Tuesday, June 9, 2009

Street Smarts: How to Fix Cash-Flow Problems

Cash-flow problems have just a few possible causes. More often than you might think, business is all about the basics

From: Inc. Magazine, May 2009 By: Norm Brodsky

…Consider Andrew Blitstein, who took charge of his family's cleaning service a few months ago after his father passed away. … I started … by asking Andrew general questions about himself and his company. It was a more or less typical commercial janitorial service. In addition to cleaning offices on a regular basis, the company did special jobs, like shampooing the rugs and washing the windows. As for problems, he said he was having a tough time with cash flow. …

Now, cash-flow problems are common in business, and people often have a hard time figuring out what's behind them, but there are actually just a few potential causes. You could have too much cash tied up in receivables or -- if you have a product-based business -- in inventory. Or you could have too many deadbeat customers. Or you could be spending too much on overhead. But if receivables, inventory, bad debt, and overhead are all under control -- as they appeared to be in Andrew's case -- there really is only one other likely culprit: weak gross margins, which could mean prices are too low, direct costs are too high, or some combination of the two.

I asked Andrew how much he was paying his employees. He said they earned about $20 an hour. "No," I said. "I mean, what's the hourly cost fully loaded with all the taxes, benefits, and so on?" He didn't know, which is not unusual. …"So you don't know what your costs are," I said. "It's hard to make a sale -- at least a good sale -- if you don't know your costs. How do you price a job?"

"Well, when we do the carpet cleaning or the window cleaning, I figure out approximately how much it's going to cost us, and then I try to double it."

"OK," I said, "that's good. But how do you price the regular cleaning service?"

"We just try to be competitive," he said. "We have a lot of competitors, and we want to get the long-term contracts. We make our money on the extras."

…"Let's take your two biggest clients," I said. "How much business do they do?" He said he had one contract that paid about $350,000 a year and another that paid $300,000. "How much money do you make on those contracts?"

"I don't know," Andrew said. "Not much. But they also use us for the extras."

"And how much do they pay for the extras per year?"

"About $20,000 or $25,000," he said.

"So, given how you price the extras, they contribute $10,000 or $12,500 to covering your overhead," I said. "That's not a lot for accounts of that size. My guess is that you're losing money on them."

Andrew gave me a skeptical look. "No, that's impossible," he said. "Besides, you don't understand. We need those accounts for cash flow."

"How do they help your cash flow?"

"They pay us on the first of the month with an American Express credit card," he said. "It's automatic. We can count on it."

"OK, but American Express is charging you an extra 3 or 4 percent for that service," I said. "That just steepens your loss." … "Listen," I said. "Why don't you go back and take those two largest accounts and break them down. I'd be shocked if you weren't losing money on them. Then, if you want to come back, I'd be glad to sit down with you."

… But four days later, Andrew contacted me and said he wanted to get together again.

"You were right," Andrew said as he sat down in my office. "We're losing money on those accounts. I figure that, fully loaded, I'm paying $31 an hour."

"OK, well, let's see what fully loaded is," I said. We started to go through his numbers on one of the accounts, and it quickly became apparent that he had underestimated the costs. By the time we finished, we could see he was losing from $50,000 to $60,000 annually on the account. "Think of it this way," I said. "If you stopped doing business with this customer today, you'd make an extra $50,000."…

"I'm not telling you to get rid of the client," I said. "There may be reasons to keep the account. But do you really think any of your competitors would take this account away from you and lose $50,000 a year on it?"

He smiled at the absurdity of the idea. "But I'd have to increase my price something like 20 percent just to break even on the account," he said. "I can't do that."

…I suggested that he put everything down in writing -- every single direct cost he had -- and then go to the customer. "Show him the numbers. Tell him it's [been] going on for a long time, but you accept responsibility for the past. You just can't go on losing $50,000 a year on the account. You have to at least break even, or you'll go out of business."

Andrew said he would think about it. …Meanwhile, he has made significant changes in the way he sells. He told me about one prospect who wanted to use him but felt that his bid was a little high. Rather than reduce the price, Andrew stood his ground. "You're talking about saving 10 cents an hour, but look what you get for those 10 cents," he said. "Our service is far superior."

He got the account. More to the point, he got the concept. And he realizes that you don't need to be a genius to deal with cash-flow problems. You just have to know how business works.

Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, was published by Portfolio in October.

Friday, June 5, 2009

LTC Insurance For The Affluent

Private Wealth magazine

By David Bidwell , Peter Gelbwaks - 03/5/2009

… Preparing for the possibility of a long-term illness should be an important component of every [individual’s] financial plan, including the affluent. …

There are an increasing number of alternative products for long-term care, including life insurance or annuities with long-term care riders. These products, however, usually do not deliver the robust benefits or tax advantages of a traditional long-term care insurance policy.

Solutions For The Affluent

…Wealthy clients … are typically open to the idea of using LTC insurance as a way to transfer the financial risk and responsibility for hands-on health care. The insurance also ensures that these responsibilities won’t fall into the lap of family members and that policyholders will have access to top-notch health care providers.

