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.

  • For Michael, the Sales Manager, the forecasting process meant that he wasn’t locked into an unrealistic budget number developed six or more months previously, before economic factors, weather, or a turnover in the sales team became key factors – up or down.
  • At the same time, the Production Team headed by Steve, who was committed to maintaining a stable work force with a relatively level production rate year-round, could participate in the market assessment and make adjustments before some models sold out or others had to get stacked in the warehouse aisles.
  • In Amy’s Marketing Department, cause and effect were compressed. The need to anticipate what might happen opened the gates for data flow from everywhere – new customers, old customers, dealers, competitors, industry pundits – all of it hashed, rehashed, and digested over the conference table to segregate the programs that were working from those that were not.
  • Meanwhile, Mary, as Controller, never lost sight of the present view of the year-end bottom line. While she and the rest of the team members knew that a one-month data point didn’t describe a trend, they were all prepared to shift tactics, guided by the resulting forecast. The bank loved it.

Vanguard’s monthly management review routinely took four hours. By lunch time, all the managers had shared the outlook, and word quickly got passed to the other 50-60 employees. Financial management may not have been anyone’s cup of tea, but they all got very good at reading the leaves.

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

Draining the Swamp

When budgeting for your company’s payroll tax expense in 2009, keep in mind the following:

  • FICA tax = 6.2% on first $106,800 of annual earnings
  • FICA Medicare rate = 1.45% for every dollar of earnings
  • FUTA (Federal Unemployment Tax) = .8% on first $7,000 of earnings
  • SUTA (State Unemployment Tax) = 1.12% – 10.96% depending on company’s termination history

Broad-based budgeting guidelines for payroll taxes:

  • 12% of salaries and wages for January – April
  • 8% for May – October
  • 7% for November and December

Modify these rates based on your company’s wage and salary distribution, its SUTA rate, and the expectation of new hires during the year.