Operating a small business.

Operating A Small Business:

Executive Summary:

Peter Torque, formerly employed by One. Tel as a sales person, has considered the possibility of entering the mobile phone business for himself. His friend, Simon, wishes to sell his mobile phone business, however, recently, it has been experiencing difficulties. Peter has also developed his own cash flow budget, in case he decides to start his own mobile phone business.

The purpose of this report is to:

*Analyse the difficulties faced by Simon’s business with regard to its business life cycle, explaining the possible implications of these difficulties and providing strategies to rectify each situation.

*Discuss the ways external advisors could aid Peter in managing Simon’s business.

*Identify and explain two other key considerations Peter would need to examine before purchasing Simon’s business.

*Evaluate the cash flow budget Peter prepared in case he decides to start his own mobile phone business.

*Make recommendations as to the course of action most appropriate to Peter’s situation.

The Difficulties Faced by Simon’s Business:

Simon’s business is currently in the decline stage of Post-Maturity. This is evidenced in the difficulties faced by the business:

*Decline in sales- the most literal characteristic of a business in Post-Maturity and decline. This universal difficulty can be attributed to other difficulties faced by the business, including:

*Outdated product line- a difficulty such as this often begins in the Maturity stage, with regard to the sense of complacency that often envelops organizations. In this instance, the management has become complacent in its research into the newest products and models available. This would have resulted in a levelling off, or plateauing, of sales. It is then the astuteness of the manager that determines what phase a business next enters. If business remains stagnant, then eventually sales will begin to decline noticeably, rather than simply plateau. This has occurred within Simon’s business. He has become complacent in his research into the latest developments in the mobile phone industry and, as such, is faced with the difficulty of selling outdated stock.

Implications- the possible implications of stocking outdated models are ominous. Simon’s customers have complained about his stock and sales are declining. Evidently, Simon is losing market share to competitors and will continue to do so if he continues to stock outdated models. Ultimately, he will be faced with a liquidity problem, that is, his debt levels will be large, while his cash levels and ability to convert assets into cash would be low. Quite simply, he will be unable to fund his activities and thus fail as a business.

Strategies- Simon must update his product line. Failure to do so will result in a continuing decline in sales and ultimately, cessation. This process has begun, so a loss of some degree will be incurred. To reduce the impact of this loss, Simon should hold a sale, offering heavily discounted prices on his outdated stock. After this, he should conduct research into the latest developments within the mobile phone industry and update his stock accordingly. He should also make it strict routine to regularly update this research. In the short term, Simon will make a loss, however, if he continues his outdated product line, the loss will be far larger - his business’ existence.

*Dissatisfied Customers- is linked directly to the characteristic complacency that envelops many businesses in Maturity phase and extends into the decline stage of Post-Maturity. The business has not kept up with the latest developments in the mobile phone industry. A customer will always desire to purchase the latest model they can afford and thus, Simon’s customers have deterred to his competitors.

Implications- the consumer is what fuels business. Evidently, if Simon does not satisfy his, profit will continue to decline. Dissatisfied customers and outdated stock are linked. As such, unless stock is changed, customers will continue to be dissatisfied and profit will continue to decline. Eventually, the same liquidity problems as outlined in “Outdated Product Line,” will arise, resulting in business failure.

Strategies- customer satisfaction is primarily linked to the product line offered by Simon’s business. Therefore, see strategies in “Outdated Product Line.” Simon should also review the service of his staff, which may be contributing to customer dissatisfaction (See strategies in “Dissatisfied Staff”). Additionally, Simon should ensure that the presentation of his shop is clean and tidy, as well as friendly and welcoming.

*Dissatisfied Staff- linked directly to the loss of enthusiasm, or complacency, that is a characteristic of business’ in the decline stage of Post-Maturity. The manager is the role model for his staff and his complacent attitude and lack of motivation will be reflected in their work attitudes. Obviously, employees will not wish to work in such a lacklustre environment, explaining his employee’s voluntary cessation. Additionally, the decline stage of Post-Maturity is characterised namely by a decline in sales. Employees are likely to realise this, perhaps in how their wages are affected or simply by observing the decrease of customers ...

