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Planning for Business Growth

A Step-by-Step Guide

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Overview of the Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Module 1: Planning for Business Growth: the Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Impact of Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Challenge of Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 How Growth Aects each Business Area . . . . . . . . . . . . . . . . . 4 Developing a Business Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Types of Business Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Myths About Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Key Planning Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Module 2: The Step-by-Step Approach to Business Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Step One: Diagnosing the Health of Your Business. . . . . . . . . 7 Step Two: Focusing on Key Divisions and Setting Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Strategic Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Choosing Your Critical Division . . . . . . . . . . . . . . . . . . . . . . 11 Setting Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Step Three: Developing Your Business Strategies . . . . . . . . . 13 Marketing Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Operations Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Human Resource Strategies . . . . . . . . . . . . . . . . . . . . . . . . . 14 Finance Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Consolidation Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Step Four: Implementing Your Growth Plan . . . . . . . . . . . . . . 14 Review Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Assign Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Review the Results Every Quarter. . . . . . . . . . . . . . . . . . . . 16 Module 3: Measures and Strategies for Business Growth Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Marketing: From Prospecting to Customer Service. . . . . . . . 17 Some Thoughts About Marketing . . . . . . . . . . . . . . . . . . . 18 Marketing Pitfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Marketing Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Marketing Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Operations: From Chaotic to Systematic . . . . . . . . . . . . . . . . . 31 Some Thoughts About Operations . . . . . . . . . . . . . . . . . . 31 Operations Pitfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Operations Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Operations Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Human Resources: From Collegial to Structured . . . . . . . . . . 39 Some Thoughts About Human Resources . . . . . . . . . . . 39 Human Resources Pitfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Human Resources Measures . . . . . . . . . . . . . . . . . . . . . . . . 42 Human Resources Strategies . . . . . . . . . . . . . . . . . . . . . . . . 43 Finance: From Internal to External . . . . . . . . . . . . . . . . . . . . . . . 48 Some Thoughts About Finance. . . . . . . . . . . . . . . . . . . . . . 49 Finance Pitfalls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Finance Measures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Finance Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Consolidation Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Table of Contents

Figures and Charts

Module 1 Figure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Growth Trap Figure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Growing Business Figure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Continued Growth Figure 1 . . . . . . . . . . . . . . . . . . . . . . Transitions in the business divisions Figure 1 . . . . . . . . . . . . . . Examples of the dierent types of business plans you may need for business development stages Module 2 Figure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . A typical planning schedule for developing a growth plan Figure 1 . . . . The four elements of SWOT represent past and future, positive and negative aspects of your business Figure 1 . . . . . . . . . . . . . . . . Use a grid like this to help formulate your thoughts on your business. Module 3 Figure 1 . . . . . . . . . . . . . . . . . . . . . Product/customer grid for choosing a strategic direction Figure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Promotional messages Figure 1 . . . . . . . . Product to customer to revenue tables and ratios Figure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . Capacity and market demand Figure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . .Capacity and decision-making Figure 1 . . . . . . . . . . . . . . . . . . . . Sample human resources needs grid Figure 1 . . . . . . . . . . . . . . . . . . . . . . . . Developing a compensation grid Figure 1 . . . . . . . . . . . . . . . . . . . . . . . Developing a commission system Figure 1 . . . . . . . . . . . . . . . Sample balance sheet for Company X Ltd. Figure 1 . . . . . . . . . . . Sample income statement for Company X Ltd Figure 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price cut/volume increase Figure 1 . . . . . . . . . . Volume increase necessary to oset a price cut Figure 1 . . . . . . . . . . . . . . . Impact of revenue on inventory, accounts receivable and accounts payable Figure 1 . . . . . . . . . . Monthly cost of capital by age and interest rate

Overview of the Guide


When you started your business, you likely had access to plenty of advice and support. The same does not hold true when an established small business looks for help to grow or evolve. The British Columbia Ministry of Small Business and Revenue, Western Economic Diversication Canada, and Small Business BC developed Planning for Business Growth: A Step-by-Step Guide for small business owners who want to plan the growth of their companies but dont have the time and resources available to larger organizations. The guide will be especially useful if: Your market is changing due to increased competition or changes in consumer behavior. Your business or your industry is in the midst of growth or change. Your local community is growing or shrinking. A key person in your company is about to retire. You are planning to nance a major capital purchase. You are constantly at, near or over your current line of credit. It includes tips and techniques that will show how you can evaluate the current state of aairs in the four main areas of your business marketing, operations, human resources and nance. With this information in hand, you will be able to determine where your attention is needed most, set goals, develop strategies to achieve these goals, and monitor your growth plan. The guide is organized in three modules so you can easily nd the information you need: Module 1 sets out general information so you have a better understanding of how growth will impact your business and appreciate the value of a solid business plan. The guide distinguishes between four areas, or divisions, that make up every business, regardless of size: Marketing: The selling things part of the business getting customers for its products and services. Operations: The making things part of the business what it does for its customers. Human Resources: The people part of the business recruiting, developing, supporting and compensating sta. Finance: The enabler of the business more than nancial statements and tax returns, it is what makes the business possible. As a company grows, there are transitions in each division. Business growth also has a predictable impact on each of the divisions. A number of business planning principles presented in Module 1 are worth including here: 1. Business planning will succeed only if the management of a company wants to change and is able to critically evaluate the business. If not, management may require the assistance of an outside party who can be more objective. 2. Business planning requires a holistic approach. All parts of a business work together to create a whole. This is true for planning, diagnosis, strategies and implementation.
Planning For Business Growth: A Step by Step Guide 1

3. Each of the four business divisions marketing, operations, human resources and nance is important, but at any given time one usually needs the most attention. 4. Businesses run into diculty when the dierent divisions grow at dierent rates. 5. As a business grows, there are changes in each of the divisions that will move the business to a more formal, structured operation. 6. Business growth is limited by capacity in each division. In order to grow, it is necessary to identify capacity needs and plan to increase capacity as needed. Module 2 takes you through the four steps involved in researching, creating and evaluating the growth plan. Step One: Diagnosing the Health of Your Business This formal analysis ensures you take a realistic look at where your business is now so you can be condent you are working with facts, not assumptions. Step Two: Focusing on the Key Division and Setting Goals This will help you examine every part of your business marketing, operations, human resources and nance so you can identify where attention is needed most, and set realistic goals. Step Three: Developing Your Business Strategies This is where you will identify the best strategies to break through the toughest roadblocks and plan for the growth of your business. Step Four: Implementing Your Growth Plan Now you need to put the strategies into place, measure the results and watch for unintended consequences. Module 3 supports Steps One and Two by providing tools and techniques you can use to measure the health of each business area (division) and strategies to support growth. Summary Together, the three modules will help you address the many challenges you nd yourself facing as your business, your industry and your world evolve and change. You will want to be sure the approach you choose works best for you so your company can grow in a controlled and uniform way. As you go through the process of growing your business, it is important to remember that you are not alone. You can seek assistance through Small Business BC, your local Community Futures, business organizations and professionals, or local banks and credit unions. You may also want to look for a mentor, someone who has been where you are and understands the challenges you face. We wish you every success with your business growth, and hope that this guide helps you on your way.

Planning For Business Growth: A Step by Step Guide

MODULE 1

PLANNING FOR BUSINESS GROWTH: THE BASICS


INTRODUCTION All businesses, from a childs lemonade stand to Bell Canada Enterprises, have four specic areas, or divisions: Marketing: The selling things part of your business getting customers for your products and services. Operations: The making things part of your business what you do for your customer. Human Resources: The people part of your business recruiting, developing, supporting and compensating your sta. Finance: The enabler of your business more than nancial statements and tax returns, it is what makes your business possible. Each division is important to the success of the business and they all must work together, but at any given time one usually needs more attention than the others. This is especially true in a growing business since, as you will see in Figure 1, dierent parts of a business often grow at dierent rates. Module 1 will show you how business planning can provide the structure you need to critically evaluate all your divisions, and how you can use this knowledge to develop and implement the best strategies for the growth and success of your business. T H E I M PAC T O F G R O W T H There is a predictable pattern as any business develops and grows. It Starts with Marketing When a business grows, nding sales is everything. The marketing division consumes most of managements eorts, and a take-any-sale attitude rules. Shifting from Marketing to Operations As orders start to roll in, the focus must shift from marketing to operations, which means production and service delivery. A business that is approaching capacity must expand to keep up with the demand or it risks missing sales commitments. Shifting from Operations to Human Resources and Finance When a business grows too quickly, it may outgrow the capability of existing sta or place unreasonable demands on individuals. People, especially owners, are seen as the most exible of all resources, creating a situation that simply cannot be sustained over the long term. A growing business also needs cash to pay suppliers, employees and other overhead. It needs cash to nance equipment so it can increase capacity. If sales are growing faster than prots, the cash ow becomes a cash trickle and nance needs more attention.
Planning For Business Growth: A Step by Step Guide 3

Figure 1 - The Growth Trap1

THE CHALLENGE OF GROWTH A problem occurs when the four divisions grow at dierent rates. A business may have $1 million in annual revenue, a production capacity for $900,000, a line of credit for $800,000 and enough employees to handle $700,000 in production or services. If that company continues to grow, the orders cannot be met, the banks will call lines of credit, and good employees will start to head for the exit! The business risks being crushed by its own growth. As businesses evolve, especially when they grow, they must make changes. Whats important is to determine where change is needed most at any given time and develop a plan that focuses on this critical division. Figure 1 - The Growth Trap The Growth Trap diagram shows the eects of the four dierent divisions of the business: Marketing (The target) Operations (The factory) Finance (The cash) Human Resources (The running man) When a business grows over time, these divisions develop at dierent rates, which has long-term implications. Figure 2 A Growing Business Figure 2 shows a business with $1 million in sales, a production capacity of $950,000, a financial capacity of $900,000 and a human resource capacity of $850,000. This is not sustainable in the long run.

Figure 2 - A Growing Business

Figure 3 - Continued Growth

Figure 3 Continued Growth Figure 3 shows that if the business continues to grow in the same way, the gaps grow. Now the same business is trying to make $2 million in revenue, but will not be able to deliver enough products because it does not have the human resources or financial capacity. The business is collapsing under the weight of its own growth. HOW GROWTH AFFECTS EACH BUSINESS AREA As Table 1 illustrates, there are obvious transitions in each division as a company grows. Marketing shifts from acquiring new customers to keeping existing customers. This does not mean you stop prospecting, it just means you now must develop new strategies to keep customers coming back.

Table 1 - Transitions in the business divisions Division Marketing From Prospecting To Customer Service Systematic Structured

Operations, which at one time could take each order and complete it before beginning the next order, must become more systematic and streamlined. Human resources, once informal and collegial, must become more structured. Finance moves from supporting the personal investment of one owner or a small group of people to meeting the needs of external parties such as banks and investors.
1 Taken

Operations Human Resources Finance

Chaotic Collegial

Internal

External

from the seminar Business Planning for People Who Hate Business Plans by William Erichson of Pacific Training Innovations Ltd. Used with permission.

Planning For Business Growth: A Step by Step Guide

DEVELOPING A BUSINESS PLAN Business planning publications generally use a one-size-ts-all approach. This guide uses concepts from strategic planning that generally apply to larger companies and adapts them for a developing small or medium-sized business one that may be growing from 10 employees to 20, or from just you, to you and someone else! Dierent business plans meet dierent needs. A growth plan is dierent from a start-up plan, and a growth plan for a mature business in a stable market is dierent from one for a volatile business in a changing market. You may even need a plan that slows your growth until your business stabilizes As you develop your plan, it is important to remember that it is for your business. If something is suggested that does not apply to your situation, ignore it. This guide is structured so you can follow it completely or focus on a specic area. Whatever you choose to do, make sure you take a hard, practical look at what you are doing. If you cut too many corners or make assumptions, your plan will lack the solid foundation needed to take you into the future. Types of Business Plans
Table 2 Examples of the different types of business plans you may need for different development stages of your business

State of the Business Description Start-up Business starting up

Type of plan used Start-up*

Notes Demonstrates viability of new enterprise. Eliminates roadblocks to growth.

Growth

Business growing in terms of revenue, volume or both

Growth

Growth -Volatile

Business encountering Growth rapid change in either marketing or operations Business is stable; not much change needed Growth

Focuses on business survival. Similar to growth plan with less ambitious revenue targets.

Growth -Mature

Helps owner adjust to existing operations. Transition Planning Assists with transition. Some management consulting companies specialize in this.

Transitional/ Business being Succession passed on to a next generation of family member or changing ownership

Transitional

* Business Planning and Financial Forecasting (http://www.smallbusinessbc.ca/pdf/businessplanning.pdf) was designed for business start-ups but it has tips and techniques that are helpful for growing businesses.

Planning For Business Growth: A Step by Step Guide

Myths About Planning Myth: Planning uses up time that is better spent on real work. Reality: Planning is an essential part of your business: Operational planning is immediate, and ensures you get todays orders out the door. Managerial planning helps you meet this years objectives, such as achieving sales and expense budgets. Executive planning assures the long-term health and direction of your business. Myth: Business plans are for banks and investors. Reality: Business plans, especially strategic-oriented plans, help you get your head out of the operational sand and focus on the medium and long term. Ive run my business without a business plan and done pretty well. I dont need one now. Reality: If you want your business to grow and change, you need to change the way you are doing things. Many entrepreneurs cannot make this transition, which explains why many businesses plateau at about $1 million in annual revenue, or go out of business when they appear to be growing rapidly between $1 million and $5 million a year. Myth: Myth: You need a consultant. Reality: Not necessarily. Facilitators are great to encourage dialogue and to assemble the plan, but the key players involved are in your company and thats who must do the work. Key Planning Principles Before moving on to Module 2, it is helpful to review some of the planning principles that are presented in this guide: 1. Business planning will succeed only if you want to change and are able to critically evaluate your business. If not, you are wasting your time and may want to turn to an outside party who can be more objective. 2. Business planning requires a holistic approach. All parts of a business work together to create a whole. This is true for planning, diagnosis, strategies and implementation. 3. Each of the four business divisions marketing, operations, human resources and nance is important, but at any given time one is usually most in need of development. 4. Businesses run into diculty when the dierent divisions grow at dierent rates. 5. As a business grows, there are changes in each of the divisions that will move the business to a more formal, structured operation. 6. Business growth is limited by capacity in each division. In order to grow, it is necessary to identify capacity needs and plan to increase capacity as needed.
Module 2 takes you through the four steps that let you plan the growth of your business.

