SESSION THIRTEEN

Business Expansion and Handling Problems

Rules to Follow Before Expanding Starting With a Pilot Operation First Problems in an Expanded Business Not Present In A Start-Up Delegation of responsibility and authority Monetary incentive plans Ways to Motivate Key Employees: Rewards And Recognition Leveraged profit sharing plan Unleveraged profit sharing plan Commission plan Key Elements for Creating Successful Profit Centers Important Overall Considerations in Starting Your Business Pitfalls to avoid Long-term financial planning Common Business Problems Uncontrolled cash flow Drop in sales or insufficient sales Higher costs New competition Business recessions Incompetent managers or employees Dishonesty and theft Basic Rules For Handling Serious Business Problems Suggested Activities Top Ten Do's and Don'ts Sound Byte Transcriptions Session 13 Business Plan Session Feedback

Rules to Follow Before Expanding

Read Transcript Once your business has started, you will face the challenge of making it grow. In this session, you will learn about some basic rules to follow before expanding.

Before even thinking about growing your business, you must first have a stable platform from which to take off. You must work out the bugs in your initial operation, including making it profitable.

Your readiness to expand will improve if you can gain experience in all aspects of your start-up unit. Whether you have started an Internet business or opened a restaurant, become personally involved in all the functions of your business. Then you can detect weaknesses that can be remedied early on, where changes can be made rapidly and at less exposure to loss.

Another reason to become personally involved in every aspect of your business is that later on, after expansion plans are implemented, you will be depending on others to whom you must delegate responsibilities. Because you will have had personal experience in running things yourself, no one will be able to mislead you.

Remember that after your expand, you will no longer be the person at the cash register. You must have systems in place to prevent employee theft and shrinkage (shoplifting). Your competitors have probably already figured out the loss-prevention systems that work best for your particular business. So, check out and implement systems already being used in your industry. (If you're going to open a convenience store, go to work for 7-Eleven beforehand to learn its systems that work!)

Try to avoid giving your personal guarantee on leases or creditor obligations. As much as possible, separate your business liabilities from your personal assets. While banks will most likely require your personal guarantee on business loans, exposure of your personal assets can be mitigated by drawing the line against this practice whenever possible.

For example, a potential landlord for your second store may ask you to personally guarantee the lease. Your exposure in a five-year lease of $3,000 per month would be $180,000. This amount could far exceed the initial capitalization of your business. Yet, because of the desire and enthusiasm to add more stores, it will be tempting to incur such potentially overwhelming liabilities.

Instead, by practicing discipline in limiting your liability, you might insist on negotiating a one-year lease with options for additional periods of time. Your liability in this case would be reduced to $36,000.

Starting With a Pilot Operation

Colette Coffeman Catering Service "If it can't be profitable, make sure that you don't go out and show yourself off in a bad light." Read 855 PC - wav 855 Mac - aif 664KB Real - rm

There are some understandable reasons why many entrepreneurs overlook the importance of having a successful pilot operation in place before expanding.

Entrepreneurs by definition are self-confident: The problem is that too often we are overconfident either in ourselves or our product or service. This overconfidence can propel us into expansion programs without carefully working out the wrinkles, including getting to the point of having a proven and profitable pilot plant (model) from which to expand.

One reason for overconfidence is that many wealthy entrepreneurs have enjoyed success in an unrelated field: A wealthy tycoon who had a successful career, for example, might start a new business in a field that he or she doesn't know or understand and might meet with failure because he or she assumed his/her expertise would transfer.

Another enemy is haste: Entrepreneurs who start multi-unit businesses will experience some deficiencies in their first unit. Many will lose money at the beginning. This is the time to work out the bugs and produce a positive income statement. If you can't, this may be time to abandon the idea. But, if you are starting a restaurant chain and in haste open six of them with problems, your losses could become overwhelming.

Problems in an Expanded Business Not Present In A Start-up

There will be controls needed in your expanded business that have not been present in your start-up mode. It will take careful preparation to break the do-it-yourself mode. For example, your business will need accounting and cash flow controls that measure performance of individual units within your overall operation. These reports will be required on a frequent basis. In many businesses, weekly income statements are used to prevent small problems from growing into bigger ones that may become unmanageable. Your accountant can help you set up unit financial reporting.

Delegation of responsibility and authority

Your expanding business will require delegation of responsibility and authority. New skills in recruitment, evaluation and training will be needed. The greatest leap of expansion for most businesses is growing from the first unit to the second one. Once you have made the big step from one to two, you are now a chain! From then on, it can become a continually improving cookie-cutter operation.

