Tag Archives | start up

Business Accelerator

See also:
Dilemma of Financing a Start Up Company
Why do most startups fail?
Financing a Startup

Business Accelerator Definition

The business accelerator definition is a program that includes mentorship, education, and typically a “demo day” where companies are able to pitch their business to the business community. This business community is typically comprised of potential vendors, investors, partners, and customers.

Start ups, early stage companies, or subsidiaries of existing companies participate in business accelerators to accelerate their sales, operations, and financials.

Business accelerators are either publicly or privately funded. Publicly funded accelerators are funded by the government. They typically do not take any equity. But they generally focus on a specific industry – including biotech, fin tech, med tech, and clean tech. Whereas privately funded accelerators are funded by private entities. Because there is a higher risk for the investors, they typically take some equity or provide capital as debt.

Regardless of the type of business accelerator, it’s important to note that they are highly competitive. Application processes are usually extensive as each accelerator needs to protect their reputation – the companies they “pump” out.


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Purpose of a Business Accelerator

The purpose of a business accelerator or accelerator programs is to grow young companies by nourishing them with the support, connections, and knowledge they need to be successful. Many times universities will have an accelerator program to monetize the intellectual property created. Likewise, governments will host these programs to fill a gap in their initiatives.

Should You be a Part of a Business Accelerator?

Now that you know what an accelerator can do for you, should you be a part of an accelerator? It all depends on the size of your company, whether you need further mentorship and coaching, and if you are preparing for a round of financing.

Need to Mentorship & Coaching

Many of our clients don’t realize how valuable mentorship and coaching until they become coaching participants in our Financial Leadership Workshop. Mentorship and coaching can help further your network, your product, your process, and your brand. They provide a non-filtered, un-biased support that, while may sometimes be harsh, will help further your company.

Preparation for Financing

If you are preparing for your Series A, seed capital, venture capital, or angel investment, it’s important that you see all your options. As more companies are starting up, you will see the investor pool growing. Just because you know only one Angel investor now does not mean that is your only option. Accelerators help connect the right investor for your company to you.

Business Accelerator vs. Business Incubator

One question we get often is, “what’s the difference between a business accelerator and a business incubator?” A business accelerator can often last anywhere from a couple weeks up to a year. Whereas a business incubator holds companies from a year up to several years. An incubator’s goal is to develop a successful company, so until they are ready to fly, they continue to incubate them.

Need guidance in networking and taking advantage of your business accelerator experience? Download your free Networking for Introverts guide and start building your network today.

Business Accelerator, Business Accelerator Definition, Purpose of a Business Accelerator

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Business Accelerator, Business Accelerator Definition, Purpose of a Business Accelerator

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Irrational Exuberance & My Calculator

Irrational ExuberanceWhen I first started my career, I had a business partner. As an entrepreneur, I would come up with all of these great ideas and run them past my partner. Every time I had a new idea, he’d bring out his 10-key calculator and say “Okay, walk me through it.” He wanted me to run the numbers to check if it was actually a viable idea. The thing is… It’s really easy to be rich on the calculator. Enter the concept of irrational exuberance.

What is Irrational Exuberance?

The term irrational exuberance, originally coined by Alan Greenspan, is defined as “unsustainable investor enthusiasm that drives asset prices up to levels that aren’t supported by fundamentals” (Investopedia). This term stemmed from the dotcom bubble of the 1990s. The market was overvalued and disaster seemed imminent, and it was.

Irrational exuberance was meant to be a warning sign. Wikipedia quoted Greenspan during his “The Challenge of Central Banking in a Democratic Society” talk on December 5, 1996 (see below). Because of these statements, companies around the world decreased the values of their products or services to accurately predict and forecast the future.

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

In very simple terms, irrational exuberance is the essentially when you value a product/service much greater than its actual worth. This is a direct result of being calculator rich.

Irrational exuberance can destroy your company’s value. Good new for you! Click here to download the Top 10 Destroyers of Value whitepaper where we go in depth why it’s a destroyer and how to avoid it (and improve the value).

