Financial Modeling Problem Definition

Posted on August 10, 2015 By

The first task in financial modeling is to define the problem or the solution that you need to propagate in your organization.  Without a defined question or stress test, financial models suffer from the wandering path.  Rather than searching for specific pattern or answer, they try to answer every single problem/issue that the business faces.

Zeroing in on a specific problem is not as easy as it might seem.  Financial modeling is often the result of research, management meetings, and judgement calls.  It’s much easier to update existing reports than to ask if those same reports are accurate and justified.   Shaking up the status quo in reporting staff, is worth if new cost savings are found.

Start from the beginning if you want to break new ground.

Broad Terms:

What is most general way that you can define the problem?  It’s helpful to even narrow it down a smidge.  Last week, I had a meeting with someone who wanted to grow their budget by $2M.  Which is all well and good.  But what are you trying to accomplish with that investment?  It’s easier for your team to develop a strategy if they at least know the basic theme.

It’s as basic as:

  • Grow revenue
  • Decrease shipping time
  • Decrease product manufacturing time
  • Increase gross margin
  • Decrease shipping costs
  • Vendor metrics
  • Increase marketing reach
  • Ship more products

Specific Financial Model

Create a specific goal for the financial model. This is where you start to drill down on the specific requirements.

  • What is the projected gross margin of our existing products?
  • Which project has the best NPV?
  • What is an appropriate hurdle rate for new projects?
  • Should we discontinue products?
  • Why are the warranty issues so high?
  • Should the capital budget be increased?

Develop Metrics and Benchmarks

Decide which and what stats are meaningful for your overall goal.  Without a precise benchmark and metric, you might spend tons of time creating spreadsheets that do not speak to the goals or solutions.

For instance, an easy to acquire metric is how many twitter followers there might be.  If you had a goal of acquiring a following of 1 million followers sounds like a peachy keen idea.  However, what is the real goal?  Isn’t it social reach or to become an influencer?  Perhaps after doing a bit of digging you find that your social media team has purchased 800,000 followers.  How is purchasing that many followers raising your company’s social marketing efforts?

Perhaps a goal of acquiring 200,000 live twitter accounts is more effective than purchasing 800,000 robot twitter accounts.  Um.  so you are thinking, but perhaps that is the same outcome?  Having that many dummy accounts can actually drive off followers.  When a person looks at a twitter profile and sees that the followers have ‘buy 5,000’ followers for $10.00; they can figure out that the followers have been purchased.  They will move on without following you.

So if you need to develop quality metric instead of a quantity metric.

Another decision quandary is the processing time for monthly financials.  Do you judge on the time it takes?  Or do you judge on the quality?  Is it better to have inaccurate results quickly or accurate results that take longer?

Many business processes are constrained by the time vs. quality issue.  For example, do you order product from an overseas factory that might be cheaper but have greater flaws vs having direct over sight over the manufacturing process. Perhaps you determine that the factory does some work well, but not the finish work.  Does it make sense to import the partially completed assemblies and then have the finish work completed near you?  It might create a better product quality and give you time to customize the product so that you can quickly respond to market changes.



What is Financial Modeling?

Posted on June 24, 2015 By

Financial Modeling

What is financial modeling?  It’s creating a mathematical spreadsheet model that mirrors the business activity.  Why is it in a spreadsheet and not in a fancy online software program?  Each business is different and therefore needs a separate and unique financial model.  Generic budget software takes inflexible short cuts that can misrepresent the results.

Financial Modeling is a different way of thinking about business data.  Take a step back and look at the big picture. Should you be investing more capital?  Is a loan a great idea?  Is expanding to a new city a good idea? What is a realistic growth pattern?  How many touches do there have to be to acquire new customers?  What is the breakdown between repeat and new customers?

The spreadsheet models should be flexible enough so that projections and estimates will automatically adjust when variables are changed. In fact, the complex variables can be switched out and replaced on sophisticated spreadsheets.

There can be fixed step cost drivers, such as the need to purchase new machinery at a certain production level.  Seasonal fluctions can also be material.  For instance, holiday cards sell year round, but the sales increase from October to December.

Generic planning software does not readily adjust to those changes.

Location Expansion

Perhaps you would like to know what your retail establishment would make if it doubled the floor space.  It’s a bit more tricky than sales times two and voila!, your sales have doubled.  Some of the factors would be:

  • Capital improvements
  • Increased working capital to purchase additional inventory.
  • Advertising to attract more customers.
  • Hiring additional staff. (Payroll and Benefits)
  • New product line additions take research and time.
  • Increases/improvements to process more customers.  (cash registers)

That’s a lot of moving parts. Effective financial modeling allows you to make educated risks and choices.

