July 1962 — VOL. 43, NO. 7 —
About Small Business
Success
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Small business is an important element in Canada's economy,
characteristic of the democratic way of life in which a man
is free to make choices and achieve security through his own
efforts.
Historically, ours has been a nation of entrepreneurs, independent
business men who are proud of their self—reliance and
their ability to accomplish miracles against overwhelming
odds. They are marked by their competitive spirit and their
single—mindedness of purpose.
There are still, in spite of the increasing bigness of industrial
operations, a large number of people in Canada with that spirit
of entrepreneurship, people who not only believe in and talk
about free enterprise but practise it by going into business
for themselves.
Some people, of course, deplore the present status of small
business, but reports of its impending demise have been greatly
exaggerated. In many sectors of our economy small factories
and small businesses hold a preferred and stable position.
We should disabuse our minds of the idea that a small business
is merely a miniature and shabby replica of big business.
It is a special area, calling for special qualities and knowledge.
Its strength resides in its individuality. It may not have
the capital and buying power and the other things that go
with size, but it is spared the sprawling bureaucracy of the
big firm, with its piles of paper work and its horde of filing
clerks. A man can keep it in his own hands, if they are capable
hands.
The essence of small business is its freedom and its scope
for enterprise. Should it come to rely upon government for
help that is not normally a government function, it loses
its independence. It is not far—fetched, under such circumstances,
to imagine a day when the entrepreneur would have to seek
a government charter before beginning business, and then submit
to tutelage by a government bureau.
Find out what's wanted
This freedom, like all other freedoms, entails responsibility
and self—reliance. The man who starts a small store or
a small factory will make use of all the aids offered him
in the way of government and industrial information, but the
summing up and the decisions for action are his alone.
One of the first things to be done is to make a careful
survey of the potential market. What is the demand for the
item he proposes to make or to sell? What is the demand at
the price he will charge? Unless the prospect is for a good
volume of business in the face of competition at a price high
enough to return a profit, the outlook is bleak.
This survey makes it necessary to learn about people's wants
and how to satisfy them. It will not do to pick some product
out of the air, however enthusiastic one may be about it,
and decide without analysis that there is a market for it.
One man tried to sell old country style pork pies in Toronto
but had to switch to Canadian style baking to become successful.
Not only the wants of people but their caprices are important.
A business man may not approve of people's tastes, but insofar
as his product is concerned he is ruled by them.
If a man feels that he is not getting a fair share of the
potential business he might ask himself: "Does my product
or my store appeal to the sort of people in the price bracket
I wish to serve?" Something designed for buyers in the $3,000
a year category may lack attractiveness for people who have
more buying power, while a store design that is attractive
to wealthy people may frighten away the lower income group.
Many a business man runs into initial difficulty through his
failure to aim a specific product at a specific group of customers.
Business is not an altruistic effort to improve people's
habits. The word "business" implies a financial statement
upon which the two most important words are "profit" and "loss".
Profit, which is the reward for taking the risks of business,
is not a guaranteed reward. It is earned only by businesses
which are successful in overcoming the risks, some of which
can be foreseen and allowed for by good management while others
come out of the blue when least expected. It is the outcome
of hard work and effort, but above all of good judgment.
Among the most common risks are these: a competitor may
produce a better product or as good a product more cheaply;
buyers may change their wants; business may change for the
worse; discovery or invention may render both product and
capital investment obsolete; governments may alter tariff
rates adversely or increase taxes.
These risks apply to all business, but small business is
particularly vulnerable because it is likely to spend some
years still unsteady on its feet. To give himself the best
possible chance of reaching success, the small business proprietor
should allow himself ample time to think ahead on management
problems; to organize efficiently; to plan adequately; and
to relate in their proper importance the operating and financial
responsibilities and functions.
These principles - that business consists of production
and marketing, with finance as the facilitating agent of both
- should be a required part of education in primary and secondary
schools. There is no need, at that stage, to learn about the
complex organization of business or to draw process flow charts,
but everyone, as prospective business operator or prospective
customer, should learn the basic principles of the private
enterprise system.
