Monthly Archives: February 2017

Getting Your Small Business Debt Free

Debt is a necessary part of running a small business. A business loan, line of credit or a business credit card can help your company hire new employees, purchase equipment and finance growth. But too much debt can stifle cash flowand put your business at risk. And the less you owe, the more you have to reinvest.

The average U.S. small-business owner has $195,000 of debt, according to a 2016 study by Experian.

Small Business Debt Management Tips

Here are five steps to digging your business out of debt.

1. Take Inventory of Your Debt

Sort all of your debts by interest rate and monthly payment. This includes payments on business loans, lines of credit and business credit cards as well as outstanding payments due to vendors.

This process can help you prioritize which debts to tackle first. Some experts recommend starting with the highest-interest-rate debt.

New small-business owners should aim to have all of their debt repaid within their companies’ first 12 months to lower the risk of bankruptcy, says Winnie Sun, founding partner of Sun Group Wealth Partners in Irvine, California, which provides financial planning for businesses.

2. Boost Sales

Once you have a debt management plan, you can think about ways to boost your sales. Here are a few ideas:

  • Reward loyal customers. A loyalty program can increase customer satisfactionand retention: About 82 percent of people said they were more likely to shop at a store that offers a loyalty program, according to a 2014 study by Technology Advice, a tech services firm.
  • Get active on social media. Sun advises engaging with customers on social media. Respond quickly to comments, ask for input, and pay attention to your company’s Yelp reviews: 84 percent of people trust online reviews as much as personal recommendations, according to a 2016 survey by marketing company BrightLocal.
  • Consider raising prices. With the right strategy — such as offering a volume discount on large orders — you can do this without losing customers. Volume discounts can help your business stay competitive, according to the Harvard Business Review.

3. Cut Costs

Ideally, boosting sales brings in enough revenue to tackle your debt. But if your expenses are running a bit too high, here are three ways to cut them:

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  • Sell off equipment, office supplies and other items that you don’t use often. Buy used equipment or lease if necessary.
  • Downsize to a smaller office with lower rent and utility costs, consider a co-working space that doesn’t require a long-term lease, or relocate into a home office.
  • Split costs with other companies. “Look for other people who are running similar businesses and consider sharing resources. Share employees, internet services,” Sun says.

4. Refinance High-cost Debt

The Federal Reserve raised interest rates in March and has signaled two more rate hikes in 2017. These increase the cost of variable-rate debt, including credit card balances and lines of credit.

If you can’t afford to repay debts in full anytime soon, consider debt consolidation or refinancing, especially if you have strong credit.

With refinancing, you’d take out a lower-interest loan to repay the original loan. With consolidation, you’d combine several loans into one new loan.

“If you can change the loan from variable to fixed, and then pay it down quickly, then that would be ideal,” Sun says.

Business credit card debt can also be refinanced or consolidated via a balance transfer to a new card with a 0 percent interest promo period; watch out for fees and aim to pay it off in full before the 0 percent period is up.

All of these options let you lock in a lower, fixed interest rate and decrease your payments.

5. Shorten Payment Terms with Clients

Maybe your business has clients on a long-term payment plan. Or perhaps they consistently pay late. In either case, it might be time to revise payment terms.

For example, give new clients 30-day — rather than 90-day — payment terms. Offering an early-payment discount or charging a late-payment penalty can also be effective strategies for collecting on unpaid invoices.

Need Small Business Financing?

NerdWallet has created a comparison tool of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness, market scope and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business.

Managing Small Business Financing

When you own your own business, you are often so preoccupied with the day to day operations that you rarely have time to manage your own money. Small business leaders do a great job wearing multiple hats at work, but it is very common for them to drop the ball when it comes to managing their affairs.

Small business owners are also drivers of immense economic value in the United States. The Bureau of Labor Statistics found that small firms and startups were responsible for the creation of three million jobs in a single year. Despite that impressive jobs statistic, according to the National Federation of Independent Business (NFIB), only 39 percent of small businesses make a profit in their lifetime. That means it is vital for the owners of those businesses to plan for the future and manage their finances to prepare for any interruptions in profit.

