Cash Flow Archives | Rick Norris

Cash Flow and the Life Blood of a Business

My 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:

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.
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.
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.

A Strategy to Measuring Your Strategy

About eight years ago I road in the Wildflower 50 bicycle rally outside Atascadero, California. Now, at the time my wife entered us in the “race” of 50 miles, I had not ridden on a bicycle for years. In fact, I didn’t own a working model. So the day before we drove up north to meet our inlaws to ride in the rally, we purchased two road bikes that had ten gears. They were not racing bikes, or even mountain bikes, but they looked alright and were on sale! I assembled the two bikes (which came in boxes) the day before we left and road around the block to test my craftsmanship. Since I made it around the block without losing a wheel, I figured I was “ready to roll.”

The next day, after we received our identification numbers, we set off on the ralley. The terraine was beautiful and I was enjoying the ride…until about mile 5 of the 50 mile course. My butt hurt. That was just the start of the long arguous ride that I was ill prepared to compete. The low point at about mile 40 was when I was going up hill. I heard a bicycle bell ring behind me with the feeble voice of ,” On your left!” I moved over just in time to see two old ladies on a tandem bicylce pass me saying, “Thank you, honey.” I thought my critical success factor in the race was to finish the race. After being passed by two 70 year old women, I realized that I had used the wrong measure for “success.”

Most small business leaders that I encounter do not use adequate measures of their strategies. Usually their measures are: Do I have enough money for payroll? And, what were my monthly sales?

Years ago, I was involved in reviewing a book, Driving Your Company’s Value: Strategic Benchmarking for Value by Maud, Dunne, Osborne, and Rigby. My late friend, Jim Rigby introduced to the measures that the book and philosophy proposed. The book identified and measured gaps in hard performance through the Mobley Matrix cash flow analysis and the DuPont formula’s Return on Equity shortfalls, as well as soft performance (groups of people marching to a different drummer). The book professed that by identifying, measuring, and managing these hard and soft gaps, the company will be able to bring strategy, systems, and people into alignment, thus maximizing value.

The Mobley Matrix using the the following financial statements: Beginning Balance Sheet, Income Statement, Cash Flow Statement, and Ending Balance Sheet is the first component for your data. Add to that, the Dupont Fomula and other metrics and you arrive at their Return on Strategic Effectiveness Scorecard (ROSE). This scorecard consists of many metrics including: sales related, turnover, and changes in cash flows. Business owners and strategists can benefit by establising critical success factors to see if they are in alignment with their strategy.

Strategy is important, but without measuring its implementation, it is almost sure to fail.

Business and Rock and Roll History Repeats itself

Watch this great performance of Alex Chadwick play 100 Riffs (A Brief History of Rock N’ Roll). Within about 12 minutes he peels through some of the greatest guitar riffs from the 1950s to the present. I’ll have to watch it again and learn several of them.

As I watched Alex play these, I was thinking of how much the great guitarists of the last 50 years evolved using variations of the blues scale. They mastered the basics and improvised creating sounds that were original and innovative.

As a CPA consultant, I can see that the same type of innovation can be applied to small business while adhering to the basics. It doesn’t matter if you publish music or manufacture tile, the basic business concepts are the same:

What is your small business mission and vision? We are not speaking of the next 5-10 years, but the next 20 years.
Who are your customers? Have you focused on who they are and what are their needs, or are you just throwing out the same product/service as your competitors?
Who are the people in your company that can help you achieve your vision? Are you restricted by family politics? Are you looking at each individual and developing their personal abilities, or are you trying to force a person into a position that they are not qualified to function efficiently?
Do you have the resources to get off the ground and ultimately fulfill your vision? Small businesses fall short when they only focus on the vision and not the resources to creatively navigate there.
Have you identified all of your stakeholders? A stakeholder can be anyone who has a stake in your business: You, your employees, your bank, your suppliers, and customers.
Do you have meaningful metrics to manage your business? How will you know if you are moving in the right direction? Do you look at the business metrics daily? weekly? monthly?
Do you have a plan to grow? Many companies get growing pain. There is a balance to growth.
How do you manage your cash? Have you prepare a budget? Do you compare you budget to your actual performance?
Are you making alliances? You should not exist as an island but be connected to a network of individuals and companies that enhance your vision.
Do you have the right professional assistance? Small business has gotten more and more complex in the last 50 years. Leverage those with certain expertise to keep up with the pace.

