1.5.6 Moving from Entrepreneur to Leader

Moving from Entrepreneur to Leader

Key Definitions

Entrepreneur: Someone who looks at business opportunities that currently exist and then turns the idea into something of a reality, but they are not affiliated with a business.

Overtrading: When a small business grows so fast that it struggles to generate enough cash to pay bills due to rising production costs and levels.

Hierarchy: The levels of different supervisory and management levels from the ordinary worker to the CEO and senior management.

Delegation: The process of passing the authority for a task down to a worker in a lower position to give them more decision-making power.

Liquidity: The business's ability to pay back short term debts and to manage its cash flow efficiently. 

Small Business Growth

Even though the start-up period is the hardest time for an entrepreneur, many small firms will find themselves struggling during periods of rapid growth too, as it is often difficult to keep on top of the financial and organisational pressures of expansion. Business founders may often find themselves working through the night if they need to in order to make sure that nothing within the business goes wrong during launch. 

The Business Effects of Forecast Rapid Growth

In certain circumstances the periods of rapid growth can be anticipated and predicted by business managers. This may be temporary, such as an effect of a change in the law, or it can also be permanent, such as the rise of a new form of social media. The most successful firms, in these situations, will be those that form a plan that be detailed enough to help in a practical way, and also flexible enough to allow for the differences between forecast and reality. When rapid growth has been forecast firms can:

• Compare the sales estimate with the avaliable production capacity. 
• Budget for any necessary increases in capacity and staffing.
• Produce a cash flow forecast to anticipate any short term financing shortfall.
• Discuss how to raise any extra capital needed. 

Timescales will always remain important, as the forecast may cover the next 3 months but increasing the capacity may involve building a factory extension that would take 6 months. This means that there would be 5 months of excess demand the business would need to cope with. 

No matter how accurate the forecast is, there is always room for error. If everyone in the business is busy things can begin to go wrong, such as unpaid bills are not being chased as quickly and stock deliveries not being checked as carefully, and this can lead to the cash flow position worsening and internal costs start to rise. An effective manager would be able to fix this, but not all managers can be called 'effective'. Once plans start to go wrong they are often harder to fix.

The Risks of Overtrading

Overtrading happens when a business expands at a rate that cannot be sustained by its capital base. A sudden surge in orders may encourage the business to buy additional stock on credit, but if the customers are slow to pay for the goods this may give the business liquidity problems. Poor funding is one of the most common reasons why seemingly successful businesses end up going into business failure. 

'Adequate finance' means the business has access to sufficient levels of funding to meet the needs of the business whenever the need arises. Established businesses will need to pay staff wages, suppliers, and other expenses on time regardless of if they have generated enough cash from sales to cover these expenses - they will also need to replace equipment and/or machinery when it becomes damaged or old. Few businesses are faced with predictable demand, therefore adequate resources need to be avaliable to respond to an unexpected increase in orders, as well as to cope with an unwanted fall in sales. 

Making sure access to adequate funding is avaliable is particularly important for businesses who are looking to expand. These firms will need capital to not only buy new assets but to also cover the costs of additional day-to-day capital requirements, such as increased materials, wages and fuel. 

Problem of Adjustment from Entrepreneur to Leader or Manager

The typical leader of a successful new business is lively, energetic, creative, creative, and often an impatient risk taker. This type of person will have a strong personality, and will quite often have an autocratic and charismatic leadership style. When the business started their own speed of decision making, attention to detail and hard work would be fundamental to the business success.

However success can also bring problems. At first the entrepreneur would be working even harder before taking on junior staff to help with the workload. Then the entrepreneur would be encouraged to take on a manager to help with decision making, but the question is whether the entrepreneur would take on a strong or weak manager. Staff will always find it hard to accept a new manager as everyone knows it is really the boss's business, however appointing a new manager is something the boss must do. 

Delegation is necessary within a business. Authority is something that should be passed down within the business hierarchy to middle managers with little interference from above - and instead of looking for the next great business opportunity, the boss may have to focus on on getting the right management structure to ensure that the business runs smoothly. 

Even if the founder of the business is able to transition and adjust successfully to becoming the manager of a large business organisation, the problem of motivation within the workplace still remains. The new staff is often not as motivated as the small team who originally set up the small business. 

Change in Management Structure or Hierarchy

As a business grows the management structure must not only grow but also change. New layers may need to be added and completely new departments may be founded, and all the time this happens new staff are being recruited, inducted to the company and trained - so there is constant change within personnel and their responsibilities. This can be disconcerting for customers and suppliers as strong relationships are hard to build between the business and the customers and suppliers, making customer loyalty harder to achieve. 

Even more importantly though is the internal effect of all these changes. With new staff coming in to the business frequently, and manager changes happening regularly, team spirit can also be harder to achieve. Junior and middle managers may spend too much of their time looking towards the prospects of promotion instead of focusing on their own departments. The potential for inefficiency, or even chaos, is evident: too many staff may mean too many mistakes. If customer relations are relatively weak the result of this could easily led to a loss of business. 

These unpleasant possibilities can be largely set aside if a good example is set to employees from the top of the hierarchy. If the founder of the business is continuously involved - especially in customer service - all may still be well within the business. The leader needs to make sure that all staff keep in sight of the qualities that brought success to the business in the first place. If new management structures threaten to create communication barriers then the leader should set an example by visiting staff, chatting to them and acting on their advice. The leader must fight against being cut off form their staff and the customers.

Risk of Loss of Direction and Control 

The entrepreneurs who get swamped by the success of the business are those whose businesses will fail to sustain their growth. They may become sidetracked by the attractions of expense account living, or they become so excited by their success that they start opening up several different businesses. They assume that their 'golden touch' will ensure success in whatever it is they do, Instead, as their core business becomes harder to handle, they are looking at a different venture altogether. Problems may then hit the entrepreneur from several different directions at once, cauing more problems to build up for the entrepreneur.