Create Jobs By Reducing Risk

There has been a lot of press lately regarding all of the cash that companies are sitting on. In addition, the government is talking about making it easier for companies to borrow money. Between the cash on hand and the loans they obtain companies will then be able to hire employees. It just doesn't work that way!

The worst part of being a manager or business owner is letting people go. Consequently, employers are not going to hire new employees until they are confident that they have enough sales demand to prevent them from having to let them go in six months.

People are sitting on cash because they have no confidence. In order to increase confidence you must reduce risk.

Whether you are a consumer or business any time you chose to spend money you are taking on risk. Rishk that you will have a job or a sale in the future. That is economic risk. You also take a risk that you will perform. That is execution risk. Finally, you take the risk that the rules and laws will be consistent. That is legislative risk.

We have had a period where the economic risk is higher than normal. Coupled on top of that is the legislative risk. How much tax am I going to pay? What new regulations are going to be imposed? What are my health care costs in the future?

Any time you have such high risk in the business environment people are going to "sit on their hands" until things stabilize. We need to slow down the pace of change in order for consumers and the business community to feel confident enough to spend money that demands jobs!

CFO News Week Ending August 27, 2010

Each week The Strategic CFO scours the Web for the most important and interesting news to CFO's. Here is what we found this week:

Pricing and Profitability Management: A Practical Guide for Business Leaders from Wiley: All New Business & Economics Titles:

A comprehensive reference for any professional to understand the capabilities and competencies required for effective Pricing and Profitability Management. It describes each of the six competencies (Pricing Strategy, Price Execution, Advanced Analytics and Optimization, Organizational Alignment and Governance, Pricing Technology and Data Management, and Tax and Regulatory Effectiveness) in detail, and addresses how an integrated approach to Pricing Read More...

Bank-capital rules: Super model from The Economist: Banking:The Basel club publishes new analysis on the impact of higher capital

WHEN asked, before the crisis, about the right level of capital they should have, the bankers answer was simple: As little as possible. Now that the world has changed, their response has morphed to less than what the regulators want. Lenders, they say, will have to hammer borrowers to recoup the costs of carrying bigger capital and liquidity buffers. The Institute of International Finance, a lobbying group, reckons the proposed Basel 3 rules might knock 3% off the absolute level of rich-world GDP by 2015, a scary result. A study by the French Banking Federation concluded that the long-term level of GDP would be 6% lower in the euro area.

In fact, the bankers, like everyone else, have not had much clue what effect tighter rules would have. Calculating their impact is tricky. Not only is there much argument about the impact of credit on the economy, there is also no reliable theory governing banks balance-sheets. They are just too surreal. When banks fail, they devastate the economy. And unlike normal firms, the relationship between banks leverage and their cost of borrowing is distorted by their ability to rely on central banks, attract savings from naive depositors and benefit from implicit state backing. ...

Gross: U.S. Role in Housing Finance a 'Necessity' from WSJ.com: Markets:

Government involvement in U.S. home-mortgage financing is a "necessity," said Pimco bond-fund manager Bill Gross, noting the current state of the private market.

Blue-Ribbon Panel Narrows Field for Private Company Financial Reporting from Journal of Accountancy:

A blue-ribbon panel tasked with providing recommendations on the future of U.S. accounting standards for private companies by the end of this year is focusing on models that are based on current U.S. GAAP but that would result in different standards for private companies, where warranted..

Managing Older Managers: A Guide for Younger Bosses from HBR.org:

You already know that winning depends in no small part on hiring people better than yourself. If you are a youngish entrepreneur or boss, that will entail hiring older and more experienced people, especially in top roles for your organization. Managing a colleague with ten or fifteen more years of experience than you can present unusual challenges of motivation, boundary-setting, and leadership. Here are some ways to get the most out of your hires and your collaboration with them.

CFO News Week Ending August 20th, 2010

This week's top news articles affecting CFOs:

The If-You-Do-Nothing-Else Guide To Managing Growth from Forbes.com: Entrepreneurs and Small Business News and Information:

"From financing and technology to marketing and management, our experts weigh in."

