Thursday, July 26, 2012

Guest Blogger: 10 Ways Cash Flow Forecasts Go Wrong

By Mary Ellen Biery
Research Specialist, Sageworks, Inc.

Experts say cash flow forecasts can be tripped up by several common items that business owners and financial managers might overlook.  Generally, these can be blamed on two factors: omission or over-optimism. We’ll discuss over-optimism later, but let’s start with common items left out of cash flow forecasts that can throw off your accuracy.

Omissions abound

1. Year-to-year operational changes. A good forecast starts with what happened last year, but then you must consider what’s changed, according to Glenn L. Friedman, a CPA and managing partner of New York accounting firm Metis Group CPAs LLC. Maybe it’s pricing or promotional activity. “Maybe you’re doing an ad campaign you didn’t do last year, and you will believe it will generate X amount of revenue,” he says. Or maybe you’re planning an earlier ad campaign this year, so you will need to adjust the expected timing of revenue associated with that. In the case of service-oriented businesses, consider whether you plan to do some work earlier or later this year, Friedman adds. This is also the time to take a look at your client list and adjust your cash forecast based on the loss of a big client or the addition of several new ones.

2. Non-expense payments.  Friedman says people often think about cash flow using their profit and loss statement. “They forget that there are cash requirements in balance sheet items as well,” he says. Repayment of debt is one example.

3. Infrequent items. Other common omissions include estimated tax payments for employees, monthly loan payments, periodic contributions to retirement plans or savings, and occasional expenses tied to unexpected surprises, such as equipment repairs or automobile maintenance.

4. Seasonality.  Most businesses have busy and slow seasons, so taking that into account as you estimate cash outlays for inventory or staffing can help avoid a cash crunch. How holidays fall on the calendar can affect a retailer’s year. If you sell ice-removal products and last year was an unusually icy winter, you may need to plan for a more normal business pattern this year.
5. Commodities. Fluctuations in commodity pricing or currencies can be difficult to price ahead of time, but it’s important to take these trends into consideration when estimating your cash flow.

6. Capital expenses. Otis says forecasts can be spoiled if you omit property, plant or equipment investments for repairs or replacements or when something has become technologically obsolete.
7. Payroll. Michael Cole, audit principal at Southern California CPA firm Holthouse Carlin & Van Trigt LLP, says payroll can often cause big mistakes in cash flow forecasts. “If companies pay people on a monthly payroll or weekly payroll, then every seven years, they’re going to have an extra pay period,” he says. If they forget to plan for that, they could come up short for payroll, he adds. Similarly, cash outflows associated with annual or holiday bonuses or with quarterly estimated tax payments for your employees can be substantial enough to cause problems.

Finally, don’t forget that staff turnover creates something called “productivity churn,” which has an impact on cash flow. Michael Voie, a CPA and partner with Stallcup & Voie LLP in San Francisco, suggests that if you lose an employee, determine how that person affected your business relative to his or her replacement. And it’s not just salary and benefit costs. “Are they a production person, and were they putting in 250 units a day and this [new] person is putting in 100? What if sales come in less?” he says. You need to think through the variance that will occur because of those changes.
Optimism confounds forecasts
The second general culprit of errors in cash flow forecasts – over-optimism – is pervasive but understandable, experts say. “Business people by nature are optimistic people, and that hurts them when they’re making cash flow projections,” says Lauren Prosser, manager of advisory services at Sageworks.
Here are several ways that too much optimism can confound your cash flow forecasts: 

