Exception Tracking Can Reveal Hidden Problems

Have you ever tried to buy a product or service only to be rejected by a less than well-informed employee of the company? Have you ever wondered who hires these people? Have you ever wondered if the “company” knows how their employees treat their customers? The misperception to all of these questions is that the root cause that inspires them is the fault of the employee. It’s not the employee at all…it is the management! Even more insidious…it is probably happening in your company or department as well. The fact that we are often unaware of our “nos” is the actual problem.

Let me start with a couple of examples of this common problem, how it manifests itself, and how it can even pervade the operations of the company.

I recently had cause to visit my family’s veterinary office to pick up some food for our dog, Abby. I noticed a decal on the front door signifying that they are a member of our local Chamber of Commerce. Also being a member of that group, I was aware of a “member to member” discount program in which they participated. I selected the needed food and brought it to the receptionist to pay for it. I asked her if this food was subject to the discount program and showed her my program ID card. She said “no, we don’t participate in that program”. “Hmmm, that didn’t sound right” I thought to myself. When I returned home I decided to check the Chamber’s list of participants and, sure enough, there was listed the Vet along with their special offers for members.

A few weeks later I happened to be speaking the owner of that office and mentioned the fact that their receptionists were apparently unaware of that program. Her response was one of surprise, and she wasn’t even clear on the program details for which she had signed up. Little wonder, then, that the employees were also unaware; but the bigger question would be “how many other details were being mishandled by staff?”. And, how would the owner ever know about them?

Another example shows an even more common attitude that some employees have. “If I don’t know about it then it obviously doesn’t exist” is a common modus operandi in many departments and companies. Take my recent trip to our local hardware store. I entered and asked the first associate to direct me to their “washers” department as I held up a gas container’s cap that was missing a washer. His response was that they “didn’t have anything like that”. An associate standing nearby who obviously heard the discussion chimed in “wouldn’t that be in the O-rings and washers section?”. I smiled and said “yes, that’s what I want, the O-rings and washers section”. Is this starting to sound familiar? If someone doesn’t know it’s very easy to simply answer “no”.

Some would respond to these examples by blaming them on employee training. Obviously the receptionist hadn’t been “trained” on the company programs. The associate hadn’t been trained on the company’s entire inventory. Those responses assume that all training is 100% effective and that there is no possibility of human error, both of which are fallacies.

So how would you respond? These issues can certainly negatively impact any organization in its dealings with customers and other stakeholders. The issue of “I don’t know = no” pervades many organizations to their obvious detriment and consternation. It is a problem that must be addressed in order to improve company performance, improve customer satisfaction, and often improve one’s sanity!

Software programs have handled such exceptions for eons. When something unexpected happens there is an exception handler that will generate an error report. Saying “no” to customers or other stakeholders should be treated as an exception to normal practice. After all, in an ideal world…or in an ideal company, wouldn’t you want all your customer contacts to be positive? If you handle a negative response as an exception, then management can then has an opportunity to review those exceptions if, for no other reason, simply for the purpose of tracking such data for possible future product or service offerings, improvements, or additions. Perhaps it might illustrate a need for further training or, perhaps, a new system aid or tool to preclude the error. The point here is that if management knows that there is a trend in negative responses to customers, or if there are erroneous negative responses taking place; management is in a position to deal with those occurrences. Without such knowledge, management is powerless to make improvements and line personnel will remain unaware of any such issues.

Implementing an exception handling system can be as simple as a list of “nos” maintained at points of contact with customers. Or, it can be as sophisticated as an exception report generated by POS or other point of contact systems used with all customer contact points. Each time a “no” response is used, it must be noted in the appropriate system with notation included which details the cause, be it a customer inquiry, request for service, special delivery time, etc. This can be an eloquent way of gaining Voice of Customer data which can help guide future company expansions, improve current operations, and perhaps bring a new level of sanity to daily operations. Oh, and did I mention retention of customers? If you are not hearing your customers, I can promise you that they will find someone who will hear them! If you’ve ever wondered why some of your customers become your competition’s customers; this may be a good “first place” to look.

© 2009 Best Business Associates – May not be reproduced in whole or in part without written permission and attribution.

Over-Reliance On Industry Specific Data Causes Business Myopia.

