By definition, an entrepreneur is a creator, a producer, an investor. So, it’s no surprise that no matter the size of their business, entrepreneurs yearn for expansion. While it might seem like today’s market is dominated by the Amazons and Facebooks of the world, the reality is that 99.7 percent of all businesses in the United States are considered “small,” totaling 28.8 million organizations with less than 100 employees. Although they likely all share the dream of growth at some point, expansion is a very risky proposition.

While 20% of small businesses fail in their first year, 50% fail in their fifth and that number rises to 70% in the tenth. These Bureau of Labor Statistics are consistent over time, suggesting that year over year economic factors do not hold outsize significance over business survival. Strategic planning does, according to Crown Sterling Ltd. CEO Robert Grant. That is because our competitors, perhaps more than any other factor, affect our outcomes. To win at business you’ll need skills, but more so you’ll need to out-strategize the other players in the game.

“Expanding a company doesn’t just mean grappling with the same problems on a larger scale,” writes Sharon Nelton in Nation’s Business. “It means understanding, adjusting to, and managing a whole new set of challenges—in essence, a very different business.” For those leaders who identify a need or avenue for growth there are important things to consider. Effective research, long range planning and a flexible budget are necessities.
A strategic plan answers some important questions, namely, what am I going to achieve by expanding and how will I get there? Some goals may include meet existing customer demands, expand into new markets or increase brand recognition. Your plan will ensure you don’t sacrifice the ultimate goal of increasing sales by sacrificing your current ones.

What do I know and not know about this new venture? Venturing into previously untapped markets is sure to unveil the unexpected. Best Buy didn’t catch on in China because big, bright stores just didn’t capture customers the way lower Chinese prices did. Starbucks underestimated its competition in Israel and bowed out of all their stores after two years. Small businesses should bear in mind that doubling the size of your company tends to increase your bills by a factor of six – budget accordingly keeping in mind the soft costs, like upgrading financial and record keeping software and communication systems.
Plan ahead but strike quickly; if you’ve anticipated a good move chances are that your competition has, as well. He who strikes first, has the advantage. Entrepreneurship is all about pushing forward and playing a step ahead of your opponent is often all it takes.
Play to win.

In recent years, external auditors have focused more attention on related party transactions. Although related party transactions aren’t necessarily bad, they do raise some concerns about the risk of misstatement or omission in financial reporting.

3 focal points
Issues with related parties played a prominent role in the scandals that surfaced nearly two decades ago at Enron, Tyco International and Refco. Public outrage about these scandals led Congress to pass the Sarbanes-Oxley Act of 2002 and establish the Public Company Accounting Oversight Board (PCAOB). Similar problems have arisen in more recent financial reporting fraud cases, prompting the PCAOB to enact tougher standards on related-party transactions and financial relationships.

PCAOB Auditing Standard No. 2410 (AS 2410), Related Parties, requires auditors of public companies to beef up their efforts in financial statement matters that pose increased risk of fraud. Specifically, auditors must focus on three critical areas:

1. Related-party transactions, such as those involving directors, executives and their family members,
2. Significant unusual transactions (SUTs) that are outside the company’s normal course of business or that otherwise appear to be unusual due to their timing, size or nature, and
3. Other financial relationships with the company’s executive officers and directors.

Subjecting these transactions and financial relationships to enhanced auditor scrutiny may help avert corporate failures. The PCAOB also hopes that enhanced auditor scrutiny will lead to improvements in accounting transparency and disclosures, which will help investors to more clearly gauge financial performance and fraud risks.

From start to finish
AS 2410 requires auditors to obtain a more in-depth understanding of every related-party financial relationship and transaction, including their nature, terms and business purpose (or lack thereof). Tougher related-party audit procedures must be performed in conjunction with the auditor’s risk assessment procedures, which occur in the planning phase of an audit.

In addition, auditors are expected to communicate with the audit committee throughout the audit process regarding the auditor’s evaluation of the company’s identification of, accounting for and disclosure of its related-party relationships and transactions. They can’t wait until the end of the engagement to communicate on these matters.

During fieldwork, expect auditors to be on the hunt for undisclosed related parties and unusual transactions. Examples of information that may be gathered during the audit that could reveal undisclosed related parties include information contained on the company’s website, tax filings, corporate life insurance policies, contracts and organizational charts.

Certain types of questionable transactions — such as contracts for below-market goods or services, bill-and-hold arrangements, uncollateralized loans and subsequent repurchase of goods sold — also might signal that a company is engaged in unusual or undisclosed related-party transactions.

To facilitate the audit process, management should be up-front with auditors about all related party transactions, even if they’re not required to be disclosed or consolidated on the company’s financial statements.

Let’s be honest
Private companies also engage in numerous related party transactions, and they may experience spillover effects of the tougher PCAOB auditing standard, which applies only to audits of public companies. Regardless of whether you’re publicly traded or privately held, it’s important to identify, evaluate and disclose all related parties. We can help you present related party relationships and transactions, openly and completely.

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In the broadest sense, strategic planning comprises two primary tasks: establishing goals and achieving them. Many business owners would probably say the first part, coming up with objectives, is relatively easy. It’s that second part — accomplishing those goals — that can really challenge a company. The key to turning your strategic objectives into a reality is a solid implementation plan.

Start with people
After clearly identifying short- and long-range goals under a viable strategic planning process, you need to establish a formal plan for carrying it out. The most important aspect of this plan is getting the right people involved.

First, appoint an implementation leader and give him or her the authority, responsibility and accountability to communicate and champion your stated objectives. (If yours is a smaller business, you could oversee implementation yourself.)

