“How to manage my company?”

“How to manage my company?”
by Nikolaos Karanassios, Ass. Professor, Dpt. Of Business Administration, TEI of Serres
1 Introduction
Managing a company that you have created needs different skills than entrepreneurship;
needs management.
The starting point is to change your perspective; from one deciding person you must turn
to be a member of a team, not necessarily the leader, even if you have the right to be,
because you own the biggest portion of the company’s capital.
Then you have to realize that your team is quite bigger than you think; it includes
everyone depending on the company. First of all are the key persons, then all the
workers, then subcontractors, agents, banks and the general public. Each one has
different expectations from your company, sometimes their interests are conflicting,
everyone seeks a bigger stake and your company (not just you) has to balance in this.
Your company is founded because you and your partners want to have a permanently
increasing income, while your wealth will perpetually increase, not for just the
exploitation of an opportunity.
To do this, you have to continuously plan, evaluate and control and for this purpose you
must register, not only what the company is doing, but also the decisions made, as well
as the reasons that led you to these decisions.
Your company will be using public money. When you borrow from a bank, you really
borrow the savings deposited; you are liable for the usage of this money, not just to the
bank but the government, which controls the function of the banks, as well. They need to
know how you are using the “public” money and if you are cautious enough. They will
not check you for the decisions themselves, but whether you are diligent enough. They
don’t give the money to your, but to your company.
When your company becomes successful you need more money to fund its activities,
then you may invite new partners (shareholders, if your company becomes an SA). It is
possible that you will never know who they are. They will only give their money to your
company if they trust the procedures of handling their money. On the other hand, you
may want or need to sell your share. Your share has a value in proportion to the degree
of independence of the persons.
Your company is founded to last forever, being profitable. Although people make and
govern a company, they are not permanently bound to it. Co-owners of the company
may change for any reason. The foundations of the company must be solid enough to
tolerate any such change of ownership. When you decide to found a company you
change from an entrepreneur to an investor.
It is not enough to have profits. Your company must have enough cash to pay all the
obligations, including the distribution of the profits to the owners.
Increasing profitability depends on the procedures that your company is implementing in
order to maximize long term profits, while controlling cash. Profits, even short term or
even occasional, do not depend only in maintaining the costs low, but the examination of
the factors influencing profitability and choosing the right mix.
All these subjects will be displayed in this booklet and you will be guided to manage your
company the best possible way. Yet, there are risks. With this series of booklets the
entrepreneurs are guided to diminish the risks. If you consult your booklets about the
most important issues of how to start a business (your company will start new activities,
as it grows), how to prepare business plans (business planning is a continuous
procedure), how to make marketing plan (concentrating to the consumers) and the
present one, your risk becomes minimal.
But.
"Entrepreneurship is risky, mainly because so few of the so-called entrepreneurs know what they are
doing." – Peter Drucker
Let us see the most common reasons why companies fail, as most writers agree:
1. Discordance between partners.
2. Cash difficulties.
3. Easy money attracted by.
4. Overexpansion.
5. Lack of preparation for expansion.
6. Favoritism.
7. Fraud.
8. Suspicions of fraud.
9. Underestimation of costs.
10. Overestimation of the Market niche.
11. Overinvestment in equipment and other assets.
12. Too much in social relations.
13. Too much in partners luxury.
14. Too much power to hired managers.
15. Too little attention to government controls.
16. Too little attention to bureaucracy.
17. Too much confidence in the product / service superiority.
18. Too much dependence on massive buyers (distribution chains)
19. Dependence on the Public procurements.
20. Dependence on subsidies.
In this booklet you will find an easy way to understand how companies work and how
they should be effectively managed. It is not intended to make you a professional or a
consultant, but give you enough guidance to understand and assess consultants and
specialist that will approach you to get a contract or get hired.
2 Statute
It is a contract between two or more persons that devote a sum of money and / or
concede assets of their property, in order to commonly operate in the market.
Depending on the type of the company, it has to be edited by a Lawyer or a Notary.
It is a series of articles, where all the common activities are governed.
You, either as a new entrepreneur or proposing the re-engineering of a company in
which you are a member, have to indicate to your Lawyer or Notary, some articles that
are not common. These Law persons use patters to write your Statute, they are more
concerned in the legal completeness of the Statute, than the functionality.
You will find in the following chapters a series of suggestions to take into consideration
and ask your Lawyer or Notary to include in the Statute.
2.1 The articles of association
In addition of the patterns of the Lawyers and Notaries, you can dictate the following
articles:
Who is the beneficiary of each partner in case of his inability to continue his participation
(death, severe illness, disappearance etc), indicating the partition for each beneficiary or
earl.
The age until which the members of the company will be able to participate in decision
making.
Most of the companies in Europe suffer succession. If something happens to one
member and his /her share is about to pass to his earls, there are usually legal quarrels
which practically “freeze” the company and drives it to resolution. Even when this does
not happen, the remaining members may not have the ability to communicate or be
accepted by the others. When they know the successors, they accept them in advance
and if something happens to one of the members, the company goes on without
problems.
An age limit in decision making of a company is very important, because even when they
may be still active, their attention is concentrated in their pension, not the future of the
company. This makes them very conservative and discordance arises among the rest of
the company members. This article must set an age for decision making and
representation of the company and also state that they can still participate in decision
making sessions and meetings, as advisors, only in preparatory discussions, not in
voting time. In the same article, there must be a clause, that their share of profits will not
be invested, unless the aged person agrees. There may be a limit (i.e. 70% of the net
profits may be re-invested without agreement).
There must be an article about the change of the Legal Status of the company (i.e. from
partnership to Limited Liability, from Societe Anonyme to the Stock Exchange and other
combinations). Too many companies loose the opportunities of development, because
the members do not reach a quick decision to change their status. In most cases they
are not prepared, so they are afraid of loosing power.
Another article must rule the entrance of new partners. Unprepared entrepreneurs are
afraid of loosing power with new members entrance, while these persons will bring in
cash and change the percentages distribution of ownership, but in the same time they
will increase the value of the ownership of the old members, since the overall value of
the company becomes bigger than the sum of what it was before together with the
money put in by the new members.
From a different point of view, there must be included, on one hand the procedures of
creating other companies (a company may be a member of another company) and on
the other hand the conditions under which the company may be sold to another
company, merge with another company or participate in cluster of companies. It is often
seen that successful companies become very vulnerable because they attract new
competitors, just because they believe that they will become successful as well. Many of
these new competitors come from within the company’s staff members. They know the
business, they have connections with the clients and they are the key persons. Creating
their own business means that they steal the competitive advantage. In such cases, the
legal representative must be delegated, with a specific article, to create a “spin out” (a
new company, together with those staff members), provided that they will go to the
market with new products / services, even if they are developed in the company. If such
an article of delegation is missing, those persons will create their company and eat up
the company. A collective decision, as in typical Statutes, takes too long to be taken,
while a lawsuit against these staff members, even if it will be accepted by the Court of
Justice, is only a compensation for the damage. It is not the same with mergers or
selling out the company. The delegation of such an authority to the legal representative
has to be limited in two ways and also facilitated; there must be a limit of time for
consultations with the partners, a specific majority (i.e. 60% of the votes) and a verbal
declaration of the partners agreeing (or against) the proposal, within a deadline. If the
deadline expires, then delegation must be tacitly given to the legal representative.
As has been demonstrated previously, success is more dangerous than stability or
decline. Success must be funded and one possible way is to bring in Venture Capital
(cash brought in by investors intending to take it back after a period of time, with or
without a combination with sharing profits). Those investors may ask to participate (or
even dominate) decision making. Venture capital opportunities are rare and are safer
than bank loans, because the company returns to the venture capitalist only profits and
the increment of the value of the company; if not successful has no liability of the
members with their personal property. An article facilitating fast decisions about the
acceptance of a venture capital proposal, must be included. At the Statute formation
time, company members are not afraid of loosing power, since they don’t have power
yet. In later time, they may oppose, so a limit of majority must be included, while easier
delegation to the legal representative must be considered, while venture capital is not
permanent (as it is with mergers and acquisitions).
Finally, an article about the obligation to elaborate an Internal Regulation within a limited
time (usually one year) must be included.
2.2 The Registration
The Statute must be registered at the appropriate authorities. They are supposed to
examine it about the conformity with the Law. They usually reject it when the minority
partners are not well protected.
Even when the Statute is not registered, the company exists as a contract between the
members. Third parties do not make transactions with the company, but with the
member.
3 Internal Regulation
The Internal Regulation is a contract as it is the Statute. For the big companies whose
shares are traded at the stock exchange market, there is European Directive which is
commonly called “Corporate Governance”, as well as all OECD member States have
agreed to promote the relative regulation.
The Corporate Governance is meant to protect the anonymous shareholders from
fraudulent actions of the Management of the companies they become shareholders. This
does not concern the Small and Medium Size companies, especially the new once.
What makes it a useful tool to such companies, is that it also regulates the way a
company is managed, as “Business Ethics” are best thought to be served.
In this section, the ethical issues are avoided, while we concentrate our efforts to what
makes a company avoid the most common mistakes.
The Internal Regulation may be an amendment to the Statute, so it may be also
registered. This means that temporary majorities cannot change it, unless it becomes a
new amendment. This gives enough time to examine the regulation as a long lasting
document.
It is better to assign the task of the preparation of such a regulation to professionals (i.e.
your NGO consultant), while your Lawyer must see it in the end, for possible legal
infringements.
The Internal Regulation is adding bureaucracy to the Management and Administration of
your company. In the same time, following the procedures set in it, saves your company
from a possible crash.
3.1 Decision Making
Both managerial and administrative decisions should be coherent, so that the company
proceeds prosperously. It is thought that these decisions are being taken in favor of the
company; but what if they are being taken in favor of one partner or a group of
executives? What if a democratic (majoritary) decision is made on a difference of
information among the decision making board or committee?
Management and Administration have to make decisions on an equal information basis.
They also have the time to reflect, or even get external advice, if they think that they
need it. Managerial and Administrative decisions are not the same.
3.1.1 Managerial Decisions
Managerial Decisions are the once concerning the company as a legal entity. As such, is
responsive to all third party interested institutions (Fiscal Authorities, Banks, Government
authorities of all levels and nature, insurance institutions, European or Public funding
and the alike).
Such decisions should be taken under an agenda, timely communicated to the
members, as all the legal systems set. Such formalities are usually followed. The
decisions are being taken informally, while evident majority participants meet and
prepare their vote, not in respect of the company’s benefit, but as a distribution of
personal benefits, even if those benefits are not relative to the personal profits.
