The balance sheet is a financial statement that shows a company’s financial position at a point in time. The balance sheet format comes in three sections: assets, liabilities, and owners’ equity. The assets represent what the company owns. Then the liabilities represent what the company owes. Finally, the owners’ equity represents shareholder interests in the company. The value of the company’s assets must equal the value of the company’s liabilities plus the value of the owners’ equity.
Balance Sheet Equation
This balance sheet formula forms the basis of the statement which is also known as the accounting equation.
There are four basic financial statements: balance sheets, income statements, statement of cash flows, and statement of owners’ equity. Of the four, the balance sheet, also called the statement of financial position, is the only one that applies to a specific point in time. The others cover financial activity occurring over a period of time. That’s why the balance sheet is considered a “snapshot” of a company’s financial condition. Typically, you prepare the balance sheet’s accounting monthly or quarterly.
The three sections of the balance sheet consist of line items that state the value of each account within that section. There is no universal format for the balance sheet, so each company’s balance sheet will look somewhat different. This makes balance sheet analysis more difficult than with GAAP compliant reports. However, the basic equation shown above must always apply.
Balance Sheet Example
Jake owns an equipment rental company called Equipco. Jake’s company has been steadily growing. Due to this, Jake is interested in receiving a bank loan to finance some additional equipment purchases. He needs to know what his total dollar amount of assets and liabilities are so that he can meet the requirements and preferences of his banker. To do this Jake asks his bookkeeper for the most recent copy of his balance sheet.
Jake is excited to learn that he can qualify for his bank loan. To begin, his total assets value is at an acceptable level. Jake also has enough owners equity to satisfy his bank on the corporate level. Surprisingly, Jake finds that he does not have too many liabilities to qualify. This concern was, as he believed, his major obstacle to earning the loan. According to Jake’s banker, his balance sheet ratios have everything in order to receive his loan. All from one statement!
Porter’s Five Forces of buyer bargaining power refers to the pressure consumers can exert on businesses to get them to provide higher quality products, better customer service, and lower prices. When analyzing the bargaining power of buyers, conduct the industry analysis from the perspective of the seller. According to Porter’s 5 forces industry analysis framework, buyer power is one of the forces that shape the competitive structure of an industry.
The idea is that the bargaining power of buyers in an industry affects the competitive environment for the seller and influences the seller’s ability to achieve profitability. Strong buyers can pressure sellers to lower prices, improve product quality, and offer more and better services. All of these things represent costs to the seller. A strong buyer can make an industry more competitive and decrease profitpotential for the seller. On the other hand, a weak buyer, one who is at the mercy of the seller in terms of quality and price, makes an industry less competitive and increases profit potential for the seller. The concept of buyer power Porter created has had a lasting effect in market theory.
Conducting an industry analysis can be overwhelming and confusing. Download the External Analysis whitepaper to gain an advantage over competitors by overcoming obstacles and preparing to react to external forces, such as it being a buyer’s market.
Buyer Power – Determining Factors
Several factors determine Porter’s Five Forces buyer bargaining power. If buyers are more concentrated than sellers – if there are few buyers and many sellers – then buyer power is high. Whereas, if switching costs – the cost of switching from one seller’s product to another seller’s product – are low, the bargain power of buyers is high. If buyers can easily backward integrate – or begin to produce the seller’s product themselves – the bargain power of customers is high. If the consumer is price sensitive and well-educated about the product, then buyer power is high. Then if the customer purchases large volumes of standardized products from the seller, buyer bargaining power is high. If substitute products are available on the market, buyer power is high.
And of course, if the opposite is true for any of these factors, buyer bargaining power is low. For example, low buyer concentration, high switching costs, no threat of backward integration, less price sensitivity, uneducated consumers, consumers that purchase specialized products, and the absence of substitute products all indicate that buyer power is low.
Buyer Power – Analysis
When analyzing a given industry, all of the aforementioned factors regarding Porter’s 5 Forces buyers power may not apply. But some, if not many, certainly will. And of the factors that do apply, some may indicate high buyer bargaining power and some may indicate low buyer bargaining power. The results will not always be straightforward. Therefore, it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market.
