Oh Dear! Are You a Micromanager?

If you own and manage a one person business, you are, de facto, a micromanager. You have no choice; you make every decision and you manage every process. If, on the other hand, you are CEO of a FTSE100 Company, you can’t be a micromanager because you can’t possibly make every decision and can only manage a very small number of processes, albeit they are likely to be major ones.

In the case of the one person business, if you don’t micromanage, your business won’t function; so it won’t survive. In the case of the CEO of the FTSE100 Company, any attempt to micromanage will cause chaos and undermine your corporate structure. So in one set of circumstances, micromanagement is very positive and very necessary, whilst in the other it is very negative and seriously damaging.

So, at what point does the positive turn negative?

Before answering that question let’s just look at what we mean by micromanagement. You can no doubt find many different definitions but essentially it means: –

• Allocating tasks, monitoring them in minute detail, intervening with the processes and making all the associated decisions. As opposed to
• Delegating responsibilities, within defined parameters, to subordinates, who make their own decisions and are accountable for the outcomes.

As soon as a business involves more than one person, tasks start to be shared. If the people involved are of equal status – directors, partners etc. – agreement is reached about the sharing of both tasks and responsibilities. However, if staff are employed, they tend to be engaged to undertake tasks under close supervision. They are probably given very little responsibility and are unlikely to make many decisions without reference to the boss.

Initially this may work ok. However, as the business grows and the number of employees increases, the boss inevitably spends more and more time making decisions for his/her employees and monitoring their activities. That means spending less and less time driving the business forward. As a consequence, the momentum of the business starts to slow down and the boss becomes increasingly stressed, as he/she becomes the main constraint on progress.

To address this problem, most businesses start to develop some form of organisation structure, with departmental demarcations and key staff taking supervisory/managerial roles. To start with, this invariably relieves the pressure. However, the extent to which this continues to happen depends on whether the boss is still just delegating tasks or whether he/she starts to delegate real responsibilities in a meaningful way. When the boss is able to delegate responsibilities enabling him/her to focus on the more important aspects of the business, the business itself has a much better chance of developing, growing and building its net worth. But where the boss still wants to micromanage, the business is much more likely to struggle and stagnate.

There can’t be a precise answer to my earlier question of, “At what point does the positive become negative?” because no two businesses are exactly the same. However, most people’s ability to micromanage everything that goes on, within a business, and still perform their own essential duties is quite limited; and once the business employs more than a handful of people, micromanagement invariably becomes negative.

Despite this, many owners and directors of SMEs don’t delegate responsibilities effectively and become increasingly frustrated with the lack of progress that their businesses make, often blaming everyone except themselves for that lack of progress. So why can’t they delegate and why do they continue to be micromanagers?

The four favourite answers seem to be: –

• I can’t get the calibre of staff I need
• My staff can’t do things the way I do them
• My staff can’t do things as well as I do them
• I can’t trust my staff

So let me deal with each of these objections in turn.

I can’t get the calibre of staff I need. If that’s true, then it’s likely that you’re not paying enough to attract the right quality staff. But in my experience, that’s not usually the problem. More often than not, the key people, within the business, are more than capable of taking on much more responsibility and are eager to do so. With very few exceptions, where I’ve been able to persuade the boss to stand back and empower his key people, the positive effect on the business has been substantial. However, when key members of staff are not empowered there is a tendency for them to become demotivated and cynical; and once this happens you really do have a problem.

My staff can’t do things the way I do them. Frankly that tends to be good not bad. A business needs a diversity of ideas. If the key staff are all clones of the boss, the business will go nowhere. The boss may be the key driver but he/she doesn’t have a monopoly on ideas, doesn’t know all the answers, doesn’t always have the best approach to problem solving and is often wrong. If key employees are empowered, bosses are much better able to develop their own strengths, whilst ensuring that their weaknesses are offset by the skills and experience of their key people. Running a successful business is about teamwork; it’s not a solo act.

My staff can’t do things as well as I do. In some cases this may be right. The boss will have skills that his/her key staff don’t have. But there will be areas where key members of staff have more skill and experience or perhaps greater aptitude or perseverance than the boss. It’s important to recognise this and exploit it. Again, it’s back to the principle of diversity of skills and ideas being the basis of a successful team. Where there are shortcomings in skill sets, you need to develop them through structured training programmes.

I can’t trust my staff. In many respects this is the real objection. The other three are often excuses for what is, in reality, lack of trust. And to be fair, all too frequently I hear stories of small businesses that have been ripped off by a rogue employee or damaged in some other way, by an incompetent one. But this opens up the much bigger question of how you actually manage and control your business.

