“How to manage my company - Serresbiz

[Pages:39]"How to manage my company?" by Nikolaos Karanassios, Ass. Professor, Dpt. Of Business Administration, TEI of Serres

1 Introduction

Managing a company that you have created needs different skills than entrepreneurship; needs management. The starting point is to change your perspective; from one deciding person you must turn to be a member of a team, not necessarily the leader, even if you have the right to be, because you own the biggest portion of the company's capital. Then you have to realize that your team is quite bigger than you think; it includes everyone depending on the company. First of all are the key persons, then all the workers, then subcontractors, agents, banks and the general public. Each one has different expectations from your company, sometimes their interests are conflicting, everyone seeks a bigger stake and your company (not just you) has to balance in this. Your company is founded because you and your partners want to have a permanently increasing income, while your wealth will perpetually increase, not for just the exploitation of an opportunity. To do this, you have to continuously plan, evaluate and control and for this purpose you must register, not only what the company is doing, but also the decisions made, as well as the reasons that led you to these decisions. Your company will be using public money. When you borrow from a bank, you really borrow the savings deposited; you are liable for the usage of this money, not just to the bank but the government, which controls the function of the banks, as well. They need to know how you are using the "public" money and if you are cautious enough. They will not check you for the decisions themselves, but whether you are diligent enough. They don't give the money to your, but to your company. When your company becomes successful you need more money to fund its activities, then you may invite new partners (shareholders, if your company becomes an SA). It is possible that you will never know who they are. They will only give their money to your company if they trust the procedures of handling their money. On the other hand, you may want or need to sell your share. Your share has a value in proportion to the degree of independence of the persons. Your company is founded to last forever, being profitable. Although people make and govern a company, they are not permanently bound to it. Co-owners of the company may change for any reason. The foundations of the company must be solid enough to tolerate any such change of ownership. When you decide to found a company you change from an entrepreneur to an investor. It is not enough to have profits. Your company must have enough cash to pay all the obligations, including the distribution of the profits to the owners. Increasing profitability depends on the procedures that your company is implementing in order to maximize long term profits, while controlling cash. Profits, even short term or even occasional, do not depend only in maintaining the costs low, but the examination of the factors influencing profitability and choosing the right mix. All these subjects will be displayed in this booklet and you will be guided to manage your company the best possible way. Yet, there are risks. With this series of booklets the entrepreneurs are guided to diminish the risks. If you consult your booklets about the most important issues of how to start a business (your company will start new activities, as it grows), how to prepare business plans (business planning is a continuous procedure), how to make marketing plan (concentrating to the consumers) and the present one, your risk becomes minimal.

But.

"Entrepreneurship is risky, mainly because so few of the so-called entrepreneurs know what they are doing." ? Peter Drucker

Let us see the most common reasons why companies fail, as most writers agree: 1. Discordance between partners. 2. Cash difficulties. 3. Easy money attracted by. 4. Overexpansion. 5. Lack of preparation for expansion. 6. Favoritism. 7. Fraud. 8. Suspicions of fraud. 9. Underestimation of costs. 10. Overestimation of the Market niche. 11. Overinvestment in equipment and other assets. 12. Too much in social relations. 13. Too much in partners luxury. 14. Too much power to hired managers. 15. Too little attention to government controls. 16. Too little attention to bureaucracy. 17. Too much confidence in the product / service superiority. 18. Too much dependence on massive buyers (distribution chains) 19. Dependence on the Public procurements. 20. Dependence on subsidies.

In this booklet you will find an easy way to understand how companies work and how they should be effectively managed. It is not intended to make you a professional or a consultant, but give you enough guidance to understand and assess consultants and specialist that will approach you to get a contract or get hired.

2 Statute

It is a contract between two or more persons that devote a sum of money and / or concede assets of their property, in order to commonly operate in the market. Depending on the type of the company, it has to be edited by a Lawyer or a Notary. It is a series of articles, where all the common activities are governed. You, either as a new entrepreneur or proposing the re-engineering of a company in which you are a member, have to indicate to your Lawyer or Notary, some articles that are not common. These Law persons use patters to write your Statute, they are more concerned in the legal completeness of the Statute, than the functionality. You will find in the following chapters a series of suggestions to take into consideration and ask your Lawyer or Notary to include in the Statute.

2.1 The articles of association

In addition of the patterns of the Lawyers and Notaries, you can dictate the following articles: Who is the beneficiary of each partner in case of his inability to continue his participation (death, severe illness, disappearance etc), indicating the partition for each beneficiary or earl. The age until which the members of the company will be able to participate in decision making.

