Share Me That Information

The term keeping the books, use to apply to settling the accounts at the end of the month ready to present to the taxman at the end of the year, ensuring all your incomings and outgoings were accounted for and the books tallied. However, nowadays many larger businesses prefer to implement business accounting software in order to keep business accounts up to date.

Accountants are still used by many, as keeping accounts in order can be challenging, self employed people and smaller businesses employ accountants to ensure the books balance, but in larger business situations there is a need for a more substantial method of managing the accounts process.

Perhaps one of the most favoured business accounting systems of today is Sage, Sage incorporates a range of many platforms which can be integrated to provide an accounting and management solutions for business.

Using business accounting software makes the whole process of accounting more straight forward and efficient, providing you choose the right software to meet your business needs. Many electronic communications can be processed by accounting software, but still requiring a trained individual to input other data.

To ensure you purchase the right accounts software for your business firstly you have to assess your accounting needs. Business accounting software packages can be used to process all major financial transactions, both incoming and outgoing, providing an overall health check on the financial status of a company.

Choosing the right package may also involve implementing a support package or person just in case things go wrong, this can be of benefit especially if you have to meet VAT returns, and problems occur at that time. In fact having a support solution is a major part of finding the right package for you.

Another thing to bear in mind is that many accounts packages as briefly mentioned previously, such as the sage 200 Suite (not sage line 200) can be a fully integrated business package, this means that not only are your business accounts managed in this manner but a wide range of other business needs such as distribution, CRM, retail, manufacturing, construction can be managed too simply by installing the individual software solutions.

It is very clear that any business benefits from having the right business accounting software, simply for tasks such as bookkeeping, payroll, invoicing, quoting and stock control, and as mentioned earlier balancing the books for the end of financial year Tax returns, this need further dictates that the need for account software does not only apply to large and corporate business but still has to cater for the small to medium business markets who still all the same responsibilities of larger organizations such as payroll but on a smaller scale.

Aside from Sage there are a number of accounts packages out there to assist companies with all their accounting needs, from small to medium business to blue chip companies, charities and churches.

Anna Stenning researched the ways in which business look to implement business accounting software in order to keep up with the financial side of their business.

The Capitalization Table provides investors with a bird’s eye view of the sum total of all the different securities issued by a company. It includes the amount of investment that the company has procured from investors and the distribution of securities which might include common/preferred shares, options, warranties etc. and the individual capitalization ratios.

The driving force behind an investment in a company is its expected return on investment, which should be profitable as well as lucrative. For investors, the tool used to state expected return is called a capitalization table, which is used in tandem with pro forma financials. Thus, the usage and preparation of capitalization tables is of great interest to prospective investors.

Basically, a capitalization table addresses the present and future funding requirements of the company as well as returns in terms of value that will be obtained over a period of time. It implies that the investor is greatly concerned about whether the returns on investment are good enough to justify the risk involved or not. The capitalization table encapsulates all the details about the amount of equity capital used in funding the company, the time of capital contribution and the ownership of the company. This information helps investors better understand their returns on investment.

Terms most commonly used in capitalization tables are “pre-money valuation” and “post-money valuation”. The former refers to the company’s value prior to any investments made by an investor. When the pre-money valuation is divided by fully diluted shares outstanding, a price per share is obtained. The latter refers to pre-money valuation plus whatever amount is invested. Obtaining the exact picture regarding calculation of pre-money valuation is not so much a scientific endeavor as it is an art form. There is great scope for personal judgment. All said and done, pre-money valuation is, by its very nature, negotiable.
However, getting future valuation for the exit can be achieved more scientifically.

