The Facts of Business Life

by Bill McBean

  It’s not enough, though, to simply establish these check points. As an owner, it’s imperative that you and your managers continually communicate to your staff why you want things done the way you do. This kind of communication is important because in every company there are individuals who complain about doing things the “company way.” Explaining the “why” gives employees a different perspective on what the company is trying to accomplish and opens the discussion to employees who may be able to help develop even better processes.

  Control of People at Level 2

  There have been literally countless books and articles written about managing employees, as well as thousands of business coaches who teach it. But here’s the thing you have to realize as a business owner: controlling your employees isn’t as difficult as many make it seem. All that getting control of your employees requires is understanding and implementing the concept I’ve already discussed and will discuss again and again: processes operate the business, and employees operate the processes. That’s it. That’s how successful businesses work. Michael Gerber, in his book The E-Myth (Ballinger, 1986), discussed this at length, and there have been others over the years who have said essentially the same thing. But none of these authors have taken the next logical step, which is putting this basic concept into practice. What that means is that, as an owner, you have to determine what you believe is important to the success of the business, develop a step-by-step process for it, and then implement it. If you do this, you will have found the easiest way to gain control over your workforce.

  Control of Product at Level 2

  As an owner, you must always remember that the sole reason your business exists is to attract customers and keep them. The products you sell are the vehicle through which that’s done. At Level 1 you were the product, but now you have to step aside and let what you represent—and the customers come for—be the product. But stepping aside doesn’t mean giving up control. In fact, it actually means controlling not just the product but everything in the business that has to do with the product, both before it’s sold to the customer and afterward—so you can get the customer to come back.

  Controlling a product is not easy but it is essential to survival and success. There are basically three steps to accomplishing it. The first is to recognize there is very little, if anything, as important as product, and because of that, you can afford to leave little, if anything, to chance. The second step is to determine what and how you will exercise control. This step should actually be taken even before you open, expand, or reengineer a business and should be an ongoing project throughout your ownership career. Day 1 is too late to begin figuring out control of the product, and it’s a mistake few owners can afford to make. The third step is realizing the extent to which product covers your business. As you will see later on, product is one of the few areas in your business that needs the complete support of all the Facts of Business Life. At this level, however, product control begins with deciding what and how much to order, when to reorder, who to hire to support the product, what the selling price should be, how much gross profit the selling price will leave you, what volume levels you’ll need to have to make a reasonable profit, and doing whatever you can to see to it that the customer comes back to make another purchase.

  Level 3: From Survival to Success

  The objective at Level 3 is obviously for the business to become successful. And it is the point at which many companies do attain that success. But statistics show that it’s also the “killing ground” for most entrepreneurs, the point at which most new businesses fail. One of the best weapons you, as an owner, have to avoid this killing ground is installing controls and instilling the discipline to maintain them as core expectations at every level of your company.

  Level 3 is where the business begins operating in real time, so it’s at this point that all the planning and preparation you did at Levels 1 and 2 has to be put into practice. In order to establish and maintain the controls you determined were necessary at the earlier levels, you have to make sure that four things happen. First, there has to be clear and concise communication between management and staff about what is wanted and expected. Second, there must be constant discipline, from the owner down, to make sure that whatever the controls indicate is not working is corrected. Third, operations and controls must be continually fine-tuned. And, finally, controls must go beyond the normal, everyday financial controls that protect the business’s assets. In fact, the controls suggested in this chapter not only cover the financial controls that most owners use, but go beyond that in order to help ensure that you and your company will succeed.

  The Benefits of Control at Level 3

  Being in control provides you with an early warning system so you can see what’s about to happen before it does.

  Being in control enables you to allow employees to provide input that can lead to streamlined processes as well as improvements in how those processes work and how they are controlled.

  Being in control requires procedures, and procedures give employees guidelines for how to do their jobs and the kind of results that are expected of them.

  Being in control essentially enables you to run your business because Control + Processes = Management.

  Being in control enables you to “inspect what you expect.”

  Being in control provides you with early indications of immediate opportunities and threats in the marketplace.

  Being in control requires a tough mental discipline throughout the company, without which good things rarely happen.