What is Calculator Rich?

Let’s start with a question to define “calculator rich”… Have you ever came up with a brilliant idea that you thought would be a million dollar deal? You start with 1,000 widgets and sell them for $10 each. Great! That’s $10,000! But what if you sold it for $25? That’s $25,000. After 20 minutes of running the numbers, you’ve grown 1,000 widgets into $1B business based upon a price that the market likely won’t bear.

Have you ever been “calculator rich”? If you’re shaking your head no, then you are most likely lying to yourself. It’s incredibly easy to punch figures that seem normal into the calculator, but when you put those figures into the bigger picture, your forecasts are dramatically skewed and irrationally exuberant. I will be the first one to admit that I have to consistently train myself not to be calculator rich. We’re all guilty of it at some times.  It’s so darn easy to dream with a calculator.

Irrational Exuberance & Calculator Rich

Being irrationally exuberant and calculator rich can go hand in hand. If you already have unrealistically optimistic expectations, it’s not hard to justify those expectations with calculations.  A calculator rich mentality is often the direct result of an irrationally exuberant environment.  The extent of that exuberance or richness is dependent on the numbers used.

How to Fight “Calculator Rich” Tendencies

Having unrealistic expectations can be a huge destroyer of value. If you have a bias to be calculator rich, there is a strong chance you are also irrationally exuberant. There are four major actions that you, as the financial leader of your company, can take to correct this normal but potentially destructive behavior.

Recognize the Bias

Being irrationally exuberant has caused hyperinflation and/or bubbles in the general market. Just like we saw in the mid 1990s, Greenspan expanded on how this type of behavior impacts spheres as large as the stock market. Recognize the bias to overvalue, overestimate, over project and correct accordingly.

This bias is not necessarily wrong, but it can be destructive if you fail to recognize it and solely rely on it.

For example, one of my team members has a business idea that she is investigating to determine whether or not it is a viable opportunity. I advised her to be realistic when measuring the opportunity, to consider all costs and benefits and to avoid being calculator rich.

Lean Start Up

As an adjunct professor for the Wolff Center for Entrepreneurship, I consistently tell my students to do things in a small way first. This allows you to fail fast and pivot into a better direction.

Do not let your excitement carry you away. Whether you are the entrepreneur, the CFO, or an aspiring CFO in your company, it is critical for your success to all be on the same page. Dysfunction (and loss of value) occurs when members of the management team do not see the company in the same light. Shave off some of the fat of the company and further develop your “lean, mean, entrepreneurial machine“.

Bring Objectivity

Particularly if you are the financial person in your company, it is essential that you guide your entrepreneur without putting out the creative fire. What do I mean by that? Sometimes, entrepreneurs have wild ideas that from the first hearing may seem outlandish. Instead of splashing water all over their idea’s spark, bring objectivity to the conversation.
The first way you can do that is to simply take away the calculator. Don’t let the person who is more prone to being overly optimistic calculate the potential upside. Your job is to help identify and mitigate the risks of this new idea, not to quash it. Put together projections, then explain how objectively the idea works or does not work.

Understand an Outside Investor’s Viewpoint

One of the Top 10 Destroyers of Value is simply not understanding an outside investor’s viewpoint. Why does this matter or relate? If you overvalue your product or service when seeking capital from outside investors, the truth will be discovered and your credibility can be called into question.
The investor pool is a small world, just like the business world. It is essential to your success that you try to remain as realistic as possible when dealing with those investors. Otherwise, you may risk being “blacklisted” from the investor pool. This happens all the time. Start by understanding how investors look at your company, and build value accurately and truthfully.

How calculator rich are YOU?

Feel like you may have overvalued your product or service? Or pursued that million dollar idea that is really only worth $10,000?Identify how calculator rich you are. Then, start fighting those habits to go from being calculator rich to actually rich. If you’re looking to sell your company in the near future, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your real value.