Planning For Business Growth: A Step by Step Guide

MODULE 2

THE STEP-BY-STEP APPROACH TO BUSINESS GROWTH


INTRODUCTION This guide is built around four steps to business growth Step One: Diagnosing the Health of Your Business Step Two: Focusing on the Key Division and Setting Goals Step Three: Developing Your Business Strategies Step Four: Implementing Your Growth Plan If you are committed to business development, you will nd the time and resources to work through the four steps and develop the plan you need. And if you take an honest look at what you are doing, you will likely nd the journey as valuable as the nal plan. To get started, you will need the following: A planning team. You want to spread the workload, even if there are only a few of you, so you can build a broadly based sense of ownership for the nal direction, making implementation easier and smoother. If you are doing all the work yourself, you may want to tell your sta (if you have any) what you are doing. You may also want to get support and guidance from other business professionals or nd a mentor who has been where you are and understands the challenges you face. Access to information. While a lot of information can be extracted from your bookkeeping programs, you may nd you need to change the management information systems, including the chart of accounts, before you get started. A commitment of time. Experience shows that after the information has been gathered, it usually takes about three to four days to complete a growth plan. This includes at least three hours to report ndings from the diagnosis, about six hours to discuss which of your four business areas is the most critical, three hours each to discuss plans for the secondary divisions, and six hours to develop the nal plan. Some businesses choose to complete the plan in a weekend if thats your choice, prepare for a grueling couple of days. STEP ONE D I A G N O S I N G T H E H E A LT H O F Y O U R B U S I N E S S Step One involves gathering the detailed information about each of your four business divisions so you can measure how well you are doing and pinpoint where changes are needed. Many owners make immediate changes to their business based on this analysis alone. The diagnosis is hard work, and is one of the reasons why you should take a team approach if possible. Team members will need to dig through business information, pull out unused accounting reports, survey employees or time operational processes.
Table 3 - A typical planning schedule for developing a growth plan Step 1 Week 1 2 Planning Step Marketing and Financial Analysis Operations and Human Resource Analysis SWOT (Strengths-WeaknessesOpportunities-Threats) Analysis Mission Vision Values 4 Selection of plan type Selection of Critical Division 3 5 Setting Critical Division Goals and Strategies Setting Secondary Goals and Strategies Development of Implementation Plan

Planning For Business Growth: A Step by Step Guide

If your team is large enough, assign one person to each division, and make that person responsible for presenting ndings to the rest of the team. The presenter becomes a champion for their area, and all team members have the information they need about all aspects of the business. If your business is small, you may need to assign more than one division to each team member, or you may need to complete the work on your own. As part of the pre-planning, you should determine an order for the analysis. While there are no set rules, many teams start with nance because it is the most objective area. While the order is not important, the formal nature of the analysis is. It cannot be said too often: Your diagnosis must be honest, objective and thorough or your plan will fail. You want to be sure you are working with facts, not assumptions. For example, it is important to know if lower sales means you are losing customers or if it means your existing customers are buying less.
Module 3 of Planning for Business Growth: A Step-by-Step Guide provides examples of ways you can measure the current performance of each division.

Your measures for marketing will show how well your business is making the necessary transition from prospecting to customer service. While marketing measures are often subjective, you can set benchmarks that track the success or failure of everything from your companys marketing strategies and the eectiveness of your sales sta to product pricing and quality control. Unlike marketing, human resources and nance, there are few general rules for operations because it is industry specic so you will have to adapt the tips to meet your specic needs. The section looks at the four general industry types retail/wholesale, manufacturing, service and hybrid (a combination of more than one of the other three). It suggests measures to examine things such as capacity, the role of suppliers, and the time required to process an order, produce a product or complete delivery. Human resources measures explore how well your business recruits, develops, compensates, supports and manages sta. As you grow, you may be moving from an informal, collegial atmosphere to one that is more structured. You need to be sure you have the right sta, people who share your values and can grow with your company. This means taking the time to recruit and train new people carefully, and taking action quickly if they cannot handle the work. It may also mean changing the duties of existing sta. Finance is the most complex division, but it also oers the most objective measure of the health of any business because rules are set and followed in a fairly consistent and systematic manner. The diagnostic measures provided help you measure the nancial strength of your business as you shift from a structure that is more internally focused to one that will meet growing external demands. You need to develop an operating, capital and cash ow forecast for your business and recognize that this is an integral part of your business operation.
STEP TWO FOCUSING ON KEY DIVISIONS AND SETTING GOALS The systematic and realistic diagnosis of each of your four business divisions will uncover both issues and opportunities. It will arm you and your team with the detailed, objective information you need to identify which division is the most critical right now and to set goals.
8 Planning For Business Growth: A Step by Step Guide

Step Two involves a series of smaller steps. They include a SWOT (strengths, weaknesses, opportunities, threats) analysis, a review of your companys values, vision and mission and an assessment of weaknesses identied in your diagnosis. At this point, you will be able to identify your critical division and then set your goals based on your capacity to take on additional work. Strategic Assessment SWOT Transitioning from the Present to the Future Most people are familiar with SWOT, a common technique used in planning that stands for Strengths, Weaknesses, Opportunities and Threats. It follows the diagnosis step so you have condence you are working with facts. Strengths are those aspects of your business that probably allowed you to achieve your success to date. Be as specic as possible. If customer service is seen as a marketing strength, exactly what does that mean fast, friendly, convenient? Weaknesses are usually found in areas of the business that are least valued or least enjoyed by management. Some weaknesses can be addressed as the business grows, others must be addressed before growth is possible. When a business is small, strengths can overcome weaknesses, but as it grows weaknesses may hinder growth. Business owners moving from being an entrepreneur to manager to executive must be both self aware and honest with themselves. Sometimes an outside consultant is needed for greater objectivity. The Opportunities you act on today are your strengths tomorrow. They can be found in every division from marketing achievements to an improved line of credit. A business must consider opportunities in all areas in order to grow protably. Threats can come from within the business, such as poor relations with suppliers or losing a key customer, key employee or key investor. They can also come from outside of the business, such as growing competition or new legislation. Watch what is happening outside of your business when completing your SWOT analysis because this can alter your operating conditions, creating both threats and opportunities. For example, you need to consider trends and technologies that have the potential to bring opportunity to one business and disaster to another. You should watch and learn from your direct competitors, especially the market leaders, and keep track of indirect competitors.
Table 4 - Use a grid like this to help formulate your thoughts on your business Marketing Strengths Weaknesses Opportunities Threats Operations Human Resources Finance

Figure 4 - The four elements of SWOT represent past and future, positive and negative aspects of your business Positive Perspective

Strengths

Opportunities

Past View Negative Perspective

Future View

Weaknesses

Threats

Planning For Business Growth: A Step by Step Guide

Values Vision Mission There are many views of what values, vision and mission mean and how they impact a business. Here are basic denitions: Values dene what a business will and will not do. They provide boundaries and direction for the planning process. The values of smaller rms usually reect the values of their owners. You need to know what is truly important to your business, and plan in accordance with these values. Dont try to separate personal and business values, in the long run this does not work. And conicting values can lead to conicting messages with devastating consequences confused employees are not productive and confused customers stop buying. Vision is simply where you see your business in the future. Your plans then help you set goals and strategies to reach this vision. Do you want your company to grow in size? Do you want higher prots? Vision is dynamic; it changes and grows over the years. When Pierre Omidyar began a company to buy and sell collectable Pez dispensers, he had no idea he was creating eBay. Vision and commitment to the vision provide both direction and the reason for that direction. Your diagnostic phase tells you where your business is at today, and your vision is your dream for the future. Your business plan must be consistent with your vision and with your values. The main dierence between vision and goals is the time frame. Where goals are short term, vision tends to be long term. Mission is your companys reason for existence, and is usually geared toward your customers and how you serve them. Many mission statements incorporate values within them, by referring to employees and the community at large. Your mission may change to include new groups of customers or new product lines. Where the values and vision concentrate on internal matters, the missions focus is external. Mission statements help keep your team on the same path. They must be understood internally, but lived out externally! If you are committed to the planning process, you should revisit your values, vision and mission. They are important aspects of the plan and your business. Assessing Your Weaknesses You must deal with any gaps you found when diagnosing the health of your business before you can concentrate on growing the business. As Table 2 shows, there are a number of dierent types of business plans, depending on whether your company is mature or volatile. If your analysis shows you are experiencing serious threats, you should consider a plan that allows you to pause and x the problems before growing.

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Planning For Business Growth: A Step by Step Guide

The following are examples of problems you may have uncovered, and the critical division you will need to examine: Ongoing quality or on-time performance problems (operations is the critical division). Problems with cash ow or nancing capital assets (nance is the critical division). High sta turnover or a lack of necessary expertise (human resources is the critical division). Loss of customers to competitors (marketing is the critical division). In each of the examples, you will develop a foundation on which to grow your business in the future. Many businesses choose to slow down expansion for a year or two so they are well prepared before embarking on the next level of growth. This is a dicult decision, especially for businesses used to continual growth and for entrepreneurs who are sales and marketing oriented. However, growing your sales when the nancial, operational and human resource infrastructures will not support growth often ends in business failure. Choosing Your Critical Division Regardless of whether you are planning to grow or consolidate, you must decide which division is the priority before you start to identify and implement strategies. This decision is based on the your capacity to generate and take on additional work. Some of these issues are calculated while others require you to make a judgment based on your experience in the industry and knowledge of your business. Capacity and roadblocks are two factors to remember when determining your critical division. Capacity is your ability to generate, produce/perform, nance and sta additional business activities. Roadblocks are issues that get in the way of capacity. Your diagnosis and SWOT analysis should show your current business capability. Set a target, such as increase sales 30% next year, based on the introduction of a new product and ask the following capacity questions: Marketing Can we increase sales with our current marketing strategy? Operations Can we produce or provide the required goods/services to achieve the sales increase? Human resources Can we sta the company if we achieve the sales increase? Finance Can we nance the capital assets and increase working capital required to achieve the sales increase? If any of the answers are no, you have reached a roadblock. Look for the most dicult roadblock to overcome and you have found your critical business division. Your Critical Business Division While all divisions are important, the planning methodology determines which is the most important right now and develops the plan around it.

Planning For Business Growth: A Step by Step Guide

11

Using the example of a 30% sales target based on the sale of a new product to existing customers, heres how to identify the critical division: Marketing capacity: The marketing team has been asking for this new product for two years and is convinced there would be enough demand with some increased marketing materials and an update to the company website. Operations capacity: The company has a design for the new product, and the inputs can be purchased from existing suppliers. An additional piece of equipment is needed, but it is readily available and will t in the existing production area. Human resources capacity (sta ): Additional clerical sta will be needed but this can be managed through an internal promotion that leaves an entry-level position, which will be easy to ll. The newly promoted individual has already begun training. The roadblocks here are not insurmountable. Human resources capacity (production): The new piece of equipment requires a trained operator, and it will be costly or dicult to recruit this person. Existing sta need six months of training before they can produce the new product. These are potential problems. Financial capacity: The down payment for new equipment and the increased working capital requirements are more than covered by the increase in company prot. Any short-term cash shortfalls would be nanced with the line of credit. This analysis shows nancial capacity after one year. Since the most dicult roadblock is in human resources, this division becomes the centre of the planning and the other divisions are planned around it. Each team bases its goals and strategies around the human resources plan. Setting Goals Now that youve determined which division is the most critical, it is time to set some goals based on your analysis to date. These goals must be SMART or: Specic Measurable Achievable Realistic Time Limited Each division will have goals that help achieve the sales growth target and also contribute to the ongoing goals of running a successful company. While you will be creating goals for all divisions, you should start your planning with your critical division. Moving away from our specic example above of a 30% sales target, here are examples of goals a company may employ in dierent business divisions. Marketing Goals By the end of the year we will: Increase our sales to customers between 20 and 35 by 10% Add three additional products to our product mix Review our pricing policies and report ndings to the VP of marketing Develop a promotional campaign for our newest products and implement this plan for the Christmas sales season
12 Planning For Business Growth: A Step by Step Guide

Operations Goals By the end of the quarter we will: Reduce our product processing time by 10% Reduce our error rate from 5/1000 to 3/1000 Reduce our waste metal from 5000 kg to 4500 kg Increase the number of tax returns per employee from seven to eight per day Human Resource Goals By the end of this year we will: Reduce voluntary sta turnover to 10% of full-time sta per year Develop a training plan for entry-level employees Review current sta benets and report back to the planning team Develop a wage grid and report to the VP of human resources Financial Goals By the end of this year we will: Reduce our collection period on accounts receivable from 55 to 45 days Provide plan-to-actual reports to all senior sta within ve working days of the end of each month Review the entire management information system with help from the other divisions, and report back to the president of the company Notice that some of these are measured in terms of quantities, and others are either done, or they are not done. The goals lead you to Step Three selecting and shaping the strategies that will help you achieve the goal. STEP THREE D E V E L O P I N G YO U R B U S I N E S S S T R AT E G I E S If the goal is the destination, the strategy is the path you take to reach it. Some strategies address more than one part of the business, for example: Pricing aects marketing and nance. Hiring levels involve human resources and operations. Customer service policies are both human resources and marketing. Capital purchases are both operations and nance. The strategies should not be dealt with in isolation. A strategy in one division may have a direct or indirect inuence on another division. Managing these interactions is one of the skills required in managing a growing company.
Module 3 offers dozens of business strategies for each of the four divisions. They represent ideas used in different industries and under different circumstances, and should be used, modified or ignored depending on your situation.

Marketing Strategies Before you pursue a marketing strategy you need to know you have the operational, nancial and human resource capacity to meet any increased demands. Marketing strategies can concentrate on nding new customers or promoting new products, or a combination of the two approaches. In the marketing section, you will nd strategies that deal with customers, products, pricing, distribution and promotions or sales.

Planning For Business Growth: A Step by Step Guide

13

Operations Strategies As is the case in other activities related to operations, the strategies outlined are more of a catalyst since the operations division is so industry specic. That said, there are some common objectives for operational strategies, such as: Increase the companys output whether in terms of manufactured units (manufacturing), hours billed (services) or units sold (wholesale/retail). Increase the companys eciency making more units faster at less cost. Decrease the companys costs including everything from the input costs to operating costs. Human Resources Strategies A growing business needs a systematic human resource plan that anticipates your companys future needs. Implementing this plan as you achieve specic nancial objectives is one of the best ways to grow your business in a controlled manner. Human resources strategies will help you structure the formal recruiting, orientation, training and development, and compensation programs you will need to move ahead. Finance Strategies Finance strategies are critical to the success of any growing enterprise yet business owners often avoid them because they do not fully understand this division. Finance is just like any other part of the business. It is essential to your success and it must be managed and planned. The strategies presented in Module 3 will help you with forecasting, cash ow (current assets), planning and control. Consolidation Strategies In addition to strategies that specically address each division, Module 3 also includes strategies for companies whose very survival is threatened. These strategies will support consolidation or even contracting of the business until the situation improves. If this is the approach you take, you will still need to follow all the steps, including: Perform a complete diagnostic and SWOT analysis Determine roadblocks, which may be roadblocks to survival rather than just roadblocks to growth Select your key business division based on the most critical roadblock Set goals, starting with the key business division Monitor your progress Running a successful business means making dicult decisions. Delaying tough decisions can damage your business, and result in business failure. Making mistakes is a natural and necessary part of business development. Fixing mistakes is an essential part of business growth and survival. STEP FOUR IMPLEMENTING YOUR GROW TH PL AN Implementing a plan, especially for a growing business, means making changes. This is never easy because people are driven by habit. It is important to be aware of your current behavior and be prepared to change as needed. For example, if your company is in the habit of extending credit to slow-paying customers, youll need to change this if your goal is to increase cash ow by speeding up collections.
14 Planning For Business Growth: A Step by Step Guide

You and your team must be committed to the new direction you have chosen. If you are working with a team, you can reinforce each others commitment to implementing changes. Of course, if the change is seen as arbitrary or unnecessary, it quite rightly will often be ignored. Using the previous example, the credit policy will change only if the person in charge of it understands the importance of the change and is committed to it. While a solid plan will minimize the risks, those that remain must be acknowledged and managed. The team approach helps to minimize risk and increase acceptance. It may also help to nd mentors, coaches or facilitators with specic expertise. For example, if you want to change your distribution network to a multiple chain operation, you may want to invite an employee or consultant to help with this part of the plan. It is usually easy to begin implementation enthusiastically but you may nd it harder to maintain the pace three months down the road. Enthusiasm wanes even more if it takes longer than expected to implement the plan. The hopes and dreams, so fresh during the planning process, begin to fade, and the goals become seemingly less important every passing day. It is important to encourage and keep the enthusiasm high as you enter the dog days of implementation. Review Goals Never forget that your objective is to eliminate roadblocks to growth, starting with your critical business division. Once you have your goals, examine the sequence and decide what needs to happen rst. For example, if hiring three new employees is a priority, you will want to write job descriptions and prepare an orientation checklist before you start recruiting. This will make the hiring process more eective. You may know you can get a loan for a new piece of equipment, but you still need to do the paperwork before you can go shopping. While it is important to complete some of these more trivial tasks rst, dont let this become an excuse to avoid the more important and complex tasks. Determine the Resources Required to Achieve These Goals Once you know the goals, determine the physical and human resources, both internal and external, that you will need to accomplish them. Internal resources exist within the company but may need to be redeployed to achieve the new goals. External resources need to be acquired to achieve this goal, either permanently, such as a new hire or new equipment, or temporary, such as the services of a consultant or renting equipment. Human resources include people and expertise, both existing employees (internal human) or new hires, consultants or contract employees (external human). Physical resources include equipment required to achieve the stated goal, both already owned (internal physical) or new or rental equipment (external physical).
Planning For Business Growth: A Step by Step Guide 15

Remember to include pre-implementation costs in your planning, such as: developing promotional materials market research product design preparing interim nancial statements for the bank cost accounting for a new project developing specications for equipment or machinery installation or moving time (plan for a drop in production during the move and remember that a move almost always costs more and takes longer than expected) time taken for recruiting new sta time for orientation and training
Goal: Hire and Train Two New Cashiers Deadline June 1 Task Create and run recruiting ad Review resumes and generate short list Hold first interviews Hold second interviews Extend offers Begin training and orientation Begin on-the-job training Date April 1 Assigned to Store Manager

Assign Roles Make sure each step aimed at achieving each goal is assigned with a deadline. Here is a very simple example for hiring new sta. Notice that all of the resources used here are internal. If you account for the time spent for all the tasks, you can calculate the cost of hiring and training the two new cashiers. More complex goals involve many more steps and often require co-ordination between divisions. For example, buying new equipment may mean that operations and nance work together to make the best decision, and human resources needs to be involved if special expertise is required. Review the Results Every Quarter Planning without a review is useless. You will want to look at each goal in light of the current conditions of the company and of the market, and decide whether it has been accomplished, is still in progress or should be abandoned. The review not only keeps you on track for a specic goal, but it also reminds you of the importance of the planning process in terms of the broad direction of your company. Hiring two cashiers may not seem terribly important until you remind yourself that it is essential if you are aiming to increase revenue by 30%. The review will also reduce the risk that your company will revert back to its old habits, which your planning has shown will keep it from moving ahead.
Module 3 offers more detailed information for each of your four divisions to support Steps Two and Three, including measures you can use to support your business diagnosis and sample business strategies.

