Joel Lesser, CFO - Executive Portfolio

Beyond Apps and the Cloud

An article, "In the Cloud and Beyond" in the Jan/Feb 2012 edition of Financial Executive, by William M. Sinnett, takes an exciting peak at the wave of technology. Last month, 32 billion searches on twitter occurred and 30 billion pieces of content were added to facebook. The average teenager sends more than 4,000 text messages per month! And, 2 billion videos are watched on YouTube each day!

Tomorrow's successful business might be an existing piece of intellectual property that has matured or become common place in society. Some of today's top technology strategies are: 1) Mobile-Centric Applications and Interfaces; 2) In-Memory Computing; and 3) App Stores and Marketplaces; it is predicted that their will be 70 billion mobile application downloads from apps stores each year, by 2014.

Organizations should focus on these types of technologies in their planning processes and invest capital to improve the network infrastructure.

Going Public: Be Aware of All of the Costs

Sarbanes-Oxley is not the only incremental costs that growth companies must incur by going public. In the December 2011 issue of CFO Magazine, the article "The True Cost of Going Public" highlights many other cost factors.

Based on survey results from Ernst & Young, additional compensation for CEO's, CFO's, investor relations, and advisers can add to over a million dollars or more, depending on the size of the organization. Additional board members will most likely be sought as well, adding to director compensation prior to the IPO. The survey revealed that public companies retain about 11 third party advisers to execute a public offering, averaging about 13 million dollars.

In addition, many organizations find they need new or improved IT systems. 25% surveyed bought a new ERP system. Every company and situation is different, but there is no doubt that a large war-chest of funds will be required, and a variety of outsourced talent.

Contractor versus Employee: More Onerous Overseas

The U.S. has its classification tests for a contractor (IRS Revenue Ruling 87-41), but it might be a surprise to many that foreign countries actually have stricter regulations. The Article: "Cracking the Classification Conundrum" by Donald C. Dowling Jr, in the December issue of Financial Executive magazine, highlights many important factors.

Many foreign countries have very specific language that must be written in the contract. For example, the contractor must have a permanent tax account number or registered as a self-employed consultant or individual entrepreneur are required in India, Israel and Russia.

In the Netherlands, Dutch law requires permission from the court to terminate an employee, including a misclassified contractor. Understanding the local laws is critical to the classification challenge.

Local counsel should be engaged to ensure the agreement lays the groundwork for true independence.

Inflation Fears

Companies across the nation are concerned about inflation, but most have
very limited options to combat against this growing trend. Energy and health
care costs are the most worrisome. The article "the deep dive, that rising
feeling" by Kate O'Sullivan, in the September 2011 edition of CFO Magazine,
sites many CFO's with the challenge of eroding margins due to inflation.

Laura Beverly, the CFO for Half Price Books, is reluctant to raise prices
given the weak economy. Further, 54% of CFO's stated their firms absorbed the
increased expenses because they feared their customers would simply reject the
price hikes. However, small increases to the customer, will make a significant
difference to the bottom line. Many companies have negotiated with suppliers,
added surcharges, or found efficiencies in their organization to offset the
effects of inflation. It boils down to the age old dilemma of managing profits
and keeping the customer happy...however these days...it boils down to keeping the customer.

Private Equity's 'Dry Powder' Funding Power

Searching for the "right" investments is a prime objective for PE firms. Armed with nearly $500 billion worldwide in "Dry Powder" or cash reserves, they are seeking acquisitions with enterprise values from $10 million to $500 million. But these targets must demonstrate their ability to execute outstanding customer service, respond to challenges, and have leadership qualities that inspire loyalty.

The Private Equity Funding article by Jim Dimitriou and Joe Burkhart in the July/August 2011 edition of Financial Executive, reveals additional information, such as the PE firms are focused on mature businesses that can be grown to substantially improve earnings and then sell within a 3 to 10 year period, at a significant profit.

A major role for the CFO is to protect the organization from employee defection. Senior support staff often leaves at the most critical time periods, like mergers, acquisitions and other intensive transition periods. The entire C-suite and especially the CFO must execute leadership plans of not only accountability, but of retention through motivation, which will be directly associated with ensuring that EBITDA and other goals are achieved timely.

Annual Budget, Rolling Forecast or Both

There are many advantages in utilizing both budget and forecast tools, as long as the process does not dilute progress for the business. Most everyone has heard the term "analysis paralysis"; there are many companies which invest too many resources to produce a budget which is usually outdated by the time its published. In the May 2011 edition of CFO, an article "Let it Roll" by Russ Banham, sites many examples of changing times associated with the planning process.