Franchise Purchases

Franchises always look rosy when looking at the franchisers estimates.  However, let me tell you that franchises are just as likely to fail as any other type of business.  It can be even worse, because the franchisers prescribed store front, processes, and fees can put a heavy burden on any new business owner.  Doing an independent financial model to examine likely sales forecasts, franchise fees, payroll, and leases can be a boon and save hundreds of thousands of dollars.  That contract you are signing?  It might put you on the hook for additional fees that you can’t imagine while looking at that shiny brochure.  Hire an attorney to review the contract and hire someone like me to do a financial forecast.

New Venture and Feasibility Analysis

Bright ideas happen all the time. Following through on them is another thing. Make a plan to succeed. Effective financial modeling can tell if the venture will make enough money to succeed. Invest some time and effort to pulling apart the numbers before investing in a new business.

Adding Employees

When I ran my CPA firm, the thing that caused the most pain in marginally profitable companies was payroll.  The deadlines are tight, the taxes are high, and the late penalty fees were even higher.  It’s normal for businesses to bet the farm on increasing staff.    Do it in a sensible and sane way.  Crunch some numbers first and don’t make a bad problem worse by increasing staff numbers.

Yearly Salary Increases

Examining before and after results for salary increases.  How does it effect the bottom line or profit and loss?  Does it materially effect the overhead or manufacturing expenditures.

Overhead calculations:

QuickBooks and other generic small business software do not correctly calculate overhead rates.  There I said it.  Something that is completely obvious to anyone who does financial analysis, but no where to be found on any Intuit website.  It’s just not set up for it.  The software is set up to be east to use; not to create accurate manufacturing costs.  I know, I know they have the builds for manufacturing.  But if you open up the inventory builds section can you find the allocation for labor or overhead?  Oooo…. I have bad news for you then.  Your product cost is severely lacking two key elements for cost accounting.

We can help you track down those costs and do a proper allocation.

Economic Conditions:

Perhaps a large factory or employer is laying off employees.  You will need to see how that will effect the bottom line.  Or perhaps there was an economic slowdown in your industry. Or some other macro thing that will drastically change how business happens.

An example is the refillable toner industry.  For years it’s been profitable to refill toner for businesses.  However, with the advent of PDF’s and the increased ability to share documents online via dropbox, google docs, sharepoint, printing actual documents is rapidly decreasing.  The ability to scan documents in more effective manner is effecting the storage market, the legal market, and CPAs.

Business Valuation:

Buying an existing business is always risky.  Do some due diligence and examine how you think the business should perform vs. relying solely on the seller’s word.  Perhaps there are some hidden costs that could be teased out by recalculating the financials.  I’ve seen both paid and unpaid relatives providing for the company.  Perhaps all that unpaid work by a spouse, will be something that you need to replace with an employee.  Perhaps that might make a material difference in the company profitability.  Refigure the cash to profit turnover.  Maybe the AR is something that you want to negotiate.  Reconsider and redo that math a few times.  What if they are carrying old fixed assets that would cost 10 times that to replace?  If something is fully depreciated is it even on the depreciation schedule?  Business vehicles, how are they accounted for?  Personal ones?  Business vehicles?  Basically, you need to the turn the financials inside and out to determine if it’s going to be profitable, a good fit, or the asking price.

Schedule a free call to discuss more about your plans. 




SBA Loans

Posted on June 17, 2015 By

SBA Loans

SBA loan applications are a frequent target of business loans.  There are a few items that you will need to know about them.  SBA loans are generally backed by the government; however, the loans are subject to the same criteria as non-SBA loans.  Bank will generally grade a loan by the classic:

Five C’s of Lending

  • Character – Reputation of the borrower.  Believe it or not there are people who go from lender to lender with absolutely no intention of repaying the loan.  This might be a small business owner who hires employees or contractors that never intends to pay them.  Perhaps a large tax payment needs to be resolved.  If you have issues in this area, this might be a blemish on your loan score card.
  • Capacity – Ability to repay the loan.  Is the investment going to pay off?  Is it going to generate enough cash to repay the loan?  This is why a business plan is so important.  It shows that you have done some calculations and thought about repayment.
  • Capital –  How much risk the business is willing to shoulder?  Is the loan/investment being 100% by the lender?
  • Collateral – Secured Property for the loan. If the loan isn’t repaid; do the borrowers have something of value that the lender can attach.
  • Conditions – Current interest rates and economy.  Is it likely the economy can support the new venture?  An example is dog walking.  Many dogwalkers go into and out of business each year.  Is there a sufficient pool of customers that will pay for a premium service?  If the economy is in a tail spin, perhaps not.

