CategoryManagement Archives — C. Lynn Northrup, CPA, CPIM

Managing Cannabis Inventories

Managing and valuing inventories in cannabusinesses is the key to increasing cash flow and lowering taxes. Cannabusinesses are restricted to reducing gross revenues by the cost of goods sold because of IRS Section 280E. Section 280E was enacted in 1982 and provides that no deduction or credit is allowed for any amount paid or incurred in carrying on a trade or business consisting of the trafficking in controlled substances within the meaning of schedule I or II of the Controlled Substances Act. The only way cannabusinesses can reduce their tax burden is by maximizing cost of goods sold (COGS).

The tax laws and regulation associated with cannabusiness are complex. Understanding these complex laws and regulations makes the job of valuing inventories and determining COGS of cannabis businesses a challenge. This is compounded by the cannabis industry being a collection of complex processes and types of businesses.

Cannabusinesses include cultivators or growers that grow plants and then harvest the flower from these plants. In addition to selling flower, it can also be processed into a variety of marijuana infused products (MIPs). Marijuana infused products are created by extracting distillate which is then infused into other cannabis products such as vape cartridges, edibles, topicals, wax, and shatter. These products are then packaged and sold through dispensaries. The tax laws and regulations for determining COGS and inventory valuation for growers and MIPs are different for dispensaries.

Cultivation or farming of cannabis needs to track the flower yield from indoor and outdoor grows measured in grams to develop a cost for the harvested flower. Marijuana infused products are the result of process manufacturing operations creating multiple varieties of products requiring different types of packaging. Costs are developed based on the recipes for these products, including packaging.

These products are then sold and distributed to dispensaries for ultimate resale to the consumer. Dispensaries, in many cases, are required to inspect, repackage, and check the quality of products before they can be sold to the consumer.

Most cannabis businesses are using Quick Books to accumulate costs supplemented by spreadsheets to calculate yield and the cost of distillate. The costs of cultivation and marijuana infused products include direct labor, material, and allocation of overhead. Allocation of overhead should be based on guidance from Section 471 and Section 263A of the Internal Revenue Code. It is critical to determine any allocation of overhead to be included in COGS in compliance with IRS codes and regulation, but also to maximize costs that offset gross revenue.

Accounting for cannabis products needs to be accurate. In some cases, ERP (Enterprise Resource Planning) systems are being utilized by larger operations. Dispensaries determine cost based on the actual cost of products purchased and associated freight. Inventory tracking is required, and many dispensaries utilize point of sale systems and inventory management systems to control and manage activity.

Based on my experience, managing and controlling inventory costs and the associated investment is one of the most challenging and critical areas of cannabusiness. First, inventory investment requires a significant cash investment. This makes effective purchasing and inventory management vital. Second, accurate and maximum determination of COGS reduces the tax burden created by IRS Section 280E. This means that inventory costing and management should be a top priority for all cannabusinesses and their accountants.

Utilization of professionals who understand cost accounting and the unique taxation requirements of the cannabis industry represents the key component to success or failure.

Cannabis Guidance and the IRS

The IRS recently published guidance to provide cannabis businesses insight regarding compliance with IRS regulations. Major questions have been raised regarding Section 471 (c) which allows small business tax payers with revenue under $25 million to adopt the cash basis of accounting and prepare the books and records in accordance with the taxpayer’s accounting records. This seemed to open the door to modifying how cannabis businesses recorded cost of goods sold to minimize the impacted of Section 280E. Changes in Section 471 (c) resulted from the Tax Cuts and Jobs Act of 2018.

Section 280E disallows all deductions or credits for a business that sells or otherwise traffics marijuana. However, Section 280E does allow businesses to reduce its gross receipts by properly calculating cost of goods sold. This means that advertising or selling expenses are not deductible.

The guidance under Section 471 (c) according to the IRS is that it is just a timing provision and would not permit a taxpayer to recover a cost that it would not otherwise be permitted to recover or deduct for Federal income tax purposes solely by reason of it being an inventory cost. We’re not sure if this works and there could a conflict with Section 471 (c). This is a new regulation and is the IRS opinion on the application of Section 471 (c). They are adding Internal Revenue Code “flush language” via a regulation which is the opinion of the Internal Revenue Service.

