Times are changing. Traditional small business management styles and practices are falling short during this recession and management must adjust their mindset for a shifting landscape.
What has worked in the past is not working now. When the economy was booming, a “fly by the seat of your pants” style of management may have worked well enough that underlining problems were not that noticeable. Yet, in the face of serious challenges brought on by a recession these same problems can put a company out of business.
It is critical that small business owners and their management team make a priority of identifying these problems quickly through timely reporting; clear communication; and action by all of their employees to solve them quickly.
Today, small businesses can be divided into two groups. The first we will call “World Class” and the second, “Also Rans”. World Class small businesses are big time into performance management while Also Rans are pretty much doing what they have always done.
Performance Reporting
As a small business owner/manager, you need accurate and timely information in order to manage appropriately. You can’t solve problems you don’t know about. If you try, you’re just managing in the dark. Thinking you can manage in the dark is just silly.
When I ask small business owners/managers how long it takes to close out the month and issue monthly reports, I often hear “15-20 days”. In this scenario, by the time the reports are distributed to the management team and each has had time to study them, then a meeting has been scheduled to discuss the reports, the next month is just about over. To make matters worse, by this time, there is a good chance that the landscape has started to shift again and no one will realize it for another month.
The best run small businesses find ways to close their month and issue reports by the second or third workday of the new month. You may ask, “How is this possible?” A business that is committed to performance management makes reporting the very highest priority once the month has ended. If accounting is performed in house, those involved are locked in their offices with the door shut and are not bothered with regular day to day activities.
Every other activity that might need to be performed during this time by this person(s) is either completed before or postponed until after this two to three day period. Or, it is delegated to someone else. If all of the numbers are not available, they can be accrued until the actual numbers are available. If accounting is handled by an outside accounting house, the key is to find a firm that is willing to act quickly at a price you can afford and then make sure you get them all of the information needed to do their job on the first day of the new month.
Under the “World Class” scenario reports are distributed on the second or third work day of the new month, studied by the management team on the third or fourth day and a meeting is scheduled to discuss proper actions by the fourth or fifth work day of the new month. This leaves three weeks of the current month to take corrective actions and realize the results. What a difference!
Communicating Performance Information
First, when it comes to decision making, each manager must realize that the decisions they make are only as sound as the quantity and quality of information on which they are based. However, not all great managers are as fond of numbers as are accountants. For example, expecting a great sales manager to read the hundreds of lines of detail in financial statements is probably expecting too much. First of all, approximately 67% of all people are visual and comprehend graphs and charts far better than the rows of numbers understood by the other 33%. For the 67%, “a picture is worth a thousand words.”
Second, World Class performance management is only possible when managing a small number of priorities. It is not humanly possible to manage 100 priorities. Each month, try giving your people 1-3 priorities to manage and watch performance increase.
Third, there may be some financial information that you do not wish to share with all employees for a variety of reasons, not the least of which is that they have little or no control over certain results. So, how can a small business owner share only the most appropriate information and do so in a way that clearly communicates the current situation?
A good solution is to issue a condensed report showing only “Key Factors” (highest priorities) relative to the budget or business plan. A key factor may be a factor that is the compilation of several other numbers. For example, instead of designing a marketing and sales report for managers that reveals “all” marketing expenses, you could distribute a report that focuses only on the “expense to revenue ratio” and possibly one or two other factors.
It shouldn’t matter if they exceed budget on marketing expenses if they also generated an acceptable margin on additional revenues. In fact, that is exactly what you want as that is what good business management is all about – growing the business.
For other departments, you might focus your reports on the number of “days turn” in inventory (so as not to tie up cash for too long of a period) or how long it takes to collect revenue. There are dozens of other key factors that can be measured that are not in a standard financial statement. Some factors are more relevant to one department than another. This information can be divided into different reports for different departmental heads.
Performance Based Compensation
In most every business, whether World Class or not, sales compensation is performance based, usually in the range of 40%-100%. In other words, 40%-100% of sales compensation is variable based upon the level of sales a sales person secures. This creates a situation where those that perform at higher levels earn more than those that perform at lower levels.
In World Class small businesses, this practice has spread to all employees (from receptionist through president). However, the percentage of total compensation that is performance based is usually much smaller for lower level positions (maybe 10%-20%) and larger for higher level positions (maybe 20%-40%).
Moving to performance based compensation plans can be dicey if managed incorrectly as employees can see this as a pay cut (a glass half empty view). You can imagine what that would do for morale. Some companies take the path of least resistance and simply make all future pay increases performance based. Others take a “cold turkey” approach to performance based pay and then introduce extra fun things for employees to ease the transition.
Still others fall in between, doing both. For example, they may give employees a 3% raise and make that 3% increase contingent on performance. Plus they may take an additional 3% from the employee’s salary and make that performance based as well. Because of the raise, the employee feels better about the change.
The key to a successful introduction of performance based compensation plans is to consistently emphasize the opportunity for increased earnings by improving performance (a glass half full view) and then to judge performance based on factors where employees have direct control. It goes without saying that management must then provide employees with feedback on their performance relative to those factors. Profit sharing might be based upon company performance but compensation must be based on individual performance.
Performance management gives employees the same incentive as the employer to meet certain objectives, gives them rapid access to critical company information, and an opportunity to have more control over their careers. The result is a “win-win” for the employee and the employer. A World Class small business starts with performance planning and management.
If you would like to contact me, you can do so by emailing me at mike.clough@bestbizpractices.org or visiting my LinkedIn page.
Posted by: Mike Clough
