Saturday, October 27, 2012

A Strategic Plan For All Businesses Part 2.

In our last article we established a business should be designed to satisfy the personal needs and wants of individuals working in the business. They want money. They want enjoyment. They want security. In order to provide these goals a business must be built specifically to provide them. If the business does not provide money, enjoyment and security to the individuals associated with the business it will more than likely not succeed.

A business must establish its goals to make certain that it will be able to provide money, enjoyment and security for all associated with that business.

The business goal for providing money:
Management should have a clear understanding (and they more then likely do) that those working in the business have a need and desire for money. Also that need and desire will grow on a regular basis. As one gets older their level of aspirations will rise. Therefore it is essential that the business expand and grow its profitability so that those involved with the business will have an opportunity to earn money and meet their ever expanding  aspirations. 

Goal number 1: Provide sufficient income to enhance the standard of living of all those who are associated with the business.

Please  note the goal is not that everybody should have the same standard of living.  The goal is that the company should make enough income so that the people within the organization will be compensated fairly along with some level of increases on a regular basis.

Is this a goal that will last forever?...You bet.

The business goal for providing enjoyment:
As you know the term enjoyment can mean many different things,  During the course of my travels I've spoken to many people about what the enjoyment is they get from work (contrary to popular belief most people do enjoy their work). What makes people feel good I asked: They want to know they are contributing to a greater good. They want to know that there's value in what they do. They want to feel good and proud of the product and or services they are providing.  

Goal number 2: Provide the highest quality product and/or service commensurate with the marketplace.

It is very important that the quality of products and/or service be commensurate with the marketplace a business serves. You wouldn't want to provide a Neiman Marcus product in a Target Store. Both have good quality products and service for the markets they serve. But each market is substantially different.
Provide a high quality product and/or service and the people within your organization will feel good about the organization and themselves. That’s what they enjoy.
Is this a goal that will last forever?...Sure.

The business goal for providing security:
The personal goal of security means different things to different people. Clearly younger people will have a different view of security then older people. Also whether one works for a company or owns the company will have an impact on how an individual views security. For example employees may believe that security is having a lifelong position, a pension plan or the hope of future ownership

The owners may want exactly what the employees. However the owners may also be looking at the potential of a sale or some kind of an event where they can cash in on the value of the business.
It is extremely important that owners of the business take a hard look at whether they are creating value or not.  Wouldn't it be awful to be working 30 to 40 years in a business to find out that you have built a business that has no value. It just fades away when you do.

Goal number 3: Build a business that will last forever.

When a business is built to last forever, it will attract better employees, build value for the owners and provide some level of security to its people.

The business must be built to last beyond the lives of its owners.
Is this a goal that will last forever?...Yep.

 A final thought:
These three goals have no priority as to which one takes precedence. Economic conditions existing at the time of decision-making will determine which of the goals will take precedence over the others. For example in the current economic condition of the nation which goal would you favor over the others?
The goals will conflict with each other. For example a company may wish to buy new equipment which will help improve existing products. The purchase of this equipment in the short run may conflict with the goal of providing “sufficient income”.
Decision-making for management becomes clearer once the goals of the business have been established. It’s almost like a decision making matrix. Management must decide, at the time a decision is to be made, what the impact of that decision will be on the three goals of the company. Management will then decide which of the three goals will take precedence. Of course we're not talking about every day decisions, but we're talking about substantial decisions that will impact the goals of the company.

Next time we’ll begin a discussion  of the strategies for achieving the company’s goals.

Monday, October 15, 2012

A Strategic Plan For All Businesses. Part 1.

The first step in developing a strategic plan, for any company, is to determining what the individuals involved with the company want to receive from the company. Throughout my years as a speaker I often asked my audiences: when you get up in the morning to go to your place of business what is it you want? Often times I need to clarify the question to what is it you personally want from the business.
After some prodding I get the following answers:
Of course. Everybody wants money.