I work with multiple cannabis businesses and have spent a considerable amount of time dealing with Section 471 (c) and how to apply it. The regulations say that qualifying businesses may choose to treat its inventory as reflected in the taxpayer’s books and records prepared in accordance with the taxpayer’s accounting procedures. If a change in accounting was made to adopt the new regulations, a Form 3115 is required to be filed outlining the changes.

A taxpayer taking the Section 471 (c) approach contrary to the regulations should consider disclosing any position that could be inconsistent with the new regulations. A disclosure should be made by filing a Form 8275R with the tax return. Determining cost of goods sold for cannabis businesses can be complicated and should be based on cost accounting logic. Cannabis businesses and their tax advisors should consult with someone experienced in these areas when applying these regulations.

IRS guidance has indicated that the growth of the marijuana industry will warrant increased tax compliance efforts. Accordingly, extreme care should be taken when developing and preparing cannabis tax returns based on the recent IRS guidance.

What is Strategic Planning?

Everyone talks about doing strategic planning, but how many really understand it. I think it is simple and can be in three steps:

1. Where are we?
2. Where do we want to be?
3. How do we get there?

How many businesses really take the time to stop and address these questions? Many organizations just go from day to day and never dig into the real issues raised by these three questions.

Strategic planning isn’t easy, but the payoff can be huge. It can alert organizations to opportunities in addition to challenges that lie ahead. We operate in a complex and rapidly changing world and gaining insight into the future can make the difference between success or failure. It can help avoid trouble or help to maintain control during a period of rapid change.

Assessing where we are involves looking at financial history, marketing, competition, problems, and opportunities. Pulling all this information together is hard work to create a foundation for planning.

Where do we want to be provides the results for visioning, innovation, and looking beyond right now. I think visons are the result of dreams of where we want to be. We then need to convert them into measurable goals and objectives. This can include profit and sales targets, market share, and ideas for new products and businesses.

We create strategies into how we get where we want to go. This is the nitty gritty of how we accomplish goals and setting new directions to take us into the future. Strategies can include some old established ideas in addition to new concepts that are completely out of the box. The planning process will detail the costs, resources, projected results, and a timeline for meeting our objectives.

The result of our planning boils down to what we need to do today to make the future be what we want it to be.

Understanding Business Entity Structures

It is important to understand that there are different entity (organizational) structures for conducting business. The form or type of organization will depend on the business purpose, a structure to provide legal protection, the size of the business, and the ease and cost to create the business organization.

Here are the common types of business organizations:

• Sole proprietorship
• Partnership
• Limited Liability Partnership
• S Corporation
• C Corporation

Each of these business organizations are described to provide background and understanding.

The Sole Proprietorship is the most common and easiest from of business organization to create. Typically, it is created by a person wanting to start a business out of their house or garage. The sole proprietor invests in their business, usually from their own savings, and begins operations. The type of business might be a service business, a small craft, or a distribution business. It also might involve an internet based business selling products, conducting affiliate marketing, and utilizing social media techniques.

A simple accounting system is used with these businesses which might include Quick Books, Xero, or other compatible bookkeeping/accounting system. The disadvantage of sole proprietorships is that it is exposed to legal liability with no limitation. The business of a sole proprietor itself does not pay income taxes. Profits and losses from the sole proprietor business flow through directly to the individual’s 1040 tax return on Schedule C and then taxed at the individual’s tax rate. However, it should be noted that profit reported on Schedule C is also subject to Self-Employment tax.

Sole proprietorships are the easiest business to form and operate. If a person does business under any name other than their true name, most states will require the filing of a fictitious business name which is known as a “Doing Business As” or a DBA Statement. These forms are available at the county recorder’s office as well as through some newspapers. There is no tax effect if a sole proprietor takes money out of their business, or transfers money to or from their business. However, it is a good idea to set up a draw account to help identify amounts that are not business but are for personal use.

Advantages of a Sole Proprietorship:

• All business tax advantages flow to the owner.
• Organizational costs are low.
• Legal & Accounting fees can be lower.
• State & Federal taxes may be lower.
• Administration is less complicated.
• Can be easily converted to another entity.

Disadvantages of a Sole Proprietorship:

• Personal liability.
• Inability to income split.
• Limited fringe benefits.
• Subject to Self-employment tax.

This covers the basic elements of sole proprietorships.