8. Sales and payments. By far, the most common issue cited by financial experts is when you’re too optimistic about when sales will occur and too optimistic about how soon customers will pay. “Don’t forget that a customer may say, ‘The check is in the mail,’ but you can’t spend those funds until the check has been deposited in your bank and cleared successfully,” says, David Douglass, a partner with Atlanta-based professional services firm Tatum.
9. “Averages.” In quickly changing times, averages used in your cash flow projections might [become] inaccurate, Douglass says. “For example, if your customers generally pay in 30 days after being invoiced and then suddenly delay payment for an additional 15 days, the extra 15 days often means you will have to cover another payroll,” he says. “There’s hardly anything worse than not having enough cash to cover payroll.
10. Gaps tied to growth. Growing businesses often run into cash troubles when they incur new costs associated with growing (e.g., new staff, logistics) but they inaccurately estimate when the cash benefits of those investments will start coming in, says. Otis echoes that concern. "In the end, what we find very often is people aren’t getting nearly as much cash flow from their growth as they expect there to be, because they need the money to pour back into the business.”
Mary Ellen Biery is a research specialist at Sageworks, a financial information company and maker of the ProfitCents suite of financial analysis applications. She is a veteran financial reporter whose works have appeared in The Wall Street Journal and on Dow Jones Newswires,,,, and other sites. She received her undergraduate degree from Wake Forest University, where she graduated cum laude, and her master’s degree from the University of North Carolina at Chapel Hill.

Wednesday, July 11, 2012

Guest Blogger: Great by Choice

By John L. Daly, CPA, MBA, CMA, CPIM
President, Executive Education, Inc.

“Must Read” Research
In the “twenty-O’s” decade, many people called Good to Great by Jim Collins the new century’s best business book.  Backed by five years spent pouring over more than 30 years data, Collins provided page after page of insights into how a mediocre company can become great. 
Now, Collins, in collaboration with Harvard professor Morten T. Hansen, may provide this decade’s best business book, Great by Choice.  Backed by eight years of research, Great by Choice examines seven companies in turbulent industries that outperformed the U.S. stock market by at least ten fold (10x) for a 30 year period.  This book is a “must read” for anyone who wants to keep up on the latest management thinking.
10x Performance
As we would expect, the list includes some biotechnology and computer companies. However, a bigger surprise is that Southwest Airlines’ performance blows them all away, beating market performance by 63 times and more than tripling Intel’s stock performance. 
How could an airline thrive in such turbulent times?  Collins and Hansen conclude it was not innovation.  Southwest directly and deliberately copied Pacific Southwest Airlines (PSA).  Yet PSA eventually merged into U.S. Airways while Southwest thrived[1].  How did they do it? 
The research concludes the difference was discipline. 

Management Myths
Great by Choice dispels several entrenched management myths:
Myth:  Successful leaders in a turbulent world are bold risk-takers.
Reality:  Even the best leaders could not predict the future and avoided bold risks.  They were more disciplined, more empirical and more worried about how future events could hurt them. 
Myth:  Innovations distinguish 10x companies.
Reality:  10x companies were often less innovative than their lesser performing peers.
Myth:  A threat-filled world favors the speedy.
Reality:  Fast decisions and fast action can kill you faster.  10x leaders knew when to go fast and when not to. 
Myth:  Radical change in your environment requires radical change inside the company.
Reality:  10x companies believed most changes in their environment were just noise.  These companies studied issues carefully before making changes.
Myth:  Great companies have a lot more good luck.
Reality:  The 10x companies did not have unusual amounts of good luck.  However, they were much better prepared for bad luck than their peers. 
SMaC Recipe
The 10x companies developed what the authors call a SMaC recipe.  SMaC stands for Specific, Methodical and Consistent.  Like the core values which Collins and Jerry Porras found visionary companies had in their Built to Last research, SMaC recipes are standard operating procedures.  Unlike core values, the 10x companies sometimes changed their SMaC recipes.  However, they changed them far less than their mediocre-performing peers. 

Important Research
As you have seen in these few paragraphs, Collins and Hansen gained many new insights into business behavior, building on Collins previous research.  The sum of all business knowledge is rapidly growing.  Will you choose to keep up by reading Great by Choice?

John L. Daly, CPA, MBA, CMA, CPIM, is President of ExecutiveEducation, Inc. in Chelsea, Michigan.