When I asked people what they mean by enjoyment I usually get a get good feeling type of responses. Such as a nice environment to work in, camaraderie with the other workers, team work etc. The most universal response is, they like to feel good about the job they are doing and that the work is meaningful.

The last item people have indicated is security. Most people realize security is very difficult in this economic environment but those involved with the business would like to have upward mobility and job security of some kind.

In summary, people get up every morning to go to work would like to accomplish the same things whether they be owners or employees. Everyone is looking for money, enjoyment and security. And the quest for these three items seems to be universal.

Bear in mind that these three items take different precedents based on the age and other factors of the individual. For example younger people may be more interested in enjoyment and money whereas older people may be more interested in security. So even though the goals are universal the weight of each one of these items is different and depends on the individual.

So if all of the individuals, who are associated with a company (owners and employees) all have the same personal goals of money, enjoyment and security then the business must be built in such a fashion as to be able to provide these things.

What happens if the business fails to provide money? People leave.
What happens if people do not enjoy the environment they're working in? People leave.
What happens if there is no long term security for the individuals associated with the business? People leave.

So we can conclude that the primary purpose of all businesses large and small is to provide the owners and employees what they personally want to achieve their individual goals of money, enjoyment and security. Furthermore if the business fails to provide the owners and the employees these three things then the business has no basis for existence and it will not survive.

The next step in developing a strategic plan is to design and set up the company's goals. Now I'm not talking about the goal of say $5 million in sales this year or reduce overhead or any of those types of goals that management thinks are company goals. In essence they are strategies to achieve the real goals of the company. The real goals that often times are never discussed. The real goals that are never laid out in a plan. Interesting that it is not unusual that management will achieve the real goals by accident and not by any specific plan.

The goals that I am going to discuss in the next blog will be the real goals of the business that will never change, that will last forever and be the guidelines that management should follow in creating annual strategies. 

Tuesday, September 25, 2012

Developing A Company Budget Without A Cash Flow Is Like Going On A Motor Trip Without Knowing How Much Gasoline Is In The Tank.

During my career as a practicing CPA I have been involved in reviewing, auditing  and compiling company financial statements. I have seen controllers CFOs and bookkeepers struggle and spend inordinate amount of time developing a company budget, with  the most important pieces of the process not developed. The cash flow forecast and forecasted balance sheets. Why not?
There are several reasons:
1. Developing a company budget can be relatively easy. It's what I call a flat forecast. Sales less expenses equal the bottom line, Pretty simple. Add a cash flow to the process it becomes significantly more complex, more time-consuming and is often skipped. Forecasted balance sheets, out of the question.
2. It seems that since we have a bad economy many companies in their search for reduction of expenses seem to have picked on the accounting department to reduce "non-revenue producing expenses". Therefore controllers CFOs chief accountants are short staff and  on overload. Preparing an annual budget is nothing more than a chore and therefore is developed on a last-minute basis.
3. To ask your outside accountant to prepare budgets, cash flow forecasts and forecasted balance sheets becomes an economic nightmare. The preparation is not the nightmare but the invoice that is sent to the company is overwhelming. The reason for that is simple, generally outside accountants don't prepare financial forecasting or budgeting for their clients therefore when asked to do so they spend an great deal of time developing a model that you get to pay for.   
4. Management seems to be primarily interested in increased sales and profitability. Therefore accounting personnel prepare budgets/forecast that are strictly related to profit and loss. Management then spends the next 12 months wondering why do I have all this profit with no cash.
As you know the banks are not as generous as they used to be. Therefore it is incumbent upon management and the accounting personnel to make certain that the company knows well in advance how much cash will be required to run the business and meet their goals and objectives for the next 12 months or longer.
Cash is king. Always has been. Always will be, The three most important questions that management must have the answers to at all times: How much cash will I need? When will I need it? Where will I get it? 
When you know the answers, you will sleep better.
Let us help you prepare your forecast

Saturday, September 22, 2012

Why the balance sheet is incredibly important when budgeting and cash flow forecasting.


