“How to manage my company?” by Nikolaos Karanassios, Ass. Professor, Dpt. Of Business Administration, TEI of Serres 1 Introduction Managing a company that you have created needs different skills than entrepreneurship; needs management. The starting point is to change your perspective; from one deciding person you must turn to be a member of a team, not necessarily the leader, even if you have the right to be, because you own the biggest portion of the company’s capital. Then you have to realize that your team is quite bigger than you think; it includes everyone depending on the company. First of all are the key persons, then all the workers, then subcontractors, agents, banks and the general public. Each one has different expectations from your company, sometimes their interests are conflicting, everyone seeks a bigger stake and your company (not just you) has to balance in this. Your company is founded because you and your partners want to have a permanently increasing income, while your wealth will perpetually increase, not for just the exploitation of an opportunity. To do this, you have to continuously plan, evaluate and control and for this purpose you must register, not only what the company is doing, but also the decisions made, as well as the reasons that led you to these decisions. Your company will be using public money. When you borrow from a bank, you really borrow the savings deposited; you are liable for the usage of this money, not just to the bank but the government, which controls the function of the banks, as well. They need to know how you are using the “public” money and if you are cautious enough. They will not check you for the decisions themselves, but whether you are diligent enough. They don’t give the money to your, but to your company. When your company becomes successful you need more money to fund its activities, then you may invite new partners (shareholders, if your company becomes an SA). It is possible that you will never know who they are. They will only give their money to your company if they trust the procedures of handling their money. On the other hand, you may want or need to sell your share. Your share has a value in proportion to the degree of independence of the persons. Your company is founded to last forever, being profitable. Although people make and govern a company, they are not permanently bound to it. Co-owners of the company may change for any reason. The foundations of the company must be solid enough to tolerate any such change of ownership. When you decide to found a company you change from an entrepreneur to an investor. It is not enough to have profits. Your company must have enough cash to pay all the obligations, including the distribution of the profits to the owners. Increasing profitability depends on the procedures that your company is implementing in order to maximize long term profits, while controlling cash. Profits, even short term or even occasional, do not depend only in maintaining the costs low, but the examination of the factors influencing profitability and choosing the right mix. All these subjects will be displayed in this booklet and you will be guided to manage your company the best possible way. Yet, there are risks. With this series of booklets the entrepreneurs are guided to diminish the risks. If you consult your booklets about the most important issues of how to start a business (your company will start new activities, as it grows), how to prepare business plans (business planning is a continuous procedure), how to make marketing plan (concentrating to the consumers) and the present one, your risk becomes minimal. But. "Entrepreneurship is risky, mainly because so few of the so-called entrepreneurs know what they are doing." – Peter Drucker Let us see the most common reasons why companies fail, as most writers agree: 1. Discordance between partners. 2. Cash difficulties. 3. Easy money attracted by. 4. Overexpansion. 5. Lack of preparation for expansion. 6. Favoritism. 7. Fraud. 8. Suspicions of fraud. 9. Underestimation of costs. 10. Overestimation of the Market niche. 11. Overinvestment in equipment and other assets. 12. Too much in social relations. 13. Too much in partners luxury. 14. Too much power to hired managers. 15. Too little attention to government controls. 16. Too little attention to bureaucracy. 17. Too much confidence in the product / service superiority. 18. Too much dependence on massive buyers (distribution chains) 19. Dependence on the Public procurements. 20. Dependence on subsidies. In this booklet you will find an easy way to understand how companies work and how they should be effectively managed. It is not intended to make you a professional or a consultant, but give you enough guidance to understand and assess consultants and specialist that will approach you to get a contract or get hired. 2 Statute It is a contract between two or more persons that devote a sum of money and / or concede assets of their property, in order to commonly operate in the market. Depending on the type of the company, it has to be edited by a Lawyer or a Notary. It is a series of articles, where all the common activities are governed. You, either as a new entrepreneur or proposing the re-engineering of a company in which you are a member, have to indicate to your Lawyer or Notary, some articles that are not common. These Law persons use patters to write your Statute, they are more concerned in the legal completeness of the Statute, than the functionality. You will find in the following chapters a series of suggestions to take into consideration and ask your Lawyer or Notary to include in the Statute. 2.1 The articles of association In addition of the patterns of the Lawyers and Notaries, you can dictate the following articles: Who is the beneficiary of each partner in case of his inability to continue his participation (death, severe illness, disappearance etc), indicating the partition for each beneficiary or earl. The age until which the members of the company will be able to participate in decision making. Most of the companies in Europe suffer succession. If something happens to one member and his /her share is about to pass to his earls, there are usually legal quarrels which practically “freeze” the company and drives it to resolution. Even when this does not happen, the remaining members may not have the ability to communicate or be accepted by the others. When they know the successors, they accept them in advance and if something happens to one of the members, the company goes on without problems. An age limit in decision making of a company is very important, because even when they may be still active, their attention is concentrated in their pension, not the future of the company. This makes them very conservative and discordance arises among the rest of the company members. This article must set an age for decision making and representation of the company and also state that they can still participate in decision making sessions and meetings, as advisors, only in preparatory discussions, not in voting time. In the same article, there must be a clause, that their share of profits will not be invested, unless the aged person agrees. There may be a limit (i.e. 70% of the net profits may be re-invested without agreement). There must be an article about the change of the Legal Status of the company (i.e. from partnership to Limited Liability, from Societe Anonyme to the Stock Exchange and other combinations). Too many companies loose the opportunities of development, because the members do not reach a quick decision to change their status. In most cases they are not prepared, so they are afraid of loosing power. Another article must rule the entrance of new partners. Unprepared entrepreneurs are afraid of loosing power with new members entrance, while these persons will bring in cash and change the percentages distribution of ownership, but in the same time they will increase the value of the ownership of the old members, since the overall value of the company becomes bigger than the sum of what it was before together with the money put in by the new members. From a different point of view, there must be included, on one hand the procedures of creating other companies (a company may be a member of another company) and on the other hand the conditions under which the company may be sold to another company, merge with another company or participate in cluster of companies. It is often seen that successful companies become very vulnerable because they attract new competitors, just because they believe that they will become successful as well. Many of these new competitors come from within the company’s staff members. They know the business, they have connections with the clients and they are the key persons. Creating their own business means that they steal the competitive advantage. In such cases, the legal representative must be delegated, with a specific article, to create a “spin out” (a new company, together with those staff members), provided that they will go to the market with new products / services, even if they are developed in the company. If such an article of delegation is missing, those persons will create their company and eat up the company. A collective decision, as in typical Statutes, takes too long to be taken, while a lawsuit against these staff members, even if it will be accepted by the Court of Justice, is only a compensation for the damage. It is not the same with mergers or selling out the company. The delegation of such an authority to the legal representative has to be limited in two ways and also facilitated; there must be a limit of time for consultations with the partners, a specific majority (i.e. 60% of the votes) and a verbal declaration of the partners agreeing (or against) the proposal, within a deadline. If the deadline expires, then delegation must be tacitly given to the legal representative. As has been demonstrated previously, success is more dangerous than stability or decline. Success must be funded and one possible way is to bring in Venture Capital (cash brought in by investors intending to take it back after a period of time, with or without a combination with sharing profits). Those investors may ask to participate (or even dominate) decision making. Venture capital opportunities are rare and are safer than bank loans, because the company returns to the venture capitalist only profits and the increment of the value of the company; if not successful has no liability of the members with their personal property. An article facilitating fast decisions about the acceptance of a venture capital proposal, must be included. At the Statute formation time, company members are not afraid of loosing power, since they don’t have power yet. In later time, they may oppose, so a limit of majority must be included, while easier delegation to the legal representative must be considered, while venture capital is not permanent (as it is with mergers and acquisitions). Finally, an article about the obligation to elaborate an Internal Regulation within a limited time (usually one year) must be included. 2.2 The Registration The Statute must be registered at the appropriate authorities. They are supposed to examine it about the conformity with the Law. They usually reject it when the minority partners are not well protected. Even when the Statute is not registered, the company exists as a contract between the members. Third parties do not make transactions with the company, but with the member. 3 Internal Regulation The Internal Regulation is a contract as it is the Statute. For the big companies whose shares are traded at the stock exchange market, there is European Directive which is commonly called “Corporate Governance”, as well as all OECD member States have agreed to promote the relative regulation. The Corporate Governance is meant to protect the anonymous shareholders from fraudulent actions of the Management of the companies they become shareholders. This does not concern the Small and Medium Size companies, especially the new once. What makes it a useful tool to such companies, is that it also regulates the way a company is managed, as “Business Ethics” are best thought to be served. In this section, the ethical issues are avoided, while we concentrate our efforts to what makes a company avoid the most common mistakes. The Internal Regulation may be an amendment to the Statute, so it may be also registered. This means that temporary majorities cannot change it, unless it becomes a new amendment. This gives enough time to examine the regulation as a long lasting document. It is better to assign the task of the preparation of such a regulation to professionals (i.e. your NGO consultant), while your Lawyer must see it in the end, for possible legal infringements. The Internal Regulation is adding bureaucracy to the Management and Administration of your company. In the same time, following the procedures set in it, saves your company from a possible crash. 