Blog

Blog

 

Sales Calls Strategy

Sales Calls Strategy

Making sales is the lifeblood of every profitable business. To be great at selling through telephone requires unique skills in communication and mastery in the sales process. Sales calls to different prospects may be intimidating at first, more especially when prospects tend to shy away from your idea. Practice, determination and preparation can greatly improve your sales’ performance hence see you achieve the set targets and goals in your company.

Think of Sales Calls Prospects and Objectives

Research your prospects – The first step at sales calls would be to gather much information as you can on who you can call to get their attention and know their interests. The much information you will have on them and their specific requirements, the better.

Objective of the sales call – You should also ask yourself whether you are seeking to make an appointment, whether you are simply giving information or whether you want to wrap up a sale through the phone. Putting in a sure objective will assist you to communicate much more effectively and progress in your sale calls. Experts from service providers like the business phone system Calgary will advise you that the call should not be leading because this way, prospects will ask so many questions that might affect the objective of the call.

Grow a rapport with your prospect – Although you may become keen to arrive at the sales pitch, it is important if you slowed down and took the time to heed to the responses made by the prospects. Getting involved in a conversation creates rapport and exhibits that you mind about your client’s concerns and needs. It would also be good if you do not dive straight to a hard auctions pitch.

Know your organization’s services and products – Having such knowledge will assist you to explain to possible customers how their problems will be solved through your services or products. For instance, if you realize that an impending client is in a bazaar looking for automobile parts and your company manufactures various kinds of parts, you should tailor your sales pitch immediately.

Needed Feedback About Sales Calls

Finally, get feedback about the sales calls from contemporaries about the sales calls. You should have your supervisor or co-worker listen to the sale calls and give their standpoint on how fine you communicated with your prospects. You should also make gradual adjustments to advance your sales calls. Sales calls enable companies to have the word out on their services and products to potential customers. You should also know when to make follow ups but do it professionally not to sound naggy.

Read more »
 

When do you know it is time for a business restructuring? Wait too long..it may be too late!

Restructuring TimeA restructuring, is it time? Tick, tick, tick, the clock is ticking. In less than a week payroll is due. The company does not have enough cash to pay the 200 employees and you are not even thinking about how to pay the suppliers. The credit line is fully drawn and you have no more collateral to give. What do you do? How much time does the company have? These are the type of issues the company is facing. Is it time for a business restructuring?

If you cannot meet payroll, staff will leave, the state will be notified that the employees have not been paid, and this will be only the beginning of the company’s problems.  You know that if the company does not meet payroll, the game, known as the business, is over. And this is the only the start of the problem. For a privately owned business, personally guaranteed company obligations will default, and the personal assets of the owners will be seized.

This is not so much of an extreme case. This scenario often happens. So thinking about the company from the perspective of how to avoid or change the situation is critical.  A business restructuring may be needed and now!

Business difficulties can happen quickly and for many reasons. Businesses may suffer from lost market expectations, reduced operating earnings, or severe cash flow troubles. Whether triggered by marketplace forces or internal dynamics, an early assessment and quick decisive moves will be needed to reinvigorate earnings and company value (PriceWaterhouseCoopers LLP, 2012). This is when you know that a business restructuring must commence.

Stakeholders Want Answers

Collectively, employees, vendors, bankers, and other creditors (the stakeholders), will be assessing answers from the rubble of the company to questions ranging (DiNapoli & Fuhr, 1999) from “What’s in it for me? to “What are my alternatives?” to “How did this happen and when do I get my money?” Think about it; the following questions each stakeholder will want to know:

  • The causes of the company’s distress
  • Required steps to affect an effective restructuring
  • Management’s capabilities, abilities and costs to execute a restructuring plan
  • Assessing alternatives to the restructuring and the related costs
  • Determining the goals of the various stakeholders
  • Establishing the value that can be realized from company for a restructuring, a sale or liquidation of the business

Many issues can cause business distress. Liquidity constraints can limit the business from operating efficiently. Cash flows, cash reserves and access to a working capital line of credit can result in a short-term liquidity crunch. The inability to pay employees, suppliers, and the taxing authorities can be acute. This will lead the company to failure.  A business restructuring will be required.

Economic Downturn

An economic downturn, shifting buyer taste or behavior, increased competition, ineffective operations, disruptive technologies, incompatible strategies, issues that can seriously place the company into financial distress. Left unanswered can result in threatening the organization’s existence.   A host of problems will trigger declines in revenue, customer loss, key employees, profitability, and cash flows that will lead to working capital constraints. Distressed symptoms often occur well before crisis hits and is felt. Before you know it, the company is in a death spiral. This situation is not inevitable, and in many cases, can be halted and reversed. Taking aggressive action and discovering at an early stage through reviewing the organization’ strategies and it operations efficiencies can lead to a swift, decisive action to restore organizational performance and enterprise value.  Timely action is critical in making this happen.

When a company is doing poorly that failure appears imminent, only a restructuring or turnaround can restore performance and profitability that can enhance the value of the business.

The best way to learn how to restructure a business is to study failure.  Think about it, NASA studied its mistakes to make corrections with the space shuttle program. Pharmaceutical companies and financial services companies study product design failures to make improvements, and hospitals study their service offerings to improve the quality of healthcare service. Successful companies create value for shareholders, customers, and other constituents.

