Wikipedia, paraphrased, defines due diligence as performing the proper and adequate amount of investigation of private mergers and acquisitions concerning relevant areas of interest including - but not limited to - the financial, legal, labor, tax, environment and market/commercial situation of the company in question. In plain English this means that if you are thinking about entering into any kind of an agreement that concerns money you need to investigate it thoroughly and exercise good judgement based on what you learn. The term particularly applies, and is most commonly used, when you are buying or selling a business but it really applies to most other financial dealings as well. Whether you are buying or selling a house, signing a contract, hiring an employee, entering into a "partnership" arrangement of any kind, buying a life insurance policy or a new car, or even proposing marriage you should exercise due diligence so you know what you’re getting into.
On the subject of fiscal responsibility, Wikipedia is much more vague and almost all its definitions allude to balanced budgets, governmental spending and proper and responsible use of governmental funds. I would add that the idea of proper and responsible use of funds i.e., fiscal responsibility, applies to individuals, companies and various other organizations as well.
To continue, in my opinion, failure to perform due diligence in any arrangement concerning money, property or personal and/or corporate indebtedness would constitute fiscal irresponsibility. I remember being introduced to the concept of caveat emptor in high school economics class. To refresh your memory, caveat emptor means "let the buyer beware." It seems to me that, in general, we have abandoned that tenet in favor of preferring that the government and the courts protect us or rescue us in all cases whether or not we exercised good judgement. No one seems to want to accept responsibility for his or her own actions any more. (I am thinking of the all the people who bought homes they knew they couldn’t afford and now want the federal government to bail them out. Also the woman who collected millions from McDonalds after she placed hot coffee in her lap and was burned.)
If you fail to perform due diligence in any particular transaction, you have no one to blame but yourself. And be sure you know what due diligence entails. If, for example, you are contemplating joining with another company in a new venture, it is not enough to "feel good" about the people in that company. (Although that certainly is important.) Nor is it enough to call a few of their business references and ask superficial questions about say, "Do they pay their bills on time?" Nor is it enough to naively think that a call to their bank would get you much more information than a confirmation that they have been doing business with that bank for the past several years. Due diligence demands that you – at a minimum - ask for financial statements and recent income tax returns, financial information release authorizations to send to their bank(s) or other financial institutions and to their major creditors. And that you study them closely when you receive them. If you get positive answers from all those sources, you will probably end up with a mutually satisfying "partnership." If you don’t, it was time well spent and probably a lot of money saved.
© 2008 by Paul Burri
Tuesday, August 19, 2008
Friday, August 8, 2008
Working With Key ratios
Uh oh, sounds like something that requires math skills. Well yes it does and if you can’t handle at least a little math you probably shouldn’t be in business. I’ll assume you can handle some math and I’ll try to be gentle with you.
You are getting periodic business financial statements every month and should be able to read and understand them. At the very least, you should be able to ask your bookkeeper or accountant intelligent questions about them. This is much more important than most small business owners seem to realize.
But beyond those standard and periodic statements, there is other information you can develop that will give you a good idea how your business is doing presently and will let you make predictions about the future.
Several of the businesses that I owned were based on quoting on almost all jobs. It worked like this. A customer would ask us to make a certain product to his specifications and the first thing he wanted to know was how much it was going to cost. We would create a quote based on our material, labor and other costs, add a profit and submit our bid. If our price was lower than the competition we would get the job. I think that there are many businesses that work this way – landscape contractors, construction contractors, machine shops, auto repair shops, anyone who does business with the government – you get the idea.
The key ratio that we used in those businesses was our Sales/Quote ratio. Each month we kept track of how many quotes we had submitted the prior month and also how many sales we had made in the current one. (Note that I am talking about the number of sales, not their dollar amount. Also, we assumed that there was about a month’s lag between our quote and getting the order.) Then we would divide the number of sales by the number of quotes. For example:
March sales = 350
February quotes = 760
Therefore: 350 ÷ 760 = .46
Which meant that we were getting orders from 46% of our quotes.
That could be good or bad depending on what industry you are in and how many competitors you have. In our case, we felt it was pretty good. We would have been pleased if it increased to say, 60%, but we would never want it to get to 100%. More on that later.
You might point out that we may have been getting orders from quotes generated in March and you would be right. But since we did this every month, we felt that any inaccuracies would average out over time and this gave us a reasonably accurate picture of our competitive position. It also gave us an idea what to expect in sales for each future month. If quotes were down in April, sales would probably be down in May.
Let’s look at what caused us to get only 46% of our quotes. One reason is that a competitor submitted a lower bid on that job. Another reason is that the price was simply too high for the customer and he just didn’t buy the product – whether from my company or the competition. Or the customer had another, more urgent need for something else. Or the customer used an alternate product to do his particular job. Or for any number of other reasons.
Now as to why we never wanted our Sales-to-Quote ratio to be 100%. That would mean, of course, that we were getting an order for every quote. It would also probably mean that our prices were too low and should be higher to generate more profit.
In whatever business you are in, you will be able to identify important ratios (or other numbers) that are relatively easy to generate that will give you a fairly accurate picture of how you are doing.
© 2008 by Paul Burri
You are getting periodic business financial statements every month and should be able to read and understand them. At the very least, you should be able to ask your bookkeeper or accountant intelligent questions about them. This is much more important than most small business owners seem to realize.
But beyond those standard and periodic statements, there is other information you can develop that will give you a good idea how your business is doing presently and will let you make predictions about the future.
Several of the businesses that I owned were based on quoting on almost all jobs. It worked like this. A customer would ask us to make a certain product to his specifications and the first thing he wanted to know was how much it was going to cost. We would create a quote based on our material, labor and other costs, add a profit and submit our bid. If our price was lower than the competition we would get the job. I think that there are many businesses that work this way – landscape contractors, construction contractors, machine shops, auto repair shops, anyone who does business with the government – you get the idea.
The key ratio that we used in those businesses was our Sales/Quote ratio. Each month we kept track of how many quotes we had submitted the prior month and also how many sales we had made in the current one. (Note that I am talking about the number of sales, not their dollar amount. Also, we assumed that there was about a month’s lag between our quote and getting the order.) Then we would divide the number of sales by the number of quotes. For example:
March sales = 350
February quotes = 760
Therefore: 350 ÷ 760 = .46
Which meant that we were getting orders from 46% of our quotes.
That could be good or bad depending on what industry you are in and how many competitors you have. In our case, we felt it was pretty good. We would have been pleased if it increased to say, 60%, but we would never want it to get to 100%. More on that later.
You might point out that we may have been getting orders from quotes generated in March and you would be right. But since we did this every month, we felt that any inaccuracies would average out over time and this gave us a reasonably accurate picture of our competitive position. It also gave us an idea what to expect in sales for each future month. If quotes were down in April, sales would probably be down in May.
Let’s look at what caused us to get only 46% of our quotes. One reason is that a competitor submitted a lower bid on that job. Another reason is that the price was simply too high for the customer and he just didn’t buy the product – whether from my company or the competition. Or the customer had another, more urgent need for something else. Or the customer used an alternate product to do his particular job. Or for any number of other reasons.
Now as to why we never wanted our Sales-to-Quote ratio to be 100%. That would mean, of course, that we were getting an order for every quote. It would also probably mean that our prices were too low and should be higher to generate more profit.
In whatever business you are in, you will be able to identify important ratios (or other numbers) that are relatively easy to generate that will give you a fairly accurate picture of how you are doing.
© 2008 by Paul Burri
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