A few years ago, a local SME asked me to assist with their annual wage review. Some of their concerns: “how to balance seniority and skill”, and “how to maintain our ‘happy family’ work environment”. They wanted their employees to feel recognized and rewarded but expected the pay system to be an effective motivational factor for better productivity and quality. I mention this story because of my lifetime belief that entrepreneurs possess special inner algorithms generating right answers for them, very much like artistic talent tells painters what colours to use in a rendering of landscapes.

The Case for Formal Approaches to Management

I analyzed the company’s data regarding pay, skills, seniority, and other variables, and I developed a formula to calculate the ideal pay rate whereby new employees with superior skills would be paid adequately without causing feelings of unfairness among existing employees with significant seniority. The deviations between the results of my formula and the existing pay rates fell within a band of ±10%! The owner-managers’ “genius” had helped them all along to make decisions almost identical with those my formal approach (i.e., regression analysis) yielded in this case.

This story is proof of my utmost respect for the entrepreneur who – in the words of an owner-manager whom I had the privilege of helping with a turn-around situation – “has created xxx parking spots” (translation: xxx jobs). Nevertheless, formal tools can help entrepreneurs to improve the performance metrics of their operations. Sometimes, entrepreneurs do not believe in formal approaches, or feel that consulting fees are not justified; they don’t even consider bringing in students from the many business management schools in B.C. for no-cost suggestions. Without exaggeration, there are hundreds of formal approaches that entrepreneurs might use to fine tune their organizations’ performances, and there are thousands of metrics that can help them compare improvements after implementing recommendations.

Navigating Challenges

To support my plea for entrepreneurs everywhere to adopt formal management, out of the countless types of challenges they may experience, I’d like to showcase a couple.

First, regardless of how much or how little inventory your company carries, please include in your MBWA routines (management by walking around) a visit to the inventory space and look at any item with a cost of $100.00. Formal approaches tell us that, in addition to its purchase cost, that item costs $2.00 per month while sitting on the shelf/floor. Multiply $2 by the number of months the item has been there: that is how much money that single item has taken off the bottom line. Then, think of all the items in inventory, their average purchase cost, and their average in-stock time. The profitability reserves hidden in inventories – when expressed in dollars and cents – surprise many entrepreneurs.

Second, please be circumspect with the concept “discretionary earnings” of an SME. If a value of, say, $150k is stated, please ask who manages the firm. If the answer is “the two spouses”, or “one parent and 2 children”, or some other combination of family members, a reasonable follow-up should be “are these family members paid in their managerial positions”? Many replies would be “we don’t pay them”, or “we pay them a modest amount and defray some of their costs (car, phone)”. This means that, should hired managers work instead of unpaid family members, take-home profits at the year-end might be close to nothing. Therefore, “discretionary” is often a euphemism for a choice between:

• paying yourself a salary that allows the company to break even, or
• taking that amount home as profit but renounce employment income.

About the Author

Vasile Zamfirescu is a member of faculty at Kwantlen Polytechnic University and instructor at the Melville School of Business. He is a management consultant with years of experience in the field.