CONTINUED ON PAGE 3

reportwww.facebook.com/ReaCPAwww.twitter.com/OhioCPAwww.twitter.com/ReaCPAwww.deardrebit.com (blog)

2 Building a Business You’ll make better decisions when you know its value.

3 By the Numbers Oil & gas in Ohio.

4 Bright People Rea’s employee highlights.

4 Series: Build a Healthier Business from the Inside Out, PART 2: Measure your options with key financial information.

6 Client Focus: Constellation Schools Staying at the head of its class.

7 Bright Points What’s happening in industry.

8 Low Real Estate Appraisals The risk to your business ... and how you can deal with it.

Rea reportVolume 12 | Issue 3 | Summer

ReaThe

GETTinG YouR BusinEss REaDYBe prepared to be overwhelmedIf you want oil & gas producers to embrace your business, you might need to expand rapidly. Don’t just react to this sudden demand; rather, plan ahead so you can control your expansion. At a minimum:• Understand your business model —

what it looks like now and what it will look like with substantial new business.

• Develop good cash flow modelsand projections. Your CPA can help with this critical need if you don’t have a CFO on staff.

• Talktoyourbankeraboutfinancingthegrowth. Incentives are available to expanding small businesses, but you must talk to your CPA before expanding.

• write a clear business plan that spells out the details of expansion and how you’ll meet increased demand, including any additional facilities or equipment needed.

Have a Plan B for any new investments you make for when the boom is over. If a particular expansion won’t have a payoff or be valuable once things slow back down, you need to have a tough conver-sation with yourself about whether the investment will be worth it. There’s no such thing as “dipping your toe into” the oil & gas industry. You’re either all in or you’re out. Make sure you’re ready for the volume you’re about to take on. If you’re not, the industry will move on to the next supplier. Be prepared for the world of Master Service AgreementsLarge oil & gas companies and their tier-one vendors issue master service agreements, or MSAs, in an effort to find qualified contractors and suppliers. This agreement states all of the obligations and responsibilities between the parties, the

Doing Business with the Big BoysWhat to Keep In Mind When Working with Oil & Gas ProducersBy Robert Mapes, director of oil & gas services; and David Shallenberger, oil & gas services team, Wooster office

Ohio is booming with oil & gas activity. Are you trying to cash in on the oppor-

tunity? If so, there are a few things you need to know.You see, gaining the trust of the large out-of-state oil & gas producers isn’t easy. Not only does your business have to be in tip-top shape, but you have to be prepared to deliver your products or services like never before.

YOU’LL MAKE BETTER DECISIONS WHEN YOU KNOW ITS VALUE By Tim McDaniel, director of valuation services, Dublin office

Why did you go into business for yourself? Was it to provide for your family? To do something you love? To control your own destiny? Those are probably all true to an extent; but more than anything, you should be in business to increase its value. Business owners typically have 50 to 70 percent of their net worth tied up in their business – that’s a huge piece of your nest egg. A business valuation tells you how much your business is worth, and that number will help you manage your business. If you know the value, you can make better decisions along the journey. Let’s say you plan to one day sell your business for $5 million. Today, you find out your business is worth $1 million. The steps you will take to increase the value will be different than the ones you would take if you found out it was worth $4.5 million.

2

KNow what DriveS valUeWith a business valuation, you will be able to identify the key drivers that will increase the value of your company. You will also be able to determine how measurable changes in these value drivers will affect the overall value.Value drivers vary by company, but they typically fall under one of these headings: strategy, systems or people. Here are a few of the most common value drivers: • risk. Identify your key risk factors and

lower them. • Growth. Ponder expenses in light of

the potential effect on value.• working capital. Manage your cash

flow, trimming receivables and inven-tory if needed.

• margin. Know how much a 10 percent increase in margin impacts your value and use that knowledge when consid-ering large investments. • environment. Look at the quality

of your management and keep your employees happy.

