Sr~zxcY A SCORECARD FOR SMALL BUSINESS PERFORMANCE Roy A. Cook Fort Lewis College Janet Bear Wolverton Oregon Institute of Technology ABSTRACT Eva(uaring organizational performance of small businesses has frequently been a neglected managena( function. When eva(uarion efforts have been undertaken, they have ranged from simple interna( reviews to complex and often costly audits conducred by independent parties. However, most individuals working in a small bustness rarely take the time or make the effort ro undertake a comprehensive review vf their business activities. To begin the process vf answering the important question of how well a small business is performing, a straightforward approach that is easy to prepare and interpret on a regular basis is requi red. Realizing thar most individuals involved with small businesses are pressed for time, an easy-to-use evaluation instrument designed to focus attention on strategic perfonnance indicators (SP)s) has been developed. These SP(s focus attention on the primary functional areas of a business: management, marketing, and fmance. Each question has been designed to help the reviewer think about the importance of straregic performance indicators to the overall success of rhe business. INTRODUCTION Evaluating overall organizational performance has long been recognized as an important (Eccles & Pyburn, 1992), but often neglected, managerial function. When evaluation efforts have been undertaken, they have ranged from simple internal reviews to complex and costly audits by mdependent parties. Unfortunately, many individuals associated with small businesses rarely take the time or make the effort to undertake a thorough performance review. Typically, performance reviews and audits have focused on evaluating the financial area, but they can be equally appropriate and effective in identifying the need for improvement in other functional areas of a business (Bogan & English, 1993). However, the literature appears to be devoid of an easy-to-use, yet comprehensive, tool that will meet small business needs. In response to this void, a performance evaluation instrument was specifically designed to be used in a small business setting. To serve the needs of small businesses, an evaluation instrument should be both universal and comprehensive in nature. It should contain common elements found in other traditional performance evaluation formats such as management audits, marketing audits, and accounting audits. The performance evaluations to be conducted in any one functional area should not be considered mutually exclusive or unrelated to those in other functional areas, since all business activities are inextricably intertwtned. Evaluations should be designed to I highlight thc interrelatedness of all business activities in a anempt to achieve the ultimate goal of striving for continuous quahty improvement. Small business evaluation instruments should he designed with a balanced approach in mind. To preserve their usel'ulness, they should be of limited scope and focus on strategic. pcrf'orrnancc indicators (SPI) within the three primary functional areas of' business: management, marketing and I'inance. SPIs must be activities that are both under the owner's or manager's direct control and which can be modified to result in improved efl'icicncy and/or el'fcctivcness. Therefore, selected SPls in an evaluation instrument should focus on key procedures, practices or sets of'data; be comprehensive in nature; and provide an opportunity for timely corrective action. Thc proposed scorecard, based on a simple "yes/no" dichotomous design, may err on the side of'ilnplicity, hut it was developed to encourage use by a broad range of'nterested parties from sole proprietors to small business consultants. Thc comprehensive overview of kcy business activities encourages users to think about linkages among the. I'unctional areas reviewed. Although these questions pre-suppose some basic knowledge of'usmess principles, practices and terminology, they have been eral'ted to bc "user-friendly " Those individuals using the scorecard who have not acquired a general knowledge of business subjects through education or experience might need assistance completing the evaluation process the first time. This performance evaluation scorecard, developed specifically for small businesses, uses thc balanced viewpoint approach proposed by Kaplan and Norton (1992). Individuals interes(ed in performance evaluation formats suitable for large husincsscs should see Kaplan and Norton (1992).'hc questions presented in the proposed perfonnance scorecard (see Appendix A) are designed to be general in nature, yct limited in number to encourage periodic use and focus on business practices that can promote improved perfonnance. These questions f'ocus attention on a variety of activities and measures ranging from planning and perfonnance processes to key strategic variables. They enable the user to easily identify significant trends. They also emphasize the important, but often overlooked, task of continuously gathering information critical to the I'uture success of thc business. It is important to note that the "yes/no" answers are not designed as an end in themselves, but as a guide to I'ocusing attention on organizational performance and ways to improve that performance. Either a positive or negative response to a question may indicate the need for corrective action and/or further analysis depending on the SPI being evaluated. Thc "Action Required" column allows the user to document future actions. Some qucstlons, by their very nature, could guide the user to take immedialc corrective action, while others may require additional information and analysis. 