“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. Last week we began our 12 part Big River series so you can pick up the story there.

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“Creditors have better memories than debtors.”

Benjamin Franklin

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. He 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. I’ve assumed a $200K line of credit (shown with a bright blue border). On Line 1 - Net Cash Flow, you can see the expected negative cash flow in the next three periods, of <$161,000>, <$75,000> and <$4,000>, respectively. [See the Sample Chart, below, to refer to these items. Line Numbers and Categories are bold-faced for easier reference. The numbers are shown in thousands.]

How much cash do we need?

If you look on Line 3 – Cash Required, you’ll see how much cash we’ll need in excess of our Opening Cash Balance for each period. Line 3 – Cash Required shows the money we need to pay our payroll and normal operating expenses on time. Line 4 – Line of Credit Used this Period, shows how much we’ll need to borrow in each period so that we have enough cash to cover those bills as well as the $150,000 Minimum Cash Balance we need to support out working capital needs. Below that is the new Line of Credit Balance (Line 5), and below that is our Remaining Availability to borrow against our line of credit.”

“Tom, I’m not following you.”

“Sorry, John. Take a look at Period 1 (marked with a bright red border) on Line 4 where you’ll see the borrowing of $96K, shown as Line of Credit Used This Period. The $96K on Line 3 - Cash Required represents the difference between the negative cash flow from our operations of <$161k> on Line 1 and our Opening Cash Balance of $65K in Period 1.

How much do we need to borrow to meet our needs?

Can we borrow enough at the right time?

“Thanks, Tom, I’m with you. It looks like you’ve set up the financial model to borrow enough money to cover our cash needs and to show what borrowing power we have left.”

“That’s right, John. You can see from Line 3 that we need to borrow $40,000 in Period 3 to meet our cash needs. However, you can see that we’ve maxed out our $200,000 line of credit by then (see Line 5 – Line of Credit Balance) so we can only only borrow $29,000. In theory, we’ll have a negative cash balance of $11,000 (Line 6 – Net Cash Balance), but we can probably manage that by deferring a few payables, but that’s not a sustainable policy.”

When does our cash flow return to positive?

“So, if I’m reading this right, the good news is that we return to positive cash flow in periods 4 & 5, our cash position starts improving again and we can even pay back some of our loan.”

“That’s right, John. It gets pretty close in period 3, but our borrowing capacity starts to grow after that. It improves because we expect to have a large, positive operating cash flow in the 5th period, when our receivables finally get collected.”

Do we qualify for a $200,000 line of credit?

“Tom, are we sure we can get a line of credit of $200,000? That’s your assumption, isn’t it?”

“Yes, I used a target line of credit of $200,000. In reality, our balance sheet is probably not strong enough to justify anything other than an asset-based loan. In that situation, the bank advances money as a percentage of our outstanding receivables and inventory. The line of credit will vary based on those balances each month, but it should be in that general ballpark.”

Do we need an Asset-Based Loan?

“Tom, I think I get the general idea but I do want the specifics. Can we reconvene this afternoon and go over the details? Maybe you could update this table to reflect how the loan availability changes based on inventory and receivables?

You can also teach me a little about an asset-based lending program and educate me about your concerns with our balance sheet. I really need to understand this. Can I check back you sometime after 3:00 p.m?”

“Sure, no problem, John. I’ll be waiting.”

What’s your experience? Do you have borrowing capacity to deal with unexpected cash shortfalls? Do you have an early warning system to let you know about a cash crunch that may be coming?

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TO BE CONTINUED …

This is Part 2 of a 12 part series called the “Big River“. The Big River signifies the growth path that so many companies follow, or are seeking, and the dangers that lurk along the shoreline as the Big River races forward trying to consume everything in its path. Next week you’ll learn how to begin to evaluate your bank borrowing capacity using an asset-based loan program. Make sure you sign up now so you receive every update in this practical series.

Business Finance | No Cash? Can we borrow what we need? is a post from: Sword Tips – the Exkalibur blog

“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. Every Wednesday, we’re sharing a new Business Finance Tidbit specifically for those business executives who don’t have a finance background. You’ll get a head start by reading Warren Buffett’s letter to shareholders this year, and his comments about depreciation.

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“The importance of knowing accounting can not be underestimated, it’s the language of business. If you don’t know it, it’s like being in a foreign country without knowing the language.”

Warren E. Buffett, CEO of Berkshire Hathaway, Inc.

We’re making money … but we’re broke?

“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. “Our sales are up over 20% and we’ve even knocked a few percentage points from our costs so our margins are up, too. Our operating expenses are about where we expected, so we should be hitting the ball out of the park.”

How can we be out of cash?

“How can that be, Tom? We just agreed that we’ve having a record year.”

