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Finance & Accounting

September 2019: Fraud — Threat & Reality in your Business

By | Finance & Accounting, News

Contributor: Richard Kannan, Warren Whitney Finance & Accounting Director

The larger the company, the bigger the risk of fraud, right? Well, not necessarily. On a relative basis, smaller organizations may be at greater risk. The average fraud loss for companies with less than 100 Employees is $200,000, versus larger businesses where the average fraud loss is $104,0001. Fraud losses occur when there are NOT proper controls put in place. When small to medium-sized businesses have a leaner accounting team or one person with too much authority, they become vulnerable. The fact is that inadequate controls create opportunities for fraudulent activities.

American criminologist, Donald Cressey, developed the “Fraud Triangle” theory which explains the factors that can lead to fraud and unethical behavior as:

  • Opportunity (i.e. Lack of internal controls)
  • Pressure (i.e. Personal finances in jeopardy)
  • Rationalization (Reasoning decreases with #1 & #2)

The combination of these three factors can turn individuals you wouldn’t suspect into a fraudster. Fortunately, as business leaders, you can take control and identify the points of weakness to deter fraudulent activity. The critical element is identifying the vulnerable areas to address immediately by establishing the proper protocols.

INTERNAL CONTROLS

Half (50%) of all fraud cases in small businesses occur due to a lack of internal controls1. The below list of real-life scenarios exemplifies how easily it happens and how it can be prevented.

REAL LIFE SCENARIOS HIGHLIGHT VULNERABILITIES IN THE SYSTEM

Scenario #1: A checking account number was used to print checks made out to the fraudster. Checks were written to an account and all available funds were transferred out as soon as funds were available. The checks continued to be written until the bank caught on and stopped payment immediately. The fraudster disappeared with the money.

Lesson Learned: Bank controls would have prevented this from happening. Banks offer “Positive Pay” protocols which will not allow checks to clear unless the company registers the check number and amount. This simple and inexpensive control will prevent checks from being hijacked.

Scenario #2: A bookkeeper wrote checks to herself using familiar amounts to the owner (i.e. monthly truck payments, rent, etc.). She shared the account reconciliation with the owner every month. The owner, who trusted his bookkeeper, conducted only a cursory review.

Lesson Learned: A trusted employee scammed her employer in a clever way. This is where business owners need a clearly defined approach to reviewing checking accounts, reconciliation, and spending.

Scenario #3: A vendor’s email account was hacked. The hacker sent an email from the hacked account to the vendor’s client requesting a large payment along with new wiring instructions. The client did not question the email and the wire was sent to the fraudsters account and the money was lost.

Lesson Learned: Always confirm payment method changes. This may require a face to face discussion, or a phone call to a known member at the organization to confirm the changes.

Scenario #4: A CFO stole $500K over 2 ½ years by sending cash from the entity’s operating account to a PayPal account he controlled. The company had no reason to dispute PayPal since the transactions were on the bank statement. The CFO controlled the bank reconciliations and nobody reviewed them or the bank statements. The fraud survived two annual audits (proving you can’t expect auditors to identify fraud). The scheme was caught when the numbers got too big to hide.

Lesson Learned: Always review your company’s bank reconciliations. Your controller should have a clear listing of all the cash movement tools.

Scenario #5: A bookkeeper “borrowed” money from a small company by writing checks to herself instead of paying the payroll taxes. Because the bank statements were not being reviewed, nobody realized that the payroll taxes were not being paid. The bookkeeper was caught when the IRS sent notices for unpaid taxes.

Lesson Learned: A defined review/checklist of the bank reconciliations is critical. Be sure to include aged reconciliation items, names of payees, etc.

Scenario #6: A bookkeeper was making her car payments with a company debit card. She would open the mail and scan the bank statement. She then used PDF editing software to change the description from her bank account to a company vendor. She then presented the doctored bank statement to the owner for approval. No one could tell the statements had been altered.

Lesson Learned: Always print out the company bank statements and/or look up the balances online to confirm that the document is legitimate.

The overall lesson learned in these scenarios is not to give one-person complete authority of your banking transactions – establish procedures for checks and balances.

