Owning a business can be very exciting but it can also be quite risky, especially if you are starting it from ground zero. One way to reduce some of that risk is to buy an existing successful business; one that already has products/services and customers. This reduction in risk does come at a price, a substantial price in some cases. However, if you have the funds, it can be an excellent option to consider.

Due Diligence

Because buying a business will involve a fair amount of money and time, it is critical to do your homework. It is important to thoroughly check out the business. This includes reviewing its  products or services offered, historical and projected financial performance, assets, liabilities, contracts, employees, customers and vendors. There are also a number of other items to consider when purchasing a business, including what type of deal will it be – a purchase of the assets of the business or a purchase of the company stock. The tax consequences of this decision can be very different for the buyer and the seller.  You will also want to determine if the seller will share confidential information about the business such as legal or audit issues.  Many times the seller will require the buyer to sign a non-disclosure agreement before information is shared.

Verify the Seller’s Financial Information

Verifying the historical financial performance of the business is a very important part of the process. The buyer will want to review internally prepared financial statements for the business as well as externally prepared/filed tax returns for the past three years. If tax returns are not available, a buyer may request audited financial statements as part of the review process. They may also request validating information from third party sources such as lenders, external accountants, and/or CPAs.

Business Valuation

A good business valuation is a very important part of the purchase. Both the buyer and seller will need to know what the business is worth in order to determine if each of them is getting a fair price for the business. Additionally, if the purchase will be financed, there will likely be a requirement by the bank to get a business valuation as part of the loan application. If real estate is involved in the business, a real estate appraisal will be needed to value the real estate, especially if the real estate will be used to collateralize any new loans financing the purchase.

Financing the Purchase

Financing the business purchase may be done through traditional lenders. Some financing may even qualify for the Small Business Administration’s loan guarantee program. When financing the business purchase, the lender will need to obtain financial information on the business. This information is critical, and will help to establish the viability of the project, ability to repay the loan, and determine if the purchase agreement meets the lender’s requirements. If the historical financial information is unavailable, you may need to prepare a comprehensive business plan to show the lender you can repay the loan.

The information the lender will require includes: interim financial statements for the last three years, the purchase agreement, documents to support the valuation of the business assets, and a business valuation. You will also need to provide specific information on exactly what the loan funds will be used for (i.e. inventory, equipment, and leasehold improvements). The lender will also want to know how much the borrower is putting into the project. Most lenders will require 10% to 50% based on the industry and the borrower’s overall credit risk. Finally, the lender will want to see cash flow projections based on the historical financial data to assure the business will provide sufficient cash flow to service the debt needed to acquire the business. In many cases, the lender will be looking for periodic cash flow generated by the business to be 1.5 times the periodic debt payments.

Get Professional Assistance

A good business attorney should be considered for all acquisitions, since they can represent you, review legal documents and provide business advice. They can also act as the escrow agent or recommend a company to handle the exchange of money. It is also a good idea to engage the services of a qualified CPA, since some attorneys and business brokers are not familiar with the tax, accounting and financing impact of business transfers.

Owning a business can be very exciting as well as risky. One way to reduce some of that risk is to buy an existing successful business. This reduction in risk does come at a price, but if you have the funds it can be an excellent option to consider. Furthermore, if you do your homework and enlist the help of a few experts it can also be a very profitable experience!

Please let us know if you have questions concerning these buying or selling a business or any related topics, we can be reached at (480) 980-3977!

Many companies think they have a good handle on their business costs. However, when we ask a few simple questions about their costs, they are oftentimes surprised at what they have been missing. They soon realize that they have significant opportunity to improve their company profits by more effectively managing their costs. Having a comprehensive cost reduction program in place for your business can lead to a 10% to 20% increase in company profits.

Current Situation

In order to improve your company’s cost performance, you first have to understand where the company is today. This means having a good accounting and financial reporting system in place that will provide you with this information. This system should be able to tell you the major drivers of your costs such as: materials, labor, external services, insurance, marketing etc. It should also be able to tell you how these costs have changed over time. Have they been increasing or decreasing each month. What percentage of revenue do they represent? What categories together drive greater than 80% of your costs?

Competitive Benchmarks

Knowing the company’s current situation is a good start. However, knowing how your cost structure compares to your industry, puts things in an even better prospective. How does your company compare to the industry average? Are you better or worse. How does your company compare to “best in class”. If you are not “best in class” for your industry, what is your competition doing that you are not? Knowing what makes your competitor “best in class” for your industry may give you ideas for improving your company performance. It will also help you to establish reasonable cost reduction goals for your company.

