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Power Bites by Edward Mendlowitz, CPA

August 27, 2015

Power Bites was published in 2010 and is still as fresh as ever.  This book shares ideas and advice given to over 1,000 clients that has helped them become more successful and happier in their businesses and lives.

For many of my clients, I was their closest non-family member and many times the first person they called when they had a problem they needed to work out a solution for.  My job was to listen, let them vent, get all the information and provide a direction and methodology of dealing with the situation and moving forward.

I know I was successful because they kept calling me (and paying my fees) with some of the relationships spanning decades.  This book condenses my best and most successful advice that has been field-tested by being used, many times, under the pressure of varied and diverse situations.

Power Bites also provides tips on communicating and getting your thoughts across better, leading difficult people, focusing on what’s important, managing your time more effectively and relating better to the people you lead, manage, work with or sell to.

This is a small book with very large practical ideas that can be immediately put to great use.

If you haven’t already read it – it is time.  Buy this book!

Happiness is a Positive Cash Flow – Some More Information

August 25, 2015

Do you understand blood?  Perhaps not, but you know that your body needs it or you will die.  The same with cash – your business needs cash or it will die.  However, unlike blood, you need to understand the flows of cash.

  • Fact: A growing business is always short of cash
  • Fact: A declining business usually starts its decline with a spurt of cash
  • Fact: You will have the most cash ever in your business when you liquidate
  • Fact: It is easier to obtain loans when you don’t need the money than when you do
  • Fact: Most businesses do not apply for a loan until they need the money
  • Fact: Profits don’t mean anything if they are not represented by cash
  • Fact: Cash has to be managed

Cash flow is the movement of cash in and out of the business.

Everything you learned about balance sheets and profits is a myth if you cannot write a check to pay your employees’ salaries, your rent or your salary.

Happiness is a positive cash flow.  Manage your cash flow successfully and you will be happy.

The Hare and the Tortoise

August 20, 2015

There once was a speedy hare that continually made fun of a tortoise for being so slow.  Tired of hearing this all the time, the tortoise challenged the hare to a race.  All the animals in the forest gathered to watch and it was agreed that the fox would set the course and be the judge.

They started together but very soon the hare was so far ahead he decided to take a rest and laid down and then fell asleep.  At some point the turtle passed the hare thinking that he had a job at hand and when completed there would be plenty of time to relax, and kept walking along at his steady pace toward the goal line.

When the tortoise crossed the finish line, the other animals cheered so loudly it woke the hare who immediately started running again only to find that the tortoise has already won the race.

The moral is: Slow and steady wins the race!

Compounding works the same way!  A slow and steady growth of investments beats the “fast” way of jumping on band wagons, chasing today’s hot stocks and continuous trading and attempts at market timing.

The Emperor’s New Clothes

August 18, 2015

From what I see, a common reason many people make an investment is that “everyone is doing it.”  Well, that is one of the stupidest reasons to do something.  Now is a good time to remind you of a story we all know too well, but frequently do not heed, especially when investing.  cloth colorful

The Emperor’s New Clothes was written by Hans Christian Andersen in 1837 and certainly holds true today.  In the story, a disreputable tailor promised a very vain Emperor he would weave a new suit for him that would be invisible to anyone that is stupid, unfit for their positions or incompetent.  When the “suit” was completed and the Emperor dressed in it, the Emperor’s ministers couldn’t see anything.  However, so they would not appear unfit for their position they pretended they did and said how much they liked it.  The new suit and the accolades from the ministers was so well publicized that the Emperor decided to proudly parade around his subjects.  None of his subjects dared to say anything also afraid they would be considered stupid, unfit or incompetent.  The charade continued until a child too young to understand cried out “He isn’t wearing anything!” However, the Emperor not wanting to be caught being deceived, continued on as if nothing was said.

This story also reminds me of a speech Warren Buffett gave in 1999 about the tech stock bubble that I wrote about in my blog on October 28 2014.  At that time, he did the crying out but was dutifully ignored.  We also still have some bubbles only to see them plummet.  Some things never seem to change.  But, they can if you take the effort to understand what you are doing and realize that following the herd based on invisible claims and what “everyone is doing” is not the way to go.