Partnerships

Partnerships can be defined as a relationship between two or more people (an individual, a corporation, a trust, an estate, or another partnership) who carry on a trade or business with each person in the relationship contributing money, property, labor or skill and with each expecting to share in the profits and losses of the business.

The partnership will be based on a partnership agreement together with any modifications and agreed to by each partner. The partnership agreement and any modifications can be either oral or written.

A partner’s share of income, gains, losses, deduction, or credits will typically be spelled out in the partnership agreement. The partnership agreement and any modification will be disregarded if the allocations to a partner under the agreement fail to have a substantial economic effect. An allocation will have a substantial economic if there is a reasonable possibility that the allocation will affect the dollar amount of a partners’ shares of partnership income or loss independently of tax consequences and the partner actually receives the economic benefit or bears the economic burden corresponding to the allocation.

Partnerships can have both general and limited partners. Limited partners are partners whose personal liability for the partnership is limited to the amount of money or other property they contributed to the partnership. Limited partners are not generally considered to materially participate in trade or business activities conducted through partnerships.

Limited partnerships can allow a sole proprietor to have part of his/her income from the business to be taxed in lower rather than the sole proprietor’s higher brackets. Family partnerships are a popular income-splitting concept by utilizing §704(e). One thing to note is that when the partnership is not recognized for tax purposes, the tax liability stays with the sole proprietor. Family members can contribute a capital interest in a partnership that can be withdrawn from the partnership or upon the liquidation of the partnership. The right to share in the earnings and profits is not a capital interest in the partnership. Family members in such partnerships can only include husband and wife, ancestors, lineal descendants, and any trust created for the benefit of such persons.

Advantages of partnerships include:

• Income is taxed to the partners rather than to the partnership.
• Distributed income is not subject to double taxation.
• Losses and credits will generally pass through to partners.
• The liability of limited partners is normally limited as in a corporation.
• There can be more than one class of partners.
• Partners can obtain basis for partnership liabilities.
• Special allocations are permitted.
• A partnership can be used to transfer value and income within a family group by making family members partners.

Disadvantages of a partnership include:

• The liability of general partners is not limited.
• Partners are taxed on earnings even if the earnings are not distributed.
• Partners cannot exclude certain tax favored fringe benefits from their taxable income.
• Partners may be required to file numerous state individual tax returns for multistate partnership businesses.
• In the absence of a business purpose, a partnership must use either a calendar year or the same year as the partners who own a majority of the interests in the partnership.

Limited Liability Companies

LLC’s are non-corporate businesses that provide its members with limited liability, a single tax, and the option to actively participate in the entity’s management. The IRS does not recognize an LLC as a distinct entity so for tax purposes the LLC may be treated as:

• A partnership,
• An association taxable as a corporation, or
• A trust.

While LLC’s have the corporate characteristics of limited liability, they are usually treated as a partnership for federal tax purposes since they can be organized without continuity of life, centralized management, or free transfer ability of interests.

When a limited liability company (LLC) is a partnership they include benefits such as the following:

• It provides the pass-through attributes provided under partnership tax rules;
• Limited liability to all members;
• It offers control membership control over the business without the risk that management participation will cost members their limited liability; and
• Provides freedom from S corporation eligibility requirements.

In addition, when an LLC holds assets with fair value in excess of basis, the availability of such an adjustment can be helpful by helping the transferring member to obtain a higher price for their interest. These situations are not available to shareholders of C corporations.

There are some non-tax benefits of LLCs which include:

• They can provide members with unique economic, voting, and other rights without creating a second class of stock.
• Rights of members can be modified by amending the LLC operating agreement which is not a publicly filed document.
• LLC members can be elected according to procedures set forth in the operating agreement.
• LLC members are not susceptible to piercing the corporate veil attacks solely as a consequence of the member’s failure to satisfy certain administrative formalities.

There are some disadvantages of LLCs which include:

• Uncertainty over self-employment taxes.
• They can be restricted to certain businesses and professions.
• In some instances, there can be additional taxes and filing fees.
• They are required to use the calendar method for accounting and taxes.
• A cancellation of indebtedness might stick to a member.
• There are issues with recourse and non-recourse debt.
• LLCs have no at-risk amounts because of the limited liability afforded to each member.

To sum up, LLCs are non-corporate businesses that provide members with limited liability, a single tax, and the option to participate actively in the entity’s management.

