Chapter 34 It's time to give your business a tune-up

Just like a car, a business needs regular maintenance.

Unfortunately, unlike a car, you can't plug your business into a computer that can spit out a maintenance 'BizFAX' report advising what's wrong and what to fix, tweak or replace. Wouldn't that be nice?

Well, tools, computer programs and consultants can provide some useful information about the health of your business.

But a word of caution: Remember that garbage in equals garbage out.

To take a reading of the health of your business, I suggest a periodic business tune-up that tries to accomplish three things:

1. Give you an understanding of the current health of your business.

2. Look at options to improve your business.

3. Make repairs or changes, as needed.

Understand the current health of your business

Start with a SWOT analysis that looks at strengths, weaknesses, opportunities and threats. Compare your business to others in your industry.

Look at trade-association best practices and metrics, if available. How is your competition doing? At SCORE, we recommend using Risk Management Association data. Banks and other financial institutions pay handsomely to access this data, which they use to determine the financial capability of a business to decide whether to make loans or extend credit to it.

RMA ratio data helps to identify, assess and manage the effects of credit risk, operational risk and market risk on businesses. It enables comparison of your company with other same-sized companies in your space. How are you positioned financially compared to your competition? Pay attention to the comparative balance sheet ratios regarding assets and liabilities, such as: cash, A/R, inventory, fixed assets, liabilities, trade payables, debt, taxes and net worth.

Then, look at income data, such as gross profit, operating expenses, operating profit and profit before taxes.

Next, consider cash flow measures: cash from sales, cash after operations, debt service, interest coverage, etc. Circle or highlight major exceptions, plus or minus.

Also consider intangibles. My column two weeks ago addressed the effect culture can have on your profits. (See "Culture: It's not in ledger, but it affects the bottom line").

A word about Dunn & Bradstreet and the Better Business Bureau: It has been my experience that Dunn & Bradstreet has terribly inaccurate information. Most business people whom I have polled over the years do not pay attention to or respond to D&B requests. They are not a government entity, nor are they an official group of any sort. And the local Better Business Bureau has a paid-for membership that has little value other than that some people seem to think they are a quasi "official" entity. They are not. My experience with them is about the same as D&B.

Once you know where you stand, you can move to step No. 2.

Look at options

to improve your business

Seek continuous improvement in all areas of your business by optimizing and simplifying all processes. Use meaningful metrics as a road-map formula. If unsure, ask your accountant to help develop your list of key performance indicators. Measure these metrics constantly. Determine what the next desirable level would be. Put your goals in writing, with expected completion dates that will guide you to achieve your desired results.

Have solutions for today and tomorrow. Innovation should be your motivation. If you're not fixing it, it's probably broken. Re-align core competencies.

Use possibility thinking to explore what else your business could be doing. Be creative and talk to trusted friends, associates, vendors, mentors and consultants. Ask them what they would do if they were you.

Make needed repairs and changes

Fill in employment gaps and create a stronger team, where necessary. Include active change management. Assess your product mix and revise as needed. Review major vendor pricing and your pricing. Adjust to changing market trends, adapt and grow.

Improve your sales, cash flow and profits. Review your service component to achieve excellence. (See my column last week on "How to achieve world class customer service").

Update your message and Internet presence. Use time management to get more done by delegation of tasks you don't have to do yourself. Improve your skills and knowledge and obtain the necessary resources to succeed.

After you have made all of these positive changes, it's time to reward yourself for a job well done.

A first step

This exercise is the beginning of the process of reviewing your business, determining possible areas of improvement and making meaningful changes.

Put this exercise on your calendar again for next year, and repeat!

Chapter 35

Why can't employees think more like a boss?

Published: Monday, October 27, 2014 at 1:00 a.m.

Have you ever wondered why your employees see things so differently from you? Sometimes, you might think, they just don't get it!

The reason is simple: You have an employer perspective and they have an employee perspective, and often these views are polar opposites.

Let's look at a few examples, starting with the most common issue.

Employer perspective: Your employee does a great job for you but you can only pay so much for the contribution. You feel that you are already paying fair market value and perhaps more.

Employee perspective: Your employee feels he is underpaid and that he does a lot of work for you and needs a raise.

Solution: Pay your employees in other ways. It may not cost you any more money, and although it may not be cash spendable as pay, it will have value to them.