“John, we’ve discussed this before. Profits aren’t the same as cash. Profits are the excess of revenues over costs, measured when we deliver our products. Cash flow is the excess of what we collect from those sales, less what we use to run our business. They don’t always occur at the same time . . . or the right time.”

“But, Tom, if we have more revenue than costs, then we’ve got to have extra cash, particularly if we’re on our way to a great year. Something’s wrong here. Have you double-checked with the bank?”

You’ve probably heard a version of this somewhere

This conversation, in many forms, takes place every day in conference rooms and hallways across America. You may have been in a few. Business is starting to grow again; the company is ready to start investing in people as well as property, plant and equipment. It’s expanding operations, adding product lines and serving customers. Business is prospering . . . but there is a limited understanding of the accounting and cash flow implications of those plans.

Have you double-checked with our bank?

“John, I don’t need to check with our bank. There are no missing deposits and we’ve reconciled all of our accounts. The problem is that we’ve invested all of our cash in the business and we’re not going to be able to meet payroll.”

“Didn’t you see this coming, Tom? You said we’re on top of the bank stuff and our accounts are clean. Why didn’t we see this sooner?”

“John, we’re lucky we’re even seeing it now. It was only when I saw our receivables climbing faster than our revenue that I knew something was off. It was Jody who told me that the salesmen got approval to extend our payment terms from N/30 days to N/60 days.”

“We had to do that, Tom. Our customers have expanded their purchases from us because we’re able to offer more generous terms than our competitors. That’s what’s fueling our growth.”

There are lots of ways to run out of cash

“Which is exactly why we’re out of cash, John. We’ve got all of these extra sales but we haven’t collected any cash from them yet because we’ve given the customers longer to pay. Nobody told me, or our purchasing manager, so we didn’t have a chance to reach a similar deal with our own vendors. So, we’re stuck with having to pay them on time, plus with the people we’ve added, our payroll is up and we have to pay that every 2 weeks no matter what.”

We love the Big River … but it consumes everything in its path

What John Wilson, CEO, is painfully discovering in this simplified example is that the flow of profits and the flow of cash are asynchronous, that is, they don’t follow the same pattern. The kind of accelerated growth that ranges at or above 15% per year is what I call the “Big River”, and the bigger the river, the greater its impact on everything in its path. It’s indiscriminate as it absorbs the cash faster than the profits can keep up.

In the conversation between Tom and his CEO, the Big River is consuming all of the company’s liquid assets. Managing the growth rate of your business is critical because the growth rate is the engine that drives so many of the issues critical to our business success. DilutionA reduction in earning per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities. … LeverageLeverage can mean several things. 1) The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment, or 2) The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.. … ValuationThe process of determining the current worth of a company. An analyst valuing a company may look at the company's management, the composition of its capital structure, prospect of future earnings, and market value of assets. Judging the contributions of a company's management would be more subjective, while calculating intrinsic value based on future earnings would be an objective technique. … LiquidityThe ability to convert an asset to cash quickly. Also known as 'marketability'. There is no specific liquidity formula, however liquidity is often calculated by using liquidity ratios. . . . . and more.

What’s the best way to evaluate the impact of growth?

“Great, Tom, the sooner the better. I’m thanking my lucky stars that I invested what I did when we started this business. Otherwise, we’d be even further in the hole.”

Where is all that cash going?

“It’s not as bad as all that, John. I think we’ve got a good story to take to the bank. We’ve got solid receivables and inventory, so we should be able to borrow enough working capital to get through this period, collect our receivables and better align our terms with our vendors and our customers.

“You were right, John. This is a good time to call our bank.”

What’s your experience? Have you run out of cash just as you thought your business was picking up?

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What’s next?

This is the first part of a 12 part series called the “Big River”. For me, Big River signifies the growth path that so many companies follow, or are seeking, and the dangers that lurk along the shoreline as the Big River races forward trying to consume everything in its path. Next week you’ll learn how to begin to evaluate your bank borrowing capacity.

Business Finance | We’re Making Money. Why Are We Broke? is a post from: Sword Tips – the Exkalibur blog

“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.

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Read Warren Buffett’s Letter to Berkshire Hathaway Shareholders

In most fields of endeavor, the more we learn, the more we realize how much we have to learn. It’s certainly no different in the world of business finance, so for non-finance executives, it’s never easy to know where to start.

So, why not  jump into the deep end right now by reading Warren Buffett’s Letter to Berkshire Hathaway shareholders for 2010. The publication of Berkshire Hathaway’s annual report is closely watched in the national media, as well as in homes and offices across the country … and for good reason.

Business Finance is about much more than finance

I’ve said before that leaders don’t have the luxury of confining their interests to just a few things. Building a Business is not just about strategy, finance and leadership. It’s about much more … and nothing brought that home more clearly than choosing the categories and tags for this article … because it’s about so much more than business finance … and yet, it’s related directly to business finance.

