Expanding and Handling Problems

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Rules to Follow Before Expanding

Testimonial Phil Holland Founder, My Own Business " I think the most common mistake made by entrepreneurs is not picking the right business to begin with." Transcription - html

Once your business has started, you will face the challenge of making it grow. In this session you will learn about some basic rules to follow before expanding.

Before even thinking about growing your business, you must first have a stable platform from which to take off. You must work out the bugs in your initial operation including making it profitable.

Your readiness to expand will improve if you can gain experience in all aspects of your start-up unit. Whether you have started an Internet business or opened a restaurant, become personally involved in all the functions of your business. Then you can detect weaknesses that can be remedied early on, where changes can be made rapidly and at less exposure to loss.

Another reason to become personally involved in every aspect of your business is that later on, after expansion plans are implemented, you will be depending on others to whom you must delegate responsibilities. Then, no one can fool you about how to run the store. You will have had personal experience in doing so.

Remember that after your expand, you will no longer be the person at the cash register. You must have systems in place to prevent employee theft and shrinkage (shoplifting). The loss-prevention systems that work best for your particular business have probably already been figured out by your competitors. So, check out and implement systems already being used in your industry. (If you're going to open a convenience store, go to work for 7-Eleven beforehand to learn their systems that work!)

Try to avoid giving your personal guarantee on leases or creditor obligations. As much as possible, separate your business liabilities from your personal assets. While banks will most likely require your personal guarantee on business loans, exposure of your personal assets can be mitigated by drawing the line against this practice whenever possible.

For example, a potential landlord for your second store may ask you to personally guarantee the lease. Your exposure in a five-year lease of CFA3,000 per month would be CFA180,000. This amount could far exceed the initial capitalization of your business. Yet because of the desire and enthusiasm to add more stores, it will be tempting to incur such potentially overwhelming liabilities.

Instead, by practicing discipline in limiting your liability, you might insist on negotiating a one-year lease with options for additional periods of time. Your liability in this case would be reduced to CFA36,000.

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Reasons Why Start-up Entrepreneurs Overlook the Importance of Starting with a Pilot Operation First

Testimonial Colette Coffeman Catering Service "If it can't be profitable, make sure that you don't go out and show yourself off in a bad light." Transcription - html

There are some understandable reasons why many entrepreneurs overlook the importance of having a successful pilot operation in place before expanding.

Entrepreneurs by definition are self-confident. The problem is that too often we are over confidant either in ourselves or our product or service. This overconfidence can propel us into expansion programs without carefully working out the wrinkles including getting to the point of having a proven and profitable pilot plant (model) from which to expand.

One reason for overconfidence is that many wealthy entrepreneurs have enjoyed success in an unrelated field. A wealthy tycoon who had a successful career, for example, might start a new business in a field that he or she doesn't know or understand and might meet with failure because he or she assumed their expertise would transfer.

Another enemy is haste. Entrepreneurs who start multi-unit businesses will experience some deficiencies in their first unit. Many will lose money at the beginning. This is the time to work out the bugs and produce a positive income statement. If you can't, this may be time to abandon the idea. But, if you are starting a restaurant chain and in haste open six of them with problems, your losses could become overwhelming.

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Elements You Must Deal With in an Expanded Business not Present in a Start-up

Testimonial Erik Wong Video Producer "It is important to pace yourself as to the number of initial clients you take on. " Transcription - html

There will be controls needed in your expanded business that have not been present in your start-up mode. It will take careful preparation to break the do-it-yourself mode. For example, your business will need accounting and cash flow controls that measure performance of individual units within your overall operation. These reports will be required on a frequent basis. In many businesses weekly income statements are used to prevent small problems from growing into bigger ones that may become unmanageable. Your accountant can help you set up unit financial reporting.

Your expanding business will require delegation of responsibility and authority. New skills in recruitment, evaluation and training will be needed. The greatest leap of expansion for most businesses is growing from the first unit to the second one. Once you have made the big step from one to two, you are now a chain! From then on it can become a continually improving cookie-cutter operation.

Delegation of authority can be accomplished by:

• Financial motivation of key employees
• Creation of profit centers

Testimonial Flecher Hull Fletcher Hull Motors, Auto Sales and Leasing "Make sure that you don't wait too long to hire people to help you expand." Transcription - html

Sometimes it is difficult for the beginning entrepreneur to delegate authority. There are many ways to do so without relinquishing certain functions that you will want to keep for yourself. For example, you should be the only person signing checks and deciding on capital allocations, yet you might want to delegate the training of employees to your managers.