Clear Goals and Actions

Setting the appropriate cost reduction goals for your company and identifying the actions you will take to achieve those goals are key to reducing costs. The goals must be clearly defined and measurable, they must also have a due date and owner. These goals must also be realistic. If they are not realistic, your cost reduction team will not be motivated to aggressively pursue them. Involving employees in the goal setting process will help give employees a greater sense of ownership of and commitment to the goals. It will also allow management to identify an even greater number of cost reduction actions that can be taken to achieve the goals, as oftentimes it is the employees that are closer to the day to day business activities. Once clearly defined goals have been established, the cost reduction team should work to establish and execute on a prioritized list of cost reduction projects or actions that will be completed to achieve the goals.

Management Participation and Review

A good cost reduction program requires active participation by management and staff. Management must work with its employees to establish appropriate cost reduction goals and objectives. Management should also work with its employees to periodically review progress toward these goals (i.e. weekly or monthly). Additionally, they should work to create an environment that promotes creative cost reduction ideas and rewards employees for taking educated risks in this area. Cost reduction must also be made a priority to the company. Management should be committed to the cost reduction program and employee performance reviews should incorporate evaluation in this area. Employees should be rewarded for achieving results in cost reduction just like they would be rewarded for achieving results in other areas of the business such as product development, sales, etc.

Having a comprehensive cost reduction program in place for your business can lead to a 10% to 20% increase in company profits. If you would like to learn more about cost reduction programs for your business please give us a call! We can be reached at (480) 980-3977.

Federal tax credits can help you pay part of the cost of running your business. Many businesses overlook them each year, even though they often qualify for one or more of these credits. Though both tax deductions and credits can save businesses money, they do it in different ways. A deduction lowers the income on which tax is figured, while a credit lowers the tax itself! An additional benefit of the credit is that in many cases, it can be carried-forward from prior years as well as carried back from later years to lower taxes.

There are many general business credits available, covering a wide variety of initiatives, such as alternative energy and employer pension plans. Here are few credits that may apply to your business:

Transportation

Alternative motor vehicle – This credit is for alternative motor vehicles that you placed in service during the tax year. An alternative motor vehicle is a new vehicle that qualifies as one of the following four types of vehicles: qualified fuel cell motor vehicle, advanced lean burn technology motor vehicle, qualified hybrid motor vehicle, or qualified alternative fuel motor vehicle. The maximum allowable credit varies by vehicle, make, and model.

Alternative fuel vehicle refueling property -This credit applies to the cost of any qualified fuel vehicle refueling property you place in service. Qualified alternative fuel vehicle refueling property is any property (other than a building or its structural components) used to store or dispense an alternative fuel into the fuel tank of a motor vehicle. The credit for all property placed in service at each location is generally the smaller of 30% of the property’s cost or $30,000.

Biodiesel and renewable diesel fuels – This credit applies to certain fuels sold or used in your business. Those fuels include: Biodiesel, Renewable diesel, Biodiesel mixture, Renewable diesel mixture, and Small agri-biodiesel producer. The credit ranges from $0.10 to $1 per gallon of fuel produced or used.

Employees and Customers

Employer-provided childcare facilities and services – This credit applies to the expenses you pay for employee childcare and childcare resource and referral services. Qualified childcare expenditures are amounts paid or incurred to acquire, construct, rehabilitate, or expand property that is to be used as part of a qualified childcare facility of the taxpayer. This credit is 25% of the qualified childcare facility expenditures plus 10% of the qualified childcare resource and referral expenditures paid or incurred during the tax year. The credit is limited to $150,000 per tax year.

Small employer pension plan startup costs – This credit applies to pension plan startup costs for a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension. This credit equals 50% of the cost to set up, administer the plan, and educate participants about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. The credit can be carried back or forward to other tax years if it cannot be used in the current year.

Work opportunity – This credit provides businesses with an incentive to hire individuals from targeted groups that have a particularly high unemployment rate or other special employment needs. An employee is a member of a targeted group if he or she is a: long-term family assistance recipient, qualified recipient of temporary assistance for needy, families (TANF), qualified veteran, qualified ex-felon, designated community resident, vocational rehabilitation referral, summer youth employee, food stamp recipient, or SSI recipient. This credit ranges from 25% to 50% of the wages paid during the first two years of employment.

Empowerment zone – You may qualify for this credit if you have employees and are engaged in a business in an empowerment zone or renewal community for which the credit is available. The credit amounts to 20% of the employer’s qualified wages (up to $15,000) paid or incurred during calendar year on behalf of qualified empowerment zone employees. Parts of Tucson, Arizona qualify as empowerment zones.

