You Can Only Tread Water For So Long!

Most people when faced with treading water realize that at some point to get somewhere they either have to start swimming or drown. You only have so much energy to stay where you are. The same thing holds true for businesses!

A business can maintain the status quo for a period of time. At some point, however, they must start growing or the competition will surpass them. In this recession the goal for most companies has been just to survive. We have seen revenue for most companies settle in at a 30% reduction from a year ago. Cash flow has stabilized at a lower level and companies are not bleeding like they were.

Now is the time for companies to start swimming! You should be improving your sales efforts and products while you have the time to invest. When the economy picks up you won't have the time to improve your company's or your own skills. Over the past 2 months we have noticed an uptick in business sentiment. Companies are now starting to realize that the world is not coming to an end.

With that thought in mind they are starting to make inquiries for services to help them through these tough economic times. Are you ready for them? Have you been honing your staff's skills and increasing the level of training of your staff? Are new skills and products being developed? Finally, are you increasing your marketing efforts before the competition?

By investing your down time into your people and systems you can come out of the recession in a stronger marketing and financial position than the one you went in with. Now is the time to start swimming!

Forming Advisory Boards for Entrepreneurs

Dave Steitz with Steitz Partners discusses how to form an advisory board, compensation of advisory boards and management of the advisory board meeting. An advisory board is one of the most powerful tools an entrepreneur can implement to spur growth and profitability!

Recession Strategies for Business

Once you find yourself in a recession your first goal is to stabilize your operations. But having achieved that goal you need to look beyond the present and develop a longer term strategy. Our goal for this recession is to "come out of the recession better and stronger than we went in!"

How do you do that? The answer is in improving your capabilities in the following areas. We immediately began improving our marketing efforts and results. While cutting expenses in other areas we increased our marketing efforts and budget dollars. We began to increase the frequency and improve the quality of our marketing techniques with the goal of being in a better position to compete when the economy came back.

The next area we invested in was improving and documenting our systems. We documented our best practices and began to institutionalized them throughout the organization. This exercise led to increase training of our employees. We took advantage of the resulting down time to train and develop new skills for our staff.

Finally, all of this combined effort led to the development of new products that could be sold to our customer base. We are now generating sales with less expensive products that are needed in the recession.

So what is your company doing to position themselves for the recovery? Are you going to come out of the recession leapfrogging your competition or playing catch up? When you find your business slow are you just taking time off instead of investing in yourself and your company? The success of tomorrow rests on the efforts of today!

Margin vs Markup

The difference between gross profit margin percentage and markup percentage is often misunderstood. It can be costly for a business when markup percentage is mistaken for a measure of profitability. The following WikiVideo walks you through the difference with an example:



More detail is available at WikiCFO.com.

Bank Stress Test

On Thursday, the US Treasury Department will release the bank stress test results for 19 financial services companies, 18 of which have received TARP funds (MetLife has not as of yet).

The Deal's Dealscape has the rundown, along with a handy list of the companies undergoing the test, complete with TARP funds received to date and the estimated capital needs of each company.

For the stress test criteria, see here.

Senior Loan Officer Outlook Still Grim for 2009

According to a survey released today of senior loan officers conducted by the Federal Reserve, the expectation is for the quality of existing loans to continue to deteriorate through the remainder of 2009.

In addition, overall the bankers reported that they tightened residential mortgage loan standards, while the percentage of those reporting tight commercial lending standards, while still high, had declined a little since the survey was conducted in January.

In short, 2009 continues to look like a nasty year, with perhaps some hope looming for early 2010.

FDIC Bank Failure Watch List: Leading or Lagging Indicator?

The FDIC produces their failed bank watch list every Friday at 7:00p.m. As of April 24th there were 29 failed banks in 2009. There were only 25 failed banks in 2008! If this trend holds true we should have 85 to 90 bank failures in 2009! A 350% increase in bank failures in 2009 over 2008.

I suppose that isn't really a surprise given the turmoil in the banking system. My question is whether the bank failure watch list is a leading or lagging indicator of the economy. If you look further back into previous years you see that 2007 had only three failed banks; and 2005 through 2006 had no banks failing. Should we have seen a stock market top with so few failed banks insured by the FDIC? If the banks are doing so well does that indicate easy money? Should we have been reducing our exposure to the stock market?

Now the trends are going the other way. It is time to ask: Should we buy stocks when the bank failures peak? When we no longer have an increase in the number of banks failing does that indicate that the economy is bottoming out?

