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Good morning!
An inventory of some key financial issues among my
current
clients emphasizes once again that it is seldom a
brilliant
decision that makes the difference between profit
and loss.
Rather, it is the development of well-considered
financial
policies and procedures and their persistent
implementation
that leads to persistent profitability.
The challenge is to identify the basis of the issues in
order to
start rooting out the weeds.
Best regards,

Bradlee T. Howe Financial Managers Trust
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Rooting Out The Weeds
At the end of last week, with another rainy weekend
in
prospect, I had the following exchange of
emails with
two of my sons, ages 25 and 26, regarding our
scheduled
landscaping work-weekend at our summer home in
Maine:
Will: Given that the weather is looking
fantastically bad with rain on both days, are we
looking to
make the trip and shake our fists at the sky? Or
change tactics
and live to fight another day?
Dad/Brad: Rain? What rain? Of course
we're on.
[Terrible Weather Service Forecast follows.] Sounds
like a
perfect weekend to me. The dirt will be all soft and
diggable.
I'll have beer and cold cuts available for your arrival
around
9:30 p.m. Friday. Beef on the barbie on Saturday
eve? Howe
[sic] can we go wrong?
Chuck: Excellent! We'll shoot to leave by
7.
Everything you suggested — beer, beef, dirt
—
sounds right on. See you tonight!
Some personalities never change: the reader might
guess that
in Pop Warner football, Will was the quarterback
and Chuck
was the middle linebacker. I — no surprise
— was the unofficial coach.
In the years since then, I have been the unofficial
coach of
scores of small companies. As I grubbed around in
the good
Maine dirt last weekend, it occurred to me yet again
that
there are many parallels between growing healthy
plants
and healthy companies.
To avoid the obvious analogies, let me simply
mention current
work with several clients to weed and cultivate their
corporate
landscapes:
The Weeds:
- In our regular management meeting last week,
the ops
manager of a medical device manufacturer
acknowledged that there was an 8x difference in
productivity between two employees working on
the same
unit. Given the strong "measured pace"
culture in the
company, were we to establish the production rate
of the faster
employee as the standard, and hold the production
team
accountable, that employee would likely be
ostracized by the
group as a "rate-buster." The root of the problem
is the
lack of production standards in the company.
Weed out: Unproductive employees.
Management will establish challenging standards
and then
teach the production team how to meet them,
getting rid of
those who ultimately fail to measure up.
- A U.K.-based client with a Boston office
provides
international educational experiences to U.S. college
students and invoices the home universities for
tuition,
room, and board. Final payment is due 30 days prior
to
enrollment, but numbers of customers (the
universities)
are delinquent for up to 90 days
post-enrollment. A little
digging revealed that the sales-oriented partners of
the
company are reluctant to antagonize their customers
by holding
them to terms, even though every well-run university
in the
U.S. requires payment in advance of registration.
Weed out: Delinquent
customers. "Dear
Controller," starts the letter that will be sent next
week to
more than 50 colleges and universities, describing
a new
policy to improve the irrigation flow to my client's
own
"garden."
- A distribution company client has for
years
significantly volume-discounted its product prices to
maintain
its business with its largest customer (25% of its
business), in
turn benefiting from volume discounts from its
supplier. Recent
financial spadework, however, unearthed a gross
margin
(net revenue minus direct cost of goods) from this
customer
that is insufficient to offset the customer's indirect
costs.
Such costs include six-day-a-week delivery, special
packaging,
extensive daily telephone time (sales and
purchasing), plus
billing, collections and payables costs.
Weed out: Unprofitable customers.
With
the management team free to devote just a third of
its
freed-up time to more productive ends, the rest of
the
customer base will come to full bloom.
The Flowers:
- A Florida-based technology client lost its
Director
of Sales (and sole salesman) in February after his
six-month
battle with cancer. Reluctant to replace him while
there was
still hope, the Company lost revenue momentum and
will
report an operating loss for the first half of 2006.
As a
result of the Company's careful cultivation of both
customers
and suppliers over the years, however, the financial
team has
successfully managed the resulting short-term cash
crunch.
By offering accelerated payment discounts to
its
continuing customers and regularly informing its
stretched
vendors of its financial situation, the company has
avoided
lay-offs and has a full sales pipeline for the next six
months.
Cultivate: Every possible personal
relationship in the finance and accounting area of
both
customers and vendors. The lowliest accounts
payable
clerk occasionally can make the difference in your
receiving a
check tomorrow, or next week, or later.
- Together with the CEO of a pre-revenue
start-up
technology company, we have been involved in
developing
an integrated three-year financial projection —
income
statement, balance sheet, cash flow. This
spreadsheet file
incorporates the strategic and tactical assumptions
that took
root in management discussions. Changes in
revenue or
expense decisions in June '06 ripple through to the
cash
position for December '08 and validate the economic
model
and, potentially, the exit strategy.