Small and mid-sized business owners are constantly faced with many different challenges every day. I’ve noticed over the years that one source of information or solutions seems to get over- riding attention, to the exclusion of other, sometimes even more reliable resources. Why is that?

There are often times when company owners feel that they are alone. After all, they are the one person to whom everyone in the organization comes when there is a problem. Have you ever noticed that no one calls you just to let you know that Joe just landed that big account and they paid up front? It’s never a call about suddenly seeing sales triple for the end of quarter reports. It’s never sounds like “Hey Bob, we’ve just been named exclusive supplier by the state procurement office”.

No, those calls you get are usually more like “Hey Bob, we have a big problem”. When they say “we”, you know they really mean you…and oh, they would like the solution right now, if that’s ok.

So what happens when you don’t have that solution readily available at your fingertips? You go to the sources of information with which you have been successful in the past. You go where “…everybody knows your name”, and it’s not Cheers! You go to people who can feel your pain. I’m thinking here that friends and family are pretty much out of the question. They’ve heard your groanings before and were never that much help anyway. Your accountant or lawyer? Nope, they are all about compliance and billing you. Besides, they don’t really know your business, they just think they do.

So where do you go? You go to colleagues. That’s right, you go to other business owners in your industry who you have met at conventions, conferences, or other meetings. After all, they know exactly what you are going through and certainly can feel your pain, because they have those same pains. And besides, you are all pretty much the same, right? Not exactly…

As much as you feel you are all the same, you are mistaken. Sure, you may have some similar issues; but those issues do not mean all else is the same. Every situation is different, and the danger with going only to those industry exclusive sources is the exclusion of other perspectives that may be far more valid and offer solutions that your unique situation really needs.

Let me give you an example. I ran a photofinishing lab for over 20 years. I went to all the industry conventions and seminars. I came to know many of the owners of the better run companies in the industry. I was even invited into an exclusive marketing group comprised of the best and smartest of the industry. We met twice a year for nothing but brainstorming and comparison of experiences and data. I became president of our international industry association. Life was good and I had access to many great sources of information. But, that is not good enough.

Why not? Surely we were all the same. I know we often faced the same issues. When I sat down with Brian I would start off with what was, at the time, one of my most pressing issues. I was having help problems. I just couldn’t find any qualified applicants for job openings in my company and sales or production was suffering as a result. Well, guess what? Brian had the same issues. So we compared notes and tried to figure out which possible solution might best fit our dilemma.

Different years brought with them different issues, and many of us would discuss them and offer our sage advice and potential solutions. But what were we missing? Sometimes we just don’t see the forest because the trees are in the way. Sometimes we get so myopic with our industry specific issues, solutions, and mindsets that we fail to also consider broader, perhaps more salient solutions. We develop a myopic system for problem resolution that excludes potential solutions that are either generic in nature or macro in perspective. I would look at solutions that were sourced from other photo companies exclusively; often ignoring other marketing procedures that could have a far greater impact on root causes that would never be addressed.

So what is the solution? Very often we must force ourselves to seek out unbiased perspectives. We must search for non-industry specific viewpoints that are more generally business centric. We must incorporate more tested marketing and business management principles into our processes that could result in preventing fires rather than simply putting them out when they occur. Proactive growth of business systems is an essential part of growing your business. Have you ever heard the platitude “spend more time working on your business rather than in your business”? That doesn’t mean that you should close your office door once a week just to spend an hour with uninterrupted meditation. Rather, it means that you must actively develop new processes aimed at growing your business and planning for eventual scaling up to incremental “next levels”. Failure to do this in an organized way results in stagnation at a minimum, and eventually in unrelenting deterioration.

Often, a “back to basics” approach or even a concerted effort to regain the business planning “high ground” can result in surprising results in a remarkably short time. We sometimes don’t realize just how much our neglect of business management has impacted the smooth (efficient) operation of our companies.

If your company is not running in what you would currently characterize as an efficient mode…if you are constantly putting out fires…if your calls deal more with problems than successes; this may be a great time to refocus on the business management and marketing disciplines that your vision originally contained. The rewards of systematic audit and review of policies and procedures can be enormous, and the problems that result from neglect can be painful. In which direction would you prefer your company to travel?

© 2009 Best Business Associates – May not be reproduced in whole or in part without written permission and attribution.

Why do your customers buy from you?

