Owner: Ask Jon Paul URL:http://www.askjonpaul.com Join Date: Sat, 26 May 2007 10:56:02 -0500 Rating:0 Site Description: Bringing new insights on results and maximizing your company value!Business and corporate financial expertise advice. Site statistics:Click here
A Creative Way around the Valuation Gap 2007-05-25 08:35:18
A private equity investor or angel investor and an entrepreneur, both may be very interested in working together. However, they may be miles apart on the valuation. Both may be optimistic about the prospects for the company, feel very compatible with their management styles and feel good about the management team and the industry. But there is a gap in the valuation that could keep the relationship from going forward.
So, how can you bridge the gap? Here’s one creative way. First, let’s look at the underlying causes. The entrepreneur may have a very emotional reaction to the valuation. He may sort of be looking at comparable companies and their multiples and extrapolating those to this company. Another cause could be that the entrepreneur may have raised money at too high of valuation during some of the early rounds and as a result that put a psychological floor on the valuation that they feel it just cannot go below with this next round.
Meanwhile, the private equity firm
Allocating the Payroll 2007-05-25 08:34:52
I’ve seen companies that sometimes do a nice job splitting out their salary and wage cost among various different departments, however in some cases they will do it fine for some departments, but leave too much bunched together in administrative. So, that’s the first point of this note.
But, there’s more. Sometime companies get the salaries right, but then they leave the fringes all down in the pot in the administrative area. Things such as:
1. FICA and Medicare payroll taxes
2. Unemployment taxes.
3. Medical insurance.
4. Disability or other insurance.
5. 401K (inaudible).
6. Other fringes.
To really get a full number on the payroll cost by department, get the fringes allocated up there too among the different departments. Don’t overload the administrative department with costs that really pertain to different departments up above. Do this allocation and you’ll have a much better picture of what’s really being spent on your payroll by area.
Jon Paul, MBA, CPA, CMC, Read more:Payroll
Creating Your Own Brand 2007-05-25 08:34:29
One of the big keys in many businesses is how can they improve the margin that they’re getting on the sale of products to customers. One factor can be whether the products are products that you’ve created and produced or are you just functioning as a distributor of somebody else’s product.
It might be worthwhile to consider creating your own label of products. I had one client that did this during the past year. It made a big difference on certain products, taking the margins up form 45% to 70% or more on certain lines.
The change in the process might not be as dramatic as one might think. In this situation, the processing was not very intense. If anything, it was as much repackaging as it was pure processing. Or, it would be very mild batch processing that would be involved. It could be as simple as just encapsulating liquids going from drums of material into individual capsules and then having the capsules packaged into bottles. Or, in certain cases, there was maybe so Read more:Creating
, Brand
It’s Do Diligence 2007-05-25 08:33:57
You’re on the trail for an acquisition. You’ve found one that looks promising and you get an agreement on a term sheet. Now, it’s time to do, you’re homework on the transaction before it closes. In other words, work on what’s commonly called, "Due diligence."
I’d like to call it a different term – "Do diligence."
It’s a play on words, but there’s an important psychology with it.
Due is a very reactive word. Do is very proactive. You can make a case that yes a lot of the material is due you. However, even if it’s due you, it’s still up to you to make sure you get it. It’s still up to you to make sure that it really happens to your satisfaction as the buyer. Being to your satisfaction means not only do you get the material, but it’s also in a form that you want and that it’s understandable, with any questions getting explained by the seller.
Due implies the ownership is with the seller. Do, on the other hand, means that you are taking responsibility for the i Read more:Diligence
Receivables - The Power of the Cutoff 2007-05-27 07:57:09
You hate to ever have to turn down sales. It feels good to get in every sales dollar that you can.
However, you have to remember it’s not really a sale until you have cash in hand. It is collections that really counts.
Because of that reason there could be times when you just have to put your foot down.
If you don’t, you could be picking up the rejects from your competitors. There could be customers that circle around. They’ll by as much as they can from you. Then when they suddenly can’t buy anymore, they’ll move on to the next person. Or, when a company says, "You can’t buy anymore because you’re too stretched out," they’ll rotate around.
