Really Understanding Financials: A Key to Small Business Success

In talking with small business owners, I am surprised how many have trouble off the top of their head responding to simple questions like what are your revenues, how much is in your bank account, what is your cash flow? Research studies find over 80% of the time poor cash management or poor understanding of cash flows contributes to the failure of a small business. 

Another way of describing this predominant problem is a lack of funding or working capital.  It is amazing how many people just jump into business without planning and understanding their working capital needs.  Even the term working capital is foreign to their vocabulary. So, if you don’t know, it is the capital in the business used for short term operations.  You take what is current assets such as cash in the bank, receivables, and inventory less the current liabilities and obligations you need to pay out in the short term considered less than a year.

You need to know more than what is working capital. Somehow accounting leaves many with that deer in the headlights look. In many ways, I understand. Even though I have a master’s in accounting, it was never my favorite subject.  But I also understood back then when getting my degree accounting is the language of business and a necessity for running businesses.

In teaching a Corporate Strategy course to undergraduate business school seniors, far too many of the students didn’t understand balance sheets, income statements, and cash flow statements even though they had introductory accounting courses.  It’s hard to execute a strategy without understanding the underlying economics.

Now to the purpose of this article. In my 4 Stage Growth Model for small businesses, those with this lack of knowledge on the basics of accounting and financial planning are generally in the Development Stage with revenues under one million dollars.  My focus here is on the second and third stages of Growth and Take-Off with revenues generally from two to ten million or more. I will also give some additional profitability concepts for the Expansion Stage.

Margins and Overhead

If you look at a basic income statement, it is made up of revenues and costs.  Revenues bring cash in, and costs take money out of the business. In understanding how to run the business, you need to break out the income statement into more useful concepts like margins.  Gross Margin is Net Revenue (i.e., Revenue minus adjustments like refunds and discounts) minus Cost of Goods Sold.  Cost of Goods sold refers to direct costs to produce the goods, that is material and directly involved labor.  For Service Companies, this would involve cost of direct services. Service Companies do not always need to calculate a margin particularly if all the salaries are fixed.

Gross Margin tells you how much you have left in revenue to run the business.  Often, you will want to turn this into a % by dividing the gross margin by the net revenue.  If you have a large percentage, that is a good sign you have an attractive offering.

Your operating expenses beyond Cost of Goods sold such as administrative salaries/costs, rent, utilities, and the like are referred to as overhead.  The higher your gross margin and the lower your operating costs the more income you make.  It is important to keep a close eye on your overhead costs that can get out of hand.  In other words, the margins do not support the overhead and income/profit is underwater.

Again, most small business owners in the Growth or Take-Off stages fully understand their gross margin and overhead expenses.  You should have a financial plan for the year that targets Gross Margin and Overheads.  Obviously, if the Gross Margin falls below the target, you will likely need to reduce overheads.  There is a tendency to say these overhead costs are in the budget and just keep spending.

Key Performance Indicators

As the name implies, these indicators are about how the business performed.  Not what you did to obtain that performance.  However, as the performance looks strong or improves that is a clear sign you are doing things that make a difference to the company’s profitability.

The word key highlights that these indicators are very important in achieving your business objectives.  A natural key indicator for Growth and Take-Off stages is revenue growth, particularly as a percentage. Gross Margin percentage (of revenue) is another indicator of the health of the business. As the company enters the Take-Off stage, understanding how this Gross Margin percentage compares to your competition gives insight into the competitiveness of your offering.

Don’t ignore net profit which deducts depreciation of your physical assets like equipment and amortization of your intangible assets such as computer software.  As you become more sophisticated, also determine your return on investment. In simple terms, it is your net profit after tax divided by the capital (debt plus equity) you have invested in the business.  That is a reasonable measure of the overall performance of the business. A similar measure is return on equity that excludes longer term debt in the denominator.  That gives you a sense of how much your investment in the business is making that you can compare to other options for your money like interest on savings.