We see many businesses ignore these points because we sometimes operate as an outside accounting department for companies. As a CPA firm, we try to help clients not lose focus on what is important to their small businesses. Even the entertainment clients lose sight of their vision. All to often they ignore our advice until they fall into a crises. A crises usually stifles creativity due to the stress.

As a small business, you should constantly reinforce the basic principles. If you don’t, you might find yourself playing the same three chords while your competitors are composing symphonies.

Do You Have An Economic Depression Mentality?

I have found that family and friends who survived the Great Depression usually have a different economic philosophy than those who did not(especially as a small business owner). Basically it goes like this: Pay cash for everything, pay off your house, and have the cash to buy large items like a car.

This may sound very foreign to you if you handle your credit card like a derringer, or amassed a boat load of student loans, but, you must understand the philosophy of those who think this way. During the depression there were no safety nets at first. You were on your own when you lost your job, savings, and house.

When it comes to small business, a depression mentality can work against you. For example, look at these troubling assumptions:

If it ain’t broke, don’t fix it. This small business conservative mentality flies in the face of innovation. I like another one I read, “If it ain’t broke, break it.!” A small business must always be evolving, and not stagnating in order to survive. So, replace and upgrade at a managed state.
I pay cash for everything. If an asset has a life that will extend beyond one year, then you may want to finance it through a small business loan (or line), or raise capital. Try to conserve your cash for operating expenses. This is when a conservative use of cash will help you.
My small business runs itself. Always a danger sign. As many have said, “You should run your small business.” This conservative point of view is a fuse to self destruction. Every good idea has its day.

Small businesses are the major job creators of our nation. It is up to us, as small business owners, to manage our businesses efficiently. At times, a conservative mindset is called for, but other times, it is not.

Business and the Artist: The Butterflies of our Society

You’ve probably heard of the story about an old man and the cocoon. He watched the cocoon for days, and then it started to move. The butterfly struggled, so the old man slit the cocoon to let the butterfly out. The butterfly emerged underdeveloped with weak wings. The reason was that the butterfly needed to forcefully squeeze through a small whole to open circulation to its wings. The man deprived it of this process. The struggle for life gave it life.

I have worked as an entertainment business manager since 1985. For the last 15 years I have helped artists strategically position themselves in new business ventures. What I have found is those who do not start out with easy financing (parents for example), tend to have a better chance of success. From a CPA business manager prospective, the adage, “easy come, easy go” has somewhat predicted the ventures. Even though our firm works as consultants, I usually take an emotional stake in my projects because I want to see them succeed. Most entertainment CPA business managers don’t do what we do, but come in after the business is funded. We have found that entering after the initial planning stage is too late.

From an entertainment CPA business manager point of view, here are some steps I suggest you take before opening up your next venture:

Research your proposed industry thoroughly: You should start by speaking to people in the industry that you trust. Don’t be afraid to ask the difficult questions, and don’t bury your head in the sand. Try to find statistics or news of your competitors and the industry you are venturing in. Most important, speak to your target market. Find out what the industry is not providing to them, and what the industry is providing to them that is unnecessary.
Find people in areas you lack expertise: If you have areas that are outside your expertise, bring in people who can fill those weaknesses. They may sign on and be a major stakeholder for you once you get started.
Develop a strategic plan with a long range vision: Start 20 years or more from now and describe a vision that is more than making money. Are you out to change communication and entertainment by putting it in the palms of every person like Steve Jobs? Once your vision and horizon is set, work backwards and set milestones. You should end on your first day of business.
Consolidate a team: If there are others that will help you, line them up and get them on board. It will show your investors that this business is more than you.
Build a business plan: A business plan is not a strategy, but a management tool. It starts today and works forward for five years. It is essential that you include the cash flow of the first twelve months. This is when businesses struggle to stay afloat. Make sure your business plan milestones correspond to your strategic milestones. Insert your team bios along with your bio.
Present the package: Now you can go to your money people. Practice your dog and pony show. A video or slide show can help bring the message across.

