Archive for Business Finance

Data Overload

Businesses run on data and we live in a data-saturated world these days.

Even for those of us who are information junkies like me, there are days when it can be overwhelming.

Sales revenue, marketing costs, social media A/B split testing, cost of goods, lead conversions, email campaign bounce rates…the list of available business data is immense.

As small business owners, we have to figure out how to assess which data is important & useful, and which is not.

If we’re overwhelmed, the data we accumulate isn’t going to do us any good because we’re not going to process it effectively or use it timely.

Data vs. Information

Here’s the secret to surviving this mountain of data:

  • Learn to distinguish between data and information.
  • Identify the information that you need to run your business today and focus on getting that in a format you can use.

Every Business is Different

Even if they’re in the same industry, individual entrepreneurs run their day to day operations differently and will have various Key Performance Indicators (KPI’s) that tell them how well their businesses are running.

As an entrepreneur, the trick is to decide what your business’ KPIs are and focus on tracking and analyzing them regularly. Doing so will support better decision-making and promote your business’ success.

Identify the Information You Really Need To Know

Start with looking at the type of business you are in and assess the data what will help make it profitable.

For instance:

  • If you own a construction company, your ability to estimate, monitor and control job costs will be critical. What numbers do you need to track that accurately and timely?

  • If you’re in Real Estate Sales, you’ll want to know how successful you are at converting new leads into sales and what the typical timeline is to do so. You’ll also want to know how much it costs you in time and money to close the sale.

  • If you’re an online retailer, you’ll need to know how your website is performing:
    • how do people find you, how long do they stay?
    • how long does it take for your pages to load?
    • are they new or repeat site visitors?
    • how many pages do they view?
    • do they buy or leave?

And that’s just for a start.

Customize Your Reports

As small business owners, we need to make decisions quickly, but effectively – which means we need clear and accurate information. Whether it is up to the minute sales reporting, current conversion rates on an online ad campaign we’re running or accurate cash flow forecasts, we need the information to be available and easy for us to evaluate while we’re juggling all our other responsibilities.

So identify your key information and design report that help you, as the business owner, to manage and make quality decisions.

These aren’t necessarily the built-in reports your accounting software will generate or that google analytics will supply. You’ll need to customize reports to your needs.

It’s well worth investing some time in this…it’ll save you time in the long run and make it easy to see what you really need to know.

This way you’ll also be able to spot opportunities and problems early. Old data isn’t much help in our rapidly moving business climate, so it also needs to be easy for you to access. Whenever possible, try to automate the report so you get it on a timely basis.


Is a Co-Working Space Right for You?

Co-working spaces are popping up everywhere. Local landlords are re-purposing existing commercial and industrial buildings to create them, while national brands like WeWork are rolling out new locations at a pretty fevered pitch.

Even a portion of Lord & Taylor’s flagship 5th Avenue store in New York City is slated to be changed from retail to a co-working space in the coming year.

What’s a Co-working Space, Anyway?

Co-working spaces are the latest iteration in the shared office space environment that began popping up about 20 years ago.

For startups, GIG economy workers, solopreneurs and small businesses, it can be a great way to have an office presence without the hassle of signing a long term lease or funding the associated build-out costs required for furnishing and equipping your own office.

As more and more folks work independently or remotely, co-working locations fill a growing need for entrepreneurs to have a comfortable, easily accessible workspace to call their own. It’s a definite professional step up from working on your laptop in a coffee shop and provides a break from the isolation of working from home.

Most co-working spaces have a mix of different businesses. But some co-working spaces are targeted toward putting entrepreneurs in specific industries together, like tech. As an example, there’s a co-working space in the town next to me that is geared toward creative businesses and artists.

Pros & Cons of Using a Co-working Space

Co-working spaces provide great flexibility, as you rent only what you need, when you need it. And you can easily expand as your business or team grows so you don’t have to lease too much space in order to accommodate growth that hasn’t materialized yet.

It’s a highly competitive market at the moment, so these spaces are usually nicely appointed and come with all the necessary amenities of an office – from desks to coffee bars. And thanks to the competition, there’s probably room for negotiation on the rent.

They generally offer the latest in technology infrastructure, so you can stay connected easily as well.

Another benefit to this type of office space is the opportunity to meet & interact with other entrepreneurs who are sharing the co-working space. Typically co-working spaces are designed on an open plan basis, affording lots of opportunity for interaction, collaboration and possibly some networking with other entrepreneurs.

On the flip side, the open nature of these spaces can afford you very little privacy. So if you’re considering the co-working route, think about how you like to work and how much privacy you need to be productive.

Spend some time in the co-working space before signing up to see how it feels & how others use the space. Always ask about the other businesses sharing the space, so you have a sense of who you will be working near.

For instance, if you’re a writer or artist & the co-working space is geared toward tech startups, you may find it very challenging to work there. You need to consider that in advance.


