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In this Section
It is our experience and belief that business plans assist the development of the overall structure of a company's financial and management needs. The day-to-day success of an enterprise and its ability to attract capital depends to a large degree on the completeness, clarity and precision of the business planning process. Strategic business plans meet specific needs of a company in various stages of its life. Creation of short term and long term Comprehensive Business Plans are used for both management control and for presentations to the appropriate capital sources, including your own. New ventures needing capital must depend on a well-documented and frequently updated plan. The objectives are two fold. First, to give prospective investors a realistic valuation of the feasibility and risks involved with a thorough analysis of capital needs and applications. Secondly, to provide the entrepreneurial team with a detailed operational guideline. Rapidly growing companies require not only adequate funding, but also strong operational and financial controls. A detailed plan decreases the risks associated with rapid growth by keeping the management team focused and financing sources up to speed. Special project plans are used to assess the reality of undertaking new markets, developing new products or services and analyzing feasibility of financial profitability related to capital acquisition. Mergers, acquisitions and leveraged buy-outs require decisive action from a position of strength. Business plans must reflect the financial structure of the surviving company, as well as detailing the generation of increased cash flow to meet new debt requirements. Turnaround companies must develop solid profitability. These plans describe management's strategic focus and how the plan will be implemented and properly executed to accomplish the turnaround. It requires detailed support of increasing revenues, expense cuts, and corporate asset management to secure the proper capital sources. Planning the Entrepreneurial Venture Business plans boil down to operating the company on paper. The aim is to validate an idea and challenge every aspect of the business. A business plan is a written presentation that carefully explains the business, its management team, its products or services, and its goals, together with strategies for reaching the goals. The entrepreneur or team members who write the plan will find it a painstaking process. But keep in mind, this is the selling tool, and it requires careful consideration of all the multiple facets of a start-up or business expansion. It cannot be written as an afterthought, and it should not be taken lightly. Check with any professional investor anywhere in the country, and you'll hear horror stories about ill conceived, poorly written, or sloppily put together business plans. As great as the company's potential may be, it is essentially doomed to rejection, before it can even get a foot in the door, if it has a poorly conceived business plan. The Primary Purpose of Your Business Plan There are two primary purposes to a business plan. The first has an outside objective--to obtain funding. There's no business without capital. The second serves an inside purpose--to provide a plan for early corporate development: to guide an organization toward meeting its objectives, to keep the entrepreneurial business itself and all its decision makers headed in a predetermined direction, to explain in an engaging way with interesting information how the company will be run for the next 3 to 5 years. The entrepreneur must put the entire "hows" and "needs" together in one neat package. The human and physical resources must effectively interrelate with the marketing, operational, and financial strategies of the company. Unless an entrepreneur has magical powers of persuasion, this is not the time to try to fake it. The business plan is considered a vital sales tool for approaching and capturing financial sources, be they investors or lenders. They want to know that the entrepreneurial team has carefully thought out the plan. They want to be convinced that the team has the skills and expertise needed to actively manage the company and that it is prepared to seize opportunities and solve the problems that arise. That's why the business plan must be well prepared, professional in tone, and persuasive in conveying the company's potential. It cannot be stressed too strongly that a good business plan is the cornerstone of successful financing. If you want investors' money, you've got to give them good reasons to buy in. The business plan is where you lay out the reasons. It does not have to be unduly lengthy or complicated, but it must be informative and relevant. It needs to maintain logic and order, and show the company as effectively positioned as a good investment. More importantly, the business plan should be specifically directed to the funding source and satisfy its particular concerns. For example, you would orient and write the plan differently for presentation to a banker than you would for a venture capitalist, an underwriter, or a private investor. The venture capitalist would want to know what risks are involved, whereas the banker wants more information about how good the security is. These concerns must be individually addressed. There are no hard and fast rules for preparing a business plan--no established, formal format. The key word is ingenuity. Strive for inventiveness; strive to be interesting and captivating. Incorporate the Nine Guiding Principles into Your Plan Here are some general guidelines covering the basic elements of a business plan. These should be helpful in writing any business plan, no matter to whom it is directed.
The Next Step: Obtain Critical Reviews You're not finished yet. One of the big differences between ordinary plans and good entrepreneurial plans is that they have been critiqued to work. After you have drafted your business plan, solicit feedback on it. Ask a cross section of people whose judgment you respect to review it. Don't fall in love with your wordsmithing. Make any revisions that are necessary, and then prepare a good oral presentation. In fact, you should have both a 2-minute and a 5-minute oral attention grabber. Follow up with a detailed 15- to 30-minute presentation. All should be modeled on your written business plan. A word of caution: When preparing your financial projections, avoid the shortcut of relying on packaged computerized information--those preset formats in which you plug in figures and percentages. Individualize your financial projections. Think them out carefully. No two businesses are alike. Show when you bring on additional personnel, and remember that each new hire adds other costs beyond salary--items like benefits, desks, supplies, maybe even another computer or additional travel expenses. These items need to be tracked for each expense period. Don't just show advertising costs as a percentage of sales. Most advertising expenditures are made some months before sales result. A lot of them have to be prepaid before they are run. It's just not justifiable to show "plugged" computer figures for most expense items. Individualize them. And keep in mind that a start-up company will not fit the standard industry norms. Your projections should include the financial obligations of bringing your product or service to the marketplace: enlisting new management people as well as workers; taking on more physical space or manufacturing capacity; purchasing support materials and services; and monitoring buildups in inventory and accounts receivable. Outline for a Business Plan There are many specifics that should be included in a successful business plan. The following general outline contains many suggestions, which may seem obvious, but it is often easy to overlook the basics. Again, this outline should be used as a preliminary planning guide. It's up to the reader to add lots of detail, meticulously gathered and presented in succinct entrepreneurial form. (For a complete guide to writing a business plan, see The McGraw-Hill Guide to Writing a High-Impact Business P lan. This book includes an offer to receive a free disk with a complete business plan and financial spreadsheets.) Cover Sheet
Table of Contents Categorize the contents. Use section names and page numbers. You have a choice of only main category headings (History, Management, Product, etc.) or detailed categories (History--date founded, founding members, place founded, etc.). Make note of any charts, tables, or graphs. Executive Summary A very important part, the executive summary briefly sets forth the contents, taking key sentences from each section of the plan to overview the project for the reader. Limit the summary to two or three pages: more is too many. Consider using your mission statement or a brief visionary type of paragraph. It should be concise and to the point. This section is the first thing that investors read, and they may not read further if you haven't captured their interest. History The first several paragraphs should briefly describe the product or service, to whom it is sold, the current status of your industry, and where your new company fits in. This is your second chance to give the reader an overview to establish a basis for detailed understanding. After this brief introduction, include a description of how, when, and by whom the company was started, its achievements and acceptance setbacks. Then bring these experiences to current-day status. Product or Service To succeed with an entrepreneuring company, you must know your product or service; to succeed in obtaining capital, you have to be able to clearly describe your product or service. After giving a simple, straightforward description, outline the need for the product or service in today's marketplace, how it will make a difference, the benefits derived from using it (or what will make the customer buy it), and its advantages. Explain any special training needed to sell or use it. Include all relevant regulations that may affect its sale or use. Expound on any exclusivity or technological uniqueness. Unless your plan is going only to specialists in your industry area, assume you are writing for the layperson. Forget industry jargon and replace it with words that the non-specialist can understand. If you tend to write overly technical descriptions, engage a professional writer. Market Description and Analysis This section profiles three key areas: customers, industry, and competition. Prepare a Customer Profile
Prepare an Industry Profile.
Prepare a Competitive Profile.
Don't guess in this section. Check all your facts and note all your sources. You can be sure that these will be checked with a fine-tooth comb during an investor's due diligence process. If you're citing voluminous reports or statistical information, note that you have them available for further review. Marketing Strategy This is a critical section that should clearly specify the company's marketing goals, how they are to be achieved, and who will have the responsibility for achieving them. Qualify all distribution methods (representatives, dealers, and so forth) and describe any planned advertising or public relations activities. Include references to sales aids, foreign licensing, and training plans as appropriate. Simply, detail how you are going to sell the product or service. Operations Plan This section is primarily oriented toward facilities, manufacturing capability, and equipment. Disclose all present capabilities as to equipment and facilities, as well as further projections for offices, branches, manufacturing, and distribution. It often helps if you include current floor plans as well as expected future space plans for production or manufacturing companies. For all fast-growth companies, task/time charts can be especially useful in this section. They help impress on the reader that the Entrepreneur has a real handle on the operational challenge. Research and Development The length of this section depends on whether you're a service or product company and--if a you're a product company--on how technical your product is. The object is to explain all past research and development efforts and accomplishments as well as future expectations. Here is your opportunity to justify past time and dollar expenditures. Substantiate the patentability of inventions, proprietary processes, or other advantages that your company will have over the competition and the resultant, anticipated market impact. Schedule Describe the timing and sequential steps that will be taken to bring the company up to full speed. Graphs or charts help indicate the timing and interrelationships of the major events in the company. Take it month by month for the first year. Thereafter, indicate the progress expected quarterly. Areas that may be important include completion of prototypes, starts of beta tests, early significant sales, when key people are to be hired, physical expansions or moves, opening of branches, trade show or convention dates, major equipment purchases, and the like. Management In the eyes of the investors, the quality of the management team often determines the potential success of the company. Consequently, this section should cover career highlights, accomplishments, and positions held, with an emphasis on good performance records. Describe how the team has worked together in the past. List all directors, consultants, advisers, and other key professionals who will be involved in company operations and point out how they add value. Detailed resumes of key management should be appended with bios of others as appropriate. Risks and Problems Risks could be a red flag. There are diverse opinions about the inclusion of this category. Some investors object to the obvious and prefer to discover their own negatives. Others prefer that the company openly acknowledge risks and potential problems. It's a toss-up; however, high profile, success-threatening risks should be brought out. Use of Proceeds Judiciously present a timetable indicating how much money will be needed, when it will be needed, and how it will be used. Most companies require multiple stages of financing, including both debt and equity. Show the proposed capital structure, including who is going to own what part or percentage of the company at what stage. Start-up plans need to detail start-up use of proceeds and then generalize on the additional stages. Finances Present the company's current equity capital structure as well as future plans. Itemize the equity payments made with dates paid. List all outstanding stock options. Include both historical and current profit and loss statements and balance sheets. Present current and proposed salary structure for those who are already on board and those who will come on board at a later date. Show projections, including balance sheets, profit and loss statement, and cash flow studies. These should be month-by-month for the first year, quarterly for the second and third years, and yearly thereafter. It is mandatory that detailed assumptions accompany all projections. It is also very helpful if the very first part of this section summarizes the details. In fact, in many cases, details can be appended or supplied separately. Appendix Include a glossary (if pertinent) and all essential pieces of evidence, such as resumes, product brochures, customer listings, testimonials, and news articles. Your Plan Is a Lot of Work It's suggested that you seek out available books on writing a business plan. They can be found in many bookstores and all libraries. Read two or three to give you the essence of a good background for specifically outlining your plan. Each company is different and your plan must be tailor made to your particular situation. The ideal business plan just does not exist, and generic plans just don't cut the mustard for Entrepreneurial companies. Expect to spend a minimum of 2 or 3 months and 200 to 300 hours writing your plan. It's not unheard of that entrepreneurs spend up to a year putting together a detailed plan. Additionally, you'll have to spend some time preparing and rehearsing your oral pitch. Remember, your words and story not only have to paint a pretty picture; they must be persuasive as well. It's of little use to approach the writing of a business plan as a necessary evil. Rather, look at it as a helpful tool that can be used to exploit the advantages of your product or service. Some companies may question the necessity of a business plan, citing successful firms that never had one. Times are changing. When the goal is to raise money, it's not only the entrepreneur's money that is at stake. Advisers, team members, directors, investors, and bankers need to be thoroughly convinced. They want to know that they won't be wasting their time and money. They want to know that the entrepreneurial management team has a clear sense of direction and is prepared to move toward its established goals. A good business plan is the answer. What's more, much of the same information would have to be gathered anyway to be made available to potential shareholders before they place their money in the company. Creating a Special Executive Summary Another unique aspect of the good entrepreneurial business plan is the putting together of a special executive summary. This summary is not the same as that in the business plan; it does, however, take advantage of the high points in the plan. It serves as an entering wedge to semi-interested parties as well as potential investors. The business plan executive summary, discussed under the Business Plan Outline section, usually summarizes the business plan in two or three pages. The special executive summary expounds on the most enticing parts of the business plan for about six to eight pages. In essence, it's a condensed business plan that shows the company to best advantage. It's an entree, when initially seeking help, to locate and identify potential financial sources. It can also be used as an overview for those who do not need to know all that much about the company (like staff personnel or suppliers), or for those from whom management wants to keep proprietary information. It can be changed and adapted to any particular audience. It's kind of the bait before the hook, a plan used to capture one's initial interest and motivate one to request more information. A special executive summary should not be taken lightly. It is indispensable, and should be kept updated. This is easier to do than revising a whole business plan if the entrepreneurial team simply wants to test some new plan ideas or gain some quick feedback. It may very well be the key to reaching the right source. Making the Transition from Business Plan to Operating Plan Once the company is up and running, top management should convert the business plan to an operating plan. This process is simply retitling the plan as an operating plan and then religiously keeping it updated, using it as an operational guide on a continuing basis. The operating plan helps keep both management and staff focused on the tasks at hand. The parts that are pertinent to various departments can be pulled from the master plan and passed on to the appropriate staff individuals responsible. Continuous updates should be given top priority in all entrepreneurial companies. The basic plan should be reviewed quarterly--at minimum, semiannually. Remember, for investors, the business plan is what they buy into. It becomes the benchmark for accountability. They intend to hold management responsible for achieving the goals and objectives that are set out in the plan. It is inevitable that things will change as the company achieves full operation. In some cases, these changes will have only a small effect on operations. In others, they could result in a drastic shift in total company focus. Given the ultimate entrepreneurial goals, it's apparent that a continuing update of business plan strategy in the form of an operating plan helps keep everyone singing from the same songbook. Entrepreneurial Plans Take Your Best Effort All companies should have a business plan. Preparing it may take months, and you won't get to first base without it. The outlines presented in this chapter may not fit every company's particular requirements, but they should contain enough general information and suggestions to provide a solid base for preparing your plan. More detailed materials and information on writing business plans can be found in many bookstores and libraries. For Entrepreneurs, there are some very important points that need to be given extra attention to set their plan apart from ordinary business plans. These include continually updating their plans, paying special attention to the corporate structure and valuation portions of the plan, creating a special executive summary, and finally, converting the entrepreneurial business plan to an entrepreneurial Operating Plan. A company should give its plan its very best efforts. You will discover that a well-prepared entrepreneurial plan will serve as a solid sales tool for approaching any financing source--investor or lender--as well as provide management with a written game plan for guiding operations and maintaining a check on expectations. Return to Table of Contents for this guide | Return to index of all guides | Return to the top of this page Venture Capital Funds In 1995, the venture capital industry raised $7.4 Billion for 1100 deals, an average of $6.7 Million per deal according to VentureOne, a San Francisco-based research firm. VentureOne is the preeminent investment research firm serving the venture capital industries. The company specializes in tracking the business progress and financing plans of thousands of privately held, venture-backed companies. Their research provides valuable insights into the otherwise murky world of venture capital. If you're trying to find money, attracting a venture fund is certainly one way to do it but you, your product or service, and your company is going to have to be very special. Most venture firms focus on emerging technologies, and are primarily interested in companies that have proprietary products or services, although there are exceptions. Retail or consumer deals are of interest only if they offer strong national or international expansion potential. VentureOne's summary of venture capital investments shows that the majority of funding goes to emerging technologies in the computer, biotechnology, telecommunications and health care fields. Annual Venture Capital Investments ($,000)