Consider it "psychic pay." Learn what motivates your employee to work for you. Perhaps the employee just wants to feel valued. Maybe he has been with you a long time and wants to be respected for his loyalty and seniority.

Consider a title change (promotion), with new business cards. Reward his seniority with extra vacation or personal days. When deserved, make him employee of the month, with a special, reserved parking space. Add a printed certificate, either framed or ready for framing, to hang in his office.

Maybe a different office with new or newer furniture, or a window office, if available.

There are many ways to recognize an employee for their contributions to your company without having to increase financial remuneration. Even public praise goes a long way.

Let's assume you have a formal performance appraisal interview process, on an annual or other frequency basis.

Employer perspective: A review doesn't mean you automatically get a raise or pay increase.

Employee perspective: I am being reviewed. I wonder how much of a raise I am going to get.

Solution: Separate the review process from raises. Who says an employee review has to be tied to a raise in pay? Have reviews mid-year and pay adjustments at year end. Your employees need to understand that these are two separate events.

Responsibility

Employer perspective: I gave you more responsibility because I know you are capable of doing the job very well and I trust that you will.

Employee perspective: If I am assuming more responsibility, then I should be paid more.

Solution: When you give someone additional responsibility, consider restructuring duties and delegating some of the easier tasks to another employee.

Bill makes more money than Sally, so Sally wants more money.

Employer perspective: You shouldn't discuss how much you get paid with other employees.

Employee perspective: Employees often discuss pay rates with other employees.

Solution: It should be taboo, even a firing offense, to discuss pay rates with other employees. Everyone has different backgrounds, education and experience, and pay is determined based on many variables.

This can put the employer in a bad situation, so it must be treated as confidential information that is never shared.

There are ways to teach your key employees to think like an employer:

Explain to key employees why they need to have an employer mentality. They need to be in sync with the owners and with the company's strategic plan. They need to act as if they were an owner. They should think about what they would do if they owned the company and then act accordingly.

Tell them this is a way for employees to become recognized for their contributions to the success of the company and to differentiate themselves from the crowd. By thinking this way, they will become more valuable to the employer, be treated with more respect, and may receive more substantial raises when it's time.

One of the best ways to get employee buy-in to an employer's perspective is to have some form of profit sharing. This will make employees quasi-owners of the business.

I am not suggesting you necessarily part with stock or member units or another form of equity. The structure can be in the form of bonuses on a special project's results or in specific product or service areas. It must be measurable and verifiable, so employees see what they will get at various levels of success. Set goals and stretch goals and watch your employees succeed.

One way to structure profit sharing: Use year-end sales or profit goals, which can be expressed as percentages.

First, pick a profit-sharing contribution, perhaps 20 percent of the company profits. Then determine what percentage of the total payroll each employee receives.

For example, if Fred receives 5 percent of the payroll pie, he would get 5 percent of the contribution-sharing amount.

This could be distributed as a year-end bonus, or through an existing 401(k) plan.

Last week, I attended a local Internet Marketing Mastermind meeting. This MeetUp group convenes every Thursday from 11:30 a.m. to 1 p.m. in the ITT building on Cooper Creek Road in the University Park area.

Toni Nelson, president of Nelson Visual Productions, the guest presenter, taught us how to make the best use of video for a business.

According to Nelson, creating a video marketing strategy helps you to be seen and heard, locally and globally, 24/7. She said that 46 percent of the people who see your video will request additional information, and 72 percent are more likely to buy.

In addition, she stressed that a video is evergreen (it will last) for four years.

People viewing videos want three things: They want to be inspired, educated and entertained.

Just as the Chinese proverb states that a picture is worth a thousand words, a video is worth 1,800,000 words, according to Nelson. Viewers will stay 80 percent longer on your website and there will be 157 percent increase in organic traffic. Viewer demographics today tend to be the active 35 to 65 year olds.

Nelson says you need to do three things to succeed with video:

Target your customer -- Reach the appropriate demographic, ask questions, and find where they hang out online. Interact on forums, in groups, and be where you need to be.

Know their problems -- Offer solutions to those problems.

Use different types of videos, as appropriate -- Use product demonstration videos, book trailer videos, testimonial videos (social proof), overview videos of your business and your team, promotional videos for events and the most important category, the leadership video.

This video explains who you are. According to Nelson, "It's like having a virtual cup of coffee." It helps build relationships and offers free tips. The 'About Us' video is the No. 1 page visited on websites. A year-end video, created to serve as a thank you video, is rarely done but is a good way to thank your readers, listeners or people you've done business with this past year.

