Financial Yardsticks for Small Business

Your Assets

Tracking your equipment, furniture, real estate and other holdings should be easy. But to have a true idea of the value of your business, you also have to track changes in the value of those assets. More than one small business has found itself located on a piece of land that’s worth more than the business itself. Similarly, you also will want to track the declining value of assets such as computers and office furniture.

Your Liabilities

On the face of it, this is easy — liabilities are what you owe. But what you owe isn’t always as obvious as a bill from your landlord. Payroll taxes are a liability that depend on the size of your payroll. Loans are a clear liability, but in repaying them you’ll want to be able to track how much of a payment is applied against principal and interest.

What does it Cost You to Produce What You Sell?

If you’re buying a finished item for resale, this is relatively easy. It’s trickier if you have to calculate all the factors, such as labour, that go into manufacturing a product. .

What’s it Costing You to Sell What You Sell?

Advertising, marketing, labour, storage and the catch-all category of overhead — it’s useful to know how much it costs you to get a product sold as well as what it costs you to create it.

What’s Your Gross Profit Margin?

This is calculated by dividing your total sales into your gross profit. If your gross profit margin is staying consistent or trending upward, you’re probably on track.

Being able to track a declining margin can give you a heads-up that you must adjust your prices or your costs. In the worst cases your gross profit and profit margin disappear altogether. At that point, you’ll be like the fellow who lost money on every sale but figured he could make it up in volume. Don’t do it.

What’s Your Debt-to-asset Ratio?

This ratio can let you know how much of the stuff you have in your company is actually owned by someone else — your lender. Having this ratio climb can be a bad sign. It can happen as part of a major expansion, but it can also indicate that you’re getting in over your head.

What’s the Value of Your Accounts Receivable?

This is the money you are owed. If accounts receivable are on the rise, you may be getting a warning that the folks you sell to are starting to stumble.

What’s Your Average Collection Time on Accounts Receivable?

This is probably one of the most aggravating pieces of information for cash-strapped businesses, because it tells you how many days you’re acting as ‘banker’ for the people who owe you money.

What Are Your Accounts Payable?

The flip side of accounts receivable. An increase in your accounts payable may merely reflect a larger amount of purchases overall. But an increase that hasn’t been planned or managed can be an internal warning that your company’s financial strength is waning.

What’s Happening With Your Inventory?

There are occasions, even in this just-in-time business world, when building up a significant inventory can be a good thing.

If prices for items you sell or use in production are relatively low, putting some of your money into inventory may make sense.

Being able to track your inventory can tell you whether business is increasing or slowing down. It also tells you how much money is tied up in this unproductive asset.

About Small Business Proposal Development

In smaller companies everyone has to be direct charge, there is no budget for sales and marketing groups or sales engineers. Everyone bills the customer and very often everyone is working on a customer site. When a new opportunity is identified there is no one to work it properly until the RFP hits. Notice that the company isn’t caught flat footed or bidding out of the CBD they’re just doing all they can do with the resources available. Because Small Company Inc. wants to grow and prosper they’ve sent people to be trained by those companies espousing the best practices and they would like to emulate those they wish to become. All that Big Company Inc. may have been doing for a year or more to get ready to bid, Small Company Inc. now tries to squeeze into a 30 to 120 day period. It would be stressful to do this once or twice in a year but some companies go through this insanity perpetually.

The few good people that get stuck on proposal teams burn out quick. Between the proposal and the customer and other company responsibilities the quality of work suffers; the proposal, the customer or the company. The best practices need not be abandoned or specifically re-written for small companies. It’s the responsibility of the small company to identify which best practice will get the greatest bang for the buck when there are very few bucks. If you only have 30 days to develop the solution, assemble the team and prepare the proposal something has to be left out. For instance, storyboarding is a very good technique when properly used. However, the day the RFP is released is not the day to begin teaching the technique to a group who has never used it or is reluctant to use it because they’ve never experienced its value. There is no time for multiple formal reviews.

Structure the review cycle to reflect the compressed situation. Past performance and team resumes is also a stumbling block for many companies. A Project Manager that’s had to tailor the project description five or six times in the last month won’t be real enthused about having to do it a seventh time. Resumes follow the same pattern. The solution lies in accepting reality and designing process and procedures to reflect it. You can still go to your association meetings and claim to follow best practices to the letter but in the long run you will have reduced your B&P cost, produced better proposals and helped retain your better people by not burning them out trying to keep up with the big guys.

Small Business Strategy

THE FOUNDATION

A good way to begin “strategic thinking” is to remind yourself why you chose the business or industry you came to be in. What were your hopes or aspirations at the time? While probably not at the top of your thoughts, the core values that attracted you once are most certainly still important to you. No matter what opportunities you choose to pursue, start by reminding yourself about the things that really matter to you. If you are doing this with a team, the process of identifying the most important common values is always a good first step.
One you are clear on what is really important at the core; there are many good tools and methods to help identify opportunities. In this article I offer four frameworks to consider; perhaps one will be tempting to delve into depending on your situation.

