The balance sheet is an often overlooked and misunderstood financial statement.  It is not as sexy and often considered less important because the income statement which shows the profit and loss is where the action is in the financial statement world.  Some important focus areas I point out to my client when we review the balance sheet each month include:

Cash – Does the balance make sense and have we reconciled these accounts to the most recent bank statements?  Are the timing differences recent and explainable or are they old and unidentified? Do we remit stale checks to the state in accordance with escheat laws?

Accounts Receivable – Do we have an aging report that lists each open invoice and the days unpaid by customer?  Is there a consistent and effective process to ensure the older receivables are followed up and collected?  Do we write of uncollected receivables after six months?  Have we identified and reserved for customers that might not pay us?

Inventory – Do we know that the quantity on hand is properly stated based on physical count or inspection?  Have we determined that the costs assigned to each item inventory are reasonable and consistent with the current costs and valued at or below current market values?  Have we identified and reserved for inventory that is obsolete or damaged?

Other current assets -   This is usually prepaid assets such as prepaid insurance or deposits held for some short period of time (less than a year).  Are the balances amortized to their current value?

Fixed Assets – Do we have all our manufacturing equipment, trucks and office equipment identified and recorded on each asset at cost?  Are we properly depreciating this equipment? 

Accounts payable - Do we have an aging report that lists each open vendor and the days unpaid?  Have we scheduled payments for the next two weeks against the oldest payables based on estimated incoming cash?

Notes payable – Are all of the notes payable to the bank or other creditors recorded on the financial statements and do the balances shown reflect the current principle due on the debt?

Credit cards payable – Do we have all credit cards listed with balances owed stated properly?

Common Stock – Have we recorded the original stock capitalization correctly and adjusted for capital infusions and withdrawals?

As you can see there is a great to look at and discuss with each monthly review of the balance sheet.  Consult your financial expert should you have unanswered questions based on this analysis.

This monthly article is dedicated to my friends in banking who deal with struggling small businesses that have misused short term debt.

It is about debt.  Short term debt.  It can be a business killer. 

It is not that short term debt is bad.  It is necessary and when used properly, a critical building block in the financial structure for most businesses.  The problem is time.

Short term debt, typically lines of credit in mid-market companies like my clients ($2 million to $20 million in revenue) as opposed to commercial paper or standby back up lines, is properly used when it funds working capital, and working capital only.  Some rules of thumb:  use short term lines to fund 70-80% of current accounts receivable and 50% of inventory.  In growing companies the available line needs to match forecast sales growth and the resulting receivable and inventory balances.

The time problem occurs when the short term debt is mismatched and used to purchase or invest in longer term assets like land, buildings, and most frequently equipment.  Or, when it is used to fund losses.

For growing companies with room in their line of credit to draw more funds, the temptation to use the line can be seductive.  After all, the interest rate is lower than other debt sources and there is no amortizing principal, so payments are lower.  But it is a slippery slope.  The money is drawn, the new machine or computer(s) is acquired, losses are funded.  The line comes due in a year.  But the equipment is longer lived than one year, or profits do not recover.  It takes time for those investments to pay back (returns on investment, present value of cash flows, internal rates of return, etc, are all topics for another day).  It takes time to recover from debt funded losses.  That’s the time problem.

When the owner uses the line to buy longer lived assets or pay for losses, the time to maturity is mismatched.  The line comes due long before the business can throw off enough cash to pay off the line.  The bank may be cooperative, but terms can be tightened, fees raised and worse case, the bank says no to the renewal.  And now the short term debt can kill the company, because it has to be repaid.  Now.  Liquidation of collateral occurs.  The business is gone.

Always match the time of the debt repayment to the asset.  Receivables and inventory are short timers, lines of credit work magic here and help the business grow.  But for equipment, use 3, 5 or 7 year installment loans, or lease from the manufacturer or leasing companies.   For commercial property, 10 years, at least (and fix the rate).  For land and buildings, the longer the term the better.  And for losses, they must be funded by equity or quickly improved cash flow.

One of my clients said he considered 10 year or longer debt as “near equity”.  He was right, because the company has lots of years to make a return on the money borrowed.  The converse is also true.  Short term debt does not give you enough time to be using it for longer term investments or to recover from losses.  If you mismatch the time, short term debt can be a killer.

