Consider an Expense to Revenue Ratios Report for Spending Decisions

An idea for more easily monitoring spending (expenses) and making more timely decisions about future spending is using a rolling expense to revenue ratio report.  Create a report that will show the current quarter’s expenses to revenue ratios for your expenses.  On the report, also present for the previous four quarters, the expense to revenue ratios.  Include an average of those four previous quarter ratios on the report.

Now use the report to determine how the current ratios (the just concluded quarter) compare to previous quarters.  The comparison should alert you to those expense to revenue ratios that are unexpectedly increasing, decreasing, or staying the same.  Think about the unexpected changes, or lack of change, as to the causes, the implications, and what actions (decisions) might need to be taken.

Such a report can be fairly easily created in the accounting system QuickBooks using the profit & loss standard report that is modified to show the percentage of income for each line item.  This report can easily be exported to Excel.    Create similar reports for the previous quarters and export those to a different worksheet in the same Excel file.  Be sure that all line items, including line items with zero activity in some quarters, are included in the QuickBooks profit & loss reports.  Using Excel's special paste feature allows copying and pasting so that current and previous expense to revenue ratios line up on one worksheet, from which comparisons can be made to previous quarters.

As a new quarter ends, update the saved Excel file with the new quarter’s data.

Rather than using traditional budgets, for quarters and longer periods, numbers which can quickly become irrelevant as conditions change, consider the rolling expense to revenue ratios report described above as a substitute for monitoring expenses.  The process should be easier.  Better decisions might be made in a more timely fashion.

The Equipment Effective Percentage Can Be Useful for Equipment Evaluation

Computing the actual percentage of time that a piece of equipment is in use compared to the total time that the equipment piece is available for use can help to evaluate the equipment piece's effectiveness.  Evaluating expensive equipment effectiveness can be useful for making better use of the equipment, in making purchase and sale decisions, and probably in other decisions related to the equipment.

The purpose of this blog is to provide an example of computing an equipment effective percentage.  Suppose a company has 2 concrete drills with different characteristics.  Drill #1 is less powerful but requires less maintenance time than Drill #2.  Drill #1 requires 4 hours of maintenance after 19 days of use, whereas Drill #2 requires 24 hours after 19 days of use.  However, Drill #2 is easier to operate, demanding less time the operator needs to take a break from using the drill.  The operator only needs a 5-minute break per hour for Drill #2.  For Drill #1, the operator needs a 15-minute break per hour.  The company has sufficient need for both drills to use them eight hours each day of the work year (240 work days; 20 days a month for 12 months).

The equipment effective percentage is a ratio of the actual use of the equipment divided by the available use (expressed as a percentage).  The available time for each drill is 1,920 hours per year (240 work days times 8 hours per day).  The actual use time for Drill #1 (from the facts above) is 1,392 hours per year [1,920 hours less 48 hours maintenance (4 hours per month times 12 months) and less 480 hours operator’s rest time (15 minutes per hour for 1,920 hours)].   The actual use time for Drill #2 (from the facts above) is 1,472 hours [1,920 less 288 hours maintenance (24 hours per month times 12 months) and less 160 hours operator’s rest time (5 minutes per hour for 1,920 hours)].

Knowing the actual use times for Drills #1 and #2, the equipment effective percentages (EEP) can be computed.  For Drill #1, the EEP is 72.5% (1,392 hours divided by 1,920 hours) and for Drill #2 the EEP is 76.7% (1,472 hours divided by 1,920 hours).  So, Drill #2 is in actual use more than Drill #1.  This may be surprising since Drill #2 has a much higher down time due to maintenance.  However, its much less down time due to operator’s rest time more than makes up for the higher maintenance time.

The equipment effective percentage is a way of evaluating equipment that can provide insights about the equipment use that may not be expected.  And, therefore, better decisions might be made.  The equipment effective percentage analysis can be applied not only to equipment but other assets that are in use.

Computing the Quantity Flow Through a Company Process Can Be Useful for Planning

Estimating an expected quantity flow through in a company process can be useful for effective planning.  A few examples of quantities that flow through a company process are customers, inventory, and requests.

If the flow rate of the quantity flowing through the process and the time of the process are known, the quantity that will flow through the process can be computed.  For example, how much inventory is needed (the flow quantity) for a future sales period?  If the flow rate (the sales rate) and the process time (the time during which the inventory will be sold) are know, the needed inventory (the quantity flow – the amount that will be needed during the process time) can be computed.    The inventory flow rate (the number of inventory items sold per period) can be based on historic values.  If during the previous 12 weeks, the average inventory flow rate (sales per week) is 10 items per week, then the expected quantity flow (amount of inventory needed) over the next 6 weeks would be 60 items (10 items per week times 6 weeks).

The equation for this computation is: Quantity Flowing Through the Process (QF) = Flow Rate (FR) times Flow Time (FT) or QF = FR x FT.

Although applying this equation to inventory (the quantity flowing through the process) and sales (the process) comes readily to mind, the equation can be usefully applied to many other company processes.  For example, suppose you want to estimate the number of sales orders (the quantity flow) that can be responded to over a period of time.  Knowing the past respond (flow) rate, an estimated quantity flow (number of sales orders) that can be responded to for a future period can be computed.  Some other examples that come to mind are the number of sandwiches that might be prepared per hour given a prepared rate and the number of patients that can be seen per day knowing how long it takes to see a patient.

A previous paragraph shows examples of computing quantity flows (QF) where flow rates (FR) and flow times (FT) are known.  But, the equation can also be used to compute either FR or FT, when the other two variables are known.  For example, if the inventory on-hand at the beginning of a period is known, the rate of sales (the flow rate, FR) can be computed in order to use up the on-hand inventory.  Or, how much flow time (FT) that will be necessary to sale a quantity on-hand (QF) at a given flow rate (FR) can be computed.   Another example is computing the number of guests arriving everyday (FR) at a bed & breakfast where the average stay is 4 days (FT), the bed & breakfast has 20 beds (FQ), and the bed & breakfast is always fully occupied.  Using the equation FR = FQ/FT gives FR equal to 5 (20/4) guests arriving each day.