It’s not all about growth and income.  Ultimately, you need to understand the very fundamental flow of cash in the business that can signal issues of sustainability.  A key indicator is your net cash flow defined as net cash flow = cash flow from operations + cash flow from investing + cash flow from financing. 

We already discussed working capital which gets impacted by net cash flow. Many Development Stage companies have a difficult time maintaining positive working capital which puts a strain on paying wages and vendors. As you grow, this working capital indicator needs to be positive.  If you have robust growth, that will necessitate cash flow from financing.

Your debt-to-equity ratio will help give you an understanding of your ability to borrow.  If this percentage is high, banks will be reluctant to give you more money. You may need to bring in investors to help grow if you are already highly leveraged.  Having a low debt-to-equity may give you the capacity for acquisitions to accelerate your growth.

And for many companies, days receivables are outstanding triggers action to speed up cash flow.  Other accounting metrics may also be useful for understanding your business’s performance. You may want to use variations of these financial indicators that fit your business better, but this should give you some ideas if you don’t already have these KPIs.

Break Even Analysis

What we have discussed so far is basic financial accounting.  Managerial accounting can give you more insight into strategies and decision-making to enhance the company’s profitability.  There are many specific costing concepts in managerial accounting often applied to larger companies, but for me break-even analysis can be very helpful for a small growing company that has unit product sales.

The concept is like gross margin analysis we discussed earlier.  The distinction is in the nature of the cost.  Some costs are inherently fixed such as rent. They generally remain constant regardless of changes in the level of activity.

Other costs vary with the level of activity and are termed variable costs. Examples are production wages, material, shipping costs, sales commission and so forth.  The difference between revenue and variable costs is termed the contribution margin.  You can then determine a contribution margin per unit of volume by dividing the contribution margin by the number of units sold.

To get the breakeven point, you then divide the fixed costs by the contribution margin per unit.  That tells you how many units to sell to cover fixed costs or in other words break even.  As you can visualize, the fixed cost per unit goes down as the number of units sold grows.

This break-even methodology can prove a fruitful modeling analysis by changing volume, contribution margin per unit, and fixed costs. You can get a real sense of how to improve your business performance by seeing how these changes impact your profitability.  Obviously, there are a lot of cost nuances such as semi-variable costs and so forth.  Overall, understanding contribution margin analysis can give some real insight into the business.

Value Drivers

Break-even analysis is one form of understanding value drivers.  Unlike key performance indicators, value drivers deal specifically with operational activities that create value for the company.  Sometimes, these are not controllable by you but knowing how they impact the business can improve your decision making.

In Shell’s downstream manufacturing business, we followed closely what was termed the light-heavy differential.  In simplistic terms, heavy crude requires a lot of coking or cracking to break down the molecules into usable products such as gasoline. Lighter crudes can be turned into gasoline with a lot less sophisticated and less costly equipment.  If the spread between light and heavy crude is large, then the “cokers and crakers” will be very profitable.  That can influence heavily the decision to invest in this type manufacturing equipment.  Thus, this light-heavy differential is a significant value driver for refineries.

Other value drivers you can control directly.  You might find that the number of calls from your call center has a significant impact on your revenue generated.  You can plot the relationship and determine the profitability impact not unlike break even analysis for such a value driver.  Likewise, number of returned items or redoes could be a value driver in that the lower the activity the higher the profit.  A similar concept is zero defects as a value driver.  The point is these are the operational activities you spend time understanding and acting on.

Value Metrics

Certainly, as you enter the Take-off Stage, you will want to follow indicators of how your company will be valued by potential investors or acquirors.  The concept of EBITDA should become part of your vocabulary and following.

The acronym stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.  Ultimately valuations come down to cash generation.  EBITDA is a proxy for cash generation.  There are many factors in valuing your business; in a typical industry you often hear multiples of EBITDA like five times. In high growth high opportunity industries, the multiples will be much higher and low growth stagnant industries will likely be lower.

