Thursday, September 30, 2010

Small Business Fraud - 10 Tips to Avoid

Several of my financial consulting engagements were the result of fraud within a client's company.  The business owner saw "weird" trends in his financial statements or "my financial statements show a lot of profit, but I don't see the cash".  The most common method of finding fraud is a tip or complaint from an employee, vendor, customer or anonymous informant. The following list of practical fraud prevention tips designed to prevent fraud from occurring and has been compiled from a variety of sources.

  1. The first step in preventing employee fraud is letting employees know you're watching for it. Inform employees during employee orientation, training programs, memorandums, or other communication that fraud is not tolerated and let employees know what to do if they suspect fraud. 
  2.  Have checks and balances in place.  For small businesses the biggest issue is to separate the duties of receiving funds, writing checks, signing checks, and reconciling bank accounts. Having one employee responsible for all cash-related functions makes small businesses vulnerable to fraud.
  3.  Have the monthly bank statement delivered unopened to the owner, who should review it for unusual transactions such as declining deposits, unanticipated payment and deposit patterns, and unfamiliar payees. Owners should look for signatures or endorsements that look forged, missing checks, check numbers that are out of order, and checks where the payee listed does not match the name in the check register.
  4. Institute background checks on new employees, and notify job applicants that their backgrounds will be checked.  Check past employment, criminal convictions, references, and education and certifications.  Always get the written consent of candidates before doing research since many federal and state laws govern the gathering of such information.  This should be part of the application process.
  5. Make sure expenditures are approved. For every expense, have a manager and someone in accounting approve it. The supervisor will ensure that the expenses are valid, while accounting will run the math.
  6. Monitor cash and inventory areas In a retail situation, have security cameras monitor activity at registers and storage areas where inventory is kept. People are less likely to do it if someone is watching them.  Deploy fraud tracking systems for any online stores you operate.
  7.  Insist that employees take a vacation for at least one week every year and use that time to have the books reviewed for discrepancies.
  8.  Adopt a tip hot line or complaint-reporting mechanism that will enable employees, vendors, customers, or outside sources to report suspected fraud anonymously  without fear of reprisal. Because most employees are reluctant to report suspicious activity, using a third-party hot line offers a level of anonymity that an in-house hot line might not provide, making employees more likely to blow the whistle on fraudulent activity.
  9.  Conduct audits, especially a "fraud audit" instead of a "general audit" if you suspect fraud. Catching an employee off guard could be your best bet in discovering fraud. The key is that an employee generally doesn't know what's coming and won't have the time to change the records to hide the fraud. A surprise audit also can uncover duplicate invoice amounts and duplicate or sequential invoice numbers, both of which can be red flags for possible wrongdoing.
  10.  Have an accounting software program expert, do the initial set-up of the program. In my QuickBooks work, I have found that the audit trail feature was never activated.  Access to personnel and vendor master file records should be password protected and restricted by job function.  Computer systems should create an audit trail of all changes made to the vendor master file records, including an identification of those who made the changes.  Changes to vendor master file records should require supporting documentation and supervisory approval.
What good techniques can you suggest?

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Sunday, September 26, 2010

Restaurants Driving Sales and Service with Social Media throughTwitter

I recently read about Restaurants using Twitter and thought about several of my restaurant clients.  I also follow a variety of Kansas City area Restaurants and other small businesses to evaluate their social media programs and to track their issues. Twitter can be a low cost and very responsive way to track and respond to issues.  Twitter has another advantage in that if a person tweets to his or her group of followers, your response can also go to a large number of followers showing that you are taking care of the issue.  

Restaurants are using Twitter to market their menus in new and unusual ways, the AP reports. Take, for instance:
  • Big chains have taken on full-time social media employees to respond to issues and notify individual restaurants of issues being tweeted about.
  • Restaurants have seen "is this food any good" tweets and responded with "try us" gift cards through cell phone applications.
  • Some Restaurant owners  let tweeters help make decisions about the restaurant—such as what music to play.
  • Some of my clients have tweeted happy hour specials to drive traffic.

There are several applications that Restaurants can use to track their mentions on Twitter such as:
  • Socialoomph
  • Hootsuite
  • Tweetdeck

How have you used Twitter for Restaurant Sales and Service?

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Saturday, September 11, 2010

Small Business Loans and the Plan to Obtain One

Busy with these !Image by micamica via Flickr
Eventually most small businesses need to get a business loan, whether to get the operating capital for a business startup or to finance an expansion.  The success of a small business depends on the funding it is able to arrange from various sources, which make sure a smooth cash flow. Finding adequate funding for small businesses is tough and time-consuming.  But whether you're approaching an institution or a friend for a business loan, the lender will have the same expectations. 

