The 3 Roles of Small Business Entrepreneurs

If you're working for yourself, you may be working for a bad boss.

In a conversation with my CPA partners in Origami, Kris and Ashley, I turned to a topic that had been on my mind lately: Why do some small businesses go for years without generating much of an income for their owners? Why do they keep going? Why do entrepreneurs put up with the stress and uncertainty if there’s no success in the present and no prospect or plan for success in the future? Isn’t the purpose of a small business to make money for its owners? Hopefully much more money than they could have earned by deploying their time and resources elsewhere? If that’s not happening and is unlikely to happen any time soon, why not call it a day?

We came up with a few theories

No one sets out to not succeed, and the way to succeed isn’t always clear. So it’s possible for an entrepreneur to say ,“I just haven’t figured it out yet,” without giving in to the fatalistic, “God! I’ll never figure it out.” Or there may be constraints that make it difficult to just walk away, borrowed money for instance. Or the entrepreneur is identifying a little too much with the work (I.can’t.fail) or the business (a passion project) to easily give it up. Or a partner (or family member) is providing financial (and emotional) support and a longer runway.

Another possibility is that people have different standards for success. Even if a small business isn’t meeting financial goals or benchmarks, there may still be other positives that make up for it somehow. Like control: the satisfaction of being your own boss, choosing what you do and how you do it, living life on your own terms. Or the sense of belonging and purpose when you see yourself serving your community or bringing something into the world that makes it a better place.

On Sunday, Darren, my other partner in Origami, suggested a more prosaic (more poetic?) reason: that it’s just one step after another (habit, inertia) and, easy as that, you get somewhere you never meant to go. You never meant to not make money in your business, but, step by step, that’s what you did. You didn’t aim for the result. You got on with the day’s work and worked hard (with a vague hope of things going your way) and you got a little lost. You arrived at the result sort of aimlessly.

It’s this last theory that interests me the most. The intentions are good, the desire’s there, the effort’s there, but the results aren’t. And the results aren’t there because, at some level, the effort was carried out without purpose and understanding.

Reasons why small businesses stall

By purpose, I mean that struggling small business entrepreneurs are less likely to have well-defined goals or to consistently measure their progress in achieving well-defined goals. Instead, their goals, along with their plans, are always shifting. Their energies go all over the place.

Goals can be simple: make $20K more in profit this year than last, as an example. They just need to point toward the desired happy future. And be well-defined. And progress has to be measurable and tracked. This really simple, time-tested approach replaces the bad habit of aimlessly doing what you’ve always done (or doing something different every day) with the good habit of doing what’s needed to hit the current goal, which, if hit, leads to the next goal, and the goal after that, and, eventually, to your ultimate goal.

By understanding, I mean that struggling small business entrepreneurs don’t quite grasp that they have three roles to play in their businesses: employee, manager, and investor. An employee is an individual contributor who has a specific function in the company and is accountable for their own work. A manager is responsible and accountable for the work of the employees that they manage. An investor holds the manager accountable for generating a return on the investment that they’ve made in the company. To make money and grow, small businesses need their owners to play each of these roles rather than defaulting to the employee role.

The entrepreneur as employee

Most small business entrepreneurs build a business around something they know how to do: baking, personal training, woodworking, etc. So it’s easy for them to jump in, do that, and start making money. Unless the entrepreneur has an unrealistic view of his abilities as an individual contributor, it’s reasonable to assume that the business won’t suffer because its first employee doesn’t have “what it takes.”

The tricky part is that, in addition to his core skill, his business needs all sorts of other standard skills that he may not know or be good at: sales, marketing, account management, accounting, finance, operations, IT, HR, etc.

It’s a dilemma. If he chooses to take on these other roles, he’s going to get distracted from the core work, the lifeblood of his business. Or maybe, once he tries them, he discovers he’s just not very interested or capable in these other areas. But if he ignores them, the business won’t run right: it starts and stops, lurches this way and that, spends more time in the ditch than on the road. The supporting work has to get done. That’s not the question. The question is how to find time and how to allocate time.

Now, if he’s able to find customers and start generating revenue, or if he’s raised some capital to launch his business, great, he can exchange money for time. He can hire employees to offload the volume in his core revenue-generating work or to take over the supporting, behind-the scenes work. But this means he has to recruit and train those new hires and supervise their work. Which means he has to play his second role in his business, that of manager.