A great example of the Art of Communication

Warren Buffett’s letter is a great example in the art of communication … about complex financial issues as well as organizational development, culture, recruitment, succession planning, ethics, stewardship … it’s a long list that will satiate any appetite for those of you interested in understanding how all of it fits together. On the subject of communication, you may find the Communication Action Plan a valuable tool to jumpstart your own communication plan, which we just published as part of our Nothing but Leadership series.

What do you think?

In his annual letter, Buffett discusses the many financial challenges within the companies and industries under Berkshire Hathaway’s broad umbrella. What’s so engaging is not just his avuncular style but the rich tapestry of issues and challenges that come together in the assessment of business performance.

Is there a particular issue that you’re curious about? Growth? Liquidity? Metrics? Leverage? Valuation? Productivity? It’s all there … with Buffett’s personal interpretations, his issues with analysts, his challenges to accepted valuation and financial metrics standards.

How does Buffett’s letter serve as a communication device for shareholders? Too much information? Not enough? Where should we start to help you with your business finance education?

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How our Weekly Business Finance series will help you

Most non-finance executives have picked up a few tidbits … from a class, from a financial colleague or friend, a banker, an accountant … and have assimilated a variety of random fragments that are probably more like a messy collage than a well-drawn portrait. Is it enough to get by? Maybe … but if you’ll take ownership of your own financial education, we’ll help you. Dig in, challenge what you read, add your comments or questions and we’ll answer them right here … every time … and we’ll get this conversation started. Are you with me?

Business Finance | Why you should read Warren Buffett’s Letter is a post from: Sword Tips – the Exkalibur blog

~ Thomas Carlyle

A lady walked into a neighborhood market one day and spoke loudly over the counter to the head butcher.

“Your prices these days are atrocious, Sal. Joe’s Deli across the street is selling your $10 chuck roast for only $5!”

“I know, Mrs. Haggle. I saw the sign. The thing is . . . Joe doesn’t have any chuck roast.”

The law of supply and demand still rules

So, the law of supply and demand rears its head again, some days a beautiful vision, other days an ugly hag. We’re surrounded by her mystique everywhere we go. Traffic is tied up because there are more cars than highway space. Starbuck’s is backed up because people want coffee faster than it can be made. There are no paper clips in the supply room but there’s plenty of fruitcake left in the kitchen.

Even for tickets to a free concert?

Supply and demand drove markets long before economists appeared … and its jarring prevalence is unavoidable. One of my favorite examples is the controversy several years ago when scalpers were selling Bon Jovi tickets for as much as $750 each … for a free concert in New York’s Central Park.

Don’t use economic pain as your excuse

While a lot of palaver continues about the persisting economic downturn, our mission is to turn from cost-cutting to demand-stimulating. Yes, it’s alluring to just damn the darkness of the lingering economic turmoil, but it’s time to turn on the lights.

I can’t count how often I hear businessmen say that “the economy is weak” or “the recession just won’t seem to go away” or “our industry is in the doldrums” to explain flatline revenue when it’s really just an excuse for underperformance. Maybe if you’re a large industrial company like GM, the economy is a measurable force … but haven’t we learned that many of their problems were of their own making anyway?

Are the macro-economic forces really our greatest enemy?

These macro-economic forces are only bit players in the travails of small and middle market businesses. Harmonizing with the recession chorus will sap your energy and infect your organization. If your employees hear you blaming the economy as an explanation for lackluster sales, they will soon adopt that perspective and come to believe that they can’t do anything to avoid its impact. It will dull their enthusiasm and create a victim’s mentality that is both demoralizing and enervating.

For us, it’s time to dropkick the “recession” term to the dumpster as an excuse for underperformance.

Discounting? Bad. Value Creation? Good!

In Keep Your Prices Strong, I described the slow descent into oblivion when price-cutting is the mantra. You can’t get off that path fast enough because it leads to a treacherous slope that’s much harder to climb than to slide down.

Start by treating your customers as guests. Focus on value creation and what steps you can take to make your customers forget all about your competitors. Empower your employees to find ways to make your customers love you. Still in doubt? Read about the Meineke Syndrome for more examples about the death spiral of price discounting.

What can you do to stimulate demand?

So, let’s cowboy up! Talk to your customers and focus on stimulating demand. Think …

• “How can I encourage hesitant customers not to postpone their purchases?”
• “Is there a way I can show my most important customers why our relationship is a partnership and why we need to lay out a purchase plan together to maximize the return for both parties?”
• “Can I offer an incentive by reducing costs without forfeiting my margins?”
• “How can I enhance our value proposition to keep our customers buying?” Check out paycheck marketing to see if it makes sense for your business. Try ideas others have used to persuade the frugal to shop.

Turn the talk about recession in your favor

Use all of the talk about “recession” as a positive force. While others remain on their heels, think about what you can be doing to fill the void created by defeatist competitors. Remind your customers that …

• … business is about the long term,
• … most recessions are short term, and
• … since prices tend to rise following a recession, maybe there’s a way to create a plan that works for both parties.

