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“Grow With Traction” – An EOS (Work)shop to help you achieve your vision!

If you are the owner, leader or manager of an entrepreneurial organization who wants to see your business consistently run better and grow faster, Brian White and EOS can help you and your team simplify, clarify and achieve your vision.

Even the most successful entrepreneurs occasionally find running a business more challenging than they expected. Many work longer hours and get less return on their investment of time and money than they would like. Most entrepreneurs regularly grapple with one or more of the following challenges:

• Lack of control – over time, the market, or the company
• People – don’t listen, understand or follow-through
• Profit – there’s not enough of it
• Growth – is okay, but they just can’t seem to break through to the next level
• Magic Pills – Lots of remedies and quick fixes have come and gone, but the wheels are still spinning

If these problems seem all too familiar, you’re not alone. It doesn’t have to be that way. For over 15 years, Brian has been helping entrepreneurs and their leadership teams succeed. In this interactive workshop, Brian will introduce you to the Six Key Components™ of successful businesses. He’ll arm you with a set of simple, practical tools you and your leadership team can begin using right away to get more done and realize better results.

Read More Details on Eventbrite:

Clarify | Simplify | Achieve your Vision

Companies who should attend:

• A company that has 10+ people
• A company that is more afraid of the status quo than making change
• A company who is self-implementing EOS (read Traction, Get A Grip, have been implementing with no facilitator and/or downloaded some EOS tools)
• Companies who want to get to the next level (would like to see what EOS is and get some tools)

Brian is excited to share his expertise to help you run a better business.

Preface: Researching and developing can be hard work, and proper documentation can be hard work too. When applicable, hopefully, the research and development projects yield improvements to your products or processes, and the documentation yields a tax credit.

Tax Credit for Research or Development (Segment II of II)

Credit: Jacob M. Dietz, CPA

Sufficiently document in the records what the original problem was to solve, the steps in the process, and what was finally created. The IRS wants documentation, although it does not specify in exactly how to document. This article gives some ideas. Consider grouping records by project for recordkeeping. Examples of this documentation could be: notes from meetings, drawings, blue prints, notes of tests, etc.

There are some exclusions for activities. Below is a partial list of the excluded activities that do not qualify for the credit:

1. Research after the product is being produced commercially
2. Adapting a product for a specific customer
3. Duplicating (reverse engineering)
4. Studies and surveys
5. Funded by others.

If the project is not a qualifying project, then do not include expenses for that project for a research credit.

If, however, the project does qualify, then make sure you have substantiated by documentation how it qualified, and then track the expenses and indicate how they are qualifying expenses.

For each period, track how many hours of each employee was for each activity. Keep records that show the employee name, the employee hours, the day, and the activity

Track and Document Expenditures

Labor

Labor is likely a significant amount of the research expense. Carefully substantiate labor costs. For each period, track how many hours of each employee was for each activity. Keep records that show the employee name, the employee hours, the day, and the activity. Also, indicate what the employee did for the project. For example, was the employee creating drawings, or sawing, or testing, etc. Include labor for the actual research, and first-line management supervision of those employees.

At the end of the project, be prepared to substantiate how many hours each employee put into the project. At the end of the year, be prepared to substantiate the ratio of qualified research hours to nonqualified hours for each employee.

 If you are buying supplies, and you know they will all be used for research and development, code them immediately to that research and development supplies account.

Supplies

Track the supplies that are used in research and development. Consider creating a separate general ledger account, and record your supplies expense in that account. If you are buying supplies, and you know they will all be used for research and development, code them immediately to that research and development supplies account.

Alternatively, some supplies that you buy may be used for both qualified research expenses, as well as other expenses. In this situation, consider keeping a usage log that tracks how many of each supply is used in a specific project. Every month, this log can be entered in your books and records, and the expense can be taken from the account that the supply was originally purchased in and moved to the research and development supplies expense account.

If you have multiple projects, then try to document which project consumed the supplies.

If using the usage log to move expenses from their original expense account to a research and development supplies account, document how the price per each is computed. For example, perhaps it is pulled periodically from a catalog or an invoice.

