Converting accounts receivable into cash is a critical process in the development of a healthy cash flow.  While booking a receivable is accomplished by a simple accounting transaction, the process of maintaining and collecting payments from your customers requires a steadfast commitment to a systematic process of Accounts Receivable Management.  To more effectively convert accounts receivable into cash it's essential that the credit and collection process be highly efficient in order for you to shorten the accounts receivable cycle time.
 
The accounts receivable cycle starts with a sale (credit sales) which in turn creates a receivable (monies due your company), and then, ultimately converts into cash.  The length of time that it takes your company to complete this cycle, from sale to accounts receivable to cash, is the collection period.  The shorter the collection period, the less time cash (capital) is tied up in the business process, and thus the better for your company's cash flow.

Try to limit outstanding accounts receivable to no more than 10 to 15 days beyond your credit terms.  If your credit terms are net 30 days, then the collection period should not extend beyond 45 days.  Keep in mind that average collection periods do vary because of industry standards, company policies, or financial conditions of the customer.  Comparing your company's actual days of collection to the average days of collection within your industry is a wise business practice.  Benchmarking your actual days of collection to that of your target days of collection (no more than 10-15 days over credit terms) is also advisable.

Your company's average collection period is calculated by using an Average Collection Period Ratio.  The ratio is referred to as an Activity Ratio; it measures how quickly your company converts non-cash assets to cash assets.
 
Average Collection Period (ACP):  ACP = Accounts Receivable / (Credit Sales/365))

A high Average Collection Period implies that your company may be too liberal in extending credit to your customers and too lax in the collection process.  A low number of days in your collection period could imply that your credit and collection policies are too restrictive.  This restrictive position may be repressing your sales. 

Accounts Receivable Turnover Ratio (ART) is an accounting measure used to quantify your company's effectiveness in extending credit, as well as, collecting its debts. This ART Ratio is considered a Liquidity Ratio; it measures the availability of cash to pay debt. 

Accounts Receivable Turnover (ART):  ART = Net Credit Sales / Average Accounts Receivable

A high Accounts Receivable Turnover Ratio implies that, either your company operates on a cash basis, or that its extension of credit and collection of accounts receivable is efficient.  A low ART Ratio implies that your company should re-assess its credit policies in order to ensure the timely collection of monies due from the accounts receivable ledger.

A key requirement for effective Sales and Accounts Receivables management is the ability to intelligently and efficiently manage your entire credit and collection process.  Greater insight into a customer's financial strength, credit history, and trends in payment patterns is paramount in reducing your exposure to bad debt.  While a comprehensive collection process greatly improves your cash flow, your ability to penetrate new markets and to develop a broader customer base hinges on the ability to quickly and easily make well informed credit decisions and, to set appropriate lines of credit.  Your ability to quickly convert your accounts receivable into cash is possible if you execute well- defined collection strategies.

Credit Process:

The initial requirement of an effective credit management process is to have each company that you plan to do business with, complete and sign an Application for Credit form.  Your Application for Credit form should include, the "terms and conditions of sale," space for the prospective customer to provide information on company background, a list of principal owners with their percent of ownership, three to five trade credit references, and the name of their bank(s). 

It is important to personally review with the prospective customer their projected product purchases - in both dollars and in units.  This review helps to initially assess the amount of credit necessary to purchase the projected products.  This review also helps to determine inventory requirements based on a projected sales forecast

Collection Process:

An efficient and effective collection management process includes well defined policies and procedures that facilitate a more expedient, sale–to-cash cycle.  The collection procedures require "attention to detail" and should include:

• Billing:  Preparation, recording, and delivery of invoices as soon as the product/service is delivered or installed.
  
• Statements:  Preparation, recording, and delivery of follow-up statements that indicate aging of outstanding balances.
  
• Accounts Receivable Aging Schedule:  Preparation and distribution of an Aging Schedule that lists all of the customer accounts that have outstanding balances. These outstanding balances are then categorized into 4 categories of time:  1 to 30 days, 30 to 60 days, 60 to 90 days, and over 90 days.
  