Most of the companies in Europe suffer succession. If something happens to one member and his /her share is about to pass to his earls, there are usually legal quarrels which practically "freeze" the company and drives it to resolution. Even when this does not happen, the remaining members may not have the ability to communicate or be accepted by the others. When they know the successors, they accept them in advance and if something happens to one of the members, the company goes on without problems. An age limit in decision making of a company is very important, because even when they may be still active, their attention is concentrated in their pension, not the future of the company. This makes them very conservative and discordance arises among the rest of the company members. This article must set an age for decision making and representation of the company and also state that they can still participate in decision making sessions and meetings, as advisors, only in preparatory discussions, not in voting time. In the same article, there must be a clause, that their share of profits will not be invested, unless the aged person agrees. There may be a limit (i.e. 70% of the net profits may be re-invested without agreement). There must be an article about the change of the Legal Status of the company (i.e. from partnership to Limited Liability, from Societe Anonyme to the Stock Exchange and other combinations). Too many companies loose the opportunities of development, because the members do not reach a quick decision to change their status. In most cases they are not prepared, so they are afraid of loosing power. Another article must rule the entrance of new partners. Unprepared entrepreneurs are afraid of loosing power with new members entrance, while these persons will bring in cash and change the percentages distribution of ownership, but in the same time they will increase the value of the ownership of the old members, since the overall value of the company becomes bigger than the sum of what it was before together with the money put in by the new members. From a different point of view, there must be included, on one hand the procedures of creating other companies (a company may be a member of another company) and on the other hand the conditions under which the company may be sold to another company, merge with another company or participate in cluster of companies. It is often seen that successful companies become very vulnerable because they attract new competitors, just because they believe that they will become successful as well. Many of these new competitors come from within the company's staff members. They know the business, they have connections with the clients and they are the key persons. Creating their own business means that they steal the competitive advantage. In such cases, the legal representative must be delegated, with a specific article, to create a "spin out" (a new company, together with those staff members), provided that they will go to the market with new products / services, even if they are developed in the company. If such an article of delegation is missing, those persons will create their company and eat up the company. A collective decision, as in typical Statutes, takes too long to be taken, while a lawsuit against these staff members, even if it will be accepted by the Court of Justice, is only a compensation for the damage. It is not the same with mergers or selling out the company. The delegation of such an authority to the legal representative has to be limited in two ways and also facilitated; there must be a limit of time for consultations with the partners, a specific majority (i.e. 60% of the votes) and a verbal declaration of the partners agreeing (or against) the proposal, within a deadline. If the deadline expires, then delegation must be tacitly given to the legal representative. As has been demonstrated previously, success is more dangerous than stability or decline. Success must be funded and one possible way is to bring in Venture Capital (cash brought in by investors intending to take it back after a period of time, with or

without a combination with sharing profits). Those investors may ask to participate (or even dominate) decision making. Venture capital opportunities are rare and are safer than bank loans, because the company returns to the venture capitalist only profits and the increment of the value of the company; if not successful has no liability of the members with their personal property. An article facilitating fast decisions about the acceptance of a venture capital proposal, must be included. At the Statute formation time, company members are not afraid of loosing power, since they don't have power yet. In later time, they may oppose, so a limit of majority must be included, while easier delegation to the legal representative must be considered, while venture capital is not permanent (as it is with mergers and acquisitions). Finally, an article about the obligation to elaborate an Internal Regulation within a limited time (usually one year) must be included.

2.2 The Registration

The Statute must be registered at the appropriate authorities. They are supposed to examine it about the conformity with the Law. They usually reject it when the minority partners are not well protected. Even when the Statute is not registered, the company exists as a contract between the members. Third parties do not make transactions with the company, but with the member.

3 Internal Regulation

The Internal Regulation is a contract as it is the Statute. For the big companies whose shares are traded at the stock exchange market, there is European Directive which is commonly called "Corporate Governance", as well as all OECD member States have agreed to promote the relative regulation. The Corporate Governance is meant to protect the anonymous shareholders from fraudulent actions of the Management of the companies they become shareholders. This does not concern the Small and Medium Size companies, especially the new once. What makes it a useful tool to such companies, is that it also regulates the way a company is managed, as "Business Ethics" are best thought to be served. In this section, the ethical issues are avoided, while we concentrate our efforts to what makes a company avoid the most common mistakes. The Internal Regulation may be an amendment to the Statute, so it may be also registered. This means that temporary majorities cannot change it, unless it becomes a new amendment. This gives enough time to examine the regulation as a long lasting document. It is better to assign the task of the preparation of such a regulation to professionals (i.e. your NGO consultant), while your Lawyer must see it in the end, for possible legal infringements. The Internal Regulation is adding bureaucracy to the Management and Administration of your company. In the same time, following the procedures set in it, saves your company from a possible crash.