[1] Some of the companies Collins profiled in Built to Last, Good to Great and Great by Choice later changed their management teams or management practices and no longer had great performance.  Collins discusses the reasons why in his 2009 book How the Mighty Fall. 

Friday, July 6, 2012

Webinar Health Care Questions Answered

Mark Dietrich, CPA, discussed the recently upheld Patient Protection and Affordable Care Act (PPACA) in a recent VSCPA webinar. Mark fielded several questions that required further research, which went out in an email to webinar attendees.

Since the information was so useful, Mark has agreed to post his answers on CPA Cafe. This information and much more can be found on Mark's blog.

Medicaid Presumptive Eligibility – Here is the quote from the Financial Professional’s Guide to Healthcare Reform
“Prior to the reform legislation, states could—but were not required to—make presumptive eligibility determinations only for children, pregnant women, and women suffering from breast and cervical cancer. Effective January 1, 2014, and subject to pending regulations, certain medical providers including hospitals will be permitted to provide and be paid for Medicaid-covered services to presumptively newly eligible individuals and families. This change permits the presumptively eligible to receive coverage before the required Medicaid application is filed; the application is necessary to determine actual eligibility. The legislation also provides that any subsequent determinations of ineligibility will not be counted against the state in the determination of its error rate.”

Subtitle C—Medicaid and CHIP Enrollment Simplification, Sec. 2202. Permitting hospitals to make presumptive eligibility determinations forall Medicaid eligible populations

Link to U.S. Senate website

Medicare Tax Withholding – Employer’s are NOT required to withhold the tax unless the wages of an individual exceed the $200,000 level. Individuals who are married and whose combined income will exceed the $250,000 threshold must factor it into their estimated tax payments.

Tricare – here is a link to what Tricare had to say after the legislation passed.

And, after the Supreme Court Decision

Applicability of Reporting to Governmental Units - Here is the quote from the Financial Professional’s Guide to Healthcare Reform
“Applicable employer-sponsored coverage also includes any group health plan established and maintained primarily for its civilian employees by the government of the United States, by the government of any state or political subdivision thereof, or by any agency or instrumentality of any such government.”

Top 5 Most Popular Articles: June 30 – July 6, 2012

Here are the five most-read news articles on! Articles are taken from the VSCPA News and Professional News sections and are ranked by unique page views.
  1. VSCPA Educational Foundation Awards $44,000 in College Scholarships
  2. House Democrats Introduce Bill to Extend 100 Percent Bonus Depreciation
  3. Virginia Society of CPAs Holds Sixth Leaders' Institute for Virginia's Top Students
  4. VSCPA Seeks Content Creator for 2013 Ethics Course
  5. U.S. Chamber Ranks Virginia as 'Most Livable State'
Check back each Friday for updated rankings of the top stories on

Thursday, July 5, 2012

Health Care Reform Upheld: What Does It Mean?

We're now a week removed from the U.S. Supreme Court's controversial decision to uphold the Patient Protection and Affordable Care Act of 2010 (PPACA). The individual mandate, a point of contention, survived as a tax.
The VSCPA has compiled a list of several resources on the new law for CPAs and taxpayers. Have you come across any useful resources we haven't linked here? Sound off in the comments or email to let us know.

Give Back to Your Community During CPA Day of Service: September 21, 2012

In honor of “Virginia Certified Public Accountants Week,” CPA firms and individual CPAs across Virginia are uniting together on the CPA Day of Service, Friday, September 21, 2012, to volunteer for an organization of their choice.

Hosted by the VSCPA, this single day of volunteer service represents the CPA profession's ongoing commitment to serving the communities where its professionals live and work. Associate members, CPA staff, students and friends are also welcome to participate!

Purchase your CPA Day of Service T-shirt here — as an additional way to give back! This year, proceeds benefit the VSCPA Educational Foundation!

Sign up today at and tell us how you plan to get involved.

Click here to see a video of last year's successful event, then sign up to be a part of CPA Day of Service 2012!