Be an Entrepreneur

Chap 12

The Entrepreneur

The Business Plan

The Enterprise•Epilogue

Be an Entrepreneur

CHAPTER 12

MONITOR AND CONTROL

Chapter 12 overview

In chapter 11, we focused on managing everyday business activities. But business is much more than routine

transactions. It is about achieving goals. Are you achieving your goals?

Chapter 12 overview

Specific questions: Are things going as planned? Are you getting the results you expect? Can you spot problems early on? How do you make sense of everything

that is happening?

Chapter 12 overview

Chapter 12 attempts to answer those questions by showing you ways to control and monitor the health and performance of your business.

Coverage of the Chapter

Identifying And Measuring Problems• The need for information• Accounting reports• The analysis

Tracing Causes

Coverage of the Chapter

Taking corrective action• Separation of duties• Transaction trail• Error prevention and detection• incentives

Activities

IcebreakerGlossary. Video. Story: Capitol

Hill Bikes

Accounting information

Analyze causes and sub-causes

Story: Landscape

Doctor

Spot the Problems

Take corrective action

Story: Party supplies. Exercises

in workbook

Summary. Case analysis:

.

Learning Objectives

• Explain why controls are needed as businesses grow

• Define monitoring and control. State their main activities

• Describe an income statement and a balance sheet.

Learning Objectives

• Apply variance-, vertical-, horizontal-, and trend analysis to a data set

• Describe the cause-and-effect diagram and brainstorming as techniques to analyzing causes to problems

Learning Objectives

• Cite and explain the traits of corrective actions that relate to internal controls

• Provide examples of incentives or measures to prevent and detect errors

Story from Real Life

• Capitol Hill Bikes is a retail bike store located in Washington DC.

• Ms. D’Amour started the business in 1999. • She approached a “Small Business

Development Center” in September 2004, to seek advice.

Story from Real Life

• Ms. D'Amour was concerned about her financial systems.

• She was not receiving the operating information she needed to make proper business decisions.

Story from Real Life

• SBDC staff visited the business and did an evaluation of the operating systems and the financial systems.

• By analyzing the accounting reports, the SBDC staff recommended changes in the financial situation.

Story from Real Life

• SBDC also made suggested to have permanent working capital and to improve some aspects of her cash flow.

• Now, Ms. D’Amour’s business is running better.

Glossary

Control: The set of supervising activities that

makes sure business proceeds as planned. It consists of identifying and measuring problems, tracing their causes, and taking corrective action.

Glossary

Income statement: An accounting report on performance

over a given period. It deducts expenses from revenues to result in either a profit or loss.

Glossary

Balance sheet: An accounting report on the condition

or financial health of a firm. It consists of assets that must equal the sum of liabilities and equity.

Glossary

Variance analysis: An analytical tool that compares

forecasts from actual data to highlight significant differences. It then looks for causes on the differences.

Glossary

Vertical analysis: An analytical tool that converts

amounts in a report to a percent of a certain base or total. For example, all items in an income statement are turned into a percent of sales.

Glossary

Horizontal analysis: An analytical tool that looks at the

percentage change of items from one period to the next.

Also called growth rate.

Glossary

Trend analysis: When vertical or horizontal analysis is

applied over several periods in the hope of observing a persistent movement in the numbers.

Glossary

Cause-and-effect diagram: An analytical tool that uses a diagram

to represent the causes and sub-causes of a problem.

Also called a fishbone diagram.

Glossary

Brainstorming: A technique that lists as many causes

(or solutions) to a problem within a short time frame.

No judgment or evaluation is made when ideas are generated in order to promote creativity.

Glossary

Separation of duties: A basic trait of control whereby no one

person is able to complete an entire transaction on his own.

Glossary

Transaction trail: A clear and correct record of all

transactions and the people that did them.

With a transaction trail, someone can trace items in the reports back to the individual transactions that affected the item.

Points to Remember

• Controls ensure that your business proceeds as planned, and that the task you set out to do is in fact done.

• More formally, monitoring and control are the set of supervising activities that identify and measure problems, trace their causes, and take corrective action where needed.

Central IDEAS: CONTROLS

Controls

Points to Remember

• To spot problems, one must first have information.

• Business information comes mainly in the form of accounting reports.

• The income statement is a report on performance over a given period.

• The balance sheet is a report on the condition or financial health of your business.

Central IDEA: Accounting Info

Accounting

Information

Points to Remember

• You can apply any combination of analytical tools on the information in order to identify problems.

• Variance Analysis – This technique compares forecasts with actual data.

Points to Remember

• Vertical Analysis – Vertical analysis converts amounts in a report into percents of a certain base or total. In the income statement, everything is turned into a percent of sales.

Points to Remember

• Horizontal and trend analysis – Horizontal analysis looks at how numbers changed from one period to another in percentage terms

Points to Remember

• When vertical or horizontal analysis is applied over several periods, you might detect that some numbers move persistently in one direction.

• When numbers behave this way, we have what is called a trend, hence the term trend analysis.

Central IDEA: Spot the Problems

Spot Problems

Points to Remember

• After problems are identified, their causes are traced.

• This task is done because the observed problem may only be a symptom to a deeper problem.

