Vision, Strategy, Structure, and Results
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The successful organization - one that is both productive currently and viable long term - has integrated the vision, strategy, and structure of the organization to enable financial success. The ability of an organization to achieve every iota of success it is capable of delivering depends first upon the organization’s clarity of vision, second on its to select the appropriate strategy (or strategies) to accomplish the vision, and ultimately on the structure the organization puts in place to deliver the "goods" to the customer.
Clarity of vision is essential, as no business can serve every master or every customer. When there is a clear vision of who the business serves and what problem the organization is solving, the business can direct its scarce resources to its priority activities. The vision of the organization is the consistent thread that weaves throughout the decision-making process beginning with the selection of an appropriate strategy for the organization.
Selecting an "appropriate" strategy is key. The organization which selects a strategy it cannot execute or deliver because of resource limitations or other factors is an organization which cannot achieve the maximum degree of success. An organization with the ability to distinguish between possible strategies and strategies it is capable of delivering – even if it is a stretch – is an organization with a well-developed self-awareness.
The degree of an organization’s self-awareness is a combination of its stage of business development, existing business resources, abilities and skills of the organization, and the structural capability which can be put in place within the relevant three to five year time horizon of strategy implementation. An organization is able to build the business infrastructure required to deliver its selected strategies when it is able to identify operational gaps and recognize, then access existing capability.
The structure of the organization today is unlikely to be the structure of the business a year from now. It is certainly not the structure for the organization in three to five years. Structure is a function of current operations AND the vision of where the company intends to be over a period of time. Remember, structure arises out of an organization’s need to deliver the "product" and the supporting activities required to produce, market, sell, deliver, and collect payment.
An organization must be careful not to mis-time the elements of structure - adding them too soon drains the organization’s resources and adding them too late prevents the organization from capitalizing on opportunities. Further, the addition of structural elements requires recognition of their impact on current capacity, systems, and processes. The integration of new elements with existing ones often results in a period of diminished capacity while the entire organization is brought back up to speed.
Results are correlated directly with an organization’s integration of vision, strategy, and structure. These key business decisions determine the productivity of available resources. Organizations which divert resources away from the visionary strategic path find themselves not reaching their intended milestones and ultimate performance goals. The organization "bleeds" resources which aren't generating the desired return.
One approach for businesses in all stages of development is to undertake a business planning process. When an organization embraces a planning process, it is required to develop the self-awareness discussed earlier. From self-awareness the organization is able to identify and evaluate its alternatives. The business planning process is much more than the development of a document. Business planning requires all levels of the organization to engage in identification and quantification of existing resources, planned resource demands, and availability of those resources.
The definition and analytical process must focus on a realistic view of the existing business, its market, customers, and the operational elements of people, processes, and systems. These are the variables which determine what resources are currently available and the level of capital needed to sustain the organization. In order to grow, an organization must determine how much additional capital is needed. The capital demand is a function of the additions to infrastructure and the increased activity an organization must undertake - increasing production, prospecting and closing more customers, etc.
The financial performance - positive or negative - is a RESULT of the clarity of vision, the execution of strategy, and the efficiency and effectiveness of the business structure. Generating positive financial results requires leadership and management of the non-financial aspects of the business. The non-financial aspects utilize and generate capital. The numbers reflect how well vision, strategy, and structure are aligned toward a profitable objective. Ask yourself the following questions:
1. Where do I want my business to go?
2. What direction is my business currently following?
3. Is my current business strategy profitable?
4. Do I know where my profits are coming from – which customers, products, services, etc.?
5. Are all of my customers profitable?
6. Am I operating efficiently and effectively?
7. Do I have the right skill sets and systems in place for where I want to take my business?
8. Are external factors driving the decisions or do I chart a course based on what my business can do and deliver?
9. What isn’t working?
10. What do I need to change – clearer vision, different strategy, or change operating structure?
The answers to these questions can guide you to toward the steps needed to improve your organization’s performance. FOCUSing your business and aligning its activities enables you to achieve more results with fewer resources. Instead of taking a shotgun approach, you begin to have a laser focus which enables you to direct your efforts with precision.
Are You Good or Are You Lucky?
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One of the pitfalls of a business that takes off right away is the ease with which one can say “I’m good!” That may be true, but it also may be that you are lucky. This isn’t meant to be a negative attack or to devalue success. It is meant as a cautionary tale.