A well regulated system should set that:
Together with the agenda, a proposal is also communicated.
The proposal, as communicated, has been approved as being beneficiary to the
company, by either internal (specialized staff members) or external (NGO consultants)
as appropriate, together with their comments.
There in an adequate time for submitting different proposals and that there is enough
time for the members to study them before the meeting. A proposal, for example, to
extend the manufacturing equipment, should be delivered three weeks before the
meeting, leaving two weeks to the members to prepare a different proposal and deliver it
to all the members, so they all have one week to study them both. This is not a Law, but
just a functional system, as we think of it.
No discussion of proposals is possible unless all the participants received them at least
an adequate time in anticipation of the meeting (one week?). The members may agree
to postpone the decision, until all proposals have been communicated to all of the
members. Only one time is possible to postpone a decision.
The proposing member may ask a staff member to present his proposal.
All proposals are registered in the Verbal.
All the members explain their vote.
The discussion is not registered in the Verbal.
A vote with hesitation is a vote against a proposal.
The secretary (the one who is registering the verbal), is not present during the
discussion.
The Secretary is not a voting member of the decision making board.
The verbals are registered in three levels; the public, the internal and the restricted. All
decisions have the same classification; A restricted decision contains all of the
proposals, while the same decision, without any argumentation, may be communicated
(i.e. it may become public that the company decided to merge with another company,
internal in regard to what this company is, restricted in regard to how such an event is
assessed).
3.1.2 Administrative Decisions
Administrative decisions are usually taken by one person, not a committee or a board,
as they have been delegated the authority to do so. For example, the legal
representative may have been given the authority to take a bank loan, a member of the
board may have been delegated to contract an external selling agent, an executive to
approve discounts to clients etc. Such decisions do not change the shape of the
company, as managerial decisions do. It is everyday operations that need fast decision
making and, most of all, personal responsibility of the person in charge.
While “democratic” management is quite widespread (making decisions in meetings),
responsibility is lost. There is a tendency to go back to “consultative” management,
where one person decides and other persons responsible for other activities are
discussing the impact of a decision to their sectors of responsibility. When the company
grows enough to assign responsibilities to staff members, instead of partners, it is wise
to distribute authority of decision making, because the board is not bound to previously
taken decisions and is free to change policy and even the staff members.
The usual decisions that create dispute and discordance, are described bellow.
3.1.2.1 Hiring
Every immediate superior has to be assigned the right to hire the persons he / she
considers most appropriate. For example, staff members must be assumed by the board
of directors, while they will be placed in responsible positions, answering to the board
(as board we mean the partners or their representatives).
The internal Regulation has to be very strict in hiring, by prohibiting the enrolment of
relatives until second degree, to all levels, with one and only exception; if these persons
are already in the Articles of Association as indicated to succeed a partner.
The hiring procedure has to delegate absolute power, restricted only by hiring relatives,
to the person they will work for. For example, the Sales Manager must select his sales
people, without the interference of anyone else, the head of the transportation unit must
select the drivers himself, not his boss; the Sales Manager in this case.
The hiring procedures must be very flexible. There must be suggestions about
advertising open positions, about the usage of external services (a specialized company)
or else, but the person who is going to be the immediate boss of an employee must be
free to grab an unemployed person that he thinks will best work for him, so he will
perform better and present better results to his superiors.
Reminder 1:
Hiring is the main cause of trouble in most companies.
Reminder 2:
However a procedure of hiring is scientifically important (for example the use
psychologists) every person, assuming responsibilities, has his / her own style and there
is no method to predict conformity with this style.
Reminder 3:
As a partner, you may be tempted to impose hiring of persons, as a favor to politicians,
friends, important clients and any kind of others. Remember that, after you have satisfied
their petition, they forget it, until their next petition!
3.1.2.2 Firing
Every immediate superior to an employee has to be assigned the power to fire. This
power must be restricted by:
A yearly percentage of possible firing.
 A written statement of the causes that occurred, signed by the dismissed person,
to verify that he / she knows the reasons claimed by his superior (not that he /
she agrees).
 A hearing from the firing person’s superior, so that the dismissed employee’s
point of view is heard.
Reminder 1:
Never fire an employee without the appropriate compensation, not even for theft. He will
go to the Court of Justice and you will pay it in the end, while he (may?) sue you for
calumniation! He / she will have a Lawyer anyway!
Reminder 2:
The decision of firing belongs to the immediate boss. It is irrevocable, even if after the
hearing you are convinced that the firing reasons were obviously different, or even illicit!
If you are convinced that one of your trusted responsible persons is using his delegated
power for either personal reasons (sexual included) or as an excuse for failure, you may
fire him!
Reminder 3:
Never admit, being a partner or legal representative, that there is such a thing as
immoral administration in your company.
Reminder 4:
Incompatibility is the reason of every person fired, for everyone, whatever the real
cause.
Reminder 5:
Sexual harassment in the working environment exists. There is no gender discrimination.
It exists between persons of the same gender and has been evidence even in the Bible!
Never admit it exists! Never accept it as an excuse for firing someone, unless there are
other behavioral discrepancies that can justify such an action (for example, there is an
evidence of molesting, which is a criminal action). Do not forget that you are running a
business, not a Court of Justice.
Reminder 6:
When you fire someone you must replace him / her. You may be suggested to fire
someone, for any reason, because there is an unemployed person waiting for the same
position.
Reminder 7:
Never listen to someone who is telling you what his / her co-workers are doing (or even
saying). He / She is waiting for a benefit, usually to get the salary without really working!
3.1.2.3 Promotions
There is no typical system of evaluation. You have to describe one in your Internal
Regulation. It will only be functional and long lasting if your system is based on recording
performance of your employees and then the evaluation comes as the result of an
examination of the records.
Reminder 1:
Nobody is perfect. People make mistakes. Unless there is a damage to your company,
do not give importance to the mistakes. Employees who make mistakes, are risk taking
persons and in most cases are better for higher positions.
Reminder 2:
An effective worker may be a very bad director. You may promote such workers, giving
the title and the salary, but not really assign them with leading duties.
3.1.2.4 Subcontracting
Subcontracting is one of the major fields of fraud or suspicion for fraud. You have to
describe the procedures of subcontracting.
Reminder 1:
A subcontracting action is never urgent. A random committee can assign it.
Reminder 2:
Set a limit of the annual budget to the managers for services that do not really affect
your business, like painting the office, repairing a photocopying machine and such.
3.1.2.5 Borrowing
Set a procure for borrowing money from the banks.
You must not revert to bank loans unless there is a written justification, including the
impact to profits and examination of alternatives (for example, shortening the credit line
to your clients, minimizing stocks, selling out participations in other companies etc.)
This part of the regulation will save you from overborrowing, but it will also save you from
your creditors, if you delay your payments to the bank. It will also facilitate your
borrowing, while the bank will see that you are prepared to pay back.
3.1.2.6 Collecting
Set the procedures and the responsibility for soliciting your clients to pay their debt.
Communicate this regulation to your customers, so they also know the procedures.
Delegate the authority to extend the credit line to your clients to only one person, other
than the legal representative.
Put an exception to the normal procedures for special clients, but the decision must be
taken only by the board of directors.
3.1.2.7 Contracting
Delegate the legal representative or the CEO to sign any preliminary agreement or
application for grants.
Set a procedure for signing the contracts. Such a procedure may include the revision by
a Lawyer, but in any case there must be a limit, over which there must be a written
assessment of the impact of a contract.
3.1.2.8 Pricing Policy
Driven by the desire to increase sales, managers tend to discount prices, while potential
buyers are pressing for discount, even telling lies about alternative offers, the tend to
discount without taking good care of the impact to overall profits and cash flow.
The discount policy is affecting all three of them; sales, profits and cash flow.
On the opposite side, managers tend to think profits only as a difference between selling
price and cost per unit.
Another point of view is examining the discounts as an attraction of clients, being a
MARKETING policy element.
Yet, another point of view examines the discount policy as a danger to damage the
quality image of the company, stating that you cannot sell high quality products and
discount in the same time; “you cannot buy cheap quality” and consumers know it. If you
discount quality you may find buyers but not customers (in the sense of frequent
buyers).
As a very important issue, it has to be decided by the Board of Directors (a meeting of
owners, if the company is small).
There must be a clause in the internal Regulation that such a decision must be only
taken after a series of studies of impact (you may revert to external consultants, if your
internal professional resources do not meet the requirements for an appropriate
evaluation), such as:
 Expected impact on sales in long term and short term.
 Expected impact on profits after taxes.
 Expected impact on the Cash Flow, for the next three years.
Make sure that:
 The Advertisement cost of the discounts that you offer has been added to the
overall costs, before you calculate profits and cash flow.
 You have taken into consideration that a new discount policy is changing your
company’s image.
 Pricing (discounts included) competition is always in favor of big companies who
can sell even under their costs, just because they want you and other small
companies out of the market; you have examined this occurrence.
 You may loose customers (especially “heavy customers”) who already have
purchased from you without a discount.
3.1.2.9 Advertising / Promoting
Advertisement and promotion are very close to aesthetics. All those activities are using
beauty as a means of “catching the eye” of the consumer. Are you sure that beautiful
sells?
The most common selling systems for advertisement / promotion agents is to approach
the deciding person of a company (in a small and new company, the legal
representative) with beautiful proposals; they usually avoid the selling impact, or the
Return On (your) investment is such a campaign. In order to secure their sales, they will
“flatter” the person in charge. They use such arguments as “we are going to advertise
you in the most popular media” or “you have the first clients who is able to esteem
beauty, here are three proposals and we are sure that you will choose the most
beautiful; yes, we were sure that you would have chosen the most beautiful one!”
Your Internal Regulation has to control the procedures of assigning Advertisement and
Promotion campaigns, so be sure that, at least:
There is calculation of “contact cost per potential buyer”.
The “message” that you want to transmit is clear and attractive.
You cannot advertise your products and your company in the same time.
The more an advertisement is beautiful, the less your potential clients remember your
message.
Celebrities cost and celebrity has a short life. Do not use them, unless you are prepared
to rely on celebrities and not one celebrity, meaning that you are going to use the actual
celebrity every time there is a new one and that your product or service is aiming to sell
to market niche attracted by actuality. For example, if you are selling scientific books,
celebrities in your advertisement may even damage your sales. If you are selling
industrial equipment, their usage will not affect your sales. If you are selling fashion
items, you cannot avoid celebrities. Calculate the impact on sales, even in arbitrary way;
if you have statistics of your past, use them.
