B2B CFO^® (602) 296-6888

I am sure that many of you have a subscription to the Tool and Pipe Journal, but for those who may have missed it, I highly recommend this article on the outlook for manufacturing. More good signs for Manufacturing.  It highlights some of the leading indicators that may bring some sunshine in 2010.  In summary:

1.  The PMI, an index compiled by the Institute for Supply Management, broke through 50 percent in August. It was a huge relief. It had been below 50, indicating decreasing manufacturing activity, for nearly 18 months.
2.  The economy as a whole is doing better now than it has in more than a year. According to the Bureau of Economic Analysis, gross domestic product (GDP) finally started growing again in the third quarter of 2009.
3. The uptick in GDP seems to be driven by two trends. First, consumers are spending a bit more on durable goods.
4. Second, although it's a grim situation, more than 88,000 businesses have gone under since the start of 2008; those that managed to survive the downturn are busier than they otherwise would be because many of their competitors are gone.

5. Many consumers cut back on spending for months, and now they're opening their wallets again. Second, quite a few are purchasing homes.

6. According to the Department of Labor, the number of claims for unemployment insurance is still growing, but slowly.

Downsides? Yes, two big ones remain. Personal bankruptcies continue to rise (373,000 in the third quarter), as do home foreclosures, which hit an all-time high (937,840) in the third quarter of 2009.

Start 2010 with an Executive Company Physical - a free 20 page benchmark study to help plot a new profitable and cash rich course for your company. Contact David Kirkup at B2B CFO on 404 348 0326 or dkirkup@b2bcfo.com.

 

It was recently said that talking to business owners about long-term planning in today’s economic environment is a bit like a doctor telling a critically wounded patient in an emergency room that ‘they need to exercise more and watch their diet to be healthy’.  Of course, the emergency room patient is focused on his or her short-term needs, such as fixing whatever put them in the emergency room so that they can go into a recovery mode and, hopefully, restore their lives to a normal status.

We all know what the problems are today with our small businesses – consumer confidence is shaken, purchases are down, accounts receivable are tougher to collect, everything seems more expensive, the banks are hesitant to lend us the money to meet our growing working capital needs, and, because this recession is almost two (2) years old, it all seems like it will never come to an end.  These all seem like very good reasons not to be setting aside time for exit planning.  But that is faulty thinking which can lead to disastrous results.

If you study the 10-year cycle of business transfers you can see why, despite the terrible economy, today is the optimal time to begin planning an exit.  For the last three decades, the cycle of business transfers follows a rather predictable trend.  The first two years of each decade have been a buyer's market, the middle five years a seller's market and the last two years have been a near or absolute recession.  And, right on schedule, the economy tipped downward in 2008 and has continued this slide in 2009.  The difference in this cycle was the severity of the downturn – this was not predictable. 

When we project out over the next three (3) to five (5) years, we see that a ‘window’ for a business exit will open again.  The question is, ‘will owners be prepared to take advantage of this exit window or will they still be holding onto their business, without an exit plan, into the next recession?’

This recent economic storm has broken the ‘status quo’ psyche for most owners.  For the most part, owners now operate under a new thought process, one which says, ‘look, I’ve been through a number of these recessions before, but this one really hurt.  I’ll survive it, but I don’t want to go through another one’.  It is the inertia of the ‘good enough’ mentality that has been broken.  And, the proper way to address this new reality of today’s economy is to begin doing some advanced planning against future contingencies.  Beginning the process of developing an exit plan is a great first step in taking inventory of what has occurred and setting a plan to be ready for an exit prior to the next downturn.

So, one may ask, ‘why start today when the next downturn is years off?  The answer is that it can take many months to develop an exit plan and many more years to execute that plan.  For example, it can take nine (9) to eighteen (18) months – or more – to sell a business.  This, of course, assumes that the business is ready to be sold and that an outside buyer is willing to purchase it.  Further, in the absence of any succession planning, a time period for grooming the next level of management is approximately five (5) years – again, if all goes well. 

The problem here is that the owner who uses this economy as an excuse not to plan their exit will miss the opportunities that are available today.  Not the least of which is the long stretch of time that it takes to properly prepare for and execute an exit.

In conclusion, most owners have always realized that, despite their best efforts, they are vulnerable to economic swings.  This recession, however, carries with it the additional reminder for baby boomer owners that there may be only one (1) more exit window before they are 70 years of age, or older. 

Since the majority of the average owner’s total wealth is tied to their business, it is more important than ever to plan for their exit while still in the midst of this recession.

