Entries Tagged 'Finance' ↓

Need help dealing with the bank. Next few months will be tough. Cash flow is already tight and taxes are coming up. If I had a bigger credit line to draw on, I’d be more comfortable, but my bank says there’s no point applying.

Thoughts of the day: Pay attention when the bank tells you there’s a problem. Short on cash – do you know why? Cut out costs, then push on sales to get past breakeven. The economy is turning up, but don’t expect gifts.

Money is available for companies that can prove they’re a credit worthy risk. Banks have loosened up from the days of 2009-2010. Many banks are focused on what is their best customer. It’s worth your while to find a banker who understands your industry.

Banks look for a few things. Three big ones are collateral, profits, and a Quick Ratio. Inability to meet a bank’s standards indicates your business isn’t as strong as it should be.

What’s a Quick Ratio? It compares Current Assets / Current Liabilities. Current assets include cash, checking and savings balances, inventory and accounts receivable. Current liabilities include accounts payable and lines of credit. Banks expect you to have twice as much (200% or better) in current assets as you have in current liabilities.

What can you do to improve your lending profile? Put money into a savings account every week – start small, build up. Don’t pay down credit lines too quickly – instead term them out – that pulls all but the current year’s portion of the term loan out of Current Liabilities, thereby improving your Quick Ratio. And it gets the loan paid off. Be willing to pay taxes – it’s a demonstration that your business is profitable.

If you’re short of cash, ask why. Sales down? Costs out of line? Too much overhead? People not paying their bills? Too much spent on upgrading – facilities, equipment, etc. – in too short a period?

Take control! Don’t spend a dime more than you have to. Cut back on space, supplies, excess equipment, extra hours of work. Every dollar saved brings you closer to having a profile that the bank will appreciate.

Ready to get creative? With rising gas prices, consider telecommuting, watch your electrical usage, and make sure the office is energy efficient. Go through vendor bills with a fine tooth comb. Don’t be afraid to question things.

Make sure that you get paid every cent that you’re owed. Some customers play the game of negotiating discounts at the end of a job. Stand firm.

Cleaning up accounts receivable is like finding money. Charge interest. If older customers delay payments check their credit rating. New customers – always check their credit before extending terms. If anyone is a poor credit risk demand significant upfront deposit and final payment before you deliver, or be willing to walk away.

Send out invoices weekly, or even daily if they’re big enough. Use email instead of snail mail. Call customers to confirm receipt and get a payment date.

Raise prices. It’s time! Shift marketing dollars to internet based strategies – they’re often less costly, and much more efficient to implement. Whatever you do, don’t cut out marketing – it’s the key to future business opportunities.

Go after new sales, but be strategic. Target profitable accounts. Ask for more upfront – if you’re used to getting 10% down, ask for 25%; if you get 30% down, ask for 40%.

Having cash available will let you sleep better at night. Use cash reserves to free yourself from time wasting activities. No more time spent figuring out how to pay today’s bills. No more running around to collect payments because you can’t wait for someone to mail the check in.

Prove to the bank you’ve cleaned up your act. Ask your banker for suggestions of what they look at. Then build it for them and for yourself. If you don’t understand what they’re looking for, or don’t know how to get there, don’t give up, get help.

Looking for a good book? Making Cash Flow (Managing Your Money) by Christine Thompson-Wells.

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What’s on the horizon for 2012? It seemed to me that things were looking up, going into 2011. Then in February, things hit a wall. Clients stopped buying, other clients stopped paying, prospects stopped looking. Should I be expecting another crash in the first quarter this year?

Thoughts of the day: Your perception regarding Q1, 2011 is what a lot of folks experienced. The first quarter can always be tricky. Preparing for unexpected bumps can pay a lot of dividends.

The first quarter, 2011, started on a good note. 11 non-manufacturing industries reported growth in December, 2011. There were still delays in ordering goods, but inventories were down and suppliers were cautiously increasing prices as order backlogs grew.

The unemployment rate dropped steadily from December, 2010, falling below 9% by March, continued down in April, 2011. Companies needed more workers to help gear up production as inventories hit a new low and orders cautiously grew.

But all was not rosy as the first quarter unfolded. As we totaled up the losses of 2010 – 157 banks closed – the bad news continued – 40 more banks closed between January and April, 2011. Many banks were not lending. Some said a double dip recession was imminent. The middle class struggled, taking lower wage jobs, if they could find jobs at all. U.S. home values fell sharply in the first quarter as the number of underwater homeowners hit a new high.

February snow storms raged across 2,000 miles, from the Midwest to the Northeast, downing power lines, grounding airplanes and closing highways. The Japan earthquake of March 2011 had impending consequences, from delaying supply chain for many importers, to loss of customers for exporters. April tornado outbreaks in the Midwest disrupted business across many states.