You have advertising / promotion proposals of more than one advertising agencies.
The proposing agencies accompany their proposal with a cost / benefit analysis.
The selection of the best fitting your business proposal is done by the board, not one
person; it is an investment, after all.
3.1.2.10Setting your own salary
Every person or entity which has interests in your company is also interested in your
salary. Those interested parties are:
 Your partners. The lower your salary is the higher the profits (their share) will be.
 Your Creditors. Your salary is going out of the company, as a cost element. They
are afraid of your intentions to increase your personal income at the expense of
the company, which you may drive to bankruptcy and never pay them back!
 Your employees, which compare their own salaries with yours.
 The government, while salaries and profits are being taxed differently.
 Your clients, because they think that you are “stealing” from them, while they
excuse profits.
Setting your salary, as a partner (together with the salaries of other partners working in
the company) as well as setting commissions on sales or any other performance
element, is an internal subject of the company, but it soon becomes public.
When you ask for a bank loan, you must declare your salary and other benefits
(commission, company car, paid holidays, use of company credit cards, personal loan
guarantee by the company, paid personal expenses, Legal assistance paid by the
company for personal cases, company paid education of your family members and the
similar). If they exceed normal wages, they may deny you the company loan,
considering it a “consumption” loan, with a much higher interest rate, a much smaller
amount and much more collateral demanded.
Venture capitalists, capital increment invited shareholders and the Stock Exchange (if
you address it for capital raising), they will all turn their back to you if your personal
revenue is considered higher than “normal”.
On the other hand, your salary should be the highest in the company (if you are the legal
representative) and higher than any of your employees (if you are a member of the
board of directors), so that your subordinates respect your decisions.
The Internal Regulation must include a procedure for this salary setting question, while it
must also put limits (both higher and lower) for these salaries, as a comparison to the
salaries of other staff members.
3.2 Business Ethics
Business Ethics are supposed to be an “oxymoron”. Profits are not easily accepted as a
legitimate way of money making, by most of the people, worldwide. In the same time the
general public admires business persons which become rich!
Within this conflicting mindset, all persons dealing with your company need to trust that
you are not “cheating” them. Since the profits of your company are the result of all the
operations in the end of a year, the only interested parties are the partners (or
shareholders) and your staff members. The clients and the creditors, will hardly learn
about your profits and the fiscal authorities will be happy to know that you declare high
profits.
Since the shares of your company are not yet being traded at the Stock Exchange, you
are not obliged to adopt the “Corporate Governance” directives; yet, reading the
guidelines of the “Corporate Governance”, paves the way to the desired “incorporation”
that will transform you from an entrepreneur into an investor.
3.3 Social Responsibility
Corporate Social Responsibility is not certainly meant for small companies. It concerns
big enterprises, but even they have been small in their past.
Social Responsibility means a company operation in such a way that it shows an evident
concern about:
The environment.
The development of the society they operate in.
The health and safety of people working in the company.
The company impact on the evolution of innovation and scientific world.
The promotion of equal opportunities to all the members of the society.
The company has to declare its values, both to the external environment and the
employees, but only if it is determined to serve these values. If, for example, your
company is dealing with chemicals without using the appropriate technology to protect
the environment, will prove disastrous for the company, because everyone (including
your competitors, will declare you a liar).
3.4 Professional Code of Conduct
For almost every profession there is a code of good conduct, being a manufacturing,
commercial or service providing.
Although such codes are not obligatory, you have better read the code, corresponding to
your business and try to implement it in your company. You will find it very difficult, while
your competitors will be getting most of those clients that are vulnerable to unfair trade,
but in the same time you will be getting more and more recognition by the final
consumers and you will gradually get back the most valuable customers.
You must use your Public Relations to frequently communicate that your company is
implementing a professional code, at a level best adapted in your market. Do not include
principles that you are not able to follow.
Remember: Sooner or later, a similar code will be adopted by your government and will
become obligatory, because you and your established competitors will try to protect your
companies from new competitors and unfair competition among you.
4 Organizational essentials
You are about to run a company, so before you start anything you have to organize your
business. Here is how to start and how to proceed.
4.1 General
Organization is putting persons to work together, co-coordinating the company facilities
and other means, so that they all go to the same direction. There are several theories
dating at least two centuries, but the essence remains the same; putting people to work
together means that they share the same goals, the same means, the same values and
the same objectives.
It is obviously impossible to have (or make) people that will put the organization (and
your company) in precedence of their personal desires, ambitions and even beliefs.
People compete for power, admiration by others and money, being (as we all are) lazy
by nature, so they prefer obtaining it all without effort.
A company can me run without a formal organization. In such a case a strong leader
(gifted by nature) is able to transmit his goals and values and mobilize people working
for him. It only lasts a little.
What we need is a formal organization which is clear to everyone, different from
company to company, making people work for the same purpose, either they believe in it
or not.
To do so, there is a little bureaucracy to tolerate, a little power to loose, but in the end,
the formal organization makes the company to last and be profitable.
People need a program to work and control, so that they know that they have to do the
job they are assigned.
Here is how:
4.2 Programming
Programming means have written the future action in advance, so that everyone knows
what has to be done and when. A program consists of the following:
4.2.1 Targets
A program has to declare a target to achieve, which everyone involved knows and
remembers, so:
The target has to be brief, so that everyone remembers it.
It has to be tangible; using numbers and dates.
It has to be coherent and in accordance to the Strategy of the company, to the tactics of
the Board of Directors and the policy of the company, in respect of every field of action.
It has to be feasible, otherwise people abandon it.
Reminder:
Use less than 18 words to declare the target.
4.2.2 Procedure Analysis
To reach the targets you need several procedures to be executed; others simultaneously
and others sequentially.
The procedures analysis is a very difficult task, if you are about to write an overall
program for your company. It becomes much easier if you break down the functions of
your company and write a separate program for each function, even if don’t have
separate units for each. For example, you can write different programs for sales and
production (when applicable), although production depends on sales. Writing the
programs you will realize that you can declare the targets in conjunction to one another,
i.e. production of orders within 20 days, means that you have to write a new program for
each new order.
4.2.3 Assignments
Every procedure is assigned to a work position (not the person working in this position)
because he / she may be absent or replaced, during the program.
Assignments have to balance the work load to the working positions. You will be
tempted to assign many procedures to the most skilful and productive workers and less
to the untrustworthy. This way you risk loosing your best people. Even if they don’t
dismiss themselves, they will change attitude.
Reminder:
Never accept “this work is not among my duties”. Employees are learning quickly that
they have to do what they are assigned and do it well. Exercise every possible way you
think to convince them, but never retreat.
4.2.4 Allocation of resources
Your resources are not infinite. You may just have one truck and it is needed both for the
transportation of raw material to your company, the transportation of the sold goods to
your clients and for the transportation of spare parts that the maintenance of your
equipment need. You have to allocate the means to the working positions, according to
their assignments.
If you don’t allocate resources, you have to expect an excuse for not doing their tasks.
Do not expect your employees to ask for the means they need.
If you have to assign tasks to external parties, assign the task to monitor the progress
that this third party is doing. If you omit this, you risk finding this third party having
forgotten you, creating a delay and disorder.
4.2.5 Budgets
Break down a budget, so that each procedure has enough money to be executed.
Adding the particular budgets, you know the overall budget of your program.
Subcontracting and external services must be trusted for payments to the person who
will receive and control the “deliverables” of this third party.
4.2.6 Schedule
Writing in a calendar the procedures, the assignments, the deadlines for deliverables,
the allocation of resources and the payments, you have the whole picture of your
program and you can control it.
Putting all these information in a table (using the Gantt table is very helpful) you can also
have the payments for each time unit (week, month etc).
Reminder:
Distribute assignments in written to all working positions and seek a receipt in duplicate,
headed by the program target declaration.
4.3 Controlling
However your programs are well done, if you don’t control the business, all you have to
expect is excuses.
The control consists of organization and observation. It sounds oxymoron, but all your
programs need an organization which facilitates reaching the targets and observation of
what people are doing and how.
4.3.1 Organization
An organized company is the one where every employee known what and how to do,
how to ask and report, as well as his / her higher and lower positions. From whom to get
directives and who to guide.
4.3.1.1 The Organizational Goals
The company is an organization. The company has been founded for a specific purpose
or more than one purposes. These purposes include the way they can be fulfilled
through competitive advantages.
The goals of the organization are those leading to the route to success in the purposes
fulfillment. For example, if the company purpose is to produce innovative products, the
organizational goal may be to promote research. If the company purpose is to satisfy the
clients servicing, the organizational goal may be to improve customer treatment.
The whole system is affected by the organizational goals, because through the
communication of these goals to all parties involved, they all know what the priorities are
and act accordingly.
4.3.1.2 Co-ordination
Co-ordination is achieved with:
 A clear hierarchy.
 Unique and clear formal communication.
 Distinction between Line and Staff members (working positions).
Hierarchy shows who is the boss in every unit, having the right to “give orders” and
makes decisions and to whom all subordinates report or revert to for guidance, or even
ask for something (for example the permission to leave).
Formal Communication is distinguished into Vertical (order and report) and Horizontal
(information of the same hierarchical level of other working positions).
Line members are those operating in segmented working positions (sales, production
etc), while Staff members are those working for the whole of the company (marketing,
accounting, research etc.).
All the above is usually represented in the Organization Chart.
Reminder:
The lines of the Organization Chart show the unique formal communication route.
4.3.1.3 Authority
Every working position must have a clear and written authorization to perform tasks. The
authority concerns the right to give orders (describing also the kind of eligible orders and
the limit to give orders) and the authority to handle items (goods, equipment, tools etc.)
For example, the Sales Manager may be authorized to send sales persons to a trip for
visiting clients but he cannot arrange their meals. He may be authorized to make
photocopies of the price lists, but not to change the prices etc.
4.3.1.4 Responsibility
Authority is connected to responsibility. There is no responsibility without authority, while
there is responsibility for every authority. If, in the previous example, the Sales Manager
is authorized to send sales persons for a visiting trip, he / she is responsible for having
the visits done and that the sales persons are equipped with enough price lists. If the
authority to make copies of the price lists belongs to the sales persons, then they must
be responsible for being provided with, before they leave.