Corporations

There are two types of corporations, S corporations and C corporations. We’ll discuss both together with their advantages and disadvantages. First, it is important to point out the characteristics of a corporation which include:

• Associates (shareholders).
• An objective to carry on a business or profession and to divide the profits from the business.
• Continuity of life.
• Centralized management.
• Limited liability to the associates.
• Free transfer ability of interests.

C Corporations

C corporations have a number of tax advantages over S corporations and unincorporated businesses. First, C corporations can be used to split income between itself and its owners with potentially lower overall tax rates.

 C corporations can deduct fringe benefits paid for its employees in contrast to S corporations who are not able to deduct these expenses for employees who are 2% or larger shareholder. Unincorporated businesses cannot deduct these payments for its owners. C corporations can elect a fiscal tax year whereas S corporations and partnerships must be on a fiscal year for the most part with some limited exceptions. Corporations are able to deduct up to 80% of the dividends they receive from investments in other domestic Corporations.

C corporations can have an unlimited number of owners and multiple classes of stock ownership. The owners of the shares are not restricted to being United States citizens or to the numbers of shareholders. Forming a corporation involves a transfer of money, property or both by prospective shareholders in exchange for capital stock in the corporation. When money is exchanged for stock, the shareholder or corporation realizes no gain or loss. The stock received by the shareholder has a basis equal to the money transferred to the corporation by the shareholder.

There are a number of complex restrictions associated with corporations which are beyond the scope of this post. The most significant issue is that C corporations are not allowed to use the cash basis of accounting and are required to use the accrual method. The accrual method requires that income needs to be reported when it is earned in contrast to the cash method of accounting used by sole proprietors, S corporations, qualifying partnerships, qualified personal service corporations, and small businesses with less than $5 million in gross receipts.

Because of the restrictions and complexity of C corporations, most small businesses and service companies will not use this method of business formation. These reasons when combined with the double taxation of earnings of C corporations will cause smaller entities to form as an S corporation, partnership, LLC, or as a sole proprietor.

S Corporations

Domestic corporations can avoid double taxation by electing to be treated as an S corporation allowing small business corporations to elect special rules under Subchapter S. The treatment allows S corporations to be treated similar to partnerships whereby income, deductions, credits, and gains and losses are passed through to shareholders on a pro rata basis. S corporations are taxed like a partnership in that it pays no taxes, and its income and deductions pass through to the shareholder.

Here are some of the advantages of S corporations:

• S corporations can distribute its profits to shareholders with only a single tax in sharp contrast to C corporations where a double tax is incurred because dividends are not deductible.
• Losses of S corporations are deductible by shareholders in contrast to C corporations where losses are not deductible by shareholders.
• A new corporation may elect S corporation status in its initial year of operation in order to utilize losses even though they may ultimately want to be taxed as a C corporation.
• An S corporation is exempted from the accrual method of accounting rules and can use the cash method of accounting.
• An S corporation provides a corporate shield for liability purposes for those who want the income and losses taxed to them, but do not want the potential liability problems of a partnership.
• S corporations can adopt tax deductible and non-deductible fringe benefit plans subject to special rules and limitation applicable to these plans.
• An interest deduction is allowed for funds borrowed by a shareholder to purchase stock in the S corporation and such interest constitutes business interest when the shareholder materially participates in the business.
• Many problems of C corporations such as alternative minimum taxes and personal holding taxes do not apply to S corporations.

There are some disadvantages associated with S corporations:

• Because there is no corporate tax rate it makes deferred compensation programs impractical.
• There is no opportunity to accumulate corporate earnings at a lower tax bracket which makes it difficult for S corporations to reinvest profits in the business.
• Split-dollar and other non-deductible fringe benefits for shareholders can’t be paid for by lower taxed corporate funds.
• The 80% dividend received deduction is lost.
• In some states, the S corporation election will not avoid the double tax.
• A new or dissident shareholder can cause termination of the Subchapter S election through a disqualified transfer of stock.
• S corporations lack the flexibility that partners, and partnerships have to equalize the outside basis of owner’s interest with the inside basis of the entity’s assets.
• All income, except long term capital gains, received by the corporation are taxable to shareholders.
• More record keeping may be required to maintain accurate records for basis in shareholders stock to maintain the accumulated adjustments account, and to determine the tax ability of distributions.