Although a simple equation, QF = FR x FT has many useful applications for estimating quantities, rates, and times, from which more effective planning can be accomplished..

Ideas Matter – Focus on Generating Good Ideas

Generating more value in a company (e.g., positive cash flow) requires the right company projects.  And, the right company projects require good ideas.  This was a concept reinforced in a Coursera (click here for information on Coursera) course I recently completed (Introduction to Finance; taught by Dr. Gautam Kaul, a Professor of Finance at the University of Michigan).  Professor Kaul, an outstanding teacher, stressed over and over that value is initiated only with good ideas that lead to successful projects.

Small company owners that associate themselves with idea generation report better company success (growth and profits).  In a study done by Shelley M. Farrington, at the Nelson Mandela Metropolitan University, 383 small company owners returned a survey with answers that revealed their personality characteristics and their perceptions on their company’s success.  A statistical analysis by Farrington indicated the personality characteristic, openness to experience, “… is strongly correlated with perceptions of performance, and enhances firm performance.”  “Openness to experience” is a personality category, used by psychologists, and characterized by having such traits as originality, open-mindedness, and likely to seek out new ideas.  To read this study, click here (PDF file).

In a recent analysis that I did, I found that gross profits and research and development expenses correlate in the chemical industry.  The analysis was done because of an interest in examining the concept that a company's R&D expenses can represent how well a company’s “good” ideas (with R&D expenses reflecting such ideas) correlate with how well a company generates value.  The assumption is made that if there is such a correlation, than the R&D expenses as a percentage of revenues would show a correlation with gross profit margin percentages (GPM %) for a series of chemical companies.  I believe that the analysis that I did shows good correlation between research and development expenses and gross profits.  And, if so, good ideas, represented by research and development, are associated with company value generation (gross profits).  Click here to read more about this analysis.

A small business owner should be opened to and accepting of new ideas.  New ideas do not need to come only from the owner – the owner should not expect to be the only generator of company ideas.  Besides employees, look to outside “consultants” – accountants, information research specialists, marketing specialists, and others for ideas.  Attend conferences and network events for the purpose of generating new ideas.

Use the Small Business Owner’s Personal Credit Score to Judge the Business’s Credit Worthiness

The credit score company Experian has found a correlation existing between the personal credit scores of small business owners and the credit worthiness of the owners’ business.

Evaluating the credit worthiness of a small company can be difficult.  Because perhaps the business has only been in existence for a short time, and for other reasons, little, or no, data is available to judge the business's credit worthiness.  However, the owner may, often does, have a long personal credit history.  Based on Experian’s findings, an owner’s personal credit score correlates well with the owner’s payments of his/her business bills.   This gives vendors (other small companies) a good opportunity for being able to judge a small business credit risk, when no other data exists.  Ask the owner of the small business you are selling to for a copy of his/her personal credit score and use this data to evaluate the risk of selling to the person’s company. 

Experian’s correlation conclusions were based on a study of thousands of its records dealing with small business owners.  You can read more about this study by clicking here (Section III) (PDF file).

Four Suggestions for Helping Your Company Grow

Presented below are four suggestions for a small company owner to help his (her) company grow.  These suggestions are based on Professor Edward Hess’ Coursera course entitled “Grow to Greatness:  Smart Growth for Private Business, Part II”. (https://www.coursera.org/course/growtogreatness).

1.   A key to growth is the owner.  The owner sets the tone for the company on all matters.  The owner needs to lead by example; what the owner does is important in influencing how employees follow.  Recognize that what the owner says, does, and shows (e.g., by body language) will have an influence on the employees and others connected to the company.  The owner will create the company’s culture.  In order for the company to grow, the owner needs to also grow.  The owner (leader) needs to go from being a “doer” to being a leader/mentor/coach.  And, the owner (leader) needs to go from being a “doer” to a delegator.  Delegation is not natural and requires skill and practice.  The leader (owner) needs to work at being a successful delegator.  Delegation is not giving orders, but demonstrating, coaching, and suggesting.  A good leader (owner) is: humble; seeks opinions and feedback; shares; and is fair and consistent to everyone.

2.  A second key to growth is making employees happy and successful.  Happy and successful employees lead to happy customers.  Employees’ happiness depend upon the owner (leader).  Do not try to control employees but to assist them in doing their jobs and in doing them better.  Recognize that employees are the most important asset of a company.  Allow employees to contribute.  Everyone wants to contribute – by contributing, people feel better about themselves, something everyone wants.   Do not give orders to employees but delegate; encourage them, guide them, suggest how you would do the task.  Go from concentrating on “me” to concentrating on “them”.  Be sure employees are adequately compensated and rewarded.  Not all people hired work out as planned.  Recognize as soon as possible when an employee is not right, explain this to the employee, and let the employee go quickly.  Work hard to have the right people.

3.  A third key to growth is excellent execution.  Focus on continuous improvements in processes done, and products and services provided.  Stress in improvements the importance of employees and the leader continuously growing.  Concentrate on the most important process for company success.  Make the necessary changes for improvements in this process.  Then move on to the next most important process, and so on.  Provide lots of training.   Set up a schedule of training and ensure that all receive the needed training.  Set up measurements to monitor desired changes in processes, products, and services and implement needed reporting to show and understand these measurements.  Reward employees when the results of these measurements are positive.

4.  A fourth key to growth is to focus on a common sense, doable list of strategic goals. Put these goals in writing and review them periodically.  Set up measurements that show success or failure on goal accomplishments.  Have strategies that relate to the company being successful, including success in other than simply making money.   Be sure that all employees and processes are in alignment with achieving the goals.  Be able to summarize the goals in a 30-second presentation.  Change the goals as needed.

