Preface: Don’t be corrupted from the simplicity in value. Value incorporates values. Exceptional value incorporates exceptional values.   The Values in Value   Your business values determine your businesses value in the long-term. Values are the desired culture of your business – the behaviors of your company. Why should your business develop and adhere to values? Because it gives your business a philosophical heartbeat, it’s what you do for your customers, your clients; and whomever your serving. Simply that’s how you develop value in business – with the value of your businesses service(s) and/or product(s) service(s).   Bright Horizon Family Solutions employs 25,000 people in the US and UK. When Roger Brown and Linda Mason started the business in 1986 to provide high quality child care at workplace centers, little did they imagine what was in store. Less than 30 years later $1.2B in revenues with 16,000 employees in the US. With early education and preschool services Bright Horizon Family Solutions has a simple core value statement with the acronym HEART – Honesty, Excellence, Accountability, Respect, and Teamwork. This is the culture of the business. Employees of Bright Horizons demonstrate these cultural values every day. And It works; because employees are committed to continuing a cultural value of honesty, excellence, accountability, respect, and teamwork, daily in the workplace. It’s the guiding compass to the service they provide to their clients – the parents who entrust their child’s care to Bright Horizons.   Today’s business environment often has debased values. But that’s not to say your business should debase values too. Bright Horizons wouldn’t be at $1.2B in revenue in their industry without adhering extraordinary core values.   What can adhering to core values do your for business? Four categories of values can exist according to Patrick Lencioni. They include i)…

  Preface: Statements of cash flows should be analyzed along with a balance sheet and income statement. What is a statement of cash flow…continue the read. What Can You Learn From a Statement of Cash Flows   A statement of cash flows shows the transfer of cash in and out of a business. It is usually measured during a specified time period such as a year, or quarter. Measurement of cash flow provides data points for analysis on a corporate financial position or valuation at a specific time. Net cash flow consists of three segments: operational cash flows, investment cash flows, and financing cash flows. Operational cash flows include net income and changes to working capital, i.e. cash sources and uses from internal business activities. Operating cash flow is also called free cash flows and is the amount of cash a business generates from revenue producing activities. Operating cash flow does not include cash from investments or capital activities. Operating cash flow provides a more accurate picture of a corporation’s current financial position than does say net income trends. Operating cash flow increases when cash is received from decreases in inventory or accounts receivable, or increases in accounts payable or accrued expenses such as payroll. For instance when inventory is sold to a customer the inventory balance will decrease = an increase in cash, but accounts receivable will increase the amount of inventory (COGS) and net income = decrease in cash, so the change on operating cash flows would zero on the sale (net income + decrease in inventory – increase in accounts receivable). Therefore, operating cash flow measures the change in working capital in its entirety for a period. Investment cash flow details cash received from sale of property or investment assets, i.e. stocks or notes receivable; or cash invested…

Preface: Steve R. Covey has written a book about what he thinks are seven habits of highly effective people. Read a summary here.   Seven Habits of Highly Effective People – Summary Highly effective people share some habits. The first habit = they are proactive. What is the difference between a proactive person and reactive. Simply Vision. If you don’t know what you’re trying to accomplish, you don’t know when you have reached what you call an accomplishment. Highly effective people need a clear blue print of what they (you) are building, then they build it. That’s being proactive. Maybe you can build a playhouse without a blue print, but not a Cape Cod house. And if you’re trying to build One World Trade Center, let’s say to aim high you need to proactive. You need a comprehensive blueprint. Measure twice, Cut Once. Every building requires blueprint revision, tweaking, and perfection, before any construction begins. Your life should have the same systematic planning. Everything is created twice. Once in the mind, and then again in reality – the finished product. Highly effective people are first visionary creators, then secondly builders. Habit Two = begin with the end in mind. Think of the project you’re working on, or a project you want to work on. Visualize the completed product. See it, touch it, taste it, feel it. What is your reaction to the finished product? Will your customers or clients like it? Will it merely be ok, or delight them? Highly effective people think of masterpiece – every time. Put first things first = the third habit. What is important? Do that first. Habit four = Go for the win-win. Seek win-win solutions for everyone involved. You must understand what the other party wants and needs, their objectives to achieve win-win. You…

