STRATEGY Industry Dictates Profit Potential, Strategy · Potential, Strategy The profit earned by a company is a function of both industry structure and strategy. The former is a

JANUARY/FEBRUARY 2013 Volume 37, No. 1 fspa.TheBusinessOwner.com

Industry Dictates Profit Potential, StrategyThe profit earned by a company is a function of both industry structure and strategy. The former is a powerful, sometimes overwhelming force, and is largely out of one’s control. The latter is firmly within one’s control. The appropriate profit-maximizing strategy a firm should take, however, can be found in an analysis of the structure of the industry in which one operates.

The forces of industry structure are:

• BarrierstoEntry• ThreatofSubstitutes• CustomerBargainingPower• SupplierBargainingPower• CompetitorRivalry

These five competitive forces determine how much profit the firms in an industry are able to earn. Why? They determine the prices that can be charged, the costs that must be paid, and the investment that is required toenterandremaininanindustry.Saleprices,costs,andrequiredinvest-ment are the elements of profit and return on investment.

The profit that is earned by the players in an industry, therefore, is not a matter of the type or function of the products or services but of the struc-ture of the industry. The strength of each of the five forces varies from in-dustry to industry and can change over time. The result is that, at any point intime,notallindustriesarealikefromaprofit-makingstandpoint.Someallow higher profits than others.

Industry analysis can be used to decide when to enter and exit an industry, or a particular segment of an industry. It can also be used to craft a strat-egy that will lead to maximized profits, given the realities of the industry’s structure.

Barriers to Entry: Competitionmeans lowerprofit. Industries thathavelow barriers to entry will attract new entrants, particularly during periods of robust demand. Any supply shortage that allows prices to be raised, and higher profit, will be swiftly eliminated.

Considertheresidentiallawncareindustry.Anypersonwhocanpurchaseor borrow a pickup truck, lawn mower, edger, broom and trash bags can

S T R A T E G Y

continued on page 6

Industry Dictates Profit Potential, Strategy ................ 1Get Critical Customer Intelligence ................................... 2To Maximize Sale Value, Involve Key Manager ........ 3Book Review: Total Recall .................................................... 4Loan Covenants .......................................................................... 5Cash Flow Forecasting ........................................................... 8Behave Like a Corp. or Lose the Shield ...................... 102012 Index of Articles ........................................................... 12

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Email: [email protected]: www.fspa1.com

Industry Dictates Profit Potential, Strategy ................ 1Get Critical Customer Intelligence ................................... 2To Maximize Sale Value, Involve Key Manager ........ 3Book Review: Total Recall .................................................... 4Loan Covenants .......................................................................... 5Cash Flow Forecasting ........................................................... 8Behave Like a Corp. or Lose the Shield ...................... 102012 Index of Articles ........................................................... 12

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Get Critical Customer Intelligence

M A R K E T I N G

Customer feedback is critical. You must know what the customerneeds, wants, and will pay extra for. You also need to know what she likes and why, and what she dislikes and why. While we’re at it, you might also want to know what your competitors are doing (and not do-ing), and the things customers like and dislike about the same.

It can be as simple as picking up the phone and inquiring. Most people are flattered by the query and are willing to share. Train your employees to ask, and to engage customers and prospects in conversation. It also builds relationships.

It is easy and inexpensive to electronically gather data. Web-based surveysoftware,suchasSurveyWriter.com,makes iteasy tocreatesharp-looking surveys, deploy them, and compile the data into easy-to-readreports.Here'showSurveyWriter.comworks:

1. Log onto SurveyWriter.com through an Internet connection andcreate an account.

2. CreateaquestionnaireusingSurveyWriter'squestioneditorsoft-ware. The wizard guides you through creation of advanced-logic questions. For example, a customer’s answer to a particular ques-tion can trigger additional, related questions that others don’t see.

3. Use the formatting tools to create the look and feel you desire.

4. Seamlesslylinkthesurveytoyourownwebsite.Noonewillever know that you are not hosting the survey. Or, if you wish,youcanhaveyourrespondentstakethesurveyatSur-veyWriter.com.

