Business Engineering for SMEs: Leveraging the Growth Technologies of Big Corporations

Seven Sins of Beginner Entrepreneurs

Entrepreneurs starting their journey in business often make basic, typical mistakes. Early identification and effective elimination of these errors will help minimize the risk of failure at the early stage of development. It also increases the chances of attracting an investor who will provide support in the implementation of projects.

1. Bad Business Idea

The most serious and frequently made mistake is a poorly thought-out business idea. Inexperienced entrepreneurs often take an overly optimistic view of their venture. This lack of critical thinking can lead to overlooking key factors that affect the business's operation in the market environment. Furthermore, entrepreneurs often rely on attracting an external investor and their financial support. Moreover, they cannot even accurately determine the amount of funds required to start the business. This mainly indicates an underdeveloped business concept.

2. Lack of Competition

The second mistake is the lack of competition analysis, that is, market research regarding companies offering similar products or services. Beginner entrepreneurs often make the mistake of thinking their project is unique and innovative. Unfortunately, in reality, the number of truly innovative ideas is minimal. Therefore, the unsubstantiated belief that their business will become the next Google or Skype could be disastrous.

3. Incorrect Financial Plan

Another common mistake concerns the incorrect development and execution of the financial plan. Writing a general plan based on average data is easy. It is much harder to develop it in detail, taking into account the specific business conditions in which the company will operate. The same goes for executing the plan according to the assumptions made in the budget. When comparing the initial plans with their execution, it turns out that entrepreneurs rarely stick to the assumptions and often make budget corrections. This situation is detrimental to the company as it disrupts its financial state and leads to conflicts with the investor. The mutual trust, which is the foundation of cooperation, can be damaged, and the investor may feel deceived if plans change.

4. Personal issues

The fourth mistake is the lack of tangible personal contribution from the entrepreneur. An investor, when deciding to cooperate, takes on the risk of failure and loss of funds. To interest the investor in a new project and increase credibility, entrepreneurs should offer their own contribution to increase the safety of the project. This contribution may not only be financial but could also include real estate. By presenting such assets as their own contribution, the likelihood of finding an investor who is willing to take on financial risk is much higher than simply presenting the idea and know-how.

5. Ill-conceived action plan

An unthought-out operational plan also discourages investors. The initial procurement plan and the number of staff should not undergo significant changes during the subsequent stages of the project. It is easy to imagine a situation where the entrepreneur, having obtained funds from the investor for the purchase of machinery, miscalculated the total investment cost by not taking into account the cost of installation or the purchase of materials required for operation. As a result, the cost of the project increased significantly, which was inconsistent with the original calculations. The investor, who is forced to increase their financial contribution compared to the original plan, loses trust in the entrepreneur.

6. What is the role of the investor?

The sixth important issue is defining the role of the investor in the project. The entrepreneur should present a well-thought-out plan of the investor's involvement at the beginning of the cooperation. A situation where the role of the investor is limited solely to financing the project is rare. Often, the investor wants to have a real influence on decision-making, control, and the implementation of business objectives. An entrepreneur who expects only financial input without a real influence on the company's decisions may lose the investor's trust.

7. Personal issues

The last common mistake is neglecting issues related to hiring within the company. When two entrepreneurs are working on the same idea, conflicts often arise about the division of responsibilities and authority. Moreover, when the business begins its operational activity and develops, the partners often create unnecessary jobs, hiring friends and family members. Such practices are usually not well-received by investors.

Avoiding the above mistakes will not only help gain investors' trust but also support the optimal development of the company. By identifying and eliminating shortcomings early on, the prospects for the new business will be much more optimistic, and investors will feel more secure about their capital.

Calendar financial plan

Finance managers in small and medium-sized enterprises (SMEs) often mistakenly believe that certain solutions are the domain of large corporations only. One such operational tool is the calendar financial plan, which significantly improves the efficiency of financial management. With minimal effort and, more importantly for SMEs, also minimal costs, it simplifies control over the company’s finances.