4.3.1.5 Delegation
Concentration of authority to the top management creates bottlenecks, while all
decisions have to be taken by the same persons and their working time is limited, never
mind their ability and skills to resolve every case. Keeping all decisions to the top
management will result to employees waiting in a cue and loosing their time, while this
discourages them from taking any initiative, thus to lack of progress.
Authority and responsibility is distributed with a formal written delegation, not to persons,
but to working positions (the boxes of the organization chart).
4.3.1.6 Span of Control
As it has been said in the previous section, it is impossible to have under control an
extended number of working positions. The same stands for the space extension. It is
impossible to control vast spaces or dispersed company facilities. Space and working
positions of the control alleged to every working position must be well defined.
4.3.1.7 Unity of Management
Delegating authority, defining responsibility, describing the span of control, may result to
undesired results.
You must examine again all of the above sections, to verify that:
Subordinates do not have more authority and responsibilities than their superiors.
Subordinate positions do not take orders by more than one superiors.
A working position does not require multiple skills (engineering together with Legal and
Computer programming). You may meet such persons, but even if you do, do not
describe a working position based on such a rarity. Skills required must be
homogeneous.
4.3.1.8 Duties / definition
For every working position there must be produced a small “book of instructions”. In this
“manual” you must describe:
 What the person occupying the working position is expected to do daily and how
to do it.
 What this working position is expected to execute periodically (every week, every
month, every year).
 How to handle security (his security and security of the others).
 What to do in cases of emergency (working accident, physical catastrophes,
external or internal attack, health hazards and similar).
Preparing all these books for every working position needs much work and efforts, but it
is quite rewarding, because your company will perform well, both in achieving goals and
keeping the employees satisfaction high.
4.3.2 Observation
The previous chapter was paperwork with working positions. This chapter is about
people working in your company.
Although the title of this chapter is observation, you will find out that there is no physical
observation. Knowing that nobody wants to be watched (we tend to make all the
mistakes while we are being watched) and keeping in mind that what you want is
performance (quantity and quality), you have to create transparent procedures for your
human Resources.
4.3.2.1 Selection
You already have described the skills and qualifications for every working position, now
you have to select the best fitting persons. Set the procedures for selection and
communicate them to the candidates.
Reminder 1:
Work experience is not always a qualification. It may be indispensable for managerial
positions, but for entry level positions it may bring in bad habits from the previous
position.
Reminder 2:
Persons selected because they are recommended by relatives, politicians or other
“obligations”, will make you loose control.
Reminder 3:
Very high academic records are only needed for research positions. The ambition of
such persons is to hold an academic position.
4.3.2.2 Training
Life Long Learning (LLL) is a universal tool for personal development and also the
evolution of the enterprises and, as a consequence, the society.
Companies are considered to be the main lever for development and in the same time
the field of action for ambitious persons. As a result, the enterprises are the most fertile
ground for LLL, being considered as learning organizations and characterized by
“Knowledge Management”.
In fact, every company is different from any other. A new comer must know his /her
environment, the colleagues, the managerial style, the locations, the premises, the
equipment and their use, the “manuals” about his working position and the general
Internal Regulation about his / her service.
As a result, the company needs to train every newly hired person.
The same necessity is evident whenever the company is either equipped with new
machinery, adopts new techniques or reengineers the whole management. The
company must train the employees again.
Whenever the technological or socio-economic environment (even the competitive
environment) changes, the company must train its employees, so they are prepared to
face the changes.
Companies change work positions of the Staff Members, especially when they are
designated to occupy high rank positions, which need a wider view of the company and
a deeper knowledge of its operations. Before they move to another position, in addition
to getting the necessary acquaintances with their new working environment, they need
training, so that they are able to understand the difficulties of the tasks they will assign to
others and know if they are real or just excuses for non-action.
Reminder:
Professionals will try to convince you, offering a part of European funding of LLL, to hire
them as “training bodies”. Close your ears to the sirens. If you listen to them, you will
end up with getting involved in fraud together with your employees, who become
“accomplices”. One time sinners; what do you have to expect? Will you able to ask them
an honest behavior?
Academics will make you believe that they are the most appropriate trainers for your
personnel. Before accepting them, ask them to show you how they can operate in your
technological / cultural / educational / procedural environment. Without such an
examination, you risk making your employees loose their morale, while they will be
shown every new scientific achievement, just because it is important.
You have to crate an internal education system, as well as an external, facilitating your
employees to bring in external knowledge. The internal education system is the one
permitting the employees to change positions, adapt to technological changes in the
company and improve their skills.
4.3.2.3 Monitoring
Supervising personnel is both costly (the supervisor does not produce income for the
company) and ineffective. When an employee decides to pretend working, he will. Even
if he really works, he will produce bad quality.
Our days are not all the same. The best employee, for personal or even no reason at all,
may not be in good mood and perform less than usual. If this causes a bad judgment, he
will be discouraged to cope up with the company expectations.
A fine tuned organization records the production of each employee in a regular basis
both in quantity and quality. Rushing production (or sales, or services) and measuring
only the quantity, you risk destroying material and other resources and even damage
your company image. Concentrated only in quality, you risk incrementing your costs and
staying out of the market. The most desired combination is to have the best quality at the
maximum quantity, but such an occurrence is very rare.
There are many ways to control quality. You should replace supervision with quality
control and record keeping of the productivity of each employee.
4.3.2.4 Evaluation
If you just record productivity (or efficiency, or effectiveness), you already have done a
step forward. If you evaluate each worker in every period (no less than a month at a
time) using a system that he knows (for example you may use an average as “normal”
and compare it with the individual average performance) in advance, your employees
will increase their contribution in the revenue making process.
It is mandatory that the evaluating system is clear to all employees and it is different
from working position to working position. It is also important to have a simple statistical
tool in hand, so that you avoid arbitrary or circumstantial evaluations.
4.3.2.5 Motivation
In 1980 scientists started expressing doubts about the wage increment related
motivation. Now most of them believe that “monetary” motivation does not really work.
Rewarding productivity (efficiency, effectiveness) is much more important for the workers
when it is related to social recognition.
There is no pattern for this, social recognition is different from society to society, even in
neighboring places. Let your imagination work!
Participation at the distribution of profits may be strongly motivating, if on individual basis
and not collective. It is not a matter of justice, but merely common sense. If an employee
can enjoy additional earnings independently from his contribution, he will not be
motivated at all.
Promotion is commonly used as an incentive for the best performers. It certainly is, but a
promotion without a salary rise seems ridiculous and does not last for long. As it has
already been explained, it may also put the wrong persons in the wrong positions. You
can invents other systems, like creating many stages with titles and a rise of wages,
without really assigning administrative duties that are often incompatible with a well
performing employee. Selecting the head of employees is not a reward for performance.
He or she must lead people and not tune machines or treat customers, while he or she
must make fast, accurate and profitable decisions, taking the risk to fail.
A systematic knowledge and analysis of the desires of the employees will give you ideas
of motivation. An incentive that you think is plausible, may not be interesting at all to your
employees and other (to you irrelevant) things may be strong incentives (for example,
paid excursion with the family, may result a wrong incentive, while the expedition to a
trade fair alone, may be a strong incentive).
4.4 Organizational tools
You can use simple tools to help you organize your company better. There is a lot of free
software in the internet, but you can simply use MS-Office.
Computer use is not necessary, but it helps you doing the same job faster and more
accurately.
4.4.1 The GANNT matrix (enhanced)
The Gannt table is a very simple tool. Here is an example:
Imagine that your company is planning to increase sales by 10% in 6 weeks.
To cope up with increased sales, you need to get raw material, increase production,
move sales persons, advertise and pack.
Here is the Chart.
Code
1
1.1
1.2
1.3
2
2.1
2.2
2.3
2.4
3
3.1
3.2
4
Task
Marketing
Brochure Creation
Brochure reproduction
Brochure distribution
Sales
Sales Persons Tour
Orders Received
Orders Executed
Clients follow-up
Provision
Raw Material
Packaging
Distribution
Cost
Payments
ASSIGNMENTS
Sales Director
Production Assistant
Assistant Accountant
Secretary
Company Car
Office Equipment
Week 1
wek 2
Week 2
wek 3
Week 3
wek 4
Week 4
wek 5
Week 5
wek 6
250
500
350
400
800
250
250
100
500
400
1.800
1.000
400
400
50
60
100
1.000
300
300
2.050
1.825
350
910
680
400
100
120
120
140
400
620
540
1.500
500
450
2.710
1.435
145
160
170
180
195
200
500
1.205
1.878
1.700
550
550
3.150
903
600
995
2.745
Cost
1.100
250
500
350
3.340
1.600
0
840
900
6.600
5.000
1.600
3.150
14.190
The original Gannt Chart had only the shadowed areas, to show when a procedure
(task) starts, when it ends, how several tasks can be executed simultaneously and how
the tasks follow one another.
This proposed enhancement, includes also the cost for each task at the time it occurs
and also the payments.
Payments differ from the cost, because you can buy on credit, but this credit must be
paid in a later time. This example assumes that you pay the credit the following week in
full. In a real case, there are different credit lines for each purchase.
It is a simplified chart. There should be also the involvement of sales position (per
territory, type of clients, type of products).
As you can see, there are no names of persons, but just working positions. This is
because the work must go on and executed in time, never mind the absence of a
person.
4.4.2 The Organization Chart
President
Accountant
Marketing
Secretary
Supplies
Production
Assistant
Some observations:
Sales
Maintainance
The boss is only one. He may represent the Board of Directors. The members of the
Board are not represented in the chart, although they may fill in positions (for example,
there may be a Sales Vice President, a Marketing Director, who is also a member of the
Board, or even an Assistant at the Production). As a member of the Board, participates
in the Decision Making meetings, has a voting right and may be assigned with other
tasks, like the representation of the company in trade Fair, sign contracts with banks and
similar high rank authority, or even delegated the power to evaluate the employees,
among them, his superiors!
The “boss” (in this example the President, but it may be Chief Executive Officer, or
differently called) has three duties; implement the decisions of the Board, Coordinate his
subordinates and resolve everyday implications. His duty is also to bring in the Board
every matter that needs a Board Decision (when the subject is so serious as to affect the
company) as in charge to compile the Agenda and Call the Board in a meeting.
Accounting, Marketing and Secretary cannot give orders, but only through the President.
They are Staff Members.
