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Flash card reminders

July 26, 2016

When training or giving a speech
Prepare thoroughly.
Be animated.
Speak deliberately.
It’s not about you. It’s about transferring knowledge.

Take the second shot first.
Be deliberate.
Follow through on your swing.
Keep head down.
Forget about the last bad shot – it not, you will end up with two or three more bad shots.

Do not invest in anything you do not fully understand.
Do not be afraid of asking for explanations that make sense to you.
Be deliberate when making a decision.

A leader needs followers.
People follow those they respect and trust.
Respect comes from making deliberate decisions and giving clear instructions.
Trust comes from assuming responsibility and making the right decisions (most of the time).
Respect those under your charge.
Take responsibility for goofs and errors and deal with them immediately.

Failure to do Long-Range Business Planning

July 21, 2016

The ultimate mark of a good business or organization (if a not-for-profit) manager is how much of their success is deliberate. Yet I am amazed that so many owners or managers fail to do long term planning at all or fail to make more than a perfunctory attempt at it.

I believe long range planning is essential, yet may limit what they do to preparing a budget for only the next year. Developing a long range plan is one of the most important jobs an owner or manager has, and one that in many cases only they can do. Failure to plan, especially to develop long-range plans, can lead to many serious financial problems that can eventually undermine a business’ viability.

One of the “why it can’t be done” reasons I get is that they feel they cannot project reasonably well for any period longer than a year. One client in particular, who believed in preparing annual budgets, argued strongly that he would never use or trust a 5 year budget because too many variables were involved. He said it would only be a waste of time and undoubtedly be completely wrong.

The client finally did prepare a 5-year budget, primarily to stop me from bugging him about it. What he found out was that his main product line had virtually exhausted its growth capacity. He realized that if he did not begin to develop other areas, his business would run into a dead end. He then thanked me immensely.

The point is not whether his numbers are on the mark, but whether the planning process provides him with information to help guide the overall growth of the organization. In this case, long range planning helped my client realize that he had to take some aggressive actions immediately to assure his future success, rather than not acting and eventually confronting the continued existence of his company.

It is a mistake to forego planning just because the numbers will be wrong. Of course your 5-year projection will be wrong, but it can help to show the trends and patterns that are most likely to develop within and outside the company. It is a tool, not a panacea or cure-all. To be successful, use every technique recognizing the shortfalls but looking to yield the benefits that can be presented.

Context in Financial Reporting

July 19, 2016

Here are some financial reporting illustrations of where something can be taken out of context. Sometimes very small changes can have a great effect. This needs awareness and understanding of the true situation.

In financial reporting sometimes a small change has to be considered in the right context. For instance can an $18,000 adjustment to a cost of sales item have any relevance to a company with $50 million in sales and $30 million cost of sales?

  • Suppose it causes a $10,000 loss to become an $8,000 profit? In effect the “fence” around the bottom line is gone. Wouldn’t that change people’s perception of the Company’s performance?
  • Suppose that same company and the same $18,000 change, but the profit is $8 million and there was an embezzlement of $230,000 by an inventory clerk? Would that change the impact of what happened? Probably not at all UNLESS it hid a defalcation involving an individual customer’s account receivable.
  • Suppose the person was in charge of the inventory?
  • What about if it was the controller? Would it affect your opinion?
  • Suppose it was the controller and it had been going on for four years and this year’s amount was $230,000 and last year’s $150,000 and $80,000 year before and $20,000 the first year?

I think context matters, but it needs an awareness of the big picture and an understanding of the consequences of what has occurred. Looking at the numbers and using ratio analysis sometimes doesn’t reflect the real issues and can present everything out of context.

In all due respects many audit procedures and review analytics deal with ratio and trend analyses, materially and the effect on the financial statements as a whole. Using all of the standard procedures and checklists properly makes is highly unlikely that an $18,000 item would show up any of the above. However, looking for an out of context possibility can perhaps remove the highly from the unlikely.

