Planning for Business Growth Guide

Planning for Business GrowthA Step-by-Step Guide

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Overview of the Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Module 1: Planning for Business Growth: the Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3The Impact of Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3The Challenge of Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4How Growth Aff ects each Business Area . . . . . . . . . . . . . . . . . 4Developing a Business Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Types of Business Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Myths About Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Key Planning Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Module 2: The Step-by-Step Approach to Business Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Step One: Diagnosing the Health of Your Business. . . . . . . . . 7Step Two: Focusing on Key Divisions and Setting Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Strategic Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Choosing Your Critical Division . . . . . . . . . . . . . . . . . . . . . . 11 Setting Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Step Three: Developing Your Business Strategies . . . . . . . . . 13 Marketing Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Operations Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Human Resource Strategies . . . . . . . . . . . . . . . . . . . . . . . . . 14 Finance Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Consolidation Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Step Four: Implementing Your Growth Plan . . . . . . . . . . . . . . 14 Review Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Assign Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Review the Results Every Quarter. . . . . . . . . . . . . . . . . . . . 16

Module 3: Measures and Strategies for Business Growth Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Marketing: From Prospecting to Customer Service. . . . . . . . 17 Some Thoughts About Marketing . . . . . . . . . . . . . . . . . . . 18 Marketing Pitfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Marketing Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Marketing Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Operations: From Chaotic to Systematic . . . . . . . . . . . . . . . . . 31 Some Thoughts About Operations . . . . . . . . . . . . . . . . . . 31 Operations Pitfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Operations Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Operations Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Human Resources: From Collegial to Structured . . . . . . . . . . 39 Some Thoughts About Human Resources . . . . . . . . . . . 39 Human Resources Pitfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Human Resources Measures . . . . . . . . . . . . . . . . . . . . . . . . 42 Human Resources Strategies . . . . . . . . . . . . . . . . . . . . . . . . 43Finance: From Internal to External . . . . . . . . . . . . . . . . . . . . . . . 48 Some Thoughts About Finance. . . . . . . . . . . . . . . . . . . . . . 49 Finance Pitfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Finance Measures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Finance Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56Consolidation Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Table of Contents

Figures and Charts

Module 1Figure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Growth TrapFigure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Growing BusinessFigure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Continued GrowthFigure 1 . . . . . . . . . . . . . . . . . . . . . .Transitions in the business divisionsFigure 1 . . . . . . . . . . . . . . Examples of the diff erent types of business

plans you may need for business development stages

Module 2Figure 1 . . . . . . . . . . . . . . . . . . . . . . . . . .A typical planning schedule for

developing a growth planFigure 1 . . . .The four elements of SWOT represent past and future,

positive and negative aspects of your businessFigure 1 . . . . . . . . . . . . . . . . Use a grid like this to help formulate your

thoughts on your business.

Module 3Figure 1 . . . . . . . . . . . . . . . . . . . . . Product/customer grid for choosing

a strategic directionFigure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Promotional messagesFigure 1 . . . . . . . . Product to customer to revenue tables and ratiosFigure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . Capacity and market demandFigure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . .Capacity and decision-makingFigure 1 . . . . . . . . . . . . . . . . . . . . Sample human resources needs gridFigure 1 . . . . . . . . . . . . . . . . . . . . . . . . Developing a compensation gridFigure 1 . . . . . . . . . . . . . . . . . . . . . . . Developing a commission systemFigure 1 . . . . . . . . . . . . . . . Sample balance sheet for Company X Ltd.Figure 1 . . . . . . . . . . . Sample income statement for Company X LtdFigure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price cut/volume increaseFigure 1 . . . . . . . . . . Volume increase necessary to off set a price cutFigure 1 . . . . . . . . . . . . . . . Impact of revenue on inventory, accounts

receivable and accounts payableFigure 1 . . . . . . . . . . Monthly cost of capital by age and interest rate

Planning For Business Growth: A Step by Step Guide 1

Overview of the GuideWhen you started your business, you likely had access to plenty of advice and support. The same does not hold true when an established small business looks for help to grow or evolve.

The British Columbia Ministry of Small Business and Revenue, Western Economic Diversifi cation Canada, and Small Business BC developed Planning for Business Growth: A Step-by-Step Guide for small business owners who want to plan the growth of their companies but don’t have the time and resources available to larger organizations. The guide will be especially useful if: • Your market is changing due to increased competition or changes in consumer behavior. • Your business or your industry is in the midst of growth or change. • Your local community is growing or shrinking. • A key person in your company is about to retire. • You are planning to fi nance a major capital purchase. • You are constantly at, near or over your current line of credit.

It includes tips and techniques that will show how you can evaluate the current state of aff airs in the four main areas of your business – marketing, operations, human resources and fi nance. With this information in hand, you will be able to determine where your attention is needed most, set goals, develop strategies to achieve these goals, and monitor your growth plan. The guide is organized in three modules so you can easily fi nd the information you need:

Module 1 sets out general information so you have a better understanding of how growth will impact your business and appreciate the value of a solid business plan. The guide distinguishes between four areas, or divisions, that make up every business, regardless of size:

Marketing: The “selling things” part of the business – getting customers Marketing: The “selling things” part of the business – getting customers Marketing:for its products and services.

Operations: The “making things” part of the business – what it does for its customers.

Human Resources: The “people” part of the business – recruiting, Human Resources: The “people” part of the business – recruiting, Human Resources:developing, supporting and compensating staff .

Finance: The “enabler” of the business – more than fi nancial statements and tax returns, it is what makes the business possible.

As a company grows, there are transitions in each division. Business growth also has a predictable impact on each of the divisions. A number of business planning principles presented in Module 1 are worth including here:

1. Business planning will succeed only if the management of a company wants to change and is able to critically evaluate the business. If not, management may require the assistance of an outside party who can be more objective.

2. Business planning requires a holistic approach. All parts of a business work together to create a whole. This is true for planning, diagnosis, strategies and implementation.

2 Planning For Business Growth: A Step by Step Guide

3. Each of the four business divisions – marketing, operations, human resources and fi nance – is important, but at any given time one usually needs the most attention.

4. Businesses run into diffi culty when the diff erent divisions grow at diff erent rates.

5. As a business grows, there are changes in each of the divisions that will move the business to a more formal, structured operation.

6. Business growth is limited by capacity in each division. In order to grow, it is necessary to identify capacity needs and plan to increase capacity as needed.

Module 2 takes you through the four steps involved in researching, creating and evaluating the growth plan.

Step One: Diagnosing the Health of Your BusinessThis formal analysis ensures you take a realistic look at where your business is now so you can be confi dent you are working with facts, not assumptions.

Step Two: Focusing on the Key Division and Setting GoalsThis will help you examine every part of your business – marketing, operations, human resources and fi nance – so you can identify where attention is needed most, and set realistic goals.

Step Three: Developing Your Business StrategiesThis is where you will identify the best strategies to break through the toughest roadblocks and plan for the growth of your business.

Step Four: Implementing Your Growth PlanNow you need to put the strategies into place, measure the results and watch for unintended consequences.

Module 3 supports Steps One and Two by providing tools and techniques you can use to measure the health of each business area (division) and strategies to support growth.

SummaryTogether, the three modules will help you address the many challenges you fi nd yourself facing as your business, your industry and your world evolve and change. You will want to be sure the approach you choose works best for you so your company can grow in a controlled and uniform way.

As you go through the process of growing your business, it is important to remember that you are not alone. You can seek assistance through Small Business BC, your local Community Futures, business organizations and professionals, or local banks and credit unions. You may also want to look for a mentor, someone who has been where you are and understands the challenges you face.

We wish you every success with your business growth, and hope that this guide helps you on your way.


MODULE 1PLANNING FOR BUSINESS GROWTH: THE BASICSI N T R O D U C T I O NAll businesses, from a child’s lemonade stand to Bell Canada Enterprises, have four specifi c areas, or divisions:

Marketing: The “selling things” part of your business – getting customers for Marketing: The “selling things” part of your business – getting customers for Marketing:your products and services.

Operations: The “making things” part of your business – what you do for Operations: The “making things” part of your business – what you do for Operations:your customer.

Human Resources: The “people” part of your business – recruiting, developing, supporting and compensating your staff .

Finance: The “enabler” of your business – more than fi nancial statements and tax Finance: The “enabler” of your business – more than fi nancial statements and tax Finance:returns, it is what makes your business possible.

Each division is important to the success of the business and they all must work together, but at any given time one usually needs more attention than the others. This is especially true in a growing business since, as you will see in Figure 1, diff erent parts of a business often grow at diff erent rates.

Module 1 will show you how business planning can provide the structure you need to critically evaluate all your divisions, and how you can use this knowledge to develop and implement the best strategies for the growth and success of your business.

T H E I M P A C T O F G R O W T HThere is a predictable pattern as any business develops and grows.

It Starts with MarketingWhen a business grows, fi nding sales is everything. The marketing division consumes most of management’s eff orts, and a take-any-sale attitude rules.

Shifting from Marketing to OperationsAs orders start to roll in, the focus must shift from marketing to operations, which means production and service delivery. A business that is approaching capacity must expand to keep up with the demand or it risks missing sales commitments.

Shifting from Operations to Human Resources and FinanceWhen a business grows too quickly, it may outgrow the capability of existing staff or place unreasonable demands on individuals. People, especially owners, are seen as the most fl exible of all resources, creating a situation that simply cannot be sustained over the long term. A growing business also needs cash to pay suppliers, employees and other overhead. It needs cash to fi nance equipment so it can increase capacity. If sales are growing faster than profi ts, the cash fl ow becomes a cash trickle and fi nance needs more attention.


T H E C H A L L E N G E O F G R O W T HA problem occurs when the four divisions grow at diff erent rates. A business may have $1 million in annual revenue, a production capacity for $900,000, a line of credit for $800,000 and enough employees to handle $700,000 in production or services. If that company continues to grow, the orders cannot be met, the banks will call lines of credit, and good employees will start to head for the exit! The business risks being crushed by its own growth. As businesses evolve, especially when they grow, they must make changes. What’s important is to determine where change is needed most at any given time and develop a plan that focuses on this critical division.

Figure 1 - The Growth Trap The Growth Trap ™ diagram shows the eff ects of the four diff erent divisions of the business: • Marketing (The target) • Operations (The factory) • Finance (The cash) • Human Resources (The running man)

When a business grows over time, these divisions develop at diff erent rates, which has long-term implications.

Figure 2 – A Growing BusinessFigure 2 shows a business with $1 million in sales, a production capacity of $950,000, a financial capacity of $900,000 and a human resource capacity of $850,000. This is not sustainable in the long run.

Figure 3 – Continued GrowthFigure 3 shows that if the business continues to grow in the same way, the gaps grow. Now the same business is trying to make $2 million in revenue, but will not be able to deliver enough products because it does not have the human resources or financial capacity. The business is collapsing under the weight of its own growth.

H O W G R O W T H A F F E C T S E A C H B U S I N E S S A R E AAs Table 1 illustrates, there are obvious transitions in each division as a company grows.

Marketing shifts from acquiring new customers to keeping existing customers. This does not mean you stop prospecting, it just means you now must develop new strategies to keep customers coming back.

Operations, which at one time could take each order and complete it before beginning the next order, must become more systematic and streamlined.

Human resources, once informal and collegial, must become more structured.

Finance moves from supporting the personal investment of one owner or a small group of people to meeting the needs of external parties such as banks and investors.

Figure 1 - The Growth Trap1

1 Taken from the seminar Business Planning for People Who Hate Business Plans by William Erichson of Pacific Training Innovations Ltd. Used with permission.

Figure 2 - A Growing Business

Figure 3 - Continued Growth

Table 1 - Transitions in the business divisions

Division

Marketing

Operations

Human Resources

Finance

From

Prospecting

Chaotic

Collegial

Internal

To

Customer Service

Systematic

Structured

External


D E V E L O P I N G A B U S I N E S S P L A NBusiness planning publications generally use a one-size-fi ts-all approach. This guide uses concepts from strategic planning that generally apply to larger companies and adapts them for a developing small or medium-sized business – one that may be growing from 10 employees to 20, or from just you, to you and someone else!

Diff erent business plans meet diff erent needs. A growth plan is diff erent from a start-up plan, and a growth plan for a mature business in a stable market is diff erent from one for a volatile business in a changing market. You may even need a plan that slows your growth until your business stabilizes

As you develop your plan, it is important to remember that it is for your business. If something is suggested that does not apply to your situation, ignore it. This guide is structured so you can follow it completely or focus on a specifi c area.

Whatever you choose to do, make sure you take a hard, practical look at what you are doing. If you cut too many corners or make assumptions, your plan will lack the solid foundation needed to take you into the future.

Types of Business Plans

Table 2 – Examples of the different types of business plans you may need for different development

stages of your business

* Business Planning and Financial Forecasting(http://www.smallbusinessbc.ca/pdf/businessplanning.pdf) was http://www.smallbusinessbc.ca/pdf/businessplanning.pdf) was http://www.smallbusinessbc.ca/pdf/businessplanning.pdfdesigned for business start-ups but it has tips and techniques that are helpful for growing businesses.

State of theBusiness

Start-up

Growth

Growth-Volatile

Growth-Mature

Transitional/Succession

Description

Business starting up

Business growing in terms of revenue, volume or both

Business encountering rapid change in either marketing or operations

Business is stable; not much change needed

Business being passed on to a next generation of family member or changing ownership

Type of plan used

Start-up*

Growth

Growth

Growth

Transitional

Notes

Demonstrates viability of new enterprise.

Eliminates roadblocks to growth.

Focuses on business survival. Similar to growth plan with less ambitious revenue targets.

Helps owner adjust to existing operations.

Transition Planning Assists with transition. Some management consulting companies specialize in this.


Myths About PlanningMyth: Planning uses up time that is better spent on real work.Myth: Planning uses up time that is better spent on real work.Myth:Reality: Planning is an essential part of your business: Reality: Planning is an essential part of your business: Reality: • Operational planning is immediate, and ensures you get Operational planning is immediate, and ensures you get Operational today’s orders out the door. • Managerial planning helps you meet this year’s objectives, Managerial planning helps you meet this year’s objectives, Managerial such as achieving sales and expense budgets. • Executive planning assures the long-term health and direction of your business.

Myth: Business plans are for banks and investors.Myth: Business plans are for banks and investors.Myth:Reality: Business plans, especially strategic-oriented plans, help you get your head out of the operational sand and focus on the medium and long term.

Myth: I’ve run my business without a business plan and done pretty well. Myth: I’ve run my business without a business plan and done pretty well. Myth: I don’t need one now.Reality: If you want your business to grow and change, you need to change Reality: If you want your business to grow and change, you need to change Reality: the way you are doing things. Many entrepreneurs cannot make this transition, which explains why many businesses plateau at about $1 million in annual revenue, or go out of business when they appear to be growing rapidly between $1 million and $5 million a year.

Myth: You need a consultant.Myth: You need a consultant.Myth:Reality: Not necessarily. Facilitators are great to encourage dialogue and to Reality: Not necessarily. Facilitators are great to encourage dialogue and to Reality: assemble the plan, but the key players involved are in your company and that’s who must do the work.

Key Planning PrinciplesBefore moving on to Module 2, it is helpful to review some of the planning principles that are presented in this guide:

1. Business planning will succeed only if you want to change and are able to critically evaluate your business. If not, you are wasting your time and may want to turn to an outside party who can be more objective.

2. Business planning requires a holistic approach. All parts of a business work All parts of a business work Alltogether to create a whole. This is true for planning, diagnosis, strategies and implementation.

3. Each of the four business divisions – marketing, operations, human resources and fi nance – is important, but at any given time one is usually most in need of development.

4. Businesses run into diffi culty when the diff erent divisions grow at diff erent rates.

5. As a business grows, there are changes in each of the divisions that will move the business to a more formal, structured operation.

6. Business growth is limited by capacity in each division. In order to grow, it is necessary to identify capacity needs and plan to increase capacity as needed.

Module 2 takes you through the four steps that let you plan the growth of your business.


MODULE 2THE STEP-BY-STEP APPROACH TO BUSINESS GROWTHI N T R O D U C T I O NThis guide is built around four steps to business growth • Step One: Diagnosing the Health of Your Business • Step Two: Focusing on the Key Division and Setting Goals • Step Three: Developing Your Business Strategies • Step Four: Implementing Your Growth Plan

If you are committed to business development, you will fi nd the time and resources to work through the four steps and develop the plan you need. And if you take an honest look at what you are doing, you will likely fi nd the journey as valuable as the fi nal plan. To get started, you will need the following:

A planning team. You want to spread the workload, even if there are only a few of you, so you can build a broadly based sense of ownership for the fi nal direction, making implementation easier and smoother. If you are doing all the work yourself, you may want to tell your staff (if you have any) what you are doing. You may also want to get support and guidance from other business professionals or fi nd a mentor who has been where you are and understands the challenges you face.

Access to information. While a lot of information can be extracted from your bookkeeping programs, you may fi nd you need to change the management information systems, including the chart of accounts, before you get started.

A commitment of time. Experience shows that after the information has been gathered, it usually takes about three to four days to complete a growth plan. This includes at least three hours to report fi ndings from the diagnosis, about six hours to discuss which of your four business areas is the most critical, three hours each to discuss plans for the secondary divisions, and six hours to develop the fi nal plan. Some businesses choose to complete the plan in a weekend – if that’s your choice, prepare for a grueling couple of days.