3.1 Decision Making Both managerial and administrative decisions should be coherent, so that the company proceeds prosperously. It is thought that these decisions are being taken in favor of the company; but what if they are being taken in favor of one partner or a group of executives? What if a democratic (majoritary) decision is made on a difference of information among the decision making board or committee? Management and Administration have to make decisions on an equal information basis. They also have the time to reflect, or even get external advice, if they think that they need it. Managerial and Administrative decisions are not the same. 3.1.1 Managerial Decisions Managerial Decisions are the once concerning the company as a legal entity. As such, is responsive to all third party interested institutions (Fiscal Authorities, Banks, Government authorities of all levels and nature, insurance institutions, European or Public funding and the alike). Such decisions should be taken under an agenda, timely communicated to the members, as all the legal systems set. Such formalities are usually followed. The decisions are being taken informally, while evident majority participants meet and prepare their vote, not in respect of the company’s benefit, but as a distribution of personal benefits, even if those benefits are not relative to the personal profits. A well regulated system should set that: Together with the agenda, a proposal is also communicated. The proposal, as communicated, has been approved as being beneficiary to the company, by either internal (specialized staff members) or external (NGO consultants) as appropriate, together with their comments. There in an adequate time for submitting different proposals and that there is enough time for the members to study them before the meeting. A proposal, for example, to extend the manufacturing equipment, should be delivered three weeks before the meeting, leaving two weeks to the members to prepare a different proposal and deliver it to all the members, so they all have one week to study them both. This is not a Law, but just a functional system, as we think of it. No discussion of proposals is possible unless all the participants received them at least an adequate time in anticipation of the meeting (one week?). The members may agree to postpone the decision, until all proposals have been communicated to all of the members. Only one time is possible to postpone a decision. The proposing member may ask a staff member to present his proposal. All proposals are registered in the Verbal. All the members explain their vote. The discussion is not registered in the Verbal. A vote with hesitation is a vote against a proposal. The secretary (the one who is registering the verbal), is not present during the discussion. The Secretary is not a voting member of the decision making board. The verbals are registered in three levels; the public, the internal and the restricted. All decisions have the same classification; A restricted decision contains all of the proposals, while the same decision, without any argumentation, may be communicated (i.e. it may become public that the company decided to merge with another company, internal in regard to what this company is, restricted in regard to how such an event is assessed). 3.1.2 Administrative Decisions Administrative decisions are usually taken by one person, not a committee or a board, as they have been delegated the authority to do so. For example, the legal representative may have been given the authority to take a bank loan, a member of the board may have been delegated to contract an external selling agent, an executive to approve discounts to clients etc. Such decisions do not change the shape of the company, as managerial decisions do. It is everyday operations that need fast decision making and, most of all, personal responsibility of the person in charge. While “democratic” management is quite widespread (making decisions in meetings), responsibility is lost. There is a tendency to go back to “consultative” management, where one person decides and other persons responsible for other activities are discussing the impact of a decision to their sectors of responsibility. When the company grows enough to assign responsibilities to staff members, instead of partners, it is wise to distribute authority of decision making, because the board is not bound to previously taken decisions and is free to change policy and even the staff members. The usual decisions that create dispute and discordance, are described bellow. 188.8.131.52 Hiring Every immediate superior has to be assigned the right to hire the persons he / she considers most appropriate. For example, staff members must be assumed by the board of directors, while they will be placed in responsible positions, answering to the board (as board we mean the partners or their representatives). The internal Regulation has to be very strict in hiring, by prohibiting the enrolment of relatives until second degree, to all levels, with one and only exception; if these persons are already in the Articles of Association as indicated to succeed a partner. The hiring procedure has to delegate absolute power, restricted only by hiring relatives, to the person they will work for. For example, the Sales Manager must select his sales people, without the interference of anyone else, the head of the transportation unit must select the drivers himself, not his boss; the Sales Manager in this case. The hiring procedures must be very flexible. There must be suggestions about advertising open positions, about the usage of external services (a specialized company) or else, but the person who is going to be the immediate boss of an employee must be free to grab an unemployed person that he thinks will best work for him, so he will perform better and present better results to his superiors. Reminder 1: Hiring is the main cause of trouble in most companies. Reminder 2: However a procedure of hiring is scientifically important (for example the use psychologists) every person, assuming responsibilities, has his / her own style and there is no method to predict conformity with this style. Reminder 3: As a partner, you may be tempted to impose hiring of persons, as a favor to politicians, friends, important clients and any kind of others. Remember that, after you have satisfied their petition, they forget it, until their next petition! 184.108.40.206 Firing Every immediate superior to an employee has to be assigned the power to fire. This power must be restricted by: A yearly percentage of possible firing. A written statement of the causes that occurred, signed by the dismissed person, to verify that he / she knows the reasons claimed by his superior (not that he / she agrees). A hearing from the firing person’s superior, so that the dismissed employee’s point of view is heard. Reminder 1: Never fire an employee without the appropriate compensation, not even for theft. He will go to the Court of Justice and you will pay it in the end, while he (may?) sue you for calumniation! He / she will have a Lawyer anyway! Reminder 2: The decision of firing belongs to the immediate boss. It is irrevocable, even if after the hearing you are convinced that the firing reasons were obviously different, or even illicit! If you are convinced that one of your trusted responsible persons is using his delegated power for either personal reasons (sexual included) or as an excuse for failure, you may fire him! Reminder 3: Never admit, being a partner or legal representative, that there is such a thing as immoral administration in your company. Reminder 4: Incompatibility is the reason of every person fired, for everyone, whatever the real cause. Reminder 5: Sexual harassment in the working environment exists. There is no gender discrimination. It exists between persons of the same gender and has been evidence even in the Bible! Never admit it exists! Never accept it as an excuse for firing someone, unless there are other behavioral discrepancies that can justify such an action (for example, there is an evidence of molesting, which is a criminal action). Do not forget that you are running a business, not a Court of Justice. Reminder 6: When you fire someone you must replace him / her. You may be suggested to fire someone, for any reason, because there is an unemployed person waiting for the same position. Reminder 7: Never listen to someone who is telling you what his / her co-workers are doing (or even saying). He / She is waiting for a benefit, usually to get the salary without really working! 220.127.116.11 Promotions There is no typical system of evaluation. You have to describe one in your Internal Regulation. It will only be functional and long lasting if your system is based on recording performance of your employees and then the evaluation comes as the result of an examination of the records. Reminder 1: Nobody is perfect. People make mistakes. Unless there is a damage to your company, do not give importance to the mistakes. Employees who make mistakes, are risk taking persons and in most cases are better for higher positions. Reminder 2: An effective worker may be a very bad director. You may promote such workers, giving the title and the salary, but not really assign them with leading duties. 18.104.22.168 Subcontracting Subcontracting is one of the major fields of fraud or suspicion for fraud. You have to describe the procedures of subcontracting. Reminder 1: A subcontracting action is never urgent. A random committee can assign it. Reminder 2: Set a limit of the annual budget to the managers for services that do not really affect your business, like painting the office, repairing a photocopying machine and such. 22.214.171.124 Borrowing Set a procure for borrowing money from the banks. You must not revert to bank loans unless there is a written justification, including the impact to profits and examination of alternatives (for example, shortening the credit line to your clients, minimizing stocks, selling out participations in other companies etc.) This part of the regulation will save you from overborrowing, but it will also save you from your creditors, if you delay your payments to the bank. It will also facilitate your borrowing, while the bank will see that you are prepared to pay back. 126.96.36.199 Collecting Set the procedures and the responsibility for soliciting your clients to pay their debt. Communicate this regulation to your customers, so they also know the procedures. Delegate the authority to extend the credit line to your clients to only one person, other than the legal representative. Put an exception to the normal procedures for special clients, but the decision must be taken only by the board of directors. 188.8.131.52 Contracting Delegate the legal representative or the CEO to sign any preliminary agreement or application for grants. Set a procedure for signing the contracts. Such a procedure may include the revision by a Lawyer, but in any case there must be a limit, over which there must be a written assessment of the impact of a contract. 184.108.40.206 Pricing Policy Driven by the desire to increase sales, managers tend to discount prices, while potential buyers are pressing for discount, even telling lies about alternative offers, the tend to discount without taking good care of the impact to overall profits and cash flow. The discount policy is affecting all three of them; sales, profits and cash flow. On the opposite side, managers tend to think profits only as a difference between selling price and cost per unit. Another point of view is examining the discounts as an attraction of clients, being a MARKETING policy element. Yet, another point of view examines the discount policy as a danger to damage the quality image of the company, stating that you cannot sell high quality products and discount in the same time; “you cannot buy cheap quality” and consumers know it. If you discount quality you may find buyers but not customers (in the sense of frequent buyers). As a very important issue, it has to be decided by the Board of Directors (a meeting of owners, if the company is small). There must be a clause in the internal Regulation that such a decision must be only taken after a series of studies of impact (you may revert to external consultants, if your internal professional resources do not meet the requirements for an appropriate evaluation), such as: Expected impact on sales in long term and short term. Expected impact on profits after taxes. Expected impact on the Cash Flow, for the next three years. Make sure that: The Advertisement cost of the discounts that you offer has been added to the overall costs, before you calculate profits and cash flow. You have taken into consideration that a new discount policy is changing your company’s image. Pricing (discounts included) competition is always in favor of big companies who can sell even under their costs, just because they want you and other small companies out of the market; you have examined this occurrence. You may loose customers (especially “heavy customers”) who already have purchased from you without a discount. 