Economic theory tells us that supply and demand create an equilibrium market price for a certain product. There is a benefit for an owner-manager of a business to understand the demand curve for the market for that business. Understanding the demand curve can help with price decisions, production decisions, and documenting consumer decisions (enabling effective response to changes in consumer interests).
When we try to construct a demand curve for a market, by necessity we are defining a market and then seeking to understand the value equation of the consumer. These are very worthwhile and rewarding things to do. We are trying to determine at what price the consumer will buy more or less of our product or services. To do this we must obtain from the consumer information about the effect of price on a decision to buy. Generally we know the higher the price, the less likely the purchase of additional units.
If we obtain the consumer information by survey, we may find various responses from consumers which may be listed in spreadsheet columns. The sample responses can be used to derive information about the amount consumers would purchase at certain prices. Usually these responses become columns of information on a spreadsheet (price and quantity) which then can be used to create a graph (price on the y axis and quantity on the x axis). In a market which is highly competitive and the products very similar, the demand curve will tend to be flat (parallel to the x axis) because price will be a determinative factor and production will be increased until the marginal cost of the last unit produced equals the revenue produced by that unit. On the other hand where unit is very differentiated from other units by quality or design, the demand for a particular unit will be much less affected by price and the demand curve will tend to be vertical (parallel to the y axis of the graph). In this type of market, price will be increased until production is at the point where the marginal cost of the last unit produced equals the revenue produced by that unit. The slope of the demand curve generally will indicate whether we sell many units at a lower price (high competition), fewer units at a higher price (differentiated products), or something in between.
Once you have developed a demand curve for the market, there are a number of different ways to use this information and the graphical portrayal of the information to analyze and make critical business decisions. More about that next time.
Friday, January 29, 2010
Wednesday, January 20, 2010
Repeal of the Estate Tax?
In 2001 Congress passed a law that imposed a ten-year schedule. The law gradually reduced the estate tax until 2010, when the estate tax would disappear. But the law then provided that in 2011 the estate tax would be again in place at a very high rate ($1 million exemption and a maximum rate of 55 percent when in 2009 the exemption was $3.5 million and the maximum rate 45 percent). It is safe to say that most people thought Congress would act before now. In fact the prevailing assumption was that Congress would extend the 2009 estate tax into 2010 and enact a long-term approach to estate tax this year.
Most estate planners and most business succession plans have been based on the assumption that there would always be an estate tax. The cardinal rule of business succession has been to not own a business at death. The burdens imposed upon heirs by the process of valuing and paying taxes on a business interest meant that owners have been motivated to sell business interests or engage in gifting programs they might not have otherwise done.
If Congress acts in 2010 and attempts to make the legislation retroactive, it will be challenged but the precedent is there for this type of tax legislation to be retroactive and valid. In U.S. v. Carlton, 512 U.S. 26 (1994) the Supreme Court upheld a retroactive application of tax law. It is unlikely that Congressional action in 2010 reinstating some form of estate tax as of the beginning of the year would be ruled invalid.
In spite of the uncertainty created by the failure of Congress to act, it still is a good idea to assume that the estate tax will be a part of the tax and business succession planning scenario and that dying owning a business interest still will be a very expensive mistake.
Most estate planners and most business succession plans have been based on the assumption that there would always be an estate tax. The cardinal rule of business succession has been to not own a business at death. The burdens imposed upon heirs by the process of valuing and paying taxes on a business interest meant that owners have been motivated to sell business interests or engage in gifting programs they might not have otherwise done.
If Congress acts in 2010 and attempts to make the legislation retroactive, it will be challenged but the precedent is there for this type of tax legislation to be retroactive and valid. In U.S. v. Carlton, 512 U.S. 26 (1994) the Supreme Court upheld a retroactive application of tax law. It is unlikely that Congressional action in 2010 reinstating some form of estate tax as of the beginning of the year would be ruled invalid.