In last month’s eNewsletter I wrote about outsourcing senior executive positions in your company.  In this month’s edition I want to talk about a few other positions that can be outsourced.

First of all, why outsource?  Isn’t it better to have an employee who only works for you, and who can spend all of his or her time concentrating on your issues?

Well, the answer is simple . . . Yes and No.

If your company requires full-time concentration in a particular area of importance to the company, it might be best to have a full-time individual be your employee.  Perhaps the most common function in a company is sales.  Not much else happens in a company without someone bringing in new business, and then spending time with existing customers to retain them and expand your relationship.  The owner is often the first salesperson and, when another salesperson is added, the owner tends to spend more time managing that new individual.  As sales grow, more salespeople are added, and you may even need to add a sales manager.

The finance area is another department that tends to have a number of full-time employees.  As the company grows, however, it often makes sense to outsource some of the functions normally handled by Finance. 

The most common function outsourced is payroll.  You would be amazed at how many companies, though, still process payroll in-house.  The reasons most often given for processing payroll in-house are confidentiality and cost:  “I don’t want everyone knowing how much others make” and “It only takes me an hour or two a week to do this, so why should I pay anyone to do it?” 

Well, you are either paying someone to handle the payroll or – worse yet – you are doing it yourself.  What a waste of time and effort!  When you add in the quarterly and annual reporting to your state and the federal government, you are spending more time than you think.  The benefit of an outside payroll service is that they process the payroll and all of the taxes, filing reports as needed, and they also take responsibility if any errors are made.  If you make errors in the processing, you are the one who will suffer.  And, with regards to confidentiality, you can still have a trusted person oversee the whole function.  I cannot name any companies that should be handling their own payroll.

The next area is human resources.  Owners of small to mid-sized companies cannot possibly keep current on the laws and requirements relating to your employees.  You can work with an HR expert on an as-needed basis and, if you get the right advisor, you can not only save money but you can ensure you are handling critical but often overlooked areas such as hiring or terminating employees.  As an owner, you should at least meet with an expert and see how that person can help you.

And, if anything changes more than HR, it might be IT – Information Technology.  Your computers.  Many companies have an employee that takes care of the computers, printers, servers, software, and so on.  The person may be busy, but he or she simply cannot keep up with the changes in technology that affect your company.  At one client, we outsourced the entire IT function and now the company not only has experts overseeing its IT, but the company saved money in so doing.

A long time ago, I outsourced the in-house tax department of a $250 million company.  I learned that, given the right circumstances, nearly any function can be outsourced to the benefit of the company.  You should keep that in mind.  Companies need expertise, but most cannot afford full-time people to provide that expertise . . . nor, in many cases, do they need full-time expertise.

Look around your company, and think about what you need.  I’d be happy to talk with you about your options.

"Why Do I Need to Outsource Anything?"

Now, that's a good question. After all, you're probably an entrepreneur and, as such, you are a successful individual who can handle many different aspects of the company. You came up with the initial concept of your company, right? And perhaps you built it from the ground up. You are also the best salesperson for the company. Sure, you had to hire additional salespeople, but you may feel no one is as good at selling as the owner… (and you may be right).

But, at some point, you have found (or you will find) you can’t have your fingers on everything in the company. The first time you see this may be when your employees cannot create or manufacture the product or provide the service you wish they could. It is just not the way you would do it. You may step in to demonstrate how it should be done.

Later, you'll look at the financial results and wonder why you didn’t achieve the results you thought you would. This may come as a surprise when your outside CPA prepares your tax return. You may say to yourself, "Why didn't I know this sooner?" or "Wasn't there anything I could have done to improve my results?”

If this sounds like you, it's time to step back and understand you could have known your results sooner. You could have done something to improve those results. However, unless your company is the exception, you simply won't have the expertise on board to help you analyze, interpret, and alter tactics.

Your bookkeeper or controller has enough to do just to process transactions: pay the bills, send out invoices, collect the receivables, and get the employees paid. They don't have the time to prepare, analyze, and interpret monthly financial statements. In addition, your controller may not be trained to do more than they currently are. That's where a chief financial officer (CFO) comes in to play.

