The Mayor Project Event

Recently, BiggsKofford hosted an event highlighting the various topics that are essential to The Mayor Project, which is slated to be on November’s ballot. In case you missed this event, a copy of the presentation handouts can be found here:

The Mayor Project: A Perspective on City Governance 

Funding is imperative for this initiative to be successful, and we believe that this is an issue our city must pass. We are requesting that you join us in contributing to this extremely important cause. We would be happy to discuss with you why we believe so strongly about this issue. Feel free to call Kurt, Chris or Jerry if you need more information before you decide to donate.

Jerry Biggs – (719) 661-1202
Kurt Kofford – (719) 661-9091
Chris Blees – (719) 649-8749

To make a donation to The Mayor Project, please make your checks out to The Mayor Project and mail to BiggsKofford, P.C., 630 Southpointe Court, Suite 200, Colorado Springs, CO 80906. You may also make online donations here.

Do you know the value of your business?

What color of car would you rather buy? Based on your personal preference, the answer to this question will affect how much you are willing to pay for a vehicle that is identical in all aspects other than color. You might ask what does this have to do with the Market Value of your business? Simply put, traditional valuation techniques generally ignore one important factor in their calculation, the buyer.

A traditional valuation certainly has its uses, particularly for IRS and litigation cases, such as determining value for a divorce settlement. However, they usually all assume a willing buyer exists and that this buyer doesn’t have any personal preferences outside of the normal industry standards.

Let’s go back to the car example, assuming a dealer has two used cars that are the same make, model, year, etc., but one is blue and the other is silver. They will almost certainly be priced exactly the same. However, if your preference is for a blue car, you would no doubt buy the blue car. In fact, the dealer would have to discount the silver car for you to consider that as an option. Therefore, your preference has effectively determined a higher value for the blue car over the silver one, despite the market suggesting that they are both worth the same.

So how do you apply this logic to the value of your business? If you’re thinking about selling your business sometime in the future, you probably have no idea of who will buy it and what their preferences are, so what can you do now to position your company to maximize value from an exit, and where do you start?

In terms of business acquisitions, there are generally two main buyer groups, each with very different views of what is important to them. These groups consist of financial and strategic buyers. Financial buyers generally consist of individuals or groups of individuals looking to invest in a business, whereas a strategic buyer is normally a company looking to add to its existing operations.

As an example, assume that after some initial research, you determine that the most logical and likely buyer type is a strategic buyer. You determine, based on other acquisitions in your industry, that the primary focus of most buyers is the quality of the customer base being acquired, rather than say the management team, who will most likely be surplus to requirements after the deal. Therefore, if the last five years have been spent investing and training a good management team these efforts could be ignored by the buyer who will discount this aspect of the business. However, if those efforts had been channeled into increasing and maintaining quality customers over the same time frame, the buyer would most likely pay a higher price for the business.

The above example highlights the impact of focusing attention on the right aspects, which we call Value Drivers, of the business to make it the most attractive to likely buyers when it comes time to sell in the future. Value Drivers can include, among other things:

• Customer Base
• Management Team
• Products & Services
• Competitive Advantages
• Location
• Quality of Financial Reports
• Financial Performance

While you can control and manage most of the value drivers of your business, other aspects specific to a buyer will also determine the potential value that they can justify paying, including:

• Risk Tolerance
• Required Rate of Return on Investment
• Ratio of Equity and Debt used to purchase the business
• Cost of Debt

The impact of these factors is not possible to plan for but is buyer specific and will result in different values being placed on exactly the same business by different buyers. They should be considered when negotiating an actual sale with actual buyers.

In order to position your business to maximize value when the time is right, we recommend going through the following exercises:

1. Undertake a market analysis of who is buying similar businesses to determine the most likely buyer type for your business.
2. Review recent transactions to determine what values are being achieved.
3. If possible, contact ‘typical’ buyers anonymously to understand the value drivers they are primarily looking for in an acquisition target.
4. Understand the level and source of debt that could reasonably be secured to finance an acquisition of your business so that you can estimate the likely ratio of debt and equity.
5. Perform a strategic planning session for your business to ensure the long term goals of the Company are focused on growing the right value drivers based on your analysis above.
6. Create Key Performance Indicators in order to track specific value drivers on a monthly basis and include as part of your monthly financial package to ensure efforts are maintained over time.
7. Review the process on an annual basis to ensure any changes in buyer types and value drivers are known and addressed in a timely manner.

