Benchmarking: Part 3

You might have noticed, but we really want to see your business succeed from information gained through benchmarking. In other words, we want you to be a pro. But, before we unleash you to get started, we need to share a few things to avoid when you start a benchmarking analysis.

  • Comparing Company A to Company B: Make sure the peer group that you’re comparing to the business is representative of the industry. Comparing yourself to another, single company, can prevent you from seeing a true comparison if there are considerable differences. If you are looking at a benchmark analysis that restricts the sample size to only one other company, be critical in your findings.
  • Be aware that the benchmark analysis doesn’t end with a variance report: Once your report reaches the variances between its financial metrics and its peer group benchmarks, you might think you’re finished, but the work is just beginning. Don’t get worried — as the work is just beginning, so are the opportunities! When viewing the variances of your report you are now given potential problem areas to fix and also the opportunity to improve the overall performance of the company. For example, the variance report shows the areas of the business that are excelling. Now that you can see the areas of your company that have successes, see if this strategy can be implemented in other areas of the company.
  • Assume that numbers and performance are always changing: Positions in a car race are constantly shifting: first to third, second to last and so on. It isn’t optimal to compare your business to its peers only once per year, since many industries are always changing, even if your business isn’t. By preforming frequent benchmark analyses, your business can identify trends and react sooner.
  • Be mindful with calculations and the conclusions drawn from them: Certain benchmarks are common financial measurements (turnover rations, net profit margin, and liquidity rations) and their calculations generally do not change. If your benchmark analysis is expanded to include industry specific key performance indicators (KPIs) (airline-sales per seat, for example), make sure to use the same calculations, period after period. However, if a subaccount is added for one period but then removed the next period, the trend analysis performed might be misleading.
    • All members of management and the financial team need to understand the definitions of the metrics, and have a copy of them as well. You want to make sure there is only one interpretation, which will help defuse any confusion. Be sure everyone is on the same page to allow for complete and easy understanding.

It may not seem like a must do task, but benchmarking is important. When it comes down to it, remember the true purpose of benchmarking: to illuminate successes and challenges for your company, and to give you, the business owner, insights to inspire action!

*Shameless plug: If benchmarking sounds like the thing for you, let us know. We love helping businesses see how they’re doing!

 

Benchmarking: Part 2

In our latest blog post, we looked at why benchmarking is important for your business. Some of those reasons include:

  • It keeps you up to speed with real-time data (that is, as long as the data is timely, relevant, and accurate).
  • It never goes out of style and can be used continually, rather than a one-and-done solution.
  • It truly helps you understand the well-being of your business situation.

So now that we have a refresher of why benchmarking is great for your business, let’s dive in deeper. After you decide which data source you’ll use (make sure it’s accurate, timely and relevant), the challenge is now deciding which benchmarks to analyze and use as a tool for the success of your business.

We’ve said it before, but we will mention it again. Different industries, and different companies within an industry, might have different success measures. For example, a contractor might have large subcontractor expenditures. Are these expenses normal considering the contractor’s sales volume?

Instead of taking a look at industry-specific metrics, we’re going to focus on some metrics that are universally important and can provide a quick look into a company’s health.

  • Liquidity Ratios. Yes plural – because there are two that need to be analyzed together. They are:
    • Current Ratio which is shown as current assets divided by current liabilities. This metric shows general liquidity, but it does have some limitations. If inventory is included in calculating the current ratio, it might provide a distorted understanding of your cash flow.
    • Quick Ratio is expressed as cash accounts receivable divided by current liabilities. This ratio might not be perfect for showing liquidity, but it can be a useful and popular comparison to pair with the current ratio.
  • Net Profit Margin. Expressed as net-profit before taxes in a given period divided by sales. Another way to view this? How many cents of profit you extract from each dollar you earn in revenue. This might be a basic metric, but it’s extremely important!
  • Turnover Ratios. There are three ratios that you should consider:
    • Inventory Days which is shown as inventory divided by cost of goods sold, multiplied by 365 days. Inventory days tells the story of how long it takes to sell off inventory. However, it’s important to remember this ratio is very industry-specific. Imagine how long wine is stored in a winery compared to the length of time milk sits in a grocery store cooler. Usually, lower numbers are better.
    • Accounts Payable Ratio is expressed as accounts payable divided by cost of goods sold, multiplied by 365 days. The accounts payable ratio shows the number of days you take to pay the vendors. Higher numbers are better – it means you hold on to cash longer.
    • Accounts Receivable Ratio is shown as accounts receivable divided by sales, multiplied by 365 days. This is a rough measure of the number of days your company takes to turn accounts receivable to cash. You want lower numbers, as it is better to have cash in the bank than extra receivables on the books.

By paying attention to some of these important metrics, you can build a picture of where your business Is, where it should be going and what it will take to get there.