• Telephone Calls:  Placement of courteous and professional telephone follow-up calls to customers with past due, outstanding balances for the purpose of establishing a date of payment.
  
• Collection Letters:  Preparation, recording, and delivery of collection letters with an urgent message that demands payment and provides details of the action that will be taken if payment is not received by a certain date.
  
• Recording Payments:  Posting of the amount of payment to the appropriate customer account.  If possible, it is advisable that the person performing the collection duties not be involved with the posting of payments.
  
• Deposits of Collected Funds:  Preparation of the deposit ticket, along with accompanying funds, should be deposited in the bank on a timely basis.

Factoring as an Option:

Very simply, factoring is short-term financing that is obtained by selling or transferring your Accounts Receivable to a third party - at a discount - in exchange for immediate cash.  In most cases, the third party, a factoring company, audits your accounts receivable to determine their collect-ability. If the factoring company feels that your receivables are bona fide then, they will offer to purchase the current ones at a discount.  A factoring company may also, under the right circumstances, purchase your future receivables at discount off the face value of the receivables.  The percentage discount depends upon the age of the receivables, how complex the collection process will be, and how collectible they are.

Once the factoring company collects a particular receivable, they will pay you the remaining balance of that receivable's face value, less their fee.  Fees vary widely from one factoring company to another.  So, it is recommended that you do your due diligence before engaging the services of any particular company.  Factoring fees are not insignificant when compared to the amount of interest you might pay to a commercial lender. For this reason alone, you should view factoring only as a short-term solution rather than a regular outlet for collecting your receivables.

Many businesses, that need an immediate infusion of cash in order to survive and/or to bridge their cash flow gap, could benefit from the process of factoring accounts receivable.  Since failing businesses regularly turn to factoring as a last resort, factoring may be viewed by many people as a negative. Although factoring may be a great way to generate cash quickly, you should consider the perception that factoring may convey to your customers and to others in your industry. Your good judgment here should dictate if your company could benefit from the quick cash flow that factoring provides, or whether or not it would be just adding to your company's financial burdens. 

Shortening the accounts receivable cycle time generates the healthy cash flow that is required to sustain your company's growth and prosperity.

Copyright 2008 Terry H. Hill:

Terry H. Hill is the founder and managing partner of Legacy Associates, Inc, a business consulting and advisory services firm.  A veteran chief executive, Terry works directly with business owners of privately held companies on the issues and challenges that they face in each stage of their business life cycle.  To find out how he can help you take your business to the next level, visit his site at http://www.legacyai.com

To download a copy of this article, click on this link:. http://www.legacyai.com/Article_Convert_A_R.html

 

        

If, as many experts agree, that the golden rule of business is "cash is king," then happiness in business is a positive cash flow.  Cash flow is the movement of money in and out of your business over a defined period of time (weekly, monthly, or quarterly).  If cash coming into your business exceeds the cash going out of your business, your company has a positive cash flow.  However, if your cash outflow exceeds the cash inflow, then your company has a negative cash flow.  To create a positive cash flow, generate more cash and collect the cash in a more timely manner and at the same time, maintain or reduce your expenses.
 
Positive cash flow does not happen by accident; it happens because a well-defined financial management technique called "cash management" is functioning.  A good cash management system helps to efficiently and effectively manage the activities that produce cash. Maintaining an optimal level of cash that is neither excessive, nor deficient is of the upmost importance. Accelerating cash inflows wherever possible is a mandatory practice. Two activities that accelerate cash inflows include invoicing customers as quickly as possible and collecting cash on past due accounts.  Delaying cash outflows until they come due is a critical step in good cash conservation.  Negotiating extended payment terms with suppliers also delays cash outflows.  In addition, investing surplus cash to earn the highest rate of return is a good business practice.

In order to understand the magnitude and timing of cash flows, plotting cash movement, with the use of cash flow forecasts, is critical.  A cash flow forecast provides you with a clearer picture of your cash sources and their expected date of arrival.  Identifying these two factors will help you to determine "what" you will spend the cash on, and "when" you will need to spend it.