5. SurveyWriter.comtabulatesresultsautomatically,inrealtime.Youcan view them anytime in presentation-ready charts.

If you wish, you can download the results to a spreadsheet or similar application. No programming experience necessary. All you need is a computer and Internet connection.

SurveyWriter.comandsimilaronlinesurveytoolsmakeiteasytogath-er intelligence from customers and prospects all over the world, in-stantly.ForSurveyWriter,thecostisjust$1.25percompletedsurvey(minimumof200completedsurveysperproject).Noupfrontcostsandtraining is free!

What you don't know can hurt you. Get in the know.

Happy New Year.

We each have an opportu-nity to make 2013 a mem-orable year. A year – when it is done – we can look back upon with pride for the brave and sober deci-sions we made, and what we accomplished.

The question for today is – where do you want to be five, ten, and twenty years from now? Do you have it clearly in your mind? Only by deciding and clearly seeing the future can you take the steps to make it a reality.

It is always a pleasure to serve you, the own-er of a private company. Our goal is to provide you with the information you need to survive, and thrive. In this issue you will find inspira-tion, advice and how-to information you can use. In our free market capitalist system, you continue to have incredible freedom. Don’t let anyone tell you differently. Don’t get caught up in the rhetoric. You know the rules. It’s the game of life and business. You can do it. It’s survival of the fittest.

You read. You work. You have experience. You are fit. Make it happen.

JANUARY/FEBRUARY 2013 3THE BUSINESS OWNER THEBUSINESSOWNER.COM

To Maximize Sale Value, Involve Key Manager

B U S I N E S S S A L E

FewbusinessownersunderstandthereISawaytheycansell their businesses, when they decide the time is right, for the very highest price possible AND serve well the people that have served them well over the years, i.e., the loyal and talented managers, employees, customers, etc. Business owner-sellers who lack this knowledge and understanding will attempt to sell the business without the full cooperation of the key manager(s). The result is a less than optimal transaction for all.

Sell to thewrongcompany,orwith thewrong typeoftransaction, and the business is put at substantial risk. In short, the “good thing we had going” can be ruined unnecessarily and, dare we say, tragically. Further, the important and personal long-time relationships between owner and key employees can be destroyed.

Business sale price can best be maximized when the management team is involved, has a financial incentive to make sure it goes well for the owner-seller, and the ex-

perienced managers are committed to remaining with the business. This is called continuity. Every business buyer wants it, and needs it.

Many buyers don’t want to manage the company themselves; they justwant to own it (all or part). They’ll pay top dollar when the key managers are involved in the sale process and are commit-

ted to staying with the business. Often, they’ll provide equity to the manager(s) who commit to stay. If the ex-perienced managers have equity capital they can contrib-ute, many buyers will gladly allow them to buy in. So, if done right,whatwasa very confusing, stressfuland suboptimal process for the seller can become an exciting win-win-win endeavor. The important long-term relationships are not harmed, but rather strengthened.

Thousandsof sourcesof equity capital in theU.S. andaround the world are willing and able to pay top dollar

for great companies, leave the tenured management in place, provide meaningful ownership to the manager or management team that remains, and mentor and sup-port the new owner-managers in continuing to grow the business. Ideal candidates for this type of transaction have the following characteristics:

• Thecurrentownerwishestosellbutdoesnotneedtosell.

• Thecurrentownerwants topdollar,butsuch isnothis/heronlygoal.Particularly,theselleralsowantsto:

» “Take care" of her employees and secure the best deal going forward for the same.

» Do her best to place the business in a position where it has a good chance of continuing to succeed.

»Seethebusinesscontinue in thefacility/commu-nity in which it operates.

Smallercompanies,ofcourse,maynotbeabletoattract“private equity.” Buyers of smaller businesses tend to beotherindividualsorindustrypeers.Still,considerationshould be given to how the key manager or managers might be able to become your ally in the effort. Or, at least, respected – and their interests considered – dur-ing the process. In fact, the current non-owner business manager or managers might be the best buyer for the business.They’lljustneedalotofhelp.