Positive changes to these drivers will impact your

value, affect competitive performance, improve

employee attitudes and increase customer

satisfaction.

eNhaNce itS worthBuild a program around the basic areas that affect value. When it comes to people, the depth and quality of your management team matter. Be sure to establish good contractual ties with your key person-nel for an immediate improvement to the bottom line. Many businesses fail because of weak financial records. Strong financial systems are critical in developing value. You have to know where you are to determine where you are going. Then you need to have a strategy. A company with a vision and a plan to get there is worth more than one without it. Keep the eND iN miNDWhen you know where your company stands and how you can increase its value, you can make better decisions when faced with changes in competition and economic conditions. But ultimately, it comes down to what you want out of life and your business. It’s never too soon to start planning your exit strategy. Simply beginning the succession planning process makes your company more valuable, as investors and lenders want to ensure the business will still be there when you exit. Owning a business is about freedom and responsibility. You will eventually leave your business, and it’s better to do so on your terms, before a life-changing event forces you out. Maintain control of the process and create a better foundation for decision-making. By identifying your value drivers and developing a plan to maximize value, you can improve your family’s quality of life and the future of the business you worked so hard to build.

BUILDING A BUSINESS IS ABOUT BUILDING VALUE

ValueWORTH

key drivers

BY THE NUMBERS:Oil & Gas in Ohio

oil & gas companies and their prospective contractors. Entering into the MSA process can be a rigorous task, and may take a fair amount of time and energy. ISNetworld is one of the better known administrators in the MSA process, and it aims to connect purchasers with safe and reliable contrac-tors and suppliers. If you are not ready to go through the MSA process or function at the rigorous level that is required under an MSA, don’t give up hope. Your company should be able to sub-contract with a company that has already entered into an MSA.Be prepared to fight for your employeesJust as you are trying to expand your business to handle the increase in activity from oil & gas, so are many others, includ-ing industry insiders. You might have to compete for quality employees and fight hard to keep current ones, especially welders or truck drivers with high quality CDLs. Don’t assume that your long-term employees won’t be poached; the allure of a new job or better pay and substantial signing bonuses can entice even the most loyal employees.

DoinG THE WoRkPut safety first…and second…and third…Safety is the first thing oil & gas produc-ers think about when they step onto a drill site, and the last thing they think about when they leave. Safeguarding workers is the absolute most crucial element of their industry, followed by the environment. Production is third on the list. The thought goes: without people and the environment, there can be no production. There is no room for error, as any error would be cata-strophic.

Doing Business with the Big Boys

expansion may require that you make an investment in your

business.InvestOhiowillgiveyouataxcreditfordoingso.Ifyou

qualify, you can get a 10 percent personal income tax credit against

your ohio tax. there is a limited pool of credits available, so apply

beforetheyaregone.Readmoreatwww.reacpa.com/investohio.

bright idea

Roll up your sleevesThe oil & gas industry is competitive. For them, being available 24/7 isn’t good enough. They’re working with an unwav-ering dedication to 24/7/365. They are very serious about their hard work ethic

– and expect you to meet or exceed their expectations. This industry is incredibly results-oriented. Suppliers must provide exceptional service so they can achieve the superior results they need to deliver.If you promise to deliver something, you absolutely have to do it – if not, they’ll find someone who will. No excuse is accept-able. If you promise to deliver a hydraulic hose in four hours, four hours and five minutes isn’t going to cut it. You’d be wise to under-promise and over-deliver.It’s not like baseball, where you get three strikes before you’re out. In oil & gas, you’re out after one strike – they can more or less take their pick with whom to do business, and they won’t settle for a mediocre supplier.But on the other hand, if you can demon-strate that you have the same work ethic as they do, and you deliver what you promise, you’ll be business partners for a long time to come. You won’t find a more faithful group of people to do business with.Most importantly – and we can’t stress this enough – don’t bet all your chips on one hand. Some things really are too good to be true.

(continued from cover)

The oil & gas industry has existed in Ohio since the 1860s. Yet there is no hotter topic as businesses and individuals look at the potential in the Utica shale formation. Here’s a look at the industry, by the numbers:

15 trillionCUBIC FEET OF NATURAL gAS MAY ExIST.

Annual salaries and personal income in Ohio will grow by

$12 billion.

will be spent by producers on exploration and development, midstream and leases over the next five years.

$

$487.8 MILLION

OF ADDITIONAL TAxES WILL BE PAID BY 2015.

Data from: Kleinhenz & Associates and the Ohio Shale Coalition

Oil & gas will bring 22,297new jobs to the state in 2012.

Darlene Finzer (New Phila.) was selected as Accounting Today’s first-ever accountant of the month.

Paula Schlosser (Cambridge) graduated from Leadership guernsey. Michelle Brooker (Dublin) graduated from Leadership Dublin.

