Category: General Business News

How Businesses Can Stay Current with the Digital Economy

Digital EconomyAccording to the U.S. Chamber of Commerce, the level of usage and data swirling around the internet is expanding at an accelerating pace. The amount of data on the internet globally during 2020 amounted to 3 trillion gigabytes; and 2022’s traffic is expected to increase to 4.5 trillion gigabytes. As a result, the U.S. Chamber of Commerce is concerned about the challenges American companies will have when it comes to business competitiveness.

According to a survey from Statista titled “Challenges encountered as a result of digital transformations in global organizations as of 2020,” there are common challenges that businesses are facing, such as:

  • 51 percent of respondents said that “skill gaps have opened up on traditional teams as top talent moves to digital teams or products”
  • 48 percent said that “cultural differences or conflicts have arisen between traditional and digital teams”
  • 41 percent also mentioned that “traditional teams have struggled to keep up with the pace of how digital teams work”

With so many issues businesses face as technology races ahead, it’s important for organizations to recognize and adapt to the dynamics of digital commerce. According to Harvard Business Review (HBR), it’s important to align the business and its goals correctly, especially when it comes to getting the most out of software development. For example, when companies buy software, they generally use third-party software for all their needs. While accounting and human resources functions may be fine for standardized uses, there are often situations when a personalized approach is needed to provide customers with a memorable experience.

HBR suggests businesses take certain steps that can make the journey easier and more effective in the long run. The first thing to do is identify current information technology-focused employees, because they’re the most closely aligned and ready for the transition. Along with looking for outside talent, it’s important to let internal software developers have an active role in the process.

It’s also important to let developers be stakeholders (along with accountability for failure) for solving organizational challenges versus giving them rigid assignments. Don’t focus exclusively on punishing failure; instead, encourage developers to analyze, pick apart reasons why failure happened and how future experiments can incorporate learning from past failures. Include developers in discussions with the people who will be using the software (other employees and customers who will be using it in the future).

Let’s look at Domino’s mobile application development as a case study. They were able stand out by improving their app with a feature that gave customers the ability to track their order from when it was being prepared to delivery. This process included increasing the efficiency of its systems, practices and techniques, along with having employees who performed advertising related functions work closely with software developers. It helped their stock price increase dramatically, performing better than many publicly traded technology companies.  

One challenge for businesses going forward is since there are still tens of millions expected to come online with broadband, the amount of data and traffic will only increase. When it comes to broadband service requirements set by the Federal Communications Commission (FCC), they are at least 25 Mbps to download and 3 Mbps to upload. According to the FCC, approximately 14 million Americans lack broadband, with as many as 42 million reporting lack of access, according to Broadband Now Research. New York City’s Mayor’s Office of Technology reports that 18 percent of NYC residents lack broadband, making it problematic to work from home, access government services online, make doctor appointments, etc.

According to a December 2021 Digital Trade and U.S. Trade Policy report from the Congressional Research Service, there’s no stopping the expansion of trade in the digital world. It found statistics from the Department of Commerce for the “digital economy,” where 9.6 percent of GDP was generated from this sector. It also found that 7.7 million workers were employed because of this approach to commerce. However, unless businesses take care to ensure the same level of communication is accessible, formally and informally, there may not be the same level of efficiency for remote workers.

According to MIT Sloan Management Review, remote workers are at a disadvantage when it comes to indirect types of learning employees have compared with in-person settings. Whether it’s before work starts, during break or lunch time, or interacting with or observing a customer or client, employees working virtually have little to zero of these types of passive opportunities to learn on the job. Be it an additional comment after signing off an email, having a few opportunities to chat or talk online during breaks or similar, this type of passive informal communication needs to be addressed to make up for the in-person experiences other employees have.

While the way work will be conducted in the future can’t be predicted, it will certainly include using the internet – and for many employees, it will involve some time away from the office.

Sources

https://www.uschamber.com/international/ten-trends-in-2022-global-perspectives-for-business

https://www.statista.com/statistics/1133436/challenges-digital-transformation/

https://hbr.org/2021/01/in-the-digital-economy-your-software-is-your-competitive-advantage

https://docs.fcc.gov/public/attachments/FCC-21-18A1.pdf

Mind the Map: The Hidden Impact of Inaccurate Broadband Availability Claims

https://sgp.fas.org/crs/misc/R44565.pdf

https://sloanreview.mit.edu/article/overcoming-remote-work-challenges/

What’s the Future for Measuring Employee Performance?

Measuring Employee PerformanceYearly performance evaluations just might be heading out the door, according to a recent WorkHuman Analytics & Research Institute Survey. Findings reveal that these appraisals are less than effective and used less often. Based on select findings, 55 percent of employees responded that yearly evaluations don’t help them become better in their role. Almost as many, 53 percent, indicated that annual reviews recognize an employee’s complete workload. The survey also found that only 54 percent of businesses used annual reviews in 2019, compared to 82 percent of workers saying their employer used annual reviews in 2016.