• Buyer purchases comprise small portion of seller sales
Buyer Bargaining Power Interpretation
When conducting Porter’s 5 forces buyer power industry analysis, low buyer bargaining power makes an industry more attractive and increases profit potential for the seller, while high buyer bargaining power makes an industry less attractive and decreases profit potential for the seller. Buyer power is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework. Many respect the buyer power Porter’s five forces.
We are now experiencing the worst global pandemic in 100 years. COVID-19 hit the U.S.A. in Q1 2020 and businesses were forced to either slow down, shut down, or change the process of how they do business. Now is a critical time to understand the business restructuring process.
Most businesses, large and small, have been affected in some way, mostly negatively. On top of that, the price of oil came crashing down once again. This brought a parallel downturn in the oil and gas industry causing companies to consider a business restructuring process.
Since 2015 business restructurings were at an all-time low.
Just a few months ago businesses were booming, companies were having record years in 2018 and 2019, low-interest rates, access to capital, strong GDP, unemployment low, decent companies had good margins and cash was flowing. If you would have asked me in December 2019, what are the chances of the world economy to come very close to a complete shut down in a few weeks? I would have told you close to zero. The business restructuring process was far less common.
When margins are high, clients are knocking on the door and cash is flowing it is easy to forget about margins, working capital, and cash flow forecasting. There was a false sense of security in 2018 and 2019. We spoke to several business owners of large and small successful business and they did not have time to talk to us about managing cash flow, KPIs, and margins. If their books closed 3 weeks after the end of the month and on a cash basis, they were fine with that. In good times is easy to forget about the basics and having a backup plan in case you have that “rainy day”. Guess what, now we are all living that “rainy day”, but it is not just one day. It is likely to be a downturn for the entire year of 2020. In addition, very few companies had a backup plan for completely shutting down operations for 2 weeks, 2 months or more.
This was never supposed to happen.
Businesses Push for Survival
We have seen some businesses push to partially open and survive. We have seen a few businesses take the punch well because they had positive net working capital and cash in the bank. But we have seen many businesses struggle with barely making payroll and meeting its debt obligations.
NET WORKING CAPITAL = the company’s ability to meet its short-term obligations.
More than ever managing net working capital has become very important.
Business Restructuring Process
Throughout my career, I have helped companies successfully restructure their business because they were impacted by an event that caused them to be in financial distress. As a recent example, there were layoffs and a division of a company was shut down. The remainder of the company was profitable, smaller, and had a future and was able to survive.
How to Successfully Restructure your Business During a Global Pandemic
This blog is intended for all business owners out there, so we all have a chance of survival. Over my 30 years as a professional, I have witnessed countless financially distressed businesses go from struggling to surviving from a successful restructuring process.
The term restructuring can have several different meanings and can be used in different ways.
Restructuring can mean…
changing the management team
entering a different industry
shuffling people around within an organization
reorganization of your debt and operations out-of-court
filing for bankruptcy and reorganizing with court protection
Restructuring your Capital Structure and Debt
In a case where a company was impacted by an unforeseen event such as a global pandemic (COVID-19), the business was a healthy business in a healthy market, and from no fault of their own, they have now faced a situation of financial distress because of lost revenue, and debt on their balance sheet.
If it were not for COVID-19, restructuring would have not been needed. Restructuring can happen out-of-court, that means without filing for bankruptcy protection, or through a court process where a company files for bankruptcy protection.
Business Restructuring Process| Out-of-Court Restructuring
Without Filing for Bankruptcy | Out-of-Court Restructuring Process
Out-of-Court Restructuring is where a company attempts to reorganize its debt with creditors without filing for bankruptcy. In order for a business restructuring process to be successful, a Financial Advisor is hired to assist the business owners to restructure their debt with secured and unsecured creditors. This could also include raising capital to recapitalize your business.
