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The Business Hierarchy of Needs

We, as humans, have needs that change as we grow. Abraham Maslow named and organized these needs in his 1943 paper “A Theory of Human Motivation.” He arranged them in pyramid form with the most fundamental needs at the bottom. He understood the human brain to be a complicated organ which could shift in between needs as they became available and unavailable. For instance, one would not worry about esteem if they are starving since physiological needs were more fundamental to well-being than esteem. However, once one need became well fed, they were ready to ascend the pyramid.

Just like human needs change, as a business grows, matures, and becomes more sophisticated their needs also change. Therefore, I would like to propose a few thoughts on the hierarchy of business needs. As listed in this illustration, I have arranged each need for business management with the most fundamental at the bottom of the pyramid.

Hierarchy of Business Needs.PNG

 

Here are my thoughts on each:

Transactional Processing & Basic Accounting

At the very basic level, if a business is not doing these things they cannot stay open as their utilities would be cut off and evicted from their premises. A company must, at a minimum, invoice for their services, receive money from customers, record their invoices, and pay those recorded vendor obligations. I went ahead and included bank reconciliations in this group because I feel like a company needs to know how much is in their bank account or else they will not be able to pay bills or see what they have already collected from customers. There’s the obvious exception of the cash rich business which has so much more income than expenses they do not care about reconciling, but that is the exception and not worth the time to explore in this exorcize.

Tax, Licensure, and Other Compliance

Without having basic accounting to file taxes or produce information regarding licensure or other compliance it would be impossible to comply. That is the only reason I listed transactional processing before compliance. I think it is evident why this is both necessary and fundamental.

Processes, Procedures, Policies, and Best Practices

If a business has basic accounting and compliance hacked then it is likely time to move on to document what makes them great. They record what they do and how they do what they do.Doing so brings continuity in the event of employee turnover, and they recognize the best ways to complete certain tasks or operations, so there are efficiencies gained. This step is also important if the business has grown to the size of which their lenders, investors, or other stakeholders require them to provide an annual audit. In that event, the auditors can rely on internal manuals to some extent to ensure accuracy.

Business Planning and Budgeting

Having a business plan (often forced upon you by a banker or small business consulting representative) is the next stop in the hierarchy along with creating a budget. The next level of sophistication in business beyond accounting, compliance, and establishing policies is formally documenting your basic plan to solicit business, provide a service/product, and finance your organization. This plan often contains a budgeting component also. Businesses at this level have a budget and compare monthly results to both the budget and prior year’s results to answer the question “Is the business performing well?”.

Enterprise Resource Planning

Enterprise resource planning is the process of managing all core processes in your business in one continuous system. It is usually a software that allows for automation as it is all kept in the same database. For instance, you can enter received inventory into the inventory module, and the system would simultaneously enter the transaction into the accounting module for the accounts payable clerk to match with an invoice from the vendor. Another example would be when you ship a product to a customer it would automatically enter the invoice for the materials to be printed.

Although ERP systems vary wildly by price and industry, they usually contain some of these features:

Accounting

Inventory Management

Customer Relationship Manager

Sales

Procurement

Production management (manufacturing)

Job/Project management (contractors)

Estimating

Human Resources

As of late, it has become more common for companies to use web based solutions that are unique to a single need, but in the whole form a complete ERP system. For instance, a company may choose to use SalesForce for their CRM, Smartsheets for project management, Zoho Inventory management, NetSuite for their accounting, and other solutions for anything else I did not mention. As niche offerings appear on the web that suits particular companies and industries well, this becomes more prevalent.

Analytical Analysis, Forecasting, Modeling, and Scenario Planning

Although these are different things, they all belong to the same level of needs. When you have an ERP system you can not only use it to do the basics of business, you now have “big data.” You are collecting information about every aspect of your company, so why not use it?

Analytical analysis can be something like the scorecard from the book Traction if you are operating on EOS (Entrepreneurial Operating System), or it can be a complicated set of dashboards that help shift managers judge the performance of their operators. Also, a business can start benchmarking targets for every aspect. Sales goals, production goals, optimized inventory balances, safety goals, and much more. You can also triangulate operational information with financial performance and thus providing clear decisions that can yield increased profits.

Forecasting, modeling, and scenario planning are all forms of predicting the financial future to understand best how the decisions you make today will impact the future. You can answer questions like “How will increased sales by 25% in our Southeast region affect our production restraints?” or “What sales commission setup optimises profits?”. Additionally, you can provide information regarding return on investment for owners and choose the most fitting loan repayment terms.

Strategy & Operational Planning

These are also two different business processes that belong to the same layer of the hierarchical pyramid. To us, using strategy is to guide your business toward an overall aim. Strategy in business involves management understanding the current state of resources, the forming of plans, and the ability to understand the outcome while executing their plans. For a strategy to be most useful you will need a dependable way to plan your resources (ERP), along with a completed feedback loop (data analysis), and a way to plan (operational planning).

Operational planning is setting forth specific numbers to hit regarding operations, including the financial impact on both the profit & loss statement and the balance sheet. An example would be how many widgets you are selling for 2018, where to produce the widgets, and whom you will pay to acquire material and a labor force to manufacture said widgets. Another plan may involve a contractor planning to complete certain phases of long term jobs in 2018, take on new phases/jobs and the material and labor they will need to complete those jobs. In addition to operational planning, you may also consider planning investing and financing activities.

In conclusion

While there are obviously plenty of businesses who are functioning fine at many of these levels, it is short term. A company that isn’t growing regarding ability and sophistication is just waiting for a company with greater abilities to invade their market. We saw it when Walmart expanded across the US, and we also saw it recently when Uber drivers started displacing taxis across America. It happens to Fortune 500 companies when a smaller, more strategic and agile company appears (Netflix vs. Blockbuster Video) just as much as it does when a larger, well-funded company rolls into town on a small struggling business (Walmart).

If a company is struggling, it possibly is because they are feeling outside pressures to ascend the hierarchy and do not have the resources to do so. There aren’t ERP’s on every corner nor analysts waiting in every coffee shop, so it becomes an effort for growing businesses to acquire the knowledge resources it takes to grow.