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Implications- the implication of dissatisfied staff is that large amounts of money and time will be wasted. Many of Simon’s staff are leaving. Obviously, Simon will have to replace them. This, however, is an extremely time consuming and costly practice. The new employees must have time to become oriented with their new position and, as such, will not work to their highest productivity for some time. This will impact on customer service and satisfaction, further lowering the reputation of Simon’s business and his profit. If these new employees too, become dissatisfied and leave, then Simon must begin the costly cycle once more. This would impact very badly upon the efficiency and profitability of the business. Combined with the other difficulties faced by Simon’s business, which also lower his profit margins, the business would likely fail.

Strategies- at a stage when staff are dissatisfied, Simon should adopt a policy of honest and open communication with his employees. He should inform them that the business has indeed suffered losses and has not been functioning as productively as previous years. The strategies he intends to instate should be outlined to employees and their contributions welcomed. Additionally, Simon should ensure he approaches work with enthusiasm - presenting a positive attitude will be reflected quality of Simon’s sales persons’ service and customer satisfaction. Essentially, employees will feel more involved with the business, more confident in Simon’s management and more secure in their employment, which will impact positively upon future profit margins.

*Generic Strategies- additionally, there are some strategies that can be applied to any business within the decline stage of Post-Maturity:

*Lower pricing to entice consumers.

*Removal of all products that do not provide a direct return.

External Advisors: There are a number of external sources Peter could utilize to assist him in managing Simon’s business, including:

*Marketing Advisors- Simon’s business has recently suffered difficulties, customers and staff are dissatisfied; sales are declining. Therefore, Peter needs to create a new, fresh image for the business. A very effective way of doing this is with the help of an external marketing advisor. They can assist Peter in the best ways to create this new image in terms of price, place, product and, particularly in the first stages of his management – promotion. Professional advertising and sales promotion would be particularly effective in drawing consumers’ attention to the new, motivated business.

If Peter did not employ the services of a marketing expert and create a new, fresh image, then the future success of his business would be jeopardised. People would likely still associate his business with the outdated and unenthusiastic business that Simon managed. This would result in sales continuing to decline and placing considerable strain upon Peter’s resources. If effective marketing advice was heeded, Peter would attract new customers and eventually, the community would realise that the business had changed and was once more up to date and efficient.

External marketing advisors would also be of assistance beyond Peter’s first months as manager. The business environment is a dynamic place, presenting many opportunities for effective marketing. By utilising an external professional, Peter could capitalise on these openings and continue to grow and profit.

*Accounting Advisors- an external accounting advisor would be very helpful to Peter both while negotiating to buy Simon’s business and in managing it after purchase. An accountant is trained to understand financial statements and could therefore study Simon’s financial records. This information would allow them to inform Peter of two important points, whether Simon’s business is even a viable venture and, what an appropriate price is, if they deemed purchase viable. This would assist Peter greatly. Obviously, knowing a business venture is unviable will save much money, frustration and time. Equally, the worth of a business can often be difficult to determine, considering intangible assets such as goodwill. Therefore, professional advice could save Simon much money. This would be an immense assistance, as Peter could use the money saved to establish a fresh, positive image for the business and to update stock.

An external accounting advisor would also be of great assistance once Peter had established himself as manager. Utilizing an external, professional accountant would free time for Peter to apply himself to the areas he excels in. Equally, the strategies proposed and work completed by a professional accountant would create a more efficient and profitable business. An accountant can provide Peter with an understanding of his business’ financial capacity, thus helping him create goals and objectives that most effectively balance challenge with realism.

*Staffing advisors- many staff have left Simon’s business, while the ones that are employed are likely to be new and inexperienced. As such, when Peter assumes managerial responsibility, he will be employing a workforce that may not be complete and one not working at its full capacity. Therefore, he will have to make some wise employment decisions. The use of an external staffing advisor can assist Peter in doing this. They specialise in locating the employee most suitable for a position. In locating quality employees, an external staffing advisor will also indirectly assist Peter in his endeavour to motivate the employees he begins with. The introduction of motivated, enthusiastic employees will positively affect others who may have developed poor work habits whilst Simon was managing.