Cultivate: A long-term financial
plan,
with written assumptions, quarterly reprojections,
and a
commitment to make the bottom line
happen.
- A local developer/builder of medium-priced
homes
has been a client for the past two volatile
years in the
housing industry. He hedges his risks by obtaining
long-term financing for land acquisition as well as by
getting
purchase commitments up front before his shovel
goes in the
ground. Equally important, his is a lean machine
—
four full-time employees generate high seven-figure
annual
revenues, as he out sources the bulk of the
hands-on work.
Cultivate: A periodic reassessment of
all of
your expenses, starting with personnel. If
protecting the
bottom line is the highest priority, you must
continually seek
ways of achieving your goals at less
expense.
On Boys' Weekend in Maine, weeding and cultivating
resulted in
our getting totally soaked and grubby on Saturday,
as
expected. But our efforts bore fruit: we survived to
see the sun
on Sunday, we completed our landscaping list, and I
solved my
clients' issues with every weed that I pulled.
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Alligator Bites
The best concise description of the process of growing a
company costs $6.00 and is available through Harvard Business
Online. More than twenty years ago, Neil Churchill and
Virginia Lewis published the results of their recent research,
identifying five distinct phases which characterized the
development path of a great number of smaller companies.
Published first by the Harvard Business Review in
May–June
1983, "The Five Stages of Small Business Growth" remains
a classic and has been one of the Review's all-time best
sellers.
For each stage — Existence, Survival, Success,
Take-off, and Resource Maturity — the authors
describe the key hurdles to be surmounted before the company
can successfully transition to the next stage. In particular,
they focus on Stage III, dividing this phase into
III-Disengagement and III-Growth.
At III-D, they say [in part], "the company has
attained true economic health, has sufficient size and
product-market penetration to ensure economic success, and
earns average or above-average profits…
Organizationally, the company has grown large enough to,
in many cases, require functional managers to take over
certain duties performed by the owner. The managers
should be competent but need not be of the highest
caliber, since their upward potential is limited by the
corporate goals."
On the other hand, for III-Growth, "the owner
consolidates the company and marshals resources for growth.
The owner takes the cash and the established borrowing
power of the company and risks it all in financing growth.
Among the important tasks are to make sure the basic business
stays profitable so that it will not outrun its source of cash and
to develop managers to meet the needs of the growing
business."
After identifying the attributes of successful Stage IV and Stage
V companies, Churchill and Lewis note that "the potential
entrepreneur can see that starting a business requires an
ability to do something very well (or a good marketable idea),
high energy, and a favorable cash flow forecast (or a large sum
of cash on hand). These are less important in Stage V,
when well-developed people-management skills, good
information systems, and budget controls take priority.
Perhaps this is why some experienced people from large
companies fail to make good as entrepreneurs or managers in
small companies. They are used to delegating and are not good
enough at doing."
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About Us
Financial Managers helps the managers of smaller
companies and non-profit organizations develop
reliable financial information for operational
decisions.
On an affordable retainer basis, FM serves as
the
part-time controller and senior financial manager for
multiple clients, leading them to profitability and
positive cash flow.
The goal is for the organization
to outgrow Financial Manager's services, at which
time FM will take the lead in identifying and hiring the
right full-time financial person for the firm, and effect
a smooth transition to his or her management.
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Financial Managers Trust
781-799-5737 | FAX 781-788-9794
PO Box 2 Lexington MA 02420
PO Box 1527 Fort Myers FL 33902
www.finman.com
To read our privacy policy click here. © 2006 Financial Managers Trust. All rights reserved.
Newsletter developed by Blue Penguin Development
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DRAINING THE SWAMP
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When you're up to your ears in old financial
records,
it can feel like a protective blanket — soft and
warm and
reassuring in case the IRS auditor ever comes calling.
But
quicksand, too, is soft and warm and reassuring, at
least until
it gets up to your ankles. If you're beginning to feel
the
undertow, here's the general guideline on records
retention from The Tax and Business
Alert:
| Record Type
| Retention Period
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| Copies of filed tax returns |
Permanently |
|
| Tax & legal correspondence |
Permanently |
|
| General ledger |
Permanently |
|
| Annual financial statements |
Permanently |
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| Contracts & leases |
Permanently |
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| Real estate records |
Permanently |
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| Corporate minutes |
Permanently |
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| Bank statements & deposit slips |
6 years * |
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| Sales records & journals |
6 years * |
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| Other records relating to revenue |
6 years * |
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| Employee expense reports & travel &
entertainment
records |
6 years * |
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| Cancelled checks |
3 years * |
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| Paid vendor invoices |
3 years * |
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| Employee payroll records |
3 years * |
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| Inventory records |
3 years ** |
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| Depreciation schedules |
At least asset's tax life plus 3
years |
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| Other capital asset records |
At least asset's tax life plus 3
years |
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| Other expense records |
3 years * |
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* From the later of the tax return due date or filing
date
** Longer if you use LIFO
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