Value Driver #4: Human Resources

At first glance, it may be difficult to see how human resources can function as a value driver for your business. Most of the time when we think “value” we think about reducing costs and increasing profits. Human resources, though, has a role to play, and it is not a minor one. How employees are recruited, trained, and disciplined are all under the purview of the human resources department. Additionally, HR usually handles decisions about various costs, such as insurance, and those decisions most certainly impact a company’s value.

In many ways, it is the employees who create the value of any company. Whether you offer a product or a service, it is your employees who make sure that your customers are happy and satisfied. Strong systems can help, but without equally strong employees, even the best systems will fail to build the value of your business. Since HR selects and trains new employees, it is critical to the value of the company overall.

Just as all departments within a successful business follow set policies and procedures, HR should have a clear delineation of responsibilities. How should HR work with other departments to make sure that key positions are filled? What are the policies regarding hiring, disciplinary action, or company benefits? When and how are employee reviews conducted?

Business valuation experts consider the length of service of key employees, the companies’ approaches to filling important positions, and overall employee morale, along with many other factors when they determine the worth of a business. The human resources department shepherds the company’s most important asset: people.

Internal Operating Policies & Procedures as Drivers of Business Value

In July, we discussed the importance of operating policies and procedures in the context of developing a useful (and legal) employee handbook. The quick summary is that having policies and procedures in place:

• gives your business a guide for growth,
• provides some legal protections, and
• makes it possible to see changes over time.

Today, we will talk about internal operating policies and procedures as drivers of business value. Whether you are getting ready to sell your company in the next few years, or you are working toward creating the most value in case you decide to sell much later, having policies and procedures in place will contribute to making your business worth more.

Internal operating policies and procedures help make sure everyone knows what to do and when and they reduce risk in the case of unexpected events. A strong and functioning set of policies and procedures could dictate whether or not the business would continue to function in the case of a sale -- or a key employee leaving, an unexpected weather event, or some other potentially business-stopping situation.

While policies and procedures serve as a guide for employees, they can also serve as a historical record of how the company responds to change. When policies don’t work, they should be reviewed and changed. Being able to appropriately react to real circumstances makes a business worth more.

Strategic Planning Tools

The elements of a good strategic plan are the same for almost any business. How owners and managers arrive at those elements can differ. 

Here are some links that will help you decide how to go about creating a strategic plan that works for you and your company:

SmallBusinessChron.comcovers SWOT Analyses, Mind Mapping, and more in their article "Four Tools Used in Strategic Planning for Marketing and Sales." 

There are many ways to analyze in addition to completing a SWOT Analysis.This article fromReferenceforBusiness.comgoes into detail about some of the other types. If matrices and charting are helpful for your thinking, be sure to check these out! 

The Research Administration Performance Improvement and Development (RAPID) Department at the University of Washington has compileda list of tools and templates to help in strategic planning. It's an excellent list, with some helpful graphics. 

Value Driver #2: Strategic Planning

This is the second installment in a series we are sharing about value drivers -- the things that make businesses more valuable. If you missed the first installment, you can find it here. 

Creating a strategic plan is one of the most important responsibilities of an organization’s top management. It is the vehicle that sets the goals and objectives of the organization, provides the roadmap as to how to reach those goals, identifies the resources needed for success, and describes how all of that information will be communicated throughout the organization.     

The plan should consist of the following:

Vision and Mission - The vision details the goals and objectives, where the company wants to be at a given point in time. The mission is preparing the roadmap as to how to get there.

SWOT Analysis - The SWOT analysis is a management tool used to scrutinize internal and external factors to help identify its strengths, weaknesses, opportunities and threats.

Strategy - After completing the SWOT analysis the following should be included
Develop strategies required to achieve the goals and objectives of the organization both internally and externally.

• Identify critical success factors.
• Develop overall organizational performance measures.
• Develop a tactical plan for each strategy.
• Develop performance measures for each tactical plan.
• Determine the resources needed to execute the plan.
• Develop a communication plan to align the entire organization.
• Assign strategic and tactical responsibilities to appropriate personnel.
• Develop a monitoring and measurement system

A well thought out strategic plan minimizes risks, enhances profitability and provides a documented, measurable, realistic plan for organizational growth.

