Unit 1: Introduction to family Business

Meaning of Family business:

A family-owned business may be defined as any business in which two or more family
members are involved and most of the ownership or control lies within a family.

Definition:

A family business is a commercial organization in which decision-making is influenced by

multiple generations of a family, related by blood or marriage, who are actively involved in the
business.

These businesses are characterized by the combination of family ties and business operations,
where family members may hold key positions, participate in management, and contribute to
the overall success of the enterprise.

Ernesto J. Poza in his widely popular book "Family Business" defined family business as a
synthesis of the following characteristics:

1. Ownership control (15% or higher) by two or more members of a family or a

partnership of families.
2. Strategic influence by family members on the management of the firm, whether by
being active in management, continuing to shape culture, serving as advisors or board
members, or being active shareholders.
3. Concern for family relationships.
4. The dream (or possibility) of continuity across generations.

Characteristics of Family Business:

• Ownership and Control:

Family businesses are often characterized by concentrated ownership within the family. This
ownership concentration may involve a significant stake held by a single family entity or
distributed among multiple family members. The degree of ownership directly influences
decision-making authority and strategic control within the business.

• Long-Term Perspective:
Family businesses frequently exhibit a commitment to long-term success and legacy-building.
This perspective arises from the desire to pass the business down through generations. Strategic
decisions are influenced by this focus on sustainability, often prioritizing stability and enduring
success over short-term gains.

• Personal Relationships:

Personal relationships within family businesses can be both a strength and a challenge. Trust,
loyalty, and shared values can foster a positive working environment. However, conflicts or
disagreements among family members, if not managed effectively, can pose significant
challenges and impact both familial relationships and business operations.

• Flexibility and Adaptability:

The close-knit nature of family businesses contributes to their flexibility and adaptability.
Direct family involvement allows for quick responses to market changes and the ability to
embrace new strategies. This adaptability can be a competitive advantage, enabling family
businesses to navigate dynamic business environments with agility.

• Succession Planning:

Succession planning is a critical aspect of family businesses, involving the transition of

leadership and ownership to the next generation. It encompasses considerations of competence,
interest, and family dynamics. Successful succession planning requires careful preparation and
communication to ensure a smooth transfer of responsibilities.

• Informality:

Family businesses often have less formalized structures and decision-making processes
compared to non-family businesses. While informality can foster a sense of unity and
collaboration, it necessitates effective communication and management to prevent challenges
arising from unclear roles or decision-making procedures.

• Values and Culture:

Family values play a pivotal role in shaping the organizational culture of family businesses.
Shared principles create a unique identity, fostering a sense of belonging among family
members and employees. Aligning business practices with these values is not only a cultural
aspect but also a strategic choice for many family businesses.
 • Emotional Attachment:

Owners of family businesses often develop a deep emotional attachment to the company. This
emotional connection stems from the business representing not just a financial investment but
also a legacy and family heritage. This attachment can influence decision-making, dedication,
and the overall commitment of family members to the business.

• Conflict Management:

Managing conflicts within family businesses is crucial for maintaining both familial
relationships and business operations. Effective communication and conflict resolution skills
are essential. The intersection of personal and professional dynamics requires a proactive
approach to address and resolve conflicts, ensuring a harmonious working environment.

• Diverse Roles:

Family members in family businesses often take on diverse roles, extending beyond traditional
job descriptions. This diversity can be a strength, leveraging the unique skills and perspectives
of each family member. However, defining and managing these roles is critical to ensure
clarity, efficiency, and the optimal contribution of each family member to the overall success
of the business.

Unique Challenges of Family Business:

In India, many businesses that are now public companies were once family businesses.
These family businesses have grown tremendously with the passage of time. However, things
are always not rosy. While family business gets many advantages, they face certain challenges
also.

• Succession Planning:

Succession planning is a complex challenge for family businesses. Identifying and preparing
the next generation of leaders involves navigating issues of competence, family dynamics, and
ensuring a smooth transition. It requires strategic thinking to balance the interests of the
business and the expectations of family members.

• Conflict Resolution:

Managing conflicts within family businesses is crucial. The intersection of personal

relationships and professional responsibilities can lead to disagreements that, if not addressed,
may negatively impact both family harmony and business operations. Establishing effective
conflict resolution mechanisms is essential for long-term success.

• Role Definition:

The diversity of roles taken on by family members can lead to challenges in role definition.
Clear delineation of responsibilities, expectations, and decision-making authority is critical to
avoid confusion and potential conflicts arising from overlapping roles or unclear boundaries
within the business.

• Professionalization:

Balancing the need for professionalism with the informality often inherent in family businesses
can be challenging. Implementing professional management practices, governance structures,
and performance evaluations may face resistance from family members accustomed to a more
informal approach.

• Innovation for a competitive advantage:

The business environment today is very competitive. To survive and grow in this competitive
environment it becomes very important to innovate and give unique value proposition to the
customers. To innovate, the business goals have to be broadened and new strategies are to be
formulated. This may mean that businesses may have to leave the age-old style of functioning.
But family businesses may remain confined to their age-old practices and not invest in research
and development.

• Limited Talent:

In family business owners and managers are by and large the family members. Members of
the family may not necessarily be talented and capable of taking the company’s legacy forward.
Attracting right talent from outside the family is crucial and retaining them is even more
important.

