Seizing Your Next Opportunity with Ease

A recent experience in CFO Connections brings me back to my child hood and it reminds me that listening to my parents has really served me well in life. I didn’t know my mother was a wise woman until years later when I look back on my life experiences. I now realize that she was steering me and showing me a better way to do things and to live life. She wanted me to learn from her life experiences so that I can make better decisions in life. I would often hear her say, “Some mistakes you just don’t want to make yourself. Sometimes, it is better to learn from other people’s mistakes.” How does that translate into the business world?

An entrepreneur with a brilliant idea put the wheels in motion a few years ago and it has grown tremendously into a second stage company with investors knocking on its doors. Recently, the founder of the company decided that he would take the company public. You ask, “hey, it all sounds great, so where is the problem?” Well, in order to go public, the company must have audited financial statements and the company plans to go public within a couple of months. This is already a challenging time frame for companies having their accounting records in tip top shape. Unfortunately, for this particular company, the accounting function was largely ignored for the past few years. With investors and underwriters pushing to move quickly and the company’s auditors in their busy audit season (so their time comes at a premium), the company must now frantically catch up in order to meet its goal of going public in a short period of time. Racing against time and pressure from investors and underwriters, the company hired a part time CFO to steer the company towards the right direction. Next, the part time CFO hired three accountants with different expertise to clean up the accounting for the past few years. This process has been costly and time consuming. Additionally, since the accounting function was largely ignored in the past, the company is also not in compliance with multi-states sales tax reporting and collections (and interest and penalties are accruing in the meantime) and its income tax filings. There are also no processes and procedures in placed with regards to internal control. Needless to say, it has been almost five months since the wheels have been put in motion and it is still a long road ahead for the company to reach its goal.

How would the alternative be different for the company? Having strong accounting leadership and an accounting team may be costly. After all, talents who can provide strategic leadership and help a company grow don’t come cheap. However, this is an investment that will generate returns many times over for a company. Taking a proactive approach on accounting means that it is less likely for a company to fall out of compliance. Being diligent in accounting also means that a company has time on its side. For example, for this particular company, it would have allowed them to strategically time the execution of the audits of its financial statements during off-season at a lower price tag. Most importantly, it allows a company to strike while the iron is hot. Opportunities don’t come often and money doesn’t have patience. This is especially true in these scenarios:

  • Investors knocking on your door – they love your idea and entrepreneurial spirit but also want to know that your company is making money
  • You decide to sell the company in the next few years – the buyer wants to know that your business is profitable
  • You have just secured a large customer and need funding from a bank to hire more people, buy more equipment, manufacture additional inventory, or acquire a new facility
  • You see opportunities and advantages in buying your competitors – you need funding in order to make it a reality

“When people tell me they’ve learned from experience. I tell them the trick is to learn from other people’s experience” – Warren Buffett

Which one are you? At CFO Connections, we are passionate in learning from each other and helping you grow. We know you have big plans ahead. Wouldn’t it be nice to know for certain that you will be able to realize those plans without the constraint of time and money? Let us help you seize your next opportunity. Contact us now.

The 3C’s to Better Credit – the Lenders Edition

On September 26, 2018, the Federal Reserve raised interest rate by 0.25%. That brings prime rate to 5.25%. Rate has been increasing at 0.25% interval at each quarter this year. I recently presented the 3 C’s to Better Credit in front of local business owners and arming them with valuable information on how to prepare themselves before talking to lenders. The best time to talk to lenders is NOW before rate continues to rise again and the cost of borrowing becomes a factor hindering growth. This could put a stop to growth plan and ultimately lead to layoff or going out of business.

Recently, I attended a panel discussion at the Commercial Finance Association in Tampa and asked the panelists (bankers and alternative funding professionals) this very important question. The answer not only doesn’t surprise me, it confirms what I have always believed that being proactive is always the best approach.

I asked that if businesses are planning on obtaining a loan, are there things that they can do to prepare themselves, not only to set themselves apart from their competitors but also would enable them to get financing quickly and with less frustration? The panelists responded that business owners should ensure that the business’s accounting and finance are in order. It is important to know that underwriters don’t begin the process of their evaluation and risk assessment until ALL requested information, both financial and non-financial, is received. Underwriters need to see the complete picture when forming those analysis. If business owners are not prepared, they could run into problems at the 11th hour and causing significant delay or even denial to much needed capital.

At CFO Connections, we educate business owners on the 3 C’s to Better Credit:

  • Credibility – show lenders you are serious by doing your own due diligence and get your accounting and finance in order and up to date. This could include doing a public record search on any potential outstanding lien and updating corporate records and creating a short list of vendors that may be a good fit based on service level, industries served, terms, or even locations, ensuring accounting records are up to date and having a deadline driven month end closing schedule.
  • Cash flows – use processes and systems to build consistent and predictable cash flows. Lenders need to know that a business can make payments on its debt. When a business has these processes and systems, it speaks to its ability to service the debt, and therefore, instantly attracts lenders’ attention.
  • Control – use effective internal control to protect cash flows and assets used as collaterals. Having all the cash flows in the world doesn’t mean much if they were threatened by fraud and embezzlement because of lack of internal control. By the way, 42% of small businesses with less than 100 employees are more susceptible to fraud as a result of lack of internal control, compared to businesses with more than 100 employees. Losses suffered by these smaller businesses are twice as much (approx. $200k) as that in larger businesses (approx. $104k).

