Tuesday, December 30, 2014

What do small business owners worry about? Part III

Goldman Sachs 10000 Small Businesses program released a survey of its participants which revealed the top four things small business owners worry about.  We have already discussed finding and retaining good employees and financing the business so this week we will talk about developing and updating business strategy.

Every business should have a business plan completed before it starts up.  Even if bank funding isn't needed, a successful business owner will want the blueprint a plan provides.  There are software programs that can help with the preparation of a plan, there are service providers who can help with the preparation and in some areas (the Fox Valley area of Wisconsin  http://www.fvtc.edu/training-services/business-industry-services/seminars/service/small-business-entrepreneurship/e-seed-entrepreneurship-training), there is a class you can take which walks you through the preparation of a business plan.

Starting with a strong business plan will help a small business owner get off on the right foot.  The next challenge is to keep the plan relevant by updating it as needed.  A business plan should be reviewed at least once a year and more often during the first few years.  The plan was the owner and advisors best estimation as to what would happen and will never be 100% accurate.  The key is to compare the actual results to the forecasted results (the pro-forma financials which were part of the business plan) and determine what caused the difference.  Using that information will allow the owner to create the budget for the next period and also determine if the underlying strategy of the company is working.  Was the actual customer base what the marketing plan forecast?  Did the sales come in as quickly as anticipated?  Were the expenses what the business expected?

Small business owners are often challenged to find enough time in the day to get all their tasks done.  Reviewing the business plan and updating it is crucial to the success of the company so we recommend setting a date on the calendar for this task to insure that it gets completed.

Wednesday, December 10, 2014

What do small business owners worry about? Part II

Last week we talked about the top four things small business owners worry about according to Goldman Sachs 10,000 Small Businesses program.  The biggest concern is finding customers which we discussed in the first article.

This week we will discuss the second most pressing concern which is financing the business.  Getting lending for a start-up can be very difficult and financing for an on-going business can be tricky as well.  What does a bank need to be able to fund a start-up?

The traditional things a bank looks at when making lending decisions are cash flow, collateral and character.  Cash flow to a banker means the business will have enough money to make the loan payments or pay back draws on a line of credit.  Collateral means the business has some assets which the bank can sell if the loan cannot be repaid.  Character means the business owner and staff have sufficient experience to make the business successful.

What many entrepreneurs don't realize is that bankers also look at the business owners themselves.  Lenders want the reassurance that if the business doesn't succeed, they can go to the business owner to get repaid.  Entrepreneurs looking to fund a start-up will be successful in obtaining financing if they have a good personal credit history and some personal funds to put into the business.  People with poor credit history and no savings to put into the business will not be able to get a loan.

The key to ongoing financing for a business is to develop a relationship with your lender.  Make sure you keep the bank aware of what is going on in the business, even if it is bad news.  Lenders have extensive experience and may have ideas to help a business owner get through a difficult period.  Another important piece is to be able to provide your lender with current, accurate financial statements.

Getting funding for a new business and continuing to be able to finance a small business are tricky tasks, but having a sound financial background and developing a good relationship with a banker can make the job easier.

Next week we will discuss business strategy and how small business owners can reduce their worry about developing it.

Wednesday, December 3, 2014

What do small business owners worry about?

Goldman Sachs has a program for entrepreneurs called 10,000 Small Businesses.  Babson College recently published a report on the program and the following were the top four challenges reported by participants:

  1. Finding and keeping customers (30%)
  2. Financing the business (21%)
  3. Developing and updating business strategy (16%)
  4. Finding and keeping good employees (15%)
The National Small Business Association did a survey of business owners in 2013 and found similar results.  What does this mean?  Today, we will tackle #1.

To succeed, entrepreneurs need to really understand who their customers are and they need to be able to communicate the true value of their product/service to these customers.  This means knowing customers be their exact demographics and as much as possible, by name.  This means being able to tell them what your business offers that others do not. 

How does a small business do this?  By planning!  Putting together a comprehensive business plan including a detailed marketing plan is something many burgeoning entrepreneurs resist.  They resist because they lack the skills and/or patience to complete the plan themselves.  They resist because they don't want to pay someone who does have the skills and patience to do it for them.  Owners who skip the planning will ultimately fail.

Next week, we will discuss how to finance a new business.

Tuesday, November 25, 2014

How to create a successful partnership

Beth and I are very fortunate in that we have a very successful partnership.  It is successful financially and personally.  Financial success is easy to measure: we are both making the amount of money we want/need.  Personal is a little trickier. I define personal success as a supportive and respectful relationship.  We help each other when things get tough and we celebrate the victories.  We don't criticize each other when we make mistakes, instead we help each other forgive ourselves.

Much of this is due to our approach to life being similar, but some of it is due to our structure and operating agreement.  We have seen several instances where business partnerships didn't work out and often it is because the work wasn't put in before the papers were signed.

Entrepreneurs tend to be go-getters and don't like to take the time to develop plans and paperwork.  Putting the time into making sure individuals are compatible is crucial to the success of the partnership.  It can be hard to get along when things are going well, especially for individuals who like to be in control.  It is nearly impossible when things are not going well.  This is when the operating agreement comes into play.  Partners need to think through how they will solve problems and disagreements before they start the business.  If they can't agree on how to do this before the business launches, they certainly won't be able to when they encounter difficulties.  Any every business will encounter difficulties.

We had a blog article in early 2013 which detailed what kind of questions should be asked and answered when creating an operating agreement.  If you are looking to start a business or you are in one and don't have an operating agreement, take a look and get started!


Tuesday, November 11, 2014

Another business fails due to poor planning

We lost another popular business in our area and I assume it is due to a lack of planning.  The business had a loyal following and ran smoothly so they decided to expand.  The original location of the expansion didn't work out, so they moved.  That location also had difficulties and the owners were unable to manage the increased staff and hours.  Service was poor at the new location and they quickly ran into cash flow issues.

