How To Boost The Value Of Your Business

All too often banks, potential investors, and creditors will determine a company’s value based on financial statements. This is a mistake. Financials don’t come close to telling the true story. Sure, they present the tangible value. But what about the intangible value? Company valuation is emotional—a company is worth what an acquirer will pay, what the market will pay, what the interested parties perceive. We see evidence of this frequently when companies with a trickle of revenue are acquired for gushing millions or even billions of dollars.

Maybe you aren’t planning on raising financing, securing a credit line, being acquired, or one day going public. You still need to continually boost the value of your company. A higher-value company has more options. It gets the right partners, preferential terms, and often a more glorious future. There’s an art to value-boosting, and I am going to tell you how to do it. First, know the facts:

• Company valuation is emotional.

• Intangibles often matter more than tangibles.

You can’t build value if your business isn’t enticing.

• You should always be selling: to financiers, customers, strategic partners, staff, and strangers.

I’ve used some or all of the following seven value-boosters to quintuple the value of my clients’ companies and my own. These value-boosters have also worked for companies such as Google (GOOG), Microsoft (MSFT), YouTube, and many, many more.

1. A killer team and a killer business plan.

2. A hot board of directors and/or advisory board.

3. Specific strategic alliances. An LOI (Letter of Intent) with a partner ain’t gonna cut it. You need a binding contract spelling out exactly what the terms of your deal are. Clarify how many widgets they will buy/distribute/co-market, the time period, as well as what happens if they default on the agreement.

4. New sales channels. Distributors, value-added resellers, outside sales forces, affiliates, joint-venture partners—all boost the value of your company. Of course, you’ll track the performance of your sales channels. Use the affiliate tools in your online shopping cart to track the performance of your online sale channels, and use your accounting system or sales force management software to track all others.

5. Product line extension. Let’s assume you sell a supercool widget. What’s next? Son of Widget? Platinum Widget? Widget Extraordinaire? Map out your future product lines so financiers, partners, and staff can see where you are headed and how you plan to get there.

6. Intellectual-property (IP) portfolio. Protect your corporate jewels! A patent portfolio can be worth gold. A friend of mine sold his company for $425 million (with about $30 million in trailing revenue) because he had locked in so many patents. That’s what the acquirer bought. They didn’t give a hoot about the business.

7. Compelling prototype of product. This is key when you’re in the zero or near-zero revenue range, as you’ll see below. People need to see/touch/feel what the product will be like. Then they can envision your fabulous future.

Consider this example. A professional services firm with an initial value of $2 million hired me to help boost its value. But the trouble with services firms is they are often valued at only revenue times one. Ick. So we beefed up the board and advisers (adding $1 million in value), helped nail down specific strategic alliances ($3 million), mapped out a line of “productized” services ($2 million), and developed new sales channels ($2 million). About six intense months later, the firm sought financing with a respectable pre-money valuation of $10 million. It closed the financing in three months.

Then there is the example of the Internet promotion company I was asked to assist. It started with no revenue. Before seeking financing, my team and I had to answer the question: How do you make an idea into a hot commodity? The solution consisted of pulling in a rocking team and coming up with a hot business plan (adding $1 million in value), developing a compelling product prototype ($1 million), locking in killer alliances ($1 million), and building an IP portfolio ($2 million). We took its value to $5 million in four intense, somewhat sleep-deprived months. Then we raised $2.5 million in financing with a pre-money value of $5 million, and a post-money value of $7.5 million. The $2.5 million invested bought one-third of the company.

Value is about potential. Potential today, potential tomorrow. The main reason you keep building value in your company, in all the tangible and intangible ways (and as I’ve shown you, the “intangible” ways often do have dollar values attached to them!), is because a high-value company gets the financing it wants on the terms it wants. It also gets multiple acquisition offers at fabulous terms. The high-value company gets the alliances, the staff, and the opportunities it wants, too.

Remember, you are selling the future as you are selling the present. The present must look promising for the future to be potentially glorious. What are you doing to boost the value of your company today? Contact us

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Due Diligence 101 or What You Do Not Know Can Kill You!

Introduction:

This article is written as a general discussion on the subject of “Due Diligence”. It is for informational purposes and not intended to be a definitive guideline for your exact situation. You should consult the appropriate professionals with regard to your specific transaction or situation. Further, this article is in no way advocating, suggesting or implying that anyone engages in any type fraudulent activities whatsoever. These are simply the things a buyer should be aware of when doing due diligence in buying a business.

You spent months finding the right business. The seller says that you cannot go by what the tax return shows but the business is making a lot of money, and he can prove it. Your inspection of the profit and loss statement shows that sales have been increasing slightly in the last few years. Most important, and the best news of all is; the price is right! Does it sound too good to be true? I am sorry to tell you this, it probably is.

I think it was Benjamin Franklin who said, “A fool and his money are soon parted.” Mr. Franklin must have known a lot of business buyers. When buying appliances that break in a month, it costs you a few dollars. When you go to a swap meet and are cheated because the solid gold watch is really gold plated, it costs you a few hundred bucks. When a used car salesman cheats you, by selling you a lemon, where the speedometer has been turned back 100,000 miles, it costs you a few thousand dollars. Getting cheated buying a business can cost you millions of dollars. The only investment or purchase that I know of where you can be cheated out of more money is in the area of real estate. Real Estate fraud can runs into the hundreds of millions of dollars and does.

I hope that the point is made. Never buy a business on someone’s word. Actually, you should never buy anything on someone’s word. Confirm everything, believe nothing and understand that you are still going to find out things, after the close of escrow, which is going to surprise you. A similar example is one known by every employer. A staff worked for a company for 4 months and complained to the personnel officer that the job was just too difficult. He kept complaining that he needed more training and lower quotas. You feel sorry for him. You talk to him and talk to him about it. You listen and believe all the excuses he gives you for poor production. Finally he quit, blaming you for something that you did, this just before you were going to give up and fire him. Then you started to take over the work of finishing his incomplete projects. This is what happens when you buy a business. You find out all the actions that the seller, not his staff, had stopped doing, from the day that he decided to sell the company.

Many businesses are doing well. Sometimes the owners have personal things going on in their home life. Sometimes they have medical problems. Many times the business is not doing well and the seller is frustrated. It is very common for a seller to work hard to build his business, but because of many reasons, it doesn’t produce what the seller wants. He gets frustrated and one day he gives up. That is usually the day he calls that business broker he met and asks the big question. How long will it take you to get me out of this place? In his mind, he is gone. He just counts the days until he physically walks out.

Have I scared you? Good. There is a plus side. It is worth all the grief that you go through to buy a business when you get in to the drivers seat, put all the marketing actions into place and start driving your own business.

In 2005 I had a client who buy a manufacturing business for $5 Million dollars. The seller swore it was making $500,000 profit per year. Due Diligence showed it was only making $300,000. When presented with the auditors report, the seller claimed the audit was wrong. The buyer bought the company, knowing he was overpaying for the business. Why? He had done his research on the production department and sales department. He went out on the deliveries with the drivers, and met customers. He determined that he could double the sales and profit within one year. After he bought the business he found two things to be true. The profit was $300,000, as my audit found. He could double the sales and profit within 12 months, and did. The seller tried to screw the buyer, but in the end, justice was served. The seller screwed himself more than he screwed the buyer by not running his business correctly. If he had he could of sold it for a lot more than $5 Million dollars.

Ok, enough with the fun stories for now. Lets get down to the details of what to look for when doing “Due Diligence.”

Due Diligence Defined:

The phrase is composed of two words. “Due” which the dictionary defines as “Proper or Adequate” and Diligence, which is defined as “Degree of care or caution expected of a person. Especially as a party to an agreement.” Caution: is the watchword in this definition.

Financial Statements – What to look for:

If you bought the business through a business broker you should have received the business financial statement with a separate worksheet showing adjustments to those statements. These adjustments show the owner’s benefits received from the business besides the profit and salary he receives. These can also be defined as personal expenses that need to be added back to the profit. Depreciation, incomes taxes, interest expense are add backs that are not personal. Personal includes such things as family auto expenses, owner life insurance, owner health insurance, business entertainment that was not really spent on clients, business trips not really for business, home office expenses, family cellular phones and much much more.