Save documentation that shows how the supplies are being used. For example, suppose that you are using metal to create a piece, and subjecting it to tests to see if it will break. Try to have some documentation that would indicate why all this metal is being used, such as notes from the tests or some other substantiation. If you have multiple projects, then try to document which project consumed the supplies.

Subcontract Labor

If subcontractors are paid to do any research, consider creating a separate general ledger account for subcontractor research expense. Keep copies of the contract on file. It should be clearly documented how they fit into the overall project. There are various qualifications for the subcontract expense to qualify. Here are some of them:

1. The work is of a nature that would qualify if it were performed in-house by an employee.
2. There should be an agreement with the subcontractor before the subcontracted work was accomplished.
3. The agreement should explain that the work is being done for your company
4. The agreement should indicate that you must pay for the research even if the project fails
5. The agreement should indicate that your company should own the rights, although not necessarily exclusively, to the research being subcontracted.

Before taking the tax credit, however, consider if you have qualifying activities and qualifying expenses. Also, make sure you have documentation to prove them.

If your business is spending significant money to research and develop, smile and consider the tax credit. Before taking the tax credit, however, consider if you have qualifying activities and qualifying expenses. Also, make sure you have documentation to prove them. Researching and developing can be hard work, and proper documentation can be hard work. Hopefully, the research and development yields improvements to your products or processes, and the documentation yields a tax credit. Taking the credit can be complex, so consult with your tax advisor if you are interested in applying to your business research or development activities.

 

Preface: If your business is spending significant money to research or develop, smile and consider the research or development tax credit. Before taking the tax credit, however,  consult with appropriate tax counsel.

Tax Credit for Research or Development

By Jacob M. Dietz, CPA

The IRS allows a tax credit for increasing research or development activities. If you are a business owner spending on research and development, then you may have felt pain watching money flow out the door to develop a product before you can even sell the product.

If you find yourself grimacing as you pay to research or develop, consider if the research credit will put a smile on your face with a tax credit.

Furthermore, you may even doubt if the product you are researching and developing will ever succeed. If you find yourself grimacing as you pay to research or develop, consider if the research credit will put a smile on your face with a tax credit.

Different industries can qualify for the research credit, and manufacturing is a prime industry for this credit. For example, suppose you are a small equipment manufacturer. You want to create a much larger version of your current equipment, but when you do that the axle tends to break. You therefore try a larger diameter for the axle, but then another part of the machine hits the axle. Then you try a second material for the axle, but one of your shop machines has trouble with it. Too much of the second material gets destroyed in the manufacturing process. Next you try a third material, which works well. Does that scenario sound familiar? If so, keep reading.

Another industry that can qualify is construction. Suppose a construction company wants to move into the energy efficient market. They may incur some qualifying research and development costs along the way.

If you are interested in this credit:

1. Determine if you have qualifying activities
2. If yes, then track your qualifying expenses and
3. Document both your qualifying activities and your qualifying expenses.

What type of activities qualify?

Not all expenses qualify. For an expense to qualify, it must be a qualifying expense of a qualifying activity. Also, you should document how the activity qualifies.

Make sure the tax documentation for a project indicates what uncertainty is trying to be researched and overcome.

In determining which activities qualify for the credit, check for these qualifications:

1. There should be uncertainty to overcome. For example, perhaps the project is to make a larger piece of equipment, but it is uncertain how to make an axle to withstand the additional stress. Make sure the documentation for a project indicates what uncertainty is trying to be researched and overcome.
2. The research should be technological in nature. If it relies on engineering or some type of physical science, that helps. The documentation that shows what the problem is may make it clear that it is technological, and that physical science or engineering should help. For example, maybe the research is to make something stronger, more powerful, larger, etc. Maybe the research is to make a new kind of equipment. This type of research would rely on physical science, and possibly engineering.
3. There should be a process of experimentation, in which the company strives to solve a problem. The problem should somehow relate to quality, reliability or similar features and not merely be cosmetic. Ideally, there should be records indicating what the problem is, and what steps are being taken to improve it. If one attempt at improving ends up failing, that can be documented. Documenting a failure in the process helps to demonstrate that experimentation occurred.
4. The research and development should be to either create an improve a new product, invention, technique etc.