220.127.116.11 Advertising / Promoting Advertisement and promotion are very close to aesthetics. All those activities are using beauty as a means of “catching the eye” of the consumer. Are you sure that beautiful sells? The most common selling systems for advertisement / promotion agents is to approach the deciding person of a company (in a small and new company, the legal representative) with beautiful proposals; they usually avoid the selling impact, or the Return On (your) investment is such a campaign. In order to secure their sales, they will “flatter” the person in charge. They use such arguments as “we are going to advertise you in the most popular media” or “you have the first clients who is able to esteem beauty, here are three proposals and we are sure that you will choose the most beautiful; yes, we were sure that you would have chosen the most beautiful one!” Your Internal Regulation has to control the procedures of assigning Advertisement and Promotion campaigns, so be sure that, at least: There is calculation of “contact cost per potential buyer”. The “message” that you want to transmit is clear and attractive. You cannot advertise your products and your company in the same time. The more an advertisement is beautiful, the less your potential clients remember your message. Celebrities cost and celebrity has a short life. Do not use them, unless you are prepared to rely on celebrities and not one celebrity, meaning that you are going to use the actual celebrity every time there is a new one and that your product or service is aiming to sell to market niche attracted by actuality. For example, if you are selling scientific books, celebrities in your advertisement may even damage your sales. If you are selling industrial equipment, their usage will not affect your sales. If you are selling fashion items, you cannot avoid celebrities. Calculate the impact on sales, even in arbitrary way; if you have statistics of your past, use them. You have advertising / promotion proposals of more than one advertising agencies. The proposing agencies accompany their proposal with a cost / benefit analysis. The selection of the best fitting your business proposal is done by the board, not one person; it is an investment, after all. 18.104.22.168Setting your own salary Every person or entity which has interests in your company is also interested in your salary. Those interested parties are: Your partners. The lower your salary is the higher the profits (their share) will be. Your Creditors. Your salary is going out of the company, as a cost element. They are afraid of your intentions to increase your personal income at the expense of the company, which you may drive to bankruptcy and never pay them back! Your employees, which compare their own salaries with yours. The government, while salaries and profits are being taxed differently. Your clients, because they think that you are “stealing” from them, while they excuse profits. Setting your salary, as a partner (together with the salaries of other partners working in the company) as well as setting commissions on sales or any other performance element, is an internal subject of the company, but it soon becomes public. When you ask for a bank loan, you must declare your salary and other benefits (commission, company car, paid holidays, use of company credit cards, personal loan guarantee by the company, paid personal expenses, Legal assistance paid by the company for personal cases, company paid education of your family members and the similar). If they exceed normal wages, they may deny you the company loan, considering it a “consumption” loan, with a much higher interest rate, a much smaller amount and much more collateral demanded. Venture capitalists, capital increment invited shareholders and the Stock Exchange (if you address it for capital raising), they will all turn their back to you if your personal revenue is considered higher than “normal”. On the other hand, your salary should be the highest in the company (if you are the legal representative) and higher than any of your employees (if you are a member of the board of directors), so that your subordinates respect your decisions. The Internal Regulation must include a procedure for this salary setting question, while it must also put limits (both higher and lower) for these salaries, as a comparison to the salaries of other staff members. 3.2 Business Ethics Business Ethics are supposed to be an “oxymoron”. Profits are not easily accepted as a legitimate way of money making, by most of the people, worldwide. In the same time the general public admires business persons which become rich! Within this conflicting mindset, all persons dealing with your company need to trust that you are not “cheating” them. Since the profits of your company are the result of all the operations in the end of a year, the only interested parties are the partners (or shareholders) and your staff members. The clients and the creditors, will hardly learn about your profits and the fiscal authorities will be happy to know that you declare high profits. Since the shares of your company are not yet being traded at the Stock Exchange, you are not obliged to adopt the “Corporate Governance” directives; yet, reading the guidelines of the “Corporate Governance”, paves the way to the desired “incorporation” that will transform you from an entrepreneur into an investor. 3.3 Social Responsibility Corporate Social Responsibility is not certainly meant for small companies. It concerns big enterprises, but even they have been small in their past. Social Responsibility means a company operation in such a way that it shows an evident concern about: The environment. The development of the society they operate in. The health and safety of people working in the company. The company impact on the evolution of innovation and scientific world. The promotion of equal opportunities to all the members of the society. The company has to declare its values, both to the external environment and the employees, but only if it is determined to serve these values. If, for example, your company is dealing with chemicals without using the appropriate technology to protect the environment, will prove disastrous for the company, because everyone (including your competitors, will declare you a liar). 3.4 Professional Code of Conduct For almost every profession there is a code of good conduct, being a manufacturing, commercial or service providing. Although such codes are not obligatory, you have better read the code, corresponding to your business and try to implement it in your company. You will find it very difficult, while your competitors will be getting most of those clients that are vulnerable to unfair trade, but in the same time you will be getting more and more recognition by the final consumers and you will gradually get back the most valuable customers. You must use your Public Relations to frequently communicate that your company is implementing a professional code, at a level best adapted in your market. Do not include principles that you are not able to follow. Remember: Sooner or later, a similar code will be adopted by your government and will become obligatory, because you and your established competitors will try to protect your companies from new competitors and unfair competition among you. 4 Organizational essentials You are about to run a company, so before you start anything you have to organize your business. Here is how to start and how to proceed. 4.1 General Organization is putting persons to work together, co-coordinating the company facilities and other means, so that they all go to the same direction. There are several theories dating at least two centuries, but the essence remains the same; putting people to work together means that they share the same goals, the same means, the same values and the same objectives. It is obviously impossible to have (or make) people that will put the organization (and your company) in precedence of their personal desires, ambitions and even beliefs. People compete for power, admiration by others and money, being (as we all are) lazy by nature, so they prefer obtaining it all without effort. A company can me run without a formal organization. In such a case a strong leader (gifted by nature) is able to transmit his goals and values and mobilize people working for him. It only lasts a little. What we need is a formal organization which is clear to everyone, different from company to company, making people work for the same purpose, either they believe in it or not. To do so, there is a little bureaucracy to tolerate, a little power to loose, but in the end, the formal organization makes the company to last and be profitable. People need a program to work and control, so that they know that they have to do the job they are assigned. Here is how: 4.2 Programming Programming means have written the future action in advance, so that everyone knows what has to be done and when. A program consists of the following: 4.2.1 Targets A program has to declare a target to achieve, which everyone involved knows and remembers, so: The target has to be brief, so that everyone remembers it. It has to be tangible; using numbers and dates. It has to be coherent and in accordance to the Strategy of the company, to the tactics of the Board of Directors and the policy of the company, in respect of every field of action. It has to be feasible, otherwise people abandon it. Reminder: Use less than 18 words to declare the target. 4.2.2 Procedure Analysis To reach the targets you need several procedures to be executed; others simultaneously and others sequentially. The procedures analysis is a very difficult task, if you are about to write an overall program for your company. It becomes much easier if you break down the functions of your company and write a separate program for each function, even if don’t have separate units for each. For example, you can write different programs for sales and production (when applicable), although production depends on sales. Writing the programs you will realize that you can declare the targets in conjunction to one another, i.e. production of orders within 20 days, means that you have to write a new program for each new order. 4.2.3 Assignments Every procedure is assigned to a work position (not the person working in this position) because he / she may be absent or replaced, during the program. Assignments have to balance the work load to the working positions. You will be tempted to assign many procedures to the most skilful and productive workers and less to the untrustworthy. This way you risk loosing your best people. Even if they don’t dismiss themselves, they will change attitude. Reminder: Never accept “this work is not among my duties”. Employees are learning quickly that they have to do what they are assigned and do it well. Exercise every possible way you think to convince them, but never retreat. 4.2.4 Allocation of resources Your resources are not infinite. You may just have one truck and it is needed both for the transportation of raw material to your company, the transportation of the sold goods to your clients and for the transportation of spare parts that the maintenance of your equipment need. You have to allocate the means to the working positions, according to their assignments. If you don’t allocate resources, you have to expect an excuse for not doing their tasks. Do not expect your employees to ask for the means they need. If you have to assign tasks to external parties, assign the task to monitor the progress that this third party is doing. If you omit this, you risk finding this third party having forgotten you, creating a delay and disorder. 4.2.5 Budgets Break down a budget, so that each procedure has enough money to be executed. Adding the particular budgets, you know the overall budget of your program. Subcontracting and external services must be trusted for payments to the person who will receive and control the “deliverables” of this third party. 4.2.6 Schedule Writing in a calendar the procedures, the assignments, the deadlines for deliverables, the allocation of resources and the payments, you have the whole picture of your program and you can control it. Putting all these information in a table (using the Gantt table is very helpful) you can also have the payments for each time unit (week, month etc). Reminder: Distribute assignments in written to all working positions and seek a receipt in duplicate, headed by the program target declaration. 4.3 Controlling However your programs are well done, if you don’t control the business, all you have to expect is excuses. The control consists of organization and observation. It sounds oxymoron, but all your programs need an organization which facilitates reaching the targets and observation of what people are doing and how. 4.3.1 Organization An organized company is the one where every employee known what and how to do, how to ask and report, as well as his / her higher and lower positions. From whom to get directives and who to guide. 22.214.171.124 The Organizational Goals The company is an organization. The company has been founded for a specific purpose or more than one purposes. These purposes include the way they can be fulfilled through competitive advantages. The goals of the organization are those leading to the route to success in the purposes fulfillment. For example, if the company purpose is to produce innovative products, the organizational goal may be to promote research. If the company purpose is to satisfy the clients servicing, the organizational goal may be to improve customer treatment. The whole system is affected by the organizational goals, because through the communication of these goals to all parties involved, they all know what the priorities are and act accordingly. 126.96.36.199 Co-ordination Co-ordination is achieved with: A clear hierarchy. Unique and clear formal communication. Distinction between Line and Staff members (working positions). Hierarchy shows who is the boss in every unit, having the right to “give orders” and makes decisions and to whom all subordinates report or revert to for guidance, or even ask for something (for example the permission to leave). Formal Communication is distinguished into Vertical (order and report) and Horizontal (information of the same hierarchical level of other working positions). Line members are those operating in segmented working positions (sales, production etc), while Staff members are those working for the whole of the company (marketing, accounting, research etc.). All the above is usually represented in the Organization Chart. Reminder: The lines of the Organization Chart show the unique formal communication route. 