SEMP Approach

Simplied Examination to Maximize Prot

Copyright 2013 by Richard L. Weinberger No part of this book may be reproduced, redistributed, taught, stored in retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, or otherwise, without the prior written permission of the publisher. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specically disclaim any implied warranties of merchantability or tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of prot or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Printed in the United States of America First printing, 2013 ISBN 978-0-9896050-1-4 Published by Association of Accredited Small Business Consultants, Inc. 901 S. Mopac Expressway Barton Oaks Plaza One, Suite 300 Austin, TX 78746 Ordering Information: Please visit our website at www.aasbc.com or call (888) 715-2435.

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INTRODUCTION 6 Summary Introduction 11 MODULE 01 - SMALL BUSINESS TODAY 1.0 The Dream Lost 1.1 Small Business Today 1.2 Small Business and Entrepreneurial Business 1.3 Studying Small Business 1.4 Success and Small Business Summary Small Business Today MODULE 02 - GENERAL FINANCIAL STATEMENT REVIEW 2.1 General Review - Income Statement 2.1.1 Adjusting for Abnormal Expenses 2.1.2 Common Size Income Statements 2.1.3 Income Statement Inquiry 2.1.4 Cash to Accrual Basis of Accounting 2.2 General Review - Balance Sheet 2.2.1 Common Size Balance Sheet 2.3 Review - Statement of Cash Flows Summary General Financial Statement Review Appendix General Financial Statement Review Checklist MODULE 03 - REVENUE AND EXPENSE REVIEW 3.1 Revenue Review 3.2 Revenue Analysis by Category 3.3 Gross Prot Margin Analysis 3.4 Internal Transaction Controls 3.5 Revenue and Gross Prot Summary 3.6 Expense Review 3.7 Revenue and Expense Narrative Variance Report Summary Revenue and Expense Review Appendix Revenue and Expense Review Checklist MODULE 04 - ASSET AND LIABILITY REVIEW 4.1 Asset Review 4.2 Liability Review 4.3 Unrecorded and Contingent Liabilities 4.4 Restructuring Long-Term Debt Summary Asset and Liability Review Appendix Asset and Liability Review Checklist MODULE 05 - RATIO ANALYSIS 5.1 Current Ratio 5.2 Acid-Test Ratio or Quick Ratio 5.3 Working Capital 5.4 Accounts Receivable Turnover Ratio 5.5 Days Sales Uncollected 5.6 Inventory Turnover 12 12 13 14 15 16 18 19 20 20 22 24 25 26 27 28 35 36 37 37 38 42 47 47 48 53 55 57 61 61 69 74 76 76 78 82 83 83 84 84 85 86

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5.7 5.8 5.9 5.10 5.11

Days Sales in Inventory Debt to Equity Ratio Times Interest Earned Prot Margin Ratio Total Asset Turnover Summary Ratio Analysis Appendix Ratio Analysis Checklist

87 88 89 89 90 91 92 93 93 94 95 97 98 99 99 100 100 100 101 102 103 105

MODULE 06 - SWOT ANALYSIS 6.1 SWOT Categories 6.1.1 Strengths 6.1.2 Weaknesses 6.1.3 Market Opportunities 6.1.4 Threats 6.2 SWOT Analysis - Now What? 6.2.1 Strengths 6.2.2 Weaknesses 6.2.3 Market Opportunities 6.2.4 Threats 6.3 SWOT Template 6.4 Sample SWOT Analysis Summary SWOT Analysis Appendix SWOT Analysis Checklist

MODULE 07 - OPERATIONAL MANAGEMENT 106 7.1 Effective vs. Efcient Operations 106 7.2 Supply Chain Management 108 7.2.1 Forecasting, Pricing, Inventory Decisions, and Scheduling 109 7.2.2 Transportation 111 7.2.3 Financing 112 7.2.4 Customer Requests 112 7.3 Managing for Change 113 7.4 Outsourcing 115 7.5 Human Resources 117 7.5.1 Hiring and Interviewing 118 7.5.2 Employee Handbook 118 7.5.3 Payroll and Related Functions 118 7.5.4 New-Hire Orientation and Training 119 Summary Operational Management 120 Appendix Operational Management Checklist 121 MODULE 08 - STRATEGIC PLANNING 8.1 How, What, Where 8.2 Strategic Approaches 8.3 The Plan Itself 8.4 An Existing Plan 8.5 Strategic Alliances 8.6 Vertical Integration 8.7 Business Plan 124 124 125 126 128 129 129 130

