So who is this Peter bloke and what does it mean to you? 

Well, for a start the Peter Principle really isn't about small organisations.  It's about large organisations such as big companies, and governments, organisations which have layer upon layer of pecking orders, organisations where your importance is measured by how big your desk is, or how close to the boss you get to park your car.  Organisations with hierarchy.

Now in small businesses like yours, where you are chef, chief cook, and bottle washer you don't have too much hierarchy.  But large organisations do.

Way back in the 1960's Laurence J. Peter, in a book called "The Peter Principle" developed a principle which stated as "In a hierarchy every employee tends to rise to his level of incompetence."  Essentially he is saying that in such organisations people are promoted to the highest level they are competent to handle, after which further promotion raises them to a level at which they may become incompetent.  He called such a level their "level of incompetence", at which the person has a dismal or no chance at all of being promoted any further.  And dismal they may be in their performance at that level.

Bear with me, I'm not saying you are incompetent, but there is another issue here.  In an earlier blog, Growth, and a Brick Wall that brings you to a shuddering halt! , we discussed the problems rapidly growing small businesses face.  Rapid growth typically leads to a business hitting a brick wall.  The brick wall has three major elements:  lack of cash flow (it's increasingly tied up in Working Capital), systems (they need to change to match the increasing requirements placed upon them), and management skills.

So let's be fair.  It may be that the person's apparent incompetence is not because the higher job is "more difficult" and so they can't handle it - it may be simply that the position is different from the position in which they were previously quite good.  The new job may require different skills, which the person may not possess.  And in his book Laurence Peter uses an example which involves a factory worker whose excellence at his work results in him being promoted into a management position, in which the skills that got him promoted in the first place are no longer of any use.

Now we're getting to the nub of it.  The skills that lead you to set up your small business, to strike out on your own, are no longer sufficient to handle your growing business.  Studies have found that lack of management skills is the cause of most small business failure, and that key elements within this in particular are a lack of understanding of finance, and of marketing.

So what can you do about this?  Well you can hire somebody else to provide those skills, whilst you get on doing the things you are really good at.  And I've known businesses that have done that.  They have recognised the gap and brought in someone to provide the management, marketing and finance skills their business needed.

  • Others have developed the skills within the family, so to speak, one partner (OK, I'm old fashioned), husband or wife) has grown into that side of the business while their other half gets on with things.  As one woman said to me in an interview for a business award when asked what her husband did in the business, "I allow him to play with the trucks!".  But seriously, I've seen some really good husband and wife teams in operation in their business. 
  • Or you can grow the skills yourself.  Someone said to me only a couple of days ago that he used to ensure he did twenty hours a week on the shop floor to ensure he "earnt' his wage, but he realised he was providing greater value to his business by managing it.  And where did he say this to me?  At a Financial Management workshop where he was lifting his skills in understanding and using Profit and Loss Statements and Balance Sheets to make better decisions about his business.
  • There are various ways you can lift your skills in management, marketing and financial management.  Workshops are frequently available so check out if they are offered in your area.  You can usually find a whole range of courses offered remotely, these days increasingly on-line.  And of course there are plenty of books available on all these subjects.

So develop you management skills for your business and you will be able to tell Peter where to poke his Principle.

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PS.  You too can do the same Financial Management workshop mentioned above, but you can do it at your own pace by taking advantage of our offer here .

PPS.  If you would like to comment on this topic please contact me.

What are the cloaks of invisibility which shield the underperforming areas of your business?

That's the problem with underperforming areas, the reason they're underperforming is that they are hidden from your sight, wrapped in a cloak of invisibility.  After all if you could see them, you would know there was a profit leak to be plugged, so you would do something about it, and they wouldn't be underperforming, would they?.

So what is their cloak of invisibility that hides them from your eyes?  Well, actually this cloak can come in many different forms to cloak your underperforming areas so let's name and shame a few.

