I recently attended an exit planning conference in Boston. After the conclusion of the conference I made the ill-advised decision to leave Boston for Washington DC via Interstate 95. On Friday afternoon at 5:30, no less! Compounding the usual traffic snarl was a heavy dose of road repair, with intermittent lane closures. We were crawling along in the left lane somewhere in Connecticut when a crop of traffic cones sprouted up, forcing us to merge into the lane to our right. To my great dismay (and other emotions), my attempt to merge was thwarted by a doggedly unyielding truck driver. Since the truck:car ratio was decidedly in his favor, I waited until he inched past before being mercifully admitted into the lane by the car behind him.

As an eager fifteen-year-old I went through driver’s training before getting my first driver’s license. My driving instructor repeatedly admonished me and his other young charges to “always leave yourself an out” when driving. That is, always be aware of your position in traffic, and don’t get caught in a situation where you can’t make a maneuver to avoid a dangerous predicament. Look down the road, not just at the car immediately in front of you.  Anticipate your next turn, and position yourself for it in advance. That wise advice seemed to resound in my head while I stewed indignantly about the abuse I had suffered at the hands of that truck driver.

As a business owner you are at the wheel of your company. My driving instructor’s caution bears repeating: “Always leave yourself an out.” Be aware of your company’s position. Know what’s happening around you–customers, competitors, legislation, the economy. Don’t allow yourself to be caught in a predicament with no way out. Constantly monitor your company’s environment and anticipate changes. Keep your eyes on the road ahead, not just on what’s right in front of you. Have an “out” planned before you need it.

 ”You got to be very careful if you don’t know where you’re going, because you might not get there.” -Yogi Berra

By establishing goals you can map out a course. Those should include goals for your business and ultimately goals for your exit from your business. Be clear about your goals and understand your options. You don’t know what will happen three months from now, let alone three years, but you’re on dangerous ground if you don’t have a plan with options. What are your growth targets over the next twelve months? The next three years? What do you expect your bottom line to look like? How much financing will you need to support your growth objectives? As you progress, the goals will need to be adjusted. They should reflect current thinking. Nevertheless, without them you’re driving in unfamiliar territory without a map or GPS.

At some point you will exit your business. There are six main options for exiting, excluding IPO and liquidation. Understand that an IPO is probably not on your company’s horizon. My completely unscientific study says the odds of you being struck by lightning, at 1 in 600,000, are greater. But if you expect to exit through an IPO, you’d better have a detailed route planned out well in advance.

The more likely options, those to consider and evaluate, fall into two categories: internal transfers and external transfers. Internal transfer options may include an ESOP, an MBO, or a transfer to children or charity. External transfer options include sale of the business to a financial investor, sale of the business to a strategic buyer,  and a private equity recapitalization. Depending on your specific situation, one or more of these options might be viable. Take the time to learn about them. Ask some fundamental questions: Do I have a management team in place that can successfully operate the business without me, or even buy it from me? Have I built and documented business processes that can be consistently repeated? Do I have a reliable and timely financial reporting structure? Have I identified and mitigated legal and financial risks to the health of the business? Have I created enough value in my business to make it appealing to an outside buyer? The more of these questions you address, the more likely you will have a successful exit before you “run out of lane.”

Always leave yourself an out.

My most recent newsletter contains an article about employee theft. While it is a problem virtually as old as mankind, certain conditions contribute to a higher likelihood of theft by employees. Of course political and macro-economic influences may come into play, but at the company level it’s usually a case of need meeting opportunity. I’ve seen the case of the trusted accounting department secretary who recycled enough petty cash receipts to purchase her new car. Or the accounts payable clerk who issued checks to herself and recorded them in the accounting system as payments to legitimate vendors. She embezzled over $60,000 before she was caught. Or how about the hard-working controller who was always too far behind to produce accurate financial statements or even a current bank reconciliation? When the dust cleared, he had issued over $80,000 in payments to himself.

