It’s better to be fair, supportive and demanding than to just be nice and let people fail.
One of the most difficult management issues for small business owners and managers to deal with is the principle of accountability for performance. In most stores this one issue is the root cause of lower than possible performance in all business areas, including sales revenue generation to gross margin dollar generation to maintaining strong bottom-line operating profits. The problem extends to cash management and inventory management and is the cause of more owner/manager stress than any other issue.
The problem is that most people don’t understand what accountability means in business practice, usually placing a "do or die" connotation on the whole idea. Most people think that holding people accountable is tantamount to being mean-spirited, hard-nosed and unfeeling. It seems as if it is more important to be liked and non-demanding than to have your company become a high-performance organization. We have a principle in our company that states: It’s better to be fair, supportive and demanding than to just be nice and let people fail. Allowing people to fail at their jobs is not nice. Whether it’s in sales or other operational areas, failure hurts. It diminishes people and it diminishes your company’s culture.
Often, long-term employees are protected like sacred cows regardless of their performance level. This means that little change can be brought to an organization, in spite of the dangerous effect that not changing may have on customers. Many stores have been left in the dust of a changing market and customer base because of the inability to successfully meld new ideas, practices and methods into a fixed culture.
In the simplest terms, organizational accountability means establishing goals for performance. These can be a specific quantifiable goals like improving average sale, or a developmental goal, such as learning a new computer skill. After a goal has been stated, a plan must be written describing the steps that need to be taken to achieve it. This should spell out who has to perform, in what ways they must perform and by what time the goal should be achieved. Finally, review dates are set for evaluating results. At review time, the employee will either have achieved the goal or not. If goals have been met, then celebrate success. If not, look carefully at the goal, at what was done and at the conditions and environmental issues that may have affected performance. Then remove any roadblocks, re-evaluate the goal and set a new plan to move ahead.
Accountability is a developmental discipline. Set a goal, work to achieve it and accept responsibility when you don’t make it, to try again.
Connecting People to Financial Performance
Most employees in family-owned small businesses have no connection to the operating results of their business. This information is usually held close by family members or owners and not shared with employees – even the most key, high-level managers. The result is that no one is connected to the results of their work in the overall performance of the company. The result of this management style is that people cannot know when they are performing well individually or as a team. People cannot improve their work and there are no standards of performance against which people can judge themselves. There is no objective system of performance appraisal and if appraisals are performed, the totally subjective basis causes discontent and job dissatisfaction.
More damaging is that in closed organizations, expectations for performance are not clear and are usually not even stated. When no clear plan for achieving sales, operational or profit goals are present, businesses tend to take on a "lottery ticket" mentality. In these organizations, employees may believe, "We do our work every day and we watch what happens. Sometimes we win, sometimes we don’t."
If you were to lay out your financial statements and assign employee names to every line where there is a direct or indirect connection between how specific people perform and the value of the result, you’d see the beginning of an accountability plan. Start with your highest level managers, because they have the overall responsibility for the performance of their staff members in broad areas of the business (sales, merchandising, administration, warehouse & delivery, facilities).
It is obvious that no one person’s work is completely responsible for the bottom line profits in your company. Operating profits are the summation of all your store’s efforts in generating revenue, purchasing inventory, controlling expenses and managing people. But if you can identify all of the direct connections between how people perform their work and lines on the income statement or balance sheet, you can begin to develop a list of key performance measurements that will guide your thinking about how to set goals and develop plans for improvement.
Your sales manager and salespeople are responsible for serving customers, converting them to buyers and selling as much as possible. In other words – generating revenue. Generally, everything starts here and it’s the top line on your income statement. The problem is that if you look at all the critical factors that go into the sales equation (traffic, close ratio and average sale) you’ll see a large performance variance among staff members.
Your top performer gets more out of her customers than your lowest performer and you can’t look just at volume to make this analysis. Suppose salesperson A sells $100,000 in a month while salesperson B sells $80,000. A is a better salesperson, right? But suppose you actually count traffic (as you should) and find that A engaged 300 customers while B engaged only 200. Now you see that B is more effective because A’s sales per customer is $333 while B’s is $400.
The important issue here is that the customers who were served by A received a different level of service from those served by B. If you employed another salesperson with B’s skills, you’d have produced an additional $40,000 in volume from those extra 100 customers that A used. Knowing this, you can begin to develop a sales strategy to fix this common problem and capture more sales revenue from your customer base. This begins the process of developing accountability for sales revenue – your sales manager’s accountability. You can see how you can easily bring this down the organization to individual salespeople, all of whom are directly connected to sales revenue generation – the top line.
