Category: business planning

You, Your Business and Internal Controls

~ C.O.R.E. Beliefs ~ Leave a comment

Some of the most exciting people to have as clients are driven small business owners.  Some of the most exacerbating people to have as clients are driven small business owners.  While they want to make their first billion in sales, they also don’t want anything to stand in the way of them making those sales; even if it keeps them out of hot water.

Invariably, the entrepreneur comes to a decision point; start putting others in charge of areas of the business or shrink the business back to a manageable level.  The really driven, focused owner starts hiring managers.  The rest, well they ignore the advice.

The excuse for not hiring managers is mostly permutations of the, “It is my company, I made it so therefore only I can control it.”  Really?  Look at your balance sheet:

  • You have uncollected receivables from 9 months ago
  • You have nothing recorded for inventory but your shop is stuffed to the rafters with stuff
  • You barely have enough cash on hand to make next weeks payroll
  • You have loaned the company $250,000
  • The bank loaned you $500,000

I can go on but I think you get the picture.  You are not in control.  Because you are the only person who makes decisions, you are merely at fault for what is happening.  Being “in control” in business doesn’t mean making all the decisions, it means that there are natural checks and balances which make sure that one person can start a transaction and someone else verifies it.

So, what should you do as a first step to start building a solid internal control structure?

Start acting ethically and responsibly.

I have worked with small business owners who don’t like safety rules.  I have walked into shops where employees are grinding metal and are not wearing goggles.  Guess what?  I carry a set of goggles in my backpack.  I have walked onto job sites where employees are not wearing hardhats.  Yes, I carry my own hardhat in the car.  The point to make is that you need to set the tone that safety matters.  And it is not just about safety, it is about acting ethically and responsibly at every moment.

Set the example: Be the example.  This one little rule applies to every small business and starts everyone on the path towards better decision making.

Reward good behavior when you see it.  I worked with a contractor who sat back and watched an employee help a subcontractor who dropped a bucket of nails off the back of a truck.  Nails scattered everywhere.  The employee stopped what he was doing and helped shovel up the mess.  It was the right thing for the employee to do.  The owner missed a great opportunity to teach his employees how to act responsibly and reinforce actions that benefit everyone.

Don’t be arbitrary as you teach employees to be arbitrary.  A business owner employed his daughter to work reception.  She would on occasion come back a few minutes late from lunch.  The owner berated her out in the open about setting a poor example.  Another employee came back over an hour late from lunch and he joked with him.  You might think it is not showing favoritism by abusing your receptionist/daughter but it is in fact an arbitrary enforcement pattern.  If the rule is “In your seat at 1pm” then make sure you enforce the rule on everyone, not just the convenient target who won’t fight back.

Strong controls begin with the tone at the top.  If you take shortcuts, your employees will take shortcuts.  If you pad your expense account, your employees will add time to their work week.  You cannot grow and be successful if everyone is always looking for the easiest route.  Believe it or not, your success as an entrepreneur is totally based on the success of the people you hire.  Act accordingly.

Have a great day.  If you would like to learn more about how to start implementing effective internal controls that won’t break the bank, feel free to write me anytime for a free consultation.  I can help you understand how to grow your business while also keeping it under control.  If you would like to learn more about C.O.R.E. and how our services can help your business and association, check out our website.

New Rules for Leases

~ C.O.R.E. Beliefs ~ Leave a comment

For decades now, businesses have been able to treat certain capital transactions as “off-the-books”, meaning that they didn’t have to record the debt and capitalize the asset. This method of treating leases was codified in ASC 840.   This is all about to change for leases beginning in the year 2020 for small businesses.  Beginning in 2020, (2019 for publicly traded companies) lease transactions will follow ASC 842.

The new lease rules will hit lessee’s hardest.  Lessor’s will see some new disclosure requirements but their accounting treatment will remain similar to what they do now.

The biggest change?  Beginning in 2020, you will be required to show a debt for the lease commitment and related asset for the “Right of Use” of the leased asset.  This means all that equipment you have been leasing will now show up on the balance sheet and run up the amount of debt you have on the books.

This may well have a major impact on businesses with loan covenants which restrict the amount of debt that the Company can incur.  If you are a business, such as a highway contractor, who leases equipment, you will want to start talking with your lender and bonding agent about the potential impact of this new accounting standard.

As for the technical details of the new standard, one thing that changes is in the definitions.  Property and buildings are now the only things considered operating leases.  Almost every other asset lease will be considered a financing lease.  The split is based on the “Consumption (usage and wear) of the underlying lease asset”.  If the lessee “consumes” a significant portion of the asset, it is considered a financing lease.  If it doesn’t, it is a capital lease.

An example might help.

You need warehouse space.  You find 5,000 square feet of warehouse space and lease it for $12.00/sf for a 5 year term.  At the end of the lease you will turn it back to the lessor in the same condition you originally found it.

