Riding the Economic Roller Coaster

By: Jill Andresky Fraser

You can't control the crazy, fluctuating world economic markets, but you can (and should) tighten your seat belt

Ask Frederick Roberts when he first began to get anxious about economic matters, and he doesn't even hesitate before replying. "It was when the news began to surface about all those problems in Asia," confides the president and chief operating officer of Certified Diabetic Services (CDS), a mail-order diabetic-supplies company based in Naples, Fla.

No, that isn't because his three-year-old company brings in any of its $9 million in sales from diabetics in the Far East. But when Asian companies started taking a nosedive, Roberts began worrying about a trickle-down effect that could possibly wind up affecting his company's credit picture. He explains, "When those companies were strong, they bought so much U.S. debt. Once it was clear that they were in trouble, I started asking myself what consequences that could have on our interest rates."

To Roberts, a former chief financial officer with years of experience in international finance, ignoring those early warning signs would have been foolhardy. "These days, you can't run a growth company without thinking globally," he emphasizes, adding, "That means continually trying to figure out which new factors or variables will likely affect your financial model--and adjusting your strategies accordingly." (It also requires the flexibility to keep readjusting in these unpredictable times, as Roberts needed to do when U.S. interest rates started falling rather than rising as he had originally expected.)

For some business owners, warning bells might have sounded when the bottom started dropping out of the U.S. stock market. Or maybe it was the collapse of the Russian economy, or Brazil's economic troubles, that created anxieties. Or maybe it was all those headlines about the $3.6-billion bailout of a hedge fund for the superrich (an especially painful reminder that rescue funds for small entrepreneurial companies are, shall we say, few and far between).
Business owners can't control the problems that have cropped up, and that may continue to develop, at various hot spots across the global economy. But they can--and should--take proactive steps now to shelter their companies from unwanted consequences of a worldwide downturn. After all, if a company's underlying financials are strong, it should be able to capitalize on competitors' weaknesses, prosper, and continue to grow, even in adverse economic times.

Protect your cash flow

To Seth Godin, president of Yoyodyne, a $5-million on-line direct-marketing company based in Irvington, N.Y., happiness for a business owner boils down to one simple thing: positive cash flow. At his three-and-a-half-year-old company, he confides, "we think about this every day. But there are a lot of people who forget, when times are as good as they've been during the past few years, that the business world is cyclical and that you need money to make money."

Sound cash-flow management is essential for any growing business. But here's the flip side of that reality: the stronger the economy is--and the faster a company is growing--the easier it can be to overlook cash-flow controls, sometimes without even suffering negative consequences...at least for a while. "The best thing about volatile economic conditions is that they remind managers to refocus their attention on the basics," notes Jeffrey Levine, a certified public accountant based in Newton, Mass., who warns his clients that it could take as long as 12 to 24 months for the full ramifications of today's economic problems to hit their businesses.
Granted, some companies' cash flow will take it on the chin much sooner than others', especially if they sell directly to countries or industries that are already experiencing difficulties. But there's only one way to begin, and the time to do it is now: evaluate your cash-flow controls, and tighten them promptly wherever it seems necessary.

If there is one single point of vulnerability in most companies, it's accounts receivable. That's because entrepreneurial companies almost invariably make the mistake--especially in their early or fast-growth stages--of paying much more attention to making sales than to collecting receivables.

That's never a great idea, but when the economy slows down and more customers start taking longer and longer to pay their bills, the result is a cash crunch. Factor into that the growing number of corporate bankruptcies that have dotted the U.S. business scene since 1997, and all those uncollectable bills could well turn the crunch into a cash-flow crisis for far too many companies.

Riding the Economic Roller Coaster

You can't control the crazy, fluctuating world economic markets, but you can (and should) tighten your seat belt

Ask Frederick Roberts when he first began to get anxious about economic matters, and he doesn't even hesitate before replying. "It was when the news began to surface about all those problems in Asia," confides the president and chief operating officer of Certified Diabetic Services (CDS), a mail-order diabetic-supplies company based in Naples, Fla.

