Like Warren Buffett, Best Investment Philosophy Balances Discipline with Flexibility

May 1st, 2013

Warren Buffett’s investment philosophy balances discipline with flexibility.

Warren Buffett is famous for his discipline in his early investing success.  Now, I think he is demonstrating his flexibility (some are critical of his recent flexibility) in investment philosophy.  Both are important skills for business owners and managers to master and to know when to utilize each approach.  A balance is required to be disciplined but not too rigid and flexible but not changing too much.  When someone tells you that there is one best way of always doing something, run away.  I have been thinking about this with the Berkshire Hathaway annual meeting this Saturday and the evolution in philosophy by Buffett over recent years.  I will be at the Berkshire meeting, so please let me know if you will also be there.

Here are some examples of how Buffett’s discipline evolved to greater flexibility over time.  Many of these changes are probably logical given the increased size of Berkshire and the reality of finding attractive places to allocate large amounts of capital, but they are interesting because of the scope of these shifts in philosophy.

Warren Buffett Investment Philosophy Changes:

  • Not willing to use stock for acquisition, then used it in the acquisition of Burlington Northern.  For years, Buffett said that he did not want to utilize Berkshire stock for acquisitions “unless we receive more in value than what we give” which was never going to happen given his belief in the earning power of Berkshire.  Then, he bought Burlington Northern paying 40% of the purchase price in Berkshire stock and even paying a full price for Burlington Northern at a time when Berkshire stock was not overvalued and probably a little undervalued.  This made the dilution even more expensive for Berkshire making it even more out of character for Buffett.   In his annual letter for 2012, he estimated the dilution as 6.1% which is about $16 billion worth of value today up from approximately $10 billion in value via equity at the time of the deal, or about an 18% annual increase in the value of that stock that could have been kept for shareholders.  He also broke tradition and split the Class B shares 50-to-1 making it easier for retail investors even though he had liked the stock being expensive to discourage short-term investors which added 65,000 shareholders to the company.  I have not analyzed the available information to determine whether this decision worked, but Buffett seems to think it has given his comments in recent letters.  I still sense that it may be painful for him to have given up so much dilution for this acquisition.
  • Disdain of private equity playbook, then using that playbook in the acquisition of Heinz.  For years, Buffett trumpeted his low or nonexistent use of debt in acquisitions or no changes to the operating styles of the acquired businesses.  With the Heinz acquisition, he again reversed his beliefs and is using the private equity playbook of utilizing debt and relying on the cost-cutting mastery of 3G Capital to create value in the acquisition.  And, he paid a full price for the business and certainly much more than he would have paid for a business earlier in his career.
  • Preference changing from businesses generating capital to businesses utilizing capital.  Buffett has said that “the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow” (and, it is rare, but would love a business if it could use a lot of capital at very high returns).  Many Berkshire businesses are great at generating capital and do not have good places to put that capital — Buffett loved acquiring those businesses because he could take the capital and allocate it himself to other businesses or projects.  Given the huge cash balances and need to put capital to work, Buffett has shifted his focus to businesses that can put large amounts of capital to work at a reasonable (certainly not great) returns on capital, such as the regulated utility business of MidAmerican or the Burlington Northern railroad.  In the 2009 report, he wrote, “In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities.”  Today, he is satisfied earning 10% returns through businesses that can soak up huge amounts of capital each year, for at least a portion of his portfolio.  I suppose earning 10% is better than earning zero.  This seems to be a logical evolution, but also one that not many people would have been able to execute a shift in strategy.
  • Loving newspapers to saying he will “never invest in newspapers again” to acquiring more newspapers.  Buffett loved newspapers in the 1970’s through the 1990’s.  He then said on a Charlie Rose interview when the Wall Street Journal was being sold that he would never invest in newspapers again and that “the circulation, advertising and profits of the newspaper industry overall are certain to decline.”  Now, he is buying newspapers such as the Omaha World-Herald and Media General.  He even said that he is rich enough that he can afford “sentimental” purchases like this.  This is all very out of character for him that would have refused to even consider a sentimental investment early in his career.  Given that these purchases are so small that they won’t impact the results of Berkshire, it makes me wonder why he is doing it other than the purchase prices may be so cheap that he cannot help himself.
  • Well documented evolution from cigar-butt value investing to broader definition of “value”.  Many people have written about how Buffett began his career buying $1 of value for 50 cents, often by just looking at a company’s balance sheet and not really the underlying nature and strength of a business.  That shifted to being willing to pay more for businesses with long-term competitive advantages.  While well examined previously, this shifts needs to be on the list because it was such a drastic shift in philosophy for him that many people would not have been able to make, particularly when they had such great success with the earlier model.

