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Cost – Balance Sheet versus Income Statement 2007-06-29 11:46:39
You might be watching your costs like a hawk on the income statement or in your product pricing sheets or service pricing sheets. You may have a good handle on variances and know very quickly when certain costs are starting to get out of line. You take appropriate action.
However, in the same circumstance, you might have the eye off the ball on the costs on the balance sheet. These costs could be just as significant.
What are some costs to be looking at on the balance sheet?
1. Capital structure. The capital structure can be one of the biggest expenses that the company has. How’s your mix of debt and equity? Are you utilizing debt to the extent that you can to bring down your cost of capital? Is your debt at as low of rates as it could be?
2. Accounts payable. Are you taking advantage of all the payment discounts that your suppliers offer you? If you happen to miss any of these, this can be just as expensive as having venture capital financing or having factoring. The incenti Read more:Balance
, versus
, Income
, Balance Sheet
How Many Months Can You Survive? 2007-06-29 11:46:15
One thing that’s very important for an emerging company to know in its early stage of life is how many months it can survive on its current capital. That’s a critical timeline to know in order to be able to tell when the additional money has to be brought in. Without knowing this number, it could be very easy for a company to get caught in a squeeze. That inflection point could come up rather quickly. When it does happen, the results aren’t always pretty. It can mean having to make some cutbacks in operation or delaying payments to suppliers or, perhaps, not funding some product development. Instead of being on the growth track, you can find yourself in retreat mode. This is not a good posture to be in at a time when you’re looking to raise additional capital and hopefully beginning to show that you’re on an upward track. It can be a sign that you don’t have as good of control over your business and could leave some questions in the minds of the potential investor.
Read more:Months
Accounting and Documentation for Your Taxes 2007-10-22 02:10:41
You might be very well documented for your monthly financial and have great support. However, there could still be some more to be done.
The tax world can be a world of its own and they have things to be looked at that go over and above.
Meet with your tax advisor prior to the start of the year or very early on in the year to go over what kind of special documentation might be needed. It’s so much easier to create it while it’s happening rather than having to backtrack. Sometimes it’s very difficult to recreate it after time. Memory fades and papers are lost.
An example of one such area can be with travel expenses. There can be a certain receipt that you need from out of town travel or other local entertainment. There can be the vehicle tracking as another example because you have the corresponding expense reports to back things up when there’s out of town activities involved. It’s so much easier when you get a process going. It’s pretty hard to recreate vehicle mileage af Read more:Documentation
, Taxes
Keep Your Tax Advisor in the Loop 2007-10-22 02:06:50
A good tax advisor can save you a lot of money and can keep you out of difficulty. But to really do the best job for you he or she has to know what’s going on in your company. It can be a good practice to say every two to three months get your tax advisor together with you or even just do an email update or a phone call. Keep them abreast on how the company is doing and up-to-date on any new plans that might be taking place.
You might even consider keeping your tax advisor on the distribution list for your monthly or certainly at least quarterly reporting packages.
Even better is to give your advisor a periodic update on what you think the tax flow numbers will be for the upcoming quarter as well as any changes to the outlook for the year. Based upon that, your tax advisor can make any appropriate adjustments to your quarterly payment that you’re going to have coming up. He or she can advise you if you need to step it up or if you’re more than covered.
Too often tax advisors are
Can You Tell Where You Stand On Your Taxes? 2007-10-22 02:03:25
It’s a good question to ask in your financial reporting package. It’s one of the biggest things to understand. Where do you stand on income taxes? What are you likely to have to pay come the next quarterly payment?
So does your package tell you that?
It can be easy for it to be out of sight and out of mind. You might not have to make quite as much in deposits during the year, perhaps, based on prior year taxes. But here’s what I can see happen time and time again. You’re having a very good year. Income is up substantially versus the prior year. You’re making the minimum tax payment during the year because it’s capped based on what you had in the prior year. That is fine, but you’re building up a taxes payable number. Are you setting aside enough cash for that number? Too often, I see that’s not the case.
A good practice could be to tuck that money away and don’t think of it as your money. In reality, it’s going to Uncle Same. It’s just a matter of timing. You can Read more:Taxes
, Stand
Hiring a Savvy Tax Advisor 2007-10-22 01:58:16
There’s a lot of dollars at stake here. It can run up to 40% or more of income. It can be your biggest expense item.
So why not have somebody who can be sharp enough to help you find ways to save some of this major expense?
There’s another reason too. The landscape changes so often because so much new each year you can’t keep up on all these law changes yourself. Without knowing it and with good intentions, you could get yourself in a lot of trouble.
Your circumstances can change too year to year. You want somebody who can adapt to your changing situations in your business or personal matters.