Your financial reporting documents should include an Income Statement, a Balance Sheet and a Statement of Cash Flows.  Your "cash flow forecast" reflects the same three types of cash flow activities that appear in your Statement of Cash Flows.  The three types of cash flow activities are:

• Cash Flows from Operating Activities:  This is the cash flow that is generated which is the direct result of the sales of your product/services.

• Cash Flows from Investing Activities:  This is the cash flow that is generated from non-operating activities, such as, investments in plant and equipment or other fixed assets.

• Cash Flows from Financing Activities:  This is the cash flow that is generated from external sources--- lenders and investors.

These three types of cash flow activities are interrelated.  They depend on, and affect each other.  The cash flow forecast should take this into account, and provide a complete picture of where cash will come from and how it will be used for the period being forecasted.  The relationships between the different cash flow activities may depend on the nature of your business, the stage of development of your business, as well as, general economic conditions, or conditions within the market or industry in which your business operates.

Cash outflows and inflows seldom occur together.  In most cases, cash inflows seem to lag behind cash outflows, leaving your business short on cash.  This shortfall is your "cash flow gap."  The cash flow gap is the period (number of days) between your business payment of cash for goods and services purchased, and the receipt of cash from your customers for goods or services sold.  In other words, inventory days on hand + receivables collection period – accounts payable period = the cash flow gap. This interval, the cash flow gap, must be financed.  Keep in mind the fact, that for each day your cash flow gap is extended, so too is the amount of interest being accrued. Even when interest rates are low, the cost of financing can add up quickly.

Here are three ways your company can narrow its cash flow gap:

1. Stretch out your payment terms on purchases for inventory. In most industries, payment terms are largely determined by tradition and vary from industry to industry.
   
   
2. Shorten the collection period. The faster your company can collect money for products and/or services sold, the smaller its cash flow gap will be.
   
   
3. Increase inventory turnover. The faster your company moves inventory, the less cash it needs. The key to managing inventory successfully is to continuously monitor your daily sales activity to your inventory on-hand.

Profit growth does not necessarily mean more cash on hand.  Profit (or net income) is the difference between your company's total revenue and its total expenses. It measures how efficiently your business is operating.  Cash flow measures your company's liquidity (the ability to pay bills and other financial obligations on time). You cannot spend profit; you can only spend cash to pay suppliers, employees, the government, and lenders. 
   
Many small business owners have discovered that profitability does not guarantee liquidity.  Over time, your company's profits are of little value if they are not accompanied by a positive net cash flow.  To create a positive net cash flow, generate more cash and collect the cash in a more timely manner and at the same time, maintain or reduce your expenses. 

The four ways that can help your company to generate more cash, are:

1. Increase sales by attracting new customers. Your business cannot sustain itself without the addition of new customers. New customer acquisition is a process that combines market data with direct marketing tools to identify and reach high-potential prospects and convert those prospects into customers.
   
   
2. Increase sales by selling additional product/services to existing customers. It is far less expensive to generate additional business from your existing customer base than it is to generate new business from new customers.  A regular review of your customers' buying history and frequency of purchases can reveal some interesting facts about your customers' buying habits. 
   
   
3. Generate more cash from each dollar of sales.  More cash is generated because of increased profit margins made possible by increasing selling prices and reducing costs of goods sold.
   
   
4. Reduce overhead. Overhead costs generally include facilities, equipment, administrative and management personnel. The key is to produce a larger volume of business at a lower cost.
   

Ideally, during your business cycle, money flowing into your business should be greater than money flowing out of it.  The buildup of a surplus cash balance is important because it enables you to plug cash flow gaps when necessary, to pursue expansion initiatives, and to reassure lenders and investors that your business is in good financial health.