Make the seller show you the details on some or all of these expenses to verify that they are really personal and not actually business expenses that shouldn’t be added back to profit. Spend time asking detailed questions with the general ledger in front of you. Go through individual charges and what they mean, until you fully understand what is being added back and why.

Inventory:

Inventory of resale merchandise must be checked for two reasons. One is you have to pay for it. Be careful, you do not want to buy merchandise that is old, worthless and not saleable anymore. Only pay for current marketable product. The price you are suppose to pay for the inventory is the seller’s cost. The price for old slow inventory is negotiable. Always spot check the price and count the merchandise listed on the inventory list. Do people put down that there is three of an item when there are only two? Of course, especially when they think no one is going to be checking them out. Comparing prices from purchase invoices is how you check prices. You cannot check every item against the actual cost but you can do 5% of the items. Pick at random, not by any suggestion made by the seller or others. If you do not understand how marketable the inventory is that you are buying, hire an expert, from that industry. Your Accountant should be able to help you in finding someone. Do not be cheap, and think you do not need to spend the money on an expert adviser. I will take a lunch bet that they will pay for them selves many times over.

The second reason for checking inventory is that if a seller doesn’t take inventory at least yearly and adjust his inventory value in his accounting records, accurately, the profit figure you are receiving will not be accurate. As a rule, the higher cost of goods sold, the lower the profit. Some business owners reduce the inventory value on the books, intentionally, to a lower value so as to make the business show a higher cost of goods sold, which then creates a smaller taxable profit. If they do this year after year, the profit may or may not be accurate for the current year. It might take a CPA to figure this one out for you, if you do not have a background in retail.

Next thing to check on the financials is the real, current value of the equipment you are buying with the business. The balance sheet might, if it shows all the equipment the company owns, give you the cost of the equipment when it was purchased. If you are buying assets rather than cash flow, the equipment valuation becomes more important. No one wants to overpay for used equipment. Also check that the equipment works and is actually being used rather than sitting behind the building with other junk.

Cash Sales:

If all income is being reported, check sales volume activities that you have observed against the daily records during your “Due Diligence” to see if the volume corresponds to what was reported last year in the same month. If you see income of $500 per day but the seller shows sales of $1,000 per day, you need to find out why. Some smart buyers sit in the business all day, watch the sales and observe the activities of the staff. This works if the seller is not putting on a full fledge production fraud for you the buyer.

Fraud:

How does a seller defraud a buyer on current sales activity levels? Sellers who keep poor records or no records, many times, suggest the buyer doing a 15-day visual inspection. This helps but it is very dangerous to rely solely on physical inspections alone because the seller can still defraud the buyer. Here is the most famous of the stories I have heard over the years.

Seller owns a dry cleaner. The buyer and seller have opened escrow and the deal is subject to a 15-day physical observation period. The seller doesn’t want the buyer to find out that business volume is very slow. The seller tells all his friends to bring their drycleaning in to the shop for a two-week period, at no charge. They bring in the clothing, get it cleaned, pick it up and pay for it. Later the business owner meets the customers and reimburses all of them for the cost of their dry cleaning. The day after escrow closes all that business traffic stops. Think it never happens? The same is true of restaurants. Seller tells all his friends to bring all of their friends in for a free meal. Customers pay the bill and some time later or at home, the business owner reimburses all the customers for the cost of their meals.

Actual time sellers spends working:

Determine how many hours the seller really works. You are buying an income stream based on a known number of hours of work. Make sure the seller isn’t working 80 hours and telling you he is only working 40 hours, per week. I had an absentee fast food owner tell the buyers and me that he worked part time – 5 hours per week. Closer inspection showed he was working 25 hours per week. One auto repair seller, we’ll call him Bob, said he never was at the business, because he had a second full time job. Inspection found he was working 30 hours a week (4 plus hours every night, and 8 hours on Saturdays).

Find out what job functions the seller does:

Get a list of functions that the seller does. Is one of them bookkeeping? Sometimes the wife does the books part time and this is never said. Again you may find the owner does the bookkeeping, at home, every night, for an extra hour. In an auto repair shop, you may find the owner is doing auto body repair work, personally, on Saturdays, which is work that you, as a buyer, will never be able to duplicate. You need to be sure you know how to do every job function that the seller does or learn them. The time to find out what technical knowledge you need to have to take over the business is when you are doing your investigation, not the day after escrow closes.

Verification of things that are not on the Financial Statements:

It is a common occurrence that businesses do not record all of their income on their financial statements. Yes, this is true. Many people do not, in fact, report the truth on their tax returns. In fact, when I am talking about small retail or service businesses that deal with the public directly, I find it is over 50%. “Will the people with an honest set of books, please leave the auditorium. There are two golf carts outside waiting to chauffer you home. You do not need to hear this.”

The balance of this article will discuss how a buyer might do their “Due Diligence” for different types of businesses. These types of businesses include Restaurants, auto repair shops; real estate services contractors, non-real estate repair/ services, and retail stores.

Restaurants- Non-Franchise:

Restaurants compose over 25% of all businesses for sale in some countries. This is not because they all go broke, as the SBA reports. It is because 28% of all retail businesses are food service or food sales. It is the largest segment of the consumer market. Because it is a retail consumer business, it deals in 33% cash. Every independent-non-franchise food service business I have been into shows zero profit on the books. Some even go overboard and show a tax loss. It is because they do simple tax planning that does not require an MBA degree to figure out. If the business doesn’t show all of its cash, or any of its cash, the expenses will equal the reported income. This alone makes it attractive to many buyers. We will not discuss the moral issues of this attitude; it is what it is. What we have to discuss is how do you, the buyer, can prove that the business is making a profit? And if it is, how much?

Restaurants come in two categories. 1. Fast food-counter sales. 2. Sit down. Fast food restaurants have computerized cash registers that record the sales into its computer, which has a memory. This memory has daily totals going back to the beginning of the computer’s history. Most owners close out their cash registers at the end of the day and print out the tape of each day’s activities. This does not automatically wipe out the information for the day. The computer does, I am told, have a delete button on it allowing the owner to wipe out the full memory in the computer, in the event of an audit. I have also been told, but do not believe, that an electrical blackout can wipe out the memory in the computer and that is why one seller said he couldn’t give me access to this information.

If we are talking about a sit down restaurant sales information, you can use the daily order ticket, which are then imputed into the computer. This gives 3 sources: tickets, computer and daily tape totals.

When this information is not available, for any reason, an experienced restaurant consultant can tell you the sales activities just by inspecting the restaurant and counting the number of customers eating at 4 key times in a day, and on several key days per week. Then the consultant can figures out what the average sales ticket amount is. With this information like magic the consultant knows the gross sales figure, for the year.

A double check procedure for restaurant consultants is to then look at the food purchases and its costs and can confirm that it matches the actual sales figures. One consultant that was hired to review a restaurant did the audit and put together a marketing program for the buyer. The marketing program included delivery and catering. Both of which do not normally show up on the computerized cash register.

Restaurants – Franchise:

You would imagine that franchise restaurants records would be very accurate because the franchise company gets a percentage of the gross income. The bigger ones connect up to the individual franchise and know what is happening faster then the owner. As stated above, the only sales that can be made and not declared to the computer are catering or delivery orders, which could be done without ringing them up.

Some franchises do not hook up to the individual franchise computers and do not do audits regularly. This allows the franchise to report reduced income to the company and the IRS. In case either comes to audit, they press the delete button on the computer. If you as a buyer can get access to the computer you know the numbers are correct even if they are not complete. It is impossible for the staff or the owner to change the computer records. The information can only be deleted. Again catering and take out may not be on the computer. Theft from employees can only be in the form of 1. Employees that give free food to friends. 2. Employees not ringing up an order, which is difficult when businesses put up signs saying, “If you do not get a receipt, your order is free.”

