Owner: Ask Jon Paul URL:http://askjonpaul.com/ Join Date: Tue, 02 Jan 2007 17:54:07 -0600 Rating:0 Site Description: As a business finance expert for 25 years, I have helped many businesses turn the finance area at their firm into a resource for the rest of the company and helped propel their growth with strategic and tactical guidance. My blog will look at various pro Site statistics:Click here
Unit of Measure -Getting a Better Measure on Your Business 2007-01-02 16:00:39
Sometimes dollars alone on the income statement are hard to get a handle on.
Suppose over several years sales have grown from $10 million to $50 million. However, would the sales growth be the best benchmark for looking at expenses? Should production or service labor have grown by 500% during that time period?
Here are a few reasons why a multiple of 5 might not be the best way to look at expenses:
Prices may have increased over time. If prices have doubled, and everything else remained the same, then unit volume would only have had grow 2.5 times to reach 5 times growth.
New products could have been added that carried very different pricing.
Prices might have fallen in general, so the company would have had to work harder to have achieved that sales growth.
Some products may decline in price as they get more mature.
In other words, sales dollar growth might not be indicative of how much more production was needed to produce the inventory or service needed for the higher leve Read more:Business
, Measure
Scoping the Acquisition - Same Industry - Very Different Cultures 2006-12-22 10:04:44
One of the softest parts of evaluating an acquisition, but perhaps one of the most critical, is getting a handle on the culture. Just because they are in the same industry doesn't mean they have the same culture as your company or another company you acquired before.
You might be thinking of doing a series of acquisitions, doing a roll-up of several companies in the same business to create a much larger company. You might find that some companies are as different as night and day in how they operate.
I ran into just that when I was CFO for a pharmaceutical manufacturer. The first several years we focused on the turnaround of our manufacturing operations and developing new products. After making a very successful turnaround and going from losing more money than we had in sales to earning 56% net income after tax, we turned our sights towards building an integrated nationwide distribution network. Strategically, we felt that it would be a great benefit to have an integrated ma Read more:Acquisition
Finding the Right Unit of Measure 2006-12-22 09:54:58
I think finding the right unit of measure to look at business is so key, it's worth chatting about some more.
I mentioned in my first unit of measure article what I used when I was CFO at a pharmaceutical firm- there it was thousands of tablets/capsules produced. It fit nicely with our particular product lines.
As our firm became very profitable, we then looked to expand into other product lines. One company we considered acquiring was a liquid pharmaceutical firm. That same metric would not have worked for them. Something along the lines of gallons or liters produced would have been more appropriate.
There may not be one key unit of measure that fits like a glove across all your business. In that case, see if you can break the business down into key parts, each with its own unit of measure.
Sometimes examples of what others have done can give you ideas. Here are just a few that I have used throughout different companies in my earlier management career and later on, clients Read more:Measure
, Right
Out of Town Travel - Use Per Diems 2006-12-20 12:08:25
Someone recently asked me about out of town travel and what expenses might be deductible.
I mentioned a different alternative that might mean a bigger deduction and if nothing more, would greatly simplify the expense reporting.
Consider using per diem allowances instead. Per diem allowances eliminate the need for substantiating the actual costs. The per diem amounts are deemed to be substantiated already by the IRS. You will still need to document the business purpose of the trip. But what a joy not to have to keep all those detailed records. It is a blessing for both you and your employees.
The per diem amounts break down into two categories and the amount reimbursed can vary by whether you are in a high cost or low cost locality as defined by the IRS. What gets allowed changes over time with the IRS, so check with your accountant or tax advisor for the latest rates and when the cutover period is. The rates below are as of October 1, 2006.
Lodging
Meals and Inc Read more:Travel
Top 25 Ways Businesses Fail in Finance 2006-12-20 12:06:35
Finance touches so many areas that affect companies- capital, reporting, people and technology. Here's my top 25 list of ways that companies can fall short in finance and keep company results from being as strong as they could. How well does your company stack up?
Reporting
1. Financials are not correct with inadvertent yet material errors.
2. Focus on income statement rather than the balance sheet.
3. Numbers come in too late, well into the next month.
4. Standard or huge reporting packages that fail to distill essence of results.
5. Limited reporting on revenues/margins; too much detail in administrative costs.
6. Relying on limited outside accounting without in-depth review.
7. No flash reporting to show preliminary results on first day or two after month end.
Cash Flow
8. Not really grasping cash flow (not cash balance).
9. Letting working capital (receivables, payables, inventory) get out of control.
10. Taxes not planned ahead and savings
Credit Insurance - Not Just for the Weak 2006-12-20 12:05:40
Credit insurance is sometimes required of early stage companies where their credit is not as strong yet.