Firstly there is the cloak of no-time, the lack of available management time.  No time is a cloak which prevents you from seeing what is happening in your business as you rush hither and thither, fixing problems, wrestling with issues, eyes fixed on the next crisis that needs your attention.  You just don't have time to stop and look around to see what is happening in your business.

It's ironic really.  It is probably those underperforming areas which are causing you to be so busy in the first place, not giving you time to look around.  If only you had the time to see them.....

And then there is the cloak of distraction.  It may be a problem at home, or some personal, or personnel problems which cause your mind to wander, tripping down side lanes and byways, and not focussed on the road ahead.  You just can't focus on where you are going because of the distractions which keep tempting your mind elsewhere.

The ‘next big thing' cloak can completely hold your attention.  You should not be only focused on THE PROJECT, but focused on it you are.  "Don't bother me now.  Can't you see I'm busy?"  Focussed on the next big thing and not on running your business.  It's probably very exciting, and really interesting but you business needs your attention too.

Even more dangerous is the cloak of insufficient data.  Data, information and knowledge are like searchlights identifying and lighting up the underperforming areas in your business.  But if you don't have the data it is like the light has been turned off, or more likely never turned on.  You are in the dark and there is nothing to see.  So there is the underperforming area, chugging along in the dark, out of sight and out of mind, leaking profits from your business..

You need to throw off the cloaks of invisibility and bring into the open those underperforming areas which have been holding you back and dragging your down.  Once underperformance is in the open it can't hide any more.  It can be fixed, and start to perform.

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PS.  If you would like to comment on this topic please contact me.

I need clarification on my message and would be grateful for any comments or contributions.

Recently I had a discussion elsewhere when it was said "Adam, I just don't understand what you do."  Now it seems perfectly clear to me, but maybe I'm just not expressing ‘what I do' in terms other people can understand.

So here it is:

1. Who do I serve?

I assist small business owners & managers whose sales are costing them profits.  They are usually people who have a professional skill, be it in IT, business services, or trade based such as a mechanic or metal worker.  Their skills have led them to establishing their own small business.  Typically they will have grown to the stage where they employ people, usually between 3 and 20 people.

2. What is their single greatest problem? 

They have no problem getting sales.  Their professional skills ensure word of mouth delivers a stream of customers, even though they don't ‘market'.  Marketing is usually completely foreign to them.  So they have the sales, but their profitability is poor.  This causes poor cash flow, leading them to working harder and harder to keep afloat, and little free time.

3. What is your definitive solution?

I find and plug the profit leaks.

Now when I'm told that "I don't understand what you do' I suspect the issue is in the solution rather than target market or problem but your comments to the contrary are welcome.

Ultimately I'm concerned about increasing profits.  After, that's what business is is all about.  But I'm not looking at chasing more sales.  There are plenty of others offering advice in that area.  I'm concerned about people who are not profitable despite having sufficient sales.

Now I do look at overheads and, Sean-like, I've recently written an article on this (http://www.profitsleakdetective.com/articles/is-there-flab-in-your-overheads.html) but that is not my main thrust.  With some 18 years consulting to small businesses I find very few small businesses that are other than lean in their overheads.

So where can the leaks be?  If the problem is not sales or overheads it lies in the gross profits they earn from those sales.  I usually look in three areas:

  • Are sales being concentrated in the right areas - you know the situation; 60% of the sales may come from one product/service group but only 30% of the gross profits (or whatever the situation might be).  There are opportunity costs of concentrating sales efforts in the wrong area (segment or products/services).  Just be selling more of the right products/service rather than the wrong can change profitability.  The case study on my web site reflects this situation;
  • Pricing - do prices reflect value to the customer?  As you will all know there is much debate on this subject on-line.  Most small businesses leave money on the table.
  • Cost of sales - now the market I'm targetting will make or do something.  So they will spend some direct labour, and maybe some parts or materials the cost of which have to be recovered.  (Don't forget consumables which are sometimes not costed into the invoice.)

