Tag: Business Accountant

Cash Flow and the Life Blood of a Business

Rick_E_Norris_An_Accountancy_Corporation_Cash_Flow_and_the_Life_Blood_BusinessMy youngest son, Austin, likes to play the “net cash game” method of settling debts.   I owe him $10, but then I pull out a twenty, he then takes out five ones from his wallet and states I now owe him $15.  Then  we exchange back and forth until the accountant in me realizes that I paid him $25 for a $10 debt.  At 16 he bought an Audi…no surprise.

Business cash flow with customers and vendors can seem like the same game.  Taking from here to pay there, paying partial or late payments to vendors to “make payroll.”  Dan Ginsberg writes about this in Ten Steps to End the Dash for Cash. His point is well taken.  Too many small and medium-sized businesses do not look at the underlying reasons for working capital shortages.

Here are some areas you should consider in addition to looking deeper into his suggestions:

  1. Take a close look at the profitability of your services or products:  Too many companies are afraid to discontinue losing products or services thinking that they will come around.  There is no room for favorites in business.  You must take a hard look, but before that, you must determine that your costing information is accurate.  This requirement is a cost accounting function.  If you do not have good information to make your decision, then your decision may not be a good one.
  2. Take a close look at the profitability of your customers.  Have you ever read The 80/20 Principle by Richard Koch?  The book argues that clients that represent twenty percent of your revenue are absorbing eighty percent of your company’s time?  Can you think of customers like that?  If you do, you should consider whether they are worth keeping.  Remember, that extra time can be used to bring in better clients or service clients that are more profitable.
  3. Generate a list of monthly metrics that represent the health of your cash flow:  Most business only look at monthly sales.  There are several other cash flow metrics that you can monitor in order to gauge the health of your business.  List them and use them.

Cash flow is the blood of a business.  Take its pulse and regulate it to a healthy future.


The Strategy of Ordering the Larger Pie

Rick_E_Norris_An_Accountancy_Corporation_The_Strategy_Of_Ordering_the_Larger_PieToday, I had breakfast with my friend, Narciso.  Narciso’s company deals in commodities.  Now, I can’t really tell you much about what he deals in because I don’t want to compromise his strategy or position in his industry.  However, his commodity has both financial and tax rewards.

Before continuing, here is a little history.  Prior to the Reagan tax acts, tax-shelters were the name of the game. Now, I am not talking about moving money offshore to the Netherlands Antilles, or buying  a pallet full of Bibles at a deep discount so you can donate them at FMV 12 months later.

No, I am speaking of apartment buildings, commercial strip malls, and commercial buildings carrying historical credits.  Most of these “tax shelters” evaporated with the dodo bird since they were “passive losses” and could not be offset against your active income like W-2s and businesses.

However, there are some investments that are not restricted by passive losses, and are still included in investment portfolios of the very wealthy.  The problem with the previous paragraph are the last two words, “very wealthy.”

So many investment salespeople tend to limit their strategy to a very small segment of our population who control 99% of the wealth.  The salesperson’s rationale is,  Why spend 10x more energy to get ten people to invest, when I can just work on one person who is 10x more wealthy?”

With the improving economy, I believe this is a poor strategy for these reasons:

  1. Many competitors are jockeying for this small market.
  2. If one of your large clients discontinue with your company, you most likely will feel the effect.  Therefore, your risk is concentrated.
  3. There may be a number of people in the top 90% that can use this product is delivered to them in an understandable way.

This reminds me of Jim Collin’s comments of why Nucor became the greatest at steel manufacturing.  They started with new technology, a new internal culture and moved from producing the lowest gauge of steel to the best.  Their competitors like Bethlehem Steel abandoned the lower markets, and as the Nucor tides rose, they also dominated the higher grades of steel.

In the same way, by developing a marketing strategy that addresses the top 10% of our population, instead of just the top 1% for this commodity tax shelter, the sales manager would be creating a “large pie.”  According to Dr. Stanley Abraham’s book, Strategic Planning, this marketing analysis would incorporate this attribute of target market, with other attributes like degree of penetration, customer needs, and distribution channels.

Business should not be content with fighting for a larger share of a smaller pie.  Many times, this strategy reduces all competitors to a commodity because the target market cannot distinguich one competitor’s offering to another competitor.

Business Solutions for Quality: Integrative Thinkers Don’t play The Game Differently, They Play on a Larger Field

Rick_E_Norris_An_Accountancy_Corporation_Business_Solutions_For_Quality_Integrative_Thinkers_Don't_Play_the_Game_Differently_They_Play_On_A_Larger_FieldI picked up the title from an article,  Inventing Elephants article by Beth Robinson.  The article was linked to the In2 Inthinking Network home page, a new way of approaching organizational problems introduced to me by Dr. William Bellows of the In Thinking Network.

