Managing Finances & Resources

'To err is human, but to really foul things up requires a computer'. Anon.

Running a business is really all about managing resources, whether they are financial resources, assets like computers and stock, or people and their different capabilities and strengths, or any other resources. 

This article examines how small or start-up businesses can use different resources, and the pros
and cons of varying approaches in a number of areas.

Computers
Most businesses use computers for some part of their operations, with varying degrees of success. A properly installed system can add major efficiencies to the operation of a business, but an out-of-control system can wreak havoc.
 
In the small business arena, the typical areas of possible computer use include:

• Bookkeeping
• Customer/prospect databases
• Word processing
• The Internet
• Other applications

Bookkeeping
There are literally hundreds of accounting packages available today, and it's a minefield for the uninitiated. Which package should you use?

Like most software packages, accounting packages can give the user a lot of power, offering every conceivable feature. (It has been said that the 80/20 rule applies to software usage - 80% of users only use 20% of the package's features).

With some software packages, this is okay. You can readily produce a nice looking document from a word processing package, even though you don't understand most of its features, the fact that you're under-utilising the software doesn't affect its usefulness. However, with other applications, this might not be the case. Take for example CAD packages, used by architects to design buildings. With limited skills, you could probably use CAD software to design a building, but if you lack engineering knowledge, would the building stand up?

The same applies to accounting software. You could install a package that does everything your accountant does. But if you don't understand bookkeeping principles, how much reliance could you place on a balance sheet or income statement produced by that package?

The key to using accounting software successfully is to find a package that matches your level of understanding where you understand the significance of what you're keying in, and where you understand the reports that are produced.

For some businesses, a fully integrated general ledger accounting system is the answer. If you, as the user of the system, understand debits and credits, and can interpret a balance sheet, you should have a full accounting system, because the information it generates can be very useful.

However, most small business proprietors lack detailed bookkeeping knowledge, and have neither the time nor the inclination to learn it! For these businesses, a fully integrated general ledger system is not the answer, and may even be potentially dangerous. The inherent complexity of such a system may lead to errors, as well as require a lot of time in trying to learn how to use the system, and in coping with the frustration and expense of trying to sort out any problems, either by the owner or their accountant.  Furthermore, without a detailed knowledge of accountancy, proprietors would not be able to make use of many of the features and reports anyhow.

If you fall into this latter category, the answer is to use a package that gets you involved in the bookwork to the extent that you can understand, and to produce reports that are useful, and relevant to your needs. Equally importantly though, these reports must be useable by your accountant as a starting point in reviewing your business performance and in finalising your annual accounts.

Most fully integrated systems incorporate most, if not all, of these sub-systems. Ideally, sub-systems should be able to be activated and de-activated as required, so that if de-activated, all aspects of that sub-system become invisible.

It is important to remember that a computerised accounting system doesn't do anything new with your books - it simply automates a task that would otherwise have to be done manually. 

Figure 3 illustrates a simple accounting system model which users with limited bookkeeping skills could adopt. Under this model, any or all of the sub-systems could be computerised. For example, if you computerised the Customers and Cashbook side, customer payments would flow automatically to the cashbook as you bank the cheques. You could operate the Suppliers side manually (as many small business prefer), whereby you would enter supplier cheques directly into the Cashbook.

Figure 3: A simple accounting system model.

How do you find a software package that suits?

The first thing to do is ask your accountant. With your level of bookkeeping knowledge in mind, they will be able to recommend something appropriate for your particular business needs.

They may also know of packages that let you give them your data on a CD or other removable storage device, or by email, so they can 'import' all your transactions to their own computer package electronically, making their job quicker and easier, and so helping minimise the fees they charge you.

You should also ask business colleagues what they use, but remember, their accounting skills and overall requirements may differ from yours. Contact your trade or professional association, to see if there are any packages that have been designed especially for your industry. These may offer extra features not found in mainstream packages.

Computer retailers have many accounting packages on their shelves. However, consider the skill and knowledge of the retail salesperson before you accept their recommendation, and also think about the after sales service - will they be able to help you set it up? It's not uncommon for small businesses to end up paying three or four times the cost of complex software for someone to come and set it up for them.