Industry
Number of Deals
Dollars Raised
Average Investment
Software and computer services
52
$496.1
$3.26
Biotechnology and pharmaceuticals
140
$806.5
$5.76
Communications and networking
139
$698.1
$5.02
Medical devices and equipment
90
$392.8
$4.36
Electronics and computer hardware
83
$293.9
$3.54
Retailing and consumer products
65
$473.3
$7.28
Health care services
44
$280.8
$6.38
Semiconductors and components
39
$189.2
$4.85
Environmental
11
$152.6
$13.87
Other
96
$646.7
$6.74
Total
859
$4,208.3
$4.90
Details about raising money from venture capital sources is provided in Finding Money but, in general, venture funds invest in companies that offer: Proprietary Products or Services Companies with proprietary products or services often enjoy a desirable "unfair" competitive advantage by virtue of the exclusivity of their products. Patents, trademarks, copyrights, exclusive distributorships, or other special rights may protect a company's unique position in the market. Sometimes, a non-protected product or service with an exceptional head start on potential competition can fit this criterion, as well. The point is that the company must have some significant advantage over existing or potential competitors so it can achieve and maintain a dominant position in its industry. Huge Market Potential Venture funded companies are expected to be able to grow to $30, $50 or even $100 Million in five to seven years. This means that the industry has to be big enough to support such growth. But many venture proposals fail to adequately convince investors of the market potential while others naively project that they'll capture 10%, 20% and even 50% market share in a very short period. When you're projecting potential market share, consider the fact that IBM achieved less than 8% market share in 1994 personal computer sales. Proven Management Talent Management is the most important element in a venture capitalist's decision to invest in your company. Are you, and the others in your company, capable of building a $50 Million business? Have you managed similar growth in the past? Do you have, or are you able to hire, the top people in your field? Venture capitalists will want to see real depth. Extraordinary Returns Venture capitalists are looking for returns of 35-50% per year. A 50% return means that if they invest $1 Million they want to wind up $5 Million in four years. Obviously most businesses, even the high-flyers, won't achieve that kind of return through profits. In fact, most will lose money in the early years. Therefore, you have to be willing and able to sell the company or go public in three to seven years. While the venture community is known for its incubation of startup businesses, the majority of their funds (almost 75% in 1995) go to more established companies. According to VentureOne's research, the typical venture-backed company, when financed, was three years old with 42 employees. They also reported that a total of only 65 startup companies in the whole country, for the whole year of 1993, won seed financing. That's less than 2% of all venture investments that year. In 1995 all startups combined received $276 million for an average of $1.2 million per deal, up from $0.9 million in 1994. Startups, even though they require relatively small amounts of capital, are among the most time-intensive venture investments. Because fund managers are responsible for deploying larger amounts of capital they probably won't increase their investment in startup companies in the future. So if all you have is a bright idea, and even a business plan, your chances of finding several million dollars to start up your business are very small indeed. The average venture capital investment has grown since 1991, reflecting the industry's emphasis on higher quality, later stage deals. Clearly, later stage deals are more in vogue right now. This, however, is a pendulum that swings with changes in the economy, the initial public offering (IPO) market, and the portfolio mix within the venture industry. In any case, the competition for venture capital is fierce. Venture firms fund fewer than one in a hundred of the business plans they receive, and they expect only one in ten of those businesses to provide a home run. Less than half of their investments, they figure, will even make it to first base. Investments are, for the most part, proportional to the fund's size, but few will look at deals of less than $250,000-it's just as much work to do a small deal, as it is a large one. While some venture firms seek majority interests in the firms they finance, most take a minority position. Regardless of their ownership, some venture sources will want to take an active role in your business, and some will be passive investors. More experienced companies give up less ownership and control than early-stage ventures in first round financing. First Round Investment as a Percentage of Company Valuation:
Finding the right venture capitalist for your situation, and negotiating a good deal, is quite an art. Informed professionals can make the process go much smoother, but in the end the venture capitalist is investing in you, not your advisors. Finding Money is a must-read if you're planning to go this route. It offers plenty of insider secrets about how investors evaluate proposals and structure their investments. In addition, The Directory of Venture Capital offers detailed information about the investment preferences of over 600 of the nation's most active Venture firms. Available in both diskette and book form, this publication is an invaluable resource for finding and negotiating venture capital funding. Return to Table of Contents for this guide | Return to index of all guides | Return to the top of this page The law requires a corporation to have a board of directors to protect the interests of the corporation and shareholders. However, there are other reasons to have an active board of directors. Effective boards can provide independent advice and act as a check to the CEO. Benefits of an Independent Board Many corporations fill positions on the board with family and friends for various reasons. Small companies, especially family-run businesses, tend to distrust outsiders and don’t want to give up control of the company. However, the benefits of having a truly independent board will usually outweigh the drawbacks. Board members can provide perspective and experience to a company that the insiders might lack. If board members themselves are entrepreneurs, they can help the insiders avoid common mistakes. A board can also help insiders realize the need for long-range planning and develop long-term strategies. The board can also provide a mechanism for controlling and disciplining the CEO as well as advising the CEO. Having experienced businesspersons on the board also gives the company credibility. This credibility can be crucial when trying to raise funds. Experienced businesspersons on the board can provide the company with valuable business connections. For family-run corporations, outside directors can often ease generational transitions. Board Size The board should be small enough to be held accountable but large enough to carry out its responsibilities. Boards usually vary from 5-10 directors. Venture-backed companies usually have five directors. There should be more outsiders than insiders on the board to maximize the benefit of independent directors. Board Meetings The role the board plays will determine how frequently it should hold meetings. A hands-on board can meet once a month. Less frequent meetings are sufficient for a less involved board that meets only to discuss major strategic issues. The CEO should stay in touch with each board member between meetings. Where and how long a meeting lasts are also important considerations. Ideally, a board meeting will last between 3-5 hours which gives the board enough time to get necessary work done but not so long that the directors can’t focus their full attention. Off-site board meetings can be valuable but if the directors are normally busy individuals, they may be hard to schedule. Type of Directors A company should consider the functional skills it needs to run smoothly and grow as well as the mix of personalities when deciding who to put on the board. Forming a board is more art than science. The CEO needs to determine the present and future needs of a company when forming the board. This includes determining the companies competitive advantages, the likely changes and future demands on the company, what things are needed for the company to succeed, the importance of marketing, research and service, and the company’s access to money. Taking these factors into account will help the CEO select an effective board that will help the company realize its potential. Skills Needed A company should assemble a complete combination of abilities when assembling a board. This requires the founders to assess their own strengths and weaknesses and then find the people with the talent to complement them. These talents include industry experience, financial know-how, marketing, start-up experience, and technical abilities. While knowing the product and market are benefits, the CEO should aim to provide as much breadth on the board. The CEO might also want to consider the age, gender and cultural background of each director. For a family business, a director who is relatively the same age as the designated successor to the CEO may be prudent so the new CEO will have a peer on the board after the succession. Matching a board member’s gender and cultural background to that of most of the company’s employees or customers may also be something to consider. If a company markets products to women, for example, having a woman who understands the market on the board might be prudent. The CEO should be wary of appointing board members whose interests may not be aligned with the company or to whom they already have access. A commercial lender’s interests may not be consistent with the company’s long-term interests. Having corporate counsel on the board or the CEO’s personal attorney may waive any attorney-client privilege. A CEO should carefully scrutinize consultants and those who work for the CEO are not as likely to challenge a CEO’s action when appropriate. Venture-backed companies will usually have one or two seats reserved for the venture capitalists. Venture capitalists tend to stay actively involved with the company and can provide leads on other potential board members. The Personality Mix Functioning as a cohesive group is important for a board. This means the board members must be compatible with each other. Board members need to respect each other and no one member should dominate the others at meetings. The board chairman should prevent that from happening and make sure that he or she also does not dominate the others. While breadth on the board is good, the board should not act as a legislative body with each member advocating its own special interests. Board members should also have practical experience and business savvy in addition to theoretical or technical knowledge. The board as a whole needs to understand the difference between meddling and being constructively active in long-range planning, budget review and checking the CEO’s excesses. Board Responsibilities The directors of a corporation owe two legal duties to the corporation and its shareholders: a duty of loyalty and duty of care. Breaching either duty can result in multimillion-dollar liability. While private companies have fewer shareholder suits involving breaches of a director’s duties, they do happen especially where a minority shareholder alleges a majority shareholder has violated its rights. Duty of Loyalty A director has a fiduciary duty to act in the best interests of the corporation. The director must set aside personal, financial and professional interests when making decisions for the corporation. Directors should avoid any appearance of self-dealing. The duty of loyalty applies to decision effecting the day-to-day operations of the company such as compensation for executives, along with strategic decisions such as whether to merge with another company. Directors with no personal interest should determine executive compensation. Directors should also refrain from any business opportunity in the corporation’s line of business and disclose the opportunity to the other directors and getting their permission to pursue it. Some jurisdictions will look at the number of outside directors to determine if a board is sufficiently disinterested. Since outside directors only receive director’s fees rather than a salary, courts view them as having less of a personal interest in making decisions for the corporation. At times it will be impossible to have a vote of disinterested directors. In that situation, the board should do its best to inform all the directors and make sure that the transaction is fair to the company and all of the shareholders. For transactions approved by interested directors, the directors have the burden of proving it was fair should it be challenged. Duty of Care Directors must act like a “reasonable person” would under similar circumstances. Thus a director must make a reasonable effort to make informed decisions. In most states, a director can rely on reports prepared by corporate officers or outside experts like investment banks and consultants. However, if the reports suggest making further inquiries, then merely relying on such reports is not sufficient. Many states will allow a corporation to amend the certificate of incorporation to limit or abolish a director’s liability for breaches of the duty of care except in clear cases of willful misconduct or fraud. A corporation can also amend to corporate charter and make other agreements (indemnity agreements) to pay a director’s legal fees if he or she gets sued. Business Judgment Rule Under the “business judgment rule”, a plaintiff challenging the decisions of disinterested and informed directors must show that the directors were grossly negligent or acted in bad faith. This high burden of proof is designed to protect directors who merely make poor business decisions. All business decisions have some inherent risk and reasonable decisions can have bad results. Thus the business judgment rule protects directors who make decisions in good faith. Compensating Board Members Directors get both tangible and intangible benefits from serving on boards. Formal compensation for serving on the board of a privately held company tends to be small. Most directors who serve on boards do so for the intangible benefits. Intangible Benefits Some of the intangible benefits of board service include keeping abreast of industry developments by overseeing the company’s operations, learning strategies or techniques and the prestige of serving on a board of a prominent company. In addition, some directors like helping a company develop from its early stages. Tangible Benefits A company will usually pay most if not all of the expenses a director incurs to attend a board meeting including meals. Companies should also compensate directors for their time and efforts. Such monetary compensation is more a token of appreciation than a payment for the director’s time which a small company probably could not afford. Effective board members will spend at least half a day examining materials provided by the CEO before attending the board meeting. Directors also spend a few hours a quarter discussing corporate business with the CEO. If there are quarterly meetings, that adds up to about eight days a year. Board honoraria should be about 2-3% of the CEO’s annual salary. Surveys estimate that most private companies pay their directors about $1,000 per meeting. If a board has six directors and meets quarterly, that adds up to $24,000 in annual directors’ fees. Other expenses could bring that figure to $35,000 and insurance for directors and officers could increase that figure to $60,000-65,000. Most companies will also compensate directors with equity in the company such as options and restricted stock grants. Providing shares to the directors will help keep their interests in line with those of the shareholders. Directors may already own shares in the company and serve on the board to protect their investment. A company can also have an informal advisory board. While helpful at the beginning it runs the risk of future conflict with the advisors who might expect compensation. Information for Directors The company should give the board members the agenda for the next meeting before each board meeting so they can effectively prepare. General statistics on how the company is doing should also be included to keep the directors updated on the company and alert them to any potential problems. Some experts also believe that the company should also provide directors with information on the company’s long-term trends. This includes information on the company’s competitive position and organizational health.