These simple, smart changes can enhance the leanest team’s internal controls:

  1. Implement “Positive Pay” with your bank accounts so that all checks are registered by check number and amount with the bank. Checks for varied amounts or non-valid check numbers will not clear.
  2. Review your checking account reconciliations – use a formal checklist to make sure you have the appropriate levels of review.
  3. Do not allow your bookkeeper to control credit or debit cards, regardless of how much you trust them.
  4. Add wire controls with the bank – all wires/ACH require two people – one to initiate and one to approve.
  5. Implement individual access passwords for each person for bank, ledger, investment account, credit cards, and PayPal.
  6. Never change payment information without directly confirming the change with the authorized person.

Warren Whitney’s team of Fractional CFOs and Controllers can assist your business to enhance your internal control environment. We have experience in helping businesses with limited accounting staff and strategically align with your goals and objectives.

To learn more about how to mitigate fraud in your business, contact Richard Kannan at rkannan@warrenwhitney.com or 804.282.9566

[1] Association of Certified Fraud Examiners, 2018.

July 2019: Financial Management for the Non-Financial Leader

By | Finance & Accounting, News

Contributor: Gene Gregory, Warren Whitney Finance & Accounting Director

Financial Management for the Non-Financial Leader

Whether you have just bought the company or have risen through the ranks, as the CEO, President, or Executive Director, you are responsible for overseeing operations, ensuring financial sustainability, and managing the organization.

If your career path has been in operations, business development or fundraising, you may feel your financial acumen is insufficient.  With this lack of experience, you question how can you be confident in your role and responsibility for financial sustainability.

This is not an unusual scenario.  The non-financial leader often carries this burden and can feel inadequately trained.  If this is what you face, below are recommendations to follow for your organization’s financial health.

  1. Internal Controls

Spend some time to make sure you understand how financial transactions flow through your organization.  Look for any concentration of duties or conflicts of interest that create risk.  Make sure there are clear lines of authority for all financial affairs; consider both the physical and virtual security of the organization’s assets. Remember assets may be “virtual”.

KEY POINT

“Cash is King”!  Embezzlement of cash is the most frequent means of misappropriation of an organization’s assets.  A simple monthly review of the bank statement might identify issues and, at a minimum, puts your staff on notice that you are paying attention to the details.

  1. Financial Reporting

Financial reports summarize your organization’s financial activities and position.  Your accounting department should produce consistent and accurate financial statements.   At a minimum, receive and review:

  • The monthly income statement that measures revenue and expenses.
  • The balance sheet that highlights assets owned, debts owed, and net equity.
  • The cash flow statement that shows how cash is being earned and used.

If your organization has significant accounts receivable, large capital expenses (building, equipment, etc.), or debt service requirements, the cash flow statement may tell a different story from the income statement.

Reviewing monthly and YTD income and cash flow statements will explain how the organization is progressing (or regressing).  Comparative statements showing current results and positions compared to past results and positions will identify trends.  Comparison to budgeted activities (see #3 below) will show how closely you are following your plan.  Ideally, your staff and system(s) can report activity at the “business unit” level that is important to your organization (i.e., division, location, department, program).

Make sure your reports are relevant to your needs.  External reporting likely requires financial statements prepared in accordance with the Generally Accepted Accounting Principles (GAAP); however, you may need a different view or format to make good business decisions.

  1. Budgets

Budgets are essential to good financial management because they project future revenue and spending.  Your budget should be your roadmap to operations.  Even if your operational managers lack budgeting experience, have them participate in the process.

Without a budget, your organization will “fly blind.”  The budget outlines your operational plan in terms of revenues and expenses.  How do your operations generate revenue? What is the expense structure of your organization?  Asking yourself these questions and reviewing the company’s past expenditures will help guide the process (Note- Units of sales or services usually have predictable revenue values).

As mentioned above, reporting financial results versus the budget shows how you are doing against your planned operation.  This comparison may indicate a need for greater skill in planning and budgeting or for a change in operations.

KEY POINT

  • Admit what you don’t know and seek help. Learn how to relate basic financial statements to your operation, mission, and financial health.
  • Make sure your leadership team and program managers can relate basic financial statements to the operation, mission, and financial health.
  • Your accounting staff must understand how operations work and why they are relevant.
  1. Outside Resources

Learn from the advisors who support your organization.

