“Take me out to the ball game,

Take me out with the crowd;

Buy me some peanuts and Cracker Jack,


I don’t care if I never get back.

Let me root, root, root for the home team,


If they don’t win, it’s a shame.

For it’s one, two, three strikes, you’re out, at the old ball game.”

]]> http://www.cbs-cbs.com/take-me-out-to-the-ball-game/feed/ 0 http://www.cbs-cbs.com/cbs-reviews-challenged-to-rebuild-the-foundational-structure-of-a-business/ http://www.cbs-cbs.com/cbs-reviews-challenged-to-rebuild-the-foundational-structure-of-a-business/#comments Tue, 14 May 2013 19:41:51 +0000 Carrie Ann Green http://www.cbs-cbs.com/?p=956

Situation

A retail business that had evolved in a haphazard fashion based upon ‘things have always been done this way’ family traditions and many periods of reactionary expansion.  Client felt that the business was now running the family rather than the other way around.

Process

Reviewed the historical roots and defined the ideas that had started the business.  Rediscovered and renewed the core business values.  Established stabilizing structures and systems to continuously reinforce the corporate mission and believes, so that they’d never be lost again, and position the business for future growth.

Conclusion

“We now have a greater awareness and …

Situation

A retail business that had evolved in a haphazard fashion based upon ‘things have always been done this way’ family traditions and many periods of reactionary expansion.  Client felt that the business was now running the family rather than the other way around.

Process

Reviewed the historical roots and defined the ideas that had started the business.  Rediscovered and renewed the core business values.  Established stabilizing structures and systems to continuously reinforce the corporate mission and believes, so that they’d never be lost again, and position the business for future growth.

Conclusion

“We now have a greater awareness and control over our costs, cash flow, and profit margins.  I hate to think how much money we may have lost by not knowing what we now know.  

It was like getting a micro MBA in business and I am thrilled that my son, my brother, and my entire company could spend the up close and personal time that they did with our CBS consultant.

I will tell every business owner I know that if they need to improve their business financially, revitalize its spirit, assess and achieve its potential, to go with CBS,” Ralph, President and Owner.

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Volunteers, friends and family of CBS gathered at Willow North Shore, A Willow Creek Community Church, to pack seeds as part of the more than 17,000 volunteers needed to help fill nearly a million family seed packs to be distributed by local churches in El Salvador, Zimbabwe and Zambia.

It was really exciting to take part in volunteer work that really makes a difference.  Each family seed pack, once planted, can produce approximately 1,000 pounds of vegetables.  This allows families in these Latin American and African countries to feed themselves as well as earn additional income by selling their extra produce.  Last year more than 450,000 families benefited from this outreach program.

World Hunger—Beet It!

We were one of ten shifts on Sunday that packed Beet seeds to help ‘Beet’ world hunger.  Each family will be receiving five of the white seed envelopes that we filled that day as part of the family seed package.  If you’re interested in being part of the ‘Seeds of Change,’ here are three nonprofit organizations, recommended by Willow Creek, dedicated to ending world hunger:

Bread for the World

World Vision

World Food Programme

To Do or Not to Do—That is the Question

Redesigning a corporate logo is not a minor commitment.  It can be extremely wasteful, since it also means replacing all your corporate collateral.  From building and tradeshow signage, product packaging, sales brochures, as well as all the company stationary—business cards, letterhead, and envelopes—everything old has to be tossed out and then replaced to keep your branding consistent.

Know that a logo should not ‘evolve’ merely on whim or to satisfy someone’s ego.  Sadly, the people at my networking group who had been involved in such an undertaking reported that the new logo did not make a major difference in customer or client perception.  No one saw a resulting spike in sales.

This infographic, titled ‘How Corporate Logos Evolve’ from The Logo Company, seemed to verify what I heard that day.  Yes, all of these major brands in this infographic have changed their logos, repeatedly.  Yet, if the end result had been satisfactory, why the next redesign?  Only the first redesign in many of these series seemed to have some logical purpose behind it.

Why Redesign?

It could be that the original logos were poorly designed and difficult to read as in IBM’s early logos.  Logos can also become outdated.  The Shell and Xerox logos from the 1900s, for example, needed to be re-imagined in color in order to stand out in modern advertising.  Still, many of the other redesigns appeared so relatively minor that I questioned why they were undertaken (as in the BMW logos which are virtually identical except for one discordant version that jumped off the screen in a tangent of swirling colors).

