As we work with small businesses and entrepreneurs we are noticing that many view the preparation of Financial Statements as being mainly for the use of their lenders and the taxing authorities. While we realize that those two groups do need accurate and timely financial statements, small businesses should be taking the lead from large corporations and using their financial statements to manage their daily business. We would encourage small business owners to focus on Financial Management as well.
What is Financial Management? It is the process of recording what money is coming in and going out of your business and using that information to generate reports which help you to make good decisions in running your business. Information from financial management is used by both internal and external decision makers.
Six Ways Financial Management Helps Your Business Succeed:
1. Cash Flow: Clearly understand how much money (cash) comes into and goes out of your business and WHEN it flows into and out of your business.
2. Manage Customers and Sales: Know who your customers are, what they purchase, how much they purchase, and when they pay. Use this data to compare your actual Accounts Receivable Collection timeline to the terms that you are offering your customers.
3. Manage Purchases and Production: Know who your vendors are; what and how much you purchase from them and at what cost, and what your payment terms are with your vendors (when you have to pay them). If you are manufacturing a product, know how much you are producing in a given time period and what it costs to produce your product.
4. Insight and Decision Making: Make informed strategic decisions regarding pricing your product for profitability, marketing, employment, growth, and financing.
5. Funding: Complete and accurate financial statements are needed for finding funding through banks and outside investors.
6. Compliance: Report your company’s income, expenses, and payroll accurately to the IRS and your state government.
We are developing a Webinar to teach small business owners how to use their financial statement for financial management. Stay tuned.
Friday, July 24, 2009
Friday, July 17, 2009
5 Things a Small Business Owner can do Today to Survive this Economic Downturn and Thrive in the Rebound
There is a feeling of frustration and despair for many small business owners as they are trying to hang on and keep their business afloat during this economic downturn. But all does not have to be doom and gloom. There are some concrete things that you can do now that will improve your situation and position your company to thrive when the economy turns around.
1. Improve your cash flow situation. The main things that drive cash flow are Accounts Receivable, Accounts Payable, and Inventory. First let’s look at Accounts Receivable. In theory, Receivables are created as soon as you sell your product or service. In reality, Receivables are not created until you send out an invoice. So that is the place to start. Look at how you bill your customers and make sure that you are sending out your invoices immediately! One of the main reasons that small businesses fail is that they fail to invoice their customers. This is particularly true of the creative types…you know who you are.
Secondly, reassess the terms that you are offering to your customers. To do this you will have to look at the terms that your vendors are offering to you. Matching Accounts Receivable collections to Accounts Payable timing means that if you have to pay your vendors in 30 days, then you need to be sure that you are collecting from your customers in 30 days.
The third step is to actually collect the Receivable in a timely manner. The day that a Receivable is past due, you will need to pick up the phone and call your customer to ask for the payment. When we say the day that a Receivable is past due, we do mean that day. Not next week, or pretty soon a 30 day receivable is being collected in 45 or 60 and your cash flow is now drying up. Put a procedure in place for this task. The phone will be more effective than an e-mail or a letter which is easily ignored. Often just politely reminding them that the payment is due and asking exactly when they expect to send it is all that is needed. If your customers know that you expect payment in 30 days, pretty soon they will pay you in 30 days without you needing to remind them. Remember, everyone is struggling with their cash flow, so this area is definitely the case of the squeaky wheel gets the money.
Next let’s look at what you can do with your Accounts Payable to improve your cash flow. While it is tempting for the accountant in me to say just stop spending, that is really not practical. In truth, you do have to spend some money to make money. If you shrink your spending too severely on such items as marketing, for example, you may shrink yourself right out of business. The most important technique for Accounts Payable is to not pay them early unless there is a really good discount and you have the cash flow to take advantage of it. If your bookkeeper or accountant only cuts checks once or twice a month, hold off mailing them until they are actually due. An old trick is to write the date due on the envelope where the stamp will go.
The third component to cash flow is Inventory. Now is the time to really look at what is selling and what is not. Whatever inventory system you use, print as detailed reports as you can and look at how long items are sitting around in your business. Mark down the slow moving items and get them out of there. Make sure that you are reordering only the items that are really moving well. Money tied up in slow moving inventory is money that cannot be used to purchase new items. Focus on just-in-time inventory which means that you are only ordering the minimum amount that you need to stock your business in the short-term and work with vendors to get a quick turnaround time for reorders. If you need to fill space, think out of the box and consider rearranging items for a new look, bringing in consignment items from hungry vendors, or working with other retailers to display some of their merchandise in your facility.
2. Analyze your operations for efficiency. Look at what every employee is doing and make sure that there is no duplication of effort. Review job descriptions (or write them if you do not currently have any). Make a flow chart of your process to see what tasks are being done by whom. Follow a process from beginning to end to verify that it is being completed in the simplest way by the fewest people while still having enough separation of duties to protect your business from theft or embezzlement. Streamline. Make sure that there is a reason for every task that everyone is doing and that the reason is not just that that is the way it has always been done. Try to maximize income-producing tasks. Cross-train your employees so that you can move personnel around, reduce overtime, and protect your business from employee absences. Get rid of dead weight. Nobody can afford to keep employees who are not doing their best possible work and carrying their weight, especially in a bad economy. Improving your operations when times are tough will set you up to prosper when times get better.
3. Revisit your business plan. Make sure that you understand your market in today’s economic environment. What are people buying right now? How are people spending now? Is your market growing or shrinking? Where do you fit in to your total market? What is your niche or competitive edge? Is it still a competitive edge? Who is your competition? How are they doing in today’s environment? Who are your target customers? With cash at a premium, it is vitally important that your marketing efforts reach your target customers.