According to Gallup, only 14 percent of workers responded positively that performance reviews motivated them to get better at their skill set. It also found that among businesses with 10,000 workers, time taken for performance evaluations reduced employee productivity by at least $2.4 million and up to $35 million. It also found that one-third of workers’ output and quality declined.

When it comes to traditional performance reviews, many employees believe they are run by managers with little regard to any employee input whatsoever. However, there are other ways to evaluate an employee: the worker can evaluate themselves; their co-workers can appraise them; or a combination of a self-, peer- and manager-focused assessment.

As Harvard Business Review explains, since traditional performance reviews are mutually stressful for managers and their subordinates, there are a few recommendations to attempt to make it a more productive experience.

The first recommendation is to set initial, mutual expectations for manager and employee. When the year begins, the business’ performance requirements should be detailed for the employee so that expectations are clear. By setting performance objectives with the employee, the manager and business will ensure that employees are answerable for their performance.

The second step is to prepare for the in-person evaluation as it gets closer to the meeting. Two weeks before the in-person evaluation, HBR recommends that workers and managers review their past accomplishments – good, bad, etc. Managers could also ask for objective co-workers’ assessments of the employee’s work to garner different perspectives on their performance.

Before a face-to-face meeting, give the employee the assessment to let them internalize it and let their emotions settle before the discussion. From there, the atmosphere should be established by the manager. When it comes to competent, high performers, managers should keep the reviews on the workers’ accomplishments and progression at the company, along with concerns they might have in their role. For poor performers, putting the focus on accountability and improved results is the recommended route.

Asking employees what’s working and what’s not working can be helpful for both manager and employee. It’s also recommended to point out what specific actions, not generalities, employees should take to keep improving.

Based on the evolution of how and where work is being conducted, it seems that the annual performance review needs to be re-evaluated and updated. Only time will tell how it will change, but based on what’s not working, it will evolve as the workplace moves deeper into the 21st century.

Sources

https://www.workhuman.com/press-releases/White_Paper_The_Future_of_Work_is_Human.pdf

https://hbr.org/2011/11/delivering-an-effective-perfor

How Businesses Can Combat Inflation’s Toll

InflationAccording to the U.S. Bureau of Labor Statistics (BLS), the Producer Price Index (PPI) or the increase in prices, goods and services that producers experienced for their input costs, saw a substantial rise, according to its latest report issued on Dec. 14.

For November 2021, the PPI grew by 0.8 percent. For the past year ending in November 2021, it rose by 9.6 percent on an annualized basis. According to the BLS, this is the hottest PPI reading since this metric originated in November 2010. With costs not appearing to abate anytime soon, how can businesses combat rising costs?

Figure out Financial Priorities

Harvard Business Review (HBR) details steps that companies can take to evaluate and make adjustments to mitigate the rising cost of inflation. The first decision is to determine “high-resolution spending visibility,” which means a fully transparent documentation of how much money is spent, in what way it’s spent and how effective such spending is in the organization.

When it comes to effectively deploying capital, HBR recommends reducing expenses and/or investing capital to grow and maintain a businesses’ market edge. If there’s a unique customer experience that would suffer, that might not be the right area to cut. However, HBR cites an energy business that conducted an audit of its operations and determined a savings of $10 million was possible if it temporarily suspended 80 business operation expenses.

Analyze Past Spending for Future Efficiency

After a business understands spending patterns and how they impact profitability, this can be analyzed to see how to work around inflation. HBR gives the example of how “external groups” beyond the decision makers on new build projects cost certain companies more than $400 million and six months of time. By using “cross-functional collaboration,” costs that could be cut or work that could be done differently gave the company a way to realize greater efficiency.

Reduce Choices for Consumers

As the competition among employers to find and retain workers is tough, including the pressure to raise wages, simplifying what a company offers can help reduce costs.

Mondelez International, a global producer of comestibles, reduced the number of products it offered to customers by 25 percent when the COVID-19 pandemic started. Similarly, hotels began reducing the need for housekeeping by asking guests, especially during the pandemic, if they needed their rooms freshened up during stays.

Selectively Digitize Tasks

When it comes to businesses fighting for their survival, one silver lining of the pandemic is automation. Many companies discovered the benefits of automation, including higher profits, gains in output, etc.

HBR explains that processes on data for products, such as weight, size, images, etc., can be automated, freeing up human workers for higher level tasks, such as analysis and projections. Citing the example of David’s Bridal, through its Zoey messaging concierge service during the beginning of 2020, appointment and communication center expenses fell by 30 percent. This helped shift human workers to devote more time to in-person assistance.

While there’s no magic recipe to combat inflation, by analyzing a company’s books and keeping up with trends, there are many ways to affect cost savings.