Take a look at a recent well-known logo’s redesign (not featured in this infographic), Louisville Slugger, the manufacturer of world famous baseball bats and other sports products.  The reason for their logo change, according to their spokesperson, was to show that the brand utilizes modern technology.  While that was the goal, given that the logo was only slightly tweaked, it appears the main result was attracting some media attention (so that public relations could be a valid objective).

If you’re a small to medium business owner considering a logo revamp, proceeding with caution would seem judicious, unless you have an unlimited budget.  Don’t do something just because an industry leader has done it—a corporate logo redo should not be a ‘jump on the bandwagon’ exercise.  Always be certain that your marketing efforts serve your business purpose, generating more leads and increasing sales, not merely to have a logo that someone deems ‘prettier.’

It was a packed ballroom at the Renaissance Schaumburg Convention Center and Hotel for the 2013 Annual Meeting.  Employees had gathered to participate in educational sessions regarding the latest tax and regulation changes facing our business clients, to share best practices, and to recognize our highest achievers.

Afterwards, attendees, and many of their spouses, gathered for a reception and informal networking.

Today, small business owners face many challenges. One of the most difficult challenges is hiring the right employees. The difficulties surrounding the hiring process include: cost of recruitment, training, management and last but not least, the frustration of employee turnover. I believe the solution to the above difficulties lies at the beginning of the hiring process, in other words, the interview.

As many business owners know, finding the right employee is just as difficult as running any other aspect of the business. Therefore, more emphasis should be placed on the interview itself. Many small business owners do their own hiring and training. Unfortunately, when a small business owner is lacking the proper training and experience, he or she is often faced with the dreaded issue of high employee turnover. Here are some solutions to alleviate this recurring problem:

1. Be prepared to explain the position’s responsibilities and difficulties. Make sure to research the position you are trying to fill so you can answer any questions the candidate might ask. By gaining a thorough knowledge of the job in question, you will be able to give the candidate a better understanding of the type of employee you are looking to hire. Don’t be afraid to scare the candidate away with your questions. It is better to find out during the interview if the candidate is a good fit. All of the interview work was for nothing if the candidate quits or doesn’t meet the necessary responsibilities. Save yourself the time, money and effort.
2. Provide a description of the type of employee necessary for the position. Explain to the candidates precisely what type of person you are looking for. Ask them about their prior experiences and how these experiences match the qualifications you are seeking. By letting the candidates explain their experiences and accomplishments, you can gain a better idea of how they can meet the needs of your business. This allows you to avoid any unrelated topics and provides for a more efficient interview process.
3. Avoid standard interview questions. It is important to avoid the standard questions often used during interviews as these may lead to canned interview responses. Hiring someone for your business is like bringing a person into your home. By asking questions that allow the candidate’s personality to peek through, you are gaining a glimpse of the type of employee the person truly is rather than the type of employee the candidate is attempting to portray.
4. Determine the style of the interview. The interview should be conducted in the same manner you run your business. It doesn’t have to be formal. There is no need for black ties. The goal of any successful interview is to “see” the person, make them feel relaxed and at home and show that you are hiring in an effort to further the candidate’s career as opposed to simply offering a job. You can do this by asking some initial “ice breaker” questions. These questions allow both you and the candidate to speak candidly which provides both parties a better understanding of one another. This often leads to greater communication between the interviewer and the candidate.

The importance of tax deferred retirement vehicles (and tax deferrals in general) and how they can positively effect your retirement and your business.

One of the most important considerations in tax planning is not just the avoidance of income tax through strategies to minimize your current tax burden, but also the calculated deferral of income tax liability to future years, where possible. So why is it that some business owners don’t value deferral techniques?

One logical answer, of course, is that they simply don’t understand deferrals or the positive effect they can have on their retirement or business needs. It is extremely frustrating to hear a client, or worse, their professional advisor, denounce a tax deferral opportunity stating it is “just a deferral,” and “you’ll have to pay tax sooner or later.” Sadly, these are often the same clients who think successful tax planning involves spending cash on capital expenditures or accelerating expenses before the year’s end.

What if you had the opportunity to defer tax expenses to some date in the future? What if it was also possible to avoid interest charges on this deferral, and potentially lower your income tax rate at the time the income was recognized so you receive a true tax savings? Alternatively, what if there were tax deferral techniques available allowing you to retain your existing liquidity, and put money back to work for you in your business? If these sound like intriguing possibilities, please read on…

This article not only explores the general benefits of tax deferrals, but also serves to remind, and perhaps reassure, small business owners that it is never too early (or too late) to examine their current retirement plan, and make sure they are taking advantage of every option available to them under the Internal Revenue Code to help them reach their retirement goals.

