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Sweet marketing music

Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Beth Ewen
October-November 2014

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Above & beyond

Everyone knows certified public accountants handle tax time, but they can advise on so much more, from inventory management to risk assessment to financial analysis and more.

 

We asked leading local CPAs to describe ways they can help business owners build bigger and more profitable companies, which go far beyond bean-counting.

 

Timely info leads to
better decisions,
BDO expert advises

 

Upsize: Why is timely and accurate information important, in your view?

Jay Dunphy, BDO: The first reason is owners are able to be more reactive in a shorter period of time, than having something that’s stale and goes out two, three, four months or even a year. Having, one, accurate financial statements, and then, two, having them be timely means the business owners can make decisions.
Upsize: Like what?

Dunphy: It could be a price adjustment, because let’s say you’re looking at your cost of goods sold, and it went up 2 percent in a particular month.

What happened? Maybe your suppliers increased their prices. That type of analytical review is going to help you run your business, and adjust quickly.

I don’t think owners need to understand all the financials, but they should be looking at certain things. We’re doing an analysis of KPIs, key performance indicators, and saying, something could be out of alignment here.

Upsize: Of course it varies by business, but what are a handful of items that all business owners should be examining?

Dunphy: The first thing is the cash flow statement, and I would say the minimum is monthly but obviously clients could be managing their cash on a daily or weekly basis.

They can reconcile where they are each month, and look at their cash position daily. That’s the most important thing, because cash is king.

Things that we’d recommend are an industry scorecard: your current ratio, or how quickly are you turning your inventory; accounts receivable days, or how quickly are you getting paid; some people like to look at accounts payable, but you’re the one managing that.

We also look at gross profit margin, and if that number is running astray compared to the previous month, year or year-to-date, there’s an indication that something’s happening here. What went astray? Those are the biggies.

Then on the debt side, what is the debt-to-equity ratio, or looking at total liabilities to total equity. When you look at those ratios, you’re saying to a banker, can this person make money, pay down debt and still have a few bucks left at the end of the day.

It’s what people call a dashboard report. If you figure out what your key performance indicators are, that feeds into a quick dashboard.

You want to look at top line revenue, your cost of goods sold, and you want to look at SG&A, or selling, general and administrative expenses, and then you have your one-page report to review.

Then it’s a monthly cycle that you can follow.

That’s the driver, so companies can say what are we doing, how are we doing, are we doing it right, and where should we go with this? Are we going to add more people, add a product line? Maybe we need to make a strategic move.

I’ve had clients who’ve done this, and they’ve fine-tuned it along the way and it’s a running machine. Now they have history here that they could go out to a potential buyer and prove their numbers are good, prove the value in the business.

Upsize: I imagine bankers like that sort of thing, too.

Dunphy: We see bankers love it if a business can produce timely financial statements. I always advise, establish a strong financial team: you have an accounting CPA, HR either in-house or outsourced, legal, bonding, insurance, banking.

The key is to have that team so when things come up, if the owners want to do something you can move quickly. The owner usually gets better rates, too.

Upsize: How often do business owners already have this information in hand?

Dunphy: I would say 80 percent of the time clients definitely don’t have the KPIs or dashboard reports, and their financial statements are sporadic, and they’re not complete.

But in 90 days we can get you flipped around, and get you caught up. You have a front-loaded fee to pay, but then it’s systematic and it rolls.

Upsize: What’s an example of how timely financials helped a client?

Dunphy: We had a light manufacturer that was not receiving timely information and we got them all caught up. They didn’t have six months of statements, so we got that done.

Then we built the one-page dashboard report. And then once that’s going they had timely financial statements. From there they want to know, can we expand our business, and now we can look at what-if scenarios.

Like, should we go out and buy the $200,000 piece of equipment, and what is our return on that? Do we have to hire a person, and what is the cost of that vs. the efficiencies we could get?

Maybe in this case the machine could run a longer period of time without someone being there and handling it. They got to a point where they bought two of these machines.

