Asset-Based Lending

If your company is in need of financing but it has been a challenge obtaining it from a traditional lender such as a bank, you might consider alternative lending sources, such as asset-based lenders. ABLs will lend against collateral, as opposed to lending based on your creditworthiness, which is what tends to make it difficult for start-ups and those with recent losses and cash flow difficulties from obtaining a bank loan.

I came across an interesting article in the Journal last week which detailed the benefits of asset-based lending, especially if it is difficult for you to quality for a bank loan.

Here's a great article comparing traditional commercial bank financing to asset-based financing.

How to Control Annual Audit Fees

Annual audits of a company’s financial statements may be required by partnership, loan or other agreements. The cost of an annual audit can constitute a significant administrative expense, if not properly managed by the company’s financial staff. Although the independent accountant has the responsibility of establishing the scope of the audit required in order for him to issue an opinion on the financial statements, the company can limit the involvement of the independent accountant’s staff, in order to keep the audit fee at appropriate levels.

The following procedures should be adopted in order to minimize annual fees and to assure appropriate cooperation between the company’s financial staff and the independent accountant...

More at WikiCFO.com

Real Estate Outlook

The future of real estate over the next thirty-six to forty-eight months in the US will impact the financial markets, as well as the general economy. And, of course, the health of the markets and the economy will impact the real estate market during this time. The ULI and PriceWaterhouseCoopers put out an annual outlook for Real Estate entitled Emerging Trends in Real Estate®, which is available free on the ULI's website.

History of Income Tax Rates: Refresher

After the President's recent State of the Union speech it might be a good time to refresh our knowledge of income tax rates in history. Given the massive deficit that the government is creating it is inevitable that income tax rates will go up. But by how much? History should provide a clue as to how high they can go.

Question: How long ago was the marginal income tax rate double today's rate of 35%? Answer: 29 years ago or 1981!

Question: What is the highest marginal tax rate in history? Answer: 94% in 1945!

Question: What was the beginning marginal tax rate in what year? Answer: 7% in 1913 for incomes over $500k!

Income taxes have been in existence for almost 100 years in the United States. They are presently the lowest they have been during that time period. What are the chances of them staying this low in the future?

During this 100 year period the taxable income threshold has dropped after being adjusted for inflation. Furthermore, income taxes have increased or taxable income thresholds have dropped after every major war time period. In other words, the government has had to pay for WWI, WWII, Korean and Vietnam Wars with higher taxes. We now have two wars to pay for; Afghanistan & Iraq!

The question faces us in not whether income taxes will increase but how high will they go? It is entirely possible that the marginal tax rates could go back up to a 70% bracket in the next 5 years.

For the past 25 years we have tended to ignore the tax effect of Federal income taxes on our investments. Going forward taxes will have a bigger impact on the economics of our deals. In the future business is going to be buffeted by strong headwinds: higher taxes and higher interest rates!

Implementing Activity Based Costing

All of us have used cost allocation, the process of assigning common costs to ending inventory and cost of goods sold (COGS), as part of our Financial Services offerings since it is required by GAAP. Our goal has been to either reduce taxes or increase reported earnings, depending on our client's needs and circumstances.

But what about cost allocation's other uses? Are we shortchanging our clients by not offering services in this area (usually referred to as cost or management accounting services)?

Managers’ use cost allocation for a number of reasons. First and foremost, cost allocation provides a methodology for assigning overhead costs of various activities, usually support departments, to products or services being produced and/or sold allowing upper management to assess and analyze their profitability. By knowing what the true "cause-and-effect" relationship is, managers are able to more accurately assess the true cost of a product or service and determine if carrying certain products and/or services contributes to overall profitability given the demand for and price these products/services sell for. This is especially important as it pertains to both operational decisions (such as calculating the maximum price a firm can charge, especially for a "commodity" product, determining the maximum cost a firm is willing to pay to provide this product or service, and in making special order and transfer pricing decisions) and capital/long-term decisions (such as make-or-buy component decisions, continue or discontinue a product line decisions, process further decisions, etc,).

