Why SME Owners need to run a tight ship

7th December, 2012

By Dr. Ipshita Guha

Web: http://sublimesense.blogspot.in

Drive thy business or it will drive thee. ~ Benjamin Franklin

The difference between an owner and employees in any kind of business is very straightforward and pivotal – one has a stake and the other does not. It is the owner and his/ her family that puts in time, effort, money, personal investments and savings to run the business. It is this stake which differentiates the approach towards responsibility, accountability, ethical practice, impacts culture and values and defines each person’s behavior and attitude towards the business.

In a small business, usually there is the owner and his/ her family, few staff and workers. The entire business operates on thin margins with limited resources and quality of workforce. Finance is always a critical matter and makes or breaks the prospects of a business. There is a compromise in every possible corner to keep the ship afloat.

With these limitations, some companies still manage to thrive where others wither. Liquidity is the key. The companies who manage to do better have lower costs, better margins, less wastage, more efficiency and productivity, better quality products and a strong customer focus. But fundamentally, they have strong control system in place for people’s contribution and output apart from other resources.

The controls ensure that ethics are upheld, responsibility is rightly allocated and people are made accountable for their actions. Misuse of power or authority, embezzlement of funds, frauds and negative work culture are stemmed before they can wreak havoc on the prospects of a company. If these factors are left unchecked, a single instance of fraud is enough to eat away the core of the business leaving the owner and remaining employees to suffer. Newt Gingrich said – You can't trust anybody with power. The solution is simple - the owner has to run a tight ship.

Management Information and Control Systems

German Philosopher Hegel’s view of control is achievement of goal through planned activities. Monitoring business processes and performance on a regular basis (periodicity may differ based on product, size of business and level of operation) to ensure strategic objectives are being met is the baseline for designing a control system.

The idea of a control system is to identify what should be monitored like financial performance, cash flow, production logs, inventory levels, marketing data, employee performance and contribution (to determine the rightful compensation and elevation). It should also include external information like industry dynamics, growth rate, improvements, competitors, innovation etc. These are also known as critical success factors. The critical success factors will need periodic tuning as the company goes through various stages of its life cycle.

Once the parameters are identified, the accepted levels and deviations have to be established. For example: required level of production maybe 100% but acceptable can be 90% too. Anything below that should triger a red flag.

As the business operates on an everyday basis, costs, revenue, production, quality, customers have to be monitored. The owner needs to have access to this information in the form of well-defined formatted reports at fixed periods to monitor performance and analyze the data for possible improvements. It also indicates how the business is performing with respect to the overall growth of the industry and other competitors. The owner’s prime concern is to understand the implication of analysis of the data and look for hidden signs, opportunities and discrepancies.

It is also important to give the feedback of this analysis to the employees so that they can realign their performance. Exceptions should be monitored more critically so that they do not become the norm. Feedback is extremely critical. It tells us where we are heading and allows us to do course correction. A company might have achieved sales of Rs. 50 lakhs in a particular month. What does it mean – above average performance or under performance? But if the collections are less then what happens to the status of cash flow? Alternately, if sales is high and so are rejections – what does it signal? Owners must understand the overall implication of all CSF and employees should be communicated the same so that they are aware of the true position of the company. It also means that there are internal checks to keep all functions on their toes.

But designing the system is not the end on itself. It has to be clearly communicated to all levels with proper measurable parameters. There should be a synchronization of structure, systems and strategy. The authority, responsibility, decision making should be aligned to achievement of objectives and goals while giving due thought to employee aspiration and motivation.

A crucial necessity for management information and control is to guide leadership. In Peter Drucker’s words - Effective leadership is not about making speeches or being liked; leadership is defined by results not attributes.

Ten points on how to run a tight ship

It is better to lead from behind and to put others in front, especially when you celebrate victory when nice things occur. You take the front line when there is danger. Then people will appreciate your leadership. ~ Nelson Mandela

Leadership in MSMEs means ensuring the business is not just afloat but moving and making progress. It is typical that when a company does well, everyone feels that it is due to their involvement but a small hiccup is enough to send these people scouring for cover and starting an all-out blame game trying to protect their own skin. Everyone looks at the owner to tide over the situation. Here are ten potential options which are extremely result-driven and effective if implemented diligently to help owners run a tight ship.

Reflection

Business is not always and only about emotions. It is about calculation, precision and agility. It is about performance and results. Your wish to nurture your emotional needs can be through philanthropy and discharging corporate social responsibility but mixing it in business and trying to become performance oriented is an oxymoron.

A business needs both formal and informal control. Keep the grapevine green and vital. In small businesses everyone knows everything which is good and bad. It is the owner’s skill on how to tap this information and make correct decisions. Transparent clear methods and strong open feedback system will help the company go a long way.

The foremost focus should be vitality of the business and not just needs of a particular customer or employee welfare. We exist when the business exists. If the company is healthy and performing then we have the scope for further actions. Handling human resource in business is most complex. Owners have to maintain a fair amount of distance to direct people and make them perform. It ensures that no one becomes complacent and emotional in their judgment. People are always on the look out to take advantage of weakness and loopholes. History is replete with examples. Owners must remain at the helms of affair and be on top of all situations while continuously monitoring bottom-line. With the best of the intentions, systems and processes, MSMEs do not have the luxury of decentralized leadership in the Indian context. There may be exception but they are “exceptions” far and few. That is why owners must be in total control of the business and exude strong character.

I have only one counsel for you - be master. French General Napoleon Bonaparte