Some sellers are so paranoid of the IRS, they are not willing to show anyone their private records or computer tapes for fear that the buyer could be an IRS agent. My personal opinion, and what I advice sellers to do, is to get their books legal and honest and hire themselves a top notch CPA firm, like Crowe Horwath Jamaica , and use every legal trick in the book. Martha Stewart didn’t go to jail for inside trading. They got her on lying. There are legal ways to avoid taxes so that fraud is not necessary. If you cannot find a good accountant, I will recommend one.

If you ask someone “Are you a government employee or IRS agent?” and they lie to you; that might be considered entrapment and a good possible defense in court. But, I ask you. Is it worth the grief?

The normal action of sellers, in this situation, is to require that the buyer take the business based on the recorded records and guess as to how profitable the place really is. This is a very difficult situation for the brokers and buyers, since sellers do not price their business based on these reported numbers but base their price on the real numbers.

I hope this is of some help to you in doing due diligence on a restaurant you might be interested in buying.

Auto Repair Shops:

Auto repair shops are almost as bad as restaurants when it comes to under-declaring cash. The normal procedure for most, I have run across, is to declare only the checks and credit card charges. The cash they put into their pocket. The good thing, in doing audits is that almost every one of these owners keeps their work orders-invoices. These are kept in monthly manila folders and put into a drawer or file cabinet. They never tell you that they keep these records, but they do. They even tell me, as the broker, that all backup documents have been destroyed, but they are not. When I insist that they cannot sell their business without providing these invoices, they tell me of their existence. With the sales invoices an audit of income becomes simple. Since the sellers keep them in a manila folder by months, you only have to pick monthly folders at random and total the actual invoices. Then compare them to what the “State Board of Equalization” report says and calculate what percentage of the total was declared. If you do this for a few months, a pattern will develop. Some sellers have even run a calculator tape of the month’s activities and/or written it in a private ledger. You can check the actual invoice tapes against the private ledger records to confirm the private ledger information is correct.

Real Estate Services/Repairs Contractors:

Real estate service contractors include new construction general contractors and sub-contractors, contractors that come to your house to offer repairs on your house (plumbers, heating and air-conditioning contractors, gardeners, landscapers, termite companies, roofers, carpet cleaners, cabinet re-modelers, carpet/drapery stores, tile stores, pool service providers, pool installation contractors, landscapers, etc.) These contractors, if the owner does the work himself, do not keep their job tickets-invoices after they are paid for their services, in cash. If the company has service men, then the owner is usually the dispatcher or other administrative person. In this situation seller, most likely, will have kept all of his invoices, so as to be able to look up prior history records of their customers. They might not have recorded the income on their records but they will have the basic records. Theses records may in a total mess, but the records do exist. If they do not, then buy the business based on what the seller can prove to you, or what you can reasonably estimate based on what percentage of the business you think is cash. What they are only going to prove to you is the total of checks and credit card charges, which is what the seller has declared on the tax return.

Non Real Estate Repair/ Services:

Non real estate repair/service companies include such things as large and small appliance repairs, barbershops/hair salons, nail shops, massage parlors, health clubs, pet grooming, wedding photographers, and movie theaters. These businesses usually do not even write up a ticket so unless a central cash register is used for recording income there will be no record at all. Again this is like a restaurant with cash register tapes. If the work is done at the customer’s location, then you study the serviceman’s truck schedule. If you only have some work records, from some work done in the field, you can determine what the average repair dollar volume is and then if you calculate how many calls are made on an average day, you only have to multiply the two numbers.

If we are talking about hair salons, nail shops or barber shops we can gather information about how many chairs there are, how many chairs are rented on a weekly bases and what rent the owner is collecting. If the technician is not paying rent then they are on a commission split. If you know the rental income and the income split you are well on your way to determining the real profit of this kind of business. Remember to ignore the income of the owner since you as a hairdresser or non-hairdresser owner would not get the income of the old owner. The old owner will probably rent space from you so you only add another rented chair to the income.

Retail Stores:

A retail store is a store that carries an inventory of products that they resale. Sometimes they offer installation, which then might put them into the service company instead of a retail store. The main distinction is that they sell a product instead of a service. This includes everything from Home Depot, pet stores, clothing stores, gift shops, supermarkets, vitamin stores, and sign shops. Retail stores have cash registers and daily tapes of their sales. This is handled similarly to a restaurant and should be audited in the same manner. (See Restaurant Section Above) In addition to the cash register information, you also have purchase records, which can be studied to determine the cost of the merchandise as a percentage of the selling price. With this relationship-percentage of cost to sale price known you can calculate either the cost of goods sold or gross sales if you have either to start with. A few smart owners buy some merchandise for cash in order to prevent a tax auditor from catching them by using this same manner. If the seller does this, he will admit it to you, if you ask.

When All Else Fails With a Retail Business:

The only way to protect yourself is disclosure so that you have grounds to sue for fraud. Make the seller put the real sales numbers, cost of goods percentage and any other information you are given and can not document down on a piece of paper and then have the seller sign and date the paper. If after the close of escrow you find the seller lied to you, the document will give you grounds to sue for fraud or misrepresentation. The important thing is be able to show a judge in writing what the buyer told you and to be able to show that he did this in writing. If the seller told you but never did it in writing you cannot prove it. “If it isn’t written, it isn’t so”

Medical Professions and Non Medical Professionals:

Professionals are a form of service business; except they charge a higher hourly rate and they have to keep patient/client files. Most people pay their professionals by credit card or check, because these expenses are usually tax deductible as medical or financial advice. If the seller doesn’t declare all the income, ask what back up records there are. Clients always get receipts for services and payments. There are records, find them and you will have all the income.

When all else fails in Figuring Cash Income:

If you have followed all of the earlier advice on documenting cash income and they in truth do not have documentation, you are in big trouble. You may have reached the end of your rope. You now have Two option left. 1. Walk away. 2. If you still want to buy this business I only have one last suggestion. It is not fool proof but it is a method. Cash appears to be approximately 30%-35% of total sales. You could make this assumption to come up with a real total. Add 50% to the sales showing on the books, this amount is from credit cards and check sales. This is not an exact science; it is only a close estimate. Cash sales could actually be anywhere between 25% or 35%. I never figured it that close.

Cash Expenses Verification:

When you think of unrecorded cash transactions we usually think of undeclared income. Undeclared income is the biggest category, but not the only one. The other is cash expense not deducted on the books. The biggest expense item in this category is cash payroll.

Unrecorded Cash Payroll:

In an attempt to reduce the payroll expense, business owners will pay some of their staff’s payroll in cash. Why would they do this? Workman’s Compensation Insurance, FICA Taxes-Employer and Employee portion – Federal and State Income Taxes. Any accountant would scream at his client “You are missing out on a legal tax deduction.” Let me explain why someone would forego the tax write off by paying cash expenses.

When you pay an employee $100.00 per day, on the books, the employee gets about $70.00 net on his check. If you give him $80.00 in cash, he is happy. He doesn’t have to worry about going into a higher tax bracket.

The employer has to pay approx 10% to cover the employers FICA and other Federal employment taxes. You, as employer also have the workman’s compensation insurance premium. If we are talking auto repair mechanics compensation insurance alone costs 15%. If we are talking new real estate construction workers we can be talking a cost rate between 25% up to 120%. A roofer’s compensation premium is greater than his gross salary. Lets look what payroll taxes cost for a normal worker. The auto mechanic insurance rate of 25% is added to the 10% Federal costs plus the wages give us an expense that equals 135% of the wages. This comes out with the employer paying $135.00 and the employee receiving $70.00. There is a loss of $65.00 per day per employee. Some employers would rather save the $65.00 and not get the income tax deduction for the expense. Also with all the unrecorded cash the business shows, it isn’t important to have a loss on the books, since there is no need for more deductions to lower taxes. The business is already not paying any taxes.

Because there is a danger that an employee might be injured and file a claim under workman’s compensation insurance, it is common among small businesses to show part of the wages on the books and the balance in cash. This means that an employee earning $40,000 per year might have $18,000 recorded on a W-2 form, creating a very low federal tax rate or no tax due at all. Since the employee is being paid part of his wages on the books if he is injured on the job he is fully insured for accidents with State Workman’s Compensation Fund, State Disability Funds, State unemployment insurance and all Social Security benefits. A win-win for employer and employee, even if not for the government. As a buyer you must figure all this out, and adjust the expenses accordingly.