'aptau, Roben S aod t)avrd P. Nonoa (l992) The balanced scorecard - measures that dove performance. H«rv«rd B«rr«era Review, 70(l ), 7 I -79. 2 SPIs OF A MANAGEMENT REVIEW Reviews of management performance have typically been designed for large organizations and have been conducted by: I) evaluating qualitative performance standards; 2) comparing accumulated performance data to planned quantitative objectives; and/or 3) conducting surveys. Due to thc importance of qualitative and quantitative strategic performance indicators, both were incorporated into this scorecard. Surveys were not selected for inclusion in this evaluation instrument due to financial and time constraints facing most small businesses. However, surveys may be used on a less frequent basis to validate perceptions and I'indings obtained from the completed scorecard. Brossy (1986) outlined several qualitative and quantitative performance measures for assessing chief executive officer (CEO) performance. Many of these measures appear appropriate for small businesses and have, therefore, been incorporated in the proposed scorecard. Although many performance criteria could be sclccied, the four strategic perl'onnance mdicators included in the proposed scorecard focusing on the functional area of management are: I Strategic Direction, 2. Strategy Implementation, 3. Human Resources, and 4. Community/Government Relations. To assess the presence of an established strategic direction, attention can be focused on the I'ollowing questions: I. Has the external environment in which thc business operates changed? If yes, have changes been made to align thc business with these changes? If no, how will potential changes be monitored in thc future? 2. Has a mission statement (the reason I'or the business's existence) been written? If yes, does it reflect the current vision of the owner-manager? If no, when will this statement be written? 3. Have specific goals been published for the next two to five years'? If yes, how much progress has been made toward accomplishing these goals? If no, when will specific goals be identified and recorded? Once the strategic direction of the business has been assessed, the evaluator can then proceed to reviewing the effectiveness of strategy implementation. Simply developing a well thought out strategy I'or conducting business is not enough. These plans must be put into action. Successful strategy implementation requires tying performance measures to desired outcomes (Grady, 1991). The effectiveness of strategy implementation can be assessed by answering the following questions: 3 4. Arc cmployecs dcdicatcd to achieving the stated goals ol'he business? If ycs, how has this dedication been reinforced? If no, what changes have been planned to improve commitment'? 5. Have procedures been established to insure consistency in quality and quantity of goods/services produced/provided'! If ycs, do thcsc proccdurcs still reflect thc desire to meet and/or exceed customer expectations? Il'o, have time I'raines hccn sci to cithcr write and/or update these documents'? Evaluating strategy implementation leads the reviewer to the next SPI - human resource issues. The strategic importance of human resources to overall business success was highlighted by scvcral authors (c.g., Flamholtz, Searfoss, & Coff, 1988; Grady, 1991; Watts & Onnsby, 1990). Grady (1991) noted the importance ol'mplementing and measuring performance as a means ol'coinmunicating strategy to employees. Watts and O&vnsby (1990) also identified thc need for I'ocusing attention on human resource iiisues in order to achieve organizational cff'ccuveness. Flamholtz et al. (1988) focused attention on the econoinic value of human rcsourccs. Kcy human resource issues may be evaluated hy asking the following questions: 6. Have yield ratios and rctcntion rates bccn calculated for various recruiting sources'! ll'yes, are the most elyective sources heing used? If no, arc new sources that could he morc cl'fcctive being cxplorcd'! 7. Have key individuals who are capable of assuming more responsibility been identilied'! If yes, what type of training have they rcceivcd or are they scheduled to rcccive'! ll'o, are plans being developed to retain key employees? 8. Are records maintained on tardincss, abscntccism, accident frequencies, and turnover'& If yes, what steps have been taken to improve each of these areas'! lf no, arc plans heing maCk to collect data necessary I'r cquitablc human rcsourcc decisions' 9. Are performance evaluations and wage and salary adjustment records maintained on all employees'? If yes, are productive employees recognized and compensated on a competitive basis and poor performing employees counseled on iinproving perl'ormance and/or dismissed? If no, are plans being made to begin keeping such records? 