Build a team
The proprietor of a small business must have the knowledge
and skill to keep reliable people on his payroll. The turnover
rate among employees may make the difference between profit
and loss.
Losing one man is more serious in a small business than
in a big concern, because quite often that man may mean the
difference between production and no production, between sales
and stagnation. A temporary absence may be overcome if everyone
else stretches a little, but turnover is always costly.
How can one protect one's self against unnecessary turnover
of staff? One suggestion is that simple aptitude tests, which
may be bought, borrowed, or designed by the manager, would
eliminate undesirables by revealing the square pegs applying
for round holes.
Industrial personnel people are more and more stressing
the benefit of positive rather than remedial action: if employees
are chosen with reasonable care as to their ability and then
given good relations with the firm, turnover may sink to obscure
proportions. Pride of workmanship can be cultivated by recognizing
work well done; security can be assured and a chance of advancement
held out, and as pleasant as possible working environment
provided. The manager will find that some of his great satisfactions
arise from his skilful handling of workers and the building
of a team.
Keep score
Keeping score on business operations lets the manager know
whether performance is living up to plans. It involves three
things: (1) a statement of the goal, which tells what is to
be done; (2) the procedure, which specifies how and when something
is to be done and who is to do it; and (3) the check—up,
which tells how well the job has been carried out.
There are many decisions to be made by management which
cannot be made by intuition or hunch: only facts can give
you a sound foundation for action. The solution of business
problems requires accurate information: in fact, examination
of the causes of business failure shows that a large percentage
of those firms which have become bankrupt either kept inadequate
records or none at all.
It is not to be thought that record keeping will of itself
ensure success, but it does keep you informed as to the progress
of your business, and it discloses faults in operation which
might be disastrous if not detected in time.
One might think that by this stage in world history business
men would have become accustomed to the need for keeping records.
It is 470 years since Luca di Borgo of Venice wrote in detail
about double—entry bookkeeping, and 420 years since the
first book in English on the subject was written by John Gowgne.
But many a manager today gets so involved with daily operating
problems that he forgets to keep score on cash reserves, inventories,
expenses and accounts receivable.
Preparation of a budget which relates purchasing, producing
and selling to their financial effects on the firm has several
benefits besides that of providing continuing information.
It raises useful questions. Will the proposed expenditure
yield a profit? Am I planning to incur this expense at the
right time? In what other way, or in what other department,
could I spend this sum to better advantage? Am I budgeting
for an excessive investment in fixed assets? Does the budget
maintain net working capital in proper proportion to sales?
Does the budget indicate where short—term and long—term
financial commitments are coming from?
Having a continuing budget provides reliable data for the
preparation of financial statements, such as those required
by a bank when making an advance. The bank likes to compare
the most recent figures with those for the previous and other
years. One thing expected is an explanation of any changes
in working capital. While it is reassuring to look at an operating
statement which shows a profit, it is important also to see
how the earnings have been used, as well as to determine what
has been done with the capital at work in the business generally.
Another point brought out by continuous budgeting is the
liability situation. A question often asked is: "How do you
stand with the trade; are any accounts pressing?" On the other
side of the ledger, it is not healthy to have a multiplicity
of slow accounts receivable. The regular income of the company,
which is the collectibility of its sales, is the very lifeblood
of the enterprise.
Emphasis on the budget and the financial statement does
not mean that the business is to become wrapped up in routine
and red tape. Far from it. These features of record, if they
are properly and consistently prepared, offer a spring—board
for development and expansion.
Here is the constructive feature of budgeting: it makes
your financial plan work for you throughout the year. Enter
monthly figures alongside the budgeted figures and study the
variations. If there is a lag in sales, you can follow through
to find the causes: weakness of sales appeal, dealer inertia,
or product and delivery trouble. If raw material costs are
higher than anticipated, you may consider changing suppliers
or changing to a lower cost material. If labour costs are
greater than anticipated in your budget, a survey of your
plant production schedule is indicated.
