Tag Archives: Management

Create Competitive Advantage

Yesterday, we examined the role of research in growing small businesses. Today, let’s see how decisions about product are an outgrowth of good market knowledge. When you gain a better understanding of buyer preferences and the competitive offerings of other providers, you then have the right kind of information to make better decisions. 

In the context of home building, for instance, design, location and pricing considerations determine both the volume of homes that can be sold, as well as the margins at which they can be sold. Design attributes must be fairly consistent with the market–even more so in a mature industry such as construction. Minor details can reflect your brand or personal touch, but don’t overdo it! The location of home sites is very important to timely sales; if homes are attractive but in the wrong area, they will take longer to sell. Finally, pricing homes to reflect profitable sales is a science–often requiring that the building company learn to gauge what the buyer will pay through past experience, a trial and error process to be sure.

Design

Design features will vary somewhat from one part of the country to another, and may even vary greatly from one neighborhood to another. The important consideration is to maintain a theme throughout the home or series of homes. This is not unique to construction–branding is important to most every industry and consistent look and feel builds equity in your product or service offering because it represents a promise that is made and kept, thereby demonstrating credibility. Whether you are a builder who hires an interior designer or a public accountant with a secretary who types up a proposal, make sure that those charged with creativity do not proceed with their own view of what is needed rather than seeking to uphold your brand. Contemporary styled fixtures in one bathroom can throw off the traditional design scheme of the rest of the home, which may feature French provincial lighting fixtures everywhere else in the same house. In like manner, a different set of colors in every PowerPoint presentation, none of which matches your logo palette, dilutes your brand.

On the other hand, it is okay to evolve your brand image through minor and gradual design changes over time. Observing competitors’ design patterns can often provide ideas for introducing features (be they plan layout or choice of  tub styles) that are attractive to the buying public but have been previously unavailable. The decision to make such a move must be grounded in research–that’s the main point.

Location

Once you make an effort to create winning designs that the public loves, your next consideration should be location. In home building, this would be neighborhoods in school districts that are popular. In a business like high school athletic team paraphernalia, the equivalent would be going to the stadiums or booster clubs where fans congregate in the largest numbers with the most discretionary income. Using research results, you can hone in on where you want your product displayed, sold, etc. Demographic data must support your offering–make sure there are enough qualified buyers prior to making a commitment to a distribution channel that stakes out your territory. Try to maintain a mix that reaches different target buyers with different offerings at prices and features that they have said they want–available where they want. 

Pricing

Trying to undercut the market may work in the short-term but is a strategy that only works long-term for well-financed organizations with superior control over input prices, labor costs, and real estate (think of Wal-Mart as an exceptional competitor, not a normal one.) Make sure your prices cover all of your direct and indirect costs, plus an additional margin for profits. It is often better to sell fewer units at higher margins than greater units at lower ones. In general, if your pricing is within 10 percent of the market, you will be given a fair chance to compete. It is best to compete on factors other than price, but you have to be within a reasonable band of tolerance to get the opportunity. Again, to know what the price sensitivity via research data is a competitive advantage.

 

 

Discovering Financial Keys to Higher Profits

Keeping a finger on the pulse of the company is essential; financial reports and management information provide vital signs of business performance. The accuracy and timeliness of financial and management information is, therefore, critical for maximizing profits. 

Systems Management

The person managing your company’s management information systems is a key ally for the business owner. With responsibilities encompassing data collection, entry and analysis, this employee must have a solid grounding in accounting and information technology. In addition, the manager must be able to implement solutions to problems discovered during review and analysis of the information generated. 

Reporting Systems

Three areas affect the way reports can be used to enhance company profitability:

  1. how information is entered and maintained
  2. how results are read, and
  3. how the reports are used to influence business decisions.

The daily tasks of information entry and data maintenance are the building blocks of any management information system. Since it does not accurately reflect the true operating and financial conditions of the business, incorrectly entered or antiquated information can lead a company to ruin if used to make important decisions. The systems manager should employ systems, then, that are relatively easy to use and allow for daily but controlled data entry; menu-driven systems are easiest to use. The system should be selected based on designed checks and balances of the data to prevent reliance on incorrect information. Review of information to catch any errors or omissions and make corrections is a best practice.

Be sure that management team members all know how to use the system. If only the systems manager can use the system, it is useless because one person begins to wield too much  influence and indirect control over the company’s direction. Take care not to fall into a trap of the system driving the company rather than the other way around. 

Reading reports requires more than a casual glance; a thorough study of a report’s essential indicators gives the owner and other key executives in-depth knowledge of operating performance. The figure below is an example of such a report:

 

An effective system must be able to generate this kind of information. For example, reading Figure A prepares an executive to question issues of timeliness in production scheduling, loan advances, and interest rates.

 

Figure B is a job costing report. The way in which the report is read and interpreted will affect every decision made–or not made–with regard to the job listed. Comparing this report with a similar report for a project either in progress or completed, the relationship between the materials and labor for specific designs can be determined. The goal of the report is to establish standards for purposes of comparison; current projects are compared to the standards to analyze their performance.