If you have questions about knowing the value of your business, please contact Austin Buckett.

Benchmarking – Can It Help Your Business?

Many business owners think benchmarking is for big or troubled companies. But no company, regardless of size and performance, can afford to ignore it. In today’s changing business environment and economy, it’s hard to keep up with your competitors, and benchmarking allows companies to compare their productivity and efficiency to other businesses.

Two Types of Benchmarking

The first step in a benchmarking program is to understand what benchmarking is. Most of us know that it is the process of comparing your own company to others to identify areas in which you can improve your performance. However, there are at least two principal types of benchmarking: overall benchmarking and process benchmarking. Overall benchmarking looks at business performance in general, such as total return on capital.

It’s important to do both types of benchmarking. Overall benchmarking may tell you that you need to improve, but without process benchmarking you may not know how or where to improve. Overall improvements cannot be made without improving key processes.

Choosing Models

The second step in the benchmarking process is to choose the company or companies you want to benchmark. Many companies assume that they should benchmark within their own industries. Often, this assumption is correct. If you are below average, it’s a good idea to learn how to meet your industry average, and to do that you need to benchmark other companies in your industry. But if you want to excel, to become superior to your peers, you should look outside your industry for ideas. Motorola, for example, benchmarked L.L. Bean when it wanted to improve its order shipping process.

Where can you find benchmarking data? Most experts agree that within the industry, you should contact key executives such as vendors, trade associations, competitors, former employees and customers for suggestions. You should also obtain analyst reports, proxy and financial statements and 10Ks from industry competitors. Outside the industry, it would be best to obtain annual reports from publicly traded companies and investigate private firms in publications such as Ward’s Business Directory or Dun & Bradstreet.

Setting Benchmarks

The third step in the process is to identify benchmarks. What do you want to compare? This is the most complex stage of the benchmarking process.

It’s critical that the benchmarks you choose reinforce the company’s strategy. If you want to offer the best price, you must set benchmarks that are different from a company that focuses on total customer satisfaction. For example, Nordstrom benchmarks would be very different from K-Mart’s benchmarks.

To choose proper benchmarks, keep in mind the stakeholder categories of any business: customers, employees, vendors and shareholders. Determine which of these relationships you are trying to improve upon with your primary goal, but keep in mind that they’re all related. For example, if you try to improve customer satisfaction, you should also ensure you maintain sufficient returns for your shareholders. A complex set of relationships needs to be balanced.

Comparing Data

After you have determined who and what you want to benchmark, you can begin the benchmarking process. Although the process involves the close scrutiny of another company’s methods, taking a tour of another company’s plant to learn how it works isn’t enough. You’ll also need to scrutinize the other company’s business goals, operations and finances.

Your accounting firm can help in these areas. Some companies prefer that their accounting firm focuses only on financial benchmarking, but this often provides inadequate information. Many companies work with their CPA firms to design a “Balanced Scorecard”. A Balanced Scorecard brings both financial and nonfinancial measures clearly into view. It measures traditional financial data like total return, inventory turnover and margin. It also measures nonfinancial data, like market share, relative quality and employee satisfaction.

Take Action

The final and critical step is to make changes based on the benchmarking process. All too often, companies go through the benchmarking exercise but don’t take the actions needed to improve or give up when improvement is not seen fast enough. Benchmarking, however, is not the only analysis companies should make; it’s simply one element of a comprehensive improvement program.

If you have questions about how your company could benefit from benchmarking, please contact Austin Buckett.

What is your Triple Bottom Line?

Sustainability has become the newest buzz word in business, but what is a sustainable business? A truly sustainable business considers its triple bottom line or impact on economic, social and environmental resources. What is the value of making your business sustainable? The overall goal is to reduce the negative impact and improve the positive impact to all three areas.

As a member of the Pikes Peak Sustainable Business Network (PPSBN), BiggsKofford recently formed a green team within our office. The green team met with the PPSBN’s assistant director, Jackie Rockwell to assess our triple bottom line. Being CPAs and entrepreneurs, we were fully aware of our financial status and what we previously believed to be the double bottom line that mattered most.