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8.8

Plan Execution Summary Strategic Planning Appendix Strategic Planning Checklist

132 133 135 137 137 138 140 141 143 144 144 145 149 150 151 152 154 155 156 157 158 160

MODULE 09 - BUDGETS AND FORECASTS 9.1 Budgets versus Forecasts 9.2 The Budget Process 9.3 Static and Rolling Budgets 9.4 Fixed and Flexible Budgets 9.5 Budget Variance Report 9.6 Capital Expenditures and Cash Budgets 9.6.1 Capital Expenditures Budget 9.6.2 Cash Budget or Cash Flow Budget Summary Budgets and Forecasts Appendix Budgets and Forecasts Checklist MODULE 10 - INTERNAL CONTROLS 10.1 Cash 10.2 Receivables 10.3 Payables 10.4 Inventory 10.5 Miscellaneous General Control Measures Summary Internal Controls Appendix Internal Controls Checklist

MODULE 11 - MARKETING & BRANDING 11.1 Marketing Strategy and Objectives 11.2 Market Analysis 11.2.1 Your Own Research First 11.2.2 Interviewing Your Client 11.2.3 Conducting Market Research 11.3 The Marketing Advantage 11.4 Branding 11.5 Marketing Ideas 11.6 The Marketing Budget Summary Marketing Appendix Marketing Checklist MODULE 12 - BUSINESS ORGANIZATIONS 12.1 Sole Proprietorship 12.2 General Partnership 12.3 Limited Partnership 12.4 C Corporation 12.5 S Corporation 12.6 Limited Liability Company Summary Business Organizations Appendix Business Organization Checklist

162 164 165 165 166 167 170 171 172 173 174 178 183 183 184 186 186 188 189 190 192

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MODULE 13 - FINANCING 13.1 Debt versus Equity Financing 13.2 Sources of Debt Financing 13.2.1 Friends and Family 13.2.2 Commercial Banks 13.2.3 Financing with Receivables 13.2.4 Vendor Financing 13.2.5 Leasing 13.2.6 Credit Cards 13.2.7 Renanced Homes and Second Mortgages 13.3 Angel Investors 13.4 Venture Capital 13.5 Initial Public Offering 13.6 Federally Sponsored Programs 13.7 Merger Summary Financing Appendix Financing Checklist MODULE 14 - RISK ASSESSMENT AND FRAUD DETERRENCE 14.1 The Fraud Triangle 14.1.1 Opportunity 14.1.2 Motive or Pressure 14.1.3 Rationalization 14.2 The Many Faces of Fraud 14.3 Some Common Examples of Fraud 14.4 Stop it in the First Place - Prevention! 14.5 Risk Assessment Scoreboard Summary Risk Assessment and Fraud Deterrence Appendix Risk Assessment and Fraud Deterrence Checklist MODULE 15 - MARKETING YOUR CONSULTING PRACTICE 15.1 Maslows Hierarchy of Needs 15.2 Value-Added Service 15.3 Billing for Services 15.4 Relationship with Client 15.5 Building your Reputation 15.6 The Consulting Report 15.6.1 Written Report Format 15.7 Practice Makes Perfect 15.8 Consulting Potential Summary Marketing Your Consulting Practice Appendix Marketing Your Consulting Practice Checklist

194 194 195 195 196 197 198 198 199 200 200 200 201 201 201 202 203 205 207 208 209 210 211 213 214 216 218 219 220 220 222 224 225 226 231 232 233 233 234 236

Glossary 238 Index 245 FOOTNOTES 253

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| GENERAL FINANCE STATEMENT REVIEW

Financing activities are related to external nancing transactions of the company. Cash inows occur when the company borrows money or investments are made into the company from owners. Cash outows take place when loans are repaid or monies distributed to owners.

Interest paid is not a component of nancing activities as interest is a component of operating net income.

TIP 2.9
OKso what is included in a statement of cash ows? All transactions affecting cash from operating, investing, and/or nancing activities. not difcult, just take one step at a time. Lets review the illustration below and everything should fall into place.