When companies without infrastructure, business processes, or key systems experience significant revenues, there is often a feeling of “We don’t need it, we’re so successful!” Reality is that businesses experiencing rapid growth and early success need strong internal systems even more than the slow growth or established business. Growth requires cash. Growth requires people. Growth requires financial management and tight reigns on operations to be sure you don’t let things get out of control that would put you in a position of being unable to continue to deliver “the goods”.
If you are able to leverage some advantage in establishing your business and getting customers, then doing so is good for business and the bottom-line. However, it is important to recognize IF that advantage is separate from and has nothing to do with your product/service, business model, or any other business element. One case in point involves the awarding of government contracts to certain categories of contractors. The government has set-aside programs and other preferences that enable companies established and owned by minorities, combat disabled or other veterans, and other special classes to gain preference in contracting. The expansion of those programs and the scarcity of qualified companies can lead to real business opportunities and to “overnight success.”
If a company falls into one of the preference categories, the windfall of business doesn’t give them a blank check. While the company gets preference in the awards process, there are no free passes on compliance requirements. The key is to understand that these contracts are to go to “qualified and capable” companies. “Qualified and capable” is what the company asserts it is by entering into the bid or proposal process.
If a company isn’t “qualified and capable”, meaning that it has financial capability and strength to meet the demands of the contract/grant, has appropriate management control systems, has established compliant financial controls and reporting, satisfies human resource related criteria, and many other requirements, then the company may be facing substantial expenditures to become compliant NOW!
For instance, according to an article in the National Journal’s “Technology Daily”, service-disabled veteran-owned (SDVO) businesses had a 3% ($103.7 million) set aside in 2003. The set-aside was not met. By the year 2009, the set aside for “qualified and capable” SDVO businesses will equal $2.8 billion dollars. There are 320,000 SDVO businesses currently in the US according to Census Bureau statistics.
These businesses can experience rapid growth, going from $0 to $10 million in just a few years. With that rapid growth comes commensurate compliance requirements and oversight by the government. The performance objective for many agencies is to make the contract/grant award to these businesses. If the company certifies it is capable, the agency often accepts that assertion without a pre-award audit. When the company signs the certifying statement or signs the contract/grant agreement, it is representing it meets the requirements. As with any false statement made to the government, there are substantial civil and criminal penalties which can be attached to the company and its people. It is up to the business to meet the requirements and pass the audits.
In another article, this one appearing in the publication “Legal Times”, authors John T. Boese and Shannon L. Haralson point out the standards companies must meet include the following:
• Cost Accounting Standards as written by the Cost Accounting Standards Board
• Cost Principles (Federal Acquisition Regulations)
• Internal Revenue regulations
• Employment Retirement Income Security Act
• Generally accepted accounting principles (GAAP)
• Financial accounting standards (Financial Accounting Standards Board)
• Other federal and state legislation
These regulations and standards are complemented by Defense Contract Audit Manual guidelines and requirements and case law from federal court cases.
All of these requirements translate into significant risk for the unaware government contractor or grant recipient. The growing trend since 1996 has been to treat many violations as fraud against the government. Fraud carries with it civil and criminal penalties for individuals and the company.
Fraud under the False Claims Act is demonstrated by the “intent in knowing the presentation is false.” If your business lacks accounting and financial controls and doesn’t have strong management controls in place, it is hard to mount a defense that you didn’t know at the time of signing you didn’t meet requirements.
The larger your company becomes and the more dollars of federal contracts and grants it receives, the greater the number of requirements and the higher the standards your internal control system must satisfy. A company with one $100,000 contract is not held to the same standard as a company with contracts of $1 to $10 million. If your company has more than $10 million in government funded projects, then you have to have robust internal control systems – financial to managerial, A to Z – that enable you to follow the myriad requirements.
The bottom-line is: obtaining government contracts and having substantial revenues isn’t the complete measure of success. You may rightly be proud of that. Execution and compliance under relevant regulations, however, is how you will continue to get contracts and grow the business. The more rapidly you grow, the more rapidly you must develop an infrastructure that supports the wonderful opportunity you have identified and captured.
Independence - Does Anyone "Get" What Enron Means to Business return to top
Perhaps I shouldn't be surprised, but I have to admit I am. In the past several months, I have encountered many instances of what I view as "compromised" independence. Here are a few examples:
• A CPA firm providing CFO services and serving as auditor for a private company.