10. Have employees with extended service been given proper attention and consideration in maucrs of scheduling, vacation preference, and other available benefits? If yes, is this information being communicated to employees on a regular basis? If no, arc plans heing made to recognize the relationship hetwccn length of service and einployment benefits? The significance ol'human resource issues was highlighted by Leileld (1992) who noted that "(ajggressive quality and performance goals require strong human resource plans and practices to insure that employees'aximum potential is utilized" (p. 5 I ). h is often said that employees are a business'nst valuable resource. However, unless this resource. is monitored, it may be overlooked and eventually wasted. 4 The final SPI in the management area deals with community and government relations. The questions in this series provide an opportunity for the reviewer to consider relationships between the community and the business. These questions have been designed to focus auention on the critical issues of ethics and social responsibility. Community/government relations issues may be evaluated by asking 1). Have clear guidelines for ethical behavior been communicated to all employees? If yes, how have employees been recognized when their actions support the ethical goals of the businessv If no, is a code of conduct that reflects the ethics of the business being formulated? 12. Does the business return value to the community by supporting socially responsible programs? If yes, how have these efforts been communicated to employees and other interested parties? If no, what programs are under consideration for support? Providing a foundation that encourages ethical behavior and fosters social responsibility creates an environment that benefits the business, the employees, the community, and the customers. SPIs OF A MARKETING REVIEW Thc central role that marketing efforts play in the success of an organization is widely recognized. Bonoma and Clark (1990) noted that managers tend to worry more about marketing issues than those in any other functional area. They also noted that marketing strategies quickly become obsolete regardless of the amount of effort spent on planning and implementation. Therefore, it is important to review periodically the effectiveness and efficiency of a firm's marketing efforts. Although several approaches (Berry, Connant, & Parasursman, 1991; Bonoma & Clark, 1990; Brossy, 1986; Kotler, Armstrong, & Starr, 1991; Walsh, 1990) to reviewing a firm's marketing efforts have been suggested, all agree on the importance of systematically performing this task. By combining the formality found in the components of the classic marketing audit (Kotler et al., 1991) with those of the service audit (Berry et al., 1991), a concise and comprehensive review of marketing efforts can be achieved. In the functional area of marketing, the three strategic performance indicators included in the scorecard arc: 1. Marketing Orientation, 2. Attracting New Customers, and 3. Serving Customers. The proposed scorecard builds upon the approach and ideas suggested by Berry et al. (1991) to develop questions designed to help reviewers assess marketing performance. Those desiring to perform a more in-depth marketing perfonnance analysis should see Bonoma and Clark (1990). 5 The I'irst SPI addressed in thc functional area of marketing, marketing orientation, examines the framework a business has laid to scrvc customer needs. According to Levitt (1960), failure to assess consumer sentiments and the changing environment on a regular basis could result in marketing disasters. It is also vitally imponant in today's competitive cnviromnent to pay close attention to the service clement in a business's nperations. To assess the current marketing orientation ol' finn, it is necessary to answer the following questions: I. Is marketing research directed at determining customer needs conducted on a regular basis'? If ycs, have customer responses bccn incorporated into business activities and/or plans'! If no, have plans been made to conduct basic marketing research'? Are employees who do not interact with customers aware of'how their jobs might influence customer satisf'action'& If ycs, are efl'orts being made to improve customer satisfaction'& ll'o, what type of training are they scheduled to receive? An active marketing rcscarch program can be dcsigncd to provide revicwcrs with a realistic assessment of consumer expectations. Although often complex, marketing research activities do noi need to be detailed, quantitative exercises. It is, however, critical to collect consumer information on cithcr a formal or inf'ormal basis. l)used on an investigation of success('ul small busincsscs, Peterson ( l 992) identified scvcral marketing related factors that were closely associated with: uccess, including consumer oriented goals, positive word-olzmouth publicity and serving customer needs. The effectiveness of a firm's efl'orts to attract new customers can be determined by asking thc following questions: 3. Are I'onnal strategies in place to attract ncw customers'! If yes, has thc cost ef'fectivcness of each strategy been assessed'? If no, what steps are heing taken to identify approaches for attracting new customers'? 