Use accounting ratios to assess business performance

From the class “Using accounting information” we know that ratio analysis is a good way to evaluate the financial results of your business in order to gauge its performance. Accounting ratios can offer an invaluable insight into a business' performance. Ratios give us a quick picture of the business performance but some cannot be measured.

Ratios are merely indicators. First, the analyst can compare a present ratio with past (or expected) ratios for the organization to determine if there has been an improvement or deterioration or no change over time. Second, the ratios of one organization may be compared with similar organizations or with industry averages at the same point in time. But ensure that the information used for comparison is accurate - otherwise the results will be misleading. The insights gained through the analyses of ratios will assist entrepreneur in gaining vital understanding of your company. For instance, from the figure of liquidity ratios you can find whether you have sufficient assents to cover your liability. Gearing is a sign of solvency. The higher the gearing, the more vulnerable the company is to increasing interest rate. Most lenders will refuse further finance where gearing exceeds 50 per cent. And profitability ratios tell how good you return on the capital used in your business is.

Ratios look back of the company performance, but entrepreneurs and analysts should not rest on the past records but have some forward steps with the help of ratios information.

reflection from rules and regulations

Once I read a sentence from the book “Robert’s Rules of Order”, it says that where there is no law, but every man does what is right, there is the least of real liberty. In reality, we need rules and laws to regulate our life. As we all know the importance of the traffic law, but not every one of us are capable to follow it.

In the business world, entrepreneurs should expand his eyesight beyond the rules and regulations that they should dare to venture and innovate themselves to the legal competition. Personally, it is possible for everyone to be an entrepreneur, but only few people can succeed. Innovation is a part of reasons. There is a test to hundreds of mangers, but few of them can solve it. Use only one rope to connect 9 points inside the square.

Indeed, there is no rule to restrict the rope inside the square. Those open minded managers can jump the circle and make a longer rope outside the square. As an good entrepreneur should not be bound by rules and regulations. Be innovative!

milestone discussion

Milestone is a subjective hypothesis in the process of operation made by the entrepreneur. Whether the milestone is a effective tool that is highly depends on the decision-maker. It is doubtable that the person who proposes the milestone is also questionable because the understanding of issues varies. However, the appropriate milestone can effectively measure progress.

It is mentioned by the authors (Smith,J.K. & Smith, R.L.) that each milestone functions as a working hypothesis about the venture. The example was given that an entrepreneur believes or ‘hypothesizes’ that a prototype of the idea can be completed in six months. If, prototype completion task takes nine months, the delay is an indication that some aspects of the venture need to be re-examined. Alternatively, the entrepreneur may have mismanaged the project. In the poor condition of management, it is not possible to use milestone as a measurement. It is possible to stage in terms of intervals that the entrepreneur can do comparison of the numbers from income statement and balance sheet to find out reasons of failure.

Fundraising after proven business model

We know that business owners need capital as important as we need blood to survive. The business running without sufficient capital will exhaust its resources and finally go bankruptcy. However, it is not always the principle that firm needs much capital. For a new venture, (s)he should raise funding after proven the business model.

On the one hand, it is easier to convince potential investors with initial development. In practice, venture capitalists would like to see a business move beyond the idea stage before they will consider financing. On the other hand, outside investors hinder entrepreneurs from their perspective in the uncertain environments that the business owners lose their right of making decisions and have less flexibility. There can also be problems with raising too much money. The money gets burned up quickly and it doesn’t produce either profits or sales. And, it is noticeable that in the early stage of start-ups new industries seldom get it right the first time. A wise entrepreneurs should have ability to generate sufficient capital in well-timed occasions after proven their business model.

The importance of time and place in start-ups

It is easy to see why most entrepreneurs bootstrap when they start because they simply don't have much start-up capital. And bootstrappers can become overly cheap, but the definition of bootstrapping is not spending as little as possible. Rather it is achieving the desired outcomes of a business within the limited resources available.