• A CPA firm with a partner sitting on the board of a company the CPA firm is auditing.
• A CPA firm providing consulting services on the policies and procedures of the firm (how to transact and control the business activities (accounting included) and serving as the auditor for the company.
In trying to understand why any CPA in the post-Enron/Anderson world would believe they could both consult and audit, especially with a smaller company, I did my research. I talked with several CPAs. The response was that the auditors are independent as long as there are "separate" teams doing each engagement. Haven’t we heard that somewhere before. . . ?
The crux of the situation at Enron and Arthur Andersen, where there were apparently numerous teams, was that the auditors were not truly independent. The auditors were not independent due to the "interest" – self-interest – of the CPA firms: the "influence" of the revenues going to AA for consulting, tax, and other services - in addition to the audit. - "Independence" was the key issue.
One individual’s perspective is that as long as the activities weren't "transactional", meaning that a member of the CPA firm wasn't actually making the accounting entries, it was okay. If the CPA firm was "just" helping establish policies, procedures, and internal controls, then the firm could still audit. My experience with audits indicates they are supposed to include a review of the adequacy of policies, procedures, and internal controls to determine if they produce reliable, accurate numbers. If you are recommending the very structure that leads to transactions, how can you audit the advice of your own firm to a client?
Under the Sarbanes-Oxley Act, independence is an issue when CPA firms, acting as consultants, make recommendations on the policies and procedures of how a public company operates. The CPA firm is recommending what it believes is the proper way to record, transact, control, and "do" business. How, then, could the same firm be independent and say –”this is the wrong interpretation, wrong method of recognition, an insufficient control, and so on? Wouldn’t that finding reflect negatively on its own actions, possibly exposing the firm to financial and professional liability?
There is a reason legislation was passed to make independence a requirement for auditors of public companies. While it isn’t mandated by law for private firms, it is just as important to be sure that a true financial audit is conducted with independence. The firm conducting the audit cannot be engaged in the transactional or policy-making activities of the organization.
Think of it this way: when members of a firm provide transactional accounting or consulting services, they are providing their “best effort” based on experience, education, training, skills, and other intangibles. The work provided is what they believe to be correct or are capable of delivering. This work is based upon the sum total of their knowledge.
Suppose the same firm sends in another team to review the work and to issue an audit opinion - that the work is an accurate reflection of financial status, management controls are adequate, and so on. That audit team is put in the position of reporting errors, failures of controls, and other “exceptions” which were a direct or indirect result of advice, activity, or transactions delivered by another team in the same CPA firm. Those findings potentially create professional and financial liability for the CPA firm. Will they get reported? What are the pressures -- real, implied or perceived – on the audit team and the individual members of the team?? Even if the auditors do a complete and thorough job, what will be the perception of the audit when (not if) it is found that the relationship between the client and the CPA firm doesn’t meet the objective criteria for independence??
It is difficult, if not impossible, to avoid the appearance of conflict of interest in that type of situation. It is my opinion that independence must be maintained in fact as well as in appearance. Clients who invest in their businesses by hiring consultants and undergoing financial and compliance audits deserve the assurance that a potential or current investor, the government, or any other interested parties are going to be willing to accept the audit findings. Neither the CPA firm nor the client needs the potential headache and cost associated with compromised independence.
Sarbanes-Oxley has set standards for financial controls and oversight for public companies. Given the competitive nature of business, those have raised the expectation of the same reporting requirements for private companies. Private companies planning to go public, be acquired, or merge with a public company, must ensure their financial reporting meets all the relevant standards of reporting for public companies. It is becoming critical to getting the deal accomplished.
Here are ten recommendations for private companies of all sizes:
1. Put in place the financial and accounting expertise to ensure that the “business” gets done. [This need not be full-time resources, just knowledgeable resources who are engaged with the business enough to ensure things are done properly.]
a. Strategic – the board and senior management level needed to ensure that overall requirements, expectations, and performance are met. This level needs to be able to understand both the complexity and scope of current business activities and those planned for the future.
b. Transactional – This level gets the “debits and credits” done. They record the activities of the business, pay the bills, and collect the accounts.
2. Understand whether your company is undergoing a true audit which will include an audit opinion or whether it is receiving a review.
