VOL. 41, No. 2 HEAD OFFICE, I’MONTREAL, I~/[ARCFI 1960

01t Small Business Managemei t

TaHE decisive factor determining the success or

ilure of small business is now, as it always hasbeen, the talent and ability of management. Techniquesand skills may be learned, but the man at the top mustbe one whose mind is naturally at home when he iswrestling with problems and controlling projects.

What sort of people become managers of smallbusinesses? Some are men who advanced throughworking for others; some broke away from depart-mental ruanagement or from specialization in bigbusiness. Both sorts are spurred by the desire to runtheir own show. Both must make adjustments: the firstbecause he is now top man and has no one above himto resolve difficulties and make decisions; the secondbecause he has no longer a picked and qualified staffto handle every chore effectively.

The small-business man is not a type of person. Heis an individual. He may be moved by any of a dozenpurposes. Some men want their businesses to be smallso that they control their own destiny. Others wish toavoid the disciplines of corporate life. Others seek tomake money, and the}, see in a business of their ownthe best opportunity offered. Others desire the non-financial rewards: they have a feeling of devotion totheir product, or they get deep satisfaction out Of

providing a service.

Managers of small businesses often are faced withserious ditficuhies because of problems they did notforesee, because of questions they did not ask beforemaking important decisions. This Monthly Letter is notan attempt to ~ve detailed operating information. Itis concerned with the management function, the keyfactor in small-business development. It will suggestsome of the questions that managers should ask.

ManagementManagement has many qualities, but among the

basic attributes are equable temperament and pa-tience. The owner of a small business must cope with

a great amount of vexing detail; he needs broadversatility, so that his talent as a salesman is backedup by ability to organize and control. He must haveinitiative, energy and foresight. He needs character, todeal justly with customers, creditors and employees.

Experience in the chosen field is necessary if one is toavoid pitfalls. A man will decrease his chance of successif he moves into management faced with the need tolearn the business from scratch. Enthusiasm will not beenough. But do not be misled into considering thelength of time served on a job as a measure of expe-rience. Intensity counts as well as the number of years.Some people merely repeat one year of experience overand over many times.

What are the responsibilities assumed by a small-business manager? They include policy making, im-proving goods and processes, marketing, and budgetingresources and expenditures. He must plan for the future,operate in the present, and keep sensitive hands on thecontrol of both present and future.

These responsibilities require special aptitudes,promptitude of action in emergencies, capacity fororganizing work, great tact, and constant self-culture.

They demand tools to do the work: standards ofgoods and performances; budgets of time, money andproduction; records from which to analyze the past,evaluate the present and project the future; research touncover new commodities, new methods and newmarkets.

Even if a business man is his own only staff, organ-ization is needed to keep all these duties and functionsand requirements in line. When he adds one or twomen to his work force it is necessary to determine andmake clear for what operations his employees areindividually responsible. Doling out instructions piece-meal day by day is wasteful of time and deadly toefficiency. Lord Macaulay said: "Many an army hasprospered under a bad commander, but no.army ha~ever prospered under a debating society."

What business failures showMore businesses fail because management is deficient

in performing some vital function than for any otherreason. Sometimes failure supposedly due to insufficientcapital is really due to a policy that is unsound inrelation to the capital available. Or failure may bedue to inept handling of inventories, over-extension ofcredit, unbalanced buying of raw materials or stock,misjudgment in estimating markets.

The evidence of all this is to be found in the reportsof failures published every year by Dun and Bradstreetof Canada, Limited, Toronto. The report of 1958 hasthis tabulation of causes of failures as percentages ofall failures:

Per cent cause2.2 neglect0.3 fraud4.4 lack of experience in the llne

46.2 lack of managerial experience12.2 unbalanced experience32.9 incompetence

1.3 disaster0.5 reason unknown.

Of the 1,380 failures reported in Canada in 1958,there were 1,321 falling within four classifications:lack of experience in the line, lack of managerialexperience, unbalanced experience, and incompetence.

It may seem illogical in face of all this to say that~mall business holds out unique opportunities in theCanadian economy. It is, nevertheless, true for thosewith the necessary qualities of knowledge and judg-ment. Some young men may continue to think ofpensions before they have begun to live, and of gettingthrough the intervening years in the easiest possibleway. But there are still men with the inner drive, theurge to create and initiate, the push of enterprise andthe courage to keep ’alive this vital sector of our wayof life.

What to knowWhat are some of the facts and conditions about

which a small-business manager should be informed?

First of all, is there a demand for the goods or serviceshe sells? Then: what superiority can he give his goodsand services over others of the same nature already onthe market?

Improvement in goods should be made with twopurposes in mind: to make the goods more attractive tobuyers and to make production more economical. Intoday’s market it is the customer who defines what is"attractive". Quality still counts. A producer cannotlong surmount the handicap of an inferior product.Note how carefully the successful companies check thelikes and dislikes of the market place.

What new commodities should be added to thosealready carried? Although some companies seem tothink that there is something sacred about the relation-ship between their company and a single product, it isgenerally recognized that even a small business shouldgive careful consideration to broadening its base.Unused machines or space- which, even at zeroproduction, are still elements of cost m suggest theadvisability of considering expansion, addition or re-organization.