In order for an out-of-court restructuring to be successful, it means that everyone wants to play ball. The parties involved are willing and able to enter into discussions to restructure the debtor’s liabilities and support the company with its future business plan. It only takes one major third party to object and this kills the opportunity for the out of court restructuring process to be successful. Also, keep in mind that in an out-of-court restructuring the business has no protection and can be hurt by aggressive creditors.
Business Restructuring Process | In-Court Restructuring
Filing for Bankruptcy | In-Court Restructuring Process
In-Court process, filing for bankruptcy; this is a formal process where the law provides the debtors with statutory protections. Assuming your business is a viable candidate for a Chapter 11 bankruptcy, your business will have the time and opportunity to negotiate and reorganize your debt and capital structure. The company will present a plan of reorganization, a business plan, that shows the court and creditors how the business will survive as a viable business after the bankruptcy.
A Second Chance at Survival for Businesses
The bankruptcy process is long, expensive, and takes a lot out of an organization. But if done correctly it gives the business a second chance to survive and probably with less debt. In bankruptcy, you will be dealing with things you have never dealt with before such as:
Bankruptcy attorneys
A court and judge
Possibly a creditors committee
Financial advisors
Strict reporting requirements and deadlines for reporting
Possibly a Trustee
The Beauty of the Bankruptcy Process
The beauty of the bankruptcy process, specifically Chapter 11, is that if the process and filing are well planned out there is a very good chance of success and emerging the other side with a strong company producing cash flow.
Kicking the Can Down the Road | Hardworking, proud, and out of control?
Common attributes of CEO’s, business owners/entrepreneurs are hardworking, proud, and they have always been in control. This is the first time for many business owners and CEOs not to be in control, it is the first time for feeling financial distress. So many of them “kick the can down the road” and avoid what their balance sheet and P&L are telling them.
The Debt is Not Going Away
Yes, it is true that many banks are being “kind” during the COVID-19 process, and maybe providing waivers for strict financial covenants related to the debt. But the reality is the debt is not going away, and there is still a lot of uncertainty around what is normal and will be the “new norm” for business.
Reclaim Control | Business Restructuring Process
Now more than ever it is critical that your financial statements are on an accrual basis. A cash-basis balance sheet will NOT tell you what your real net working capital is, and you will only be lying to yourself.
Take Corrective Action
Corrective action – talk to a financial professional to determine if you might need to have your company restructured. Your financial professional is NOT the CPA that prepares your tax returns.
A Trusted Advisor
We can provide an analysis and recommendation and walk you through the restructuring process, out-of-court, or in-court through a bankruptcy process. Give us a call and find out how we can become your trusted financial advisor through this difficult time.
It’s hard for companies to realize how much they are actually spending when it comes to hiring a new employee. Once they decide it’s time to pursue a new worker, a lot of resources are used to find the perfect candidate for the job. Finding the perfect candidate within a vast number of people might be very difficult, therefore costing a significant amount of time and money to the company. There are certain steps a company can take in order to minimize these costs. In this blog, we will walk through what the current hiring process costs.
What the Current Hiring Process Costs
Hiring and recruiting a new employee costs the company a lot more than just their salary. Recruitment costs are very often overlooked. Recruiters spend countless number of hours trying to find the perfect candidate for their needs, leading them to go through extensive research on countless number of candidates. This research, however, is not free. Finding the perfect candidate comes with a price. Let’s look at what the current hiring process costs:
Suppose you pay your recruiter $75 an hour and he looks through 100 resumes, each for 20 seconds:
$75 x (20s x 100 Resumes)
Let’s assume that 10% of those applicants now get an interview lasting an average of 1.5 hours:
$75 x (20s x 100 resumes) + (10 x 1.5 hours)
On top of that, lets presume 10% of those interviews make it to a second round:
$75 x [(20s x 100 resumes) + (10 x 1.5 hours) + (1 x 1.5 hours)]
That’s a total of 17 hours and for $75 and hour you ended up paying your recruiter:
17 x $75 = $1,275!
That is not even adding the cost that you spent advertising for the job posting, drug tests, background pre-screenings or assessment tests!
As you can see, hiring a worker is clearly not free, it can come with various unexpected costs that sometimes can go unnoticed. Companies should take proper measures to minimize these costs because as you can see above, each recruiting process can cost a hefty amount.
