CategoryUncategorized Archives — Page 8 of 11 — C. Lynn Northrup, CPA, CPIM

Recession Survival

How you do survive the worst economic downturn since the great depression? This is a big question. Many people never experienced the depression or even the big recession of 1981 and 1982. I was a controller of a large corporation back in 81-82. This got me thinking about how could I provide guidance to those who haven’t experienced such turbulence.

Based on my experiences I created a toolkit to package all the tips and techniques of how to get through the tough times. One of the key elements of the survival toolkit is developing a plan and a budget for recession survival. The toolkit contains a cash flow and budgeting template. The process of developing a plan should include an assessment of whether the business needs a tune up, a turnaround, or is in a state of crisis. When you can’t cover payroll, you’re in a crisis. This is why cash is king. If you don’t have adequate liquidity or access to cash, the chances for survival get pretty slim.

During a recession it is time to get aggressive with your sales and marketing. It isn’t always just pricing. Make sure you reach as many potential customers as possible. It’s a numbers game, and having more leads in the pipeline is crucial. Understanding your profit margins is another essential step so you can make price adjustments and at the right level to secure a greater share of the market.

The Recession Survival Toolkit  outlines tips and techniques for reducing costs on every facet of the business. Just reviewing all of the potential opportunities to reduce costs is a healthy process. Usually the first step in cutting back is reduction of headcount. There are numerous ways to control payroll costs without reducing headcount. Consider adjusting hours worked or vacations with out pay as a way of keeping your valuable employees.

Another opportunity is to use lean workflow techniques and paperless systems to streamline the office and accounting functions. Not only is it cheaper, but it speeds up data retrieval, improves accuracy and saves time. It also minimizes the cost of paper and storage space.

Getting financing and having a relationship with your banker is a key element of making it through tough times. When your bank is your partner, your survival chances get a lot better. The toolkit reveals the techniques used by banks to make loan decisions. When you understand what the bank wants, you are in a better position to get the necessary financing.

Having developed a recession survival toolkit for businesses, I am now motivated to provide more guidance for individuals and retirees. I think CPAs have a responsibility to help citizens achieve a higher level of financial fitness. The AICPA and the Virginia Society of CPAs have launched a website that offers a great deal of information and advice on financial management.

Remember, it took a while for us to get in this mess, and it is going to take focus, patience, and discipline for us to get healthy again.

Cash Conversion Efficiency

In these times, cash is king. Achieving better cash flow starts with sales and marketing. A tough economic environment means there are more businesses looking for the same customer. Taking a more aggressive approach to finding more sales leads that can be converted into sales is a critical component to increasing your cash flow. You might even have to shave the selling price to secure the sales, so knowing your profit margins is essential.

Once we secure the sales it is time to be firm on how and when you will get paid. This is one of the key areas where cash conversion efficiency begins. Get cash at the time of sale if possible. Most businesses sell on credit, typically with terms of payment in 30 days. The days accounts receivable are outstanding is one of components of the cash conversion efficiency ratio. The faster or fewer number of days sales outstanding, the better. This generates cash needed for the business.

You have to purchase materials or goods that are recorded in inventory before converting them into sales. Since you likely paid for these goods based on credit of 30 days net and perhaps a discount of 1 to 2 percent if paid sooner than the terms of credit. The more effectively you turn your inventory into sales by reducing cycle time is crucial. Likewise, use your vendors as a bank by adhering closely to the established terms of sale without losing the discount offered.

Your cash conversion is determined by combining the average number of days cash is tied up in accounts receivable plus the average number days cash is held in inventory less the average number of days of payables. The smaller the number of days contained in the cycle the better.

Some additional metrics that should be monitored include:
• Cash as a % of Sales
• Gross Margin %
• Selling, General, and Administrative Expense as a % of Sales
• Net Working Capital as a % of Sales

The faster your cycle time, the faster you will convert your sales into cash. A component in achieving faster cycle times is to reduce the number of days required to send out your sales invoices after goods have been shipped or services rendered.

A couple of good references on how cash conversion efficiency is used include Go with the Flow published on CFO.com and Cash Conversion Efficiency – A Great Outcome published by Management Mythbusters.

Focusing on these basics of accelerating cash flow will help keep your business healthy in these turbulent economic times.