Financial Management Tools

The Strategic CFO has recently made available a core set of financial management tools which it has developed over its twenty years' of experience providing financial leadership to entrepreneurs and middle market companies.

These CFO tools have been proven to improve profits and cash flow for clients in a wide array of situations and industries. The financial tools come with an instructional video, written outline, templates, and sample financial analysis in order to properly train users in the art of providing financial management services.

The Action Plan program includes an action plan template and sample action plans. Action planning is one of the most important activities for a CFO or controller to do to get the right things done on time. An Action plan is a to do list for business. An action plan for business is often misunderstood and certainly not often implemented, despite its proven benefits.

The Daily Cash Report provides a CFO or controller with the ability to monitor a company's daily cash flow, as well as to estimate a company's weekly cash flow. In addition, it allows for a daily bank reconciliation using the best reconciliation techniques. Routine use of a cash projection is imperative.

Flash Reports enable users to monitor key performance indicators (kpi) in order to evaluate the productivity of a company and tie that productivity to profitability. In addition it trains the user to monitor a company's liquidity. The program includes a flash report sample. Developing a flash report template and using it weekly is paramount for your company to improve profits and cash flow.

The Dynamic Cash Flow Projection Tool training program trains users to develop a financial statement model for their company. Financial projections are one of the least understood tasks of a CFO. Yes, there is much in the way of financial projection software available, but none that walk a user through the creation and implementation of their own custom financial statements projection. Included is a sample financial model.

The R-Series Report training program instructs the user on how to perform a ratio analysis on their company and includes all the financial ratios you need to be able to communicate with banks and other lenders. Benchmarking is also an important process for improving your company's performance. There are many benchmarking tools available, but the R-Series training program walks you through the setup and process implementation of this vital report.

A Flux Analysis is important for finding ways to improve profits and cash flow. Flux Analysis is one of the most unknown financial management processes but also one of the most valuable. Known also as common size analysis, it enables users to quickly identify potential cost savings as well as to identify both positive and negative financial trends.

Together, the Strategic CFO suite of financial management tools provide CFOs and controllers with a set of proven reports and processes which will help their organizations improve their profits and cash flow. Each tool training program comes complete with a instructional training video, written instruction, sample financial tools, and financial templates. They are worth taking a look at today.

It's Not Hot and I'm Not Here!

I was having lunch last week with a workout officer at a large bank. He was commenting on how customers referred to his department were often in a state of denial. Not unlike the man who finds himself in Hell but won't accept it!

It seems that a lot of businesses are in denial. Their sales are off on average thirty percent, they have been collecting old receivables and are losing money. Furthermore, they know they are going to have a problem with their debt compliance certificate in the coming quarter. Yet, they wait for something to change.

It is important for all of us to accept that this recession will last longer that those in the past. It already is one of the longest!

One of the perplexities of finance is that a company often has more cash when it is shrinking and going out of business than when it is growing. Consequently, a number of companies are generating cash and losing money at the same time. In a way they are consuming their flesh! At some point they will have run through their liquidity and have fewer options to save their company.

What every company should be doing is developing a business plan to reposition themselves to first stabilize the profitability at a lower level of sales and, more importantly, take advantage of the changes taking place. It all starts with making a business plan and putting it in writing.

When Crisis Breeds Future Crises

One can't help but watch the actions of the Federal Reserve, Treasury Department, the FASB, the Congress, etc...and wonder what new crises for which we are being set up. In the near term greater inflation and higher interest rates seem likely. But in the long run are we not simply setting ourselves up for a larger bubble that will inevitably burst? The Fed continues to press the 'Easy' monetary button relentlessly. The Congress and the Executive Branch do not seem to have found a matter unworthy of greater expenditure. Our national debt increases by the trillion within a week. Our government's deficit moves towards 10% of our national income.

The FASB changes accounting rules meant to provide a more accurate view of a company's true financial position to the users of their financial statements. Since that was inconvenient for those who made poor business decisions, the rule has been relaxed.

One cannot help but wonder when the true day of reckoning will occur. In a capitalist economy (or at least an economy which is purportedly capitalistic) those companies unable to stay in business will shutter their doors. In the US economy, those companies are put on life support by the powers that be in DC. Your Surburban's warranty will be serviced by Uncle Sam.

Anyways, this doesn't even consider the looming mess that is the social entitlement programs.

