Archive for the ‘financial management’ category

Strategies for Thriving in a Tough Economy

August 8th, 2022

Whether or not you believe we’re heading into a recession, or even if you have come to believe that what we have now is pretty much as good as it’s going to get, there’s no getting around the fact that we’re experiencing poor economic times. An enduring lack of consumer confidence and decreased sales threaten all businesses, but small businesses are particularly vulnerable as they often don’t have the reserves to help them survive difficult times.

Entrepreneurs who are survivors will look at this as an opportunity to improve their business practices so they can not only weather the tough times, but thrive during them. How, then, can you recession-proof your business? Thinking through the following practices and how you can make them your strategies will help ensure your business’s success in a tough economy.

1. Protect your cash flow

To keep your business healthy, cash needs to continue flowing through it. As long as your business exists, you will have expenses. But the harder times get, the harder it can be to keep the cash flowing into your business. Be more diligent in how you are spending money. It’s important to be frugal and aware of your income and expenses. By doing a line item cost for each expense, you will be able to identify areas that need greater attention. Efficient cash flow management is crucial. The sections below are all, for the most part, areas that will have impact on your cash flow, but take special note of the ones regarding evaluating your vendors, reviewing your inventory management, and keeping your personal credit in good shape.

2. Streamline your business practices

This is an opportune time to review your business procedures for effectiveness. Consider areas that can be combined into one. Consider areas that can be structured differently to reduce costs. Think about sharing resources, like administrative or payroll work, with other entrepreneurs to reduce overhead. The goal is to streamline operations so you can still provide a quality product or service, yet realize a greater profit by reducing the expenses to produce it.

3. Evaluate your vendors

If you use vendors for packaging, labeling, distribution, or in other areas of your business, this is a good time to do some price comparisons. There is a lot of competition among vendors to attract new business, so you could realize some serious savings in this area. Since no one wants to lose business during a bad economy, chances are good that your current vendors will meet the competitor’s price. If not, it’s time to move your business to the lowest bidder, just as long as you’re not sacrificing quality.

4. Review your inventory management practices

See what can be done to reduce inventory costs without sacrificing the quality of goods or inconveniencing customers. Are you ordering too many of particular items? Can an item be sourced somewhere else at a better price? Is there a drop-shipping alternative that will work for you, eliminating shipping and warehousing costs?

Just because you’ve always ordered something from a particular supplier or done things in a particular way doesn’t mean you have to keep doing them that way, especially when those other ways may save you money.

5. Focus on your core competencies

A diversification strategy is often recommended for small business success. But too often small business owners simplify the concept of “diversification” to “different”. Just adding other products or services to your offerings is not diversification. It’s potentially just a waste of time and money. Worse, it can damage your core business by taking your time and money away from what you do best. It may even damage your brand and reputation. If you have diversified out into different areas over the years to improve market reach, it might be time to regroup and focus on the core of your business and outsource the rest. Evaluate what is and isn’t working and put more effort into what started you out as a successful entrepreneur in the first place. It’s important to get in touch with your core business and make sure it continues to meet the changing needs of customers. So consider dropping the extras and focus on what you do best and which is most profitable to recession-proof your business.

6. Develop and implement strategies to get your competition’s customers

If your small business is going to prosper in tough times, you need to continue to expand your customer/client base. If you have competitors, then they have customers. So, there are already people out there buying what you sell, just not from you. What will it take to attract those customers? You’ll need to offer something more or something different. Research your competition and see what you can offer to entice their customers into becoming your customers. It’s not only lower prices or a better price/quality trade-off that gets the business. Providing better customer service is often identified as one of the easiest ways to outdistance the competition. But you need to do the research in your own market to find out what it takes to be the customer’s first choice.

7. Make the most of the customers/clients you have

They say that a bird in the hand is worth two in the bush. The bird in the hand is the customer or client you already have. These customers are an opportunity to make more sales without incurring the costs of finding a new customer.

Even better, he or she might be a loyal customer, giving you many more sales opportunities. If you want to recession-proof your business, you can’t afford to ignore the potential profits to be had from established customers. But remember that your customers are going through tough times too. In order to retain their business, implement measures to express your appreciation. This could be a one-time price reduction, a customer loyalty card, or a referral incentive. Whatever the strategy may be, it should be something of value to the customer and within your marketing budget.

