JHB Philosophy 101

This week, Jeff Becker steps up to the podium.  Jeff and I go back a lot of years.  In this post he shares his experiences running businesses.  Jeff is truly of the business owner mold.  Take it away Jeff...

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Frank had suggested that I write a piece for his blog a few years ago. However, I was still licking my wounds from having lost a 15 year old company that I had grown from 1.5 million per year into a 28 million dollar a year company. I simply hadn’t spent enough time reflecting on what I did wrong and what I did right. I now think it would be helpful to some to put my thoughts down in writing.

I started my construction company at the age of 28. My confidence came from having personal experience in actually doing the work and feeling as though I understood the technical side as well as the physical side of construction means and methods. So doing the work was the easy part. The piece of the puzzle I had to learn on the fly, was the business side.

MY APPROACH TO BUSINESS

My company travelled the entire United States as well as a few overseas jobs. I was always meeting other business owners in new places and those business owners were 60 year old men who were always happy to engage in conversations about business challenges and experiences. I think they found it interesting that I didn’t want to make small talk. I still don’t understand why so many people waste time by thinking their time is better spent talking about sports or the latest reality show when there is so much to glean from other owners when you get a brief moment of their time. Most business owners don’t want to be buddies, so trying to find “personal” common ground, is a waste of time more often than not. If there is common ground, it will happen without any effort. This approach really helped me tremendously as I tried to navigate and learn business. After all, work was the common ground that landed me in front of them in the first place. The rest happens or doesn’t happen. The relationship grows when working through challenges together. You will find this approach throughout this piece.

Another base belief I have, is that money is only made on the actual performance of the work. So if you believe that money is made by the office, this article is not for you. My entire 15 years was a constant struggle to create efficiencies that eliminated or reduce office personnel needed. I did this with as many as 6 and as few as 2 people. Other entities in my trade were using many more than I was. Becoming paperless is the key.

So after the first year, I realized I needed to know more about accounting. I felt powerless and the CPA I had was a specialist in filing IRS extensions. I was cash strapped and had no idea how to really budget my year when all I was getting each year, was what I called an end of the year “Oh Shit”! This is how I found Frank.

PICKING A CPA

I was really becoming a computer nerd. More on that later. I was using Peachtree at the time and so I felt it would be smart to find a CPA that actually knew my accounting package. Frank was on the Peachtree software support list. He was providing bookkeeper training and I didn’t see any other CPA at the time doing this.  Since I had a bookkeeper, I pulled the trigger and our relationship commenced. Frank and I later learned that we had common ground and that we both had visions concerning our two trades. Through that process, we continued to teach each other and pontificate about how we were trying to manage our businesses. Although Frank and I never just “went out to have a beer”, we did however have many personal conversations that I think pointed to the fact that we could. So, lesson 1, always find a competent CPA that you respect. How do you find that? Talk business first and make the conversation as much about your business as theirs. How the other party runs their business will tell you a lot about how they view yours. It also educates them about yours, so they can better help you organize yours. Make sure you know what you want to track, how you want to track it, and eventually how you want to see it on paper. Most CPA’s don’t care, and don’t know how to run your business. Don’t ask them! However they really can help you organize your information, so you can file taxes correctly. Over the years, Frank has only made one mistake and one joint mistake. Both times he did what was right and we both shared in our portions of the issues. The fact that Frank and I still do business, must mean he feels the same. Did I mention that I always felt that we “Could” go out and have a beer together? Make sure you are like minded.

PICKING A LAWYER

I was in a trade where it was more like the “Wild West” back in the 80’s. It was run by a generation that worked out more problems without the need for lawyers. Millions of dollars were worked out on a bar napkin or a simple hand shake. Of course lawyers were a part of forming a contract document, but law suits were really a last resort and marked the end of doing business with the other party. The moment you sued, the relationship was done forever and any friends they had, you lost as well. So it was always in everyone’s best interest to work things out, even if it cost you money in the short term. This was a very good learning exercise. I quickly became focused on developing a clear and concise bid document. Spelling out what items we would perform, really helped weed out the customers that really didn’t understand the job that they wanted built. Avoiding a customer that doesn’t understand what they want, will save you a lot of money, time, and energy by not working for them. I have only used a lawyer for litigation twice in 15 years. Once in Pittsburgh over $15,000….he was a crook and another against an insurance company that wouldn’t pay for a 1.5 million dollar machine that got dumped on a Tennessee interstate. 