The trust issue may be about not trusting people to complete tasks properly or take decisions appropriately; equally, it may be about the honesty and integrity of employees. In practice, most people are reasonably honest; but, unfortunately, a small minority is not. However, regardless of honesty and integrity, it’s important that no one, within the team, behaves as a lone wolf, acts outside their jurisdiction, covers up mistakes, works within a self-constructed silo or behaves dishonestly in any way. So how do you reconcile all of this with delegating responsibilities and losing detailed control of what your staff do and how they spend their time?

The answer is that you manage your business in a completely different way. And to do this, you need good management information that tells you, on a regular basis, how each significant element of your business is performing. In conjunction with that, you need to set targets, so you can see how each part of the business is performing against expectations. The type and level of information will differ depending on the type of business, its size and complexity and the markets served; but it’s likely to include data about sales, production and/or service output, productivity, costs, inventories, cash and all other key activities within the business. Some of this data will come through the production of monthly management accounts, some will require your IT systems to be set up to produce it. Some information will be most useful on a monthly basis, some weekly and some daily. When you have this data, you can identify areas of over and under performance, trends in both the right and wrong directions and aberrations that don’t, on the face of it, make sense. Whenever you identify anything that appears to be going in the wrong direction or otherwise out of the ordinary, you dig deeper until you have answers. If necessary you then take remedial action; but its remedial action based on facts not on gut feel or guesswork. You’ll soon find that you’re learning far more about what’s going on in your business than you ever did before.

This management information shouldn’t be treated as just yours and available to no one else. Headline data needs to be available to all your key players and each key player should have more detailed information about their own individual areas of responsibility. You can then meet regularly with your key players, both on a one to one and as a group, to set new objectives, report back on current issues, agree solutions to problems and establish strategies to exploit opportunities. This ensures that everyone is clear about strategies and objectives in general; and clear about their individual responsibilities and how these interface with the responsibilities of their colleagues.

As a result of this, you’ll start to build a real team that co-ordinates effectively, buys in to the core values and direction of the business and works with much greater enthusiasm and commitment. Under performance and lack of integrity then become a much smaller issues; but also much easier to identify because they’re much more difficult to hide.

Small businesses that make this leap are much more likely to grow and prosper than those that don’t. Sadly, many small businesses fail to reach their potential for no other reason than the boss remains a frustrated and stressed micro-manager. Some owners of small businesses do find it incredibly difficult to let go. If you’re one of these and you want to try and change, don’t try and do it on your own. In most industries, there are specialist business consultants, business coaches and mentors that understand this problem only too well and will be able to take you through a difficult learning curve far more quickly and effectively than you would otherwise achieve.

If you’d like to discuss any of the issues raised in this article, in more detail, please feel free to contact me.

The Importance of Having Good Management Accounts

In this day and age, most small and medium sized businesses (SMEs) use computerised accounting systems; and suppliers of accounting software, such as Sage, have made the bookkeeping process very straightforward, irrespective of whether your annual sales are £100k or £50m. As a result most SMEs now maintain a reasonable quality of bookkeeping that accurately records their financial transactions. However, many limit the regular use of their accounts systems to the processing and control of sales and purchase invoices, debtors & creditors, wages & salaries, the bank, VAT etc. And this means that they are missing out on one of the most important tools that is available to help them manage their businesses more effectively and more profitably. I’m talking about the production of monthly management accounts.

From the work that I do with SMEs, there seem to be two distinct issues. The first is businesses that don’t produce monthly management accounts at all. The second is businesses that do produce monthly management accounts but structure them in such a way that, at best, they are not particularly helpful and, at worst, are seriously misleading.

Let’s look, firstly, at those businesses that don’t produce monthly management accounts at all. Generally these are at the smaller end of the SME scale. They often don’t see management accounts as a priority; perhaps have some difficulty understanding and interpreting them; and may struggle to produce them. Realistically, if yours is a one person business with no employees and a very small number of transactions, monthly management accounts are probably not going to add much value because they won’t really tell you anything, you don’t already know or can’t work out in five minutes with a calculator or spreadsheet.