Building A Brain Trust Out Of A Board
Bylaws Come First
Changing Roles for Boards of Directors in Entrepreneurial Companies
Choosing a Board of Directors for Your Small Business
Outside Directors—Do You Need Them and Where to Find Them
Pieces of Advice
The Best Practices for Board Operation
The Council of Growing Companies
The Ultimate Board Game
Unlimited Partners
Young Entrepreneurs Organization
Return to Table of Contents for this guide | Return to index of all guides | Return to the top of this page Problem Solving and Decision Making Much of what managers and supervisors do is solve problems and make decisions. New managers and supervisors, in particular, often make solve problems and decisions by reacting to them. They are "under the gun", stressed and very short for time. Consequently, when they encounter a new problem or decision they must make, they react with a decision that seemed to work before. It's easy with this approach to get stuck in a circle of solving the same problem over and over again. Therefore, as a new manager or supervisor, get used to an organized approach to problem solving and decision-making. Not all problems can be solved and decisions made by the following, rather rational approach. However, the following basic guidelines will get you started. Don't be intimidated by the length of the list of guidelines. After you've practiced them a few times, they'll become second nature to you -- enough that you can deepen and enrich them to suit your own needs and nature. (Note that it might be more your nature to view a "problem" as an "opportunity". Therefore, you might substitute "problem" for "opportunity" in the following guidelines.) 1. Define the problem This is often where people struggle. They react to what they think the problem is. Instead, seek to understand more about why you think there's a problem. Defining the problem: (with input from yourself and others) Ask yourself and others, the following questions:
Defining complex problems :
Verifying your understanding of the problems :
Prioritize the problems :
Important problems deserve more attention. For example, if you're continually answering "urgent" phone calls, then you've probably got a more "important" problem and that's to design a system that screens and prioritizes your phone calls. Understand your role in the problem:
2. Look at potential causes for the problem
3. Identify alternatives for approaches to resolve the problem
Very simply put, brainstorming is collecting as many ideas as possible, and then screening them to find the best idea. It's critical when collecting the ideas to not pass any judgment on the ideas -- just write them down as you hear them. (A wonderful set of skills used to identify the underlying cause of issues is Systems Thinking.) 4. Select an approach to resolve the problem When selecting the best approach, consider:
(The nature of this step, in particular, in the problem solving process is why problem solving and decision-making are highly integrated.) 5. Plan the implementation of the best alternative (this is your action plan)
(An important aspect of this step in the problem-solving process is continually observation and feedback.) 6. Monitor implementation of the plan Monitor the indicators of success:
7. Verify if the problem has been resolved or not One of the best ways to verify if a problem has been solved or not is to resume normal operations in the organization. Still, you should consider:
Planning Quick Look at Some Basic Terms Planning typically includes use of the following basic terms. NOTE: It's not critical to grasp completely accurate definitions of each of the following terms. It's more important for planners to have a basic sense for the difference between goals/objectives (results) and strategies/tasks (methods to achieve the results). 1. Goals Goals are specific accomplishments that must be accomplished in total, or in some combination, in order to achieve some larger, overall result preferred from the system, for example, and the mission of an organization. (Going back to our reference to systems, goals are outputs from the system.) 2. Strategies or Activities These are the methods or processes required in total, or in some combination, to achieve the goals. (Going back to our reference to systems, strategies are processes in the system.) 3. Objectives Objectives are specific accomplishments that must be accomplished in total, or in some combination, to achieve the goals in the plan. Objectives are usually "milestones" along the way when implementing the strategies. 4. Tasks Particularly in small organizations, people are assigned various tasks required to implement the plan. If the scope of the plan is very small, tasks and activities are often essentially the same. 5. Resources (and Budgets) Resources include the people, materials, technologies, money, etc., required to implement the strategies or processes. The costs of these resources are often depicted in the form of a budget. (Going back to our reference to systems, resources are input to the system.) Basic Overview of Typical Phases in Planning Whether the system is an organization, department, business, project, etc., the basic planning process typically includes similar nature of activities carried out in similar sequence. The phases are carried out carefully or -- in some cases -- intuitively, for example, when planning a very small, straightforward effort. The complexity of the various phases (and their duplication throughout the system) depends on the scope of the system. For example, in a large corporation, the following phases would be carried out in the corporate offices, in each division, in each department, in each group, etc. NOTE: Different groups of planners might have different names for the following activities and groups them differently. However, the nature of the activities and their general sequence remains the same. NOTE: The following are typical phases in planning. They do not comprise the complete, ideal planning process. 1. Reference Overall Singular Purpose ("Mission") or Desired Result from System During planning, planners have in mind (consciously or unconsciously) some overall purpose or result that the plan is to achieve. For example, during strategic planning, it's critical to reference the mission, or overall purpose, of the organization. 2. Take Stock Outside and Inside the System This "taking stock" is always done to some extent, whether consciously or unconsciously. For example, during strategic planning, it's important to conduct an environmental scan. This scan usually involves considering various driving forces, or major influences, that might effect the organization. 3. Analyze the Situation For example, during strategic planning, planners often conduct a "SWOT analysis". (SWOT is an acronym for considering the organization's strengths and weaknesses, and the opportunities and threats faced by the organization.) During this analysis, planners also can use a variety of assessments, or methods to "measure" the health of systems. 4. Establish Goals Based on the analysis and alignment to the overall mission of the system, planners establish a set of goals that build on strengths to take advantage of opportunities, while building up weaknesses and warding off threats. 5. Establish Strategies to Reach Goals The particular strategies (or methods to reach the goals) chosen depend on matters of affordability, practicality and efficiency. 6. Establish Objectives Along the Way to Achieving Goals Objectives are selected to be timely and indicative of progress toward goals. 7. Associate Responsibilities and Time Lines With Each Objective Responsibilities are assigned, including for implementation of the plan, and for achieving various goals and objectives. Ideally, deadlines are set for meeting each responsibility. 8. Write and Communicate a Plan Document The above information is organized and written in a document, which is distributed around the system. 9. Acknowledge and Celebrate Accomplishment of the Plan This step is frequently forgotten, which can lead to increasing frustration and skepticism on the part of those people who are responsible to carry out the plan. Guidelines to Ensure Successful Planning and Implementation A common failure in many kinds of planning is that the plan is never really implemented. Instead, all focus is on writing a plan document. Too often, the plan sits collecting dust on a shelf. Therefore, most of the following guidelines help to ensure that the planning process is carried out completely and is implemented completely -- or, deviations from the intended plan are recognized and managed accordingly. 1. Involve the Right People in the Planning Process Going back to the reference to systems, it's critical that all parts of the system continue to exchange feedback in order to function effectively. This is true no matter what type of system. When planning, get input from everyone who will responsible to carry out parts of the plan, along with representative from groups who will be affected by the plan. Of course, people also should be involved if they will be responsible to review and authorize the plan. 2. Write Down the Planning Information and Communicate it Widely New managers, in particular, often forget that others don't know what these managers know. Even if managers do communicate their intentions and plans verbally, chances are great that others won't completely hear or understand what the manager wants done. Also, as plans change, it's extremely difficult to remember who is supposed to be doing what and according to which version of the plan. Key stakeholders (employees, management, board members, funders, investor, customers, clients, etc.) may request copies of various types of plans. Therefore, it's critical to write plans down and communicate them widely. 3. Goals and Objectives Should Be SMARTER SMARTER is an acronym, that is, a word composed by joining letters from different words in a phrase or set of words. In this case, a SMARTER goal or objective is: Specific: For example, it's difficult to know what someone should be doing if they are to pursue the goal to "work harder". It's easier to recognize "Write a paper". Measurable: It's difficult to know what the scope of "Writing a paper" really is. It's easier to appreciate that effort if the goal is "Write a 30-page paper". Acceptable: If I'm to take responsibility for pursuit of a goal, the goal should be acceptable to me. For example, I'm not likely to follow the directions of someone telling me to write a 30-page paper when I also have to five other papers to write. However, if you involve me in setting the goal so I can change my other commitments or modify the goal, I'm much more likely to accept pursuit of the goal as well. Realistic: Even if I do accept responsibility to pursue a goal that is specific and measurable, the goal won't be useful to me or others if, for example, the goal is to "Write a 30-page paper in the next 10 seconds". Time frame: It may mean more to others if I commit to a realistic goal to "Write a 30-page paper in one week". However, it'll mean more to others (particularly if they are planning to help me or guide me to reach the goal) if I specify that I will write one page a day for 30 days, rather than including the possibility that I will write all 30 pages in last day of the 30-day period. Extending: The goal should stretch the performer's capabilities. For example, I might be more interested in writing a 30-page paper if the topic of the paper or the way that I write it will extend my capabilities. Rewarding: I'm more inclined to write the paper if the paper will contribute to an effort in such a way that I might be rewarded for my effort. 4. Build in Accountability (Regularly Review Who's Doing What and By When?) Plans should specify who is responsible for achieving each result, including goals and objectives. Dates should be set for completion of each result, as well. Responsible parties should regularly review status of the plan. Be sure to have someone of authority "sign off" on the plan, including putting their signature on the plan to indicate they agree with and support its contents. Include responsibilities in policies, procedures, job descriptions, performance review processes, etc. 5. Note Deviations from the Plan and Replan Accordingly It's OK to deviate from the plan. The plan is not a set of rules. It's an overall guideline. As important as following the plan is noticing deviations and adjusting the plan accordingly. 6. Evaluate Planning Process and the Plan During the planning process, regularly collect feedback from participants. Do they agree with the planning process? If not, what don't they like and how could it be done better? In large, ongoing planning processes (such as strategic planning, business planning, project planning, etc.), it's critical to collect this kind of feedback regularly. During regular reviews of implementation of the plan, assess if goals are being achieved or not. If not, were goals realistic? Do responsible parties have the resources necessary to achieve the goals and objectives? Should goals be changed? Should more priority be placed on achieving the goals? What needs to be done? Finally, take 10 minutes to write down how the planning process could have been done better. File it away and read it the next time you conduct the planning process. 7. Recurring Planning Process is at Least as Important as Plan Document Far too often, primary emphasis is placed on the plan document. This is extremely unfortunate because the real treasure of planning is the planning process itself. During planning, planners learn a great deal from ongoing analysis, reflection, discussion, debates and dialogue around issues and goals in the system. Perhaps there is no better example of misplaced priorities in planning than in business ethics. Far too often, people put emphasis on written codes of ethics and codes of conduct. While these documents certainly are important, at least as important is conducting ongoing communications around these documents. The ongoing communications are what sensitize people to understanding and following the values and behaviors suggested in the codes. 8. Nature of the Process Should Be Compatible to Nature of Planners A prominent example of this type of potential problem is when planners don't prefer the "top down" or "bottom up", "linear" type of planning (for example, going from general to specific along the process of an environmental scan, SWOT analysis, mission/vision/values, issues and goals, strategies, objectives, timelines, etc.) There are other ways to conduct planning. 