What value does a lawyer have in a business? Well, they sort of do and they sort of don’t. The answer is about 50/50…LOL!! Those of you that own a business get that comment. How I used a lawyer, was as an advisor. Lawyers are very good at telling you both sides of the issue and how it plays out in the courts. Many things can be written, however, if there is no case law concerning the other parties issue, you will most likely win when going to court. I used my lawyer as a researcher. I wanted to hear what case law supported my position and what case law supported theirs. I would then use this new found knowledge in conversation with the other party and plant the seed, that their position wouldn’t exactly be a slam dunk for them. It always resulted in a compromise by both parties and a real savings in time and money. The lawyers always win and cost more money than a simple compromise. So how did pick a lawyer? I point you back to my “approach to business”.

BANKING

The most important lesson I learned was that you can’t just have one banking relationship. Although I did always want one, this is never good for the business. I was financing machines that cost about 1.5 million each and they were specialized. Meaning, there was only 5 companies in the USA that even really used these larger machines. This put my business model in a high risk category regardless of the profits. So the best way to say it is this. Eventually every bank is controlled by the Feds. They have to fit into a federally defined risk assessment model. If you get a “No” from your banker, it may not be you. You obviously have to be able to determine whether or not you need to improve some part of you balance sheet, but a lot of times the bank may not be looking to put YOUR RISK TYPE of business into their loan portfolio. I say move on and find one that is. I still have what I consider my go to banker and he played a very important role in helping me when I met my demise due to the depression. When I got a “No” from him when I was wanting to grow, he sent me to another loan officer that was looking for my type of company and could do a higher risk loan. That is the most important attribute you want in a loan officer. When he can’t help, does he care enough about you to recommend someone that will? Another must have attribute is whether or not they will spend a day and take a tour looking at how your business operates. They need to be asking a lot of “why do you do it that way” kind of questions. This shows interest. I can’t recommend anyone better than Pete Fuge with BB&T. The guy was a great teacher as I learned about banking. I still remember him showing up in a nice suit and wore out construction boots. This let me know that he has done this before and he really wanted to learn what I was up to and eventually needed. He also played a role in telling me “No” and advised that growth wasn’t a good idea, based on what he was seeing in the market. In the end, it was Pete that helped the bank officers realize that I was failing due to the economy and not that the business was being run improperly. I was simply written off and we both took our lumps as businesses that took risk together. Your loan officer has to be your best cheerleader. After all, when the doors shut and they consider your loan, you are not allowed in the room to speak your case directly. Educate your loan officer…dress him up and equip him with flashy pom pom’s….and send him in! Taking nothing personal when it comes to banking.

PICKING AN INSURANCE AGENT

I found this to be one of the funniest experiences. Every agent I ever had, drove up in an older model car and within a year, upgraded to some high end luxury or sports car. The insurance game is a racket. Especially when it comes to workers compensation. I had to fight with the insurance company every time I changed agencies. I never got confirmation of this, but it is my opinion that once you get an agent, the insurance company doesn’t want you to change. As a matter of fact, they won’t quote another agency for fear that the broker is pushing your rates up higher and they don’t want to expose that. They are hoping that the “relationship” can allow them to increase your rates every year and chalk it up to problems with your industry risk. I call bullshit! Every time I forced a change, I saved money! So what I am saying is….make a change. Make your agent be competitive and keep your rates the same. Even if you like the guy…..fire him one time….see if he comes back for your business next year.

PICKING EMPLOYEES

I love this topic. Much has been written about this topic since I have been in business. HR has really put a strangle hold on the industry. I still can’t get my head around this entity and why it is needed. I guess I can see it for mega large companies that are just selling a widget, but I think I can argue as much for itas I can against it . I have always liked a small business, so I naturally grew larger with a small business approach. Back in 2001 my father and I did a roll up of small engine businesses in Manassas. It was a retail business that I eventually became too busy to be a part of. My father took over that and eventually sold it.

I was very unconventional, because I really like the “Type A” personalities. I guess big businesses eventually run out of Type A’s but I still believe they are stifled more than they simply run out of them. HR is a big factor in my opinion. Anyways, here are my reasons why.

A type A person wants responsibility. They hate control and if they are capable, they will help you get there with little to no supervision. It really simplifies your business. However there are some pitfalls that you have to manage immediately until you determine you are like minded.

