WELL-BUSINESS CHECKUP
WHAT IS A WELL-BUSINESS CHECKUP
Small businesses often fail because owners are unaware of the many elements that can prevent the business from growing and being successful. Often, small businesses are organized around the manager's specific area of expertise, such as marketing, accounting or production. This specialized expertise often prevents the business owner from recognizing problems that may arise in other parts of the business.
By doing an audit of key areas of the business, you can determine strengths and weaknesses, and work on making improvements. This should include seven critical business functions: basic planning, general bookkeeping and accounting practices, financial planning and loan proposals, sales and marketing, advertising and promotion, personnel, and production. In the healthy and financially sound small business, these seven functional areas are in balance. In many cases, one cannot work on all seven areas at once. The manager must decide which area to concentrate on based on past practices and the needs of the business. Regular use of this audit instrument can help make the small business manager more efficient.
This publication will provide the small business entrepreneur with the essentials for con-
ducting a comprehensive search for existing or potential problems. The audit was designed with small businesses in mind and addresses their unique problems and opportunities.
DESIGNING THE AUDIT
As the first step in determining what small business owner-managers need to know, the audit creators analyzed 900 Small Business Institute (SBI) student counselors' case reports. This analysis showed that the small businesses used consultants to help them obtain essential information for conducting many of their business affairs, such as basic planning, general business practice, accounting, finance and loan procurement, advertising and promotion, market research, feasibility studies and operations.
Next, 50 Small Business Development Center (SBDC) client cases were selected at random – 5 to 6 cases from each SBDC for an in-depth probe. The SBDC’s provide, through paid staff and faculty coordinators, in-depth counseling to small businesses. Like the SBI program, SBDC’s generate a client case report that details the current operations of the business and recommendations for improvement. The authors have combined case evidence, logical procedures, expert advice and systematic thinking to create a management audit for small businesses. This instrument is not exhaustive, i.e., the business owner/manager still must rely on personal judgment and past experience. However, it does provide a systematic framework to ensure that critical areas have been addressed before action is taken. The audit is a tool, not a replacement for good management skill. Audits and handbooks cannot do the consultant's job; however, effectively designed instruments, such as this audit, can save valuable time for the seasoned as well as the novice small business manager.
In their review of management literature the authors did not find an audit instrument that addressed the needs of small businesses. They studied actual SBI and SBDC case reports to find out what management practices were being used by small business, and used that information to create this audit.
SBDCs are sponsored by the SBA in partnership with state and local governments, the educational community and the private sector. They provide assistance, counseling and training to prospective and existing business owners. There are more than 1,000 SBDC service locations in all 50 states.
HOW TO USE THIS AUDIT
In order to gain maximum effectiveness from this audit, the small business manager should answer all questions in the audit, with an affirmative answer indicating no problem and a negative answer indicating the presence of a problem in a specific area.
After completing the audit, the manager can review the analysis of each section of the audit that follows (in the management audit analysis section) to determine what action is
most appropriate. The audit analysis provides an overview of how the various elements of the audit are related. The authors have linked the seven critical business functions, basic planning, general bookkeeping and accounting practices, financial planning and loan proposals, sales and marketing, advertising and promotion, personnel and production under three major audits: the management audit, the operations audit and the financial audit.
In the healthy and financially sound small business, these seven functional areas are in balance. In many cases, one cannot work on all seven areas at once. The manager must decide which area to concentrate on based on past practices and the needs of the business. Regular use of this audit instrument can help make the small business manager more efficient.
