SurvivalWare Version 3.0

What a terrible communicator I have been recently: the last post to this blog was 3 months ago, about the same amount of time since the last newsletter.

I am turning over a new leaf.  As a company, we finally figured out what we are good at, and what customers are willing to pay for.  Luckily there is some overlap.

Version 3.0 is all about SurvivalWare coming of age as the ultimate small business analysis tool.  Every business is unique, and with version 3.0 we hope to make a quantum leap forward in the ability of customers to customize a Survivalware model.  You can customize in layers – for example, leave the model logic intact but create a new set of dashboards with your own targets contained therein. Report formats will be under your control, so format to your heart’s content.  If it’s just the Stats and the Key Performance Indicator (KPI) calculations you want to customize – not a problem.  The specs are housed in a separate Excel spreadsheet, and you are free to edit and re-generate the SurvivalWare model at any time.  The SurvivalWare model stays intact – it just adds on the newly created logic in a space reserved for PlugIns.

Then there are the new and improved forecasting tools.  Recently I worked with a customer via a web session to help him learn how to use SurvivalWare to put together some financial projections.  This was in connection with his efforts to secure an SBA loan.  It sure would have been nice if SurvivalWare could have handled the modeling of the loan itself a little easier.  It’s embarrassing when you tell a customer to go do the loan amortization calculations in Excel and copy/ paste the principal repayments in one line (and reversing signs to create negative numbers representing cash outflows), and then figure out the interest rate and type it in a separate row.  There were some other glaring deficiencies as well in the ease of use of the underlying financial model. 

So in version 3.0, a big effort has been made to make it easier to create and understand financial projections.  The more uncertainty there is in the economy, the more critical it is to update financial projections frequently, and watch key performance indicators like a hawk.  But if it is hard to do, it won’t get done.

We are systematically collecting support call data using IssueTrak, and will continue to cull “opportunities for improvement” based on what customers are having the most trouble with.   IssueTrak promises to be a great management tool as our customer base grows, and the support team along with it.  (Full disclosure, I am a director of IssueTrak, Inc.  My brother, Hank, is founder and CEO.  www.issuetrak.com)

So when will this new version of SurvivalWare be available?  As soon as I quit bragging about it, and get back to work on it.  I’m shooting now for a May, 2009 release.  I have several customers in the middle of major customization projects I am applying the new technology to.  I want to have all of them up and running before final product release.

We’ll also be publishing a ton of technical reference content covering the Automator (for creating applets), the Model Generator, Report specifications, and automated Graphics (including the Comparanator).  The hope is to make it attractive for third parties to build customer solutions on top of the SurvivalWare platform.  Lots of demo and training videos are planned as well.  Well – at least they’re past the “gleam in the eye” stage.  Look for the documentation and videos to appear a couple of months after the software.

Year End Rollover

Your SurvivalWare data file (.MTX) holds a limited amount of historical data.  At the end of each year, there is a process you go through called a “Rollover” to archive the oldest 12 months of data, and make room for the new year.

 

The time to do the rollover is when you are ready to load January data – which is probably some time in February.  You can do it right AFTER loading December data.  There is no harm in doing it then.

NOTE: If you are on a fiscal year that ends in a month other than December, you would do the rollover after loading the first month of the new fiscal year, not January.

 

To do the rollover, go to Rusty’s Toolbox from SurvivalWare’s main screen.

 

As a way of preventing accidental rollovers, SurvivalWare requires the “Last Actual Month” be set to December (the last month of the Fiscal Year) before you are allowed to do a rollover.  From Rusty’s Toolbox you can set the Last Actual Month yourself – select Data / Set Last Actual Month.

 

 

When you are ready to do the Rollover, select Data / “Rollover this file”.

 

 

The first box controls what the settings are to be AFTER the rollover.  Set the month to January (or the first month of the Fiscal Year if you are on a fiscal year).  Set the year to the new fiscal year.  (2009 for those rolling over from 2008).

 

You have four options for dealing with the Budget:

 

1. Clear budget columns – just sets all the budget values to zeroes, for both the 2009 Budget, and the 2010 budget.
2. Preserve budget data – leaves the 2008 budget in the 2009 budget columns.
3. Move projected values into Budget Columns – the monthly projections you made for 2009 are moved into the 2009 Budget columns.
4. Move Next Year budget into Current Year Budget.  During 2008, you are allowed to work on the 2008 budget (Current Year) or the 2009 budget (Next Year).  All actual to budget reporting uses the Current Year.  If you’ve already prepared the 2009 Budget,  you can move it into the Current Year budget columns during Rollover. (This is the default).

 

When you click OK, SurvivalWare saves a copy of the file pre-rollover in the Archive directory, and tells you its name.  Your current file will now show a current fiscal year of 2009.  You can select File / Properties, and click on “This Data File” tab to check.

