Key Performance Indicators that are Helpful for Tracking Business Performance - Case Study Example

Section 1: Understanding the Small Business Environment Small businesses play a key role in every economy. Governments have put in place various initiatives aimed at supporting small businesses. In starting a small business, the structure of the business is an important consideration. The best business structure that suits Paint Pleazer is a sole proprietorship. At this instance, this form of business is preferred since it is simple to run and manage. Anthony Newmanzer will also maintain control over the business. Tax issues will also be easy to handle with no need for specialised experts that will cost more. Besides, Anthony will enjoy the profit from the business by himself. If he intends to exit the business it will be easy. However, sole proprietorship has unlimited liability. This means that Anthony will have no legal separation from the business. He will be liable for all debts incurred on behalf of the business. Also, Anthony will have to face various challenges in raising the required funds to run the business. He could as well be under pressure to ensure the business succeeds because if it fails he losses as an individual the time, resources and effort invested in the business. Antony has got to consider various legal elements in setting up his business to avoid needless legal confrontations and litigation. The first legal requirement to pond over is the company’s safety standards. Under the Occupational Health and Safety (OHS) laws, everyone has a right to be safe at work. Therefore, Anthony should ensure that the workplace is safe for the employees. This is important because the nature of his business entails hazards that need to be contained to reduce injuries that may lead to unnecessary expenses. Anthony should as well ensure that insurance is provided for the business. He should mainly consider a cover for third parties and property. This is to ensure there is immediate settlement of incidents that may befall his premises, such as fire. Besides, Antony should consider employment laws. Workers enjoy various rights, such as minimum wage, overtime treatment, to form/join unions, among others. Key performance indicators (KPIs) are helpful for tracking business performance over time. Anthony can as well use the KPIs to benchmark his business performance. The main KPIs that he should consider include; Net income margin Rent as a percentage of total sales Employee expenses as a percentage of total sales Advertising expenses as a percentage of total sales Number of vehicles sprayed per day Antony needs to consider the impact of his business activities on the environment. Paint Pleazer core operations entail the use of paint. Paint involves chemical substances. Indiscriminate dumping is not proper. Antony should therefore come up with a plan to ensure that there is proper waste disposal such that the chemical substances do not find their way to the wider environment. He should also sell paint products that can be easily decomposed. Carbon emissions have been widely blamed for climate changes and its effect. Anthony needs to check if the equipment to be used at the premises are free from carbon emissions or they should not exceed the acceptable levels. For instance, if the machines emit smoke, this will lead to environmental destruction. Section 2: Report Explanation a) Key performance indicators (KPIs) are important for monitoring business performance. The profit and loss budget provides an important instrument from which financial KPIs can be extracted from. These include the gross profit margin (revenue-cost of goods sold/revenue), net profit margin (net profit/total revenue), net profit (total revenue – total cost). b) The cash flow budget indicates the expected cash flow in and out of the business. Therefore, it generally helps to manage the movement of cash. The budget indicates particular times of the year when the business may experience cash shortfall. This will inform when the business may require cash injection. This can be facilitated through short-term financing. Besides, future business prospects can be evaluated. If it is found that the budgeted figures deviate much from the budgeted figures, corrective action can be undertaken. c) In order for Anthony to realise optimum benefits from the budgets he has set a proper plan. An important element in budget planning is budgetary control. Anthony has got to compare the budgeted income and expenses with the actual performance to spot any variances. He should ensure that there are controllable costs that will allow him to take remedial measures should there be adverse variances or are quite excessive. Section 3: Forecasting Discussion Forecasting is important in planning for the future. Forecasting relies heavily on the historical trends. Accuracy is a big element in attracting people’s reliability on the forecasted figures. There are various methods that are used in forecasting. Nonetheless, no method is one hundred per cent accurate. A method would attract great reliability if the predicted values do not vary very much from the actual figures. Forecast errors should display normal distribution given that accuracy is based on the intrinsic volatility of the forecasted item. A reliable method should mimic the actual values. In forecasting, the some of the factors to consider include the general trend. For instance, it is expected that in starting a business, sales will be low. It is also important to consider the demand of the commodity in the market. This is likely to indicate the sales revenue as well as the growth of the business. Seasonality should also be considered given that there are particular times in a year when there is greater demand for the commodity. This will