Issue 48

FOCUS on Business

Bringing Together the Parts return to top

One of the most significant challenges early stage businesses face is finding the right people with the right skills for the roles which need to be filled in the business.  This challenge is often heightened by limited financial resources.  An early stage company usually needs a combination of business and technical resources now.  It may not always have the flexibility of unlimited cash for compensation or complete flexibility in offering equity, options or warrants as incentives.

Roles Should Fit with Expertise

In the earliest stages of founding a company, the c-level (CEO, CFO, CIO, COO, etc.) roles tend to be "granted" to the founders - regardless of qualifications.  Some companies may be blessed with both technical and business people as founders.  Others start with an incredible depth of technical experience and little to no business experience.  Both categories of companies face the challenge of making sound structural, financial, operational, and administrative decisions which can significantly impact the options for the business going forward.

Limited internal business experience can often be supplemented through board members (directors or advisors), investors, and through professional consultants and experts.  The ability to obtain these resources, however, is also constrained by the capital resources available to the organization.

Implications of Disparate Parts

In analyzing where, how, and what knowledge and assistance to obtain with the limited financial resources available, it is imperative that companies understand the far reaching implications of poor decisions in the core business processes.  The administrative and operational business processes, especially finance, accounting, and human resources, are activities which require both strategic and operational impact assessments.  These assessments should encompass the impact of various alternatives, the cost (direct, indirect, and opportunity) of executing or not executing certain activities and perhaps – more critical – what resources are at risk if the organization gets it “wrong."

Areas of Risk

A couple of areas quickly come to mind when illustrating the potential impact on the organization of not comprehending and complying with key human resource and/or financial regulatory requirements.  In early stage companies finance and human resource roles are often viewed as the "simple" part of business - when in actuality these areas can quickly become the cause of "losing the business."  Actions undertaken and decisions made in these areas can leave the organization open to significant exposure financially and can lead to impairment of the value of intellectual property areas or even forfeiting rights to the intellectual property.

Improperly written and executed work-for-hire (employment or independent contractor) agreements can lead to the inability to patent or otherwise protect intellectual property - or at least to have sole ownership by the company.  Further, the misclassification of workers can lead to the company and its officers being required to pay back wages, taxes, fines, and interest to employees and the IRS; facing forfeiture of tax exempt status of compensation plans, charges of tax evasion, and significant criminal and civil charges; and can impact the employees creating tax and other personal consequences for them.

Yet another area that companies often plunge into is financing the business – raising funds.  Raising funds, whether those funds are debt or equity from friends, family, or “investors”, is a securities transaction.  The importance of understanding what the process, parameters, and restrictions are on the who, what, when, where, and how of financing your business cannot be over emphasized.  This is a highly regulated area, and while there may be an exemption provision that applies to your securities, it won’t apply if you don’t follow the rules.

What Are You Saying?

Do you hear yourself saying things such as these?

• Accounting is “only” numbers.
• Human resources is just dealing with payroll and people.
• I’m talking to a customer (friend, colleague, etc.) about putting money into the business.
• I picked up a template (financial model, budget format, contract, etc.) from so-and-so and just did a “find and replace” or “filled in the blanks”.
• I downloaded a business plan from the internet.

You may have all the “parts”, but it is unlikely  you are bringing them together to form a workable, thriving, and successful business model.  Even if the business is “working,” the potential for legal and financial issues is substantial if you’ve been writing agreements and handling other tasks which have specific regulations that are applicable.  Furthermore, while the business is driving down the road to success at a steady pace, you don’t know what roadblocks, detours, and hazardous conditions may be ahead to navigate.

It is important to deal with financial (tax, financing, payroll, etc.); human resources (employee agreements, benefits, compensation); intellectual property (patents, trademarks…); and other business transactions from a position of knowledge.  Knowledge is power.  Having the ability to bring all the parts together the right way creates a business which will thrive.

In Print return to top

For all those small businesses who need to get the basics of grant accounting, audit requirements and other financial elements of compliance, FOCUS Resources' President/CEO Lea Strickland's new book, SBIR Basics: The Numbers (Accounting, Costs, Rates, Audits, and More) is written just for you!  Now available from the publisher and coming soon to Amazon.com and other retailers.  Order now!

Buy Now

 And don't forget the book for the first time entrepreneur!