Get these right and Gross Profits will be maximised.  Over the years I've become convinced that it is the volume of Gross Profits, not Sales per se which is the key to maximising Net Profit.  How each business maximises Net Profits will depend on their market, and their business model.

As I see it, Yes-Yes factors, bonuses and Upsells are all part of maximising the volume of Gross Profits.

So what do I do?  I find where the (gross) profits are less than they should be and seek to plug the leak.  

Now in reality most small businesses are not collecting the information to identify the leaks easily.  Some digging is usually required.  So we give them some templates to do so.

Is that clear?  To me it is but it may not be to others.

Let me know what you think!

 

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PS.  If you would like to comment on this topic please contact me.

Are you trying to do too much and getting nothing done?

As a small business owner or manager have you been in the situation where you are just trying to do too much, running from crisis to crisis, filling in roles, directing and doing, so in fact you don't get time to think about what is the best or the most important thing to do.  As a consequence the crises keep on springing up, because you haven't had time to think about how to prevent them, you've time to only put them out.

Doing instead of managing is a common problem in small business, and it condemns owners to a life in the heat of the kitchen, instead of out in front, growing the business and socialising with the guests.  Because you are doing instead of thinking, nothing gets changed, and your business never grows or prospers.  In fact you probably spend a lot of your time dealing with minor and major crises, without the time to plan and create the environment which would prevent the problems arising in the first place.

It was a client's crisis that brought this to mind.  My client was part-owner of a rapidly growing business that did a wonderful job in their particular niche, but had expanded beyond it without being able to create the additional management resources to plan and manage the business.  Consequently the owners were perpetually hands-on, applying band-aid solutions to problems as they arose, without having the time to make a permanent fix, frantically cooking and bottle-washing.

Michael Gerber wrote of this situation, doing not thinking, in his book "The E-Myth" in which he classified small business owners and managers in terms technicians, managers and entrepreneurs.  Technicians are the people with the skill who do the job, and that is all many owners and managers do.  They are good at what they do and want to keep doing it, so they never get out of the kitchen.

Managers organise and plan the day to day activities, getting the business of the business done, whereas it is the entrepreneur who steps back and has a vision of what the business could be.  She focuses on what the business could be and takes it to a new and higher level.

Long before Gerber I learnt of the same concept, except it was presented in terms of managers, supervisors, and workers.  It was demonstrated through a graph, suggesting that business owners and managers should spend 70% of their time managing and planning, 25% supervising and 5% actually doing.  Instead, and how very real this turned out to be, they spend their time in exactly the reverse proportion, spending less than 5% of their time managing and planning, and 70% doing.  I'm sure you will recognise this situation.

The problem my client faces is that they can't afford to hire the management resources to free them up to be entrepreneurial.  So the only solution may be to get rid of the problems, rather than keeping on fighting each crisis.  In other words if they can't afford to hire management time then they should reduce the management requirement so that they need to spend less time cooking and bottle-washing, and more time being the chef, that is reduce the size of the business by getting rid of the problem areas to concentrate on their particular niche that they are good at. 

Then they will have the time to be the chef, doing enough and getting a lot done.

 

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PS.  If you would like to comment on this topic please contact me.

 

In recent times I've twice gone into the market to buy some business equipment for the office.  Probably the most striking thing from each experience was the lack of sales skills out there.  Winning a sale is more than having a marketing strategy.  Very few people seem to know how to make a sales pitch or even follow up from a sales enquiry.

It is as if they assume that a sale will follow from a sales enquiry or it won't, and there is nothing they can do to influence the result.  They couldn't be more wrong.

So what are sales skills?  They are the mixture of personal selling skills and sales systems that lead to successful business.  Personal skills such as a genuine interest in customers, the ability to actively listen to ascertain the real needs of the customer, to know how to follow up a sales call or offer, to present oneself so as to make the right impression.