Jennifer Masters (New Phila.) was promoted to staff accountant.

Nita Bates (New Phila.), Babs Douglass (Marietta) and Amina Mukadam (Dublin) have retired from the firm.

New to the Rea team…

Kim Chase (Lima), staff accountant

Therese Filippi (Dublin), executive assistant

Kelley Graham (Marietta), administrative assistant

Alicia Longfellow (Marietta), client service specialist

Lori Stolly (Lima), senior manager

Kate Westfall (New Phila.), staff accountant

Erin White (Medina), staff accountant

part tWO: MeasureYourOperationswithKey Financial information

bright people

Seri

es:

A few years ago, I worked with a controller who was a true numbers person. He sat in front of his

computer all day, but didn’t know what was happening in the business. I actually asked him if he could do his job without his computer – and I was completely serious. He’s actually not all that unique. Many business owners struggle to get their hands in every function of the company. Their entrepreneurial spirit, which is a blessing in so many ways, leads them to put their heads down, figure things out and get things done. But as your business grows, you need to tap into more data – from the shop floor or job site, to production meetings and the sales team. You need a person who knows finance and operations. A person who understands where in the business’ money is made. A person who jumps in with both feet. A CFO.Numbers and operations go hand-in-hand, and successful businesses blend the finance, operations and sales func-tions. You need to focus on the right things – that critical financial information that drives each aspect of your business operations.

FocUS oN YoUr KeY DriverSThere are always three or four things that generate positive results in a business. You need to figure out what yours are, track them and aggressively manage them. Recognize that these key performance indicators (KPIs) vary greatly by industry. If you’re in manufacturing, they might have something to do with production by shift, materials, inventory, overtime or scrap. If you’re in construction, it might be the daily production of each crew, equipment run time, daily costs or field overtime. I once found a construction company owner looking out the window at the equipment yard during a meeting. When I asked what was on his mind, he said he was counting trucks. He knew the more trucks that were in the yard, the less money he was making. His KPIs are the number of trucks on job sites, the overtime he pays and the cash he has in the bank – and these drivers are always on his mind. Think about those things that tell you if you’re being successful and pay attention to them every day. If you’re waiting for accounting reports to make decisions, the data you’re using is 45 days old – and you need to be able to gauge your progress much quicker than that.

by Brad Martyn, managing director, FocusCFO

www.FocusCFO.com

4

One owner I know ran his small business off accounting reports before discovering the power of flash reports. He identified his three KPIs, (sales per day, gross margin per day and inventory over 90 days), then set and measured goals for each of them. Within two years, revenue doubled and profitability increased 500 percent – simply by focusing on those three numbers daily. One way to strengthen your business is by using the information you have to make better decisions. Use it to look ahead. Act quicker. Make adjustments. Outmaneuver your competition. But none of this is possi-ble if you don’t know how much money you made yesterday – that’s one KPI every business owner should measure.

if you have excess inventory,

look at your policies related to

inventory, purchasing and accounts

receivable. Bad policies have a

negative impact on your

business and they

tie up your cash.

bright idea

this is the second part of a series that looks at the four core business systems you need to have in place to operate at an optimal level and maximize your internal cash flow from operations.

KNow where caSh hiDeSIf you sell or manufacture products, chances are you have extra inventory eating into your precious cash. When you add inventory, you do so with the intent of using it and selling it. Once you spend the cash, you need to sell the product. The faster you do, the more efficient you are at managing your inventory. Some businesses that are struggling to pay bank loans and other debt have hundreds of thousands of dollars of inven-tory sitting on their shelves. Do these busi-nesses need to liquidate? Retailers have clearance sales so they don’t hold on to inventory – it’s something you might want to consider. That way you can have more cash to invest in something that you can actually make money on.

looK BeYoND the BUDGetBudgets have been instrumental in busi-ness planning for decades. But long gone are the days of setting a budget in stone at the beginning of the year and expecting it to still make sense in 12 months. A budget is outdated as soon as the ink is dry. When the economy tanked a few years ago, some businesses learned that annual budgets weren’t as useful as everyone thought. That’s when those businesses supplemented their budgets with rolling forecasts. This forward-looking view of your business allows you to reallocate resources as needed. Forecasts are most often done quarterly for anywhere from four to eight quarters out. Your budget still serves a purpose, so don’t go scrapping it just yet. It can help you control costs and communicate company performance. Don’t set it and forget about it. Be sure to update it throughout the year.

maNaGe with FlaSh reportSA flash report is compiled daily or weekly. It lists your identified KPIs and shows how you are trending compared to a historical period, which may be as recently as two weeks ago.

