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.

May 24, 2010

Successfully Navigating the Current Bank Lending Environment

Filed under: Strategic Advisory — Tags: , , , , , , — admin @ 8:21 pm

* Has your lender tightened the terms on your existing loans?

* Have you found getting new loans a challenge?

* Has your lender been merged or bought and your relationship lost in the confusion?

* Not sure what is really happening in the banking industry?

Credit is the life blood of our economy and particularly our business-to-business relationships. This flow has been severely disrupted and threatens to take many viable businesses down with it. If you think the impact is just confined to Wall Street or the money center financial institutions, think again! We are now seeing the cascading ripple effects flowing into all corners of our national economy. Cases in point:

* Our client (whose bank recently changed hands) contacted the bank to inquire about their line of credit and was told the bank had no record of any such LOC.

* Another client received a form letter from their bank telling them their line of credit had been frozen. This left the client without their expected operating funds on which to run their business.

Although we are starting to see some freeing up of the credit markets, we still have a long way to go before we get back to “normal.” Many of our clients have had to devote much time and attention to establishing new bank relationships or reestablishing existing ones.

Here are some tips for getting and keeping a solid bank relationship:

1. Have a business plan that provides the company’s background, its history, and most importantly, where it’s going in the future.

2. Provide budget and financial projections. An entrepreneur who’s borrowing money should detail what he or she is planning to do with those funds and how they’re going to help the business grow or thrive.

3. Check your personal credit score regularly. Banks often do. Most lenders are going to look at your credit score because it tells a lot about the individual that you won’t see otherwise in a business set of financials. If an individual has a bad credit score, it doesn’t matter how good the company financials are.

4. Maintain up-to-date financial records prepared by a business accountant even if you use accounting software. A lot of people use canned software systems, but [records] should be prepared by someone who’s financially astute, who can prepare a balance sheet, income statement, tax returns, and updated personal financial statements for the chief executives.

5. Plan for the possibility that you may have to personally guarantee the loan.

6. Be prepared to provide personal collateral for the loan if asked.

7. Seek out information from the Small Business Administration to see if you qualify for a loan guarantee.

8. Start and maintain a relationship with the bank. If a bank is going to make a loan, they want you to bring your entire banking relationship to them—deposits, business accounts, even your personal account.

9. Refer other businesses. Banks are always interested in receiving referrals. It’s not a bad thing to refer other businesses to your bank.

10. Don’t surprise your banker. Banks don’t like surprises. If there are things happening at the company—good or bad—be sure to communicate with the bank. Let them know how you’re doing—the things that are positive and negative. Make a concerted effort to meet with the bank regularly.

Top 10 Tools for Maximizing Cash Flow

Filed under: Strategic Advisory — Tags: , , , , , — admin @ 8:05 pm

1. Shore Up Capital (both equity and debt) as you go. This means leave equity in the company to grow so that borrowings may grow as well without increasing the debt-to-equity ratio.

2. Track Cash Daily so you can manage cash outflow (your company’s expenses), cash input (payments received) and borrowings appropriately.

3. Re-Forecast Cash Weekly to get good at projecting cash surpluses and shortages well in advance.

4. Stay Close to Lenders and prospective Investors long before you need them!

5. Remember that Growth Gobbles Cash, so determine the “right growth rate” for your company at its different stages of life.

6. Become a C-H-I-P-S searcher for life! That stands for “Cash Hides In Peculiar Spots.” Turn over every stone as you walk the four corners of your business daily.

7. Break The Check-Signer’s Arm! And then sign the checks yourself for a while; this will help you REALLY understand where your people are spending YOUR money.

8. Have An “all Hands” Weekly Meeting with everyone in the business who has an impact on cash, incoming and outgoing.

9. Remember — Owning 40 Percent Of A Success is far better than owing 100 percent of a failure. Too many entrepreneurs have hung onto “control” right into Chapters 11 and 7!

10. Become A Cash Student, striving to understand the things that have driven your company into paroxysms in the past.

May 20, 2010

Tax Credit to Pay Third of Small-Business Health Cost

Filed under: Strategic Advisory — Tags: , , , — admin @ 1:27 pm

As many as four million small businesses in the U.S. may qualify for tax credits to recover more than a third of the cost of providing medical care for employees, under a program created by the health overhaul law.