Buy Now

Stepping out of your role IN an organization to create the business, become the owner, manager, "product", employee, and be responsible for ALL aspects of the business there are questions you may not know to ask. There are perspectives on questions that you may not think about.  Now you can!  Before you they become issues for your business.  Out of the Cubicle and Into Business is the book experienced entrepreneurs have said this about:

"I wish this book had been around 30 years ago!  I would have avoided a lot of costly mistakes." - CEO, Charlotte, NC

"I've spent over 30 years in major corporations.  Now I'm starting my own consulting business.  This book has been invaluable in making that transition." - Transitioning Bio-tech Executive, Research Triangle Park, NC

"Must have.  Must read." - Technology Entrepreneur, San Francisco, CA

"Thanks! This book is practical AND positive. It made me realize the work I needed to put into starting my business.  It also made me realize I could do it!" - IT Consultant, Washington DC

Have a Clear Line between Business and Personal Factors and Decisions return to top

The business is the business. You may be the sole owner, business decisions, however, need to be first and foremost about the business.  After you have made a decision based upon the business needs, then the impact of that decision on you personally can be determined.  Two things can happen when you examine the impact:  you may change or modify the business decision or you may adapt what happens personally.

By applying business terms first then understanding the personal implications, you increase the viability of the business. Ultimately a business that is viable for the long term generates better personal returns, so making decisions based on business factors first contributes to long-term perspective.

Of course to get to long-term success individuals must first sustain success in the short term, establishing wise trade-offs and understanding the impact of making decisions which are dictated by more than purely business will ultimately contribute to your business' success.

Another aspect of drawing the line between the personal and business comes into play as decisions are made about staffing, performance, and results.  Many business owners and executives turn to family members and friends to fill key roles in the new or growing business.  Often these individuals join the company in positions for which they have little to no experience, in areas of the business that truly require an understanding of the field.  For instance, placing someone that is "good at math" in an accounting role, doesn’t recognize that accounting is more than addition and subtraction.  There are accounting rules and tax regulations which must be followed.  Another area which can put your business at risk quickly is employment practices and labor regulations.  Companies can fall victim to human resource and compensation issues early in establishing the business if the right knowledge isn't available.

When making decisions about what to do for and in your business, it is important to frame your decisions as if you were managing the business for someone else.  If you have a mix of family, friends, and others as employees in your organization, then insuring they are all treated fairly is critical to maximizing your return and minimizing your risk.  When an individual who isn’t a friend or relative isn’t doing the job well, you have less tolerance for performance issues.    Behavior you wouldn't tolerate in a "stranger” isn’t acceptable behavior for any employee.  If you (by design, necessity, or desire) employee family and friends, the ability to establish an employer/employee relationship immediately will be beneficial to the success of your company.

To establish an effective employer/employee relationship with all employees, it is necessary to have – and follow -- employment policies and business guidelines as well as a clear definition of general and specific expectations for each employee.  By establishing set hours of work and other key operational requirements, all employees, regardless of the relationship, will know where they stand.

Now many of you may be imagining the need to "discuss performance" with a spouse, parent, best friend, etc. - not a fun scenario - but you need to be prepared.  Someone with the best of intentions who is paid to "help you out" may not have the same perspective as a "regular" employee.  Then again, those personal relationships may translate into your being able to ask more of someone for less.  You may then get use to people who go the extra mile and make sacrifices that others are not willing to make in their defined role.  Again the ability to separate what is personal motivation and what is business necessity will factor into your success.

Need versus want is another determinant of business versus personal.  Let’s suppose your car is a clunker - not the right image and/or unreliable.  Your business doesn't need a car, but you do personally.  You make the decision to have a "company" vehicle.  You use it to get to and from work, run errands, and travel for the business. The portion of the use that is personal - commute and errands - isn't a business cost - it is a part of your compensation and as such is taxable.

Purchase of a "company car" is certainly a decision the business owner can make.  It is important, though, to recognize that it is a personal decision, not a business one.  Furthermore, the impact and implications for the business and how this decision needs to be treated for tax purposes (and possibly for other business matters –such as funding covenants) are important to understand.  The implications differ based upon the legal and tax structures.

Higher quality decisions occur when the lines are clear between what is personal and what is business.  This doesn't necessarily mean the decision will be different -just that the implications of the decision will be considered.

When making any decision, consider the following points:

• What is being decided?
• What are your assumptions?
• What are the facts of the situation?
• Is this a "need" or a "want"?
• What other options are available to satisfy the need or want?
• What alternative uses of funds will be rejected because the funds have been committed to this (the opportunity cost)?
• Are you doing this because it is a "deal to good to pass up"?
• Will it improve your operations?
• Will it lead to more revenue or reduce costs?
• Can the expenditure be delayed?
• Can you get better terms?
• Is there another approach which could be taken?

Take time to understand your motivation and the impact of every decision.  Honesty is the best policy - acknowledge your motivation especially to yourself.

