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The funny thing about planning- it is often most useful when it is performed before you need it.  If you were going to sell your home, wouldn’t you plan out a number of critical elements first?  When is the best time to sell?  What do I need to fix to maximize the value?  Who will I list it for sale with?    This same logic is true with a business but is much more complicated, time consuming, will take far longer than selling a home and there are many more options to choose from.  With the help of Pinnacle Equity Solutions I am going to detail a number of questions every business owner needs to consider now-- in order to have a successful exit-- whenever that may be.

1.  What do you wish to accomplish from the exit strategy from your business?  You went into business in the first place to accomplish certain goals for your life.  You need to think about an exit in the same way.  Goals are the foundation of any successful strategy and they are no different with an exit.
2. Do you know the range of values for your business?  Unlike a house which normally sells within a range of the listing price.  A business can and does have a number of wide ranging values based upon the method of transfer of ownership.  An outright sale to a synergistic buyer will provide the highest value, whereas a gift to family will provide the lowest. 
3. Do you understand all the options available to you with an exit strategy?  Owners of privately held business normally have 5 options available to them.  They include; a sale; a gift; a recapitalization; an ESOP or a sale to management.
4. Have you calculated the risk factors of your business?  It is important for you as the owner, who has lived with your business for many years to understand how a third party would view the risk of owning your business.  Ultimately any investment is priced based upon the perceived risk to the buyer. 
5. Have you developed an income replacement strategy to satisfy your lifestyle after the business exit?  Do you have a personal financial plan?
6. Have you considered the taxes and fees due at closing, and beyond?  If you approach the exit of your business with the idea that you will know the right deal when you see it and do not properly plan the type of deal you wish and understand the cost of each option, you will end up chasing deals that are liable not to close.  If you clearly know the dollars necessary to satisfy your post exit lifestyle, you will be in a better position to know the right deal when you see it.
7. Do you know that deal structuring can have a serious impact on the net, after tax amount that you receive for your shares?  With any exit there are many variations that may occur.  Are you selling shares or assets?  Is it cash up front or structured over time? 
8. Are you aware of the estate tax consequences to your business and other assets?  In the absence of proper planning, estate taxes can cut deeply into the pie.  Should you not plan for the exit of your business and the business needs to be sold at a fire sale price you can lose twice, once with estate taxes and secondly with a reduced sale value of your largest asset.
9. Have you identified the legal agreements you will need to sign to complete the transaction?  Agreements can include a sale or asset transfers, non-complete, escrow and loan agreements along with potential consulting arrangements.   The more you understand the deal you are entering the better prepared to close you will be.
10. Have you chosen a service provider to manage the transaction? This is probably the largest single transaction you will execute.  Do you know the advisory team you wish to employ?  Do you need a local business broker or a larger M&A firm?  The right real estate agent will help you maximize the sale price of your house; the same is true for an exit strategy.

Your business is probably the largest single asset you own.  Isn’t it worth spending the time necessary to properly think out your own goals and develop an appropriate exit strategy?  As a partner with B2B CFO® in partnership with Pinnacle Equity Solutions I am well prepared to help you develop these goals and plan for their successful achievement.

Although every business wants to grow, some types of growth are certainly better than others. Consider the following 2 options:

1: Grow Sales by 20%, and net income increases 50%.        OR

 2: Grow Sales by 50% (a lot more work and risk than Option 1), and net income only increases 20%.

The best way to grow is when net income growth out-paces sales revenue growth. For every additional unit of sales, we want to generate more profit, not less. How can we accomplish this?

Jim Collins, the author of Good to Great, found that the more an organization sticks to its core competency, the more opportunities the company had for the good kind of growth – the growth where net income increases faster than sales!

What is your core competency? It’s what you do well and, when you do it, you’ve proven that it can make money. If you are a trade contractor, then it is your trade. If you are an attorney, then it is the law. If you are a widget manufacturer, then – I think you get the point.

I have experienced many occasions when, in its desire to grow, a company strays from its core competency and involves itself in a business and industry it doesn’t know very well. Sadly, these new ventures begin to drain time and resources (and most importantly, CASH!) from the main business. In essence, the core competency of the firm subsidizes a less successful venture.