There can be a perception that carries over from the mortgage industry. People with weaker credit scores may be required to get personal credit insurance (PMI) in order to qualify for the mortgage.
When I was head of finance and operations at a toy manufacturer, we had to have credit insurance in our earlier days. It helped us receivables financing that we might not otherwise have qualified for.
However, credit insurance is not just for the emerging or weaker credits. There is also a way that more established companies can put it to good use as well.
You might ask, why would they take out insurance that they don't have to have?
1. It could allow them to get a lower rate on their receivables financing from their bank. The reduced rate could more than offset the cost of the insurance.
2. It could allow them to get a higher advance rate on their receivables. They coul
How Much Detail in Revenues 2006-12-17 13:41:39
I was at a new client yesterday and it was music to my ears. They were looking at going deeper into an area - well past what most people think about in their financials.
That area was revenues. The new client wanted to break revenues down into more lines of business. They had good reasons for this:
To really get an understanding of how they were making money by product line.
To reflect warehousing as a profit center, since they were now providing warehousing services for customers and generating revenues from it.
To make better decisions on pricing.
To see how new product lines are coming along.
To decide if any product lines should be phased out or outsourced.
Very few companies do this well in their financial statements. Typically revenues and cost of revenues are pretty collapsed, sometimes even just one line in the income statement for each. Yet in the administrative cost area, there is much more detail.
I think that is backwards. Much of the detail in administrative Read more:Detail
, Revenues
Getting Tight with Purchasing 2006-12-17 13:25:18
A common problem with accounting and getting accurate numbers at month end at many companies is accounts payable. If bills are missing, then the financial statements will be off and income will be overstated. Even when all the payables are in the system, there could be too much time wasted tracking down missing invoices and month end financials can be delayed.
This information may not come as smoothly to accounting as it should. Accounting may be isolated in a different area of the office and not nearby purchasing.
That is all the more reason for our recommendation- that accounting get very tight with purchasing. You want accounting to know everything that is being ordered by purchasing and when the merchandise or services are set to arrive.
One control point can be the mail. At many firms, invoices go directly to the individual in purchasing. Accounting may not be aware of the invoices and therefore not have them on the books.
What I usually suggest is that all such Read more:Purchasing
Plan for Management's Shares 2006-12-17 13:12:27
Raising equity can be a big deal for many firms. A lot of thought goes into what stake will the investor get for the capital they put into the company.
However, there is another important piece of the puzzle which usually is not thought about. What share of equity will management have?
Percentages can vary, but a good range could be from 10-20%. This could be earned over time.
Usually when an investor is putting in this kind of stake, it's for a company with growth prospects that will expect to add some additional people to the management team. Even key management people who are already there may warrant getting additional equity over time for their role in helping develop the business.
If you leave this out of the equation in your thinking, then you will probably overstate the return that your business will generate for the investor and underestimate the stake that the investor will need in your business. You may get surprised when you see their proposal on what equi Read more:Management
Check the Balance Sheet 2006-12-17 13:02:31
When most people look at the financials to see if the numbers look right, they check out the income statement. That's good, but it isn't the real test.
Check
the balance sheet.
If the balance sheet is wrong, then the financials are wrong. If the balance sheet is right, then the cumulative financials are right. If the income statement is right, the financials could still be wrong- there could be a prior period mistake that has still not been caught.
If someone tells you they think the numbers are off and talk about the net income being too low, ask them this question back- "What part of the balance sheet do you think is wrong?" That usually quiets the conversation.
A general manager at one client thought his incentive was low for the month. I asked him the above balance sheet question. I pointed out that for income to be too low, it would usually have to mean that either inventory was overstated or payables were overstated. I indicated that I was confident about Read more:Balance
, Balance Sheet
Getting the Focus on Margins 2006-12-17 12:35:46
Sales are usually on the radar at most companies. The president will have it at her fingertips. It is likely to be on management dashboards or more traditional reports that are seen across management.
However, it often is not the same with margins.
That wouldn't matter if all sales items returned the same margins. However, that is usually not the case. At the pharmaceutical firm where I was CFO, our margins were dramatically different. New products could have margins as high as 98% while more mature items could fall in the 15-20% range.
While you might not have as dramatic a swing of margins like we had in the pharmaceutical business, if you are like most companies, your margins can vary significantly:
· Some items might be newer and carry a price premium.
· Some items may be made in larger quantities and cost less per unit or service hour.