 

 

 

Time periods stored in a SurvivalWare MTX file

 

2008 file prior to rollover:

 

Months:  Dec 2005 to Dec 2009

Years: 2010 to 2019

Current Budget: 2008

Next Year Budget: 2009

 

2009 file after rolling over the 2008 file:

 

Months:  Dec 2006 to Dec 2010

Years: 2011 to 2020

Current Budget: 2009

Next Year Budget: 2010 

 

Note:  The time periods stored may vary from model to model.  The example above is for the generic FM2008 model that comes with SurvivalWare.        

 

 

 

 

 

“How to Take Control of Your Cash Flow” Webinar re-scheduled

We’ve been doing webinars the last 3 or 4 months in an attempt to make the sales and training process more efficient.  Simultaneously, we cranked up the advertising and marketing efforts, and have created a steady flow of prospects who want to do a better job of forecasting cash flow and future liquidity.

 

We still talk to people one on one – in fact we like doing that.  But as you can imagine, 20 or 30 people attending a webinar helps us leverage our time and reach more people for a relatively low per capita investment in time.   So we’ll continue to do both, and expect the webinar attendance to reach 75 to 100 at a time as we crank up the marketing surge next year.

 

We finally hit on a format that is goes right to the core of a critical need facing small business / all business with “How to take control of your cash flow.”  Philip Campbell, author of the book “Never Run Out of Cash”, explains in plain English the difference between Net Income and Cash Flow, and why you positively cannot run a business well without doing cash flow projections.

 

Then I follow with a very targeted demo of SurvivalWare – first doing an analysis of the latest cash flow for a mythical company, and then going through the steps of creating a cash flow projection for the next 18 months.

 

We had about 20 attendees at the Dec 1, 2008 presentation of this webinar, and recorded it using the GoToWebinar recording feature.  It actually turned out pretty well.  Philip’s part was especially good. (www.survivalware.com/webinars.html)  I decided I needed to improve the dummy data for my demo.  I had used the “data disguise module” in Rusty’s Toolbox to create the dummy company data from a real live customer submission.  Unfortunately some of the randomizing caused weird things like negative cash to appear in a couple of months.  I’ve got that all fixed now for next time, and the numbers actually tell a story now.

 

I’m toying with the idea of working with 100% real live data submitted just a day or two in advance if there are customers or prospects willing to participate.  We don’t have to reveal whose data it is.  But I find real live data more compelling than contrived examples.  The truth is stranger than fiction.  Send me an email if you want to volunteer.  It could be a cheap way (free!) to get your initial data mapped and loaded.

 

So here I am burying my apology for what happened yesterday 6 paragraphs deep.  We had 22 signed up for yesterday’s webinar, and lo and behold with less than 10 minutes to go, I couldn’t get the audio portion to work (basically a conference call number that GoToWebinar provides).  The reason to use their audio service is that they seamlessly include the audio when you record the webinar.  No special microphones or cabling required.  It’s great when it works. 

 

After about the 10^th try, even using a different phone line, different telephone handset, I had to punt. I put up a lame message in a Word document and showed my screen to all attendees.  Anne Briggs is supposed to follow up with a personal email to each today.  Best laid plans and all that.  I am sorry for wasting your time.  Unfortunately, I can’t completely rule out user error.

 

I’ve decided that next time we will have a backup conference call number just in case (and forgo recording the session if we have to).  Also, I’m going to make a renewed attempt to create some pre-recorded webinars of shorter duration, for specific topics like “loading data”,  “Valuation”, or “RMA Ratio Analysis”. Then you can view these at your convenience – no need to sign up for a webinar.

 

So what’s a person to do when you’re so embarrassed you don’t want to show your face?  Well, it was 60 degrees outside in mid December.  I took a nice long bike ride.  The photo below is from a park just north of old town Alexandria, looking up toward Washington, D.C. in the distance.  This was about 9 miles by bike from the world headquarters of Luhring SurvivalWare, Inc.  Not all was lost. 

Einstein and Entrepreneurs – Traits in Common

My son Nick, who is studying to be a theoretical physiscist (I think), sent me a link to this article that appeared on www.entrepreneur.com,   

Here’s an excerpt:

“Entrepreneurs have more in common with Einstein than they think. Many of the traits that led him to be named Time magazine’s Person of the Century–kind of an elite club–drive people to create businesses. Do you see a little of Einstein in you?”

He goes on to list 10 traits, which I think are revealing (also makes me proud to be an entrepreneur).  I rate highest on trait #6 (naps).  See how you compare to Einstein.  Here’s the link to the full article:

10 Traits that Einstein and Entrepreneurs share

Einstein statue in Washington, D.C.

Models have personalities – Part 1: Overview

SurvivalWare is a software platform on which to run financial models.  A financial model is a mathematical representation of a company with an emphasis on financial results.  The idea is the same as with other models or simulations:  you tinker with the model instead of doing things in real life.  A financial model is just a list of variables, and formulas to apply to the variables.  Generally, you’ll have one set of formulas to apply to historical time periods in order to calculate Financial Ratios and Key Performance Indicators (KPI’s).  Another set of formulas will look into the future, and translate your assumptions about what you expect to happen into a complete set of financial statements for each time period in the planning horizon.  The planning horizon is typically “the rest of the year,” or “the next 12 months,” or “the next 3 to 5 years.”