Preface: Attorneys are an invaluable resource to business. Retain an attorney for legal business matters when necessary. Why Your CPA Advises You to Work with an Attorney When Necessary   You are well advised to retain an attorney in certain instances. Why?Namely, sometimes you don’t know what you don’t know. Your CPA appreciates this fact. After all, if you knew every tax and accounting angle, you wouldn’t need your CPA. When financial matters involve a peripheral individual or business additional risks arise, an attorney is worth the investment.   If you need accurate financial statements, tax advice, resolution of an IRS matters, or numerical analysis, your CPA is the right resource. If you need to amend a partnership agreement, write a buy-sell agreement, incorporate a new business, or draft a letter of intent, you need an attorney. Remember this; if your CPA or attorney disagrees with this advice, you probably need a new CPA or attorney.   Often your CPA and attorney will work together to provide your business with a financial fortress. The fortress works like this. You wouldn’t pay a carpenter to install a new phone system in your business, nor would you pay marketing experts to install carpet in your new office. You understand the importance and value in working with a business or individual specializing in the task at hand. You would, perhaps, pay a human resource specialist to hire the right talent for a managerial role in your business. These are understandable examples of specialization. In too many instances entrepreneurs have the wrong impression of what trusted advisors can do for their business, e.g. their CPA.   Suppose you are selling an interest in an LLC to your partner. You tell your accountant your plans, and they write an agreement of sale document and rewrite the…

Preface: Financial statement assurance is not equal. Work with a CPA you trust for accurate financial statements.   Financial Assurance   Accountants have two types of assurance – positive and negative. Positive assurance is the wording in the report that obtains reasonable assurance with sufficient appropriate evidence to determine that the financials conform in all material respects with the specified criteria. The specified criteria must be sufficient in quantity and evidence obtained, e.g. Generally Accepted Accounting Standards. The criteria in positive assurance requires collection and review of adequate financial isotopes to fit the risk profile and requirements of the attest work. The quality of positive assurance varies from CPA firm to firm and largely upon the experience and expertise of the staff on the project. Positive assurance is not equal. For instance there are numerous smartphone networks. If all you need is a smartphone to make calls why shouldn’t you purchase the lowest cost? Simple. First let’s consider why you need a smartphone for business. The reason for the smartphone is to make phone calls, check email, and manage your business. Should you travel you need a smartphone network with the positive assurance to make or receive a call from any location. Low cost Wi-Fi phones will not suffice in this instance. Why try to save $10 or $30 dollars a month on your smartphone when you could miss a $20,000 or $200,000 sale with a faulty connection or missed call. In this instance it doesn’t make sense to save a few dollars. You need a superior phone network, and it makes financial sense to pay. If and when you need the smartphone in one of those cannot afford to miss moments, you will not regret paying that extra cost of an additional $150 or $500 per year. You pay…

Preface: Installment sales can defer capital gain taxes. When and how can installment sales work for your. Read further…   Capital Gain Deferrals with Installment Sales   Thinking of selling property with owner financing? Maybe you’re looking at an installment sale – a sale of property that occurs when one or more payments occur after the tax year of ownership transfer, and gain is deferred. Deferral is the key word here.  If a sale qualifies for an installment sale gain recognition, the deferred gain must be reported with installment sale methods unless your tax accountant elects out of the installment method on the sale in the initial year of filing. Here’s how an installment works. Suppose Jacob sold his farmland to Will for $2,000,000, to be paid in equal installments over 10 years, plus interest. Let’s say Jacob’s basis in the farmland was $1,000,000, and the deed was mortgage free. Jacob would receive a payment for $200,000, in the first year of sale and prorate his capital gain over the 10 year payment period. This therefore would result in stretching the deferral of tax payments on capital gains of $1,000,000 ($2m sale price – $1m basis). Jacob would report the sale or property on IRS Form 6252 with the following parameters. On IRS Form 6252 Jacob’s CPA would report the sale with a description of the property and selling price, and calculate the gross profit with the contract price ratio for the gain percentage on the installment sale of 50% ($1m/$2m). In this example Jacob would report $100,000 (50% of $200,000) of capital gain on his tax return in the first year of sale, versus $1,000,000. This would reduce his tax burden from say a $250,000 of capital gains tax in the year of sale to say only $25,000. Now let’s look at…

 Preface: If you’re selling your corporation, you should understand that you need to properly plan that sale to maximize value, and not only price.    Sale of Your Corporation: Assets vs. Stock   Thinking of selling your corporation? Read further. Selling a closely held business requires a team of advisors with business, finance, legal, and tax expertise. A sale of corporate assets should never be driven from one perspective, e.g. highest bidder. Here’s why. Let’s say you have a business valuator appraise the value of your corporation. Maybe the report said it’s worth $3.5m for instance. You’ve worked years to build that value in your corporation, and you should harvest the optimal net dollar; and net dollar is not always the highest bid. There are two common methods for selling for a corporation. Asset sale, or stock sale. Let’s look at these options in more depth. An asset sale is a sale of business assets, e.g. inventory, equipment, receivables, goodwill, patents….maybe even real estate. You should plan carefully years ahead for the sale of your business, especially if real estate is a corporate asset because of the tax implications. A stock sale is the sale of the stock of your business; the legal certificate(s) that entitle ownership to the entire corporation. Stock sale vs. asset sale. Let’s say that hypothetically your business appraiser valued your business at $3,500,000 and you have a $1m building in your corporation, $1m of equipment and machinery, $400,000 of accounts receivables, and $600,000 of inventory, with a stock basis of $2,800,000. You decide to take your business to the marketplace at $3,500,000. Be cautious, whether your selling for $3.5m, $1m or $10m, you need the right advisors before selling your business for the following reason. Trusted business advisors will help you maximize value, not price. Let’s say you get…