Because owners are collecting so much cash, they need a place to spend it. If you make a major purchase, you cannot just walk in and pay cash for a car. The IRS will be notified of this cash transaction. Owners with a lot of cash will pay for all repairs, gardeners and everything for the home that costs less than $10,000, in cash. Why $10,000? That is the recording cut off that a vendor or bank is required to report when receiving funds in cash. If a business owner still has too much cash, sellers will start paying for business expenses. They start with the expenses where a service man gives a discount for cash. I found two restaurants that were paying for the hood cleaning service in cash, partly because they got a discount for paying in cash. By asking the correct questions, you can discover what is being paid in cash.

Unrecorded Labor:

Because we are talking small businesses, the wife comes in to the business full or part time. One of the children may come in to work part time. You must be aware of these employees who may or may not be paid. This is another form of cash payroll. If you have to replace these people with paid employees, these expenses need to be calculated in to the adjusted profit and loss calculation. .

Sometimes the family member is being paid some wages but not full market value. The adjustment is still needed but in this case only by the difference between actual payroll and the fair market payroll amount.

Conclusion:

It is a hard life when you own your own business; you work long hours. Many people feel that is better than the alternative, which is to work for someone else, pay high taxes, never know if you will be laid off and after years of hard work, never have anything to show for it all.

If you are going to buy a business with your hard earned money, you want to make sure you get what you paid for. Many people believe it is all right to cheat the taxman but otherwise are very honest citizens. Others feel it is all right to cheat any poor sucker that comes along. Don’t be a sucker, do your due diligence and get what you paid for.

Then build your new business into something you can be proud of and enjoy. While building your new business make a point to study everything you can about Tax planning, tax avoidance and reducing taxes legally. I started my professional career learning about the tax codes, and there are so many ways to save taxes legally, you would never believe it. You will sleep better at night, I promise you. Then 10-20 years from now when you want to sell your business, you can ask top dollar and get it. This because a buyer can do a simple due diligence and know that your business is doing exactly what your books say you are doing.

DO YOUR DUE DILIGENCE and buying your own business can be a pleasant and rewarding experience!

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Ten Entrepreneurial Mistakes

It’s hard to avoid certain mistakes, especially when you face a situation for the first time. In fact, many of the following mistakes are hard to avoid even if you’re an old hand. Of course, these are not the only mistakes CEOs make, but they sure are common enough. Take the following self assessment: give yourself ten points for each of these entrepreneurial blunders you are in the process of making. Deduct five points for those you have narrowly avoided. Your score, of course, will be kept confidential, but do seek help. Fast!

1. Big Customer Syndrome

If more than 50 percent of your revenues come from any one customer you may be headed for a meltdown. While it both is easier and more profitable to deal with a small number of big customers, you become quite vulnerable when one of them contributes the lion’s share of your cash flow. You tend to make silly concessions to keep their business. You make special investments to handle their special requirements. And you are so busy servicing that one big account that you fail to develop additional customers and revenue streams. Then suddenly, for one reason or another, that customer goes away and your business borders on collapse.

Use that burgeoning account as both a cause for celebration and a danger signal. Always look for new business. And always seek to diversify your revenue sources.

2. Creating products in a vacuum.

You and your team have a great idea. A brilliant idea. You spend months, even years, implementing that idea. When you finally bring it to market, no one is interested. Unfortunately you were so in love with your idea you never took the time to find out if anyone else cared enough to pay money for it. You have built the classic better mousetrap.

Do not be a product searching for a market. Do the “market research” up front. Test the idea. Talk to potential customers, at least a dozen of them. Find out if anyone wants to buy it. Do this before anything else. If enough people say “yes” go ahead and build it. Better yet, sell the product at pre-release prices. Fund it in advance. If you don’t get a good response, go on to the next idea.

3. Equal partnerships

Suppose you are the world’s greatest salesman, but you need an operations guy to run things back at the office. Or you are a technical genius, but you need someone to find the customers. Or maybe you and a friend start the company together. In each case, you and your new partner split the company 50/50. That seems fine and fair right now, but as your personal and professional interests diverge, it is a sure recipe for disaster. Either party’s veto power can stall the growth and development of your company, and neither holds enough votes to change the situation. Almost as bad is ownership split evenly among a larger number of partners, or worse, friends. Everyone has an equal vote and decisions are made by consensus. Or, worse still, unanimously. Yikes! No one has the final say, every little decision becomes a debate, and things bog down quickly.

To paraphrase Harry Truman, the buck has to stop somewhere. Someone has to be in charge. Make that person CEO and give them the largest ownership stake, even if it’s only a little more. 51/49 works much better than 50/50. If you and your partner must have total equality, give a one percent share to an outside advisor who becomes your tie-breaker.

4. Low prices

Some entrepreneurs think they can be the low price player in their market and make huge profits on the volume. Would you work for low wages? Why do you want to sell at low prices? Remember, gross margins pay for things like marketing and product development (and great vacation trips.) Remember, low margins = no profits = no future. So the grosser the better.

Set your prices as high as your market will bear. Even if you can sell more units and generate greater dollar volume at the lower price (which is not always the case) you may not be better off. Make sure you do all the math before you decide on a low price strategy. Figure all your incremental costs. Figure in the extra stress as well. For service companies, low price is almost never a good idea. How do you decide how high? Raise prices. Then raise them again. When customers or clients stop buying, you’ve gone too far.

5. Not enough capital

Check your business assumptions. The norm is optimistic sales projections, too-short product development timeframes, and unrealistically low expense forecasts. And don’t forget weak competitors. Regardless of the cause, many businesses are simply undercapitalized. Even mature companies often do not have the cash reserves to weather a downturn.

Be conservative in all your projections. Make sure you have at least as much capital as you need to make it through the sales cycle, or until the next planned round of funding. Or lower your burn rate so that you do.

6. Out of Focus

If yours is like most companies, you have neither the time nor the people to pursue every interesting opportunity. But many entrepreneurs – hungry for cash and thinking more is always better – feel the need to seize every piece of business dangled in front of them, instead of focusing on their core product, service, market, distribution channel. Spreading yourself too thin results in sub-par performance.

Concentrating your attention in a limited area leads to better-than-average results, almost always surpassing the profits generated from diversification. Al Reis, of Positioning fame, wrote a book that covers just this subject. It’s called Focus.

There are so many good ideas in the world, your job is to pick only the ones which provide superior returns in your focus area. Don’t spread yourself thin. Get known in your niche for the thing you do best, and do that exceedingly well.

7. First class and infrastructure crazy

Many a startup dies an untimely death from excessive overhead. Keep your digs humble and your furniture cheap. Your management team should earn the bulk of their compensation when the profits roll in, not before. The best entrepreneurs know how to stretch their cash and use it for key business-building processes like product development, sales and marketing. Skip that fancy phone system unless it really saves time and helps make more sales. Spend all the money really necessary to achieve your objectives. Ask the question, will there be a sufficient return on this expenditure? Everything else is overhead.

8. Perfection-itis

This disease is often found in engineers who won’t release products until they are absolutely perfect. Remember the 80/20 rule? Following this rule to its logical conclusion, finishing the last 20 percent of the last 20 percent could cost you more than you spent on the rest of the project. When it comes to product development, Zeno’s paradox rules. Perfection is unattainable and very costly at that. Plus, while you getting it right, the market is changing right out from under you. On top of that, your customers put off purchasing your existing products waiting for the next new thing to roll out your doors.

The antidote? Focus on creating a market-beating product within the allotted time. Set a deadline and build a product development plan to match. Know when you have to stop development to make a delivery date. When your time’s up, it’s up. Release your product.

9. No clear return on investment

Can you articulate the return which comes from purchasing your product or service? How much additional business will it generate for your customer? How much money will they save? What? You say it’s too hard to quantify? There are too many intangibles? If it’s too difficult for you to figure, what do you expect your prospect to do? Do the analysis. Talk to your customers, create case studies. Come up with ways to quantify the benefits. If you can’t justify the purchase, don’t expect your customer will. If you can demonstrate the great return on investment your product provides, sales are a slam dunk.

