From the e-Mailbox: Can the Business Have Moving Targets?
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The answer to this question depends upon two things: the context of the question and the timeframe being discussed. As a part of normal business processes - performance targets, budgets, sales forecasts, and so on - a specific target is set. For example, achieve $250,000 in annual sales. This is an annual objective that has interim measures - daily, weekly, monthly, or quarterly. The annual measure is usually static; the interim measures are "flexible" - if a measure is achieved ahead of time, it might logically be increased to continue to challenge the organization. If it is missed, the performance gap may be rolled into the next period --to be "made up".
Moving targets are often a part of robust financial forecast and analysis process. Setting annual budgets and performance targets is simply the beginning of the financial management process. As starting points, budgets lay the groundwork for operational performance within the fiscal or calendar year. It is based upon the business' best estimates, information, and assumptions about what the organization can do, should do, and expects to do.
As the budget year gets underway, new information and actual results occur that can be incorporated. Think of the process this way, toward the end of the current fiscal or calendar year (possibly earlier), the business begins taking a look at expectations and plans for the next budget year. These operating plans and assumptions take into consideration what the business has accomplished in the current year, economic conditions, client base, “capacity,” and known and anticipated opportunities. All of this information is quantified into a sales or revenue plan for the coming year.
Once the sales and revenue projections are completed, it is time to plan the costs of delivering products and services, for administration, and infrastructure investment required to support the planned sales/revenue. All of this information comes together in pro forma financial statements that are the business’ “best estimate” of the coming year’s performance. For some businesses, the process stops here. The budget or plan is set and, at most, it may be used as a comparison for what actually happens. Often it sits on someone’s desk or gets tucked away in a drawer or on a shelf. It isn’t an integral part of the business of managing the business.
For the business striving to reach the next level, the “plan” is just a starting point. As new information comes in through actual performance, changes in regulations, economic conditions, or any number of variables, the “plan” is updated to take the new information into consideration. The original plan remains as “a stake in the ground” and serves as a basis for forecasting and comparing performance based upon new information, actual results, and prior objectives.
Here’s an example of the ways a sales budget can be used:
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1 |
2 |
3 |
4 |
5 |
6 |
7 |
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Month |
Budget $ Sales |
Actual |
O/(U) |
Revised "Plan" w/ Actuals and No Other Adjustments |
New Forecast Incorporating New Information and Holding Annual Target |
New Forecast Revising Down the Annual Target – Based on 1st 4 Mths Performance |
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January |
10,500 |
8,000 |
(2,500) |
8,000 |
8,000 |
8,000 |
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February |
12,000 |
10,500 |
(1,500) |
10,500 |
10,500 |
10,500 |
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March |
12,500 |
12,000 |
(500) |
12,000 |
12,000 |
12,000 |
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April |
14,000 |
14,500 |
500 |
14,500 |
14,500 |
14,500 |
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May |
20,000 |
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20,000 |
20,500 |
18,500 |
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June |
15,500 |
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15,500 |
16,000 |
14,000 |
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July |
16,000 |
|
|
16,000 |
16,500 |
14,500 |
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August |
19,500 |
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19,500 |
20,000 |
18,000 |
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September |
12,000 |
|
|
12,000 |
12,500 |
11,000 |
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October |
12,000 |
|
|
12,000 |
12,500 |
11,000 |
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November |
11,500 |
|
|
11,500 |
12,000 |
10,500 |
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December |
10,000 |
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10,000 |
10,500 |
9,000 |
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Total |
165,500 |
45,000 |
(4,000) |
161,500 |
165,500 |
151,500 |
In the table above:
- The budget/plan year is January through December.
- The Annual Sales Objective is $165,500.
- The new information is actual performance January through April.
- Column 2, Budget $ Sales, the plan is broken into monthly performance targets.
- Column 3, Actual, shows the actual sales made for January through April.
- Column 4 is the variance or difference between the planned sales and actual sales.
- Columns 5 through 7 show some alternatives on how to incorporate actual results.
Note that actual results versus plan for January through April (45,000 Actual/49,000 Planned) are about 92%.