Sticking to your competency requires a great deal of discipline, but it is the best way to grow your company. By sticking to your core, you will find the most profitability and enduring growth opportunities!

The role of business owner can be a lonely one. It's easy to surround yourself with good people,  but you can still feel that there is no one with whom to share your fears and  concerns, or brainstorm new ideas and strategies.

Outside input can help.  Simple questions that illuminate an issue or prompt change. Initiatives from other industries that help spark ideas and generate new business models. For any new and growing company, securing the right external advice and support is fundamental to success.

Too often, senior personnel keep problems close to their chest so as to avoid worrying staff unduly. However, this approach can cause additional stress and make a small problem seem larger than it really is. It is also easy to become so entrenched in a situation where it is not possible to see the wood for the trees and it then becomes difficult to think of solutions or innovative ideas.

So...how can you get the right advice? There are five simple steps that can influence the quality of the advice you receive:

• Find the right accountant – The mere fact that someone is completing your tax returns does not mean you are getting the best out of your accountant. A fast-growing enterprise needs a financial advisor who can plan ahead and proactively suggest ways to make strategies financially possible.
• Select the most appropriate professional for individual tasks – A common mistake is to appoint a lawyer or accountant to handle all legal or financial matters. It is wiser to pick and choose specialists for different functions. For example, payroll differs from corporate finance, while drawing up employee contracts does not require the same skills as protecting intellectual property.
• Assess your banking needs – A conventional retail bank can provide an excellent business service but if your growth plans are more aggressive, then it would be beneficial to enlist the skills of a corporate banking advisor. The key to success is in finding a service that supports the company you want to become, rather than the one you are now.
• Work with people you like – In business, it is often necessary to cooperate with individuals whom you may not like or respect. However, when seeking advice on the future of your firm it needs to come from someone you trust. It is worth spending time to find professionals you ‘click’ with and who complement your company.
• Don’t be too proud to ask for help – Never see it as a failure to ask for guidance. No one is infallible, and having people to support you can make the journey to success so much smoother. Nowadays, there is a proliferation of mentoring schemes, where experienced specialists are on hand to offer guidance and information on a range of topics. It is important to remember though that a mentor is not the same as an advisor; their role is to question and motivate rather than to offer instant solutions. Even if suggestions are never acted upon, their value is in helping to shape an alternative strategy.

B2B CFO® partners are real-world experts in managing working capital for business at the highest levels of America's fastest growing companies. "Cash. We Help You Get It" is not only our slogan; it is what we do with hundreds of clients every day.

Contact David Kirkup, B2B CFO Partner on 404 348 0326 or dkirkup@b2bcfo.com and let's talk.

I spent the day learning from two experienced insurance agents learning about the commercial insurance industry.  The underlying issue is the lack of knowledge and exposure many businesses have in areas of risk particularly with employee theft.  This is a clause embedded in most commercial policies which limits the total loss from any occurrence to $10,000.  This often is woefully inadequate at the time of loss however because many thefts and embezzlements go undetected well into a loss in excess of $100,000.  However, if this clause is written the insurance company will only cover $10,000.

Another complicated area that is misunderstood is insurance for business interuption.  It is important that the policyholder understand how this insurance will be determined and what the coverage will actually pay.  A good insurance broker should be able to answer these questions with specific details and calculations.

An independent third party such as a certified fraud accountant can provide objective advice that may well be worth their cost to assure proper insurance coverage over specific risks.

I spend a good bit of time meeting with business owners and discussing their particular “Strength of the Franchise”.  While some businesses are starting to see small shoots of new growth, there is still a lot of ground to cover in order to reach their former status pre-recession.

What I find interesting is that while the industry may change, and the target market may differ slightly (businesses or consumers or a mix of both), the things that are working seem to be relatively consistent.

With this in mind, I wanted to share some of the topics that seem to be recurring:

1.       Reputation is everything – whether you are a business owner or an individual seeking employment, it’s really more about who you know than what you’ve done.  If you provide a good value to your customers and word gets around, you will benefit from increases in your business because people are coming to know and trust you.  You need to actively cultivate relationships, partner with complimentary vendors, and consider hosting low cost, joint IN PERSON marketing events.

