The Most Important Part of Managing Your Business Is...

I have been consulting companies for years now and own a few businesses myself where I can confidently state that the most important part of managing a business - any business, is knowing and understanding how the business works. Each time I sign a new consulting agreement I advise the client that I will be out in the factory, or out with the sales team visiting customers, or even learning how to weld steel or shoot liquid plastic into an injection moulding machine. Why do I do that?

The answer is simple really and uses shear common sense. I need to know the current condition of a company's processes. It's only logical that I (as a consultant), or you as a business owner (business leader) get out onto the shop floor and learn your business. There is no way in the world anyone can convince me that leadership begins, exists, and ends behind a desk in an office.

Sitting behind a desk creates theories of how internal processes "should" run and sitting behind a desk creates more pontificators than leaders. I have walked through production facilities with owners to find out that half the employees in that business didn't know who I was walking with. That is crazy but it is true. Sometimes business owners get bogged down with smaller issues in the company rather than the bigger issues that they lose sight of where the company is and where it should go; thus creating ineffective leadership.

I have witnessed companies "believe" they are headed in the right direction when in fact the organization is bleeding cash or production runs are actually running slower than they should.

The most important part of managing your business is understanding how it does what it does to make a buck. In other words, how do we fabricate that mobile hospital, how do we get material so we can make kitchen cabinets, and how many man hours does it cost to make what we make when we sold that thing we make for much much less?

Managing and leading your business starts and ends with understanding your processes. Simple. Understand your supply chain. Understand man hours per unit. Understand "hidden costs" in your product and most importantly, understanding Activity Based Costing (ABC).

ABC relates to the cost you incur everytime your employees touch the process that makes the product. In other words, why are you having to touch the production of that thing so many times? For example; I worked with a company that had a minimum of 34 touch points in the fabrication of their product where over time we reduced those touch points to 15. This reduction resulted in faster lead times for the customer, faster raw material turns which increased discounts etc; and this reduced direct costs by over 25,000 hours in a year.

Understanding processes within your organization does not just fit into fabrication and production of something. It also fits into the accounting process of your business as well as the marketing aspect of your business. I used to teach graduate level accounting where I would show students that A/R ratios of 45 days does not fit into the typical 30 day vendor A/P side of the business. In this scenario a business would alwyas be strapped for cash.

Learn how your business operates. Learn what processes are good for your business and what processes are bad for your business and make the appropriate adjustments. It's not hard. Whether you own a cabinet shop, and insurance agency, or a bakery - it's all the same = common sense.

For more about Luis Luarca PhD and Allectus LLC click here.

Categories: Leadership

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