Similarly, revenue is another barometer of value.  There is no value unless the business can generate revenues. You will hear metrics like one times revenue as a measure of the company’s worth.  High potential industries will have much higher multiples.  In the Take-off and Expansion stage, you will want to keep up with the going value of your business.

Discounted Cash Flows

In the Expansion Stage of the growth model, you will want to become familiar with discounted cash flows as a measure of value.  EBITDA and historical revenue relate to the past and are only proxies of the future. The true value of the business is what it can generate in the future. The concept of discounted cash flows is based on forecasting the future and then valuing the cash flow stream.

The forecasting you do goes out a number of years like ten and then you set a terminal or sale value at that point as the final cash input. The key concept is that cash today is worth more to me than cash in the future.  Why is that so?  Because I could invest cash today and get a return on that cash. You include not just the projected future cash generated but the cash outflows you must make.  The major investment usually occurs in the beginning and is not discounted as it is in the present.  It represents a negative cash outlay that must be overcome.

The return on the cash is the discount rate much like the ROI discussed earlier. For any year out into the future, you apply the return multiplicative to the number of years out in the future.  What you find is the value out ten years is much less than the value generated a year from now.  The higher the rate of return, the lower the value of future cash generated.

Using this technique, you can determine the exact rate of return on the future cash flows you projected for the business.  That occurs when the rate of return causes the present and future cash flows to equal zero. Some people refer to this rate as the earning power of the business.

By the time you consider using this concept to value your business, an acquisition opportunity, or a large investment in the business, you may have determined your cost of capital. There are many definitions you get when you do an internet search.  Simplistically, it is the minimum return you want from making an investment in an acquisition or big expenditure.  From the capital markets standpoint, it is the weighted average return of what it costs you to borrow or have stockholders invest.

It is very useful to know your approximate cost of capital.  Venture capital companies have a much higher cost of capital expectation because they are taking on more risk. It is somewhat similar for angel investors.  Debt is almost always cheaper as they will have the rights to your assets in the case of default.  If you can get debt, that is generally the preferred option as it lowers your cost of capital.  When the risk is too high for the bank, you will have the higher cost from investors.

If you have determined a cost of capital, then that rate can be used to discount the present and future cash flows projected.  There will be a discounted cash value that may be positive or negative. If the value is negative, then you reject the outlay as the projected value does not meet your cost of capital. If it is positive, then from a financial standpoint the investment is worthwhile.  The resultant is called present value profit.

As you grow and have more investment alternatives, it can be useful to determine profitability index by dividing the present value profit by the initial investment.  This enables you to compare the attractiveness of these various alternatives.

Wrapping Up

None of these measures are without problems and issues.  Discounted cash flows would be very exact if you could in fact accurately estimate future cash flows. Thus, you may have to run various cases. ROI does not incorporate the future and so forth.  Most of the financial indicators are snapshots in time.

The combination of what we have discussed is much better than flying by the seat of your pants as is often done in the development stage.  The more you know and understand these concepts the much greater your chance of growing a successful business. 

What you use of these financial concepts should grow as your business grows.  You must understand working capital as fundamental.  As business develops, get a grip on your margins and overheads.  With maturity into the Growth Stage, managing the business with KPIs can be very helpful.  To continue to grow, understanding your value drivers will be key.  Break-even analysis can be helpful in this understanding. As you reach the Take-Off stage think more about valuing your business.  At first, that will be traditional measures like EBITDA and revenue multiples.  Then as you expand, discounted cash flows can provide more insight which is why large companies use this technique.

Highlighting Rich Hall

Silver Fox Advisors is proud of our members and would like for you to get to know them better.

Rich Hall has been a valued member of Silver Fox Advisors since 2020. He currently serves as a Board member, Chair of the Membership Committee, and Facilitator of two CEO Roundtables (The Woodlands area and in partnership with Houston’s Better Business Bureau).

As the founder of Rich Hall Group, he works with small business owners and leaders to help them achieve their vision of success for themselves and their company. He has extensive experience with family-owned businesses looking to grow, transition to the next generation, or prepare for a successful exit.

