Alliance Advisory Group Blog

July 21, 2010

Back to Basics-Financial Management

Filed under: Strategic Advisory — Tags: , , , , — admin @ 5:40 pm

There is one simple reason to understand and observe strong financial planning in your business – to avoid failure. Eight of ten new businesses fail primarily because of the lack of good financial planning.

Business financial planning affects how and on what terms you will be able to attract the funding required to establish, maintain, and expand your business. Financial planning determines the raw materials you can afford to buy, the products you will be able to produce, and whether or not you will be able to market them efficiently. It affects the human and physical resources you will be able to acquire to operate your business. It will be a major determinant of whether or not you will be able to make your hard work profitable.

No matter how small or large your business, there are a few basic things any company should be doing in the area of good financial management:

* Have a system in place to capture financial information important to your business, i.e. sales, COGS, expenses, receivables, payables, etc.
* Measure everything! What gets measured gets done. Create a financial budget and compare your actual performance to your plan.
* Monitor your financial performance regularly:
o Review the balance sheet to analyze trends within your assets and liabilities.
o Review your cash flow statements and projections. Remember, profits don’t pay the bills, cash does.
o Analyze your profit and loss statement in comparison to prior periods, as well as your budget. This can point out positive or negative trends in sales, gross profit margin and net profits.

June 30, 2010

Plans to Assist the Small Business Lending Market

Filed under: Strategic Advisory — Tags: , , , — admin @ 1:25 pm

Small business lending remains down following two years of attempts by Washington to revive it. The latest remedy to surface is President Barack Obama’s $30 billion plan to offer capital to small banks with incentives to loan it to small companies. That plan passed the U.S. House of Representatives on June 17, but it’s not clear if it will manage better than previous efforts to increase the supply of credit by pumping money into banks.

Beneath the problem, say some economists, policymakers, and observers, is a lack of information: We don’t have the data that’s needed to understand why small business lending is down—and what a proper fix might look like.

The data shortfall makes it hard to determine if the decline in small business lending has been driven by the banks’ unwillingness to lend—or by the companies’ disinterest in borrowing or lack of creditworthy status.

Small business portfolios at the largest bailed-out banks—those with over $100 billion in assets—shrank by 9 percent from June 2008 to June 2009, compared to a drop of 4 percent in their overall lending, according to a May report from the Congressional Oversight Panel.

TARP’s record prompts questions as to whether the $30 billion Small Business Lending Fund will work. The plan would offer community banks government loans that become cheaper if they increase lending to small businesses.

A pair of surveys offers clues about how supply and demand may have driven the drop in lending. The Federal Reserve’s quarterly Survey of Senior Loan Officers indicates that banks tightened standards for small companies during each quarter from the start of 2007 to 2010. Demand for credit from small businesses dropped in the same period. The National Federation of Independent Business’ monthly member survey shows that while credit has tightened, few respondents—a mere 8 percent in May—say their credit needs are unmet. Most rank such problems as poor sales well ahead of difficulty borrowing.

Scattered efforts are underway to produce better data. Regulators just started making banks report small business lending each quarter, rather than just once a year. The Treasury is considering using data from credit bureaus to get a better picture of small business lending conditions.

June 28, 2010

Measuring Winning Financial Performance

Filed under: Strategic Advisory — Tags: , , , , — admin @ 1:23 pm

Financial management of a small business is a challenging endeavor. For any business to succeed cash must flow and profitability must increase at a rate that provides a reasonable return on investment. Yet the fluid nature of a business sometimes makes keeping track of performance as easy as nailing Jello to a wall.

Knowing what to track is the most important part of developing an effective bookkeeping system. Most businesses only have a few “key performance indicators” that will provide the vital signs for success. Reviewing these indicators on a regular basis will help assess the true health of your business.

The numbers don’t lie and if you are keeping good financial records, the vital signs of your business will become glaringly apparent; and for many small business owners, it is not uncommon to find these vital signs conflict with the owner’s intuitive measures of performance (which is usually the checkbook balance).

At a minimum, the review should include:

Liquidity – is your cash balance in your checking account increasing? Are inventory levels and accounts receivables increasing or decreasing?

Profitability – did you have more income than expenses for this period?

Return on Investment – is the percentage of profitability divided by your assets increasing or decreasing? You may also want to measure this against just your fixed assets.

No matter what the reasons may be for your performance to date, there is always hope for a better future. Tomorrow’s balance sheet is always going to differ from today’s if you are conducting business. By learning the lessons of how your business has performed to date you can develop plans to improve for the future.

Once you have honestly addressed why your business is where it is, you will be better positioned to develop plans to grow and prosper in the future. Any effective plan should have a scorecard of what you intuitively think will happen. This way you can measure success and make adjustments if things don’t go as planned.

Growing a successful business is a balance of measuring performance to date and developing new possibilities for a better future. As you study your performance, don’t dwell only on the results; also think about what you are going to do better in the future.