Many companies that once dominated their markets later slide into corporate distress often occur. These organizations lose their touch. It is often said that success breeds failure. Companies no longer have that “mojo” that touch, which creates shareholder value. When a company succeeds, we assume that they know what they are doing, but in fact it could be they got lucky. Companies create an overconfidence bias, becoming so self-assured that they think they do not need to change anything.

Business Restructuring

A number of factors influence a business restructuring strategy to achieve recovery. From an external perspective, in most part, the competitive environment and the maturing of the industry influence the selection and effectiveness of the turnaround strategies. From an internal perspective, the severity of the financial distress and management failure is a contributing factor to formulating the turnaround recovery strategy. The choice of the restructuring strategy is a function of the company size, management perception of the external factors, but most importantly, the degree of resource availability.

For a small business, given the exceptional high mortality rate, elements of decline and failure are important. Small business failure is generally attributable to issues of management control. Performance deterioration and resource availability are critical factors of for the enterprise success in addition to the strategies chosen to, in some cases, stop the bleeding.

Two organizations that have members that can effectively structuring and implement a business restructuring strategy include the Association of Insolvency and Restructuring Advisors (AIRA) where you can find a Certified Restructuring and Insolvency Advisor (CIRA) and the Turnaround Management Association (TMA) where you can look for a Certified Turnaround Professional (CTP).  Remember…tick, tick, tick the clock is ticking maybe to your business’s decline.

References:

DiNapoli, D., & Fuhr, E. (1999). Trouble Spotting: Assessing the Likelihood of a Turnaround. In D. DiNapoli, Workouts and Turnarounds II: Global Restructuring Strategies for the Next Century: Insights from the Leading Authorities in the Field (Vol. I). John Wiley and Sons.

PriceWaterhouseCoopers LLP. (2012, August 20). Restructuring and recovery. Retrieved August 20, 2012, from PWC: http://www.pwc.com/us/en/transaction-services/restructuring-recovery.jhtml#

Read more »
 

Raising Money? The Use of Alternative Credit Assessment Tools and Financing are changing the Game. Small Businesses will Benefit!

kabbage-CANFor small businesses raising money, innovative sources and frameworks for credit risk assessment are changing the game to enhance borrowing possibilities.

Traditional Credit Assessment in Raising Money

Raising money is a daunting task to small business borrowers.  Most lenders depend on traditional credit information sources and analytics such as obtaining an entrepreneur’s credit score. Providers of credit such as banks, credit card companies, depend on credit scores to assess the prospective risk posed by the potential borrowers.

For the small business borrower raising money, many entrepreneurs feel that they are at a disadvantage.  In an empirical study by Allen N. Berger, Adrian M. Cowan, and W. Scott Frame (2011) found the use of consumer credit scores rather than business credit scores by community banks in small business lending when the banks underwrote small business credits.  Community banks often used the scoring for only very small loans typically under $50,000. The study suggests that community banks depended more relationship lending than the using of technology when utilized credit scores for automatic approval/rejection of loan applicants.

In the U.S. the most widely used statistical credit score model is the FICO score initially developed in 1956 by Bill Fair and Earl Isaac and sold by the FICO Company. The FICO Score model is designed to measure the risk of default by taking into account numerous factors in a person’s financial history such as payment record, the utilization of credit, length of credit history, the type of credit used, and other proprietary metrics.

Currently there is an emergence of companies chasing small-business loans by using alternative data sourcing then consumer credit scores to extend credit.  These companies include Capital Assess Network, Kabbage, and Amazon

Kabbage, Inc.

Kabbage leverages social media data as part of lending decisions. The company grants working capital to online merchants as its credit risk model encompasses social media and loyalty assessments in an effort to attract, interact with, and retain small business clientele.

The Atlanta base company founded in September 2011, Kabbage connects with clients Facebook fan pages and twitter feeds.  According to the Credit Union Times (Samaad, 2012), Facebook and Twitter feeds are immediately analyzed and translated into capital. With merchants increasing the number of followers, the enhanced activities and chatter on Facebook and Twitter increases the amount of capital access.  Known a Social Klimbing, the merchant cash advance is called a “Kabbage Advance.”

The advance is not a loan. No interest charge is assessed.  A fee is charged base on how long the advance is outstanding. No prepayment is assessed for early payments.  Advances range from one to six months. The company founded a correlation between the activity on social media and default rates.  Merchant cans obtain advances as low as $500 up to $100,000.

Last year in May, Bank Technology News awarded Kabbage’s CEO Rob Frohwein for conceptualizing its breakthrough technology and data platform that provides working capital to small business in less than seven minutes.  In winning the Top 10 Innovator award, Frohwein was recognized for its significant impact on small business (PR Newswire, 2012).

Kabbage received venture funding by Mohr Davidow Ventures and BlueRun Ventures.  Additional investors include David Bonderman, founder of TPG Capital, Warren Stephens, CEO of Stephens Inc., the UPS Strategic Enterprise Fund, and TriplePoint Ventures.

Capital Access Network, Inc.

Capital Access Network, Inc. (CAN) is becoming a significant player in providing small business credit scoring and capital.  The company developed a technology platform that automatically analyzes a multitude of business performance variables that integrate data sources from banking, credit card processing data and other sources with its proprietary risk models assessing over 100,000 transactions over multiple business cycles reviewing over 650 SIC codes.  Its model is considered an alternative to the FICO score. Over $2.5 billion in working capital financing were granted to small businesses since 1998 through NewLogic Business Loans, Inc. and AdvanceMe, Inc., both CAN subsidiaries.