STATEMENT OF CASH FLOWS

Cash ows from operating activities (1) Net operating income (2) Adjustment to reconcile net income to net cash provided by operating activities (3) Increase in accounts receivable (4) Increase in accounts payable (5) Depreciation expense (6) Net cash provided by operating activities Cash ows provided by operating activities (7) Cash received from sale of equipment (8) Cash paid for equipment (9) Net cash used by investing activities Cash ows from nancing activities (10) Increase in note payable (11) Payment of cash dividend (12) Net cash provided by nancing activities (13) Net increases in cash (14) Cash balance at prior year-end (15) Cash balance at current year-end 50,000

(8,000) 1,500 2,000 (4,500) 45,500 800 (9,600) (8,800) 35,000 (5,000) 30,000 66,700 4,500 71,200

* Not a real company. Illustration purposes only. Does not relate to previous illustrated income statement.

Again, the statement of cash ows has three major sections (these are illustrated above in bold lettering):
Cash ows from operating activities Cash ows from investing activities Cash ows from nancing activities

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3.2

Revenue Analysis by Category

Seldom does a business only have one product or one service that generates revenue. Not all products or services, obviously, bring in the same amount of revenue or prot. Since the small business owner is spending most of his time bringing in revenue and managing the daily operations of the business, many times there is no thoughtful analysis of each separate line of revenue, what prot it is producing, and what effort is necessary to produce that revenue. An analysis should be made by product line, department, or service accounting for the various sources of revenue. This is important because, as you will see in the next section, not all sources of revenue produce the same amount of gross prot. Financial statements normally will not be broken down in detail by product line.

ASK YOUR CLIENT If the revenues are not detailed by product line or service on the Income Statement, you must ask your client for this detail or work with your client in constructing this detail as much as possible.

ADVICE TO CLIENT Explain to your client how important it is to have a detailed breakdown of the revenue and advise him to start keeping this detail and supplying it to whoever keeps his books and prepares the companys nancial statements.

Keep in mind that you might nd some resistance from your client in trying to obtain the revenue detail. If the detail is not readily available (many small businesses for simplicity put all revenue into one category on their nancial statements), this can be a rather timeconsuming process in reconstructing the various sources of revenue for each month during the accounting year or even a year-to-year analysis. If revenue detail is not available, it increases the difculty in trying to make recommendations for revenue improvement. The analysis and review process follows the same pattern as the analysis of the income statement and balance sheet. Revenue gures should be entered into Excel or another spreadsheet application program using both dollars and percentages as illustrated below.

Historical Revenue by Category

YEAR ENDED 12/31/08 Product Line A Product Line B Product Line C Product Line D YEAR ENDED 12/31/09 YEAR ENDED 12/31/10 YEAR ENDED 12/31/11

Total Revenue
Product Line A Product Line B Product Line C Product Line D

50,000 60,000 10,000 80,000 200,000 25.00% 30.00% 5.00% 40.00% 100.00%

95,000 110,000 40,000 155,000 400,000 23.75% 27.50% 10.00% 38.75% 100.00%

125,000 125,000 90,000 210,000 550,000 22.73% 22.73% 16.36% 38.18% 100.00%

135,000 160,000 185,000 320,000 800,000 16.88% 20.00% 23.13% 40.00% 100.00%

Total Revenue
* Not a real company. Illustration purposes only.

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Quite possibly, your client has never actually seen a breakdown of the business by product, service line, or department. This detail is the beginning of your revenue analysis. In the example above, you will note that although the revenue has increased for all product lines, the percent of revenue per product line as compared to the total revenue has been: Decreasing steadily for product line A and B, Increasing signicantly for product line C, and Holding steady for product line D This is a perfect example of how converting dollars into percentages gives you an entirely different perspective as to which product lines are growing and which product lines are shrinking. In this example if the current trends do not change, the future of the business lies more with product lines C and D rather than with product lines A and B. Revenue analysis does not stop with a simple preparation of trending historical revenue numbers in the spreadsheet. This might be an excellent time to go back and review section 1.4 related to success in small business (operate a business as efciently as possible and beat the competition by being better and different). Keep these thoughts in mind as you begin your analysis by product, service line, or department. Some sample questions and recommendations (based on your clients answers) might be:

SAMPLE QUESTIONS AND POSSIBLE RECOMMENDATIONS

1

Is all revenue recognized in the correct period?

POSSIBLE RECOMMENDATION: You must recognize revenue in the correct period. Holding the books open past the end of the month or quarter distorts the true revenue and prot or loss of the business. Lets gure out why youre not recognizing the revenue in the correct period and what can be done to correct and improve the situation that causes you to shift revenue from one period to another.

How is your pricing determined?