Cash Investments are Critical for Growth – Make Them Wisely

Cash investments are critical to a company’s growth.   Cash investments can lead to increased revenues and/or decreased costs, leading to higher profits, and growth.  So, decisions about what investments to make are critical to your company’s future.

This blog suggests using a quantitative approach to making decisions about how to invest cash for growth.  Think in terms of the affect that the investment will have on profit by increasing revenues or decreasing costs.   Quantify these changes in revenues and costs in dollars and than divide these changes by the dollar amount of the investment made.  The result will be the return on the investment.  Have in mind a minimum return on investment percent (e.g. 5%, 10%, or greater) that you will required before you will make the decision to invest.  Use your financial statements for support in making investment decisions.  Consider each line item on the profit and loss statement for where increases or decreases can result from investments.   Accept that too low a return is not worth the effort.  Rather look for other investments with sufficient returns.

Return on investment calculations need to be based on reasonably accurate estimates of gains (the increased in revenues less costs) divided by reasonably accurate estimated costs.  Too often the return on investment determination is flawed, because the estimated gains and costs are incorrect, leading to a wrong rate of return. The return on investment concept for decision making should only be used when there is a clear amount of investment and a quantifiable gain and cost that clearly and unambiguously results from the investment.  Otherwise too much uncertainty exists about how the investment correlates with the gain.

Accounting systems such as QuickBooks and QuickBooks Point of Sale can be used to determine the return on the investment for each item of inventory that is sold.  Reports in these software packages can show total costs (investments) and total profits (gains) form the inventory item sales.  From this data, investment returns can be calculated showing those inventory items that are most profitable.   Investment return percentages give a more pronounced picture of the differences in gains from sales than gross profit margin percentages and, in that respect, can be useful for decisions related to inventory investments.

Besides inventory investments, investments in creating new products or services, in marketing, in adding personnel (where the personnel can be clearly tied to increased revenues, such as sales personnel), and projects with clear, directly-related costs are likely investments for return on investment decision-making analysis.  Remember, be as accurate as possible in estimating these gains (benefits) and the costs of the gains. And implement only the investments with sufficient returns.  Where limits on investments exist, choose the investments with the best expected returns.

Other factors need to be considered in addition to the percentage rate of return of an investment, not the least of which is the risk associated with the investment failing to meet the expected gain.

Try to keep in mind that computing investment returns in your business should be straight forward, not unduly complicated and complex,  and fully understandable by you.  Although good estimates of gains and costs are important, absolute accuracies are not so critical such that determining the estimates become a lengthy, complicated, painful, and costly exercise.  Rely on good judgments and common sense in estimating the gains and costs.   Whether the return is 15%, higher, or even lower, the decision to make the investment in your business will help your business.  What is important is to be in the right ball park, e.g., the result that the return is above your lower limit for a return, rather than in the wrong all park, meaning there is no return, and therefore a bad decision.

Lots of information can be found on the Internet about returns on investments, their calculations, and other factors about there use.  Finding this information is relatively easy, and from the information you can begin your education about using returns on investment for decision making.  

Keep Your Eye on the Competition

A critical function in your small retail business is to know and analyze details about your competition.  Such knowledge and analysis can help you make better decisions so that you can become more successful in attracting the customers you want.

Here are a few details that you should know about your competitors:

1.  Know your competitors’ stores.  What signage is used?  How are the signs used and are they successful?  How are shelves designed and used?  What is the feeling in the store derived from such attributes as lighting, flooring, walk areas, entrance and aisle space, wall coloring, and decorations?  What are the store hours?

2.  Know your competitors’ check out procedures.  Is the check out efficient?  Do long lines accumulate?  Why?  Are the cashiers friendly and polite, do they smile, make welcoming comments to the customers?  What check out and payment technology is used?

3.  Know what products are sold, their prices, the stores’ discount policies, and loyalty and coupon programs.  Analyze these policies and programs for what they are trying to accomplish and how.

4.  Know the marketing done by the competitors.  What newspaper, radio and other media are used?  What brochures, pamphlets, and other documents are available for distribution?

5.  Know who the suppliers are.  Hang out (or have someone else hang out) around the stores to take notes on suppliers.  Once suppliers are known, research the suppliers, e.g. at their websites and at other sources, to compare competitors' suppliers to your own.

6.  Know the competitors’ internet presence.  Do competitors show ads when a search is done for such a business in your market area?   Do the competitors show up on Google and Bing local map listings and on Superpages, Yellowpages, and other local listings designed to help the searcher find businesses?  Are the competitors’ websites easy to navigate, to find contact information?

7.  Know the customer traffic at the competitors’ stores.  Hang out (or have someone else hang out) around the stores to take notes on the customers – the numbers, ages, genders, social levels.  Take notes on what customers seem to be buying, the quantities, and when.

8.  Know what customer services are provided.  Are employees on the store floor to provide assistance?  Are employees friendly and helpful throughout the stores?  How many employees are there?  Are there too many, not enough?  What employee turnover exists (are help wanted ads appearing in the local media)?

9.  Ask your employees, suppliers, family, and friends what they know about the competitors, what their evaluations are of the competitors, what they might suggest about how the competitors compare to your business.

10.  Use your local library and the internet to find information about the competition.  Many local newspapers now have been digitized so that they can be easily searched by keywords (e.g. competitors’ names).  Past information appearing in newspapers could be useful.

In the knowledge and analysis from the above, compared what you discover to your business situation.  Think about the comparisons and how what you now know can be used to improve your situation.  Think about how you should respond to what the competitors are doing, what they might continue to do, or implement, that will affect your situation.  Are the competitors not providing something that you could provide, or provide better, to gain customers?

Record what you learn and your conclusions and keep for future use.  Update what you have recorded periodically, e.g., at least once a year.  Think about how complete and reliable what you discover is and what you can do to gain more completeness and insights.

