Back to Basics 2.0

What matters now in building business

by RaeAnne Marsh

build-business

No one is good at everything. So, with the many hats a business owner must wear, some will be in the comfort zone and some in an area of actual expertise. All, however, require attention.

Whether a business founder continues to actively handle all responsibilities personally or is able to delegate certain roles in the company’s organization, it remains important in any successful business operation to understand its essential competencies.

Authorities within our business community share their expertise on core elements of business. We contacted top executives with extensive experience and success in the given realm as the decision maker or consultant to business.

Business Planning and Legal Matters

Keeping an eye on relationships, internal and external, and making sure there is appropriate documentation to manage or govern them — this is important at all stages of a business, says Mike Gillette, a partner in the Phoenix law firm of Gammage & Burnham.

If business ownership is shared, there should be something in place which governs that basic fundamental relationship. Among the concerns are how the company is organized, where more capital will come from if capital is required, how the company is managed, how decisions are made, and what decisions can be made by one person as opposed to needing to get a vote or consensus among partners. Regarding distribution of profits, is one person ahead of another in terms of preferential return? How is it determined when and in what amount distributions are made — is it a collective decision or is somebody in charge of it?

“If you set up rules in advance that govern how you interact with your partners under different circumstances, it goes a long way toward achieving good results during times when having answers is quite a valuable thing,” Gillette explains.

The choice of who to partner with in the first place is cause for careful consideration, points out Adrienne Wilhoit, a partner in the Phoenix office of Ballard Spahr, speaking of investors and comparing the relationship to a marriage. “If you have different philosophies, it can run you off track,” she says. “Be sure to formalize the relationship, as you bring in investors, between you, the company and the investors.” In addition to day-to-day operation, how will deadlocks be resolved regarding critical growth decisions?

“And think ahead about when you want to part ways,” Gillette suggests, noting that a lot of successful businesses have suffered adverse consequences or even been torn apart because people cannot get along any more but don’t have a clear path to walk away from one another. He cites such involuntary situations as divorce, bankruptcy, being expelled for cause, death or becoming disabled. Or the situation may be voluntary, due to not getting along “or just deciding you don’t want to be here anymore.”

These situations are all best handled in advance, Gillette emphasizes. “These are all emotionally charged circumstances, ones that don’t lend themselves to rational decision or compromise.”

Other internal relationships to cover are with employees and independent contractors. “In a lot of cases, it may make sense to have agreements in place that govern those relationships,” Gillette says, “especially with someone paid on contingency or commission-based compensation, or when they have a particular relationship or knowledge of confidential information you want to protect.”

And then there are external relationships with vendors, suppliers and customers. Being clear on what is owed, when payments are made and how to handle changes in orders and defective goods is only part of the story. “If a vendor or subcontractor will be transferring intellectual property, to manufacture or act upon, you want those specifications and drawing to belong to you, and all the derivatives that come from it,” Gillette says.

Recommending a company take the necessary steps to protect critical intellectual property, such as trade name and patents, at the earliest stages, Wilhoit observes, “Spending a little money at the outset will often save a lot of grief down the road.”

Companies should also consider how they are protecting customer data — and what data they collect in the first place, Wilhoit cautions, referring to the potential of law suits if sensitive data gets hacked.

Another problem Wilhoit addresses is business owners not thinking long-term about their choice of legal entity. “They start as a sole proprietor with no formal legal structure, and never incorporate or organize as an LLC or corporation,” she says. When a business is small, there can be a liability issue with not being a corporation or LLC, she notes, and in terms of opportunity for growth, investors will require some form of structure. “You’re not prepared for growth if you don’t have the proper legal entity.”

Leadership and Management

“One of the biggest things entrepreneurs and small-business owners do wrong is to focus on things they’re comfortable with, and not do other things because they’re not comfortable with them or literally don’t know about them,” say Mitchell Bolnick, subject matter expert with Eliances, an organization headquartered in the Valley that facilitates high-level entrepreneurship alliances. But the most important thing for a leader to do, he says, is define the culture and make sure it is fulfilled. This requires hiring the right people and communicating effectively with them.

“Make sure, from top to bottom in the company, that everybody is marching to the same drum beat,” he says. A business owner may hire the “best” technician but, if he’s angering or annoying the customers, “is he really the best technician?” Bolnick asks. “It’s easier to teach people skills; it’s very difficult to change their personality and the way they go about life.”