In spite of the uncertainty created by the failure of Congress to act, it still is a good idea to assume that the estate tax will be a part of the tax and business succession planning scenario and that dying owning a business interest still will be a very expensive mistake.
Tuesday, January 12, 2010
Why Do Owner-Managed Businesses Fail to Plan?
Lack of planning causes a variety of problems for owner-managed businesses. Business owners manage from bank account balances and then wonder why they have cash flow problems. Owners jump into a project, forgetting about marketing for the time being, and then wonder what happened to sales when the project completes. Owners initiate the business by wearing all hats, causing the business to succeed with hard work and a variety of talents, do not delegate and train, and then wonder why they have no time and their business has no value without their participation. These are just of few examples of many well-recognized problems resulting from the failure to plan.
The number of owner-managed businesses in this country and the difficulty of these businesses sustaining a long-term existence indicate the need for strategic planning to be utilized by these businesses. Businesses that engage in strategic planning have a much better success rate – both for the current owners and for the heirs of those owners.
So if the need and benefit are so clear, what is it about strategic planning that makes it so difficult for the owner-manager to practice? There are a number of suspects: the failure to prioritize and schedule time for planning, the inability to poll and communicate with the business group (owners, managers, and employees) to produce a wise plan, the fear of losing control (perhaps the most prevalent reason owner-managers do not train and delegate), and the managerial skill to execute the plan through effective monitoring and employee review. These and other critical issues can be addressed to make the valuable strategic planning process accessible and of use to owner-managed businesses.
It happens one owner at a time. You know the owner is getting it when the owner responds to a crisis by saying: “I need to review the plan to see why we did not anticipate this and then revise the plan” instead of saying “I am the only one who can save this situation, and I need to get to work.”
The number of owner-managed businesses in this country and the difficulty of these businesses sustaining a long-term existence indicate the need for strategic planning to be utilized by these businesses. Businesses that engage in strategic planning have a much better success rate – both for the current owners and for the heirs of those owners.
So if the need and benefit are so clear, what is it about strategic planning that makes it so difficult for the owner-manager to practice? There are a number of suspects: the failure to prioritize and schedule time for planning, the inability to poll and communicate with the business group (owners, managers, and employees) to produce a wise plan, the fear of losing control (perhaps the most prevalent reason owner-managers do not train and delegate), and the managerial skill to execute the plan through effective monitoring and employee review. These and other critical issues can be addressed to make the valuable strategic planning process accessible and of use to owner-managed businesses.
It happens one owner at a time. You know the owner is getting it when the owner responds to a crisis by saying: “I need to review the plan to see why we did not anticipate this and then revise the plan” instead of saying “I am the only one who can save this situation, and I need to get to work.”
Wednesday, January 6, 2010
Managing Professionals
In my experience, the question of when a business needs to pay for expert professional advice (accountants, lawyers, and consultants) often is not the subject of structure and policy, but it should be.
Professionals generally get paid by the hour or fix a fee for a project and respond to requests. This places a burden on the client, as the initiating party, to handle the relationship in a thoughtful and efficient way. This, of course relates to the resources available to pay the professional and the nature of the tasks the professional is asked to perform.
There are tasks which require certain professionals to be involved (tax returns and court cases). There are certain issues on which a business needs expert guidance. You may not know what all these tasks and issues are, but you will know most of them. Even if there are times when you will have to receive advice on what requires an expert’s opinion or action, you should control the relationship.
It will be less expensive for you if the professional is familiar with your business and the concerns it generates. Rejoice if a lawyer you are dealing with wants to know more about your business without charging you for that time. Similarly be pleased if your accountant makes suggestions for which payment is not expected. The more you interact with your professional advisors, the less time (fees) you will spend on giving the professional facts about your business, but as with any other cost the doctrine of diminishing marginal utility applies to more and more frequent levels of interaction.