Proposal Would Require Most Leases to Appear on the Balance Sheet from Journal of Accountancy:

"FASB and the International Accounting Standards Board (IASB) today unveiled a joint proposal to revamp lease accounting. The proposal would result in a single right-of-use approach."

How Cloud Computing Impacts the Cash Needs of Startups from GigaOM:

"Cloud computing has been a key enabling factor in the latest generation of web startups, letting them start with small amounts of capital and scale quickly in response to demand. Startups don't care about a lot of the factors that slow adoption of cloud computing. New startups don't own anything yet, so they don't have a legacy investment in physical infrastructure. They also don't have IT departments, who often have a stake in the old way of doing things. So, if you want to see what the future of IT infrastructure looks like, look at what startups are doing today."

Bank-capital rules: Super model from The Economist: Banking:

"The Basel club publishes new analysis on the impact of higher capital.

WHEN asked, before the crisis, about the right level of capital they should have, the bankers' answer was simple: As little as possible. Now that the world has changed, their response has morphed to less than what the regulators want. Lenders, they say, will have to hammer borrowers to recoup the costs of carrying bigger capital and liquidity buffers. The Institute of International Finance, a lobbying group, reckons the proposed Basel 3 rules might knock 3% off the absolute level of rich-world GDP by 2015, a scary result. A study by the French Banking Federation concluded that the long-term level of GDP would be 6% lower in the euro area."

Video: Josh Felser on Angels vs. VCs, Me-Toos & What Startups Need to Know from GigaOM:

"About a year ago, Josh Felser, co-founder of the Web 1.0 era music service Spinner.com and more recently, online video service, Grouper, decided to forego being an entrepreneur and instead become an angel investor. He and David Samuel started San Francisco, Calif.-based firm, Freestyle Capital, which is well known for some high-profile investments such as Formspring and SimpleGeo.

Felser stopped by our office for a conversation about recent investing trends and the growing tension between angel investors and venture capitalists. In a freewheeling chat, he talked about the shortcomings of scattershot investing, startups pointlessly abusing the phrase “game mechanics” in their pitch decks and, most importantly, revealed a few things he believes start-ups should know."

CFO News Week Ending August 13th, 2010

This week's top news articles affecting CFOs:

Businesses Go Bank Shopping from Inc.com:

Lending to small businesses may be a rather unsavory prospect to many banks, but that doesn't mean they don't want your business. On the contrary, your deposits help strengthen their balance sheets and your day-to-day operations have a great big fee sign hanging over them.

When You're Most Vulnerable to Fraud from WSJ.com: Small Business:

By Rob Johnson Five years ago, Ed Couvrette was on top of the world.The manufacturing company he founded, E.F. Couvrette Co., was ringing up sales of $10 million a year and was negotiating contracts for triple that amount. On employees' birthdays, he routinely gave out bonus checks, a week's pay for every year they'd been at the company."Now I can hardly afford birthday cards," he laments.

Six Costly Cloud Mistakes

Six Costly Cloud Mistakes from CFO.com: Today in Finance:

The savings from cloud computing may be considerably less than expected if you don't avoid these missteps.

Check Out These 10 Super-Successful CEOs' First Jobs

Check Out These 10 Super-Successful CEOs' First Jobs from Silicon Alley Insider:

At some point in their lives, every young adult realizes that they no longer want to ask for Mom and Dad's permission to purchase their latest "need," like that new outfit, or the latest awesome video game. Or just lunch.

So they go out and get a job of their very own. One day, those same young adults will look back and consider that first job more than just an insignificant side step taken to collect a few extra dollars -- it could have been the beginning of a gradual ascent toward the C-Suite.

From flipping burgers, to teaching in public schools, to working in the rice fields of China, some of the world's most powerful CEOs started out their careers in humble places....Click here to see how these 10 CEOs earned their first dollar

Might Take 'Hail Mary' to Recharge Economy

Might Take 'Hail Mary' to Recharge Economy from WSJ.com: What's News US:

With conventional tools off the table, it might take an untested gamble from policy makers to recharge the economy if an anemic recovery slows even further.