8. Continue to market your business

In lean times, many small businesses make the mistake of cutting their marketing budget to the bone or even eliminating it entirely. But lean times are exactly the times your small business most needs marketing. Consumers are restless and looking to make changes in their buying decisions. You need to help them find your products and services and choose them rather than others by getting your name out there. So don’t stop marketing. In fact, if possible, step up your marketing efforts.

9. Keep your personal credit in good shape

Hard times make it harder to borrow and small business loans are often among the first to disappear. With good personal credit, you’ll stand a much better chance of being able to borrow the money needed to keep your business afloat if you need to. To recession-proof your business, keep tabs on your personal credit rating as well as your business one and do what’s necessary to keep your credit ratings in good shape.

There’s absolutely nothing that will make your small business one hundred percent recession-proof. But implementing the practices above will help ensure your small business survives tough times and might even be able to profit from them.

Top 4 Cash Flow Tips

September 19th, 2013

Water tap dripping dollar bills, Water waste conceptProfit is important because without it your business will fail. But for small businesses, cash flow is king. Your company’s cash flow will determine its profitability, and scrutiny of your business’ cash flow will increase your control over this dynamic. Follow these 4 cash flow tips to establish the structure you need to succeed.

1. Know Your Balance Sheet
Many business people don’t understand how cash flow works and its significance to keeping their business operating. Focusing on the profit and loss statement is potentially a fatal mistake as healthy profits can mask an impending cash flow crisis. Profit and loss statements don’t usually contain the information required to make an adequate cash flow projection. What is need is a structured balance sheet that includes all the influencing items such as debts, interest payments, inventory and so on. You want to see the data that represents your cash flow and which can be employed to project the comings and goings of your cash over the period you have selected.

2. Set Up a Cash Flow Budget, Revise it Periodically, and Stick to It
Plan forward to generate a projection of likely future sales and expenses. You, or your accountant, can set up such a cash flow worksheet in Excel to automate this exercise.

Reviewing and updating your cash flow budget regularly is your best insurance against potential cash shortages. If your business has a predictable cash flow, then revising the cash flow budget on a quarterly basis is probably sufficient. But the greater the cash flow uncertainty a business has, the more frequently a new cash flow budget should be prepared.

If cash is tight, you may need to do to weekly projections, and decide which invoices you’ll pay and which customer payments you need to collect as soon as possible.

Rapid growth sounds good but, ironically, it can bring on a surprise cash crunch. Additionally, a sudden increase in sales often creates an inventory drop that can make the timely fulfillment of orders difficult.  The extra time you spend managing your increased sales often takes up your time and results in debtors not being tracked or followed up on when their accounts become overdue. Strong sales one month often means a cash shortage next month. By monitoring the business’ cash status you can arrange credit from suppliers, banks and other sources such as factoring, to cover the temporary shortfalls.

Just like your company budget, you need to continuously reference your cash flow budget worksheet in order to drive your cash flow situation rather than become a casualty of it. So set that budget and stick to it. As your cash flow circumstances evolve you will need to revise that budget and adjust to the new level of cash management it will then require. Stay on top of your cash flow process.

3. Set Credit, Accounts Receivable & Accounts Payable Policy & Procedure as One Strategy
What credit you allow, how you monitor its use, how you manage the bills you pay, and how you pay the bills you owe, are the components of your cash flow process. How you coordinate them is what determines your actual cash flow, and often times the survival of your company.

Set Your Credit Policy & Terms
If the nature of your business requires offering credit, then it is important to set clear limits to your terms of credit.

Manage Accounts Receivable Strictly
Get payments in quickly. Master the art of debtor management. Let debtors know how much time remains before due dates. Stay in close touch with major debtors as payment deadlines approach. Offer small discounts for early payment as an incentive.

Pay Your Creditors Strategically
Take advantage of credit terms and prioritize payments according to the consequences involved in becoming past-due. Wages, taxes and direct debits are at the top of the list for on-time payment. Key suppliers may be prepared to wait to keep your business. Don’t pay early just to get a discounted price unless getting the discount is better than being without the cash.

Plan for Lean Times
Monitor your bank balances, be aware of when lean cash flow periods are coming up, and plan accordingly. Avoid funding major purchases from your business’ working capital unless you are sure you have the cash to cover it.

4. Get financial products working to your benefit
Overdrafts, premium funding, lease facilities and cash flow funding products such as factoring can all be excellent tools to help match cash supply with outlays. These arrangements take time to set up, so you need to be prepared in advance. In a pinch, the business credit card can be a good way to ease the crunch as long as it can be paid off before interest kicks in.