Without a budget, none of these checks is possible, and
the business is drifting without control.
Watch that inventory
The handling of material and its storage are important operations
to watch. Handling does not add a cent to the basic value
of the items, but merely gives them "place utility" - it puts
them where they should be at the right time. The manager should
make it a rule to restudy the processes in his plant or store
periodically, to see that the handling is being done efficiently,
with least damage.
Out—size inventories cost money just to carry. Figures
compiled by the United States Department of Commerce show
that the average cost of carrying average warehouse stocks
is 25 per cent of their value, divided as follows: storage
facilities ¼ of 1 per cent; insurance ¼ of 1 per cent; taxes
½ of 1 per cent; transportation ½ of 1 per cent; handling
and distribution 2½ per cent; depreciation 5 per cent; interest
6 per cent; and obsolescence 10 per cent.
It is evident, then, that if inventories get out of balance
it can quickly lead to trouble. If the amount of any one item
of the merchandise is out of proportion, the cost of carrying
this item can become a serious factor in the ultimate cost
of other finished articles.
For example, if a sizeable quantity of goods which can be
sold in only one season of the year has to be carried until
the next year, it follows that the money tied up in these
"frozen" assets is expensive to replace, or, if this isn't
possible, the lack of money will restrict the volume of business
the company can do until the item is brought back into its
proper proportion.
When looking at inventory figures you should take into consideration
the net sales and determine the turnover ratio. This is only
a simple arithmetical ratio and is not conclusive, but when
placed beside the comparable figures for previous years it
can give rise to worth—while questions. If it is out
of line, that fact can be a danger signal indicating obsolete
or slow moving lines, or stress due to overbuying.
The budgetary system, in which inventory record plays its
part, enables the proprietor to stand off from affairs for
an over—all view. When one man did this he found that
his turnover ratio had declined from an average of X per cent
to Y per cent and that his credit position could be considered
vulnerable, and he immediately took steps to remedy it. He
had been so close to the scene in his day—to—day
operations that he did not know his total position until the
need for such an appraisal was brought to his attention.
Plan before expanding
While keeping his finger on all the elements mentioned heretofore,
the man in small business must be always on the search for
new markets where he can launch his goods with a well—thought—out
programme; he must pre—test his commodity with consumers
before embarking on extensive expenditures; and he must follow
through to make sure that consumer—response is good and
that needed service is being given to customers.
In approaching the building up of business we should have
in mind the rule common to so many commercial enterprises:
two of the greatest factors in volume sales are quick turnover
and low profits on the individual sales. There is no good
reason why the small independent store and the small manufacturer
can not use these selling weapons to as good effect as the
chain store and the big factories. Price is as much a matter
of efficient management and imaginative selling as it is of
low first cost through quantity buying. The Woolworth Building
in New York is a monument to the genius and initiative of
a young man who discovered the commercial importance of the
nickel and the dime.
If the manager of a small business keeps his mind alert
and his finger on the pulse of operations and is broad minded
enough to take advantage of new ideas, he will become aware
early of burgeoning opportunities as well as of developing
weaknesses.
It is reported in a publication of the Small Business Administration
in the United States that ninety per cent of all business
failures are due to managerial shortcomings, and this is confirmed
by a Dun and Bradstreet survey. Only one out of twelve of
the affected proprietors in an earlier survey conceded any
possibility that his own shortcomings were a handicapping
factor.
Keep learning
What should a small business man do in order to enhance
his prospects of success? He should make sure that he minimizes
the chance of failure and increases the prospect of success
by attaining additional skills in management.
Unless a man recognizes that he does not know all about
everything he is not likely to embark upon such a course,
but, on the other hand, if he does not know that there are
things to learn he has no right to be in business. As Paul
Donham said in an article in Harvard Business Review:
"Education programs in business have attendance problems not
unlike those of the churches: the ones in the greatest need
are not there."