If you decide to diversify your products, make surethat every added item stands on its own feet. It mustserve a real purpose, not merely that of keeping wheelsturning. It should yield a profit, or serve as a hedgeagainst a seasonal recession, or make use of a by-product. It should be of admitted worth to customers,representing a new standard of value in its field.

Materials and inventoriesIt goes without saying that the efficient handling of

materials is a big factor in costs. This applies to everyincident, from the manufacturer’s order for raw mate-rial through reception and processing to dispatch, andfrom the retailer’s order to the wholesaler throughdisplay on counters to the check-out desk. Everyone inthe plant or shop should be made to respect material,because it represents a certain definite amount of moneyto the proprietor.

As to purchasing, the wise man knows that the sizeof the outgo is just as important in determining profitas is the amount of income.

The purchasing function has received much attentionin recent years, with one eye on saving money and theother on increasing efficiency. A general rule of prudentmanagement is that no one should have the power tospend money until he has justified the expenditure. Inbusiness as in household management, the essence ofgood purchasing is to decide precisely what you needand not to pay for anything you don’t need.

A business can fail even though it owns things worthmore than it owes, so the amount of inventory isimportant. Bills are paid with liquid funds, not withfrozen assets. Running out of money to meet outstandingobligations can amount to bankruptcy, even though thewarehouse is filled with goods ready to be sold.

ProductionIn giving his plant a periodical critical examination,

the business man will have in mind these questions:is the product being turned out by the most efficientmethod, in the shortest time, at the lowest possiblecost, and in the best quality?

Matthew Arnold wrote, in the expansive Victoriandays a hundred years ago, "Faith in machinery is ourbesetting danger.., aa if it had a value in and foritself." The purpose of the machine is to increaso

production, and if it is not doing so, or if there is noprofitable way to dispose of what it produces, thenmachinery is an expensive waste.

To make sure there is no waste, the manager mightconsider a study of the methods used on his machines.One such study resulted in a 78 per cent increase inproduction, a ten per cent decrease in material costs,and an improvement in the appearance of the article.

Another source of loss in an establishment whereorganization and control are not up to par is in time.The business man should develop his sense of timing.looking toward simplifying jobs, eliminating duplicateprocesses, and decreasing handling. Any work that doesnot add value to material, does not plan or calculateddoes not give or receive essential information: thatwork involves waste of time.

MarketingMarketing is one of the most necessary and most

difficult of small business activities, but there are certainprinciples and practices that will help.

To do a good job of marketing may mean a somewhatpainful change from comfortable habits of work. Itis a job involving the product designer, the machineoperator, the production manager, the advertising andsales people, and everyone having anything to do withgetting products from raw material to the consumer.Unless all departments are busied about the provisionof a good article at a good price, suitably packagedand attractively presented, there cannot be efficientmarketing.

Every business, however small, needs to advertise.Unless you let prospective purchasers know what youhave to seU, whether goods or services, you cannotexpect them to buy. But advertising is not somethingto be attempted hap-hazardly. When done by peopleignorant of the principles, it is one of the easiest waysof throwing away money.

Large sums are not necessary. Wrigley started with$62; Waterman’s first advertising appropriation was$65, and Borden’s was $513. One point of judgment isthe amount (in percentage of sales or other measure)being spent on advertising by other concerns withsimilar products.

Discussion with an advertising agency will providesuggestions as to the most effective means of advertisingyour goods: direct mail, newspapers, radio, television,general magazines, trade publications, handbills, post-ers, point-of-sales displays, or combinations of some ofthegc.

The advertising must have a purpose: to introducenew goods, promote new uses, establish your name, orsome other objective. Aimless advertising seldom pays.

Setting an objectiveThe most stable and successful business growth is

that which follows a sound predetermined plan,

propelled toward a known destination. No wind,however benign, is of use to the sailor who has not alanding-place in mind.

Every journey must start from a point, and the onlyway to determine that point is by way of records.Today’s relationship of income and outgo, of produc-tion and sales, must be taken into account when decidingthe destination and route.

Some business men have an aversion to keepingrecords, perhaps because of boredom or lack of apti-tude, while a few shrink from accounts because theydo not like to face the grim realities of their position.The history of business is marked with the bleachedbones of many promising industries whose managersneglected their book-keeping.

Suppliers and banks usually require financial state-ments before advancing credit, and certain governmentdepartments call for periodical reports. The book-keeping need not be too greatly detailed. Keep itsimple, but do it regularly and correctly. The manwhose business does not need a full time book-keeperwould be well-advised to employ a qualified person tomake up his books and accounts once or twice a week.Many small-business men find this help in the ranks ofretired accountants and bank managers.

It could probably be said that no technique is morebeneficial in sound business management than that ofbudgeting.

Without a budget it is practically impossible toprovide for the three sorts of working capital: regular,seasonal and special. By planning for these in advance,a company is able to insure itself to a large extentagainst financial embarrassment.

