Corporate Governance and Small Businesses

Let’s start with some review of what types of companies primarily drive the US economy.   We know that there are about 16,000 publicly traded companies represented on the NASDAQ, NYSE and the AMEX.  The key economic driver in the US is the 27 million small businesses.  The Small Business Administration 2008 Presidential Report on The Small Business Economy clearly communicated “the economy generated 1.1 million net new jobs in 2007. In the first quarter of 2007, 74 percent of the net new jobs were in small firms with fewer than 500 employees and 22 percent were in firms with fewer than 20 employees.”   Yet, the gross amount of attention in the media and the federal bureaucracy is around what is happening in the Markets.  This is understandable with the volumes of dollars transitioning in this public environment. The economic recovery program is not addressing the core of the economy, small businesses.   More than ever the public market environment is being questioned about corporate governance.  The new legislation being considered for public companies has sections that may very well trickle down and require the small businesses to adhere to similar if not exact rules on Corporate Governance.

A simple definition of Corporate Governance for the small business:  

Corporate governance simply refers to the set of internal policies, rules, and procedures that a company follows on a regular basis to ensure that it operates in a fair, equitable, and appropriate manner for the benefit of the company, its management and its shareholders. A corporation usually has a board of directors and a senior “C” level management team.   Most small businesses do not have these organizational entities clearly defined and functional.  For private companies that are registered as a corporation and have investors, the various states require these entities to have a governing board.  Yet many small businesses incorporate for tax issues and do not necessarily pay attention to the concepts of corporate governance. 

How does Corporate Governance apply to small businesses?  

All businesses should look at their organizational structure and continually assess what will allow the company to perform in an optimal way.  The simplest way to implement this is to have an advisory board.  The advisory board is non-paid individuals that have business or industry specific backgrounds that can contribute ideas or mentor management.  In more formal and traditional cases a small corporation has a board of directors comprised of the founders, a spouse, an employee and maybe – just maybe an outside director.  The focal point of corporate governance within small businesses is that all businesses need to set company strategic goals, provide the leadership to put them into effect, supervise the management of the business, and if the company has stockholders, report to the stockholders on their stewardship.  For those small businesses that do not have the hierarchical structure in place to implement formal corporate governance plans, it is recommended that regular self assessment of the company will be the starting place for accountability, to enhance performance, grow the company and be a greater contributing force in the economy.  At the end of the day, if you follow some set of policies and procedures and are reporting your stewardship of the company to someone even if it is your dog, then you have accountability that is key to corporate governance practices.

Will the government impose its will and definition of Corporate Governance from the public markets into the small business environment?

This imposition of government from the public market companies to privately held companies is making its way through the halls of congress.  One idea being tagged onto present legislation is to extend Sarbanes-Oxley down to privately held companies.  Anyone that knows anything about SOX is aware of the high cost to implement the documentation processes and the reporting.   Pushing this down to the small business environment would be cost prohibitive and stunt economic growth.  The general politics of mandated corporate governance is to wait and see how new legislation will affect the small businesses driving the US economy.

As a final note, every company, no matter what size it is, will see the positive effects of implementing the principles of corporate governance.  The facts remain that there are 27 million plus small businesses in the US who are the job creators and the drivers of the economy.  The greatness of US business is that it performs the best when individuals come together in a free market environment to meet the needs of the economy and society.  In the end, best practices of corporate governance can be freely implemented to benefit the company or corporate governance can be instituted by the government, which can cost more in resources, planning and profit.  Take the time to assess how your small business views corporate governance and how this will enhance your growth in the market place.

Why You Want to Partner With A Small Business Coach-Advisor

According to The National Federation of Independent Business [NFIB] Education Foundation, over the lifetime of any small business, 30 percent will lose money, 30 percent will break even, and just fewer than 40 percent will be profitable. The Small Business Administration [SBA] reports that 50 percent of all small business fail after their first year, 33 percent fail after two years, and nearly 60 percent fail after four years. Reasons for failure cited by the SBA include: limited vision, over expansion, poor capital structure, over spending, lack of reserve funds or too little Free Cash Flow, failure to adjust to market changes, underestimating competition, poor business execution, poor business location, failure to establish company goals, poor market segmentation and strategy, poor knowledge of the competition, no management systems, over dependence on specific individuals, and/or focusing on the technical aspects more than the strategic aspects of the business, and an inadequate business plan.

Developing and growing a small business enterprise, either from a new venture or as an existing one, is difficult in a bull market, where the economy is growing. The difficulty factor is there none the less. However, in a down economy, in a recession, where the risk of business failure is magnified several times, the difficulty factor is increased by a significant magnitude. Entrepreneurs and small business enterprises find themselves working in their business as opposed to working on their business. That is, when times are tough, the small business owner feels compelled to spend all his or her time on operations just trying to keep the boat afloat, while putting off where the boat may be going. It is particularly critical in a recessionary economic cycle to spend as much time as possible on the direction of your boat, as it is on operations. If the vision is lost or clouded, it won’t really matter how hard you try to keep things afloat, at some point you may well run aground because you were not watching where you were going. Having an extra pair of eyes to help stir your ship and keep you in the right direction is critical to not only maintaining your business, but helping you to grow it. And as the principal in your small business, this is where you want to position yourself; at the helm stirring your enterprise in the direction of your vision.

