What do I mean by the Craft of Business? Why does Craft come before Art?

If a professional dancer wants to be great, he or she spends endless hours with professional instruction, learning how to move in a very precise way. This may take years. Every muscle in the dancer’s body learns and remembers how to move. Only when the dancer has learned the craft of dance, can he or she combine that craft with creative inspiration to perform with true art. Clearly, the hard work of learning the craft comes before the freedom of the art.

There is craft before art in drawing, painting, architecture, acting, cooking, or any creative endeavor. Why should business be any different? The fact of owning a business in no way qualifies a person to competently and effectively run a business. Small businesses differ from larger organizations in that they are typically run by non-business professionals. Most small business owners are artists, doctors, roofers, or chefs. But nothing in the training in art, medicine, construction or cooking deals with the “nuts and bolts” of the business.

Regardless of the field, the craft of business requires specific skills in finance, marketing, employee management, selling, and planning. In medium and large companies, the organization hires specialists in these areas. But that is not an option in most small businesses. So the small business owner needs to learn enough in each of these areas and to find resources to allow their business to be successful.

If you are a small business owner, what can you do about the craft of business? First, be honest about what you know and do not know. Then get help. Think strategically. No one can do it all themself.  Do not assume for example, that just because you cannot afford expensive advertising, you shouldn’t have a marketing program. There is a lot more to managing employees than just “I’m the boss, do what I say.”

To listen to an interview with Michael Carroll on this topic, click this link. This interview was broadcast July 2, 2008 on KZYX, Mendocino County Public Broadcasting.

A slow economy to a business is like winter to a farmer. It is part of a normal cycle. Things may be dormant, but there is still lots to do. And winter is always followed by spring. Unfortunately, economic cycles are far less predictable, and the slow periods may be years long. But here are a few things to think about.

1. Lower interest rates Interest rates are at historic lows. It may be possible to refinance your debt and lower your monthly expense. It is not necessarily a good idea to borrow against losses just to maintain lifestyle. Rather it is more appropriate to tighten belts and spend less.

2. Slow economy weeds out your weaker competition If the slower economy is hard on a strong, well-run business, it will be much harder on businesses that were just barely making it in the good times.

3. Sometimes easier to find new employees Recruiting good employees is always a challenge, but when the economy slows down, more people are out of work, and it is often easier to find new employees.

4. May be cheaper to have new construction done When the construction industry is down, there are more out-of-work construction trades people, and it might be possible to get construction work done sooner or more inexpensively.

5. Be frugal This is not a time to spend extravagantly and even to continue to spend as you have been. This is a time to be extremely careful with your expenses. If you need to cut, cut owner’s salary first. For a while, live on less.

6. Watch the business expenses even more closely Use your P&L and cash flow. If you do not have these essential tools, get them and learn how to use them. Costs are going up in spite of what they government is announcing about low inflation. Your suppliers may not notify you when they increase prices. Stay on top of it.

7. Revise your cash flow forecast regularly This tool is important anytime, but in questionable economic times, it is essential. If you have a sales forecast and cash flow forecast, review and revise it more often. If you don’t, get urgent about getting one.

8. Increase, not decrease marketing A common mistake is to cut marketing. It is often the only way to reduce expenses without reducing owner draw or payroll. Other expenses like rent are usually fixed. But if you are doing effective marketing, reducing the effort will guarantee your sales decrease. Rather, find other ways to cut, and spend more effort on marketing.

9. Avoid fear-it’s corrosive Watching Fox News or CNN on TV will convince you we are in trouble even if we are not. Fear is good for keeping you from going over a cliff, but staying in the state of fear over a long period is unhealthy and unproductive. The antidote to fear is action. Ask yourself what can you do differently – then do it.

