Businesses Evolutions

Only one month to go in 2004, how has your business changed this year?  Have things gone as expected?  Better than expected?  Not as well as expected?

Regardless of, or may be because of, the things your business has or hasn't experienced this year, it is time to focus on the year to come.  What do you want to achieve?  Do you know what went right?  Do you know what you want to change?

I hope the articles included in this month's issue will give you ideas for change and going forward with even more success!

Transitions return to top

A business undergoes numerous changes throughout its lifetime.  In its earliest stages, a business will be searching for a clear identity, a viable business model, and a paying audience for its products or services.

As the business grows and matures, it finds a need for more formal structures, processes, and control systems.  This is one of the most challenging transitions for the founders and stakeholders.

Transitioning from a primarily entrepreneurial perspective to professional management, as it is often called, can be an extremely painful phase.  It frequently requires the existing leadership team to step back or step out of roles they have fulfilled during the early stages of forming and establishing the business. These people, as individuals and as a team, may find themselves in a learning curve so steep they cannot both do the business and run the business - the scope of operations and activity has reached a level that requires specific business functional expertise - finance, accounting, human resources, business development, sales, and the multitude of other business processes and systems that comprise the infrastructure of most businesses.

Taking a proactive approach to transitioning roles and responsibilities enables business owners to address the issues objectively and separate emotions from the process.  When an organization establishes decision criteria that are objective, address business needs, and are independent of a specific individual fulfilling a role - making it about the experience and expertise the role requires - the organization is engaging in succession planning.

Having a planned transition based upon business needs recognizes that rarely can a single person fulfill the same role throughout the life of a business. As a business grows it requires different and additional skill sets, expertise, and experience.  To meet those needs, founders and early stage leaders need to be willing to step up to strategic roles (CEO, Board, etc.), step over to technical leadership roles (CSO, CTO, etc.), or step into advisory roles.

As early stage leaders transition to other roles, they begin to surround themselves with complementary, supplemental talent.  It typically requires a significant amount of time to identify, select, and recruit new team members who have the right blend of qualifications to meet the new requirements of the business.  The mix of skills, experiences, and personalities to be acquired, integrated, and built upon must be managed.  The transition for the organization doesn't happen seamlessly or overnight...  It requires strategic planning and action. It must include clear communication of intent and results.  It should be supported by both the incumbent and the new team member - demonstrating mutual respect and true support.

Family owned and operated businesses are something of an exception to the previous discussion.  With family-owned businesses "Mom & Pop" often do everything and as the business grows they remain integral to the business.  They add new talent to expand operations and gain expertise, but the core leadership is "Mom & Pop".

With family-owned businesses, transitions come from necessity as time passes and a change in leadership is created by retirement or death...  It is even more critical for family-owned businesses to make plans for the eventual transition to another operational stage, another family member, or a planned sale of the business.

In family-owned businesses, emotion can rarely be excluded from the equation.  The relationships and roles are defined by more than business.  If a family business is based strongly on the family role - parent/child, spouses, siblings, etc. - then making decisions regarding the who, when, and how of the transition must be thought out as completely as possible BEFORE the need occurs.

The transition of "Mom & Pop" from day-to-day activity to advisors or full retirement from the business is a tough one.  The mixed signals the organization receives from an incomplete or inconsistent transition can have long-term impact on the organization's operations.  Management styles and strategic direction may differ significantly.  If "Mom & Pop" can't or won't let go, then the new business leader can quickly lose credibility and the ability to function effectively.  The last thing the company needs is two CEOs!

The bottom-line is that succession or transition planning is one more way to insure business continuity and provide for continued business success and growth, whether for a family-owned or non-family business.  Every key position in an organization should have a succession plan for the time when new skills are needed, medical or other emergency occurs, or someone resigns or is fired.  Knowing what it takes and where to look keeps an organization moving forward and functioning effectively.

