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A Thankful Message from Protea Financial Director Zane Stevens

A Thankful Message from Protea Financial Director Zane Stevens

November is a month to reflect and be grateful for all the good we have in our lives. While we may be thankful for things throughout the year, we don’t always vocalize those thanks. Tomorrow is Thanksgiving, though, and I want to put my personal thanks into words. I want to let everyone know how thankful I am for each and every one of you.

Thankful for Our Clients

First, I want to express my gratitude towards all of our clients. When we started Protea, we started with one client. Just one. They were a very small business, too. At that point we had no idea if Protea would even grow much more than that or even have a future.

But grow it did, and now we are consistently motivated and amazed by our diverse and interesting clients. We are focused on the wine industry, and we are very proud of the number of people we can help on a daily basis.

Thank you to each client, past and present, that has put their faith in us. As a company, we are very happy you chose us. We will continue to try and repay your faith by working hard, remaining focused, and growing and improving. We will continue to strive to reach our mission of better accounting for everyone. To each of our clients, thank you for trusting us! We are truly blessed with such amazing clients!

Thankful for Our Team

Next, I’m personally grateful for everyone on the Protea team. Every single one of you is amazing. Whether you’re new to Protea, have been here for years, or have found an opportunity elsewhere, you have contributed to our success. I appreciate all the hard work you put in, even during the times it gets tough. I am thankful and grateful for all the commitment and sacrifices everyone on the Protea team has made. We have a great future ahead, and I look forward to seeing the growth and success of each one of you. Thank you! I am truly blessed to have such a wonderful team. 

Thankful for Our Network

I’m grateful for our supporters and connections. When I first started Protea in 2014, I was new to the country and to the wine industry. Through hard work and a bit of luck, I’ve connected with so many wonderful people. I’ve had the opportunity to create lasting business relationships and, at the same time, cultivated some really good friendships.

I’m thankful to each banker, CPA, and consultant that has trusted Protea with a referral. It’s crazy at times to think you put your trust in us when we were a brand-new business. Thank you! I am blessed to know so many wonderful people and to have had your help in growing this company.

Of course, no post on gratitude would be complete without mentioning my family. I have parents that have always supported me no matter what I decided to do. Knowing that they believed in me gave me the confidence to follow my dreams. I have two wonderful kids who love me and mean the world to me. They keep me motivated and are the reason I strive to be better every single day.

I have the most amazing wife anyone could ever ask for. I do not deserve her. I appreciate her so much and am so thankful for her support, her caring personality, and her love. I am thankful she is my best friend and supports me daily. My family gives me the strength to keep striving to be the best!

I am truly lucky. I am grateful for my team, my supporters, and our clients. Each and every one of you is amazing, and I am fortunate to have your trust and your friendship. You motivate and encourage me daily. Today, and every day, I am so thankful for everything I have been blessed with! Thank you!

What is a W-2?

What is a W-2?

One vital task every business owner must do annually is generate and submit W-2 forms to their employees, the IRS, and other entities. These forms are important because without them, employees cannot complete their tax returns. However, while some parts of the form are fairly self-explanatory, some are not. Understanding what a W-2 is and how to fill one out is necessary. If you fail to send these forms out or make mistakes on them, you can be fined by the IRS or subject to an audit. Let’s look at the basics of a W-2, who needs to receive one, and what information is conveyed so you can always be compliant with IRS regulations and answer any questions your employees may have.


W-2 Basics

The W-2 is a form that the IRS requires every employer to file for every employee that has worked for them during the year. This includes employees who have left and employees who may have only worked a few weeks before the end of the year. Your employees need the information on the W-2 to accurately file their taxes. The IRS uses their copy of employees’ W-2 forms to ensure that the employees claimed the correct amount of income and deductions on their returns and that your company withheld the correct amount of taxes, social security, and other withholdings.

Protea Financial What Is a W-2


Who Receives a W-2?