And the right impression is enhanced if it is supported by a good sales system.  A system which ensure the right people get the enquiry, that enquiries are followed up, that sales called are planned, and backed with the current information on that particular customer. 

Is it wrong to expect that asking someone to telephone back in response to your interest in purchasing office equipment should lead to a returned phone call seeking further details of my intended purchase?  Of the four calls I made one did not call back.

Now I can only assume that the sales person didn't receive the message, in which case the supplier's system and training aren't very good, or that he forgot, (no recording system), he was too busy (a courtesy call wouldn't hurt) or that they had plenty of business.  Of course, without calling back how would he (or she of course) know how much business I was offering?

If this is their level of interest in winning a sale, what would their level of support be like?  A supplier definitely not worth pursuing.

Now for the second of the four.  My telephone call and outline of our requirements resulted in a few questions about the specification, and within one hour I had an emailed quotation.  Not bad you might say, but it would be nice if he showed some interest in me as a customer, or even wanted to come and inspect our operation, but there was no suggestion about that.  It makes you also wonder about their level of interest in providing maintenance and support.  There has been no follow-up since.  Strike two.

Now the final two suppliers were an entirely different story.  Both questioned me in detail about our requirements and insisted in coming to look at our facility and current equipment.  Both returned to hand deliver a quotation, and came back again with variations.  Both sought options to offer me.  Both want the sale.  Interestingly both are older people, a man and a woman.

Whether it is a factor of being trained in the old school, or just having a real interest in the customer, the change is refreshing.  One of them will get the sale.

Can you assume you will get the sale without some sale skills? 

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PS.  If you would like to comment on this experience please contact me.  Tell me what you think.

At a recent forum I was struck by the similarities between running a city and running a small business.  At issue was the direction of the city, making decisions about the city and its CBD, and actually making things happen. 

There was a strong feeling in the business community that our city had lost direction, that there was no vision for the city and what it could be.  Consequently it was going nowhere.  It was stagnating, and this was apparent.  Empty shops, few improvements, lack of agreement on what to do next, all signs of a city going nowhere.

And of course this in turn was affecting decision making by business.  People became reluctant to invest.  Without investment there was nothing new, buildings and shops became tired.  And tired shops didn't interest shoppers, so they deserted to the suburbs.  Fewer customers lead to less reasons to invest, and so it spirals down.

The City Council had the view that their only responsibility was "roads, rates and rubbish".  In their view investment decisions were purely up to business, and if business needed a prod, then that was responsibility of government.  After all, this was the state capital.

Government's view was that the City Council was the city council and had responsibility for the city.  That is what they were elected for and why resident's and business paid rates.

And business said that, hey, we can invest but we can't make decisions about landscaping, street-scaping, building heights and appearance, all the infrastructure issues. Will somebody JUST DO SOMETHING!

You see, there was no vision because there was no leadership, no-one willing to accept responsibility, set a direction and make some decisions.  And there was no one to follow-up and make sure those decisions were implemented.  After all, implementation, or execution is the biggest cause of failure of any planning.

Does this sound like some small businesses you may have seen.  Businesses that have no vision, haven't or won't change, that have no direction, that don't care about their customers.  Businesses that are just drifting along.  Businesses without leadership and squabbling internally.  Businesses just not making this happen.

Lack of direction and leadership is a recipe for disaster in small businesses, and a city is not much different.

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PS.  If you would like to comment on this tale please contact me.

Have you been in or seen this situation.  You establish a business and get the formula right.  Things are growing swimmingly; sales are increasing, the money is rolling in, you start to put on staff, invest in more stock, which brings more in more sales, you hire more staff to handle the increased business.  And so it goes on.

And on and on, for a while.  You are revelling in your success in business, and maybe even indulging in a few luxuries to reflect your success.  But almost imperceptibly life starts to get more difficult.  You find you are spending more time at work, there are more problems to solve, and the bills seem to be harder to pay despite the sales continuing to go up.  It has become hard work and you're not enjoying the business, or life as much.

