Canada, Germany, Great Britain and most other countries rejected outright Mr. Obama’s invitation to go deeper into debt and spend more money on stimulus.   The president of the European central bank took direct aim at Mr. Obama stating that Mr. Obama’s logic was flawed.

There are great lessons we as business owners can realized from Mr. Obama’s visit to the G-20 meeting.

• Your Management Team – Mr. Obama selected his management team (cabinet) and neglected to find anyone with high level management experience.  There are no business CEO’s on the team and there are only 2 people in his inner circle with any type of business background.  The management issue is compounded when the CEO of the country (Obama) has no management experience.  Your management team is a phenomenal resource, the stronger the team the better the decisions.  One of my clients make an acquisition of a company and in that acquisition, they also acquired a high level executive with strong industry management experience.  The acquisition was a prize and the acquired executive dramatically propelled the company forward.  Over the next 10 years, the company went on to win many outstanding awards for growth and financial performance.
• Objective Assessment – It is difficult for any organization to have checks and balances when all decisions are made in a vacuum.  Obama’s inner circle has made the decision that dramatic growing government debt is desirable (the 1^st bail out, universal health care, cash for clunkers, General Motors, Chrysler, etc.). Closely held businesses have some of the same challenges.  Many times the owner/president of the company doesn’t have anybody to discuss direction, major decisions or how to value opportunities (they have very objective input).  It is difficult to have a discussion with yourself and get all the options out on the table.  Few closely held businesses have board of directors that are different than the employees of the company.  It is difficult for an employee to be objective about issues when the owner of the company signs the paychecks.  An outsider (consultant for example) doesn’t have to be smarter than his client to add value, just as a Tiger Woods’s coach does not have to be a better golfer than Tiger.  The outside perspective, the freedom to ask questions, the ability to pull his viewpoint above the day-to-day challenges and look at the bigger picture, these are the things that consultants bring to the client.
• No Free Lunch – Peter Drucker PhD, one of the world best known management consultant, teacher and author told my MBA class at Claremont Graduate School many times, if there is only one thing you learn here remember: “there is no such thing as a FREE LUNCH” (that is impossible to get something for nothing).  Everything has to be paid for at some time, either in the front end or back end (depending on your marketing strategy).  Business owners all know that if we give away our product without a strategy to make money, we will go broke.  Here is what is frightening: over 85% of business owners (closely help businesses under $20 million in revenue) don’t do a good job of profit or cash flow planning.  Profit in your business is the grease that keeps your business turning and growing. We have to be fiscally responsible; our elected representatives need to understand this concept or the country will go broke.

Much of what I do with clients revolves around helping businesses improve their management team, focus on accountability and make much more money.  If you need help, please give me a call or shoot me an email.

Currently the national debt (principal only) is $13,145,954,178,723 or $118,450 per tax payer or $42,000 per citizen.  The 2008/09 stimulus package was $3.27 trillion and the Obama health care bill is estimated to cost another $940 billion over 10 years.  Mr. Obama is floating the idea of additional deficit borrowing to support more spending.   We cannot borrow our way to prosperity; most all business owners already know that excessive debt doesn’t create wealth.  In today’s banking environment, it is critical that business owners manage their debt very carefully by insuring that their companies are making money (similar to a government budget that shows a surplus)

Harold soon found out that this was going to be one of the worst days of his life. His banker had come to tell him that his line of credit and the $325,000 equipment loan was being called.  Harold had 30 days to find other financing.   If you haven’t had the opportunity to experience this, it is like being hit (unexpectedly) by a truck, it is a demoralizing experience.

What Harold did not realize is that the banker had been reviewing the profit performance of Harold’s business for the last 18 months. And there wasn’t any (profit).   The banker had been looking at the monthly financial statements each month, whereas Harold didn’t give them much thought.  The company had cash in the bank, were paying their vendors, payroll and making the bank payments; Harold was not concerned until today. Don’t fall into this trap.

