Registration Statements (#93)

In this podcast episode, we discuss the various types of registration statements required by the SEC. Key points made are:

  • An approved registration statement is needed to sell shares. The filing goes to the SEC. When the SEC declares it effective, that means it has met the SEC’s rules. It does not mean that the SEC is passing judgment on the quality of the company.

  • Can avoid a registration statement by using the Regulation A or Regulation D exemptions.

  • Could be forced to file a registration statement by an investor.

  • Form S-1 is the worst; it requires comprehensive documentation of the company.

  • Form S-3 allows for the incorporation of information by reference, but there must already be a class of registered securities outstanding. It is designed for larger public companies.

  • Form S-8 is for shares offered to employees and consultants who have provided services to the company. It is very easy to use, and shares are registered as soon as you file it.

  • Shelf registration can be used to file several years in advance of the actual stock issuance. This process is reserved for well known seasoned issuers (quite large public companies).

Related Courses

Corporate Finance
Public Company Accounting and Finance

The Product Cancellation Decision (#92)

In this podcast episode, we cover the issues to consider when you are thinking about cancelling a product. Key points made are:

  • There may be some marginal products to eliminate. Doing so frees up both cash and staff time, which can be used elsewhere.

  • The product profitability decision should be based on just the totally variable expenses, such as direct materials, commissions, third-party processing work, and packaging costs. Do not include the costs of direct labor and overhead in this analysis, since they will still be there if the product is cancelled.

  • If a cancellation decision includes overhead in the analysis, the product was probably contributing something towards the profits of the business, and so its cancellation will reduce total profits.

  • If an entire product line is to be cancelled, then overhead should be included in the calculation to the extent that the overhead would be eliminated along with the product line.

  • There might be exit costs to consider, too. For example, it may take some time to draw down any residual inventory on hand. Also, inventory may be needed to guard against expected warranty claims.

  • Consider the ramifications of a product cancellation; you might need it because it is on an upgrade path for customers. Or, a key customer may need it, or it fills a key spot in a product lineup.

  • Might recommend that engineering develop a lower-cost replacement, and then cancel the original, higher-cost product when the new version is ready.

  • Do not slash and burn the product line; a product cancellation should be a relatively rare event.

Related Courses

Cost Accounting Fundamentals
Financial Analysis
Financial Analysis Education Bundle

FASB Statement 165, Subsequent Events (#91)

In this podcast episode, we discuss the new requirement for the reporting of subsequent events in the financial statements. Key points made are:

  • The new standard describes the period during which a business has to evaluate a subsequent event for disclosure, the circumstances under which this has to occur, and the types of disclosures to be made.

  • Have to update the financial statements when subsequent events provide additional information about events already in existence as of the balance sheet date.

  • Do not recognize a subsequent event in the financial statements when it involves evidence about something that did not exist as of the balance sheet date, though it should still be disclosed in the accompanying notes, along with an estimate of its financial effects.

  • Disclose the date through which the financial effects of subsequent events were evaluated.

  • This rule applies to both interim and year-end financial statements.

Related Courses

Closing the Books
GAAP Guidebook

Regulation A Stock Sales (#90)

In this podcast episode, we discuss how fund raising can be achieved by using the Regulation A exemption. Key points made are:

  • This approach is used in order to avoid a full stock registration with the SEC.

  • Regulation A is designed to raise a maximum of $5 million per year, of which no more than $1.5 million can be a secondary offering (where current shareholders sell their shares).

  • This approach is not available for certain types of companies, or if the business currently has a registration statement under review with the SEC.

  • It is designed for smaller organizations that have been in business for a while.

  • Advantages of Regulation A are that there is no limit on the number of investors, no restrictions on the sale of these shares, and no ongoing reporting requirements to the SEC.

  • Major steps in the process are to issue an offering circular, which needs to be approved by the SEC; then file a Form 1A, then conduct a general solicitation, and file the Form 2A every six months to state the cumulative stock sales and proceeds.

  • A qualified securities attorney needs to be involved, since this is a relatively complex process.

  • Regulation A stock sales are fairly expensive, but the shares will be registered, which investors like.