Why do your customers buy from you? I’m sure we all have our own ideas of how we are better, faster, cheaper and just an overall better choice than our competitors; but sooner or later we all pause and wonder if those are the real reasons why our customers are…well, our customers.

You’ve probably heard it said that customers buy from us because they are drawn by our Unique Selling Proposition (USP). True enough. To take that further, they actually formulate a Unique Value Proposition of their own based upon our expressed USP. But enough of the marketing jargon, how do we even create our USP in the first place?

We don’t start our businesses just thinking of what we can do to attract customers, although that is important. More important to us, at least initially, is how are we going to make money. And that brings us to the heart of most businesses…profit! This is where we concentrate much of our planning if the company we run is actually going to sustain itself, sustain growth, and sustain an acceptable return on invested capital (ROIC) over time. Now we are really getting to the heart of most businesses and “what makes them tick”.

So what is the key ingredient to the recipe which allows an acceptable ROIC, make a profit, attract customers and create a highly valued USP? Why do they come to us? The foundation for all of the above rests within our distinctive competencies.

Distinct competencies form the basis upon which companies earn above average profits and are usually those capabilities which competitors are either unwilling or unable to imitate. If a company has distinctive competencies it will earn above average profits. Competitors will notice and will naturally wish to imitate whatever competency they see as the basis upon which you’re earning these higher that average profits. Their ability to imitate these competencies will determine how quickly they can erode your higher than average profits, so the level to which they are distinctive is very important.

By erecting barriers to imitation, you increase the distinctiveness of these competencies and therefore your competitive advantage. These barriers can be a patent or trademark, technological know how, a secret recipe, or some particular skill not easily replicated. They could even be composed of special access to a particular market or sales channel. The degree to which a business develops or nurtures these competencies determines the ultimate formula used to create their sustainable competitive advantage. This is the fundamental reason that some companies seem to flourish and other struggle against seemingly insurmountable hurdles. Luck works too…just not very often. I’d much rather have a plan to follow than rely on the goodness of lady luck, the weather, or the much awaited economic upturn to help a new or underperforming company.

So how do we craft this formula for a sustainable competitive advantage? There are four keys you can dial into in varying degrees comprised of Price (efficiency), Innovation, Quality, and Customer Responsiveness. (Hill, C., Jones, G. 2008 Strategic Management) Through these keys you will determine whether your competitive advantage leans toward low cost (low price to customer) or differentiation (high margin). The goal with either scenario is to achieve a sustainable advantage which means that there must be enough ROIC to be able to also continue feeding the needs of the four keys to achieve growth and maintain barriers to imitation.

Competitive advantage is not about a willingness to accept less profits, it is about a drive to sustain and improve those keys which fuel growth over time.

© 2009 Best Business Associates – May not be reproduced in whole or in part without written permission and attribution.

Customer service betrayed by those pesky details.

We are all familiar with customer service. We interact with customer service representatives, we ask to be connected with them, and we hear of or take part in initiatives to improve it. Companies tell us how great theirs is, or even ask us to help them improve it by taking a survey. Do they really care? Of course they do, but do they really get it? What is it anyway?

Some companies think it is a process. Some think of it as contact points with customers, and that those should be improved. Still others think of it as a metric to be measured and improved. It is really much more than any of those well meaning definitions can encapsulate. Customer service should be a mindset that drives the basic premise of how a company should envision its customers would be most satisfied. And satisfying a need is what marketing (business) is all about. So how does a company’s well intentioned mindset get derailed?

The details will betray company mindsets that are not truly systemic. I’ll offer just two examples of companies, one large and the other small, that think they are offering truly great customer service but are failing miserably.

The first is a bank. Now we all know the problems plaguing the banking sector, so we don’t need to stretch our imaginations to realize they could use some customer loyalty right now. The bank I have in mind has done the traditional “me too” types of promotions such as free checking, but do they really have a customer service mindset? As it happens, this particular bank has a front and rear entrance. In the rear there are two parking spaces right at the door, with about twenty more a short distance away. I noticed that there are always the same two cars parked right by the door so one day I asked the branch manager, with whom I am friendly, just whose cars were parked there. She responded one was hers. I asked why she would park in the best parking space instead of leaving it for customers. Her answer? “Well, you wouldn’t want me to get my shoes dirty, would you?” (There was some slush in the lot from an overnight storm, but you can bet she is there on sunny days as well). Clearly this manager does not have a customer service mindset. She is the most important person in that building and she is going to make sure everyone knows it, including customers! Oh, and to whom did the second car belong? Why, the assistant manager of course! These people just don’t get it! (You might be thinking at this point that most customers will not know who is parked there anyway. You would be right, but those customers will never experience the feeling that “hey, this is really a convenient bank that lets its customers park right here by the door. I’m always going to use this bank.”)