9. Critical -- But Frequently Missing Step -- Acknowledgement and Celebration of Results It's easy for planners to become tired and even cynical about the planning process. One of the reasons for this problem is very likely that far too often, emphasis is placed on achieving the results. Once the desired results are achieved, new ones are quickly established. The process can seem like having to solve one problem after another, with no real end in sight. Yet when one really thinks about it, it's a major accomplishment to carefully analyze a situation, involve others in a plan to do something about it, work together to carry out the plan and actually see some results. So acknowledge this -- celebrate your accomplishment! Effective Delegation The hallmark of good supervision is effective delegation. Delegation is when supervisors give responsibility and authority to subordinates to complete a task, and let the subordinates figure out how the task can be accomplished. Effective delegation develops people who are ultimately more fulfilled and productive. Managers become more fulfilled and productive themselves as they learn to count on their staffs and are freed up to attend to more strategic issues. Delegation is often very difficult for new supervisors, particularly if they have had to scramble to start the organization or start a major new product or service themselves. Many managers want to remain comfortable, making the same decisions they have always made. They believe they can do a better job themselves. They don't want to risk losing any of their power and stature (ironically, they do lose these if they don't learn to delegate effectively). Often, they don't want to risk giving authority to subordinates in case they fail and impair the organization. However, there are basic approaches to delegation that, with practice, become the backbone of effective supervision and development. Thomas R. Horton, in Delegation and Team Building: No Solo Acts Please (Management Review, September 1992, pp. 58-61) suggests the following general steps to accomplish delegation: 1. Delegate the whole task to one person This gives the person the responsibility and increases their motivation. 2. Select the right person Assess the skills and capabilities of subordinates and assign the task to the most appropriate one. 3. Clearly specify your preferred results Give information on what, why, when, who and where. You might leave the "how" to them. Write this information down. 4. Delegate responsibility and authority -- assign the task, not the method to accomplish it Let the subordinate complete the task in the manner they choose, as long as the results are what the supervisor specifies. Let the employee have strong input as to the completion date of the project. Note that you may not even know how to complete the task yourself -- this is often the case with higher levels of management. 5. Ask the employee to summarize back to you, their impressions of the project and the results you prefer 6. Get ongoing non-intrusive feedback about progress on the project This is a good reason to continue to get weekly, written status reports from all direct reports. Reports should cover what they did last week; plan to do next week and any potential issues. Regular employee meetings provide this ongoing feedback, as well. 7. Maintain open lines of communication Don't hover over the subordinate, but sense what they're doing and support their checking in with you along the way. 8. If you're not satisfied with the progress, don't take the project back Continue to work with the employee and ensure they perceive the project as their responsibility. 9. Evaluate and reward performance Evaluate results more than methods. Address insufficient performance and reward successes. See the next major section, "Employee Performance Management." Basics of Internal Communications Effective communications is the "life's blood" of an organization. Organizations that are highly successful have strong communications. One of the first signs that an organization is struggling is that communications have broken down. The following guidelines are very basic in nature, but comprise the basics for ensuring strong ongoing, internal communications. 1. Have all employees provide weekly written status reports to their supervisors Include what tasks were done last week, what tasks are planned next week, any pending issues and date the report. These reports may seem a tedious task, but they're precious in ensuring that the employee and their supervisor have mutual understanding of what is going on, and the reports come in very handy for planning purposes. They also make otherwise harried employees stand back and reflect on what they're doing. 2. Hold monthly meetings with all employees together Review the overall condition of the organization and review recent successes. Consider conducting "in service" training where employees take turns describing their roles to the rest of the staff. For clarity, focus and morale, be sure to use agendas and ensure follow-up minutes. Consider bringing in a customer to tell their story of how the organization helped them. These meetings go a long way toward building a feeling of teamwork among staff. 3. Hold weekly or biweekly meetings with all employees together if the organization is small (e.g., under 10 people); otherwise, with all managers together Have these meetings even if there is not a specific problem to solve -- just make them shorter. (Holding meetings only when there are problems to solve cultivates a crisis-oriented environment where managers believe their only job is to solve problems.) Use these meetings for each person to briefly give an overview of what they are doing that week. Facilitate the meetings to support exchange of ideas and questions. Again, for clarity, focus and morale, be sure to use agendas, take minutes and ensure follow-up minutes. Have each person bring their calendar to ensure scheduling of future meetings accommodates each person's calendar. 4. Have supervisors meet with their direct reports in one-on-one meetings every month This ultimately produces more efficient time management and supervision. Review overall status of work activities, hear how it's going with both the supervisor and the employee, exchange feedback and questions about current products and services, and discuss career planning, etc. Consider these meetings as interim meetings between the more formal, yearly performance review meetings. Meeting Management Meeting management tends to be a set of skills often overlooked by leaders and managers. The following information is a rather "Cadillac" version of meeting management suggestions. The reader might pick which suggestions best fit the particular culture of his or her own organization. Keep in mind that meetings are very expensive activities when one considers the cost of labor for the meeting and how much can or cannot get done in them. So take meeting management very seriously. The process used in a meeting depends on the kind of meeting you plan to have, e.g., staff meeting, planning meeting, problem solving meeting, etc. However, there are certain basics that are common to various types of meetings. These basics are described below. (Note that there may seem to be a lot of suggestions listed below for something as apparently simple as having a meeting. However, any important activity would include a long list of suggestions. The list seems to become much smaller once you master how to conduct the activity.) Selecting Participants
Developing Agendas
Opening Meetings
Establishing Ground Rules for Meetings You don't need to develop new ground rules each time you have a meeting, surely. However, it pays to have a few basic ground rules that can be used for most of your meetings. These ground rules cultivate the basic ingredients needed for a successful meeting.
Time Management
Evaluations of Meeting Process It's amazing how often people will complain about a meeting being a complete waste of time -- but they only say so after the meeting. Get their feedback during the meeting when you can improve the meeting process right away. Evaluating a meeting only at the end of the meeting is usually too late to do anything about participants' feedback.
Evaluating the Overall Meeting
Closing Meetings
Managing Yourself There are many sources of additional information and advice referenced at the end of this section. Role of New Manager or Supervisor of Often Very Stressful The experience of a first-time supervisor or manager is often one of the most trying in their career. They rarely have adequate training for the new management role -- they were promoted because of their technical expertise, not because of their managerial expertise. They suddenly have a wide range of policies and other regulations to apply to their subordinates. Work is never "done". They must represent upper management to their subordinates, and their subordinates to upper management. They're stuck in the middle. They can feel very alone. Guidelines to Manage Yourself Everyone in management has gone through the transition from individual contributor to manager. Each person finds his or her own way to "survive.” The following guidelines will help you keep your perspective and your health. 1. Monitor your work hours The first visible, undeniable sign that things are out of hand is that you're working too many hours. Note how many hours you are working per week. Set a limit and stick to that limit. Ask your peers or boss for help. 2. Recognize your own signs of stress Different people show their stress in different ways. Some people have "blow ups". Some people get very forgetful. Some people lose concentration. For many people, they excel at their jobs, but their home life falls apart. Know your signs of stress. Tell someone else what they are. Ask them to check in with you every two weeks to see how you are doing. Every two weeks, write down how you are doing -- if only for a minute. Stick in it a file marked "%*#)%&!!#$". 3. Get a mentor or a coach Ideally, your supervisor is a very good mentor and coach. Many people have "been there, done that" and can serve as great mentors to you. 4. Learn to delegate Delegating is giving others the responsibility and authority to carry out tasks. You maintain the accountability to get them done, but you let others decide how they will carry out the tasks themselves. Delegation is a skill to learn. Start learning it. 5. Communicate as much as you can Have at least one person in your life with whom you are completely honest. Hold regular meetings with staff -- all of them in one meeting at least once a month, and meet at least once every two weeks with each of your direct reports. A common problem among new managers and supervisors (or among experienced, but ineffective ones) is not meeting unless there's something to say. There is always something to communicate, even if to say that things are going well and then share the health of your pets. New managers and supervisors often assume that their employees know as much as they do. One of the first signs of an organization in trouble is that communications break down. Err on the side of too much communication, rather than not enough. 6. Recognize what's important from what's urgent -- fix the system, not the problem One of the major points that experienced manages make is that they've learned to respond to what's important, rather than what's urgent. Phone calls, sick employees, lost paperwork, disagreements between employees all seem to suddenly crop up and demand immediate attention. It can seem like your day is responding to one crisis after another. As you gain experience, you quit responding to the crisis and instead respond to the problem that causes the crises. You get an answering machine or someone else to answer the phone. You plan for employees being gone for the day -- and you accept that people get sick. You develop a filing system to keep track of your paperwork. You learn basic skills in conflict management. Most important, you recognize that management is a process – you never really "finish" your to-do list -- your list is there to help you keep track of details. Over time, you learn to relax. 7. Recognize accomplishments Our society promotes problem solvers. We solve one problem and quickly move on to the next. The culture of many organizations rewards problem solvers. Once a problem is solved, we quickly move on to the next to solve that one, too. Pretty soon we feel empty. We feel as if we're not making a difference. Our subordinates do, too. So in all your plans, include time to acknowledge accomplishments -- if only by having a good laugh by the coffee machine, do take time to note that something useful was done. Designing Organization and Staff Overall, the organization and its various groups should be organized in the configuration that reaches business goals in the most effective and efficient fashion. Guidelines in this section will help you ensure your organization and its various groups are organized in the best configuration possible. NOTE: Sources for additional and advanced information are included at the end of this section. If You Are In An Already Established Organizations, Then Organizing Will Be Easier if You Have Been...
If You Are In An Already Established Organizations, Then Typical Problems That Suggest Need for Organizing (or Re-Organizing) Are... There are several problems that seem to keep coming up in small businesses, whether for-profit or nonprofit. These problems include:
NOTE: It is not always problems that provoke the need for organizing. For example, if the organization has been conducting strategic planning and produced new goals, these goals may require the organization to reorganize. For example, if the business wants to expand market share in a certain region, then the organization may need a new office in that region, more sales people, etc. General Principles to Remember Whether you're in an already established or a new organization, the activity of organizing and re-organizing can be a major undertaking that has substantial effect on everyone in the organization. Therefore, before we visit some specific guidelines for carrying out change, it's important to keep the following general principles in mind:
General Guidelines for Planning the Organizing Recurring problems often seem to have little to do with the business's overall purpose and goals. However, any attempts at reorganizing may be just fine-tuning, or tweaking, if not done with the long term in mind. In fact, the recurring problems may be a symptom of the organization's not having clearly thought out what its overall purpose and goals are. Without visiting the overall purpose and goals, redesign is usually a highly reactive and very short-term fix. Therefore:
Guidelines During Organizational Design One of the most frequent and straightforward means to guide decisions about organizational design is to examine similar businesses, including similar design and nature of services and products. However, management should still undertake careful examination of the design of their business. The following guidelines will help you in this activity. Lewis, Lewis and Souflee, in Management of Human Service Organizations (Books/Cole, 1991, p. 80) list several key questions developing an organizational design. These questions apply, whether for-profit or nonprofit organization. [Items in brackets "[]" were inserted by Carter McNamara.]