4. Are employees motivated to sell to prospective customers'& If yes, are programs in place to rccogmze and/or reward thcsc employees'? If no, are steps bmng taken to educate employees as to thc value ol'rospective customers to the future success of thc bus&ncaa/ 5. Is the organization capable of delivering on the promises made to auract new customers? II'yes, are customers being surveyed to determine their level of satisfaction? Il'no, are steps being taken to ensure service quality? New customers &nay not be thc lifeblood of' successful business, but they provide an endowment for the business's I'uture growth and success. The final marketing SPI to be evaluated is customer service. "The nature of the relationship betwccn a small business finn and its customer is, and must be, one of trust" (Humphreys, Robin, Reidenbach, k. Monk, 1993: p. 9). This customer orientation can be assessed by asking thc following questions: 6 6. Are employees properly trained to perform their service roles? If yes, are programs in place to recognize and/or reward these employees? If no, have plans been made to train employees properly' 7. Are customers offered concrete reasons for doing more business with the company? II'yes, how have these reasons been cominunicated to customers? If no, have steps been taken to identify thc reasons customers patronize the business? 8. Are customers made aware that their patronage is valued? If yes, how is this recognition communicated to customers? If no, how can customers be informed that they are important to thc success ol'he business? 9. Is sufficient attention paid to solving customer problems when they occur? If yes. are records of customer coinplaints being maintained so that potential problems in the system can be solved? If no, have plans been made to train employees in customer service recovery procedures'? 10. Do the facilities and communication materials of thc organization appear attractive to customers? Il'es, have time tables been established to review and update current facilities and oft'erings? Il'o, have plans been made to address deficiencies? 11. Does the organization offer tangible evidence of the quality of its services? If ycs, how is quality communicated to customers? If no, what steps are being taken to identify ways of providing tangible evidence of quality? 12. Do the products/services offered by the organization met the needs of the customer? If yes, how are these perceptions documented'& If no, are steps being taken to identify customer wants and needs? The inter-connectedness of marketing activities with business resources was highlighted by Larrabee (1988) who noted that evaluating marketing plans in relation to these resources can lead to higher profitability. SPIs OF A FINANCIAL REVIEW Although there are numerous financial criteria that could be examined in any business, the following strategic performance indicators have been identified for evaluation purposes since they are the most commonly used (Barnes, 1987; Hermanson & Hermanson. 1994; Lawder, 1989; Yallapragada & Breaux, 1989): l. Budgeting, 2. Ratio Analysis, and 3. Inflation Adjusted Trend Analysis. Budgeting is the most commonly used planning and evaluation tool. Budget information allows the reviewer to identify quantifiable objectives and determine if these objectives were achieved (Yallapragada & Breaux, 1989). When reviewing linancial performance, a comparison of actual performance with budgeted performance or a predetermined benchmark provides valuable feedback on managerial effectiveness. Budgeting can be evaluated by asking the following questions: 7 I. Is a sales budget prepared foreach month of the corning year? If'ycs, is this budget updated monthly to reflect changes in the business environment? If no, what plans are heing made to dcvclop this budget? 2. Is an expcnsc and purchases budget prepared I'or each month of the coming year? If yes, is this budget updated monthly to reflect significant changes? II'o, what plans are being made to develop this budget? 3. Is a capital expenditures budget prepared for each month of the coming year? If yes, have these expenditures been made to retain a competitive advantage' II'o, what plans are being made to develop this budget' 4. Is a budget of projected cash flows prepared I'or each month of the coming year? If yes, is it heing updated on a monthly basis to reflect changes in levels of business activity? If no, what plans are being made to develop and maintain this budget? 5. Have performance benchmarks been established for all quantifiable pert'ormancc measures'! ll'es, have actual re: ults been compared to budgeted amounts? If no, have competitors or industry sources been identified where these performance benchmark measures can bc obtained? Once thc actual results of operations have been cotnpared to the budg ted figures, the reviewer can then proceed to more detailed financial analysis. The management of cash, accounts receivable, inventories and fixed assets is important when evaluating financial performance and can be accomplished through the use of ratio analysis for predictive purposes. A ratio by itself does not provide particularly useful information. It is only when a ratio is compared with some predeiermined standard or the results from previous accounting periods that a true picture of performance can be obtained (Barnes, 1987). Although dozens of ratios can be calculated, the following I'our have been selected for linancial performance evaluation purposes: return on mvestment (ROI), current ratio, accounts receivable turnover, and inventory turnover. Appendix 2 provides examples of thc selected SPI ratios with accompanying analyses. To assess financial performance, it is necessary to answer thc I'ollowing questions: 6. Has the return on investment been calculated for the most recent accounting period? If yes, has this information been analyzed to determine ways of improving profitability? If no, have plans been made to analyze return on investment'! 