· Some items you may make yourself, while other items have more outsourced parts.
· Some ite Read more:Focus
, Margins
Operations or Treasury 2006-12-12 11:28:16
Here's another key dimension in deciding on your head of finance- "Do they have more of an operations background or a treasury background?" This is how they differ:
· Operations. This person is involved in the day to day financial operation- accounting, budgeting, financial reporting, taxes, financial analysis, processing invoices and collecting accounts receivable, accounts payable, inventory, fixed assets, acquisitions and other operational activities.
· Treasury
. Someone here is mainly involved with raising or restructuring capital, whether debt or equity, setting up capital arrangements (versus accounts receivable) with customers, and the related cash management and services.
In other words, the treasury person lines up the financing and manages cash, while the operations person plans and keeps track of results and oversees the assets and liabilities involved in the daily operations.
Some positions may require some of both skills. However, usually one
Find the Soft Spot in Your Numbers 2006-12-12 10:59:54
Not all numbers are created equal in the financial statement. Some numbers are more solid than others.
Some are based on hard data while others are based on estimates. Some numbers are readily available while other numbers may take time to generate. Some numbers are backed up by pretty solid internal reporting while other numbers may have less support from the internal reports.
If you want to improve the quality as well as the timeliness of your financial reporting, find the soft spot in your numbers.
When I became CFO of a pharmaceutical firm many years ago, there was one particularly glaring soft spot. Their cost accounting system which drove the margin information and inventory information in the financial statements was not as reliable as other information. It took a long time to come together and numbers fluctuated dramatically from month to month. It took a lot of time when I first came on board to run the supporting inventory reports Read more:Numbers
Real Company or High Paying Job 2006-12-12 10:36:06
I have friends who have successful companies, consulting or service businesses, which are doing quite nicely. Some of them are growing well over time. Others are staying around the same revenue level year after year.
Not all businesses are what we might really call companies. When we look underneath the surface, it could be really be a high paying job.
Now there is nothing wrong with that. There can be a lot to be thankful for a business that generates steady revenues year after year and brings a nice income to the owner. Not many people get to that point.
The challenge is when a business is intended to be a real company that could be later sold, but is effectively being run as a high paying job for the owner. It doesn't just apply to consulting or service businesses. It could affect companies that handle products as well.
I saw one situation just like that. It was a company that distributed products it designed that were manufactured by others for them. Sales had gr
Good Report Gone Bad 2006-12-08 10:53:45
At one of my clients, we have a daily report that is used to tell how shipments are doing during the month. This report compares the month to date sales results against both the forecast and the prior month. This gives a good read on what products are moving faster or slower than expected. The client can adjust the inventory purchases to control inventory and the online promotions to drive sales based upon what this report shows.
A key with any report is how accurate is the information. We could prove out the shipments against credit card receipts as one check. I built in another checkpoint- a separate report plotting the shipments by day.
Based on that, I noticed something unusual during the middle of November. Suddenly the new shipment information was very small for weekday shipments. That was a signal that something was not right.
I met with the head of IT at the client. It turned out around that time that a minor change had been made in the main computer program.
One More Step on Year End Payroll - Personal Use of Autos 2007-01-04 12:22:26 You might think that now that all the payrolls have been paid for the year end, that you are done with the payroll and ready to produce the W-2's and other year end payroll reports.However, there is one step that you might have left out - the personal use of automobiles. Photo courtesy of flickr.comIf someone has a car provided that is predominantly used for business, but still used personally, this personal use needs to get accounted for and either:
Reimbursed back to the company or,
Added to the W-2 as additional income.Generally, the second option would be preferable. The cost to the employee would then just be the taxes they would owe on this income. Your cost would be the employer share of FICA/Medicare taxes.However, if this is your own business and depending upon your corporate setup, you might be better off just reimbursing the company, since it all becomes income to Read more:Payroll
, Personal
, Autos
The Mechanics- Setting up the Credit Card Charge Bookkeeping 2007-01-04 15:01:35
Here are a couple options to set up the credit card bookkeeping.The first step is to set up online access to your credit card information. Of course, keep tight security on the username and password. Then based upon the volume of your credit card charges, access the data weekly or daily- get a jump on it before year end. The information gets copied into Excel in a credit card charge download sheet.The second step is to set up the conversion of the data. This can involve two parts:
A vendor name conversion. For example, all the Starbucks charges will likely have details about location. I set up a process to convert the vendor detail into a common vendor name, Starbucks, so all Starbucks transactions can be grouped together.