Related Courses

Corporate Finance
Public Company Accounting and Finance

Regulation D Stock Sales (#89)

In this podcast episode, we discuss why a business might want to sell shares using the Regulation D exemption, and what that entails. Key points made are:

  • Stock registrations through the Securities and Exchange Commission are both expensive and time-consuming.

  • Regulation D is an exemption from the stock registration requirement.

  • Under Regulation D, you can only sell to accredited investors. These people must have an income of at least $200,000 per year individually, or joint income of $300,000, or a net worth of at least $1 million. Must be wealthy enough to make informed investment decisions.

  • Cannot find accredited investors through a general solicitation. Usually use an investment banker or personal contacts instead.

  • Each accredited investor has to certify that he or she qualifies as an accredited investor.

  • Shares sold under Regulation D are not registered, so they cannot be sold. This arrangement works best for longer-term investors. They usually get piggyback rights, where their shares will be included in the registration if the firm ever decides to register any shares.

  • Regulation D investors may demand warrants along with their shares, in order to profit more if the stock price goes up. They might also demand preferred stock with conversion rights, dividends, and/or super voting rights.

  • Regulation D stock sales could extend over a period of months, where the stock sales are all for the same purpose or are all sold under the same financing plan.

Related Courses

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Public Company Accounting and Finance

Types of Acquisitions (#88)

In this podcast episode, we discuss the different types of acquisition structures that can be used, and their relative advantages and disadvantages. Key points made are:

  • A key point in choosing an acquisition type for the seller is to defer taxes. This is only possible when the arrangement has a bona fide business purpose, a continuity of interest, and a continuity of business enterprise.

  • Ideally, the buyer does not want to recognize a gain or loss, but wants to increase the value of acquired assets. It may also want to retain the acquired legal entity, in order to maintain any contracts associated with it.

  • In a Type A transaction, all assets and liabilities go to the buyer in exchange for the payment of at least 50% of the price in the buyer’s stock, after which the acquired entity is liquidated. This allows for tax deferral of that portion of the price paid in stock.

  • In a Type B transaction, it is the same general approach, but it is paid 100% in stock, and the acquired entity can remain.

  • In a Type C transaction, payment must be in at least 80% stock, and the acquired entity is liquidated.

  • In a triangular merger, a subsidiary of the buyer merges with the seller and then the selling entity is liquidated. The approval of shareholders is not needed.

  • In a reverse triangular merger, a subsidiary of the buyer merges with the seller, and then the subsidiary liquidates, leaving the selling entity. The approval of shareholders is not needed.

  • The buyer has greater control over the transaction, and so is more likely to determine which of these structures is used.

Related Courses

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Mergers and Acquisitions

The CFO Position (#87)

In this podcast episode, we discuss the nature of the chief financial officer (CFO) position. Key points made are:

  • The CFO position is not related to the accounting function. It does not involve accounting transactions, or financial statements, or setting up controls, or accounting software, or preparing public company reports.

  • All accounting training only leads a person to the controller position.

  • A CFO is paid to observe, investigate, and think. This involves observing operations for anomalies, investigating trends, and deciding where the company needs to go next. The CFO should be quite familiar with control system breaches.

  • The CFO monitors risk management, such as the risk of floods and fires, theft, and so forth.

  • The CFO runs the treasury department, and so needs to be aware of cash forecasts and when to raise more funds.

  • The CFO is deeply into the budgeting process, watching where cash is actually being used, and questioning the need for capital expenditures.

  • The CFO is in charge of investor relations, road shows, and investor conference calls.

  • The CFO needs to be a forecaster, including scenario planning.

  • The CFO needs excellent people skills, since he or she will need to talk to all departments.

  • This is a persuasion job. The CFO needs to spend a large part of the day persuading other people about what the company needs to do next.

Related Courses

CFO Guidebook
Enterprise Risk Management
Investor Relations Guidebook

Credit Best Practices (#86)

In this podcast episode, we cover a number of best practices that can be applied to the credit function. Key points made are:

  • Credit practices revolve around whether to grant credit, the amount to grant, and the related payment terms.