It was a hard number to pinpoint, but their revenue increased, their customer satisfaction increased, their accounts receivable improved because they were turning around product in a more efficient, better quality way.

They went back to their customers and said, we’d like to shorten the time period in which you pay, so then their cash flow improved.
They ended up picking up 4 to 5 percent to the bottom line in a tight margin business, so that’s huge. It doesn’t happen overnight, but all those things add up.

Jay Dunphy is senior director at BDO in Edina: 952.656.2607; jdunphy@bdo.com;
www.bdo.com

Smoother processes
live in the cloud,
at Lurie Besikof

Upsize: What’s one way your firm helps business owners, beyond taxes?

Kevin Besikof, Lurie Besikof Lapidus: One area I head up in our office is called YourBook. It’s outsourced accounting.

We put it on a cloud platform, we put together best practices for payables and receivables, and we do it in a systematic manner that helps business owners analyze and understand where they’re going.

A lot of companies today will have really two systems at once. They have an owner who gets all the bills, and handwrites checks. And then the good ones will give it to a bookkeeper who puts it into the system after the fact.

The bad ones lose everything. And what do you have? Paper, which is inherently inefficient. You’ll have someone entering things, finding stamps, licking envelopes.

Upsize: How many businesses still do it that way today?

Besikof: A lot. We put together a system that takes an invoice, scans it, records it into our system, and it hits the right account, payble to the right vendor, you name it, and then it’s routed to someone in the company for approval via a portal.

That happens without anyone pushing a piece of paper around. It gives you, one, a better process, two, more control, and three, more security.

Upsize: What about the payables side?

Besikof: The system that we use allows for electronic invoices. You can have an electronic payment from your vendor, to create efficiency and reduce collection times.

Upsize: What prompted you to develop this system?

Besikof: We’ve been using this system for about 18 months. It’s based on the development of cloud technology, getting it to where we felt it was a viable service offering, and two, internal vetting just to figure out the best-in-breed technology and what we wanted to implement. We spent a good nine months to develop it.

Upsize: Are you one of the name partners?

Besikof: Our firm is 75 years old, and throughout different generations the names have changed. My dad was a partner for 35 years, and he’s been retired for eight.

I’m the next generation, so I think technically it’s his name.

Upsize: I like that, the next generation rises and you’re ushering in new methods.

Besikof: The profession is changing. The technology is good and bad. This is a side of technology that gives us new opportunities.

There’s technology that takes business away. Some of the easier tax returns, for example, a lot of people are deciding to do those on their own now, because they can. So we need to zig when the rest of the world zags.

Upsize: I’m sure it varies, but give an idea of the cost.

Besikof: It’s from $500 to $10,000 a month, and truly it depends on what kind of company it is, how complex it is, how many transactions they have.

Upsize: It surprises me that you said so many clients still do things the old-fashioned way.

Besikof: Some people are comfortable with the old way. There definitely are a lot of people that feel very connected to writing a check. They feel that they know where the money is going.

There are other people who, and this happens all the time, just don’t really know what’s available. When you show them what’s available, and implement an efficient system for them, their first reaction is, ‘That’s it? That’s all I’ve got to do?

You’re kidding me, right? If I could get back all those hours that I spent in the past, I don’t know what I could have done with them.’

Kevin Besikof is a partner at Lurie Besikof Lapidus & Co. in Golden Valley: 612.377.4404; kbesikof@lblco.com;
www.lblco.com.

Strong internal staff
saves money later on,
says John A. Knutson heir

Upsize: You advocate for a strong internal accounting staff at your clients’ companies. Why?

Andy Knutson, John A. Knutson & Co.: One of the misconceptions that a business owner can have, and especially a growing business, there’s not a lot of money to throw around and have staffing.

They don’t put enough faith in the accounting role in general, and especially into having a well-paid person in that position. If you want a qualified person, it’s going to cost you money.

The second thing is, it’s a piece of paper, a balance sheet or income statement, that the business owner may or may not understand how that affects their business and can affect the decisions. If a qualified person is in there, they can explain that piece of paper, and add a lot of value.