  • Your banker can share observations about your financial position. Banks offer many financial services, and you can learn a lot by investigating those services (even if you don’t adopt them).
  • Your audit firm will have a good financial perspective because they work with other similar organizations. While the practices of their other clients are confidential, they will have general observations they can share.  Many CPA firms offer newsletters and seminars on financial topics that impact industry, businesses, and operations.
  • Your payroll service provider (if you use one) is a good source for employment regulations.
  • Your benefits broker understands market trends for health, retirement, and other benefits. They may also be a resource for employment laws and regulations.
  • Your property, casualty, and liability insurance broker can provide a profile of organizational risk and suggest ways to mitigate it.
  • Investment managers have a perspective on the economic outlook that may be useful in organizational planning.
  • Peers from other organizations can provide their point of view and you may find shared solutions to issues.
  • Industry and community organizations may provide “capacity building” assistance for smaller organizations.
  • Professional associations offer industry learning opportunities.
  • Many, many more resources exist. Think about opportunities within your community.

Warren Whitney

Many of our clients have found that our accounting and finance professional offer an efficient and effective solution to financial management.  Our professionals work on an ongoing, part-time, fractional basis to provide a cost-effective way to supplement your finance function and build for the future. To learn more about financial management, please contact Gene Gregory at 804.977.6693 or ggregory@warrenwhitney.com

January 2019 Newsletter: Tips for Year-End Planning from our Fractional CFO.

By | Finance & Accounting

Ready or not for your year-end?  – And why do we ask in January?

Start at the beginning to be ready for the end.

Do you take your fiscal year-end preparation in stride, or do you dread it?  Whether your year end is December 31st, June 30th, or any other date, most likely you need to make sure your financial statements are ready for tax returns and, possibly, for auditors, bankers, and/or investors.  The best way to take it all in stride is to ensure you take the proper steps monthly and quarterly for minimal work at the end of your fiscal year.

Jill Swinger, Warren Whitney’s Director of Finance & Accounting, who serves clients in the roles of fractional CFO, interim assistant to the president / owner, provides the critical steps one should take throughout the year to ensure a smooth and painless fiscal year end.

Monthly:

  • First and foremost, perform a good review each month of the balance sheet and profit & loss statement while information is still fresh in your mind.
  • Run comparisons to budget and comparisons to prior year to identify variances that do not look right.
  • Review all general ledger activity.
  • Reconcile all the balance sheet accounts monthly, which will minimize year end corrections.
  • On monthly bank reconciliations, ensure there are no checks over 60-90 days that have not cleared the bank.  If there are, start calling vendors to see if they received check and re-issue as necessary.
  • Run an Accounts Payable detailed listing and make sure all bills are current.  Sometimes you have re-issued a payment for a lost check only to realize at year end that you haven’t taken care of the first payment that was lost or voided.
  • Review Accounts Receivable aging and take follow-up actions accordingly.
  • Record Investment activity monthly.
  • Make copies of any capital purchases and consolidate in either a capital expense profit & loss account or in a category of fixed assets on your balance sheet.

Quarterly:

  • Reconcile your wages paid to the 941 Employer’s tax form filed.  This will ensure that all taxable wages paid have been reflected properly on the 941.  If there are adjustments to be made, ensure you can correct before the annual W-2 Wage and Tax Statement are filed for employees.
  • Ensure that board and committee minutes required for annual audits are approved and filed.

Annually:

  • Make a reminder to review payroll adjustments necessary to be added to employees W-2’s for other taxable income.
  • Review listing of 1099 eligible vendors and ensure you have proper federal identification numbers.
  • If you are being audited by an outside firm, request a listing of documents needed in advance of field work.
  • If you need an annual inventory count, schedule the date and publish procedures.
  • Start a new filing system for the next fiscal year during the 2nd half of your last fiscal month, so that records can be kept separate right from the beginning.
  • Review your fixed asset listing for any items that you have disposed of during the year.

** Above all, ensure that you reconcile your bank statement monthly. **

A key point is to take corrective action while transactions are still clear in your mind.  It’s much harder to figure out adjustments if the details are fuzzy.