Becoming an S Corporation

In order to become an S corporation, it must be formed in accordance with both state and federal laws. The corporate capitalization involves the transfer of money and/or property to the corporation in return for stock. The corporation must meet the requirements of S corporation status and all shareholders must consent to the S corporation status. The corporation will utilize a tax year status unless it meets special requirement to select another tax year and it will have to file Form 2553, Election by a Small Business Corporation, to indicate that it chooses S corporation status.

S corporation status is only permitted to “small business corporations.” S corporations are limited to a maximum of 100 shareholders who are U.S. citizens and non-resident aliens are prohibited from being shareholders. While this is the primary rule, resident aliens who possess a green card could be a shareholder, but this puts the corporation in jeopardy should this status change after achieving S corporation status. The requirement is to have only individuals as shareholders who are advised to establish a buy-sell agreement that restricts transfers to ineligible persons.

There are some special situations that allow estates and certain trusts to be a shareholder. In these instances, it is essential that the laws and regulations be carefully followed so as to not jeopardize the sub-chapter S status of the organization. Non-resident aliens may not be S corporation shareholders. In addition, a C corporation is not allowed to be a shareholder in an S corporation.

There you have the basics of business entities.

Urgency Creates Change

Change starts with a sense of true urgency and in most cases needs to be created to make things happen. The enemy of urgency is complacency. Complacent people don’t look for new opportunities and they pay more attention to their internal feelings than external feelings. They tend to move slow when they need to move fast. What ever worked in the past is what guides them.

While anxiety and fear can drive behavior that might be mistaken for urgency, the resulting actions tend to be non-productive. This is called false urgency resulting from failure. The thought process from a sense of false urgency usually is not productive and proactive. It typically is mindless wheel spinning that creates no positive results.

A true sense of urgency is created and recreated by communicating the existence of great opportunities together with the existing hazards and roadblocks. People engaged in a true sense of urgency exhibit a strong need to move and win, now. The biggest challenge about creating a sense of urgency is taking the first step in initiating the action needed to succeed in a changing world. Real urgency isn’t a natural state of affairs because it needs to continually be created to get change initiatives moving and in the right direction. In a constantly changing world, the good news is that there are an over abundant number of opportunities that can be utilized to create true urgencies.

A true sense of urgency evolves from a set of feelings that creates a compulsive determination to move right now. True urgency is a process of winning the hearts and minds of the people needed to make change happen. Mindless emotion doesn’t get the job done. Winning change strategies utilize sound, ambitious, but logical goals using methods allowing people to experience the feelings that embrace the determination needed to make things happen.

The strategy for producing a true sense of urgency focuses on creating very alert, visibly oriented action, aimed at winning with daily progress toward achieving the vision and goals targeted at core emotional feelings. Here are the four tactics needed to make this strategy successful:  

1. Reconnect internal reality with external opportunities and obstacles using data, people, video, and other media.
2. Avoid acting anxious or angry and always effectively demonstrate your own sense of urgency in meetings, one-on-one interactions and other communication with the people engaged in the change process.
3. Take the opportunity to determine if crises can be used to your advantage and always proceed with caution.
4. Remove the negative and urgency skeptics and keep the group complacent to avoid destructive negative urgency.

In addition to these four tactics is the necessity of keeping up the pressure to maintain a sense of continued urgency. The trap that can occur is achieving success and then losing your momentum of continuous improvement. Short-term success does not always translate to long-term results.

Here are some thoughts on maintaining urgency after making a successful change. Always be on the alert for potential declines in the sense of urgency. Realize that complacency can set in so be ready with backup solutions to maintain momentum. Take advantage of new developments to apply to change initiatives and improvements. Essentially, building a culture acting with a high sense of urgency will focus on the strategy for producing a true sense of urgency and application of the four tactics that are needed to make a positive change become a constant.

Assessing a Business

Ask and Listen

A key tool in assessing a business is diagnostic interviewing. This is a process of asking questions and then carefully listening to the answers. W. Edwards Deming, the man who helped the Japanese recover from World War II, always said, “Ask the people who are closest to the action to find out what was really happening.” This advice has never failed me.

Diagnostic interviewing provides indications and clues as to problems. It is a technique I have used to conduct assessments in countless organizations. Getting business owners and management to open the lines of communication can be difficult, but it’s worth the effort. Employees might be reluctant to open up and provide the “unvarnished truth.” It is essential for management to make it clear that they want the truth and the facts. Tell me like it is.