So, how does somebody get paid in that situation? Often times, it could be putting the clamps on them and saying no more shipments until they get certain invoices paid up. That might be your final leverage in order to get payments to come in sooner. Over the long-term, you’ll have to decide if this is the type of relationsh Read more:Cutoff
Moving to Electronic Billing 2007-05-27 07:56:44
It’s not just how fast you get your bills out; it’s how fast you can get them into your customer’s hands.
That’s the business case from moving to electronic billing whenever possible.
Depending upon your average length of time for mail to get to customers, it could save two to three days. Then you have to consider how many of your customers start the meter from when they received the bill. Like it or not, there are some customers that work that way. So one way to determine the value of converting to electronic billing could be taking two days out of your day’s sales outstanding in accounts receivable and seeing what the value of that would be. That could more than offset some cost of electronic billing.
However, there might be other factors too. Certainly, by billing electronically, you might cut down on some of your processing costs by sending out invoices. Certainly, there’s savings in the paper and the mailing and the staff time you have to put together the invoices. Th Read more:Moving
, Electronic
, Billing
Putting Together the 13 Week Cash Flow Plan 2007-05-27 07:56:03
You bought into the idea that a 13 week cash flow plan would be helpful for your business, so how do you create it? Here are some of the steps:
1. Accounts receivable collection. Do a download on your accounts receivable and project out when do you think you’ll collect the current accounts receivable.
2. New Revenues. Have a separate collection item for new revenues. What revenues do you expect to come during the next 13 weeks? And then put in what will the timeline be between the shipment and collection. This combined with your receivables will give you core cash info.
3. Other receipts. Are there other receipts that you get that might be outside your core shipments? This could either be investment income, commission income, or perhaps other income you have coming from different sources.
4. Accounts payable. Do a download on the accounts payable. Get that information and determine when the various current bills that you have will be paid.
5. Payroll. Base your projection on Read more:Putting
Pre Money and Post Money 2007-05-27 07:55:36
I sometimes get asked the question, what does pre money and post money mean and how are they calculated?
Post money represents the value of a company after a round of investment has been made. So for example, if an investor is putting in $2.5 million into a company and getting 25% of the company, the post money valuation is $10 million. That would be calculated as $2.5 million divided by 25% of the company.
The pre money valuation then is the post money valuation less the money that was just put in by the new investor. In the above example, the pre money evaluation would be $7.5 million, which is $10 million less $2.5 million put in the latest round of investment.
In particular, look at the trend of the pre money valuations. Are they going up and, if so, by how much? Does the trend seem to make sense? That can give you an indication of, perhaps, the quality of the pre money valuation.
And, of course, don’t get too hung up on the pre money valuation as an absolute. I feel if y Read more:Money
When the Pie Isn’t Big Enough for Everyone- Accounts Payable 2007-05-27 07:58:26
One of the toughest challenges to deal with on your accounts payable list is when you have a lot more that is due than what you have money in the bank account. How do you slice up the pie then?
I’ve been in some situations like that where the cash was tight until we had turned the company around, but I think some of the actions that we showed and how we handled ourselves during the tight times helped us as we climbed out of the hole and got back on our feet. I think that behavior helped us to move along much faster.
Here are some ideas from my past experiences:
1. If you’re new with the company, use that as a time to get breathing room. The information you have might not be correct. Very often, there can be bills that you are missing that don’t show up on the sheet. You can buy some time, but you don’t need to buy a lot to get the picture straight. I would talk with the various major vendors and ask them to send me their balances, so I could make sure our records’ in Read more:Enough
, Accounts
Scalability 2007-05-27 07:57:57
One big question to establishing the value of your business going forward is can your business operations scale up? In other words, can you be expected to earn higher returns off your existing operations as you grow? Normally, there are some upfront expenses that you have to setup, computer systems, accounting, corporate structure, manufacturing processes, service processes and so forth. In theory, as you expand to more customers or expand geographically, you should not have to incur some of that same level of cost and there should be higher profits.
So, what things can you look at to see if your business can really scale up and really maximize the long-term value of the company?