  Control of Information at Level 3

  Level 3 essentially begins at survival and, if managed correctly, ends with success. Control of information is a particular challenge at this level because the business is fluid—that is, it’s moving from one end of the spectrum to the other—and the type of information you need changes. For example, when a business is still on the survival end of the spectrum, the most important information an owner needs to have is cash flow, sales, gross profit margins, and expenses, among others, and he or she needs to track them on a daily or weekly basis. But as the business gains some momentum and begins its journey toward the success end of the spectrum, the microfocus on financial issues becomes part of the owner’s focus on larger issues, such as business tactics, strategy, how to take advantage of the business’s strengths, and shoring up any weaknesses it might have. In other words, as the business matures, what was once key information continues to be important, but new and different kinds of information also have to be generated to help the owner and the company meet its new objectives and goals.

  As at every level, though, it is essential to maintain control over information at Level 3 because, as an owner, you can never let up on the relentless pursuit of accurate information. As was the case at Level 2, at this level the best way to do that is to prioritize what information is needed, by whom, and in what time frame; continuously check to determine that the information being used in the company is accurate; and make sure your employees are using the information the way you want them to.

  Control of Processes at Level 3

  As we’ve already noted, at Level 2, Creating Your Company’s DNA, an owner thinks through how he or she wants the business to operate on a day-to-day, week-to-week basis and devises processes to make sure it works that way. It’s at Level 3 that all these processes begin to be implemented, and it’s through them that the owner gains and keeps control of his or her business. Again, though, because at this level a company is moving along the spectrum from survival to success, its needs are changing, and implementing processes and their controls is a particular challenge for an owner.

  For example, when a company is still on the survival end of the spectrum, processes that involve assets are usually the ones owners pay most attention to, including things like how cash is handled and accounted for, what criteria are used for allowing customers to charge their sales, and how the company decides what products are to be inventoried. But when
a company has gotten closer to the success end, the most important thing may not be the processes themselves but the means by which the processes are managed. As I mentioned earlier, developing a process is one thing, but making sure it’s working properly may be an even greater challenge. Implementing and fine-tuning processes are, of course, essential, but managing them is just as important and must be an ongoing activity as long as you’re in business.

  Perhaps the most effective way of controlling processes at the survival end of the spectrum is by micromanaging them. Success is the goal, but first you have to survive. That means you can’t afford to let employees make mistakes and learn from them, or discover that a process you thought would work doesn’t and hasn’t from the beginning. As an owner, you need to be on top of everything and immediately fix whatever isn’t working.

  Controlling processes at the success end, however, is somewhat different. At that point, the best means of maintaining control is by stepping back and taking more of a macro view of your business. Knowing when to empower employees isn’t an exact science, but micromanaging will eventually smother the business, and if you want your company to grow and succeed, you will eventually have to empower your staff. That doesn’t mean, of course, that you don’t pay attention to what’s going on. What it means is that if the company is operating as you want it to, you should leave it alone and get involved only when and if there is a problem that requires your attention.

  It’s important to note that implementing processes and their controls is far easier if you’re starting a new company than if you’re reengineering your current business or taking over an existing one. This is primarily because if your employees are used to doing something a particular way, and you want it done differently, there is inevitably going to be some pushback. At the same time, it’s never a good idea to overload your staff with changes. It’s bad for morale and employee confidence, and it shows up in the results. Because of this, it’s particularly important for owners at Level 3 to determine which processes they want to implement first and how they will control each of those processes. Regardless of the challenge, though, the bottom line is that processes have to be implemented or your business will never operate to your standards and will never attain success.

  Control of People at Level 3

  As I’ve mentioned before, creating processes and procedures is one thing, but getting people to follow them is another. And no matter how good the processes are, unless they are followed, they will serve no useful purpose. Controlling people at Level 3 is essentially about getting them to follow those procedures, and there are several ways you can do this. First, you can continuously encourage them to follow the procedures and keep explaining why you want them to do it that way. Second, you can try to find a better way by rethinking the procedures and/or encouraging them to do so and implementing improvements. Third, you can tie their following procedures to their compensation. Finally, if you can’t do anything else, you can fire them and bring in people who will do it the way you want.

  It is very important to remember, though, that control of employees always starts with the company’s owners, which is good news for the proactive owner who understands the importance of consistent employee management and control. It’s the owner who must set the tone in the business, not just through words but also through actions. If owners want their employees to work hard, be professional, and have a positive attitude, they have to exhibit these characteristics themselves. In addition, as I mentioned earlier, controlling employees doesn’t mean becoming a dictator. It does require an owner to be tough when he or she has to be, but it’s also important that he or she be fair in dealing with the company’s staff.