The benefits associated with a tax-deferred retirement plan are well-documented. There is a reason that nearly every large company in America currently offers its employees the opportunity to participate in a 401(k), or some other retirement vehicle that offers employees the ability to defer income into future years. The reason, of course, is that there is a significant benefit in doing so. Understanding the benefits associated with tax deferrals may not only help small business owners meet their retirement needs, but can also positively affect their businesses, depending on the type of deferral. Of course, companies offer these types of benefits so they can also be competitive in the marketplace. This is a testament to the widespread belief that taxdeferred retirement vehicles are a powerful planning tool.

The financial benefits associated with tax deferral techniques can come in many forms. Consider the following:

Time value of money

Most individuals are familiar with this concept. Simply stated, because of the investment return that we can earn on our money while we have it, a dollar in hand today is worth more than a dollar we receive tomorrow. In other words, if I can avoid paying my taxes today and, instead, pay that obligation in a future year, I can use and invest those funds generating a return for myself that I couldn’t have otherwise achieved. For example, assume that a small business owner owed $10,000 in income taxes, but through successful tax planning, had the ability to defer that tax obligation for one year. The business owner could then invest those funds and, assuming a 6 percent investment rate of return, could earn $600 on his or her investment before he or she had to pay the tax bill one year from now. This is a simple example and the amounts are small, but it illustrates a business owner’s ability to earn additional investment income from assets by simply holding on to them for a longer period of time – provided, of course, that any expense or additional cost of the deferral doesn’t outweigh the investment return.

When you consider that the deferral period associated with many tax planning vehicles can be far longer than the one-year period used in the previous example, that tax deferrals can be extended for an extremely long period of time and combined with possibly much higher dollar amounts, the real power of deferrals starts to show. For example, in the case of monies contributed to a qualified retirement plan, like an IRA, you could theoretically extend the deferral of income taxes on these monies over your entire lifetime and then pass the benefit on to the next generation in which the beneficiary designee is a child (in the case of a Stretch IRA). In such an example, mandatory withdrawals after the account owner’s death will be based on the life expectancy of the child. This could allow tax on the funds to be deferred for decades (25-plus or even 50-plus years).

Reduced Tax Rates

Perhaps the primary reason that tax deferrals associated with retirement planning can be so attractive is because, during our “earning” years, we are often in the highest tax brackets we will ever be in as individuals. During retirement, the vast majority of Americans are living off of their net worth and retirement savings which may be decreasing from year to year. During this time, retirement plan withdrawals and other investment earnings will have most retirees in a significantly lower tax bracket as compared to the bracket they were in while actively working and earning the money that was put into their retirement accounts. The difference between the tax bracket they were in when they earned the funds put into their retirement plan, and the tax bracket they are in when they withdraw their retirement savings in the future, represents a TRUE TAX SAVINGS as these amounts can turn out to be quite significant.

Let’s look at an example using existing tax rates and tax brackets for simplicity. Let’s assume you put $100,000 into a retirement savings account at age 50, and throughout the next 15 years, $100,000 earns a seven percent return. After 15 years, when you turn 65, your account would have nearly tripled to approximately $276,000 (rounded). Let’s also presume that at age 50, you were married and your combined net income was $200,000 per year, which placed you in the 33 percent federal tax bracket. At age 65, you are still married, but because you and your spouse have retired and are living off of a fixed income, your combined income is now somewhere below $123,000, which places you in the 25 percent federal tax bracket (or for further illustration, assume your income is below $61,000, which would place you in the 15 percent bracket). This tax rate differential of 8 percent (or 18 percent depending on the retirement income level previously shown), applied to the total investment of $276,000 would yield a tax savings of $22,080 in the 25 percent bracket, or $49,680 in the 15 percent bracket. This is money that you could never get back if expended at the time the monies were earned without the benefit of a tax deferral. This reduction in your investment also means significantly less earning power.

The “time value of money” concept, combined with the likelihood of being in a lower tax bracket at retirement, is not only like receiving an interest-free loan from the government that you can invest for yourself, since a deferral to a later year helps lower your income tax bracket, it is similar to forgiveness of that debt! These are the primary reasons why qualified retirement plans are so popular.

