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•An Incentive Compensation System for all employees that rewards employees for performing above
standard or budget and does so by sharing a portion of increased profits.
When all of these organizational components are in place and being utilized routinely, organization will have structure and purpose. Employees will feel they know where company is going and what their role is in helping it get there. They will know boundaries of what is expected as acceptable behavior and they will be aware that outstanding performance will be rewarded.
Now let’s look a little deeper at what we mean by Operating Support Systems.
The simplest type of system is a form, such as employment or credit applications, a product return authorization or a shipping release document. More involved examples of systems include cash forecasting and management, budgeting, variance reporting and incentive distributions. These more involved systems usually include some method of automated assistance such as a Microsoft Excel® worksheet or even more specialized software.
Usually most involved system for a small business is Accounting System. This may be a relatively simple system such as QuickBooks® or Peachtree®. These canned systems are particularly good for non-manufacturing businesses that simply buy and resell items. Also, they manage customers, vendors, accounts receivable and accounts payable very well. Finally, they have capability of generating excellent managerial reports.
For manufacturing or other businesses that modify (add value to) product after purchasing materials or for larger scale Point of Sale retail businesses, software that is more specific to industry may be more appropriate. Great care should be taken before purchasing these systems, however, as they (1) often are much more expensive in long run than simpler systems, (2) provide superior product cost accounting but often inferior general accounting reports and (3) have rigid reporting formats that are difficult to modify or adapt.
No matter what type of business, some type of accounting software package that can capture daily transactions in a real-time environment and be easily operated by in-house personnel is needed. In today’s fast paced business world, relying on an accountant to provide periodic statements of company performance several weeks or even months after fact is not an acceptable strategy.
Other systems small businesses should have in place:
•Cash Management. This should be a forecasting system (spreadsheet) that projects accounts receivable and other inflows against accounts payable and other outflows and allows management to anticipate shortages and take action before a crisis occurs or to improve utilization of excess cash during periods of relative abundance. The projection should be for at least six weeks forward. Properly automated, this system should take no more than 15-30 minutes per week for an administrative person to generate for management review.
•Budget. This is one-year profit plan and critical to management control. This system should relate to company’s historical cost structure but allow for zero-based budgeting (justifying all costs by line item). The system should be automated to produce monthly budgets that directly relate to whatever sales volume was, in fact, generated. Properly automated, this system should require only a few hours per year of management input.
•Variance Report. This system is complementary to budget system. It should be automated to produce a comparison of actual results against budget and should report monthly and year-to-date totals by line item. The report should indicate trouble areas, by exception, for management to take action upon. Properly automated, this system should take 10-15 minutes per month for an administrative person to generate report.
•Key Indicator Flash Report. This report summarizes on one page key weekly changes in cash position, accounts receivable, accounts payable, sales and inventories. Requires 10-15 minutes per week for an administrative person.
•Labor Burden Worksheet. This spreadsheet keeps track of costs of benefits and other employee related expenses by employee and department. The full cost per hour or year for each employee is reported, which can and should be used in pricing strategy and pricing calculations. A complementary Employee Benefits Sheet repackages information for communication to employee as their full-benefits compensation package. Requires 15-30 minutes per quarter for an administrative employee to update information.
•Job or Product Pricing System. This system automates calculation of pricing required to meet overhead absorption requirements and budgeted profit goals or it can report net profit margin before tax on any proposed pricing scheme. This system is used as needed.
•Incentive Plan Worksheet. This is a system for equitably distributing profit sharing monies to employees based on loyalty, performance and extent of employee responsibilities. Properly constructed, it requires only 10-15 minutes per quarter to input updated information.
•Break-Even Calculator. This system calculates company’s break-even sales volume by day, week, month or year. Also provides “what-if” capability to analyze major decisions that potentially and significantly affect company’s cost structure before decision is implemented. This system is used as needed.
•Weekly Sales Reporter. This is a reporting system that keeps track of sales by product group and salesman on a weekly, monthly and year-to-date basis. Requires 15-30 minutes per week for updating by sales manager or designated subordinate.
If you have none of these developed, task is not as daunting as it may seem at first. Plug-in systems are available from a number of sources at modest cost and include backup training and support (one such source can be found at profitmanagementinstitute.com).
In summary, management principles discussed above can be visualized as a stool with four legs. One and two legged stools are totally unstable. Three legged stools are more stable but can tip if too much weight is shifted from one side to another. Four legged stools are most stable.
The four legs supporting our profitable business stool model are, again:
1.Positive, Committed, Persistent and Patient senior management.
2.A Defined Business Concept and current Strategic Business Plan.
3.A Structured and Functional Organization.
4.Basic, Automated Tracking Systems to support organization and make it efficient.
A business with these four critical components in place stands a much higher probability of success than businesses that are not so equipped.
© 2004 The Profit Management Institute, Inc. All Rights Reserved
Robert A. Normand is Executive Director of the Profit Management Institute located in Sarasota, Florida. The Institute is dedicated to providing small business management guidance and rehabilitation of businesses exhibiting sub-standard performance. The Institute’s website can be viewed at profitmanagementinstitute.com