#1 Make sure they are not a prima donna. You want a type A that feels responsible for their mistakes. Once you have that, you got it made. If a Type A makes a mistake, they will move heaven and earth to correct that mistake and see it as a learning experience. A type B will most likely be afraid to approach the same issue twice and need a lot of babysitting when it happens again.

#2 Make sure they are the type that wants to find an easier way to perform the work. I am unfortunately prejudiced with the opinion that most people will bitch about a process within a company, but never take the steps to improve it. Even Type A’s. They simply show up every day and chalk it up to it being a part of the job they don’t like. This is where you HAVE to be there, so you can talk about the bad parts of the job and eventually come up with a way to make the bad part become a good part. That was always the leading topic when putting all the type A’s in the same room to brainstorm. This is how I opened the minds of my fellow cavemen and eventually became a paperless company.

#3 You have to make sure that the job you want done is clearly communicated. Otherwise you give the type A, wiggle room to point the finger back at you…..if something goes wrong. If you don’t clearly communicate…and it will happen…you have to take it on the chin and shift to fixing the problem WITH them. After all it is only costing you money if you don’t and you caused the problem by not doing your part.

#4 You ABSOLUTELY have to interface with them every day for a year to make sure you are comfortable that they perform the tasks required to your satisfaction. This is when you communicate how the company is going to interface with clients, other employees, and most importantly organize their work. I never really cared about how they did the work. I learned new ways to do the work from these type A’s sometimes. Having spent the time to discuss the process of doing the work netted us many efficiencies. There is nothing more productive than a bunch of type A people, driving towards the same goal, discussing how to improve what we do. We became a company of inventors as a result. Both sides felt very good about what they were doing because we all had a hand in solving a challenge. I even have a joint patent as a result. It is meaningless now, but I don’t want to get started down that road. It is another learning curve that has no place here.

#5 If you do all of the above correctly…..and you have a business that is growing…..you can now start focusing on having that type A groom a successor. Nine times out of ten, they will pick and groom their successor, much like you. I don’t recommend doing this until you have at least 5 years under your belt. If customers are wanting you to grow, resist it until repeat business demands it consistently. I have seen the 5 year rule play out in many businesses.

So I like Type A’s in leadership roles and from there, I try and find Type A’s that are in hiding amongst the type B’s. I had many that stayed with me for the entire ride. I hope this helps.

PICKING CLIENTS

Never forget that YOUpick your clients! If you work for a problem client, then you have forgotten how to say NO! Bad clients will always cost you time, money, and possibly employees. Make sure your client knows why they need you, how to use you, and appreciates the relationship and what you offer. If you have to have a bad client to make ends meet, start looking for another quickly. This challenge is what pushed me out of Northern VA. There are only so many “Good Clients” in any geographic area. Go find what you are looking for in other places. However, don’t discount what a so called “Bad Client” is telling you. They may be trying to help. So stay opened minded until you figure the relationship out.

 

FINAL THOUGHTS

So I now find myself looking for a new challenge. I have grown a business to a size few achieve. In Northern VA that isn’t so big, however nationally it is. I have purchased and run a retail business during that time, so I know what it is like to be “at Risk” and also how to manage and sell widgets…this I lovingly refer to as “Retail type” businesses. My latest passion/venture is going to market with processes and custom software that streamline and teach small companies how to grow and manage the office and “get it done” processes. Process challenges is what I really excel in. Predicting a depression was not.

Well, I hope this hasn’t been too long winded. If all of this is posted on Frank’s blog, then and only then, will I drop my insecurity of being too long winded. I am hoping Frank doesn’t edit this down to something simpler….like…..he had a great business….but failed!

Good Luck in business,

jeff@jhbecker.com

 

Trust Your Banker

Dear Santa, I don't need any new electronics this year.  I couldn't wait for you and Rudolph.  My iPhone 3 battery was dead.  So I got a new iPhone 5, and since I happened to be at the Verizon store already, I got an iPad as well.

This year, please just heal RGIII's knee.  And if you don't mind, please get the Redskins a head coach, who knows how to use the last four minutes of each half.  This coach  would instill a sense of urgency in his offensive players, so that they don't waste a minute of every last four mulling around aimlessly.  This coach should also comprehend the concept of calling a timeout just before the two minute warning when the other team is trying to run out the clock.  After you've accomplished those two things, then you can work on healing Tiny Tim, that little poser.