 

 

The model developer has a number of decisions to make:

• What comprises the “Common Chart of Accounts?”  This can vary quite a bit from one industry to another.
• What are the KPI’s for companies in this target market?  How are they calculated?
• What non-financial data should be collected to support calculation of the KPI’s?
• How much history should the model hold?
• How far to project into the future?
• What are the critical success factors that drive the projections?
• Should I include the 12 month average option?
• What variables are the most important and should be displayed in the dashboard?
• How many reports and what does each include?
• How many column sets?
• How to divide the data into tabs for presentation in the DataViewer grids?
• What SurvivalWare icons and options should be displayed on the main screen?
• Should I develop some applets to automate certain things like the collection or distribution of data among participants in a group?
• Should I go to the trouble of building consolidation logic in case there are multi-location owners?

 

 

 

 

 

 

These and many other decisions combine to form the personality of a model

FM2008 – the all purpose financial statement model

 

FM2008 is a general purpose model, and is the one that comes with SurvivalWare when you buy it off the website. It allows for up to 10 product lines, and 40 or so operating expenses.  You can customize the product names, and several expense categories.  The Balance Sheet is fairly standard, and most importantly has “Other” categories for Current Assets, Long Term Assets, Current Liabilities, Long Term Liabilities, and Equity. 

Cash Flow Statements are calculated in two different formats: the Traditional one blessed by the organization formerly known as FASB, and the Peace of Mind schedule promoted by Philip Campbell in his book Never Run Out of Cash. 

The Working Capital section is real nice – calculates automatically the number of Days of Cash you have on hand each month, and also Days of Inventory on hand, Days Sales of Receivables, and Days Expenses of Payables.

You can track your credit limit for Credit Cards and other Credit lines, and SurvivalWare will calculate the total amount of Cash and Available Credit each month so you can see how close to the edge you are. 

There is a Valuation section that calculates a value of your business based on four different methods, and your assumptions about “multiples” of EBITDA, Sales, Net Income, or Equity. 

The Non-Financial Data section is kind of bland – stuff like Headcount, Square Feet of retail or office space,  and then some high level stats for web-based businesses such as Website visitors,  new prospects, and new customers. 

There is a Custom KPI section that was just recently revamped and documented so that you can specify additional variables to track and special calculations to make.  We don’t recommend doing this yourself unless you feel comfortable doing light programming tasks.

 

 

 

Oddly the RMA ratios are available only in printed reports.  Not sure why.  These are the same ratios published by RMA based on the financial statements of thousands of companies as reported by their banks.  There are 700 some NAICS (formerly SIC) codes for which benchmark financial ratios exist. 

The FM2008 model allows for 24 months of history, plus 12 months of the current year, and 12 months of additional projections.  Another 9 years of projections are possible beyond that. 

You can view the data as months, quarters, year to date totals as of any month, full-year totals, or 12 month moving averages. 

Alphagraphics – highly customized model and analysis system 

At the other extreme is the Alphagraphics model.   This was started in the summer of 2005 and rolled out to their network of franchisees in early 2006.  After a year and a half of field experience, Alphagraphics agreed to fund some development in return for a promise to overhaul the user interface and make it easier for any franchisee to use, no matter how computer illiterate.  This effort took a long time to reach fruition, but is now in its fourth month as version 2.0.

 

 

The SurvivalWare software platform is the same for FM2008 and for Alphagraphics.  You run the same EXE file – SurvWareV2.EXE.  You do drilldowns, trend charts, and reports the same way,  regardless of which model you are using.  But the variables and report formats are different.  And there are some special purpose modules written just for Alphagraphics that are accessible from the main screen, such as the Vital Metrics report, and the AG Rankings Update routine.

 

 

 

SurvivalWare’s opening screen

 

The opening screen reveals up to 15 modules and applets that can be accessed right away.  The FM2008 model makes use of 13, and includes one that Alphagraphic does not have – the Report Package module.  The AlphaGraphics model adds three modules and applets that do not appear when the FM2008 model is running:

 

• Vital Metrics Report
• Leaders and Stats
• AG Rankings Update

Little known fact:  you can run the FM2008 model in “retro” mode by logging in as the user “retro.”  The icons used then are the original edgy, whimsical icons created by Nick Luhring.

 

Part 2 of this article compares and contrasts these two models in more detail, delving further into their respective personalities, and explains what they actually do.

 

 

Why I am a Solopreneur

I love programming.  I like to solve big complicated problems.  Especially when there is a purpose, such as making money or helping a loved one.

