In an entrepreneurial business it’s easy to get really close to clients, suppliers and most of all staff. In theory, this is a good practice and relationships are often what hold an entrepreneurial business afloat, but that is only when such relationships are not interfering with sound business decisions.
Whether in a corporate or an SME, decision making should be based on cold data that is efficiently analysed in order to determine the correct decision to be made – there is no room for emotion.
When a client requests a discount because of its own budget restraints, the entrepreneur should have the cost of sale figures available to determine at which point a loss will be made on a job and have the courage to walk away if the job is no longer profitable, even if the client has become a close friend.
Making tough choices
Similarly, when suppliers are charging too much and thus affecting profitability negatively, it is the duty of the entrepreneur as custodian of the business’ finances to find alternative suppliers. If one has been working with a specific supplier for years, then this can become difficult to do, as it could mean disrupting an otherwise good relationship – but not doing so will be even more hazardous to the longevity of the business.
The most intricate and difficult area is that of staff. There is a basic principle in life; spend less than what you make. Especially in the service industry, salaries can easily become a huge portion of the company’s expenses and when there is free capacity in human resources it is as good as having wasted stock in the warehouse of a manufacturing business.
It’s the duty of the entrepreneur to ensure that there is just enough capacity to service the clients and fulfill on the requirements of the business. Extra capacity should be cut. It seems like a heartless approach to take, but keeping wasted capacity for the sake of relationships or compassion will put the sustainability of the business and, ultimately, everybody’s jobs at risk while compromising the credibility of the entrepreneur. Another pitfall is to tolerate non-delivery by staff or suppliers due to relationship and for the sake of keeping the peace.
Difficulties arise when suppliers and employees are fulfilling on all requirements, but an over supply of capacity is forcing an entrepreneur to cut back. The word retrenchment is probably one of the most feared words an entrepreneur can use. Not just for the employees, but also for the entrepreneur. It accompanies a feeling of failure.
When managing a small business, relationships will be much closer than in a corporate environment and it is always a hard decision to let go of talent and allow someone to re-enter the market when they have intimate knowledge of the company’s intellectual property. But the hard reality is that stock availability should match requirements and, similarly, human resource capacity should match service requirements or the business will burn money and will therefore not be sustainable.
There are two ways in which retrenchments can be rolled-out; operational requirements or last-in- first-out (LIFO), each with their own set of procedural requirements. Once again an entrepreneur has to be careful not to let personal relationships cloud sound judgment.
When a retrenchment principle has been chosen, it has to be adhered to regardless of personal feelings or relationships. When choosing to retrench on operational requirements, decisions have to be based on which employees have too much spare capacity or whose absence will not negatively affect the business. It is important to be able to justify the decisions made.
Managing a business, especially a small business, is not an easy task and requires continuous planning, organising, leading and control. Management of any business needs to be approached in an unemotional and analytical manner in order to make sound business decisions. While in some instances compassion is a good thing and can foster wonderful working relationships, without balance and objectivity it can easily kill a business.
There are many tools available to entrepreneurs to ensure sound running of the business. When business processes have been developed and quality and HR policies and standards are in place according to client requirements, there are measurements available to measure the performance and profitability of each client, supplier and employee. Any variance from standards or policies and any non-compliance with processes should be addressed immediately, regardless of the relationship involved.
Finding your tools
According to Churchill and Lewis (2000), the tendency of entrepreneurs to focus on their own skill and relationships often leads to them ignoring the ‘science’ of business and operational management.
They contend that this is the main reason for the low entrepreneurial success rate. Systems development is neglected and the owner-manager remains the main survival factor of the enterprise. During the life cycle of an entrepreneurial enterprise, the rapid growth phase is often followed by chaos, especially where there are no processes in place.
The need for sound processes increases as the enterprise progresses to a rapid growth phase. Hall, Daneke and Lenox (2010) argue that without processes and an awareness of sustainability, entrepreneurship will remain uncertain. Hung and Whittington (2011) believe that process and system theory will institutionalise entrepreneurship. They contend that entrepreneurs should use systems and technology to build legitimacy and mobilise resources.
Other tools which entrepreneurs should be using include role definitions and performance management systems. Service level agreements should be in place with suppliers and clients. Both the performance management system and the service level agreements should be used on an ongoing basis to track whether value is derived for the organisation.
When an entrepreneur realises that profitability will be affected by the performance of employees and suppliers, it becomes easier to manage the business based on facts and action, which leads to the creation of a win-win situation for the business itself, its employees, suppliers and its clients.
When running a business, there are various elements affecting its success and sustainability. The most important aspect for an entrepreneur is to ensure that the business is profitable. This cannot be achieved when relationships interfere with sound decision making processes.