Copyright 2008 Terry H. Hill

Terry H. Hill is the founder and managing partner of Legacy Associates, Inc, a business consulting and advisory services firm. A veteran chief executive, Terry works directly with business owners of privately held companies on the issues and challenges that they face in each stage of their business life cycle. To find out how he can help you take your business to the next level, visit his site at www.legacyai.com


To download a copy of this article, click on this link:. http//www.legacyai.com/Article__Cash_Flow.html

        

An economic downturn is a phase of the business cycle in which the economy as a whole is in decline.  This phase basically marks the end of the period of growth in the business cycle.  Economic downturns are characterized by decreased levels of consumer purchases (especially of durable goods) and, subsequently, reduced levels of production by businesses. 

While economic downturns are admittedly difficult, and are formidable obstacles to small businesses that are trying to survive and grow, an economic downturn can open up opportunities.  A well-managed company can realize the opportunity to gain market share by taking customers away from their competitors.  Resourceful entrepreneurs capture the available opportunities, from an economic downturn, by developing alternate methods of doing business that were never implemented during a prior growth period.

The challenge of successfully navigating your business through an economic downturn lies in the realignment of your business with current economic realities.  Specifically, you, as the business owner, need to renew a focus on your core clients/customers, reduce your operating expenses, conserve cash, and manage more proactively, rather than reactively, is paramount. 

Here are best practices that will help you to successfully navigate your business through an economic downturn:

Goals:

The primary goal of any business owner is to survive the current economic downturn and to develop a leaner, more cost-effective and more efficient operation.  The secondary goal is to grow the business even during this current economic downturn.

Objectives:

     •  Conserve cash.

     •  Protect assets.

     •  Reduce costs.

     •  Improve efficiencies.

     •  Grow customer base.

Required Action:

        •  Do not panic…  History shows that economic downturns do not last forever.  Remain calm and act in a rational manner as you refocus your attention on resizing your company to the current economic conditions.

        •  Focus on what YOU can control…  Don’t let the media's rhetoric concerning recessions and economic slowdown deter you from achieving business success.  It´s a trap!  Why?  Because the condition of the economy is beyond your control.  Surviving economic downturns requires a focus on what you can control, i.e. your relevant business activities.

        •  Communicate, communicate, and communicate!  Beware of the pitfall of trying to do too much on your own.  It is a difficult task indeed to survive and to grow your business solely with your own efforts.  Solicit ideas and seek the help of other people (your employees, suppliers, lenders, customers, and advisors).  Communicate honestly and consistently.  Effective two-way communication is the key.

        •  Negotiate, negotiate, and negotiate!  The value of a strong negotiation skill set cannot be overstated.  Negotiating better deals and contracts is an absolute must for realigning and resizing your company to the current economic conditions. The key to success is not only knowing how to develop a win-win approach in negotiations with all parties, but also keeping in mind the fact that you want a favorable outcome for yourself too.
 
Recommended Best Practice Activities:

The Nuts and Bolts…  The following list of recommended best practice activities is critical for your business' survival and for its growth during an economic downturn.  The actual financial health of your particular business, at the outset of the economic downturn, will dictate the priority and urgency of the implementation of the following best practice activities.

     1.  Diligently monitor your cash flow:  Forecast your cash flow monthly to ensure that expenses and planned expenditures are in line with accounts receivable.  Include cash flow statements into your monthly financial reporting.  Project cash requirements three-to- six months in advance.  The key is to know how to monitor, protect, control, and put cash to work.  

     2.  Carefully convert your inventories:  Convert excess, obsolete, and slow-moving inventory items into cash.  Consider returning excess and slow-moving items back to the suppliers. Close-out or inventory reduction sales work well to resize your inventory.  Also, consider narrowing your product offerings.  Well-timed order placement helps to reduce excess inventory levels and occasional material shortages.  The key is to reduce the amount of your inventory without losing sales.

     3.  Timely collection of your accounts receivable:  This asset should be converted to cash as quickly as possible.  Offer prompt payment discounts to encourage timely payments. Make changes in the terms of sale for slow paying customers (i.e. changing net 30 day terms to COD).  Invoicing is an important part of your cash flow management. The first rule of invoicing is to do it as soon as possible after products are shipped and/or after services are delivered.  Place an emphasis on reducing billing errors.  Most customers delay payments because an invoice had errors, and therefore, will not pay until they receive a corrected copy.  Email or fax your invoices to save on mailing time. Post the payments that you have received and make deposits more frequently.  The key is to develop an efficient collection system that generates timely payments and one that gives you advance warning of problems.