 

My love of problem solving is one of the reasons that I have evolved to become a Solopreneur.  It lets me indulge my passion for software design and programming.  I don’t have to let other people have all the fun.

 

I’ve observed what it takes to become the successful leader of a growing company.  You have to spend time on it.  You spend a lot of time on people – recruiting, evaluating, meeting with, seeking out opinions from, and sometimes firing.

 

I like to have a certain amount of alone time each day.  When I can concentrate with no distractions, and think about the problem at hand.  Maybe I need to break a larger problem into smaller parts.  Maybe I am writing code to solve one of those parts.  Maybe I am researching new stuff, or trying to find a bug.  This is how I get my jollies.  I get up early most mornings to make sure I get my quota of alone time, even in the midst of deadlines and scrambling for cash.

 

I also like to help people.  I get a genuine kick out of doing something for someone else.  But I’d rather sit back and let them come to me rather than to seek them out.  Doing customer support is a natural outlet for this aptitude and desire.

 

Solopreneur as software developer can make for some very happy customers, because the developer is forced to face the music if he gets things wrong.  There is no bureaucracy involved in the decision making.  The disadvantage is that it is just one person, and it is hard to get everything done.  As cash flow improves, certain tasks can be sub-contracted out without compromising product quality. The competition fields teams of dozens and hundreds of developers.  Being close to the customer is your only chance at competitive advantage.  Walking in your customers’ shoes, solving the right problem, and all that.

 

Here is the other part of my Solopreneur strategy:  finding other Solopreneurs who can be close to their customers.  Other Solopreneurs to automate and customize using the Automator and the financial modeling language built into SurvivalWare.  If I can teach other people to do what I do, and make them efficient and productive, I extend my market and reach exponentially without having to hire people and build a real company.

 

A modeler with some special industry knowledge can tackle micro-markets the big guys just can’t afford to go after.  This is the promise of SurvivalWare – for the Solopreneurs (including myself) who deliver their expertise in the form of models and applets, and for their clients who reap the benefits of specialized software without having to shoulder the full burden of development.

 

There is an organization devoted to helping Solopreneurs called the International Association of Solopreneurs (http://www.solopreneurs.org).  I was interviewed by the founder, Donna Amos, earlier today, and I checked out the website.  Some great resources for entrepreneurs, whether flying solo or not.  But watch out for the interviews..

 

I came across a couple of goodies I really liked on her original website:

 

Are You Ready to Start Your Own Business?  The 4 Key Questions You Must Ask

 

http://www.donnaamos.com/are-you-ready-to-start-your-own-business-the-4-key-questions-you-must-ask/

 

 

A white paper on the benefits of creating white papers

 

(you have to give her your name and email address to get the white paper, but it is well worth it)

 

http://www.donnaamos.com/?s=white+paper

 

 

 

Joe the Plumber is not my role model

Laura Lang, my ace marketing consultant, sent me this link to a commentary piece on CNN.com written by Carl Schramm, president and CEO of the Kauffman Foundation.  Carl does a great job of laying out the reasons we as a nation should encourage people to become entrepreneurs.

 

http://www.cnn.com/2008/POLITICS/10/19/schramm.entrepreneur/index.html

 

I agree with everything Carl said except for the headline, and his elevation of Joe the Plumber as someone we should admire.  My reading of Joe the Plumber is that he wants instant success.

 

Here is one concept that Carl missed.  His stats about 1,000 high growth firms started each year is probably more accurately stated as 1,000 small firms joining the high growth club each year.  They may have been started years earlier.  Companies aren’t necessarily high growth from the git-go. 

 

My brother Hank’s company, IssueTrak, is a case in point.  He started the company in 1992, and just made the INC. 500 a year ago for his performance in the 5 years ending in 2006.  Where was he the first 10 years of the business?

 

And what about my company, Luhring SurvivalWare, Inc., which went live on the web in 2002?  We’ve been coasting along at about $100,000 in annual revenue the last three years, while pouring every spare nickel into development, field testing, and documentation.  With the release of version 2.0 of SurvivalWare over the summer, the focus is now shifting to marketing and sales.  Our web traffic has quadrupled in the last 2 months, and leads have grown by the same amount.  We think 2009 will be a breakout year.  The transition from hanging on by our fingernails to high growth will have taken 7 or 8 years.  Excuse me if I don’t have a lot of sympathy for someone who expects to make $250,000 soon enough to be affected by Barack Obama’s tax policies.   Joe the Plumber should be worried about Barack Obama’s successor 4 to 8 years from now.

 

One reason we as a society celebrate the entrepreneur is the same reason idolize the cowboy from years past.  We are independent.  We can take care of ourselves.  We march to the tune of our own drummer.  We mostly do what we want.  We don’t have a boss telling us to do ridiculous things.  Unfortunately, we do have the government telling us to do ridiculous things on occasion, like “Fill out this tax form” or “File this report.”  Sometimes we drag our feet in silent protest.  Then there’s that other thing we have to deal with – that whole thing about not running out of cash.  The stress from worrying about that can be crushing.