  Control of Product at Level 3

  When the subject of controlling a product or service comes up, the first thing many owners think of is quality control. And that’s entirely understandable, since maintaining quality is an essential aspect of running a successful business. But controlling quality is only a small fraction of the control needed at Level 3. Since at this point the business has begun operating, there is a lot of activity around your product or service, and this activity has to be well managed, meaning controlled.

  In fact, control of product at Level 3 can mean many things. It can mean the way you buy your products for resale, how well you train your employees, how deeply you inventory your products, the price at which you sell your product or service, how well you record which products sell the fastest and which bring in the highest gross profit margin, how you follow up after a sale, how you differentiate your product or service from your competitors, and how you track lost sale opportunities, among many others. Because there are so many areas in which you could exercise control at this level, if you try to control all of them, you are more likely than not to paralyze your company. The real challenge, then, lies in prioritizing, that is, deciding which areas are the most important and, accordingly, which you should concentrate on. This doesn’t mean you can ignore the less important areas, but rather that you have to find a balance between those you need to exercise greater control over and those you do not.

  It’s important to remember that as a company moves across the spectrum from survival to success, as it matures and changes, the areas that are most important are likely to change, and you have to be able to change with them. For example, as the business grows, you will have to invest more money in inventory and accounts receivable. That means you’ll have to have more cash to run the business. In a situation like this, it is essential that you exercise control over the expense associated with that extra cash requirement, whether it comes from a bank or from some other area of your business. And it’s not easy. This kind of decision, and others like it about product control, account for a lot of the heartburn and sleepless nights that plague owners.

  Level 4: Maintaining Success

  At Level 4, control is not the most important Fact of Business Life—that role belongs to the fact concerning leadership. However, maintaining control over information, processes, people, and product is still essential, for several reasons. Perhaps the most important of these is that in order to function properly, leadership needs the support internal controls provide. For example, it’s hard to lead a charge for improved sales and gross profit without using past performance as a baseline. And if the new sales and gross profit objectives are based on past performance and information that’s incorrect, your new forecast will be meaningless because you will have raised the bar either too high or too low and wasted everyone’s time and energy. You will also have shot yourself in the foot as far as any momentum you may have made is concerned, and possibly led your employees to begin questioning your leadership.

  There are also traps awaiting unsuspecting owners at this level as they attempt to solidify their companies as Level 4 businesses, and without the use of internal controls these traps will be almost impossible to navigate around. For example, it’s important that the sales and gross profit figures you get from your sales department balance with those you get from accounting. If they don’t and you lose control of the balancing process, you will end up with two different sets of information, with the possibility that neither one is accurate. As a general rule, owners must exercise continuous oversight and control in order to have accurate financial statements on which to base decisions, as well as continually expand these controls as the business grows.

  As I’ve already mentioned, as an owner, it’s important to understand that as you move from one level to the next you have to bring the tools and experiences from the previous levels with you. But it’s particularly important in making the transition from Level 3 to Level 4 because at this point you don’t only have to bring what you’ve learned with you, you have to improve on it. In fact, if you want to maintain your success and become a strong Level 4 business, you have to take your company to a higher plateau of performance. Unless you do, you will be unable to avoid the traps of success and will never be able to put your company on a continuously solid foo
ting. There is an old adage that says it’s one thing to win but quite another thing to continue winning, and this is especially true in business. Your competitors want what you have—your customers—and if you don’t fight for them, you’ll lose them and your business along with them.

  The idea of ratcheting up performance is certainly not unique to business. Think, for example, about NFL, NHL, or NBA teams. Hoping to win a championship, they play the entire season to position themselves to make the playoffs. And then, since only the best-performing teams get into the playoffs, they have to ratchet up their performance in order to win the playoffs and become champions. It’s the same in business. Unless you take your company to a higher plateau of performance at Level 4—the equivalent of the playoff games—you will never get any closer to sustained success. There’s also another similarity between business and sports at this advanced level of competition—the first rule to continue winning is to not beat yourself. In sports, this means not incurring penalties or making other mental mistakes such as misreading plays or being out of position. In business, it means your company has to be running smoothly on all cylinders, and the only way that can happen is if your company’s internal controls are working efficiently and effectively.