SBA Loan Types

SBA loans are not issued by the SBA.  They are issued by the lender and are guaranteed in portion by the SBA.  The loans are in compliance with the SBA rules and regulations.  They do not offer grants for for-profit companies.  Occasionally, I get requests to do SBA grants and it’s an urban myth that you don’t need to pay for business investments.

7(a) Loan Program – Generally have good credit, small business as defined by SBA, for profit business, be an eligible business type, and have repaid other federal loans.  See the link for more specific details.

CAPLines – Lines of Credit for up to $5M to help with short term or cyclical working capital needs. See the Link for the exact terms.  Here are the programs names:

  • Contract Loan Program
  • Seasonal Line of Credit Program
  • Builders Line Program
  • Working Capital Line of Credit Program

Microloan Program –  Loans up to $50,000 for small businesses and some not-for-profit childcare centers.  They may be disbursed by community organizations.

CDC/504 Loan Program – Real Estate and & Equipment loans.

Disaster Loans – Low interest loans to recover from a disaster.  As with the rest of the loan programs, make sure you check the current requirements.

Useful Documents:

Business Plan: A comprehensive business plan is exceeding persuasive.  Usually they are five year projections for traditional business loans.  Check with your loan officer and confirm that is what they desire before submitting.  There are some quick track loans that are sometimes available.  You should already have a committed plan before applying for funding; but cross check the actual loan requirements.

Mission Statement:  What is the company’s goal?  This should be a few sentences or a short paragraph.  Mission statements are sometimes flowerly and vague.  Try to be between “World Peace” and “ONE MILLION DOLLARS” in the mission statement.

Strategy:  How are they going to beat the competition?  If you think your company has no competition, you are highly mistaken.

A recent applicant on Shark Tank sells gloves with lights at the ends of fingers for club dancers.  No competition?  Glow Sticks, glow in the dark gloves, glow in the dark fingernail polish.  Those are all low cost alternatives to their products.  They compete by being better and having programmable lights, staging competitions, and having promotional teams go to clubs.

There are always alternatives to your services/products.  Address those concerns in your business plan.

Management Bios: Who is the management team?  Why are they effective leaders? Have they managed similar projects in the past?

Cash Flow Spreadsheet

A spreadsheet showing the ins and outs of money in your company is essential for SBA loans.  They want to see when and where the company is going to be funded and when it expects to be cash positive.  Here is a sample one that I’ve used in the past:

E-PNL-006 Main Sheet

Notice it isn’t the same document as an Cash Flow Statement, which is a traditional accounting report that shows the ins and outs in a highly stylized manner.  Those are created to show high level cash flows.  We want to show the company as having enough cash in the bank to pay their obligations. Two different goals.

Capital Improvements. List of Capital Improvements and the effects on the business.  Try to cover expenditures, revenue inflows, revenue increases, and depreciation.

Marketing and Revenue Planning.  Show how the loan will increase the revenue and gross margin.  If it will make your start up reach a new goal be sure to say Cash Flow Positive or Positive Gross Margin in your description.  Most bankers or investors understand what those terms mean, don’t shy away from those terms.  Amazon spent about 20 years losing money each year, but still seemed to round up plenty of investors to buy or invest in their company.


Franchise Business Plans

Posted on June 15, 2015 By

LauraDodsonCPA Franchise Busienss Plans

Franchise Business plans are used for a variety of purposes.

Convince the franchisor that you are up to the challenge

Many franchises pick and choose between applicants.  The business plan quality is one of the sorting mechanisms.  A good quality plan will show that you have a capable team, understand how the business operates, and have a great location choice.  They are looking for people to own and operate the franchise as well repay the loan.  A professional plan goes a whole long way to establishing those credentials.

Secure Funding

Most franchises have large cash requirements in the first year.  Building a location to established standards, advertising, and operating pre-profit for a while.  Each franchise is different, however, rarely are they profitable from day one.  Do you have enough cash on hand?  Or will you need to borrow or secure the funding.  Along with a great credit score, a persuasive plan will help ensure a bank loan or funding from the franchisor.

Your lender might be the franchise owner, so they might be evaluating your net worth and your credit risk.

Feasability Study

Perhaps you are interested in learning more about how it would work before committing to buying the franchise.  Learning how those pieces go together can make the decision easier.  After all, if you are committed to spending $500K or more in the next year, it might be judicious to do so.

Operational Business Plan

Perhaps you have an existing franchise and need help creating a yearly budget and management plan.  Knowing how advertising and franchise fees affect your bottom line is essential.  An operational plan can help with that.  The Item 7’s for the FDD (Franchise Disclosure Document) statement are for three months of operating capital.  It might take longer for your franchise to reach profitability.  A critical eye looking at the statement and estimating your own startup costs might be a useful investment.

We help you craft an actionable and attainable business plan.