The entrepreneur as manager

In reality, the entrepreneur has to play the manager role whether he hires employees or not. Every business has to be managed, even if managed badly. Every business has to have a manager, the person responsible in the eyes of the world.

The employee work is tangible. It produces results that can be counted or measured. The manager’s work is intangible and harder to define. As a result, the tangible-work-focused entrepreneur is tempted to ignore it. Because when he’s doing what he thinks is management work, it doesn’t feel like he’s really doing anything at all. Giving in to the temptation is a costly mistake.

A manager is responsible (and accountable) for the output of his team. In larger organizations, he’s also responsible for their professional development and growth. He has to determine what his team needs to do their jobs. He has to make sure they have those resources when they need them. He has to define processes his team follows to ensure they work together efficiently and produce high quality work. He has to set performance targets for his direct reports and review their actual performance against these targets. He has to motivate, support, and correct. He has to hire and fire.

At the higher-up, executive level, the manager has to set the overall objectives and direction for the company. He has to make the decision on which opportunities to pursue, which resources to commit, and which strategy to use. He has to come up with the annual and long-term plan. What are we doing? Where are we going? How do we get there?

Of course, it’s the manager who’s responsible for the overall results of the business. If the business doesn’t make money or doesn’t make enough, it’s on the manager. He’s not doing his job. He’s the one who has to figure it out, and figuring it out means more than telling the entrepreneur as employee to work harder.

All of this seems a little much in the small business context. But it’s the main principle that matters. In any successful and growing business, there’s someone doing the work, someone coordinating and overseeing the work, and someone setting the overall direction. If you’re working for yourself and you’re not doing the manager job in your business (or don’t know what that is), then you’re working for a bad boss.

The entrepreneur as investor

The role of the investor is simple. The investor expects a return on his investment, and he expects the manager to deliver it for him. As an owner, the manager works for him after all. If the investor is not getting the return he seeks and if, after objectively studying the prospects of the business, he doesn’t expect to get that return in the near future, he’ll take his capital out of the business and seek the return elsewhere. At least, that’s how things would work if the business was publicly traded. But, in our small business case, the entrepreneur as investor can’t walk out on the entrepreneur as manager. They’re stuck with each other.

What the investor can do is draw the manager’s attention to the gaps in financial performance. The entrepreneur as investor can hold the entrepreneur as manager accountable for his failure to perform. He can question the use of scarce capital, rein in vanity spending, oppose high risk, low reward projects. He can demand that the manager of his struggling or stalled business come up with a plan for turning things around and a timeline for when the turn around is to start. He can’t threaten to fire him, of course, but he can hector and cajole, keeping the manager focused on financial results. He can, in short, become an activist investor. The type who lights a fire under the inept, underperforming, too casual manager.

Wrapping up

To become a better writer, Benjamin Franklin made it a habit to rewrite from memory examples of strong writing he happened to come across. The surest way to acquire a skill, he reasoned, is to study and emulate the skill of those who are already the most capable in the field.

An analogy to becoming a better entrepreneur and business owner is to study and emulate the approaches and techniques used by more successful entrepreneurs and businesses. Deciding to be an entrepreneur is just the start. Becoming an entrepreneur, a good one (which is the same as a successful one), means a steady commitment to learning, trying, and improving. Sam Walton wrote in his autobiography, modestly perhaps, that he was willing to “learn from anyone” and that “most everything I’ve done I’ve copied from somebody else.”

Successful businesses tend to be larger businesses, businesses with many employees, managers, and investors. Their employees are more productive than the employees of less successful businesses. They have more resources to recruit and support their employees. Their employees’ individual contributions are higher. These businesses require greater coordination of effort and resources. Their executives and managers must face and resolve more complex operational and strategic issues. Their investors demand consistently high rates of return on their invested capital, serving as a constant spur to correct action. Each group plays an important role in moving the whole business forward.

Again, all of this may seem far removed from the concerns and realities of small business. What I’ve come to understand and appreciate, however, is that, in the same way the concept of a balance sheet applies to both the largest and the smallest business, the roles of employee, manager, and investor apply at both scales as well.

Every small business entrepreneur struggles to some degree in moving their business forward. For some, that struggle becomes entrenched. If you’re in this group, I think the way forward is to take a moment and consider whether you understand the different roles you have to play in your business and whether you’re playing those roles at the level required. If you see that you’re not, it’s OK. As an entrepreneur, you’ll always have something to learn.