Return to Table of Contents for this guide | Return to index of all guides | Return to the top of this page Defining a New Job Role
Hiring (Advertising, Screening and Selecting)
Building Teams Management experts assert that most work (and most learning) occurs in teams. Therefore, it's important to know how to design, build and support highly effective teams. NOTE: There are several major "breakthroughs" in how teams are designed and carried out. These activities can be done. These breakthroughs are in regard to the extent of independence of the teams, producing, for example, self-organized teams, self-directed teams and self-managed teams. NOTE: Additional and advanced information is referenced at the end of this section. Major Types of Teams (or Groups) There are many types of teams. The type used depends very much on the nature of the results the team is to accomplish. Formal and informal teams are "official" parts of the overall organization, assigned to a major, ongoing function, for example, quality management, patient care, etc. Management appoints formal teams. Informal teams are usually loosely organized groups of people who volunteer to come together to address a non-critical, short-term purpose. Committees are organized to address, major ongoing tasks in an organization and membership is based on position, for example, committees in boards of directors, grievance committees, etc. Problem solving teams These teams are formed to address a particular, major problem currently faced by the organization. Often, their overall goal is to provide a written report that includes recommendations for solving the problem. Membership is comprised of people who perceive and experience the problem, as well as those who can do something about it. Self-directed and self-managed teams These increasingly used types of teams afford members great latitude in how they achieve the overall results preferred from the team. For example, they may select their leader who serves for a limited time and purpose, depending on the particular point in the group's process. This type of team is used especially when the team is working in a complex, rapidly changing environment. Stages of Team Development It helps a great deal to have some basic sense for the life of a team. Teams go through several major phases including the following: Forming: Members first get together. Individually, they consider "What am I here for?", "Who else is here", "Who am I comfortable with?", etc. During this stage, it's important to get members involved, including to introduce themselves to each other. The team may require clear leadership to facilitate clarity and comfort for involvement of members. Storming: During this stage, members are beginning to voice their individual differences, trying for join with others who share the same beliefs, trying to jockey for position in the group. Therefore, it's important for members to continue to be highly involved, including voicing their concerns in order to feel represented and understood. The team leader should focus on clarity of views, achieving consensus (or commonality of views) and recording decisions. Norming: In this stage, members begin to share common commitment to the purpose of the group, including its overall goals and how it will reach those goals. The team leader should focus on achieving clarity of roles, structure and process of the group. Performing: In this stage, the team is "humming". Members are actively participating in the team process in order to achieve the goals of the group and its organization. During this stage, the style of leadership becomes more indirect as members take on stronger participation and involvement in the group process. Closing and Celebration: At this stage, it's clear to members and their organization that the team has achieved its overall purpose (or a major milestone along the way). It's critical to acknowledge this point in the life of the team, lest members feel unfulfilled and skeptical about future team efforts. Guidelines for Designing Teams 1. Set clear goals for the results to be produced by the team The goals should be designed to be "SMARTER", that is, be specific, measurable, acceptable to members, realistic, and have a time frame to be started and stopped, extend the capabilities of members and provide reward for their accomplishment. As much as possible, include input from other members of the organization when designing and wording these goals. Goals might be, for example, "produce a project report that specifies project plan, schedule and budget to develop and test a complete employee performance management system within the next year". Write these goals down for eventual communication to and discussion with all team members. 2. Set clear goals for the effectiveness of the team process The goals should also be designed to be "SMARTER". Goals might be, for example, attain 90% participation of all members during the first 6 weeks of weekly attendance, achieve 90% satisfaction ratings among members, each person takes at least one turn at facilitating the group, meetings start and stop on time, etc. Write these goals down for eventual communication to all team members. Write these goals down for eventual communication to and discussion with all team members. 3. Determine time frames for commencing and terminating the team, if applicable Write these times down for eventual communication to and discussion with all team members. 4. Determine the type of team Various types of teams have various purposes. Consider use of permanent teams, committees, self-directed teams, problem solving teams, etc. (See additional information provided at the end of this section.) 5. Determine the membership of the group Consider the extent of expertise needed to achieve the goals, including areas of knowledge and skills. Include at least one person who has skills in facilitation and meeting management. Attempt to include sufficient diversity of values and perspectives to ensure robust ideas and discussion. A critical consideration is availability -- members should have the time to attend every meeting. 6. Determine the structure of the group Structure includes the number of people in the group, how often they will meet and when and who will be the leader of the group. 7. Determine the process of the group Depending on the nature of the results to be produced by the group, the process might be focused on open discussion, action planning, problem solving and decision-making, generating recommendations, etc. 8. Identify any needs for training and materials For example, members might benefit from brief overview of the stages of development of a team, receive training and packets of materials in regard to their goals and the structure and process of their team, etc. 9. Identify the costs to provide necessary resources for the team Consider the cost of paying employees to attend the meeting, trainers and/or consultants, room rental, office supplies, etc. 10. Plan the first meeting In the first meeting, communicate the goals of the team, why each member was selected, the overall benefit of the goals to the organization, the time frame for the team effort, who will lead the team (at least, initially), when the team might meet and where, etc. Have this information written down to hand out to each member. 11. Early on, plan team building activities to support trust and strong working relationships among members Team building activities can include, for example, a retreat in which members introduce themselves, exercises in which members help each other solve a short problem or meet a specific and achievable goal, extended period in which members can voice their concerns and frustrations about their team assignments, etc. 12. Support team meetings and processes At this point, it's critical that supervisors remain available to provide support and resources as needed. Monitor that team goals are being met. Provide ongoing encouragement and visibility to members. One of the most important forms of support a supervisor can provide is coordination with other supervisors to ensure that team members are freed up enough to attend team meetings. Training Orienting New Employees Develop an employee orientation checklist and consider the following activities for inclusion on the list. The following activities should be conducted by the employee's supervisor. 1. Before the employee begins employment, send them a letter welcoming them to the organization, verifying their starting date and providing them a copy of the employee policies and procedures manual. Note that you'll dedicate time for them to discuss with manual with you later. 2. When the employee begins employment, meet with them to explain how they will be trained, introduce them to staff, give them keys, get them to sign any needed benefit and tax forms, explain the time-recording system (if applicable), and provide them copies of important documents (an organization chart, last year's final report, the strategic plan, this year's budget, and the employee's policies and procedure manual if they did not get one already). 3. Show them the facilities, including layout of offices, bathrooms, storage areas, kitchen use, copy and fax systems, computer configuration and procedures, telephone usage, and any special billing procedures for use of office systems. 4. Schedule any needed computer training, including use of passwords, overview of software and documentation, location and use of peripherals, and where to go to get questions answered. 5. Review any policies and/or procedures about use of facilities. 6. Assign an employee to them as their "buddy" who remains available to answer any questions. 7. Take them to lunch on the first day and invite other employees along. 8. Meet with them at the end of the day to hear any questions or comments. 9. Meet with the new employee during the first few days of employment to review the job description again. Remind them to review the employee manual and sign a form indicating they have reviewed the manual and will comply with its contents. Review any specific goals for the position, e.g., goals from the strategic plan. In the same meeting, explain the performance review procedure and provide them a copy of the performance review document. 10. Have one-on-one meetings with the new employee on a weekly basis for the first six weeks, to discuss the new employee's transition into the organization, get status on work activities, hear any pending issues or needs, and establish a working relationship with their supervisor. Job Training Some Basics to Know About Training Variety of Reasons for Training Employee job training can be initiated for a variety of reasons for an employee or group of employees, e.g.,:
Very Basic Types of Training When planning training for your employees, it helps to understand some basics about training. Let's look at four types of training. Self-Directed Learning Self-directed learning is where the learner decides what he or she will learn and how. Other-Directed Learning Other-directed learning is where other people decide what the learner will learn and how. Informal training Informal training has no predetermined form. Examples are reading books to learn about a subject, talking to friends about the subject, attending a presentation, etc. Formal Training Formal training has a predetermined form. The form usually includes specification of learning results, learning objectives and activities that will achieve the results, and how the training will be evaluated. Examples might be college courses, workshops, seminars, etc. Note that because formal training has a form, it does not necessarily mean that formal training is better than other forms. Informal Means of Training This is probably the most common type of training and includes, for example, on-the-job training, coaching from supervisors, using manuals and procedures, advice from peers, etc. Coaching Probably the most common form of informal training is job coaching.
The above approach works best in tasks or jobs that include straightforward procedures or routines. As jobs and roles become more complex, employees often require more formal training. Common Pitfalls in Employee Training
Learn How to Plan Your Training Supervisors and employees can accomplish highly effective training by following certain guidelines.
Identifying Your Learning Objectives and Activities
Developing Any Materials You May Need Consider if you need to obtain, or start:
Planning Implementation of Your Training Plan
Planning Evaluation of Your Training Plan and Experiences
For example, are your methods being pretested before being applied? Do you understand the methods as they're being applied? Are regularly providing feedback about how well you understand the materials? How will you (and your supervisor, if applicable) know if implementation of the plan achieves the training goals identified in the plan? Are there any plans for follow-up evaluation, including assessing your results several months after you completed your plan? Budget Necessary Resources for Training
Employee Performance Management Setting Goals New Managers and Supervisors Often Lack Perspective on Performance of Employees One of the common problems that new managers and supervisors experience is no clear, strong sense whether their employees are really being effective or not. The first step toward solving this problem is to establish clear performance goals. Some people have a strong negative reaction toward setting goals because they fear goals as "the law" that must be maintained and never broken. Some people fear they will not achieve the goals. Others have disdain for goals because goals seem to take the "heart" out their work. Advantages of Goals Despite the negative views that one can have about goals, they hold certain strong advantages in the workplace. They:
Goals for Performance Gaps, Growth Gaps, Opportunity Gaps and Training Gaps Goals can be established for a variety of reasons, for example, to overcome performance problems, qualify for future jobs and roles, take advantage of sudden opportunities that arise and/or give direction to training plans. Performance gaps are identified during the employee performance management process. Ideally, performance gaps are addressed by performance improvement plans. In these plans, goals are established to improve performance, and may include, for example, increased effort on the part of the employee, support from the supervisor, and certain training and resources to assist the employee in their development. Dedicated employees can greatly appreciate having specific performance goals for them to achieve in order to keep their jobs, verify their competence to their supervisor and accomplish overall professional development. Growth gaps are identified during career planning. Employees perceive certain areas of knowledge and skills that they would like to accomplish in order to qualify for certain future roles and positions. Employees often appreciate having clear-cut goals that mark what they need to do to advance in their careers. Opportunity gaps are identified when a sudden opportunity arises for the employee. If the employee is highly interested in taking advantage of the opportunity, then he or she will appreciate knowing exactly what they need to accomplish (what goals they need to achieve) to grab the opportunity. Training gaps are identified when hiring a new employee, during employee performance management or career planning. Gaps are usually in terms of areas of knowledge, skills or abilities. Training plans can be designed with clear-cut training goals to give direction to the employee and trainer. Whatever the type of goal, it's critical that the employee have strong ownership and commitment to achieving the goal. Goals Can Be Agreeable to Supervisors and Employees These views can be addressed, largely by
When setting goals with employees, strive to design and describe them to be "SMARTER". This acronym is described in this guide, in a subsection listed above, and stands for:
If goals seem insurmountable to the employee, then break goals down into smaller goals, or sub-goals or objectives. Each of these should be SMARTER, as well. Supporting Employee Motivation Clearing Up Common Myths About Employee Motivation The topic of motivating employees is extremely important to managers and supervisors. Despite the important of the topic, several myths persist -- especially among new managers and supervisors. Before looking at what management can do to support the motivation of employees, it's important first to clear up these common myths. 1. Myth #1 -- "I can motivate people" Not really -- they have to motivate themselves. You can't motivate people anymore than you can empower them. Employees have to motivate and empower themselves. However, you can set up an environment where they best motivate and empower themselves. The key is knowing how to set up the environment for each of your employees. 2. Myth #2 -- "Money is a good motivator" Not really. Certain things like money, a nice office and job security can help people from becoming less motivated, but they usually don't help people to become more motivated. A key goal is to understand the motivations of each of your employees. 3. Myth #3 -- "Fear is a damn good motivator" Fear is a great motivator -- for a very short time. That's why a lot of yelling from the boss won't seem to "light a spark under employees" for a very long time. 4. Myth #4 -- "I know what motivates me, so I know what motivates my employees" Not really. Different people are motivated by different things. I may be greatly motivated by earning time away from my job to spend more time my family. You might be motivated much more by recognition of a job well done. People are motivated by the same things. Again, a key goal is to understand what motivates each of your employees. 5. Myth #5 -- "Increased job satisfaction means increased job performance" Research shows this isn't necessarily true at all. Increased job satisfaction does not necessarily mean increased job performance. If the goals of the organization are not aligned with the goals of employees, then employees aren't effectively working toward the mission of the organization. 6. Myth #6 -- "I can't comprehend employee motivation -- it's a science" Nah. Not true. There are some very basic steps you can take that will go a long way toward supporting your employees to motivate themselves toward increased performance in their jobs. (More about these steps is provided later on in this article.) Basic Principles to Remember