     4.  Re-focus your attention on your existing clients/customers:  Make customer satisfaction your priority. A regular review of your customers' buying history and frequency of purchases can reveal some interesting facts about your customers' buying habits.  Consider signing long-term contracts with your core clients/customers which will add to your security.  Offer a discount for upfront cash payments.  The key is to do what it takes to keep your current customers loyal.

     5.  Re-negotiate with your suppliers, lenders, and landlord:
 
          i)  Suppliers:  Always keep your negotiations on the level of need, saying that your company has reviewed its cost structure and has determined that it needs to lower supplier costs. . Tell the supplier that you value the relationship you have developed, but that you need to receive a cost reduction immediately.  Ask your supplier for a lower material price, a longer payment cycle, and the elimination of finance charges.  Also, see if you can buy material from them on a consignment basis.  In return for their price concessions, be willing to agree to a long-term contract.  Explore the idea of bartering as a form of payment.

          ii)  Lenders:  Everything in business finance is negotiable and your relationship with a bank is no exception. The first step to successful renegotiations is to convince your lenders that you can ultimately pay off the renegotiated loan.  You must point out to your lenders why it would be in their best interest to agree to a new arrangement.  Showing them your business plan and your action plan that includes your cost-savings initiatives, along with "the how" and "the when" of the implementation of your plan is the best way to achieve this goal.  Explain to them that you will need their cooperation to insure that you can survive, as well as, grow your business during the economic downturn.  Negotiated items include: the rate of interest, the required security to cover the loan, and the beginning date for repayment.  A beginning date for repayment could be immediate, within several months or as long as a year.  The key is to realize that your lender will work with you, but that frequent and continual communications with them is critical.
 
          iii)  Landlord: Meet with your landlord.  Explain your need to have them extend the term of your lease at a reduced cost.  Make sure you have a clause in the lease agreement that entitles you to have the right to sublet any or all of the leased space.

     6.  Re-evaluate your staffing requirements:  This is a very critical area.  Salaries/wages are a major expense of doing business. Therefore, any reduction in the hours worked through work schedule changes, short-term layoffs or permanent layoffs has an immediate cost saving benefit. Most companies ramped up hiring new employees in the good times, only to find that they are currently overstaffed due to slow sales during the economic downturn. In terms of down-sizing your staff, be very careful not to reduce your staff to a level that forces you to skimp on customer service and quality.  Consider the use of part-timers or the current trend of outsourcing certain functions to independent contractors.

     7.  Shop for better insurances rates:  Get quotations from other insurance agents for comparable coverage to determine whether or not your present insurance carrier is competitive. Also, consider revising your coverage to reduce premium costs.  The key is to have the right balance-to be adequately insured, but not under or over insured.

     8.  Re-evaluate your advertising:  Contrary to the other cost-cutting initiatives, evaluate the possibility of increasing your advertising expenditures.  This tactic realizes the advantage of the reduced "noise" and congestion (fewer advertisers) in the marketplace.  The downturn period a great opportunity to increase brand awareness and create additional demand for your product/service offerings.

     9.  Seek the help of outside advisors:  The use of an advisory board comprised of your CPA, attorney, and business consultant offers you objectivity and provides you with professional advice and guidance.  Their collective experience in working with similar situations in past economic downturns is invaluable.       

     10. Review your other expenses:  Target an across-the-board cost-cutting initiative of 10-15%.  Attempt to eliminate unnecessary expenses.  Tightening your belt in order to weather the downturn makes practical, financial sense.

Proactively managing your business through an economic downturn is an enormous challenge and is critical for your survival.  However, through well-planned initiatives, an economic downturn can create tremendous opportunity for your company to gain greater market share. In order to take advantage of this growth opportunity, you must act quickly to implement the above best business practices to continue realigning and resizing your company to the current economic conditions.  