Be aggressive … be innovative … be consistent as you continue to fight hard and press for the advantage everywhere you can.

Flush the recession Kool-Aid!

So, stop drinking the recession Kool-Aid. Make sure you’re doing what you can to stimulate your own demand … create value … delight your customers with overwhelming customer service. Don’t allow the economy to take you out of your game.

What programs have you implemented recently to create value for your customers? Share some specific … concrete … creative ideas that puts you in the driver’s seat and puts the wind in the face of your competitors.

Flush the recession Kool-Aid! Create your own demand! is a post from: Sword Tips – the Exkalibur blog

The holidays are just around the corner, and we’re still trying to figure out how we’re going to get it all done. So, instead of asking you to work at something – anything – I’ve decided to give you a gift of holiday music. Elmo did it, so did Ren & Stimpy, Winnie the Pooh, Shrek, the Muppets … so with animated competition like this, what can go wrong with my first effort at song-writing?

Yeah, I know, don’t quit your day job. So, feel free to sing along to the tune of the 12 Days of Christmas. Key of D Sharp, please.

All together now:

The first thing in business that’s such a pain to me … is the never-ending stinking eee-mail.

The second thing in business that’s such a pain to me … stuff a-cumm-u-lating … and the never-ending stinking eee-mail.

The third thing in business that’s such a pain to me … meetings, meetings, meetings … stuff a-cumm-u-lating … and the never-ending stinking eee-mail.

The fourth thing in business that’s such a pain to me … cell phones a’ringing  … meetings, meetings, meetings … stuff a-cumm-u-lating … and the never-ending stinking eee-mail.

The fifth thing in business that’s such a pain to me … bubble-headed numbskulls … cell phones a’ringing  … meetings, meetings, meetings … stuff a-cumm-u-lating … and the never-ending stinking eee-mail.

The sixth thing in business that’s such a pain to me … worthless status updates … bubble-headed numbskulls … cell phones a’ringing  … meetings, meetings, meetings … stuff a-cumm-u-lating … and the never-ending stinking eee-mail.

The seventh thing in business that’s such a pain to me …  jam-packed airplanes … worthless status updates … bubble-headed numbskulls … cell phones a’ringing  … meetings, meetings, meetings … stuff a-cumm-u-lating … and the never-ending stinking eee-mail.

The eighth thing in business that’s such a pain to me … tweeters tweeting nothing … jam-packed airplanes … worthless status updates … bubble-headed numbskulls … cell phones a’ringing  … meetings, meetings, meetings … stuff a-cumm-u-lating … and the never-ending stinking eee-mail.

The ninth thing in business that’s such a pain to me … linking, linking, linking … tweeters tweeting nothing  … jam-packed airplanes … worthless status updates … bubble-headed numbskulls … cell phones a’ringing  … meetings, meetings, meetings … stuff a-cumm-u-lating … and the never-ending stinking eee-mail.

The tenth thing in business that’s such a pain to me … never-ending traffic … linking, linking, linking … tweeters tweeting nothing  … jam-packed airplanes … worthless status updates … bubble-headed numbskulls … cell phones a’ringing  … meetings, meetings, meetings … stuff a-cumm-u-lating … and the never-ending stinking eee-mail.

The eleventh thing in business that’s such a pain to me … tracking people down … never-ending traffic … linking, linking, linking … tweeters tweeting nothing  … jam-packed airplanes … worthless status updates … bubble-headed numbskulls … cell phones a’ringing  … meetings, meetings, meetings … stuff a-cumm-u-lating … and the never-ending stinking eee-mail.

The twelfth thing in business that’s such a pain to me … New Year’s resolutions … tracking people down … never-ending traffic … linking, linking, linking … tweeters tweeting nothing  … jam-packed airplanes … worthless status updates … bubble-headed numbskulls … cell phones a’ringing  … meetings, meetings, meetings … stuff a-cumm-u-lating … and the never-ending stinking eee-mail.

Be with your loved ones in person and in spirit. Get some rest. It will all be waiting when we return.

Happy Holidays!

KBO

•••

Lary Kirchenbauer is the president of Exkalibur Advisors,providing practical business strategies for family and other privately owned businesses in the middle market. Exkalibur works closely with senior executives and their businesses in the wine and other industries, and hosts the Exkalibur Leadership Forum for leaders of middle market companies in the North Bay. Please visit Exkalibur.com for a library of valuable resources, articles and insights or connect on Twitter, LinkedIN or the Exkalibur fan page on Facebook.

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The North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which I have served as a regular columnist for about three years. The Business Journal covers the North Bay area of San Francisco – from the Golden Gate bridge north, including the Wine Country of Sonoma and Napa counties.