April 8

Store Manager & Head Cashier

April 15

Store Manager & Head Cashier Head Cashier

April 22

April 29 May 5

Head Cashier Head Cashier

May 12

Cashier assigned to trainee

Cashier trained

May 28

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Planning For Business Growth: A Step by Step Guide

Module 3

Measures and Strategies for Business Growth Planning


INTRODUCTION This module will provide you with specic tools to help you move through the step-by-step process identied in Module 2. Keep in mind that the measurements and strategies identied in these tools are examples only. You will want to choose the ones that best apply to your business, or use them to create your own measures and strategies. This is especially true for operations, which tends to be more industry specic. What you want to do is use some of these examples to spark your own creative thinking and help you nd measures and strategies that will work for you. MARKETING FROM PROSPECTING TO CUSTOMER SERVICE When a business starts, its priority is getting customers. As it grows, more revenue is generated by repeat business so its business strategy moves from nding customers to keeping customers. This important transition must be reected in your marketing plan to maintain the necessary balance. As Figure 5 shows, you will take one of three approaches to develop your business: 1. With a customer-oriented strategy, you start by determining whether you are the only supplier for current customers and, if not, you try to get more of their business. You can also look for new customers who are willing to buy existing products or services, or ones that have been slightly modied. 2. With a product-oriented strategy, you modify or add products and services. Again you start with current customers, asking what you might be able to provide that they want. It is best to modify existing products rst, then add new products. 3. With a hybrid strategy, you are combining the rst two strategies. This can be risky if you nd you are looking for new customers and creating new products at the same time. If this is the case, you need to answer some important questions: Does my business have the capability to produce the product or provide this service? Does my business have the capacity to oer this product or service? Theres less risk if you have the excess capacity. Is there a substantial reward? Measure the cost of both money and eort against the rewards to your business. New opportunities should have high rewards.
Figure 5 Product/Customer Grid for Choosing a Strategic Direction

Potential Customers

mer S

trateg

Existing customers

Custo

Existing Products

Hy
y trateg uct S Prod

br

id

St

ra

te

gy

Potential Products

Planning For Business Growth: A Step by Step Guide

17

Some Thoughts About Marketing Some General Thoughts 1. Dont try to please everyone. Decide who you are, and whom you want to serve. 2. Recognize the dierence between need and demand. Need is something customers want; demand is their willingness to pay for it. Demand, not need, creates business opportunities. 3. Recognize the dierence between a trend and a fad. Unfortunately, this is dicult when you are in the middle of the fad. 4. Remember that customers are not always forthcoming when surveyed. When you ask what a customer will do in the future, take the response with a grain of salt. 5.Dont try to be your own target market youre probably biased. The only true test of anything is the marketplace. Some Thoughts on the Mind of the Customer Buying behaviour embraces everything from what customers will buy and how they will buy it to what they will pay and even how you get your message across. 1. It is important to understand why your current customers buy from you. Is it habit, great product, great service or any of a number of other factors? Its harder to lose a customer who buys your product or service frequently and regularly. 2. New customers are either moving from a competitor or they are new to your product/concept/service. Marketing strategies depend on the reasons customers buy products and services. 3. All customers, both individuals and commercial, are aected by rational and emotional reasons so your product must appeal to both. 4. Large organizations are more averse to risk so the safety of the product, service and the supplying company and important to their buying decision. Some Thoughts on Product Look at your product or service through the eyes of your customers, and make sure you are giving them what they want. Make sure your timing is right. Great marketers create products and services customers did not know they wanted until it was oered. Dreamers create products and services customers will want in the future and go broke in the process. 1. Customers do not buy products and services; they buy what the products and services do for them. 2. The dierence between products can be as important as the product itself, especially in a competitive marketplace. 3. Products have always gone through a predictable cycle from introduction through acceptance to obsolescence but it is happening a lot faster these days. Sometimes you must compete with yourself and drop older products.
18 Planning For Business Growth: A Step by Step Guide

4. You should brand your company and its products when applicable. This is true even for a small company because brand can often be a deciding factor for the customer. 5. The Total Product Concept can attract customers by oering products with a surrounding group of services. When products are essentially the same, the added service may sway a customers decision. Some Thoughts on Price Pricing brings together marketing and nance. It is one of the most important, and yet least considered, elements in marketing. The nance (costing) part of pricing tells you what you need to cover your costs; the market part of pricing tells you what the customer is willing to spend. 1. You may nd that justifying price increases by saying your costs have increased doesnt work because customers usually dont care about your costs. 2. It is easier to set prices correctly than to change them, especially in a lowination environment. 3. Prices must be set in terms of the way in which customers think. For example, since most people nance their cars, prices can be stated in terms of a price per month rather than the total cost of the car. 4. Prices are high or low only when compared to something else so if you can control the comparative frame you can control the perception of price. 5. Pricing strategies designed to maximize revenue will not maximize prots in any business with a marginal cost (such as retail or manufacturing). You must determine exactly what your pricing strategies are designed to accomplish. 6. Raising prices is a strategy you can use to slow growth and increase prots. Some Thoughts on Distribution Distribution or location is one of the new battlegrounds in modern marketing. In the past, a retailer was a retailer, a wholesaler a wholesaler and a manufacturer a manufacturer. Today these lines have become blurred. 1. All businesses should consider multiple distribution systems. A manufacturer can sell direct or a retailer can set up a mail order/on-line option. 2. Great distribution makes it easy for the customer to buy. This applies as much to a well-designed store as it does to a well-designed web page. 3. If you are a retailer, make a map of your store and trace with a pencil the route a customer would follow. You will soon get a sense of trac patterns and bottlenecks. 4. Like-minded customers often live in similar neighborhoods, especially in the suburbs where subdivisions are made up of homes roughly the same age. For a retailer, if you notice a pocket of existing customers (from a postal code analysis for example), a targeted mail drop will have a higher probability of success than a random mail drop.

Planning For Business Growth: A Step by Step Guide

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Some Thoughts on Promotion Many people think marketing is advertising, sales and promotion. In reality, advertising, sales and promotion are only a part of the entire marketing package. Promotion is simply communicating information about your product or company to your customers and potential customers. Choosing the message and the medium is crucial to your overall success in business promotion. 1. Dont use your company name as your headline unless you are really well known. Nobody cares who you are until they know what you do!
Table 5 - Promotional Messages Type of Message Concept Message Financial Services Registered Retirement Savings plans are a great way to save for your future.

2. As your business grows, make sure you have a great fullment strategy. This is what you give a customer who asks you for more information. It can be a brochure, a package of information or a card with your website. It is more detailed than an ad and can be a very eective sales tool. 3. There are two customer groups existing customers and potential customers. Choose the audience you want to reach, and make that communication very clear! 4. As shown in Table 5, there are three general messages to send to your target audience. A concept message tells the customer about your product in general. A company message tells the customer about your company. A product message tells the customer the specics of a particular product. 5. Never let a newspaper design your display ads, unless you want them to look the same as everybody elses. Marketing Pitfalls Not Learning to Say NO! When a business starts, it often has more capacity then customers, something that changes as the business grows. Too often, an entrepreneur nds it hard to turn down a sale and instead accepts it and tries to gure out how to deliver as an afterthought. Oering Too Much to Your Customers Sometimes, businesses have a tendency to try to keep increasing the number of products they oer. Plan additions to your product mix carefully; dont just make them because a customer asked for something. Falling in Love with a Product Take care not to keep making or carrying a product you like if your customers are not buying it, even if it is something you have always carried. All products have a life cycle and most will eventually become obsolete. Dont hang on too long. Justifying Your Price Because of Your Costs Price is a function of cost and competition. If you cannot compete, you may be better o discontinuing a product rather than hurting your price image by having a product sold at a higher price than your main competitors. The Danger in Discounting Cutting prices can increase your market size, but it can be disastrous from a prot perspective. As you can see from the Table 12 youll need to increase revenue to oset a price cut. And if the discount is not inuencing buying behavior, it means you are just giving money away.
20 Planning For Business Growth: A Step by Step Guide

Company Message We here at XYZ Financial Planning can provide for all your financial needs. Product Message Our Super Growth Wonder Fund has returned 18% over the last three years!

Friendliness Versus Speed It is important to be friendly, but good service these days means speed and convenience. All elements of distribution, from store line-ups to commercial ordering, must be predicated on speed of order and speed of delivery. Failure to Develop Information To grow your business, you will need great fullment tools such as company proles, brochures, catalogues and websites. In an information age where savvy customers are demanding more facts, this is one of the most crucial issues in business. Marketing Measures Marketing is tough to measure because there is no single, objective source of information like a nancial statement. Marketing measures are subjective, they can be interpreted a number of ways and there are no set industry standards. That said, you will need to identify benchmarks so you can track the success or failure of your companys marketing strategies. Make sure you choose measures that reveal the most important information for your business. Customer Measures (Consumer Businesses) Measure: Customer Radius Explanation: Develop a customer list by postal code or address, and sort it by a specic distance from your business to nd out how far customers are willing to travel to get to your business. Measure: Explanation: Average Purchase Use a cash register tape or count the number of invoices processed in any given time period to measure the average size of a transaction. Average Purchase (Traffic) This is for retail only. Divide the number of customers who enter the store (potential customers) into the sales over the same period of time. Used with the average purchase, it can measure the eectiveness of your sales sta and determine if your marketing eorts are drawing the right customers and generating sales. Average Annual Purchase Measure the average amount purchased by a customer in a year, and use it with your customer concentration ratio to identify better-than-average customers. This is a useful measure for companies wishing to increase their sales to existing customers. In businesses where each customer transaction is invoiced, the numbers are taken directly from the accounts payable system. In retail businesses, the average annual purchase is dicult to calculate unless there is an identier with each purchase.

Formula: # of Customers within X distance Total # of customers

Formula: Sales Customer count

Measure: Explanation:

Formula: Sales Potential customers

Measure: Explanation:

Formula: Annual sales Unique customers

Planning For Business Growth: A Step by Step Guide

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Formula: Sales from top 20% of customers Total sales

Measure: Explanation:

Customer Concentration Take the sum of the sales from the top 20% of your customers based on annual sales (if you invoice, use your accounts receivable journal) and compare this to your total revenue. Use this to develop a marketing strategy to either sell more to loyal customers or reduce your dependence on them by seeking new customers or selling more to the next 20% group. Customer Turnover Compare this years customer list and last years list. If you use a program where customers are not dropped, look at the number of customers in your system. This is a critical measure in businesses with repeat business cycles of less than one year, and is less useful if purchases are infrequent.

Formula: Number of customers lost Total number of customers

Measure: Explanation:

Formula: Revenue generated by a product or departament Total revenue

Product Measures (Product Business) Measure: Product/Department Importance Explanation: Set up your management information systems to track this information. This is important in all businesses with multiple product lines, and can be done by product type or by a group of products/services known as a department. This tells you the relative importance of a particular product or department. Measure: Explanation: Product/Department Contribution The previous measure tells you how important a product/ department is to revenue. This measure tells you where you are actually making your prot, which is very important in retail and manufacturing businesses. New Product Ratio This is a good measure of innovation, and is a very important benchmark for product-oriented businesses and those that have expanded by opening new outlets. If the ratio is too low, the company is in danger of being left behind by more innovative competitors. As a business matures, its new product ratio will slowly be reduced. Returns to Revenue A measure of quality or customer satisfaction that is important in retail and manufacturing businesses. If the number of returns increases, it may signal problems that need to be xed. In construction the number of callbacks per job is used. Product to Customer to Revenue Table 6 shows how this important measure can help to focus marketing eorts. Determine the percentage of revenue represented by an individual customer or a specic market segment, as illustrated in the example below.

Formula: Gross profit by departament or cetegory Gross Profit

Formula: Revenue generated by new products Total revenue

Measure: Explanation:

Formula: Returned sales Total revenue

Measure: Explanation:

Formula: Revenue of a particular product to a particular customer Total revenue

Measure: Explanation:

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Planning For Business Growth: A Step by Step Guide

Table 6 Product to Customer to Revenue Tables and Ratios (using a computer store as the example) Home Users Computer Systems Laptop Computers Printers Other Peripherals Parts Service Total $100,000 $25,000 $25,000 $15,000 $10,000 $50,000 $225,000 Home Users Computer Systems Laptop Computers Printers Other Peripherals Parts Service Total 10.00 % 2.50 % 2.50 % 1.50 % 1.00 % 5.00 % 22.50 % Small Business $150,000 $100,000 $75,000 $20,000 $10,000 $100,000 $455,000 Small Business 15.00 % 10.00 % 7.50 % 2.00 % 1.00 % 10.00 % 45.50 % Large Business $200,000 $20,000 $220,000 Large Business 20.00 % 2.00 % 22.00 % Government $50,000 $50,000 $100,000 Government 5.00 % 5.00 % 10.00 % 50.00 % 17.50 % 10.00 % 3.50 % 2.00 % 17.00 % 100.00 % $500,000 $175,000 $100,000 $35,000 $20,000 $170,000 $1,000,000

Measure: Explanation:

Market Share While this is a common measure in larger businesses, it is harder to estimate for smaller businesses. However, if you are in a consumer-oriented business, you can get an estimate of market size through Statistics Canada by going to www.statcan.ca/start.html and searching for Household Expenditure. Dominant Price Point The most common product selling price Find out what prices are most likely to attract customers so you can create price choices around those clusters. This is especially helpful for retail and restaurants. Cost Per Lead, Cost Per Sale Both are important measures of advertising eectiveness. You want to know that your advertising is drawing trac AND resulting in sales. If it is not, this may mean the advertising is attracting the wrong clients or your sales sta are not eective.