Production position can give orders (in fact he prepares programs) to the Assistant and
Maintenance positions and receives Reports from them. If the Production Assistant
needs a change in Raw Material supply, he must refer it to the Production position. The
Production responsible, then, may ask the Supplies responsible to make this change. If
the Supplies responsible does not agree, even if he thinks that this change is major for
the company, their disagreement will be resolved by the President. If the President
thinks that this change is in fact major to the company, he will put in the Agenda of an
Ordinary meeting, or Call an Extraordinary Meeting of the Board, to decide upon.
5 Human Resources essentials
When the work gets to be too much, you may find yourself toying with the idea of adding
staff to help out. But do you really need help? First, ask yourself if you need to hire
someone or just be better organized. If you're having trouble getting organized, try local
libraries, community centers, or colleges for information or seminars on time
management.
Can you afford an employee? Even if you know that you need the extra help, you'll still
need to consider whether you can afford to hire a new employee. How do you know how
much you can afford to pay? There's a tension between how much the employee's
salary and benefits will drain your business's budget and how much extra money the
employee's presence will bring in.
Look at your operating budget. How much slack is there in it? How much money could
be cut from other areas, so you could use it to pay an extra person? Remember that
you'll need to pay at least the minimum wage, not only under the law, but under the
danged to have your business boycotted. Don't forget about payroll taxes and legally
mandated employee benefits, like workers' compensation.
Now, try to estimate how much extra income that employee would generate in the first
year. It's not always easy. If the employee is going to sell your product or services, it will
be easier to figure out how much extra income he or she would bring in than if the
person is going to perform data entry or cashier duties.
But in the absence of a "cause and effect" relationship, consider other ways that an
employee could generate extra income:
•
With an extra employee, would you have more time to market your services and
expand your business?
•
•
Would an extra employee allow you a chance to produce more products or serve
more clients?
Would an extra employee allow you to give your customers more efficient service
or quicker delivery, with the result that higher quality would lead to more
customers?
If the answer is "yes" to any of these, try to estimate how much extra business would be
generated by more, faster, and better delivery of your product or service.
The math is simple. If you're fairly sure that the extra business would amount to more
than the minimum salary of the employee, then you are in a good position to hire
someone. If the added business does not outweigh the minimum salary that you would
have to pay, then look for other alternatives to hiring a permanent employee.
Will you really save time? Once you've got someone to help out, you'll have all this
extra time, right? Well, maybe. But don't forget, when you hire someone - especially
when you hire for the first time - you have to invest a lot of time in the hiring process, in
training the worker to get them up to speed, and in managing records.
5.1 Organizational Behavior basics
Organizational behavior deals with the sociological and psychological attitude of the
employees, such as work satisfaction, leadership, conflicts in team work and the similar.
For a small company, especially in early stages, it is a waste of resources to analyze the
organizational behavior, while your organization is not yet established, there is no
struggle for power, other than the one among partners, there is no disappointment, yet,
there is no establishment to block the ambitions.
5.2 Human Resources Management basics
People working for you (employees or externals) will do their best for your company if
you treat them as humans. They need to be paid, respected and cared about.
First of all, there are laws protecting work and workers. Most of the Constitutions oblige
the Parliaments to make Laws in favor of the workers. These are legal obligations that
you have to follow, as well as all bureaucracy that goes with it. Your accountant is
usually able to guide you. Hiring a person is not a simple thing. You must follow all the
rules, otherwise you risk to loose money and time to remediate. Look at following
checklist:
 What authority (or more than one) must be notified about hiring and in what
form?
 Is the Salary that you have agreed, over minimal wage?
 Is the Insurance Authority notified and how?
 Does the person hired belong to a Profession with special obligations (like
notification of his Professional Association, special insurance, additional
payment)?
 How many hours per week?
 What are the minimal allowances per day for a business trip?
 Is this person eligible for commuting reimbursement (because of distance or
profession)?
 Are the duties of the position corresponding with the actual duties?
 Do the actual duties oblige you for additional compensation, insurance, less
working hours, other obligations?
Reminder 1:
You may sign a contract with an employee in which some terms are such that they omit
the legal minimal. Such contracts cannot stand before Court.
Reminder 2:
Fully legal work costs less than any low cost work, in mid term.
Reminder 3:
You save money when you pay all your obligations to the employees. They produce
more value for your company than what you save from the payment.
Reminder 4:
Pay your employees first. All the others can wait (at a cost).
Reminder 4:
Remind your employees at any chance you have, that they are paid in due time at the
Legal standards. If someone gets more than that, remind him /her that he /she has to
earn it.
Reminder 5:
If an employee neglects to perform a task assigned because he does not know how,
arrange training for him / her. If he / she does not get trained or after training does not
perform as expected, do not hesitate to fire.
5.3 Work-force costs
The arithmetic of the cost of an employee is simple. Since you are calculating the costs
on a production (or working hours) basis, you must calculate his / her hourly cost.
Take the basic (or nominal) wage, add insurance (without the retained part), add
bonuses, add the cost of other benefits (coffee break offers, commuting, company car
costs etc) on a yearly basis and divide the sum with the real yearly working hours.
Remember to subtract the working hours corresponding to the yearly leave for holidays
and other holidays.
Wages are admittedly low. Your employees will try to find a second employment. It is
better to keep them in your own work “overtime”, even if the cost is elevated.
Reminder:
Do not calculate extraordinary bonuses and travel allowances as work-force costs. They
are overheads.
5.3.1 Internal work
You may hire full time or part time. The cost of part-timers is not half the fully working
persons cost but reaches 2/3.
You must create a working position when you have calculated what this position is
expected to do and how much time is needed.
Managerial positions are created when you have 5 or more working positions and they
need coordination. If they become more than 10, you need a second managerial
position. The more employees you have, the more managerial positions you will need,
because they are working positions as well and if they exceed 5 they will need a
coordinator. As the number of employees increases you will need to add more
hierarchical levels.
You may “Lease” workers (whenever this becomes valid), but only for auxiliary works.
Reminder 1:
You cannot create portions of working positions. You may hire only full time or part time
(which is half a persons working hours). It is better to employ overtime.
Reminder 2:
Part time working needs a very well organized company, with too many workers that
permit detailed specialization.
Reminder 3:
Special agreements with the employees about overtime compensation are extremely
rarely denounced or complained about, as long as what you have promised you keep,
even with a delay.
Reminder 4:
You may hire your children, at any age, without fear of legal procedures. It is most
unlikely that the authorities will press charges. But beware; your partners may not like
this.
5.3.2 Outsourcing
Instead of hiring employees, you may assign the same tasks to independent
professionals. You may be tempted to assign tasks instead of hiring. There is a danger
that the Government will not accept it and charge you with fines and other penalties.
 In general, you may only use external contractors, when:
 They have or will create an enterprise.
 They have premises of their own, even if they work in your premises.
 They do not have a working program, even when they are paid by the hour.
 They are proficient in a specific specialty, mentioned in their contract.
 They issue an invoice for their services.
In general terms, Staff tasks may be assigned to externals (outsourcing), but not line
work position tasks.
5.3.3 Employment Liability
When you hire someone and he / she, during the execution of his duties, harms
someone else with his doings or negligence, you have the full responsibility.
Under this general rule, this harmed third party may sue you and win a compensation or
even press charges on you, through the penal procedures.
You never know what your employees are doing. They may harm a third party and claim
that they were just following the orders of the company to avoid their own liability.
You never know what third parties may “invent” and ask for compensation, claiming that
an employee has harmed them.
If you ever receive a legal document of such a kind, however obvious it is that your
company has no responsibility, call a Lawyer.
What you can do to protect your company, is to describe the duties of each employee in
a contract in which you limit the duties to the content of this document and give the right
to the employee to ask for written instructions for additional tasks you may assign to
them. If possible, make this documents unique, by either depositing the documents to an
authority (Tax Office, for example), or with a registration in your Books.
It is bureaucratic, but if your company becomes very profitable, you will face such
occurrences.
5.3.4 Work Health and Safety
Employees feeling safe at work, perform better, are regular at work (minimizing
absenteeism) and rarely dismiss.
The Ministry of Labor has a set of Health and Safety regulations, following the European
Standards. Those regulations are minimal and even if you follow them, you are not safe
at all from potential accidents. Even when accidents happen, if you have taken all
precautions and you were ready to affront it, you are safe from being asked for
enormous recompense.
Here are some additional guidelines:
Gather specific facts about your situation.
Before you make any changes in your safety and health operations, you will want to
gather as much information as possible about the current conditions at your workplace
and about business practices that are already part of your safety and health program.
This information can help you identify any workplace problems and see what's involved
in solving them.
The assessment of your workplace should be conducted by the person responsible for
the safety and health program and/or a professional safety and health consultant.
 Request a consultation visit covering both safety and health to get a full survey of
the hazards that exist in your workplace and those that could develop.
 Establish a system, such as vendor consultations, to get expert help when you
make changes and to be sure that the changes are not introducing new hazards
into your workplace. Also, find ways, such as through trade groups, to keep
current on newly recognized hazards in your industry.
 Make a commitment to look carefully at each type of job done in your workplace
from time to time, taking it apart step-by-step to see if there are any hidden
hazards in the equipment or procedures. Some initial instructions from a
consultant may be necessary.
 Set up a system of checking to make sure that your hazard controls haven't failed
and that new hazards haven't appeared. This is usually done by routine selfinspections.
 Provide a way for your employees to let you know when they see things that look
harmful to them and encourage them to use the process.
 Learn how to do a thorough investigation when things do go wrong and someone
gets sick or hurt. This will help you find ways to prevent recurrences.
 If you've been in business for a while, take the time to look back over several
years of injury or illness experience to identify patterns that can lead to more
effective prevention. Thereafter, periodically look back over several months of
experience to determine if any new patterns are developing.
Once you know what your hazards and potential hazards are, you are ready to put in
place the systems that prevent or control those hazards. Your state or private consultant
can help you do this. Whenever possible, you will want to eliminate those hazards.
Sometimes that can be done through substitution of a less toxic material or through
engineering controls that can be built in. When you cannot eliminate hazards, systems
should be set up to control them.
Here are some actions to take:
 Set up safe work procedures, based on the analysis of the hazards in your
employees' jobs, and make sure that employees understand the job procedures





and follow them. This may be easier if employees are involved in the analysis
that results in those procedures.
Be ready, if necessary, to enforce the rules for safe work procedures by asking
your employees to help you set up a disciplinary system that will be fair and
understood by everyone.