Irrational Exuberance

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Mezzanine Debt Financing (Mezzanine Loans)

See Also:
Recapitalizing Your Company Using Mezzanine Financing
Angel Investor
Venture Capitalist
Why Venture Capital
What is a Term Sheet

What is Mezzanine Debt Financing (Mezzanine Loans)?

Mezzanine debt financing is a subordinated and unsecured loan which typically features a warrant. This type of debt has higher interest rates because of its subordinated and unsecured status. It is not backed by collateral. In the event of debtor default, the claims of mezzanine lenders are senior only to the claims of common shareholders. Therefore, use mezzanine debt to finance startup companies with growth potential or to complement other forms of debt in a leveraged buyout.

Like other debt instruments, mezzanine debt includes a contract that stipulates the details of the loan. The contract describes the amount of the loan, the rate of interest and the interest payment schedule, the due date for principal repayment, and whether or not there is a conversion feature. The loan may also allow a portion of the interest payments to be accrued over the life of the loan and paid along with the principal at maturity. This feature is payment-in-kind.

Interest rates on mezzanine loans are substantially higher than other types of loans. This is to compensate the lender for the riskiness of making a subordinated and unsecured loan.


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Mezzanine Lender

Mezzanine lenders are often private equity funds or venture capitalists. Therefore, consider these mezzanine loans speculative investments. The debt instrument provides a stream of income and some downside protection, while the warrant feature offers the potential for upside gains.

Advantages and Disadvantages of Mezzanine Debt Financing

For borrowers, mezzanine debt financing allows companies with less collateral to secure funding for growth. On the other hand, the interest rates on this type of loan are comparatively high. So it is expensive source of capital.

For lenders, mezzanine debt instruments offer higher yields than secured or more senior forms of debt. Also, the warrant feature offers the promise of gains if the borrowing company’s equity increases in value in the future. On the other hand, there is a greater risk of default because the claims are subordinate and unsecured.

Mezzanine Capital

Mezzanine capital refers to subordinated and unsecured debt or preferred equity. It often includes a warrant, or a conversion feature, that allows the lender or investor to convert the debt or preferred stock into a specified quantity of the company’s common stock at a set price within a stated period of time.

Equity Warrants

The equity warrant feature of mezzanine capital allows the lender or investor to convert the loan or preferred stock into a specified quantity of the company’s common stock at a set price within a stated period of time. Design it to give the lender or investor an equity stake in the possible future success of the company.

Mezzanine Meaning

The word “mezzanine” derives from the Italian diminutive form of the word “middle.” Use it to describe the lowest balcony in a theater.

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Mezzanine Debt Financing, mezzanine loans
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Prepare a Break Even Analysis

See Also:
Contribution Margin
Cost Volume Profit Model
How to Prepare an Investor Package
ProForma Financial Statements
Net Profit Margin Analysis
Comparison Analysis

Break Even Analysis Definition

The break even analysis definition is the studying the path to the point where a company is neither losing money nor making a profit. It is very important to the survival of any start-up business. You can perform it for either products or the business as a whole. Reference the break even expenses as either pro or post-forma – that is before or after the company has been formed.

Break Even Analysis Explanation

The break even analysis serves to provide the company with a very important piece of information: “How much revenue does the firm need to make in order to break even?”

This break even analysis is quite easy to do. The only critical piece of information that you will need to attain is a breakdown of the your firm’s expenses into Fixed Expenses and Variable Expenses.

Once you have a breakdown of fixed costs and variable costs, input these costs into the template. You will also be able to conduct various “What if” scenario analyses to see how the breakeven revenue will change.

Once you are able to arrive at the break even analysis, you can show the Owner(s)/Management this metric and make it part of their sales planning. Another idea might be to incorporate this metric into the Flash Report review meeting. This way your staff can know on a weekly basis if they are on track to at least breaking even.


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Break Even Formula

Use the following break even formula:

Break Even Point: Total Revenue = Total Costs

Prepare a Break Even Analysis

Let’s look at how to prepare a break even analysis.

