Effective guidance and controls: A formula for success?

Businesses havebeen in exis-tence for

years—some success-ful and long-lasting,others short-lived.Through the years,there have been noclear-cut criteria orformulas for success.Many businesses have been suc-cessful through such intangibleattributes as dumb luck, fallinginto a niche marketplace, beingthe first, consumer acceptance,and so on. Other entities usingthe best available business acu-men and methods have failedmiserably. Identifying, imple-menting, and maintaining thesecrets of success is an elusivetarget. Banking on what hasworked in the past and your owninternal Ouija board are ineffec-tive substitutes for objectiveinternal appraisal and analysis—that is, effective business guid-ance and controls. It may be theclosest thing we have to a realsuccess formula.

The process begins with ananalysis of existing operationsand activities, next identifiesareas for positive improvement,and then establishes a perform-ance standard upon which activi-

ties can be controlled. The goalis to improve the business andeach identified activity so that itcan be the best possible—andstay that way.

WHY BUSINESSES ARE INEXISTENCE

Before one even thinksabout providing the necessaryguidance for growth for the busi-ness, it is necessary to determinewhy the organization is in exis-tence. When business owners areasked this question, invariablythe answer is to make money.Although this is partly true, inmy mind there are really onlytwo reasons for an organization-al entity to exist:

1. The Customer ServiceBusinessTo provide goods and servic-es to satisfy desired cus-

tomers, clients, patients,and so on so that theywill continue to use theorganization’s goodsand services and refer itto others. 2. The Cash Conver-sion BusinessTo create desiredgoods and services so

that the investment in theorganization is as quicklyconverted to cash as possi-ble, with the resultant cash-in exceeding the cash-out(net profits or positivereturn on investment).

This means that one is inbusiness to stay for the longterm—to serve its customers andgrow and prosper. A starting pointfor establishing organizationalguidance is to decide which busi-nesses the organization is really in(such as the two above) so thatoperational efficiencies and effec-tiveness can be compared to suchoverall guidance.

BASIC BUSINESS PRINCIPLES

Each business owner mustdetermine the basic principlesupon which it conducts its opera-tions. These principles then

Some businesses are successful and long-lived.Others come and go quickly. But is there a clear-cut formula for success? The closest thing, arguesthe author, is effective business guidance andcontrols. And he gives some detailed advice onhow to achieve that. © 2005 Wiley Periodicals, Inc.

Rob Reider

Effective Guidance and Controls: AFormula for Success?

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41© 2005 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/jcaf.20117

become the foundation uponwhich the organization bases itsdesirable operations and relatedcontrols. It is these basic businessprinciples that guide the owners’desires and provide the controlsupon which to hold the othermanagers and employeesaccountable. The mutual under-standing throughout the businessassures that the business moves inthe right direction. Exhibit 1 listssome basic business principles.

There seems to be an organi-zational trend toward empirebuilding, particularly from thetop, and the power and controlthat comes with it. Even withpresent-day movements towardsuch things as downsizing,restructuring, reengineering, andso on, with the emphasis on get-ting by with less people andresources, those in power aretrying to hold onto unnecessaryempires of people and budgetallocated resources. While man-agement is quite agreeable toreducing another manager’s

empire, there is considerableresistance when it comes toreducing the size of its own area.In many instances, even withthese quick and short-term reme-dies at people reductions, therestill remain individuals and lay-ers of organizational hierarchythat are unnecessary (non-value-added).

Proper guidance and control,with the basic principle of doingthe right thing, assists in buildingeconomic, efficient, and effectiveorganizations and maintainingthem properly at all times usingthe correct techniques for the sit-uation. Proper operational tech-niques assist the business in iden-tifying its critical problem areasand then in treating the cause ofthe problem and not merely thesymptom. With sensible businessprinciples as the hallmark for thebusiness’s guidance, the companycan be clear as to the directionfor positive movement and avoidmerely improving poor practices.Clear business principles that

make sense to all levels of theorganization allow the companyto identify and develop the properorganizational controls. In thismanner, everyone in the organiza-tion is moving in the samedesired direction.

STRATEGIC CONCEPTS

Proper guidance and con-trols provide the company—owners, management, andemployees—with data necessaryfor effective resource allocationand the strategic focus for theorganization. The process pro-vides for those objective meas-ures and controls to determinethe success of the company’sinternal goals, objectives, anddetail plans.

When developing businessguidance and controls throughthe strategic planning system,management must be fully awareof all of the factors to be consid-ered in the development of itsstrategic plan. In developing the

42 The Journal of Corporate Accounting & Finance

© 2005 Wiley Periodicals, Inc.

