Are You Having A Cash Flow Nightmare?

A number of years ago I started a software company that developed a specialized cash flow forecasting and business budgeting software program designed to help management forecast future financial activities by predicting profit or loss, and future cash flow requirements of their business. The main premise of the program was to provide an understanding of how long cash will last and if a profit will be made. Having this information would provide management sufficient time to secure funds to keep the business running if cash was to become scarce.

I started my company with about $200,000. I knew it would be more than enough to get the company into a profitable position. After several months the burn rate of cash was far beyond my expectations. I was just about out cash and my resources were tapped out.

One night at around 3 AM, I was in great pain. I was having a cash flow nightmare. I was starring at the ceiling with major anxiety wondering what do I do?  What made it worse I was the managing partner of a very successful CPA firm in Southern California. We had never had a cash flow problem and had never run out of cash. Here I was having a new painful experience…the pain of running out of cash. Not knowing what’s going to happen. It was awful. The anxiety was beyond anything I had ever felt during my business career. I knew it was just days before my dream was to end.

Have you guessed it yet? I developed a cash flow software program designed to predict profit and cash flow and I hadn’t used it for my own business.  Here I was a CPA telling people how important it is to predict profitability and cash flow and not following my own advice. Shame, shame on me for not practicing what I have preached for so many years.

I immediately jumped out of bed, threw on some jeans and headed for my laptop. I needed to get a handle on just how long the little cash I had would last. I entered my assumptions, crunched the numbers…and was shocked to discover that the disaster I was sure of was at least three months away. Suddenly, there was no more anxiety; I had some time left to fulfill my dream. Best of all, I had the time to do what was needed to get the resources and keep the company going.

So now, by my own experience, I discovered sleepless nights are not unusual. In fact, they are all-too-common. Whenever I ask entrepreneurs if they have ever had a cash flow nightmare as I described, I get a resounding yes!

Most anxiety is produced from fear of the future. Today more then ever a glimpse of what lies ahead is an absolute must. So I’ve started a new venture, along with providing the software I spoke of, called gohagit.com. We help companies develop an Early Warning System so entrepreneurs can take a look at where they’re going. If they don’t like what they see there will be plenty of time to take action before its to late. By the way, my software company just celebrated 20 years in business!

Harvey

*Contact me if you would like some guidance or to talk about our service or our software. You can reach me at 1-800-873-7789 or harvey@gohagit.com
www.cashplan.com | www.gohagit.com

Small Biz Owners Less Optimistic on Economy

Some 40 percent of small business owners feel less optimistic about the economy than they did three months ago during the inauguration of President Obama, according to a recent poll conducted by the City Business Journals Network, a publisher of more than 40 local business journals across the country.

By contrast, 26 percent of small business owners felt more optimistic during that same time frame.

Just 27 percent indicated that they believe their business will benefit from the $787 billion economic stimulus plan. As national health care is once again on the president’s radar, some 66 percent expressed concern that health care reform would increase their cost of doing business.

More than three quarters of the respondents (78 percent) said that banks that received TARP funds should boost their lending to small businesses. 

This article is from SMB Finance Magazine.

How optimistic are you? Tell us how you feel by leaving us a comment.  The more we all know the better right?

Something To Think About … Eliminating Mark To Market, Will It Work? Probably Not!

Written by Harvey A. Goldstein, CPA
President & CEO of GoHagit, Inc.

Maybe I’m crazy, but I’m sure you’ll let me know after reading this. It seems as if, for all the “brilliant” people in DC, they don’t have a definitive solution to the banking problem.  They keep pouring money into the system and hope the banking and other economic problems go away.   

Now they’ve convinced the world and the FASB that eliminating the “mark to market” accounting standards will help reduce the problem.  They think that a simple accounting entry (a book entry with no real economic substance) may be part of the solution.  I don’t think so.

 

I know that lack of money is part of the banking problem, but I believe that accounting rules are also at fault.  I contacted Congressman Elton Gallegly, a Republican friend of over 20 years, spoke with his staff, explained my thoughts, and was asked to send a memo to them.  In my fantasy I thought that, because of my solution, I’d be the talk of DC.  I wasn’t.

 

Here’s a summary of what I told the Congressman’s staff.  If I’m miles off base, please let me know.

 

Mark to market means that the assets of the bank are reduced to market value.  Example:  Bank raises $2 million from investors so has equity (capital) of $2 million and $2 million in cash.  Balance sheet looks like this:

 

Cash     $2,000,000

Equity   $2,000,000

 

Regulators say, (I simplified this), the bank can lend the $2 million because they have $2 million in equity (capital).  Bank lends $1 million for mortgages.  Balance sheet now looks like this:

 

Cash                 $1,000,000  (original $2 million less the $1,000,000 they loaned)

Mortgage asset   1,000,000

Equity               $2,000,000

 

Bank can still lend an additional $1 million because capital will allow it to loan $2 million and it has loaned only $1 million. 