If you are the talented and tenured manager and/or mi-nority owner of a company that meets the above cri-teria, show this article to your controlling owner(s). If you are the controlling owner of a business that meets the above criteria and your motives fit what we’ve de-scribed, we hope you will give this serious thought. There’s a lot at stake.

Buyers pay more when the key man-agers are involved in the sale and are committed to stay-ing with the busi-ness.

JANUARY/FEBRUARY 20134 THE BUSINESS OWNER THEBUSINESSOWNER.COM

Total RecallB O O K R E V I E W

Although not a “business book” per se, it’s an amazing, real-life story of vision, commitment, hard work, and unabashed success. The story of Arnold Schwar-zenegger – as he himself tells it in his new autobiography, Total Recall: My Un-believably True Life Story – is as inspiring as it is entertaining. He grew up poor in post World War II Austria and found suc-cess as a bodybuilder, movie actor, politi-cian and, yes, businessman and investor.

Arnold was born into a working-class family in 1947 in war-torn Austria. The country was occupied by the Allied armies, which had liberated Austria from German occupation.The Schwarzeneg-ger family struggled through economic depression and widespread famine. Food was hard to come by.

At the awkward age of thirteen, Arnold’s turn came to accept a page of newspaper from his teacher and write about anything in it that inter-

ested him. There was an article about a Karl Marnul, who held the “Mr. Austria” bodybuilding title. He had bench-pressed 190 kilos (418 pounds), a world record. What struckSchwarzeneggerwasthepictureofMarnulwork-ing out on the beach. He had a massive build, tiny waist, and was wearing what appeared to be reading glasses. Arnold thought only intellectuals wore glasses, and was fascinated that a guy could be both smart and powerful.

Arnold began to take an interest in sports and girls. He befriended and hung around athletes, including an older boy who“worked out.” Slowly,Arnold started workingout, too, and became friends with bodybuilders. He want-ed to look good and attract girls.

Soon,hemetKarlMarnulhimself.Arnoldrecallsthathewas strong, looked amazing, had beautiful girls hanging around, “and drove an Alfa Romeo.” He was also an in-tellectual.Hereadtheclassics,suchasPlato,andwastotally into “balancing the body and the mind.” It was a religion to Marnul. He became Arnold’s idol.

Arnold started working out for hours each day. His body

responded. And then he saw a cheap U.S. film titled, Hercules and the Cap-tive Woman. Hercules was played by an Englishman named Reg Park. Who isthis guy that looks like a million dollars, stars in movies, and probably makes a lot of money? And how did he become this person?

Schwarzenegger readU.S.-basedMus-cle Magazine, which dominated the worldwide market and regularly fea-tured bodybuilders in and around Mus-cleBeach(locatedinMalibu,California).RegParkregularlyappearedinit,andAr-nold learned that – after winning cham-pionships and setting records – Reg was

invited to America by the owners of Muscle Magazine. HewasthenpickedtostarinHerculesandtheCaptiveWoman, sent to Rome for shooting, and found success and fame.

Arnold decided he’d take the same path. Become the greatest bodybuilder in the world, get invited to America, be featured in magazines, become an ambassador for body-building worldwide, and parlay all of the above intostarringrolesinU.S.-made movies. Oh, and be a “businessman” and adored by women!

He did it all in rapid suc-cession. He won the bodybuilding titles, and was invited by the owner of Muscle Magazine to movetoCaliforniaandgetpaidtoworkoutfull-timeandwrite a column about his methods and techniques. He became close friends with the owner of the publication, Joe Weider, who also owned real estate, a nutritional supplement business, and a line of exercise equipment. SoonafterarrivingintheUnitedStates,inadditiontohiswork for Weider, he started a bricklaying business with

continued on page 7

As inspiring as it is entertaining. Soon after arriving

in the United States, he started a brick-laying business. He then used profits from his bricklaying business and body building competi-tions to start a mail order business.

byArnoldSchwarzenegger


Loan CovenantsF I N A N C E

A loan covenant is a provision in a loan agreement that requires the borrower to do certain things or maintain certain conditions, or that limits or forbids certain things so long as loan funds are outstanding. Typically, violation of a covenant will allow the lender to declare the loan in default, cause additional fees to be charged, trigger more stringent covenants, or accelerate the loan.