Consider hiring a sub-contractor for help in gaining knowledge, information, and analysis about your competition.  Independent information professionals specialize in just such tasks.  A good source for finding such a professional in your area is the Association for Independent Information Professionals.  Click here to go to this association’s directory of information professionals.

The well-known Harvard Business School Professor, Michael Porter, has gained a world-wide reputation on his conclusions about what drives competition.  You can read some of what he a writes by clicking here (PDF file).  His insights can be thought-provoking for you.

The British Newcastle Library has written an article about questions to ask about your competitors.   Click here to read this article (PDF file).  Troy A. Festervand and Jack E. Forrest at Middle Tennessee State University outline a program related to knowing your customers.  Click here to read this article (PDF file).

Important decisions you make are best made when informed by good information and analysis.  Some of your most important decisions will be about how to run your business based on what the competitors are doing.

Business Failure Research Provides a Guide for Better Accounting

New small businesses have about a 50% probability of lasting more than 4 years.  This is a fairly well-known, and probably the most reliable, statistic about this conclusion.  This statistic can be found by searching the Internet.   For example, reference to the statistic can be found at two sites (click here and here), which are associated with the US Bureau of Labor Statistics, a Department of Commerce agency.  This statistic is based on US Census Bureau survey data obtained from US businesses. 

What are the reasons for business failures?  This is a question that many business researchers and analysts ponder and pursue the answer to.   I researched the Internet to find an answer and found many lists of possible (suggested) causes for business failure for small businesses.   Nothing found suggests that any one cause can be shown to account for most business failures. 

But rather, my Internet research found more than 40 causes suggested by various business researches and analysts.  Many of the 40 possible causes are identified at these three websites:  the first, a US Small Business Administration site (click here); the second, (click here) (a PDF file) shows a study conducted for the Washington State Governor; and the third, the best-guess opinion of a long-term, and presumably knowledgeable, business researcher and analyst (click here).  Other similar websites add additional causes not identified at these sites.   Many of the lists at these websites identify the same causes, with some of the sites giving a ranking of the most likely to less likely. However, I did not find statistical studies that show the predominance of some causes over other causes.

In analyzing these lists, I realized that several of the suggested business failure causes might be prevented by good accounting and the competent analysis of the accounting data.  This suggested to me that these accounting–related causes could serve to alert the small business owner and accountant to critical problems that good accounting can address and, in doing so, guide the business decision-makers on ways to reduce the risk of business failing.

The 12 causes on the lists I analyzed that might be averted by using good accounting, its analysis, and the correct responses to that analysis are:

Controlling costs
Fraud
Inadequate capital
Low sales
Over investment in fixed assets
Personal use of business funds
Poor cash flow management
Poor credit arrangement management
Poor inventory management
Pricing not sufficient to cover overhead and to earn sufficient profits
Too much debt
Unexpected growth

The consequences in each of these 12 potential problems could be averted by using good, sound accounting practices, competent analysis of the accounting results, and then the right responses to the analysis.

Although there is no one cause for business failure, a significant number of causes that business analysts have identified that lead to business failure are accounting-related.  By accounting-related, I mean the cause lends itself to correction with good accounting.   Be aware of this list of 12 as you run your business and use accounting resources.

Mapping Sales and Other Data

With commercial products such as Microsoft’s MapPoint (click here) and MapBusinessOnline.com (click here), mapping a company’s sales and other data, I suspect, is relatively easy.  With these products, and probably others, a small company, it seems to me, can, for a small cost, gain a lot of leverage from data that the company has in its accounting system.

A company’s accounting system often stores a lot of data that might be usefully mapped.  With the mapping, new insights can possibly be gained.  If the data, such as sales, and vendor and customer names, have address information (e.g. street, city, state, and/or zip codes) and the data can be exported to Excel, the data should be able to be mapped using a commercial product.

Besides showing the geographical concentrations of sales, customers, and vendors, other ways in which data out of the accounting system might be mapped include:

1.  Showing a sales representative’s territory and sales quantities;

2.  Showing optimal routes to drive from customer to customer locations (or potential customers, vendors, etc.);

3.  Showing where employees live, which might be useful in scheduling and perhaps other planning;

4.  Showing percentages of products sold in geographical areas;

5.  Showing quantities and names of inventory at various warehouse locations; and

6.  Comparing sales trends for more than one time period in geographical areas.

Maps showing the above information could well give new insights, and useful decisions, resulting from data (valuable data) already captured by the company.

Tracking Costs (and Revenues) Directly Related to a Product or Service in QuickBooks

Knowing as accurately as possible those costs (resources) that are required to produce a product or a service can be very useful in making decisions on producing the product and service.  Are you charging enough for the product or service?  Can the cost be reduced?  Knowing accurately the costs and revenues related to the product or service will make the answers to these questions more correct.

Accounting systems, such as QuickBooks, usually offer various ways of tracking costs.  For example, QuickBooks has a good method of associating costs with jobs (customers) and tracks well cost of inventory sold.  However, although knowing costs associated with jobs is useful in making decisions related to the jobs (and customer), such costs are not equal to product and service costs.  Also, the cost of inventory sold is not the full cost associated with a product. 

Two sets of costs, job and product/service, are useful and should be used in making decisions, one about customers and the other about products and services.  The nature and need for decisions made about customers and about products/services are different.

In QuickBooks, using the class feature allows for efficient and effective tracking of most, if not all, costs, including general operating costs such as marketing and training, required to produce a product or deliver a service.  Using the class feature leaves the job cost feature free for job costing.  A class list can be set up containing each product and service category that generates revenues.  With such a class list, the appropriate revenue category can be quickly selected at the line item level on both the sales form and the payment form.    The key to this process is being able to track revenues and costs by line item on the sales and purchase forms.  This means that single invoices, sales receipts, bills, and checks allow for the recording of multiple revenues and costs by class selection.  This greatly accounts for the efficiently and effectiveness of this tracking process.