The man most likely to succeed in small business is the
man who will take the time to study just what he is trying
to make of his business and the methods he will follow. How
is he to go about this? There are several courses of action
which he can follow: (1) He can avail himself of the educational
opportunities which exist in his community, such as evening
classes; (2) He can urge his trade or industry association
or his business organization to promote the establishment
of an educational programme which will fit his requirements;
(3) He may persuade the nearest available school of business
or commerce to undertake an educational programme for men
in small business; (4) He may enroll in a correspondence course
in the subject in which he feels himself to be deficient;
(5) He may lay out for himself a course of reading, using
the many available books in every area of business administration.
A good book with which to start is the Small Business Manual,
published by the Department of Trade and Commerce, Ottawa,
and available from The Queen's Printer for 75 cents.
In addition, he may wish to avail himself of outside aids.
Unlike big concerns, he is not in a position to hire expensive
consultants or employ specialists in all areas of his business.
He may, however, find talent on his doorstep. Many university
and college schools of business are ready to have their competent
staff assist people in small business. Their combined knowledge
and skills are usually available, and their fresh, unbiased,
viewpoints may make the difference between life and stagnation
of the business. Even if the business is running along at
a relatively stable level, free of obvious difficulty, it
can be improved by objective study with the perspective of
an outsider.
Growing and progressive small businesses have available
now, as in the past, through their banks, a great fund of
helpful information and all the financial help their initiative
and good management warrant. Whether you are in manufacturing,
processing, wholesale or retail trade, transportation, construction,
or one of the service industries, or if you are planning to
start in one of these activities, your bank is just as ready
to support your small business as it is to make advances to
bigger corporations.
Bank personnel are particularly qualified to give guidance
in matters affecting organization and expansion. Not only
are branch managers well acquainted with local conditions,
but they have access, through their head offices, to national
and world—wide sources of information regarding the money
market and the trends of business.
Look ahead realistically
Simple hopefulness, sometimes desirable in ordinary affairs
of life, leads only to disaster in business management. Activity
designed to foster growth is needed if the enterprise is to
succeed. Even if a business man is holding his own at last
year's figures and not sliding downhill, some competitor is
moving up, or moving past.
It is a very good rule for the man intent upon building
up his business to develop to the best of his ability an inquiring
mind and a mental attitude receptive to lessons.
The records of successful small companies show that sound
management uses yesterday's records and today's experiences
to plan for the future. The manager finds time to think. He
sets objectives and draws a map showing how he expects to
reach them.
How should you go about this planning? No matter how much
or how little capital you have available, make a list of desirable
things. By knowing ahead of time what items will become available
and what items will have to be left out until later, you can
plan so as to make the best of every month's work and every
machine and worker.
Planning of this sort does not remove all risk, but it does
make you aware of uncertainties and their possible consequences
so that you may take bold or avoiding action as seems best.
It also reveals to you the opportunities for expansion and
tells you the prospect of success.
Getting down to bed rock, you should know at all times these
factors: what the plant is capable of producing or what the
store's turnover should be; what jobs or what goods are on
hand for current consumption; what work or what prospects
are lined up to keep your plant and staff busy, and what materials,
supplies and tools are needed.
We should guard against allowing planning to wander off
into a dream world. Planning is an exceedingly practical job,
on which the future of your business depends. Objective honesty
is essential. No true values are impaired by learning the
truth about them. If you allow your wishes to rig your analyses
so as to make some aspect of your business look well, you
invalidate your planning.
Discrimination is a part of planning: the ability to see
the best ends and the best means to those ends; the ability
to distinguish between what is effective and what is inefficient,
what is necessary and what can be done without.
Long—range or wishful planning must not be pursued
at too great expense of short—range policy, or there
may be no long—range existence in which to apply the
planning.
Other features of Small Business Management were dealt with
in our Monthly Letters of June 1955, September 1955,
and March 1960, and in our collection...of Interest to
Executives, copies of which are still available on request.
Published by RBC Financial Group. All editions from the RBC
Letter collection are available on our web site at www.rbc.com/responsibility/letter.
Our e-mail address is: rbcletter@rbc.com.
Publié aussi en francais.
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