New Small Business: Economic Development Catalyst

Small businesses are the backbone of the U.S. economy. This is a statement that is tossed out for public consumption on a fairly regular basis. What data backs it up? What might it mean for job creation and other key indicators of economic health that matter to the general population? In the November 2012 Business Dynamics Statistics monthly report from the Census Bureau, it was noted that hiring and job creation in small businesses (19 employees or less) with two years or less of operations was stronger than in larger companies that had been around longer.

While older firms only hire 25-33% of new employees for newly created jobs, young firms average about two in five (40%)! A substantial fraction of the job creation for young firms is due to the job creation that occurs in the quarter of starting up. However, there is substantial subsequent job creation as well as job destruction in the succeeding quarters in the first two years. The overall net job creation (the difference between job creation and destruction) is much higher for young firms than for older firms.

Small Business strengthThe other area in which startups excel is in worker churning (hiring in excess of job creation and the separations in excess of job destruction.) Job creation measures the employment gains from the expansion of existing establishments and the creation of new establishments. Job destruction measures the employment losses from contracting and closing establishments. The Department of Labor maintains that churning helps the matching of workers to jobs. Hiring and separation rates at young firms are seen as being unusually high. There is also a trend of a marked improvement in hiring and job creation in young firms since 2008 in comparison to established firms. 

The report, entitled “Job Creation, Worker Churning, and Wages at Young Businesses,” draws its conclusions from the U.S. Census Bureau’s Quarterly Workforce Indicators, which use federal and state administrative data on employers and employees combined with core Census Bureau data. On a less rosy note for employees in small companies, the study also showed that their earnings per worker are lower than at more mature firms. Since the wage premium for workers who choose to work for large companies has persisted, earnings growth–even during the most recent recession–is largely attributable to wages paid by larger companies. Some of this decline is accounted for by changes in the industry  composition of startups over the last decade, but the overall trend is downward.

Just before the 2001 recession, workers at new firms earned about 85 percent as much as workers at mature firms. By 2011, this earnings ratio had dropped to 70 percent. The earnings premium associated with working for a large employer versus a smaller employer also grew during this time period: Average real monthly earnings in small firms fell from a high of 78 percent in 2001 to a low of 66 percent in 2011. 

Churning rates are said to be “procyclical,” dropping during recessions as firms become cautious about hiring, and employees, with fewer jobs available, stay where they are. In both the 2001 and, especially, 2007-2009 recessions, worker turnover rates declined, but failed to recover to their previous peak after the recession ended. Churn rates for the youngest businesses recovered modestly after the most recent recession, but dropped slightly after first quarter 2011, perhaps reflecting eroding worker and business confidence, the study said.

What does this all mean? Here are the key takeaways:

  • Small businesses create more new jobs than large businesses
  • Pay at small companies tends to be less than at larger ones
  • Turnover is higher at smaller firms than at larger ones
  • Small business bounces back faster than big business after a recession
  • Startups are paying less now than they were a decade ago

 

 

 

Smarter Family Business Via Communication

Having grown up in a family owned business, I have experienced a thing or two in common with many of my clients. Even when I was yet in middle school, I would be recruited to help out in the business, much to my own dismay at times when I would much rather be doing something (anything?) else. However, a little bit of pay went a long ways to making a young man very content. As I grew older, however, the conflict between what needed to be done in the business and what I wanted to do became greater. My goals, dreams, and ambitions had less and less to do with staying in town, working alongside my dad, and us building something together. As you can imagine, this difference of opinion caused a bit of a rift in our relationship. So it goes with many family businesses.

The mismatch between the expectations that a founder has in terms of the involvement of children in the business and their actual desire to be involved is one of the leading problems encountered in family businesses. The parent (substitute other type of founder, but effect is similar) wonders why the child doesn’t put forth the same effort, see the same vision, realize the potential, etc. I delivered a talk for Harley Davidson University on this subject a few years ago, “Why They Don’t Ride With You.” In my session, I spoke with dealers about their frustrations with family members who seemed disinterested in working in or taking over the business. My encouragement to them was to do three things:

  1. Hold the opportunity with an open hand. Instead of making up your mind that there is only one “right” scenario for family members to take part in your business, be flexible! Determine that, while you may have preferences, you will corral your opinions and keep them in check as you attempt to find a common ground.
  2. Communicate often, specifically, including listening. Far too often, a patriarch will squelch the input of a child, spouse, etc in the home–and at work–particularly if work and home blend as in the case of a family business. Rather than honing in on what the other person has to say, we can easily insist on getting our point across before seeking to understand the other person’s view. Ask open ended questions about what the family member enjoys doing, what role they see themselves in, and how those choices affect the business. Create an open dialogue-constantly.
  3. Distinguish between ownership and management. An heir may work in the business or out of it, but still function as an owner. Sometimes, it is best for all if it’s known to be a safe choice to be just an owner or just a manager, rather than both as the founder has been. Realizing that such options exist can diffuse tension, lead to productive conversations, and aid in succession planning. Quite often, outsiders are better successors to founders because they can be objective about the contribution family members make to the business.