If you have any questions, reach out to Jill Swinger (804.282.9566 or jswinger@warrenwhitney.com )

*****

Learn more about Jill at www.warrenwhitney.com/jill-swinger/

 

October 2018 Newsletter: Fractional CFO of Goodwill

By | Case Studies, Finance & Accounting, Nonprofit

CELEBRATING WARREN WHITNEY’S 25-YEAR RELATIONSHIP WITH GOODWILL

Warren Whitney is proud of the over 25-year relationship we have enjoyed with Goodwill of Central and Coastal Virginia. While our relationship began with a series of various projects, it has deepened through the long-standing Fractional CFO role. Over the years, we have become an integral partner in Goodwill’s mission to “change lives by helping people help themselves through the power of work”. Goodwill’s workforce development services are designed to give people the life skills and job training they need in order to secure and maintain employment. As one of the first social enterprises in the U.S., much of Goodwill’s revenue is generated by people donating items such as: clothes, housewares, toys, electronics, furniture … even cars! Proceeds from reselling these items – as well as from contract services and philanthropy — allow Goodwill’s mission to become a reality.

Charles Layman, President and CEO of Goodwill of Central and Coastal Virginia, recently sat down with Stephanie Ford, Director at Warren Whitney, to dive deeper into Goodwill’s achievements and explore the role Warren Whitney has played throughout its journey of growth.

WARREN WHITNEY & GOODWILL

SF: Tell us about one of the biggest challenges Goodwill has faced and how Warren Whitney helped you overcome it?

CL: One of the biggest challenges we faced was having employees keep pace with the change in growth we were experiencing. As we hired individuals, they were often good for that particular timeframe in which they were hired. However, many didn’t have the bandwidth to take us to the next level. When we brought Warren Whitney Co-founder Scott Warren on as a fractional CFO, he gave us access to expertise we otherwise could not afford, and he took us to the next level without skipping a beat.

FRACTIONAL CFO & GOODWILL

SF: How did you know that the fractional CFO model was right for Goodwill?

CL: (1) A fractional CFO brought us a higher level of business expertise, acumen, and experience that we would not have been able to afford as a full-time expense. (2) The right fractional CFO becomes an integral part of the leadership team and strategic thinking. He or she has the ability to take our organization to a higher level and at a faster pace we otherwise wouldn’t have the capacity for, and help us to think strategically and broader.

SF: Why would you recommend a Fractional CFO?

CL: (1) The main factor is the level of experience and exposure offered in the business world. (2) The affordability of being able to bring in that high level of expertise into the organization. (3) A fractional CFO can be objective, non-emotional, and have a fresh perspective.

EVOLUTION OF WARREN WHITNEY’S ROLE AT GOODWILL

SF: How has Scott’s role evolved over the years?

CL: Scott has been involved with Goodwill in a number of engagements dating back to the 1990s. When we merged with the Hampton Roads Goodwill in 2006, consulting with Scott on new systems to improve efficiencies was instrumental as we began to manage a broader territory. These strategic discussions directed the transition as we smoothly doubled the size of our territory with limited resources. Soon after, Scott joined us as a Fractional CFO. His primary focus was debt and bond management, banking relations, cash flow, forecasting, and strategic planning. Now, in addition to that, he oversees Human Resources and IT.

THE BIGGEST VALUE IN WORKING WITH SCOTT WARREN

CL: The biggest value in having Scott Warren has been his integrity and ability to relate internally and externally; internally with our leadership team and board of directors, externally with our stakeholders. The fractional nature of his work also allows Scott to stay very involved in the community and keep his finger on the pulse of changes and opportunities that can benefit Goodwill.

ChamberRVA’s IMPACT AWARD

SF: We want to congratulate you on becoming a finalist in the “large organization” category for the 2018 ChamberRVA IMPACT AWARD. What makes Goodwill a good candidate?

CL: Goodwill gets people to work who have not been working. It is giving them the ability to become contributing citizens. We are supporting them to break barriers and move up the career ladder. Last year, over 2,000 people were placed in employment with Goodwill of Central and Coastal Virginia. When it comes to impact, we look at earnings of those people as compared to their dependence on subsidies. It builds the economy, their self-confidence, and self-esteem.