Here is an easy way to tell if your company is making enough money to keep your banker happy (and if your banker is happy, you can relax), for the last 12 months:

1)    add up the interest expense on your line of credit,

2)    add up all of your payments on term debt (principal and interest)

3)    Add: a) net profit, b) deprecation expense, c) amortization expense and d) all interest expense (including your line of credit)

4)    Add 1 and 2 together and divide that into 3, that numbers should be 1.25 or higher.

Example:

Last 12 months interest on line of credit.       $  60,000

Payment on trucks (P&I)                                    $  36,500

Payments on Equipment Loan (P&I)              $  37,500

Total                                                                       $134,000

Profit                                                                       $100,000

Depreciation                                                         $  72,500

Interest                                                                   $  83,400

Amortization                                                          $    0

Total                                                                        $255,900

Calculation                                  $255,900/134,000 = 1.91

In this example, the company has adequate debt service capacity to service all of the principal and interest payments that company has due.  It is in pretty good shape because its debt service coverage ratio is greater than 1.25:1.  There are many indicators that indicates the health of a company; but it is an important one.

This is one indication you should evaluate quarterly or at least semi-annually from your financial statements.  Your banker is looking at this and so should you.

Having trouble with your banker or your company’s financial performance?  Call me for an objective discussion on what you can do to increase the financial performance of your company and your personal net worth.

Buried in section 9006 of the health care bill, there are just a few lines that are going to create havoc for small businesses. Beginning in January 1, 2012 – just 19 months away; all businesses will be required to issue 1099 tax forms on everything purchased over $600.  Not just individuals; but for every goods or services purchased.

A quick review of my check register, my small consulting firm will be required to issue more than 300  separate 1099’s to institutions such as the phone company, garbage company, utility company, cell phone provider, office supply (Office Depot, Costco, Staples), internet provider, Apple Computers, lawn mowing service, window service, gas stations, just to name a few.  Larger businesses that purchase materials from multiple sources (one of my clients has over 300 suppliers) will have a daunting task.  You will be required to find their corporate address, corporate tax number and identify the department the information goes to.  This will waste hundreds of hours in lost productive time and increase your tax bill at the end of the year.  More work for thinly staffed companies that are trying to survive the Great Recession.

Representative Dave Camp (Republican from Michigan) released a new report detailing how the Obama healthcare bill vastly expands the responsibilities of the Internal Revenue Service adding up to 16,500 people to expand their auditing capacity.  Are we more productive and profitable holding the hands of auditors or helping our customers?

Small business owners cannot afford to be passive politically – our elected officials are out of touch with reality and need a wake up call.  Contact your local state and federal representative and tell them your thoughts on the new 1099 law.

Unfortunately, many business people have not come quite as far since the Depression, in their ability to discern what makes a company or organization work and what needs to be done to ensure its survival. There are basically nine “danger signals” that indicate the strength and viability of a business is deteriorating:

1. Declining gross income, combined with operating losses. In most instances, declining sales will not be targeted as a problem until operating losses deplete cash reserves. Normally operating costs will remain high and not be adjusted as sales decline. This creates the operating losses that eat up cash reserves.

2. The absence of an operating plan to guide the company. Most managers do not use a carefully crafted planning procedure to create an on-going validation system. If a planning document exists, it is often shelved and forgotten as day-to-day concerns take precedence over future goals. When this happens, management has little or nothing to measure itself against and is oblivious to hidden dangers.

3. Breakdown in communications between upper management and the labor force. Failure to communicate vertically creates a situation where upper management cannot identify conflicts that exist in the on-going operation of the organization.

4. Inadequate cash flow. The ability to generate cash flow is the key ingredient in a successful business operation. Without adequate cash flow, an organization is doomed to failure. While it is normal for most organizations to have seasonal fluctuations, balancing these adjustments is critical for the survival of any organization.

5. Inability to convert accounts receivable to cash promptly. The slow collection process of accounts receivable can be a danger signal that a poor job of screening accounts and granting credit has taken place.

6. Inability to convert inventory to cash promptly. A slow down in inventory may signal a problem in the quality of products shipped.