188.8.131.52 Authority Every working position must have a clear and written authorization to perform tasks. The authority concerns the right to give orders (describing also the kind of eligible orders and the limit to give orders) and the authority to handle items (goods, equipment, tools etc.) For example, the Sales Manager may be authorized to send sales persons to a trip for visiting clients but he cannot arrange their meals. He may be authorized to make photocopies of the price lists, but not to change the prices etc. 184.108.40.206 Responsibility Authority is connected to responsibility. There is no responsibility without authority, while there is responsibility for every authority. If, in the previous example, the Sales Manager is authorized to send sales persons for a visiting trip, he / she is responsible for having the visits done and that the sales persons are equipped with enough price lists. If the authority to make copies of the price lists belongs to the sales persons, then they must be responsible for being provided with, before they leave. 220.127.116.11 Delegation Concentration of authority to the top management creates bottlenecks, while all decisions have to be taken by the same persons and their working time is limited, never mind their ability and skills to resolve every case. Keeping all decisions to the top management will result to employees waiting in a cue and loosing their time, while this discourages them from taking any initiative, thus to lack of progress. Authority and responsibility is distributed with a formal written delegation, not to persons, but to working positions (the boxes of the organization chart). 18.104.22.168 Span of Control As it has been said in the previous section, it is impossible to have under control an extended number of working positions. The same stands for the space extension. It is impossible to control vast spaces or dispersed company facilities. Space and working positions of the control alleged to every working position must be well defined. 22.214.171.124 Unity of Management Delegating authority, defining responsibility, describing the span of control, may result to undesired results. You must examine again all of the above sections, to verify that: Subordinates do not have more authority and responsibilities than their superiors. Subordinate positions do not take orders by more than one superiors. A working position does not require multiple skills (engineering together with Legal and Computer programming). You may meet such persons, but even if you do, do not describe a working position based on such a rarity. Skills required must be homogeneous. 126.96.36.199 Duties / definition For every working position there must be produced a small “book of instructions”. In this “manual” you must describe: What the person occupying the working position is expected to do daily and how to do it. What this working position is expected to execute periodically (every week, every month, every year). How to handle security (his security and security of the others). What to do in cases of emergency (working accident, physical catastrophes, external or internal attack, health hazards and similar). Preparing all these books for every working position needs much work and efforts, but it is quite rewarding, because your company will perform well, both in achieving goals and keeping the employees satisfaction high. 4.3.2 Observation The previous chapter was paperwork with working positions. This chapter is about people working in your company. Although the title of this chapter is observation, you will find out that there is no physical observation. Knowing that nobody wants to be watched (we tend to make all the mistakes while we are being watched) and keeping in mind that what you want is performance (quantity and quality), you have to create transparent procedures for your human Resources. 188.8.131.52 Selection You already have described the skills and qualifications for every working position, now you have to select the best fitting persons. Set the procedures for selection and communicate them to the candidates. Reminder 1: Work experience is not always a qualification. It may be indispensable for managerial positions, but for entry level positions it may bring in bad habits from the previous position. Reminder 2: Persons selected because they are recommended by relatives, politicians or other “obligations”, will make you loose control. Reminder 3: Very high academic records are only needed for research positions. The ambition of such persons is to hold an academic position. 184.108.40.206 Training Life Long Learning (LLL) is a universal tool for personal development and also the evolution of the enterprises and, as a consequence, the society. Companies are considered to be the main lever for development and in the same time the field of action for ambitious persons. As a result, the enterprises are the most fertile ground for LLL, being considered as learning organizations and characterized by “Knowledge Management”. In fact, every company is different from any other. A new comer must know his /her environment, the colleagues, the managerial style, the locations, the premises, the equipment and their use, the “manuals” about his working position and the general Internal Regulation about his / her service. As a result, the company needs to train every newly hired person. The same necessity is evident whenever the company is either equipped with new machinery, adopts new techniques or reengineers the whole management. The company must train the employees again. Whenever the technological or socio-economic environment (even the competitive environment) changes, the company must train its employees, so they are prepared to face the changes. Companies change work positions of the Staff Members, especially when they are designated to occupy high rank positions, which need a wider view of the company and a deeper knowledge of its operations. Before they move to another position, in addition to getting the necessary acquaintances with their new working environment, they need training, so that they are able to understand the difficulties of the tasks they will assign to others and know if they are real or just excuses for non-action. Reminder: Professionals will try to convince you, offering a part of European funding of LLL, to hire them as “training bodies”. Close your ears to the sirens. If you listen to them, you will end up with getting involved in fraud together with your employees, who become “accomplices”. One time sinners; what do you have to expect? Will you able to ask them an honest behavior? Academics will make you believe that they are the most appropriate trainers for your personnel. Before accepting them, ask them to show you how they can operate in your technological / cultural / educational / procedural environment. Without such an examination, you risk making your employees loose their morale, while they will be shown every new scientific achievement, just because it is important. You have to crate an internal education system, as well as an external, facilitating your employees to bring in external knowledge. The internal education system is the one permitting the employees to change positions, adapt to technological changes in the company and improve their skills. 220.127.116.11 Monitoring Supervising personnel is both costly (the supervisor does not produce income for the company) and ineffective. When an employee decides to pretend working, he will. Even if he really works, he will produce bad quality. Our days are not all the same. The best employee, for personal or even no reason at all, may not be in good mood and perform less than usual. If this causes a bad judgment, he will be discouraged to cope up with the company expectations. A fine tuned organization records the production of each employee in a regular basis both in quantity and quality. Rushing production (or sales, or services) and measuring only the quantity, you risk destroying material and other resources and even damage your company image. Concentrated only in quality, you risk incrementing your costs and staying out of the market. The most desired combination is to have the best quality at the maximum quantity, but such an occurrence is very rare. There are many ways to control quality. You should replace supervision with quality control and record keeping of the productivity of each employee. 18.104.22.168 Evaluation If you just record productivity (or efficiency, or effectiveness), you already have done a step forward. If you evaluate each worker in every period (no less than a month at a time) using a system that he knows (for example you may use an average as “normal” and compare it with the individual average performance) in advance, your employees will increase their contribution in the revenue making process. It is mandatory that the evaluating system is clear to all employees and it is different from working position to working position. It is also important to have a simple statistical tool in hand, so that you avoid arbitrary or circumstantial evaluations. 22.214.171.124 Motivation In 1980 scientists started expressing doubts about the wage increment related motivation. Now most of them believe that “monetary” motivation does not really work. Rewarding productivity (efficiency, effectiveness) is much more important for the workers when it is related to social recognition. There is no pattern for this, social recognition is different from society to society, even in neighboring places. Let your imagination work! Participation at the distribution of profits may be strongly motivating, if on individual basis and not collective. It is not a matter of justice, but merely common sense. If an employee can enjoy additional earnings independently from his contribution, he will not be motivated at all. Promotion is commonly used as an incentive for the best performers. It certainly is, but a promotion without a salary rise seems ridiculous and does not last for long. As it has already been explained, it may also put the wrong persons in the wrong positions. You can invents other systems, like creating many stages with titles and a rise of wages, without really assigning administrative duties that are often incompatible with a well performing employee. Selecting the head of employees is not a reward for performance. He or she must lead people and not tune machines or treat customers, while he or she must make fast, accurate and profitable decisions, taking the risk to fail. A systematic knowledge and analysis of the desires of the employees will give you ideas of motivation. An incentive that you think is plausible, may not be interesting at all to your employees and other (to you irrelevant) things may be strong incentives (for example, paid excursion with the family, may result a wrong incentive, while the expedition to a trade fair alone, may be a strong incentive). 4.4 Organizational tools You can use simple tools to help you organize your company better. There is a lot of free software in the internet, but you can simply use MS-Office. Computer use is not necessary, but it helps you doing the same job faster and more accurately. 4.4.1 The GANNT matrix (enhanced) The Gannt table is a very simple tool. Here is an example: Imagine that your company is planning to increase sales by 10% in 6 weeks. To cope up with increased sales, you need to get raw material, increase production, move sales persons, advertise and pack. Here is the Chart. Code 1 1.1 1.2 1.3 2 2.1 2.2 2.3 2.4 3 3.1 3.2 4 Task Marketing Brochure Creation Brochure reproduction Brochure distribution Sales Sales Persons Tour Orders Received Orders Executed Clients follow-up Provision Raw Material Packaging Distribution Cost Payments ASSIGNMENTS Sales Director Production Assistant Assistant Accountant Secretary Company Car Office Equipment Week 1 wek 2 Week 2 wek 3 Week 3 wek 4 Week 4 wek 5 Week 5 wek 6 250 500 350 400 800 250 250 100 500 400 1.800 1.000 400 400 50 60 100 1.000 300 300 2.050 1.825 350 910 680 400 100 120 120 140 400 620 540 1.500 500 450 2.710 1.435 145 160 170 180 195 200 500 1.205 1.878 1.700 550 550 3.150 903 600 995 2.745 Cost 1.100 250 500 350 3.340 1.600 0 840 900 6.600 5.000 1.600 3.150 14.190 The original Gannt Chart had only the shadowed areas, to show when a procedure (task) starts, when it ends, how several tasks can be executed simultaneously and how the tasks follow one another. This proposed enhancement, includes also the cost for each task at the time it occurs and also the payments. Payments differ from the cost, because you can buy on credit, but this credit must be paid in a later time. This example assumes that you pay the credit the following week in full. In a real case, there are different credit lines for each purchase. It is a simplified chart. There should be also the involvement of sales position (per territory, type of clients, type of products). As you can see, there are no names of persons, but just working positions. This is because the work must go on and executed in time, never mind the absence of a person. 