To be continued….

Preface: Now you have a financial target, and now you know when you “don’t have enough (working capital or equity).” We omit the “when you have too much” because that’s usually not the problem.

Surviving a Debt Euroclydon (Segment VI)

Credit: Donald J. Sauder, CPA | CVA

Typically, as an entrepreneur builds equity with profitable earnings, liabilities decrease as they are paid-off, and investment increases. Therefore, the measurements and grades improve with time. Startup business ventures should appreciate that their most substantial risk is liquidity, i.e., measured as working capital.

Diligent financial managers will measure this monthly, and possible graph the trends on comparable actual working capital to the 100% level

The above working capital tool is advisedly applicable to businesses in almost every industry. Diligent financial managers will measure this monthly, and possible graph the trends on comparable actual working capital to the 100% level.

Preparing for a Debt Euroclydon can begin with two easy tools. Tool one is working on optimizing the analytical ratio of equity to total assets or total liabilities and equity.  Tool two is tracking trends with working capital levels and grades. These are quantitative financials to bring a mathematical approach to what some advisors say is too much…debt, payables, etc. Now you have a target, and now you know when you “don’t have enough (working capital or equity).” We omit the “when you have too much” because that’s usually not the problem.

…..while financial tools and weather forecasts may be helpful, always keep the following (Questions) top of mind, because that’s what your financials reflect.

If your business has all the necessary financial reporting to begin these steps towards diligent financial preparedness, then your also advised starting to be your own business “financial weatherman.” You can achieve this following these two easy tools. If you don’t know where to start, then all you need to do is ask for help.

Above all, when preparing for any business risks or pressures, i.e., a Debt Euroclydon, while financial tools and weather forecasts may be helpful, always keep the following questions top of mind, because that’s what your financials reflect.

1)    What is our enterprises’ purpose?
a.     Are we achieving that purpose effectively?
2)    What is our enterprises’ vision?
a.    Are we working successfully towards the vision?
3)    What are our enterprises’ core values?
a.    Do we commendably exemplify those values?
4)    What is our enterprise core focus?
a.    What do our customers appreciate most about our core focus?
5)    What does our business contribute to the community?
a.    Are our products or services, adding the most exceptional         value possible?

Finally, many business successes and opportunity are a matter of “time and chance.” They are not necessarily indications of superior strength, wisdom, understanding, or skill, so as an entrepreneur give thanks daily, and live with gratitude.

Preface: Numerous business owners have an intuitive feeling on working capital levels, but quantifiably grading working capital provides an understandable and mathematical measurement where your business is at now, and where your business working capital could and should be.

Surviving a Debt Euroclydon (Segment V)

Credit: Donald J. Sauder, CPA |CVA

Measuring working capital is the second easy tool to help maintain a well-oiled enterprise. Working capital is a balance sheet calculation, or current assets minus current liabilities equals your business working capital. Working capital measures the operational liquidity level of a business.

So what are currents assets? They are often your cash and equivalents accounts, accounts receivable, vendor prepayments, and inventory. Assets that are easily convertible into cash with a year. Current liabilities are often your accounts payable, credit cards, line of credit, tax liabilities, accrued expenses, customer prepayments, and deposits, and don’t forget the current portions of debt.

To precisely measure an enterprise’s working capital, it is necessary to have accurate accounting with appropriate accountant oversight for proper classifications of both current and noncurrent assets and liabilities.

The current ratio applies for the same financial numbers as working capital, yet instead of subtracting current liabilities from current assets, the current ratio divides current assets by current liabilities. Typically, a current ratio should be higher than two and likely two and a half, to be solidly established from an analytical measurement metric.

….the working capital grading tool is to help clients measure optimal working capital levels, i.e., how much is enough when discussing working capital? Let’s call it the working capital grade. It requires analysis of both the balance sheet and profit and loss statement.