S T E P O N ED I A G N O S I N G T H E H E A L T H O F Y O U R B U S I N E S SStep One involves gathering the detailed information about each of your four business divisions so you can measure how well you are doing and pinpoint where changes are needed. Many owners make immediate changes to their business based on this analysis alone.

The diagnosis is hard work, and is one of the reasons why you should take a team approach if possible. Team members will need to dig through business information, pull out unused accounting reports, survey employees or time operational processes.

Step

1

2

3

4

Week

1

2

3

4

5

6

7

Planning Step

Marketing and Financial Analysis

Operations and Human Resource Analysis

SWOT (Strengths-Weaknesses-Opportunities-Threats) Analysis

Mission Vision Values

Selection of ‘plan type’

Selection of Critical Division

Setting Critical Division Goals and Strategies

Setting Secondary Goals and Strategies

Development of Implementation Plan

Table 3 - A typical planning schedule for developing a growth plan


If your team is large enough, assign one person to each division, and make that person responsible for presenting fi ndings to the rest of the team. The presenter becomes a champion for their area, and all team members have the information they need about all aspects of the business. If your business is small, you may need to assign more than one division to each team member, or you may need to complete the work on your own. As part of the pre-planning, you should determine an order for the analysis. While there are no set rules, many teams start with fi nance because it is the most objective area.

While the order is not important, the formal nature of the analysis is. It cannot be said too often: Your diagnosis must be honest, objective and thorough or your plan will fail. You want to be sure you are working with facts, not assumptions. For example, it is important to know if lower sales means you are losing customers or if it means your existing customers are buying less.

Module 3 of Planning for Business Growth: A Step-by-Step Guide provides examples of ways you can

measure the current performance of each division.

Your measures for marketing will show how well your business is making the necessary transition from prospecting to customer service. While marketing measures are often subjective, you can set benchmarks that track the success or failure of everything from your company’s marketing strategies and the eff ectiveness of your sales staff to product pricing and quality control.

Unlike marketing, human resources and fi nance, there are few general rules for operations because it is industry specifi c so you will have to adapt the tips to meet your specifi c needs. The section looks at the four general industry types – retail/wholesale, manufacturing, service and hybrid (a combination of more than one of the other three). It suggests measures to examine things such as capacity, the role of suppliers, and the time required to process an order, produce a product or complete delivery.

Human resources measures explore how well your business recruits, develops, compensates, supports and manages staff . As you grow, you may be moving from an informal, collegial atmosphere to one that is more structured. You need to be sure you have the right staff , people who share your values and can grow with your company. This means taking the time to recruit and train new people carefully, and taking action quickly if they cannot handle the work. It may also mean changing the duties of existing staff .

Finance is the most complex division, but it also off ers the most objective measure of the health of any business because rules are set and followed in a fairly consistent and systematic manner. The diagnostic measures provided help you measure the fi nancial strength of your business as you shift from a structure that is more internally focused to one that will meet growing external demands. You need to develop an operating, capital and cash fl ow forecast for your business and recognize that this is an integral part of your business operation.

S T E P T W OF O C U S I N G O N K E Y D I V I S I O N S A N D S E T T I N G G O A L SThe systematic and realistic diagnosis of each of your four business divisions will uncover both issues and opportunities. It will arm you and your team with the detailed, objective information you need to identify which division is the most critical right now and to set goals.


Step Two involves a series of smaller steps. They include a SWOT (strengths, weaknesses, opportunities, threats) analysis, a review of your company’s values, vision and mission and an assessment of weaknesses identifi ed in your diagnosis. At this point, you will be able to identify your critical division and then set your goals based on your capacity to take on additional work.

Strategic AssessmentSWOT – Transitioning from the Present to the FutureMost people are familiar with SWOT, a common technique used in planning that stands for Strengths, Weaknesses, Opportunities and Threats. It follows the diagnosis step so you have confi dence you are working with facts.

Strengths are those aspects of your business that probably allowed you to achieve your success to date. Be as specifi c as possible. If customer service is seen as a marketing strength, exactly what does that mean – fast, friendly, convenient?

Weaknesses are usually found in areas of the business that are least valued or least enjoyed by management. Some weaknesses can be addressed as the business grows, others must be addressed before growth is possible. When a business is small, strengths can overcome weaknesses, but as it grows weaknesses may hinder growth. Business owners moving from being an entrepreneur to manager to executive must be both self aware and honest with themselves. Sometimes an outside consultant is needed for greater objectivity.

The Opportunities you act on today are your strengths tomorrow. They can be found in every division – from marketing achievements to an improved line of credit. A business must consider opportunities in all areas in order to grow profi tably.

Threats can come from within the business, such as poor relations with suppliers or losing a key customer, key employee or key investor. They can also come from outside of the business, such as growing competition or new legislation.

Watch what is happening outside of your business when completing your SWOT analysis because this can alter your operating conditions, creating both threats and opportunities. For example, you need to consider trends and technologies that have the potential to bring opportunity to one business and disaster to another. You should watch and learn from your direct competitors, especially the market leaders, and keep track of indirect competitors.

Posi

tive

Per

spec

tive

Strengths Opportunities

Weaknesses Threats

Past View Future View

Neg

ativ

e Pe

rsp

ecti

ve

Figure 4 - The four elements of SWOT represent past and future, positive and negative aspects of your business

Strengths Strengths Strengths

Weaknesses Weaknesses Weaknesses Opportunities Opportunities Opportunities Threats

Marketing Operations Human Resources FinanceMarketing Operations Human Resources FinanceMarketing Operations Human Resources FinanceMarketing Operations Human Resources FinanceMarketing Operations Human Resources FinanceMarketing Operations Human Resources FinanceMarketing Operations Human Resources FinanceMarketing Operations Human Resources FinanceMarketing Operations Human Resources Finance

Table 4 - Use a grid like this to help formulate your thoughts on your business


Values – Vision – MissionThere are many views of what values, vision and mission mean and how they impact a business. Here are basic defi nitions:

Values defi ne what a business will and will not do. They provide boundaries and direction for the planning process.

The values of smaller fi rms usually refl ect the values of their owners. You need to know what is truly important to your business, and plan in accordance with these values. Don’t try to separate personal and business values, in the long run this does not work. And confl icting values can lead to confl icting messages with devastating consequences – confused employees are not productive and confused customers stop buying.

Vision is simply where you see your business in the future. Your plans then help you set goals and strategies to reach this vision. Do you want your company to grow in size? Do you want higher profi ts?

Vision is dynamic; it changes and grows over the years. When Pierre Omidyar began a company to buy and sell collectable Pez dispensers, he had no idea he was creating eBay.

Vision and commitment to the vision provide both direction and the reasonfor that direction. Your diagnostic phase tells you where your business is at today, and your vision is your dream for the future. Your business plan must be consistent with your vision and with your values.

The main diff erence between vision and goals is the time frame. Where goals are short term, vision tends to be long term.

Mission is your company’s reason for existence, and is usually geared toward your customers and how you serve them. Many mission statements incorporate values within them, by referring to employees and the community at large.

Your mission may change to include new groups of customers or new product lines. Where the values and vision concentrate on internal matters, the mission’s focus is external. Mission statements help keep your team on the same path. They must be understood internally, but lived out externally!

If you are committed to the planning process, you should revisit your values, vision and mission. They are important aspects of the plan and your business.

Assessing Your WeaknessesYou must deal with any gaps you found when diagnosing the health of your business before you can concentrate on growing the business.

As Table 2 shows, there are a number of diff erent types of business plans, depending on whether your company is mature or volatile. If your analysis shows you are experiencing serious threats, you should consider a plan that allows you to pause and fi x the problems before growing.


The following are examples of problems you may have uncovered, and the critical division you will need to examine: • Ongoing quality or on-time performance problems (operations is the critical division). • Problems with cash fl ow or fi nancing capital assets (fi nance is the critical division). • High staff turnover or a lack of necessary expertise (human resources is the critical division). • Loss of customers to competitors (marketing is the critical division).

In each of the examples, you will develop a foundation on which to grow your business in the future. Many businesses choose to slow down expansion for a year or two so they are well prepared before embarking on the next level of growth.

This is a diffi cult decision, especially for businesses used to continual growth and for entrepreneurs who are sales and marketing oriented. However, growing your sales when the fi nancial, operational and human resource infrastructures will not support growth often ends in business failure.

Choosing Your Critical DivisionRegardless of whether you are planning to grow or consolidate, you must decide which division is the priority before you start to identify and implement strategies. This decision is based on the your capacity to generate and take on additional work. Some of these issues are calculated while others require you to make a judgment based on your experience in the industry and knowledge of your business.

Capacity and roadblocks are two factors to remember when determining your critical division. Capacity is your ability to generate, produce/perform, fi nance and staff additional business activities. Roadblocks are issues that get in the way of capacity.

Your diagnosis and SWOT analysis should show your current business capability. Set a target, such as “increase sales 30% next year, based on the introduction of a new product” and ask the following capacity questions: • Marketing – Can we increase sales with our current marketing strategy? • Operations – Can we produce or provide the required goods/services to achieve the sales increase? • Human resources – Can we staff the company if we achieve the sales increase? • Finance – Can we fi nance the capital assets and increase working capital required to achieve the sales increase?

If any of the answers are no, you have reached a roadblock. Look for the most diffi cult roadblock to overcome and you have found your critical business division.

Your Critical Business DivisionWhile all divisions are important, the planning methodology determines which is the most important right now and develops the plan around it.


Using the example of a 30% sales target based on the sale of a new product to existing customers, here’s how to identify the critical division:

Marketing capacity: The marketing team has been asking for this new product Marketing capacity: The marketing team has been asking for this new product Marketing capacity:for two years and is convinced there would be enough demand with some increased marketing materials and an update to the company website.

Operations capacity: The company has a design for the new product, and Operations capacity: The company has a design for the new product, and Operations capacity:the inputs can be purchased from existing suppliers. An additional piece of equipment is needed, but it is readily available and will fi t in the existing production area.

Human resources capacity (staff ): Additional clerical staff will be needed but Human resources capacity (staff ): Additional clerical staff will be needed but Human resources capacity (staff ):this can be managed through an internal promotion that leaves an entry-level position, which will be easy to fi ll. The newly promoted individual has already begun training. The roadblocks here are not insurmountable.

Human resources capacity (production): The new piece of equipment requires Human resources capacity (production): The new piece of equipment requires Human resources capacity (production):a trained operator, and it will be costly or diffi cult to recruit this person. Existing staff need six months of training before they can produce the new product. These are potential problems.

Financial capacity: The down payment for new equipment and the increased working capital requirements are more than covered by the increase in company profi t. Any short-term cash shortfalls would be fi nanced with the line of credit. This analysis shows fi nancial capacity after one year.

Since the most diffi cult roadblock is in human resources, this division becomes the centre of the planning and the other divisions are planned around it. Each team bases its goals and strategies around the human resources plan.

Setting GoalsNow that you’ve determined which division is the most critical, it is time to set some goals based on your analysis to date. These goals must be SMART or:

Specifi cMeasurableAchievableRealisticTime Limited

Each division will have goals that help achieve the sales growth target and also contribute to the ongoing goals of running a successful company. While you will be creating goals for all divisions, you should start your planning with your critical division. Moving away from our specifi c example above of a 30% sales target, here are examples of goals a company may employ in diff erent business divisions.

Marketing GoalsBy the end of the year we will: • Increase our sales to customers between 20 and 35 by 10% • Add three additional products to our product mix • Review our pricing policies and report fi ndings to the VP of marketing • Develop a promotional campaign for our newest products and implement this plan for the Christmas sales season


Operations GoalsBy the end of the quarter we will: • Reduce our product processing time by 10% • Reduce our error rate from 5/1000 to 3/1000 • Reduce our waste metal from 5000 kg to 4500 kg • Increase the number of tax returns per employee from seven to eight per day

Human Resource GoalsBy the end of this year we will: • Reduce voluntary staff turnover to 10% of full-time staff per year • Develop a training plan for entry-level employees • Review current staff benefi ts and report back to the planning team • Develop a wage grid and report to the VP of human resources

Financial GoalsBy the end of this year we will: • Reduce our collection period on accounts receivable from 55 to 45 days • Provide plan-to-actual reports to all senior staff within fi ve working days of the end of each month • Review the entire management information system with help from the other divisions, and report back to the president of the company

Notice that some of these are measured in terms of quantities, and others are either done, or they are not done. The goals lead you to Step Three – selecting and shaping the strategies that will help you achieve the goal.

S T E P T H R E ED E V E L O P I N G Y O U R B U S I N E S S S T R A T E G I E SIf the goal is the destination, the strategy is the path you take to reach it. Some strategies address more than one part of the business, for example: • Pricing aff ects marketing and fi nance. • Hiring levels involve human resources and operations. • Customer service policies are both human resources and marketing. • Capital purchases are both operations and fi nance.

The strategies should not be dealt with in isolation. A strategy in one division may have a direct or indirect infl uence on another division. Managing these interactions is one of the skills required in managing a growing company.

Module 3 offers dozens of business strategies for each of the four divisions. They represent ideas used in different industries and under different circumstances, and should be used, modified or ignored depending on your situation.

Marketing StrategiesBefore you pursue a marketing strategy you need to know you have the operational, fi nancial and human resource capacity to meet any increased demands. Marketing strategies can concentrate on fi nding new customers or promoting new products, or a combination of the two approaches. In the marketing section, you will fi nd strategies that deal with customers, products, pricing, distribution and promotions or sales.


Operations StrategiesAs is the case in other activities related to operations, the strategies outlined are more of a catalyst since the operations division is so industry specifi c. That said, there are some common objectives for operational strategies, such as: • Increase the company’s output – whether in terms of manufactured units (manufacturing), hours billed (services) or units sold (wholesale/retail). • Increase the company’s effi ciency – making more units faster at less cost. • Decrease the company’s costs – including everything from the input costs to operating costs.

Human Resources StrategiesA growing business needs a systematic human resource plan that anticipates your company’s future needs. Implementing this plan as you achieve specifi c fi nancial objectives is one of the best ways to grow your business in a controlled manner.

Human resources strategies will help you structure the formal recruiting, orientation, training and development, and compensation programs you will need to move ahead.

Finance StrategiesFinance strategies are critical to the success of any growing enterprise yet business owners often avoid them because they do not fully understand this division. Finance is just like any other part of the business. It is essential to your success and it must be managed and planned. The strategies presented in Module 3 will help you with forecasting, cash fl ow (current assets), planning and control.

Consolidation StrategiesIn addition to strategies that specifi cally address each division, Module 3 also includes strategies for companies whose very survival is threatened. These strategies will support consolidation or even contracting of the business until the situation improves. If this is the approach you take, you will still need to follow all the steps, including: • Perform a complete diagnostic and SWOT analysis • Determine roadblocks, which may be roadblocks to survival rather than just roadblocks to growth • Select your key business division based on the most critical roadblock • Set goals, starting with the key business division • Monitor your progress

Running a successful business means making diffi cult decisions. Delaying tough decisions can damage your business, and result in business failure. Making mistakes is a natural and necessary part of business development. Fixing mistakes is an essential part of business growth and survival.

S T E P F O U RI M P L E M E N T I N G Y O U R G R O W T H P L A NImplementing a plan, especially for a growing business, means making changes. This is never easy because people are driven by habit. It is important to be aware of your current behavior and be prepared to change as needed. For example, if your company is in the habit of extending credit to slow-paying customers, you’ll need to change this if your goal is to increase cash fl ow by speeding up collections.


You and your team must be committed to the new direction you have chosen. If you are working with a team, you can reinforce each other’s commitment to implementing changes. Of course, if the change is seen as arbitrary or unnecessary, it quite rightly will often be ignored. Using the previous example, the credit policy will change only if the person in charge of it understands the importance of the change and is committed to it.

While a solid plan will minimize the risks, those that remain must be acknowledged and managed. The team approach helps to minimize risk and increase acceptance. It may also help to fi nd mentors, coaches or facilitators with specifi c expertise. For example, if you want to change your distribution network to a multiple chain operation, you may want to invite an employee or consultant to help with this part of the plan.

It is usually easy to begin implementation enthusiastically but you may fi nd it harder to maintain the pace three months down the road. Enthusiasm wanes even more if it takes longer than expected to implement the plan. The hopes and dreams, so fresh during the planning process, begin to fade, and the goals become seemingly less important every passing day. It is important to encourage and keep the enthusiasm high as you enter the dog days of implementation.

Review GoalsNever forget that your objective is to eliminate roadblocks to growth, starting with your critical business division. Once you have your goals, examine the sequence and decide what needs to happen fi rst.

For example, if hiring three new employees is a priority, you will want to write job descriptions and prepare an orientation checklist before you start recruiting. This will make the hiring process more eff ective. You may know you can get a loan for a new piece of equipment, but you still need to do the paperwork before you can go shopping.

While it is important to complete some of these more trivial tasks fi rst, don’t let this become an excuse to avoid the more important and complex tasks.

Determine the Resources Required to Achieve These GoalsOnce you know the goals, determine the physical and human resources, both internal and external, that you will need to accomplish them.

Internal resources exist within the company but may need to be redeployed to achieve the new goals.

External resources need to be acquired to achieve this goal, either permanently, such as a new hire or new equipment, or temporary, such as the services of a consultant or renting equipment.

Human resources include people and expertise, both existing employees (internal human) or new hires, consultants or contract employees (external human).