Nelson emphasized that, just as you would build a house using a blueprint, you should plan four video production steps so you can get positive results:

Know why you are doing this and what you hope to accomplish.

Have your blueprint (your plan).

Express your "P" factor (personality).

Create your script.

9 tips from Toni:

1. Capture attention -- You only have two to four seconds to do this. The best way is to ask a question.

2. Use an intro -- You have a maximum of five seconds. Use music (get permission or use royalty free music). Also use a visual in your website introduction.

3. Have good content -- Use FAQs (frequently asked questions) with short answers. Use Google alerts to find out what is trending in your business.

4. Keep it short -- Video length should be 1.5 to 3 minutes.

5. Use the lower third of the frame -- for streaming website information, such as upcoming events, your name or phone number.

6. Have a call to action -- "I want you to sign up for X." Tell your viewer what you want them to do next.

7. Practice before you record -- Use a mirror. Your body language is important. Memorize what you are going to say.

8. Never wear stripes; solids are best. The attention should be on you, not your clothing -- no distractions. Keep it simple: white or grey shirt, nice slacks, no shorts. Women should wear earrings and necklaces that will not jingle during recording.

9. Re-purpose your script into an article or blog post -- Extract the audio and re-purpose it as a podcast. Use multiple platforms. Have someone video your speaking engagements and include sections in your videos. Post to LinkedIn and Google+.

The "P" factor -- Some people freeze or are uncomfortable in front of a camera. You can help yourself by thinking of the camera as a person you are talking to. Relax, be yourself and have fun producing videos that can help you succeed in your business.

Get excited about what you are talking about. That will make a huge difference. Of course, if it's not really you, it won't work. Not everyone should be in front of the camera.

In case you missed this

Last week, Google chose Sarasota as Florida's eCity for 2014. Sarasota joins 49 other cities nationwide in being designated as a leading city this year. The independent research firm Ipsos analyzed the online strength of small businesses across all 50 states, weighing the use of blogs and websites, online sales and mobile friendly portals.

I'll bet YouTube videos helped put Sarasota on the map and make this prestigious list.

Lights, cameras, call to action!

JOBS, GATES, BUFFETT.

They were ahead of their time as creative thinkers and visionaries. Are you a visionary leader? Do you see things that don't exist? No, I am not talking about having an imaginary friend or seeing spots before your eyes. (Get your vision checked, if that's the case!) I am talking about having a vision for your business that probably only you can plainly see. Your vision may be illusory or unreal, and perhaps you are merely a dreamer. But your vision may be prophetic foresight and a prognostication of what will actually happen in the future.

If you are indeed a visionary leader, then your job is to verbally paint a picture of the future for the troops. Explain what you and they are in the process of accomplishing with the business. If you do a credible job in this area, you may have loyal followers who will help your business get to the promised land, wherever that may be. Think of Apple's Steve Jobs -- who led what has arguably become the most successful company of all time.

But if you do a poor job of internalizing and explaining your vision, I am afraid you may fail to achieve your goal.

Let's face it, you can't do it alone.

Why is being a visionary leader important to the welfare of your company? Simply put, people want to follow a leader, someone who knows where he is going, someone with a compass and who understands what it takes to succeed -- someone who knows true north. People want to follow a person who can create, sustain and achieve long-term goals.

A visionary leader should have command of the following skills:

Communication -- A visionary leader has to be an excellent, inspirational communicator and be able to clearly define both individual and team goals. Goals they set must be specific, achievable and understood, while instilling hope and confidence that the team will succeed.

Empowering relationships -- A visionary leader has to assemble the right team. He must understand the team's strengths and weaknesses, and choose team members based on complementary skills. The leader must have confidence in himself and the team and allow for mistakes. Hopefully, these mistakes will not prove to be expensive.

Strategic planning -- A strategic plan must be devised and implemented by the leader and have buy-in from all team members. A believable plan and a focus on results is essential. Progress must be continually tracked and adjustments made when deviating from the plan, unless it is purposeful pivoting. It's a good idea to solicit input from employees on tasks, which will further help establish employee buy-in.

General excellence -- Leaders must have high standards, live up to them, measure them, and yet be prepared to revise them, as needed, without sacrificing integrity.

