One Accountant's Perspective: Types of Investors

Question:

Dear Tran:

I recently came across a client that is in need of an investor(s).  The primary objective of the business is to provide digital media marketing, business social networking and information technology services for the Supplier Diversity community.  Any ideas as to how to go about and find these investors?

Answer: 

As an accountant, I get approached a lot to help with formulating business plans for potential investors. This also includes, introducing the business owners to new investors, potential investors, long-term investors, and angel investors (if I can find them).

When I approach any individual, I like to start within my own circle first -- high school friends, college classmates, and chamber of commerce. Once I have identified my initial roaming area, I then classify the "investors" into "New Investors", "Potential Investors", "Long-Term Investors", and "Angel Investors".

The reason for such categorizing -- so I know how to approach and what to approach them on.

New Investors

-- this is likely to be their first investment and they will range from terribly reserve/conservative to being very liberal with their investment. They are likely to care more about the infrastructure of the business and because this is their only investment right now, they are likely wanting to be a part of the business on a more active level (weekly financial reports opposed to monthly or quarterly).

-- I approach these investors according to my profession. I am an accountant and have an established reputation for careful money management and working on a tight budget to make a company successful. I also have a reputation for "not needing a large client. I will make your company into a large client". Thus, they have confidence that an accountant with such reputation is going to watch their investment.

Potential Investors

-- These investors already have other investments and are just looking to diversify their portfolio. They likely won't want an active role in their investment due to the quantity of their investment. They are also a slightly older crowd and have their own accountants & financial analyst on reserve somewhere on their phone.

-- Approaching these investors require more skills, but the payoff is bigger -- more money, more resources, and they're ok with being absent from their investment. However, they'll definitely want to see you polished up, suit and tie, and at least a good level of assurance that you're not an "upstart kid looking for money" as one of them had told me. Approach them as you would a new investor -- just expect to have all the questions answered, good responses, and a lot of projections.

Long-Term Investors

-- These investors are normally older and you will likely be dealing with their accountant(s) than you will with them. They are old money and have been investing a long time and thus, are highly experience and can smell a good business plan when they see one.

-- When you approach these type of investors, approach them with significant care. You are not only presenting to them, but also to their accountant/financial team. They will bring the idea back to their accountant and relay it, which means, anything and everything you say have to be extremely clear so not to be lost in translation. Also, copies of business plans, projections, investment amount, and so on is your best bet. Finally, if you know a friend or a family member who knows this type of investor, it is going to be your best approach.

Now that we have the type of investors out of the way, finding them is not that difficult. Chamber of Commerce is a great place to meet business owners and investors. Also, approach your local investor's organization -- there are about 10 big ones in St. Louis and I just did a quick search. Approach friends and inner circles. Failing all of this, go to a Financial Advisor or Accountant that you do business with frequently. They are the money handler and will know who is interested and who isn't.

Anyway, I hope this all helps!

Tran Nguyen

Accountant

One Accountant's Perspective: Bulk Order

Question:

Dear Tran:

I have a small business that has been in operation for about 6 months. I have about $7,000 dollars in gross sales per month. I offer a product that currently costs me $24.00 and I sell it for $30.00. This price is pretty fixed due to other competition.

I found out I can purchase a crate of this product from China for $50,000. This amount equates to $18.00 per item (substantial savings). At my current rate it would take me about 1.5 years to sell the entire inventory. I do not know much about loans and getting capital (started the business with $300 ) so any suggestions you may have is appreciated. I did a few calculations and it looks like a 2 year loan even at 20% would save me $9,000 per year. But where do I get a loan from? Or maybe my calculations are wrong?

I applied for a business/personal loan from my local bank, but as I expected I was denied as I do not have any equity.

What are my options? Should I go with this plan?

Answer:

To be honest, your options are limited by several factors. First, being that it takes roughly 1.5 years for you to move the entire shipment, while the bank has to wait 2 years for full repayment -- that is assuming everything goes according to plan.

So the turnover rate is not in your favor. But do not be disheartened just yet. A small business loan is possible if you have a working and fully written business plan. Most bankers will listen to your idea and make a personal judgment on whether your ideas are feasible or not. A written business plan will always help that along.

Another thing you can try and do is to go through a third party. An accountant who knows your businesses would be a great person to approach. They are likely to have contacts with banks and bankers that trust their judgment and thinking. Thus, you are using their credibility to get a loan.

One more possibility is to approach the company selling these items directly. See if they would extend to you a credit line as long as you moved the items and sold it for them. Most companies will agree to extend this courtesy if you are able to sell the products and pay them on time -- just do not ever miss a payment or that trust will disappear.

On a personal note, I would recommend finding investors. At a 10% per year return, you can find some decent investors who are willing to go into the business with you. Plus, a short-term investment is great for those just wanting to get their feet wet so that gives you a wider range of investors to pick from.

As an accountant, I would advise against such an idea. While it is true that you would go from a gross profit margin of $6.00 to $12.00 if you made the switch; you would also be incurring a large risk to your business. There are several factors to consider when looking at such a bulk order and one from a different supplier.

The first of which, is it the same quality material. It is possible that your $24 product is built more reliably than the $18 product item. Thus, a switch might cause more faults and defects to occur. Which would ultimately result in higher warranty costs -- if you offer warranties -- and lower customer satisfaction.

Second, if the items are comparable then, you are faced with having a huge amount of your money invested into your inventory that is staying on your shelves for nearly two years. That is money you can be spending on advertising, customer service, expansion, investing, and the list goes on -- the opportunity cost could potentially be too high.