Physical resources include equipment required to achieve the stated goal, both already owned (internal physical) or new or rental equipment (external physical).


Remember to include pre-implementation costs in your planning, such as: • developing promotional materials • market research • product design • preparing interim fi nancial statements for the bank • cost accounting for a new project • developing specifi cations for equipment or machinery • installation or moving time (plan for a drop in production during the move and remember that a move almost always costs more and takes longer than expected) • time taken for recruiting new staff • time for orientation and training

Assign RolesMake sure each step aimed at achieving each goal is assigned with a deadline. Here is a very simple example for hiring new staff .

Notice that all of the resources used here are internal. If you account for the time spent for all the tasks, you can calculate the cost of hiring and training the two new cashiers.

More complex goals involve many more steps and often require co-ordination between divisions. For example, buying new equipment may mean that operations and fi nance work together to make the best decision, and human resources needs to be involved if special expertise is required.

Review the Results Every QuarterPlanning without a review is useless. You will want to look at each goal in light of the current conditions of the company and of the market, and decide whether it has been accomplished, is still in progress or should be abandoned.

The review not only keeps you on track for a specifi c goal, but it also reminds you of the importance of the planning process in terms of the broad direction of your company. Hiring two cashiers may not seem terribly important until you remind yourself that it is essential if you are aiming to increase revenue by 30%.

The review will also reduce the risk that your company will revert back to its old habits, which your planning has shown will keep it from moving ahead.

Module 3 offers more detailed information for each of your four divisions to support Steps Two and Three, including measures you can use to support your business diagnosis and sample business strategies.

Task

Create and run recruiting ad

Review resumes and generate short list

Hold first interviews

Hold second interviews

Extend offers

Begin training and orientation

Begin on-the-job training

Cashier trained

Date

April 1

April 8

April 15

April 22

April 29

May 5

May 12

May 28

Assigned to

Store Manager

Store Manager & Head Cashier

Store Manager & Head Cashier

Head Cashier

Head Cashier

Head Cashier

Cashier assigned to trainee

Goal: Hire and Train Two New CashiersDeadline June 1


Module 3Measures and Strategies for Business Growth PlanningI N T R O D U C T I O NThis module will provide you with specifi c tools to help you move through the step-by-step process identifi ed in Module 2.

Keep in mind that the measurements and strategies identifi ed in these tools are examples only. You will want to choose the ones that best apply to your business, or use them to create your own measures and strategies. This is especially true for operations, which tends to be more industry specifi c.

What you want to do is use some of these examples to spark your own creative thinking and help you fi nd measures and strategies that will work for you.

M A R K E T I N GF R O M P R O S P E C T I N G T O C U S T O M E R S E R V I C EWhen a business starts, its priority is getting customers. As it grows, more revenue is generated by repeat business so its business strategy moves from fi nding customers to keeping customers. This important transition must be refl ected in your marketing plan to maintain the necessary balance.

As Figure 5 shows, you will take one of three approaches to develop your business:

1. With a customer-oriented strategy, you start by determining whether you are customer-oriented strategy, you start by determining whether you are customer-oriented strategythe only supplier for current customers and, if not, you try to get more of their business. You can also look for new customers who are willing to buy existing products or services, or ones that have been slightly modifi ed.

2. With a product-oriented strategy, you modify or add products and services. Again you start with current customers, asking what you might be able to provide that they want. It is best to modify existing products fi rst, then add new products.

3. With a hybrid strategy, you are combining the fi rst two strategies. This hybrid strategy, you are combining the fi rst two strategies. This hybrid strategycan be risky if you fi nd you are looking for new customers and creating new products at the same time. If this is the case, you need to answer some important questions: • Does my business have the capability to produce the product or provide this service? • Does my business have the capacity to off er this product or service? There’s less risk if you have the excess capacity. • Is there a substantial reward? Measure the cost of both money and eff ort against the rewards to your business. New opportunities should have high rewards.

Figure 5 – Product/Customer Grid for Choosing a Strategic Direction

Existing Products Potential Products

Exi

stin

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stom

ers

Pot

entia

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tom

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Cus

tom

er S

trate

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Hybrid

Stra

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Product Strategy


Some Thoughts About MarketingSome General Thoughts1. Don’t try to please everyone. Decide who you are, and whom you want to serve.

2. Recognize the diff erence between need and demand. Need is something customers want; demand is their willingness to pay for it. Demand, not need, creates business opportunities.

3. Recognize the diff erence between a trend and a fad. Unfortunately, this is diffi cult when you are in the middle of the fad.

4. Remember that customers are not always forthcoming when surveyed. When you ask what a customer will do in the future, take the response with a grain of salt.

5.Don’t try to be your own target market – you’re probably biased. The only true test of anything is the marketplace.

Some Thoughts on the Mind of the CustomerBuying behaviour embraces everything from what customers will buy and how they will buy it to what they will pay and even how you get your message across.

1. It is important to understand why your current customers buy from you. Is it habit, great product, great service or any of a number of other factors? It’s harder to lose a customer who buys your product or service frequently and regularly.

2. New customers are either moving from a competitor or they are new to your product/concept/service. Marketing strategies depend on the reasons customers buy products and services.

3. All customers, both individuals and commercial, are aff ected by rational and emotional reasons so your product must appeal to both.

4. Large organizations are more averse to risk so the safety of the product, service and the supplying company and important to their buying decision.

Some Thoughts on ProductLook at your product or service through the eyes of your customers, and make sure you are giving them what they want. Make sure your timing is right. Great marketers create products and services customers did not know they wanted until it was off ered. Dreamers create products and services customers will want in the future – and go broke in the process.

1. Customers do not buy products and services; they buy what the products and services do for them.

2. The diff erence between products can be as important as the product itself, especially in a competitive marketplace.

3. Products have always gone through a predictable cycle from introduction through acceptance to obsolescence – but it is happening a lot faster these days. Sometimes you must compete with yourself and drop older products.


4. You should brand your company and its products when applicable. This is true even for a small company because brand can often be a deciding factor for the customer.

5. The Total Product Concept can attract customers by off ering products with a surrounding group of services. When products are essentially the same, the added service may sway a customer’s decision.

Some Thoughts on PricePricing brings together marketing and fi nance. It is one of the most important, and yet least considered, elements in marketing. The fi nance (costing) part of pricing tells you what you need to cover your costs; the market part of pricing tells you what the customer is willing to spend.

1. You may fi nd that justifying price increases by saying your costs have increased doesn’t work because customers usually don’t care about your costs.

2. It is easier to set prices correctly than to change them, especially in a low-infl ation environment.

3. Prices must be set in terms of the way in which customers think. For example, since most people fi nance their cars, prices can be stated in terms of a price per month rather than the total cost of the car.

4. Prices are high or low only when compared to something else so if you can control the comparative frame you can control the perception of price.

5. Pricing strategies designed to maximize revenue will not maximize profi ts in any business with a marginal cost (such as retail or manufacturing). You must determine exactly what your pricing strategies are designed to accomplish.

6. Raising prices is a strategy you can use to slow growth and increase profi ts.

Some Thoughts on DistributionDistribution or location is one of the new battlegrounds in modern marketing. In the past, a retailer was a retailer, a wholesaler a wholesaler and a manufacturer a manufacturer. Today these lines have become blurred.

1. All businesses should consider multiple distribution systems. A manufacturer can sell direct or a retailer can set up a mail order/on-line option.

2. Great distribution makes it easy for the customer to buy. This applies as much to a well-designed store as it does to a well-designed web page.

3. If you are a retailer, make a map of your store and trace with a pencil the route a customer would follow. You will soon get a sense of traffi c patterns and bottlenecks.

4. Like-minded customers often live in similar neighborhoods, especially in the suburbs where subdivisions are made up of homes roughly the same age. For a retailer, if you notice a pocket of existing customers (from a postal code analysis for example), a targeted mail drop will have a higher probability of success than a random mail drop.


Some Thoughts on PromotionMany people think marketing is advertising, sales and promotion. In reality, advertising, sales and promotion are only a part of the entire marketing package. Promotion is simply communicating information about your product or company to your customers and potential customers. Choosing the message and the medium is crucial to your overall success in business promotion.

1. Don’t use your company name as your headline unless you are really well known. Nobody cares who you are until they know what you do!

2. As your business grows, make sure you have a great fulfi lment strategy. This is what you give a customer who asks you for more information. It can be a brochure, a package of information or a card with your website. It is more detailed than an ad and can be a very eff ective sales tool.

3. There are two customer groups – existing customers and potential customers. Choose the audience you want to reach, and make that communication very clear!

4. As shown in Table 5, there are three general messages to send to your target audience. A concept message tells the customer about your product in general. A company message tells the customer about your company. A product message tells the customer the specifi cs of a particular product.

5. Never let a newspaper design your display ads, unless you want them to look the same as everybody else’s.

Marketing PitfallsNot Learning to Say NO!When a business starts, it often has more capacity then customers, something that changes as the business grows. Too often, an entrepreneur fi nds it hard to turn down a sale and instead accepts it and tries to fi gure out how to deliver as an afterthought.

Off ering Too Much to Your CustomersSometimes, businesses have a tendency to try to keep increasing the number of products they off er. Plan additions to your product mix carefully; don’t just make them because a customer asked for something.

Falling in Love with a ProductTake care not to keep making or carrying a product you like if your customers are not buying it, even if it is something you have always carried. All products have a life cycle and most will eventually become obsolete. Don’t hang on too long.

Justifying Your Price Because of Your CostsPrice is a function of cost and competition. If you cannot compete, you may be better off discontinuing a product rather than hurting your price image by having a product sold at a higher price than your main competitors.

The Danger in DiscountingCutting prices can increase your market size, but it can be disastrous from a profi t perspective. As you can see from the Table 12 you’ll need to increase revenue to off set a price cut. And if the discount is not infl uencing buying behavior, it means you are just giving money away.

Type of Message

Concept Message

Company Message

Product Message

Financial Services

Registered Retirement Savings plans are a great way to save for your future.

We here at XYZ Financial Planning can provide for all your financial needs.

Our Super Growth Wonder Fund has returned 18% over the last three years!

Table 5 - Promotional Messages


Friendliness Versus SpeedIt is important to be friendly, but good service these days means speed and convenience. All elements of distribution, from store line-ups to commercial ordering, must be predicated on speed of order and speed of delivery.

Failure to Develop InformationTo grow your business, you will need great fulfi lment tools such as company profi les, brochures, catalogues and websites. In an information age where savvy customers are demanding more facts, this is one of the most crucial issues in business.

Marketing MeasuresMarketing is tough to measure because there is no single, objective source of information like a fi nancial statement. Marketing measures are subjective, they can be interpreted a number of ways and there are no set industry standards.

That said, you will need to identify benchmarks so you can track the success or failure of your company’s marketing strategies. Make sure you choose measures that reveal the most important information for your business.

Customer Measures (Consumer Businesses)Measure: Customer RadiusExplanation: Develop a customer list by postal code or address, and sort Explanation: Develop a customer list by postal code or address, and sort Explanation: it by a specifi c distance from your business to fi nd out how far customers are willing to travel to get to your business.

Measure: Average PurchaseExplanation: Use a cash register tape or count the number of invoices Explanation: Use a cash register tape or count the number of invoices Explanation: processed in any given time period to measure the average size of a transaction.

Measure: Average Purchase (Traffic)Explanation: This is for retail only. Divide the number of customers who Explanation: This is for retail only. Divide the number of customers who Explanation: enter the store (potential customers) into the sales over the same period of time. Used with the average purchase, it can measure the eff ectiveness of your sales staff and determine if your marketing eff orts are drawing the right customers and generating sales.

Measure: Average Annual PurchaseExplanation: Measure the average amount purchased by a customer in a Explanation: Measure the average amount purchased by a customer in a Explanation: year, and use it with your customer concentration ratio to identify better-than-average customers. This is a useful measure for companies wishing to increase their sales to existing customers. In businesses where each customer transaction is invoiced, the numbers are taken directly from the accounts payable system. In retail businesses, the average annual purchase is diffi cult to calculate unless there is an identifi er with each purchase.

Formula:

Formula:

Formula:

Formula:

# of Customers within X distance

Total # of customers

Sales

Customer count

Sales

Potential customers

Annual sales

Unique customers


Measure: Customer ConcentrationExplanation: Take the sum of the sales from the top 20% of your customers Explanation: Take the sum of the sales from the top 20% of your customers Explanation: based on annual sales (if you invoice, use your accounts receivable journal) and compare this to your total revenue. Use this to develop a marketing strategy to either sell more to loyal customers or reduce your dependence on them by seeking new customers or selling more to the next 20% group.

Measure: Customer TurnoverExplanation: Compare this year’s customer list and last year’s list. If you use a Explanation: Compare this year’s customer list and last year’s list. If you use a Explanation: program where customers are not dropped, look at the number of customers in your system. This is a critical measure in businesses with repeat business cycles of less than one year, and is less useful if purchases are infrequent.

Product Measures (Product Business)Measure: Product/Department ImportanceExplanation: Set up your management information systems to track this Explanation: Set up your management information systems to track this Explanation: information. This is important in all businesses with multiple product lines, and can be done by product type or by a group of products/services known as a department. This tells you the relative importance of a particular product or department.

Measure: Product/Department ContributionExplanation: The previous measure tells you how important a product/Explanation: The previous measure tells you how important a product/Explanation: department is to revenue. This measure tells you where you are actually making your profi t, which is very important in retail and manufacturing businesses.

Measure: New Product RatioExplanation: This is a good measure of innovation, and is a very important Explanation: This is a good measure of innovation, and is a very important Explanation: benchmark for product-oriented businesses and those that have expanded by opening new outlets. If the ratio is too low, the company is in danger of being left behind by more innovative competitors. As a business matures, its new product ratio will slowly be reduced.

Measure: Returns to RevenueExplanation: A measure of quality or customer satisfaction that is important Explanation: A measure of quality or customer satisfaction that is important Explanation: in retail and manufacturing businesses. If the number of returns increases, it may signal problems that need to be fi xed. In construction the number of callbacks per job is used.

Measure: Product to Customer to RevenueExplanation: Table 6 shows how this important measure can help to Explanation: Table 6 shows how this important measure can help to Explanation: focus marketing eff orts. Determine the percentage of revenue represented by an individual customer or a specifi c market segment, as illustrated in the example below.

Formula:

Formula:

Formula:

Formula:

Formula:

Formula:

Formula:

Sales from top 20% of customers

Total sales

Number of customers lost

Total number of customers

Revenue generated by a product or departament

Total revenue

Gross profit by departament or cetegory

Gross Profit

Revenue generated by new products

Total revenue

Returned sales

Total revenue

Revenue of a particular product to a particular customer

Total revenue


Table 6 – Product to Customer to Revenue Tables and Ratios (using a computer store as the example)

Measure: Market ShareExplanation: While this is a common measure in larger businesses, it is Explanation: While this is a common measure in larger businesses, it is Explanation: harder to estimate for smaller businesses. However, if you are in a consumer-oriented business, you can get an estimate of market size through Statistics Canada by going to www.statcan.ca/start.html and searching for Household Expenditure.

Measure: Dominant Price PointFormula: The most common product selling priceFormula: The most common product selling priceFormula:Explanation: Find out what prices are most likely to attract customers so you Explanation: Find out what prices are most likely to attract customers so you Explanation: can create price choices around those clusters. This is especially helpful for retail and restaurants.

Measure: Cost Per Lead, Cost Per SaleExplanation: Both are important measures of advertising eff ectiveness. You Explanation: Both are important measures of advertising eff ectiveness. You Explanation: want to know that your advertising is drawing traffi c AND resulting in sales. If it is not, this may mean the advertising is attracting the wrong clients or your sales staff are not eff ective.

Marketing StrategiesThis section shows strategies to develop your market along with details, pros and cons, and tips on when to use which strategy. You will want to be sure you have the operational, fi nancial and human resource capacity before proceeding.

Not all strategies are appropriate for all situations, and this is hardly an exhaustive list of strategies. Hopefully, this will be a spark for your team’s own creative business ideas.

Formula:

Formula:

Computer Systems

Laptop Computers

Printers

Other Peripherals

Parts

Service

Total

Home Users

$100,000

$25,000

$25,000

$15,000

$10,000

$50,000

$225,000

Small Business

$150,000

$100,000

$75,000

$20,000

$10,000

$100,000

$455,000

Large Business

$200,000

-

-

-

-

$20,000

$220,000

Government

$50,000

$50,000

-

-

-

-

$100,000

$500,000

$175,000

$100,000

$35,000

$20,000

$170,000

$1,000,000

Computer Systems

Laptop Computers

Printers

Other Peripherals

Parts

Service

Total

Home Users

10.00 %

2.50 %

2.50 %

1.50 %

1.00 %

5.00 %

22.50 %

Small Business

15.00 %

10.00 %

7.50 %

2.00 %

1.00 %

10.00 %

45.50 %

Large Business

20.00 %

-

-

-

-

2.00 %

22.00 %

Government

5.00 %

5.00 %

-

-

-

-

10.00 %

50.00 %

17.50 %

10.00 %

3.50 %

2.00 %

17.00 %

100.00 %

Annual revenue

Total Market

Number of new leads

Cost of ad campaign

Sales due to ad campaign

Cost of ad campaign


Customer StrategiesStrategy Opening Additional OutletsDescription A common strategy is to duplicate an operation in another geographic area. Details Both outlets can have the same name and share marketing or each can have a separate name and image with a shared infrastructure. Examples of companies with more than one outlet under their control include Thrifty Foods (a Victoria, B.C.- based grocery chain) and Chapters.Pros • You have experience with the business, and control of the new operation• Your business has a customer image and supplier relations• You reduce costs by sharing overhead expenses such as bookkeeping and purchasing• You may get goods at a lower cost through volume buying• You can use your existing operation to train staff for the new outletCons• You will need a manager and staff for each operation, and your own workload will grow• Each operation needs a separate business plan and involves start-up costs• There could be a strain on cash fl ow until each new outlet is in full operation

Strategy FranchisingDescription Your company can set up a turnkey operation for a franchisee. You provide the physical location, training, marketing and purchasing support.