The actual results for January through April with no other information have different alternatives for incorporating the information. Each is equally valid and results from the “interpretation” of the results.
- Column 5 shows the information on a substitution basis. The actual performance is incorporated into the plan, but no other changes are made to future months.
- Column 6 shows the incorporation of actual performance and holding the annual target. To hold the annual sales objective, the business must increase sales targets for the future periods by $500 each period.
- Column 7 shows the reduction of all future periods based upon the “trend” of the first four months average. The annual sales objective is reduced to approximately 91% of the original sales objective.
The three options above are examples of how a business can use the same information in different ways. The information used in this example can obviously be used and applied in different ways for different results. How a business chooses to use or not use new information is based on several factors that include the following:
- Nature of business
- Performance in prior years
- Type of business
- Industry
- Outside influences
- Regulations
- Business Practices
- Management Objectives
- Skill set
- Organization capability
- Other items
It is important for every business to understand that how new information is used or not used to influence or change operations against a plan (formal or informal) will impact how the business performs. Recognizing the reality that business projections may need to be revised downward is certainly valid. Revising them too far down may result in an organization that doesn’t maximize the opportunities that are available.
The opposite is also true. When a business is consistently outperforming projections, then revising the objectives upward may be desirable. Revising them to unrealistic levels may cause the organization to stop trying.
“Moving” targets are certainly an option that needs to be considered. Understanding the impact on the organization when targets are moved is critical to the organization’s ability to maximize performance.
Understanding the Different Experts
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With the proliferation of functional area experts - attorneys (from corporate to intellectual property), CPAs, sales and marketing, and all the others, there is an increasing need to build and understand an integrated approach from the enterprise perspective. The “how-to” of achieving an integrated and coordinated effort is increasing in importance as the complexity of business increases. There are, within every functional category, specialists who bridge the chasm between being a pure specialist and one who understands the complete business picture through the eyes of their area of expertise. These experts are important and special resources when acting as an advisor, director, or colleague.
The Experts
Functional experts have breadth and depth of experience in a particular field – intellectual property law, federal tax law, public accounting, non-profit accounting, etc. These individuals are specialized within a service category – law, accounting, marketing, and so on – and often further specialize into categories within their fields.
Business generalists have broad knowledge at a high level of most functional fields. A business generalist will understand the need for accounting systems, human resource systems, compliance programs, and most of the functional activities businesses need. They do not get into the implementation, design, or integration of strategic, tactical, and operational processes.
Business specialists are somewhere between functional experts and business generalists in knowledge, experience, and ability to get into the content of the functional areas. These tend to be broad-based practitioners who have years of experience in a particular field. They may or may not have in-depth study and experience in a functional area, but have “worked” closely with or held positions that exposed them to a broad range of the functional issues. There may or may not be an understanding of the issues and implications beyond those experienced in previous roles and activities.
Integrated Business Advisors (IBAs) have a "total" business perspective that is supported by significant functional expertise in one or more areas; have a breadth of strategic, tactical and transactional understanding with regard to most business functions; have a pre-dominant perspective that they use to "engage" the business activities, process and infrastructure in addressing the needs, demands, resources, opportunities and risks; and have depth of experience in varied roles, industries, and companies. (Note: This is the category F.O.C.U.S. Resources operates in.)
The Expert Approach
Each of these experts brings a different set of skills, abilities, and perspectives. Which category of expert is needed at any particular point in time depends upon the business looking for assistance and the type of assistance needed.
Functional experts focus on the detailed how-to of specific activities, events, and transactions to insure the integrity of the result data, document, or "entity". These are resources for dealing with specific needs – tax filings, patents, copyrights, contracts, employment agreements, etc.
Business generalists provide the less complex business with a high-level analysis of the issues the business needs to address. These can range from the need to change accounting software to human resource and operating issues. These individuals may or may not have the depth of experience or knowledge to address fully the specifics of a functional issue – setup of accounting software, develop employee compensation program, and review timekeeping and accounting processes to determine compliance with grant accounting requirements.