So the buck is inflated some more and rolled on down the road, while we wait to capitalize on the next bubble.

FASB Eases Mark-To-Market.

Today the Financial Accounting Standards Board (FASB) changed FAS 157, providing companies more flexibility in determining the fair value of their investments held. In addition, the FASB also granted companies more flexibility in taking impairment charges on investment losses. The changes will take effect in Q2, though companies will be free to report Q1 under the new rules.

It will be interesting to follow the impact of these rule changes on those companies most affected by the "toxic assets" on their balance sheet. Will the change enable them to workout their problems or will it mask future poor decision making?

Update: Geithner Plan

An excellent op-ed in The New York Times by Joseph Stiglitz about the Geithner plan.

FASB Change to FAS 157 at odds with Geithner's Plan

This week the FASB is considering relaxing the mark-to-market accounting rule, which would seem to undercut the US Treasury Department's plan to help banks fix their balance sheets by ridding themselves of the so-called "toxic assets."

As a taxpayer, I'd have to say that I prefer the FASB's approach to the Treasury's. The Treasury plan counts on helping banks rid themselves of problem loans by selling those loans to private parties (presumably including those evil hedge funds), which would provide a limited amount of equity investment, along with Uncle Sam as a co-equity partner and also the provider of the debt financing. If the investment is good, the private partner gets a good chunk of the upside. If not, We The People eat it.

It makes good sense that at some point those who had a hand in making these now-problem loans find a way to get out of their mess. Changing the mark-to-market rule in this context is not a bad thing.

Geithner's plan is less appealing, but may very well improve lending (albeit at a handsome price). Though it simply looks like another way for the taxpayer to subsidize those who got us into this predicament.

It will be interesting to see how this plays out. One thing does seem certain: the taxpayer will lose.

Mark to Market Controversy vs The Laws of Finance

A large part of the mark to market controversy revolves around the fact that mark to market accounting is in direct violation of a fundamental law of finance.

It has long been accepted that when financing assets you should match the term of the debt with the life of the underlying asset. In other words, long term assets should be financed with long term debt and short term assets should be financed with a short term liability.

Mark to market accounting ignores the liquidity of the underlying asset. In fact, in many respects it converts the characteristics of long term assets into short term assets.

Assume that I am going to finance a house. The house should last at least forty years, consequently, I place a thirty year mortgage on it. Unless I sell the house during the thirty years then I should pay off the mortgage. No problem; everybody wins!

However, what if I were to place a short term debt on a long term asset? I would stand a very good chance of losing my investment in a down economy. The same situation holds true for a lender who makes a long term loan secured by a short term asset.

But a house is a long term asset you say! What is a long term asset? A long term asset is an asset whose expected life is greater than one year. In the case of a mortgage it is a loan whose maturity is greater than one year. The problem with mark to market accounting is that you must treat that asset as if it were sold every day. In effect converting the long term asset into the characteristics of a short term asset.

From the banks perspective you now have a long term asset (ie: mortgage) secured by a short term asset (ie: house). The total opposite of what we are taught in the laws of finance.

The bottom line is that mark to market accounting distorts the true economics of the transaction versus reflecting it. Mark to market accounting has to go before the banking community can recover.

Is This Any Way to Bake a Cake? (or Build a Company?)

Several weeks ago I met with an entrepreneur who was wanting to purchase several companies and consolidate operations. He was emphatic that he was performing a "consolidation play" not a "roll-up". I mentioned that it seem to me that he was describing a "roll-up" and that those don't work! He corrected me by saying again that it was a consolidation play not a roll-up. My thoughts were if it walks like a duck, talks like a duck, then it must be a duck!

This conversation brings up an interesting analogy. If you going to bake a cake and had the ingredients for five different cakes and the cakes were all chocolate, but were all different in the other ingredients. You probably would not attempt to create a cake by combining all of the ingredients? Why do people think that it is any different with companies?

Most banks require a company to have been in business three years before they will consider lending them money. Furthermore, have you ever noticed that it takes 10 to 20 years to build a successful company? Building companies involves establishing a culture with a unique chemistry of people. It is difficult, perhaps impossible, to do this overnight. It takes time. You can't combine the ingredients from five different cakes, shorten the baking time in half and expect to be able to eat the cake. The same thing goes with companies! Roll-ups don't work!

The Economic Trinity!