 

Leadership: Lessons Learned from the Trenches

By | Family Businesses, Finance & Accounting

G Herceg cropped

Contributor: Greg Herceg

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Organizations can only be as good as their leaders; even with top talent and sufficient resources, a lack of proper management and guidance can mean the difference between failure and reaching your full potential. Fortunately, regardless of the size, revenue, or industry of the business, some leadership skills are always applicable. This newsletters outlines five important lessons in leadership that were learned from the trenches.

1.  Build personal and trusting relationships.

The most important lesson I’ve learned in leadership is to build a strong team around you through developing deep, trusting relationships. Take an interest in really getting to know those who work around you and learn what makes them happy, whether it’s fishing on the weekends or a particular sports team. Show that you care by asking about your team members as individuals, not just as workers. Learn employees’ names even outside your department, ask about hobbies and interests, talk about their family, write personal thank you notes, or visit the hospital when someone is ill. Build trust by being fair and consistent, clearly expressing expectations, and never criticizing one manager to another, especially in front of your team.

2.  Learn each employee’s motivation “button.”

Motivating the employees on your team to perform their best is not one-size-fits-all. Build upon your personal and trusting relationships with your employees by learning what motivates each person. Some people work better with flexible scheduling options and being left to work independently on a variety of tasks, whereas others prefer structured timelines, stability, and regular updates. Showing appreciation, supporting community involvement, and a willingness to listen can also encourage loyalty and excellence from those who react positively to interpersonal workplace connections.

3.  Financial dashboards are a must.

Tracking a business’s financials is not a job exclusively for CFOs and Controllers; especially in marketing and sales divisions, leaders at all levels should keep a pulse of the financial health of the business. Departments may find it helpful to have visual aids such as charts displaying monthly, quarterly, and annual data to track financial trends, including revenue, operating income, net income, cash flow, and return on investment. Monitoring the business’s finances may also mean rolling up your sleeves and auditing a few invoices periodically, holding cash flow meetings, checking on the timeliness of invoicing and collections, and getting other departments involved when necessary. Rather than delegating all duties, leaders who are actively involved in the financials demonstrate that it should be a priority to both their team and the organization as a whole.

Leaders should also keep abreast of customer feedback and satisfaction. This can be tracked over time using customer surveys analyzing categories such as customer performance average scores, willingness to recommend percentages, and overall process ratings. Don’t be afraid to call customers yourself to resolve disputes and express your appreciation for their business.

4.  Update your strategic plan (and use it).

Your organization has gone to the great time and expense to create a strategic plan, but after it is written and bound it sits on a shelf and collects dust for the next few years. Sound familiar? Too often strategic plans are treated as a mile marker or a hurdle to tackle and move past on the way to success rather than as a map.

A good strategic plan re-energizes people around the organization’s mission, vision, and values. The plan outlines what the organization intends to accomplish over the longer term, how it will achieve that, and the specific goals it will address to move forward, including objectives, actions, key stakeholders, and time frames. Once complete, the strategic plan and progress on the plan should become a regular agenda item at board and staff meetings, forming the basis for annual budget and performance reviews, and acting as a platform for frank discussions about the company and your competition. Management should evaluate and refresh short-term initiatives annually, and create a new plan at least every three years to ensure that the organization stays on track and continues moving forward.

5.  Collaborate your way to success. 

One issue that can arise with a growing business is that it can be difficult to keep up with the demands of expanding into new markets. Whether it requires hiring more personnel, employee training, increasing capacity, or large capital investments, growth can put a strain on any organization and its resources. Consider leveraging your internal resources to collaborate and partner with other businesses on aspects of expansion that would be difficult for your company to accomplish on its own. Partnership opportunities could minimize risk by assisting with finances or providing education, training, or resources that will take your organization to the next level.

 

The Warren Whitney team is ready, able, and willing to help! We would welcome the opportunity to have a conversation about your organization.  Contact Stephanie Ford at sford@warrenwhitney.com or at (O) 804.977.6691 with any questions.

