Struggle Everyday to Stay Small
Volume 13, Number 9
Issue 609
The best companies I have ever been professionally associated with are the ones that realize that they can be even more profitable by staying small and resisting the temptation to grow.
Sure, huge companies with large numbers of employees can make many hundreds of thousands of dollars in profit, but you and I probably will never be able to have one of those. But what can we have?
We can easily have a company with a few--say, five, employees that makes $300,000 to $500,000 in profit for a sole owner. Sound extreme? Think I am exaggerating? Well, I have a lot of those companies as clients and they all started with one owner with a great idea, a great business plan and a well-defined target market.
The worst-managed small businesses focus too much on cash-flow and sales volume and trying to get as big as possible rather than simply focusing on making as much bottom-line profit as possible with the smallest cost of delivery (overhead).
I see many companies with, say, 20 employees and up that have far too much administrative costs associated with too few dollars in sales. One of my benchmarks is always to take the company's gross sales and divide by the square footage of dedicated office space. You should always be having at least $300-$350 in gross sales per square foot of office space. If you don't have this level of sales, especially in hourly service businesses, you probably have lost touch with making money and are spending too much money on the business of doing business, or you have unused office space that you should find another use for.
Just like the old adage "the business of government is government," entrepreneurs often become so enamored with "the business of doing business." The most profitable companies I have ever had the honor to serve as their CPA have less-than-fancy office space and do the most they can with very little. These companies are frugal with overhead. The dollars are real dollars to them and the owners never, no, not ever, lose touch with reality.
I feel certain one of the differences that often makes small companies more successful than large ones is the presence of an owner-operator who spends dollars very frugally, just like they do in their personal life. How in-touch can a huge company be with the frugality of business spending when they have stopped signing their own checks and writing their own payroll?
Mark Henricks, a business writer for several national publications states, "too much of management is often based on volume and size. Many entrepreneurs want to say 'I have a company that's this big, with this many people, this many square feet of space.'"
I've always thought this type of thinking places too much emphasis on the appearance of doing well rather than actually doing well. Less-than-successful business owners think that bankers and investors want to see the business doing well by appearance but, actually, the exact opposite is true.
One thing that always fascinates me is looking at the cars that business people drive.
Over the years I have formed the opinion that, contrary to the way you would think it would be, the most successful business people drive a really lousy car and unsuccessful business people are-more than likely-the ones who will drive the really fancy cars. You would think that the opposite would be true, but my personal opinion is that fancy cars fulfill the need that business profit usually provides. Since fancy cars are more easily had than business success, the car often comes first as a means to justify eventual success that is only hoped for.
It's more likely-than-not that a business owner who has a lot of profit will drive to my office in a VERY average car-even a beat-up old clunker. I think that this type of entrepreneur "gets it." They spend their profit on other things in their personal, professional and charitable lives. After all, isn't a car supposed to be the business tool that will simply get you from Point A to Point B and that's it? A $50,000 HummerT is eventually worth the same thing that a Nissan SentraT will be. The by-product along the way-the tremendous amount of financial resources that were expended to buy the more expensive vehicle-could have been better invested in an appreciating asset, especially people (staff salaries) and charitable interests.
Ultimately, the only thing that really matters in business TO ANYONE is the ability to sustain and to generate continually-growing profit IN ADDITION to the ability to pay the owners and employees fair market value salaries for the time they spend in the business. After all, the only way a business has any value relating to any premium above and beyond the net realizable value of "assets minus liabilities" is its ability to generate sustained earnings and profits without the day-to-day involvement of the owners and through the long-term loyalty of key employees. If this ability exists, that's "goodwill."
In the absence of an ability to generate profit, a business is only worth what its assets will realize in an asset sale, minus any liabilities.
Entrepreneurs are into creating and building, but they also have to learn to channel that energy into building sustained profits. Entrepreneurs who focus "only on the gross" by thinking that sales are the secret to success are not realizing that sales dollars mean absolutely nothing. It's profit that matters! I could start a company today with $5,000,000 in sales instantly. I would do this by selling things that cost me $7,000,000. I wouldn't be around in business very long because I wouldn't be generating profits. A business with $400,000 in sales with $100,000 in overhead is worth far, far, far more.
Entrepreneurs that focus on building monuments to their efforts with fancy office space, buildings, large staffs, fancy cars and plush furnishings are wasting their profit dollars by simply not being frugal.
With regard to staff salaries, do more with less. Pay more than your industry's average "per person" salary and you'll attract the best employees who will do more with less because they value their jobs more. Your gross payroll will be less than your rivals' as a percentage of sales, and your individual workers will be making more than their counterparts in the marketplace.
A large amount spent on a large staff is a waste. A medium amount spent on a small staff will make you the most profitable company in your industry because you will have the best workers.
Remember, a wasted dollar in expense is a wasted dollar of profit. By cutting expenses to the bone (or never letting them get out of control in the first place), every dollar in low expenses is a dollar that is just as green as a harder-earned dollar of profit.
David B. Robinson, CPA
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