You want them to be savvy on the personal side as well. After all, you want to maximize the income that flows to you personally and not to the IRS.
Of course, you want to find somebody you’re comfortable with. Get a sense on how aggressive that person is and does it match your particular style. It’s not black and white. There are different shades of grey on certain matters. Ask questi Read more:Hiring
, Savvy
What Does Your Finance Leader Like to Do? 2007-10-22 01:52:06
How good of a fit will your head of finance be?
One way to tell is to ask this question, "What Do You Like to Do?"
That gives you a very good clue about how he will operate. While in the short term he may be able to change his style, eventually, it should drift back to their preferred way of operating.
Let’s consider a couple different answers.
I like to train and develop people. This can manifest a couple different ways. You could end up with a larger finance staff than you might need to have. If it makes sense for your finance head to be very hands-on, then a person who answered above will look to get someone else hired to take this off their hands. Another way this can play out is that she might hire weaker people that might need more training, so she gets to do more of what she wants to do. But then, what is falling through the cracks when all that extra time is spent training?
However, if your company is large enough, this could be just the people answer that you want to hear. Read more:Leader
The One Line Margin Myth 2007-10-21 13:45:48
It’s a hot day and you want to jump in the water. But how deep is it? You can’t see the bottom so you have to rely on how many feet deep it is. A sign nearby says the average dept is 8 feet. So do you feel comfortable enough to dive in? You probably don’t.
Yet, ironically, how many people operate that way with their business? When you look at their income statement, their reporting package gives them a one line margin number. Rather than knowing if they have shallow or deep margins in a product line or service line, they operate with just one number and dive right in.
Consider the following simplified example:
Product RevenuesService Revenues=Total Revenues
Material CostsLabor CostsOverhead Costs=Total Costs of Revenues
Total Gross Margin
(Revenues - Costs of Revenues)
Is the company making more money on products or services? Unfortunately, you can’t tell from the income statement.
That is pretty key information to be missing.
- Should the company emphasize one area over th
Reducing the Finance Staff – You May Need to Look Outside Finance 2007-10-21 07:21:23
You know your finance staff is too heavy. You’ve benchmarked it against firms similar to yours and they come up leaner. It makes sense to trim your staff back.
So do you just go ahead and make the cuts?
Maybe you can’t do these cuts alone. You could be treating a symptom and still not getting to the disease.
You might need to also see what is causing the bloat. Where does some of the extra staff seem to be spending their time? Consider some possibilities:
· Accounts Receivable. This could be a signal of service, production or system issues. Are customers holding back on payments for a reason? Are change orders not getting communicated before the billing gets out, leading to large number of credit memos?
· Accounts Payable. Are there cash flow issues that mean the company is behind payments, resulting in time spent handling vendor calls, juggling payments and other non-productive work?
· System Issues. Poor systems can really hit home in finance and lead to a lot of extra work Read more:Reducing
, Staff
, Outside
Plan Taxes Ahead of Time 2007-10-20 03:30:27
It can sound like a blinding flash of the obvious, but you can do more on your taxes if you look at it before the yearend rather than after. Sure, there might still be some things that you can do if you look at it late. You might be able to reallocate some expenses and there are some costs that you might find that could be accrued and then paid for by the time you file your tax return so you get a deduction on your corporate taxes. Plus things like retirement spending, which allows you to pay for them after the end of the year.
However, you still have a lot less wiggle room, a lot less that you can operate with by waiting until after yearend. If you start earlier like in September that gives you three months left. With more time, you can do a lot more fine tuning. For example:
1. Capital expenditures. You might be able to move some capital expenditures up or defer some expenditures into the early part of the next year depending upon your tax situation. The IRS gives a wonderful tax br Read more:Taxes
Start High Then Drill Down 2007-10-20 03:21:48
An approach sometimes often taken in financial models is to work piece by piece with a lot of detail in each particular area and then try to fit the pieces together.
There are a couple issues with that. One is that sometimes the pieces don’t fit together very well. You end up having to make some changes to have to make it work. Secondly, it can be more time consuming to put the pieces together. It can be much harder work. And third, it’s longer before you get a glimpse of the big picture. You’re not sure how things are turning out. You don’t have the reality check of seeing how it all comes together and what overall numbers are resulting.