The balance sheet in forecasting is the bridge between the P&L and the cash flows. The net result of all activity from those two reports (P&L and cash flows) is displayed on the balance sheet. Therefore it is very important that after the completion of the P&L and cash flows that a forecasted balance sheet be prepared and complete review of the balances sheet takes place.

The primary items to review are cash balances, accounts receivable, inventory, accounts payable and accrued expenses.

If any of the above items are not reasonable based on past experience then check the following items in your forecast:
1. Review sales collections and how the opening accounts receivable are being collected.

2. Review how expenses are being paid within the forecast and how you handled the payment of opening payables.

3. Inventory purchases (if applicable) have a profound impact on cash flow. Make certain the inventory levels make sense. The inventory levels will be the determining factor of what inventory will be purchased throughout the forecast which directly impacts cash balances and accounts payable.

4. Check term loan balances and credit line. Make certain that term loans have been properly amortized through the forecast and the credit line is at an appropriate level.

5. If after checking the above items and you are satisfied they are correct and the balance sheet still seems to be unreasonable I suggest you review the  P&L and cash flows in great detail to make certain they are correct.
If your are using a spread sheet to prepare the reports you may need to check  the formulas developed.

The balance sheet will tell you whether your P&L forecast and cash flow forecasts are right or wrong.



Friday, August 24, 2012

Need A Life Saver

Harvey A. Goldstein, CPA

THINK ABOUT THE AMOUNT OF MONEY a company spends on CFO’s, Controllers, bookkeepers, outside accountants, and a myriad of other advisers that will counsel you on your financial past. Yes, they will tell you your sales were up or down. Expenses to high or too low. As if you didn’t know. They’ll also counsel that you spent too much here and maybe not enough there.

Companies spend thousands of dollars analyzing what they did. The major problem with this exercise? You cannot change the past. Its not possible. It’s over. It’s too late to fix it.
How much money managent spend to find out what the company will doing?
Does anyone help management see the future?
Does management want to know what lies ahead? 
Does management want to know how long cash resource will last? 
Does management enjoy the anxiety produced from the fear of not knowing what is going to happen? 
Sleep well?
Has anyone ever provided management educated read as to the financial future of the company?

… is the ability to see and manage the future. The only thing you can manage is the future. Every decision you will ever make will only impact the future. We spend so much time and so many resources looking at the past, yet we live for the future. The more we know about the future the more effective we can be at managing it.” Knowing what the future holds is powerful. And it is yours for the asking.

THE MAIN PURPOSE of the forecasting process is to let management always know in advance how much cash they will need and when they will need it. In addition, the forecast will set flexible goals that are very effective in controlling expenses. Furthermore, the by-product of the information produced will make the information in financial statements significantly more meaningful and be effectively used for managing the business. How can you assess financial data if you don't know what the numbers should be? BASIC FINANCIAL FORECASTING is the tool that will provide sufficient data to navigate the future.

IF I CAN TELL YOU approximately how much cash you’ll have in the bank at the end of the month for the next 12 month…

Wednesday, June 27, 2012

My Solution...Same as 30 Years Ago: Get cash to small business

Harvey A. Goldstein, CPA

Hello my name is Harvey Goldstein. I’ve been a practicing CPA for a very long time. I used to be the managing partner one of the largest CPA firms in Southern California. I’ve had quite a great professional career. I've been blogging since 2005. This is a repost from a while back. I challenge you to tell me this same information isn't as relevant as it was 30 years ago or when I posted it early on the new web.

In 1980s, I had the good fortune of being appointed by President Ronald Reagan to his National Productivity Advisory Committee. Our game plan was to provide suggestions to the president on how to improve the productivity of the United States.

