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Business Adviser Fast and Furious: Tips and Strategies for Fast Growth By Dennis Fortnum Canadian Managing Partner KPMG Enterprise

Companies constantly seek innovative ways to answer some of the key questions around productivity. What steps can we take to improve financial resource utilization and increase productivity in this tough economy? What common missteps can put a damper on that process? What are the best ways to optimize revenue?

Certainly there are some innovative approaches to these questions, but there are some obvious ones too. While some solutions may seem like old business, implementing them-if we are to take the example of many Canadian businesses to heart-is apparently not. When a thing is so obvious that nobody does it, it can pay off to be the first in line to take another look.

Perhaps it’s time to identify easy-to-win opportunities, beginning with creating a more cash-conscious organizational culture. That may seem obvious, but then why isn’t it done more often and more effectively?

For one thing, culture change is a process and not a procedure. It’s simple to pressure clients to pay while holding off on an invoice or two of your own; it’s a challenge, however, to develop a culture where everyone in the organization-end-to-end and top-to-bottom-understands that their individual role and day-to-day actions have a direct impact on financial productivity. True culture change requires planning and multi-stage execution, and many companies-though they clearly see the end value-either lack the internal expertise or do not feel that the time and expense to get there is worth it.

Even at the procedural level, there are straightforward but often overlooked steps that can enhance your financial position immediately. A more valuable way to look at billing, for example, beyond the temporary solutions of hounding clients and stalling creditors, is simply billing promptly. It’s amazing how many companies let this slide, and in doing so limit their access to working capital.

Say you complete a service or ship a product on the 10th of the month, but don’t bill for it until the end of the month, or even later. It does not get into accounts receivable on a timely basis and an extra month goes by before cash is collected. In fact, companies should review receivables for significantly aged accounts. If you’re a small or mid-sized business whose large clients have 30 or 60-day payment policies, make sure you stay on top of that cycle. If you pay clients early and clients pay you late-well, that result is obvious.

The list of often-overlooked measures goes on. Create a robust weekly cash flow forecast that’s reviewed by key management to understand where and why things are occurring; be sure to account for variables like one-time items and seasonality and extend the forecast out for at least two months, ensuring that there is time to deal with unforeseen issues. Take advantage of early payment discounts-or ask for them; extending payables should be a last resort. Also, put the proper controls and processes in place so working capital isn’t tied up in excess inventory. This doesn’t have to be a full “just-in-time” system, but managing excess and potentially obsolete inventory will certainly increase financial productivity. Many off-the-shelf accounting systems have monitoring reports embedded in their systems and companies should look at whether they are using these tools effectively.

Of course, innovation is still a critical driver for Canadian entrepreneurs, and there’s plenty of support for strong ideas, though it’s another area where businesses aren’t taking enough advantage. All levels of government earmark hundreds of millions of dollars for innovative start-ups. The Ontario Media Development Corporation, for instance, allocates money to all kinds of companies, including video game developers, internet ventures, manufacturers and other service businesses. Many companies may not even know they qualify.

One of the key factors in companies ignoring such free advice and financial aid is simple lack of knowledge and experience. Canada thrives on the ability of its entrepreneurs and start-ups, but without a practical knowledge resource in the company, information around government programs, for example, can be time-consuming and overwhelming if you don’t know what you’re looking for. There are however sites that make this process much simpler such as The Funding Portal, and businesses of all sizes are encouraged to make use of this service.

When it comes to implementing the right productivity measures, however, the “obvious” can hide in plain sight, lost in the search for innovative ideas and new approaches that, for some core business and operational processes, just don’t exist. And sometimes it’s achieving the obvious-reaching that end point that’s clearly where you want to be-that’s difficult.

Canada has money for innovation if companies take the time to seek it out. Sometimes, however, straightforward measures like proper billing procedures, prompt collection of receivables and inventory oversight are the order of the day, yielding smoother operations, increased cash flow and the means to drive organic growth.