A great modern day investor is a contradiction of shifting philosophies and evolving beliefs.  My take from this is that a balance of discipline and flexibility, and when to utilize each, is an important skill to learn.  There is no one right strategy.

 Related articles

 

Enhanced by Zemanta
Categories:Business Management, Warren Buffett & Berkshire Hathaway
Tags:, , , , , , , , , , , , , , , ,

Real Estate Institute Acquired by Greybull Stewardship

April 9th, 2013

Greybull Stewardship, my long-term oriented partnership of business owners investing in exceptional small businesses, announces the acquisition of Real Estate Institute and its sister company, Bookmark Education.  Both companies are headquartered in Niles, IL, which neighbors Chicago. Real Estate Institute

Since 1992, Real Estate Institute has been a leader in Illinois providing high quality online, classroom, and independent study programs for professional licensees.  Known for outstanding customer service, the company’s positive reputation with loyal students has enabled growth beyond its real estate roots to include insurance, mortgage, and legal professionals.  Last year more than 20,000 professionals completed programs with the school.

After directing the company’s operations for nearly ten years, Larry Toban will become the Real Estate Institute President as part of a planned management transition.  Larry helped to select Greybull Stewardship from nearly a dozen firms that competed for the opportunity to invest with him in the company’s growth.  “This is a game changer for the organization.  We are excited to work with Greybull as we expand our expert team of employees and instructors who are all passionate about fulfilling our students’ education and compliance requirements,” said Larry Toban.

“I’m delighted that Greybull Stewardship understands the core strengths and potential of our business.  With Greybull’s investment, support, and long-term investment approach, I’m confident that Real Estate Institute and its employees will continue to prosper,” added Alan Toban, founder.  Former owners Alan and Ellen Toban will assist Greybull Stewardship throughout the transition.

“Real Estate Institute is an exciting acquisition for Greybull Stewardship.  The company is a leader in its space and poised for continued growth in the ever-expanding education market,” said Mason Myers, founder and general partner of Greybull Stewardship Business Investment Fund.  “We see exciting opportunities to offer new and more diversified programs.”

Categories:Business Financing & Funding
Tags:, , , , , , , , ,

Unique Businesses Are A Force For Good

April 4th, 2013

The best businesses are not just about making money.  It is necessary to make money to stay in business, but it is not sufficient for the business to be worth your time.  That is why the strongest businesses, in my opinion, are the ones that have a purpose beyond making money.  The work is more interesting for everyone involved if there is meaning for the customers, for the employees, for a certain community, or whatever it may be.  Why spend your time on something that has a single payoff (money) when you can have multiple payoffs (money and meaning) from the same investment of time and money?

And, by the way, I have found that the businesses that strive to have a more meaningful purpose also can get the best financial returns.

I put together my investment fund, Greybull Stewardship, so that unique businesses have a unique alternative for financing that will allow them to maintain their strategy.  Taking investment capital from an outsider means that a business owner has to incorporate the investor’s dreams, visions, constraints, and realities.  By selling to traditional private equity, that means another quick, disruptive sale of the company in 3-5 years (that may be the ideal plan for some businesses, which is totally fine).  By selling to a strategic acquirer, that means morphing the acquired company into the objectives of the acquirer.  Greybull Stewardship allows current management and owners to continue with their unique strategy because my fund structure allows greater alignment with the current owners and fewer outside constraints.