As a result, the business had numerous dissatisfied customers and had to close.  The bad publicity will make it difficult for the owners to start up again even if they can get the working capital to do so on a smaller scale. This could have been avoided if the owners had taken the time to really research the location of their expanded business and determined if they had the time to manage both locations.  There are many entrepreneurs who think they can do it all and when forced to actually map out the amount of time each task takes and the amount of time they actually have available, realize that they must delegate.

The community is saddened by the loss of the business, the owners are in trouble financially and the employees are out of a job.  Planning is important!

Wednesday, October 22, 2014

How paperwork can save you time and money!

We have had a couple of clients where we stepped in blindly as their previous, in-house accountant left unexpectedly.  We found in both cases that we were operating blindly as those previous accountants had left very little behind to guide us. We found no contact lists, no standard operating procedures, very little paperwork.  We were fortunate to have a list of logons and passwords for one client and had the use of an excellent IT person at the other, otherwise we had to start from scratch.

As a result, each spent a great deal more for our services than they would have if there had been a binder.  Such a binder should contain key contact people (customers, vendors), key accounts (bank accounts, investments, credit cards, loans) and the contact people for the key accounts.  There should be a listing of all key logons/user names/user IDs as well as passwords.  Obviously, this needs to be locked up for security reasons.  Another important section would have important dates-when are bills due, what is paid automatically and what needs to be processed for payment.

Think of the peace of mind that will result if such a binder exists.  It will take some work to create it and keeping in updated will be important.  It can save a business time and money to establish it so get started today!

Tuesday, October 14, 2014

Staying in good graces for Sales tax

So you have determined that you have nexus in several states. What do you need to do to remain in compliance?

The first thing that you need to do is to register in that state for a sellers permit. Some states have a special permit for out of state companies.

Secondly, you need to have your programs set up to calculate the correct tax rate on the sale. Sales tax is a destination tax. It gets charged based on the destination that the product is shipped to, not on the billing address of the customer. A business, then, needs to set up their ecommerce website and their accounting system to correctly charge and account for the destination sales tax. Sales tax needs to be charged on product or taxable services going to any state where your company has sales tax nexus. The more advanced programs use geolocation technology which determines exactly where the business is located instead of just zip codes to determine the correct tax rate. This is especially important for states which also have local sales tax filing requirements.

Thirdly, if there are any reasons why you are not required to charge the customer sales tax, then you need to have the correct Exemption Certificates on file. Each state has different requirements for what paperwork is needed as well as for how often the paperwork needs to be updated. You need to be sure that you know what those requirements are and have a system in place to remain compliant in case of an audit. Noncompliance fines are steep!

Finally, be sure to note the timing of sales tax return filings for each state that you have nexus in. Some will be monthly, some quarterly, others annual. Timely filings will prevent late fees and interest charges.

Sales tax compliance has become an overwhelming task for small businesses with all of the recent changes in legislation. There are some fantastic resources that we can recommend to assist you with staying in compliance.

Monday, October 6, 2014

What you don't know about Sales tax can hurt you

Many small business owners launch their business or branch off into a new line of business with only a limited knowledge of how their activities affect sales tax. It has always been a challenge to understand the sales tax codes of your own state. However, the days of only worrying about your own state’s sales tax are gone. There are activities that are common business practice which may make you liable to register and collect sales tax in multiple states. What are the questions that you should be asking? Following are just a few:

Are you selling a product or a service? If a service, is it a taxable service in your state? Is it taxable when combined with selling a product?

Are you selling from only a brick and mortar location or do you also have a web presence?

Do you sell only within one state or do you sell in multiple states?

Are you a manufacturer and/or distributor? Do you sell wholesale or retail?

Are there circumstances in which you do not have to collect sales tax? Do you understand those circumstances? Do you have the correct exemption certificates on file?

What type of sales activities do you do outside of your own state?

Do you attend trade shows in other states?

Do you have employees or outside reps who market your product in other states?

Do you do any affiliate marketing?

Do you maintain inventory or warehouse space in other states?

Do you install and/or repair equipment that you sell in other states?

These are just some of the many questions that need to be answered in order to determine which states you have created nexus in. The challenge is that the laws of each state differ. Be sure you investigate this yourself or get outside help before you find yourself on the hook with Sales Tax issues.

Thursday, September 25, 2014

How did E&S Entrepreneur Advisors come to be?

I was reading another blog recently tying to get ideas for this blog.  Any of you who write a blog know that the hardest part is finding fresh ideas!  This blogger recommended telling your story as a source of content so here we go!

Beth and I have been friends since 2000 when our sons became friends in kindergarten.  Those little boys are now sophomores in college and are still best friends.  As the years passed, we realized that we had more than the boys in common and found ourselves picking each others brains for solutions to our individual client issues.  While we were both small business accounting consultants, our backgrounds were different so we had different skill sets.

Beth has a finance degree from Notre Dame and has worked as a corporate financial analyst for several Fortune 500 companies as well as an operations manager for Kimberly Clark.  I worked for a public accounting firm doing audits as well as income taxes and then worked as an internal auditor for a bank holding company.

We both took some time off to raise our kids and when it was time to go back to work full time, we didn't want the restrictions of corporate life.  We both had been doing some consulting part-time and saw the need for someone to help the small businesses in our area with managing their business.  We do not prepare income taxes because neither of us wanted to and there are plenty of quality tax accountants in the area.  We do help with employees, payroll taxes, sales taxes and all thing accounting other than income taxes.  We write business plans, help secure the funding and help the new owner navigate the start-up.

This is how E&S Entrepreneur Advisors came to be.  We still enjoy working together and working with our clients.

Wednesday, September 10, 2014

How do you increase revenue for your small business?

You have been reading about how to improve your small business by working on it instead of in it so you are setting goals for next year.  Great-make sure they are specific enough to guide you properly.  You decide to improve your business by increasing sales by $100,000.  That is specific enough, so the next question is how are you going to do this?

You can increase sales by increasing the price of the products or services you sell or you can do it by increasing the number you sell or a combination of both.  If you are going to do it by selling more, you need to know how many you need to sell to achieve the $100,000 increase you are seeking.  How do you achieve that?

