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The Art of the Forecast

Developing an Accurate Forecast

It has often been said that forecasting is a waste of time. After all, it’s just a guess and as such will only generate inaccurate and unreliable information. Well, forecast accuracy is what you put in it and you can improve it. These best practices will help make the forecast more accurate and reliable.

  1. Prepare a monthly, 3-month rolling forecast by model or product family. Since individual models and product families yield different margins it can have a vast impact on the profitability for a given period.
  2. Utilize historical sales data. Sales history provides the most accurate projections. If possible, analyze 3 years of sales history to determine averages or eliminate highs and lows.
  3. Review outstanding quotes, projects, marketing programs and seasonality. Knowing your conversion ratio (close rate) for open quotes, timelines for large scale projects, ongoing marketing programs and market seasonality can all influence monthly sales. Staying on top of these factors can further enhance sales history data.
  4. Contact your customers for input. Customers can provide valuable insight into what’s in the pipeline. Take advantage of this valuable resource!
  5. Consider external factors that can influence sales. Economic changes, unusual weather conditions or other significant events can impact a monthly forecast.

The Significance of the Forecast

The sales forecast is an effective management tool for improving operational efficiency and increasing profitability. Properly prepared, it provides valuable financial information and insight across other departments that improves the decision-making process.

Weekly cash flow analyses are a management tool used to ensure sufficient cash will be available to sustain day to day operations. Since the forecast is a critical component of the cash flow analysis, it’s essential that the forecast be as accurate as possible. Additionally, the forecast can be used to generate a pro forma P&L Statement. By projecting income and continuously monitoring its progress throughout the period you can better control expenses or make other necessary adjustments to help maximize profitability.

Operations benefits from a solid forecast as well. If utilized it simplifies planning and scheduling, improves material flow, positively affects the supply chain and keeps inventory to a minimum while achieving on time delivery to your customers.

For the sales team, it not only keeps them current with the industry, market and customers, but serves as a Key Performance Indicator for the month.

While the monthly sales forecast requires a lot of time and work to properly prepare, the applications and benefits of it make it time well spent.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

A Productive Workforce is Made Not Born – Part 2

“Good Employees” is at the top of any business owner’s Wish List. But, wishin’ don’t make it so. It takes time, effort, knowledge and skill to create and manage an effective workforce. Here are some tips on the types of people you do not want working for your company and how to manage them.

See “A Productive Workforce is Made Not Born – Part 1” for the types of people you do want working for you and how to manage them.

Prima Donnas

We all know and have worked with Prima Donnas. They are the people who have exaggerated ideas regarding their talent, importance and contributions to the company. They will throw tantrums and objects. They are very vocal and arrogant in their unhappiness about “not being treated right”. But, when you look closely at Prima Donnas they do very little actual work.

What to do: A Prima Donna has only one or two things he brings to the business (i.e. skill set, customer, ownership, seniority, community connection). But, when looked at objectively, what he brings is overrated, and not worth the problems he creates. Do not buy into his belief that he is irreplaceable, it is not true. He should be held accountable for all his duties and responsibilities.

Dead Woods

Their behaviors and attitudes are bad, and their productivity is worse. They are “give them an inch and they’ll take a mile” employees. Dead Woods are not hard to identify. By the time they are in this category everybody knows who they are and how much harm they are doing to your business.

What to do: First, figure out if you can you turn a Dead Wood into an Easy Goer (see Part 1). You will be able to bring some around by consistently applying a system of consequences and incentives. If not, then the employee should be fired, no excuses. Remember, you get the workforce you are willing to tolerate.

Zombie Leaders

A Prima Donna alienates others. A Dead Wood lacks credibility when he tries to stir things up. But, look out for the Zombie Leader – he wants power and is able to manipulate people to get it. He gets hold of people’s brains, makes followers and creates problems. Over time, he and his army will attack management, Stars, Good Potentials and Easy Goers (see Part 1).

What to do: Zombie Leaders can be decent performers and are liked by employees and managers. They are confusing – contributing to and sabotaging the business at the same time. They are also difficult to manage, and will not give up their desire for power. You can manage them with very tight controls, but make sure they are worth the effort. They normally are not.

It is difficult to create a productive workforce, but look at the alternative. Life is too short to work with dishonest, angry, under-performing, power hungry employees, especially when you do not have to. Take Casey Stengel’s advice, “The key to being a good manager is keeping the people who hate me away from those who are still undecided.”

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

A Productive Workforce is Made Not Born – Part 1

“Good Employees” is at the top of any business owner’s Wish List. But, wishin’ don’t make it so. It takes time, effort, knowledge and skill to create and manage an effective workforce. Here are some tips on the types of people you do want working for your company and how to manage them.

See “A Productive Workforce is Made Not Born – Part 2” for the types of people you do not want working for your business and how to manage them.

Stars

These are the employees everyone wants. They do an excellent job, with a positive attitude and require very little management. They are also very difficult to find, and not the average employee. Owner’s have an unreasonable belief that all their workers should be Stars, they will not be.

What to do: Because they are such good employees managers often take advantage of Stars. Avoid the temptation to pile on work because you know they will get it done, be careful of burning them out. Also, Stars need support and attention just like everyone else – do not ignore them because they are “no trouble”.

Good Potentials

Good Potentials are capable, steady workers, who are regularly overlooked. They do not shine like Stars, but have more ambition, and a willingness to learn than Easy Goers. They are the people who – with training, time and support – will become the backbone of your company.

What to do: Most business owners are bad at spotting talent. Develop and use metrics to give you good, solid data to identify your Good Potentials. Do not promote the sociable foreman with the low productivity numbers over the quiet foreman with high productivity numbers just because you did not bother to figure who was better at his job.

Easy Goers

Easy Goers will make up the bulk of your productive workforce, they are average. They do their job capably with a reasonable attitude and then go home – a good days work for a good days pay. Easy Goers need structure and respond well to it. If they do not have it their performance and attitudes suffer.
What to do: Too many owners have the unreasonable belief that employees should manage themselves, which results in Easy Goers becoming Dead Wood (see Part 2). Productivity is your responsibility. You get the workforce you are willing to tolerate. Nearly all employees work better when you use consequences and incentives. It is your job to be the leader of your company and learn these techniques.

It is difficult to create a productive workforce. You can have one filled with Stars, Good Potentials and Easy Goers when you are willing to do your job. If you are not willing to accept and meet the challenges of your position, why do you expect your employees to do it for you?

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Small Businesses Have Cyber Security Risks Too

Full Content It seems about every other week there’s a news story about a major hack at a multi-billion company, exposing all kinds of customer data such as credit card numbers, banking information and social security numbers to illicit use, with significant financial implications to both the company and its customers. A recent breach at Equifax demonstrates that even the companies with the most sensitive information and multi-million-dollar IT budgets aren’t immune to hackers seeking to exploit weakness in business data systems. What then, can a small business owner possibly do to defend against breaches on a lesser-scale?

While it might seem that cyber criminals will favor larger organizations with potentially bigger payoffs, research shows that small businesses fall prey to cyber-attacks in significant numbers. According to a CNBC report based on research conducted by The Ponemon Institute, more than 50% of the 48 million small and medium-sized (SMB) businesses in the U.S. experienced a cyber-attack between 2015-2016, most involving theft of customer and employee information. Further, the cost to address such attacks can be crippling – the research showed small companies spent an average of $850K due to damage or theft of IT assets. Coupled with estimated disruption to normal operations, total costs to recover from cyber-attacks averaged roughly $2mil.

Cyber criminals may wreak havoc in other areas as well. Information essential to running a small business such as sales history, vendor transactions, QuickBooks data files, HR information, taxes, etc. can be jeopardized by hackers, especially if not adequately secured and/or backed-up periodically. Small business owners might be exposed on both a personal and professional level if individual and business accounts are linked or if family assets fall under the corporate umbrella
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All of this points to an immediate and pressing need for small business owners to examine their risks and take steps to guard against cyber interference. Risks come in many forms, including computer viruses, malware, phishing, weak passwords, out of date software, insufficient firewall protection, unencrypted data, mobile device security and many other threats.

Things like natural disasters threaten small businesses as well. Events such as flooding, hurricanes and tornados may not be top of mind for business owners but news coverage of places like Houston, TX and areas of Florida demonstrate that complete destruction of business assets and information may only be one storm away.

Internal employees present further risks because, quite-often, security breaches are an ‘inside job’ with individuals unknowingly compromising company safeguards or, worse-yet, deliberately undertaking activities to profit by exploiting company weak points.

So, how can small businesses protect themselves? Here are a few areas to consider:

• Government Resources for Small Businesses: The FCC, FTC and U.S. Department of Commerce have published guidelines specifically aimed at small and medium business. The FCC provides free resources including a Ten Tip Guide on Cybersecurity for Small Businesses and a customizable Cyber Security Planning Guide both of which allows a business owner to assess vulnerabilities and take actions to combat threats. The FTC publishes guidance for SMBs on Small Business Computer Security Basics. Finally, the Department of Commerce put together security information in a document called “Small Business Information Security: The Fundamentals“. These government sites are a good place to start when seeking universal recommendations on small business information security.

• Compliance and Regulatory Considerations: It is advisable to ensure that a small business is in compliance with legal and regulatory requirements which can expose a business to fines, lawsuits or sanctions inflating the costs of data breaches and threatening a company’s ability to do business. A simple Internet search will help identify the main areas of compliance for small businesses. For instance, the FTC has guidelines for businesses and financial institutions that act as creditors to adhere to the Red Flag Rule which seeks to protect business customers from identity theft.

Small businesses having access to Personal Health Information, either for employees or customers, must adhere to the Health Information Portability and Accountability Act (HIPAA) as well as the Health Information Technology for Economic and Clinical Health Act (HITECH Act). Forbes Magazine said that, “According to HIPAA, if you are belong to the category of “covered entities” or “business associates,” and you handle “protected health information (PHI),” you and your business are required to be HIPAA-compliant.” That means that businesses with company health plans or businesses interacting with health care providers, health billing agencies or related entities should investigate whether they need to compliant in this area and to what extent. These regulations require a data breach reporting plan and spell out specific actions if an incident occurs.

Small companies should educate themselves on requirements at the state level as well. Individual states may have security breach notification laws which require companies to contact all involved parties, internal and external to the firm, whenever sensitive information is compromised.

• Undertaking Security Initiatives Within a Small Business: For individually-tailored recommendations about information and asset security, small business owners might be well-served in seeking outside help such as consultants, advisors and lawyers specifically focused on the needs of the SMB market. It may be advisable to undertake cyber-security as part of a larger strategic engagement designed to address overall company improvements for growth, financial security, process efficiencies and/or performance management. Cogent Analytics is a provider in this space, helping many small companies achieve their objectives and position themselves for ongoing success.

No business, large or small, is completely safe from information or asset risks, but there are ways to mitigate these risks and prepare to act if a company suffers a breach. Being aware of public resources, creating action plans for cyber security, engaging with professional advisors and keeping abreast of process or technical developments is a great place to start!

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Cell Phones and Workplace Risk

Although it seems like it, smartphones have not been around for long. In this short time they have changed the way people live their lives and do business. Cells have blurred the lines between personal and work time. Business owners complain about employees wasting time with personal matters and employees complain about being chained to work 24/7.

Cell phones are creating problems owners have never dealt with before. The debate of appropriate use in the workplace is a new one, one with strong opinions on both sides. Companies are struggling with the issue, most have yet to develop and enforce clear policies.

But, the clock has run out on sitting back and doing nothing. It is time to pay attention to your smartphone policies. The courts are ruling on workplace problems created by phone use. They are making new laws, which create new guidelines for your employee handbook.

Here are 3 of the issues the courts are looking at.

Americans with Disabilities Act – Some people are too attached to their phones, and have lost the ability to function in the workplace. Owners are seeing employees’ cell use negatively affect their jobs. Employees are getting professional help to fix the problem and keep their jobs. The courts will eventually define it as a mental health issue.

This is such a new condition that the medical community has yet to agree on what to call it or how to treat it. Lawyers are figuring out how to litigate it. Smart owners will keep an eye on this issue and address it early. They will link their phone/workplace policies with their ADA and Mental Health policies.

Fair Labor Standards Act – Laws are being enacted and amended to reflect today’s always connected workplace. This is a hot topic for federal and state courts. One difficulty they are addressing is employers expecting nonexempt employees to work (emails, phone calls, paperwork, etc) on their devices outside of a 40 hour week without getting paid for it.

How are you defining normal work hours and are they clearly spelled out? Are hours being consistently monitored? What policies, procedures and training have you done to insure compliance? Can you show disciplinary action against managers and employees when policies have been violated?

OSHA/Safety – Providing a safe workplace is an owner’s responsibility. The laws are extensive and well established. Cell phone use is new to safety and the details are being sorted out. But, one thing is clear – owners are liable for employee negligence created by phone use. Therefore, employers have a right and duty to restrict cell use, especially when it is a safety hazard.

Have you evaluated and updated everyone’s (management included) job requirements concerning phone use? When is cell use a hazard and what steps are you taking to contain it? What policies, procedures and training have you done to insure compliance? What disciplinary action have you taken against managers and employees when policies have been violated?

These are only a few of the issues the courts are looking at. Others include: harassment, discrimination, violations of the National Labor Relations Act (social media posting and the “right” to phone use), and theft of confidential information/trade secrets.

Many people believe using their cell phone in the workplace is a right, rather than a privilege. It is going to take future court cases to decide if they are correct. But, do not wait until they decide. It is important to your company’s success to be proactive with workplace risk.

Talk to a lawyer who has up-to-date knowledge and develop cell phone/workplace policies now. Then be sure to enforce them. You do not want to become a test case to make new law, leave that to other – bankrupted – companies.

EXEMPT OR NON EXEMPT; THAT IS THE QUESTION!

In general, employees who work more than 40 hours a week are entitled to overtime pay at a rate of 1 half times their “regular rate” if they exceed the 40 hours. However, certain employees may be exempt from overtime if certain criteria are met. These are regulated by the Fair Labor Standards Act of Fair Labor 1938 Section 213(a)(1). In general, those exempted are classified into five positions:

  1. Employed in a bona fide executive role.
  2. Administrative role.
  3. Professional capacity.
  4. Outside salesman .
  5. Computer designers and developers. (Base salary must be at least $57,740).

In addition each position must meet certain tests in regards to their job duties.The test is usually two-fold; a salary test and a duties test. If an employee is paid a fixed amount of money; weekly, biweekly or monthly and there is no deduction from the fixed rate based on the quantity or quality of the work; the salary part of the test would be met.

The duties test is different for each of the criteria and must be considered by the actual work done and not the job title or job description. According to the Code of Federal Regulations Section 541; to be exempt an:

  1. Executive must:
    1.1 Customarily direct the work of 2 or more employees
    1.2 Primary duty is Management
    1.3 Authority to hire and fire or recommend a change in status
    1.4 Regularly and customarily exercise discretionary powers
    1.5 Spend no more than 20 % of their hours in a workweek not directly and closely related to those duties or 40% in a retail or service establishment.
    1.6 Be paid on a salary basis.
  2. Administrative Employee:
    2.1 Primary duty must be to:
    2.1.1 Perform office or non-manual work directly related to management policies or general business operations or
    2.1.2 Perform work in and educational administration which is directly related to academic instruction or training.
    2.2 Customarily exercise discretion and independent judgement
    2.3 Regularly and directly assist a bona fide executive or administrative employee; or perform under only general supervision work that is specialized or technical and requires special training or knowledge; or performs special assignments or tasks under only general supervision.
    2.4 Spend no more than 20 percent of their hours in a workweek in activities not directly or closely related to the above duties, or 40% in a retail or service establishment.
    2.5 Be paid on a salary basis.
  3. Professional Employee must:
    3.1 Primary duty must require:
    3.1.1 Advanced Knowledge customarily requiring extensive education or
    3.1.2 Originality and creativity in a recognized artistic field or
    3.1.3 Teaching or otherwise imparting knowledge as a teacher in a school or in an academic or educational institute or
    3.1.4 Theoretical or practical application of highly specialized knowledge in computer system analysis, programming, and software engineering in a computer or software occupation
    3.1.5 Consistently exercise discretion and judgement.
    3.1.6 Perform work which is predominately intellectual and varied and which cannot be standardized in relation to a given period in time.
    3.1.7 Spend no more than 20% of their hours in the week in activities not essential and necessarily incidental to the above duties and
    3.1.8 Be paid on a salary basis.
  4. Outside Salesmen must:
    4.1 Engage in making sales or obtaining orders away from their employer’s place of business
    4.1.1 Devote no more than 20% of the hours worked by non-exempt employees of the employer to work other than making sales.
  5. Computer Designers and Developers
    5.1 Engage in the application and system analysis techniques and procedures
    5.2 Design, develop, create testing for computer systems or programs.
    5.3 Design ,document, testing programs related to machine operating systems.