Although price will undoubtedly affect your choice, cheapest is not always best, and nor is the most expensive always the most suitable. If you save a couple of hundred dollars on the purchase, but it takes your accountant an extra few days of work every year because the reports aren't in the right format, or important details are missing or recorded incorrectly, you'll be well behind before long.

If the package you finally choose is not the one your accountant recommended, let them know what you've decided, and let them look at the package and/or its specifications. There may be some aspect of the package that perhaps you didn't notice or consider. Remember: your accountant is the best person to know what your accounting software should and shouldn't do.

For anyone starting a new business, it's also wise to choose an accounting package which is not only easy for a layman to use, but which also incorporates access to any training or other support needed.  If you strike a problem or have a query, you really need a quick answer to avoid possibly long delays while a call centre on the other side of the world puts you in a queue of possibly thousands of other queries. The more local support you can get, from people familiar with New Zealand business needs, the better off you will be.
    
Ideally, you also need a package which is flexible, starting small initially and then, as your business grows over time, so can your accounting system, adding extra modules or features as and when that extra cost is warranted. 

Customer/prospect databases
Computers can really give small business marketing a shot in the arm. Before the computer age, many small businesses found it uneconomical and time consuming to engage in direct marketing campaigns, but simple database packages with mail merge bring direct marketing to the smallest business. We will look at direct mail in more detail in a later chapter.

Figure 4: Database terminology explained.

There are some extremely powerful database packages available today, but unless you want to delve into the world of database programming and design, you would be well advised to stick with a very simple one. A customer and/or prospect database with mail merge capabilities is probably the simplest database application you could imagine, and all basic requirements (adding, editing, mail-merging etc) could be handled by the most elementary database package.

Word processing
At the simplest level, a word processing program is simply a glorified typewriter, with the added benefit of being able to store commonly used letters and documents so they can be 'recycled' over and over again.

Word processing packages also give you the power to create professional looking documents, which can enhance the appearance of your organisation to customers and others. However, remember the saying: Substance over Form the Form, or appearance, is one thing, but the Substance or content, is what counts!

The 80/20 rule invariably applies to word processing packages (80% of users use only 20% of the features), but the good thing about this (and in stark contrast to accounting packages) is that you can still get good results even if you don't know or understand 80% of the package's features.

When choosing a word processing package, consider the following:

• it should be simple enough for you to use without having to read a 500 page book or attend courses;
• it should be WYSIWYG-based (What You See Is What You Get, referring to the fact that as you type, the screen displays the words exactly as they will print, complete with typeface, size etc);
• it should be able to link up with your database package for running your mail merge documents.

The Internet
Wherever we turn these days, we're bombarded with the Internet, and without doubt, the role it plays in our daily lives will increase dramatically in years to come.

By and large, in most small businesses today, its applications are limited to 'email' (i.e. sending and receiving messages and data), and as an information gathering tool (e.g. searching databases or logging questions with specialist groups).   

In retail businesses, some EFTPOS (Electronic Funds Transfer at Point Of Sale) networks use the Internet for the services they provide to their retail clients, while some others rely on normal telephone or even cellular phone links. If your business is serving retail customers, most of them will expect you to have EFTPOS available, as well as possibly credit card facilities.

In addition, the Internet is increasingly being used as a marketing tool. Organisations can set up a home page or a website which anyone with Internet access can view. Home pages usually contain advertising material, and provide an easy means by which anyone can email the organisation and place an order or request more information. However, market research suggests that many businesses which set up web pages as a means of attracting customers are finding that their expectations are not always being met, and that on-going maintenance costs are higher than they anticipated.

If you feel compelled to establish a home page for your business, you should remember the key distinction between web advertising and traditional advertising. Traditional advertising has always limited you to a finite space, whether it has been a 30 second TV spot, or a 3 x 30cm magazine advertisement. However, with a web page, you have the ability to offer your prospect as much information as they can bear! By carefully designing the entry page and links, you can give your prospect links to product information, sales brochures, testimonials, operating instructions, magazine reviews, photos, other websites that complement yours; the list goes on. The prospect should be able to find an answer on your pages to every question they could have.