Note may not qualify for an SBA loan if:

  • Franchises are eligible except when a franchiser retains power to control operations to such an extent as to equate to an employment contract; the franchisee must have the right to profit from efforts commensurate with ownership


How to Create a Cash Flow Forecast

Posted on June 11, 2015 By

Cash Flow Forecast

A Cash Flow Forecast is a handy business tool that is rarely discussed.  What is it? It is a spreadsheet that quantifies the total money coming in and going out of your business.  It’s also the secret cash management tool for accountants.

You say, “that’s what I have online banking for!  I don’t need this!”  Except you do need it.

Online banking and current online software does not show the inflows and outflows of FUTURE transactions.  They rarely show any projections.  A monthly budget to actual results report can yield insights, but that is historical information that won’t help you with how much money is needed next week for payroll. Updating a daily cash budget with actual information is more useful.

Note:  A Cash Flow Statement sounds extremely similar.  It is a financial statement that shows cash flow trends over a period of time.  It’s a historical record of what happened according to GAAP.

There is a pretty good chance that you aren’t spending an average amount each day and you aren’t receiving an average amount in the bank.  Nope, it’s more like large lumpy bits of expense and income.  Even burger restaurants make more during their rush time vs. their slow days.  All that money swirling about has a pattern.  A cash flow forecast is one the best ways to track that pattern and spot problems before they start.

Cash Planning

The importance of cash planning cannot be overstated.  Businesses go under when they run out of cash, not income.  Sales don’t mean a thing unless the customer ultimately pays actual money.  Some examples of issues?

  • Credit card payments can take days to clear.  Most merchant service companies have sped up the process so that it doesn’t take six days from the customer purchase to the receipt of cash. Double check and track how long it is actually taking for your merchant services.  A new trend is to delay payment if it isn’t a verified credit card. Check with your vendor to see if that is holding up payments.
  • Not tracking merchant service fees.  That 3.5% fee might be draining your bank account.  Review the fees annually.
  • Non payment of trade accounts. Much more common than most new business owners realize. Be strict with which customers have trade accounts. Don’t be so eager for the sale that you overextend credit. Ask for credit references, call them and check out their credit score.
  • Returns and Refunds. The after Christmas return season can put a dent in your cash flow. Have a sensible return policy that is available to customers.
  • Business Debit Cards. Using debit cards randomly and not tracking the outgoing cash is quite common in micro businesses. Does your accounting software import bank downloads? If it doesn’t, you can also set up Mint or Quicken to do the heavy lifting. This is a primary cause of bank fees and overdrafts.  Don’t let your Starbucks addiction cause $$$ in bank fees.
  • Subscriptions. Software subscriptions, Google AdWords, insurance and other automatic payments can dip a just cash positive bank account into negative territory.
  • Bank Fees. I’ve seen some bank accounts trigger thousands of dollars in over draft fees because the bank account balance was never monitored. Review it daily.

Create a Daily Cash Report

Creating a useful report takes time and effort to maintain. It requires being authentic and real about where your cash is going to and from. I consider it to be almost a true confession for a business owner.

Start off with basic spreadsheet.  Enter some categories:

Incoming Cash

Create rows/categories for each major cash source.

Customers: If there is a customer who is responsible for most of your sales, give them a separate row.

Payment methods: Categories might be:  Cash/Check, Merchant Service, paypal or other payment systems.  They could also be:  Retail, Wholesale, or Trade payments.

Financing or Investors:  Have a separate line item for this.  If you have a revolving credit line, I like to create a sub category showing the balance and the ins and outs of the account.  Hitting bottom on your revolving credit can cause multiple issues.

Subtotal the incoming cash.

Incoming Cash Flow Forecast

Outgoing Cash

Create rows/categories for outgoing cash.

Loan Payments:  These are regular payments that need to happen to maintain a good credit standing. Once you have listed all the past ones, go forward and post all the future ones as well.

Payroll and Payroll Taxes:  This might be the largest, most inflexible cash drain. Make sure you give this proper attention. Know what specific day and amounts the cash will be deducted. After you know the pattern add those amounts to the future columns.

Operating Expenses:  Use this category to post the weekly check run. I usually create a separate row for large vendors.

Cost of Goods Sold: Do you have large payments for Cogs? Usually businesses buy in bulk quantities and sell over a month or more. Make sure those large payments are accounted for.

Insurance:  Large lumpy payments also deserve their own category

Rent:  Enter past payments and future payments.

Fixed Assets/Capital Improvements: Plan your improvements.

Taxes:  Estimated federal, state or local tax payments.

Dividends or Owner Draws: Budgeting these items will help ensure that future funding is available.

Create a subtotal for this section.

Outgoing Cash Flow Forecast

Enter a Beginning Balance

Enter beginning balance and an ending balance.  Apply some basic algebra you have a running cash balance.  Enter the dates across the top and you have a cash flow calendar.