For example:

1. $50,000 for the bulk order at $18 per unit equates to 2,778 units
2. 18 months (or 1.5 years) to move all 2,778 units, means you must sell 154 units per month to stay on schedule
3. (2,778 units on hand - 154 units sold) = 2,624 units on hand
4.  (2,624 units on hand x $18 per unit) = $47,232 inventory costs
5. If interest is at 0.0083% (10% per year), your opportunity cost is at: $47,232 x 0.0083% =$393.60 per month (or $6,691.20)

This means you would lose roughly a month worth of sale by purchasing this bulk order -- despite the more appealing pricing.

Lastly, you are potentially facing another problems with obsolescence. The product could be replaced with a better product or you could have issues liquidating the items in the event you need cash. Overall, I would recommend against such an idea.

I hope this helps!

Tran Nguyen - Accountant

One Accountant's Perspective: Audit Questions

In recent conversations with several business owners, I was asked the same questions in varying forms. I have decided to address this in my blog since I believe it will help both new and current business owners.

How do I get out of an audit?

The truth is, there is no way out of an audit once you are in. Though it is easy to find the IRS intimidating once you discover you are being audited -- it’s one of the worst feelings to have in the world!   Here are three ways to go about addressing the issue.  Know what kind of audit it is -- there are three types of audits routinely performed by the IRS, and each has a different resolution:  letter, office, and “on-site”.

The least of these audits is the "Letter Audit" -- the IRS mails a letter to your home or business informing you that an audit is taking place. 

The Solution:  bring all of your records for verification by cross-referencing with other supporting documents. An example would be proving that you own the house by showing property taxes were paid on time and a mortgage payment stubs as supporting records.

The second type of audit is the "Office Audit" -- you are summoned to the IRS office to answer questions, review your financials, and anything else that might interest the IRS agent.  

The Solution:  hire an accountant (preferably with a Law Degree), but notice, I did not say Lawyer.  A CPA or good accountant would be your best defense in a situation such as this since they understand financial laws and can tell you what to divulge and what is not pertinent.  An accountant will be able to tie in evidence with supporting documents in a financial light. They will also have a much better understanding of the financial situation that the IRS agent is trying to dig into.

(The reason why you do not want a lawyer in this case is because a lawyer has knowledge in common and criminal laws, not financial laws. They can tell you when not to speak, but they cannot tell you which financial portion to omit. Thus, this is a situation where less is more.)

The last and most severe, is the "On-Site Audit" -- the IRS sends agents to your office to audit your financial information.

The Solution:  cooperate and hire an outside auditing firm to lend credibility to your financial information. An outside accounting firm has both its reputation, a list of clients, and dealing with the IRS. If they put their name after your financials, it will usually be sufficient to show that an audit is no longer necessary. Furthermore, you should consider hiring an Accountant to verify the IRS agent's numbers to ensure they are not tacking on more than they should -- just be sure to not use the same accounting firm that performed the audit to avoid any counter-argument of "conflict of interests".  Overall, the best way to avoid an audit by the IRS is to ensure you have accurate and supporting documentation. A paper trail, audit trail, invoices & receipts, and finally a good accountant are your best defense against an audit.  Which leads into the next question...

“What makes a good accountant?

There are many variables that go toward an accountant being "good" at their job.  Obviously,  knowledge, work ethics, and abilities to manage your financials accurately.  However, this does not make an accountant "good" it simply makes him/her "an accountant".

The trademark of a "good" accountant is their willingness to be your friend, consultant, and advisor. A good accountant will always volunteer their vast network of professionals for their clients to use to grow their business. An example would be an acquisition of a bank loan --the accountant should be able to give you a list of good bankers that they know and research a few more for you to pick from.

What separates individual accountants is their ability and willingness to not only work with you, but for you. An accountant that has a network but reserves it for themselves is as good as any other accountant. However, the instant they invite you to lunch to meet another professional that can help grow your business, you found yourself a good accountant.

Finally, the true mark of a good accountant is their selflessness in helping you, not themselves. An accountant that does not take your business because you cannot afford them is not good, they are just practical. But an accountant that tailors their service to meet your need with the confidence that they can be paid later -- because they can generate better cash flow and advise you in the right way -- are the ones you want to be with. The reason being, they are confident, willing to work with you, and have a vested interest in growing your business so they can grow their practice.

This leads me to the final question...

I've had my accountants for years.  (Why) Should I change accountants?

Yes, you should consider it. There is no such thing as a "stagnant" accountant, but there are such things an "overly-comfortable" accountants.  By that, I mean the accountant is more focused on maintaining their practices instead of growing your business. The accountant may become comfortable with an outdated system, no longer expanding their professional network, or miss out on a new cost saving technique being used in the industry by another accountant.

Thus, you should always entertain the notion of switching accountants for the pure reason that the younger accountants are ambitious, possess the latest knowledge, and willing to work to prove their worth.

Second, as a business owner, you should always be shopping for a better deal. Accounting is a black and white profession. That means an accountant's worth is purely in their ability to service you at the right price range, how extensive is their network, and how experience they are in your industry.

An accountant with forty years experience, but no network is worth less than an inexperienced accountant with a vast network. The reason being, the inexperienced accountant can gain the experience, with time, but they have the energy to maintain and grow their professional network -- which means, you as the business owner, have an unlimited source of professional talents to tap into for every sector of your business.

I would like to point out that, I am not encouraging you to go find the youngest accountant out there, but simply to be smart about it and keep an eye open. I would interview an accountant who is handing out business cards on the hottest summer day purely because he/she is determined and knows that the other accountants are most likely indoors with air conditioning. 

I hope this eases your audit anxiety and assists you in making the decision and finding the right accountant.

I wish you all the best.

Tran Nguyen, Accountant