Happiness is a Positive Cash Flow

August 13, 2015

Sunday, I saw Donald Trump on TV proclaiming that he doesn’t need contributions since he is rich and will fund his campaign himself.  On Monday, I read a news item that he will be accepting contributions.  In that same news item, it was reported that even though he is definitely a rich man, his wealth is not readily liquid and a Bloomberg analysis estimated that he has about $70 million in liquid assets.  Not too shabby but certainly not enough to fund a presidential campaign.  However, what Donald Trump has or does is not much of a concern for me, but his cash situation as it relates to businesses is, so I am using this opportunity to share some insights about cash.

Cash is the life blood of a business.  Cash amounts.  Cash flows.  Cash changes.  No matter what anyone tells you, cash is the bottom line you must watch and accumulate.

Simplistically, knowing your cash balance gives you a sense of how you are doing – if it goes up, you are making money – if it goes down, you are losing money.  Of course not everything is that simple.  There are factors such as accounts receivable and inventory that can increase and have profits absorbed there; or accounts payable can decrease also absorbing profits as can unfinanced equipment purchases.

I have seen many extremely profitable businesses consistently plow the profits back into the company and even borrow to pay the income taxes with the owners taking next to nothing out for themselves to grow their personal net worth – and then the business hits a losing streak and doesn’t have the internal or personal resources, i.e. cash to meet the challenges it is confronted with, hastening the decline.

Profits in the true sense should be measured by the increase or decline of cash balances.  The owners should become sensitive to cash changes and should measure the profitability of their business by actual cash flow and not by the accountants’ definition of profits.

Most financial statements include a statement of changes in cash balances.  This is usually skipped over with the major attention being given to the balance sheet and profit and loss statement.  The statement of cash flows should be reviewed carefully to see where the profits are being absorbed and what can be done to reverse downward trends in the cash balances.

At the end of the day, we accumulate and spend cash and its various iterations of liquid assets.  No matter how wealthy you are, happiness is created by a positive cash flow.

The title quote was by Frederick Adler.

Not-for-Profit Budgeting: 10 Things to Keep in Mind

August 11, 2015

The following ten items should be considered during the not-for-profit budgeting or budget revision process.  This also should be considered by anyone preparing a budget for a business organization. Joyce_Mayeresky_300dpi

  1. Use actual results from the prior year and the current year actual amounts projected to year end as well as the prior and current year budget as starting point. Analyze budget variances and look for unusual or non-recurring items that should not be included in the new budget.
  2. Include projections of known or anticipated transactions based on programmatic changes, new initiatives, committed capital expenditures or directives from the Board.
  3. Identify changes in activities that would result in decreases in revenue which may then result in decreases in expenses. This is sometimes due to a reduction in government contracts or grants, the termination of a project because of recurring losses to operate, or activities that are no longer within the mission of the organization.
  4. Include direct costs, indirect and overhead allocated costs and capital expenses if not financed and expected to be covered by current revenues. If capital costs are financed, then the periodic payments should be included in the budget if they are to be paid from current revenues and not from a capital campaign or other sources outside the operating budget.
  5. A supporting list of in-kind items which is expected to be received to offset cash outlays should be attached to the budget. This would reduce the expenditures of the organization and may allow budget modifications to certain budget lines. Unless the items are committed by donors, the expenditure should remain in the original budget until received.
  6. Consider the need to identify unrestricted revenue to offset some program costs when there is a matching requirement from a funder. This match may be required from the organization in order to fully fund a program or project; and accordingly those funds would not be available for other purposes or to cover general and administrative expenses.
  7. Consider the effect of restricted time or purpose contributions and revenue contained in the budget. If the organization received and budgeted revenue that contains these restrictions, then those funds may not be expendable in the budget year. A matching of the revenues and related current expenditures should be made to identify remaining restricted funds carried to the next year for expenditure.
  8. Review separate program budgets prepared by other departments or program personnel to support specific funding requests to ensure that all are included in the overall budget. If those budgets are prepared on a program period that differs from the agency fiscal year, then adjustments should be made to include the portion of those budgets as well as a projection of the continuing project on a fiscal year basis.
  9. Include explanations or budget justifications to document what was included in the various budget line items, especially if the line item was based on fluctuating criteria (such as for the travel line item- projected staff mileage, estimated gas costs, estimated vehicle rental costs, etc.)
  10. Consideration should be given to preparing a cash flow budget on a month-by-month basis in order to determine if certain discretionary expenditures should be made at a later date. Management needs to obtain input from their fundraising department, major donors, and government funding sources to estimate when funds will actually be received.

Once the budget is completed and reviewed, a monthly or quarterly budget to expense report should be prepared to assist in the monitoring process. This report should be shared with the governance body and could contain additional information including prior year activity to serve as a benchmark for the explanation of variances. Based on the monthly or quarterly review, the budget may need to be modified for the remaining term.