I had lunch a couple of weeks ago with an investor the day after the President spoke to the nation. I commented on how every time the President spoke the next day the stock market dropped. My friend made the observation that there would not be any economic recovery until the following institutions participated: banks, Wall Street and the stock market.

He asserted that as long as the President and Congress continue to attack these institutions then there would not be any confidence in the economy.

Two weeks later after declining more than 20% the stock market jumped on the day (Tuesday) that Citigroup reported that it had positive earnings. Perhaps Congress and the President should take note.

You Know Business is Bad When .....

Yesterday I opened our local newspaper, the Houston Chronicle, and discovered that the "business section" had now been combined with the "City and State" section. To add insult to injury the City and State section had more pages than the Business section! Finally, most of the business section articles were from the AP newswire.

You know business is pretty bad when the fourth largest city in the United States can't justify enough local news for a seperate business section. I am now faced with trying to find out where I am going to find my local news. I suppose I will have to rely on the Houston Business Journal.

It appears evident that newspapers as we knew them are going away. I wonder what online resources are going to cover the detail local business news?

Declining Sales: or How low is low?

If you are like most companies I am talking to these days your sales are off from there high for last year. Nobody is immune and there is no place to hide! You have had declining sales for the past six to 12 months with no end in site. So what sales volume should you anticipate going forward?

In speaking with several entrepreneurs over the past few weeks I have come to the unscientific conclusion that most companies severely impacted by the recession are experiencing sales declines of 25% to 33% from there highs for last year. Of course there are exceptions, but, for the most part, this percentage hold true.

As to why this is taking place I have my theories. Though there obviously is a recession going on, more importantly, there is a complete lack of confidence in the future. Most companies are still making money though all are hoarding cash.

So if you anticipate sales dropping 25% what do you do? We are recommending our clients prepare a "worst case" scenario using a break even template. You should identify what cuts will be required to survive a sales drop of this magnitude. If and when a sales drop occurs you will then be in a position to take action quickly.

Just tell me where the bottom is and I can make money!

Got Job? Get LinkedIn

Are you looking for a job? Do you think you will be looking for a job? Do you have a job but want more security? Join LinkedIn today!

Company executives and professionals are joining social networking sites in droves. Successful executives have numerous contacts. You should too!

Get your professional experience out on the World Wide Web. Make contact with other professionals who can help you solve problems and do a better job at work.

Join the Strategic CFO's LinkedIn group to start securing your future!

Facebook or LinkedIn? Which is it?

Should I join Facebook or LinkedIn? What is the difference? Or should I join both?

Facebook is by far the more popular social networking site of the two. However, it is more personal in nature. Do you want your business contacts seeing you dancing at a Super Bowl party? Probably not.

A deciding factor is how discriminating are you with who is your friend? This applies to both your physical relationships,as well as,your online ones. You are not friends with everyone you meet in person. Why should you be friends with everyone you meet online?

Everyone has two lives. A personal life and a business life. We try to keep them separate. The same approach should be taken online. Join Facebook for the personal friends you have and join LinkedIn for your business contacts.

I'm Not Scared; I Am Challenged!

Everywhere I turn there is negative news or comments. The news media is selling the bad things that are happening in our economy. Consequently, I find my intensity rising at work. On Sunday, I ran into a business acquaintance who inquired as to how my business in going. I expressed a few challenges that we are facing with the changing times. I left the conversation feeling that I should have put my salesman face on and told him that everything is GREAT! That is just not me.

So how do I feel and how do I portrait my feelings? I have decided to be honest. Are things GREAT? No! But they aren't bad either. They are changing. Consequently I am challenged to meet the changing environment. I have been in business for 30 years and have been through several recessions. I will survive. In fact, I will prosper! But not with a "business as usual" attitude.

So we are implementing three goals for 2009. First, we are going to improve the quality of the service we deliver. People will buy goods and services in a recession. They just are more discriminating in how they spend money. They want value for their dollars. Consequently, we are going to increase the value of what we deliver by improving our procedures and training our consultants on how to deliver those procedures.

Second, we are holding the consultants accountable for implementing the systems we have developed and the value given. We are going to design checklists and customer feedback forms to measure the effectiveness of each consultant.

Finally, we are going to increase communication both internally and externally. We are going to improve the feedback of service being performed by obtaining customer feedback. We are then going to improve our feedback internally so we can improve our service sooner rather than later. Last, we are going to increase our communication to the marketplace by increasing our marketing budget and networking activities.