Upsize: How do you know what type of person is necessary, from bookkeeper to controller to CFO?

Knutson: It depends on the type of business. If it’s a start-up company, it’s sufficient just having a bookkeeping person who can enter transactions and understands accounting, and understands the difference between the basic items.

If nothing else at that point the information is more organized, and when they go to their CPA and tax preparer then that person is in a better spot to give advice.

As a company grows the role would change. As you get successful, it’s more of a controller, someone who can step in and help with banking relationships, equipment purchases, items that would normally occupy the attention of the business owner, and then the owner can focus on what the owner is good at.

Then at a certain level it’s a CFO that helps manage a full accounting department, and you’ll need a more sophisticated person.

Commonly, in our client base, those start-ups and even the successful long-running companies, they don’t feel the need to have a qualified bookkeeper or controller.I continue to see no value placed on that position, yet we’ll come in and audit and review and find mistakes that could have been corrected.

Upsize: Really? Like what?

Knutson: I have seen cases where a transaction was mis-posted during the year.

The bookkeeper mis-posted a six-figure expense item and put it in a distributions account and so it affected equity, and the company’s income looked much higher than when that was posted.

So at the end their income was much lower, and they had already paid out bonuses. I’ve seen other instances where we’ve made a number of adjustments to correct something and the year will flip from an income to a loss, and that will change perspectives. So it’s a big deal.

Upsize: I see your firm offers training services.

Knutson: Our firm does a number of things, if a bookkeeper leaves or if a client is looking to upgrade. I’ve looked at resumes and offered thoughts. I’ve sat in on interviews and offered perspectives. That way the accountant can ask questions that the owner may not know to ask.

The other aspect is the training, so rather than taking the traditional role and going in at the end of the year and making adjustments and entering in the system ourselves, we like to go in, find the mistakes, teach the bookkeeper or controller, help put in place systems so mistakes don’t happen again, and then have the person make those corrected entries themselves.

Upsize: What does that type of service cost?

Knutson: The costs are at our normal hourly rates, and it depends on the level of staff. If it’s bookkeeping type training, it’s $60 to $100 an hour; if it’s a more senior staff person or manager, it’s $110 to $150.

Upsize: Tell me about another service accountants offer, which is helping to allocate overhead.

Knutson: If you’re a contractor or manufacturer, or even a service company, you need to know your overhead. You know your expenses, and somehow you need to allocate your costs.

Most businesses understand their direct costs, and even some of their direct labor. They can calculate that easily enough. But then a lot of times they have a hard time pinning down the indirect costs and the overhead rates that go with those.

They need to do so in order to get enough in their price to cover equipment costs including depreciation, and indirect labor, whether shop guys or owners themselves or office rent. A CPA firm can help point out those costs and then help them come up with a rate to charge, to make sure those profits are high enough.

One trap a couple years ago was people would go bid a project really skinny, and say, I’m going to bid a 2 percent profit margin. They thought 2 percent would cover direct expenses, but they didn’t know how much the indirect costs would be.

Upsize: Any other advice for business owners?

Knutson: A quick call to your CPA can save a lot of money later on. I’ve had a number of 15-minute calls that either stopped an owner from doing something that would have cost a bunch of money, or led him down a different path of thinking that saved him money or made him money later on.

Upsize: Are you related to John A. Knutson?

Knutson: Our firm goes back to 1925, and it was started by my great-grandfather, Andrew Knutson, and John Knutson was my grandfather. Brian Knutson is my father. I’ve been full-time since I graduated in 2003.

Andy Knutson is director at John A. Knutson & Co. in Falcon Heights: 651.379.5724;
aknutson@knutson-cpa.com;
www.knutson-cpa.com

 You can increase
your company’s value,
Olsen Thielen pros say

Upsize: You work with owners to increase the valuations of their businesses. What are the value drivers?