Nothing exposes a weak business plan like a down economy. But how do you develop a better strategy? For 27 years, George Bergmark, a member of the Rotary Club of Sandy Springs, Ga., USA, managed the finances of emerging and midsize companies. He’s now a partner at B2B CFO in Georgia, where he teaches clients how to maximize profits. For the entire article, click below:
http://www.rotary.org/en/MediaAndNews/TheRotarian/Pages/UF_bergmark1001.aspx

For a PDF Copy of the Rotarian Magazine Article, click below:
http://www.b2bcfo.com/partner/gbergmark/article-rotarian-magazine.pdf

Well managed companies employ many tools to optimize financial performance, some of which can be very sophisticated.  However, most of these techniques these fall within three key areas: accurate financials, adequate internal control and proactive management.

Invariably, companies that under perform their peers or experience fraud or some other catastrophe will have failed in at least 2 of these categories.   And the price of failure can be harsh.  Many companies that experience a negative event - such as a fraud perpetrated by an employee or a significant misstatement of their financial statements - may be forced into bankruptcy or may be forced to merge or restructure against their wishes.

So it is wise to review your business operations and determine if you are lacking in these areas.  If so, you should take quick, calculated action to supplement the areas of internal control, financial reporting and financial monitoring.  

Accurate, detailed financial statements produced in a timely fashion

• Management should ensure that financial statements and management reports are produced in a relatively timely fashion.  If your accounting staff cannot produce meaningful reports in a timely fashion or if the information is inconsistent or contains many errors, you could have a serious problem.  If erroneous data is being sent to bankers, auditors or joint venture partners, you may lose credibility or may incur financial losses directly attributable to the loss of confidence of your stakeholders – such as the closure of a debt facility.  You should ask yourself these questions:
• Is the financial data contained with reports consistent?  Does it dovetail with what you know is happening with the business?  Does it allow you to exploit new opportunities and control exposures?
• Are you able to answer relatively simple questions such as what has led to an improvement or deterioration  in your business over time or what is the biggest contributor to operating profit?

Adequate internal controls including adequate segregation of duties

• Most business fraud is quite simple in nature.  Making checks to fictitious vendors or altering such checks are very common.  Most fraud results from opportunity and lax supervision.

• Does your business have adequate controls and procedures in place to prevent errors and irregularities?

• Do the proper checks and balances exist so that one employee does not have an undue level of access or control ?  What controls and procedures are in place to prevent an employee from making an unauthorized disbursement by check or wire transfer?  What prevents an employee from setting up a phony vendor or phony employee in your computer system?

Proactive, well informed, inquisitive management

• The most valuable asset to a small business is astute management that asks the right questions, has a strong vision and is able to capitalize on opportunities quickly and efficiently.   This type of management will use the solid financial data at their disposal to determine where their business is headed, to change course and/or speed and use all their resources to get to their destination.
• Management will need to be able to “mine” data to determine how the business is doing and why?  Which clients are profitable and which are less so?  Which products generate the highest gross margin and which contribute little?  How are the trends in your business versus competitors of a similar size and make up?  How do you position your business for a trade sale and how do you modify your business to give rise to a higher purchase price from an acquirer?

• Management will need timely, reliable financial data produced in a strong control environment to be really successful.  Otherwise, you will be making decision and determining a course that might not be the best one.

If your management is not able to be really proactive, to gain the knowledge that they require from management data and to be truly inquisitive, you may be incurring serious exposure due to poor performance in financial management.

The inclusion of a B2B CFO® partner onto your senior team can give you the financial expertise and strategic insight that you need to maximize the performance of your operation.   Our partners, who have over 4000 years of cumulative experience, (including significant merger and acquisition related experience), are part of the largest US firm providing services on a part-time basis to closely-held companies with annual revenues of as much as US$75 million.

Call David Kirkup, Partner at B2B CFO® on 404 348 0326 for a timely and accurate "Executive Company Analysis" and let's start moving forward.

How much debt financing is right for a business?  In today’s low cost money environment, the ‘easy’ answer might be “as much as you need” because it is inexpensive (depending on a company’s financial situation).  However, the credit environment has tightened significantly during the past two years due to the stress that has been placed on the financial markets.  Low cost money really isn’t that easy to come by.

Possibly the more important question may be, what would it take to run the business without any debt?  As the B2B CFO for a number of small and mid-sized businesses, I can attest to the fact that operating a business on the cash flow generated from operations is easier and lower stress than being saddled with a lot of debt.  It also increases control over the company.