Our social impact was fairly strong as well. BiggsKofford has always been involved in the community and we are extremely involved in the non-profit arena. Employees are able use work time to volunteer, sit on numerous non-profit boards, and both the company and employees contribute monetarily within the community. Not to mention the heavily discounted services we offer to non-profits.

However, the environmental line of our triple bottom line had not been as seriously addressed. Although our audit department was already paperless, surely there was more that could be done to lessen our environmental impact. During this process we found was that making changes to reduce our negative impact did not require not mind bending concepts or even invasive changes. There were a number of small changes that were easily made without much cost or inconvenience to clients and employees. Some of those small improvements include serving clients water from a filtered water system as opposed to buying bottled water, stocking the break room with dishes and utensils purchased from Goodwill as opposed to buying disposable, turning off computer screens at the end of the day, and of course recycling aluminum, paper, plastic and cardboard.

Larger initiatives do require some employee time to implement and adjustments to policies and procedures, but overall the changes made have actually improved efficiency and either didn’t incur additional cost or actually saved money. We started by evaluating our larger cost areas, paper and printing transitioning many internal processes paperless. We continue to working toward more paperless processes such as paperless billing, increasing the number of tax returns filed electronic ally, and electronic delivery of tax returns where applicable and accepted by clients.

One of the unexpected side effects of these changes is the strong buy in from employees and their enthusiasm to participate and share ideas. Taking steps toward sustainability are beneficial for all involved. A sustainable business can create value for clients, employees, owners and the community using the triple bottom line concept.

Need help with your business loan?

Recently the Colorado Springs Business Journal published an article entitled “Delinquent loans hurting local banks”, giving a good perspective of what businesses and banks are facing alike when it comes to financing in this economy.

If your business is facing any of these issues:

• You can’t renew your line of credit.
• Your loan has a balloon payment, but the bank won’t extend.
• You have an opportunity to expand your business, but you can’t get the financing.
• What are you to do to keep your business afloat?

BiggsKofford has developed solutions:

• We can help you develop, plan and present your financial story for lenders and capital sources.
• We have successfully placed clients with new lenders, when others have turned them down.
• We have identified alternative capital sources – when traditional lenders won’t do the deal.

For more information on how BiggsKofford can help, contact Chris Blees or Austin Buckett. You can also find more information on capital sources here.

Auditing the Auditors

Consider these scenarios:

1. You just received a regulatory notice in the mail from the government agency that regulates your company or organization, informing you that the audit of your company didn’t meet the required standards. The notice uses threatening language to spell out the negative consequences of not complying. What went wrong?
2. You just received your company’s audit report in the mail and you realize that you have had very little interaction with your auditors. Instead of reaping the side benefits of insights and recommendations from the auditors outside perspective developed while auditing your organization, all you got were the pieces of paper you are required to give to the bank. What went wrong? Could this situation have been changed by taking different steps when choosing a CPA firm?

Aren’t all financial statements audits created equally?

The answer is a definite no! Audits are not a commodity in which one gallon of gas is just like the next. Yes, there is a large body of professional standards to guide all auditors in the performance of an audit and reporting on financial statements, but there is a wide variance in actual practice as to how those standards are followed.
The professional auditing and reporting standards are broad enough and flexible enough to allow for the uniqueness of different companies and organizations and the different approaches of CPA firms performing the audits. This is as it should be, because no two organizations are alike and professional judgment is still the most important element of an audit.

When an audit is not an audit

Unfortunately, in my 26 years as a CPA and an auditor, and my experience over the last four years on the Colorado State Board of Accountancy, I have learned that some audits are better than others, and a few are downright bad. There are many factors that go into creating a superior audit, including the approach, skills, knowledge and time allocated to the audit. Most of these are factors in arriving at the cost of an audit, yet many organizations and companies select their auditors on the basis of cost alone as if the audit by one CPA firm is the same as the next.

How big is the problem?

No one knows for sure how many sub-standard audits there are, but recent studies in certain sectors have revealed concerning deficiencies. Substandard audits have become enough of a concern for the department of Housing and Urban Development (HUD) that they are considering a proposal to require any auditor performing an audit to be submitted to them to be from an approved list, which would allow them to exclude auditors who have not been performing audits up to the required standards.