Copyright © 2008 Terry H. Hill  

You may reprint this article free of charge in your newsletter, magazine, or on your website, provided that the article is unedited, and that the copyright, author's bio, and contact information below appears with each article. Articles appearing on the web must provide a hyperlink to the author's web site. 

An author, speaker, and consultant, Terry H. Hill is the founder and managing partner of Legacy Associates, Inc., a business consulting and advisory services firm based in Sarasota, Florida.  A veteran chief executive, Terry works directly with business owners of privately held companies on the issues and challenges that they face in each stage of their business life cycle.  Contact Terry by email at www.legacyai.com or telephone him at 941-556-1299.

        

As a business consultant, probably the number one recurring question that business owners ask me is, "What are the keys to survival in this competitive small business environment?" My response to this question has remained unchanged over the years. My reply is simple, practical, and straight-forward advice – advice, which if implemented, would dramatically increase a business owner's odds of survival and success.

My answer to the question is… "Try to emulate what other businesses have done over time that has made them successful." Notice how simple, practical, and straight-forward this advice is. This advice incorporates a process that bankers, CPAs, and consultants, like me, have used for years to determine the strengths and the weaknesses of a particular business as compared to that of other businesses. It is the process of benchmarking.

Unfortunately, most business owners do not use this valuable method of analysis, or perhaps, they are unaware of available sources to obtain the necessary data in order to benchmark their company's performance. The Business Performance Dashboard (BPD) is a valuable source of information for the business owner to use to help determine how his/her business measures up to other businesses within their industry.

The Business Performance Dashboard is a new tool from Entrepreneur.com. With this tool, a business owner can easily compare his/her business in regards to size and age with that of the average business in their industry. This BPD pinpoints areas of the business that need improvement and also, pinpoints the areas where they excel. BPD focuses largely on sales issues which include sales-per-employee statistics, sales by business age, and more. For more information, visit http://www.entrepreneur.com/benchmark/index.html.

        

        

Whether you are aware of the fact or not, your "company culture" can attract or repel those whom you need the most to build a prosperous business.  Most experts agree that business is about people ---people, as in employees, customers, suppliers, lenders, and investors.  In order to attract the most talented employees and the most profitable customers, your company's culture has a large impact on your success.

However you define it, your company culture is critical.  Whether performance is defined in terms of customer satisfaction, attendance, safety, or productivity, research clearly indicates that culture influences organizational performance.  A strong company culture aligns your entire organization with its shared set of goals and objectives, and simultaneously empowers employees to make decisions in their areas of responsibility.

In the business environment, culture is a system of shared values and attitudes that focus on how work gets done and how people and materials are affected.  Webster’s Dictionary defines culture as "the integrated pattern of human behavior that includes thought, speech, action, and artifacts, and depends on man’s capacity for learning and transmitting information to succeeding generations."  It is a set of shared beliefs, practices and assumptions that we base people's behavior on.  When people come together with a shared purpose, a culture is created.

In order for your company to grow and prosper, a "company culture" must be created which clarifies your identity, your values, and your beliefs.  A culture must also be created so that a company is able to not only attract quality people, but also – and even more importantly – to keep them.  As your company attracts the best and brightest people, it is wise – and ultimately beneficial to the company as a whole – to view these new employees as long-term employees, rather than short-term.  One cannot over emphasize the significance of the planning stage in the development of the foundation for a company's culture.  A well-established "company culture" empowers employees, drives revenues, and optimizes your future.

Creating a culture for your company is about cultivating passion in your employees. Your company culture can only begin to take shape when people beyond you, the business owner, begin to articulate the company's principles and reflect them in its actions.  As the business owner, you can take actions to create a strong company culture, but it is your employees and their actions that bring the company's culture to life. 

The individual who leads the company is the one who establishes values and sets the vision and strategic direction.  In small companies, it is almost always the personalities and values of the founders, owners, and general managers that determine the company culture.  Over time the company's personality mirrors that of the leader's personality.  The employees emulate what they perceive to be the values of the “boss.”  As the business owner, it is important that you fully understand this phenomena and its impact on your organization.