I am in the middle of spending 9 hours in Dr. Bellow’s class to think about organizational problems differently.  He quotes Dr. W. Edwards Deming: “This is the age of superstition.”  Basically, we live in the “last straw era of philosophy where the problem is the  person, or department that caused it.  The awards/benefit concept exacerbates this because it has winners and losers.

The opposite of this is to look at the larger picture and the relationships between the actors that produced the product and service.  Dr. Bellows introduced us to Deming’s System of Profound Knowledge to change an organization.  He says the system provides an outside lens to the organization, and a map of theory by which to understand the organization.

To understand this system, the first step is the transformation of the individual, and the application of its principles in every kind of relationship with other people. There are 14 points to transformation.  I won’t list them all but will highlight a few:

  1. Breakdown barriers between departments:  The concept of awarding (or punishing)  a department level breaks down relationships between departments.  Concentrate on the relationships and the COMPANY WIDE teamwork that works towards the same goal.
  2. Remove barriers that rob people (including hourly workers) to their right to have pride of workmanship: This is something that many businesses fail in.  The staff or rank and file lose the desire and opportunity to a sense of ownership of their labor.
  3. Cease dependence on inspection to achieve quality: Do people tend to work better if they are part of a much bigger picture than a menial task?  I would think most would. If so, their product would not need to have extensive quality inspection.

These are just a few of the ideas on how this organization is trying to change the way organizations approach problems before they happen.  The old saying, “If it ain’t broken, don’t fix it,” should be changed to “if it ain’t broken, break it, or you aren’t looking hard enough.”  Continuous improvement should be the point of view.

Just Like Poor Singing, Failed Strategy May Be in the Execution

Rick_E_Norris_An_Accountancy_Corporation_Just_Like_Poor_Singing_Failed_Strategy_May_Be_In_The_ExecutionMy family have enjoyed making music for a few generations:  My dad (Bobby Norris) sang under the Capitol Records label in the 1950s, I’ve been playing and writing music a little most of my life (not professionally, though I’ve written and produced an EP on Itunes), my middle son is a jazz pianist, two other sons are vocalists, and my youngest (daughter) is a clarinet player.

All of us (like many of you) can instantly  determine if a person is singing sharp or flat.  Though many would say that this person is “tone deaf,” the real culprit is execution.  More and more studies are saying that tested “tone deaf” people really have good tone recognition.  The problem is their muscle control to reproduce it. An APA article states, ” The pattern of results across experiments demonstrates multiple possible causes of poor singing, and attributes most of the problem to poor motor control and timbral-translation errors, rather than a purely perceptual deficit…”

This sounds a lot like strategy.  Failure of strategic plans usually are not the result of the plan, but the execution.  If you are considering executing a strategic plan, here are some tips:

  1. Put the Right People on the Bus: Jim Collins (Good to Great) professes “You can’t start off by asking which direction you’re headed in … First you figure out if you’ve got all the right people on the bus, then you figure out where to drive.”   This is really essential.  Small and large companies have “culture” problems.  In other words, companies have people within them that do not want to change what the company is doing, and how it is doing it.  Those people are the biggest threat to the strategy  implementation before it gets off the ground.  You must really take a look at your team and make the hard decisions.
  2. Develope an operating plan: Develop a plan that is consistent with both long-term and short-term goals.  In other words, you should look at your vision, your 20 year horizon and work backwards using milestones to gauge your progress.
  3. Cascade your operating plan: Make sure you design your plan to be implemented on different levels: organizational, department, region, division, unit, and employee levels.
  4. Communicate your plan to all levels: This is self explanatory.
  5. Assign the right people to the right roles: Don’t force someone to perform in an area that they are not gifted in.
  6. Measure your results: As many have said, if you can’t measure it, you can’t manage it.
  7. Evaluate and adjust: Your tactics and operational plan should always be flexible and adjustable.

This list is not meant to be complete, but a sketch of stages that you should consider before you implement ( or maybe even design) your strategic plan.  Upfront planning may save your plan if done prudently, and keep your company humming a tune of prosperity.

CPA Tip: Should Your Business Buy Your Car, or You?