2.       Continue to set goals and track progress – your goals may be different today than they were two years ago, but you should still have goals.  Keeping a portion of your attention on the future will help you to make the right decisions today.  It will also motivate your staff if they see you working not just IN your business, but ON your business.  And excited, motivated manager creates a greater sense of accountability and unity among their staff

3.       Value your employees – remember that you can’t do it alone and you’ve hired intelligent, competent staff to help support your goals.  Do what you can to reward your team and you will reap long lasting benefits by retaining your staff into the recovery.

4.       Maintain a positive attitude – chances are good that you’re in business because you’ve found something you’re passionate about to do.  You may be running leaner and you may be experiencing profitability challenges, but seek to find the positive.  Trust the advice of experts while retaining your initial enthusiasm and spirit.  As my Mother always told me, “This too shall pass”.

Almost every hiring manager or recruiting firm, when posting a job description looks for a similar trait, “Ability to multitask.” This may be attributed to the digital age in which we live.

But do we really multitask?

Author Dave Crenshaw, The Myth of Multitasking: How "Doing It All" Gets Nothing Done, might describe the ability to walk and chew gum as “background tasking.” The idea of multitasking is nothing more than refocusing your attention from one task to another.

In her 2008 article in The New Atlantis, The Myth of Multitasking, Christine Rosen writes, “Used for decades to describe the parallel processing abilities of computers, multitasking is now shorthand for the human attempt to do simultaneously as many things as possible, as quickly as possible, preferably marshalling the power of as many technologies as possible.”  Among a number of research studies that she writes about, Rosen describes one study at Vanderbilt University. One of its conclusions was that a bottleneck occurs in the brain when it is forced to respond to several stimuli at once. As a result, task-switching leads to time lost as the brain determines which task to perform.

In a recent New York Times article, Your Brain on Computers: Hooked on Gadgets, and Paying a Mental Price, author Matt Richtel, writes, “While many people say multitasking makes them more productive, research shows otherwise. Heavy multitaskers actually have more trouble focusing and shutting out irrelevant information, scientists say, and they experience more stress.” He cites a research study by Eyal Ophir at Stanford University on multitasking that concluded that multitaskers had trouble filtering out irrelevant information and that they were less efficient at juggling problems.

Are we becoming victims of information overload? Melina Uncapher, a neurobiologist on the Stanford team says that this idea was supported by more and more research. Richtel also mentions a study at the University of California, Irvine, which found that people interrupted by e-mail reported significantly increased stress compared with those who focused on the task at hand. Dr. Gary Small, a psychiatrist at the University of California, Los Angeles says that stress hormones have been shown to reduce short-term memory.

Rosen suggests that maybe we need to pay more attention to the task at hand and to exercise judgment about what objects are worthy of our attention. She offers a quote from Isaac Newton. When asked about his particular genius, he responded that if he had made any discoveries, it was “owing more to patient attention than to any other talent.”

If you need help with the information overload in your business, call Ed Baloga, New York based Partner with B2B CFO® at 914.474.9547 or via email at ebaloga@b2bcfo.com.

One key aspect to building value in a company is that of optimizing gross profit. Gross profit  is what you have left after the direct costs of the sale of a product or service, such as materials and direct labor, are paid for. It is expressed as a ratio of sales and should be as high as possible depending on the industry - certainly above 50% and sometimes as high as 90% in service companies. 

Gross Profit is a key metric for every business to manage, as it impacts both how fast your company breaks even and the amount of profit that can be earned once that happens. Every business has overhead costs such as rent, office, payroll that are relatively fixed and these have to covered before you can become profitable.  In other words, gross profit directly impacts risk and return. The levels of gross profit margin can vary drastically from one industry to another depending on the business. For example, software companies - which are selling services - will generally have a much higher gross profit margin than manufacturing companies - which may have significant labor, inventory and overhead costs built in to the cost of their product.