6

tom Babb, treasurer for Constellation Schools, is many things – organized, personable, proactive, funny, easy

to work with and structured. He’s also well-rested.Babb has been with Constellation since its infancy in 1998. “This job’s only given me three restless nights in 14 years,” he said.

“I know people who have 3 restless nights per week, and I’ve never understood that.”So what’s his secret?

“First, you have to have a top-notch staff. I mean, the best of the best. We work hard. We try to do everything right. My philoso-phy is this: When you screw something up, you admit to it, you fix it and you move on. When you’re open and honest – and when you don’t hide your mistakes – you sleep like a rock.”Babb admits that this philosophy sounds old-fashioned and maybe even a little hokey, but he stands by it nonetheless.

“I taught my kids this. I really do believe that you need to have a clean conscious when you put your head on your pillow each night.”Drastic changes and uncertainty early in Babb’s career taught him important lessons about taking control of the future and harnessing your own power. “When you have power over your own life, you feel a sense of calm. And when you’re doing what you want to be doing, you’re much happier, and more successful and effective, too.”And without those hard-learned lessons, Constellation might not be where it is today.Originally, Babb and Constellation’s co-founders, Richard Lukich and gerald Preseren, tried to open a private Montes-sori school. “We just couldn’t get things to work out,” said Babb. “But we didn’t give up. The state passed a charter school law, so we applied and were accepted.”Constellation Schools is an umbrella charter school management organization, providing business, administrative, educa-tional and financial support services to its schools. It opened its doors in 1998 as a single elementary school with three employ-ees and 27 students. In its second year, it boasted 87 students and an expanded staff. Today, Constellation has 19 charter

BRIGHT CLIENTS

My philosophy is this: When you screw something up,

you admit to it, you fix it and you move on. When you’re

open and honest – and when you don’t hide your mistakes

– you sleep like a rock.”

constellation schools

How Constellation Schools Stays at the Head of Its Class

schools. Between them, the schools and the management company employ nearly 600 individuals in Northeast Ohio.Babb, Lukich and Preseren intentionally took their time growing Constellation. “If you grow too quickly, it’s easy to lose control,” Babb said. But the slow growth of Constellation allowed for a sense of community and a more selective process in hiring quality teachers.Though Constellation faces flat funding for the fourth consecutive year, it will certainly remain at the top of its class.

“Even though Constellation’s budget is uncertain, it will stay strong, I’m sure of it,” said Dan Watson, principal, Medina office. “They are so proactive. They are already prepared to react accord-ingly and responsibly, no matter what the outcome is.”While most charter schools rent their facilities, Constellation is innovative in that it owns several of its school buildings – thinking out-of-the-box to get financing in place. And it continues to be rated very highly by its regulatory authorities because its number one focus is always, always on the students and their education.

“Tom puts 100 percent of himself into everything he does, and it really shows,” Watson said. “He and his whole team would do anything for their students. He is fantastic to work with – he respects deadlines, puts people first and always gives everything he has. That’s a huge part of why Constellation has been so successful.”

“It’s been a heck of a ride,” said Babb. “Never in our wildest dreams did we imagine what we were about to start. We never thought we’d be sitting where we are today. It was just beyond our compre-hension.”

tom babb

t maNUFactUriNG Investing in advanced equipment for their facilities, manufacturers are improving products, lowering costs and sometimes even increasing profits. One leading area of tech investment is logistics: using technologies such as radio frequency identification (RFID) tags, manufacturers are able to track the locations and inven-tories of products and components in real time.

t meDicalHospitals and physicians are trying to plan for the influx of newly insured patients who will soon have insurance thanks to of the Affordable Care Act. Doctors are already in short supply and 45 million new patients could exacerbate the problem. They are also struggling with lowered Medicare and Medicaid disburse-ments which are leading them to explore other fee models, including retainers or concierge practices.

t coNStrUctioN The foreclosure crisis’s dampening effect on new home construction may finally be turning around. According to Builder, the national foreclosure rate dropped 14 percent in April, compared to the previous year. Fewer foreclosures mean less competition for new home construction and they also decrease the foreclosure crisis’s negative impact on home prices and construction profits.

t DeNtal A fairly new product, clear aligners (invisible braces), now accounts for 6 percent of the braces industry, according to Wagner Investments. While invisible braces may be a healthy new product line for dentists, they also have unique tax treatment that dentists need to consider. A recent change to Ohio’s taxation of invisible braces requires action by all dentists who use the product.

t oil & GaSIncreased supply, from new production in the U.S., has caused natural gas pric-es to fall. A mild winter that lowered demand for heating fuels helped. But gas demand is recovering in the long-term. Electric utilities are switching from coal to less expensive gas. Homes and manufacturing facilities are switching too as natural gas becomes a more cost effective heating alternative.