Erik Wong Video Producer "It is important to pace yourself as to the number of initial clients you take on. " Read 1,407 PC - wav 1,407 Mac - aif 1,091KB Real - rm

There will be controls needed in your expanded business that have not been present in your start-up mode. It will take careful preparation to break the do-it-yourself mode. For example, your business will need accounting and cash flow controls that measure performance of individual units within your overall operation. These reports will be required on a frequent basis. In many businesses, weekly income statements are used to prevent small problems from growing into bigger ones that may become unmanageable. Your accountant can help you set up unit financial reporting.

Delegation of responsibility and authority

Your expanding business will require delegation of responsibility and authority. New skills in recruitment, evaluation and training will be needed. The greatest leap of expansion for most businesses is growing from the first unit to the second one. Once you have made the big step from one to two, you are now a chain! From then on, it can become a continually improving cookie-cutter operation.

Delegation of authority can be accomplished by

• Financial motivation of key employees
• Creation of profit centers

Flecher Hull Fletcher Hull Motors, Auto Sales and Leasing "Make sure that you don't wait too long to hire people to help you expand." Read 2,647 PC - wav 2,647 Mac - aif 2,047KB Real - rm

Sometimes it is difficult for the beginning entrepreneur to delegate authority. There are many ways to do so without relinquishing certain functions that you will want to keep for yourself. For example, you should be the only person signing checks and deciding on capital allocations, yet you might want to delegate the training of employees to your managers.

But without giving up these functions, you can still motivate key employees in two ways: recognition and reward. Recognition means much more than bestowing an impressive title. The most important recognition is to let it be clear that your key people are in positions of authority as well as responsibility. While delegating authority will mean that your managers will be making some mistakes, their mistakes will be limited to their spheres of responsibility. Also, frequent financial reporting will minimize adverse financial impact of their mistakes.

Monetary incentive plans

Good managers are motivated by monetary incentive plans that are tied to their individual success: The incentive compensation of your management team should be, therefore, compartmentalized for each manager, so that a manager's bonus is based solely on what he or she has accomplished and not diluted by how other parts of the business are doing. For example, if you develop a chain of stores, each store manager's incentive compensation should be based only on the profit of his or her store.

If you are uncertain as to how to set up such a profit sharing plan, you might get ideas from your most successful competitors, who have already gone through the trial-and-error process of refining such systems.

Ways to Motivate Key Employees: Reward and Recognition

Let's first set a definition of recognition: It is creating a business structure where your key employees are given authority and responsibility, which is tied to profit and accountability. This becomes a "profit center" that the key employee manages. Each profit center has separate profit and loss accountability, which is determined frequently. (Many fast food stores operate on weekly profit and loss statements!) The idea is to create an atmosphere where your key people feel they have entrepreneurial decision-making authority, and are paid incentive compensation based on their own center profits. But, they are not given authority in two non-delegated roles, which remain your sole responsibility:

1. Capital expenditures
2. Signing checks

This suggests that your key people will be given enough latitude in operating their profit centers that they might make some mistakes.

By the two restrictions stated above, plus frequent financial reporting, you can recruit well-motivated managers and at the same time limit your exposure to big losses.

Obviously, the incentive plan must be tailored to each business situation and be based on the profit and loss report of the individual's separate responsibility.

By rewarding managers through profit participation, you create the engine that will drive your managers to success. And, the greater their success (and reward), the more your overall business will benefit.

Here are three types of plans (there are many) that have been used to structure a manager's incentive:

Leveraged profit sharing plan

Managers receive all, or a large part of, unit earnings over a fixed target. This has been used successfully by fast food chains that are company owned and operated (rather than franchised units). Here is an example of a simplified weekly income statement of a doughnut shop that is operated by a company employee-manager. This plan is "leveraged" because every penny saved becomes a penny going into the manager's bonus check.

Unleveraged profit sharing plan

In this case, your manager receives a percentage of earnings of his or her profit center. Here is an example:

Commission plan

In this plan, the manager receives a percentage of sales for the accounting period. Assuming, as above, that sales for the period are $5,000 and the commission is 5%, the compensation would be $250. In many instances, commission incentive is not appropriate because it does not include provisions for expenses. Your manager could get rich while you go broke. But commission incentive can work well when the manager does not control pricing. Salespersons in a retail-clothing store would be a good example of a commission structure.

Key Elements for Creating Successful Profit Centers

Read Transcript Let's review some of the basic rules that apply in the creation of profit centers:

• Create a separate profit center for each expansion unit. This means separate profit and loss statements that are compartmentalized for each manager.