Business specialists provide services and advise on the systems, processes and procedures related to a functional area within the business. The degree to which these advisors are able to get into the details of complying with regulations, requirements, and practices depends upon the level of experience and knowledge base. They usually are quite knowledgeable in the area of specialization and may be able to provide insight into how other functions will impact the area or process that they specialize in.
Integrated Business Advisors (IBAs) provide a 360-degree business perspective and have depth and breadth of knowledge across many functional areas. The “total” business perspective is one that integrates functional expertise with an understanding of how that information fits with all of the other business perspectives to create a unified whole. The IBA is a result of expertise, experience, and “intuitive” business knowledge that comes from broad-based experience, in-depth study, and hands-on application of the functional and business roles. IBAs look at the whole business - activities, events, and functional areas – to insure a cross-functional, comprehensive alignment of the organization. The coordination of the various interests facilitates the organization’s ability to deploy assets properly, to utilize resources fully, and to leverage of the activities of the organization.
Integration of business activities and perspectives enables the organization to make reasoned, planned trade-offs and to manage enterprise and project risks. For early stage and emerging businesses or businesses that are at significant transitional points (failed product, operating losses, cash negative, etc.), the ability of an integrated business advisor is invaluable. It will help the organization determine total needs, prioritize the needs, and develop organization-specific tools, processes, and techniques to address the need for balance between the purpose of the business and the operations of the business
How to distinguish between experienced functional experts and integrated business advisors?
One of the easiest ways to make a distinction is to understand where the business knowledge is coming from.
Has the knowledge and experience all been gained from “outside” of business – through reviewing or advising from a service perspective?
Is the person advising from the perspective of being an external accountant or legal advisor?
Has the advisor been in a business other than one providing their particular “specialized” function?
Keep in mind that, while they may not have the 360-degree perspective needed for a particular project, event or stage in the business “external” perspectives are valid and valuable perspectives.
How to distinguish between a business generalist and a business specialist?
Business specialists will have a specific set of activities or processes they address. A payroll specialist, compensation specialist, website designer, product packaging specialist, internet marketer, or recruiter may be just what is needed for the business at this particular point.
Business generalists tend to look at higher levels of the functional area or business – human resources, accounting, and administrative areas for example. They look at how these areas are working together and where there are opportunities for improvement or change.
Define the Need, Find the Expert
Define the need based the following factors:
- size of business
- stage of business
- industry
- type of issue(s) – profitability, customer base, human resource, etc.
- desired outcome – what need to be achieved
- affordability
- internal skills, abilities, capabilities, and experience
- impact on the business
- short-term or long-term perspective
- stakeholders
Each of the “experts” categories discussed can play a valuable and important role in the business. Taking the time to understand the role each can play is critical to selecting the right expert at the right time for the right role in guiding the business success.
The process of finding the right expert may include:
- referrals from experienced and respected colleagues and other businesses (preferably someone who has shared similar needs in the past)
- interviews/meetings with the experts to understand how they operate and what category they fall into
- references from past clients, colleagues, and others
- credentials – education and experience
- project proposal/scope document
- small test project – “test-drive” by dividing a large project into smaller, discrete part of the project and once the results of the smaller project are in – make a decision on the rest of the project – base the decision on set the deliverables, timelines, etc. and review the results
- hourly basis – hire them on a hourly basis rather than a full project (small or large)
Understand the Need and Risks
The ability to act selectively and with coordinated effort is the difference between spending dollars on services and investing in the business. A shotgun approach to addressing the business needs often leads to gaps in operations that increase enterprise risk.
Decisions made related to compensation, payroll, and “employment” relationships can put intellectual property at risk. Operational decisions on outsourcing and off-shoring can also impact intellectual property ownership. For companies receiving government grants and funding from other sources (debt and equity), errors in compliance with accounting, costing, and securities registration and other clauses and conditions can require the company to repay the grant, loan or even face rescission by equity holders.
Having advisors who are specialists in accounting, law, taxes, and other areas can only be enhanced by having an advisor (or advisors) with the ability to integrate functional perspectives across the entire business. A comprehensive, coordinated perspective enables the organization to be aware of (and reduce) enterprise risk and make reasoned decisions on how and when to spend the limited capital resources of the organization.