For any given decision involving expert advice, the professional should identify to you the information you need to know to make your business decision according to your values and business acumen. Professionals are paid to advise, but beware of the professional who gives advice broader than their area of expertise. For example, lawyers advising you should not be telling you what decision to make, but informing you of the consequences that will occur depending on your decision. Therefore, it is misleading and unwise to engage a lawyer to provide specific legal advice and then ask for general business advice.
You should have a written fee agreement for all work done by professionals. You should understand the fees and costs associated with what you are asking before the service is performed, and if there is a change the professional should give you notice of that change immediately. You should expect the professional to be accessible by responding to your communications quickly and by having time to discuss important matters with you. You should be billed promptly and accurately for services with no surprises. Such a billing deserves immediate attention and prompt payment.
Create a thoughtful structure for asking for and receiving professional work and advice. Keep track of what you like and do not like about the various relationships. Learn from your experiences and change your structure. It is incumbent upon you to effectively manage your business relationships with professional advisors.
Professionals generally get paid by the hour or fix a fee for a project and respond to requests. This places a burden on the client, as the initiating party, to handle the relationship in a thoughtful and efficient way. This, of course relates to the resources available to pay the professional and the nature of the tasks the professional is asked to perform.
There are tasks which require certain professionals to be involved (tax returns and court cases). There are certain issues on which a business needs expert guidance. You may not know what all these tasks and issues are, but you will know most of them. Even if there are times when you will have to receive advice on what requires an expert’s opinion or action, you should control the relationship.
It will be less expensive for you if the professional is familiar with your business and the concerns it generates. Rejoice if a lawyer you are dealing with wants to know more about your business without charging you for that time. Similarly be pleased if your accountant makes suggestions for which payment is not expected. The more you interact with your professional advisors, the less time (fees) you will spend on giving the professional facts about your business, but as with any other cost the doctrine of diminishing marginal utility applies to more and more frequent levels of interaction.
For any given decision involving expert advice, the professional should identify to you the information you need to know to make your business decision according to your values and business acumen. Professionals are paid to advise, but beware of the professional who gives advice broader than their area of expertise. For example, lawyers advising you should not be telling you what decision to make, but informing you of the consequences that will occur depending on your decision. Therefore, it is misleading and unwise to engage a lawyer to provide specific legal advice and then ask for general business advice.
You should have a written fee agreement for all work done by professionals. You should understand the fees and costs associated with what you are asking before the service is performed, and if there is a change the professional should give you notice of that change immediately. You should expect the professional to be accessible by responding to your communications quickly and by having time to discuss important matters with you. You should be billed promptly and accurately for services with no surprises. Such a billing deserves immediate attention and prompt payment.
Create a thoughtful structure for asking for and receiving professional work and advice. Keep track of what you like and do not like about the various relationships. Learn from your experiences and change your structure. It is incumbent upon you to effectively manage your business relationships with professional advisors.
Wednesday, December 9, 2009
Shared Leadership
Good policy development is based upon wise decisions. Wise decisions evolve from a process which includes polling a group of diversely informed individuals. While the decision must be made by a person with authority, leadership has been historically conceived around an individual decision-maker and that individual’s relationship to subordinates or followers. The leadership field has focused its attention on the behaviors, mindsets, and actions of the leader in a team or organization, which has traditionally been hierarchical.
Shared leadership concepts can enhance and make more effective the process of policy development and the process of making wise decisions. The fastest growing organizational unit is the team, specifically cross-functional teams. What distinguishes these groups from traditional organizational forms is often the absence of hierarchical authority. Leadership is not determined by positions of authority, but rather by an individual’s capacity to influence peers, and by the needs of the team in any given moment. Each member of the team brings unique perspectives, knowledge, and capabilities to the team. For each there are moments when background characteristics provide a platform for leadership and decision-making. Much thought should be given as to how the authority to make a decision can help and not hinder a shared-leadership organization.