To surf the Net yourself, you will need a reasonably fast modem and communications software. These are usually sold as standard with most computer purchases. You will also need to establish an account with an Internet Service Provider (ISP) whom you use as a gateway to the Net. Your service provider will charge you on either a flat fee basis, or at a set rate per hour.

Currently, data transfer speeds in many areas mean that surfing the Net requires patience, and research indicates that, while most PC owners have had a look at the Net, not all use it regularly. This will undoubtedly change as technology advances. More and more businesses are finding niche market applications via the Internet, but it's anyone's guess as to how far the Internet might be utilised in a few years.

E-commerce is certainly one area of growth potential, and the huge popularity of websites like Trade Me and E-Bay confirms this trend. Theoretically, almost any business could benefit from potential e-commerce applications to help widen their customer base and sales. However, will the benefits outweigh the likely costs involved? While there have been some notable successes, many other companies have jumped on to the e-commerce band-wagon, only to find the ride has been a very expensive experience.  For any small company considering e-commerce, do think about areas of potential applications - areas where you could offer extra benefits for your present or potential new customers and gain a sustainable edge on the competition. But also look very critically at the likely set-up costs, as well as realistic, on-going maintenance costs.  Be conservative in assessing likely benefits, and then balance those benefits against the costs, to ensure there is a worthwhile business case for the initiative and all the effort it will involve.         

Other applications
A browse at your local computer store will reveal a huge range of software applications, and we have only looked at a few here. There are spreadsheets, presentation packages, drawing and graphics programs, utility programs, not to mention games by the thousand. Many of these programs can enhance your business, but remember: there are always costs setting up, maintaining, upgrading and so on.

Back-ups
Entrusting any sort of information to a computer brings an added risk: loss of data. Keep this thought in the back of your mind at all times: sometime in your computer's life, it will fail. Accept this as a certainty. The loss you suffer at that time will be entirely dependent on how good your back-up practices are.

Your back-up procedure might simply involve backing-up selected data files to CD or USB device, or might entail storing the entire contents of your computer onto a tape or high capacity drive. If you simply back-up selected data files, you should be aware that if the inevitable happens, you will have to re-install and possibly re-configure all your software and this may take many hours.

How often should you do a back-up?

Whenever you enter data to your computer, think to yourself: Would it worry me if I lost this data and had to do it again? If the answer is yes, do a back-up. You'll sleep easier!

As a minimum, you should back-up vital computer files weekly, and store a copy off the premises. You should also adopt the grandparent-parent-child principle in your back-ups, regardless of whether you're using CD, USB or tape. This principle involves using three sets of tapes or disks in the back-up cycle. For your first back-up, use Set 1, the next time Set 2, then the next time Set 3. For your fourth back-up, revert to Set 1 again, and so on. This way, if anything happens to the current back-up, you can still call up the previous one, and if that one is damaged, you have the next oldest set.

Networks
Networking in a computer sense refers to the linking of two or more computers so that they may share data, programs and/or devices (e.g. printers, modems). In some businesses, a network is vital for example where several people need to access the same data files simultaneously.

Unfortunately, networks bring with them a whole new set of problems. Installation and configuration can be complex, and this is usually carried out by experts at a cost to the user. In a sense, network software adds another level of processing between the user and the computer one more level at which problems may occur.

Programs need to be 'network-aware' if they are to provide simultaneous access to data files, as they need to control potential conflicts. For example, if two users want to update a customer at the same time, the software must lock out the second user until the first user has finished.

            Benefits:
            - Multi-user access to central data files
            - The ability to share resources, like printers, can reduce capital costs
            - Back-ups can be easily controlled if all data files are on one computer
            - Opens up way to intra-office email

           Drawbacks:
           - Usually involves additional cost in purchase, installation and ongoing maintenance
           - Makes operating environment more complex
           - Adds an extra level between the user and the computer, increasing potential for
             problems

Viruses
Everyone has heard of computer viruses - those programs that attach themselves to host files, and wreak havoc in your computer.