The accounting secretary felt underpaid and under-appreciated. The A/P clerk felt underpaid and believed she had been promised a raise. The controller had a drug dependency. All three worked in small to medium sized companies with inadequate or disregarded internal controls. Simple measures, had they been prescribed and followed, would have prevented the losses in each case. All three perpretrators had access to the company’s cash and took what they thought they could get away with. And in only one of the three cases was the theft prosecuted.

So the question for the business owner is: Have you or your advisors designed and implemented the internal controls necessary to protect your hard-earned cash? If not, I suggest you begin today. If you have, I congratulate you on taking care of your business, and I suggest that you have those controls reviewed and tested at least annually.

The newsletter article follows.

Employee Theft

 Is it Happening to You?

It is not a nice thing to think about but employee theft is rampant in small to mid-sized businesses. It never ceases to astound people that a trusted employee could steal from them. It angers and saddens, but it is happening every day. Large amounts are being stolen from businesses both small and large.

After the Enron debacle, Congress passed “Sarbanes Oxley” to tighten the responsibility of the accountant to detect fraud. Talk to someone in the accounting community about SOX and they will roll their eyes and heave a large sigh. In all levels of the attest function performed by accountants (compilation, review and audit) SOX has had an effect. The result of this increased testing is that more employee theft than ever before is being uncovered. In fact, the AICPA (American Institute of Certified Public Accountants) released a recent study that has some astounding statistics. According to their survey of members, up to 82% of small to mid market businesses have or will experience employee theft. Of the incidences of theft uncovered, the average theft amount equals $125,000!! And believe it or not, most of these thieves are not prosecuted.

Are you a victim? Most of us would immediately say “No, all my employees are completely trustworthy.” But, what about the next employee you hire? What about the employee who has had an unexpected life change (divorce, death in the family, or other experience) that has affected his/her financial stability? What about that employee’s spouse who you might not quite trust? Could that person have undue influence to convince your employee to do something?

Employee theft can come in many forms. Look at the following ways employees can steal from you.

•  Cash. Does the employee who collects the cash also make the deposit and reconcile the bank statements?
• Payables. Does the employee who makes the vendor payments reconcile the bank statement? Does this employee have access to online accounts or a signature stamp?
• Time. Do your employees steal time by running personnel errands or spending excess time on the phone as you are paying them for doing the company work?
• Company credit cards. Do your employees have company credit cards? Are the expenses charged to these cards reviewed by someone other than that employee?
• Computer access. You would be amazed at how many employees run a small business on your computer and on your company time.

How can you stop this? First of all, have a policy that strictly forbids the above activities (and other similar activities). Second, look at your business functions and determine where you are vulnerable. Third, make sure there is a separation of duties between employees who handle areas where theft could occur. Fourth, consider monitoring where employees spend their computer time.

There are many ways an employee can steal from their employer. There are also many ways an employer can prevent this activity. Being aware is the first step.

Whether it’s the entrepreneur looking for start-up capital, the owner of the small business looking for growth capital, the CEO looking for acquisition capital, or the company founder looking to recapitalize for an eventual exit, there are certain rules which, if followed, will dramatically increase the likelihood of success. Many of these rules may seem obvious, but the financing expressway on-ramp is littered with businesses that neglected them.

1. Establish and follow a process. Haphazard casting about hoping to secure financing yields haphazard results. Identify a process for seeking financing and methodically follow that process.

2. Start raising capital before you need it. The time to begin is not “when the iron is hot.” Your sense of urgency and your immediate need will likely leave the financing source cold. You must allow the investor or lender adequate time to perform their due diligence. It’s part of entrepreneurial lore that banks are most willing to lend when you least need it. If you have financing lined up in advance, you will be in a position to strike when the time is right.

3. It is relatively easy to get an audience with investors compared to getting funding. Be prepared for the tough questions and know your business (get your house in order):

•       Know your market and competition (details).
•       Know your weaknesses and have a solution.
•       Define a clear use of funds (this leads to alternative capital structure and funding sources).
•       Be able to explain your strategy.
•       Identify relationships and levers (this sometimes reveals funding sources and partners).
•       Prepare the management team and rehearse your presentations.