• Lack of Succession Planning:

There is lack of efficient succession planning, mentoring and developing the next generation
of successors and leaders. Family businesses have to give proper attention to this issue.
 • Technology Needs:

With the changing environment and rapid technological developments, the business need to
adapt to the new technological advancements or bring in new, if need be. This may mean that
they may have to part with the older business models which have been passed on to the present
generation.

• Sibling Rivalry:

Sibling Rivalry is something that needs no explanations. All the heirs of the family get share
in the business. Some may do well and flourish further, some may not. This often creates rivalry
and pulling down each other is started even at the cost of organisational resources. This rivalry,
if remains unsolved, may lead to split in the family business.

• Internal Conflict:

Interest of the family members of family business is varied. This may disturb business
harmony. Handling this internal conflict is very difficult. If it is not handled properly, this may
lead to failure of the business.

• Biased Decision-Making:

There is always a possibility that decisions in the family business may be biased for non-family
members and employees of the business. The family members may try to impress upon their
own ideas on the other members.

• Limited Finance:

Family businesses have limited financing options since they cannot raise large amounts of
capital on their own, and external financing options may not be attractive to them as outside
debt may lead to significant influence over the company. For family businesses, determining
where and how to get the capital and resources needed to grow can be a challenge.

Evolution of Family Business:

Early Agricultural and Craftsmanship Period:

In ancient societies, family businesses were established in agriculture and

craftsmanship. Families worked together on farms or in artisanal trades, passing down skills
and knowledge from one generation to the next.
Mercantile and Trading Era:

As economies evolved, family businesses became involved in trade and commerce.

Many early mercantile enterprises were family-owned, engaged in international trade, and
played a crucial role in economic development.

Industrial Revolution:

The Industrial Revolution marked a significant shift in family businesses. With the rise
of industrialization, larger-scale enterprises emerged, often replacing traditional family crafts
and cottage industries. Some family businesses adapted to new technologies, while others faced
challenges in the changing economic landscape.

Post-World War II Period:

After World War II, there was a resurgence of family businesses, particularly in sectors
like manufacturing and retail. Many family businesses played a vital role in post-war
reconstruction and economic recovery.

Globalization and Multinational Expansion:

In the latter half of the 20th century, family businesses expanded globally. Some
transformed into multinational corporations, adapting to the challenges and opportunities
presented by globalization. This period saw family businesses diversifying into various
industries.

Current Trends in the 21st Century:

Family businesses continue to evolve in the 21st century. Trends include a focus on
innovation, diversity, and inclusion, with some businesses transitioning leadership to non-
family members based on merit. Digital transformation and e-commerce have also influenced
the way family businesses operate and connect with customers.

Importance of Family business:

Economic Impact:

• Job creation:

Family businesses are a major source of employment, contributing significantly to local

economies and providing job opportunities for generations within families and communities.
As family businesses grow and expand, they naturally create new positions within the
company, offering employment opportunities across various departments. Many family
businesses spawn new ventures and subsidiaries, further diversifying their operations and
generating additional jobs. When family members take over roles within the business, it opens
up opportunities for others to be hired and fill vacated positions.

• Entrepreneurial Spirit:

They serve as incubators for innovation and entrepreneurship, driving economic growth and
fostering a spirit of self-reliance within families. Growing up in a family business exposes
individuals to entrepreneurship firsthand, fostering an understanding of business challenges
and opportunities. This early exposure can spark interest and inspire a desire to be involved.
Family members who have built the business serve as natural mentors and role models,
demonstrating entrepreneurial spirit and passing on valuable knowledge and skills. Family
businesses often provide a supportive environment where new ideas are encouraged and
mistakes are seen as learning opportunities. This fosters a sense of security and freedom to
experiment.

• Financial stability:

Their focus on long-term goals and reinvestment often leads to financial stability and
resilience, contributing to a well-balanced and diverse economy. Family members often have
a deeper emotional connection to the business, leading to a strong sense of ownership and
commitment. This translates to greater financial discipline, careful resource allocation, and a
focus on profitability for long-term survival. Family businesses are more likely to reinvest
profits back into the business, rather than distributing them as dividends. This fuels growth,
creates jobs, and contributes to the overall economic well-being of the community.

Social Impact:

• Community engagement:

Family businesses are often deeply rooted in their communities, supporting local causes and
charities, and promoting social responsibility. Family businesses often dedicate resources to
local charities, events, and organizations, supporting causes important to the community. They
may invest in local infrastructure projects like parks, schools, or community centres,
contributing to the well-being of residents. They might encourage and financially support
employee volunteerism in local initiatives, fostering a sense of social responsibility.
 • Preserving traditions and values:

They act as custodians of traditions and values, passing down skills and knowledge through
generations, strengthening cultural identity and social fabric. Some family businesses are
closely tied to specific cultural practices, products, or services. They may actively work to
preserve and promote these cultural elements, ensuring that they are passed down through the
generations.

• Personal fulfilment and legacy building:

They provide a sense of purpose and achievement for family members, fostering emotional
attachment and building a legacy beyond individual lives. Family businesses often have a rich
history and legacy that they strive to maintain. The founders' values and principles are woven
into the fabric of the business, creating a sense of continuity and connection to the past.

Types of Family Business:

Family businesses can be of three types. These are discussed below:

1. Family-Owned Business:

Family-Owned businesses are for-profit organisations whose majority voting shares (or other
form of ownership) are typically but not necessarily controlled and owned by members of a
single extended family, or by one family member but significantly influenced by other
members.