Basic Business Principles

Examples of basic business principles include the following:• Produce the best quality product at the least possible cost.• Set selling prices realistically, so as to sell the entire product that can be produced within the constraints of the

production facilities.• Build trusting relationships with critical vendors; keeping them in business is keeping the company in business.• The company is in the customer service and cash conversion businesses.• Don’t spend a dollar that doesn’t need to be spent; a dollar not spent is a dollar to the bottom line. Control costs

effectively; there is more to be made here than increased sales.• Manage the company; do not let it manage the managers. Provide guidance and direction, not crises.• Identify the company’s customers and develop marketing and sales plans with the customers in mind. Produce

for the company’s customers, not for inventory. Serve the customers, don’t sell them.• Don’t hire employees unless they are absolutely needed, and only when they multiply the company’s effective-

ness so that the company makes more from them than if they did it themselves.• Keep property, plant, and equipment to the minimum necessary to maintain customer demand.

Exhibit 1

organization’s business plan,many factors need to be consid-ered. Each of these strategic fac-tors may result in one or moredesirable controls and relatedoperational practices. Such plan-ning concepts enable top man-agement to define the directionthey desire for the business andform an effective communicationtool, so that the entire organiza-tion moves in the same direc-tion—that is, everyone is singingout of the same songbook. It is a

good idea to have operationalpersonnel, together with man-agement, define such strategicfactors so that there is a buy-inat all levels of the business.Exhibit 2 lists some strategicfactors to consider in developingguidance and controls.

GUIDANCE TOOLS FORDECISION MAKING

Proper business guidanceand controls provide the tools for

management to make those deci-sions that ensure the continuedgrowth and prosperity of thecompany. Such guidance canassist in making the proper deci-sions in all areas of its opera-tions. Once such decisions aremade and internalized by theentire organization, thesebecome the measures for guid-ance as well as the internal con-trols to measure progressagainst. Exhibit 3 lists some use-ful guidance tools.

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Strategic Factors in Developing Guidance and Controls

• Organizational mission: why the organization is in existence, which products or services it will provide, who areits customers, what it desires to provide to each of its customers, the basic business principles upon which it willoperate, and so on.

• Organizational goals and objectives: overall results desired to be achieved, directions to be moved toward(increase, decrease, status quo), definitions of desired best practices, critical areas for improvements, and so on.

• Stakeholders’ concerns: owners, shareholders, vendors, customers, employees, management, and so on.• Environmental issues: economy (international, national, local), competitors, political, consumers, legislative, and so on.• Organizational requirements: personnel (hiring, training, downsizing, transferability), facilities (increase, decrease,

combine), equipment (production, data processing), systems (production, management, administrative), and so on.• Control and reporting systems: identification of key operating indicators (e.g., sales by product/product line, on-

time deliveries), evaluative criteria (e.g., late delivery), reporting format (e.g., real time online, daily summary),and follow-up procedures.

• Resource requirements: personnel, facilities, equipment, funding, earnings, outside assistance, cash flow, sys-tems, and so on.

• Market assessment: by product, by product line, by customer, by competitor, existing products, changes required,potential products, and so on.

• Strategies for competitive advantage, which can be applied to the entire organization, a distinct product line, aspecific product, a division or department of the company, and so on. For example, a strategy of “quality” mightinclude the following:• Immediate order entry into production schedule on receipt of customer order• Vendor delivery of materials needed at time of production requirements• Entry into production at scheduled time to ensure completion for delivery time• Minimal time spent in production per schedule• No excess materials, rejects, rework, scrap, production delays, and so on• Production completed on time with total quality and correct quantity• Shipping of order to customer on time by right method• Billing at time of shipment (or before)—accurate and complete• Collection from customer in timely manner (i.e., at time of shipment/receipt)

Exhibit 2

GUIDANCE FORORGANIZATIONAL GROWTH

There are numerous areasthat management may choose toimplement in their program ofguidance and control leadingtoward organizational growth.Some of these include the fol-lowing:

• Cost reductions. Manytimes, costs can be reducedor eliminated without anyappreciable diminishment ofthe organization’s efficiencyor effectiveness—these costreductions should be aggres-sively pursued.

• Price increases. Companymanagement may decide atany time to increase theprices charged to customersfor their goods and servic-es. Such price increasesmay be justified in the mar-ketplace (and part of astrategic plan) or just man-agement’s desire to increase

revenues (hoping every-thing else stays the same).

• Sales volume increases. Partof the company’s strategicplan may be to increase thelevel of sales to customers—both present and potentialcustomers. It is usually easierto increase sales volumeswith the company’s presentcustomers than to continuallyprospect for new customers.