To know how many you need to sell, you need to know how what your average sale is: how much does your average customer purchase from you?  Once you determine how many sales you need to achieve the revenue growth you desire, you need to know how many proposals you need to provide to achieve the sales you need.  If proposals aren't relevant to your business, you need to know how many people need to come into the store before one buys from you.  We call this your close rate as no business sells to every person they meet or who come into the store.

So to improve the profitability of your small business, set a specific goal and determine how you will achieve this goal.  If you follow the process described above, you can tell your friends and family you are tracking metrics and using goal setting to improve your bottom line.  Sounds impressive, doesn't it?  All you had to do is track some numbers and make some calculations-not that complicated!

Wednesday, September 3, 2014

Start your tax planning now!

As summer comes to a close and we head into September it is time to begin the year end tax preparations. September 15 is the deadline for the 3rd quarter estimated taxes. This is a good time to take a look at how your business is doing so far and how you expect it to do through the end of the year. I like to compare this year’s results versus last year’s results as well as versus our forecast for this year.

Once you have done the analysis for your own business purposes, it is a good idea to meet with your tax accountant, especially if your results are significantly different from the prior year and from forecast. You may need to adjust your third and fourth quarter estimated tax payments. You will want to make sure that you are taking advantage of any tax breaks available to you. You will also want to make sure that you are aware of any changes in tax laws that relate to you.

Often we see owners of S-Corps, particularly in the first year of the S-Corp, have not had enough withholding from payroll and will need to run a special “bonus” payroll with the bulk of the bonus going to taxes. Most of my clients would prefer to adjust their payroll for the last 4 months of the year instead of being surprised with this December 31 “bonus”. From the tax accountant perspective they prevent having additional fees and penalties, but from a business cash flow perspective this can be a cash flow problem that you were not expecting.

Don’t sit back and wait for the tax accountant to make suggestions to you. Take a proactive role and ask for their advice and suggestions.

Wednesday, August 20, 2014

How to communicate in the modern world with grace and kindness

There are so many more ways to communicate than when we were kids.  With the growth of non face-to-face modes, we see more problems with people being unkind and/or unprofessional.  People will text or email things in a manner they would never use if they were talking to recipient on the phone or in person.  You see the same thing with the comments people leave on Facebook posts, in Tweets or on other social media sites.  The world is becoming a harsher, angrier place and some of it is due to the way we communicate.

We operate under the rule that we will never send anything out that we wouldn't be willing to say directly to someone's face.  We also take a moment to re-read anything received which appears to be offensive and consider whether we are misinterpreting the message.  It is easy to assume a nasty tone where perhaps none was meant.  This may mean having someone we trust read an email or text message and see what they think of the words.  This may mean holding off on a response until you can be sure it will not be charged with emotion.

As a result, we can assure ourselves that our communications, whether verbal or written, will be calm and professional at all times. It may take more effort, but we think it pays off.  In today's stressful world, it pays to take the time to not kill the messenger!

Wednesday, August 13, 2014

Planning for your exit

Just about everyone will retire from work at some point in time.  For entrepreneurs and small business owners, it takes a little more planning than for employees.  As part of your ongoing strategic planning, it is helpful to occasionally consider when and how you will wrap up your business life.

As you consider when you want to retire, think about whether you will be able to sell your business.  If you want to sell it, who will be the mostly likely buyer, an employee, a colleague or a competitor?

If the exit plan is to sell the business, then planning is needed to prepare the business for sale.  Good financial records will be needed to help prove the value of the business.  Good customer records are also helpful for the same reason.

If you don't think someone will purchase the business and you plan on shutting it down instead, then it is considerate to let your employees, customers and vendors know well in advance so they can make plans as well.

Even if you hope to sell your business when you wish to retire, it is not a good idea to have this be your sole source of retirement income.  It is always a sound idea to save during your working life and have any sale proceeds be a bonus.  We have seen business owners who have been unable to retire because no one was interested in buying the business and they didn't have adequate savings.  Sometimes this is due to the economy as many people may be unable to get lending to allow them to purchase an existing business.  Sometimes this is due to poor record keeping by the business owner so potential buyers are uncertain as to the profitability.  Sometimes this is due to the nature of the business, as it is really successful due to the owner so a buyer would not be able to purchase the company and run it with the same level of success.

Planning for the future is important for anyone, but small business owners need to take the additional time to figure out how it will happen for them and their company.

Tuesday, July 29, 2014

Risk management planning for small business owners

What will happen to your business if something happens to you?  Many small business owners don't think about what will happen if they get injured or sick.  Planning for this can insure the survival of the business.

You want to create a notebook or folder or spreadsheet which would allow someone to step in and run your business for you.  Assume you will be unable to communicate with this person so they will need all the information which is in your head!

Start keeping a record of all the task you, the owner, do every day.  Note what you did, how you did it and how often it has to be done.  Have a comprehensive list of all contacts (suppliers, service providers, customers) and their contact information (names, addresses, phone numbers).  Have a comprehensive list of all your logins, user names and passwords.  Make sure this list is locked up or password protected.  Make sure someone knows how to access this list though or it will do you no good!  Make there is a list of all your bank accounts, loan and credit card numbers and other details.

Now that you have the information ready, you have to find someone who will use it.  Consider who would be willing and able to step in for you.  Is there a family member or friend who has the time and skills needed to fill in for you?  Perhaps you will need more than one person to replace you.  Make sure you do some training once that person has agreed to be your backup.  Show him/her the lists and procedures and walk them through your most important tasks.  They need to know how to pay your bills, deposit your money and communicate with your key contacts to let them know what is happening with your business.

Taking the time to develop a back up plan can be the difference between life and death for your small business.

Thursday, July 24, 2014

Ongoing planning

Last week we talked about the importance of planning before you start a business.  This week we will talk about planning on an ongoing basis.

Large corporations have personnel in charge of strategy and planning.  Anyone who has worked for such an entity remembers long range planning sessions or meetings held with consultants to facilitate strategic planning.  Small businesses have different needs and issues, but they still need to have planning as part of their routine.