Central IDEA: Trace Causes

Trace Cause

s

Points to Remember

• Tools to trace the causes of problems include: • cause-and-effect diagram, a tool that identifies

the causes and sub-causes of a gap and organizes the analysis by using a diagram, and (continued)

Points to Remember

• (continued)• brainstorming, where a group is presented with

an identified problem. The task of the group is to list as many causes as they can within a short time frame. All possible causes are listed.

Points to Remember

• Solutions to problems and root causes, were discussed. Solutions that relate to control and monitoring are likely to have the following traits: • separation of duties, • a transaction trail, • measures to prevent or detect errors, and • incentives.

Take Corrective Action

Take corrective action

Ask Yourself

• Have I ever had to control a process? Have I supervised employees before?

• Have I ever tried to repair a broken item?

• Have I ever encountered a problematic process? Did I successfully analyze the problem?

Ask Yourself

• Have I ever made a list of monthly expenses?

• Did I discover expenses that are unnecessary or perhaps even harmful?

Ask Yourself

• Did I notice trends in my pattern of expenses?

• Did I notice trends, good or bad, in my other activities?

Ask Yourself

• Have I ever worked with a team before to solve a problem? Did I identify the root causes of the problem?

• Have I ever worked with a team before to attain an objective? Did we all achieve the desired effects?

Ask Yourself

• Have I ever taken corrective action for a defective process?

• Have I ever implemented improvements in a process that reduced the number of errors?

Exercises

Go through list of ways you can motivate staff below. Provide examples of each:• Achievement• Learning• Working in groups• Being respected

• Knowing the meaning of the work they are doing

• Variety, difficulty, and challenge

• Recognition• Prestige

Exercises

• In groups, discuss the effects of little or no control.

• The table on next slide shows the income statement of a firm over three years.

Year 1 Year 2 First Half of Year 3

NET SALES 105875 100% 117842 100% 61737 100%

COST OF GOODS SOLD 82391 78% 90065 76% 45737 74%

SELLING GEN. ADMIN. EXPENSES 17658 17% 18520 16% 10202 17%

OPERATING PROFIT 5826 6% 9257 8% 5798 9%

DEPRECIATION 979 1% 1090 1% 562 1%

OTHER INCOME 0% 293 0% 165 0%

INTEREST EXPENSE 518 0% 784 1% 484 1%

ZAKAT 1515 1% 2686 2% 1721 3%

NET INCOME 2814 3% 4990 4% 3196 5%

INCOME STATEMENT

In groups, discuss the questions below (the term “amounts” below refer to the riyal amounts)

1. What analytical techniques have been applied to the raw numbers?

2. What insights can you come up? Is the firm’s performance improving or worsening?

3. Are the comparisons “fair” across the amounts? Across the percents?

4. What else can you do with the amounts to give you more insights?

Review Questions

Why are controls needed as a business grows?

What is monitoring and control? What are the main activities in

monitoring and control?

Review Questions

What does an income statement tell you?

What does a balance sheet tell you? What is variance analysis? What is vertical analysis?

Review Questions

What is trend analysis? Describe a cause-and-effect diagram.What are the characteristics of

brainstorming?

Review Questions

What are the main traits of corrective actions that relate to control and monitoring?

Give at least three ways to prevent or detect errors .

Review Questions

If a staff member is not very interested in money as a motivation, give three other ways to motivate him to work better.

Case study questions

• What were the causes for the double payment?

• Do you think the suppliers will return the overpayment? If they do, what can prevent Yousuf from depositing the checks to his account instead of to the business?

Case study questions

• If copies are accepted, Yousuf could copy an invoice himself, have Party Supplies pay twice, ask for the refund, and pocket the overpayment.

• What can Mahmoud do, to prevent this from happening?

LAST CHAPTER: EPILOGUE

Harvesting and Exit Strategy

Epilogue: overview

You’ve spent years building your small business. You’ve taken no vacations. Work pressure forced you to miss family events.

And you have succeeded.

Epilogue: overview

You now have a rhythm of regular sales for your company.

You now have an “engine of growth.”

Epilogue: overview

Now, you are tired, wondering what is next, and ready to reap the fruits of your labor.

You wish to explore your options now.

Epilogue: overview

Time to ask yourself: Is the entrepreneurial experience satisfying, so far?

If yes, then good. Keep going. If not, then the logical next step is to

look for a way forward or a way out.

Epilogue: overview

Way forward 1: You could drive your single-product

company to expand to medium-sized status, or to the stature of a large multinational.

You could go global.

Epilogue: overview

Way forward 2: You could expand sideways into other

related industries, set up new lines of business, and become a diversified conglomerate.

Be global AND multi-product.

Epilogue: overview

But eventually, you might reach a peak. A peak implies a high point between two low points.

One usually climbs up to a peak, and then goes downhill all the way afterwards.

Epilogue: overview

Do you relish the prospect of reaching a peak and then going downhill from there?

Epilogue: overview

Way out: Retirement is also an option. Remember that even great athletes retire. They may win the world championship five times in a row. Then they get out of the game. …

Epilogue: overview

…They quit while they’re at their peak.

They give reasons like “shifting priorities….”

They want to “spend more time with the family …”.

Epilogue: overview

In the end, do whatever enriches your life.

Think about the harvest. Be optimistic always, as you walk this

road …that branches out into alternative futures.