What often happens with this approach is to scramble at the end to put things together. There isn’t enough time left to review what’s done. What’s done is more subject to having some errors because there hasn’t been enough time to check through it more thoroughly. And people aren’t happy with the end result in terms of how the numbe Read more:Start
, Drill
Do the Financials in Your Model Link Together? 2007-10-20 03:18:35
We can take it for granted because it should happen automatically with financial packages but in doing the financial model it may not necessarily be the case. So you need to ask yourself do your financial statements in your financial model link together and make sense. Here are a few ways that they could be out of sync:
1. The cash balance and the cash flow does not tie out to the cash on the balance sheet. This is usually a sign that there’s some activity that’s not being captured on the cash flow statement. Or, perhaps, the cash number on the balance sheet is being generated in a different way.
2. The income per the income statement does not tie out to the retained earnings change on the balance sheet. This could be a sign that maybe some numbers on the income statement may not be rolling together properly or there’s an error in the income statement rollup on the balance sheet.
3. Any balance sheet accounts may be inconsistent with their income statement counterparts. Are acco
Bring Finance into the Inner Circle 2007-10-20 03:13:13
What’s one way to get more productivity out of your finance department?
Make the finance department part of your inner circle.
The better they know what’s going on in the different parts of the company, the better job they can do working with the numbers, working with your capital to make sure you have adequate funds, doing the planning and other tasks.
Not just doing it on a reactive basis either, make it proactive. Bounce ideas off the person. That doesn’t mean you need to agree, but it will give you a different perspective from what you might be getting from some of the others that are confidants in your current inner circle. A finance person might just see things very differently then tip you off on ideas that would be very important to be successful at what you’re trying to put in place.
Unfortunately, there are too many cases where it doesn’t work that way in the company culture. Some companies have the mentality where finance is kept in its corner and does their thing Read more:Circle
A Number of Ways to Buy Low 2007-10-20 03:09:01
There are a number of different ways that somebody can do acquisitions by buying low:
1. Buying at the lower point of the market. Unlike the difficulties of perhaps trying to tie in a stock market purchase, the acquisition market works on a longer cycle. And while you can’t necessarily hit it right at a low point, you can get some sense on where things are on the curve.
2. Distress companies. A company that isn’t doing quite so well can be bought at a lower price with the expectation that you’ll be able to turn it around and get it back up to par with that it could do in the industry.
3. Smaller companies. Size does matter in all things being equal on relative profitability. Smaller companies will go at a discount versus the larger companies. That’s one way to add value is to be buying small and then rolling them up into a larger mass of companies which can then go for a higher value.
4. Special circumstances. There may be other special circumstances that can trigger lower pri Read more:Number
Bank Leverage in the Acquisition 2007-10-20 03:06:11
It got crazy in the mid-80s, the days of the very highly leveraged buyouts. It settled down some, although it has come back a bit.
Adding leverage by using more bank debt rather than equity can help you improve your return on equity in an acquisition. And you’re putting less of your own equity or other investor’s equity up into the acquisition. However, like many things in life too much of a good thing is not a good thing. With a lot of bank debt and a transaction, there’s more risk, more money is going out to interest expense, cash flow has to be allocated towards paying down the debt that leaves less cash generating that can go towards operating the business.
If things fall short of the mark, it can turn out to be very precarious. In the worst case, it could mean that the company could go under. And no matter what the leverage when the company goes down, the return on equity is a multiplier times zero.
So how much is too much? Take a look at the cash flows that you expect to g Read more:Leverage
, Acquisition
Acquisitions versus Organic Growth 2007-10-20 03:02:32
There’s different ways to grow the company. You can do it through acquisition or you can do it by growing organically, getting more from the current operation.
There’s a case that can be made for both. It all depends which is right in the circumstance. It could be both could be right and one of the keys is coming down to execution. How well can you execute either strategy?
When might acquisition be a viable alternative?
1. Market timing. There are times in the market when acquisitions are relatively cheap and it’s a less expensive way to pickup new customers and infrastructure.
2. Synergies. There are synergies that come with the acquisition that you can pick up quicker than having to build them on your own. The acquisition might give you entrees into new customers, new markets, new product or service lines, new technology, new infrastructure or new R&D resources.
3. Timing. Timing may be very important at this stage of the life cycle in your industry. It might be a race for Read more:Acquisitions
, versus
, Organic
, Growth
Technician versus People Person 2007-10-20 02:58:11
The best technician may not be the best people person. Keep that in mind when it comes time for considering promoting someone. When somebody moves up to the CFO level and, perhaps, even one level down at the controller level, additional skills come into play. Even though the person has done a great job for you so far what got him or her there may not be what’s going to carry him or her through the next roll.
Consider some of the things that can be different as they move up to the top role in the finance area.
1. Developing staff. They have to recruit, motivate, develop and work with staff.
2. Mixing with peers. At another level, there’s more coordination with peers in the company. Particularly in finance, you have to work to be proactive at this.