Industry profiles from First Research, Inc. were used to compile this information.

Hire Military Veterans. Tax credits are available for businesses that hire eligible veterans before January 1, 2013. The amounts and criteria vary, but credits are available for hiring unemployed veterans, those with service-connected disabilities and those whose families have been receiving benefits from a nutritional service program (food stamps). Not-for-profits can benefit from hiring wounded veterans too as they can claim the credit against their Social Security taxes.

Set up a company Gym. There are many health benefits to working out that can improve the overall productivity of your employees. And the use of an athletic facility on your premises is a tax-free fringe benefit you can offer. If you allow all employees access to it, you can deduct the costs involved in setting it up. Sorry, the tax exclusion doesn’t extend to employer-paid memberships that are off-site though.

look at Your Social Security Statement online. This year you didn’t get your annual Social Security statement in the mail. The process changed and you now have to access this information online. go to www.ssa.gov/mystatement and sign-in or create an account if you don’t have one. You can then review your information online or download a copy to save or print. Be sure to review this information annually so you understand your changing taxes and benefits.

bright ideas

What’s Happening in Industry

pointsbright

419 W. High AvePO Box 1020New Philadelphia, OH 44663-5120

Presorted StandardU.S. Postage

PAIDCanton, OHPermit. 1005

www.reacpa.com

Even if your business survived the recession, your property values defi-

nitely didn’t. You might think that your property values won’t impact your busi-ness until you’re ready to sell. But, did you know that they can affect your ability to refinance your mortgage or continue your line of credit?

Beware the Loan to Value Ratio“Many small businesses have significant assets tied up in real estate,” said Kent Beachy, principal, Dublin office, “so real estate values help determine the overall value of net assets. As real estate prices fall, so does the overall value.”

“To reduce risk, banks generally want to lend to customers who have higher net asset values compared to the amount of financing required,” said Beachy. “If you use prop-erty as collateral, the bank will appraise it to determine the amount they can loan.”

Look Out for Appraisal Time“If your last appraisal was before the reces-sion, your property value probably isn’t what you expect,” said Kyle Stemple,

principal, New Philadelphia office. “If that happens, your bank might hesitate to give you credit, which can hurt your business.” Banks evaluate loans with the loan to value ratio (LTV). “A low appraisal means that you have a higher LTV and less net asset value. Your bank may consider you less credit-worthy and decline extended credit,” added Beachy.Now What?So, what should you do if you get a low appraisal?Get a second opinion from a second appraiser. You’ll have to pay for it your-self, but it might be worth it if the first was unjustly low.put up additional collateral. “If you need a loan for more money than your build-ing’s worth, you might be able to use other assets as collateral,” said Stemple.Negotiate. “Be prepared for low apprais-als on new construction and existing real property alike – and even vacant land,” said Michael Taylor, principal, Millersburg office. “But your banker also under-

Low Real Estate AppraisalsThe Risk to Your Business ... and How You Can Deal with it

stands market conditions. Leverage your relationship to make an argument for your continued credit worthiness.” On this point, Stemple added that, “A good banking relationship should involve open and constant communication. Keep your banker in the loop to avoid surprises in this type of situation.”

consider the Small Business adminis-tration (SBa). “The banking environment is not like the days of old,” said Taylor.

“SBA loans are great for businesses that struggle to negotiate with their bank.” Through its 504 refinancing program, the SBA splits the cost of the loan with lend-ers. “This is attractive to lenders because it reduces their risk without turning down capital for you,” he said.Bring in the pros. Talk to your CPA or attorney. Depending on your situation, they may be able to recommend different courses of action or could even negotiate with the bank on your behalf. A low appraisal doesn’t have to doom your business – just develop a strategy to mitigate its impact.

Small Business Corner