Tony Stinar, Olsen Thielen: In reality not enough business owners ask themselves these questions until it’s time to sell, so it’s a good topic. When you’re talking about what can increase the value of the business, the obvious thing is earnings and cash flow.

I came at it from the standpoint of, if you have two businesses where earnings and cash flow is equal, what’s going to make one business more attractive than the other?

That comes down to mitigating and minimizing risks. That’s an often overlooked piece of value. Risk is a function of value, and higher risk equals lower value.

Tom Pesch, Olsen Thielen: Tony’s comments about earnings and cash flow are unique to each business, but it’s paramount for all business owners to create a reasonable return on equity.

They should, in addition to that, be getting paid for their time. And there should be reasonable cash flow, so all profit and no cash flow is no good.

There’s a host of other items, too, that are expectations of a valuable business. So having a reasonable financial model is a big deal, it’s a pillar.

Upsize: How do you help business owners increase value?

Stinar: I always talk to clients about completing internal due diligence. Put on the hat of a potential buyer, and identify where the holes are.

That comes down to the management team: is my management team stable and is it deep, or do my operations rely on one or two individuals? Are my systems and procedures designed well and are they implemented? Do I have internal controls to prevent fraud? Do I have too much customer concentration?

This one is overlooked, too: are my facilities and equipment clean and updated? You wouldn’t sell your house with a dilapidated roof and missing siding; you would clean it and update it and make sure it’s saleable. And even when you’re operating that should be at the forefront.

Another thing that’s overlooked is sound financial discipline, that you have audited or reviewed financial statements, your books are in order. All of those things are of utmost importance when selling your business, and so there’s no better time than now, while you’re still operating it.

Pesch: We think a trained workforce is a huge deal right now, so it’s important to invest in a workforce that can come up with the intellectual capacity and creativity that’s needed.

We’ve all met people who are doing it like they did last year, but over time that’s not going to work. In our changing world, because it’s changing so fast, if people don’t have the mental capacity to keep up and expand the distance between their ears, they just kind of fade off.

Another thing we think is a big deal is to have reasonable, fair labor practices. If you’re consistently pushing the edge, that’s not a good driver of value.

Upsize: What else is important?

Stinar: One other thing that’s important is having a realistic and a detailed and a clear growth strategy. A lot of companies are in maintenance mode, and they’re not thinking about how we’re going to innovate.

A clear and realistic growth strategy is huge, especially if you’re talking about two companies with equal economic benefits, equal cash flow and earnings. If one has a detailed growth plan and one is in maintenance mode, the first is going to be more valuable.

Upsize: Can you quantify that in any way: how much more valuable?

Stinar: The more significant items will be management depth; if you have all the management capacity in just one person, that risk can have a huge impact on suppressing the valuation. It could be 25 percent or more in the valuation.

Pesch: Or it could make the difference whether one business gets an offer and one does not. We’ve seen people walk away from deals if only the owner runs the entire show.

Stinar: The other significant piece can be customer concentration. You’re looking at a pretty big discount for that risk, and that can be a deal killer as well.

Upsize: There’s a lot of activity in mergers and acquisitions right now, so how should owners prepare?

Stinar: It’s good to have this discussion even with owners who aren’t looking to sell, because you don’t know. You don’t know when someone is knocking on your door and saying, I want to pay 5 times EBIDTA [or gross earnings] for you firm, and you don’t have your house in order.

I would say right now, you’re looking at a seller’s market. There’s more money on the sidelines now than there are companies looking to sell.

I think we’ll see in the next five years that’s going to flip, as the baby boomer population starts to get into that retirement age, starts looking at exits, there’s going to be a lot of businesses for sale, and these private equity groups and investors are going to have their pick.

That’s a potential cautionary issue for business, to prepare themselves for that sea of companies that are on the horizon.

Upsize: And maybe even think about beating the rush.

Tom Pesch is principal and Tony Stinar is valuation services manager at Olsen Thielen in Eden Prairie: 952.829.3430;
tpesch@otcpas.com; tstinar@otcpas.com; www.otcpas.com