Why Small Businesses Usually Under-Perform

Justice Rogers, Chief Justice of the Commercial Division of the Supreme Court of NSW in hearing the case found himself faced with an unexpected challenge; he found there were very few guidelines available to the Court – or to Boards – as to just what their duties were, and that those guidelines that did exist were often contradictory or unclear!

J Rogers’ observations on the AWA case lead to Professor Fred Hilmer chairing an Independent Working Party into Corporate Governance to clarify the relative roles and responsibilities of those who direct Companies, and those who run them.

I found the working party’s report (outlined in a small, rather dry little book, cutely titled “Strictly Boardroom”) made a lot of sense to me when looking at the challenges faced by our corporate clients but I think what started me seeing the parallels between the big and the small end of town was Hilmer’s focus on the generally poor performance of many large public companies in generating profits for their shareholders.

Putting together the fact that ATO figures show the average SMB owner makes around 4-5% net profit and the fact that a significant percentage of our Business Analyses show similar or worse figures prior to our starting work with clients, the penny dropped for me that some of Prof Hilmer’s observations are as relevant for our small and medium business (SMB) clients as they are for public companies, and so I’m taking the opportunity to share them with you here, along with a few observations of my own.

To begin with, many of our SMB Clients wear both hats of being the Director and the Manager of their business. So the person under the Director’s hat, who is responsible for setting the goals for the enterprise and enforcing performance relative to attaining those goals, is the same person who, when wearing the Manager’s hat, is mired in the day-to-day running of the business. As Manager he understands all the reasons and excuses for his own underperformance, distraction and loss of direction that are responsible for failing to achieve the Director’s goals.

How do you “fix” this apparently irresolvable challenge? Fairly simply, in fact: Separate your roles as Director of your Company (or business) and as Manager of its day-to-day running, and allocate specific times – and quarantined “head space” – to fulfilling these complementary yet antagonistic roles.

So let’s take a look at how the good Professor’s recommendations might shape up when applied to carrying out your Directorial duties in your own business:

Duty 1

Review and approve management’s proposed strategy.

What the average SMB owner does: Has no formal and precise performance goals and therefore, no formal strategy or written business plan against which to measure day-to-day priorities and activities.

ProfiTune Option: Set clear and precise profit performance goals for the business; assess and select strategies to achieve those profits; write out your business plan complete with milestones (sub-goals) and review points. Constantly refer to the plan, and judge your performance against it.

Result: The business owner allocates time in which to step back from the day-to-day activity of working in the business to check its progress against “the original plan” and from that perspective can see what is working, what is not, and what must change.

Your Manager will then be able to step back into the business with valuable feedback and input from your Director.

Duty 2
The Directors should appoint and reward the Executive on the basis of performance.

What the average SMB owner does: Takes a fixed wage each week, just like any other staff member (after all, they have to run a home too, and seek some degree of certainty in their private budgeting.)

ProfiTune Option: Set monthly performance goals; pay yourself a low weekly base wage and top it up at the end of each month with a performance bonus based on your performance.

Result: You’ll be well and truly attuned to how the business is going; far more focused on performance; and more motivated than ever before when you receive your performance bonus each month. Of course, if you don’t get a bonus, you know immediately that change is needed, and are far more likely to act in a timely manner to lift performance.

Your Director will have ensured that your Manager is suitably focused and motivated.

Duty 3
Approve and foster corporate culture.

What the average SMB owner does: Head down, bum up, expecting staff to read their mind, follow their lead, understand their standards and wishes, and do as they do.

ProfiTune Option: Spend a little time deciding just what values and behaviours you want to promote and develop within your team, then give some thought as to how you might install those in a deliberate and efficient manner.

Result: Everyone on the same page, singing the same song, sharing the same values. Less friction; less inefficiencies; less stress; greater opportunities to reward and recognise your team’s performance. More productivity!

Your Director ensures your Manager installs a deliberate and desired culture, as opposed to letting one grow like mould on old cheese.

Duty 4
Monitor the management of all business risks.

What the average SMB owner does: Save time on the management of risk (because “we just don’t have time for that stuff”), and then blow a multiple of the time saved on handling the crises as they occur.

ProfiTune Option: Create a basic checklist of the common risks faced by the majority of businesses, and set about using your ingenuity and budgeting time to apply it to minimising your risks in both a time and cost-effective manner. Then review your changing risk exposure in a routine and regular (quarterly?) manner.

(For a free “Basic Business Risks Checklist” click here.

Result: Your risks won’t “go away” but they are far less likely to damage you or your business; less expense, less stress, happier staff, more certainty.

Your Director will ensure that your Manager is duly protecting the Director’s assets.

Duty 5
Establish committees to assist the Board.

What the average SMB owner does: Works alone in attempting to discern where the market is going; what they can do best; how to improve processes; how to manage expenses; how to . . . . well, “how to” just about everything!

ProfiTune Option: Formally chair meetings at which your staff can contribute their thoughts and observations on the business in a regular and structured way. Do the same with key customers and/or suppliers in brainstorming sessions, feedback panels, market research groups, etc.

Result: You will tap into a free storehouse of great knowledge and goodwill that has the potential to take your business out of the mundane and into the ranks of the winners.

Your Manager will be guiding your Director with accurate, current and timely information so that you can both work together to improve the performance of your business.

Complementary Yet Separate Roles
If you fulfil the roles of both Director and Manager it helps to be mindful of which hat you are wearing and when; it helps to make sure that you wear each in turn to an appropriate degree, and it helps to be clear on which duties go with what hat.

As the Director, your tasks are to:

1. Clarify exactly what you want from your business – your Desired End Result.
2. Determine what recurrent measurable results (including profits) that the business has to deliver to you to achieve that Desired End Result.
3. Set clear and concise performance goals (precise, dated, etc)
4. Decide on a measurement regime – monthly, weekly, quarterly.
5. Coach management to improve their performance.
6. Measure as and when planned.
7. Reward or replace the manager.

As the Manager, your tasks are to:

1. Accept responsibility for producing the recurrent measurable results
2. Create a plan to achieve the concise performance goals.
3. Seek the knowledge and skills to produce the goals.
4. Measure your performance against the goals.
5. If you consistently fail to achieve the goals, resign one of your positions!