What quietly happened in the first quarter of 2011, as it does every year, also hurt the fragile economy. By the beginning of April, companies had an extra payroll to deal with – the natural result of 13 week quarters. Not a big deal, if companies planned for it. But many companies were cash strapped and had to scramble to make the extra payroll, just as their owners were scrounging around for money to make their April 15 deadline for 2010 year end tax payments. Suddenly, it was as if cement were thrown into the pipe. Customers stopped paying, accounts receivable shot up. Orders slowed dramatically. Costs were cut in favor of making tax payments.

By May, 2011, the impact of all the first quarter stresses was showing. The unemployment rate was back up over 9%. It stayed over 9% through November, 2011.

So what’s coming this year? The unemployment rate is back down under 9%, an indication that somebody is hiring. Weather, so far, is milder than last year. Banks are lending, if companies can produce strong financial reports. Foreclosures have slowed, but have a long way to go, as pressure has increased on banks to work out solutions. Backlogs of inventory remain low, creating demand for goods all along the supply chain.

Many companies did what they could in 2011 to put reserve funds aside as their sales ticked up. March – April, 2012 will still have an extra payroll, and taxes will still be due by April 15, but the hope is that increased business activity and reserves will cushion the blow more this year.

What can you do to protect your company? Be careful to build up reserves. If your company still has loans to pay down, you’re not alone, most companies do. Don’t be in too much of a hurry to pay them off. Make sure you also build up cash for expected, and unexpected events.

March-April is right around the corner. Get an extra payroll set aside. Meet now with your accountant to get an estimate of what will be owed in taxes. Keep your eye on the ball, building relationships with profitable customers that can pay their bills and fuel your company’s future. Build a budget so you can see what’s coming.

Looking for a good book? Financial Management 101: Get a Grip on Your Business Numbers, by Angie Mohr.

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Results of an accounting study: Errors committed by employees with post- graduate degrees have losses five times greater than those with high school degrees; fraud was estimated at 6% of a typical company’s total revenue.

Finance has been handled for a long time by a partner. The job evolved as we grew. Now we’re changing things around. We have to define what is the finance role and who does it.

Top Thoughts: Figuring out who is responsible for what in finance is crucial. Not everything has to be handled by a partner or executive of the firm. Make sure that controls are in place to audit and monitor what’s going on.

Most small businesses start out with informal, unwritten or incomplete job descriptions. Often the job gets to be too big for one person. Or the person doing the job wants to move on. Make this an opportunity to better define what has to happen, and who is responsible.

Tax accounting is usually handled by an outside accountant. Preparing records for the accountant is usually handled by a bookkeeper. Routine data entry of both accounts payable (vendors bills) and accounts receivable (invoices to customers) can be handled by a bookkeeper or a clerk reporting to the bookkeeper.

Routine accounting tasks include answering questions about what’s on a bill and what’s outstanding. Verifying bills are correct takes time and initiative. Decide if customer questions about invoices will be handled by someone in accounting, or referred to customer service.

Different departments may want to be involved in negotiating prices for the materials and services they use. Some people are better at negotiating than others. Centralizing negotiations may result in better pricing, as one person or department has a more global view and hones their negotiating skills.

If the company has inventory, make sure that 2 or more people keep track. One person from accounting, one from operations match records to be sure that all inventory is accounted for regularly. A formal system for checking inventory in and out can reduce questions.

Someone needs to have responsibility for regularly preparing and analyzing reports: Profit and Loss, Balance Sheet, Cash Flow Statement, for starters. This person should be good at excel, comfortable with ratios, able to compare performance from one period to the next.

Data entry is a detailed job. It includes issues of privacy, discretion, and ability to reason through to a logical conclusion. Be sure to assign payroll to someone who can keep pay rates and personnel issues confidential.

The analysis person should like figuring out puzzles, such as how much was spent last year, and how does that compare to spending this year. This person can also be asked to put together a budget and forecast. Communication skills come into play, as budgeting includes working with all departments to gather their input and negotiate end results.

The company’s banking relationships are best handled at the owner level. Having a good relationship with the company’s bankers is crucial. Build that relationship with regular updates on where the company is, how things are going, what needs are likely to come up short and long term. Make it someone’s job to be sure the owner is well informed and prepared for every banking meeting.

Some tasks require a higher level of security and trust. Opening up client payments, entering them into the accounting system, entering credit card details, cutting checks for payments to vendors, and making deposits and withdrawals at the bank, are all high security items. Whenever there’s need for security, consider having an audit system in place.

The # 1 rule in accounting is, “respect what you inspect. Double checking includes a bookkeeper overseeing a clerk’s work. An auditor can come in monthly or quarterly, to verify all transactions.