help to identify low seasons and peak seasons such that Anthony will make plans for employees, or when more resources are needed. Besides, the business capacity should be considered so as to make correct predictions. The economic environment also has to be considered including economic growth and population growth. Anthony’s business falls under provision of luxury commodities. Therefore, he should specifically focus on the economic trends. If people have more disposable income, he is likely to get more customers. Competitive market forces should also be considered since they reflect the extent to which the business can survive. Anthony may as well consider the capacity of his business to meet the demand in the market. Section 4: Finance Options Choosing a proper source of finance is crucial to the survival of a business. By and large, the sources of business can either be short-term or long-term depending on the cost that needs to be financed. Short-term sources of finance typically cover a period of less than 12 months. These include short-term loans, overdrafts, credit facilities, trade credit. Short term financing caters for small expenses such as payment of salaries, paying day-to-day suppliers, among others. Long-term sources of finance cover a period of more than 1 year. They include long-term loan, mortgage, venture capital, accruals, leasing, debentures, shares, bonds, retained earnings among others. Long-term financing is usually used to finance capital investments. These include purchase of fixed assets, business expansion, working capital financing, improving the cash flow, and construction, among others. Besides, terms for long-term financing also vary based on the business structure. Companies may access long-term financing on better terms than sole proprietors. Anthony is seeking to expand his business. The main items he wants considered include (1) renovating the existing property at a cost of $80,000; (2) acquiring new equipment at a one-time cost of $12,000; and (3) employing another part time spray painter additional at an estimated cost of $45,000 per year. The three options Anthony desires to discuss typically involve capital spending. The first option of renovating the existing property requires huge financing. However, since Antony can be regarded as a sole proprietor, he may not access cheap sources of long-term financing. This means he will not access share capital, he cannot issue debentures or bonds. The most conceivable options of long-term financing Anthony may consider involve venture capital, owner capital, or a loan facility with a bank. From these sources, Anthony can raise the $80,000 required to renovate the existing property. The second option of acquiring new equipment at a one-time cost is of capital nature and requires a relatively big sum of money for a sole proprietor. Anthony may successfully finance this activity through acquiring a loan of around 3-5 years. In employing another part time spray painter additional, Anthony may consider leasing the spray painter. This will entail a contractual agreement where Anthony will be allowed to use the equipment and pay the lesser based on the contract. Anthony can use the $45,000 per year to pay for the lease of the painter. Besides, he may get a favourable deal whereby he may spend less. Leasing also gives Anthony the opportunity to either return the product at a terminal value or buy off the asset after he is satisfied that the equipment is bringing in additional revenue for the business. Section 5: Succession Planning Anthony Newmanzer Proprietor, Paint Pleazer 4th November, 2015 Dear Mr. Anthony, This letter will inform you of the need and importance as well as the options for the future of your business. In particular, the letter addresses the element of succession planning. Succession planning entails the identification and development of prospective business leaders in the future. This very much crucial for your business. There are various options that you can consider. One option is to sell the business interest in return for assets or cash. You may also decide to transfer the business interests through a legal instrument. Another option is to choose a trust to which to transfer your business, such as granter retained annuity trusts (GRATs). The trusts will provide income to you and in case you pass away, the trust beneficiaries will derive income from the trust. Besides, the business can be transferred to family members or any person may come from within the organisation or from the family members. However, the person should be closely linked to the business and understands the nature of the day-to-day operations. You should train the successor on the critical activities of your company in order for him to have an in-depth understanding of the business. Another option is to transfer the business to any willing buyer in exchange for a promissory note. This will require the buyer to pay you a set amount of money over time. However, the payments are cancelled once you die. I have indicated the need for succession planning and the various options that you can consider for your business. It is my sincere hope that you shall consider the various elements for each option. I look forward to having detailed discussion on the options indicated and provide further assistance that may be required. Yours Sincerely, Brian Richardson. References Boettke, P. J and Coyne, C.J. (2004). Entrepreneurship and Development: Cause or Consequence? Global Prosperity Initiative Working Paper 6 Burnett, D (2001). Creating a Personal and Purposeful Definition for the Entrepreneur Jackling, B. Raar, J. and McDowall, T. (2010). Accounting: A Framework for Decision Making, 3rd ed. McGraw-Hill. Steven, M.B. (2006). Financial Analysis: A Controller's Guide, 2nd ed. Wiley. Read More