Related Topic: Book Conscious Capitalism by John Mackey, the CEO of Whole Foods

I found recent comments by Mackey to be a helpful addition to this discussion.  Mackey explained in a podcast from the Harvard Business Review that a business person should improve his ability to answer the question, “What do you do?”  Ideally, the answer should not be simply to “make money.”  It should be something with a meaningful purpose as a doctor says, “heal people” in addition to making a living.  As he writes, “all businesses operate in a broader system thick with interdependencies.  Being a conscious capitalist means that you don’t ignore those interdependencies by taking a narrow view of the impact you make.  You remain aware of the whole system. . . . But here’s what you would not be signing on for: the overthrow of capitalism. . . . Capitalism is the greatest system of social cooperation and source of prosperity ever devised — and we can make it even better.”

Related posts and links:

 

 

Enhanced by Zemanta
Categories:Business Financing & Funding, Culture Is Strategic
Tags:, , , , , , , , , , , , , ,

Investment Strategy & Structure Is the #1 Thing Founders and CEO’s Should Watch In Raising Capital

March 24th, 2013

To be better, one must first be different.  Thus, good strategy focuses on understanding differences and creating differences.  This also applies to investment firms — differences in structure often drives the strategy.  Any entrepreneur or business owner considering raising capital needs to understand the structure of the investment firm and how that will affect their strategy.

This hit home recently reading a book, The Outsiders, by William Thorndike.  The chart below is in the book showing the differences between the structure and strategy of Berkshire Hathaway and traditional private equity.  I have added a third column to the chart to demonstrate the structure and strategy of my investment firm, Greybull Stewardship, in comparison.

 

Traditional Private Equity

Berkshire Hathaway

Greybull Stewardship
Holding Period

3-5 years

“Forever”

No limitations
Management

New CEO (often)

Existing CEO

Existing CEO
Leverage

A lot

None

Moderate
Deal Source

Auction

Direct

Mostly Direct
Postacquisition management interaction

Frequent

Infrequent

Infrequent
Cost Cutting

Usually

Never

Not usual
Due Diligence

Extensive

Cursory

Extensive
Use of outside advisers

Always

Never

Not usual
Compensation System

Complex

Simple

Simple

 

In observing Berkshire Hathaway over the years, I learned how Buffett had a tremendous advantage over traditional private equity because his firm was structured differently.  As you can see, I have built the structure of Greybull Stewardship to have many of the same advantages to attract interest from the founders/owners/management of companies.  I want Greybull Stewardship to be the preferred home for outstanding businesses.

Related Posts:

Categories:Business Financing & Funding, Competitive Advantage & Differentiation, Warren Buffett & Berkshire Hathaway
Tags:, , , , , , , ,

Family Business Role Models: Blumkin Family of Berkshire Hathaway

March 4th, 2013

Louis Blumkin

Blumkin family of Berkshire Hathaway a role model for family businesses.

Heroes have been a topic several times in talks by Warren Buffet.  “Pick your heroes carefully,” he said one time, “as it will have a big impact on who you become.”  Another time he said, “Tell me who someone’s heroes are, and I will have a pretty good idea who they are.”

To me, the Blumkin family of the Nebraska Furniture Mart and Berkshire Hathaway are role models of family and American business.  Last week, the patriarch of the family, Louie Blumkin, passed on to great acknowledgement around Omaha, Nebraska and throughout the furniture world.  If you do not know, the Nebraska Furniture Mart is a very large business that has been a cornerstone of Warren Buffett’s Berkshire Hathaway since 1983.  It is admired throughout the world of furniture retailing for its success and its innovations over the years.

