Workbook for Small Business Management

The process of small business management needs to be understood within the context of the overall enterprise environment that consists of micro, small and medium-sized firms, within the entrepreneurial culture from which they are formed, and within the support networks that allow them to get started. Enterprise, entrepreneurship and small business management are closely related concepts but are not identical. Entrepreneurship is about new entry, new products or services, and the desire to grow a venture and maximise profits Entrepreneurs are typically strategic in their outlook. Small business management is about the operation of small ventures that may or may not have entrepreneurial capacity. Owner-managers of small firms are often focused on lifestyle. Many myths exist about entrepreneurs. Generally, they are not as risk oriented, not high-tech, not experts in their fields, and not strategically focused or supported by venture capital as is popularly believed. Entrepreneurs typically identify opportunities, marshal the necessary resources needed to launch their venture, and then build capability over time. Most entrepreneurial ventures are led by one or two entrepreneurs who are supported by a small development team and a wider constituency of customers and employees. Small business start-ups are generally lacking in resources and should be managed to achieve break-even quickly with low fixed costs and a strong focus on cash flow. The start-up process typically involves: acquiring the motivation to start; identifying the idea and validating it through market feasibility testing; acquiring the resources to launch; and then launching. Most nascent entrepreneurs are influenced by common barriers and triggers when establishing their new ventures. These are a combination of internal and external factors. While each individual is different, motivation and a desire to follow personal goals or creative ideas may be the most powerful factors.

Small business owner-managers need to learn how to screen business opportunities and adopt a more strategic mindset. Most tend to be more reactive and short range in their thinking. A lack of adequate market analysis and a reliance on guess work and intuition are common problems. Common causes of failure in small businesses are a lack of capital, poor financial management, lack of industry knowledge and managerial expertise, poor planning and staffing decisions, inadequate marketing and poor use of professional advisors, and personal problems experienced by the owner-manager.

Small business owner-managers are not generally engaged in formal business planning. However, they can derive benefits from strategic planning. The development of a clear vision for their business is an important step in successful strategic management. Formal written business plans are often prepared by small firms to secure financing from banks or venture financiers, or at the request of suppliers and customers. However, the most valuable use for a plan is to guide the internal operations of the business. Small business owners should plan to replace themselves with a system, placing attention on the design of a business model and structure that allows them to work on rather than in the business. The process of strategy is continuous and involves setting a clear vision and mission, identifying the critical success factors needed for the firm, then setting clear objectives before developing a plan for implementation. An important element of developing a strategic plan is to undertake an analysis of the external environment and competitors, which includes understanding the ‘rules of the game’ that exist in the firm’s industry. Environmental analyses should focus on the factors driving competition within the industry, as well as the political, economic, social and technological forces likely to impact on the business in the future. Small firms should seek to adopt competitive positioning strategies focusing on securing niches in the market that allow them to make best use of their internal resources. Future growth is likely to involve a balance of matching product and market opportunities and following emergent strategies. There are at least four main planning responses that the small business owner can adopt depending on their environmental uncertainty and organisational complexity. These responses will involve varying degrees of formality and sophistication and operational or strategic levels of focus. Selecting the right planning response for the conditions under which the business is being managed can be important to the overall success of the firm.

Marketing within the small business is not the same as found within larger organisations due to limited resources, but also the owner-manager’s ability to get closer to the customer and understand their needs and wants. The term “customerising” has been coined to describe the process of marketing within the small business. This involves the ability to delight the customer by offering significantly better levels of product or service quality. Successful small firms have formal approaches to marketing and secure an above average level of word of mouth referrals. These firms have business generating systems and know why their customers buy from them and how they make buying decisions. Small business owners need to understand customer needs while monitoring the past performance of their firm within its market. They also need to develop a coherent and well considered sales management process and a marketing strategy that considers each of the seven elements of the marketing mix. This strategy must identify selected target markets, develop a position within these markets and create appropriate plans for the management of products, pricing, distribution, promotion, process, people and physical evidence. Further, by paying attention to the quality of service that the firm can give to its customers, and engendering in them a perception of value it can generate customer loyalty, repeat business and positive word of mouth referrals.

Growth is only one option available to small business owner-managers and one that most do not chose to follow. Most small business owners are content to manage their firms primarily for lifestyle rather than growth. If the owner-manager decides to pursue growth they must learn how to manage ever increasing scale and scope, putting in place systems to allow the business to be effectively controlled. Keeping the business profitable during major periods of expansion is one of the most important challenges as overheads rise and working capital is at a premium.