Managing Growth is About Doing the Math By Alex Levy CEO and lead designer, MyVoice

In the one-and-a-half years MyVoice has been in business, growth has been a constant. While it’s an enviable position for a startup, managing it does come with challenges.

MyVoice develops mobile technology to help people with speech disabilities communicate. Since launching it in April 2011 we have been taken aback by the interest in this product. To date we have 13,000 users in 30 countries. To put that in context, a top company in the traditional communications hardware space might sell about 10,000 units a year.

For a company in the tech space that competes with well-established, large incumbents, we’ve learned a lot in that short time. The first and most significant thing is that in our world it’s all too easy to think your technology will sell itself. In our case, we had a wonderful product that made sense and people were motivated to buy it.

All that may be true, but there is an important ratio at work that you have to take into account. By way of example, let’s say one in 10 prospects chooses you over your competitors and your projections are 10,000 users. It’s easy to forget you would need 100,000 contacts to achieve that.

Here is some other math to consider: the relationship between product and marketing metrics. If your marketing efforts rate a 10 and you have substandard product that scores a zero, multiply the two together and your output is zero. If your product is a 10 but your sales and marketing are zero, the result is the same.

We all know that maximum exposure is critical when starting out. It’s important to decide early in the process what the identity and message for your product and your company will be. Entrepreneurs don’t have billions of dollars larger organizations do to make it happen. So a good first step is to create a message that is as simple as humanly possible, and requires less effort to convey. The MyVoice’s message is really, really simple: “It’s easy, affordable and it will make your life better”.

Also, don’t fall into the habit of talking about every single feature of your product or service. That holds true whether you have a tech company or a Yoga studio. If we had advertised MyVoice by listing all 50 or so features, no one would remember a single one. Pick the ones you want to be known for and say it over and over.

We’re also an organization that relies almost exclusively on online marketing. The first thing you need to understand when in that game is where your natural customers are. We started out by doing extensive customer surveys and analytics to find out where they were, what they liked to buy, and why. The results surprised us.

We thought the largest users would be people with aphasia (i.e. language impairment from a stroke or brain injury). Research however showed the number one users by far would be kids on the autism spectrum, the second was cerebral palsy, and aphasia came in third. Not only did this help focus our marketing efforts, it drove us to develop access features to meet specific challenges for those populations.

Within that community you also have to find your best customers. There is always the tendency to really want to push to achieve the big deals. In our case, an example would be selling into school boards. A lot of new businesses fail to realize that getting the tougher accounts can take twice as much time and effort, which are resources you don’t always have.

A better approach is to view new customer opportunities equally. It makes strategic sense to focus on the “easy sells” that are ready to buy today. In that way you can keep your selling costs down, and your returns higher, and go after the tougher sells when you’ve gained some traction.

Funding Growth through Working Capital By Chris Hough Senior Manager, Management Consulting, Financial Management Advisory, KPMG Enterprise

As the last several years have proven, the economic climate is always uncertain. While the cost of borrowing may be historically low at the moment, it is not always easy for private companies to access that capital. In addition, the risk of rising interest and global economic uncertainty make most business owners think twice about taking on additional debt. So how do you finance growth when faced with this uncertain environment? One solution is working capital.

Reducing working capital levels frees up cash to reinvest in the business without taking on extra debt. And these reductions do not need to come at the expense of customer service or top line growth. In fact, proper working capital management can actually improve relationships with your suppliers and customers, and increase margins.

The key to working capital improvement is taking a systematic and sustainable approach. Extending credit terms with vendors or instituting more aggressive collections practices with customers may drive short term working capital improvements, but the long term effects could be devastating. Instead, you are better to follow three simple steps: Analyze - Diagnose - Implement. Execution of these steps needs to be a joint effort. The Finance team cannot drive these changes on their own. The entire organization needs to commit to making the improvements.

In the Analyze phase, review your historical working capital trends. Are there peaks and valleys? What drives those fluctuations? Based on this information, begin projecting your cash flow requirements for the upcoming three months. How accurate are your forecasts? What causes the variances? This should point you towards areas for improvement. Good decisions are driven by accurate and reliable information. This is an area that many private companies do not focus on enough.