Disabled access – This credit is for an eligible small business that incurs expenses to provide access to persons who have disabilities. You must pay or incur the expenses to enable your business to comply with the Americans with Disabilities Act of 1990. The credit can range from $125 to $5125. Eligible access expenditures include amounts paid or incurred:

• To remove barriers that prevents a business from being accessible to or usable by individuals with disabilities
• To provide qualified interpreters or other methods of making audio materials available to hearing-impaired individuals
• To provide qualified readers, taped texts, and other methods of making visual materials available to individuals with visual impairments
• To acquire or modify equipment or devices for individuals with disabilities

Technology

Increasing research activities – This credit is designed to encourage businesses to increase the amount they spend on research and experimental activities, including energy research. This research must be undertaken for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component of the taxpayer. This credit varies with calculation method.

Energy efficient homes – This credit is available for contractors of qualified new energy efficient homes, as well as reconstruction and rehabilitation of existing homes, whose construction is substantially completed before 2009. The homes are required to be certified to meet certain energy saving requirements. The credit is either $2,000 or $1,000 depending on whether or not the dwelling unit that is certified to have an annual level of heating and cooling energy consumption at least 50% or 30% below the annual level of heating and cooling energy consumption of a comparable dwelling unit and has building envelope component improvements that account for at least 10% of the 50% reduction in energy consumption.

Renewable electricity, refined coal, and Indian coal production – This credit is for the sale of electricity, refined coal, or Indian coal produced in the United States from qualified energy resources at a qualified facility. Generally, the credit is 2.5 cents per kilowatt-hour (kWh) for the sale of electricity produced by the taxpayer from qualified energy resources at a qualified facility during the credit period, which can range from 5 to 10 years. The 2.5 cents credit amount is reduced by 50% for open-loop biomass, small irrigation, landfill gas, trash combustion, and hydro-power facilities. The credit is $7.173 per ton for the sale of refined coal produced at a qualified facility. The credit for the sale of Indian coal produced at a qualified facility applies to the 12 year period beginning in 2006.

Each year, many businesses will overlook tax credits, even though they often qualify for one or more of them. There are many general business credits available covering a wide variety of initiatives! As with many government programs, there are some rules that you need to comply with in order to qualify, however, these can be managed with a little research and planning. So take a closer look at these federal tax credits, they can really impact your company’s bottom line!

Please let us know if you would like to discuss these tax credits or any other financial, accounting or tax issue further. We can be reached at (480) 980-3977.

How does a good accounting system increase your company’s likelihood of staying in business and earning larger profits?

It helps you answer questions like these:

How much business am I doing and how much of that business is tied up in receivables?

A good accounting system will not only help you track your company revenues, it will help you track how much cash is actually being collected on those revenues. Closely monitoring your collection of accounts receivable is critical to good cash flow management for any business. An effective system will also help you determine what your losses from credit sales were, who owes you money, who is delinquent and who you should continue to extend credit to.

How much cash do I have in the bank? How much is my investment in merchandise? How often do I turn over my inventory? Have I allowed my inventory to become obsolete?

A solid accounting system will give you a complete picture of your company’s assets. It will also tell you if you are utilizing your company assets efficiently. A good system will tell you your cash position at any point in time. It will also tell you how much inventory you are carrying, the makeup of the inventory you have, and how quickly it is turning over.

How much do I owe my suppliers and other creditors?

Knowing how much you owe your creditors and when those bills need to be paid is key to managing your company’s cash flow. It can help you take advantage of favorable credit terms with your suppliers, as well as avoid late payment penalties. It will also help you to maintain strong relationships with those same suppliers.

How much gross profit did I earn? How much profit did I earn and what are my resulting taxes?

Profit: it’s why most business owners are in business. Knowing your company’s gross margin and profit margin is key to having a sustainable business, putting cash in the bank, and paying your taxes. Also, since these are common measurements across many industries, knowing these metrics for your business will allow you to compare your company’s performance to competitors in your industry, as well as best in class in other industries.

What were my expenses, including those not requiring a cash outlay?

This is critical to effectively managing your business and earning a profit. You need to know what your current expenses are in total, as well as the major drivers of those expenses. It is also critical to know how those expenses have changed over time and what they are forecast to be in the future as your company grows.

What is my weekly payroll? Do I have adequate payroll records to meet the requirements for worker’s compensation, social security, unemployment insurance, and withholding taxes?

Having employees that enjoy coming to come to work each day is key to having a productive company. Your employees are depending on you to handle their payroll accurately and on a timely basis. So, keep your employees happy and get your payroll right the first time. Your company’s profitability depends on it.

What is my capital position? How much of my assets would be left after paying my creditors?

Knowing what your company is worth today and what it will be worth in the future will help you to ensure that your company is on track to achieve its short term and long term goals. It will also help you focus on those items in your business that increase its value over time. Furthermore, it could help you position the company for a sale or public offering if that is in your plan.

Are my sales, expenses, profits and capital showing improvement? Did I do better than last year?

