Benchmarking: Part 3

You might have noticed, but we really want to see your business succeed from information gained through benchmarking. In other words, we want you to be a pro. But, before we unleash you to get started, we need to share a few things to avoid when you start a benchmarking analysis.

  • Comparing Company A to Company B: Make sure the peer group that you’re comparing to the business is representative of the industry. Comparing yourself to another, single company, can prevent you from seeing a true comparison if there are considerable differences. If you are looking at a benchmark analysis that restricts the sample size to only one other company, be critical in your findings.
  • Be aware that the benchmark analysis doesn’t end with a variance report: Once your report reaches the variances between its financial metrics and its peer group benchmarks, you might think you’re finished, but the work is just beginning. Don’t get worried — as the work is just beginning, so are the opportunities! When viewing the variances of your report you are now given potential problem areas to fix and also the opportunity to improve the overall performance of the company. For example, the variance report shows the areas of the business that are excelling. Now that you can see the areas of your company that have successes, see if this strategy can be implemented in other areas of the company.
  • Assume that numbers and performance are always changing: Positions in a car race are constantly shifting: first to third, second to last and so on. It isn’t optimal to compare your business to its peers only once per year, since many industries are always changing, even if your business isn’t. By preforming frequent benchmark analyses, your business can identify trends and react sooner.
  • Be mindful with calculations and the conclusions drawn from them: Certain benchmarks are common financial measurements (turnover rations, net profit margin, and liquidity rations) and their calculations generally do not change. If your benchmark analysis is expanded to include industry specific key performance indicators (KPIs) (airline-sales per seat, for example), make sure to use the same calculations, period after period. However, if a subaccount is added for one period but then removed the next period, the trend analysis performed might be misleading.
    • All members of management and the financial team need to understand the definitions of the metrics, and have a copy of them as well. You want to make sure there is only one interpretation, which will help defuse any confusion. Be sure everyone is on the same page to allow for complete and easy understanding.

It may not seem like a must do task, but benchmarking is important. When it comes down to it, remember the true purpose of benchmarking: to illuminate successes and challenges for your company, and to give you, the business owner, insights to inspire action!

*Shameless plug: If benchmarking sounds like the thing for you, let us know. We love helping businesses see how they’re doing!

 

Benchmarking: Part 2

In our latest blog post, we looked at why benchmarking is important for your business. Some of those reasons include:

  • It keeps you up to speed with real-time data (that is, as long as the data is timely, relevant, and accurate).
  • It never goes out of style and can be used continually, rather than a one-and-done solution.
  • It truly helps you understand the well-being of your business situation.

So now that we have a refresher of why benchmarking is great for your business, let’s dive in deeper. After you decide which data source you’ll use (make sure it’s accurate, timely and relevant), the challenge is now deciding which benchmarks to analyze and use as a tool for the success of your business.

We’ve said it before, but we will mention it again. Different industries, and different companies within an industry, might have different success measures. For example, a contractor might have large subcontractor expenditures. Are these expenses normal considering the contractor’s sales volume?

Instead of taking a look at industry-specific metrics, we’re going to focus on some metrics that are universally important and can provide a quick look into a company’s health.

  • Liquidity Ratios. Yes plural – because there are two that need to be analyzed together. They are:
    • Current Ratio which is shown as current assets divided by current liabilities. This metric shows general liquidity, but it does have some limitations. If inventory is included in calculating the current ratio, it might provide a distorted understanding of your cash flow.
    • Quick Ratio is expressed as cash accounts receivable divided by current liabilities. This ratio might not be perfect for showing liquidity, but it can be a useful and popular comparison to pair with the current ratio.
  • Net Profit Margin. Expressed as net-profit before taxes in a given period divided by sales. Another way to view this? How many cents of profit you extract from each dollar you earn in revenue. This might be a basic metric, but it’s extremely important!
  • Turnover Ratios. There are three ratios that you should consider:
    • Inventory Days which is shown as inventory divided by cost of goods sold, multiplied by 365 days. Inventory days tells the story of how long it takes to sell off inventory. However, it’s important to remember this ratio is very industry-specific. Imagine how long wine is stored in a winery compared to the length of time milk sits in a grocery store cooler. Usually, lower numbers are better.
    • Accounts Payable Ratio is expressed as accounts payable divided by cost of goods sold, multiplied by 365 days. The accounts payable ratio shows the number of days you take to pay the vendors. Higher numbers are better – it means you hold on to cash longer.
    • Accounts Receivable Ratio is shown as accounts receivable divided by sales, multiplied by 365 days. This is a rough measure of the number of days your company takes to turn accounts receivable to cash. You want lower numbers, as it is better to have cash in the bank than extra receivables on the books.