And the enjoyment gets less and less as the whole business just gets more and more difficult.  Suddenly you are not longer the rapidly rising business.  In fact you are going......nowhere.  You've hit the business brick wall.

Rapid growth typically leads to a business hitting a brick wall.  The brick wall has three major elements:

  • Systems - the systems good enough for a business of (say) three people may not be enough for 10 people.  And that for 10 people may not be good enough for 25, and so on;
  • Management skills - the same applies.  As the business grows management must spend more time managing than ‘doing', more time chasing business, understanding the finances, supervising staff etc.
  • Cash flow - more money gets tied up in inventory, work-in-progress, and debtors.  The inventory must be paid for but the debtors are slow to pay.  The more orders to process, the more that are urgent, the more stop-start you get, the less that actually get through when they are supposed to.  And the more mistakes people make.

Businesses can, and do, hit a brick wall more than once as they grow, particularly if they are growing rapidly.  Because they are growing rapidly they don't have the time to step back and look at what is happening.  They don't have time to spot the obvious.

So if this is you, take the time to step back to see the brick wall before you run smack bang into it.  And if you do that, the brick wall will just prove a mirage on the road to success.  What do you do when there is a mirage on the road ahead?  Why, you just cruise right through it. 

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PS.  If you would like to comment on this tale please contact me.

He's making too much money!

At first sight Bill (as good a name to use as any) was very similar to many of my clients; a tradesman who was very good at his job do he opened his own business.  And because he was good at his trade, his business grew, word-of-mouth referrals led to more business, leading to more referrals. 

After a year of so of these referrals Bill had to start employing people, at first just one, then two, the three and putting an apprentice on.  And the rest of the story is pretty familiar too.

Planning and objectives - now let me see?  How about ‘three time as big as we are', whatever that might mean?  It was pretty hard to pin Bill down any more than that, or what the implications might in terms of working capital, shop floor space, equipment, or number of employees.  I guess these were bridges he'd cross when he got there.

Marketing - none existent.  No advertising, not even Yellow Pages, the only sponsorships being his son's sporting team, no company stickers as a reminder, no give-aways.  In fact Bill didn't even give away his telephone number or e-mail address.  Effectively you had to become a customer to get that!

Pricing strategy - now how much does the competition charge?  Bill doesn't want to be out of line with what his competition charges.  Never mind that he could really differentiate himself by charging more.  In other words, no real strategy.

Financial statements - basic.  Set up by the accountant for accounting purposes, not management purposes.  He couldn't even tell you his cost of sales or gross profit with any degree of certainty.  And as for gross profit by market segment or type of job, no way. 

Measurement, collection of data and analysis - one thing for sure, you can't analyse what you haven't got.  Sure, there were timesheets, employees wanted to be paid, but no job cards for Bill to measure what happened on a job, or whether he made a profit.  Neither did he collect any information on which industries customers might have come from.

Systems and procedures - not a written system or procedure in the place.

In fact there was only one real point of difference in Bill's story.  He was profitable, very profitable.  But why, or how?  Now that's the question.

And the answer to the question is not yet clear.  The local marketplace has been booming, with a great shortage of skilled labour.  So the market suits Bill and he hasn't been greedy with his prices.

Part of the answer may be in productivity.  We've benchmarked Bill's figures against fabrication and engineering small businesses and his ‘sales per employee' are considerably higher than industry averages.  And his overheads are lower than the average.  A nice combination if you can get it.

There may be a key here.  Most small business people like Bill go straight from the shop floor to their own business.  Bill didn't follow this path.  He was Operations Manager of a larger business for a while, responsible for a much larger workforce.

Maybe, just maybe, he bought with him good systems and procedures that underpin his business. 