1. Management. Is the company heavily dependent upon one or a couple key people? If so, that could severely limit how far a company could be able to grow.
2. Established processes. Have you put established processes in place that have been tested over time and are well documented? Can these easily be transfer
Forecasting your Accounts Payable 2007-05-27 07:59:32
One of the more detailed parts of doing a cash flow forecast for the next 13 weeks is projecting out the payments on your accounts payable.
I’ve seen some companies go through a very manual process for this. They were able to slug their way through it with the enthusiasm of doing this forecast for the first time. However, when it comes time to do this on a repetitive basis, the process gets very old. What usually happens is the forecast gets updated infrequently at best and often times dropped altogether.
It doesn’t have to be that way. There is a way to streamline this process and turn it into more of a weekly review than a big manual exercise.
The first step is to get a download of the accounts payable trial balances. This download should show the vendors, invoice dates, and invoice amounts and probably invoice numbers for reference.
With that information downloaded into Excel, you can then put together the second leg. This would be a separate table that would list the supplier Read more:Forecasting
, Accounts
Billing Delays Equal Collection Delays 2007-05-27 08:00:34
One of the best ways to improve cash flows is to get your receivables coming in sooner. And there’s one way that can improve your days receivable as a sure thing.
A sure thing is taking any delays out of your billing practices.
If your billing’s delayed, your collections are almost automatically going to be delayed too. In many cases, companies will pay invoices from the day they receive them. Take an extra three or four days to get your bills out and you just added three to four days on the backend.
You might be depending upon information coming in from the field to get your billing done. You might rely on various invoices from suppliers to get in, so you can complete your project cost and complete that part of the billing. Whatever it is, first step is to take a look at see what is causing the delay in the billing.
Then find ways that you can cut it out. If you have people in the field, perhaps, they can get the information expedited to you. Could it be faxed? Could it be scanne Read more:Billing
, Delays
, Equal
Your Partner in Capital Expenditures 2007-05-27 08:01:40
You have a great partner with your capital expenditure program that you might not be taking advantage of.
That partner is Uncle Sam, the Internal Revenue Service.
Are you taking advantage of all that the IRS has to offer?
In particular, one that is sometimes missed and is, perhaps, the sweetest program is the section 179 deduction. This is where you get to deduct capital expenditures up to a certain dollar amount, roughly $100,000, during a given year. Rather than having to depreciate these over an extended period of time, Uncle Sam is letting you take a full deduction right upfront for capital expenditures up to the certain dollar amount. It’s a great way to save on taxes and reduce the net cost of some of you capital expenditure programs.
Another area that Uncle Sam is certainly taking advantage of depreciation for those assets and capital expenditures that you have acquired that go above your limits for the section 179 deduction. Check with your tax advisor to make sure you’re Read more:Partner
Tie Back to the Tax Returns 2007-05-27 08:03:24
Sequence often goes like this, company produce their numbers for the year-end. Then the information is sent over to the outside tax accountant. Then the outside tax accountant makes the final adjustments and the numbers are completed by the tax accountant with our various adjustments that he or she might have. Then the tax return comes back to the client. They sign off on it and the year is done.
Right? Not necessarily so, still another step that often gets overlooked.
That next step is adjusting the financial statement back to the tax return as applicable. That doesn’t include any things that are intended to be differences between the books and the tax return, such as for meal and entertainment expenses and other miscellaneous where the tax law treats them differently than the books. What it does mean is getting the other adjustments posted back into the general ledger, so that on a book basis not include the unusual tax item that the books agree with the tax return.
What ha Read more:Returns
Are You Tracking Any Margin At All? 2007-06-10 20:06:02
I saw a presentation which included financial statements. The financials basically went like this revenues, then expenses, coming to net income.
So, what’s critically missing? Margin
information.
By not having margin information, the owner was missing out on some trends that could be taking place in the business. In this case, it happened to be a financial services firm that was under some financial pressure in their industry as part of a typical long-term cycle. When money was readily available and there was a good transaction flow, rates were good. However, when the transaction flow declined, margins would get squeezed.