Regardless of the size of your company, you need a CFO. It is important to understand you most likely do NOT need a full-time CFO. What you do need is someone who has the knowledge and real-life experience from working in a number of companies over a number of years, who can bring all of that to bear in looking at your company.

You may discover outsourcing this particular senior executive position in your company is the best decision you could make.

Many business owners operate their organizations with processes, some think that they do. They create process which, at times are based on flawed logic. The flaw originates from their experiences as a Technician[1] rather than from learned experiences from professionals whose expertise comes from years of reviewing, creating and implementing process.

Business Owners intuitively understand that without process, sales cannot be processed, product delivered, payroll distributed to employees. However, they do not put much energy and muscle into creating processes that are easy to implement, easy for employees to embrace, flexible when change is required. Instead, they set up processes and forget to review and revise them as needed.

Consider the month end reporting requirements of any business. Typically, various processes must be finalized. Let’s consider the sales, billing and cash receipts processes.

Sales

Sales data is entered into a sales module within the period that the transaction is consummated. Data is reviewed and invoices are remitted to customers. Period sales reports are generated.

Cash Receipts

Cash is applied to customer invoices. Customer remittances are accumulated and deposited into corporate bank accounts. This all must occur prior to the last business day of the month. Cash receipts reports are generated.

Accounts Receivable

This report is the culmination of proper sales and cash process. The idea is for this report to accurately inform management the sum total of outstanding invoices so that metrics can be created and collection activities performed. It is what this example is all about.

Yet, when the financial professionals review the aging report to ensure that it agrees with corporate books and records (general ledger), inevitably they do not agree. This creates inefficiencies because financial staff must dig to find errors and omissions. The errors continue, multiply and become more cumbersome to correct taking valuable time away from everyday tasks.

When this occurs, one would conclude that the process may need review and modification. Yet many businesses don’t and won’t because there is no process to review the process. Owners are not focused on ensuring that the above process (for example) continues to operate efficiently. Instead there is an “out of sight, out of mind” mentality, a pervasive lack of understanding and sometimes, caring.

The best run organizations have leaders who understand that their companies cannot grow without finite processes that allow their staff to efficiently perform their jobs. It is imperative that Companies, Owners and their senior management keep their eye of the process ball. The cost of doing so is minimal compared to the cost of fixing!

In the course of working with my clients I am often asked to help with personnel issues ranging from hiring, to termination, to rehabilitation and everything in between. In the markets we serve, which are the owners of SMBs, it is more likely than not there will be no HR department, or anyone in the company with the experience and skills to handle the variety of people issues which arise. Because my experience includes over 25 years in corporations, most of those in management positions overseeing staff from entry level to director level I am able to help my clients with even the stickiest employee related issues. And in the event a situation requires greater expertise my large network allows me to locate the right resource to help.

A common phenomenon I see in the SMBs I work with  is that many times employees are family and/or friends, or the owners feel an obligation to keep long time employees on when it is no longer in the best interest of the business. Family and friends as employees present its’ own challenges as we can all imagine.

Once I have been with a business owner long enough to establish the “trusted advisor” relationship they will almost always ask my advice in personnel related issues. Most commonly it is either an issue of under-performance or attitude. Under-performance issues are very straightforward to address. We can document the acceptable level of performance, clearly communicate that to the employee, put measurements in place to track improvement, and give the employee access to any training necessary to be successful. They will either be successful or not, in which case the decision is apparent.

Attitude issues are much more harmful to a business. Owners often ignore the issue because they don’t want to confront an employee, or they will make excuses for the behavior. In every case I advise the owner too promptly and very directly address the issue otherwise the situation will get worse the disgruntled employee will poison the environment. And by addressing the issues I mean replace the employee.

When recruiting to fill a position it is always important to try to find someone with the right skills to do the job, but are skills the most important thing to assess? NO! The most important aspect to assess is attitude. Virtually any skill in an SMB can be trained in fairly short order if the employees have good education and attitude.  You can’t train someone to have a good attitude.

As a business owner, imagine that every single employee loved and appreciated their job, got along well with every other employee, and never complained about work, co-workers, customers, the hours, weekend work, etc. A situation like that would be wonderful. And, it’s easy. Just make sure that all employees in your business have good attitudes. Of course the business owner has the responsibility to create a safe, challenging, and appealing workplace.