Context with Investments

July 14, 2016

Many times we get caught up in insignificant things that can have no meaningful effect on the final or overall outcome. We take things out of context. Here are some illustrations to consider with respect to investing:

  • Let’s take someone with a $900,000 stock portfolio that is managed quite well, and $100,000 that is held back to “play around” with and 10 stocks are bought for about $10,000 each. If just one of those stocks went down 50% to $5,000 most people would get very upset and feel bad about their choice. However, in relation to the entire $1,000,000 portfolio it is not meaningful or even representative of the total return you might expect. That $5,000 loss is taken out of context.
  • Let’s look again at that portfolio and assume that the entire $100,000 portion goes up 50% or $50,000. Again, in relation to the entire portfolio, it is not significant. You might feel good about it, but in reality it represents a 5% overall gain, and it might draw energy or attention away from evaluating how well your managed investments are performing and whether the present constitution of the portfolio is in accordance with your original plan or if it had drifted away from the targeted asset allocation.
  • When considering gains you need to measure them in relation to the entire portfolio for a given period of time. A 50% increase in that group might occur immediately and then there would be minimal upward or downward changes thereafter. Over a 5 year period the initial 50% gain become an annualized 10% gain which represents a 1% increase in the portfolio return. Not as attractive as it originally seemed.
  • The $100,000 portion in some respects is being managed by you so you should ask yourself what are the investment and trading costs, time commitment by you and effect of income taxes on realized gains and how that factors into your total return.
    Further, whether those stocks pay a dividend is also significant. For example if your base portfolio pays a 2% dividend and your side grouping pays 1% then you are behind 1% each year on that portion of your investments. Again, overall it is not significant, but like a constant drip, it does wear away your returns.
  • Alternatively, if you pay a management fee of 1% on your primary portfolio, and no fee on your playing around stocks, then that offsets the loss of the dividends. Again, not that significant to the entire picture.
  • A recurring theme by me is that you should stick to a plan and that the purpose of your investments should be to provide for your and your family’s financial security.
  • Does the trading bring you closer to your goals, or is it a “feel good” activity that is not treated with the same seriousness as the rest of your investments? Sometimes the “feel good” really is a “feel important” action that is not allied with your primary goal of providing for your financial security.
  • While you might have a big gain in a short period on your side portfolio, it is the sustainability of that gain over a longer term that really will matter. How will those stocks (or the ones with the really big gains) end up in ten years compared to the market as a whole? One way to look at this is to examine the long term performance of individual companies as shown in their annual reports. If you do this for enough companies you might notice that most end up comparable to the market index appropriate for that industry. The ups and down balance out and everything ends up close to each other over that period. If this is so, then why not just stick to index funds or large mutual funds rather than individual stocks?

The context of what we do is important and related to the big picture; but we sometimes take the importance of what we do to the overall situation out of context.

Death of a Spouse – What Else To Do

July 12, 2016

My previous blog gave useful information about getting your affairs in order. I want to follow up by addressing three remarks made to me about what I wrote.

“I am not going to fill out 40 pages”
Good comment, but shortsighted. The information exists but usually in a haphazard way and should be organized. Filling out the worksheet which I provided as a Word document shouldn’t be that difficult for the more knowledgeable spouse. Based on my personal experience filling out the worksheet it should take less than three hours. The tradeoff is that it will take much longer and not be as complete if an executor needs to search for that information as well as being pretty costly. I also found that by filling it out it forced me to review many of my affairs and I ended up consolidating bank and brokerage accounts; making decisions of who to contact about my hobby collections; speaking to certain people that I would want my wife to consult with; and it gave me a calming effect that I had things in order.

As to “40 pages” there is plenty of blank space for those that choose to print it and fill it in manually. Further, the worksheet tries to cover every conceivable situation and many items will not apply to most people. The worksheets also contain additional information that I feel would be helpful to know about and consider. Please start it and don’t be put off by the number of pages; not doing it would be off putting to your survivors.

“How do I start?”
There are a number of ways to start with regards to your financial affairs. For starters, your tax returns are a road map of many of your taxable accounts and mortgage debt. The backup data has tax statements showing the payer’s name, account numbers, and how the account is owned. That would be a great start.

Retirement accounts are more difficult to track down since they are not reported on the tax return if no distributions were made from them or contributions made into them. This is why completing the list is so important. One tip is that your current employer’s W-2 form would indicate the amount of the 401k payroll deduction for the previous year and whether the employee was covered by a retirement plan. IRA custodians now send out an annual form indicating the yearend balance in the account and the previous year’s contribution. Look for these with the tax data. I know many people get these statements, glance at them and then throw them away. If so, then this destroys the trail.

Reviewing the check book for the last couple of years can uncover payments that might be for the purchase of assets, life insurance premiums, annuity purchases, and retirement account contributions. The more check books and tax returns you have, the better, up to five years.

This is a start – not as good as having the completed worksheet, but a start. Good luck!

