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People in business, but not really businesspeople!

 

People in business, but not really businesspeople!

estimating a building job
Builder Preparing Estimate For Home Improvement

An unhappy experience with a small business owner last week caused me to reflect on the fact that so many people who are in business are not really businesspeople. By that I mean they have no idea of the basic principles of running a successful business. Nor do they have any idea of basic business good manners. Consequently, they make fundamental business mistakes that have negative impacts across all aspects of their business.

These shortcomings range across most business sectors. Amongst the worst offenders are business owners in the building trade. However, they are not the only ones and I don’t wish to pick them out for unfair criticism.

The aim of business

Before looking at these mistakes and shortcomings I would like to step back and consider what are the aims of being in business, and how we can achieve these aims.

The basic aim or objective of most businesses I believe is to make a profit. I know some talk about other, often altruistic, business aims and I acknowledge their legitimacy. However, I still maintain that most of us are in business to make a living.

That said, there is more to setting up a business than just being good at a particular trade or skill. It is not enough just to have technical expertise, or some good business ideas. Running a successful business is a profession, an art, or a science – call it what you will. And to be successful in business you need to be proficient in business skills and know how business works.

The necessary business skills

The necessary business skills include the following:

  1. Understanding of the financial foundations of business. These include understanding operating and overhead costs, pricing, cost of goods sold, gross profit, net profit, budgeting and cash flow, etc.
  2. Being able to produce adequate accounting records, which not only record past performance, but also enable you to plan for the future.
  3. Providing goods or services that meet customer needs.
  4. Treating customers fairly, decently and in a friendly fashion. You must understand the value of satisfied customers and the importance of repeat customers.
  5. Executing your promise. That is delivering your services or providing your goods to meet your customer needs in a timely, efficient and cost-effective way,
  6. Having an operating business model that is viable, including among other things correct costing and pricing, controlled overheads, efficient invoicing and debt collection.
  7. Protecting your brand and controlling your advertising and marketing costs. You must understand that bad customer service and/or follow-up wastes or negates marketing and advertising spending.

The building trades

Moving from the general to the particular, let us consider the building trades industry.

In most advanced western countries, the demand for building services exceeds their supply.  Therefore, by the simple law of supply and demand most building trades businesses should make significant profits. However, I believe excess demand has lead to sloppy business practices in the industry, which in the longer term has engendered customer discontent and eroded profitability. It has also stunted business growth, resulting in many businesses never growing beyond the “one man and a dog” team.

Sloppy business practices are amplified because many business owners in the building trades have no idea of how to run a business. Many of them have been employees with a skilled trade who decided that there is more money to be made in setting up a business rather than working for someone else. But few of them have business experience or business skills and, consequently, many make basic and repeated business mistakes.

I list below some of the most common ones, set out in sequence from handling a sales enquiry to collecting the money due.

Typical mistakes

  1. Don’t return telephone calls or answer emails (often an initial sales enquiry).
  2. Make appointments, but don’t turn up.
  3. Come to the appointment but, subsequently, don’t provide a quotation for the work.
  4. Have no system for estimating in place and, subsequently, quote incorrectly.
  5. Provide a quotation, but can’t do the work for several months.
  6. Don’t start the work at the time promised.
  7. Start the work on time, leave a wheelbarrow on site and disappear!
  8. Work is badly organised, spasmodic and runs well over time.
  9. Complete the work, but leave loose ends undone, including failure to clean up.
  10. The work is well done, completed on time and the customer is happy – but they forget to invoice!
  11. Invoice incorrectly. For example, forget extras agreed on the job, or omit VAT, or payment terms.
  12. Customer doesn’t pay, but no reminders or follow ups are sent out.
  13. Eventually realise that payment has not been received and chase up the debt. Don’t have an adequate debt collection and follow up system in place and let debt lapse.

The outcomes

You may have been on the receiving end of some of this behaviour or, perhaps even been guilty of it. But whatever, its results are negative for all concerned. It’s frustrating and annoying if you are the client. Equally, for the business owner it’s very bad for your business in many ways.

Let us consider some of the outcomes.