Rick_E_Norris_An_Accountancy_Corporation_CPA_Tip_Should_Your_Business_Buy_Your_Car_Or_YouMost small businesses owners, and even entertainment industry personalities (and companies) ask, “Should I Run My Car Through My Business?”  The facts are as follows:

  1. They want to buy a new car.
  2. They use a large percentage of this car for business, say 70%.
  3. The other 30% is used for commuting and personal travel.

Most clients want to purchase a vehicle in the company.  Here are the facts:

  1. If you use the vehicle for any personal use (including driving to work and back), then the value of that use will be added to your W-2 wages.
  2. If you were to fully depreciate the automobile, the company will show a “gain” upon its sale for any amount because it will have no tax basis.
  3. If you were to try to transfer the car’s title to yourself from the company, then you may have to recognize income for its value.
  4. Commuting costs to and from work are usually not deductible.

If the client wants to purchase the vehicle personally, they have two options:

  1. The company can pay a fixed allowance which is recorded on the employee’s W-2.
  2. The company may reimburse the auto gas and other costs for the business portion resulting in no taxable income to the employee.
  3. The company can pay the employee a standard rate established by the IRS, (like 55.5 cents per mile). There is no taxable income reported by the employee.
  4. Any amount not reimbursed is reported as a miscellaneous itemized deduction subject to a 2% AGI floor, and many times ultimately not deductible.

As a CPA, I see many auto situations, but basically they come down to these same two options.  Plan ahead and keep records of any employee business use regardless of which method you use. Always consult a tax professional before implementing any tax strategies.

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Bad Strategies are Like Undercooked Pasta…Nothing Sticks

I worked in my family’s Italian restaurant as a pizza cook during my teen years and even today I still have to taste  pasta to know for sure that it is done.  Another way is to throw it against the wall and see if it sticks.  That’s too messy.

So it is with a bad strategy.  No matter how hard you try in implementing it, it will remain a bad strategy.  Charles Roxburgh tackled this problem in his article, Hidden Flaws in Strategy, and why executives back them.  His article addresses the problem from the point of veiw of the  human brain function.  I refer to that article from time to time, but will point out other practical aspects:

  1. Overconfidence:  Roxburgh’s article discusses the overconfidence of companies like start-ups.  In other words, “rose-colored glasses.”  We prepare business plans in addition to strategic plans.  I always try to interject a business strategy for those companies that hire us to prepare business plans.  I have found that entrepenuers that are trying to impress their investors usually fall into this category.  So, as a CPA, I have to gently bring them down to earth.  One of my approaches is to lay out all assumptions so potential investors in order to inform potential investors.  Another approach is to have the client embrace their weaknesses.  Most clients ignore that, but want to dwell on their strengths.  In several instances we were able to turn their weaknesses into strenghts.  In any event, as CPA’s we have a special point a view because we see both the big picture and the minutia.
  2. The Sunk-cost effect: I like this concept from Roxburgh because I have seen so many small companies continue on a bad strategy until they implode.  I have found it very hard to change the course of an executive whose company is plummeting downward.  The gambling instinct comes out and they refuse to address the problem.  I refer to it as the “ostrich stage,” because they will stick their heads in the sand and not make the hard decisions that usually require a different strategy.  I have found the solution to this is to closely monitor your startegy with metrics, and if the metric(s) start pointing south, do not hesitate to explain it.  This is why it is imperitive to have a current set of accurate accounting records, a condition we don’t find very often with new clients.
  3. The herding instinct: Roxburgh cautions about following the herd off a cliff. The situation that comes to my mind are bankers in the United Kingdom who backed the Southern Confederacy’s “Cotton Bonds” in 1863.  Due to the taking of New Oleans and the Union’s victory of Vicksburg, the price of cotton skyrocketed because of the Union blockade.  Some UK investors of that time herded together to buy the Confederate Bonds presumably backed by cotton) which supported the war.  Unfortunately, they usualy couldn’t get their hands on the cotton collateral, the South lost, and so did the investors. This is a simplistic view of the events, but Illustrates how the herd can lead others into financial ruin.

Another example of the “herd” factor was when my brother-in-law tried to get my wife and I to buy into a ponzie scheme where people were doubling their money in a week.  We laughed, but didn’t like hearing of family and friends who “bought” into the hype and lost their $1,500 investment within thirty days.

The main takeaway from this article is to measure.  Like many say, “If you can’t measure it, you can’t manage it.”  These points can help you to measure your strategy and to make the necessary adjustments.

CPA Advice on How to Grow a Business of Any Kind

Rick_E_Norris_An_Accountancy_Corporation_CPA_Advice_on_How_to_Grow_A_Business_of_Any_kindI grew up in a family of entrepreneurs.  Most of my uncles were some form of contractor: General, electrical, and plumbing.  Prior to becoming a CPA, I learned a little about these trades from them which helped me when I built my own house.  They were (and are) masters at their trades and deserve the greatest of respect.