The classification of firms into micro, small, medium and large is undertaken primarily on the size of their payroll. As the business expands in size the role of the owner-manager becomes more complex and leadership more important. The owner-manager’s ability to develop his or her staff into a team who can operate systems efficiently and effectively is one of the most critical elements in the firm’s long-term success. If the owner-manager is unable to develop an effective team, capable of taking over responsibility for operation of the business, it is problematic that they can ever successfully grow their firm. In this chapter we look at the duties and responsibilities of small business owners when recruiting employees, and the importance of team building to the successful development of a small business. We also examine the need for the owner-manager to view their role as that of a coach and the importance of coaching skills to successful team building.

Operations management is crucial to the success of any small business. It impacts both the firm’s financial and non-financial aspects. Of importance is the control that can be obtained over the firm’s cash flow, stock and other productive assets to achieve the maximum levels of operational efficiency and effectiveness. Each business is likely to be different in how it operates, and the key performance indicators (KPI) that it needs to monitor how it is performing. This chapter examines operations management and how it applies to small businesses. It includes a review of business process analysis, the development and use of meaningful KPIs, operations management systems and techniques.

Technology offers small business owners an opportunity to enhance the productivity of their firm, widen its marketing reach and significantly improve the level of control they have over information and communications within the company. The use of technology, particularly information communications technologies (ICT) by small businesses has grown significantly in recent decades. This is due to the proliferation of high performance, but relatively low-cost ICT and their enabling software. One of the main areas in which this technology use has manifested itself is in the area of online and ‘in-the-cloud’ business software for marketing, accounting, HRM and operations. This chapter examined the use of technology in SMEs such as enterprise resource planning (ERP), customer relationships management (CRM), and knowledge management systems (KMS). It also examines the use of e-commerce, e-business and e-marketing within the small business.

Financing a small business venture requires the owner-manager to determine the amount of capital that will be required to achieve the level of activity and growth within the business over its early years. How large this amount of capital is will depend on the nature of the business, its industry dynamics and the ambitions or goals set for it by the owner-manager. Many small firms are established with relatively small amounts of capital. They also manage to trade successfully for long periods without seeking external funds from banks or venture capital. In this chapter, we examine the financing of a new small business venture.

While many small businesses start up with only bootstrap financing, it is usually necessary for them to expand their operations and invest in both new capital equipment, employees and marketing or advertising activities. The expansion – even modest expansion – of a small firm can place a strain on the firm’s resources and it is possible for a small business to overtrade and find itself in a financial crisis even though sales are increasing. This chapter explores the importance of understanding the working capital cycle and the need to monitor the break-even sales within the firm while understanding the importance of ‘gross’ rather than ‘net’ profit. It should be noted that the purpose of this book is not to cover financial accounting issues in any detail as this would be beyond its scope. Instead this chapter aims to provide an overview of key financial management concepts considered important to the successful operation of the small business.

Franchising has become one of the most successful forms of business model in recent years with business format franchising systems spreading rapidly throughout the world. Franchising offers the advantages of a proven business system, training and management support, and ongoing marketing. In this sense it is often viewed as being less risky than starting or buying an independent operation. However, franchising may be overly restrictive for many owner-managers and can incur high up-front and ongoing costs. Not all franchising is successful and franchisees may not make as much profit as independent operators. Care should be taken when selecting a franchise, the need for due diligence is no different to other forms of business purchase. Australia has introduced a Franchising Code of Conduct that aims to regulate franchises and protect franchisees. Franchising has proven a highly successful business model for exporting as it serves to reduce risk. Franchisors seeking to enter overseas markets are likely to seek partners to assist them to secure local knowledge and access to resources.

Crisis management, turnaround strategies and reengineering are just as important to the small business owner-manager as they are to the managers of large corporations. Unlike their large business counterparts, the small business owner-manager is likely to experience not only loss of profits and shareholder value if things don’t go well, but may lose their entire livelihood, personal assets and reputation. Fortunately, the small business is capable of getting itself out of trouble just as quickly as it may get into difficulties. This chapter examines how small business owner-managers can deal with trouble and overcome difficulties by problem solving. It explores the process of crisis management in the small firm and suggests that reengineering and turnaround strategies are not only the preserve of large firms.

This chapter examines the issue of valuation and the related issues of purchasing and selling a small firm. It highlights the fact that valuation is not a precise science, and there is no established formula for determining how much a business should be worth. It also considers consolidation and harvesting of the wealth from the business.