Where necessary to protect your employees, provide, at your own cost, personal
protective equipment (PPE) according to published standards and be sure that
your employees know why they need it, how to use it, and how to maintain it.
Provide for regular equipment maintenance to prevent breakdowns that can
create hazards.
Plan for emergencies, including fire and natural disasters, and drill everyone
frequently so that if the real thing happens, everyone will know what to do, even
under stressful conditions.
You must ensure the ready availability of medical personnel for advice and
consultation on matters of employee health. This does not mean that you must
provide health care. But if health problems develop in your workplace, you are
expected to get medical help to treat them and their causes.
To fulfill the above requirements, consider the following:
 Have an emergency medical procedure for handling injuries, transporting ill or
injured workers, and notifying medical facilities with a minimum of confusion.
Posting emergency numbers is a good idea.
 Survey the medical facilities near your place of business and make arrangements
for them to handle routine and emergency cases. Cooperative agreements could
possibly be made with nearby plants that have medical personnel or facilities onsite.
 If your business is remote from medical facilities, you are required to ensure that
a person or persons be adequately trained and available to render first aid.
Adequate first aid supplies must be readily available for emergency use.
Arrangements for this training can be made through your local Red Cross
chapter, your insurance carriers, your local safety council, and others.
Reminder:
The employees working in production or other hazardous environments will try to
convince you that they can take care of themselves without all these PPE (helmets,
boots, gloves, ear protection devices, masks etc.) equipment. Impose your will to
protection procedures with disciplinary actions. Soon they will get used to the use of
PPE and safety procedures. It usually takes some weeks. After starting to use PPE they
feel that they belong to a well organized company and they increase fidelity and
performance.
6 Financial essentials
6.1 Your Basic Bookkeeping
To succeed in business, one of your most important tools is financial analysis, based on
your business records. Accurate financial records will help you answer some very
important questions. Are you making money, or losing it? How much? Is your business
on sound financial ground, or are troubles lurking ahead? A sound bookkeeping system
is the foundation on which all of this valuable financial information can be built.
As a small business owner, you probably rely on an outside accountant to do your taxes
and prepare financial statements. However, like many small business owners, you may
find that it's too expensive to pay an accountant to do routine bookkeeping chores.
Someone in your organization must take on the responsibility of keeping an accurate set
of financial records. Fortunately, you may find this task easier than you thought,
especially if you use your computer.
You are not going to become an accountant, especially if you choose to use “doubleentry” book keeping (which is most advisable). You must understand some simple
principles of accounting.
6.2 Accounting Basics
This is not an accounting guide, but yet you must understand how accounting works, so
that you know how your company is doing.
Accounting is a system of recording transactions of your company, so that all the
property transformations can inform you about what your property is at any time. To do
so, property is classified in “Accounts” and all the transactions are recorder there. Those
Accounts are registered in a book called “General Ledger”.
In order to facilitate control, every transaction or property transformation is also
registered in a sequential manner one after the other, day after day) in another book
called “Journal”.
Every year (called fiscal year) starts and ends with a Balance Sheet.
6.2.1 Balance Sheet
A Balance sheet is an account where Assets and Liabilities are put together. As in all
accounts, there is a left hand part and a right hand part. The two parts are equal.
The left hand part contains the value of the property of the company, the right hand part
contains the financial sources that permitted the acquisition of this property.
6.2.2 Assets (Active)
They represent the current value of the property which the company owns. In case that
the company holds property of others (even your personal property), it is not represented
in the Assets part of the Balance.
At the end of the fiscal year the company counts all the possessions in an Inventory and
evaluates them, so that they will be represented with their value.
6.2.2.1 Fixed Assets
Fixed Assets are those that are not items of trade, but they are used by the company for
its operation. For example, a company car is a fixed asset, if the company sells cars,
those cars are not fixed assets.
Fixed assets loose their value as time passes by, except the land.
Studies on which the company foundation and development is based upon, are fixed
assets, as long as they can be sold (together with the company) to a new owner.
6.2.2.2 Current Assets
Current assets are those commercialized by the company, or used in property
transformation. Cash is one of them. The value of what your clients (or others) owe to
you, are current assets as well.
6.2.2.3 Depreciation
As your fixed assets grow older they loose their value, mainly because they become
obsolete and at some time you will have to replace them, even if they are still functional.
In order to calculate the current value of a fixed asset, you have to subtract the value
which has been lost because of their oldness.
Depreciation of a period is a cost element.
Simple Example of initial Balance Sheet
Initial Balance Sheet
Assets (Active)
Fixed Assets
Terrain
Buildings
Machinery
Transportation Means
Equipment
Special Installations
Intangible Assets (Studies - Licenses)
Current Assets
Stock (material inventory)
Clients (owing you)
Advances to Suppliers
Bank Deposits
Cash
TOTAL Assets
Liabilities (Passive)
Equity Capital
Shareholders / Prtners Capital
Long Term Depts
Banks (for Investment Loans)
Shareholders / Partners Loans
Fixed Assets suppliers
Short Term Depts
Advances from Clients
Banks (loans for working capital)
Suppliers (selling to you on credit)
TOTAL Liabilities
Subsequent provisional balances would have the following simple format:
Provisional Balance Sheets
Assets (Active)
Fixed Assets
Terrain
Buildings (initial Value)
Minus Accumulated Depreciation
Current Value
Machinery (initial Value)
Minus Accumulated Depreciation
Current Value
Transportation Means (initial Value)
Minus Accumulated Depreciation
Current Value
Equipment (initial Value)
Minus Accumulated Depreciation
Current Value
Special Installations (initial Value)
Minus Accumulated Depreciation
Current Value
Intangible Assets (Studies - Licenses)
Minus Accumulated Depreciation
Current Value
Current Assets
VAT The State Owes to the company
Losses of previous years
Stock (material inventory)
Clients (owing you)
Advances to Suppliers
Bank Deposits
Cash
TOTAL Assets
Year 1
Year 2
Year 3
Liabilities (Passive)
Equity Capital
Shareholders / Prtners Capital
Retained Profits
Forecasts for exchange rate
Forecasts for employee compensation on firing
Forecasts for debtors banruptcy
Long Term Depts
Banks (for Investment Loans)
Shareholders / Partners Loans
Fixed Assets suppliers
Short Term Depts
Advances from Clients
Unpaid profits to the owners
Banks (loans for working capital)
Suppliers (selling to you on credit)
Social Insurance owed
Profit Taxes unpaid
VAT your company owes to the State
TOTAL Liabilities
Year 1
Year 2
Year 3
6.2.3 Liabilities (Passive)
This part contains all the accounts payable. These are the sources of finance that
permitted the company to have property.
They are divided in Long Term and Short Term.
6.2.4 Equity Capital
The Capital that you have put in your company is a liability of the company to you,
together with profits that have not yet been paid to the owners.
6.3 Double Entry
Every transaction is registered two times; once in the left side of one or more accounts
(credit) and once on the right side of one or more accounts (debit). The sum of credits
and debits must be equal.
Every transaction or property transformation has a present or future cash change, equal
to the property change. With double entry accounting, the company is able to monitor its
potential at any time.
6.4 Investments
An investment must start with a business plan and be implemented with special studies
(Marketing, Construction, installations etc) and concludes with the constructions,
installations, purchase of machinery and equipment.
The accounting system does not recognize as investment any initial training of the newly
hired employees. If you consider it an investment, you will have to include it in a study
(Business and Marketing Planning included). If the training concerns the operation of
machinery, you may ask your suppliers to include training in the price of the machinery.
An investment is an expense. If an expense is considered an investment, then it is
depreciable, which means that the initial expenses are divided in the next fiscal years, so
that a more reliable calculation of the results (profit or loss) is done.
You may think that the value of your warehouse is an investment; well it is not (at least
for accounting).
If your company buys shares at the Stock Exchange Market, or participates in another
company, this is an investment.
The investment plan consists in listing and evaluating all assets necessary to the initial
phase of the project. It is important to provide detailed information in this listing since the
financing scheme will depend on the investment plan and, if the latter is under
evaluated, capital may be insufficient and therefore the project may fail.
The amounts included in the investment plan should be valued at real prices (including
VAT) at the time of payment. These amounts correspond, in short, to the following items:
 investment in tangible fixed assets;
 investment in intangible fixed assets;
 financial investments;
 Cash.
The tangible fixed assets (the ones that will remain in the company) are, for instance,
buildings, plots of land, basic equipment or transportation equipment.
In order to calculate the amount of the associated investment, you should list in detail all
the items that are included in tangible fixed assets associated with the project,
requesting budgets to suppliers (when applicable) and doing an approximate calculation
for the remaining companies.
The intangible fixed assets are associated with the expenses related to the incorporation
of the company (preparation of articles of association, statements, registrations and
publishing) and also the ones associated with purchase of software, property
conveyance, studies and projects, marketing campaigns, patents, trade marks,
authorizations, licenses, etc.
Investment Plan
Tangible Fixed Assets
Plots and preparation works
Buildings and other constructions
Directly productive areas
Non-directly productive areas
Environment
Quality
Training
Others
Equipment
Productive
Non directly productive
Environment
Quality
Training
Others
Social
Administrative and movable
Tools and utensils
Transportation and load material
Other tangible fixed assets
Total of Tangible Fixed Assets
Intangible Fixed Assets
Legal Entity Foundation
Studies and diagnosis
Licenses and royalties
Technical assistance
Software
Training
Research and Development
Disclosure - Announcements
Other Intangible fixed assets
Total of Intangible Fixed Assets
Financial Contributions
Year 1
Year 2
Year 3
Accumulated
Amount
Total of financial contributions
Interests regarding current Fixed Assets
Total of interests regarding current fixed
assets
Investment Plan
Year 1
Year 2
Year 3
Accumulated
Amount
Working Capital
Direct Needs
Stocks (Material Inventory)
Clients (what they owe to you)
Treasury Security Reserve (Cash and Bank
Deposits
Advances to suppliers
Others
Total of needs
Resources Acquisition
Contribution to Suppliers
Advances to clients (to enter the chains)
State and other public entities (VAT)
Others
Total of resources
Necessary cash
Total of Investment
Total of Investment
The Finance for the company investment is roughly:
Financing Plan
Year
1
Year
2
Year
3
Equity
Share Capital
Additional contributions (Subsidies)
Self - financing (retained profits)
Total of Equity
Medium and Long-Term Debts to Third Parties
Debts to Credit Institutions (banks)
Debts to shareholders (Lent money, not capital)
Suppliers of Fixed Assets (bought on credit)
Accumulated
Amount
Financial Lease
Others
Total of Medium and Long Term Debts to
3rd. Parties.
