Why management skills are more crucial than cash

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According to Facebook data, nearly a third of all small businesses have closed permanently during the pandemic. If you ask the owners of these businesses why, I’m willing to bet they would list “money” – or lack thereof – as the reason for their closure.

Every independent business owner believes that money is the first thing they need to survive. While this is crucial, what they really need is a clear focus on management practices in their business.

In my world here at American Management Services, these practices boil down to what I call the Four Strong Management Practices:

  1. Profit planning
  2. Know the real costs
  3. Discipline in all aspects (manage by numbers)
  4. Key performance indicators (KPI)

I’ve detailed most of these practices in previous articles, but here’s a quick recap:

1) Profit planning

Most homeowners, especially those we meet, think that any money left over at the end of the year – after all expenses have been paid – is considered their profit; this is the residual benefit. Residual profit is based on “hopium”, or the false hope of making a profit.

At American Management Services, we believe profit should be the number one expense. Referred to as “predetermined profit,” this means that every set number of pennies of every dollar you incur is marked as profit.

The number of pennies your business generates for every dollar is determined by your business model and management practices.

2) Know the real costs

Do you know what it really costs to run your business: per hour; employee; or by sector of activity?

Understanding your actual operating costs will allow you to set realistic prices in your offers / estimates / quotes. Without it, you could seriously under-bid on your products and services, leading to disastrous results.

3) Discipline – Managing by the numbers

Once you understand where you should be, now you need to set a goal to generate sales at that margin. Take the guesswork out of where you think you should be versus where you actually are.

Your plan should be aggressive while maintaining some realism. And I can’t stress this enough: make sure it’s written down and communicated to those directly involved in turning goals into realities.

Break it down further by implementing KPIs and linking key managers to pay for performance.

4) Key performance indicators (KPI)

Key Performance Indicators, or KPIs, measure goals against quantifiable data over a specific time period.

Also known as flash reports, KPIs provide a way to track how well you are achieving your goals at both broad and low levels.

A KPI measures business goals against actual, quantifiable data over a specified time period. Set goals for every aspect of your business in your predetermined profit plan, then monitor your performance with KPIs and make adjustments as needed.

Key indicators may differ for several companies; a distributor’s KPIs will be different from a manufacturer’s, and so on. Even similar companies can have varying KPIs because not all companies share the same goals and metrics.

A new approach to running your business

I mentioned the Four Strong Management Practices because if you implement them – and do it right – you will undoubtedly reap benefits.

It’s not the lack of money that is killing businesses, it’s the way they run all aspects of their business that wins them over.

Remember the old adage “teach a man to fish”? The same philosophy applies here.

While money is crucial to paying your employees and expenses, think of money as a “fish.” I’ve seen homeowners borrow from their lines of credit to stay alive. It doesn’t solve a problem, it just adds to it.

Owners need to focus on sound management practices instead of expecting their business to make money. Basically, for you owners reading this “Learn to Fish”.

Must make you sick to borrow, open a line of credit, get federal handouts, et cetera. Follow the four principles I mentioned above to get the peace of mind most homeowners want. If you need any help, please do not hesitate to contact me via LinkedIn.

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