Working capital measurement is an analytical approach to monitor a business’ capacity to continue operations with sufficient cash flows and to pay operating expenses and satisfy current liabilities cash uses.

Sauder and Stoltzfus, as an entrepreneurs CPA firm, has developed a working capital grading tool to help clients measure optimal working capital levels, i.e., how much is enough when discussing working capital? Let’s call it the working capital grade. It requires analysis of both the balance sheet and profit and loss statement.

Tracking the working capital balance from consecutive period to period will provide a data map, but you need to know, “Do you have enough yet?”

Working capital seems easy enough to calculate. You look at your financial statements and subtract current liabilities from current assets. If you should have the financial accuracy to calculate the balance, the numbers independently, do not provide much analytical guidance. Tracking the balance from consecutive period to period will provide a data map, but you need to know, “Do you have enough yet?”

Numerous business owners have an intuitive feeling on working capital levels, but quantifiably grading working capital provides understandable and mathematical measurement where your business is at now, and where your business working capital could and should be.

Here’s how we grade working capital. You can do math or follow along with current assets minus current liabilities as the formula.) Let’s say the cash $5,000 + accounts receivables $45,000+ inventory $70,000 is $120,000. Now subtracting accounts payable $30,000 + accrued wages $15,000 + current portion of debt $25,000 is $70,000. Now the working capital calculation is $120,000 – $70,000 = $50,000.

In our example, the working capital was $50,000, so the business is not yet solidly positioned or fully prepared for a debt Euroclydon.

Next, we compare that working capital level of the balance sheet to the profit and loss statement, measuring both direct labor expenses, and operational or general and administrative costs on a quarterly basis, e.g., what do you pay indirect labor expense or general and administrative expense, on average, every three months? This example can include multiplying a year of data with .25 for 1/4th of the annual costs or merely looking at quarterly data. This number is an estimate only, like a professor grading essay papers, the difference between the grade of a B+ or A is discretionary.

Now following with a business that has a direct labor expense in cost of sales of $300,000 per year, you would multiply the twelve-month fiscal year number by 0.25; that calculates to $75,000 per quarterly 300,000 * 0.25). If your operating expenses or general and administrative expenses are $250,000 for the twelve-month fiscal year, then you would multiply that balance by 0.25 to arrive at a calculated $62,5000 ($250,000* 0.25).

The greater of those two numbers is your optimized working capital. That is the $75,000 or $62,500. The greater is the direct labor of $75,000. Do you make the grade? Your business is solidly pillared if you have the greater of these two numbers in the working capital formula, i.e., $75,000.

In our example, the working capital was $50,000, so the business is not yet solidly positioned or fully prepared for a debt Euroclydon. If you have working capital above the calculation, your business can take on additional risk to safely develop the expansion of operational activity, as long as you continue to maintain or monitor appropriate working capital levels in your business.

In the above-calculated working capital scenario, the $50,000 of working capital measurement divided by $75,000 is a 66% ($50,000 balance sheet working capital / $75,000 profit and loss measurement)  Making the grade? Yes, it’s that simple.

The working capital grading tool works like this:
1.    35% equals one month of working capital
2.    70% equals two months of working capital
3.    100% equals three months of working capital.
4.    You can score well above 100% in a firmly positioned business, and you’re ready for the debt Euroclydon.

If your business working capital grade is below 15% to 25%, your business likely needs immediate help from an expert financial advisor. On the other hand, the $25,000 increase required from $50,000 to achieve $75,000 can be obtained with steady additional earnings and profits retained in the business, i.e., you can earn your way out of the problem, or maybe a long-term amortization of say a line of credit, i.e., reducing current liabilities.

To be continued.

Preface: Buyers are well-advised to give appropriate attention to asset allocations for tax purposes with transactions to avoid being pressured by uncooperative sellers after signing.

Did I Purchase What You Sold?