4. Select only a few prospects; otherwise you waste time and get a reputation for shopping the deal.

5. Know what kind of money you need and how it plays into the overall capital structure of the company. If you are looking for additional financing, you must understand the effect it will have on your balance sheet. Your creditors, whether banks or investors, will monitor key financial statement ratios. Know in advance which ratios will be affected and will be a cause of concern. If this is not your strength, find an advisor who can support you in this analysis.

6. Sample the market for acceptance and issues; listen to criticism and learn. Go to sources where you have relationships for quick and candid feedback. Look for trends. Use mentors and advisors. Find out where the issues and concerns are before you go to your prospects.

7. Be realistic regarding valuation, issues, strengths, weaknesses, and timing. Anticipating concerns by calling out issues and concerns up front will cast you in a much more favorable light than having them called out by the potential stakeholder. It demonstrates thorough preparation as well as an absence of rose-tinted glasses.

8. Have alternatives and be creative. There are myriad types and sources of financing. Have not only “Plan B”, but sketch out C,D, and E as contingencies.

9. Follow the operating principles of “do what you say you are going to do” and “no surprises.” Nothing builds stakeholder confidence in a company and its management team like delivering on performance commitments.

All of this can be summed up in a single word: credibility. Nothing is more important to the process than carefully establishing and scrupulously maintaining credibility. The documents you present and the statements you make must be accurate. Bankers have countless stories of the business owners who come to them with incomplete and obviously inaccurate financial statements, yet are bewildered and frustrated by the bank’s reluctance to lend. Potential investors time and again see business cases that are based on an assumption of securing one percent of some enormous market or other. I recently reviewed one such plan. When I asked the entrepreneur where he got the one percent, his answer was, “I pulled it out of my [hat]“. Certainly candid, but not a help to the credibility of the business plan.

These nine guidelines will help you obtain the growth financing necessary for your business. Disregard them and risk being stranded by financing sources. Find a professional advisor who understands and can implement the recommendations here. He or she will assist you in navigating your way onto the financing expressway. At B2B CFO® we have long-term, trusted advisor relationships with our clients. Our many banking and financing relationships enable us to consistently deliver on our tag line: Cash. We help you get it®. Feel free to contact me for more information.

Adapted from the preface to “The Handbook of Financing Growth“, Second Edition, written by Kenneth Marks, Larry Robbins, Gonzalo Fernandez, John Funkhouser, and D.L. Williams; published by John Wiley & Sons.

Working Capital Problems?

Here Are 8 Signs That You Need To Watch

Does your business have working capital problems? Let’s take a look at what working capital involves. Basically working capital falls into four main areas. These are:

1. Cash
2. Accounts Receivable
3. Inventories
4. Accounts Payable

Most companies would say “yes, they have a problem in one of these areas.” Why? Because these factors most affect how a company can operate. Face it, if you don’t have cash in the bank, accounts receivables from sales, inventory to sell, and payables from the purchase of inventories, you are basically out of business. Therefore, these factors should be monitored very closely and on a regular basis.

There are many reasons why a business will have working capital problems. As a business owner, it is critical for you to determine why the situation exists, and correct the problem(s) immediately. So how do you determine why you would have working capital problems? Here is a short list of some of the usual causes of this issue.

1. Not enough sales, therefore not enough cash
2. Past due receivables are increasing
3. Customers are paying short, due to quality issues
4. Staff has been added to process orders and/or invoices
5. Detailed information on inventory not available
6. Inventory turnover problems
7. Interest incurred or late payment penalties from vendors
8. Overpurchasing

To avoid problems in working capital, the business owner should spend time carefully looking at what is going on in the business at this level. At the end of every month, a financial “dashboard” should be prepared for the business owner that gives him/her the vital statistics in the areas needed to monitor working capital. For instance, each month a report should be produced showing information such as aged receivables, inventory levels by category, inventory turnover, and days in payables. These statistics should be looked at and compared month by month to determine if the problem is getting better or worse. Action should be taken immediately when the numbers show a trend that will be bad for the company.