4.4.2 The Organization Chart President Accountant Marketing Secretary Supplies Production Assistant Some observations: Sales Maintainance The boss is only one. He may represent the Board of Directors. The members of the Board are not represented in the chart, although they may fill in positions (for example, there may be a Sales Vice President, a Marketing Director, who is also a member of the Board, or even an Assistant at the Production). As a member of the Board, participates in the Decision Making meetings, has a voting right and may be assigned with other tasks, like the representation of the company in trade Fair, sign contracts with banks and similar high rank authority, or even delegated the power to evaluate the employees, among them, his superiors! The “boss” (in this example the President, but it may be Chief Executive Officer, or differently called) has three duties; implement the decisions of the Board, Coordinate his subordinates and resolve everyday implications. His duty is also to bring in the Board every matter that needs a Board Decision (when the subject is so serious as to affect the company) as in charge to compile the Agenda and Call the Board in a meeting. Accounting, Marketing and Secretary cannot give orders, but only through the President. They are Staff Members. Production position can give orders (in fact he prepares programs) to the Assistant and Maintenance positions and receives Reports from them. If the Production Assistant needs a change in Raw Material supply, he must refer it to the Production position. The Production responsible, then, may ask the Supplies responsible to make this change. If the Supplies responsible does not agree, even if he thinks that this change is major for the company, their disagreement will be resolved by the President. If the President thinks that this change is in fact major to the company, he will put in the Agenda of an Ordinary meeting, or Call an Extraordinary Meeting of the Board, to decide upon. 5 Human Resources essentials When the work gets to be too much, you may find yourself toying with the idea of adding staff to help out. But do you really need help? First, ask yourself if you need to hire someone or just be better organized. If you're having trouble getting organized, try local libraries, community centers, or colleges for information or seminars on time management. Can you afford an employee? Even if you know that you need the extra help, you'll still need to consider whether you can afford to hire a new employee. How do you know how much you can afford to pay? There's a tension between how much the employee's salary and benefits will drain your business's budget and how much extra money the employee's presence will bring in. Look at your operating budget. How much slack is there in it? How much money could be cut from other areas, so you could use it to pay an extra person? Remember that you'll need to pay at least the minimum wage, not only under the law, but under the danged to have your business boycotted. Don't forget about payroll taxes and legally mandated employee benefits, like workers' compensation. Now, try to estimate how much extra income that employee would generate in the first year. It's not always easy. If the employee is going to sell your product or services, it will be easier to figure out how much extra income he or she would bring in than if the person is going to perform data entry or cashier duties. But in the absence of a "cause and effect" relationship, consider other ways that an employee could generate extra income: • With an extra employee, would you have more time to market your services and expand your business? • • Would an extra employee allow you a chance to produce more products or serve more clients? Would an extra employee allow you to give your customers more efficient service or quicker delivery, with the result that higher quality would lead to more customers? If the answer is "yes" to any of these, try to estimate how much extra business would be generated by more, faster, and better delivery of your product or service. The math is simple. If you're fairly sure that the extra business would amount to more than the minimum salary of the employee, then you are in a good position to hire someone. If the added business does not outweigh the minimum salary that you would have to pay, then look for other alternatives to hiring a permanent employee. Will you really save time? Once you've got someone to help out, you'll have all this extra time, right? Well, maybe. But don't forget, when you hire someone - especially when you hire for the first time - you have to invest a lot of time in the hiring process, in training the worker to get them up to speed, and in managing records. 5.1 Organizational Behavior basics Organizational behavior deals with the sociological and psychological attitude of the employees, such as work satisfaction, leadership, conflicts in team work and the similar. For a small company, especially in early stages, it is a waste of resources to analyze the organizational behavior, while your organization is not yet established, there is no struggle for power, other than the one among partners, there is no disappointment, yet, there is no establishment to block the ambitions. 5.2 Human Resources Management basics People working for you (employees or externals) will do their best for your company if you treat them as humans. They need to be paid, respected and cared about. First of all, there are laws protecting work and workers. Most of the Constitutions oblige the Parliaments to make Laws in favor of the workers. These are legal obligations that you have to follow, as well as all bureaucracy that goes with it. Your accountant is usually able to guide you. Hiring a person is not a simple thing. You must follow all the rules, otherwise you risk to loose money and time to remediate. Look at following checklist: What authority (or more than one) must be notified about hiring and in what form? Is the Salary that you have agreed, over minimal wage? Is the Insurance Authority notified and how? Does the person hired belong to a Profession with special obligations (like notification of his Professional Association, special insurance, additional payment)? How many hours per week? What are the minimal allowances per day for a business trip? Is this person eligible for commuting reimbursement (because of distance or profession)? Are the duties of the position corresponding with the actual duties? Do the actual duties oblige you for additional compensation, insurance, less working hours, other obligations? Reminder 1: You may sign a contract with an employee in which some terms are such that they omit the legal minimal. Such contracts cannot stand before Court. Reminder 2: Fully legal work costs less than any low cost work, in mid term. Reminder 3: You save money when you pay all your obligations to the employees. They produce more value for your company than what you save from the payment. Reminder 4: Pay your employees first. All the others can wait (at a cost). Reminder 4: Remind your employees at any chance you have, that they are paid in due time at the Legal standards. If someone gets more than that, remind him /her that he /she has to earn it. Reminder 5: If an employee neglects to perform a task assigned because he does not know how, arrange training for him / her. If he / she does not get trained or after training does not perform as expected, do not hesitate to fire. 5.3 Work-force costs The arithmetic of the cost of an employee is simple. Since you are calculating the costs on a production (or working hours) basis, you must calculate his / her hourly cost. Take the basic (or nominal) wage, add insurance (without the retained part), add bonuses, add the cost of other benefits (coffee break offers, commuting, company car costs etc) on a yearly basis and divide the sum with the real yearly working hours. Remember to subtract the working hours corresponding to the yearly leave for holidays and other holidays. Wages are admittedly low. Your employees will try to find a second employment. It is better to keep them in your own work “overtime”, even if the cost is elevated. Reminder: Do not calculate extraordinary bonuses and travel allowances as work-force costs. They are overheads. 5.3.1 Internal work You may hire full time or part time. The cost of part-timers is not half the fully working persons cost but reaches 2/3. You must create a working position when you have calculated what this position is expected to do and how much time is needed. Managerial positions are created when you have 5 or more working positions and they need coordination. If they become more than 10, you need a second managerial position. The more employees you have, the more managerial positions you will need, because they are working positions as well and if they exceed 5 they will need a coordinator. As the number of employees increases you will need to add more hierarchical levels. You may “Lease” workers (whenever this becomes valid), but only for auxiliary works. Reminder 1: You cannot create portions of working positions. You may hire only full time or part time (which is half a persons working hours). It is better to employ overtime. Reminder 2: Part time working needs a very well organized company, with too many workers that permit detailed specialization. Reminder 3: Special agreements with the employees about overtime compensation are extremely rarely denounced or complained about, as long as what you have promised you keep, even with a delay. Reminder 4: You may hire your children, at any age, without fear of legal procedures. It is most unlikely that the authorities will press charges. But beware; your partners may not like this. 5.3.2 Outsourcing Instead of hiring employees, you may assign the same tasks to independent professionals. You may be tempted to assign tasks instead of hiring. There is a danger that the Government will not accept it and charge you with fines and other penalties. In general, you may only use external contractors, when: They have or will create an enterprise. They have premises of their own, even if they work in your premises. They do not have a working program, even when they are paid by the hour. They are proficient in a specific specialty, mentioned in their contract. They issue an invoice for their services. In general terms, Staff tasks may be assigned to externals (outsourcing), but not line work position tasks. 5.3.3 Employment Liability When you hire someone and he / she, during the execution of his duties, harms someone else with his doings or negligence, you have the full responsibility. Under this general rule, this harmed third party may sue you and win a compensation or even press charges on you, through the penal procedures. You never know what your employees are doing. They may harm a third party and claim that they were just following the orders of the company to avoid their own liability. You never know what third parties may “invent” and ask for compensation, claiming that an employee has harmed them. If you ever receive a legal document of such a kind, however obvious it is that your company has no responsibility, call a Lawyer. What you can do to protect your company, is to describe the duties of each employee in a contract in which you limit the duties to the content of this document and give the right to the employee to ask for written instructions for additional tasks you may assign to them. If possible, make this documents unique, by either depositing the documents to an authority (Tax Office, for example), or with a registration in your Books. It is bureaucratic, but if your company becomes very profitable, you will face such occurrences. 5.3.4 Work Health and Safety Employees feeling safe at work, perform better, are regular at work (minimizing absenteeism) and rarely dismiss. The Ministry of Labor has a set of Health and Safety regulations, following the European Standards. Those regulations are minimal and even if you follow them, you are not safe at all from potential accidents. Even when accidents happen, if you have taken all precautions and you were ready to affront it, you are safe from being asked for enormous recompense. Here are some additional guidelines: Gather specific facts about your situation. Before you make any changes in your safety and health operations, you will want to gather as much information as possible about the current conditions at your workplace and about business practices that are already part of your safety and health program. This information can help you identify any workplace problems and see what's involved in solving them. The assessment of your workplace should be conducted by the person responsible for the safety and health program and/or a professional safety and health consultant. Request a consultation visit covering both safety and health to get a full survey of the hazards that exist in your workplace and those that could develop. Establish a system, such as vendor consultations, to get expert help when you make changes and to be sure that the changes are not introducing new hazards into your workplace. Also, find ways, such as through trade groups, to keep current on newly recognized hazards in your industry. Make a commitment to look carefully at each type of job done in your workplace from time to time, taking it apart step-by-step to see if there are any hidden hazards in the equipment or procedures. Some initial instructions from a consultant may be necessary. Set up a system of checking to make sure that your hazard controls haven't failed and that new hazards haven't appeared. This is usually done by routine selfinspections. Provide a way for your employees to let you know when they see things that look harmful to them and encourage them to use the process. Learn how to do