I love working with business owners to make their businesses stronger. I can be reached at 404-787-5835, or rdaigle@b2bcfo.com.

The theme of my Blogs for this year is what I would include in a book about small business finance and accounting. This month I discuss accurate and timely financial reporting.

One thing I consistently see in well run companies is accurate and timely financial reporting. Among other things this increases the intrinsic value of the company. Why is this important and how is this accomplished?

Accuracy is the key to assuring you are basing your decision on correct information. Can you imagine purchasing inventory only to find you already had a significant quantity on the shelf? Perhaps it can be returned with shipping and restocking fees, but shouldn’t the inventory listed in our monthly closing have been right? And backing up that question, why isn’t it correct? Where was the break down? How much time elapsed between the time you got the information and when you had to make the purchase decision? It could well be that the information wasn’t available when the decision was made.

Perhaps this is not a great example, but it demonstrates my two key points: 1) Financial information has to be current to be useful for decision making and 2) The information needs to be correct in order to use the information to make informed decisions.

The preparation of accurate and timely financial statements each month requires a process. A calendar should be established and items that can be addressed each day prior to the end of the month should be done to reduce the pressure on the other accounts. Depreciation, prepaid expenses written off to the P&L and certain accruals can be done prior to the end of the month in order to have them off of the closing list when crunch time comes to the monthly closing calendar.

Another example of timing is Accounts Payable. Accounts payable should be one of the last accounts closed for the reporting period. Why? This allows the invoices for items related to the prior month to be recorded in the correct period, thus improving the accuracy of the financial statements. A good cut off for inventory so that costs are in the correct period is also required to improve financial statements. This process needs to occur throughout the system to assure accuracy.

Like any process top gain time in the closing schedule you need to run some elements and reconciliations concurrently. This is best done by assigning certain account reconciliations to multiple people in the accounting department. Further, no longer do you need to wait for credit card and bank statements in the mail. Now with electronic banking, these reconciliations can be done throughout the month and simply tied out with the final on line statement.

Take a hard look at your closing process. Like any process it can be analyzed and improved. Layout a calendar, assign responsibilities and put together a closing binder each month with the reconciliations. These simple but often overlooked steps will assure accurate and timely financial statements each month.

Your CFO and Controller should work together to accomplish accurate and timely reporting first, so that time can be spent analyzing the numbers, not just preparing them.

This memorable line spoken by Clara Peller of Wendy’s fame came to our attention in January 1984. The campaign ended the following year. It referred to an imaginary competitor’s enormous looking hamburger. In fact, that bun only had a minuscule hamburger patty inside. The line even made its way into politics during the 1984 presidential election.

In today’s online, web-connected world, the line that marketers need to ask themselves is, “Where’s the content?”

This question is answered in an interesting article called The 10 Commandments of Content Marketing by Eric Anderson, VP of Marketing at White Horse, a digital marketing agency based in the Pacific Northwest. He contends that it is no longer enough to have just a web site. The idea that advertising and social media are mutually exclusive is no longer the case. A summary of these Commandments is outlined below:

#1 Content shall be shareable

Advertising is about creating something worth passing on. Broadcast advertisers that top the viral video charts week after week don't shout -- they amuse, entertain, and inspire.

#2 Content shall be malleable

How does the message fit the medium? Brands are built on trust. And trust is built on relevance. Good content is always relevant.

#3 Content shall be collaborative

Doritos let consumers create the brand's Super Bowl ads. These ads were the most-favored and most-recalled of the Super Bowl, and they were the most-shared (see #1).

#4 Content shall be measurable

When you put content out on social networks, on YouTube, on blogs, etc. -- you can measure the traffic that comes back.

#5 Content shall be fearless

Content concerns itself with an exchange of ideas, so it morphs and evolves as new ideas are added.

#6 Content shall invite comment

Most content produced for our customers will fail. This is a good thing; success depends on knowing when things fail, so we can try something else.

#7 Content shall start everywhere

The marketer's core expertise will no longer be knowing how to produce marketing content; it'll be knowing how to channel marketing content in ways that keeps the conversation going.

#8 Content shall go everywhere

Today’s consumers visit blogs, message boards, review sites, and social networks to get the real scoop on the brand. You need content in all of those places.