2. Family Owned and Managed Business:

Family-Owned and Managed businesses are for-profit organisations whose majority voting
shares (or other form of ownership) are typically but not necessarily are controlled and owned
by members of a single extended family, or by one family member but significantly influenced
by other members. This controlling authority enables the family to determine the company's
objectives, methods, and strategies for reaching them, as well as policies for implementing
those strategies. In addition, at least one family member has active participation in the top
management of the company, which means one or more members of the family have ultimate
control of the company.
 3. Family Owned and Led Business:

Family-Owned and Led businesses are for-profit organisations whose majority voting shares
(or other form of ownership), typically but not necessarily are controlled, and owned by
members of a single extended family, or by one family member but significantly influenced by
other members. This controlling authority enables the family to determine the company's
objectives, methods, and strategies for reaching them, as well as policies for implementing
those strategies. In addition, at least one family member is an active member of the company's
Board of Directors, so one or more family members have at least a high level of influence over
the company's direction, culture, and strategies.

Family Dynamics and its importance in family business:

Family dynamics in the context of a family business refer to the interpersonal relationships,
interactions, and behaviours among family members who are involved in the management or
ownership of a business.

Family dynamics play a critical role in the success, continuity, and overall functioning of
family businesses. The interaction and relationships among family members can significantly
impact the business environment. Understanding and managing family dynamics is crucial for
addressing challenges and capitalizing on the strengths that family involvement can bring.

• Communication:

Effective communication is fundamental in family businesses. Clear and open communication

helps prevent misunderstandings, resolves conflicts, and fosters a healthy working
environment. Family members need to communicate transparently about business goals,
expectations, and individual roles.

• Roles and Responsibilities:

Establishing clear roles and responsibilities for family members within the business is essential.
Clarity in expectations helps prevent ambiguity, reduces conflicts, and ensures that everyone
contributes to the business's success based on their strengths and skills.

• Succession Planning:

Family businesses often face the challenge of passing leadership from one generation to the
next. Succession planning involves not only selecting the right individuals for leadership roles
but also managing the emotional aspects of transition, ensuring a smooth handover of
responsibilities.

• Conflict Resolution:

Conflicts are natural in any organization, but in family businesses, they can be complicated by
personal relationships. Effective conflict resolution strategies are crucial to maintaining a
healthy work environment and preventing disputes from negatively impacting both the
business and family relationships.

• Professionalism vs. Family Bonds:

Balancing professionalism with family relationships is a delicate task. It's important to maintain
a level of professionalism in business dealings while also acknowledging and respecting the
familial bonds that exist among family members in the workplace.

• Decision-Making Processes:

Family dynamics influence decision-making processes within the business. Understanding how
decisions are made, whether collaboratively or through a designated leader, and ensuring that
the processes are transparent and inclusive are vital for effective governance.

• Adaptability and Innovation:

Family businesses that embrace innovation and adapt to changing market conditions are often
more successful. Encouraging a culture of continuous improvement and openness to new ideas
can be influenced by the family's attitude toward change and innovation.

• Cultural Values:

The cultural values of the family often shape the business's overall ethos. Whether these values
are rooted in tradition, ethics, or a particular vision, they contribute to the identity of the family
business and impact decision-making and behaviour.

• Fairness and Equality:

Treating family members fairly and equitably in terms of opportunities, compensation, and
recognition is crucial. Striking a balance between family ties and professional merit helps
maintain trust and harmony within the business.
 • External Professional Advice:

Seeking external professional advice, such as from consultants or advisory boards, can be
valuable for family businesses. Objective perspectives can provide insights and guidance on
navigating complex family dynamics and business challenges.
 Unit 2: Governance and Leadership in Family Business

Establishing effective systems for decision making communication and

conflict resolution:

Business board and Governance:

Ensure a diverse and skilled board with members possessing relevant expertise and experience.
There should be balance between family and independent members to avoid conflicts of
interest. Conduct regular assessments of board performance and individual directors. Establish
and adhere to governance principles for transparency, accountability, and ethical conduct.

Succession Planning:

It refers to process of Process of transferring leadership and Ownership. Begin succession

planning early to allow for a smooth transition. Identify and groom potential successors within
the family or organization. Consider external candidates if they bring the necessary skills and
experience. Business should Provide ongoing training and development opportunities for
potential successors. It should facilitate mentorship programs to transfer knowledge from
current leaders to successors.

Family Employment Policies:

Family business should establish clear policies for hiring family members, including
qualifications and entry-level positions. Clearly communicate performance expectations for
family members to maintain professionalism. Develop procedures for resolving conflicts that
may arise due to family employment. Roles, Responsibilities, and expectations from family
members should be clear and conveyed to them in advance.

Communication Protocol:

In a family business, establishing a clear and effective communication protocol is essential to

foster harmony, transparency, and the successful operation of the enterprise. First and foremost,
open and honest communication should be encouraged, emphasizing the importance of sharing
information, concerns, and objectives among family members involved in the business.
Regular family meetings can serve as a structured platform for discussing strategic decisions,
performance updates, and long-term goals
Conflict resolution mechanisms:

Conflict resolution mechanisms play a pivotal role in maintaining healthy relationships and
sustaining the long-term success of the enterprise. Firstly, establishing a formalized process for
addressing conflicts is crucial. This process should include clear steps for identifying,
discussing, and resolving disputes, ensuring that all involved parties have a voice in the
resolution. Mediation can be a valuable tool, either through an external mediator or a
designated family member who is impartial and skilled in conflict resolution.