There are a number of formulas that help determine the value of the company but, often, just one solitary equation without need for other and more complex formulae will help solve the issue. For a company wishing to achieve higher valuations at exit, it must have first achieved a sustainable competitive edge, and normally this may only occur after six years or more for those companies having planned for a five year plan of action. That makes it imperative for companies to outperform “also ran” companies and prove to the competition that trying to imitate more successful companies will surely not be of much use.
Some important and noteworthy aspects that a capitalization table should address are:

While attending a recent annual conference I ran into Jim-just as I do each and every year. Jim is short and stout, usually a little disheveled but typically with a jovial attitude-A Santa Claus without the boots, red robe and “ho ho ho”. This time, however, something was different. He wore a look of frustration like the one I used to give my father when he tried to explain quadratic formulas and I just wasn’t getting it.

After we exchange the usual “hellos” and “how are you” Jim says, “My partners are telling me to give up on the valuation business. They gave me an ultimatum: if I want to continue pursuing the valuation business then I am on my own. I just can’t seem to penetrate this market and build my practice!” he adds. “I feel like I am failing myself, I am failing my partners and I am failing my family.”

“What have you done to build your valuation practice?” I ask.

“Well, I tried newsletters for a couple months, and that didn’t work. I met with an attorney here and there, but that hasn’t brought in business. I’ve attended a couple of networking meetings, but that didn’t work, either. I’m not sure what I’m doing wrong.”

A common conversation among BV professionals

Jim is not alone in his frustration. Over the past decade and through my travels, I have had the same conversation with numerous colleagues trying to gain market share and build their valuation practices. Their development efforts are not achieving their objectives - so perhaps it’s time to consider the feedback from these results, and change our collective approach. As Warren Buffett once said, “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

Today we are faced with numerous marketing challenges in our practices that may seem insurmountable. The level of competition in the industry has increased tremendously as has its sophistication. We live in an era of spam filters, mind filters, mass deletions and constant change. We are typically bombarded with over 5,000 messages a day through various media. Viewed through this lens, navigating the BV marketing landscape is no less rocky than trying to ski the 4,800 foot drop from the top of Half Dome in Yosemite National Park. That’s just as frustrating and perilous a journey as building a valuation practice without the proper planning, tools, and systems.

How do you invest your marketing time and money?

We need to understand that each and every day of our business life, we make an invesent in our professional futures:

We invest our time. Every day, we decide what gets our focus. Do I golf at the local club or attend a networking lunch at the local Bar Association? No matter who we are, how wealthy or poor, our background or our base abilities: We are all given the same amount time each and every day. What determines who is successful and who is not is how that time is invested.

We invest our energy. After determining where to invest your time, you must put sufficient energy behind the decision to create measurable progress towards your goals. For example, if you say you want your BV practice to be worth $XXX, then you’ll need to spend your time and energy in activities specifically geared to building that level of practice.

We invest money in our operations. Typically, you should strive for 2 to 4 times return on your marketing dollar. For instance, an ad in a professional journal for your valuation services should generate revenues well in excess of the cost.

We invest our creativity. Given the high market competition and constant media bombardment, we are constantly searching for unique strategies to set us apart from the crowd, including exceptional marketing or client relationship concepts, or planning techniques that we provide our clients.

We make each of these invesment decisions on a daily basis, mindfully or not. To be successful in building a BV practice, you must make conscious decisions that propel you toward the desired results. In addition, you’ll want to have a consistently-executed system and process to accelerate your results.

Statistics show that nearly half (48%) of marketers typically give up after the first contact. A quarter (25%) give up after the second contact, 12% give up after the third, and 5% give up after the fourth. All told, the vast majority (90%) of marketers will contact their potential referral sources or customers four times or fewer with no results. This is precisely the situation my friend Jim was in. What he didn’t realize is that statistics also show it takes a minimum of seven contacts to make the sale.

Tips and tactics to build a BV practice

What follows are a few tools and tactics that helped build my practice from nothing to a substantial national presence. These strategies also helped create a systematic, automatic process of communicating with contacts that is both efficient and cost-effective.