The borrower and lender agree to the covenants when the loan is negotiated. Covenants are memorialized in

the loan documents. Their purpose is to help the lender limit its risk, avoid material credit quality ero-sion during the term, and protect their right to and need for repayment.

Covenants can be af-firmative or negative. Affirmative covenants require the borrower to do something, such as periodically submit finan-cial statements or make interest payments in a timely manner. Negative

covenants prohibit the borrower from doing something, such as borrowing more money or selling the business without payoff of the loan.

Here are covenants commonly found in business loan documents:

Reporting Requirements: For example, the borrower might require the lender to submit their financial state-ments every month.

Leverage Cap: Typically, a debt-to-equity ratio that must not be exceeded, such as 2:1 debt to equity.

Liquidity: May mandate minimum liquidity, such as a current or quick ratio that exceeds a certain threshold, such as 1.25.

Debt Service Coverage: A requirement that, for exam-ple, earnings or operating cash flow exceed the total debt service required. Often, it’s gauged by calculating a debt service ratio, with the profit or cash flow as the numera-

tor and the debt service as the denominator. Dividing the numerator by the denominator yields a ratio that will ex-ceed 1.0 so long as the numerator is the larger number.

Interest Service Coverage:Similartotheabovebutiso-lates the borrower’s ability to meet its interest burden. Often effected through a requirement to maintain a mini-mumInterestServiceCoverageRatio(ISCR).

Loan-to-Value: Typically used when a loan is secured by particular assets, such as real estate, public securi-ties, commodities or precious metals. Requires the total amount borrowed to remain below a certain percent of the value of the underlying property. For example, 75% loan-to-value.

Change of Control:Simplystatesthattheloanwillhaveto be paid off before there is a change in who controls the business (from a legal/ownership standpoint).

Key Man Insurance: Requires that, while the loan is in place, a certain dollar amount of life insurance be main-tained on the life of a key person or persons that work in the business. Typically, the death benefit is assigned to the lender.

Borrowing: Often, the lender will prohibit the borrower from borrowing additional funds from other sources with-out prior approval from the lender.

Limit on Owner Compensation/Dividends: As a means to protect the financial health of the business (borrower) and force the borrower to place a priority on loan repay-ment, loan documents will often limit the amount of money the business can return to equity holders while the loan is outstanding.

For both borrower and lender, covenant compliance can ensure key indicators of financial health and solvency are periodically reviewed. In this way, it is a means to alert the parties to trends that could be troublesome to both.

A loan covenant is a provision that requires the bor-rower to do certain things or maintain certain conditions, or that forbids cer-tain things.

"Jealousy is the tribute mediocrity pays to genius."

Archbishop Fulton J. Sheen


enter the residential lawn care business and charge any amount that will exceed their cost of gas, oil, trash bags, etc. The entrants drive prices down and make it difficult to charge enough to earn attractive returns.

Efforts could be made to raise the barriers to entry, such as getting laws enforced that prevent the hiring of illegal aliens, getting legislation passed that would require all providers to be bonded, outlawing the use of older equip-ment, etc. In most industries, however, it’s an uphill battle.

Of course, one could also employ certain strategies to attempt to maximize profit in the face of the reality of aggressive com-petition. First, one could radically reduce costs to address the lack of pricing power and, thereby, earn acceptable profits. Con-versely, one could adopt a

strategy of differentiation to try to command higher pric-es. For example, developing a brand for safety, reliability, trustworthiness, compliance with the law, or “best of class” quality and service.

Threat of Substitutes: Substitutes are alternatives toyour product or service. Online bill payment is a substi-tute for printed checks. Leasing a car is a substitute for buying.Publictransportationisasubstituteforpersonaltransport.UPSisasubstitutefortheU.S.PostalService.Email is a substitute for the telephone. The ER is a substi-tute of sorts for health insurance.

