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.