Communication skills are critical. It is the responsibility of the leader to make sure messages are received so that the employee clearly understands what is expected of him or her. The challenge in this is knowing each employee on a personal enough level to know what gets through to him or her. Words, phrases, even form of the communication may convey differently to different generations — and this may manifest in unexpected ways. Bolnick shares a mobile phone interaction he had with his adult son in which he made a reference to the “boob tube,” using the old slang for “television.” The son assumed the phone had auto-corrected from “YouTube,” and it took several message relays to sort out the confusion.

Hiring people who buy into the culture helps create internal customer loyalty, which drives end-customer loyalty. Noting that business owners cannot know everything that is happening at every point in time in their company, Bolnick emphasizes, “If you have disgruntled people or people who don’t understand the message or the process, the probability of something happening with the end-customer that is negative is increased.” However, if everyone is marching to the same drum beat — and they understand the importance of that — the probability of having a positive customer response is increased.

A challenge in identifying and attracting the right talent may be in how to afford them, says Tim Wales, who has started multiple businesses over the past 10-plus years. “Then you shift your focus from attracting people to raising capital — and get stuck in a rut.” He is a strong proponent for businesses finding advisors, not just financial investors, and he’s found that many successful businesspeople truly care about giving back. “If you’re passionate about what you’re doing, and they see something in you, they will give you time.” His business — Visibility Technologies Solutions, which launched last year and involves multiple executive leaders who are giving time back to the community, and his current new project, WebProctor, an education cloud service solution, which taps into other expertise among Eliances members — reflect this philosophy.

Wales also emphasizes the importance of a business owner listening to his or her employees. For instance, a business owner may keep old technology in place because of the comfort level in using something that’s familiar. Employees, however, could be frustrated with the systems in place because they don’t get the job done. “It’s OK to have open communication channels,” Wales says, warning against complacency and ignoring the people who contributed to the business’s success.

Human Resources

“From an HR perspective, one of the things we think is most important is selecting people who really represent your brand,” says Phyllis Senseman, vice president of Agency Management and Marketing with CopperPoint Mutual Insurance Company. She emphasizes the value of investing in the pre-hire process because of the significant expense attached to that the termination process and retraining.

And, so that the company has solid footing if an employee is terminated, she says, “Be sure you have strong HR policy guidelines regarding what’s permissible in the workplace.”

Companies may also consider having a probationary period for new hires, for possibly a 90-day or six-month period. “Then it’s ‘no harm, no foul’ if you don’t keep that employee,” she says. Such an arrangement needs to be agreed to at the outset.

An aspect of HR that businesses may overlook is safety. Senseman suggests a business owner develop a network, based on similar company size or industry, so they can learn from one another. “Let someone else come in and look around your business for what they might see, and you can do the same courtesy for them.” She notes that a fresh set of eyes will often bring a different perspective.

Other resources she suggests are local chambers of commerce or business organizations, which may offer HR advice and policy training. And the U.S. Small Business Administration also has useful guides for small companies to navigate HR matters, shares Ballard & Spahr’s Wilhoit, calling it critical that businesses spend time thinking about HR matters. “Those are the areas where people make the most mistakes.”

In the employment realm, government agencies have stepped up their activities, and LeighAnn Ciccarelli, general council for Diversified Human Resources, notes this has led to employees being much more aware of their rights. “They’re not afraid to go to these agencies if they feel they’re not being treated fairly.”

In the areas of graft and discrimination, the Equal Employment Opportunity Commission has substantially increased its enforcement activity. Says Ciccarelli, “Employers need to be aware of what’s going on in their work force, and not turn a blind eye.” It’s important that a business not just have a policy that covers these issues but the employees are educated and the policy is consistently enforced.

“Be very aware of misclassification issues,” Ciccarelli advises, warning that the Department of Labor has been charged with a responsibility of going after these violations. It’s not just a matter of paying non-exempt employees minimum wage and overtime, but whether employees are properly classified in the first place. Businesses should be aware that a salary does not automatically make a position “exempt”; there are other factors, which include the duties of that job.

The misclassification issue also lies at the heart of IRS activity focused on 1099s versus W2s. “So be sure to ask an expert, and not just call someone an independent contractor,” Ciccarelli says.