4. Start using your financial information to manage your business instead of just saving the data for your tax preparer’s use at the end of the year. We call this focusing on Managerial Accounting versus Tax Accounting. The information you need to implement the steps outlined above to improve your cash flow will come from using your financial statements. Keep up with your bookkeeping daily. Understand what concrete data you need to help you make your business decisions. Get help now to set up your system to be able to pull out that information quickly and efficiently. Have solid numbers at your fingertips. If you do not know how to read and use your financial reports, hire someone to teach you. Your financial system can help you manage your business on a daily basis if you understand it and use it.
5. Look to the future. What are the trends in your industry? Read, read, read! Don’t just keep doing the same thing over and over in hopes of hanging on. Instead, plan for the future. Be a trendsetter, constantly evolving. React quickly. Be forward thinking. Life is constant motion and those who go with the flow not only survive, they thrive.
1. Improve your cash flow situation. The main things that drive cash flow are Accounts Receivable, Accounts Payable, and Inventory. First let’s look at Accounts Receivable. In theory, Receivables are created as soon as you sell your product or service. In reality, Receivables are not created until you send out an invoice. So that is the place to start. Look at how you bill your customers and make sure that you are sending out your invoices immediately! One of the main reasons that small businesses fail is that they fail to invoice their customers. This is particularly true of the creative types…you know who you are.
Secondly, reassess the terms that you are offering to your customers. To do this you will have to look at the terms that your vendors are offering to you. Matching Accounts Receivable collections to Accounts Payable timing means that if you have to pay your vendors in 30 days, then you need to be sure that you are collecting from your customers in 30 days.
The third step is to actually collect the Receivable in a timely manner. The day that a Receivable is past due, you will need to pick up the phone and call your customer to ask for the payment. When we say the day that a Receivable is past due, we do mean that day. Not next week, or pretty soon a 30 day receivable is being collected in 45 or 60 and your cash flow is now drying up. Put a procedure in place for this task. The phone will be more effective than an e-mail or a letter which is easily ignored. Often just politely reminding them that the payment is due and asking exactly when they expect to send it is all that is needed. If your customers know that you expect payment in 30 days, pretty soon they will pay you in 30 days without you needing to remind them. Remember, everyone is struggling with their cash flow, so this area is definitely the case of the squeaky wheel gets the money.
Next let’s look at what you can do with your Accounts Payable to improve your cash flow. While it is tempting for the accountant in me to say just stop spending, that is really not practical. In truth, you do have to spend some money to make money. If you shrink your spending too severely on such items as marketing, for example, you may shrink yourself right out of business. The most important technique for Accounts Payable is to not pay them early unless there is a really good discount and you have the cash flow to take advantage of it. If your bookkeeper or accountant only cuts checks once or twice a month, hold off mailing them until they are actually due. An old trick is to write the date due on the envelope where the stamp will go.
The third component to cash flow is Inventory. Now is the time to really look at what is selling and what is not. Whatever inventory system you use, print as detailed reports as you can and look at how long items are sitting around in your business. Mark down the slow moving items and get them out of there. Make sure that you are reordering only the items that are really moving well. Money tied up in slow moving inventory is money that cannot be used to purchase new items. Focus on just-in-time inventory which means that you are only ordering the minimum amount that you need to stock your business in the short-term and work with vendors to get a quick turnaround time for reorders. If you need to fill space, think out of the box and consider rearranging items for a new look, bringing in consignment items from hungry vendors, or working with other retailers to display some of their merchandise in your facility.
2. Analyze your operations for efficiency. Look at what every employee is doing and make sure that there is no duplication of effort. Review job descriptions (or write them if you do not currently have any). Make a flow chart of your process to see what tasks are being done by whom. Follow a process from beginning to end to verify that it is being completed in the simplest way by the fewest people while still having enough separation of duties to protect your business from theft or embezzlement. Streamline. Make sure that there is a reason for every task that everyone is doing and that the reason is not just that that is the way it has always been done. Try to maximize income-producing tasks. Cross-train your employees so that you can move personnel around, reduce overtime, and protect your business from employee absences. Get rid of dead weight. Nobody can afford to keep employees who are not doing their best possible work and carrying their weight, especially in a bad economy. Improving your operations when times are tough will set you up to prosper when times get better.
3. Revisit your business plan. Make sure that you understand your market in today’s economic environment. What are people buying right now? How are people spending now? Is your market growing or shrinking? Where do you fit in to your total market? What is your niche or competitive edge? Is it still a competitive edge? Who is your competition? How are they doing in today’s environment? Who are your target customers? With cash at a premium, it is vitally important that your marketing efforts reach your target customers.
4. Start using your financial information to manage your business instead of just saving the data for your tax preparer’s use at the end of the year. We call this focusing on Managerial Accounting versus Tax Accounting. The information you need to implement the steps outlined above to improve your cash flow will come from using your financial statements. Keep up with your bookkeeping daily. Understand what concrete data you need to help you make your business decisions. Get help now to set up your system to be able to pull out that information quickly and efficiently. Have solid numbers at your fingertips. If you do not know how to read and use your financial reports, hire someone to teach you. Your financial system can help you manage your business on a daily basis if you understand it and use it.
5. Look to the future. What are the trends in your industry? Read, read, read! Don’t just keep doing the same thing over and over in hopes of hanging on. Instead, plan for the future. Be a trendsetter, constantly evolving. React quickly. Be forward thinking. Life is constant motion and those who go with the flow not only survive, they thrive.
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