Financing Alternatives

By | Family Businesses, Finance & Accounting

Stepahnie

Contributor: Stephanie Ford

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Imagine this…. Your company is growing… you need capital to continue to expand… however, you’ve been turned down by three banks in a row.  Yikes!   Has this ever happened to you?

In my 12 years of experience as a commercial banker, the better prepared a business owner was for the request, the more likely they would receive financing.  Owners that came to me with a binder chocked full of financial statements, detailed reports, and maybe even a strategic business plan were impressive. Entrepreneurs that provided few concrete materials and simply shared a stream of consciousness of their ideas gave me little to work with.

How to position yourself to get funding for your business is critical in today’s tight credit markets. Preparing a request for financing should be taken seriously, and good preparation will yield better results. Here is a framework for thinking about your approach.

1Think hard about why you need to borrow.  Specifically identify the purpose and develop a business case for the need to borrow and repayment.  The best way to do this is to prepare monthly cash flow projections of sources and uses of cash.  This prediction of needs and surplus will help to identify how much you need to borrow and how quickly your business can repay the loan.  The purpose of your borrowing need will also help to determine what type of loan is best for your company, such as a revolving line of credit for working capital needs or a term loan for permanent improvements to real estate or equipment purchases.

2.  The more complete a package of information you can provide to the bank, the better.  If you have a business plan, share the entire plan with your banker.  In addition to 3 years of financial statements and tax returns, also include any other key reports that you use to run your business.  This may seem excessive, but even routine reports such as an accounts receivable aging and accounts payable aging aid in giving the banker insight to your customer management and diversification.  Be sure to share any key metrics that are valid for your industry, such as inventory turns, job costing reports, days to market, customer returns, utilization rates, etc.   Providing organizational charts and competitive industry details is also valuable.

3.  Just as important as preparing your loan request package, give serious evaluation to the bank and banker you want to work with.  In today’s market, financial institutions vary widely.  Consider what is important to you: branch convenience, technology and services, commercial focus and approval process, legal lending limit, ability for the bank to grow with you over time, etc.  Think about whether these needs are best met by working with a large national institution, a strong regional player, or a small community bank.  Once you have a sense of the type of institution that would best fit your business, research to determine the best contact at that bank for you.  Most commercial banks have several bankers in one department with a manager above them. Finding the right person and personality for you to build a long-lasting relationship with can make all the difference in the growth of your business over time, particularly through the tough years.

 

The classic 5 C’s of Credit have been an excellent guide for many over the years on the borrowing process. If you can imagine yourself in the shoes of the banker, thinking through their concerns, it will help you prepare your request and business case.

Character

During the entire request process, the banker is also evaluating your character to try to determine if you would be a trustworthy borrower.  Be sure to have your personal finances in order as well.  Complete a detailed personal financial statement (any bank can provide you their form), know your credit score, and clear up any incorrect items with the credit bureaus. Provide background about your relevant experience and track record of profitability and repayment ability. This can also include any prior company experiences. Most of all, be forthcoming with both the good and any downside to your experience.  Bankers never like surprises.

Capacity

You should know that the bank will be examining your financial statements and then calculating certain financial ratios. Two of the most critical ratios are leverage and debt service coverage. Leverage is measured by debt/net worth and the lower the better.  While the target varies per industry, a good guideline is under 2:1. Cashflow is a measure of income/debt payments or more specifically EBITDA/(prior year’s current maturities of long term debt + interest expense).  It is essential that this ratio exceeds 1.2:1.0, no matter your industry.  The higher the better as you want to show the bank you have sufficient cashflow to service your debt along with a cushion for good margin.

The key takeaway: it is good if you are able to calculate these in advance so that you can anticipate how favorably your numbers will be viewed in the eyes of the bank.

Capital

This refers to your net worth or equity value in the businesswhich is determined by the value of your assets less the amount of your liabilities (how much youown minus how much you owe).   The higher your net worth, clearly the better.

Note: a negative net worth is a red flag to the bank and a sign you may still be at the level of borrowing from friends and family or other non-traditional sources such as factoring receivables or venture funding.