The second company is a smaller business; a dance studio that has done relatively well in recent years. They’ve done so well, in fact, that they moved into a larger building with its own parking lot. You’re seeing a theme here, right? Yes, you guessed it; the owner and instructors park right by the door leaving all the customers who drop off their kids to park further away. But there is decidedly more to this story. Just to make sure each and every customer knows who is the most important to this company, they erected signs (two of them) right by the door. What do they say? One says “Reserved for Jane Doe” (name changed to protect the guilty), who is the owner of the studio. The second sign has her mother’s name. Her current customers may be putting up with that but how about the visitors that check out the place before signing up. How many of them get the message and end up going elsewhere? Clearly the owner will never know. She obviously doesn’t care.

And, that is the point of customer service. A company…no, strike that… a company’s employees must know their customers are the driving force of their success and they must care. If your company directors think customer service might be important to bottom line results, then it would be wise to pay attention to bottom line interactions with those customers. If you are communicating one thing to your employees, yet they are communicating an entirely different message to your customers; it is probably the insidious details that are betraying your efforts. The next time you look at customer satisfaction surveys and customer retention metrics, ask yourselves if you have included the small details that can have large effects on the mindset of your employees. Do the customers truly rank higher in importance than “clock out time” or “key in the door” time? If the phone rings at 1 minute after hours, does it go unanswered? Are your customers’ calls left on hold for 10 minutes before a human answers? Do your employees “park next to the door”? It’s not the acts themselves but the mindset that will eventually create a negative spirit in both the company and its customers. If you truly value your customers, you sometimes have to get your shoes dirty. Do your employees go the extra distance?

© 2009 Best Business Associates – May not be reproduced in whole or in part without written permission and attribution.

Roadblocks…why is it so hard for small business owners to grow to the “next level”?

One of the most common refrains I hear from fellow small business owners is their frustration upon reaching a plateau in business. It seems almost universal that you see exciting start up periods followed by excellent organic growth only to arrive at the inevitable plateau. This barrier varies by business type, but for you it might be that you have reached your first million dollars in sales and just cannot grow beyond that limit. For some businesses it might be the first five hundred thousand, or even a couple of million; but the story remains the same…once you hit that threshold, it seems there is just something holding you back from growing beyond it.

This syndrome is counter intuitive in many respects. As an entrepreneur, you obviously pride yourself on having succeeded in starting your business. You have grown it from an original dream of yours through the vulnerable start-up phase right up to today; a fairly profitable concern but with much more potential waiting to be tapped. You probably credit your talents such as keen insight, astute business planning, and powers of observation as traits which have helped you succeed where others have not. Your hard work, long hours, and ultimate dedication have paid off with a business that has seen success, but could be so much more if only this seemingly invisible roadblock had not stalled its growth. Just what happened?

The short answer is nothing happened. At least, the next things that needed to happen didn’t. And the reason is that those skills which enabled you to achieve your current status are just not sufficient to continue to propel you further. That is a hard lesson to learn, but you are probably experiencing its effects right now! At this point, you might be thinking that I’m crazy and that your astute business planning skills and powers of observation have never been better. Really? Before I go further and offer you a solution to your dilemma, I’d first like you to view a short video. It’s only 2 minutes long and I promise you it will be an eye opener…at least for those of you truly wishing to grow your business beyond its current level! Just click on the following link and come back here when you’re done. You will be coming back with some new found information that could have a significant impact on your business today!

Click here for short video.

(If you are reading on here without viewing the video, please don't. You just won’t get it and your time will be wasted).

Surprising, isn’t it? Even though we may truly be quite observant, even though we can be truly astute in our business planning and be the most dedicated hard working entrepreneurs ever imagined; our perceptions are filtered by those very experiences that have gotten us to where we are today. It’s not a bad thing; it’s just a thing we must recognize if we are truly going to grow beyond our current limitations.

