Habits of Highly Successful Small Business Owners

Being a successful small business owner requires a dedication to hard work, confidence, and the adoption of positive habits (to name just a few requirements).  We all know how detrimental bad habits can be to building a business: poor time management can push back project milestones; poor focus can distract you from your priorities— the list goes on.  But what are the habits that small business owners must have in order to succeed? What should a small business owner be doing on a daily basis to ensure his or her profitability?  Consider the following habits, which are of course not the only things you need to be doing in order to be successful, but a good start to put you on the right path.

Plan your time in advance using value driver “buckets”

All successful small business owners know that time can be their most limited resource. That’s why the most effective small business owners have a method of allocating their time effectively. One strategy is to plan your time in advance by using the bucket system. This means that you should focus your time and energies around your to-do list items that drive business value. While this can be a challenge even for the most skilled time-managers, don’t get bogged down on the little things, which will only get in the way of achieving your big-picture tasks. This minutia doesn’t drive value for your business, so why focus all your efforts there?  Every weekend, try to plan out the next week by deciding how much you will spend on each big category. However you decide to divvy up your schedule, the key is to plan ahead, so you don’t get off track when the week actually rolls around.

Know your numbers

Without keeping track of your income, expenses, and profit, you’re flying blind! You need to know your numbers inside and out, and that requires careful, regular check-ins. Devote time each week to reviewing your revenue, margins, expenses, cash flow, inventory and net profit. To keep track, you can do it the low-tech, manual way and keep an Excel or Google spreadsheet, or, you can use QuickBooks or a bookkeeper to manage and report your numbers to you. Regardless of your preferred approach, knowing your numbers is critical to being a successful small business owner.

Always look forward

It’s easy to get bogged down in your current workload, but in order to grow your income streams, you need to always be looking for the next deal or client. High-performing businesses are always generating leads, so it’s key that you have your sights on the future, even while working with current clients.  Practically speaking, try to set a daily goal for yourself. For example, commit to reaching out to a minimum number of business development contacts each day. While some days may be a bust, if you’re consistent, you will inevitably generate real positive returns on this allocation of your time.

Follow up

It’s rare that you’ll have customers knocking down your door for business opportunities, especially as a young business. Instead of assuming that business will come your way, take action: take initiative by making cold calls, sending emails, and following up until you get a definitive ‘no.’ Be persistent. These days, everyone gets distracted, and leads may need a friendly reminder from you that you’re still interested in their business.  To follow up effectively, leverage technology to reach more people with your business opportunities. You can try email add-ons, which will remind you to follow up on emails from potential clients that are sitting in your inbox and/or schedule emails for later, more optimal times. The idea is to keep the conversation moving. Ultimately, you will see the pay-off via your bottom line.

Net Income Effect of Overstating & Understating

Business owners sometimes make value judgements that affect net income.  Legitimately, some income statement entries are estimates.  If you overstate or understate such entries as inventory, net income can be shifted up or down. That may give the owner, prospective buyers and/or the IRS a distorted idea of how your business is doing.  At worst, a business owner may be accused of fraud or tax evasion.

Why Net Income Matters

Investors and lenders study financial statements to decide if a business is a good risk. The income statement, which shows how much a business earned in a given period, is particularly important to investors.  Public company dividends are paid based upon net income; dividends divided by the number of shares yields earnings-per-share. Overstating net income can make earnings per share better.  It may also affect performance-based bonuses.  Conversely, understating net income can make a company look less profitable, and therefore less desirable.  Even so, there are reasons business owners deliberately opt to understate it.

Distorting Revenue

The top of the income statement deals with revenue for the period.  Income includes cash sales and credit sales, which are accounts receivable as credit sales are income a company has earned but haven’t received yet.  Some of that debt may never be paid, for example when customers refuse to pay or go bankrupt.  By looking at how many bills went unpaid in the past, a company can estimate how much of current debts will also go unpaid.  Understating the amount of bad debt makes both the income statement and balance sheet look stronger and healthier.  For every debt not written off, net income gets a little bigger.  Likewise, if a company understates the amount of bad debt anticipated, that makes the revenue and net income figures higher.

Inaccurate Inventory

Revenue minus cost of goods sold determines gross income. Various other additions and subtractions turn gross income into net income.  Cost of goods sold is based on the difference between beginning and ending inventory.  If a company overstates inventory, indicating they have sold fewer items, cost of goods sold shrinks and net income gets larger.  If a company understates inventory, net income becomes smaller than it really is.  Business owners may err in that direction to pay less in taxes in a given year.  Or, inventory may be deliberately overstated to pad net income.

Problems with the Accuracy of Financial Statements 

While a business owner can tout the success of a business, their financial statements are the proof that an investor or lender will ultimately rely upon.  Inaccurate financials may result in:

Ruining buyer trust – If a buyer believes that an owner intentionally withheld or falsified information, the buyer may just choose to walk away from the deal, even if it truly was an honest mistake.

Delaying the process – When a buyer or a financial advisor that they have hired discovers an error, the sales process can grind to a halt. The sale of a business can be delayed for weeks or a month or more while an owner and the prospective buyer try to reconcile the error and/or dive deeper into the financials.

Loss of financing – A buyer who is relying on outside financing or investors to raise funds for a purchase might lose their opportunity to obtain funds, causing the deal to collapse.

Legal liability – In the event that the sale is completed without a material error being discovered prior to closing, a business owner could one day run the risk of a claim or litigation for fraud, even though the error may be an honest mistake.

Business Valuation: Do the Financials Tell the Whole Story?

Many experts say no! These experts believe that only half of the business valuation should be based on the financials (the number-crunching), with the other half of the business valuation based on non-financial information (the subjective factors).

What subjective factors are they referring to?  SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats – the primary factors that make up the subjective, or non-financial, analysis. Below you will find a more detailed look at the areas that help us evaluate a company’s SWOT.

Industry Status – A company’s value increases when its associated industry is expanding, and its value decreases in any of the following situations:  its industry is constantly fighting technical obsolescence; its industry involves a commodity subject to ongoing price wars; its industry is severely impacted by foreign competition; or its industry is negatively impacted by governmental policies, controls, or pricing.

Geographic Location – A company is worth more if it is located in states or countries that have a favorable infrastructure, advantageous tax rates, or higher reimbursement rates.  A company with access to an ample educated and competitive work force will also enjoy increased value.

Management – A company with low turnover in management and a solid second-tier management team comprised of different age levels is also worth more.

Facilities – A company operating profitably at 70 percent capacity is worth more than a company currently near capacity. Equipment should be up to date and any leases – either equipment or real estate – renewable at reasonable rates.

Products or Services – A company is worth more if its products or services are proprietary, are diversified with some pricing power, and have, preferably, a recognizable brand name. In addition, new products or services should be introduced on a regular basis.

Customers – A company is worth more if there is not heavy customer concentration, but rather recurring revenue from long-time, loyal customers, as well as from new customers created through a regular and systematic sales process.

Competition – A company not contending head to head with powerful competitors such as Microsoft or Wal-Mart will rate a higher value.

Suppliers – Finally, a company is worth more if it is not dependent on single sourced key items or items available from only a limited number of suppliers.

 

Copyright 2012 Business Brokerage Press, Inc.