Do your business ethics measure up?

Have you ever wondered how many of the successful businesses get caught in the public spotlight and are criticised for the lack of integrity in the organization.






Culture counts and it starts at the top with senior management or the board of directors. Organizations need to understand that ethics drive compliance and the leadership is responsible for setting the tone.

Checks and balances require care in how the organization structure is designed, how human resource decisions are made, and how overall business is conducted. Organization integrity is paramount; when difficult decisions are faced the instinct must be to default to core values.

Larger organizations often pressure smaller business for concessions they can ill afford but if they don’t concede an entire contract may be lost. This happens even if the original pricing were agreed between the parties. Where is the pride in living up to one’s word? What values are at the core of that behaviour?

Ethics are derived from values and they make integrity a way of life in the organization. Honesty, respect, and responsibility can be pillars on which to build. It is essential that these values are shared throughout the organization through practice in decision making.

The vast majority of businesses are ethical and at least have informal standards expressed through the behaviour of the CEO and senior managers. Anyone working in an organization that seems to behave in an overtly unethical way and chooses to stay or ignore the behaviour is part of the problem.

Corporate governance is used to promote business ethics and social responsibility. It also creates the framework for guidelines used by all individuals who are part of the organization.

Need to manage your Money Better?

Cash flow is the fuel your business needs to keep running smoothly. Here are a few techniques you may want to consider to improve your operation.

1. Budget cash flow.
Create a cash flow budget to make sure you can pay expenses; it allows you to be proactive in monitoring revenues and expenses. Include sales/revenue forecasts, receivables, and outflows including costs of goods, debt payments and operating expenses.

2. Understand sensitivities.
It is important to know which items impact cash flow most among price, volume, costs or overheads. Cost of goods is a key component but may be difficult to change. At the same time competitive pressures may prevent a price increase.

3. Credit.
Effective credit policies are a key component to successful cash flow management. Early payment can be encouraged through discounts on early payment or penalties for late payment. Careful monitoring of late payments is important so they do not become write-offs or tie up working capital.

4. Payables.
Review payables regularly to maintain obligations. An aging schedule will show you how much you owe and whether anything is past due.

5. Reduce costs
Review operations for ways to reduce expenses. When business volume accelerates consider hiring contract or part-time staff before committing to full time employees.

Good luck with your review and improving your cash management. Your banker will appreciate your efforts and this can have a positive impact on the banks impression of your business and the professional management approach.

Crisis Management

Unplanned events can have a devastating effect on small businesses. Crises such as fire, damage to stock, illness of key staff or IT system failure could all make it difficult or even impossible to carry out your normal day-to-day activities.
At worst, this could see you losing important customers - and even going out of business altogether.

But with good planning you can take steps to minimize the potential impact of a disaster - and ideally prevent it happening in the first place. Here are a few ideas to consider:

1. Plan
It's essential to plan thoroughly to protect yourself from the impact of potential crises since you may lack the resources to cope easily in a crisis.
Failure to plan could be disastrous. At best you risk losing customers while you're getting your business back on its feet. At worst your business may never recover.
As part of the planning process you should:
             -    identify potential crises that might affect you
             -    determine how you intend to minimize the risks of these disasters occurring
             -    set out how you'll react if a disaster occurs in a business continuity plan
             -    test the plan regularly

2. Assess the impact
You need to analyse the probability and consequences of crises that could affect your business. This involves:
- assessing the likelihood of a particular crisis occurring - and its possible frequency
- determining its possible impact on your operations

This kind of analysis should help you to identify which business functions are essential to day-to-day business operations. You're likely to conclude that certain roles within the business - while necessary in normal circumstances - aren't absolutely critical in a disaster scenario.

3. Minimize the Potential Damage
Once you've identified the key risks your business faces take steps to protect your business functions against them.
Premises:
Good electrical and gas safety could help protect premises against fire. Installing fire and burglar alarms also makes sense.
Think what you would do in an emergency if your premises couldn't be used. You might consider an arrangement with another local business to share premises temporarily if a crisis affected either of you.
Equipment/machinery:
If you use vital pieces of equipment, you may want to cover them with maintenance plans guaranteeing a fast emergency call-out.
IT and communications
Installing anti-virus software, backing up data and ensuring the right maintenance agreements are in place can all help protect your IT systems. You might also consider backing up your data offsite on a secure server.
Printing out copies of your customer database can be a good way of ensuring you can still contact customers if your IT system fails.
People:
Try to ensure you're not dependent on a few staff for key skills by getting them to train other people.
Consider whether you could get temporary cover from a recruitment agency if illness left you without several key members of staff. And take health and safety seriously to reduce the risk of staff injuries.
Insurance:
Insurance forms a central part of an effective risk-management strategy.

