High growth small businesses (and business owners) typically do a really good job of assessing their overall business model, market strategy, profitability and areas of risk and opportunity. But if (or when) things go wrong, they often struggle with pinpointing the specific issues that might be negatively impacting performance.
When clients come to me with issues or challenges, the first thing I do is conduct several assessments to determine the root causes. Most often, the issues exist in three main areas–financial management, human resources, and/or information management. While the issues can be strategic, tactical, or operational in nature, there are three key questions to explore to assess whether or not you are on track.
#1 – Do You Have Good Financial Data to Support Your Decision-Making?
Small business owners are experts in their industries and content areas. They know a good product or service when they see it and are passionate about delivering it to their customers/clients. Where many of them feel they fall short is in understanding their financial data. But what I assure my clients is that the numbers simply tell a story, and if the numbers don’t make sense or answer the critical questions you have, then perhaps the financial reporting isn’t designed to tell that story. It’s possible to redesign your financial reports so that they make sense to you, and a good bookkeeper, accountant, or consultant can help guide you in this area. It’s also important to note that having good tax data for your accountant and good financial management data for your decision making are not mutually exclusive.
What to look at:
- The pattern of profitability: You can tell a lot from the monthly P&L statements, especially over time. That’s why I like to look at three years of P&L statements by month. It’s extremely helpful to look at trends within a year and also to compare this year and last year to see if the pattern this year is reflected in prior years. Are you profitable for the whole year, not just certain months of the year?
- Cash flow: You can also look at the balance sheet month by month to determine if you have enough cash to meet your obligations. Does much of the cash come in at certain times of the year, such that planning for cash-poor months is necessary? Are there higher-than-usual expenses at certain times of year, such as annual insurance payments or labor costs, that you need to save up for?
- Gross profit by line of business: Can you see the revenue and direct costs associated with each line of business, broken out, or is it all lumped together? It is critical to know the direct costs associated with each line of business in order to determine profitability, and also to determine which costs go away if a line of business is dropped.
- Overhead: What do your general overhead costs look like? Are you investing too much or too little? It can be very helpful to get information from your industry association on typical costs, both direct and overhead, to see how you’re doing compared to your competitors. Too much overhead might signal a need for improvements in efficiency. Too little might indicate a lack of investment in your company’s administrative capacity, which can be damaging to your business success in the long term.
#2 – Do You Have the Right People in the Right Positions with the Right Tools/Resources to Do Their Jobs Well?
Most people that you see in any company are trying their best to do a good job. Small business owners know this, and they’ve hired people who are excited about the company and its mission. But over time, things change–the environment changes, the customer changes, the expectation changes, etc.–and employees can become frustrated, overwhelmed, or disengaged. And what exacerbates the problem is that the business owner is simply too busy to notice the issue.
What to look at:
- The major company functions: I like to think about companies, no matter what business they are in, in three major buckets–marketing (lead generation), sales (lead conversion), and delivery (of the service/product promised). Without these functions, no company would exist. How does work flow between and among these areas? Are the tasks/activities covered? Are they covered in ways that are effective and efficient? What about the supporting functions–finance, HR, IT, legal? If these aren’t running smoothly, it can really harm your marketing, sales, and delivery. For example, if vendor bills aren’t paid on time, vendors might hold off on providing their services or products, which in turn could cause delays in your ability to serve your customers.
- HR risk and compliance: The size and jurisdiction of your company dictate the majority of your risk and compliance in this area. While your payroll vendor may provide some HR support, this is one area where an outside consultant can be extremely valuable in helping to assess if your practices are fair, if you are maintaining privacy, and if you are compliant with the ever-changing local, state, and federal laws.
#3 – Does Critical Information Make It to the Right People at the Right Time?
People need information to do their jobs. I often find client issues whose root causes are breakdowns in lines of communication, or problems in how information is shared, stored, and managed across the marketing, sales, and delivery functions of the company. Look for where things are going awry, and you’ll often find that a key piece of information didn’t make it to the right person at the right time. Next, you’ve got to troubleshoot this information flow to determine if it’s a one-off or a pattern.
What to look at:
- Bottlenecks: While bottlenecks tend to be associated with process decision or approval points, there can also be information bottlenecks. One person knows some piece of information and doesn’t realize other people need to know it, or they don’t know how to get it to other people without inundating them with a thousand emails per day. So it’s key to determine whose job it is to ensure that each piece of critical information is shared appropriately.
- The storage and display of information: Also key is determining how that piece of information will be updated. Databases, file storage systems, and notification systems are not sexy, but companies that function well have established systems for what information is needed, how it’s stored, and whose job it is to make sure the information is always up-to-date.
Hopefully this overview of our assessment process provides some guidance that is helpful to you as a small business owner. If you’d like any assistance in conducting an assessment, we’d be pleased to hear from you. We can work on a project basis for implementing specific changes quickly, or we can set up a regular meeting schedule to help you focus your approach and keep projects moving forward. Give us a call and let us know how we can help.