Accumulate Expense Information

In order to successfully prepare a break even analysis, you need to gather and/or create the following financial information: Current Monthly Fixed Expenses (Dollar Basis), Current Monthly Variable Costs (as a Percentage of Revenue) and any “What if” scenario changes that you would like to consider. Note: This is optional depending on whether or not you would like to conduct a sensitivity analysis.

Depending on the robustness of your financial system, you may or may not have some of the above inputs. As such, it may be necessary to first create them prior to working on the break even analysis.

Once the initial break even analysis has been done, it will just be a question of maintaining it by inputting the most recent financial information. This maintenance can be done on either a monthly or quarterly basis. The CFO/controller should set it up. Another consideration would be to “outsource” the task to a consultant. Once you get the expense info, you will need to separate the list into a Fixed Expense portion and a Variable Expense portion.

Also, as part of your break even analysis, you may want to discuss any “What if” scenarios with the Owner(s)/Management. They will be able to provide any direction you need with regards to changes in expenses going forward.

Input Expense Information/Scenario Analysis

Once the initial break even analysis is done, you can also input alternative scenarios under the “$ Change” OR “% Change” columns. Do not input data into both columns as the program will sum up both together.

Once you have gathered and/or organized all the expenses into either the Fixed or Variable group, it will now be time to enter the appropriate data into the template.

Fixed Expenses

List each type of fixed expense under the “General and Admin/ Fixed Expenses” header. You can usually get this information off of your income statement.

NOTE: Express fixed expenses in dollars. Input the dollar value of each fixed expense item under the “Base” heading.

Variable Expenses

List each type of variable expenses will be entered under the “Variable Costs” header. You can usually get this information off of your income statement.

NOTE: Variable expenses are expressed in terms of percentage of revenue. Input each variable expense item as a percentage of total revenue under the “Base” heading.

Scenario Analysis

Once the initial breakeven analysis is done, you can also input alternative scenarios under the “$ Change” OR “% Change” columns. Do not input data into both columns as the program will sum up both together.

Fixed Expenses

Input your changes in the areas highlighted EITHER in yellow or aquamarine. DO NOT enter changes in both columns as the program will sum up both columns.

Variable Expenses

Input your changes in the yellow highlighted area only.

The program will calculate the contribution margin and the sales necessary to achieve breakeven status. Please note that this break even analysis assumes a single/composite product line. You may want to use a more sophisticated approach to ascertain the break even point for a mixed product group.

Maintain Monthly/Quarterly

Once the break even analysis has been done, it will be very easy to update it. Line items on the income statement usually don’t change. However, it may be worth double-checking to make sure that no additional expense line items have been made. Having done so, it will simply be a matter of updating the figures for the expense line items.

Once you have set up the initial break even analysis template, it will just be a question of maintaining it by inputing the most recent financial information.  You can do this maintenance either on a monthly or quarterly basis.

Break Even Analysis Example

For example, Sly is considering starting a new business. Sly, an experienced business person and professional in his field of expertise, knows that proper planning is essential to consistent company profits. He wants to see that his company can survive before he creates it.

Break Even Calculator

Sly initially scours the internet for the keyword “break even calculator”. Unsatisfied with the result, Sly really wants to get his hands dirty. He decides to perform his own break even calculation on paper before he creates financial models.

Estimates

First, Sly estimates total revenue. He thinks about all of the products and services he would provide which create income. Now that he knows these he thinks about what he could sell them for. He does a little competitive research to find the standard market price for his products. Sly settles on this as a good point to begin his assumptions. He considers his products in reference to how many he can sell a year and decides he will be calculating break even points for each year.

Then, Sly estimates total cost. He thinks about the resources needed to conduct business. Add overhead, cost of goods sold, salaries, and other factors. Once again Sly assumes the cost of these based on what he sees as the average cost of these resources in the market. He adds these together in regard to each year.