4. Continuity
You should draw up a business continuity plan setting out how you will cope if a crisis does occur.
             It should detail:
- the key business functions you need to get operating as quickly as possible and the resources you'll need to do so
- the roles of individuals in the emergency
Making the most of the first hour after an emergency occurs is essential in minimizing the impact. As a result, your plan needs to explain the immediate actions to be taken.

These are some steps that can be taken to ensure that damage from any crisis is minimized. Proper planning can be critical to survival.

This week’s blog is written by Federica Nazzani, President, Capital Assist (Valuation) Inc. The blog provides a continuation to last week’s article providing some of the optional methods for valuing your business.

This is the second part of a two part article on the topic.


Making Sense of Valuation
By Federica Nazzani

Approaches to value
There are three general approaches to valuing a business and/or asset, namely the cost, earnings, and market approach.  The approach adopted will be determined having regard to factors specific to the company including profitability and the risks related to the operations of the company as well as industry and economic conditions.
  
Cost approach
The cost approach is (i) the sum of the costs required to replicate the asset or (ii) the book value of the assets and liabilities of the business.  The cost approach may be appropriate where the value of the business interest does not include intangible value and the earnings potential of the asset does not exceed its cost.  This approach does not consider competitive strengths and weaknesses, potential for earnings growth or risk associated with achieving the earnings of the business and therefore, requires significantly less judgment than alternative approaches.  This approach most often results in relatively lower valuation.

Earnings approach
The basis of the earnings and/or cash flow approach is the future economic benefits derived from the business and/or commercial exploitation of the asset, taking into account the risks associated with achieving those benefits.  Most important to a purchaser of a business and/or asset is the ability to generate future earnings and cash flows and satisfy an investor’s expected return on investment.  It is determined by applying an appropriate capitalization/discount rate to a selected stream of historic and/or prospective earnings or cash flows.  The more aggressive the cash flows or earnings assumptions, the higher the capitalization/discount rate for achieving those projections.
A variation of the earnings approach, most often adopted in corporate finance, is the discounted cash flow technique (“DCF”).  DCF is calculated as the present value of future cash flow expectations.  It is applied in various situations where a business is in start-up or growth phase or forecast to experience a change in operations (i.e. merger, divestiture, etc.), or in instances where the business has a finite life.  The preparation of a detailed financial forecast will require a detailed review of the historic performance, internal operations and relationships between revenues and costs, and an analysis of the external competitive environment (i.e. trends of competitors and industry as a whole).

Market approach
Value determined based on the market approach is often based on the use and analysis of comparable transactions in the marketplace.  These transactions are a good indication of the prices paid in the marketplace for similar assets and/or business interests.  However, certain transactions do not provide a direct means of determining value as it is often difficult to find comparable assets and/or business interests and public disclosure of transaction information is frequently not available.

Understand the basics 
The valuation exercise is best described as “an art, not a science”.  This is correlated to the level of judgment that is required in supporting value.  Arriving at a valuation or the worth of a business and/or asset will require an understanding of the basics including a defined and supportable business model, thorough assessment of the future operations and relative risks, and a clear understanding of the competition and industry trends.

Please contact Federica for more information on this important topic. She can be reached as follows:

Federica Nazzani
President
Capital Assist (Valuation) Inc.
Tel: 226.347.8100
Email: fnazzani@capitalassist.ca

This week’s blog is written by Federica Nazzani, President, Capital Assist (Valuation) Inc. The blog provides an outline of factors to consider in valuating your business. I hope you find the outline of interest.

This is the first part of a two part article on the topic.


Making Sense of Valuation
By Federica Nazzani

Whose side are you on? 
The objective of vendors of businesses is to maximize their selling price whereas buyers will seek to minimize the price which will be paid, thus, the importance of understanding the value assessment.
The relentless question, “What is it worth?”
The simple answer is, “It is a matter of judgment” as there is no hard and fast response to the worth of a company and/or asset.  We often hear of value terms such as “fair market value”, “fair value”, “market value”, “adjusted book value”.  The significance of each of these terms will differ in the practice of business valuation.