Louis was a dynamo.  Because my business partner in the National Holistic Institute is related to the Blumkins, we have received great support, enthusiasm and encouragement from the Blumkin family over the years.  When Louie visited us, he was quick to ask insightful questions.  You could see him running the numbers in his head about how the business worked as we discussed the organization and its impact.  At 90 years plus, he was quick and fun to talk with.  It was also enjoyable to listen to his stories of fighting in World War II and liberating a concentration camp, and his train ride back to Omaha after the war full of anticipation of what to do with the Nebraska Furniture Mart.  From 1945 onward, he ran the Nebraska Furniture Mart, while his mother and the founder of the Nebraska Furniture Mart, Mrs. B, was the front person getting the press and acknowledgements.  Their philosophy, if you haven’t heard it before, is “Sell cheap and tell the truth.” They sold a majority of the Nebraska Furniture Mart to Berkshire Hathaway in 1983, and Louie’s sons Irv and Ron Blumkin manage the business today.

Family Business Lessons from the Blumkins and the Nebraska Furniture Mart

Several things have impressed me about the story of the Blumkin family and the Nebraska Furniture Mart.

  • It’s a strong family, working hard to support each other.  They are very good about making time to spend together and support each other. A favorite scene from these family gatherings is when they get together on July 4th and sing “God Bless America” at the family farm.  This particularly means something as Mrs. B (and others) immigrated to America from other countries.  When a trip seems too far or too difficult, I get inspiration from the Blumkins who make the trip and make the effort to spend time together.
  • Healthy growth for the long-term.  The store began in 1937, expanded to a larger Omaha location in 1980, added a Des Moines location in 1993, added a Kansas City store in 2003, and is working on a fourth location.  They have grown, but they have done it in a very measured, controlled manner that has kept an eye on the very long-term health of the organization.
  • Share with their customers.  Like other businesses that begin to get scale that leads to lower costs (Wal-Mart or Geico), the Nebraska Furniture Mart is good at sharing those cost savings with customers. This creates a virtuous cycle of more customers that leads to lower costs that is shared with customers that leads to more customers, etc.
  • Honorable organization & doing things the right way.  I don’t ever hear of complaints about customers not feeling that they received a fair shake from the Mart. Everyone should aspire to build organizations that have as strong of a track record over 75 years. After the Mart opened their Kansas City location, they were kind enough to share their “lessons learned” from the experience with my business partner and me at the National Holistic Institute. I had a couple of reactions to their list: a) most of the things seemed very nit-picky and small to me, but not to them — they are perfectionists; and b) everything they mentioned was about making sure things were done as well as possible from day one. These were things such as hiring more people so that they had an abundance of staff at the store opening or training people for longer to make sure that their entire staff and organization were primed for success. There was nothing more important to them than doing it the best way possible right from the beginning.

Many people contribute to our success in life.  Although I didn’t know him well, I had a few meaningful interactions with Louie and his wife Frannie that had an impact on me — it contributed to why I am building Greybull Stewardship in the way that I am.  Ideally, I want Greybull Stewardship to be a long-term home for businesses like the Nebraska Furniture Mart that are about long-term success and they have the best elements of family businesses — a long-term focus, continuity of beliefs and values, and a willingness to share with their customers, employees, and community.

Categories:Business Management, Execution, Warren Buffett & Berkshire Hathaway
Tags:, , , , , , , ,

Investment Returns of Venture Capital vs Greybull Stewardship

February 24th, 2013

Investment Returns for Venture Capital

Greybull Stewardship investment returns are outperforming venture capital as an asset class. Table Source: Cambridge Associates.

Investment returns in venture capital as an asset class have not been good for a long time.  To me, that result is somewhat predictable.  Great investment returns are not going to come from anything where you have to swing for the fences with every investment (or should I say gamble) and expect to lose money on a lot of the investments.