Sly now has his total revenue and total cost per year. Though these are estimations, he is satisfied with this acceptable starting point. He moves on to subtract these total costs from his total revenues. Sly finds that he actually stands to loose, not gain, money from the business idea he is currently studying. Sly considers scraping his idea but decides to keep his notes and look deeper into the model. Though he has not found the results he is looking for, he is pleased to have performed a proforma break even analysis. In his current situation it is much worse than performing a post-forma break even analysis.

Break Even Analysis Template

A break even analysis template can be found at: S.C.O.R.E. Template Gallery.

If you want to find out more about how you could utilize your unit economics to add more value, then click here to download the Know Your Economics Worksheet.

Prepare a Break Even Analysis, Break Even Analysis Definition

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Prepare a Break Even Analysis, Break Even Analysis Definition

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Dilemma of Financing a Startup Company

See Also:
Working Capital
Angel Investor
Venture Capitalists
Why Venture Capital
Mezzanine Debt Financing

The Dilemma of Financing a Startup Company

I had a meeting the other day with a prospect named Chris. Chris owns a distribution company he started fifteen months ago from his home. He has grown his company to annual revenues in excess of one million dollars and has opportunities to double the revenue over the next fifteen months. This article is all about the dilemma of financing a startup company and how to manage that startup growth.

Chris’ story is one I hear all the time… He got tried of working 50-60 hours a week for somebody else. So, he decided to start his own business. The business he started was the same as where he had been working for the past ten years. He started with the blessing of his wife and used their savings to get the business off the ground. After about six months, they no longer had sufficient savings to continue to invest. He did not want a partner, so they decided to take out some credit cards and use the money to fund the next level of growth for the business. Now, the credit cards are at the maximum credit limit. Chris and the company are experiencing real cash flow needs because of the rapid growth of the company.


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Finance a Startup Company

Chris had gone to several banks requesting assistance in the form of a line of credit. But, the story is the same around every corner. All the banks told him his company was doing great; however, his personal credit was not. His personal credit score was low because of the high credit card exposure, so they would not loan his company any money. One of the bankers told him to give me a call to discuss alternative financing of his company’s accounts receivable to help finance a startup company.

Needless to say, our first meeting did not start out great. Chris was very frustrated with the banks putting so much emphasis on his personal credit instead of just looking at his company. After listening to his story, he asked me “Why won’t they just loan the money to my business?”.

Not knowing what to tell him but the truth, I said “Chris, you are the business.

He then said “What do you mean?

I responded, “Without you, the business would probably fail”. I continued by telling him that his banker looks at him and his business as one entity.

We talked a lot about his personal credit and determined that it was not that he was not paying his bills… He just had so many credit cards. I told him banks just do not make consolidation loans for credit cards. Because, once you pay off your credit cards, there is no guarantee you won’t max them out to the credit limit again. He then decided what he needed was a way out. He asked me “How can I get out of this credit card debt circle?

Rebuild Personal Credit

I told him to create a plan to rebuild his personal credit, which would allow his personal credit score to improve. He said, “But if I take the money from my company to pay the credit cards, then I will not be able to take advantage of the growth opportunities I have with my company.

I showed him how his company would be able to meet it’s growth. He would have the money to pay down his credit cards over the next fifteen months by creating cash flow using alternative accounts receivable financing. Then I told him he should show the banker his plan and stay in contact with him to show him the improvements. I continued by saying “If you follow through with your plan, then the banker will decide when he can satisfy your company’s needs and be happy to loan the money you need for your business.

After twelve months of dealing with Summit, I am proud to say that Chris did follow his plan. The company took advantage of all its opportunities. He now has good personal credit, a loan from his bank, and his company is continuing to grow. Dilemma resolved. Download our three best tools to prepare yourself as a financial leader to improve cash flow, profitability, and your effectiveness.

Financing a Startup Company

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Financing a Startup Company

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Company Life Cycle

See Also:
Dispersion
Capitalization
Market Positioning
Limited Partnership
Mergers and Acquisitions
Product Life Cycle

Company Life Cycle Definition

Broadly speaking, companies progress through a predictable series of phases called the company life cycle. The life cycle starts with the startup phase, moves into the rapid growth phase, followed by the maturity phase, and finally the last phase is decline. Furthermore, the duration of the individual stages varies widely across industries and differs between individual companies. As a result, the phases differ in terms of characteristics related to profitability and financing needs.