The real key to success is listening and hearing what people are telling you. Frequently, what people say with body language is more revealing than the words that are spoken.

Other Thoughts

A business assessment involves more than just looking at financial data. Take time to step back and thoroughly evaluate the business. Find out what hurts and locate the source of the pain.

Assessments should encompass the entire state of the business from every aspect and all points of view. Get an effective understanding of what is happening in the industry and in the business. Get the big picture as fast as possible.

Analysis

Analysis is performed in order to prioritize problems. Examine problems and then break them into their component parts. Conclusions then can be developed to fit the problem. This is when symptoms are distinguished from problems.

Analysis depends on the specific problems under consideration. Here is my three phase approach:

1. Sort out the facts,

2. Applying analytical techniques, and

3. Use judgment to draw conclusions from the analytical process.

Sorting out the facts is a process of categorizing all the information collected during the assessment. The facts should be sorted based on the assessment parameters. There will be a lot of data to match up including the information gathered from the interviews. Take time with this process and avoid jumping to premature conclusions.

Once the facts are sorted, then start applying analytical techniques. There is both qualitative and quantitative analysis. Qualitative techniques are used to analyze factors which can’t be measured in numerical terms. Examples of qualitative techniques include the development of matrices, asking fundamental questions, and searching for patterns. Additional examples include comparison of events for the purpose of identifying both differences and similarities. Qualitative techniques also include development of flowcharts and fish bone diagrams. Applying analytical techniques is very important so think carefully about the potential range of possibilities.

Self-Assessment Toolkit

I developed a Self-Assessment Toolkit for use in my consulting work. You don’t need to use it but the checklists and questionnaires it offers provides a good roadmap. Another component of the toolkit is a team survey to gain feedback regarding employee opinions about the organization.

The 10 Step Process

To get things on a profitable footing I created the 10 Step Process to Building Business Value:

1. Identify and locate the pain.

2. Establish the parameters on what needs to be done.

3. Evaluate your market, products, and services – are they right for your business?

4. Right size the business.

5. Financing the business.

6. Maximize asset utilization and returns.

7. Improve employee productivity.

8. Conduct product and customer analysis.

9. Improve business processes.

10. Measure and monitor performance.

These 10 steps represent the essential components of what every business needs to do to maximize profitability and build the value of their organization. These steps represent a long-term no nonsense approach to value based management that produces results.

This methodology works because I have used it to produce results in a number of businesses. When businesses apply the tools and employ them consistently over a period of time, the benefits are record growth in sales and profitability.

These concepts are not silver bullet fixes. They represent a common sense application of tried and true methodologies that can make the difference between survival and failure.

Health Care Cost Control

Health care costs are outrageous and continue to climb. A Business Week article reported that over 700 hundred billion dollars is wasted on countless wasted procedures, fraud, and unnecessary treatments. After thinking about the current state of the economy, this revelation struck home. With all the effort being placed on health care reform, it is shocking that this legislation will have no impact on the rising level of health care costs.

Because the health care system operates on a fee-for-service basis, there is no incentive for doctors and medical care facilities to eliminate waste and do a better job of cost control. While there is no incentive for doctors there seems to be plenty for those who are interested in using the system to fraudulently rip off the system for an estimated $150 billion dollars or more.

In thinking about this mess, I tried to consider some potential solutions. CPAs have lots of tools to assist in fraud investigation. The talent is there to get the job done. Why not engage some of the best resources available to stem the tide of leakage from fraud?

The health care system is a process, just like internal control and business processes. Again, wouldn’t it make sense to tap into the lean experts that are streamlining our supply chain and provide focus on the health care system?

When considering cost containment and control, health care represents one of our biggest challenges. I realize the political sensitivity and polarization that surrounds these issues, but government could wake up and pay attention to the talent pool available and make some real progress in contrast to pushing legislation that isn’t going to get the job done. The answer doesn’t lie with Congress; it requires executive action to take the steps that could really make a difference.

5 Steps in Achieving Success

Everyone wants success. The difficulty with achieving success results because it hasn’t been clearly defined. I am going to give you a 5 step approach to achieve success and build the value. The secret to creating value and achieving success starts with a vision for what you want to achieve and how you define success and the steps that are associated with it. The 5 steps necessary to achieve success are:

1. Create a Vision for Success

2. Set Objectives

3. Develop a Strategy for Making it Happen

4. Build Action Plans

5. Evaluate Performance

Following these 5 steps and documenting them are essential to keep your life or your business on track. This doesn’t need to be a complicated process, and in fact, the simpler the better. However, putting these steps into a written document is essential and helps to build the commitment necessary to convert the vision for success into reality.