E-PNL-003 Daily Cash Flow Spreadsheet

I also like to add a low cash warning to the spreadsheet:

E-PNL-003 Negative Cash Warning

Monthly or Weekly Cash Reports

If daily cash tracking is too detailed, try weekly or monthly cash flow forecasting.  It won’t specifically show trends, but it can help you keep cash positive and track spending trends.

Monthly Cash Worksheet


A little Bit of Work with Tremendous Payoff

Once this very basic data entry becomes a daily task; it will help you plan and focus your energy.  It will be easier to see that the payroll is going to be underfunded, a large tax payment is due, and the operating account is almost negative.  In the heat of the moment, many people make these decisions after the bank account goes negative.  Cash flow is variable, but there is a pattern.  Plan ahead for the dips.

The SBA has some templates you might be interested in:

SBA Link

I have a sample Daily Cash Flow Forecast for sale on Organized Bookkeeping:

Organized Bookkeeping Daily Cash Flow



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Common Business Plan Mistakes

Posted on June 5, 2015 By

Common Business Plan Mistakes

There are some common denominators to business plan snafus that are easy to commit.  Here are some reasons to have someone review the business plan before sending it out to third parties.

Unrealistic Projections

We all want our children to be successful, but projecting a 2.5 B revenue increase in one year is perhaps a bit too optimistic.  Scale it back a bit and you are more likely to score funding.  Other rosy projections take the form of unrealistic payroll projections where everyone is willing to work for minimum wage or work 14 hours a day without overtime. Be real about your goals.  It’s okay to have aggressive goals; just not impossible ones.

Math is Hard

The financial statements, projections and the plan itself do not agree.  This is more common that you think it is.  Some people will spend months on a business plan, but not check the final presentation for basic items.  Let it sit for a day.  Reread and tie out the numbers once more.  Even a dollar rounding error will cause your application to be round filed.  An investor might think; if there are simple math mistakes; perhaps there are more lurking below the surface.

Poor Editing

Numbers don’t match, formatting is unreliable, and whoa; what’s that semi colon doing there?  Some mistakes that I’ve seen.

  • The year 20,000 instead of 2,000.
  • The table columns don’t have consistent formatting.  One column might have rounded numbers.  The next column has three digits after the decimal.
  • Management Bios for people who are no longer with the project.
  • Using Facebook pictures for management bios instead of professional picture.
  • Graphics are located in the margins.
  • Cut paste of graphics with irregular margins. This usually happens when business plans are printed on non-white paper/background.  It ends up looking like a fifth grade art project.  If you don’t have clean edges, use a white background to mask the issue.
  • Repeated sections.  This is common in the executive summary and the detailed sections.  At time, the executive summary is posted word for word in the detailed section.  You need to be a bit more verbose in the detailed sections.  If you are going to copy the summary, why even have a detailed section?
  • Upside down graphs and tables.
  • Spelling mistakes.
  • Clashing graphics.
  • Grammar mistakes.
  • Text doesn’t match the tables/financial statements.

Getting Crazy with the Graphics

I’ve noticed a trend lately.  now that just about anyone has a basic photo editing software, like Picassa, there are a few that insist on jazzing up their business plans with outrageous graphics.

Before you get started with the instagram filters, remember that a business plan is quite likely going to be photocopied.  Your memorizing sunset picture might turn in a giant blob.  Pick colors and graphics that will not lose their shape if photocopied.  Or even make them black and white.

Not lining up the graphics on a grid.  Word is a wonderful program.  However, it doesn’t really do a great job of aligning graphics.  They will probably start mish mashing and wandering if you have more than a few.  First, turn on the paragraph tool.  It will show you all the hidden commands that are messing up your work.  Fix those and 80% will be fixed.

Expensive Binding

Most successful business plans are photocopied.  If you put them in an expensive binding system, remember the poor clerk who has to undo your binding.  If they photo copy it poorly, it will end up looking like a shadow of itself.  Or you could also provide a nicely formatted PDF copy as well.

Table of Contents

Some might argue that a Table of Contents takes up valuable space in a business plan.  Others might remember that the plan might be scrutinized by someone who might toss their plan if it doesn’t have this basic ingredient.  If this is a huge issue for your group, consider if a Lean Plan is more appropriate at this time.


No.  There are some cultures where it’s acceptable to write in all caps for emphasis.  It’s not that way for the United States.  I’ve seen this in emails, reports, websites and other business correspondence.  Just tone down the all caps yelling and more people will read your proposal.



Luck or Preparation?

