Study Notes for Business Law Quiz for Clinical Legal Education 1, January Semester 2011

MANAGEMENT

According to Mary Parker Follet “Management is the art of getting things done through people.” In today’s world this definition should expand to include getting things done through technology. As Lawyers we need management skills. It is something that we are not taught in our university course load but management is a key facet in our future careers.

Management is often considered a “soft skill” but management is a crucial aspect to success in the business world.

Management includes a variety of tasks including: planning, organising, staffing, leading, controlling and motivating.

In today’s highly specialised business world there are several established sub-categories of management fields including: human resources, operations management, strategic management, marketing management, financial management and information technology management. If you are involved in a small business in the future you will likely need to develop skills in all of the major sub-categories of management.

One key aspect to consider in management is that it should address both the “front end” and the “back end.” “Front end” management techniques include the development of mission statements, vision and objectives and strategy. “Back end” techniques include accountability and assessment. In many instances businesses and organisations work hard to develop “front end” instruments but often fail to execute on the “back end.” It is important to make sure that assessments and accountability measures are utilised consistently and professionally in order to keep them from feeling like personal attacks on the parties that are assessed and evaluated. It is also important to keep records of assessments for purposes of employee actions such as promotions and terminations.

There are several key management tips that are particularly applicable to lawyers.

Delegation is the process of assigning tasks to the employees that can complete tasks. Lawyers can make better use of their time and their client’s resources by delegating straightforward tasks to lower level employees that can accomplish them. In law delegation is complicated by the prohibition against the unauthorised practice of law. Certain tasks in Uganda can only be performed by advocates while other tasks require the supervision of advocates.

Building Capacity of the Staff is a key management skill that is related to delegation. Through capacity building an advocate can expand the tasks he or she can delegate and improve the efficiency and quality of the work produced by his or her law chambers. Building capacity also increases the moral of staff and shows that you value employees.

Treating People with Respect is something that many “higher” level individuals fail to do. While managers need to establish their authority in accordance with the chain of command in an organisation, they must always do so in a way that is respectful of other team members. Failing to treat employees with respect creates animosity, fear, dissension and distrust within organisations.

Constructive Criticism and Controlled Feedback Opportunities are important to the health of an organisation. Regular and formal feedback is helpful to the subject of the feedback and is less likely to be seen as a personal attack.

Showing Appreciation is another key aspect to law practice management. Employees need to know that their efforts are appreciated. If you show employees that you appreciate them through the provision of bonuses, gifts, flex-time or other benefits you will build employee loyalty and will encourage good performance.

MARKETING

Consider the following quote from Peter Drucker:

“Marketing is not only much broader than selling, it is not a specialised activity at all. It encompasses the entire business. It is the whole business seen from the point of view of the final result, that is, from the customer’s point of view. Concern and responsibility for marketing must therefore permeate all areas of the enterprise.”

What are the implications of Peter Drucker’s quote to the provision of legal services?

Marketing Orientations:

Product Orientation: Here the emphasis is on the product itself. An example would be Apple Computer or Mercedes Benz where people largely purchase the product because of the quality and nature of the product itself.
Sales Orientation: Here the emphasis is on the ability to sell the product itself. An example would be MTN in Uganda with its army of sales people offering its product aggressively. However, MTN also has a heavy marketing aspect as well.
Production Orientation: Here the emphasis is on how the product is produced. Here an example is Toyota with its emphasis on total quality management production.
Marketing Orientation: Here the emphasis is on the brand itself and how it is placed at the top of consumers minds. An example of a marketing oriented approach is Coca-Cola.


The 4 P’s of Marketing:

The 4 P’s of Marketing are Product, Pricing, Placement and Promotion.

Customer Focused Marketing

According to Barnwell the customer focused marketing approach is based on identifying, anticipating and satisfying customer needs.

Product based marketing is customer focused when it is designed to create a solution for the consumer.

Price based marketing is customer focused when the product is priced so as to provide the customer with net value.

Promotion based marketing is customer focused when it provides the customer with meaningful and useful information as to how the product will assist the customer.

Placement based marketing is customer focused when it provides customers with access to products and services.

When adopting a customer focused marketing approach it is important to “script” the customer experience. This means that you need to plan for the experience that the customer will undergo from the time the customer enters the office to the final bill.

