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..."

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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...."

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Wiki of the Week Ending February 21, 2010

WikiCFO's top wiki with the fastest percentage growth in traffic for the past week was:

What are the 7 C's of Banking?

Traffic increased 218% over the previous week's visits to that wiki!

The Dreaded "F" Word

"The dreaded “F” word, FACTORING. Now that factoring has been said, I am sure we all are feeling a little more at ease. I was in a meeting recently with a prospect, a Houston based oilfield servicing company, and their CPA whose name was John.

The company was experiencing cash flow problems because of growth. And they have more new business opportunities coming up in the near future. They were trying to determine how to capitalize on these opportunities in their situation of stressed cash flow. The topic of factoring their accounts receivable came up and John said “Only companies about to go broke factor their accounts receivable!” Knowing the CPA profession as I do since I was a CPA earlier in my career, I knew John’s concern was cost. So I had to ask him why he felt that way. He did not disappoint me when he said “factoring is too expensive.” I then told him that I would not normally recommend factoring to any client unless factoring will make or save them money...."

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Why Don't I Have Cash?

I was involved in a meeting with a prospect a few weeks ago who we will call Don. Don owns a manufacturing company which is presently experiencing a growth rate of thirty percent annually. He is showing a profit, but his bank will not increase his line of credit and this is resulting in Don’s company having cash flow problems. He told me that he has to extend payments to his suppliers and they are not happy with him. He also told me he is unable to call most of his customers for payment, because they are within their credit terms and he feels he would be harassing them. He asked me “Why don’t I have cash?”

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The 5 C's of Credit

"The “5 C’s of credit” or "5C's of banking" are a common reference to the major elements of a banker’s analysis when considering a request for a loan. Namely, these are Cash Flow, Collateral, Capital, Character and Conditions. This article will provide an in-depth description of each of the 5 C’s of credit or banking to help you understand what your banker needs to understand about your business in order to approve your loan. By the end of this article, you will have insight as to where your banker is coming from, and therefore better prepare you to handle their questions and concerns..."

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Wiki of the Week Ending Febuary 14, 2010

WikiCFO's top wiki with the fastest percentage growth in traffic for the past week was:

Capital Budgeting Methods

Traffic increased 62% over the previous week's visits to that wiki!

Financial Ratios

Monitoring a company's performance using ratio analysis and comparing those measures to industry benchmarks often leads to improvements in company performance. Not to mention that financial ratios are often part of loan covenants. The following article provides an overview of the five major categories of financial ratios and links to their description and calculation.

"Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when performing financial ratio analysis is trend analysis. Financil ratios are derived from the three financial statemtents; Balance Sheet, Income Statement and Statement of Cash Flows.

There are five (5) major categories included in the financial ratios list are:
- Liquidity Ratios
- Activity Ratios
- Debt Ratios
- Profitability Ratios
- Market Ratios..."

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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...

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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....

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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...."

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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..."

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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...."

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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....

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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..."

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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...

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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.