No, that isn't because his three-year-old company brings in any of its $9 million in sales from diabetics in the Far East. But when Asian companies started taking a nosedive, Roberts began worrying about a trickle-down effect that could possibly wind up affecting his company's credit picture. He explains, "When those companies were strong, they bought so much U.S. debt. Once it was clear that they were in trouble, I started asking myself what consequences that could have on our interest rates."

To Roberts, a former chief financial officer with years of experience in international finance, ignoring those early warning signs would have been foolhardy. "These days, you can't run a growth company without thinking globally," he emphasizes, adding, "That means continually trying to figure out which new factors or variables will likely affect your financial model--and adjusting your strategies accordingly." (It also requires the flexibility to keep readjusting in these unpredictable times, as Roberts needed to do when U.S. interest rates started falling rather than rising as he had originally expected.)

For some business owners, warning bells might have sounded when the bottom started dropping out of the U.S. stock market. Or maybe it was the collapse of the Russian economy, or Brazil's economic troubles, that created anxieties. Or maybe it was all those headlines about the $3.6-billion bailout of a hedge fund for the superrich (an especially painful reminder that rescue funds for small entrepreneurial companies are, shall we say, few and far between).

Business owners can't control the problems that have cropped up, and that may continue to develop, at various hot spots across the global economy. But they can--and should--take proactive steps now to shelter their companies from unwanted consequences of a worldwide downturn. After all, if a company's underlying financials are strong, it should be able to capitalize on competitors' weaknesses, prosper, and continue to grow, even in adverse economic times.

Protect your cash flow

To Seth Godin, president of Yoyodyne, a $5-million on-line direct-marketing company based in Irvington, N.Y., happiness for a business owner boils down to one simple thing: positive cash flow. At his three-and-a-half-year-old company, he confides, "we think about this every day. But there are a lot of people who forget, when times are as good as they've been during the past few years, that the business world is cyclical and that you need money to make money."

Sound cash-flow management is essential for any growing business. But here's the flip side of that reality: the stronger the economy is--and the faster a company is growing--the easier it can be to overlook cash-flow controls, sometimes without even suffering negative consequences...at least for a while. "The best thing about volatile economic conditions is that they remind managers to refocus their attention on the basics," notes Jeffrey Levine, a certified public accountant based in Newton, Mass., who warns his clients that it could take as long as 12 to 24 months for the full ramifications of today's economic problems to hit their businesses.
Granted, some companies' cash flow will take it on the chin much sooner than others', especially if they sell directly to countries or industries that are already experiencing difficulties. But there's only one way to begin, and the time to do it is now: evaluate your cash-flow controls, and tighten them promptly wherever it seems necessary.

If there is one single point of vulnerability in most companies, it's accounts receivable. That's because entrepreneurial companies almost invariably make the mistake--especially in their early or fast-growth stages--of paying much more attention to making sales than to collecting receivables.

That's never a great idea, but when the economy slows down and more customers start taking longer and longer to pay their bills, the result is a cash crunch. Factor into that the growing number of corporate bankruptcies that have dotted the U.S. business scene since 1997, and all those uncollectable bills could well turn the crunch into a cash-flow crisis for far too many companies.

How I Learned to Stop Worrying and Love the Death Tax

By: Nadine Heintz

Roger Peugeot jokes that a fitting way for him to die would be while hugging the toilet in his basement during a tornado -- preferably in 2010. Peugeot, better known in Overland Park, Kansas, as "Roger the Plumber," owns the company that his father, Arley, founded in 1950. At age 7, Peugeot was his father's apprentice, eventually joining him full-time after graduating from high school. Ten years later, Arley died during a house call, but luckily, he had hashed out a succession plan a year and a half earlier: He gave his truck and tools to his son and helped him train two new employees. As soon as he died, Roger would inherit the business.

Things are a lot more complicated for Peugeot today. His father's once-humble plumbing concern now boasts 25 employees, 15 trucks, and more than $5 million in annual sales. Peugeot, 60, says estate taxes have become a big worry. While there is scant statistical evidence that many small businesses are affected by the levy, the so-called "death tax" is nonetheless considered by opponents to be a kind of bogeyman preying on entrepreneurs and family farms. Politics hasn't helped matters, either. In 2001, Congress enacted an eventual phaseout of the levy; in 2010, it will be repealed altogether. The problem is, the tax is set to return in 2011 unless Congress votes to make the repeal permanent -- something unlikely to happen in an election year and even less likely should Republicans lose the White House or Congress. In other words, there's no telling what will happen. "We don't know what the prospect for repeal is," notes Steve Aikers, managing director of wealth-management firm Bessemer Trust's Dallas office. As a result, he adds, the onus is on business owners to "do enough planning so they won't have a problem."