Ethical Guideline:

Establishing ethical guidelines is necessary for effective decision-making in family businesses,

where interlinking personal and professional relationships can pose unique challenges. Firstly,
integrity should be at the core of every decision, emphasizing honesty, transparency, and fair
practices. The family business should uphold a commitment to ethical behaviour, complying
with legal standards and promoting a culture of trust. Objectivity is paramount, necessitating
those decisions be based on merit and business considerations rather than personal preferences.

Financial Transparency:

Clear and comprehensive financial reporting is essential, providing family members with a
detailed understanding of the business's financial health. This includes regular updates on
revenues, expenses, and overall financial performance. Establishing a transparent budgeting
process further enhances financial clarity, enabling family members to make informed
decisions about resource allocation and investment. In addition, family businesses should
delineate protocols for sharing financial information, ensuring that all stakeholders have access
to critical data. This transparency not only fosters trust but also enables collaborative decision-
making, as family members can collectively assess risks and opportunities based on a shared
understanding of the financial landscape.

Types of Family business Conflicts:

The conflicts of family business may be categorised into five broad

categories.

Conflict of Interest:

Conflict of interest results from people making decisions which are driven by self-interest.
These conflicts can arise between an owner/founder and the company's managers since
principals and agents have different interests. Majority and minority family shareholders may
also have conflicts of interests when they place different emphasis on growth and dividends.
Work Family Conflict:

When family members are involved in the family business they have overlapping roles in work
and in family life. These overlaps increase the risk of incongruent role expectations and
incongruent work-family conflicts. For example, A parent interact with a next generation
member not only as a parent but also as a boss and business partner, which can makes it
challenging to know how to treat one’s relative in any circumstance.

Relationship conflict:

A relationship conflict occurs when personal goodwill and incompatibilities cause negative
emotions like annoyance and frustration. Relationship conflict can take place between people
at many different levels, but it is more likely to appear among family members due to their
emotional bonds.

Task Conflict:

In general, Task conflicts arise from disagreements about the content and purpose of the tasks
being undertaken. For example, disagreements about a task (e.g. "that's not my job").

Process Conflict:

Process conflicts exist when there is disagreement over a method of completing a task. For
example, members might disagree whether a decision should be made by group consensus or
a single individual.

Conflict Resolution Strategy in Family Business:

An important goal of a family business is to learn how to manage conflicts so that good family
decisions emerge, individuals grow in healthy ways, and relationships flourish. There are some
ways to avoid or manage family business conflicts which are listed below:

Hire Wisely:

The best idea would be to avoid hiring someone from the family if they have little or no
knowledge about how your business operates. An organization should hire members who work
wisely. Relationships that are sensitive should be kept aside.
Development of Good Communication System:

Communication is the key to conflict resolution. Never shove conflicts under carpet. It is
imperative for the success of the organization to accept and handle them. Make sure the
organization has a proper communication system. In this regard, family meetings can be
beneficial.

Have Family Meetings:

Holding family meetings frequently is a good way to diagnose the conflict or to prevent
conflicts from escalating. Family meetings provide an opportunity for everyone to express their
opinions on company issues, share relevant information or updates; and plan for the future.

Create a Shared Vision:

It is important that the family understands what the business aims to achieve and how achieving
that goal will benefit each family member and the business enterprise. In addition, it's crucial
that all participants adhere to the same family values and that there's no misconduct that
undermines the business goals.

Structured Approach to Problem-solving:

Conflict is inevitable in any business. Many companies have adopted conflict resolution
processes that may include the formation of a grievance committee. Using a forum such as this
can facilitate a safe, organized method of resolving issues through dialogue.

Seek the Help of Mediators:

Sometimes a family conflict may not be resolved among members of family easily, so expert
mediators may be a better option to help resolve it through a formal mediation process. Expert
mediators may provide an objective view of the issue and lead the family members through
initial discussions until they reach an agreement.

Deciding Upon Probable Disputable Issues in Advance:

To avoid issues and disagreements, it is preferable to identify problems ahead of time and
devise solutions that will lead to the members adopting a unified course of action. Some of the
difficult concerns that family members should decide ahead of time include:

➢ What should be done if more than two family members wish to run the company?
➢ How should the business's heir be chosen?
 ➢ What if the younger generation refuses to participate in the family business?
➢ How should members' duties and responsibilities be distributed?

Leadership Development in Family business:

Succession Planning:

Develop a comprehensive succession plan that outlines the process of transferring leadership
roles from one generation to the next. Identify and groom potential successors early on,
providing them with the necessary skills, knowledge, and experience. Facilitate open
communication among family members about succession plans to minimize conflicts.

Professional Development:

Encourage family members to pursue formal education, training, and professional certifications
to enhance their leadership skills. Provide opportunities for leadership training and
development programs outside the family business context. Foster a culture of continuous
learning and improvement to adapt to changing business environments.

Clear Roles and Responsibilities:

Define clear roles and responsibilities for family members within the business to avoid
ambiguity and potential conflicts. Ensure that individuals are placed in positions that align with
their strengths, skills, and interests. Establish a governance structure that outlines decision-
making processes and mechanisms for conflict resolution.

