What kind of entrepreneur are you? pt.2

And now for the follow up to yesterday’s informal poll. My focus is on training business owners because if you’ve made the hire you should have, you’ve hired workers who are more competent in their tasks than you are. Any training you do should be akin to an orientation to the specificity of your product and how to wend it through the system you’ve set up. Ideally, you want people who will tell you how to optimize what you have because you can never capture the full value of your people or machines in a small operation. You have an abundance of underutilized equipment and skills. More on this at close.

The paradox is that even with under utilization of people and machines, smaller businesses are more efficient and productive than large ones. This case study (pdf) claims small businesses (2-9 employees) generate more revenue per employee than larger ones, 100% to 400% on average. I found a similar trajectory when I did a study in 1997. Among respondents (caveats abound), sales increased by 800% for the first employee, an additional 600% for the second and so on. It strains credulity to see how much product one small company can put out, it always surprises me. Here is the revenue by employee chart.

sales_by_size_compared1

This doesn’t mean you can breathe a sigh of relief vindicated by the research because the vast majority of businesses not listed here –20 million– are sole proprietors. Sole proprietors are more honestly described as #3s. This study doesn’t quote sole proprietor sales figures but one source I trust puts the figure at about $30,000 per year. To realize the gains above, you have to make that first hire and most people who should be growing (#2s) don’t.

The culture of firms with 2-9 employees is sometimes described as survival mode; it’s stressful worrying about making payroll and your own expenses (a value of #3). Making the leap to 10-24 employees is a trade-off, there’s less concern about survival meaning your personal financial stress eases but your focus increasingly becomes one of growing the business and there is less revenue per person (but still better than yet larger firms). If you’re a dyed in the wool #2 and want the best of both worlds, 10-24 employees (or as close to that as you can get) could be the sweet spot or another alternative altogether (at close). The vast majority of sewing contractors have 10 or slightly fewer employees. I think this size contractor is the best match for DEs. They’re small enough to be flexible to produce a range of products but large enough to have staff with specialized skills and needed equipment.

Businesses with 25-49 employees are interesting in several respects but I wonder how accurate the results of the study are. First is that business owners become externally focused, they’re looking for connections with peers and joining industry associations. I don’t know how “industry associations” was defined but we have evidence enough of that with our member’s forum. The study also says the value of company web sites also increase but I find it hard to believe that small companies I know (mostly sole proprietors), could be more interested in the value of their web sites. Hmm. Perhaps this is a generational difference. If it is true that firms with 2-9 employees are disinterested in web sites, it could easily explain the disconnect between the need of web sites for old-school smaller firms (contractors etc) versus the needs of potential customers who want to find them. A third feature of these firms is a focus on best practices. Again, that is a focus of F-I but I am remiss to know how much of the discussed best practices are adopted. Like I said, the study results are interesting.

Businesses with still more employees (50-99) are a better choice for #1s and #3s. Better for #1s because this is where they can begin to hit their stride and stretch; their challenges are more closely aligned to their opportunities. It’s better for #3s  because larger firms have the revenue to pay for better employee benefits such as health insurance and training opportunities. Businesses this size are also better for other businesses in that they’re more likely to bring in outside expertise (training and consulting).

The implications of this study are thought provoking but I am curious about outliers and how their performance fits into the mix. I would define an outlier as a very small firm (under 10 employees) who is externally focused (joins organizations to connect with peers), values their website very highly and who also adopts best practices used in the trade or even beyond that, being progressive in adopting something like lean manufacturing. They are also more likely to hire consultants to solve operational difficulties. This describes the path of a lot of people who visit Fashion-Incubator. Outliers are a hybrid. Their focus is more typical of a large firm but their application is on a scale complimentary to their size. I only know a few firms like this and the most stunning thing about them is their sales per employee ratio. A claim of $250,000 per person seems so ludicrous as to be irresponsible but in my experience, it’s a very conservative figure.

The summary conclusion could be that it is less a matter of employee head count (staff size could even be a cop out) and more a matter of making your goals congruent with your practices because as I said in my opening, smaller firms have an abundance of underutilized equipment and skills in spite of having higher productivity. It is a cop out to believe a trade off between quality and quantity (a belief of #2s) is required to grow. I don’t believe you have to be a larger firm to realize the benefits. You can be a 1 and a 2; it’s a perfect marriage. I think we need more 1s.

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5 comments

  1. Rocio says:

    Kathleen,

    It’s always great when you come across something I’ve been suspecting for a while but just hadn’t had time to research and validate!

    Based on your definition of an “Outlier” I think we fit into that category, and although it’s still rare to come across likely minded piers…. they’re out there… coming out of the woodworks dusting off and adjusting to the new reality of the business after the downturn…

  2. Trish says:

    Another great topic, Kathleen. The Guardian Special Report is a wonderful resource. Thanks so much! And my favorite “Kathleenism” of the day…”caveats abound”!!

  3. ClaireOKC says:

    Since almost the beginning of my company, I have wondered about these options. I have purposely stayed small because 1.) the work I enjoy, most companies would source out, 2.) I felt I would then be more of an administrator and manager of personnel than actually doing the designing and executing those designs, and 3.) because the jump of expense (and therefore the jump in income) wouldn’t mean more income for me personally. I do outsource some basic work when necessary, and some of the bookkeeping and financial reports (I hate this stuff even though I can do it), but it is mostly me.

    This allows me the freedom to change styles and trends on a dime, to pull back or expand when needed and a little freer schedule. It also allows me to seek other avenues within my industry most lately that has been teaching.

    It’s good to see these stats and realize that I was essentially right, although according to these stats, I would be better hiring more employees, but I probably won’t. Thanks for the great post.

  4. Renee says:

    It really is possible to have all three of these battling it out in one person. My default is #2, coming from a design/technical background, but I got my MBA in following my #1 heart of entrepreneur and when I designed my current product for my own daughter (a very #2 act) I recognized it as the “widget” that I’d been looking for to move toward #3/#1. Interestingly, though, because I do a lot of advertising, customers seem to assume that mine is a big company, where I still consider it tiny, even though I use other people’s time (OPT) to get a lot more done than I could ever do by myself.

  5. Ann says:

    Excellant paper. We plan on staying small at this time as we love to do the work we do. We have people who would love for us to source out the projects but then we would be just administrators and managers. We would not have the opportunity to produce what we want to have produced. We might have to relook at this in a years time if the business continues to keep growing the way it is.

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