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Article published as Vol. 79 on December 20, 2010: The electronic version of this article, as published by the North Bay Business Journal, may be found here. ******************************

Any related materials or articles referenced in the published column, or otherwise applicable, are referenced in this digital version of the article.

Vol. 79: The 12 Pains of Christmas is a post from: Sword Tips – the Exkalibur blog

Yes, the holidays are here and already the list of things to do continues to grow – completing the annual budget, planning parties, visiting with friends, figuring out what to get who for when … and so it goes. Yet, my spirit remains strong, so I’ve prepared a menu of 12 holiday treats that I hope will slide down like Amaretto eggnog in front of a winter fire.

I’ve even scoured some of my earlier columns to find the most delectable morsels. So, here’s a smorgasbord of lessons learned – a few appetizers, a choice of entrees, a little dessert – from executives of both extraordinary capability and numbing incompetence  — that should grace your executive table.

1.     It’s never about you. It’s always about them. Customers, employees, suppliers … family, friends, colleagues. Be clear about it and thrive. Get it backwards? Fail.

2.     If you don’t think you’ll ever have a management succession problem, you already have one.

3.     Build your compensation plan based on performance. Period. Skip all of the egalitarian schemes and make sure you’ve set clear expectations so that the rewards actually promote your objectives.

4.     Forget about economic news. Don’t allow the naysayers to take you off your game. Press forward, be aggressive and instill a positive attitude throughout your organization.  George Bernard Shaw famously said, “If all economists were laid end to end they would not reach a conclusion.” So, focus on what you can control. Change what you can. Leave the rest to someone else.

5.     Get out of the discounting mindset. Think value, service, delivery. How can you defend your value proposition and find a way to nudge prices upward and increase value? The discounting path is a descending staircase … and we all know it’s much harder to climb the stairs than to go down.

6.     There’s no such thing as over-communicating. Talking too much, yes. Saying little, not good. But reminding your colleagues, customers, employees and vendors what you stand for, where you’re headed, how you’re going to get there? Keep saying it. Again and again. You can’t say it often enough.

7.     Growth is a magic elixir in many ways. It stimulates stronger relationships, greater buying power, opportunities for people development … and the list goes on. It’s also a death trap if it’s not managed. The unexpected lack of cash surprises companies on a growth path more than those struggling to survive. The latter group understands the problem clearly. The first group doesn’t know there is one.

8.     Banks and accountants are valuable allies. Don’t go into battle without them. If the relationship’s not working, check the mirror. The solution is probably smiling back at you.

9.     While this is an appropriate time to remember the “family” part of the “family business,” never overlook the equally important discussion about the “business” of the family.

10.  “Incentives are the cornerstone of life” sayeth Steven Levitt in “Freakonomics.” Figure out if they’re working and if not, fix them. If you don’t have any, get some. They work. Believe it.

11.  Most experienced executives know the right answer, they just don’t like it. As a result, they get wrapped around the axle and trapped in inaction justifying all the reasons they can’t decide. If you’re right, you’re right. Make the decision. It will work out.

12.  Have fun like Jimmy Buffett. He always seems to be on a beautiful tropical island, sipping margaritas, guitar in hand, sun baking the sand. An occasional company picnic or an after-hours pub-crawl isn’t enough. Neither is a ropes course or a team-building cook-off. They’re the ruffles and flourishes. The heart of a company is its values; its brain is a leadership team that’s serious about its mission but doesn’t take itself too seriously.

Make sure you take some time to have fun. Just for the fun of it.

KBO

•••

Lary Kirchenbauer is the president of Exkalibur Advisors,providing practical business strategies for family and other privately owned businesses in the middle market. Exkalibur works closely with senior executives and their businesses in the wine and other industries, and hosts the Exkalibur Leadership Forum for leaders of middle market companies in the North Bay. Please visit Exkalibur.com for a library of valuable resources, articles and insights or connect on Twitter, LinkedIN or the Exkalibur fan page on Facebook.

**********************************************************************************

The North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which I have served as a regular columnist for about three years. The Business Journal covers the North Bay area of San Francisco – from the Golden Gate bridge north, including the Wine Country of Sonoma and Napa counties.

**********************************************************************************

Article published as Vol. 78 on December 4, 2010: The electronic version of this article, as published by the North Bay Business Journal, may be found here. ******************************

Any related materials or articles referenced in the published column, or otherwise applicable, are referenced in this digital version of the article.

Vol. 78: 12 Holiday Morsels to Strenghten Your Business is a post from: Sword Tips – the Exkalibur blog

“Speed, for lack of a better term, is good”.

That’s not quite what Gordon Gekko said in the original Wall Street movie, but it’s close enough for our purposes.