Freddie Mac Seeks More Aid

Freddie Mac Seeks More Aid from WSJ.com: What's News US:

Freddie Mac posted a second-quarter loss, and the mortgage financier said it would request another $1.8 billion in government aid.

Stocks Firm; Focus on Fed

Stocks Firm; Focus on Fed from WSJ.com: What's News US:

U.S. stocks opened higher as investors grew hopeful that recent signs of economic weakness could prompt more stimulus measures from the Federal Reserve.

Some Companies Struggle to Fill Jobs

Some Companies Struggle to Fill Jobs from WSJ.com: What's News US:

A 9.5% jobless rate has left many employers inundated with applicants, but some say they're having trouble filling positions.

Stocks Post Modest Losses

Stocks Post Modest Losses from WSJ.com: What's News US:

U.S. stocks fell only modestly on fresh signs of weakness in the labor market as investors said expecations had been low anyway. Some think it could spur the Fed to act next week.

Housing Inventory Grows

Housing Inventory Grows from WSJ.com: What's News US:

Is this what the beginning of a double-dip feels like? The number of homes listed for sale grew in many U.S. cities in July, a month when inventory typically declines.

Wheat Goes Up, Prices to Follow

Wheat Goes Up, Prices to Follow from WSJ.com: Economy:

Wheat futures surged 6.7% to above $7.25 a bushel, their highest since September 2008, prompting a range of companies to at least consider passing the cost on to consumers.

Senate Rejects Fed Nominee Diamond

Senate Rejects Fed Nominee Diamond from WSJ.com: Economy:

The Senate rebuffed the Obama administration on its nomination of Peter Diamond to join the Federal Reserve, putting in flux the effort to fill the central bank's board of governors.

A Third Depression?

Nobel Prize-winning economist Paul Krugman's recent column in The New York Times anticipating an extended economic downturn on par with the "Long Depression" of the 1870s and the "Great Depression" of the 1930s has stimulated a significant amount of discussion online.

Among those weighing in is Professor Michael Brandl of the McCombs School of Business at The University of Texas at Austin. Professor Brandl is an economist whose work have been cited in numerous media outlets including The Associated Press, Boston Globe, CBS Evening News, CBS Early Show, CNBC, Fox News, Forbes, National Public Radio, Dallas Morning News, Fort Worth Star-Telegram, Houston Chronicle, USA Today, and The Wall Street Journal, The Washington Post. He is also a very popular lecturer at the McCombs School of Business.

So what does Professor Brandl think of Krugman's analysis?

"Krugman has a point in that we should not think that every thing is peachy simply because the stock market has rebounded, corporate profits are up and our banks are profitable.

Similarly, the critics have a point in that we must build our macroeconomic models from sound microeconomic foundations. We simply can not go back to “story telling” or have models based on ad-hoc assumptions.

But, both arguments are fatally flawed. Krugman’s Keynesian prescription of more spending ignores the reality that not all spending is the same. Keynes and even FDR, did not see spending for the sake of spending as the key to pushing the economy out of a depression..."

Read more at Professor Brandl's blog Macroeconomic Updates.

The 13 Week Cash Flow Report

13 Week Cash Flow Report: Definition

The 13-Week Cash Flow Report, defined as a method to forecast the cash flow needs of a company, is commonly used in businesses with complicated cash cycles. This tool is especially useful in a situation where active cash management is required. The 13 Week Cash Flow Model is used best as a "big picture" tool to see how much cash is required on a forward rolling basis. Having a clear sense of your working capital needs and when you need it gives added impetus to collect cash and/or to generate revenue.

This tool is also helpful when used in conjunction with the daily cash report. 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 the firm's cash position.


13 Week Cash Flow Report: Meaning

For a 13 week cash flow report, meaning the report used to project cash flow expectations into the coming weeks, a strong understanding creates the foundation to make valuable models. There are several key areas of information that you will need to obtain: beginning cash balances, estimated cash receipts, estimated payroll and taxes, estimated operating expenses, note/lease payments, payments on LOC-ML and payments on old A/P.