• Make the accounting periods very short. When there are not big fluctuations in inventories or other costs, even weekly profit and loss statements work well. But, if possible, don't wait for six or twelve months to reward managers. Rewards are best when received early!

• Keep your profit sharing incentive plan simple and clear. It will avoid misunderstandings and misinterpretations. Use simple words and simple accounting.

• Have all your profit sharing agreements in writing. It will avoid innocent differences of interpretation. A ball painted half black and half white is going to look differently depending on where you are viewing the ball!

• Check out how your best competitor motivates their managers. Your competitors may have already come up with a system that is most appropriate for your particular business.

Important Overall Considerations in Starting Your Business

Phil Holland Founder, My Own Business "I think the most common mistake made by entrepreneurs is not picking the right business to begin with." Read 994 PC - wav 994 Mac - aif 772KB Real - rm

• Save money.
• Stay in a field you love.
• Know your business before you start (work for someone else in it).
• Copycat the winners in your business.
• Specialize, even to a single product.
• Find a product or service that is needed or desired and not subject to price regulation.
• Set a cap on your liability.
• Learn computer skills.
• Learn communication skills.
• Have a lawyer, accountant, and insurance agent before you start.
• Prepare a business plan.
• Prepare the site criteria model for your particular business.
• Do "for and against" lists for major decisions.
• Buy when everyone is selling (and vice versa).
• Deal with those you like, trust and admire.
• Learn accounting.
• Create your own internal control plan.
• Keep going to school in subjects important to you.
• Give back to the community.

Pitfalls to avoid:

• Never sign a lease without your lawyer's review.
• Don't rush: there is no such thing as the last good deal.
• Avoid a "commodity" business (one without pricing power).
• Don't burn bridges of job security to start a business if you can help it.
• Don't become a business zombie: take time off.
• Don't compete with category killers (Wal-Mart or Toys-R-Us) unless you have a special niche.

Long-range financial planning

Before expanding your business, you should consult with your lawyer, accountant and insurance agent to develop benefits for your future employees as well as for yourself. The goal is to provide benefits sufficient to recruit and maintain outstanding managers. Provisions can be considered for retirement plans, health insurance and vacation and holiday benefits. These costs should then be included in your budget.

It is also important to make plans for times when you're not actively running your business. When you die, or become incapacitated or simply going on a much-needed vacation, will those you have left in charge know how to maintain the momentum of your business? It is good idea to have a guide prepared for your employees to know what-to-do, who-to-call and where-to-find-it information to maintain the momentum of your business.
Common Business Problems

Now let's identify some of the common mistakes made when businesses begin to grow. These mistakes can be deadly, so benefit from the others who have gone before you!

• Uncontrolled cash flow: People fail because they run out of money. When you run out of cash, you crash. So, prepare your cash flow projections for expansion very conservatively. Review "Cash Flow" in Session 8. In projections, be sure to:
  1. Forecast income (sales) very low
  2. Forecast expenses very high
  3. Provide for unanticipated contingencies

• A drop in sales or insufficient sales: If this happens, your income and cash flow will be impacted. Immediately take the necessary remedial steps by ruthlessly cutting costs.

Martin Ruiz Gardener "Anyone who has the desire to be their own boss should consider going into business." Read 643 PC - wav 643 Mac - aif 501KB Real - rm

• Higher costs: Can you increase volume of sales? Can you offset with higher prices?

• New competition: The reality of the entrepreneur's life! Can you learn from them? Can you neutralize their opening impact?

• Business recessions: You will need to promptly cut costs to maintain earnings and cash flow.

• Incompetent managers or employees: Act swiftly to rid yourself of them.

• Dishonesty and theft. Study the ways your most successful competitor controls all forms of dishonesty that your business is exposed to, including shrinkage (shoplifting) and employee dishonesty. Each business will be different.

• A combination of any or all of the above.

Basic rules for Handling Serious Business Problems


Read Transcript

• Identify and acknowledge your problems with brutal honesty.

• Immediately reduce your losses by unemotionally cutting your costs to maintain a positive cash flow and profitability. This is the first and most important action to take.

• Don't switch horses. Stay with the business you know unless its future is fatally defective.

• Take the initiative to explain to your creditors what your problems are and why slow or smaller payments will be necessary. Never write post-dated checks or send late payments without an explanation.

• Don't cut value or quality of your products or services. Make them even better.

• Improve every aspect you can of your performance and image.