Then, the profit and loss by class report will show what should be truer profits made on each product and/or service category, leading to better pricing and cost control changes.

Access Company Credit Risk Using Internet Resources

Granting a company the right to pay for a service or product at some time after you have delivered the service or product involves a risk that the company will not pay what is due.  Resources on the Internet might help you in assessing the credit worthiness of that company and help you decide on whether selling to that company is a good idea. 

This blog identifies some of these resources.  Some of the resources do not require a fee but others do.  All involve in some way a database with historic information related to the company.  Such historic information is useful for assessing the credit worthiness of the potential customer.  

The expense of using these resources, in terms of your time plus any fees, probably can be kept to less than two to three hundred dollars per customer, perhaps much less. This seems like a small price to pay to weed out potential non-paying companies when the cost of the service or product to you is high enough.

What follows is a suggested sequence of using the Internet to obtain information on a company and its credit worthiness.

Maryland, and probably most other states, offers access to Maryland-registered company information from its websites.   At this Maryland site (click here), information can easily be found on such things as when the company was formed, the value of personal property (based on personal property tax returns), and whether the company is in good standing for paying it personal property tax.  Also from this site, a search of UCC filings will show those filed against assets owned by the company.  These filings might be useful in evaluating the debt status of a company and perhaps how others view the credit risk of the company.

Also in Maryland, and probably other states, you can search  for the real (land and structures) property a company owns and the value of that property as assessed for real property tax purposes (click here to go to the site where a search can be made).

The American Bankruptcy Institute has a site (click here) apparently still being developed (i.e., in beta status) that will search several databases simultaneously for bankruptcy and other legal news related to the company of interest.  Knowing that a company has gone through bankruptcy, and/or other legal proceedings, can be useful in evaluating the credit worthiness of the company.

The United States Government maintains the PACER (Public Access to Court Electronic Records) system (click here to go to this system’s website).  At the site, you can search US court cases that a company has been involved in.  Fees do apply.  Court cases can provide insights into a company’s financial and other transactions.

Experian (click here), Equifax (click here), and TransUnion (click here) offer reports on small businesses that assess the credit worthiness of the businesses.  Fees for basic reports range from $35 to $100, and more.

D&B (Dun & Bradstreet) offers reports starting at $62  that provide information on a company’s payment history.  Click here for details.

LexisNexis, which maintains or has access to large numbers of databases, offers a small business credit risk service based on LexisNexis use of those data bases (click here to go to the service).  LexisNexis also offers a service that will search not only state records of UCC filings but also state records showing state tax liens against companies, another indicator of a company’s ability or willingness to pay on time (click here to go to the service) .

Spending some time, and in some cases fees, using such Internet resources as identified above could fine risks associated with the credit worthiness of a company, and help you decide on whether you want the company to be a customer.

Using Force Field Analysis for Change

Recently I was in Mali working with a women’s rice growing cooperative to help them improve their accounting.  During this period, I had a chance to assess and become familiar with their situation and their desire to be more profitable.  Their lack of profitability is a concern for them.  They want more profits, more wealth generation.

A conclusion that I came to is that the cooperative needs to be run more like a business, needs to incorporate sound business management practices, in order to become profitable.  Because it seems to me a change is needed, I decided to learn more about force field analysis by writing this blog and apply the concept of force filed analysis to the suggested change for the cooperative.

At the risk of over-simplifying, force field analysis evaluates the forces that promote a change and the forces that oppose the change.  The analysis tries to identify all those relevant forces that promote and those that oppose the change

Here is a list of factors that I came up with that promote the cooperative in Mali to being more like a business:

1.  Lack of profit as a cooperative – 3;

2.  Recognition that as a business, profits are more likely – 4;

3.  A better work environment, and other benefits, for cooperative members when the cooperative is run more like a business. – 3.

For these three factors that promote the change, I have assigned a weight to the importance of the factor in promoting (leading to) a change.   The weight is on a 1 to 5 scale, with 5 being of the highest importance.   The total weight of factors supporting a change is 10 (3 + 4 + 3).

Here is a list of factors that oppose the cooperative being more like a business:

1.  Lack of business skills and practice know-how – 4;

2.  Traditional practices and habits of behaving as individuals in decision making and action in rice growing versus company decision making and behavior – 5;

3.  Lack of concepts on assigned roles and company organizational structure – 3.

The total weight of factors opposing a change is 12 (4 + 5 + 3).

Now for some analysis on the above lists and what they might mean and what they suggest.

First, the above lists are based strictly on my experiences while in Mali teaching the cooperative accounting and evaluating their situation.  The correctness of the above lists is therefore constrained by whatever skills and experiences I have in the evaluation.

I believe the first obvious conclusion to reach from the above lists is the cooperative is not going to change to being more business-like on the basis of the current forces for and against that are in place.  The against forces are stronger then the for forces.  So, actions and interventions need to occur if a change is to take place.  The above lists can help guide on what these actions and interventions might be.   An approach is to create a greater weight for each of the for factors and a lesser weight for each of the against factors.

The factor with the greatest weight (5) and therefore draws the most attention is the against factor - traditional practices and habits of behaving as individuals in decision-making and action in rice growing versus company decision making and behavior.   How do we reduce this weight?  Like many of the other factors, both for and against, training is an important action to take.  But, now we recognize one type of training should relate to the advantages of group decision-making; collaboration; team building; advantages of group versus individual performance, and similar concepts.  Such concepts relate to changing traditional practices and habits of behaving as individuals.

Training is also important to reduce the other against forces.  Through creating the lists, we now know better what the training should focus on.  

For the factors that promote change to being more like a business, training on what profits are, how to measure them, for example, by using correct accounting and creating income statements, should be emphasized.  An accounting system should be implemented with the goal of showing annual profits.  Using an accounting system should help the cooperative to be more business-like.