THE MANAGEMENT AUDIT
I. Basic Planning ( yes—no)
A. The company has a clearly defined mission. ----- -----
1. There is a written mission statement. ----- -----
2. Company is carrying out the mission. ----- -----
3. Mission statement is modified when
necessary. ----- -----
4. Employees understand and share in the
mission. ----- -----
B. The company has a written sales plan. ----- -----
1. Market niche has been identified. ----- -----
2. New product lines are developed when
appropriate. ----- -----
3. Targeted customers are being reached. ----- -----
4. Sales are increasing. ----- -----
C. The company has an annual budget. ----- -----
1. Budget is used as a flexible guide. ----- -----
2. Budget is used as a control device. ----- -----
3. Actual expenditures are compared against
budgeted expenditures. —— ——
4. Corrective action is taken when expenses
are over budget. ----- -----
5. Owner prepares budget. ----- -----
6. The budget is realist ----- -----
D. The company has a pricing policy. ----- -----
1. Products or services are
competitively priced. ----- -----
2. Business provides volume discounts. ----- -----
3. Prices are increased when warranted. ----- -----
4. There is a relationship between pricing
changes and sales volume. ----- -----
5. New prices are placed on last-in goods when
the price on old stock gets changed. ----- -----
II. Personnel
A. Employees know what is expected of them. ----- -----
1. Each employee has only one supervisor.---- -----
2. Supervisors have authority commensurate
with responsibility. ---- -----
3. Employees volunteer critical information to
their supervisor. ----- -----
4. Employees are using their skills on the job ----- -----
5. Employees feel adequately trained. ----- -----
B. Each employee has a job description. ----- -----
1. Employees can accurately describe
what they do. ----- -----
2. Employees do what is expected. ----- -----
3. Work load is distributed equitably. ----- -----
4. Employees receive feedback on
performance. ----- -----
5. Employees are rewarded for good
performance. ----- -----
6. Employees are familiar with company
policies. ----- -----
7. There is a concise policy manual. ----- -----
C. Preventive discipline is used when appropriate. ----- -----
1. Employees are informed when
performance is below standard ----- -----
2. Unexcused absences are dealt with
immediately. ----- -----
3. Theft prevention measures are in place. ----- -----
D. Regular employee meetings are conducted. ----- -----
1. Employees' ideas are solicited at meetings. ----- -----
2. An agenda is given to employees prior to
the meeting. ----- -----
THE OPERATIONS AUDIT
I. Production
A. The company has a good relationship with
suppliers. ----- -----
1. A well-documented plan addresses how to
deal with suppliers. ----- -----
2. Inventory delivery times are specified. ----- -----
3. Levels of quality of materials and
services are specified. ----- -----
4. Payment terms are documented. ----- -----
5. Contingency plans are provided. ----- -----
6. Regular contact is made with suppliers. ----- -----
1. Company has an inventory control formula
to provide for optimum inventory levels. ----- -----
2. Company has a policy on securing inventory
in a timely fashion. ----- -----
C. The company conducts incoming inventory
inspections. ----- -----
1. Company has a written policy on incoming
inspection. ----- -----
2. Incoming inspection is being performed. ----- -----
3. Incoming inspection levels of quality
are documented. ----- -----
D. The company has alternate sources of
raw materials. ----- -----
1. Two or more suppliers are identified
for each product needed. ----- -----
2. Majority of raw material requirements
are divided equally between two major
suppliers with a third source receiving
lesser but consistent orders. ----- -----
E. The company has a routine maintenance program. ----- -----
1. A routine maintenance program is docu-
mented and communicated to all main-
tenance personnel. ----- -----
2. Every major piece of equipment has a
maintenance log positioned in an obvious
place. ----- -----
3. Preventive maintenance is a regular
occurrence. ----- -----
F. The company has a formal operator
training program. ----- -----
1. Company has a written operator training
manual. ----- -----
2. A progressive training process is in
place. ----- -----
3. Accomplished operators are identified to
answer questions from trainees. ----- -----
4. Constructive feedback on training progress
is provided in a non-intimidating
fashion. ----- -----
G. The company meets Occupational Safety and
Health Administration (OSHA) standards. ----- -----
1. Company is aware of OSHA standards per