Of course there are other items that impede proper cash flow, and are important to avoid, such as:

  • tax penalties
  • non-budgeted purchases
  • personal use of company monies
  • making advances and loans to employees
  • having un-deposited checks sitting on your desk
  • not investing excess cash
  • etc., etc., etc….

But the four major categories discussed above should be your first concern as they are the foundation for establishing control over your cash flow and the impact it has on your business’ profit, survival and growth.

6 Tips for Cost Improvement

June 12th, 2013

6 Tips for Cost ImprovementMost small business owners can agree that saving more money is a continually reoccurring topic. Cutting costs, boosting cash flow and paying less in taxes, will allow you to keep more of what you make, and is a good entrepreneurial frame of mind to be in.

To take this from prudent thinking to actual practice, and put more money in your own pocket, utilize these six tips to put your business on the path to fiscal improvement.

1. Talk to your employees
Employees who are on the front lines of your business, dealing with customers, processes and systems, often have ideas for ways you can cut costs. Have you listened to them? Sit down with your employees and brainstorm ways that costs could be cut without sacrificing quality. Make it more interesting for them by offering a bonus to the people who come up with ideas that have a positive impact on the bottom line.

2. Pay attention to detail
Often, substantial sums of money slip between the cracks a few dollars at a time. One good crack to seal up could be done by reevaluating your businesses recurring expenses. This could be a subscription you signed up for a year ago, insurance that you no longer really need, or a monthly membership fee to an organization you’re no longer involved with. Auto billing is a great way to reduce the cost of paying reoccurring expenses. But it is common that these fees can get rolled into your monthly credit card bill to the point that you no longer notice them. And little sums do add up. Go over all invoices and bills in detail and cut out anything you don’t really need. And don’t stop after looking at auto payments, review everything that isn’t providing a return on investment (ROI).

3. Negotiate with vendors
What you’ve been paying your vendors does not have to be the final word on what you continue paying. Ultimately, vendors want to stay in business too, and they’re dealing with a tough economy just as you are. Many are often willing to negotiate lower prices rather than lose a regular customer. The potential to save money, without even having to change vendors, can result in better prices on everything from office supplies to the phone bill. You certainly won’t lose anything by trying, and you may find yourself able to shave several hundred dollars off your monthly operating costs.

4. Stay on top of your invoices
One of the biggest cash flow problems for small businesses are the slow-paying customers. To speed up the process, make sure your invoicing system is working smoothly. Your invoices should be clear, easy to read, and simply state what is due and when. Make sure you’re meeting any special requirements of each customer, such as including purchase order numbers, and that your invoices are going to the right person at the right address. This may sound basic, but simple errors like putting the wrong suite number on an invoice can cause delays.

5. Enable customers to pay invoices faster
Once your invoicing system is cleaned up, look for other ways to encourage customers to pay you even faster. Depending on your industry and financial situation, this could mean offering a discount for cash payments or early payments. Encourage your customers to use e-payments. This will not only enable faster payment, but also saves processing time on your end.

6. Partner with your accountant
Sure, you have an accountant, but do you only get together at tax time? A good accountant can help shape up your business’s finances all year long. Enlist your accountant to give your company a checkup. What could be improved? Where could you cut costs, free up cash, or make more by putting profits back into the business? Check in with your accountant once a month to follow up on results, fine-tune systems, and make sure your company is on track. There is a wealth of information in your books for improved business decisions. Have your accountant help you access it and be rewarded with higher profits, better cash flow, lower expenses, reduced taxes, and more money going into your pocket.

Simplifying the Profit & Loss Statement

March 29th, 2012

You might not need to be an accountant to be successful in business, but understanding financial reports will help you understand the basics of financial management and feel comfortable using standard financial tools and metrics to monitor and appraise the performance of your business.

How a Profit & Loss Statement helps you manage your business

Financial reports distill the vast amount of daily business data your company produces and arranges it into a usable format, useful in making the best possible business decisions.

Producing regular profit and loss statements, at least quarterly or monthly, will enable you to:

1. Answer the question, “How much money am I making, if any?”

2. Compare your projected performance with actual performance

3. Compare your performance against industry benchmarks

4. Use past performance trends to form reasonable forecasts for the future

5. Show your business growth and financial health over time

6. Detect any problems regarding sales, margins and expenses within a reasonable time so adjustments may be made to recoup losses or decrease expenses

7. Provide proof of income if you need a loan or mortgage

8. Calculate your income and expenses when completing and submitting your tax return.

What is a Profit & Loss Statement?

A profit and loss statement, also know as a P&L or an Income Statement, records sales income, costs and expenses and shows business performance over a specific period of time.  Profit and loss statements:

1. Show business performance over a specific period of time

2. Show income (revenue from sales)

3. Show the costs of the goods you sell (Cost of Goods Sold) such as purchases made from suppliers for goods or raw materials

4. Shows your gross profit (income minus cost of goods sold)

5. Show operational expenses (overhead and other expenses of running your company)

6. Show net income or loss (whether a profit or loss has been made )

Creating a Profit & Loss Statement

The figures in a profit and loss account will come from a number of different sources in your business, so it’s best to organizes and categorize your day to day receipts and expenses into a Chart of Accounts which represents the income and expense categories you want to track and evaluate. This Chart of Accounts forms the core structure of your bookkeeping system, and will be the basis for your Profit and Loss Statement.

A Profit and Loss Statement will usually look something like this:

$250,000       Income
  $10,000        Less Discounts
$240,000        Equals Net Income

   $50,000       Less Cost of Sales/Cost of Goods Sold
 $190,000       Equals Gross Profit

$100,000       Less Operating Expenses
  $90,000       Equals Operating Profit

$5,000        Plus Other Income
    $3,000        Less Other Expenses
  $92,000        Equals Net Ordinary Income (Profit Before Taxes)

  $33,000        Taxes
  $59,000        Net Profit (or Net Loss)

 Accounting Software and Financial Reporting

Accounting software makes it easy for you to create different views of your data. For example, you can compare this month with last month, this year-to-date with last-year-to-date, several months in sequence, or you can convert the figures into percentages and compare them that way. All this makes it easier for you to identify trends over time.

Your goal in business is for your sales and profits to increase, and your expenses, as a percent of sales, to decrease. Look at your profit and loss statements and compare them from one period to another. Are there any sudden changes or anomalies that raise a red flag? For example, if your office expense spending suddenly rose from $100 a month to $500 for one month, you would want to look into this. Or if your staff costs on average 30% of your income and this figure suddenly goes up to 40%, again you would want to investigate.

You can also draw some deeper conclusions than just seeing that more money is coming in than before. Is the increase equivalent to, or better than, the rate of inflation? Is it the result of more sales, or is it hiding the fact that although you have charged more per sale, you actually made fewer sales? And looking ahead, is the rate of increase in line with your goals, or do you need to set a new target? These are just some of the many questions accurate reports can help you address.

Business Start-up Costs

September 12th, 2011

Understanding what it will cost to start up a new business is a major factor toward the success of every business.  Each business start-up will have unique needs. A retailer might need a storefront and staff to operate it, plus inventory, while a manufacturer might need machine shop equipment and trained staff to operate it, plus raw materials and a warehouse. If you’re starting an online business, you might be doing it at home, may not need an outside facility and will have minimal operating expenses and possibly no staff at all.

It’s best to determine the financing and borrowing needs of a new business by estimating its start-up costs when writing the business plan. Business plan writing software, the US Small Business Administration and other organizations offer start-up cost worksheets to help identify these business expenses. Or with a basic knowledge of spreadsheet software such as Excel and the following set of example cost categories, you can put a custom worksheet together yourself. 

Costs for a start-up business can be divided into these sometimes overlapping categories:

Permits and Licenses
A start-up cost estimate must include funding to cover not only the business license and Fictitious Business Name registration and publication, but also the cost of permits, zoning and possibly a zoning variance. You may also have expenses related to refitting your place of business to satisfy licensing and regulatory requirements. For example, your business may have to conform to fire safety regulations and may incur the cost of fire extinguishers, sprinklers and exit signs.

Professional Fees
Setting up a legal structure for your business (e.g. LLC, corporation, etc.), trademarks, copyrights, patents, drafting partnership and non-disclosure agreements, etc., will require attorney fees. You may also need to engage the services of an architect or engineer, and retain an accountant and/or a tax advisor. Consider that some of these professional service expenses may be ongoing.

Administrative Costs
Administrative costs include anything else you need to have on a daily basis to operate a business including express shipping and postage, and a wide range of office supplies, and other consumables.