Hook, Line, or Sinker, PR isn’t a Strategy return to top

While PR (public relations, including but not limited to press releases and sponsorships) can play a significant role in building your business, PR alone isn’t enough.  PR doesn’t replace a strategy.  PR is a tool which advances the strategic positioning of your business only if it is done well.

Effective PR

To succeed, businesses must reach qualified prospects.  Not all prospects are created equal, and all PR isn’t equally effective for all businesses.  Businesses can spend significant amounts of money on generic press releases, events that aren’t attended by potential buyers, and building a “brand” that has little or nothing to say about the actual business.

Many small businesses make the mistake of equating building the name of the CEO or founder as advancing the overall reputation and presence of the business.  If the business’ competency, “product”, or credentials are that of the CEO/founder, then it may in fact equate to a return on investment.  However, when the business is about services or products which have nothing to do with the positioning of the CEO/founder, then the business rarely sees the return.

For example, say your business provides services and has an unusual business name.  The founder has been profiled as a “rising young entrepreneur” touted for rapid and early success.  The first PR campaign centers around the founder and talks about the successful business that has been established – the services, the atmosphere, the emphasis on quality of services and products.  Is this campaign about the founder or about the business?

Hook the Interest in the “Product”

The “hook” (what gets the story out and the media interested) is the founder’s success.  The message which brings in the customers is the business and what it offers to its clientele.

Future PR campaigns include press releases about what the founder is doing.  Appearing here, there and everywhere, “Ms. Successful Entrepreneur, founder of EIEIO Services, is serving as chair of such and such a committee of such and such group.  The group will be doing A, B, and C.”  What is EIEIO Services and why should you, a potential customer, care?  This bit of PR may interesting or be informative if you care about the group, committee, or know the Mr. S.E., but there is no “hook” about the company she is running and presumably trying to attract more business for.

Contrast the PR for a company whose CEO/founder is the business’ product.  “Ms. Attorney, author of “Understanding Your Legal Rights” and national speaker on corporate business issues, will be speaking at MYOMY’s national conference on entrepreneurship.  Ms. Attorney is the founder and senior partner of Your Law Attorneys, practicing in the field of corporate law.”

The second example builds the expertise positioning of the founder and the business.  The first is purely about the CEO/founder and doesn’t position the business for business.

Draw the Line

Ensuring that your PR campaign reaches potential stakeholders (customers, investors, strategic alliances) means having an overall business strategy and objective before you initiate a marketing campaign.  Once the business strategy has been established, THEN it is time to take the next step - develop a comprehensive marketing and PR strategy.

The capability, competency, competition, and resources of the organization have to be taken into consideration when deciding how to select and execute any marketing program,  The campaign must be scaled to fit the budget and the ability of the business to take advantage of success.

Regardless of the size of the business, every dollar must count.  A few well-positioned press releases, print ads, radio or television commercials make more difference than the largest media blitz that never reaches your qualified prospects.  Think laser and not shotgun…hone the message, select a narrow focus, and go for it.  Don’t just keep blasting away with scattered shot.

The Sinker – Misplaced PR Dollars

Where does a business start its spending on marketing and PR?  With a well-developed objective, sound strategy, and a plan that takes into consideration each of these issues:

• Stage of business
• Type of business
• Resources of the business
• Objective(s)
• Definition of qualified prospect
• Definition of “ideal” customer
• Budget
• Milestones
• Timeline
• Performance metrics
• Commitment
• Message

PR is meant to build the reputation and visibility of the organization, to enable the selling of the “product”.  The importance of understanding who your customers are, how to reach them, and how to set the “hook” for reeling in the business makes the difference in what, if any, return on investment you achieve.

Consistency of the message ensures that a continuous “line” winds through every encounter potential customers have with your media presence.  If your organization’s campaign loses focus on the core objective – getting the potential customer through the door to buy – then the dollars spent may contribute to sinking your business.

Be Careful When Selecting Vendors return to top

Selecting vendors can be a perilous journey.  One of the first steps is to obtain and check references for the vendor.  Seek references which are from organizations of similar size and market power.  This is important because vendors often provide different levels of service to different sizes of companies. 

Also, the size of the transactions you intend to do will also impact the ability of the vendor to do business with you reliably.  References should verify the quality of the merchandise, timeliness and reliability of delivery, willingness to address service or product issues, and business stability (will they be around in the future?).

When dealing with new vendors, starting small and growing the size of transactions as you get more experience with the vendor is a good strategy.  Not only does it test the vendor, it also enables both sides to build a relationship.  As the relationship grows, you can signal to the vendor that you want to increase your business with them, giving them time and incentive to increase capacity if necessary.