• New market expansion. Aspart of the guidance plan,the company may decide toexpand their operations intonew markets. They maydecide to expand on a localbasis, or nationally or inter-nationally. They coulddecide to introduce newproducts, enhance their pres-ent products, or expand thesales of their products intonew markets. Each of thesedecisions should be part ofan organized plan.

• New distribution channels.Company management may

decide to develop additionalchannels for marketing anddistributing their products.For instance, if they havetraditionally sold their prod-ucts directly to customersthrough their own internalsales force, they may decideto use outside sales groups,sales brokers, sales repre-sentatives, the Internet, andthe like.

• Market share increase inexisting markets. Guidancemay include specific stepsas to how to increase thecompany’s market share inexisting markets. The planmay include product line,product, or customer. Spe-cific results should beclearly spelled out, andthose responsible for suc-cessful completion of eachwork step in the planshould be identified.

• Sell or close a losing opera-tion or location. Some-times, an operation (product



Guidance Tools

• Resource allocation—in which operational areas should the company’s finite resources be allocated to achieveoptimum results and overall effectiveness?

• Strategic focus—what strategies (e.g., quality, customer service, vendor reliability, employee productivity, and soon) are to be addressed by the company?

• Continuous improvements—which operational areas are considered most critical to be included in the organiza-tion’s program of continuous improvements?

• Competitive excellence—in which areas is the company seen to have a performance gap compared to competi-tors or where management believes excellence needs to be maintained or improved?

• Objective measures of success (internal and external)—what are the specific results (in quantitative measures)desired to be achieved?

• Recognized levels of excellence (competitors)—what are the defined levels of competitor excellence and whichones are desired to be met and then surpassed?

Exhibit 3

line, product, customer,etc.) or a plant or officelocation is deemed to be toocostly in relation to thevalue (income or cost sav-ing) added to the company.With the proper informa-tion, company managementcan arrive at the properdecision to retrench.

• Acquire another company,division, operation, or prod-uct. Management maydecide that the quickestmethod for achieving desiredresults (such as increasedsales, reduced costs,increased net income) isthrough acquisition.

• New product or servicedevelopment. Managementmay decide that the bestmethod for achieving orga-nizational growth is todevelop a new product orservice. To do this effective-ly, the company should havea real vision of their market-place, their existing prod-ucts, their customer’srequirements, the desiredneed for the new product, itseffect on existing products,and so on.

• Efficiency or productivityimprovements. The ability toeither operate more effi-ciently at less cost orincrease productivity at thesame (or less) cost may alsobe a workable approach toreaching a company’s orga-nizational growth.

• Non-value-added activitieseliminated. Functions oractivities that produce novalue added to the productor service should be elimi-nated. Management shouldbe able to identify thoseareas to be eliminated. Forinstance, they may identifyall unnecessary quality con-trol inspections or the prepa-ration of purchase orders.

• Making employees responsi-ble. Employees should bemade to feel responsible formeeting expectations andresults through motivatingself-disciplined behavior.With an effective control andmonitoring system, this elimi-nates the need for manage-ment personnel to exist main-ly for policing and controllingthese individuals—with mini-mal value-added activities.

• Organizational structurerevisions. There are manytechniques for building anorganization structure thatare not dependent on thetypical top-to-bottom mili-tary model that is based onpolicing and controllingthose reporting to each high-er level. Some other tech-niques for organizationalstructure include participa-tive management, sharedmanagement, team manage-ment, self-motivated disci-plined behavior (no manag-er), coaching and facilitativesupports, and so on.

BUSINESS GUIDANCEEXAMPLE

As previously discussed, thefirst step in providing successfulbusiness guidance is to definethe company’s basic businessprinciples as related to their rea-sons for existence, These basicbusiness principles encompassthe organization as an entity aswell as its major functions. Anexample of such a guidancestructure is shown in Exhibits 4through 9.

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Example of Organization-wide Guidance

• Operate all activities in the most economical, efficient, and effective manner.• Provide the highest-quality products to our customers at the least possible cost.• Satisfy our customers so that they will continue to use the company’s products and refer the company to others.• Convert the cash invested in the business as quickly as possible so that the resultant cash-in exceeds the cash-

out to the greatest extent possible.• Achieve desired results using the most efficient methods so that the company can optimize the use of limited

resources.• Maximize net profits without sacrificing quality of operations, customer service, or cash requirements.