There are many other issues that, seen operating in a family business, look and feel different than their counterparts in other types of businesses. Everything from performance measurement to compensation, perks to preferences, psychology to sociology, and very much in between can be seen at work and become a spark for emotions. By far, family businesses are more emotional than others. Whatever your situation, think about tools that help create objective conversations about business issues so that you can lessen the impact of emotions in decisions that are being made. Your business and your family will be better off for it!

 

Why Ignore the Obvious?

Margaret Heffernan wrote a book last year entitled Why We Ignore the Obvious at Our Peril, a look at how leaders have intentional blind spots. She queries why many people prefer ignorance over being well informed. In examining the Catholic Church, political despots, unethical corporate leaders, financial mismanagement, and the foibles of top military brass, Heffernan makes the tie between a leader’s choices and the impact on the organizations served. using psychology, researched accounts, and some intuition, she has been compared to Malcolm Gladwell and Nicholas Taleb and has received kudos from Dan Pink.

In an article published in Inc, she analyzes the General Petraeus fiasco and makes comparisons between others she covered for her book and the characters in the saga splashed across many websites, newspapers, and journals presently. Heffernan tries to get inside his head as to what he may be thinking about his new dilemma: soon to be unemployed and suddenly having destroyed a very accomplished career that others coveted until the story broke. 

Yet, was it so sudden? Hasn’t this revelation been building since the point of the first indiscretion? Digging more deeply, what was the thought process that led up to the first bad decision? Heffernan says she heard a CNN interview in which a Petraeus friend said that the general “sees this as a failure, and this is a man who has never failed at anything.” She asks the counterintuitive question–did he go wrong by never going wrong? An excerpt from her article:

If you have never failed at anything, then you haven’t been trying hard enough, aren’t very imaginative, or have had such extraordinarily good luck that you have come to believe you are invincible. And that, of course, is the problem.

“Success confers its own blindness,” Emily Brown told me. She’s a marriage counselor who has worked extensively with couples who have had the experience of infidelity.

“Successful people believe they can get away with it,” she says. “I talked once to a group of men who’d all become millionaires before the age of 40, and they’d had affairs. They don’t even see the danger! It isn’t a love of risk. They think: The wives will never know, so where’s the harm? Everything else in their lives has worked out, so they think they have some kind of magic, that their success has meant that they can have everything they want and they’re invulnerable. And they were completely blind to the harm they had done.”

Most of us make mistakes, and we should take some comfort in the fact that these usually remind us that we are fallible. If we are very lucky, we make mistakes from which we can learn and recover. Most of us have the oddly good luck not to imagine that we are infallible.

I’m a big believer in mistakes. Not just because I make lots of them–like everyone, I try very hard not to–but because every mistake contains learning. The best mistakes are the ones from which you learn the most and that you never forget. I would bet Petraeus thought that never failing was a sign of his genius. The truth is probably that he made mistakes, but he didn’t take time to learn from them. Or, hauntingly, he got away with mistakes by benefiting from everyone else’s care and attention, like a man who drinks too much but drives home safely.

No one is infallible. And those who think they are are probably going to be the most disappointed.

As you read about the former general’s mistakes, hopefully you can look at your own and have some perspective. Have you grown from them? Do others cover over your missteps — or do you have a circle close to you who will level with you at the expense of saying something that you may not want to hear in the short run?

 

Watch Your Asset – It May Not Be a Resource

First, the bad news: making operations, finances, and employees work to maximum value can mean having to eliminate some employees or operations at times. The good news, though, is that many businesses have been able to hold on to existing resources–even during a turnaround situation–by reassigning them to better purposes and uses where required. This is the heart of asset redeployment–the practice of reassigning people, things, and efforts to achieve optimal efficiency. By using capital wisely, your team can make it stretch a lot further. For example, coordinating employee and independent contractor work to produce the greatest amount of work with the fewest number of people working the least number of hours means greater return on efforts and dollars.

Eliminating Operations

Eliminating unprofitable operations–in whole or in part– is a wide-ranging task. Anything that may be termed “waste” in the company needs to be discarded or put to better use. One area that should be addressed is waste due to unnecessary multiple consumption of potentially shared resources. In plain terms, the individual use of items that could be shared is an extravagance that few small businesses can afford. Think of shared printers rather than a printer on each desk as an example. it is highly unlikely that every single person in the office will be printing at the same time. What’s more, high volume printer/copier combination machines use less expensive toner than ink cartridges in smaller units. This initiative may require more cooperation and patience than providing unique units for each employee, but such a move can reduce the amount of money the company must spend to get work done.