1. Understand your capabilities. At the core of this process you must first determine where you currently are, and then where you want to go. This is no different than planning a road trip to Chicago; knowing the destination is not enough to determine the best way route, which will change depending on whether you’re starting from Ohio or New Mexico. An assessment of your current starting point includes knowing your particular capabilities (education and designations), BV market requirements, capital and professional capacity.

We’ve developed a tool called the Practice Silhouette that allows you to understand the various elements of your valuation practice-including your employees, expertise, relationships, service and product in a matrix format. The process helps you determine whether you are a commodity, a unique provider or a “standout” within the marketplace. The one-page matrix give you a quick “snapshot” of your valuation practice position as it exists today. It allows you to identify your base (where you are), gaps (where you want to be), and bridges (how to get there).

2. Create and implement your marketing plan. To truly succeed in business valuation, you cannot be a secret. People must know about you before they can decide whether to use you. You must become a recognized authority or go-to person. Many valuation professionals are technical experts, but not recognized experts. They get the work accomplished accurately and effectively, but no one knows they exist.

You must raise the market’s awareness of your existence, expertise and knowledge. This will build your reputation as well as your value in the marketplace. To accomplish this, you need to structure a marketing plan around a systematic process of building market awareness of your existence, your reputation and your business. The system has got to take place on multiple levels. The goal is to develop an ongoing relationship with referral sources over time; remember the “minimum of seven” rule.

Fortunately, our current Internet age allows us create a systematic marketing plan that is both effective and cost-efficient, more so today than even a decade ago. Historically, the majority of business development efforts went toward the use of direct mail (such as newsletters) and direct contact (such as lunch meetings).

Now your marketing plan must include both online and off-line marketing strategies, including those that reach the masses-and those that use more intimate, one-on-one methods.

The off-line tactics still include focused direct mail (client newsletters, press releases, postcards, etc.), seminars and educational programs, articles and networking meetings. The ultimate desired outcome is the creation of solid relationships in the marketplace.

Given current technological developments, online tactics should permeate all of your marketing channels. The focal point is a properly designed website, which serves as a resource for site visitors and provides a systematic mechanism to capture the visitor’s data. Once the system has captured the date, it will communicate with the visitors on a regular, automatic and cost effective basis.

A capture system with autoresponders allows you to provide ongoing resources and communications to thousands with a simple push of a button. An autoresponder is an automated delivery system that sends prescheduled emails, audio mails or video mails to all of your “captured” contacts at certain designated intervals. After the initial setup, the delivery process runs on its own. In my own practice, I use this system to provide over 9,500 colleagues and referral sources access to my E-Audio Alert on a regular basis with no mailing costs. It is also a system that can be used to automatically deliver a report, article or some other digital benefit to a person that visit the site such as our 5-Part Mini Audio e-Course on the 5 Deadly Sins of Building a Practice Through Internet Strategies.

These online tactics lead to others such as telephone seminars, webinars and a continuous flow of resources to your referral sources. For instance, I recently assisted a CPA create a video e-mail to his tax clients discussing some new rules affecting their 2006 tax returns. We did this with a $50 camera and a computer while the CPA was sitting at his desk, and then immediately e-mailed it to over 300 clients - a personal message with a level of authenticity, articulation and sincerity that no letter or email could capture. If marketing is the process of creating relationships, which I believe it is, these new technological tactics allow us to reach and touch our potential referral sources and clients in new ways.

Be committed and consistent

Only a committed, consistent use of this multi-tiered marketing will create visibility. Visibility leads to experience. Experience leads to credibility. Credibility leads to a reputation and reputation leads to marketing momentum. Marketing momentum results in growth for your valuation practice.

Each of theses strategies and tactics has a specific syntax and frequency to assure a consistent connection with your referral sources. In addition, you need to consider goal setting, strategic visioning, rapport building skills, controls and procedures, engagement management issues and other practice development factors we don’t have the opportunity discuss here.