Additional Resources on Business Structure

If examining your business structure seems overwhelming, or confusing, you may want to consult a few more resources. Here are some that we recommend for further reading:

Corporate by-laws serve as an internal  guide to how things are done within the business the company. This article contains more information on how to approach writing them:
http://www.ehow.com/info_8107137_corporation-bylaws.html

Having a clear organizational structure helps keep things functioning smoothly. There are various ways to consider organizing. This article describes several and offers examples: 
http://www.businessdictionary.com/article/557/which-organizational-structure-is-right-for-your-business/

Your business structure is important for several reasons, including tax purposes. The Small Business Administration offers a clear breakdown of the different types of structures, and some of the pros and cons for each one:
http://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/choose-your-business-stru

Keeping an eye on your competition is a smart way to drive up the value of your business. Inc.com offers 10 tips that may help you research your competition in this article: 
http://www.inc.com/guides/201105/10-tips-on-how-to-research-your-competition.html

Resources for Developing Good Business Structure

If examining your business structure seems overwhelming, or confusing, you may want to consult a few more resources. Here are some that we recommend for further reading:

Corporate by-laws serve as an internal  guide to how things are done within the business the company. This article contains more information on how to approach writing them:
http://www.ehow.com/info_8107137_corporation-bylaws.html

Having a clear organizational structure helps keep things functioning smoothly. There are various ways to consider organizing. This article describes several and offers examples: 
http://www.businessdictionary.com/article/557/which-organizational-structure-is-right-for-your-business/

Your business structure is important for several reasons, including tax purposes. The Small Business Administration offers a clear breakdown of the different types of structures, and some of the pros and cons for each one:
http://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/choose-your-business-stru

Keeping an eye on your competition is a smart way to drive up the value of your business. Inc.com offers 10 tips that may help you research your competition in this article: 
http://www.inc.com/guides/201105/10-tips-on-how-to-research-your-competition.html

Value Driver #1: Business Structure

Value Drivers are elements of a business that reduce risk and improve returns. In order to build the value of a business you must understand what  business valuation experts believe justify a premium price. There are two types of business drivers:  generic (common to all industries) and industry specific.  We have planned a series of articles to introduce you to the most important generic business drivers:

• Business Structure
  
• Strategic Financial Planning
• Internal Operating Systems and Procedures
• Human Resources
• Financial Management
• Benchmarking and measuring success

This month we will talk about business structure, and how it can affect a business’ value. Business structure is the foundation upon which everything else is built, and without sound structures in place, risk goes up while value goes down. There are three main components of business structure:

1. Corporate Documents
2. Organizational Structure
3. Competition

Corporate Documents

Your corporate documents must be maintained and in order at all times. Documents can serve as signed agreements that describe how the business will operate. If  the company has multiple shareholders, the rights and responsibilities of each shareholder should be clearly documented in order to avoid misunderstandings.

You can minimize risk by maintaining documents that are applicable to your business such as:

• shareholder agreements
• buy/sell agreements,
• by-laws  
• operating agreements

These documents should clearly state  how the company will address various situations as they occur.  For example, what will the company do if one of the shareholders becomes ill or passes away? Having a plan -- in the form of corporate documents -- lowers risk and raises the value of a business.    

Organization Structure

Creating an organization flow chart -- also known as process charting, workflow charting or business process mapping -- defines what a business entity does, who is responsible for specific tasks, to what standard the business process is to be completed, and how the process can be measured to determine success or failure. If only the owner knows who should be doing what, the value of business decreases because it is unlikely that the business could continue without the owner.

The functions represented in the chart can consist of sales and marketing, human resources, shipping and receiving, manufacturing, inventory, accounting and finance, and purchasing. Each business function should flow seamlessly to the next business function throughout the organization and should be completely understood by management and employees alike to maximize the efficiency of operations and to minimize the risk of loss.

Competition

You should know your industry and know who your competitors are, both directly and indirectly. Once you have that understanding (through research) you need to formulate documented plans to deal with competitors. The execution of a well thought out plan will reduce risk of loss due to competition.

Definitions and References To Help Develop an Employee Manual

Before beginning your employee manual, you may find it useful to consult some resources and to review the definitions of policy and procedure.

The article “The Policy and Procedure Manual: Managing By the Book” by Paul Rao, PhD, is an

excellent resource that offers a sample format and table of contents, along with solid advice on how to put a manual together.

The Small Business Chronicle offers a concise four step plan for writing an employee manual in the article “How Do I Develop a Policies and Procedures Manual?” One step they include that many others do not is asking employees to sign a statement saying they have read and understand the manual.

Always a good resource, the Small Business Administration suggests some excellent reasons to write an employee manual, along with a good list of items to include. There are additional links within the article that may be useful.

One useful definition for the word policy is “a consistent guide to be followed under a given set of circumstances.” Good policies are broad, current, comprehensive, and used frequently.

A procedure is a set of steps for completing an activity. Procedures may outline how policies are implemented, but do not take the place of policies.

An Easy Way To Create an Employee Manual -- and Why You Should

There are myriad reasons for a small business to develop policies and procedures. Some of those reasons relate to efficiency and profitability and some have to do with legal issues. The difference between policy and procedure is that policy is the statement of what should be done, and procedure is the doing. For example, the policy may be to report all expenses on the thirtieth of each month, and the procedure may be to file each receipt in a folder throughout the month, then to fill out the expense report using the receipts.