Unilever, a $54 billion dollar consumer products giant, has eliminated the budget process all together; they now have an eight-quarter rolling forecast. Even smaller companies, such as Norton Lilly, a $50 million dollar shipping agency adopted a 12-month rolling forecast.

The bottom line is that each organization must utilize the tools which provides the best results. I personally find a combination of the annual budget and quarterly forecasts to be an efficient combination. The annual budget sets revenue and profitability expectations tied to an incentive program. The quarterly forecasts account for current trends and/or changes to strategy, such as an acquisition or a divestiture. Management needs quick access to current business modeling that is not hindered by layers of bureaucracy, typically found in a budgeting process.

One of the most effective tools is to have routine business review meetings with the key management staff. If these meetings are focussed and the take-aways are incorporated into the forecast, they will enable the team to manage the business dynamically.

 

CFO's are More Optimistic

Over half of the CFO's surveyed are more optimistic about the economy than last quarter; this is a 50% increase from December of 2010, according to the most recent Duke University/CFO Magazine Global Business Outlook Survey.

The good news is that there is a correlation between CFO optimism and GDP growth, spending, and employment. The transportation and energy sectors will do the most hiring, especially with skilled labor, professionals, sales and engineers. Estimates are as high as 5% on average. Although manufacturers are avoiding significant hiring by utilizing overtime and increasing efficiency standards, as it simply is not wise to build the production workforce with the amount of uncertainty that still exists.

The number one factor is consumer demand for a recovering economy; weak spending leads to soft demand and tight margins. Inflation is another concern as fuel costs are pushing-up prices across the board. However, all this being said, most CFO's agree that the economy is in a recovery period, and we are bound for greater prosperity; it will just take more time. For more information, please see the article written by Kate O' Sullivan, deputy editor of CFO, called Business Outlook Survey, Spring Fever.

Private to Public: An Unintentional Road

Reaching 500 shareholders can be much easier these days, and that could mean public disclosure and SEC reporting requirements. As stated by Russ Banham's article in the March 2011 edition of CFO Magazine, "Going Public by Accident", companies such as Facebook may have crossed that blurry line. Between stock option plans to employees and investment pool structures, these equity plans muddy the waters. And with the added responsibility of public reporting comes the risk of litigation from shareholders if the company's value decreases.

A strategy to avoid this scanerio is filing for an exemption to the 500 shareholder limit. In addition, the SEC still has not issued an official ruling on whether investment pools count as multiple shareholders. If a company still finds its self as an unintentional public entity, the SEC gives 120 days after the end of the fiscal year to register as a reporting company.

Sell-Side Due Diligence

A sell-side due diligence prepared by a potential seller can be a worthy investment, and is a growing trend, according an article written by Steven E. Brady of Grant Thornton, in the February 2011 edition of Mergers & Acquisitions magazine, a publication of ACG.

A seller can actually increase the speed to closing a deal and have more certainty to a valuation with a sell-side due diligence process involving a third party experienced with financial, tax and operational expertise. By conducting this analysis before going to market, issues can be identified well in advance so corrective actions can be taken. If issues are discovered from the buyer, re-negotiations will most likely lead to a lower valuation or even killing the deal.

Of course, this process will add another layer of cost for the seller, but the potential benefits could far outweigh this extra expense. Knowledge about your business and careful planning is absolutely crucial in executing an exit strategy.

Corporate Governance Protection Against Litigation

In the past couple of years, there has been an onslaught of corporate governance cases, stemming from the credit crisis and the general business conditions of the economic recession. In an article by Sheryl Hopkins, "Litigation Stemming from the Credit Crisis Increasing" in the Jan/Feb 2011 issue of Financial Executive Magazine, there are several approaches executives can use to protect their organizations.

For starters, the officers and directors must not only define the roles and responsibilities, but put processes and procedures in place to: 1) govern decision making, 2) ensure the parties are informed on those decisions, and 3) ensure they are followed, and if not, why not. These simple measures can be crucial in avoiding and defending the litigation of SEC cases and general fiduciary duty roles. This includes misstated financial statements and/or improper disclosures.

Many current cases are headed to trial because motions to dismiss have been denied. Settlements are very expensive; there have been 16 settlements of sub prime and credit crisis-related actions for more than $1.8 billion as of November 2010.

Even M&A activity is generating claims against directors and officers regarding the price of the transaction or even the decision to merge.

The establishment and continuing efforts of a strong governance process is one key element in protecting your company.