Understanding Money, Management and Marketing: The 3Ms of Successful Small Business Venture

Understanding Money, Management and Marketing: The 3Ms of Successful Small Business Venture

  by James Gaius Ibe, Ph.D., CAE.

What is the business entity concept? How do you minimize the age of account receivables? What accounts for the high failure rate of small businesses? How can a small business owner ensure a higher probability of success? The answers to these questions are vital to the ongoing debates about the best ways to assist the main engine of job creation in the US economy. Additionally, entrepreneurs who undertake new business ventures should proceed with a known probability of success. In this three parts series we explore the 3Ms of successful small business venture. Please bear in mind that the following are merely guidelines and in no way constitute formal business advice. They are designed to provide general information regarding the subject matter covered. Laws and practices often vary from state to state and are subject to change. And because real-world situations differ markedly, specific illustrations may not be applicable. Please consult a competent professional for specific business advice.

Many non-business majors such as architects, dentists, pediatricians, and lawyers, etc go through college without taking any business courses. However, upon graduation they become small business owners of private practice. These deficiencies are then made up in a hurry through on the job training or hiring business managers. However, without a working knowledge of the fundamentals, small business owners become totally dependent on business managers. Agency problem arises when the interests of business owners are divergent from the interests of business managers whether they full-time employees or outside help. Agency problem aside, small business owners must understand what the numbers mean to provide effective leadership and control. We will discuss the role of appropriate business systems and functional areas of business under management principles.

A preliminary review of failed small businesses indicates a common pattern: Lack of attention to the 3Ms of business enterprise: Money, management and marketing. Additionally, many small businesses ignore the business entity concept: The activities of a business should be recorded separately from the activities of the owners. Indeed, the personal activities of a small business owner should be separate and distinct from the activities of the business entity. Many small businesses get into trouble for failure to draw this distinction, particularly with respect to cash flows and uses of cash derived from business operation.

Understanding Money

There are some basic principles a small business owner should know about money. First, small business owners must consider sources of capital-equity or debt. The appropriate mixture of equity and debt is referred to as optimal capital structure. This has consequences on the return on equity. Where can a small business find seed money or additional funds to grow the business? Many small business upstarts use their personal savings. There are government grants available. Please see your local SBA office. For many small business resources and information please go to http//:www.sba.gov.However, with a good credit history, a local bank may be willing to extend credit. There are more creative sources of funds such as venture capital beyond the scope of this article.

Second, small business owners must know how the business money is being used. An accurate record of cash inflows and outflows is essential for successful operation of a small business. An effective accounting system is the best way to accomplish this goal. All financial transactions must be journalized. A financial statement is required and consists of income statement- a summary of the revenue and expenses for a specific period of time, such a month or a year; statement of owner’s equity-a summary of the changes in owner’s equity as of a specific date, usually at the close of the last day of a month or a year; balance sheet-a list of the assets, liabilities, and owner’s equity as of a specific date, usually at the close of the last day of a month or a year and statement of cash flows-a summary of cash receipts and payments for a specific period of time, such a month or a year. These statements are needed to determine whether your efforts are paying off. Unfortunately many sole proprietors do not understand that it all about cash flows. Banks, other creditors, stakeholders and industry experts are interested in these numbers, you should be as well.

 PART 2:

In this three parts series we explore the 3Ms of successful small business venture. As I have already explained, please bear in mind that the following are merely guidelines and in no way constitute formal business advice. They are designed to provide general information regarding the subject matter covered. Laws and practices often vary from state to state and are subject to change. And because real-world situations differ markedly, specific illustrations may not be applicable. Please consult a competent professional for specific business advice. A preliminary review of failed small businesses indicates a common pattern: Lack of attention to the 3Ms of business enterprise: Money, management and marketing.

Understanding Management: The key functions of a manager include planning, organizing, coordination and control. Management success is gained through accomplishment of mission and objectives. Managers fail when they do not achieve their mission and objectives. Success and failure are tied directly to the reasons for being in business, i.e., mission and objectives. However, accomplishing mission and objectives is not sufficient. Success requires both efficiency and effectiveness. While efficiency refers to producing at the lowest cost possible, effectiveness is getting the mission and objectives accomplished. For example, cost overruns are indications of inefficient operation. Planning is key function of a manager. T he ultimate measure of management's performance includes: execution-how well management's plans are carried out by members of the organization; leadership- how effectively management communicates and translate the vision and strategy of the organization to the members; and delegation-how well management gives assignments and communicate instructions to members of the organization.