Next, establish teams of carefully selected employees with specific duties and timelines under which to complete goal-related projects. Choose employees with the experience, will and energy to implement the plan. These teams should deliver regular progress reports to you and the implementation leader.

Watch out for roadblocks
On the surface, these steps may seem logical and foolproof. But let’s delve into what could go wrong with such a clearly defined process.

One typical problem arises when an implementation team is composed of employees wholly or largely from one department. Often, they’ll (inadvertently or intentionally) execute an objective in such a way that mostly benefits their department but ultimately hinders the company from meeting the intended goal.

To avoid this, create teams with a diversity of employees from across various departments. For example, an objective related to expanding your company’s customer base will naturally need to include members of the sales and marketing departments. But also invite administrative, production and IT staff to ensure the team’s actions are operationally practical and sustainable.

Another common roadblock is running into money problems. Ensure your implementation plan is feasible based on your company’s budget, revenue projections, and local and national economic forecasts. Ask teams to include expense reports and financial projections in their regular reports. If you determine that you can’t (or shouldn’t) implement the plan as written, don’t hesitate to revise or eliminate some goals.

Succeed at the important part
Strategic planning may seem to be “all about the ideas,” but implementing the specific goals related to your strategic plan is really the most important part of the process. Of course, it’s also the most difficult and most affected by outside forces. We can help you assess the financial feasibility of your objectives and design an implementation plan with the highest odds of success.

As the old saying goes, “Knowledge is power.” This certainly rings true in business, as those who best understand their industries and markets tend to have a knack for staying on top. If that person is a company’s owner, however, great knowledge can turn into a vulnerability when he or she decides to retire or otherwise leave the business.

As you develop your succession plan, consider how to mitigate the loss of pure know-how that will occur when you step down. One way to tackle this risk is to implement a knowledge management strategy.

Two types of knowledge

Knowledge management is a formal process of recognizing and treating knowledge as an asset that your company can identify, maintain and share. Generally, a business can subdivide knowledge into two types:

1. Explicit knowledge. This exists in the tangible world and typically includes company reports, financial statements and databases. These items are usually easy to access, extrapolate from and append. For your succession plan, however, you may need to dig deeper into your own confidential files, memos or emails.

2. Tacit knowledge. This is information that resides solely between the ears of a business’s leadership, employees and perhaps even service providers. As such, it’s not easily retrievable. In terms of succession planning, this may be the stuff that you haven’t written down or even talked about much.

Typical categories

Typical knowledge management categories include:

• Taxes and accounting,
• Financial management,
• Strategic planning,
• HR, payroll and employment practices,
• Sales and marketing,
• Customers,
• Production, and
• Technology.

In addition, knowledge management should account for your company’s intellectual property —trade secrets, for example. Many business owners keep such details close to their vests and even managers may not know the full value of the company’s intellectual property. This could put your business at risk following your departure.

A comprehensive knowledge management effort related to your succession plan will call on you to undertake a full inventory of every category listed above and perhaps others. Gathering your explicit knowledge may entail compiling years’, even decades’, worth of documents, files and writings. This may not be an easy task, but it’s still a matter of straight research.

You’ll likely find capturing your tacit knowledge somewhat more challenging. One idea is to ask a suitable employee or engage an outside consultant to interview you regarding all the pertinent categories. Many business owners find these conversations arduous at first but eventually enlightening and enjoyable.

A legacy preserved

A solid succession plan is imperative to maintaining the future stability and success of your company. Knowledge management can strengthen that plan and help preserve the legacy you’ve worked so hard to build.

Contact us for further information and for help identifying knowledge related to your tax filings, accounting methods and other financial matters.

Ask many entrepreneurs and small business owners to show you their financial statements and they’ll likely open a laptop and show you their bookkeeping software. Although tracking financial transactions is critical, spreadsheets aren’t financial statements.

In short, financial statements are detailed and carefully organized reports about the financial activities and overall position of a business. As any company evolves, it will likely encounter an increasing need to properly generate these reports to build credibility with outside parties, such as investors and lenders, and to make well-informed strategic decisions.

These are the typical components of financial statements:

Income statement. Also known as a profit and loss statement, the income statement shows revenues and expenses for a specified period. To help show which parts of the business are profitable (or not), it should carefully match revenues and expenses.

Balance sheet. This provides a snapshot of a company’s assets and liabilities. Assets are items of value, such as cash, accounts receivable, equipment and intellectual property. Liabilities are debts, such as accounts payable, payroll and lines of credit. The balance sheet also states the company’s net worth, which is calculated by subtracting total liabilities from total assets.

Cash flow statement. This shows how much cash a company generates for a particular period, which is a good indicator of how easily it can pay its bills. The statement details the net increase or decrease in cash as a result of operations, investment activities (such as property or equipment sales or purchases) and financing activities (such as taking out or repaying a loan).

Retained earnings/equity statement. Not always included, this statement shows how much a company’s net worth grew during a specified period. If the business is a corporation, the statement details what percentage of profits for that period the company distributed as dividends to its shareholders and what percentage it retained internally.

Notes to financial statements. Many if not most financial statements contain a supplementary report to provide additional details about the other sections. Some of these notes may take the form of disclosures that are required under Generally Accepted Accounting Principles — the most widely used set of accounting rules and standards. Others might include supporting calculations or written clarifications.

Financial statements tell the ongoing narrative of your company’s finances and profitability. Without them, you really can’t tell anyone — including yourself — precisely how well you’re doing. We can help you generate these reports to the highest standards and then use them to your best advantage.