POSSIBLE RECOMMENDATION: You should determine the pricing of your products or services based on the amount of your anticipated gross prot. Determine the costs that you will have in each product or service and price accordingly to obtain the desired gross prot. You must also be competitive in your pricing based on market factors, economic conditions, quality of products and services, and strategic goals of the company.

What are your sales terms?

POSSIBLE RECOMMENDATION: Depending on your products or services, think about offering: discounts for early payment, delayed payment for credit worthy customers, COD (collect on delivery) for hard-to-collect customers, down payments, refundable retainers, consignment sales, take home on approval, or interest on late payments.

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MODULE 05 RATIO ANALYSIS

What in the world is ratio analysis? You may or may not be familiar with the term. No need to worry our ASBC course will walk you through the process as ratio analysis can be an effective part of a nancial review. Ratios can highlight trends and provide assistance in identifying and quantifying some of a companys strengths and weaknesses, both on an absolute basis and even relative to other companies in the same industry. There can be a ratio for practically anything you want to review; however, we will only cover those ratios that will be most important and most helpful in your consulting engagement to develop trends and review the relative nancial strength in certain areas for your client. This module will cover the following ratios: Current Ratio Acid-Test Ratio or Quick Ratio Working Capital Accounts Receivable Turnover Ratio Days Sales Uncollected Inventory Turnover Ratio Days Sales in Inventory Debt to Equity Ratio Times Interest Earned Ratio Prot Margin Ratio Total Asset Turnover

There are no precise ratio measurements that can tell you unequivocally that the ratio is either good or bad for your particular client. There are generalized statements that can be made for each of the various ratios, but the ratio must be compared to previous years of the same company, compared to other companies, or compared to industry norms. The easiest, fastest way to analyze any ratio is to understand its trend. Is it increasing or decreasing? Is it getting better or worse? Set up a simple spreadsheet so you can see the trend of each ratio as illustrated below (detailed explanations will follow).

Ratio Analysis
YEAR ENDED 12/31/08 Current Ratio Acid-Test or Quick Ratio Working Capital Accounts Receivable Turnover Ratio Days Sales Uncollected Inventory Turnover Ratio Days Sales in Inventory Debt to Equity Ratio Times interest Earned Ratio Prot Margin Ratio Total Asset Turnover YEAR ENDED 12/31/09 YEAR ENDED 12/31/10 YEAR ENDED 12/31/11

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MODULE 06 SWOT ANALYSIS

Now that the nancial review has been completed, the next step in understanding your clients business is to prepare a SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis highlights all factors that a company should consider when planning for the future. So you can obtain a comprehensive overview of your clients company, you want to understand the SWOT factors. Chances are your client has never performed a SWOT analysis or, perhaps, has never heard of a SWOT analysis. Without a critical self analysis of ones company, how does a small business owner plan for the future? A prevalent misconception with small businesses is thinking that whatever is being done right and protable today should continue without change into the future. This is where most small business analysis stops and fails. What was protable ve years ago, what was protable one year ago, or what is even protable today does not mean that the same products or services will be protable in the future. This is one of the reasons that approximately 50% of new businesses are out of business ve years after their inception. Business is not static; it does not remain the same. Think about how technological advancements have changed businesses. Think about how economic cycles have changed the business landscape. A business that does not understand the need for change and self-reection has a lesser opportunity of succeeding than those that understand the need for analysis, responsiveness, and change. It is great to understand what made a business protable in the past, but it is equally important to understand what failures have taken place, what has hurt protability, and how those factors could be improved. A sign of business intelligence is to be able to understand a companys strengths and opportunities as well as understanding its weaknesses and threats. This is what a SWOT analysis accomplishes. With the proper completion of a SWOT analysis, you will be able to identify important elements in a business and discuss with your clients changes for the future strategy of their businesses. A business cannot rest on its past successes. Yes, a companys reputation, customer loyalty, superior products or services offered, and other factors that proved successful in the past will certainly benet a company in the future; nevertheless, past performance is not a guarantee of future success. Equate this to someone investing in your clients company. There is no question that a investor is interested in past earnings, but they are really investing to share in the potential future earnings as a part owner. An investor has no claim on past earnings. So, the past can be an indicator and, to a certain extent, a predictor of future performance; however, future performance and protability lies in the foundation of a company capitalizing on its strengths and opportunities and improving upon its weaknesses and reducing potential threats.

6.1

SWOT Categories

Lets review a SWOT analysis and identify some of the individual characteristics for each of the four categories.