• Look for opportunity in adversity. Sometimes there will be bargain opportunities during business slumps.

• Remember that businesses have cycles. So, hang in there and ride out the adverse periods.

Suggested Activities

• Review case histories of the most successful businesses in your field.

• Review the case histories of failed businesses to determine their mistakes. Was it inadequate testing, planning and experience?

• Identify a typical business problem in your intended business and plan a solution.

• Identify a combination of problems in your business and plan a solution.

Top Ten Do's and Don'ts                         Print this Top Ten List

TOP TEN DO'S

1. Motivate your managers with monetary incentives tied to their individual success.
2. Copycat the successful marketing and policies of your large, successful competitors.
3. Identify, acknowledge and attack your problems with brutal honesty.
4. Look for opportunities, including bargains, in hard times.
5. Stick with what you do best during downturns in business cycles.
6. Compartmentalize your expanding business into profit centers.
7. Copycat the internal controls used by your successful competitors.
8. Prepare monthly financial statements of your individual profit centers.
9. Act swiftly to rid yourself of incompetent or dishonest employees.
10. Take the initiative to keep creditors informed of your problems and needs.

1. Think about your second store before the first one is reliably profitable.
2. Sign long-term leases, (Instead ask for short-term plus options.)
3. Open the second store before delegation controls are in place.
4. Let self-confidence overcome prudent and calculated decision-making.
5. Give your personal guarantee wherever asked.
6. Let commissioned salespersons set prices.
7. Fail to promptly cut cost to maintain positive cash flow.
8. Pursue a "commodity" business (one without pricing power).
9. Cut the value or quality of your product or service.
10. Delegate signing checks (any amount) or making capital expenditures.

Sound Byte Transcriptions
Phil Holland - Founder, My Own Business, Inc.     |Listen|

	Phil Holland Founder, My Own Business, Inc.

I'm Phil Holland and I'm the founder of this course that you're now taking, My Own Business, Inc. People fail in business by making avoidable mistakes. So, if you are aware of these pitfalls before you start, you can enhance your chances of success enormously and avoid unnecessary grief.

Here are some pitfalls to keep in mind. I think the most common mistake made by entrepreneurs is not selecting the right business to begin with. Take your time and do something you love and are good at, and select a product or service that has pricing power. Pricing power means that your customers will be willing to pay a fair price based on your unique benefits.

Another common mistake is that people go into business without knowing how to keep score. So, if you don't know accounting, take a course, perhaps at your local community college. Don't go into business without having a good business lawyer at your side. You're going to need one for all kinds of reasons such as partnership agreements, leases and business contracts.

Also, it's not uncommon for people to go into business without preparing a written business plan. Don't bypass this important step, and after you're in business, update your plan on a regular basis. Your business plan will not only become your compass to keep you in the right direction, but it will also be a valuable tool to gain valuable advice.

Provided that you are adequately prepared before you start, you will find that going into business can become one of the most satisfying and rewarding experiences of your lifetime. And I hope you will let us at My Own Business know how you're doing.

Colette Coffeman - Catering Service      |Listen|

	Colette Coffeman Catering Service

This is Colette Coffeman with Colette's Catering and Specialty Cakes, a business that I've owned for the past eight years. We have made some mistakes yet had a lot of successes in business. My biggest mistakes have been not being a good manager of my employees and also not having long-term business plans and goals. The communication shortcomings between my staff and me have been my major problem.

You definitely need to have a good marketing plan and a good business plan and have some long-range goals and definitely good communication with your employees.

You need to have very, very high attention to details in all sorts of business details and really make sure that your customers know that they will be taken care of. Although I don't do too well with my employees, I take excellent care of my customers. We have had a lot of successes. It is very important to make sure that you do exactly what you say you are going to do. Don't ever just not do something or not do what you promise.

Although we don't communicate too well with our staff, we are very flexible and we work together with their schedules and that makes it a good, fun place to work.

Another mistake that some people make, especially in the catering business, is to accept jobs that will make them look bad. You always want to make sure that you don't accept a job, be it a charity event or something where you're going in front of hundreds and hundreds of people, and not being able to do your best work. If it can't be profitable, make sure that you don't go out and show yourself off in a bad light.

Erik Wong - Video Producer      |Listen|

	Erik Wong Video Producer

My name is Erik Wong, and I own a company called Right Line Productions, a sole proprietorship. We are in the video production business. We produce informational, educational and promotional videos and even some TV commercial work.

I started this business a year and a half ago. I got a loan from my parents in order that I could outfit my company with two digital cameras with a desktop editing system and other necessary equipment.