Preface: What is the difference between the accountants your business has the opportunity to retain? Read further to gain familiarity with what a CPA firm can do for your business.   CPA Firms and Your Business                                                          A respected CPA firm is more than a group of accountants and tax experts. CPA firms are trusted advisors who work with you to manage and protect your business assets and adhere to compliance regulations. CPA’s assist in corporate finance decisions such as financial accounting, financial analysis, budgeting, financial planning, forensic accounting, tax planning and filing, financial reporting, mergers and acquisitions, initial public offerings, share and debt issuance, corporate governance roles, i.e. a board of directors, and estate planning.   Managing   CPA’s guide your business through the mazes of key financial decision making. Whether you are refinancing debt, deciding on equipment purchase vs. equipment lease, maximizing cash flow, negotiating customer contracts, or acquiring a subsidiary, CPA’s have the knowledge to assist you in relevant financial decisions. Perplexing financial analysis can be simplified by having a trusted financial advisor, such as a CPA.   Protecting   A CPA can protect your business from financial risks by helping you to budget for avoidance or mitigation of cash flow shortages or more important, resolve issues with special asset department loans, and reduce tax. Often the greatest form of protection is in pre-planning and avoidance of risk prone decisions. You would be well advised to discuss financial plans with your CPA before decision making. Discuss how to structure business investment loans or equity investments to reduce risk of loss; have a consultation on capital expenditures or product pricing and cost methodologies to gain assurance your business is safeguarding resources and optimizing revenue.   Compliance   CPA firms can add value to your business by asserting observation of compliance concerns….

Preface: Pricing products or services requires planning. Opportunistic businesses will review and re-review pricing continuously.   What Is Your Product or Service Worth   What should you charge? It’s a question business owner, managers, and marketers have debated for centuries. Pricing your product or service is key to profitability; and business continuity. After all, you’re in business to make a profit; otherwise you’re a non-profit organization.   So what factors are considered in pricing? Common methods are variables of cost times a percentage markup; or cost+ pricing. Cost+ pricing factors cost of raw materials, labor, and overhead multiplied to a net profit margin. Overhead adds a pricing factor for utilities, rent, depreciation, insurance, repairs, advertising, office wages, employee benefits, etc. These are often fixed costs since you would have $5,000 dollars of rent per month whether you sell 100 units or 1,000 units. The set margin of markup should give you an above average market rate of return to your business and be a value to your customer too. Industry averages could include markups from 10% to 35%+. The markup should result in a 5%-10% margin of net income after all-in costs are calculated, i.e. cost of goods sold, production labor, and overhead.   Let’s say you produce 1,000 units a month and raw materials and labor cost $300 per unit. You would have $300,000 of costs per month + overhead. If monthly overhead is $50,000 you would have an average of $50 per unit of overhead for a total cost of $350 per unit. If you marked up your product 30% you would sell each unit for $455. This is simple pricing structure. You also need to evaluate your customer’s perception of price and value. Is $455 equal/higher/or lower than competitor’s? What is the shipping cost if you’re selling to products in multiple…

Preface: Financial projection assumptions require a wide scope of professional knowledge and financial judgment. Here’s what you need to know before preparing projections for your next major business decision. Cash has a source; plan before you write checks.      Financial Projections   Whether you’re raising capital for your business from bank financing or investor capital, financial projections are often required as an important tool to paint the projected financial future of your business subsequent to obtaining the capital from the source(s), and assessing the corresponding cash investment in your enterprise.   Financial projections begin with assumptions about your business marketplace and environment that require a wide scope of knowledge about factors specific to your industry, e.g. competitive conditions, market sensitivities and conditions, accounting policies, and regulatory conditions. But the scope of knowledge doesn’t end there, in addition, for accurate financial projections, you must identity past performance patterns for the business (or businesses, if projections are for a merger or synergistic acquisition) and trends in revenues, expenses, financial metrics, i.e. cash flows and performance ratio’s, and management performance contingencies.   CPA prepared projections are often for limited use, such as a regulatory agencies review or specific bank negotiations. More so, the more experienced the team, e.g. your CPA firm, assembling the financial projection, the greater the accuracy. Financial projections are based upon hypothetical assumptions that form the basis of the projection. Forming hypothetical assumptions is the first technical step of a projection. The hypothetical assumptions are the nucleus of projections and require profession judgment. This includes assumptions of top line revenues (sales), cost of goods sold, and operating expenses. These metrics are acquired from insights gathered assessing marketplace landscape from the scope of knowledge listed. Once the hypothetical assumptions are formulated, a projection projects next step is to form the financial projection….