Benchmarking: Part 1

Do you ever wonder how your business does compared to others similar to you in size and industry? Maybe knowing this information would give you a more competitive drive, or would lead you to make some improvements to better your company. Or, maybe you’re just curious.

Whatever your reason for wanting to know, benchmarking can be a powerful tool to compare you to your peers and check your performance. Benchmarking can even lead to an overall greater level of success as a company.

Here are a few (of many) reasons why we think benchmarking is pretty awesome.

It never goes out of style| Benchmarking isn’t just a one and done concept. It can, and should, be used throughout the entire lifecycle of the business. As your numbers and statistics change, the same happens for the competition. Benchmarking can provide a real-time look into how your business is stacking up against the competition and industry trends, and can help you find solutions at any stage in your business.

Knowledge is power| When you see and understand how your business is ranking relative to similar businesses, you can empower management to evaluate company performance and make informed decisions. This information can also be used to identify new and future opportunities that can lead to greater growth and success. To accomplish this, it’s best to compare on an industry or peer group level, rather than just a one-company comparison.

Data doesn’t lie| Without good data, you’re wasting your time. Make sure to look for data from benchmarking that is:

  • Relevant – Data won’t mean much to you if it isn’t relevant to your business. Make sure you consider your geography, size and industry when getting your data. Each has their own trends and characteristics that are incorporated into the data – which makes for a meaningful comparison.
  • Timely – You want to be sure the benchmarks being used are the most recent available, which helps account for seasonality, economic cycles and other fluctuating factors.
  • Accurate – If you’re making sure your data is relevant, it will likely be accurate too. However, it’s always a good idea to verify the data before applying to make important decisions.

A way to measure success| Each business and industry (even businesses in the same industry) has a different way of measuring what success means to them. While you can only decide what success looks like for your business, there are a few metrics that can provide a quick, high level view of your business’s well-being:

  • Net Profit Margin = Net profit before taxes, divided by sales
  • Liquidity Ratio – Current Ratio = Total current assets divided by total current liabilities
  • Turnover ratios, which include inventory days, accounts receivable days and accounts payable days.

As you can see above, benchmarking is a great way to get a picture of how your business is really doing compared to those around it. Using this information, you can feel comfortable making changes to better grow and improve your business.

Small Business Loans 101

Guest Blog By: Matt Gruchalla and Shelly Kegley of Bell Bank

In today’s banking environment, securing a small business loan takes more organization than one may anticipate. There also seems to be a correlation between how organized a borrower is, and success in getting approved for a small business loan.

Financing for a New Business

It is important to plan well in advance for starting a business so the business owners are financially well positioned for success. This gives the bank an idea of the owner’s capacity to support the business if additional cash injections are needed at any point. Some items to consider prior to starting a business include:

  • Personal credit – The owner’s credit report should be free of anything derogatory, and reflect that all accounts have been paid as agreed. Revolving debt and credit card balances should be minimal. Assuming the owner’s personal accounts have been handled as agreed, personal credit scores should be acceptable.
  • Personal income tax returns – Typically, lenders require three years of personal income tax returns, as well as income tax returns for any business ventures the owners have been involved with.
  • Personal financial statement – This is a detail of the owner’s assets and liabilities. Potential lenders will look closely at owner’s cash, liquid investment balances and equity in homes or other real estate, as these can be sources for initial or ongoing business capitalization.
  • Outside investors or loan guarantors – If a business owner feels they may not be financially positioned to start a business, a good option may be to consider outside investors or loan guarantors.
  • Business plan – A great business plan includes a market analysis that’s backed by real data. The business plan should explain why there’s a need for the product or service that the potential business will sell, as well as what differentiates them from their competitors. The business plan should include a summary of the background and experience of the owners and key employees. Obstacles and success barriers should be discussed and mitigated.
    • A business plan shouldn’t be lengthy or redundant. Keep it clear and concise! SCORE and the Small Business Development Center are two outstanding resources available in the FM area to contact if you need assistance with completing your business plan.
    • Projections are a key component of a business plan, and shouldn’t be overly optimistic. The assumptions used to formulate the projections need to be explained so the lender understands how they were determined. The projections should include a “day one” balance sheet, along with year-end balance sheets for the first three years. Income statement projections should include monthly projections for the first year and annual projections for the next two years.
  • Sources and uses summary – This gives the lender an idea of what the loan funds will be used for, and will detail the equity that will be contributed by the owners. There isn’t a hard and fast rule for the amount of equity needed but typically 20% to 25% is normal.

Financing for an Existing Business

Securing financing for an existing business is normally an easier process because a lender can rely on a proven history rather than on projections. A projection may be needed if the financing request materially changes the business operations; however, these projections may be easier to complete since the business owner will have a better understanding of their business and industry.