Last week, I met with a long time client in the residential construction industry for income tax planning.  Tax planning gets much easier in mid-December, since we only have to crystal ball a few weeks.  They are having a fantastic year, growing by almost a third in what is best described as a challenging year in construction.

However, they are facing the cash flow problems that come with rapid growth.  When you are growing, your receivables grow more rapidly than your payables, and you run out of cash.  So I asked about the size of their bank line of credit and how much they had used already.  They are a very well managed company with involved owners and a good internal bookkeeper.  So they had not used much of their line and had plenty of availability left.

Bringing up the topic of banking led into a discussion of their relationship with their current bank.  Actually I brought up the topic.  I work with a number of great small business banks, and I always look to match clients with banks that will serve them well.  They are happy with their current bank and should be.  However, they told me a story about how their previous bank had treated them.

A few years ago, the company had about $3 million in revenue.  They were profitable, but not wildly so.  They had a small line of credit with a bank, maybe $200K at most.  One day, without warning, the bank called the line of credit for immediate repayment.  The bank had decided to quit lending to residential construction businesses.

On an emergency basis, the company owners went bank shopping and were fortunately able to find a new bank during the worst of the recession.  For 2012, the company will exceed $9 million in revenue.  I'll bet the old bank would love to have them back now.

Your relationship with a bank might end the way Ike and Tina Turner's relationship ended, and you won't be the Ike in the relationship.  So get ready for a beating.

The way to avoid a good Ike Turner style beating from your bank is to cultivate relationships with other banks before you need them.  Emergency shopping for a bank can be a good way to go out of business.  Start networking now with community bankers.  Get to know them and the types of businesses they like.  When you find one that works well with your industry, give them a chance at your business.  Annually reviewing your bank relationship gives you alternatives if Ike gets pissed off.

Last night, I had my hair cut by a Russian spy.  Apparently, the spy business isn't so hot with the end of the Cold War.  So Natasha is working for Hair Cuttery to make ends meet.  I didn't understand a word she said, but she sounded like someone from an old James Bond movie.  I'm pretty certain she planted a bug on me.  When I turn on my car radio, all I get is a Moscow classic rock station that plays nothing but "Back in the USSR."

As always, thanks for reading.  For real tax and accounting advice, please visit our main S&K web site at www.skcpas.com.  Also, "How to Screw Up Your Small Business" is now on Facebook.  Please like the page.  I post a screw up of the day as well as various other short rants.  Once in a great while, I might post something truly educational, but don't count on it.

I'm looking for interesting blog topics.  If you have a subject you would like me to butcher, please leave a comment here or on the Facebook page.

Until next time, let's do it to them before they do it to us.

How to Screw Up Your Bank Loan

This week, we have another guest blooger - Mike Otto, VP Lending, John Marshall Bank, 571-405-2919 (o) motto@johnmarshallbank.com

Mike was answering a question from a potential borrower about how the bank evaluates a business loan application. Mike's answer shows how a business owner can screw himself / herself by reporting a really low income to the IRS and then trying to get a bank loan. Here are Mike's comments:
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In looking at the historical cash flow of a business, banks (all banks) look at tax returns and CPA prepared year end financials to confirm that the company prepared numbers which are available throughout the year are an accurate snapshot of the businesses performance. Some banks (like us) also look at the "global" cash flow of the business and borrower - taking into account the financial wherewithal of the guarantor in addition to the business cash flow.

The financial meltdown we saw has hurt businesses in more ways than they realize. The natural tendency of most business owners is to try to minimize their tax exposure where they can, and when they are doing well, this is ideal. The problem occurs when they need to either borrow money… or sell their business. Banks are under an extreme amount of scrutiny on who they lend to and why they are making certain loans… we have to justify to examiners our calculations and why we make the loans that we do to our clients… Yes, I know that President Obama is telling the American Public that banks need to lend more to small businesses and loosen up lending standards; however, the reality is that Federal Examiners - due to those bank failures we all saw - are scrutinizing everything we do, more now than ever before. Every loan that a bank makes is subject to review by examiners; they review only a small percentage of our loans, but they can ask to see them all… if need be. If a "potentially" bad loan is found on their review… or a calculation cannot be explained… or if the examiners feel the bank's lending guidelines are too relaxed (lenient), then they can widen their review and ask for more files, and more files, and more files… until they are comfortable with a bank's ability to lend, or deem them unfit and put them on the "potentially" troubled bank list, which becomes public knowledge. The net effect is that banks are discouraged from lending money in this environment - which is why most big banks have slowed down or stopped lending altogether and have focused their resources on cleaning up their existing loan portfolio.