Exhibit 4



Example of Sales Function Guidance

• Make sales to the right customers that can be collected profitably.• Develop sales forecasts that are realistic in that the forecast results in a present or future real customer order.• Sell those products as determined by management to the right customers, at the right time, and in the right quantities.• Actual customer sales should directly correlate with management’s long- and short-term plans.• Sales efforts, and corresponding compensation systems, should reinforce the goals of the company.• Customer sales should be integrated with other functions of the company such as manufacturing, engineering, account-

ing, purchasing, and so on.

Exhibit 5

Example of Manufacturing Guidance

• Operate in the most efficient manner with the most economical costs.• Integrate manufacturing processes with sales efforts and customer requirements.• Manufacture in the timeliest manner considering processes such as customer order entry, timely throughput, and cus-

tomer delivery.• Increase productivity of all manufacturing operations on an ongoing basis.• Eliminate, reduce, or improve all facets of the manufacturing operation, including activities such as receiving, inventory

control, production control, storeroom operations, quality control, supervision and management, packing and shipping,maintenance, and so on.

• Minimize the amount of resources such as personnel, facilities, and equipment that are allocated to the manufacturingprocess.

Exhibit 6

Example of Personnel Guidance

• Provide only those personnel functions that are absolutely required as value-added activities.• Maintain the levels of personnel at the minimum required to achieve results in each functional area.• Provide personnel functions such as hiring, training, evaluation, and firing in the most efficient and economical manner

possible.• Develop an organizational structure that enables each function to organize in the most efficient manner for their purposes.• Minimize the hiring of new employees by such methods as cross training and interdepartmental transfers and other

best practices.• Implement compensation systems that provide for effective employee motivation and the achievement of company goals.

Exhibit 7

DEVELOPING GUIDANCE ANDCONTROLS

As we have seen, the develop-ment by management of suchbusiness guidance and controlsprovides the basis upon which toevaluate current practices, identifycritical problem areas, analyzedetailed operations, identify bestpractices, and implement correc-tive solutions in a program ofcontinuous improvements. With-out the definition and communi-cation of such business principles,

the company’s efforts may onlysucceed in developing best prac-tices for functions and activitiesthat in themselves are bad prac-tices. Management guidance andcontrol should not be an effort toimprove bad practices but todevelop procedures that bring bestpractices into the organization.Through the management guid-ance process, operating functionsand activities are evaluated as totheir necessity as related to theachievement of organizationalgoals and objectives. If it is decid-

ed that a function or activity isnot necessary, then it should beeliminated. If it is needed, then itshould be considered forimprovement, looking for the bestpresent practice and then continu-ally analyzed in the company’sprogram of continuous improve-ments. Through this process, thecompany starts to develop as alearning organization, with eachindividual accountable for him-self or herself, and the activitiesthey are responsible for achievingresults.

May/June 2005 47


Example of Purchasing Guidance

• Purchase only those items where economies can be gained through a system of central purchasing.• Implement direct-purchase systems for those items that do not need to be processed by the purchasing function

such as low-dollar purchases and repetitive purchases.• Simplify systems so that the cost of purchasing is the lowest possible.• Effectively negotiate with vendors so that the company obtains the right materials at the right time at the right

quality at the right price.• Maintain a vendor analysis system so that vendor performance can be objectively evaluated.• Develop effective computerized techniques that provide for economic processing, adequate controls, and reliability.

Exhibit 8

Example of Accounting Guidance

• Analyze each of the accounting functions and activities—such as accounts receivable, accounts payable, payroll,budgeting, and general ledger—as to their necessity.

• Operate each of the accounting functions in the most economical manner.• Implement effective procedures that result in the accounting functions becoming more analytical than mechanical.• Develop computerized procedures that integrate accounting purposes with operating requirements.• Develop reporting systems that provide management with the necessary operating data and indicators that can

be generated from accounting data.• Eliminate or reduce all accounting operations that are unnecessary or provide no value-added incentives.

Exhibit 9



Rob Reider, CPA, MBA, PhD, is the president of Reider Associates, a management and organizational con-sulting firm located in Santa Fe, New Mexico. Reider has been a consultant to numerous large, medium,and small businesses of all types in both the private and public sectors. Rob is the course author and pre-senter for over 20 different seminars conducted nationally. Rob is the author of the following profession-al management and business strategy books published by John Wiley & Sons:

• Operational Review: Maximum Results at Efficient Costs (text and workbook)• Benchmarking Strategies: A Tool for Profit Improvement • Managing Cash Flow: An Operational Focus (co-author with Peter B. Heyler)• Increasing the Economy, Efficiency, & Effectiveness of Not-for-Profits

Rob is also the author of the business-related novel Road to Oblivion: The Footpath Back Home, whichlooks at the life of a downsized executive and life after downsizing. He can be contacted via e-mail at [email protected].

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Effective guidance and controls: A formula for success?