And if we can get him to document these systems and procedures and to develop his data, information and knowledge to go with them, Bill won't be my typical small business client, but something much, much more.

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PS.  If you would like to comment on this tale please contact me.

Can there ever be a good time to discount?

Discounting is anathema to most small business owners and managers, as I'm sure it does to you.  You know that while discounting can increase sales, it does so at the expense of profitability.  Any reduction in price reduces your overall margin, your gross profit and hence straight off you're the bottom line, your net profit.

A simple example demonstrates the impact on profitability.  These figures are entirely hypothetical, but they illustrate the principal.

Suppose you operated a fast food cart in a shopping mall.  What you are selling could be hamburgers, meat pies or whatever is popular in your locality.  Site rental costs you $1,000 per week and labour $500.  Your solitary item for sale, be it pie or hamburger whatever costs you $1.85 to make and sells for $3.85, giving you a gross profit of $2.00 per item.  Yes, I know this is simple but bear with me.

So to breakeven, that is to sell just enough to cover all costs before you start making a profit, you have to sell 750 items, a simple calculation of dividing your fixed costs (site rent and wages) by your gross profit of $2.00.

Let's look at two scenarios in our simple example when some things change.

  • Firstly, an increased cost scenario - both site rental and wages increase by 15% to a total of $1,725.  To breakeven you have to sell, naturally 15% more items.  That sounds pretty straight forward.
  • Alternatively, you bravely decide to discount your price by 15% to increase sales.  There has been no increase in costs.  Do the maths.  To breakeven now at the reduced price of $3.27 per item you have to sell, wait for it, .........40% more items.  That is a very large increase in sales.  Can you do it.  And to make a reasonable profit you will have to sell even more.  Can you do it?

So can there ever be a good time to discount?

Well, yes, in certain circumstances.  

If you can lower your cost of sales so that there is no change in your margin then, with your gross profit protected, your nett profit will be unchanged.  Effectively you are competing on costs not price.

In another situation, if your goods are slow moving and have a ‘use by date' or short shelf life, discounting can help.  For example with our simple food cart you can't sell today's food tomorrow, so discounting at the end of the day may help to recover at least the cost of the item, your variable costs, with maybe a small contribution to your fixed costs of rent and wages.  Another example would be fashion items at the end of the season, or model run-out for vehicles.

But discounting generally ?  Only if you are not in the business of making profits.  It's anathema.

A Chrysalis Unfolding

You know what a chrysalis is, the pupa of a moth or a butterfly enclosed in a cocoon.  It is the inactive stage of development of an insect before it emerges to its full glory.  And a wondrous thing it can be.

Watching a small business owner or manager unfold and grow to reach their full glory can be equally wondrous.  It doesn't always happen.  Many, in fact most, remain in the pupa stage.  The reasons for so doing can be varied.

  • They are content where they are and don't want the stresses and strains of growing their business;
  • They like working with the tools of their trade, whatever that may be and don't want to give them up to become a manager;
  • They haven't really thought about it and can't imagine anything else.
  • They have ‘always done it this way' and nothing is going to change them.

Unfortunately, as someone said, you can be on the right track and still get run over.  Staying where you are, standing still in your business market place, can make your business terribly vulnerable.

Change, removing that vulnerability, isn't easy but unless the owner or manager changes their business won't change.  The change is often like emerging from a cocoon into the light, unfolding their wings to display their colours and get ready to fly.

I watched one such change in a client.  It was a second generation business, and Dad was still a big influence.  He was in his seventies and around every day, making it very difficult to break out of the cocoon.  A simple question, "What would you like the business to look like in three to five years?", and it was like the first break in silk.  "I haven't thought about that" he replied.  But you could see a light come in his eyes.

Unlike the butterfly, developing into full management glory and taking flight does not happen overnight.  It takes time and there is much to learn.  But watching the flight begin is indeed wondrous.

Do you want to emerge and fly, or stay wrapped in your cocoon?  The choice is yours.

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