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Statistics |
| Unique Visitors: 57 |
| Total Unique Visitors: 154821 |
| Visitors Out: 2170 |
| Total Visitors Out: 2176 |
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| 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 rationalize your behavior. You say it was too low a valuation, when really you are just afraid to give up some control.
4. You keep a tight leash on the money. You do not let go and give...
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| 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 without realizing it.
Your people may also be traveling when it is not needed. Technology is changing the landscape and may allow you to have face to face interactions without hitting the road.
Y...
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| 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 greatly simplifies things for accounting. One of the most unpleasant tasks accounting can have is going through credit card statements and having to separate out personal versus business expense...
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| 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. Balance that against saving some money
on airfare.Keep up on ways technology could eliminate having to
travel for a meeting. A conference
call, webcast or video conference might do the job instead.Insist on documentation you need for IRS purposes. Get guidance from your accountant or tax
advisor. Insist on documentation or
hold back payment. Remember this
includes local vehicle use as well.Make the reimbursement process simple and quick. In this electronic world, things can
move a lot faster than the old paper days....
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| 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 set
a tone that people pick up on. ...
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| 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 going from nothing for a
long time to eventually hiring an HR director, use an outside HR
firm. Get the benefits of their
knowledge without having to pay for it full time.Invest in training your other operating people just as you
do for your people on the line.
Keep tabs on what you spend on training. You may find it is very low. Ask yourself, is that really what you
need to spend to keep your people on top?Anticipate ahead what new positions you will need as you
grow. What skills will be
needed? Do you have anybody
in-house who could move up? Where
might she fall short? What could
you do ahead of time to build up those skills? A common area is people skills. People start in their careers as good
technicians. They learn their
craft. However, to move up, they
need to learn how to work well with and lead people. A strong accountant may need supervisory
training in order to step up to become a controller.Understand how powerful benefits can be. When you first start, your benefits will
be limited. As you grow, revisit
...
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| 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 growth.
You are not large enough to bring in a full time person. So you go without. The area suffers. One common area is human resources. You may not realize about good part-time
HR leadership firms. You end up
being out of compliance in many HR areas and do not even realize it.You are not aware of the skills needed. You are familiar with your people and
stick with what you know. You
promote them based on their good work and loyalty. Your intentions are good. However, you just put them in over their
head. They want to do well for you
and give it a shot. It can either
blow up and the person leaves. Or
you end up living with mediocrity.You may under train.
You may have great programs to teach people how to make your
products or service your customers.
But people in other areas get little training. It is baptism by fire. There is no or little training budget.You inadvertently do other things that make it hard for
people to be successful. There
could be too much chaos. People
turn into firefighters not le...
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| 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 that would not be so dramatically
affected?How will the move affect your execution? What is likely to not get down or take
more time to do? What will you have
to do to counteract this?What if you were to break your lease early and move to a
larger space? How would that
benefit you? How would that compare
against the additional real estate and moving costs? If it still makes sense to open up a second office in
town, even after factoring in all the additional costs, what can you do to
counterbalance the negative side effects?
How will you keep people in touch and on the same page? How will you make sure that things get
done that need to be done?
A second
location may still be the right move.
Think ahead about what you are getting into. Otherwise, it could cost you dearly. People could take much longer to do
things. You could end up executing
poorly and performing poorly. Plan ahead
so it does not end up that way....
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| Operating Costs - Local Out of Sight |
| 2008-01-03 23:38:00 |
It does not have to be long distance. You could have operating cost issues right across town. It could even be walking distance. Or even just an elevator ride away. This can hit you even if you are just located locally and have no remote locations.You have grown your company. You need to add some people. You are bursting at the seams. Your lease is not up for a year or two. You decide to move a department or two to another spot for the short term.You know the additional costs of the real estate. You are fine with that. After all, you would be paying more rent if you could lease more space at your current location.But you may be missing the highest costs of all.• People- it takes your people more time to get thi...