7. Has the current ratio bccn calculated for the most recent accounting period? II'yes, do measures need to be taken to improve thc current lmancial position of the business? If no, have plans been made to analyze the current ratio? 8. Has the accounts receivable turnover ratio been calculated I'or the most recent accounting period'! If yes, has thc average days in receivables ratio been calculated'! If no, have plans been made to analyze the accounts receivable turnover ratio'? 8 9. Has the inventory turnover ratio been calculated for the most recent accounting period? If yes, has the average days in inventory ratio been calculated? If no, have plans been made to analyze the inventory turnover ratio'? 10. Have these ratios been compared to those of past accounting periods, industry standards and/or projected ratios'? If yes, do the results meet with your performance targets? If no, what sources for obtaining comparable ratios have been identified? Ratios have traditionally been used as an evaluation tool to determine a business'inancial health (Lawder, 1989). However, mflationary effects on financial performance must also be taken into consideration. The final SPI examines the effects of inflation on financial performance. A cursory review of year-to-year revenues can often provide a false sense of growing vitality when inflationary growth is being viewed rather than real growth. To determine the real growth of a business, it is necessary to adjust each year to constant dollars, thereby reflecting the impact of inflation. For a complete explanation of these calculations, refer to Appendix 3. The following question should be answered to complete the evaluation process; 11. Has a source been identified for obtaining inflation information that is appropriate for your geographic region? If yes, is this source reviewed on a regular basisv If no, what measures are being taken to locate an appropnate source of information'? 12. Have the sales, cost of goods sold, net income and other relevant figures been adjusted to determine the effects of inflation? If yes, have financial performance measures been improving'& If no, what measures arc being taken to determine the effects of inflation? By adjusting for inflation, a more realistic picture of a flrm's financial performance can be obtained. Although inflation information on a national basis is a good starting point for analysis, it would be more useful to identify a source containing regional of local information. SUMMARY The purpose of any type of performance evaluation process should be to review business activities and ensure that perl'ormance is as planned. The perfonnance evaluation process also provides opportunities to integrate the functional areas of a business and communicate business strategies throughout the organization. To answer the question of how well a small business is performing, a straightforward approach that is easy to prepare and interpret on a regular basis is required. In this spirit, the authors have developed a scorecard utilizing strategic performance indicators that focus on the primary functional areas of a business: management, marketing, and finance. 9 Thc strategic perfonnance indicators are accompanied by questions which assess current perl'ormance levels for thc three l'unctional areas. Each question has been designed to provide general guidance to help the reviewer evaluate the strategic performance indicator. The perl'onnance scorecard should be completed at regularly schcdulcd intervals. This allows reviewers to assess performance on a regular basis and usc the results for evaluation, control, and planntng purposes. Small business owners and managers may lind it especially useful to have their employees complctc the performance scorecard. By comparing employee responses with their own responses, owners/managers can determine how much variance or continuity exists bctwcen perceptions of perfonnance and actual performance. Peri'otmance evaluation provides one morc tool in the quest for continuous improvcmcnt. 10 REFERENCES Bames, P. (1987).The analysis and use of linancial ratios: A review article. Journal of Business Finance & Accountin, 14, 449-461. Berry, L. L., Connant, J. S., & Parasuraman, A. (1991).A framework for conducting a services marketing audit. Journal of thc Academ ol'arketin Science, 19, 255-268. Bonoma, T. V. & Clark, B. H. (1990).Assessing marketing performance. In T. V. Bonoma & T. J. Kasnik (Eds), Marketin mana etnent text & cases. Hotnewood, IL: Irwin. Brossy, R. (1986, Summer). What directors say about their role in managing executive pay. Directors & Boards, pp. 38-40. Flamholtz, E. G.. Searfoss, D. G., and Col'f, R. (1988, September). Developing human resource g h 4 I I pp y .