She cautions against taking shortcuts. A discrimination lawsuit by the EEOC or private party can go to six figures and up. With DOL misclassification issues, liquidated damages and penalties are mandatory. And if the IRS undoes a misclassification, the employer is responsible for all the back taxes — not just the employer’s but the employee penalties, too. Says Ciccarelli, “These are tricky areas and can get you into trouble if you just think you know what you’re doing versus really asking the questions.”

Marketing and Knowing One’s Data

“Your brand is not what it is on paper or in your commercials,” says Ruzica Radulovic, vice president, division marketing director for Alliance Bank of Arizona and Bank of Nevada. “Your brand is your user’s experience.” And users communicate their experience broadly and rapidly through social media. Happy customers have always begot happy customers, but Radulovic notes that not only does social media make that more true today than ever, it also provides a channel for unhappy customers to have a voice.

Businesses, therefore, need to bring a holistic view to their marketing. The user’s experience encompasses such elements as the employees who answer the phone and the building customers walk into. For Alliance Bank, for instance, “from walking up to the teller to the ATM to the online platform, it’s all a reflection of who we are.”

Admitting the market has never been more complicated, she notes also there has never been more opportunity for research to simplify matters. “An educated strategy is better than a gut check,” she says, observing many companies skip the research because they think they know their customer.

Or people may think they are marketing experts, says David Anderson, managing partner and CEO of Off Madison Ave, cautioning the need for people on the team who know what they’re doing and are strategic thinkers, “especially in this day and age when there are more channels than you can count to communicate with people.”

Anderson advises having the right people in place to implement a strategic plan — and then holding them accountable through measurement. What to measure depends on the goal. Facebook “likes,” for instance, is one measure of a market’s awareness of a business. “There are all kinds of things to measure and tools to do it, but,” Anderson notes, “tools are just tools unless you have the brainpower behind analytics to know what to do with the data.”

As he puts it, “Marketing tactics will cost you money; a solid marketing strategy is an investment.” He divides strategy into three parts: objectives, strategies to achieve them, and the tactical tools to implement.” “It depends on what business goal you’re trying to achieve,” Anderson says.

Radulovic suggests a business identify its happiest clients and direct its marketing to finding more of them rather than try to reinvent itself or add a new division. “Chasing bright, shiny objects rarely pans out,” she says. “Once you have that down and you have a holistic view of that user experience, then put your money where your mouth is.”

An integrated approach to the advertising is important. “You can’t ignore online for print and you can’t ignore print for online,” Radulovic says. Calling that an “essential mistake” that many companies make, she states the two work together. Another option she suggests is thought leadership, especially if a business’s budget is constrained.

But once advertising is decided, it’s critical to be consistent, Radulovic emphasizes. “One ad will never change a company’s trajectory.”

Sales

“The best salesperson in a company is the owner because he has the most skin in the game,” says Murray Goodman, CEO of Intelemark, speaking from 30 years’ experience consulting to small and mid-sized companies. But he has also found that these people may also be ones for whom sales is outside their expertise and even comfort zone. “They either created something or invented something, but they’re not salespeople.”

So when they are building a sales force, Goodman says the most important thing is to keep an eye on the habits of their salespeople. Among the key factors is their ability to problem solve. Another is their level of preparation before picking up the phone and going into a sales presentation. “If they’re not prepared at the most professional and highest level, they’re compromising their ability to succeed.”

Most important in managing a sales force is making certain the salespeople are spending time with prospects who can buy. “The former CEO of Kinko’s told me, ‘The worst thing for a salesperson is to spend time with a prospect who can’t buy,’” Goodman shares, emphasizing quality of calls over quantity. “It’s important to have salespeople who can get to that determination.”

“It’s important to have the right people with the right skill set in the right position,” says Tracy Bullock, president and owner of Bullock Training & Development, a licensed Sandler training facility. For instance, she notes a company’s best salesperson may not necessarily be the best choice for sales manager, and observes she’s seen people promoted as a reward or in hopes they will inspire others — but who have no skill in management.

There are numerous assessments available to help business owners understand the profile needed for various positions in their company. And Bullock advises keeping in mind goals not just for today but for five years from now. “You cannot run or staff a business with only today in mind,” she says.