Great investors know that the first rule of good investment returns is to not lose money on any investment, if you can.  It just takes too much good fortune on the rest of the portfolio to make up for the losses.  An investment philosophy that does not swing for the fences each time but instead hits steady singles, doubles, and triples should outperform every time.

20%+ Investment Returns for Greybull Stewardship

The early returns from my investment fund, Greybull Stewardship, have been very good — averaging over 20% net of fees.  We are focused on the marriage of companies and existing management that already have a good track record of financial results.  We make sure the management has plenty of equity to get us all aligned and let management run the company, helping when we can.  And, the most difficult of all, we do not try and change the company (culture, strategy, growth rate, etc.) and risk disrupting the company’s track record of success.  We can do this because we do not have to prepare the company for sale in another 3-5 years and we can treat the company as if it is our family’s only asset to be treasured and grown with care.

Our strategy takes several risks out of the venture capital equation.  First, the businesses are already proven so we aren’t gambling on a new product or “product market fit”.  Second, we are not gambling on management because the management already has a good track record in managing the business.  Third, we are not gambling on a new strategy to attempt to sell the company in 3-5 years.

My goal is to make Greybull Stewardship the perfect home for unique, well-managed businesses where the management wants to keep going and own a lot of equity (either minority or majority stake is fine for me).  There are not many places for owners to find this — strategic buyers will change everything and traditional private equity will only be focused on a sale in 3-5 years.  And, I want to earn good returns for my investors in exchange.  So far, so good.

NOTE: I know that venture firms in the top quartile or top decile outperform the class and do very well, so it may be unfair to compare Greybull Stewardship to the entire asset class of venture capital.

Cambridge Associates provided this data as of September 30, 2012.

 Related Posts:

Categories:Business Financing & Funding, Investment & Business Models
Tags:, , , , , , , , , , , ,

BCG Study: Superior Investment Returns From Family Business

February 20th, 2013
Deep wisdom exists in how family businesses are managed for the long-term.  In fact, the financial returns for closely held businesses outperform their peer groups across business cycles according to a recent study by the Boston Consulting Group and Sophie Mignon of Ecole Polytechnique.  While their returns may be lower in good economic times than their peers, returns are better in slower economic times and across business cycles.

 

To me, it is obvious how investment time horizons influence how any asset is managed.  If you own a car for one year, you manage it very differently than a car you plan to own for twenty years.  It is obvious that a short-term ownership cycle of a few years may generate good returns for those years, but this is also very likely to leave the company in a less than ideal position for the long-term.  A longer term time horizon seems to put the company in the best position to earn optimal returns overall.

 

Wise Management from Family Business

This article in the Harvard Business Review explains some differences about how closely held businesses are managed.

  1. They are frugal in good times and bad.
  2. They keep the bar high for capital expenditures.
  3. They carry little debt.
  4. They acquire fewer (and smaller) companies.
  5. Many show a surprising level of diversification.
  6. They are more international.
  7. They retain talent better than their competitors do.

My investment firm, Greybull Stewardship, is organized to be an ideal home for closely held businesses who want to sell the business or receive investment but not change the long-term orientation and culture of the business.  I am motivated to earn optimal returns over the long-term by allowing these businesses to pursue the unique strategies that made them successful in the first place.

Related Posts and Links:

Categories:Business Financing & Funding, Charts & Graphs
Tags:, , , , , , , ,

Should CEO’s, Business Owners, Founders Focus Inside or Outside?

February 10th, 2013

Founders, CEO’s, and business owners need to be skilled at knowing how to balance many competing ideas, priorities, initiatives, and more.  We explored this idea in the post the Art of Balance that listed 20 continuums that founders, CEO’s, and business owners must balance constantly. How much to focus your attention inside or outside your organization is one of the most important continuums to consider. There is no right answer. The focus should change constantly. Below are several contradictory points of view, any of which could be the most relevant for your organization at any point in time.

founder-internal-or-external-focus

Founders focus should shift between internal and external.