If your company’s financial position is not improving, you need to know what is driving it. Being able to analyze the financial performance of your business on a monthly basis will help you understand how your company is changing over time. It will also help you identify those problem areas early on rather than later, so that you can make minor course corrections in your business to stay on track with your goals.

On what line of goods or in what departments am I making a profit?

For companies that provide several products or services, this can be very important. Oftentimes, there will be products or services your provide that are very profitable and others that are not. Knowing the breakdown of these products and services in your portfolio of offerings can help you determine which products or services to provide more of when you are resource constrained.

A good accounting system should be able to answer all the questions above and more. If your not getting this kind of information out of your accounting system on a regular basis, maybe it’s time for a change. If used effectively, a good accounting system can significantly increase your company’s likelihood of staying in business and earning larger and larger profits.

Please let us know if you have questions concerning good business accounting systems or any related topics, we can be reached at (480) 980-3977!

Covid-19 has significantly impacted businesses throughout the United States in many different ways, from government mandated shutdowns to significant decreases in customer demand and disruptions to business supply chains.  In an effort to reduce the economic impact of Covid-19, the Internal Revenue Service has recently introduced three important new tax credits available to US businesses with a focus on main street business and employee retention.  These new tax credits include the:  Employee Retention Credit, Paid Sick Leave Credit and the Family Leave Credit.  Business owners will want to take advantage of these credits in the next few quarters to improve their business performance and support their employees.

Employee Retention Credit:
The employee retention credit is designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.

The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans such as the Paycheck Protection Program (“PPP”) or the Economic Impact Disaster Loan (“EIDL”).

Qualifying employers must fall into one of two categories:

• The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
• The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

Employers will calculate these measures each calendar quarter and take the tax benefit each calendar quarter until the $10,000 limit is reached or they no longer qualify for the credit.

Paid Sick Leave Credit:
The paid sick leave credit is designed to allow business to get a credit for an employee who is unable to work (including telework) because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis. Those employees are entitled to paid sick leave for up to 10 days (up to 80 hours) at the employee’s regular rate of pay up to $511 per day and $5,110 in total.

The employer can also receive the credit for employees who are unable to work due to caring for someone with Coronavirus or caring for a child because the child’s school or place of care is closed, or the paid childcare provider is unavailable due to the Coronavirus. Those employees are entitled to paid sick leave for up to two weeks (up to 80 hours) at 2/3 the employee’s regular rate of pay or, up to $200 per day and $2,000 in total.

Family Leave Credit:

Employees are also entitled to paid family and medical leave equal to 2/3 of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the family leave credit.

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.  This is a significant benefit to employers allowing them to immediately benefit from this tax incentive.

Eligible employers are entitled to immediately receive a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave, for the period of April 1, 2020, through Dec. 31, 2020. The refundable credit is applied against certain employment taxes on wages paid to all employees.

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.

Covid-19 has significantly impacted businesses throughout the United States in many different ways, from government mandated shutdowns to significant decreases in customer demand and disruptions to business supply chains. In an effort to reduce the economic impact of Covid-19, the Internal Revenue Service has recently introduced three important new tax credits available to US businesses with a focus on main street business and employee retention. These new tax credits include the: Employee Retention Credit, Paid Sick Leave Credit and the Family Leave Credit. Business owners will want to take advantage of these credits in the next few quarters to improve their business performance and support their employees.

Please let us know if you have questions concerning these new tax credits  or any other tax compliance or planning issues, we can be reached at (480) 980-3977!

In these very challenging and uncertain times many companies struggle to maintain focus, and control of their businesses. All too often, these companies become paralyzed by the uncertainty in their markets. In many cases, their lack of decision making, results in the market making the decisions for them and a business closure. The need for sound financial management is even more important during these times. There are several things companies can do to manage and thrive in challenging markets. Here are a few items you may want to consider to help your company maintain its bearing.

Preserve Cash

Preserving cash is critical in these challenging markets. Deferring expenses and delaying non-critical capital purchases can help to preserve cash. Renegotiating payment terms with vendors to extend loan terms and lower monthly payments can also help preserve cash. Companies should also focus on making their expenses more variable so that they pay more when their sales or usage is higher and pay less when their sales or usage is lower. Some examples of this are putting more employees on commission or an hourly rate vs. salary, renegotiating pricing with your vendors to buy on a usage/per unit basis versus a fixed price contract. Another example is paying for such things as insurance and maintenance on a monthly basis instead of an annual or quarterly basis.

Reduce Costs

Cost reduction is key in these markets, companies should perform a Pareto Analysis to evaluate the key drivers of their spending. They should then work to eliminate all non-critical expenses and reduce critical expenses. Many companies don’t’ realize what they can do in this area, until they really scrutinize their spending and challenge existing norms. Only spend money on those items that lead to immediate sales profitability and cash flow for the company. Companies should also evaluate their overall operating/manufacturing efficiency during these times. This starts with having clear objectives and good performance tracking capabilities. Companies should identify the underperforming equipment or people and improve their performance or eliminate them.