So, who’s complaining about the super-fastest fiber-cable ever? Nobody that I know of, but here’s what caught my attention. It isn’t just the extraordinary speed extolled in Forbes’s recent article, Wall Street’s Speed War. Sure, it cost about $300 million to bury a one-inch underground cable over the 825 mile distance between New York and Chicago. Yes, it’s been done in stealth mode so no one would find out and build one even faster, and yes, it’s about to go live.

Big deal? Apparently so … but here’s the thing. The only reason this cable got built was … grab your abacus … to save 3 MILLISECONDS off the previous route for such cable traffic. That’s equal to THREE 1/1000 OF A SECOND!

What for? Here’s a few of the effusive remarks that Forbes quoted: ‘That’s close to an eternity in automated trading” … or “Anybody pinging both markets has to be on this line, or they’re dead.” Yes, this cable line is “required” to accelerate the automated trading by Wall Street houses that use “algorithms to make lightning-fast trades”. In that world, phenomenal speed is the differentiator and 3/1000 of a second is a lifetime.

Is it just me … and I’m the last guy any one would call a Luddite … I don’t think I’m out of touch or old-fashioned, am I?  … but isn’t there something eerily disturbing about this plan by Spread Networks? Aren’t we simply adding rocket fuel to a raging fire that is increasingly out of control and most recently, threatened to burn down our entire financial system?

Remember the old adage … “Speed, Quality, Price – Pick Two!” I kinda wished we’d pick the last two when it comes to Wall Street.

What about you?

Warning: Speed may not be good for our health! is a post from: Sword Tips – the Exkalibur blog

I’ve never read articles by Rex Nutting before, who writes for MarketWatch on the WSJ Digital network … but a banker friend of mine referred me to his “Time to stop worshiping small businesses” article.

I’m not sure where Rex gets his information but his conclusions about the limited job creation value of small businesses is generally unsupported. After arguing, in Clintonesqe fashion about “it depends on how small the definition of small is”, he goes on to claim that while “small businesses do create a lot of jobs, but they also destroy a lot.” Citing a Census Bureau study, he claims that “once they pass their first birthday, small companies, on average, lose more jobs than they create. Many fail within years.”

A recent study by the Ewing Kaufman Foundation reported an entirely different result, concluding that “80% of the jobs created in the first year are still here after 5 years.” There’s not enough detail available to comprehensively compare these disparate reports, but to debunk the value of SMB job creation requires a little more factual support from Nutting.

He also claims that tax rates don’t matter and that the tax on SMB business owners is entirely irrelevant to their hiring plans. While I agree that the immediate decision to hire is related to the expected ROI on the costs/benefit side, Nutting fails to recognize that the long term investment capability of all businesses is driven, in significant part, by the after tax cash available for future investment. To the extent that Cash Flow before Financing (“Free Cash Flow”), which is calculated on an after-tax basis, is impacted by increasing tax rates, there will clearly be less cash available for future investment. Moreover, the tax rate has a powerful effect on the hiring ROI itself, since higher taxes means that to justify the new hire requires a higher ROI threshold.

Provocative thoughts … but generally “good for Nutting” ideas that fail to hit the real target … the prevailing uncertainty and unpredictability that’s killing American business and job growth.

What do you think is stalling job growth? Is it credit? Tax rates? Uncertainty?

Small Businesses – Stop Worshiping Them? is a post from: Sword Tips – the Exkalibur blog

So What? It’s a $30B bill so it sounds like a lot of money … but so did the TARP $750B number when it was announced … and it’s still a long way from fully invested. The NYT claims it will help “credit-starved businesses” … says who? Read Uncertainty is killing business – NOT credit in which I review why credit availability is NOT what’s killing small business. If you’re uncertain about what uncertainty we’re certain about … read the WSJ verbatim quote to be reminded of the painful litany of  the economic and regulatory  quicksand on the road to recovery.

Sure, there may be qualified businesses struggling to get credit. It is tougher out there, the underwriting standards are less flexible … but will the economy recover when credit is extended to small and middle-market businesses? No, the economy will recover when small and middle-market businesses NEED credit to support the growing demand for their products and services.

We haven’t been through such a traumatic time in our economy in several generations. The issues are plentiful, but the most insidious is the lingering Double V – my expression for the deadly duo of Big Volatility and Little Visibility. Until demand is spurred by confidence in the economy driven by VISIBILITY AND PREDICTABILITY, this bill will provide little help.

Is your business starved for credit … or for customers? Is it all about politics?

Small Business Finance Bill passes – So What? is a post from: Sword Tips – the Exkalibur blog

A recent WSJ opinion piece nicely summarizes the quagmire of uncertainty that plagues American business. I’m pretty tired of all of the “credit-starved businesses” stories presented like medieval alchemy … fix this and you’ve found gold … because most of them based on a few unproven anecdotes. The real issue is UNCERTAINTY … so I’m forced to resurrect my own design that tells the story that really underlies the lack of job growth and investment … the Double V – my expression for the deadly duo of Big Volatility and Little Visibility.