 

Here’s a message to Hank Paulson, Ben Bernanke and the others:

 

Hey you all!  You’re not making life any easier for us out here in the trenches with all the uncertainty you’re layering on top of an already uncertain world.  Cut it out!

 

Let the damn banks fail.  You won’t see a lot of tears shed from this sector.  I kind of like the imagery of a squirming banker being told he’s been turned down for loan.

 

Let Wall Street change its business model.  Excuse me, but buying a Credit Default Swap to me is like buying a lifetime membership in a health club.  Did you really think the counter-party was going to be around to make good on the debt?  If you’ve got any money left, I’ve got swampland in Florida you should take a look at.

 

My problem with Joe Plumber is that he had the expectation of making a $250,000 income right after buying (not building from scratch) a plumbing business.  I’ve been an entrepreneur for almost 30 years and have yet to make $250,000 in a single year.  When I do get there, I will only be happy to pay more in taxes, because I will have more to pay with.  I tell my kids and anyone else who will listen that my goal in life is to pay $1,000,000 a year in taxes – because that means I’ll be making a whole lot of money.

 

My personal preference is for a flat tax like the one Steve Forbes proposed years ago.    As I recall, the first $40,000 in income would be totally exempt from taxes, and then a flat 17% of income after that was paid in tax.  No deductions.  No loopholes.  Total simplification of the tax code.  Time to sell your stock in H&R Block.

 

In the meantime, going easy on the middle class by squeezing the rich just a little bit more doesn’t seem so bad.

 

Note to the politicians – whatever you do, just give us a level playing field, and stay off of our backs.  We’ll be glad to pay our fair share in taxes as long as you treat us right.

10 Tips to Survive a Cash Flow Crisis

This just went out on the wire 2 days ago, and already we’ve had calls from the Wall Street Journal, Bloomberg News, and the BBC.

The Wall Street Journal boiled it down to 5 tips, which can be found on their Independent Street blog:

 

 

http://blogs.wsj.com/independentstreet/2008/10/01/five-tips-for-surviving-a-cash-flow-crisis/

ALEXANDRIA, Va., Sept. 29 /PRNewswire-USNewswire/ — For small business owners and entrepreneurs facing a cash flow crisis, it feels like the world is closing in. You’re in trouble. You’re not sure how you’re going to meet payroll, much less other essential bills.

Rusty Luhring, who has spent three decades as a consultant and financial software developer, is passionate about aggressive management of cash flow and freely shares his tips and experiences at www.survivalware.com. His most timely advice? Telling people to take immediate action—before their cash crisis escalates. “They need to do some detailed planning to understand the magnitude of the problem, and when their cash needs are greatest,” he says. “Similarly, they can bolster cash flow by thinking outside the box about invoicing and collections.”

 

Having bootstrapped two start-up companies, starting in the late-70s, and raised four children, he has a lot in common with those seeking his help. He offers the following 10 steps to help business owners and entrepreneurs start regaining control of their cash flow. 

 

1. Triage payments 

Make a list of all payments due for the next three months. Give payroll priority and see what else you can negotiate to pay later. You may be able to slide with utilities; subcontractors can often be persuaded to wait a bit.  

2. Accelerate collections 

Call customers to check on payments that are overdue, or due soon. If you have a good relationship, you may be able to ask for early payment as a favor. For older accounts receivable, offer to forgive 15% of their overdue balance if they pay within the week. This may encourage them to respond and it’s less costly than hiring a collection agency to go after receivables you may never see.  

3. Invoice early 

If you consistently send out invoices a week late, you are delaying receipts by a week. If you average $7,000 a week in receipts, the net effect is that you have $7,000 less to work with. If you take 10 days to send out the invoices, it’s the same as if you need another $10,000 in working capital to run your business. 

4. Offer discounts

This invoicing carrot can speed collections, but make sure that you understand how much it is costing you. Some large companies have policies in place that require speeding payments to earn discounts, e.g., 2% for paying within 10 days. But beware: Suddenly offering a 5% discount for payment in 10 days could give out the wrong signal. 

5. Invoice more frequently 

If you are billing customers for time, consider billing twice a month instead of once. Billing promptly on the 1^st and 15^th of the month speeds up immediate cash flow. 

6. Ask for some payment upfront 

Instead of just billing for time as it is incurred, ask for a third upfront, a third while the job is in-progress, and a third upon completion. 

7. Fine-tune the timing of your payables  

Take advantage of the maximum allowable time (60 to 90 days) to pay suppliers. Picture it as an interest-free line of credit that gives you more time to collect accounts receivable without spending money on short-term credit lines. If your payroll withholding taxes total less than $50,000 per year, remit the withholding on the 15^th of the following month, instead of three days after payday. 