However, the business doesn’t have to grow too much, before the number of transactions increases to the point, where you lose track of them. At this point, many businesses then keep a close eye on the bank account and assume that, if there’s cash in it, they’re OK. And that’s the first big mistake because cash is not profit. A business can be making losses, whilst still having a healthy cash flow. It can also be making healthy profits, whilst having a cash flow problem (I’ve written another article about this, which you can access at Cash v Profit). You need a profit and loss account at the end of each month to tell you whether you’re making money or not and you need a balance sheet to show you whether you’re solvent and whether you have a liquidity problem or not.

Your management accounts should give you an accurate picture of where all your costs are and whether your margins are where they need to be. You can monitor where all your cash is tied up (stock, debtors etc.) and whether there is enough in the business to pay your wages and creditors. As the months go by, you begin to identify trends that may be developing; rising or falling costs; deteriorating or improving margins; increases or decreases in stocks, debtors and creditors; improving or deteriorating cash position etc. So you start to identify problems at an early stage and are able to take remedial action before those problems become acute. Similarly, you can see where you’re having increasing success; so you can then start developing strategies to build on that success. Finally, where you have a business plan with a detailed financial budget, you can compare your performance against the budget and take actions to get things back on track, when you’re falling behind plan; or build on your success, when you’re pulling ahead of plan.

Unless you have some form of accounting/bookkeeping experience, you may struggle to produce monthly management accounts yourself. Apart from ensuring that everything has been posted to the correct nominal account, a number of procedures such as stock adjustments, work in progress adjustments, dealing with prepayments and accruals are required. So you’re probably going to need someone to make all of these adjustments and to then produce the profit and loss account, balance sheet and any other reports that you may require. Obviously, some SMEs are big enough to employ a full time or part time bookkeeper and if so, the bookkeeper should be able to undertake all of these tasks. Some larger businesses will have accounts departments with a number of dedicated staff. These are likely to be producing monthly management accounts as a matter of routine. However, if your business is not producing management accounts each month, you’ll need to consider whether it’s possible to produce them, using existing resources or whether you need additional support. If you do need additional support, you may be able to employ a bookkeeper on a part time basis for a few hours a week; or there are many self-employed people and small companies offering bookkeeping services. Either way this doesn’t need to be a hugely expensive commitment and the benefits to your business are likely to be substantial.

The fact that you personally may struggle with accounts and may not have a very good understanding of them, doesn’t mean you shouldn’t have management accounts as part of your business processes. They’re just too important to ignore. In these circumstances, just be honest with yourself and your bookkeeper or prospective bookkeeper; admit it’s not your thing and ask your bookkeeper to go through the figures with you, line by line, explaining what each line is and what it’s telling you. You’ll need to invest some time in this; but, if you do, you’ll soon learn; and you’ll quickly discover it’s not rocket science.

I now want to move on to the second problem, I see all too frequently, and that is management accounts that are not appropriately structured and, as a result, don’t provide information that is helpful for the business.

Generally speaking, this problem comes about because the business owner/CEO doesn’t tell the person, responsible for producing the management accounts, what information is actually required. It’s just left to the accountant/bookkeeper, who may well understand the numbers but who, invariably, doesn’t understand the business.

The two most common problems are: –

1. A lack of sufficient breakdown between key business activities and/or product groups.
2. Classifying as overheads, entries that should be shown as direct costs.

Let’s look firstly at the breakdown between business activities or product groups.

If your business has more than one business activity, you need to understand the performance of each one. For example, let’s say you fabricate PVCu windows and doors; but you have two different market channels. The first is selling an installed service to homeowners; and the second is selling, on a supply only basis, to the trade.

Your production costs are likely to be more or less the same irrespective of the channel. However, the cost structures of the two channels are likely to be considerably different, as are the selling prices. Selling an installed service to homeowners is likely to involve sales commissions, advertising, survey costs, sub-contract installation costs, installation material costs and finance/credit card charges. Selling to a trade customer, is likely to involve different sales and advertising costs and may involve delivery or possibly trade counter costs; but it’s unlikely to involve survey and installation costs. Your management accounts need to pick all this up and provide a margin analysis for both market channels. If everything is lumped together, you just don’t know where you’re making money and where you’re not. So how do you know what strategies to apply to each channel? The answer is, “you don’t”!

A similar issue arises between different product groups. Let’s now say that you’re still a PVCu fabricator but all of your sales are based on selling an installed service to homeowners. However, this time you also sell conservatories. Your sales and advertising costs may be similar for both products; but conservatories require a roof, and also involve a significant amount of building works. So the cost structure of supplying and installing a conservatory is entirely different from that of windows and doors. Once again, if you lump these two product groups together, how do you know where you’re making money and where you’re not? And once again, you don’t.