An expense category. Following our example, all the Starbucks charges might get grouped into Meals and Entertainment. The final step sets up the reporting. A credit card charge database is set up that includes:
The downloaded data.
The vendor name.
The expe Read more:Mechanics
, Setting
, Bookkeeping
The Mechanics- Setting up the Credit Card Charge Bookkeeping 2007-01-04 15:01:35
Here are a couple options to set up the credit card bookkeeping.The first step is to set up online access to your credit card information. Of course, keep tight security on the username and password. Then based upon the volume of your credit card charges, access the data weekly or daily- get a jump on it before year end. The information gets copied into Excel in a credit card charge download sheet.The second step is to set up the conversion of the data. This can involve two parts:
A vendor name conversion. For example, all the Starbucks charges will likely have details about location. I set up a process to convert the vendor detail into a common vendor name, Starbucks, so all Starbucks transactions can be grouped together.
An expense category. Following our example, all the Starbucks charges might get grouped into Meals and Entertainment. The final step sets up the reporting. A credit card charge database is set up that includes:
The downloaded data.
The vendor name.
The expe Read more:Mechanics
, Setting
, Bookkeeping
One More Step on Year End Payroll - Personal Use of Autos 2007-01-04 12:22:26 You might think that now that all the payrolls have been paid for the year end, that you are done with the payroll and ready to produce the W-2's and other year end payroll reports.However, there is one step that you might have left out - the personal use of automobiles. Photo courtesy of flickr.comIf someone has a car provided that is predominantly used for business, but still used personally, this personal use needs to get accounted for and either:
Reimbursed back to the company or,
Added to the W-2 as additional income.Generally, the second option would be preferable. The cost to the employee would then just be the taxes they would owe on this income. Your cost would be the employer share of FICA/Medicare taxes.However, if this is your own business and depending upon your corporate setup, you might be better off just reimbursing the company, since it all becomes income to Read more:Payroll
, Personal
, Autos
Unit of Measure -Getting a Better Measure on Your Business 2007-01-02 16:00:39
Sometimes dollars alone on the income statement are hard to get a handle on.
Suppose over several years sales have grown from $10 million to $50 million. However, would the sales growth be the best benchmark for looking at expenses? Should production or service labor have grown by 500% during that time period?
Here are a few reasons why a multiple of 5 might not be the best way to look at expenses:
Prices may have increased over time. If prices have doubled, and everything else remained the same, then unit volume would only have had grow 2.5 times to reach 5 times growth.
New products could have been added that carried very different pricing.
Prices might have fallen in general, so the company would have had to work harder to have achieved that sales growth.
Some products may decline in price as they get more mature.
In other words, sales dollar growth might not be indicative of how much more production was needed to produce the inventory or service needed for the higher leve Read more:Measure
, Business
Scoping the Acquisition - Same Industry - Very Different Cultures 2006-12-22 10:04:44
One of the softest parts of evaluating an acquisition, but perhaps one of the most critical, is getting a handle on the culture. Just because they are in the same industry doesn't mean they have the same culture as your company or another company you acquired before.
You might be thinking of doing a series of acquisitions, doing a roll-up of several companies in the same business to create a much larger company. You might find that some companies are as different as night and day in how they operate.
I ran into just that when I was CFO for a pharmaceutical manufacturer. The first several years we focused on the turnaround of our manufacturing operations and developing new products. After making a very successful turnaround and going from losing more money than we had in sales to earning 56% net income after tax, we turned our sights towards building an integrated nationwide distribution network. Strategically, we felt that it would be a great benefit to have an integrated ma Read more:Acquisition
Finding the Right Unit of Measure 2006-12-22 09:54:58
I think finding the right unit of measure to look at business is so key, it's worth chatting about some more.
I mentioned in my first unit of measure article what I used when I was CFO at a pharmaceutical firm- there it was thousands of tablets/capsules produced. It fit nicely with our particular product lines.
As our firm became very profitable, we then looked to expand into other product lines. One company we considered acquiring was a liquid pharmaceutical firm. That same metric would not have worked for them. Something along the lines of gallons or liters produced would have been more appropriate.
There may not be one key unit of measure that fits like a glove across all your business. In that case, see if you can break the business down into key parts, each with its own unit of measure.
Sometimes examples of what others have done can give you ideas. Here are just a few that I have used throughout different companies in my earlier management career and later on, clients Read more:Measure
, Right
Out of Town Travel - Use Per Diems 2006-12-20 12:08:25
Someone recently asked me about out of town travel and what expenses might be deductible.
I mentioned a different alternative that might mean a bigger deduction and if nothing more, would greatly simplify the expense reporting.
