In business ownership there are many costs that are incurred. Whether these cost come from advertising, manufacturing, salaries, repairs, or warranties they are always there. But between all these costs there are two common themes between them. All costs are either a division cost, or general cost. Divisions are small separations of your company within itself. The company itself is not literally divided, however for accounting cost it is considered in this fashion. There are some costs that a division might incur or in other words a cost that, if that division were to disappear, the cost would disappear also. The other costs are general cost, or the cost cannot be attributed to one part of the company. These costs are dealt with in a unique way because they are allocated throughout the company. Each division’s statement of earnings will have part of the companies general costs built into its expense (generally fixed expenses).
So let’s say, as a business owner, you are presented with the earning statements of the two divisions within your company. Division A is earning $600,000 a year, and Division B is losing $200,000 a year. You job, as the owner, is to make the very tough decision to either drop the losing division, or keep it and continue to lose money. Interestingly enough you find the $370,000 of the cost ($900,000) are sunk costs, or in other words they will not go away when the division does. They are general costs. Subsequently if you are to drop Division B, sales in Division A ($4,000,000) will drop by 10%. You are now tasked with making the decision on whether it is cost effective to drop Division B or not.
Upon further inspection you will see that with the decrease in overall contribution margin ($940,000) added to the fixed cost that you will lose ($530,000) will result in an overall loss of $410,000. This is considerably larger than the $200,000 the division was losing before. So as you can see Division B consumes a large portion of the general company cost. So by dropping it you will lose more money than you would normally lose. This leads to the first general rule of business and accounting, nothing is what it seems, always look deeper.
Saturday, April 17, 2010
Saturday, April 10, 2010
Internal vs. External
A common theme of business that will never stop happening is hiring new employees to fill open positions. This brings to light the important question of where this new employee should come from, mainly internally or externally.
An internal employee knows the system and the company. They know all the internal functions of the company and the people that work there. This reduces the need for excessive training which can be timely and costly. An internal employee as has a larger likely hood to have a better team oriented attitude towards the company because of their time and experience there. You as management also know what to expect from these employees. Because they have been working for you there should be no character surprises that arise once they are given the job. This can clearly be beneficial to an employer in any case.
An external employee on the other hand has no predetermined biased. Many times someone who has been involved in a company can carry the negative attributes or opinions that you do not redistributed throughout the company. This is where an external hire can be beneficial. A new person will have no ill will to offer the company and can provide a ‘fresh start’ that could be greatly needed. An external employee can also offer the company skills unique to the company and what it does. This is beneficial for when you are planning to expand what the company can do. If your company only sells product A and everyone that works there only knows how to sell product A, then when you plan to expand to product B you will need to hire a person who knows about that product and how to sell it. External employees are a good chance for a fresh start in your company.
Whether you choose external or internal employees to hire is all dependant on what your needs and circumstances are. Both can be a positive experience, but that just all depends and what your needs are.
An internal employee knows the system and the company. They know all the internal functions of the company and the people that work there. This reduces the need for excessive training which can be timely and costly. An internal employee as has a larger likely hood to have a better team oriented attitude towards the company because of their time and experience there. You as management also know what to expect from these employees. Because they have been working for you there should be no character surprises that arise once they are given the job. This can clearly be beneficial to an employer in any case.
An external employee on the other hand has no predetermined biased. Many times someone who has been involved in a company can carry the negative attributes or opinions that you do not redistributed throughout the company. This is where an external hire can be beneficial. A new person will have no ill will to offer the company and can provide a ‘fresh start’ that could be greatly needed. An external employee can also offer the company skills unique to the company and what it does. This is beneficial for when you are planning to expand what the company can do. If your company only sells product A and everyone that works there only knows how to sell product A, then when you plan to expand to product B you will need to hire a person who knows about that product and how to sell it. External employees are a good chance for a fresh start in your company.
Whether you choose external or internal employees to hire is all dependant on what your needs and circumstances are. Both can be a positive experience, but that just all depends and what your needs are.
Thursday, April 1, 2010
Five Skills of a Perspective Employee
The employee’s that you hire are what define your company. If you hire persons of a low caliber then you will notice an eventual shift in your company. That is why it is important that you clearly define what attributes you want in your employees even before you begin the hiring process. An ideal employee should exhibit five basic characteristics. These are Experience, Willingness to Learn, Personable, Persistent, and Honesty.
An employee must have experience in the field that he/she works. This will contribute to your efficiency of production and cut back on any rework time necessary. Nothing in business is more valuable that a confident experienced employee.
Although it is desired to have an employee that knows what he is doing you want your employee to be humble and willing to learn. Most experienced professionals find it difficult to admit when they are unable to complete a task. However eventually, no matter how hard they resist, they will reach a point where they cannot do something. The sooner they realize this the less time that will be wasted in resistance. This will increase productivity and decrease project time.
Employees need to be personable. A business is like a well oiled machine. Each person acts like the gears of the machine and when they work well together then the machine as a whole performs optimally. Each member needs to be able to functionally work with their counterparts in order for your company to be a happy desirable place to work. Let’s say that two employees from different divisions have a feud and do not get along. Eventually they start to spread word to the other members of their division that they don’t like this other person. After a while the members of the division begin to not like this person. This situation, as it continues to escalade, now causes a large separation between not just the people, but the division itself. As a general rule you should always hire people that can get along well with others.
Persistence is another important attribute of an employee. Persistence shows that your employee is willing to go the extra mile to get what they want and to finish what they’ve started. You want a persistent employee so that you don’t have to micromanage. With a persistent employee you are always assured that the job will be completed.
Finally you want your employee’s to be honest. To counter any problems that might arise you can be assured that honesty will diffuse them all. Honesty is the most highly valued attribute. There is no experience, knowledge, or dedication that can replace on honest person in all their dealings. A business staffed with honest employees is and business where people want to work.
If you begin your staffing process with these attributes in mind then you can be assured that you will create a strong business where people will want to work.
An employee must have experience in the field that he/she works. This will contribute to your efficiency of production and cut back on any rework time necessary. Nothing in business is more valuable that a confident experienced employee.
Although it is desired to have an employee that knows what he is doing you want your employee to be humble and willing to learn. Most experienced professionals find it difficult to admit when they are unable to complete a task. However eventually, no matter how hard they resist, they will reach a point where they cannot do something. The sooner they realize this the less time that will be wasted in resistance. This will increase productivity and decrease project time.
Employees need to be personable. A business is like a well oiled machine. Each person acts like the gears of the machine and when they work well together then the machine as a whole performs optimally. Each member needs to be able to functionally work with their counterparts in order for your company to be a happy desirable place to work. Let’s say that two employees from different divisions have a feud and do not get along. Eventually they start to spread word to the other members of their division that they don’t like this other person. After a while the members of the division begin to not like this person. This situation, as it continues to escalade, now causes a large separation between not just the people, but the division itself. As a general rule you should always hire people that can get along well with others.
Persistence is another important attribute of an employee. Persistence shows that your employee is willing to go the extra mile to get what they want and to finish what they’ve started. You want a persistent employee so that you don’t have to micromanage. With a persistent employee you are always assured that the job will be completed.
Finally you want your employee’s to be honest. To counter any problems that might arise you can be assured that honesty will diffuse them all. Honesty is the most highly valued attribute. There is no experience, knowledge, or dedication that can replace on honest person in all their dealings. A business staffed with honest employees is and business where people want to work.
If you begin your staffing process with these attributes in mind then you can be assured that you will create a strong business where people will want to work.
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