To illustrate how gross profit margin affects break even and profit, consider a company with $300,000 in fixed overhead expenses. If the firm's gross profit margin is 50%, it would need to generate sales of $600,000 to cover overhead. If we were able to increase gross profit margin by 2 points to 52% instead, break even would decrease by $23,000 or approximately 4%. The company would then start earning a higher profit of $0.52 on each dollar in sales after revenues reach $577,000, rather than just $0.50 on the dollar after $600,000.

Inadequate gross profit indicates problems with prices that are too low and/ or direct costs that are too high, and therefore problems with break even and profit. When a company is generating adequate sales but gross profit margins are low, it signals an issue in one or both of these areas. This lack of understanding often leads to decisions that only worsen the company's position, such as attempting to increase sales via lower prices, leading to even smaller gross profit margins - so-called "making it up on the volume"

Gross profit optimization often does not get the attention it deserves. Companies should be aware of the factors that will impact gross profit margins and pay close attention to them.

A B2B CFO advisor can help companies find a benchmark for gross profit margin using competitor data and industry averages to provide a targeted goal. They can also help measure and manage the factors impacting gross profit margins as they change over time. A B2B CFO can help analyze gross profit by product or service, and highlight low margin products, or help restructure service delivery to optimize gross profit.

Call David Kirkup, Partner at B2B CFO, for a complimentary "Executive Company Physical" and a plan for how to get where you need to be at 404 348 0326 or dkirkup@b2bcfo.com.

During the course of their existence, companies may run into issues for a variety of reasons but there is ultimately one thing that kills them: they run out of cash.  Too many managers and investors become focused on the income statement and balance sheet at the exclusion of the statement of cash flows.  There is one noted investor, Warren Buffett, who watches cash closely.   The reason, “Cash is hard to fudge.”

Why should cash flow be targeted as a key measure of business performance?   Why not use solely profit as is found on the income statement?   The income statement and balance sheet, although very useful, do have all kinds of potential biases as a result of the assumptions and estimates that are built into them.   However, when you look at a company’s cash flow statement you are getting an indirect look into their bank account.

So then, if cash flow is so important, why don’t more senior executives pay closer attention?   Some managers do not understand the accounting rules that determine profit, so they may assume that profit is pretty much the same as net cash coming in or out.   Some managers may think that their daily actions do not impact cash in a meaningful way while others may believe that they do affect cash, but do not know how.   In some finance organizations, they believe that cash is their concern and nobody else’s.

If time is taken to understand cash in an organization, the return on that investment in time can be considerable.   The organization can then see how well they are turning profit into cash.    They can see early warning signs of trouble and take appropriate action.   They can learn how to manage their business so cash flow is healthy.   Yes, cash is an ultimate reality check.

WHY PROFIT DOES NOT EQUAL CASH

Why is profit not equal to cash coming in?   Some differences such as loans received which do not impact the profit and loss statement are pretty obvious.   Others may not be as obvious but you can break them down into three main areas:

-       Revenue is booked at sale.   In many cases a sale is recorded for accounting purposes in the profit and loss statement when a company delivers a product or service.   In many cases, no cash has been exchanged at the time of sale since customers typically have a stated number of days to pay.   So, since profit is partially determined by revenue, a component of that profit reflects a customer’s promise to pay.   Cash flow reflects only cash actually received.

-       Expenses are matched to revenue.  An overriding accounting principle is to match the costs and expenses associated with the revenues generated during a given time period.   The expenses charged to the income statement may not be those that were actually paid during that period.   Many will be paid later when they are invoiced by a vendor.  Cash flow reflects the cash that actually went out the door during a period.

-       Capital expenditures do not count against profit directly.  A capital expenditure does not appear on the income statement when it occurs.   It is only the depreciation that is charged against revenue over time which is based on the useful life of the item that was purchased.   The cash flow reflects a different story as most items are paid for long before they may be fully depreciated on the profit and loss statement.

It is true that in mature, well managed companies, cash flow will more closely track net profit.   Receivables may be collected on a timely basis, payables will be paid, and capital expenditures will be incurred in line with depreciation charges.   However, until an entity reaches, and more importantly is able to manage to, such a state, all sorts of havoc can take place.   It is very easy to reach a state where there is profit without cash.    This is The Danger Zone.