Viruses vary in potency some just display messages like 'Your computer is stoned', whereas others erase all your data and software. There is an antidote for most, but as many viruses aren't discovered until after they've done their damage, having an antidote is of little consolation.

The adage 'prevention is better than cure' is certainly true in the case of computer viruses. There are many virus protection packages on the market today, and no business computer should be without one.

Virus protection programs usually 'reside' in your computer's memory, keeping alert for telltale signs that a virus is at work. If they identify a potential virus, they will warn you, and invite you to take appropriate action. Most of these programs come complete with cures, so when properly installed, they can eradicate most viruses before they cause any damage.

Traditionally, most viruses spread via programs as they're being transferred from computer to computer, although some migrate through data files like word processing documents. It is therefore wise not to install any program of uncertain parentage on your computer, and to ensure that your virus protection software scans all incoming CDs.

Viruses are creations of small minded people, and unfortunately, these people are always working on bigger and better viruses. It is, therefore, important that you keep your virus protection software up to date, by obtaining regular updates from the supplier.

Business insurance
For a business, insurance is a necessary evil. You really need to have it in some form, but you hope it remains an unproductive overhead.

There are various types of policies, covering a variety of risks. Some are vital and some not so vital.

The insurance industry is very competitive, and you should consider using an insurance agent. Agents are familiar with different kinds of policies and will be able to review your needs and make recommendations. Remember that some agents are connected with specific insurance companies, and may not hunt around for a better deal. Others are independent, and although they may favour a particular insurance company or companies, they will place the business elsewhere if your needs are better met.

Insurance agents receive their fee in the form of commission paid by whichever insurance company gets your business.

The most important thing in taking out an insurance policy is 'full disclosure'.  You must answer all questions on the proposal form completely and honestly. If you don't, when you make a claim the insurance company may argue that there was a 'material omission', and may be able to avoid making a payout. Insurers will spend more time verifying your proposal after you make a claim than when you first applied for a policy. Just because they accept your money doesn't mean they've accepted the accuracy of your proposal!

Another important point concerns over-insurance and under-insurance. Even if you insure something for more than it's worth, or insure it with two separate insurance companies, you aren't able to claim for more than the value of your loss. And if you under-insure, the principle of co-insurance applies in effect you are agreeing to carry some of the risk yourself. For example, if your shop contents are worth $50,000 but you only insure them for $25,000, any claim you make will be reduced accordingly if you suffered a break-in and lost stock worth $10,000, the insurance company only need pay you $5,000.

Note also that you must have an 'insurable interest' in the risk being insured. You could not, for example, take out an insurance policy on your next door neighbour's car, because you would not suffer any financial loss if it was stolen.

So what kinds of insurance might you need to consider?

Property Insurance
Property insurance covers your assets against loss, destruction and theft. You should opt for a policy that offers replacement value cover, because there's no point having insurance for anything less than what it will cost if the item needs replacing.

Most property insurance policies exclude specific events, for example war, flood damage, etc. Make sure you understand what these exclusions are, and that you are happy to accept that risk yourself. If you aren't, you can probably find an insurer that will accept the extra risk, but it will undoubtedly cost more.

Accident Compensation
New Zealand's Accident Compensation Corporation covers all New Zealanders for injuries suffered at work, at home, on the road or at play, anywhere in New Zealand.
 
All employers pay ACC employer premiums calculated as a percentage of earnings, and that percentage varies depending on the nature of your business - the higher the perceived risk, the greater the premium. For example, office-based and similar businesses are at the low end of the scale, being assessed at a low rate, while those involved in the building and related industries are assessed at a much higher rate.

All employees also pay ACC employee premiums, based on a percentage of wages and salaries received.  And the self employed also pay ACC earner premiums.

While ACC provides basic cover for medical costs arising from treating accidental injuries, as well as some benefits for serious injuries like loss of limbs or permanent disability, many businesses also take out supplementary private insurance to cover their personnel for death or permanent disability arising from workplace injuries. This extra cover supplements the basic ACC benefits, and provides an extra measure of protection for employees (and thus their dependents).