From the e-Mailbox: Late Paying Customers return to top

We have a client that continually pays late, as much as 75 days late. It is also our largest customer.  They currently have another late substantial outstanding balance. Now they are ordering more products.  They aren't willing to pay the outstanding balance, refuse to pay cash for this new order, and are threatening to take their business to someone else if we don't agree. Can this be handled tactfully without causing hard feelings? We are considering putting them on cash basis only starting January 1.  What do you think?

Putting them on cash only terms is certainly an option.  It can have the same impact as making them pay on time ¡V losing the customer.  It is "standard procedure" for many companies to place customers who consistently pay late on cash only terms.  This is one reason I advise companies which are tight on cash to pay on time.  Otherwise they end up even tighter by getting put on cash only basis.

The real question this:  How "great" is this customer when you analyze the impact on your own business?

In deciding what you want to do not only for this customer but also in similar situations, look for answers to these questions about your business:

1. How really "profitable" is this customer?
   • Are they causing you to have to borrow money to pay your bills, make payments late to your creditors?
   • Do they require more support time - trying to collect?
   • Do they cause you to miss other sales because you don't have that particular product on the shelf and can't restock because they are impacting your cash flow?
2. What will be the impact if you don't have them at all - removing them from the equation entirely?
3. Can you sell the items they buy to someone else at the same or a better price and get paid on time?
4. Are you giving them lower prices per unit, etc. on their purchases?
5. Do you offer incentives for early payment or cash payments in full?

Many businesses don't take the time to determine profitability of a customer's business - they look only at the revenue generated by customer sales.  If you look at the pricing and late payments with regard to this and other customers, you may find that profitability increases when you don't have a particular customers business - you've priced too low to cover interest and other expenses their business costs you.

Another thing that seems counterintuitive is that many businesses will pay early or pay in cash to get a discount. The strategy you choose to deal with a single customer, a category of customer, or all customers depends upon how your business currently operates and the composition of your customer base.

Now ask these questions about the late-paying customer and evaluate the risk of continuing to do business with them versus the risk they will take their business elsewhere:

1. Are you the only one from whom they can buy these products?
2. Are you the only one willing to deal with them due to their credit history, etc.?
3. How financially strong are they if they aren't paying on time?
4. Do you have a recent credit rating on them?
5. Are they a "strategic" customer - do you receive visibility that you wouldn't get otherwise or some other "extra" that grows your business?

Collecting from customers is one of the toughest issues to deal with.  Once they get a little "flexibility' they often start taking more without your permission.  Many times companies add financing and late fees on top of the existing bill - more money that you aren't collecting and have to keep track of.
 
Another point to think about is the impact of customer late payments on your ability to pay your vendors AND the fact that you are doubly at risk - you don't have the product to sell to another customer and you are out the money that you haven't received in payment. Is the product being purchased from you one that you can reclaim/seize from the customer for late payment?

There are a number of options that are open to you.  Your choices depend upon what you are willing to change, do, and forego in your business.  Remember, losing a slow paying customer may be the right thing for your business; it all depends upon the parameters and financial strength of your business.

To take a proactive approach to accounts receivable, consider the following:

1. Establish credit policies and procedures for checking, granting, and maintaining a customer's credit terms
2. Set guidelines for when you stop doing business with slow paying or consistently late paying customers
3. Periodically review the profitability of each of your major customers - understand when they are costing you money
4. Consider incentives for paying in full and in cash at time of order or delivery
5. Eliminate quantity discounts for customers who don't pay on time
6. Ask for personal guarantees from the company owners, managers, or officers - if the company doesn't pay on time, the debt can be pursued against the guarantor
7. Consider taking credit cards and establishing "automated" charges that are pre-authorized by the customer to occur on certain dates - these can often be established with debit cards or other direct drafts from customer bank accounts
8. Understand how small claims court works and when it is a "tool" in your business for keeping customers on time
9. Utilize credit reporting - inform credit reporting agencies when you have late and defaulted customers
10. Know your business!  Be strategic in extending credit and look at the many new ways to do business, reach customers, and protect your business from customers that use you to finance their operations.