We provide these services to business owners to help them proactively manage growth in their business. We believe that in doing so, it puts them ahead of their competition and makes them instantly appear more attractive to lenders. When a business is credible, has cash flows and controls to mitigate fraud, it becomes easier and quicker for lenders to make the important decisions, saving them more energy to work on the next deal.

If you are working with prospects or clients that are struggling to provide you the information you need, we can help smooth out that process by helping them strengthen the 3 C’s. Please reach out to us so that we can better help you and your clients and prospects. E-mail to [email protected]

Growing Your Business in a Rising Rate Environment

In June 2018, Federal Reserve Chairman Jerome Powell spoke at a news conference. Mr. Powell said that the economy had strengthened significantly since the 2008 financial crisis. Mr. Powell signals that rate could go up twice again during the remainder of 2018 and again in 2019. The Wall Street Journal prime rate currently sits at 5%, up 0.75% from a year ago.

It is certainly good news that our economy is strong but what does that mean for businesses that need to borrow to grow? Here is what commercial lenders recommend: be proactive and start talking to lenders now.

Applying for a business loan is not any different from applying for a mortgage. You fill out an application, provide the necessary documents, and wait for a call from the mortgage company. You anxiously wait for that call and when you finally hear from the mortgage company, 9 times out of 10, it isn’t a go right from the beginning. The mortgage company has done the due diligence on you and is now requiring you to clean up your record before giving you the green light. If that isn’t stressful enough, you now are concerned that your dream house could be off the market in the time that it takes you to “get everything nice and pretty”. Does this scenario sound familiar to you?

Commercial lenders use a similar approach when evaluating companies applying for loans. You can be certain that one of the companies is likely your competitor. How do you position yourself at the front of the pack to get the lenders’ attention? The key is to understand what kind of due diligence they perform to uncover the weaknesses in your businesses. Wouldn’t you, as the business owner or CFO of the company, like to know those weaknesses and proactively correct them before going to the lenders? In addition, lenders use the 5 C’s approach to size you up against other companies vying for capital to grow their businesses. They use them to evaluate your ability to service the loan and the strength of your collaterals, among other things.

Time is money. That rings even more true when growing your business in a rising rate environment.

  1. Do you have a growth plan in the next few years that requires capital to bring it to fruition?
  2. Do you want to attract lenders’ attention and obtain the most favorable terms?
  3. Do you want to be your industry’s leader?

We are passionate about helping businesses grow. At CFO Connections, we help business owners become less anxious about time and money. We help businesses rise to the top of their game by improving cash flows, and building and protecting business value. If you answer YES to any of these questions, please contact us and we will stop by for a complimentary visit!

Protect Your Legacy with Effective Internal Control

Recently, quite a few conversations I had with business owners and finance professionals were around how to protect the value they’ve built in a company during exit planning. One of the conversations I had with the COO of a local company went like this:

COO:   We had an accountant many years ago who we thought was doing a great job for us. He had worked for us for 5 years and we didn’t know that he was stealing money from us until after he dropped dead!

Stella:  Let me guess… he also never took a vacation either.

COO:   Come to think of it, you are right, Stella!

Poor internal control, or lack thereof, provides employees the perfect opportunity to steal at the expense of your business. Had the company instituted and enforced a mandatory vacation policy, it could have given the fraud scheme to unravel on its own. Embezzlement comes in many forms and stealing cash from a business, when the ingredients are ripe, is one of the easiest ways to commit fraud. Here are the ingredients required for the perfect storm:

Opportunity – let’s say you are walking your dog in a park and you come upon a wallet with money inside on a bench. What do you do?

Rationalization – on the rare occasion, an ethical personal may hand the wallet over to the park ranger or the police. However, most likely, someone will pocket the wallet and rationalize “finder’s keeper”.

Pressure – let’s say the person who discovers the wallet has financial hardship. The person may not make a lot of money and has overdue bills at home. Now this person could be more likely to pocket the wallet.

Internal control comes in many forms. It could include the followings:

  • Owner, senior management or board of directors setting tone at the top letting everyone in the business know that unethical behaviors are not acceptable and could have severe consequences to the fraudsters’ personal and professional life.
  • Segregate duties to include more than one person in processes so that people can cross-check each other, reducing fraud incidents and the likelihood of errors.
  • Restrict access to computer records so that information is only made available to people who need it to conduct specific tasks. Doing so reduces the risk of information theft and the risk of asset theft through the modification of ownership records.
  • Safeguard assets, either through electronic control or physical control when not in use, making it more difficult to steal them. This includes the company’s cash, accounts receivable, marketable securities, inventory and other valuable assets.

