Managing the operational side of your business

The entrepreneur is key to getting a business going: their drive, passion, and doggedness cannot be bought. Their ability to identify the product, inspire others, and win customers is essential, especially in those early years.

As I wrote in an earlier column, having colleagues with the skills the entrepreneur does not have is vital. Using a sporting analogy, it is wonderful to have a fantastic centre forward, but it’s the team behind that will dictate if you sit at the top of the league table.

In addition to the head of sales, the two other key people in the business are the head of operations and the head of finance. Along with the founder, you would then have a management board that must speak every day, meet every week, and manage the company towards achieving its potential. I have also always had two non-executive directors on my boards, wise owls who have seen it all before, imparting invaluable advice.

In a car you have the steering wheel, accelerator, and brake. You also have aids, such as the speedometer, fuel gauge and air bags to advise you of potential problems and provide protection. In a business you need similar information: without the right data you are steering the company blindfolded.

The management team should get an evening email stating that day’s revenue and a detailed weekly report of sales won and lost, the cash position, and any significant operational and staff issues. In addition, there should be a full monthly accounts sent out with commentary from the finance director, and the annual report and accounts should be finalised quickly, within four months of the year end.

The financial director constantly monitors all aspects of the business, knows what the payroll will cost, the big bills to be paid and what money is due in. They also scrutinise all agreements to ensure that the right margin is achieved. They should be respected internally, even feared by overzealous sales people.

The operations director has the task of quality control, and ensuring the right product is produced at the right time. They should always be seeking a speedier and more cost effective way of production.

I love Key Performance Indicators, known as KPIs. Every business should create these to suit their company. At a shortbread maker, for example, they would have staff costs as a percentage of sales, rent and rates and also the cost of ingredients. Knowing what your big costs are allows you to focus and work on reducing these as a percentage of units sold. Butter and flour is a major cost of making shortbread of course.

One of my favourite West Highland businesses sells a lot of shortbread, and due to their small scale used to buy kilogram bags of flour at £2 each. As they grew their revenue they were able to get a distributor to supply pallets of flour at 69p per kilogram. The benefits of scale cannot be exaggerated: Walkers Shortbread will have a fraction of the per unit labour costs and a far lower cost of buying flour and butter than my much loved West Coast baker. Without the right data you can be a busy fool. Many companies make 80 per cent of their profit from 20 per cent of their product. KPIs will keep you right.

The other key hire is the human resources person. Some companies have their HR person on their board. You should outsource the HR function if you are, say, fewer than 50 staff. There are numerous excellent individuals or companies who offer this service. Hiring well is the key task of a manager, embrace it. Having fantastic colleagues is great for the business and makes going to work a real pleasure.

Firing is very nearly as important a role as hiring well. Occasionally you get a really bad influence in the company. They complain about everything, don’t put the hours in, bully or just are clearly not up to the job. That person must be let go as quickly as possible. When they do go, almost always, everyone agrees the correct course of action has been taken. In my view, one of the worst issues of the public sector is that bad employees keep their jobs.

So get great business information and employ the right senior management to complement your skill set and to help you sleep well at night.

Next week: Preparing for inevitable disasters.