Performance
Improvement News |
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Winter 2007: Volume 6, Issue 1
By Stuart A. Kaufmann, President, Kaufmann & Company, Inc.
Your success in life, in large measure, reflects the extent to which you assume responsibility for predetermining outcomes. In your business, the predetermination of your desired outcome, coupled with planning, implementation and adjustment, determines what your business will "grow to become."
The challenges to growing a business, however, can be daunting. The solution to managing these challenges may be found in undertaking a pragmatic approach and comprehensive evaluation of your business.
The first step is to predetermine your outcome; to define your vision. Your vision can be developed in terms of a five-year or ten-year time horizon. At the center of your vision should be the "purpose" of your business. Ideally, your purpose will be qualitative in nature and relate to "who is being served" by your business.
To create your vision,
| At the center of your vision should be... who is being served by your business. |
consider all of your stakeholders: employees, customers, suppliers, shareholders, and so on. You can, for example, choose to focus on your employees, given the critical role they play in the success of your business. Just as in any team sport, it is always the team effort that determines the outcome.
The extent to which your employees feel that they are regarded as essential stakeholders bears directly on their level of motivation, commitment and performance. Harnessing the human spirit of your employees will have an enormous impact on the success of your business.
| Pivotal to the growth of your business is understanding how you are different from your competition. |
The second step requires that you assess who, what and where you are currently. This involves a comprehensive evaluation of your business—including all relevant internal factors as well as all relevant external factors.
Internal factors relate to: ownership, leadership and management; products and/or services provided; methods by which these products / services are marketed and sales generated; production, operations and quality control; human resources; financial resources and accounting; administration; and technology.
External factors relate to: competition; issues that affect your ability to market, sell, produce, or deliver your product / service; and general economic / regulatory / environmental / other issues that can impact your growth or survival.
Pivotal to the growth of your business is an understanding of how you are perceived as being different from your competition, and how you capitalize on this difference. This is your competitive advantage. It is precisely why your customers or clients do business with you, as opposed to doing business with your competition.
The next step is the preparation of a SWOT Analysis—Strengths, Weaknesses, Opportunities, and Threats. Your strengths and weaknesses reflect internal circumstances; those over which you tend to have a level of control. Strengths and weaknesses are evaluated in terms of the internal factors cited earlier. Ideally, you want to understand how you compare with your competition in all of these areas.
Armed with a clear understanding of your strengths and weaknesses, you can determine how to capitalize on those strengths to grow your business, and how to shore up those weaknesses so that they don't undermine your rowth.
Opportunities and threats reflect external circumstances, as cited earlier, and tend to be beyond your control. Opportunities and threats are evaluated largely, though not solely, in terms of your competition. It is important to understand how your business stacks up relative to your competition.
Your understanding of opportunities enables you to leverage your strengths and grow your business. Your understanding of threats enables you to mitigate the damage that might otherwise result from not being aware of future challenges.
The financial management of your business is absolutely critical. It is imperative that you understand your financial statements; balance sheet, income statement, and changes in financial condition. Certain accounts and benchmarks need to be reviewed daily, some weekly, some monthly, some annually.
The accounts and benchmarks that need to be managed constantly relate to cash flow, working capital and profitability. These include sales, cost of goods sold, gross profit margins, operating expenses, operating profit margin, Accounts Receivable, Inventory, and Accounts Payable.
Cash flow is crucial to the health of your business as cash is the only true medium of account settlement. Gross profit and operating profit margins are critical as they must be sustained, if not improved, in order for your business to remain a "going concern."
Accounts Receivable must be managed to ensure the maximum amount of timely collections and to reduce reliance on other sources of cash such as Accounts Payable and costly borrowings. Inventory must be managed to avoid tying up capital, incurring unnecessary carrying costs, or suffering losses due to obsolescence.
| The SWOT analysis helps you understand how your business stacks up relative to your competition. |
Accounts Payable must be managed so that you don't expose your business to any form of supply or delivery interruption. Management of both Accounts Receivable and Accounts Payable, should always include current aging schedules.
The income statement must be monitored constantly. Revenue must be generated on a profitable basis, which implies that you have a firm understanding of your cost structure. The analysis of your cost structure is essential to the development of proper pricing of your products/services. The components of your cost structure, most notably, your breakeven point, and fixed and variable costs must be completely understood.
A thorough analysis of your breakeven point enables you to understand the level of sales required to cover all costs—both production and operating overhead. It enables you to understand unit costs and the profit contribution made by each additional sale. It enables you to understand your gross profit and operating profit margins, the true indicators of your operating performance.
Cost of goods sold and operating expenses, viewed in descending order of magnitude, need to be reviewed constantly; variances from budget and plan should be fully understood.
Your business plan will ultimately include your vision, goals and objectives, and strategies and tactics that will enable you to grow the business from your current position to your desired, predetermined outcome. It will serve as a tangible tool and living document that will provide significant benefits. Your business plan will greatly enhance your ability to make decisions—decisions that are congruent with your vision. It will enable you to more effectively evaluate alternative courses of action as you grow your business.
Two major challenges you will encounter as you grow your business relate to the need for additional human and capital resources.
As relates to human resources, the development of your employees as stakeholders is crucial if you are truly committed to growing effectively. This will be required if you are to achieve maximum synergy and productivity, and mitigate the damage and costs associated with employee turnover. This will also be required if you are to retain control over your time and energy and maintain focus on your vision and business plan.
As relates to capital resources, you may well need capital to grow your business. In the event that you do, your ability to demonstrate that you can provide for the return of capital, and an appropriate return on that capital, commensurate with the perceived level of risk, will facilitate your success in this endeavor.
The development and implementation of your business plan will surely position you to answer the question, Who determines your destiny?
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Stuart A. Kaufmann, President of Kaufmann & Company, Inc., Secaucus, NJ, is an entrepreneur, owner/investor, and business consultant.
For more information, contact Melissa A. Slaybaugh at 212-973-9622 or mslaybaugh@carmelus.com.
* Newsletters are in PDF format, which requires the free and safe  Adobe Acrobat Reader. To get a single printed issue, please e-mail us at customercare@carmelus.com.
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