Action -- Without action, nothing happens. The leader must lead and the followers must want to follow the leader. There has to be a higher calling than money. Engagement is a must. As in war, the leader is akin to the general who must be visible, determined, sensitive and protective of his front-line soldiers. "The boat won't go if we all don't row, together."

Charismatic persona -- The leader should exhibit a charismatic personality that unites the members in their cohesive, singular purpose to achieve the desired results. Enthusiasm goes a long way toward achieving success. It is infectious (in a non-Ebola way!) A good sign is when employees flock around the leader as opposed to ducking when he walks by.

Cultural fit -- The team must embrace the corporate culture, be positive, and believe that success is only a matter of time, with a journey of getting from here to there.

In the beginning, a company's founder establishes its culture as an extension of personal style, beliefs and values. The culture and the behavior it engenders are aligned with the company's values, mission and goals, but it also must be able to adapt. (This was discussed in my column on culture, published Oct. 6, 2014.)

Visionary leaders to emulate include Bill Gates, Michael Dell, Richard Branson, Mark Cuban, Walt Disney, Oprah Winfrey and Mark Zuckerberg.

From Apple's "Think Different" commercial in 1997:

"The people who are crazy enough to think they can change the world are the ones who do."

I can't think of a more significant visionary leader than Steve Jobs. (I am an iFan. Can you tell?)

MANY SMALL-BUSINESS owners do not know the best way to work with their accountant. I interviewed Jim Repp, CPA, and here are some of his suggestions.

From an accountant's perspective, what should a client do before starting his business?

Establish a team consisting of an accountant, an attorney and a banker. Decide what type of legal entity to create (corporation, make a Sub 'S' election, partnership, LLC, etc.). Protect your assets — don't do it on the cheap! If you have to go to court, make sure it's set up properly by an attorney. Choose a banker to help you set up your business checking account.

Know what your entity is in order to have a final business name, and have your business address and phone number available before printing business cards and brochures.

When signing checks or other documents, is it necessary to use your title?

It helps to differentiate between acting as an individual or as an officer acting on behalf of an entity. Your business name (including Inc., Corporation, or LLC) should be on everything, including checks, invoices and letterhead. Sign all documents using your title (President, Vice-President, Managing Member, etc.).

When should an S election be made, if desired?

After discussing the matter with your accountant and attorney, and assuming you have decided to start a corporation or an LLC, if you decide to file an S election, form 2553 should be prepared and filed by the 15th day of the 3rd month after you start that business.

Does it matter what state you incorporate in or form your LLC? Are there any tax advantages in one state versus another?

There may be tax and legal advantages that could be significant on a state level. Some states have a very high tax rate, and legal considerations may be significant. Some states don't have a personal income tax. Many companies choose to locate in Delaware or Nevada. Discuss this with your professional team.

How often should I meet with my accountant, and will that change as the business matures?

When you first start the business, you need an accountant to prepare the information, set it up correctly, and then, at the end of that period, sit down with you and explain what the different statements tell you: balance sheet, income statement, and cash flow. Understand what they mean and how you can use them. Everything is usable. Do it on a monthly basis initially, until you feel comfortable understanding these reports; thereafter you can review them quarterly.

Talk with your accountant at least quarterly to find out what his/her anticipation is of your tax needs. Estimated tax payments are going to be due quarterly during the year. You have to pay in at least 90% by the time you file a return. This is critical and can cost you penalties if you don't do it properly. If you base your payments on the prior year's taxes make sure you ask your accountant if the 100% or 110% payment is required either through quarterly or withholding taxes.

What should I expect to pay for accounting services?

It's all over the board and it depends how you're quoted. Most small firms are very competitive; they try to keep their rates in the ball park unless there's a significant difference between the services being provided.

When you're quoted a monthly amount, you have to find out what's included in that monthly package. You have to be certain that it includes keeping track of the financial records. If you have sales taxes, the sales tax return must be filed quarterly. Will it include your payroll? (If it doesn't, somebody else could do it, or you could do it in-house.) Most firms, including smaller CPA firms and bookkeepers, will do this on a package deal.

A package usually includes financial statements and accounting, sales tax, and your payroll and payroll taxes. Although it varies everywhere, it's probably somewhere between $350 and $450 a month.

When should I do payroll in-house versus outsource?

Can you make more money or save more money by having it outsourced? If you only have one or two employees and have one or two payrolls a month, outsourced payroll can process it for about $40 a pay period. That's a heck of a lot cheaper than you trying to learn the tax laws yourself.