Avoiding Duplicate Efforts

A counter problem to the above is too many employees doing the exact same job, either knowingly or unknowingly. Such multiple effort, a clear waste of time, resources, and money, often occurs when someone is fearful of delegation or feels threatened by another’s talents and abilities. Therefore, management should make sure that several people are not doing the same job in differing formats and degrees. 

Non-linked software is a perfect example of this kind of waste; if the secretary maintains supplier addresses and phone numbers, and the accounting group keeps the same information in their files, someone is performing an unnecessary job. Instruct employees in ways to avoid duplication of effort. Look across your organization, document processes by task, and find ways to reduce overlap. This is not to say that your staff should not be cross-trained. It is, in fact, good succession planning and talent management to have people who could do someone else’s job in a pinch!

Managing Capital Resources

Capital resources include facilities, supplies, and work in process. Buying only what is needed when needed (“just in time”) is one way to wisely manage resources. Another way would be to try to have more finished goods inventory than unfinished, because finished goods can be sold quickly to raise cash. At times, you may consider renting or leasing an asset rather than purchasing it–especially if the term of the contract is less than the useful life. You may elect to “turn in” resources that you don’t need very often or convert them to less cash intensive resources through alternate financing. 

Coordinating Human Resources

This is an area often overlooked because it is seen as “just administrative.” When employees, however, have jobs that overlap in requirements, it is up to the executive team in the small business to correct the situation for optimization. When your people are performing jobs that are not their strong suit, they usually take more time and make more mistakes than a better qualified and motivated counterpart.

Develop a competent management team to help you steward resources more efficiently. There are multiple areas for gains in efficiency and profitability if you will commit to the process. Note: process rather than one-time task–follow-through and experience the fruit of your labors!

Entrepreneurs: Learn to Delegate to Capable Employees

Delegation

The “take charge” attitude that permeates a builder’s very makeup is easily channeled and tempered with proper direction and focus. Avoiding “one man rule” tendencies is as easy as one word: delegation. The effective executive delegates rather than performing all critical tasks. However, successful delegation requires that responsibility and authority also be delegated. Herein lies a problem for the executive–“hands off” management.

An experienced founder’s abilities and characteristics relate to starting and preserving a good business idea. Chief among those abilities would be creating a vision for the company, which is usually unstated but somehow understood. While it may seem a chore for others in the company, projecting a confident and self-assured image that appeals to prospective buyers  comes naturally to the experienced executive.

Additionally, identification of market opportunities and provision of top notch service to meet customer needs are focal points of the founder’s vision. Unfortunately, the ability to create a workable organization to achieve company goals and objectives may prove more elusive. The business owner who possesses the innate skill to attract others to pursue an unwritten vision may lack the skill to build an efficient organization.

Employees

Clearly, employees are critical to the success of profit maximization in any business; it is their effort that keeps the wheels of progress turning. Most employees have spent careers in similarly sized (small) companies in the same industry setting–be that white collar or blue collar–with limited exposure to alternate environments. Consequently, their frame of reference in employer/employee relationships amounts  to that which the founder and, where applicable, previous employers have provided.  With limited cross-training in other professional disciplines, these members of the team have the least job flexibility and therefore generally welcome changes in work flow patterns that can make their jobs appreciably easier and more effective.

Job Specialization

While cross training or shared skill sets occur as a matter of necessity, job specialization is a focus of many small businesses. A certain “pride of ownership” can arise from this high degree of specialization. Fiercely loyal, most employees would rather sacrifice some temporary perks rather than leave a benevolent employer “high and dry” in a time of financial duress. Since the employees tend to be skill-oriented, they require a great deal of direction in defining work assignments. At the same time, they spend a lot of time observing the founder and mimicking his or her efforts; if the entrepreneur is a go-getter, they will learn to hustle on the job in order to meet production requirements. In short, employees can be extremely valuable in performing the legwork that makes the business optimization a reality.

Employee Responsibilities

Employees are required to adhere to schedules, commit to the strategic plan, be willing to work long hours, and be brand ambassadors of the company in the community. Schedules governing production, documentation, and reporting must be religiously followed to ensure optimal work efficiencies. Time, budget, and administration constraints are to be respected and emphasized among employees and their  supervisors.

Mindful of how they represent the company, your people are the “front line” experience that others have with your brand. Whether buying from suppliers, meeting with customers, or serving in a local non-profit, they have an opportunity to make you look great–or not.

When company plans cause inconveniences for employees, it should be up to the employees themselves to raise the issue with their superiors. Once they have been given the right to voice their opinions and concerns, they should be expected to fall in line with the plan. Failure to follow established guidelines should not be tolerated. Without respect of your core values, your employees should be replaced by those who can carry your banner proudly!