10. Not admitting your mistakes.

Of all the mistakes, this might be the biggest. At some point you realize the awful truth: you have made a mistake. Admit it quick. Redress the situation. If not, that mistake will get bigger, and bigger, and… Sometimes this is hard, but, believe me, bankruptcy is harder.

Assume your costs are sunk. Your money is lost. There is good news: your basis is zero. From this perspective, would you invest fresh money in this idea? If the answer is no, walk away. Change course. Whatever. But do not throw any more good money after bad.

OK, everybody makes mistakes. Just try to catch them quickly, before they kill your company.

To avoid some mistakes in the future, it sometimes helps to ask good questions ahead of time.

 

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Help To Start A New Small Business

Starting a new small business comes with many risks involved. It is not easy to start a business large or small. Starting a business involves a lot of hard work. As you are about to become an owner of a small business, you must realize the challenges which do exist within many different aspects. A small business no matter the products or services offered needs to plan accordingly while achieving the goals needed to exist within the market.

You must network

This is one of the most important steps in starting a new small business. Networking means that you are expanding your network of businesses as well as friends who could end up aiding you in starting your small business. You can join the Chamber of Commerce within your area. Anyone could benefit greatly from the advice of business professionals. Join professional networking websites. These websites can make you more aware of the business world as well as opportunities, which do exist locally to your small business. Embrace your family and friends. Inform them about your new small business while seeking their advice.

Research and understand what you are getting into

A lot of planning, knowing your competition as well as a thorough study of the market is necessary in starting your small business. These are very important points you should keep in mind in starting your small business. Select the best opportunities among the many, which do exist for beginning business owners. You can create or add to an existing business idea. Prepare a business plan. Finalize the plans on what kinds of business you want to have or do currently have. Gain complete knowledge about the market as well as investment opportunities with your company while preparing this business plan. Keep in mind that strategic consultants can prepare these for you .

Family and friends

You might want to consider being funded through family and friends, financial institutions or banks. Each of these options needs some degree of authority over the money, which they lend to you for your small business.

How should I list my small business?

Choose a legal structure for your small business. Run your business as a sole proprietor or you can enter into a partnership or create a limited liability Company. Register the business, which is when you will find out the rules and regulations of commencing your business. Keep a back up for your business by opting for small business insurance.

Do not forget Accounting and bookkeeping. From the beginning, you or someone you hire should keep the books on a regular basis. This will aid you in avoiding any type of future financial difficulty. Crowe Horwath Jamaica have affordable SME packages you can explore . Contact them here

You have various options when searching for ways to finance your business. After the business plan is prepared, the next step should be arranging for the funds for your small business. Calculate how much capital will be needed while looking for the many options available. Remember you want to start a small business first look within your own personal savings. Other options to consider are banks and investors. Financial institutions and investors however will always ask for a share in the management as well as profits. You may need to also submit collateral as a backup for money given by these institutions.

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How To Manage The Problem Manager

It is not a rare occurrence to find people in the wrong job or profession. One reason could be that they just love the social attributes of the job. Some are in the job because they have not been able to get anything better. Others may be on a job because it is the “family business”, and they feel compelled to follow it. Many others begin a work history with the first job they can get and just stay in that industry forever. Your problem manager is defined as a product of one or a combination of the foregoing motives.

Left to his devices, the problem manager can significantly decrease production and staff morale, and contribute greatly to cost increase – quite the opposite of what most company objectives are about. The problem manager can make a large company an unpleasant place to work, and will almost certainly destroy a small company. He may not be quite so difficult to spot. The classical example is the individual, who has the general impression that the entire world rests on his shoulder, and will come crashing down to pieces, if he is not more efficient than he presently is. In the budding stages, he may appear as the supervisor who constantly berates and intimidates his subordinates; the team leader who constantly creates division within his team instead of harmony; the manager who condescends to talk to the individuals in his group but never listens to their inputs; the manager who considers self as better than everyone else, and makes sure that everyone else knows this; the manager, who would “get the job done even if has to do it by himself.” And in their drive to achieve their very personal goals, they ignore or overlook other people in the organisation.

There are too many managers who do not understand what management is about. Despite what many may imagine, management is not about working hard; it is about working easy. An Unofficial Handbook of Management gives the following as the chief attributes of a true manager:
* Likes not doing anything
* Has no trouble telling others what to do
* Fascinated by work – likes to sit and watch work for hours
* Likes sweating the small stuff
* Always been something of a loner
* Enjoy having people despise him just for doing his job
This perhaps looks like an extract from the CV of a loafer, but the fact, which it seeks to express, is that management is not about working hard, but assisting a team to use their individual strengths more effectively.

It may not be quite easy to use a rule of thumb to identify a problem manager without creating the impression of a corporate witch hunting exercise. But there are several ways to make a tidy investigation, which will leave no one in doubt of the objectives. Quite often all that a senior manager may need to do is talk to the junior staff. Many employees will often seek a sympathetic ear to their complaints. If they are not talking, there may exist a larger problem of their distrust of senior management – or just their fear of their supervisors. Talking to the clients of the company could reveal a lot about the strengths and weakness of the managers in a company. Still a lot more can be revealed by looking at the overhead costs of the company. Overheard increase, which is not linked, to increase in productivity in a department should alert to a problem. For the same reason, staff turnover – when one group has more people quitting (or retiring) than others; when there have been instances where several individuals from the same unit have left the company in a short period of time; when one department has higher overtime costs than the others; when the employees in a particular section have been using up all their vacation and more of their sick days than the average – there is usually a problem manager in charge.

Yet it may be a lot easier to find the problem manager than to correct him. Except the individual has suddenly inherited the family business, they are unlikely to have got where they are without being good at something. If they weren’t good at some particular facet of the company, they would quite certainly have been fired long ago. It is important therefore to be able to assess the value of the manager in question to the company and weigh it against their cost to the company. If the manager has increased productivity, by fifteen percent over the past year, stakeholders in the company may wish to overlook the fact that the turnover rate in that department is higher than average. However, if the books show that the cost of sale has increased by ten percent during the same period, because of increased training costs, payment to employment agencies, sick leave costs, and increased overtime, stakeholders will be very much concerned. It is important to quantify the impact of every manager’s performance in monetary terms – or in terms directly related to the objectives of the organisation.

The action of top management with respect to a problem manager will depend on the circumstances. Coaching or advanced training can be recommended. The individual might be transferred to a position with less responsibility for people. Again, it must be observed that many problem managers are a result of company policy. Perhaps the goals set for the individual are unreachable, which has caused their management style; and should be adjusted. Lack of motivation is one other fault in company policy, which may produce a problem manager. If management is not sensitive to the skills of employees, resulting in people being placed in positions in which their ability to perform is not stimulated, one can correctly guess the result. A dreamer should for instance be put in charge of creative tasks rather than the accounting. The detail-oriented person should be put in charge of tasks with more structure rather in strategic planning. And, an introverted loner is not likely to go very far in customer service.

Whatever the action taken, it is important to document and quantify the measurements that are used to determine how the problem manager is hurting the company. Intangible faults should not be addressed. True bottom line impacts should be demonstrated by the use of overhead expenses as well as direct costs. The same measurements should be used to quantify the benefit to the company when the action taken, resolves the problem. An honestly implemented manager reorientation policy has the ability to produce more productive satisfied managers. And when this is achieved, the big picture – achieving greater profitability, becomes much clearer.

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Activity Based Budgeting in Organizations

Activity based budgeting is not new. As early as 1990, some organizations in countries like the USA and Australia implemented this new budgeting program to replace the old and known method of budgeting, the “line item budgeting.”

Activity based budgeting is a method of budgeting in which activities that incur
costs in each function of an organization are established and relationships are defined between activities. This information is then used to decide how much resource should be allocated to each activity.

In other words, activity based budgeting is budgeting, planning and controlling by activities rather than cost elements of an organization. For users of this budgeting program, they claim that it engages everyone in thinking about how they can better create value for organization. It develops a flexible budget based on activity work load that is not as rigid as ledger of the line item budgeting that pre-identifies costs eventhough that cost may not be of use at all.

