The Essential Attributes of a Good Business

Four 'Must Haves' to Succeed

He had a glum look on his face. We had just finished a workshop on marketing and tendering to Defence and this small business participant was struggling. “It’s a lot to take in” he said. “I’m just a tradie, now I’ve bought out this business and I’m a Managing Director. It’s all a bit overwhelming. Where do I start?”

A good question indeed and it lead me to try and think through what are the key attributes of a profitable, growing and sustainable business.

People who start businesses without understanding how businesses work end up creating employment for themselves and a few others, and not a business that can create real wealth. They have been called their self-employment companies. A self-employment-company is one in which the success of the business depends on how long and hard you work.

I'm not so concerned here about individual skills like leadership, the ability to delegate, accountability, the ability to develop a harmonious culture. There is no denying that these are important but it is not the individual skill I am concerned about.  Rather it is attributes of the business as a whole.

Here are my thoughts. They are of course open to challenge and I would be interested in your comments or suggestions.

1. A Sound Base

There are two components of this; direction and capitalisation.

Direction

A good business has a clearly defined strategic direction, an overall vision goal, what they want out of the business and where they want to take it. So many small businesses drift aimlessly, caught up in the day-to-day currents of doing, but going nowhere.

A sure sign a company is not doing as well as it could is when the owner’s focus is 100% on short term goals, on what he is going to do today, and not where he is taking the business.  Direction is critical but if owners and managers ignore that and focus on getting the sales in now, prioritising immediate sales over everything else, including customer service and satisfaction, then it doesn’t matter which way they go, they’re steering for no particular port.

A recent planning session with a client emphasised just how important it is to determine direction with clarity. The business has four major product groups, one of which has grown to represent about 70% of sales, a dangerous dependence.

We were examining future options for the business to reduce this danger when it became apparent that there was major constraint on the options that had not been voiced.  That unvoiced constraint meant that most of the options being canvassed would not have been realised had they been pursued.  They just weren’t where the owner wanted to take the business and would have been resisted, probably unconsciously.  Once that constraint had been put on the table the future direction was very clear, and greater clarity given to the options being discussed.

Good businesses have a clear business focus on what business they are in and on their target market.

Capitalisation
Undercapitalisation is a major cause of business failure. Capital is required for two types of assets; fixed assets and working capital.

Fixed assets – you need an office or a workshop from which to run your business. It may even be a home office, in which case it requires little capital.  Depending on your business you may need equipment, at least a vehicle and office equipment, and maybe much more in operational equipment.

Working capital – to work your business, that is fund your day-to-day, week-to-week and month-to-month activities.  That may have to cover wages, stock, debtors and pay creditors. Much will depend on the cycle time of your business, whether you provide credit and the terms of that provided to you.

Well capitalised businesses have the right premises, facilities and equipment to deliver sufficient value to the customers, and because they are able to deliver value they have a good customer base and good margins.

2. Customer Acquisition

Most small businesses, because they are founded on the technical skills of their owners, focus on the operational aspects of their business, doing the work.

They fail to recognise the primacy of selling; that unless you know how to win sales for your business and keep on producing sales your business will not be sustainable.

Unless you are willing to market your product, you won't succeed. Business is selling, acquiring and keeping customers.

“Of the major functions of business – product development, customer service, accounting, operations, and marketing – the one that always should be give top priority in an entrepreneurial venture is marketing.

The other functions are important, but without marketing you will not have sales and without sales you will not have cash flow and without cash flow you will not be able to pay for all the other functions (except by going into debt, which is simply borrowing against the cash flow of the future).” (Michael Masterson)

There is one other aspect of acquiring customers to think about. For all the importance of the lifetime vale of a customer, nothing lasts forever.  Look at your customer list from even two years ago. What proportion are still there today?

Let me ask you three questions:

  • How many sources of new clients do you have?
  • Do a large percentage of your clients and income come from one source?
  • Have you ever implemented a strategy that got you clients at break even or better and then stopped doing it?

Good businesses have learnt the lesson – they have clear strategies to keep acquiring new customers even while looking after and treasuring their existing customers.  Keep exploring new ways of acquiring customers.

One of those ways could well be government, and that means acquiring skills in tendering and bid preparation.

3. Making Sound Decisions

“The road to success is paved by good information.” You will make better decisions if you are informed on a regular basis by the facts regarding your business finances and a few other key indicators that measure the health of your business.

All the good businesses I have seen over a lifetime have a good (i.e. accessible and accurate) Management Information System that gives them the information they need to make sound decisions.

These Management Information Systems report on a regular basis. The owners have identified a limited number of Key Performance Indicators (KPIs) that are critical to their business. Information is provided in an easy to understand basis, often graphical because many people interpret information visually.

If you are required to tender or respond to Requests for Quotation it is imperative you track the number of requests for tender/quotation you get, and your success rate.  Both are lead indicators of future cash flow.

Businesses with a good Management Information System take one further step, one that is easy to bypass, but that makes all the difference to turning data into information on which to make decisions.

They ask “Why is it so?” and report on it. A typical couple of KPIs for trade-based businesses may be the number of quotes submitted and their Success Rate. They are important lead indicators of future cash flow. If there are changes in either it is important to know “why” in order to make the right decisions.

An attribute of a good business is that it makes good decisions because it has ready and regular access to the right KPIs.

4. Continuous Improvement

Good businesses keep getting better. They do so because they are continually looking to benchmark themselves other businesses, not only in their industry but also against those who perform well in other industries.

Guided, if not goaded by what they find, they work on all their key processes, only one or two at a time if necessary to ensure they can deliver faster, cheaper, easier to their customers.  Improvement is a constant series of small steps that compound over the year to make a real difference to their operations.

Continually improving your tender preparation skills is one area that will reward you.

Continuous improvement is practised, by definition, continuously.  It’s a good discipline, but sometimes it isn’t enough. When might you need something different, what Alastair Drysdale (This email address is being protected from spambots. You need JavaScript enabled to view it.) calls a discontinuous improvement?

Discontinuous improvement can be dramatic, but it can be safer than continuous.  In times of rapid change, continuously improving something which the market no longer values may be the worst possible thing to do.  It doesn’t have to involve a leap in the dark, and like continuous improvement need not be expensive to undertake.

If you find an opportunity for a discontinuous improvement it is almost certain there is already a profit leak in your business.

If my tradie works on developing the attributes of a sound base, prioritises acquiring customers, sets up and uses a good Management Information System to make sound decisions and practises continuous improvement he will not be overwhelmed by his new business. He will have a good business.