Another strategy is to avoid sole sourcing, use more than one vendor on critical purchases, so that if something should go wrong with one vendor, you have another alternative.  Sole sourcing is often used as a means of getting significant concessions on terms; this may leave you vulnerable to changes in terms in subsequent agreements (unfavorably) and if your supplier has issues - financial, quality, delivery, or others - your business feels the effect.

Vendors can be strong allies in growing your business.  They can be great marketing partners if you have a strong relationship of most any size with them.  They can also be a source of financing during strong growth periods IF you have done right by them.

Strong vendor relationships are built between customer and vendor by fulfilling the terms of any business agreements - especially paying on time and in full, or even paying early.  It also means that if you can't pay on time or in full that you are honest with the vendor in letting them know what you can do - pay part of the balance, pay late, etc.  Vendors don't want to lose good customers; if you have a solid history with  vendors, they will often work with you when you have an instance of not being able to meet terms.

However, few vendors can afford to indefinitely wait for payment.   No vendor should be asked to forgo payment or be "used".  “Used” means making the vendor wait for payment so you can do something else with the money that isn't truly a business necessity.  Not paying vendors and taking their product or service isn't an acceptable form of cash management.  You are vendors to your clients, how do you feel if you are paid late, not paid, partially paid, or told "the check is in the mail"?

If you have ever had problems with collecting outstanding debts, then you know the impact on your business. Don't put others in a place you don't want to go. Negotiate terms you can meet.  If you aren't going to be able to meet the agreed terms, then let you vendor know.  A vendor won't be happy they aren't getting paid in full and on time, but if they know that then they are able to address the impact on their business before it occurs.

Getting good vendors is a function of:

• Research
• References (yours and theirs)
• Referrals
• Credit history (yours and theirs)
• Terms
• Integrity in past and current vendor relationships

Both sides in vendor/customer relationships take risks.  Every business is both a vendor and a customer depending upon the situation.  The best "marketing" you can do in your business is deal fairly as a vendor with your customers and as a customer with your vendors. Don't act in any manner that you wouldn't want to be on the receiving end in your relationships. The key is relationships that are sound and based on integrity - for the long term - those are the relationships that build opportunities, options, and strategic advantage.

Establish Credit Criteria for Customers return to top

Unfortunately not all customers are created equal.  The larger customer who makes a significant purchase may require extended purchasing terms.  Even on those extended terms large customers may pay late because they know they can.  Because you are essentially lending money to your customer, this increases the cost to your business.  The same can be said for many smaller customers.

There are different types and levels of risk associated with customers:

• Extended terms
• Late payment
• Non-payment
• Partial payment
• Discount for early payment or for cash
• Combinations of the above

It is important, therefore, to understand what type of customers adding if they aren't  cash customers.  This doesn't necessarily mean you won't see to the customer, but it does mean you will know the "full cost" to your business when you decide to make the sale.

A customer who requires extended terms but pays on time is predictable and reliable within the terms extended.  The business' extra expense is the financing required to meet its own cash obligations or missed opportunities to use those unavailable funds during the longer collection period.  The business knows, however, the cost of doing business with this customer.

A customer who accepts terms (extended or normal) and then pays late burdens the business with the uncertainty of when the payment will be received.  If the customer is consistently 10 days late, then the business may be able to change the timing of cash inflows; but if the customer is unpredictable in being late, then uncertainty increase.  Your business is also faced with trying to determine if this is just a cash flow "management" tool of the customer or a solvency issue which is signaling a more dangerous risk –  default.  If your business has enough leverage to collect, financing charges may be an incentive to change behavior. If you can't collect them, adding finance charges to the bill will demonstrate your awareness of the issue and that nonpayment isn't acceptable.  Why would you take this step?  Because you are signaling that the customer’s terms remain those agreed to – you aren't changing the terms.  If you have to pursue legal action at some point, then you have documentation that you were enforcing your terms and conditions, even if you weren't able to collect.

Non-payment differs in that the customer has your goods or services and isn't paying for them.  This is the double jeopardy risk - you have spent money to acquire the "product," you haven't recovered the cost, and you are no longer able to sell the "merchandise" to someone else.  This is the customer who may be screened out through the use of a credit application.  The credit application would include credit references from companies doing business with the prospect of similar size.  (The criterion of similar size company credit reference is a means of assessing how the prospect deals with companies of similar "leverage" and market power.)

Partial payment is perhaps the most difficult to address because the customer is making limited payments of some amount, just not the full amount. This is the "I live in hope" client, not completely good, not completely bad.  This is the type of prospect you hope to screen out or provide cash-only terms.