3. Connecting with outsiders. There can be a whole new group of people to connect with in the outside world, customers, suppliers, service firms and others.
They may have very different skills than what the person might have been using on Read more:versus
, Technician
Watch for the Hockey Stick 2007-10-20 02:54:56
There’s a classic curve that shows up in a number of financial models for early stage companies. It’s called the "classic hockey stick." It begins with a slight dip in performance. Then starts to rebound and continues on a straight line path at a sharp upward curve until the numbers get very huge a few years out.
It almost looks like you could do the graph by using a hockey stick and save you the trouble of going through the whole forecast in Excel.
The problem with these is that in almost all cases it’s not real. I’ve been blessed to be part of two ventures where we actually exceeded any forecast that might have even been done on a hockey stick basis, but those are the exception and they’re few and far between.
The fundamental issues with a hockey stick type of forecast is that it assumes many costs will stay fairly steady or just rise very modestly with the increase in sales. Among some of these costs are:
1. General and administrative expenses.
2. Marketing cost.
3. Techn Read more:Stick
The Owner’s Role 2007-10-20 02:50:35
One of the important things to judge with an acquisition is how important is the owner’s role in the company. Typically, it will get downplayed by the broker or other financial intermediary representing the seller. However, often times, there’s more to it than what is said. A company may be more dependent on the owner than how they are letting on. What are some things that you could look at to judge this?
1. Product or service development. Who’s developed some of the new products or services that have been offered over the last few years? Has it been the owner or has it come from others? How important has the owner’s say been in deciding which projects make the cut and see the light of the day?
2. Sales. Look at the new customers that have been brought onboard during the past few years, especially if it’s a company that’s dependent upon a smaller number of customers. Who brought those customers onboard? How were they first approached? What was the sales cycle like? Who was Read more:Owner
Timing Matters 2007-10-20 02:50:02
With acquisitions timing can make a big difference. It plays out in two major ways:
1. What kind of multiples might be paid for the acquisition?
2. The availability of financing to finance the acquisition.
Think of it as being similar to the real estate market. There can be times in real estate when things get too pricey. The people who get in near the top may have to take a hit for a couple years and ride it out for a while to get back on the curve.
On the other hand, people who buy at nice timing in the market can get some very nice returns and give themselves an extra measure of safety. Like real estate, some of the cycles in buying companies can be rather long-term. It can be like a ten year cycle.
Work with your financial advisor who’s helping you on the transaction and get a sense on how the timing is in the market. If you think you’re not quite in the market yet and it may be a couple years, it’s good to start making those connections. That could influence you perhaps to Read more:Timing
Why is the Company Really Up for Sale? 2007-10-20 02:33:44
Selling a company can be a very emotional moment, especially if it’s been held for a long period of time including across multiple generations. For many owners this has been their livelihood, this has defined their life and it’s not an easy thing to let go of.
A key is to understand why the owner really wants to sell. If it doesn’t feel strong enough, seller’s remorse could kick in and you’re left at the altar and back to ground zero on the acquisition trail.
So when might you be most at risk for a transaction that could fall through:
1. The owner’s looking to retire however the owner might not really have to retire quite so soon.
2. The owner’s eggs are all in one basket. This is his only company. This is where he or she’s been spending most of their time and there doesn’t appear to be much in the way of outside interest.
3. He only began with high expectations on the valuation. Even though you’ve got to negotiate down to a more realistic level that nagging though
Operating Costs Pets and Orphans 2007-12-13 06:22:07
You own your business. You the owner are really strong in some areas. You may have a knack for sales or are very creative in designing products or services. These may be the reason you saw the need and got into the business in the first place.
Yet you the owner may be weak in some other areas. You never got trained there. You do not have much experience. You may not get marketing or understand information technology. It is a bit of magic or a black box to you.
This can play out in operating expenses in several ways not to your benefit:
· You have your pets. You love to spend money there when you can. You feel very rosy about any projects that come up here. It is like someone who goes out and buys a neat new tool from the hardware store, that they may only use once a year and is way beyond what they needed.
You may for example, be very visionary and very enamored about information technology. You see the power of the Internet. You pour a lot of money into it. You spend more than you Read more:Operating
, Costs
, Orphans
Financial Vertigo 2008-02-22 09:52:42 You have heard of vertigo, the fear of heights. You might be a fearless mountain climber. You scale up a cliff with hardly a sweat. Your heartbeat barely rises.
But mention finance and you break out in a cold sweat. You have a fear of finance heights. You hold yourself back.
You may say, “That is not me.” Yet you just might be doing it without even knowing it.