We meet once a year to review where we are and how we got here and where we want to go.  It is amazing how a business can change during a year without the principals being aware of it!  We review who are customers are, how our processes are working and what areas need improvement.  As a partnership, we talk about our relationship and how that is working.  We have a very detailed operating agreement and as such, we have very times where we have disagreements.  When we do find our approaches to an issue differ, we fall back on the processes in our operating agreement and we have always found a way to compromise.

It is important for any business to understand who their biggest customers are and who they would like to have as customers.  It is also helpful to understand the margins for each type of customer or service or business segment so you can focus on the most profitable areas when you work on the marketing plan.

It is also important to know who the key suppliers or service providers are and to have backups available if needed.  Understanding your supply chain is vital to the survival of any business.

If your business has employees, you will want to have regular performance reviews (at least annual) and to plan for future hiring.  Having job descriptions and required skill sets ready makes it easier and quicker to replace employees if necessary.  Having an understanding of the work/tasks done by the owners of a small business is also important so that work may be delegated to employees as the company grows.

Owners of small businesses are almost always busy, but taking the time to plan and work on your business is vital to the success of your company!

Friday, July 18, 2014

The importance of planning in a small business

Not everyone is a planner, but if you are a business owner, you must learn to be one.  You cannot run a small business successfully flying by the seat of your pants.  If a business requires bank funding to start up, they must have a business plan to obtain the funding.  There are service providers (including us) who can help write the plan but it is important to use that plan for more than getting a bank loan.

A good business plan is like a good blueprint for a building.  It lays out the foundation, shows where everything should be and how the building should be constructed.  A business plan lays out what kind of working capital the company will need for the first three years, how the business will be managed and operated and what the marketing strategy will be.

Now matter how much time and research you put into a business plan, things will never go entirely according to plan, so it is good to revise the plan frequently during the first three years.  Give some thought as to why things have differed and whether the plan needs to be adjusted or if the execution needs to be improved.

I come from a family of planners so it comes naturally to me.  Any tips on how to become a good planner if you were not born that way?

Wednesday, July 2, 2014

Improving your cash flow: Part VI

We have been discussing ways to manage and improve cash flow for small business owners.  Accounts Receivable need to be collected, inventory needs to be managed, accounts payable should be extended as far as possible, loan terms should be considered carefully and the cash needs of the owner should be budgeted for.  What is left?  Taxes.

Income taxes are handled differently for small business owners than for employees.  If the business is structured as an LLC, the owner(s) isn't eligible for a true paycheck and thus income taxes are not withheld from the money that is taken from the business.  Small business owners must send in estimated tax payments quarterly to cover their anticipated income tax.

These estimated tax payments do not show up on the P&L (assuming the owner pulls the money from the business) but are draws which are part of the equity portion of the Balance Sheet.  Cash flow is reduced by the payment of the estimated taxes and thus is part of our discussion on how to manage cash flow for a small business.  Some people find it helpful to transfer money into a savings account monthly so it is available when it is time to make the quarterly payments to the government.  The biggest part of cash flow management is making sure the money is available for all the different needs of the business: paying for inventory, paying employees, paying rent and other bills, paying taxes and providing income for the owner(s).

We hope this series has been helpful.

Wednesday, June 25, 2014

Improving your cash flow: Part V

We have discussed ways to improve your cash flow: managing accounts receivable, controlling inventory, watching accounts payable and thinking about debt services.  Today we will discuss the impact that owner draws can have on cash flow.

Many small businesses are set up as sole proprietorship's and/or single member LLC's.  This type of entity requires the owner to get paid via owner or member draws instead of paychecks.  A paycheck would show up as an expense on the Profit & Loss while a member/owner draw shows up as a reduction in equity on the Balance Sheet.  Having the draw show up on the Balance Sheet rather than the Profit & Loss confuses many people as many focus solely on the Profit & Loss when judging the success of the business.  They will see a profit for the period they are analyzing, but no money in the bank and wonder why.  One factor may be those owner draws.

We have seen cases where the business is successful enough to support itself, but not enough to support the owner and his/her family. This may require changes on a personal level if the business is unable to improve it's cash flow.  Unfortunately, we have seen cases where the business was a success on a small level, but not enough to support the owner's lifestyle which resulted in the failure of the business.

We will finish up next week with a discussion of taxes and how they can impact cash flow.

Monday, June 16, 2014

Improving your cash flow: Part IV

We have talked about how to improve your business' cash flow by being aware of the components (accounts receivable, inventory, accounts payable) and how they impact the amount of money available to a company.  This week we will discuss debt service and how that can effect cash flow.

Debt service means the payments you make on loans, both the interest portion and the principal, if applicable.  The interest portion appears on the profit and loss statement, but the portion reducing the debt (principal) shows up on the balance sheet as a small loan balance.  As such, if your budget is solely a P&L based budget, you may not have the full loan payments reflected.  This can have a major impact on the business if you have significant debt.  Another aspect of debt service is the need to pay down or rest a line of credit.  A lender will want a borrower to occasionally pay the loan down to zero or close to it.  A line of credit is designed to help cash flow in cases where large purchases are needed (raw materials or other types of inventory) and the length of time before the items are sold and the proceeds collected is significant enough to cause the bank balance to dip too low.  The idea is to draw on the line (transfer the money into checking) to pay for the purchases and then to pay it back when the sales proceeds are collected.  Too often, businesses do not keep in mind the need to pay the line back down.  This not only causes concern by the lender, it can also cause problems down the road for the business as there may not be sufficient money left to borrow on the line for the next large purchases.

Debt is necessary for many business owners, but properly managing it is an important part of managing cash flow.  Next week we will talk about owner's draws and how they effect cash flow.

Wednesday, June 11, 2014

Improving your cash flow: Part III

We are discussing how managing your cash flow is crucial to the success of a business. In this discussion, we have dealt with accounts receivable management and inventory control.  This week, we will talk about the impact accounts payable can have on cash flow.