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| Feel the Field Costs |
| 2008-01-03 23:38:00 |
Recognize that operating costs below the margin line may be just as important or even more important out in the field. It can be much harder work to oversee the field. However, it may be crucial to bringing home positive net income from field operations. The farther away the location is, the more important this can be. If they are located in another country, this magnifies the challenge.• Know how much your field operating costs represent out of your total operating costs. Does the field get the attention it deserves from you?• Get on the road. Get there before a crisis hits. You will learn things you cannot tell from reports alone. • Build the relationships. Open up the lines ...
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| Operating Costs - Company or Industry Stage |
| 2008-01-03 17:12:28 |
Your company has a life cycle. Your industry has a life cycle. Your other operating costs need to fit what stage you are in. What fits at one part of the cycle can be a disaster at another.• You may be running too far ahead of your stage. You may have a dynamite marketing program but your industry is not ready yet. • You may be running too far behind your stage. You may be running a tight ship while your industry is exploding. You miss out on grabbing market share while the going is easier. You may have a better bottom line now, but it will be skinny compared to what it could be later.• &...
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| Operating Costs - Field Costs |
| 2008-01-03 16:10:20 |
Your business may have multiple locations. You are located at your corporate headquarters. You may do a great job of keeping on top of operating costs there. It is easier when things are right under your nose. You can see it, you can feel it. You sense things about operating costs even before they hit the numbers in your dashboards or financials.Out in the field locations, it could be a different matter. It may be out of sight, out of mind. You may not get around as much as you should. You may not have ways to keep in touch beyond getting the monthly numbers. When the cat is away, the mice will play. It may take a crisis to get you there. By then you have spend a lot more in operating costs. You missed opportunities to...
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| Operating Costs- Play on the Right Stage |
| 2008-01-03 16:09:25 |
Get the big picture. Operate at the right level for your company and your industry.• Early Stage. You are finding your reason for being. Now is the time to be investing heavily in product or service development. You also lay the early foundations for other areas.• Rapid Growth. You have been discovered. The market likes what they see. Now is the time to grab all that you can. You want to entrench your position. You may spend more in many operating areas to get as much market share as possible.• Mature. Now is the time to harvest. Reap the benefits of the hard work you did in the earlier stages. You can fight for more but ...
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| Budget Smart |
| 2008-01-03 16:06:44 |
Make budgeting be as powerful as it can be:• If you do not have a budget, start one now.• Add budgets to your monthly reporting package and your dashboards.• Keep your people in the loop about results against budget.• Review variances against your budget monthly. Let your people know you are watching.• Get your key people to buy in and own their budgets. Guide them on the overall revenues for the next year, but make the expenses come from the bottom up. • If your business changes dramatically from the budget, re-forecast.• If an expense is no longer needed at the same level, challenge it. Do not...
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| Operating Costs - Budget Games |
| 2008-01-03 15:51:21 |
Operating Costs- Budget
Games
Budgeting can be a very powerful, yet underutilized
tool.
You may not have any budget at all. You just operate month after month. You may get lucky, but you may not do as
well as you could. Or problems
start, but you do not see them until they get very large.You budget your company but not from the owner
perspective. You have a net income
target but not an owner compensation target. You could hit your company income
number, but fall short on your return.
Money gets spent elsewhere before it gets to you.You have a budget but do not use it. It sits on the shelf. It does not get integrated into your
financial reporting. You lose sight
of how you are doing.You have one, but it is top down. You own the budget, but nobody else
does. Your team is not operating on
the same page.Budgeting is a long, laborious process. Your people spend more time on it than
they should. It drains the energy
out of your key people.It becomes a game.
Money goes to the best politician and not necessarily where it
should go to. It turns into a self-fulfilling prophesy. People use it to protect turf during the
year. They go out and spend money
because they have it in their budget, even when circumstances changed. It is the use or lose it syndrome. If they do not spend it, they will not
have it for next year. You end up
spending money you did not need to.Budgets stay fixed for the whole year, rather than
re-forecasting when a big change takes place. Your people aim for the wrong, outdated
target.Budgets are fixed only, even though some costs vary with
sales. If sales are down, you could
overspend and still look good against budget when you should not be. If sales are up, you could be punishing
people for spendin...