If you are in the business of selling new autos and you do not offer leasing, the threats posed by those that offer the alternative could have (and likely have had) a damaging ef-fect on your business. Another example is the threat that full-service copy shops face from the ever-cheaper and more functional copy machines. As copy machines become cheaper to buy and maintain, the prices that companies are willing to pay for the service of a copy shop declines.

Strategies to compete against the threat of substitutescould include reducing operating costs to a level that matches the price-value offering of substitutes, adding fea-tures to your product or service that cannot be matched by substitutes (as some cell phones have added paging and

short-wave radio capabilities to try to capture sales from those stand-alone products), offering compelling substi-tutes yourself, or educating consumers about real or per-ceived risks or deficiencies of substitute offerings.

Customer Bargaining Power: Do your customers (buy-ers) have a variety of places where they can get the productorserviceyouprovideatgoodprices?Canyourcustomers switch to purchasing from one of your com-petitors with little cost or disruption? Do you have a single customer that accounts for a large portion of your rev-enue? If so, your customers have a lot of power that can make it tough for you when you move to raise prices. Industries that are characterized by powerful buyers tend to earn lower profits. For example, beverage distributors tend to earn lower profits as dominant brands such asCoke,Pepsi,Gatorade,Budweiser and Miller use their power to garner for themselves a higher per-cent of the profit.

Strategies to combatbuyer power might in-clude developing real or perceived switching costs, i.e., things that cost the buyer money or time if he or she choos-es to move his or her business to one of your competitors.Suchthingscould include owning the molds (custom manufacturers), integrating systems (which require “unwinding”), or offering services that competitors would have a hard time duplicating, e.g., complete order fulfillment, complex reporting or rapid delivery. Other tactics might be reducing customer con-centration, selecting customers that you have a unique ability to serve well or inexpensively, or developing fea-tures or benefits your customers value and cannot get from your competitors.

Supplier Bargaining Power: How critical are your suppli-erstoyourbusiness?Couldyoueasilychangevendors?Or would the loss of a particular one be damaging? For example, you distribute the top name brand in your in-dustry niche. The brand your competitors covet and that

continued from cover page

Industry Dictates Profit Potential, Strategy

continued on next page

Five competitive forces determine how much profit the firms in an industry are able to earn.

The profit that is earned by the play-ers in an industry is not a matter of the type or func-tion of the products or services but of the structure of the industry.


commands a sixty percent market share. If your vendor wished to do so, they could use this clout to squeeze profits from your pockets into theirs. If they can, they probably already are. This is supplier power.

Strategiestobattlesupplierpowermight includedevel-oping strong and loyal relationships with key, high-vol-ume customer accounts that might be willing to switch brands with you if your supplier drops you as a reseller (assuming you could pick up a similar line of products). Or building your owner-buyer (customer) power by growing market share or developing a co-operative buying organi-zation to bind together the collective power of many.

Competitor Rivalry: As you may know all too well, the competitive culture between peers in your industry can greatly affect the profits you earn. An industry that is characterized by ruthless, senseless competition among competitors is one that earns meager profits. On the other hand, higher profits tend to be earned in industries where civil and sensible attitudes prevail.

Every business owner should consider how their compe-tition might react to new initiatives. Taking into account howamajor rivalmight respond toyourefforts towinbusiness from his or her core customer base is prudent business management.

While industry structure is made up of forces over which a firm has little in-fluence, appropriate com-petitive strategy can in-fluence the structure and allow a firm to maximize profits in light of indus-try realities. Competitivestrategy, then, both re-sponds to the environ-ment and attempts to shape it in one’s favor.

Understanding industry structure can help a busi-ness owner choose between the two primary “generic” strategies – cost and differentiation (both of which are pe-riodically discussed in this publication). It can also provide insight into strategic and tactical moves that can improve profitability, as discussed herein.

In 2013, you will make renewed efforts to improve prof-itability. Use this article to assist you in understanding forces that impact your profitability. Then, plot a strategy that will take you to a more profitable future.