One of the major keys to cash flow is to insure that the terms of your accounts receivable mirror the terms of your accounts payable.  You do not want to be paying your vendors faster than you are receiving payment from your customers unless you have a line of credit to ease the timing difference.  Developing a good relationship with key suppliers can be very helpful in this process. Negotiating for extended terms can be done if you are a valued customer.  Keeping track of the business you do with vendors can be an asset when conducting these negotiations.

If you have the chance to get an early payment discount from a vendor, be careful to consider all your cash flow needs before accepting.  The discount is helpful only if you still have enough money to pay rent or make payroll.

Tuesday, June 3, 2014

Improving your cash flow: Part II

Last time we talked about improving cash flow by controlling accounts receivable so this week we will tackle inventory control.

The goal with inventory management is to maintain a sufficient supply of inventory to satisfy customer demand without tying up company cash flow by needlessly storing excess product.  This can only be done effectively by tracking metrics such as on-time delivery rates for your vendors/suppliers and inventory turnover rates.  Businesses should be aware of how fast products are being sold and how reliable their suppliers are.  The more reliable the supplier, the less excess inventory you need to have on hand as you can be comfortable that the product will arrive when you need it.

Another facet of inventory management is determining the proper number and composition of your inventory.  You want enough product on the shelves to be interesting to customers, but not so much that is overwhelms them.  You also don't want your cash flow tied up in merchandise that isn't selling so you need to track inventory turnover rates to determine what is selling and what is not.  Consider discounting the slow moving items regularly to get them off your shelves and the money into your bank.

Maintaining good relationships with your suppliers is an additional way to improve inventory management.  You want to insure that you have the lowest lead times, smallest minimum order quantities and largest volume discounts you can get.  Don't be afraid to negotiate for this things!  Consider implementing a supplier managed inventory program or try to get consignment stocking (supplier owns the inventory and stores it at your business).  Not all suppliers are capable or willing to participate in programs like this, but you don't know if you don't ask.

Remember that every dollar of inventory sitting on a shelf is a dollar not available for spending on payroll, owner draws or advertising, etc.!  Next time, we will talk about accounts payable and their impact on cash flow.

Thursday, May 22, 2014

Improving your cash flow: part I

There is a popular saying in business: Cash is King.  Having adequate cash flow is crucial and many a business fails due to a lack of cash.  What drives cash flow?  Accounts receivable, inventory, accounts payable and debt payments are the main drivers.  We will talk about accounts receivable management this week and address the others in subsequent weeks.

Managing accounts receivable includes setting the terms you offer your clients/customers as well as enforcing those terms.  You should consider what terms your suppliers give you when determining the length of time you offer your customers.  If you have to pay for your materials in 30 days, you should think twice about offering your clients 60 days.  Of course, industry standards should be considered as well.

Once you have set your terms, you need to make sure customers are aware of them.  If you sign contracts, the terms need to be in the contract.  They should also be on all of your invoices and sales receipts.  It is also good to mention them verbally to new customers to make sure they really understand how soon you will be expecting payment.

Finally, you need to enforce your terms.  There are certain businesses who won't pay until you call them.  It is not that they aren't aware of your terms, it is just that they are short on cash themselves so they only pay the vendors who call and ask for payment.  If you set terms of 15 days, you should be calling or emailing on day 16 if you have not received payment. It doesn't have to be a contentious exchange.  I find that the simple "I haven't received your check yet.  Do you think the mail has lost it?" works quite well.  You usually get a quick apology as they forgot to mail the check.  Sometimes, they really did forget and sometimes they were waiting for you to ask.  If they promise to mail it out today, then make note and follow up again if you don't receive the payment as expected.

If you continue to experience delays or difficulties collecting, you should consider whether you want to continue doing business with the customer.  Don't hesitate to go to small claims court or use other legal methods to collect if the outstanding bill is large enough.

No one enjoys making collection calls, but it is part of doing business.  Collecting accounts receivable on time is very important to the success of a business.  Next week, we discuss inventory management.

Thursday, May 15, 2014

Do I need to have accounting skills?

I love accounting which is a good thing since it is my chosen profession!  Many people do not and many business owners resist gaining any knowledge of the subject.  We often speculate why so many small business owners do not know how to read financial statements and do not want to learn how.  I suspect some subscribe to the ignorance is bliss theory.  No one is truly ignorant and I think many owners suffer sleepless nights because they know something is wrong even though they are trying to remain ignorant.

I read an interesting article in the NY Times recently about how a lack of skills in accounting is hurting society in general.  I have included the link below and it make a compelling argument for educating society and how other countries have done so successfully for hundreds of years.  Some high schools require some financial education-our local school district requires a class called Personal Financial Management.  This is a good start but more is needed.  The University of Wisconsin School of Business requires all students to take a minimum of two accounting classes regardless of the major and several other schools within the University require some accounting classes in order to graduate as well.  DePauw University is completely overhauling its Music Conservatory using an entrepreneurial base which requires two accounting classes for all music majors (much to many students dismay!).  No Accounting Skills?

We encourage all of our clients to gain as much of an understanding of their financials as possible.  They have us and their accounting software programs to handle the nitty gritty accounting, but they still need to understand basic concepts like profit margins and cash flow.  What do you think about requiring all citizens to have a better accounting education?

Tuesday, May 6, 2014

Turning your business around Part IV: Do you need outside help?

If your business has not achieved the level of success you were hoping for, you may turn to outside help for the answers.  A consultant, coach or advisor may bring the expertise you need to improve your operations, your procedures or your bottom line.  Before you sign any contracts, a few things to consider.

First, you will want to make sure you have found the right person or business to help you.  Get references to make sure there is a track record of success in assisting business turnarounds.  You will also want to verify that they have worked with similar types of businesses or similar problems/issues.

Second, make sure you understand what the full cost of the service will be.  A contract is a must so that everything is spelled out in terms of cost and timing.

Finally, you must be committed to making changes.  The consultant can give you all the answers you need to turn things around, but if you aren't willing to implement the changes, you are wasting your money.  It is hard for most entrepreneurs to let go of the reins, but they need to from time to time!

Monday, April 28, 2014

How to turn your business around Part III: Do you have the right personnel?