The basic principles of developing the plan are extremely simple and achievable even with low financial outlays. First of all, the plan should be developed on a monthly basis — creating the document for the next month should start in the current one. The main sources should include invoices, agreements with banks, contracts, and the repayment and borrowing schedules for loans, tax payments, and salary payments. It is crucial to pay attention to the date of their accounting, as this determines to which month and accounting cycle the specific data will be assigned. The development of the plan itself begins with dividing income and expenses into three main categories:

Operational — income and expenses related to operational activities. This mainly includes cash flows related to the daily functioning of the business, such as sales and purchases of goods and services, or administrative expenses.

Investment — income and expenses related to investment activities. This group includes income and expenses related to the development of the business, such as the purchase of machinery and equipment, larger goods orders, or financial investments, as well as revenues from investment activities.

Financial — the smallest and situation-dependent group, covering financial activities, including taking out and repaying loans.

A financial plan allows for a high probability of knowing the exact financial status of the business. If it is created with sufficient accuracy, and all available data has been analyzed, it is also possible to know the company's funds for the next month or accounting period. The reliability of the financial plan is very high — around 90-95%. This high percentage is linked to the fact that in Polish business, the traditional payment term is 30-45 days. This means that the estimates on which the financial plan is based are based on actual, not forecasted, payments and invoices.

Another advantage of the plan is the information about a temporary cash deficit, meaning a situation where incoming payments do not cover all outgoing expenses. The formula to determine the possible deficit and its scale is simple and applicable in any business:

Initial Balance + Incoming Payments – Outgoing Payments = Final Balance

The initial balance for the period is added to incoming payments, and from the resulting sum, outgoing payments are subtracted. The result indicates the final balance and the possible deficit. The information obtained from analyzing the data about the deficit can be used to cover it. There are several ways to address this, depending on the situation, the overall financial condition of the company, and the decisions of counterparties. One of the primary and more popular tools is the postponement or rescheduling of payment deadlines. However, this solution has a significant disadvantage — it is dependent on the decisions of counterparties and may be subject to penalties for overdue payments.

Another way to cover the deficit is to speed up the collection of receivables from business partners or to use financial operations such as factoring. Unfortunately, this solution also increases the financial cost. A third way to cover the deficit is to take out a short-term loan, such as a working capital loan or overdraft.

The preparation of a monthly calendar financial plan has one more — seemingly trivial but very important — advantage. With minimal costs, it allows entrepreneurs to organize accounting information in an understandable form. It also creates a solid foundation for making the right financial decisions, which, like the use of the right tools, are in the hands of the person responsible for financial management, consulting their actions with the management.

Controlling finances in a small or medium-sized enterprise using a calendar financial plan is not overly complicated. All that is needed is a thorough and detailed analysis of the available documents on which a precise monthly plan can be based. From this plan, current decisions can be made regarding cash flow on accounts, and as a result, the financial health of the company can be more confidently assessed.

Business Management and Crisis Situations

During a fire, awareness of the threat and a pre-prepared action plan allow people to avoid danger, saving health and lives. In a similar way, the impact of threats affecting a managed company can be prevented or minimized. The key to this is knowledge of the appropriate defensive mechanisms.

In the context of company operations, the term "crisis" is most often associated with the economic slowdown of recent years. However, this definition limits the wide range of threats not directly related to the market situation, which may arise in a managed company. These include situations such as: restructuring, loss of market position, the likelihood of a hostile takeover, and even changes in key legal aspects of the company’s operations. Given the multitude and ubiquity of threats, business managers should always be prepared to implement crisis management actions. One of these actions is constant monitoring of the situation — both internal and external. Properly conducted and systematic monitoring allows potential threats to be detected early, enabling managers to prepare for avoiding them.

The Most Difficult Economic Crisis

An economic crisis can create dangerous situations both within and outside the company. Business managers are generally unable to influence the changes in the market situation, but by planning appropriate crisis management actions in advance, they can mitigate the effects of unfavorable market changes. By being aware of the challenges and threats facing the company, it is possible to avoid unpleasant surprises. For this, a crisis management plan is necessary, which includes actions aimed at internal company changes. These actions include: reducing production costs, staff cuts, restructuring, and ensuring financial liquidity. The company’s situation monitoring should also consider the external environment. It is important to take measures in advance to maintain the current market position and even block or outpace competitors. A company's operations should adapt to processes occurring during an economic slowdown, which leads to changes in the regulatory system. An example could be the situation where taxes are sometimes collected in the form of an advance to supplement the budget of tax authorities.