You can greatly increase your chances of successfully securing a loan by being ready to meet those expectations.  If someone asked you for a small business loan, you'd want to know:
  1. Exactly why he or she wanted the money, and
  2. What the chances were that he or she would repay the loan in full and on time.

So the key to getting a loan is preparation to get the right answer  for those two questions.First, gather together the documents that will help persuade the lender that a business loan is necessary and that you are a good risk.  Answering the first question means being  conversant with all the details of your business plan and being able to point to the relevant financial statements, documents, charts or graphs   that will help convince the lender that you need the amount of money you're asking for to do what you want to do.  Answering the second question means having already given some thought to the credit risk you represent to the lender and being ready to discuss his or her concerns.

These are the documents you will need:

Statement of your personal financial status - A list of your personal assets, debts, and other income sources to give the lender a fuller financial picture.

Past business tax returns- For established businesses, you need to give past business tax returns.  They'll give the lender a better idea of how your business is doing financially.

Financial Statements-  You will need to have historical financial statements for established businesses and a forecast of those financial statements.  You will need to include Income Statement, Balance Sheet, and Cash Flows.  Many small businesses will not have audited financial statements, but an accountants "review letter" that the historical statements conform to generally accepted accounting principles  would be helpful.

Collateral you have - Collateral refers to  tangible assets you are willing to put up to secure the loan. These assets might be:  equipment, stocks and bonds, a house, a car - something of value that you own. If you fail to repay the loan, then the proceeds from the sale of the assets are used for repayment.  You should offer statements and valuations supporting the values.

Resume -  This should detail your experience and background in the area you are securing funding for.  Because the success of your business is dependent on this to some degree, any potential lender will want to know more about you.  You will need one for each member of the management team.

Your Own Funding - How much money will you be putting into the business and your sources of the funding.

Credit Rating Report -  This assessment summarizes how well you pay back any current credit relationships.  While the banker will and can easily get one on their own, its important for you to know what your business and personal credit ratings are and correct any errors before the banker orders one on you.  If there are any issues, be upfront and give an answer for any negative history.
Business Plan - This shows the lender not only why you want a small business loan but what you plan to do with the money. The financial element the investor will key on are the Cash Flow Projections  with a focus on will you be able to repay the loan.  Your business's cash flow projections give lenders  financial data that they can use to assess this risk.

Now that you have all the documents you need to get a small business loan in order, the next step in getting a small business loan is to persuade the lender to give you the loan. You need to prepare in advance to make a winning small business loan presentation.  Approach the loan presentation as a sales meeting with a major client.  Generally, you will have an hour to meet with the banker.  You should use 20 minutes for the formal presentation and reserve the remaining 40 minutes for questions and answers that will probe details.  Your "formal" oral presentation consists about 10 high level slides covering the following points:
  1. Why are you seeking the loan
  2. Describe the pain you are trying to solve or the Market Opportunity and how are you going to offer the solution.
  3. How are you going to market the solution.
  4. Summarize your business model that is in detail in your business plan.
  5. What background and support do you bring to the table? Detail your qualifications and those of your management team if you have one and show them that you are capable of producing, servicing, or marketing your product
  6. Don't try to impress with your language. Using simple terms, describe your goals, your product or service, what you intend to charge, and how you can compete with the competition.
  7. A forecast showing your ability to pay,  when you expect to breakeven, and what you will do with positive cash flow.

You will have a business plan with you that will give details to your oral presentation.  The oral presentation is the pitch to get the investor to discuss, read, and seriously consider the investment opportunity.This is a big effort, but the reward is funding for your business opportunity.
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Wednesday, September 8, 2010

Social Media Is Just Not About Customers

While working on the Social Media element of a Business Plan's Marketing strategy, many Entrepreneurs focus on the customer.  While the customer is king, we can not forget the other constituencies that Social Media touches.  Businesses of all sizes have long understood that building relationships with customers is key to success.  What is less recognized is the importance of the Social Media relationships across the entire spectrum of constituents.  Many organizations recognize and utilize Michael Porter's Five Forces SWOT analysis from an overall strategy perspective, it is often forgotten about in Social Media Implementations. Suppliers, Distribution Channels, Employees, etc. are all considered.  The stronger your relationships across all constituencies, the likelihood of your success increases.  These constituencies need to be considered in your Social Media Implementation:
  • Customers
  • Employees
  • Suppliers
  • Vendors
  • Distributors
  • Stakeholders
  • Governments
  • Outside Agencies
With the openness of the Social Media, remember and consider these other constituencies as they are likely listening to you as well as your customers.