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6.1.1

StrengtHs

The strengths of a company are those internal resources, processes, or procedures a company does well. These strengths enhance its competitiveness in the market. Examples might be: Specialized skills or expertise in certain areas that make the company highly competitive, relative to other companies in a similar market or industry. These might involve: (1) Having a low-cost operation (2) Advanced technological abilities (3) High-quality products or specialized services (4) R  esearch, development, and introduction of new and innovative products and/or services (5) Fine-tuned supply chain management functions (discussed later in section 6.4) (6) Being one of the rst to the market companies with new products and services (7) Expertise with Internet, websites, and e-commerce Assets, equipment, and facilities that enable the company to have a competitive edge such as: (1) Technological advanced equipment (2) Location of real estate (3) Modern warehouse and distribution facilities (4) Capacity to grow Human capital: (1) Depth of management (2) Experienced, long-term employees (3) Highly competent personnel Intangible Assets: (1) Marketing and selling superiority (2) Broad base of customers (loyal and long-term) (3) Broad base of suppliers (quality service and price competitive) (4) Recession proof business (as much as possible) (5) Non-seasonal business (6) Branded name (7) Superior products and wider variety of products and services than competition Internal and organizational assets: (1) Financial strength and resources (2) Provides excellent customer service (3) Proprietary assets (4) Strategic alliances with other businesses As you can see, the list of strengths can be endless or the list can be very short. It is the combination and an accumulation of all the various strengths of a company that give it a competitive advantage and strength in the marketplace. It is the synergistic effect of all of a companys strengths that make a company valuable. The overall strength of a company is not dependent upon one person, one product

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| SWOT ANALYSIS

APPENDIX - Swot Analysis Checklist

Process
Prepare SWOT Analysis identifying strengths:
Specialized skills Assets, equipment, and facilities enabling company to have competitive edge Human capital Intangible assets Internal and organizational assets (See Section 6.1.1 and 6.2.1) Lack of expertise Lack of employee talent, loyalty, and longevity Inferior and/or obsolete assets, equipment, real estate Poor location Ineffective marketing No clear strategic direction Weak financial position and resources High costs, low profit No product or service innovations Non-responsive customer service and follow-up Narrow product or service line Small customer base compared to competition Weak brand image Small group of suppliers Losing market share Lack of strong management (See Section 6.1.2 and 6.2.2)

Comments

Date Completed or N/A

Needs Additional Analysis ()

Prepare SWOT Analysis identifying weaknesses:

Prepare SWOT Analysis identifying market opportunities:

Expanding geographically or globally with existing products or services Purchase of a competitor Purchase of an unrelated company to diversify product or service offerings Developing strategic alliances with other companies Hiring talented personnel to enter new markets and/or offer new products or services Discover underserved markets and satisfy needs of that market (See Section 6.1.3 and 6.2.3)

Prepare SWOT Analysis identifying potential threats:

Competition with cheaper or better technologies New or improved products or services introduced by competitors Less expensive foreign imports New taxes or business regulations Increase in interest rates and operating costs Shift in customer or supplier base Larger companies with more financial resources duplicating products or services Tight credit market due to national and worldwide economy Bargaining power of major customers reducing prot (See Section 6.1.4 and 6.2.4) SWOT template (See Section 6.3)

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MODULE 08 STRATEGIC PLANNING

If a business is to grow and prosper, the owner must know where the business is going. There must be direction with goals to be achieved. Without a plan, a business simply operates from day-to-day without any clear path to its future. Perhaps, it succeeds in spite of the fact that there are no plans; perhaps, it ounders. It is similar to starting a trip without a roadmap and without any knowledge of where youre headed. Among many factors leading to the success of a business is a strategic plan. It should dene what the business is trying to achieve and how it will achieve those objectives. Put very simply, a strategy is a plana blueprintas to how the owner or management intends to operate and grow the business.

8.1

How, WHat, WHere

When developing a strategic plan, many questions need to be answered. The basic questions always start with the word how, what, or where. How do we do this? -How is that to be done? How do we develop loyal customers? How do we retain employees? How do we actually conduct our operations? How is pricing determined? Where do we nd suppliers? Where should we locate? Where do we advertise? What are the needs of our customers? What is the best way to market our services or product? What is the best way to nance the business? What type of insurance do we need?