The reason to review this is that the minimum “basis” for salary was set at $455 dollars a week (updated in 2004). In 2014 President Obama directed the Department of Labor (DOL) to promulgate new rules regarding the minimum wages that need to be paid in order to be exempt from Overtime Regulations. This was done to “modernize” overtime exemptions.

New rules were announced in the Spring of 2016 which doubled the minimum salary required to $47,476 annually or $913 per week.

In the fall of 2016, the rules developed by the DOL were challenged by the case of Nevada vs. U.S. Department of Labor. U.S. Court of Appeals Judge, Amos Mazzant of the Eastern District of Texas issued a temporary injunction nationwide for the new rules, effectively stopping them from being enforced on the December 1st date. The DOL was found to have overstepped its authority in drafting the final rule. The Judge held that it created a rule based on salary levels and without the duties test that Congress desired.

A final ruling was later issued which permanently stopped the rules from taking effect. The only recourse left was for the DOL to appeal. With a change in administrations this ruling does not seem likely to be appealed.

On August 31st 2017, the Judge granted the Plaintiff’s Motion for a Summary Judgement holding the December 2016 rules” invalid” for eliminating the duties test and basing it solely on salary.
The DOL has asked for comments in order to form a new set of rules. New rules are expected to be drafted to raise the salary level to at least require a salary above the poverty level.

Overtime issues that arise can often be things like:

  1. Working through lunch.
  2. After hours emails
  3. Time spent going through security; before and after work
  4. Failure to track hours worked, accurately.
  5. Requirements for being at work early for meetings, updates etc. prior to clocking in.
  6. Unpaid training or safety sessions.
  7. Tipped workers reporting early to set-up tables, bar etc.

CONCLUSION
Having said all this, it would appear that change is inevitable and we should be cognizant of our clients employees and their salary ranges. In addition, it would behoove us to ensure that those on salaries fall within the “duties” required for exemption. If the salary levels are met; are the duties test also being met? We often have clients that may not be aware of the rules but put themselves at risk. The pay awarded for failure to pay earned overtime can be very substantial. Advising them of potential pitfalls is our responsibility as well as suggesting valid alternatives. Remember that paying Overtime may not be as expensive as first thought.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

The Difference Between Order Takers and Salespeople

When a small business owner talks about the goals he has for his company “make more sales” is usually high on the list. Not enough sales are an on-going concern, and frustration, for the typical owner. There are many reasons why a company struggles with selling.

One of them is that most have order takers rather than salespeople. This isn’t just a matter of semantics or word play. There is a difference in aptitude, attitude and approach between the two, a difference which can increase or decrease the company’s bottom line.

Salespeople

Aptitude – They know the pros and cons of selling, and chooses to do it. It’s a career rather than a job. They see themselves as a professional and take pride in providing good client service. Also, they believe in the product, understand the benefits it can bring to the customer and is challenged by the process of bringing the two together.

Attitude – Salespeople believe it’s their responsibility to take an active role in finding, helping and selling to people whose companies would benefit from their product. The salesperson and the customer are a team, together they identify problems and find solutions.

Approach – A salesperson enjoys communicating with people, especially customers or prospects. They seek out opportunities to interact (i.e. face to face, email, text, newsletters, trade shows, seminars) with future and existing clients. They keep up on their profession and are open to suggestions on how to improve their performance.

Order takers

Aptitude – Order takers are in the job by default and don’t see it as a career. Usually, order takers “drift” into the job, they don’t seek it out. It’s just a way to pay the bills and there’s little or no personal investment in the products or the customers. There’s a lack of professionalism or pride in their work.

Attitude – At best an order taker sees the job as “OK” and at worst doesn’t like it. They believe their role in the sales process is a passive one – the customer tells them what they want, they put in the order and they’re done. They are often annoyed with the customers, doesn’t handle their problems or concerns well and sees paperwork as the job rather than the selling.

Approach – The order taker spends all day in the office, regularly playing games on their computer, waiting for orders to come in from established lead sources (i.e. RFP, incoming call, referral, web request), rather than any new self-generated ones. They are complacent and resists ideas for getting more sales or improving customer service, especially if it means changing the way they do things.

A company’s sales plan is only as good as the people who execute it. Too many small businesses have order takers rather than salespeople. This is a management issue; most owners haven’t learned how to, or are afraid to, effectively motivate order takers. Don’t let it be this way – selling is too important to be left in the hands of people who are unwilling or unable to do it properly.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

4 Trends to Watch in the Construction Industry

Business analysts are cautiously optimistic about the growth of the construction industry. They believe the industry has entered a realignment and renovation phase, which should produce increased profits for the companies able to keep up with changes.

Here are 4 trends they are watching.

Shift in retail construction
Online shopping and sales continue to increase, and are expected to grow for many years. This is causing the need for retail construction to shift, but not decrease. It is moving away from walk-in stores to regional distribution centers, warehouses and manufacturing centers. This is especially true for the grocery industry.

Amazon and Walmart have declared war on each other, and other grocery/retail companies are closely following their transformations. They are developing new ways to get product to customers – ways which will require new buildings and major refits of existing ones.

Green and energy efficient houses/buildings
The green movement in construction is here to stay. Even though it took hold faster in residential than in commercial, the trend toward eco-friendly, health conscious buildings is putting pressure on all contractors to offer clean and resource-efficient options to customers.
Clients’ demands and expectations for green solutions, options and products are creating changes and innovations in all trades. They may not take the options, but they are increasingly expecting to be offered choices.

Technology
The construction industry will increasingly see customers expecting tech – software and hardware – solutions to problems. Tech has significantly raised the bar for accountability, safety, quality, productivity, communication, transparency and on-time/on-budget project management.

One of the biggest trends in safety and productivity is in wearable tech. It includes: smart safety vests with GPS and emergency buttons, smart hard hats with virtual display visors that send and receive information, smart safety glasses with camera’s giving real-time feeds, jobsite reality devices to show/change design elements in the field and bionic suits.

Integrated project delivery
Integrated project delivery is changing the construction industry. The idea that collaboration is essential to the success of any project is not new. Experts knew it was cost, quality and time efficient. But, no one had a good system for making it happen.

For the first time, contractors finally have the tools to share information in real-time. They can immediately communicate up and down the supply chain, with customers, office to jobsite, project manager to foreman and contractor to sub-contractor.

The construction industry has been shifting and will continue to do so for many years. The industry is large, well established, conservative and slow to make changes. The companies that understand and adjust to these new trends will beat their competition.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Is Your Entrepreneurial Spirit Hurting Your Business?

An entrepreneurial spirit is part of the American dream – a lot of people want to have their own business. But, most people never take the steps to make it happen. They do not follow though for variety of reasons. Some of the reasons include not having the determination, desire for control and denial needed to start a business and run it.

Entrepreneurs need all 3 of these traits to be successful and effective. However, like most things, there is a downside to these characteristics. They may be hurting you and your ability to achieve your goals. Let us look at how you are getting in your own way.

1. Determination

It is good to be determined. That is what keeps you going, even when it is tough to do so. But, too often, determination (positive) turns into stubbornness (negative). Stubbornness creates the inability and unwillingness to listen to others who have information you need to succeed.

Are you willing to ask for help, or do you think “strength of character” means going it alone? Do you take too many risks because you think you can force it all to work out? Has there been a toll on your physical or mental health due to “gutting it out” for months or years? Do you think problems and difficult situations need to be attacked, rather than logically managed?

2. Desire for control

People go into business for themselves because they want to do things their way – excellence and innovation are created from people’s desire for control. Unfortunately, it becomes a negative when people fail to understand that controlling is not leading or managing, and they do not want to do either. They do not want the responsibility (i.e. operations, financials, people) that comes with ownership.

Is your desire for control really a desire for autonomy (to be left alone)? If so, are you the best person to be running the company? People, products and money will never manage themselves. They need a firm, committed, visible leader to guide them. Is that you? Should someone else, better suited to leadership, be in charge?

3. Denial

Denial is a legitimate coping skill, one which all entrepreneurs need. There are times when the naysayers and doom peddlers must be ignored. Denial becomes harmful to you and the business when it is a knee jerk response, instead of a reasoned one. It can easily turn into defiance, hopelessness and helplessness.

When others (i.e. employees, family, key people, accountants, lawyers) tell you there are problems do you ignore them? Do you get angry and defensive when they are brought up? Do you have high turnover, employee trouble, or quality issues that you “can’t do anything about”? Have you given up looking for solutions? Are you saying, “I’ve tried everything and nothing works.”?

Your entrepreneurial spirit is a double-edged sword. It has taken you far, and with the right amount of honing it will take you further.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

6 Questions to Answer Before Applying for Growth Capital

Your business is doing well and you are ready to grow. But, your cash flow does not support the expenditures you want to make. So, you need a bank loan. Before you fill out the paperwork here are 6 key questions to ask.

Can I qualify?

Many owners make the mistake of applying to see if they qualify, rather than figuring it out on their own. They want the bank to do the due diligence they should be doing. It is important to find out if you have a chance of qualifying for the loan before you apply.

Talk to the bank(s) and make sure you meet all the requirements. If you apply and get turned down it can hurt your credit. It also gives the impression you are a bad risk and may make it harder to borrow next time you try.

How much do I really need and how will it help?

Specifics, specifics, specifics – the more the better. How much cash do you actually need and how is it going to drive growth? Be ready to show the math, guesses do not count. Banks want to clearly see how you will leverage the money to increase revenue. They routinely turn down loans for operations which only support the status quo, rather than growth. Is the borrowed $1 driving $1 or is it driving $5?

What documents do I need?

This is a no-brainer, and yet it has been estimated that 3 in 5 loans never close because the business owners did not do all the paperwork. It is simple – find out what documents you need and have them ready before you apply.

What is my collateral really worth?

Owners are notorious for overestimating the worth of the business’s assets. They are shocked when the bank values them for much less. Find out what the bank’s guidelines are and adjust your request accordingly. Here is an example.

You want a loan for a $50,000 piece of equipment. You plan on borrowing the $50,000 using the equipment as collateral. But, the bank’s formula only allows lending on 65% of the value of the asset. How you are going to make up the $17,500 short fall, when the bank just offers you a $32,500 loan?

What is my repayment plan?

If you do not understand your financials (i.e. margins, revenue, profit and loss, cash flow) now is the time to learn. The bank wants to know how you plan to give them their money back. Good intentions, hopes and dreams do not count here.

Do the financial projection ahead of time, and in the format they want. Many banks focus on the monthly cash flow projections for loan repayment information. One of the standards is that your monthly cash flow should be 3 times greater than your monthly debt repayments.

How good are my personal and business credit scores? Do they need repaired?

The size of your business may dictate which score banks give more attention to. The smaller the company the more they focus on your personal financial situation (i.e. mortgage, credit card debt, student/car loans, late payment history) and credit score.

A lot of business owners do not realize the business has a credit score, and it should be regularly monitored. Do not let your loan application be denied because of something you did not know existed – something that has incomplete or wrong information.

One extra question – Why would you apply for a loan, and not do what you could to get it? The long term growth of any company depends on being well capitalized. Countless once thriving, profitable businesses have failed because of poorly funded and executed expansions.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

4 Ways to Build a Successful Family Business

Building a successful family business can be one of the most rewarding experiences of your life, or it can be one of the most frustrating. Many times it is both, often on the same day. It is a unique situation, which comes with unique challenges. When it is going well it can bring family members closer, and give them a good life. When it is not going well it can damage or destroy families, and leave them financially insecure.

Do not let that happen to your company or family. Here are 4 ways to run a successful family business.

Keep it structured

Family businesses are usually run informally, and this is where the problems start. If anything they should have more checks and balances than the typical business, not less. When – not if – a family member starts taking advantage you want to address the behavior immediately. Clearly written policies, metrics and procedures should already be in place.

When someone knows what his duties and responsibilities are, and has agreed to be held accountable for them, it is more difficult for him to develop hard feelings. Metrics are facts, not feelings – solid numbers reduce misunderstandings and conflicts.

Control power struggles

On-going power struggles are common in family companies, usually going back to childhood. Be rigid and vigilant about keeping family drama out of the workplace, and workplace drama out of family life. Take as much of the emotion out of decision making as possible.
Develop a clear chain of command and follow it. Decide who is in charge of which area and leave them alone to do their job. The metrics will show, in a non-emotional way, who is doing a good job and who is not.

Everybody pulls their weight

Commit to running a business, not a charity. Everybody works and gets paid fair market value for the work they produce. They should have a job description, clear duties/responsibilities and get yearly, formal performance reviews.

One of the reasons family businesses fail is that there are too many non-producing members on the payroll. It is simple math – overpaying family to do less work than an unrelated employee can be the difference between profit or loss. If you want to provide financial rewards to family then do them and your bottom line a favor, tie it to performance. No free rides.

Have a succession plan

A succession plan is important in any company, but it is doubly so in a family company. Most do not survive into the second generation. One of the main reasons is lack of a succession plan. Planning for succession is difficult for owners, most just avoid it. Their belief that “It’ll all work out.” is naïve and commonly wrong.
A successful plan starts years in advance of retirement. It covers 3 main areas: operational leadership/management, financial/wealth and family issues/interpersonal. Each section is equally important and may require outside help to navigate it. Families often respond better to a neutral party.

Strong families and family businesses are the backbone of our country. They are what built it and they are what will keep it strong. Make sure both your company and your family have all the tools they need to survive the challenges of working together.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Do Not Let Single Customer Dependence Hurt You

Over the years a lot of major industries have had boom and bust cycles – manufacturing, steel, auto, rubber, construction and infrastructure. Some industries have recovered from the bust phase, while others have not. A recent example of this is the oil industry. While it is showing signs of coming back, experts believe it may take years to recover, if it ever does.

These cycles affect everyone up and down the supply chain, both positively and negatively. As a general rule the smaller the company is, the bigger the impact. It is common sense – if the majority of your business is with one customer, you live and die with them.

It is easy to live with single customer dependence when things are going good. There are advantages: you know the client well, billing and accounts receivable are simpler, production and quality are easier to control, there is no need to focus on sales or marketing, cash flow is predicable and staffing requirements are consistent. Small business owners talk about how their lives can be less stressful with one major customer.

However, it is not a smart way to achieve long term success. When the bust cycle comes around the majority of owners find they are unable to recover from it. They have allowed themselves to be lulled into complacency. They have put all their eggs in one basket, which is only sensible so long as you can control what happens to the basket.
It is not possible to control the basket if you are single customer dependent.

Here are some reasons why.

• They have a lot of power over your margins, cash flow, receivables and profit.
• You are stuck with and controlled by their seasonality and volatility.
• Your ability to grow, or scale back, is limited by their budgets and production requirements.
• If you lose them, you probably are out of business.
• It makes your company harder to sell and its value less.

So, what do you do? The answer is to focus on diversifying. Create a strategic plan which focuses on limiting risk and boosting sales.

Here are some places to start.

• Commit to sales and make it a focus of your strategy. Do not wait for a downturn to start selling. You will be in a position of weakness (and possibly desperate), which is a bad time to put together estimates and bid on new contracts.
• Decide on ways to diversify. It can be accomplished in several ways – find new customers, adapt product or service for a different market, expand customer territory and change or add your operations location.
• Figure out where you are the most vulnerable and fix it (i.e. overhead, production, quality, staffing, financials).
• Start slow with smaller contracts. They are easier to sell and will give you the chance to ramp up without making costly mistakes or needing much, if any, growth capital.

Just because the industry you are in has cycles of feast or famine does not mean you have to be held hostage to it. Even modest diversification will help you perform better than your competitors, because chances are they have none. Who knows, you could be the last man standing when the cycle swings up again.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

3 Ways to Get Control of Your Accounts Receivables

What is the number one reason small businesses fail? The answer is simple – they run out of money. They do not have enough cash flow to keep the doors open. There can be many reasons for why they do not have enough cash, but one of the biggest is mismanagement of accounts receivables.

A lot of small business owners confuse accounts receivables with cash. They think money owed to them is money they have to run the company with – it is not. Every day businesses close because they are out of funds, even though “on the books” they have enough to keep operating.

An account receivable is created when a customer buys something from you, but does not pay for it immediately. When you do not collect right away you become their creditor, you have loaned them the money. How well you manage these debts will determine: cash flow, company stability and growth, your ability to get loans, capital improvement expenditures and salaries/bonuses.

Here are 3 ways to effectively manage your accounts receivables.

Be Proactive
The best way to control debt is to not accrue it in the first place. A growing trend in small business is to require new customers to “prove” their credit worthiness for the first few orders. They are asked to pay via COD, credit card, on-line merchant or very short terms (7 days). Once a good relationship is established the client is offered the “benefit” of credit. Credit is a privilege, not a right.