By paying attention to some of these important metrics, you can build a picture of where your business Is, where it should be going and what it will take to get there.

Benchmarking: Part 1

Do you ever wonder how your business does compared to others similar to you in size and industry? Maybe knowing this information would give you a more competitive drive, or would lead you to make some improvements to better your company. Or, maybe you’re just curious.

Whatever your reason for wanting to know, benchmarking can be a powerful tool to compare you to your peers and check your performance. Benchmarking can even lead to an overall greater level of success as a company.

Here are a few (of many) reasons why we think benchmarking is pretty awesome.

It never goes out of style| Benchmarking isn’t just a one and done concept. It can, and should, be used throughout the entire lifecycle of the business. As your numbers and statistics change, the same happens for the competition. Benchmarking can provide a real-time look into how your business is stacking up against the competition and industry trends, and can help you find solutions at any stage in your business.

Knowledge is power| When you see and understand how your business is ranking relative to similar businesses, you can empower management to evaluate company performance and make informed decisions. This information can also be used to identify new and future opportunities that can lead to greater growth and success. To accomplish this, it’s best to compare on an industry or peer group level, rather than just a one-company comparison.

Data doesn’t lie| Without good data, you’re wasting your time. Make sure to look for data from benchmarking that is:

  • Relevant – Data won’t mean much to you if it isn’t relevant to your business. Make sure you consider your geography, size and industry when getting your data. Each has their own trends and characteristics that are incorporated into the data – which makes for a meaningful comparison.
  • Timely – You want to be sure the benchmarks being used are the most recent available, which helps account for seasonality, economic cycles and other fluctuating factors.
  • Accurate – If you’re making sure your data is relevant, it will likely be accurate too. However, it’s always a good idea to verify the data before applying to make important decisions.

A way to measure success| Each business and industry (even businesses in the same industry) has a different way of measuring what success means to them. While you can only decide what success looks like for your business, there are a few metrics that can provide a quick, high level view of your business’s well-being:

  • Net Profit Margin = Net profit before taxes, divided by sales
  • Liquidity Ratio – Current Ratio = Total current assets divided by total current liabilities
  • Turnover ratios, which include inventory days, accounts receivable days and accounts payable days.

As you can see above, benchmarking is a great way to get a picture of how your business is really doing compared to those around it. Using this information, you can feel comfortable making changes to better grow and improve your business.

Business Myths: Busted!

There are a lot of misconceptions, myths, bad advice and even lies about what it takes to be a successful business. Most of these issues come from people who have never gone into business, or those who have failed and are trying to find somewhere to put the blame.

To help clear the air, we’re here to debunk some common myths about running a business.