The 13-Week Cash Flow Report should be used in the active cash management of the company. The tool should be updated and reviewed on a weekly basis by the CFO/Controller.

The thirteen week cash flow model should be prepared and updated by the CFO/controller. The CFO/controller should be the one to setup and prepare the template. Information to populate the template will most likely reside with the persons in Accounting and HR.

Maintenance and updating should be done on a weekly basis.

More at WikiCFO.com

Supplier Power

"In Porter's five forces, supplier power refers to the pressure suppliers can exert on businesses by raising prices, lowering quality, or reducing availability of their products. When analyzing supplier power, the industry analysis is being conducted from the perspective of the industry firms, in this case referred to as the buyers. According to Porter’s 5 forces industry analysis framework, supplier power, or the bargaining power of suppliers, is one of the forces that shape the competitive structure of an industry.

The idea is that the bargaining power of the supplier in an industry affects the competitive environment for the buyer and influences the buyer’s ability to achieve profitability. Strong suppliers can pressure buyers by raising prices, lowering product quality, and reducing product availability. All of these things represent costs to the buyer. A strong supplier can make an industry more competitive and decrease profit potential for the buyer. On the other hand, a weak supplier, one who is at the mercy of the buyer in terms of quality and price, makes an industry less competitive and increases profit potential for the buyer...."

More at WikiCFO.com

Liquidity Hits Main Street

For the past year we have been hearing in the news regarding all of the cash that the Fed has pumped into the economy. The stock market has rallied and the banks have been making record profits. Until now we have not seen much direct results affecting our clients and the local economy. Over the past few weeks however we have started to see the cash showing up in our local economy.

I was having lunch with a friend whose company owns and manages over 10 million sq ft of industrial and office real estate. He was remarking about how he had no delinquent tenants on his rent roll.

Later in the week I spoke with two different bankers. They both remarked that utilization of their clients line of credit had dropped over the past 6 months. It appears that their customers were paying down debt. This phenomena raised an interesting problem. The banks were having difficulty finding new loans. It seemed that there was little new loan demand.

Finally, all of our clients' DSO is 45 days or less. In addition, some clients were asking for and getting deposits on new orders.

So what does this mean? It means that the Fed's actions over the past 12 - 18 months has worked! The question now is what does the business environment look like when they start sucking all of this liquidity out of the economy?

Whole New Meaning For "Tax Return"

I was helping my daughter prepare her tax return last night. She graduated in May of 2009 and started a job in August 2009. As she was entering information into Turbo Tax she asked me how much money she would get back. I informed her that she may or may not get any money back. In fact, some years she might have to write a check!

She was shocked! She said, "I thought tax returns meant that they return your taxes!"

Once I stopped laughing, I spent the next 30 minutes explaining the difference between getting a refund and how much taxes you pay. Needless to say it was an awakening for her.

How to Prepare a Break Even Analysis

"Break even analysis, defined as the studying the path to the point where a company is neither losing money nor making a profit, is very important to the survival of any start-up business. It can be performed for either products or the business as a whole. The break even calculation can be in reference to pro or post-forma, that is before or after the company has been formed.

Break Even Analysis Explanation

The break even analysis serves to provide the company with a very important piece of information: "How much revenue does the firm need to make in order to break even."

This break even analysis is quite easy to do. The only critical piece of information that you will need to attain is a breakdown of the your firm's expenses into Fixed Expenses and Variable Expenses.

Once you have a breakdown of fixed costs and variable costs, input these costs into the template. You will also be able to conduct various "What if" scenario analyses to see how the breakeven revenue will change.

Once you are able to arrive at the break even analysis you can show the Owner(s)/Management this metric and make it part of their sales planning. Another idea might be to incorporate this metric into the Flash Report review meeting. This way your staff can know on a weekly basis if they are on track to at least breaking even."