taining to the business. ----- -----
2. Company conducts regular meetings with
employees concerning OSHA standards.----- -----
3. All safety records and lost time accidents
are documented. ----- -----
H. The company has a well-documented
processing procedure. ----- -----
1. A scheduling process enables orders to be
grouped for more efficient processing. ----- -----
2. A scheduling chart allowing instantaneous
recognition of production status is in an
obvious place. ----- -----
3. Subassemblies are manufactured in suffi-
cient quantities on a timely basis. ----- -----
4. Finished stock is safely transported to
a clean and dry area. ----- -----
5. Adequate controls are provided to preclude
excessive inventory buildups that could
result in finished stock spoilage or ob-
solescence. ----- -----
I. The company has an environmental aware-
ness policy. ----- -----
1. A policy pertaining to the disposition
of hazardous waste materials is fully
documented and communicated to all pertinent
parties. ----- -----
2. Attempts are made to stay current with all
existing regulations pertaining to the
environment. ----- -----
3. Regular meetings are conducted to determine
better methods of dealing with
by-products. ----- -----
1. Company representatives attend trade shows
on a regular basis. ----- -----
2. Company subscribes to trade
publications. ----- -----
3. A formal employee suggestion program is
in place. ----- -----
4. Company conducts regular technology
advancement brainstorming sessions involving
the employees. ----- -----
5. Company is involved in the community's
extended learning programs. ----- -----
II. Sales and MarketingA. The owner knows exactly what the business is. ----- -----
1. The owner knows exactly who the
customer is. ----- -----
2. Potential customers know about the
business. ----- -----
3. Location is appropriate for the business.----- -----
4. The market is clearly defined. ----- -----
B. The owner knows competitors and their location. ----- -----
1. The owner knows how his or her prices compare
with the competitions'. ----- -----
2. The owner knows how the competition is
regarded. ----- -----
3. Census data are used for strategic
marketing. ----- -----
4. The owner knows the county sales
patterns. ----- -----
C. The owner and employees focus on customer needs. ----- -----
1. The owner and employees treat customers
courteously. ----- -----
2. The customer's concerns, complaints and
suggestions are listened to carefully. ----- -----
3. Customers are provided with quick,
reliable service. ----- -----
4. The owner is considered knowledgeable
by customers. ----- -----
5. Appropriate housekeeping procedures for
the business are followed. ----- -----
D. The owner is aware of customer needs. ----- -----
1. Feedback is requested from customers. ----- -----
2. Sales receipts are monitored. ----- -----
3. Sales receipts are compared to those
from previous years. ----- -----
4. Seasonal variations are taken into account.----- -----
E. The company needs to increase sales volume. ----- -----
1. There is a sales plan in effect. ----- -----
2. Sales goals are being met. ----- -----
3. Effective sales presentations are being
made to potential customers. ----- -----
4. Names of prospects are kept in a follow-up
file. ----- -----
5. Sales are closed effectively. ----- -----
III. Advertising and Promotion
A. The owner has an advertising and
promotion plan. ----- -----
The business
1. Has an advertising budget. ----- -----
2. Advertises monthly. ----- -----
3. Advertises weekly. ----- -----
4. Has a promotional calendar. ----- -----
B. The owner uses effective advertising
and promotion. ----- -----
The owner
1. Advertises in the Yellow Pages. ----- -----
2. Uses newspapers and "shoppers." ----- -----
3. Uses radio and television advertising.----- -----
4. Obtains no-cost or low-cost media
coverage. ----- -----
C. The owner uses effective merchandising techniques ----- -----
The owner
1. Relates display space to sales potential. ----- -----
2. Uses vendor promotional aids. ----- -----
3. Knows traffic flow patterns of
customers. ----- -----
4. Keeps facilities clean. ----- -----
D. The owner evaluates advertising and
promotional efforts. ----- -----
The owner
1. Determines if sales increase with
advertising. ----- -----
2. Ascertains if sales increase after special
promotion. ----- -----
3. Finds out whether advertising is reaching
intended market. ----- -----
THE FINANCIAL AUDIT
I. General Bookkeeping and Accounting Practices
A. The company has a bookkeeping system. ----- -----
single entry ----- double entry -----
The owner
1. Prepares the books. ----- -----
a. Understands the how and why. ----- -----