The budget is not, as those who dislike the ideadeclare, a straight-jacket. It is a measure of performanceproviding a guide in new conditions. It gives the man-ager a means of control. It prevents waste. It is asafety signal that operates in good and bad economicweather. It sets up a target and provides a gaugemeasuring the accuracy of the shot.

Every budget should provide for savings. Capitalgoods are constantly wearing out, and must be renewed.Business men have to decide every year how much ofthe production capacity at their command shall bedevoted to assuring future production. That sum issaved to provide capital.

Credit is useful as a money-making tool. It shouldnot be used to make up for inefficiency in managementor production. That habit gets quickly out of hand,leading to a vicious circle whirling one into troubleand disaster.

Those who have money to lend (the chartered banksof Canada are the primary source of short-term loans’)

are prepared and willing to advance money forproductive purposes. Ifa small-business man showsthat his sales volume yields an adequate margin overcosts, and that there is a good amount of ownershipcapital invested, and that he has an adequate systemof records and accounts, he should experience littletrouble in obtaining an amount of short-term moneyin keeping with his legitimate needs. There must be areasonable working capital so that the banker is assuredthat the business is not threatened by pressing currentdebt. Current debt and fixed assets is a combinationwhich leads to trouble.

As to granting credit to customers, sound businessdemands a thorough knowledge of the customer’sfinancial position and a regular checking of accountsreceivable to note and correct deviations from theagreement for payment.

To extend credit costs money: what would otherwisebe cash in your till is tied up, and should you needcash you must borrow at interest; the book-keeping ofcustomers’ accounts costs money; there are bad debtsto reckon with.

The dynamics of businessBusiness and the business manager cannot remain

static. All the routines and procedures in the worldwill do no more than provide the mechanics. Fromthere on we need thinking, planning and doing.

The business must keep abreast of developments, andas far ahead as possible. Change is the daily experiencein business, but even unexpected changes need not bebad if you are flexible and can take advantage of them.Do not cling to opinions about business possibilitieswith too great obstinacy. Just as soon as you get aninkling that there may be another viewpoint, go overand take a look. You may find that what you tookto be a temporary, unimportant change is really thesetting in of a basic trend.

Determine, for example, what is held in store foryour business by these facts: (1) Every year there arethousands of new customers starting to buy things inCanada, young men and women entering the 20 to 24age group, earning their first money. By 1980, it ispredicted in the report of the Royal Commission onCanada’s Economic Prospects, there will be 2,187,000in this group, more than twice what the number was in1953. The earlier age group, 15 to 19, will have ex-panded from 1,129,000 to 2,262,000. (2) There are260,000 citizens getting married every year, setting upnew households, forming new buying habits. (3) Peoplemove from district to district, from town to town andfrom province to province. In the nine years endingwith !955 there were 323,350 migrations from oneprovince to another. (4) About 100,000 immigrantscome to Canada every year. °

Authori;~od as s~eond class mail, (4Post Office Department, Ottawa

The market, therefore, is not static. There are newneeds and new people to attend to. Your product,packaging and distribution may have been admirablefive years ago, but out of date today. Customers havechanged individually. They cannot be viewed as units ~"in a statistical mixture. They are struggling to improvetheir status. Every satisfaction of a want they attainplants the seeds of new desires.

The successful small-business man is ahead of his time,not by flights of fancy but by studying and judging factsand trends like these. He anticipates change insteadof waiting to have it forced upon him. He is studying theline from the engine driver’s cab, to see where he isgoing, instead of from the caboose, where he can seeonly where he has been.

Practical business wisdom comes by constant vigi-lance, periodical revision of ideas, and positive thinking.It might be a good idea to diarize every month:"What innovations can I introduce this month?" Askof every unique event in manufacturing or distributing:"What does this mean to me?" By answering the ques-tion you may open up a new area of production or anew market: at the very least you keep your businessmind alive.

Even in time of stress, when, like the Red Queen inThrough the Looking Glass, it takes all the running you cando just to stay in the same place, self-pity is not agood weapon to have in the business man’s armoury.Necessity often fosters a kind of practical audacity that ~.._enables a man to do great things with little means.

The greatest resources of the small-business man arewithin himself, close to home.

Every business man over fifty has heard, or hasheard about, the lecture called "Acres of Diamonds"which was given several thousand times by RussellHerrman Conwell at the turn of the century.

Every small-business man of whatever age couldprofit by reading it. One place to read it is in volumeeight of Modern Eloquence, to be found in many publiclibraries.

"Acres of Diamonds" is based upon an Arab’s storyof a man who was seized by diamond fever, sold hisfarm, and wandered over the earth in search of dia-monds until he died, impoverished and discouraged.The man who purchased the old farm from him foundtherein the great diamond mines of Golconda.

To anyone wishing more detailed information on topicsdiscussed in this Monthly Letter we will be pteased to send a list ofgovernment and other booklets and books. Write: A¢snthly LstttrDepartment, The Royal Bank of Canada, Head Office, P.O.

: Box 6001, Montreal, Quebec.

PRINTED IN CANADAby The Royal Bank of Canada