Diagnosing Enterprise Risk from the Operational Perspective return to top
When businesses think in terms of risk it is generally from the traditional perspective of investments, hedging, and investments. There is another perspective that precedes that traditional perspective - diagnosing the business to identify operating factors and elements that can lead to financial exposure and loss that can lead to the "enterprise risk" as measured and reported in financial markets.
Daily operations have inherent in them risks associated with transactions and the people involved in the transaction. These "events" are comprised of potential exposure in the following areas:
- Human Resources
- Employment Practices
- Compensation
- Performance Measurement
- Succession Planning
- Accounting/Finance
- Regulatory – Sarbanes-Oxley, SEC, GAAP, Taxes, etc.
- Managerial - Performance Reporting and Performance "Management"
- Financial – Cash, Credit, Assets, etc.
- Funding Covenants – Grants, Debt, and Equity
- IT/Infrastructure
- Privacy
- Data Security/Firewalls
- Product/Service Delivery
- Recovery Plans and backup systems
- Intellectual Property
- Infringement
- Ownership
- Creation
Risk is inherent in business. How the business chooses to operate and manage processes impacts how much "additional" risk is added to the process. The proper controls and proactive processes enable the business to minimize or eliminate areas of exposure that can lead to financial outlays related to "transactional" aspects of the business.
For example, a business can, through working with human resource experts, create policies, procedures, and other tools that facilitate recruiting of qualified candidates and a selection process that utilizes objective, position specific criteria to fill any openings. The ability to document and objectively select qualified people for the business can minimize the risk of legal action for discriminatory recruiting and hiring practices.
An example related to accounting and financial practices is the process of complying with government grant requirements. Grants have very specific requirements for tracking costs, calculating burden rates, and excluding certain expenses or costs from projects. Having an accounting process and system that supports the requirements enables a business to pursue and utilize grant sources to fund the development of new technologies on its way to commercialization. Failure to comply with those terms or to establish a process that doesn’t place a burden on the business to meet compliance can lead to substantial financial outlays - even being required to repay the grant!
Financial risk results from operational decisions and activities. It is a critical activity of all businesses to find the balance between acceptable and unacceptable risk – risk that stems from inadequate operational controls and/or lack of attention to areas that have specialized requirements such as HR, Tax, IT, Accounting, etc... The degree of impact and financial risk varies from business to business. To begin the process of determining where the business is today on the scale of risk, review the following questions:
- What are the qualifications, experience, and expertise of the people filling the following roles in the organization?
- Human Resources Manager, Director, VP
- CFO, Controller, VP Finance
- General Counsel, Internal Legal or Compliance Manager
- What intellectual property has been developed or is being developed - who is working on those projects, what is the relationship of those individuals to the company?
- Employee
- Independent contractor
- Consultant
- What specific compliance requirements exist for debt, grants, or other funding?
- What product or service is being delivered and what are the liabilities associated with it?
- How many employees does the business have?
- In how many states, countries, or other geographic areas that may have some type of regulatory requirement does the business operate?
- If the business has a board of directors and/or advisors, what is the breadth and depth of experience they bring to the business in areas such as finance or operations?
- How many "business units" such as R&D or manufacturing does the business have?
- Is the company privately-held, closely-held, or publicly-traded?
- Does the business sell to other businesses or direct consumers?
- What is the potential for environmental or other adverse events such as product tampering, terrorism, nationalization of foreign operations?
- How integrated are the business' processes?
- How dependent is the business on technology – whether internet, software, hardware, website, or e-commerce?
- What is the nature of the company's core business?
- What is the nature of the business' intellectual property?
- How much and what in the business is outsourced and/or off-shored?
- How visible is the company’s "competitive advantage" or "core technology" to vendors, customers, and employees?
- If there are strategic partnerships, joint ventures, or other "relationships", how many of them are domestic? foreign? How are the agreements governed and the intellectual property protected - within the US and outside the US?
- What stage is the industry in?