MERCHANDISING & GROSS MARGIN
The functions of buying and pricing merchandise affect many specific areas of your financial statements: Cash and inventory being the most obvious. You usually have either one or the other since inventory is just cash in a different form. On your income statement, the gross margin line is the most direct connection of merchandising to results. It incorporates how things are bought, priced, marked down and sold. Gross margin dollars are what you use to pay bills and, unless you borrow or put in more cash, what you use to buy more merchandise.
What are the things that affect gross margin?
•Selling price. Does the selling staff negotiate prices with customers? Is there a pricing strategy?
•Markdown strategy. When do you mark down merchandise? Do you have a markdown strategy to maintain margins?
• Inbound freight. Who sets the rates? Can you negotiate for lower rates?
•Purchase price. Are you getting the best price based on your volume or purchasing plan? Are you using the right vendors?
The point is that there are specific performance issues you can identify and for which you can hold your merchandise manager or buyers accountable. In doing this you will also see where there is cross-departmental accountability, between employees responsible for sales (who determine pricing) and those in merchandising (who set the initial gross margin expectations).
Every department head has responsibility for certain operating expenses whether for salaries, material, utilities or equipment. These expenses are critical to bottom line profits and should be carefully controlled. But this cannot be accomplished without a good operating budget where line item expenses are attributed to specific department heads and reviewed regularly by your controller or by the entire management team.
One key problem encountered in this area is that most furniture stores do not produce operating statements on a regular basis – meaning monthly. This important control tool is the key reporting tool for all organizational accountability and is used like a 12-step program to ensure that things are on track according to plans and expectation.
Another key area of disconnection from accountability is the manner in which furniture stores apply accounting standards to their reporting structure. To be truly responsive and to fully realize the benefits of accountability for performance, you have to break out all possible expenses by business aspect. Salaries are usually reported as one lump sum on most income statements, but there are salaries incurred in each department – sales, administration, operations, facilities, etc. These direct expenses should be assigned to the operational department where they are incurred using a much more detailed chart of accounts than is typically used by outside accountants for tax purposes. Unless you can measure expenses assigned to your departments, you cannot successfully hold your department heads accountable for them.
Job Descriptions Versus Job Plans
The final element of an accountability system is to ensure that everyone knows their role and understands their job. Jobs are processes and the way a person performs his or her job is defined by a list of tasks or procedures. Finally, it is critical that for every job and for most tasks, the employee knows what are the expectations for performance and how to determine if she or she is performing above, at or below those expectations.
Typical job descriptions list all the things (tasks) a person is responsible for. We suggest taking a different view using job plans that list all the tasks a person must do, attach a performance expectation to the task (i.e. complete 12 forms per hour, complete all key entry by end of shift, maintain a close ratio of not less than 25%, return all customer calls within 3 hours of receipt, etc.) and include overall personal and job goals, job mission and company mission.
Job plans are constructed in such a way that the job plan can be used as a living document, used for documenting monthly or other short-term goals as well as longer-term performance goals. These job plans are directly connected to the performance appraisal process and are reviewed monthly by managers with all employees under their direction.
Once operating budgets are in place and job plans have been written to connect to them, performance appraisals should be performed monthly for all employees to ensure they remain connected to their performance goals and expectations and are working toward the right results. These reviews should be minutes long, not hours long and be related to the measurable things that connect directly to company financial and operational results.
Remember that accountability is a developmental issue and keeping people connected to their job results through constant feedback and planning for improvement is necessary. An added benefit of this constant performance improvement and appraisal system is that poor performers who cannot improve will often remove themselves from the organization. Others, who you might not have thought could keep pace with change and growth, will surprise you in a system of structure and accountability.
High Performance Organizations
This is how high performance companies work. Goals are clear. Everyone knows their role and their responsibilities. Accountability for performance allows the best people to excel and weaker people to be identified and provided an opportunity for training and development. Everyone is working toward the same, clearly stated and mutually developed goals. Interdepartmental dependencies are recognized and valued and systems are established to help them work together better. Performance appraisals are directed toward achievement of corporate and personal goals and people are encouraged to succeed.
Even the smallest company can make this happen. In fact, in my view it’s as important to family health and owner success to have this kind of accountability structure in place. This is the only way to liberate owners from carrying the whole performance burden themselves.