June 24, 2010

Small-Business Confidence Increased in May

Filed under: Strategic Advisory — Tags: , , — admin @ 7:26 pm

Confidence among U.S. small businesses rose in May to the highest level since September 2008 as executives became more upbeat about the economy six months from now, a private survey found.

The National Federation of Independent Business’s optimism index increased to 92.2 last month from 90.6 in April, the Washington-based group said today. Seven of the index’s 10 components increased, and three declined. The measure is still lower than levels reached in past economic rebounds, indicating the recovery will take time to gain strength.

The small-business optimism gauge has recovered more slowly than measures such as the Institute for Supply Management’s manufacturing index that capture activity among companies of all sizes.

A gauge of whether firms think this is a good time to expand rose 1 point to a net 5 percent. The survey’s net figures are calculated by subtracting the percent of business owners giving a negative answer from those giving a positive response.
A net 1 percent of respondents plan to hire over the next three months, up two points from April. Nine percent of firms said they currently had job openings that were hard to fill, compared with 11 percent a month earlier.

Plans for capital investment rose one point to a net 20 percent, matching the highest level since November 2008.
A measure of profit trends rose 3 points to a minus 28 percent, 24 points below the best expansion reading, which was reached in 2005.

Concerns within the small business community still exist as noted below:

Thirty percent of respondents cited “poor sales” as their top business concern, up 1 point from April. A net negative 12 percent of business owners expected credit conditions to ease, a 3 point improvement.

A net 2 percent of firms plan to add to inventories, the first positive reading since November 2007 and up 4 points from April. A net zero percent, down 1 point, reported inventories as too low.

The NFIB report was based on 823 survey responses through May 31. Small businesses represent more than 99 percent of all U.S. employers and have created 64 percent of all new jobs in the past 15 years, according to the U.S. Small Business Administration. A small business is defined as an independent enterprise employing up to 250 people.

June 7, 2010

Business Sellers Increasingly Play Banker

Filed under: Strategic Advisory — Tags: , , , , — admin @ 12:47 pm

During the recession, merger and acquisition activity in the lower-middle market (private companies with up to $100 million in annual sales) was anything but active. Now sharp discounts of private company valuations are again piquing buyer interest.

With the tightness of the traditional bank credit markets (historically a major provider of credit in these situations), which we have written about in this space, buyers are increasingly turning to sellers to fill the funding gap.

We turned to Greg Caruso (a strategic partner of Alliance Advisory Group), President of Harvest Associates, LLC, a noted local expert in the M&A community to provide his insights regarding this situation. Here are his thoughts:

“Seller take-back is an essential component of getting a transaction done today because of the lack of bank financing. In evaluating an offer where substantial seller financing is involved we recommend the following be considered:

1. What will the price be without the financing? Often the price without the seller financing will be very close to the amount being put down by the buyer with financing. Buyers only have the cash they have. The internal rate of return on 3rd party equity is cost prohibitive. If you must sell in this environment what is your real risk from taking a note when the alternative is a guaranteed $0 ?

2. On a more positive note the buyer must be carefully underwritten and transaction structures sometimes must be modified to reduce the risk of taking a buyer note. We recommend that the seller consider – **The buyer’s experience with business in general. Ownership experience is highly preferred. Owning a business is just different than even being the 2nd in command and not an owner. I equate it to the difference between riding a bike and being in the bike seat. Seems the same to the person in the bike seat but it is not. Of course, the buyer’s experience in the exact industry is also helpful. **Additional resources from other sources of cash such as investments, other businesses etc. Remember to consider the likelihood that those sources of cash could become a cash drain and what that would mean. **Collateral such as outside real estate, security in the business assets etc.

3. The seller may have to stay involved with the business for 1-5 years to make sure the buyer can manage the business and pay the note. If the buyer can’t pay the note at least the seller will have a shot at taking the business back over.

None of this is as simple as a bank taking the financing risk. What it means is sellers need to be prepared to share in the risk to gain the upside and sell earlier so they have the energy to stay involved if they want full value. Unfortunately it may be the only way to get full value for your business for quite a while.”

If you are a buyer or seller in this, or any, market it is important that you have a strong advisory team supporting you in the area’s of strategic advisory, legal, accounting, risk management/assessment, etc. The dollars you spend on the front end will save you a tremendous amount of money and heartache in the long run.

May 6, 2010

The IRS Targets Independent Contractors

Filed under: Strategic Advisory — Tags: , , , — admin @ 2:45 pm

If you are not already aware of this you need to be. With the recent economic downturn many employers have begun using independent contractors (1099’s) in place of employee’s (W-2’s) in order to save costs and better align their labor to their business need.

Both the IRS and the states are beginning to crack down on this and auditing firms to make sure these folks are actually independent contractors by their (the governments definition). Here is a good article on this: http://bit.ly/dp4Y3V.

The IRS guidelines for independent contractor classification looks at the relationship from the perspectives of:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Visit the IRS website and review their specific information on this subject, http://bit.ly/DLM9O.

If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker along with other charges and penalties.

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