The Virtual CFO

Happiness is a Positive Cash Flow

When I was in college, I read a book called And the Wolf Finally Came: The Decline of the American Steel Industry by John P. Hoerr (1988).

This book tells of a meeting between stakeholders at a steel mill and the famed corporate raider, T. Boone Pickens. Upon entering Mr. Pickens office, they noticed an embroidered pillow that read “Happiness is a Positive Cash Flow.” As an investor, Mr. Pickens understood that companies cannot survive without positive cash flow.

At the time, I didn’t really grasp the significance of this sentence (like a lot of other things I learned as an undergraduate in business school). After many years of small business operations and financial management experience, I have gained a deep respect for the wisdom in the saying.

It is important to understand that cash flow is different from income.

Income is the difference between sales revenue (collected and uncollected) less expenses (paid and unpaid).You can make a million dollars in income and still end up bankrupt if you aren’t able to collect the cash from customers after the sales.

Cash flow, on the other hand, is the difference between the actual cash a company receives from customers less the cash actually paid for expenses (payroll, vendors, taxes, etc.). Without cash flow, it is impossible to pay bills and employees, let alone take advantage of growth opportunities. This is why analyzing and managing cash flow is particularly important for small businesses because there is such a small margin for error when cash flow is tight or negative.

As a businessman, I've come to know that yes, happiness is a positive cash flow.

The Virtual CFO Blog Will Resume Momentarily

I know that over the last couple of years I haven't updated The Virtual CFO blog regularly. Anyone who has had a business-related blog understands that business and taking care of clients takes a priority over writing blog posts. When this happen, it is easy to get out of the habit of writing posts.

Though I've posted that "I'm Back" a few times over the last few year, I never got back into the groove of writing. So I've decided to start posting again with a different approach to "I'm Back".

Between 2006 and 2010, I had a number of blog series that were relevant to small businesspeople and entrepreneurs. These series pertained to cash flow, financial statements, etc. So I have decided to update these posts into a new series of Virtual CFO blog posts.

I hope you enjoy them and they help you manage your business better.

Freaking Accountant: How a single mouse click can destroy a company

At the American Accounting Association's convention in August I met Mark Holtzman who runs the Freaking Accounting blog.

Mark asked me if I would like write a guest post for his blog. Earlier this week, Mark posted my article entitled "How a single mouse click can destroy a company".

If you didn't see it in one of my tweets, please read the post. I think you'll like it.

The Virtual CFO is Back

After an extended break, the Virtual CFO blog is back.

Some things are the same since I last blogged. My firm, CPA for Small Business, is keeping me busy. It's hard to believe that I opened my company six years ago. Time has gone by fast.

There is one major change, I am working on my Doctorate of Business Management (DBA) at Kennesaw State University with a concentration in accounting. Kennesaw State's DBA is a research doctorate for professionals.

I have been a capacity in my firm the last few years, so I made blogging lower priority. A few weeks I attended a panel discussion on financial blogging at the American Accounting Association's annual conference. The panel was composed of David Albrecht (The Summa blog), Anthony Catanach, Jr. (Grumpy Old Accountants blog), Mark Holtzman (Freaking Important, Freaking Accounting, and the Accountinator blogs), and Edith Orenstein (Financial Executives International blog). I walked away from this session wanting to blog again.

So here we go.

If You Increase Taxes on Corporations, the Consumer Will Pay for the Increase

In my last blog post, I wrote how the nation’s economic recovery needs to start with me.

I know some of the readers of this blog will respond back that many large corporations have been able to work the political system in order to pay little or no income taxes. So you feel that the recovery should start with the corporations and then you would be willing to have the focus be on me.

I understand the negative sentiment towards Wall Street right now. I’m an entrepreneur and my company, CPA for Small Business, was created to serve entrepreneurs and small businesses. I know firsthand that entrepreneurs pay their fair-share in self-employment and income taxes. Most entrepreneurs don’t have the luxury of lobbyist, tax breaks, and a department of tax attorneys who enable us to pay minimal tax in comparison to our profits.

However, I know what will happen if corporations are required to pay more in taxes. The corporations will merely pass their increased tax cost on to the consumer, which are you and me.

I remember the last oil price spike and how during the oil spike period that “big oil” experienced record profits. Oil companies had profit margins they wanted to maintain. Ten-percent of $125/barrel is larger than ten-percent of $89/barrel.  The oil companies target margin was merely added to the increased cost per barrel.

So as I said, we all have to be willing to participate in our nation’s recovery. It may be better if all of us decide up front to bear the burden of solving the deficit. Because no matter what strategy is chosen by our leaders, all of us will eventually end up participating financially.

I’m Willing to Have the Recovery Start with Me, Are You?

One of the universal truths is that no one wants to pay more in taxes. A second universal truth is that most of the people who are vocal in the news on this subject support tax increases on somebody else in society besides themselves or cutting spending on programs that don’t personally affect them or their livelihood.

I understand these sentiments, but feel we need to move beyond this if the U.S. is going to correct the deficit problem we’re facing.

We’ve come to a point with the deficit and our economy where something needs to be done. Unfortunately, congress seems to think that we can fix the problem with a combination of lowering taxes and raising expenditures.