3. Examine the timeline you have established for going public, seeking a merger with a public company, or becoming an acquisition target of a public company. If it is three years or less, then you need to be sure you are doing the following today to prepare for the deal:
a. Complying with GAAP (generally accepted accounting principles)
b. Complying with industry-specific GAAP
c. Complying with additional accounting requirements imposed by government grant or contract award requirements
d. Obtaining true financial audits of your year-end results
4. Implement internal management and financial controls
5. Establish financial policies and procedures which ensure transactional accuracy
6. Develop and use budgets to demonstrate performance oversight
7. Use a minimum of two different firms for consulting and auditing
8. Obtain a strong financial expert for your board – a person with education, experience, and credentials demonstrating financial and operational leadership experience [Note: it is critical that the person have both BUSINESS and FINANCIAL knowledge and experience.]
9. Establish a code of ethics for the company and make sure employees at all levels of the organization understand it and act and transact according to the policy
10. Monitor, monitor, monitor – internal and external relationships to ensure that no relationship arises that could compromise the business
Understand the financial aspects of the business – what do the numbers mean and what activities are generating them (It is not necessary to understand the “debits and credits;” it is necessary to understand the meaning of the results!)
Out of the Cubicle and Into Business return to top
This book is now available through Amazon.com and Barnes and Noble (www.bn.com).
Book Synopsis:
The practical insights, questions, and information are for the person considering owning a business. Individuals who have a business that isn’t living up to its potential will also find this book informative and an aid to getting things on track. Designed to walk the reader through critical questions about the business they envision – what they think, want, and can do; what resources are needed; and what things need to happen to “open the doors”, it challenges the reader to learn and apply, to think through and document what he or she believes to be true versus what they can validate as true through research, observation, and working on the business design. This book contains a process to lay the foundation for success.
To purchase this book, go to:
http://www.authorhouse.com/bookstore/ItemDetail.aspx?bookid=30345
or from Amazon:
http://www.amazon.com/exec/obidos/tg/detail/-/1420831305/qid=1110842027/sr=1-1/ref=sr_1_1/103-5485892-9131846?v=glance&s=books
or from www.bn.com
http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=kr4eom6B3j&isbn=1420831305&itm=1
Grant Accounting - It's Not Rocket Science... return to top
Some say that grant accounting and its related cost and tracking activities isn't "rocket science". Certainly it isn't rocket science’ it can, however, be intimidating, confusing, convoluted, and complex. With complexity increasing with every proposal, award, and completed project, the time it takes to stay clear, and in compliance can quickly become a concern if proper systems and processes aren't put in place. Ensuring that the proper data collection tools, reports, and processes are implemented and available to the organization can greatly reduce the enterprise investment overall and reduce the risk of being asked to repay a grant due to non-compliance.
The first exposure applicants have to the financial aspects of government grant accounting (and sometimes "normal" business) is often their first grant proposal. The need to determine provisional rates for cost elements, develop "budgets," and identify expense and investment items not allowable in the proposal has lead to hyperventilation, increased blood pressure, and other undesirable physical and emotional changes.
While grant accounting isn't rocket science, it does require an understanding of some basic accounting and financial terms and processes. Let's start with a few key terms:
Costs are the expenditures for items, services, and the like. For government grants and contracts, those expenditures exclude equipment and certain other categories of operating, marketing, and general expense
There are two cost categories: direct and indirect. As the names imply, direct costs are the items that can be DIRECTLY traced or tied to a specific project or activity. Costs in this category include items such as labor, supplies, and/or materials which are used to accomplish the research or other outcome of the project.
Indirect costs are those which must be incurred to provide supporting activities - accounting, sales, administration, human resources, and other activities which are the infrastructure of the business. These activities and costs exist regardless of an individual project or group of projects and while used INDIRECTLY by every project are not specifically related to a project’s tasks or outcomes.
Both direct and indirect costs as defined by commercial business operations have cost items that are not allowable costs under government grant (or contract) activities. Costs which are chargeable to a government-funded project are called “allowable costs.”
Allowable costs are determined by satisfying clearly established criteria. These criteria establish parameters which include complying with Generally Accepted Accounting Principles (GAAP), adhering to what can be termed "single usage" - the cost cannot have been or currently be used in any way with another grant award (cost share or cost match, specifically), ensuring consistent treatment across programs (grant and commercially funded), and complying with any limitations or exclusion specified within the program or applicable regulations and principles.