Sources

https://hbr.org/2021/09/6-strategies-to-help-your-company-weather-inflation

https://www.bls.gov/ppi/

4 Common Liquidity Ratios in Accounting

One way a business can manage its books and viability in the near and long terms is to see how liquid its assets are. Businesses that have better cash positions are naturally geared toward sustaining continued success. One important reason for a business to measure and maintain healthy levels of liquidity is because it promotes better odds that a company will be able to satisfy its short-term debts. There are many ways business can accomplish this, and below are four common ways it can be done.

Current Ratio

One of the few liquidity ratios is what’s known as the current ratio. It’s a way to determine how well a company can pay back its debts.

The current ratio is also known as the “working capital ratio,” showing how well a business can satisfy financial obligations that must be paid back within 12 months. Using an example is a good way to see how it works:

Let’s assume a company has the following assets, it would use the following ratio:

Current Ratio = Current Assets / Current Liabilities

Marketable Securities such as stocks, bonds or purchase agreements maturing in 12 months or less can be considered a current asset. Businesses may also consider cash, accounts receivable, prepaid expenses, office supplies and saleable inventory they have in stock as current assets.

Outstanding bills or accounts payable and short-term debt – within the next 12 months as described above – are considered current liabilities. Other expenses can be interest payable, income and payroll taxes payable, which can also be considered current liabilities.

If the current assets of a business are $250 million, and that is divided by current liabilities of $75 million, the Current Ratio would be 250 / 75, or 3.33

With a current ratio of 3.33, the company is in good financial health because it can pay off its debts easily.

Acid-Test Ratio

The Acid-Test Ratio determines how capable a company is of paying off its short-term liabilities with assets easily convertible to cash.

Also known as the quick ratio, the formula is as follows:

Acid-Test Ratio = Current Assets – Inventories / Current Liabilities

Current assets consist of cash and similar assets (savings/checking accounts, deposits becoming liquid in three months or less), marketable securities and accounts receivable. From there, the summation is divided by the company’s current liabilities expected to be paid in 12 months.

The other way to calculate the acid-test ratio or quick ratio is as follows:

The first step is to look at the company’s current assets that can be liquidated within 12 months. Then inventory must be valued – that which is intended to be sold for purchase. From there, the inventory value is subtracted from the current assets. The resulting value is then divided by the business’ current liabilities.

The acid-test ratio is one way to determine a company’s ability to satisfy current liabilities without selling inventory or getting more lending. With the uncertainty and profitability of selling inventory, one can argue that it gives a better picture of a company’s financial fitness.

For example, if a company comes out with a ratio of 3, this means that a business has $3 for every $1 of liabilities. However, as a company’s quick ratio increases, it might show there’s too much money not being reinvested to increase the company’s efficiency and profitability. A higher quick ratio figure can also indicate that there are too many accounts receivable that are owed but uncollected by the company.

Cash Ratio

As the name implies, the cash ratio determines how financially able a company is to satisfy short-term liabilities with cash and cash equivalents.

Also referred to as the cash asset ratio, this tells how capable a business is of satisfying short-term debts, usually 12 months or less, with cash and cash equivalents only. This ratio is as follows:

Cash Ratio = Cash and Cash Equivalents / Current Liabilities

Examples of cash and cash equivalents include physical currency, minted coins and checks. Cash equivalents include money market accounts, Treasury bills and anything that can be converted into cash in almost real-time.

When it comes to current liabilities, accrued liabilities, short-term debts and accounts payable are examples that are due within one year.

From there, the ratio is as follows to determine a company’s cash asset ratio:

Cash and Cash Equivalents (Cash: $25,000 + Cash Equivalents: $100,000) / Liabilities (Accounts Payable: $30,000 + Short-term debt: $25,000)

$125,000 / $55,000 = 2.27

Based on this calculation, the company would be able to pay off 227 percent of present liabilities with its cash and/or cash equivalents. For creditors and investors evaluating a company, it can show the company has ample liquidity. Creditors are naturally more willing to lend to companies with more cash flow; and investors are interested to see how liquidity is being managed.

Operating Cash Flow Ratio

This ratio measures how efficiently a business can meet present liabilities from the cash flow of its core business operations. It tells a company the number of times over it can satisfy its liabilities based on the amount of cash it generated over a certain time-frame.

This ratio can also include accruals, giving a fair estimate of a business’ short-term liquidity. The formula to determine this ratio is as follows:

Operating Cash Flow Ratio = Cash Flow from Operations / Current Liabilities

The statement of cash flow is where the operation’s cash flow is found. It can also be calculated by determining a company’s net income, plus non-cash expenses, plus working capital changes.

Current liabilities are defined as financial obligations due within the next 12 months. Common ones are accrued liabilities, accounts payable and/or short-term debt.

Once the operating cash flow ratio is calculated, a company’s financial health can be determined. If the ratio is 1.5 or 2, for example, it means the company can cover 1.5 times or double its present liabilities. However, if the ratio is less than 1, then the amount of cash generated from operations is insufficient to satisfy short-term liabilities.

As part of a comprehensive accounting practice, businesses that run these ratio calculations will be able to identify where there’s too little or too much liquidity and reduce current and future financial peril.