Cost allocation can also be used to reduce wasteful spending and/or promote more efficient use of resources (especially PP&E) by evaluating needs and uses for the year to come as part of the planning/budgeting process. Managers can then be evaluated on their planning effectiveness, leading to better communication, sharing of resources, and cost efficiency. It can also used to manage product and process design. As allocations are broken down/determined, the use of resources becomes transparent from a process standpoint, allowing managers to improve operations as needed....

More at WikiCFO.com

The Future of the Accounting Workforce

"Firms who are hiring new accountants or accounting majors have to understand where the newer generations are "coming from," as a Boomer (born 1946-1964) might say, to target a style that will bring out the next generation’s (the Millennial Generation’s) strengths and maximize their effectiveness. This involves discarding biases and pre-conceived notions, and enjoying our generational differences—and similarities!

Millennial workers grew up in a technology-driven world where the way we do business has changed dramatically over the last 2-3 decades. As a result, they often operate under different perspectives than older workers do. Companies across North America that recognize that the differentiator is their people will emerge as winners in the battle for talent. They’ll design specific techniques for recruiting, managing, motivating, and retaining them.

A notable demographic shift will begin to occur in 2011 when the oldest Baby Boomers (b. 1946) hit the United States' legal retirement age of 65. As Boomers begin retiring members of Generation X will take roles in middle and upper management, and, Millennials will take positions in the workforce, a process has already begun since some members of Millennials in their late 20s.

Other scenarios that will become commonplace will include experienced Boomers reporting to Millennials, members of all three generations working side-by-side on teams, and, Millennials calling on Gen X clients. And, all this is going to happen while three generations, the Boomers, Gen Xers and Millennials continue the process of finding a way to get along in an uncertain workplace.

This is made all the more interesting given the gap between these two generations: Gen Xers complain that the Millennials are indulged, self-absorbed and overly optimistic, while Millennials charge that Gen Xers are cynical, aloof and don’t appreciate fresh ideas and idealism...."

More at WikiCFO.com

Working Capital from Real Estate

"Many companies own the land and buildings necessary to conduct the day-to-day operations of their business. Oftentimes this valuable asset is included in traditional bank financing packages as the cornerstone of the credit facility. As long as the business progresses as the bank deems appropriate, and all loan and debt service coverage covenants remain in compliance, the real estate loan will serve to anchor the lending relationship.

Companies and/or individuals may also own commercial real estate which may provide an income stream or conversely, suffer from under-utilization and needed development. These transactions are typically financed by the banking community as a “onetime” advance which is conditioned for certain renewal requirements, and/or additional funding is triggered by developmental thresholds that have to be met. Additionally, the investment opportunity associated with these properties may require balance sheet leverage beyond what the bank is willing to tolerate..."

More at WikiCFO.com

Common Problems in Charts of Account

Accountants are often great at, well, accounting, but tend to get lost in the detail, preferring to count expenses down to the paper clip level instead of focusing on what truly matters for a company's profitability. Nowhere is that more evident than in the chart of accounts they create.

Here's a look at the common problems in charts of account and some recommendations for improvement:

"Problems in Chart of Accounts Design

Too many general ledger accounts
Often when using QuickBooks or Peachtree accounting software the number of general ledger accounts grow over time. Usually the person entering the data is not a trained accountant. When faced with an accounting entry that is not specifically described by an existing general ledger account they will often set up a new account. It is especially easy to do in QuickBooks.

Too much detail in Selling General and Administrative Expenses
Similar to the problem mentioned above, often the person maintaining the general ledger is a detail oriented employee. This trait is both a blessing and a curse. The theory goes as follows: If a little detail is good then a lot is better! In order to get more and more detail on the general ledger they set up new general ledger accounts. In the end they are counting paperclips with numerous accounts with less than a thousand dollars charged to them...."

More at WikiCFO.com

How to Develop a Daily Cash Report

The Daily Cash Report is used to report on the daily cash balance and to help manage cash on a weekly basis. This tool is especially useful when entering a situation where active cash management is required for your daily cash flow. The daily cash report template is used best as a tactical, active cash management tool. Knowing your daily cash position as well as your weekly cash commitments will give you added impetus to collect money and/or to generate revenues.