Even in a bootstrap startup, it is important to spend some money – two issues should be paid attention to, that is, in the right places and at the right times. Bootstrapping is not about being a cheapskate about everything, squeezing every last penny out of your vendors and partners and otherwise being the nightmare customer for every company you deal with. At some level, you will begin to realize that markets are somewhat “efficient” and unless you have some special connections or characteristics that cause you to convince people to give up their goods and services at a price well below market rates, you’re essentially going to get what you pay for. And, of course, there are places that entrepreneurs should find the least expensive option, because it doesn’t matter all that much. Further, I’d like to emphasize something that too many founders forget that time has Value. In fact, one of the scarcest resources (next to cash) in a startup is founder time. The opportunity is unable to bear waiting and the entrepreneurs might lose their opportunity due to the delay.

Motivate creativity and effectiveness in organizations

The importance of creativity and effectiveness in organizations is well known by us, but it is easier said than done. We can see that thousands of organizations go bankruptcy every year. On the side of administrators or entrepreneurs, if they are able to motivate creativity and effectiveness in their organizations that their business will go further than those organizations have less or no creativity and effectiveness.

All the companies are facing competition pressure, but this pressure on the companies can be solved partly by the optimal use of human performance. It has been demonstrated that a motivated and healthy work force contributes significantly to innovation and business productivity (Eijnatten, 2002). We take a look at Toyota, which has the highest profits in auto industry. And the secret to be successful due to the motivated work force. It is suggested that the work will be more decentralized. In my company, I will make use of my employees sufficiently in order to get higher creativity and effectiveness. Allocating to my employees the tasks best suited to the employee. Each of them has a larger space to exhibit their personal ability.Employees have more access to information and more power to innovate and adapt their work. Traditional management practices—such as asking for suggestions, only one personspeaking at a time, and evaluating options beforeexhausting them—hurt rather than facilitate creative work. Creatively realistic requires that companies support employees that do seemingly purposeless and senseless things, such as striving for quantity rather than quality (at least initially), suggesting deliberately impossible to realize ideas, and creating havens for individualthinking (Thompson, 2003).

As a leader in the organization, more attention should be paid to an optimal loading of the work force. Employees work at the optimum between overload and under load. Under loading is not beneficial for the company and the worker, not any creativity and effectiveness but high risks.

Also, regarding the organization, changes will occur, like operating in variable dynamically changing network instead of hierarchical structures. Higher flexibility is created in variable dynamically network that helps employees to be more creative and effective. As I know that most of organizations in China are used to adopt hierarchical structure, but they realize the shortcomings with old structure and turn to new flexible structure. The obvious change is that changing network benefits the organization and motivates its creativity and effectiveness. For my own company, I prefer to adopt a flat structure that enables my employees have more flexibility to work with each other. The more flexibility my employees have, the more creativity and effectiveness that will be created to my firm.

reference:
Eijnatten FM van, Ed, 2002, Intelligent manufacturing though participation: a Participative Simulation environment for Integral Manufacturing enterprise renewal.

Thompson Leigh, 2003, Improving the creativity oforganizational work groups, Academy ol Management Execulive, Vol. 17, No. I

Module 3 reflection

Traditionally, entrepreneurs have a product-based view (external-perspective) towards the competition to be competitive, but resource-based view (internal-perspective) is in some sense supersedes it nowadays. For the firm, resources and products are two sides of the same coin (Wernerfelt, B. 1984). No matter product or resource must evaluated of their short-term balance effect and also in terms of their long-term capacity to function as stepping stones to further expansion, to get sustained competitive advantage.

It is possible to agree with that the resource-based view is efficient and practical because it focuses on the strengths, assets, and capabilities of entrepreneurs and their ventures. Without resources to exploit a situation, even the best situation cannot create an entrepreneur (Dollinger, M.J. 1999). And the sustained competitive advantage (SCA) is created when firms posses and employ resources and capabilities that are valuable, rare, hard to copy, and nonsubstitutable with other resources. If the firm has these four qualities, and has capability to maintain, it will have competitive advantage over the long term. Sustained competitive advantage is an addition from competitive advantage, doesn’t mean that it can last forever. It is a time gap for its competitors to catch up and duplicate the benefits of the strategy.