Businesses with less than 25 full-time employees each will be eligible, according to a U.S. Treasury Department fact sheet made public today. Enterprises that qualify will get 35 percent of the cost of employee health-care premiums reimbursed by the government, beginning this year, and 50 percent starting in 2014, the fact sheet said.

To be eligible, companies have to pay, up front, at least half the cost of employees’ insurance premiums. Only companies with 25 or fewer workers may take the credit, and the average salary of the employees must be less than $50,000.

To find out more regarding this tax credit opportunity visit the IRS website or review their fact sheet.

May 11, 2010

Access to small business credit remains tight

Filed under: Strategic Advisory — Tags: , , , , — admin @ 1:14 pm

Anyone who has gone out into the market to find new small business credit or hold on to what they already have has probably experienced the new lending environment.

From our perspective two things are happening that has turned the lending spigot to a small drip. First the banks are licking their wounds from the excess (some would say reckless) lending they engaged in before the big meltdown. This has made their appetite for new loans virtually non-existent.

Second the regulators are now ruling the day in determining the risk levels banks can engage in, even if the bank was interested in extending credit. From our perspective this is somewhat a case of closing the barn door once the horse has escaped. Obviously the regulators should have been doing a better job of monitoring the lending and overall risk profiles of the institutions they oversaw during the hey day.

A couple of good articles on the current state of the lending market have recently come out and are worth a quick glance. Here are links to each, C&I Lending to Stay in Doldrums and Big Banks’ Small-Business Lending Promises.

What kind of action plan should you put in place now to ensure continuing access to operating capital?

* Use rational thought and planning to avoid knee-jerk reactions.
* Prepare a weekly cash-flow plan for at least three months (preferably six months) to see what your cash flow needs will be and how you will cover them.
* Reassure your banker of your company’s financial viability. Ask what you can expect of the bank in the coming months.
* Start courting other banks to ensure that you are not left high and dry if you experience a problem with your primary lender.
* Examine your accounts receivable for potential problem customers and begin aggressive collection and work-out activities.
* Look at exporting as a market strategy. The dollar is likely to be weak for a while and U.S. goods and services will be a bargain abroad.
* Trim excesses in your operations and hold on to internal cash.
* Get external help from turnaround experts who can help you develop a survival plan.
* Be optimistic—the economic crisis will pass in time. The key is to anticipate carefully and take intelligent action.

Planning and flexibility are key to successfully navigating these difficult times. Thinking outside the box is called for as well. Think beyond traditional commercial financing sources if necessary. Other areas to consider might be credit unions, grants, credit cards, angel investors, venture capitalists, factoring (selling a business’s receivables), friends and family, and microlenders. Each of these alternatives has pros and cons associated with them so be sure to carefully evaluate each option and which is best suited for your needs.

March 27, 2010

Obama Administration Announces enhancements for TARP Initiative for Community Development Financial institutions

Filed under: Strategic Advisory — Tags: , , , — admin @ 1:07 pm

As we begin to recover from the credit markets meltdown we are beginning to see changes in the lending landscape that will have a profound and lasting impact in the marketplace, particularly as it pertains to the small business community.

The traditional lenders that this community used to rely on are beginning to change and like any change that impacts your business and its viability you need to be aware of it.

The emergence of Community Development Financial Institutions or CDFI’s are changing this landscape in many ways. What is a CDFI? A certified CDFI is a financial institution that works in markets that are underserved by traditional financial institutions. CDFIs are certified by the Department of the Treasury’s CDFI Fund, which was created for the purpose of promoting economic revitalization and community development in low-income communities. CDFIs offer a wide range of traditional and innovative financial products and services designed to help their customers access the financial system, build wealth and improve their lives and the communities in which they live. To be certified as a CDFI, an organization must demonstrate that it meets each of the following requirements:

• Be a legal entity at the time of certification application;

• Have a primary mission of promoting community development;

• Be a financing entity;

• Primarily serve one or more target markets;

• Provide development services in conjunction with its financing activities;

• Maintain accountability to its defined target market; and

• Be a non-government entity and not be under control of any government entity (Tribal governments excluded).