~Ai H I* .Bp)9. D dy.M.W. )1991.1 ). P I'::I pl g» gy.~M ~A" . pp. 49-53. Hennanson, D. R. & Hetmanson, H. M. (1994. June). Do the numbers tnake sense? Accounting ly f y b ..~NBDC 8,pp. 1-4. Humphreys, N.. Robin, D. P., Reidenbeck, R. E., and Moak, D. L. (1993).The ethical decision making process of small business owner/managers and their customers. Journal of Small Business Mana ement, 31(3), 9-22. Kotler, P., Armstrong, G. & Starr, R. G., Jr. (1991).Princi les of marketin, (5th ed.). Englewood Cliffs, NJ: Prentice Hall. h b,M.)1988,W ).Ad gh k gf I .~IIAdi,pp.IB45. Lawder, K. (1989, June). Ratios 101: Back to the basics of I'inancial analysis. Business Credit, pp. 28-30. fld ~ il99259 b I I.d*h bididg dg dl ..~lp»mtpp51- 55. Peterson, R. T. (1992). A longitudinal analysis of marketing factors related to small business success. Journal of Business &. Entre reneurshi, 4, 71-75. U.S. Department of'abor Bureau of'abor Statistics. (1994, March). Monthl Labor Review. Walsh, E. F. (1990, November). A primer for planning. Sales & Marketin Mana ycmcnt, pp. 75- 78. Watts, L. R. & Ormsby, J. G. (1990, October). Thc eft'ect ol'perational and strategic planning on small firm performance. Journal of Small Business Stratc ~, I, 27-35. Yallapragada, R. R. & Breaux, A. P. (1989, January). Financial statement analysis. The National Public Accountant, pp. 32-37. ll APPENDIX I MANAGEMENT PERFORMANCE Acuon Yes No Re uired STRATEGIC OIRECTION I. Hai the external environment in which the business operates changed'! ll'cs, have changes been made lo align the business wuh these changes'! ll'o, how will otcntial chan es be monitored in the fuiure'! 2. Hai a mission statement (the reason for the business's cxistcnce) been wrinen? If yes, does it reflect the current vision of the owner-manager? If no, when will this slatement bc written? 3. Have spemlic goals been published for the next two to five years'! ll'yes, how much progress has been made loward accomplishmg these goals'! ll'o, when will s cific osis be identilied and recorded? STRATEGY IMPLEMENTATION 4. Arc employees dedicated to nchieving the stated goals ol'he business? If yes, how has this dedication berne reinlorced'! If no, what changes have been tanned lo iin rove commilment7 5. Have procedures been established to insure consismncy in quahly and quantity of goods/services produced/provided'i If yes, do these procedure~ suit rellect the desire to meet and/or exceed customer cxpectations7 If no, have time frames been set to either wnte and/or u date these documents'! HUMAN RIISOURCES 6. Have yield rauos and retention rates been calculated for various recruiting sources'! If ycs, are the inosi cffi.ctive sources heing used'! lf no, are new sources that could be niore effi:ctive bem ex loredv 7. lieve key individuals who are capable of assuming morc responsibility been identilied? II'es, what type o( traming have they received or arc they scheduled to receive? If no, are plans bemg developed to retain key em lo ees? g. Are records mainmined on tardiness, absenteeism, accident frequencies, and turnover? If yes, what steps have Ixwn taken to unprove each of these areas? ll'o, are plans being made to collect data necessary for eqmtable human rcsuurcc decisions' 9. Arc perfonnance evaluations and wage and salary ad/ustment records maintained on all employees'! ll'yes, arc productive employees recognized and compensated on a competilive basis and poor performing employees counseled on intprovmg performance and/or dismissed? If no, are plans bein made to be m kee m such records'! 12 10 Have employees wtth exlended service been given proper attention and consideration in matters ol'cheduhng, vacation preference., and other available benefits? Il'es. is this in(ornmtion bemg communicated to employees on a regular basis? If iio, are plans bemg made to recognize rhe relationshi between len th of service and em lo ment benetits7 COMMUNITY/GOVERNIIIENT RELATIONS Have clear guidelmes for ethical behavior been communicated to all employees? If yes, how have employems been recognized when their acuons support the ethical goals of the business? If no, is a code of conduct that reflects the ethics of the busmess bein I'onnulated'i 12. Does the business return value to the community by supportmg socially responsible programsv If yes, how have these effons been communrcated to employees and other interested pames? If no, what programs are under consideration for su on? MARKETING PERFORMANCE Action Yes No Re uired MARKETING ORIENTATION l. Is marketing research dnected at delennimng customer needs conducted on a regular bastsv If yes, have customer responses been incorporated into business activities and/or plans? It'no, hnve plans been made to conduct basic marketin research7 2. Are employees who do not iaternct with customers aware of how their jobs might influence customer satisfamton'! ll'yes, are efl'orts being made to improve customer sausfaction'! If no, what type of training are they scheduled to receive7 ATTRACTING NEW CUSTOMFRS 3. Are lormal strategies in place to attract new customers? If yes, has the cost effectiveness of each strategy been assessed" If no what steps are being taken to identif a roaches for anractin new customers? Are employees molivated to sell to prospective customers? If yes, are progrmns in place to recognize and/or reward these employees" If no, are steps being taken to educate mnployees as to the value of prospective customers to the future success of the business? 