a thorough investigation when things do go wrong and someone gets sick or hurt. This will help you find ways to prevent recurrences. If you've been in business for a while, take the time to look back over several years of injury or illness experience to identify patterns that can lead to more effective prevention. Thereafter, periodically look back over several months of experience to determine if any new patterns are developing. Once you know what your hazards and potential hazards are, you are ready to put in place the systems that prevent or control those hazards. Your state or private consultant can help you do this. Whenever possible, you will want to eliminate those hazards. Sometimes that can be done through substitution of a less toxic material or through engineering controls that can be built in. When you cannot eliminate hazards, systems should be set up to control them. Here are some actions to take: Set up safe work procedures, based on the analysis of the hazards in your employees' jobs, and make sure that employees understand the job procedures and follow them. This may be easier if employees are involved in the analysis that results in those procedures. Be ready, if necessary, to enforce the rules for safe work procedures by asking your employees to help you set up a disciplinary system that will be fair and understood by everyone. Where necessary to protect your employees, provide, at your own cost, personal protective equipment (PPE) according to published standards and be sure that your employees know why they need it, how to use it, and how to maintain it. Provide for regular equipment maintenance to prevent breakdowns that can create hazards. Plan for emergencies, including fire and natural disasters, and drill everyone frequently so that if the real thing happens, everyone will know what to do, even under stressful conditions. You must ensure the ready availability of medical personnel for advice and consultation on matters of employee health. This does not mean that you must provide health care. But if health problems develop in your workplace, you are expected to get medical help to treat them and their causes. To fulfill the above requirements, consider the following: Have an emergency medical procedure for handling injuries, transporting ill or injured workers, and notifying medical facilities with a minimum of confusion. Posting emergency numbers is a good idea. Survey the medical facilities near your place of business and make arrangements for them to handle routine and emergency cases. Cooperative agreements could possibly be made with nearby plants that have medical personnel or facilities onsite. If your business is remote from medical facilities, you are required to ensure that a person or persons be adequately trained and available to render first aid. Adequate first aid supplies must be readily available for emergency use. Arrangements for this training can be made through your local Red Cross chapter, your insurance carriers, your local safety council, and others. Reminder: The employees working in production or other hazardous environments will try to convince you that they can take care of themselves without all these PPE (helmets, boots, gloves, ear protection devices, masks etc.) equipment. Impose your will to protection procedures with disciplinary actions. Soon they will get used to the use of PPE and safety procedures. It usually takes some weeks. After starting to use PPE they feel that they belong to a well organized company and they increase fidelity and performance. 6 Financial essentials 6.1 Your Basic Bookkeeping To succeed in business, one of your most important tools is financial analysis, based on your business records. Accurate financial records will help you answer some very important questions. Are you making money, or losing it? How much? Is your business on sound financial ground, or are troubles lurking ahead? A sound bookkeeping system is the foundation on which all of this valuable financial information can be built. As a small business owner, you probably rely on an outside accountant to do your taxes and prepare financial statements. However, like many small business owners, you may find that it's too expensive to pay an accountant to do routine bookkeeping chores. Someone in your organization must take on the responsibility of keeping an accurate set of financial records. Fortunately, you may find this task easier than you thought, especially if you use your computer. You are not going to become an accountant, especially if you choose to use “doubleentry” book keeping (which is most advisable). You must understand some simple principles of accounting. 6.2 Accounting Basics This is not an accounting guide, but yet you must understand how accounting works, so that you know how your company is doing. Accounting is a system of recording transactions of your company, so that all the property transformations can inform you about what your property is at any time. To do so, property is classified in “Accounts” and all the transactions are recorder there. Those Accounts are registered in a book called “General Ledger”. In order to facilitate control, every transaction or property transformation is also registered in a sequential manner one after the other, day after day) in another book called “Journal”. Every year (called fiscal year) starts and ends with a Balance Sheet. 6.2.1 Balance Sheet A Balance sheet is an account where Assets and Liabilities are put together. As in all accounts, there is a left hand part and a right hand part. The two parts are equal. The left hand part contains the value of the property of the company, the right hand part contains the financial sources that permitted the acquisition of this property. 6.2.2 Assets (Active) They represent the current value of the property which the company owns. In case that the company holds property of others (even your personal property), it is not represented in the Assets part of the Balance. At the end of the fiscal year the company counts all the possessions in an Inventory and evaluates them, so that they will be represented with their value. 126.96.36.199 Fixed Assets Fixed Assets are those that are not items of trade, but they are used by the company for its operation. For example, a company car is a fixed asset, if the company sells cars, those cars are not fixed assets. Fixed assets loose their value as time passes by, except the land. Studies on which the company foundation and development is based upon, are fixed assets, as long as they can be sold (together with the company) to a new owner. 188.8.131.52 Current Assets Current assets are those commercialized by the company, or used in property transformation. Cash is one of them. The value of what your clients (or others) owe to you, are current assets as well. 184.108.40.206 Depreciation As your fixed assets grow older they loose their value, mainly because they become obsolete and at some time you will have to replace them, even if they are still functional. In order to calculate the current value of a fixed asset, you have to subtract the value which has been lost because of their oldness. Depreciation of a period is a cost element. Simple Example of initial Balance Sheet Initial Balance Sheet Assets (Active) Fixed Assets Terrain Buildings Machinery Transportation Means Equipment Special Installations Intangible Assets (Studies - Licenses) Current Assets Stock (material inventory) Clients (owing you) Advances to Suppliers Bank Deposits Cash TOTAL Assets Liabilities (Passive) Equity Capital Shareholders / Prtners Capital Long Term Depts Banks (for Investment Loans) Shareholders / Partners Loans Fixed Assets suppliers Short Term Depts Advances from Clients Banks (loans for working capital) Suppliers (selling to you on credit) TOTAL Liabilities Subsequent provisional balances would have the following simple format: Provisional Balance Sheets Assets (Active) Fixed Assets Terrain Buildings (initial Value) Minus Accumulated Depreciation Current Value Machinery (initial Value) Minus Accumulated Depreciation Current Value Transportation Means (initial Value) Minus Accumulated Depreciation Current Value Equipment (initial Value) Minus Accumulated Depreciation Current Value Special Installations (initial Value) Minus Accumulated Depreciation Current Value Intangible Assets (Studies - Licenses) Minus Accumulated Depreciation Current Value Current Assets VAT The State Owes to the company Losses of previous years Stock (material inventory) Clients (owing you) Advances to Suppliers Bank Deposits Cash TOTAL Assets Year 1 Year 2 Year 3 Liabilities (Passive) Equity Capital Shareholders / Prtners Capital Retained Profits Forecasts for exchange rate Forecasts for employee compensation on firing Forecasts for debtors banruptcy Long Term Depts Banks (for Investment Loans) Shareholders / Partners Loans Fixed Assets suppliers Short Term Depts Advances from Clients Unpaid profits to the owners Banks (loans for working capital) Suppliers (selling to you on credit) Social Insurance owed Profit Taxes unpaid VAT your company owes to the State TOTAL Liabilities Year 1 Year 2 Year 3 6.2.3 Liabilities (Passive) This part contains all the accounts payable. These are the sources of finance that permitted the company to have property. They are divided in Long Term and Short Term. 6.2.4 Equity Capital The Capital that you have put in your company is a liability of the company to you, together with profits that have not yet been paid to the owners. 6.3 Double Entry Every transaction is registered two times; once in the left side of one or more accounts (credit) and once on the right side of one or more accounts (debit). The sum of credits and debits must be equal. Every transaction or property transformation has a present or future cash change, equal to the property change. With double entry accounting, the company is able to monitor its potential at any time. 6.4 Investments An investment must start with a business plan and be implemented with special studies (Marketing, Construction, installations etc) and concludes with the constructions, installations, purchase of machinery and equipment. The accounting system does not recognize as investment any initial training of the newly hired employees. If you consider it an investment, you will have to include it in a study (Business and Marketing Planning included). If the training concerns the operation of machinery, you may ask your suppliers to include training in the price of the machinery. An investment is an expense. If an expense is considered an investment, then it is depreciable, which means that the initial expenses are divided in the next fiscal years, so that a more reliable calculation of the results (profit or loss) is done. You may think that the value of your warehouse is an investment; well it is not (at least for accounting). If your company buys shares at the Stock Exchange Market, or participates in another company, this is an investment. The investment plan consists in listing and evaluating all assets necessary to the initial phase of the project. It is important to provide detailed information in this listing since the financing scheme will depend on the investment plan and, if the latter is under evaluated, capital may be insufficient and therefore the project may fail. The amounts included in the investment plan should be valued at real prices (including VAT) at the time of payment. These amounts correspond, in short, to the following items: investment in tangible fixed assets; investment in intangible fixed assets; financial investments; Cash. The tangible fixed assets (the ones that will remain in the company) are, for instance, buildings, plots of land, basic equipment or transportation equipment. In order to calculate the amount of the associated investment, you should list in detail all the items that are included in tangible fixed assets associated with the project, requesting budgets to suppliers (when applicable) and doing an approximate calculation for the remaining companies. The intangible fixed assets are associated with the expenses related to the incorporation of the company (preparation of articles of association, statements, registrations and publishing) and also the ones associated with purchase of software, property conveyance, studies and projects, marketing campaigns, patents, trade marks, authorizations, licenses, etc. Investment Plan Tangible Fixed Assets Plots and preparation works Buildings and other constructions Directly productive areas Non-directly productive areas Environment Quality Training Others Equipment Productive Non directly productive Environment Quality Training Others Social Administrative and movable Tools and utensils Transportation and load material Other tangible fixed assets Total of Tangible Fixed Assets Intangible Fixed Assets Legal Entity Foundation Studies and diagnosis Licenses and royalties Technical assistance Software Training Research and Development Disclosure - Announcements Other Intangible fixed assets Total of Intangible Fixed Assets Financial Contributions Year 1 Year 2 Year 3 Accumulated Amount Total of financial contributions Interests regarding current Fixed Assets Total of interests regarding current fixed assets Investment Plan Year 1 Year 2 Year 3 Accumulated Amount Working Capital Direct Needs Stocks (Material Inventory) Clients (what they owe to you) Treasury Security Reserve (Cash and Bank Deposits Advances to suppliers Others Total of needs Resources Acquisition Contribution to Suppliers Advances to clients (to enter the chains) State