Mentorship and Coaching:

Facilitate mentorship relationships between experienced family members and those who are
entering leadership roles. Seek external mentors or advisors who can provide objective
guidance and bring fresh perspectives to the business. Invest in executive coaching for family
members to develop specific leadership competencies.

Communication and Team Building:

Foster open and transparent communication within the family and the business. Promote
teamwork and collaboration to leverage the strengths of each family member. Conduct regular
family meetings to discuss both business and non-business matters to strengthen relationships.

Conflict Resolution:
Establish a formal process for addressing conflicts within the family and the business.
Encourage open dialogue and seek professional mediation or counseling when needed.
Develop a culture that values compromise and consensus-building.

External Perspective:

Bring in external advisors or consultants to offer objective insights and guidance. Participate
in industry associations and networks to stay informed about best practices and industry trends.

Financial Literacy:

Ensure that family members have a solid understanding of the financial aspects of the business.
Provide financial education and training to family members involved in leadership positions.

Values and Culture:

Define and communicate the family's values and the business's culture to guide decision-
making. Emphasize the importance of aligning personal values with the values of the business.

Continuity Planning:

Develop contingency plans to address unforeseen events or emergencies. Ensure that

leadership development plans consider long-term sustainability and business continuity.

Ethical Consideration and Social Responsibility in Family business:

Transparency and Fairness:

Family businesses should prioritize transparency in their operations, decision-making

processes, and financial dealings. Fair treatment of family and non-family employees is
essential to maintain trust and promote a positive work environment.

Succession Planning:

Ethical considerations play a crucial role in the succession planning process. Fair and
transparent procedures should be in place to determine the next leaders, based on merit and
qualifications rather than favouritisms.

Corporate Governance:

Establishing strong corporate governance structures is essential to ensure that the business is
managed ethically and responsibly. This includes the creation of independent boards, clear
roles and responsibilities, and mechanisms to address conflicts of interest.
Community Engagement:

Family businesses should actively engage with their local communities and contribute
positively to societal well-being. This could involve supporting local charities, participating in
community events, or implementing environmentally sustainable practices.

Environmental Responsibility:

Family businesses should consider the environmental impact of their operations. Implementing
eco-friendly practices and adopting sustainable business models can contribute to social
responsibility and long-term business sustainability.

Employee Well-being:

Prioritize the well-being of employees by providing fair wages, a safe working environment,
and opportunities for professional development. This includes both family and non-family
employees.

Ethical Decision-Making:

Encourage ethical decision-making at all levels of the business. This involves creating a culture
that values integrity, honesty, and ethical behavior, even when faced with difficult choices.

Philanthropy and Social Initiatives:

Family businesses can actively contribute to social responsibility by engaging in philanthropic

activities, supporting charitable organizations, and investing in initiatives that address social
issues.

Customer Relations:

Uphold ethical standards in customer relations by providing quality products or services, being
transparent in marketing and sales practices, and addressing customer concerns in a fair and
timely manner.

Adaptability and Innovation:

Family businesses should be adaptable to changing societal expectations and norms.

Embracing innovation and staying current with ethical and social trends can enhance the
business's reputation and relevance.
Balancing Business and Family Interest:

Establish clear boundaries:

Clearly defined roles and responsibilities for family members within the business help delineate
professional expectations, ensuring that decisions are made based on merit rather than solely
on familial ties. This clarity minimizes the potential for conflicts of interest and creates a
framework for fair and objective decision-making.

Separate Family and Business Time:

Set specific times for family activities and business-related discussions. Avoid discussing work
matters during family dinners or gatherings to maintain a healthy separation. Establishing
designated periods for business discussions and decisions helps maintain a professional focus
during work-related interactions, preventing personal matters from unduly influencing business
decisions. Similarly, allocating specific time for family activities and discussions unrelated to
the business fosters a nurturing family environment outside of professional obligations.

Communication is Key:

Foster open and honest communication within the family and the business. Regular family
meetings and business updates can help ensure everyone is on the same page and prevent
misunderstandings.

Professionalism in the Workplace:

Encourage professionalism in the workplace, treating family members like any other employee.
This helps maintain a productive work environment and minimizes favoritism.

Create a Succession Plan:

Develop a clear succession plan to avoid potential conflicts about leadership roles in the future.
Discuss and document how the transition will occur and what criteria will be considered.

Set Clear Expectations:

Establish clear expectations for performance and behavior within the business. This applies to
family members and non-family employees alike.

Promote a Healthy Work-Life Balance:

Encourage a healthy work-life balance for all family members involved in the business. This
includes setting reasonable working hours and ensuring that personal time is respected.

Regularly Review and Adjust:

Periodically review the balance between family and business interests. Adjust policies, roles,
or communication strategies as needed to accommodate changes in the family or business
dynamics.

Conflict Resolution Strategies:

Develop effective conflict resolution strategies. Conflicts are inevitable in any family business,
but having a structured approach to resolving them can prevent long-lasting damage.

Focus on Shared Goals:

Emphasize the common goals and values shared by the family and the business. This helps
align interests and create a sense of purpose that goes beyond individual roles.
 Unit 3: Strategic Plan for Family Business

Developing Strategic vision and Mission for Family Business:

• A strategic vision describes management’s aspiration for the future and defines the
company’s strategic course and long-term direction.

• “Where are we going?”

• In Family business, Vision statement establishes the family's desired philosophy for
the business and creating a sense of purpose and alignment among family members.