Determining the strength of a business based on business performance rather than personal credit scores and the ability to provide access to capital has given CAN a leg up on other small business lenders. WebBank, a Utah-chartered FDIC industrial bank underwrites the loans for NewLogic Business Loans Inc. and AdvanceMe, Inc.

Headquartered New York headquarters, Capital Assess Network has presence in Boston, Atlanta and San Jose, including Costa Rica.  The company employs approximately 400 people with the majority focused on data services technology and analytics.

Other Alternative Lenders in Raising Money

The companies using alternate means to assess credit risk to provide financing for small businesses include ZestCash, BillFloat and LendingClub.

References:

Berger, A. N., Cowan, A. M., & Frame, w. S. (2011, August 1). The Surprising Use of Credit Scoring in Small Business Lending by Community Banks and the Attendant Effects on Credit Availability, Risk, and Profitability. Journal of Financial Services Research , 1-17.

PR Newswire. (2012). Kabbage CEO Selected as a Top Innovator by Bank Technology News . Atlanta: PR Newwire.

Samaad, M. A. (2012, June 27). Kabbage Links Social Media With Cash Advances. Credit Union Times, p. 15.

Read more »
 

To Get Venture Capital Funding, You Must Begin Thinking Like a Venture Capitalist When Raising Money!

When raising money, think like a venture capital. For many entrepreneurs, success begins with a great idea. However, how do you get this idea off the ground?  Raising money is needed for your company, but how do you attract investors?

Venture-CapitalMany young, emerging growth companies, understand that venture capital serves as an alternative.  Often, venture capital provides cash funding in raising money, which is exchanged for shares in the business and an active role in the enterprise’s future.

In January the National Venture Capital Association, one of the trade associations representing the U.S. venture capital industry announced the results of its industry paper, MoneyTree Report, on venture funding for fiscal year 2012.  The Association with PriceWaterhouseCoopers reported that venture capitalists invested about $26.5 billion in 3,698 deals last year. The report showed declines in both dollar and deal transactions down about 10% and 6%, respectively, from 2011. Fiscal year 2012 was the first drop off in venture capital activities in three years.

Economic uncertainty hindered the growth in new investments. As a result, many venture capital funds shrunk during the year. Venture capital firms have increased fund reserves  to support funding of current  investments and have become more discriminating in assessing new deals.

Understand that before a venture capitalist takes on higher risk the firm will determine the upside pay off. What this means is that the entrepreneur must do his or her homework to meet the expectations of the venture capital firm in raising money.  This is a two-way street.

Venture capital funding comes with a price. Some of the considerations the venture capital firm will review in raising money when assessing a potential investment include:

  • Enterprise leadership.  Evaluating the background, knowledge, and business acumen of the leadership teams is most important. Can the company’s leadership manage the business through the obstacles of a new business?  For the management team, each member should be prepared to explain how he or she would overcome any difficulties and how to get done more with less. For the entrepreneur, be warned that the venture capitalist is going to look into their eyes and ask, “Does this person know how to make money?”
  • Product and Service Offering.  Surprisingly, many venture capital firms say they cannot find good deals.  These firms are in large part, looking for emerging growth companies that offer products and services that can potentially provide a competitive advantage in the market place.  Venture capital firms want to know a lot about the specific industry sector and how the business will effectively compete with the competition.  The leadership must provide a strategic plan that synthesizes the marketing, sales, and distribution tactics that will be employed to attract and retain the targeted customer base.
  • Potential Return on Investment. Know that the venture capital firms are willing to take on high risk, it the potential returns are high too.  If the venture capital believes that the financial up side will be worth the risk, the firm will make the investment. To make this happen, the leadership will want detailed financial projections that are in line with the strategic plan in raising money.

Venture capitalist want to mitigate or manage their risk. Entrepreneurs, on the other hand, can assemble a strong management team, provide a well-written business plan, and show a leadership team that can execute the plan in raising money.

For a free online video course on how to raise money go to: http://garyrushin.com/raising-money-mini-course/

Read more »
 

Crowd Funding: Turnkey Financing Source for Entrepreneurs and Small Businesses

If ideas for a big creative project swirl in your head, but you need money to make it happen! Look at crowd source funding. Crowd funding may be the answer. People want to support creative activities for example looking for filmmakers needing money for documentaries, independent musicians needing money for musical projects, or just plain ideas that need money to make the world a better place. Alternately known as crowdfunding, crowd financing, equity crowdfunding, or hyper funding, crowd funding enables access to turnkey financing that supports projects with little regulatory friction. This is because, equity participation are not given to providers of the funding. In short, crowdsource funding aligns visionaries needing money with participants wanting to fund the vision. The U.S. is not alone; crowd-funding opportunities has gone global to include opportunities for Eurozone and Canadian businesses and entrepreneurs as well.Crowd-Funding-Vision

But now wait! The Jobs Act of 2012 is a game changer. Small businesses and entrepreneurs will have increased access to crowd funding sources. The U.S. federal government will allow participants in crowd funding projects to received ownership stakes. The U.S. Securities and Exchange Commission is writing the prudential regulations (the rules) for equity participations in crowd financing activities. With the recent departure of SEC Chairwomen Mary Shapiro, the regulations have been delayed (Mandelbaum, 2012). The SEC is tasked to protect investors. Investing in small business, especially start-ups, are notoriously risking and fraudulent activity can take place.

What is Crowd Funding?