The Obama Administration has recently announced a new initiative, http://bit.ly/9WKjRS, aimed at CDFI’s. Under this program, CDFI banks, thrifts and credit unions – which have been certified by Treasury as targeting more than 60 percent of their small business lending and other economic development activities to underserved communities – would be eligible to receive capital investments at a dividend rate of 2 percent.

As you plan for your growth financing and capital needs make sure you are considering all available resources and not the ones you have historically relied upon. This is a brave new world of finance we are entering into and the successful company’s will understand that and act accordingly.

Corporate Balance Sheets Show Surprising Strength

Filed under: Strategic Advisory — Tags: , , , — admin @ 12:53 pm

A recent Business Week article, http://bit.ly/duusrO, discusses how large cap companies have restructured their balances sheets in light of the economic slowdown, namely deleveraging.

Whether this was voluntary or forced upon them it was obviously the right thing to do in light of falling revenues and squeezed margins.

We have been leading many of our clients through the same sort of exercise but in a much more strategic and focused fashion.

Engaging in a process to actually measure a firm’s financial health we help them understand where they are, where they should or need to be and, more importantly, the specific steps they need to take to get there.

The raw numbers on your balance sheet, income statement and cash flow statement are just that. They only have value when tracked and measured against some standard of performance (either internally oriented or externally generated). The secret to effective financial management lies in knowing which ratios to track and what they tell you about the state of your business.

Unlike the profit and loss (income) statement, which is a historical recording that never changes, the balance sheet is a living, breathing document that changes on a daily basis. Three important balance sheet ratios to track are:

* Current ratio (Current assets/current liabilities)
* Quick ratio ([Cash + receivables]/current liabilities)
* Debt-to-equity ratio (Net worth/total liabilities)

The P&L statement focuses on revenues, expenses and net income (or loss) over a defined period of time. It measures the company’s ability to turn sales/revenues into profits, a key ingredient for long-term success. Key P&L ratio’s to track would include:

* Gross income (Revenues – cost of goods sold)
* Gross margin (Net sales – cost of goods sold)
* Net operating profit (Gross margin – SG&A expenses)
* Net profit (Net operating profit + income) – (other expenses + taxes)

Gross margin the most important ratio on the P&L. If you lose the gross margin battle you can do a lot of other things right and still go out of business.

Key operating ratios combine information from the balance sheet and income statement to provide a more sophisticated look at what is happening with the business. These include:

* Gross profit ratio (Gross profit/sales)
* Pretax profit ratio (Pretax profit/sales)
* Sales-to-assets ratio (Total assets/sales)
* Return on assets ratio (Pretax profits/total assets)
* Return on equity ratio (Pretax profit/equity)
* Inventory turnover ratio (Cost of goods sold/inventory)
* Days in inventory ratio (Inventory turnover/365 days)
* Accounts receivable turnover ratio (Sales/accounts receivable)
* Collection period ratio (Accounts receivable turnover/365 days)
* Accounts payable turnover ratio (Cost of goods sold/accounts payable)
* Payable period ratio (Accounts payable turnover/365 days)

You should track and measure your performance ratio’s at least monthly and compare them to internally generated standards of performance (i.e. budget) or against an external source of data (i.e. peer comparisons for your industry)

Health Care Reform

Filed under: Strategic Advisory — Tags: , , , — admin @ 11:48 am

The much talked about Heath Care Reform bill is now law. Depending on which side you listened too this is the greatest thing since the discovery of fire or the end of the world as we know it (tongue firmly planted in cheek). Our guess is, like most things, its not as good nor as bad as it is being described.

One thing is for sure and that is this bill will, and is, creating a lot of uncertainty in the marketplace and that is never a good thing for business. As a business owner you will be affected both from a business perspective as well as a personal one. Depending on the size of your company you can probably expect increased government scrutiny and regulation along with higher hard and soft dollar costs. However, in some cases you may actually benefit from some of the new changes.

Make sure you have a good professional resource to help you navigate this ever changing landscape so that you are proactively positioned in a way that minimizes any potential negative impact to you.

Here is an article, http://bit.ly/9XeS48, that provides a brief overview of some key provisions in the new bill.

If you have a good summary overview of the new bill send it off to me and I will get it distributed with attribution.

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