This is not possible in some industries, while in others it is the way of the future. Contractors are notorious for their tactics – start a company, pile up massive debt, file for bankruptcy and repeat. A little bit of vetting can go a long way towards protecting yourself – not all sales are good ones, and some should not be made.

Establish a strict credit and collections policy
Establishing a clear credit and collections policy will help keep your risk low. A lot of owners balk at this suggestion, ant it is a mystery. The would not let a customer steal $50 off their desk, but would let him owe $5,000 180 days out. Be sure to include the following in your policy.

  • Set the lowest possible DSO (Days Sale Outstanding) for each customer based on their track record.
  • Create and update customer track records based on: on-line databases and resources, BBB ratings, credit checks, payment history with your company, etc.
  • Assign an employee to monitor and instantly follow up on overdue payments. The longer you let a customer go without paying the less likely you are to be paid. He will not think it is important to pay if you do not think it is important to collect.
  • Clearly state payment terms on all paperwork (i.e. warranties, service agreements, contracts, invoices, bills, receipts) and give a specific due date.
  • Cut off credit to overdue clients, sooner not later. It is not good business to extend credit to clients who are all ready behind; it just gives them a chance to get further behind.
  • Charge interest on overdue accounts.

Make following policies and procedures a mandate for everyone
All policies and procedures should be understood and followed by everyone, you included. Cash flow is the lifeblood of your business and an effective accounts receivable system is one of the things that will keep it flowing. Create a company culture where everyone is aware of how important it is to the success of the company and to their jobs.

By actively monitoring your accounts receivables you: make sure you get paid for your hard work, maintain a steady stream of cash and keep your business open. You are running a business, not a charity. Do not let other people increase their cash flow at your expense.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Business Analytics – Do You Need it?

Business analytics – if you are like most small business owners you have heard of it. And, if you are like most owners you are not exactly sure what it is or if you need it. Let us break it down and see if it is right for you.

What it is
Business analytics refers to the methods you use to measure the performance of something – projects, machines, employees, crews, products, shifts, processes, customers, etc. These measurements give you numbers, real data not guesses. You then use the numbers to make fact based management decisions.

How it works
Owners often know what they want; they just do not know how to make it happen. Their goals are good, but too vague. Therefore, they do not know where to start. Business analytics shows them how to turn open-ended goals into achievable tasks.

Think simple, simpler and simplest. In a small company the analytics should never be complicated. They are only a tool to do the job better, and should not be a job itself. You can start small – with the most obvious problems – and still get good results. Here is an example of how it works.

Your goal is to make more money. Problems have to be identified before they can be fixed. So, you develop a method to collect information (data) about productivity and quality, the areas with the biggest problem costs. When you get the data you use it to identify the trouble (Bob’s crew is 25% less productive and has 30% more rework than other crews) and look for solutions (Bob needs some training, disciplinary action and/or fired).

Why you need it
Most small businesses owners are not using analytics to manage. Those who do have an unbeatable competitive edge. They are: profitable with higher margins, better able to allocate resources and capital, customer focused, more efficient, controlling risk, proactive and focused on success.

Good employees like fact based management, bad ones do not. Responsible ones like looking at and comparing their numbers. They take pride in having 5% less scrap than the guy at the next machine. Incentives and discipline are much more effective and successful when based on data, not management “playing favorites”.

Other benefits include: salary planning, greater understanding and control over financials (cash flow, balance sheets, profit and loss), on-time and under budget project management, and sales and marketing effectiveness.

People lie, memories can be faulty and guesses are not facts. Business analytics give you a way to stay focused on your goals, and a way to reach them. They make things more efficient and less stressful for you, your employees and customers. Numbers, by themselves, are worthless if they are not used to improve understanding, empower people and coordinate resources with decisions. They should be used for a purpose – to make you more successful.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Manufacturing Industry – A Time of Uncertainty

Anyone who is in, or paying attention to, the manufacturing industry is in a state of unease – with good reason. Just a few of the challenges manufacturers are facing include: slow-growth in 2017, low output projections for 2018, political uncertainty at home and abroad, money for growth is tight, the energy supply chain is still depressed and foreign trade is at historically low levels.

It is difficult to be a small business owner in manufacturing right now. Many owners are taking an “I’m going to wait and see what happens” approach. Overall, that is a good idea, so long as you hunker down with a strategy. Risk adverse owners are going to wait it out and do nothing. Risk smart ones are going to wait it out with a plan. They will be the ones who come out of these tough times stronger than ever and positioned for growth.

There are a lot of opportunities out there to position your company for success, if you know where to look.

Focus on Productivity
On average the typical $5 million company is leaving $100,000 – $300,000 on the shop floor, much of it lost in production. Finding and fixing problem costs in a slow-growth time is a no-brainer. You and your employees have the time to create, add, try, and tweak new systems, before you get busy again.

You may need outside help to identify and correct the harder problems, but spending $50,000 to save $100,000 minimum is just good business. It saves you money during down times and gives you the ability to ramp up immediately when things pick up.

Get serious about analytics and data
Simply put -The goal of analytics is to use data to improve business management (i.e. cost control, quality, productivity, estimating, inventory). In manufacturing a lot of small business owners are resistant to using analytics as a management tool. Consequently, they are being left further and further behind; soon they will be left out.

Companies up and down the supply chain are starting to assume that everyone has and uses operational data. The expectation, especially with tech natives, is that data will be shared for everyone’s benefit. For example: You have an on-going problem with shipping defective parts to your largest customer. How are you going to answer when he says, “What do your analytics say? Send me your numbers along with your action plan. Let’s get this fixed.”

Learn how to estimate and bid
The inability to estimate and bid is one of the top 3 reasons manufacturing businesses fail. Take this easy test to see if you know how to do it – answer all the following questions with facts, not guesses or assumptions. If you do not have hard numbers it is time to learn how to do it correctly.

What are your margins? How often do you look at your profit/loss statement (should be no less than weekly)? What is your overhead? What is your break-even point? How much rework are you doing and why? How are you calculating how much of your overhead is applied to each job? What is your machine loading? What are your percentages of waste and scrap? What are your warranty costs?
Succeeding in difficult times requires patience and resolve. Waiting for the smoke to clear can be a good strategy, unless it means doing nothing while you are waiting. Doing nothing is standing still and standing still quickly turns into going backwards. Smart owners will move forward by getting their companies in good working order while waiting.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Too Many Hats – Tracking the Work

In most instances, we find that small business owners really enjoy the technical aspects of their job. They are passionate about “Doing the Work” – getting their hands dirty. Many also like the thrill of the hunt – “Getting the Work.” Consequently, these are the areas where most small business owners tend to focus their time and energy. A majority of small business owners I encounter dislike tracking the work – the financial controls of the operation. In fact, I would venture a guess that if you were to talk to ten entrepreneurs, eight (if not nine) out of the ten would tell you office work is the part of the business they enjoy least. As a result, many tend to avoid doing it. We find this typically trips them up and stifles their growth.

In the previous two articles of this series, we looked at a couple of the hats an emerging entrepreneur must wear to grow their company – getting the work and doing the work. As previously stated, somewhere between $1.5 and $3.0 million small businesses typically stall out because there are not enough hours in a day, or days in a week for the owner to wear all the hats. To keep growing, they must delegate someone to wear the hats.

More Profitable

In this article, we talk about tracking the work – the remaining hat an owner must effectively delegate to grow beyond the initial plateau. Unlike the other two, hats which most owners are reluctant to delegate, small business owners frequently have no problem handing this hat to someone else. Many entrepreneurs feel that getting the work and doing the work are where a company makes its money. While those aspects are essential to a company’s success, we find that keeping track of the work is equally important. The tighter the financial controls, the more profitable the company. The looser the controls, the more bad things can happen.

By turning this hat over to someone else in the company, they are turning over the control of the company. More often than not, we find that person is undertrained, and there are no real systems in place for them to do their job effectively. This can cause a variety of issues to surface in the business – from reduced profitability to poor cash flow, to low productivity and lack of accountability, to name just a few.

Financial Controls

We find that if an entrepreneur is to grow their company to the next level, they must have robust financial controls in place. If you can’t measure it, you can’t manage it. As a company grows and picks up velocity, finding out if they made a profit at the end of year when they do their taxes, is too late. To move to the next level, an owner needs a clear and accurate understanding of their financial performance on a day by day, week by week basis. By installing an operating budget and management dashboards, we help our clients proactively manage their company for a predetermined profit. We typically find it is necessary to help install a more robust cash management tool so owners can know their cash needs 6 – 12 months out. In addition to the financial management systems, we find somewhere between $1.5 and $3.0 million a business can typically cost justify a full-time controller, someone to manage the numbers.

Manufacturing Case Study

For example, several years ago, Cogent worked a pre-cast concrete manufacturer who had stalled out and was struggling. They weren’t as profitable as they would have liked to be, and weren’t exactly sure why. The owner tried to keep up the financial performance but readily admitted to their lack of experience. They didn’t know their true costs and as a result weren’t pricing their products correctly. Tracking materials and labor was like chasing vapor. Plus, as the company had grown and taken on larger and larger projects, cash flow became a killer.

Cogent was able to help them identify their true costs to come up with more accurate pricing which included a predetermined profit. We then set up an operating budget and management dashboards to help them better control their manufacturing costs. We installed project tracking tools to help better manage the production process. We also helped implement a twelve-month cash management tool to help the owner better anticipate and manage cash demands. Once the financial management systems were in place, Cogent helped them hire a full-time CPA to wear the financial management hat. This alleviated a lot of stress on the owner and freed up his time to focus on things he enjoyed doing and was better suited for. As a result of these efforts, the company has increased their bottom line by over 20% and boosted their top line by over $1 million.

Each company is different and this is just one example. However, to effectively grow a company beyond the initial plateau, we typically find owners must start to build a true organizational structure and delegate the responsibility of who wears the hats.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Trade Shows. Can they work for you?

Nearly every business owner at some point in time confronts the decision of participating in a trade show – not as a visitor but as an exhibitor. This decision may seem like a wonderful idea. Or, it may put you in an, all too often, position of saying that “trade shows are for big companies” not one our size.

As a rule, what scares away the small and medium sized business owners is the unknown of what all is involved and how much does it cost. Both are very realistic questions that need to be addressed to determine participation.

Identifying the Convention and Show

Whether you are introducing a new product or service, expanding into new classes of trade or taking on a larger geographical area, you must determine desired outcomes for your potential trade show participation.

Trade shows come in all sizes and offer a variety of opportunities for your specific business goals. There are local, state, regional, national and international shows that take place every month of the year in places from Seattle to Orlando and Palm Springs to Boston. They may have 75 or 100 booths and exhibitors or encompass over two million of net square feet of space like the CES (Consumer Electronic Show) does in Las Vegas each January.

Depending upon your trade show goals and type of products or services that you want to expand, you need to identify shows where your existing customers and potential customers attend. Sometimes a state or even local show is a good place to start but only if your potential customers have a reason to attend that show.

Where, When and Attendees

Seek out and find shows that are in your class of trade. Though not the primary determinant, consider any geographical travel required to attend the show. Most trade show organizations will send you a list of past exhibitors and attendees if you show an interest in being an exhibitor. Sometimes they will send you a partial list of exhibitors and attendees who have signed up for this year. If this show is within your current industry and has retailers, wholesalers or groups of businesses using your products or services then you will readily recognize the list of attendees. Keep in mind that in addition to current customers and prospective customers, your competitors will also be there showing.

What’s The Cost?

The cost to attend a trade show depends upon several components, and there is no real set formula for figuring out the cost. How far away is the show, how many people will you be taking to the show, what type of booth decorations will you need as a backdrop, the lodging, travel and meals, sales materials required, and of course the actual costs for the booth space, set up, storage, etc. All of these costs and more are real and true expenses. To assist in your compilation the following “rule of thumb” formula will give you some idea.

+ Booth space 33% of budget
+ Booth furnishings & graphics 18%
+ Travel & Ent. 18%
+ Show Services…electric, cleaning, storage, etc 12%
+ Shipping 9%
+ Promotion 8%
+ Misc 2%

Using a standard booth size of 20 x 20 and an average square foot price of $21.00 you would have a cost of $8,400.00 which multiplied times “3” would give a rough total cost of $25,200. Square footage pricing does vary depending upon the show.

Do people really go to trade shows?

According to Quora and Skyline, two companies who are heavily involved in national and international trade shows for all industries, over 40 million people attended trade shows in the U.S. in 2015. 38% of these visitors were “first-timers,” and they spent an average time of 9.5 hours in exhibitor’s booths. Over 81% of them had total recall of visiting a specific company’s trade show exhibit and what they were selling.

Summation
Trade shows do work and can be very profitable assuming they are handled properly, and the necessary planning and follow-up is adhered to.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Your Corporate Veil Isn’t as Protective as You Think

Like most owners, when you started your small business you probably did not know much about corporate veils. Eventually, you learned enough to know you needed one. So you got a lawyer, did the paperwork, paid the money, and became a corporation or limited liability company. Then you put the paperwork somewhere and forgot about it, believing you were now covered against being personally liable for the debts and obligations of the business.

But, you, like most owners, would be mistaken. You are not as protected as you think you are. In business the most common legal cases are disputes about a company’s legal liability, which they routinely lose. Let us look at why they do.

What is a corporate veil supposed to do?

It was designed to shield people (i.e. shareholders, officers, directors, owners) from the debts and bad acts of the company. The business is a separate and distinct entity from the owner. The owner, even though he acts for the entity, cannot be held liable for the business’s obligations or actions. Claimants and creditors can only go after the company, not the people involved with it.

What is piercing the corporate veil?

The corporate veil is not a get out of jail free card. If you are not following the rules or laws the courts can pierce, or disregard, the veil and hold you personally responsible for the debts and bad acts of the company. Once declared personally responsible the shareholder’s, officer’s, director’s and owner’s assets (bank accounts, property, investments, etc) can be used as restitution for the improper behavior of the business.

What factors contribute to piercing the corporate veil?
The short answer is – it depends. There are many factors a court will consider before it will pierce the veil. Here are a few of the main ones they look at.

Intent to deceive – You cannot knowingly behave dishonestly, wrongful or fraudulently and be shielded by the veil. For example: If you take on debt you have no means to or intention of paying, the creditor may be able to pierce the veil and you will be personally responsible for it.

Alter ego – The business is separate from you, it is not a part of you. It has limited liability status, you do not. The assets of the company belong to the company, not you. There should be a rigid line between business and personal money. When you commingle assets you tear down the veil.

Identities of subsidiaries – Any companies you own must have separate identities and not share resources (i.e. bank accounts, facilities, financing, contracts, management, employees). Courts look at the purpose for having multiple companies – deception, insufficient capitalization to evade creditors, tax avoidance, fraud, etc.

Not following regulations – If the formalities (i.e. updating by-laws, annual reports, stock or membership ledgers, annual meetings, election of officers) are not followed it can be seen as an attempt to achieve limited liability status without any plan to form a valid company.

Most small business owners do not know what they need to do to maintain their corporate veil. This comes from a lack of knowledge, rather than a desire to deceive. Unfortunately, claiming ignorance will not protect your personal assets. Take the time, spend the money and contact a business attorney to make sure you are following all the rules. A lot of small business owners are not protected. You should not have to lose your home to find out you are one of them.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

How to Start Strategic Planning

Many small business owners think that strategic planning is for larger companies, but they are mistaken. No matter what size a business is, it can benefit from a strategic plan. In fact, compared to larger companies, small business owners are in a good position.

They have greater control over the development and implementation of the strategy. They can assess its successes and failures easier, allowing them to make changes and pivot quicker. This allows them to have a greater impact on the profitability of their business, with fewer hassles and politics. It is a lot simpler to do a 3-point turn with a car, rather than a semi-truck.

But, there is a downside. Small business owners have fewer resources to draw from – less time, money, people, experience, and knowledge. Not having enough resources can make creating a plan more difficult. Most owners know they need a plan, but often do not know how or where to start.

The following 3 areas are good places to start.

Get a new attitude about learning

Owners are known for not being willing to take others’ advice. In the long run, this unwillingness to ask peoples’ opinions and learn from them hurts the success of the business. The best strategic thinkers will not substitute someone else’s judgment for their own, but they are willing to listen to and learn from them.

Also, effective planners understand that everyone makes mistakes. They can learn from theirs and not do them again. Ineffective planners make the same ones over and over expecting different results. Businesses fail every day because the owner would not acknowledge and correct his mistakes.

Understand the financials’ strengths and limitations

Usually, owners are the “I don’t look at the numbers, I go with my gut” guy or the “I’m a by-the-numbers, they don’t lie” guy. In the long term, neither is useful for the well-being of the company. The financials are an important planning and management tool, which should not be ignored or overly emphasized.

The successful strategist strikes a balance between relying too much on perceptions or the numbers. Using and understanding the numbers adds a much-needed dose of reality to the gut guy. While having a feel for the clients, product and employees will get the numbers guy out of his office and make him a more hands-on, better manager.