  1. To be successful, you have to be a pioneer – It’s often said you have to be the first one to develop and sell a product or service. However, this isn’t always the case. Think of Microsoft or Dell. Dell wasn’t the first computer and Microsoft wasn’t the first word processor. However, looking at the industry now, these two companies dominate! While the leading edge can be fun and exciting, joining an established industry with your own take on a product can also bring success.
  2. To be successful, you have to be cheaper –How you price your product does not always determine your success. Nordstrom and Ferrari don’t use a cheap pricing model, but they’re wildly successful. On the other end, Amazon and Southwest Airlines use cheaper pricing models and are also successful. The moral? Customers will pay what they think is fair for your product, but ultimately you have to decide how to model your product pricing. If you have a luxury item, customers will pay more for it. If you aren’t selling your product on the cheaper end, but are providing excellent service with it, your customers will give you business based on other factors besides price.
  3. The customer is always right – Let us guess, you’ve heard this one a few times before. If this was always true, it would be tricky to find any business being profitable. The truth is customers might be wrong sometimes, but they’re still important for your business. Take time to listen to what customers have to say, and use their valuable input when making business decisions. However, don’t let customer opinions overrule logical thinking or dismantle your business mission. When customers are wrong, they can sometimes cost you more money than they make you.
  4. Bigger teams mean bigger results – While having a bigger team can help get more accomplished, it can also hinder progress. Having too many people can lead to complicated lines of communication. It can also result in productive team members getting slowed down by helping new team members get up to speed. Team work can be great for your business, just make sure the teams are operating smoothly and efficiently.
  5. Failure means you’re doomed – We’ve been told our whole lives that being a failure is bad. In reality, failure is actually a stepping stone towards success. While failing can be a setback, it’s important to remember the lesson that can come from it. Failure is only a problem when you allow it to be the final stage, rather than taking lessons learned and growing from them. Sometimes our businesses must encounter failure in order to move forward.
  6. Knowledge is power – Unless you are actually applying this knowledge to your business or other endeavors, it’s just potential. Take what you know and consider using it to better your business, rather than keeping it to yourself. You never know what kind of growth and ideas you could spark from sharing your knowledge.
  7. Every customer is equal – Truth be told, some customers can actually be more valuable than others, but in their own ways. A customer who pays you more money isn’t necessarily of more value. Sometimes a customer who pays less for a smaller project might prove more value because they can help move your business in the direction you want it to go. A valuable customer will make you money, but will also align with your vision for your business.
  8. The more customers the better – Would you believe that some companies go out of business due to too many customers or unreachable demand for their product? If you have so many customers you cannot reach their demands, your business will struggle. Customers may start cancelling orders and taking their business elsewhere, which can result in word traveling that your business isn’t competent. Although it’s a tough decision to make, sometimes you have to turn away customers to keep up with demand and keep your capacity in check.

While some of these myths have some truth to them, many of them are just that – myths. By understanding what can really help or harm your business, you can put your business in a healthy position for growth and success.

 

 

 

 

It’s Lonely at the Top

You’ve started a business. Things are running smoothly, you’re drawing in customers and your employees are happy. Things are going great! Or are they? While everyone around you may be thriving, you find yourself stuck in a hole. You feel stressed, pressured and alone – even though you have all these great people around you. So, what’s going on?

Sometimes, it can be lonely at the top. You may have never thought being an entrepreneur would lead to these feelings. As an entrepreneur, you had a dream to start a business, and you followed that dream until it became a reality. You believed in and trusted yourself. When there were successes, you had your team there to share in them with you. But when there were failures and setbacks, there weren’t as many people around to take them on.

These feelings of loneliness can come from a variety of sources. Maybe you feel lonely because you sit in your office all day working on the core of the business, while everyone else is interacting and working together. Maybe you know the nitty gritty details of your business, but realize you can’t share these details with your employees because they just won’t understand. In other words, you know your vision and goals for the business, but you just aren’t able to share with everyone.

This loneliness might impact other areas of your life as well. Maybe you’re spending too much time traveling for work, so you’re missing valuable time with your kids or family. Your social life could be suffering, and your friends might think you’ve fallen off the face of the Earth. The loneliness you are feeling can even have a negative impact on your health.

Although this loneliness may seem impossible to deal with, there are some ways to combat and manage these feelings.

