Expanding and Handling Problems
OBJECTIVE: A growing business needs to have appropriate expansion policies in place, plans to motivate key employees, and the know-how in handling common business problems. In this session you will learn how to face the challenge of making your business grow. You will receive advice from been-there-done-that experts.
Rules to Follow Before Expanding
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 $3,000 per month would be $180,000. 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 $36,000.
Reasons Why Start-up Entrepreneurs Overlook the Importance of Starting with a Pilot Operation First
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.
Elements You Must Deal With in an Expanded Business not Present in a Start-up
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:
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.
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:
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.
Do's and Don'ts of Profit Centers:
Let's review some of the basic rules that apply in the creation of profit centers:
Some Do's and Don'ts in Starting Your Business
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.
Common Business Problems
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!
Basic rules for Handling Serious Business Problems:
Business Plan for Session "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.
Instructions on filling in the business plan template:
We suggest that you fill in each section of the business plan
The template for all sessions can also be downloaded into your computer as a single document:
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 15 sections.
Many other business plan formats are available in libraries, bookstores and software.