A collective effort by consumers that network and pool their moneys, usually through the Internet, crowd funding enables the investment in and support of efforts initiated by other people or organizations (Ordanini, Miceli, Pizzetti, & Parasuraman, 2011). Kickstarter and Indiegogo are leading intermediaries organized to support crowd funding. Kickstarter alone helped facilitate over U.S. $350 million in project financing pledges.

Founded in 2009 by Jeff Chen and Yencey Strickler, Kickstarter is a New York based Internet funding platform for creative projects surrounding the arts to include films, games, and music to art, design, and technology. Backed by Union Square Venture and other venture capital firms, Kickstarter’s revenue model includes receiving five percent of the funds successfully raised through its platform (Milian, 2012). Indiegogo, a San Francisco based crowd-funding site is another player in the crowd finance space. Pledges to projects can be funded in U.S. dollars, British pounds, euros, and Canadian dollars.

So how does this work?

Financial backers, which are armchair philanthropists of projects, put their trust in the project creators by providing cash in return for a promise of a future return. The return can be naming credits as with a film, a discount price of the develop item, or some insignificant benefit. With the Jobs Act, crowd funding in the U.S. is about to evolve. Providers of project funding will be able to receive equity participations. Entrepreneurs will have greater access to capital as new providers of crowd sourcing and investors see opportunities.

Examples of projects that successfully received funding in 2012 (Santos, 2012) include SmartThings, which raised over $1.2 million with the help of 5,694 backers. With an initial goal of raising $250,000, SmartThings designed a device to let users digitally monitor and control parts of their homes. As a digital hub, allows the use of apps to switch on and off appliances with a bevy of sensors and products. OUYA raised over $8.6 million from more than 63,000 supporters. The goal of the company was to initially raise only $1 million. The company’s project was a $99 Android-base gaming console that offers its own controller and promises to make game development affordable.

References:

Lazar, S. (2012, December 27). Meet The 25-year Old Who Raised Over 8 million on Kickstarter . Retrieved May 7, 2012, from Huffington Post: http://www.huffingtonpost.com/shira-lazar/pebble-founder-eric-migicovsky_b_1497515.html

Mandelbaum, R. (2012, December 26). Crowdfunding’ Rules Are Unlikely to Meet Deadline. Retrieved January 3, 2013, from New York Times: www.nytimes.com/2012/12/27/business/smallbusiness/why-the-sec-is-likely-to-miss-its-deadline-to-write-crowdfunding-rules.html?pagewanted=all&_r=0

Milian, M. (2012, August 21). After Raising Money, Many Kickstarter Projects Fail to Deliver. Retrieved December 27, 2012, from Bloomberg: http://www.businessweek.com/news/2012-08-21/kickstarter-s-funded-projects-see-some-stumbles

Mulian, M. (2012, December 5). Crowd-Funding Site Indiegogo Is Going International. Retrieved December 27, 2012, from Bloomberg: http://go.bloomberg.com/tech-deals/2012-12-05-crowd-funding-site-indiegogo-going-international/

Ordanini, A., Miceli, L., Pizzetti, & Parasuraman, A. (2011). Crowd-funding: transforming customers into investors through innovative service platforms. Journal of Service Management , 22 (4), 443-470.

Santos, A. (2012, December 27). Insert Coin: 2012’s top 10 crowd-funded projects . Retrieved January 3, 2012, from Engadget: http://www.engadget.com/2012/12/27/insert-coin-2012-top-10-crowdfunding-projects/

TechCrunch. (2011, February 14). Startup Sherpa (Kickstarter): How To Get Successful Projects. Retrieved from YouTube: http://www.youtube.com/watch?v=kqDNWcu6Hs0

Read more »

Creating Your Niche Marketing Website

24 Jul 2012
Posted by Gary Rushin
 

Most entrepreneurs get involved in niche marketing for one reason and one reason only–to make money! Well, you can too. All you have to do is be sure to pick a niche you are interested in and go from there. This is all about leveraging the web in your competitive strategy.

To get started with your new niche marketing business, you will need to create a website that is professional looking, easy to use, and fully functional for a complete and positive user experience. Things to consider include visual representation of your niche through captivating design; easy to follow navigation; user friendly e-commerce solution; and the ability to optimize content and code for search engines and linking campaigns.

There exist a number of helpful software products available that will help you create an effective and successful niche marketing website. Products such as WordPress not only help you design and build your website, but they show you how to optimize your pages to maximize your efforts and your business.

However, when selecting your site software, be aware of scams and imposters. There are a lot of so-called cheap and easy software products out there, but many are less than desirable when looking to create a truly great website that looks professional and actually works well.

The website building software you choose should be:

* Affordable within your budget

* Have readily available, positive reviews

* Provide support from set-up through launch and maintenance

* Offer downloadable updates to ensure seamless integration and use moving forward.

If you are unsure of which software to use, ask around. Visit other niche marketing sites and try to find out what they use. If all else fails, go with more popular software because although it may come with a higher price tag than some others, it is often tried, tested and approved by users across the globe.

2 Essential elements of a niche marketing strategy must be considered:

  1. Know the customers
  2. Set clear goals and objectives for what you hopes to achieve
  • Capturing new customer segments?
  • Lowering marketing costs?
  • Securing premium pricing?

Ask yourself does niche marketing match up with the resources, capabilities and preferences?

Read more »
 

Many strongly believed that, in large part, the success of the U.S. capital markets is due to the quality of the financial statements and the disclosure standards used by U.S. public companies (Smith, 2012).  However, an “audit expectation gap” exists (Gray et al, 2011) between users of the financial statements and the auditors in providing informative disclosures during the financial crisis.