Collateral

After the bank examines your cash flow repayment ability, they then look to collateral.  Consider your business assets and personal assets you have available to offer. This may include real estate, investments, accounts receivable, inventory, equipment, and even your personal residences.  How large and liquid are they in relation to the loan you are requesting?  The reality is, they should be larger than your loan request as banks discount the value of most assets and only lend 40%-80% against most assets.

Conditions

If you have encountered any difficult spots in your business in the past few years, address them up front.  Prepare to tell the story of your business and how you worked through the challenging times. Different banks may also have different tolerances for different industries.  This may be based on the performance of the industry overall, the bank’s experience in that industry or their amount of current exposure to that industry.  Ask about their preferences to find a better match and increase your success rate. Remember, no industry was untouched in the recent great recession.  How you faced those challenging times will be insightful.

Seeking financing in today’s market is complex.  To put your best foot forward, much preparation is needed.  Seek the guidance of an advisor(s) for input into your request and positioning.  Your CPA, attorney or Warren Whitney consultant can be a valuable resource in this process.

 

March 2014 Newsletter: How Much Does Your Business Need in Cash Reserves

By | Family Businesses, Finance & Accounting

Scott Compressed

Contributor: Scott Warren

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Businesses don’t always have a choice in their level of cash reserves, but having a target will help guide decisions regarding how to deploy cash. Deciding what that target should be depends on your business’s particular risk factors. There is no exact formula, but consider the two broad categories of revenue generation and fixed vs. variable expenses as a starting place and a range of three to six months of operating expenses for your cash reserve. If your risk in generating stable income and your fixed costs are both high, your cash reserve target should be closer to six months.

Try the following approach to get a sense of what type of cash reserve target you should have.

1. Start your analysis by identifying and assessing your revenue risks. These risks could include factors such as:

a. Diversity of revenues – Greater diversity equals lower risk. Consider various types of diversity, including industry, size of company, location, etc.

b. Concentration of revenue – This is the flip side of diversity of revenues. If a large percentage of your revenue comes from one source, your risk is higher.

c. Margin associated with revenue line items – Greater margins equal lower risks.

d. Control over revenue – Is your product or service necessary or optional for your customers?

e. Length of contracts – Do you have contracts? Do they span months / years? What are the terms of cancellation?

f. Market share – How likely is it that your organization will be on the “short list” as customers make their decisions.

g. Economy – How is the economy – local, national or international – based on where you draw customers?

h. Trends – Does your crystal ball show that things are getting better or worse?

i. Accounts receivable – Are you a cash business? Will you be able to collect your accounts receivable?

2. Next, identify and assess your fixed versus variable costs. More fixed costs mean higher risk because you cannot make adjustments as quickly and, therefore, a higher cash reserve target is appropriate. Consider:

j. Type of expense – Examine your fixed short-term vs. long-term expense commitments.

k. Debt service – How much do you have to pay to stay current, and what is that as a percentage of total expenses?

l. Long-term leases – Again, what are the fixed payment commitments?

m. Staff – Can you cut staff if you lose contracts? How fast are you willing to cut staff if there’s a downturn?

n. Corporate overhead – What other overhead costs are essentially fixed?

o. Variability of expense – Examine the flexibility of expense levels for different business units.

3. Finally, plot your risk assessment on a matrix where one axis represents revenue risks and the other represents fixed cost risks. See an example below.

 

                     Example of Completed Cash Reserve Matrix

                       Suggesting a Reserve Equal to Two Months of Expenses

                    (letters indicate risk factors listed above)

Cash Reserves chart

 This methodology should provide structure to support to your estimation of cash reserves.

Operational Analysis

By | Finance & Accounting, Privately Held

The client was a professional services firm that provided accessibility testing and training for businesses and organizations. The client had realized that they were not getting the management information that they needed to manage the business properly, and that they were not able to provide their bank with the specific information that it needed. In addition, the client did not know the exact profitability of each position/employee. As a result, they engaged Warren Whitney’s Scott Warren to conduct an operational review of the company’s accounting and informational functions.

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Operational Analysis

By | Finance & Accounting, Nonprofit

After several years of underperforming against budget, this nonprofit health care organization engaged Warren Whitney’s Gene Gregory to conduct an operational analysis to identify opportunities for improvement in operations and their potential impact on the financial position of the organization.

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