Worst Strategies for Small Business by: Mike Hardesty Hardesty Hackett & Partners, LLLP

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1 The In the thirty years that I ve been helping struggling small business owners overcome their obstacles, I have seen the use of three predominant strategies that serve only to bring the state of small business to its worst possible condition. Three Worst Strategies for Small Business by: Mike Hardesty Hardesty Hackett & Partners, LLLP

2 In the thirty years that I ve been helping struggling small business owners overcome their obstacles, I have seen the use of three predominant strategies that serve only to bring the state of small business to its worst possible condition. Here I offer how each one came to be, its consequences for the owner and society, and how an owner might adjust his approach for the better. Go for Broke! Strategy Imagine a business as if it were a train careening down the track, the business owner in the engine compartment shoveling coal as fast as he can. He can t take time to look out the window, so he doesn t know where the train is going. He can t take time to look at the gauges, so he doesn t know how fast he s going, nor what his fuel mileage might be. He just takes it on faith that if he keeps shoveling, something magical will happen. This approach is popular among new business owners and those who still have lots of energy even when the business has been running for a while. Common knowledge suggests that a new business owner must work VERY hard to get a business running. But nowhere does common knowledge suggest the point at which working hard becomes detrimental to the business not to mention, to the owner. After a while, the Go for Broke owner comes to believe that he has no control over his market, costs, prices, cash, employees, customers, or his vendors. So, he continues to shovel fuel into the engine, trying to sell more products, believing that if he works hard enough and long enough, he ll suddenly become successful. Consultants call this living on hope-ium, hoping that everything will work out.

3 Accountants tend to foster this approach because when an accountant sells more, he makes more profit. So, he encourages his clients to simply sell more, therefore they too will be more profitable. But accountants are selling time, and most small business owners are not. Without a focus on costs, this strategy can cause many business owners to sell themselves into bankruptcy. The result of the Go for Broke strategy is a tired owner who feels he can t take a vacation, who continues to pour resources into the business until the retirement fund and the college fund are gone, the house has a third mortgage, and the credit cards are maxed out. He ends up where he seems to have meant to go broke. When he ultimately files for bankruptcy, he takes with him a huge bite out of the livelihood of his vendors, disrupts his customers, sends his workers to the unemployment lines, and often takes the rest of his life to get his family back on an even financial keel. If you recognize yourself or your spouse as a Go for Broke entrepreneur, I recommend the following: First, understand that you can control your cash, your customers, your vendors, your employees, your costs, and your future! So, stop shoveling! Step back from the business for at least two weeks. Start looking at where you want the business to go and what you want the business to do for you. Learn how to read the gauges. For gosh sakes, start focusing on your costs.

4 No Growth Strategy Struggling owners who have been in business for quite some time tend to adopt a No Growth strategy. They feel that they don t seem to be able to control what they have, and they re working too hard already. They ve learned over time that the larger the business has grown, the harder it has been on them personally. Growth comes to mean less time, less cash, and more employee hassles. They ve lost the desire to put continually more heart, soul, time, and money into the business. They adopt this strategy at just the point where it is making one or two percent profit, and paying them just enough to pay their personal bills, (but not lowering their credit card debt, the second mortgage, or replacing the retirement funds that have been borrowed). This is where they settle in; having what I call purchased a job. These folks feel beaten down by economic stressors. They feel more like a failure than a success, and the actual value of their business matches how they feel about it It s worth nothing. When they finally decide to give up and try to sell it, they either get no offers, or sell it for far less than it would take to replenish the funds than it took to keep it going. They just want out. For the economy then, a No Growth strategy robs employees of higher wages, and customers of lower cost products and products delivered on-time. It robs the owners of a decent return on their investment. And it tends to be wasteful for the environment.