Even after spending countless amounts of time and money finding the perfect candidate, companies still run the risk of a bad hire. Maybe they needed to fill the job quickly, maybe they didn’t have enough talent intelligence, or maybe it was just an honest mistake. But hiring the wrong person can have significant effects on the company’s performance. Hiring a person that does not provide value to the company can be critical hit to the company’s development. Not only does it waste the companymoney, but it can also have a negative influence on companyculture. Be cautious when it comes to hiring a new employee and take proper measures to properly decide on the best candidate.
Tips to Improve Your Recruiting Process
Once you realize it is time for your company to hire someone, it’s a chore finding the correct person for the job. From the marketing to the interviews, it can be very important how you go about this process. Or you risk missing out on great potential candidates when you do things imperfectly. Here are some tips to improve your recruiting process:
Have an Accurate Job Description
Thoroughly define what exactly are the duties and responsibilities you are looking for and add these to the job description. Make sure they are as clear and accurate as possible. Try to have a job posting that will attract qualified candidates and discourages others. This will help you save a considerable amount of time in the screening process.
Advertise Your Job
Do some research on what type of job posting resources will work the best for your company, whether its posting online, in a school placement office, or through an employmentagency. The way you find you candidates can have a remarkable difference on the quality of your applicants.
Compare Applicants
Think of what your ideal candidate will look like. Then, have a strict screening process that would weed out applicants that would not be suitable for your company. After this, rank your remaining candidates in order from most to least suitable. You can also choose to have an assessment test that would measure their abilities in an actual job-like situation.
Show Them Why They Should Work For You
Once you have chosen your ideal candidate, now it’s your turn to sell him on the job. Remember that the strongest candidates will always have more opportunities. Hiring is a two-way street, so make sure you convince your candidate by communicating a strong vision and mission for your business with enthusiasm and sincerity.
Bypass the Current Hiring Process
It’s 2020. The Strategic CFO created Short|LYST due to the current environment and demand. Unemployment is at an all time high due to the global pandemic and many have lost their job. Candidates are faced with the traditional outlets of posting resumes on countless online sites and never getting a response. This is a black hole in most cases…There had to be some revolution to the hiring process, but the only changes in the past couple of decades are search firms, headhunters, and recruiters. That’s why we created Short|LYST. It allows employers to bypass the current hiring process and cut the current hiring process at least in half.
Instead of screening hundreds of candidates, interviewing dozens more, and risking not even finding the right candidate, Short|LYST does that all for you. Our team of experienced HR and financial executives take the financial and time burden off from the employers. All the employer has to do is pick and choose which recommended candidate they want to take forward. Learn more about Short|LYST here.
But often people either do not communicate these procedures or simply don’t follow them consistently.
Even when everyone is aware of and follows the established protocol, your system may be flawed. Before we show an example, you need to know how to manage cash flow.
Know How to Manage Cash Flow
We all know that cash is king – liquidity is essential for survival. Many entrepreneurs only know how much is in the bank, but they don’t understand how much cash they actually have. So, how does one manage cash flow?
First, you need tools.
Here are a few tools that can help a company manage cash flow:
Then you need to manage and work your operating cycle. Your operating cycle is “how many days it takes to turn purchases of inventory into cash receipts from its eventual sale”. It indicates true liquidity – how quickly you can turn your assets into cash. Calculate how long your operating cycle is using the following formula:
Watch your expenses carefully. If you do not have an eye on SG&A and procedures on what can be purchased, then you risk racking up unnecessary overhead. Think about too much inventory, unnecessary equipment replacements, extreme marketing budgets, etc.
Use Cash Wisely
Use your cash wisely. Always be thinking about will this add value to my company? when spending your valuable cash. If you will not see a return on your investment, then consider spending the cash elsewhere.
Collect Quicker
Another method to manage (and improve) cash flow is to collect quicker. This is a great method to use if you are in a cash crunch and can only make small improvements. For example, there is a $10 million company that collected their accounts receivable every 365 days. They had a lot of cash tied up. If they improved their DSO 5 days, that would be an extra $137,000 of free cash flow.