If you recall in the early 80s when Ronald Reagan was elected president we were living in one of the worst economic times since the Depression. The President believed that increasing productivity would help our country restore its economic well-being. Our committee had met on many occasions. So the real question about this committee was since we were studying productivity were we productive? Frankly no. We wrote a report. I still have a copy of it in my garage. It was just another one of those Washington committees that meet prepare a report that nobody reads.

The Congress during the early 80s was attempting to do everything it could to come up with an economic plan to help increase employment and improve our economic conditions. As you may know most of the members of Congress spend most of their time sitting in committee meetings discussing ways to improve the economy and making laws we don’t want. Since most of the members of Congress have been around for a long time and have spent most of their careers in committee meetings they really don’t have any idea what it takes to help business people to improve their lot. Yes some of the members may have been in business but their real business is government.

They live in the beltway and never see the real world. Today history repeats itself. Again we have some of the same members of Congress sitting on their butts behind the protection of the Beltway coming up with the same ideas as in the 80s.

Just listen to the rhetoric. Nothing new.

Reduce capital gains to help small businesses raise capital.
Will a reduced capital gain rate really induce people to make an investment in a small business? What is the incentive of investing in a high risk venture when it’s success may come, if at all, some time in the distant future? Incentives should be quick and not something to wait for.

Or how about providing employment incentives so that people in business will hire? Think about this: If I’m a small business owner does it make any sense for me to hire a person who I might have to pay anywhere from $20-$25,000 or more per year and the government is going give me an incentive of $5,000 to hire that person? It’s a joke. Where will I get the other $15-$20,000 to pay them? And does it make sense to hire somebody I probably I don’t need as this time?

In addition to they’re now talking about giving banks billions of dollars to loan to small business. Is that believable? I think not. When a small business owner walks into the bank hands them a financial statement that shows a shrinkage in sales and a shrinkage in profits would any banker loan them money? I doubt it. The goal of the bank is to get paid back. Looking at declining business is a risk the bank will not take. These were all the same ideas and solutions that they were presented during the 80s. What we need is money, cash, green you know that stuff that pays the bills. What should be done?

During my travels in the 80’s to attend my not so productive committee in DC I started to come upon an idea that would provide a sufficient incentive for individuals to take a chance on investing in a small business.

It’s just too simple.

But here goes. Instead of providing an incentive to hire people and an incentive if the business succeeds why not provide an incentive for direct investment into the business up front. I hate to use the terms which in the eyes of the government and the Internal Revenue Service is a real no-no but to why not make the investment in a small business a legal tax shelter.

When in DC I had presented the idea to a number of members of Congress in the 80s and they said to me
“write a bill”. So I sat down with my tax partner and we came up with “The Small Business Investment Incentive Act.” It provided that a group of investors could invest up to $250,000 into a small business and take a tax deduction for the investment. This gives the investor a tax benefit immediately upon the investment in the business as opposed to waiting for some future success to reap a tax benefit.

If all businesses have the same tax benefit then all businesses are on an equal footing. Therefore investors will be looking for better businesses to invest in since the incentive is the same for all. If the business becomes successful and the investors receive their money back through the sale of their interest in the business at that time they would pay back the tax incentive they received when they invested. Anything over and above their original investment would be taxed at a capital gains rate. About 30 years ago this idea was introduced to Congress and had a whopping 26 sponsors.

The bill went nowhere. Actually in the 1986 White House conference on small business it was considered the number 11th most important issue that small businesses at the conference had supported and wanted adopted.

Now is the time to get The Small Business Investment Incentive Act on the books.

This is a direct incentive for providing cash to a small business. Cash that can be used for expanding, marketing, hiring or anything that might make that business successful and sustain itself during these difficult times.

If you think this idea makes sense please send this information to everybody you know
and if you would like a copy of The Small Business Investment Incentive Act as originally introduced in 1983 I'll post it on or email it to you.

That’s my solution.

I'd love to hear what you think, please leave me a comment by clicking on the link below (if no one has left a comment yet, it will say 'no comments.'