Franchises tend to succeed in operations in which a well-honed system leads to an excellent business. Franchising is not a do-it-yourself proposition. Seek the help and advice of good franchise consultants before embarking on this strategy. Details There are well-known franchises such as McDonald’s and Curves but many smaller companies follow this route as well.Pros• Somebody else takes on the risk of the operations• You receive revenue from selling the franchise and from the ongoing royalty• You have reduced costs for starting up each new outlet• Usually faster than opening new outlets on your own Cons• Selling and operating franchises is a very diff erent business and you will usually have to hire marketing specialists• There are a number of complex legal regulations in franchising that diff er from province to province and state to state• You loose control of your operations and part of your image – one bad franchisee can hurt the reputations of all franchisees


StrategyStrategy Strategy Line Extension/Brand ExtensionDescription Adding to your product line or modifying products can attract new customers or open up new markets. In brand extension, the product is modifi ed slightly to meet a new market.

This is a diffi cult strategy to get right – too few products and there’s not enough choice, too many and you risk diluting your overall brand and confusing customers.Details A company that sells wood tables could make other types of furniture.Pros • Less risk if the original line is well established.• Often less re-design expense• Off ers your customers more choiceCons• You are competing with yourself• If products are similar, customers could get confused• Too much brand extension can work against you as customers can become confused with too many choices

Strategy Double Branding/Private LabellingDescription Some companies create a separate image if they have products destined for diff erent markets. If a product is labelled for a specifi c supplier, it is known as private labelling.Details Branding strategies can be very successful especially in the small manufacturing sector. A jeweller making both fi ne and costume jewelry is a perfect candidate for such a strategy. Or an independent retailer could approach a small manufacturer for a privately labelled line to distinguish itself from national chains and franchises.

Black & Decker produces a professional line of hand tools under the brand name Dewalt. Some supermarkets sell more privately labelled soft drinks than the heavily advertised national brands, and at a higher profi t margin.Pros• Provides a similar product to a new customer base• Penetrate diff erent markets; upscale if branding and down market if private labellingCons• The diff erences in brand must be real and be presented clearly• There are costs in developing new brands, packaging and promotional material

Pricing StrategiesStrategy Price PackagingDescription Sell products or services together or break them apart and price accordingly.Details This encourages customers to buy a group of products in exchange for a price discount. The package must make sense to the consumer or business buyer, and is most eff ective in habitual or impulse purchases. Examples include season’s tickets or a full meal package in a restaurant.


Pros • Easy to implement strategy• Makes the purchase easier for the customer• Encourages the customer to buy moreCons• Gives up some gross profi t margin

Strategy Value-Added Pricing Description Giving away an item or product with a purchaseDetails A great pricing/promotional strategy, especially for products that appeal to children, such as toys in a fast-food restaurant. It includes promotions such items in cereal boxes, a free makeup bag with $50 worth of cosmetics or 20% more shampoo for the same price.Pros• Preserves the value of your existing product• The value to you is at cost, but the value to the customer is at “retail”Cons• The cost of the promotional item • The product/company should be complementary

Strategy Pay one priceDescription Unlimited use for a single price Details This system works well if there is little marginal cost and excellent capacity, such a seasonal pass for a ski hill. There should be no added costs per use and customers with a pass must not be taking the place of customers paying a higher one-time cost. Pros • Up-front payments are great for cash fl ow• Customers are tied to your product since they have pre-paid• Customers often do not use as much as they think they willCons• Unless cost accounting is done correctly, over use can hurt• Not a good strategy in areas with a marginal cost or a capacity issue

StrategyStrategy Strategy Captive PricingDescription Sell a system at a lower cost and make money on the high- margin consumable.Details This is a common strategy in larger industries, such as razors and blades, video game systems and video games, ink jet printers and print cartridges.

The greatest risk is that if somebody competes on the low-margin consumable, you lose the advantage of the downstream income, and the price reputation of the system could be ruined. Pros• Provides a long-term stream of high-margin salesCons• Risk of a lower-priced competitor


Strategy Price Lining / Key Price PointsDescription Providing a good, better, best price choiceDetails Price lining, such as a restaurant wine list, is an extremely important aspect of retail. The price line provides a choice for the customer, yet limits the choice to logical groupings.

For example, if your lowest price is $4.99, a logical mid-range price is $19.99 and the high-end price is $49.99. For a higher- priced product, the key price points might be $14.99, $39.99 and $99.99

Price lining is an important aspect of consumer marketing, however, more and more consumer marketing techniques have been adopted in commercial marketing. If you are a wholesaler/manufacturer it is important to know what the fi nal selling price for your product will be and work backwards from the retail price. For example, if you know a retailer takes a 100% mark-up, ensure the wholesale price marks up to a reasonable retail price.

Extra hint for luxury industriesIf you are selling luxury items, you should always have a very high price point. For example, if a jeweller sells earrings, the price line could look like this: Plain Earrings $ 24.99 Better Earrings $34.99 Fine Earrings $49.99 Outrageous Earrings $89.99

The outrageous earrings make the fi ne earrings appear more reasonable and provide a higher price point for customers who want to pay top dollar. Pros • Allows you to provide price choice• Customers can compare within your product assortment rather than going to your competitionCons• Can only be used if you have several products in your product mix

Strategy Time or Seasonal pricingDescription Adjust price up or down during specifi c timesDetails Something like an end-of-season markdown is tricky. If you move too soon, you give up profi t margin. If you move too late, the product may not sell or require a higher markdown. Keep track of the numbers sold at each price point so you can tell if the initial price was too high or if customers are responding to the markdown.Pros• Allows for seasonal clearances or load balancingCons• Customers may be conditioned to wait for the sales• Customers are unhappy when a product they just bought is marked down.


Strategy Trial Pricing Description Make it easy for a fi rst-time buyer.Details Trial pricing works well if a customer is trying a product or service for the fi rst time, rather than leaving one competitor for another. When it is used to encourage customers to change suppliers, there is a risk of either a price war or customers changing suppliers frequently. Some companies will have an off -price promotion program for existing customers to avoid losing customers. Trial pricing is often used for health club memberships or wireless communications where the fi rst few months can be free.Pros• Encourages customers to try the product or serviceCons• Turnover is costly when customers leave• Existing customers can feel that they are paying too much

Strategy Annual Volume DiscountsDescription Wholesalers or manufacturers provide rebates to customers based on their annual orders from that company. Details This is more of a business-to-business strategy, although co- operative selling and banking enterprises do use a version of volume rebates to members. It is often used for high-volume, low-margin (retail margins) products.Because they do not have to pass on the annual volume rebate, your retail customers are more likely to choose your products if they sell things like milk or fi lm that off er very little margin but provide a convenience for their customers. Pros• Encourages retailers to promote and reorder your product• Encourages retailers to limit their product line to move customers towards your brands and products• Great for cash fl ow as you would never rebate a customer who owed you money and the discount comes after the sale Cons • The strategy may not be aff ordable if your own product is low margin

Distribution StrategiesStrategy Multiple Distribution – ManufacturingDescription Factory direct stores and wholesale distributionDetails This can be very successful, especially with the advent of the Internet as a direct selling tool. If you still plan to sell your products wholesale, make sure your price is similar to the price charged at a retail outlet to maintain price integrity. The possible exception is where you have a factory in a remote area and people can get a bargain by coming to you. This is often used to sell seconds, slightly defective products not sold in stores. Pros • Makes manufacturer less dependant on retailersCons• You can be perceived as competing with yourself


Strategy Multiple Distribution – RetailDescription A business begins with one method of distribution, then expands into other types of distribution.Details Tilly Endurables began as a mail-order business, and now has retail outlets, retail partners, on-line sales as well as its original catalogue distribution methodology.

There are many ways to be creative and off er multiple distribution methods. A record store could set up a kiosk selling soundtracks and DVDs at a local movie theatre. A bookseller could off er best-selling novels from vending machines at smaller airports that do not have gift stores. Service businesses also off er multiple distribution methods – you can choose a teller, an ATM or on-line banking. The trend toward the customer doing the work previously done by paid staff can also save costs and become an eff ective operations strategy.Pros• Allows you to expand geographically • Meets diff erent customer needs• Provides added convenience for customersCons• You may need to master a diff erent style of selling/distributing

Promotional StrategiesStrategy Membership/Affinity PlansDescription Programs that reward customers for repeat business.Details A common promotional strategy for customer loyalty. With today’s technology, tracking rewards has become very easy – even for small operations. That said, the stamp or punch card method, (buy fi ve cups of coff ee, get the sixth cup free) is a low-tech approach to reward marketing.Pros• This can keep customers coming back to your business• It creates a sense of community that is so important to many of today’s consumersCons• It costs money, whether you are off ering points or a discount • There are so many of them they may lose their ability to aff ect buying behavior

Strategy NewslettersDescription Sending newsletters to valuable customers.Details A professionally edited and laid-out newsletter works well if you have information that is of value to your customer, such as tax tips from an accountant. Before you start, make sure you are prepared to commit to sending out a quality newsletter every quarter for one year. A newsletter can be emailed to a voluntarily subscribed list, linking customers to your website. Put it in a PDF format (Acrobat Viewer can be downloaded free) so it looks the same regardless of the operating system used to view it.


Pros• You touch base with your clients on a regular basis• You promote your expertise• You show you take care of your customers on a year-round basisCons• Newsletters are diffi cult to do well, and a poor one does more harm than good• They can be perceived as junk mail and discarded• They are time-consuming and distribution (other than by email) can be costly

Strategy Customer Events Description Customers are invited to a central location for a special event/celebration.Details A retail fashion store can hold a fashion show/pre-sale for new customers or an automotive dealership can launch the new models. In businesses with longer business cycles, such as automobiles, it off ers a reason to stay in touch. Pros• Provides non-price reasons to keep customers• Provides a reason to stay in touch with customers• Customers get together in a casual atmosphere with a business purpose• You present your product/company to a receptive audienceCons• Can be time consuming and expensive• Can become more a party than an eff ective promotional event

Strategy Seminars and WorkshopsDescription Presenting an informative seminar or workshop on a topic that demonstrates your professional competence.Details You can promote and arrange your own workshops, teach at a local college or hold a workshop at a trade shows. It is not easy to lead a successful seminar so some companies hire people with appropriate expertise to lead seminars on their behalf. Pros • Great way to build credibility in your industry• Valuable exposure for the company and its products/service• A good performance can get great resultsCons• If you do a poor job, you can do more harm than good• Involves substantial time commitment to promote and develop workshop materials

Strategy On-site Signage and Local Area Mail OutsDescription Post a sign promoting your company at a job site and follow up with a neighborhood mail out.Details Many neighbourhoods are built up in a similar time period so the needs of homeowners are similar. When one roof needs to be replaced, others will need to be replaced.Ask permission to post a sign at the site promoting your company and make sure operations vehicles used for the job are well signed.


When the work is done, mail an information card to neighbours in a one- or two-block radius. This is an excellent and inexpensive way to promote services such as gardening, painting or home renovations.Pros • Increases your credibility locally; potential new clients can ask their neighbours for a referenceCons• The follow-up cards can be viewed as junk mail

O P E R A T I O N SF R O M C H A O T I C T O S Y S T E M A T I CUnlike the other divisions, where general rules apply to all businesses, the operations division is more industry specifi c. Effi cient operations are an essential foundation for the growth of any business – whether it provides services or produces goods. Techniques and strategies that work in retail may have no use in manufacturing. Measures that are important in a service business may not apply in wholesaling.

Operational issues for start-up businesses are also very diff erent from those of stable or growing businesses. You need to use your own judgment around how to apply the measures and strategies found in this section to your business.

The goal here is to provide you with some of the over-arching principles that deal with all types of businesses. You or the people within your organization have the technical knowledge needed to adapt these practices to meet your needs. This guide cannot provide industry-specifi c technical advice but it can help you refocus your eff orts to become more effi cient and eff ective at whatever you are doing. In general, your business will fi t into one of the following industry types:

Retail/wholesale businesses generally buy and sell things made by others without substantially changing the product.

Manufacturing businesses make things out of diff erent inputs, and include traditional manufacturing as well as industries such as food processing and even restaurants.

Service businesses provide services to customers such as personal services or travel services.

Hybrid businesses combine more than one of the above. For example, a plumbing contractor who provides services and sells parts at a markup for these services or a business in custom manufacturing/direct sales that combines manufacturing and retail.

Some Thoughts About OperationsCapacity is at the heart of every businessCapacity applies to every type of business and even non-business applications, and is the centre of all operational improvements. As illustrated in Figure 6, capacity is a function of production over time. It can be measured for everything from billable hours a week to units of production an hour to number of haircuts a day.

Figure 6 – Capacity and Market Demand

Current Capacity

Projected Demand

Under Capacity Over Capacity


You must address three issues in order to develop a capacity strategy:

1. What is your current capacity?2. What capacity will you need in the next two years?3. How can you increase this capacity?

You do not have an operational problem if you currently have more capacity than you need. If you project increased sales, you want to look for ways to increase capacity before you risk having more demand than capacity. Or you may want to change your marketing strategy (such as reducing sales eff orts or increasing prices) to reduce the projected demand.

Backlog is a Symptom of a Capacity ProblemBacklogs or waiting lists are symptoms of a capacity problem. If you want to grow your business, you must increase your capacity. If you want to slow your growth, modify the demand for your product by adjusting your marketing strategies.

While this is a simple concept, it is also profound and has major implications for your business. Capacity costs money and therefore must be fi nanced. If you have too much capacity, it will mean added costs. If you have too little capacity, you risk losing customers because of backlogs.

Some businesses have the option of stockpiling products during slow times and selling them when demand is high. Obviously this does not work with services so if you have a service industry you need to plan around peak demand.

Seasonal Businesses Need More FlexibilitySome businesses run fairly consistently throughout the year; others are seasonal with peaks and lulls at diff erent times of the year. Fixed costs, such as rent, lease and loan payments, must be paid despite these seasonal fl uctuations so the business operations must be fl exible.

Every Business has a SystemEvery business, from a fast-food restaurant to a service station, has systems that start when a customer enters the business or places an order, and continue through the purchasing/manufacturing process to billing, delivery and customer service.

Often these systems evolve over time, with many quick fi xes rather than a complete redesign. In small businesses, owners often do all of these things, and keep all of the information in their heads. As a company grows, this becomes impossible.

Design Systems for the Rule, not ExceptionsMany companies design systems that will meet all contingencies when most of the time they are dealing with routine situations. For example, you might improve your effi ciency by replacing specialists with generalists. While specialists can handle the most complex jobs, in most businesses the greatest amount of work is simple and straightforward and can be handled by a generalist with access to information through a computerized database.

Figure 7 – Capacity and Decision-MakingFigure 7 – Capacity and Decision-MakingFigure 7

The problem with services is that they cannot be put into inventory and therefore you must pland around “peak demand”

Your productive CapacityDemand for Products orServices

Supply of Products orServices

If demand is greater thansupply, then there is a

backlog.

If Production is greaterthan demand, there is asurplus which can be put

into inventory.The problem with servicesis that they cannot be putinto inventory andtherefore you must planaround “peak demand.”


Customer Service is Personal and SystematicShorter lines and quality products do more to improve customer service than friendly clerks. Make sure your staff are able to provide excellent customer service through well-designed processes. A hotel that promotes effi cient check-outs is working against its own customer service if the desk staff also have to answer the telephone.

Vendor Relations is a Critical Component of OperationsYour suppliers are an important part of your operations, and you should rank them on issues such as responsiveness, minimum orders and clarity of invoicing as well as price. Wal-Mart provides suppliers with internal, confi dential sales data so they can better anticipate purchases and match production to ordering. This leads to lower inventory costs for both Wal-Mart and its suppliers.

Design Decisions are More Than Marketing DecisionsA new business develops products in response to market demands. Once the company is established, considerations such as existing infrastructure and existing inventory enter the mix. It is less risky to add a new product that can be made with existing equipment for the market you already serve than to plan a new product that needs new equipment to capture a new market.

Everybody Needs to Know the Whole StoryWhen a company is small, everybody knows everything. As it grows, people can become disconnected. When an individual does not understand why a task is important, they are less likely to do it well … if at all.

Operations PitfallsExpanding Capacity Too SoonAs a business grows, it needs to increase capacity by adding equipment in a manufacturing business or hiring new staff in a service business. The higher overhead costs become an issue if the increased sales do not materialize.

Opening Multiple Outlets/Running Multiple Crews Without a Diff erent StructureAs a business grows, a new outlet, such as a branch offi ce, new store or branch plant, can allow it to produce more. In a location sensitive business, it can also sell to a diff erent geographic market.