Steps You Can Take The following specific steps can help you go a long way toward supporting your employees to motivate themselves in your organization. 1. Do more than read this article -- apply what you're reading here This maxim is true when reading any management publication. 2. Briefly write down the motivational factors that sustain you and what you can do to sustain them This little bit of "motivation planning" can give you strong perspective on how to think about supporting the motivations of your employees. 3. Make of list of three to five things that motivate each of your employees Fill out the list yourself for each of your employees and then have each of your employees fill out the list for themselves. Compare your answers to theirs. Recognize the differences between your impression of what you think is important to them and what they think is important to them. Then meet with each of your employees to discuss what they think are the most important motivational factors to them. Lastly, take some time alone to write down how you will modify your approaches with each employee to ensure their motivational factors are being met. (NOTE: This may seem like a "soft, touchy-feely exercise" to you. If it does, then talk to a peer or your boss about it. Much of what's important in management is based very much on "soft, touchy-feely exercises". Learn to become more comfortable with them. The place to start is to recognize their importance.) 4. Work with each employee to ensure their motivational factors are taken into consideration in your reward systems For example, their jobs might be redesigned to be more fulfilling. You might find more means to provide recognition, if that is important to them. You might develop a personnel policy that rewards employees with more family time, etc. 5. Have one-on-one meetings with each employee Employees are motivated more by your care and concern for them than by your attention to them. Get to know your employees, their families, their favorite foods, names of their children, etc. This can sound manipulative -- and it will be if not done sincerely. However, even if you sincerely want to get to know each of your employees, it may not happen unless you intentionally set aside time to be with each of them. 6. Cultivate strong skills in delegation Delegation includes conveying responsibility and authority to your employees so they can carry out certain tasks. However, you leave it up to your employees to decide how they will carry out the tasks. Skills in delegation can free up a great deal of time for managers and supervisors. It also allows employees to take a stronger role in their jobs, which usually means more fulfillment and motivation in their jobs, as well. 7. Reward it when you see it A critical lesson for new managers and supervisors is to learn to focus on employee behaviors, not on employee personalities. Performance in the workplace should be based on behaviors toward goals, not on popularity of employees. You can get in a great deal of trouble (legally, morally and interpersonally) for focusing only on how you feel about your employees rather than on what you're seeing with your eyeballs. 8. Reward it soon after you see it This helps to reinforce the notion that you highly prefer the behaviors that you're currently seeing from your employees. Often, the shorter the time between an employee's action and your reward for the action, the clearer it is to the employee that you highly prefer that action. 9. Implement at least the basic principles of performance management Good performance management includes identifying goals, measures to indicate if the goals are being met or not, ongoing attention and feedback about measures toward the goals, and corrective actions to redirect activities back toward achieving the goals when necessary. Performance management can focus on organizations, groups, processes in the organization and employees. 10. Establish goals that are SMARTER SMARTER goals are: specific, measurable, acceptable, realistic, timely, extending of capabilities, and rewarding to those involved. 11. Clearly convey how employee results contribute to organizational results Employees often feel strong fulfillment from realizing that they're actually making a difference. This realization often requires clear communication about organizational goals, employee progress toward those goals and celebration when the goals are met. 12. Celebrate achievements This critical step is often forgotten. New managers and supervisors are often focused on a getting "a lot done". This usually means identifying and solving problems. Experienced managers come to understand that acknowledging and celebrating a solution to a problem can be every bit as important as the solution itself. Without ongoing acknowledgement of success, employees become frustrated, skeptical and even cynical about efforts in the organization. 13. Let employees hear from their customers (internal or external) Let employees hear customers proclaim the benefits of the efforts of the employee. For example, if the employee is working to keep internal computer systems running for other employees (internal customers) in the organization, then have other employees express their gratitude to the employee. If an employee is providing a product or service to external customers, then bring in a customer to express their appreciation to the employee. 14. Admit to yourself (and to an appropriate someone else) if you don't like an employee -- Managers and supervisors are people. It's not unusual to just not like someone who works for you. That someone could, for example, look like an uncle you don't like. In this case, admit to yourself that you don't like the employee. Then talk to someone else who is appropriate to hear about your distaste for the employee, for example, a peer, your boss, your spouse, etc. Indicate to the appropriate person that you want to explore what it is that you don't like about the employee and would like to come to a clearer perception of how you can accomplish a positive working relationship with the employee. It often helps a great deal just to talk out loud about how you feel and get someone else's opinion about the situation. As noted above, if you continue to focus on what you see about employee performance, you'll go a long way toward ensuring that your treatment of employees remains fair and equitable. Observing and Giving Feedback McGill and Beatty (in "Action learning: A practitioner’s guide", London: Kogan Page, 1994, p. 159-163) provide useful suggestions about sharing effective feedback:
Addressing Performance Issues (Note that if your organization's policies about performance management indicate a specific procedure for handling performance issues, that procedure should be followed very carefully. Otherwise, a court may interpret your official policies to be modified by how you actually handled a performance issue and you may lose protection from your related policies in court.) 1. Note that performance issues should always be based on behaviors that you see, not on characteristics of the employee's personality 2. Convey performance issues to employees when you see first see the issues! Don't wait until the performance review! Worse yet, don't ignore the behaviors in case they "go away." 3. When you first convey a performance issue to an employee, say what you noticed and would like to see instead be specific about what you saw that you consider to be a performance problem. Ask the employee for feedback. Ask the employee if there's any special training or more resources they need to do their job. Explore if the job is configured so that most people would probably fail, and so the job needs to be redesigned. Tell them that you want the behavior to improve. If they react strongly and claim they will quit, give them a day to think it over. In any case, remind them that you support them in their role. 4. (Consider special circumstances: You can usually fire someone if they committed certain gross acts, such as theft, blatant insubordination, a major impropriety, e.g., telling information to competitors or spreading confidential information about customers, etc. However, if there is poor performance or chronic absenteeism because of potential verified alcoholism or depression, it's best to consult an expert to deal with this situation.) 5. Make notes about the first meeting and its results, and keep it in a file for yourself This note may come in handy later on if the performance problem persists. (In the case of a corporation, you might mention the situation to your board. The board will likely be a precious and objective asset to dealing with this situation, especially if things with the employee get worse.) 6. If the problem occurs again over the next month or two, immediately issue them a written warning In the memo, clearly specify what you saw, mention the previous meeting and its date, say the behaviors have not improved, warn them that if this occurs again over some period (e.g., the next month), they will be promptly terminated. Meet with them to provide them the memo. If you are convinced that the employee is trying hard, but can't improve, consider placing him or her elsewhere in the organization. Attempt to have this meeting on other than on a Friday. Otherwise, employees are left to ruminate about the situation without ready access to you for at least three days. (In the case of corporations, update the board.) 7. On the third occurrence, consider firing the employee. (See below.) Conducting Performance Appraisals/Reviews Yearly performance reviews are critical. Organizations are hard pressed to find good reasons why they can't dedicate an hour-long meeting at least once a year to ensure the mutual needs of the employee and organization are being met. Performance reviews help supervisors feel more honest in their relationships with their subordinates and feel better about themselves in their supervisoral roles. Subordinates are assured clear understanding of what's expected from them, their own personal strengths and areas for development and a solid sense of their relationship with their supervisor. Avoiding performance issues ultimately decreases morale, decreases credibility of management, decreases the organization's overall effectiveness and wastes more of management's time. Conduct the following activities. 1. Design a legally valid performance review process; consider these legal requirements of the performance review process: Patricia King, in her book, Performance Planning and Appraisal, states that the law requires that performance appraisals be: job-related and valid; based on a thorough analysis of the job; standardized for all employees; not biased against any race, color, sex, religion, or nationality; and performed by people who have adequate knowledge of the person or job. Be sure to build in the process, a route for recourse if an employee feels he or she has been dealt with unfairly in an appraisal process, e.g., that the employee can go to his or her supervisor's supervisor. The process should be clearly described in a personnel policy. 2. Design a standard form for performance appraisals and include the name of the employee, date the performance form was completed, dates specifying the time interval over which the employee is being evaluated, performance dimensions (include responsibilities from the job description, any assigned goals from the strategic plan, along with needed skills, such as communications, administration, etc.), a rating system (e.g., poor, average, good, excellent), space for commentary for each dimension, a final section for overall commentary, a final section for action plans to address improvements, and lines for signatures of the supervisor and employee. Signatures may either specify that the employee accepts the appraisal or has seen it, depending on wording on the form. 3. Schedule the first performance review for six months after the employee starts employment Schedule another six months later, and then every year on the employee's anniversary date. 4. Initiate the performance review Tell the employee that you're initiating a scheduled performance review. Remind them of what's involved in the process. Schedule a meeting about two weeks out. 5. Have the employee suggest any updates to the job description and provide written input to the appraisal (Note that by now, employees should have received the job descriptions and goals well in advance of the review, i.e., a year before. The employee should also be familiar with the performance appraisal procedure and form.) Have them record their input to the appraisal concurrent to the your recording yours. Have them record their input on their own sheets (their feedback will be combined on the official form later on in the process). You and the employee can exchange each of your written feedback in the upcoming review meeting. 6. Record your input to the appraisal -- always reference the job description and associated formal goals for basis of review Be sure you are familiar with the job requirements and have sufficient contact with the employee to be making valid judgments. Don't comment on the employee's race, sex, religion, nationality, or a handicap or veteran status. Record major accomplishments, exhibited strengths and weaknesses according to the dimensions on the appraisal form, and suggest actions and training or development to improve performance. Use examples of behaviors wherever you can in the appraisal to help avoid counting on hearsay. Always address behaviors, not characteristics of personalities. The best way to follow this guideline is to consider what you saw with your eyes. Be sure to address only the behaviors of that employee, rather than behaviors of other employees. 7. Hold the performance appraisal meeting State the meeting's goals of exchanging feedback and coming to action plans, where necessary. In the meeting, let the employee speak first and give their input. Respond with your own input. Then discuss areas where you disagree. Attempt to avoid defensiveness; admitting how you feel at the present time, helps a great deal. Discuss behaviors, not personalities. Avoid final terms such as "always," "never," etc. Encourage participation and be supportive. Come to terms on actions, where possible. Try to end the meeting on a positive note. 8. Update and finalize the performance appraisal form Add agreed-to commentary on to the form. Note that if the employee wants to add attach written input to the final form, he or she should be able to do so. The supervisor signs the form and asks the employee to sign it. The form and its action plans are reviewed every few months, usually during one-on-one meetings with the employee. 9. Note that if the supervisor has been doing a good job supervising, then nothing should be surprising to the employee during the appraisal any performance issues should have been conveyed when they occurred, so nothing should be a surprise in the review meeting. Firing Employees 1. You should consider firing the employee only if you have a) given the employee clear indication of what you originally expected from him or her (via a written job description previously provided to the him or her); b) Have clearly written personnel policies which specify conditions and directions about firing employees and the employee initialized a copy of the policy handbook to verify that he or she had read the policies; c) warned the employee in successive and dated memos which clearly described degrading performance over a specified time despite your specific and recorded offers of assistance and any training (the number of memos depends on the nature of the problem, but should be no more than three or four); and d) you clearly observe the employee still having the performance problem. (Note that if the employee is being fired within a probationary period specified in your personnel policies, you may not have to meet all of the above conditions.) 2. Take a day or so to consider what you are about to do. Consult with members of your board (in the case of corporations). 3. If you still decide to fire the employee, do so promptly, both for your credibility with other employees and so as not begin procrastinating about this rather painful, upcoming event. 4. Write a letter of termination to the employee As with the previous letters of warning, be clear about the observed behaviors, when you saw them, earlier warnings and their consequences, what you did in response, and the consequence that must now be enacted according to your policies. 5. Tell the computer system administrator to change the employee's password and assert that this action should be done promptly and in complete confidence. 6. Meet with the employee. Provide them the letter. Explain how the termination will occur, including when, what they must do, what you request from them and when. Ask for any keys. Give them a half hour or so to remove personal items (you may choose to monitor them during this removal, depending on the nature of the grounds for dismissal). Consider changing the door locks to the facilities. Change the passwords on phone systems, if applicable. 7. As with other meetings, make notes of what was said and exchanged Keep them in your records. Personal Policies Developing Personnel Policies Need for Personnel Policies From review of the above personnel management information, it's clear that there are numerous considerations and potential areas for litigation when dealing with personnel issues. There are numerous rules and regulations, which regulate the nature of the relationship between an employee and his or her organization, e.g., about affirmative action, managing personnel files, employee retirement, rights of privacy, discrimination and harassment, wrongful termination, etc. Consequently, it's better to have thought out these potentially controversial situations before they occur and establish guidelines by which they might or will be addressed. These general guidelines are called policies. Specific activities resulting from the guidelines are often called procedures. Developing Personnel Policies Each organization should carefully consider what policies it requires and how they should worded. Many organizations begin developing their personnel policies by reviewing policies from other organizations. This is fine as long the organization carefully reviews each policy, modifies them according to the nature and needs of the organization and has all policies approved by the board (in the case of corporations). When developing policies, always consult a lawyer who's well versed in federal, state and local laws regarding employment practices, e.g., the Civil Rights Act of 1964, Americans with Disabilities Act of 1992, and Occupational Safety and Health Acts. Personnel policies may need to be governed to by union rules or other contractual agreements. Note that the on-line information referenced from these Web pages and the associated examples should be considered as guidance, rather than as policies to be adopted as is for any organization. Training on Policies Note that if management's behaviors do not conform to the personnel policies, courts will consider the related policies to be superseded by the behaviors. Therefore, it's critical that management have basic understanding of the major points made in each personnel policy. Consider setting aside a half day per year for employees to review the policies and procedures to ensure they are up-to-date. Any recommended changes should be discussed with and approved by the board (in the case of corporations). In addition, each employee should have a manual that includes all personnel policies. (See below.) Developing an Employee Manual Document all intended policies and procedures and collect them in a policies and procedures manual. Having all policies and procedures in a manual facilitates training about them to all employees. All employees should have read the manual to understand and accept its contents. They should sign a form indicating so, and provide the signed form to the organization's administrator. All supervisors should be trained about the policies and procedures. A large number of suits brought against organizations is because, although the organizations had clear policies, supervisors did not enact the policies because they did not understand them. Note that courts may consider policies and procedures as superseded by the actual behaviors displayed by supervisors. The board (in the case of corporations) should authorize all policies in the manual and every employee should receive a copy of the manual. Each policy should include wording to the effect that the policies are for general guidance in the relationships between employees and the organization, the board (in the case of corporations) has authorized the policy, that policies can be changed at any time and that the policies do not constitute a contract between the organization and the employee. Consider the following wording on the cover of your policies manual: "Nothing contained in or implied by this manual creates or shall be deemed to create or constitute a contractual obligation to employees on the part (of the organization). The policies, procedures and guidelines contained in this manual are subject to change at any time, do not confer any obligation (on the part of the organization) and do not create any right to employment on the part (of the organization)." Sample List of Personnel Policies The following list is an example of policies included in a personnel policies manual (or an "Employee Handbook"). The contents of your manual will depend on the nature and needs of your organization.