8. Ask the right people for a loan or investment  

Remember what they say about banks: They will lend you money only if you can prove beyond a shadow of a doubt that you don’t need it. Outside investors will sense your plight and demand onerous terms. This is a time to turn to friends and family and/or to get creative. Key customers might be able to help you out by advancing money to undertake a new product or pre-paying for products in anticipation of future demand. 

9. Manage your credit cards 

Many credit cards offer a cash advance credit limit that is separate (and lower) than the overall credit limit. Take the time to track the balances and credit limits for cash advances vs. overall purchases separately. Create a simple spreadsheet, and update it as the bills come in. When things get tight, make sure you charge whatever expenses you can to those cards that still have available merchandise credit, but no available cash advance credit. During a cash flow crisis, you want to maximize your available cash advances as they are almost the same as cash. 

10. Consider layoffs 

While large companies can take advantage of “redundancies” and “synergies” in downsizing their staff, it’s more difficult for small business owners. Each employee has his/her own specialized revenue-generating abilities. Instead of letting go entirely, discuss rehiring them as freelancers. It reduces the costs of health insurance, payroll and stock options for you, and increases their freedom and provides time for them to seek out additional work from other companies to boost their income. 

Now what? 

Going through these ten steps should give you some ideas of where you can delay payment, speed collections, or find additional cash. “Make the calls, send the e-mails, and write the letters,” advises Luhring. “Then get back to working on your business, making it the success you know it can be.”

About LSI

Luhring SurvivalWare, Inc. (LSI) develops, supports and sells financial modeling and cash flow planning software. LSI released a new version of SurvivalWare in 2008 that bundles an entry-level Cash Planner with a sophisticated financial modeling platform.

 

The Cash Planner is designed to help entrepreneurs survive severe cash flow problems by juggling payments to fit estimated cash flow. The modeling platform targets small and medium sized businesses, helping them survive and thrive in the face of financial challenges.

 

Customers can use the all-purpose model delivered with SurvivalWare, or one from a growing list of vertical market models developed by LSI and third parties. More information is available at www.survivalware.com.

 

To download a trial version of SurvivalWare 2.01 or to receive LSI’s free e-newsletter, visit www.survivalware.com or call 703-780-2044.

 

 

Media Contact: Laura Lang, Lang@KeatingLang.com, 703-272-3581

The GAO Should Apologize to Small Business

Here’s a letter I just sent to Senator Carl Levin (D – Mich):

August 12, 2008

 

Honorable Carl Levin

Chairman

Senate Homeland Security and Governmental Affairs Committee’s Permanent Subcommittee on Investigations

 

Fax: 202-224-1388

 

Dear Sir:

 

This letter is in response to a July 29, 2008 Washington Post article about the GAO report that found that “Businesses have shorted the Internal Revenue Service about $58 billion in federal payroll taxes they withheld from employees’ wages over the past 10 years.”

 

Here you are quoted in the article:

 

“At a time when our nation is drowning in debt, it is appalling that delinquent businesses have cheated Uncle Sam,” agreed Sen. Carl M. Levin (D-Mich.), the subcommittee chairman.

 

EXCUSE ME.  LET ME EXPRESS SOME OUTRAGE ON THE PART OF SMALL BUSINESS OWNERS.

 

We do your dirty work for you, the federal government.  We withhold payroll taxes from our employees, kick in another 7.65% for our share of Social Security and Medicare, and 99.9% of the time pay it to Uncle Sam.  How much would it cost you to collect that money from individuals directly?  What would the compliance rate be?  Please, show a little respect for your front-line tax collectors.

 

If we’re one day late, you hit us with a penalty of 2%.  6 to 15 days late, and the penalty is 5% of the taxes withheld.  What kind of BS is that?

 

Most states would call that usury.  The last time I did the analysis, I came up with a APR of 50%+ for an instance of borrowing from the feds for a quarter or two, and paying it back over time.

 

I think the GAO owes small business and the IRS an apology.

Has anyone tallied the amount of penalties and interest collected vs. the amount of uncollectible debt written off?  I’m just a simple man, and have no time to pester the bureaucracy for details – but a quick look at statistics published by the IRS seem to indicate that $7 billion in civil penalties were assessed against employers in FY2007 related to payroll taxes.  (See links to IRS tables at the end of this letter). You guys have the resources to get at the numbers.  Me – I’m just an entrepreneur struggling to make ends meet.  But gosh, the total penalties could equal or exceed the $58 billion not collected over the last 10 years.  Is not your outrage just a little misplaced?

 

My reading of the total tax collections table indicates that $7 trillion in employment taxes were collected over the last 10 years.  The $58 billion is less than 1% of that total.  Bad debt expense of less than 1% of revenues – not too bad considering the riff-raff (i.e. small businesses like mine) you have to deal with.

 

I’m shocked that the number of egregious cases is so low.  14,681 out of what – 30 million or so employers/tax collectors?  That is less than 0.05%.