By not having margin information, he was not able to tell the impact of such a squeeze on his business.
So, regardless of what industry you’re in, now with all cases there should be a gross margin (inaudible), to show what kind of margin you get from the sale of your product or service. In this particular example, to get to gross margin, they would’ve de Read more:Tracking
The Importance of Consistency – Accounts Payable 2007-06-10 20:08:03
Perhaps, one of the biggest things that can help you and your relationship with your suppliers is to be consistent in your payment. You might not be able to pay everybody right on time. But if you can establish a regular pattern of making your payments, such as getting payments in 40 days or 45 days as opposed to 30 day terms, that can still be much appreciated.
The accounts payable department on the other end will know when to expect your money. They’ll know their better off putting efforts elsewhere with other customers. They won’t bother you after 35 days or so.
What doesn’t work is being erratic. If sometimes you pay right on 30 and other times it’s going to be on 60, you’re going to condition certain behavior. You’re going to condition them to feel like they need to call you that they need to keep on you in order to get payment done in the shorter timeframe.
By being consistent and having your payments scheduled out on a consistent basis, it can also help you be more Read more:Consistency
, Accounts
Bigger is not Better Always in Technology 2007-06-18 06:19:43
It can be tempting to go with that big enterprise system that you’ve been reading about or, perhaps, one of the sales people has been calling on you about. However, this is a case to look very, very carefully before you leap and know what you’re really getting into.
I had a past client that went from QuickBooks right to a midrange enterprise system that was a rather expensive jump for them. With all the programming cost for conversion, the price tag was much near a million dollars than it was a hundred thousand dollars.
The key to a system is finding one that not only fits your particular industry, but also fits your particular size of company. Here’s some reasons why bigger may not be better for your system:
1. The expense can be very large moving to the big enterprise system. You might be able to get much more bang for your buck with a smaller system that could still meet the vast majority of your particular needs.
2. Very often, there can be inflexibility in the bigger system Read more:Technology
Should you have a Lockbox? 2007-06-18 06:19:22
In the past one means to speed up your collections by a little bit and help improve your cash flow was to get a lockbox. A lockbox would be a box where your customers would send their deposits to. This could save you a day or so time in the processing of the receivables into your bank account. There would be extended hours where it could be processed and you could get that same day notice of the deposit into your account. It might still take a day or so to get the deposit to clear, but at least you started the process a bit sooner.
The benefit is saving time compared to having the checks come to your office. Then they have to be written up. Then somebody takes the deposit to the bank, and then the bank processes it and then you get credit for it. Now, your lockbox can help save some of the floats on the money, but it also could save you some of the hassle of going to the bank and the time required to process the deposit manually.
However, a couple things are happening that may take
Board Packages – Two Things You Need 2007-06-18 06:20:54
There are two things that are needed in the board package. Most people usually focus on the first. Because they’re so busy taking care of the first item, they often end up blowing the second one. Two things that board members need from the board package:
1. Good information in the board package.
2. Enough time to review it.
It’s the second one that often falls short, although, certainly, the first one can fall short too, but that’s a subject for a different message. The focus on this article is about the second one.
So your board can be most effective, they need to be able to see the information in plenty enough time prior to the board meeting. To get the information on the spot at the board meeting or just a day before, it doesn’t give enough time to go over the material and give it the thought that it deserves.
I’d like to say in my career I’ve gotten out board packages all the time in the board members hands a week ahead of time. That hasn’t always happened. I’ve le Read more:Board
, Packages
Balancing Operational and Financial Risk 2007-06-18 06:20:32
You can take the risks that your company faces and put them into two broad categories:
1. Operational
risk. These are risks in terms of how well your company will operate. Will you be able to execute on your business plan? Will you generate the kind of sales that you need? Will your cost keep within control?
2. Financial
risk. This is related to the financial structure in your business. How much financial risk are you taking on? In other words, are you very highly leveraged with debt? Do you have some safety room in your financial area?
You want to strike a balance between the two. If you have both high operating risk and high financial risk, you give yourself very little room to operate. If something goes wrong, you could be out of business very quickly.