Any employee who is on the company’s payroll and paid a minimum of $600 during the year must be issued a W-2 by their employer. Again, it does not matter when the individual worked for the company during the year or if they are currently an employee. The only time the length of an employee’s time with the company affects the need to send a W-2 is if they did not earn at least $600.

You may have paid non-employees to do work for you during the year. These individuals are categorized as contractors or freelancers. Instead of a W-2, you may need to submit a 1099-NEC form. These forms are similar to a W-2 but are designed for non-employees.

Businesses need to submit W-2s in triplicate. One is sent to the employee, one to the IRS, and one to the state the employee pays taxes in (typically their state of residence, but not always). While employee W-2s were traditionally mailed, today companies can make them available online and can submit W-2 information to the government electronically.


When Are W-2s Sent?

W-2 forms are sent out early in the new year. Employers must have all W-2s postmarked or made available online by January 31 each year. Employees should have them in hand by the middle of February so they can file their tax returns before the April 15 deadline. Employers who do not mail out the forms timely can be fined.

Employees who have left a job can ask that employer for their W-2 at any time. The employer then has 30 days to generate the form and deliver it to them. If the employee does not request the form, the employer does not have to provide it until January, even if the employee left the job early in the year.


Why are W-2s Important?

Without a W-2, employees cannot correctly fill out their annual tax return. They need the information provided on the form to determine their gross wages, what was withheld, and other information. The IRS will use the form to make certain the tax return includes the correct figures.


Protea Financial W-2 Boxes

What is Reported on a W-2?

A W-2 form is composed of six lettered boxes, 20 numbered boxes, and several other spaces for information. Some of this is self-explanatory, but other boxes are not as clear. Let’s break down the form into sections and look at what information is reported there.


Boxes a-f: Employee and Employer Information

  • Box a contains the employee’s social security number.
  • Boxes b and c are for the employer’s EIN/FEIN and the business’s name, address, and zip code.
  • Box d lists the employer’s control number. Some companies have a specific control number to help identify items in their system. However, smaller businesses likely do not have this. Box d can be left blank in that case.
  • Boxes e and f contain the employee’s name, address, and zip code.


Boxes 1 through 6: Income and Withholdings

  • Box 1 includes all of the earnings paid to the employee by the employer. This includes wages, tips, and any other compensation. It does not include anything that is considered a pre-tax benefit like contributions to a 401(k) or life insurance.
  • Box 2 is the amount withheld from the employee’s salary for federal income tax.
  • Box 3 is the amount of wages subject to social security tax. Only a specific amount of earned income is subject to this tax. That amount is multiplied by a specific amount (6.2 percent in 2021) and reported in box 4.
  • Likewise, boxes 5 and 6 list how much of the employee’s income is subject to Medicaid tax and how much was withheld.


Boxes 7 through 14: Other Reported Income and Information

This section may not be as clear if you have not dealt with a W-2 before. This is where  having a bookkeeper assist in preparing W-2s can truly help because they understand what qualifies as allocated tips, deferred income, and the other items required here.


  • Box 7 is where tips are listed.
  • Box 8 lists allocated tips. These are additional tips given to the employee. Employers are only required to allocate tips in specific situations, so this box may be left blank.
  • Box 9, Verification Code, is no longer used. It should be blank.
  • Box 10 indicates how much was deducted from the employee’s check for insurance for their dependents. These deductions may include matched spending and other benefits.
  • Box 11 is for the total amount of money an employee received from a non-qualified deferred compensation plan.
  • Box 12 will contain one or more letters. These letters are specific codes for types of income. There are four available boxes (12a through 12d).
  • Box 13 is a check box the employer uses to identify if the employee is a statutory employee, contributed to a retirement plan, or received any sick pay from a third-party.
  • Box 14 is essentially a miscellaneous box. It is used to report any income or withholdings that do not fit elsewhere.


