Howe's Bayou Brad Howe's monthly guide to navigating the swamps of small business financial management January 2009 Good morning and Happy New Year! The coming year can't be any worse than the past year, right? Well, hopefully — but not necessarily. How will you know where you're going to come out at December 31, 2009? Not by budgeting, but by forecasting. Not by making the tea, but by reading the tea leaves. There's a big difference. Best regards, Bradlee T. Howe Financial Managers Trust Reading the Tea Leaves It was 7:15 a.m. It was the second Wednesday of the month. I was in my car, heading to Portsmouth, RI and Vanguard Sailboat Company. Every month, for more than a dozen years until new ownership took over in April, 2007, I made the 75-minute trek to 300 Highpoint Avenue.And every month, without fail, starting at 8:30 a.m., the members of Vanguard's management team trooped into the conference room, each of them with PowerPoint locked and loaded, ready for the review and preview. Everyone knew the drill. Mary, the Controller, would present the income statement for the month just ended. No matter if the second Wednesday fell on the 8th, leaving only 5 working days to close the month, the financial statements were ready, and the dozen managers discussed every line of the results for the month, identifying and explaining the variances from what had been anticipated. Okay, you say, no big deal. A regular variance analysis of budget vs. actual. Lots of companies do that if they have the discipline and have made the investment in a budgeting process. It's a way of holding the management team accountable, as we described here last month. But the Vanguard managers were measured only in part against the budget. Of equal significance were their results against their forecasts. Each monthly meeting brought a reassessment of the outlook for the next three months. The Sales Manager's PowerPoint presented his "present view" of revenues for the next three months, based on orders in hand, reports from the field, seasonal historical trends, and so on. The Production Manager projected the number of each model of boat to be built in the coming three months based on the original budget, last month's forecast, plus equipment and labor capacity (including overtime) and materials availability. The Director of Marketing then provided an overlay of marketing and merchandising tactics and strategies for coming months as context for the unit sales forecast. Critical to the successful integration of the plans of the functional managers was the fact that they completed their updated assessments prior to the meeting and furnished Mary with their latest forecasts — not only for their spending, but for their anticipated results. Mary, in turn, was able to integrate these inputs, with the result that each month's management meeting aligned the tea leaves: all of the managers could see in the PowerPoint forecasts the implications of their latest collective decisions. Most importantly, everyone could see what that meant for the year-end results.
Alligator Bites "Yet another credit crunch casualty: venture capital firms, and potentially, their portfolio companies. The Wall Street Journal reports that VCs are seeing an increasing number of rebuffs, some borne of necessity, when they hit up their limited partners for dough (reader note: investors in private equity and venture capital funds do not remit the full amount committed at the closing of the fund, so these "capital calls" were contemplated in the partnership agreements)."The article mentions in passing that VCs suffered from missed capital calls in the dot-bomb era. Private equity funds did as well. I recall a partner in a PE fund of funds saying that nearly half the money committed to PE then was from wealthy individuals, many of them from Wall Street, and a large percentage of them were missing capital calls. "This then begs the question… of endowments selling their PE holdings, even though they are taking very big discounts to get out. Some readers suggested that they wanted to escape capital calls, particularly since the money was almost certain to be going to replace maturing debt (many of the recent deals had been done with a large component of short-term funding, and a fair bit is maturing now, just as interest rates for junk credits are super high). Given the high cost of exit, and the fact that (as the article describes) some high profile investors, such as Calpers, are adopting the "just say no" approach to capital calls, why aren't endowments doing the same? Are the endowments insufficiently tough-minded? "Indeed the Financial Times tells us the reverse side of this story, namely, that investors are ganging up on PE firms and telling them to forget about the idea of getting more money from them. This too parallels the VC experience in the dot-com bust, when funds were (effectively) told to shrink because the money crowd did not want to be putting more money into tech during a recession/post Y2K downturn." — by Yves Smith, posted on www.nakedcapitalism.com Draining the Swamp When budgeting for your company's payroll tax expense in 2009, keep in mind the following:
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 Managers' 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. 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 Newsletter developed by Blue Penguin Development |