Peugeot, for one, has done precisely that. Rather than driving himself crazy with what-ifs (or praying for a timely demise in 2010), he's taken matters into his own hands. This election season, as politicians and pundits debate the issue, the master plumber will rest a little easier thanks to smart, and legal, estate-planning strategies.
Make the Most of Your Marital Status

There's at least one nice thing to say about the estate tax: You're entitled to an exemption. In 2004 and 2005, the exemption is $1.5 million. (The amount jumps to $2 million between 2006 and 2008 and hits $3.5 million in 2009 before the tax is repealed for one year in 2010.) Any amount exceeding $1.5 million is subject to a federal estate tax as high as 48%. Fortunately for married couples, the tax only kicks in upon the death of the spouse. With some planning, couples can qualify for two $1.5 million exemptions instead of just one.
To that end, in 1997, Peugeot and his wife, Diane, 55, each set up living trusts funded by personal assets like the plumbing business, bank accounts, and real estate. (There's no limit to how much they can contribute to the trusts.) Things get a little macabre here, so bear with us. Let's say Roger were to pass away this year. In that case, his trust is designed to split into two subtrusts: a bypass trust and a marital trust. Diane would be the primary beneficiary of the bypass trust, which she could use for health, education, maintenance, and support needs. She'd also be the sole beneficiary of the marital trust.

Now, let's say Diane's revocable trust is worth $1 million and Roger's $2 million. Upon Roger's death, $1.5 million of his trust would go to his bypass trust (and remain free from estate taxes), while the remaining $500,000 would go to his marital trust. Upon Diane's death, the $500,000 in the marital trust would become part of her estate value, bringing it to the $1.5 million exemption. Meanwhile, Roger's $1.5 million bypass trust would go to the couple's four children, free of federal estate taxes. It's a somewhat complicated way to get to a simple end: The Peugeot estate will have fully utilized the $3 million combined exemption available, and the children may not have to pay any

estate tax.

Create an Irrevocable Life Insurance Trust

With the help of his estate-planning attorney, Kyle Krull, Peugeot created another safety net just in case his estate exceeds the estate-tax exemption. He established an irrevocable trust that's separate from his estate and exempt from estate tax. (As with the bypass trust, this irrevocable trust cannot be altered once it's established.) The trust is funded by a survivorship life insurance policy that will deliver to the beneficiaries -- Peugeot's children -- upon the death of both Peugeot and his wife, providing their four children with liquid funds to help pay off any potential estate tax owed. Because the children are the trust's beneficiaries, Roger and Diane can each put $11,000 a year per child into the insurance policy tax-free, thanks to the gift-tax exemption. That translates into a maximum of $88,000 total per year. Since 1997, Peugeot has stashed away some $200,000 into the life insurance trust. He figures his kids can't lose: Even if his estate winds up being exempt, he says, they'll just be a lot richer.

How I Learned to Stop Worrying and Love the Death Tax

By: Nadine Heintz

Roger Peugeot jokes that a fitting way for him to die would be while hugging the toilet in his basement during a tornado -- preferably in 2010. Peugeot, better known in Overland Park, Kansas, as "Roger the Plumber," owns the company that his father, Arley, founded in 1950. At age 7, Peugeot was his father's apprentice, eventually joining him full-time after graduating from high school. Ten years later, Arley died during a house call, but luckily, he had hashed out a succession plan a year and a half earlier: He gave his truck and tools to his son and helped him train two new employees. As soon as he died, Roger would inherit the business.