Loss of Profits and Business Interruption Insurance
You can insure your business for loss of profits. This covers you for the profits that you lose as a result of pre-defined events, like destruction of business premises. Having this insurance means that you can still meet your overheads like wages, rent, etc even if you can't carry on business. The policy will specify a maximum period over which such payments will be made. If you make a claim, you will need to prove the amount of your loss, and this will be easier if your accounting records are up to date.

Public Liability, Product Liability and Professional Indemnity
You can be held liable for accidents that happen on your business premises (e.g. a customer falling over and hurting themselves). This is referred to as public liability. One claim can be enough to destroy your business, so no business should be without some form of public liability insurance. It is usually quite inexpensive.

You can also be held responsible for the consequences of selling faulty products or for poor services provided by you. Professional indemnity insurance and product liability insurance are designed to cover you against such claims from customers. This is normally much more expensive than public liability, and you should assess the cost in the light of likely claims.

Some industries are required to have this form of insurance, either as laid down by law or by a controlling body. Your industry association should be able to provide further details, and may be able to put you in touch with insurance brokers who specialise in your industry.

Sickness and Accident Insurance
Even though working proprietors can be covered to a limited extent the ACC scheme, you may consider taking out a separate medical insurance policy for your partners and yourself. If you have to take a lot of time off work, these policies pay out a defined amount each week and usually also cover most medical costs. However, the big difference is that a medical policy will provide coverage regardless of how or where the injury or illness occurred, whereas ACC only provides coverage for accidental injury. This form of insurance is especially critical if you're a one-person business, particularly if you have dependents relying on your weekly pay packet.

Key Person and Life Insurance
A key person policy is one which provides a capital payout in the event of a key person suddenly becoming unable to work in the business. It is more commonly seen in business partnerships, and is designed so that the payout will compensate the business for the revenue lost from a partner's permanent absence, until such time as other arrangements can be made.

Partners in a business partnership sometimes have term life insurance policies on each other's lives, so that if a partner dies, the remaining partner or partners have enough money to buy out the deceased's share of the business. 

Such key person and term life insurance policies have significant ramifications involving income tax law as well as general insurance law. You should seek professional advice from your solicitor, insurance broker or accountant before taking out such policies.

Other Policies
There are many other policies available to cover a variety of contingencies: cash, machinery breakdown, embezzlement etc. An insurance broker can provide you with a checklist.

Business Security
Business security is more than having someone call by your premises four times a night jangling keys, although that is important if your location and nature of business warrant it. There are also issues like protection of office records from destruction, malicious employees and even competitors.

Your property insurance can go part of the way to cover you for losses from fire or other destruction. However, what would happen if fire destroyed all records of your customer accounts? Would your customers voluntarily send you the money that they owed you, knowing that you didn't know how much was due? What if you lost your customer list, developed over many years? Or a file of correspondence that was to be used in a forthcoming court case? Property insurance won't cover the consequence of these losses, unless you specifically include coverage for the often substantial cost involved in recreating computer records from scratch.

What if it was a disgruntled employee who destroyed these items?

You will need to assess the steps that you feel are worth taking to protect your business against these kinds of risks. One solution is a fireproof safe. Another solution is to periodically copy these vital documents and leave them off the premises, perhaps at your home.

Computerisation leads to a whole new requirement for data security, and you are not only liable to loss from destruction of the computer, but also to loss from computer equipment failure. Data back-ups are of vital importance.

Employment
Taking on your first employee is a big step, and is usually a milestone in the growth of any small business. It places a significant burden on the company's cashflow (hopefully being more than offset by extra income) but it is also the time when you take on management responsibilities.

Much has been written on personnel management, and that is beyond the scope of this article. But let's consider the business side of employment.

The first hurdle is a psychological one.

Your employees will never do the job as well as you, or at least that's what you'll believe. They'll probably make mistakes, goof off occasionally, and do other things that you never had the luxury of doing as the proprietor. They may not share your commitment, enthusiasm or experience but these qualities can be groomed. And they will also doubtless do the tasks differently from you.

You have to be imaginative and humble enough to accept the compromises of sharing the workload with a hired hand, and to consider it an opportunity of introducing a fresh set of ideas and approaches to your business.