Seek out advisors

A confident owner asks others for help before the plan is created. He realizes he cannot know everything he needs to know, no one can. Today’s business world is too complicated for just one person to understand it. So, he seeks out others (i.e. peers, experts, employees, key people, vendors, customers) who have the knowledge and experience he does not have. He gathers data, ideas, and opinions, and uses them to reach his own conclusions.

Developing, implementing and following a good strategic plan can take time and effort. But, it is worth it – like most rewarding things in life. Once it is in place and working you will wonder why it took you so long to do it.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Why It Is Time to Take Cyber Security Seriously?

Do you lock the doors when you leave your business unattended? Is your office or building protected by a security system? Are your outside tools, machines, parts and vehicles surrounded by a fence and locked up at night? Chances are you replied yes to some or all of these questions. You replied yes, because it makes good sense to protect your stuff – your tangible assets.

So, why are you not protecting your other assets?

A lot of small business owners have been late adapters to cyber security. At first, their lateness was not much of a problem. While it did not help them to ignore the subject, it did not hurt them either. Cyber hacking affected only the few, not the many. But, that has changed and owners can no longer afford to close their eyes to the issue. Depending on the study 60% to 70% of small businesses have had a breach or breach attempt in the last year.

It is a given that cyber crime is here to stay and will get worse. Small companies are being attacked in increasing numbers because they have a lot of unprotected, valuable information (i.e. credit card numbers, bank account and routing numbers, employees’ personal data, passwords, social security numbers). They also provide easy access into larger, better protected systems. Many major breaches start down the supply chain in an unsecured system.

Therefore, providing adequate cyber security for customers, vendors and suppliers is now considered to be a standard line item, a normal expense. Owners are expected to know this and act accordingly. Large companies are starting to add minimum levels of cyber security to their contracts and will not work with companies who do not have them. Online buyers are told to only use web sites that have an Extended Validation Certificate (the green padlock).

In addition to protecting others’ information you also want to protect your own. The U.S. National Cyber Security Alliance reports that after a successfully completed cyber attack 60% of small businesses are unable to stay open past 6 months. They cannot reclaim the money stolen from their accounts and have no means to replace it. This situation is so common that there is now Cyber Insurance to protect against this type of loss.

Small companies are easy and lucrative targets for cyber attacks. Hackers have little to lose and a lot to gain by going after them. The days when owners could say, “I didn’t know” has past, and it is time for them to take the necessary steps to protect themselves and others. After all, you do not want to be the guy in your supply chain who put everyone else at risk because you were the weakest link.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

6 Ideas for Creating Positive Cash Flow

Remember when you were in high school math class and you said, “This stuff is stupid. I’ll never use it in the real world.” Well, as a small business owner, it is time to realize that you were partly wrong. To be profitable and successful you do need some of that math you ignored then, and are still ignoring now. It is time to learn to do the math – poor cash flow management is one of the top 3 reasons small businesses fail.

Understanding how to create and maintain positive cash flow can be one of the biggest challenges owners face, and yet it is overlooked by almost all of them. That is good news for you. The better you are at managing your cash flow the bigger the edge you have over your competitors, and the better your chances are for long term success.

Understand the difference between cash flow and profit – A lot of owners make the fatal mistake of thinking profit and cash flow are the same thing, they are not. These are 2 different symptoms of your company’s financial health. You can make a profit and have cash flow problems. You can have cash flow and not be making a profit. Both are indicators there is a problem in the business.

Build up cash reserves – You will have cash shortfalls, every business does. Cash reserves will help you get through them. How much of a reserve is dependent on a variety of factors. Be realistic about figuring out your requirements, and hard-nosed about not touching the money. It is not a slush fund and should not be used as one.

Negotiate and track receivables – Keep net-60 and net-90 terms to a minimum, and think about offering early payment discounts. Assign someone the job of monitoring receivables, initiating collections and regularly updating you via the cash flow worksheet. At least weekly, although for most businesses daily is best. Do not let customers keep your money in their bank.

Negotiate and track payables – Get the best deal on payables you can for your cash flow. Contracts can often be negotiated to net-60 and net-90 terms. Pay your bills on time – paying late fees is a good indication that your cash management system is not under control.

Keep control of debt – Debt should not “just happen”, you have to manage it. Create a strict, written policy for giving credit and stick to it. Do not over extend, even your best customers will take advantage of a lenient system if allowed to. Credit is not cash until you are paid, until then it is a debt. Remember, you are running a business, not a charity.
Also, keep control over the credit you accrue. Only take on credit you can pay back, not credit you think you can pay back – do the cash flow math and have patience before you take on any debt.

Create and use a cash flow worksheet – This is an important document, one you ought to know by heart. It should tell you, at a glance, your current cash flow situation. Since it is updated and used often the simpler it is the better. There are many worksheet templates available, find one that suits you. If you have an accounting program it will be a part of the package.

Trying to run a business without managing your cash flow is like trying to shoot upstream rapids, alone in a canoe without a paddle or map. You might be able to do it. But, why make it hard, when it can be much easier? There will always be rapids to navigate, but you have a better chance at success if you are going downstream, in a kayak with a paddle and map.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Doing the Work

Doing the Work

Just by sheer numbers, most businesses in the U.S. generate between $1 – $5 million in annual revenue. Many companies stall out at this level, while some manage to grow beyond. Why is that?

Too Many Hats

Many entrepreneurs start their business because they enjoy the technical aspects of their job – the hands-on work. Plumbers like plumbing, machinists like machining, etc. Those technicians with entrepreneurial tendencies often grow tired of working for someone else and decide to strike out on their own. We usually find that somewhere around $1.5 to $3.0 million in annual revenue these technicians bump into the fact that there aren’t enough hours in the day, or days in the week for them to get the work, to do the work and to keep track of it all. The owner is… wearing too many hats!

With the first article in this series, we discussed the “Getting the Work” hat. The owner must delegate this hat for in order to grow sales. Now, let’s look at the second hat – “Doing the Work.” This second article addresses the operational aspect of business.

Delegating this hat can be especially challenging given the fact that many small business owners are highly skilled technicians. They love doing the work. In many instances, they feel that no one in the company can do the job as well as they do (and in some cases, they are right). Unfortunately, continued growth is often stifled at this point because the owner becomes a bottleneck. Frequently this can also affect a company’s financial performance because inefficiencies begin to surface.

To complicate things further, the operations side is the most physically demanding part of most businesses. Many owners try to get more done by putting in extra hours. They come in early and stay late with the hopes of keeping up. It is not uncommon for owners at this stage to be working 70 – 80 hours per week. That may work for a short period of time, but it’s not sustainable long-term. Frequently we see productivity actually go down when fatigue begins to set in.

Grow Beyond the Plateau

To grow beyond this plateau and realize a viable work/life balance, an entrepreneur typically must delegate the operations hat to someone in the company other than himself – someone that will be solely responsible for managing operations. At Cogent we recognize that it’s more than just handing the hat to the next closest person. We know the key to success is structure and control. Typically we find it is necessary to install operational systems, procedural systems, and reporting systems.

• An example of systems include developing formal job descriptions so that company-wide everyone is aware of responsibilities.
• Another example is the need for employee training to emphasize processes and quality requirements.

These systems are just a few of the many that are critical for success! Letting go is tough for many technician/owners. But the payoff can be significant.

Real life success

For example, a small cabinet shop Cogent Analytics worked with several years ago had maxed out $4.5 million in revenue and was actually losing money because of bottlenecks and inefficiencies.

• The owner, a cabinet maker, tried to be hands-on in all aspects of the business and attempted to wear all the hats. While that management style worked when he was just starting out, it was becoming increasingly less effective as he added employees and grew revenue. Ultimately, growth halted, productivity dropped, quality slipped and employee morale suffered.
• Early in our consulting project, Cogent recognized the fact that the owner needed to delegate his operations hat. We helped identify an employee with the aptitude and interest in becoming the operations manager. Beyond that, we helped train the employee on how to be an effective manager and set him up with the tools he needed to perform his new responsibilities. We worked with the owner to develop job descriptions and install employee incentives, measurement tools, management dashboards, etc.

At the end of the project, the owner stated, “My quality of life has improved. Probably the biggest thing is it’s helped my time – really taken the pressure off me.” The best part is the company returned to profitability and the owner actually found himself working less. Plus, the company began to grow again.

Each company is different and this is just one example. However, to effectively grow a company beyond the initial plateau, we typically find owners must start to build a true organizational structure and delegate the responsibility of who wears the hats. In the next article in this series, I will discuss another hat a small business owner must hand off to grow their company to the next level.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

What to Do If You Need Growth Capital

Congratulations on your success, all your hard work is paying off. You are doing well and want to expand. But, while your company is stable and profitable its cash flow will not support a large growth expenditure. You need to get a loan from the bank.

In this era of Shark Tank and all its offshoots, the traditional bank is still the lender of choice for most small business owners for growth capital. But, due to increased regulations, they are finding it difficult to secure loans. Veterans of the old process and rookies new to the game are both frustrated and confused by the current procedures.

There are 4 steps to applying for and getting an expansion loan – many small business owners are not good at any of them. However, you are going to have to get good at them, because the bank has the money and you have to follow their rules to get it.

1. Be realistic

It is a given in the banking industry that owners are unrealistic when valuing their companies. They see the application process as a way to fulfill their desires, hopes, and dreams (emotions), rather than a business transaction (logic). Most do not realize they are acting on emotion rather than logic. They believe they are being rational, but they are not.

Banks want realistic data and hard numbers based on revenue, profit, physical assets, receivables, current customers’ contracts and future customers’ letters of intent. They want the actual, not perceived, value of the business and its ability to pay the money back.

2. Do the homework

Learn to speak the language of banks – numbers. Do you understand your financials? Can you talk about margins, profit, debt-to-income ratio and overhead with authority? Do you know what servicing the debt means? What is your credit score? Is your customer base large enough?
Expecting the bank to give you money when you are not able to tell them exactly how you plan to pay it back is unrealistic and naïve. Talk to a loan specialist and get an idea of what a successful loan application requires. Do your homework before submitting the paperwork.

3. Have patience

Now you know – based on your realistic attitude and the homework you have done – what is required to successfully get a loan. If you have everything you need and are sure that you are ready to apply, then you can skip this step and go directly to number 4.
However, if you are like most owners you have found that you are not ready to apply right away. Your financial house has to be put into order first. You might need to pay down debt, increase your credit score, clean up an existing credit line, find more customers or decrease production costs. Patience, time and sticking to a corrective plan are the 3rd step for many businesses.

4. Follow their procedures

This step should be a no-brainer, and yet accountants, consultants, and bankers are baffled by how often owners are their own worst enemies. Up to a point it is understandable – the typical owner started his business so he could do things his way and not have to answer to other people. Unfortunately, this does not work with banks.

Do not let your ego (emotion) get the best of you and sabotage the loan process in the final step. You have done the other 3 steps and know what they want – give it to them. Completely fill out and submit the paperwork exactly as they want it. Arrive at the interview on time. Be polite, concise and professional.

Experienced business bankers have seen too many successful businesses fail because of poorly funded, thought out and executed expansions. Although it may not seem like it sometimes, responsible small business owners and bankers have the same goal – a growing, thriving, profitable company.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

How to Start Building a Customer-centered Culture

A customer-centered culture. This is one of those things that small business owners who want to be successful talk about needing, but do not always have. These owners have heard about it, think they need it and want to have it, but do not know how to get it. As with most things in life, the idea is really very simple; it is the doing it that is hard. A customer-centered culture will lift you above your competition.

In a customer-centered culture, it is everyone’s responsibility to understand and uphold the company’s stated purpose and values – the customer comes first. When a business’s objectives are at the center of the owner’s, manager’s and employee’s actions, decisions, conversations, and strategies it becomes easier to get things done.

If the company stays focused on the why and how it is selling the product in the first place; everyone is rowing in the same direction. It, also, makes it easier to see who is not rowing or working with the group. In a strong positive culture, employees who are troublemakers will often leave the company on their own. Their behavior and attitude are not supported by peers or tolerated by management.

The customer-centered culture flows from top to bottom and bottom to top. Management and employees work together to hold each other accountable for establishing and maintaining the culture. Everybody is responsible for monitoring, supporting and mentoring each other. It is an on-going project which requires discipline and commitment at all levels but is well worth the effort.

The place to start is to identify your purpose and values, as everything flows from there. The purpose and values should be practical, simple and easy to understand. They ought to answer the “why and how” questions. Why are we doing this? How does it affect the customer? The customer’s perspectives and experiences guide how people think and act on a daily basis. Here is an example of how it works.

The purpose:

  • In a simple, timely and cost effective way we will provide the best hex, flange and lag bolts on the market.

The values based on the purpose:

  • Simple – We provide an easy ordering system and responsive customer service. We listen to the customer and if there is a problem, we fix it.
  • Timely – We meet our order deadlines and deliver on time. We listen to the customer, and if there is a problem, we fix it.
  • Cost-Effective – We focus on good quality, financial and production controls. We listen to the customer and if there is a problem, we fix it.

Remember – people will buy from whoever gives them what they want when they want it – and they usually are willing to pay a little more for it. A customer-centered culture is not always easy, but winners do the things that losers are not willing or able to do. It is your company, which do you want to be?

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Playing Favorites Can Harm Your Business

One of the biggest complaints employees have about their managers is that they play favorites. Employees say rewards and consequences are not handed out equally, and not everyone is held to the same standards. What is interesting is when managers are shown these findings they usually agree with the employees. Managers admit they have favorites and do not treat everyone the same, even though they know they should.

This creates favoritism in the workplace. We all have experienced it and know what favoritism is – it is when someone is singled out as special. He is perceived as better than other workers even though usually he is equally, or only slightly more, skilled as they are. In some cases, he is even less skilled than his co-workers, but is still seen as special for other reasons.

When employees are working with someone who has been singled out as a superstar it creates a damaging work atmosphere, which can hurt a business’s success. Over the years, thousands of companies have been harmed or gone out of business because of favoritism. Here are 3 reasons why.

1. Legal problems: This one should not have to be said, and yet it must be said – all the time. Hundreds of small businesses have been bankrupted because they did not treat all their employees equally. It is simple – employees sue, employees win and the company is out of business or severely compromised.

2. Lowers employee morale: It is true, one favored apple can and will spoil the whole barrel. Having one, or more, identified favorite can ruin a whole company’s morale, especially in small businesses where the impact is greater. The fewer the people, the more likely favoring one person over the others will negatively affect the whole group.

A fundamental human principle is – People do not like to be treated unfairly. Starting from childhood we react strongly to a person, situation or idea that we think is unfair. It is also one of the most common reasons people leave a job. They get tired of being treated poorly, not having their ideas listened to and managers playing favorites.

If employees are not able to leave a job physically they will leave mentally; and, this is when morale and motivation really start to drop. When they feel their ideas and skills are not valued, they give up. And, when people give up productivity, quality and innovation suffer. “Why bother, what I think doesn’t matter” are words you do not want your employees to say or believe.

3. Good workers leave: One of the reasons that having a favorite is so destructive to a workplace is the amount of attention he gets. Positive attention matters, it is the best way to motivate others. Employees have the expectation that their good work should get them a certain amount of good attention. But, the favorite often gets more attention for slightly better, the same or worse work while others go without attention.

When the favorite gets more notice it causes turmoil, jealousy, and resentment in others. Over time even the most levelheaded employee becomes affected by it – good, solid performers start to become discouraged, annoyed and fed up. Good workers have options and they take their skills to another company where they are appreciated and fairly rewarded.

There are very few superstars in business and chances are there are none in your company, including your favorites. Avoid the problems of favoritism by learning how to set up a transparent system, which ties rewards and consequences to performance only. It will go a long way toward having less risk, a smoother running operation and happier employees.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Two Signs Your Business is in Trouble

Every successful small business has its problems. It is normal to have ups and downs – a sales slump, a few jobs requiring a lot of rework, a sudden increase of employees’ leaving or a week where some machines break down. Short term, stand alone difficulties are just part of being a small business owner. While they are frustrating, they are not fatal.

The trouble starts when they become a pattern – the seasonal sales slump lasts too long, rework and mistakes become normal, there is a revolving door of employees and machines break down every month. Instead of being stand alone problems, they are part of daily operations; and, that is when they become fatal!

Here are 2 big signs your business has crossed the line of having routine problems to having fatal ones.

– Cash flow problems. If you are having a hard time paying employees, yourself or bills you are in trouble. Cash is king in a small business. You can be making a profit, but still not have enough cash to keep the doors open. Learn to read and understand the information your financials contain. They are a valuable management tool which provides facts – not your guess – as to why you are in this situation.

How long have the cash flow problems been going on and why? Who is paying on time and who is not? What are your profit margins? What is the billing cycle? How are the receivables and collections? Where can you decrease costs? Where is your money tied up (i.e. inventory, debt, overhead, salaries, skimming too much, perks)?