  • Examples 1 to 3: This is not only bad business practice it is also bad business manners. It staggers belief that any business could not deal with a sales enquiry in an efficient and courteous way. Why, for example, would you incur advertising costs and then squander the opportunity of the enquiry? Why damage your reputation before you start with potential customers? What if the enquiry comes through a referral; what do this do for your reputation?
  • Examples 4 to 8: Here we are talking about operational issues, namely estimating, and completing the work. In other words, straightforward business competence. Where this is inadequate, as it often is, the damage to reputation and profitability is obvious.
  • Examples 9 to 14: This is about a much-neglected business skill: correct invoicing and competent debt collection. It is a well known  business maxim that a job is not complete until the money is in the bank. Also, there is no grater loss to any business than completing the work (or supplying the goods) and not being paid. I understand that non-payment of debts is often not the debtor’s fault and arises from the actions of the creditor. But it is an inexcusable business mistake if it does arise from the slackness of the debtor.

Good manners or not understanding your industry?     

The mistakes listed above are a mixture of technical misunderstanding of what makes a business tick and non-adherence to an unwritten code of business ethics, or good manners.  But it must be emphasised that  even those mistakes that appear to be merely ethical issues have a solid business rationale and will take their toll if not obeyed.

For example, returning telephone calls and answering emails to establish customer contact is not just good manners but also basic business common sense. Customers are your life blood. You have probably spent good money trying to attract them and to not follow up an enquiry is madness!

Another way of looking at these mistakes is to say they either break the rules of business common sense, or arise because of a lack of knowledge of the art or science of the industry.

In the building trade a critical skill is the science of quoting or estimating for work. Let us consider this through the eyes an expert, David Gerstel, who I am indebted to for part of this blog.

the skill of extimation
The tools for drawing up an estimate

 Quoting (or estimating) correctly

David Gerstel is the author of Running a Successful Construction Company, published by The Taunton Press. Please see: http://www.davidgerstel.com/books.

David’s book is considered to be “the bible” of the construction industry. He has very strong views on the non-professional approach to business adopted by many business owners in then construction industry in the United States.  He points out that in the US nine out of ten building companies fail within two years. This is compelling evidence he believes of their incompetence in an industry where demand exceeds supply.

To quote David:

“Building companies fail because people who start them don’t know their trade well, or they don’t know business management.”

As an example of not keeping adequate financial he notes a builder who said: “I was so busy out in the field “making money” I didn’t have time to keep accurate records and make sure I really was making money.”

Estimating

Turning specifically to the art of estimating, David says the following:

“Few builders ever get on top of their job costs. Jobs, they rationalize, are going to cost what they cost and it is impossible to estimate them accurately, so why try?  Or they think … they can estimate costs without the benefit of jobs costs records.”

“Like the builder who told me “Oh, I have got all kinds of computer programs for job costing, but I don’t need them. The costs are right in my head.

Without proper job cost records, David says the work of estimating is often merely a guess and not a strict financial exercise. However:

Capable builders do not just roughly estimate/guesstimate the costs of building projects they submit to clients. They calculate the costs and  figure the charges. They nail down those numbers and get them right.”

“Fudging is not necessary. Construction is not like a lawsuit. Costs can be accurately projected in advance. By developing systematic procedures, capable builders are able to turn out estimates and bids that come within a few percentage points of the work shown in plans and specifications.”

So, if the experts are confident it can be done, why are so many building estimates still just guesstimates? The obvious answer is that many tradespeople just haven’t properly learned their trade!

In conclusion

So, in conclusion:

  • If you are in business, you need to understand the technicalities of your industry. If you are in the motor industry you must how cars work. And if you are in the building trade you need to be competent in your trade and know how to estimate.
  • But you also need to know about the business profession itself. You need to recognize that to be successful in business you need to know how to run a business, which is quite a separate skill from knowing about the specialist technicalities of your industry.

But, from our review of the common mistakes made by business owners in the building industry we can see that too many people don’t know or understand these things. The fact is that too many people are in business without really being businesspeople!

Further reading 

For more on basic building skills please refer to FAQ 3.4:  https://www.freeforumofideas.com/faq/4-what-are-the-basic-survival-skills-you-need-to-run-a-business/

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“I have a good business idea but admit I haven’t got an idea about business!”

Working on a good business idea.
Working on business ideas

“I have a good business idea, but admit I haven’t got an idea about business!”

In reality, you seldom hear anyone actually say “I have a good business idea, but I haven’t got an idea about business!”.

However, it is true that many people who start up a business enterprise have no idea of how to run a successful business. People plunge into the deep end, perhaps influenced by what they read and hear.

The glamour of business

The internet and television give a highly distorted idea of what business is really like. TV has its Dragon’s Den, while the media glamorises entrepreneurs who have made millions from their great ideas. However, business is seldom glamorous and successful entrepreneurs are often even less so.