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| Operating Costs - Internal View |
| 2008-01-03 15:50:29 |
You know you cannot do it all. You hired good people to run your areas. The same can hold true for them on a smaller scale. They cannot know it all themselves either. They need to have the general view, the big picture, for their department. Like you, they will have some special skills. And like you, they will have some areas they do not know as much about.As you grow, that can become an issue. Initially, some costs were too small to care about. Now you spend more significant dollars. You cannot expect your people to be experts on every cost in their area. However, that does not mean it can be ignored. Your telecom costs may have been pretty small but now you shell out a couple grand a month. You are not an exper...
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| Get Your Department Heads to Own their Numbers |
| 2008-01-03 15:49:16 |
You hired
good people. Now make your department
heads feel like owners of their areas.
Keep them up to date on their operating costs. You do not have to share the whole
financials with them, but certainly let them see their department costs.Have them budget their numbers each year. Add this into the reporting
package. Hold them accountable for
what they planned and make it easy for them to see how they do. Make the variances visible to them and
you. They may take action on it
even before you see the need. Give them reasonable room.
Decide what they have discretion to spend on and what needs to come
up to you for approval. Celebrate and reward their successes as well.
You, your
family and your investors may own all the stock. Yet you will have something better to own if you
let your people have psychological ownership of their areas....
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| No Ownership of Operating Costs |
| 2008-01-03 15:46:56 |
When you are just starting out, you may have total ownership of the operating costs. The bucks stop with you. As you grow, that can change. You move from having just outside spending on information technology to having your own head of IT. Or you could now have heads in other areas, like marketing, product development, or customer service.As your company grows, you cannot do it all. Even though you have hired them, you still may not be using them well:• You may have too tight of a leash. It all goes through you still. Everything has to be approved.• You could go the other extreme. One or more department might get free rein. You end up spending money you d...
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| Grouping Operating Costs to Clearly See Spending |
| 2008-01-03 15:45:46 |
If you have all your operating costs in one large bucket, like administrative costs, break it up into meaningful sections. Among the departments you may consider are:• Product or service development or research and development- depending on your business or stage, these could be very large and very critical costs. It shows you how much you are spending for the future versus operating the present.• Sales and marketing- keep track of the more fixed costs here, which do not vary automatically with sales.• Variable selling costs- commissions, credit card fees, incentive plans, royalties, advertising. These can be split separately when significant. You see how these change wit...
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| Operating Costs - Grouping Well or not at all? |
| 2008-01-03 15:44:04 |
Your reporting package may dump operating expenses into one large bucket. All the operating costs come down to one total, such as total administrative or operating costs. Instead, you may have split your operating costs into a couple different groups, but you still have a big chunk in total administrative costs. Or you have costs that are part of the administrative total that really belong somewhere else like marketing.• It is harder to see bigger trends by area. Are total marketing costs climbing? You may miss it.• It is tougher to summarize. Anything that is summarized to a one page financial summary is just total operating costs.• It does not match how you operate. You have different de...
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| Not Paying Attention to Operation Costs |
| 2008-01-03 15:24:22 |
You focus on revenues. You watch the cost of revenues. You know when your margins slip a little bit. You are right on it. You make adjustments to get margins right back on track.You might not be paying enough attention, however, to operating costs. They do not feel as core to the business. You would rather work in your business: driving revenues and serving customers.That is true - to a degree. But you still have to work on the business too. It may not need as much of your time, but it still needs some attention. Part of working on the business is working on your operating costs. If you end up spending too much money in operating costs, then:• You work hard to squeeze a couple percentage points more into your m...
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| Hiring a Savvy Tax Advisor |
| 2007-12-13 06:50:57 |
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...
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| 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...
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| 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...
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| 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...
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| 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...
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| 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. ...
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| 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...
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| 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...
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| 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...
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| 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...
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| 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...
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| 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...
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| 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...
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| 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...
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| 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...
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| 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...
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| 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...
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| 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...
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| 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 ...
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