Branding

Branding is a "name, term, sign, symbol or design, or a combination of them intended to identify the goods and services of one seller or group of sellers and to differentiate them from those of other sellers.”

There are certain objectives you should try to achieve through branding. You should make sure that your brand delivers your intended message clearly, confirms your credibility, connects emotionally with your target prospects, motivates buyers to purchase your product or services and solidifies user loyalty.

Positioning Statement

Your marketing positioning statement should be constructed with the following steps:

Write down what your business is.
Write down what business you are in.
Think about and write down who your company serves. Who does your target market represent?
Brainstorm and write down what it is is that your target market needs.
Make a list of your competitors.
Write down and explain what makes your business different from your competitors.
Make a list of the unique benefits that derive from your product or services
Use the above information and in a second session focus on refining it to the final statement.
Publish the final statement shortly after the second session ends to prevent changes, additions and more meetings.

Target Marketing

The following is a list of questions that should be asked when developing a targeted marketing approach/strategy:

Who is your target audience?
Where is your target audience located?
What do they think about your current brand?
What would you like them to think about your brand?
How will you attract them to your products or services?
Who else is competing for their loyalty and devotion?
Are you targeting business or consumer sectors?

Target Marketing activities that advocates can employ include attending events that will be attended by members and representatives of your target market, dining with members and representatives of your target market, speaking at seminars that will be attended by members and representatives of your target market, and the distribution of educational mailers that concern issues relevant to members and representatives of your target market.

Marketing Activities for Advocates:

Possible permissible marketing activities that can be employed by advocates include: (1) Networking, (2) the use of Social Media, (3) Public Speaking, (4) involvement in Educational Seminars, (5) Pro Bono Work, (6) Joining Bar Associations, (7) Appropriate pricing and packaging of legal services, (8) Assisting the Judiciary, (9) legal representation in high profile matters, and (10) Blogging. However, it is important to note that all of these activities could be done in a way that is not permissible under Ugandan law. Nonetheless, they are activities that can be done within the bounds of the law to promote one’ legal practice.

Legal Specialisation

Legal Specialisation is an emerging trend that is just beginning to take hold in Uganda. It is based on the principle that advocates can be more effective if they focus on key areas in which they build up a high level of expertise. In the present Ugandan legal market many practitioners still present themselves as capable of performing any legal task and rarely refer any work to other lawyers. Legal Specialisation in Uganda is likely to grow with the emergence of a larger legal market (East Africa), influence from legal practices of more developed legal markets, the presence of international law firms, increased complexity in the law, and the growth of chambers in Uganda.

Entrepreneurship
The following are some key character traits for entrepreneurs:

▪ The entrepreneur has an enthusiastic vision, the driving force of an enterprise.

▪ The entrepreneur's vision is usually supported by an interlocked collection of specific ideas not available to the marketplace.

▪ The overall blueprint to realise the vision is clear, however details may be incomplete, flexible, and evolving.

▪ The entrepreneur promotes the vision with enthusiastic passion.

▪ With persistence and determination, the entrepreneur develops strategies to change the vision into reality.

▪ The entrepreneur takes the initial responsibility to cause a vision to become a success.

▪ Entrepreneurs take prudent risks. They assess costs, market/customer needs and persuade others to join and help.

▪ An entrepreneur is usually a positive thinker and a decision maker.


Business Plans

According to the “Quick MBA” materials included in the power point presentation offered in class a business plan should consist of the following subject treatments: (1) Company Description (2) Industry Analysis (3) Market Analysis (4) Competition (5) Marketing and Sales (6) Operations (7) Management and Organisation (8) Capitalisation and Structure (9) Development and Milestones (10) Risks and Contingencies, and (11) Financial Projections.

It is important for you to know the components of each of the above listed subject treatments. These are available on the powerpoint notes as well as on line at: www.quickmba.com/entre/bplan/

Accounting for Lawyers

“Accounting is the scorecard of business. It translates a company’s diverse activities into a set of objective numbers that provide information about the firm’s performance, problems and prospects.”
-Robert C. Higgins

Negative entries

In accounting “( )” means that the sum inside is a negative.

Balance Sheet

A balance sheet is a snapshot of an entities financial position at a given time.

The equation for a balance sheet is:

Assets = Liabilities + Shareholder’s Equity.