I had this notion that I would be working only one or two days a week. We shoot a lot of weddings; so, the idea originally was that I would take a Saturday to shoot a wedding, and then take another day to edit the wedding.

I did not anticipate that it takes a lot of time doing paperwork, administrative duties and client acquisition. For instance, over the course of a week I'll take a Saturday to shoot a wedding and do the editing another day in the week. But then I find that for the rest of the week I'm drawing up contracts, or on the phone with clients, or seeking clients through referrals and shows.

One must realize that there is a lot of work that takes place behind the scenes that requires a lot more time than you might anticipate in the beginning. So, it is important to pace yourself as to the number of initial clients you take on.

Once you have the experience of finding out how much time you have to spend with clients, you're going to develop better ways to organize your business. For instance, I used to go to a client's home to show them demos of videotapes and to solicit business. Now, I'm having them come to where I operate my business and most of my clients feel comfortable doing that. Also, it's a more professional way of doing things when you ask them to come to your office.

Fletcher Hull - Fletcher Hull Motors, Auto Sales and Leasing      |Listen|

	Fletcher Hull Fletcher Hull Motors, Auto Sales and Leasing

My name is Fletcher Hull and I have my own business called Fletcher Hull Motors. I worked for over 20 years for a large leasing company in Los Angeles. Then I decided to go into my own business.

When I started in business six years ago, I focused heavily on selling and I ignored learning how to run a business. It is extremely important that before one does anything, he should learn how to create budgets, understands cash flow, and most assuredly, be able to stay as debt-free as possible.

I felt that because I had been in the business for years, it would be very simple to begin and carry on from where I left off. My business didn't change in terms of being able to give my customers good service. But what did change is that I was much more competitive because of the smaller size of my business.

Make sure that you don't wait too long to hire people to help you expand. While you're saving money, you're losing business. But the minute I hired an assistant my business flourished and grew faster than I ever expected.

Find and know people that can give you advice and suggestions. It's a great thing to ask people to give you help and they love to do it. Then, never forget someday you can do the same thing in return.

A good banking relationship is extremely important. Meet the manager, walk up and shake hands with him or her, and introduce yourself as a customer. Make friends with the tellers and learn how to deal with them.

Pay your bills very promptly. I have an auto detail service that handles numerous dealerships that give them far more business than I do. But I pay them immediately when I pick up the car. So, if I go in with a car I need quickly, they put me in front of everybody else.

This has been one of the most satisfying adventures of my life, I love what I do and look forward to go to my office.

Martin Ruiz - Gardener      |Listen|

	Martin Ruiz Gardener

My name is Martin Ruiz. I'm in the gardening business. The way I started was that I was working for a company, and I was doing jobs on the side. One day I got fired for doing that. After that, I decided to work on my own.

I've been working on my own for three and a half years. I've been growing my business little by little, and now I have enough customers. I'm learning a lot--how to do many different things, but it took me a long time to learn. When I started learning about gardening, I made a lot of mistakes. Some people called me to fix the timers and the sprinklers; sometimes they called me back and said I didn't do the work the way it should have been done. But now I have a lot of experience doing many things.

When I started learning how to fix lights, I went to school classes to learn things. It took me six months to get the classes I wanted, but now I know how to do any kind of gardening things.

Anyone who has the desire to be his or her own boss should consider going into business. You've just got to work hard. I've been working very hard to make my business grow. And I invite anyone to do the same as I have done. Thanks a lot.

Business Plan for Session 13: Expanding and Handling Problems

We heartily recommend that you download the individual business plan template for this session Business Plan Template Document 13 and complete it now.

Section 12: Growth Program

MS Word Printer Friendly Web Page Adobe PDF

Instructions on filling in the business plan template:

1. Each box has a permanent title in CAPITAL LETTERS
2. Below each title is a sentence starting with an "Insert here…" sentence. This will suggest information to insert. The boxes will enlarge as you take up more room so use all the space you need.
3. After completing each box, delete the "Insert here" sentence, which will leave only the permanent title of the box and the information you have filled in.

We suggest that you fill in each section of the business plan
as you proceed through the course.

The template for all sessions 1-14 can also be downloaded into your computer as a single document:

Section 1-14: All

MS Word Printer Friendly Web Page Adobe PDF

Include sufficient research findings and background materials. Make it interesting up by the use of background data, your biography, charts, demographics and research data. When your business plan is completed, print off and assemble the 14 sections.

Many other business plan formats are available in libraries, bookstores, and software.

Session 13 Feedback

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