In the Diagnose phase, identify the root cause of your working capital issues. For example, if accounts receivable are an issue, the solution may lie with the sales staff. Perhaps they are being compensated based on revenue, without any consideration towards cash. This can drive the sales team to accept customers with weak credit, or negotiate unfavourable credit terms in return for closing a deal. These types of behaviours can easily be eliminated through changes to the incentive model.

The Implement phase is where the rubber hits the road. Once the root causes have been identified, the organization needs to work together to make the necessary improvements. For example, a company that is experiencing rapid growth may be tempted to build in “safety stock” to ensure that orders can be delivered to customers on time. It is very easy for this excess inventory to grow out of control. Buyers purchase extra raw materials, production staff build to stock, sales staff overstate demand. All of a sudden inventory has grown by 50% to support sales growth of 15%. Eliminating this extra inventory requires constant communication and coordination between purchasing, production and sales, but the payoff can be huge.

This cycle of working capital improvement is not a one-time project, it’s an iterative process. Ongoing analysis leads to the diagnoses of new issues and the implementation of new solutions. Each time the company goes through the cycle, more cash is freed up. Before you know it, there are funds available to pay down debt, buy new equipment, or invest in other parts of the business. This ultimately leads to sustainable (and profitable) growth.

Buying a Business? – Check the Closets for Tax Skeletons By Liz Murphy Partner, Mergers & Acquisitions Tax, KPMG Enterprise, Toronto

For many private companies planning to grow, acquiring another business can be an important step toward achieving their goals. But if your company is considering buying another company, keep in mind that you are likely acquiring the other company’s tax liabilities too.

One way to minimize potential tax issues is to acquire a business’ assets rather than its shares. But if your sellers are entitled to the small business capital gains tax exemption on their shares, they may not agree to sell the assets.

If you’re planning to buy the shares of a business, it makes sense to “check the closets” for any potential tax problems that can affect the company’s value so you can negotiate terms to mitigate these issues before you finalize your deal.

Based on my experience with private company acquisitions, here are some questions to ask:

Are all tax payments up-to-date and are deductions well documented?
You’ll want to know that all your target company’s tax payments are up-to-date – ask to see tax returns and their supporting schedules for all open years. Tax deductions should be well supported in case the CRA challenges them. For example, the CRA has recently paid special attention to deductions such as reorganization or transaction costs and management fees paid to business owners’ personal holding companies.

Don’t forget sales taxes – recently we’ve seen the CRA looking at businesses’ compliance for GST/HST, including self-assessed GST on imports and input tax credit claims.

Are any asset transfers happening?
If your seller is planning any pre-sale transactions, you’ll inherit any tax obligations that arose from the transfer. You’ll want to be prepared for the CRA to question how any transferred assets were valued for tax purposes. It’s riskier to rely on internal valuations – you’ll have stronger evidence for the value of the assets if you have external valuations.

Does the company have tax losses?
If your target company has carried forward any losses, you may be able to use these losses after you acquire the company. But you’ll have to carefully consider the rules for doing so – for example, the losses may be deductible if the business continues to operate and it sells similar products and services.

Are there cross-border transactions with related companies?
Another recent interest for the CRA is transfer pricing. If your seller has transactions with related companies in other countries or even other provinces, you’ll want to confirm that their transfer pricing documentation is up-to-date and appropriately reflects pricing as if the companies were dealing at arm’s length.

Does the company have sales or other business in the US?
If your target company has sales in the US, you’ll need to investigate whether they met their US sales tax obligations and have good documentation to support this. We’ve seen the US tax authorities aggressively pursue Canadian companies that have US sales tax liabilities.

Also, have the company’s activities in the US made it liable for US income tax? For example, ask whether the company has signed contracts in the US, how much time its employees spend there and what their activities there involve. If a Canadian employee spends a substantial amount of time in the US, his or her presence there can actually create a “permanent establishment” of the company, making it liable for US tax.