I’ve seen it. I’ve also experienced it. I have the answer for it. It’s very simple really. It’s something you used to do on a regular basis before it all fell on your shoulders. And it’s something you must do again if you are going to grow out of your boundaries. You need to get other opinions! You need other viewpoints and that is why working with a business advisor is not only the right thing to do, it is essential if you are going to truly grow beyond these barriers. I’m not saying you need to hire me, even though I do work as a business advisor. I’m not saying that at all. I’m only saying that you do need to work with someone outside of your organization and family who can bring an unbiased perspective to your business operations. If you’ve never done that before, it can truly be an epiphany. If you tried it and didn’t get much from it, you either had the wrong person or the wrong goal. Try again. It is the only way I know of to get truly unbiased information from a source with a vested interest in nothing other that helping you grow your business. All other sources of advice will be biased in one way or another; be they family, sales reps, colleagues, employees, or creditors. Even your accountant or lawyer will have an agenda which will include their interests.

Now you may have “perceptions” already of how consultants work and their possible worth. Remember how accurate your perceptions can be? You’ve heard that a consultant will borrow your watch and then tell you what time it is. That could be true of large corporations and some of their wasteful systems, but it’s not true of small business. Businesses such as yours are lean and efficient by definition. There are better definitions of business than simply ‘large business’ or ‘small business’. How about ‘slow business’ and ‘fast business’? Small business is fast business. You can change much quicker than larger companies. That is both good and bad. It’s good if you make a good decision, bad if you don’t.

An advisor can open your mind to opportunities that you may or may not know about. You may have known about them and dismissed them prematurely, or you may not know about them at all. The irony is that you don’t know what you don’t know. Taking the time to actually work on your business instead of just in it can pay huge dividends if done methodically. Most advisors will give you an hour or two for free just to explore the possibilities. Find one and ask them if they do. That way you risk nothing but have the potential to gain much.

Bob Banasik is a senior business advisor and an accredited associate of the Institute for Independent Business, and can be reached at bob@bestbusinessassociates.com .

© 2009 Best Business Associates LLC

Partnership agreements…why copying someone else’s is a bad idea.

I have heard more than once from someone asking if I had some boilerplate type of document which they could use as a framework for their own particular need. It could be a marketing piece, a lease agreement, or as recently happened, a partnership agreement. The thought behind this is along the lines of looking at what someone else has done and just copying the applicable (in their minds) paragraphs and perhaps inserting a thought or two of their own to come up with a document for their use.

The trouble with that theory is…
a. You are placing implicit trust in someone else that may or may not know what they are doing.
b. You are attempting to do most of the work yourself even though you are apparently unqualified or at least not expert in this particular task.
c. Your motivation is to minimize the fees that a professional might charge to do this; thinking in simplistic terms such as ‘hey, it can’t be that hard’.
d. The ever present ‘gotcha’ of “you don’t know that which you don’t know”. In other words, if you are unaware of certain options or, worse, if your chosen advisor or professional is unaware of certain options; then your resultant framework will be correspondingly weak and perhaps expose you to potential liabilities that you haven’t had the opportunity to consider.

When two or more people get together on a business idea, their knee jerk reaction is often “Hey, let’s form a partnership”; not even realizing that there are partnerships, Limited Partnerships (LP), Limited Liability Limited Partnerships (LLLP), etc. Each has definitive characteristics which may or may not accommodate your ultimate needs. Further, there are other business forms which people might not consider; thinking naively that they are more expensive, harder to accomplish, or just too technical and unnecessary. Perhaps a Limited Liability Company (LLC), a stock corporation, or a sub chapter S corporation would have desirable benefits. Sometimes people tend to over simplify their needs thinking expeditiously rather than strategically.

When I consider starting up a new business I explore my vision for both the start up phases and future operations. I’ve owned partnerships, LLC’s, and Corporations, as well as sole proprietorships. All exist in the business world and entrepreneurs need to learn the subtleties and benefits of each. There are reasons why one may better suit you than another, and failing to explore them is a disservice to yourself as well as all the other stakeholders in your company, including your family.