In addition to his advisory and coaching services, Rich is the proud father of 3 boys, Jeremy, Mark, and Daniel, and husband to his beautiful wife, Jamie. They’re active members of The Woodlands Methodist Church, and parents to pandemic puppies, Bucky and Riley.

If you would like to learn more about Mr. Hall, or Silver Fox Advisors, see our website at www.silverfox.org/directory

Dr. Ken Wells

Featuring Dr. Ken Wells

Silver Fox Advisors is proud of our members and would like for you to get to know them better.

Dr. Ken Wells is one of our newest members. He is a seasoned executive with extensive corporate health experience spanning clinical medicine, health benefits, public health, and pharmacy. He is an Army reservist, flight surgeon, and pilot.

Ken serves as Vice-Chair of our CEO Roundtable Committee and an active participant in several of our programs including our recent Lunch & Learn on April 7th when we returned to an in-person gathering at the Houston Racquet Club. Ken joined a panel of other Silver Fox Advisors and updated those in attendance with information about “Hot Topics Facing Business Today.”

If you would like to learn more about Ken or join Silver Fox Advisors, visit our website.

A Serious PLIGHT of the Business Owners and Execs

In my coaching activities, I have found that there is one common issue present in virtually all of these folks that leads to what I refer to as the 3 Ps:

  • Lower Productivity
  • Lower Profit
  • Lower Peace of mind

What is this roadblock?

CONTROL – it seems that most want too much control over many aspects of their business and other affairs. Often referred to as micromanagers

Almost always, they see others performing certain tasks and their first thought is that they could do it better, faster etc.

This leads to micromanaging, a desire to control too many things. This results in

  • Poor time management – spending time on trivial matters
  • Resistance and resentment from workers who want to do it their way – that are doing their best.

The Need for Control

Unfortunately, this need for control usually carries over to other parts of their life.

They want to be the writer and director of the play that is going on in their daily lives.

But because they cannot control so many things, they lose focus and momentum. Then people resist and the results almost NEVER turn out exactly the way THEY think it should or the way THEY would do it.

Since things are not meeting their expectation, this, in turn, leads to toxic emotions like frustration, which can lead to anger and resentment.

And people DO NOT like to be controlled. Like a dog resisting when you pull their leash. And since people are one of any firm’s most important assets, you need to set the stage for them to succeed and not control them.

Breaking this habit of control is the single biggest breakthrough I have witnessed in business owners that I have coached.

After I point out this issue and the negative consequences outlined above, they are ready to get out of that rut.

They are ready to work ON the business, not IN all the details.

Like right NOW.

Time Usage

They reaffirm what they already know – they should use their time on the highest and best use instead of the minutia that comes from micromanaging – in ALL of their affairs.

But habits are hard to break, so I recommend a process that they repeat over and over until they form a new better habit of “LETTING GO”.

That process is:

  1. I ask that they commit to me and another person, to give up fighting to control people and things
  2. They come to realize that while they engage in that fight, they never or rarely win.
  3. I have them realize the value of peace of mind that comes from accepting people places and things for what they are. In most cases you cannot FIX people and have a minor influenced on other things/situations
  4. They are to carry a copy of the serenity prayer with them and when they become agitated with people or circumstances, they PAUSE and read/think about, the serenity prayer.

A good but simple example is traffic.

 Instead of tensing up and/or shouting, pause and read/think about the serenity prayer

God grant me the serenity to accept the things I cannot change;

Courage to change the things I can.

And the wisdom to know the difference

I have seen this work with many people, myself included.

Their state of calm and peace of mind is immediately apparent and rewarding to them, their coworkers, their family, and friends.

Of course, vastly improved results naturally follow from such freedom. .

Do everyone a HUGE favor, let go of the reins and let the world go around.

Note – This article was written by Howard Rambin, of the MoodyRambin Company. He is a Silver Fox Advisor and is available for consultation, advising, and mentoring.