Here’s the WSJ verbatim quote that underlies much of the UNCERTAINTY that plagues American business:

Do you think the lack of customers … or the lack of credit … is killing American business? What’s affecting you the most?

Uncertainty is killing business – NOT credit! is a post from: Sword Tips – the Exkalibur blog

Thaler recounts how overconfidence in forecasting is a common thread that weaves a nefarious tapestry in corporate America. He reports on a study by three financial economists that found that CFOs of major corporations are not too good at forecasting … rather, they were terrible at it. CEOs, in turns out, aren’t much better … and studies as far back as 1986 … imagine that … found that hubris … overconfidence with a capital H … is to blame for the bloated premiums paid to acquisition candidates. As I’ve reported earlier, Pride is considered the mother of all sins … and Hubris is its evil twin.

He closes his article with one of my favorite Mark Twain quotes: “It ain’t what you know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Can I get an Amen?

General Pride? Dr. Hubris? Welcome to our Strategic Finance lesson is a post from: Sword Tips – the Exkalibur blog

1. The number of start-ups that flourish and create jobs balances the jobs lost by companies that close.
2. 80% of the jobs created in the first year are still here after 5 years.
3. Companies that start during recessions general catch up in hiring after the recession ends.

So what?

First of all, it means that start-up jobs do not disappear overnight and that small business remains a durable engine of job growth. The start-ups that do survive create sustainable jobs that make up for most of the jobs lost by failed start-ups.

Secondly, a recession does not impose lasting consequences on businesses started during a recession. While there is a temporary slowdown, by year 5 they reach a level roughly equal to businesses started when there wasn’t a recession … although it’s getting a little harder each day to remember when that was.

So, the job creation engine of small business is critical to expanding our economy and putting people back to work. Too bad the Beltway Boys don’t know how to do about it!

Start-Ups Create Lasting Jobs is a post from: Sword Tips – the Exkalibur blog

You can see here how the CEO’s grade the states in such categories as regulation, workforce quality and living environment and see the real disparity between California and say, the average state grade or #1 Texas.

We’re long overdue to weed out the private industry bashers in Sacramento and renew the powerful business community in this state – and it couldn’t start too soon!

California still sharing space with whale pucky! is a post from: Sword Tips – the Exkalibur blog

By now, many of you are familiar with the story about Michael Burry, the Stanford Hospital surgeon who uncovered the flailing mortgage market and made a fortune betting against the continued surge in mortgage offerings, usually buried inside a CDO – Collateralized Debt Obligation. Michael Lewis featured him prominently in his new book, The Big Short, and 60 Minutes also recently profiled him.

Burry’s recent NY Times Op-Ed piece is interesting reading and a good reminder that most everything you’d like to know is knowable … if you look hard enough and do your homework. Most of us are too lazy, though, and the lemming syndrome continues to befall the investor looking for easy pickings.

I’ll be back soon to comment further on the Goldman Sachs case, particularly now that they’re becoming the favorite whipping boy of the dreamcats in Washington.

He saw it coming …. is a post from: Sword Tips – the Exkalibur blog

While there is certain to be a lot of political fallout and spin doctors massaging the message, it’s hard to argue that the health care reform razzle-dazzle isn’t part of it. As I’ve said before, I doubt that there’s a single American, let alone a U.S. Senator, who could even tell you, clearly and plainly, what the bill looks like today.

You can find other articles in Sword Tips discussing some of these provisions, and the lack of cost-saving provisions. I think what Americans resent is the enormous resources devoted to an omnibus bill of gargantuan proportions, unread by virtually all, that has jumped ahead of job creation and economic stability for so many Americans. I think the current Administration has been plagued by trying to do too much and taking their eye off the ball with respect to the economic stimulus necessary for job growth. Without that, Americans aren’t going to be comfortable with much of anything and certainly not something that threatens to cobble up the health care of those currently covered at an enormous cost that is barely estimable.

Alas, another reminder. Sharpen your focus on “what’s now” …  the most important issue … if you want people to pay attention to “what’s next”.

Taxachusetts? Not this time! is a post from: Sword Tips – the Exkalibur blog

One parenthetical observation in this article is the reminder that “there are no proposals in either the House or Senate reform bill to scrap the fee-for-service system.” As a result, there is little expectation from the Congressional Budget Office that the legislation will do much to halt the medical health inflation.

Don’t you think some attempt to get at the core of health care costs should be the ante for any health care reform bill?

Health Care Costs – Cut? Not! is a post from: Sword Tips – the Exkalibur blog

What do you think of the ideas being floated about, the key ones of which are summarized here? Will any of them help your business? Are there other ideas that could work? Fire up those fingers and add your comments here.