An external staffing advisor will also be of assistance to Peter once he has been managing for some time. One, at some stage, must always replace certain employees. External, professional advisors will be able to locate and present a pool of appropriate candidates, saving Peter much time.

Other Key Considerations: Two other key considerations Peter needs to examine before purchasing Simon’s business include:

Supply and Distribution Networks- supply networks are more important to this business, as their distribution is very simple. It is done within the store, by handing product to customer. There are three major areas that Peter will need to examine with regard to supply networks:

Reliability- if a supplier is not reliable and punctual in their deliveries, a business wastes time and money. Equally important, customers become aggravated, as their purchases are delayed. Consistent unreliability and delays will result in customers deterring to competitors. Reliability is therefore highly significant to future business success, as business efficiency and customer satisfaction is dependent on it.

Quality- is extremely significant to future success of a business. If the quality of products is poor or inconsistent, then Peter’s customers will be unsatisfied. Customers always desire consistent product quality. If this is not achieved, they will seek better products from competitors. Obviously, if one has no customers, one makes no profit. As such, the quality of supplies is integral to future business success.

Transportation Mode- can affect the cost, reliability and quality of supplies. Peter needs to analyse which mode will balance these three aspects. If one aspect is too highly valued, for example, cost effectiveness, then reliability may be affected, which would deter customers. To ensure future business success, therefore, a manager must select a transportation mode that allows balance, that is, one that allows all key business functions to operate efficiently.

Location: There area number of factors Peter must consider with regard to location, many of which impact heavily upon the future success of his business:

*Visibility- in a retail business such as this, clear visibility is essential to business success. Retail outlets rely largely on passing customer traffic to notice their shop and then walk in and make purchases. If they are not visible, many customers and thus much profit is lost. Therefore, it is vital that Peter’s business is easily visible and accessible, or its future will be jeopardised.

*Cost- considering that the majority of sales in a retail business relies on passing customer traffic, the location must be prime, which results in expensive rates and rent - often becoming the major expense. Peter must analyse whether the cost of Simon’s location will be warranted by sales. It is important to have a prime location in retail; however, one must create a balance between location and profit. Peter’s ability to balance will impact heavily on the business’ future success. If they are not visible, they will not benefit from passing customers, however, if rent is exorbitant, then profit will be badly affected, and their great location will be counter-productive.

*Proximity to Customers- essentially the same as visibility. A business must be in an area that will be close and accessible to its customers, easily in view. If not, then the business will not make enough profit to sustain itself, as retail businesses are heavily reliant on “window shoppers,” or passing customer traffic.

*Proximity to suppliers and proximity to support services- these two aspects of location are not vital to the future success of this business. The supplies needed by a mobile phone business are compact and thus do not incur large transportation fees. Such a consideration is more relevant to a logging company or steel manufacturer, whose supplies are very large and heavy.

With the vast communication systems provided by technology, support services are now readily available to most businesses. Particularly through phone and Internet networks, Peter will have ready access to a vast range of support services.

Evaluation of Peter’s Cash Flow Budget:

Peter’s cash flow has been very poorly managed. This will be demonstrated through three main criteria:

1. Debt Collection- Peter’s debt collection situation is dire. By the second month (August) only one fifth of credit sales have been honoured. Similarly, by the third month of his budget (September) only one third of credit sales have been honoured. This is a very poor record and has resulted in Pete suffering substantial losses.

*Strategy- One possible strategy Peter could implement is making it store policy that fifty percent of a purchase should be paid up front. Additionally, he should consult an accountant to assist him in developing a strict policy of debt collection. To further safeguard against unhonoured credit sales, Peter should consider employing the services of factor. In periods where Peter urgently needs money from credit sales, a factor will give him a large proportion of the money he is owed and collect his debt for him. Peter must then pay the difference between what the factor gave him and the amount he was owed on credit.