This is just as true for the American population as a whole. Studies show that 50 percent of Americans have less than a month’s salary saved for a rainy day. If you own a business that number might sound all too familiar. Personal savings often get funneled into the company to support new initiatives or cover costs.

Many business owners tend to engage with accountants and financial advisors for asset planning, while partnering with lawyers on legal matters, though in today’s increasingly complex business climate a combination of these partners may be ideal. Jeffrey David Katz, of law firm JDKatz, advises, “Clients should be vigilant in reviewing their current and future plans with their counsel and financial advisor. Current and former planning techniques may already be out of date, and plans should be amended as appropriate.”

Tips for Managing Small Business Finances

Below are some insights from industry professionals to help you get started on a more sound long-term financial strategy, and to help you understand what partners you can take.

Find the Experts

Unless you are an accounting whiz, you probably pay someone else to do all of the books for your business. This kind of division of labor is necessary for efficiency and quality, yet people rarely take the same approach for their own money. Having a team of experts on your side is the best way to secure sound financial advice.

Since wealth management is a complex field, your dream team of partners should include financial advisors, lawyers, real estate experts, and as many other verticals as needed to advise on the many aspects of your portfolio. Whatever you decide works best for your needs, be sure to research the companies you plan to partner with to ensure they are credible experts.

Have a Strong Tax Strategy

It may seem like a no-brainer, but for many newer business owners, the tax code is a daunting set of rules that leads to nothing but audits and financial woe. It does not have to be that way, however. Financial writer Darla Mercado details the reality of personal tax planning, “In a perfect world, entrepreneurs would pay their estimated state and federal taxes, including Social Security and Medicare levies, on a quarterly basis. In reality, it’s easy to overlook these payments, especially if your cash flow is hard to predict.”

Again you will want to find experts, specifically in tax law, to help you navigate the complexities of owning your own business. Recent political discourse has opened up a lot of conversations about tax policy, but at this point, it is still unclear as to how tax law will change in the coming year. Stay close to qualified experts in tax policy so you can plan your contributions throughout the year.

Plan Your Legacy

Katz explains how the regulatory climate is increasing the importance of effective estate planning. “Various proposals are currently working their way around Capitol Hill, and this is an evolving area of estate planning, which individuals should be aware. In short, these proposals could increase the taxes paid by many Americans, transforming the estate tax into an income tax.”

Additionally, Katz shares how “recent changes in tax law allow trusts to hold IRAs, and defer distributions to the beneficiaries over their life expectancies instead of over the compressed five-year period.” While you may not benefit directly from planning out your estate, you can have peace of mind knowing that you have left accounts in good order and in such a way that they will continue to be useful and provide for surviving family.

For business leaders, financial management is often just another responsibility to add to a growing list. In order to stay on top of it and plan better for the future, it helps to rely on the expertise of informed and credible parties that can help you find the strategy that would best for you.

Avoid Cash Flow Problems at Your Small Business

Inadequate cash flow can cripple a small business. In fact, research shows that the insufficient management of cash flow can be pinned on as much as 82 percent of small business and start-up failure.

If you run a small business and are experiencing problems with cash flow, take a look at the advice of Fred Parrish.

Parrish  is founder and chief executive officer of The Profit Experts and creator of The Profit Beacon, a new app that provides predictive analytics to help businesses make timely and smart decisions. Parrish is also author of “The Profit Mentality”.

How to Avoid Cash Flow Problems

Parrish, aka “America’s Small Business CFO”, provided Small Business Trends the following tips on avoiding cash flow problems at your small business.

Do Appropriate Planning, Constantly

According to Parrish, the real key to avoiding a cash flow crisis is to do the appropriate planning on a constant basis.

“To accomplish this, you as the business owner/manager must look at the profit and loss (P&L) and any other non-operational items (or circumstances) that specifically affect cash flow,” Parrish advises.

Take the Appropriate Steps to Manage Profit and Loss

Small business owners must take the appropriate steps to manage P&L. This includes, says Parrish, being “realistic about upcoming revenue opportunities and the timing of when they will be realized.”

Part of a solid profit and loss management strategy should include performing an analysis of all costs (direct and indirect) and how they are driven by revenue or other activity in the business.

According to Parrish, the “appropriate staffing level for the different stages of the company should also be determined” to help small businesses manage profit and loss adequately and help prevent running into cash flow problems.

A monthly forecast for at least one year should also be developed says Parrish, “starting with the line items in accounting reports.”

Create a Forecast for Future Cash Streams

Parrish also advises small business owners to create a forecast of future cash stream, “preferably weekly.”

“Developing an understanding about when revenues can be collected” is part of a comprehensive and effective cash flow, he says.

Think About the Timing of All Operational Cash Payments

Are you always aware of the timing cash disbursements will be made? It is wise for small business owners to, as Parrish says, “determine the timing of all operational cash disbursements.

Other disbursements should also be identified, such as owner distributions, principal payments on debt and capital expenditures.

Parrish advises small business owners to subtract the disbursements from the receipts to determine cash balances for each future period.

“Update the information as conditions change in the business or the market that will influence the outcomes to maintain a realistic view of the future,” he told Small Business Trends.

Carry out a Comparative Analysis

According to Parrish, small businesses must do a comparative analysis (compare the actual results to the forecast) to determine where the company is not performing as expected, in order to gain a better understanding about what actions should be taken to ensure an optimal outcome.

Parrish warns that: “No forecast is perfect and you can always come back to adjust any items that look to be incorrect. This will not be as painful as it sounds. Start with what information you have and refine the process over time.”

Focus on Proactive Planning

The veteran CFO and author also told Small Business Trends that proactive planning is the key to avoiding a cash flow crisis and the symptoms  or warning signs.

According to Parrish, small businesses can avert running into a cash flow crisis by proactive planning and avoiding the following:

Cash Discounts Being Missed

The returns on cash discounts far exceed most returns on any other use of cash.

Vendors Being Stretched Beyond Normal Payment Terms

Parrish warns small business owners: “If this situation is allowed to persist for too long it will irreparably damage these relationships and could impede the business from acquiring the necessary items to operate.”

Late Fees Being Incurred on Lease Payments or Trade Accounts

“In a similar way as cash discounts, the effect of these penalties can far exceed the normal costs of traditional financing arrangements,” says Parrish.

Age of Your Accounts Receivables Increasing or Increased Difficulty in Collecting Accounts

Unfortunately, most managers do not attempt to manage A/R with more than a passing thought until there is a problem with cash or a question arises regarding the validity of the recorded balances, Parrish says.

“You must have a sustained effort to manage A/R in place at all times. Uncover any issues that impair the ability to collect all amounts billed and develop a plan for working through each to a successful conclusion,” says Parrish.

He says this plan should include:

  • Billing promptly and as often as possible.
  • Collecting all payments as and when due.
  • Eliminating all barriers to payment at the outset.
  • Providing all documentation necessary to facilitate payment at the beginning of the process.
  • Aggressively following up on overdue invoices.
  • Not working only the old accounts. (If you focus only on the older accounts, you ensure that you will always have older accounts. Working the more current accounts allows you to collect them before they become old.)
  • Staying on top of the situation.

Parrish advises all small business owners ask themselves:

“Who would you pay first — a vendor who is sending invoices on a consistent schedule with full supporting documentation who is very diligent in contacting you to determine the status of a timely payment, or a company that sends invoices from time to time with little explanation and no follow up?”

Increase Scrutiny of Operating Expenses

There are numerous reasons why a business owner will incur debt. Most are perfectly valid. However, there are times when business owners will take on debt in the hope that it will buy enough time to repair a damaged business or to prop up an inability to gain revenue traction in a particular market.

To avoid this, Parrish advises:

“Increase scrutiny of operating expenses, liquidation of under-performing assets or outdated inventory, and carry out an unbiased evaluation of staffing requirements”.

Avoid Filing Delays in Deposits of Payroll or Other Taxes

Parrish says filing delays in deposits of payroll and other taxes should be avoided at all costs.

“The penalties can be severe,” he sats. “Once this path is taken, it’s a dangerous slippery slope.”

Are you a small business owner who has successfully overcome cash flow problems? Is so, share your experiences of running into, avoiding and overcoming issues related to small business cash flow.