Be sure to align your culture with the type of work you do.  Cultures that are right in one context can be disastrous in another.  Is your culture a casual, loosely organized group of developers or designers in an environment that encourages collaboration and innovation?  Or, is your culture a hard-driving sales environment that rewards competition and individual performance?

Many people believe strong cultures equate to strong performances; and, strong performance attracts the best and most talented employees and the most profitable customers.  This is true if your company is moving in the right direction.  Failure to move in a strong culture direction will simply fast-forward failure.  Check the strength of your culture.  Make sure it supports the work you do.  If it does not, realign it to better serve your customers, and to attract quality long-term employees.  Your business life depends on it.

Copyright © 2008 Terry H. Hill  

You may reprint this article free of charge in your newsletter, magazine, or on your website, provided that the article is unedited, and that the copyright, author's bio, and contact information below appears with each article. Articles appearing on the web must provide a hyperlink to the author's web site. 

An author, speaker, and consultant, Terry H. Hill is the founder and managing partner of Legacy Associates, Inc., a business consulting and advisory services firm based in Sarasota, Florida.  A veteran chief executive, Terry works directly with business owners of privately held companies on the issues and challenges that they face in each stage of their business life cycle.  Contact Terry by email at http://www.legacyai.com or telephone him at 941-556-1299.

        

Strategic planning is by far the most important task of any management team.  Unfortunately, far too many entrepreneurs believe that strategic planning is an exercise that is meant only for big businesses; when in fact, strategic planning is equally applicable and critical to small businesses.

Strategic planning is a way to identify and move your organization toward its desired future state.  Strategic planning aligns the strengths of your business with the available opportunities.  It is the process in which you develop a vision, set objectives, craft a strategy, implement and execute the strategy, and finally monitor and evaluate the desired outcome.

The benefits of planning are quite evident.  An organization simply cannot know what it is currently doing, where it is going, or what it intends to do to get there, unless the organization periodically establishes and monitors its goals.  Strategic planning enables people to influence the future by focusing on the important resources of time, talent, and money, while properly allocating these resources to provide the most benefits.

The very act of strategic planning implies a proactive style of management that anticipates future events before the events actually take place.  Proactive management eliminates the possibility of being over-run by the event, and sets plans and procedures in place to cope with this type of event should it present itself.  Your strategic planning process develops a frame of reference for your sales forecasts, operational expense budgets, and capital requirements.

A strategic business plan is the end result of the strategic planning process and it becomes your "roadmap" to success.  It is your strategic business plan that allows you to better articulate your vision while providing the necessary documentation to support your claims. Your stakeholders (lenders, customers, suppliers, and employees) gain a greater sense of security that evolves from a better understanding of the opportunities, the obstacles, and the ability that you and your company's have in order to adapt more effectively to an ever-changing business environment.

Copyright © 2007 Terry H. Hill

You may reprint this article free of charge in your newsletter, magazine, or on your website, provided that the article is unedited, and that the copyright, author's bio, and contact information below appears with each article. Articles appearing on the web must provide a hyperlink to the author's web site.

An author, speaker, and consultant, Terry H. Hill is the founder and managing partner of Legacy Associates, Inc., a business consulting and advisory services firm based in Sarasota, Florida.  A veteran chief executive, Terry works directly with business owners of privately held companies on the issues and challenges that they face in each stage of their business life cycle.  Contact Terry by email at http://www.legacyai.com or telephone him at 941-556-1299.

 

        

        

Starting a new business is an exciting venture, full of challenge, opportunity, and excitement.  Especially, if your entrepreneurial concept gains traction and generates growth.  When it does, the next step is transitioning from an entrepreneurship to a professionally run business.

However, here is the irony.  At this transition point—precisely the one you want to reach—is where many small businesses run into trouble.  Because while the entrepreneurial skill set is great for creating and building new businesses, it is not as well suited to transforming fledgling businesses into long-term companies.