Formula: Annual revenue Total Market

Measure: Formula: Explanation:

Measure: Explanation:

Formula: Number of new leads Cost of ad campaign Sales due to ad campaign Cost of ad campaign

Marketing Strategies This section shows strategies to develop your market along with details, pros and cons, and tips on when to use which strategy. You will want to be sure you have the operational, nancial and human resource capacity before proceeding. Not all strategies are appropriate for all situations, and this is hardly an exhaustive list of strategies. Hopefully, this will be a spark for your teams own creative business ideas.

Planning For Business Growth: A Step by Step Guide

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Customer Strategies Strategy Opening Additional Outlets Description A common strategy is to duplicate an operation in another geographic area. Details Both outlets can have the same name and share marketing or each can have a separate name and image with a shared infrastructure. Examples of companies with more than one outlet under their control include Thrifty Foods (a Victoria, B.C.based grocery chain) and Chapters. Pros You have experience with the business, and control of the new operation Your business has a customer image and supplier relations You reduce costs by sharing overhead expenses such as bookkeeping and purchasing You may get goods at a lower cost through volume buying You can use your existing operation to train sta for the new outlet Cons You will need a manager and sta for each operation, and your own workload will grow Each operation needs a separate business plan and involves start-up costs There could be a strain on cash ow until each new outlet is in full operation Strategy Description Franchising Your company can set up a turnkey operation for a franchisee. You provide the physical location, training, marketing and purchasing support. Franchises tend to succeed in operations in which a well-honed system leads to an excellent business. Franchising is not a do-it-yourself proposition. Seek the help and advice of good franchise consultants before embarking on this strategy. There are well-known franchises such as McDonalds and Curves but many smaller companies follow this route as well. Somebody else takes on the risk of the operations You receive revenue from selling the franchise and from the ongoing royalty You have reduced costs for starting up each new outlet Usually faster than opening new outlets on your own Selling and operating franchises is a very dierent business and you will usually have to hire marketing specialists There are a number of complex legal regulations in franchising that dier from province to province and state to state You loose control of your operations and part of your image one bad franchisee can hurt the reputations of all franchisees

Details Pros Cons

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Planning For Business Growth: A Step by Step Guide

Strategy Description

Line Extension/Brand Extension Adding to your product line or modifying products can attract new customers or open up new markets. In brand extension, the product is modied slightly to meet a new market. This is a dicult strategy to get right too few products and theres not enough choice, too many and you risk diluting your overall brand and confusing customers. A company that sells wood tables could make other types of furniture.

Details

Pros Less risk if the original line is well established. Often less re-design expense Oers your customers more choice Cons You are competing with yourself If products are similar, customers could get confused Too much brand extension can work against you as customers can become confused with too many choices Strategy Description Details Double Branding/Private Labelling Some companies create a separate image if they have products destined for dierent markets. If a product is labelled for a specic supplier, it is known as private labelling. Branding strategies can be very successful especially in the small manufacturing sector. A jeweller making both ne and costume jewelry is a perfect candidate for such a strategy. Or an independent retailer could approach a small manufacturer for a privately labelled line to distinguish itself from national chains and franchises. Black & Decker produces a professional line of hand tools under the brand name Dewalt. Some supermarkets sell more privately labelled soft drinks than the heavily advertised national brands, and at a higher prot margin. Pros Provides a similar product to a new customer base Penetrate dierent markets; upscale if branding and down market if private labelling

Cons The dierences in brand must be real and be presented clearly There are costs in developing new brands, packaging and promotional material Pricing Strategies Strategy Price Packaging Description Sell products or services together or break them apart and price accordingly. Details This encourages customers to buy a group of products in exchange for a price discount. The package must make sense to the consumer or business buyer, and is most eective in habitual or impulse purchases. Examples include seasons tickets or a full meal package in a restaurant.
Planning For Business Growth: A Step by Step Guide 25

Pros Cons

Easy to implement strategy Makes the purchase easier for the customer Encourages the customer to buy more Gives up some gross prot margin Value-Added Pricing Giving away an item or product with a purchase A great pricing/promotional strategy, especially for products that appeal to children, such as toys in a fast-food restaurant. It includes promotions such items in cereal boxes, a free makeup bag with $50 worth of cosmetics or 20% more shampoo for the same price.

Strategy Description Details

Pros Preserves the value of your existing product The value to you is at cost, but the value to the customer is at retail Cons The cost of the promotional item The product/company should be complementary Strategy Description Details Pay one price Unlimited use for a single price This system works well if there is little marginal cost and excellent capacity, such a seasonal pass for a ski hill. There should be no added costs per use and customers with a pass must not be taking the place of customers paying a higher one-time cost.

Pros Cons

Up-front payments are great for cash ow Customers are tied to your product since they have pre-paid Customers often do not use as much as they think they will Unless cost accounting is done correctly, over use can hurt Not a good strategy in areas with a marginal cost or a capacity issue Captive Pricing Sell a system at a lower cost and make money on the highmargin consumable. This is a common strategy in larger industries, such as razors and blades, video game systems and video games, ink jet printers and print cartridges. The greatest risk is that if somebody competes on the low-margin consumable, you lose the advantage of the downstream income, and the price reputation of the system could be ruined.

Strategy Description Details

Pros Cons
26

Provides a long-term stream of high-margin sales Risk of a lower-priced competitor


Planning For Business Growth: A Step by Step Guide

Strategy Description Details

Price Lining / Key Price Points Providing a good, better, best price choice Price lining, such as a restaurant wine list, is an extremely important aspect of retail. The price line provides a choice for the customer, yet limits the choice to logical groupings. For example, if your lowest price is $4.99, a logical mid-range price is $19.99 and the high-end price is $49.99. For a higherpriced product, the key price points might be $14.99, $39.99 and $99.99 Price lining is an important aspect of consumer marketing, however, more and more consumer marketing techniques have been adopted in commercial marketing. If you are a wholesaler/manufacturer it is important to know what the nal selling price for your product will be and work backwards from the retail price. For example, if you know a retailer takes a 100% mark-up, ensure the wholesale price marks up to a reasonable retail price. Extra hint for luxury industriesIf you are selling luxury items, you should always have a very high price point. For example, if a jeweller sells earrings, the price line could look like this: Plain Earrings $ 24.99 Better Earrings $34.99 Fine Earrings $49.99 Outrageous Earrings $89.99 The outrageous earrings make the ne earrings appear more reasonable and provide a higher price point for customers who want to pay top dollar.

Pros Cons

Allows you to provide price choice Customers can compare within your product assortment rather than going to your competition Can only be used if you have several products in your product mix Time or Seasonal pricing Adjust price up or down during specic times Something like an end-of-season markdown is tricky. If you move too soon, you give up prot margin. If you move too late, the product may not sell or require a higher markdown. Keep track of the numbers sold at each price point so you can tell if the initial price was too high or if customers are responding to the markdown.

Strategy Description Details

Pros Cons

Allows for seasonal clearances or load balancing Customers may be conditioned to wait for the sales Customers are unhappy when a product they just bought is marked down.
Planning For Business Growth: A Step by Step Guide 27

Strategy Description Details

Trial Pricing Make it easy for a rst-time buyer. Trial pricing works well if a customer is trying a product or service for the rst time, rather than leaving one competitor for another. When it is used to encourage customers to change suppliers, there is a risk of either a price war or customers changing suppliers frequently. Some companies will have an o-price promotion program for existing customers to avoid losing customers. Trial pricing is often used for health club memberships or wireless communications where the rst few months can be free.

Pros Encourages customers to try the product or service Cons Turnover is costly when customers leave Existing customers can feel that they are paying too much Strategy Description Details Annual Volume Discounts Wholesalers or manufacturers provide rebates to customers based on their annual orders from that company. This is more of a business-to-business strategy, although cooperative selling and banking enterprises do use a version of volume rebates to members. It is often used for high-volume, low-margin (retail margins) products.Because they do not have to pass on the annual volume rebate, your retail customers are more likely to choose your products if they sell things like milk or lm that oer very little margin but provide a convenience for their customers.

Pros

Encourages retailers to promote and reorder your product Encourages retailers to limit their product line to move customers towards your brands and products Great for cash ow as you would never rebate a customer who owed you money and the discount comes after the sale

Cons The strategy may not be aordable if your own product is low margin Distribution Strategies Strategy Multiple Distribution Manufacturing Description Factory direct stores and wholesale distribution Details This can be very successful, especially with the advent of the Internet as a direct selling tool. If you still plan to sell your products wholesale, make sure your price is similar to the price charged at a retail outlet to maintain price integrity. The possible exception is where you have a factory in a remote area and people can get a bargain by coming to you. This is often used to sell seconds, slightly defective products not sold in stores. Pros Makes manufacturer less dependant on retailers Cons You can be perceived as competing with yourself
28 Planning For Business Growth: A Step by Step Guide

Strategy Description Details

Multiple Distribution Retail A business begins with one method of distribution, then expands into other types of distribution. Tilly Endurables began as a mail-order business, and now has retail outlets, retail partners, on-line sales as well as its original catalogue distribution methodology. There are many ways to be creative and oer multiple distribution methods. A record store could set up a kiosk selling soundtracks and DVDs at a local movie theatre. A bookseller could oer best-selling novels from vending machines at smaller airports that do not have gift stores. Service businesses also oer multiple distribution methods you can choose a teller, an ATM or on-line banking. The trend toward the customer doing the work previously done by paid sta can also save costs and become an eective operations strategy.

Pros Allows you to expand geographically Meets dierent customer needs Provides added convenience for customers Cons You may need to master a dierent style of selling/distributing Promotional Strategies Strategy Membership/Affinity Plans Description Programs that reward customers for repeat business. Details A common promotional strategy for customer loyalty. With todays technology, tracking rewards has become very easy even for small operations. That said, the stamp or punch card method, (buy ve cups of coee, get the sixth cup free) is a low-tech approach to reward marketing. Pros This can keep customers coming back to your business It creates a sense of community that is so important to many of todays consumers Cons It costs money, whether you are oering points or a discount There are so many of them they may lose their ability to aect buying behavior Strategy Description Details Newsletters Sending newsletters to valuable customers. A professionally edited and laid-out newsletter works well if you have information that is of value to your customer, such as tax tips from an accountant. Before you start, make sure you are prepared to commit to sending out a quality newsletter every quarter for one year. A newsletter can be emailed to a voluntarily subscribed list, linking customers to your website. Put it in a PDF format (Acrobat Viewer can be downloaded free) so it looks the same regardless of the operating system used to view it.
Planning For Business Growth: A Step by Step Guide 29

Pros You touch base with your clients on a regular basis You promote your expertise You show you take care of your customers on a year-round basis Cons Newsletters are dicult to do well, and a poor one does more harm than good They can be perceived as junk mail and discarded They are time-consuming and distribution (other than by email) can be costly Strategy Description Details Customer Events Customers are invited to a central location for a special event/celebration. A retail fashion store can hold a fashion show/pre-sale for new customers or an automotive dealership can launch the new models. In businesses with longer business cycles, such as automobiles, it oers a reason to stay in touch.

Pros Provides non-price reasons to keep customers Provides a reason to stay in touch with customers Customers get together in a casual atmosphere with a business purpose You present your product/company to a receptive audience Cons Can be time consuming and expensive Can become more a party than an eective promotional event Strategy Description Details Seminars and Workshops Presenting an informative seminar or workshop on a topic that demonstrates your professional competence. You can promote and arrange your own workshops, teach at a local college or hold a workshop at a trade shows. It is not easy to lead a successful seminar so some companies hire people with appropriate expertise to lead seminars on their behalf.

Pros Great way to build credibility in your industry Valuable exposure for the company and its products/service A good performance can get great results Cons If you do a poor job, you can do more harm than good Involves substantial time commitment to promote and develop workshop materials Strategy Description Details On-site Signage and Local Area Mail Outs Post a sign promoting your company at a job site and follow up with a neighborhood mail out. Many neighbourhoods are built up in a similar time period so the needs of homeowners are similar. When one roof needs to be replaced, others will need to be replaced.Ask permission to post a sign at the site promoting your company and make sure operations vehicles used for the job are well signed.

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Planning For Business Growth: A Step by Step Guide

When the work is done, mail an information card to neighbours in a one- or two-block radius. This is an excellent and inexpensive way to promote services such as gardening, painting or home renovations. Pros Increases your credibility locally; potential new clients can ask their neighbours for a reference

Cons The follow-up cards can be viewed as junk mail O P E R AT I O N S F R O M C H A O T I C T O S Y S T E M AT I C Unlike the other divisions, where general rules apply to all businesses, the operations division is more industry specic. Ecient operations are an essential foundation for the growth of any business whether it provides services or produces goods. Techniques and strategies that work in retail may have no use in manufacturing. Measures that are important in a service business may not apply in wholesaling. Operational issues for start-up businesses are also very dierent from those of stable or growing businesses. You need to use your own judgment around how to apply the measures and strategies found in this section to your business. The goal here is to provide you with some of the over-arching principles that deal with all types of businesses. You or the people within your organization have the technical knowledge needed to adapt these practices to meet your needs. This guide cannot provide industry-specic technical advice but it can help you refocus your eorts to become more ecient and eective at whatever you are doing. In general, your business will t into one of the following industry types: Retail/wholesale businesses generally buy and sell things made by others without substantially changing the product. Manufacturing businesses make things out of dierent inputs, and include traditional manufacturing as well as industries such as food processing and even restaurants. Service businesses provide services to customers such as personal services or travel services. Hybrid businesses combine more than one of the above. For example, a plumbing contractor who provides services and sells parts at a markup for these services or a business in custom manufacturing/direct sales that combines manufacturing and retail. Some Thoughts About Operations Capacity is at the heart of every business Capacity applies to every type of business and even non-business applications, and is the centre of all operational improvements. As illustrated in Figure 6, capacity is a function of production over time. It can be measured for everything from billable hours a week to units of production an hour to number of haircuts a day.
Planning For Business Growth: A Step by Step Guide 31
Figure 6 Capacity and Market Demand

Current Capacity

nd ma De d te jec Pro
Under Capacity Over Capacity

You must address three issues in order to develop a capacity strategy: 1. What is your current capacity? 2. What capacity will you need in the next two years? 3. How can you increase this capacity? You do not have an operational problem if you currently have more capacity than you need. If you project increased sales, you want to look for ways to increase capacity before you risk having more demand than capacity. Or you may want to change your marketing strategy (such as reducing sales eorts or increasing prices) to reduce the projected demand.
Figure 7 Capacity and Decision-Making The problem with services is that they cannot be put into inventory and therefore you must pland around peak demand

Backlog is a Symptom of a Capacity Problem Backlogs or waiting lists are symptoms of a capacity problem. If you want to grow your business, you must increase your capacity. If you want to slow your growth, modify the demand for your product by adjusting your marketing strategies. While this is a simple concept, it is also profound and has major implications for your business. Capacity costs money and therefore must be nanced. If you have too much capacity, it will mean added costs. If you have too little capacity, you risk losing customers because of backlogs. Some businesses have the option of stockpiling products during slow times and selling them when demand is high. Obviously this does not work with services so if you have a service industry you need to plan around peak demand. Seasonal Businesses Need More Flexibility Some businesses run fairly consistently throughout the year; others are seasonal with peaks and lulls at dierent times of the year. Fixed costs, such as rent, lease and loan payments, must be paid despite these seasonal uctuations so the business operations must be exible. Every Business has a System Every business, from a fast-food restaurant to a service station, has systems that start when a customer enters the business or places an order, and continue through the purchasing/manufacturing process to billing, delivery and customer service. Often these systems evolve over time, with many quick xes rather than a complete redesign. In small businesses, owners often do all of these things, and keep all of the information in their heads. As a company grows, this becomes impossible. Design Systems for the Rule, not Exceptions Many companies design systems that will meet all contingencies when most of the time they are dealing with routine situations. For example, you might improve your eciency by replacing specialists with generalists. While specialists can handle the most complex jobs, in most businesses the greatest amount of work is simple and straightforward and can be handled by a generalist with access to information through a computerized database.