Activity-based budgeting is simply organized common sense. More specifically, activity based budgeting is a technique for enhancing the accuracy of financial forecasts and increasing management understanding. When automated, activity based budgeting can rapidly and accurately produce financial plans and models based on varying levels of volume assumptions.

Activity based budgeting also can eliminate much of the tedious work in traditional budgeting. Activity based budgeting analyzes the products or services to be produced, what activities are required to produce those products or services, and what resources need to be budgeted to perform those activities. Simply put, activity based budgeting is the reverse of the activity-based costing process to produce financial plans and budgets.

With the advent of powerful and low-cost database systems, activity based budgeting is allowing businesses to reduce costs, better utilize resources, and achieve strategic objectives.

The Australian National Audit Office has identified the advantages of activity based budgeting:

The Advantages

– Output costs are supported by a schedule of costed activities
– Opportunities to examine work processes
– Identifies non value-adding activities that can be eliminated
– Basis of a performance measurement system and direct link between strategic goals and operational realities
– Enables cost profiles to be managed
– Accurate costing data for operational management
– Costs are transparent, understandable and actionable

Disadvantages

– Activity definition may become too detailed and the model may become too complex and difficult to maintain
– Underestimation of the task of collecting activity driver data
– Implementation may be considered a financial management “fad” and there is insufficient commitment from operational managers
– Usually requires buying Activity Based Budgeting software
– Requires training of all managers including budgeting department
– Requires people to really understand what drives their budget
– Eliminates excuse that activity volume changed because it makes visible volume changes
– Requires everyone to collect or estimate activity volume

By understanding how resources are transformed into products or services, and by focusing on the cost of activities, activity based budgeting helps an organisation to obtain a greater understanding of how costs behave in their organization and which activities create significant amounts of cost. Organizations can then begin to control their costs based ontangible activities rather than relatively uninformative general ledger or cost centrereports

 

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A Guide To Performance Management

Nowadays, a great significance is being given to Performance Management, as companies incorporate them in their effective management strategies. However, a lot of people find this process a complicated one, mostly because of the many options that it offers – on the organization, a specific department/branch, a product or service, and on employees, among others.

In order to minimize this confusion, the items below will give you a general idea of what Performance Management is all about as well as the activities that are involved in this process.

What is Performance Management?

Performance management is a process that provides both the manager and the employee (the person being supervised) the chance to determine the shared goals that relates to the overall goals of the company by looking into employee performance.

Why is it important?

Performance Management establishes an outline for employees and their performance managers to assess and to come to an agreement on certain concerns and aims that are in accordance with the overall structure of the company. This enables both parties to have clear objectives that would help them in their work and in their professional growth.

Who conducts Performance Management?

Performance Management is carried out by those who oversee the performance of other people – work/team leaders, supervisors, managers, directors, or department chairs.

What are the processes involved?

Below are the phases of the Performance Management process:

1. Planning

This phase of Performance Management process includes establishing job descriptions and identifying the employee’s essential functions as well as defining the strategic plan/s of the department or the company as a whole.

Job Description

A job description is used to advertise a vacant position, which typically specifies the following:

– The specific functions, tasks, and responsibilities of the position
– The amount of time needed to act upon each function
– The qualifications needed (skills, knowledge and abilities) to perform the job
– The physical and mental requirements of the position
– Salary range for the position
– To whom the position reports

Job descriptions should be disclosed to the employee as soon as he or she is hired. Note, however, that job descriptions are listed using words that make it difficult to measure the employee’s performance. They are in contrast with competencies, which list the skills needed in performing such tasks and are described using terms that can be measured.

Strategic Plan

In effect, a strategic plan tells you three things:

– Where the company is heading in the coming year/s.
– How the company is going to get there.
– How the company will know if it is already there or not.

Included in a strategic plan are the following:

Mission statement – the primary reason why your department (or company) exists.

Goals – associated with the mission statement, they determine the results that will advance said statement/s.

Strategic initiatives – specifies definite steps that must be taken to accomplish each goal. It is a dynamic process, usually examined during periods such as one or two years.

2. Developing

This phase of Performance Management process includes developing performance standards, which offers a scale that describes how a specific job should be performed in order to meet (or exceed) expectations. They are explained to newly hired employees and are later used to evaluate work performance.

Performance standards are generally outlined with the help of the employees who actually perform the tasks or functions. There are a number of advantages with this approach:

– The standards will be suitable to the requirements of the job
– The standards will be applicable to actual work conditions
– The standards will be easily understood by the employee (and performance manager as well)
– The standards will be acknowledged (and received) by the employee and the performance manager

Standards of performance are usually in the form of ratings (1 to 5, A to E) that are used by performance managers to rate the employee’s actual level of performance.

3. Monitoring

This phase of the Performance Management process includes monitoring employee’s work performances and giving feedback about them.

As the basis of feedback, observations should be verifiable: they should involve noticeable and work-related facts, events, behaviors, actions, statements, and results. Feedback of this type is called behavioral feedback, and they help employees improve and/or sustain good performance by precisely identifying the areas that the employee needs to improve without judging his or her character or motives.

4. Rating

This phase includes conducting performance evaluations. This is the critical aspect of the Performance Management process, especially because it is important for performance managers to arrive at an unbiased assessment.

A performance appraisal form has the following features:

– Employee information
– Performance standards
– Rating scale
– Signatures
– Employee performance development recommendations
– Employee comments
– Employee’s Self-appraisal

Why conduct performance appraisals? It provides an opportunity to improve performance in the future not only for employees, but for managers as well. Performance appraisals enable managers to acquire information from employees that will help them make employee’s jobs more productive.

5. Development Planning

This phase of the Performance Management process includes establishing plans for improved employee performance and development goals. This advances the overall goal of the company and at the same time increases the quality of work by employees by:

– Encouraging constant learning and professional growth.
– Helping employees maintain the level of performance that meets (and exceeds) expectations.
– Improving job – or career-related skills and experience.

In closing, Performance Management is a process that, when executed fairly and effectively, can improve the quality of the company’s workforce, raise standards, increase job satisfaction, and develop professionalism and expertise that would benefit not only the employees but the entire organization as well.

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Business Performance Audits

An effective audit process will mean that audit teams will be taking a systematic approach to gathering and interpreting data and information. In order to maximise the value of the outcomes of the audits the management should:

  • Accept that the audit activity needs appropriate resourcing, including training of auditors, education of operational and management staff, and physical and financial funding. If any of these are inadequate, then the quality of outcomes will suffer.
  • Accept that there will be limitations to the data gathered and the outcomes produced, not least because of the influence of the quality and quantity of resources allocated to the audit activity, but also because of the varying standards of judgement and interpretation that may be applied to the outcomes;
  • Focus on trends, take appropriate corrective action on specific issues, but look for trends and patterns that indicate underlying, hidden, problems that need addressing;
  • Ensure that the auditing activity is flexible and adaptable, in order to make it compatible with the culture and structure of the organisation, rather than adopt a rigid, unchanging process which is likely to be inappropriate and producing inaccurate results;
  • Challenge the findings, the audit process will not be infallible, and should be challenged continuously to ensure that it is, itself, performing effectively;
  • Apply the highest possible standards to the interpretation of results and judgement on what action to take, this requires training, experience, expertise, awareness of the internal and external environment, and an awareness of the impact of proposed changes on the motivation and morale levels of staff and managers, and an ability to forecast the impact on the operational and strategic objectives.

    However, there are some dangers that must be avoided in order to maximise the effect of the audits. These include:
  • Overload of data and information, the result either or too many audits being scheduled in general and-or the unnecessary auditing of areas of activity that are obviously performing well. This can be avoided by targeting the audits and schedules more thoughtfully;
  • Overload of improvement recommendations, not in itself a danger, but the organisation can find it impossible to resource, in terms of budget, time, or human resources – all the improvements identified. The answer is to prioritise, focusing on those improvements that will bring greatest value to the achieving of the organisation’s objectives; Complacency, where results are apparently positive in most areas, there is a danger that management will become complacent. By adopting the kaizen continuous improvement approach to auditing, this should be avoided;
  • Over-reliance on the auditing process, by leaving the identification and correction of poor performance to the audit process, rather than the audit process at least in part confirming that positive, continuous improvement activity is taking place; Managers ignoring the relevance of audit findings which is the most damaging response. If managers do not take the audit results and recommendations seriously and refuse to implement, or only half-heartedly implement the required changes, then the value of the audit process is wasted.