I believe that we all have a responsibility to educate ourselves on the realities our country is facing instead of polarizing this serious issue because of politics. This is why I suggest you put aside 45 minutes or so and watch this video entitled “Where We Are, How We Got here, What May Be Next” by KPCB.

USA Inc. - Where We Are, How We Got here, What May Be Next from KPCB on Vimeo.

This nonpartisan presentation explains the U.S. economy as if it were a business and presents ideas on how to solve the deficit problem. One of the interesting facts is that expenses have exceeded revenues in the U.S. for forty of the last forty-five years. So both sides of the aisle are culpable for the deficit.

I don’t have all the answers, but I know that to fix the deficit problem that all of us will be affected with a combination of tax increases and federal spending cuts.

As Andy Stanley said, I’m willing to have the recovery start with me, are you?

 

Should Entrepreneurs Strive to Hit Homeruns or Singles?

CPA for Small Business serves clients in a wide range of industries. Across all industries, one of the primary topics of discussion is whether to try and make it big (home run) or strive for incremental growth (singles).

I owned an entrepreneurial logistic company in the mid-1990’s. The goal I had with this company was to grow as fast as I could with the resources I had at my disposal. Whenever I had enough cash hire a new employee and set them up with a desk and computer, I did.

There were also four or five times I “bet the company” during the four years I owned this firm. By betting the company, I mean that I took most of the cash reserves I had built up and invested them in marketing in an effort to either grow or turn the company around during periods of slow sales. The last time I bet the firm I lost and my logistics firm eventually failed.

Over the years, I’ve come to see that it is far better to focus on singles than swinging for the fence every time you step up to the plate. By basing your business on incremental growth, you are more likely to have a strong foundation of customers and sales. With a solid foundation, home runs then become the icing on the cake as opposed to a means of survival.

I wonder what you think about this.

Restaurant Owner Receives a Surprise Sales Tax Audit, Xtranormal Style

This Xtranormal animation was part of a presentation on tax obligations for small businesses I made at PodCamp Nashville 2010. I hope you enjoy.

 

Repeat Offenders are Common in Bookkeeper Fraud

Last week, the Kingsport Times News reported that a Knoxville bookkeeper had plead guilty to stealing $4 million from her employer (East Tennessee Bookkeeper Who Stole $4 Million to Finance Luxury Lifestyle Pleads Guilty). What was disturbing about this story is that the perpetrator was on probation for embezzling from another employer two years earlier.

Unfortunately, this story isn’t unique. It is often the case that those committing fraud have done so at previous jobs.

I was once the CFO of a company that was owned by a person who owned multiple businesses in the same industry. A year or so before I started working at this firm, a bookkeeper had used the owner’s signature stamp to sign checks that were deposited in the bookkeeper’s personal bank account. The bookkeeper was prosecuted when the owner discovered the fraud. A few years later, I was at CFO of another company where a vendor had the same bookkeeper use a knife to pick the lock where the company’s checks were stored. These checks were deposited in the bookkeeper’s personal bank account.

What can you do to protect yourself from this happening at your firm?

There are a couple of things you can do to lower the chances that your firm will be the victim of this type of bookkeeper fraud.

The first is to run a criminal background check before making a final job offer to a bookkeeper. Such background checks may run several hundred dollars, but it’s a relatively small amount when compared to what undetected fraud can cost your business. At a recent fraud training session I attended, the speaker told how a motorcycle dealership in Middle Tennessee had to file bankruptcy as a result of a bookkeeper embezzling. Choosing $300 over a liquidation bankruptcy is an easy choice to make.

Second, you can have someone other than the bookkeeper reconcile and review your bank accounts on a monthly basis. If you have time to do this yourself, then you should. If not, a CPA firm can provide this service for you at reasonable costs. By putting a control like this in place, it lets the bookkeeper know that someone else will be reviewing the bank accounts for improper transactions. This should lower the chances that they will attempt to embezzle from your business.

As they say, an ounce of prevention is worth a pound of cure.

There is No Such Thing as Long-Term Tax Planning

Over the last few weeks, I have been monitoring the debate in Washington about tax rates for 2011. As a CPA who advises clients on tax startegies, it's my job to keep up with this. Though I feel it’s unfortunate that congress waited to the last minute to address the issue, it has given all Americans a look at how tax laws are negotiated in our country.

On a news program last week, one of the commentators said someone wanted pass “permanent tax rates”. What I think they meant is that someone in congress wanted to make the current tax brackets the law, instead of just extending them. That sounds good in theory, but in practice there is no such thing as permanent tax rates. Congress always has the power to adjust the rates and tax rules any time they feel changes are appropriate.

It would probably help the economy if there was a set of tax brackets and rules that could be kept in effect for an extended period of time. But in the current political climate I don’t see that occurring.
If businesses and individuals knew what their tax burden would be and the tax rules that would be in effect several years down the road, they would probably be more inclined to make investments that would help the economy. Without this, you have what Donny Deutsch described last Friday on MSNBC’s Morning Joe (transcript) as $2 trillion dollars that business is holding on the sidelines and not investing because they don’t know if Washington is going to be pro- or anti- business in the coming years. 

Hopefully, the tax rate compromise will ease some of these fears and provoke businesses and individuals to start investing again.

But as all tax preparers know, there is no such thing as long-term tax planning because tax rules can, and often do, change.