By Jacob M. Dietz, CPA

Sometimes a hardworking entrepreneur decides to move on to new adventures. The new adventure could be another enterprise, it could be mission work, or it could be a slower lifestyle and grandchildren. When this happens, there may be a sale of the business. When selling a business, make the allocation of the price a part of the agreement of the sale.

The Case of the Missing Allocation

Imagine if a custom chopping business owner named Reuben decided to sell his business, ABC Custom Chopping, LLC to another custom operator, Henry. He is selling the entire business including the equipment, the customer list, the employees, etc.

They agree to sell it for $750,000. In June, Henry writes a check (with the help of a bank loan) and takes over the business. Everything seems great until February.

In February, Reuben goes to his accountant and says he sold the business for $750,000. His accountant asks for an allocation schedule showing how much was paid for different asset categories. Unfortunately, no such allocation was ever created.

Purchase Price Allocation to Assets

What is an asset allocation, and why does it matter? IRS Form 8594, Asset Acquisition Statement, lists 7 classes of assets. A full treatment of this form is beyond the scope of this blog, but in certain cases when a business sells both the buyer and seller must fill out form 8594, which shows how the price of the business is allocated among asset classes.

Ignoring most of the classes, let’s look at class V and class VII. Class V includes various items, including equipment. Class VII includes goodwill. Goodwill has also been referred to as “blue sky” and can be the amount of the purchase price not allocated to other items.

Back to Reuben and Henry. How should they allocate the purchase price? Henry hopes to allocate as much as possible to the equipment, which is class V. Why? Equipment can be depreciated quicker than goodwill is amortized, and with accelerated depreciation Henry may even be able to deduct it all in year 1. Goodwill (class VII) on the other hand, is amortized (expensed) over 15 years.

Reuben, however, may want to allocate more to goodwill. Why? All or part of the sales price allocated to equipment will be subject to ordinary income treatment. The price allocated to goodwill can be subject to capital gain treatment. Ordinary income is often taxed at a higher rate than capital gain income.

Unfortunately, Reuben and Henry are motivated in opposite ways on how to allocate the purchase price, and they lack a business incentive to compromise. Henry has the business. Reuben has the money.

Agree when Negotiating

What could have been done differently? They could have agreed on an allocation before the deal was signed. When they were still negotiating the price, then they would have had a business incentive to compromise.

For example, assume Henry wants to allocate $700,000 of the purchase price to equipment, and Reuben wants to allocate $600,000 to equipment. They could perhaps meet in the middle, and agree to $650,000.   Alternatively, perhaps Reuben could agree to Henry’s number, $700,000 for the equipment, but negotiate an additional $10,000 or so to the sales price.

Although it may seem like one extra hurdle to selling the business, make sure your purchase agreement includes an asset allocation. What is purchased should be the same as what is sold. If there is disagreement, it is better to compromise at the time of the sale instead of trying to agree months later when the business incentive to compromise is no longer present. Months after the sale is a good time to enjoy the new adventure, but it is not a good time to argue over the allocation.

Preface: You’re living the college student dream if you’re debt free.

Surviving a Debt Euroclydon  (Segment III)

Then the hypothetical debt Euroclydon came. The only man who sticks closer to you in adversity than a friend is a creditor – Author Unknown. Today, debt drives the economy from credit cards and real estate mortgages to personal and business lines of credit.

We can gain valuable and keystone business insights into the economic power of debt and the credit cycles from the book, The Big Debt Crisis; credit: author Ray Dalio.

If you understand the game of Monopoly®, you can pretty well understand how credit cycles work on the level of a whole economy…..Early in the game, “property is king” and later in the game, “cash is king.”

Now, let’s imagine how this Monopoly® game would work if we allowed the bank to make loans and take deposits. Players would be able to borrow money to buy property, and, rather than holding their cash idly, they would deposit it at the bank to earn interest, which in turn would provide the bank with more money to lend. Let’s also imagine that players in this game could buy and sell properties from each other on credit.