The basis of this article is the work of Michael E. Porter as published in his two primary works: Competitive Strategy and Competitive Advantage.

a bodybuilding partner. He used profits from the brick-laying business and body building competitions to start a mail order business, selling bodybuilding and fitness equipment, and instructional tapes. He then started in-vesting in real estate, first buying apartment buildings. He and his wife opened a restaurant in their hometown of Santa Monica.As his success grew, he participatedin real estate development ventures, invested in real es-tateholdingcompanies,andco-foundedthePlanetHol-lywood restaurant chain. More recently, he became an owner of and investor in Dimensional Fund Advisors, an investmentfundthatcurrentlymanages$300billion.

Of course, he also became a movie star, married a Ken-nedy,andbecamegovernorofCalifornia.

He’s not perfect. He’s human. And he explains it all in his book. But for anyone looking for inspiration, or to see how vision plus unyielding determination can make dreams come true, this book is for you.

There’s a LOT more to the story, and I think the book sheds light on HOW he was able to do what he did. For this reason, business owners – and aspiring business owners – might be well served by giving it a read.

continued from page 4

Total Recall

Understanding industry structure can help an owner choose between the two primary “generic” strate-gies – cost and differentiation.


Short-Term Cash Flow Projection WorksheetStartwithyourcurrentcashbalance,addthecashyouexpecttoreceiveintheperiodandthen subtract the cash you have to pay out during the same period.

Beginning cash balance

+ Estimated cash sales

+ Estimated collections on credit sales

+ Transfers from savings/investment accounts

+ Other sources

+ Borrowing anticipated

Total cash available during period

- Bills to be paid

- Loan payments (principal and interest)

-Payrolltaxorincometaxdeposits

- Transfers to savings/mmda

- Other payments

Estimated ending cash balance

FROM FROM

TO TO DESCRIPTION

Cash Flow ForecastingF I N A N C E

Acashflowprojectionisaforecastofthedifference,overperiods of time, between cash coming into the business and cash going out of the business. The estimation or projectionofcashflowisapowerfulmanagementtool.If you were to choose one financial management tool to useonaroutinebasis,cashflowprojectionandanalysiswould be the one. By knowing your cash position now and in the future, you can:

• Make sure you have enough cash to purchase suf-ficient inventory for seasonal cycles;

• Takeadvantageofdiscountsandspecialpurchases;

• Properlyplanequipmentpurchases for replacementor expansion;

• Prepareforadequatefuturefinancingneeds.

Cash isthe lifebloodofyourbusiness.Onlycashpaysthe bills - profit does not. Know where your cash is go-ing, from where it is coming, and what the future holds. Cashflowprojection is the tool.The formand instruc-tions are below. The ability to predict and plan cash out-lays means that you won't be forced to resort to unex-

pected and costly borrowing (such as credit cards) to meet your cash needs.

How to Prepare a Cash Flow ProjectionPreparing a cash flow projection is something like pre-paring your budget and balancing your checkbook at the same time. Unlike the income statement, a cash flow statement deals only with actual cash transactions. De-preciation, a non-cash transaction, does not appear on a cash flow statement. Loan principal and interest pay-ments will both appear on your cash flow statement, as they both require the outlay of cash.

Cash isgeneratedprimarilybysales.But inmostbusi-nesses, not all sales are cash sales. Even if you have a retail business and a large percentage of your sales are cash, it is likely that you offer credit (charge accounts, term payments, lay-a-way, trade credit) to your custom-ers. Thus, you need to have a means of estimating when those credit sales will turn into cold, hard cash.

Cashflowprojectionsshouldbepreparedforshort-term(weekly, monthly) and longer-term planning purposes.


INSTRUCTIONS FOR SHORT-TERM CASH FLOW PROJECTION WORKSHEET

FROM TO Enterthestartdateandenddatefortheperiodoftimethatyouwouldliketoprojectthechangeincash.Startwiththecurrent date so that you have an accurate cash balance. Weekly increments are most frequently used for small busi-nesses. A computer spreadsheet will allow you to have many periods lined up right next to each other. One column’s projectedendingbalanceisthenextcolumn’sbeginningcashbalance.

Beginning Cash Balance Startwiththecurrentbookbalance(s)inyouraccuratelyreconciledcheckingandsavingsaccounts.Don’tusethelastbalance on your bank statement as it may be out of date.