Boxes 15 through 20: The Remaining Boxes

The bottom line of the form, which includes boxes 15 through 20, is used for state reporting:

  • Box 15 – Employer’s state ID number
  • Box 16 – Employees wages subject to state tax
  • Box 17 – Amount withheld for state tax
  • Box 18 – Wages subject to city or other local/state taxes
  • Box 19 – Amount withheld for these city/local taxes
  • Box 20 – The city/state/other entity that received the taxes from box 19.


Other W-series Forms

In addition to the traditional W-2 form, there are a few special variations that some employees may receive. These forms are typically used to report income in U.S. territories. For example, the W-2AS is used by those who live and work in American Samoa. Other forms in the W-series include the W-2CM (used in the Commonwealth of the Northern Mariana Islands), the W-2GU (used in Guam), and the W-2VI (used in the U.S. Virgin Islands. There is also the form W-2c, which is used to submit corrections to a filed W-2.

One solution to avoid filing a large number of W-2c forms is to work with a payroll provider such as Gusto. This full-service provider does more than just ensure that your employees are paid correctly and on time. They also handle all of their clients’ W-2s, 1099s, and other tax forms. If you do not want to worry about filling out W-2s yourself, you may want to consider working with one of these services.


Differences Between a W-2 and a W-4

When an employer hires someone, one of the first things this new employee should do is fill out a form W-4. This form is what the employer uses to determine how much to withhold from the employee’s paycheck. The employee will enter their number of dependents on the W-4 plus indicate any additional amount they want withheld from each paycheck. The employee can make changes to their W-4 at any time. For example, it should be updated if the employee gets married, has a child, gets divorced, or if they determine they want to change their additional withholding amount.


The W-2 and W-3

In addition to submitting a W-2 to the Social Security Administration, employers also submit a W-3. This form summarizes the employee’s wages and the amount they contributed to social security. It is used by the Social Security Administration to reconcile the amount received. Employees do not receive a copy of this form.

Protea Financial Can Help You Prepare W-2s and Avoid Fines

If you are new to paying employees, you want to make certain your W-2s are generated correctly and made available to employees before the deadline. For that, you need a professional. Protea Financial can assist you in preparing W-2s and with any other bookkeeping need you may have. Contact us today to learn more about virtual bookkeeping and what we can do for you.

Call Protea Financial for Help Understanding Your W-2

For help understanding a W-2, how to fill it out, or what you need it for, please contact us. We are here to help!

Advantages of a Virtual Bookkeeper Over a Physical Bookkeeper

Advantages of a Virtual Bookkeeper Over a Physical Bookkeeper

If you recognize that your business has reached the point of needing a bookkeeper, you have two options: you can hire a local bookkeeper you can meet with in person, or you can hire a virtual bookkeeper. While outsourcing your bookkeeping to a virtual contractor is a fairly new concept, there are a number of benefits to doing so.


What is a Virtual Bookkeeper?

Before looking at the advantages a virtual bookkeeper offers, it is important to fully understand what one of these professionals is and what they do. There is no difference in skills or education between a virtual bookkeeper and one you meet with in person. They are full bookkeepers who have the education, knowledge, and training to do the job. They are experts in their field.

Virtual bookkeepers provide all of the same services that an in-person bookkeeper does. In fact, you may be able to find a virtual bookkeeper who is able to provide specialized services related to your specific industry. It may not be as easy to find such services in your local bookkeeper options.

The biggest difference between virtual and physical bookkeepers comes in their location and in how you communicate with them. Virtual bookkeepers can be anywhere around the country. You may, in fact, even find a great virtual bookkeeper who lives outside the U.S. As long as they are familiar with U.S. tax laws and other financial regulations, it truly does not matter where they live. Some virtual bookkeepers may even frequently travel between locations.

These travels will not impact a virtual bookkeeper’s ability to work or communicate with their clients. Instead of meeting at an office, you will communicate with your virtual bookkeeper over the phone, through email, or via online meeting. This may actually not be that different with how you would communicate with a physical bookkeeper. Most of your communication with them may be over the phone or email anyway—you may rarely visit their office. In that case, there is truly no difference between a virtual and a physical bookkeeper.