For one thing, the Administration continues to talk about incentive programs to spur business lending. While that would also be welcome, it doesn’t get at the root cause of unemployment and jobs growth. I’ve reported here before that lending is NOT the biggest problem in the middle market … it’s demand and revenue growth. Companies are not going to borrow except to meet demand and if demonstrable demand is present, borrowing is usually easier anyway.

One idea is to eliminate the capital gains tax for small business investing. I’m not a tax maven … and any tax relief is always welcome … but the capital gains tax is only paid by small businesses when they SELL their business or property – and it creates NO direct benefit to encourage investing in people, plant or equipment. There might be a crooked line benefit if the idea to extend 100% capital gains tax relief to 2010 investments is implemented, which could encourage investors to provide new capital to businesses, with the expectation that the ultimate sale of their stock would be tax free … but it’s a serpentine path at best.

The recommendation to extend the investment tax credit that allows businesses to immediately write off as much as $250,000 in qualified investments … also known as an IRS Section 179 deduction … does make sense for businesses that have investment capacity and might spur investments that would otherwise be deferred. By coupling this with the so-called “bonus depreciation”, it could really stimulate needed investment … for some. But, for companies without any borrowing or investment capacity, it won’t help much.

Finally, the idea of a payroll tax credit or “hiring credit”, while still being promoted by the President, has been shot down by most business observers, including yours truly. If you don’t need to hire someone to meet current demand, would you do it if you could save 15%? Simple answer? No!

Congress has already put off until next year any chance of passing this kind of legislation. In the meantime, middle market businesses are on their own to seek innovative solutions to the continuing problems that plague most markets.

White House Jabbing about Jobs is a post from: Sword Tips – the Exkalibur blog

Nouriel Roubini, the NYU economist,  writes in a column published in BusinessWeek that the small business economy, is still mired in an “deep and persistent recession”. In fact, a Goldman Sachs analyst recently explained that small business sentiment is out of line with other measures of the economy, like GDP.

What’s the answer? A recent meeting of chief executives concluded that efforts need to center on getting more credit to small and mid-market businesses. The CEOs argued that the main impediment to a faster economic recovery was the high level of unemployment and called for ensuring that credit was available to jump-start hiring, with an emphasis on smaller businesses. I seriously doubt that’s the holdup and am inclined to agree more with the NFIB Chief Economist.

William Dunkelberg, Chief Economist, National Federation of Independent Business, arguing in a CNBC guest blog that banks shouldn’t make bad loans … they’ve made enough already … explains that in an October NFIB survey, only 4% of small business owners identified financing as their biggest problem. The lack of revenue to stimulate hiring was by far the biggest drag on the lagging employment figures.

Time magazine reports further that the NFIB recently found that 86% of small businesses surveyed reported that earnings either fell or were flat in the past three months and 82% posted either flat or lower sales. Over the next three months, 21% plan to cut workers and 32% expect to reduce inventory.

On another front, Goldman Sachs and Warren Buffet recently announced a $500 million small business investment plan that, while small, represents some valuable initiatives.

Small business still swimming upstream is a post from: Sword Tips – the Exkalibur blog

According to a new report, over $700 million is wasted each year in the medical system, equal to roughly 1/3 of total health care spending in the U.S. Business Week dug beneath the surface to find 10 Ways to Cut Health Care Costs Right Now, to learn about other ways you can begin … NOW … to cut health care costs for your company and family.

Get after health care costs NOW! is a post from: Sword Tips – the Exkalibur blog

… not to mention how much stuff is buried in there we haven’t heard about yet or the laughable observations that it won’t cost anything. Where to start? How about David Broder’s observaations about its failure to deliver on cost controls, he being the former of Chief of Staff for Prez Clinton.

How about the Wall St. Journal report that the promised tort reform – sounds good – is coupled with a provision that provides incentive payments to states that adopt a “alternative medical liability law” … but ONLY IF it does not limit attorney’s fees or impose caps on damages”? Huh? Isn’t that at the core of tort reform in the first place?

How about the concept that none of this will cost anything  because the savings will offset the cost? Gee, we’ve never heard that one before. For this part, start with Pelosi’s 5.4% income tax surcharge which turns into a 69% capital gains tax hike? Oops, haven’t heard of that one yet? It turns out that the Bush tax cut which resulted in the 15% capital gains rate will go to 20% when those tax cuts expire on Jan 1, 2011 … and go to 24.5% thereafter as a result of the surtax – a 69% bounce overnight.

Here’s some more frosting … that Sen. Harry Reid (D) is contemplating an increase in the Medicare payroll tax. The package was reportedly put together in secrecy and submitted to the Congressional Budget Office for analysis.

Health care reform is a worthy cause and much needs to be done. But wrapping the concepts in a labyrinth of bureaucracy buried in the conundrum of a 2,000 page bill, funded by an enigma of hidden tax schemes, is hardly the way to do it.

Buried in a 2,000 page bill … is a post from: Sword Tips – the Exkalibur blog