#9 Content shall be sponsored

It used to be that PR content went to PR outlets and advertising content went to advertising outlets. Not any longer, they go hand in hand.

#10 Content shall be forever

In the past, advertising only lasted as long as you paid for it. Content marketing lives well beyond a campaign because it shows up in archives, on sharing sites like SlideShare and Scribd, on blogs, in tweets, and in content aggregators like Digg and StumbleUpon.

Feel free to email me your thoughts at ebaloga@b2bcfo.com. Ed Baloga is a New York based partner and small business advisor with B2BCFO®.

So You Want To Sell Your Business

As the baby boomer generation approaches 60 more and more business owners will begin to look at the option of selling their business as a way to finance their retirement plans.  One critical aspect of this process is the valuation of the business from a market perspective versus the business owner who has a tendency to place a higher value on their business than the market will.  This in turn makes the closing process unduly tense and as often as not will lead to a non event when it is time to sign on the dotted line.  So what can be done to set the table for a completed transaction?

One must start with an understanding of how value is created in the business arena.  In many respects it is the same as buying a stock, which is investing in a public company.  An investor buying your business is investing in your company.  You start by looking at earnings, - is the company profitable and how are its key metrics in relation to the industry overall?  Is it better than its competitors, the same, or worse?  You then move to cash flow- specifically what is called Free Cash Flow.  Free Cash Flow is defined as net income plus depreciation & amortization minus working capital and minus capital investment needed to sustain the revenue stream.  Ultimately a business is valued as a multiple of income and or Free Cash Flow.

After the earnings and cash flow are determined, a risk factor is added that measures the sustainability of this cash flow.  The riskier the investment, the lower the price.  There are a number of things that go into the risk profile of the business.  Is there a strong management team in place that can function without the owner being present?  Is the market the business operates in a growing market or is it declining?  Are there new products in the pipeline?  What is the level of customer satisfaction with the business?  What is the quality of the products or service?  How strong is the corporate culture?  Is the compensation structure appropriate to the business and industry?

Each of these sections could have its own white paper written on it.  But in addition to the top level review of the business, looking under the hood must be clean as well.  Surprises will raise risk and lower the value of the business.  Are the financial statements accurate? Are there potential claims brewing that have not surfaced?  Is the business OSHA compliant?  Is the software, especially mission critical software, properly licensed or owned?  A buyer will ask to look at everything pertinent to understanding the business.  You, as the owner, need to be confident that everything is communicated accurately upfront.  At the end of the day, would you purchase this business for this price at this point in time, knowing what you know?

As a partner with B2B CFO® I am prepared to help you put your best foot forward when looking to sell your business.

The Danger Zone in business occurs when "the cash needs of the company greatly exceed cash availability." Although cash flow problems can occur at any point in the business cycle, there are predictable problems at each phase of the cycle which can slow the growth of a company. By anticipating some of these problems, corrective action can be taken to minimize their impact on the company. For example:

Business Development Cycle 

• Initialization Phase. This is usually the start-up phase of the business when the initial direction of the business is determined. Typically, business problems focus on survival, such as:
  • Running out of cash
  • Making a fatal mistake
  • Dealing with personal problems

Solutions to these problems often focus on operating procedures:

•  
  • Tracking cash flow before profits.
  • Staying within the budgetary limits.
  • Maintaining the operational control.
• Expansion Phase. This is the growth phase of the business when employees are trained to do the right things, at the right time, for the right reasons. Typically, business problems focus on managing resources, such as:
  • Spreading the Founder too thin.
  • Running out of cash.
    
  • Relying too heavily on debt.

Solutions to these problems focus on management experience:

•  
  • Track cash flow before profits.
  • Stay focused on the core values.
  • Strengthen flow of funds through the company.

• Stabilization Phase. This is the maintenance phase of the business when business decisions are made proactively rather than reactively. Typically, business problems focus on professional management, such as:
  • Lack of internal controls.
  • Failing to delegate responsibilities.
  • Accurate management information.

Solutions to these problems generally focus on profitability:

•  
  • Developing business partnerships.
  • Requiring “outside the box” thinking.
  • Strengthen the business organization.

The key to structuring the company for growth involves the entrepreneur staying within their core competencies and delegating business responsibilities to employees, associates and professional advisors. Companies that do not plan for growth, prepare for failure.