Protea Financial Virtual Bookkeeping

Why Work with a Virtual Bookkeeper?

If you are communicating with your bookkeeper primarily over the phone or email, why not look at the advantages of a full virtual bookkeeper? You may find that these advantages positively impact your budget, the work you receive from your bookkeeper, and your company’s future. Here are just a few of the things virtual bookkeeping has over traditional, in-person bookkeeping.

Finding a virtual bookkeeper is quite easy, too. All you have to do is go online and search for one. However, you will want to carefully check reviews before selecting one. You do not want to work with a bookkeeper who is less than reputable. You should also do some research into the company to determine if they have worked with businesses similar to yours and what kind of social media reputation they have. You can also use social media to ask for recommendations.


You Only Pay for the Work You Need

Most virtual bookkeepers offer a pay-as-you-go option. This flexibility means you only pay for the services or work you need done. You do not pay any retaining cost, nor do you have to pay any of the costs associated with hiring your own internal bookkeeper. With an employee, you would pay their salary, benefits, vacation pay, and other direct expenses as well as provide them with office space, equipment, and other tools. All of this can add up very quickly.

With a virtual bookkeeper, you only pay the agreed-upon service costs. You can add or remove services or dedicated hours of work as needed, allowing you to adjust your cost as you go. You may need your virtual bookkeeper more during certain parts of the year or during specific projects. For example, you may initially want a virtual bookkeeper to handle your accounts payable and receivable. Later, however, you determine you could also use their help in tracking orders and inventory. Simply contact your virtual bookkeeper and add these services.


Cloud Software and Sharing Makes it Easy for Your Virtual Bookkeeper to Access Information

One thing that may seem to work in favor of physical bookkeepers is that you can meet with them and bring them your physical receipts and other paperwork. However, take a look at your invoices and other paperwork. How much of it are you actually getting in a physical form? More and more vendors are cutting back on providing customers with paper receipts. Instead, they are emailing the paperwork or making it available via an online customer portal. You can download and print this paperwork if you want, but you do not need to.

With a virtual bookkeeper, you simply email these virtual receipts to them or copy them over onto a shared drive such as Dropbox, Google Docs, or Microsoft OneDrive. You can even give your virtual bookkeeper access to your online accounts so they can get these documents straight from the source.

By sharing these documents as you receive them, your bookkeeper is always up to date. This saves them a lot of time, especially around tax season. You do not need to take anything to them. If you do have physical receipts, you can snap photos or scan them. You may not even need to do that if you enter your transactions into a shared accounting program. By using the cloud, you can always access your financial reports, while your bookkeeper can always access your latest financial documents.


Protea Financial Virtual Bookkeeping Services

You Can Find the Right Bookkeeper for You

If you only want to work with a local bookkeeper, you may find yourself fairly limited on options. This is especially true if you are in a niche industry. For example, how many local bookkeepers fully understand the winery business? You may not find many that do.

With a virtual bookkeeper, though, you have hundreds, perhaps even thousands, of bookkeepers to select from. You can find the bookkeeper that understands your industry and that is a good fit with you personally. Having a good working relationship with your bookkeeper is just as important as finding one who understands your needs. You need to find someone who knows your niche, is able to provide information in a way you find helpful, and is available to answer your questions. A local bookkeeper may be able to meet these needs in a limited way. By taking your time to find the best virtual bookkeeper, however, you can find a professional who fully provides the services you need.


Virtual Bookkeepers Are Flexible

A physical bookkeeper likely has very set hours. If you call or email them outside of their work hours, they may not respond. However, virtual bookkeepers are more likely to offer flexible scheduling. This is because they understand that they are not going to be in the same time zone as all of their clients. They will need to be available to you during your workday. Many are also available outside of your standard business hours or on the weekends. They are often able to work with you to find the best time to meet, even if it is outside of regular working hours.