Things are a lot more complicated for Peugeot today. His father's once-humble plumbing concern now boasts 25 employees, 15 trucks, and more than $5 million in annual sales. Peugeot, 60, says estate taxes have become a big worry. While there is scant statistical evidence that many small businesses are affected by the levy, the so-called "death tax" is nonetheless considered by opponents to be a kind of bogeyman preying on entrepreneurs and family farms. Politics hasn't helped matters, either. In 2001, Congress enacted an eventual phaseout of the levy; in 2010, it will be repealed altogether. The problem is, the tax is set to return in 2011 unless Congress votes to make the repeal permanent -- something unlikely to happen in an election year and even less likely should Republicans lose the White House or Congress. In other words, there's no telling what will happen. "We don't know what the prospect for repeal is," notes Steve Aikers, managing director of wealth-management firm Bessemer Trust's Dallas office. As a result, he adds, the onus is on business owners to "do enough planning so they won't have a problem."

Peugeot, for one, has done precisely that. Rather than driving himself crazy with what-ifs (or praying for a timely demise in 2010), he's taken matters into his own hands. This election season, as politicians and pundits debate the issue, the master plumber will rest a little easier

thanks to smart, and legal, estate-planning strategies.

Make the Most of Your Marital Status

There's at least one nice thing to say about the estate tax: You're entitled to an exemption. In 2004 and 2005, the exemption is $1.5 million. (The amount jumps to $2 million between 2006 and 2008 and hits $3.5 million in 2009 before the tax is repealed for one year in 2010.) Any amount exceeding $1.5 million is subject to a federal estate tax as high as 48%. Fortunately for married couples, the tax only kicks in upon the death of the spouse. With some planning, couples can qualify for two $1.5 million exemptions instead of just one.

To that end, in 1997, Peugeot and his wife, Diane, 55, each set up living trusts funded by personal assets like the plumbing business, bank accounts, and real estate. (There's no limit to how much they can contribute to the trusts.) Things get a little macabre here, so bear with us. Let's say Roger were to pass away this year. In that case, his trust is designed to split into two subtrusts: a bypass trust and a marital trust. Diane would be the primary beneficiary of the bypass trust, which she could use for health, education, maintenance, and support needs. She'd also be the sole beneficiary of the marital trust.

Now, let's say Diane's revocable trust is worth $1 million and Roger's $2 million. Upon Roger's death, $1.5 million of his trust would go to his bypass trust (and remain free from estate taxes), while the remaining $500,000 would go to his marital trust. Upon Diane's death, the $500,000 in the marital trust would become part of her estate value, bringing it to the $1.5 million exemption. Meanwhile, Roger's $1.5 million bypass trust would go to the couple's four children, free of federal estate taxes. It's a somewhat complicated way to get to a simple end: The Peugeot estate will have fully utilized the $3 million combined exemption available, and the children may

not have to pay any estate tax.

Create an Irrevocable Life Insurance Trust

With the help of his estate-planning attorney, Kyle Krull, Peugeot created another safety net just in case his estate exceeds the estate-tax exemption. He established an irrevocable trust that's separate from his estate and exempt from estate tax. (As with the bypass trust, this irrevocable trust cannot be altered once it's established.) The trust is funded by a survivorship life insurance policy that will deliver to the beneficiaries -- Peugeot's children -- upon the death of both Peugeot and his wife, providing their four children with liquid funds to help pay off any potential estate tax owed. Because the children are the trust's beneficiaries, Roger and Diane can each put $11,000 a year per child into the insurance policy tax-free, thanks to the gift-tax exemption. That translates into a maximum of $88,000 total per year. Since 1997, Peugeot has stashed away some $200,000 into the life insurance trust. He figures his kids can't lose: Even if his estate winds up being exempt, he says, they'll just be a lot richer.