There are other advantages as well. Here are a few more to consider, some of which may also protect or improve your business:

Asset protection

When a tax deferral technique involves contributions to qualified (or non-qualified) retirement plans, those funds are protected from the reach of your business creditors, lawsuits and bankruptcy. This means money in your retirement plan is much better protected than the assets you have in your personal or corporate savings or brokerage accounts, which in the event of a judgment against you or your business, could be exposed to the reach of your creditors.

Increased cash Flow and/or Improved working capital

Reduced income tax expense, in some cases, could translate into more cash onhand, which could then be used for other business purposes. Consider the following:

• Since a deferral technique does not involve a cash expenditure (like a retirement plan contribution does), the improved cash flow can allow a business to consider taking advantage of better vendor terms (i.e., 2/10 net 30), thereby directly reducing hard expenses and creating “real” savings. This may sound like a minor benefit, but improved vendor terms may be more significant than they initially appear when you consider that getting a two percent reduction in your total expense for parting with funds 20 days early is the equivalent of receiving (roughly) a 36 percent return on your funds. In other words, to make two percent in investment return in 20 days requires an investment with an annual return rate of roughly 36 percent.
• One example of a deferral technique not involving a cash outlay might include a change in a company’s method of accounting from accrual to cash, in which accounts payable consistently exceed accounts receivable. When the excess receivables over payables are taken into income, the effect would be to reduce taxable income. If you are in a business where this differential remains consistent, then it is conceivable that the deferral could be perpetuated for a number of years.
• Increased cash flow could also be retained to build a war chest and secure a source of funds for future use. This could create a safety net for a business owner to cover unexpected costs associated with exigent circumstances.
• Increased cash flow could be used to increase incentive programs. Such programs could be used to attract and help retain key-employees, which in turn can reduce employee turn-over costs.
• It is importan to note that even when a deferral technique requires a contribution to a retirement plan (as previously discussed), thereby not improving corporate cash flow, individuals may often “borrow” plan assets for liquidity. While these funds need to be paid back to the plan, there are no penalties, interest is paid to your own account and it can provide a readily available source of funds when a bank loan may not be.

Reduced debt and reduced interest expenses

When the excess cash is used to reduce debt, the result is improved financial statements and improved balance sheet ratios, which can translate into greater ease in securing bank loans, and perhaps improved marketability and company value.

These are simply a few of the benefits associated with tax deferral techniques. The result of successful tax planning can be similar to tumbling dominos, as the effects within your business can be far reaching. The results can be more beneficial than just a better return on your investment and tax dollars saved (not just deferred). Rather, it can provide an infusion of working capital that can be reinvested in your business to save real dollars in other ways.

Small business owners should also understand that there is a wide variety of retirement planning tools available to help them meet their retirement goals as well as to complete the succession of their businesses. By consulting with a qualified professional specializing in retirement plans, small business owners, armed with an appreciation of the power of tax deferrals, can better explore these options and how they fit with their businesses given their goals, employee make-up, company profitability and willingness to provide employees with benefits and incentives. For those employers that don’t feel inclined to provide significant benefits to their employees, but would prefer to simply provide benefits to owners, there are also qualified and nonqualified retirement plan options allowing for significant tax deferral opportunities that primarily benefit corporate shareholders.

Regardless, the choice regarding a retirement plan should be made with a licensed retirement planning professional present, and should include a careful analysis of the company, its ownership and the business owner’s and professional’s individual and collective goals.

The headlines, seminars and business school classrooms are all abuzz about the need for stricter and tighter corporate governance.

However, their focus is aimed at public companies, the big corporations, financial institutions, Wall Street, etc. What is not discussed is small business. Does corporate governance have a place in a small, privately held company?

President James Madison pointed out very clearly that governance is a difficult problem when he wrote the following as part of the Federalist Papers in 1788.

“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed and in the next place oblige it to control itself.”

Has anything changed? No—human nature is human nature. A business in the sense that Madison describes government is much the same. Executives of a company govern the entity and the employees, and must be enabled to do so. However, at the same time, the executive team needs to control itself. This is where corporate governance comes in, causing the following question to arise: is it necessary to have a governance structure in a small, privately held company?

To answer this question, let’s look at what we want to protect. The key behind governance is to force compliance and control on the protection of assets, and on transparent, timely and accurate financial reporting. Both of these key issues are as relative to a small business as they are to a large company. In fact, it could be argued that these issues are more important to a small company, as a large company has the wherewithal to handle a small breach, while a small company typically has no room to handle an unexpected loss of assets (theft of inventory, tools, equipments, cash, etc.) or false financial reporting. Clearly, the depth of governance policies and regulation is overkill for a small business; however, that does not obviate the need for governance.