Short - term Debts to Third Parties
Debts to Credit Institutions (banks)
Debts to shareholders
Advances on account of sales
Suppliers
Suppliers of Fixed Assets
Financial Lease
Others
Total of Short Term Debts to 3rd. Parties
Total of Financing
Total of Financing
6.5 Sales Forecasting
Some marketing research material is nothing but trash. Marketing research can be done
for peanuts -- even with peanuts. Shocking statements? Perhaps, but both of them are
literally true.
Take trash, for instance. Inspection of outgoing waste is a practice at many small
restaurants. People may order the Flounder a la Marzipan because of the novelty of the
dish; but if a restaurateur finds most of it leaving the table uneaten, it had better come off
the menu because it won't be in demand much longer.
You can use trash positively, too, to find out what people like. It may not be very
dignified to check trash cans for cartons and containers, but they are a direct indication
of what consumers are buying. You could also find out what competitors are selling (or
at least ordering) by checking their trash.
The point here isn't to turn you into a scavenger, but to suggest that marketing research
isn't necessarily only done by sophisticated staffs of statistical technicians working with
powerful computers and grinding up figures from elegant surveys.
Marketing research doesn't have to be fancy and expensive. It can be done with
peanuts, as one creative discount merchandiser discovered. During a three-day
promotion the merchant offered customers . . . all the roasted peanuts you can eat while
shopping in our store. By the end of the promotion the merchant had litter trails that
provided information on the traffic pattern in the store. Trampled peanut hulls littered the
most heavily travelled store aisles and heaped up in front of merchandise displays of
special interest to customers. By studying the trails, the merchant learned where
customers went in the store and what they wanted.
Having assessed the wider environmental conditions and considered the internal
decisions regarding the proposition, it is possible to make more accurate predictions for
Month 1. After that, it is a case of extrapolating into the future using a growth factor and
flexing for seasonality or cyclical trends. Notwithstanding the difficulties in forecasting for
a start-up, the real benefits accrue after a year of successful trading. Once there is an
historical record for a year of trading, it is then possible to plan with more certainty
through the use of more scientific methods, such as trend analysis and comparison with
variables. For example, an ice cream vendor could compare sales of ice cream with an
obvious variable – weather temperature – in order to assess the correlation between the
two variables. Once a sales forecast has been made, it can then be used for budgeting,
allocating resources, managing cash flow, and as a basis to secure investment.
You can make forecasts of your company’s future sales by assuming that you will be
able to sell all what you can, after you have considered that:
There are competitors.
You address to specific Market Niche and you know how big it is (potential buyers) and
what they are able to pay for the satisfaction of your product / service.
There is a seasonality of demand. There is no such a thing as constant demand (and
sales).
You will be able to sell a small fraction of what your closest competitor (nearing you in
size), if you are new in the business, either because you offer a new product / service to
the Market you already know, or a new product in a Market in which you are new.
Mass distribution (Super Market Chains) may be your goal, but if you are not already
established at the consumers’ mind, they will not let you in, unless you pay them for it.
Even if you are present in such chains, this does not mean that you will receive new
orders, because your product sells.
New products may sell as for trial. This does not mean that the consumers will continue
buying. Pioneer consumers usually turn to new products in a big rate (more than 50%).
Do not get excited from the “first appearance” sales.
Do not expect to get a market share which exceeds a one digit percentage, even if you
see better initial selling results; your competitors can diversify, can’t they?
You can calculate your prospective sales by assimilating your business to other
companies with same characteristics.
You have to think that there are three main scenarios; an optimistic, a most probable
and a pessimistic. It is true that you know little (or you can learn little) about what your
competitors really do and how much they really sell. You can extrapolate by observing
the life style of the owners and staff members, the number of employees they afford, the
renovation of their facilities and the advertisement that they pay.
Reminder:
Do not bother to apply sophisticated methods of calculating your future sales. They
would be very useful and accurate if primary data was available.
6.6 Profits
Yes, we are talking only about profits, not losses! A company is founded for profits. Yet,
in the initial stages you have to expect losses. Profits are expected after a period of
successful operation. It usually takes up to three years before the partners can start
cashing their share of profits.
The calculation of profits (or loss) for every period (year) is based on the accrual
accounting. This means that both sales and supplies are calculated when they occur,
never mind when they get paid.
Profit & Loss a/c for the Year
Ending 31
st
December
Year 1
€
Year 2
€
Year 3
€
Income
Sales
Minus Materials Consumed
Gross Margin
Minus Overheads
Wages & National Insurance
Staff Training
Rent
Research & Development
Advertising & Promotion
Marketing Costs
Transport & Packaging
Heat, Light & Power
Telephone
Printing, Postage & Stationery
Insurance of the company
Accountancy/Audit Fees
Machinery Lease Payments
Cars/Mileage/Travelling
Bank Charges
Repairs & Renewals
Management Salaries
Depreciation – Machinery
Miscellaneous Expenditure
Depreciation-Office Equip.
Depreciation – Furniture
Operating Profit (Before Tax)
Employment Grants
Accumulated Losses (past)
Net Profit (Before Tax)
Taxation
Net Profit (After Tax)
6.7 Cash Flow
Once the costs and proceeds of the company are identified, you should assess money input and
output flows, so as not to exist treasury breakdowns.
Business receipts and expenses usually come-up at different times and you should not calculate
monthly averages from the amount foreseen for the annual sales, mainly if you have a
seasonable activity. On the other hand, the entrepreneur is committed to pay for supplies, wages,
financial charges, etc., within the agreed deadlines, regardless of the proceeds evolution.
The treasury budget should be prepared for a minimum period of one business year, every month
or possibly every week, and should foresee all foreseen payments and receivables (taking into
account the agreed payment term).
A very important aspect of the treasury budget is VAT. Although companies do not pay VAT, they
actually receive the VAT in the sales and will pay VAT in the purchases, and every month or
every quarter they will have to pay the difference to the Tax Department. In the treasury budget,
all amounts must be paid or received and therefore must include VAT (there must be an item for
the amount of VAT to be paid to the Tax Department, and do not forget that VAT is applied to the
amount of the invoice and not to the paid or received amount).
The analysis of the treasury budget allows you to check if there are periods with "negative
treasury balances", to calculate the necessary amount to cover those situations and to build a
regular balance out of available capital. Thus, based on the treasury budget, it is possible to study
the most convenient financing schemes, as to its type, amount and term.
Cashflow Projections
Year 200_____
JAN
FEB
MARCH
APRIL
MAY
JUNE
JULY
AUG
SEPT
OCT
NOV
DEC
TOTAL
Cash Inflow s
Starting Cash
Sales
Capital Introduced
Loan Capital
Grants
Total
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
Cash Outflow s
Purchases
Machines
Wages & National Insurance
Staff Training
Rent
Research & Development
Advertising & Promotion
Transport & Packaging
Heat, Light & Power
Telephone
Printing, Postage & Stationery
Insurance
Accountancy/Audit Fees
Machinery Lease Payments
Cars/Mileage/Travelling
Bank Charges
Repairs & Renewals
Management Salaries
Miscellaneous Expenditure
Vat Payments (Refunds)
Capital Exp. Office Equipment
Capital Exp. Furniture
-
-
-
-
-
-
-
-
-
-
-
-
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
Total
Net Cash Inflow /(Outflow )
Opening Bank Balance
Closing Bank Balance
Bank Overdraft Facility
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0,00
0,00
0,00
0,00
Vat
Vat
Vat
Vat
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
on Sales
on Purchases
on Purchases
Payable
Reminder 1:
Agreements for payments are rarely kept. You have to calculate a percentage of delays,
as it is usual in some regions and the economic circumstances. You have to press your
debtors, but not too much to loose them, unless they are don’t really like paying!
Reminder 2:
You collect VAT from your clients and pay VAT to your Suppliers. In real terms, your
clients pay VAT on their purchase value, while you have paid a fraction to your suppliers
(while wages are not charged with VAT), so you are really financed by the Tax Office,
which is going to receive the difference in a later time. You will see competitors selling
without VAT charges. Taxation systems have accumulated a secular experience. Even if
you temporarily tick them, they will make you pay with heavy fines in the near future.
Reminder 3:
If you find your way to avoid VAT payment through contacts with “tax collectors”
remember that the persons change, but the system remains! Insufficient VAT
compliance is the main risk factor for the Balkan enterprises.
Reminder 4:
The main cause of business failure and bankruptcy is the inability of a company to pay
its obligations to the State and the Banks. Even you, as a partner, want your profits
share in cash, not material, merchandises or promises (drafts, postponed checks). Do
not get fascinated by profits, unless you have calculated the cash flow incidence. In the
accrual system, profits are the difference between sales value and costs. If payments of
the costs are faster than collections, you will find your company with nominal profits (and
taxes to pay for) without having got the money yet.
Reminder 5:
If you know what your cash needs will be in a time that cash difficulties have not yet
appeared (some months before) your bank will lend you the money needed. If you go to
your bank for a loan, after the cash difficulties appeared, the bank is the first to “turn its
back” to your company and ask for your bankruptcy (in order to confiscate the
guarantees, known as collateral).
6.8 Gauges (Measurement of Performance)
The management of the company (the representatives of the owners) wants to know
how their company is performing, so that they can take actions correcting the course of
their company.
The same stands for financial contributors (banks lending money to the company, equity
capital contributors) as well as third party interested collaborators (major suppliers and
clients) even your staff and potential staff members.
Here are some very important indices that you can calculate yourself.
First of all you must keep in mind that you need some key factors for the operation of
your company. Even before you start operating, you should observe the market and
extrapolate some numeric information, which you can verify and adjust in later time. Do
not forget that you must adjust these “assumptions” regularly, while the market changes
and so does the mindset of all parties involved.
6.8.1 The Key Gouges are:
Usual number of days in which you collect the credits from your clients.
Asking around you will be informed of the usual payment period of clients and the usual
rate of “uncollectible” credits.
You need to sharpen this number by subtracting the advance that clients in your sector
usually pay when they buy and find the usual rates of payment. Take for instance the
foodstuff sector; clients may pay a 15% as down payment, 30% within 30 days, 30%
within the next 30 days (60 days from purchase time) and 25% another 40 days (totaling
100 days from purchase time).