What about sales? Do you have salespeople or order takers? Do they have sales goals and are they held accountable for them? Do you need to increase or change your marketing? What are your customers’ perceptions of the products and their quality? Do you know what they think of your customer service? Have clients gone to competitors and why?

– A constant state of chaos. Some people thrive in chaos, but the majority do not. They operate best in a stable workplace, where they can do their jobs without too much turmoil and difficulties. If you go from crisis to crisis and spend most of your time putting out fires you are in trouble. It is time to figure out who and what is causing these problems.

Is it you? Are you trying to do too much by yourself? Does everything have to flow through you? Do you know how to delegate and hold people accountable effectively? How is your time management and ability to prioritize? Do your employees respect – respect, not like – you? Do they listen to you? Is employee turnover too high, and if so why?

Is it someone or something else? Do you have a disruptive employee or group? Is there a manager(s) who is undercutting you? Are your employees really a problem, or do they have valid concerns and complaints that you do not want to face? Do the employees have the instructions, skills, knowledge and tools to do their job properly? What will you do to address these situations?

Small businesses do not “suddenly” fail. There are signs all along the way that identify problems. As the owner of the company, you have the responsibility to figure out whether they are go, caution, or stop signs. Knowing the difference between the three will help you avoid the crash.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Cross or Up Sell to Add Value to the Customer

At most of the places we shop today, employees often ask customers if they need anything else with their order. It could be the clerk at the deli counter asking you if you would like any cheese with your order, the server at a restaurant asking if you want to start with an appetizer, or the now famous, “would you like fries with that.” Why is this? Business owners have determined that they only have a finite number of customers. Therefore, they must maximize the potential of each customer. Retailers often track the ‘average sale;’ whereas, in the restaurant businesses, managers look at the ‘average check size.’ Managers track that number to be sure they are achieving their sales goals.

Whether you’re in customer service, management or sales, you increase your value to an organization by retaining valuable customers. Research shows that the more products and services your customers use, the more likely they will remain your customers. But how do you sell additional or higher value products or services without feeling pushy?

How do you give more value to customers? Additionally, how do you recognize this is good for them, for you, and for your company? Cross and up selling often provide a win-win situation for everyone. This allows you to work with proven tools to open doors for additional business and learn how to sell without feeling pushy.

You need to develop a plan with your managers on ways to increase each sale. Listed below are the concepts of what this plan should contain.

  • Offer additional items that add value for the customer
  • Convince the customer that you are supporting their original purchases
  • Move the buying decision to a higher level, more valuable solution
  • Create a value map to increase the quantity of the sale
  • Raise the quality of the solution and help customers save time or improve efficiency
  • Follow a consistent system of gathering information, opening the door to the solution, presenting added value, and confirming needs

Now that you read the concepts above, you are probably asking questions on how that can be implemented in your business. Below are some real-world solutions:

  • In a coffee shop a customer asks a clerk, Can I please have a cop of coffee? You ask; a Large? Most likely the customer will say OK. If you responded, a small, medium or large, most likely the customer would have responded with a medium please. In this process you moved the sale up without being pushy.
  • In an auto parts store a customer comes in for parts to replace the brakes on their car. The counterman notices the customer does not ask for any brake fluid. Knowing brake fluid is needed when replacing the brakes, the counterman makes the suggestion. The customer could respond with, I have some at home. Or, most likely the customer will say yes and thank him for the suggestion. Again, not pushy and you are actually offering better customer service because there is nothing worse than starting a job and not having all of the required parts.

Cross or Up Selling is not limited to restaurants, retailers, or wholesalers. Contractors can use the process as well. In most trades, it is very easy to sell a better product than the customer may have requested. Remember in many cases the labor component of the cost would be the same. It could be as easy as showing the value of paying a little more for a roof that has a longer warranty. The same would be true for a plumber installing a new water heater. The point to remember is the cross or up sell must add value to the customer. If they are planning on moving in 5 years they probably don’t want to spend the extra money on longer life products, but those still could be added features when they are selling the home.

Implementing a plan to improve your Cross or Up Selling can easily add ten to fifteen percent to your sales!

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Familiar with the ‘Burdened Labor Rate?’

As a small business owner, have you ever wondered how to determine service charges? It is important to know exactly how much an employee is costing you per hour to do so. When calculating the hourly cost of an employee you need to be using the “Burdened Labor Rate.” This is actually different from the rate you pay an employee per hour. The burdened labor rate is an individual’s wage plus all the benefits that you give an employee or pay on the employee’s behalf.

Let’s work through an example of this! It is generally accepted that an average employee will work 40 hours a week for 52 weeks or 2080 hours in a year. A base pay of $15 per hour would result in total wages of $31,200 for the year. Having said that you now must subtract (estimated values in this case):

  1. Vacation hours -40
  2. Paid holidays (8)-64
  3. Sick days (5)-40
  4. Training Days (2)-16
  5. Idle time (15min/day)-60

The above example would bring the hours available to work down to 1,860 for the year.

Now add to the individual’s compensation all the employers’ contribution to:

  1. Social Security-$1900
  2. Medicare -$450
  3. Unemployment Ins.-$150
  4. Workman’s Compensation-$1200
  5. Health Insurance-$3000
  6. 401K -$500
  7. Bonus $250
  8. Vehicle usage or car allowance -$3600
  9. Uniforms $100

Other benefits.

The benefits paid on behalf of the employee totals $11,150.

You would then take the benefits and add this to the base rate of $31,200 which gives a total of $42,350 of compensation. Having determined that the actual hours of work would be 1,860 you would now need to divide the total burdened compensation by the reduced hours. This gives us an hourly rate of $22.77. An increase of $7.77 an hour for all the benefits we provide. It represents a 52% increase over the base wage.

You must know exactly what each employee costs the company per hour when “on the job.” On the job can vary by company, since it could mean preparation time, marshaling, equipment repair all of which may be off the job site itself. However, the “burdened rate” is the base rate we need to be using when starting an estimate. It is what the employee really costs you, and you need to recover that money for the hour they work.

To take this even further, add the Overhead Recovery Rate as you need to recover your fixed expenses. But, that’s a subject for another day! This is just a quick example of taking the concept of the burdened labor rate and applying it to a real-life scenario.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

A Growing Business can Outgrow an Owner

Most small businesses start out, well, small. Usually, there is just the owner and maybe a few associates. This is typically referred to a ‘Mom & Pop” business. However, as the business starts to grow, the facility gets larger, and more employees are hired. It is quite possible for the company – due to its increased size – to outgrow the owner’s business acumen.

Often the owner is quite skilled in a trade or specialty; which is why the business was started in the first place. The owner knows a lot about the company but may not know how to run all facets of the business. Initially, the owner could run the business. But when businesses hit the one to two-million-dollar revenue mark, things begin to change. The owner may not be able to track everything; there are more employees, more regulation, more headaches, and just more of everything.

While some small business owners recognize the short comings, many do not. If the owner does not, the business problems are usually blamed on external forces. In this case, the business may limp along for years and in the worst case, the business goes out of business.

How can a small business owner address these shortcomings in business acumen? You can hire a General or Operations manager. Just because you own the business does not mean you need to sit in the corner office. Do what you love to do in the business and hire capable people to fill in the voids. Remember you were not necessarily trained in business management.

Items to consider when making that decision:

  1. First, congratulations for realizing that you cannot wear every hat in the organization – and be great at wearing all of them.
  2. Making a change in the management of your company should not be on a ‘whim.’ It must be a well thought out process and fit into you long term plan for the company.
  3. The person you hire does not need to be from your industry. However, the person must have formal business education and background.
  4. First look at your current team for a possible candidate. You may be surprised at what talent you may already have. However, finding the right person for the position is more important than promoting someone from within.
  5. Search widely. You need the best person to lead your company. Take no short cuts here, the position is too important.
  6. Create a well-defined list of expectations for the new manager prior to the start date.
  7. To attract a good candidate, the person must see a valuable long term future and cultural fit with your business. Depending on this situation, they may need to see a future for the company beyond your retirement.
  8. Be realistic on what the person can expect in their position and the authority given. You are hiring this person to manage your business, so let them manage. The new manager most likely will differ in management procedure. Stay out of the way and let them do the job you hired them to do. Now, if they are not achieving the desired results, that is another story.

It is a very big and tough decision to hand the management of your company over to another person. If you decide on this course of action, be sure you have a thorough approach.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Getting the Work

As a Regional Vice President for Cogent Analytics, I, have the unique opportunity of meeting with three to four small business owners one-on-one almost every day of the year. I have been in the industry for over 18 years. So, if you were to do the math, I have had the chance to personally meet with over 18,000 small business owners throughout the United States. Enough to populate a small village – Entrepreneursville.

Over that time, I have witnessed first-hand common challenges that almost every entrepreneur encounters. This article will be the first in a series that will discuss key issues most every small business owner faces soon after opening their doors.

Entrepreneurs are a unique breed. No two are exactly alike, yet they each have a common trait – a burning desire to own their own business and call their own shots. Many of them start with a dream and a technical skill, but little knowledge of how to go about growing a business. One of the phenomena I encounter frequently is small business owners stalled out around $1.5 – 3 million in revenue. Many stagnate there or regress, while others grow beyond. Why is that?

When you distill business down to super-simple, there are essentially three hats a budding entrepreneur must wear: 1.) Getting the Work. 2.) Doing the Work. 3.) Tracking the Work. Somewhere around $1.5 – 3 million in revenue (and usually between 10 – 15 employees), an owner encounters the fact that there are not enough hours in a day, or days in a week for him to wear all three hats effectively. At that point, he must get others to wear the hats for him, or remain stuck at that size. A small business owner must move beyond the “mom and pop” model that got him to this initial plateau and adopt a true business model with management, infrastructure, systems and controls if he hopes to grow beyond it.

Let us take a closer look at the first of these three hats – “Getting the Work.”

To propel any small business beyond this initial plateau, an owner must identify someone within the organization to manage the sales effort full-time. Someone whose primary responsibility is to continually drive sales with existing clients, or pursue business with new prospects.

There are many ways to go about it. For example, Cogent Analytics worked with a small landscape contractor in Texas a few years ago. They had been stuck at $3 million in revenue for several years. They had tried many different strategies to grow the company – fancy brochures, radio advertising, trade shows, etc. Try as they might, nothing seemed to get them past that point. While working with the client, our consultant quickly recognized one of the owners did all the bidding and got bogged down dealing with minutia in the office. There was only so much work he could bid during any given day, and he had very little time left over to call on clients. Our solution to grow the business was not another brochure or billboard, rather we promoted an experienced employee to the position of Estimator. We trained him to bid work full time. That freed up the owner’s time to wear his business development hat again. It allowed him to pursue new business with existing clients, plus find new clients. He was then able to diversify into other lucrative markets including landscape maintenance, as well as time & materials work. In one year’s time, the company grew from $3 million to $5 million in revenue. Along with the incremental sales of $2 million the client could achieve a bottom line improvement of $250,000.

At Cogent, we find that it is common for small business owners to be hesitant to let others wear their hats – to give up control. However, in this example, by putting in place a more clearly defined sales system, carefully outlining the new estimator’s role, training them how to bid correctly and installing proper management tools, Cogent could help our client monitor the bidding process without having to be the guy to put the pen to paper. That freed up his time to get back in the field full-time and do what he was good at – selling landscaping services.

Each company is different and this is just one example. However, to effectively grow a company beyond the initial plateau, we typically find owners must start to build a true organizational structure and delegate the responsibility of who wears the hats. In the next article in this series, I will discuss another hat a small business owner must hand off to grow their company to the next level.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Little Things Add Up Quickly

“Why are you making such a big deal out of it?” asked a machine shop lead when I was incredulous that he paid his eight machinists 8 hours per day for only 7 hours of work (half hour for breaks and a half hour lunch).

As a Small Business Consultant, I work with many small businesses who are not actively aware of organizational performance metrics. In this case, it just took a week to identify key metrics to provide my machine shop lead friend with some interesting facts.

Here, the lady newly responsible for the pack/ship and distribution team had started measuring 1) the number of items shipped and 2) the total value. These are two pretty basic metrics and easily obtained. On this particular week, they had shipped 4,565 individual parts that equaled $393,000. And, a simple ratio shows each part had a value of $86.09.

We had also started measuring some very basic shop metrics (much to the displeasure of my lead friend) and found that the shop had produced 1,770 parts using 216.75 machine hours. Again, a simple ratio yields a production rate of 8.17 parts per machine hour.

We already knew there were 8 people getting paid and extra 30 minutes per day, so we calculated that cost as well.

.5 Hours X $20 (average rate of pay) = $10
$10 X 5 Days per week = $50 per week
$50 week X 50 weeks per year = $2,500
$2,500 X 8 machinists = $20,000 of over payment

Additionally, we are losing 30 minutes per day of work, so there is more productivity to be gained, so we did the math;
.5 hours X 5 days per week X 8 machinists X 50 weeks per year = 1,000 lost production hours.

Here is where we put this all together: If we can produce 1,000 more hours of product and the product makes $86.09 per part and we can produce 8.17 parts per hour the numbers get staggering.

$86.09 $/Part X 8.17 Parts/hour X 1,000 hours = $703,355.30 of additional revenue. At a modest 5% Net Profit that would yield $35,167.77 in profit. By the way, this would more than double what the business earned the prior year.

“What’s the big deal,” my friend asked. $703,355 in additional revenue (with the same resources) and potentially $35,168 in additional profit, THAT’S the big deal.

Do the math and count your money.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Use Goal Setting to Achieve Long Term Success

We all know companies who have had short term success. They do well for a while and then “suddenly” they are out of business. However, when you look closely at their circumstances, it is not sudden after all. Most collapse because there was no plan for sustainable success – long-term success is much harder to obtain than short term.

The way to achieve long term success is a subject people have talked about for centuries – along with the question, “Why do some people have it and others don’t?” There are a few ways small business owners have achieved success over the years that do not rely on goal setting. But, counting on pure dumb luck is not an effective business plan. Goal setting is the gold standard; it has stood the test of time.

Sometimes working toward your goals is satisfying, rewarding and worthwhile, while other times it is hard, time consuming and boring. But remember, successful people do things that unsuccessful people are not willing to do. Here are the 3 steps they use to achieve their long term goals.

1. Write a plan – A lot of people sabotage themselves at the very beginning of their search for success. Although it is illogical, the more they want something, the less likely they are to develop a plan to reach it. It is basic human nature – we think that good intentions, positive thinking and will power are enough to carry us through.

They are not enough, not even close. Thinking is not action, doing is action. We need to “do”, to work, our way to achievement. People with written plans are much more likely to complete their goals than those who do not have one.

2. Break it down – Once the plan is written, it should be broken down into manageable pieces. Each goal should be parsed into small, practical actions; otherwise, it is too uncontrollable and complex. When people do not have control, they feel frustrated, confused, and inadequate to the task, which leads to abandoning it.

For example, Kevin set the goal of “Make More Money.” It was a good goal, but impossible to achieve as written. How was he going to do it and where was he going to start (i.e. Increase sales, decrease production costs, lower overhead, cut labor, improve quality)? He worked with an outside expert to define and quantify the ideas into manageable, measurable daily, weekly and monthly tasks.

3. Build in consequences and rewards – Motivation is hard to sustain, which is why a lot of people struggle with meeting long-term goals. A good plan for achieving them builds in accountability measures or motivation – the carrot and the stick. People are much more likely to accomplish their goals when this happens.

After the plan is written and broken down into measurable tasks, it is important to add benchmarks. Benchmarks will let you know when and if you have reached your goals. Each benchmark should have a reward or consequence attached to it. If the mark is hit then the reward is given, if it is not the consequence is activated.
Involving others is very helpful to this process. People are more successful in reaching their goals when others know about them. Kevin and his coach created a system – when he reached a goal he spent Saturday morning with his family and when he did not reach a goal he spent Saturday morning at work. His family was a big motivating factor for him to stay on track.

The definition of success is a personal one. It is unique to each of us and only we can say if we have reached it. Unfortunately, most people say they have not attained it. As the saying goes, “There are basically two types of people. People who accomplish things, and people who claim to have accomplished things. The first group is less crowded.” (Mark Twain)

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

5 Simple Methods to Motivate Yourself

Small business owners are in a unique situation. They are expected to be a leader and the main motivator for others. But, who motivates them? It usually falls on them to self-motivate, which the majority of people do not know how to do effectively. Very few people are born knowing how to inspire and encourage themselves, they have to learn how and then practice it.

Will power is overvalued and misunderstood in our culture. People usually do not need more will power, what they really need is more discipline. Discipline is established through organization, habit and control, which, in part, is created by understanding how you are motivated. Once you know what drives you, you can create a blueprint to achieve your goals – even when your will power is fading or gone.