This can become a problem in businesses structured for a single location/single crew type of operation. As the number of outlets grows, the management structure changes and there is a need for a supervisory level between the owner and the employees, such as a job foreman or new store manager. This changes the culture of a company where everybody knows the owner.

If employees are used to dealing with the owner, they may be tempted to bypass their new supervisor and take issues to the owner. An owner who is not prepared for the new role as a manager of managers may undermine the supervisor.


Failing to fi nd BottlenecksOne of the easiest ways to analyse your operation is to staple yourself to an order. Once you have followed the order you should do the following: • Determine the specifi c steps for your customers to order and for that order to be fulfi lled. Start with a regular order. • Review the routine process, and determine how specifi c exceptions are handled. • .Identify any bottlenecks. • Make an eff ort to fi x the bottlenecks.

A company off ering professional forestry services was having trouble increasing its capacity. It found that almost all its jobs had to be mapped and the mapping department was at capacity. By hiring an additional mapping technician and buying a new computer, software and plotter, the company increased its production by 40%.

Operations MeasuresNote: These measures will provide a guideline, but business owners must adjust them to they are relevant to individual situations. The following are a combination of objective and subjective analyses.

Measure: CapacityExplanation: Measure current capacity in terms such as units/day or billable Explanation: Measure current capacity in terms such as units/day or billable Explanation: hours/year. In the above equation, you can also replace maximum production with a dollar amount.

Measure: UtilizationExplanation: Measuring your actual production against maximum production is an excellent planning tool because it shows how close you are to full capacity.

Measure: Peak UtilizationExplanation: This measure shows how close to capacity you are during your Explanation: This measure shows how close to capacity you are during your Explanation: busiest month. An example would be hotel capacity in the busiest month.

Measure: Order Processing TimeFormula: Time from an order being placed to being processedFormula: Time from an order being placed to being processedFormula:Explanation: An excellent service measure that reveals any gaps between Explanation: An excellent service measure that reveals any gaps between Explanation: sales and manufacturing. It can be simple, the average number of rings it takes to answer the telephone, or complex, the time required to provide a requested quote for a job.

Measure: Product Processing TimeFormula: Time required from when an order is placed to when the item Formula: Time required from when an order is placed to when the item Formula: is produced Explanation: Look for ways to reduce this time period if you are losing customers because production is too slow. This is becoming an important non-price competitive factor.

Measure: Seasonal Variance RangeExplanation: This measure is a simple way to calculate seasonal variance. Explanation: This measure is a simple way to calculate seasonal variance. Explanation:

Formula:

Formula:

Formula:

Formula:

Maximum production

Time period

Peak monthly production period

Maximum production period

Actual production

Maximum production

Peak production

Maximum production

Low production

Maximum production-


Measure: Order Delivery TimeFormula: Time from processing to when the customer receives Formula: Time from processing to when the customer receives Formula: the productExplanation: Effi cient ordering and production mean little if there is a Explanation: Effi cient ordering and production mean little if there is a Explanation: shipping backlog because the customer still does not have the product. You can add up the order processing, product processing and order delivery for the total processing time of your product or service.

Measure: Quality or Defect Rate Explanation: Usually used in manufacturing businesses, this measure looks Explanation: Usually used in manufacturing businesses, this measure looks Explanation: at quality before the product leaves the factory. Customer returns are another quality measure discussed in the marketing section.

Measure: Inventory lead timeFormula: Time (in days) to order and receive inventoryFormula: Time (in days) to order and receive inventoryFormula:Explanation: Compare this with inventory turnover and use them together Explanation: Compare this with inventory turnover and use them together Explanation: to determine inventory turnover targets. Minimum orders and shipping fees should also be taken into account when determining inventory levels and triggers for re-ordering. You will fi nd more information about inventory in the fi nance section.

Measure: Supplier SatisfactionFormula: Subjective measure of your dealings with the supplierFormula: Subjective measure of your dealings with the supplierFormula:Explanation: Use a supplier evaluation form to help you determine if your Explanation: Use a supplier evaluation form to help you determine if your Explanation: suppliers are as good as they should be.

Operations StrategiesOperational strategies are business specifi c so this section is intended to act as a catalyst for diff erent strategies and ideas you might want to employ. Common objectives of operational strategies include: • Increasing the company’s output – whether it is manufactured units (manufacturing), hours billed (services) or units sold (wholesale/retail). • Increase the company’s effi ciency – making more units faster and at a lower cost. • Decrease the company’s costs – for everything from the input costs to operating costs.

Procurement StrategiesProcurement strategies help you reduce input costs by re-examining your relationships with suppliers and working with them for better effi ciencies in inventory levels, order/shipping times and prices.

Strategy Implement a Just-in-Time Inventory SystemDescription Ask suppliers to deliver supplies when you need them, reducing your holding costs. Details This is part of a comprehensive procurement strategy. You will have to share forecasts and other information with suppliers since they become your partners in the overall distribution chain. It is common in construction to order to site for use.

Formula:

Defective products

Total products


Annual volume discounts, which come into play if you order a certain amount in a year, are credited once a year. If you negotiate an off - invoice discount, this is taken off each invoice and gives you a better idea of the actual cost. Pros • Reduces your inventory levels and holding costs• Reduces obsolete inventory as only current inventory is purchasedCons• Requires stronger bonds, often with fewer suppliers• May lose order volume discounts• The discounting structure can be a downside

Strategy Have Suppliers Add Value to Your Manufacturing ProcessesDescription Suppliers process inputs to meet your specifi cations.Details This can be a win-win if the supplier has processing equipment and the manufacturer does not. Examples include a manufacturer ordering pre-cut material to specifi c specifi cations, a computer manufacturer buying pre-loaded software or a restaurant purchasing special cuts of meat. It is important to agree on specifi cations ahead of time, and have a comprehensive quality control program in place. If you are a supplier, this is a great marketing opportunity.Pros • Speeds up your manufacturing process • Frees up your staff • Saves you money if you would otherwise need additional equipment or staff Cons• Makes the ordering function more complex• Costs more than buying the raw materials• Means you lose part of the manufacturing process

Strategy Review all of Your Supply Relationships.Description Review relations with all suppliers on an annual basis with respect to price, quality, responsiveness, service and other factors important to your business, starting with your largest suppliers. Details Often the only reason for using a particular supplier is that a company has been using them for a number of years. It is important to systematically review:quality of the product or serviceon-time performancecredit and discount termsproblem facilitationpersonal relations with sales and accounts receivableYou don’t have to threaten to leave, but sometimes you can get improved credit terms, or even prices just by asking. Remember that all your suppliers including your fi nancial institution are suppliers in a competitive marketplace.Pros • Saves you moneyCons • Takes time and eff ort


Strategy Review Overhead ExpensesDescription Go through each expense to determine if you are truly getting value for your money.Details As revenue grows, many entrepreneurs fail to watch the expenses. Having a person who controls costs, such as a corporate controller, is essential to the ultimate success of the business.There are companies whose entire business is saving you money by providing this kind of service. Areas to consider include:

Communications: Even a medium user of telephone, Internet and mobile telephone services should always be looking at ways to improve effi ciencies and reduce expenses. Ask a sales representative to put together a comprehensive monthly plan, or examine bundled services or Voice over Internet Protocol (VoIP).

Company Benefi ts: Have your various suppliers re-bid on your Company Benefi ts: Have your various suppliers re-bid on your Company Benefi ts: business. Benefi ts can account for up to 35% of wage costs so this can save a great deal of money.

Power consumption: If you are a large power consumer, Power consumption: If you are a large power consumer, Power consumption: review your energy consumption on a regular basis. In B.C., the BC Hydro® PowerSmart™ program can help industrial power users save money. For more information see www.bchydro.com/business/investigate/investigate834.html.

Travel Costs: It may be as easy to book online (using airline Travel Costs: It may be as easy to book online (using airline Travel Costs: or hotel websites or services as expedia.ca) as it is to use a travel agent; however, if your needs are complex, you should spend the extra money on an agency to ensure that your travel arrangements are made correctly.Pros • Can save thousands of dollars, and add up over the years Cons• Involves a picky, administrative exercise, and must be done by the right kind of person – rarely the owner

Strategy Sell Somebody Else’s Product as an AgentDescription Find a supplier to provide the entire product Details This is a great way to use a supplier’s expertise (operations) to increase your product mix (marketing) in a cost-eff ective manner. For example, a pub can allow patrons to order pizza from the local pizza parlor after its kitchen has closed. Pros• Provides your business with added revenue• Off ers your customers added convenience• Off ers benefi ts to your business and your supplier Provides opportunities to enter new businesses with little or no riskCons• Requires co-ordination and co-operation• Reduces your profi t margin in an area where you could provide the product or service yourself


Strategy Develop a Quality Management Program Description Set and monitor measures for specifi c processes and quality assuranceDetails Competitive forces in today’s marketplace mean that quality is no longer value added, it is required. A growing business needs to take a careful look at process management and quality.

Certifi cation programs like International Standards Organization (ISO) (www.iso.org ) and Six Stigma are worth examining if you plan to develop a formal, quality management program for your growing business.

When an operational system is in place, everyone should follow it until it is replaced. There may be other ways to get the job done but once a preferred process is chosen, it should be followed by everyone until a new one is adopted.

This is a greater challenge in a growing business where people are used to doing things their own way. This can make it hard to co-ordinate projects and to convince staff to move to a standardized process.

The ISO certifi cation program summarizes eight quality management principals. See: www.iso.org/iso/en/iso9000-14000/understand/inbrief.html

• Principle 1 Customer focus • Principle 2 Leadership • Principle 3 Involvement of people • Principle 4 Process approach • Principle 5 System approach to management • Principle 6 Continual improvement • Principle 7 Factual approach to decision making • Principle 8 Mutually benefi cial supplier relationships

Operational strategies are very industry specifi c. What is universal is the need to increase capacity and to continue to be cost eff ective.Pros• Improves quality and consistency of any process, including production and provision• Provides data to support marketingCons• This involves a lot of work, and it may sometimes feel like there is little return for the eff ort made.


H U M A N R E S O U R C E SF R O M C O L L E G I A L T O S T R U C T U R E DHuman resources represent an especially challenging area in a growing business for a variety of reasons, many of them linked to the fact that the business is often moving from an informal, family-style atmosphere to a more structured organization.

Growth aff ects the number of positions, the type of positions and the organizational structure. Since people are usually the most fl exible resource in a company, it is easy to put off human resource decisions and strategies. Many business owners fi nd it tough to tackle human resource issues, and the problems take longer to surface. So it is not surprising that human resource decisions often lag behind other business decisions, something that can be extremely damaging to a growing business.

It is always wise to have a systematic human resource plan, especially if your company is growing. You need to anticipate your needs and meet them as you achieve specifi c fi nancial objectives if you want to grow your business in a controlled manner.

Some Thoughts About Human ResourcesNote: The following points relate to the four areas of human resources: needs analysis and recruiting; training and development; compensation, and management/supervision.

Needs Analysis and Recruiting

1. If it is diffi cult to anticipate your needs as your company is growing, you will want to look for people who are fl exible and willing to take on new tasks.

2. As your business grows, your needs may become more specialized and you may need help to judge whether individuals have the right expertise. For example, ask your accountant to assist when you are hiring a bookkeeper.

3. Recognize there is always a trade off between hiring for skill and experience only, and hiring for attitude only. Both are important.

4. If you have the choice of hiring a slightly over-qualifi ed person or a slightly under-qualifi ed person, hire the one who is less qualifi ed. If your company is growing, you want people who are reaching for the next level rather than those who are content with where they are. If a position is specialized, hire the best person with the best attitude.

Conducting Job InterviewsThere are only two reasons to ask a question – to gather information to support hiring an individual and to determine if there is a reason why they should not be hired. There are several kinds of interviews:• Candidates anticipate a traditional interview (e.g. “Where do you see yourself in fi ve years?) so you don’t learn a lot about them.• Questions in a behavioural interview probe a candidate’s past on the premise that the best predictor of future behavior is past performance.• In the stress interview, a recruiter may just say nothing and observe what the candidate does, or ask candidate to open the window in a skyscraper whose windows do not open.


• Microsoft has popularized the puzzle interview. Some questions (e.g. “How can you measure exactly four litres of water if you have fi ve-litre and a three-litre containers?”) have correct answers and determine the ability of the candidate to solve problems. Others (e.g. “How many gas stations are there in British Columbia?”) show the thinking process required to make an estimate.

Job DescriptionsA growing business is well advised to create job descriptions that focus on results and objectives rather than on tasks. This allows you to clearly determine desired outcomes, and to ensure the job description leads naturally into performance. A person who performs all the tasks but does not achieve the results may have little value to the company.

Training and Development1. Have a formal orientation for new employees, and make sure expectations are clear. Prepared a checklist with everything from the location of the washrooms, breaks, hours of work and illness policies, and review it with the new employee.

2. When teaching a new skill, keep in mind that people learn in three ways. Visual learners learn by sight and tactile learners, also known as kinesthetic learners, learn by doing. The least common are auditory learners who learn by listening.

3. Explain things in context. Telling someone why something is important helps reinforce the importance of completing a step within the task.

4. As your company grows, make sure your staff have opportunities for mentoring, coaching and further training so they develop skills the company needs.

Compensation1. Compensation includes wages as well as statutory benefi ts such as employment insurance, workers compensation, Canada Pension and holiday/vacation pay. These benefi ts alone add about 15% to the hourly wage. The average company in Canada has benefi t costs in excess of 30% of the base wage.

2. Know all the rules. In British Columbia, you will fi nd information about the Employment Standards Act at www.labour.gov.bc.ca/esb/. In a unionized environment, the collective agreement is the rulebook for your workplace.

3. Wages help you recruit, but do not motivate. Bonuses motivate so it is important that performance-based compensation rewards the right behavior. For example, if you pay people on a commission basis, and they can negotiate on price, then perhaps the compensation should be based on gross profi t rather than on sales.

Management/Supervision 1. As a manager – and as the owner you are the ultimate manager – your fi rst priority is to create and maintain a great working environment if you want to retain staff and make sure they are as productive as possible.


2. Regular and clear communication will do more to improve the working environment than anything. Clearly communicate your expectations, and do not assume anything, especially in times of rapid change.

3. Identify your company’s critical measures, focus your management on them, track and share information, and refl ect the results in your compensation.

4. Let your supervisors supervise. If you interfere, this just creates frustration and confusion for everyone.

5. If your company is growing, it is especially important to identify future management/supervisory needs and start developing leaders now.

Human Resources PitfallsNote: Human resources needs to be examined from two points of view – the owner/manager as an employee and the owner/manager as the company CEO.

Owner as EmployeeFailing to Defi ne Your Role Within the Companys your company grows, make sure you have a clear defi nition of your role so you don’t wind up doing whatever is left over. Look at what you can do, what you want to do and what needs to get done.

Be aware of your own skills. You do not have to know how to do everything, but you should have an understanding of all areas of your business. You may not be able to create fi nancial statements, but you must know how to read them. Base your decision on what you can do and what you want to do.

If your company has grown from a staff of fi ve to a staff of 100, you will fi nd yourself moving from worker to supervisor to manager to executive. Some entrepreneurs do not necessarily want to stay right at the top. Bill Gates wanted to stay closer to the technology so he made Steve Balmer CEO at Microsoft.

Failing to Share InformationOwners must be willing to share information if they want their companies to grow, and this means trusting employees with critical information. As noted earlier, people who do not understand the whole picture cannot perform their jobs as well.

Businesses with owners who do not trust their employees will not be able to grow beyond a size where the owner can personally oversee everything. This is not necessarily a bad thing, unless the objective is to grow the company.

Owner as ManagerFailing to Fire Quickly EnoughOf all the human resources mistakes, this has to be number one! When you make a recruiting mistake, fi x it and fi x it fast. Try to recruit well, make your expectations crystal clear, provide employees with proper tools, support, training and encouragement, and give them time to learn a new position. But if there are problems, and a person is not willing to perform tasks for which they were hired, you made a mistake. Cut your losses and let them go immediately. The longer you let the poor recruits remain, the more damage is caused and the more diffi cult and costly it is to fi x later.


One business owner reports that he hired the wrong person as business manager and it really cost his business. “He was great behind his desk performing technical tasks, but never went out to see customers. Years later, we found out that our customers’ opinion was that we as a company no longer cared enough to send the general manager to see their facility, delegating it to the sales staff . This led to a slow but defi nite deterioration of our relations with our customers from which we were unable to recover.”

Failing to Co-ordinate Training and Recruiting PoliciesYou have a choice – either hire trained people or pay less and train people. Many people talk about hiring for attitude and training the new recruits, then fi nd they have neither the time nor inclination to do the training. Either strategy is good as long as you have a training plan and are prepared to follow through if you chose the second option. Otherwise you will wind up with under-performing and frustrated staff .

Human Resources MeasuresMeasure: Staff TurnoverExplanation: If there is high turnover, this may signal a recruiting or morale Explanation: If there is high turnover, this may signal a recruiting or morale Explanation: problem, and it means you will spend a lot of time recruiting and training new staff .

Measure: Sales per Employee (FTE), Profit per EmployeeExplanation: This measures effi ciency. Reductions on a year-to-year basis Explanation: This measures effi ciency. Reductions on a year-to-year basis Explanation: show more human resources going into non-operational or marketing areas of the business. If you move to more sub-contracting, the expense moves from human resources to operations.