+ Estimated cash sales Include only the cash sales that will occur during the time period.

+ Estimated collections on credit sales

Include collections on accounts receivable and credit card sales. Do not include sales that are expected to be purchased on credit during this time, unless they will also be converted to cash during the period.

+ Transfers from other accounts (savings, investment, etc.)

This line item may also be a “plug”, meaning you decide how much you should transfer in after you complete your cash flow forecast.

+ Other sources Other sources might include interest received, refunds, deposits, or other miscellaneous cash receipts. You would also include any capital from shareholders or partners.

+ Borrowing anticipated Entertheproceedsofanyloansthatyouexpecttocloseduringtheperiod,includinglineofcreditborrowings.Similarto “Transfers from ...” above, you may need to fill this out after you have completed the worksheet.

Total Cash Available The sum of your beginning cash balance plus all cash inflows during the period.

- Bills to be paid Use your accounts payable aging to help estimate bills that will be due during the time period.

- Loan payments Subtractanyloanpayments(bothprincipalandinterest)thatwillbedueduringthetime.

- Payroll tax or income tax deposits

Many small businesses fail to make timely payroll tax deposits because they aren't managing their cash flow and they don't have adequate cash available to make the deposit. Owners and officers are personally liable for payroll tax depos-its.Talkwithyouraccountantifyouneedhelpwiththisestimate.Makingaprofit?Putyourestimatedincometaxeshere as well, and make them.

- Transfers to savings/invest-ment accounts

Include here any amounts that you plan to transfer into investment accounts. You may want to leave this line blank until you have completed the worksheet and determined whether you will have excess cash.

- Other payments Include any miscellaneous payments such as security deposits, insurance premiums due or other items not included in “bills to be paid”. You can also include any partners’ draws or dividend payments.

Estimated EndingCash Balance

This is the estimated ending cash balance - the net of all the cash activity you expect during the period. This should be a "comfortable" balance. If this number is too large or negative, revisit transfers and proceeds from loans.

Purpose of Short-Term Cash Flow Projection (Weekly and Monthly)

• Todetermineshort-termcashposition.

• Toplantheamountofcashnotneededintheshort-termand, therefore, can be put in short-term investments or used to take early-pay discounts from vendors.

• To estimate cash needed for due obligations andworking capital requirements.

Purpose of Intermediate-Term Cash Flow Projections (12 months)

• Toshowhowmuchcashwill beneeded to run thebusiness in the coming year.

• Todeterminewherethecashwillcomefrom.

• Todetermineseasonalvariationsincashflow.

• Toestimateannualborrowingrequirementsandabil-

ity to make repayments.

• Supportinginformationforloanapplication.

Purpose of Long-Term Cash Flow Projections (3 to 7 years)

• Tosupportstrategicplanning.

• Todetermineequityneeds.

• Substantiationandsupportoflong-termdebtorequi-ty-raising efforts.

The level of detail needed in your cashflowprojectionwill vary depending on the complexity of your business.

This article originally appeared in The Business Owner (www.TheBusinessOwner.com), the periodical of choice for owners of small and mid-size private businesses. All rightsreserved,D.L.Perkins,LLC.Copyright2005.


An important reason you operate your business as a cor-poration or limited liability company, as opposed to a sole proprietorship or partnership, is to protect yourself from being held personally liable for debt of the corpo-ration.Still, formationoftheentity isnotsufficient.Toenjoy personal (shareholder) protection, you must dothe following:

Obtain Valid Incorporation:TheCorporationmusthavebeen set up correctly, according to the laws of the state in which the entity is formed. Typically, it begins with fil-ing an application, in the form of articles of incorporation, with the secretary of state for a corporate. If accepted, the state will issue a certificate of incorporation. The board of directors named in your application must then meet to adopt bylaws, elect officers and transact such other business as may come before the meeting and as required by state law.

Conduct Business as a Corporation: To maintain your “corporate veil” of protection, you must also do certain things dictated by state law. Most states require each corporation to hold annual shareholders’ and directors’ meetings and record the minutes of each meeting; maintain a corporate book; keep corporate funds sepa-rate from those of stockholders; and maintain financial records on the business. In some states, however, the requirements for “closely held corporations” may be re-laxed.Checkthelawsofthestateinwhichyourentityis organized.

