Searching for the "Next Level" of business success?
Focus on these 3 key success factors
By Michael Gould, CPA
Congratulations! You've survived the "new business syndrome," the one that kills three out of four new companies within the first five years.
Rather than patting yourself on the back, though, you may be fretting that your profits aren't high enough, your net income is not up to industry standards, or your sales and growth are stagnant. In short, you're wondering how to get your business to the ever-elusive "Next Level."
The fact is, there are three key ingredients that are absolutely critical to the long-term success of any business, regardless of the industry or the types of products or services sold:
- Fiscal management
If these three areas aren't working in sync, the business will never reach the Next Level of steady, long-term growth and profitability - even if it has managed through hard work, a boom economy or just plain luck to survive its infancy.
As you analyze your company in the context of each of these critical success ingredients, consider the following suggestions:
- Drive your company by profits - not revenues. While many small business owners talk about sales, it's more important to know how much profit you are actually making from a certain product line or service.
- Develop a monthly budget. This may sound elementary, but most small business owners get a vacant look on their faces when the subject of budgeting comes up. Without a budget, you can't have a handle on how your company is performing, and you can't compare your expectations with what's really going on. We've found companies that are actually bankrupt and don't even realize it - they're simply surviving by not paying vendors.
- Operate on an accrual basis, cognizant of receivables and payables as well as available cash. Some companies exist on customers' deposits, and that's bad news. You could have great cash flow and be losing money. We had one client who had two lines of business, one of which sold large manufacturing equipment. Each piece of equipment cost $1 million, with a third of that required as down payment. A couple of sales a year were providing great cash flow, but when business in this line slowed down and the owner had failed to build the other division, the company was in deep trouble.
- Track the performance of all advertising and promotional programs. Many small business owners say they market their product or service the way they do because that's how they've always done it. But when you ask them about the results of their marketing and advertising, they don't have a clue.
- Stay on top of industry trends and network among your contemporaries. Some entrepreneurs tend to be loners, not joiners, who typically stay away from trade association and other industry meetings because they see no benefits (or in other words, no immediate sales). In fact, networking with your peers helps you stay abreast of industry trends, new marketing techniques, new technology, etc.
- Don't underprice yourself. This is a particular problem with service companies, which are afraid that people will be scared off if the price is too steep. In fact, the perception of low-cost providers often is "If you're so cheap, how good can you be?" Think of it this way: Would you go to a barber who charged a quarter for a haircut?
- If applicable, keep time records. For service companies especially, time is inventory. If you don't know how much time is being spent on a client or a job, it's like opening the door and letting the product walk out.
A case study in success
A successful client of ours illustrates the importance of marketing, production and fiscal management in getting your business to the Next Level. Golden Artists Colors is a small family-run business in New York state with a reputation for quality and strong customer service.
Manufacturers and distributors of artists' acrylic paint, Golden's strengths when we first started working with them included its knowledge of the business, creativity and an overwhelming desire to please its customers. What it didn't possess was expertise in strategic planning or financial management. As a result, company profits were far less than they should have been and cash flow was poor. Profit was an afterthought. In short, they needed to make a decision on whether they wanted to run a hobby or operate a business.
We determined very early in the relationship that the company's inventory was far too high for its volume. Production of these lines proved inefficient and tied up money. Although they sold a number of different colors, sizes and containers, we recommended that any product that sold below a certain sales volume should be discontinued.
Golden also had been operating with a flat organizational structure. We suggested that a reporting structure be put in place that would allow for greater accountability and decision-making capability. And to increase their retail penetration, we had the company explore the use of distributors to open additional accounts and to take a more pragmatic view on decisions regarding expansion, financing and equipment purchases.
The changes in the company have been dramatic. Since 1991, Golden has tripled its revenue, more than doubled the size of its facility and workforce and, most importantly, multiplied its profits 10 times. In 1996, the company's president was named the Small Business Administration's Business Man of the Year for New York state.
Clearly, the company's success started with a concentration on the three key ingredients to business success that we've identified here. This concentration has enabled the business to reach the Next Level of consistent growth and profitability that characterize a steady, mature business.
Michael Gould is a business consultant and partner in the CPA firm of Mintz Rosenfeld & Company LLC in Fairfield, NJ.