There are 5 common methods which motivate most people. Sometimes we use 1 method only, while other times we may use a combination of methods. We all have different ways to inspire ourselves, ways which work for us but not for others. These techniques are neither good nor bad, better or worse – just different.

Words – Individuals who are motivated by language need to hear or read words of affirmation, inspiration, and instruction from others, as well as themselves.

Steve was accountable only to himself and had become lazy. He kept putting off the work required to get his business to the next level. Steve knew he liked being challenged by and learning from others, so he found an outside expert to help him. Talking with and being accountable to someone else was the “kick in the pants” (motivation) he needed.

Time – Having control over their time (i.e. lives) is important to some people. They do not like having their time being overly structured or regimented, especially by others.

Neal started his business to have more freedom and “not punch a time clock.” But, he ended up working longer hours and felt tied to the company. He realized that if he wanted time off, he would have to do something differently. He was finally motivated enough to make the management and operational changes he had known for years needed to be made.

Experiences – The people who are motivated by experiences need to do something for others or have something done for them as an incentive.

Allen was the 2nd generation to run the family business, and employee morale was at an all-time low. His father had prided himself on running a shop where workers were “treated like family and liked coming to work.” Even though sales were flat, productivity was down, and quality was slipping it was his employee’s anger that finally motivated Allen to address long-standing problems.

Need for Community – People who have a need for community are motivated by belonging to and being accountable to an entity (i.e. team, group, club, friends, co-workers, family).

Lynn liked selling. She built a successful company through networking, sales calls, meetings, and presentations. But, she had become office bound. She wanted to be out talking with and selling to potential and current customers. Her desire to be out with “her people” motivated Lynn to develop controls and structures, allowing her to return to selling by turning the daily operations over to a manager.

Money and Things – Some people are motivated by money and/or the things they can buy themselves or others.

Charles started his business to make “serious money”. He was finally making it and enjoyed spending it. But, he knew there was trouble in the business and had an outside expert in to look things over. Charles was shocked when he and the expert uncovered $285,000 in problem costs. He quickly became motivated to fixing the problems – no more of his money was going to be taken from his pocket.

Motivation is big business – books are read, TED talks watched and workshops attended every day. There is no one size fits all technique. Motivating yourself is a learned skill which takes work and practice. It does not come naturally and is accomplished through trial and error. But, having the ability to build and maintain a successful business through self-motivation is worth the effort.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Why Your Employees Won’t Listen to You

Talk to any small business owner about the problems they are having with their employees and one of the main complaints you will hear is, “They won’t do what I tell them to do. Most owners think the problem is with the employees. But, the good news is that most of the problem is with the owner. Yes, good news.

If the problem is with you, the owner, then the solution is also with you. The best kinds of problems to have are the ones where you can take control and influence change. The worse kinds of problems to have are the ones that are dependent on other people to fix them.
Unfortunately, the majority of owners do not see it that way. They do not want to do the job of managing; they want the employees to manage themselves. This seldom, if ever, works. No one will, or should, care more about the success of your business than you.

Here are 4 of the most common errors a lot of owners make.

Poor communication skills – The biggest problem people have with communication is assuming it has taken place. Good communication skills do not come naturally to many of us; we have to be taught them. An owner who wants to be successful will make an effort to learn these skills. They will make your professional and – added bonus – personal life easier.

Want to be the “Nice Guy” – These owners are more worried about being liked than managing effectively. However, what they see as niceness is frequently a cover up for weakness. People will like you and still take advantage of you. You can be liked and respected for being a tough, but fair manager – rather than just liked, but disrespected for being a pushover.

Poor or no follow through – Countless owners mistakenly believe, “I should only have to tell my employees something once and they should do it.” This thinking shows a poor understanding of human behavior. People have to be managed by a repetitive 3 step process – clear instruction, active supervision and immediate consequences for poor work or praise for good work.

Inconsistency – You have legitimate complaints about your employees, and they have some about you. One of the biggest is inconsistent management. Do you say one thing and then do another? Do you change your mind from day to day? Do you tell people to do something and someone else tells them something different? Do you make promises and not keep them? Bottom line – if you are untrustworthy people do not feel obliged to listen to what you say.

Changing ourselves is not easy. But, a little learning, some coaching and regular practice will go a long way towards reducing the problem of getting people to listen to you. If you are consistent, most employees will welcome the positive changes and perform better. Also, your new skills and knowledge will help you effectively deal with the few employees who cannot be helped. You will finally be listened to as an owner.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

3 Ways to Achieve Success in Your Small Business

There are a lot of statistics out there about how often small businesses fail, and they do not always agree with each other. Depending on who is doing the computing the numbers range from 33% to 75% of small businesses fail within the first 5 years. Also, these numbers do not represent the companies who do not fail, but are still unsuccessful – they limp along for years barely profitable.

But, no matter the actual numbers, what we do know is that building a viable, profitable company is hard, and most people cannot do it. There are many reasons, some out of their control, for this. But, fortunately, the basics of building a solid business can be taught to anyone willing to learn and apply them.

Here are 3 ways to create a successful small business.

Understand the financials
Cash is king. If you run out of it and cannot pay your bills the business has failed. The majority of owners do not understand this simple idea – volume is not profit, nor does it guarantee a positive cash flow. A $5 million job shop can fail faster than a $2.5 million one if the owner does not understand how to manage his cash.

Understanding the financials and using the information (i.e. margins, profit/loss, break even, productivity and cash flow) to manage effectively is key to staying afloat. Making money was one of the reasons you went into business, as you did not start a charity instead. Therefore, why would you be unwilling to learn how to determine if you were really making it or not?

Be willing to manage effectively
Entrepreneurs can be creative, driven and hard-working (the good). They can also be short-sighted, insular and inflexible (the bad). They are usually stubborn, unwilling to learn and know-it-alls (the ugly). No one is a born a fully formed good manager – we all have our strengths and weaknesses that help and limit our ability to lead others.

It follows that no one is born a fully formed good employee either. Just as you must learn how to be a good manager, the typical person must learn how to be a good employee. They must be trained, managed, rewarded and disciplined. It is naïve and a miscalculation of human nature to expect people to be any different.

Create and maintain systems
One of the main reasons owners start their companies is because they do not want to follow other people’s rules or systems. They want to be their own boss and accountable to no one. It is also one of the main reasons they fail. They are so rules adverse they refuse to put even the most minimal of systems in place.

The trouble is that most people, including owners, require structure and order to get things done. If there are no formal, effective systems in place then people (partners, managers, foreman, employees) will cobble together informal, ineffective ones – you included.

The positives of an entrepreneurial spirit can turn into negatives over time. Especially if you do not understand that we all have to keep learning and evolving if we want to compete and prosper in a rapidly changing world. It does not seem so, but sometimes it is harder to stand still than to move forward. How many times have you said, or heard other people say, “I really don’t know why I didn’t do this sooner.”

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

What to Do If Your Business Partnership Is Not Working

It has been said many times – A business partnership is a lot like a marriage. They both start out with each person believing he has the same expectations and dreams as the other person. And they both fall apart when the real expectations and dreams of one individual are very different from what the other individual first assumed.

A business relationship is usually started with the partners discussing how the business is going to work (i.e. sales, production, product, quality, startup costs). It rarely includes how the relationship is going to work (i.e. division of management decisions/duties, leadership styles, who is disciplining employees and how, long term financial payouts, conflict resolution).
This is why problems start, usually leading to the partnership ending in bitterness. But, it does not have to be that way. No matter how many partners your company has there are steps you can take to create a functional, successful ownership, rather than a dysfunctional, failing one. Here are 3 places to start.

Start Rowing Together
Why are you in this business and what do you want to get out of it? Each person should be able to answer this question in detail, with examples and time frames. You cannot plan for and work together to meet people’s expectations if you do not know what they are. This must be an on-going conversation because people’s situations and needs change over time.

Your individual goals for what you want out of the business can be different, but your company specific objectives and methods should be the same. A business fails every day because the partners were not able to set up a working relationship where everybody was getting most (not all) of what he wanted. The idea is to move forward, not go in circles or backward.

Take Responsibility
Disagreements happen in any relationship, even the best of them. The key to a good partnership is the ability to work them out. This requires each party to take responsibility. What is your part in the problem? How are you going to fix it and by when? Keep in mind an old saying – There’s your side, my side and then the truth.

We all have strengths and weaknesses. You bring both to the table, as does your partner. You can agree to work together and maximize each other’s strengths to improve your business, or you can tear each other down for your weaknesses and fail. This step can be hard for a lot of people. A third, neutral party is often required to work out old problems and help create ways to minimize new ones.

Be Accountable
A working partnership holds everybody accountable, especially the business owners. It is easy to point fingers and blame other people for your company’s problems. Are you willing to be accountable for your behavior? For what you say and what you do or do not do? A good leader expects to account for his actions.

Effective business partners have defined roles and jobs. They understand they each are responsible for certain tasks, outcomes, and duties. Each person knows that if he does not perform them satisfactorily, there will be consequences. The number 1 reason partnerships (and businesses) fail is that owners give themselves a free pass when it comes to their own behavior. Therefore, this is another area where a neutral, third party can be particularly helpful.

Some business partnerships go well, a number of them just limp along, and others end very badly. Give yours its best chance for success by following these steps. And remember: Perfect partners do not exist – you included.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Employee Productivity Measurement – The Why and How

For most businesses, the costs associated with having employees are significant; in some cases, employee cost is the single biggest cost area for the company. It should be no big surprise, therefore, that employee costs must be controlled in order to optimize profitability. So how can the costs associated with having employees be measured, monitored, and controlled. There is an old, but very true, saying in business circles that states “if you do not measure it, you cannot control it“. If you do not measure employee productivity, you cannot control it; so how do you measure employee productivity?

First and foremost, the measurement should be a ratio. The ratio should be a measure of “value” produced divided by either a direct or indirect measure of the cost to the company for producing that amount of “value”. Using a ratio gives a relatively reliable metric that can be used to compare performance during busy business periods and slack business periods and ideally should remain constant (or improve) regardless of volume. Examples of potential productivity measurement ratios include:

  • Number of widgets produced per hour for a production worker.
  • Dollars of sales revenue booked per hour worked for an inside customer service representative.
  • Dollars of sales revenue invoiced per hour for service technician.
  • When monitoring employee productivity and making managerial decisions based on the information, it is advisable to:
  • Look at a sufficiently long period of time; this reduces the chances of short-term aberrant data distorting the facts. Use a moving average of 4 to 12 weeks (use the shorter time frame for very stable data with minimal variability and the longer time frame when outside influences can cause greater week-to-week variability).
  • Look for trends. Graphing the data is a good way to visualize the trends. If the moving average is declining, it is a warning sign that prompt corrective action is needed; if the moving average is stable, this is good; if the moving average is improving, this is very good and the employee(s) should be commended for their efforts.
  • Monitor the data both for individuals and the average of the entire work group. This allows for comparison between the employee in question and the work group average.
  • Share the data openly and frequently. Use the date in all performance discussions with individual employees, both during informal discussions and during formal performance evaluation reviews. Additionally, routine (weekly) posting of the productivity graphs without managerial comment can be a positive factor in stimulating improvement; nobody wants to be at the bottom of the productivity “pack”.

Although the above comments refer specifically to employee productivity, the same logic can be applied to monitoring the effective utilization of other company expenditures. For example, you could measure and monitor:

  • Inventory carrying cost per dollar of sales revenue. This can provide information to assist management in deciding what to carry in inventory and what to consider as “special order” only.
  • Advertising expenditures per dollar of sales revenue (particularly when the sales revenue produced can be matched with the advertising vehicle that generated that sales opportunity). This can provide information to assist management in deciding which advertising expenditures are producing sufficient sales revenue and which expenditures should be discontinued.

Generally speaking, the best managed companies track their performance using a set of carefully selected Key Performance Indicators (KPI’s) which are often nothing more than ratios that measure the productivity for specific performance areas.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Why Employees Steal – Because They Can

Like millions of other Americans having your own business has always been a dream of yours. But, unlike most of them, you went out and did it. You put time, money and effort into making your company a success. You made the dream a reality. Congratulations.

So, are you letting someone else take it all away from you?

Before you say no, really stop and think about it. The answer might be the difference between staying open or not. Every year occupational fraud, or employee theft, is responsible for closing about 30% of small businesses (U.S. Department of Commerce, 2015). The reason is simple math.

When employees steal time, money, supplies and products, many companies cannot absorb the financial damage. Participants in the 2015 Global Fraud Study “Report to the Nations on Occupational Fraud and Abuse” estimated the average small business loses approximately 5% of revenue each year to employee theft (The Association of Certified Fraud Examiners).

Five percent often means the difference between a profit or a loss. Even if your margins are good enough to stay in the black after a 5% hit, it can be the difference between paying yourself a living wage or not. Given how common and harmful theft is, it is baffling why so many owners are unprepared and unwilling to fight it. The only strategy most have is denial.

They think it will never happen to them. But, unless you are the exception to the rule (and you are not) your employees have stolen, are stealing, or will steal from you. Depending on the study, 75% – 85% of employees admit that given the right circumstances they have or would steal from their employer. Contrary to most owners belief’s, how they felt about their boss (liked him or hated him) played little or no part in their decision.

The right circumstances are simply a combination of motive, means and opportunity. All three components have to be available for fraud to happen.

Motive is the rationalization a person uses to steal time, money and property from the company. A rationalization is a reason he makes up and uses to justify his behavior. This reason gives him an excuse to steal. These reasons are as different as the people who make them.

“I’ll pay the money back.” “I don’t stop at home during work very much. What he doesn’t know won’t hurt him.” “I’m not getting paid enough, he owes me.” “It’s not a lot of supplies. I’m just doing a little bit of side work.”

Motive is not enough for fraud to occur. A person also has to have the means – ability, knowledge and access – to manipulate the system. A bookkeeper embezzles money because she knows how to. Stock goes out the back when the supervisor develops an inventory method only he understands and controls. A landscaping crew’s productivity is 30% lower than another one because they leave later in the morning, take long lunches and quit work earlier.

Finally, even if an employee is ready to steal (motive) and knows how to do it (means), the opportunity must also be there. If there are controls, checks and balances in place fraud can be significantly decreased or stopped. The bookkeeper may want to “borrow” your money and knows how to take it, but if you monitor the books, understand the financials and sign the checks she cannot get to it.

Every year billions of dollars, millions of sweat equity hours and endless hope are poured into starting and maintaining small businesses. Building a successful one is still a part of the American Dream. Do not let someone else take yours away from you. A smart and successful business owner will understand the elements of employee theft and use the knowledge to stop it.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Business Model vs. Business Plan

Business owners are often confused about the difference between a Business Model and a Business Plan. Although they are related, there are also distinct differences, and both deserve serious consideration as part of the business’s Strategic Planning process.

First, let’s define Strategic Planning as – the process for setting goals, determining actions to achieve goals, and mobilizing resources to execute the planned actions. This sounds simple and appropriate; however, most small businesses don’t have a Strategic Plan. By default, businesses that do not develop and follow a Strategic Plan evolve over time rather than take control of their own future. As a result, these businesses generally underperform their potential and, all too often, do not survive. The Strategic Plan provides clarity of direction and a means of measuring the business’s degree of success; with no Strategic Plan the odds of success are dramatically diminished. The Strategic Plan embodies both the Business Model and the Business Plan. So, what is a Business Model, and what is a Business Plan?

A Business Model captures the key elements of the company’s plan for how the organization will create, deliver, and capture value, in economic, social, cultural or other contexts. For example, a traditional business model for a retail business might be to use a chain of brick-and-mortar stores with media advertising to generate revenue and profits. An alternate business model for retail could use an on-line B-to-B web-site with search engine optimization (SEO) to generate sales and a brick-and-mortar distribution warehouse for order fulfillment. Therefore, it is appropriate to think of the business model as a conceptual representation of how the company intends to do business; thus, the Business Model can be thought of as the skeleton and vital organs of the entity you know as your business.

A Business Plan is a formal statement of business goals, reasons they are attainable, and plans for reaching them. Think of the it as the muscles, connective tissue, and skin that overlay on the skeletal structure and vital organs represented by the Business Model; the Plan brings the Business Model to life. Business plans can be developed for a variety of audiences and may be externally or internally focused.

  • Externally focused plans express targets and goals that are important to external stakeholders (i.e. owners, investors, lenders, strategic partners, etc.) along with plans for achieving those targets and goals. The external plan normally covers the next 3 to 5 years, which is the time frame during which stakeholders would expect to realize a return on their investment.
  • Internally focused business plans express operational performance goals and specific action plans for achieving those goals thereby assuring accomplishment of the organization’s goals as represented in the “external” business plan. The internal plan provides company management with a plan for achieving the external stakeholder expectations. Included in the internal business plan should be the company’s operating budget. The internal plan can be as short as 1 year (annual budget), or can project several future years, but normally will only look 1 to 3 years into the future.