Monitoring working capital is not a difficult thing to do. A simple report put together every month will focus management in the right areas, and help to move the business into better times. B2BCFO can help business owners monitor their working capital by putting together simple, easy to understand reports that get to the heart of the matter. Tackle this problem early, and working capital will not be a problem.

One of my partners at B2B CFO®, David Kirkup, recently posted an excellent article on his blog. David provides CFO services in the Atlanta area. I have re-posted his article here, with a link to his blog as well.

Better Receivables Management – a Proactive Approach

March 9, 2012 David Kirkup

One of the biggest barriers to implementing regular cash flow forecasting is the unpredictability of incoming receipts. Accounts receivable is among the largest and most liquid assets on the books of most companies. A properly managed accounts receivable portfolio can expedite cash flow and support corporate cash requirements. The ultimate goal of accounts receivable is to increase working capital and reduce debt leverage.

So why do most companies entrust this key function to the lowly accounts receivable person? And worse, why do they then ask the likely introverted AR clerk to be aggressive about making difficult collection calls?  Because, in many companies accounts receivable management is reactionary, time consuming and often neglected. Consider that most customers are contractually bound to pay their invoices in 30 days.  Would it surprise you to know that nationally the statistics for receivables payment show that less than 50- 60% are paid within terms? Of course, by the time most companies are aware that a payment is late it’s already at 40 days and counting.

So what can be done to improve collections, reduce write-offs and improve cash flow? The four basic processes that make up the accounts receivable function are typically:

• Invoice Processing
• Payment processing
• Credit management
• Collections

There are many good articles on how to improve Accounts Receivable Management.  Since the squeaky wheel gets attention they often recommend:

1. Create and enforce credit policies and credit limits up front
2. Get invoices out quickly and accurately – by email, not snail mail
3. Make sure deliveries are correct and resolve disputes quickly
4. Call customers promptly when payment is late
5. Monitor Days Sales outstanding and Receivables Aging closely.

All good ideas and long tried by good Chief Financial Officers.  Unfortunately, there is one major flaw. You can’t call all 50, 100 or 500 customers on Day 30 to ask if they are going to pay – even if you could staff for that, it would annoy the customers.  Thus, you cannot spring into action until you can identify the late payers – and by then you are approaching 40 days before you begin collection efforts.

So what if you could quickly identify and deal with late payers, and focus less effort on collection and more on customer service?

I think I have a solution.  The problem with traditional receivables management processes is that they work on the Opt-In principle.  This means that all the power lies in the customer side of the relationship, and until the customer is late, you remain ignorant of their intent and thus predictability of your cash flow is impaired.  This is just the way things work…or is it?

Receivables management software firm TermSync is pioneering a new approach to pro-active receivables management to help our clients improve cash flow.  TermSync works with vendors to capture invoice information, and then sends simple email reminders to the customers upon due date.  The unique idea is that the emailed invoice gives the vendor three options or check buttons: Pay Invoice, Dispute Invoice, and Delay Payment.

In addition, TermSync has found that their “third party status” has helped them to put many problem customers onto a back-up ACH payment mode.  What this now means is that the vendor/customer relationship has subtly changed.  Now the vendor can receive advanced notice of the customer’s payment intentions, and can direct resources appropriately and quickly to resolve disputes and accommodate short payment delays.  But the mere act of asking the customer to take 30 seconds to confirm intent and give a short reason for delays or disputes seems to make a huge difference.  TermSync reports collection rates of 97% within terms for their customer base. Other unique features of this system include management of payment plans, dashboard summaries of AR stats, and the intelligent use of the network effect to ensure their vendors get to the top of the customer’s “must do” list.