Crisis Within the Company

Unsuccessful actions within a company can also trigger a crisis situation. Therefore, when planning restructuring, transformations, and other changes in the company's operations and structure, it is crucial to create a contingency plan. A well-prepared and implemented plan minimizes the consequences of poorly executed operational actions, ensuring the company’s continued stability. The contingency plan should also include protection against employees acting to the company’s detriment. In Central European countries, company workforces are particularly privileged. Proper manipulation of powerful trade unions can significantly contribute to destabilizing the operations of the entire company. There is a risk that in a crisis situation, the management may lose the primary factor of the company’s operation — the support of its workforce. To resolve conflicts between management and employees, controlled unions can be introduced within the company. This process involves dividing the workforce into internal groups of influence, arranged according to their previous professional affiliation (production, trade, administration). By assigning different privileges to each group, antagonisms are created not between the workforce and the management, but between different groups. The primary goal of such an action is to turn the conflict between employees and management into creative energy, which over time will translate into profits for the company. In times of threat, employees are also more likely to resolve conflicts. In one company, employees called off a strike after the management informed them that new workers would be brought in to prevent production downtime, taking over their duties.

Threat of Hostile Takeover

A crisis situation for a company may also involve attempts of hostile takeovers. Their goal is often to increase market share and strengthen the company’s competitive position. Hostile takeovers are also carried out by entities interested in gaining access to technological secrets. To protect against the risk of a hostile takeover, it is essential to understand the methods of conducting such takeovers. This knowledge will allow business managers to prevent potential problems related to the loss of the company. One of the most common and widely used methods of defending against a hostile takeover is monitoring liabilities and receivables, which also reflects the company’s liquidity. Competitor activities should also be monitored in order to predict their plans and actions. It is also essential to maintain confidentiality regarding technologies and formulas used within the company. Other forms of protection against hostile takeovers include management buyouts and special provisions in the company's statute, which prevent changes from being made to the company after a hostile takeover.

Crisis as an Opportunity

Although many managers view a crisis as a moment of trial, this state does not necessarily only represent a threat. It can also be an opportunity for business owners to analyze and evaluate their previous operations and, in case of doubts, to introduce beneficial changes. The result of these changes can be the strengthening of business positions and increased competitiveness. Companies emerging from a crisis are always richer in valuable experience. After overcoming difficulties, their image in the industry improves, and the managers responsible for successfully managing the crisis are seen as responsible and competent.

How to protect yourself from the insolvency of contractors

It is impossible to completely protect oneself from dishonest contractors, but it is possible to minimize the risk through appropriately chosen tools. The quickest way, offering the greatest guarantees of a successful transaction, is to thoroughly check the business partner's reliability. On the other hand, the most complicated and time-consuming actions are those taken after the fact, such as debt collection or seeking legal redress in court.

Preventive Measures

Every entrepreneur can minimize the chances of incurring losses related to the insolvency of contractors by selecting optimal protection methods.

Firstly, an assessment of the risk of capital loss should be made, and an additional analysis of the contractor's credibility should be conducted. Key questions to answer include: what is the origin of the contractor? Did they propose cooperation themselves? Is it a recommended and verified entity?

Next, publicly available registers, reports, and databases on debtors, such as the National Debtors Register or the Credit Information Bureau, should be utilized. These tools make it easy to verify a company, eliminating untrustworthy entrepreneurs. However, it is important to remember that these databases may be outdated or contain errors, and should therefore be treated as supplementary sources when analyzing a company’s financial statements.

Similarly, financial reports cannot be regarded as the only reliable source of analysis. Experienced accountants can present data that often does not reflect the true state of the company, subtly manipulating the reality.