Effective management requires the development of a business model. This is an integral part of any enterprise. A business model is a path to a company’s profitability, an integrated application of diverse concepts to ensure that the business objectives are accomplished efficiently and effectively. A business model consists of business objectives, a value delivery system, and a revenue model. The path to shareholders’ value maximization goes through customer value maximization, so delivering value to the customer is absolutely crucial. An effective revenue model consists of a set of revenue streams that contribute to the company’s profitability. The company must maintain a well balanced portfolio of multiple revenue streams without losing focus of the core business. Indeed, without a clear vision and effective revenue model, there is no clear path to profitability. For additional information please go to http//:www.sba.gov.

Additionally, effective contemporary management requires a global perspective. Globalization produces a tension between standardization and customization. Adaptability is not functional when it is not purposeful and informed by environmental scanning, environmental analysis and costs/benefits analysis. Note carefully, that for every strategic choice a company makes, there are costs and benefits. The pertinent question is: do the benefits justify the costs? Successful companies choose the optimal strategy that maximizes the net benefit to the enterprise. Globalization and technology have intensified competition in all markets and depressed profit margins in most industries. However, some successful companies such as Wal-Mart and Walgreens continue to perform well. The key is to think globally and act locally. The tension derives from pressures to reduce cost and pressures to be locally responsive. In balancing standardization and customization, successful companies formulate and execute appropriate and optimal strategies pursuant to its strategic mission and objectives. At global level, companies choose international, multi-domestic, global, or transnational strategy. At corporate level, they choose diversification-related and unrelated executed through internal new venturing, acquisition or outsourcing. At business level, they choose cost leadership, product differentiation or niche/focus strategy. In part three, we will summarize the principles and mechanics of marketing. 

PART 3:

In this three parts series we explore the 3Ms of successful small business venture. Again, please bear in mind that the following are merely guidelines and in no way constitute formal business advice. They are designed to provide general information regarding the subject matter covered. Laws and practices often vary from state to state and are subject to change. And because real-world situations differ markedly, specific illustrations may not be applicable. Please consult a competent professional for specific business advice. A preliminary review of failed small businesses indicates a common pattern: Lack of attention to the 3Ms of business enterprise: Money, management and marketing.

Understanding Marketing:

Marketing function consists of a series of activities undertaken by a firm to relate profitably to its customers. A firm’s ultimate success in the global marketplace depends largely on its ability to perform the marketing function efficiently and effectively. This requires adequate knowledge of the market dynamics: who are its prospective customers? Where are they? What do they buy? From whom do they buy? When, how and why? To create and maintain competitive advantage, a firm should be the best able to identify and satisfy the needs of its customers better than the competition, both domestic and global. Firm grasp of customers’ product adoption process is vital.

Identifying the needs of potential customers is not sufficient. Understanding market dynamics alone is critical but not sufficient. To create and maintain competitive advantage, a firm should anticipate and effectively respond to the market dynamics-shifts in customers’ demand and preferences and the attendant competitive responses. Relevant, accurate and timely marketing intelligence is critical. However, accurately forecasting market demand is difficult but essential to the formulation of efficient and effective marketing strategy. As Pride and Ferrell (2003) points out, while marketing is the process of creating, distributing, promoting, and pricing goods, services, and ideas to facilitate satisfying relationships in a dynamic environment, marketing management is the process of planning, organizing, implementing, and controlling marketing activities to facilitate exchanges efficiently and effectively. Successful firms efficiently and effectively integrate marketing strategy and overall corporate global strategy: International, multi-domestic, global and transnational.

In practice, marketing strategy involves a plan of action for developing, distributing, promoting, and pricing products that meets the needs of the target market(s). Marketing strategy requires that marketing managers focus on four fundamental tasks to accomplish the stated objectives: (1) target market selection, (2) marketing mix development (4Ps), (3) marketing environment analysis, and (4) marketing management. Indeed, to best satisfy the needs of the target market(s) requires an effective coordination of marketing programs-a set of activities formulated around the marketing elements (4Ps: product, price, promotion and place), that allows the organization to achieve its stated goals. The overriding purpose of marketing strategy is to create and maintain competitive advantage. Additionally, the timing must be consistent with the calculus of economic advantage. Finally, a firm through its strategic planning process should clearly articulate its organizational mission and goals, corporate strategy, marketing objectives, marketing strategy, and marketing plan. The formulation and execution of an effective marketing plan allows a firm to accomplish not only its marketing objectives and goals but its overall corporate goals consistent with ethical marketing decisions that foster mutual trust in profitable marketing relationships. 

ABOUT THE AUTHOR: Dr. James Gaius Ibe, is the Principal-at Large of the Global Group, LLC-Political Economists and Marketing Management Consultants; and a senior professor of Economics, Finance and Marketing Management at one of the local universities.