Driving Your Company's Value

Disciplines of the Entrepreneur: The Enterprise Leader

According to Michael Gerber, author of E-Myth Mastery, there are seven disciplines that a successful entrepreneur must develop to build a World Class Company. Each discipline is like a puzzle piece that makes up the enterprise. Each discipline is like a puzzle piece that makes up the enterprise. It’s not a building block working in a linear fashion, but rather part of a system of components that work together to complete the whole that make up the company. The entrepreneur must have all disciplines regardless of the size of the company in order to achieve his or her desired objective, the vision of what he or she is trying to create.

The seven disciplines are: 

1. The Enterprise Leader
2. The Marketing Leader
3. The Financial Leader
4. The Management Leader
5. The Client Fulfillment Leader
6. The Lead Conversion Leader
7. The Lead Generation Leader

There are five essential skills the Enterprise Leader must have

Concentration, Discrimination, Organization, Innovation and Communication. The skill of Concentration is learning to feel comfortable with being a lone. We’ve heard the phrase, “It’s lonely at the top.” It’s true. The entrepreneur is the final decision-maker. Good or bad, your decisions are the ones that will create the company of your dreams. As the enterprise leader, your work is to lead, not do. According to Gerber in his book E-Myth Mastery, you need to remind yourself every day, “I am a leader. My job is to do the work of leadership.” This skill deals with how to focus your attention. 

The second skill, Discrimination, deals with where to focus your attention. You need to learn how to choose between alternatives. The most important things for an enterprise leader to consider are the vision, mission and values (the culture or consciousness) of your enterprise. Focus on the end game of what you’re trying to create. Every option or path you choose to pursue should be held up against those elements. Ask the question, “will this path get me to the vision I’m trying to create? Does it tie into the mission of what we’re doing?”

The third skill, Organization, deals with the functional components of your enterprise. This is how you organize your business, turn chaos into order, how you structure your business so everything has a place and function and it works in an orderly fashion.   

Innovation, the fourth skill, depends on Discrimination. Everything you do must be held up against the standards of you vision, mission and values. Performance is judged by the standards of how well it contributes to achieving the future objective of the enterprise. Innovation comes from following a series of steps that include determining what you want to improve, deciding how to improve it, quantifying the improvement or its effect on the enterprise, testing it, and re-quantifying, and testing it again and again, until you get positive results.

The fifth skill is Communication. This involves how you communicate to
your people what you expect of them, how you listen to their understanding of your expectations, and how you improve your communication to close the gap between your expectations and their understanding of them. Organize your communication so it’s clear, compelling and inspiring. Present it in a variety of ways, in person, via e-mail, in newsletters, on the website, in brochures and other marketing materials.

7 Reasons Why You Often Need To Use A Professional Consultant

Business owners and management teams often decide they don’t need to use a professional consultant and can do the work themselves.  Think about the seven reasons why you often should make the decision to use a professional consultant.

1. Tyranny of the urgent – you procrastinate and don’t get to it.  As businesses use lean staffs, managers just don’t have the time to take on new time consuming projects.
   
2. Doing it yourself isn’t the best use of your time.   Unless you are experienced in the subject matter, the learning curve to reach the level of expertise desired is not an effective use of your time.
   
3. It’s hard to be objective about your own business.  Like with our own children it is hard to be objective, it is just as hard to be objective about our own businesses.  We find as managers perform analysis of their company’s strengths, weaknesses, opportunities and threats, they underestimate the company’s weaknesses and threats.  With one exercise involving 27partners in separate professional firms, we found the partners believed their firms had no weakness but their competitors had weaknesses.  You be the judge on your abilities to be objective.
   
4. You can’t see the forest for the trees.  When we work with all the nitty-gritty details of our businesses we often lose sight of the big picture.  Bringing in an outsider generally helps in organizing all the facts into an understanding of the business as a whole and how all the trees of parts of the business work together or at least should work together effectively.
   
5. You can’t keep up with all the change in the marketplace.  Your industry and marketplace, like everybody’s, is changing faster than you can keep abreast of with your daily management responsibilities.  When you retain the services of a professional consultant in a particular area, you are gaining the insight and expertise of someone who’s job it is to stay current of all the changes taking place in their area or areas of expertise. 
   
6. You don’t know… what you don’t know.  As managers we normally have a general knowledge about a lot of areas related to our businesses, but lack an in depth knowledge about many of these areas.  When this happens we are not aware of what we don’t know about a particular area.  The professional consultant can bring expertise into the company to fill the holes in management’s overall expertise.
   
7. Lack of exposure to how others do it.  Managers generally have worked for a limited number of companies and some have only worked for one company.  This creates a lack of exposure to processes, methodologies or management techniques other companies use to successfully run their companies or manufacturing processes.  Consultants, by the nature of their work, have the opportunity to gain insight into a large number of companies and generally network with peers who have been into an even greater number of companies.