Another method of obtaining business information is investigating the contractor's financial situation. This is particularly relevant for small and medium-sized private companies, with the majority of ownership controlled by the entrepreneur. A thorough investigation can be conducted by using external companies, so-called economic intelligence agencies. The reports prepared by these agencies are very detailed and contain information about the history and business health of the company. Importantly, the reports are prepared by specialists and experts from the relevant industry, which significantly enhances their informational and practical value. Companies often lack the necessary know-how or specialized staff to prepare such materials. Economic intelligence agencies monitor the market continuously, not only from a financial perspective but often from the standpoint of various aspects of the company’s interaction with its external environment (media reports, the prevailing "climate" around the company). The decision to commission the preparation of analyses and reports by economic intelligence agencies must be well thought out and depend on two main factors: primarily, the size of the transaction and the scale of the contractor’s operations.

Each of the methods presented has various pros and cons. When trying to assess the reliability of a given entrepreneur, we should apply the rule of using at least three sources in our analysis. This reduces the chances of making a mistake when selecting a future business partner.

Protection and Debt Collection Methods

If the business partner’s reliability remains low, and we still decide to engage in business operations with this entity, we should protect ourselves from capital loss. A simple way to protect a company from contractor insolvency is to insure receivables with one of the specialized insurance companies.

Such a decision should depend on the percentage of doubtful receivables within the overall portfolio structure. Most insurers do not offer insurance for a portion of the capital (e.g., 5%) but require coverage for the full amount. Therefore, the company should conduct a thorough analysis of potential losses arising from unpaid receivables.

It may turn out that the cost of insurance, even for a short-term period, significantly exceeds the potential losses from unpaid receivables. In extreme cases, the cost can even be multiplied, e.g., through the extension of the debt collection period or the need for additional, non-standard services. Entrepreneurs who do not specialize in finance are particularly prone to making mistakes. Insurance companies often use contracts that allow them to individually take action for debt collection, and such actions always incur additional costs.

The argument in favor of insuring receivables is that insurance companies are experienced in debt collection and have the necessary expertise and tools for it. For entrepreneurs, the mere awareness that they will have the support of a specialized company in case of contractor insolvency is often enough to make the decision to insure their portfolio.

Companies that have long-term, trusted suppliers rarely use such protections. It is often the case that large corporations operating in specific sectors have the same subcontractors, suppliers of materials, products, or services for years, which guarantees payment security. There are also international brands that have provisions requiring the insurance of all financial transactions in their procedures.

Therefore, insurance for a specific transaction should always be considered individually, depending on the specific business situation, e.g., when entering a new market, segment, or launching a new product, as this almost always involves risk, including financial risk. Gaining a larger market share may involve the risk of contractor insolvency. This means that when entering into a large number of sales transactions, the financial return is significantly delayed or may not occur at all. In such a case, the cost of insuring this risk can be treated as the cost of entering the market or segment (quasi-marketing).

The final decision to insure the portfolio always rests with the company. The decision should be based on a thorough analysis of the need for such action, without pressure or lobbying from insurance companies.

Another method of protecting the entrepreneur in case of the risk of capital loss is the issuance of a promissory note by the contractor. A promissory note, as a security instrument, issued either by the company’s owner or in its name, effectively protects financial transactions and, in case of non-payment, provides a basis for recovering the debt. The disadvantage of this form is that it is not as popular and widespread in Poland as it is in Western European countries or the USA.

A similar mechanism to securities is the property guarantees of third parties. Through an official guarantee, third parties pledge their own property as collateral for another person’s financial obligations. Such claims can be pursued through legal action if debt collection is necessary.

Prevention is Better Than Cure

As with most cases, the most effective and cost-effective tool for protecting a receivables portfolio from dishonest contractors is prevention. It should be based on a thorough and in-depth analysis of the business partner’s reliability. This is an operation worth dedicating time and resources to, because fixing and rectifying mistakes made later can often be much more difficult. The loss of funds due to negligence by a contractor is often the smallest immediate cost, while debt collection, whether through an insurance company or through the courts, can be a long and costly process.