POSITIONING

In any business or organization it is important to differentiate yourself in a relevant, meaningful way from everyone else out there. A good starting point is to take a closer look at the unique competencies and strengths in your organization.

In a method commonly used in strategic planning known as SWOT (Strengths, Weaknesses, Opportunities, and Threats) it becomes relatively easy to identify strategic opportunities by mapping out organizational strengths, weaknesses, the market situation, customer needs and the environment. I highly recommend trying this out for your business. If you are interested in reading more about SWOT go to http://www.netmba.com/strategy/swot/ [http://www.netmba.com/strategy/swot/%20]

PRODUCTIVITY

Whether you face increased competition, or simply don’t want to work as hard as you have in the past, you can become more efficient by focusing on what you do best.
In 1906 Italian economist Vilfredo Pareto observed that twenty percent of the Italian people owned eighty percent of their country’s accumulated wealth. Over time and through application in a variety of environments, he developed a concept that has become know as “The Pareto Principle,” “The 80-20 Rule,” or “The Vital Few and Trivial Many Rule.” The rule states that a small number of causes is responsible for a large percentage of the effect in a ratio of about 20:80. In a management context, the theory is that 20% of a person’s effort will often generate 80% of their results.

The challenge is to distinguish the right 20% from the trivial many. Once you start looking, you will find powerful implications in every area of your business
Do 20 percent of your products account for 80 percent of product sales?
Do 80 percent of your visitors see only 20 percent of you web pages?
Does 20 percent of your sales force produce 80 percent of the revenues?
Is 80% of your time spent on Trivial Many activities?
What competencies are bringing you the majority of your results? Once you figure this out the idea is to focus!

PARTNERING

Forming an alliance with a complementary partner can have many benefits. Working together with a partner may enable you to offer more value to clients, create new combinations of services, and think through ideas from new perspectives.

If you think a partnership might be beneficial, start by identifying your own core competencies. Only then, should you start looking for a partner. When you are successful at finding a candidate with complementary strengths, it is time for both of you to sit down and do some strategic planning. So many partnerships begin without clear roles and responsibilities, expectations and written goals.

PERSONAL GOALS

For any of you who are in transition, thinking about transition, trying to build a motivated productive team, or are simply reevaluating your own strengths, I would like to share with you a paragraph from Dr. Mel Levine’s groundbreaking book “A Mind at a Time.”

“Each of us is endowed with a highly complex, inborn circuitry- creating innumerable branching pathways of options and obstacles. While some of us have brains that are wired to handle a lot of information at once, others have brains that can absorb and process only a little information at a time (often with greater accuracy). While some of us have brains that store and retrieve from memory with precision and speed, others possess brains that access facts more slowly or with less precision. Some kinds of minds prefer to dream up their own original thoughts rather than drawing upon the ideas of others, and vice versa. Although some of us have minds that are more comfortable and effective visualizing complex political or even religious ideas, others are apt to do much of their thinking in words and sentences. So it is that we all live with minds wired to excel in one area and crash in another. Hopefully we discover and engage in good matches between our kind of mind and our pursuits in life.”

While this book is intended primarily for parents, educators and doctors, it has a valuable message for anyone trying to improve their situation. Different minds learn differently, and with a better understanding of ourselves and the people in our organizations, we can help ourselves and others design goals that build on strengths. There are a myriad of excellent assessments that can be administered by trained professionals to help you gain new insights into yourself and the others on your team. I welcome your questions if this is an area that you think is worth exploring.

Budgeting Software for Small Business

The budget is an essential element of the business process. It allocates the financial resources of the company according to a preset plan and forecasts cash flow. How well the business adheres to the budget and how quickly it can react to deviation from the budget are often determining factors in the success or failure of the enterprise. Budgeting software that can assist in this becomes a great aid to the small business owner. The following are three of the top budgeting software programs available on the market today that are geared for small business.

Microsoft Forecaster is the first. It works well with a variety of general ledgers and coordinates with other Microsoft small business software to automate and simplify the entire budgeting process. It is considered a very intuitive type program, and the fact that it is so similar in its appearance to other Microsoft programs makes it very easy for the small business owner, and his key people to quickly grasp its operation and to benefit from its features.

Budget Maestro by Centage is the second entry. It has a very sophisticated logic that is built into the program and continually tracks the income statement, balance sheet, and the cash position. It allows manager to see the bottom line impact of plans and combines forecasting software and budgeting software into one easy package.

The third on the list is the Applix Budgeting TM1 program. This software has been designed to work well with Excel spreadsheets. It takes the spreadsheet past the limitations of Excel and is also very much a forecasting software with its “what if” modeling features. There are many good budgeting software programs and another’s Top 3 list might appear different, but the bottom line is that the small business owner has the help he needs for this important business function.