Accounting

When Convertible Notes Make Sense for Consumer Companies

Great piece by Ryan Caldbeck, CEO of crowdfunder CircleUp, on using convertible debt to grow early stage consumer product companies.  Shorter version: It helps defer valuation conversations when you have solid revenue, but the current revenue does not reflect the company’s potential.  For the full article, click here.

If you are interested in investing in early stage consumer product companies, I highly recommend CircleUp.  They have a number of great investment opportunities.

Job Swapping and Career Development

As a middle market CFO, one aspect of my past experience at large corporations that I miss is the ability to develop talent throughout the accounting and finance team through job swapping and promoting from within.  In fast growing middle market businesses, there is ample opportunity for career development, but it stems from the growth of the company and the need for each person to wear multiple hats.  In larger corporations, you need to rotate people through different positions to diversify their skills, improve operations and prevent boredom.  In middle market companies, it’s not as easy or as necessary, but that doesn’t mean you shouldn’t do it.

If there aren’t enough positions within your accounting and finance team to make it happen, consider temporary job swaps with other departments.   Your financial folks might bring a new perspective to the sales or operations divisions and vice versa.  It will promote better teamwork, develop your talent pool and keep people engaged, just like it does at large corporations.

Kickoff of Budget Season

The chill in the air, the smell of brats and burgers wafting through crowded parking lots, the excitement on the painted faces of rowdy fans… it can only mean one thing:  It’s time to kickoff Budget Season.

The quarterback sneak, the triple option, the end around, the hail mary and the punt – these are all moves managers make throughout the budget approval process with varying degrees of success.

What tools do you use for budgeting?  Do you rely solely on Excel spreadsheets or do you use a more sophisticated budgeting software such as Microsoft’s Management Reporter or do you use a hybrid approach such as Vena Software? The advantages of going beyond Excel include the ability to manage workflow throughout the process, to make your individual budgets more consistent and structurally secure and to roll them up easier for automatic visibility to the big picture.  Most companies start out using only Excel spreadsheets and eventually evolve to a more structured format.

Regardless of the software you use, your budget should typically include the following components:

(1)  A schedule of dates and deadlines that clearly spells out who is responsible for what and by when.

(2) Payroll by employee including open positions and additional headcounts – this schedule should roll forward into the budget to calculate labor costs and benefits and may also be used to allocate expenses between departments.

(3) Fixed Assets and Capital Expenditures – this schedule should roll forward to the P&L for depreciation and to the Balance Sheet/Cash Flow Statement for capital expenditures.

(4) Comparisons to current year and long term plan.

(5)  The aforementioned “Cash Flow Statement” should be part of your budget.

I have to get on a plane now.  What other components should be built into a good budget?

E&Y Study Shows Private Equity Backed Companies Crushing Public Markets

A new study released by Ernst & Young examined 539 Private Equity deals that exited from 2006 to 2012.  These are my key takeaways from the study:

  • PE backed firms crushed public companies and have done quite well in spite of the recession.  The PE exits from 2006 – 2012 outperformed investor returns on publicly held companies by a multiple of 5.4 over the same period.  For PE exits from 2010 – 2012, many of which were entered into prior to the recession, annual EBITDA growth averaged 11.8% compared to 5.5% in public markets.
  • Organic revenue growth is increasingly the primary driver of growth in EBITDA.  For PE exits from 2010 – 2012, organic revenue growth (as opposed to EBITDA growth through acquisition or cost-cutting) accounted for 45% of the growth in EBITDA versus 39% in the pre-recession years of 2006-2007.  In 2010-2012 alone, organic revenue growth accounted for over 50% of the growth in EBITDA.
  • Multiples, which were depressed during the recession, have rebounded.  For PE exits from 2010 – 2012, EBITDA growth accounted for 70% of the PE returns with the other 30% being from increasing multiples.
  • Holding periods are up.  For PE exits in 2012, the average holding period was 5.1 years, up from 3.4 years in 2006.

Here is the link to the full study: EY PE Study 2006 to 2012

Accounting Humor – It’s Accrual World

prepared TB balanced babyA few accounting and finance jokes….

What did the accountant use for birth control?  His personality.

What do you get when you cross an accountant and a jumbo jet?  A Boring 747

Things overheard at a recent CPA mixer:

“With friends like mine, you need an allowance for doubtful accounts.”

“I consider myself a recovering CPA.”

“I’m a CPA.  A Certified Party Animal.”

“No, Irving.  Obamacare’s individual mandate doesn’t have anything to do with you going out to dinner and a movie by yourself.”

Please share your favorite accounting and finance joke in the comments section of the blog or the LinkedIn discussion group.

Win a free registration in Excel University Vol 1 online training – a $399 value

excel_university_logo_100A few weeks ago I blogged about the Microsoft Excel tips I had learned at a meeting of the Los Angeles chapter of the Institute of Management Accountants.  The presenter at that meeting, Jeff Lenning of Click Consulting, just notified me they have converted the content of Excel University Volume 1 into an interactive, self-paced training format, and it is now available through their online learning management system (LMS).  Click here for details.

The original blog entry was quite popular and generated many comments on the blog and in various LinkedIn discussion groups as well as many clicks through to the Click Consulting website.  As a thank you, Click Consulting has offered me the opportunity to give away one free enrollment in the new Excel University Vol 1 online training, a $399 value (currently on sale for $299).  To enter, simply join the LinkedIn Discussion Group “Middle Market CFO” on or before 7/31/13.  One member of that group will be chosen at random on 8/1/13 and the winner will be announced right there, in the Middle Market CFO discussion group on LinkedIn.  Good luck!