Receivables management has always been the neglected stepchild of financial management, and it’s long overdue time for a rethink.

To discuss how we can start accelerating your cash flow, contact me at tomadkins@b2bcfo.com.

To learn more or request a demo, go to www.termsync.com and enter B2BCFO-TA in the comments.

(* When it comes to cash flow, there’s no time for a Top 10 list!)

Why do you need to concentrate on Cash Flow? Simply put, especially for a small to mid-sized business, cash flow equals life, growth, prosperity . . . and survival.

You need to free yourself to focus your unique talents and abilities on growing your business rather than fighting the constant cash flow fires. Remember . . . you are the only one who really cares about the ongoing viability of your company. It’s your future that you are most concerned about because, if your company is not successful, none of your employees will have a job.

Here are the Top 5 Cash Flow Rules you can implement immediately that will transform the way you manage your business from this point forward. But first, remember the two cardinal rules of managing a business:

• Never run out of cash. Make the commitment to do what it takes so that it does not happen to you.

• Cash Is King. Cash is what keeps your business alive. Manage it with the attention it deserves. Without cash, you have no business.

Now, the Top 5 Rules . . .

1. Know the cash balance right now. Even the most intelligent and experienced person will fail if they are making business decisions using inaccurate or incomplete cash balances.

2. Do today’s work today. The key to keeping an accurate cash balance in your accounting system is to do today’s work today. When you do this, you will have the numbers you need—when you need them.

3. Either you do the work or have someone else do it. Either you do the work or have someone else do it—those are the only two choices you have. The work must be done. So, either you do it or have someone else do it. (See Rule 3a.)

3a. If you are doing the work of determining the cash balance, you may not have the right people working for you. Unless you are a start-up business without any accounting staff, you must be sure that the financial people know that you need and demand that they focus their efforts on monitoring the cash balance, and keep you aware of what’s happening with your cash.

4. You absolutely, positively must have cash flow projections. Cash flow projections are the key to making wise and profitable business decisions. It’s impossible to run your business properly without them.

5. Eliminate your cash flow worries so you are free to do what you do best—take care of customers and make more money. This is the real key to your success in business. The reason you have to make sure you have the cash flow of your business under control is so you are free to focus all your time and talents where you can make the most difference in your business.

B2B CFO® specializes in helping business owners manage their cash flow. Give us a call for a free Discovery Analysis™ of your business. It’s a call worth making.

Many small businesses will benefit from moving their payroll services out of the company. Payroll processing services reduce a company’s risks by filing taxes timely and ensuring regulatory compliance. Outside payroll processing costs can be lower than in-house costs, particularly when you add in the cost of the almost inevitable in-house mistakes. In addition, outsourcing payroll often frees up bookkeeping resources for other more important activities. There are several key factors that should be considered when selecting an outside payroll service.

• Customer Service
• Payroll Service Software
• Costs
• Payroll Support
• Employee Leasing

 Customer Service

The elements to consider for customer service include initial setup, training, customer service churning and corporate focus. Moving from one service to another or moving the payroll activities out of the company can be stressful and time consuming. Look for a service that has this planned and can do it quickly and correctly. Training is important for the initial phase of payroll but please recognize the future impact as employees change and regulatory issues change.

When employee resources at your payroll service change the impact will be felt. Small payroll services are hurt badly when they churn employees. Large firms have depth to enable continued support but the loss of a trusted connection is always difficult.

Certain payroll services focus their attention on the needs of small businesses. Look to a firm that operates in the same market you do. This will ensure that they are dealing with the same challenges that you face.

Payroll Service Software

A payroll service is only as good as their software. Data entry that is intuitive and organized into a logical process flow speeds the process and improves the accuracy of the results. Select a company that has existing software. Do not invest in future updates. Current connectivity to the payroll service should be broadband and secure.

There should be simple, easy-to-read reports that support each payroll period and they should have year-to-date information. Ad-hoc inquiries are needed between payroll periods to address questions from employees, management or outside agencies. This information should be available on-line and should be printable.