  • There may be no credit function in a smaller business, though it is likely to be added after a large credit loss has occurred.

  • The credit policy states who is responsible for credit, and the credit-granting procedure.

  • Be aware of when the policy is not needed; orders below a threshold amount can be accepted without a credit review, to save time. The amount of this threshold will vary by industry.

  • The credit policy may be loosened or ignored when selling off remainder items, since the intent is to get rid of them.

  • The credit policy should be reviewed and updated at least once a year, and more frequently if there are changes in economic conditions.

  • As part of the credit granting process, collect information about customers. At a minimum, just get their identification information, to run a credit report. At a more detailed level, have them provide credit references. At an even more detailed level, mandate a personal guarantee, or a security interest in the goods sold, or reimbursement for collection costs. At the most advanced level, ask for audited financial statements.

  • Ask for a new credit application if a customer has not ordered from the company recently.

  • Treat empty fields on a credit application as a warning sign.

  • The main focus of a credit review is on larger customers; may need to include credit reports, site visits, and inquiries at industry credit groups.

  • May impose a short payment period on a customer with a higher perceived credit risk.

  • May refer questionable customers to a distributor, who may have a looser credit policy.

  • May demand partial payment up-front, to reduce the risk of loss.

  • Could obtain credit insurance on a customer.

Related Courses

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The Acquisition Term Sheet (#85)

This podcast episode describes the contents of an acquisition term sheet and some of the clauses contained within it. Key points made are:

  • The term sheet states the initial terms of a possible acquisition deal. This just means that the parties are interested in a deal. It is not legally binding.

  • A term sheet helps to prevent misunderstandings, which can reduce conflicts later on in the relationship. Its presence may act to commit the parties to a deal. It can also be used to narrow the field of possible buyers.

  • The buyer still needs to do due diligence, before a formal acquisition deal is completed.

  • Common clauses found in a term sheet include the following:

    • The general structure of the deal

    • The payment amount and the form of payment

    • Earnout terms

    • A statement that the terms are subject to adjustment

    • A guarantee that the buyer will register all shares paid to the owners of the acquiree

    • Compensation and employment terms for key employees of the acquiree

    • A guarantee that all outstanding acquiree stock options and warrants will be honored

    • A statement that the deal’s outcome is dependent on a variety of other factors

    • A statement that the deal is contingent on the buyer obtaining sufficient funding

    • A statement that the parties must mutually agree on any announcements to the public

Related Courses

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Taking a Company Private (#84)

In this podcast episode, we discuss the mechanics of taking a company private. Key points made are:

  • It makes sense to take a company private when its share trading volume is low, or when the stock price is so low that it’s not viable to sell shares to investors. Also, the cost of being public for a small firm is in the range of $50,000 to $1 million per year.

  • The quickest way to go private is to file the one-page Form 15 with the SEC. This approach only works if the number of shareholders of record is less than 300.

  • If there are more than 300 shareholders of record, file the Form 13e-3 instead, in which you explain how the going-private process will work. There are two options, both of which require shareholder approval. Once completed, a Form 15 still needs to be filed. The options are:

    • Do a reverse stock split to clear out small shareholders, thereby driving down the number of shareholders to under 300. This approach tends to require less cash.

    • Issue a general solicitation to buy back shares, which requires substantially more money. This takes a minimum of two months to complete.

  • The shareholder of record may be a stockbroker, in which case a number of individual shareholders could essentially hide behind the stockbroker. This means that the 300 shareholder rule could be met, even if there are many more shareholders. However, once a company goes private, stockbrokers tend to kick these shares back to the shareholders, which increases the number back above 300.

  • Going private increases the risk of shareholder lawsuits, since they will now have a harder time selling their shares. The company can reduce this risk by forming a separate committee of the board to investigate the issue, and documenting its proceedings and decisions as thoroughly as possible.

  • An alternative is going dark, where the company stops filing reports with the SEC, but does not file a Form 15.

Related Courses

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Accounting from Home (#83)

In this podcast episode, we discuss how to have your accounting staff work from home. Key points made are:

  • Set up an expense allowance for everyone, to be used to set up shop at home.

  • Mandate a separate room in which work will be done, to minimize distractions.