Later, when you have real data of your own, extracted from your accounting books, you
will be able to know what the clients of your company do for paying you. This depends
on the sector “habits”, your specific market niche and your company’s credit and
collection policy.
You can calculate the days that you have to wait until your clients pay you, by multiplying
their credit with the days elapsed before they paid you and dividing the sum of these
multiplications with the sum of payments occurred.
It is much easier to calculate the percentage of “outstanding credit” (the payments
promised but not done in due time, by your clients) and the percentage of uncollectible
(clients that went bankrupt or disappeared).
Another calculation, important for your company, is the percentage of profits over the
turn over (sales). This measurement will show you if it is profitable borrowing money in
order to increase sales. If the interests and other expenses you are going to pay are
superior to the percentage of profits that you are going to make by using this money, you
have better not borrow.
Similar to this, is the profits over the capital used. This will produce a percentage which
is useful for comparison with similar companies in the same sector. If your prospective
percentage is less than the average of the sector, bankers will need a plausible
explanation, if you want them to lend you money. It is difficult to know what this
percentage is for your competitors, because they do not make public all the relevant
information, but you can have an idea reading the Balance Sheets of corporations as
they are published.
These measurements are useful, but they mean little for your company. The most
important measurement is the Inventory Turn Over. A quite important part of the capital
used by your company is used to buy goods that you are using either as raw material,
packaging, spare parts or merchandises that you are reselling to others as they are. The
margin that you expect (or you are setting through your pricing policy) is not the real
question. Your margin creates profits every time you sell all your stocks. Your profits are
being calculated on an annual basis. The profits of your company, at the end of each
year, may be a multiple of your margin, depending of the times you manage to make full
circles of your inventory (you sell out and buy again).
It is obvious that you need stocks, for the following reasons, at a relative cost:
Massive supplies may be done in a discount, so they cost less.
Remaining without material will damage your company (imagine clients who want to buy
from you and you are short of inventory, you risk loosing them, while you risk loosing
your employees, if they come to work and your company either pays them without
working or discharges them). The question is; how to optimize you inventory?
There is an answer with a solid scientific background, but as in all these complicated
calculations, you need data of your company of many years and a stable economic
environment, well regulated and transparent (with information of your competitors
available). You may feel that this is not your case. Your company is new and you don’t
have enough information from it, while your business environment is quite obscure and
changing. How to determine your inventory? Instead of sophisticated methods, you may
use simple common sense. How long does it take to safely refill your warehouse? If, for
instance, 20 days are enough, you may choose not to exceed 30 days of inventory
sufficiency. What is the daily consumption (either sold or used in production) of the items
in your inventory? Considering both your sufficiency until refilling and your daily
consumption, you can determine your “reordering” stock for each item in your inventory.
There is no general rule, except that you must keep your inventory as low as possible.
The same point of view may be considered in discounting to your clients. In many cases,
the more discounts you offer, the more clients buy.
Another component of profitability at an annual basis has to be considered. Your clients
will buy more from your company as you extend your credit line. This will help your
company increase the sales, but will you be able to finance your supplies and other
expenses?
What if you discount at prompt (even better, cash) payments?
6.8.1.1 Current Ratio
The current ratio is a way of looking at your working capital and measuring your shortterm solvency. The ratio is in the format x:y, where x is the amount of all current assets
and y is the amount of all current liabilities.
Generally, your current ratio shows the ability of your business to generate cash to meet
its short-term obligations. A decline in this ratio can be attributable to an increase in
short-term debt, a decrease in current assets, or a combination of both. Regardless of
the reasons, a decline in this ratio means a reduced ability to generate cash.
If you're looking to secure money via the sale of some stock through an initial public
offering, many Government Bureaus will require that you have a current ratio of 2:1 or
better.
Merely paying off some current liabilities can improve your current ratio.
6.8.1.2 Quick Ratio
The quick ratio, also known as the acid test, serves a function that is quite similar to that
of the current ratio. The difference between the two is that the quick ratio subtracts
inventory from current assets and compares the resulting figure (also called the quick
current assets) to current liabilities.
Why? Inventory can be turned to cash only through sales, so the quick ratio gives you a
better picture of your ability to meet your short-term obligations, regardless of your sales
levels. Over time, a stable current ratio with a declining quick ratio may indicate that
you've built up too much inventory.
How to improve your quick ratio. Since this ratio is quite similar to the current ratio,
but excludes inventory from current assets, it can be improved through many of the
same actions that would improve the current ratio. Converting inventory to cash or
accounts receivable also improves this ratio.
In evaluating the current ratio and the quick ratio, you should keep in mind that they give
only a general picture of your business's ability to meet short-term obligations. They are
not an indication of whether each specific obligation can be paid when due. To
determine payment probability, you may want to construct a cash flow budget.
In general, a quick or acid-test ratio of at least 1:1 is good. That signals that your quick
current assets can cover your current liabilities.
6.8.1.3 Return On Investment (ROI)
Your company is looking forward to making profits. One of the primary concerns is when
the money invested will come back (though profits) to the investor?
You will hear about Net Present Value (NPV) of future earnings as Internal ROI. It is a
very useful tool for buying shares, but it would be more useful to you to calculate the
time needed to take back, in the form of profits collected, the money you are contributing
to the equity capital of the company.
This means that after this time you will still own a part (or all) of the company and still be
getting profits, but practically without risk!
6.8.1.4 Breakeven Analysis
A second tool for management decisionmaking that has grown out of cost/volume/profit
analysis is breakeven analysis.
Once you know what your variable costs are, as well as your overall fixed costs for the
business, you can determine your breakeven point: the volume of sales needed to at
least cover all your costs. You can also compute the new breakeven point that you'd
need to meet if you decided to increase your fixed costs (for example, if you undertook a
major expansion project or bought some new office equipment).
Your breakeven point can be determined by using the following formulas:
 Sales Price per Unit — Variable Costs per Unit = Contribution Margin per Unit.
 Contribution Margin per Unit divided by Sales Price per Unit = Contribution
Margin Ratio.
 Breakeven Sales Volume = Fixed Costs divided by Contribution Margin Ratio.
Variable unit cost:
Cost associated with producing an additional unit.
Fixed cost:
The sum of all costs required to produce any product. This amount does not change as
production increases or decreases.
Expected unit sales:
The number of units that are expected to be sold.
Price:
Price you will be able to receive per unit.
Total variable costs:
The product of units produced and variable unit cost (example 10 units at €5 variable
cost produces a total variable cost of €50).
Total costs
Sum of fixed costs and variable costs.
Total revenue
Product of price and expected sale unit sales (example 10 units at €10 equals €100 total
revenue).
Profit
Total revenue minus total costs.
Breakeven
Number of units required to sell to make a profit of zero.
7 Controlling essentials
Whatever your plans and management style, if don’t control your company you will soon
loose it.
You must establish a system to control every aspect of your company. When people
think that there is no control, tend to abuse their duties. Some hints to control are
following.
7.1 Internal Auditing
You or a person appointed by you (when your business grows, you may hire a specialist)
must perform internal verifications of the operations of your company, in order to avoid
fraud and increase diligence of everyone. People tend to behave themselves when they
feel that there is control. Some others take control as a struggle for power and are trying
to trick it.
If you perform ordinary audits, you will find out that your company is doing better than it
appears, which is not true. You must control some operations daily, some other
occasionally and some randomly.
It is imperative that you control daily your cash. Since most of the cash is coming in from
your clients, you have to contact a sample of them to verify that what appears to be
collected is what they really have paid to someone else in your company (cashier, if
there is one).
You must control the goods that you are receiving and compare the quantity that you
have ordered with the real quantity that you receive, verifying that you receive what you
are invoiced for. You must also check if the prices that you are being charged with are
those of the market and you are not overcharged.
You must control your inventory frequently and not wait the end of the fiscal year. It is
possible that items that you have bought are missing. You may choose a sample of the
most expensive items in your warehouse and count them every month.
You must also control the working hours of your employees. It is frequently seen that
one employee may sign presence for another, who retards or doesn’t even show up.
Your employees will ask you for overtime to have the job done for next day. Do not
accept it, unless you have counted their production of a similar day without overtime, or
a plausible excuse (power failure, for example, or tax office control).
Occasionally, control shipments to verify that what you have invoiced is what you are
really sending to your clients.
7.2 External Auditing
External auditing is used as a tool to increase trust between the partners (or
shareholders). External controllers verify that what appears in your books is properly
documented.
Reminder:
Do not use the same external auditors for more than two years.
7.3 Quality control
Set quality standards for all your operations, not just your products and verify that every
operation meets those standards.
Reminder 1:
Quality costs but pays back more than what it costs.
Reminder 2:
Certify quality as soon as possible. There are special enterprises performing quality
audits and emitting certificates. Certification will increase your earnings more than it
costs.
7.4 Total Quality Management (TQM)
Today's competitive market, in almost every category of products and services, is
characterized by accelerating changes, innovation, and massive amounts of new
information. Much of this rapid evolution in markets is fueled by changing customer
needs. Significant customer behavior and market changes happen almost overnight.
Changes in market preference or technology, which used to take years, may now take
place in a few short months.
For example, the product life cycles for new consumer computer technology and
computer printers is estimated to be as little as six months. Computer marketers must
carefully plan one or two new product introductions each year, with contingency plans for
making design changes with current product lines as they are being manufactured.
As the pace of change accelerates, it becomes more difficult to maintain stable
relationships with suppliers, customers, brokers, distributors, and even your own
company personnel. "Putting out fires" and reacting to new emergencies is unfortunately
the norm for many large and small companies caught in the whirlpool of technological
change.
Are competitors stealing your best customers while you are out looking for more?
Commitment to quality and customer satisfaction programs are essential for a small
business to compete against both smaller and larger competitors. Think about "postsale" customer satisfaction (or managing customer "dissatisfaction") programs as a way
to reinforce customers' buying preferences for your products and services for their
current and future purchases!
TQM for small businesses. A new company or a small business has limited financial,
personnel, and capital plant/equipment resources and is especially vulnerable to
instability brought on by rapid changes in customer behavior. One way to help ensure
your business success is to make quality and customer satisfaction the number one
priority for all employees in your company. Make sure your company is providing
"customer management," not just "product management."
Larger companies committed to TQM programs may appoint a special manager or VP of
quality. In smaller companies, this task is usually undertaken by the chief executive
officer (CEO) or the owner. There are many aspects of successful TQM program
implementation. And it may require months or years to fully incorporate TQM into every
employee's value system.