And in the final analysis, even if they take three hours to do a task that would take you one hour, that's still one hour you've freed up, and hopefully you will have achieved something more significant in that hour.

How do you find the right person? The most common method is by placing ads on online job websites or newspaper advertisements. When you run advertisements, give as much detail about the job as possible, and ask applicants to email or post a CV. You can then review the applications at your convenience, and speak only to those who meet your criteria.

Employment agencies specialise in sourcing staff for clients. Sometimes they place advertisements themselves, sometimes they have people on file who want new jobs, and sometimes they 'head-hunt' by calling potential applicants out of the blue to see if they're interested in changing jobs.

Agencies charge the employer a fee, usually based on a percentage of the salary involved (often equivalent to several weeks' pay). Although agencies take a lot of the work off your hands, you will still be involved in the final interviews. You need to assess carefully the costs and benefits of using an agency.

When you meet with the applicants, try to put yourself in their position and think back to when you were looking for a job.

Try to avoid two-on-one interviews, as this can be daunting to the applicant, and may not bring out the best in them. Watch your body language too. In fact, you should play the same game they're playing as they'll be trying every trick in the book to impress you, and you should do the same. Even if you've got dozens of promising applicants, you still want to make a good impression on them, because you want the best of the bunch to want the job.

In the interview, don't forget to give applicants the chance to ask questions about your company and the position. If they leave the interview with some doubts and receive another job offer, you may miss out on a good employee.

It's most important that you follow up the previous employers of short-listed applicants, even if a written reference was tendered. Employers often loathe making negative comments in writing and a quick phone call may reveal some vital information.

Once you've chosen the person you want, contact the unsuccessful applicants if your choice doesn't work out, you may want to be able to go back to the list. Provide the successful applicant a letter, and a detailed employment contract, setting out the job description, salary and conditions and other details. 

Your employment contract must comply with the Employment Relations Act, which governs all aspects of the employment relationship in New Zealand.  For instance, probationary periods are no longer legal in New Zealand, so you must be doubly sure you've chosen the right candidate, before you offer them the job. Later on, if you decide any employee is performing so badly that he or she should be discharged or demoted, the Act has stringent procedural provisions which must be followed; and many employers have found that even minor procedural breaches can later cost them dearly in court.

Do use professional advisers to help draw up your employment contract, and ask business colleagues for examples of employment contracts they use. If you ever encounter a situation where you are contemplating discharging or demoting an employee, be aware that this area can be a minefield where you will need expert, professional advice to ensure the correct procedures are fully and fairly followed. 

Issues to consider in letter of appointment and employment contract:

• Job description in detail
• Hours, including starting and finishing time
• Expectations, targets
• Salary and allowance (i.e. pursuant to award?)
• Policy regarding overtime (i.e. payment with or without loading, or time off in lieu)
• Pay frequency and method (e.g. fortnightly by cheque)
• Sick, holiday and other leave entitlements
• Leave loading
• Uniforms or dress code
• Superannuation entitlements, award and other

The first employee is always the hardest. You may need to re-configure your business a little to suit the presence of another person it may be a good opportunity to pick up your own dress standard, or standardise your hours. And don't forget paydays! It's easy to do, especially when you're used to just cashing a cheque whenever you're a bit short - it's one sure way to upset your new employee.

When new employees start work, organise an orientation meeting so they can become familiar with your business goals and aspirations, and make sure they understand clearly what is expected of them and to whom they report.

Give your employees plenty of feedback, both positive and negative. Set aside time for formal reviews, at least yearly but preferably more frequently, and make sure employees have at least a few days' advance notice of the review meeting to give them a chance to muster their thoughts. The staff review process gives them and you time to discuss future plans, hopes and aspirations, as well as an opportunity to say those things that get swept under the carpet in the day to day work environment.

A trap often encountered by small businesses is placing too much reliance on one employee. This is particularly important for businesses employing only one or two people. Always be aware of the consequences of key people leaving, or becoming ill if they suddenly aren't there, what would happen to your business? You can minimise this risk by ensuring that you or another employee is familiar with that person's job. This way, someone else can fill that person's shoes if necessary, and will also be in position to train replacement staff.