The list of how, what, and where questions can go on for pages. You can imagine everything that could be answered with these questions, ranging from sales to service, production and nancing, to hiring employees. The answers to these basic questions can be a summation of (1) how is the company going to operate, (2) how is the company going to grow, and (3) how is the company going to obtain a competitive advantage over others in the same business and in the same marketplace? Remember, the goal of the business is not to simply meet the competition although this is a philosophy of many small business owners. The goal should be: to beat the competition and obtain that competitive edge necessary to be protable and successful. Pick a company you are familiar with and consider if that company operates with a plan or not. Most small businesses operate on a whim and a prayer hoping from one day to the next and from one year to the next that they will be protable and grow. Sometimes it happens; sometimes it doesnt. Rather

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| STRATEGIC PLANNING

than a company opening its doors and hoping for the best, it should have goals and objectives, which are clearly stated and understood by all employees. Yes, all employees because everyone involved in the business from the owner or manager down to the lowest level employee must understand the business goals, where it is headed, and how it intends to get there. When a business grows and prospers, everyone involved with the business enjoys a similar prosperity. This is why it is vitally important for all employees to understand the goals of the business.

8.2

Strategic ApproacHes

There are many approaches to develop a competitive business strategy. These approaches must be a match for the company based on the companys internal strengths and weaknesses (back to the importance of a SWOT analysis!). Example strategies might be: Striving to be a low-cost provider (least expensive product or service) Having a higher quality service or product Wider product selection or multitude of related services (diversication) Value added services Technological superiority Reputation for exceptionally good value for ones money Focusing on a narrow market niche Developing marketplace expertise First into a market (taking advantage of being the rst), last into the market (letting the bugs be worked out by others), or somewhere in between (after doing more research into the product, service, and market) ntroduction of a better product or service based on I changes in the marketplace or consumer demand From the strategies listed, it is easy to see that there can be a wide variety of strategies that companies within the same industry can take. Each company can and will have a different strategy. While some companies might want to be the rst mover into a market to gain a competitive advantage, other companies are content to be late arrivals into the marketplace gaining knowledge from what other companies have done, both good and bad. Of course, a late arrival into the marketplace might nd that the market is already diminishing, but this is a strategy for many businesses. Diversication is another example. Much thought has to be given if a company decides to diversify into an unrelated business in which it has no experience. There might be potential for growth, but where does the talent come from to run the new segment of the business? Is key talent brought in from outside the company to properly develop new strategic options or is key talent someone within the company who is groomed for the new position? An advantage of diversication is that risk is spread across different areas of the business rather than having all the risk associated with only one segment.
ASK YOUR CLIENT

Start your discussion in this area by asking your client to describe to you the companys competitive business strategy. If your client has one, thats great and that gives you the opportunity to learn about its strategy and how it might be improved. If there is no strategy, this really gives you the opportunity to start working with your client to develop one. Either way, you can assist in establishing the future course of the business.

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through vendors. They would then eventually be selling products they manufactured themselves. They expanded vertically by adding another process to the companys activitiesmanufacturing and selling, rather than only selling. Vertical integration does not have to be a complete integration taking over 100% of another process. It could also be a partial integration depending on what activity is undertaken. Obviously, before a company can undertake vertical integration, it must decide what skills and capacity the company has and what skills and capacity must be added so desired results can be achieved. Before undertaking vertical integration, a company must have the internal resources available for the type of vertical integration it desires to undertake. The company risks nancial problems and loss of efciency if not handled correctly. Taking resources away from one part of the company and investing those resources in other parts of the company might prove to be either benecial or detrimental to the company. Pros and cons must be weighed to determine what is best.

8.7

BUSINESS PLAN

Frequently, a business plan and a strategic plan are used synonymously. They may be the same, but as previously stated, a strategic plan is very precise, dening in detail how a company will be run and how management intends to grow the company. A business plan has similar information but with less detail. It is usually prepared in the formation stages of the company, especially, if the founder of the business is trying to attract investors or obtain nancing. A well-developed business plan is a work in progress and can (and should) be expanded into a more complex, strategic plan as the company begins to operate, evolve, and grow. As with a strategic plan, there is not a single template that should be used in writing a business plan. The most important element in the preparation of a business plan is to make certain that important factors of the business are covered, and it has a professional appearance. It should contain the following:
I II

Cover Page Executive Summary

a. Short overview of the business b. Objectives c. Mission statement

III IV

Table of Contents Business Prole

a. Description of the business (product and/or services offered) b. History and form of organization c. Organizational chart and individual manager resumes d. Board of Directors or Board of Advisors (short resumes) e. Core competencies f. Opportunities and challenges g. Marketing Plan