Virtual bookkeepers are also flexible in the services they offer. You can scale up or down your services as needed. This helps ensure that you protect your budget when needed but that you can also get the level of bookkeeping you may require at certain times of the year.


You Can Focus on Your Business

Finally, by outsourcing your bookkeeping to a virtual professional, you can focus on your business. Even if you only spend a few hours on your bookkeeping every week, that is time you could be spending on your company strategy. Only you can lead your business forward, but virtual bookkeepers can handle your finances for you. Why not take advantage of their expertise? 

In addition to freeing you up to grow your business, you may find that the cost of a virtual bookkeeper is much less than you expected. This is because these experts do not need the same amount of time as you do. They have professional accounting software and other tools, in addition to their training, that makes it much easier for them to get the work done.

Having a professional advise you financially also helps you make better business decisions. You will know where you stand profit-wise, your exact expenses, and much more. With this information, you can make informed decisions regarding products, pricing, vendors, and every other aspect of your company.


Protea Financial Brings the Benefits of a Virtual Bookkeeper to You

Ready to explore what a virtual bookkeeper could do for your winery? Protea Financial has a team of experienced bookkeepers who understand the industry and have the skills needed to assist you in all of your bookkeeping needs. You don’t need to spend all of your time doing the books when we can provide that service and much more.

Contact Protea Financial today to discuss your bookkeeping needs and how we can help you. 

Don’t Let Accounting Problems Sour Your Wines: Avoiding Common Accounting Issues

Don’t Let Accounting Problems Sour Your Wines: Avoiding Common Accounting Issues

Wineries need to pay attention to every detail when it comes to accounting. You need to keep an accurate record of the total amount of wine made during the year. Even a simple mistake can cost money and time. There are two mechanisms that ultimately decide whether you will stay in business.

First, how much profit you make is determined by the market based on how much someone is willing to pay for your bottle of wine. The wine industry is growing rapidly in many parts of the country. Because of increased competition, wineries will need to be creative to differentiate their products to demand higher prices.

Second, the costs of making and selling wine determine how much profit is left. Since there is not much wiggle room to increase the revenue from one bottle, how you understand and control your costs has the greatest impact on how profitable your winery is.

In this article, we are going to discuss some of the difficulties wineries face when it comes to tracking the accounting of cost of goods in producing wine.

Protea Financial Blog Don't Let Accounting Problems Sour Your Wines

Winery Operations

A winery has four main operations. Well, five if you are vertically integrated and harvest your own grapes. 

  • First, after harvesting is the crush phase where grapes are pressed and squashed.
  • Second is the fermentation stage; this is the most vital part of producing wine. Fermentation continues until all the sugar is converted to alcohol and a dry wine is produced.
  • Third, clarification is where the juice is separated into tanks. This allows the sediment to drop out. Winemakers will rack or siphon their wines from one tank to another. Wine is separated from the solids, which is known as pomace.
  • Last, the wine is aged and bottled. There are many choices and techniques in this stage, which results in the many distinct types of wines.

Of these steps, the crushing and bottling phases are quite short, while the other stages can be exceptionally long.

Keeping Track of Costs

Because of the time it takes to create different types of wine, you will need to keep careful track of how long each type of wine takes to produce. For example, a red wine with low production values would take less time to process than a high-grade red wine. Consequently, the high-grade red wine should accumulate more indirect costs.  Indirect costs include depreciation on the production facilities, labor by the wine master, utilities, production supplies, testing expenses, etc.

Your record of costs will include taking into account any wine that was transferred from barrels or tanks, any wine that spoiled before you could sell it, as well as any wine that you gave away for free or dumped because it became unsellable.

These costs are what is called cost of goods produced (COGP) and includes all the costs that went into making the wine. They include the raw materials, labor, overhead, direct, and indirect costs, which were incurred from the crushing phase all the way through bottling and storing the wine.