Update Financial Plans

Updating financial plans can really make a difference in challenging markets. These plans help you to maintain focus and priorities, when the environment around you is changing rapidly. Financial plans that include sensitivity analysis help you determine what your course of action will be under best case, worst case, and most likely case scenarios. These plans help you proactively manage your business instead of being forced to react quickly to changes in your market. These plans help you understand your cash flow today and in the future. They also help you obtain the cash you need before you need it. These plans also help you understand what your financial ratios look like under each of the scenarios and whether or not you are getting close to violating any loan covenants with your bank.

Communicate

It is important to keep the lines of communication open with your vendors and lending institutions. Let them know what is going on with your business and how you plan to proactively maintain control of the situation. If your vendors and bankers do not hear from you, they can often assume the worst and may take aggressive action to collect any outstanding debt. The more these partners understand your business and believe you will be successful, the more likely they are to work with you in these tough times. Furthermore, in challenging times you may want to consider restructuring your debt with your bank to extend loan terms and lower your monthly principle and interest payments.

Depending on your financial condition, some banks may be willing to allow your business to make interest only payments for a period of time to allow you to weather a downturn in your market. Other banks may consider lowering interest rates on outstanding debt for a period of time to allow a business to bridge a downturn. Still other financial institutions may allow a business to refinance assets to free up cash that can be used to support a business in a difficult market.  You may also want to consider applying for SBA loans to help you get through these challenging  times.  These loan programs come in a variety of shapes and sizes from the traditional 7a and 504 loans to the Economic Injury Disaster Loan and the Paycheck Protection Program Loan.

Continue to Market/Sell

Continuing to market and sell in a challenging market is critical. Many businesses allow challenging markets to distract them from this important part of the business, especially if the business is downsizing its staff during these times. It is important to continue to support existing customers while looking for new opportunities to sell your products and services. Take a proactive role in driving new business; do not wait for the business to come to you. It is the businesses that are able to identify new markets for their products and services that survive these challenging markets.

Conclusion

By implementing these ideas, you have the cash you need to sustain your business in these markets; you have a much better focus on your priorities for the coming months. You also have a lean organization able to adapt to its dynamic market, you have business partners that understand your business and believe in your success and you have a team that is motivated and driven to bring in new business even when the road gets rough. Implementing the ideas listed above can have a very positive impact on your business! You may even find that you pick up a few customers from your competitors that are less savvy in financial management!

Please let us know if you have questions regarding financial management in a challenging market or any other financial, accounting or tax planning issues.  We can be reached at (480) 980-3977.

The goal of most business owners is to increase the value of their company. However, in many cases this discussion does not arise until the business owner decides it’s time to sell the company. In most cases, this is too late in the game to have the discussion. Business owners that focus on building shareholder value throughout the life of their companies will create healthier more profitable companies than those that do not. In many cases, these healthier companies will in turn, lead to stronger economies, higher living standards and more career opportunities for individuals.

In the real market, you create value by earning a return on your invested capital greater than the opportunity cost of capital. The more you invest at returns above the cost of capital the more value you create (i.e. growth creates more value as long as the return on capital exceeds the cost of capital). Business owners should select strategies that maximize the present value of expected future cash flow or economic profit.

There are two key drivers of company value: the rate at which the company is growing its revenues, profits and capital base and the return on invested capital (relative to the cost of capital). These value drivers make common sense. A company that earns a higher profit for every dollar invested in the business will be worth more than a similar company that earns less profit for every dollar of invested capital. Similarly, a faster growing company will be worth more than a slower growing company if the both are earning the same return on invested capital.

If we look at the key drivers of company value more closely, here is what we find:

Profit Margin: This reflects the portion of revenue that remains as profit after paying operating costs, such as manufacturing costs, R&D, sales, general and administrative etc.

Asset Productivity: This term refers to the amount of Revenue that you generate from each dollar invested into Operating Assets (i.e. Revenue/Operating Assets). These assets may include such things as property plant and equipment. The more productivity we get out of existing assets or the same productivity we get from fewer assets, the higher the return on invested capital. This higher productivity typically leads to higher revenue, profits and company value.

Growth: A growing company and a stream of cash are worth more to investors than if it were constant or declining. Profit growth is what’s important; a growing company has the opportunity to generate more profits faster and as a result receives a higher value.