and other public entities (VAT) Others Total of resources Necessary cash Total of Investment Total of Investment The Finance for the company investment is roughly: Financing Plan Year 1 Year 2 Year 3 Equity Share Capital Additional contributions (Subsidies) Self - financing (retained profits) Total of Equity Medium and Long-Term Debts to Third Parties Debts to Credit Institutions (banks) Debts to shareholders (Lent money, not capital) Suppliers of Fixed Assets (bought on credit) Accumulated Amount Financial Lease Others Total of Medium and Long Term Debts to 3rd. Parties. Short - term Debts to Third Parties Debts to Credit Institutions (banks) Debts to shareholders Advances on account of sales Suppliers Suppliers of Fixed Assets Financial Lease Others Total of Short Term Debts to 3rd. Parties Total of Financing Total of Financing 6.5 Sales Forecasting Some marketing research material is nothing but trash. Marketing research can be done for peanuts -- even with peanuts. Shocking statements? Perhaps, but both of them are literally true. Take trash, for instance. Inspection of outgoing waste is a practice at many small restaurants. People may order the Flounder a la Marzipan because of the novelty of the dish; but if a restaurateur finds most of it leaving the table uneaten, it had better come off the menu because it won't be in demand much longer. You can use trash positively, too, to find out what people like. It may not be very dignified to check trash cans for cartons and containers, but they are a direct indication of what consumers are buying. You could also find out what competitors are selling (or at least ordering) by checking their trash. The point here isn't to turn you into a scavenger, but to suggest that marketing research isn't necessarily only done by sophisticated staffs of statistical technicians working with powerful computers and grinding up figures from elegant surveys. Marketing research doesn't have to be fancy and expensive. It can be done with peanuts, as one creative discount merchandiser discovered. During a three-day promotion the merchant offered customers . . . all the roasted peanuts you can eat while shopping in our store. By the end of the promotion the merchant had litter trails that provided information on the traffic pattern in the store. Trampled peanut hulls littered the most heavily travelled store aisles and heaped up in front of merchandise displays of special interest to customers. By studying the trails, the merchant learned where customers went in the store and what they wanted. Having assessed the wider environmental conditions and considered the internal decisions regarding the proposition, it is possible to make more accurate predictions for Month 1. After that, it is a case of extrapolating into the future using a growth factor and flexing for seasonality or cyclical trends. Notwithstanding the difficulties in forecasting for a start-up, the real benefits accrue after a year of successful trading. Once there is an historical record for a year of trading, it is then possible to plan with more certainty through the use of more scientific methods, such as trend analysis and comparison with variables. For example, an ice cream vendor could compare sales of ice cream with an obvious variable – weather temperature – in order to assess the correlation between the two variables. Once a sales forecast has been made, it can then be used for budgeting, allocating resources, managing cash flow, and as a basis to secure investment. You can make forecasts of your company’s future sales by assuming that you will be able to sell all what you can, after you have considered that: There are competitors. You address to specific Market Niche and you know how big it is (potential buyers) and what they are able to pay for the satisfaction of your product / service. There is a seasonality of demand. There is no such a thing as constant demand (and sales). You will be able to sell a small fraction of what your closest competitor (nearing you in size), if you are new in the business, either because you offer a new product / service to the Market you already know, or a new product in a Market in which you are new. Mass distribution (Super Market Chains) may be your goal, but if you are not already established at the consumers’ mind, they will not let you in, unless you pay them for it. Even if you are present in such chains, this does not mean that you will receive new orders, because your product sells. New products may sell as for trial. This does not mean that the consumers will continue buying. Pioneer consumers usually turn to new products in a big rate (more than 50%). Do not get excited from the “first appearance” sales. Do not expect to get a market share which exceeds a one digit percentage, even if you see better initial selling results; your competitors can diversify, can’t they? You can calculate your prospective sales by assimilating your business to other companies with same characteristics. You have to think that there are three main scenarios; an optimistic, a most probable and a pessimistic. It is true that you know little (or you can learn little) about what your competitors really do and how much they really sell. You can extrapolate by observing the life style of the owners and staff members, the number of employees they afford, the renovation of their facilities and the advertisement that they pay. Reminder: Do not bother to apply sophisticated methods of calculating your future sales. They would be very useful and accurate if primary data was available. 6.6 Profits Yes, we are talking only about profits, not losses! A company is founded for profits. Yet, in the initial stages you have to expect losses. Profits are expected after a period of successful operation. It usually takes up to three years before the partners can start cashing their share of profits. The calculation of profits (or loss) for every period (year) is based on the accrual accounting. This means that both sales and supplies are calculated when they occur, never mind when they get paid. Profit & Loss a/c for the Year Ending 31 st December Year 1 € Year 2 € Year 3 € Income Sales Minus Materials Consumed Gross Margin Minus Overheads Wages & National Insurance Staff Training Rent Research & Development Advertising & Promotion Marketing Costs Transport & Packaging Heat, Light & Power Telephone Printing, Postage & Stationery Insurance of the company Accountancy/Audit Fees Machinery Lease Payments Cars/Mileage/Travelling Bank Charges Repairs & Renewals Management Salaries Depreciation – Machinery Miscellaneous Expenditure Depreciation-Office Equip. Depreciation – Furniture Operating Profit (Before Tax) Employment Grants Accumulated Losses (past) Net Profit (Before Tax) Taxation Net Profit (After Tax) 6.7 Cash Flow Once the costs and proceeds of the company are identified, you should assess money input and output flows, so as not to exist treasury breakdowns. Business receipts and expenses usually come-up at different times and you should not calculate monthly averages from the amount foreseen for the annual sales, mainly if you have a seasonable activity. On the other hand, the entrepreneur is committed to pay for supplies, wages, financial charges, etc., within the agreed deadlines, regardless of the proceeds evolution. The treasury budget should be prepared for a minimum period of one business year, every month or possibly every week, and should foresee all foreseen payments and receivables (taking into account the agreed payment term). A very important aspect of the treasury budget is VAT. Although companies do not pay VAT, they actually receive the VAT in the sales and will pay VAT in the purchases, and every month or every quarter they will have to pay the difference to the Tax Department. In the treasury budget, all amounts must be paid or received and therefore must include VAT (there must be an item for the amount of VAT to be paid to the Tax Department, and do not forget that VAT is applied to the amount of the invoice and not to the paid or received amount). The analysis of the treasury budget allows you to check if there are periods with "negative treasury balances", to calculate the necessary amount to cover those situations and to build a regular balance out of available capital. Thus, based on the treasury budget, it is possible to study the most convenient financing schemes, as to its type, amount and term. Cashflow Projections Year 200_____ JAN FEB MARCH APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC TOTAL Cash Inflow s Starting Cash Sales Capital Introduced Loan Capital Grants Total 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 Cash Outflow s Purchases Machines Wages & National Insurance Staff Training Rent Research & Development Advertising & Promotion Transport & Packaging Heat, Light & Power Telephone Printing, Postage & Stationery Insurance Accountancy/Audit Fees Machinery Lease Payments Cars/Mileage/Travelling Bank Charges Repairs & Renewals Management Salaries Miscellaneous Expenditure Vat Payments (Refunds) Capital Exp. Office Equipment Capital Exp. Furniture - - - - - - - - - - - - 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00 Total Net Cash Inflow /(Outflow ) Opening Bank Balance Closing Bank Balance Bank Overdraft Facility 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0,00 0,00 0,00 0,00 Vat Vat Vat Vat 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 on Sales on Purchases on Purchases Payable Reminder 1: Agreements for payments are rarely kept. You have to calculate a percentage of delays, as it is usual in some regions and the economic circumstances. You have to press your debtors, but not too much to loose them, unless they are don’t really like paying! Reminder 2: You collect VAT from your clients and pay VAT to your Suppliers. In real terms, your clients pay VAT on their purchase value, while you have paid a fraction to your suppliers (while wages are not charged with VAT), so you are really financed by the Tax Office, which is going to receive the difference in a later time. You will see competitors selling without VAT charges. Taxation systems have accumulated a secular experience. Even if you temporarily tick them, they will make you pay with heavy fines in the near future. Reminder 3: If you find your way to avoid VAT payment through contacts with “tax collectors” remember that the persons change, but the system remains! Insufficient VAT compliance is the main risk factor for the Balkan enterprises. Reminder 4: The main cause of business failure and bankruptcy is the inability of a company to pay its obligations to the State and the Banks. Even you, as a partner, want your profits share in cash, not material, merchandises or promises (drafts, postponed checks). Do not get fascinated by profits, unless you have calculated the cash flow incidence. In the accrual system, profits are the difference between sales value and costs. If payments of the costs are faster than collections, you will find your company with nominal profits (and taxes to pay for) without having got the money yet. Reminder 5: If you know what your cash needs will be in a time that cash difficulties have not yet appeared (some months before) your bank will lend you the money needed. If you go to your bank for a loan, after the cash difficulties appeared, the bank is the first to “turn its back” to your company and ask for your bankruptcy (in order to confiscate the guarantees, known as collateral). 6.8 Gauges (Measurement of Performance) The management of the company (the representatives of the owners) wants to know how their company is performing, so that they can take actions correcting the course of their company. The same stands for financial contributors (banks lending money to the company, equity capital contributors) as well as third party interested collaborators (major suppliers and clients) even your staff and potential staff members. Here are some very important indices that you can calculate yourself. First of all you must keep in mind that you need some key factors for the operation of your company. Even before you start operating, you should observe the market and extrapolate some numeric information, which you can verify and adjust in later time. Do not forget that you must adjust these “assumptions” regularly, while the market changes and so does the mindset of all parties involved. 