The budget process should help to bring together the needs and perspectives of those members of the organization responsible for the mission, financial stability, operational effectiveness and management of the organization. If properly completed, it will also effectively communicate the goals and priorities of the organization and reflect the annual outcomes which could strengthen the organization.

This blog was written by Joyce M. Mayeresky, CPA, PSA, CFE, CGFM, Partner in our Government and Not-for-profit and Education groups. She can be reached at 732.828.1614 or jmayeresky@withum.com

Drop Dead Valuation – When an Owner Dies Without a Buy-Sell Agreement

August 6, 2015

The right thing to do is have a buy-sell agreement, but many owners stupidly neglect to get this done.  Here is a suggested buy-out plan where one owner drops dead, unexpectedly, and there is no agreement.

A caveat is that the right way is to engage an appraiser to determine the value and go through an entire process that was explained in my previous blog.  However, with smaller businesses where the families want to keep costs low, not cause excessive time and stress and remain friends… what follows is a suggested plan.  This might not work in every situation and is certainly not ideal.  However, it does offer a manageable method of price and terms.

Valuation Method #1:

    • The price for the deceased owner’s share of the business will be equal to two times the average salary and benefits paid to the deceased plus two times his proportionate share of the average retained profits over the last three calendar years
    • Payment will be paid monthly over five years
    • An example is the deceased’s salary and benefits plus his proportionate share of retained profits for each year for the previous full three years were $300,000, $250,000 and $200,000… averaging $250,000.  The price is two times that amount or $500,000
    • The payment will be $100,000 per year
    • Interest will be added at the applicable federal rate (“AFR”)
    • The payment will be treated as a capital gain to the recipient.  Note that this will not be deductible by the buyer.  Alternatively, depending on the nature of the business, the buyer can elect to treat part of the payment as for goodwill and amortize the total payment over 15 years
    • Upon signing the agreement, the ownership interest will be turned over to the buyer, but will be held in escrow pending full payment to the buyer
    • This company or remaining owners can be the purchasers at their option

Valuation Method #2:

    • The price will be the proportionate book value (on the accrual basis) if this results in a higher valuation
    • The valuation date will be the last day of the previous fiscal year
    • Payment will be monthly over sixty months with AFR interest

Valuation Method #3:

    • This becomes effective if the company is sold within two years after the agreement is executed
    • The seller will receive 80% of their proportionate interest of the sales price if that amount is greater than the price under this method; and payment will be made in full at closing regardless of how payment is made by the ultimate buyer
    • There will be a reduction for principal payments previously made

Owner Loans:

    • Any owner loans will be treated separately and repaid over five years with interest at the AFR
    • The estate will agree to subordinate this amount to any bank debt for which the deceased was a personal guarantor as long as the estate is released from the guarantee
    • If there was no personal guarantee or no release, then no subordination

Other Issues:

  • All passwords, websites, social media sites, intangibles and any other property of the business will be retained by the company
  • If there is any IRS challenge to the valuation amount, each party will deal with it themselves or at their cost.  Regardless of what the IRS’ final determination is, this price will not change.

The above sets forth a workable plan if the two parties agree to it.  A reality test is to determine whether the survivor can handle the payments without undue stress.  I believe this is a reasonable method for a smaller business in that it gets it done quickly, without consternation and a minimal amount of legal and professional fees.  For larger businesses where the costs are relatively insignificant to the total transaction, this will not work.

Nothing is perfect but this plan can work well in the right circumstance.  It is a practical compromise and a get-it-done plan.  If the owners cared, they would have had an agreement and this plan wouldn’t be necessary.  Get it done right if you can or, if too late, do it this way and let the families get on with their lives.

If nothing is agreed to, there are a few alternatives.  Except for Alternative 1, the others do not seem reasonable.

Alternatives if Nothing is Done:

  • Alternative 1: Nothing has to be done.  The estate can remain an owner.  The surviving owner likely will have to account for his actions, but the business will still be intact and since he will be running it, he should have a greater element of control and would still earn his living
  • Alternative 2: The estate can look to sell their interest to a third party and then see if the survivor could match or exceed it
  • Alternative 3: The business could be sold intact to a third party
  • Alternative 4: The business could be liquidated

Keep in mind, if the owners cared, they would have had an agreement and none of this would be necessary.  The best thing to do is to not make a bad situation worse.  I believe that getting something done is better than the alternatives presented.

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