Stay Small to Stay Strong
Companies learn big isn't always better
Some entrepreneurs choose to stay small. Size really does
matter, particularly in business, where entrepreneurs are often
seduced by growth purely for growth's sake.
On an individual basis, entrepreneurs decide what "small"
means to them and it undoubtedly varies. Some are perfectly
satisfied working alone in a home office. Others continue to see
themselves as small with up to 20 employees and
multi-million-dollar sales. But regardless of how they define
small, they will know they should be reconsidering the size of
their firms when faced with these warning signs.
- Cash flow is tight.
- Profit margins have shrunk.
- More mistakes are being made or repeated.
- The entrepreneur is stressed, cranky or not sleeping
well.
- The entrepreneur isn't having any fun at work or in life.
- The entrepreneur is no longer sure who is accountable for
which results.
"A company that is the right size and has grown well will
see exactly the opposite effects," notes Steve Semple, a
Toronto-based small-to-medium-sized business consultant. "Growing
and becoming a bigger company is great if you're doing it to
achieve certain business and personal goals, but you have to be
clear about what you want and why."
When pondering the size of their companies, most
entrepreneurs look at revenue, market share and the number of
employees, but they do not always assess one of the most important
factors - profitability.
"Profitability rarely comes into this definition, but it
should be what matters most and neither growth nor size can
guarantee greater profitability - in fact they can adversely affect
it," says Semple. "If you're not going to net more money, why put
yourself through the rigours of running a larger firm."
While growth and size are typically credited with realizing
certain economies of scale, it is not always guaranteed. Growing a
small firm into a bigger one almost invariably costs money. Sales
staff must be hired and equipped. Marketing, communications and
public relations budgets may need a boost. When new business is
acquired, additional employees and office/production space are
often required. Financing the growth will also add to the price, as
there is always a cost attached to borrowing.
"The goal is to increase receivables, but remember you'll
also grow costs," says Semple. "Stress is knowing that you have to
sell an extra $500,000 just to cover the additional overhead."
To decide whether or not your firm is the right size for
you, you need timely, accurate numbers, but it is the one thing
many firms lack, whether they are big or small. When Fern
Gordon first started The Profit Line, she planned to consult
to businesses with sales of $500,000 to $5 million. But as she
began working with clients, she discovered most clients couldn't
access even their most basic financial data, which she needed to
assess the company's health and identify its challenges and
problems.
"We couldn't make good decisions without the hard numbers,"
says Gordon, who subsequently shifted the Toronto-based firm's
focus to financial management and bookkeeping. "Most of them didn't
even know what a profit and loss statement was."
Event Spectrum, an event management company, knows how
important the numbers have to be. Founded in 1997, Event Spectrum
grew sales from $107,346 in 1998 to $4.3 million in 2003 and still
has just 12 employees.
Through the aggressive growth phase, president Cynthia
Richards learned to watch the numbers, particularly profit margins.
In 2002, profits declined a couple of percentage points although
sales had increased 38 per cent. Profits fell because Event
Spectrum had dramatically increased costs by adding staff, office
space plus new computer and phone systems.
But Richards was determined to increase profitability in
2003, so she instituted profit sharing for employees who had been
with the firm for two years. She wanted to inspire efficiency,
productivity and cost containment and make sure her super, young
staff stayed with the firm. "It shows employees that the company's
profitability directly affects their pockets," explains Richards,
whose company built a small gym onsite, has quarterly retreats and
brings in a personal trainer four times a week. "A small firm can
decide to offer big-company benefits," she says.
The bigger the company gets, the harder it is to retain
personal relationships with staff and customers. Over the years,
Semple has noticed that most entrepreneurs can effectively manage
up to 15 people. Beyond that they will have to hire additional
staff as managers. On the downside, this will be costly and there
is no guarantee the managers will have the capabilities required.
Being bigger and having more employees certainly didn't make
Steve Schleicher, president of kayak maker Rainforest Designs in
Maple Ridge, B.C., any happier. In fact, he and Jan Bain, his wife
and Rainforest's manager, didn't like it at all. At one point in
the mid 1990's, they were producing about 500 ocean-touring kayaks
a year with 16 employees. "We'd always had trouble finding good
staff, but to meet a sudden surge in demand, we'd really scraped
the bottom of the barrel," admits Schleicher. "We were spending too
much time on staff problems and fixing their mistakes when we
should have been building kayaks."
They kept at it for a while, but when the Japanese economy
crashed and up to 40 per cent of Rainforest's sales went with it,
"Schleicher and Bain simply decided not to replace that market.
They looked at each other and said, "You know this isn't a bad
thing. We can relax a little more."
Today, Rainforest makes up to 300 kayaks a year with 12 to
13 employees during peak season.
Both Rainforest and Event Spectrum have managed to stay
relatively debt-free by growing carefully and staying small. At the
moment, Event Spectrum has only a line of credit that remains
virtually unused.
While Bain and Schleicher concede they make more money when
they manufacture twice as many kayaks with double the number of
employees, they decided to work and live with less. "We didn't have
the time or energy to spend the extra money," adds Schleicher. And
Bain has the last word on that subject. "I'd hate to leave that
money behind because we kicked off early after working ourselves to
death."
So when you are considering what "small" means to you and
your firm, focus on what you really want to achieve with your
company and in your life. The answers may surprise you.
Excerpted from:
Canada's S.O.H.O. Magazine
Fall 2004
Information and Inspiration for Small Office and Home Office
Entrepreneurs