Since the land will last indefinitely and the structure 50 or more years, you are considered to not put significant wear and use (i.e. consume) on the leased asset.  Accordingly, you enter into a capital lease.

In comparison, you are going to lease 3 trucks for your business to deliver goods to customers.  These are 60 month leases for $1,000 each truck.  You could purchase the trucks new for $70,000 each.  Since the trucks have a typical economic life of 7 years and the lease payment represents a substantial portion of the asset’s value, these would be considered financing leases.

Why does it matter?  Well, as you might infer from the name, financing leases will report financing costs – interest expense.  Capital leases will only report lease expense.  However, both do require recording the lease asset – the Right of Use (RoU) and the corresponding liability at the present value of the lease payments.

To calculate the present value, you need to know 3 things: 1)The number of periods to make the payment;  2) the payment amount; and 3) the interest or discount rate.  Guess what, 2 of the 3 are provided but the interest rate? Typically not.

The interest rate to use will either need to be stated by the lessor or you as the lessee will need to impute your rate.  So, for the truck lease above, the capitalized value with an interest rate of 4.5% is $53,000; but if the interest rate is 9.0%, then the amount capitalized is only $47,000.  And if your only source of additional capital is your credit card at 18% interest, well, your capitalized value will be much lower but your interest cost will skyrocket.

Why does all this matter?  Because there is far too much debt off balance sheet and note disclosure, especially for small business, was typically weak on the subject of the lease contingency.  Although there is some additional work, it doesn’t take a huge amount of skill to set up a PV formula in Excel.  Obviously, the hard part will be in identifying the interest rate to use and also to account for step increases and other lease costs but it is not terribly complex.

As you approach 2020, make sure your accountant is up-to-speed on the new lease rules.  You as the business owner or bookkeeper will need to provide more information to the accountant so it is set up correctly and the asset and debt recorded.  And you will want to make sure you have a conversation with your lender well in advance of that financial statement as you do not want underwriting surprised by the sudden increase of debt that shows up on your financial statements.

Have a great day.  If you would like to know more about the details of the upcoming changes to the lease rules, you should discuss with your accountant or feel free to write me anytime.  And if you are looking for a more proactive accountant, feel free to contact me anytime for a free consultation.

 

Improving the odds

~ C.O.R.E. Beliefs ~ Leave a comment

Some days, it is challenging to write on topic.  For instance, today for this blog, I am on topic number 4.  And frankly, number 4 is just wing it.  So many things to discuss and I am not quite certain how to frame the issues or put them in context.

We had several meetings last week, not the least of which was the meeting to discuss a private placement strategic plan.  That did not go quite as well as I would hope.  The concern is valid – I mean, the plan calls for changing how certain software is licensed.  It models out but we all know models only go so far.  To change direction will cost a ton in marketing dollars and face resistance from the current marketplace who do not want a shift in power.

The shift will happen; it is whether this group wants to be the driver.  Actually, that isn’t it, they want to be, but the hard reality is that it takes a lot of resources to upset the current way of doing business.  With no guarantee of success.

Not that there is any guarantee of success by following the same model as the other developers in the marketplace.  But that channel is well known and understood.  The licensors will likely be open to incremental change which means that the cost to land a subscriber will be substantially lower than trying to go directly to the consumer.

Sorry, I know this seems somewhat vague but I am working under an NDA so have to be extremely generic.  But the strategic business problem is not unique – it is one faced by every business that decides to sell.

Who is the customer?  And how do you improve your odds of success within a sales and distribution channel?

If you are a handyman service one way to go about this would be to get door hangers and go to a mature neighborhood and hang them.  If you do up 2,000 you will likely end up with 40 new customers.  It won’t happen immediately but that 2% is pretty much cast in stone.  You will spend a bit on advertising but it will likely pay off rather quickly.

But, what if you wanted 10% new customers?

One way to attract more customers would be to offer free yard debris removal, for example.  People love a free deal and chances are, many more would look at your service offering after having a positive experience with you.  You will spend more money than on just advertising alone but, it might pay off.  Again, no guarantee that you will substantially increase above the 2% but there is lots of evidence to support the conclusion you will get above 2% new customers.  Your costs will most certain go up though.

Freebies, giveaways, basic services with the opportunity to license premium services.  These are ways to build trust with your product and service but they are not free to you and oftentimes are quite expensive.  Are they still worth doing?

Perhaps.  And that is what I am facing this week.  Do we redesign the offering to make it compelling to the existing channel?  It is going to be expensive either way – either by spending a ton of money on marketing and advertising to go around the existing purchasing channel or on giving away revenues while we work to entice users through free use.

Part of me, of course, loves the idea of challenging the status quo.  It would be awesome to completely upset the applecart and win this my way.  But, the reality is, it is probably more risky to take that approach than it is to work within the existing channel – even if the existing channel is ripe for challenge.

More on this another day.  Have a great Monday.  If you are ever in the market for a thinking accountant who loves marketing and sales, feel free to contact me for a free consultation.  I am here to be of service to you.