If Monopoly® were played this way, it would provide an almost perfect model for the way our economy operates. The amount of debt-financed spending on hotels would quickly grow to multiples of the amount of money in existence. Down the road, the debtors who hold those hotels will become short on the cash they need to pay their rents and service their debt. The bank will also get into trouble as their depositors’ rising need for cash will cause them to withdraw it, even as more and more debtors are falling behind on their payments. If nothing is done to intervene, both banks and debtors will go broke, and the economy will contract. Over time, as these cycles of expansion and contraction occur repeatedly, the conditions are created for a big, long-term debt crisis.

Today, central banker vocabulary doesn’t include the word “bankruptcy.” As of May 2019, the United States consumers in aggregate had $4.02 Trillion in consumer debt, says credit cards, and $1.50 trillion of student debt on educational loans, and $1.20 trillion of auto loans. In 2018, the average American household had too much debt, with an average of $135,000. The average US household had $47,500 of student loans, $27,500 of auto loans, $6,000 of credit card debt, and the remainder of the $135,000 of total debt is either a mortgage, line of credit, and home equity loans. With average wage earnings of $60,000 per household, approximately 8% to 10% of Americans think they will never be free of credit card debt in their life. The statistics are increasingly bleak for long-term economic vibrancy with the absence of continual injections of credit for new consumer spending highs.

Now, let’s ask a rhetorical question. Where will this average American likely receive the necessary future capital to acquire or pay for what your business will sell? Will it be from new credit cards, or say will it be a mortgage? Will it be a home equity line of credit? You hope it’s discretionary earning, right? Look at the statistics. Simply because someone earns more than $60,000 doesn’t say they save more capital or have a higher percentage of investable assets than someone who is earning less. Higher earnings permit more opportunity to accumulate debt with greater credit access. The economic gaps among the haves and have nots continue to widen creating expansions in the underlying tectonic pressures in the greater society.

A debt crisis is deflationary because the artificial price increases per the Monopoly game example above, simply cease to support inflated asset prices when the credit compressor stops. Deflation is a decline in asset prices. Hence real estate and business values decline in deflation. A Debt Euroclydon in terms of this article does not outline what happens in that scenario. The best answer may be that the actual economic playbook is almost impossible to design for most, but likely outlines bleak economic conditions that have not been seen in most generations in the business industry and entrepreneurship today.

Preface: And the rains came and winds blew and beat upon that business, yet it  stood firm, because it was built on the rock.

Surviving a Debt Euroclydon  (Segment II)

Credit: Donald J. Sauder, CPA | CVA

To double the financial impact of the business quicksands, the new project pipeline had nearly evaporated, while profitability from costs on the signature project was 25% above the bid. Instead of immediately decreasing overhead risks, Paul drew on his new line of credit to finance payroll and equipment loan amortizations. Paul was having an out of money experience. But he was a successful entrepreneur, and he had confidence he’d work it out.

The banker began to stop in at regular intervals to discuss the work-out possibilities on the loans. What steps could be taken to make sure Paul could make his monthly loan payments? The banker continually reassured Paul that calling the loan was only a last step, even if all the loan covenants designed to maintain prudent financial ratios created repayment risk. Paul had the hunting cabin listed for sale at a steep discount to raise cash fast. Selling that was painful enough, but the fact it turned into a capital loss, doubly pained him. Placing the proceeds from that sale as contributed capital into the business, the accumulated accounts payable made only a slight decline with the cash infusion. Paul’s wife began to become concerned too about the business predicament and liquidated her IRA account to help.

His team also began to become increasingly concerned about the financial woes and began to explore safer and more secure paychecks. Keeping optimism on the team, resulted in a plateau of lackluster operational performance in the field. The financial pressure was now stressing Paul to the point that Sundays were a day of stress, instead of a day of rest. Would he get that next bid? What if he had an unexpected business expense such as a truck engine overhaul? What is couldn’t make payroll next month? What if the economy turned south? What if the bank would not renew his line of credit in a few months?

As the weeks elapsed, the business work-out possibilities diminished. Paul began to reduce business overhead out of necessity, and with that, his opportunity for larger project bids because of the team experience required. The banker continued to hunt for optimism among the financial atrophy. Paul began to liquidate excess assets, the extra truck, the loader, etc. for working capital.