Pennywise, IP Foolish return to top

Often business individuals, whether working along or as the owner of a small business or start-up technology company, do not fully understand the impact contracts and other agreements they make will have on their ownership of intellectual property.  A young and/or growing business is often cash constrained; they'd rather save money for the costs of the patent process than have attorneys review every agreement.

And all too often the reality is that the money "saved" has a costly price when related to intellectual property ownership.  Intellectual property rights are significantly impacted by the type, nature, and scope of agreements.  Agreements with employees, independent contractors, vendors, lenders, strategic partners, investors, and customers all can have an impact on who owns the intellectual property, if intellectual property can be protected (patents), and whether or not you have a business at the end of the process.

Imagine this scenario:  you are given the opportunity to act as a subcontractor on a larger project to develop a product.  You are given a contract between your company and the primary contractor.  The contract states this:

"All intellectual property developed during the length of the contract belongs to the primary contractor."

You question the clause and are assured they won't enforce it.  You really do want to close this deal.  Your attorneys and other consultants have advised you there are no circumstances under which you should sign an agreement without its being reviewed for impact on intellectual property, projects for other clients, etc.  Here's the dilemma - the primary contractor implies that if you don't sign the contract immediately, you might not get the chance.

What do you do?  If you want to be sure you'll have your own intellectual property and your company at the end of the contract, you walk away and have the contract reviewed.

The phrase "all intellectual property" may be subject to "interpretation".  Written as it is now, however, means that ALL - everything, whatever you work on regardless of for whom, where, when, whatever you put to paper - it ALL belongs to THE PRIMARY CONTRACTORS!  How can it possibly be worth saving the cost of a contract review if you are potentially signing over the heart and soul of your own company?  What will you have left if you are working on unrelated intellectual property within your own company and the clause does truly mean ALL?

Are you guilty of being pennywise and IP foolish?  If you have not been INVESTING in your business future by having various legal agreements reviewed, have been writing your own employment or independent contractor agreements, or have been using template documents from the internet or from reference books, it may be time to take a comprehensive look at where you and your business stand with regard to IP ownership.

If you (or your company) aren't engaged in technology or other intellectual property development, if you aren't working on projects for multiple customers to develop products or other intellectual property, then you may not be as concerned. Intellectual property, however, is not limited to product patents or technology.

You may want to ensure that your employees and independent contractors cannot take information regarding business processes that enable you to stay ahead of the competition straight to that competition!    In some instances, a non-compete or non-disclosure agreement isn't enough.  Investing in strategic legal advice can keep your business viable and its IP and business processes protected.

Here are some of the agreements that can create exposure for you and your business:

• Employment contracts
• Independent contractor agreements
• Subcontractor agreements
• Grants
• Secured debt agreements
• Vendor agreements
• Customer purchase orders and contracts

Be cautious, be cognizant, and be IP-wise.

Grant Recipient Considerations return to top

For many companies, getting the grant proposal accepted and winning the award is the "end game".  The reality is that it is just the beginning of the process.  Once a grant has been awarded, the grant recipient begins the process of negotiating rates and identifying the business requirements needed to support and satisfy the terms and conditions of the grant.  While grants are "free" money - meaning they don't normally have to be repaid, they do have technical and business performance and regulatory compliance requirements that must be met.

There are four critical aspects that businesses must be willing to address as government grant recipients:

• Timekeeping
• Financial controls and accounting systems, including cost tracking
• Recordkeeping
• Management oversight (controls)

Timekeeping is required to track all hours worked on different tasks and projects - government and non-government. The timekeeping system and documentation needs to reflect all hours worked throughout the organization - whether these hours are compensated or not.  The timekeeping process also requires management oversight through policies, sign-off on time records, and other processes and procedures.

Financial and accounting systems and controls must include traceability of direct costs, distinction between allowable and non-allowable costs, expenditure controls, and other processes, procedures, and policies that ensure funds are properly managed, controlled, and reported.