  • No one understands the market like the founder or CEO.  Jack Welch used to say that CEO’s should ask themselves what one or two things can they do that no one else in their organizaton can do.  Many times, the founder or CEO understands the marketplace better than anyone and has the best sense of where to go.  Therefore, they should constantly focus on making sure the organization is positioned well in the market.
  • Winning is all about execution.  Ideas are a dime a dozen.  Competitors come and go.  Analysts (particularly on Wall Street) talk about the latest fads that will only last a quarter.  It is all just noise.  Focus internally and execute because more companies fail to succeed because of lack of execution rather than being beaten by the competition.
  • The founder and CEO has the best access to people and information, and the organization needs that.  The CEO calling another CEO is totally different than anyone else calling another CEO.  The organization needs that information and access to players in the market (financing sources, strategic partners, acquisition candidates, etc.) for long-term success.
  • The best strategists focus externally.  The Chair of the Strategy Unit at Harvard Business School and my old professor, Jan Rivkin, says that the best strategists “are relentless in understanding the external world.”
  • Being different is the key to competitive advantage — if you focus externally too much it becomes tempting to pursue strategies done by everyone else.  When you see a competitor doing well, it takes a very strong organization not to copy them.  Sometimes you should copy good ideas.  Sometimes a strategy that works for them is not the best for you.  If you are constantly trying to catch-up to someone else, you will never be the leader.
  • Our market is changing constantly (technology) and we need our best people watching the changes or our market hasn’t changed in 100 years.

There is no one right answer.  It helps, however, for every founder or CEO to make a conscious decision about how they should balance their time and priorities between the interior and exterior of their organization.

Related Posts:

Categories:Balance, Competitive Advantage & Differentiation, Execution
Tags:, , , , , , , , ,

Five Forces by Michael Porter — Fundamentals Through Graphics

February 3rd, 2013

Five Forces of Competition

The five forces of competition concept is one of the most influential in modern business.  It was developed by Michael Porter of the Harvard Business School.  Like all good frameworks, it takes something complicated and provides a simple, shorthand method to understand and remember the concepts.  This is the next post in my series of fundamentals through graphics, charts, and graphs.  Revisiting fundamental business concepts is helpful.  We last did this in the post on the economies of scale and the experience curve developed by the Boston Consulting Group in 1966.

“The collective strength of these forces determines the ultimate profit potential of an industry,” writes Porter.  These concepts are important to any business owner trying to determine how better to compete within an industry.  Or, they are important to any entrepreneur contemplating a venture in an industry where they want to understand the industry dynamics.

Here is a quick summary of the Five Forces (more detailed reading can be found through Harvard Business Review articles by Michael Porter and his books).

Five Forces of Competitive Advantage:

  • Threat of new entrants.  This is the classic analysis of how high are the barriers to entry in a market.  Some classic barriers to entry are economies of scale, product differentiation (company is set-up to offer things competitors cannot), capital requirements, regulatory limitations, and distribution channels.  Any analysis of an industry should begin with how easy is it for new entrants to enter because if it is easy, there will be a constant flood of entrants eager to earn market share or distract your valuable customers with their offerings.
  • Bargaining power of suppliers.  Obviously, if a company is dependent upon a certain supplier or suppliers, they are at a high risk that their profit margins will be eroded by those suppliers making increasing demands upon the company.  At its worst, this has been called “supplier hold-up” where they can hold-up your company until they get what they want.  This is not a good place to be.
  • Bargaining power of customers.  Similarly, if your company has little ability to combat price erosion or other customer demands, the profit potential of your business will be constrained.
  • Threat of substitute products or services.  Substitutes are a different product, but something that customers may be tempted to use to replace your product.  High-fructose corn syrup as a substitute for sugar.  Train travel as a substitute for airplane travel.  Video game entertainment as a substitute for movie entertainment.
  • Rivalry and jockeying among existing competitors.  Some industries are intensely competitive while some industries are a sort of friendly rivalry (for decades, the competition between Coca-Cola and Pepsi did not lessen the profitability of either).  Intense industries, according to Porter, tend to be ones that have many competitors, slow growth, high fixed costs (because they are tempted to reduce marginal prices), high exit barriers, etc.