For an excellent treatment of this subject see Shared Leadership, Craig L. Pearce and Jay A. Conger, Editors, All those Years Ago: The Historical Underpinnings of Shared Leadership, Craig L. Pearce and Jay A. Conger, Sage Publications, 2003.
Shared leadership concepts can enhance and make more effective the process of policy development and the process of making wise decisions. The fastest growing organizational unit is the team, specifically cross-functional teams. What distinguishes these groups from traditional organizational forms is often the absence of hierarchical authority. Leadership is not determined by positions of authority, but rather by an individual’s capacity to influence peers, and by the needs of the team in any given moment. Each member of the team brings unique perspectives, knowledge, and capabilities to the team. For each there are moments when background characteristics provide a platform for leadership and decision-making. Much thought should be given as to how the authority to make a decision can help and not hinder a shared-leadership organization.
For an excellent treatment of this subject see Shared Leadership, Craig L. Pearce and Jay A. Conger, Editors, All those Years Ago: The Historical Underpinnings of Shared Leadership, Craig L. Pearce and Jay A. Conger, Sage Publications, 2003.
Wednesday, November 11, 2009
Budgeting
A budget is an important part of the business plan for an owner-managed business and is the detailed planning for how funds are to be allocated in the business. Once the strategic (long-term) part of the business plan is in place, the budget deals with the distribution of cash to execute the plan.
Putting the budget in place will show where the strategic plan is realistic and where it is not realistic. It will help answer the concern of whether the goals of the strategic plan can be reached. The budget will also help with the choice of what methods will bring you closest to reaching the goals of the strategic plan.
The budget will be a projection of the income statement for the business. Comparing the budget to experience will give you the opportunity to examine why there is a difference. Answering questions about the difference will make the next budget more realistic and more effective.
Also the owner-manager should be asking am I getting enough from the business? As a manager you should receive compensation for the management and other services you render to the company? As an owner, you should receive a return on your investment in the business. The budget should plan for this compensation and return on investment.
Effective budgeting requires adequate accounting information to allow comparison of your forecast budget with experience. After you budget a profit and loss statement projection, you will be interested in receiving an accurate profit and loss statement in a similar format on a frequent basis.
In analyzing the budget look at the chart of accounts and determine what accounts are fixed costs and what accounts are variable costs. Variable costs usually change with sales. Sometimes variable costs rise unreasonably because variable costs are not managed effectively. Variable costs that are rising when sales are falling must be carefully examined. Review and question the arrangement for fixed cost circumstances, the costs may not be as fixed as was first assumed.
The budget is a tool that will help you understand why things did not go as planned.
Putting the budget in place will show where the strategic plan is realistic and where it is not realistic. It will help answer the concern of whether the goals of the strategic plan can be reached. The budget will also help with the choice of what methods will bring you closest to reaching the goals of the strategic plan.
The budget will be a projection of the income statement for the business. Comparing the budget to experience will give you the opportunity to examine why there is a difference. Answering questions about the difference will make the next budget more realistic and more effective.
Also the owner-manager should be asking am I getting enough from the business? As a manager you should receive compensation for the management and other services you render to the company? As an owner, you should receive a return on your investment in the business. The budget should plan for this compensation and return on investment.
Effective budgeting requires adequate accounting information to allow comparison of your forecast budget with experience. After you budget a profit and loss statement projection, you will be interested in receiving an accurate profit and loss statement in a similar format on a frequent basis.
In analyzing the budget look at the chart of accounts and determine what accounts are fixed costs and what accounts are variable costs. Variable costs usually change with sales. Sometimes variable costs rise unreasonably because variable costs are not managed effectively. Variable costs that are rising when sales are falling must be carefully examined. Review and question the arrangement for fixed cost circumstances, the costs may not be as fixed as was first assumed.
The budget is a tool that will help you understand why things did not go as planned.