The Reality of IFRS

I am sure many CPAs have seen IFRS and heard there was going to be a convergence from Generally Accepted Accounting Principles (GAAP) to international accounting standards. But how many of them realize the magnitude of what lies ahead? I was involved in teaching SOX and internal control standards under Section 404. This gives me a pretty good idea of the effort required to make the shift. Since this web site and blog is geared to providing current and cutting edge information for businesses and CPAs it made sense to get on the IFRS band wagon sooner rather than later.Why all the fuss? Well IFRS accounting standards have been adopted by 113 countries and by 2011 it will be the standard used by 150 countries. The United States is immersed in global business and investors need to have the ability to evaluate investments around the globe. This makes a pretty good cased for a single set of globally accepted accounting standards. As was the case with SOX, CPAs are not yet prepared to shift to IFRS. Because of the global implications, CPAs in the United States will need to be capable of preparing and interpreting financial statements using IFRS.

The education process will be massive. It will impact investors, CPAs, and other specialists such as actuaries, and professional associations. Comprehensive education programs will be needed across the board. The AICPA has launched an initiative to help educate and pave the way for 2010 when conversion will likely be a reality.

In drafting this post the potential impact of the transition became starkly real. Colleges and universities will need to revise their curricula to accommodate the new standards. The CPA exam will need to be revised. Many CPAs could find themselves in situations where clients will demand adoption of IFRS. Those CPAs who make the effort to educate themselves will be on the winning end of the conversion game. My prediction is there will be more unprepared accountants versus those who make the leap.

This post is just the beginning and a way of sounding the alarm. I will be busy in the months ahead developing training material. Plus, we will be offering regular and current information on this site to help with the education process.  I’m looking forward to the journey, so sign up for my RSS feed and newsletters.  Let’s saddle up and enjoy the ride.

Succession – Planning for the Future

One of the key components of succession planning is deciding where the business should be going and who is going to provide the necessary leadership. This process is a double edged sword. It involves planning for both owners as well as the business. Things can get pretty emotional in family-owned businesses. Accordingly, it is very important to make sure the planning process gets done properly.The emotional process is what stalls many initiatives. It is critical to have a skilled outsider to help to balance the emotions, personalities, and politics of the family-owned business. An objective facilitator with no stake in the outcome dramatically increases your chances of success.

Organizational planning combines development of ownership plans with strategic planning for the business. Achieving balance between these two plans is the key ingredient. This function is where facilitators can earn their money. They balance management interests with ownership goals and the board. Many family-owned businesses don’t have a formal board of directors’ function. We think that boards provide a balance point between owners and management. The board provides a key role in providing continuity between business strategy and long-term vision that helps to preserve owner’s value.

When owners and the business look to the future, the shareholders have to ask the following questions:
• Where do we want to be in 5 to 10 years?
• Can the business survive without the founder?
• What are the goals of non-family team members, entrepreneur owners, and family of the entrepreneur?
• What are the strengths, weaknesses, opportunities, and threats associated with this business?

It is amazing how many family-owned businesses haven’t developed a succession and transition planning process. A well-designed and systematic succession planning process focusing on the family, management, and the organization of the business pays big dividends. This represents a huge opportunity for family-owned businesses to step up and do what they need to do. Planning for the future pays off.

Family-Owned Business (Family Planning)

There are tons of issues and challenges associated with succession planning. Most family businesses want the family to be involved with the business. This gets tricky when there is more than one child and even worse when spouses and cousins are thrown into the mix. Another component of the process relates to non-family managers involved in the business. They have a stake in the business and usually represent a critical link to the future success of the business.

There are many stories about fights and disputes that arise when family members get side ways over the selection of who is in charge. Without an effective planning and communication process, you open the door for lawsuits and fighting between family members. It doesn’t need to be that difficult when the succession and transition process is handled properly from the beginning. We use an approach that sets the stage for proper evaluation of both involved family members and non-family member managers. Our methodology makes a clear distinction between owners, boards, and management. This is done at the beginning and family owner plans are developed and shared with management in an effort to achieve agreement on how to move forward in a balanced fashion. Owners have a role separate from management and it should not be mixed with management responsibilities. These are separate roles and responsibilities. Open communication amoung family members is critical as they reach consensus on ownership goals and on the direction of the business.