Anytime I provide financing or funding for businesses through my investment partnership Greybull Stewardship, I think about the five forces in the industry of the company.  And, anytime I am thinking about strategy and building competitive advantage for our companies, it is helpful to refer to the five forces to make sure we are not missing anything.

Related Posts:

Categories:Charts & Graphs, Competitive Advantage & Differentiation, Execution
Tags:, , , , , , , , , ,

Financial Audit Helpful for Financing, Funding, and Selling Your Business

January 24th, 2013

Audit Financing Funding

Financial audits are helpful for financing, funding, or selling your business.

My first financial audit was intimidating.  My company, Student Advantage, was preparing for its IPO in 1999 and the audit firm, PriceWaterhouseCoopers, needed to audit all of the material entities that had merged with Student Advantage during the prior few years.  My little start-up company, The Main Quad, had merged with Student Advantage in December 1997 and now the PWC auditors wanted to audit my homespun little Quickbooks accounting that I had done myself as a 20-something entrepreneur and no formal accounting training.  I survived it, and the official audit of The Main Quad Inc. was in the Student Advantage IPO SEC filing with all $60,000 of revenue or whatever we had back in 1997.  Audits come up anytime you are considering financing, funding, or selling your business.

Financial audits are on my mind every year at this time as many of my companies and my investment fund, Greybull Stewardship, have their annual audits.  Audits are work and sometimes the detailed requests are annoying and time-consuming (and many people will say to not waste your time and money).  Nonetheless, I am convinced of the helpfulness of them and recommend them to owners whose business gets to the size range where I invest — between $500,000 and $3,000,000 in net income.  For start-ups, they probably aren’t worth the time until you have proven your product and your market and are starting to gain traction.  For companies in between, a review may be a good option as they are less expensive and time-consuming but you get the benefit of an outsider helping you think about accurate financial records.

Financial audits (and other audits such as IT security, food safety, education accreditation, etc.) are helpful for these reasons:

  • Signals professionalism.  While accounting theory is not perfect, a bunch of people have spent time contemplating the best methods to accurately portray financial results.  It signals professionalism when your company wants to do things accurately (using the best methods possible) and to a high standard.
  • Improves processes.  Having to produce documentation for revenue recognition or any other purpose helps a company understand what is needed for accuracy.  Then, the company can adjust its internal processes over time to produce the proper documentation.  This also helps management better know what is happening in the business more quickly.
  • Identifies big, avoidable accuracy issues.  Sometimes, there is a larger liability or revenue issue that should be recognized in a fundamentally different way.  It is better to adjust when you are small.  It is embarrassing to have a big fundamental issue pop-up during a financing, funding or business sale process that could have easily been identified years earlier.
  • Establishes a (more) reliable record.  A good track record is like gold, particularly one that is blessed by a third party.  While the future always changes, a verifiable track record of the results of your business will pay-off big time in any financing, funding, or sales process.
  • Outside look at your business (and your explaining everything) never hurts.  It is always helpful to explain your business and get feedback, particularly on something as fundamental as financial processes, internal controls, and accurately assessing how the business is doing.  Don’t expect any ground-shaking insights, but give-and-take with an intelligent person with experience, like most audit partners, is always helpful.

Even when I spend a weekend day handling audit requests like I did last weekend, I am convinced of the value of the audit process and recommend it to business owners, particularly if you are thinking of a financing, funding, or selling process in the coming several years.

Related Posts:

 

Categories:Business Financing & Funding
Tags:, , , , , , , , ,