Company organizational structure can bring benefit to the participants in a company versus when the members go alone, which a problem with the current cooperative situation.   Such benefits include: specialization of duties, which promote greater success for the organization versus when individuals act alone and better collaboration and coordination on the use of the available resources, easing the burden that can exist when individuals go alone.    Specialized training should be planned and presented demonstrating these concepts and the results of these benefits to members.

Force field analysis strikes me as a relatively simple but powerful tool to help in implementing a needed change.  Hopefully, the above has demonstrated this. 

More can be found about the concept and use of force field analysis at the MindTools website. Click here to go to this website.

Use a Twitter Tweet Dashboard to Help Manage Your Business

An enormous amount of information flows down the Twitter electronic pike as tweets.   This continuous flow from thousands of tweeters – individual, company, and other organizational types – represents a unique source of information.  It seems to me that there has never been anything like what this flow of tweets represents with respect to information availability.

It is technically relatively easy to select a specific topic, for example, employee performance, and then to pull (filter) from the Twitter flow many tweets with relevant information on the topic “employee performance”.   If one is seeking what others know about employee performance, using Twitter as one source of information would be easy and likely productive.

Although, as stated above, gaining access to tweets on specific topics is relatively easy, what should one do who is interested in a broader subject, such as human resource management, under which employee performance is but one subtopic?  In other words, how does one filter Twitter for all tweets with information on the various subtopics that make up a broad subject area such as human resource management? 

An answer that I have come up with uses the idea of a dashboard consisting of several filters, each filter on a specific subtopic within the broad subject area.  Once set up, the dashboard can easily be brought up as a webpage and then each filter on a specific subtopic will be available to drill down for details in the tweets on that subtopic.  The collective tweet fitters will cover many, if not most, of the subtopics that make up the broad subject area of interest.

This idea of a dashboard of Twitter tweets seems to me to offer the possibility of being a good tool in managing various broad subject areas in a company.   Besides human resource management, other areas might include: financial management; benchmarking; sector analysis; environmental issues; governmental issues; and country and regional informational needs.

A dash board concept is used extensively in financial management of a company where the various components of a financial dashboard represent various financial and accounting data relevant to the company.  Collectively, the various filtered data (on the dash board) gives an overview of the financial condition of the company. 

Hopefully, the collective filters of tweets on subtopics of a broad area, such as human resource management, will also give useful information in managing the general area in a way not possible otherwise. 

Click here to go a version of this blog which shows the “Human Resource Management Twitter Tweet Dashboard”.  Shown at the bottom of the page are 7 subtopic Twitter filters making up the dashboard.  These filters were set up using Twitter creation tools on one of their web pages.   The subtopic filtered is shown at the top in the presentation box.   The presentation box presents tweets in real time as they are submitted in Twitter, and will cover tweets in the recent past (e.g. several days).   Clicking the link “Join the discussion” in the presentation box will bring up a complete list of the tweets related to the subtopic that have appeared in the recent past.

Twilert, a Twitter App, Should be Useful to Support Decision Making

Twilert is a free web app that enables you to receive selected Twitter tweets by email.  The tweets sent to you will have the keywords in them that you select. Twilert, which is easy to set up and to use, can provide you selected information that flows through the Twitter system.  This information could be useful to you in decision-making.

For example, many federal, state, and local government agencies now “tweet” (send out electronic messages) using Twitter.  These tweets contain information about the agencies’ services and actions that the agencies feel may be of value to the public, the users of its services and recipients of its actions.    These tweets can contain such information as pending regulatory and compliance requirements, information that is valuable for businesses to know about as soon as possible.  Twitter is a very efficient and effective method for agencies to electronically distribute important information.  And, for companies, who can benefit from knowing this information as soon as possible, using a service like Twilert could be very useful in being alerted to these tweets.

Monitoring Twitter for government regulations is just one example of what information, which flows down the Twitter electronic pipe, can be monitored by a company.   Other examples include:  software used by the company; products produced; services offered; markets targeted; retail products being considered for sale; and likely many others.

Perfecting and using skills to extract useful information from million of tweets that flow down the Twitter message pike will likely prove to provide many advantages to a company.  One easy to set up and use tool to begin monitoring Twitter tweets is Twilert.  Click here to go to the Twilert website.  Check it out.

Using a Decision Tree Analysis for Insights on Marketing Expenditures

In my last blog below, I wrote on the use of What-If Analysis to reach conclusions about pricing by a small professional services company.

Data generated by the Excel What-If Analysis Tool for the below article can be nicely used to gain insights on marketing expenditures, when used with decision tree analysis. 

For example, assume that the company in year 1 has a $90 per hour fee it charges, a demand of 800 hours, a fixed cost of $10,000 (rent, utilities, office expenses, etc, but not including the salary), a variable cost equal to 30% of revenues (which corresponds to US Census survey data that shows that professional service companies have an average 70% gross profit margin percentage), and breakeven profit (profit = $0).   At these amounts, the company is able to pay a $40,000 salary (as shown by What-If Analysis).

Now, the company wants to increase the $40,000 salary that it can pay in year 2 by increasing the demand above 800 hours, while keeping the $90 per hour fee the same.  So the company decides to increase marketing expenditures to try to increase demand.  How much should the company increase the marketing expenditures?

The use of the  analytical tool, decision tree analysis, can help answer this question.  A major difficulty in answering the question is predicting the increased demand with certainty.  To counter this uncertainty, the decision tree analysis approach is to assign probabilities to possible demand increases resulting from marketing.  

Here is an explanation.  Assume that one outcome of the marketing program is that it is not very successful.  In using decision tree analysis for this outcome, I have defined the outcome - not very successful - as: 80% probability that there is no demand increase; 20% probability that there is sufficient demand increase to increase the revenue (and therefore salary) from $40,000 to $50,000, and there is no probability to increase the revenue (salary) by $60,000 or $70,000.  With these probabilities, the expected revenue increase in year 2 can be computed to be $2,000 [from $40,000 (year 1) to $42,000 in year 2].    This is computed by using this formula: 0.8 x $40,000 + 0.2 x $50,000.   In other words, there is an 80% probability that the revenue (salary) will remain at $40,000 and a 20% probability that the revenue (salary) will go to $50,000, so that the most likely result is $42,000 (assuming 80% and 20% are correct). 