We acknowledge there are many unqualified or incompetent consultants in the world.  But there are probably even more competent consultants who would love to work with you.  Any qualified consultant will be happy to discuss with you, why they are the right consultant for you.

The essential skills of leadership

It's lonely at the top. While running your own company has its merits...you get to call the shots...it also has its drawbacks. One is that as the leader of the organization you need to do the work of leadership. Your job is to set the direction, motivate the troops, and define the vision for the organization. It doesn't mean you can't include your team in helping to set that vision, but you are the ultimate decision-maker. After all is said and done, you need to make the tough choices.

In his book, E-Myth Mastery, Michael Gerber identifies the essential skills of leadership as:
1) Concentration - focusing your attention on the work of leadership, especially when you are confronted with the choice of doing the technical work of the business or focusing on the longterm direction of the organization.Remind yourself that you are the "Leader" and you need to do the work of a Leader. This is the skill of how to work on your organization.

2) Discrimination - learning how to choose between alternative courses of action.This is the skill of where to focus your attention. According to Gerber, The most important things you as a leader should focus on are the vision of the enterprise, its substance and how it's communicated; the business model, the unique way your business works that sets it apart from the competition; the consciousness of the organization (often called company culture), how people are treated, compensated and how work gets done, which translates into the look and feel of the organization; and the end game, when and what is expected to happen and the strategies needed to take you from today to that future outcome.

3) Organization - defining the organizational structure of the enterprise and the relationships between the various departments or divisions. You have to set up the proper structure for collaboration to ensure everyone is working together to achieve the same outcome, your future vision.

4) Innovation - continually improving on everything you do in the enterprise. This means staying abreast of changes in your external environment and making the necessary adjustments to create new products, deliver new services to your customers, and stay competitive.

5) Communication - how you communicate what you expect of your people is, how you listen to their understanding, and ensuring that your communication is clear, compelling and inspirational. This is the skill through which you motivate your staff to excellence.

Building a world class business

I’ve been reading Michael Gerber’s E-Myth Mastery to see how his recommendations dovetail with systems thinking. He is, after all, a systems thinker, and an intentional dreamer, looking at business as a whole system made up of many systems or parts. Frequently, the parts don’t work fluidly together because we get so mired in the day-to-day activities, we lose sight of the end goal….the reason we started the business in the first place. 

E-Myth Mastery goes beyond his first book, The E-Myth, which is all about systems and planning, to help the entrepreneur get back in touch with the passion, the vision, the dream....the reason for being an entrepreneur. Then he applies what he calls “The Seven Essential Disciplines” to the entrepreneurial planning and management process, which become a road map for building a world class organization. 

According to the author, “Building a World Class Company is a commitment to the integration of passion, purpose and practice.”

In our practice, we go a step further by including a review of the external world outside your business as one of the steps in a total strategic management system. But I'll talk more about that in a future blog.

The first step in a holistic approach to your business is developing clarity of purpose and connecting with your passion. This is perhaps the hardest part of the process. You started your business because you thought you could produce a better product or deliver a better service to your customers. Perhaps it’s because you got tired of having someone else call the shots, telling you when, what and where to do your work. That was the passion that got you started. Now, you’re mired in all the day-to-day emergencies of meeting payroll, solving customer or production problems, handling employee issues, and any number of other things that keep you from doing what you love, yet have to be done in order for the business to operate. Now, instead of a boss telling you what to do, it’s your employees, your customers, and the very business itself, demanding more and more of your time, and leaving you frustrated and exhausted. You’ve lot the passion for the business. What happened? 

According to Gerber, this is a common problem among entrepreneurs. Even those who have followed his E-Myth systems, found themselves so mired in running the systems and tracking their progress, they feel  like gerbils running on a circular treadmill. Everything demands their attention, and none of it is fun anymore. 

Now is the time to take a step back, take a deep breath, get away from the business for a little while, and give yourself time to THINK. Yes, that ugly five-letter word, THINK. We’re so busy doing, we don’t take time to just sit and think. Think about why you started the business. What is it really that you set out to do? Is it just to repair shoes or was there a grander passion behind opening up that shoe repair business? Was it to repair other people’s clothes or to clothe the world with designs that flatter any body? Was it to repair computers because you have a knack for understanding how they work? Or was it grander like Microsoft’s, to envision a PC on every desktop? What was the spoken or unspoken vision you had when you started your business?

What was the dream you set out to create?

The key to getting back in touch with your passion is to understand the difference between passion and purpose. Passion is what calls you to action. It’s the vision you have for the future you want to create. The tingly feelings you get when you think about this grand idea. Purpose is HOW you put that vision into action. It’s the WHAT that you do everyday. Vision is the WHY. 