With a good focus on cash flow and a deliberate plan to reduce debt, it is possible to achieve the objective of being debt free.  The elements of a robust cash flow plan will likely include a sound understanding of the classic elements of the sources and uses of cash.  In simple terms, you want to increase the sources of cash and reduce the uses of cash to the extent possible.

Sources of Cash

·         Improve the efficiency of revenue generating processes

·         Collect customer receivables faster

·         Turn inventory faster and reduce the inventory balance

·         Lengthen supplier payment terms, request early pay discounts, or take full use of existing terms

·         Reduce operating expenses

·         Increase gross margin of products or services

Uses of Cash

·         Increasing working capital in all its forms – A/R, Inventory, etc.

·         Increasing interest expense as a result of increasing debt or rate increases

·         Increasing operating expenses – payroll, benefits, rent, travel and entertainment

·         Capital expenditures

·         Adding employees or contractors

·         Decreases in gross margin

Successfully implementing these actions so that the sources outweigh the uses will increase cash flow in the business.  The CFO is then able to turn this into a comprehensive financial plan to determine when the business can be debt free.  Without debt in the business, owners are no longer reliant on other entities for success.

Debt isn’t always a detriment.  In fact, by the end of the year my firm will have helped clients obtain over $200 million in debt financing.  These clients have largely been growing businesses where a loan can be very helpful to support capital expenditures and increased working capital to support additional revenue.  When used properly growth supporting loans are paid off when the revenue growth and increased profitability are achieved.

Unfortunately in a difficult economy, too much reliance on debt has become a way of life for many businesses versus a vehicle for growth.  As we enter a year when the economy has at least stabilized, eliminating or reducing debt is one beneficial goal to achieve for companies in 2010.

With the New Year approaching, we always think of it as a New Beginning.  What does 2010 hold in store for your business?   Was 2009 a year of hardships or was it just a year like many others, with successes and struggles and changing plans. 

Big Ideas for The New Year should begin with a Plan.  Strategic Planning is a necessity for any business and should include Dreaming** Outside the Box.  What would your business look like if money or manpower was not an object?  Once you can see it you can then determine what it takes to make it happen.  Planning your Work and working your Plan is the most effective way to accomplish any task.  Once the plan is conceived it can then be shared and others can catch the Spirit.  Every business needs a One Year Plan and a Long Range Plan. 

Is your business in need of a Turn Around?  Is this just a turnaround in profit margins or personnel issues?  Or could it be you have heard the words Bankruptcy mentioned yet do not feel that is an option you desire to consider?  There are others ways to “skin a cat” so by all means, talk to professionals that will consider differing alternatives to whatever may be your current need.     A Business Turn Around can provide for many more years of growth and profits but will take time, determination and integrity.  It is certainly worth exploring the options.

Plans to End the Year

Timing strategies are always the Number One Year End item as they land on the Balance Sheet to stay with a business throughout its lifetime:

        Think ahead as to what you would like your year-end numbers to represent?

                        Can you speed up collections to have cash at year-end or pay down 
                        debts?

                        Maybe you need to increase your EBIDA to stay within Bank                
                        Covenants or to apply for a loan in 2010.  

Do you need to make additional asset purchases to be eligible for increased tax savings?  

Do you need to close that deal so you can move out some inventory and increase year-end Receivables?   

If you are on a cash basis, do you need to pay some expenses to reduce your income and thus reduce your income tax debt?

If you need to take a distribution from company earnings or an early distribution from a retirement account, consider the tax implications.  It may be that you should take some in 2009 and wait until early 2010 to take the remainder.  You may need to wait until 2010 entirely, depending on your current level of income. 

…..       Federal and state income taxes are considered paid timely if all have been paid no later than 12/31/2009 through W2 earnings.    This allows for large amounts of tax dollars to be paid at one time yet still be considered paid on time.  This is only for those paying through W2 earnings.  For workers that have only 1099 income, quarterly estimated payments are considered timely if paid throughout

            the year.   If there are large variances in earnings, these calculations can be adjusted and prorated by schedule.  Talk to an expert for more details. 

Planning can improve your Future!

**John C. Maxwell;  Put Your Dream to the Test – 10 Questions to Help You See It and Seize It;  Thomas Nelson, Inc. 2009

Once a budget for revenue and expenses for the year is established (see last month blog, Flexibility-The Key to Sound Budgeting), I strongly recommend that you continue on and also budget for balance sheet items.  To be honest, there was a time in my career that I viewed trying to budget assets and liabilities as a tremendous waste of time, and if the budget was stagnant and we missed our sales targets, it was!  However, using flexible budgeting, you can build a budgeting model that ties the income statement and balance sheet.  Even if you miss the sales target, you can still link assets and liability to revenue and expense accounts.

