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" How To Build Ur Business "

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Ways to Build Your Business

Ask most new business owners how they're progressing, and you'll probably hear:

They're so busy they barely have time to breathe.

If they could only obtain more financing, they could expand.

You don't have to analyze their books to realize these entrepreneurs are bogged down in the first stage of development. Ironically, success can leave you so busy you don't have the time or the energy to plan for your business's eventual expansion. Must progress always be stymied so soon after initial success? Four small-business specialists at major U.S. accounting and consulting firms gave the steps they would take to ensure growth past the first stage of business development. If you and your business are stuck on first base, try these 10 suggestions:

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^{Re-examine your original business plan.}

Most business plans, no matter how elaborate, fail to properly anticipate the second and third stages of development. Yet most businesses, with the exception of some professional services, change their character - their thrust, prime markets, or product/service lines - within the first three years.

"The basic business plan should be a living, breathing, dynamic document - a road map to the future," says Louis Salamone, a partner at Deloitte & Touche and head of the firm's middle market companies services in the New York City area. Salamone and other consultants agree that few entrepreneurs look at or adhere to the initial business plan they labored over after they use it for the purpose of interesting financiers.

Review your initial business plan, and ask yourself these questions:

If I were to revise the plan today, what would I change? What parts am I holding onto even though they have proven incorrect?

Have my original assumptions about the dimensions and characteristics of my market held true?

Has the demand for my product or service lived up to my original expectations?

Were my original estimates of income, profits, and the required capital accurate?

If your original business plan is accurate in all these major respects, you are either a genius or a victim of your own limitations. Every growing business - whether it is a huge multinationl corporation listed on the New York Stock Exchange or a one-person service operating out of a homebased office - needs to change and adapt constantly in order to keep up with the new trends and circumstances continually occuring in the marketplace.

To finance expansion, it's important to look for strategies that require less cash, says Ralph Ells, a partner and director of entrepreneurial services in the Milwaukee office of Ernst & Young. "Entrepreneurs tend to think in terms of profitability rather than the dynamics of their cash position," Ells says. "But if they revisit their basic business concepts and look for creative ways to minimize inventory, work in progress, receivables and other items, they may be able to find the cash necessary for business expansion."

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2 ^{Know the critical success factors necessary to keep your business growing.}

Business owners often let their initial business plans gather dust because they are creative, dedicated and resourceful, and have a highly defined vision of their firm's future, says Paul Sherman, a partner and head of the accounting and business advisory services division at Laventhol & Horwath in New York City.

However, Sherman quickly adds, initially successful entrepreneurs are rarely aware of the "mechanics of success." He says the new company's back office typically does not keep up with sales and marketing.

Defining critical factors for successful growth does not mean jotting down "more time" and "more money." This task requires a three-column list for:

Setting forth the critical factors;

Defining the factors as a specific, quantifiable goal; and

Listing all of the procedures or sources necessary to achieve those business goals.

Do not accept the two favorite excuses of all "has-been," "never-was," and "never-will-be" personalities; not enough time or not enough money. Any entrepreneur who accepts these limitations and lives by them, will find it almost impossible to grow beyond the initial development.

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3 ^{Study the critical factors that will produce the greatest yield.}

Then assess each factor in terms of three things:

Timeliness. What can be done immediately?

Accessibility. What action requires the least amount of money?

Size of Yield. What action will yield the greatest end result as a multiple of time and money invested?

Ells says he finds success usually depends on a few factors - which should be quantified. "The entrepreneur should start to collect statistics about these factors, once they're indentified," he says. "Displaying them graphically on charts is helpful because it instantly shows trends and can be communicated to others in your organization.

These factors require formal study, since everyone's natural inclination is to do what is obvious, what they know best and what seems easiest to achieve. Unfortunately, this attitude equates your personal limitations with those of your business. It can also result in one of two major mistakes: egotistical complacency or a desire to do something - anything - even if it wastes time and money.

The best way to find the answers to questions of priority is to distance yourself from them. Have your accountant or a business consultant work with you. "Too many entrepreneurs operate without external advisers because they want to project a Superman personality."