The partnership idea often comes as a result of initial discussions between the founders and goes something like this:
“Ok, so we’ll set up this company and we’ll sell this product or service. We’ll split everything equally and we’ll call it…”
Does that sound familiar? That’s generally where the first problems arise, or at least that is the source of what can become future problems. Nothing could be as simplistic as starting off with the notion that “we’ll split everything equally”. It’s just not logical and I’ll explain why I feel that way. People change. All people change, and that in itself is a neither good nor bad thing. It is just a fact of life. When married people change they do one of two things. They either adapt to one another so that their changes are more or less in sync or in the same direction; or they decide they are travelling in different directions and seek a separation or divorce.

Partners often find themselves in similar situations, although separating a partnership is often much more complicated than, and at least as catastrophic as a divorce. The source of these situations can often be traced back to that concept of equality which, more often than not, ends up being questioned or disputed by one or more of the partners. Why?
The answer is relatively simple and stems from initial perceptions in starting up the company. Often equalities are subjective. Sure, you can agree to pay each other equally, and you might also agree to invest equally; at least in the beginning. But that is where equality usually ends. Sooner or later one of you is going to notice or suspect that you are putting in more than your fair share. You are either working harder, contributing more to the success of the company, or are simply shouldering more of the “burden”; at least in your mind. From this point things decline; sometimes quickly or sometimes over a period of years. Nonetheless, that down slope continues and rarely levels off.

To minimize the potential for eventual dispute, I suggest fashioning an agreement based on two principles.
First, think of everything. Right now you are thinking I’m nuts, no one can think of everything. You’re right, no one person can; but a group of people have tried and their framework has been revised over the years and stood the test of time. It is the Revised Uniform Partnership Agreement* (RUPA). This is a set of regulations that will, in fact, govern your partnership should you fail to write an agreement in the first place. Many companies fail to do this and don’t realize that their failure invokes this standard set of rules should conflict or dispute arise. So read this set of regulations and adopt those which are appropriate for your organization and adapt or change those which aren’t. You can change much of the RUPA simply by agreeing to do so in writing, and this framework will help you formulate an agreement. This one step will increase your business’s chance of success exponentially!
Second, develop a dual compensation plan. Do not go into business thinking everything is always equal. Just as the tooth fairy seems to leave us during our later childhood years, so will your sense of fairness should you fail to do this crucial thing. There are, in my mind, two distinct relationships you will have with your business, partnership, LLC, or whatever.
• You will be first and foremost an investor. If you can’t get your head around this concept, you have probably not created a business plan detailing the customer needs that you will fulfill nor how your company will profit from doing that. Notice I say “how your company will profit”, not you personally. Your company will become an entity no matter which form of business you select, and it will be treated as such by others. The days of “Joe the handyman” just don’t exist any longer in any significance.
• You will also be an employee of one type or another. A partner can be a senior partner sharing in all the decisions of any import or however you care to define it. But usually in a small company you will also serve some function(s) and those should be described as well. And, you should earn commensurate pay accordingly. This can be as simple as a salary for X amount of hours. I would adjust the pay scale so that it has some relation to the market. In other words, suppose one of the partners is going to assume the job of manager of operations; perhaps both of you will. That job should be defined with a job description and pay scale just as any other job would be. Let’s say it is worth $60,000 per year for the standard work week as defined in the job description (40 hours?). Now let’s say further that after a year or two it has turned out that this job requires regular periods of overtime. Treating this as any other job would dictate that overtime be paid. Why not? If you lost that partner and had to replace them, the market would dictate such payments normally, right?

The whole point here is to mimic the employment marketplace with your own jobs as best you can and as closely to what you feel logically applies and is reasonable. With both partners on the same page at the start, it then leaves less chance for conflict or disagreement later since it is all laid out in the written agreement. This also allows the partners to think of their inputs in relation to value added. Just as a redundant employee would be reassigned or terminated, so should tasks assigned to partners if those tasks become either irrelevant or better done by a less expensive employee.

As you can probably now see, copying someone else’s agreements or even mimicking selected parts of others’ agreements can be a really bad idea. Start your business off on the right foot and give yourselves the advantage of logical planning. A little effort expended now can save an enormous amount of grief and stress later. I promise you, every ounce of planning effort expended now will pay off many times over in the years to come.