My favorite software for developing a budget model is MS-Excel®.  Put all active asset and liability accounts into your model.  It is important that all your revenue and expense accounts be linked to some account on the balance sheet.  As an example, if you typically sell on open account with 30 days turnover, you must link to net revenue to accounts receivable.  If you manufacture a product, you will need to build the purchasing and production cycle into your model.  Materials will need to flow from raw inventory to work-in-process and through finished goods. 

This process also provides the ability to create a detailed capital budget that includes the timing for your purchases.  You can also tie depreciation expenses to accumulated depreciation.  I’ve found that the process works best if you have separate lines for the beginning balance, debits to the accounts and credits to the account.  When transactions are complex, you can add a line for each level of detail.  Total the beginning balance, debits, and credits (credits should be negative numbers) together for the ending balance.  Using the ”sumif” function makes calculating totals for balance sheet information easy.

Why is this useful?  Imagine that you sell a product through a commissioned sales force that is paid 5% commission.  By tying the commission expense to the accrued commission liability account, you can watch the liability go up with additional sales or fall on lower sales.  That is the beauty of this process.  Not only does this account reflect what happens in a “what-if” manner, but done properly, all accounts move up or down in relation to activity within the organization.  Taken as a whole, companies can anticipate the future movement of asset and liability accounts based on reasonable assumptions.    In total then, cash needs can be forecast.  Anticipating future cash movement goes a long way toward managing cash and making sure your organization has the cash necessary to grow and be successful.

Using this information allows you to forecast the balance sheet by month.  Once a forecasted balance sheet is in place, you can have your internal accounting personnel generate a formal projected statement of cash flows by month.  This becomes particularly useful when you want to know the effect of reducing accounts receivable days outstanding or the effect of increasing inventory turns by a full turn annually.   The changes created by these improvements become very visible and often this visibility helps drive organizations to realize these benefits.

If all this sounds like a process that would really help your company but you don’t know who or how to go about developing, our partners at B2B CFO® are experts at putting together business models.  Our experience makes the process much easier for clients and provides a sound business tool that helps companies understand the effect of incremental changes on the business.  Feel free to contact us.

All business owners can expect to exit at some point.  You should begin to lay the groundwork for such a transaction long before the actual sale.  Proper planning and execution at each stage will lead to clearer objectives, higher value and fewer obstacles at settlement

Some best practices and considerations in planning your exit:

Strategy - Determine the key factors that might impact the execution of the sale transaction.  Answer the following questions, among others:

• What is the structure you prefer for the transaction - 100% sale or a fraction of the shares?
• If fractional sale - are you willing to forfeit operating control?
• What is the time frame that you want the transaction to occur?
• Do you (or other key employees) desire to stay post settlement?
• Are any key assets (employees, clients, vendors, Joint Venture partners, etc) at risk of leaving in the event of a change of control?
• Proceeds - is an earn-out acceptable or must the transaction be structured so that most of the proceeds come at settlement?
• Must proceeds be in cash or are you willing to accept equity in the acquiring company?

Preparation - It is important that the entity that is the target of the transaction has reliable financial and operational information which is produced regularly. This will serve multiple purposes.

• It will enable the seller and other parties to clearly understand the performance of the business.
• It will help to ensure that a repository of data is always available in the event that a buyer wants to perform financial due diligence.
• Reliable and clear operational and financial data will give the buyer confidence that he knows what he is getting and will increase the likelihood that the transaction will be executed in a timely manner.

Analysis - Accurate and reliable financial and operation information will let you and your advisors study your business and understand its dynamics. It may also bring to light items which are "less than arm's length" which could have purchase price implications, such as:

• Vendor relationships - for instance, is rent reflected for a family owned real estate that is used by the business.
• Salaries of owners - Are they at arm's length? What are the ramifications of adjusting the salaries to arm's length salaries - does this increase or decrease potential purchase price?
• Balance sheet - Are there assets on the books that are valued on a historical basis that need to be properly adjusted to reflect market prices? Is there excess cash or working capital that is not necessary to the operation of the business - don't leave it there for the seller - consider paying a dividend so that no excess net worth is left in the business.  This could effectively increase your purchase price.

Execution - To begin executing the sales process, make sure that you have a stellar team of advisors.