Posted on May 26, 2015 By

Oprah Winfrey Quote

Is it lucky when a product or service goes viral?  Sometimes, it might be luck.  However, if you prepare, plan, and execute, it’s much more likely that any project, stretch or crowdfunding project will be more successful.

Without effective planning; it’s much less likely to go viral.  The old school way of going viral was to get your product or serviced discussed on the Oprah Winfrey show.  That’s no longer around, so getting mentioned on The Today Show or it’s sister morning shows is it’s almost like that.

Is it getting mentioned enough on popular media enough to make a product or service a success?  I think not.  An anonymous former client of mine was fortunate enough to get featured on The Oprah Show.  As soon as she left the studio; her calls and emails were given the automated response treatment.  Is it because her product wasn’t worth featuring?  Nope, it’s a delightful product.

If you have a plan besides, ‘get on shark tank’, get on ‘the today show’, or viral youtube video; your products will be more positioned for success.  Betting the farm on some third party, it a traditional hope, but most products don’t get that exposure.  And there are plenty of successful books, products, and kickstarters that never receive that exposure or publicity.

Service Marketing

A detailed service business marketing plan will have:

  • Ideal Client Description
  • Sales Funnel
  • Client pre-qualification
  • Opportunity for Multiple Contacts with Prospects to Build Trust

Social Media can be part of the plan.  However, for some ideal clients, they don’t participate in social media.  Twitter isn’t for them.  It does no good to have an active twitter account, if your ideal client thinks it’s a waste of time.

HR Planning

A detailed employee expansion plan might have positions, titles, and responsibilities penciled out.  A detailed HR plan might include actual benefits prices, vacation time, and an employee handbook.  A detailed manufacturing expansion might include manufacturing location expense, utilities, improvements and other factory expenses.

It might be great to say, we want to expand our sales force by 20% next month.  But saying that you want to hire one sales lead, two salespeople and one marketing admin, is a bit more focused.

Manufacturing Planning

Is it lucky when a factory can scale to twice it’s size in six months?  It isn’t luck that tracks down reliable material sources and vendors.  It isn’t luck that increases the warehouse floor space.  It might be lucky to track down a manager that makes all that effortlessly happen.

Plan to be successful without hope or luck.  Luck will happen, but only to those that are poised to take advantage of it.


Tracking Down the Competition

Posted on May 22, 2015 By

Tracking Down the Competition

Competitive analysis is essential to a solid business plan. You need to know who and how you will be competing for revenue and market share with. To assume that the consumer has no alternatives to the company’s products is silly. What products are they using now in place your company’s services? How do you determine who your competitors are?

For example, Etsy has the lion share of the online handmade market.  But is a new ecom website for handmade goods really competing with it?  Or is competing with the myriad of other startups that are competing for the rest of the online handmade market?

Amazon is in the middle of debuting a new handmade market on their website.  Is Amazon too heavy handed to work with independent crafters?  Are their traditional customers looking for inexpensive toilet paper and not cutesy toilet paper holders?  Time will tell; I’ve been a vendor on both platforms and Amazon is a bit too sterile to deal with crafters, who are noisy, don’t want to learn a system, and expect a flexible platform.

Get out the white board, it’s time to do some thinking.

Industry Competitors

Who are the competitors in your industry?  Chances are that you can immediately name a few.  Who are the rest?

When I had my tax practice, it was easy to name H & R Block, Deloitte, and other large local firms.  Who were the sole practictioners that I was also competing against?  Established CPAs do not have websites, are not listed in the phone book, and worked out of their homes.  Finding nearby competitors was a bit like tracking down people in the witness protection program.  (I solved that problem by tracking them through the WBOA CPA list, networking, and by asking around.  The IRS now lists names of local CPAs in the PTIN database.)

Social Media?  Youtube, Facebook, Linkedin and Twitter will yield both established brands and scrappy startups.

Trade Shows.  Even if you don’t attend; you can check out who is advertising, bought a booth, or is presenting.  Perhaps they are also live streaming discussion panels.  Go back to YouTube and see if anything has been posted.

Networking.  Networking goes beyond going to Chamber of Commerce meetings.  Try looking on to see if there are any interest groups that speak to your customers.  Consider sponsoring a meetup group to advertise.  It’s my understanding that the meetup groups are now being charged a small annual fee.  Linked in groups are a way to meet others; however, they can also be large echo chambers.  The members are listed once you are joined.  Consider reading their profile and contacting them.

Where Do Potential Customers Shop Now?

FaceBook, Etsy, or Pinterest?  Brick and Mortor?  Sears?  Walmart?  Where do people shop now?  Local?  Online?

The globalization of our economy has lead to anything that can being packed into a box and shipped; is being sold online.  Even the big box stores like Target and Walmart are competing online.

Is your product/service shipable?  Is that a barrier to being sold online?