5, Is the orgamzation capable of delivering on the promises made to attract new customers? If yes, arc customers being surveyed to determine their level of satisfaction? If no, are ste s bein taken to ensure service uaht ? SERVING CUSTOMERS 6. Are employees properly trained to perform their service roles? If yes. are programs m place to recogmze and/or reward these employees? If no, have lans been madetotrainem lo ees ro rl v 13 7. Are customers of(ared concrete reasons for doing more business wuh the company'! lf yes. huw have these reasons hewn cunnnunicated tu customers? I(no, have steps been taken to identify thc reasons customers atron&re the business'! tl. Are customers made aware that their pairr&nage is valued'! If yes, how is this recognition communicated to customers? II'no, how can cus&omers he informed that thev arc im onani to the success of the husiness7 9. Is suflicient attention pnid to solving customer problem& when they occur'! If yes, am records of custon&er complainis heing tnaintained so that potential problems in the system can bo solved'! ll no, have plans hewn mnde to train em lo ees m customer service recover rocedurev'! &0 Do the (ac&lit&ex and communicatiun materials o( the orgt&nicotian appear anmmive to customers? If yes, have time tables been establish«d to review and update current hciliiies and ofFerings'! ll'no, have plans ber:n made to address deficiencies? I I. Does the organization of(er langihle evidence of the quality of its services'! If yes, how is qunlity comrnumcated to customers'! I( no, what steps me bem taken toidenti( wa sof rovidm tan ibleevidcncco( unlit 7 l2. Do the produas/services offerred by the organization mct the needs of the customer'! If yes, how nre these perceptions documented? If no, are steps bein taken to iden&if customer wants and needs' FINANCIAL PERFORMANCF. Action Ycs No Re uired BUDGETIN(i Is a sales budget prepared (o& cnch mont&& o(thc coming ym&r'! lf yev, iv this hudgm up&In&cd tm&t&thly to &ctlcct chai&grv &i& ihe hu&inc&& cnvirorm&ent'! lf no, what lans are hem'rado &o devclo this bud'c&'! Is an cxpcnsc and purchase& budget prepared Iru each month of the coming ymu? If yes, is this budget uprl ~ led monthly to re&1ect vigniticanl changes'! If no, what lon& are hain 'ade to dcvclo th&s hud e&'! 3. Is a aipitnl expenditures budget prepared (or each month o& the coming ycnr'! If ycs, have these expenditun:v bwn made to retain n compctitivc advnntage! l(no, what lans are hem made to develo this bud et'! ls a budget of projemed cash liow& prepared I'or each month of the commg year? If yes, is it being updated on n mr&nthly basis to rellect changes in levels of husmess activity'! If no, what plans are heing made to develop and n&ninmin this hud et? 5. Have perl'ormance benchmarks been established for all quanti(iahle perfonnance measures" .If yes, have actual results been compared to budgeted amounts'! H no, have competitors or industry sourcev been identilled where these rformance benchmark measures can be obtained" !4 RATIO ANALYSIS 6. Has the return on mvestment been calculated for ihe most recent arcounung periods I( yes, has this in(ounation been analyzed to determtne ways of improving prolitabilityv H'no, have plans been made to analyze return on mvestmentv 7 Has the current ratio been calculated for the most recent accounting periods If yes, do measures need to be taken to improve the current financial position of the business& If no, have lans been made to anal ze the current rane? g Has the accounts receivable turnover ratio been calculated for the most recent accounting penodv If yes, has the average days in receivables rauo been calculatedv If no, have plans been made to analyze the accounts recmvable turnover ratio& 9 Has the inventory turnover ratio been calculated for the most recent accounting period& If yes, has the average days m mventory rauo been calculated? If no, have plans been made to analyze the inventory turnover ratio? IR Have these ratios been compared to those of past accounting peuods, indusuy standards and/or prolected ranosv If yes, is yes do the results meet with your performance mrgets7 If no, what sources for obuuning comparable ralios have been tdentifiedv INFLATION AD JUSTMFNTS II Has a source been idenufied for obtaining mflation mformation thnt is appropuate for your geographic region'! lf yes, is this source reviewed on a regular basis? If no, whai measures are being taken io locate an a ro nate source of informationv 12 Have the sales, cost of goods sold, net income and other relevant figures been adjusted io determine the etl'acts of intlauonv If yes, have financial performance measures been improvingv If no, what measures are being taken to determine the ef(ects o(inflauon? 