be the subject of a future blog.
But there is no doubt that appraisals should be done at least once a year for the benefit of both the staff and for planning the future of the business. And they need to be based on facts that are captured during the period since the last appraisal.
A lot has been said about customers’ loss of trust in banks, supermarkets and other large corporations but there is another aspect of trust that is essential for a business.
There is need for a mutual trust based on the relationship between staff and their employer, normally its directors as the key decision makers.
A good example is what happened at the onset of the global financial meltdown, when many businesses were able to survive only because their employees agreed to cuts in hours or pay.
Much of the employees’ motivation would, of course, have been based on a fear of unemployment or redundancy if they did not agree. The mutuality of the relationship would suggest some element of compensation for the sacrifice beyond simply retaining a job.
Furthermore if the relationship is abused such as by holding down wages when profits return, how will employees react when their fear of not getting another job is no longer keeping them?
Trust and loyalty are as important in times of growth as in times of crisis.
Business owners need to understand their staff and acknowledge those who made sacrifices; equally employees need to feel valued and be able to trust their employer.
While money can be one way of thanking staff for their sacrifice or ‘going the extra mile’ there are plenty of other ways from a staff party to holiday vouchers, hampers or simply improved facilities and fresh flowers in the office.
It would be great to hear some interesting examples of how employees have been rewarded for their loyalty.
While large companies tend to have systems that provide information for management to monitor activity and make informed decisions, small businesses tend to ignore these in the mistaken assumption that because the directors are involved in everything they know what is going on.
Many SMEs simply focus on profit and loss, where the directors monitor how profitable the business is. They will also certainly keep an eye on the bank account. This may reassure them about their cash position.
However, without a balance sheet and regular scrutiny of the current assets: book debts and work in progress, stock and short term liabilities: factoring, trade creditors and VAT/PAYE it is difficult to know the real situation.
It is common for small businesses to run out of cash because they simply haven’t been paying suppliers or HMRC.
The reassurance of cash in the bank is little comfort when liabilities are mounting.
We would argue that it’s essential to have a basic dashboard of key figures to review regularly, including some of those items listed above. This will give a more accurate picture of where the business is today, but even so does not necessarily tell you where it is going.
Monitoring performance also requires further information, such as debt collection, aged debtors or pre-payment by customers as well as sales related information such as inquiries, quotes and sales orders are equally essential for planning the future.
While every business is different, each should have a dashboard of information that will help it monitor performance and adjust plans to ensure it doesn’t run out of cash.
What information is crucial to your business future?
In our last blog we discussed the importance of business leaders structuring their busy working week to find time to think and reflect.
At the turn of the 20th Century Henry Ford closed his factories on Saturdays and cut daily working hours from the then standard 12 hours to eight. The result was a more efficient and productive work force.
Research shows that when we are at leisure, our brains are most active and this is often when stray thoughts or images come together in ways that result in novel ideas.
Yet despite the benefits, taking leisure and creative time is something that many CEOs of SMEs fail to do. Not being perpetually busy makes them feel guilty, but this can result in them not seeing the bigger picture, not seeing the obvious such as opportunities for their business.
However, arguably, in what is increasingly being called a knowledge economy, creativity is what will keep SMEs ahead of the competition.
Often the breakthrough to a more profitable company can come from what in hindsight is obvious or simple.
Yet how can creative ideas rise to the surface or attract the attention in a brain that is constantly too busy?
It is just as important to make time to walk on the beach, play with the kids, perhaps meditate or go for a jog as it is to be totally focused on a business.
When do you get your most creative ideas?
It can be hard for owners of a small business to prioritise their time, especially if they pride themselves on being hands on.
But to truly lead and guide a business means setting aside some time each week to look at the bigger picture and spend some time thinking and planning.
This can be difficult for time poor CEOs or business leaders but it can be done. The secret is discipline and recognising the value of your time.
A diary or a weekly timetable can help allocate time, lists of priorities, delegation and simply the recognition that you can do everything help ensure you do what is important and not always what seems urgent.
Saying “no” is also key to protecting yourself from others who want to steal your valuable time.
To create a timetable you need to first identify any peaks and troughs that regularly occur in the business week, and to then allocate a couple of quiet-ish periods for specific purposes, during which you take no phone calls and refrain from checking the e-mail. From this you can begin to set out a timetable that you can stick to.
It may be that a half hour at the start and end of each day or week is enough, the first to review and plan any initiatives you may have in mind, the second to review progress on ones you have set in motion and note any adjustments that may be needed.
A regular slot once a week to review cash and once a month to review management accounts are essential. As is the regular monitoring of key performance indicators (KPIs) to check how the business is doing and if necessary change what it is doing.
It may be that you can be more productive by allocating a specific time each day to dealing with messages, returning phone calls and answering e-mails.
Organising the week and making sure everyone in the business knows when you are available or not is also useful, as are focused meetings that have clear outcomes. The key is to stick to the schedule once it has been made.
How do you ensure you have enough time in the week to think and plan the path for your business?
Over the years I have dealt with a number of business partners, be they directors or shareholders, including husbands and wives working together, who for whatever reason have fallen out with each other.
One example was a husband and wife who owned their business as partnership. After their marriage failed they ended up working as sole traders but retained the partnership which owned the business premises, she occupying the top two floors, he, the bottom two. Their staff had to ensure the two never met.
The two were running complementary businesses, PR and events, and their only common interests were the premises and the long-term lease on the photocopier!
Their 5 years battle about what to do with the premises was more emotional than practical.
In another example, two 50/50 shareholder/directors in a plumbing business used the business to ‘beat each other up’. An example is when one partner terminated the mobile phone contracts for 50 phones, used by the company’s engineers!
Disagreement about valuations, buy-sell margins and terms all inflame the situation. Notions such as a win-win tend to go out of the window in such circumstances. When helping resolve such situations, I always suggest to clients that they should all be equally unhappy with the outcome: lose-lose!
It is important to separate emotions from reality and this can be particularly difficult if the parties try to solve the issue themselves.
This is why, as with divorce, impartial advisors or mediators are essential for achieving a resolution. It’s all about drawing a line in the sand to complete the separation fairly and finally so they can get on with running the business.
For years we’ve seen many SMEs who do not produce regular management accounts, which we would argue are far more important to the small company than year-end accounts.
Too many SMEs rely on the profit and loss and do not put enough time into understanding their balance sheets.
Yet it is the balance sheet that tells a business what is really in the ‘tank’ which is more than simply the cash in the bank. Current assets and in particular those like recent debtors, work in progress and easy to sell stock that can all be quickly turned into cash are key. The other item to monitor is current liabilities such as trade creditors and HMRC liabilities. Withholding payment can provide temporary respite and even improve the cash balance in the bank but creditors don’t go away.
A related issue is that a lot of SMEs are reliant on factoring or invoice discounting their book debts which essentially means that there is little cash to come back to them when the book debts are paid. All too often such companies have large liabilities without current assets to service them so they become reliant on new sales or prepayments which are in fact another liability.
If, for example, a business has book debts of £10,000 which are factored at 70% and a liability to trade creditors of £5,000, it has a problem because it really only has £3,000 to pay the trade creditors since the factoring company will keep £7,000 of book debts when they are paid.
It is crucial for all SMEs and in particular those planning to grow to understand their balance sheet and ensure that they have sufficient cash to fund growth without over trading, ie running out of cash.
I shall address monitoring the balance sheet and possible key indicators in a future blog.