Communicating Financial Info to Non-Financial Folks

Clear communicationMany highly intelligent employees who are skilled and passionate in their area of expertise will glaze over like Jessica Simpson listening to Robert Plant when you try to talk to them about financial information.  The following tips will help you talk about finances so non-financial management and staff will listen and understand.

  • If there’s a bustle in your hedgerow, don’t be alarmed now.  It’s just a spring clean for the May queen.  No idea what I’m talking about?  That’s what we sometimes sound like when we are talking financials to non-financial people.  CFO’s are so accustomed to abbreviations like EBITDA and ROI; or to phrases like Working Capital and Discounted Cash Flows; or even to words like Accruals and Amortization, we forget these words sound like gobbledygook to some of our non-financial peers.  Do not assume they will ask for the definition of terms they don’t understand as they may be too embarrassed.  By keeping your jargon in check and stopping to explain the meaning of confusing terms, you will keep them engaged and win their trust.
  • Speaking of trust, build it, ’cause you know sometimes words have two meanings.  Non-financial people are often intimidated by financial discussions and they may feel you are trying to fool them.  Once you have built their trust, they become far more interested and responsive in financial discussions.  Getting to know your audience will help you build their trust.  Go to lunch with them or activities outside of work.  Give them credit for their accomplishments in front of others.  Admit something self-deprecating like your love of Led Zeppelin.  Most importantly, don’t do anything to erode their trust.
  • Numbers are intimidating, but with a word she can get what she came for. Most CFO’s can look at a page of numbers in a detailed financial statement and quickly extract all the important information.  Non-financial people do better with words and, better yet, graphics.  The ability to create easy-to-understand graphics is a skill CFO’s need to master.
  • Yes there are two paths you can go by, but in the long run, your message will be better received when you use consistent metrics.  If you are constantly changing the metrics or not reviewing them on a consistent and frequent basis, they may not spend the time to figure out the message.  When they see the same metrics over and over on a routine basis, they become comfortable with them, they learn how to quickly absorb the key information and they will review them as part of their regular routine.

Following these tips may not help you climb the stairway to heaven, but they will make you a more popular CFO.  More importantly, it will help you keep your company’s non-financial employees better informed so they can do their jobs more effectively.  If you want an idea of how nonsensical financial jargon can sound, check out this hilarious random financial phrase generator.  If you like this blog post, please share it with your connections and discussion groups on LinkedIn, or on Twitter or Facebook using the icons below.

Complying with California Sales Tax

sales taxIn California as well as most other states, if your business purchases taxable items from an out-of-state vendor, that vendor may not be required to charge you sales tax if they have no presence in California, but that doesn’t mean you don’t have to pay it.  It’s called Use Tax and your company is required to pay it directly to the California Board of Equalization (BOE).  The BOE keeps track of the top non-compliance issues they bust companies for and that one tops the list.

Next in line?

  • When you sell taxable goods to another company for resale purposes, you do not have to charge sales tax provided you obtain and retain a resale certificate from the customer.  The second biggest non-compliance issue is selling for resale without the proper supporting documentation.
  • When you purchase items for resale, but then remove them from inventory for personal or non-resale use, you are required to pay Use Tax on the purchase cost of those items.  Failure to do so is the third most prevalent noncompliance issue.

For more information and the complete list of the top CA BOE non-compliance issues, click here.

Management By Dumpster Diving

ManagementByDumpsterDivingI met with a middle market company last week.  It was owned by two charming brothers who had grown it over 20 years into a successful $30 million manufacturing business.  We were discussing preparing the company for outside investment.   If you ever listen to the NPR radio show Car Talk hosted by the venerable, Peabody-Award winning Tappit Brothers, Click and Clack, you have an idea of the type of guys who owned this business and how much fun I had talking to them.

While touring the facilities, one of the owners was talking about their differing management styles and said his brother practiced what he called ‘Management By Dumpster Diving’.  Each morning, he would tour the facilities and each time he passed a dumpster or waste can, he would poke his head in to see what was there.  It was a 24-7 operation, so this was his primary way of determining the waste and efficiency of the operation the night before.  The dumpster diving brother claimed he learned a lot of interesting information about his company and employees over the years.  The other brother claimed he was preparing for a future life on the streets!

This highlights what I love about entrepreneurs and why they need to make changes when they bring in outside investors.  Entrepreneurs are there everyday, doing whatever they need to do to grow the business, taking risks, getting dirty if necessary, inventing their own methods and solutions that fit their unique business and personal management style.  Private equity groups are not going to go dumpster diving to determine the previous day’s waste.  Larger companies with offsite ownership need systems and policies in place to measure and report KPI’s such as raw material usage analysis and production efficiency.  It’s not necessarily better or worse than the dumpster diving approach.  It’s just a good example of how a management process that works for a company at a particular stage of it’s development will not work as effectively as it grows and the ownership structure changes.

As an interim CFO for companies like this, I can help identify the necessary changes and implement them, before or after the change in ownership.  Please contact me directly if I can help your company or private equity group in this capacity.  For 7 tips on being successful as an interim CFO at private equity portfolio companies, click here.  And feel free to share any interesting management techniques you’ve come across and post them in the comments below or tweet them to me @middlemarketCFO with hashtag #ManagementByDumpsterDiving.