All too often, senior managers are reluctant to implement governance and oversight structures in their companies for fear of what the backlash might be from the rank and file. The reality is that the lack of implementation is where the danger for disaster and potential for crisis stems from. Both management personnel and employees often fear and resist change due to the fact that change cannot be dictated, as there must be company-wide adoption and buy-in.

However, in every adversity, we can find opportunity. The fact is that now, more than ever before, employees are acutely aware of what has caused the economic tsunami and the collapse of the global economy. Therefore, there is no better time to implement stringent governance policies. Your employees may even be pleased, as a lack of governance policies in the company could cause major problems. Basically, if you implement creative strategies now, you may be able to create value for all stakeholders at the same time, which will ultimately make your business stronger in the long run.

Depending on when you read this article, the light at the end of the tunnel for your company might be that long-awaited, positive turning point in your business that you fought for. Or, it might be another train coming at you.

The continuing turmoil caused by this lengthy economic downturn has undoubtedly affected you and your employees in many ways, most of them negative. Even if your company has not been directly impacted by a reduction in force (such as layoffs), hiring freeze, reorganization or a realignment of responsibilities, the chances that your employees have been touched by one of these through friends, extended family or associates are highly likely. How your employees respond will run the gamut from finding ways to work harder and smarter and truly excel in times of adversity to drawing inside a shell, protecting their interests, blaming others for their troubles or engaging in even more insalubrious activities.

A January 2009 employee attitude survey found that most respondents (67 percent) said the economic situation has had a negative impact on their state of mind (motivation), while another 15 percent admitted it has almost paralyzed them with fear. Another 15 percent said they are actually more motivated as a result of the economic downturn. Reasons for this motivation included fear of being laid off and an increased workload.

As you are well aware, a motivated workforce is crucial to ensuring you have engaged, productive and dedicated employees that are quality salespeople and advocates for your company. While it typically does not take an abundance of resources to guarantee you are motivating the right people in the right way, it does take an appreciation of the differences in how everyone is motivated. Some employees will be motivated by money, competition and increased pressure, while others prefer encouraging words, team building and appreciation exhibited from you and fellow colleagues. Failure to properly motivate your staff will have a devastating effect on the health of your business and the bottom line.

In most companies, a workforce begins to lose motivation when management becomes aware of a potential financial crisis, or other uncertainties, and begins to reduce the workforce and as many other costs as possible. These types of behavioral changes are almost certain to send shock waves throughout any organization.

Also, as is often the case during the beginning of an organizational crisis, communication between management and the workforce begins to deteriorate. Renditions of the old Marvin Gaye song take over, and the informal grapevine is in control, often raising anxiety to new heights and leading to overstated consequences. Employees begin to get angry and detached, and eventually resign themselves to the impending loss of their jobs. This, of course, leads to management becoming even more secretive, thereby continuing the vicious cycle.

In addition to the moralistic and human nature concerns, you must consider the financial bottom line and how it is affected. The subtle impacts are the lower production outcome exhibited by employees resulting from decreased concentration, irritability and anger directed at management and coworkers, higher absenteeism and even substance abuse. The not-so-subtle impacts include an increased theft of materials, supplies, money, time and other company-owned items.

So what is management to do? The following four suggestions can counter the impact of the negativity and hopefully assist you in navigating through this transition.

• Establish a sense of honesty and understanding by first acknowledging the obvious insecurities, uncertainties, suspicions and fears felt by your employees.
• Openly and honestly discuss the difficult and complex challenges and decisions that need to be made. Engage employees by seeking suggestions regarding new ways to improve processes, reduce costs, etc.
• Increase the frequency and vary the methods of communication to employees. Encourage collaboration and set the example from the top down. Communicate via conferences, the intranet, blogs, newsletters, one-on-one meetings, etc. In this case, more truly is better.
• It is important to make these efforts your number-one priority. You will be the focal point of this endeavor, so you must demonstrate your desire to succeed through your behavior and actions. Be quick to recognize and reward, and celebrate contributions and achievements.

Depending on your personal style, characteristics and the organizational environment, some of these ideas may be very difficult, if not impossible, to achieve. However, the less you do will be in direct proportion to the chances of your business surviving and thriving during this transition. Remember, this economic downturn will run its course, and the job market will once again be plentiful. To this end, you want to be the business and organization that the survivors will want to join, not leave.