There is yet another dimension to the above cost categories and sub-categories. That is the "reasonability" of those costs. A cost may be direct or indirect and it may be allowable; however, it also must be at a level which doesn't exceed normal expectations. Reasonable costs are costs which don't exceed what the average person would expect to pay to acquire the good or service. (Remember the days of $1500 hammers and $5000 toilet seats being charged to government contracts?)
The discussion of costs has many more dimensions and levels beyond the scope of this article. Each additional element adds a level of complexity to managing, tracking, controlling, and reporting costs and activities. The number of layers and the degree of complexity of a business' operations impacts the significance of each additional project, funding agency, and commercialization effort. A proactive, planned approach to establishing a well-designed, robust internal accounting and compliance process enables a company to take full advantage of government funding with a reasonable "return." The benefits of seeking government funding - grants or contracts - are worth pursuing. The costs of implementing compliance and accounting system are, in reality, investments. They provide businesses with an opportunity to pursue innovation as well as new technologies and applications with funds which do not require repayment, interest, or dilute equity stakes. Just remember, compliance with the rules, regulations, and accounting guidelines isn't optional.
Guest Expert Perspective: Working the Puzzle Backwards return to top
Whether your business is for profit, not-for-profit, or some variation of the two, making the required pieces fit together correctly can surely resemble working a puzzle with only the brown/gray side showing. There are so many pieces you know must be worked within the frame – strategic objectives, laws, regulations, intentions, cost-effective operations, employee needs and wants, making a profit and/or building reserves, and of course, providing for that elusive life/work balance. The list could be endless. Without the completed picture, you feel literally clueless. Of course you want to finish the puzzle quickly. And you believe in doing things right the first time. A tall order!
The position and results – focus, capability, and impact – of human resources in your organization can be very similar to working a puzzle (or reading a book) backwards, from the end to the beginning. If you can get an idea of how the pieces fit (or where the plot comes together) it is much easier to make sense of the work along the way. And the pieces (or characters) usually have more in common than we often suspect. There are always laws and regulations to follow; it is always less expensive to establish a destination (strategic objectives) as a guide for decisions about a business journey; mistreating or ignoring customers and/or breaking promises to clients and employees will always be counterproductive actions. Count on it – these are common pieces for all business puzzles.
What does this mean as you build your human resources function? It means you may elect to look at the end product – the finished puzzle – as you wish it to be, then fit the pieces together in a manner that is and will remain an integral part of your competitive advantage and fully compliant with laws/regulation as the organization expands/contracts, adds/changes products and services, and acquires new contracts or businesses. And it means you keep an eye on the finished picture – a business which is meeting its long-term goals and strategy – at each step along the way.
Here’s an example, the Department of Labor requires all employees must be classified correctly – exempt or nonexempt – regardless of how few or many are on your payroll. On the other hand, the provisions of COBRA apply (simplified statements) to group health plans of employers with 20 or more employees while FMLA (the Family Medical and Leave Act) applies when you have 50 employees. This means you may construct your benefits programs for paid and unpaid leave in such a manner that when you reach each of the “magic” numbers, you are ready to spring into the appropriate actions without hesitation or misstep. You are not inviting financial risk by ignoring the regs nor are you spending money prematurely. You are putting the pieces together when and as required, not in a disorganized manner with multiple changes, additions, and retractions.
Another example: you may intentionally defer the design and implementation of a new or improved HR process such as performance management while ensuring there are connectors (the interlocking corners and curves of a puzzle) to your job descriptions and your compensation and benefits policies for linkage at the right time. You will not need to provide a translation for everyone when you introduce the improvement – its “fit” in the business puzzle will be transparent.
The HR puzzle isn’t measured in pounds of paperwork nor in managerial hours spent completing forms; it is measured in how well it fits into your business puzzle – right pieces, right colors, right connections, right timing – to complete the picture that is your business!
Copyright 2005 Anne Harttree
Capital City Club Business Alliance Meeting return to top
Lea Strickland will be leading the April 14 Business Alliance Meeting at the Capital City Club from 11:30 am to 1:00 pm. The meeting will be facilitated networking.
To register:
Contact Vickie Nelligan at the Capital City Club
vickie.nelligan@ourclub.com
Copyright © 2005 F.O.C.U.S. Resource, Inc.
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