However, in the third article, the discussion between resource homogeneity and mobility and First-Mover Advantages, it neglects the uncertainty and risks that First-Movers are facing. I think it is not absolutely possible for those firms with resource homogeneity and mobility to gain competitive advantage. What’s more, Barney (1991) also consider if one firm purchased a physical tool or equipment in order to implement their strategy, and the other firms also purchased the same physical tools and equipments, then the tools and equipments are not considered as the resources of sustained competitive advantage. It is possible to figure out that, resources may not fit for other firms once it is tailor-made for a specific firm. Same tools and equipments can be purchased by different firms, however, the tools and equipments cannot generate the same value to different firms since different firms have different strategy on doing business. So, the same tools and equipments in different firms can be considered as the sources of sustained competitive advantage under different strategies.

It makes us think that how the entrepreneur of a new venture is able to determine whether his or her resources meet the criteria of being value, rare, hard to copy and non-substitutable. The four attributes are the understand sources of sustained competitive advantage.

Do you change your business planning?

In the lecture of Business planning, roughly I get an idea of how important the business planning it is and the reason why firms do it. However, there is a famous Chinese saying that changes often leave plans behind. And many entrepreneurs and administrators are embracers and go along with this opinion. However, it is correct to have a business planning, which is an instruction for employees acquaint themselves to the working environment.

And I absolutely agree with Amar Bhidé’s opinion that business planning at early stages have questionable value, but a bit of afterthought might not hurt. Any business planning is goal-oriented, and the goal is defined by the administrator or entrepreneur, which is the guideline and standard for the business planning and its following actions. If there is a misunderstanding or imperfect planning of the goal, the business plan will result in problems. Personally, I think the business planning is changeable that should adapt to the situation how does the firm perform in the process. The persistent business planning will make the company run worse or even bankruptcy.

There are three key words in the business planning,that is, customer focus, growing market and generate income. As we can see that customers are easy to lose than keeping. It is important for the company to do research of demography regularly because there is fluidity among customers, customers you are having might not the most profitable group. And, market is changing fast, thousands of organizations are created and die every year. Those failed firms have problem with the market definitely. Fixed or sustained business plan is not seasoned with the market. What’s more, in order to generate income, any firm faces risks and rewards. Be prepared to change course and make it pass through.

Okay, go back to the topic, it is important to check and change the contents of business planning. As a matured administrator or entrepreneur, their business planning is totally different compared with 2 years ago. Change business planning is a good habit and one of the surviving methods to continue business.

Does Brainstorming always bring value to the firm?

Before the lecture of Entrepreneurial creativity, I thought that Brainstorming only brings positive value to the organization since it gathers a great deal of ideas, but it not always as good as we expect. Even though it is popular used in many companies, as an entrepreneur or manager in the company should fully understands the function of the brainstorming, and maximize it positive value and at the same time try to avoid or minimize side effects.

First of all, social loafing might happen. Some staffs are not motivated to work in a group than when they work alone. Group sometimes performs less effective than the combined performance of their member working as individuals.

Secondly, conformity is the result of process by which people’s beliefs or behaviors are influenced by others in the group. It regular happens in the firm whose employees having the same culture and similar background that the pattern of thinking is homologous, thus, it is hard to generate diverse opinions. Positive conformity brings active impacts to the firm, while negative conformity leads to an impasse.

Thirdly, production blocking is a common problem in Brainstorming groups. It is a tendency for one individual to block other people during a group discussion. For instance, if 10 people are in a group and one person is talking about his idea, then other 9 people are “blocked” and less able to provide his or her creative input because their way of thinking is followed by the person who gives his or her input earlier.

Last but not least, another passive phenomenon we call it downward norm setting. As we know that each member comes from different departments or places and each of them specializes in different field. It is common that some members are not familiar with the topic they are discussing that it will demotivate the general level if there are few weak members in the group.

Whatever, we should realize the Brainstorming might hurt the business development if we don’t have the full picture of it. Find out problems beforehands and try to elicit the utmost values from the creative staffs.