7. Cash tied-up in nonproductive assets. Investing heavily in a new office building, equipment and personnel without careful planning can be a nonproductive use of assets and can destroy a company.

8. Amounts owed to vendors. When an organization is unable to meet the payment terms of their vendors, not only does a serious cash-flow situation exist, the future credibility of the company is in doubt. Long-term business success depends on the goodwill a company is able to generate with its creditors.

9. Low employee morale. Most employees truly want their organization to be successful. When a company is without solid direction, morale declines and with it goes productivity.

In today’s economic climate, if any of these ring true with your business, it is time to take swift action.

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There are steps to take as you head up the road to success. Here is a quick overview on Dynasty Builders and how I make millionaires by examining the financial side of businesses.

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Historically, being a contractor is a great vocation and a productive way to make a great deal of money.  Although 2008 and 2009 were not great years for contractors, predictions are that 2010 and 2011 are going to be much stronger than the last 24 months.  How do you capitalize on that opportunity?

I am a believer in copying things that work and after 30 years of working with business owners, those that have the most money, least amount of debt and stress are the contractors that focus their attention on the bottom line. Yes, making profit, month after month, quarter after quarter and year after year.  They use every method they can to insure that the actions they take every day will make them money.

Want to your spouse to see big pay checks – focus on profit.  Want your kids to have a good education – focus on profit. Want to retire early and wealthy – focus on profit.  Want your banker to loan you money when you need it – focus on profit.  Want to have cash liquidity when you need it – focus on profit.

One of the tools used by successful contractors as a way to manage the performance of their business is their monthly financial statements.  They not only tell if the company was profitable for that month; but also if the company wasn’t profitable, why it wasn’t profitable.  Was revenue lower than expected, margins off or expenses high?  Information is powerful and with current and accurate information, the contractor can be successful.

Where the contractor gets into trouble is when he shoots from the hip and makes a decision without good data.  The contractor wouldn’t be caught dead on a job site without a tape measure. Financial statements are the business’s tape measure.   When the profit and loss statement shows profitability, money will be flowing freely.  When the company doesn’t show a profit, management will always be struggling with having enough cash to operate their business.

Here are six benchmarking tools you can use to determine if your company is on the right path from a financial performance measurement standpoint.  This information was cleaned from a hundreds of other contracting companies as of January 2010.

• Gross profit margins 45% of 50% of revenue
• Net profit 5% to 9% of revenue
• Outstanding accounts receivable – 22 days to 35 days
• Outstanding accounts payable – 29 to 35 days
• Debt to equity ratio 1.6 to 2.9 to 1
• Sales per full time employee $81,000 to $112,000 per year

The financial management function for most contractors consists of looking at the outstanding unpaid bills, outstanding invoices and seeing how much money is in the check book. Most contractors stagnate at revenue levels over $1 million because the check book method of financial management doesn’t work.

The bottom line. When you invest a little time and money into a good financial accounting system with job costing and get some one with experience to enter the data and print reports, you will be ahead of 70% of your competitors.  They don’t know when they are loosing money.  Only the strong survive in any business.  Will it be you or your competitor?  You get to decide.

Questions? Get with me. Want to add to this list? What are your thoughts?

John said that since late last fall, his banker has been very concerned about his company’s ability to make a profit by year end and now, since he hadn’t, his banker was demanding more information on a more frequent basis.  John didn’t understand what all of the fuss was about.  The company was not profitable and probably wouldn’t be profitable until the economy turn around.  John had been through these down turns before and always came out of them, what made this one different?

The story behind the story.  What John didn’t realize was his banker had been reviewing the company’s financial statements for the last 9 months and it shows that although the company had met payroll, payroll taxes and bank payments, it was getting further and further behind with its payments to its vendors.  The company lost $400,000 last year and accounts payable had increased $490,000 in the same period.  The vendors had paid for the $400,000 in losses and also picked up the $90,000 in principal payments the company had paid down on their term debt.

So why was the banker so concerned about the company’s ability to make a profit and John wasn’t so concerned.