Debits and Credits and Double Entry Book Keeping

On the liabilities side of the balance sheet increases to liabilities are classified as credits and decreases to liabilities are classified as debits. On the asset side of the balance sheet increases to assets are classified as debits and decreases to assets are classified as credits.

Under “double entry” book keeping for every credit there must be an equal debit. The opposite proposition is true as well. For every debit there must be an equal credit. The debits and credits can appear on the same side of the balance sheet (e.g. on the asset side or on the liabilities/shareholder’s equity side) or on different sides.

In order to determine how a transaction should be reflected in terms of double entry bookkeeping it is important to classify the relevant item as an asset or liability (or when appropriate shareholder’s equity).

You should be able to property reflect certain simple transactions in terms of double entry bookkeeping. Examples of such transactions and their proper classification were provided in class lecture on the power point.

Assets

Assets are defined as “(r)esources with probable future economic benefits obtained or controlled by an entity resulting from past transactions and events.”

In accounting internally developed inventions, an entity’s reputation and an entities business relationships are generally not considered to be assets that appear on a balance sheet.

Goodwill:

Goodwill is one instance where an intangible asset appears on a balance sheet. Goodwill is the value attributed to brand names and intellectual property that is acquired when an entity is acquired or an entity’s brand or intellectual property is acquired. Goodwill only appears on a balance sheet in the case of an acquisition. When Goodwill appears on a balance sheet it is depreciated as a non-cash asset over time.

Liabilities:

Liabilities are defined as “(p)robable future economic sacrifices of economic benefits arising from present obligations to transfer assets or render services in the future as a result of past transactions or events”

Shareholder’s Equity:

Shareholder’s Equity is the residual interest in assets of an entity after subtracting its liabilities. Basically everything that is not an IOU (“I owe you”) is Shareholder’s equity

One helpful way to think of Shareholder’s Equity is to think of it like homeowner’s equity where the increased value of a home due to rising property values is not reflected as a liability but is attributable to the home owner. This is also the case as the liability owed to the bank is decreased over time. As the liability decreases the value in the home credited to the home owner increases.

Shareholder’s Equity is on the liabilities side because it represents owners’ claims against existing assets. Accountants consider this to be money that has already been spent. Shareholder’s Equity does not represent funds that the entity has access to.


Current Assets and Liabilities

Accountants arbitrarily define any asset or liability that will turn into cash within one year as “current” and all other assets and liabilities as “long term.”

The Income Statement

An income statement records the flow of resources over time.

The basic formula for an income statement is: Net Sales - Cost of Goods Sold - Operating Expenses + Non-Operating Income (or expense) - Taxes = Earnings

The income statement is designed to reflect an entity’s financial performance during some period of time. Its central feature is the comparison of the entities revenues and expenses during the relevant period. Revenues and expenses are critical terms for accountants.

Revenues are defined as “increases in equity resulting from asset increases and/or liability decreases from delivering goods or services or other activities that constitute the entity’s ongoing major or central operations.”

Expenses are defined as “decreased in equity from asset decreases or liability increases from delivery of goods or services, or carrying out any activities which constitute the entities ongoing major or central operations.”


Examples of a Balance Sheet, Income Statement and Statement of Cash Flows:

It is important for you to be familiar with actual balance sheets, income statements and statements of cash flows. Examples were provided in the power point presentation offered in class.

For addition examples and easy to follow explanations (complete with videos) visit Investopedia at the following addresses:

For a Balance Sheet: http://www.investopedia.com/articles/04/031004.asp
For an Income Statement: http://www.investopedia.com/articles/04/022504.asp
For a Statement of Cash Flows: http://www.investopedia.com/articles/04/033104.asp

The 4 Types of Cash Flow


1. Net Cash Flow which equals Net Income -+ Noncash Items
2. Cash Flow from Operating Activities which equals Net Cash Flow +- Changes in current assets and liabilities
3. Free Cash Flow which equals Total cash available for distribution to owners and creditors after funding of all worthwhile investment activities
Discounted Cash Flow which is a sum of money today having the same value as a future stream of cash receipts or disbursements

Understanding the Importance of Cash Flow

Cash is the lifeblood of a business entity. If an entity does not have cash flow it will be unable to meet its cash obligations and will have to find another source of cash to meet its accruing cash expenditures. It is important to note that income is not the same as cash. That is because accountants treat certain transactions as creating income regardless of whether they result in increases access to cash.