Audit Opinions without Predictive Value

Throughout the financial crisis of 2007 through 2009, many unqualified (clean) audit opinions were issued to entities without including the conservative informative going concern modification (GCM) paragraph prior to filing bankruptcy, or being placed into receivership in the case of a bank, although accounting promulgation requires notification by the auditors’ to users concerning of the material risk of insolvency.

Audited financial statements must provide users both predictive value and feedback value; two primary ingredients that supports the decision usefulness qualities of financial statements. When an auditor issues an unqualified (clean) opinion, however it is determines that the entity face material risk of insolvency within 12-months of the audit report issuance date, a GCM paragraph must be included in the opinion. Under Generally Accepted Auditing Standards—AU Section 341(PCAOB, 1989), states that when an auditor has substantial doubt whether an audit client’s likelihood of continuing as a going concern for one year from the date of the audit, a GCM opinion is required (Hahn, 2011).

Unfortunately, this has not been consistently followed, which lessens the predictive value of financial statements.  Andersen (2011) examined 565 companies from 2002-2004—the post Enron era and the passage of the Sarbanes-Oxley Act of 2002 compared to 2000-2001 noting that auditors provided more conservative opinions when the profession is in the news headlines, however such conservatism declined in the following periods. In a complimentary study, this trend remained the same through 2008 (Feldmann & Read, 2010).  Carson et al (2012) found that half of the bankrupt companies in the U.S. had not received a going-concern uncertainty opinion prior to filing bankruptcy.

The audit reports of financial institutions during the banking crisis provided little warning that the global financial system was at risk as to the financial statements’ narrowness of the attestation assurance (The House of Lords, 2011) and those institutions operating in the zone of insolvency. Little research both in the U.S. and abroad have been conducted on whether auditors are, or should be, reluctant to issue going concern reports to financial institutions as to the self fulfilling notion of precipitating the bank’s failure by issuing a going-concern opinion (Carson et al, 2012).

One belief is the danger that an auditor issuing a going concern may undermine the institution’s confidence that may trigger a “run on the bank” (Shin, 2009). Others may believe that that because of the implied assurance by the U.S. federal government mitigated the need for a going concern paragraph (Lastra, 2008). According to Hull (2010), regulators are concerned with the systemic risks associated with banks as “a default by one bank may create losses at other banks” (page 84), and the prospects of “moral hazard” (page 52) whereas banks are considered “to-big-to fail” requiring the government to bail out the institution to protect the financial system. Determining whether the assumption that a going concern opinion precipitates unanticipated consequences and how, if at all, moral hazard affect audit opinions will be studied. Unfortunately, accounting literature as to whether auditors were reluctant in issuing going-concern opinions to financial institutions during the financial crisis is limited (Carson et al., 2012).

The concept of Zone of Insolvency is often cited in director fiduciary duty litigation cases following bankruptcy filings (Kandestin, 2007) and derivative actions for breach of fiduciary duty (Rothman, 2012). The zone of insolvency is defined under the U.S. Bankruptcy Code by not operationally meeting one of three solvency tests (Stearn & Kandestin, 2011): (1) the Balance sheet Test, which determines insolvency when the sum of the entity’s adjusted liabilities is greater than the sum of the entity’s property, as determined by its fair value, and taking into account contingent assets and liabilities, (2) the Cash Flow Test under Section 548—Fraudulent Transfers, which requires taking a forward-look at an entity’s ability to pay its debts as they come due, which includes subjective knowledge that the company has insufficient liquidity to satisfy its obligations, and (3) the Unreasonably Small Capital Test, which is based on case-law that the entity is unable to generate sufficient profits to sustain operations and unable to raise credit.

The accounting profession is at a quandary. How will the profession follow the accounting quality concept of predictive value for shareholders to make informative decisions without lighting the “fire” to the “gasoline” when an entity is “swimming” in the zone of insolvency? The accounting rules making bodies must decide what is best for the shareholders, the capital markets, and the banking system.

________

For  a free online accounting mini course “Cracking the Accounting Code” designed for entrepreneurs go to http://AccountingMiniCourse.com

References

Anderson, K.L. (Sep 2011). The Effect of Hindsight Bias On Auditors’ Confidence In Going-Concern Judgments. Journal of Business & Economics Research 9.(9), pp. 1-11.

Carson, E., Fargher, N., Geiger, M., Lennox, C., Raghunandan, K. & Willekens, M. (2012) Auditor Reporting on Going-Concern Uncertainty: A Research Synthesis. Retrieved April 7, 2011, from Social Science Research Center http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2000496

Feet, J. (2012, Mar.). Turnaround Topics. American Bankruptcy Institute Journal. 16, pp. 70-71.

Feldmann, D.A. & Read, W.J. (2010, May), Auditor Conservatism after Enron. Auditing 29.(1), pp. 267-278.

Gray, G.L., Turner, J.L, Coram, P.J. & Mock, T.J. (2011, Dec.). Perceptions and Misperceptions Regarding the Unqualified Auditor’s Report by Financial Statements Preparers, Users, and Auditors.  Accounting Horizons 25.(4), pp. 659-684.

Harn, W. (2011). The Going Concern Assumption: Its Journey into GAAP. The CPA Journal, pp. 26-31.

