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What do Magicians, Grifters and Financial Legerdemain Have in Common?

It's the money

Magicians are pretty amazing, aren’t they?

They do stuff right in front of our eyes

… we’re on the edge of our seats …

expecting the unexpected …

and even then we have no idea how they just did what they did.

Somehow, he gets you to look one way while he’s doing something else right in front of you … and you completely miss it.

Watch Apollo Robbins, the best pickpocket it in the world, and you’ll see exactly what I mean.

Financial Legerdemain: A Magician’s Trick by any other name

I’ve always loved the term, “legerdemain”. The shorthand definition is “sleight of hand”, kind of “now you see it, now you don’t”. Like Apollo.

But when it’s applied to financial metrics, with an unstated intention of distracting you from focusing on the right thing, it’s a particularly destructive force.

It’s the worst if you turn it on yourself … and end up deceiving yourself about what performance metrics really count. Read the entire article to avoid a fool’s errand ….

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Business Finance | Pick a card … any card ….

New metrics to Define Financial Performance?

In the tumult surrounding the 3D maelstrom (Debt Ceiling, Downgrading and Deficit) of several weeks ago, you may have missed another chilling corporate finance update on the relentless pursuit of performance metrics that extol the sunshine while you’re in the heart of darkness. Yes, there may be some economic value for certain of these metrics, but they’re dangerous barometers of realizable value and highly misleading as to future achievements of tangible operating profits and free cash flow.

Another Sign of the Apocalypse?

Most of us recall the “eyeball counting” that preceded the Dot-Com-Bomb and those certain “Signs of the Apocalypse”, as when your cab driver is telling you what stocks you should buy. (more…)

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Business Finance | Valuation | What kind of investor do I need?

A Weekly Business Finance series for Non-Finance Executives!

“Financial Adrenaline” is a term we love around here because it reflects our commitment to help you turbocharge your business with practical tips and techniques to improve free cash flow, the lifeblood of business. As a further extension of our Financial Adrenaline program, we’re going to share a new Business Finance Tip every Wednesday specifically for those business executives who don’t have a finance background. Our current Big River series started with We’re Making Money. Why are we broke? … then No Cash? Can we borrow what we need?, What if our loan collateral doesn’t cut it? and the need for outside investors.

Last week, we began our conversation about business valuation. We continue that discussion today with a valuable chart that will help you understand some of the key valuation principles.

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“Can anybody remember when the times were not hard and money not scarce?”

~ Ralph Waldo Emerson

What’s the difference between a Strategic & Financial Buyer

John Wilson, CEO of Ace Business Stuff, has been working diligently with his controller, Tom Sampson, to assess his financing needs. They may require an equity investor as he suspects that his controller’s right that bank financing may be insufficient.

“Hi Lary,” John said when he got Lary Blogger on the phone again.

“We’re almost finished with our forecast, but it still looks like we’ll need some equity. I’d like to explore what you said about strategic buyers and financial buyers and see the diagram you mentioned.”

Different Buyers have Different Perspectives

“John, this diagram is only meant as a general overview of some key valuation concepts,” I said when I visited with John at his office a few days later. “It should help you better understand certain key concepts which underlie the valuation of an ownership interest in your company.

The Strategic Buyer will pay the highest premium

“At the top is the Strategic Buyer. In short, he’s looking for more than a simple financial return. (more…)

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Business Finance | The Big River | Chapter 4 – What happens if we need an outside investor?

The Big River series

The Big River series is a 12 part installment about a company desperately seeking cash to fuel their growth and the struggles they face trying to find it.

John Wilson, CEO of Ace Business Stuff, was thinking about several of the issues that he discussed earlier that day with his controller, Tom Sampson, and what Tom told him:

“Giving our customers an additional 30 days to pay, relaxing collections and neglecting the sale of inventory already on hand, isn’t a very sound strategy.”

Instinctively, he knew that Tom was right and that whatever bank loan they could obtain, it wouldn’t be enough.

What if bank financing isn’t enough?

Ted Deepockets, his long-time friend, had periodically needled John about the pros and cons of outside investors. He always seemed like he’d be interested in investing if the opportunity was presented. (more…)

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Business Finance | The Big River | Chapter 3 – What if our loan collateral doesn’t cut it?

The Big River series

The Big River series is a 12 part installment about a company desperately seeking cash to fuel their growth and the struggles they face trying to find it.

Tom Sampson, the controller for Ace Business Stuff, was in his office considering how to explain to John Wilson, the Company’s CEO, the issues related to the Company’s borrowing capacity and the weaknesses in the Company’s Balance Sheet.

Tom pulled together several schedules for his meeting with his CEO that afternoon, but was still struggling with how to get across some of the subtleties that he knew John would want to understand.

Tom knew that his CEO was absolutely committed to the Company’s success, although he became very frustrated when his convictions about future performance collided with the bank’s concerns about current performance.

What factors will the bank consider?