 

Accountants say the market value (mark to market) of the mortgages are only $500,000, so the bank must now record a write off — take a paper loss (no impact on cash) of $500,000.  Balance sheet now looks like this:

 

Cash                 $1,000,000

Mortgages            500,000 (Original $1 million less $500,000 write off)

Total assets       $1,500,000

 

Equity               $2,000,000

Less loss              (500,000)

Net equity         $1,500,000

 

Regulators now say the bank no longer has $2 million in equity, therefore it can loan only $1.5 million (again simplified) because that’s all the equity it has remaining.  But the bank has already loaned a million (the original mortgages). So it has only a half million left ($2 million original equity less half million loss, less $1 million already loaned).

 

Notice that the bank still has $1 million in cash (liquidity), but can lend only one-half million.

 

The bank now lends the remaining half million allowed.  Balance sheet looks like this:

 

Cash                 $   500,000

Mortgages          1,000,000 (original million less half million write off plus half million new loans)          

Total assets       $1,500,000

 

Equity               $2,000,000

Less loss              (500,000)

Net equity         $1,500,000

 

 

Note that the bank still has a half million in cash but can’t lend any more.

They were limited to equity (capital):

 

Original equity               $ 2,000,000

Actually Loaned            $(1,500,00)

Reduced by paper loss   $ ( 500,000) 

Lending left                   $ 0

 

So what to do:

 

1.       Have the government invest more money to increase equity (they already did this), therefore the bank can lend more. This costs taxpayers a whole lot of money.

 

2.       Let the bank add the paper losses back to their capital calculation which would allow it the ability to lend the additional half million in my example above with no use of taxpayer funds.

 

I realize the example is very simplified, but my simple mind says why not?  Explain to me why it wouldn’t work.

 

Now they want to buy the “toxic assets” of the bank.  Well that’s OK if the bank needs cash.  However, rather then buy the “toxic assets,” let other banks or the FED make the banks loans with a government guarantee instead of government funds. 

 

Are we creating another problem buy selling the “toxic assets”?  Maybe!  It seems to me that if the government buys the “toxic assets” for less then their book value, the bank will show losses on the sale of the “toxic assets” and impair their capital even more.  Of course the solution to this is would be more government bailout money to cover the reduced capital resulting from the sale of “toxic assets.”  A circular equation?

 

Eliminating marking to market is not going to be helpful.  What will help?  Easing, for a period of time, the capital requirements for lending.  Government stops putting up the bucks and just guarantees inter-bank lending activities and other lending activities. This could stop the treasury printing presses.

But it seems to me that giving the money is what the government wants to do. Why? How about de facto nationalizing of the banks.

 

Something to think about!  

 

www.gohagit.com

 

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Keep up with our updates by following us here: http://twitter.com/gohagit. We’ll make sure to follow you too.

After 42 years with SingerLewak…

I wanted you to know after 42 years at SingerLewak (SLGG) as a partner and 30+ years as managing partner, I have decided to leave the firm and pursue new activities.  What a great time I have had over those 42 years. Starting with the firm with 5 staff and partners and playing a substantial role in growing it to well over 200 people. During my career I have had so many wonderful experiences that were well beyond anything I could have imagined. Experiences that will always be a part of me and I will always cherish.

Now it’s time for me to start a second career!

I’m very excited about doing new things. I’ve started a new practice specializing in non-traditional accounting services. I will be providing cash flow analysis and cash flow planning services for the business community and the accounting profession. I’ll be helping businesses focus on their future cash requirements, not the past, as traditional accountants do. You might call it setting up an Early Warning System of potential cash flow disaster, thus providing ample time to take action before its too late.

See my brands:

www.gohagit.com  - www.cashplan.com – www.hgoldsteincpa.com

 

I’ll also be teaching a bit and because of over 30 years as Managing Partner of SLGG,  I’ll be available for consulting with other professional firms in the area of management. In my capacity as Managing Partner, I have covered almost every conceivable management issue and as a result I can help professionals navigate many of the management issues they may be facing today and in the future.

During the past several years I have made many great friends through all the social and business networks I have been lucky to have been a member of. These are friendships that are important to me and want to continue.

Thank you for your past support. I look forward to continuing to play a role in the Los Angeles business community.

I have relocated to an office in Woodland Hills (San Fernando Valley). I can be reached at 1-800-873-7789 x 1233 or you can always email me at hgoldstein@dslextreme.com.

To the future,

Harvey A. Goldstein CPA
hgoldstein@dslextreme.com  
www.cashplan.com
www.gohagit.com
www.hgoldsteincpa.com
1-800-873-7789

 

Harvey Goldstein interviews Peter Stephan on trouble with the IRS

Listen to this podcast on how to deal with the IRS during these tough economic times.  Turn up the volume and enjoy the show.

Click here for podcast to open in separate window.