One of the major obstacles to succession is the failure of entrepreneur owners to give up control of the company. This often is an attitude of denial and deceit relative to their own mortality. Once founders realize that it is healthy for them to move out of the center of the circle, we start to see progress. The lack of an effective ownership transition plan could be fatal if something unforeseen happens to the founder.

Our process involves family and non-family members in a positive fashion. By fostering effective communication, the business can focus on the right things and achieve a smooth transition. The failure to engage in this critical planning and communication process can prove fatal to the business. Maintaining a balance between all family owners and non-family management is the best way to secure a successful future and build the value of the business.

Family-Owned Business – Financial Planning

Usually most of the planning done by family-owned businesses is in the area of retirement and estate planning. Owners here are attempting to accomplish the following objectives:

• Avoid or minimize estate taxes
• Attempt to minimize built-in gain taxes on company stock
• Establish the value of their business
• Diversify investments
• Establish that there will be enough cash flow for their retirement years
• Provide for funding of estate taxes at death
• Assess and analyze the cash flow and financial statement impact on the business.

Unfortunately, this is where the succession planning process stops. There are many other components to the planning process that need to be considered. Our family-owned business planning process is designed to deal with the family and their goals in addition to addressing how the business will continue to be managed.

This later point is critical because the market in which to sell businesses has shrunk because of the economy and the credit crunch. Going forward in ways that preserve and build business value is an essential step in preserving adequate cash flow to cover the owner’s retirement. Finding the balance point for owners and management is a key element of succession and transition planning.

We’ll talk more about family needs and management planning in our future posts.

Outcomes of Succession Planning

What is the typical outcome of succession planning? This is a frequently asked question. The typical results from such planning end up with a transfer of ownership as well as management. Some of the results include:
• Management buyout
• Outright sale of the company
• The transfer of stock to children
• An employee stock ownership plan (ESOP) or other internal transfer of ownership
• Sometimes you have a parent retaining control with a child stepping into the CEO spot
• Other times you have an owner retaining control with a manager stepping up to CEO

Regardless of which direction it goes, succession planning should provide for an integrated approach that considers the organization, management, and the ownership. There is a lot of work that needs to be done to achieve the correct balance point for all of the involved parties.

Because of the many issues and challenges facing owners of family owned businesses, it is imperative that they begin this process and avoid procrastination that only invites disaster and problems. The price of the succession and transition planning will be well worth the time and effort.

This planning effort should be done by professionals experienced in dealing with these areas. They will help facilitate the strategic thinking of the owners to create a solid ownership plan. These professionals will also help to coordinate work with other professionals such as the CPA, attorneys, and other specialists likely to be part of the process.

This type of approach represents the best way to preserve the value created by the business and have it transferred according to the desire of the owners. Application of a proven blueprint avoids mistakes, saves time, and keeps legal and professional fees to a minimum. We’ll talk about financial planning, family planning, management, and organization plans in future posts.

The key here is to take a systematic and proven approach to the process. If you don’t do the planning, someone else will do it for you and it might not be the way the owners envisioned.

Succession Planning Issues

Here are some questions and issues for family-owned businesses that I hear from many of my clients. I thought it would interesting to share some of these questions with you. It will spark some thought and questions as to how to address these issues.

Succession Planning:

How do you make a smooth transition from one generation to the next?

How do you pass ownership and plan for future management of the business in a fair and equitable fashion?

What is an appropriate organizational design and structure for the company as it grows?

Are individuals well suited to their jobs and the business?

How does the senior and the founding generation accept “letting go” and turning over the business to the next generation?

How can a business that has never or very frequently planned, develop long-range plans for the future?

If you can’t effectively provide answers to these questions, relax because you’re not alone. The challenge of succession planning is one of the number one issues facing baby boomer businesses today. It is getting even more critical because of the difficult economic environment that exists today. Succession becomes more urgent because a willing buyer for the business might not be easy to find. Even if they are a willing buyer, they might have difficulty finding the financing to close a deal.

My advice to first generation owners of family-owned busineses to get the help from people capable of helping navigate through these difficult waters. There are no easy answers and spreading twinkle dust won’t get the job done. It will cost some money and it will take hard work. But when you think about the most valuable asset in your estate it is important to realize that failure to address these challenges could result in the tax man getting a significant chunk of your value instead of your heirs.

