Keeping the Nest Egg Intact


I don’t want to save money and then spend it to get through our slow months. Every year it feels like we give back all our profits when it gets quiet. Help!

THOUGHTS OF THE DAY: Savings are essential. So is fiscal discipline. Know what you can and cannot afford to do. As the business grows, be careful not to increase volatility. Consider getting into complementary business.

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Good Accounting Practices Must Be a Top Priority

Office staff doesn’t know enough about our accounting system, or accounting in general. The accounting department says they’re overwhelmed. If anyone in that department is out sick, they get really behind. Space is very limited in accounting, and they’re dealing with a lot of interruptions. We could be doing a better job with the numbers side of the business. Any suggestions?

Thoughts of the day: Pay attention when accounting says they’re overwhelmed, as their performance is essential to a healthy business. Putting accounting in an area where they can’t be easily disturbed is a really good idea. Look for opportunities to involve people from around the company in accounting functions. The more your people understand what makes the numbers work, the more they can help ensure a profitable year.


What’s My Sweat Equity Worth?

Starting to think about selling the business and wondering what it might be worth. My family and I have invested a lot of time, energy and hard work building our business. We’re still a few years away from selling out. But if something were to happen to me and we had to get out quickly, or if a good offer came along, I’d want to know what the business is worth. Suggestions?

Thoughts of the Day: There are several ways to get a ballpark value. Working backwards from what you need is always a good idea if you have the time left to do so. Get an estimate of value now so you know what gaps you have to fill. Have a rapid action plan ready in case of emergency.

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Where Did All the Money Go?

Last year didn’t feel like we were making that much money. We were grossing a lot of money but have a lot of debts to pay off. And our bank account is really low – a lot lower than I’m used to. I didn’t see this coming. How do I fix this?

Thoughts of the day: Building up cash can be a real challenge. The profits that show up in a profit and loss report get distributed to pay for many things. Building a budget for both the profit and loss report and the balance sheet can help. Getting a good handle on costs that are variable and ones that are fixed is essential for predicting what will happen in the future. Prioritizing savings and getting debt-free will help the long-term picture.

In order to build up cash on hand, the company needs to make a profit — which means that more money comes into the company than goes out. That means keeping a lid on spending and planning to pay taxes on profits. For every dollar you want to put into savings or use to pay off debts, you need to make about $1.33, to allow for federal, state and local taxes on profits. Said another way, for every $1 of profit, only two-thirds will be available to put toward savings and debt repayment.

There is an annual rhythm to spending that most business owners don’t think about when planning spending from year to year and quarter to quarter. Businesses often use up year-end profits to buy things they might need in the coming year, in order to save on taxes. Other businesses focus on building up cash between January and April to pay taxes on the previous year’s profits. As businesses move back and forth from a spending cycle to a savings cycle, many industries are much busier in the fourth quarter than the first quarter. That means a steady ramp-up in sales during a year followed by a drop in volume the beginning of the next year. If your business is geared up for the fourth quarter and not ready for a drop in volume in the first quarter, profits could drop through the floor.

Whatever profits the company generates during the year, it pays to be aware of how many thing can drain the coffers: taxes, savings, paying off debts, advance spending to ramp up for growth in the coming year, increased money sitting in accounts receivable as the business grows, vendors who tighten up terms in down markets, increased costs of materials and services as the economy expands and, of course, paying shareholders distributions rewards. What looks like a great year of paper profits can very quickly turn into a negative cash year.

Reports indicate that most small businesses lack a budget, even though most business owners admit that a budget is an important tool for managing a well-run business. Going further, research shows that having and using a budget is a significant success/failure determinant.

If the business does have a budget, the focus is usually on building one for the profit and loss statement. Remember to also build budgets for the balance sheet, setting goals for savings, debt repayment, need for credit lines and payments to shareholders, as well as one for each major project anticipated in the upcoming year.

When budgeting for the profit and loss statement, separate out variable expenses — those that are likely to go up when sales go up, or drop when sales fall. Use the cost-of-goods-sold category to isolate these costs and figure out what percent of sales is used up to cover cost of goods sold. This exercise will help you to understand how costs are likely to increase in a growth cycle.

It may take a while to build up cash and pay off debts. Don’t give up working toward that objective. Having cash on hand and being able to keep profits in the company, will create a significantly brighter future for you and your business.

Looking for a good book? Try “Managing Cash Flow: An Operational Focus” by Rob Reider and Peter Heyler


When to Hire and When to Pay Off Debts

I want to hire, but I get pushback because of cost. We do have a lot of outstanding bills to pay. If we owe people money we can’t hire until our debts are paid, versus we should hire where we’re weak so we can get to the next level. It’s looking at hiring as an expense versus an investment. Question is, can we get a return on the investment?

Thoughts of the Day: Today’s businesses are highly dependent on people. Know which areas will get you a payoff, and where to make do until there’s more profit to work with. Think about reorganizing the company’s financials to free up funds. Make sure you have a realistic plan to work with.

The majority of companies today are service companies rather than manufacturing companies. That means that hiring people can be directly tied to expansion. Take on more work, need more people to do the work. If you don’t hire ahead of need you end up with untrained people making mistakes, costing the company profits. Mass hiring isn’t going to solve the problem. Some departments may need help. Some can wait.

Collections help won’t be needed until you’re well into your busy season. Try to eliminate some of the collections demands by asking sales and project managers to complete paperwork accurately along the way. Eliminate the need for collections later on…Ask someone to send out invoices to clients as soon as work is completed and call to confirm receipt and payment date.

Are you getting enough sales? Would another sales person help generate more sales more quickly? What’s the ramp up time from hiring, to generating new business? Focus on quick payoff hiring in sales, where you can cut the lead time by adding someone with existing contacts and by focusing on sales with short lead times. do you need to invest in marketing to support lead generation? That can be farmed out, usually for less.

Pay attention to your operations staff. Can they handle the present workload efficiently? What about when things pick up. Increase productivity by investing in training when things are slow. Look for opportunities to automate with low cost systems.
Buy your company time to recover by looking at repositioning your existing debt. Is your credit line big enough? Consider terming out the credit line into longer term loans, giving the company more time to pay it down.

Long term, build up savings and consider investing in a building to house the business. Real estate can be a great asset, especially for a service based company. Banks will be more willing to work with you if there are assets they can touch.

Paying off debt can be tricky. It can also be tricky trying to increase sales and generate enough profit to pay the bills. Keep in mind that as sales increase, cash flow usually dries up, as you spend money to pay for the work that has to be done before you get around to collecting payments from clients.

Know how much work your company can afford to take on, and try to cap the amount of work you agree to do in your busiest months. More strain on the system will most likely result in less profits. Give customers incentives to work with you in quiet periods, and look for additional business activities that are in demand in your weakest months.

Make sure promises to hand out raises and bonuses are linked to growth in profits. As the job market tightens, people are going to be looking around and you don’t want to lose good people. But you also can’t make the problem worse by spending money you don’t have.

The solution about getting through lean times comes from bits and pieces. No silver bullets. Having a plan, and being able to see if that plan is working will help. Try using a budget to pay out how you think things will go. If you don’t like what the budget is saying, fix it now, before you get into the headaches for real.

Looking for a good book? Budgeting: Setting up a Budget and Making It Work, by Leonard Campbell.