POSITION PAPER ON NON-PROFIT ORGANIZATIONS

Most non-profit organizations’ fundraising struggled in 2020 and 2021 as the Covid 19 economic shutdown forced in-person donor and financial supporter functions to be greatly limited in size and scope or even canceled. Some organizations moved to computer-generated fund-raising events but these events were not as successful in raising money as the more face-to-face get-togethers had been. In addition, many businesses struggled financially just to get their employees paid and their doors open, thus having monies for support to charitable organizations and causes was and is simply just not there.

Further, in Houston, Texas the oil bust of 2020 caused many large companies that operate in the energy sector to limit or completely do away with charitable contributions.

Even prior to these 2020 events there had been a “Trust Crisis” developing regarding non-profit organizations. Ben Gose, a contributor to the Chronicle of Philanthropy, addressed this topic in an article he wrote that was published in the Chronicle’s January 7, 2020 newsletter. This article is very enlightening and worth reading.

fund raising

With all this being said, there were also several very emotional political causes being promoted in this time frame, and many corporations began making contributions to certain groups and causes to show their stakeholders and customers that they are good corporate citizens and are providing support to these groups and causes.

On the Foundation giving side of fundraising, the story was somewhat different in that the stock market provided many Foundations that support non-profit and charitable organizations, increases in their corpora, thus enabling them to have the funds available to make contributions; however, these Foundations are getting more requests than ever before.

Further, Foundations have refined their requirements and giving criteria such that the request process has gotten more detailed and lengthier with committees and/or staff having to evaluate requests more thoroughly and provide the Board with very specific recommendations. Most Foundations today require at a minimum that organizations seeking funding have audited financial statements, which is an added cost burden on these charitable and non-profit organizations. Most Foundations will also check with Guide Star/Candid(1) to see if the organization has filed all the necessary organizational documents, like financial statements and 990 Tax Returns with Guide Star/Candid.

NON-PROFIT ORGANIZATION RECOMMENDATIONS

Richard Hendee/Horizon Associates, Inc. has been working with and assisting non-profit organizations for years. Further, Mr. Hendee has started several non-profits and has sat on numerous non-profit organization boards. He never agrees to serve on any non-profit board if that organization doesn’t have Director and Officers (D & O) Insurance coverage. In today’s litigious environment legal action of some kind is, unfortunately, a given. Even if the organization did everything right and by the book, if a suit is brought against the organization, typically the Directors and Officers are included in the suit, and the expense of hiring an attorney to defend being right can get really costly, an expense most individuals do not want to risk their personal assets for. Having D & O insurance coverage is a must for any non-profit.

Here are some other key recommendations:

  • Run the organization just like any for-profit business would be run. Eventhough the organization has been given non-profit status by the IRS for federal income tax purposes, it is still a business.
  • Develop a well-thought-out (not wordy) Mission and Vision Statement that clearly states the organization’s purpose and future direction.
  • Create an organizational chart that includes position titles and functional areas of responsibility.
  • Identify areas that need specific levels of expertise, like legal, accounting and human resources, and contract with outside service providers to assure all the details are done correctly from the start, like the Bylaws.
  • Set-up the organization with the Secretary of State in the State the organization is located in and make sure updates are filed periodically.
  • Prepare a thorough detailed Business Plan which includes what the organization does, for whom is does it, how it will do it, who are the management team and board members and what are their levels of experience, who are the competitors, how the organization will be marketing what it does, what the organization’s strategic plan is, and the key: how the organization will be funded and what happens if there are shortfalls in the funding.
  • Develop criterial governance policies like code of ethics, conflict of interest statement, whistleblower policy, directors’ roles and responsibilities, gift giving policy, investment policy, internal controls, and record retention policy.
  • Schedule monthly and annual Board Meeting dates and times and hold these meetings using a formal Roberts Rules of Order(2) process. Agendas need to be created prior to the meetings and sent out ahead of time with any related agenda item documents in order that directors may have an opportunity to review documents prior to the meeting. Further, meeting minutes should be taken at these meetings and approved at the next Board Meeting.
  • Create working Committees like Fundraising/Development, Audit, Finance, Nominating, Executive (if needed). Make sure these Committees meet regularly, take minutes, have specific assignments, and periodically report to the Board.
  • Create a Community Advisory Board made up of key visible community leaders, key business executives, and community group leaders who all can be called upon for fundraising assistance, opening doors that may need to be opened and/or providing invaluable information and support about the communities the organization may be servicing. Try to stay away from putting political officials on Advisory Boards.
  • Assure that the organization is properly protected by carrying General Liability Insurance, Hazard Insurance if the organization has a lot of fixed assets, Workers Comp. if the organization has employees, and event riders to these policies for fundraising events like Galas, Hunting Trips, Golf Outings, Trade Show Events, etc.
  • Create budgets and fundraising goals and regularly review and measure actual results.
  • If the organization has real estate, apply with all taxing authorities for a reduced property tax schedule.
  • Hold annual board retreats to develop annual plans and a five-year strategic plan. These plans should be evaluated and adjustments made periodically especially if a major event occurs.
  • Develop a robust communication plan to keep your sponsors, supporters, stakeholders, community groups, and volunteers updated on the organization, events, and developments.
  • Establish a volunteer group that can be available to help with projects, events, manpower shortage, and the like. These volunteers need to be informed and made to feel they are a part of the organization and a valuable resource.
  • Participate in local Better Business Bureau (BBB) non-profit evaluations. Often individual gift-givers check with the BBB to see if the organization has any complaints filed with the BBB.
  • Prepare collateral materials (3) that communicate your messages and what you want others to know about your organization. You want to make sure that your message is in your words to avoid any miscommunication or key details being left out in any communication chain.
  • Develop an annual giving campaign that is geared around some important date related to your organization, like the founding date. You could always use the end of the year date, as some contributors do tax-saving contributions at that time of the year.

Horizon Associates, Inc., founder by Silver Fox Advisor, Dick Hendee, has developed this non-profit organization position paper to provide non-profit organizations some guidance and assistance as individuals set up a non-profit organization and to provide existing non-profits some directional changes or planning ideas if needed Horizon Associates, Inc. does not guarantee using any of this material will result in your organization being able to achieve any specific results.

  • (1) GuideStar/Candid is an information service specializing in reporting on U.S. nonprofit companies. In 2016, its database provided information on 2.5 million organizations. In February 2019, GuideStar merged with Foundation Center to become Candid.
  • (2) Robert’s Rules of Order is the basic handbook of operation for most clubs, organizations and other groups. So, it’s important that everyone know these basic rules! Organizations using parliamentary procedure usually follow a fixed order of business.
  • (3) Collateral material is any media material used to promote a company’s products or services. This includes everything from print materials like posters and flyers to digital content like catalogs and e-magazines. Anything you can use to communicate your company’s brand message is considered marketing collateral.

Silver Fox Advisors Elect New Officers

For immediate release – Houston, TX – December 2. 2021

The Silver Fox Advisors held its annual Business and Board meeting to elect new officers and announce its slate of committee chairs for 2022.

The new Board Chairman is Donnie Roberts of the Woodlands. Previously, Mr. Roberts served as President. Joining him is Doug Thorpe, elected as the new President. Mr. Thorpe of Richmond, Tx formerly served as the organization’s Vice President and Chairman of the Marketing Committee. He will retain that committee seat.

Joseph Tung, an attorney with Grable Martin Fulton PLLC is the Vice President. Mr. Tung served as the Chairman of the Education Committee and will retain that role too. The Education Committee organizes and hosts special events, workshops, panel presentations, and the Lunch & Learn programs, bringing keynote speakers.

David Neuberger will remain as Treasurer while Jim Griffing serves as Secretary.

Other committee chairs appointed at this meeting are:

Rich Hall of Spring. Mr. Hall chairs the Membership Committee. His Vice-Chair will be Ibrahim Saleh. This committee manages the selection and on-boarding of new members wishing to join the Silver Fox Advisors.