…Whether you are new to business and just setting foot on your first mountain or you are an experienced climber, this mountain, this economic crisis, is the highest peak we will likely face in many generations of business. But in the end, it is still just another mountain to be climbed.

As a country, we are now in the second phase of what will likely be four phases of the current economic crisis, each phase worse than the one before. Therefore, it is imperative that everyone, particularly small business owners, understand the economic playing field on which we presently find ourselves.

The first phase was the housing crisis. The seeds of the housing crisis were laid in the late 1990s and early 2000s. First, there was a push to make it easier to get a home loan by relaxing some of the standards required for approval. Freddie Mac and Fannie Mae reduced down payment and qualification requirements, thereby making it easier for more people to get into a home with less savings. Precipitately, home ownership went up. Then, in the wake of the September 11th attacks, the country was moving toward a rather severe recession.

In an effort to mitigate the recession and avoid another round of “stagflation,” the Federal Reserve Bank reduced the cost of funds to next to nothing. This meant a substantial amount of very inexpensive and easy-to-get money flooded into the marketplace in every sector of our economy. Almost anyone could get a loan to buy a home with very little or no down payment. This drove up housing demand, which in turn drove up housing prices. Higher prices still did not slow demand because interest rates were so low that the monthly loan payments were still within reach of most Americans.

Demand quickly outpaced supply, and the market scrambled to keep up. We had a residential housing development and construction boom the likes of which this country has never seen, creating millions of jobs in that sector. The rise in housing values, coupled with the ease of acquiring credit, benefited existing homeowners as well; they could now readily access their newly acquired home equity wealth and use the money to buy flat-screen televisions, a new swimming pool for the backyard, that trip to Disney World, etc.

The benefits of the housing boom, which was created by a credit boom, began to fertilize the entire economy. The lush tropical rainforest that was the housing market spread like mad into nearly all sectors of our economy. The flowers bloomed, the sun broke through the clouds, and there was a great deal of low-hanging, ripe fruit for nearly everyone in the economy to take as they wanted. During this period, the biggest struggle for business owners was how to organize their day-to-day operations in a way that allowed them to handle more and more of the work available (i.e., increase production capabilities and efficiencies). Little focus was given as to how to organize businesses to be more competitive with regards to cost controls, pricing and sales engineering. This was the case for small and big business alike.

Everyone became so intoxicated with success that they began to take extreme risks. The banks began to create new and extremely risky loans, like “liar loans,” where individuals did not have to prove that they actually had enough money to repay loans as long as they had decent credit scores. Adjustable-rate mortgage loans with very low introductory rates designed for those with poor credit and high debt-to-income ratios were given to individuals based on their ability to pay the monthly mortgage at the low introductory rate as opposed to the much higher rate they would have to pay later. There were “interest-only” loans in which one only had to pay that month’s interest payment without paying off any of the principle of the loan, which again made it possible for individuals to acquire houses they could not otherwise afford when the principle came due. Needless to say, this led to a rise in home loan defaults.

One must understand how the home mortgage system works in the United States to understand how the foreclosure down the street nearly brought about the overnight collapse of the entire developed world’s economic structure.

When you obtain a mortgage through a mortgage broker, the broker is merely facilitating the loan between the borrower and what is called a wholesale lender (i.e., mortgage banks like Countrywide or Centex). If you decide to obtain a loan from a local bank, these banks only have a limited amount of money to lend in this way. Once they make $100 million worth of loans, for example, they run out of capital and are no longer in the mortgage-making business unless they can sell the mortgage contract to someone else and use the proceeds to fund a new loan in its place.

Overall, there are two types of mortgage loans that banks can make: conforming or nonconforming (also known as “subprime”). The difference between these types of loans lies in who will buy these mortgage contracts from a bank. The primary purchasers of loans in the United States are Freddie Mac and Fannie Mae, and they have specific risk tolerance criteria that banks must use when approving the loans before they will buy them (i.e., the bank’s loan approval criteria must “conform” to Freddie Mac or Fannie Mae standards). Hence, when a bank is able to sell its loans to one of these loan purchasers, it is said to be “conforming loans,” meaning that the bank is conforming to Freddie Mac or Fannie Mae standards for risk exposure.

The second type of mortgage is the nonconforming, or subprime mortgage. This is a loan that is considered too risky for Freddie Mac and Fannie Mae to market as a safe investment. This means the banks that offer these subprime loans have to sell them to a company that is willing to take the higher level of risk involved in order to make a higher profit, which is why these types of loans have higher interest rates.