In most cases, organizations are required to keep records related to grant awards anywhere from two to four years.  These records include cost information, timesheets, expenditures under the grant, equipment purchases, and all accounting data for the period.  Essentially, the requirement is that all records for the relevant period be maintained for audit and review.

Understanding that getting the grant is just one phase of you're the business's journey is critical.  Failure to comply with the "business" aspects of grant funding can lead to serious complications with intellectual property ownership, equipment and asset valuation and ownership, and impact many other areas of operations and financial performance.  Non-compliance that is termed willing and knowing can result in the company being required to repay the grant (at a minimum) and even criminal and civil charges against owners, officers, and key executives.

To get the clearest picture of what your company will need to do once an award is made, do the following:

• Review the federal and agency regulations
• Obtain a draft of the clauses, representations, and certifications that will be incorporated directly or by reference in your agreement
• Understand the threshold for compliance with the granting agency and across agencies if the award "triggers" a new level of operation - such as a cost reimbursement or cost plus grant or the dollar level of awards ($500,000 in awards is often a point where additional requirements kick-in)
• Understand other regulations of other agencies such as the Department of Labor, etc. which may also be triggered by certain sizes and types of awards
• Evaluate and understand current business processes and controls in your business to determine how robust they are and whether they will satisfy the "management controls and oversight" requirements
• Identify accounting and financial control policies, procedures, and systems that are weak (i.e. QuickBooks alone will not satisfy a financial controls audit)

Know what your business will be asked to do before you make the commitment to a grant.  Grants are great sources of funds to cover costs that would be incurred in proof of concept and commercialization activities.  However, it is important to recognize that as your grant "business" grows, you will be expected to put in place sound business, management, and accounting systems and controls to monitor and administer the funds you are being entrusted with.

Bottom-line Analysis return to top

The numbers tell the story.  Every aspect of what you do and don't do is reflected in the financial results of your business.  What is and what isn't present indicate the activities the business is undertaking and the results which are or are not happening.

When a business is able to identify and track specific financial performance back to specific customers, activities, or events, the business is able to decide whether to continue "business as usual" or whether different tactics and options need to be evaluated and implemented.  Gaining an understanding of the relationship between the financials and every non-financial aspect of your business is critical to getting the results you want.

The first step is to evaluate the financial information currently available - determining whether or not there is enough visibility or detail in the numbers to understand what is generating results and what is draining resources.  Many times the financial reporting structure, the accounts being used, is a result of using a template that came with the software, setting up accounts as the business has a need, or accepting whatever your accountant (tax or financial) establishes or is use to having.  For many businesses, the visibility (or lack of) is a function of someone else's perspective of the business - for tax or financial reporting purposes.

That brings us to the next step.  If you can't identify and clearly understand the breakout of your numbers through an existing report or through standard financial reports, it is time to add MANAGERIAL accounting to your business's tool kit.

Managerial accounting takes an internal perspective on the financial results of your business by enabling you to see what is happening in your business, driving results, costing resources, and indicating trends.  Managerial accounting is about making the internal decisions and having the information readily available for you to act rather than react.  Managerial accounting is about both past performance and the ability to make adjustments to current performance today, when it will make a difference.

Step three is to realize that it doesn't take two different accounting or financial systems to understand your business performance and to have both financial/tax and managerial numbers.  It simply takes redesigning your existing chart of accounts, creating/adding custom reporting, and enhancing existing tools and processes with "add-ons."

Add-ons can include Excel spreadsheets, Access databases, macros, and software that enable data mining and extraction from your existing systems.  You want information today and you don't want to add additional people and time to your processes to get it.  With wise additions and careful analysis of your business needs, you can get the information you need to run your business more effectively utilizing existing accounting packages.  (If you are considering implementing new accounting/financial systems in your business, take the time to be sure there are managerial reporting tools and custom reporting options available in your new software.)

Step four is to make the connection between the numbers in the accounts and on the financial statements to what is producing them.  This requires understanding your staffing plan, salary and wages, cost of supplies, investment in marketing, and every activity of your business.  The numbers are a result of decisions, actions, and activity.  Make the connection between the cause and the effect on your financial performance.