Another element which can hold a business back is not having the right personnel.  Every business has to sell and if the owner is unable or unwilling to sell, then a sales person must be hired.  The same is true for the bookkeeping/accounting.  It has to be done so the question is who is going to do the work?  The financial arena is one which is often neglected and is the frequent target of cutbacks.  While this area is not a profit generator, having accurate numbers is crucial for managing the business so the cost of maintaining the books for the company must be built into the budget. The decision as to whether to outsource certain tasks can be easier to make if the owner can see he/she is able to free up time for income generating tasks by hiring people to tackle non-income generating tasks.  

An important part of hiring the right personnel is to create an detailed job description with the tasks to be performed and the skills needed to perform the tasks.  Take time to determine what kind of personality the owner works best with is also important, especially if the business is a small one.  You don't want to have clashing personalities with your only employee!  If this is going to be your first hire, think about which family member you work the best with and what personality traits that individual has.  Also think about which people you have the most frequent conflicts with and determine what personality traits that person has.  

If this is your first hire, make sure you get some expert assistance in becoming an employer.  There are so many rules and regulations and paperwork involved so you will want help to get it right.  

Don't let you fear of being an employer hold your business back.  Do your homework, find the right person and get help with the paperwork and move your business to the next level of success.

Wednesday, April 16, 2014

How to turn your business around - Part II: Setting Goals

A successful turnaround plan can take a business from where you are to where you want to be.  To get to where you want to be, you need to determine what is working and what is not.  The ability to read financial statements is crucial to this task.  Every expense account needs to be reviewed and the spending levels questioned.  Can you save money by shopping around for a different vendor?  Have you done enough business with a vendor to ask for better terms or pricing? 
The key to the goal setting is to make them specific so having a budget is helpful at this stage as once you set your goals for spending levels, you can compare actual spending to your budget (goals.)   This comparison of actual to budget helps hold the business owner and staff accountable. 
You also want the goals to be reasonable, enough of a change to be a stretch but not so much that it is not achievable.  Cutting costs mindlessly does little good to a business as some spending is essential to the existence of the business.  Eliminating all marketing is not a good idea.  Paying for marketing and then not tracking the success of the various elements is not a good idea.  A good marketing plan requires the tracking of metrics to determine the success of each campaign.  Asking new customers how they came to the business is vital.  A business is throwing money away if it doesn’t track how customers find them or select them to buy from.
Revenue goals are also important and again should be specific and achievable.  Saying that you are going to double sales in the next year sounds far-fetched.  Saying you are going to increase sales 5% next month by initiating more cold calls to extend your sales area is much more reasonable. The key is to have specific steps to follow to achieve the sales growth.

Turning around a business successfully can be done with proper analysis and goal setting which includes the preparation of a budget and the determination of specific metrics to track, the comparing of actual results to the budget and the numbers of other metrics to determine the progress of the plan.

Friday, April 11, 2014

How to turn your business around

Turning a business around is a little like making a New Year's Resolution to get in shape.  You can't just make the resolution and expect to lose weight and build muscles.  You need a plan to achieve the goal and the drive to follow the plan.

The same is true for turning your business around.  If you're not achieving the sales and profits you hoped for, you need to determine what changes are needed to get the success your business should reap.  The first thing you need to do is learn to read your financials. Understanding where your money is being spent and where you can cut back is very important.

One area which is frequently overlooked by non-accountants is cash flow.  Understanding when the money comes into a business and when it goes out is even more important than how it occurs.  If your customers are paying you in 60 days, but you are paying your suppliers in 30 days, you are going to run out of money unless you have a line of credit or enough capital to keep the business afloat.

Hiring a consultant can be useful to provide an impartial, fresh perspective on your business.  One key to  the success of this relationship, is the owner's ability to take advise and implement it.  If you don't want to make the hard changes, don't waste your money on a consultant.

Experts on achieving New Year's resolutions are big on writing down your goals.  The same is true for business goals.  Write down specific goals for your business and make sure you also determine the steps needed to achieve the goals. We will get more specific next week.

Wednesday, April 2, 2014

How much detail do you need in your accounting system?

I can't tell you how often I hear people talk about how easy accounting is or should be.  The invention of accounting software certainly has improved the process.  It is not, however as easy as people think it is or should be.  What takes time and thought and experience is deciding what level of detail you need and how to best achieve this level of detail. More and more businesses use outside systems for sales, purchasing and payroll.  Full details on each of these areas reside in the systems so the question is what level of detail do you need in your accounting system?  If the systems don't integrate, you don't want to have to enter the information twice, once in the outside sales or invoicing system and again in the accounting program.  While it is nice when the systems do integrate, we often find that they don't so we have to figure out the best procedure to transfer the information.

I find that if the detail is in the outside system (your invoicing program has all the customer names, invoice details, contact information) then there is often no need to duplicate this level of detail in the accounting program.  What you want in your accounting program is the financial details-what were your sales in dollars, how much did you spend on advertising, what was your net profit for the month, what does your cash flow look like?  You can get this information without all the customer details or payroll details in the accounting program.

We are often called into a business when the process has become bogged down by trying to keep up with the work flow.  Working through where all the information comes from and creating a process to get the pertinent details into the accounting program while eliminating as much duplication of effort takes time, but it pays off almost immediately.  Doing research upfront into the various systems you will be using to run your business and making sure they play well together is always a good idea.

Tuesday, March 18, 2014

Mistakes entrepreneurs often make

This is the fourth in our series about mistakes entrepreneurs make.  We have talked about the perils of not having a business plan, the problems partners run into if they don't have a detailed, written operating agreement and how a business can suffer from not having good accounting right from the start.  This week we will discuss how poor communication skills can hold a business back.

Prompt, courteous and accurate communication is important whether you are dealing with a customer, a vendor, a colleague or an employee.  We have had numerous issues come up due to poor communication from clients.  It is very important to let your accountant know immediately if you receive correspondence from the federal government (IRS) or the state.  Filing requirement change frequently and penalties can occur if you are notified that you must file your payroll or sales taxes monthly instead of quarterly and you don't do so.  Your accountant can't do this if you don't let them know about the change.