1. Create a Vision for Success

A mission statement should be brief and focused. It can be nothing more than a few words or phrases that provide a description of how you define success for you and your business. It should become a living document about where you’re headed going down the road. When you define where you are going you have a better chance of getting there.

Your vision statement should spell out where you plan on going and the steps required for getting there. There needs to be a link with the goals and objectives required for achieving the desired level of success. The best vision statements are simple and straight forward. Keep it simple and spell it out in contrast to just thinking about it. Writing the vision versus thinking about it is usually the difference between success and failure.

2. Setting Objectives

After establishing a vision for success, the next step in the process it setting goals and objectives. Setting goals and objectives stems from the vision statement and assessing current performance and the major issues that need to be addressed and how they relate to strategy to accomplish your objectives.

Objectives should specify measureable results that need to be accomplished together with a target date or a time span for completing it. Objectives should be as specific and quantitative (measurable and verifiable) as possible. Development of objectives should specify only what and when it needs to be accomplished and should not venture in to the why and how. Objectives and goals should relate directly to crafting a strategy to achieve your objectives.

3. Develop a Strategy to Make it Happen

Strategy corresponds to the actions and approaches necessary to achieve your objectives and fulfill your vision. The components of strategy include deciding on those attributes which offer the best chance to achieve your objectives or to gain a competitive edge. Strategy is where you focus on the skills, expertise, and competitive capabilities that will set you apart from your rivals.

Strategy is about being different in contrast to something that everyone is or should be doing. It boils down to making the tough choices that create a sustainable competitive advantage. These choices are those that allow you to change the rules in your favor.

4. Build Action Plans

Action plans are when you need to get more specific to clearly identify what has to take place. They represent an opportunity to test and validate your objectives. In addition, they provide a basis for communication for others who need to contribute to or will be affected by what takes place.

The following basic components should be part of the plan development. First, document the specific steps that will be required. Next, it is important to identify the people who will be held accountable making sure that each action step is completed. Developing a timetable getting things done is essential. Make sure to determine what resources will be needed to achieve your objectives. Finally, it is critical to provide feedback mechanisms to monitor progress.

Documentation provides a basis for monitoring the progress of each action step. Incorporate this documentation into a schedule that spells out what needs to get done and when.

5. Evaluate Performance

“If you can’t measure it, you can’t manage it” is a term frequently associated with achieving results. Monitoring and evaluating performance is essential if your vision is to become reality. It might be necessary to reevaluate your strategy depending on how things are working out. Assessing the financial impact is essential in determining if you are achieving the level of expected results. Regularly evaluate your resources. Do you have everything in terms of personnel, materials, information, and other resources to support your vision and strategy? After establishing the vision, the strategy, objectives, and action plans, it is essential to monitor the few vital factors that let you know whether or not you are on track or if modifications are necessary. Continually check your progress and respond appropriately.

Final Thoughts

When creating a vision and converting it into reality is not only critical, it is essential to put it into writing. Written goals and objectives are more likely to be accomplished. Make this a habit and I think you’ll start to see success. Written plans represent a commitment that translates into success.

Basics of Strategy

Gaining an understanding of strategy and its objectives is essential not only for business, but in everyday life. I teach this topic to my accounting and finance students and thought it would make a good blog post.

Competitive strategy is really about being different and selecting a different set of activities capable of delivering a unique mix of value to customers. In the process of selecting a different set of activities it boils down to the choices you make to change the rules in your favor so you create a competitive position that eliminates the competition.

Choices to change the rules should include setting the right goals. A sound strategy might be to achieve superior profitability by not becoming too big or growing too fast. It might involve becoming a technology leader. Strategy needs to have continuity and is something that can’t be constantly reinvented. It boils down the basic value you are trying to deliver to customers. It is important to maintain a strategy that is consistent in the face of a multitude of changes.

A good strategy will ensure that its components will drives competitive advantage and sustainability. There should be a simple consistency between each functional activity and the overall strategy. This will occur when activities are reinforcing and there is an optimization of effort. A good competitive strategy will grow out of the entire system of activities.