Discounts for early payment or for cash are incentives to customers to pay earlier in exchange for paying less.  You may offer a one or two percent discount for cash or for payment within 10 days of purchase.  Incentives of this type recognize the "financing" aspect of extending credit to customers.  The reduced collection amount or "price" is less expensive than carrying the outstanding accounts receivable balance for a customer. When making this offer, you have made the decision that having the cash today is more valuable than collection of the full price later.

In many instances, customers will utilize over time most of the credit options you make available to them.  Circumstances change.  The customer who was the most reliable may go through hard times and become a cash only customer.  The customers who were slow to pay may get a handle on their own businesses and start taking advantage of cash discounts.  The credit policies you have in place today and the terms you extend to each customer will undoubtedly change because circumstances change.

Recognizing when customers’ purchasing patterns and payment habits change is part of managing your credit terms and cash flow.  At a minimum, your credit policies and the activity of each customer should be reviewed annually.  It would also be wise to utilize standard accounting reports such as accounts receivable outstanding balances, aging of accounts receivable (shows how long each account or group of accounts has been outstanding), and reports by customer to understand how your accounts receivable management practices are working.  It is smart business to understand that you may have to offer certain terms to customers because of industry practice or because your competition does.  It is critical to your business to understand the full cost of those offers on your cash flow and profitability.

Results Oriented, High Performance return to top

An organization’s culture plays a significant role in the degree of success that is achieved.  A results-oriented culture equates to a high performance organization.  The ability to define performance and establish specific standards of performance for all levels of the organization, for groups as well as individuals, contributes to the ability of the organization to ask for and get the desired level of results.

If an organization lacks specific strategic objectives, then strategy selection and plans are without a means to measure “success”.  Establishing organizational objectives without translating those objectives into performance criteria for subordinate levels leads to a lack of alignment and clear priorities that can be used to unify the decision-making criteria and direction of the organization toward a common purpose.

No single performance measure – at any level of the organization – is sufficient to ensure that the desired outcomes will result.  Measures both financial and “soft” are necessary to create a comprehensive snapshot of what the organization has chosen to pursue and is achieving.  Typical objectives at both the organization and business unit level include these:

• Profitability – measured as total profits, return on equity, return on investment, return on total assets, return on sales, operating profit
• Market share
• Growth rates in sales and profits

Here are other performance measures which are more operational:

• Customer satisfaction
• On-time delivery
• Quality
• Uptime
• Productivity increases

Regardless of the measures selected as the strategic targets/objectives, the organization must be focused on the results the measures represent and not just on undertaking the activities and doing.  “Doing” isn’t sufficient – results are required.

An ability to instill a high level of commitment to the strategic success of the organization and all its components creates an atmosphere where there is a constructive pressure to achieve.  This pressure to achieve must be accompanied by a culture that mandates “doing the right things” – operationally, financially, ethically, and at all other decision points.  Achieving results at any cost, even sacrificing the future to hit today’s targets, is destructive, not constructive, to the overall intent and long-term vision of the organization.

When an organization is able to achieve performance consistently and to reach its desired outcomes, then momentum builds within the organization and beyond.  High performance begets high performance.  The expectation of the organization becomes success.  Each person’s role and the expectation to perform provide motivation and support for moving the organization forward.

High performance and achievement should not be thought of in terms of getting along and being happy, although those elements would provide additional contributions to the culture and results.  The organization is looking for consistent results.  To achieve consistent results, the organization must have consistent expectations applied across all members of the organization.  Rewards and consequences must be applied equitably, consistently, and in a timely manner in order to sustain, motivate, and enforce standards of performance.

One of the most critical elements of results-oriented, high performance is to create champions out of high performers.  The reward of recognizing contributions and results recognized is that an environment is created which generates motivation to continue the high performance because of the direct tie between results and reward.

High performance is a combination of culture, clear objectives, resources to achieve the objectives, commitment to the outcomes, and belief that performance/results lead to rewards.  It also means that underperformance is addressed and those responsible are moved out of critical positions, possibly the organization itself.

To be successful organizations must have a culture which supports and rewards success.  Resources and energies consumed by underachievers and poor performers pull the organization’s total performance down.  Morale is significantly impacted when poor performance isn’t addressed.  Poor performance means that others in the organization must pick up the slack.  If your organization is kept busy picking up the slack, then resources are being overused, misused, or abused.  Make the commitment to a results oriented high performance mentality.  Walk the walk, talk the talk, and take action.

Copyright © 2007 F.O.C.U.S. Resource, Inc.