5 Yet, many No Growth owners, who begin to learn how to manage using internal controls, suddenly look forward to growth. Internal control, coupled with growth, results in a higher return, higher profits, higher cash flow, higher business value, and a higher overall energy level. It also results in lower stress, fewer owner hours required, and higher customer satisfaction. If you recognize yourself or your spouse as a No Growth entrepreneur, I recommend the following: Again, put down the shovel. An unusual approach that I ve often seen work is this: Begin to do the work of preparing your business to sell. The things you must do to prepare it for sale are some of the very things you must do to grow out of a no growth strategy. Your accounting must be cleaned up. Your organization must be right for your business. Your people should have job descriptions. Your marketing methods and plans must be documented. As you concentrate on all the things you would do to prepare your business for sale, you may find that your efforts begin to look more like internal problem resolution so Some of your biggest time-consumers are quickly resolved! Gaping leaks in your cash flow are found and plugged! Problems with internal systems are corrected! Suddenly employees don t seem to be so much trouble! Those small successes tend to generate more energy, and more energy tends to generate more clean up of your processes and systems. Business owners who go through this exercise often

6 discover that they no longer want to sell the business because running a business finally begins to feel like it was supposed to at the outset. But, keep reading. No Taxes Strategy The No Taxes strategy is probably the most detrimental to every faction of the economy. Many entrepreneurs recognize this strategy because it is fostered by the tax accounting industry. Small business has evolved away from the family craftsman business, where the family business-owner-mentor passed down his experience to younger members of the family. The stock market crash ended many small family businesses. Then, wives and daughters were pulled out of the family-business-home environment and into factories to support the war effort. The 60 s saw a revival of the small business, but not a revival of long-term family member participation. There was no longer anyone to mentor the new business owner, so the next generation of business owners began the effort alone. The origins of the accountant becoming the mentor lie in two faulty beliefs. The first is that people with business degrees know how to run a business. The second is that because accountants have business degrees and have several business owners as clients, that they understand how to run a business. I believe these misconceptions originate solely from the

7 absence of any other mentor option, short of the owner going to school. Accountants, armed with business degrees and looking for more sales, took up the sword, so to speak, believing that they could give the right answers to business owner s constant queries. Of course I can, after all, I do have a business degree. But business degrees offer very little training in using internal controls, and accountants have little or no experience in operating a business. With accountants predominately specializing in tax accounting, and business owners seeking help from their accountants, the natural way to help owners, from the tax accountant s perspective is to lower taxes. In doing so, it is necessary to also lower profit. They proudly employ a myriad of methods for lowering profits to reduce taxes. I have found that most business owners who accept this type of help from their tax accountant get further discouraged about business ownership when, year-after-year, they show fewer and fewer profits. To ask an accountant to help improve the profit of the business, the business owner is really asking for a kind of help that the tax accountant is not equipped to deliver. Again, when these tactics are used, the business shows far less value than it might. Personal expenses are often run through the business, and there is little or no effort to understand and control costs, vendors, employees, or customers.

8 If, on the other hand, businesses would focus on paying as many taxes as they absolutely have to, the problem would turn itself around. Consider this example: a business makes $60,000 in profit. It also has $20,000 in principal payments to the bank, equipment vendors, or credit card debt. That leaves only $40,000 in cash generated by the business. This is barely enough to survive. Taxes on the $60,000 might be as high as $20,000, leaving the business with a mere $20,000 in cash generated. That amount feels like quite a squeeze to the owner. Wouldn t you rather make $600,000 in profits, even if you had to pay $200,000 in taxes? Sure, most people freak out when I suggest that they might have to pay $200,000 in taxes, but look at the rest of the picture. After paying your taxes, you have $400,000 to pay principal payments, buy equipment with cash, and take home a larger return on your investment. At the same time, look at what $600,000 in profits would do to your Equity and the value of your company! In this scenario, the value of your business would skyrocket, and then when you re ready to retire, you can sell it for far more than it s worth today! Abandon your no tax strategy. Stop running personal expenses through the company. Implement internal controls. Pay attention to your costs. Start growing in a controlled manner. Business will feel exciting again, you ll stop draining your personal resources, and you ll start earning a decent return on your investment.

9 About Mike Hardesty Mike is the Managing Partner of Hardesty Hackett & Partners and has more than 30 years of management consulting experience with both large and small firms in Australia, New Zealand, South America, Africa and North America. He has a JD and an MBA and co-authored the book, Adapt, available on Amazon.com. Hardesty Hackett & Partners LLLP At HH&P we provide classic management consulting deliverables: Reduce Costs, Increase Profits, Improve Productivity, Provide Organizational and Managerial Development, Team Building, etc. But unlike other firms, we use a 21st century approach of integrating the Knowledge Era dependency of Enterprise Value on Intellectual Capital. Hardesty Hackett & Partners, LLLP 70 Mansell Court, Suite 100, Roswell, GA P: HardestyHackett.com [email protected]