At this point I’ll add the standard disclaimer that I’m not a lawyer and I’m not attempting to give anyone legal advice. What I am doing, though, is urging you to speak with your lawyer (preferably one who is experienced in business structure law) and ask them if they are capable of helping you create a partnership or business agreement which is suitable for your particular use. Make sure you include other advisors in these decisions as well such as your accountant and trusted business advisor. You do have one of those, right? It would be a shame to face the business world without the essential resources competing companies most likely have.

* RUPA – Access to the RUPA as of January 2009 via the following link.
http://www.law.upenn.edu/bll/archives/ulc/fnact99/1990s/upa97fa.htm
Also, see your particular state’s ratification or version of this act for details which may be applicable to your particular state.

Bob Banasik is a senior business advisor and an accredited associate of the Institute for Independent Business, and can be reached at bob@bestbusinessassociates.com .

© 2009 Best Business Associates LLC

Why Financial Statements Don't Make Sense.

Ask any small business owner and we will tell you that “we don’t use financial statements”, “I confess that I don’t know how to read them”, or “they just don’t make any sense”. Are small business owners ignorant, uneducated, or dumb? No. Our financial statements are dumb!

In fact, we small business owners are so smart that we actually figure out other ways of tracking our businesses just so that we can make sense of our cash flows and survive an extremely competitive environment. We will micro manage by product, class of service, or sales category. We’ll track sales by week, month, or quarter; we’ll track cash flows, expenses and anything else that give us a clue as to the health of our companies; all without the aid of regular financial statements. So why, then, is the very tool that seems so universally sought as the standard benchmark by big business, stockholders, bankers, and all financial institutions so important to them and so totally useless to us?

It’s because they are made by accountants for accountants. It’s just like lawyers making our laws. It’s designed to keep them in business and keep us guessing! And it is all due to the format which was somehow deemed to adhere to a standard which they figured was great for quickly analyzing a business’s credit worthiness; the insidious generally accepted accounting principles (GAAP). Statements so formatted are typically for external use (read that for your bank or lending institution) and gives them some assurance that the reports have been prepared in accordance with a common set of ground rules. That’s fine for them but does nothing for me.

So why are they confusing, hard to read, or just not in sync with our needs? The answer is that they use absorption costing. Simply put, that means that some fixed overhead expenses are allocated directly to all products, both those that are sold and those still in inventory. The result is that an expense can be held as an asset until it is sold. You may have already paid that expense, but it won’t show up on your statements as an expense until the allocated inventory has been sold. By now you’re probably thinking “no wonder these reports were confusing, they’re nuts”!

Is there a solution? You bet there is! Keep in mind that accountants are all about compliance. They consider their work to be all about documenting a company’s financial records for external users such as banks, tax agencies, and the like. They often figure that by getting the tax filings done, statements prepared, and everything nicely balanced their job is done and all that is left is to bill the client. If that is true in your case, then you are letting them off the hook too easily. You should also be asking for some reports that would actually make sense in helping run your business. Those same statements your accountant has prepared can often be easily reformatted into something just a little more intuitive using the Contribution Approach. Simply stated, this avoids allocating fixed overheads to unsold inventories and actually deals with period costs as they occur. Chances are that your accountant already has the data needed to re-issue company financial statements using variable costing instead of absorption costing. For many companies all you need do is request those statements in addition to those already issued. Statements showing contribution margin and realizing fixed period costs as they occur not only make more intuitive sense, they actually give you information which you can use in the decision making process. Gee, what a concept; a financial statement that you can use!

At this point I’ll add the standard disclaimer that I’m not an accountant and I’m not attempting to give anyone financial advice. What I am doing, though, is urging you to speak with your accountant and ask them if they are capable of creating financial statements which are more suitable for your internal use. There are a number of different tools one can use to measure and improve one’s performance. Variable Costing, Cost Volume Profit (CVP) Analysis, Theory of Constraints (TOC), Lean Six Sigma, and other tools may or may not be appropriate depending on your particular circumstances. Being able to measure your business’s performance is one of the keys needed to unlock the doorway to improvement. Creating reliable metrics requires accurate data that is usable. Don’t settle for statements that you only pass along to placate others. Insist on statements you can use in your every day decisions!

Bob Banasik is a senior business advisor and an accredited associate of the Institute for Independent Business, and can be reached at bob@bestbusinessassociates.com .

© 2009 Best Business Associates LLC