But without giving up these functions, you can still motivate key employees in two ways: recognition and reward. Recognition means much more than bestowing an impressive title. The most important recognition is to let it be clear that your key people are in positions of authority as well as responsibility. While delegating authority will mean that your managers will be making some mistakes, their mistakes will be limited to their spheres of responsibility. Also, frequent financial reporting will minimize adverse financial impact of their mistakes.

Good managers are motivated by monetary incentive plans that are tied to their individual success. The incentive compensation of your management team should be therefore compartmentalized for each manager, so that a manager's bonus is based solely on what he or she has accomplished and not diluted by how other parts of the business are doing. For example, if you develop a chain of stores, each store manager's incentive compensation should be based only on the profit of his or her store.

If you are uncertain as to how to set up such a profit sharing plan, you might get ideas from your most successful competitors, who have already gone through the trial-and-error process of refining such systems.

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Ways to Motivate Key Employees: Reward and Recognition

Let's first set a definition of recognition: It is creating a business structure where your key employees are given authority and responsibility, which is tied to profit and accountability. This becomes a "profit center" that the key employee manages. Each profit center has separate profit and loss accountability, which is determined frequently. (Many fast food stores operate on weekly profit and loss statements!) The idea is to create an atmosphere where your key people feel they have entrepreneurial decision making authority, and are paid incentive compensation based on their own center profits. But, they are not given authority in two non-delegated roles, which remain your sole responsibility:

1. Capital expenditures
2. Signing checks

This suggests that your key people will be given enough latitude in operating their profit centers that they might make some mistakes.

By the two restrictions stated above, plus frequent financial reporting, you can recruit well-motivated managers and at the same time limit your exposure to big losses.

Obviously, the incentive plan must be tailored to each business situation and be based on the profit and loss report of the individual's separate responsibility.

By rewarding managers through profit participation, you create the engine that will drive your managers to success. And, the greater their success (and reward), the more your overall business will benefit.

Here are three types of plans (there are many) that have been used to structure a manager's incentive.

• LEVERAGED PLAN. Managers receive all, or a large part of, unit earnings over a fixed target. This has been used successfully by fast food chains that are company owned and operated (rather than franchised units). Here is an example of a simplified weekly income statement of a doughnut shop that is operated by a company employee-manager. This plan is "leveraged" because every penny saved becomes a penny going into the manager's bonus check.

  Sales		CFA5,000
  Wages	CFA1,500
  Purchases	CFA1,500
  All other expenses (including co. profit)	CFA1,500
  Total expenses	CFA4,500	CFA4,500
  Weekly profit and manager's bonus:		CFA500

• UNLEVERAGED PROFIT SHARING PLAN. In this case your manager receives a percentage of earnings of his or her profit center. Here is an example:

  Sales		CFA5,000
  Wages	CFA1,500
  Purchases	CFA1,500
  All other (actual) expenses	CFA500
  Total expenses	CFA3,500	CFA3,500
  Net profit		CFA1,500
  Manager bonus @ 10%:		CFA150

• COMMISSION PLAN. In this plan, the manager receives a percentage of sales for the accounting period. Assuming, as above, that sales for the period are CFA5,000 and the commission is 5%, the compensation would be CFA250. In many instances, commission incentive is not appropriate because it does not include provisions for expenses. Your manager could get rich while you go broke. But commission incentive can work well when the manager does not control pricing. Salespersons in a retail clothing store would be a good example of a commission structure.

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Do's and Don'ts of Profit Centers:

Let's review some of the basic rules that apply in the creation of profit centers:

• Create a separate profit center for each expansion unit. This means separate profit and loss statements that are compartmentalized for each manager.
• Make the accounting periods very short. When there are not big fluctuations in inventories or other costs, even weekly profit and loss statements work well. But, if possible, don't wait for six or twelve months to reward managers. Rewards are best when received early!
• Keep you profit sharing incentive plan simple and clear. It will avoid misunderstandings and misinterpretations. Use simple words and simple accounting.
• Have all your profit sharing agreements in writing. It will avoid innocent differences of interpretation. A ball painted half black and half white is going to look differently depending on where you are viewing the ball!
• Check out how your best competitor motivates their managers. Your competitors may have already come up with a system that is most appropriate for your particular business.