Measure: Average SalaryExplanation: Combined with your percent-to-sales ratio, this determines Explanation: Combined with your percent-to-sales ratio, this determines Explanation: if your wage costs result from salary increases. Changes in this area are not necessarily good or bad, depending on what is happening with the sales-per-employee or the net-profi t- per- employee ratios (see above).

Measure: Training per Employee (Days, Dollars)Explanation: This will show how much time and eff ort are devoted to Explanation: This will show how much time and eff ort are devoted to Explanation: training. Don’t forget to include dedicated internal training resources.

Measure: Absenteeism Days per EmployeeExplanation: Changes in absenteeism can indicate morale problems or it Explanation: Changes in absenteeism can indicate morale problems or it Explanation: could mean a bad fl u season. This is an indicator, but should always be taken together with other factors before reacting.

Formula:

Formula:

Formula:

Formula:

Formula:

Total revenue

Total # of employess

Net profit

Total # of employess,

Number of employess leaving

Total number of employees

Total wage & benefit costs


days devoted to staff training


Expenses devoted to staff training

Total number of employees,

Total sick days



Measure: Employee SatisfactionFormula: Measured with various surveysFormula: Measured with various surveysFormula:Explanation: As a company grows, it is easy to lose touch with how Explanation: As a company grows, it is easy to lose touch with how Explanation: employees feel, which can result in resentment, turnover, burned-out employees and an overall lack of productivity. A company can only grow if it has a team of dedicated individuals performing beyond their ability. It is important to keep a handle on employee satisfaction and morale, based on based on variables such as:Working conditions Job contentand satisfaction Pay and benefi ts Work groups and teamsEmpowerment Leadership Job performance/ performance appraisal Development and training commitment Communication Customer focus and quality Health, safety and environment

Human Resources StrategiesNeeds AnalysisStrategy Determine a Long-term Staffing PlanDescription Plan what your staffi ng needs will be at diff erent levels of sales.Details This is probably the least accurate of all aspects of business planning because it involves managing two variables – fi nding the right structure and positions and then fi nding the right individual for each position.

By linking recruiting and growth, you can link your business growth to your human resources plan. The grid in Table 7 shows how to divide your needs analysis into three categories:

Sales and Marketing: Up-front people who develop and carry Sales and Marketing: Up-front people who develop and carry Sales and Marketing: out the marketing/sales strategies to generate the revenue to make your business grow.

Production/Operations: People involved in producing products or providing services. In a restaurant, up-front staff include hosts, waiters and bus staff . Cooks and dishwashers are in production/operations.

Support Personnel: People who serve the business rather than the customers, such as payroll, accounting and information technology.

You may have individuals who are currently working in more than one area but it is still best to think in terms of these three departments. You must determine how you are going to fi nd new customers, fulfi ll these additional orders and support a larger business.

Table 7 has columns divided into employed and contracted. Try to use contracted employees where possible, especially in support positions. It is often more cost eff ective to contract your bookkeeping rather than hiring a full-time bookkeeper. It is often more eff ective, and always more accurate, to use a payroll service rather than having a payroll clerk who spends a great deal of time understanding and updating payroll policies and procedures.


The Table 7 grid should be computed in dollars rather than in hours or full-time equivalents (FTEs) to allow for more eff ective planning and budgeting purposes. It is very important to watch the overhead line very closely. This is a fast way to lose control of controllable costs.Pros • You to think about hiring before you exceed capacityCons • The plans change as you realize exactly what you need and the kinds of people you need to perform the function

Table 7 – Sample Human Resources Needs GridTable 7 – Sample Human Resources Needs GridTable 7

Strategy Use Contract LabourDescription Contract out everything from bookkeeping and payroll to janitorial services. Details As your company grows, you should consider contracting out as many tasks as possible, especially those such as bookkeeping, which may be outside your core competency.

All business owners must understand the Canada Revenue Agency and Human Resources Canada guidelines that distinguish between a contractor and an employee. The existence of a contract does not necessarily mean that there is a contractor relationship.

One small business owner had a delivery driver who agreed to work under contract. When the “contractor” complained he had not been paid for minimum shifts, statutory holidays and overtime, the company found that because he was using their van for deliveries and they were setting his delivery schedule, he was ruled an employee. The business was held liable for the outstanding amounts.

For more information see: www.labour.gov.bc.ca/esb/facshts/employee.htm.

(This example is merely an illustration and should not be taken as advice. See the appropriate government agencies and professional services.)

$750,000

$1,000,000

$1,250,000

$1,500,000

$1,750,000

$2,000,000

$2,250,000

$2,500,000

$2,750,000

$3,000,000

MarketingEmployed Contracted

SupportEmployed Contracted

ProductionEmployed Contracted


Pros• Increased fl exibility and expertise• Reduced costs; you only pay for the services you needCons• Less control over a contractor’s time • Costs more than an employee on an hourly basis

Recruiting StrategiesStrategy Internal Recruiting IncentivesDescription Encourage employees to use their network of friends and acquaintances to fi nd potential candidates. Details Employees know the exact combination of skills, abilities and personal characteristics you require. Make them partners in your sourcing and recruiting, and you will not only have a better choice of recruits, but also a stronger sense of teamwork within your organization. One seasonal business paid a $50 fi nder’s fee to any employee who referred a successful job candidate for their season. Pros• If you have a good place to work, people will recommend friends• Potential candidates will have some knowledge of the job and company before the interviewCons• Hard feelings if things do not work out with the referred employee • Friends who work together may have fun when they are supposed to be working

Strategy Use Recruiting Staffing Agencies. Description Executive search fi rms can help with hard-to-fi ll positions or specialty areas such as information technology. Details While search agencies are most often used by larger companies, they can help with specialty or executive positions. It is worth taking the time to fi nd out what services can be provided because you may fi nd that as your business grows it is worth the cost to have the expertise.Pros • As recruiting professionals, they can often help you clarify your business needs• They are able to target the best sources, including other companies, sort through piles of resumes and perform preliminary interviewsCons • Cost – you will pay up to one year’s salary for the successful recruit of a senior manager or specialist

Compensation StrategiesCompensation packages must ensure a company’s ability to recruit and retain good people – and at the same time be aff ordable to that business. As the business grows, there must also be a perceived fairness between the compensation of diff erent employees. Never assume that your employees do not know other employees earn.


Strategy Develop a Compensation Grid Based on Skill Level and Years of ServiceDescription Determine the compensation required to recruit and retain good employees based on the skills required for a position. Details Table 8 shows a sample for a service business with fi ve-year increments and six skill levels. This grid may be subject to annual changes to account for infl ation or changes to your local labor market.

Diff erent jobs of diff erent skill levels are assigned a skill level based on the education, experience or skill set required. An employee is rewarded for their service with regular increments. In this system, merit is rewarded with bonuses rather than with raises.

In a retail store, a cashier might be considered to be at skill level 1 – starting at $9.50 per hour and receiving a $.25-per- hour increase after a set probationary period (perhaps three months or 500 hours for a part-time position). The increments would then happen annually, or every 2,000 hours (the equivalent of one full-time year).Skill categories must be assigned correctly to provide a sense of fairness. Pros• This provides you with a more transparent method of compensation and wage management issues • Well-crafted compensation schemes can help reduce staff turnover Cons • It can become restrictive, which forces you to re-examine the compensation grid or compensate each person individually • Compensation grids that appear to be arbitrary can create morale problems

Table 8 – Developing a compensation grid

Strategy Develop a Commission System Based on Gross Profit Margin Rather Than Sales.Description Pay 25% of gross profi t rather than 10% of revenue as a sales commission.Details A common strategy in the auto industry where there is some negotiation on price. As Table 9 shows, it gives sales staff , who otherwise might off er a discount quickly to make the sale, an incentive to sell at full price.

Recruiting Wage

Year 1

Year 2

Year 3

Year 4

Year 5

Basic Skill

$8.00

$8.25

$8.50

$8.75

$9.00

$9.25

Skill Level 1

$9.50

$9.75

$10.00

$10.25

$10.50

$10.75

Skill Level 2

$11.00

$11.25

$11.50

$11.75

$12.00

$12.25

Skill Level 3

$12.50

$12.75

$13.00

$13.25

$13.50

$13.75

Skill Level 4

$14.00

$14.25

$14.50

$14.75

$15.00

$15.25

Skill Level 5

$15.50

$15.75

$16.00

$16.25

$16.50

$16.75


Table 9 – Developing a Commission System

You could also pay diff erent discounts based on higher or lower profi t margin items to encourage everybody to think in terms of profi t margin rather than in terms of sales.Pros• Your sales staff is rewarded for contribution rather than just sales• Sales staff , who otherwise might off er a discount quickly to make the sale, have an incentive to sell at full priceCons • You must be prepared to share cost information with your sales staff

Management StrategiesThere are hundreds, if not thousands, of books that will tell you how to motivate staff . There are some strategies applicable to a growing business with increasing staff levels – most aimed at supporting the transition from micro-business (less than fi ve people) to small business (six to 20) to medium-sized business (20 to 100).

Strategy Formalize Training/Orientation Procedures.Description Develop a formal orientation checklist for new hires and at least a rough training plan for all positions you constantly recruit.Details Here is a brief guide to developing a training plan.

1. List the main tasks the employee must be able to perform.

2. Develop a way to explain and demonstrate each task.

3. Explain why the task is important to the job.

4. Identify some common mistakes people make and how they can be overcome.

5. Have an experienced employee work with the new person and make sure they allow the new employee to practise the tasks.

6. Provide a fast way for new employees to fi nd information about the best way to perform tasks.

7. Make sure there is follow-up so you know that learning has actually taken place. This is best done through observation.

Selling Price

Cost

Gross Profit

Commission Paid at 10% of Sales

Commission Paid at 25% of Gross Profit Gross Profit

Regular Price

$1,000

$500

$500

$100

$125

10% Discount

$900

$500

$400

$90

$100

20% Discount

$800

$500

$300

$80

$75


It is important to make sure on-the-job training is complete and provides information about how to handle tasks that are not routine and not likely to come up during the training period, such as a cashier accepting a gift certifi cate.Here are issues that need to be addressed in an orientation plan:

1. Hours of operation

2. Scheduling, days off and illness policies

3. Forms that need to be completed. (including a TD-1)

4. Tour of the facility

5. General expectations

6. Pay days and pay periods

7. Company/work policiesPros• Provides uniformity in training and orientation• Helps new employees start off well and reduces anxiety• Ensures new employees understand your company’s expectations Cons• It takes time and costs money • It must be done properly or it adds no value

Strategy Provide Back-up Positions.Description Critical tasks should have both primary and secondary personnel. Details Identify the tasks performed by each person in your company, beginning with the 10 most critical tasks, and determine the primary and the secondary performer. This will ensure you have a trained back-up if necessary. If more than one person performs a task, you will need additional trained back-up people.

Often the tasks performed by the owner have no back up, which means the company is highly dependant on the founder/owner. This will hurt the company in the long term. Pros • You are less dependent on individuals• There is a back up for everything from coff ee breaks to illness – especially long-term illness• If somebody is promoted or moved into a new position you have the ability to move the back-up into the starting position Cons• Added cost to train back ups • Back-up staff may assume they will be promoted

F I N A N C EF R O M I N T E R N A L T O E X T E R N A LFinance is one of the most objective ways to measure the health of any business because rules are set and followed in a fairly consistent and systematic manner. For entrepreneurs, fi nance is scorekeeping, not playing the game – and most would prefer to play the game.


As your business grows and develops, making fi nancially sound decisions becomes, more and more, a part of your business strategy. Some common fallacies regarding fi nance include:

Finance is accounting. Finance is strategic and accounting is systematic. Accounting applies rules (known as Generally Accepted Accounting Principals) and generates fi nancial statements. Finance involves thinking about the fi nancial implications of business decisions.

Finance is banking. There is more to fi nance than banking, although understanding the requirements and conditions of your bank loans is a crucial part of your overall business strategy.

Good tax advice is the same as good business advice. When making a decision, make sure that it is good for business rather than just a write off . Remember, before you can write it off , you have to “write it on”!

Some Thoughts About FinanceYou should already be familiar with the key defi nitions involved in fi nancial statements. If not, you can fi nd more information from a number of sources including Solutions for Small Business: Business Planning and Financial Forecasting Solutions for Small Business: Business Planning and Financial Forecasting Solutions for Small Business: Business Planning and Financial(www.smallbusinessbc.ca/pdf/bpff2002.pdf)www.smallbusinessbc.ca/pdf/bpff2002.pdf)www.smallbusinessbc.ca/pdf/bpff2002.pdf

There is a Big Diff erence Between Profi t and Cash A profi table company may have very little cash. The profi ts may be tied up in inventory or accounts receivable, or may be used to make principal repayments on loans. As your business grows, cash fl ow becomes more important than profi ts.

The Balance Sheet is Important, Too! It is common to look at the top line (revenue) and the bottom line (profi t), and pay little attention to the balance sheet. The balance sheet is critical to a growing business because it off ers a snapshot, showing what the business owns (assets), what it owes (liabilities) and how much is represented by the owner’s investment (equity).

Don’t look at fi nance as just numbers and equations; consider the concepts behind the numbers. Think about how the balance sheet works – rather than what it is. Simply put, the balance sheet represents what your business owns (assets) and how it paid for or fi nanced those assets. One important, immutable fact is that every asset, whether it is new equipment or increased inventory, must be fi nanced. Even if you pay cash – an asset – to pay for another asset, that cash was originally fi nanced!

Financing Assets: There are only four ways to fi nance assets in your business. • You can borrow the money from a bank or other fi nancial institution.• You can borrow from your suppliers – usually for the short term. • You can invest new money into the business.• You can use retained earnings from previous years’ profi ts.

When your business grows, you need more assets. These assets can include more current assets, such as higher levels of inventory, or more capital assets, such as new equipment. This means you will need more fi nancing. To grow your business, you have to plan for revenue growth, asset growth and growth in liabilities or equity to fi nance those assets.


Financial Reporting Financial statements and charts of accounts are often created with tax needs in mind. As a business grows, the information needs change. You need to review your fi nancial reporting systems periodically to ensure the information you need is available. Even something as simple as redefi ning the chart of accounts can make a huge diff erence.

Sample Financial StatementsThe following is an example of a balance sheet and an income statement for a generic company. These same statements are also used for the sample fi nancial analysis.

Table 10 – Sample Balance Sheet for Company X Ltd.

Sept 30, 20X4Year End 1

Assets

Current Assets

Cash

Accounts Receivable

Inventory

Total Current Assets

Capital Assets

Equipment

Automobiles

Computers

Less Accumulated Amortization

Total Capital Assets

Total Assets

$

-

70,000

90,000

160,000

150,000

30,000

24,000

48,000

156,000

316,000

% to Asset

0.0%

22.2%

28.5%

50.6%

47.5%

9.5%

7.6%

-15.2%

49.4%

100.0%

$

-

85,000

112,500

197,500

120,000

20,000

16,000

48,000

108,000

305,500

% to Asset

0.0%

27.8%

36.8%

64.6%

39.3%

6.5%

5.2%

-15.7%

35.4%

100.0%

$

-

100,000

132,500

232,500

90,000

10,000

8,000

48,000

60,000

292,500

% to Asset

0.0%

34.2%

45.3%

79.5%

30.8%

3.4%

2.7%

-16.4%

20.5%

100.0%




Assets

Current Liabilities

Line of credit

Accounts payable

Income Tax Payable

CPTD

Total Current Liabilities

Long Term Liabilities

Term Debt

Less Current Portion

Shareholders Loans

Total Long Term Liabilities

Total Liability

Equity

Owners Equity

Current Earnigs

Total Equity

Liabilities + Equity

$

72,700

30,000

2,760

22,500

160,000

99,500

22,500

80,000

157,000

284,960

20,000

11,040

31,040

316,000

% to Asset

23.0%

9.5%

0.9%

7.1%

40.5%

31.5%

-7.1%

25.3%

49.7%

90.2%

6.3%

3.5%

9.8%

100.0%

$

75,785

37,500

3,043

24,000

140,328

77,000

24,000

80,000

133,000

273,328

20,000

12,172

32,172

305,500

% to Asset

24.8%

12.3%

1.0%

7.9%

45.9%

25.2%

-7.9%

26.2%

43.5%

89.5%

6.5%

4.0%

10.5%

100.0%

$

106,235

44,167

1,807

25,700

174,285

53,000

25,700

80,000

107,300

281,585

20,000

9,085

10,915

292,500

% to Asset

36.3%

15.1%

-0.6%

8.8%

59.6%

18.1%

-8.8%

27.4%

36.7%

96.3%

6.8%

-3.1%

3.7%

100.0%




Table 11 – Sample Income Statement for Company X Ltd.

Finance PitfallsUsing Price to GrowA common strategy used to increase revenue is to cut prices to sell more products or services. As Table 10 shows, the focus on revenue can be misleading. It costs $60 to produce a product and the price is $100. Every 2% price cut yields a 3% increase in unit volume. Take a look at what happens when the price cut reaches 4% – the revenue keeps increasing but the gross profi t starts going down.