Why use a daily cash report? Often CFO/Controllers when facing a cash crunch manage cash by reviewing the online bank balance. Though easy to do this number is not accurate. It does not take into consideration outstanding checks. Another symptom of a cash crunch is that accounting falls behind in processing information. By preparing this daily cash flow forecast or projection you force the accounting department to stay current with posting transactions.

This tool is also helpful when used in conjunction with the Thirteen Week Cash Flow Projection. It is helpful to think of the 13-Week Cash Flow Report as giving you the strategic big picture needs, while the Daily Cash Flow Report provides a more tactical level measure of your firm's cash position. You can tie a week's worth of cash receipts and cash disbursements as reported in the Daily Cash Report to the 13- Week Cash Flow Report....

More at WikiCFO.com

Recapitalizing Your Company Using Mezzanine Financing

"There comes a time in every company’s life cycle when the company and/or the entrepreneur need some more cash. Perhaps the company needs more working capital or some additional money to help fund an expansion. Or, maybe the entrepreneur feels that it’s time to reap the benefit of all those years of hard work. Whichever the case may be, the entrepreneur will be faced with many different financing options. An interesting and often over-looked option is that of bringing in a private equity partner in the form of mezzanine funding.

Why can’t I just go to a bank?

Let us consider a common business dilemma: 1) lack of working capital or 2) lack of funds for capital expansion. Entrepreneurs by nature are optimists and passionate people, especially when it comes to their companies. They want and need a financial partner that can grow with them. Typically, your first option of choice is your friendly, neighborhood commercial bank. There are several issues that one often encounters here..."

More at WikiCFO.com

Warning Signs of a Company in Trouble

When considering an acquisition of, investment in, or employment with a company it is best for your peace of mind, as well as, financially to be aware of indications that the company’s true picture may not be what management would lead you to believe.

The surest sign that something is amiss is a frustrated stakeholder – be it the owner, investors, or lenders. What are their concerns? Have there been repetitive problems with the company? Does management not seem to have the right skill set to handle the most pressing issues? Does management spend too much time assessing blame and not a lot of time accurately identifying the company’s problems and devising solutions?

Where to Start

It is best to first take a look at the company’s financials. Start with the balance sheet. Are they building inventory and not able to sell it? Do they have a negative cash position? Have they maxed out their borrowing base? Also be sure that the balance sheet reflects the true state of affairs. For example, has the company written a check which it has yet to mail despite debiting its accounts payable account?

Take a look at the income statement, preferably one with monthly performance over the last 12 months. Group the items into three categories: sales, variable costs including direct sales costs, and fixed costs. What trends do you see in those categories? Perform a breakeven analysis. What is their contribution margin? Is it declining? What about EBIT? Is the company able to service its debt?

It can be helpful to simplify a company’s financial statements, combining similar items in order to move out of the detail and focus on the company’s overall performance and financial position.

The greatest mistake is not necessarily investing in a troubled company, but rather misdiagnosing the company’s problem(s).

Checklist

Here are some items to consider when performing diligence on a company:

Cash shortfall – does the company seem to be constantly in a cash crunch?

Physical deterioration of facilities – signs of inability to maintain facilities due to lack of proper planning and ability to re-invest.

Poor Accounting Systems - accounting records and reporting are delinquent. Often the company does not know if they are making money or losing money.

High concentration of leased assets – inability to secure traditional financing...

More at WikiCFO.com

Breaking Debt Covenants Written Guide & Video

A few days ago we posted our video on how you should deal with debt covenants, if you are currently or are at risk of breaking them. In addition to the video, we have produced a written instruction guide which covers what is discussed in the video in greater detail.

If your debt covenants are a major concern right now, you need to know what your options are and how you can proactively deal with the situation. This program will help you do just that. Now is the time to take action and get control instead of letting that flow to someone else who will not have your best interest at heart.

The written guide is available here.

Should You Pay Attention to Economic Indicators?

An article published recently in the Journal makes the case that smaller companies should pay attention to certain economic indicators, such as the Producer Price Index (PPI), unemployment rates, and consumer confidence. Yet most smaller companies take what the market will bear, and sell and buy in markets which are impacted by much more narrow factors than the general economic environment. Not to mention that many of these indicators are lagging indicators rather than leading.