It is also important to deal with customers quickly and politely.  While the customer isn't always right, you need to consider all aspects of the situation before you respond.  Even if they are wrong or being unreasonable, you must consider the downside to responding negatively.  It is usually better to try and compromise if possible to maintain goodwill.  If the cost of compromise is too high, at least maintain your positive tone and don't respond with a nasty tone.

The same is true with vendors.  If you have cash flow issues, it is important to be upfront with everyone.  Don't make promises you can't keep.  If you negotiate for extended terms, make sure you can meet the expectations.

When dealing with employees, make sure you have all reviews and discussions documented whenever possible.  It is a good practice to have both the employee and the supervisor sign the review form to document that the discussion with the possible repercussions took place.  This can be helpful if ending an employment relationship becomes litigious.

If you cannot respond to an email from someone in a reasonable period of time, make sure you at least acknowledge the email and let the sender know when to expect a detailed reply.

Good communication skills can help a business run smoother and more profitably.  Small business owners are busy and usually wear multiple hats, but they still need to take the time to be good communicators.

Wednesday, March 12, 2014

Mistakes entrepreneurs make: Part III

We get the majority of inquiries into our services in the first quarter of the year.  This is when people realize that it is time to file income taxes and that they don't have the business information organized for tax preparation.  So we get the call asking for help corralling all the receipts and deposit slips and other pieces of paper so the taxes can be filed.

A funny thing happens whenever we do this: the business owner is shocked at how much he/she spent on things.  "I spent that much on office supplies?", "We spent that much on packaging materials?!", "I couldn't have spent that much on meals during the year!".

You just can't run a business without financial statements.  Knowing how much money you have in the bank is not the same thing as knowing how much you are spending on various elements in your business.  Trying to run a business by looking at a checkbook balance just doesn't cut it.  The time and money you put into establishing proper bookkeeping/accounting will be worth it.  You can see right away that all the pretty office supplies are eating into the amount you have available for advertising and you quit visiting Office Depot.  If you don't have a P&L to study, all you know is that you don't have enough money to place that radio ad you wanted to have.  You don't know why you don't have the money or how you can cut back to save the money.

Cash flow is crucial at all stages of a business's life, but never more so than during start-up.  That is why an entrepreneur should establish accounting procedures before launching the business so they know right away if they are deviating from the plan and if changes or cuts need to be made.  So do your accounting-you will get the answers you need to run your business and you will be ready come tax time.

Wednesday, March 5, 2014

Mistakes entrepreneurs make Part II

As we discussed last week, there are several common mistakes entrepreneurs make with their businesses.  Not having a solid business plan is one.  If the business is owned by partners, not having a detailed operating agreement is another.

Beth and I have a very detailed operating agreement.  We were friends before we became business partners and we wanted to remain friends no matter what happened with E & S Entrepreneur Advisors LLC.  We worked on this for over a week and it is in writing.

It is amazing how often you can think you are in agreement when you are talking about a subject, and then when you see it in writing, you do have differences to work through.  We recommend having each member of the business answer a series of questions designed to create the operating agreement and then compare answers.  There will always be areas of disagreement and then there must be compromise if the partnership is to work.  If the members can't come to a compromise, they should not open a business together.

This is true with family members as well.  Spouses, parents, siblings and other family relationships can be strained when running a business together.  Setting up a formal operating agreement can help.  We recommend designating an arbitrator at the outset to help resolve disagreements.  This should be someone everyone agrees on and is someone everyone feels is unbiased and will have the best interested of the business in mind.  This is only one facet of the operating agreement but it is a key one to getting decisions made while maintaining harmony.

Other things to agree upon are the duties of each member, compensation of each member, financial responsibilities of each member and how the business will be dissolved should the need arise.

We have seen several instances where a business didn't have a detailed operating agreement and in every case, the business failed or the relationship failed.

Monday, February 24, 2014

Mistakes that entrepreneurs make

I was asked to give a presentation recently and one of the topics was what are the most common mistakes entrepreneurs make?  There are a number of them and I will address them over the next few weeks.

The most common and most dangerous mistake people make is not planning properly.  This can manifest itself in a number of ways.  The entrepreneur may not put enough time into the business plan.  A business will need a plan if it is getting a bank loan but if the start up is self-funded, many owners skip this step.  All start-ups need a business plan and neglecting to create one often results in failure.

The process of writing a business plan forces the entrepreneur to deal with all the potential problems the start up may face.  Who will their customers be?  How will they find them?  How long will it take to reach break even?  How much money will the business need before it is self-supporting (at break even)?

All these questions are answered in a well crafted business plan.  The marketing portion will address all the customer issues and the pro-forma financial statements (budgets) will address the break even and capital needs (money needed to support the business until it reaches break even).  These are important issues and they need to be answered even if a bank loan isn't needed.  The entrepreneur may find that a bank loan is needed when completing the financial projections for the start-up.  Business owners often underestimate the costs of starting up a business and overestimate how quickly they will generate a profit.

If you are considering launching a new business, take the time to plan properly and create a business plan.  If you have already started your business, it isn't too late to write a business plan.  There are software programs to help you do this, SCORE can help you do this or you can hire someone to assist.  Just make sure that you do your planning so you don't fail do to a failure to plan.

Tuesday, February 11, 2014

You don't have to be an expert to be an employer, just ask for help

Today's generation has no idea what the world was like before the invention of the internet.  You know, when you had to go to the library to look things up?  Before you could google the subject and get then answer from Wikepedia?  Hopefully the easy access to information will train this generation that there is no shame in not knowing the answer to a question.

I was foolish enough to think this was expected of me when I left college, that my fine education should be given me the answers to all the questions which were put to me in the working world.  This created a great deal of stress for me in the early years as I struggled to figure things out on my own and to hide my presumed "lack of knowledge" from my supervisors. Thankfully, I am now older and wiser and have learned that saying "I don't know the answer to that, I will have to look it up" is not shameful.