Figure C shows a sample income statement for a growing small business ($3-5 million in sales). The income statement reports prior activity and should therefore be used to modify future business operations to maximize profits.  The statement needs to be even more detailed than the sample below to help determine how the profits or losses are being generated. One can be profitable and still not have cash. Cash flow projections, incorporating actual expenses, show the sources and uses of cash and are a good complement to the income statement and balance sheet.

 

The ability to read and understand reports and statements prepares the executive team member to use the information to influence business decisions. After reviewing Figure B, you should be equipped to establish workable production schedules. Subsequent production meetings should highlight areas to reduce costs and improve production deadlines.

Figure B should be discussed with all managers, who in turn implement  the schedules and budgets with subs and vendors. The resulting scheduling and budgeting systems ensure timely, cost-efficient job completion. Managers also need to assist in keeping the information current.

In Figure C, data is presented comparing the current year to the prior year in order to analyze trends and ratios. Tracking composite numbers such as gross profit takes on meaning when it serves as a basis for comparison, rather than being viewed in isolation. Deviations from the norm should be discussed in management meetings. So, if sales and profits are lagging,  the group should investigate any underlying causes and develop alternative production and sales methods–and implement them immediately.

Watch Your Asset – It May Not Be a Resource

First, the bad news: making operations, finances, and employees work to maximum value can mean having to eliminate some employees or operations at times. The good news, though, is that many businesses have been able to hold on to existing resources–even during a turnaround situation–by reassigning them to better purposes and uses where required. This is the heart of asset redeployment–the practice of reassigning people, things, and efforts to achieve optimal efficiency. By using capital wisely, your team can make it stretch a lot further. For example, coordinating employee and independent contractor work to produce the greatest amount of work with the fewest number of people working the least number of hours means greater return on efforts and dollars.

Eliminating Operations

Eliminating unprofitable operations–in whole or in part– is a wide-ranging task. Anything that may be termed “waste” in the company needs to be discarded or put to better use. One area that should be addressed is waste due to unnecessary multiple consumption of potentially shared resources. In plain terms, the individual use of items that could be shared is an extravagance that few small businesses can afford. Think of shared printers rather than a printer on each desk as an example. it is highly unlikely that every single person in the office will be printing at the same time. What’s more, high volume printer/copier combination machines use less expensive toner than ink cartridges in smaller units. This initiative may require more cooperation and patience than providing unique units for each employee, but such a move can reduce the amount of money the company must spend to get work done.

Avoiding Duplicate Efforts

A counter problem to the above is too many employees doing the exact same job, either knowingly or unknowingly. Such multiple effort, a clear waste of time, resources, and money, often occurs when someone is fearful of delegation or feels threatened by another’s talents and abilities. Therefore, management should make sure that several people are not doing the same job in differing formats and degrees. 

Non-linked software is a perfect example of this kind of waste; if the secretary maintains supplier addresses and phone numbers, and the accounting group keeps the same information in their files, someone is performing an unnecessary job. Instruct employees in ways to avoid duplication of effort. Look across your organization, document processes by task, and find ways to reduce overlap. This is not to say that your staff should not be cross-trained. It is, in fact, good succession planning and talent management to have people who could do someone else’s job in a pinch!

Managing Capital Resources

Capital resources include facilities, supplies, and work in process. Buying only what is needed when needed (“just in time”) is one way to wisely manage resources. Another way would be to try to have more finished goods inventory than unfinished, because finished goods can be sold quickly to raise cash. At times, you may consider renting or leasing an asset rather than purchasing it–especially if the term of the contract is less than the useful life. You may elect to “turn in” resources that you don’t need very often or convert them to less cash intensive resources through alternate financing. 

Coordinating Human Resources

This is an area often overlooked because it is seen as “just administrative.” When employees, however, have jobs that overlap in requirements, it is up to the executive team in the small business to correct the situation for optimization. When your people are performing jobs that are not their strong suit, they usually take more time and make more mistakes than a better qualified and motivated counterpart.

Develop a competent management team to help you steward resources more efficiently. There are multiple areas for gains in efficiency and profitability if you will commit to the process. Note: process rather than one-time task–follow-through and experience the fruit of your labors!

Keeping Costs Under Control

If expenses are simply allowed to fluctuate, with no way of monitoring where they will be, optimal profitability will be hard to come by. Cut out as much fat as possible and keep the company lean. Clearly, certain expenditures are necessary and unavoidable. There are ways, however, to limit their influence on company profitability. For example, taking advantage  of any offered cost savings an creating efficient procedures to save time and project financing overruns will cut costs significantly. A purchasing requirements program is a start for reducing many hard costs. Most soft costs, however, can be decreased through effective scheduling.

An effective requirements program includes the following steps:

  • using purchase orders 
  • inspecting all deliveries
  • taking advantage of discount incentives
  • implementing invoice verification procedures
  • scheduling efficiently

Using Purchase Orders

Purchase orders are seen as a relic of old business practices by some. Others view them as an indispensable management tool. Somewhere in between the extremes there is a fit for every organization. Their usefulness is in getting reliable quotes upon which invoices can be checked later.