Profit Margin

There are two fundamental ways to improve profits: increase revenues and or reduce costs. Increasing revenue can be done by:
Strengthen pricing: Success here may mean charging more, holding prices flat, or even slowing price declines. When increasing prices with a repeat customer, you will often need a compelling business reason, such as fuel cost pass-through, severe supply shortages, or a breakthrough new product feature. Analysis on competitor’s prices and your product advantages/disadvantages can give you a solid footing in price negotiations. If you have a large number of customers (like a retail store), you can experiment with different prices to see the impact on sales volume and then set prices to optimize profits. Some customers are willing to pay more than others, and you should look for ways to set different prices for these different customers.

Optimize Product/Customer Mix: Some products are more profitable than others. Likewise, some customers are more profitable than others. When your operations are constrained (e.g. by manufacturing capacity or personnel), you may want to cut low-profit products and customers to make room for high-profit ones. Be careful here not to shoot your golden goose by losing a key customer that you will need later on.

Reduce Cost
To reduce your product/service cost, set specific goals and incentivize your employees to achieve them. You may set a goal to reduce manufacturing spending by $1M and then pay out $100K in incentive if the goal is achieved. Set goals and incentives each period, and make it a part of your company culture and a point of pride. To help seed cost reduction efforts, identify your largest cost drivers (like raw materials, rent, utilities, and labor), break up the spending categories, and assign a team to each area.

R&D spending is another important focus area for improving profit margin and in turn company value. There are two things to consider when optimizing your R&D investment – setting the right budget and managing R&D productivity. To set the right R&D budget, start out by looking at how much other companies in your industry spend as a percentage of revenue. If your industry spends 10% of revenue on R&D, then this may be a reasonable starting point for your spending. If you have a high growth business relative to your industry, your spending may need to be a larger percentage of revenue. R&D productivity should reflect the quality of the R&D projects that are funded (i.e. are you funding worthwhile projects), speed (i.e. are you getting new products to market quickly), and efficiency (i.e. was the cost reasonable).

Optimizing SG&A spending is an important part of improving profit margin and growth. It is about setting the right spending budget and managing and rewarding productivity. You can again get started by looking at how much other companies in your industry spend as a percentage of revenue and then back into your implied spending level. Define your processes; identify value add steps; and eliminate all other steps. This approach often yields 30% cost improvements. Look to optimize sales, determine what a sale is worth to the company; consider the incremental revenue; the longevity of the revenue stream; and the cost to produce, deliver, and support the product volume. Ensure that sales compensation is heavily commissions based. This helps align incentives, but it also helps ensure that you are not investing more in sales than what you are getting in return.

Asset Productivity

Look separately at assets that are directly involved in generating revenue (like factories or delivery trucks) and those that are not (like office buildings). For revenue generating assets, look for opportunities to increase output. You may be able to stagger employee break time to keep equipment running; identify your bottleneck assets and improve their availability; or start running a facility 24 hrs a day. There are probably hundreds of ways to improve here, so think of this as continuous improvement rather than a one-time effort.
If you have assets that are not being effectively utilized 90% of the time, you may want to consider selling them.
For assets that don’t directly drive revenue, look for ways to eliminate waste. For example, what would it take to consolidate from three buildings to two? Does every employee need their own desk, or can frequent travelers share a few community desks? What if employees worked from home once per week? Can you use cubicles instead of offices? What about outsourcing some services to save cost and reduce assets?

Growth

Growth is a powerful lever for improving company value. Simply put, a growing stream of cash is worth more than if it were constant or declining. Driving growth requires time, motivation, and resources. The best way to manage for business growth is to assign an individual or team to focus on it, free up necessary resources, set goals and incentives, and hold the team accountable. Good ideas will never materialize without proper growth management in place. Once your highly motivated and skilled team is ready to embark on their mission, looking at your products and customers is a good place to start.

Sell more of your current products to your current customers
Sell your current products to new customers who are similar to your current customers.
Sell adjacent products that leverage your core strengths
Partner with a complementary business in a way that is mutually beneficial. For example, each company may introduce the other to their customers in order to grow revenue for both companies.
Advertise through the right channels. Where and how are your target customers being educated on products that you sell, and how can you advertise there?
Some businesses suite themselves well to a sales-force, either internal or contracted. The gauge is whether a sale brings in enough profit to afford the sales commission. If your business model can afford to send sales reps out after new customers, this can be a powerful sales approach.
If your product or service could enhance the offering of other companies, you should consider licensing your product.

Conclusion

The goal of most business owners is to increase the value of their company. Increasing focus on the rate at which the company is growing its revenues, profits and capital base and the return on invested capital is critical to driving business value. Business owners that focus on building shareholder value throughout the life of their companies will create healthier more profitable companies than those that do not. In many cases these healthier companies will in turn lead to stronger economies, higher living standards and more career opportunities for individuals.

Please let us know if you have questions regarding business value creation or any other financial, accounting or tax planning issues.  We can be reached at (480) 980-3977.