Tom knew that the bank considered many factors when judging an asset-based loan.

Having enough collateral to support the Company’s borrowing request was only part of it.

How do they measure the strength of the collateral?

One key ingredient is the quality of the collateral. (more…)

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Business Finance | The Big River | Chapter 2 – No Cash? Can we borrow what we need?

The  Big River series

The Big River series is a 12 part installment about a company desperately seeking cash to fuel their growth and the struggles they face trying to find it.

What happens if we run out of cash?

“John, are you ready for our meeting? We said yesterday that we were going to meet to go over our financial projections and review a possible bank proposal.”

“I’ll be right there, Tom,” John Wilson, company CEO said to his controller.

John reflected on their conversation last week about the Company’s expected negative cash flow and the need to borrow from their bank, most of which resulted from giving extended terms to their customers.

John learned his lesson and wanted to avoid borrowing, but Tom had been pretty explicit about the need.

First, we need to review our short term cash needs

“John, I’ve gone over our short term cash needs again,” Tom said after they gathered in the conference room and were looking at some numbers on the overhead projector.

“I’ve created a simple example on the screen with all the numbers shown in thousands, which you can see in Figure 1 – Borrowing Availability, below. (more…)

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Business Finance | The Big River | Chapter 1 – We’re Making Money. Why Are We Broke?

The Big River series

The Big River series is a 12 part installment about a company desperately seeking cash to fuel their growth and the struggles they face trying to find it.

“We’re broke,” Tom mumbled to himself. Tom Sampson is the controller of Ace Business Stuff and was reviewing his latest calculations about their cash flow.

“What do you mean, we’re broke?” Tom looked up sheepishly to see John Wilson standing in his doorway. He fingered his collar and turned to address the company’s CEO. “We can’t be broke because business has never been better,” John said. (more…)

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Business Finance | Warren Buffett | Should We Depreciate Our People?

A Weekly Business Finance series for Non-Finance Executives!

“Financial Adrenaline” is a term we love around here because it reflects our commitment to help you turbocharge your business with practical tips and techniques to improve free cash flow, the lifeblood of business. As a further extension of our Financial Adrenaline program, we’re going to share a new Business Finance Tidbit every Wednesday specifically for those business executives who don’t have a finance background.

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Depreciation = Cash? Why do we care?

We’ve kinda been on a Warren Buffett tear lately, and last week I encouraged you to read his recent 2010 Annual Report to Berkshire Hathaway shareholders.

I want to plant another seed this week about an often misunderstood concept: DEPRECIATIONIn accounting, an expense recorded to allocate a tangible asset's cost over its useful life. Because depreciation is a non-cash expense, it increases free cash flow while decreasing reported earning. It is used in accounting to try to match the expense of an asset to the income that the asset helps the company earn. For example, if a company buys a piece of equipment for $1 million and expects it to have a useful life of 10 years, it will be depreciated over 10 years. Every accounting year, the company will expense $100,000 (assuming straight-line depreciation), which will be matched with the money that the equipment helps to make each year.. (You can see the definition by placing your cursor over the term.)

How is Depreciation Relevant to EBITDA?

Today, let’s just think about it in terms of EBITDA. In Does EBITDA Bury Its Own Dead?, I wrote about the perils of treating EBITDA as a placeholder for cash flow, and Buffett couldn’t agree more.

In his Annual Letter to Shareholders, 2002, Buffet describes (more…)

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The 12 Days of Christmas – Prices UP!

We knew that 2010 was a pretty “fowl” year didn’t we … but did you think that the price of a French hen would increase by 233%? Or that two turtle doves would now cost 78.6% more? That a lone partridge would go up 20%?

Not that there’s anything wrong with a basket of assorted swans, geese, French hens and turtle doves … I’d prefer a beef tenderloin myself … but who expected that in 2010, the  “Christmas Price Index”, which has closely tracked the Consumer Price Index (CPI) for most of its 27 years, would rise by 9.2%, the 2nd largest increase over that period (2nd only to a 16% jump in 2003), according to the NY Times report?

It’s PNC Wealth Management that has tracked the cost of the fanciful mix of gifts heralded in the classic carol “The 12 Days of Christmas” for more than a quarter century. This year, they’ve included a popup book on their web site about this index.

Of course, this basket of good is much narrower than the CPI, but there’s one other interesting “nugget” in here … namely that the price of “Five Golden Rings” is up 30% to $650 this year, although a lower increase than last year’s 43%. Should have bought a bunch of gold a few years ago, huh? (I’m such a great rear-view investor, it’s actually scary.)

BTW, if you want to give all of the gifts featured in the song … repeats included … it’s 364 gifts for a total of a mere $96,824, up 10.8% from last year. It only costs $23,439.28 for just the 1-12 gifts. Oh, that’s all? Feeling better already ….

At least there’s one piece of good news in here. If inflation rears it’s ugly head, we can put it on a plate and serve it for dinner!

Happy Holidays!

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