Surviving a slow economy is not impossible, it's just challenging! For the most part we will all get out of it alive. Just some people will survive and others will prosper! Our goal for 2009 is to use this challenge to improve ourselves and our company.

New Year's Resolution # 1; Join Linked In

If you haven't already you should join Linked In. If you are under 25 you probably are on Facebook or Myspace. If you are over 40 you don't even think about joining a social networking site. I have been evaluating several sites for the last year and have come up with three good reasons to join.

First, if you are going to need a job in the next few years (or you think that with the recession getting worse that the probability is high) then being on a networking site raises your visibility. You can search the sites to find someone already working at a company that you are interested in. The IT industry has been a power user of Linked In for several years.

Second, if you are doing the hiring then you can find people that have worked with the candidate in the past. It makes checking references easy.

Finally, by joining a group on a networking site you can find like-minded professionals. You can share ideas, research vendors and ask questions.

So once you have decided to join a group then you need to decide which one. I think that everyone should pick two sites; one personal and the other business. Facebook is becoming the defacto personal social networking site. If you ask any teenager they prefer Facebook over MySpace. I think that the same thing is going to happen in the business networking sites.

Last year I joined Linked In, Naymz, Plaxo and Ning. After 12 months of trying to maintain three different sites I finally decided this fall to concentrate on Linked In. Every month I received more request to connect to someone on Linked In than the other two. I am now trying to go "deeper" into one site versus trying to maintain three.

Weakening in Commercial Real Estate Debt

Came across an interesting article in the WSJ recently. It appears that the underwriting standards of lenders for commercial property became somewhat lax over the last few years, much as they did for residential lenders. Granted, the commercial debt outstanding ($3.4 trillion) is somewhat smaller than residential property debt in the US ($11.2 trillion), but it's larger than US consumer credit outstanding ($2.6 trillion).

What makes the weakening in commercial property debt worrisome is that roughly 50% of outstanding commercial debt is held by banks and the banks are heavily invested in this debt.

So many financial institutions may not be out of the woods yet, as assets they expected to be safer turn out not to be so, in a weakening economy with declining consumer spending.

A Whole Lot of Kissing Going On!

If you were like me for the most part you took off the last two weeks of the year and coasted at work. Most people didn't want to start new projects or make sales calls. It seems with 2 1/2 work weeks and the emotional stress of the last quarter everyone need a break. I know I did!

But this first week back it seems everyone is coming out of the woodwork! We are getting tons of emails and phone calls. Everyone wants to meet and follow up on introductions. I can't seem to get to them all and still get my work done. I have been going from meeting to meeting and talking on the phone half the day.

Yesterday I finally sat back and asked "what's going on?" I thought about who was calling and what was the short term results? I came to the conclusion that there is a whole lot of kissing going on, but, not a lot of sex!

What I mean is that most of the people wanting to meet were other service providers who wanted to network but didn't have much business going on. There wasn't any actual sales leads coming in. It appears that everyone is hitting the ground running trying to work twice as hard to generate the same amount of sales. Not a bad idea!

Who Is Swimming Naked In Your Back Yard?

Warren Buffet has a saying that goes as follows: "You never know who is swimming naked until the tide goes out". This past week there have been two major businesses who have been exposed as having been "swimming naked". The major blow up was the investment manager Bernard Madoff, founder of Bernard L. Madoff Investments Securities LLC, to the tune of $50 billion. The other scandal was the lawyer Marc Dreier in New York for $280 million.

Both of these individuals were assumed to be the pillars of their profession and financially secure. In fact, both were big frauds waiting to be exposed. It was only after the financial stress of the past year caught up to them that the world discovered the truth. More to the point the only reason you heard about them is because they were large enough to make it in the Wall Street Journal.

The real question going through your mind should not be about what they did or how they did it, but, instead you should be asking yourself; who in your community is doing the same thing or something similar? or Who is swimming naked in your business community?

Often what we see of people or businesses is only surface deep. I have know several individuals and companies over the years who appear successful on the surface but in reality they don't have the financial strength to weather a shock to their systems. As this recession takes hold across the country we are going to see who has been fiscally conservative and who has been living on the edge.

As a business owner or CFO you need to be concerned about which receivable is going to be uncollectable. You can rest assured that somewhere in your accounts receivable ledger there is a bad debt that has not been exposed. Now is the time to tighten up your underwriting requirements and collect your old receivables.