Herb Kalman will Chair the Outreach Committee. This committee is responsible for the organization’s efforts to coordinate with other area business entities like the BBB, United Way, and Rice University Business Competition.

Lane Sloan is the new Chair for the Business Engagement Committee, the team that oversees the CEO Roundtable programming as well as other program and service offerings. His Vice-Chair will be Dr. Ken Wells.

Don Baird will be the Vice-Chair of Marketing with Mr. Thorpe. The Education Committee Vice-Chair is Henry Florsheim.

Mr. Jim Iden of Houston will fill the member-at-large seat on the Board.

The Silver Fox Advisors is Houston’s premier organization of proven business leaders serving the needs of small business owners, CEOs, and entrepreneurs in the Greater Houston area. We help leaders establish, grow, and prosper their businesses by sharing our collective wisdom through robust service offerings. Visit us on the web at SilverFox.org.

Houston BBB Presents Awards of Excellence

On Tuesday, October 12, the Houston Better Business Bureau hosted its awards gala, honoring recipients of the 2021 Awards of Excellence.

Annually the BBB sponsors the contest to highlight the great work being done by the small business community in the Greater Houston area.

Judging for this contest is done by members of Silver Fox Advisors. Our advisors spend hundreds of man-hours reviewing the packages submitted by business owners, selecting winners in each of the various categories.

In the cover photo, are Silver Fox Advisor members (from L to R), Donnie Roberts, President, George Connally, Herb Kalman, Mark Miller (judging chairman), and Rich Hall. Not picked is Joseph Tung who co-chaired the judging team with Mark.

Congratualtions to all the winners. You can see more details on BBB’s website.

The Keys to Becoming a Great Leader

Now everybody knows something about leadership. 

But when I taught strategic leadership courses to MBA students at the University of Houston, in the beginning my first question to the students was “who wanted to be a leader and a great one at that?”

There was always this look of bewilderment on their faces not knowing how to answer. 

Leadership can be puzzling and seems like a lofty aspiration as many times leaders are put on a pedestal.

 Leadership does make a significant difference in the performance of an organization.

Jim Collins demonstrated that in his well-researched book Good to Great as have a boatload of others. 

Normally, when people begin to talk about leadership, they start rattling off all these characteristics.

Well, I am not going to tell you that these are the top ten characteristics of being a great leader as many articles do. 

But in my opinion that is coming from the wrong starting place.

If you begin with characteristics and try to figure out who is great, you enter into a mindset of rating one leader against another based on the characteristics they possess.

The focus is all on the leader trying to find that special one. It’s grading on the curve.  You are better than that guy, but this other bloke is better than you.

 When the conversation begins with the leader and their characteristics, it leaves out the other half of the equation.

What is really fundamental about leadership is that there are followers. There is no leadership without followers. 

You can be a great solo performer, but that is not leadership which requires more than one person. 

Think of the Other Person First

But why do people follow? 

They follow you because their needs are being fulfilled in some meaningful way.

In effect, the leader must provide a value proposition that fulfills follower’s needs as discussed in my other leadership blogs. 

This is the first key to becoming a great leader, you must start with the needs of the follower by developing a value proposition that motivates them to follow you.

That is what a company does with customers.  It provides a value proposition that cause people to buy. 

You must have a value proposition that potential followers can buy into.

What about the natural born leader? Don’t people just want to follow them naturally regardless.

Sorry, it doesn’t work that way. You shouldn’t rely on whether you got that special leadership gene. 

In fact, most serious leadership authors advocate that leadership can be learned and dismiss this great man theory from days of yore.

Develop the We Mindset

Unfortunately, we grow up being graded solely on ourselves.  It begins in grade school right on through to high school, and then on to college.  It is all about me.

When I worked for Shell, there was a lot of emphasis on the qualities the leader possessed.

I always felt under the microscope to be this superhuman leader with all these wonderful characteristics. 