    Although the auditing should be scheduled to examine all processes and activity on a regular basis, there is a need for additional emphasis to be given to auditing poor performers. These are activities, processes, functions, systems, where problems are visible or suspected, but the causes are not certain and need further investigation. In these cases management should arrange for ad hoc audits, and-or for these areas to be given priority in current or imminent auditing activity. It is not acceptable to rely on a generic auditing approach. Not dealing with visible or suspected poor performers immediately will allow poor performance to cause immediate and possibly long term damage. Inevitably, the longer the problems remain unaddressed, the more difficult it will be to take corrective action.

    There is a danger that management will see only the audit results and concentrate on the decision making as to what improvements to make, and how to implement these. However, management must remember that the audit results are drawn from the activities of people. This means employees, operational staff, managers, specialists, suppliers, customers, stakeholders. Feedback, shaped and delivered in an appropriate manner, depending on the target group, must be seen as an essential element of effective auditing and successful implementation of changes. Not informing people of the rationale, the purpose, the results, and the positive contribution made by auditing, will lead to low morale and motivation, dissatisfaction, and possibly conflict.

    It is essential that the improvements generated by the audits strengthen the organisation’s capability to compete. In order to ensure this happens, management will need to be aware that: It will often be necessary for improvement action to be prioritised. Where this is the case, then those improvements that will contribute the most value to the organisation’s competitiveness should be given higher priority. This is a responsibility of management, who will need to be appropriately skilled in this task; The business sector and general external environment is changing rapidly, and even relatively recent outcomes and improvement recommendations may no longer be appropriate due to significant external changes. This requires management to be alert to such changes and to have the ability to interpret how their organisation should best respond; After improvement changes have been implemented these will have, by default, altered the nature of activities and processes, and will need monitoring, auditing, to ensure that the effect is positive. It is highly likely that most changes made will need adjustment, especially in the early stages after implementation. This must be an integral, high profile, element of the change process.

    Business Performance Audits are critical to the success of the organisation. The specific functional, process, and activity improvements generated by the Performance Audits are important and must be visible supported by the management. However, strategic and operational priorities will be constantly changing. Senior management must also ensure that the audit activity contributes positively and supports the strategicdirection that the organisation is taking. It is the responsibility of senior management to continuously monitor the effectiveness of the auditing activity in the light of this requirement, and make appropriate changes if necessary.

    To obtain the maximum benefit from Business Performance Audits the management must view them as a critically important element of the business. Appropriate resources must be allocated to the activity itself, to the interpretation of results, and to the implementation of improvements generated. Auditing must be integrated into the continuous improvement approach of the organisation. In addition, the objectives of the auditing process must be to generate improvements that contribute positively to operational and strategic objectives. If this approach is taken by management, then the organisation will benefit greatly from the continuous improvements that an effective auditing process can deliver, enabling it to continue to perform to the best of its ability.

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Leading The Strategic Changes

Implementing new strategies, new directions, new objectives, is introducing change, major change, into the organisation. As such it is essential that the implementation is approached, managed, in a similar fashion to that adopted when major changes are being made. The implementation of the changes must be planned, implemented as smoothly as possible, and then be monitored and evaluated for progress and performance against the desired outcomes, objectives, that were the drivers of the change. The leader must ensure that all aspects of the changes, the new strategic plan, are managed successfully.

The leader is the change strategist, whose role is to lead, to champion the changes, to promote the vision, to keep the organisation travelling in the chosen direction, and to ensure that all those involved in implementing the changes, the strategies, perform to the best of their ability. There are a range of leadership styles that could be drawn on. Some would argue that certain changes need an autocratic, aggressive style of leadership, and, whilst there may be the need for an element of this approach, if used as a single style it rarely results in a positive post-change environment. This is the flaw in this approach, for, after the changes have been implemented, and the strategies are in place, the managers, specialists, operational employees, and all contributing stakeholders, must work together in a harmonious, positive, manner to make the desired progress and achieve the objectives. If the leadership style during the change has been harsh, unforgiving, and aggressive, it may take many months, even years, to re-establish a positive environment, a healthy, goals focused, teamwork driven culture. The only logical choice of leadership style in any major change is one that combines all the styles, but leans heavily to those which focus on a team approach. The leader adopts a flexible, responsive style, that is a blend of the consultative, participative, and democratic, leaving room for an occasional, sparing touch of the autocratic to be employed if absolutely necessary. This style will then be the foundation on which the new, changed, organisation is built on.

Performance at the strategic, corporate level must be monitored by the leader. Changing strategic direction, no matter how thorough the preparation and planning, entails taking the organisation into uncharted territory. The leader is the guide, the expert, the most high profile member of the team embarking on this journey, and as such must be constantly aware of how much progress is being made and, when required, able to adjust the pace of progress and degree of activity to ensure that progress is satisfactory. To be successful in this the leader must carry out monitoring and evaluation activity on a regular basis, demanding timely and accurate information with which to make the assessment. In turn, the senior management team must show that they are successfully cascading this review and evaluation process down into the operational activity areas. The leader must set evidence of achievement of this task as one of the performance appraisal criteria for the senior managers, and they in turn must apply this approach to the operational managers and teams, as discussed below.

The senior managers are the change implementers at corporate level. Their role in implementing and managing the strategies and ensuring that the objectives are met, is crucial. It is these managers that will be leading and managing the operational managers and specialists, and monitoring performance and progress made. One of their roles will be to inform and manage the operational managers, and to appraise their performance. In all of these activities the leader(s) must provide the senior managers with encouragement and the necessary support to carry out their work, but must also appraise their performance and demand improvements where necessary.

At the operational levels the middle and functional managers must assist in making the changes and then achieving the objectives. This includes in hard areas of activity such as the achievement of targets, goals, deadlines, outcomes, objectives, in managing budgets, controlling costs, maintaining quality standards, producing goods or delivering services. It also includes the effective management of soft areas of activity such as in communications, coaching, training and development, managing resistance, and providing support for those negatively affected by the changes. The leader cannot manage at this level, but should regularly ask for evidence from the senior managers that the strategic objectives have been successfully translated into operational targets, deadlines, and goals, and that operational performance is satisfactory.

In all but the smallest organisation the leader will have little regular contact with the operational employees. However, that does not mean that the leader should not be known to them, or that their feelings should not be known by the leader. The role and style adopted by the leader should ensure that the operational employees are aware of the leader, and of the style of leadership being adopted. This is achieved partly through the communication of the mission, or vision, or simply the strategic direction being taken by the organisation, partly through the cascading down of the strategic plans, becoming visible as operational objectives, and partly by the visibility of the leader in channels such as newsletters, the corporate website, and local or national media. Visibility by physical presence, for example in the leader visiting operational activity areas, could be helpful, but is not always possible and must always be carefully handled. The only realistic way for the leader to communicate the strategic plan and direction is through the operational managers, themselves responding to the messages from their more senior managers. However, the importance of the operational employees in helping to achieve the strategic objectives, through their performance at the operational activity level, cannot be overestimated. The leader must ensure that they receive the support, the training, the resources, the quality of management, that they need in order to achieve the operational objectives. Without success at this level, the strategies will fail.

Most organisations have a number of important external stakeholders. The leader must inform and liaise with these, as they are important to the success of the strategies. Shareholders must continue to support the changes, and the leader; lenders will need constant reassurance that their funds are being used wisely and repayments are not under threat; business partners will need reassurance of positive progress being made; suppliers will need reassurance that they will be paid; local authorities and other agencies will be required to provide services; the media will want to report on positive progress but will also be watching for negative news to report; families of employees will need reassurance that their providers are not at risk; and customers will continue to demand that the products or services that they purchase will meet their needs. The leader must be aware of, and respond to, all these demands.