Perhaps not.  Angie’s List operates a defacto online market for construction services.  So much so, that Amazon is now advertising a local service market.  I checked it out.  It is invitation only at the moment.  Where are they finding the peeps to list on it?  Probably Angie’s List.

Local Competition

If you are planning a local brick and mortor, you need to research your local competition.  Who are they?  Are they a chain?  Another restaurant?  How do they stack up against you?

Do you consider Yelp reviews to be helpful?  There is a thriving market on positive reviews on Fiver, Elance, and UpWork.  Are the reviews vague?  Do the reviewers sound local?

Yelp has been removing reviews if they sound spammy or insincere.  Many have complained that actual real reviews have been removed until Yelp advertising has been purchased.  I don’t know the truth of that.  I do know that they offered to advertise my tax service for about $200 a month.  More than newspaper advertising in my local community paper, which charges $200.00 a year.

My suggestion?  Read the reviews, make a list of your local competitors, but don’t be swayed by the reviews.  Do your own research.

Google and Bing Search

This probably sounds funny and dumb, but just google your business idea and keywords.  There is very little new under the sun, and that includes business ideas.  The difference is execution and customer happiness.  If business ideas were unique, there would be only one place to buy cars.

Google and Bing are forever changing their algos to enhance customer experience.  I’ve noticed a few trends over the years.  National brands are becoming more prominent and are drowning out local mainstays.  Brands are more likely to be visited and used.  Therefore, the search engines seem to be favoring them.

Some websites compete by having many hundreds of domains and landing pages.  For instance, they might have a page titled Seattle_donuts when they do not in fact have any donuts sold in Seattle.  Now, should you do this on your own website?  I’m not a SEO expert, nor do I claim to be one.  Check out their site map to see all the pages, not just the ones listed on the main menu.

My main point is that for a complete competitor list, you need to search more than just the first page of results.  Page 20?  Page 50?  You decide.

IP Search

Hire a trademark attorney to do a search for you.   It can be expensive, but worth it in the long run.  It’s much more fun than a cease and desist letter from your opponent.


Create a customer survey that asks people who they currently use. Survey Monkey does a great job of creating fun surveys that people will actually complete.

I’ve found that Facebook surveys get goofy answers, Linkedin surveys have pretty much disappeared, and that Intuit wants my opinion on just about everything.

Make your questions non-biased, it’s easy to manipulate the results by asking biased questions.

Top Ten Lists

Many business publications publish annual best of lists.  Let them do the legwork for you.  The lists will also feature size, locations, products and employee counts.  It can be a great information source.

Phone Book or Online Phone Book

Are you a local attorney, CPA, or service professional?  Perhaps riffling through a phone book will help you find your competition. Established service firms rarely need to advertise; their customers and contacts give them new referrals on a regular basis. They do not need to advertise.  They might be listed in online directories, phone books and industry lists.

Industry Publications

Industry publications will often interview or profile experts about subjects that are interesting to their members.  The Wall Street Journal has long been a source of competitive information for Fortune 500 companies.  What is the Wall Street Journal of your industry?


Techcrunch has a startup database.  Go look through there.  You might find some interesting info on people who are also looking for funding, recently funded, and so on.  They specialize in the birth, success and death of startups.  It’s fascinating reading if you want to know who had funded your idea, failed, or is living in a Malibu Mansion.

Edgar Online and 10K Reports

SEC Reports by publically traded companies sound extremely boring, don’t they?  What if I told you that many have competitive and market analysis tucked inside?  Perhaps your largest competitor has their financials posted there.  Maybe even by region.  Take a look at your list and see which one is a publically traded company.  It might be a division of a multinational conglomerate.



Uncategorized     , ,

Dear Linkedin Connection

Posted on May 20, 2015 By

Dear Linkedin Connection,

There is nothing that warms my heart than seeing that on an email.

My heart always beats a little faster when I move things to my spam folder.

Mail Merge, it’s so 90’s.



What if the Numbers Don’t Add up?

Posted on May 18, 2015 By

What if the Numbers Dont Add Up

While presenting business plans, the financial statement information should have perfectly balanced books and tie out.  The first thing what people think when reviewing your masterpiece, is what other problems are there?  Is any of this information reliable?  Should I even bother asking them another clarifying question?

Here are some common gaffes for financial statements and projections:

Retained Earnings

Not understanding or putting enough effort into making sure retained earnings is correct?  What is retained earnings?  It is the accumulated earnings of the corporation.  Each year, the net income and other items are rolled into it.  You can think of as a running balance.

What can go wrong?

  • Not setting up the equity accounts correctly, then hiding everything left over in the Retained Earnings Account.
  • I’ve seen people take it off because it’s a negative number and that would make them look bad.  I got news for you, making up fake numbers is bad.  This one is important, don’t run from it.  Most startups run a negative retained earnings balance.  Own it.
  • Not rolling over the Net Income and other items to Retained Earnings.