Staffing is just one of what Bullock calls the “four S’s” of sales. Two others are strategy and structure. Strategize first by determining the goal — is it to achieve a specific revenue amount, level of profitability or market share? Each would have different activities and measures that would align to it. For instance, if aiming for market share, Bullock says, “It’s more important to price competitively and understand your research and competitors more than if you were going for a revenue play.” It’s also important to understand value versus price. “You’ll often get into a sales situation and start offering things that aren’t necessary because you don’t understand the true value to the person who’s buying.”

Skill is the fourth “S” — skill in working with different decision makers, influencers and executors in a company. Bullock notes that differences come into play based on both size of company and industry, but in general the sales cycle is longer in larger businesses because there are more touch points within an account. If there are fewer than 10 decision makers, they usually talk to each other; if there are more than 10, it usually adds more layers. “At each level, one person’s ‘pain’ is not transferable to another. They will have a different perspective on time and resources.”

When qualifying a prospect, it’s not a matter just of who makes the decisions, but, more importantly, how and why. Bullock suggests thinking of the reasons that person would buy: What is the business impact? Why does this person want to solve for it? And don’t overlook the person who will ultimately implement the item in question — who may not be considered a decision maker in the company but whose opinion in the particular case might be the final “yea” or “nay.” Notes Bullock, “You increase your closure rate by determining whether or not there is a qualified reason to continue.”

Goodman puts it even more strongly: “There are no B2B sales concluded unless the buyer is ruthlessly qualified.” But most importantly, he adds, solutions must stand on their own merit. “You have to be able to articulate how you’re going to solve their critical business issue. If you can’t solve it, all the rest of the qualifications don’t make any difference at all.”

Accounting

Both the cash situation and working with customers are important from an accounting standpoint, says Mike Finnegan, a managing director in the Tax & Business Services Division of CBIZ. “Know how cash comes in and how your cash goes out,” he advises. “We tell clients, as a general rule, to keep cash on hand for 30 days’ expenses or have a line of credit to draw on.” Nothing hurts a business more than a cash crunch, he observes. And knowing what times of year money is tight or flush will help in planning, such as when to buy equipment.

Finnegan also recommends a business owner know all the company’s major customers. Keeping them happy, he says, includes knowing if the company’s pricing policy is working, as well as not giving them more than they need. “If you’re selling them extras they don’t need, you may be wasting time and cash.”

He believes having a good relationship with customers requires mutual respect. The customer will, of course, try to drive the price down, but “have a relationship so they know you’re also in business and need to make money,” he says.

“And if you have that strong relationship, it makes it difficult for the customer to leave,” Finnegan adds, explaining the customer would be faced with having to develop a relationship all over again with a new vendor.

But beyond the P&L statement and knowing how much cash is in the bank, the most important accounting instrument is the balance sheet, says Jerry Mills, founder and CEO of B2B CFO.

Observing it’s the instrument most business owners are least familiar with, he emphasizes it is the barometer of how the company is doing. The balance sheet holds the company’s cash, inventory, fixed assets, accounts payable and long-term liability.

“You can run on cash for a while looking at sales and the income from it,” he says, “but as the company grows and sales increase, the owner thinks cash will increase commensurately.” In fact, though, as the company grows, cash actually decreases. “The owner gets panicky because he doesn’t know where the cash is. But it’s on the balance sheet — what cash is tied up in inventory or payables or debt,” Mills says.

Honored earlier this year with a Blue Ribbon Small Business Award from the U.S. Chamber of Commerce as one of the Top 100 Small Business in America, and named five years in a row as one of the Inc. 5000 “Fastest Growing Companies,” B2B CFO has worked with many businesses, and, says Mills, “Most business owners tell us they had more cash when they had much lower sales. For example, they may have grown from $5 million to $15 million or $10 million to $30 million and they ask us why they had more cash when their sales were much lower.”

Mills says that, when working with businesses, “I tell clients, ‘All the sins of the company are buried on the balance sheet.” For instance, a customer may be paying later than it used to or be on the verge of bad debt so the company would not be able to collect at all. Or someone in the company is buying too much inventory. In fact, Mills notes, that is where employee theft can occur — burying it in inventory.

Mills notes also that a bank will look first at the balance sheet — not the P&L — when considering a loan. Ultimately, it is the balance sheet that determines if a company is bankable or unbankable.

 

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