Like moving from a worm to a butterfly, artists must go through the “pain” before the doors open. The more pain you endure, then better informed you will be when you meet your investors and launch the enterprise.

As CPA entertainments business managers, we have seen failed ventures that did not take these steps. By engaging in this practice, it does not guaranty success, but will at least give you the wings to soar a little higher.

What! I Have to Pay Taxes on My Unemployment Benefits?!

Do you remember the Marx Brother’s “contract scene” in Night at the Opera? It started with Groucho reading, “The party of the first part, will be known in this contract as the party of the first part…” Chico said it was “no good.” He couldn’t say why, so he wanted to hear it again.

You may feel like you are experiencing this non sequitur when you find out that the government, who just paid unemployment benefits to feed you, asks some of it back in April of the next year. So, before sending them one of your frozen hams, you should know how these benefits are taxed:

Unemployment compensation generally includes, among other forms, state
unemployment compensation benefits, but the tax implications depend on the type
of program paying the benefits. You must report unemployment compensation on
line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.

Here are four tips from the IRS about unemployment benefits.

1. You must include all unemployment compensation you receive in your total
income for the year. You should receive a Form 1099-G, with the total
unemployment compensation paid to you shown in box 1.

2. Other types of unemployment benefits include:

Benefits paid by a state or the District of Columbia
from the Federal Unemployment Trust Fund
Railroad unemployment compensation benefits
Disability payments from a government program paid as a
substitute for unemployment compensation
Trade readjustment allowances under the Trade Act of
1974
Unemployment assistance under the Disaster Relief and
Emergency Assistance Act

For complete information on each of the benefits listed, see chapter 12 in
IRS Publication 17, Your Federal Income Tax, or Publication 525, Taxable and
Nontaxable Income.

3. You must report benefits paid to you as an unemployed member of a union
from regular union dues. However, if you contribute to a special union fund and
your payments to the fund are not deductible, you only need to include in your
income the unemployment benefits that exceed the amount of your contributions.

4. You can choose to have federal income tax withheld from your unemployment
compensation. To make this choice, complete Form W-4V, Voluntary Withholding
Request, and give it to the paying office. Tax will be withheld at 10 percent
of your payment. If you choose not to have tax withheld, you may have to make
estimated tax payments throughout the year.

However, there may be a silver lining if you did not make enough money to pay taxes. Another possibility is that you over-withheld on compensation you earned before or after you received your benefits which ends up paying the taxes for the unemployment benefits.

As a planning tool, if you were unemployed early in the year, you should look into claiming no more than zero on your W-4 to withhold taxes. If that is not enough, you may want to withhold even more taxes in the year. To avoid planning may bring an unwelcome surprise with penalties in April.

Changes: Bowie Was Right, Look Out You Rock n Rollers

“Still don’t know what I was waiting for

And my times was running wild

A million dead-end streets and

Every time I thought I’d got it made

It seemed the taste was not so sweet.”

–David Bowie, Changes from the Hunky Dory album

This song ran through my head when I read the article, Just-in-time strategy for a turbulent world by Lowell L. Bryan. Bryan tackles the corporate world, but the same principles would apply to artists or small businesses. Basically, change is good and time can be on your side.

One unique concept he proposes in his article is “for businesses to take full advantage of their best opportunities without taking unnecessary risks.” Bryan implements this concept by advocating that businesses set up a portfolio of initiatives.

In a nutshell, his concept states that businesses should not develop a single-minded strategy that requires a bucket full of resources. Instead, develop smaller pilot programs at much smaller price tags, and re-evaluate constantly. The small business or artist will be able to switch directions quicker because they will not be so heavily invested in any one.