Hiring Procedures
New Employee and Internal Orientation
Compensation
Payroll Information & Timekeeping Procedures
Benefits
Workers' Compensation Information and Procedures
Performance Assessment Procedures
Financial Management
Data Practices
Return to Table of Contents for this guide | Return to index of all guides | Return to the top of this page How to estimate time taken to achieve a project It is always difficult to estimate the length of time that a task will take, particularly if it is not a task that has been carried out before. It is quite normal for the time taken for completion of a project to be seriously underestimated as the influence of the unexpected or unscheduled high priority work is forgotten. This section firstly covers unpredictable events that may be factored into your estimates, and then looks at formal methods of estimating time taken to achieve complex projects. Taking unpredictable events into account When you have to guess time, and particularly when you are likely to be held to a time estimate, ensure that you allow time for:
If the accuracy of time estimates is critical, you may find it effective to develop a systematic approach to including these factors. Typically this would be based on past experience. Estimating time taken on complex projects Where you need to carry out a complex project in which resources are limited or performance of one task is dependent on completion of another task, then techniques such as Critical Path Analysis can be useful. Time estimates for each stage should allow for unpredictable events as described above. Critical Path Analysis Critical Path Analysis is an extremely effective method of analyzing a complex project. It helps you to calculate the minimum length of time in which the project can be completed, and which activities should be prioritized to complete by that date. Where a job has to be completed on time, critical path analysis helps you to focus on the essential activities to which attention and resources should be devoted. It gives an effective basis for the scheduling and monitoring of progress. Sequential and parallel activities The essential concept behind Critical Path Analysis is that some plan activities are dependent on other activities being completed first. For example, you should not start building a bridge unless you have designed it first! These dependent activities need to be completed in a sequence, with each activity being more-or-less completed before the next activity can begin. Dependent activities are also called 'sequential' activities. Other activities are not dependent on completion of any other tasks, or may be done at any time before or after a particular stage is reached. These are non-dependent or 'parallel' tasks. Method The process of carrying out a critical path analysis is shown below: 1. List all activities in plan, show the earliest start date, estimated duration and whether the tasks are parallel or sequential. If the tasks are sequential, show what they depend on. This will show a task list like the one below (simplified custom written computer installation): NB: Start week shows purely when resources become available. Whether a task is parallel or sequential depends largely on context.
2. Head-up graph paper with the days or weeks through to task completion 3. Plot the tasks on the graph paper, start on the earliest start dates, and mark on the duration. Show the tasks as arrows, and the ends of tasks with dots. Above the tasks arrows, mark the time taken to complete the task. Do not worry about task scheduling yet - all we are doing is setting up the first draft of the analysis. Once you have plotted the tasks, plot in lines to show dependencies. Return to Table of Contents for this guide | Return to index of all guides | Return to the top of this page Three Universal Laws of Marketing: How to Get Customers to Beg for Your Product . Law #1: It is more important to be significantly different than a little bit better. So often we see companies trying to outdo competitors by being a little bit better, rather than by being significantly different. They try to add a little more memory to their chip, or make the monitor a little bigger, or run their programs a little faster. But this is a game that emerging firms can't win. Competitors can simply augment their memories, enhance their monitors and speed up their programs. It's the same with other kinds of products and services. The secret to success in the market is to be really different—to set yourself apart from competitors by clearly and consistently differentiating what you do. Entrepreneurs make their companies significantly different by understanding the environment of their customers. By this, we don't mean the socio-economic or natural environment that surrounds us. We mean the internal, working environment of individuals. Savvy entrepreneurs work to understand the knot in the stomach of their customers. They learn what their customers worry about, what keeps them awake at night, and thus what prevents them from purchasing. Knowing this, entrepreneurs can position their products and services to address and eliminate these concerns, and thus encourage customers to buy. Amazon.com, for example, ensures confidentiality in the purchase process, so you don't have to worry about using your credit card. Software Company Ashton-Tate called its first product dBase II, even though it was the first version, because George Tate realized that no one wants to buy the first of anything. And a medical-device company focused its pitch on the issue of minimizing malpractice suits for doctors, rather than on the technical aspects of their product. Focusing on intangibles. Too many entrepreneurs think they can succeed by competing on price or specifications alone. They can't. Don't get us wrong—the price and specs are important. But by themselves they don't differentiate a product effectively enough. As surely as the sun rises in the east and sets in the west, if an entrepreneur competes only on the basis of providing a cheaper product or a faster machine, someone will come along and provide the same thing at a lower price or a faster pace. Intangibles, on the other hand—like convenience, reliability, quality, upgradability, service, and ease of use—provide powerful incentives to buy. Amazon.com makes it easy and convenient for you to buy, so you do. eBay provides a sense of community among its users, even calling groups "neighborhoods.” Targeting customers. No product is bought by everyone. Therefore, entrepreneurs must target a specific group of customers and then meet their needs. If one is developing software for doctors or architects, then which kind of doctors or architects? Danny O'Neill has a fast-growth coffee company in Kansas City. His gourmet, "air-roasted" coffee is designed for more elegant restaurants and the coffee aficionado. Sam Walton started Wal-Mart by targeting smaller, rural communities that the then-big retailers believed to be unprofitable. By being significantly different, companies make themselves unique in the mind of the customer. And gaining share of mind is the way to gain share of market. Law #2: Customers don't just buy a product or service. They buy trust. Successful companies are trusted by their customers. Trust is the basis of loyalty; it's the foundation upon which companies not only survive but also thrive. Trust is hard to achieve, must be proven day-in and day-out and is easy to lose. To gain the trust of customers, entrepreneurs: Keep promises. Entrepreneurs continually tell customers that they will do things for them. Often they don't realize that when they say what they will do, they are making promises. When a company tells a customer that an order will be there the next day, that's a promise! When FedEx launched its now famous advertising campaign to deliver packages "absolutely, positively overnight," it made a promise. Because it delivered on that promise, customers truly trusted that their packages would be there absolutely, positively the next day. Smart entrepreneurs know that they don't let their mouths, or their ad campaigns, or their promotions, make a promise that they or their companies can't deliver. Build credibility. A company's reputation is its most treasured asset. Reputation—good or bad—is a reflection of how everyone in the company interacts with the customer. It's based on the credentials of the entrepreneur and the management team, the values that employees demonstrate and the evidence of success, like the visibility and growth of the company. By their action or inaction, companies create impressions, engender testimonials and leave reference trails. One sign of credibility is the good word-of-mouth that comes from satisfied customers. Just as people talk about the latest movie that they've seen, they talk about the good and bad experiences they have with businesses. Fix mistakes fast. Most customers realize that companies, like people, aren't perfect, and that mistakes will happen. Smart entrepreneurs know that fixing mistakes fast is essential to retaining trust. A company gains the trust of its customers by being trustworthy. And being worthy of trust means treating the customer as the entrepreneur who heads the company would want to be treated. Law #3: A complete product consists of the totality of what a customer buys. When you buy books from Amazon.com or flowers from 1-800-FLOWERS, you’re not buying just books and flowers. You’re buying an experience. You’re buying a Web site that's easy to navigate, a simple purchasing process, confidentiality and security when you use your credit card, cordial and helpful people on the other end of the phone when you call and an ability to fix mistakes fast and without question. Too often, entrepreneurs think that customers just want a specific product or service, and they forget all the other expectations that customers have along with it. Entrepreneurs who are attuned to the range of customer expectations surround their products and services with all the support, features, acts and information that add not only real value and utility but also comfort for their customers. Like Newton's Laws that govern the physical universe, or the periodic table that delineates the elements of nature, we feel these three laws govern the marketing universe and delineate the elements that move products and service into the marketplace. Companies that understand and follow these laws will move forward, making discoveries and solidifying their competitive advantages. They will have satisfied customers who keep coming back again and again, clamoring for more. Those that don't will wind up like the inventors who tried to build a perpetual motion machine or the alchemists who tried to make gold out of lead—frustrated and defeated—because they keep trying to defy the laws of the universe. Return to Table of Contents for this guide | Return to index of all guides | Return to the top of this page
Sales Considerations
Return to Table of Contents for this guide | Return to index of all guides | Return to the top of this page Obtaining money for an entrepreneurial company is really pretty simple--it's just another sale. Your customer has something you want--their money. You have something they want, equity or a piece of the action of the potential growth of your enterprise. The key, as in all sales, is to determine the right price and close the sale. To do that, you have to develop a financial marketing mindset. Just as you would prepare a marketing program to sell your product or service, you need to prepare a financial marketing program. That means you prepare a business plan and develop and practice a verbal pitch, develop a marketing scheme, present the package, and close the sale. It takes intimate knowledge, unbounded enthusiasm, and a scuff-resistant ego. Your business plan is going to show you how much money you will need, if it should be debt or equity, and at what stage or time period it's needed to accomplish what tasks. By consulting with your peers, legal counsel, accountants and company consultant, you will have determined the most proper legal structure for your company as well as the proposed valuations. From this, you can then develop your financial marketing program, which in turn will help you narrow in on the type of investor you will be seeking. For seed and concept companies, this invariably means the entrepreneur starts with "family and friends" money, and then proceeds on to obtaining informal investor financing prior to attracting the interest of the more formal investors such as venture capital firms. It will be helpful if you understand the accepted "stages of growth" used by all financing sources. Understanding the Stages of Entrepreneurial Development Prior to delving into the details of entrepreneurial financing, it's helpful to establish an understanding of the traditional stages of development for entrepreneurial companies. These are: Seed or Concept, Startup, First, Second, Third, and Harvest. They are briefly described with Status, Tasks, and Financing as follows: Seed or Concept Status. This is the wild-eyed, perhaps incurable, inventor stage. There is an idea, a concept, no management team, no prototype, and patentability has not been determined. No business plan, timetable, or market research has been assembled. Founder(s) may be technicians. Tasks. To begin development of a prototype, assemble some key management, develop a business plan, assess market potential, structure the company, and assess patentability or proprietary standing. Financing. Traditional venture capital firms have little interest in funding a company at this stage. The risk level is just too high, and the time for achieving a payout or harvest is not determinable. Personal savings or friend and family money funds this stage. It ends with the completion of a seed stage business plan and the formation of the company. Start-up Status. At least one principal person of the company is pursuing the project on a full-time basis. The s prototype is being developed, the business plan is being refined, a management team is being identified, market analysis is being undertaking, and beta tests are being set up or initial customers are identified. More formal funding is being accomplished.