10. Might be a good time to start a new venture This doesn’t seem to make any sense. However, if you use the time during a slow economy to do the groundwork for the new business–make a good plan, perhaps raise money, hire key employees–you might struggle some in the beginning, but you’ll have a year’s head start on a competitor who’s just thinking about getting started in the same business. The enterprise can follow the growth of the economy when it does turnaround. Think about the difference between starting an internet company in 1993 verses 2000.

Don’t misunderstand me. Things are tough and may get tougher. It may not be as much fun as boom times. But usually a well-run business can survive, even thrive, during an economic downturn.

Last Saturday night, Margaret took me out to her favorite San Francisco restaurant for a belated birthday dinner. Since her own restaurant was famous for both great food and wonderful service, I am always intrigued by a restaurant that impresses her.

When ordering wine, the waitress was very knowledgeable about some esoteric Italian regional wines. And all three wines we ordered were everything she promised. As we expected, everything about the food and the service was exceptional.

At the end of the meal, I asked the waitress how she knew so much about the wines. What she answered is as close to a secret of success as one will ever get in any restaurant. She enthusiastically answered, “I drink the wines, they are always teaching us about the wines and they test us every month.” She said this with a confident pride and enthusiasm.

In a restaurant, your servers are your sales force. They need to be trained. Not just once, but regularly. They need try all of your offerings so that they know and believe enthusiastically in your product. I guess you small business owners both restaurant and others are saying to yourself, “I cannot afford to regualrly train and test my employees.” I say that you cannot afford not to.

Like most of my clients, I am not an accountant and have had to learn a simple method of looking at all those numbers. As I mentioned last post, many small business owners do not use their financial statements because they do not know how. In this post, I will suggest a simple method of looking at financial statements for non-accountants.

Step one. Get a monthly profit and loss statement, also called an income statement, and don’t panic.

Step two. Look at the left hand column of accounts and pick the three or four that you have any control over. They will be unique to your business, but there are usually only three or four. These are typically Total Income, Cost of Goods Sold, Payroll Expense, and Profit. For now, ignore the rest.

Step three. Compare each of these four numbers to what you expect them to be. For example, with the income in a seasonal business, compare the number to last year’s sales for the same month. If the sales are up and that is what you expected, great. If they are off, why and what can you do about it. For the rest of the numbers, it sometimes helps to look at the number as a percentage of the total sales. So for example, if your Cost of Goods Sold usually runs 32% of total sales, and this month it was 40%, there is something wrong. Find out what. Do the same for the other two numbers.

You are done. Well, not really. Now the real work begins. If the labor costs are up significantly, what can you do about it? If sales are flat, do you reconsider that next order?

The key to using the financial statement as a management tool is focusing on the numbers that you can do something about. For most businesses, most months, that means that you can ignore most of the numbers on the financial statement. That does not mean that you do not care about the cost of insurance or the cost of your rent, but as a practical matter, you can’t do anything about it. But you can and should stay on top of those three or four things that you can do something about.

Running your business without financial feedback is like driving on the freeway wearing a blindfold. This comparison may be a little extreme, but one of the most common problems I encounter in small businesses is not using financial tools. By this I mean that the business owner either does not have current accurate financial statements or, if they do, they are not using the information to run their business.

In fact, most of clients who come to me with a business that is losing money are also not keeping or using their financial feedback. Considering most small businesses are not started or run by financial managers, but by roofers, physical therapists, chefs and artists, this problem is understandable. That does not make it OK. I can not tell you how many times I ask a new client for their profit and loss statement and get a rather sheepish look. It is the same look I give my dental hygienist when she brings up flossing.

So here is the upside of learning to use financial statements: Many of the clients I see who learn to read and use current accurate financial statements become profitable very quickly. Why? It is just like the last time you took your eyes of the road and wound up driving on the shoulder. Then looking back to the road, you correct without even thinking about it. If you are a builder or a restaurant owner, I can understand why you pay more attention to blueprints or menus, but if you want to have enough to pay yourself at the end of the month, learn to use your financial statements.

I’ll give you my easy method in next week’s blog.