1. John had not understood that profitability (one of the key elements of cash flow) is the grease that keeps the business running.  John feels that if he has enough determination, worked hard enough and is committed to his business, everything will work out.
2. John’s banker was more in tune with the financial viability of the company than John is.  This is a bad sign – that your banker knows more about the internal financial workings of the company than the owner does.  The banker is trained to glean minuet pieces of key information from the financial data.  John doesn’t have the background or experience to understand his financial data like his banker does.
3. John was relying more on the past than on the future.  John had been through these down turns before, they always came back and he always made it through them.  Except this time, he is more leveraged than the last down turn and this time it is taking much longer for the economy to turn around than any of the previous 20 years John has managed the company.

In this case, the banker was right to point out to John his concern about the company’s profitability.  Here are six (6) reasons why business owners need to keep their focus on profitability: Profit is the primary ingredient in cash flow (EBIDTA).  It is the “E” in EBIDTA :Cash flow generated from the business is what pays debt service on term debt: vehicles, equipment, real estate, etc.  Want to be debt free – profit is the only thing that will get you there.

• Profit is what builds equity.  Growth in equity is what enables the company to grow.  Revenue growth creates an expansion in assets which forces an increase in the other side of the balance sheet Liabilities and Equity, Liabilities expansion has limitations based on that relationship with Equity.  Want to grow your business, equity has to grow and profit is the biggest contributor to equity.

• Profit is one of the primary elements in value.  Profit has a 3 to 8 times multiplier, which adds directly to value and is the biggest contributor to a company’s value.  Thinking of exiting soon – profit will make you the most take home money.

• Profit builds working capital which enables the company to pay bills in a timely manner and take discount.

• Profit is one of the primary elements that support additional term and working capital debt.  Want to grow your business and need financing, increase your profits and financing is sure to follow.

Profit aren’t everything, they are the only thing.  Profits are critically important to every business.  John won’t be around long if he doesn’t take the steps he needs to get his company showing a profit.  His vendors are going to clamp down on allowing him purchase materials on credit.  Then the pendulum will swing the other way, COD.  No 30, 60 or 90 days to pay, it is pay in advance.  That really puts a crimp in cash flow.

Much of what I do with clients revolves around these concepts in some way. While I have always preached how critical it is to set goals and march toward them, being a sounding board, confidant, and accountability partner is just as important. If you need help in any of these areas, please contact me today!

Here are some of the red flags you need to be aware of:

• Tax Surprises.  Your accountant calls you after working on your taxes for two months and tells you on a Friday afternoon that you owe the government an extra $100,000 because you made more money than anticipated, and by the way, it is due next Tuesday.  Every decent accountant should look at the information after every quarter to give you feedback and updates.
• Answers to common questions.  Your accountant can be a great resource in how to handle specific issues with accounting, taxes, and planning; but if you are charged every time you talk to them – it is disempowering.  Find an accountant that is willing to spend a few minutes with you on the phone as part of his on-going service that you are not charged for.
• Co-dependency.  This issue arises when your accountant wants a consistent flow of monthly income (from you) and you cannot print out your month end results until there are adjustments made to: deprecation, inventory, cost of goods, sales tax or payroll taxes withholdings.  If this is happening to you, you need to ask your accountant if your current bookkeeper or controller can learn how to make these adjustments (with your accountants oversight); if they say “yes” then ask for a specific time frame to complete it.  Over the course of six months the accountant should have your inside person trained.
• Re-vamping Your Chart of Accounts. Some accountants will look at your books and make a recommendation to set them up differently.  Sometimes there is a good reason to change the layout of your system; however many times the recommendations are made so they are able to send you a larger bill.  I know of a business owner who changed accountants based on a recommendation from a banker and the bill for accounting services for that year exceeded $67,000 – much more than any added benefit the owner received and was in fact $37,000 higher than the previous accountants highest annual charge.
• Mistakes. If you find that your accountant has to correct previous work and you get stuck with the bill for that work.  Or if there are multiple changes in journal entries or adjustments that don’t seem to make sense – follow your instincts and find out what is happening.  Your goal is not to have your month end financial statements changing as the year progresses.  This is easy to go with QuickBooks because there is nothing to keep anyone from making a prior period adjustment after you think that month is closed out.
• Response time.  How long should the turn around be for: 1) Preparing monthly financial statements – 10 to 30 days from the time they receive the data, Example – if your accountant prepares your monthly financial statements for you and your bankers – you should get the information back in 10 to 20 days from the time you send the information in.  You want to get your financial information as soon as you can.  If you send January’s info by February 15 and it takes 30 days to get the statements back to you, you are now looking at January financial results on March 15.  Would you drive your car with a speedometer that had a 30 minutes delay on the freeway in a work zone? 2) Receiving year-end financial statements- 30 to 60 days depending how quickly after year end your accountant gets you the data and 3) common questions answered – within 24 hours.