When a bottle of wine is sold, the cost of producing that specific wine is recorded as cost of goods sold (COGS). The difference between the revenue generated and the cost of goods sold is the gross profit on that wine.

Allocating Costs

Activity based costing (ABC) assigns overhead costs and indirect costs to related products. Activity based costing enhances the reliability of assigning costs. This enables wineries to have a better understanding of the costs associated with producing wine.

Wineries use a variation of ABC where they assign expenses to each of the functional areas in the winery. The costs are then allocated to what is a gallon-month for each wine product. For example, 100 gallons of Pinot Noir aged for six months equals 600 gallon-months. If it costs $10,000 to store the wine, those costs are assigned to the Pinot Noir based on its share of gallon-months of wine stored.

Because of the unique aspects of making wine, tracking costs can easily become complicated. Wines are commonly held in storage for longer than one year. So, not only do you have to allocate costs to several types of wines, but you also have to allocate costs to vintages of each varietal. Due to the lengthy process to make wine, it is common to lose some to evaporation. Additionally, if the wine master engages in blending two or more types of wines, the calculations change because of how these separate costs are allocated between multiple wines.

Protea Financial Blog Don't Let Accounting Problems Sour Your Wines Avoid These Common Mistakes

Accounting Helps Keep Track of All Channels to Make Your Life Easier

As complex as tracking costs is, you may be asking whether it is even worth it. As a winery you have various sales channels that have various profit margins. Many wine sales go through distributors who expect lower prices so they, too, can make a profit. You may only make 10-30 percent. Where performance is measured, performance improves. As you meticulously track your costs you can improve those margins.

Other than to improve profit margins, another compelling reason to keep track of costs is because it is required by the federal Alcohol and Tobacco Tax and Trade Bureau (TTB). Federal regulations include tracking weight tickets when harvesting and how much wine is available after production.

In addition to the TTB, the Internal Revenue Service (IRS) wants to see the profit levels for each product sold, as well as proof for the calculations. When the production process takes greater than two years, the IRS wants wineries to allocate interest costs. Furthermore, they want to see separate calculations for the source of the grapes, the type of wine, how long it takes to age, and the size of the storage containers used. The IRS has even created a Wine Industry Audit Technique Guide.

Let Protea Financial Be There to Help You with Cost of Goods Accounting for Your Winery

All this can seem overwhelming. It can be, but it does not have to be. Our expert team has worked with the wine industry for years. We can help you navigate the difficult terrain of tracking costs and staying in compliance with Federal regulations. Reach out to us here at Protea Financial. We would love to help! 


Tips To Avoid A Cash Crunch: 3 Ideas For Cash Flow Management

Tips To Avoid A Cash Crunch: 3 Ideas For Cash Flow Management

Cash flow is an important element of any small business. To effectively manage your cash flow, you need to be aware of all the aspects that can affect it and how they impact your business. The best way to achieve this is by understanding what might cause fluctuations in cash flow and coming up with solutions ahead of time for each negative event so as not to be caught off guard if one occurs. This article will discuss some common factors that may reduce or increase your company’s cash flow and provide tips on how to handle crunches when they arise.

What is Cash Flow?

In quite simple terms, cash flow is the money flowing in and out of your business each month. Small businesses need to strike a balance between accounts payable and accounts receivable to ensure that more money comes in than goes out each month. Although cash flow is related to net income, they have some key differences. 

Net income refers to the earnings of a business during a period after considering all expenses incurred during the period. Net income includes sales recognized but not collected until subsequent months. In addition, net income likely includes a monthly depreciation charge which is a non-cash item. These are important to consider when comparing net income to your operating cash flow.

Why is Cash Flow Important?

Understanding how your business generates and uses cash can help you better navigate the growth of your company. Analyzing your cash flow helps you see how well your business is performing and how much liquidity your business has. 

