Changing your small business that might be a routine job into a major venture is not difficult. If this is done you can move from being financially weak to absolute monetary freedom.
This write-up is meant to transform the thought process of small time businessmen. This change in thought process can bring about this small time businessman to think largely about increasing the wealth of the investor i.e. the shareholder. This change can come about if the small time businessman shifts his focus from considering his present business as just his breadwinner to understanding that the current business itself can grow into a very large and profitable business enterprise.
So what is it that it takes to bring about this change? Spend time trying to study and assessing ways and means to make the business grow by adopting new and progressive strategies and then perhaps at a later stage even contemplate going ahead with a public issue or raising capital otherwise. This kind of thought process would help in translating these thoughts into reality.
The Point of Reference
The first few steps when starting off any small business would be
- The plan
- The funds
- Absolute involvement of the proprietor
When all these three fall into place only then will income be generated and allow the business to carry on. This is when most small time businessmen end up just continuing with the same strategies that have been used so far in their business failing to realize that their business has tremendous growth prospects.
If they think beyond and broaden their horizon then their current business, which earns them their bread, will provide them with much more. If they do not think ahead the small business will continue to remain so. Most small business owners are of the belief that they are the only ones competent enough to take decisions about the business. For any business to grow, what is required is to think ‘out of the box’.
What this alternate path proposes is that it is the duty of the owner to identify, utilize and promote useful and effective proposals and suggestions by others as well. For this to happen it would require a significant change in the thinking of the smalltime businessman. Nevertheless it is important that the smalltime businessman understands that to convert your small business into a large scale enterprise requires a drastic change in thought process.
This change in thought process is what is required to convert the small business into a large-scale enterprise. Only if it is considered an investment can the business go public. If the business requires continuous involvement for its day-to-day operation the value of this business would come down significantly.
The main purpose of this write up is to make understand that it is feasible to covert a smalltime business into a large-scale operation. This would make it grow from monetary dependence to absolute monetary freedom. This would give such businessmen total independence.
One way the small time businessmen can achieve this would be by making a change in the image of the job during the period of converting it from a small business to a large business enterprise. This can be achieved by adopting the following methods.
- Conceiving the Job – This would involve putting together both the business plan and the funds required. This along with the businessman’s work principles/beliefs will be able to put up a business that generates profits.
- Building up the Investments – The role of the businessman would shift from that of an entrepreneur to that of a managerial one. The job would be to build your investment by erecting such a set up that runs smoothly and it should grow in such a manner that it can continue to do well even without the constant attention of the proprietor.
- Handling the Investments – When the investments are handled well you can set an objective for both expansion and increase in the profits which would increase the income in the hands of the owner which are kept aside for paying off salaries, taxes, bonuses etc.
Building the Investment
Let us assume that the business has already started. Now we have to shift our focus from converting this into a large business enterprise, which would be more of an investment for the businessman. To do so the businessman would have to work in other sections of the business also. That would include:
- Forming a team that is capable of making decisions efficiently.
- Adopting effective marketing strategies
- Developing a method wherein productivity increases.
The aim of this whole exercise is to ensure that the business is run efficiently even without the constant attention of the businessman. The aim of the marketing strategies would be to get a substantial increase in the revenue of the business. If the productivity increases then one can target a certain turnover and continuous growth with the fulltime attention of the businessman.
This is possible only if the small time businessman sets out a new pattern of functioning in order to achieve all of the above. This new way of functioning would make owner of the small business so busy that all tasks undertaken then on would be aimed at achieving the new targets. If all the tasks, undertaken with the right earnest then at the end of it all would be a business that is functioning independently without the fulltime attention of the businessman.
That is when the small business would have truly taken the shape of a large enterprise, which would turn out to be an investment in every sense of the term. At this point of time the income, which is at the owner’s discretion, also increases substantially.
Handling the Investment
The owner of the small business would also be assigned the role of handling the investment. This would mean that the owner would have to start functioning at a totally different level. The owner would have to be involved in the whole process. This would involve the owner to examine the investments thoroughly and enrichment of the value of the company.
The aim is to keep a constantly monitor both the operations and finance related activities. This would permit the businessman to handle the investment well. When you talk about development and progress of the business it is related to finding new ways of generating income and increase production. Since the businessman would stop focusing on the entire production process now is the time to focus on these tactical matters.
For example take the case of the American Dixie Group, Inc., which was founded in 1989 in Albany, New York by Lay Cooper. It was done for building machines for industrial use, which was used in, for food processing, making of plastics and other packaging purposes. The business was called a success and it was said to be good at problem solving and catered to clients such as Campbell Soup and Nestle.