  • Require a horizontal scanner for all staff, so they can scan documents and upload them to a central server.

  • Scan all incoming mail and store it in the central server.

  • Use a virtual private network to access centrally-stored accounting software.

  • Use a check scanner in order to submit electronic deposits to the bank.

  • Use rented storage for filing cabinets, which is centrally located for employees.

  • Rent a mailbox to accept all incoming mail.

  • Sponsor a weekly lunch for the staff at a local restaurant. Do not have meetings at anyone’s home.

  • Install a land line for better connections, especially if you are working in the basement where a cell phone signal is weak.

  • Do not impose a dress code.

  • Working at home eliminates commuting time, dry cleaning bills, and snow days.

  • People tend to work longer hours than in the office, though they may shift their work hours around.

  • Working at home might not work for junior staff, who may need additional supervision.

Related Courses

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Accounts Payable Matching (#82)

In this podcast episode, we discuss the many variations on accounts payable matching, and the situations in which they should be used. Key points made are:

  • Complete payables matching involves comparing approved supplier invoices to the authorizing purchase orders and receiving documentation, to ensure that the right prices and quantities are being billed to the company.

  • The whole thing can be avoided when the amount of goods received is quite low.

  • Could do either half of the matching process if there are cases in which either prices are incorrect or quantities are incorrect, but not both.

  • Could allow large variances, such as 5%, without adjusting supplier invoices; works when the total purchases are low.

  • Could use completely automated matching through the computer system, but this requires that every line item of supplier invoices and purchase orders be entered into the system, while the receiving staff logs all receipts on-line.

  • Could use the evaluated receipts concept instead, where deliveries are made straight to the production line, and the accounting system then uses bills of material and the unit prices on authorizing purchase orders to calculate the payments to make to suppliers. No supplier invoices are needed. For this to work, all suppliers must be pre-certified, while the bills of material have to be 100% accurate. It is easier to use if suppliers are located nearby, and so can deliver frequently and in small batches. The company needs to be big enough to force this system onto its suppliers.

Related Courses

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Payables Management

Accounts Payable Best Practices (#81)

In this podcast episode, we discuss several ways to improve the payables function. Key points made are:

  • Shrink the invoice volume by using corporate credit cards instead. Can also reduce the number of suppliers.

  • Set up an online portal and have suppliers enter their invoices through it, thereby eliminating in-house data entry.

  • Use negative approvals, so that payments will be made by default unless a manager halts the process.

  • Eliminate petty cash; use corporate credit cards instead.

  • Eliminate cash advances, since the associated deduction tracking is burdensome.

  • Do expense report audits, and flag violating employees for more detailed ongoing reviews.

  • Avoid check payments entirely; use ACH payments instead.

  • Scan all invoices when received, and attach the images to the related accounts payable record in the accounting system.

  • Do not pay suppliers until they send in a Form W-9.

  • Report on late payments, to focus on processing issues.

  • Report on small payments, to focus on credit card payments.

  • Report on the ratio of checks to ACH payments, to focus on achieving a higher level of electronic payments.

Related Courses

Optimal Accounting for Payables
Payables Management

Acquisition Due Diligence (#80)

In this podcast episode, we discuss some of the key items to look for when conducting due diligence on a target company. Key points made are:

  • Due diligence is the investigation of a target company by the acquirer.

  • The point is to uncover every possible reason why an acquisition will not work.

  • Look for missing items in the financial statements; probably because they only make some entries, such as depreciation, at the end of each year.

  • Look at the fixed assets on a trend line. If increasing, they could be capitalizing expenses.

  • Look at net margins. If they are not consistent or are declining, there could be a long-term profitability issue.

  • Review the management team in person, as well as how they interact with staff. Avoid command and control types, since they do not allow others to make decisions. In general, see if the managers will be able to fit in with the acquirer team.

  • Identify exactly where the profits are made, and also locate revenues by product for the past three years. See if they have been able to consistently invent new products that make money.

  • Conduct a bottleneck analysis; could be in the sales staff or in the production area.

  • Meet as many people as possible, and ask questions constantly.