Example of Strategy for Managing Cash
Let’s look at an example of a strategy for managing cash flow. Imagine that Company A has 120 days of inventory on hand. They collect receivables in 60 days. And they pay payables within 30 days. Even assuming that this is their established cash managementstrategy and everyone follows it, Company A will still find itself in a cash crunch. This is because of the disparity of time that cash is tied up in inventory and receivables versus the speed with which it pays its payables.
While we never aim to scare our clients and readers, we have a huge plethora of war stories about what happens when companies don’t have internal controls. Just in my 18+ years of experience, I’ve compiled all the crazy stories for you today.
What Happens When Companies Don’t Have Internal Controls
So, what happens when companies don’t have internal controls? They open themselves up for theft, embezzlement, and liability. If there are no controls over what’s going on inside, then there is no control over cash flow, profitability, etc. It also “gives permission” to your team to do as they please and when it pleases them.They may or may not be making decisions in the best interest of the company.But without internal controls, they are likely less careful with the decisions they make.Have you ever noticed how easy it is for a child to spend their parent’s money, but if it was their own money they are less likely to spend frivolously?
War Stories | What Happens When There Are NO Internal Controls
In my experience, I have gathered so many war stories on what happens when there are no internal controls. Read about some of my most unforgettable below.
My Most Trusted Accountant and Advisor
Many years ago, while I was part of the audit team, I had a client who had the same accountant for 20+ years – we’ll call her Sheila. She has been with the company since it opened its doors and was the owner’s most trusted confidant and advisor. Sheila was in complete control of the receivable and payables.There was no oversight over Sheila’s position. When I started to look at their accounting records, there were several red flags…
Sheila was very defensive and abrasive when I came into the office and during the review phase of the engagement.She mentioned several times it was okay for me to work remotely.She wanted me to sit outside of her office, even though her office was large and had a meeting table and several chairs. Intuitively, I knew something was off with her.
I also noticed that the company cut thousands of checks every month to different companies. Sheila cut them and signed them herself.The business owner trusted Sheila and gave her access to manage the bank account and accounting records.
The biggest red flag was discovered during the audit of the transactions.There were several inconsistencies with who the checks were being written to and how they were recorded in the accounting system.It appeared Sheila would have the checks payable to herself and immediately go back into the system and change the name to a made-up vendor.After months of due diligence and investigation, it was discovered that she had stolen at least a quarter of a million dollars in just the last 10 years of her employment. While this hurts the owner, the owner gave less trust at face value and implemented internal controls to regain trust in accountants.
Creating Checks and Balances with Internal Controls
In another instance, the Chief Operating Officer of a company approved several supplier invoices.The accounts payable department processed the invoice and paid the supplier without further questioning. It took at least a year before the company learned that the COO created this false company, approved the invoices and received payments for personal gain.
Therefore, it is critical to have internal control at all levels of the company with different teams in place to create the check and balances it needs.Internal control would the purchasing group validate the supplier, approve the purchase order before submitting the order to accounts payable.Generally, operations would have received a receiving document once goods/services have been provided with a signature of the person receiving the goods/services.Accounts payable would receive the final invoice and match it against the approved purchase order and receiving document.
There are several things I learned about internal controls when I was in audit and now even as a CFO.
Trust Your Gut
If your gut is telling you something is wrong or off, it is worth investigating. When I have followed my gut, I have either found something wrong or found comfort that everything is okay. But those few times I did not trust my intuition, I missed steps to prevent fraud, etc.
Never Do Anything Without Oversight
As a CFO, business owner, entrepreneur, and accountant, I have learned that no one is too high not to have oversight. If I cut all the checks and sign them, that leaves it all up to me. Thankfully, I know myself and I would never do anything criminal! However, not all people are like me. There are, unfortunately, individuals that are motivated by rationalization, pressure, and/or opportunity. Oversight helps protect all parties – even yourself.
So that is what happens when companies don’t have internal controls – lack of control.