House of Lords (2011). Auditors: Market concentration and their role. Select committee of economic affairs. 2nd Report of session 2010-2011. London: The Stationery Office Limited.

Hull, J.C. (2010). Risk Management and Financial Institutions, Boston, MA: Prentice Hall, (2nd Ed.), p. 52 and p. 84

Kandestin, C.D. (2007). The Duty to Creditors in Near-Insolvency Firms: Eliminating the “Near-Insolvency” Distinction. Vanderbilt Law Review 60.(4), pp. 1235-1272.

PCAOB (1989). The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern. Retrieved on March 28, 2012 from the Public Company Accounting Oversight Board from http://pcaobus.org/Standards/Auditing/Pages/AU341.aspx

Rothman, S.J. (2012). Lessons from General Growth Properties: The Future of the Special Purpose Entity. Fordham Journal of Corporate & Financial Law17.(1), pp. 227-260.

Shin, H.S. (2009, Winter). Reflections of Northern Rock: The Bank Run That Heralded the Global Financial Crisis. The Journal of Economic Perspectives 23.(1), pp. 101-119

Stearn, R.J. & Kandestin, C.D. (2011). Delaware’s Solvency Test: What Is It and Does It Make Sense? A Comparison of Solvency Tests Under the Bankruptcy Code and Delaware Law. Delaware Journal of Corporate Law 36.(1), pp. 165-187.

Read more »
 

Fresh-Start Accounting

Not since the Great Depression has the number of business bankruptcies been so prevalent. Bankruptcy is a dramatic experience. It is one thing reading about the recent large bankruptcies of AMR Corp., parent of American Airlines, Kodak, and MF Global Holdings. But for the business leader, understanding and planning a Chapter 11 bankruptcy to save their own company is a whole different “ball of wax.” Securing the professional advice from an accounting firm, not an individual practitioner is advisable. This is because several areas of specialization will be needed. A key question that will be asked is what the company will look like after all is said and done. After all the activities of debt restructuring and redistributing the ownership of the new company, accountants will use fresh start accounting, if it qualifies, to report the new balance sheet of the company. Because many business leaders are new to the process and never heard of fresh start accounting, and although the bankruptcy process and fresh-starting accounting are complex, a simplistic explanation of fresh-start accounting is attempted. Key expertise will be needed from the following areas that will effect the challenging bankruptcy process:

  • Bankruptcy and insolvency
  • Business valuations
  • Taxation
  • Accounting
  • Restructuring

What is Fresh Start Accounting?

Fresh-start accounting means, “the financial statements of the emerged from bankruptcy entity obtains a fresh presentation of its financial position with newly valued assets after the liabilities have been cancelled and/or adjusted.” Under certain conditions, it is recognized that the new users of the financial statements will be better served by re-valuating the balance sheet on a “fair value” basis after the confirmation of the bankruptcy. Accountants are required to follow promulgations of ASC 852 (formerly SOP 90-7) in establishing an opening balance sheet of the successor company.

Fresh start accounting benefits the new shareholders by creating a “clean” balance sheet and favoring a step up in the value of the assets. Business leaders can eliminate losses of the bankrupt company, which enables the new company to come out of bankruptcy stronger. Use of fresh-start accounting is not a standalone process. It is an integral part of the Chapter 11 reorganization procedure designed to create a solvent, operationally viable entity. Certain debts of the bankrupt company are restructured and/or discharged. Then, if the new company qualifies for fresh start accounting treatment, the balance sheet of the new company is reset.

Complexity of Fresh-Start Accounting

The American Institute of Certified Public Accountants developed strict rules for restating and a timeline for implementing fresh start accounting reporting. Determining the fair value of both tangible and intangible assets, the start date for fresh-start reporting, and the best practices in “push down” fresh start adjustments to subsidiaries and underlying ledgers must be understood. Valuation is most critical to the overall process. This can be an enormous burden on the financial, operational and systems teams as well as management. Completing this process will enable management to move forward and focus on the operations of the newly reorganized business.

Many attorneys and accountants boast having bankruptcy experience, however regarding fresh-start reporting, the requirements are beyond most of them. Practitioners and firms with experience in fresh-start accounting, along with other advisers will be needed to support the individual asset valuations to the company’s external auditors. Know that stakes are high; the situation tends to be demanding; and delays will come with penalties, which requires expertise in this area.

Criteria to Qualify for Fresh-Start Accounting

To qualified for fresh-start accounting two requirements must be met:

  1. The new company’s reorganization value must be less than the total claims and the post-bankruptcy petition liability, and
  2. The holders of the pre-bankruptcy confirmation-voting shareholders will receive less than 50 percent of the voting shares of the new emerge company.

These requirements were put into place to prevent solvent companies from filings and to prevent companies to exploiting the bankruptcy code to writing up the carrying value of the assets.