Moving payroll data from the payroll service to the company’s job cost or general ledger system may be critical for some companies. The software may already have interfaces to systems if they are simple and generally distributed (e.g., Peachtree, QuickBooks, GP). Companies taking advantage of the Internet will develop more robust time and attendance systems that will enable payroll and detailed job cost information.

Costs

Charges related to outsourced payroll vary but are often associated with headcount. This facilitates business planning for expanding employee resources. Other costs will be incurred to setup the payroll and process year-end requirements. The payroll service should take care of W-2 mailings and year-end reports to all regulatory agencies.

Look for a company that provides payments to independent contractors. This will facilitate cash planning because independent contractors can be paid in the same cycle as payroll and 1099s can be handled by the payroll service. Some companies handle this with no additional cost. Other companies cannot handle contract employees and the fees become prohibitive.

Payroll Support

Payroll services often provide other services that may benefit your company. The risk reductions of administration of benefit plans can greatly benefit a company. Examples include the 401k, Section 125 Cafeteria plans, garnishments, credit union deposits, healthcare payments and other benefit related activities.

Larger payroll services offer 401k plans or can connect you to affordable 401k plans. They can administer employee related tasks and provide advice for regulatory compliance. Not all payroll services offer this support and those that offer it may be costly.

Employee Leasing

Companies that require a high level of benefits to attract key personnel may consider companies that offer employee leasing. These companies process payroll and offer the full services of healthcare, dental, 401k, drug testing, compliance administration and other activities of the human resources function. These services move cost from headcount to a percent of payroll. They care for the many aspects that human resources should address. This can be as complex as health insurance or dental insurance and as simple as employee handbook maintenance. These companies also get involved with safety, security, wellness care and significantly raise the bar on benefits for employees

Unless payroll processing is your core business, you will likely benefit from outsourcing your payroll. It will simplify your company’s administrative function, and it may pay for itself in labor cost savings and avoidance of penalties and interest arising from incorrect payroll tax filings.

Hiring and firing employees is very costly. Good companies keep good employees with good management practices. Managers can contribute to retention efforts by improving overall job satisfaction. When companies lose good employees, it not only affects productivity, but also morale. Managers can make a difference through effective management-employee relations.

Mentoring

Many first-time managers don’t have experience in mentoring, coaching or reinforcement — all necessary skills for managing employees. When managers act as mentors, it helps employees reach their full work potential. Mentoring is a one-on-one relationship that helps prepare lower level employees for advancement. As a retention tool, mentoring gives employees the opportunity to actively participate in their own career development. As a result, employees feel they have future career opportunities with the company as opposed to just a job and a paycheck.

Coaching

Coaching is another way managers can help keep good employees. Coaching is a form of on-the-job training that gives employees regular feedback on performance and recommendations for improvement. Effective coaching entails clarifying expectations, monitoring progress, and providing consistent feedback. For example, if an employee has difficulty working on a project, the manager should provide guidance on how to resolve issues and resume productivity. Also, the manager can follow up with the employee to discuss progress. While coaching may not be possible in larger groups, it’s a good choice for work teams.

Reinforcement

Reinforcement is another management technique companies can use to motivate employees. Incentives and rewards often help create a more fulfilling work environment. When companies recognize high performance, it gives the employee a sense of satisfaction and accomplishment. Managers who observe employees doing a good job could let them know immediately or provide spot bonuses. A spot bonus is a one-time cash incentive that is given to employees who do exceptional work.

Attitude plays a significant role in employee relations, as a poor manager can create an undesirable work environment and increase turnover. Good managers try to maintain a positive attitude and show empathy to workers. Proactively, employers can conduct confidential surveys, monitor exit interviews and establish grievance procedures to improve employee relations. In summary, by valuing employees and treating them fairly, managers can create a positive and supportive work environment, which can result in lower turnover and improved retention.