Category Archives: Finance

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 Current and former planning techniques may already be out of date, and plans should be amended as appropriate.”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.

Saving Emergency Funds for Your Business

It makes shrewd business sense to build an emergency fund, cash put aside for a rainy day. Businesses that fail to have a ‘safety net’, a sum of money kept aside to pay for unexpected expenses, can find themselves in a whole host of trouble.

When working on a tight financial leash, for many businesses, creating an emergency fund can be easier said than done. The good news is, with a little astuteness and know-how, businesses can save for an emergency fund without really noticing.

Small Business Trends looks at 20 tips for building a business emergency fund.

Tips for Building a Business Emergency Fund

Got a Tax Refund? Save Instead of Spending It!

Having a tax refund arrive through your letter box is always a nice surprise. And surprise is the operative word here, as instead of going out and spending this refund you didn’t expect, make it the first instalment in your business emergency fund.

Spare Change? Put It Into a Savings Tin

It might be a lucrative way to encourage children to save up, but you may be surprised at just how much your company could save by tossing spare change into a saving tin.

Cut Back on Business Trips

Is that business trip to New Orleans really necessary? Or could the meeting be conducted remotely via teleconferencing software?

Take stock of how much your company is spending on business trips, and ask yourself which trips are absolutely essential, and where savings can be made. Use the money you save on cutting back on business trip expenses to put into an emergency fund.

Save when the Going Is Good

Is your business seasonal? If so, and you take in higher profits during particularly times of the year, seize the opportunity to use the high profit months to put money into emergency funds.

Keep It Separate

When emergency funds are simply placed into a normal business account, the urge to spend it can be all too tempting. Instead, keep emergency funds separate from other business bank accounts, so you can keep tabs on exactly how much you’ve got saved in emergency funds, and will resist the urge to spend it.

Be Realistic

If you’re a small business, a start-up, or even an established business with a tight cash flow, set realistic goals for emergency fund savings.

Putting too much away for a rainy day might put financial strain on your business. Set realistic goals, start off slow and gradually build up your emergency funds.

Make Emergency Funds Part of Your Business Plan

Statistics show that an alarming number of small businesses don’t have a business plan in place. Business plans are vital in conveying organizational structure, and setting goals, operational milestones and targets.

When mapping out a business plan, include plans and objectives for emergency funds. Putting such funds into an official business plan will mean you are more likely to stick to emergency fund objectives.

Use a Direct Debit

With ease-of-use and without having to worry about making late payments, direct debits come with many advantages to businesses. With clear knowledge of your regular income, direct debits can help improve business cash flow.

Use the ease and convenience of direct debits to help save for an emergency fund. Set up a direct debit to pay into the fund each month. Again, be sensible and realistic about how much you pay in so the fund doesn’t infringe too heavily on your business’s cash flow.

Only Use It for Emergencies!

It might sound obvious, but don’t be tempted to ‘break into’ emergency funds to pay for services and products that, quite simply, aren’t emergencies. Map out what you consider emergencies to be and only use the fund if such emergencies arise.

Put the Fund Somewhere It Can Gain Interest

You shouldn’t lock emergency funds away, as you could find yourself in an ironic position where an emergency has occurred and you can’t get to your emergency funds! That said, all savings should ideally be placed where they can generate some interest to help them grow.

Do your homework and look around for instant access savings accounts offering the highest levels of interest.

Motivate Yourself and Your Team About Saving Goals and Reaching Milestones

Motivate yourself in a similar way you would when making personal financial savings. When you reach a business emergency fund goal or milestone, give yourself and your team a treat, preferably one that doesn’t cost any money, such as a dress down day!

Cut Back on Outsourcing Expenses

Outsourcing business tasks such as marketing and bookkeeping comes with both advantages and disadvantages. Outsourcing might save your business time but, at the same time, it will cost you.

Revaluate your outsourcing expenses and see if there could be cutbacks you could make. With the savings you make by tightening the financial leash on outsourcing, put the money into your emergency funds.

Limit Other Business Expenses

Of course, business trips and outsourcing are not the only expenses businesses can be a tad lavish with. Assess your business expenditure and see where additional savings can be made and put into emergency funds – Is today’s business lunch at a local restaurant really needed, for example?

Steer Clear of Impulse Buying

Resist the urge to spend money on a whim. Every dollar saved or not spent, is a dollar into your emergency fund account.

Consider Your Emergency Fund As a Non-Negotiable Expense

Be serious about saving for a rainy day by treating emergency funds as non-negotiable expenses.

Work With Your Financial Advisor

During the next meeting with your financial advisor, bring the subject of emergency funds up. Let your financial advisor offer support and advice on how to structure your emergency fund savings.

Make Use of Budgeting Tools

Keep on top of your business finances, including emergency funds, by taking advantage of budgeting and bookkeeping software, tools and apps.

Generate Extra Cash

If you’re struggling to find the money to put into an emergency fund, go that extra mile to generate additional cash. From recruiting another member in the sales team or introducing an additional product, generating an additional business income will soon help the dollars mount up in your emergency fund.

Introduce a Savings’ Competition at Work

Motivate employees to reducing expenditures by establishing a monthly competition, which offers prizes to the biggest savers.

Create a More Competitive Climate

As well as encouraging members of staff to making greater savings where possible, craft a greater sense of competition at work. Rouse sales teams by setting sales targets and giving away prizes to the person with the highest number of sales at the end of each month.