Now we can compute the likely revenue increases in three other possible demand increase outcomes: moderate success in more demand; good success in more demand; and very successful increase in more demand.   The computations for each of these three possible outcomes, done as above for the not very successful outcome, give these increases from $40,000 in year 1 to: $46,250 (moderate success); $48,250 (good success), and $55,000 (very successful), in year 2.   These increase values depend on the probabilities that I have assigned to the possible outcomes. 

These three possible demand outcomes are given percentage probabilities for each of the four revenue (salary) outcomes: $40,000; 50,000; $60,000; and $70,000.  These percentages are:

1. Moderate success:  $40,000 – 50%; $50,000 – 40%; $60,000 – 7.5%; $70,000 – 2.5%.

2. Good success:   $40,000 – 30%; $50,000 – 60%; $60,000 – 7.5%; $70,000 – 2.5%.

3. Very successful:  $40,000 – 10%; $50,000 – 40%; $60,000 – 40%; $70,000 – 10%.  These percentages need to be selected by the company.

The decision tree analysis is greatly assisted by first doing the What-If Analysis, which will give the demand hours needed for various increases in revenues (salaries).  Knowing these hours help in deciding on the probability that marketing expenditures can reach these number of hours.   The demand levels for these revenues (salaries) are:  $40,000 – 800 hours; $50,000 – 952 hours; $60,000 – 1,111 hours; and $70,000 – 1,270 hours.

The results now give us some insight into how much the company should increase the marketing expenditure.  Probably less than $15,000 should be spent, since it is unlikely that a revenue increase will be greater than $15,000 (that is the amount of revenue increase predicted in a very successful marketing campaign).   A conservative decision for marketing expenditures would be less than $2,000, since this is the amount of revenue increase predicted for a not very successful marketing campaign.  For year 2, the best expenditure is probably between these two amounts.  Year 2’s results should help in better selecting the outcome probabilities in subsequent years, if the marketing campaign continues.

The Mind Tools website (click here) provides an explanation, with an example, of decision tree analysis.

Pricing Decisions for Professional Service Providers Using Excel’s What-If Analysis Tool

(Salary amounts modified on August 1, 2012 due to error discovered in initial computations.)

A problem for small professional services companies in starting up their businesses can be what price (fee) to charge for the services provided.   The demand for the services and what other similar (same experienced, skills, etc) providers charge are often uncertain.  Using Excel’s What-If Analysis Tool can provide a baseline fee level for various demand hours (total billable hours) at an assumed variable cost and fixed cost (including an expected salary) and at a breakeven point ($0 profit).

A lowest baseline fee level needed to reach a certain salary at an assumed demand, variable and fixed costs, and profit = $0 (breakeven point) should be useful for professional service providers to know.  Knowing a lowest baseline fee level removes some uncertainty about the lower limit of a fee to charge.  With this knowledge, the service provider should be more confident that any fee below a fee determined by using the What-If Analysis Tool will not provide an expected (needed) salary.  This does not mean that this lowest baseline fee is the fee that should be used.  What is met is that the fee is the lowest fee that should be considered.  Considering higher fees depends on many uncertain factors, not the least of which is demand at various fee levels, which a tool like What-If Analysis will not be able to provide much help with.

Using Excel’s What-If Analysis, I was able to show, at 1,200 hours of demand (total billable hours), a fixed cost of $10,000 (rent, utilities, office expenses, etc.), a variable cost equal to 30% of revenues (which corresponds to US Census survey data that shows that professional service companies have an average 70% gross profit margin percentage), and at a breakeven point (profit = $0), the following:

1.  With an additional fixed cost of $30,000 (salary), the fee needs to be from $45 to $50 per hour; at an additional fixed cost of $40,000 (salary), the fee needs to be from $55 to $60 per hour; at a additional fixed cost of $50,000 (salary), the fee needs to be $70 to $75; and at an additional fixed cost of $60,000 (salary), the fee needs to be from $80 to $85 per hour, in order to reach the stated salary. 

2.  But, decreasing the demand to 800 hours, the corresponding required fees for the above stated additional fixed costs (salaries) need to be:  $70 to $75; $85 to $90; $105 to $110: and $125.

So, if a professional service provider expects a $50,000 salary and will have a demand equal to 1,200 hours, and has $10,000 of other fixed costs (in addition to the salary expectation), and assumes a 70% gross profit margin percentage, a fee of $70 to $75 per hour will obtain the expected $50,000 salary.  Also, it is possible that a professional service provider will be very intolerant of continuing in business at a salary level lower than $30,000 to $40,000.  If yes, a minimum fee for such a service provider would be $45 to $60 per hour, given the above stated conditions.  (In other words, a $45 to $50 per hour fee provides a $30,000 salary, at the conditions stated.)  This fee range would go down at higher demand levels, and up at lower demand levels, again, given the conditions stated above. 

In addition to suggesting a lowest baseline fee to use, the What-If Analysis Tool can generate demand (number of total billable hours) levels that will provide a certain salary, at a fee amount.  One possible use of such data might be adjusting a fee on a year to year basis.  For example, if after year 1, a certain salary is achieved at one fee and demand, What-If Analysis results will show how much a drop-off in demand can be tolerated in the next year when the fee is raised (assuming a raise will lead to a lower demand) yet obtain the same salary as  in the previous year.  

For those interested in using Excel’s What-If Analysis Tool (available within standard versions of Excel), many websites can be found that provide information on using the tool.  One such website (click here) provides instruction, by Wayne Winston, on setting up and using What-If Analysis, with an application description similar to the application discussed above.