Business owners need to learn this as well.  They obviously have an area of expertise which is what led them to open the business.  They are not expected to be experts in other areas, such as accounting, marketing, IT or human resources.  Trying; to master all these areas on your own can sink many a new business.  Knowing when to ask for help is the sign of a savvy business owner.

Becoming an employer for the first time is a complicated matter and guidance is always recommended.  Making sure you have completed and filed the proper paperwork, you are paying employees within labor laws and you are paying payroll taxes and filing forms correctly and promptly is tricky.  Failing to do so can cause a business to fail.  Being an employer is very different from being an employee so find an expert in your area to help you establish payroll policies, hire and train your employees, process payroll and file and pay payroll taxes.

We have seen far to many cases where a business owner just hires someone and writes them a check for wages without calculating the payroll taxes.  Or, they consider an employee to be an independent contractor when they should be an employee.  This link provides some clarification to the independent contractor vs. employee question.contractor or employee?

Wednesday, February 5, 2014

How a year end review with your accountant can save you money

Most small business owners are careful to watch where they are spending money and avoiding accounting bills is common.  We like to sit down with our clients at the end of the year and review their financial statements with them.  We go through each account on their Balance Sheet to verify the accuracy and then we talk about the Profit & Loss and where/how they can make improvements.

I was meeting with one client recently and as we worked our way through the Balance Sheet, I went to the Accounts Receivable Aging report to see if it agreed to the Balance Sheet.  It did, but most of the accounts were over 90 days old.  I asked my client about it and was told that the invoices had been paid so they weren't outstanding. They were still new to the accounting system they were using and hadn't followed the process accurately.  I verified that the income for the invoices had been properly recorded and removed the invoices in question.  I explained that the invoices had doubled up the revenue for the business so their net income was $25000 higher than it should be.  That meant they could have paid taxes on $25000.

We continued the review and determined that there was additional revenue which wasn't accurate as they had put some personal money into the business checking account and had classified it as income instead of owner contribution or a loan.  We corrected that as well which reduced their income by another several thousand dollars.

We accomplished all of this in an hour which means she paid me a relatively modest sum of money to save thousands of dollars in taxes.  Tax accountants usually don't have the time or ability to drill into the details when they are preparing tax returns so these errors likely would not have been detected.

This client isn't likely to repeat this error, but we are all humans and having a second set of eyes double check your accounting efforts is always a good idea.

Wednesday, January 15, 2014

When should you fire a client?

When is it appropriate to fire a customer?  It is a question most small business owners face and it isn't an easy one.  There are a few factors to consider: how much revenue does the customer bring in?  How much of the business' time do they take?  If you have this information, you can calculate the hourly rate the customer merits which you can then compare to other customers.  If the rates very significantly (the customer takes up much more time per dollar of sales than your typical customer) that may justify letting them go.

Another factor to consider is what revenue this client may generate for the business in the future.  If the client is apt to grow and need additional services down the road, it may be worth dealing with a lower ROI in the present.  If their need for your services is likely to remain the same, you may find it best to end the relationship.

One further thing to consider is the customer's influence in the community.  A business doesn't want to be held hostage, but it may pay to be practical and stay on the good side of a community benefactor.  Consider the goodwill this customer may bring as a marketing cost to lessen the sting!

There was an interesting article on calculating the lifetime cost of a customer.  Check out this article:  http://www.entrepreneur.com/article/224153

If you do decide to end a relationship with a client, try to make it as pleasant as possible. Don't make things personal and don't get emotional.  Do end things in person if possible and offer to help with the transition if you are a service provider.

Tuesday, January 7, 2014

What do you need to do to close your books at the end of the year?

January is drawing to a close and you should have enough information to close the books for 2013. We use a checklist for our clients to make sure everything has been entered and all accounts reconciled or verified. A brief checklist looks like this:

1. Verify that all vendor bills are posted by the end of the year
2. Invoice any customers for any work done in 2013
3. Review Accounts Receivable and determine if any need to be sent to a collection agency or written off as uncollectible
4. Review all loan payments to verify the correct allocation between interest and principal.
5. Reconcile
    a. Bank accounts
    b. Credit cards
    c. Accounts Receivable (compare the Balance sheet amount to the aging report)
    d. Accounts Payable (compare the Balance sheet amount to the aging report)
6. Create a list of 1099 vendors and calculate the amount due them.
7. File your 1099s
8. Adjust any prepaid items, such as insurance
9. Record any accruals for the year end for any other expenses which aren't included in Accounts        Payable or the credit card
10. Calculate and record depreciation and amortization expense as needed
11. Review asset and expense accounts to insure that all fixed assets have been recorded on the books
12. Prepare year-end reports: W2, W3, 940, 941, 1096, 1099, WT-6, WT-7, UCT101 and remit to the   appropriate parties
13. Review your financial statements for 2013: Profit & Loss, Balance Sheet, A/R aging, A/P aging,   Budget to Actual
14. Enter the budget for 2014 into your accounting program
15. Review your data backup plan for adequacy and clean up your paper files
16. Schedule your appointment with your tax preparer

Thursday, January 2, 2014

Happy New Year!

It is the beginning of 2014 and we hope 2013 was a good year for all of you.  It was a good year for both of us even though we had a lot of changes to deal with.  We had children finishing school (two high school graduates and one college) and children starting school (two college freshmen and one starting graduate school) and one applying to med schools.  Susan is learning to be an empty-nester and Beth is getting ready to have her youngest driving.

Business was good for E&S Entrepreneur Advisors, LLC and the business did not experience many changes, which was nice!  We have new clients, of course, but no major changes for us to deal with.  We are gearing up for our busiest month, January, when we help everyone close their books, file 1099s, file payroll forms and get ready for tax preparation.  We usually get a lot of calls from potential clients this time of year as business owners realize that they are not ready for tax time and will need help getting ready.  Our hope is to have all of our clients ready for taxes, both from an information and document standpoint and from a mental standpoint.  We like to help our clients avoid surprises like large tax payments due!

This is the traditional time to make resolutions for the new year.  We always set goals for ourselves as individuals and goals for servicing our clients.  What are your goals for the new year?