“Who to turn to”
“Who is turn to” is a complicated question and needs careful consideration. In many cases the person the knowledgeable spouse dealt with is someone they had a long term relationship with and has grown comfortable with, but is likely not as confident with as they would like to be, but they are “used to him.” That person would never be recommended as the go to person, but sometimes is chosen by default.

An alternative scenario is that the deceased handled everything themself and the survivor also has no one to turn to.

So called knowledgeable family members are usually not financial professionals versed in making decisions for others that include short and long term asset and cash flow management and balancing interests of current and eventual beneficiaries. Further the advisor will need good communication skills able to explain what they are doing and why and what it means to their client; and be able to issue clear reports and answerable if things do not materialize the way they were expected to.

A suggestion is for the spouses to choose someone or an organization that represents values they have and is qualified to handle investments and manage cash flow. If it is a new advisor, then open an account with a minimum amount and see how it goes with investment strategy and execution, cash flow, communications and availability.

Nothing will be perfect, but planning beforehand offers a much better chance of success than no planning and a willy-nilly helter-skelter try at finding someone after a death.

Final tip
A final tip for the survivor whether or not plans have been made is to do nothing for at least months while you get used to your new circumstances. Doing nothing cannot cause much harm and at worse only result in possible lost opportunities while acting precipitously could cause potentially irretrievable losses.

Death of a Spouse

July 7, 2016

Spouses die. In some respect it could be you or your spouse, so failure to prepare can be self-defeating.

Preparation is a way that creates security for the spouses, removes some doubt about what will be faced and how to deal with it, eliminates some very time consuming obstacles, and provides a method of liquidity for the survivor. Here are some things that can be considered.

  • Fill out the checklists that can be downloaded by clicking at end of this article
  • List all accounts and location and advisor’s name and contact information
  • Discuss total assets and cash flow from all accounts
  • Discuss debt and how to pay it off
  • Determine spending needs and if there is adequate cash or cash flow coming in
  • Determine if there is liquidity for immediate expenses. This can be obtained by having a joint account. Note that a payable on death account might need the death certificate which could take a couple of days to get or require a visit to the bank
  • Discuss liquidity to cover major spending until estate is settled. This includes estate operating and administrative fees and taxes
  • Discuss all credit cards and automatic bill paying linked to those accounts
  • Discuss what advisor(s) survivor should go to for advice and guidance
  • Discuss choices of outside advisors, trustees and executors
  • Location of life and disability insurance policies
  • Review how assets and accounts are titled and determine if they are properly titled and survivor or beneficiaries will have access to the accounts
  • Prepare warning letter for IRA beneficiaries to seek professional advice. See previous blog:
  • Location of will, trust agreements, retirement account information, house deed and other pertinent legal documents
  • Discuss funeral arrangements and where cemetery and deeds to plots are
  • Prepare a list of people to notify of death and funeral
  • Discuss location of prior tax returns

To download checklists, click here:  Important Papers Listing and Checklist

Unexpected but Inevitable

July 5, 2016

Death is usually unexpected for most people, but never avoidable. For business owners, being prepared for the unexpected is an important responsibility of their stewardship. The current issue of Inc. magazine provides a story of the dire consequences of being unprepared for the death of a co-owner.

In the July/August issue the first person story tells how when the Company’s co-founder (who was also her father) died, the bank loan was called, sales plummeted, the product line was destroyed, major customers bailed out, and the finances became precarious. What is not mentioned in the article is how the father’s ownership was transferred, how employees were let go and the cost of downsizing, what happened to the lease and relations with suppliers, and how the surviving owner’s routine job functions were handled when she had to step up to taking over the sales and marketing the deceased owner did. Some of these could have been avoided. For instance, a key man insurance policy on the father would have stabilized the financial front while a buy-sell agreement (which is not covered in the article) would have eased the ownership transfer.

Some that likely could not have been avoided might have been taking over the sales the father was doing, the effect of the recession on their product line, or the change in purchasing habits of customers. Businesses, particularly those that are family owned usually have tight finances and little back up for jobs the owners perform, and the death (or sudden disability) of an owner creates a huge void. Also, economic changes and buying drifts are hard to anticipate. However, preparing for what can be done such as the life insurance or the buy-sell agreement can serve to alleviate some of the pain and unpleasantness that accompanies a death permitting fuller concentration on what could not have been planned for.

Preparation is necessary before something terrible occurs, not afterwards. Do it now! Get it done!


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