  • Collaborate – Finding a way to collaborate with your employees, even if it’s just one day a week, can be extremely beneficial. Find ways to engage your employees in what it is you’re doing, so that they can get a better understanding. Having your employees working with you, rather than just for you, creates a new relationship that doesn’t leave you feeling isolated.
  • Self-Care – At the end of the day, you will always have yourself – so it’s important to remember to take care of yourself. Whether it be allowing yourself to relax in front of the TV at night, hitting the gym or volunteering, finding ways to take care of your mind and body outside of work can help you feel better all-around and push off those negative feelings of loneliness.
  • Consider Co-working – If you live and work in a town that has co-working space available, take advantage of it. Often times, other business owners, entrepreneurs and CEOs will be doing the same thing – and this can provide a place for you to work around like-minded people. You might meet people who are going through the same struggles as you, and you might be able to form a relationship that is beneficial to both of you. Working around others can help you find a support system that can help you through the struggles of loneliness.
  • Find an Advisor – Looking to a trusted business advisor may be one of the best ways to beat the woes of entrepreneurial loneliness. It’s likely that your business advisor has dealt with feelings similar to what you are feeling – so they can really truly understand what you’re dealing with and how to help you. Having a trusted advisor also takes some of the burden of decision making off your shoulders.
  • Peer Groups – You can seek out advice and mentorship from other people besides a business advisor. Consider joining a peer networking group that interests you and matches with your situation. This will give you access to a network of people who can be there for you during life’s struggles, but are also ready to celebrate life’s triumphs. Being a part of a peer group gives you access to people who won’t let you feel alone.

While being lonely at the top might be a struggle, it’s important to remember your business depends on you. With the right amount support and guidance, as well as remembering to take care of yourself, it’s possible to overcome the loneliness of being at the top.

Are you an intrapreneur?

Have you ever thought of yourself as a risk taker? You know, someone who pushes the envelope, challenges the status quo or maybe someone who finds the word “impossible” to be a challenge. Now, what if you were acting this way in an attempt to better your business/employer? If you are taking risks and being innovative for the possibility of bettering your business, you might be an intrapreneur.

An intrapreneur is defined as “an employee of a business who is given freedom and financial support to create new products, services, etc. and does not have to follow the usual routines or protocols” according to the dictionary. The American Heritage Dictionary adds on that an intrapreneur takes responsibility for an idea through assertive risk taking and innovation. Further yet, Christian Koch goes on to say that intrapreneurs are the “secret weapon” of the business world.

To sum it all up, an intrapreneur is an employee who takes risks in the hope and desire they pay off for the better of the business.

Intrapreneurs can have a very positive impact on a business. The work of intrapreneurs can lead to increased productivity. When new ideas and tasks are presented, more people are often needed to make these dreams a reality. Adding more people to a new project can lead to more work being completed and more employee engagement.

Along with increased motivation in a business, intrapreneurship can also lead to an increase in innovation – and who doesn’t want that? New ideas can bring about a need for new processes, technology, etc. Acknowledging this need and acting on it can introduce new-to-your business tools that can help foster growth and change which could help your business get ahead.

Another positive impact from intrapreneurs comes from their understanding of current trends and issues. The risks these employees take are usually to address a need or opportunity their business can capitalize on. By keeping up with, and acting on, trends, intrapreneurs can help the business gain a competitive advantage by being early adopters. This competitive advantage can help your business get the leg up it needs to be successful.

These intrapreneurs sound pretty great, right? So how do you go about creating a culture of intrapreneurship in your business?

  • Reward and Recognize Behavior — Reward your employees for taking the initiative or for thinking ahead on projects. Whether it’s a simple thank you, pat on the back or going for lunch, this can show your employees you value (and encourage) them to step up and be innovative.
  • Encourage Healthy Competition – Healthy competition can be extremely helpful when trying to foster a culture of intrapreneurship. This can often times lead to employees working hard in order to win by getting the best results. To do so, it’s possible they will have to come up with new or unique ideas – which can help them transfer this skill over to other parts of their work.
  • Encourage Networking and Collaboration – You’ve heard the saying – two minds are better than one. Encouraging your employees to network and work together on projects can lead to more innovation and productivity, as well as new ideas and feedback. Offering brainstorming sessions allows a set time for employees to get together and collaborate at a time that works for everyone.