What to Do? Our Recommendations

The first thing to consider is the competence and longevity of the firm or accountant that you are engaging to audit your company. How long have they been in business? What is the firm’s professional standing and experience in your industry? Do they list references in their proposal for similar work and similar industries that they have done work for in the past? Check the Web site for the Colorado State Board of Accountancy to see if they have had any complaints filed against them. Not only should you find out if the CPA firm is a member of American Institute of Certified Public Accountants (AICPA), but you should inquire how they have used their membership to improve their audit quality. For example, the AICPA has Audit Quality Centers for specialized areas such as employee benefit plan audits, where members can join to access resources to improve the quality of their audits. Also, check to see if they are in good standing with the Colorado Society of Certified Public Accountants (CSCPA). Both organizations require audit firms to conduct tri-annual peer reviews (an audit of the auditors).

Ask them for their most recent peer review report and discuss the finding of their peer review with them to determine what suggestions for improvement were made.

And of course, it’s important to take a detailed look at the proposal. Are they proposing in writing that your company’s needs will be met and to the proper regulations? When looking at proposals to decide on a CPA firm, many companies put together an audit committee to come to a decision as a group.

In my position with the State Board of Accountancy, I’ve seen situations where businesses or organizations have made bad decisions in choosing CPAs when it came to their audit. These situations haven’t made headlines, but bad situations happen more than what I would like to see.

The Bottom Line

Selecting an auditor based only on cost is not a good idea. Often the old axiom applies “You get what you pay for”, so make sure you are reaping the benefits that an audit should bring to an organization.

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Tagged Accountants, Audit & Assurance, Business Consulting, Colorado, Colorado Springs, CPA, Financial Statements, Kurt Kofford
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Using Financial Statements to Grow Your Business

June 01, 2010

Braden Hammond Sr. Manager Send Email View Full Bio

I have had people tell me that, while they understand why financial statements are necessary, they believe using them to run their business is like driving a car by looking into the rearview mirror. It’s true that historical financial statements have limited usefulness for decision-making. However, forward-looking or forecasted financial statements can be a powerful tool to help you grow your business.

To get the most out of your forecasted financial statements you should (1) start with your long-term goals, (2) go beyond the income statement, (3) identify milestones and incentivize employees to achieve them, and (4) monitor your progress.

Start with your long-term goals

Hopefully it’s apparent that the financial statements I’m referring to are not the stereotypical budget you hastily prepare, by adding x% to last year’s revenues and expenses, and then stick in a drawer until next year. Instead, these financial statements should be based on your long-term goals.

For example, assume your goal is to sell your business in five years for $10 million. You know that businesses in your industry typically sell for five times net income, so you need net income of $2.5 million five years from now to achieve your goal. You can work your way up the income statement to determine the revenues that you need to generate that specific net income and then fill in the rest of the details. Finally, you can forecast income statements for years one through four to get from where you are today to where you want to be in five years.

Go beyond the income statement

No one ever bought a vacation home with net income. To do that, you need cash flows. So, while forecasting the income statement is a great first step, you also need to forecast the balance sheet.

Growing a company generally requires upfront cash investments in advertising, inventory, equipment, personnel, etc. To be successful, you need to be able to predict when you will need that cash and where it will come from. How much extra cash do you need? Can it be generated internally? Will you need additional debt or equity financing? The only way to answer these questions is to forecast the balance sheet.

As an ancillary benefit, simply going through this process can help keep you focused on managing the balance sheet. For example, an active focus on reducing the time it takes to collect accounts receivable can accelerate your cash flows and reduce bad debts. Both will reduce the amount of external financing needed to fund your growth.

Identify milestones and incentivize employees to achieve them

One of the primary benefits of creating forecasted financial statements is to create expectations for employees in carrying out their job functions that lead towards your long-term goals. By soliciting feedback from key managers and employees in the forecasting process you can create buy-in for the overall objective.

An important element of any growth initiative is incentivizing your key managers and employees to align their goals with your goals for the company. Ideally, the milestones on which you base incentives should be a challenge to achieve, but also attainable, objectively measurable and based on things which your employees can affect.

The costs of these incentives should be included in your forecasted financial statements.

Monitor your progress

I recommend rolling financial statements for each of the next 12 months and then yearly financial statements from that point as far into the future as is practical. Each month you should compare your actual results with the forecasted financial statements to ensure the long-term goal is realistic and that you’re on target. If you’re not on target, or if circumstances have changed, you should update the financial statements to reflect your revised expectations.