Having policies and procedures in place, usually in the form of an employee manual, means that your company is prepared for growth. The best time to develop official company policies and procedures is before the company grows. Having a basic employee manual in place gives new employees some structure, and expectations are clear. In addition, a statement of policies and procedures can provide some legal protection for your company.

Setting aside the legal ramifications of having an employee manual, consider the efficiency aspect. When procedures are clear and followed, things are done the same time and again, giving you an opportunity to examine the results. Over time, following the same procedures will allow you to create reports and identify trends.

If writing an all-encompassing employee handbook seems like an overwhelming task, take it on in small segments. Start by simply listing what you do, as you do it. For example, the next time you make a bank deposit, write down each step as you do it. Then, the next time, ask someone else to use your list of steps to make the deposit and “test” your written procedure. Obviously, the more complicated the task, the harder this will be, but it is certainly a way to get started. Finally, keep in mind that policies and procedures can (and probably should) change. Your company will grow and change, so it makes sense that your policies and procedures should too. As you develop your employee manual, build in some flexibility, a process for change, and set specific times in advance to review the manual.
 

Links for Budgeting Tools

Here are a few places you may want to check out if you are looking for budgeting and forecasting tools:

Inc. offers a rundown of 12 tools that can make dealing with your finances easier:
http://www.inc.com/guides/2010/09/12-best-tools-for-budgeting.html

A few suggestions with contact information from ehow:
http://www.ehow.com/list_6768530_budgeting-forecasting-tools.html

Reviews of a number of frequently-mentioned tools: 
http://www.capterra.com/budgeting-software

Overview of the 10 most-recommended accounting tools:
http://www.softwareadvice.com/accounting/

SCORE is a great resource, and has plenty of advice:
http://www.score.org/finance

Tools for Budgeting

Business owners are bombarded with advertisements, introductions, suggestions, and other forms of marketing. Budgeting software is no exception. How do you decide which system will work best for your business?

Budgeting, forecasting, bookkeeping, payroll are all important when it comes to your business’ finances. Manually tracking all of those numbers would be slow and not the best use of time. However, choosing between the many tools available may seem overwhelming, particularly when there is so much marketing noise.

There are a few ways you may be able to make the process of evaluating various options a bit easier:

1. Discuss the issue with your CPA. As an expert, your CPA likely has insights into both what your needs are, and what is available. Ask for recommendations, and you will immediately narrow the list of systems to consider.

2. Decide if you want a web based or installed system. Each has advantages and disadvantages. Your situation will help you determine which is most suitable.

3. Talk to your staff. If the people who must use the software feel that their opinions have been taken into account, it is likely you will have an easier time getting it fully implemented.

As you begin to look at various systems, you will want to consider cost, technology, training and support, and your specific needs. Changing your processes will require an investment of time and effort, so carefully evaluating the options before making a decision could well save you money -- and headaches -- in the long run.

We will be happy to answer any questions you may have regarding budgeting tools.

Why Do You Need Key Performance Indicators?

Key performance indicators are one of the hallmarks of good business management. Performance indicators provide an analysis of the overall business operations of a company, which can be used to make decisions about finance, employee training, resource deployment, and many other facets of the business. Although universal indicators do exist, business owners will benefit more from having information about their individual companies.

Goals related to sales, production, resources, and more are clearer and more measurable when companies use key performance indicators. Over time, performance indicators create a historical record of business operations, so that it is easy to make comparisons year-to-year or quarter-to-quarter.

Performance indicators can serve as an external benchmark that allows for the comparison between a company and the industry standard. It can be difficult to measure the performance of a small business to that of a larger operation, but performance indicators let business owners look at smaller, more comparable data sets.

Using performance indicators to set company policies can help make sure that all employees follow the same operating standards. Policies related to customer service can benefit from the use of customer service performance indicators, and operational managers may find performance indicators useful in reviewing employee performance.

Key performance indicators usually track money spent on business operations and the return from business opportunities. Implementing performance indicators that specifically track cost cutting measures or increasing sales can enhance profitability by allowing for small operational changes that have a big impact based on what the performance indicators show.

Tips for Developing Individualized Key Performance Indicators

Set your goals. 

Without clear goals, performance indicators cannot measure progress because no one knows what they are progressing toward. Specific, clear goals for each area of the company from safety to sales to employee performance.

Attach numbers to each goal. 

Giving concrete value to each goal provides specificity and gives the company clear, measurable objectives.  How many new customers  are necessary? How many safety violations must be avoided? How much money needs to be saved through cost cutting measures? “Increase profitability” is a vague goal; add $1 million in new sales is clear and measurable.

Track progress that has already occurred.

 When key performance indicators are paired with specific company activities, it becomes easier to develop indicators that will measure progress toward future goals.

Take a close look at the current numbers.