Pro Forma Fresh Start Reporting

The creation of a pro forma balance sheet using fresh start accounting includes two primary considerations:

  1. The recording of the pro forma effects as it relates to:
    1. Extinguish of debt
    2. Cancellation of the pre-bankruptcy common shares
    3. Estimation of the allowed settlement claims
    4. Issuance of the new capital (equity and debt)
    5. Adjusting the balance sheet items to the “fair value” the encompasses:
      1. Writing up and down the values of receivable, inventories, and fixed assets
      2. Adjusting and recording to the balance sheet any reorganization intangible assets
      3. Recording the present value of all surviving post-bankruptcy liabilities
      4. Adjusting any pensions and other post-retirement benefits
      5. Eliminating pre-bankruptcy retained earnings or deficits
      6. Cancellation of debt and any operating loss carry-forwards

____

For free online accounting mini course “http://AccountingMiniCourse.com” designed for entrepreneurs go to http://AccountingMiniCourse.com

____

Sample of Fresh Start Reporting

The following provides an example of Fresh-Start in practice:

Fresh-Sart Accounting Reporting
Read more »
 

The Entrepreneurial-Based Business

The competitive dominance of entrepreneurial driven companies have historically forged the path of economic growth. Now at the time when such dominance is needed with a vengeance for prosperity and employment,  such owners are working hard to stay afloat and survive especially after the recent financial meltdown and the great recession.  The fundamental issue is that tools and the conceptual frameworks that work for traditional businesses must be modified to meet the challenges, operations, and new business models of today’s entrepreneurial-based companies.

When dealing with an entrepreneurial-based business, when the company is in trouble, recognizing this fact will give the owner more options for dealing with the problem to save the business. However, by waiting too long, being in a state of denial, not taking decisive action will leave the entrepreneur with little options other than shutting down the business or bankruptcy. Furthermore, the longer the owner waits, the likelihood that the owner’s personal finances will be affected, in the event that the owner’s are personally liable for the business debts. This can leave the entrepreneur filing for personal bankruptcy protection.

Signs of Distress

Every business is different. So the signs that the business is in trouble may not be the same for one company compared to another. However, certain warning signals are clear. The business may be in trouble if:

  • Revenue has been trending down for the past several quarters and below the budget.
  • Demand for the products or services have dropped off.
  • Loss of one of more important customers and being unable to find replacements
  • Finding it harder to fund working capital needs as cash becomes tighter and tighter.
  • Struggling to fund payroll
  • Being unable to service the debt or even meeting just the interest
  • The company’s debts being turnover to collection agencies
  • Creditors asking for more cash collateral
  • The bank is unwilling to extend additional credit or threatening to call the loan.
  • Using collected payroll tax money to fund operations instead of sending it to the government. [A major no…no!]
  • Key managers and staff have begun to quit

Bad to Worse

With symptoms like the above, conditions can transform from bad to worse. For example

  • The IRS is beginning action to levy company bank accounts and following other avenues to enforce collections
  • Suppliers and creditors threatening to sue to collect owed moneys
  • Secured creditors liquidating collateral
  • Eviction notices received covering rented facilities
  • Key suppliers requiring cash, no credit

Entrepreneurial Options

Options that may be to the entrepreneur include:

  • Selling of the business in entirety
  • Liquidating the business through bankruptcy
  • Selling off parts of the business
  • Saving the business through restructuring or a bankruptcy reorganization

When the business is heading towards the “zone of insolvency,” the entrepreneur needs to first decide whether or not to stay in business. This is an important decision. Deciding on whether to cut off a cancerous limb to stop the infections or to treat it must be made.

Decision Factors

For an entrepreneur, emotions and egos must be set aside. Issues to be considered must include the welfare of the family and self.  Moreover, reflections must be made questioning:

  • The ability to raise fresh capital, and
  • The capacity to obtain the capabilities needed to turn around the business, which is like changing the direction of a battleship whether it is a small, medium size business or large corporation. Can enough momentum be directed toward business renewal?

Not all distressed businesses can be saved. Knowing if the company can be salvaged and which ones have little or no chance of survival is important.  The sooner that decision is made; the sooner steps can be taken to either begin the process of business turnaround or winding down the company.

Turnaround Basic Questions

Basic questions or requirements that are needed for a successful turnaround must have four characteristics:

(1)  Does one or more viable core businesses exist within the enterprise?

(2)  Can adequate bridge financing be obtained?

(3)  Does the company have sufficient organizational resources and skills

(4)  Can the company secured a turnaround manager (leader) to facilitate the daunting restructuring task?

Professional Advice

Having poured their hearts and souls in to the business, the entrepreneur must try to be objective about the prospects for the future. Although emotional attachment is there, they should seek professional advice from other entrepreneurs, lawyers, and accountants for recommendations of turnaround professionals. As a start, the membership of the Turnaround Management Association comprises of specialist (Certified Turnaround Professionals) in the area of business turnarounds.

____

For a  free online accounting mini course “Cracking the Accounting Code” designed for entrepreneurs go to http://AccountingMiniCourse.com

Read more »
 

The 2007 credit crisis and the economic downturn revealed high-embedded financial risks of many entities that eventually led to significant bankruptcies. The high-embedded financial risks affected many entities ability to continue as going concerns because of the lack of liquidity and the availability of credit. So financial institutions such as Bear Sterns, Lehman Brothers, American International Group, and Washington Mutual all failed. With the inclusion of Fannie Mae, Freddie Mac, Citigroup and Bank of America, the U.S. government had to shore up the capital of systemically important institutions (“too big to fail”) with direct investments due to the high-embedded risks in the balance sheets of these institutions (Bair, 2010). What happened to the going concern assumptions by Auditors prior to the crisis? Nothing! Should not the risks of the valuation assertions of an entity’s balance sheet be measured and access for going concern issues if such risk can lead the entity into the “zone of insolvency”?