So the answer to the question about the difference between a Business Model and a Business Plan is that they are both part of an effective Strategic Planning process. The Business Model defines the business structure (what the company will look like and how it will operate). The Business Plan defines the expected operational results from effective utilization of the Business Model and effective execution of a set of action plans. Having an effective Strategic Plan is a very powerful business advantage that dramatically increases the odds of success. The lack of an effective Strategic Plan can lead to problems, chaos, and failure.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Want to Be an Absentee Owner?

Many small business owners start their companies with the vague idea that someday they want to be an absentee owner. Years pass, they work hard and become successful. Eventually, they are ready to transition out of the business. But, they get a nasty shock – they cannot do it. They have not done the preparation required to transition smoothly and are stuck.

An effective changeover takes time, planning, money and skill to complete. Unfortunately, a lot of owners learn this too late. By the time they realize it they are tired, burned out and ready to move on. They become depressed, frustrated and discouraged when they find out it may take a couple of years to make the change successfully.

Do not be this guy.

A worry free, profitable absentee ownership takes time and groundwork to achieve. The blueprint starts with these two main areas. Each area is equally important and, depending on your knowledge and experience, may require outside help.

Leadership/Management

Who should be in charge is a difficult decision for an owner to make. It is surprising how often he is unwilling to make the hard choices. It is the number one reason absentee ownership usually does not work out. The stories of absent owners coming back into the business to rescue it – or it going bankrupt – are common. The problem can be traced directly back to putting incompetent people in key management positions.

What an owner wants to happen and what is best for the company can be at odds. No matter how much he wants it, his child might not be the best choice to take over. He may have to pass over a loyal, trusted key person. The best thing for the company could be to hire from the outside. He must be willing to make the best long-term decision for the company.

Financial/Legal

This subject is a minefield and can benefit from an outsider’s point of view. There are legal, tax and emotional issues to take into account. Even the best-behaved families and employees change when money becomes involved. All financial and legal requirements should be decided and agreed upon well in advance. Here are just a few of the questions that should be answered.

What is reasonable to take out without financially hamstringing the company? How will the owner financially monitor the company? Will he retain decision-making power over expenditures? If so, what are the limits? Will the pay-outs fluctuate with profit/loss or remain consistent regardless of it? Will he retain 100% ownership?

Specific to a family business – Does the wealth of the company belong to the family, the owner or the business? Will the business be a part of the inheritance? What do family who do not work in the business get and how (stock, bonuses, buy-out, profit sharing)?

The dream of absentee ownership starts as a vague idea. But, an idea without a working plan just stays a dream. You have worked too hard, for too many years to throw a Hail Mary pass at the end because your game plan was incomplete from the start.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Use Your Financials to Stabilize Your Business

We’ve all heard them, and it’s true – the statistics for small business failure rates are discouraging. Depending on who’s doing the counting the range is between 75% – 90%. But, it doesn’t have to be that way. There’s a light at the end of the entrepreneurial tunnel, and you have a lot of control over whether it’s a train or not.

Contrary to most peoples’ thinking, external forces are responsible for only a small part of business failures. The majority closed because they weren’t able to generate enough operating capital to stay open, they simply ran out of money.

Businesses run out of money because the owner won’t or doesn’t know how to evaluate his financial situation and problems. He’s unprepared to be a fully functional manager. He doesn’t look past the finances of the start-up phase (short term planning) to the requirements of day to day operations (long term planning). There are ways to fix this.

Can you answer these fundamental financial questions?

What are your margins? Where are your profit centers? What’s your break-even? How much is your rework costing you? Which salesman or estimator is generating the most profit, not the most revenue? How far out is your billing? Are your receivables within industry standards?

If you can’t answer these questions with facts (no guessing), then you’re not taking advantage of all the valuable management information your financials can give you. As an owner – the buck literally and figuratively stops here – you’re derelict in one of your most important duties.

The good news is that if you’re the problem, then you’re also the solution. There are only a few real reasons (no excuses) for why businesses collapse. Not learning to read, understand and use your financials as a management tool is one of the biggest. If this oversight is addressed promptly, your business can be stabilized, turned around and positioned for growth.

Most small business owners don’t look at their financials, and if they do they don’t know what they’re looking at. They certainly don’t use them to manage. Here’s the bottom line on the bottom line – 1. You can’t expect to be successful if you don’t understand how to make a profit and 2. You have to manage your cash flow.

Every accountant, business consultant, and banker has heard an owner say as he’s trying to make payroll, “I don’t understand how this happened. How did I get here?” If he used his financials to manage, he’ d have an answer to his question, or more likely not be in the situation in the first place.

He’d understand that profit is the difference between the amount earned and the amount spent in producing a product or providing a service. Revenue is the money coming in and isn’t the same as profit. You can have revenue and not make a profit, which means running at a loss.

He’d also know where his cash was and where it was going through a cash flow statement (i.e. working capital, dates and reliability scores for receivables, next day billing tracking, daily expenses, loan and payment due dates). Even the best customer can miss a payment, stop working with you or go out of business – having control of your cash flow can significantly minimize the damage.

If you’re willing to step up, learn some new skills and consistently apply them, the monetary and non-monetary rewards are well worth it. You just might get all the things you went into business for in the first place – flexible time off, a good income, self-sufficiency, a secure future, increased quality of life and a legacy to pass on.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Rethinking the Hiring Process

In order for small businesses to succeed, they have to have solid employees to build upon their foundation. But, sometimes finding great employees can be difficult. These guidelines should ensure your hiring process will continue to add top notch personnel to your team. Using this recruiting process will help you find and hire capable and strong people. Those strong people will, in turn, raise the bar for your existing employees and create a more productive workplace.

Chart 1 displays each step to the hiring process. However, if you look at Chart 2, you can see those same steps, but in order of importance.

rethinking-the-hiring-process-charts

As you can see the most important step and the first step are not the same. Most business owners believe that the most important step is the INTERVIEW, some will tell you TESTING, and others will say that the SEARCH is number one. Unfortunately, none of those are the most critical step of the process. Let’s take a closer look at the two most important steps and the least important step to more clearly understand their value.

IDENTIFY – This part of the hiring process is where you clearly identify the attributes and experiences of the ideal candidate. If you, as a business owner, do not apply an effective and comprehensive effort the identification step, you will often be unable to find and/or hire strong employees, such as Driver, Outside/inside Sales Representatives, Installer, or Project Manager, that will succeed in your business. Through this step employers should be able to detect “soft skills” in potential candidates. These are the skills that can be transferred between different jobs and different industries allowing the candidate to be adaptable. Identifying people with the right skills to fulfil the role and contribute to the organization’s success should be at the forefront of their mind.

TEST – Many business owners and managers feel that the interview is the second most important step, but that is not the case. If you have experienced any hiring mistakes in the past, those errors were probably the result of an interview in which the candidate made a positive impression on you. Unfortunately, many candidates are capable of making a favorable impression in an interview but are not capable of actually doing the job and being productive. The results you gather from the correct test (i.e. accounting, sales, ability, intelligence, computer applications, personality, industry-specific process knowledge, etc.) can either confirm or challenge your initial impression of the candidate. For that reason, this is the second most important step, although it is actually the fourth step, in the process.

INTERVIEW – Of all the steps in the hiring process, the conversational INTERVIEW is the least significant step, although some would beg to differ. No other step in the interview process helps you measure self-presentation, composure, maturity, style, wit, responsiveness, thoughtfulness, or eye contact. Occasionally, the only way you can accurately assess the candidate is in a conversational interview, but without the other – more important – steps, you could potentially be wasting your time. If you have not performed the other steps properly, you will not know if the candidate is truly under-qualified or incapable of performing the job. Make sure that during this step of the process you are not wasting time on items that can be answered on an application or the resume.

Unfortunately, the resume has become a far less important tool than it once was. The only real information that can be gathered from a resume, anymore now, is the projected length a candidate would spend with your company. Make sure to note those work trends for potential candidates so you know when to expect some kind of depression, distraction, slump, or other downturn in performance, as those could all be signs the person is about to jump ship. People are creatures of habit and are no different when it comes to the workplace.

The hiring process for businesses should always remain a thorough and carefully executed process. Make sure you are constantly keeping your process up to date and that you do not become lax in any one step. Hiring great employees can be difficult, but if you value the process and place your efforts into the critical steps you will be able to find the diamond in the rough you have been looking for.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Stop, Look, and Listen

Good parents know that part of their “job” is to teach their children how to navigate life’s risks and handle its responsibilities. One of the fundamental lessons is how to safely cross the road – stop, look and listen. This is a life lesson so basic that it applies to a lot more than just getting to the Starbucks across the street.

Good business owners know that part of their job is to prepare their company for growth – to minimize the risks, understand and accept the responsibilities, and provide a logical plan. When going to the next level they take time to position themselves for success by stopping, looking and listening.

Stop

A lot of owners are surprised to learn there are danger zones for small businesses when they expand. They only see growth as a positive step forward; not understanding that if not done correctly it’s actually high risk. Many successful companies have failed because they didn’t plan for the new problems, responsibilities and challenges which come with the next level.

They didn’t take the time to stop and think about what it really means. It requires improved management skills and an increased understanding of business issues. The management and personnel issues are more complicated. There’s an increase in tax and government regulations. Also, developing a working knowledge of the financials is vital.

They didn’t take the time to stop and think about what it really means. It requires improved management skills and an increased understanding of business issues. The management and personnel issues are more complicated. There’s an increase in tax and government regulations. Also, developing a working knowledge of the financials is vital.

Look

Look at where the company has been, is currently and where it’s going. Owners believe that what they did in the past got them to the current point of being able to expand and it will serve them well in the future. So, they think their good to go.

However, that’s not what usually happens. There’s a tipping point where the ignored problems of the past and present increase exponentially in the future. As a company grows the weaknesses become more pronounced and do more damage. A classic example is with finances.

If an owner didn’t develop an understanding of margins, profit and loss in the past, and doesn’t think he needs to learn it in the present, he may put himself out of business in the future by expanding. Financial ignorance has closed thousands of business during a growth phase – generating revenue isn’t making a profit and the more customers it has the faster a company can lose money.

Listen

The bigger a company grows the more people it needs for its success. Success isn’t a solo act and smart owners know it. They understand that growth requires them to shift from a one person management approach to a team one. They seek out others’ ideas, listen to them and are open to change.

Many owners are resistant to this step, believing they know better or it implies weakness to ask for help. However, this thinking is dangerous to a business, as no one person can be expected, by others or himself, to know everything.

Past success doesn’t guarantee future success – we all know people stuck in their glory days. Owners become stuck in their past successes when they don’t understand that growth in the business requires them to grow too. It’s important for both children and adults to acquire the ability to stop, look and listen.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Ruin Your Business – Use It as Your Personal Bank

Small business owners using their companies as personal banks is a common practice that has lead to thousands (at the very least) of them closing. Some owners didn’t understand the damage they were doing to their companies; while others understood, but didn’t care. Either way, too many people have driven thriving concerns into bankruptcy at worst or severely limited its growth at best.

These owners share the same misunderstanding – they don’t think there’s a difference between personal and business money. They believe the business’s money is an extension of their personal money, that it’s all their money. There are a variety of ways this thinking affects their actions, but here are the 2 most common and destructive.

Run personal expenditures through the company’s books

Many owners believe a benefit of having a business is that it can and should absorb the costs of personal items (i.e. airplanes, horses, kid’s college tuition, motorcycles, the family’s country club membership). Too often business money is seen as “free” money. They use it to provide loans to themselves and family, which they aren’t responsible for paying back.

But that’s what personal money should be used for. If an owner, or his family, has to be personally responsible for personal expenses, the chances are they’ll think and act differently about them. When the business is responsible for them, it’s out of sight out of mind.

One man was shocked to discover his business was paying for 5 family member’s cars. His bookkeeper paid the bills and he’d lost track of how many personal vehicles he was running through the books. Another man had “somehow slipped” into the business paying for the vacations he and his family took, to the tune of $50,000 a year.

The bottom line is that most small businesses can’t support the overhead of personal costs; companies regularly go bankrupt or lose the ability to grow. Too often personal expenses use the money needed to successfully compete in the marketplace: buy new machinery, hire more personnel, add a service truck, get professional help for a marketing plan or upgrade computer systems.

Use the company as an ATM

Some owners use the business as their personal ATM machine. In addition to paying themselves a salary they skim cash. Some owners take “just a little” thinking it “won’t hurt anything”. One dipped into petty cash daily for pocket money, because it was easier than stopping by his bank. He couldn’t believe it when his accountant pointed out that petty cash was costing over $1,000 a month. This was business money he could have used elsewhere.

Others take larger amounts, sometimes hundreds or thousands. A successful painting contractor skimmed large amounts of cash. However, when he wanted to expand his business he couldn’t prove to banks or investors how profitable he really was. While his books showed him in the black, they didn’t show enough volume or cash flow to repay the loan he wanted. Until he changed his behavior he was unable to grow.

It doesn’t matter how it’s done, using your business as a personal bank is short-sighted and self-defeating. Strategically used business money can be turned into higher profits, which means an increase in personal money via salary and bonuses. We all know the moral of the story; you don’t kill the goose who lays the golden eggs and you don’t ruin your business by using it as a personal bank.

(Sidebar – this article intentionally leaves out the tax problems and consequences that come from these behaviors. Those are a different discussion.)

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Imagination + Innovation = Survival

You’ve probably heard the old business saying, “Innovate or die”. It’s been around for a long time. But, the idea it represents has been around a lot longer. The concept is as old as business and commerce itself.

A horse’s ability to work is dramatically decreased without “shoes”. Thousands of years ago Asian horsemen imaginatively used leather and plants to make booties for their mounts, and changed the world. Horses were able to transport goods further and more efficiently, opening up new trading opportunities.

The horse’s important place in history had a good, long run until Henry Ford made them obsolete. He looked at the automobile and re-imagined the manufacturing process. His innovation radically changed the way business was conducted throughout the world, again.

Imagination stimulates innovation, which increases your business’s chances of survival. Just as we can learn from Ford and the ancient horseman what to do, we can also learn from Blockbuster, Woolworth, Bethlehem Steel and Polaroid what not to do.

Unfortunately, many of today’s small business owners feel like they “don’t have time to think”, let alone imagine or innovate something. They believe they aren’t even keeping up, forget about getting ahead. They identify being discouraged and frustrated because they’re falling further behind their competitors each year.

So, what can you do? How do you learn how to imagine and innovate?

Identify your strengths and interests. Before you made your first dollar you had to imagine your business into existence. In the beginning, it’s easier to put good ideas into place because they’re part of your areas of expertise (plumbing) and passion (customer service). But, over time, you can lose your enthusiasm in routine tasks and problems.

The area to re-start the innovating process is the one you do well in and enjoy (i.e. mechanically inclined owners redesigning machining processes, people oriented ones creating customer service programs, number’s guys developing better bidding systems). The more you work your innovating muscle the stronger it’ll become, and then you can move out of your comfort zone into more challenging areas.

Look for inspiration and be willing to recognize it when you see it. Stimulating the Imagination is important to a business’s success. It sparks creativity and inspiration, which lead to ideas, which turn into actions. Smart entrepreneurs understand the importance of this process and actively pursue it.

There’s no limit to the places where a good idea might come from – trade shows, industry magazines, customers, employees, competitors, networking, web sites or Little League games. Innovative people seek out ways to have their minds jump started by others. As Isaac Newton said, “If I have seen further than others, it is by standing upon the shoulders of giants”.

Interact, listen and learn. Get out from behind your desk, get out of the office, ignore all electronic devices and talk to people. There’s no replacement for talking and listening to other people. Put your ego aside, recognize that others have good ideas too and be open to learning from them. The biggest barrier to success is thinking you do, or have too, know everything.

Following these 3 simple, but not easy, steps will automatically put you ahead of your competitors; because chances are they’re not following them. It’ll take time and perseverance to develop these new habits, but it’s worth it. Imagination and innovation gives people the ability to see a future which doesn’t exist and the ideas for getting there.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

How to Stop Employee Theft in Your Small Business

Many small business owners think their employees won’t steal from them. They may believe that “if I’m a good guy my people won’t steal”. Or they might believe “if I’m a hard case nobody would dare steal”. These are mistaken beliefs. The good guy/hard case (or anything in between) personality of the owner has little to do with the amount of theft they’ll have.

Owners of all personality types are equally likely to be taken advantage of. People commit fraud for a variety of reasons, but how they feel about their bosses and how their bosses feel about them is rarely one of the reasons. The number one reason people steal is because they can. If there are no effective controls in place, if it’s simple to do, employees will take supplies, products, time, materials and money from any type of boss.

Unfortunately, when owners believe their personalities can stop theft they also think that’s all they need. They don’t establish truly effective deterrents – a system which promotes transparency and accountability in daily operations. An owner’s personality is the weakest form of defense, fighting fraud is an operational issue not a personal issue.