Having cash on hand puts you in a better financial position, adds stability, and gives you better purchasing power. Your cash flow determines how quickly you can expand your business. Additionally, having positive cash flow that leads to a surplus makes you a worthwhile investment for banks or investors. 

maximize cash flow

Tips for Boosting Your Business’ Cash Flow

There are so many things you can do to keep your business running smoothly.

You should have a plan for every day; when the unexpected happens, you should be able to react. There are three areas to focus on for boosting cash flow.

Increase Revenues

  • Keep an eye on customer retention rates, customers are the backbone of any business, and if you have a low customer retention rate, it is time to look at what is going on. Customers are the lifeblood of any company. They provide the revenue that funds your business, and they keep you in business. 
  • Find out what is lacking in the market and offer new products and categories to augment your current offerings. You may be able to charge a higher price for new or improving on existing items.

Decrease Expenses

  • Reach out to new suppliers or renegotiate prices with an existing vendor. Even offering to pay early could result in getting a small discount, which is almost always worth taking.
  • Find ways to automate, or even outsource, parts of your operations. 
  • Find less expensive suppliers that have nothing to do with the product you sell. You do not want to sacrifice product quality for a lower price since this affects your image and reputation in the market. Focus on costs such as office supplies or a less expensive insurance provider. 

Operational Efficiency

  • Be open about what your cash flow is like with your team. They will need to know what is going on if cash flow is already tight or if it becomes tight. They can help your business quickly find ways to cut expenses or reinvest profits into projects with high rates of return.
  • Find ways to increase your return on assets. Smart business owners track their return on assets because it reveals how effectively you are investing in your business.
  • Manage inventories through buying more efficiently or increasing inventory turnover. When you buy efficiently your customer is the focal point, which makes it easier to make more sales.


An interesting observation by the Italian economist Vilfredo Pareto helps explain how best to manage cash flow. He noticed that 80 percent of the land in Italy was owned by 20 percent of the population. He further noticed that it happened in nature in that 80 percent of the peas in his garden were produced from 20 percent of the pods.

What does this have to do with cash flow management? Look at your business: it is likely that the Pareto Principle, also known as the 80/20 rule, is in play. Do 80 percent of your sales come from 20 percent of you customers? If so, it might make sense to cut out some of your more high-maintenance, low profitability clients. Your ratios may be different but understanding roughly 80 percent of an output results from almost 20 percent of an input gives you a competitive advantage on where to look to focus your effort and resources. 

By keeping an eye on your expenses, income, and operational efficiency you can predict when you might need a little extra cash coming in or going out. You can even use a budgeting tool to help with this process. You will see how much money is coming in each month and where all the money is going out each month, so it is easy for you to make changes if needed.

De-Risking a Business to Drive Enterprise Value

De-Risking a Business to Drive Enterprise Value

As an appraiser of every type and size business, my experience and training has helped me develop several key defaults to value, the biggest of which is as follows;


Value is driven by three key inputs; risk, growth and cash flows


In other online forums and presentations, I’ve represented this truth as a three-legged stool that provides structure and support to an opinion of value for tax, financial reporting, planning and strategic purposes. I’ve explained that the relationship between these three inputs is a simple one based on the direction of the input (with all other inputs unchanged) directly correlated to an increase in  value, in this case, an increase where;

  1. Risk – The lower the risk the higher the value;
  2. Growth – The higher the growth, the higher the value; and
  3. Cash Flows – The higher the cash flows, the higher the value.

I believe that any business owner or individual with some finance background can understand how an increase in growth and cash flows increases the value of a business.  In this blog, I want to talk specifically about how risk impacts value and how a company or business owner can lower or mitigate risk (i.e. “de-risk”) to increases value.

The easiest way for me to explain de-risking is to discuss the concept of insurance.

“Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses.”

In the case of a business, an owner/operator who is vital to an organization puts his/her business at considerable risk every day he/she walks out of the office. A bus, heart attack or accident can be a fatal blow to the owner but also the business. To protect against this loss, the company helps mitigate this risk through Key Person Insurance where the beneficiary is the business and the amount of insurance is at or above the value of the business or the determined impact that person has on the business.