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- Market research - Customers - Industry information - Pricing - Sales forecast - Marketing strategy - Marketing budget h. Competitive Analysis - Major competitors - Long-term industry forecast i. Operational plan - Personnel - Location - Legal environment and licenses (if applicable) - Inventory and suppliers (if applicable) - Credit policies - Professional assistance
V

Financial Information

a. Projected income statements and balance sheets for three years by quarter b. Projected statement of cash ows for three years by quarter c. Start-up expenses (if new) d. Break even analysis e. List of capital assets (date to be acquired and cost) f. Loan applications (if applicable) g. Debt servicing schedule h. Insurance
VI VII

Growth Plan Supporting Documents

a. Marketing materials b. Research studies c. Industry articles d. Loan applications e. Licenses and permits Although each business plan will contain the above elements, a business plan will also be individualized for the particular industry in which it operates. A manufacturing company might have presentations on their production processes, production levels, direct and indirect costs, capacity limitations, supply chain processes, or possible research into new products. Service businesses might have specic information on pricing, industry standards, control procedures, or subcontracting while retail businesses might discuss their company image, branding policies, pricing policies, inventory and control methods, and major promotional activities.

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following year making it more difcult for that particular department or division to achieve its goals in the subsequent budget year. If this atmosphere exists, there is a tendency for managers to spend all budgeted funds even though expenditures might not be completely necessary with the mind set that more money will be allocated the following year making it easier to achieve the next years targeted goals (and, maybe, even a bonus for those involved). When the companys performance takes a back seat to individual performance, efciencies are usually lost along the way. At times, it is difcult not to pad budgets, but they should reect realistic minimum amounts of revenue to be expected and expenses to be incurred. Since it is common that sales might not be achieved as expected orsome out of the ordinary expenses incurred, a realistic budget should take into consideration various factors that could change during the normal course of business. This is different than those occurrences that are completely out of the ordinary, unusual, and out of managements control.

RECOMMENDATION TO CLIENT Solve this budgeting problem by giving a monetary incentive to exceed expected results, while still operating efciently as or better than expected.

9.3

STATIC AND ROLLING BUDGETS

A budget can either be static or rolling. A static budget does not change. In other words, the budget might be for a 12-month period of time (or any time period that management selects), and that budget remains the same until the next years budget is prepared. This is the most common type of budget and easiest to prepare. The budget is prepared prior to the accounting period commencing and is used during the entire budget period until a new budget is prepared for the subsequent accounting period. Another type of budget that many companies nd extremely useful is the rolling budget. In contrast to the static budget, the rolling budget splits the annual budget into four quarters, which produces a budget that includes the most current upcoming four quarters. This is called a rolling budget because as soon as one quarter ends, the budget rolls in another quarter. Rather than getting to the last quarter of the year with no future budget to work from until the next years budget is prepared, a rolling budget always gives a company at least four quarterly budgets (goals) to achieve. A rolling budget could, of course, be for any period of time a company chooses. There are several advantages to using a rolling budget. It forces management to constantly review not only performance but update goals that the company is trying to achieve. Rather than preparing a static budget for a 12-month or longer period of time and then only reviewing variances based on actual performance, the rolling budget keeps management abreast of current factors that inuence future business decisions, such as economic conditions, competition, changes in product or service lines, or other variables that affect performance. The constant review of goals to be achieved and evaluation of performance keeps owners and managers more involved in daily decision-making processes. It makes the process more meaningful and realistic by making decisions based on current conditions contrasted with making decisions based on budgeted numbers that might have become outdated due to circumstances not known or predicted at the time the original static budget was prepared. Rather than

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TIP 11.3

Review with your client, the companys current marketing programanything that is done to reach out to customers. Strongly encourage your client to think out loud when describing what the company does to market and why. Do not make judgments or observations about your clients choices, but listen, ask questions, take noteseven bring a digital recorder so you can recall details later on.

11.2.3

CONDUCTING MARKET RESEARCH

Some small businesses think they cannot afford any market research. The actual fact is that they cannot afford NOT to do any market research. A small business must make the most of allocated marketing dollars. An efcient use of some of those dollars must be for market research and analysis. Market research does not have to be elaborate or expensive nor does a market research rm have to be hired. Small businesses can conduct their own market research. One way you can add value for your clients is to explain how this can be done on their own. Below are some options for small businesses to conduct their own market research: Send out surveys to existing and potential customers asking what they think about new products and services. Seek out suggestions from customers and clients. Test the water with a small amount of advertising to judge interest in a new product or service and measure results. Have in-business questionnaires. Review monthly activity for business trends. Estimate how big the market is and research whether it is growing or shrinking. Measure the market against the companys objectives. Research what the competition is doing. Review pricing relative to competition and value. Find out if any professional studies have been completed and published. Interview prospective customers about their needs. Analyze who the companys customer really is. Establish an advisory board to get a fresh set of eyes. If a marketing agency is being used, obtain a progress and results report.