Small business owners can use the ACE Business Review as a good method to help find and target risks in their business. In conjunction with a theft prevention plan, a business will be able to better mitigate their vulnerability to theft. Here are some things to include in a theft prevention plan to further protect your business.

On-going training – Businesses who have regular loss prevention training for managers and employees lose less money/materials/time per occurrence, have fewer incidences of theft and shorter time periods before the offender is caught.

Reporting opportunities – Giving people a way to anonymously report suspicious behavior is an important part of an overall strategy. Fraud is almost 3 times more likely to be uncovered through employee tips than any other method (Association of Certified Fraud Examiners, 2015).

Verify new hires – Employers are usually lazy about this one. Often the hiring process is the “I like him, he’s hired.” method. Those who are serious about finding honest people will do the due diligence.

Everyone has oversight – Don’t give too much responsibility to one person, and establish checks and balances for everyone. Embezzlement is overwhelmingly committed by trusted people (often family and friends) who have no supervision or accountability.

Know your people – Ignoring people’s behavior doesn’t make it go away or get any better. Almost all perpetrators show red flags (i.e. living beyond their means, financial difficulties, addictive behaviors, too close with vendors or customers, controlling/secret behavior, lying or changing stories, never taking time off).

Commit to consequences – Allowing people to steal without penalty is very poor management. The biggest complaints employees have about their bosses is that they don’t holding workers accountable and bad follow through, “Everybody’s allowed to get away with stuff. No one ever gets fired or punished.” Honest employees want to work in safe, fair, honest environments.

Employees will steal from their employers. It’s not a matter of “if” it’s a matter of “when and how”. A small business owner who has never experienced theft is the exception, or he just may be in denial. A responsible owner will protect his company and its honest employees by establishing a deterrent strategy. It’s nothing personal, its good business.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Is Your Business Paying Too Much in Taxes?

If a business owner thinks that they are paying too much in taxes, they probably are.

When it comes to taxes, some companies pay little to none and other pay huge amounts. For example, companies like GE, Boeing, and IBM typically pay zero in US taxes. Another company that pays hardly any taxes, Apple. They made over 34 billion dollars a couple of years ago and paid 9.7% in taxes. The common characteristic of these companies is an aggressive tax avoidance plan. Most businesses do not realize that taxes are typically the third largest expense in a company behind materials costs and wages.

Lower Corporate Tax

Most small businesses are typically set up as an S Corporation or an LLC and are done so for either asset protection or taxation savings. Companies set up a corporation and believe that is all that needs to be done. They forget about the fiduciary responsibilities of the company, such as holding a yearly meeting and keeping minutes of that meeting as set forth in the company’s by-laws. Other companies decide that personally loaning the company money is also okay without a promissory note with an implied interest rate, which is one of the many ways to pierce your corporate veil. One must also ask, have there been any tax law changes since you started your business? Was the way you were originally set up and taxed still the best possible way to be structured?

When you are set up as a sole-proprietorship, partnership, S Corporation or LLC, those entities are reported to your personal tax return. Therefore, making company profits additional to any W-2 wages earned by you and/or your spouse. The larger your income, the higher your tax bracket. The top tax bracket for personal tax returns is now 39.6%. However, people like Warren Buffet, Mark Zuckerberg of Facebook, and Larry Elision of Oracle only pay about 20% in personal income tax. If a small business owner pays anywhere from 25% to 39.6% in income tax that they must be making more money than GE, Boeing, IBM or Apple as well as Warren Buffet, Mark Zuckerberg or Larry Elision, right? False.

How can lower taxes be achieved?

Strategic companies might have two (or many, many more) entities. Small businesses could set up a c-corporation and an s-corporation so they can take advantage of all of the possible deductions. The c-corporation might not have a calendar year-end so that income can be timed and deferred. The company might choose to have one of the companies with only the key people as employees so that the benefit plan in that company can be enhanced. The c-corporation will show some income so it is taxed at a rate below the individual’s tax rate, but still taking caution to not get involved in double-taxation. The only way to be double taxed in a C-Corporation is to take a dividend. In a nutshell, forward thinking small businesses are actively trying to minimize their taxes instead of waiting to see what is due.

Tax law is black, white and gray. Most businesses venture very little into the gray. The gray is legal and legitimate; however, it is more aggressive than almost every small business’s approach. If you are never pushing into the gray, you are paying more than your fair share of tax and our president certainly appreciates it. If you believe the federal government can spend your money more wisely than you can, then continue to donate unneeded cash to our federal government.

Why doesn’t your accountant tell you this?

The simple answer is they can’t by federal law. Ever since Enron and WorldCom failed in 2001 and 2002, the federal government passed a law called Sarbanes-Oxley which today is simply called S”OX compliance. The legislation came into force in 2002 and introduced major changes to the regulation of financial practice and corporate governance and set a number of deadlines for compliance. The Sarbanes-Oxley Act of 2002 is mandatory. ALL organizations, large and small, MUST comply. Small businesses do not have all of the same rules as publicly traded companies, but it does mandate that your accountant needs to be either a tax compliance officer or a strategic tax planner. They cannot do both. In fact, if you look at any of your financials you receive back from your CPA, there is either a Circular 230 statement or a statement where – you provided the numbers and they take no responsibility for their accuracy. In fact, the business owner signs the return under the penalty of perjury if the numbers are not true and correct. The wording on the tax return is immediately above where you sign your name. You are responsible for your taxes. You are responsible for their accuracy. You are responsible for making sure that you minimize the taxes for the business and the business owner. You are responsible for accounting and tax compliance. So, why don’t small business owners do a better job of strategic tax planning? The answer is simple. Most small businesses are trained to believe that they owe whatever the CPA says that they owe and they do not know that there are options for them to put more money into their pockets rather than the government’s pockets.

Strategic Tax Planning is more than just saving money on taxes. Strategic tax planning is something that develops a Strategic Wealth Enhancement Plan comprised of specific business and tax related strategies for the Business and the Business Owner. It touches areas such as, tax savings, proper entity structuring, proper asset protection, wealth building, retirement planning, succession planning, proper compensation at the minimum tax rates, benefit planning and different forms of education funding.

If you are interested in finding out more about how your company can keep more cash in the business or keeping more cash personally, or to provide better asset protection for your company, please contact us to have a full tax review performed for your company.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Incentive Plans for Small Businesses

Incentives are an excellent way to foster loyalty and to get the extra effort sometimes required for a company to continue to grow and succeed. It is important to keep in mind that incentives can also have unintended negative consequences. For example, if an employee thinks they are deserving of an incentive bonus but don’t receive one or get one they feel is inadequate for their contribution, the incentive, meant as a motivational tool, can turn out to be a disincentive and create employee dissatisfaction when the opposite effect was intended. There is a saying, “tell me how you measure me and I will show you how I perform“, and its corollary, “if you measure me irrationally, do not be surprised by irrational behavior.”

Bonuses, not to be confused with incentives, are when companies “share” a portion of the profits with its employees. Generally, these come in the form of a “special day” or year-end bonus. These should be considered benevolent gifts from management, as there was no specific behavior of performance that drives the bonus. In most cases, bonuses are paid after the financial results are posted and only excess profits are used to fund the bonus. The philosophy being that it is better to share a portion of the company’s success with the employees rather than pay an equivalent amount in additional taxes. The structure of bonus programs is usually subjective and used as a means to reward the employees in general for the overall success of the company.

Incentives are quite different. Unlike bonuses, incentives are paid for specific, predictable behavior or results. The goal of an incentive program is to create one that has objective criteria for its basis. The criteria needs to be fair, obtainable and provides the type of positive motivation for which the incentive is intended. Incentives are not be benevolent gifts from Management but are earned for specific and measurable results. Unlike bonuses, incentives are paid before the financial results are posted as part of the recipients’ earnings, and are taxed accordingly.

When developing an objective incentive program for small business there are multiple things to consider to avoid pitfalls. Who should be eligible for such a program? How to determine what is “fair” and provides the impetus for the desired behavior or results. How are owner’s draws and dividends or other expenses that get assigned to the business treated? In some cases, these costs increase the indirect expense possibly creating an unfair burden on those with profit goals.

Another difficulty with incentives is the development of specific incentive programs: Based on the type of business, there might be several different populations of employees for which incentives make good sense. For example, in a contracting company you may have the following programs:

1) Foremen
2) Project Managers
3) Service Personnel
4) Administrative Personnel

1) Foremen: One company wanted to address an erosion of the company’s profitability directly related to lower labor efficiencies on jobs. An incentive was developed to allow Foremen to be eligible to receive a calculated, proportioned amount based on achieving targeted savings in labor and material costs on jobs based on the job estimate. The incentive is tied directly to the specific goal of improving labor efficiency and to use quoted material rather than spot purchases. The result will be increased profitability for the company with a portion of the profits going to the ones who had the most direct impact on it.

2) Project Managers: Adding to the emphasis on improved labor productivity and materials costs, the Project Managers were also eligible to receive a bonus on a job’s Net Profit. The presumption being that labor and material are the only controllable costs, but also every project must cover some portion of the company’s overhead. Because they are so closely aligned the Foremen and Project Manager’s incentives should be paid on the same dates.

The primary goal of these two programs is to increase the awareness and emphasis on controllable costs of labor and material purchases. It will also serve to help the Project Managers become more fiscally aware of a project’s finances.

3) Service Personnel: The Service Manager and Service technicians will participate in a quarterly incentive program based on the overall profitability of the Service department as a whole. The Service manager will be eligible for a certain percentage of the overall performance of the department and each of the technicians will share an amount set aside based upon their tenure with the department.

4) Administrative employees: Once annually, the administrative staff (To include Project Managers) will be eligible for an incentive based on the overall company profits. The payout is based on two factors that include: The percentage of Net Profit to be put into an incentive pool and the percent an individual earns to the total administrative salaries. This bonus, if offered, is paid sometime after the fiscal year closes.

The company, in the example, will pay out approximately 4% of revenue in the four incentive programs and the year-end bonus program. This is a very small price to pay to keep good employees happy and motivated.

Other businesses will have completely different populations. The key is to establish the incentives using S.M.A.R.T Metrics for your incentive plan will help you track the performance of each individual. They should be obtainable, even if some goals are a stretch to achieve.

In summary incentive plans are a very economical way to provide motivation for employees who are in roles where specific and measurable outcomes can be achieved. Each program should focus on the goals management and owners want to accomplish.

When contemplating the development of an incentive program, be aware that not everyone who receives an incentive will be pleased. If the recipient feels their reward is not commensurate with their contribution, the incentive could turn into a disincentive, breeding ill will. This is the exact opposite of the intention of the program. For that reason, any incentive must be objectively based, fairly applied and easily understood by all the participants with goals that are attainable, even if they are a stretch for the participant.

There is no one perfect solution for an incentive program, but by using just a few critical metrics the right program can be developed for any sized company.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

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It’s Never too Early to Have an Exit Strategy

Business plans – every small business owner should have one. Most don’t, but at least they know they ought to. As for an exit plan, most don’t know that they’re supposed to have one. The closest they come to having a plan is really just a hope and a wish. An idea without a strategy isn’t a plan; it’s a dream.

A true exit plan consists of a long term strategy for how the owner will extract value from the company, while transferring ownership to others. It establishes priorities and sets out concrete steps, which end with him getting a reasonable return on his hard work, sacrifice and investment.

Here are 3 exit dreams that the typical owner has.

Sell to an outside interest

Small business owners are notorious for over valuing their companies. Their method for establishing worth is simple – they guess. It’s rarely based in reality and they get a nasty surprise when no buyer, broker or bank agrees with their valuation.

A typical exit plan should start years before the actual sale. The end goal, positioning the company to be attractive to a buyer, can be accomplished in many ways. How you want it to end will dictate what you need to do to get there.

For example, if you want to make a big profit at the end, you might focus on building the company and reinvesting most of the profits in growth. Or you may prefer to sell for a more modest profit, which might mean growing slower and taking more of your profits out as income.

Pass it on to a family member

According to the Small Business Administration (2013), 88% of family business owners would like their companies to stay in the family. But, only about 30% survive in the second generation and 12% in the third. The number one reason family businesses don’t survive into later generations is the lack of an exit plan.

Planning for succession can be the most difficult challenge owners’ face. Therefore, to the determent of the company and their family, most just avoid it. Their belief that “it’ll all work out” is usually wrong – avoidance isn’t an effective strategy and it seldom works. A successful plan is begun years in advance of retirement.

The plan creates a blueprint to sustain future generations. It should address 3 main areas: operational leadership/management, financial/wealth and family issues/interpersonal. Each section is equally important and may require outside professionals to help navigate through them, as family matters can be particularly volatile.

Sell to an inside interest

Some of the messier exits are those that involve selling to a partner or an employee(s). Many of the “contracts” are hand-shake deals, which can quickly become “You said. I did not” conflicts. Also, they often happen without proper timelines or guidelines for the transition.

An owner must be particularly cautious in this situation. In lieu of a careful plan many partners and employees take over duties they have no training for and are ill suited to. The stories of owners coming out of retirement to try and save the company (and his money) when it’s been run into the ground are legend.

The exit plan should be well thought out and implemented in a prearranged, orderly manner. It ought to provide legal coverage for all parties, clearly spell out the financial requirements, have concrete dates for transitions (the stories of owners never leaving are also legend) and ample opportunity for training.

A word to the wise – don’t blow it at the end. You’ve worked too long to end up getting poor value for all your hard work. Don’t be one of those people who go out with a whimper rather than a bang.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Be Successful – Know What Kind of Smart You Are

It used to be that people thought there was only one way to be a successful business owner. You had to be “smart” – the kind of smart that’s measured on an IQ (intelligence quotient) test. It was thought that the higher your IQ was the more likely you were to be successful.

Fortunately, that way of thinking has been proven wrong. There are many types of intelligence, and we’re all better at some of them than others. An entrepreneur can increase their chances for success by understanding their strengths and weaknesses in each category, and using that knowledge to their advantage.

Here are a few of the more common kinds of smart based on the typical small business owner, each with its own pros and cons. Most people are combinations of the different types, with 1 or 2 being the most dominate.

Mechanical smart

These are the people who have the ability to figure out mechanical or technical things. They can help a customer figure out the best tolerances for their new product. They’ll tear apart a mother board and rebuild it better than before. They’re able to rewire a building, up to code, with incomplete schematics.

Pros: Mechanically smart people thrive in environments where they are mostly left alone and can work at their own pace. They tend to be self-motivating, conscientious, independent and dependable.

Cons: Successful owners have to be able to establish on-going, effective interactions with partners, employees, customers and vendors. Their desire to work alone doesn’t serve the business well. Overall, they can struggle with personal interactions, creating and enforcing accountability, and motivating a workforce.

Language smart

Language smart people know how to use words to motivate, support and inspire others. They’re the writers, public speakers, educators and employers who communicate well and often. They give good presentations, write the business plans which raise venture capital and are able to explain complicated ideas simply.

Pros: They have the ability to get information across matters. Lack of communication is one of the biggest complaints workers, in all types of businesses, have about their bosses; but language smart bosses understand the importance of keeping others in the loop.

Cons: They spend too much time communicating (meetings, memos, emails, texts) and not enough time on other parts of their job (selling, quality control, financials, human resource issues, customer service). They believe talking or writing “at” others is managing – not getting that listening is the other half of the communication process.

Number smart

Number smart entrepreneurs understand profit, loss, and margins. Their estimates and bids are based on data, not guesses. They know how to “do the math” and use financial information to make plans from start-up costs to exit strategies.

Pros: Number people have a natural advantage that others don’t, and they’re more likely to outlast their competitors. The lack of number smarts is one of the biggest problems most owners have. It’s estimated that 80% of businesses fail in the first 5 years because they didn’t know, or didn’t care, how important the math is.

Cons: We’ve all known the guy who sits in his office and crunches the numbers, but ignores other aspects of his business. He has the same cons as the mechanically smart owner. In addition, he believes too much in the numbers and can overlook the human aspects of his decisions.

People smart

Owners who have this kind of smart enjoy, and are energized by, working with people. Their qualities include: having good social skills, being able to “read” others, easily interacting with many types of individuals and being well liked. Employees and customers describe them as having the ability to put others at ease and draw them out.

Pros: Owners who are people smart create great loyalty in their employees, have good customer service skills and get “pumped up” spreading the word about their products. Also, they provide a good image for the company and its brand.

Cons: People smart owners can focus too much on personalities, while finding day to day operations dull. Every day several companies close because the charming, Mr. Personality owner didn’t know how to make a profit, wouldn’t manage his employees, and ignored quality and production problems.

To be a smart business owner, you will understand which kinds of smart you are. You’ll learn to focus on your positives and overcome or compensate for the negatives. The more you know about yourself the greater the chance is that you’ll be successful.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

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