15 APPENDIX 2 GUIDELINES FOR RATIO ANALYSIS Ratio analysis plays an important role in evaluating the financial perfonnance of a business. Four ratios have been selected for analysis in the scorecard. A brief discussion of each follows. Return on Investment Return on investment (ROI) is a measure of a business'arnings in relation to its investment in assets —margin and turnover. MARGZN x TURNOVER = EARN.CNG POWER Net Oper aCing Income Sal es NoC Operating Income X Sales Average OperaCing AsseCs Average OperaCing AsseC: (I) Margin measures the amount of each sales dollar remaining after the operating expenses have bccn deducted. Thc lower the operating expenses, thc higher net operating income and margin will be. Turnover is a measure of the number of times each dollar of operating assets has been used to produce a dollar of sales. Turnover measures a business'ontrol over investments in operating assets. The lower thc investment in operating assets, the higher thc tumovcr will be. Using this information, the return on investment or earning power of the business can be improved in thrcc ways. ROI can be increased by: ~ increasing sales at a faster rate than the corresponding cxpenscs increase, ~ decreasing expenses more than sales decrease, or ~ dccreastng the operating assets used without changing the sales or operating expenses. Current Ratio The current ratio is a measure of whether or not the cash flows from current assets will be sufficient to CurrenC AsseCs meet the current liabilities of the business. A Current Liabilities comparison of'hc current assets to the current liabilities shows how many dollars of current assets arc available (2) to cover each dollar of current liabilities. Although a relatively high current ratio is often desired, caution should be exercised when analyzing this ratio since a very high number may suggest that too much inventnry is on hand, or that the accounts receivable are not turning over quickly enough. There are several ways to improve the current ratio; 16 o sell lixed assets and use the cash to increase current assets or pay off current liabilities, o use long-term borrowing to purchase assets or pay off current liabilities, and o use current assets to pay off current liabilities. Accounts Receivable Turnover Annual Credit Sales The accounts Average Trade Accounts Recei vable (3) receivable turnover shows how often thc receivables are collected during an accounting period. For example, if the turnover is six times per year, thc average waiting time for the collection of a receivable is two months; if it is four times per year, the average collection period is three months. A receivable turnover that is too high may result in money being tied up in receivables that could be put to usc in purchasing more inventory. If the receivable turnover is too low, it could indicate a credit policy that is too tight. 360 Days p " ™ nc Accounts Recei vable Tuznovez (4) measure that can bc evaluated is the average collection period on accounts reccivablc. This performance standard will indicate the average length ol'ime it takes to collect an account receivable. As the days required to collect receivables incrcascs, the owner's need for capital also increases. T Cost of Goods Sold Inventory turnover also shows how efficiently the capital invested in inventory is being uttlized and indicates how quickly it is being converted into sales. A low inventory turnover may indicate that excessive stock, obsolete stock and/or slow movtng stock is on hand. A high turnover may result in a loss ol'customers due to stockouts on popular items. However, keep in mind that there is always a trade-off between overstocking and the possibility of running out of an item occasionally. 360 Days Another related lneasurc days inventory on 1 enter Turno (6) hand, indicates thc average length of time inventory is being kept in the business. Since items kept in inventory have a tendency to lose value if retained too long, careful auention should be directed toward managing these assets. 17 APPENDIX 3 CUIDELINES FOR INFLATION ADJUSTED TREND ANALYSIS The typical yardstick used to adjust for general inflation is the Consumer Price Index (CPI), although other indices may he used. Current information on the CPI can be obtained from the Monthl Labor Review which can be found inmost libraries. Any base year may be selected to review a particular time frame. It is advisable to review and adjust financial data to reflect thc impact of inflation over at least a three-year period, although a five-year period is preferable. An adjustmcnt factor can be obtained by dividing the CPI for each of the successive years by the reported CPI for a selected base year. For example, il' five-year period is selected using 1988 as thc base year, the following int'ormation on thc CPI would be used. Year CPI ~Ad'ustment Factor 1988 354.3 I.00 1989 371.3 1.05 1990 391.4 1.10 1991 408.8 1.15 1992 420. 3 1.19 1993 432.7 1.22 Once the adjustmcnt factor has been calculated, it can then be divided into reported data to obtain a more realistic financial picture. For example, reported sales figures of a firm may have shown steady growth each year from a base of $ 100,000 in 1988 to $ 122,000 in 1993. It may appear as il'he firm has grown, but, in reality, it has had stagnant sales when inflation is taken into account ($ 122 000/ 1.22 = $ 100 000). If a more detailed analysis of the effects of inflation on the finances of a firm is desired, this same process can be followed on any of the firm's reported financial data. 18