I guess in summary, as a bank lending overview - banks look at business cash flow (historical as well as projected) to determine the Debt Service Coverage Ratio (DSCR) - these tell the bank how many times the business can cover the proposed new debt (1.25x to 1.50x or greater is what the bank would like to see in the current environment), and how much extra cash is available in case of an unexpected "challenge" in the business; this is considered the "primary" source of repayment of the debt. In addition to this, banks look at a "secondary" source of repayment, just in case the business is not able to cover the debt through that primary repayment source - as they have projected; the guarantor's net worth and liquid assets come into play here (the global cash flow I mentioned earlier). In addition to that, banks will also look at collateral to cover the loan in case of a meltdown; overkill at times, I know, but banks are conservative and are lending stockholders money - not investing in a business, so they have to be conservative. These things, as well as past credit performance/history, are a large part of what the bank looks at with any credit request, and why we are careful to be able to confirm/justify all our calculations. The bank needs to be able to justify that the cash flow of the business is sufficient for the business to support its existing debts and any additional debts they incur.
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Thanks Mike! Great advice to loan seekers in this economy.

Screw Up Your Banking Relationship

Here is how to screw up your banking relationship. Send your internal financial statements to your bank without having a CPA review them first. Last week, I got a panicked call from Jim, who was in a meeting with his bank. The banker, who was in Jim’s office, had some serious questions about the financial statements they were reviewing together. I was in a meeting. So I couldn’t take his call immediately. After my meeting ended, I returned his call. Jim had given the bank financial statements that his internal bookkeeper, Jan (his wife), had printed directly out of QuickBooks.

Jan is a wonderful person, but she isn’t much of a bookkeeper. She doesn’t have a degree or certificate in accounting. She isn’t certified as a bookkeeper. Jan’s sole qualification as a bookkeeper consists of sleeping with the owner each night. Surprise, surprise, the financial statements that she produced were a mess. They have been a mess for years.

If you read my prior post about bookkeepers, you will remember the keys to the accounting kingdom. Every number on your balance sheet should match an amount in the real world. In other words, if your balance sheet shows $100K of accounts receivable, in the real world, your customers show owe you exactly $100K.

Jim’s bank had loaned about two million dollars to his business. Since the business had poor financial results for two years in a row, they were keeping a close eye on Jim, meeting with him quarterly. The financial statements that Jan had produced for the meeting were incorrect in every way imaginable. There was a non-existent bank account on the balance sheet with a large negative balance. Accounts receivable and payable were incorrect. There were a number of totally unsupported, large liability amounts on the balance sheet. One liability account showed that Jim’s business owed two million dollars to someone, but Jan had no idea to whom the money was owed. The only thing Jan had done correctly on the balance sheet was the reconciliation of the main checking account. The financial statements were unreliable in every way. The banker in Jim’s office was understandably alarmed. They had loaned two million dollars to a business, whose owner had no idea how his business was performing. Jim sent me the financial statements he had given to the banker. I couldn’t tell either how his business was performing. Over the next couple weeks, I will be working with Jim to fix his financial statements. However, his credibility with the bank has been irreparably damaged. Jim should fire his bookkeeper even if it ruins his sex life.

I am currently working on a set of June 2010 financial statements for Samantha’s business. I have made ten adjusting entries so far. I expect to have about twenty when I am finished. Some of the adjustments are for only a few thousand dollars. One of the adjustments is for almost a million dollars. Samantha’s bookkeeper is no prize either. At least Samantha isn’t sleeping with him. This is a large company. After making twenty adjustments, Samantha’s financial statements will be ready for the bank. Imagine what the financial statements looked like before I started working on them. At least Samantha had the good sense to have me look at and fix the financial statements before presenting them to her bank. Her credibility with her banker will continue to be good.

Unless you have a really good understanding of your financial statements, and are absolutely certain your internal bookkeeper is outstanding, you should have a CPA review your financial statements before sending them to any third party. By the way, your bookkeeper’s main qualification shouldn’t be sexual attractiveness. A little accounting knowledge would be nice. There is a reason banks require business customers to submit financial statements prepared by CPA’s. They know most internally prepared company financial statements are unreliable if not outright misleading. Keep your credibility with your banker. Make certain your financial statements are reliable by having your CPA review them regularly.