6.8.1 The Key Gouges are: Usual number of days in which you collect the credits from your clients. Asking around you will be informed of the usual payment period of clients and the usual rate of “uncollectible” credits. You need to sharpen this number by subtracting the advance that clients in your sector usually pay when they buy and find the usual rates of payment. Take for instance the foodstuff sector; clients may pay a 15% as down payment, 30% within 30 days, 30% within the next 30 days (60 days from purchase time) and 25% another 40 days (totaling 100 days from purchase time). Later, when you have real data of your own, extracted from your accounting books, you will be able to know what the clients of your company do for paying you. This depends on the sector “habits”, your specific market niche and your company’s credit and collection policy. You can calculate the days that you have to wait until your clients pay you, by multiplying their credit with the days elapsed before they paid you and dividing the sum of these multiplications with the sum of payments occurred. It is much easier to calculate the percentage of “outstanding credit” (the payments promised but not done in due time, by your clients) and the percentage of uncollectible (clients that went bankrupt or disappeared). Another calculation, important for your company, is the percentage of profits over the turn over (sales). This measurement will show you if it is profitable borrowing money in order to increase sales. If the interests and other expenses you are going to pay are superior to the percentage of profits that you are going to make by using this money, you have better not borrow. Similar to this, is the profits over the capital used. This will produce a percentage which is useful for comparison with similar companies in the same sector. If your prospective percentage is less than the average of the sector, bankers will need a plausible explanation, if you want them to lend you money. It is difficult to know what this percentage is for your competitors, because they do not make public all the relevant information, but you can have an idea reading the Balance Sheets of corporations as they are published. These measurements are useful, but they mean little for your company. The most important measurement is the Inventory Turn Over. A quite important part of the capital used by your company is used to buy goods that you are using either as raw material, packaging, spare parts or merchandises that you are reselling to others as they are. The margin that you expect (or you are setting through your pricing policy) is not the real question. Your margin creates profits every time you sell all your stocks. Your profits are being calculated on an annual basis. The profits of your company, at the end of each year, may be a multiple of your margin, depending of the times you manage to make full circles of your inventory (you sell out and buy again). It is obvious that you need stocks, for the following reasons, at a relative cost: Massive supplies may be done in a discount, so they cost less. Remaining without material will damage your company (imagine clients who want to buy from you and you are short of inventory, you risk loosing them, while you risk loosing your employees, if they come to work and your company either pays them without working or discharges them). The question is; how to optimize you inventory? There is an answer with a solid scientific background, but as in all these complicated calculations, you need data of your company of many years and a stable economic environment, well regulated and transparent (with information of your competitors available). You may feel that this is not your case. Your company is new and you don’t have enough information from it, while your business environment is quite obscure and changing. How to determine your inventory? Instead of sophisticated methods, you may use simple common sense. How long does it take to safely refill your warehouse? If, for instance, 20 days are enough, you may choose not to exceed 30 days of inventory sufficiency. What is the daily consumption (either sold or used in production) of the items in your inventory? Considering both your sufficiency until refilling and your daily consumption, you can determine your “reordering” stock for each item in your inventory. There is no general rule, except that you must keep your inventory as low as possible. The same point of view may be considered in discounting to your clients. In many cases, the more discounts you offer, the more clients buy. Another component of profitability at an annual basis has to be considered. Your clients will buy more from your company as you extend your credit line. This will help your company increase the sales, but will you be able to finance your supplies and other expenses? What if you discount at prompt (even better, cash) payments? 220.127.116.11 Current Ratio The current ratio is a way of looking at your working capital and measuring your shortterm solvency. The ratio is in the format x:y, where x is the amount of all current assets and y is the amount of all current liabilities. Generally, your current ratio shows the ability of your business to generate cash to meet its short-term obligations. A decline in this ratio can be attributable to an increase in short-term debt, a decrease in current assets, or a combination of both. Regardless of the reasons, a decline in this ratio means a reduced ability to generate cash. If you're looking to secure money via the sale of some stock through an initial public offering, many Government Bureaus will require that you have a current ratio of 2:1 or better. Merely paying off some current liabilities can improve your current ratio. 18.104.22.168 Quick Ratio The quick ratio, also known as the acid test, serves a function that is quite similar to that of the current ratio. The difference between the two is that the quick ratio subtracts inventory from current assets and compares the resulting figure (also called the quick current assets) to current liabilities. Why? Inventory can be turned to cash only through sales, so the quick ratio gives you a better picture of your ability to meet your short-term obligations, regardless of your sales levels. Over time, a stable current ratio with a declining quick ratio may indicate that you've built up too much inventory. How to improve your quick ratio. Since this ratio is quite similar to the current ratio, but excludes inventory from current assets, it can be improved through many of the same actions that would improve the current ratio. Converting inventory to cash or accounts receivable also improves this ratio. In evaluating the current ratio and the quick ratio, you should keep in mind that they give only a general picture of your business's ability to meet short-term obligations. They are not an indication of whether each specific obligation can be paid when due. To determine payment probability, you may want to construct a cash flow budget. In general, a quick or acid-test ratio of at least 1:1 is good. That signals that your quick current assets can cover your current liabilities. 22.214.171.124 Return On Investment (ROI) Your company is looking forward to making profits. One of the primary concerns is when the money invested will come back (though profits) to the investor? You will hear about Net Present Value (NPV) of future earnings as Internal ROI. It is a very useful tool for buying shares, but it would be more useful to you to calculate the time needed to take back, in the form of profits collected, the money you are contributing to the equity capital of the company. This means that after this time you will still own a part (or all) of the company and still be getting profits, but practically without risk! 126.96.36.199 Breakeven Analysis A second tool for management decisionmaking that has grown out of cost/volume/profit analysis is breakeven analysis. Once you know what your variable costs are, as well as your overall fixed costs for the business, you can determine your breakeven point: the volume of sales needed to at least cover all your costs. You can also compute the new breakeven point that you'd need to meet if you decided to increase your fixed costs (for example, if you undertook a major expansion project or bought some new office equipment). Your breakeven point can be determined by using the following formulas: Sales Price per Unit — Variable Costs per Unit = Contribution Margin per Unit. Contribution Margin per Unit divided by Sales Price per Unit = Contribution Margin Ratio. Breakeven Sales Volume = Fixed Costs divided by Contribution Margin Ratio. Variable unit cost: Cost associated with producing an additional unit. Fixed cost: The sum of all costs required to produce any product. This amount does not change as production increases or decreases. Expected unit sales: The number of units that are expected to be sold. Price: Price you will be able to receive per unit. Total variable costs: The product of units produced and variable unit cost (example 10 units at €5 variable cost produces a total variable cost of €50). Total costs Sum of fixed costs and variable costs. Total revenue Product of price and expected sale unit sales (example 10 units at €10 equals €100 total revenue). Profit Total revenue minus total costs. Breakeven Number of units required to sell to make a profit of zero. 7 Controlling essentials Whatever your plans and management style, if don’t control your company you will soon loose it. You must establish a system to control every aspect of your company. When people think that there is no control, tend to abuse their duties. Some hints to control are following. 7.1 Internal Auditing You or a person appointed by you (when your business grows, you may hire a specialist) must perform internal verifications of the operations of your company, in order to avoid fraud and increase diligence of everyone. People tend to behave themselves when they feel that there is control. Some others take control as a struggle for power and are trying to trick it. If you perform ordinary audits, you will find out that your company is doing better than it appears, which is not true. You must control some operations daily, some other occasionally and some randomly. It is imperative that you control daily your cash. Since most of the cash is coming in from your clients, you have to contact a sample of them to verify that what appears to be collected is what they really have paid to someone else in your company (cashier, if there is one). You must control the goods that you are receiving and compare the quantity that you have ordered with the real quantity that you receive, verifying that you receive what you are invoiced for. You must also check if the prices that you are being charged with are those of the market and you are not overcharged. You must control your inventory frequently and not wait the end of the fiscal year. It is possible that items that you have bought are missing. You may choose a sample of the most expensive items in your warehouse and count them every month. You must also control the working hours of your employees. It is frequently seen that one employee may sign presence for another, who retards or doesn’t even show up. Your employees will ask you for overtime to have the job done for next day. Do not accept it, unless you have counted their production of a similar day without overtime, or a plausible excuse (power failure, for example, or tax office control). Occasionally, control shipments to verify that what you have invoiced is what you are really sending to your clients. 7.2 External Auditing External auditing is used as a tool to increase trust between the partners (or shareholders). External controllers verify that what appears in your books is properly documented. Reminder: Do not use the same external auditors for more than two years. 7.3 Quality control Set quality standards for all your operations, not just your products and verify that every operation meets those standards. Reminder 1: Quality costs but pays back more than what it costs. Reminder 2: Certify quality as soon as possible. There are special enterprises performing quality audits and emitting certificates. Certification will increase your earnings more than it costs. 7.4 Total Quality Management (TQM) Today's competitive market, in almost every category of products and services, is characterized by accelerating changes, innovation, and massive amounts of new information. Much of this rapid evolution in markets is fueled by changing customer needs. Significant customer behavior and market changes happen almost overnight. Changes in market preference or technology, which used to take years, may now take place in a few short months. For example, the product life cycles for new consumer computer technology and computer printers is estimated to be as little as six months. Computer marketers must carefully plan one or two new product introductions each year, with contingency plans for making design changes with current product lines as they are being manufactured. As the pace of change accelerates, it becomes more difficult to maintain stable relationships with suppliers, customers, brokers, distributors, and even your own company personnel. "Putting out fires" and reacting to new emergencies is unfortunately the norm for many large and small companies caught in the whirlpool of technological change. Are competitors stealing your best customers while you are out looking for more? Commitment to quality and customer satisfaction programs are essential for a small business to compete against both smaller and larger competitors. Think about "postsale" customer satisfaction (or managing customer "dissatisfaction") programs as a way to reinforce customers' buying preferences for your products and services for their current and future purchases! TQM for small businesses. A new company or a small business has limited financial, personnel, and capital plant/equipment resources and is especially vulnerable to instability brought on by rapid changes in customer behavior. One way to help ensure your business success is to make quality and customer satisfaction the number one priority for all employees in your company. Make sure your company is providing "customer management," not just "product management." Larger companies committed to TQM programs may appoint a special manager or VP of quality. In smaller companies, this task is usually undertaken by the chief executive officer (CEO) or the owner. There are many aspects of successful TQM program implementation. And it may require months or years to fully incorporate TQM into every employee's value system.
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