Do you know what it is like to meet a payroll?  It ain’t easy.  Has anyone inside the GAO ever met a  payroll?  Probably not.  (Why else would they be working for the government?)  I’m just trying to give you some insight that may be lacking from government investigators operating Inside the Beltway.

 

Sure, they may be able to find some egregious cases that should be vigorously pursued (I’m all for pursuing the deadbeats).  After all, these are the ones that make the headlines.   But I suspect the vast majority of the 1.6 million employers who have fallen behind in their payroll taxes are just doing what they can to survive as they are buffeted by the winds of erratic cash flow.  They’re not deadbeats – just experiencing temporary liquidity problems.

 

The constant refrain you here from people who have taken the entrepreneurial plunge is how difficult it is to manage cash flow.  The consequences of doing it poorly are severe.  Please, don’t make it any tougher.

 

Predatory Sub-Prime Lenders look nice by comparison

Here’s how it works in the real world:

For small companies whose total withholding is $50,000 or less per year, they are required to send in the withholding by the 15^th of the month after the employees were paid.

 

If you miss a payment, the IRS doesn’t notice until you file the quarterly report by the 30^th of the month after quarter end.  Even then, it may take them a quarter or two before they ask for the money.  And if you resume paying as you go, they will allow you to pay off the old stuff over time.  Sometimes they will even abate some of the penalties.

It is one of the easiest ways to borrow money.  You don’t even have to fill out a credit app.

 

What about the fine print?  Oh yeah.  Officers of the company are personally liable for payroll taxes withheld.  The debt is not discharged in bankruptcy.  The IRS can and does threaten to talk to your business associates and neighbors to find out why you haven’t paid on time. They can file an intent to levy, and attach your bank accounts.  This is a pretty big hammer.  They don’t have to be nice.

 

From Lemons, Lemonade

Here’s what I propose (in addition to a public apology from the GAO):

Make this a profit center for the IRS.  Offer a $50,000 credit line to any business that withholds and remits payroll taxes.  No – make it $100,000.  Set the interest rate high – enough to cover loan losses and make a profit, but less than loan shark levels.   Require NO paperwork.  None.  Nada.          

 

Then sit back, watch the economy catch fire as entrepreneurs put this money to good use, and extra tax revenues roll in.  Sure beats building a bridge to nowhere, or screwing up grain markets with ethanol subsidies.

 

Here is a link to the Washington Post article:

http://www.washingtonpost.com/wp-dyn/content/article/2008/07/28/AR2008072802712.html?nav=rss_politics

 

Here are the tables from the IRS Data Books:

www.survivalware.com/download/IRS_Table_17_2007_07db17cp_civil_penalties_FY2007.xls

www.survivalware.com/download/IRS_Table_NumReturns_2006-2007_07db02nr.xls

www.survivalware.com/download/IRS_07db06co_taxes_collected_last_50_years.xls

 

Sincerely Yours,

 

 

Rusty Luhring

Founder and CEO

Luhring SurvivalWare, Inc.

rusty@survivalware.com

Doing Projections in SurvivalWare – Part 5: Other Cash Flow

This is part 5 of a 5 part series on how to create a cash flow projection using SurvivalWare and the generic financial model that comes with it. 

1. Getting familiar with the Forecast Tool
2. Sales and Expenses
3. Debt Service and Investment
4. Working Capital
5. Other Cash Flow

 Other Cash Flow

 

What happens in a financial projection model is that you use various techniques to forecast each and every item on the Income Statement and Balance Sheet (except for cash).  The model figures out what the level of cash has to be each month in order for the balance sheet to be in balance.  The integrity of the model is kept intact by calculating two checks:

 

(1)   Is the balance sheet in balance?  (i.e. Total Assets = Total Liabilities and Equity)

(2)   Is your ending cash balance each month consistent with the beginning cash balance and Net Cash Flow?

 

In the previous sections, we have forecasted all the income and expense items for the Income Statement, and the major items on the balance sheet (Accounts Receivable, Inventory, Accounts Payable, Debt, and Fixed Assets).  This last section ties up the loose ends by giving us an opportunity to forecast what happens to the minor players on the balance sheet.

 

Most of the items in this section are of the type “Incr/(Decr)” or “(Incr)/Decr.”   Most accountants will recognize these terms from traditional Cash Flow statements.

 

Incr is an abbreviation for “Increase.”

Decr is an abbreviation for “Decrease.”

 

The parentheses are used to indicate what type of cash flow occurs when there is an Increase or Decrease.

 

“Incr/(Decr)” means that this line item is calculated as a POSITIVE number where there is an increase in the underlying account from one month to the next, and a NEGATIVE number when there is a decrease.  Cash flow items associated with Liabilities fall into this category.  Suppose for example that the balance of Customer Deposits jumps from $5,000 one month to $8,000 the following month.  This is an Increase in a liability account of $3,000.  “Incr/(Decr) – Customer Deposits” would show a positive value of $3,000 for that month.  In real life this means that a customer has put down a deposit of $3,000 that month, and you now have the cash.