Stages of the Company Life Cycle

The startup phase is the first phase in the company life cycle. Companies in this stage are typically losing money, developing products, and struggling to secure a position in the marketplace.

Then the next phase in the company life cycle is the rapid growth phase. In this phase the company begins to generate profits. This phase is also characterized by rapid expansion and an increased need for and dependence upon outside financing to sustain the rapid growth.

The third phase is maturity. In this phase, growth and expansion is slow. Therefore, the need for outside sources of capital subsides. The company is generating enough profits and cash flows to invest in all available projects.

The final stage is decline. During this phase the company remains profitable but sales decline. The company has more cash than it needs for all available corporate projects.

Company Life Cycle Phases

The following includes the company life cycle phases:

1. Startup
2. Rapid Growth
3. Maturity
4. Decline

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company life cycle

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company life cycle

Source:

Higgins, Robert C. “Analysis for Financial Management”, McGraw-Hill Irwin, New York, NY, 2007.

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Cost Recovery

See Also:
Disaster Planning for IT
Modified Accelerated Cost Recovery System (MACRS)
Cost Recovery Method
Payment Terms
Business Drivers

Cost Recovery Definition

Cost recovery, defined as the method to recovering an expenditure which a business takes on, is both a specific and general term. Generally, cost recovery is simply recovering the costs of any given expense. This can be the initial startup costs of the business by meeting and exceeding the break even point, the cost of an investment through evaluating the return on investment, or even the cost of capital taken to finance the firm. Specifically, the cost recovery method of accounting gains back the cost of an investment by relying on the certified depreciation schedule of the item.

Cost Recovery Explanation

Cost recovery, explained simply as regaining the value of an expense, is an important concept for accountants and company founders alike. Each of these parties are interested in cost recovery solutions.

Cost Recovery Methods

For entrepreneurs, cost recovery methods are an important concept. Founders of a company are interested in evaluating and optimizing the benefit of their effort, especially their capital. Without moving too extensively into the subject, start by evaluating the return on investment of anything: the business as a whole, a piece of equipment, even a hired employee. Even more, an entrepreneur is truly interested in return on equity; explained simply as the return on their investment interest. This differs from return on investment which measures the return on the entire investment.

Cost Recovery Accounting

For accountants, cost recovery accounting means gaining back the value of an expense. Accountants do this mainly through depreciation; using depreciation tax law to minimize the taxes paid, thus increasing final profit for the firm. These accountants study tax law to find the rules which result in the greatest benefit for their employer. Ultimately, a tax law expert will be the best at achieving this goal.

Cost Recovery Example

Dee is a tax accountant for a fortune 500 company. Unlike where many accountants deal with the everyday expenses, projects, and various operations of of the business, she does not. Dee has one focus: optimizing cost recovery deductions by minimizing the tax expense of her company. She is a tax accountant and loves to save her firm money.

Now, Dee is working on the cost recovery model of depreciation. She understands the laws well and follows a strict system to assure that she is processing company records properly. Dee is a creature of habit.

At a networking event, Dee heard about a tax law change that just happened this month. Even though she has done a great job so far, she wants to use this to make even more profit for her employer. After the event, she rushes back to work to see what value she can create.

Example Conclusion

Dee finds that she can save the company $1,000,000. If she had not heard of the recent change, this large sum of money would have been lost. These kind of thing happens all the time. Tax law generally stays the same but often a small change occurs to the statute. In this case, the small change caused big results for Dee and the business she works at.

After saving the company, Dee receives a big promotion and raise. In her field, she is an expert. Though a creature of habit, Dee can change when she needs to. She has shown it through this achievement. As she moves forward, Dee will continue to keep track of tax law to make sure she can do the best job possible.

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cost recovery

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LEARN THE ART OF THE CFO