How should I provide business information for my accountant? What should I give him, and how often?

If you're preparing for year-end taxes, your accountant will give you a list of what happened the year before or what they want. Avoid bringing in a shoe box full of receipts in disarray, because you're going to pay handsomely to have the accountant sort that stuff out. That's why they send you an organizer — they want you to pull that information together.

What you provide should be organized, accurate and legible. It also has to be useful to them. The worst mistake people make is to bring stuff in piecemeal. That's bad, because if somebody tries to prepare your return, thinking everything is there, they may get all set up to do it and start to record the data, only to find out something is missing. Then they have to call you. You may play telephone tag for a few days. Anyway, you can see the problem! It's very inefficient for the preparers to work on it if they don't have everything.

What's the best accounting software to use for my business?

Most CPA and accounting firms use QuickBooks and Peachtree. Both of them have been around many, many years. They offer sophisticated and flexible products. Most importantly, they are supported by local accountants who use them constantly with their clients. They know how to set it up and make it work for you.

Additional recommendations from my interview with Jim Repp, CPA, will appear in next week's BUSINESS SCORE CARD column.

THE FOLLOWING suggestions on working with your accountant are from my interview with CPA Jim Repp.

These are all important numbers both to you and to a bank. It shows on one page how much of those total assets you own and how much of those your creditors own. Key elements are shown, to determine your cash flow.

The profit-and-loss statement is what everybody focuses on. What's the bottom line? Am I making money? That's certainly important, but you could be making a ton of money, and if you don't have the cash to pay your bills, you can go out of business. A lot of companies -- both large and small -- have gone down that path. It's important for you to get someone whom you can work with, who will give you proper advice.

The other financial statement is a cash flow statement. That's going to be more critical than anything. You should keep track of receivable balances and know their aging. Are you collecting the receivables? Same thing with inventory, is there obsolete stuff?

If your inventory is going up and your receivables are going up, that means it's not coming in as cash, and you're financing somebody else's business. This is critical to watch.

Q: Could you explain what a cash versus an accrual system is, and when should you use one versus the other?

A: A cash system is the one we normally use as individuals. On our tax return, we recognize income that we collected. When the money comes in, we record it as revenue. By the same token, we only get to take deductions when we actually wrote a check or paid a bill.

Cash means just that, money coming in and money going out. It can be very distortive, because if you don't have the money to pay your bills, it looks like you're making more money than you actually did.

The only truly accurate method of accounting is the accrual method. When you incur the cost, even if you haven't paid it until the next period, you recognize that cost. When you make the sale, you recognize it as revenue. You put it in accounts receivable and record it as sales, even though you haven't collected the money. By doing it that way, you're actually matching your revenues with your expenses in the period they were incurred, not paid. That way you can tell if you're making or losing money.

As a business, I would definitely want to be on the accrual method. The problem is that it's harder to do because you have to record the payables and the receivables. However, you can make that adjustment to an accrual at the end of any period.

Your accountant will make journal entries. You can add those receivables that you haven't collected. You can add the payables that you haven't paid, and convert it to an accrual method. Some businesses, in some industries, use cash for tax, and also use accrual for books. This can be significantly advantageous to a company that hasn't collected on a big sale, and has paid the bills in advance for some of the expenses.

It's more distortive, but it's simple. It was originally created for people to keep track of the records. You can provide your data, maintain on a cash basis, and have the accountant make the accrual only when you do a financial statement. What they will do is make a journal entry, and then the next day after that period ends, they do what they call a reversal entry, and it puts everything back on a cash basis.

If you're comparing the last year, for example, your profit and loss indicates what you did last year and that you're doing better this year. But last year could've been horrible. You could've lost your shirt, and you're comparing it to that. That's why you want to use a budget, and have a positive, realistic outlook, rather than aiming at the wrong target. You want to take that target and look at percentages.

Look at ratios, so that on a profit-and- loss statement, you will see the ratios of your cost of sales and your operating expenses are the same, especially if you've got certain variable expenses.

If you know your material cost runs 40 percent, you should see that same 40 percent every month. If you don't, ask what happened. Do we have a bad batch of something that we made? These are the things that you have to get used to looking at.

Another option is benchmarks. Some companies use RMA ratio data. Risk Management Associates is a national firm that does analysis of thousands of financial statements in every industry. The power is in the numbers.