Business owners, just by their very nature, are greater risk takers than the average person on the street. In many cases, the process of starting a business requires that the entrepreneur put a significant portion of everything they have worked for on the line, based on a belief that their efforts will lead to success. Furthermore, once the risk of starting up is over, other risks, with the potential of even greater opportunity, continue to entice business owners.

Large contracts, new products, acquisitions and expansions into new markets are just a few of the risks. These opportunities along with increased competition are just some of the reasons entrepreneurs need to take a serious look at placing the business at risk again and again. Much of the research about appropriate risk taking, warns against overconfidence, that biases in human behavior against risk might lead business owners to overstate the likelihood of a project’s success and minimize its downside. Such biases were certainly much debated during the financial crisis.

Often overlooked are the behavioral forces, company structures and reward systems that lead businesses to become risk averse or unwilling to tolerate uncertainty even when a project’s potential earnings are far larger than its potential losses. The profit forgone by choosing a safer alternative, putting less money at risk with a shorter time to payoff could result in underinvestment that would ultimately hurt company performance, share-holder returns and the economy as a whole.

Mitigating risk aversion requires that companies rethink activities associated with investment projects that cause the bias, from the processes used to identify and evaluate projects to the structural incentives and rewards used to compensate employees. Much of the typical risk aversion related to smaller investments can be attributed to a combination of two behavioral biases. The first is loss aversion, a phenomenon in which people fear losses more than they value equivalent gains. The second is narrow framing, in which people weigh potential risks as if there were only a single potential outcome instead of viewing them as part of a larger portfolio of outcomes.

Reduce the Effects of Risk Aversion

Diversify Risks Across Multiple Projects

If the same employee faced not one decision but five, the story would change. The employee’s range of outcomes would no longer be an all-or-nothing matter of success or failure, but instead a matter of various combinations of outcomes, some more successful, some less. In other words, combining risks can lead to a striking reduction in risk aversion.

Evaluate employee performance based on a portfolio of outcomes, not single projects.

Wherever possible, employees should be evaluated based on the performance of a portfolio of outcomes, not punished for pursuing a more risky individual project. Reward skill, not luck. Companies need to better understand whether the causes of particular successes and failures were controllable or uncontrollable and eliminate the role of luck, good or bad, in structuring rewards for project owners. They should be willing to reward those who execute projects well, even if they fail due to anticipated factors outside their control, and also to discipline those who manage projects poorly, even if they succeed due to luck.

Promote an organization-wide attitude towards risk that guides individual decisions.

Encourage employees to explore innovative ideas beyond their comfort levels, ask for project ideas that are risky but have high potential returns. Encourage further work on these ideas before formally reviewing them. Require employees to submit each investment recommendation with a riskier version of the same project with more upside or an alternative one.

Consider both the upside and downside.

Business owners should require that project plans include a range of scenarios or outcomes that include both failure and success. Doing so will enable project evaluators to better understand their potential value and their sources of risk. In many cases,downside risks are seldom fixed. If you look at the opportunity creatively and objectively, there are often ways to decrease the downside and reduce the risks. The range of scenarios evaluated should not simply be the baseline scenario plus or minus an arbitrary percentage. Instead, they should be linked to real business drivers such as penetration rates, prices, and production costs. By forcing this analysis, business owners can ensure that the likelihood of a home run is factored into the analysis when the project is evaluated and they are better able to thoughtfully reshape projects to capture the upside and avoid the downside. One rule every business owner needs to follow, if you do not have the time to determine what the downside is, pass on the opportunity.

Have a Contingency Plan

Even though the majority of time and effort spent evaluating an opportunity will not, and should not, be directed towards the downside, it is important to have a back-up plan. The contingency plan needs address how the company would recover in a worst case scenario. From there, a step-by-step plan can be designed. The major value of having a contingency plan is that if the ship starts sinking, benchmarks and plans to take action have already been devised. A contingency plan can also help keep the business focused on going forward with the knowledge that a back-up plan is in place.

Utilize Your Trusted Advisors

At times like this, you need to rely on the opinions of your advisors. Talking to the company’s accountant, banker, attorney, or other business people can provide a wealth of information based on their professional or life experiences. The purpose of listening to these individuals is not necessarily to do what they say, but to build a foundation of information upon which to base the decision.

Monitor Your Results

Compare your actual results to your projected results on a regular basis. If the project is not going according to plan, understand what is causing the diversion and take action to correct it as soon as possible. Also, understand at what point you begin execution of your contingency plans. Monitoring project results on a regular basis can allow you to identify when a project is not on track and gives you the time to make the necessary course corrections to get it back on track.