• One of these advisors should be a B2B CFO® partner who can provide you with the financial, operational and strategic advice that you need to maximize the operation of your business and to make exceptional transactions like a sale or purchase as effortless as possible.
• You will also need a merger and acquisition specialist - use a quality advisor like the Woodbridge Group , an M&A advisor and a  B2B CFO® strategic partner, that has a worldwide footprint. They can help you clarify your transaction criteria and help execute an efficient search and sale transaction.

B2B CFO® has a strategy for just such an engagement called "Finding the Exit."  This program has been specifically designed for our clients to help them navigate this challenging path.  Make sure that you maximize the proceeds from a "once in a lifetime" sale of your business.

The inclusion of a B2B CFO®  partner onto your senior team can give you the financial expertise and strategic insight that you need to maximize the performance of your operation.   Our partners, who have over 2500 years of cumulative experience, (including significant merger and acquisition related experience) are part of the largest US firm providing services on a part-time basis to closely-held companies with annual revenues of as much as US$75 million.

Happy New Year to all my readers! I hope your holidays were wonderful, and that Santa brought lots of goodies. Each year when the calendar turns over it is a great time to recommit to goals. There are many things that you can do to help your business prosper and flourish in 2010.

The trick is to make a commitment to move forward. You have to “do what it takes,” bite the bullet, put in the time, and do the hard work. And hard work it is. Ask anyone who has a successful business, and they will tell you about the sleepless nights, anxious moments, hard decisions, and sacrifices they made.

If you are confused and don’t know where to start planning, the following suggestions will start you moving forward and achieving your goals in 2010.Set personal goals. What do you want out of your business, now and in the future?

1. Establish a long-range vision for the business, consistent with your personal goals.
2. Establish a 3-year business vision, along with specific 3-year goals, consistent with the long-range vision.
3. Develop a brief (1-2 pages max) 1-year business plan, consistent with your 3-year vision and goals.

After you take this “long term” look, back it down to the next twelve months. Then take a look at the next six months, and finally look at the first quarter. What can you do in the next 4 weeks to move toward achieving your goals? Write it down, set time lines and due dates, and get moving! One hint…..make your goals reasonable, achievable, but able to stretch you and make you work for it.

B2B CFO specializes in helping small businesses achieve their goals. A part time Chief Financial Officer can help you establish your business direction, analyze your financials so you set reasonable and achievable goals, and help you measure your progress. If you feel “stuck in the mud,” look for a professional partner with whom you can work, with whom you feel comfortable, and who is affordable and has the background to work with your business.

Start soon and 2010 will be a banner year for your business and yourself.

Maximize your payday by planning ahead.  Any business owner knows that building a business is a time consuming and challenging process.  It required an idea, a passion and a very detailed plan to bring that idea to life - not to mention the hours of sweat equity.  Have you considered that selling your business could be equally as difficult both personally and financially? 

Many people underestimate the complexity and the value of proactive planning.  A proper exit strategy is a process rather than an event and a vital component of your overall plan to maximize the value of your business.  Most businesses require between 3 - 18 months but best practice is to begin your process at least one year in advance.   You will be more successful if you hire a knowledgeable professional to help you understand your options, increase the value of your business and maximize your pay day.

Proper Planning adds significant value - below are some things to consider in your pre-planning process:

·      Are you ready to exit your business?

o   What are your exit goals?

o   Do you want to continue working in your business or exit completely?

o   Are you mentally ready – what will you do?

o   Are you financially ready?

o   How much money do you need to retire?

o   How much money have you saved for retirement?

o   Do you understand the various types of Exit Strategies?

o   Tax consequences – a higher sales price may not yield the best result

o   Work with a professional that can help you decide which strategy is best for your particular situation

Is your business ready for your exit?

o   Get a business check-up to identify issues and opportunities for improvement

o   Improve cash flow and drive profitability

o   Grow sales - buyers avoid a falling knife

o   Strengthen your infrastructure - a well run business generates a higher price

o   Build your brand image - identify future growth opportunities

o   What makes you different? How you are better positioned to win business?

o   Timing – how is the current economy affecting your business?

o   Hire a professional that will work with you to develop a plan to improve your company’s financial health and maximize the value of your business

Whether you are considering a sale of your business now or many years from now, proper planning is vital to a successful exit.  Setting your goals, selecting a strategy and improving your company to make it more attractive to a potential buyer are just the start.  Work with an advisor capable of improving the financial health and adding value to your business before you start down the sales path.  Remember, exiting your business is not an event, it is a process.  Build the business for a successful exit and enjoy the benefits on payday.