Is it possible that a business that has been successful for years could suffer financial crisis, losses and even risk disappearing? Why do employers so often neglect their company's controls? Why do brilliant businesses that seemed so successful disappear? Why do many companies that grow in assets and sales, make less profit than when they were smaller?
The third deadly sin that entrepreneurs should avoid is this:
Neglecting your business controls
I have seen it hundreds of times, in these thirty years as a business consultant:
- Businesses that were very successful when run by their own founders; but that later failed to pass to a second generation or to be managed by “professional managers.” Successful businesses when they were small; but they were losing profitability, as they grew. To which I call “the irony of growth.” Businesses that, to finance their growth or create a “structure”, went into debt beyond their possibilities, causing the company to fall into financial chaos and risking leading it to failure. Companies with profitable products, but with many others that do not generate profits; but that the entrepreneur does not know, which eats away the profitability and delays the growth of the company. Entrepreneurs who, for fear of failure, do not take their companies to new levels of growth.This is one of the 30 mistakes of the entrepreneur. So, we have businesses with enormous potential; but they are no more than small family businesses. For fear of not being able to control them
Three weeks ago, I took on a new face-to-face consulting client. The businessman is young, he is 42 years old. In 2005 it had five branches, currently (2012) it has 19 branches throughout the country and dreams of having 50 open by 2020. I have mentioned your problem in the three sessions we have had to date:
"Don Enrique, I cannot control my company. I don't know the actual earnings of each store. I know that some are generating losses; But I don't know how to control the costs, nor the quality. I want to have 50 stores open by 2020. I don't want to go into debt, I don't want to bureaucratize my company, I want to continue growing with my own resources. What do I do if I fell ill?
Did I tell you about another client with whom I started in 2011? That said: "I want to have my first store in China by 2020" That is a true "dreamer"; but down to earth. And I can say that your company does have control. A year ago I had three stores. By December 2012 it will end with six stores (one of them virtual).
Controls are essential in any company: small, medium, large, corporate, multinational. And controls are equally necessary in companies of all economic lines: service companies, agricultural companies, agro-industrial companies, hotel or restaurant businessmen, industrial companies, commercial companies and now, of course, in virtual companies.
When we talk about controls, we think only of financial controls. But it is not true. The successful businessman takes full control of his company. There are "controls of controls" and there are "controlling entrepreneurs". Have you heard the phrase “you take care of the pennies; but you neglect the millions ”? Have you seen employers monitor if a worker was 5 minutes late or if he talked to his wife on the phone twice a day? Have you seen the same businessman carelessly delegate control of his inventories or production costs to the hands of an incompetent?
What should be controlled then?
The successful businessman must control what generates value, the aspects that have an impact on the success of his company and on those elements within and in the environment that could put the success of the company at risk.
Example of what to control:
1. Financial:
1.1. Working Capital and Financial Solvency.
1.2. Debt Level and Leverage of the company.
1.3. The company's monthly financial results: Sales, Contribution margin, fixed costs and expenses, net profit.
1.4. The Company's Cash Flow, historical and future.
1.5. The trend and behavior of sales.
1.6. Production costs and contribution margin of the company and each of its products.
1.7. Fixed costs and their impact on profits.
2. Non Financial
2.1. The level of customer satisfaction
2.2. The quality of the products or services offered.
2.3. The participation that the company has in the market and the entry of new competition.
2.4. New needs that the clients of the company want.
2.5. The non-financial factors that ensure the success of the company in the business sector where it is located.
These are just a few items that need to be controlled; but behind them there are many other details that require specialized control: aspects such as inventory turnover, the quality of raw materials, new suppliers with better quality and better price, the efficiency and competence of the staff who serve customers, the level of innovation, quality and efficiency of equipment and machinery, etc.
Look at this question from one of my clients:
Why am I making less profit now that my business is so much bigger? Five years ago with $ 100,000 a month and 35 employees, I earned $ 25,000 a month. Today with $ 300,000 dollars a month and 150 employees, I earn $ 40,000. It is too much effort and more debt, to earn "only" an additional $ 15,000. Shouldn't I be earning triple? ”
Remember what I often say:
"Not always more sales are more profits"
To efficiently control your company, keep it on a path of sustained growth and increasing profits, you must have effective control systems in your company. And you must have competent people to control it.
One of my clients uses this phrase: "Who controls the controller?" It says a lot. He says controls are not always enough. You have to know how to choose "the wars we fight."
Control cannot be more expensive than what is intended to be controlled.
What do I recommend to my clients specifically?
- They must surround themselves with talented, competent, capable, committed, loyal and accountable people for results. They must know how to choose the areas where controls are essential. They must create practical, economic control systems; but effective. They must create control and measurement habits. They must establish the indicators of success that will be measured and dedicate time (weekly or monthly) to analyze the results carefully. Based on the results, they must take corrective measures and execute them immediately. They must be methodical, disciplined and precise to resolve deviations. They must be cold and objective to solve and "cut the bad" from the roots. They must know precisely the results they expect from their company, in each of the areas.
Controls will never be enough to control everything that must be controlled; but if controls must be established. It is one of the main responsibilities and functions of the entrepreneur, whether he is the one who directly manages the company or has an administrator in charge.
You can delegate many operational topics, I call it "the carpentry"; but you can't delegate the controls. That is your responsibility, since you want success in your company.
You can take your company to the next level of growth. You can turn an idea into a business. You can turn your small business into a large company. You can create an empire. But you will only achieve great goals, if you implement all the controls that are essential to ensure the results you want.