Inspecting all Deliveries

Inspecting all deliveries is essential to make sure orders are shipped according to the quantities and quality specifications provided on the purchase orders. Many managers complain that they do not have the time to physically inspect every item delivered to a work place. Inasmuch as doing so would require a huge time commitment, they are right.  However, for containing cost overruns, these same managers could not be more wrong in their assumptions.  Inspecting samples  from every delivery when delivered and figuring quantities by up close, visual inspection are necessary steps to ensure that suppliers are responding to the company’s needs.

Taking Advantage of Discounted Materials Prices

When suppliers make discounts available on purchases, your team should try to make the most of them. In addition, verify all invoices against delivery inspection reports, checking  the invoiced amount against the total amount delivered, and unit prices against the purchase order. This procedure will help ensure that a supplier’s negligence is not costing the company money.

Scheduling Efficiently

Time constraints are of utmost importance in eliminating inventory carrying costs–whether your business produces goods or services. If a product line or project is slow to be completed, many extra costs begin to accumulate. Alternative uses of profit margins are foregone. Had your team been able to finish sooner and collect within a finance cycle closer to the one in which work began, there would have been profit margin to discuss how to allocate. With margins, choices exist that don’t otherwise–suppliers can be kept happy and bankers and investors can too! If yours is a business that uses work in process assets, insuring those assets is an ongoing cost for the company. Theft and obsolescence of design and features due to carrying raw inputs too long further eat away at margins. The cost to repair items damaged over time also rings up expenses. All of these combine to make inventory (due to delayed delivery) costly.

Proper scheduling is not limited to getting one work team to immediately follow another onto the job. By ordering raw inputs in bulk through purchase orders, trips to supply houses are reduced, resulting in cost savings through lower fuel costs and less time away from actual work. As these employees spend more time on the job and less time running around town picking up materials, their projects are completed faster. Getting teams to succeed one another promptly with slight overlaps can also tighten production schedules and help reduce costs.

By tying your project financing to interest rates in a market where rates are rising, you and your team can make the most of prompt completion of projects. If you operate efficiently, you can move before rates rise consistently. Finally, scheduling vacations with as little overlap as possible will help with your production efficiency, and thereby improve margins.

 

What to Do When Financing Fails

Having been in business in the same town for almost twenty years, a Midwest company was accustomed to expansion and going after market opportunities. The owner had kept her business competitive by continuously improving product offerings and learning from the input of both customers and target customers. With a loyal, experienced operations team, she felt that she had the recipe for long-term success. However, when the recession of 2008 hit, she was unable to obtain a renewal of her line of credit by which she had historically been able to normalize cash flows.

The case study above illustrates a business principle–that we must always as business owners prepare for the unexpected and have the flexibility to adapt to changing market conditions. If we seem surprised when an action that we did not anticipate occurs, then it follows that either: 1.) our planning is incomplete, 2.) our systems and processes are too unresponsive to key indicators, or 3.) we have not established a feedback loop that provides us as small business executives with vital, timely information. Regardless the reason, it is poor management to not have a contingency strategy or tactic in mind for situations that may arise.

What should an executive team do when financing from lenders or investors falls through? First, the reason  for such a collapse in financing is normally attributable to one of the following:

  1. Partners or new regulations restricted the financing source from making (continuing) the deal.
  2. A more attractive alternative was available to the lender/investor from another source at the same time.
  3. The company failed to read the market conditions and adjust the financing request accordingly.

To stabilize the business in response to one of these situations, the owner and top finance executive should always seek new sources of funds–even if today’s source has been very reliable. If you have built relationships with other providers of financing, you may be able to reduce the risk any one player undertakes by spreading it among several. Alternately, you may find that some institutions have differing standards for new clients than for existing ones and may want the entire financing facility.  In either scenario, it is incumbent upon you and your team to perform due diligence. Find out how the bank (or alternate source) has shown commitment to other borrowers. In many cases, your accountant or attorney may be able to recommend new sources for you. Others in your trade group may have similar referrals to provide.

Being able to lay out both your best case scenario and a worst case one will show a new source your planning strengths and help to establish credibility. Ask questions about how credit facilities could be expanded as you hit milestones. Offer your plan for reporting your financial and operating performance. Discuss what the loan covenants may look like and have frank conversations about how your team will accommodate the request to demonstrate creditworthiness.

To avoid a recurring financing problem, owners should try to over-finance their operating needs whenever possible. It is extremely valuable to have credit available that is not being used–this cannot be overstated! Given that this funding source may dry up at any point, you never want to have to go back to the lender or investor because you failed to anticipate growth. 

The other recommendation is that you look at different types of credit. If you traditionally have only taken out installment loans, look for lines of credit–and vice versa. There are additional types of financing that may also be advantageous to consider–accounts receivable, factoring, purchase order financing, contract or project financing, asset based lending, leasing, etc. By using more than one type of funds from more than one source, you are diversifying your vulnerability to a credit restriction that could be deleterious to your business success.