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Sunday, September 5, 2010

Uncertainty Keeping Business Plans From Being Executed

Economic uncertainty and questions about the impact of health care reform and congressional tax and small business lending legislation are keeping many small businesses on the sidelines and not executing sound Business Plans.  In my discussions with small business owners, they are hesitant to hire, expand locations, and inventory.
  • There is a small business bill that is now stuck in the Senate. This bill would establish a  $30 billion small business lending program for community banks and provide small companies billions in new tax breaks.  Generally funding has been fairly tight even though a few larger banks are beginning to make some more loans.  Until this goes through, it will be tough to act on.
  • Small businesses are not seeing much of a recovery as evidenced through several surveys and general discussions.  Small Businesses have a lot of consumer like sentiment in "what recovery?"
  • Many small business owners are still trying to get a handle on what impact Health Care will have on them. Some accounting entrepreneurs are creating health care tax calculators to help small businesses evaluate the impact.  Do companies try to avoid being over 50 employees through different legal structures?   How much will insurance cost continue to increase above inflation?  How much can employers pass on to their employees without triggering  health care penalties?
What I am observing is that many solid value generating business plans that are financially sound are setting on the table until we have more certainty.  How has this uncertainty impacted you?
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    Friday, September 3, 2010

    10 Tips to Create a Budget For Your Small Business

    The key for small business success is cash flow which needs planned and managed. A budget is a useful tool. It is a written financial plan that helps you set goals and measure progress. A properly structured budget model will also let you do what if scenario analysis to see the impact on your cash flow and help to secure financing.

    Here are 10 Tips for creating your budget:

    1) What do you expect to sell? Start by coming up with a sales revenue target. This is driven by multiplying your units and price for your key products and services. This will allow you to test the impact of rate and volume variances. Your first year needs to be monthly so that you can check monthly cash flow needs. You also need to consider how your prices compare to the market to understand any pricing pressures you need to evaluate.
    2) What's it costing you to produce the goods/services you sell? If you're buying finished items for resale, this is relatively easy. It's trickier when your produce items since you have to calculate all the factors, such as labor and material, which go into manufacturing a product. This needs accuracy for your model to work properly. The cost per unit needs to match the units you are using to drive sales.
    The difference between your Revenues and Cost of Goods is Gross Profit. Dividing the Gross Profit by Revenues gives you a Gross Profit Margin percent. If your Gross Profit Margin percent is staying flat or trending upward, you're probably on track in terms of adjusting your prices to show changes in what you pay for what you sell or produce. Seeding a declining margin over time gives you a heads-up that you must adjust your prices or check your cost structure.
    3) What's it costing you to sell what you sell and operate? Advertising, marketing, labor commission, storage and general and administrative overhead. Some of these costs will be variable with sales and some will be fixed within a sales volume range.
    4) What are the financing costs? You need to include interest expense on all forms of debt including any credit card or accounts receivable financing. This expense will normally be a function of the amount being financed.
    5) How much Inventory do you Need? Inventory levels are very important to manage. It should be a reason of your forecast sales. Too much inventory and you are using up cash unnecessarily and too little, you may have lost sales. Managing your supply chain is critical to having proper and timely inventory levels. Retail businesses will have finished goods as their major inventory while manufacturing and construction businesses will have to factor in raw materials and unfinished inventory.
    6) What are your Accounts Receivable? Managing Accounts Receivable is critical to the cash flow lifeblood of a small business. You need to understand how long it is taking for your customers to pay and develop ways to improve it if it is hurting your business. There is where having a real credit and collections policy is important and you need to track delinquent accounts. For big-ticket items that have a long lead time, you may need to consider an upfront deposit
    7) What are your other assets? In addition to accounts receivable and inventory, you have cash balances and property, plant, and equipment to forecast. You also need to reduce the balance for accumulated depreciation and depreciation expense. Don't forget to consider the age of your equipment if you need to replace it during the forecast period. If your capital spending is a function of growth you need to have it as a function of your sales growth and don't forget about the lead time to get it installed.
    8) What are your liabilities? This represents who you owe including payroll taxes and current debt payments. This would also include credit cards. Accounts payable is important to manage. Pay too quickly and you are using up cash and pay too slow it could hurt your businesses credit rating. This should be a factor of your monthly expense forecast and capital spending. When you make debt payments you want to be sure to separate the interest as an expense and the principal portion as a reduction in the balance.
    9) What is your debt to asset ratio?  This measures debt as a percent of total assets.  If this ratio keeps increasing, your business becomes more riskier.  You need to include debt repayments on existing debt as well as new debt.
    10) What is your cash Flow? This is the bottom line of what you need to see. The following is the formula for cash flow:
    Net Income
    + Depreciation
    - Change in Current Assets
    + Change in Current Liabilities
    -Capital Spending
    + Change in Debt
    = Cash Flow

    Although tracking the big 10 budget tips and knowing what's up with your cash flow is essential to knowing and running your business, don't be afraid to turn to professionals for help. It needs to be done right.
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