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ASK YOUR CLIENT

(5) How can we think differently than our competition in our marketing strategy? (6) How can we let our customers know that we care about them? (7) How can we communicate the unique aspects of our brand, company, products, and services to our customers and clients?

A competitive advantage is established when the company offers superior customer value to satisfy a customers needs. It is also essential for a company to know its competition and its competitors products or services as well as its own. Competition is broader than just a direct competitor. Take the airline industry as an example. Airlines compete with each other, but airlines also compete with cars, trains, and buses for the same dollars and to provide the same solution to a customer. A marketing strategy has to appeal both to direct and indirect customers. If needs are satised and value established, indirect customers can become direct customers.

11.4

BRANDING

What is it that makes a product or service readily recognizable? Why is it that when we see something, we immediately associate it with a particular company? It is branding. Branding clearly identies a product or service. It is a recurring theme, symbol, slogan, or logo that someone sees all the time on products and in print ads, websites, TV promotions, company shirts, and other media forms to keep the companys name and products in the public eye. Apple Computer has its Apple symbol. Southwest Airlines planes are painted the same. Coca-Cola, Amazon, FedEx, Target, and Nike all have their own brand identity, as well. Branding allows a company to stand out from the crowd. It differentiates one company from another. Constant and repetitive communication to customers brands a companys image in the marketplace. It is branding that ties the company to the customer or client. When branding is on target and successful: Quality and value become associated with the branded products and services. Buyers immediately relate a product or service to a particular company. Credibility is instilled for the seller with the buyer. Emotional attachments are developed. Sales increase and loyalties are established.
RECOMMENDATION TO CLIENT Find one thing that is unique to your business, sets you apart from the competition, and, perhaps, is a bit clever that can be a branding tool for your business.

What are you doing to brand your product or service? ASK YOUR CLIENT

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MODULE 13 FINANCING
Whether your client is already in an existing business or is thinking about starting a business, the question of nancing is sure to come up. Most business owners do not have enough personal funds to nance an entire business and if they do, they usually do not want to invest all of their capital in the business. There are numerous ways to nance a small business with debt or equity. There are advantages and disadvantages to each. The reason for nancingstart-up, working capital, or expansionmakes a difference as to which form of nancing should be undertaken. Various options should be reviewed and considered carefully before making a nal decision. Decisions made today related to nancing have future impacts. Once made, some cannot easily be undone, so it is prudent to study all options to understand the current and future effects on both the business and the owner.

13.1

DEBT VERSUS EQUITY FINANCING

When a business borrows money, it is called debt nancing. The business is creating a debt and that debt must be repaid with interest. The repayment terms and interest terms will be specied in the debt instrument. Interest is a business expense and tax deductible. In todays economy, business loans can be difcult to obtain and are based on the businesss ability to repay, collateral, and amount of capital invested by the owner. Since there is a direct relationship between risk and reward, lenders carefully scrutinize a business before making a loan. Given that there is a greater risk for a small business to succeed, a lender will normally charge a higher interest rate compared to interest rates charged to larger companies. Equity capital or equity nancing, in contrast to debt nancing,is an investment from the owner or outside investors. This is sometimes referred to as risk capitalcapital that is at risk of being lost if the business is not successful. Investors lose money if the business fails, but if the business is successful, investors share in the rewards through the payment of dividends and an increase in the value on their investment. Equity capital does not have to be repaid, which is quite different from debt nancing, and can be a source for small businesses. An owner must understand that at times to obtain capital and attract outside investors, a percentage ownership of the business must be given up. This amount depends on: How much the investor is willing to invest? How long the company has been in business? How successful the company has been in the past? What are the future prospects for the business? An investor seeks to make a return on an investment (ROI). An owner seeks needed capital and in exchange gives up a percentage of ownership of the business. Some questions the owner might ask when contemplating obtaining equity capital from outside investors are: What are the potential benets for the business? Will the outside capital allow the business to grow?

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