Often time, business owners are not willing to invest upfront cost to protect their businesses and they end up paying for it dearly at the end. These problems could have been prevented right from the beginning. When nothing bad happens, we are tempted to think that the risks are low and that the business is properly protected. However, ignoring the risks could have catastrophic consequences in the long run and therefore, much more expensive, as supposed to addressing the risks right now. An experienced advisor can help identify and address the risks in your internal control and help you protect the value you’ve built in your business through blood, sweat and tears! This will make a successful exit more likely and uneventful!

If minimizing the threat to the business value you’ve built has been on your mind, but you haven’t focused your attention on, contact us today so that we can begin to help preserve your legacy for you.

Special invitation: CFO Connections will be partnering with local merger and acquisition experts in September to host a lunch and learn event on protecting business value. Please send an e-mail to [email protected] to reserve your special invitation. This lunch and learn is limited to a small group of local business owners so hurry before we reach our limit.

“I wish I had done…” Never give yourself the opportunity to utter these words by having effective internal controls.

Here is a nightmare scenario that could happen to you if you don’t have effective internal control.

An accounting manager who allegedly embezzled more than $1.5 million from her employer has pleaded guilty to wire fraud.

Stantisha Kemp was a payroll and accounting manager at an Atlanta-based company that developed medical technology from 2007 to 2013, according to the Justice Department. Over that six-year period, she allegedly falsified payroll records that were sent to a payroll processing company and telling the payroll processor to directly deposit the deposit funds in her personal bank accounts every month. She told the payroll company that a doctor with the initials Y.H.J. was an employee of her company. She hid the scheme by creating a set of fabricated internal payroll records that made no mention of Y.H.J., who hadn’t worked for her company since early April 2010. Nevertheless, Y.H.J.’s unauthorized salary payments were deposited in Kemp’s bank account each month until February 2013. Sentencing is scheduled for June.

“Accountants who lie, cheat, and steal threaten the financial solvency of businesses,” said U.S. Attorney Byung J. Pak in a statement. “Businesses must remain vigilant against fraud — all too often the perpetrator is someone they know.”

Internal control, as defined in accounting and auditing, is a process for assuring achievement of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. Another way of looking at internal controls is that these interlocking set of activities are needed to mitigate the amount and type of risks to which a company is subjected.

Internal control comes at a price because it frequently slows down the natural process flow of a business, which can reduce its overall efficiency. Consequently, the development of a system of internal control requires management to balance risk reduction with efficiency. Therefore, management must be willing to accept a certain amount of risk in order to create a strategic profile that allows a company to compete more effectively, even if it suffers occasional losses because controls have been deliberately reduced.

Internal control comes in many forms. It could include the followings:

  • The existence of a board of directors who oversee the entire organization and provides governance over the management team.
  • The use of internal auditors to self-test the system for flaws. Internal auditors routinely examine all processes and look for failures that can be corrected.
  • Segregate duties to include more than one person in processes so that people can cross-check each other, reducing fraud incidents and the likelihood of errors.
  • Restrict access to computer records so that information is only made available to people who need it to conduct specific tasks. Doing so reduces the risk of information theft and the risk of asset theft through the modification of ownership records.
  • Safeguard assets, either through electronic control or physical control when not in use, making it more difficult to steal them. This includes the company’s cash, accounts receivable, marketable securities, inventory and other valuable assets.

A key concept that companies must understand is that even the most comprehensive system of internal control will not entirely eliminate the risk of fraud or error. There will always be a few incidents, typically due to unforeseen circumstances or an exceedingly determined effort by someone who wants to commit fraud, e.g. collusion.

A company that operates without internal control is like a vault without a lock. No matter the size of the company, there are always processes that can help safeguard company assets and reduce fraud and error. If you are already operating with internal control that were put in place a few years ago, it is highly recommend that you review the processes to ensure that they still contribute to your organization’s objectives. This is especially crucial if your company has experienced growth since most of the organization’s efforts naturally went towards achieving such result and keeping up with growth.

Have you often wondered about the followings?

  1. My accounting department consists of just one person. How can I design and implement effective internal control in my company?
  2. I thought I should be more profitable based on how much we sell and spend but the numbers don’t show it. Are there errors in my financial statements?
  3. We implemented some internal control in our company a few years ago. Since then, we have expanded our offerings to our customers and hired additional team members. Things get chaotic in our office from time to time and some things fell through the cracks and we upset a few customers. Is it beneficial for us to re-evaluate our internal control?
  4. We have a certain level of internal control in place but how do I know that they are operating effectively?

Give us a call and we will help you navigate through your world of financial control in a complimentary consultation.

or e-mail us here.