3.1 Decision Making

Both managerial and administrative decisions should be coherent, so that the company proceeds prosperously. It is thought that these decisions are being taken in favor of the company; but what if they are being taken in favor of one partner or a group of

executives? What if a democratic (majoritary) decision is made on a difference of information among the decision making board or committee? Management and Administration have to make decisions on an equal information basis. They also have the time to reflect, or even get external advice, if they think that they need it. Managerial and Administrative decisions are not the same.

3.1.1 Managerial Decisions

Managerial Decisions are the once concerning the company as a legal entity. As such, is responsive to all third party interested institutions (Fiscal Authorities, Banks, Government authorities of all levels and nature, insurance institutions, European or Public funding and the alike). Such decisions should be taken under an agenda, timely communicated to the members, as all the legal systems set. Such formalities are usually followed. The decisions are being taken informally, while evident majority participants meet and prepare their vote, not in respect of the company's benefit, but as a distribution of personal benefits, even if those benefits are not relative to the personal profits. A well regulated system should set that: Together with the agenda, a proposal is also communicated. The proposal, as communicated, has been approved as being beneficiary to the company, by either internal (specialized staff members) or external (NGO consultants) as appropriate, together with their comments. There in an adequate time for submitting different proposals and that there is enough time for the members to study them before the meeting. A proposal, for example, to extend the manufacturing equipment, should be delivered three weeks before the meeting, leaving two weeks to the members to prepare a different proposal and deliver it to all the members, so they all have one week to study them both. This is not a Law, but just a functional system, as we think of it. No discussion of proposals is possible unless all the participants received them at least an adequate time in anticipation of the meeting (one week?). The members may agree to postpone the decision, until all proposals have been communicated to all of the members. Only one time is possible to postpone a decision. The proposing member may ask a staff member to present his proposal. All proposals are registered in the Verbal. All the members explain their vote. The discussion is not registered in the Verbal. A vote with hesitation is a vote against a proposal. The secretary (the one who is registering the verbal), is not present during the discussion. The Secretary is not a voting member of the decision making board. The verbals are registered in three levels; the public, the internal and the restricted. All decisions have the same classification; A restricted decision contains all of the proposals, while the same decision, without any argumentation, may be communicated (i.e. it may become public that the company decided to merge with another company, internal in regard to what this company is, restricted in regard to how such an event is assessed).

3.1.2 Administrative Decisions

Administrative decisions are usually taken by one person, not a committee or a board, as they have been delegated the authority to do so. For example, the legal representative may have been given the authority to take a bank loan, a member of the

board may have been delegated to contract an external selling agent, an executive to approve discounts to clients etc. Such decisions do not change the shape of the company, as managerial decisions do. It is everyday operations that need fast decision making and, most of all, personal responsibility of the person in charge. While "democratic" management is quite widespread (making decisions in meetings), responsibility is lost. There is a tendency to go back to "consultative" management, where one person decides and other persons responsible for other activities are discussing the impact of a decision to their sectors of responsibility. When the company grows enough to assign responsibilities to staff members, instead of partners, it is wise to distribute authority of decision making, because the board is not bound to previously taken decisions and is free to change policy and even the staff members. The usual decisions that create dispute and discordance, are described bellow.

3.1.2.1 Hiring

Every immediate superior has to be assigned the right to hire the persons he / she considers most appropriate. For example, staff members must be assumed by the board of directors, while they will be placed in responsible positions, answering to the board (as board we mean the partners or their representatives). The internal Regulation has to be very strict in hiring, by prohibiting the enrolment of relatives until second degree, to all levels, with one and only exception; if these persons are already in the Articles of Association as indicated to succeed a partner. The hiring procedure has to delegate absolute power, restricted only by hiring relatives, to the person they will work for. For example, the Sales Manager must select his sales people, without the interference of anyone else, the head of the transportation unit must select the drivers himself, not his boss; the Sales Manager in this case. The hiring procedures must be very flexible. There must be suggestions about advertising open positions, about the usage of external services (a specialized company) or else, but the person who is going to be the immediate boss of an employee must be free to grab an unemployed person that he thinks will best work for him, so he will perform better and present better results to his superiors. Reminder 1: Hiring is the main cause of trouble in most companies. Reminder 2: However a procedure of hiring is scientifically important (for example the use psychologists) every person, assuming responsibilities, has his / her own style and there is no method to predict conformity with this style. Reminder 3: As a partner, you may be tempted to impose hiring of persons, as a favor to politicians, friends, important clients and any kind of others. Remember that, after you have satisfied their petition, they forget it, until their next petition!