The business was doing well till the time it remained a small enterprise with just about 24 employees who would handle the shop and they had to handle about 6 projects. Problems started seeping in when they started their expansion plans.
The suppliers started complaining about the delay in payments and the customers also had complaints due to the delay in deliveries and the substandard quality of workmanship. The Company claimed bankruptcy in September 1998. They had failed because the management was not run professionally. These problems are quite common in small enterprises but what you need to be aware of is that is can all be altered with just a little focus and desire.
It is important that the thinking has to change significantly when it comes to preparing the budget as well as handling the investment. This is done so because the budget that is usually prepared doesn’t give a smalltime businessman enough room for building and enriching the worth of the business. The usual budget is not meant for enhancing the value of the investment but is just a simple procedure of income as compared to expenses.
This is the usual approach. In bigger establishments a lot of time and effort is spent for to make a proper budget and this is scrutinized time and again. Earlier events have proven the fact that businessmen owning small enterprises do not have the required means to achieve the whole lengthy procedure of proper budgeting. Therefore the smalltime businessman must have foresight and work towards it.
It is a belief that the smalltime businessman must prepare a budget starting from the bottom upwards. This would ensure that the focus is on the target of building and enriching the investment worth of the business. Later on this can be achieved with the necessary means that the businessmen has.
There are basically 5 steps that are involved in the preparation of the budget.
- Prepare a budget on the basis of the businessman’s target as regards the profit.
- Determine the difference between the targeted budget and the current one.
- Determine a method of filling the gap by either cutting down or growing or by applying a mixture of the two.
- Mention the plan of action that would be undertaken to actions that are required to fill the gap.
- Prepare a method by which you can focus on indicators, which relate to improved performance and also their impact in the long run.
The first step of the businessman would be to ascertain the equity that is required for the particular kind of business and the risks involved. This is a very valid question but rarely asked. This should be established by finding out what the requirements of an ordinary shareholder are. More often than not this is determined by what the proprietor is comfortable with.
This should be actually done on the basis of the behavioral mechanism of the return on investment (ROE). This is also known as the Du Pont System of Financial Control. This is shown in the below mentioned example wherein only two items are used i.e. the Pre-tax Return on Equity (PTROE) and the Profit before Tax (PBT).
After these two main percentages are determined, then the businessman will have to prepare all the other percentages on the basis of this. Let us try to illustrate this. A review of similar businesses shows that the PBT is in the range of 14% to 16% of the sales and the PTROE is in the range of 22% to 26%.
The statement below shows the present income in percentages. It is well below the businesses of similar nature with the PBT being 10% and 14.29% on the PTROE of $700,000. In the statement given below Budget A is the estimated income statement for the forthcoming period given in percentages keeping in mind the new PBT percentage which would require building of investment worth. However, Budget A does not meet its goal with revenue being $1,000,000. The costs could not possibly be reduced to attain the preferred PTROE or the PBT. Budget B was prepared to achieve the 15%.
To attain the desired results not just the cost of goods sold (COGS) need to be reduced but also operating expenses (OE). Finally to logically attain these targets the actual revenue has to increase to a level of $200,000. All of this would mean that the smalltime businessman has an understanding of the relation between cost, volume and profit. Any text on managerial accounting would help in the understanding of all this.
|CURRENT INCOME STATEMENT||BUDGET A||BUDGET B|
|Sales: $1,000,000||Sales: $1,000,000||Sales: $1,200,000|
|Revenues: 100%||Revenues: 100%||Revenues: 100%|
|CGS: 40.00 %||CGS: 39.00 %||CGS 38.00 %|
|OE: 50.00 %||OE: 48.00 %||OE: 47.00 %|
|PBT: 10.00 %||PBT: 13.00 %||PBT: 15.00 %|
|PBROE: 14.29 %||PBROE: 18.57%||PBROE: 25.71 %|
To attain this objective a proper plan has to be prepared to get all the percentages in order so as to reduce the difference between the current PBT and the desired one. The business is required to prepare an action format having two parts. The first one would include activities that are to be undertaken based on the impact it has on the value (i.e. from the higher most to the least).
The second one is related to the effort required to achieve the same (i.e. starting with the easiest and move toward the difficult). Then all the actions that are required to achieve Budget B are to be prepared.
Even if the businessman does not have the required resources the new plan would have definitely increased the PBT from the current 10.00% and the PTROE from 14.29%. Last but not the least; continuous monitoring of the budget is required. This would help in comparing the actual performance to the desired one.