Here are some ways it shows up:
1. You hold back on spending money. You sit on the marketing program. You stall on product development. You wait to hire that new person. These make perfect sense to spend money on, but you just cannot pull the trigger.
2. You do not sign that bank loan.
3. You decide not to go ahead with the equity investment. You rat Read more:Financial
, Vertigo
Travel and Entertainment Costs Traveling High 2008-02-22 09:29:47 A close cousin to credit card costs is travel and entertainment expenses. You could be tight on your costs at home or in the field offices. But once people are on the road, it is loosen the wallet.
It can feel like a vacation to your people. They spend on things they would not normally. Or they may treat it as a cost of doing business. They are sacrificing by being out of town. So why not splurge a little as a reward? You may agree. You may want to treat people well on the road so they make the trips that they should. But it could go overboard.
There may be good intentions to travel inexpensively. But it may not be done well. You could think you are being tight but could be spending more than you need to w Read more:Travel
, Entertainment
, Costs
, Traveling
Credit Card Control 2008-02-22 09:29:30 Treat credit card expenses just as seriously as you would regular purchases. While the dollars may be much less, you could save a lot of discretionary spending with little or no corporate value.
Decide if corporate credit cards are really necessary or could be cut back. Have people put things on their own credit cards and submit the expenses. When it is not as automatic like on a corporate credit card, some expenses may just go away. If cash flow is an issue, consider modest cash advances. Make the reimbursement process simple and quick.
If you still need to use credit cards, separate out the business from the personal. Have a separate credit card for business only. Avoid running personal costs through. Shut that door. It also Read more:Control
, Credit Card
Taking Care of Travel & Entertainment 2008-01-04 00:21:00 Like credit
cards, treat your travel and entertainment costs seriously. You may not have big dollars in T&E, but
you could be throwing some dollars out the door.
Set guidelines and stick to them. Make it clear to your people. Do not reimburse when they go astray or
you in effect set a new guideline.Follow them yourself.
Nothing hits home like a good example from the top.Get the help of an expert.
A good travel agent might save you money. There are firms that specialize in going
over your T&E costs and suggesting ways to cut expenses.See what you can simplify. You might move to per diem reimbursement
for out of town meals and cut out a lot of paperwork.Consider the value of your people’s time. Balanc Read more:Travel
, Entertainment
, Taking
Credit Cards Gone Astray 2008-01-04 00:18:00 You may run a tight ship with purchasing. You compare and shop well. You have budgets and keep in line. It works well for what purchasing gets
involved with.
But then there are the credit cards. They do not follow the same controls. Money gets spent in different ways. Approvals are different and may be more
lax. The expenses hit later. You may not see them until up to a month if
you still rely on paper statements. You
may not get the documentation you should for some credit card purchases.
Personal expenses can slip in too. It may be under the dollar radar.
You as the owner may be the culprit. You may choose to run things through. You may be more generous on your spending
than you are for your people. It can s Read more:Cards
, Credit Cards
Personnel Power 2008-01-04 00:16:00 Your highest
operating cost may be your people.
Certainly it can be the most powerful.
Even though they do not produce a product or service customers, your
people in other operating areas can make or break your performance.
Bring in the right people at the right level in the right
numbers at the right time. Know
your biases. Realize where you know
less and might be prone to over or under hire. Get feedback from your advisors or other
outside experts about areas you are not sure about. Your CPA, for example, could help you
understand when to bring in a controller or CFO. Check with owners at other
companies. Get feedback from peer
groups.Use part-time leaders to bridge your growth. Rather than Read more:Personnel
Personnel 2008-01-04 00:15:00 One of your highest other operating costs may be
personnel. Yet it also can be one of the
toughest to manage. You know what people
you need to produce your product. You
know how many you need to deliver your service.
But you may feel like a fish out of water when it comes to people below
the gross margin line.
You may under invest in some areas. You do not see the benefits so you keep
it too lean.You may overcompensate and over hire. You might have too many people, too much
talent or overpay. An owner with a
$2 million company has a CFO that costs nearly $200,000 with
benefits. That is nearly 10% of
revenues and overkill.You may miss out on using good outside part-time or
interim help to manage your growt Read more:Personnel
Look at Keeping Local Together 2008-01-03 23:43:00 You squeezed
every square foot out of your current space.
You have people to add. There is
just no way at first glance that you can put in one more body. You are thinking strongly about adding a
second local office and moving a department or two over there. Before you make the leap:
Factor in all the additional costs. It is much more than just the real
estate costs. What does it mean in
lost time for your people? How will
it affect your time? What added
communication costs will you incur?What departments would you move? What departments do they interface
with? How will that be
affected? What impact will that
have on performance? Is there
another department you could move Read more:Local
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