Every independent business owner thinks money is the number one thing they need to survive. While it is crucial, what they really need is a clear focus on management practices in their business.
In my world, here at American Management Services, those practices are boiled down into something I call The Four Solid Management Practices:
- Profit Planning
- Know True Costs
- Discipline In All Aspects (Manage By The Numbers)
- Key Performance Indicators (KPIs)
I’ve gone into detail on most of these practices in prior articles, but here’s a quick recap:
1) Profit Planning
Most owners, especially ones we meet with, think that whatever money is left over at the end of the year–after all expenses have been paid–is considered their profit; this is residual profit. Residual profit relies on ‘hopium,’ or false hope to turn a profit.
At American Management Services, we believe profit should be the first line item of expense. Named ‘Pre-Determined Profits,’ this means every set number of pennies from every dollar you incur is marked as profit.
How many pennies your business generates from every dollar is determined by your business model and management practices.
2) Know True Costs
Do you know what it truly costs to run your operation: By the hour; employee; or by line of business?
Understanding your actual operating costs will allow you to set realistic pricing in your bids/estimates/quotes. You could be seriously underbidding your products and services without it, leading to disastrous results.
3) Discipline – Manage By The Numbers
Once you understand where you should be, you now need to establish a goal to generate sales at that margin. Eliminate any guesswork around where you think you should be versus where you really are.
Your plan should be aggressive but maintain a degree of realism. And I can’t stress this enough: Make sure this is written down and communicated amongst those directly involved in turning goals into realities.
Break this down further by implementing KPIs and tying key managers to pay-for-performance.
4) Key Performance Indicators (KPIs)
Key Performance Indicators, or KPIs, measure goals against quantifiable data over a specific period.
Also known as flash reports, KPIs offer a way to track how you achieve your goals on broad and minute levels.
A KPI measures the goals of the business against the actual, quantifiable data over a specified period. Set goals for each aspect of your business in your pre-determined profit plan, then monitor your performance with KPIs and make the necessary adjustments.
Key indicators can differ for multiple businesses; a distributor’s KPIs will differ from a manufacturer’s, and so on and so forth. Even like-companies can have varied KPIs as not every business shares the same goals and metrics.
A New Approach To Managing Your Business
I mentioned the Four Solid Management Practices because if you implement them-and do so correctly-you will undoubtedly reap benefits.
It’s not a lack of money that kills businesses, it’s how they manage every aspect of their business that does them in.
Remember the old “teach a man to fish” adage? The same philosophy applies here.
While money is crucial for paying your employees and expenses, think of cash as a “fish.” I’ve seen owners borrow against their lines of credit to stay alive. That doesn’t solve a problem, it just adds to it.
Owners need to focus on solid management practices instead of hoping their business makes money. Essentially, for you owners reading this: “Learn to fish.”
Has to make you sick to borrow, run up line-of-credit, get federal handouts, et cetera. Follow the four principles I mentioned above to have the peace of mind most owners wished they had. If you need help, feel free to reach out to me via LinkedIn.