Business owners, just by their very nature, are greater risk takers than the average person on the street. However, often overlooked are the behavioral forces, company structures and reward systems, that lead businesses to become risk averse or unwilling to tolerate uncertainty even when a project’s potential earnings are far larger than its potential losses. The profit forgone by choosing a safer alternative, putting less money at risk with a shorter time to payoff could result in underinvestment that would ultimately hurt company performance, share-holder returns, and the economy as a whole. Utilizing techniques to encourage employee risk taking, evaluating performance on a portfolio of outcomes, considering a project’s upside and downside, having a contingency plan, utilizing your advisors and monitoring performance, can have a significant impact on a business owner’s ability to effectively manage risk.

Please contact Pinnacle Business Solutions if you have questions concerning managing business risk or any other financial or business planning issues.

Business credit cards have been around for many years, but only recently explicitly targeted true entrepreneurs by offering special financing incentives. Now, major credit card issuers are going after the small business market with a diverse array of credit card products. What isn’t explicitly stated in most credit card offer’s is the fact that business owners can leverage startup and working capital. Furthermore, streamline the buying process for essential business purchases. They may also provide capital solutions for new employees who do not have sufficient personal credit to cover their business expenses.

Credit Card Overview

Credit Cards Can Help Extend Company Cash Flow

For businesses that rely on consistent cash flow for supplies or contractors, a business credit card that can aid in purchases before invoicing customers is ideal. For example, a computer manufacturer may use a credit card at the beginning of the month to buy materials from its computer parts supplier and then pay the card off when the statement comes at the end of the month and its customers have paid for their computers. This way money paid out by the company does not need to come from the computer manufacturer’s cash accounts.

Credit cards offer flexible credit limits, some include fairly generous spending limits while other have no preset spending limits. If your business spending needs increase dramatically due to inventory purchases, a credit card with a flexible spending limit can give you the short term working capital you need to continue doing business. Credit cards can also help businesses on the record keeping side, which is crucial for proper business management. Credit card statements, particularly year end statements, report spending by category which will help the business managers monitor their spending more closely. Having these statements will also make it easier for your CPA to prepare your business tax return.

Credit Card Solutions

Business credit cards come in a variety of sizes and shapes. There are small business credit cards, company credit cards and corporate credit cards offered by the major issuers of Visa, MasterCard and American Express. In general, small business credit cards are targeted at privately held small businesses with less than 100 employees. The unique characteristic of these cards is that they are most often guaranteed by the employee, the business, and the business owner or principal of the firm.

Company credit cards are targeted at companies that have been in business for 2 to 3 years, and are consistently generating revenue and profitability or have a higher net worth (i.e. greater than $1M). These cards are often guaranteed by just the employee and the business. There are also company credit cards available that only have to be guaranteed by the business. However, the company will have to secure the combined credit limit on these cards with some type of collateral such as cash or certificates of deposit held in an escrow account at their bank.

Corporate credit cards are offered to Fortune 500 sized companies and are generally issued in the name of the corporation. As with the nature of corporate structure in American business law, the corporation is considered an individual, and the liability for repayment is placed upon the organization and not the individual using the card. The secondary responsibility between the company and its employees is set and enforced using human resource policies.

Credit Card Terms

Most credit cards contain terms and conditions that cover how the card can be used, what kind of charges the card holder will incur, and a preset monthly spending limit based on business credit history. That spending limit could range from $1,000 to $50,000 per card depending on the company. Some cards do not have a preset spending limit, however, the outstanding balance on these cards is required to be paid off each month.

Many cards charge the holder a fee to use the card such as an annual fee ranging from $0 to $200 per card. All cards come with a stated annual interest rate (or APR) which is charged on all outstanding balances that are carried over from month to month. Interest rates can range from introductory limited time annual interest rates of 0% to annual interest rates as high as 18% APR. Beware of credit cards that offer a very low introductory rate for a limited time, say the first six months, to get your business and then automatically convert to a regular APR of 15% to 18% after the six month period has ended.

Many credit cards offer rewards for making purchases. Rewards can take the form of travel rewards, discounts on autos/gas purchases, discounts on retail purchases, contributions to various types of savings plans and cash back. Cash back awards can range from 1% to 5% of the value of the purchases made.

Find The Card That Is Right For Your Business

Before you select a credit card for your business, ask yourself a few questions.

• How many cards do I need for my business/employees?
• What kind of purchases will my business make with the card?
• Where will my employees use the card; domestically or internationally?
• How much will my business charge on the card?
• Do I plan to pay the card off every month?
• Who will be responsible to guarantee payment of the outstanding balance on the credit cards?
• What credit card rewards could be most effectively utilized by the business?

Knowing the answer to all of these questions will help you determine which credit card solution will work most effectively for your business.

If used properly they can be quite effective in addressing a business owners startup and working capital needs and help streamline the buying process for essential business purchases. They may also provide capital solutions to new employees who do not have sufficient personal credit for business expenses and can even help businesses with their record keeping!