Many of these approaches are considered non-traditional, and you must have an open mind to consider them in building your valuation business. Jim has proven to us that doing the same thing but expecting different results doesn’t work. Try expanding your references; you will be surprised at the results. As Albert Einstein once said, “We are boxed in by the boundary conditions of our thinking.” Don’t allow yourself to be boxed in: Get on with your success, and do it with conviction.

As for Jim, he is now consciously making the decisions of how to invest his time, money, energy and creativity. He put a structured marketing plan in place by completing a Silhouette Matrix, identifying and implementing specific strategies such as autoresponders, postcards and an article campaign. His plan executes systematically and automatically and more importantly, is producing results. I expect to see the old jovial Jim at the next business valuation conference.

Mel Abraham is an author, Adjunct Professor (USD Law School), and award-winning speaker & consultant. He has created numerous online training courses and practice tools at http://www.ValuationEducation.com, and http://www.BuildAValuationPractice.com. He can be reached at mel@melabraham.com.

Accounting provides some measure of a firm’s economic efficiency on its income statement. A large net income usually tells us that something has gone right, while a large loss indicates that something is amiss. The same cannot be said about a non profit’s income statements (usually called the Statements of Revenue and Expense). Since the central goal of a non profit is to provide services, not earn large profits, the absence of a profit is not a mark against the organization. As an alternative to the income statement, accounting attempts to measure a non profit’s efficiency on a financial statement called the Statement of Functional Expenses (SFE).

The SFE divides a non profit’s expenses into three categories:

1.Program Expenses: goods and services distributed to fulfill the purpose of the organization.

2.Administrative expenses: costs of business management, record keeping, budgeting, and finance and other management and administrative activities.

3.Fund raising expenses: costs of fund-raising campaigns and events.

The underlying idea of the SFE is that an efficient non profit is one that minimizes its cost of fund raising and administration. The SFE allows us to compute the ratio of these three expense categories. We might reasonably expect that an organization that spent 80% of its resources on program, 15% on administration and 5% on fund raising would be more efficient than an organization that spent 80% of its resources on fund raising, 15% on administration and 5% on program related expenses.

In theory, we should be able to compare the efficiency of various non profits by comparing the expense ratios reported on their SFEs. Alas, these reported ratios are not so reliable because non profits tirelessly diddle the accounting rules and definitions as to what constitutes a fund raising expense versus a program expense.

The Big Fudge: Joint Fund Raising and Program Costs

The idea of joint costs is to partially disguise fund raising costs as program costs. Traditionally this is done in large direct mailings by enclosing a newsletter or a call to action with the fund raising appeal. The enclosed newsletter allows organizations to claim that the cost of the mailing is at least partially attributable to education (a program function). Or the enclosed call to action is part of the organization’s advocacy work (also a program function).

Example. Onandon is a charitable group devoted to assisting traumatized victims of over talking. In addition to providing support and treatment groups, the organization supports legislation to combat over talking in the society at large. They annually send a 10,000 piece direct mailing that cost them $25,000. In the mailing, along with a request for funds, they include a newsletter and an appeal to supporters to contact their congress person to vote for a reform law that would limit the length of election campaigns to three weeks. They expect to collect $40,000 from the mailing. So after costs they net only $15,000 on the mailing. If the cost of the mailing is fully allocated to fund raising expense it would appear that only 38% of raised funds go to program purposes ($15,000/40,000). On the other hand, if they divide the cost of the mailing equally between fund raising and program expense then the ratio looks much better. Now it would appear that 75% of the funds raised go to program purposes ($15,000/$20,000).

What the Accounting Rules Say about Joint Costs

Accounting rule makers have made sporadic attempts to close this obvious loophole. The latest rules still allow organizations fairly broad discretion in fudging fund raising costs. One restriction that cannot be circumvented is the use of paid fund raisers. If a fund raising campaign uses paid fund raisers paid on commission then the entire cost of the campaign must be classified as fund raising expenses. Other than that restriction almost any other type of fund raising costs can be partially allocated to program expenses.