From the business a lender will require:

  • Three years of business financial statements
  • Most current year to date financial statements
  • Three years of business income tax returns

From the business owners a lender will require:

  • Three years of personal income tax returns
  • A current personal financial statement

Obtaining a small business loan may seem daunting, but an organized, financially healthy borrower will have a much easier time securing a small business loan. Taking the time to prepare a well thought out business plan, and becoming financially healthy, will make the financing process go more smoothly.

An Exit Interview with Jim Ramstad

Jim Ramstad is no stranger when it comes to business. From starting businesses to selling businesses and every step in between, Jim has done it all. After all his time and experience, Jim has decided it’s time for a new path in life – retirement!

Jim has been an important part of our work here at Eide Bailly, and we know his advice and knowledge will be missed. We sat down with Jim to ask him to share some of his thoughts and advice with you, fellow business owners and entrepreneurs.

How long have you worked in the business world?

Altogether, I’ve spent 49 years in the business world, involved in various aspects of business.

How/what made you want to get involved in business?

Growing up and in high school, I never even thought of getting involved in business. In fact, I wanted to be a teacher and a coach. As I grew up, I watched as my dad’s family did very well for themselves in business. As I watched their successes and trials, I became more and more intrigued, and decided it was the right path for me.

If you weren’t in business, what would you be doing?

As mentioned before, I thought about being a teacher and a coach when I was younger. Now looking at it, I think it would be fun to be in politics. Twenty some years ago, I took a personality test that determined the top two areas that would make sense for me career wise. My top two were politician and ambassador, and accountant wasn’t even on the list. I feel like ambassador made sense, and I’ve gotten to do some of that in being an ambassador for other businesses.

How long have you been at Eide Bailly?

I’ve been working at Eide Bailly for 12 years, and I was a client here before I started working here. I’ve always had a connection with the Firm, which has led me to some of the career positions I’ve been in.

What positions have you held prior to being at Eide Bailly and at Eide Bailly?

Prior to being at Eide Bailly, I held many different positions. I’ve been an accountant, controller, CFO, COO and CEO. I’ve also done business development and government relations for a company in which I got to propose a piece of legislation that actually got approved into law in the energy bill.

Here at Eide Bailly, I’ve always worked in business advisory. In 2005, I started working with entrepreneurs to help get their businesses to take off. Throughout this role, I’ve been blessed and fortunate to take my personal experiences in business and apply it to other clients and help them learn from it.

What was your favorite position and why?

I don’t think I could really pick a favorite – I’ve enjoyed them all! I’ve really enjoyed the last twelve years here at Eide Bailly. I’ve enjoyed getting to apply my past experiences while also learning new things from our clients. Although there have been challenges, I’ve found it very rewarding.

What changes did you see take place in the business/accounting world during your tenure?

The biggest and most obvious change I’ve seen is in technology. From everything being completely manual to now being nearly all online and in the cloud, it’s been a total change. When I was 26, I worked with for a trucking company that completed everything manually. I gradually helped introduce them to technology, which was a process. Now, they use technology for everything.

What advice would you offer small to mid – sized businesses just getting started?

Get an advisor. It’s important to find people who are truly and genuinely interested in you and your success, not just in selling you something or getting a fee for the job. Find these people and rely on them – don’t try to do it all on your own.

What will you miss most about Eide Bailly?

The people, hands down. I am also sad that I won’t be around to watch the Possibilities Center grow into a bigger, Firm-wide practice, but I will be paying attention and willing to help if the need arises.

What are your plans after retiring?

I’m going to stay busy. I’m going to use my facilitation skills to start some groups in the FM area, such as mastermind groups and a bible study type group. I always want to continue to be a mentor and resource for Eide Bailly professionals who may need my help. The rest of my time will be spent with family, being a grandpa and a great grandpa.

While Jim isn’t leaving us for a few more weeks, please join us in wishing him well and thanking him for all his hard work and dedication.

Who Doesn’t Love a Discount?

Who Doesn’t Love A Discount?

If given the option to pay full price or receive a discount, it’s safe to say the majority of individuals would prefer a discount, regardless of what they’re purchasing. Why would this be any different when it comes to your business?

When valuing a minority interest in a business (an ownership interest of 50% or less), it’s typical of buyers in the marketplace or a valuation analyst to apply minority discounts, which are more technically known as a discount for lack of control (DLOC) and a discount for lack of marketability (DLOM).

We know what you’re thinking: what are these discounts and why do they matter? Here’s a look at each type:

A DLOC is an amount or percentage deducted from the operating value of an entity to reflect the absence of some or all of the powers of control. When someone holds a minority interest in a business, they lack the ability to:

  • Implement business and operational characteristics;
  • Appoint and remove management;
  • Control the timing and amount of distributions;
  • Put the entity’s assets to their highest and best use.

In other words, the person buying into the business is receiving a discount because they are not receiving the full benefits of control.