Like the story of the three men who are laying bricks. When asked what they are doing, the first man says he’s laying bricks. The second says he is building a wall. The third man answers, I’m building a cathedral. That’s a vision! 

What are you building in your business…..a wall or a cathedral?

Think about that, and we’ll take the next step in the blog that follows.

Understanding Your Financial Statements – Part 11: Long Term Liabilities

Long term liabilities represent the debts of the company which will not have to be paid within the next twelve months.  These liabilities commonly include:  bank debt, loans from stockholders or related entities and contingent liabilities.  The portion of the liability that has to be paid within the next twelve months is recorded in the financial statements as part of Current Liabilities (See Part 10). 

Financial statement analysis questions that should be asked related to the company’s long term liabilities include:

1. Are your long term liabilities increasing or decreasing as compared to the prior period or previous year?  What are the factors that caused the change?
2. Long term liabilities represent what percentage of total assets (long term liabilities divided by total assets)?  How does it compare to the prior period or prior year?  How does this compare to industry comparative data?
3. Do you have a good relationship with your banker and other creditors?
4. Should you consider restructuring your interest bearing debt to change lengthening your repayment schedule?
5. Should you consider repaying your debt sooner to lower your future interest expenses?
6. What is percent of your payments or principle versus interest?
7. Can you accelerate your principle payments without having a significant negative impact on your operations?
8. Have you set goals for the level of debt you desire to maintain?
9. Do you plan to repay debt from related parties (stockholders or other related parties) or is it really a form of equity (long term debt without FMV interest being paid)?  If so, should the debt be reclassified to equity?
10. Are there any balloon payments that need to be paid in the next two to three years?

Understanding Your Financial Statements – Part 8: Fixed Assets

Fixed assets are the assets used by a business that are non consumables and are generally considered to last more than one year.  Many like buildings, last 30 or more years, while machinery may only last a few years and become technologically obsolete.

The effective use of your fixed assets is one of the three factors determining your return on equity.  Later posts will look at ratios including asset turnovers and their implications for the business.

Financial statement analysis questions that should be asked related to the company’s fixed assets include:

1. Fixed assets represent what percentage of total assets (fixed assets divided by total assets)?    How does it compare to the prior period or prior year?  How does this compare to industry comparative data?
2. Have you expensed your fixed assets under tax code section 179 and therefore have not recorded them on your balance sheet?
3. What percentage of total assets does each of the components of fixed assets (building, equipment, vehicles, etc) represent as a percentage of total assets?  How does it compare to the prior period or prior year?  How does this compare to industry comparative data?
4. Have any capital improvements or investments been made in the last fiscal year end?  If so, have they been utilized according to your plan?  Has the increased level of efficiency been achieved?
5. How much equipment is required to maintain your production needs? To sustain your planned growth?  Your equipment is currently being utilized at what level of capacity?
6. Should you liquidate any equipment or properties that are not being used effectively?
7. What are your levels of down time?  Should you consider replacing equipment to lower or eliminate your down time levels?  Should you replace equipment with new state of the art equipment to improve efficiency levels or to produce more products?
8. What are your long term plans for fixed assets?

Understanding Financial Statements - Part 7 - Current Assets

Current Assets are referred to in Spanish as circulating or cycling assets.  Circulating assets probably is a more accurate reflection of the fact that these assets are normally considered to revert to cash within the next 12 months.  The most common of the current assets are cash, accounts receivable and inventory.

These three assets plus accounts payable (found in the current liabilities section) are the four assets that management should spend most of the daily time managing.

Financial analysis questions related to current assets include:

1. Current assets represent what percentage of total assets (current assets divided by total assets)?    How does it compare to the prior period or prior year?  How does this compare to industry comparative data?
2. Cash, accounts receivable, and inventory each represent what percentage of current assets?  How do they compare to the prior period or prior year?  How do they compare to industry comparative data?
3. What are the factors that caused the changes in each of these accounts?
4. How much cash is needed for current operations?  If the company has more cash than required is it properly invested in short term investments?  If the company has large sums of excess cash, should distributions to shareholders or alternative investments be considered?
5. Is your accounts receivable and/or inventory growing but your cash decreasing?
6. Have you aged your accounts receivable?  If so, is it different than normal?  Is it constantly getting older?
7. Do you have a line of credit to assist in managing short term cash needs?  If not, do you need to arrange for a line of credit?
8. Are you using the line of credit as permanent financing?  Is the line going up and down?  Do you pay it off at least once a year?
9. What other current assets do you have in current assets?  Are they really current?  Are any receivables really collectable?
10. Have you been properly expensing prepaid expenses?
11. Should you liquidate, fire sale or donate your old, obsolete or slow moving inventory?
12. Do you need to set up procedures to manage your cash and inventories?