What the Watchdogs Say

Because accounting rules are relatively lax, charitable watchdogs often recharacterize joint costs as fund raising expenses. The American Institute of Philanthropy (AIP) on its web site makes the following comments on how it rates the percentage of expenses allocated to fund raising costs:

“The mailings and phone calls of these (charitable) groups may serve a dual purpose: raising funds and educating donors. However many of these groups consider such mailings and phone calls to be largely educational and their costs to be primarily program expenses. In some cases AIP adjusts the higher number. For example, AIP may differ with a group’s decision that the cost of acquiring new donors or members is a program service. Fund raising costs, i.e., direct mail and telemarketing, are often factored in as program expenses.”

Not All Non Profits Fudge Joint Allocation Costs

While the accounting rules on joint costs allow for fudging on fund raising expenses, this should not be taken to mean that all non profits fudge these expenses. Certainly informative newsletters and bona fide calls to action combined with a fund raising appeal warrant allocations between program and fund raising expense. Unfortunately the rules also allow for abuse. And you cannot tell which organizations fudge and which do not just by looking at their Statements of Functional Expenses. To a certain extent watchdog groups such as the AIP can help because they look closely at the actual fund raising practices of many of the largest non profits. You can find their charitable ratings on their web site.

Other Tests of Whether Your Favorite Non Profit Spends Too Much on Fund Raising

As a donor you can catch on fairly quickly as to whether your favorite charity is spending too much on fund raising. Here are some indicators:

1.Do you have a 200 year supply of address labels provided by the charity?

2.Do you receive three times as many phone calls from your charity asking for funds as you do calls from your friends and relatives?

3.Does your charity request annual membership renewals two months after you paid your annual dues?

4.Has your charity sold your name and address to 100 other non profits so now you receive 4 times as many direct mail solicitations as personal mail?

5.Do you have to increase your anti-anxiety meds every time you receive a new “call to action” from your favorite advocacy group warning you that if you do not give them more money civilization as we know it will come to an end?

Big Unanswered Questions about Non Profit Efficiency

Even if all SFEs reflected an accurate and fair allocation of a non profit’s expenses, there would still be big unanswered questions about efficiency. Efficiency is not just about minimizing administrative and fund raising expenses. Efficiency is ultimately about choosing the best strategy to accomplish the non profit’s goals. Efficiency also involves hiring and managing competent staff and being accountable to an independent board of directors. It is entirely possible that an organization that spends 40% of its expenses on fund raising is, in this larger sense, more efficient than an organization that spends only 20% on fund raising. Unfortunately, these overall efficiencies or inefficiencies are utterly immeasurable by any financial statement. This is not to say that such overall efficiency is not measurable, but that any such measurements are not derivable from a non profit’s financial statements.

Michael Sack Elmaleh is a Certified Public Accountant and Certified Valuation Analyst. His book, “Financial Accounting: A Mercifully Brief Introduction”, has received wide critical acclaim. He has nearly 30 years of accounting and 10 years of teaching experience.His web site is understand-accounting.net

Sunk costs are usually defined as previously incurred costs that are not recoverable and should not be taken into account in decision making. Here is a slightly modified example of a sunk cost from Jerold Zimmerman’s “Accounting for Decision Making and Control” (Irwin McGraw-Hill):

Example. Abadabba Berman, the comptroller of the Schultz Cement Shoe Company, has contracted with Microstiff to design a proprietary accounting software package for the company at a cost of $15,000. After months of dealing with countless glitches and bugs the system just barely works. Finally one of the frustrated bookkeepers points out to Abadabba that for only $2,000 they could purchase an off the shelf package from Quickcrooks that would generate all the reports that the more expensive system provides with a fraction of the aggravations and crashes. Abadabba cannot bring himself to invest the additional $2,000 in the replacement system even though the company will easily save that much and more in the improved productivity of the accounting department. Abaddaba reasons that they have too much invested in the old accounting system to simply abandon it.