Small Biz Braces for Life on the High (Priced) Seas

By: Rod Kurtz

Importers and exporters face a new era in port security -- and that could bring choppy waters for small companies. As Inc. first reported in January, the nation's 361 ports, and the thousands of companies that do business there, were required at the end of 2003 to submit detailed plans to the Coast Guard explaining what they were doing to guard against maritime terrorism. The ports had until July 1 to implement any measures that the government suggested after reviewing those plans.
Exactly who will pay the estimated $7 billion tab for these new measures remains unresolved. At most ports, which act as landlords to private sector operators, the cost will trickle down to private companies. In those places where a municipal port authority manages everything, new fees may be assessed directly.
In either case, "I think it will raise costs for everyone, but the cost for a small firm will be proportionately larger," says Clemson professor John Mittelstaedt, a small-business trade expert. Fully 97% of U.S. exporters -- more than 230,000 firms -- are small or midsize.
A report cited by the American Association of Port Authorities sounded an even more dour note, raising fears that shipping rates could increase 1% to 3%, with 2% being enough to cause a "sharp drop" in commerce.
Business groups in Washington are now busy lobbying to bring federal security funding more in line with that of the airline industry. "There's a share that industry is willing to pay," says Jonathan Gold, vice president for international trade policy at the Retail Industry Leaders Association, "but not the lion's share."
The Coast Guard will spend $1.3 billion of its operating budget on security in 2004 (up from just $33.8 million before 9/11), but Homeland Security Secretary Tom Ridge has repeatedly said that industry should expect to absorb much of the cost for securing ports. And in February, Charleston, the nation's largest operating port and the fourth-busiest overall, became the first in the nation to introduce a terminal security surcharge -- $1 per foot, based on the length of ships docking at the port. The measure will raise $1 million per year. Among other measures, that revenue will pay for increased vehicle screening and closed-circuit surveillance.

How Do You Define Cash Flow?

By Philip Campbell

If you increased your sales by 25% to 50% over the next six months, what would happen to your cash balance? My experience is nine out of 10 business owners can't answer this question. That's why so many businesses succeed in growing their business only to end up with an uncomfortable and embarrassing cash flow crisis on their hands.

How Do You Define "Cash Flow"?
Knowing what makes up your cash flow is the first step to avoiding a cash crisis. Most business owners believe their cash flow is defined as the revenues they generate less the expenses they have to pay.Not true.The answer lies in the fact that the accounting rules that govern the creation of financial statements are not about tracking the actual flow of cash through your business. They are focused on measuring profit or loss -- not cash flow.The "bottom line" of the P&L is net income. And net income does not tell you what happened to your cash balance during the period. It merely defines net income based on the accounting rules used to create the income statement.It's an important measurement, but it is only one component of understanding and managing your cash flow.

Certain cash flow items never show up in an income statement while other cash flow items will show up there but in different periods and in different amounts. So what you will find is that your income statement will not show you what happened to your cash flow. Why? Because your cash flow is made up of more than just profit and loss. It also is affected by:
1.Accounts receivable
2.Inventory
3.Accounts payable
4.Capital expenditures
5.Borrowings and debt service
6.Other "timing" differences

That's why you can't look at your income statement and see what happened to your cash during the month. Profit and loss is only one component of your cash flow. You have to have a clear picture of how each of the other areas affected your cash flow each month in order to understand, and take control of, your cash flow.Here's an example to illustrate the point.

I Made Money, But What Happened to the Cash?
I worked with a client recently who could not understand why his income statement said he made money last year but he didn't have enough cash to pay all his bills.
In this case, the difference between his net income and his cash flow was primarily a result of the purchase of a truck for cash, sales made during the period that were not collected (accounts receivable), estimated tax payments made in an amount different than tax expense for the period, increased inventory levels in preparation for the coming selling season, distributions to the owner, and principal payments on a bank loan.
The rules of accounting determine when transactions are recorded in your financials and how they are recorded. The reality of business determines when you receive, or let go of, your cash.It's All About the Cash

On top of having a P&L that governs your accounting life, it's important to keep a schedule that governs your monthly cash flow. Imagine having a schedule in front of you every month that showed you exactly what was going on with your cash flow. A schedule that made it simple and easy to know exactly what was going on with the lifeblood of your business -- your CASH.
That's the secret to taking control of your cash flow.
You need an easy-to-understand view of each component of your business that affects your cash flow. Your cash flow schedule needs to show you what's going on with each of the components of cash flow mentioned above.
If you're ready to take control of your cash flow, check out my December column, which provides you a template and step-by-step instructions for formatting easy-to-understand cash flow projections.
Focus on understanding and managing your cash flow each month and you will make it dramatically easier to grow your business without creating a cash flow crisis in the process.