  • Not doing bank recs on a regular basis.  I know you probably have a bank load and that is handling everything for you.  But you should really take a glance at the transactions once in a while.
  • A good 50% of accounting mistakes can be fixed by reviewing cash.  Once you start reviewing the transactions, solutions to thorny issues will pop up.
  • Remember that most anyone can request an audit and compare your bank statement to the amount on your books.

Accounts Receivable

  • If you have written off customer accounts, you should clean them off the receivable list.  It can produce phantom income/sales that might disappear under a close examination.  Run an AR Aging reports to look for laggards.
  • Understand the GAAP Revenue Recognition rules for your industry.  There are specific legal rules for recognizing revenue that might adjust your receivables.

Fixed Assets

  • Understand the different Tax and GAAP categories for assets.
  • Incorrect Accumulated Depreciation.  I can’t tell you how many books that I’ve seen where the accountant didn’t bother posting the annual depreciation expense.  For years.  Run a depreciation report for your business assets and cross check to make sure the net book value is accurately calculated on your financials.
  • Disposing of destroyed or scrapped assets.  Again, very common.  Do you really still have that 10 year old laptop?

Intangible Assets

  • Goodwill, if you are looking for investors, they will looking at this number.  It could materially effect their funding involvement.  Make sure you can answer questions about it and the current valuation.
  • Patents & Licenses.  Like the goodwill, it’s a good idea to review the pertinent facts about the valuation.

Accounts Payable:

  • Not entering all the liabilities.  I think this is a newbie mistake.  Understating liabilities usually translates into artificially lowering your expenses. And that usually increases your net income.  Honestly, this is a classic work around for companies seeking investors since before the depression.  You want a stink eye from an auditor?
  • In QuickBooks, there is a flaw that allows you to write vendor checks without decreasing the liabilities.  The accountant correctly records the liabilities, but writes a direct check to the vendor.  Expenses are double counted.  Run an AR liability report and see how many items are still being carried on your books.  Fix it by deleting the check and reissue it as a liability payment.

Payroll Liabilities

  • Do you owe money to your employees or tax authorities?  The amounts should be clearly listed here.  This might require tweaking how your payroll downloads into your company PNL.
  • ADP and other payroll providers often
  • Vacation and other paid time off.  You will need to accrue the amount of money that you will need to pay if an employee leaves or takes their vacation.  The accrual is according to GAAP if you have an obligation to pay, ie. employee handbook or regulation.  While I’m not in favor of this plan, some tech companies have specifically removing vacation pay and carryovers and replacing with PTO or Paid Time off.  You should consult with your legal counsel or CPA firm before doing so.  It could have legal reprocussions or your valued employees might leave enmasse.

Loans and Long Term Liabilities

  • Record all of them.
  • The biggest mistake that I see here is not properly recording them according to GAAP.  The interest expense might be recorded to reduce liability expense.  I suggest creating an amortization schedule for the loan, cross checking with your lender about the outstanding liability.  Adjust accordenly.
  • Capital Lease.  Did you know that some leases are technically loans?  You should double check with your CPA and reread that long term lease agreement to learn more.  This can be a tricky subject.


  • Get it right.  If you need help with this section, make sure you get help.  Each business type has a specific equity structure in the books.

Profit and Loss

Sales and Revenue:

  • Make sure you are familar with GAAP rules for reporting income.  For some industries, it might not be as easy as you think.  Some triggers?  Long Term Contracts.  Long Term Commitments with a payment upfront.  Software Sales. Ownership transfers don’t occur until delivery.
  • Be as specific as you need to be and and as general as you need to be.  If you need to make a schedule to break out the market segments, make sure the totals tie out to the main financials.

Cost of Goods Sold:

  • Be familar with the rules.  Try not to hide any cogs expenses in the operating expenses.  Most common? Freight Expense.
  • If you are manufacturing, it’s helpful to know the difference between LIFO, FIFO and Average Cost.
  • Know what your overhead rate is.
  • Know at what point you need to increase capacity or production.  If you want to get fancy, even make a graph.

Operating Expenses

  • Run a transaction report for the general ledger.  Skim it to make sure that everything is in the correct category.
  • Have categories or general ledger accounts that tell your story.  If you are spending the lions share on marketing, break out some categories for online marketing, PPC, design, tradeshows, free samples and so on.
  • Clean up extra categories.  I’ve seen three different business license accounts.  State, County and City.  Don’t be that specific.  Create some sub accounts if it’s truly necessary to have that specific information recorded.

Okay, so that’s probably a bit much to ingest in one sitting.  🙂