Not that looking for signs of what's to come is necessarily without value for your business. What I took from the article is that it is important to know what drives your business. Also, it is important to review the pricing of your products and/or services, as well as that of your vendors.

Still, it is worth your while to know how your company makes money. Which factors drive your earnings? How does operational performance connect with your profitability? Knowing the economics of your business is important in improving your profits and cash flow. What is your gross profit margin percentage? How much can you increase profits through a price increase versus through an improvement in productivity? Perhaps once you know your P&L statement inside and out and maximize the factors that impact that the most will it be worthwhile to consider the indicators that the popular business press bombard us with abandon.

Breaking Debt Covenants

What should you do if you are currently violating or are at risk of violating your debt covenants? The following video addresses this issue. The key is to be proactive and not wait for it to fix itself.

Regulators Require Small Banks to Increase Capital...

...while at the same time increasing new loans. A new article from the Journal details an interesting story about smaller banks which invested in mortgage backed securities as hedge funds were dumping them in 2007 and 2008.

"They want to force you to take your medicine all at once, and, at the same time, they want you to go out and make a bunch of new loans," says Thomas Page, president of Emprise Bank in Wichita, with $1.3 billion in assets. "You can't have it both ways."

Meanwhile, FASB has argued that regulators should allow banks some flexibility in reporting their assets using mark-to-market accounting rules.

It will be interesting to see how this unfolds.

Fed Open to Raising Rates....

Fed Chief Ben Bernanke recently stated that the Fed might raise rates to cut off future financial asset bubbles, but mounted a defense against critics who claim that the Fed's failure to do so led to the most recent financial asset bubble.

I think this belies the dichotomy present in the mandate put to the Fed by Congress. Per the Humphrey-Hawkins Full Employment Act, the Fed is to pursue actions which promote....full employment, with low inflation and economic growth.

That seems like a recipe for financial asset bubbles.

While the Congress debates auditing the Federal Reserve, perhaps it should reconsider the mandate it has placed on the Fed.

FTC Examines Cloud Computing

While the potential value of using cloud computing in your organization should be considered, it is also important to consider the potential risks, legal and regulatory, you may face if your organization offers cloud computing services.

The FTC is currently examining the matter, per a request from the FCC.

Cloud Computing: Advantages and Disadvantages

We currently run on a Windows NT server using Remote Terminal Services. It has worked like a charm and is instrumental in our daily operations. Unfortunately, it is coming to the end of it's useful life. Our outsourced IT department has informed us that we should replace the system during the year. They are recommending that we go to their cloud computing system. We're not sure.

Cloud computing seems all the rage right now. We have had our own local cloud computing system for the past six years. Now they are asking us to consider going to a "regional" cloud system. Google would like us to consider their "national" cloud system. I'm not sure I want our financial information floating around. Furthermore, what do we do if they go out of business or mess up our information. (Think ATT sidekick!).

The cloud computing advantages as I see them are: access from anywhere, secure backup, redundant systems in the event of national disasters, and limited upfront investment. The disadvantages of cloud computer are: control, security, and control. (Did I mention control?)

We have a client that is using a national cloud computing accounting system. The annual fee came up for renewal and the company demanded immediate payment. They would not finance the system like they had in the past. Our client was stuck. Also, the bill came due December 15. Not a good cutoff date.

As information has become more valuable and instrumental in our ability to service our clients I am not comfortable in outsourcing our servers. What are your thoughts? I would like to hear from anyone who has had any experience with cloud computing.

Fed Leaves Rates Unchanged

Per FT the FOMC has left the discount rate and fed funds target rate unchanged.

FOMC press release available here.

Employment in Services to Dominate US Job Growth

The US Department of Labor issued a report yesterday detailing expected changes in US employment over the next decade.

Service related jobs are expected to constitute virtually all (96%) jobs created through 2018, with health care industry employment constituting a significant portion.

Manufacturing employment is expected to continue its long decline, which was accelerated by the recent recession to the tune of two million manufacturing jobs.

In addition, a third of new job openings are expected to require educational attainments past the high school level.

All in all, this report seems to confirm that the basic trends in the US economy over the last four decades, as the country has moved from an exporting creditor nation with a large manufacturing base to an importing debtor nation heavily dependent on the technical and financial service industries for economic growth, continue.