Once the math is done, affluent clients usually recognize that LTC insurance makes sense. This is particularly true of business owners, who can reap many advantages from long-term care coverage. These benefits include the ability to provide enriched employee benefits packages, which can improve worker productivity and provide for better retirement planning.

Business owners can also reap tax advantages from LTC insurance, including the ability to deduct premiums as a business expense, receive state tax credits or deductions or exclude premiums from an employee’s gross income…

…Most affluent [individuals] … want the best care available and they want it delivered in their homes. This type of service—it typically includes 24-hour home care in two shifts per day—can cost considerably more than conventional coverage that calls for nursing home care.

Doing The Math

Generally speaking, regardless of the age of the client or the plan design, it will only take three to 18 months of receiving benefits from an LTC insurance policy to recoup an entire lifetime of premiums.

For example, a 65-year-old married healthy person buys coverage with benefits of $200 a day or roughly $6,000 a month. We’ve assumed a 20-year life expectancy, so $3,335 per year in premiums would total $66,700, assuming no claims are paid before age 85. The $6,000 benefit doubles with a simple 5% inflation rider built into the plan, which means the policy pays $12,000 per month at claim time. After six months, the benefits will exceed the total premiums paid…

Flexible payment options are very attractive in the affluent market as they enable the policyholder to pay the full cost of the premiums within a specified time period. … The first is “10-pay” in which the premiums are paid in ten individual payments. The second is a “paid-up at age 65” option that enables those under age 55 to pay all premiums before turning 65, to avoid payments during their retirement years. Among the advantages of these options is that they expose [individuals]to less risk of a future rate increase. They are also attractive to business owners, allowing them to provide a paid-up LTC insurance policy before an executive or employee retires. …

A Planning Tool

Given the availability and flexibility of today’s products, it’s hard to argue against making LTC insurance a part of an affluent [individual’s] financial plan. Take the case of a wealthy client with more than $50 million in assets who purchased LTC insurance for himself and his spouse. He insures a $10 million home, a $2 million boat, $1 million in jewelry, $1 million in art and $500,000 in cars. … In fact, out of all his insurance policies, he believes he is most likely to use the benefits of his LTC policy…

Peter Gelbwaks is chairman of Gelbwaks Insurance Services Inc. of Plantation, Fla., and immediate past chairman of the National LTC Network, the largest LTC insurance marketing firm in the nation. He can be reached at or at 800-826-1686.

David Bidwell is the southeast regional director for John Hancock’s LTC insurance division. He is a 16-year veteran of the long-term care insurance industry. He can be reached at

Shortsighted Success

Private Wealth Magazine

By Mindy Rosenthal - 03/5/2009

The majority of ultra-wealthy family business owners have succession, personal trust and estate plans, but even the most successful owners are poorly prepared when it comes to protecting their wealth and planning for future generations.

… [According] to a 2008 study by Prince & Associates and Campden Research … [trust]and estate plans are often out of date and families simply are not implementing asset protection strategies, the study found.

The study, entitled “Protecting the Family Fortune,” is the first to focus on ultra-wealthy family business owners. …

Only 38.3% of those who have succession plans are implementing them, according to the study. … More than three-quarters of respondents have succession plans, but they are dominated by strategic business issues rather than family issues. When 183 high-net-worth families were asked to identify “highly important issues” in their succession planning, 72.7% cited strategic business issues and 55.2% cited family issues.

The study also showed that business owners are failing to keep their succession plans up to date. About 78% of the families have an estate plan, but 79.4% of those plans are more than three years old. The failure of families to update their plans is magnified by the fact that 89.4% of respondents say they have had life-changing events …

Failing to regularly review and update succession plans could be a costly mistake for many of these families, according to experts.

“Families need to work with an advisory team that not only … looks at estate and succession planning and asset protection but also tends to family dynamic issues,” says Chris Zander, managing director and head of the Multi-Family Office Group at U.S. Trust, Bank of America Private Wealth Management.

“The personal and financial objectives of the various family shareholders change and may become less cohesive as the family grows …,” notes Zander. “This makes it harder to find commonalities and can result in families not addressing important planning issues.” …

“Estate [and] wealth transfer plans need to address the allocation of asset ownership and voting control with an increasing number of family members as the business transitions further out in generations,” Zander says. “Ownership, control and management cover both financial and non-financial areas. …”

Psychological factors clearly play a role in families not keeping their estate plans up to date. About 55% of families surveyed say estate planning raises issues that are too difficult to confront. …

The study also found that many estate plans are flawed. For example, 93.4% say it is important for them to lower their tax obligation in a business transition, yet only 26.8% say it’s important to address this issue in a succession plan. Only 26.9% are using asset protection strategies, despite the fact that 89.7% say they are concerned about being involved in an unjust personal lawsuit or divorce. In fact, 64.5% have already been involved in an unjust suit or divorce. …

Mindy F. Rosenthal, managing director, North America, for Campden Media, specializes in the wealth management and family governance needs of ultra-high-net-worth individuals and families, with a focus on alternative investments and holistic family office services. More information is available at