Table 12 – Price Cut/Volume Increase

Year 1 $ %

Year 2 $ %

Year 3 $ %

700,000

360,000

98,000

458,000

242,000

78,000

48,000

5,000

9,100

15,000

10,500

10,500

5,000

4,200

4,200

38,700

228,200

13,800

2,760

11,040

100.0%

51.4%

14.0%

65.4%

34.6%

11.1%

6.9%

0.7%

1.3%

2.1%

1.5%

1.5%

0.7%

0.6%

0.6%

5.5%

32.6%

2.0%

850,000

450,000

120,000

570,000

280,000

110,500

48,000

5,250

9,555

15,750

10,000

11,025

5,250

4,410

4,410

40,635

264,785

15,215

3,043

12,172

100.0%

52.9%

14.1%

67.1%

32.9%

13.0%

5.6%

0.6%

1.1%

1.9%

1.2%

1.3%

0.6%

0.5%

0.5%

4.8%

31.2%

1.8%

1,000,000

530,000

150,000

680,000

320,000

130,000

48,000

10,000

10,490

17,000

11,805

14,000

7,500

5,290

5,000

70,000

329,085

9,085

1,817

7,268

100.0%

53.0%

15.0%

68.0%

32.0%

13.0%

4.8%

1.0%

1.0%

1.7%

1.2%

1.4%

0.8%

0.5%

0.5%

7.0%

32.9%

-0.9%

Sales

Cost of Goods

Manufacturing Labour

Gross Profit

Overhead Expenses /

Operating Expenses (indirect)Operating Expenses (indirect)O

Labour + C ommissions

Amortization + Depletion

Repairs + Maintenance

Utilities + Telecommunications

Rent

Interst + Bank Charges

Professional + Business fees

Advertising + Promotion

Delivery, Shipping + Warehousing

Insurance

Other Expenses

Total Operating Expenses

Net Profit

Income Tax (at 20%)

Net Profit after Income Tax

Price Cut

Volume Increase

8%

$92.00

12%

112

$10,304

$60

$6,720

$3,584

6%

$94.00

9%

109

$10,246

$60

$6,540

$3,706

4%

$96,00

6%

103

$10,176

$60

$6,360

$3,816

2%

$98.00

3%

106

$10,094

$60

$6,180

$3,914

Current Situation

$100.00

100

$10,000

$60

$6,000

$4,000

Price

Volume

Revenue

Unit Cost

Cost of Goods

Gross Profit


Before lowering your prices, calculate the volume increase required to off set the price cut required, as outlined in Table 12.

Also keep in mind that if this is a temporary price cut, you will want to be confi dent your customers will be willing to pay the full price later or you may fi nd you increased your volume for nothing. If your overheads have increased, you may be stuck with the lower price permanently.

Table 13 – Volume Increase Necessary to Offset a Price Cut

Problems Due to Revenue GrowthAs revenue changes on the income statement, there is an impact on the inventory, accounts receivable and the accounts payable on the balance sheet.

Table 14 illustrates this using the balance and sample income statements for Company X Ltd. (Tables 10 and 11) as the example. Turnover ratios were calculated slightly diff erently to predict year-end inventory, accounts receivable and accounts payable rather than the average inventory, accounts receivable and accounts payable.

Table 14 – Impact of Revenue on Inventory, Accounts Receivable and Accounts Payable

This analysis tells you that if the turnover ratios and the percentage of revenue used for materials does not change, every $200,000 increase in sales means working capital requirements will increase by $37,667. If after-tax profi ts do not exceed this amount, then the line of credit must increase. This ignores any repayment of term debt, which is not an expense to the business.

Gross Profit

20% 25% 30% 35% 40% 50% 55% 20% 25% 30% 35% 40% 50% 55%

Price Cut Price Cut Price Cut Required Volume IncreaseRequired Volume IncreaseRequired Volume Increase

5% 133.33% 125.00% 120.00% 116.67% 114.29% 111.11% 110.00% 133.33% 125.00% 120.00% 116.67% 114.29% 111.11% 110.00% 133.33% 125.00% 120.00% 116.67% 114.29% 111.11% 110.00% 133.33% 125.00% 120.00% 116.67% 114.29% 111.11% 110.00% 133.33% 125.00% 120.00% 116.67% 114.29% 111.11% 110.00% 133.33% 125.00% 120.00% 116.67% 114.29% 111.11% 110.00% 133.33% 125.00% 120.00% 116.67% 114.29% 111.11% 110.00% 133.33% 125.00% 120.00% 116.67% 114.29% 111.11% 110.00%

10% 200.00% 166.67% 150.00% 140.00% 133.33% 125.00% 122.22% 200.00% 166.67% 150.00% 140.00% 133.33% 125.00% 122.22% 200.00% 166.67% 150.00% 140.00% 133.33% 125.00% 122.22% 200.00% 166.67% 150.00% 140.00% 133.33% 125.00% 122.22% 200.00% 166.67% 150.00% 140.00% 133.33% 125.00% 122.22% 200.00% 166.67% 150.00% 140.00% 133.33% 125.00% 122.22% 200.00% 166.67% 150.00% 140.00% 133.33% 125.00% 122.22% 200.00% 166.67% 150.00% 140.00% 133.33% 125.00% 122.22%

15% 400.00% 250.00% 200.00% 175.00% 160.00% 142.86% 137.50% 400.00% 250.00% 200.00% 175.00% 160.00% 142.86% 137.50% 400.00% 250.00% 200.00% 175.00% 160.00% 142.86% 137.50% 400.00% 250.00% 200.00% 175.00% 160.00% 142.86% 137.50% 400.00% 250.00% 200.00% 175.00% 160.00% 142.86% 137.50% 400.00% 250.00% 200.00% 175.00% 160.00% 142.86% 137.50% 400.00% 250.00% 200.00% 175.00% 160.00% 142.86% 137.50% 400.00% 250.00% 200.00% 175.00% 160.00% 142.86% 137.50%

20% 500.00% 300.00% 233.33% 200.00% 166.67% 157.14% 500.00% 300.00% 233.33% 200.00% 166.67% 157.14% 500.00% 300.00% 233.33% 200.00% 166.67% 157.14% 500.00% 300.00% 233.33% 200.00% 166.67% 157.14% 500.00% 300.00% 233.33% 200.00% 166.67% 157.14% 500.00% 300.00% 233.33% 200.00% 166.67% 157.14% 500.00% 300.00% 233.33% 200.00% 166.67% 157.14% 500.00% 300.00% 233.33% 200.00% 166.67% 157.14%

25% 600.00% 350.00% 266.67% 200.00% 183.33% 600.00% 350.00% 266.67% 200.00% 183.33% 600.00% 350.00% 266.67% 200.00% 183.33% 600.00% 350.00% 266.67% 200.00% 183.33% 600.00% 350.00% 266.67% 200.00% 183.33% 600.00% 350.00% 266.67% 200.00% 183.33% 600.00% 350.00% 266.67% 200.00% 183.33% 600.00% 350.00% 266.67% 200.00% 183.33%

30% 700.00% 400.00% 250.00% 220.00% 700.00% 400.00% 250.00% 220.00% 700.00% 400.00% 250.00% 220.00% 700.00% 400.00% 250.00% 220.00% 700.00% 400.00% 250.00% 220.00% 700.00% 400.00% 250.00% 220.00% 700.00% 400.00% 250.00% 220.00% 700.00% 400.00% 250.00% 220.00%

35% 800.00% 333.33% 275.00% 800.00% 333.33% 275.00% 800.00% 333.33% 275.00% 800.00% 333.33% 275.00% 800.00% 333.33% 275.00% 800.00% 333.33% 275.00% 800.00% 333.33% 275.00% 800.00% 333.33% 275.00%

40% 500.00% 366.67% 500.00% 366.67% 500.00% 366.67% 500.00% 366.67% 500.00% 366.67% 500.00% 366.67% 500.00% 366.67% 500.00% 366.67%

Revenue

Cost of Material

Inventory

Accounts Receivable

Accounts Payable

Change in Working Capital

Inventory Turnover

AR Turnover

AP Turnover

Current Year

$1,000,000

530,000

132,500

100,000

44,167

4.00

10.00

12.00

Forecast

$1,200,000

636,000

159,000

120,000

53,000

Change

$200,000

106,000

26,500

20,000

8,833

37,667


Many companies with growing revenues and little profi t to show for the revenue increase, will fi nd their debt load increasing – and if they have trouble fi nancing this, they could actually go bankrupt due to their own growth.

Now change the scenario just slightly. In the example above, the collection period is 36.5 days.

This is a very fast collection period. What would happen if the collection period increased to 45 days or 8.11 turns per year? The expected inventory at the end of the year would increase from $120,000 to $147,945 for a diff erence of $27,945. Now the change in working capital per $200,000 in sales climbs to $65,612.00. This is a huge change for such a seemingly small change in the collection period. The same dynamics would happen if there were changes in inventory turnover.

As you can see, managing the balance sheet is as important as managing the income statement. Just as a slight change in the gross profi t percentage had a huge impact on the net profi t, slight changes in the accounts receivable and inventory strategies have a huge impact on the balance sheet.

Financing Capital Assets with Current Liabilities (Balance Sheet Mismatch)Many businesses need to increase capacity to increase capital assets. A machine shop may need a new lathe or a retailer may need a new cash system to keep up with the increasing demand. These must also be fi nanced from your business, and this will aff ect your business in two ways – you will have to make payments on the loans used to fi nance the assets and the new debt will aff ect the debt-to-equity ratio of the business.

Unfortunately, many entrepreneurs fi nance capital assets with cash or a line of credit. This creates a balance sheet mismatch – current liabilities are fi nancing both current and capital assets. It changes cash, a current asset, into a capital asset (the item that was purchased). This is great when the business has plenty of cash but not if it relies on a line of credit to fi nance receivables and inventory. It is usually best to fi nance your capital assets using a longer-term debt.

One good, general rule for fi nancing capital assets is to remember that for every $1,000 in new debt, you require $25 a month in additional debt service. This will show you the link between your income statement forecast and your balance sheet requirements.

Finance MeasuresRatio analyses should be an integral part of the planning process because they are one of the best ways to diagnose the fi nancial health of a business and, therefore, its overall health. Common examples are goals against average in hockey, student/teacher ratio in education or kilometres per hour on the highway

The ratios themselves mean nothing – 50 km/h is not fast on the freeway but amazingly fast in a marathon. They must be compared to something, which can be done in three ways:• To history (this year vs. last year)• To an objective (actual vs. budget)• To industry standards

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Industry standards may take some research. The Small Business Check-up (http://smallbusinesscheckup.com/) lets you compare your business with similar businesses in your region, and helps you develop strategies for improvement. A good Canadian source is Performance Plus on Industry Canada’s Strategis website at: http://strategis.ic.gc.ca/epic/internet/inpp-pp.nsf/en/Home.

In the United States, the Annual Statement Studies: Financial Ratio Benchmarks from the Risk Management Association provides key ratios in several hundred businesses. www.rmahq.org/RMA/ProductsandServices/RMABookstore/StatementStudies

Once you have your ratio analysis completed, it is important to integrate the fi nancial results to business strategies or conditions.

Income Statement RatiosPer-cent-to sales ratioExplanation: The percent-to-sales ratio measures expenses and profi ts as a Explanation: The percent-to-sales ratio measures expenses and profi ts as a Explanation: percentage of sales. For example, this might tell you that 10% of revenue went to paying the rent of the business.

Percentage Increase/DecreaseExplanation: The percentage increase/decrease shows the percentage change in matching income statement items. (For example, sales were up 10% or profi t was down 4%).

Balance Sheet RatiosPercent-to-Asset RatioExplanation: The percent-to-asset ratio tells you where your assets are tied Explanation: The percent-to-asset ratio tells you where your assets are tied Explanation: up as a percentage of the total asset base (i.e. 15% of the assets are in accounts receivable). It also tells you, as a percentage, how your business is being fi nanced (i.e. 10% of assets are being fi nanced by your line of credit). This is not a common analysis, but some business analysts fi nd it helpful.

Working Capital Ratio (or the Liquidity Ratio)Explanation: The working capital ratio measures your company’s ability to repay debt due in the next year. For every dollar in current liabilities, you have this number of dollars in current assets.

Quick Ratio (or Acid Test)Explanation: The quick ratio measures your company’s ability to repay debt Explanation: The quick ratio measures your company’s ability to repay debt Explanation: due in the next year with cash, liquid investments and accounts receivable. Inventory and pre-paid expenses are subtracted because they are diffi cult to liquidate at their book value.

Formula:

Formula:

Formula:

Formula:

Formula:

Expense

Revenue

-1 x 100([ ] ) -1 x 100([ ] ) -1 x 100Current year expense, revenue or profit([ ] )Current year expense, revenue or profit

Previous year expense, revenue or profit([ ] )Previous year expense, revenue or profit([ ] )

x 100

Asset, liability or equity item

Total assetsx 100

Current assets

current liabilities: 1

Current assets - inventory - pre paid expenses

Current liabilities


Debt-to-Equity RatioExplanation: The debt-to-equity ratio shows the structure of your company’s fi nancing – for every dollar contributed by the owners, how many dollars have been borrowed by banks and suppliers. This ratio has diff erent meanings. It can indicate the company’s capacity for asset growth. There comes a point at which lenders feel they are taking a greater risk than the business owner.

There is no ideal debt-to-equity ratio. The security value of the assets determines the risk to the bank – for example, a company with land and buildings has more security than one where the majority of the fi xed assets are computers.

Related Ratios Bank Debt to Equity only includes bank debt in the numerator, as the bank is Bank Debt to Equity only includes bank debt in the numerator, as the bank is Bank Debt to Equityusually a preferred creditor.

Long-Term Debt to Equity compares long-term debt to equity.Long-Term Debt to Equity compares long-term debt to equity.Long-Term Debt to Equity

Debt to Owners’ Contribution moves the shareholders’ loans from debt and puts them into equity. Often the owner’s entire initial investment comes through shareholder loans. This is an investment for practical purposes but debt for legal and accounting purposes. If there is no repayment schedule and no fi xed interest rate for the shareholder loan, it is more appropriate to use debt to owners’ contribution rather than debt to equity.

The Turnover RatiosInventory Turnover & DaysExplanation: Measures the number of times a year inventory is replaced, or Explanation: Measures the number of times a year inventory is replaced, or Explanation: the number of days of inventory remaining. This is the most important fi nancial ratio in any business that depends on inventory.

Accounts Receivable Turnover and DaysExplanation: Measures the number of times the receivables are replaced or the average number of days it takes to collect accounts receivable.

Accounts Payable Turnover and DaysExplanation: Measures how quickly a business pays its bills by showing the number of times payables are replaced or the number of days it takes to pay an account.

Formula:

Inventory Turnover

Inventory Days

Accounts Receivable Turnover

Accounts Recievable Days

Accounts Payable Turnover

Accounts Payable Days

Total liabilities

Owners Equity: 1

Cost of materials

Average inventory

365

Inventory turnover

Sales

Average accounts receivable

365

Average accounts receivable turnover

cost of materials

Accounts Payable

365

Accounts payable turnover


Return RatiosReturn on Assets (ROA) Explanation: Measures the eff ectiveness of asset utilization. Presumably the Explanation: Measures the eff ectiveness of asset utilization. Presumably the Explanation: more assets, the more profi t the management of the company should be able to derive. Some companies will subtract investment assets from the total assets, and any income derived from those assets from the net profi t fi gure.

Return on Owners’ Investment or Return on Equity (ROI)Explanation: Measures the return on the owners’ investment and on the retained earnings within the company. Just as with the debt equity ratio, sometimes the shareholders’ loans are added to the owners’ equity as a more complete measure of the investment in the business.

Finance StrategiesFinance strategies are critical to the success of any growing enterprise. Here are some strategies to consider along with tips on how to control and fi nance your business.

Often business owners do not develop fi nancial plans and strategies because they are afraid they do not have a thorough understanding and might make a mistake. Finance is just like any other part of the business. It is essential to your success and it must be managed and planned.

Strategy Develop an Operating ForecastDescription Forecast your annual revenue and expenses and review the results on a quarterly basis.Details This is perhaps the most important fi nancial strategy in this guide. Forecasting lets you plot the fi nancial future of your business based on its marketing, operational, capital and human resource needs. It is a great place to do ‘what if’ calculations such as “What if we opened fi ve new outlets, and then what if we opened 10 new outlets?”

An operating forecast can be used to determine the viability of a new business or project, and it can be used to make business decisions for an existing business. Staff budgets, capital budgets and buying budgets are all determined based on a forecast. Banks will also use projections when evaluating a loan proposal. Projections should give a realistic expectation of what the business owner thinks can be achieved in the coming year.

To be eff ective, the forecast is continually upgraded and adjusted through the year. If sales are trending up, then you might have to hire new staff sooner than planned. If they are trending down, then purchases may need to be adjusted so you avoid being overstocked. Your forecast should be the benchmark from which to compare your plan to actual results.

Formula:

Formula:

Net profit

Total assets

Net profit

Owners equity


The following steps are commonly followed when developing a forecast: • Review fi nancial data and analysis (part of your business diagnostics). • Gather other information on your industry and your market. • Make assumptions and set your strategies. You may develop and test multiple strategies. • Develop an operating forecast. You may develop alternative forecasts based on diff erent strategies but you must choose a path for your fi nal forecast. • Monitor your results and compare them to your forecast. • Adjust your operations depending on your actual results.

