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Throughout the recent financial crisis, the strength or weakness of a company’s balance sheet has received more attention.  So how strong is your balance sheet?  Most entrepreneurs do not know, since they focus only on the income statement.  However, creditors and investors will also examine your balance sheet.  If there is one thing that we have learned from this crisis, it is to keep your lenders happy and access to credit available.

Valuations

Before you can assess the strength of a balance sheet, you need to examine the individual line items and understand their valuation.  A key consideration here is that values of many accounts are dependent on assumptions.  Those assumptions are essential for the accountants, but they must be in line with reality.  Accountants value most assets based on historical cost, while investors value them for the wealth they create.  

Accounts receivable (AR) value is dependent on your ability to collect the amounts due.  An AR aging is a tool to assess this since typically the more overdue an account is, the less likely it is going to be collected.  Beyond the aging, are your customers struggling and are their customers paying them in a timely manner?  If your customer is not getting paid, what is the likelihood of you getting paid? 

Inventory is carried at cost, but needs to be assessed in terms of its salability; is it obsolete or have market prices dropped below cost (think commodities)?  In some businesses, spoilage can destroy the value of inventory overnight.  In industries with rapid technological change, obsolescence can occur within months of the product being introduced.  Knowing the underlying physical goods is critical in assessing valuation in these types of businesses.

Fixed assets are carried at cost and are reduced in value on the balance sheet over time via depreciation.  These accounts are the most dependent on assumptions.   Buildings and equipment are depreciated over an estimated economic life, which assumes a certain level of maintenance.  Have they been maintained?  Do these assets really have the remaining economic life that is reflected?   Or has the replacement cost of them changed dramatically?   Have they been made obsolete by technological advances? 

Land is carried at cost for accounting purposes, without any depreciation.   Has the market value of the land you own grown significantly?  Or did you find environmental issues that will decrease its value?

Intangible assets such as patents, trademarks and goodwill arise from the purchase of another business.  These assets are assigned a value when they are purchased for accounting purposes.   The key questions to ask are whether there is real value to an outside purchaser, or do they generate cash on their own?

Liabilities may seem simple, but what if you have payments due based on some contingent event?  Is all of your expected indebtedness accounted for?  Have you provided for vendor invoices that were not received on a timely basis?   Have all taxes incurred, but not paid, been reflected?  Are longer term liabilities, such as pensions, taken into account?

Once you understand the underlying valuations, you can further assess the areas that a balance sheet reveals: liquidity, cash to debt coverage, and leverage.

Understand your balance sheet so that you can look at it the same way your creditors and investors do.   Make them happy and you will increase your financial possibilities.

This article was first published in the January 2010 issue of New Jersey Business.

February 2010 marks the 100^th anniversary of the Boy Scouts of America.  When most people think of Scouting, they think of camping and knot tying.  While those are part of the program, they are but a few of the tools employed to fulfill Scouting’s mission.   To me, the goals of Scouting are twofold; develop the leaders of tomorrow and build the character of our youth.

When the terms Scouting and leadership are used together, most people think of those Scouts who attained the rank of Eagle Scout.   Eagle Scouts  include a US President, the first man to walk on the moon, Nobel Prize winners, as well as numerous Senators, Governors and successful business executives.

While the list of Eagle Scouts and their accomplishments is impressive, the majority of Scouts do not earn the Eagle rank.   What Scouting has done for them is no less important; it has helped build their character.  Many of my fellow B2B CFO partners have been involved with Scouting  and exemplify Scouting’s values.

As an Eagle Scout and an adult volunteer, I am proud to be a part of an organization that is committed to the development of young men into responsible adults and training the leaders of tomorrow.

February 11 is the birthday of one of America’s greatest entrepreneurs; Thomas Alva Edison.  While best know for his invention of the electric light bulb, and to a lesser extent the phonograph and motion picture,  his real legacy lies in the business arena.  Like his best friend, Henry Ford, he changed the way industrial companies operated. 

Besides founding General Electric, Edison revolutionized  the way products were developed.  His Menlo Park laboratory was the first industrial research lab.  He  integrated various scientific disciplines in a single location and combined the process of invention with mass production techniques.   By integrating teams of researchers that could focus on all aspects of his inventions, he was able to move them  rapidly from research to development to commercialization.   These concepts remain in widespread use today, in industries ranging from household goods  to pharmaceuticals.

The "Wizard of Menlo Park", as he was often referred to, left his mark on industry and humanity for generations.