- What is the availability of "skilled" or "professional" workers needed by the business?
- Is the business seasonal or cyclical?
The topic of risk isn't complete without touching on insurance. Insurance is certainly a tool for addressing the degree of risk that comes from being in business and from the litigiousness of society today. Regardless of how careful a business is lawsuits and other events can occur. Once an assessment of the areas of risk and level of risk has been reviewed, it is time to look at the options for "covering" exposure through various types of insurance.
The insurance industry provides a wide selection of insurance types and coverage. Some of the insurance categories that may be necessary to the business include the following:
- General, Product, and Umbrella Liability
- General Property including special coverage Floods, etc.
- Life – including Key Person
- Directors and Officers
- Errors and Omissions
- Commercial and Non-owned, and other vehicle
- Business Interruption
- Business Expense
- Workers Compensation
- Internet/e-commerce
- Employment Practices
Understanding the types, nature, and limitations of each insurance coverage is critical to assuring the business has coverage for "inherent" risks of operations. The nature of the business, the industry, geographic regions, and products/services offered all have significant impact on what coverage is needed and available. Also, the stage of the business can limit the amount of coverage under some types and policies. Many times an early stage company will be limited in the amount of Directors and Officers insurance coverage allowed - say $5,000,000 cap due to the nature and "experience" of the business.
Every business should be able to find some level of coverage. It may not be complete - due to affordability, restrictions on what can be offered, etc. - but some insurance is better than none. Here are a few things to consider related to insurance:
- Shop through brokers and utilize on-line resources to gain an understanding of the available options.
- Take time to understand the aspects of insurance coverage critical to the business.
- Read and review all aspects of insurance policies.
- Have an attorney who deals with insurance review and explain the policies.
Understanding the Business of Business return to top
Too often those of us with a particular area of expertise believe it is necessary to be all things in our business. Whether we are technology specialists (IT, Bio-tech, etc.) or professionals (doctors, lawyers, architects, dentists, accountants, and so on), we are smart, so we can do it. The question isn’t always if we can do it; the question may be whether or not we should be doing it.
The potential for success in business requires a combination of knowledge, skill and the ability to know when and how to seek the talents, expertise, and experience that complements what we know and who we are. There are many success stories of the "garage inventor" who successfully grows the business into mega proportions. Most of these people were savvy enough to surround themselves with talent - business talent.
While many people are capable of learning and developing the necessary business skills and knowledge to take the business to the "next step", there are just as many who can't. Neither group of individuals or founders is better, smarter, or superior - they are just different. It isn’t about intelligence. It is about “business sense.”
Some businesses by the nature of the product, service, or "innovation" will grow so rapidly that they outpace the founder’s ability to assimilate the business skill set needed in the short amount of time available. Furthermore, most founders tend to be so critical to the technology, process, or product that the business has been founded to develop, produce, and sell, that time spent on the "business" end of the business is time that would add greater value employed on the "technology or innovation."
Business (like life) is about trade-offs. It is about the cost/benefit choices that are made – consciously or subconsciously– every day. Opportunity cost is defined as “the income or benefit foregone as a result of carrying out a decision.” The opportunity cost of those choices may be significantly higher than first apparent when they are decisions about how to “spend” the time of an inventor or other skilled resource in a business. When an opportunity is measured against the benefit of an alternative use of the time, its cost may increase significantly. If the "innovator" is the only one, or one of the few resources, in the business that can work out the "bugs and glitches" that are keeping the product from market, then the time spent by that person on anything else is time that is constraining the organization from getting to market. If the product is projected to make $2,000 a day for the company once it is in production, every day that it isn't in the market "costs" the company $2,000 in lost revenue.
Suppose an attorney has a full complement of clients and can bill $200 per hour for services. This same attorney also has work handling accounting activities which require 10 hours a week, hours which could be contracted out at $20 an hour. Doesn’t it make sense in terms of opportunity cost to spend the available hours on client projects which generate revenue and not on billing and collections?
Time is a constraining resource for most companies - either from a "capacity" perspective or from a "rate" perspective. It is important that in working in the business and on the business those decisions about where it is wisest to spend time and dollars are made consciously, not by default.