  • This is a multi-layered progression with several review points, so that most due diligence reviews are quickly abandoned. Only a few make it all the way to the end.

  • Document everything, noting all problems and opportunities. State a recommendation at the end of the report.

Related Courses

Mergers and Acquisitions

Analyst Relations (#79)

In this podcast episode, we discuss how analysts operate and how to deal with them. Key points made are:

  • The analyst investigates public companies and then issues buy-sell-hold recommendations to their clients.

  • A public company wants analysts, since they bring investors with them.

  • Not so many analysts are left, since they tend to be laid off during downturns and not rehired.

  • There is a minimal analyst following for small companies, since they have less trading volume, and so generate low brokerage fees for analyst employers.

  • A small company can approach independent analysts and boutique brokerages for coverage. The best bet is someone already covering the industry.

  • For the care and feeding of an analyst, always provide conservative guidance, investor conference calls, and access to management.

  • Cannot reveal non-public information to the analyst during a management meeting.

  • Can talk about general operating conditions, which the analyst can use to assemble a view of the business.

  • Send copies of all SEC filings to the analyst.

  • The analyst might send the company a preliminary draft of a research report. The company can correct errors and note misinformation, but cannot comment on analyst conclusions or give the appearance of endorsing the report.

  • Only list analyst contact information on the company website, not their reports.

  • Over time, analysts will issue both buy and sell recommendations, depending on the level of the company’s stock price.

Related Courses

Investor Relations Guidebook
Public Company Accounting and Finance

Controls for Financial Statements (#78)

In this podcast episode, we discuss the controls that apply specifically to the creation of financial statements. Key points made are:

  • Use a standard closing checklist, to ensure that all tasks are completed.

  • Document all journal entries with a standard journal entry form, and have someone approve them.

  • Use a closing binder, which contains all documents relating to a close.

  • Review high-risk transactions in detail; the controller should approve them.

  • Only one person enters journal entries into the general ledger.

  • Reconcile all major accounts, every month.

  • Archive the spreadsheets used to produce the financial statements for every month, with password access.

  • Conduct an annual review of the spreadsheets being used to produce the financial statements.

  • Conduct an analytical review across the prior months, using a trailing 12-months report, to look for errors.

  • Match financials back to the trial balance, especially when the company is publicly-held.

  • Ask report recipients for comments about the financial statements.

  • Ask the accounting staff about what needs to be changed the next time around, and incorporate these changes into the closing checklist.

Related Courses

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Closing the Books

Fast Close for a Public Company (#77)

In this podcast episode, we look at ways in which the time required for a public company to produce financial statements can be reduced. Key points made are:

  • A public company has to file the annual Form 10-K and the quarterly Form 10-Q, which take a lot of time to produce.

  • Have a specialist write these reports, with no other tasks to interfere with this work.

  • Ask the auditor to keep returning the most experienced audit staff to the job, so that they can complete the annual audit and quarterly review more quickly.

  • Order the accounting staff to support the auditors as fully as possible, so that they will be done sooner.

  • Ensure that the company’s controls are very strong, so that the auditors find fewer problems that need to be investigated.

  • Make sure that all provided by client (PBC) audit schedules are done before the auditors arrive.

  • Reference your work paper sources in the 10-K and 10-Q reports, so that the auditors can refer back to them. Then remove the references when issuing the final reports.

  • The company’s attorneys can review the reports in parallel with the auditors.

  • Send the reports to the CEO and CFO for their review at the same time the reports are sent to the auditors and attorneys.

  • Over time, try to schedule audit committee review meetings a bit tighter, to shave a few days off the total schedule.

  • Use a smaller local edgarizing firm to edgarize the reports for the SEC, and try to file early with them, to get ahead of the rush.

  • No matter what you do, issuing public company financial reports takes much longer than is the case for privately-held companies.

Related Courses

Closing the Books
Public Company Accounting and Finance

Budgeting Controls (#76)

In this podcast episode, we describe a number of controls that can be applied to the formulation of a budget. Key points made are:

  • Verify the impact of budgeted amounts on company bottlenecks, to see if the amounts are valid.