It is also important to keep in mind that you may run into a situation where you have good cash flow without profit.   Say you are a retailer and collect cash at sale.   Your expenses may be paid to vendors at a later time which may lull an owner into a false sense of health.   The cash flow statement may look fine as the business is growing, but if margins and expenses are poorly managed, the owner may find themselves in an unprofitable situation which cannot perpetuate a healthy business.

It is this balance of financial and operational expertise that the partners of B2B CFO^® excel at.   We balance the needs of the business and provide information which leads to informed decisions which are actionable.   We understand that cash and profit are different and a healthy business requires both to be managed.   We conduct a reality check and advise accordingly.

At B2B CFO^® we concern ourselves with the client’s success and aspire for them to attain their goals and dreams.

Cash.  We help you get it.

Have you seen your company's Strategic Plan collecting dust on the CEO's shelf?  I think I know why, and will recap what I have learned in my 37 years of business experience and philosophy & cultural studies in a three-part series.

Strategic planning is not a new-age concept, having served as the cutting edge of the art of war in the Eastern world since well before Sun Tzu wrote a series of martial essays on the subject in China during the fourth century, BCE.  Great military strategists in the East learned how to win wars strategically rather than violently from Sun Tzu's compilation of The Art of War. Sun Tzu was first brought to the attention of the Western world by a Jesuit missionary to Peking, Father J.J.M. Amiot, whose interpretation of The Art of War was published in Paris in 1772.  Unfortunately, that was well after generals in the West learned to win wars through extreme violence.

Amiot's The Art of War was a major insertion of Eastern intelligent thought into what was to quickly becoming the Age of Enlightenment in the West, where traditional institutions, customs and morals had come under question.  Enlightenment influenced intelligent thought throughout the West to this day, and gave us terms such as coffeehouse, encyclopedia and democracy, and names such as: Voltaire, Hegel and Kant; Beethoven, Haydn and Mozart; Franklin, Jefferson and Madison.  Winning through intelligent strategy was advocated as the primary source for legitimacy and authority.  Strategy, thought and reason are inherently non-violent, which makes perfect sense in the world of business (don't you think?).

Then why is our plan up there collecting dust?  There are four main reasons: (1) Leaders cannot be strategists, and vice-versa; (2) The practice of strategic planning as an exercise in intelligent thought has been watered down in Modernity to mean little more than business planning in prose rather than in numbers; (3) Intelligent thought has been cast aside in favor of making quick decisions, thinking on the run, and thinking outside the box, and: (4) strategic planning as a futuristic, visionary exercise means very little to almost every person working in mid-market companies, as their job is to work in the now or to analyze the past.  For these reasons, strategic planning is not understood, is undervalued (if not hated) and, if done at all, quickly collects dust on the CEO's shelf.

Last year, I had the privilege of attending a Leadership and the Art of War workshop in Honolulu, Hawaii, an introductory offering in the Art of War Series of IZS-Applied Zen, a program of the Institute of Zen Studies.  There, I learned that the nature leaders and strategists differ greatly.

A leader is a person who is optimistic, has a broad scope, is easily followed, is able to inspire, and cares about much.  We practiced meditation for leaders by standing tall, chest out, legs firmly planted, hands stretched out to the side, humming peacefully and breathing slowly while focusing on our peripheral vision.  People would follow us because we were fair and saw the big picture.

The strategist, generally the wise elder of a group of tribes, is truthful to a fault, has an extremely narrow scope, a cutting edge and cares a lot about very little.  We practiced meditation for strategists by standing with one foot in front of the other, lunging forward while forcefully lowering a Samurai sword from overhead, exhaling loudly and focusing only on the head of the enemy.  We cut off what was in our way.

See the difference?  Diametrically opposed, leaders cannot be strategists and vice-versa.  Few humans have the ability to lead (less than 1%), but much rarer is the strategist.

Modern strategic planning has evolved into many forms of common "See, Think & Draw" or "Vision, SWOT, Formulate, Implement & Control" thinking.  Although the competition is discussed to some extent, it often focuses on inward thinking, broad-based objectives, and action (who does what by when).  The term 'strategy' is confused with the term 'objective’.  Picture the meditation for leaders, above.  Knowing yourself first is important, so do it thoroughly.