There are some basic fundamental principles in valuation:

Price versus value
Price is determined in the open market once a business interest and/or asset is exposed for sale, strategic benefits and synergies are quantified and the parties to a transaction enter into negotiations.  Without exposure to the market, notional value would prevail based upon rates of return required by investors given economic and business conditions existing at the valuation date, but without consideration of possible purchaser synergies.  Synergies may include economies of scale, increased purchasing power or other strategic benefits to purchasers of shares and/or assets. Only when an asset or a business interest is exposed for sale that the impact on “price” of arm’s length, third party purchaser synergies can be quantified with any degree of certainty.  Therefore, the primary objective of negotiation is to transform value into the transaction price.


Value is at a point in time
A principle often overlooked by business owners is that value is determined at a specific point in time and thus, based on a set of facts together with reasonable and foreseeable forecast and business and industry risk assumptions made at the time.  As an example, a business in anticipation of a large contract or in anticipation of the completed development of a technology/asset will have a lower value as it will require a higher risk rate to the estimate of cash flow and earnings than a business with a signed contract and commercially available technology/asset, respectively.
Approaches for valuing your business will be covered next week.

Please contact Federica for more information on this important topic. She can be reached as follows:

Federica Nazzani
President
Capital Assist (Valuation) Inc.
Tel: 226.347.8100
Email: fnazzani@capitalassist.ca

Is the time right?

One of the more interesting and challenging questions as a business owner is “when should I be thinking about exiting this business? There are many factors to be considered but here are a few thoughts.

1. Business Health
Is the business operated from strong principles of strategy with a clear vision? Can that vision be expressed and understood by those who manage the business or potential buyers? If you the owner cannot clearly state the purpose or reasons that you exist don’t expect new owners to invent it for you.

2. Maximize return
In cases where management/ownership is dominated by a single individual it is important to maintain a high degree of confidentiality so that employees do not become insecure and unsure of the stability of the company or their jobs. This instability can easily be communicated to a potential new buyer and create a poor impression.

3. Need change?
Factors that may support your decision to leave can grow out of many conditions. The most common is an age derivative. A long career leading to a desire for more personal time; reap the rewards of your career. Age may not be the prime driver but longevity at the job could be creating burn out. Time to move on.
Another good time chosen is driven by a need for change. You may feel you have achieved all that can be achieved and you wish to quit while on top of the game. This may also provide a high rate of return if the business is at a high level of performance. Selling now may produce the equity needed to finance a new opportunity.

4. Exit from strength
Look for opportunities to exit from positions of strength. A well trained and competent management group may provide the opportunity to offer management buyout.  Managers may be able to pool resources to fund the buyout, you as owner may offer to finance all or part of the buyout or there may be an option to use company assets to finance the loans needed for the buyout. This is often referred to as a LMBO – Leveraged Management Buy Out. It also provides good opportunities for maintaining stability in the organization.

5. The market
The marketplace may facilitate determining the right time to exit. Poor economic conditions or competitive activity can have a huge impact on if or when you should exit. Positive conditions too might bring a competitor to the door with a buyout offer.

So the options are many but not always easy to sort through. Timing is critical, business life changes, choose wisely. These are my thoughts, care to share yours? gerry@polarisgroupmc.com

Do you have a Succession Plan

Succession planning recognizes that some jobs are the lifeblood of the organization and too critical to be left vacant or filled by any but the best qualified persons. Effectively done, succession planning is critical to mission success and creates an effective process for recognizing, developing, and retaining top leadership talent. 
 Here are some of the factors to consider for a successful plan:

1. Senior managers need to be personally involved and held accountable for growing key managers.
2. Managers need to be committed to self-development.
3. Succession planning is linked to a strategic plan and investment in the future growth of the business.
4. The company needs to have a performance system in place to measure competencies that can be used for selection and development of key potential managers.
5. A pool of talent needs to be identified early that can fill key positions for the long-term health of the business.

These are a few of the key points to consider for implementing a succession plan; succession plans address challenges such as recruitment and retention to ensure key positions are always protected in the near term and long term as well.

Good luck with your planning; let me know your thoughts: gerry@polarisgroupmc.com