2. Liquidity- this is an extremely dangerous problem in Peter’s cash flow budget. The only ways he can get access to cash without changing legal entity are:

Selling his equipment, furniture and other assets.
Taking out a loan.

Obviously, the first option is impractical; as the money would be need to be used to repurchase most of the items sold. The second option is feasible, and is indicated on the budget, however, creditors are unlikely to loan sufficient funds given Peter’s heavy losses and high debt levels. As such, the liquidity problem would worsen steadily until the business was forced to cessation.

*Strategy- changing the legal entity before starting business is the best option for Peter. His cash flow indicates that he hasn’t sufficient finance to succeed using his own funding and a loan. It is also likely that his poor budget is a result of a lack of managerial training and or skill. By taking on a partner with managerial skill Peter will be able to combine his and his partners skills, reduces his liability and have access to more finance. Essentially, he will be far better equipped to create a successful business.

3. Credit Control- is linked very closely to liquidity. Peter’s budget predicts that he will be in debt within the first month. The budget also indicates (at the base) that a loan is required. In the second and third months Peter also records debt. This means that the business will only survive if Peter is granted a second loan. This is a dire position to be in. Peter would be unlikely to secure a satisfactory loan if he adhered to this budget and would simply fall into deeper and deeper debt, culminating ultimately in business failure.

*Strategy- the same as suggested for “Liquidity.” Peter’s cash flow reveals a business that simply begins with insufficient finance and very likely, run by a manager with little or no managerial knowledge and experience. As such, changing legal entity to a partnership will inject the required finance and managerial skill needed to make Peter’s business successful.

Considering all these factors, poor debt collection, a desperate liquidity situation and poor credit control, Peter’s cash flow is extremely discouraging. If used, the business would fall into greater and greater debt. This would make it extremely hard to secure additional finance or attract a partner. Additionally, the business would become inefficient and sales would fall dramatically. Ultimately, the business would fall so badly into debt that it would be forced to declare bankruptcy and cease operating.

Recommendations:

Peter should not buy Simon’s business or start his own mobile phone venture as a sole proprietor. His appalling cash flow management strongly suggests a lack of managerial experience.

He was, however, a sales person for One.Tel. If he secured a partnership with an experienced manager they could combine their skills and finances to create a successful business. Peter would also be advantaged by shared liability.

The question of how Peter should enter the mobile phone industry, by purchasing Simon’s business or establishing his own, is even. One might initially suggest that the large start up costs associated with establishing a new business would render purchasing Simon’s more cost effective. Simon’s business has also been established for ten years, which is an advantage. However, the cost to purchase another business is also high, and becomes greater still when one considers the difficulties currently faced by Simon’s business. Peter and his partner would have to:

*Invest in an extensive marketing campaign to promote a new, fresh image for the business.

*Contend with low profits while customer resistance to this new image is still strong.

*Possibly contend with staff still unenthusiastic after Simon’s management, some of whom might have to be dismissed. To create an efficient workforce might take considerable time and finance.

*Devise strategies to minimise the inevitable loss that will be made on Simon’s outdated stock.

*Purchase an entirely updated product range.

*Contend with the normal difficulties suffered within the business environment and complete the routine activities of management.

As such, the total cost of Simon’s business would be not deviate immensely to the cost of establishing a business. Peter would have a far greater personal connection and motivational drive if he were to establish his own business. Additionally, it would be simpler to cope with difficulties as they arose, rather than starting with many problems. This is not to suggest that establishing a new business will be easy. Both Peter and his partner would have to work extremely hard. If however, they develop a comprehensive business plan, there is a high chance they will be able to cope with difficulties that arise.

Therefore, the probability of Peter’s success would be greater if he were to establish his own mobile phone business with a partner who has had managerial experience. Particularly, greater personal motivation is derived from establishing one’s own business - providing the energy and enthusiasm essential to succeeding in the business environment. Equally significant is the fact that it is far easier and effective to plan for difficulties. If Peter purchased Simon’s business, he and his partner would be burdened and overwhelmed by problems immediatedly.

Ben

Cotton.