After knowing yourself, true strategic planning focuses on the competition (enemy) almost exclusively, while being very exclusionary by deciding what NOT to do (what to cut... picture the meditation for strategists, above) given your own strengths and weaknesses.  Again, this is done only after you first focus on knowing your own company, knowing both what you are and what you are not.  Perhaps you hide in a niche, narrow you product line, de-hire some customers.  Remember to pick the battles that you can win, and emulate the competition in all other cases.  The focus, then, is on doing one thing and doing it very, very well (see Google's core principle #2, "It's best to do one thing really, really well.").

Just as the skillful strategist can subdue the enemy's army without engaging it, take cities without laying siege to them, and to overthrow countries without bloodying swords, companies should carefully plan to take advantage based on sound, honest competitive information.

I will present more in Strategic Planning - Part II, Finders, Minders & Grinders: Why Strategic Planning Isn't for Everyone in another post.

To the Leaders reading this... Sun Tzu said: "Know the enemy and know yourself; in a hundred battles you will never be in peril.  When you are ignorant of the enemy but know yourself, your chances of winning or losing are equal.  If ignorant both of your enemy and of yourself, you are certain in every battle to be in peril."

As an early mentor taught me, the best gardens are made not by planting more flowers but by picking more weeds.  Thanks, and see you in Part II.

Thoughts on the Economy, Debt Financing and Banking Relationships

·         Unemployment rates are historically high and holding steady.

·         Economic growth has been stunted without foreseeable increases.

·         Businesses not seeing revenue growth on the horizon have no need to add employees or borrow money to facilitate the forecasted growth.

·         Businesses “needing” to borrow money are usually financially stressed and are experiencing cash flow challenges.

·         With little demand for loans from growth oriented borrowers, banks are focused on conducting the arduous task of cleaning up their loan portfolios and managing their bad debt reserves.

So where does all this leave the emerging or middle market company and business owner that has struggled to generate revenue and cash flow while becoming increasingly dependent on its line of credit over the last two and a half years?

Part of the answer lies in “relationships”.  Another part of the answer lies in “business fundamentals”.  The last part of the answer is a combination of both of the above.

Having been a banker and now a part time CFO for several closely held businesses, I have a somewhat unique perspective on today’s economic challenges faced by emerging and middle market businesses and how these challenges can be overcome with a strong vibrant relationship between a business owner/borrower and their banker.

I don’t remember who I heard this from first, but nevertheless, it is true that “relationships are a two way street”.  No one would argue that it is not good business for a banker to continually reach out to his/her customers to see if there is a bank product or service that can help the business owner meet some of the day to day challenges related to cash management or internal controls associated with the company’s cash balances, or just simply to check on the health of his/her business borrower.  After all, isn’t this, as a core part of business development or client service, part of the banker’s job?

 The business owner is on the other, less talked about, side of the street.  In spite of all of the demands on his/her time associated with running a business, the business owner must realize that the banker is a significant stake holder in his/her business.  As such, it is incumbent on the business owner to make the banker feel as comfortable as possible in the knowledge that the business he/she has lent money to is in capable hands.  However, I don’t think I have ever seen this in the job description of a business owner or CEO.

A business owner or CEO “keeps their finger on the pulse” of their business with direct, real time knowledge of his/her “Business fundamentals”.  Knowing key information such as daily sales volumes, operational labor metrics, accounts receivable aging balances, gross profit by customer and overhead burden provide invaluable information on and insight into the performance of the business.  Our founder and CEO, Jerry Mills is fond of saying something to the effect that he would bet on (that is if he was a betting man) “good information in the hands of a manager with average intelligence” over “bad information in the hands of a manager with high intelligence” every time.

The third facet of creating and maintaining a dynamic, vibrant relationship between you and your banker is to demonstrate to him/her that you are firmly in control of the fortunes of your company.  You not only have the actionable information available to manage your business, you have created a culture of  accountability within the company so that your managers are responsible for meeting defined objectives measured by your “business fundamentals” and you firmly understand the profitability drivers associated with your business.