A DLOM is an amount or percentage deducted from the operating value of an entity to reflect illiquidity (inability to quickly convert to cash) in privately-held entities when compared to public companies. In the valuation world, we refer to liquidity as “cash in three days”, which is expected when selling publicly-traded stock. However, when it comes to selling private companies, it takes much longer than three days to receive cash, which is why a DLOM is appropriate.

Discounts are extremely important to understand when negotiating transactions with investors. Investors’ primary way to receive a return on their investment is through distributions, which are primarily dependent upon the company’s financial stability, and diversification among the services and/or products and geography of the business.

Going back to the concept of “cash in three days”, investors will also look at the obstacles they could encounter if they decide to sell their interest in the future, which could potentially be affected by the company’s transfer restrictions and redemption policy. Therefore, appropriately discounting a minority interest is important as it could potentially make or break a deal.

Of course there are some risks that should be considered on the sell-side of a transaction. The amount of time it takes to complete a transaction, accounting and administrative fees incurred and the probability that the actual sales price could be much less than the asking price are some sneaky issues worth keeping an eye on.

Not only are discounts important to consider when searching for outside investors, but they are also a strategic tool that can be helpful when exiting a business. In fact, if you’re planning to sell your business, there’s a good chance you might encounter these discounts. It’s important to understand them so you know what price you can realistically expect from the sale of your business.

It goes without saying that buyers appreciate discounts to the share price, but sellers may not. After all, everyone wants to get top dollar for their business. Buy-sell agreements are commonly used to allow a company or its shareholders to purchase the interest of a shareholder who decides to withdraw from the company for a specific price or by using a set formula to determine a price. However, instead of preparing for a smooth exit, many buy-sell agreements tend to cause more issues as the use of a set price or a formula may not consider the current economic and financial condition of the company, which could lead to legal (and expensive) issues.

An effective buy-sell agreement should include an explanation of relevant discounts and the requirement for an appraisal from a certified appraiser to determine the current fair market value of the company. A well written buy-sell agreement will help minimize misunderstandings and disagreements, ensure proper discounts are appropriately applied to the company value and make for a smoother transaction among all parties involved.

Buy-sell agreements and all pieces of the puzzle can be difficult to put together. Luckily, our business valuation team is trained and ready to help you conduct a successful business transaction. If you need help, just ask!

 

Strategies for Success

As you begin your business, or even as you’re running it day-to-day, it’s important to consider strategy. Putting strategies in place can help you stay on track and achieve your goals.

When developing success strategies for your business, there are three common strategies you can focus on to help your business.

1. Profit Strategy. It might seem obvious to focus your attention on profit, but it comes down to how deliberate you are in making plans to reach this goal. Have you thought about how much profit you are aiming for each week, month or year? How about your sales plans to achieve these goals? P.S. For more on all things profit, check out this blog.

2. Resource Management. Resources here refer to human and capital. You know, the people and things the business depends on to make a profit. Some businesses are heavy on human resources, such as service oriented businesses, while others are heavy on natural and capital resources, such as manufacturing or technology companies. Furthermore, some businesses even require a good dose of both. No matter what type of business you’re running, your resources are extremely valuable. If you don’t take care of them, you risk the negative impact it can have on your business’s bottom line.

So what do resource management strategies look like? Human resource management can take on many shapes and forms. Maybe it’s developing an employee wellness program to keep your employees healthy, or offering special perks like free lunches or themed days in the office. There are a lot of options when it comes to keeping one of your most important resources, your people, happy. (If you’re struggling with this part of the strategy, let us know – our outsourced HR practices are pretty great!)

It’s also important to have a strategy in place to manage your capital. Capital, which can be anything from the tangible machinery and buildings a business owns to the financial assets of the company, is essentially the backbone of your business. For your physical capital, it’s good to have strategies in place which determine when to renovate or upgrade items as they get worn down. You should also have a game plan in place for your financial capital. Consider creating a strategy that helps you determine which assets can be used for which projects, and which assets should be left alone to grow and invest.

3. Market Alignment. Having a strategy in place to fit in the market and give people what they want is a major key to having a successful business. You want your product or service to line up with the needs and desires of your potential customers – otherwise, no one will buy.

So how do you put together this type of strategy? First and foremost, it’s important to understand who your target market is. Once you know who you’re trying to reach, you can further develop your strategy of how to reach them.

When developing this strategy, it’s also important to keep in mind the possibility and impact of change. People always want something newer, faster, better, etc. Try to develop a strategy that is flexible and allows for change when it is needed. This can help you stay up to date with the market and ensure your business is always ready for the next big thing.

The moral of the story

Setting strategies early on, and taking the time to think through them, can help you set your business on the right path to grow into the dreams you have for it. Strategies help develop the tactics and plans needed to perform your mission, achieve your vision and reach your goals.