This concept can be achieved more today, than any time in the last one hundred years because of technology. Technology, most notably the Internet, allows artists and small businesses to reach their target audiences in real time. This ability will accelerate changes and require an artist or small business to adapt quickly.

So, how do you get started? Using Bryan’s illustrations, all initiatives should adapt the artist’s and small business’s core competencies. In other words, you have to know what you don’t know. If you are developing your core competency, than the time frame can be much shorter, even less than one year. The risk would be lower.

Conversely, if you are venturing into unfamiliar territories, then your time frame should be 2-3 years before it comes to fruition. The less you know about an initiative, the larger the risk.

But, should you invest entirely in longer time frames? The answer obviously is no. You have to make sure you balance your longer term initiatives with your immediate ones so you can provide adequate cash flow for all of them.

Now that you have picked out your initiatives and time frames, how should you implement the plan? Bryan suggests four steps: Search, execute, monitor progress, and reassess the initiative portfolios. This procedure is no different than what I have been writing about all year. In any of your initiatives, you have to measure what you are doing against benchmarks and milestones. The old adage is if you can’t measure it, you can’t manage it.

Artists and small businesses should consider adapting this method of strategy in the fast-moving world. Who would have believed 20 years ago that you would be able to access the world in a little handheld device?

Small Business Opportunities in the Wind

Small businesses are the main sources of employment in our country. According to the US Small Business Administration, small firms:

Represents 99.7 % of all employer firms.
Employ half of all private sector employees.
Pay 44% of total US private payroll.
Generate 65% of net new jobs over the past 17 years.
Produce 13 times more patents per employee than large patenting firms

However, there rarely are laws that benefit just small businesses. That may change with some bills passed by the House that may help small businesses to raise capital. Alix Stuart’s article discusses these in more detail.

The Small Company Formation Act (HR 1070): If you ever tried to raise capital from the public, you may have been cautioned by an attorney to watch out for SEC laws. With this bill, small companies could raise up to $50 million through a Reg A offering without spending a fortune to hire attorneys to prepare a full blown IPO. Today, small businesses are limited to $5 million, and subject to state law regulations. I remember going through one of these IPOs. The reporting and legal paperwork piled very high. However, if you think your business may benefit from this, you must be able to produce a comprehensive business plan to convince buyers that you are worth the risk. Many small businesses, if not most, do not have this level of sophistication.

• The Entrepreneurial Access to Capital Act (HR 2930): Crowd funding has become such a new phenomenon. Under this bill, small businesses can raise up to $2 million without registering with the SEC. In addition, investors would not have to be accredited.

• The Access to Capital for Job Creators Act (HR 2940): Currently under Reg D, you can only approach your family and friends. If this bill passes, a small business can approach others that do not already have a relationship with the small business. Family and friends are usually the first level of investment for new entrepreneurs, but this bill can expand the reach significantly.

• HR 1965: This really only pertains to small banks, allowing them to have up to 2,000 shareholders without being subject to SEC regulation. However, if a small bank’s regulation is lighter, then their ability to help a small business will be expanded.

It is imperative for a small business owner to keep a watchful eye on legislation that may affect them. Sometimes these opportunities only come around occasionally , so a small business owner must be vigilant. Most business periodicals can alert you to new changes.

What is the Difference Between a Business Plan and a Strategic Plan?

Business plans are very familiar to me. I receive calls from time to time to design one for individuals who have potential investors. In doing so, I try to incorporate some form of a strategic plan in the product because new entrepreneurs rarely think on that level.

Business plans and strategic plans are different though. Take Johnson and Smith’s book 60 Minute Strategic Plan for instance. They state that, “a business plan is [used] to evaluate teh viability of a business…Business plans keep the company on its rails as it relates to key tactical financial and operational ratios…In a word, a business plan explains the ‘what.’