Dealing with your accountant is just like dealing with any other vendor. Ask yourself these questions to see if your accountant is performing to your standards:  Does what they recommend have a purpose and what is the ROI (return on investment)?  Do you feel good about the changes they are recommending?  How will these changes make money for you?  Are there any outside circumstances that are pushing you to make these changes?  There are many great accountants out there, get one that will work for you to maximize your profits and respond to your questions in a quick and knowledgeable manner.

T. Ray Phillips Testimonial from Dan Lacy on Vimeo.

There are millions of intelligent business people out there who start businesses not understanding everything they need to in order to be financially successful in the long haul. Have any questions? Let us help your business today.

One of the more significant challenges of owning a business is having enough cash to pay the bills.  Your ability to pay your bills on time, to a large effect, is based on how successful you are in collecting your accounts receivable in a timely manner.

Companies we have worked with who had problems with collecting their accounts receivable have seen dramatic improvement when they followed these few principals.  They may be just what you need to get that cash out of the bush and into your hand.

1. Implement a procedure in your organization where you or someone you appoint is systematically responsible for getting the invoices out in a timely manner. It doesn’t help cash flow if the end-of-the-month billing is not mailed until the middle of the following month. Many customers take 15 to 45 days from the date they receive the invoice to make their payment.  If you get your invoice out late, it just adds that much more time before you receive the money.
2. Always put the current date on the invoice. Many times the customers get a number of bills and they pile up until there is cash to pay them.  If your invoice is not dated, the customer assumes that they just received it and places it with the invoices just received.
3. Put the term of the sale on the invoice. The customer will probably not remember your verbal agreement or may have misplaced the written agreement.  If there is not a reminder on the invoice of when the money is due, you always end up at the end of the line.
4. Establish an accountability system for follow-up on overdue accounts receivable. If someone is not in charge, believe me, no one will take the responsibility of collecting that past due money.
5. Have your accountant or bookkeeper prepare a written aging of accounts receivable at the end of each month, so that you know what is collected and what is outstanding. This report needs to be circulated to the appropriate people at least once a month.  Increase the frequency of preparing this report and distribute it weekly if the monthly method is not effective.
6. Depending on your industry, there is normally a standard for how your customers pay their bills. If a customer exceeds that time frame, either follow up with a nice letter or a personal phone call. There is no need to get aggressive with the first contact.  In that contact, see if the customer received the invoice and if it is in their system to be paid.  Flag your calendar based on their response, and follow up (if no payment) and get another commitment for payment.  Follow this process until the account is paid in full or becomes 90 days old (or the date your have predetermined by your collection policy).  At that point, send a letter indicating that the bill will be sent to the collection agency if arrangements are not made by a specific date (usually 10 days from your current date).  If the amount is large, try to get a face to face meeting with the pay due customer.  In that meeting try to work out payment terms or a trade for product or service.  If that does not work, assign it to a local collection agency or attorney for collection.  Courtesy and consistency have worked the best for me, maybe it will for you, too.
7. If, for some reason, you want to speed up collections because you need an injection of money for a specific purpose, give a freebie. In the radio business, a station could easily give a few spots away if the customer paid their current bill within 15 days when the normal is 30 or 45 days.

Have any questions? Let me know. I’d be more than happy to sit down with you to talk about other ways we can help improve your business cash flow.