Essentially there are five steps in developing strategy which are presented as follows:
1. Formulating a strategic vision of the organization’s future business composition and the direction on where the entity is headed.
2. Setting objectives.
3. Crafting a strategy to achieve the desired outcomes.
4. Implementing and executing the selected strategy efficiently and effectively.
5. Evaluating organizational performance and making appropriate corrective adjustments wherever necessary.
These five primary tasks become a continuous loop whereby you are observing, orienting, deciding, and acting on necessary adjustments as needed. In the current economic environment, organizations need to be agile and quick in making these decisions.

Good strategy can involve a variety of approaches. This might include a variety of cost approaches ranging from low cost/low price, differentiation, to a specific market niche. Other approaches include responses to changing market conditions, moves to secure a competitive advantage, geographic market coverage, and vertical integration. In addition strategic approaches include financial approaches, human resources, R. & D., marketing, manufacturing, and collaborative partnerships and alliances. The development of the strategy will certainly consider some of these options.

In addition to various approaches, there are some fundamental components of strategy. Foremost, it will be essential to decide what product or service attributes offer the best chance to win a competitive edge. The next step is to develop the skills, expertise, and competitive capabilities that will set the business apart from rivals. Your choice of strategic components should insulate the business as much as possible from the effects of competition.

Attempt to evaluate your firm or company as to whether it is either conventional or reactive. Another way of looking at the evaluation is to determine whether your firm is distinctive and far-sighted. One way of assessing this is evaluating which issues absorb management’s time and attention. How does management’s point of view regarding the future measure up against the competition? Are you better at improving operational efficiency or at creating new businesses? Is the company’s agenda determined by actions of competitors or is it set based on your own unique vision of the future? Within the organization, what is the balance between anxiety and hope?

Finally, it is essential to assess the quality of your strategic market leadership in terms of the customers being serviced today in contrast to those you expect to service in the future. This same question can be directed to your current competitors and who you expect to compete against in the future. Where are your profits earned today and versus where they will be earned in the future? Effective strategy is dependent on resolving the key questions of what drives your business today in contrast to what will provide the competitive advantage in the future. In too many instances, organizations fail to address these issues and follow the course of plodding from day to day with not real thought of the future.

Creating Client Value

How valuable are CPAs to their clients? What do clients want their CPAs to do for them? These questions have puzzled me and frustrated me for some time. After giving this some thought I reached the conclusion that clients don’t receive value and CPAs don’t provide the value they are capable of delivering.Creating value lies in the pursuit and development of value propositions. Value propositions aren’t defined in the tax code or in generally accepted accounting principles, yet it is the secret to greater profitability which is created by providing needed and necessary services. Clients want more than taxes and accounting from CPAs. They want and need help with their businesses, especially when economic conditions are tough. This means defining customer value in terms of what services CPAs provide and how they do business with their clients. Here is where you can link price together with reliability, dependability, and convenience of the service provided.

Far too many CPAs provide a service, but miss out on providing and building client value. This occurs because they haven’t taken the time to develop the knowledge and understanding as to what clients really need. You need to ask the key questions of clients so you know what they expect of you and how they think you could help them address their challenges and opportunities. This most likely means the ability to provide them with management consulting in strategic and operational areas.

Developing a basket of services which provide value will allow you to value bill. This begins with understanding clients needs and translates into increased profitability for you relative to the hours expended. You now have a choice on what you charge because the client is receiving greater value from the services you provide.

You might end up servicing fewer clients and receiving greater revenue. Providing added value services to clients you truly want to work with ends up being a win/win situation. You can develop some ideas relative to the types of services by reviewing the list of services I offer both to clients and as resources to CPAs.

Employing a value proposition strategy to your practice is an effective way to re-engineer what you are doing by giving clients the services they need and want. Providing added value to clients puts you in the driver’s seat and lets you value bill in contrast to just being paid for the hours you charged to an engagement. It also creates a better overall client experience since it enhances the flow of communication and avoids difficulties and problems which can occur.

You can now start charging the maximum amount that a client is willing to pay which results in greater revenue and a more productive work environment. You will have happier clients since they now perceive they are receiving the value they wanted and are willing to pay for it. Your practice should grow because happy clients talk and this should translate into increased work. This is truly a way of working smarter and not harder.