Business Forum

Understanding Money, Management and Marketing: The 3Ms of Successful Small Business Venture
by James Gaius Ibe, Ph.D.

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.

In the next article we will focus on some key management and marketing principles for a small business. We will conclude with understanding what the numbers mean and strategies for minimizing the age of receivables.

ABOUT THE AUTHOR: Dr. James Gaius Ibe is the principal of Global USA-Marketing and Management Consultants. He is also a senior Professor of Economics and Marketing at one of our local colleges.

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