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4 ^{Decide whether the current organizational structure is the most efficient one to facilitate growth.}

Most new companies start as sole proprietorships or partnerships which are not necessarily ideal for second-stage growth. Many bankers prefer not to lend money to sole proprietors, and some retail chains do not want to do business with suppliers who are not incorporated. It's also difficult to attract executives during early stages of development without giving them a limited piece of the pie, usually equity or warrants; this can only be achieved easily in the corporate structure. The tax benefits unincorporated companies enjoy may not be worth the restrictions they impose on growth in the second and third stages of development.

Salamone says many entrepreneurs are comfortable with the S corporation form of ownership because it is flexible enough to meet the needs of suppliers and customers, yet it allows for maximum tax benefits, similar to those found in a sole proprietorship or partnership. The S corporation form is used by many companies well into the second stage of development, and sometimes even into the third.

Another concept to consider is "critical mass" - the point at which your company is big enough to be a significant factor in the marketplace and large enough to enjoy "economies of scale," or obtaining better service at the bank, and receive better prices from suppliers. Growth is not always simply a matter of bigger numbers, more products or larger market areas. Often it involves buying (or buying into) independent dealers, suppliers, and competitors. In any case, you can be sure of one thing: If your organization isn't ready for the next stage of development, you're not going to get from here to there efficiently.

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5 ^{Examine what your chief competitor does well that you haven't done.}

Truly competitive business owners ask this question constantly. First, ask yourself, "What are my competitors doing?" Talk to prospects who are now using your competitors' products or services. Then ask, "How can I offer and deliver the same things my competitors do - or better?"

More than likely, you will need to utilize the expertise of other individuals or businesses to remain competitive. As Ells points out, it is not always necessary to put experts on the payroll to gain specialized knowledge.

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6 ^{Ask yourself if you are utilizing all the benefits of your products and services.}

To be truly market-driven, you must understand your market - not just in broad statistical term, but in intimate detail. It is not sufficient to say, "My company needs more customers like our best customer." You must understand how and why major customers use your products or services. It's easy to find out - just ask. Don't assume. Explore the subject in detail with all your major customers. They may reveal one or two important benefits you and your customers are aware of. Then it's up to you to translate your customers' suggestions into marketing and production changes.

Ells observes that many entrepreneurs don't pay enough attention to marketing, and tend to neglect the recruiting and training of salespeople. "Entrepreneurs in manufacturing tend to prefer to stay at the factory, concentrating on production and administration," he says. "Yet most significant new ideas come from being out in the field rather than shaving nickles and dimes off production and administrative costs."

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7 ^{Consider the use of subcontractors.}

In today's fast-paced business environment, particularly in view of the global marketplace, the nature of make-or-buy decisions has expanded. Every area of your business - from building subcircuits to selling your product, from packaging to payroll - can be handled by independent subcontractors. If General Motors subcontracts dashboards and car seats, why shouldn't you obtain the products or services of others, too? Your guide to follow here should be what the customers need and want, not the limitations of your own expertise, facilities or your ego.

In many cases, subcontractors may be able to do the job for less money than it costs you to perform the function internally. (This assumes you have accurate and updated cost accounting.)

But saving money is not the only benefit of using subcontactors; you may also enjoy distinct technological benefits. Most likely, at least one subcontractor will have advanced products or processes you have not been able to integrate into your existing operations due to lack of time, money or expertise. Another benefit may be savings gained from "just-in-time" deliveries. These deliveries often help solve production, labor, storage, and warehousing problems.

Ells says too many entrepreneurs fall in love with assets: "They want to concentrate on building their own plants and controlling virtually every aspect of production. But this involves making very large investments, usually inadvisable in the first or second stage of development. The more you can subcontract and pass the overhead charge to someone else, the less cash you will require initially, and the more money you have to expand."

However, Sherman warns, it is important to know suppliers' reputations. "Cost is never the only consideration," he says. "If a supplier cannot deliver the quality of goods you have ordered on time, it can have serious marketing and financial ramifications for your company."

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8 ^{Use your time and talent to their fullest potential.}

The biggest personal problem every business owner faces is distinguishing between being busy and making money. One of the basic paradoxes of being an entrepreneur is the need to be self-reliant, yet delegate functions and authority to others. Many entrepreneurs like to boast they can do every job in their organization better than anyone else can. But consider the absurdity of this claim, even if it is true.