• For example,

“To improve the quality of life of the communities we serve globally, through long-term
stakeholder value creation based on Leadership with Trust."

Wording a vision statement – the Dos and Don’ts

Developing a Mission Statement:

• It describes its purpose and Present business.

• “Who we are, what we do, and why we are here ?”

Ideally, a company mission statement

1. Identifies the company’s products/services.

2. Buyers need and target market.

3. Gives the company its own identity.

"To operate always with a genuine commitment to environmental sustainability, social
responsibility, and business ethics, providing innovative and sustainable products and
services that improve the quality of life of consumers worldwide."

Conducting SWOC analysis:

• A technique that enables organisations or individual to move from everyday problems

and traditional strategies to a fresh prospective.

• SWOT analysis looks at your strengths and weaknesses, and the opportunities and
threats your business faces.

Strength:

• Characteristics of the business or individual that give it an advantage over others in

the industry.

• Positive tangible and intangible attributes, internal to an organization or individual.

• Beneficial aspects of the organization or the capabilities of an organization, process

capabilities, financial resources, products and services, customer goodwill and brand
loyalty.

• Examples - Abundant financial resources, Well-known brand name, Lower costs [raw
materials or processes], Superior management talent, Better marketing skills, Good
distribution skills, Committed employees.

Weakness:

• Characteristics that place the firm or individual at a disadvantage relative to others.

• Detract the organization from its ability to attain the core goal and influence its
growth.

• Weaknesses are the factors which do not meet the standards we feel they should meet.
However, weaknesses are controllable. They must be minimized and eliminated.

• Examples - Limited financial resources, Very narrow product line, Limited

distribution, Higher costs, Weak market image, Poor marketing skills, Limited
management skills, Under-trained employees.

Opportunities:
• Are external attractive factors that represent reasons your business is likely to prosper.

• Chances to make greater profits in the environment - External attractive factors that
represent the reason for an organization to exist & develop.

• It arise when an organization can take benefit of conditions in its environment to plan
and execute strategies that enable it to become more profitable.

• Organization should be careful and recognize the opportunities and grasp them
whenever they arise..

• Examples - Rapid market growth, Rival firms are complacent, Changing customer
needs/tastes, New uses for product discovered, Economic boom, Government
deregulation, Sales decline for a substitute product .

Threats:

• External elements in the environment that could cause trouble for the business -
External factors, beyond an organization’s control.

• Arise when conditions in external environment jeopardize the reliability and

profitability of the organization’s business.

• Examples - Entry of foreign competitors, Introduction of new substitute products,

Product life cycle in decline, Changing customer needs/tastes, Rival firms adopt new
strategies, Increased government regulation, Economic downturn.

Setting Strategic goals and objectives aligned with the family’s value and Long-term
vision:

Purpose of setting objective is to convert the vision and mission into specific performance
targets. Objectives are an organization’s performance targets – the specific results
management wants to achieve.

Types of Objective:

Financial objectives – Financial Performance targets management has established for the
organization to achieve.

Strategic Objective's – Target outcomes that indicate a company is strengthening its

market standing, competitive position, and future business prospects.
 • Define Family Values:

Identify and articulate the core values that are important to your family. These could include
principles such as integrity, unity, education, philanthropy, or innovation.

• Clarify Long-Term Vision:

Develop a clear and compelling vision of where the family sees itself in the long term. This
could involve defining financial success, family harmony, contributions to society, or other
specific aspirations.

• Involve Family Members:

Engage all family members in the process of setting goals. Ensure that everyone has an
opportunity to share their perspectives, aspirations, and concerns. This fosters a sense of
ownership and commitment.

• SWOT Analysis:

Conduct a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) for the family.
This helps in understanding internal and external factors that may influence goal-setting.

• SMART Goals:

Develop Specific, Measurable, Achievable, Relevant, and Time-bound (SMART) goals. This
ensures that goals are well-defined and practical. For example, if one of the family values is
education, a SMART goal might be to establish a family scholarship fund within the next five
years.

• Prioritize Goals:

Prioritize goals based on their significance and impact on the family's long-term vision. Not
all goals can be pursued simultaneously, so it's important to focus on the most critical ones
first.

• Integration of Values:

Ensure that the selected goals align with and reflect the family values. If a particular goal
contradicts a core value, reconsider its inclusion or modify it to align better.

• Regular Review and Adaptation:

Establish a process for regular review and adaptation of goals. The family's values and
circumstances may evolve over time, requiring adjustments to the strategic goals.

• Communication and Transparency:

Clearly communicate the strategic goals and objectives to all family members. Transparency
fosters understanding and support, aligning everyone toward a common purpose.

• Professional Guidance:

Consider seeking professional advice, such as from family business consultants or financial
planners, to ensure that the goals are realistic, sustainable, and aligned with best practices.

• Document the Plan:

Document the strategic goals and objectives in a comprehensive plan. This document can
serve as a reference point for the family, helping to track progress and make informed
decisions.

Exploring Diversification Strategies and Expansion into new Markets:

Note: Please refer Power point presentation slides for this topic
 Unit 4: Finance and Wealth Management

Understanding Financial Statements and Performance indicators:

FINANCIAL STATEMENT ANALYSIS

Financial Statement Analysis involves the examination of the relationship between financial
statement numbers and the trends in those numbers over a period of time. From an investor’s
point of view, predicting the future is what financial statement analysis is all about, while from
a management’s standpoint, financial statement analysis is useful in helping anticipate future
conditions and, more importantly, as a for starting point in planning actions that will improve
the firm’s future performance.