Successful athletes typically hire a coach to help them achieve success. Certainly this is the case in professional golf. It is the case in the world of professional cycling. And it is the case in professional team sports, such as baseball. For the entrepreneur and small business enterprise, having a coach, advisor, on the sidelines as well as in the game, to provide critical objective guidance to help them attain their business objectives can be the difference in achieving real success. As a small business enterprise, you want to be in the category of a ‘small business growth’ company, positioned for IPO, acquisition, merger or growing into a medium-sized company. A Business Coach and Advisor will work with you to help avoid becoming an SBA or NFIB Education Foundation statistic on their list of small business failures. From time to time we all need outside guidance, counsel, mentoring and advice. A Business Coach/Advisor will actually help you to become a success story. The benefits of partnering with a Business Coach/Advisory far outweigh the costs. Five critical benefits of partnering with a Business Coach/Advisor include, but are not limited, to the following:

1. Accountability. A Business Coach /Advisor will help you to maintain focus on driving your business forward, and helping you to work through the temptation to work in your business and not on your business. A good Business Coach/Advisor will insist on holding you accountable for achieving your goals and objectives, and work with you to delegate operation tasks that need to be performed by key personal, and guiding you towards providing the strategic vision your business needs to grow. Your Business Coach, acting in an Advisory capacity will work with you to develop or refine strategic short- and long term goals and then hold you accountable to achieve them. You want your coach to be tough, yet personable having the capacity to understand your business and where it is you want to take it. There job is to help you formulate that and to get you positioned to attain it.

2. Formulating Strategic Goals, Ideas, Objectives. A Business Coach/Advisor will work with you to develop and refine your goals, ideas and objectives. A combination of coaching and advising is necessary here, and your Coach has the acquired expertise and experience to work through these with you and knows how to adapt them to your business.

3. Contributing Business Growth Strategies. A good Business Coach/Advisory will have the ability to share and communicate their experience and expertise in developing business growth strategies. Remember, no one has all the answers. No one. Not a coach or a business executive. Sharing ideas are critical. Thinking out of the box is essential. So, when you’ve just “run out of ideas” on how to market and sell your products and services, your Coach will work with you, as a partner, to develop and then implement the business growth strategy or strategies that are specific to your company and market to meet your growth objectives. To be most effective, weekly communication with your Coach will keep you on track.

4. Resources. When it is needed, your Business Coach/Advisor will provide referrals to contacts or resources for your business, such as expansion capital, legal and accounting services, social media marketing, technologies, and other resources that are relevant to helping you meet your goals and objectives. My view here is that it is incumbent on a business coach and advisory to have a teaming or partnering viewpoint, and it is essential for them to do so for the benefit of you, the small business owner.

5. Objectivity. A Business Coach/Advisor provides you with the necessary objectivity to see your business as it really is. This is essential for an honest assessment of where your business is in its life cycle. When you get used to the same processes and procedures, tasks, basic routine, you lose the ability to see your business with the same objective clarity that you once did. Your Business Coach provides you with a double perspective; looking into your business from the customer perspective, and looking out at the customer from your perspective. And then provide you with feedback about what works, what doesn’t and what your options are. To be effective, weekly communication with your Coach will keep you on track.

Partnering with a Business Coach/Advisor should be on a retainer basis for three to nine months, preferably six months. It will normally take a good Business Coach/Advisor two months, sixty days, at least to become fully knowledgeable about your business, its practices, your strengths, weakness, your vision, and your objectives. Then another month to begin working with you to arrive at your business objectives. While three months is the minimum time needed for a good Business Coach/Advisor to begin making a difference under a single retainer agreement, nine months is the maximum under a single retainer agreement, where six months is the optimal. During a six month retainer, a Business Coach/Advisor should be able to meet all goals and place in to practice the critical elements that a small business needs to attain strategic objectives. Typically, once a small business has partnered with a Business Coach/Advisor, they retain them continuously, or as needed.

In today’s troubled economic climate, the use of a Business Coach/Advisor makes strong financial sense. While you might feel you can go it alone, the resulting cost may far outweigh what it would be had you partnered with a Business Coach/Advisor when needed. It’s sort of like the old TV commercial about changing your oil, you can either do it now at the cost of an oil change, or wait until your engine blows and pay the cost then. Waiting will certainly cost you infinitely more. If you are facing a limited vision, over expansion, poor capital structure, over spending, lack of reserve funds or too little Free Cash Flow, failure to adjust to market changes, underestimating competition, poor business execution, poor business location, failure to establish company goals, poor market segmentation and strategy, poor knowledge of the competition, no management systems, over dependence on specific individuals, focusing on the technical aspects more than the strategic aspects of the business, or simply need help in growing your business, then partnering with a Business Coach/Advisor makes good financial sense.