Then the week arrived to renew the line of credit with the bank. Paul talked with other financiers about an additional cash infusion. The banker had warned him that they were losing confidence in Paul’s ability to find a solution. The worries turned into fear when the bank denied the line of credit renewal. Paul began to have some serious doubts; doubts about his expert business acumen, and more precisely his ability to make effective business decisions.

But all was not lost. Paul’s Uncle George has just sold his investment real estate in town. He had an inkling Paul needed help. Paul’s phone rang. It was Uncle George “Your business is going to recover nephew, stop in for your check.”

A little wiser, and little more experienced, Paul had assembled a team of advisors, including a trusted business leader, accountant, and business consultant. As the team worked to help Paul out of his predicament, they noticed some unusual gaps in cash flow. Upon further accounting review, it became apparent that Paul’s bookkeeper had embezzled more than $85,000 in cash, in just the prior year, from his business.

And so, goes the story of how Entrepreneur Paul survived another day as an entrepreneur. The day the phone rang with Uncle George on the line, Paul understood for the first time, the definition of “experienced businessman.” That hypothetical story is just that, a typical distressed business story. How do entrepreneurs survive a Debt Euroclydon where the business problem is an economic snafu that pressures entire industries?

 

Preface: “I’ve seen successful squirrels, and successful entrepreneurs can learn a lot from such continuous future planning, diligence and focus.” Quote from a Canadian entrepreneur.

Surviving a Debt Euroclydon 

Credit: Donald J. Sauder, CPA | CVA

 

“The economy depends about as much on economists as the weather does on weather forecasters.” Jean-Paul Kauffmann. Experienced entrepreneurs know more about their marketplace than most economists or experts. Why? They have a vested interest in the market activities; they have chips in the game. Entrepreneurs communicate. They talk to customers, they talk to friends, or hear rumors, and read news and industry publications, and from all these information sources they develop and construct a narrative of data for an understanding that helps them form an accurate opinion on the best course of actions. Most importantly, they know more about their small business marketplace because of their year of actual in the field experience. Some economists do have more experience than entrepreneurs, and hence, sometimes we need to listen carefully and closely when they talk.

Let’s begin with an exploration of the hypothetical story of Entrepreneur Paul to learn and gain insight from hypothetical business history. Entrepreneur Paul was a capable craftsman when he started his new entrepreneurial business. Although it was a challenging economic environment in the early years, his ambition and diligence with his developing enterprise, mitigated the low-risk business landscape.

Navigating through the new enterprise’s terrain, Paul rapidly built confidence and credibility in his industry. Soon he had a team of six employees. As his business grew, he needed to acquire additional trucks, equipment, and tools. Of course, the bank was happy to lend him the necessary money for these new assets. Paul’s first business debt from the bank was a truck loan. The terms and ease of the loan, along with the marketplace opportunity for his craft, boosted Paul’s confidence that he was beginning to be an expert businessman.

Within less than a decade, Paul had a crew of fourteen employees, along with ample equipment, and trucks for nearly any opportunity inside his businesses service area of expertise. With $450,000 of approximate debt, Paul was earning a nice profit each year on his growing enterprise, and the economy continued to boom. There was always some extra money for the new cabin, the church building fund, and the hunting trip. Financial calibration was not on Paul’s mind, although he talked to his accountant about tax reduction strategies and effectively maximizing depreciation deductions when necessary.

Then one day, Paul received the big opportunity to bid his enterprises largest signature project in his business history. He won. Commencing the work required two more employees, and another truck, plus some additional equipment. The project required all of Paul’s key employees’ attention too with; it’s signature visibility. There was minimal time to bid on new projects to keep the work backlog fueled. As the signature project, neared completion, the customer began to express discontent with trivial features of the project craftsmanship and began to withhold payment. With thirty percent of the payout remaining, Paul had a challenging decision. The decision, for better or worse, completion was necessary with the projects community visibility. After many meetings and tense communication, Paul never received the remaining payments on the project.

To be continued.