So, if you have high operating risk, consider being more conservative financially. Don’t take on as much debt. Have more equity in place. Have more cash on hand in order to give yourself breathing room in case the operating side of Read more:Balancing
Should the Valuation be in? 2007-06-29 11:40:21
One question comes up with business plans – should the valuation be in?
My general reaction is no. However, there’s a case where it could be in.
The reason I don’t like it in is because that sets a ceiling for the transaction. Someone is not likely to come on in and offer a higher valuation than what you have put in your plan. That is unless you suddenly have a competitive situation with multiple investors competing and happen to be a hot property or you happen to have grossly undervalued your company in the valuation that you did put down. Having a valuation in almost never works in your favor and usually can work against you. So you might say you have a high valuation in, but that can work against you to because it can scare investors off if they feel you’re too unrealistic in your expectations.
There is an optional case though where valuation could be put in- the historical valuations. If you put it in a cap table, it would show that the capitalization of the shares that ha
Shipping and Handling 2007-06-29 11:39:48
For many companies, shipping and handling costs millions, yet may not be given a lot of thought.
That could be leaving some serious money on the table. Treat shipping and handling just like you would another product. Ask yourself some of the following questions:
1. How are the margins on your shipping and handling? Are you making money in this category? Does your reporting give you that capability to be able to determine whether you are or not? If not, what do you need to do to get that type of reporting in place?
2. Drill down to a deeper level. It could be by product line, it might be by sales territory, it could be customer class or, perhaps, by country. Where do the shipping and handling margins vary the most? Are there particular soft spots where you’re losing money on shipping and handling that drag down the overall margins in this category for your entire company?
3. Are there times when you’re not billing the shipping and handling charges when you should be? Is there addit Read more:Shipping
, Handling
Knowing Your Service Margins 2007-06-29 11:37:57
Your business might be entirely service or their might be a service component to your business. In manufacturing businesses, it’s important to understand the margins that are being made on selling products. In a service business, it’s just as important to know what margins are being made on your particular services.
I don’t mean just sort of in general in terms of what you think you are making. It is knowing what are the numbers that are showing up through your financial statements.
Take a hard look at your financials. Are you really geared to know through your financials what kind of margins you’re generating from each of your core service areas?
In many cases, I find that is not so. One cause can be using cash based accounting, which can be very prevalent in service businesses. What happens then is that revenues may get booked in one period and the expenses booked in another. There’s not really the alignment between the revenues and expenses, so the company is not really a Read more:Service
, Margins
Cutting Checks Ahead of Time 2007-06-29 11:37:36
Cash may be tight, yet I sometimes see companies still go ahead and cut more checks than what they have in cash to pay for them in their bank account.
I’d like to see that practice stop.
Cutting
checks has gotten a lot easier these days. Technology has brought great power into the hands of our people. There’s no reason that checks can’t be cut frequently in small batches as needed. It’s not the big deal that it used to be. Certainly, I prefer to see it done on a regular basis, such as once a week to be more efficient. However, when cash is tight, you have to be more flexible and operate differently.
One reason I don’t like it is what it does to the financials. At month end, there’s a negative balance in the cash account and accounts payable is at a lower level. A journal entry needs to be made to put cash back into a positive balance and to put the corresponding balance back into accounts payable. Accounts payable isn’t paid until there’s money in the bank to pa
Design Resources 2007-06-29 11:41:44
You might have some design work to be done, could be for your business card, could be for your logo, might be for a brochure or other marketing collateral that you may have.
The next time around consider using the internet as your purchasing department to find resources out there that you might not have been aware of. I’ve used it and I’ve gotten some incredible results for incredibly little money. Here are a few resources to consider:
1. DesignOutpost How they work is that you post a particular project, you set a budget for the project and then you post the money for the project with Design Outpost. Here’s where the advantage of this particular approach is. You get people really competing at a deeper level for your work. When I went through with the business card design change, I spelled out what I was looking for and put that up as a project on design outpost. I set an amount that was pretty modest. I believe it was $125. What happened then was amazing. A beauty contest broke Read more:Resources
What Bias Does Your Technology Head Have? 2007-06-29 11:41:18
We can all be creatures of our past. If we are brought up to be a hammer, we can see everything as a nail. One of the biggest tools you’ll use in your company will be the technology that drives the information technology. IT has become an even bigger resource to companies during the past two decades as more power has been pushed out to users, we now have the internet and we know have email as an additional way to communicate.