Put the additional income both saved and earned into your soon-to-be flourishing emergency fund account.

Financial Business Decisions

Many small business owners lack the skills to make good financial business decisions. But it is not always a result of their lack of experience, interest or education in this difficult area.

The Effect of Human Nature on Financial Decision Making

According to John Howe, author of “The Foolish Corner: Avoiding Mind Traps in Personal Financial Decisions”, it involves human nature and the evolutionary instincts that take over inside of every person when faced with these types of choices. He says that the first step in making better financial business decisions is to be aware that there are internal biases that are affecting each outcome.

They include:

1. Overconfidence. This is when the small business owner is so sure of the outcome despite market data and feedback telling them otherwise. They do need optimism, but when it mushrooms into blinding overconfidence, they ignore reality and it becomes a problem.  This happens many times because they have made a big financial bet where they do not feel they can turn back. Solution: The successful small business owner knows when stop, pivot and move on to a new strategy.  A safety switch to insure against overconfidence is to have reliable sounding boards from trustworthy sources. These can’t just be “yes men” that will agree with every financial business decision the owner makes. Rather, they need to be advisors or mentors that can play a devil’s advocate role and are not afraid to disagree on a regular basis.

2. Supercharged emotion. Financial business decisions around money can be emotional. Things like wanting to win at any cost or extracting revenge based on the past can also be factors. Overall, most competitive small business owners hate to lose at anything. This can only end up clouding their judgement.  Solution: Base decisions on results from a variety of sources. Ask advisors who are not emotionally involved with a particular decision to give their viewpoint. The small business owner needs to try to name the emotions they are feeling that are not grounded in fact based conclusions.

3. Internal bias. Every owner has a predisposition they bring to any decision making. It helps them frame the problem and then, the solution. In their own mind, this is based on what has worked or not worked in the past. Solution: A small business owner needs to know that their outlook is not always accurate or actually optimal. Again, ask an advisor who is outside the company or the process to give their viewpoint.

4. Peer pressure. For many small business owners, it is more comfortable to follow what others are doing. They make financial decisions based on what is popular or generally accepted since they want to “keep up with the Joneses”. They are afraid if they do not invest when or how others do, they will be single out as a loser when everyone else has success. Solution: Get comfortable in dissenting from what others think. Analyze the decisions to be made with all the pros and cons that are separate from any outside pressure or paths that others have taken before.

It’s a balancing act. Small business owners do need to trust their experience and instinct when making financial business decisions. At the same time, they need to understand what gets in the way of the an optimal outcome.

Loans, Cash Advances and Factoring

Getting the right financial product for your small business is important. However, entrepreneurs should be careful about which small business financing options they choose. Some make more sense for your company than others. Small Business Trends talked with Hanna Kassis an expert at Segway Financial about how to differentiate between loans, cash advances and factoring.

“The biggest difference is cash advances and factoring are not loans, although sometimes they’re disguised as loans,” Kassis says. The trick for small business owners is in understanding how to pick the financial product that works to make their situation better.  Choosing the wrong path can lead to deeper financial issues if your small business is in some trouble to begin with.

Here’s a chart showing the benefits of  the various types of financing depending upon your business needs:
The Difference Between Small Business Financing Options

Small Business Loans and FICO

There are some fundamental differences. For example, small business loansreport to the credit bureaus about the credit of the business and not the owners. These are generally the way to go when you’re looking to make a long term investment in your business.

A good FICO score is required. All your company assets can be used as collateral and funding usually takes about 3-7 days. Use these when you’re on a stable footing financially and looking to grow or expand. Small business loans are a great way to replace outdated machinery and even build a new wing.

Miss a payment on one of these and it gets reported on your business credit. With the other two types, that kind of slip up gets reported on your personal credit.

Merchant Cash Advances and Factoring: For a Different Set of Business Needs

These other products have a different set of requirements. A merchant cash advance is a good product for an emergency financial situation. Factoring is the right tool to match income and expenses. With the merchant cash advance, cash flow history is required but your small business doesn’t need to supply any collateral.

Factoring, on the other hand, requires actual invoices and those receivables and invoices are used as collateral.

Kassis notes another difference between the two products.

“Companies that qualify for factoring are typically B2B under unfavourable terms,” He says. “That delayed payment could be a result of the seller offering it to get business or the vendor offering it because they’re spending enough money they can dictate the terms of the deal.”

Say you’re selling bolts to a manufacturer. They’re buying in volume and keeping you busy, buy not paying for terms of 30, 90 or ninety days.  Factoring can help you can over temporary cash crunches. These products generally take about  2-5 days to process.

Sending Invoices

If you send invoices, you have a wider range of options. Those choices are limited for enterprises like grocery stores that accept cash up front.

“Businesses with invoices will qualify for factoring, cash advances or a loan,” Kassis says. “Businesses that don’t invoice can only get a cash advance or a loan.”

Cash advances are the quickest solution to get but you need to be careful when you make a decision to go after one of these. There is no collateral needed here and the time to fund is quick at 1-3 days. However, Kassis is clear small business needs to take a good look at why they’d need this type of money before they act.

“The cash advance is the catch-all. With about $10,000 a month from any source, you can probably get one of these products.”

Cash Advance Catch-all

However, there’s a big caveat to this catch-all. Kassis explains this is a great product for seasonal businesses and restaurants in tourist areas. Both of these small businesses might need some cash ahead of their busy season.  He’s clear, however, a cash advance won’t stop a downward business slide.