Johnson and Smith contrast strategic plans as “requiring leadership and inventive thinking and assume higher risks, leading to higher rewards. The strategic plan is an internal leadership tool used to plan a course of action to address unanticipated problems or opportunities…” In other words, it explains the “why and how.”

Bill Birnbaum, author of Strategic Thinking distinguishes the two types as strategic thinking and tactical thinking. I would have to side with his distinction between a strategic plan and business plan. The strategic plan is used to help you decide what to do, and the business plan (or company budget forecast) is used to decide how to do it.

If you are a small business owner, or an entertainer, the concept is the same. Strategic thinking will make you focus on the needs of your customer, how your product benefits your customer, and the reason why a customer would want to buy your service. Or as Birnbaum states it, “In thinking strategically, you’ll be concerned with doing the right things, rather than doing things right.”

Let’s take an entertainer for instance. I am meeting next week with a recording artist who wants to stand out. What we will not look at in the recording industry is what is being done now. The reason why is that why duplicate things that are working in an industry that is moving a break-neck speed, or duplicate business models that are not working? No, instead, we will be exploring her talents not only in the recording industry, but other industies with the vision of producing a specific message about who she is.

The same goes for small business. If you want to be an industry leader, you must distinguish your strategic plan from your business plan. Using Jim Collin’s phrase, you will never achieve your “Big Hairy Audacious Goal” (BHAG) if you are 1) duplicating what others have done in your industry, or 2) just doing an annual budget. The annual budget is contained in the Annual Operating Plan (OAP) which must move an organization towards teh BHAG.

If you want to move your career and/or business beyond your competitors, you must start thinking strategically by implementing and executing a strategic plan. If you are one who only focuses on the future business plan or budget by looking in the past, you will be on operating on a financial treadmill. You may seem like you are moving forward, but all you will be doing is spinning your wheels.

Business Opportunities: Gas Stations Making Their Own Music

Back in the 1960s, it wasn’t unusual to find four gas stations at an intersection in Los Angeles. These were full service stations who would fill your tank, wash your windshield, and check your oil. You would also just hand them your money (not credit card) from your open window to pay. These stations would try so many ways to attract customers and build a niche market in their neighborhoods.

Union 76 (currently Unocal) distinguished itself by creating a relationship with the former Brooklyn Dodgers. Union 76 would give away many different types of Los Angeles Dodger’s baseball memorabilia when you purchased a certain amount of gas. One such item was a flexible 45 rpm record of a Dodger player interview. Vin Skully would interview a Dodger player like Sandy Kofax. Union 76 had found a niche market with Dodger fans–forget about the gasoline.

Jon Ostrow’s article, How To Conquer Your Musical Niche reminded me of Union 76’s niche serving with automobile/Dodger fans. He laid out a number of items that a band should consider:

Demographic (age, gender location)
Similar / influential artists (remember to start locally, then branch out to the regional, national and global scale)
What are the influential promotional outlets?
Where do the fans exist online?
What blogs do they read?
How do they find out about new music?
Are they into fashion? If so, what brands?
What are their favorite hobbies?

At first glance, you may think this pertains to only musicians. But, look again. Here is the list converted to a 1965 Union 76 strategy:

Demographic (age, gender location)–Are they near a freeway that can lead to Dodger Stadium? Are they male?

Similar / influential artists (remember to start locally, then branch out to the regional, national and global scale)–Unocal may have start in certain neighborhoods and branch out.
What are the influential promotional outlets? Use Dodger radio to advertise Union 76 items.
Where do the fans exist online? What radio stations do Dodger fans listen to?
What blogs do they read? Advertise in the Sports Page of the Los Angeles Herald Examiner.
How do they find out about new music? Who do auto owners learn to about gas? Mechanics? Make sure each station has one.
Are they into fashion? If so, what brands? Sell Dodger hats at the stations.
What are their favorite hobbies? Unocal hit the head of the nail with Dodger fans.

Each business or band can use similar questions in nailing their niche market. The Blue Ocean Strategy is a strategy concept that can help you in searching for it.