10 Good Reasons Why Small Enterprises (Small Businesses) Fail

You’ll agree with me that there are so many small businesses which have contributed a lot to the growth of economy. They have created employment opportunities for many families although some remain to be small throughout their operational life.

It is obvious that those who are starting new ventures have objectives to achieve. And to mention each business has got its own objectives to achieve such as maximization of profits and sales, minimize costs, maintain a certain level of production and labor force etc.

Failing of a business opportunity is what an entrepreneur won’t want to happen. Inasmuch as we agree with the fact that there are firms which have succeeded, we should also accept the fact that a good number of them have failed even before two years lapse after they commence business.

If aspiring entrepreneurs addressed the reasons why small businesses fail, then they will not fall to be victims of the same causes of failure. This is because they’ll be in a position to identify these causes and fix them before it’s too late.

Now you may be asking yourself as to why some businesses remain to be small throughout their operational life despite some of them making profits or are capable of growing.

4 Reasons Why Small Business Remain to be Small

1.) The owners of these businesses prefer not to expand their businesses. Some sole proprietors do not want to be bothered with the challenges of managing a big business. They don’t want to employ people to assist them in running their businesses but instead they prefer to be assisted by their family members.

2.) The nature of the product/service the business is involved in doesn’t allow expansion. There are people offering products/services which make it difficult for their business to grow.

3.) Lack of capital for expansion. There are small businesses which are viable and have the potential of growing but they lack enough capital. Such businesses have the challenge of securing funds from financial institutions. Lack of capital plays a negative role in hindering the growth of small businesses.

4.) Very low demand. If the business has a very low demand for its product or service, then at the end of the fiscal financial year/trading period the business won’t realize profits, and if it does, it’s very low, therefore the chances of it expanding are very minimal. Just to mention, realization of inadequate profits as a result of very low demand hinders the growth of small businesses.

However, there must be a starting point and as such, every business starts as a small entity and it gradually grows to a medium entity and eventually it becomes a big business entity which is either a private limited company or a public limited company. Note that a partnership business can also grow to become a big business.

Reasons Why Small Businesses Fail

1.) Wrong Reasons For Commencing Business: People who start a business for wrong reasons haven’t succeeded. Just because another person is making high profits in a certain line of business doesn’t mean that you will also make the same amounts of profits as him/her if you start the same business.

2.) Poor Business Management: When there is poor management of the business it becomes difficult for such a business to succeed in its operations. Finance, marketing, purchasing and selling, planning, hiring and managing employees is what most new business owners fail to execute effectively thus making their small businesses to fail.

3.) Lack of Commitment: Starting a business requires someone who is committed in ensuring that it succeeds. Neglecting the business will cause the business to fail. Many small businesses have failed because the owners didn’t take their time in monitoring performance and in marketing them. Some business owners leave their businesses to be managed on their behalf by incompetent people who lack book keeping knowledge and the knowledge of managing a business.

4.) Lack of Finances: Small businesses have failed because of lack of adequate finances. Some of the owners underestimated the amount of capital required and as a result of this underestimation some ended up running out of operating capital thus ending the operation of their businesses.

There are those who have no reserves which has led them not to be able to take care of loses and disasters when they occur thus making them to quit business.

5.) Over-Expansion of the Business: This has led to failure of many small businesses. This happens when there is borrowing of too much money beyond what the business requires so as to expand the business. Moving to markets that are not profitable is also over expansion of the small businesses.

An ideal expansion is the one that is driven by customers due to their high demand for the products and services which leads to high sales thus the business experiences good cash flow.

6.) Location: The place where the business is located is critical in determining its success. Small businesses have failed because of them being located in areas that are not ideal for business. They should be located in areas that are accessible, populated with people and has demand for their products and services.

7.) Personal Use of Business Money: This is the biggest challenge facing many small business owners. They withdraw money meant to operate their businesses to meet their personal wants and needs. If they continue to withdraw money from their businesses without returning it, their businesses will eventually run out of finances therefore forcing them to end the operations of their businesses.

8.) Lack of Delegation: Small enterprises have failed due to owners not delegating some of the duties to their employees. They think that if they delegate them, then their employees will not perform these duties as they would personally perform them. When such owners fall sick or are away from their businesses, then the operations of some tasks will be paralyzed till they resume to work.

9.) Not Diversifying: Small enterprises which have only one product/service to offer are prone to fail easily compared to those that have a variety of products/services.

10.) Procrastination and Poor Time Management: Postponements of tasks which the small business owners feel to be unpleasant to perform has made the small businesses to fail. An example of such tasks include following debtors to pay their debts (debt collection).

Time management remains to be a challenge for many people who own small businesses. If important tasks like delivering products to customers, purchasing stock etc are not handled in the appropriate time, then the business will lose its customers.

The above are not all the reasons why small businesses fail, there are more reasons.