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Some Do's and Don'ts in Starting Your Business

Do's

• Save Money.
• Stay in a field you love.
• Know your business before you start (work for someone else in it).
• Copycat the winners in your business.
• Specialize, even to a single product.
• Find a product or service that is:
  • Needed or desired
  • Thought by customers to have no close substitute
  • Not subject to price regulation
• Set a cap on your liability.
• Learn computer skills.
• Learn communication skills.
• Have a lawyer, accountant, and insurance agent before you start.
• Prepare a business plan.
• Prepare the site criteria model for your particular business.
• Do "for and against" lists for major decisions.
• Buy when everyone is selling (and vice versa).
• Deal with those you like, trust and admire.
• Learn accounting.
• Create your own internal control plan.
• Keep going to school in subjects important to you.
• Give back to the community.

Don'ts

• Never sign a lease without your lawyer's review.
• Don't rush: there is no such thing as the last good deal.
• Avoid a "commodity" business (one without pricing power).
• Don't burn bridges of job security to start a business if you can help it.
• Don't become a business zombie: take time off.
• Don't compete with category killers (Wal-Mart or Toys-R-Us) unless you have a special niche.

Begin Your Long-Range Financial Planning

Before expanding your business you should consult with your lawyer, accountant and insurance agent to develop benefits for your future employees as well as for yourself. The goal is to provide benefits sufficient to recruit and maintain outstanding managers. Provisions can be considered for retirement plans, health insurance and vacation and holiday benefits. These costs should then be included in your budget.

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Common Business Problems

Testimonial Martin Ruiz Gardener "Anyone who has the desire to be their own boss should consider going into business." Transcription - html

Now let's identify some of the common mistakes made when businesses begin to grow. These mistakes can be deadly, so benefit from the others who have gone before you!

• Uncontrolled Cash Flow. People fail because they run out of money. When you run out of cash, you crash. So, prepare your cash flow projections for expansion very conservatively. Review "Cash Flow" in Session #7. In projections, be sure to:
  1. Forecast income (sales) very low
  2. Forecast expenses very high
  3. Provide for unanticipated contingencies.
• A drop in sales or insufficient sales. If this happens, your income and cash flow will be impacted. Immediately take the necessary remedial steps by ruthlessly cutting costs.
• Higher costs. Can you increase volume of sales? Can you offset with higher prices?
• New Competition. The reality of the entrepreneur's life! Can you learn from them? Can you neutralize their opening impact?
• Business recessions. You will need to promptly cut costs to maintain earnings and cash flow.
• Incompetent managers or employees. Act swiftly to rid yourself of them.
• Dishonesty, theft. Study the ways your most successful competitor controls all forms of dishonesty that your business is exposed to including shrinkage (shoplifting) and employee dishonesty. Each business will be different.
• A combination of any or all of the above.

Basic rules for Handling Serious Business Problems:

• Identify and acknowledge your problems with brutal honesty.
• Immediately reduce your losses by unemotionally cutting your costs to maintain a positive cash flow and profitability. This is the first and most important action to take.
• Don't switch horses. Stay with the business you know unless its future is fatally defective.
• Take the initiative to explain to your creditors what your problems are and why slow or smaller payments will be necessary. Never write post-dated checks or send late payments without an explanation.
• Don't cut value or quality of your products or services. Make them even better.
• Improve every aspect you can of your performance and image.
• Look for opportunity in adversity. Sometimes there will be bargain opportunities during business slumps.
• Remember that businesses have cycles. So, hang in there and ride out the adverse periods.

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Suggested Activities

• Review case histories of the most successful businesses in your field.
• Review the case histories of businesses you know that failed to determine the reasons they failed. Was it inadequate testing, planning and experience?
• Identify a typical business problem in your intended business and plan a solution.
• Identify a combination of problems in your business and plan a solution.

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Business Plan for Session 12: Expanding and Handling Problems

We heartily recommend that you download the individual business plan template for this session Business Plan Template Document 12 and complete it now.

Section 12: Growth Program

MS Word

Instructions on filling in the business plan template:

1. Each box has a permanent title in CAPITAL LETTERS
2. Below each title is a sentence starting with an "Insert here…" sentence. This will suggest information to insert. The boxes will enlarge as you take up more room so use all the space you need.
3. After completing each box, delete the "Insert here" sentence, which will leave only the permanent title of the box and the information you have filled in.

We suggest that you fill in each section of the business plan
as you proceed through the course.

The template for all sessions 1-12 can also be downloaded into your computer as a single document:

Section 1-12: All

MS Word

Include sufficient research findings and background materials. Make it interesting up by the use of background data, your biography, charts, demographics and research data. When your business plan is completed, print off and assemble the 12 sections.

Many other business plan formats are available in libraries, bookstores and software.

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SESSION 12 Quiz: Expanding and Handling Problems