Separate functions. For example, anyone with their hands on the keyboard, and access to the accounting system, is not allowed to participate in an audit. All bank statements and credit card statements are opened by the owner and scanned for oddball items before being going to data entry.

Make sure that everyone knows there is an audit system. Use feedback from audits to improve performance. Have the team meet regularly to discuss what else has to happen in finance.

Looking for a good book? Schaum’s Outline of Managerial Accounting, 2nd Edition.

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This year has flown by, and I’m starting to think about 2012. We went into last winter way too thin, financially. I expect 2012 expenses will go up, health care especially. Meanwhile, I want to hire a national sales person, but I’m wondering: “Where’s the money coming from to pay for this?” Any suggestions on how to plan now, so I start 2012 on a high note?

It can be especially difficult to plan, given the number of variables business owners are faced with today.  Costs are increasing. Health care is in transition. Revenue swings up and down, sometimes erratically. There’s uncertainty about where the economy is going. Opportunities are cropping up. And the cushion that many businesses had, in cash on hand and back up lines of credit, is way down.

Keep in mind that when planning for 2012, it’s all about making the business healthy. And that includes paying taxes, building reserves, paying down debt and carefully predicting cash flow.  One more thing – especially in turbulent times, take limited, calculated risks.

Many business owners go to extraordinary lengths to avoid tax payments. They run up expenses in order to lower the tax bill. Usually that results in a cash crunch the first half of the upcoming year. Money is needed elsewhere and no longer available. Business growth stalls for lack of funds.

Business owners also take profits out of the business, in the form of distributions. The profits go into personal checking and savings. In time of need, the business asks for the money back, only to find it was put to use elsewhere, and funds are no longer available.

Entrepreneurs, as a group, tend to be optimists. That includes looking on the bright side when planning cash flow. Plan instead on things going wrong. Conserve cash inside the company, as if it is the most precious resource you have – it is!

When doing year end planning, focus on reserve building as a strategy. Plan to put a third of profits into spending for growth and development. Use a third of profits to pay down debt – more slowly than you might otherwise like to do. Keep a third of profits on hand in an emergency fund.

Build a plan now of how you think 2012 will play out. Ask yourself the following questions, as if you were an outside investor. Then put your money behind the winning answers.

• What business lines will be the most profitable?
• What products or services will represent growth in 2012 – 2015?
• What can I do in the 4th quarter 2011, to set up for a great first half of 2012?
• What could go wrong in 2012, and how much could it cost me to fix those problems?
• How much do I need to put into reserves, so that I’d have 3 months of expenses on hand, in case things go wrong?
• What is the company’s ratio of current assets to current liabilities> What can I do to get the ratio well over 200%?

In 2012 it’s all about building up cash on hand, inside the business, so that your company has options. Lending couldn’t get much tighter for small businesses. Don’t expect lenders to help you out if you run short of funds. It’s all about being conservative, having a plan to self fund business growth, and proving you can do exactly that.

Keep a lid on risks. Remember that according to business guru Peter Drucker, more businesses go out of business from too much growth as opposed to too little. You can’t do everything you want to do at once, and neither can your business.

Make a list of the things that the business could spend money on. Estimate the payoff of each, after calculating for risk that it doesn’t pan out. Compare the list to available cash for investments. Build a plan to get one new idea off the ground and productive before launching the next one.

Looking for a good book? Successful Business Plan: Secrets & Strategies, by Rhonda Abrams, John Doerr.

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We can’t live on 60-90 day payments, but more and more clients delay paying. My vendors are asking me for a check right away, but I get the run around from my customers. My staff won’t push customers for payment, but they expect their paychecks on time. That’s two double standards I’d like to change.

Getting paid on time is essential. Cash flow is tighter, today, and some clients are in financial trouble. Get everyone in the company on board with collections.

Most companies are dealing with some or all of the following: greater competition, fewer quality sales, shrinking margins, increased prices for materials, labor and overhead. In the process, some companies are struggling financially, pulling their vendors into the pool with them.

Keep your company out of trouble by demanding payment sooner. Set spending limits on clients. If clients delay payment, change terms immediately to payment upfront. Don’t refer to the old days, and what a good customer this was. Just because clients could be relied on in the past, doesn’t mean they can be today.

Many companies are using up what credit they can get. Banks have reduced credit lines and lowered spending limits on credit cards. Vendors have increased interest charges and demand payment upfront. There’s less margin, as costs for insurance, gas and materials rise. Your company needs to adjust to the new reality.

Preserve cash flow by reducing accounts receivable. Increase the amount you ask for upfront, upon contract. If you accept progress payments, add another increment. Reduce the final payment to 10% or less of the total amount.