Abaddaba should consider the past investment in the expensive Microstiff software a sunk cost. He should ignore the past investment in deciding whether to abandon the software and replace it with the Quickcrooks package. According to cost accounting theory the only relevant costs to consider are the future costs associated with each option. If retaining the Microstiff software is more expensive going forward than buying the Quickcrooks package then the Microstiff software should be abandoned. The previous heavy investment in Microstiff should not be a consideration in making his decision.

Loss Aversion: Why Abaddaba Won’t Let Go of Microstiff

According to cost accounting theory Abaddaba’s choice to hold on to Microstiff is irrational. The best choice for the company is to abandon the software, not keep it. Now of course, the irrational choice for the company may be a very rational choice for Abaddaba personally. Why? Because the boss of the company, Dutch Schultz, has a notoriously bad temper and Abaddaba does not want to face Dutch’s wrath when he tells him that he made a $15,000 mistake going with Microstiff. So from Abaddaba’s perspective it is rational to cover his rear and stick with the bad software.

But this is not really the full story because even if Abaddaba was the owner of the firm the odds are that he would still make the irrational choice to stick with the crummy software. Why? Because he, like all of us, tends to be very reluctant to accept losses. Abaddaba’s failure to treat the prior investment as irrelevant is a species of a very common behavioral trait known as loss avoidance.

Varieties of Loss Aversion

For most people losses loom larger than gains. The pain we feel from a loss generally outweighs the pleasure we feel from a comparable gain. This is what the social scientists term loss aversion. Variations of loss aversions are common place in business and investing. For example, investors are, as a rule, much quicker to realize gains than losses. This is the reason why automatic stop loss orders are implemented when buying stock. An automatic stop loss triggers a sale when a stock investment’s price drops to a certain point. It is automatic and commonly used because it is the all too human trait of loss aversion that often keeps people from cutting their losses. The tendency is for people to hold on to losers in the hopes that the loss will reverse.

Real World Decisions

In the above example all the consequences of the different courses of action were specified. I told you what the dollar consequences of keeping the old software versus buying new software would be. Rarely in real world situations do we have precise dollar estimates for the results of different courses of action. The tendency to stick with losers, and thus not cut our losses, can be reinforced by the ambiguity surrounding real world decisions. If you are in a position of being emotionally invested in a bad decision, the tendency will be for you to filter out and skew data that would support abandoning the course of action you are invested in.

Practical Advice on Dealing with Sunk Costs and Loss Aversion

First recognize that there is no way to detach yourself emotionally from the consequences of important decisions that you have made. Recognizing that you have made a poor important decision is always going to be painful. What you can do is recognize that you have an emotional investment in your decisions and seek the advice of individuals who are not so emotionally invested. These individuals are less likely to filter out information that might call for abandoning a bad investment.

So who can you consult with about important decisions? If you are a small business owner it is important to have an outside advisor. Outside accountants, Small Business Extension Center staff, or volunteers from S.C.O.R.E are all good possibilities that will not break your budget. Trade or business associations often have staff available for advice on business operations. Also do not overlook the web as a possible resource of good advice. Almost every type of industry or business has forums where similarly situated owners can offer each other advice.

For larger businesses, independent boards of directors can fulfill the role of detached advisors as well as outside consulting specialists. Also remember loss aversion and the unwillingness to abandon sunk costs can exhibit itself in groups as well as individuals.

Finally, do not forget that even the smartest people make mistakes and often very big ones. Ignoring non-recoverable costs requires admitting that we have made bad decisions. Never an easy thing to do. But the ability to admit mistakes, abandon sunk costs and move on is vital to success in any enterprise.

Michael Sack Elmaleh is a Certified Public Accountant and Certified Valuation Analyst. His book, “Financial Accounting: A Mercifully Brief Introduction”, has received wide critical acclaim. He has nearly 30 years of accounting and 10 years of teaching experience.His web site is understand-accounting.net