Good Cash Flow Management Is Simple

Cash management is an essential part of being competitive today.  Luckily, good cash management is simple.   You just need to:

1. Understand why, when and where your cash needs will occur.
2. Control your financial drivers (accounts receivables, inventory, etc.) which have the most significant impact on your cash balances.
3. Establish and maintain good relationships with lenders and your creditors.
4. Develop a cash flow planning system as part of your budgeting process to quantify your cash flow needs.

The starting point for good cash flow management is developing and updating projected financial statements, including cash flow statements, which will provide you with the answers to why, when and where your cash needs will occur.  The projections will also provide the basis for communicating with your bankers and creditors. Watch for future postings on developing and managing with your projections.

7 Reasons To Have a Business Plan

Is your business plan up to date? Do you actually have one?  There are 7 key reasons why a business plan will benefit you and why you should keep your plan up to date reflecting how you will react with the changes taking place around you. They are:

1. It forces you to focus on why you are in business and how you plan to compete in the changing world around you.  With the changes taking place in the world around us management teams must be able to clearly state what business they are in, define their key customer groups, state what the company will look like In the future, and determine how they plan to reach their vision of the company in the future.
   
2. The planning process helps you set goals for the business, be prepared to face uncertainty in the marketplace and be prepared to handle business and financial risks you will encounter.
   
3. It keeps you focused on customer related Critical Success Factors (CSF) and their related Key Performance Measures. Customer related Critical Success Factors are the limited number of areas in the company’s operations  important to the customer in which satisfactory results will cause the customer to continue patronage and will attract new customers. Critical Success Factors are the few key areas where “things must go right” for the business to flourish and its strategy to be achieved.
   
4. It helps you communicate your business strategy and plan of action to your key stakeholders, including employees, and gain their commitment to your plan.
   
5. It forces you to establish performance metrics.  Performance metrics can be lagging indicators (i.e. how many units you produced last month) of your past performance or leading indicators (i.e. a decline in customer satisfaction) of future difficulties.
   
6. It can help attract or retain key employees.  Key employees are attracted to companies that can articulate their mission, values, vision and strategy. It gives them confidence that they will be part of a successful team.
   
7. It helps you secure adequate bank debt and/or investors to support your future growth. Although most lenders want their loans to be supported by tangible assets that can be sold, they prefer to lend money to firms that have a plan they can understand and believe can be accomplished to pay off the loans.

Developing a credible business plan requires a lot of work and analysis.  Management will not always have time to do all the analysis and can use consultants to assist in the process and to document the business plan. For a business plan to be effective the individuals who will have to implement it should own it. Therefore, the business plan cannot just be delegated to a consultant. But, an experienced business facilitator can add value to the process, while still ensuring that ownership is in-house

A Framework for Approaching Compliance

The whipping boy of the accounting world for business management over the past couple of years has been “compliance,” and particularly compliance related to Sarbanes-Oxley (SOX). Articles for the good, the bad and the ugly relating to the effort, cost, etc. of compliance litter the media and internet. I would like to take a step back for a moment and propose a context and attitude that keeps compliance and management efforts in perspective. I begin with the two following core assumption:

Unless a business operates in the not-for-profit sector, making a profit is a key, if not the primary, goal of the entity’s efforts. Within that context, however, all business entities have a “social” responsibility to the economic environment in which they operate to be good stewards of that environment’s resources, which are afforded to them by that environment in their pursuit of profit. The laws and regulations set up to monitor the activities and reporting of business entities activities within the environment exist to protect that environment and make it a desirable place for both the business and non-business inhabitants.

and

All successful businesses have consistent repeatable, efficient “processes” in place that drive the entity’s efforts in the generation of profit. Those that don’t will ultimately fail.

Applying these assumptions, one of business’ responsibilities in the pursuit of profit, is to comply with regulations designed to ensure that all of the environment’s interests are met as well as the business entity’s specific interests. To this extent, compliance needs to be considered as part of the profit generating process as opposed to “non-profit generating effort.” Preserving, maintaining and enhancing the economic environment a firm operates in helps to generate more profit through better resource management and development and community support.

To reach effect, profit supporting compliance levels, then requires that compliance activities become consistent processes and not once a year “project-based” efforts. It is incumbent on every business entity to incorporate a set of values that enables the design of compliance efforts infused into every process that a company employs in such a manner as to generate value and promote profitability while remaining in “compliance.” This promotes consistent review of business processes, activity flows and efforts that not only keep the business in compliance, but create value by through the identification of needed operating improvements that will produce more profits.

It is my contention here that the development of company values that include compliance processes that add to the bottom line is far more profitable than taking the chance by simply ignoring or making “annual projects” that take as much or more effort.