That makes it all the more important to make sure that we’re getting effective use of our technology and that we’re headed in the right particular direction. You might have a head of information technology or you might happen to be relying more on an outside technology advisor. It’s really important to know where is there background and what perspective are they coming from. You need to make sure that this will match up with what you’re going to need for your particular business. If you find that there’s anything missing, how can you fill in the blank Read more:Technology
Getting the Payment Discount 2007-06-29 11:43:10
One of the best returns on your investment that you can get in your business is taking advantage of payment discounts that your suppliers offer. Now, maybe only a handful offers it, but when it comes it has a very high ROI and should be something to take advantage of.
For example, suppose the terms are 1% 10, net 30. That would mean you’re paying 20 days sooner and saving 1%. Based upon a 360 day year to keep the math simple, this represents an annual return of 18%. That’s certainly much higher than you could get on a savings account with your bank.
If the terms are 2% 10, net 30. You can see that it’s even better 36%. That should even be higher than the return on equity in most companies. So the first step is to do the calculation and determine what the return on investment is. To do that, you look at the difference between how many days you’d have to pay in to take the discount versus how many days you’d have to pay without the discount. In the above example, it was 20 day Read more:Payment
, Discount
Breakdown Your Manufacturing or Service Variances 2007-06-29 11:42:42
You show variances, so that’s a good start. For example, you might be showing variances in your manufacturing cost versus the budget.
However, there’s a more powerful way to go about it that drills down even deeper.
Break you manufacturing or service variances down into three different parts:
1. Volume. Here’s the variance that is related the volume of your work. As you have more volume come in, in theory you can be spreading some of your fixed cost and picking up some positive variances from that standpoint.
2. Efficiency. How efficient were you in producing the product or delivering the service versus what your standards were or what you had expected for that particular level?
3. Purchasing. This would cover how efficient were your rates. What were the commodity prices on your raw material, what were the hourly rates on your labor, higher or lower than what you had anticipated?
By breaking down your variances among these three factors, you get a much deeper look at how Read more:Manufacturing
, Service
What Will Your Buyer be Picking Up? 2007-06-29 11:45:05
One important thing to look at when considering the future value of your company would be looking at it from the buyers eyes. What would they be likely to be picking up? Looking ahead like this gives you a clue to what a buyer might think is important and it can be a valuable aide to you in the short-term decisions that you have to make. It can protect you from cutting into bone and doing some things that might hurt the long-term valuation. It can help you focus on what areas should you putting resources into and what areas would not be as important that you could perhaps harvest or let slide some.
So, what are some of the things that somebody might acquire? Here are just a few of the possibilities:
1. Your people. Particular in a technology venture, your people might be a real key.
2. Your patents. What kind of intellectual property do you have?
3. Your facilities and equipment. What fixed assets would you have that might be a greater appeal?
4. Your customer base. This could Read more:Buyer
, Picking
Scrap 2007-06-29 11:44:27 Scrap
. It can be part of every manufacturing operation, usually pretty insignificant. However, in some industries, there can be material dollars that are just a natural byproduct of the manufacturing process. If not being careful about it, scrap can be another byproduct. That byproduct is an IRS audit.
Scrap is something that I’m hearing is on the radar of the IRS these days as they come out to do their periodic audits. Why?
Here’s what can happen with scrap. It can be a way of skimming money out of the company. The scrap that’s generated during the manufacturing process is recorded as an expense. However, that’s one man’s scrap can be another persons gold. In many cases, they’ll be a market for the scrap. So, what unscrupulous companies might do is sell the scrap, but instead of reporting that income on the books the owner profits the scrap rebates personally.
So, be prepared for this should your number be called for an IRS audit. An audit doesn’t necessarily mean that
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