  • Review the budget model for step costing points, to ensure that necessary expenditures are included at these points to deal with increased volume.

  • Simplify the model to keep errors out of it.

  • Budget for groups of employees, which can massively reduce the number of line items.

  • Merge small budget line items to simplify the model.

  • Managers tend to make errors in the model, so pre-load line items before sending the budget to managers.

  • Manually recalculate the budget to find errors; have a third party do this.

  • Have a final round of budget reviews by everyone, to search for any remaining errors.

  • Put “Final Version” in the footer of the final budget model, and throw out all earlier versions, so that everyone is working from the same document.

  • Cross-check the entry of the final budget into the accounting software, and then lock down access to the software. In addition, use a tracking log to see if any changes are subsequently made to the budget numbers.

  • Create separate budget vs. actual reports for every responsible party.

  • Use the final budget model for performance appraisals.

  • The budget model is only created once a year and is quite complex, so be sure to take the extra time to get it right.

Related Courses

Budgeting
Capital Budgeting

Acquisition Valuation (#75)

In this podcast episode, we discuss the many variations on how to value a business, as well as the expectations of the buyer and seller. Key points made are:

  • The easiest valuation is for a public company, where it is based on the current market price of the shares. The buyer then offers a control premium over this amount, to gain control of the business.

  • Another option is the multiple of revenue, which is based on related deals. It should be based on recent transactions in the same market space, ignoring any outliers. This can be useful when a company is growing fast, but does not factor in the cash flows of the target company.

  • When several companies in an industry are being bought out, the first purchase is usually for the best one; its sale price will be better than for all subsequent purchases.

  • Another option is the multiple of profits, though there tends to be less comparison information available from similar deals.

  • A good option is the multiple of cash flows, which is used by most experienced buyers.

  • Any valuation option should be adjusted downward for such factors as employee severance payments, the loss of customers, asset replacements, and so forth.

  • The lowest valuation is to only value a business based on its assets, ignoring the business operations entirely.

  • A valuation calculation should be based on the target company’s audited financial statements for the past year.

  • Could value based on future sales, offering an earnout for sales greater than the historical sales rate. But, this approach can lead to arguments and possibly lawsuits, and so is not recommended.

  • Consider calculating all possible valuations, to see the full range of possibilities.

  • There may be synergies, due to such issues a increased sales by using the buyer’s sales force, or cost reductions due to overlapping overhead cost structures. The buyer may want a piece of these expected gains.

  • The seller’s expectation is frequently too high, because it has no experience with valuations. When this is the case, it can make sense for the buyer to walk away from the deal and try again later, after the seller ‘s expectations have deflated to a more reasonable level.

Related Courses

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Mergers and Acquisitions

Short Sellers (#74)

In this podcast episode, we discuss how short sellers do business and how to deal with them. Key points made are:

  • A short seller is someone who borrows shares from a broker, sells it on the open market, and then buys it back later after the stock price drops, and returns the shares to the broker. The intent is to profit from stock price declines.

  • Short selling is very risky, because an increase in the stock price can make losses effectively unlimited, while any possible profits are capped.

  • Short sellers like to plant negative rumors about the company, sometimes doing so on electronic bulletin boards.

  • They also monitor the terms of restricted stock, to see when investors are most likely to sell them, since this puts downward pressure on the stock price.

  • The CEO could fight back by issuing strong guidance for future periods (that profits will increase), which will drive away short sellers in the short term. However, doing so drives the stock price to unsustainably high levels, so that the short sellers will make an even bigger profit later, when the stock price drops even more.

  • It is better to always issue conservative guidance, which reduces stock price variability.

  • You might also consider issuing press releases to counter any rumors being spread by short sellers.

  • When there is bad news, issue it all at once, to get it out of the way. Doing so results in a one-time stock price drop that should not happen again.

  • It can be useful to have canned responses available for a variety of bad news items, such as a product recall, to give the impression that the company is highly responsive.

  • In conference calls, do not let short sellers hog the call with negative comments.

  • Can be useful to track the proportion of short seller positions, to gauge the level of short seller interest in the company.

Related Courses

Investor Relations Guidebook
Public Company Accounting and Finance