As a business grows beyond the startup stage, the ingredients that made for a winning start become a recipe for disaster.  This is where entrepreneurs often make big mistakes. As Bill Gates observed, “Success is a lousy teacher.  It seduces smart people into thinking they can’t lose. “ 

Smart people can lose.  And many entrepreneurs do every day.  The key is to understand the business lifecycle and how to move from one stage of the lifecycle to the next.  Transition is a natural part of the process.  A rapidly expanding company can quickly outgrow its infrastructure.  Suddenly the informal management style that worked so well in the beginning no longer gets the job done.  The organization’s existing infrastructure cannot support the next stage of growth, and the fallout is upheaval.

In truth, rapid growth and expansion place an incredible strain on resources.  The gap between the
infrastructure you will need and the infrastructure that has evolved becomes painfully evident.  If your business is to succeed, you need systems and processes that will stabilize your company and support future growth.  This is why a well-planned transition strategy is so important.

In most cases, with an entrepreneurially run business, management is more growth-and innovation-driven and less profit-driven.  The emphasis is on creativity and innovation rather than structure or operations.  Planning is haphazard rather than systematic.  The organizational structure is loosely defined.  Budgeting is implied.  In essence, an entrepreneurially run business is an adolescent in the business lifecycle, pursuing growth, change and opportunity but is desperately in need of stabilization.

On the other hand, a professionally managed organization is one with formal, thoughtfully-developed systems and processes and a disciplined, profit-oriented approach to doing business.  In professionally managed organizations, management techniques have evolved beyond the spontaneous, reactive mentality typical of startups.  Management styles are established.  Professionally managed organizations are more democratic (typically consultative or participative).   Professionally managed enterprises are based on clearly communicated objectives, expectations, and accountability.

To advance beyond an entrepreneurship business, the entrepreneur must take stock and implement systems, develop processes, and hire people who can steward the company into the future.  This transition requires formal planning, meetings, systems, and clearly defined roles, responsibilities, and processes. 

The first step in advancing from an entrepreneurship to that of a professionally run business is to recognize that the business has reached a new stage in its business lifecycle.  The second step is to acknowledge that it is now time for change.  The third step is to enlist the help of outside professional business advisors to assist you with the transition.

With a professional general business advisor, you obtain an accurate and an unbiased diagnosis of your entire business.  Only then can you develop and implement an effective strategy to transition from entrepreneurship to a professionally run business.  The professional general business advisor assists you with the development and implementation of the following:

• Assess your organizational infrastructure to determine how well existing systems, processes, and structure support future needs.

• Know where you are headed so you can communicate to your employees the direction that your company will take in future developments.

• Draft a development plan that maps out how you will build the competencies you need for the next stage of development.

• Create or revisit your business plan and use it to guide and monitor your progress.

• Develop training and mentoring programs to cultivate the management team’s capabilities.

• Implement realistic systems for planning, organizing, managing, and increasing accountability.

• Standardize the various processes for the best efficiency.

• Define the roles and responsibilities of each employee.

• Establish and communicate objectives, goals, measures, and rewards to your stakeholders.

• Let go, and let the experts do their jobs.

When companies transition from startups to professionally managed enterprises, founder/entrepreneurs often arrive at a crossroads.  As the business owner, you need to consider if you should step back and hand the reins over to an experienced, professional management team?  Or, should you stay and attempt to adopt a more structured management style?

The decision is yours.  However, keep in mind, that the skills it takes to hatch a business concept … identify a market … develop a product or service …and assemble the resources and operations to bring it to market are not the same skills you need to shepherd a company into the future.

Copyright © 2007 Terry H. Hill

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An author, speaker, and consultant, Terry H. Hill is the founder and managing partner of Legacy Associates, Inc., a business consulting and advisory services firm based in Sarasota, Florida.  A veteran chief executive, Terry works directly with business owners of privately held companies on the issues and challenges that they face in each stage of their business life cycle.  Contact Terry by email at http://www.legacyai.com or telephone him at 941-556-1299.