More at WikiCFO.com

Compare IFRS vs U.S. GAAP for SME's

Do you want to know what is going to change when the new international standards are adopted? The AICPA has now created a wiki comparing the streamlined and complete version of the international standards using IFRS vs. U.S.GAAP for SME's (Small and Medium Sized Entities). All of the sections of the IFRS will be updated in a wiki format on a go forward basis.

You can now see how the new rules will apply to private companies. As the rules become evident and adoption more likely, this web site will be a great resource for navigating the change. To see the comparison go to the new site at wiki.ifrs.com.

Insulate Your Company from Rising Health Insurance Costs

"How many times have your employees — or even potential employees — expressed concerns about the cost of the health insurance that your small business provides. It's an employee concern that most small business owners dread discussing because providing comprehensive health care can be a substantial cost burden. There are small business owners who can afford to provide a competitive benefits package in the short-term, but many are not aware that their rates can increase in the long-term as the result of employee illnesses that require substantial medical care and cost.

Going It Alone

Often times, small businesses implement a health insurance plan one year, only to see their costs skyrocket in subsequent years due to the health experience of their small employee base. If there have been health conditions that resulted in significant costs, insurance rates for the small group plan rise, and a once competitive plan becomes a cost burden to the company. When a small or medium-sized business obtains its own health care coverage and is faced with a significant rate increase due to the performance or cost burden generated by the small pool of employees, difficult choices emerge:

• Eliminate or reduce coverage

• Increase the employer contribution to the premium

• Increase employee premiums

Partnerships Can Help

To help protect themselves from these types of increases, many small businesses choose to partner with a Professional Employer Organization (PEO). PEOs operate under a co-employment model which is based on a commitment by the PEO to share employment-related risk with clients, thereby helping to reduce financial exposure..."

More at WikiCFO.com

Personal Credit: How Important For Business Loans?

Often business owners go to great lengths to pay the company's bills on time. Often at the expense of their not taking a salary. When cash is tight which is more important; your company credit rating or your personal credit rating and why?

Bankers don't like it but they understand when the economy goes south. Sometimes businesses can't meet their financial obligations and need their banker to work with them. It is at these times that the banker resorts to the Five C's of Credit for evaluating the risks.

When collateral is not there, nor the cash flow, the banker looks to the character of the borrower. The best indicator of a borrowers' intent to repay is their personal credit history. If you keep your personal credit squeaky clean then you will probably do the same with your business credit once the economy returns.

So as you work with your companies to either maintain your business credit or obtain new credit sources make sure that the owners are maintaining their personal credit ratings.

Are You Collecting the Data You Need to Run Your Business?

"It seems simple enough. You're making a decent gross profit. You know who your customers are, you know how much you are charging them for your product and you know how much they are buying. So no worries, right?

Well, do you know how much it costs you to sell to each customer? What if you are generating substantial sales from one customer, yet find yourself spending a large amount servicing that customer in terms of custom orders and/or shipping costs?

Not only must you know how much you are making by product line, but you should have an idea of what your gross profit looks like for each customer, especially your key large customers. Perhaps you are missing out on opportunities to reduce shipping costs through aggregating shipments. Maybe you are missing out on opportunities to head off costly service calls through greater communication with the customer up front.

In addition, you need to know how you make money..."

More at WikiCFO.com

The Strategic CFO also offers the Flash Report training program, which will help you collect the right data and use it in the right way to improve profits and cash flow. Buy now!

Capital Budgeting Methods

"Most small to medium sized companies have no idea how to approach capital investments. They treat it as if it were an operating budget decision rather than a long-term, strategic decision that will impact their cash flow, efficiency of their daily operations, income statement, and taxable income for years to come. They need your help understanding the importance of and then making the right capital budgeting decisions.

Capital budgeting decisions relate to decisions on whether or not a client should invest in a long-term project, capital facilities and/or capital equipment/machinery. Capital budget decisions have a major effect on a firm's operations for years to come, and the smaller a firm is, the greater the potential impact, since the investment being made could represent a substantial percent of the firm's assets...."

More at WikiCFO.com