Tasks. Complete and test the prototype and obtain evidence of commercial interest. Assemble and identify an initial management team, finish the business and marketing plans, establish manufacturing and initiate sales. Financing. Traditional venture capital firms may show an interest at this stage, assuming that a top-rated management team is assembled, patentability or proprietorship is proven, and marketability is demonstrated. Fund raising is a major effort at this stage and it may take from several months to a year or more. First Stage Status. The company is now a going concern. The product has proven manufacturability and is selling. If it's a service company, some customers have tried the service. The management team is in place, the company has experienced some setbacks, customers can confirm product usage, marketing is being refined, adjustments are being made in the business plan and the money raising efforts continue. Tasks. To achieve market penetration and initial sales goals, reach close to break-even, increase productivity, reduce unit costs, and build the sales organization and distribution system. Financing. At this stage, traditional venture capital firms are interested in investment--in fact, it's their most preferable stage. Financing is needed to get the production bugs worked out and to support initial marketing efforts. Second Stage Status. Significant sales are developing, as are assets and liabilities. The company is sporadically achieving break even, and cash flow management becomes critical. Second-level management is being identified and hired. Export marketing is being explored and more sophisticated management systems are being put into place. Tasks. To obtain consistent profitability, add significant sales and back orders, expand sales from regional to national, identify international marketing plans, and obtain working capital to expand marketing, accounts receivable, and inventory. Financing. More sophisticated and second-round venture capital financing comes into play at this stage. The founders and investors are forming plans for the harvest Third Stage (also Mezzanine Stage) Status . All systems are go, and the potential for a major success is beginning to be apparent. Snags are being worked out in all areas from design and development of second-generation products; to marketing and distribution; to management and all its applied systems. Tasks. To increase market reliability, begin export marketing, put second-level management in place, begin to "dress up" the company for harvest. Financing. At this stage, the company may need to obtain "bridge" or "mezzanine" financing to carry increased accounts receivable and inventory prior to harvest. There is a great amount of pressure to prove second- and third-generation products, increase profitability records, improve the balance sheet, and firmly establish market share and penetration. Stage Four: Or is the Harvest Near? The end may be near for entrepreneurial companies. The company is sifting and sorting out its options including going public, being acquired, selling out, or merging. What started out as a dream has become an entrepreneurial reality. The next challenge is to start all over again, but this time with a pocketful of dollars. With an understanding of the stages of development of entrepreneurial companies, we can delve into the various types of entrepreneurial financing. Types of Entrepreneurial Financing Entrepreneurial managed companies are constantly on the search for new capital and it is seldom easy to come by. Top entrepreneurs understand that raising money is a way of life. Experienced entrepreneurs realize that the financing of companies is done in stages and that they have to be flexible in identifying the latest trends in financing. Many first-timers erroneously believe that they can successfully generate sufficient cash flow on a near-term basis, then bootstrap their way to financial success. This does not work in today's fast-moving business climate, especially in many medium and high-tech areas. This section discusses this fact and other potential problems. The next section offers many solutions for the sourcing of financing. There Are Several Types of Financing: Debt and Equity Contrary to the dreams of many startup entrepreneurs, initial financing can be the hardest part of launching their new business. There are many popular misconceptions that an idea, a startup team, and a preliminary business plan will get them in the venture capitalist door. They expect to exit, happily, with the check in hand. They don't realize that traditional venture capital-venture capital funds that are supported by institutional investors-only finance a fraction of a percent of the new companies started each year. They are not cognizant of the fact that 90 percent plus of startup money comes from private sources and its up to the individual entrepreneur to identify and sell their project to these financing sources. It's tough, tough work. The first thing to do is to put together a business plan to use as a fundraising tool (see Business Planning). Second is the actual raising of the financing, or financial marketing. Each alternative to raising money requires a different approach to the business plan. Financing never happens quickly; it is never simple. In fact, it is usually quite painful and exasperating. Entrepreneurs can find themselves chasing down blind alleys if they don't prepare properly. There are a number of sources of financing and a variety of forms of capital. Some are used to finance seed or startup companies while others are used for expansion. Start-ups are usually limited to the type of financing they can get, like personal savings used as equity or personally secured subordinated debt. On the other hand, companies with a proven track record have a much larger choice of financing alternatives--such as banks, venture capital firms, or public offerings. What all entrepreneurs soon discover is that there are several factors that they must constantly reckon with, in pursuit of the elusive dollar. These are:
These factors are touched on in this section. Your Two Basic Choices for Financing For all intents and purposes, the entrepreneur has two basic choices when considering financing: debt or equity, pledging a part of one's soul or giving away a piece of it. Commonly, one does both. In simple terms, debt is borrowed money secured in some fashion with some type of asset for collateral. Equity, on the other hand, is contributed capital, usually hard dollars. Debt may be secured by a personal signature only, and equity can also be in the form of a contributed asset. But most often new businesses require long-term debt or permanent equity capital to support major expansion and anticipated rapid growth. The advantage of borrowing is that it is a relatively simple process to arrange. It does not take a great deal of time and does not dilute equity ownership. The disadvantages are that it is a high-risk strategy as far as company growth is concerned, in that incurring debt subjects the company to a firm obligation, usually including the principals as cosigners. A downturn in business or an increase in interest rates could result in the inability to service debt payments with the consequences being that the co-signers have to personally pay the company's debt. Successful Entrepreneurs Use Combinations Unlike oil and water, debt, equity, self-funding, and external funding do mix well. In fact, it's an entrepreneurial secret. The best-managed companies mix their financing sources and choices. Which to use, and when, becomes a matter of individual option, although there are some pretty well established precedents. Founders' personal investments, including both personal assets and family and friends' equity and loans, are usually what finances concept or seed stage companies. Development or Start-Up stage companies commonly seek funding from private placements, early-stage venture capital firms, and various grants from both foundations and government sources. Early/First-stage or production companies may receive financing from bank loans, leasing companies, and research and development partnerships (for incremental product development). Strategic partnerships are often entered into at this stage with potential customers, suppliers, and manufacturers. A company at the next stage of ramping up (Second Stage), which is full-scale production and expanded marketing, often receive additional dollar injections. These come from second and larger rounds of traditional venture capital, larger companies that are looking for product distribution opportunities, institutional investors, more venture leasing companies (for manufacturing equipment), and additional strategic partners (often seeking secondary manufacturing and distribution rights both domestically and for foreign countries). After this stage, the entrepreneuring company has some heavy choices to consider. Here is where the harvest point (Third and Forth Stage) is a natural if the plan has been to build a company and then sell out. They still need more money (what's new), but their choices are a lot broader: more venture capital, bridge or mezzanine financing while going public, being acquired (perhaps by one of the earlier-stage strategic partners), or selling out to a cash-rich company. So Debt or Equity? If we're saying that entrepreneurs use combinations, how do we distinguish which and when? The use of debt almost always requires that some equity has come in first. A rough rule of thumb is that a dollar of early stage equity can support a dollar of debt, if there is some additional security to further back the debt. Lenders feel that a start-up has little ability to generate sales or profits. Consequently, the lender wants to have their debt secured, and even then, they feel that the asset value will be decreasing with time and there's always the possibility that management may not be up to the company-building challenge at hand. This debt will most likely be short-term debt (one year or less) to be paid back from sales. Short-term debt is traditionally used for working capital and small equipment purchases. Long-term borrowing (one year or maybe up to five) can be used for some working capital needs, but usually is assigned to finance property or equipment that serves as collateral for the debt. While commercial banks are the most common source of short-term debt, there are more choices for long-term financing. Equipment manufacturers provide some, as does the Small Business Administration (SBA), various state agencies, and leasing companies. More examples are given in the following section. It's true, entrepreneurs can finance start-ups with more debt than equity, but there are some distinct disadvantages. As an example; if they negotiate extended credit terms with several suppliers, this restricts their flexibility to negotiate prices. Heavily leveraged (i.e., debt-financed) companies are constantly undercapitalized and will experience continuing cash flow problems as they grow. Paying close attention to strained cash flow requires a lot of management time be diverted from company operations. It also affects the balance sheet, making it difficult to obtain additional equity or debt. On the other hand, there is one big positive in using debt. Debt does not decrease or dilute the entrepreneur's equity position and it provides nice returns on invested capital. However, if credit costs go up, or sales don't meet projections, cash flows really get pinched and bankruptcy can become reality. Top entrepreneurial companies use-varying combinations of debt and equity. They determine which is the most advantageous for the particular stage of growth they're financing. Their aim is to create increasingly higher valuations or profit structures. Sources of Financing Financing an enterprise can be both confusing and exasperating. If you’re a beginner in the subject, you may feel lost in not knowing the "lingo." If you have years of experience, you may find yourself needing a "refresher." The following section sets out some sources for finding money and is meant to spark your thinking process. Entrepreneurs need to be creative, but sometimes we need a jumpstart to help us get going. Equity Types and Sources PERSONAL
FAMILY &; FRIENDS
ANGELS Individual private investors are commonly and affectionately known as "angels." Along with family and friends, they provide the vast majority of start-up funding for entrepreneurial companies. They may invest in either debt or equity or combinations. What they look like: 90% male, ages=40-60, masters/advanced degrees, prior start-up experience, income $100-$250k, invest 2 ½ yr, $25k-50k per deal-$130k tot, seldom invest in more than 10% of a deal, they seek 20% compounded per annum returns, they expect to hold their investment for 5-7 yrs, prefer manufacturing and product companies, they like to invest in technology they know, prefer start-up, dislike moderate growth, like a consulting or board of advisor position with the company, they like invest with others and prefer to invest close to home (50-300 miles), their motivation is a high rate return, learn about deals from friends, 30% from accountants or attorneys, they would like to see more deals, and they refer deals to other private investors. Where to find them: network-network-network Ask for referrals, use calling card file, spread the word--"have plan/will travel" anybody, anytime, anyplace. Make contact with attorneys, accountants, management consultants, customers, employees, doctors, dentists, investment bankers (pay fees) Networking is hard work. How to present to them: Need one page brief (2-4 page) executive summary, and full business plan. Most important, one minute pitch, 3 minute pitch, 15-20 minute presentation with visuals. Objective is to get one-on-one with investment decision maker. ANGELS Part of the contingent of private financing sources, or informal investors, are persons affectionately referred to as "angels." Along with family and friends, they are the largest providers of early stage financing, both from a dollar standpoint as well as their sheer numbers. They are a homogeneous group that is very difficult to identify and capture. They may be your next-door neighbor or a relative of your friends. They may be affiliated in that they have some contact with you or your business, or they could be nonaffiliated in that they currently have no idea you even exist. Obviously, it's easier to start with someone who is already familiar with you and has a vested interest in the relationship. Recognizing that there is no typical angel, just like there are no typical Entrepreneurs, it's still helpful to establish a characteristic profile of angels. EMPLOYEES Many entrepreneurs overlook the possibility of obtaining investment in either debt or equity from their existing and prospective employees. VENTURE CAPITAL Venture capital investment firms have some very tough qualifications for their investments.
INVESTMENT BANKERS
MERCHANT BANKERS Basically same as Investment bankers except frequently supply some of their own money. STRATEGIC PARTNERS/ALLIANCES
BANKS - Savings and Loans - Credit Unions Place secured short, or medium-term loans
COMMERCIAL FINANCE COMPANIES What are they?
How do they differ from banks?
What do they finance?
LEASING FIRMS
SBA
GOVERNMENT SOURCES
SUPPLIERS
EQUIPMENT MANUFACTURERS
FACTORS - deep discounts
SOURCES of FINANCING HINTS There are many "source guide books" and listings available. Good libraries have numerous listing books for banks, venture capital firms, asset based lenders, investment and merchant bankers, leasing firms, commercial lenders, factors, venture capital clubs, and "Million Dollar Directories" for determining strategic alliances. There are several CD-ROM and diskette providers of financing source databases. You should also inquire with your city, county and states’ departments of economic development. See your local Small Business Administration (SBA) for information on their many programs. A Final Financing Note The secret to successful entrepreneurial financing is that it takes COMBINATIONS! Combinations of debt and equity and different time periods in the ongoing life of any enterprise. And the secret to successfully operating an entrepreneurial company is to pay constant, unrelenting attention to:
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