The only institutions that had enough money to buy these huge blocks of subprime loans and take the higher level of risks involved were Wall Street or comparable sectors in other countries. As such, Wall Street brokerage firms like Lehman Brothers bought these subprime mortgaged-backed securities and resold them. In order to make these higher yield, higher risk investments more attractive for resale to the risk averse institutions like AIG that held all the cash, trusted rating agencies like Moody’s were paid to rate the investments as safe. Moody’s and others then sold out their integrity and independence by accepting a fee to rate these investments, thereby creating a conflict of interest in their rating process that made them biased toward rating the investments as safer than they actually were, to keep the income from the banks rolling in. Freddie Mac and Fannie Mae were now forced to compete for the same buyers, so they relaxed their loan standards in order to compete with the subprime market.

Eventually, these subprime mortgages began to go bad. When they did, foreclosures increased, causing a full-blown housing crisis in which hundreds of thousands of Americans working in the housing sector began losing their jobs, and millions of Americans suddenly lost the only real source of wealth they had—the equity in their homes.

When Freddie, Fannie, Lehman Brothers and AIG all collapsed in this interconnected way, it sent shock waves through the entire global economic system. Banks stopped lending to each other because there was no way of knowing which bank was going bankrupt next, and who would be taken down with them. In fact, we were, and in many ways still are, within days of a potential collapse of all the major financial institutions in the world because of the interconnectedness of these financial weapons of mass destruction. If banks are not lending to each other, money is not flowing to the companies and economies that have come to depend on the flow of credit for survival.

This then moves us into the next phase: the credit crisis.

The credit crisis is worse than the housing crisis, as our entire global financial and economic system has been based on the easy flow of credit for decades. Not only is it difficult for an individual to currently obtain a loan to buy a house, one can hardly get a car loan or a credit card. Furthermore, it is not just individuals that are affected. McDonald’s Corporation, arguably one of the most sound and trusted companies in the world, cannot obtain a loan to put coffee machines in its stores.

The sad reality is that it has been so easy to get a business loan or line of credit over the last decade that businesses did not have to be good at managing all of the eight drivers of cash flow (sales growth, gross margins, SG&A costs, A/R, A/P, inventory, capital expenditures and taxes). Instead, businesses could get by with incomplete management, organizational systems and processes because a bank’s money would cover their lack of management skills.

Managing all eight drivers of cash flow effectively means we have a great deal of capital available from internally generated cash. Not managing all eight of these drivers effectively means that we may not have much internally generated capital in our bank accounts, even though there are substantial profits and sales on our income statements. This means we must access externally generated capital (i.e., a bank’s money) to cover the growth, and sometimes the operating costs, of our businesses. This is capital the banks were only too ready to provide. In fact, the banks were so happy to provide business owners with this money that they were able to convince owners that their companies were not performing bad business by borrowing money to grow and/or sustain operations.

In a market where you could acquire money with almost nothing more than a wink and a smile, you could get by just fine by solely concentrating on growing sales and profits since the banks had all the actual cash you might need. But when that flow of credit was turned off, only the businesses with significant cash on hand and low debt service loads were in a position to comfortably survive. These companies fought the fight in order to successfully manage all of the key areas even when they did not have to. Unfortunately, these examples are rare, and most companies are in trouble, with a very high percentage being forced to close their doors and let their employees go. If this is not happening to you, then it is happening to your vendors and clients.

This then pushes us into the next phase of this crisis: the unemployment crisis.

The consensus amongst all the leading economists in the country is that we will be lucky if we end up with nine percent to 13 percent unemployment over the next year. This might not seem so bad, but all one has to do is travel to Michigan to see how devastating nine percent unemployment is in our economy. Not only does it mean that nine percent of the workforce cannot find jobs, it also means that about another 60 percent of the economy is now under-employed. Individuals who earned $100,000 salaries, for example, now earn $35,000 salaries just to put food on the table. These individuals are certainly not doing any discretionary spending to stimulate the economy. Unfortunately, they are barely getting by, if at all. Michigan is practically an economic wasteland with approximately nine percent unemployment now imagine 13 percent unemployment nationally.

It is important to note that during the Bush administration, the unemployment calculation was changed. Currently, anyone unemployed for more than six months is no longer counted as unemployed, as that person is no longer considered a potential worker. When you add these individuals into the calculation, you generally see numbers running about two percent higher. That puts the “real” projected unemployment numbers between 11 percent and 15 percent.