It is defined as the process of identifying the financial strengths and weaknesses of a firm by
adeptly establishing a relationship between the details of the Balance Sheet and the Profit &
Loss Account of the enterprises.

It is a study of the relationship among various financial factors active in a business, as disclosed
by a single set of statement. Moreover, a series of statements helps the analyses to study the
trend of these factors.

❖ OBJECTIVE OF FINANCIAL STATEMENTS

• Helps in preparing budgets.

• Helps in analysing past performances with respect to current earnings and financial
position.
• Helps in projections.
• Helps in inter- firm comparison.
• To provide financial information regarding economic resources and obligations of a
business enterprise.
• To study solvency and liquidity
• To provide information about available resources
• To show strengths and weaknesses of the organisation
• To provide better insights to stakeholders for evaluation of organisation’s
performance
TECHNIQUES USED FOR FINANCIAL STATEMENT ANALYSIS

COMPARATIVE STATEMENTS

A business concern does not exist in isolation. It co-exists with other competing concerns in
the same industry. It has to therefore constantly compare its performance with such competing
concerns to find out where it scores over its rivals and where it lags behind them. Such
comparison is called inter-firm comparison.

It also needs to compare its own past performance with its current performance to ascertain its
progress or decline over the years. This is known as inter-period comparison. Such statement
proves that “the accounts of one period are but an installment of the continuous history of a
going concern”.

COMMON SIZE STATEMENTS

In common size financial statements, all items on the statement are expressed as a percentage

of the base item. Common size statements are useful for seeing how significant the components
of the individual items of the statements are.

Generally the Financial Statements show odd amounts such as 67,689.92 and 57,324.96 and so
on. It is a difficult job to compare such odd amounts especially if the Financial Statements run
into many pages. Accountants have devised a short-cut known as Common Size Statements for
a quick comparison of the items in the Financial Statements shown in odd amounts.

The inability of financial analyst to understand and interpret the changes in the total assets,

liabilities or Proprietors Funds and their composition, financial statements are reduced to

percentage statements. This facilitates comparison of two or more business entities with a

common base.

In the case of balance sheet, total assets or liabilities or capital can be taken as the common
base and in the case of income statement, net sales can be taken as the base. These common
size statements are often called “common measurement” or “Component Percentage” or “100
percent” statements, since each statement is reduced to the total of 100 and each individual
component of the statement is represented as a percentage of the total of 100 which invariably
serves as the base.

Thus, the statement prepared to bring out the ratio of each asset or liability to the total of the
balance sheet and the ratio of each item of expense or revenue to net sales is known as the

common size statement.

TREND ANALYSIS

Trend Analysis treats year 1 as the base year and compares the figures of all the years (year 2,

year 3) with those of the base year to ascertain the trend in figures. Thus trend analysis of sales
will reveal whether as compared to the base year, i.e. Year I, the sales show a trend of increase
or decrease in subsequent years, i.e. Year 2, Year 2, Year 3 ….. And so on.

Trend Analysis is useful because:

(a) Trends show the direction (up or down) of the changes.

(b) Trends are easy to calculate and interpret.

(c) It is a quick method of analysis.

(d) It is more accurate because it is based on percentages and not absolute figures.

Trend ratios can be defined as index numbers of the movements of the various financial items
in the financial statements for a number of periods. It is a statistical device applied to the
analysis of financial statements to reveal the trend of the items with the passage of time. Trend
ratios show the nature and rate of movements in various financial factors. They provide a
horizontal analysis of comparative statements and reflect the behaviour of various items with
the passage of time.

RATIO ANALYSIS

A ratio shows the relationship between two numbers. Accounting ratio shows the relationship
between two accounting figures. Ratio analysis is the process of computing and presenting the
relationships between the items in the financial statement. It is an important tool of financial
analysis, because it helps to study the financial performance and position of a concern. Ratios
show strengths and weaknesses of the business.
OBJECTIVES OF RATIO ANALYSIS

Inter company comparison is a technique of comparing the information of other similar

concerns for Assessing company's own performance. Reasons for any difference in efficiency
can be ascertained with the help of such comparison. Ratio Analysis has been widely used as a
tool for analyzing the performance of the company over the years. Trend of the ratios indicates
whether the company is moving in the right direction or not. There are certain ratios for which
no standard is available to compare the performance with e.g. Gross Profit ratio, operating ratio
etc. These ratios can be studied & interpreted only when they compared with the last years'
ratios. Such comparison is known as inter-period comparison of the same company.

• To show the firm’s relative strengths and weaknesses.

• To help to analyze the past performance of the firm and to make future projections.
• To allow interested parties like shareholders, investors, creditors and the government
to analyze and make evaluation of certain aspects of firm’s performance.
• To concentrate on inter-relationship among the figures appearing in the financial
statements.
• To provide an easy way to compare present performance with the past.
• To depict the areas in which the business is competitively advantageous and
• disadvantageous.
• To determine the financial condition and performance of the firm.
• To help to make suitable corrective measures when the financial conditions and
financial performance are unfavourable to the firm.

ADVANTAGES OF RATIO ANALYSIS

• Simplifies Financial Statements

Ratio analysis simplifies the comprehension of financial statements. Ratios tell the whole story
of changes in the financial condition of a business.