Thursday, November 5, 2009
Health Insurance Premiums
In an article for the National Center for Policy Analysis (http://www.ncpa.org/pub/ba642) Daniel Wityk states: “Since 1999, the cost of employer-provided health insurance has risen 120 percent, or four time faster than prices generally . . . small businesses face higher than average costs.” Wityk points to two causes for the higher than average costs for small business: first, insurance premiums for small businesses are 18 percent greater than those paid by large companies, and second, administrative costs run up to 25 percent of the cost of premiums for small business health plans compared to 10 percent for large businesses.
Large businesses self insure and are governed by federal law where small business must use small-group health policies subject to state regulation. The Employee Retirement Income Security Act of 1974 (ERISA) exempts self-funded employer plans from state regulations. In self-funded plans, the firm pays employees' medical bills and a third party processes claims. Large employers (and trade unions) do not face costly state mandates, but do enjoy economies of scale. Therefore, their costs are lower.
Given the fact that reform is on the way, but will not change things in the immediate future, what are the best tactics for the owner-managed business?
First, do not hesitate to delegate the fact finding and research aspects of this task. Having someone else, besides the owner-manager, understand the issues of health care is an advantage.
Second, understand the effect of the group of which your insurance is currently a part and the effect of state regulation on that group. While your insurance broker may feel that the best choices have been made, make sure you understand what other group and state regulation options there may be given your business configuration. You may belong to a trade or professional group who offers some meaningful programs or resources.
Third, understand what co-pay and deductible options are available. Other benefit plans may be able to compensate for having higher deductibles. Make sure you understand what cafeteria plans and medical health care savings plans have to offer.
Fourth, do not hesitate to use an insurance broker, but make it clear that this will not be a relationship purchase or renewal. You will want hard work and creative thought to obtain the most efficient health care package available. You will reserve the option and have every right not to select the health care plan offered by a broker.
Fifth, involve your employees to properly consider that effect certain decisions on coverage will have on their lives and their work attitude. Do not delegate the authority to make a decision, but make an effort to inform your employees and determine their opinions before you make your decision.
Sixth, start at least 90 days before renewal. Make your decision with enough time so that any change necessary can be accomplished.
Please comment or post with your own health insurance experiences and issues.
Large businesses self insure and are governed by federal law where small business must use small-group health policies subject to state regulation. The Employee Retirement Income Security Act of 1974 (ERISA) exempts self-funded employer plans from state regulations. In self-funded plans, the firm pays employees' medical bills and a third party processes claims. Large employers (and trade unions) do not face costly state mandates, but do enjoy economies of scale. Therefore, their costs are lower.
Given the fact that reform is on the way, but will not change things in the immediate future, what are the best tactics for the owner-managed business?
First, do not hesitate to delegate the fact finding and research aspects of this task. Having someone else, besides the owner-manager, understand the issues of health care is an advantage.
Second, understand the effect of the group of which your insurance is currently a part and the effect of state regulation on that group. While your insurance broker may feel that the best choices have been made, make sure you understand what other group and state regulation options there may be given your business configuration. You may belong to a trade or professional group who offers some meaningful programs or resources.
Third, understand what co-pay and deductible options are available. Other benefit plans may be able to compensate for having higher deductibles. Make sure you understand what cafeteria plans and medical health care savings plans have to offer.
Fourth, do not hesitate to use an insurance broker, but make it clear that this will not be a relationship purchase or renewal. You will want hard work and creative thought to obtain the most efficient health care package available. You will reserve the option and have every right not to select the health care plan offered by a broker.
Fifth, involve your employees to properly consider that effect certain decisions on coverage will have on their lives and their work attitude. Do not delegate the authority to make a decision, but make an effort to inform your employees and determine their opinions before you make your decision.
Sixth, start at least 90 days before renewal. Make your decision with enough time so that any change necessary can be accomplished.
Please comment or post with your own health insurance experiences and issues.
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