 

“(Incr)/Decr” means that this line item is calculated as a NEGATIVE number where there is an increase in the underlying account from one month to the next, and a POSTIVE number when there is a decrease.  Cash flow items associated with Assets fall into this category.  Say you have a Notes Receivable from a business partner of $12,000 as of the end of June.  This means the business partner owes your company $12,000.  If you advance another $5,000 in July, the balance owed will increase to $17,000.  But because this consumes your cash, the $5,000 shows up as a NEGATIVE number when you look at a cash flow statement.

 

For the “Other Cash Flow” section of the cash flow projection, you enter the CHANGES to these balance sheet items as the way of forecasting the balance each month into the future.  It is important to get the sign right.  Positive cash flows (an increase in a Liability or a decrease in an Asset) are entered as positive numbers.  Negative cash flows (a decrease in a Liability account or increase in an Asset) are entered as negative numbers.

 

When you enter numbers in this tab, you can quickly flip to the Balance Sheet tab to see the impact of your assumptions.

 

Of course, the first step is to eyeball what happened in the past. 

 

In the sample data , notice that the account “Other Current Assets” just bounces around a bit, and you might see a change of $2,000 or $3,000 from one month to the next.  Here is what it looks like on the Balance Sheet:

 

Other Current Assets

And here is the (Incr)/Decr calculated in the “Other Cash Flow” tab.

(Incr)/Decr Other Current Assets

It seems reasonable to forecast no change in the account going forward unless you have some specific knowledge of some activity that will affect this account in the future.

 

There are times when accounts play a more prominent role in your total Cash Flow Projection.

 

If you are a software vendor who sells annual support contracts, or a publisher who sells prepaid subscriptions, you might find a lot of activity in the Deferred Revenue Liability account.  If you sell a $12,000 support contract that covers a 12 month period, you would set up a liability (deferred revenue) of $12,000 – and reduce that amount by $1,000 per month as you perform the service.  The corresponding cash flow item – “Incr/(Decr) Deferred Revenue” would show a positive change of $11,000 the first month (the $12,000 sales less the $1,000 recognized as revenue the first month), and then minus $1,000 per month for the following 11 months.

 

For the sample data we’ve been using in this projection, here are the items we forecast in the “Other Cash Flow” tab:

Other Cash Flow tab

We’re planning a “Distribution to Owner” of $10,000 in August 2008.  This is a payment not considered to be Salary, but is more like a dividend.  Depending on your ownership structure and how you capitalized the business, you might have an “Owners Draw/Distribution” account in the equity section on the balance sheet.  You can put money in or draw it out without tax consequences.

 

Separately, there is an asset account called “Loans to Shareholders.”  By prior agreement, we’re lending an additional $2,000 each month to a key shareholder.  This is a negative cash flow and is entered as -$2,000 in the line “(Incr)/Decr Loans to Shareholders” in each month.

Summary of Cash Flow

 

This is the combination of all the assumptions made in the other sections.  Changes you make are instantly reflected here.  The summary starts with the beginning cash balance, and adds each of the four major cash flows to get to the Ending Cash Balance. Note that Ending Cash is projected to be negative in July and August.  And of course,  Beginning Cash Balance is equal to the prior month’s Ending Cash Balance.

 

Note: EBITDA is Earnings before Interest, Taxes, Depreciation, and Amortization – and is basically the same as Operating Income.

Summary of Cash Flow

This is how it looks graphically:

Projected Cash Balance

There is also a “Cash Flow Balance Check” section to make sure the model is in balance.

Balance Check

 

 

 

When you see “POM” in the variable names, it stands for “Peace of Mind” – the cash flow schedule that Philip Campbell talks about in his book, Never Run Out of Cash. The SurvivalWare model calculates two cash flow formats:

 

·        The “Peace of Mind” Schedule

·        A Traditional Cash Flow statement

 

The line item “Ending Cash Balance – POM” is the ending cash balance calculated when you add all the cash flows from the Peace of Mind schedule to the beginning cash balance.  This should equal the Ending Cash Balance that appears on the Balance Sheet, and if it does the “Cash Flow Check” line will have all zeroes.  If not, it probably means the balance sheet was out of balance in the last historical month.

 

At this point, you can go back to any prior tab, and make changes – then come back to this tab to see the impact on you cash balance.  You can also look at tabs that contain the projected “Income Statement” and “Balance Sheet” in the same format used for the historical statements.  Use the menu item “File / Save” to save these projections.  You can save them under a different file name if you want, and keep multiple scenarios.

 

Changing the planning horizon

 

The model allows for a total of 5 projected years beyond the current year.  Within that planning horizon, you have the option of breaking next year into months, or forecasting it in total.

 

To switch the view to years, click on the “Years” radio button in the upper right.

 

Months or years

 

Projecting Years

Then you can use the “File” menu item to switch back and forth between forecasting next year (2009 in this case) as Months or Years.

File menu