The Bottom Line on Leadership & Management

Is there a difference between leadership and management, and if so – what is it?

Loaded question isn’t it? As a business advisor I am often asked my opinion on this matter, but as I endeavored to write this, I struggled with a bit of writer’s block. For the life of me I couldn’t figure out why. I have my opinion well thought out on this matter as I have enjoyed many a discussion on the topic. So why the struggle to put pen to paper? When I took a step back I realized my intended audience was speaking to me. The small business owner asking, “So what?”.

You have to love the small business owner – always direct and to the bottom line! And the thing is they’re right. Their time is much too valuable to read an academic discourse on leadership versus management. So the intention here then is not to debate the differences between leadership and management – but to address how the two affect the small business’s bottom line. In effect – answering the “So what?” question.

It has been my experience that most small business owners, whether they realize it or not, are actually very effective leaders. In that they took a concept, a dream, and turned it into a reality. Along the way the business owner convinced others such as creditors, customers, and employees that the dream was indeed viable and worthy of their investment. If that’s not leadership, well then I would have to say I am not sure what is!

Sure there are different styles of leadership; some better than others, but that mostly depends on the situation and people involved. At times consensus building is the best way to go, but at others (such as a turnaround situation) a directive approach is required. The small business owner that can distinguish the difference and adapt accordingly will go far. But only so far – as described in the following scenario.

I once had a middle-manager proudly tell me that his reports would follow him into battle. When I asked why this was, he credited his willingness to get his hands dirty and help them out with personal issues. While admirable, I noticed a glaring omission from his answer; he did not mention how he made their jobs easier and better. This was actually not a surprise since we were having the conversation due to inefficiency and productivity concerns in his department.

To continue with the manager’s battle analogy, I asked what he thought might happen once in battle, with bullets flying and the enemy breaking through the front line due to his lack of preparation – would his troops continue to follow him? Would the memory of him getting his hands dirty, and helping with personal issues motivate them onward? Sure that might inspire loyalty in some – but you can’t win a battle with only some of your troops!

As a small business owner you must always keep in mind that 80% of your employees work for you to obtain a paycheck in a manner that most conveniences them. For example an employee might take a job with low pay in return for a flexible schedule, a short commute, or advancement opportunity. Or conversely, they may accept long hours and poor conditions if the pay is high. The key here is – what’s good for the employee is what motivates the employee.

Expecting great results from an employee dealing with angry customers, long hours, disorganization, lack of communication, a failing company, etc. is a losing proposition. The employee can’t find anything good for them about the job and so therefore lack motivation.

Even the best of leaders would be extremely challenged to inspire positive results in negative conditions (as interpreted by the employee). And what small business has not gone through negative conditions? So what’s a leader to do?

The answer lies in exercising those other less sexy aspects of management such as planning, organizing, and controlling. By planning the work that needs to be done, organizing your resources to do the work, leading (read: influencing) your people through the work, and finally controlling the work to ensure the desired result – you will have accomplished the ultimate small business win-win scenario.

Your employees will have what they want – a secure paycheck while being productive and efficient. And productive and efficient employees mean better results for you. So the bottom line? If you want a better bottom line, remember that leading is only one element of the management process. Ignore planning, organizing, and controlling and get ready to watch the bullets fly!

Mark A. Sandate is the Managing Director of MASSolutions, LLC – a small business advisory firm, and an accredited Executive Associate of the Institute for Independent Business (IIB). For more information and to inquire about a free, IIB sponsored, 4 hour consultation please email mas@mas-solutions.biz.

My Customer Ate My Cash!

Attention Small Business Owners! Announcing a new business model guaranteed to make you rich quick, this is a revolutionary secret so please don’t share it!

Loan your customers money, and then let them pay you back 70% of it in 4 months.

Sounds pretty shaky don’t it? Where’s the get rich quick part? Yes, you can laugh at such a ludicrous concept, but before you laugh too hard, let’s take a look at your Accounts Receivable – you know, the loans you give out and book as a sale. Now, I am not saying extending credit to your customers is a bad thing, in fact, it’s difficult to do business these days without offering terms, if you don’t, chances are your customers will go to someone who does.

The problems start when you extend credit without having a strong Credit & Collection Policy in place. If you don’t have one, or if you don’t consistently execute the one you have, then I would wager your Accounts Receivables are well aged and your Cash Flow tight at best. In simpler terms – you can’t pay your bills on time, or at all, because your customers have not paid you. How aggravating is that!? You’re being hassled by your creditors, maybe even taking out a loan to cover shortfalls, and there your money sits, in someone else’s bank account!

At the foundation of any good Credit & Collection Policy must be the idea that:
A credit sale is not really a sale until the account has been collected.

Prior to collection; the only thing tangible that a credit sale produces is a financial burden that strains cash resources. Payment for products and services delivered have not been received, but expenses for salaries, supplies, equipment and overhead have been incurred and probably already paid.