The analysis that I did with Excel’s What-If Analysis Tool, a summary of which is provided above, I believe shows that the tool can be very useful in decision making.   Some thought has to go into the details of what is desired.  Then the tool needs to be tested based on the analysis of these details to determine if useful data is generated that helps in decisions that needs to be made.

Concentrate on Coaching and Organizational Goals in Employee Feedback

What companies should communicate to employees about employee performance is a major area of management research and analysis.  Searching the Internet and academic article databases on such terms as employee, performance, evaluation, strategy, and alignment will find hundreds of examples of this research, analysis, and discussions about employee performance feedback.  Much of what is found in recent information recommends changes in the traditional supervisor to employee evaluation, assessment, and rating schemes in practice for dozens of years.

One article found at the Bersin & Associates website provides what seems to me as an excellent overview of the changes being recommended in employee performance feedback.  Click here to read this article.  This article does not eliminate the traditional supervisor to employee performance assessments, but indicates that this traditional practice is only one of the goals of employee feedback, and is a less important contributor to the company’s success than other goals for employee feedback.  These other goals deal not with past performance of the employee, as traditional assessments do, but with aligning the employee’s future performance in ways that support company strategic goals.

Therefore, the major objective of supervisor to employee feedback and supervisor and employee goals for this feedback is not past performance but future directions.  The supervisor now has the role of serving as a coach moving the employee in the direction of acquiring the skills, understanding, motivation, and activities aligned with the company’s strategic goals.

Consider as an example to demonstrate this forward-looking, coaching-management perspective of supervisor-employee feedback, a small company and its accounting function.  Assume the company has three strategic goals:  increased revenues; increased profits; and better customer and vendor relations.  The accounting department would then develop a set of goals for its function that support the company’s strategic goals.  These accounting goals might be: customer and vendor evaluations and analysis; cost analysis; and sales analysis.  Now supervisor to accounting personnel feedback sessions will have a new objective – the needed individual actions, competencies, and analysis to meet the three accounting department goals (which are tied to the company’s goals).

The traditional supervisor-employee work assessments still are needed, but with a lot less importance.  Its importance is now primarily only to screen out those employees who need to be terminated.  All other employees are accepted as worthy in the ways that they are worthy.  These employees are given encouragement and coaching to increase their worthiness, and are asked to set personal goals related to the accounting department’s goals.

Return on Equity – an Excellent Metric for Decision Making

The return on equity is an excellent measurement for small businesses to use to monitor how their businesses are going.  The return on equity is determined by dividing the net income for the year by the average equity (beginning equity plus ending equity divided by 2) for the year.  This Wikipedia site (click here) provides more on the definition.

Searching the Internet can find commentary on the value of the return on equity measurement.  For example, an article by Timothy Vick associates success of many companies with a high return on equity percentage.   Click here to read this article (PDF file).  Another article, by Richard Teitelbaum, Kimberly McDonald, and Ed Brown, does the same.  Click here to read this article.

Researchers have shown a relationship between a company culture, as defined by the researchers, and higher returns on equity.  Lorraine Eastman, Christopher Kline, and Robert Vandenberg show that companies with certain cultural characteristics have higher returns on equity.  Click here to read this article (PDF file).    Richards Barrett demonstrates the same conclusion.  Click here to read his information (PDF file).

The return on equity measurement is easy to make.  Net income is quickly obtained from the profit & loss statement and average equity can be computed from the equity balances at the beginning and ending of the year, obtained from the balance sheet for those dates.

Another useful return on equity attribute is that three other measurements, net income as a percentage of sales, sales as a percentage of total assets, and total assets as a percentage of average equity, can be targeted for improvements.  As each of these ratios are improved (increased percentages), the return on equity will increase.  This is because (net income/sales) X (sales/total assets) X (total assets/average shareholder equity) equals net income/average shareholder equity (which is return on equity), when the numerators and denominators in the equation cancel one another out.  So, a company can target anyone, or all three, of these percentages for improvements, and by doing so, will increase the return on equity.  Such actions as reducing costs while maintaining the same sales amount or selling assets but maintaining the same sales amount will increase the return on equity.

Companies should stride to increase their returns on equity. This site (click here), maintained by Aswath Damodaran, at New York University, provides average returns on equity for about 98 business sectors.

Save on Airline Tickets with Advanced Purchases

Significant savings can be obtained by booking airline tickets in advanced.  A 2012-published survey by Egencia found that advanced purchases of airline tickets to several destinations could result in savings from 11% to 47%.  Purchases were at least 22 days in advance compared to near term travel purchases.  Click here to read the data in this survey (PDF file).

In Priceline (click here), I found that I could save from 31% to 87% if I purchased round-trip tickets from Baltimore to 4 destinations (Boston, Chicago, Denver, and Miami) four months in advance rather than a few days in advance.

However, special factors, such as advanced bookings to a destination when a seasonal or

well-publicized event is happening during the desired travel dates, might reverse this finding to where a purchase price is higher than lower for an advanced booking.

I also found that there was no material difference in purchase price whether through Priceline or directly from the airlines at their websites.   But, using Priceline is very convenient because several airline prices are shown in one search, from which the best price can be chosen.  Otherwise, each airline has to be searched separately.

No airline consistently had the lower price.   Airlines recognized as being low price carriers did not have more “lowest” prices than other airlines.  There was great variability between the airlines in who offered the lowest price.   Also, there was often a wide range between the lowest price and the highest price.

According to the Aberdeen Group report entitled “Travel & Entertainment Expense Management – Reducing Processing Costs & Improve Policy Compliance”, travel and entertainment expenses, on average, account for between 8% and 10% of total operating expenses.  The report provides several recommendations for a more efficient and effective management of a company’s travel needs.  As this report and the above data on advanced bookings suggest, policies and procedures related to a company travel needs can lead to significant cost reductions.  (Click here to read the Aberdeen report.) (PDF file.)