As great as having an intrapreneur sounds, it’s important to remember that intrapreneurs simply do not fit in some businesses.  Because intrapreneurs take risks and like to push the envelope, they usually do not fit well with businesses who have a tried and true way of operating. Businesses that have been around for many years, or those who have a set process in place might struggle to adopt and compliment the skills and characteristics of an intrapreneur. Because of their risky behavior, intrapreneurs can cause conflict and disruptions between employees and the business. In this case, it is best to focus on communication in order to keep everyone on the right track and working efficiently and effectively.

Although intrapreneurs can have both positive and negative impacts on a business, it’s important to remember that intrapreneurs typically have the business’s best interest as heart. They’re not just showing up to work for the paycheck. Rather, they are investing in the company by bringing passion and a desire to better the business through innovation and risk taking.

 

Exit Planning: Estate Planning

As a reminder, this blog series is based on The Seven Step Exit Planning Process created by the Business Enterprise Institute (BEI).

After several blog posts, we’ve reached the final post in our exit planning blog series. So, what does the final component of the exit planning process have in store for you? Personal wealth and estate planning!

As a note, just because this is the last step in the process, it doesn’t mean this shouldn’t be considered when you’re actually out of the business. In fact, the earlier business owners start this step, the more benefits they may receive.

It’s no surprise that the IRS lays claim to a business owner’s wealth, especially when it comes to estates. However, there are other beneficiaries a business owner might want this wealth to go to. As a business owner, you will want to have a wealth transfer method that will pass on the wealth with minimal interruption from that pesky IRS.

So, how do you go about keeping the IRS interruptions to a minimum? According to the BEI, focusing on the following three issues can help ensure success in the wealth preservation planning process.

  1. Money for Yourself – To make decisions regarding how much money should be left (to children, charities, etc.), you must first decide how much wealth you want to keep for yourself after exiting the business. This can be determined by looking at the objectives and goals you set in the beginning of your exit planning process.
  2. Money for Kids – The idea of leaving money to children after the sale of the business is a common, but sometimes difficult one. It’s often hard to decide, given the success of the business, how much is too much or too little to leave to children. It’s important to remember that children usually do not receive the full amount up front. Rather, it is transferred through trusts or over time.
  3. Minimize Tax Impact – With tax outcomes always fluctuating due to governmental policies and procedures, it’s hard to make a solid plan and know exactly how much money will be left untouched. To try to keep the amount of money taxed to a minimum, business owners (and their advisors) must be proactive.

A few other pointers for estate planning…

  • Estate Planning Preferences –Having your preferences documented can make the estate distribution process go a lot smoother. Consider including how you want personal property distributed, any personal representatives you may have, donations to charities, how the estate will be distributed, trust designs and power of attorney, to name a few.
  • Personal Lifetime Wealth Management – Understanding the decisions and actions that must take place to manage your personal wealth is crucial in making sure you obtain the highest amount upon leaving the business. It is important to consider spending strategies, estimated income and retirement, investment strategies and possible insurance strategies.
  • Wealth and Estate to Family – More than likely, you have decided to leave some part of the estate to family members, be it your children, spouse or both. Things to consider for your family include insurance proceeds, timing of income stream, transfer of assets and estate allocation preferences.
  • Protection of Personal Assets – Protecting your personal assets can enhance security of your assets against any claims against your company. Such assets to be considered may be loans to the company, collateral, ownership and rights and lifetime transfers.

Personal wealth and estate planning can help ensure you have a solid exit plan in place that is ready for whatever life may throw at you next.

In closing, we want to remind you that exit planning is a crucial step to ensure your business continues on long after it has left your hands. If done correctly, having a solid exit plan in place can help business owners be sure their dreams and goals are reached.