Monday, February 22, 2010

Why Operating Agreements are great!

Beth and I are often asked how our working relationship affects our friendship. We were friends for over eight years before we became business partners. I feel that working together has made us better friends. What has allowed this to happen is all the work we put in before we started working together.

When we were exploring the possibility of forming a partnership, we had extensive conversations about how we envisioned the business working and growing. We talked about our skills and our fears-what were we good at, what scared us, what could Beth never count on me to do (cold calls-shudder). After all the talking was done, we committed all this information to paper. We have a very detailed operating agreement.

Last week, a situation arose in our business that we had a difference of opinion over how to handle. We exchanged several emails on the subject and gathered all the information we needed to make a decision. Then we followed the terms of our operating agreement: we talked in person. It is so easy to have misunderstandings when communicating via email. We were able to reach a compromise we both felt comfortable with and this difficult situation did not impact our working relationship or our friendship.

The moral of this story: Most businesses put a good deal of time and money into creating operating agreements and business plans. Use them! Any other good stories out there about using your business plan or operating agreement to solve problems? Let us know.

Wednesday, February 10, 2010's not too late!

What are the components to a good budget?

Yes, we are back to budgeting. It is only mid-February so there is still time to create a great budget for 2010. Your company’s budget should really be assembled as a master budget which is made up of an operating budget, a financial budget, a capital budget and finally a sales budget.

The operating budget deals with your basic business operations: what do you need to run your business? Categories in your operating budget will include marketing budgets, staffing (employees costs), as well as other expenses related to running your company. Take the time to talk to vendors and suppliers so you have good numbers to work with.

A financial budget is concerned with where the money is coming from to keep your business running. How are you going to obtain all the resources you need to run your business? This is looking at your cash flow and determining the timing of when money comes into your company through sales and collection of receivables and when money goes out through payment of expenses, purchases of inventory and other assets as well as payments to yourself, the owner. A line of credit from a bank is the best way to deal with timing issues in your cash flow. In light of a continuing tight credit environment, many small business owners are relying on credit cards to manage their cash flow. This can be a dangerous path to take if your balances push you into high interest rates.

Your capital budget is for evaluating and determining the growth of your company. Careful analysis is recommended before purchases of fixed assets are made or a new product or line is launched.

As you can see, a good budget deals with much more than just expenses. Now let’s talk about revenue.

Creating a good sales budget depends on good research and goal setting. This is a good time to look at where you fit in today’s economy. What is your competitive edge and how are you communicating it to your target market? After you have analyzed trends in your market and your industry, you can create a good sales forecast for your business. Next you will want to write down short-term and long-term goals detailing how you will achieve your sales as forecasted. All this work will allow you to set up a workable and helpful sales budget which when placed into your master budget will give you a masterful tool to manage your small business.

Tuesday, February 2, 2010

What Non-Financial Business Measures Do You Track?

Susan and I had the opportunity last weekend to be interviewed on the Biz Talk radio show where we talked about the importance of planning for small businesses. As promised in our last blog, today I am going to blog about some non-financial measures that small businesses might track. Pick and choose or add your own to measure progress toward your business goals.

First, let’s focus on acquiring customers. If your company has a goal of increasing customers, you might begin by tracking any number of the following items: the number of new leads, the number of leads contacted, the % of leads which turn into prospects, the number of new clients, the % of prospects which turn into clients, the number of prospect contacts required to move the prospect to a client, the total sales to new clients. The information gathered from these measures can help you fine tune your sales process.

For tracking customer satisfaction you might track customer returns, complaints, the time it takes to return phone calls, the time from order to completion, the number of on-time deliveries, how close your estimates are to actual invoices.

To track the effectiveness of your marketing efforts you might track where potential customers heard of you, the number of new accounts per marketing campaign, and the total sales dollars per marketing campaign.

If you are trying to track efficiency, you might keep track of time to complete billable services, unbillable activity hours, set-up time, lead-time, defects or time spent correcting errors, scrap or waste in manufacturing, parts availability or extra trips to get parts for service technicians, and of course, production rate per hour or per day. By tracking some time and productivity measures, you can begin to hone in on practices which are taking too much time and then can search for technology solutions or implement better procedures to solve these problems.

And if you are trying to build a motivated team you might track employee turnover rates, suggestions for improvement per employee, number of employee suggestions implemented, new product or service ideas, training hours for skill improvement per employee, employee participation in non-business related company activities (i.e., service projects, family picnics, etc.).

Track the measures you choose in the most efficient manner possible, whether that be taking advantage of a feature already available in a software program that you own or whether it be as simple as tracking it on a spreadsheet. And then, as with budgets and all business planning tools, the key is to analyze the data that you track and make appropriate adjustments where needed to move your business closer to your goals.

What non-financial measures do you find most useful to track for your business? We would like to hear about your experiences.