Analyze the numbers in each area of review and determine the percentage of change that has occurred. Examining current numbers will help in developing effective goals for the future.

Decide how often the indicators will be reviewed.

Key performance indicators should be reviewed at set dates throughout the year; different areas will require different frequencies. For example, financial indicators may be reviewed monthly, but employee review indicators may only be reviewed annually.

Scalability as a Determining Factor for Outsourcing

 Several factors determine whether or not outsourcing specific tasks is the best option for your company’s needs.  Scalability is one of these.

At the core of the scalability factor rests the theory that you only pay for what you use.  This means that a small business can save a significant amount of money that would otherwise have been consumed by retainer costs.  Several advantages exist to working under a scalability model:

·       Allows for businesses to outsource only that portion of projects which may prove expensive to manage internally

·       Augment existing staff or services during identified high traffic or peak activity periods to better service clients and customers

·       Ability to draw on and access key expertise areas when needed for specific aspects of projects or services without having to absorb costs for that expertise full time and “in house”

Determining Scalability

Scalability, by itself, is a major factor in determining what to outsource and to whom.  The extent to which a vendor allows you to scale back operations can also influence the decision to outsource.  Other factors that influence outsourcing on the basis of scalability could include some of the following elements:

·       Scalability inherently requires some degree of automation.  A vendor with high investment in the latest technology and understanding of how to integrate business requirements with tools and applications is best suited to offer scalability.

·       Scalability may not be applicable to all processes; in services that are people driven, it may not be possible to scale back operations at all

·       Understanding how much to scale back, and when, can be determined only by a vendor with significant maturity or experience

·       An organization or a vendor offering scalability can demonstrate breadth and depth of services and have process – driven solutions with proven methodologies and strategies

·       Executing scalability requires the existence of quality infrastructure.  To ensure a steady stream of business continuity, it is essential that the documentation process be thorough and structure applied at all stages to ensure success of the project time and again

Scalability as a Reflection on the Vendor

A vendor who has invested significantly in training and coaching its manpower can ensure high returns for its clients by ensuring quality work.  The combined experience of efficient automation with experienced human resources and input positions a vendor to offer relevant client solutions, consistently and repeatedly.

How Small Businesses Can Leverage Cloud Computing

Cloud computing is redefining how businesses run, impacting the operations of large enterprises as well as start-ups.  For some the notion of “cloud computing” is a relative new concept. 

Cloud computing provides businesses with access to the valued end result or output of equipment and   Most often, cloud computing is delivered as software as a service (SaaS) where users can access a web based solution via a subscription without the heavy investment in the IT infrastructure to support it.  Recent growth in cloud computing is partly driven by the growth in mobile technology platforms that allow users to access information anywhere, anytime.

software, without the ownership or maintenance costs required by purchasing it.

Although large enterprises with multiple geographically dispersed offices have benefitted from cloud computing, it has been an even greater benefit to small business.  Small businesses now have access to enterprise solutions via the cloud computing that would otherwise be unaffordable for them.  Even more importantly, these cloud based solutions allow small business to function more like larger business in the information they can access while simultaneously maintaining the flexibility and agility of a small business, allowing them to react and adapt to situations. 

Some of the benefits cloud computing provides for small businesses include:

• No heavy investment or maintenance costs in IT.  The software as a service method allows multiple users to subscribe to the solution.  The vendor providing the solution- Intaact, NetSuite, etc., absorbs the maintenance costs, and by offering the service on a subscription basis can pass along cost savings due to economies of scale attributable to user volume.
• Ease of implementation. Cloud based solutions eliminate the need for small businesses to invest in infrastructure development, training, and support. Businesses subscribe to the service, and training and support are provided by the vendor on an as needed basis.  The business owner can subscribe and unsubscribe to the cloud service as they wish.
• Redeployment of IT.  For small business with limited manpower, cloud based services free up time for IT resources to be redeployed on more strategic initiatives or reduce the need for full time IT employees.
• Security. Business owners should always check this, but reputable cloud based solutions are knowledgeable about the most up-to-date security measures and encryption technology.  This becomes one critical task which the business owner does not need to address, as the responsibility is absorbed by the cloud service provider who may have more expertise in this arena. 
• Scalability.  Most cloud providers offer packages with different access levels so that small businesses only need to pay for the services they require and use, resulting in overall cost savings for the small business.
• Business Continuity/Disaster Recovery.  As a small business, this is a critical task which can often lack the attention it deserves simply due to manpower and bandwidth.  Cloud based services assist with this, as they back-up critical data offsite as part of providing the solution, facilitating access to this data in case of an emergency.

Small to mid-sized businesses have the most to gain from leveraging cloud based solutions in their business operations.  If you would like to learn more on how Alan Neal & Associates can assist you with selecting and implementing an appropriate cloud based solution for your business, please call me directly at 423-756-4076 or email me at alan@alanneal.com