This site presents simple, basic business principles to help each small business function well. Michel A Bell spent 32 exciting, fruitful years with former Alcan Inc., now Rio Tinto (Alcan), in mostly senior executive capacities in head offices, large and small subsidiaries, on boards of directors of publicly traded and private affiliates, in different countries, cultures and continents. There were a few constants: Alcan's principles, objectives, and policies applied always. What applied in Canada applied equally in Thailand. These business principles, business objectives, and business policies were valid for billion-dollar businesses and million dollar businesses. Though I will devote this page to small businesses, the business principles, objectives, and policies I will discuss are valid for all businesses.
Small businesses are significant contributors to the economic growth of a country. Although each small business might seem insignificant, collectively, small businesses in North America employ a substantial portion of the workforce. That's why small business stewardship is crucial not only to the economy, but for job creation, and value creation for stakeholders.
Running a small business requires the same basic principles to create value as a big business. However, it's essential for each small business owner to understand that the failure rate is high. Some studies show up to 70%, but USA the Bureau of Labor Statistics, reports about 20 percent of small businesses fail within the first year, and a further 10% in the third year. Still, although starting a business comes with risks, understanding and applying specific core values and principles consistently and systematically with the right attitudes, product, and people, the likelihood of success rises significantly.
Developing and growing a small business can and should be fun. However, you need to be in the right business, for the right reasons, with the right people and right expectations. You must be realistic. If you plan to start a small business today, probably it will produce "unnecessary" goods or services. How many stores in a typical shopping plaza sell "necessary" stuff? How many businesses produce "needed" goods or services? Your small business will compete with other businesses for access to highly indebted folks' credit facilities to spend on non-essential items. Think about this as you journey.
The economy cycles from boom to recession, and then boom, but we don't know the timing. But we know the economy will continue to cycle between feasts (growth) and famines (recessions or contractions). That's why effective small business stewardship is an important consideration of every small business owner. She must be patient and never chaste the current fad.
Many business owners don't accept that famine follows feast, and the reverse. Often, they overextend their businesses in good times, and in the slump, they contract, collapse, or linger for years on the verge of collapsing. They don't realize they must find a sustainable operating level, with minimum debt (ideally, no debt) at which to operate during boom and famine periods. To do this, they must overlook some opportunities in boom periods. Most of all, they must avoid bad growth — opportunistic growth outside their vision, mission, and capabilities — especially those temptations requiring debt. Why do you think we have so many lay-offs in famine periods? Corporations chased unsustainable growth with borrowed funds, and then reality sets in, and they must contract. Sadly, too many of the CEO's of these corporations survive, some with huge bonuses, to boot.
Several business owners, particularly small business owners, don't see the need for flexible cost and revenue structures to cope with extended famine periods. Nor do they see a need to conserve funds and other resources always—in boom and famine.
Here is a business truism: if you and a business partner are not on the same page, the relationship will be a disaster. Imagine learning these matters after you start the business: You believe in paying taxes, paying creditors on time, being open with customers, but your business partner doesn’t share these views. Watch out; draw up a set of core values you and your business partner will commit to before you agree to join the business. Agree a dispute resolution process ahead. You don’t need a values’ statements or dispute resolution process when things go well. You need them for three reasons. First, each business partner can think through his or her obligations in sensitive areas ahead of his commitment. Second, when disputes arise, each partner can refer to the agreement as a reminder of the original intent. And third, your business partner can channel disagreements through a previously agreed dispute resolution process.
These procedures do not prescribe solutions, but the process to follow to get to solutions. I found pre-agreed core values and dispute resolution process invaluable during my career, especially working in different countries and cultures.
Why do you want to be in this business? Why not just offer your services for a fixed or commission-based fee? Some folks want to be in business because someone tells them about a "good business." Alternatively, they might see an enticing advertisement. Still, they might have a vision or dream from childhood. Beware of your pet project, your vision, your plans. Listen to and try to understand your spouse. If he or she is uncomfortable, ensure you listen and understand each concern. Telling your spouse to "trust you" or "he or she doesn’t understand" suggests you are not prepared to discuss the matter openly.
Starting a business, buying 100% or a share in a business, could be one of your most important commitments. Ensure your are doing it for the right reasons.
Though obvious, often we decide to start a business, home-based or otherwise, but we don’t think through what the business will do, or what skills it will need. Sometimes we see a TV ad with folks telling us how to earn thousands and do no work. That's the first sign we shouldn't be involved. I tell my students that only governments make money—they print it! We should strive to earn it. Ignore those TV ads telling you to sit, do nothing, and earn millions. To be sure, if it sounds too good to be true, it isn't true.
Be clear on why you will be in business—understand the mission. Along the way, you should do a SWOT analysis: examine strengths, weaknesses, opportunities, and threats to the business and other analyses to understand "where you are." This will lead to developing the business strategy—identifying core capabilities, customers, markets, and how to get to them. Most businesses do not have coherent strategies; instead, they have lists they call goals, without supporting plans.
Your strategy must show how you plan to win your customers, and how you will build on your strengths, remove weaknesses, seize opportunities, or overcome threats. This is crucial. Calling something a strategy, such as a pricing strategy, does not make it a strategy. Southwest Airlines exemplifies a corporation with a coherent strategy in an awful industry where almost all its competitors are perennial losers. Business owners should pause and ensure they understand their strategies before rushing ahead chasing dreams that will later become nightmares.
There are several matters each potential business partner should consider carefully during the business evaluation procedure. Here are a few questions each partner should answer before moving ahead:
Settle mission, business strategy and goals and then develop or update the business plan to reach them. The plan is your road map to do your strategy to reach the business' goal. Without an effective plan built on a coherent strategy, you will get lost.
The business plan should be an active document that helps you clarify your thoughts to see how you might seize opportunities, respond to threats, and handle the business' strengths and weaknesses. If you write it for someone, such as your banker, and then file it, you will miss the full benefits. The business plan should include the mission (often there is a vision, too) business strategy, ownership structure, economic and other assumptions, corporate goals, products, services, market analyses, financial analyses such as cash flows, balance sheet, and specific funding needs. Do not get lost in the numbers. They should merely reflect the score or result of doing the strategy and plan. I repeat: the numbers are the result of business activities; they do not drive performance.
If you are working without a business plan, write one. It should be simple and non-financial focused. As you develop the business plan, test major assumptions. First, consider again why you will be in this business. Second, how realistic are the business’ strengths and weaknesses, potential opportunities you identified? Third, have you identified realistically, threats from competition, the economy, and the marketplace? Essentially, you want to test the business strategy.
After finishing the business plan, you will have decided the organization type, structure, funding needs, and essential key resources. Still, you must work out several operational details, such as operating budgets and information systems.
Last but not least, the key to the businesses success will be people. People are even more critical in a small business where there is less specialization. Put the right people in the right slots and empower them to serve each other and your customers. For more check out Business Simplified.
Visit Michel's Blog for several business blogs dealing with taxation, value creation, boards of directors, and more.