Consider using per diem allowances instead. Per diem allowances eliminate the need for substantiating the actual costs. The per diem amounts are deemed to be substantiated already by the IRS. You will still need to document the business purpose of the trip. But what a joy not to have to keep all those detailed records. It is a blessing for both you and your employees.
The per diem amounts break down into two categories and the amount reimbursed can vary by whether you are in a high cost or low cost locality as defined by the IRS. What gets allowed changes over time with the IRS, so check with your accountant or tax advisor for the latest rates and when the cutover period is. The rates below are as of October 1, 2006.
Lodging
Meals and Inc Read more:Travel
Top 25 Ways Businesses Fail in Finance 2006-12-20 12:06:35
Finance touches so many areas that affect companies- capital, reporting, people and technology. Here's my top 25 list of ways that companies can fall short in finance and keep company results from being as strong as they could. How well does your company stack up?
Reporting
1. Financials are not correct with inadvertent yet material errors.
2. Focus on income statement rather than the balance sheet.
3. Numbers come in too late, well into the next month.
4. Standard or huge reporting packages that fail to distill essence of results.
5. Limited reporting on revenues/margins; too much detail in administrative costs.
6. Relying on limited outside accounting without in-depth review.
7. No flash reporting to show preliminary results on first day or two after month end.
Cash Flow
8. Not really grasping cash flow (not cash balance).
9. Letting working capital (receivables, payables, inventory) get out of control.
10. Taxes not planned ahead and savings
Credit Insurance - Not Just for the Weak 2006-12-20 12:05:40
Credit insurance is sometimes required of early stage companies where their credit is not as strong yet.
There can be a perception that carries over from the mortgage industry. People with weaker credit scores may be required to get personal credit insurance (PMI) in order to qualify for the mortgage.
When I was head of finance and operations at a toy manufacturer, we had to have credit insurance in our earlier days. It helped us receivables financing that we might not otherwise have qualified for.
However, credit insurance is not just for the emerging or weaker credits. There is also a way that more established companies can put it to good use as well.
You might ask, why would they take out insurance that they don't have to have?
1. It could allow them to get a lower rate on their receivables financing from their bank. The reduced rate could more than offset the cost of the insurance.
2. It could allow them to get a higher advance rate on their receivables. They coul
How Much Detail in Revenues 2006-12-17 13:41:39
I was at a new client yesterday and it was music to my ears. They were looking at going deeper into an area - well past what most people think about in their financials.
That area was revenues. The new client wanted to break revenues down into more lines of business. They had good reasons for this:
To really get an understanding of how they were making money by product line.
To reflect warehousing as a profit center, since they were now providing warehousing services for customers and generating revenues from it.
To make better decisions on pricing.
To see how new product lines are coming along.
To decide if any product lines should be phased out or outsourced.
Very few companies do this well in their financial statements. Typically revenues and cost of revenues are pretty collapsed, sometimes even just one line in the income statement for each. Yet in the administrative cost area, there is much more detail.
I think that is backwards. Much of the detail in administrative Read more:Detail
, Revenues
Getting Tight with Purchasing 2006-12-17 13:25:18
A common problem with accounting and getting accurate numbers at month end at many companies is accounts payable. If bills are missing, then the financial statements will be off and income will be overstated. Even when all the payables are in the system, there could be too much time wasted tracking down missing invoices and month end financials can be delayed.
This information may not come as smoothly to accounting as it should. Accounting may be isolated in a different area of the office and not nearby purchasing.
That is all the more reason for our recommendation- that accounting get very tight with purchasing. You want accounting to know everything that is being ordered by purchasing and when the merchandise or services are set to arrive.
One control point can be the mail. At many firms, invoices go directly to the individual in purchasing. Accounting may not be aware of the invoices and therefore not have them on the books.
What I usually suggest is that all such Read more:Purchasing
Plan for Management's Shares 2006-12-17 13:12:27
Raising equity can be a big deal for many firms. A lot of thought goes into what stake will the investor get for the capital they put into the company.
However, there is another important piece of the puzzle which usually is not thought about. What share of equity will management have?
Percentages can vary, but a good range could be from 10-20%. This could be earned over time.
Usually when an investor is putting in this kind of stake, it's for a company with growth prospects that will expect to add some additional people to the management team. Even key management people who are already there may warrant getting additional equity over time for their role in helping develop the business.
If you leave this out of the equation in your thinking, then you will probably overstate the return that your business will generate for the investor and underestimate the stake that the investor will need in your business. You may get surprised when you see their proposal on what equi Read more:Management
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