• Analyse Past and Forecast Future

It helps to analyse and understand the financial health and trend of a business, indicating past

performance and making it possible to forecast the future trends.

• Decision-Making and Cost Control

It serves as a useful tool in management control process for decision-making and cost control

purpose.

• Summaries Accounting Figures

It makes the accounting figures easy to understand and highlight the inter-relationship between

various segments of the business.

• Overall Profitability

Different users of accounting information make use of specific ratios to meet or satisfy their

requirements. But the management is always interested in overall profitability and efficiency
of the business enterprise.

• Liquidity Position

The short-term creditors are more interested in the liquidity position of a firm in the sense that

their money would be repaid on due dates. The ability of the firm to pay short-term obligations

can be found by computing liquidity ratios.

• Long term Solvency

This is required by long-term creditors, security analyst and the present and potential

shareholders of the company. The help of capital structure ratios kept the above in assessing
the financial status of the organization.

LIMITATIONS OF RATIO ANALYSIS

The ratio analysis is not a full-proof method in financial statement analysis. It suffers from a

number of limitations. Some of the important one are:

• Ratios ignore qualitative factors

Ratios are obtained from the figures expressed in monetary terms. In this way, qualitative

factors, which may be important are ignored.

• Trends are not the actual ratios

The different ratios calculated from the financial statements of a business enterprise for one
single year are of limited value. It would be more useful to calculate the important figures in
the case of income, dividends, working capital, etc., for a number of years. Such trends are
more useful than absolute ratios.

• Defective accounting information

The ratios are calculated from accounted data in the financial statements. It means if the

information is defective then the calculation of ratios would be wrong. Thus, the deliberate

omissions would affect the ratios too.

• Change in accounting procedures

A comparison of result of two firms becomes difficult when we find that the firms are using

different procedures related to certain items, such as inventory valuation and treatment of

intangible assets.

• Variations in general operating conditions

While interpreting the results based on ratio analysis, all business enterprises have to work

within given general economic conditions, state of the industry in which the firms are operating

and the position of the individual companies within the industry. For example, if the firm is

forced by the government to sell their products at a fixed price, its comparison with other firms

would become impossible.

• Single ratio not sufficient

It is very necessary to take into account the combined effect of various ratios so that the results

are correctly interpreted regarding the financial condition and the profit-making performance
of the business. Each ratio plays a part in interpreting the financial statement.

• The use of standard ratio

The financial statements represent historical data and, therefore, the ratios based on them

would only disclose what happened in the past.

Financial Planning and Budgeting for Family business:

Financial planning and budgeting are critical components for the success and sustainability of
any family business. Effective financial planning ensures that the business can cover its
expenses, invest in growth opportunities, and withstand economic uncertainties.

Following points are important to keep in mind when any family business do financial planning
and budgeting:

• Establish Clear Financial Goals: Begin by defining the financial objectives of the family
business. These goals could include revenue targets, profit margins, expansion plans, debt
reduction, or wealth accumulation for future generations.
• Understand Cash Flow: Cash flow management is essential for family businesses,
especially during periods of growth or economic downturns. Understand the inflow and
outflow of cash to ensure that the business has enough liquidity to meet its obligations.
• Create a Budget: Develop a comprehensive budget that outlines expected revenues and
expenses for the upcoming period, typically on a monthly or annual basis. The budget
should be realistic and based on historical data, market trends, and future projections.
• Identify Key Expenses: Categorize expenses into fixed (e.g., rent, salaries) and variable
(e.g., raw materials, utilities) costs. This helps in identifying areas where costs can be
reduced or optimized to improve profitability.
• Allocate Resources Wisely: Prioritize spending based on the strategic goals of the business.
Allocate resources to areas that generate the highest return on investment and align with
the long-term vision of the family business.
• Monitor Performance: Regularly track financial performance against the budget and key
performance indicators (KPIs). This allows for timely adjustments and corrective actions
if the business is not meeting its targets.
• Risk Management: Identify potential risks that could impact the financial health of the
family business, such as market volatility, changes in regulations, or disruptions in supply
chains. Develop strategies to mitigate these risks and build resilience.
• Investment Strategy: Determine how profits will be reinvested back into the business for
growth opportunities or distributed among family members as dividends. Consider factors
such as tax implications, liquidity needs, and long-term sustainability.
• Financial Controls: Implement internal controls to safeguard assets, prevent fraud, and
ensure compliance with regulatory requirements. This includes segregation of duties,
regular audits, and financial reporting procedures.
• Seek Professional Advice: Consider consulting with financial advisors, accountants, or
business consultants who specialize in family businesses. Their expertise can provide
valuable insights and guidance in developing and executing a robust financial plan.
• Communication and Transparency: Foster open communication among family members
involved in the business regarding financial matters. Transparency builds trust and
alignment towards common goals, reducing conflicts and promoting collaboration.
• Adaptability: Be prepared to adjust the financial plan and budget in response to changes in
the business environment, market conditions, or internal dynamics within the family.
Flexibility is essential for navigating uncertainties and seizing new opportunities.

In summary, financial planning and budgeting are essential processes for managing the
finances of a family business effectively. By setting clear goals, monitoring performance,
managing risks, and seeking professional advice when needed, family businesses can ensure
long-term success and sustainability.

Evaluating Investment Opportunities and Managing Risk: