Bennet Tchaikovsky, CPA, Esq. is one of our guest authors who shares his instruction successes with our professors and CPA community. In this article series, "Making Accounting Connect with Students", we continue with part 2 of how Tchaikovsky teaches budgeting with cash flows. Read the first article here. 

Here are the steps Tchaikovsky utilizes in his own classroom to execute a student project that will help them better understand budgeting. 


Step 1: Select the business, form the entity and choose group members

Students should select the type of entity they will form and why they have selected that particular type of business form. Ultimately, I suggest students initially select a corporate entity in California with an important caveat: if their business raises significant funding, the business reincorporates in Delaware or another state where other publicly traded companies reside. Why Delaware? Corporate law is state law. If you have a Delaware corporate law matter, 10 attorneys will come up with generally the same response. If you have a California corporate law matter, 10 attorneys will come up with at least 15 responses, if not more. 
Use articles/certificates of incorporation, bylaws and other corporate documents of publicly traded companies so students can see actual examples. Here are the links to Snap, Inc.’s (Snapchat) bylaws, amended and restated certificate of corporation and form of stock certificate.
Understanding the importance of moving away from operating as a sole proprietorship  / partnership model is critical: if you hire employees or conduct business without corporation / limited liability company (“LLC”) protection, owners may face potential unlimited personal liability. The LLC has great tax planning flexibility and should be used for some types of business activities. However, the LLC form of entity is relatively recent (1977 in Wyoming) and more counsel have experience with the corporate form of entity. Please let me know if you find a publicly traded LLC or a domesticated publicly traded company in California, you may have found the white buffalo of corporate america. 

Step 2: Draft a buy-sell agreement

If you or your students have seen the David Fincher film “The Social Network”, or read the book that film was based on, “The Accidental Billionaires: the Founding of Facebook” by Ben Mezrich, you could discuss the fact that if Mark Zukerberg had created a buy-sell agreement with his co-founder Eduardo Saverin, the movie would have never been made.
A buy-sell agreement is one of the most important business documents, yet is generally overlooked or mentioned only in passing by most business instructors. I use the example in class of physically handing out shares of stock (thank you eBay) to four students stating, “Congratulations, you have just formed your own corporation, each of you owns 25% of the company.” The students get excited, holding the share certificates. Then I instruct one of the new shareholders to walk out of the classroom. As the student is walking out, I ask, “What aside from physical means would you use to stop the shareholder from leaving the classroom?”. The answer is the buy-sell agreement. 
The buy-sell agreement can be used in the group project setting to ultimately encourage members to do their job; however, this may create too much group infighting. Alternatively, I provide my students with a sample and then go over the basics that the buy-sell covers when it comes to share ownership: death, divorce, incapacity, individual performance obligations, disability, buyout procedures, and bankruptcy, among other factors. 
There are many buy-sell agreements that can be found online. A great book has been put together (including a disc with the actual documents) by Anthony Mancuso and Bethany Laurence: Business Buyout Agreements. The book can be purchased at nolo.com or Amazon. 

Step 3: Prepare a 12 month projected cash flow

While working as an Assistant Controller, I was introduced to a cash flow format that I have followed ever since. There are others out there, but this, in my opinion, is one of the better reflections of a company’s cash flow. The cash flow leadsheet would look as follows:
Behind the leadsheet, students then have slides with further details as to each one of the categories. 
My former students Shah Ahmed and Stephen Phan created this cash flow for a business they created.
At this point, the real conversations with students as to the elements of the cash flow can begin. Here are some guideposts that I’ve given to my students over time:
  • Cash sales. For a startup, sales always take longer than anticipated and should be gradually ramped up. Additionally, sales need to be checked with the physical location that the business is operating in: can a 1,000 sq. foot ice cream parlor generate $1,000,000 in monthly sales? Also, credit card fees should be considered (including when the bank will issue the funds to the business). 
  • Salaries & Wages. This is where the cost of having employees and giving benefits arises. In California, an employer has to consider the following costs related to labor: worker’s compensation premiums, Employer’s Practices Liability Insurance, health insurance, and Social Security/Medicare contributions, among other costs. Do I want my students to become Human Resources Experts? No. Rather, it’s important for students to realize what they do not know and to seek the appropriate assistance. 
  • Insurance costs. Director and Officer’s (“D&O”)  Insurance, Errors & Omissions (“E&O”) / Professional Liability Insurance, and general liability insurance are all concepts that your students should become familiar with. In our litigious business environment, a company will inevitably be sued. When a company is sued, a plaintiff’s attorney will name, at a minimum, the company, the company’s named corporate officers, and a company’s board of directors. D&O Insurance can provide the company potential coverage against these types of lawsuits. I do not go into depth about Side A coverage for a D&O policy since, again, it’s important for a company to consider this for their business. The product/professional liability is meant to insure the business against lawsuits pertaining to a company’s revenue producing activities, while general liability coverage will hopefully be the “catch all” for everything not specifically covered by other insurance. 
Students should think through every cost area of their business and be able to explain why or why not a certain cost was considered. As an instructor, I am always amazed by how much I myself also learn during this process. 
If you are looking to incorporate “peer review” as part of the project, this is a great point in the project to do so. You would be surprised as to what students will pick up on as to their classmate’s work. With the resources of the internet, students can readily question assumptions made within someone else’s cash flow model.

Step 4: Create and make an oral classroom presentation

Each member of the group is required to participate in the classroom presentation. This will make some students nervous, but I expressly state to my students that I do not take off points for nervousness, rather only if a student is “monitor reading”. Also, would a student rather make a mistake in front of forgiving peers or a group of potential investors? I use this as an opportunity to share with my students how I prepare for my classes: by walking around the house and talking through what I am about to lecture on that day. Ozzie and Grey, our two cats, are almost CPAs and ready to take the FAR exam as a result. 
Instead of reading from the cash flow leadsheet, students can create visual accompaniment to the cash flow. I do not have any strict guidelines on the presentation; I only request that the presentation is there to visually assist the presenter and connect with the audience. Slides have included marketing strategies, facilities location and competition, and other topics. A sample prepared by my former students Shah Ahmed and Stephen Phan can be found here. 
Depending on the class level and time available, the oral presentations should be limited to 10 minutes with time given for Q&A. April Morris, a business instructor at California State University at Fullerton, has used this type of format to great success creating a “Shark Tank” type environment.

Step 5: Modify the 12 month cash flow to show the best / medium / worst case cash flow scenarios

If you are looking to teach “flexible budgets”, having the students further modify their cash flows to show a best/normal/worst case scenario is a great exercise. Further taking down sales projections will have students considering how much money they really need. If you talk with entrepreneurs, most will share that the business takes a lot longer than expected and cash resources are always a challenge. 

Final thoughts

Making accounting connect with students requires a significant amount of time on the instructor’s part. However, consider this: a student having done this project will have an immediate conversation starter with a potential employer and an appreciation of one of the most important mantras in business: admitting what you don’t know.
I hope you found this helpful and that you will be implementing it into your classroom curriculum!