3.1.2.2 Firing

Every immediate superior to an employee has to be assigned the power to fire. This power must be restricted by: A yearly percentage of possible firing.

A written statement of the causes that occurred, signed by the dismissed person, to verify that he / she knows the reasons claimed by his superior (not that he / she agrees).

A hearing from the firing person's superior, so that the dismissed employee's point of view is heard.

Reminder 1: Never fire an employee without the appropriate compensation, not even for theft. He will go to the Court of Justice and you will pay it in the end, while he (may?) sue you for calumniation! He / she will have a Lawyer anyway! Reminder 2: The decision of firing belongs to the immediate boss. It is irrevocable, even if after the hearing you are convinced that the firing reasons were obviously different, or even illicit! If you are convinced that one of your trusted responsible persons is using his delegated power for either personal reasons (sexual included) or as an excuse for failure, you may fire him! Reminder 3: Never admit, being a partner or legal representative, that there is such a thing as immoral administration in your company. Reminder 4: Incompatibility is the reason of every person fired, for everyone, whatever the real cause. Reminder 5: Sexual harassment in the working environment exists. There is no gender discrimination. It exists between persons of the same gender and has been evidence even in the Bible! Never admit it exists! Never accept it as an excuse for firing someone, unless there are other behavioral discrepancies that can justify such an action (for example, there is an evidence of molesting, which is a criminal action). Do not forget that you are running a business, not a Court of Justice. Reminder 6: When you fire someone you must replace him / her. You may be suggested to fire someone, for any reason, because there is an unemployed person waiting for the same position. Reminder 7: Never listen to someone who is telling you what his / her co-workers are doing (or even saying). He / She is waiting for a benefit, usually to get the salary without really working!

3.1.2.3 Promotions

There is no typical system of evaluation. You have to describe one in your Internal Regulation. It will only be functional and long lasting if your system is based on recording performance of your employees and then the evaluation comes as the result of an examination of the records. Reminder 1: Nobody is perfect. People make mistakes. Unless there is a damage to your company, do not give importance to the mistakes. Employees who make mistakes, are risk taking persons and in most cases are better for higher positions. Reminder 2: An effective worker may be a very bad director. You may promote such workers, giving the title and the salary, but not really assign them with leading duties.

3.1.2.4 Subcontracting

Subcontracting is one of the major fields of fraud or suspicion for fraud. You have to describe the procedures of subcontracting. Reminder 1: A subcontracting action is never urgent. A random committee can assign it. Reminder 2:

Set a limit of the annual budget to the managers for services that do not really affect your business, like painting the office, repairing a photocopying machine and such.

3.1.2.5 Borrowing

Set a procure for borrowing money from the banks. You must not revert to bank loans unless there is a written justification, including the impact to profits and examination of alternatives (for example, shortening the credit line to your clients, minimizing stocks, selling out participations in other companies etc.) This part of the regulation will save you from overborrowing, but it will also save you from your creditors, if you delay your payments to the bank. It will also facilitate your borrowing, while the bank will see that you are prepared to pay back.

3.1.2.6 Collecting

Set the procedures and the responsibility for soliciting your clients to pay their debt. Communicate this regulation to your customers, so they also know the procedures. Delegate the authority to extend the credit line to your clients to only one person, other than the legal representative. Put an exception to the normal procedures for special clients, but the decision must be taken only by the board of directors.

3.1.2.7 Contracting

Delegate the legal representative or the CEO to sign any preliminary agreement or application for grants. Set a procedure for signing the contracts. Such a procedure may include the revision by a Lawyer, but in any case there must be a limit, over which there must be a written assessment of the impact of a contract.

3.1.2.8 Pricing Policy

Driven by the desire to increase sales, managers tend to discount prices, while potential buyers are pressing for discount, even telling lies about alternative offers, the tend to discount without taking good care of the impact to overall profits and cash flow. The discount policy is affecting all three of them; sales, profits and cash flow. On the opposite side, managers tend to think profits only as a difference between selling price and cost per unit. Another point of view is examining the discounts as an attraction of clients, being a MARKETING policy element. Yet, another point of view examines the discount policy as a danger to damage the quality image of the company, stating that you cannot sell high quality products and discount in the same time; "you cannot buy cheap quality" and consumers know it. If you discount quality you may find buyers but not customers (in the sense of frequent buyers). As a very important issue, it has to be decided by the Board of Directors (a meeting of owners, if the company is small). There must be a clause in the internal Regulation that such a decision must be only taken after a series of studies of impact (you may revert to external consultants, if your internal professional resources do not meet the requirements for an appropriate evaluation), such as:

Expected impact on sales in long term and short term. Expected impact on profits after taxes.

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