Yet, as a CPA, I have learned that a great tradesman does not necessarily translate into a successful entrepreneur.  In fact, they can be completely opposite.  A tradesman may focus on detail and create a great product, where an entrepreneur would focus on the vision and produce products to fulfill it.  I always joke that a small business person usually wants to know two things: 1) What are my sales? and 2) Do I have enough cash to make payroll?

CPAs run into this issue, too.  Many of us tend to focus on the minutia of getting a job done and not on the big picture of running the business towards its long-term vision.

If this sounds familiar to you, here are some pointers and sources:

  1. Be a hedgehog. The hedgehog is not as cunning as the fox, but does something that makes it the world’s best defender against the fox.  It rolls up into a little ball and sticks out its spikes.  According to Jim Collins in Good to Great, you can be a hedgehog if you do three things: 1) Be deeply passionate about what you are doing, 2) Do something that makes money, and 3) Be the world’s best at what you do.  The intersection of these three requirements will brand you into a specialized business in which others will struggle to compete.
  2. Focus on your customer needs, not the industry.   The Blue Ocean Strategy by Kim and Maugorgne shows you how to extrapolate unnecessary services that the industry provides, but the customer doesn’t need. The strategy book also describes companies that have transformed their businesses to a level to make competition irrelevant.
  3. Manage the business, don’t let the business manage you.  Michael Gerber’s E Myth describes entrepreneurs that let their businesses run them into the ground, and destroy their quality of life.  This is the most common problem with trades people.
  4. Know where in the cycle your business is at all times.Les McKeown’s Predictable Success discusses the cycles as: Early struggle, fun, whitewater, predictable success(balance), treadmill, the big rut, and death rattle.  Predictable success stage has the right amount of systems and processes to tame a company.

Though we are CPAs, we look at out client’s businesses through the lenses of strategy and planning.  Small business entrepreneurs must be measuring their businesses in light of their visions and short-term objectives in order to accomplish their goals and desires.

The Strategy of a Serial Entrepreneur

Rick_E_Norris_An_Accountancy_Corporation_The_Strategy_of_a_serial_entreprenuerSome think I’m crazy, others know it.

I was raised to always have a full life.  In my professional life, I run my CPA firm; Author business blogs, videos and newsletters; Write as a novelist (now trying to secure an agent); Compose, record and distribute my music on I-tunes;  And participate in a little e-bay antique business with my wife called Manhattan Beach California Antiques.  These tasks are in addition to teaching Sunday school and riding my horse as a volunteer mounted park ranger on a weekly basis.

The question remains, though, can this professional lifestyle be done effectively or do people like me cut off  more than they can chew?  If you gravitate to this professional lifestyle, may I make a few suggestions:

  1. Take stock of your time: A Pastor did a great demonstration with a tall glass vase.  He fill it first with large rocks, smaller rocks, sand, and then water.  His point was to prioritize important things in your life first.  (That would be the rocks.)  Then fill in the gaps with the least important things like watching TV. (That would be the water.)  If you pour all water in, there would not be any room for the rocks.  The same is in business.  Don’t participate in activities that are not driving you toward your vision.  Develop a refined strategy that propels you toward, not away from your vision.
  2. Cross-collateralize the function of your businesses: Look for common ground between your businesses.  How do they compliment each other?  For example, my social networking and search engine optimization skills will transfer nicely when I publish my novel.
  3. Do not procrastinate with any of the businesses: It is easy to fall into the trap of putting one of more businesses on the back-burner.  If you find yourself doing that, drop that business because you are not passionate about it.  Passion must drive all the businesses like the cylinders of a car.  They all pump in unison driving the car forward.
  4. Solicit help from those with expertise: Try to focus on what you do best and hire out other tasks to specialized professionals.  Make sure they are in step with your vision.

This type of planning is not for everyone, but if you find yourself in this life, work it efficiently or you may find yourself in a midlife crises without accomplishing anything.  A strategy is always the place to start.

Small Business Fraud: We Have A Situation Here

Rick_E_Norris_An_Accountancy_Corporation_Small_Business_fraud_We_Have_A_Situation_HereOver the last 30 years I have  investigated a few situations  where fraud was suspected.  However, my favorite story actually happened well before my CPA career.  I worked for a person who  verbally abused everyone around him, not the least of that, his wife.  She handled the books of his company.  Unbeknownst to him, she skimmed a little cash each month for many years.  One day, she took the kids, the money and disappeared.