Step five is to understand the "return" that is being generated for every dollar being spent.  Trade shows, advertising, recruiting, marketing, staffing, computers, supplies, and so on are part of your business strategy and structure - if they aren't a cohesive set of actions and decisions, a result of planned direction and activity, then what do you expect to accomplish with these unsynchronized actions?  Making sure there is an expectation of some type of return on every dollar spent, every dollar invested, every resource deployed is critical to getting bottom-line results.

Investing IN Your Business return to top

In the past several weeks, colleagues have related they have been experiencing an increase in businesses contacting them for services - only to be asked to "donate them" to a for-profit start-up business.  We've often heard "it never hurts to ask". Think, however, what you are asking someone to do.

If you are a for-profit business - at any stage - you are in business to provide a product or service at a price which will generate revenue and profit.  You are not in business to give away the products and services you sell to your target customer.

Yes, most businesses do give away some product or service.  Yes, many businesses donate time and products - to not-for-profit and charitable causes.

Are you going into business to give away your product or service?  I don't think so!  You are going into business to make money - for you, your investors, and to grow the business.  Put yourself in the shoes of the business you just asked to GIVE you the product FREE.  How are you reacting? What is your answer?

Let's use a somewhat extreme example.  You are selling $50,000 cars.  Customers come in and look at the car.  They take it for a test drive (taking advantage of the "free" aspect of the product/service).  The customers love the car!  They want it!  You as the salesperson tell them the price of the vehicle.  They tell you they want you to GIVE them the car as they are just getting started in life and don't have the money to buy the car.  Outside of Pontiac giving away cars on OPRAH, have you ever heard of a car dealer giving the car to someone because they can't afford it?????

If your business is struggling and cash constrained, then it may be time to reallocate existing resources and using cash to find a new solution.  It may be necessary to shift money from publicity to sales training, from executive salaries to infrastructure redesign, from what you have been doing to identifying what needs to be done.  If your business is reaching the point where it succeeds or fails, it is wise to invest what resources remain into determining how to go forward and do something differently.

Many businesses that reach "critical mass" where success hangs in the balance aren't willing to invest in doing something differently.  They fail to recognize that if the existing team and resources keep doing what they have been doing, they will get the same results.

It is important to understand the following points:

• If what you have been doing hasn't generated the desire outcomes, then something needs to change.
• If your organization hasn't been able to identify what needs to change, then it is time for you to invest in external assistance.
• It takes investigation, observation, review, and analysis to determine the "best" strategy to move your organization ahead with limited resources.
• It takes planning and action to make significant, reasoned changes to your organization.
• It takes a willingness to be uncomfortable, to ask the organization to evolve and stretch beyond current roles and ways of doing things.

Above all, growing and changing your business takes a willingness to acknowledge the things we can't do ourselves.  It takes looking in the mirror and looking around at those who have helped us come this far on the journey and being able to say thank you.  Then it takes identifying who we need to go down the next road, what we need to enhance our roles, how we need to change in order to succeed.  The bottom line is that continuing to do what you've always done will continue to get what you have today or less.  The world has one constant - change.

Change is inevitable, necessary, and important.  Products, services, and technology are constantly changing and that is what creates opportunity for businesses and individuals.  Embracing the change, driving the change, or creating the change in your industry, business, or role can be the biggest and most important investment you can make in your business.

FOCUS Implementation Team Business Plan Programs return to top

December 7 will be the first session of the F.I.T. Business Plan six-month program.  The program includes:

• 12 hours of tele-clinic group sessions
• 3 hours of one-on-one counseling and advice
• On-line materials and resources
• Weekly F.I.T. Business Newsletter
• Monthly FOCUS Resource e-Zine
• Email support

The program cost is US$1,350 payable in three installments of $450.  More information is available on our website under F.O.C.U.S. Implementation Teams and Events.

Applications are now being accepted for the December session.  Enrollment is limited to a maximum of 12 participants.

Copyright © 2004 F.O.C.U.S. Resource, Inc.