Is a holding company involved in the deal?
If your sellers are entitled to the small business capital gains exemption, they may want to sell the shares of holding companies that in turn own the shares of the business you want. If so, you’ll need to look at the holding companies’ tax issues as well, including any pre-sale transactions the sellers may be planning.

Will your corporate group go over the small business deduction limit?
If your company is now entitled to the lower tax rate under the small business deduction, keep in mind that this rate starts to be phased out when a corporate group’s taxable capital exceeds $10 million. Your ability to claim refundable R&D tax credits at a higher rate can also be affected by an increase in the group’s capital or income. If your new acquisition puts your corporate group over these thresholds, you may want to keep potentially higher tax costs in mind when considering how much you want to pay for the company.

Are you protected from surprise tax costs after the sale?
As part of your deal, you may want an escrow arrangement including vendor take-back loans or a price reduction to account for tax liabilities, if warranted, along with an indemnity. Consult your lawyer to ensure you’re protected.

Acquiring another business is certainly an effective option for your private company to grow, whether you’re looking to eventually go public, get a private equity investor or remain with the same owners. Considering potential tax issues as part of your acquisition plans can help you make sure you pay a fair price for your new company and you don’t face costly tax surprises after the deal is done.

The Devil is in the Details When Financing for Growth By Shubo Rakhit Managing Director, KPMG Corporate Finance – KPMG Enterprise, Toronto

With market conditions being what they are, it is more important than ever to ensure you follow all the right steps when seeking financing. Even the most robust of businesses need to ensure they have all the prerequisites in place when speaking to potential lenders.

One of the core fundamentals when private companies are seeking financing for growth is to have a well thought out business plan. Typically financiers ask for both short- and long-term projections. In response you should have details at the ready on what your business will look like in the next 12 months as well as the next five years.

It’s very important in that process to demonstrate solid financial forecasts, including cash flow. Many times companies will put together revenues and expenses and P&L when they start talking about financing for growth. But the cash flow questions will follow. Expect the lender to ask what you are using the proceeds for and what are the projected cash flows from that spend.

On the back of that is the ability to show you have an appropriate capital structure to run your business and more importantly, to manage risk. A good approach is to look at what your peers and comparables are doing in terms of how they are capitalized, and what would be considered acceptable risk. Providing a sense of context for managing business and financial risk is an important piece of information for lenders.

Remember that financial risk can vary considerably depending on the risk profile of the business in question and industry norms. On the personal front, some business owners simply don’t want debt. Others want lots of financial leverage. Leverage availability is also dependent on your industry sector, the types of products or services you sell, and your competitive market position.

During the preparation stage, we strongly advise businesses to conduct a sensitivity analysis to show they have alternative strategies should growth projections not follow the plan. The key question you need to answer your lenders is what is my plan B if there are changes in the growth plan?

Once you have done your planning and compiled your information, the next step is assessing your financing options. The structure of third party financing is largely dependent on three things: equity value, asset value and cash flow strength of your business. Depending on where you fall in that spectrum, it’s prudent to look at the most viable options for maintaining your business, while providing flexibility for growth.

At this juncture, it’s essential to prepare a succinct management presentation of our business. Succinct is the key word here. Keep things to 10 to 20 pages at most. This is a good time to consider working with an advisor to make sure you are reaching out to the most appropriate sources of capital to present your business proposition.

To summarize, the key attributes lenders look at from a debt raising standpoint are:

1) The amount of security (i.e. assets) available

2) The ability of the business to free cash flow to service interest cost and principal repayment

3) A financial covenant structure to ensure financing obligations stay within defined parameters.

4) The cost of financing

While the cost of financing is an important factor, I would argue that structure of financial covenants is equally important. We have seen situations in which financial covenants are so restrictive, businesses have actually ended up being undercapitalized, hampering their ability to grow quickly if at all.

The prospect of seeking out funding for growth can be a daunting one. There have been periods in recent history where funding options have been limited and resources scarce. However, capital availability for the mid-market is improving and borrowing rates continue to be very attractive. As we move forward, banks and alternative lenders are more open to new funding opportunities, which is good news for all.