See www.smallbusinessbc.ca/pdf/businessPlanning2004.pdf for a sample forecast. This is for a business start-up, but the general principle remains the same.Pros• Forces you to think about the future of your business• Allows you to re-think your expenses• Provides a link between your fi nancial and marketing strategiesCons • If you fail to update your forecast based on the actual results, this can result in over/under buying

Strategy Develop a Capital BudgetDescription Provides a one- to fi ve-year outlook on capital assets required by the business. Details A growing business often faces capital expenses such as the need for new computers or manufacturing equipment, or even a move to larger premises. These plans allow such capital purchases in a rational and economical manner.

For example, a business owner may fi nd her growing company has plenty of equipment for the start of the job but not enough to complete it. She would create a long-term capital plan that balances the equipment needs and presents details to the bank for fi nancing purposes.

Capital equipment has a cost attached to it. These capital costs can also be thought of in terms of the monthly fi nancing costs that are associated with the asset purchase. Table 15 defi nes the associated monthly cost to the value of a $1,000 capital purchase.

Failing to do proper capital planning can result in the fi nancing problems described earlier.Pros• Allows you to fi nd fi nancing before you need it• Prevents random purchases of equipment on an as-needed basisCons • Absolutely none!


Table 15 – Monthly Cost of Capital by Age and Interest Rate

Partners and ShareholdersStrategy Take on Partners or ShareholdersDescription A company sells shares to friends and business acquaintances in the form of preferred shares, secured loans or sometimes going public.Details Taking on partners or shareholders is a great way to increase the capital and the expertise base of a business. It is also tricky because the owner wants as much new money as possible without giving away too much control. The investor wants to own/control as much of the business as possible.

Make sure you seek professional help, in the following order: 1. Business Advisor – to make sure that your agreement makes Business Advisor – to make sure that your agreement makes Business Advisor good business sense.

2. Tax Advisor – to make sure that your agreement makes Tax Advisor – to make sure that your agreement makes Tax Advisor good long- and short-term tax sense.

3. Legal Advisor – to make sure that your legal rights are Legal Advisor – to make sure that your legal rights are Legal Advisor protected, and that your agreement is properly documented in law.

There are two separate, but equally important issues to consider when developing a partnership/shareholder agreement – repayment and control.

The most common control problems faced by business partners (shareholders are partners in an operational sense) involve roles and responsibilities and the future of the company. Issues with roles and responsibilities are common for both co-founders and future investors; issues around the future of the company are more common with founding partners.

Rate

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

3

29.30

29.52

29.75

29.97

30.20

30.42

30.65

30.88

31.11

31.34

31.57

31.80

32.03

32.27

4

22.36

22.58

22.80

23.03

23.26

23.49

23.71

23.95

24.18

24.41

24.65

24.89

25.12

25.36

5

18.19

18.42

18.64

18.87

19.10

19.33

19.57

19.80

20.04

20.28

20.52

20.76

21.00

21.25

10

9.89

10.12

10.36

10.61

10.85

11.10

11.35

11.61

11.87

12.13

12.40

12.67

12.94

13.22

15

7.15

7.40

7.65

7.91

8.17

8.44

8.71

8.99

9.27

9.56

9.85

10.14

10.44

10.75

20

5.80

6.06

6.33

6.60

6.88

7.16

7.46

7.75

8.06

8.36

8.68

9.00

9.32

9.65

2

43.20

43.42

43.65

43.87

44.10

44.32

44.55

44.77

45.00

45.23

45.46

45.68

45.91

46.14

1

84.92

85.15

85.38

85.61

85.84

86.07

86.30

86.53

86.76

86.99

87.22

87.45

87.68

87.92

Years

$$$


Clear roles and responsibilities avoid confusion and the risk that two people will perform some tasks and ignore others. They are especially important if an investor is going to take an active role in the company, and removing them means buying back the investment.

It is also important to avoid a situation where one partner wants to enjoy the fruits of his or her labor while the other wants to continue plowing profi ts back into the company. And if your business has equal shareholders, make sure there is some kind of tie-breaker or dispute-solving mechanism in the shareholders’ agreement, such as an arbitrator or a third party who holds 1% of the shares. Pros• Allows increased funding without incurring additional bank debt• Can provide increased expertise from the new principal shareholdersCons • Meeting the diff ering needs of the diff erent parties involved

Investor Exit StrategyThere are two common ways for investors to get their money back:

Repayment: The business repays the investor with a stream of cash fl ow as if it Repayment: The business repays the investor with a stream of cash fl ow as if it Repayment:were repaying a loan. In the case of a loan, the return is usually an interest and principal repayment; with an investment it is often a combination of dividends and share repurchase. Here is a simple example:

Company A goes to an investor for $100,000. The company issues 1,000 preferred shares that pay a 7% dividend to the investor. The company has the right to repurchase up to 100 shares a year for $110 a share at the end of any given year. The investor receives a regular dividend and the company can eventually buy the shares back. This scenario is great for the company, however, it may be diffi cult to fi nd an investor willing to take this kind of risk.

Sell for Capital Gain: The investor puts money into a company with the hope that in the long term it will either go public or will be acquired. This scenario is less common, however, there are companies and entrepreneurs who plan to sell their company or go public in the future.

The Buy-Sell AgreementThese are general comments. Please seek legal advice before agreeing to any form of contractual agreement with any potential investor!

In most private agreements there are some conditions set on buying and selling shares. Large investors will often ask for some kind of buy-sell agreement, or shotgun clause. For example, Fred Founder sells 25% of his company to Irene Investor. The shotgun clause allows them to buy their partner’s shares. The partners have the right to purchase the shares off ered at the same price. If they do not, then the off ering shareholder gets the shares at that price. Here is how it would work:


Owner Fred Founder sells 25% of his company to Irene Investor. They have a shotgun clause as described above. If Fred decides to exercise the shotgun clause, he can off er Irene $25,000 for her 25%. Irene would then have the fi rst right to purchase Fred’s 75% for $75,000. This arrangement assures a fair price will be off ered to the fellow shareholder.

There are dangers to this form of shotgun clause. If, for example, the minority shareholder has greater access to wealth than the majority shareholder, then the minority shareholder can scoop the company from the founder.

Some variations on the shotgun clause include a minimum price, a time limit, and a business valuation. There are always risks, and it is important to be aware of those risks from the outset. In all cases, arrangements must be made to buy out minority shareholders.

Current Asset StrategiesNote: The next two strategies have similar implications to the financial health of your business because inventory and accounts receivable are current assets waiting to be turned into cash. If inventory or accounts receivable account for 10% or more of your total assets, pay careful attention to these two strategies.

Strategy Review Your Inventory and Purchasing Practices – TODAYDescription This review should cover both the number of items purchased and the quantities in which they should be purchased.Details As you saw in the analysis section, inventory ties up cash and costs money. Since cash fl ow is essential for business growth, all eff orts must be made to reduce inventory-related costs. For example, brand extension means retailers are increasing their assortment. Some retailers choose to carry only the top-selling brands to reduce both inventory and the shelf space commitment.

Inventory involves a balance. From a fi nancial perspective you want to minimize it; from a marketing and operations perspective, you would rather have too much than too little. As noted in the operations section, Wal-Mart and its suppliers work together to better manage their inventories.Pros • Reduces inventory levels, which reduces carrying costsCons• Creates the risk of running out of stock; this can cause problems especially for manufacturers • Depends on transportation systems, which could be disrupted by weather, labour strike, equipment or infrastructure damage and/or accidents • Depends on border/customs issues if importing (e.g. U.S./Canada border shutdown following 9/11 event)

Strategy Review Credit and Collection Policies – TODAY!Description Review both the way you grant credit and the manner in which you collect from your customers.Details Some entrepreneurs provide credit terms to anyone who asks, and never set a credit policy. This often works well but it could come back to haunt you. At a minimum, you should have a credit policy that includes:


• Terms and conditions: These should include a time period (30 days is normal), any penalties if bills are paid late and a maximum credit limit for customers. Make sure your terms and conditions are consistent with the rest of your industry. Using credit terms as a marketing tool can give your company competitive advantage, but it can also wreak havoc on your cash fl ow. Carefully consider the implications before you implement this kind of strategy.

• Credit applications: You must have permission to check credit records. Your bank can often help in credit checking and setting credit policy. Remember you are dealing with customers so make credit applications as straightforward as possible.

• Credit criteria: You should have a threshold for Credit criteria: You should have a threshold for Credit criteria:granting/denying credit. Some companies use credit reports, time in business and number of orders from your company. Some companies do not grant credit on a fi rst order.

Do not hesitate to make a collection call – sometimes an invoice does not get properly processed or a company will not bother to pay until there is a second contact.

One company reduced days receivable by 30 days with a three-level follow-up system – when the account was at 45 days, the bookkeeper called; at 60 days (30 days delinquent), the account manager called, and at 90 days the owner called. In many cases the problem was a lack of documentation, which was sorted out with the fi rst call.

As your business grows, make sure your employees know exactly what you want done with respect to credit decisions and reporting. There should be a formal procedure for reducing or revoking credit privileges to avoid problems between divisions. If a customer is going to be cut off , the sales representative in charge must be informed.

Be lenient if a customer has a repayment problem and follows through on promises. If they continually break promises, you may need to seek actions such as liens, collection agencies or court. You don’t want to have a bad reputation; you also don’t want to be seen as a pushover.

Pros • Increases cash fl ow• Identifi es problem customers before you grant them credit Cons• Handled poorly, this can hurt customer relations • Could lose potential customers with a tighter credit policy (and create a confl ict between your company’s fi nancial and marketing objectives)


Strategy Develop Strong Financial Control Policies.Description Decide who will make payments, place orders, approve refunds etc.Details Every company needs a controller. It does not have to be a full-time, dedicated position, but it is essential in any multi- person business to provide fi nancial discipline as well as to avoid theft and errors.

During your next annual or quarterly review, ask your accountant to review your internal control procedures. Accountants can be an integral part of helping you run a better business. Many fi rms have auditors who are well trained in review and control procedures, and can off er tips on procedures, that prevent mistakes and theft.Pros • Prevents errors such as double payments and theftCons • Are hard to implement, and may cause employees to feel they are not trusted

C O N S O L I D A T I O N S T R A T E G I E SThe diagnostics in Step One and SWOT analysis in Step Two may reveal that your company’s survival is at risk. While this is usually identifi ed in the fi nancial analysis, keep in mind that fi nancial weaknesses may be symptoms of diffi culties in other areas.

Here are some strategies for consolidating or even contracting your business. They must be used in the overall context of your business; if you run out of cash or access to cash, your business will collapse. The more desperate your situation, the more extreme the strategy!

Marketing StrategiesStrategy Review your Product MixDescription Make sure all your products or services are profitable or necessary.Details Evaluate your products by profi t margin and inventory turnover, and make sure you are brutal – it could save your business.

Give priority to products with high-profi t margins and low inventory requirements. You should only carry low-margin products if they are essential to the business and have low inventory, such as milk in a convenience store.Pros • Helps keep the focus on profi ts and cash fl ow rather than revenueCons • May lead you to drop products you have carried a long time, and reduce customer selection and satisfaction


Strategy Raise PricesDescription Raise prices either on a product-by-product basis or across the board.Details As was pointed out in the marketing section, increasing prices can slow demand so operations can catch up. Some companies use the margin/turnover analyses to determine where to raise prices and others just determine if they can charge more for a product or service. Ongoing service businesses will often charge more for new customers. Cost has nothing to do with this analysis – it is designed to slow unit growth and focus on profi t. If your supplier has a provision to return poorly selling inventory, take advantage of this, especially if you have too much cash tied up in slow moving inventory.Pros • Increases per unit profi t Cons • You may lose customers

Strategy De-market Poor CustomersDescription Engage in strategies designed to eliminate some customers.Details More companies are realizing that there are times when a customer is not worth the time or eff ort. These include: • small customers who take up a disproportionate amount of time • slow-paying customers • customers with higher-than-normal levels of returns

This fl ies in the face of everything we learn about customer service but the simple fact is that if you have reached capacity, you should be supplying customers who off er the best return on your investment.

Pros • Reduces high-maintenance customer groups Cons • Risks eliminating the wrong customers• De-marketing eff orts, especially if they are blatant or insensitive, may harm customer relations across the board and hurt the company’s overall reputation

Strategy Reduce Prospecting EffortsDescription Switch promotional strategies to existing customers.Details Some companies become the victims of their own marketing

success. One small fabricator was quoting on more jobs than could actually be done and paid a large salary to one person – pure overhead – to bid on contracts that it eventually turned down. By reducing these marketing eff orts, it increased profi ts dramatically.This is one of the most delicate balances in business. Too much prospecting can result in more business than the company can handle; too little can result in stagnation and eventual shrinking. Use this strategy as a short-term way of managing overall demand.


Pros • Improves relations with existing customers• Identifi es new opportunities within existing customer base • Reduces promotional expenses Cons • May be diffi cult to reorient promotional strategies to go back into prospecting mode• May be perceived that the company is not interested in new business so it is removed from vendor lists and not considered when companies tender for contracts

Financial StrategiesStrategy Sell Unneeded Capital AssetsDescription Sell equipment you do not use often, and rent it instead. Details Liquidation can be seen as a last-ditch strategy yet many companies prefer to sell unneeded assets rather than wait until a creditor does it for them. You usually sell at a loss, but an expensive asset that is not being used is tying up much- needed cash. Use the rule ‘if you haven’t used it within the last 12 months, you should rent it if you need it’. You can apply this same logic to selling unwanted inventory. Pros • Turns capital assets into current assets (cash)• Increases cash fl ow. Cons• You may eventually need to buy the equipment again• You usually sell at a loss • You may sell to a potential competitor

Strategy Re-Negotiate DebtDescription Determine which debts can be rescheduled.Details Reschedule your term debt or take a part of your line of credit and change it into a term loan. Long-term debt can be rescheduled over a longer amortization period to reduce monthly payments. Work with both your accountant and your bank, and take care that your business does not collapse under the weight of its own debt.Pros • Improves cash fl ow by reducing monthly paymentsCons • You will carry the debt for a longer period of time

Strategy Get Serious with Accounts ReceivableDescription Call delinquent accounts frequently. Examples The fi nance section recommends reviewing credit and collection policies, however, when you are out of cash you cannot aff ord to be a creditor and must be ruthless.


Don’t hesitate to cut off credit and sales for customers who are 30 days past due, and serve them COD (Cash on Delivery) for one year before even considering credit. Some construction companies use a lien at the fi rst sign of payment diffi cultyPros• Customers will take you seriously.Improves cash fl ow. Cons • You risk off ending customers.

Desperate Measures – Human Resources and OperationsStrategy Re-examine Staffing LevelsDescription Fire or lay off unproductive staff or reduce staff overall.Examples This is one of the most diffi cult situations a business owner will ever face. Firing people who are unproductive or insubordinate is one thing; laying them off for reasons beyond their control is another. Alternatives include reduced workweeks, temporary pay reductions or compulsory vacations

Sometimes you have no choice and have to lay off staff . Here are a few ideas to help manage this diffi cult situation: • Be honest with everyone. Let people know exactly what is going on. Share fi nancial information with them. • Don’t make promises you cannot keep. Large companies have hurt their credibility by promising that there will be no more layoff s, then announcing additional cuts four months later. • Symbols are important. Don’t announce layoff s today and drive to work in your new Porsche the next day.

Accept the inevitable. If your company is losing money and you fail to take action, you may all fi nd yourselves out of work. You need to make tough choices, and implement them with compassion and honesty.Pros • Immediate cash /expense saving Cons • The morale or those who remain may drop, which is very diffi cult for a small company.• Workload may increase for those employees who remain, and they may have to take on duties they are not trained or qualifi ed to do• Training costs may increase• Employees may be frustrated and quit, which could impact customer relations.

Strategy Look for substitute suppliers and inputsDescription If it does not aff ect quality, look for a replacement for your products. Details This is another tough decision and it does not work in all businesses. In retail, many businesses tried to carry domestic goods while their competitors turned to imports that are less expensive and often of comparable quality.


When sugar became prohibitively expensive, Coca-Cola changed sweeteners. Nobody noticed, and the company avoided a price increase. Pros • Saves money and brings products back to profi tabilityCons • Customers may reject the replacement

Strategy Drop a losing divisionDescription If your company has several lines of business, drop one entirely.Examples If a promising opportunity turns sour or moves you away from your main business, you may need to shut it down. IBM sold its printer and personal computer divisions to focus on service and mainframe and super computers.

The problem is identifying the right time. For example, a business owner may start a new division, believing it to be complementary to the existing business only to discover it involves a completely diff erent market, has lower profi t margins than the rest of the company and needs specialists. Ultimately the division may wind up losing money, and pulling down the rest of the company with it.Pros • Saves cash fl ow if the division is unprofi table• Saves management time and eff ort if the division is struggling Cons• You lose revenue and potential future profi t• Loss of market presence• May need to lay off staff

Other places to fi nd money

1. Re-negotiate rent payments. Your landlord may prefer to charge less rather than go through the hassle of fi nding a new tenant.

2. Find any lost co-op advertising funds. This is an off set to your advertising budget provided by manufacturers to retailers.

3. Track down any government grants available to your business.

4. Sell your receivables at a discount to a factor. Depending on the arrangement, the factor will take some or all of your accounts receivable. This is often expensive money and can aff ect your bank line of credit so make sure you research this option before committing to anything.

5. Assign bad debt to a collection agency. Something is better than nothing!


Documents

Planning for Business Growth Guide