Using the going concern assumption is a fundamental principle in the preparation of financial statements by auditors. The assessment of an audit client’s ability to operate, as a going concern, is the responsibility of the client’s management, coupled with the appropriate applicable financial disclosure framework. The auditors must consider the appropriateness of the use of the going concern assumptions. The International Standard of Audit (ISA) No. 570, “Going Concern,” institutes the relevant requirements and guidance as to auditor’s consideration of the going concern assumption in the attestation report. According to IAASB (2011), “Auditors must remain alert throughout the audit for evidence of events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern. We cannot stress enough the importance of professional skepticism and judgment in evaluating financial statement disclosures and the implications for the auditor’s report when a material uncertainty exists relating to events or conditions that, individually or collectively, may cast doubt on the entity’s ability to continue as a going concern.”

Consideration of the need for a going concern emphasis paragraph is a difficult matter of judgment. With the huge losses incurred by shareholders from impacted institutions, it creates a need for a heightened risk concern disclosure that would enhance the financial usefulness of the financial statements, especially after another high embedded risk bankruptcy, MF Global Holding, became insolvent in the fourth quarter 2011. Ironically in December 2011 (IFA, 2011), Professor Arnold Schilder, Chairman of the International Auditing and Assurance Standards Board (IAASB) sent a membership alert regarding going concern reporting, “… an entity may be experiencing a decline in its financial health, or may have material uncertainties arising from direct or indirect exposures to sovereign debt of distressed countries. Auditors are therefore encouraged to review the Alert and, importantly, the relevant requirements in the ISAs.” This alert came out after the MF Global holdings filing with its exposure to sovereign debt holdings.

Statement of Auditing Standards (SAS) No. 59 “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern” requires auditors to evaluate conditions or events discovered during audit fieldwork that raise the validity of entities’ going-concern assumptions. For those auditors who are not satisfied with managements’ going-concern mitigation plans they are required to issue modified (unqualified) opinions. Unfortunately, auditors are not required to design audit procedures specifically to identify questions about the validity of an entity’s going concern assumptions unless issues were discovered contradicting the representation (Venuti, 2009).

Unfortunately the “expectations gap”[1] of auditing standards concerning the level of what a user envisions from audited financial statements and the anticipated performance by auditors of the financial statements continues to widen. SAS No. 59 superseded SAS No. 34 because of the perceived ineffectiveness of the old codification as to providing an effective warning of impending bankruptcies (Ojo, 2007). However the efficacy of even SAS No. 34 is questioned as none of the top ten 2011 bankruptcies received a going concern paragraph.

The fear that a going concern opinion can hasten the demise of a distressed company, which can lessen the chances that the client can receive fresh capital, is at the center of a moral and ethical dilemma. Should the auditor increase the pain of the troubled company or provide an unbiased opinion to stakeholders so that they can make informed decisions?  This is an open question.

The Solution

According to IAS 570, a detailed going concern analysis need not be required for an entity that has a history of profitability and access to financial resources. However with the most recent economic environment (the credit crisis and economic downturn) the landscape has changed. The validity of longstanding approaches no longer hold and undermines previous assumptions. Current economic uncertainties, issues around liquidity and credit risk create new assumptions. Therefore, auditors must approach an entity’s assumptions with the current market environment in mind. The solution is for auditors to supplement prior years reviews with robust analysis that deals with the current economic conditions.

Critical to this assessment, IAS 1 requires management to take, “into account all available informa­tion about the future, which is at least, but is not limited to, twelve months from the balance sheet date.” IAS 570 requires auditors to consider the same timeframe. But if the auditors feel that managements review time period is less than twelve months, the auditor is required to ask management to increase its review period up to one year after the balance sheet date. If management is unwilling to comply, the auditor is required to consider modifying the audit report as to a limitation to the audit scope period.

The auditor is required to assess management’s knowledge of event or conditions and related enterprise risks beyond the period of assessment as the significant doubt on the enterprise’s ability to remain as a going concern.

References

Bair, S. (2010). Speeches and Testimony Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation on Systemically Important Institutions and the Issue of “Too Big to Fail” before the Financial Crisis Inquiry Commission, Room 538 Dirksen Senate Office Building.

IAASB (2009). Staff Audit Practice Alert- Audit Consideration in Respect of Going Concern in the Current Economic Environment. International Auditing and Assurance Standards Board.

IFAC (2011). Economic Conditions Continue to Challenge Preparers and Auditors Alike; Focus Must Include Going Concern Assumption and Adequacy of Disclosures. Retrieved on February 5, 2012 from http://www.ifac.org/news-events/2011-12/economic-conditions-continue-challenge-preparers-and-auditors-alike-focus-must-i

Ojo, M. (2007). Eliminating the audit expectations Gap: Reality of Myth? Retrieved on February 6, 2012 from http://mpra.ub.uni-muenchen.de/232/MPRA Paper No. 232, posted 07. November 2007 / 00:53

Vanuti, E.K. (2009). The Going-Concern Assumption Revised: Assessing a Company’s Future Viability. Retrieved on February 5, 2012 from http://www.nysscpa.org/cpajournal/2004/504/essentials/p40.htm



[1] The “expectations gap” is the difference between what users of financial statements, the general public perceives an attestation to be and what the auditor claims is expected of them in conducting an audit.

Read more »
Page 1 of 212
GET BLOG FIRST
Join over 3.000 visitors who are receiving my BLOG and learn how to optimize your business for value creation.
We hate spam. Your email address will not be sold or shared with anyone else.
 

Leave a Reply

Featured Box Wordpress Plugin developed by YD

WP-Backgrounds Lite by InoPlugs Web Design and Juwelier Schönmann 1010 Wien