Click here for the actual report.

Guest Blog: Why Dubai Matters

Sandy Leeds, CFA, Senior Lecturer in Finance at the McCombs School of Business of The University of Texas at Austin holds forth on a blog, named appropriately enough, Leeds On Finance.

He recently posted an entry which I believe our BlogCFO faithful would find interesting, regarding the impact of Dubai World's inability to service its debt:

"Why Dubai Matters

In the past week, we have seen world markets decline and this drop has been attributed to Dubai and their desire to delay their debt payments. Yet, if you look at the amount of debt involved (probably close to $80 billion) and the fact that this will not be a total loss (the collateral is worth something), it seems strange that world markets could drop so much. As a result, it’s interesting to think about what is really going on.


This paper is divided into four sections:

1. Background on Dubai and Dubai World

2. What Happened This Past Week

3. The Market’s Reaction to The Events

4. Lessons Learned...."

Continue at Leeds on Finance.

Corporate America

A thought occurred to me while digesting the news that the current presidential administration, upon discovering that most new jobs are created by small businesses, has seen fit to offer "help" to them in order to save the Republic.

What a fine land this is to live in for a large business! Governments at all levels will bow before you and grant every wish you have in exchange for locating your operations in their taxing jurisdiction, so long as you bring "jobs" and their families along. Health care "reform" means politicians catering to your every concern and ensuring that someone else pays for it, most likely the small businessman whom those politicians claim to defend from "big government."

This is no longer a land for the risk taker, the entrepreneur, the individual who dares to live their life differently, and not just wear a certain brand of clothes or drive a certain car to prove their individuality.

The federal government doesn't care about you when it needs taxes to pay for all of its excessive borrowing, a part of which went to subsidize the foolishness of large Wall Street firms. Not to mention that it had been subsidizing those firms with easy credit and low rates for a long time before.

Yet now, Uncle Sam needs you lest the proletariat wake from its slumber due to double digit employment. And so, once more, the managed economy is proven a failure, yet we cling to it, as children settled into our beds for a long winter's nap, waiting for Santa to bring gifts for us to open in the morning.

Bernanke sees low rates, sluggish growth ahead

Federal Reserve Chairman Ben Bernanke stated today that he expects interest rates to remain low for an "extended period" while the economy struggles out of the recession, given high unemployment and tight credit. He expects rates to remain low as, according to him, inflation is under control. Is your company prepared to face an extended, slow recovery? Have you factored this into your projections? Do you maintain monthly financial projections, complete with a cash flow forecast, and update those with actuals? If not, you should consider The Strategic CFO's Dynamic Cash Flow Projection training program.

FASB Chief to Propose Accounting Rule Change

The Chairman of FASB is set to propose that bank regulators be allowed to make adjustments to the financial statements of banks in order to determine whether those banks have met capital requirements, while requiring that those banks report to the investing public according to GAAP.

Naturally, the banks are in favor of this, yet investors should pay attention to the financial statements and not the pronouncement of regulators that a given bank has met its capital requirements through some "adjustments" to its loan portfolio.

Death By Networking

With so many people looking for work or trying to generate sales, networking has taken on a frenzy that I haven't seen in over ten years! Everyone is trying to reconnect or meet new people. I try to meet with as many people as possible but I am caught in a predicament.

I am torn between leaving no stone unturned and possibly missing a good opportunity versus going broke by not generating sales. If I were to meet with everyone that requested a meeting when they wanted to meet, I would not generate any revenue. I would be spending all of my time on future relationships and not nurturing existing ones that will pay off today.

On the other hand there are some very talented people out there forging new relationships. So of these contacts will lead to future sales or opportunities.

In an attempt to balance future opportunities with current sales needs I have adopted the following strategies:

First, I limit my new introductions to no more than three per week on average.

Second, I first visit on the phone to decide how I might best help that individual. Sometimes all it takes to make a difference is to point someone to the right people.

Finally, for those individuals that I want to meet with I either bundle my meetings into one day or schedule the meetings on non-prime time hours. (either breakfast or after work)

Regardless of the burden it is important for all of us to help each other. I believe the axiom that if you help others get what they want (or need) they will help you in return!