If Production is greater than demand, there is a surplus which can be put into inventory.

The problem with services is that they cannot be put into inventory and therefore you must plan around peak demand. Supply of Products or Services

Demand for Products or Services

Your productive Capacity

If demand is greater than supply, then there is a backlog.

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Planning For Business Growth: A Step by Step Guide

Customer Service is Personal and Systematic Shorter lines and quality products do more to improve customer service than friendly clerks. Make sure your sta are able to provide excellent customer service through well-designed processes. A hotel that promotes ecient checkouts is working against its own customer service if the desk sta also have to answer the telephone. Vendor Relations is a Critical Component of Operations Your suppliers are an important part of your operations, and you should rank them on issues such as responsiveness, minimum orders and clarity of invoicing as well as price. Wal-Mart provides suppliers with internal, condential sales data so they can better anticipate purchases and match production to ordering. This leads to lower inventory costs for both Wal-Mart and its suppliers. Design Decisions are More Than Marketing Decisions A new business develops products in response to market demands. Once the company is established, considerations such as existing infrastructure and existing inventory enter the mix. It is less risky to add a new product that can be made with existing equipment for the market you already serve than to plan a new product that needs new equipment to capture a new market. Everybody Needs to Know the Whole Story When a company is small, everybody knows everything. As it grows, people can become disconnected. When an individual does not understand why a task is important, they are less likely to do it well if at all. Operations Pitfalls Expanding Capacity Too Soon As a business grows, it needs to increase capacity by adding equipment in a manufacturing business or hiring new sta in a service business. The higher overhead costs become an issue if the increased sales do not materialize. Opening Multiple Outlets/Running Multiple Crews Without a Dierent Structure As a business grows, a new outlet, such as a branch oce, new store or branch plant, can allow it to produce more. In a location sensitive business, it can also sell to a dierent geographic market. This can become a problem in businesses structured for a single location/ single crew type of operation. As the number of outlets grows, the management structure changes and there is a need for a supervisory level between the owner and the employees, such as a job foreman or new store manager. This changes the culture of a company where everybody knows the owner. If employees are used to dealing with the owner, they may be tempted to bypass their new supervisor and take issues to the owner. An owner who is not prepared for the new role as a manager of managers may undermine the supervisor.

Planning For Business Growth: A Step by Step Guide

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Failing to nd Bottlenecks One of the easiest ways to analyse your operation is to staple yourself to an order. Once you have followed the order you should do the following: Determine the specic steps for your customers to order and for that order to be fullled. Start with a regular order. Review the routine process, and determine how specic exceptions are handled. .Identify any bottlenecks. Make an eort to x the bottlenecks. A company oering professional forestry services was having trouble increasing its capacity. It found that almost all its jobs had to be mapped and the mapping department was at capacity. By hiring an additional mapping technician and buying a new computer, software and plotter, the company increased its production by 40%. Operations Measures
Note: These measures will provide a guideline, but business owners must adjust them to they are relevant to individual situations. The following are a combination of objective and subjective analyses.

Formula: Maximum production Time period

Measure: Explanation:

Capacity Measure current capacity in terms such as units/day or billable hours/year. In the above equation, you can also replace maximum production with a dollar amount. Utilization Measuring your actual production against maximum production is an excellent planning tool because it shows how close you are to full capacity. Peak Utilization This measure shows how close to capacity you are during your busiest month. An example would be hotel capacity in the busiest month. Order Processing Time Time from an order being placed to being processed An excellent service measure that reveals any gaps between sales and manufacturing. It can be simple, the average number of rings it takes to answer the telephone, or complex, the time required to provide a requested quote for a job. Product Processing Time Time required from when an order is placed to when the item is produced Look for ways to reduce this time period if you are losing customers because production is too slow. This is becoming an important non-price competitive factor. Seasonal Variance Range This measure is a simple way to calculate seasonal variance.

Formula: Actual production Maximum production

Measure: Explanation:

Formula: Peak monthly production period Maximum production period

Measure: Explanation:

Measure: Formula: Explanation:

Measure: Formula: Explanation:

Formula: Peak production Maximum production

Measure: Explanation:

Low production Maximum production

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Planning For Business Growth: A Step by Step Guide

Measure: Formula: Explanation:

Order Delivery Time Time from processing to when the customer receives the product Ecient ordering and production mean little if there is a shipping backlog because the customer still does not have the product. You can add up the order processing, product processing and order delivery for the total processing time of your product or service. Quality or Defect Rate Usually used in manufacturing businesses, this measure looks at quality before the product leaves the factory. Customer returns are another quality measure discussed in the marketing section. Inventory lead time Time (in days) to order and receive inventory Compare this with inventory turnover and use them together to determine inventory turnover targets. Minimum orders and shipping fees should also be taken into account when determining inventory levels and triggers for re-ordering. You will nd more information about inventory in the nance section. Supplier Satisfaction Subjective measure of your dealings with the supplier Use a supplier evaluation form to help you determine if your suppliers are as good as they should be.
Formula: Defective products Total products

Measure: Explanation:

Measure: Formula: Explanation:

Measure: Formula: Explanation:

Operations Strategies Operational strategies are business specic so this section is intended to act as a catalyst for dierent strategies and ideas you might want to employ. Common objectives of operational strategies include: Increasing the companys output whether it is manufactured units (manufacturing), hours billed (services) or units sold (wholesale/retail). Increase the companys eciency making more units faster and at a lower cost. Decrease the companys costs for everything from the input costs to operating costs. Procurement Strategies Procurement strategies help you reduce input costs by re-examining your relationships with suppliers and working with them for better eciencies in inventory levels, order/shipping times and prices. Strategy Description Details Implement a Just-in-Time Inventory System Ask suppliers to deliver supplies when you need them, reducing your holding costs. This is part of a comprehensive procurement strategy. You will have to share forecasts and other information with suppliers since they become your partners in the overall distribution chain. It is common in construction to order to site for use.

Planning For Business Growth: A Step by Step Guide

35

Annual volume discounts, which come into play if you order a certain amount in a year, are credited once a year. If you negotiate an o- invoice discount, this is taken o each invoice and gives you a better idea of the actual cost. Pros Reduces your inventory levels and holding costs Reduces obsolete inventory as only current inventory is purchased Cons Requires stronger bonds, often with fewer suppliers May lose order volume discounts The discounting structure can be a downside Strategy Description Details Have Suppliers Add Value to Your Manufacturing Processes Suppliers process inputs to meet your specications. This can be a win-win if the supplier has processing equipment and the manufacturer does not. Examples include a manufacturer ordering pre-cut material to specic specications, a computer manufacturer buying pre-loaded software or a restaurant purchasing special cuts of meat. It is important to agree on specications ahead of time, and have a comprehensive quality control program in place. If you are a supplier, this is a great marketing opportunity.

Pros Cons

Speeds up your manufacturing process Frees up your sta


Saves you money if you would otherwise need additional equipment or sta

Makes the ordering function more complex Costs more than buying the raw materials Means you lose part of the manufacturing process Review all of Your Supply Relationships. Review relations with all suppliers on an annual basis with respect to price, quality, responsiveness, service and other factors important to your business, starting with your largest suppliers. Often the only reason for using a particular supplier is that a company has been using them for a number of years. It is important to systematically review:quality of the product or serviceon-time performancecredit and discount termsproblem facilitationpersonal relations with sales and accounts receivableYou dont have to threaten to leave, but sometimes you can get improved credit terms, or even prices just by asking. Remember that all your suppliers including your nancial institution are suppliers in a competitive marketplace.

Strategy Description

Details

Pros Saves you money Cons Takes time and eort

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Planning For Business Growth: A Step by Step Guide

Strategy Description Details

Review Overhead Expenses Go through each expense to determine if you are truly getting value for your money. As revenue grows, many entrepreneurs fail to watch the expenses. Having a person who controls costs, such as a corporate controller, is essential to the ultimate success of the business.There are companies whose entire business is saving you money by providing this kind of service. Areas to consider include: Communications: Even a medium user of telephone, Internet and mobile telephone services should always be looking at ways to improve eciencies and reduce expenses. Ask a sales representative to put together a comprehensive monthly plan, or examine bundled services or Voice over Internet Protocol (VoIP). Company Benets: Have your various suppliers re-bid on your business. Benets can account for up to 35% of wage costs so this can save a great deal of money. Power consumption: If you are a large power consumer, review your energy consumption on a regular basis. In B.C., the BC Hydro PowerSmart program can help industrial power users save money. For more information see www.bchydro.com/business/investigate/investigate834.html. Travel Costs: It may be as easy to book online (using airline or hotel websites or services as expedia.ca) as it is to use a travel agent; however, if your needs are complex, you should spend the extra money on an agency to ensure that your travel arrangements are made correctly.

Pros Cons

Can save thousands of dollars, and add up over the years Involves a picky, administrative exercise, and must be done by the right kind of person rarely the owner Sell Somebody Elses Product as an Agent Find a supplier to provide the entire product This is a great way to use a suppliers expertise (operations) to increase your product mix (marketing) in a cost-eective manner. For example, a pub can allow patrons to order pizza from the local pizza parlor after its kitchen has closed.

Strategy Description Details

Pros Cons

Provides your business with added revenue Oers your customers added convenience Oers benets to your business and your supplier Provides opportunities to enter new businesses with little or no risk Requires co-ordination and co-operation Reduces your prot margin in an area where you could provide the product or service yourself

Planning For Business Growth: A Step by Step Guide

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Strategy Description Details

Develop a Quality Management Program Set and monitor measures for specic processes and quality assurance Competitive forces in todays marketplace mean that quality is no longer value added, it is required. A growing business needs to take a careful look at process management and quality. Certication programs like International Standards Organization (ISO) (www.iso.org ) and Six Stigma are worth examining if you plan to develop a formal, quality management program for your growing business. When an operational system is in place, everyone should follow it until it is replaced. There may be other ways to get the job done but once a preferred process is chosen, it should be followed by everyone until a new one is adopted. This is a greater challenge in a growing business where people are used to doing things their own way. This can make it hard to co-ordinate projects and to convince sta to move to a standardized process. The ISO certication program summarizes eight quality management principals. See: www.iso.org/iso/en/iso9000-14000/understand/inbrief.html Principle 1 Customer focus Principle 2 Leadership Principle 3 Involvement of people Principle 4 Process approach Principle 5 System approach to management Principle 6 Continual improvement Principle 7 Factual approach to decision making Principle 8 Mutually benecial supplier relationships

Operational strategies are very industry specic. What is universal is the need to increase capacity and to continue to be cost eective. Pros Improves quality and consistency of any process, including production and provision Provides data to support marketing

Cons This involves a lot of work, and it may sometimes feel like there is little return for the eort made.

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Planning For Business Growth: A Step by Step Guide

HUMAN RESOURCES FROM COLLEGIAL TO STRUCTURED Human resources represent an especially challenging area in a growing business for a variety of reasons, many of them linked to the fact that the business is often moving from an informal, family-style atmosphere to a more structured organization. Growth aects the number of positions, the type of positions and the organizational structure. Since people are usually the most exible resource in a company, it is easy to put o human resource decisions and strategies. Many business owners nd it tough to tackle human resource issues, and the problems take longer to surface. So it is not surprising that human resource decisions often lag behind other business decisions, something that can be extremely damaging to a growing business. It is always wise to have a systematic human resource plan, especially if your company is growing. You need to anticipate your needs and meet them as you achieve specic nancial objectives if you want to grow your business in a controlled manner. Some Thoughts About Human Resources
Note: The following points relate to the four areas of human resources: needs analysis and recruiting; training and development; compensation, and management/supervision.

Needs Analysis and Recruiting 1. If it is dicult to anticipate your needs as your company is growing, you will want to look for people who are exible and willing to take on new tasks. 2. As your business grows, your needs may become more specialized and you may need help to judge whether individuals have the right expertise. For example, ask your accountant to assist when you are hiring a bookkeeper. 3. Recognize there is always a trade o between hiring for skill and experience only, and hiring for attitude only. Both are important. 4. If you have the choice of hiring a slightly over-qualied person or a slightly under-qualied person, hire the one who is less qualied. If your company is growing, you want people who are reaching for the next level rather than those who are content with where they are. If a position is specialized, hire the best person with the best attitude. Conducting Job Interviews There are only two reasons to ask a question to gather information to support hiring an individual and to determine if there is a reason why they should not be hired. There are several kinds of interviews: Candidates anticipate a traditional interview (e.g. Where do you see yourself in ve years?) so you dont learn a lot about them. Questions in a behavioural interview probe a candidates past on the premise that the best predictor of future behavior is past performance. In the stress interview, a recruiter may just say nothing and observe what the candidate does, or ask candidate to open the window in a skyscraper whose windows do not open.

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Microsoft has popularized the puzzle interview. Some questions (e.g. How can you measure exactly four litres of water if you have ve-litre and a three-litre containers?) have correct answers and determine the ability of the candidate to solve problems. Others (e.g. How many gas stations are there in British Columbia?) show the thinking process required to make an estimate.

Job Descriptions A growing business is well advised to create job descriptions that focus on results and objectives rather than on tasks. This allows you to clearly determine desired outcomes, and to ensure the job description leads naturally into performance. A person who performs all the tasks but does not achieve the results may have little value to the company. Training and Development 1. Have a formal orientation for new employees, and make sure expectations are clear. Prepared a checklist with everything from the location of the washrooms, breaks, hours of work and illness policies, and review it with the new employee. 2. When teaching a new skill, keep in mind that people learn in three ways. Visual learners learn by sight and tactile learners, also known as kinesthetic learners, learn by doing. The least common are auditory learners who learn by listening. 3. Explain things in context. Telling someone why something is important helps reinforce the importance of completing a step within the task. 4. As your company grows, make sure your sta have opportunities for mentoring, coaching and further training so they develop skills the company needs. Compensation 1. Compensation includes wages as well as statutory benets such as employment insurance, workers compensation, Canada Pension and holiday/vacation pay. These benets alone add about 15% to the hourly wage. The average company in Canada has benet costs in excess of 30% of the base wage. 2. Know all the rules. In British Columbia, you will nd information about the Employment Standards Act at www.labour.gov.bc.ca/esb/. In a unionized environment, the collective agreement is the rulebook for your workplace. 3. Wages help you recruit, but do not motivate. Bonuses motivate so it is important that performance-based compensation rewards the right behavior. For example, if you pay people on a commission basis, and they can negotiate on price, then perhaps the compensation should be based on gross prot rather than on sales. Management/Supervision 1. As a manager and as the owner you are the ultimate manager your rst priority is to create and maintain a great working environment if you want to retain sta and make sure they are as productive as possible.

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Planning For Business Growth: A Step by Step Guide

2. Regular and clear communication will do more to improve the working environment than anything. Clearly communicate your expectations, and do not assume anything, especially in times of rapid change. 3. Identify your companys critical measures, focus your management on them, track and share information, and reect the results in your compensation. 4. Let your supervisors supervise. If you interfere, this just creates frustration and confusion for everyone. 5. If your company is growing, it is especially important to identify future management/supervisory needs and start developing leaders now. Human Resources Pitfalls
Note: Human resources needs to be examined from two points of view the owner/manager as an employee and the owner/manager as the company CEO.

Owner as Employee Failing to Dene Your Role Within the Company s your company grows, make sure you have a clear denition of your role so you dont wind up doing whatever is left over. Look at what you can do, what you want to do and what needs to get done. Be aware of your own skills. You do not have to know how to do everything, but you should have an understanding of all areas of your business. You may not be able to create nancial statements, but you must know how to read them. Base your decision on what you can do and what you want to do. If your company has grown from a sta of ve to a sta of 100, you will nd yourself moving from worker to supervisor to manager to executive. Some entrepreneurs do not necessarily want to stay right at the top. Bill Gates wanted to stay closer to the technology so he made Steve Balmer CEO at Microsoft. Failing to Share Information Owners must be willing to share information if they want their companies to grow, and this means trusting employees with critical information. As noted earlier, people who do not understand the whole picture cannot perform their jobs as well. Businesses with owners who do not trust their employees will not be able to grow beyond a size where the owner can personally oversee everything. This is not necessarily a bad thing, unless the objective is to grow the company. Owner as Manager Failing to Fire Quickly Enough Of all the human resources mistakes, this has to be number one! When you make a recruiting mistake, x it and x it fast. Try to recruit well, make your expectations crystal clear, provide employees with proper tools, support, training and encouragement, and give them time to learn a new position. But if there are problems, and a person is not willing to perform tasks for which they were hired, you made a mistake. Cut your losses and let them go immediately. The longer you let the poor recruits remain, the more damage is caused and the more dicult and costly it is to x later.

Planning For Business Growth: A Step by Step Guide

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One business owner reports that he hired the wrong person as business manager and it really cost his business. He was great behind his desk performing technical tasks, but never went out to see customers. Years later, we found out that our customers opinion was that we as a company no longer cared enough to send the general manager to see their facility, delegating it to the sales sta. This led to a slow but denite deterioration of our relations with our customers from which we were unable to recover. Failing to Co-ordinate Training and Recruiting Policies You have a choice either hire trained people or pay less and train people. Many people talk about hiring for attitude and training the new recruits, then nd they have neither the time nor inclination to do the training. Either strategy is good as long as you have a training plan and are prepared to follow through if you chose the second option. Otherwise you will wind up with under-performing and frustrated sta. Human Resources Measures Measure: Staff Turnover Explanation: If there is high turnover, this may signal a recruiting or morale problem, and it means you will spend a lot of time recruiting and training new sta. Measure: Explanation: Sales per Employee (FTE), Profit per Employee This measures eciency. Reductions on a year-to-year basis show more human resources going into non-operational or marketing areas of the business. If you move to more sub-contracting, the expense moves from human resources to operations. Average Salary Combined with your percent-to-sales ratio, this determines if your wage costs result from salary increases. Changes in this area are not necessarily good or bad, depending on what is happening with the sales-per-employee or the net-prot- peremployee ratios (see above). Training per Employee (Days, Dollars) This will show how much time and eort are devoted to training. Dont forget to include dedicated internal training resources. Absenteeism Days per Employee Changes in absenteeism can indicate morale problems or it could mean a bad u season. This is an indicator, but should always be taken together with other factors before reacting.

Formula: Number of employess leaving Total number of employees

Formula: Total revenue Total # of employess

Net profit Total # of employess

Formula: Total wage & benefit costs Total number of employees

Measure: Explanation:

Formula:
days devoted to staff training Total number of employees

Measure: Explanation:

Expenses devoted to staff training Total number of employees

Formula: Total sick days Total number of employees

Measure: Explanation:

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Planning For Business Growth: A Step by Step Guide

Measure: Formula: Explanation:

Employee Satisfaction Measured with various surveys As a company grows, it is easy to lose touch with how employees feel, which can result in resentment, turnover, burned-out employees and an overall lack of productivity. A company can only grow if it has a team of dedicated individuals performing beyond their ability. It is important to keep a handle on employee satisfaction and morale, based on based on variables such as:Working conditions Job contentand satisfaction Pay and benets Work groups and teamsEmpowerment Leadership Job performance/ performance appraisal Development and training commitment Communication Customer focus and quality Health, safety and environment

Human Resources Strategies Needs Analysis Strategy Determine a Long-term Staffing Plan Description Plan what your stang needs will be at dierent levels of sales. Details This is probably the least accurate of all aspects of business planning because it involves managing two variables nding the right structure and positions and then nding the right individual for each position. By linking recruiting and growth, you can link your business growth to your human resources plan. The grid in Table 7 shows how to divide your needs analysis into three categories: Sales and Marketing: Up-front people who develop and carry out the marketing/sales strategies to generate the revenue to make your business grow. Production/Operations: People involved in producing products or providing services. In a restaurant, up-front sta include hosts, waiters and bus sta. Cooks and dishwashers are in production/operations. Support Personnel: People who serve the business rather than the customers, such as payroll, accounting and information technology. You may have individuals who are currently working in more than one area but it is still best to think in terms of these three departments. You must determine how you are going to nd new customers, fulll these additional orders and support a larger business. Table 7 has columns divided into employed and contracted. Try to use contracted employees where possible, especially in support positions. It is often more cost eective to contract your bookkeeping rather than hiring a full-time bookkeeper. It is often more eective, and always more accurate, to use a payroll service rather than having a payroll clerk who spends a great deal of time understanding and updating payroll policies and procedures.

Planning For Business Growth: A Step by Step Guide

43

The Table 7 grid should be computed in dollars rather than in hours or full-time equivalents (FTEs) to allow for more eective planning and budgeting purposes. It is very important to watch the overhead line very closely. This is a fast way to lose control of controllable costs. Pros You to think about hiring before you exceed capacity Cons The plans change as you realize exactly what you need and the kinds of people you need to perform the function
Table 7 Sample Human Resources Needs Grid Marketing Employed Contracted $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $2,000,000 $2,250,000 $2,500,000 $2,750,000 $3,000,000 Production Employed Contracted Support Employed Contracted

Strategy Description Details

Use Contract Labour Contract out everything from bookkeeping and payroll to janitorial services. As your company grows, you should consider contracting out as many tasks as possible, especially those such as bookkeeping, which may be outside your core competency. All business owners must understand the Canada Revenue Agency and Human Resources Canada guidelines that distinguish between a contractor and an employee. The existence of a contract does not necessarily mean that there is a contractor relationship. One small business owner had a delivery driver who agreed to work under contract. When the contractor complained he had not been paid for minimum shifts, statutory holidays and overtime, the company found that because he was using their van for deliveries and they were setting his delivery schedule, he was ruled an employee. The business was held liable for the outstanding amounts. For more information see: www.labour.gov.bc.ca/esb/facshts/employee.htm.
(This example is merely an illustration and should not be taken as advice. See the appropriate government agencies and professional services.)

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Planning For Business Growth: A Step by Step Guide

Pros Cons

Increased exibility and expertise Reduced costs; you only pay for the services you need Less control over a contractors time Costs more than an employee on an hourly basis

Recruiting Strategies Strategy Internal Recruiting Incentives Description Encourage employees to use their network of friends and acquaintances to nd potential candidates. Details Employees know the exact combination of skills, abilities and personal characteristics you require. Make them partners in your sourcing and recruiting, and you will not only have a better choice of recruits, but also a stronger sense of teamwork within your organization. One seasonal business paid a $50 nders fee to any employee who referred a successful job candidate for their season. Pros If you have a good place to work, people will recommend friends Potential candidates will have some knowledge of the job and company before the interview Cons Hard feelings if things do not work out with the referred employee Friends who work together may have fun when they are supposed to be working Strategy Description Details Use Recruiting Staffing Agencies. Executive search rms can help with hard-to-ll positions or specialty areas such as information technology. While search agencies are most often used by larger companies, they can help with specialty or executive positions. It is worth taking the time to nd out what services can be provided because you may nd that as your business grows it is worth the cost to have the expertise.

Pros Cons

As recruiting professionals, they can often help you clarify your business needs They are able to target the best sources, including other companies, sort through piles of resumes and perform preliminary interviews Cost you will pay up to one years salary for the successful recruit of a senior manager or specialist

Compensation Strategies Compensation packages must ensure a companys ability to recruit and retain good people and at the same time be aordable to that business. As the business grows, there must also be a perceived fairness between the compensation of dierent employees. Never assume that your employees do not know other employees earn.

Planning For Business Growth: A Step by Step Guide

45

Strategy Description Details

Develop a Compensation Grid Based on Skill Level and Years of Service Determine the compensation required to recruit and retain good employees based on the skills required for a position. Table 8 shows a sample for a service business with ve-year increments and six skill levels. This grid may be subject to annual changes to account for ination or changes to your local labor market. Dierent jobs of dierent skill levels are assigned a skill level based on the education, experience or skill set required. An employee is rewarded for their service with regular increments. In this system, merit is rewarded with bonuses rather than with raises. In a retail store, a cashier might be considered to be at skill level 1 starting at $9.50 per hour and receiving a $.25-perhour increase after a set probationary period (perhaps three months or 500 hours for a part-time position). The increments would then happen annually, or every 2,000 hours (the equivalent of one full-time year).Skill categories must be assigned correctly to provide a sense of fairness.

Pros Cons

This provides you with a more transparent method of compensation and wage management issues Well-crafted compensation schemes can help reduce sta turnover It can become restrictive, which forces you to re-examine the compensation grid or compensate each person individually Compensation grids that appear to be arbitrary can create morale problems

Table 8 Developing a compensation grid Basic Skill Recruiting Wage Year 1 Year 2 Year 3 Year 4 Year 5 $8.00 $8.25 $8.50 $8.75 $9.00 $9.25 Skill Level 1 $9.50 $9.75 $10.00 $10.25 $10.50 $10.75 Skill Level 2 $11.00 $11.25 $11.50 $11.75 $12.00 $12.25 Skill Level 3 $12.50 $12.75 $13.00 $13.25 $13.50 $13.75 Skill Level 4 $14.00 $14.25 $14.50 $14.75 $15.00 $15.25 Skill Level 5 $15.50 $15.75 $16.00 $16.25 $16.50 $16.75

Strategy Description Details

Develop a Commission System Based on Gross Profit Margin Rather Than Sales. Pay 25% of gross prot rather than 10% of revenue as a sales commission. A common strategy in the auto industry where there is some negotiation on price. As Table 9 shows, it gives sales sta, who otherwise might oer a discount quickly to make the sale, an incentive to sell at full price.

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Planning For Business Growth: A Step by Step Guide

Table 9 Developing a Commission System Regular Price Selling Price Cost Gross Profit Commission Paid at 10% of Sales Commission Paid at 25% of Gross Profit $1,000 $500 $500 $100 $125 10% Discount $900 $500 $400 $90 $100 20% Discount $800 $500 $300 $80 $75

You could also pay dierent discounts based on higher or lower prot margin items to encourage everybody to think in terms of prot margin rather than in terms of sales. Pros Your sales sta is rewarded for contribution rather than just sales Sales sta, who otherwise might oer a discount quickly to make the sale, have an incentive to sell at full price

Cons You must be prepared to share cost information with your sales sta Management Strategies There are hundreds, if not thousands, of books that will tell you how to motivate sta. There are some strategies applicable to a growing business with increasing sta levels most aimed at supporting the transition from micro-business (less than ve people) to small business (six to 20) to medium-sized business (20 to 100). Strategy Description Details Formalize Training/Orientation Procedures. Develop a formal orientation checklist for new hires and at least a rough training plan for all positions you constantly recruit. Here is a brief guide to developing a training plan. 1. List the main tasks the employee must be able to perform. 2. Develop a way to explain and demonstrate each task. 3. Explain why the task is important to the job. 4. Identify some common mistakes people make and how they can be overcome. 5. Have an experienced employee work with the new person and make sure they allow the new employee to practise the tasks. 6. Provide a fast way for new employees to nd information about the best way to perform tasks. 7. Make sure there is follow-up so you know that learning has actually taken place. This is best done through observation.

Planning For Business Growth: A Step by Step Guide

47

It is important to make sure on-the-job training is complete and provides information about how to handle tasks that are not routine and not likely to come up during the training period, such as a cashier accepting a gift certicate.Here are issues that need to be addressed in an orientation plan: 1. Hours of operation 2. Scheduling, days o and illness policies 3. Forms that need to be completed. (including a TD-1) 4. Tour of the facility 5. General expectations 6. Pay days and pay periods 7. Company/work policies Pros Cons Provides uniformity in training and orientation Helps new employees start o well and reduces anxiety Ensures new employees understand your companys expectations It takes time and costs money It must be done properly or it adds no value Provide Back-up Positions. Critical tasks should have both primary and secondary personnel. Identify the tasks performed by each person in your company, beginning with the 10 most critical tasks, and determine the primary and the secondary performer. This will ensure you have a trained back-up if necessary. If more than one person performs a task, you will need additional trained back-up people. Often the tasks performed by the owner have no back up, which means the company is highly dependant on the founder/owner. This will hurt the company in the long term. Pros Cons You are less dependent on individuals There is a back up for everything from coee breaks to illness especially long-term illness If somebody is promoted or moved into a new position you have the ability to move the back-up into the starting position Added cost to train back ups Back-up sta may assume they will be promoted

Strategy Description Details

FINANCE FROM INTERNAL TO EXTERNAL Finance is one of the most objective ways to measure the health of any business because rules are set and followed in a fairly consistent and systematic manner. For entrepreneurs, nance is scorekeeping, not playing the game and most would prefer to play the game.
48 Planning For Business Growth: A Step by Step Guide

As your business grows and develops, making nancially sound decisions becomes, more and more, a part of your business strategy. Some common fallacies regarding nance include: Finance is accounting. Finance is strategic and accounting is systematic. Accounting applies rules (known as Generally Accepted Accounting Principals) and generates nancial statements. Finance involves thinking about the nancial implications of business decisions. Finance is banking. There is more to nance than banking, although understanding the requirements and conditions of your bank loans is a crucial part of your overall business strategy. Good tax advice is the same as good business advice. When making a decision, make sure that it is good for business rather than just a write o. Remember, before you can write it o, you have to write it on! Some Thoughts About Finance You should already be familiar with the key denitions involved in nancial statements. If not, you can nd more information from a number of sources including Solutions for Small Business: Business Planning and Financial Forecasting (www.smallbusinessbc.ca/pdf/bpff2002.pdf) There is a Big Dierence Between Prot and Cash A protable company may have very little cash. The prots may be tied up in inventory or accounts receivable, or may be used to make principal repayments on loans. As your business grows, cash ow becomes more important than prots. The Balance Sheet is Important, Too! It is common to look at the top line (revenue) and the bottom line (prot), and pay little attention to the balance sheet. The balance sheet is critical to a growing business because it oers a snapshot, showing what the business owns (assets), what it owes (liabilities) and how much is represented by the owners investment (equity). Dont look at nance as just numbers and equations; consider the concepts behind the numbers. Think about how the balance sheet works rather than what it is. Simply put, the balance sheet represents what your business owns (assets) and how it paid for or nanced those assets. One important, immutable fact is that every asset, whether it is new equipment or increased inventory, must be nanced. Even if you pay cash an asset to pay for another asset, that cash was originally nanced! Financing Assets: There are only four ways to nance assets in your business. You can borrow the money from a bank or other nancial institution. You can borrow from your suppliers usually for the short term. You can invest new money into the business. You can use retained earnings from previous years prots. When your business grows, you need more assets. These assets can include more current assets, such as higher levels of inventory, or more capital assets, such as new equipment. This means you will need more nancing. To grow your business, you have to plan for revenue growth, asset growth and growth in liabilities or equity to nance those assets.
Planning For Business Growth: A Step by Step Guide 49

Financial Reporting Financial statements and charts of accounts are often created with tax needs in mind. As a business grows, the information needs change. You need to review your nancial reporting systems periodically to ensure the information you need is available. Even something as simple as redening the chart of accounts can make a huge dierence. Sample Financial Statements The following is an example of a balance sheet and an income statement for a generic company. These same statements are also used for the sample nancial analysis.
Table 10 Sample Balance Sheet for Company X Ltd. Sept 30, 20X4 Year End 1
Assets $ % to Asset

Sept 30, 20X5 Year End 2


$ % to Asset

Sept 30, 20X6 Year End 3


$ % to Asset

Current Assets Cash Accounts Receivable Inventory Total Current Assets Capital Assets Equipment Automobiles Computers Less Accumulated Amortization Total Capital Assets Total Assets 150,000 30,000 24,000 48,000 156,000 316,000 47.5% 9.5% 7.6% -15.2% 49.4% 100.0% 120,000 20,000 16,000 48,000 108,000 305,500 39.3% 6.5% 5.2% -15.7% 35.4% 100.0% 90,000 10,000 8,000 48,000 60,000 292,500 30.8% 3.4% 2.7% -16.4% 20.5% 100.0% 70,000 90,000 160,000 0.0% 22.2% 28.5% 50.6% 85,000 112,500 197,500 0.0% 27.8% 36.8% 64.6% 100,000 132,500 232,500 0.0% 34.2% 45.3% 79.5%

Sept 30, 20X4 Year End 1


Assets $ % to Asset

Sept 30, 20X5 Year End 2


$ % to Asset

Sept 30, 20X6 Year End 3


$ % to Asset

Current Liabilities Line of credit Accounts payable Income Tax Payable CPTD Total Current Liabilities Long Term Liabilities Term Debt Less Current Portion Shareholders Loans Total Long Term Liabilities Total Liability Equity Owners Equity Current Earnigs Total Equity Liabilities + Equity 20,000 11,040 31,040 316,000 6.3% 3.5% 9.8% 100.0% 20,000 12,172 32,172 305,500 6.5% 4.0% 10.5% 100.0% 20,000 9,085 10,915 292,500 6.8% -3.1% 3.7% 100.0% 99,500 22,500 80,000 157,000 284,960 31.5% -7.1% 25.3% 49.7% 90.2% 77,000 24,000 80,000 133,000 273,328 25.2% -7.9% 26.2% 43.5% 89.5% 53,000 25,700 80,000 107,300 281,585 18.1% -8.8% 27.4% 36.7% 96.3% 72,700 30,000 2,760 22,500 160,000 23.0% 9.5% 0.9% 7.1% 40.5% 75,785 37,500 3,043 24,000 140,328 24.8% 12.3% 1.0% 7.9% 45.9% 106,235 44,167 1,807 25,700 174,285 36.3% 15.1% -0.6% 8.8% 59.6%

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Planning For Business Growth: A Step by Step Guide

Table 11 Sample Income Statement for Company X Ltd. $ Sales Cost of Goods Manufacturing Labour Gross Profit Overhead Expenses / Operating Expenses (indirect) O Labour + C ommissions Amortization + Depletion Repairs + Maintenance
Utilities + Telecommunications

Year 1

%
100.0%

Year 2

%
100.0%

Year 3

%
100.0%

700,000

850,000

1,000,000

360,000 98,000 458,000 242,000

51.4% 14.0% 65.4% 34.6%

450,000 120,000 570,000 280,000

52.9% 14.1% 67.1% 32.9%

530,000 150,000 680,000 320,000

53.0% 15.0% 68.0% 32.0%

78,000 48,000 5,000 9,100 15,000 10,500 10,500 5,000 4,200 4,200 38,700 228,200 13,800 2,760 11,040

11.1% 6.9% 0.7% 1.3% 2.1% 1.5% 1.5% 0.7% 0.6% 0.6% 5.5% 32.6% 2.0%

110,500 48,000 5,250 9,555 15,750 10,000 11,025 5,250 4,410 4,410 40,635 264,785 15,215 3,043 12,172

13.0% 5.6% 0.6% 1.1% 1.9% 1.2% 1.3% 0.6% 0.5% 0.5% 4.8% 31.2% 1.8%

130,000 48,000 10,000 10,490 17,000 11,805 14,000 7,500 5,290 5,000 70,000 329,085 9,085 1,817 7,268

13.0% 4.8% 1.0% 1.0% 1.7% 1.2% 1.4% 0.8% 0.5% 0.5% 7.0% 32.9% -0.9%

Rent Interst + Bank Charges Professional + Business fees Advertising + Promotion


Delivery, Shipping + Warehousing

Insurance Other Expenses Total Operating Expenses Net Profit Income Tax (at 20%) Net Profit after Income Tax

Finance Pitfalls Using Price to Grow A common strategy used to increase revenue is to cut prices to sell more products or services. As Table 10 shows, the focus on revenue can be misleading. It costs $60 to produce a product and the price is $100. Every 2% price cut yields a 3% increase in unit volume. Take a look at what happens when the price cut reaches 4% the revenue keeps increasing but the gross prot starts going down.
Table 12 Price Cut/Volume Increase Price Cut
Current Situation

2% $98.00 3%

4% $96,00 6% 103 $10,176 $60 $6,360 $3,816 Volume Increase

6% $94.00 9% 109 $10,246 $60 $6,540 $3,706

8% $92.00 12% 112 $10,304 $60 $6,720 $3,584

Price

$100.00

Volume Revenue Unit Cost Cost of Goods Gross Profit

100 $10,000 $60 $6,000 $4,000

106 $10,094 $60 $6,180 $3,914

Planning For Business Growth: A Step by Step Guide

51

Before lowering your prices, calculate the volume increase required to oset the price cut required, as outlined in Table 12. Also keep in mind that if this is a temporary price cut, you will want to be condent your customers will be willing to pay the full price later or you may nd you increased your volume for nothing. If your overheads have increased, you may be stuck with the lower price permanently.
Table 13 Volume Increase Necessary to Offset a Price Cut Gross Profit 20% Price Cut 5% 10% 15% 20% 25% 30% 35% 40% 133.33% 200.00% 400.00% 25% 125.00% 166.67% 250.00% 500.00% 30% 120.00% 150.00% 200.00% 300.00% 600.00% 35% 116.67% 140.00% 175.00% 233.33% 350.00% 700.00% 40% 114.29% 133.33% 160.00% 200.00% 266.67% 400.00% 800.00% 50% 111.11% 125.00% 142.86% 166.67% 200.00% 250.00% 333.33% 500.00% 55% 110.00% 122.22% 137.50% 157.14% 183.33% 220.00% 275.00% 366.67%

Required Volume Increase

Problems Due to Revenue Growth As revenue changes on the income statement, there is an impact on the inventory, accounts receivable and the accounts payable on the balance sheet. Table 14 illustrates this using the balance and sample income statements for Company X Ltd. (Tables 10 and 11) as the example. Turnover ratios were calculated slightly dierently to predict year-end inventory, accounts receivable and accounts payable rather than the average inventory, accounts receivable and accounts payable.
Table 14 Impact of Revenue on Inventory, Accounts Receivable and Accounts Payable Current Year Revenue Cost of Material Inventory Accounts Receivable Accounts Payable Change in Working Capital Inventory Turnover AR Turnover AP Turnover 4.00 10.00 12.00 $1,000,000 530,000 132,500 100,000 44,167 Forecast $1,200,000 636,000 159,000 120,000 53,000 Change $200,000 106,000 26,500 20,000 8,833 37,667

This analysis tells you that if the turnover ratios and the percentage of revenue used for materials does not change, every $200,000 increase in sales means working capital requirements will increase by $37,667. If after-tax prots do not exceed this amount, then the line of credit must increase. This ignores any repayment of term debt, which is not an expense to the business.
52 Planning For Business Growth: A Step by Step Guide

Many companies with growing revenues and little prot to show for the revenue increase, will nd their debt load increasing and if they have trouble nancing this, they could actually go bankrupt due to their own growth. Now change the scenario just slightly. In the example above, the collection period is 36.5 days. 365

{ }
10

This is a very fast collection period. What would happen if the collection period increased to 45 days or 8.11 turns per year? The expected inventory at the end of the year would increase from $120,000 to $147,945 for a dierence of $27,945. Now the change in working capital per $200,000 in sales climbs to $65,612.00. This is a huge change for such a seemingly small change in the collection period. The same dynamics would happen if there were changes in inventory turnover. As you can see, managing the balance sheet is as important as managing the income statement. Just as a slight change in the gross prot percentage had a huge impact on the net prot, slight changes in the accounts receivable and inventory strategies have a huge impact on the balance sheet. Financing Capital Assets with Current Liabilities (Balance Sheet Mismatch) Many businesses need to increase capacity to increase capital assets. A machine shop may need a new lathe or a retailer may need a new cash system to keep up with the increasing demand. These must also be nanced from your business, and this will aect your business in two ways you will have to make payments on the loans used to nance the assets and the new debt will aect the debt-to-equity ratio of the business. Unfortunately, many entrepreneurs nance capital assets with cash or a line of credit. This creates a balance sheet mismatch current liabilities are nancing both current and capital assets. It changes cash, a current asset, into a capital asset (the item that was purchased). This is great when the business has plenty of cash but not if it relies on a line of credit to nance receivables and inventory. It is usually best to nance your capital assets using a longer-term debt. One good, general rule for nancing capital assets is to remember that for every $1,000 in new debt, you require $25 a month in additional debt service. This will show you the link between your income statement forecast and your balance sheet requirements. Finance Measures Ratio analyses should be an integral part of the planning process because they are one of the best ways to diagnose the nancial health of a business and, therefore, its overall health. Common examples are goals against average in hockey, student/teacher ratio in education or kilometres per hour on the highway The ratios themselves mean nothing 50 km/h is not fast on the freeway but amazingly fast in a marathon. They must be compared to something, which can be done in three ways: To history (this year vs. last year) To an objective (actual vs. budget) To industry standards

Planning For Business Growth: A Step by Step Guide

53

Industry standards may take some research. The Small Business Check-up (http://smallbusinesscheckup.com/) lets you compare your business with similar businesses in your region, and helps you develop strategies for improvement. A good Canadian source is Performance Plus on Industry Canadas Strategis website at: http://strategis.ic.gc.ca/epic/internet/inpp-pp.nsf/en/Home. In the United States, the Annual Statement Studies: Financial Ratio Benchmarks from the Risk Management Association provides key ratios in several hundred businesses. www.rmahq.org/RMA/ProductsandServices/RMABookstore/StatementStudies Once you have your ratio analysis completed, it is important to integrate the nancial results to business strategies or conditions. Income Statement Ratios Per-cent-to sales ratio Explanation: The percent-to-sales ratio measures expenses and prots as a percentage of sales. For example, this might tell you that 10% of revenue went to paying the rent of the business. Percentage Increase/Decrease Explanation: The percentage increase/decrease shows the percentage change in matching income statement items. (For example, sales were up 10% or prot was down 4%). Balance Sheet Ratios Percent-to-Asset Ratio Explanation: The percent-to-asset ratio tells you where your assets are tied up as a percentage of the total asset base (i.e. 15% of the assets are in accounts receivable). It also tells you, as a percentage, how your business is being nanced (i.e. 10% of assets are being nanced by your line of credit). This is not a common analysis, but some business analysts nd it helpful. Working Capital Ratio (or the Liquidity Ratio) Explanation: The working capital ratio measures your companys ability to repay debt due in the next year. For every dollar in current liabilities, you have this number of dollars in current assets. Quick Ratio (or Acid Test) Explanation: The quick ratio measures your companys ability to repay debt due in the next year with cash, liquid investments and accounts receivable. Inventory and pre-paid expenses are subtracted because they are dicult to liquidate at their book value.

Formula:
Expense Revenue

x 100

Formula:

([

Current year expense, revenue or profit Previous year expense, revenue or profit

])

-1 x 100

Formula: Asset, liability or equity item Total assets x 100

Formula: Current assets current liabilities :1

Formula: Current assets - inventory - pre paid expenses Current liabilities

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Planning For Business Growth: A Step by Step Guide

Debt-to-Equity Ratio Explanation: The debt-to-equity ratio shows the structure of your companys nancing for every dollar contributed by the owners, how many dollars have been borrowed by banks and suppliers. This ratio has dierent meanings. It can indicate the companys capacity for asset growth. There comes a point at which lenders feel they are taking a greater risk than the business owner. There is no ideal debt-to-equity ratio. The security value of the assets determines the risk to the bank for example, a company with land and buildings has more security than one where the majority of the xed assets are computers. Related Ratios Bank Debt to Equity only includes bank debt in the numerator, as the bank is usually a preferred creditor. Long-Term Debt to Equity compares long-term debt to equity. Debt to Owners Contribution moves the shareholders loans from debt and puts them into equity. Often the owners entire initial investment comes through shareholder loans. This is an investment for practical purposes but debt for legal and accounting purposes. If there is no repayment schedule and no xed interest rate for the shareholder loan, it is more appropriate to use debt to owners contribution rather than debt to equity. The Turnover Ratios Inventory Turnover & Days Explanation: Measures the number of times a year inventory is replaced, or the number of days of inventory remaining. This is the most important nancial ratio in any business that depends on inventory.

Formula: Total liabilities Owners Equity :1

Inventory Turnover

Cost of materials Average inventory

Inventory Days

365 Inventory turnover

Accounts Receivable Turnover and Days Explanation: Measures the number of times the receivables are replaced or the average number of days it takes to collect accounts receivable.

Accounts Receivable Turnover Accounts Recievable Days

Sales Average accounts receivable 365

Average accounts receivable turnover

Accounts Payable Turnover and Days Explanation: Measures how quickly a business pays its bills by showing the number of times payables are replaced or the number of days it takes to pay an account.

Accounts Payable Turnover Accounts Payable Days

cost of materials Accounts Payable 365 Accounts payable turnover

Planning For Business Growth: A Step by Step Guide

55

Formula: Net profit Total assets

Return Ratios Return on Assets (ROA) Explanation: Measures the eectiveness of asset utilization. Presumably the more assets, the more prot the management of the company should be able to derive. Some companies will subtract investment assets from the total assets, and any income derived from those assets from the net prot gure.

Formula: Net profit Owners equity

Return on Owners Investment or Return on Equity (ROI) Explanation: Measures the return on the owners investment and on the retained earnings within the company. Just as with the debt equity ratio, sometimes the shareholders loans are added to the owners equity as a more complete measure of the investment in the business. Finance Strategies Finance strategies are critical to the success of any growing enterprise. Here are some strategies to consider along with tips on how to control and nance your business. Often business owners do not develop nancial plans and strategies because they are afraid they do not have a thorough understanding and might make a mistake. Finance is just like any other part of the business. It is essential to your success and it must be managed and planned. Strategy Description Details Develop an Operating Forecast Forecast your annual revenue and expenses and review the results on a quarterly basis. This is perhaps the most important nancial strategy in this guide. Forecasting lets you plot the nancial future of your business based on its marketing, operational, capital and human resource needs. It is a great place to do what if calculations such as What if we opened ve new outlets, and then what if we opened 10 new outlets? An operating forecast can be used to determine the viability of a new business or project, and it can be used to make business decisions for an existing business. Sta budgets, capital budgets and buying budgets are all determined based on a forecast. Banks will also use projections when evaluating a loan proposal. Projections should give a realistic expectation of what the business owner thinks can be achieved in the coming year. To be eective, the forecast is continually upgraded and adjusted through the year. If sales are trending up, then you might have to hire new sta sooner than planned. If they are trending down, then purchases may need to be adjusted so you avoid being overstocked. Your forecast should be the benchmark from which to compare your plan to actual results.

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The following steps are commonly followed when developing a forecast: Review nancial data and analysis (part of your business diagnostics). Gather other information on your industry and your market. Make assumptions and set your strategies. You may develop and test multiple strategies. Develop an operating forecast. You may develop alternative forecasts based on dierent strategies but you must choose a path for your nal forecast. Monitor your results and compare them to your forecast. Adjust your operations depending on your actual results. See www.smallbusinessbc.ca/pdf/businessPlanning2004.pdf for a sample forecast. This is for a business start-up, but the general principle remains the same. Pros Cons Forces you to think about the future of your business Allows you to re-think your expenses Provides a link between your nancial and marketing strategies If you fail to update your forecast based on the actual results, this can result in over/under buying Develop a Capital Budget Provides a one- to ve-year outlook on capital assets required by the business. A growing business often faces capital expenses such as the need for new computers or manufacturing equipment, or even a move to larger premises. These plans allow such capital purchases in a rational and economical manner. For example, a business owner may nd her growing company has plenty of equipment for the start of the job but not enough to complete it. She would create a long-term capital plan that balances the equipment needs and presents details to the bank for nancing purposes. Capital equipment has a cost attached to it. These capital costs can also be thought of in terms of the monthly nancing costs that are associated with the asset purchase. Table 15 denes the associated monthly cost to the value of a $1,000 capital purchase. Failing to do proper capital planning can result in the nancing problems described earlier. Pros Cons Allows you to nd nancing before you need it Prevents random purchases of equipment on an as-needed basis Absolutely none!

Strategy Description Details

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Table 15 Monthly Cost of Capital by Age and Interest Rate Years Rate 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 1 84.92 85.15 85.38 85.61 85.84 86.07 86.30 86.53 86.76 86.99 87.22 87.45 87.68 87.92 2 43.20 43.42 43.65 43.87 44.10 44.32 44.55 44.77 45.00 45.23 45.46 45.68 45.91 46.14 3 29.30 29.52 29.75 29.97 30.20 30.42 30.65 30.88 31.11 31.34 31.57 31.80 32.03 32.27 4 $$$ 22.36 22.58 22.80 23.03 23.26 23.49 23.71 23.95 24.18 24.41 24.65 24.89 25.12 25.36 18.19 18.42 18.64 18.87 19.10 19.33 19.57 19.80 20.04 20.28 20.52 20.76 21.00 21.25 9.89 10.12 10.36 10.61 10.85 11.10 11.35 11.61 11.87 12.13 12.40 12.67 12.94 13.22 7.15 7.40 7.65 7.91 8.17 8.44 8.71 8.99 9.27 9.56 9.85 10.14 10.44 10.75 5.80 6.06 6.33 6.60 6.88 7.16 7.46 7.75 8.06 8.36 8.68 9.00 9.32 9.65 5 10 15 20

Partners and Shareholders Strategy Take on Partners or Shareholders Description A company sells shares to friends and business acquaintances in the form of preferred shares, secured loans or sometimes going public. Details Taking on partners or shareholders is a great way to increase the capital and the expertise base of a business. It is also tricky because the owner wants as much new money as possible without giving away too much control. The investor wants to own/control as much of the business as possible. Make sure you seek professional help, in the following order: 1. Business Advisor to make sure that your agreement makes good business sense. 2. Tax Advisor to make sure that your agreement makes good long- and short-term tax sense. 3. Legal Advisor to make sure that your legal rights are protected, and that your agreement is properly documented in law. There are two separate, but equally important issues to consider when developing a partnership/shareholder agreement repayment and control. The most common control problems faced by business partners (shareholders are partners in an operational sense) involve roles and responsibilities and the future of the company. Issues with roles and responsibilities are common for both co-founders and future investors; issues around the future of the company are more common with founding partners.

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Clear roles and responsibilities avoid confusion and the risk that two people will perform some tasks and ignore others. They are especially important if an investor is going to take an active role in the company, and removing them means buying back the investment. It is also important to avoid a situation where one partner wants to enjoy the fruits of his or her labor while the other wants to continue plowing prots back into the company. And if your business has equal shareholders, make sure there is some kind of tie-breaker or dispute-solving mechanism in the shareholders agreement, such as an arbitrator or a third party who holds 1% of the shares. Pros Cons Allows increased funding without incurring additional bank debt Can provide increased expertise from the new principal shareholders Meeting the diering needs of the dierent parties involved

Investor Exit Strategy There are two common ways for investors to get their money back: Repayment: The business repays the investor with a stream of cash ow as if it were repaying a loan. In the case of a loan, the return is usually an interest and principal repayment; with an investment it is often a combination of dividends and share repurchase. Here is a simple example: Company A goes to an investor for $100,000. The company issues 1,000 preferred shares that pay a 7% dividend to the investor. The company has the right to repurchase up to 100 shares a year for $110 a share at the end of any given year. The investor receives a regular dividend and the company can eventually buy the shares back. This scenario is great for the company, however, it may be dicult to nd an investor willing to take this kind of risk. Sell for Capital Gain: The investor puts money into a company with the hope that in the long term it will either go public or will be acquired. This scenario is less common, however, there are companies and entrepreneurs who plan to sell their company or go public in the future. The Buy-Sell Agreement
These are general comments. Please seek legal advice before agreeing to any form of contractual agreement with any potential investor!

In most private agreements there are some conditions set on buying and selling shares. Large investors will often ask for some kind of buy-sell agreement, or shotgun clause. For example, Fred Founder sells 25% of his company to Irene Investor. The shotgun clause allows them to buy their partners shares. The partners have the right to purchase the shares oered at the same price. If they do not, then the oering shareholder gets the shares at that price. Here is how it would work:

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Owner Fred Founder sells 25% of his company to Irene Investor. They have a shotgun clause as described above. If Fred decides to exercise the shotgun clause, he can oer Irene $25,000 for her 25%. Irene would then have the rst right to purchase Freds 75% for $75,000. This arrangement assures a fair price will be oered to the fellow shareholder. There are dangers to this form of shotgun clause. If, for example, the minority shareholder has greater access to wealth than the majority shareholder, then the minority shareholder can scoop the company from the founder. Some variations on the shotgun clause include a minimum price, a time limit, and a business valuation. There are always risks, and it is important to be aware of those risks from the outset. In all cases, arrangements must be made to buy out minority shareholders. Current Asset Strategies
Note: The next two strategies have similar implications to the financial health of your business because inventory and accounts receivable are current assets waiting to be turned into cash. If inventory or accounts receivable account for 10% or more of your total assets, pay careful attention to these two strategies.

Strategy Description Details

Review Your Inventory and Purchasing Practices TODAY This review should cover both the number of items purchased and the quantities in which they should be purchased. As you saw in the analysis section, inventory ties up cash and costs money. Since cash ow is essential for business growth, all eorts must be made to reduce inventory-related costs. For example, brand extension means retailers are increasing their assortment. Some retailers choose to carry only the top-selling brands to reduce both inventory and the shelf space commitment. Inventory involves a balance. From a nancial perspective you want to minimize it; from a marketing and operations perspective, you would rather have too much than too little. As noted in the operations section, Wal-Mart and its suppliers work together to better manage their inventories.

Pros Cons

Reduces inventory levels, which reduces carrying costs Creates the risk of running out of stock; this can cause problems especially for manufacturers Depends on transportation systems, which could be disrupted by weather, labour strike, equipment or infrastructure damage and/or accidents Depends on border/customs issues if importing (e.g. U.S./Canada border shutdown following 9/11 event) Review Credit and Collection Policies TODAY! Review both the way you grant credit and the manner in which you collect from your customers. Some entrepreneurs provide credit terms to anyone who asks, and never set a credit policy. This often works well but it could come back to haunt you. At a minimum, you should have a credit policy that includes:

Strategy Description Details

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Planning For Business Growth: A Step by Step Guide

Terms and conditions: These should include a time period (30 days is normal), any penalties if bills are paid late and a maximum credit limit for customers. Make sure your terms and conditions are consistent with the rest of your industry. Using credit terms as a marketing tool can give your company competitive advantage, but it can also wreak havoc on your cash ow. Carefully consider the implications before you implement this kind of strategy. Credit applications: You must have permission to check credit records. Your bank can often help in credit checking and setting credit policy. Remember you are dealing with customers so make credit applications as straightforward as possible. Credit criteria: You should have a threshold for granting/denying credit. Some companies use credit reports, time in business and number of orders from your company. Some companies do not grant credit on a rst order.

Do not hesitate to make a collection call sometimes an invoice does not get properly processed or a company will not bother to pay until there is a second contact. One company reduced days receivable by 30 days with a three-level follow-up system when the account was at 45 days, the bookkeeper called; at 60 days (30 days delinquent), the account manager called, and at 90 days the owner called. In many cases the problem was a lack of documentation, which was sorted out with the rst call. As your business grows, make sure your employees know exactly what you want done with respect to credit decisions and reporting. There should be a formal procedure for reducing or revoking credit privileges to avoid problems between divisions. If a customer is going to be cut o, the sales representative in charge must be informed. Be lenient if a customer has a repayment problem and follows through on promises. If they continually break promises, you may need to seek actions such as liens, collection agencies or court. You dont want to have a bad reputation; you also dont want to be seen as a pushover. Pros Cons Increases cash ow Identies problem customers before you grant them credit Handled poorly, this can hurt customer relations Could lose potential customers with a tighter credit policy (and create a conict between your companys nancial and marketing objectives)

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Strategy Description Details

Develop Strong Financial Control Policies. Decide who will make payments, place orders, approve refunds etc. Every company needs a controller. It does not have to be a full-time, dedicated position, but it is essential in any multiperson business to provide nancial discipline as well as to avoid theft and errors. During your next annual or quarterly review, ask your accountant to review your internal control procedures. Accountants can be an integral part of helping you run a better business. Many rms have auditors who are well trained in review and control procedures, and can oer tips on procedures, that prevent mistakes and theft.

Pros Prevents errors such as double payments and theft Cons Are hard to implement, and may cause employees to feel they are not trusted C O N S O L I D AT I O N S T R AT E G I E S The diagnostics in Step One and SWOT analysis in Step Two may reveal that your companys survival is at risk. While this is usually identied in the nancial analysis, keep in mind that nancial weaknesses may be symptoms of diculties in other areas. Here are some strategies for consolidating or even contracting your business. They must be used in the overall context of your business; if you run out of cash or access to cash, your business will collapse. The more desperate your situation, the more extreme the strategy! Marketing Strategies Strategy Review your Product Mix Description Make sure all your products or services are profitable or necessary. Details Evaluate your products by prot margin and inventory turnover, and make sure you are brutal it could save your business. Give priority to products with high-prot margins and low inventory requirements. You should only carry low-margin products if they are essential to the business and have low inventory, such as milk in a convenience store. Pros Helps keep the focus on prots and cash ow rather than revenue Cons May lead you to drop products you have carried a long time, and reduce customer selection and satisfaction

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Planning For Business Growth: A Step by Step Guide

Strategy Description Details

Raise Prices Raise prices either on a product-by-product basis or across the board. As was pointed out in the marketing section, increasing prices can slow demand so operations can catch up. Some companies use the margin/turnover analyses to determine where to raise prices and others just determine if they can charge more for a product or service. Ongoing service businesses will often charge more for new customers. Cost has nothing to do with this analysis it is designed to slow unit growth and focus on prot. If your supplier has a provision to return poorly selling inventory, take advantage of this, especially if you have too much cash tied up in slow moving inventory.

Pros Increases per unit prot Cons You may lose customers Strategy Description Details De-market Poor Customers Engage in strategies designed to eliminate some customers. More companies are realizing that there are times when a customer is not worth the time or eort. These include: small customers who take up a disproportionate amount of time slow-paying customers customers with higher-than-normal levels of returns This ies in the face of everything we learn about customer service but the simple fact is that if you have reached capacity, you should be supplying customers who oer the best return on your investment. Pros Reduces high-maintenance customer groups Cons Risks eliminating the wrong customers De-marketing eorts, especially if they are blatant or insensitive, may harm customer relations across the board and hurt the companys overall reputation Strategy Description Details Reduce Prospecting Efforts Switch promotional strategies to existing customers. Some companies become the victims of their own marketing success. One small fabricator was quoting on more jobs than could actually be done and paid a large salary to one person pure overhead to bid on contracts that it eventually turned down. By reducing these marketing eorts, it increased prots dramatically.This is one of the most delicate balances in business. Too much prospecting can result in more business than the company can handle; too little can result in stagnation and eventual shrinking. Use this strategy as a shortterm way of managing overall demand.
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Pros Cons

Improves relations with existing customers Identies new opportunities within existing customer base Reduces promotional expenses May be dicult to reorient promotional strategies to go back into prospecting mode May be perceived that the company is not interested in new business so it is removed from vendor lists and not considered when companies tender for contracts

Financial Strategies Strategy Sell Unneeded Capital Assets Description Sell equipment you do not use often, and rent it instead. Details Liquidation can be seen as a last-ditch strategy yet many companies prefer to sell unneeded assets rather than wait until a creditor does it for them. You usually sell at a loss, but an expensive asset that is not being used is tying up muchneeded cash. Use the rule if you havent used it within the last 12 months, you should rent it if you need it. You can apply this same logic to selling unwanted inventory. Pros Turns capital assets into current assets (cash) Increases cash ow. Cons You may eventually need to buy the equipment again You usually sell at a loss You may sell to a potential competitor Strategy Description Details Re-Negotiate Debt Determine which debts can be rescheduled. Reschedule your term debt or take a part of your line of credit and change it into a term loan. Long-term debt can be rescheduled over a longer amortization period to reduce monthly payments. Work with both your accountant and your bank, and take care that your business does not collapse under the weight of its own debt.

Pros Improves cash ow by reducing monthly payments Cons You will carry the debt for a longer period of time Strategy Description Examples Get Serious with Accounts Receivable Call delinquent accounts frequently. The nance section recommends reviewing credit and collection policies, however, when you are out of cash you cannot aord to be a creditor and must be ruthless.

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Dont hesitate to cut o credit and sales for customers who are 30 days past due, and serve them COD (Cash on Delivery) for one year before even considering credit. Some construction companies use a lien at the rst sign of payment diculty Pros Customers will take you seriously.Improves cash ow. Cons You risk oending customers. Desperate Measures Human Resources and Operations Strategy Re-examine Staffing Levels Description Fire or lay o unproductive sta or reduce sta overall. Examples This is one of the most dicult situations a business owner will ever face. Firing people who are unproductive or insubordinate is one thing; laying them o for reasons beyond their control is another. Alternatives include reduced workweeks, temporary pay reductions or compulsory vacations Sometimes you have no choice and have to lay o sta. Here are a few ideas to help manage this dicult situation: Be honest with everyone. Let people know exactly what is going on. Share nancial information with them. Dont make promises you cannot keep. Large companies have hurt their credibility by promising that there will be no more layos, then announcing additional cuts four months later. Symbols are important. Dont announce layos today and drive to work in your new Porsche the next day. Accept the inevitable. If your company is losing money and you fail to take action, you may all nd yourselves out of work. You need to make tough choices, and implement them with compassion and honesty. Pros Immediate cash /expense saving Cons The morale or those who remain may drop, which is very dicult for a small company. Workload may increase for those employees who remain, and they may have to take on duties they are not trained or qualied to do Training costs may increase Employees may be frustrated and quit, which could impact customer relations. Strategy Description Details Look for substitute suppliers and inputs If it does not aect quality, look for a replacement for your products. This is another tough decision and it does not work in all businesses. In retail, many businesses tried to carry domestic goods while their competitors turned to imports that are less expensive and often of comparable quality.

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When sugar became prohibitively expensive, Coca-Cola changed sweeteners. Nobody noticed, and the company avoided a price increase. Pros Saves money and brings products back to protability Cons Customers may reject the replacement Strategy Description Examples Drop a losing division If your company has several lines of business, drop one entirely. If a promising opportunity turns sour or moves you away from your main business, you may need to shut it down. IBM sold its printer and personal computer divisions to focus on service and mainframe and super computers. The problem is identifying the right time. For example, a business owner may start a new division, believing it to be complementary to the existing business only to discover it involves a completely dierent market, has lower prot margins than the rest of the company and needs specialists. Ultimately the division may wind up losing money, and pulling down the rest of the company with it. Pros Cons Saves cash ow if the division is unprotable Saves management time and eort if the division is struggling You lose revenue and potential future prot Loss of market presence May need to lay o sta

Other places to nd money 1. Re-negotiate rent payments. Your landlord may prefer to charge less rather than go through the hassle of nding a new tenant. 2. Find any lost co-op advertising funds. This is an oset to your advertising budget provided by manufacturers to retailers. 3. Track down any government grants available to your business. 4. Sell your receivables at a discount to a factor. Depending on the arrangement, the factor will take some or all of your accounts receivable. This is often expensive money and can aect your bank line of credit so make sure you research this option before committing to anything. 5. Assign bad debt to a collection agency. Something is better than nothing!

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