I knew an awful lot about leadership theories, but it wasn’t until my later years in senior management that the second key came to light. 

A lot of my conversation had too much I.

To be a great leader you must shift your mindset from me to “we”, which is the second key to becoming a great leader.

That requires going out talking to people finding out what really drives them.

Thinking in a “we” mindset opens them up to describing their needs.  People truly love to talk about themselves.

Leadership and Planning Go Together

Leadership is not a random hit or miss process.

How do you figure out a value proposition that motivates people to follow you? This requires planning. 

What big thing have you ever accomplished without a plan?  Planning sets direction. 

Thus, the third key to leadership is planning and setting a motivating direction.

Execution is the Fourth Key

Planning by itself is not enough, even though it does set the stage. 

The plan must be executed achieving the desired results.

People follow successful performance. 

Thus, the way to measure a great leader is to look at the absolute results. 

Thus, the fourth key to becoming a great leader is to focus on results.

That is the mindset shift that makes all the difference. 

Look at the results, but what results are we talking about?

A leader has various stakeholders with different needs as set out in the first key.

Targeting these needs means forming value propositions for each key stakeholder, and since every leader has multiple stakeholders, that means multiple value propositions. 

Great results come from satisfying these different value propositions that cause your stakeholders to follow you. 

Moreover, if you judge leadership on the basis of absolute results, it’s absolutely possible for everyone to become a great leader.  

Leadership Maturity develops a Situational Style

People have different needs; situations require different leadership, and things change over time. 

There is no cookie cutter approach to being a great leader.

Thus, the fifth key is to recognize that leadership is situational depending on the world you and your followers face.

Look to Other’s Strengths

Next, you win by utilizing yours and other’s strengths.

That is what companies do with their value propositions.  They capitalize on their strengths. 

 Great leadership is all about building a winning team, where people step up with their greatest strengths.  That is the sixth key.

You build a gameplan that leverages and synergizes on these strengths.

Develop Specific Actions

Many plans fail for lack of execution as set out in the Fourth Key.

The plans must have executable components with specific actions and be constantly reviewed and revised as results dictate. 

Leadership is not about how many initiatives you can create.  It’s about how well did you deliver on your value propositions by taking well defined actions. 

Thus, the seventh key to leadership is delivering on your value propositions with specific targeted actions.  

That creates authenticity.  Doing what you say you are going to do.

Those are my seven keys to becoming a great leader.

Develop your Leadership Plan

This is a prelude to My book Develop a Leadership Plan Become a Great Leader that recognizes that your personal planning is the key catalyst for greatness.

Typically planning is done from the business perspective, at the corporate or business unit levels on what the company is going to do.

The leader needs to figure out how to integrate into these business plans with his or her leadership actions. 

Some of the leader’s value propositions to key stakeholders will be integral in the business plans. 

Other elements require the leader to formulate more specifically a leadership plan to fulfill those people’s value propositions.

In developing these leadership plans, the focus can then turn to what strengths the leader needs to develop and what fatal flaws to correct. 

That requires the leader to fully assess his/her inner profile. 

What is your leadership style?  What are your proficiencies, things you are really good at?  What are your values, beliefs, and character?  And fundamentally, what is your purpose in life? What legacy do you want to leave?

Weaving together the “outer” world of a leader’s work environment with their “inner” world of character, style, strength, and purpose s brings a practical focus to leadership development efforts.

The leader can then reflect on those aspects of the inner self that more directly impact the outer world and pursue improvement in the areas that will make a significant performance difference, and much sooner.

In doing this, the chances of becoming a great leader go up significantly because there is a targeted focus on your actions and behaviors that will make a real difference in achieving great results.

That is the whole concept that led to my book Develop a Leadership Plan Become a Great Leader. 

The quest for great results doesn’t end with one great achievement.   

It’s not one and done; it’s a marathon. 

People will follow the leader who consistently produces great results that benefit them.  And when these great results occur, that is a great leader in my book.

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