The leader is, without doubt, the most important person in the process of implementing a change of strategicdirection. The analogy with the captain of a ship is an apt one. It is the responsibility of the captain (the leader) to ensure that the officers (the senior and middle managers), the engineers and mechanics (the specialists in finance, marketing, quality, etc), and the crew (the operational employees), are all working to the best of their abilities in maintaining all areas of the ship. With this under control, the leader can then focus on the primary role of maintaining the course that has been set and forecasting and taking corrective action against threats that may lie ahead.

One aspect of managing change, relevant here in implementing a new strategic plan, or direction, is that of celebrating success. Mechanisms should be in place, at senior management, middle and operational management, and operational employee levels, to visibly reward success. Success here could mean many things, including: achieving important milestones or targets; overcoming resistance to change; removing barriers; settling conflict; taking opportunity; defending against threats; removing or reducing weaknesses; making unexpected improvements; raising quality standards; improving the plan. Morale and motivation will be raised significantly if success is rewarded. The leader should ensure that reward for success is a high profile aspect of the way in which change is managed.

In leading the strategic activity that is required to implement the strategic plan, to change the strategicdirection of the organisation, the leader is managing, leading, a major change. The majority of the change activity will, by necessity, be technically, operationally, managed by others. With this in mind, the leader must focus on ensuring that the organisation is following the direction laid down in the strategic plan, whilst at the same time managing those who are operationally implementing the plan. It is a dual role that requires great skill and a high level of effort and energy. Effective leaders will have prepared for this by equipping the organisation with appropriate physical, financial, and human resources, and by equipping themselves with the necessary knowledge and understanding of strategic change management. With these in place, the leader will be successful in managing the change and the strategic objectives will be achieved.

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Auditing Business Performance


At one level this is a relatively simple tool, requiring the management to select a key area of business activity and to audit performance in that area, comparing to previous performance levels and, ideally, benchmarking against known best practice and performance levels. The information generated by these audits will then be used to identify unsatisfactory performance and enable measures to be introduced to bring about improvements.

The business areas that should be regularly audited, in any business, whether public, private, or not-for-profit, include: External Environment: well established tools and techniques are available and used to scan the external environment for information on issues, events, and trends that will impact on the strategies and performance capabilities of the organisation. The quality of this information, and the interpretations of it, is critical, as it is the foundation stone of the strategic planning activity that follows. An audit of processes, tools, and techniques, and the quality of output, is essential in ensuring that the strategic planning process is provided with high quality, relevant, valid information.

We will now examine a few of them:

Competitors: although an element of the external environment analysis activity, this deserves a separate mention. Monitoring and-or benchmarking – variations of auditing – of competitor performance is essential. Competitors are, by default, in the same business, and gaining knowledge of competitor performance levels, in as many key areas as possible, will bring benefits to any organisation in any sector.

Strategic Planning: often an area of activity that is not evaluated, because it is carried out by the senior executive levels of management, but should be. In addition to the information gathering discussed above, the level of expertise in strategic planning of the managers, the rationale and justification for the chosen strategies, the processes used to communicate the strategies throughout the organisation, the level of support and resources provided for implementation, the performance of existing and previous strategies, are all areas that should be audited in order for optimum performance to be continuously achieved.

Leadership: separate from the Strategy audit, the quality of leadership should be audited regularly. A set of competencies for leadership, at all levels in the organisation, should be drawn up, and the leadership performance measured against these. Development activity should also be based on these competencies, and on eliminating or reducing weaknesses identified by the audit.

Culture: the existing culture that blend of beliefs, values, perceptions, behaviour, that makes up the culture of the organisation should be regularly audited and compared to the culture that is desired by, the objective of, the organisation’s leaders. Particularly at times when the organisation is planning or undergoing major change, information gathered from these audits will be invaluable.

Financial: where, although there is usually a framework of management and financial accounting processes, there is a need to rigorously and regularly audit the effectiveness of these, to ensure that the budgeting and accounting activity is as productive as possible.

Suppliers: one of the most critical areas of any organisation’s activity, the start of the supply chain, supplier performance, including the performance of those in the organisation who audit supplier performance, must be audited, rigorously and regularly. Now accepted, in parallel with research & design and strategic planning, as one of the foundation stones of quality assurance, any weakness in supplier performance can damage the organisation, sometimes irreparably. Auditing ensures that optimum performance levels are maintained.

Physical Resources: the quality of and use of physical resources, such as raw materials, operational equipment, technological equipment and systems, furniture, fittings, and buildings, all need regular auditing to ensure that the most appropriate resources are purchased, installed, maintained, and used effectively.

Human Resources: this entails auditing the quality of human resources employed by the organisation, the way in which they are deployed, how well they are trained and developed, as well as what opportunities and channels exist for progression. Every aspect of human resources activity should be audited at all levels, from operational up to and including executive level.

Equality: encompassing diversity, discrimination, and equality of opportunity which are all key areas that if not audited regularly to ensure high levels of performance not only abiding by legislative requirements but also contributing positively to the culture of the organisation will lead to conflict, dissatisfaction, lower morale, lower motivation, and ultimately lower levels of performance.

Internal Customers: often ignored, the level of satisfaction of internal customers.The next department, individual, or team, that handles the next stage of production or service creation is critical. Overwhelming evidence shows that dissatisfaction of internal customers, leading to breakdowns in communication and cooperation, is one of the major causes of poor overall performance.

Distribution: of the products and-or services provided by the organisation is an essential element in making the organisation successful. Auditing this process will ensure that logistics best practices are in place, and that distribution activity is contributing positively, in terms of financial costs and corporate identity, to marketing, sales, and customer service efforts.

External Customers: auditing the satisfaction levels of external customers is a critical activity that should be carried out on a frequent basis. Customers here include all those at separate points in the distribution chain, through to buyers and end users. Information drawn from these audits will ensure that the organisation is in tune with and can respond appropriately to the needs of its most important stakeholders its external customers.

Stakeholder Relationships: stakeholders are any individual, team, external organisation, that has a legitimate interest in the performance of the organisation. This could include, depending on the sector and specific organisation: employees, unions, parents, relatives, local or national media, local authorities, emergency services, shareholders, financial institutions, funding bodies, governors, national or international governments, strategic partners, and of course, a variety of external customers. Relationships with each of these, in their own way, are critical, and should be audited regularly to ensure that they are as healthy as possible.

Quality System: deliberately listed as the last area to be regularly audited, this is an audit that should be carried out in addition to all the individual audits listed above. Whether an organisation has an externally certificated quality assurance management system, or an internal only system, there should be quality criteria set for every critical activity, event, stage, and process, from the starting point to the final point of the supply chain from the earliest stages of design and supply activity to the point where the product or service is in the hands of the final, end-user customer. Quality criteria that describe required quality levels, performance levels, and outputs, are essential to the success of any organisation. The quality system, including the internal and external auditing processes, should be audited to make certain that it is performing as intended that is, assuring that the required quality standards are being met, and of course, continuously improving.

Effective auditing will bring a number of benefits to the organisation. The first group of benefits are those where obvious weaknesses or problems are identified, including: identifying where immediate improvements could be made; identifying emerging trends that may signify corrective, defensive, or offensive action is needed. The second group of benefits are more subtle, and include: identifying the actual situation, rather than what is perceived to be the case by management or specialists; increasing the pool of knowledge that individuals and teams can learn from; ensuring that the operational activity is, as intended, supporting the strategic objectives: establishing a culture that expects performance to be regularly audited and evaluated: establishes a culture that is driven by continuous improvement activity.

Unless an organisation continuously audits and evaluates its performance in all key areas, it cannot know for certain where poor performance is occurring, and it cannot take corrective action because it is not aware of the problem, or it does not have sufficient information on which to base appropriate action. Rigorous, regular auditing will provide a flow of valuable information that the organisation’s management can use to decide on operational changes that will improve performance in critical areas. Applied across the whole organisation, this will provide the strategic objectives with a stronger foundation of support, and ultimately more chance of success.

 

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