Why SMEs stagnate?
How to go beyond better?
The bottom line is an indication of what goes on right or wrong in the company. Without a sustaining profit, a company is challenged for survival, much less growth. And that is why many business owners tend to channel their energies into direct contributors to the bottom line: finding novel ways of bringing in the money – from introducing different revenue streams to cost cutting measures everywhere. But results may not necessarily show a boost in profits. Often, when implemented poorly, the only result achieved is distress to stakeholders affected by the sudden -and likely- dictatorial changes in the organisation.
So why do results turn out differently?
Every department of the organisation, be it a profit centre (sales & marketing) or a cost centre (tech, finance) is in some way interconnected to this big thing called revenue. The linear way of thinking assumes the sole and most important driver for increased revenue is increased investment in the profit centres. This traditionally leads to a channelling of costs from the rest of the company to departments such as marketing, especially when the company isn’t doing as well as before. When a decision maker fails to see the interconnectivity between all departments – say viewing the cost centres as strategic functions, bringing them toward collective goals and allocating resources across in a meaningful way to reflect that, they stagnate.
Introducing what works: Hello, Productivity frontier
The productivity frontier is the sum of all existing best practices at any given time or the maximum value that a company can create at a given cost, using the best available resources.
Operating on it (point C) means you are being operationally efficient – processes run the way they do; , workflows are clear, and governed well and supported by appropriate systems such that everything a staff does adds value to the process chain. The result: a company which gives its customer the best value at optimal cost.
Most start-ups start out beneath that frontier (point A), and even without knowing it, try to work their way outwards. They usually succeed, moving from point A to point B, simply because owners of start-ups are usually extremely focused on a single mission - user acquisition, product development, etc.… and so anything that gets in the way is delegated; necessary business processes which do not differentiate the company is outsourced – and that helps to move the company towards the frontier.
But there is a tipping point, a point where the start-up transits into a phase of growth and establishment. At this stage the company generates a consistent source of income and regularly takes on new customers. Cash flow starts to improve as recurring revenues help to cover ongoing expenses, profits improve and this is where comfort kills the cat.
The biggest challenge here is managing a whole new range of demands requiring attention– managing increasing levels of revenue, attending to customers, dealing with the competition, accommodating an expanding workforce, etc. Despite the well-meaning efforts of the organisation to create stability, stagnation sinks in because companies don’t realise they are starting to manage their resources badly. And, instead of continuing its ascent towards the frontier, they shift to another spot further from it. They have unknowingly albeit well-meaningly compromised something.
What going beyond better means
At this point, asking the right questions determine whether the company stagnates or gets back on track. Even before jumping into new initiatives or making drastic changes, make sure the company is ready. Here are some tips:
1. Being the best at the frontier
Move from bookkeeping to management accounting: Don’t simply settle for bookkeeping services but move towards management accounting such as break-even analysis, planning and budgeting to understand how processes can be improved & resources can be utilised.
Resource rightly: Resources are limited. Business owners (or managers) should periodically review if the right resources are in the right places, for example in terms of people and capability. Does the team have the right skills? Is work distributed efficaciously? If not should they be trained or should work be redistributed?
Make decisions wisely: investing in useful management information is worth it. Many SMEs don’t use regular management accounts. Without this, business owners have little more than gut-feel and the bank balance on which to base important decisions. SMEs should aspire the best in gathering management information to support decision making, even hiring third-party specialists to gain insight and flexibility in both their business model and practices.
Once a company is at its best at the frontier, it is ready to look at ways to expand beyond its existing frontier.
2. Moving beyond the frontier
Invest in systems which support growth: When businesses operate at the frontier and grow sizeable, look at how to move manual management information systems, such as those on spreadsheets, onto platforms (such as ERP systems) which automate and integrate processes within the firm.
Engage the cloud: Low-cost cloud technologies such as Skype, Dropbox, and cloud accounting give small businesses the ability to emulate the virtual operations and practices of larger organisations.
Look at company strategy: Begin to take a step back and analyse where the business stands in amongst its competitors in the segment. Analyse ideas, opportunities and potential for market growth and how the core business can continually deliver value to its customers. Devise a growth/expansion plan and work on implementing it.
Align the organisation behind the vision: Begin to cascade the vision & strategy to the staff. Can the managers communicate the vision and take the organisation along for the ride? How is progress measured? What KPIs should be put in place? What happens when it goes off track? How is the vision retained even with strategic changes?
Business owners who understand the dynamics of building an enduring company will know the importance of continually evaluating its growth plan, being on top of resourcing and finally winning all stakeholders to that plan.
Where is your company at? Are you having the right growth plan, aligning your resources to that plan to bring your company to the next level?