An investment in the business that relates to developing the internal skills and abilities of "business" and "functional" expertise is important to long-term business success. To weigh the when, what, and where of those decisions, consider the following questions:
- What opportunities are being missed by doing "everything"?
- What opportunities can be pursued if some business processes are outsourced, contracted out, or "hired-in"?
- What are the alternatives for expanding capacity by making selective choices on what REALLY needs to be handled by the founders, owners, technicians, etc. who ARE the business?
- Would it be better to "hire" the "behind-the-scenes" activities and have more time for sales, marketing, and the core business that only you can provide?
- Are you truly the only one who can do it, and if so, what does that mean for the long term growth of the business?
- What would it take to add another "you"?
Do you REALLY want to be doing everything?
- Can you trade services - your services for accounting, marketing, legal, etc.?
- Do you have a life?
- What does your business need to take it to the next level?
360°Enterprise Diagnostics™ return to top
F.O.C.U.S. Resources has added to its service options the "360° Enterprise Diagnostic™ Review".
Because businesses are comprised of multiple issues, influences, and conflicting demands, every issue needs more than a single functional perspective in assessing its impact on the business. In order to achieve near term financial results NOW and comply with internal and external requirements (debt covenants, equity agreements, employment laws and other regulations), companies must understand how each part of the business' operations integrate with each other.
Businesses make operations decisions everyday. Those choices reflect the information, expertise and resource constraints in play at that point-in-time. As organizations grow and time passes, many of those choices, systems, procedures and processes that were acceptable before can no longer meet the increased demands that result from additional regulations and complexity that come with growth. Businesses need to run a diagnostic on processes, procedures, and systems to determine where the business is at risk from increased and changing demands.
The F.O.C.U.S™ Resource 360° Enterprise Diagnostics™
- Review current financial position
- Cash needs and levels
- Collections and credit issues
- Internal Expertise
- Reports
- Review of financial policies and controls
- Review of employment practices
- Review human resource compliance status
- Assess need for asset controls and policies
- Identification of areas of potential risk
- Review product/service cost methodology
- Review pricing methodology
- Review project/grant compliance needs
- cost tracking
- timekeeping
- certifications and representation clauses
- accounting
- reporting
- audit compliance
- Review equity and debt covenant reporting requirements
- Assess internal controls
- Assess existing accounting system
New Hire Reporting return to top
It's not new, but many small businesses have not been aware of this reporting requirement. Since October 1, 1997, all employers have been required to report certain information about newly hired and rehired employees to state agencies within 20 days of the date of hire. (The 20 day requirement comes from federal regulations. Many states have instituted more stringent requirements. North Carolina's current reporting requirement is 20 days.)
New Hire Reporting is part of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996 that is intended to assist in the enforcement of child support rulings and reduce welfare payments. The new hire reports are used to compare to child support order records to locate parents that must comply with court ordered payments. Additional data uses are for monitoring fraud related to workers' compensation and unemployment claims.
Report content includes employee's name, address, social security number, and date of hire, as well as the employer's name, address and federal and state identification numbers. Employers may comply using a Form W-4, a custom form created by the employer or through use of on-line or other reporting templates available through the state reporting agencies. Penalties for non-compliance can be up to $25 per employee and up to $500 per employee in the case of deliberate conspiracy to not report between an employer and employee.
Information on New Hire Reporting requirements, forms, and on-line filing options are available at www.ncnewhires.com.
TrendSetters return to top
TrendSetters, Capital City Club, Raleigh - 3rd Tuesday of Every Month 6 pm Networking, 6:30 Program
June - Eileen Stevie and Janice Russell - Professional Organizers
July - Lea Strickland and Anne Harttree - The Business of Business
August - Erika Mangrum and Dr. Angela Bayliss - Health and Wellness
September - Vickie Bevenour and Lea Strickland- Extreme Networking!
For more information contact the Capital City Club at (919) 832-5526 or go to www.capitalraleigh.com.
Copyright © 2004 F.O.C.U.S. Resource, Inc.
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