Another issue that needs to be addressed is what happens if the owner becomes disabled or incompetent? An effective succession and transition plan now becomes worth its weight in gold. Stuff can happen so it makes good sense to be prepared.

I think that if business owners haven’t done this work they should make a New Year’s resolution to begin this important planning work and get someone to help guide them through the process. For any CPAs reading this post, I would bet that you have clients that fit this profile. If you are not confident in your ability to guide clients through this process go locate another CPA who has experience and specializes in doing this work. Your client will thank you.

Well, I have rambled enough for one day but I hope you understand the urgency of this challenge. We’ll share some additional questions and situations in future posts together with thoughts on the process we use to guide clients as they plan their transition.

Get Help Now!

These are economic conditions that I have not seen ever in a career of over 45 years. It will impact and hurt all businesses, particularly the smaller family-owned entrepreneur. One of the reasons for this is that driven entrepreneurs prefer to go solo and either do not want to ask for help or are unwilling to pay for advice that could save their business. The entrepreneur likes to break the rules and often feels they can get away with things. The danger of this approach in this tumultuous environment is there is a good chance of going down blind alleys with no escape.Now is the time to think strategically about the business. Get the help of advisors who can help lead businesses out of trouble before they get in too deep and go too far. The thinking and planning process is where entrepreneurs need to listen to advisors. If they don’t have an advisor they should go find one. Setting here writing this blog, I can think of several examples where companies didn’t want to seek advice or if they did, they didn’t listen. In some of these instances the results might be fatal. Companies failed to expand credit lines when they could and now getting credit isn’t an option. They also purchased assets when they should have save their cash.

I have had bankers tell me they wished some of these companies would seek help because it makes their job easier and reduces risk. It is all about being penny wise and pound foolish. A little money spent on planning and prevention could be the difference between solvency and bankruptcy. You would think more entrepreneurs would pay the price and choose solvency.

Another issue where procrastination is high is succession and transition planning. Time and effort devoted to putting good succession and transition plans in place allows business owners to preserve the wealth achieved over a lifetime of work. The failure to implement these plans either due to lack of time or not wanting to spend advisor fees results in the loss of all the accumulated wealth or in excessive estate taxes. It also produces a mess for the survivors to clean up when it could have been avoided.

One final caveat is that advisors do their best work when they can focus on fixing the business rather than managing a short-term cash crisis. It is easier to prevent the fire than to put it out after it gets started.

Building Customer Value – A Case Study

• As an example, there was some cedar that was delivered that they found to be inferior. They refused to use it and had the cedar supplier make it right.

The subcontractors they used were highly skilled.
• The stone mason seemed to work magic with the placement of the stone (and we have a lot of stone!)

• The painters did an outstanding job of painting and staining. If we decide to repaint a room in the future they will be the first ones we call.

• Architectural Interiors from Olathe, CO designed our alder front door and mantle which are show stoppers! They have since built a beautiful walnut table desk for the study.

• Superior Alarm did the alarm and sound system. When we had trouble figuring out the system – they would promptly send out a technician.

• A euro style shower door had to be adjusted. The installer, Colorado Glass and Shower, came out the same day we called and took care of the issue.

• We woke up one morning to no heat or hot water. We called Paul, and, he and Mitch were there within 30 minutes along with the plumber. We were back in business in no time!

• Best Appliance is the local company we used to buy all of our appliances. They did a fantastic job of accommodating us when we had a problem with the dishwasher and microwave.

• Last, but not least, U.S. Bank did a fantastic job providing the financing. They were there for us, especially our loan officer Lance Michaels; he got the job done. Their service and support was the best I have ever received from any bank.

We could go on and on……. from the interior alder cabinets and doors to the white oak floors and everything in between. But you can see what we are saying about “building customer value.”

Once the construction began we became less apprehensive, enjoyed the process and truly are satisfied customers who will definitely recommend Ultimate Design Construction Inc.

The term “downsizing” wasn’t in our vocabulary. So we are now enjoying our beautiful Colorado home on a lovely golf course in the Uncompaghre Valley with views of the San Juan Mountain Range, the Cimarron’s, the Uncompaghre Plateau and the Grand Mesa.

We usually don’t provide all these details but this was the best way to demonstrate how you “build customer value” and thank the people who made our dream become a reality.