Concepts of the great idea and the overnight success are usually myths. Business porn might make for exiting reading and watching, but it does not represent the slightly sweatier reality.

A good business idea

Having some idea of how your business will operate is the first step for starting a business. An idea of how your business will be different or better than the competition takes you a step further.  But, from my observation, many people start a business based solely on their knowledge of having worked in a particular business sector. Or, because they have a technical skill. Also, because they are convinced they can do it better than the boss.

So, they have an idea for business, but do they know anything about business?

Business knowledge

Running a business is different from working in a business. Thinking you can do better than the boss is not the same as being better than the boss. Business is both a particular skill and requires a particular mindset. Also, having a business idea, even a great business idea is not by itself a sound basis on which to start a business.

An idea is just an idea; you need the business skills as well as the business mind to execute the idea.

Business skills

The textbooks will tell you what the basic skills for running a business are. These include:

  • marketing
  • bookkeeping,
  • understanding cash flow
  • communication
  • team leadership anf
  • selling

The entrepreneurial mind

Likewise, the text books list the qualities of the entrepreneurial mind. These include the following:

  • passion
  • vision
  • self-belief
  • resilience
  • drive
  • risk tolerance
  • robust health

Most experts claim you can be taught business skills. However, most believe you or either born with the entrepreneurial mindset or you are not.

I agree with the latter, but I am not so sure about the former. Those who fall into the category of “I have a good business idea, but I haven’t got an idea about business!” might have an entrepreneurial mindset, but do have have the necessary basic business skills to succeed.

Born with the business skill

I have dealt with business owners for nearly 50 years. They have been both highly successful ones and those who have not achieved a great deal of business success.

Some writers believe that the business skills and the entrepreneurial mindset necessary to startup and grow a truly successful business are inherent (that is a part of one’s nature). However, others believe they are acquired (that is a part of one’s nurture).

I understand the dangers of generalisation. However, one factor that distinguishes the successful from the unsuccessful is the “feel” for business. That is, the inherent ability to recognise how to do a deal, how to buy the right stuff at the right price and how to make a profit.

Mark McCormack https://en.wikipedia.org/wiki/Mark_McCormack the American lawyer and sports promoter wrote a famous book called What they Don’t teach you at Harvard Business School. The gist of his book was that street-smart skills in negotiating, marketing, deal making, etc., were more important than merely acquiring academic MBA theory if you wanted to run and grow a successful business. He believed these skills were acquired partly through experience and were partly inherent.

In my view, the skills are more likely to be inherent or, more specifically, that people with the inherent business mindset are much more likely to be able to learn the business skills than those without.

Startups drive the economy

People are rightly encouraged to start up businesses, as a vibrant economy needs new businesses starting up all the time. In fact, the number of startups is both a driver of a strong economy and evidence of the economy’s strength.

However, startups are not for everybody. If business startups are to be successful, their owners need to have a good idea of what business is all about. They need to have a feel for the business world.

Business idea analysis

On this website we offer a free analysis of business ideas. The analysis is in two parts. The first part looks at the idea itself and the second considers the characteristics of the person who has the idea. The owner of the idea completes a questionnaire. A couple of the questions focus on basic business principles, such as gross margin and profit percentages.

It is surprising how many people have no idea about these basic principles. For example they have no idea how to price their product to make a reasonable return. In my view these people should never go into business.

Similarly, the mechanic, the electrician, the builder, the web designer who havn’t the feel for business and how to cost a job, should avoid being their own boss. By staying employed they will probably have an easier life and earn just as much money

The right sort of people   

So what do we make of those who say “I have a good business idea, but I haven’t got an idea about business?”

Firstly, it is clear that many of the wrong sort of people often launch startups. This is evidenced by the fact that 65% of small businesses fail in the first three years.

However, many of the right sort go into business as well. The 35% that succeed represents hundreds of thousands of small businesses trading away happily and profitably, some of them going on to be successful big businesses.

This is the way a successful economy should operate – the successes more than compensating for the failures. The only negative is the impact of failure on the poor folk who own the businesses that fail.

Free help

For free help in analysing your business idea please go to:  https://www.freeforumofideas.com/free-help/business-analysis-form/

Further Reading

For more on business ideas please see: https://www.freeforumofideas.com/blog/do-i-need-a-new-idea-to-start-a-business/

And for more on business failure please see: https://www.freeforumofideas.com/blog/attitudes-towards-business-failure/ and https://www.freeforumofideas.com/blog/the-effect-of-business-failure/

See also FAQ 2.4

and FAQ 2.6