Provide Adequate Financial: The shareholders must in-vest sufficient equity capital into the business to meet the reasonably anticipated requirements of the business.

Avoid Illegal Activity: If you use the corporation to commit fraud, the officers and directors can be held personally liable.

In addition, when executing agreements for the corpo-ration, officers and directors must clearly sign in the name of the corporation as corporate representatives, i.e., not as individuals. The corporation must file its own tax return, separate and distinct from the owner(s) indi-vidual return(s). The Closely Held CorporationMany companies have few shareholders, and the shareholders serve as the directors and officers. The

result is a flattened corporate structure that looks more like the following:

For closely held corporations, the statutory requirements – such as annual meetings of shareholders, elections of directors and appointments of officers – become merely a formality. Many small companies do not even bother. Fortunately, many states have enacted laws that relax the non-essential formalities on closely held corporations. Suchlawspermitoperationwithoutaboardofdirectors;allow broad use of shareholder agreements; make the annual meetings optional; and authorize the execution of documents by one person in more than one capacity.

To operate under these relaxed rules, some states re-quire the corporation both qualify as a closely held cor-poration (typically less than 50 shareholders) and elect “statutory close corporate” status. To avoid potential loss of the corporate shield, it’s critical you understand the laws of the state in which your company is incorporated and abide by them.

Figure 1 - Management Structure of Typical Closely Held Corporation

Shareholders = Directors = Officers

Behave Like a Corp. or Lose the ShieldR I S K M A N A G E M E N T

"The higher-ups want to see you, and the lower-downs want to make an appointment."


S T A T I S T I C A L D A T A O F I N T E R E S T

S&P 500 Historical Price-to-Earn-ings (P/E) Ratio

Source:Standard&Poor's

S&P500isanindexthattrackstheperformanceofthelargest500publiclytradedcompaniesintheUnitedStates.Price-to-Earningsratio(P/E)isonemeasureoftherelativepriceof,inthiscase,theS&P500.Stocks,i.e.,pub-lic equities, are valued, in part, by the amount of their earnings. Higher prices will generally follow higher earnings. In this graph we see that, relative to recenthistory,S&P500stockscurrentlyseemtobemoderatelypriced(when using this particular measure).

S&P 500 Historical Price-to-Divi-dends (P/D) Ratio


S&P500isanindexthattrackstheperformanceofthelargest500publiclytradedcompaniesintheUnitedStates.Price-to-Dividendsratio(P/D)--similartoP/Eratio--istrackedasonemeasureoftherelativepriceof,inthiscase,theS&P500.Stockarevalued,inpart,bythedividendstheydistribute. Higher prices will generally follow higher dividend yields. In this graph we see that, relative to recent history and according to this particular measure,S&P500stockscurrentlyseemtobequitemodestlypriced.

2-Year S&P 500 Inflation Adjusted Total Returns


This chart clearly shows that the value of - or we could say the total return earned by owners of - publicly traded stocks ("equities") fluctuates wildly. More specifically, the two-year total return can swing nearly 50%. We can also see, however, that when they go down they tend to come back up, and visa versa. The moral? Buy when the stock market is down. For goodness sake, don't sell when they're down!

Initial Unemployment Claims

Source:FederalReserveEconomicData

InitialunemploymentclaimsdataistrackedbytheU.S.government.It'sconsidered a measure of the general direction of the overall economy. When the number of people filing for unemployment benefits is rising, we infer that the number of people being laid off is rising and that the economy is contacting.ThisgraphseemstoindicatethattheU.S.economyissteadilyimproving and that "where we are" is not unprecedented in history. Keep in mindaswellthattheU.S.workforceislargertodaythatinthepast,sothisgraph is skewed higher on the right side.

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2012 Index of Articles

Documents

STRATEGY Industry Dictates Profit Potential, Strategy · Potential, Strategy The profit earned by a company is a function of both industry structure and strategy. The former is a