Reviewing your progress monthly you will renew your focus on your long-term goals and improve your chances of success.

If you follow these recommendations you will find that your financial statements become less like a rearview mirror and more like a roadmap for growing your business. Clearly identifying your goals and monitoring your progress will give you peace of mind and the process will provide you with deeper insights into your business.

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Tagged Accountants, Braden Hammond, Business Consulting, Colorado, Colorado Springs, CPA, Financial Statements
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PTAC Comes to Colorado Springs

April 01, 2010

Michael McDevitt Director Send Email View Full Bio

Original article published January 22, 2010 at Colorado Springs Business Journal

In case you haven’t heard, Colorado was recently awarded a Procurement Technical Assistance Center (“Center”) in September 2009.  The Center’s office is located right in Colorado Springs, at 6 South Tejon.  Getting a Center in Colorado was a long, difficult two year process led by several key members of the local business community.  I have the honor of serving as the Chairman of the Board of the Colorado Center, and I wanted to tell the community more about who we are and what we do.

What is a PTAC?

You’re thinking, ‘Okay, great.  Colorado now has a Center, but what is it and what does it do?’  Procurement Technical Assistance Centers (PTACs) are offices (over 300 nationwide offices) that form a nationwide network of procurement professionals working to support small businesses seeking federal contracts from the Department of Defense and other government agencies.

During the 1980s, Congress became concerned that small businesses were not able to compete effectively against larger businesses for federal contracts.  The Procurement Technical Assistance Program (PTAP) was authorized by Congress in 1985 in an effort to expand the number of businesses capable of participating in the Government Marketplace.

PTACs are the bridge between buyer and supplier, bringing to bear their knowledge of both government contracting and the capabilities of contractors to maximize fast, reliable service to our government with better quality and at lower costs.  PTAC counselors have backgrounds in government acquisitions, and virtually all receive ongoing training to keep pace with continually evolving acquisitions procedures and policies.

Colorado PTAC

Our Colorado PTAC is a non-profit entity, and operates under an agreement between the federal agency that administers them nationwide, the DLA, and Colorado’s Office of Economic Development & International Trade (OEDIT).  Both the DLA and the OEDIT allocated funds for the operation of the Colorado PTAC.  Additionally, several El Paso County local businesses funded the remaining required amounts to operate the PTAC for its initial year.

The Colorado PTAC’s mission is to provide Colorado small businesses with training, support, and counseling, on government contracting, with the ultimate goal of assisting these small businesses in being awarded federal contracts.  In addition, the Colorado PTAC will also help small businesses do the same for Colorado state government contracts and local government contracts.  The Colorado PTAC is organized to provide this support to small businesses throughout the state.

Why is the Colorado PTAC important and how will it impact the local community?

The small business community here in Colorado that sought to do business with the federal government have been at a distinct disadvantage for many years.  Small businesses in other parts of the country that have PTACs have been receiving support from their local PTAC and were better prepared to win federal contracts.  Our Colorado small businesses were left without this critical support, trying to compete with small businesses outside our state that had PTAC support.

One of the reasons the Colorado PTAC was located here in Colorado Springs was the understanding of how important government contracts are to the local community.  The business community in El Paso County relies heavily on federal contracts.  The critical assistance provided to local small businesses by the Colorado PTAC will help increase the number of federal contracts awarded to them, by making them better able to compete with small businesses outside the state and win these contracts.

The Colorado PTAC also helps large government contracting businesses.  These businesses often need to partner with small businesses as part of the contract requirements they are awarded by the federal government.  So, they need small business partners who understand government contracts, have experience with government contracts and can help them meet their contract requirements.  The Colorado PTAC helps these large businesses by training and supporting their small business partners.

The director and counselors at the Colorado PTAC are experienced government contracting experts.  They are providing invaluable government contracting support to our local small businesses.  They have been in operation for only a few months, but their results so far have far exceeded targeted expectations.  We fully expect their results to continue to exceed targets, meaning local small businesses will be better at getting government contracts.

If you think the Colorado PTAC can help your business, call (719) 434-3470 or stop by their office.  They are ready and waiting to help you meet your government contracting goals.

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Tagged Accountants, Colorado, Colorado Springs, CPA, Government Contracting, Michael McDevitt, News
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