While key person risk is one that can easily be mitigated through insurance, other risks are more difficult to lower or eliminate. Below is a list of risk factors that I believe any business has to manage. Each risk has a “de-risk opportunity” that management can consider in mitigating this risk.  Their ability to de-risk the business through operational and strategic initiatives or investment help the business drive value by lowering its overall risk. And, based on the simple math above, lowering risk increases value.



Risk Factor Rationale
Industry Risk

Industry risk is associated with the market in which the company competes and how volatile it is compared to the overall market.  Consider the recent pandemic and two industries; grocery stores and restaurants. One was considered essential (grocery stores) and the other was shut down (restaurants).

De-Risk Opportunity: The best way to mitigate or de-risk the business for this factor is diversification. Restaurants who survived the pandemic used delivery and to-go opportunities as a way to diversify its business model.

Execution Risk

Execution risk is based on how well the company has performed in the past in meeting its budgets (top and bottom-line metrics) and the overall strength of the management team.

De-Risk Opportunity: A company can hire specialized personnel to help fill holes in the management team. Other opportunities include building out the board of directors or creating an advisory board to provide checks and balances and accountability.

Technology Risk

Technology risk is most commonly associated with technology tools that lead to higher efficiencies and productivity.

De-Risk Opportunity: Along with hiring specialized personnel, the company can invest in software tools to help with financial planning, manufacturing, point-of-sale, and other programs that can turn hard data into management tools and dashboards.

Supply Chain Risk

In a post-COVID recovery, the term “supply chain” is now the catchphrase for defining risk associated with low to no supply of products and the delay in getting available products to the end-user. That Peloton bike is now six weeks out instead of four because they are having a problem securing the video screens from China…

De-Risk Opportunity: The best way for a company to de-risk supply chain issues is adding additional suppliers to the mix and increasing its inventory when it can to add a few months of extra supply to combat extended turnaround times.

Customer Risk

While retail stores have minimal customer concentration, a construction firm and government contractor may have 70% of its business with the Department of Defense.

De-Risk Opportunity: Diversification in both product and service offerings allows for any company to manage this concentration risk by focusing selling efforts on new industries or new customers.

Integration Risk

This risk is associated with an expected change of control or selling the business. There may be issues with transferring licenses, key contracts (see above) management transition of key people.

De-Risk Opportunity: Overall, this risk is highly correlated all of the others above. For owner-operated companies, putting together an operations manual that defines management roles and outlines key responsibilities will help eliminate “key person” risk. In selling a company, that risk may only be mitigated through consulting agreement that keeps the prior owner or top management in an active or shadow role or involved with a minority equity stake (as is the case with private equity purchases and “rollover” equity that allows the seller to participate again in another sale of the business.

What Does This All Mean?

Focusing on and managing these company-specific risks prior to an exit event will help increase the value of the business and provide the eventual buyer with a stronger basis by which to run the business going forward.  Think about it as a homeowner de-risking the sale of their home by renovating the kitchen, replacing the roof or cleaning up the landscaping and curb appeal. While all of these activities involve an investment (some more than others) the eventual return should come in the form of a quicker sale with more potential buyers which correlates with a higher sale price that, almost certainly, will exceed the cost of the investment.  The same is true with your business; there will likely be a tradeoff of value in de-risking the business through an increased cost structure (insurance, technology tools, increased staff). Remember, a decline in cash flows equates to a decline in value. However, the real challenge for management is to either eliminate other, more marginal costs and/or find leverage in these incremental costs to increase revenue and profits.

Exit Strategies values control and minority ownership interests of private businesses for tax, financial reporting, strategic purposes. If you’d like help in this regard or have any related questions, you can reach  Joe Orlando, ASA at 503-925-5510 or jorlando@exitstrategiesgroup.com.