What is really concerning is that so far, every time we have reached a consensus as to how bad the economic news might be, the news proves to be significantly worse than expected.

We now have a housing crisis, a credit crisis and an unemployment crisis occurring all at once, and now that the unemployment crisis has begun, the credit and housing crises become increasingly worse. We have a compounding economic crisis, which is further compounded by the fact that we live in a global economy, and the rest of the world has the same issues but with less capacity to deal with them.

The first three phases of the overall economic crisis all precipitate and overlap each other, each of the later phases making the preceding phases worse. It is likely that the looming fourth phase will not hit us until the other problems begin to clear up. Yet the fourth phase may be worse than all the others combined. This phase is known as the monetary crisis. Whenever an economy adds new money to the monetary supply, it waters it down or reduces the value of the existing dollars in the system (i.e., the purchasing power of the dollars in the system goes down). The ability to purchase less with the same amount of money is known as inflation. Prices going up, or the value of the dollar going down, causes you to purchase less for the same amount of money. In other words, the more money you “create” and pump into the monetary system, the more diluted the dollar becomes, forcing you to purchase less for the same amount of money.

So far, in response to the economic crisis, the Federal Reserve Bank has created and diluted our monetary supply with more than $1.5 trillion new dollars to pay for these seemingly weekly bailouts. (The federal government does not have, and cannot borrow, enough money to pay for these bailouts, so it must print the money instead.) It is expected that before everything is said and done, we will have diluted the monetary system in the United States by more than $5 trillion.

The businesses that have enough skill and flexibility to survive the next two years will be facing, and functioning in, nothing less than a new financial and economic world order. The economic growth we have become accustomed to will likely to be a thing of the past, as growth requires capital, and capital is gone.

We have seen many of these cycles over the last century, but this one is far worse than any other. Our economy became almost entirely based on the flow of loose, easy credit. Entrepreneurs did not have to learn the highly evolved skills of cash flow management because they could simply get a loan to cover the cash flow shortages that rapid business growth creates.

Loose and easy credit dummied down the business skills and discipline that it takes to be a successful business owner in a cutthroat, competitive environment. We did not have to build a solid aggressive sales process because there was more work than we could handle, and we did not have to measure and control all our costs because in an environment where everyone is making significant amounts of money, price competitiveness is not as important. We did not have to as aggressively negotiate paying and receiving terms with vendors and clients because we could easily get a line of credit when we created a cash flow shortage for ourselves. We kept too much money tied up in inventory for the same reasons.

Finally, we did not have to worry about making sure we had as much cash in our bank accounts as we had profit on the books since almost anyone could acquire financing to buy a business for big dollars later down the road. In other words, many business owners figured they could defer their personal wealth building for the time being (available cash required), and cash out big on the sale of their businesses later. But the wealth left tied up in the businesses is evaporating before our eyes just like the equity in our homes, and the survival of our businesses trumps the idea of selling and cashing out as the grand prize winner in the business beauty contest.

Over the next decade, very few individuals will be buying businesses under favorable terms, and business owners small and large will have to learn to manage their companies with a focus on cash generation instead of profit generation if they want to grow and thrive. Cash is the fuel that keeps your business moving forward. You, your clients and your vendors used to get that fuel from the bank, but now you will have to generate that fuel internally by utilizing strategically focused business management and controls. Those that learn this quickly and make the necessary changes with the most skill and the least amount of trial- and-error mistakes will be the business leaders of tomorrow. The business owners that do not quickly and skillfully adapt will not survive. Instead, they will likely be the new, highly qualified employees of the highly skilled business professionals that did quickly adapt.

My friends, whether you are new to business and just setting foot on your first mountain or you are an experienced climber, this mountain, this economic crisis, is the highest peak we will likely face in many generations of business. But in the end, it is still just another mountain to be climbed. It is an opportunity for greatness for those who choose to seize the chance.

We may lose as much as 50 percent of all small businesses. But when we get to the other side of this mountain—and we eventually will—we will not return to 100 percent of the available business we had before. Instead, we will return to 110 percent or better, as the population is not decreasing. Those that make it to the top of this mountain will have 110 percent of the work available with possibly as little as 50 percent of the competition. The 50 percent that remain will not be those that simply worked harder or put in longer hours. They will be the small business owners that learned the most about themselves and the most about the skill needed to operate a business in the most difficult of environments. The road is steep and the challenges are great, but for those of us that saw the mountain and had to climb it, this is just more of what we ventured out into the world to conquer in the first place.