Insolvency

When a company does not have sufficient cash to meet maturing obligations it is insolvent

Debits and Credits and Double Entry Book Keeping

On the liabilities side of the balance sheet increases to liabilities are classified as credits and decreases to liabilities are classified as debits. On the asset side of the balance sheet increases to assets are classified as debits and decreases to assets are classified as credits.

Under “double entry” book keeping for every credit there must be an equal debit. The opposite proposition is true as well. For every debit there must be an equal credit. The debits and credits can appear on the same side of the balance sheet (e.g. on the asset side or on the liabilities/shareholder’s equity side) or on different sides.

LImitations of Accounting Analysis

There are certain inherent limitations with accounting analysis. First, all accounting information must be reflected in monetary units. Things that are difficult or impossible to reflect as monetary unites such as risk and potential for growth are often not reflected in accounting statements. Accounting also has a bias/preference for historic values and is often inconsistent with market values that are based on expected future performance. Accounting analysis is based on the matching principle so gains in value that are not associated with actual expenditures go unaccounted for. Accounting seeks to classify all transactions as one thing or another. This often creates boundary problems when a transaction or occurrence falls somewhere on a boundary between two categories as it must be placed in one category or the other. Items that are particularly difficult to classify are intangible assets (whether or not they meet the standard of being an asset), contingent liabilities (whether they meet the standard of certainty needed to become a liability) and extraordinary or unusual items or events that impact the value of a business entity in ways that are not accounted for when one applies the “matching principle.”

Liquidity

Liquidity is the ability of an entity to produce cash or convert assets into cash within a short period of time. One popular measurement of liquidity is the current ratio. The formula for the current ratio is as follows:

current ratio=current assets/current liabilities

Solvency

Solvency is an entity’s ability to meet its debt obligations as they occur. Financial measurements of solvency include an entity’s debt to equity ratio and the ratio of interest expense verses earnings before interest and tax.

Managerial Efficiency

Managerial Efficiency reflects an entity’s efficiency in turning assets into income or in other key business functions. Financial measurements of managerial efficiency include the ratio of cost of goods sold over year end inventory and sales revenue over accounts receivable.

Profitably

Profitability concerns an entities ability to generate profits based on its assets or its market value. Financial measurements of profitability include: Return on Assets (ROA) which is Net Income/Total Assets and Return on Equity (ROE) which is Net Income/Total Owners’ Equity. ROE can also be reflected as ROE=Profit Margin*Asset Turnover*Financial Leverage.

Three Levers of Return on Equity

As you can see from the last formula listed above, Profit Margin, Asset Turnover and Financial Leverage are the three levers though which an entity can change its Return on Equity. The first two levers are very straightforward.

The last level (Financial Leverage) concerns the debt to equity ratio of the company. The concept behind financial leverage is that if equity can replaced by debt and an entity can return profits at a higher rate than it pays interest on its debt that Return on Equity can be increased as debt is added. Of course higher debt is a double-edged sword and creates a liquidity risk as debt holders must always be paid. In addition equity holders will make less if the rate of return of the entity is less than the interest owed on the debt.

Market Value

The Market Value reflects what people are willing to pay for the entity. One way to evaluate the market value of a company is to look at its earnings per share. This is the earnings of the company divided by the number of shares. A low earnings per share usually reflects a market expectation of growth and higher future earnings. Another way to evaluate the market value of an entity is to look at an entity’s price earnings multiple which is it total market cap value (the total value of all its issued stock) divided by earnings. The higher the PE value the higher the market expectation for growth and increases future earnings. Prior to the bursting of the “dot.com bubble” many highly valued companies did not even have positive PE values as many of the highly valued companies were not earning a positive number. Most of the so called “dot.com” entities that had positive earnings had very high PE ratios as the market values dwarfed earnings.

FInance

Finance is the study of how people allocate scarce resources over time. Two features that distinguish financial decisions from other resource allocation decisions are that the costs and benefits of financial decisions are (1) spread out over time and (2) usually not known with certainty in advance by either the decision maker or anybody else.

Time Value of Money
At its most basic level the time value money is based on the principle that money today is worth more than money in the future. Due to time constraints we were unable to go any deeper into that concept than that basic point. This concept will be covered in more detail in Clinical Legal Education 2 for your educational benefit.