Look at it this way – assign a dollar value for the product/service you provide (Hint: your sale price which covers the cost of sale plus overhead and desired profit), say it’s $100, now instead of delivering the product or service – just fork over the cash to your customers and tell them to pay you when they can!

Wait, it gets worse! Did you know that for every 30 days your customer doesn’t pay you back you are incurring additional costs that were not factored when you came up with your sales price? Here they are:

> Time Cost. Calculates how much money you would have to invest today, at a given interest rate, to generate a principal-plus-interest amount equal to what will be collected in the future.

> Administrative Cost. Expense of increased collection efforts like phone calls, letters, lawyers, etc.

> Opportunity Cost. Rate of return you would have received if that money was available to invest in other sales/projects.

> Predictability Costs. Expenses resulting from imprecise cash forecasting.

> Financing Cost. Cost of a Line of Credit or loan to cover slow collection periods.

> Bad Debt Costs. Statistics show the older an account becomes, the greater the risk of not collecting. For example, of accounts 30 days past due, only 99 cents of every dollar is collected. Beyond 30 days the chances of collecting become progressively poorer. At six months this hits 50% and continues to drop with time.

So let’s look at the value of that $100 you “lent” your customer as it ages over time (certain assumptions have been made to calculate costs, results will vary per business).

Customer—Current—–30Days——60Days—–90Days—-120Days
XYZ———–$100———–$98.18——-$89.71——-$80.26—–$69.29

Remember, the $100 should cover the cost of sale, overhead and profit. Let’s assume your $100 is broken down as follows: cost of sale (COS) 70%, overhead 25%, and net profit 5% – it would look like this:

———————Current—–30 Days——-60 Days—–90 Days—–120 Days
Sales ————-$100——$98.18——–$89.71——-$80.26———$69.29
COS —————$70———-$70————-$70———–$70————-$70
GrossProfits——$30——-$28.18——-$19.71——-$10.26——($0.71)
Overhead ———–$25———$25————-$25———-$25———-$25
Net Profit ———-$5——-$3.18——–($5.29)——($14.74)——($25.71)

At 30 days you have eaten into your profit by almost $2; in 60 days all your profit is gone and you have $5 less to pay toward overhead expenses; at 90 days your short $15; and at 120 days not only can’t you pay your overhead, you’re coming up short covering the cost of sale (i.e. what you paid your vendor for the widget and/or the labor you paid your employees to perform the service).

Now multiply that times all your credit sales; still wondering where all the money went? I am absolutely positive you would never lend your customer $100 and tell them to pay you back $69 in four months! You wouldn’t would you? Unfortunately, if cash is tight, it is very likely that’s exactly what you are doing. Imagine, paying customers for the privilege of selling to them!

Ready for that Credit & Collection Policy now? Your policy should consist of the following three elements or activities:

1. The decision on granting credit and the terms to be offered.

a. Credit Application filled out and signed pre-sale (get a Personal Guarantee signed while you’re at it!)

b. Credit References thoroughly checked (if credit amount is substantial pull a credit history report – it is well worth the cost! Resources: Credit.net, D&B, Experian, etc.)

c. Designated authority decides on credit limits and terms based on established criteria.

d. Notify applicant in writing of acceptance, limits, and terms (include credit hold and late fee/interest penalties)

e. Notify sales team and file in customer folder, update accounting systems accordingly.

f. Review and update annually, sooner if “red flags” appear.

2. The monitoring of Accounts Receivable

An Accounts Receivable aging report must be generated weekly and all accounts reviewed, this way problem accounts can be identified early enough that effective collection proceedings can be initiated.

3. The formulation and execution of an effective collection policy

a. You must have a correctly aged listing of the Accounts Receivable.

b. Designated person with the authority and credibility to collect, and still maintain the highest possible client relations.

c. A record of collection efforts for each account, include follow-up action to be taken and when. An Excel spreadsheet works well for this.

d. Work in this “tickler” file every day. Follow-up should happen exactly as indicated and when.

e. Establish Collection Procedure similar to following:
1) Current: Make a “customer service” call pre-due date to ensure product/service was delivered satisfactorily and invoice was received without discrepancies.
2) 30 days: Call customer with friendly reminder. This will be followed by a brief letter confirming the agreements reached.
3) 45 days: Call customer to determine why money still hasn’t arrived and secure a new commitment. Send second letter.
4) 60 days: Call customer and send letter notifying of suspended account and intent to enforce collection.

In summary, the foundation of a collection policy should be clear, effective, and consistent communication between you and your customers. This communication begins with the customer’s application for credit, and continues through all subsequent contact. The emphasis of this communication is the customer’s responsibility as a recipient of credit, and your responsibilities as creditor. Avoid writing off bad debt by having a clearly articulated credit policy, and by letting all customers know what the policy is, and that you are committed to executing it till they comply. Happy collecting!

Mark A. Sandate is the Managing Director of MASSolutions, LLC – a small business advisory firm, and an accredited Executive Associate of the Institute for Independent Business (IIB). For more information and to inquire about a free, IIB sponsored, 4 hour consultation please email mas@mas-solutions.biz.