b. Prepares own financial statements. ----- -----
2. Pays for bookkeeping service. ----- -----
a. Understands financial statements. ----- -----
b. Has taxes done by bookkeeper. ----- -----
c. Has compared cost for bookkeeper
with that of a CPA. ----- -----
B. The company reconciles bank statements
monthly. ----- -----
C. The company keeps income and expense
statements accurate and prepares state-
ments monthly. ----- -----
The owner
1. Understands purpose of financial
statements. ----- -----
2. Compares several monthly
statements for trends. ----- -----
3. Compares statements against
industry averages. ----- -----
4. Knows current financial status of
business. ----- -----
D. The company makes monthly deposits for
federal withholding and Social Security taxes. ----- -----
The owner
1. Understands Form 941. ----- -----
2. Makes deposits on time to avoid
penalties. ----- -----
3. Provides W-2 information. ----- -----
E. The company has a credit policy. ----- -----
The company
1. Ages billing system monthly. ----- -----
2. Accesses late payment fee from customers----- -----
3. Writes off bad debts. ----- -----
4. Has good collection policies. ----- -----
5. Has a series of increasingly pointed
letters to collect from late customers. ----- -----
6. Has VISA, MasterCard, or other credit
card system. ----- -----
7. Emphasizes cash discounts. ----- -----
F. The company files all tax returns in a
timely manner. ----- -----
The owner
1. Considers tax implications of equipment
early. ----- -----
2. Considers buy versus lease possibilities. ----- -----
3. Considers possible advantages/
disadvantages of incorporation/
Subchapter S. ----- -----
4. Does not pay tax penalties (federal, state,
sales). ----- -----
II. Financial Planning and Loan Proposals
A. The company has adequate cash flow. ----- -----
1. Prenumbered cash receipts are
monitored and accounted for. ----- -----
2. Checks are deposited properly
each day. ----- -----
3. Customer invoicing is done promptly
(within two working days). ----- -----
4. Collections are received within
60 days. ----- -----
5. Accounts payable take advantage of
cash discounts. ----- -----
6. Disbursements are made by
pre-numbered check. ----- -----
B. The company projects cash-flow needs. ----- -----
1. Payrolls are met without problems. ----- -----
2. Money is set aside for expansion,
emergencies and opportunity
purchases. ----- -----
3. Short-term financing is used when needed. ----- -----
4. Line of credit is established
with a bank. ----- -----
C. The company understands the role of financial planning in today's highly competitive lending markets. ----- -----
1. The owner's personal resume is prepared
and current. ----- -----
2. Personal financial statements have been
prepared. ----- -----
3. The business has a written
business plan. ----- -----
4. Source and use of funds statements exist
for the past two years, with a projection
for the next two years. ----- -----
5. An accurate balance sheet exists for
the past two years and includes a pro-
jection for the next two years. ----- -----
6. The owner has a good working relation-
ship with a banker. ----- -----
7. There is a strong debt-to-equity ratio
(1:2/1:1). ----- -----
HOW TO USE THE AUDIT FOR IMPROVEMENT
Now that you have the results of your audit, how do you apply the data to making improvements? One approach is to make a list of strengths and weaknesses for your firm. Here you will take the areas where your responses were predominantly "yes" answers and identify these as strengths. Conversely, if your audit showed a large number of "no" responses in some areas, this may represent a weakness, or an area for improvement. Some of your strengths may not actually be major contributors to your success. In this event you might reevaluate the need for the management practices you currently use. Are you spending too much management time on issues that don’t yield as high a return as others might?
The next step to making improvements is to identify the areas that need work, and focus on these. This can be a "to do" list, and represents your greatest opportunity to improve your business. The bottom line is finding a way to make things better. Without goals, you will rarely stumble upon the time or inclination to make such improvements.
By undertaking your Well-Business Checkup, you have gone above and beyond the normal day-to-day activities of working "in" the business. This activity represents a commitment of time and resource to your working "on" the business. By committing to improvement and spending time working "on" your business you will be hard pressed not to see improvements in your results over time.