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10 Commandments For The Smaller Firm, Part 1

Here are four of the top 10 pieces of advice typically offered entrepreneurs at seminars for owners of small businesses.

By John Aberle, Ph.D., Emeritus Professor of Marketing San Jose State University

 

Almost every seminar conducted for smaller firm owners contains in one form or another the same notions. These may appear in different formats or under different titles, but the ideas remain the same.

Following is the first of a two-part article concerned with each of the principles that continue to appear over and over again.

The First Commandment

Thou Shall Look at the Bottom Line But Know How That Line Was Reached

The notion for the section title just cited came from a talk I heard that the speaker entitled “The Tony Bennett Factor.” What he said was that Mr. Bennett, recognizing his strength as a balladeer, never changed his style and as a result his success has spanned generations.

The speaker had been studying business longevity, trying to determine what makes some firms survive so successfully for so long. His findings have considerable relevancy for the owners of smaller firms. Although each of the firms he studied recognized the importance of diversification, they all held fast to a WBAWI—or “what business are we in?”—philosophy. They knew their strengths, developed strong market presence based on those strengths and never forgot their roots.

A Tension Exists Between Short-Term Results and Long-Term Performance. And so it is with the survival and growth of the smaller firm. In virtually every case I have seen the owner appreciated the tension between short-term results and long-term performance, but the short term did not control decision-making. The tension was always there.

One of the owner’s toughest jobs, really, is to mediate between the two viewpoints just mentioned—short-term profit, results now, versus investment for future development.

Again, the theme was simple. Long before customer service was emphasized in business journals, the successful smaller firm owners made sure their salespeople listened to their customers, followed up on promises, and provided replacements or refunds when requested. These were the things that allowed them to remain in their customers’ minds and good graces.

Therefore, it can be said that virtually anyone can learn to read a monthly financial report and interpret the figures so that trends can be spotted. Obviously there is a need to look at the bottom line. More important, however, is to know how that line was reached.

The Second Commandment

Thou Shall Trust Thy Hunches

In this day and age when most smaller firm owners have come to depend upon data forthcoming from their personal computers as the basis for making a management decision, the old-fashioned hunch seems to have taken a back seat. This may be reinforced, particularly if you now have a younger employee associated with you in your store. He or she will be taught that business is an exact science, and you will be told that you are not supposed to say, “I feel,” because that means you are equating instinct with judgment.

Today, because of the penchant for exactness, a great many academicians associate a number with a formalized judgment. Thus the management professor wants a number judgment from the students with respect to the correctness of the alternative solutions they propose. Are they 60 percent sure, 70 percent or 80 percent?

No one knows for sure how the intuitive hunch surfaces. The theory is that bits of information upon which the hunch is based are stored and processed in some unknown way in your mind. An activity or event that requires a solution probably trips the hatch to the storage vat, and out comes the feeling that you should or should not do something.

Consider, for example, the notion that numbers increase the exactness of decision-making. Let us say your accountant urges you to incorporate. He draws up the figures. “Look at all the money you will save,” he says. “The numbers make the decision.”

“But wait a minute,” something inside you says. “Are the underlying assumptions correct? Is it really possible to divide income as the accountant has shown?”

These questions can’t be answered with numbers. The tiny voice inside that raised the questions—your intuitive hunch—must take over and help you make the decision.

The Third Commandment

Thou Shall Make Thine Own Forecasts of the Economy

We’ve had 10 recessions since World War II. Undoubtedly there will be more.

Recessions, however, never repeal the business cycle. As long as people are willing to work to succeed, times will eventually improve.

Our current economic state of affairs consists of feeling our way through a kaleidoscope of transitions. While the entire world has felt the effects of a global recession the past few years, the events shaping the economy vary differently on regional areas. In fact, a number of economists will argue that we have at least half a dozen regional economies—each having its own business cycle, and none of which occur simultaneously.

In view of the foregoing, who should the smaller business owner depend upon when it comes to economic forecasts? A case in point: The Wall Street Journal announced that Susan Sterne outdid 61 fellow economists in forecasting economic activity for a certain timeframe because she simply observed surrounding events—events that any one us could also see. She ignored sophisticated statistics as foreign trade flows, corporate spending plans or Federal Reserve monthly patterns. Instead, she watched what the consumers were doing in order to pin down their spending patterns.

The point I’m making is this: No one is more sensitive to consumer trends than retailers like yourselves. More importantly, these trends take place in your “neck-of-the-woods.” While economic activity may be picking up for you, other regions may still be facing slower times.

Economic forecasts generally are all inclusive and the data is usually an accumulation of material that is not nearly as immediate as that which you receive by talking with your customers.

In summary, don’t be overwhelmed by the predictions of high-priced economic seers. Use your own good common sense to interpret the flow of information forthcoming from your surroundings.

The Fourth Commandment

Thou Shall Focus on Cash Rather Than Profit

“Though my bottom line is black,

I am flat upon my back.

My customers’ pay is slow;

The growth of my receivables

Is almost unbelievable.

The result is certain—unremitting woe

And I hear the banker utter

An ominous low mutter,

‘Watch cash flow.’”

For years accountants have focused most of their attention on the problems of measuring income and have tired to convince business owners that income should be based on accrual rather than a cash basis—that expenses should be recorded in the year that they occur rather than the year they are paid.

Creditors certainly are interested in accrual-based income or profitability. In the long run, a firm must be profitable to survive. But in the short run, a creditor’s interest lies almost exclusively in cash flow. The question of overriding importance to a creditor is whether the borrower will generate enough cash to repay the debt. And if a creditor is interested in estimating future cash flows, a statement that shows where cash came from and how it was used in the past would be a good starting point.

Please visit www.performanceracing.com next month for the fifth through 10th commandments.

 

 




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