Your accounts must be structured to provide a margin breakdown for all your key product groups and market channels so you have an accurate understanding of the true margin made by each one.

Moat accounting software can handle this type of analysis as a matter of routine; but it does have to be set up correctly to do so; and that’s where the main problem lies.

I’ll now move on to the second problem I encounter, which is all about whether costs are classified as direct costs or as overheads. Direct costs refer to materials, labour and expenses, related to the production or supply of a product or service. Other costs, such as depreciation or administrative expenses, are more difficult to assign to a specific product or service, and are, therefore, considered as overheads.

Many SMEs classify materials and direct labour as direct costs but almost everything else as overheads. And this can be very misleading. Let’s go back to the business selling windows and conservatories on a supply and install basis to the homeowner. Not only does this business have materials and direct labour as direct costs, but it has installation labour and materials, disposal of site debris, survey costs, sales commissions, lead generation/advertising, finance/credit card costs, warranty/guarantee insurance. All of these are directly related to the sale, production and supply of the product and its installation. So all should be classified as direct costs.

If you decide to classify only some of these costs as direct, you’ll end up exaggerating your gross profit, which is normally calculated by deducting your direct costs from your sales revenue. You’ll also overstate your overheads because some of your direct costs will be absorbed as overheads. The consequences of this could be quite profound.

Let’s say that the business is barely profitable and that you have to take action to improve profitability. One way of doing this would be to increase sales; you, therefore, put a sales plan together. You think you’re making some good margins so you decide to offer some additional discounts. You also need to spend some more money on advertising and, of course, extra sales mean extra commissions installation costs etc. Everything seems to hang together and off you go. You’re initially pleased with the increase in sales, but when you run your management accounts, the effect on the bottom line is shown to be marginal. You’ve added some volume but for little or no extra profit. So what’s happened?

The problem is that your accounts have mislead you about your margin. Because you’ve only included materials and direct labour as direct costs, you’ve been duped into believing that you’ve been making healthy margins. However, if you’d included all of the other direct costs as direct costs, you’d have found that your margins were in fact very poor; and, once you’d accounted for the additional discounts you offered, it would have been clear that there wasn’t much left.

If you’d known this at the outset, it would have been very apparent that additional volume wasn’t going to provide a solution. The only effective options open to you were (a) drive down your direct costs as a proportion of your sales, (b) increase your selling prices, or (c) a combination of both.

Let’s now look at another problem that can occur as a result of confusing direct costs and fixed costs. Many businesses seeking to improve their profitability, embark on a cost cutting exercise; but they cut the wrong costs.

If many of your direct costs are treated as overheads and you need to make cuts, staffing, process costs, administration, maintenance & renewals etc. are often the soft options that you go for rather than address the more challenging issue of high costs in sales and marketing, installation etc. However, the outcome of this can be catastrophic because, in reality, you still have a margin problem but you’ve cut the basic infrastructure that would have enabled you to address that margin problem by driving down your direct costs.

In the home improvement sector, which is where I focus most of my time, one of the most common problems I see is SMEs that under resource their processes, controls and administration and, as a result, suffer from direct costs that are out of control. Genuine overheads are relatively easy to control because you can make definitive decisions as to whether you proceed with something and spend the money or whether you don’t. Direct costs are much more difficult because they depend on operational efficiency, effective processes, quality control etc. In many SMEs, total direct costs are much higher than total overheads. So controlling direct costs provides far greater potential to improve the bottom line than controlling overheads. In fact, quite often, an increase in overheads is needed in order to provide the resources that are required to bring direct costs under effective control. In this situation, the bottom line may get worse, for a short time, before it starts to recover to the levels, at which it should be.

Once you have your accounts structured to give you really good information about your direct costs and overheads, you can start making these sorts of decisions with confidence.
Many owners and directors of SMEs find interpreting their management accounts quite challenging; so, if that describes you, don’t think that you’re on your own because you’re not. It’s, therefore, very important to have good accounting and bookkeeping support, the scale and structure of which will depend on the size and complexity of your business. It could range from a part-time bookkeeper or bookkeeping service to a significant sized accounts department. But wherever your business is on that scale, what you can’t do, is just let them get on with it, as they see fit, because they won’t understand your business as well as you do. You need to work with them to get the structure of your management accounts right and to ensure that it provides you with the right information in the right way at the right time. If you invest some time and effort in this, it will repay you handsomely.

If you’d like to discuss any of the issues raised in this article, in more detail, please feel free to contact me.