Insurance
There is no better protection from the unforeseen than to have the full and proper insurance coverage in place. You will need liability and property insurance to protect yourself and any business assets. Some businesses also require workers’ compensation, health, life, fire, product liability and professional malpractice insurance. Check what you need for the kind of your business.

Depending on your type of business this could be a considerable expense, or maybe not.  If you are starting a typical home-based service business your renter’s or homeowner’s insurance may cover your business equipment, supplies and inventory. But it’s best to be cautious and check your policy coverage with your insurance agent before you open for business. Often a small additional fee, perhaps $50 or so, will purchase a rider for your policy that will cover such equipment as your computer, telephone and printer/copier.

Premises & Business Location
Some costs for a business location are considered one-time business plan start-up costs such as building renovations, down payments on a mortgage, construction costs and landscaping.

Other costs of having premises are monthly expenditures such as the payment of a mortgage or rent, utilities, parking, building and landscape maintenance, and office security. Also consider that you will need to buy office furniture including desks, chairs, filing cabinets, etc.

Technology Expenses
A cost effective and efficient company will leverage technology and must estimate expenses related to computer hardware and software, printers, copiers, telephones (both land lines and cell phones), PDAs, website development, optimization and maintenance, internet access, security measures, and IT consulting and training.

One-time expenditures often include the purchase and installation of computers and telecommunication equipment including networks, phones, and mobile communications gear. Monthly expenses can include equipment leasing or payments and technical support services.

Marketing, Advertising and Sales Expenses
Marketing and promotion are vital to the success of any business. All businesses should have advertising budgets based upon their business models. A marketing plan will help determine the exact costs required for a specific business model.

Advertising should be considered a monthly expense that can include the cost of Internet and print media advertising, postage for mailings, design and printing costs for promotional brochures and stationary, public relations services, event or trade show attendance or sponsorship, trade association or chamber of commerce membership fees, plus related travel and entertainment.

Employee Expenses
Many business start-ups fail to include an estimate of the owner’s salary in their business plan start-up cost estimate. Omitting this important salary can cause undue stress during the first year, when the business may not be making a profit. Business owners should include a twelve month estimate of all employee costs, including salaries, payroll withholding taxes, worker’s compensation insurance, and benefits. Including your own.

Business Product
Businesses that sell a product must consider start-up costs for such items as initial inventory, vendor deposits, raw materials, manufacturing equipment, warehousing costs, product packaging, shipping, shipping insurance, and sales tax.

Businesses that provide a service must consider costs such as travel to client sites, mobile services and printing costs. Business product costs differ based upon the business product and business sales model. Writing a business plan will help to identify the start-up costs.

Operational Expenses
Operational costs should be budgeted out monthly. Estimate costs such as telephone, mobile services, Internet access, electricity and other vital services for a year, since the loss of any of them will directly affect the success of the business. Other operational costs include on-going , attorney and other professional fees, banking fees, credit card usage fees, and possibly transportation expenses.

Factor in the Time to Get Off the Ground
One critical component of getting an accurate start-up cost estimate is to determine the length of time it’s going to take you to open your new business. It will be very different if you’re opening a restaurant versus an eBay business. No matter what your business type, take into account everything you will spend, from the moment you begin the start-up process, through the moment you make your first sale. If you need three months from the time you sign a lease to the time you can put the open-for-business sign on your retail storefront, then calculate how much money you will need for salaries, electricity, rent and so forth, during those three months.

Learn the Specific Costs for Your Type of Business
There’s a wealth of resources available to you on the Internet that you can access to understand the specific costs associated with your particular business. For starters, engage multiple social media platforms, connect with other people in your industry, and post on message boards asking for help from fellow entrepreneurs.

Check out your industry’s trade association(s). There should be active members who are going through or have successfully navigated the start-up process, and they may be happy to share tips with you. You might even get access to sample business plans and checklists for your market niche, but most importantly, you’ll find out which hidden costs to be wary of in your industry.

Take every opportunity you can to network with business owners in your industry, both online and in person. They will have the best understanding of how the costs of a typical business in your industry balance out across the above categories. With that knowledge, you’ll be able to create a reasonable cost estimate for starting a business of your own.

Above all, be realistic when calculating your start-up costs. The first attempt to list out and calculate your costs may not be complete. Continue to research, consider your options, and refine your analysis until you’re satisfied with the final number, and then take the additional step of adding a miscellaneous line item for 10% of your total budget. The fact is, you’ll spend more than you expect to get your start-up business going, and the miscellaneous category will be there to cover the inevitable unexpected costs.