Why in the world would any entrepreneur value his or her time in such a perverse way? You don't have to be a time-management expert to figure out your contribution to your business is not that you can do everything, but that you can do just three things better than anyone else in your organization:

Bring together all the required resources - staff, money and materials and pull it together to form a profitable business;
Develop a vision of success and translate this into a sense of purpose and specific goals for everyone in the organization; and
Take final responsibility for every aspect of your business, no matter how unpleasant.

Entrepreneurs should use the "80-20 rule." Focus on the 20 percent of the issues that give you 80 percent of the profit impact, in other words, 80 percent of the issues out there are waste of time. "The ability to identify product and sales opportunities is more important than figuring out how to squeeze an extra dollar's worth of goods out of a supplier."

Similarly, Ells recommends that entrepreneurs focus on the major elements of costs - those categories of activity that account for 25 percent or more of the product or service. "It's a good idea to concentrate on costs in proportion to their percentage, rather than on those cost categories about which the entrepreneur has the greatest knowledge," Ells says.

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9 ^{Remember, you are building a team, not a personal triumph.}

Entrepreneurs have to restrain their egos to build a team of intelligent executives rather than hiring competent drones who merely carry out orders. To do this, they must begin to yield pieces of their domain, to delegate authority and responsibility.

Some years ago, I was a consultant to a small, very successful service company during a period when the founder decided to hire a president. This would allow him to become chairman and take more time off to enjoy life. He told me has was drawing up a list of attributes he thought the new president should have. I pointed out to him that would be like a husband predetermining what kind of man his wife would want when he died. He did not agree, and created a list of attributes that were amazingly similar to his own.

After he chose a leader to fill the job, he then spent a month gathering evidence of this man's inadequacies. Only after this was I able to convince him it was necessary to go through a formal selection process with a personnel consultant.

Some of the most important factors that make up the personality of most entrepreneurs - drive, total commitment, self-reliance and resourcefulness - also stand in the way developing an organization that includes other strong leaders and individuals. It usually takes all the diplomacy and authority a consultant can muster to help the entrepreneur in this particular area.

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10 ^{Write an annual report.}

An unnecessary fuss and expense for a small privately-held company, you say? Don't be so sure. Most entrepreneurs rely on their gross sales, cash flow, number of employees, tonage shipped, or tax filings to ascertain their progress. All of these references are interesting indexes of progress, but they're not a particularly good way to evaluate your company. That's certainly not the way a bank or a buyer would evaluate it.

A small company's annual report doesn't have to be fancy. Rather, it should honestly reflect whatever modest accomplishments the company has achieved at this stage of development. It's best to think of the report as a confidential internal document for restricted circulation, not much more elaborate than a 10-page memorandum. But it should contain all the basic information found in a large corporate report: accurate descripttions fo purpose and plans, facilities, product, services and markets, as well as a formal financial statement and a detailed analysis of it.

Seen as an opportunity to reexamine every aspect of your company from the standpoint of a potential investor, lender or buyer (and perhaps in preparation for presentations to such people), the creation of an annual report is far more than an academic exercise. Particularly when done by an independent accounting firm or business consultant, it is the only honest way to face all the realities . . . before others do.

Salamone says preparing the annual report should be part of the next year's planning process. "This ensures that you find out what you did and why you did it," he says, "and what you should do to rectify mistakes and increase growth."

You may be delightfully surprised to find you've make more progress than you think, that your business is sounder than you realized, that you have certain operations, or markets, or assets which are underdeveloped or underutilized, and that you can use the annual report as a basis to obtain more credit or capital without substantially straining your cash flow or sacrificing a large portion of your equity.

The main thrust of these 10 points is to alert you to the need for more information and more control. Most small-business owners pride themselves on their ability to think fast on their feet; but that's really crisis management - not the stuff long-term success is made of. It's those old problems of seeing the forest when you're surrounded by trees, and draining the swamp when you're up to your elbows in alligators.

But remember this: There was a time when your business existed only in your mind, and you developed the idea and made it a reality. You achieved success in the first stages of development; now, don't shut the door on your imagination. Keep thinking first and doing second - and you'll keep moving forward faster