Another situation occurred when I was speaking to a friend who owned a bakery.  Her bookkeeper worked there for fifteen years and never took a vacation or got sick.  She was also the only person that knew the accounts receivable.  I responded, “Sounds like a text-book example for fraud.”  My friend laughed.

One day the  bookkeeper abruptly quit leaving the accounts receivable ledgers in disarray.  The bookkeeper had been using funds from one customer to pay other customer’s balance because she had been embezzling funds for quite a long time.

I always have recommended that small business owners run their businesses instead of the other way around.  The risk in making this transition is that in relinquishing many aspects of the business like accounts receivable, inventory, accounts payable, and inventory control, may lead the owner to delegate control.

That is not the way to delegate.  Nobody should be given a task that does not have internal controls regardless if they are friends, family, or experts.  You should review your controls with a professional, however, here is a sample of a few areas:

  1. Generally:
    1. Create an accounting procedures manual
    2. Used pre-numbered forms
    3. Limit access to certain areas
    4. Require vacations
    5. Separate record keeping
  2. Cash on hand
    1. Have custodian responsibilities
    2. Require backup for any checks or cash spent
    3. The custodian should not have access to accounting records
  3. Cash Receipts
    1. Have your bank call your cell phone anytime a check is to be cashed.
    2. Reconcile cash daily
    3. Separate cashier and accounting duties
  4. Accounts Receivables
    1. Require all credit approvals
    2. Reconcile sales to inventory
    3. Separate sales, AR, recipts, billing, and shipping

This just scratches the surface.  There are many other areas that need controls, but this should give you an idea of how detailed your controls should be.  The survival of your business may depend on it someday.

 

 

 

Strategic Leading, A Task Not for the Timid

Rick_E_Norris_An_Accountancy_Corporation_Strategic_leading_A_Task_Not_for_the_timidRecently I led a strategy meeting for the Association for Strategic Planning, Los Angeles Chapter (ASP).  What made this exercise unusual is that even though was the Chapter President, I was not the only strategist in the room.  In fact, there were several proven strategists who had more experience in me in the area of strategic planning.  Moreover, I am a CPA, a profession that usually doesn’t embrace strategy and deals in the past of historical financial statements.  So, what is a Strategic Leader?

Cynthia Montgomery’s article How Strategists Lead in the McKinsey Quarterly addresses this question. She offers a few points on what makes a strategic leader:

  1. Meaning Maker: “It is the leader–the strategists as meaning maker–who must make the vital choices that determine a company’s very identity…” There is more to this than strategy charts.  The leader has to tap on the personal gifts of key people to implement the vision.
  2. Voice of Reason: “A leader must serve as a voice of reason when a bold strategy to reshape an industry’s forces reflects indifference to them.”  At the ASP meeting, we chose not to “check the box” strategy style.  We asked the hard questions to arrive at our vision.
  3. An Operator: “A great strategy, in short, is not a dream or a lofty idea, but rather the bridge between the economics of a market, the ideas at the core of a business, and action.” Inadequate implementation is the single biggest failure of strategic plans.  The blame would seem to fall on the leader, but leaders, too, sometimes have limited power in corporate culture.
  4. Consistency and Follow-thru: “…facing an overhaul can be wrenching, particularly if a company has a set of complex businesses that need to be taken apart or a purpose that has run its course.”  I recall so many “systems” of implementation that are just a regurgitation of the same cyclical analysis.  You think, plan, act, re-assess, think, plan, act, reassess, etc.

All of this is fine, but what really makes an effective leader?  Jim Collin’s book, Built to Last answers that in five steps:

  1. Level 1: Highly capable individual
  2. Level 2: Contributing team manager
  3. Level 3: Competent manager
  4. Level 4: Effective leader
  5. Level 5: Executive

It seems Ms. Montgomery’s article stops at Level 4 which Mr. Collins defines as a person who “catalyzes commitment to and vigorous pursuit of a clear and compelling vision, stimulating higher performance standards.”  Mr Collins goes a level higher which defines Executive as a person “who builds enduring greatness through a paradoxical blend of personal humility and professional will.”

Mr Collins seems to go beyond the function of an individual and focuses on his or her attitude.  A lot of his book dealt with those leaders who humbled themselves to lead by serving.  Any small business leader should keep this in mind.  As Mr. Collins puts it, ” Level 5 leaders channel their ego needs away from themselves and into the larger goal of building a great company.”  In other words, their ambition is for the company, not for themselves.