Don’t cave in to bullying. Customers who say they’re planning to go elsewhere if you don’t extend terms, may be worth losing. Check with their other suppliers to find out if they’re past due. Hold back final shipment until you have payment in hand, if you can.

Stopping work until you get paid is a great way to reduce outstanding amounts. Work customers down to 45 days past due, and then under 30. Recognize that continuing to work on something when payment is in question is potentially like working for free.

Switch away from wasting time on collecting accounts. Assign staff to call customers prior to delivery. Arrange for payment ahead of time. Email invoices and call to confirm receipt. Tell customers that terms have changed, and they’ll have to use more traditional credit sources such as their own credit lines and credit cards.

You don’t have to treat all customers equally. Focus on your best customers and the ones that have potential to be best customers in the future. Stack rank customers to identify who are the keepers and who you can afford to lose.

Score each client for profitability, ease of working together, ability to get paid without effort, and future potential. Clients that score low in one area often score low in others. Fix or get rid of the low scores.

Focus on reducing accounts receivable to zero with the riskiest accounts. If they won’t comply, suggest they go elsewhere. Call their bluff, refusing to deliver unless they give you a credit card or check. Make sure they understand you’re serious and prepared to stand your ground.

Have meetings with your staff to discuss the importance of changing how your company collects money. Point out that while it’s difficult to confront customers over money, the alternative, not getting paid, is even worse. Make collections everyone’s responsibility.

Set up teams. Put someone in charge of meeting with staff every few days to work on the most difficult accounts. Ask them to report back to you on progress.

Don’t give up. It’s a process to change behaviors with both clients and staff. Once you make changes, your company will be much healthier.

Looking for a good book? The Guide to Getting Paid: Weed Out Bad Paying Customers, Collect on Past Due Balances and Avoid Bad Debt, by Michelle Dunn.

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I’m starting to think about selling my company. What can I do in a short period of time to prepare?

Figure out what you want from the sale. Make sure the financials tell the story you want to tell. Do what you can to get the business to run without you. Decide who will most likely value what you have, and who can afford the purchase. Build a team of advisors and a back-up plan.

Start with some basic questions. Do you want out, cash in hand? Do you have a minimum amount you need to make from the sale? Do you want a job with the new company? Are you planning to do additional work in the industry, or do you want to walk away and never look back?

Can I produce reports that show a clear picture of the business, both the strengths and the weaknesses? Do the details match my story of what I’m selling, and why? Do I have a financial advisor who can talk with a potential buyer and support the selling process?

How much of the company depends on me? Why would a buyer purchase the company, if the company is just me? Who can step up to do what I do? Do the people in my company have an incentive to stick around through a sale process?

Thinking through a list of potential buyers is crucial, and goes back to your earlier questions about what you want out of the deal and what are your company’s strengths and weaknesses. You probably know as much as anyone about other players in your industry. That’s an obvious place to look.

Once you’ve gone through industry players, start to list less obvious options. Who is looking to get into the industry? Who wants clients and client relationships like the ones your company has already built up? Who is looking for proven human capital talent? What processes does your company have in place, that you’re particularly good at, and who would find those a benefit in their business?

Get your financials well organized and clear so a buyer trusts what you’re telling them. Don’t be afraid of showing your company’s weaknesses, such as too much overhead, not enough sales, too much debt, not enough reserves. Many buyers look for problems they can fix and profit on. And the problems will come to the fore when you go through due diligence, so you might as well be upfront about them.

You may or may not want to tell your team that you’re thinking of selling. On the one hand, they’ll figure out something is up sooner or later anyway. On the other hand they may get nervous and start looking for a job. You can offer key employees an incentive to stay through the sale and transition. You can also get an idea from potential sellers as to what they’re looking to buy. If they’re looking for talent, it will be important for you to do some selling to your employees on the advantages of sticking with it.

When considering buyers, look for bigger, profitable companies. You want to be sure your potential buyer has the muscle to get the deal done. They are likely to be more sophisticated, and more demanding. Don’t let those traits discourage or intimidate you.

Review your list of current advisors. Do you have an accountant and a lawyer who have experience helping their clients negotiate their way through a sale? Do you have a business broker who can help build a target list of potential buyers? Who do you trust to advise you as you go through the ups and downs finding a buyer and closing a deal?

Consider your options, as you start to go through the selling process. Find more than one potential buyer, at least a primary and a backup. If you’re not sure you’ll get what you want out of the sale financially, make a plan for how you’re going to close the gap – with the business or outside of it. Negotiate from strength because you’ve already figured out how to deal with the variable.

Looking for a good book? Sell Your Business Your Way: Getting Out, Getting Rich & Getting On With Your Life, by Rick Rickertsen.

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