“I found Ray to be a very experienced and competent financial professional, with a broad base of knowledge across the full spectrum of financial disciplines. More importantly, Ray was extremely conscientious in all of the work that he did to support my business. In fact, Ray became an integral member of my management team. Based on my experience with Ray, I am quite sure that he would do an excellent job as a B2B service provider and I recommend him with confidence.”

Phil Kornbluth

Matheson Tri-Gas

It’s the Customer Stupid!

I know, this is a take off on a campaign strategy of the early 1990s, but it is true.  As a colleague of mine often says, what is the one thing it takes to have a business?  It’s a customer.  Your can have a product or service, a business plan, a sales team, or even money.  But without a customer, you don’t have a business. 

Focus on your customer, not your internal operations and you will be far more successful than your competition.  If you are like most entrepreneurs, you know your business and customers better than anyone else in your company. 

My point is not to neglect your internal operations, but that you as the business owner should focus on your customers.  Put the people, processes and infrastructure in place to handle the operations.  Surround yourself with talented employees and advisors, so you can develop the vision for your business and then deliver it.  

As we enter the holiday season, I thought that I would address not-for-profit organizations.

Ever wonder why so many not-for-profit organizations struggle?  The number one reason is that they think that they are a non-profit organization.  There is a difference.  While they both are focused on accomplishing a particular civic or charitable mission, the not-for-profit functions like a business.  

A not-for- profit knows and acts like it needs to make a profit in delivering the mission of the organization.   A non-profit thinks and acts like it is not supposed to make any money.  What’s the result of these different philosophies?  The not-for-profit makes money that enables it to grow and further deliver on its mission.   The non-profit struggles to maintain the status quo and often disappears.  If you were a philanthropist, how would you want your organization or foundation operated?

Profits don’t matter.

Am I nuts?  Maybe, but let me explain. 

Profits, often referred to as earnings or net income, are an accounting measure meant to measure business performance.  If profits were the end goal, the standard set of financial statements would not include a cash flow statement.

You can’t pay people or bills with profits, only with cash.  Have you ever put profits in your bank account?   Or written a check out to ‘Profits’?  I would bet that all of you have at some time written a check out to ‘Cash’. 

As for what you take home out of your business, it is still only cash that matters.  You see, if you take more cash out of the business, that cash has to come from somewhere.  And usually, it is in the form of debt.  And what is debt?  It is a claim to the assets of the business.  Debt reduces the net assets or equity, which in economist’s terms is wealth.

Wealth comes from cash, not profits.  Generate cash to create wealth. 

Tracking and planning for your business’s cash flow is not a luxury, but a necessity. 

Cash and only cash matters in the end. 

Back during the industrial revolution, Frederick Taylor, introduced the field of scientific management to US industry.  Scientific management was based on time and motion studies that resulted in the concept of the specialization of labor by breaking down each process into distinct tasks based on the time required.  Now, I am not saying that we should put all work into an assembly line process.  What you can do to help your business, manufacturing or not, is to do what Taylor did.  Measure it!  

• Measure your customers:  What they want and how well you deliver.
• Measure your products and services:  What do they cost to make or deliver and what is the cost to service.
• Measure your profitability:  What customers, products, or businesses make money or lose money. 
• Measure your wealth:  What assets yielded what return in your business.

And last, measure your happiness.  For most business owners, their business is a major part of their lives.  Is the business allowing you to enjoy those aspects of your life outside of business that you really want to have?   Is it time to think about an exit strategy?

Why does someone start a business?  Is it for the money?  Well, it may surprise many, but most entrepreneurs start their business for reasons other than making money.  It usually is to pursue something they love or to control their own destiny.  But that being said, without money coming in, the dream ceases. 

While entrepreneurs often have several traits in common, a passion for their work, a desire to innovate, or a need to be independent, successful entrepreneurs do something else.  They keep their eye on the ball.  In this case, the ball is money.

What do I mean by that?  They have the financial infrastructure in place to help them run the business side of pursuing their dream.  There are many aspects to that, but three of the most critical are:

Internal controls- there is a system of internal controls in place to ensure that the firm’s money and other assets are being used in line with company policy.

Financial reporting- they know where they make money and where they don’t.

And last, but not least, they have a planning process to let them know how much money, that is cash, that they are going to need.  And when.

So how do you do this and pursue the dream.  You surround yourself with the right people to give you the right tools and decisions.  That way, you can focus on pursuing your dream, and I may add; doing what you do best, which is moving your business forward.

Stephen Halasnik

HEALTHCAREseeker.com

An Inc. 500 Company