Two Basic Financial Mistakes Entrepreneurs Make

As an entrepreneur, learning the ins and outs of business accounting or finance is usually pretty low on the priority list. Especially when dealing with the myriad daily challenges of starting and running your own business.

But whether entrepreneurs do their own bookkeeping or hire a bookkeeper to handle tracking their financial records, having a basic understanding of both the Profit & Loss Statement and Balance Sheet is a “must learn” entrepreneurial skill.

To truly understand your business’ financial position, both financial statements need to be looked at together. Simply relying on your accountant or bookkeeper for interpretation is not a way to build your business.

Financial Mistake # 1: Profit and Loss Statement Tunnel Vision

All business owners want to make a profit, so they naturally obsess about their Profit & Loss Statement (P & L). Clearly, Revenue and Expenses are always top of mind with small business owners, but it’s only part of the financial picture.

You ignore your Balance Sheet at your peril.

OK, that sounds kind of dire. But the result of doing so can be serious.

Rarely have I met an entrepreneur who realizes that looking at only the P & L may lead them straight into a cash flow bind…until they are in one.

Business failures caused by serious cash flow problems are all too common. But understanding and properly managing Balance Sheet Assets and Liabilities can help prevent that.

Your Balance Sheet is where your “cash flow warning system” is located. And you can use simple financial ratios to keep an eye out for problems too.

Don’t get me wrong, you still need to focus on profitability, but Accounts Receivable, Accounts Payable, Loans, Inventory and Fixed Asset purchases all affect cash flow. And balances in those accounts show on the Balance Sheet, not on the P & L.

Knowing how to use that information and carefully managing those balances can help avoid some nasty financial surprises, so taking steps to learn how to read both statements is very important.

Financial Mistake #2: Not Understanding the Accounting Method in Use

Or worse yet, mixing them together, which I’ve seen multiple times. There is no way to manage cash flow or know your true bottom line unless you know how your business finances are being “booked” in accounting parlance.

There are two methods of accounting: the Accrual Method and the Cash Method.

They are very different from a financial reporting standpoint and depending on the type and size of your business, one may definitely be better than the other for you. This is something to discuss with your accountant when opening your business.

Generally, I prefer accrual under most circumstances but sometimes the cash method is preferred.


Nonprofit Board Member Due Diligence

Entrepreneurs are typically very engaged in their communities and we often volunteer with local nonprofits.

I’ve served on numerous nonprofit and municipal boards and have always found the work to be rewarding. It’s a wonderful way to be involved with helping out a good cause and giving back to one’s community, so I always recommend that small business owners do so.

Board Membership vs. Volunteering

Agreeing to be a Board Member brings with it more responsibility than being a regular volunteer, however.

When volunteering to work on a specific project or event, you are only responsible for showing up and doing what you have agreed to do. But Board service brings with it added oversight, legal and fiduciary responsibilities.

For that reason it’s important to perform some basic due diligence on the organization before agreeing to serve.

Doing so will:

  • reduce the chance that you’ll unknowingly walk into a bad situation
  • make it much more likely that it’ll be a good fit between you and the organization
  • protect you from unanticipated risks

After many years of both serving on Boards and working with Boards on financial and governance best practices, I’ve put together a few recommendations.

Before Agreeing to be a Board Member

  • Review the organization’s mission and vision statement to be sure you are comfortable being identified with it in your community.
  • Accept the fact that you will be expected to fund-raise and also to donate to the organization.
  • Find out what the annual Board member fundraising goal is.  (Nonprofits often play this down when recruiting Board members, but it’s a key Board member role.)
  • Meet with both the Board Chair & the Executive Director/CEO to discuss the organization’s current operations and challenges.
  • Review the biographies of current Board members.
  • Read the Nonprofit’s By-Laws (boring, I know, but you’ll be legally bound to follow them.)
  • Find out what the annual fundraising plan and goals are – and what is expected of you.
  • Discuss how many hours you will need to commit – both in terms of meetings and other duties
  • Review the audits and the IRS Form 990s for the nonprofit’s last 3 Fiscal Years.

Ask Questions First

Here are some basic questions to ask before going too far down the Board Member volunteer road:

  • Are there currently any cash flow difficulties?
  • If so, what is the cause and what is being done to address it?
  • Is there any litigation pending?
  • What is the Board term of service?
  • Is committee service required as well?
  • How long is a Board term?
  • Are there term limits on Board service?
  • Is there an active Finance Committee?
  • Is there an Executive Committee and what role does it play?
  • What is the mix of Revenue and Funding sources (e.g., operations, grants, donations, endowment)?
  • Are all payroll and benefits payments for staff members current and up to date?
  • How much are Board members expected to give or fundraise annually?
  • How often you will get financial statements and what are they providing?
  • Is there an annual audit done by an outside CPA firm? If not, why not?
  • Do they have Directors and Officers insurance?
  • Does the organization indemnify Board members against liability claims?
  • What is the history of Board member turnover?
  • Is there a Board conflict of Interest Policy?

Protect the Nonprofit and Yourself

Many entrepreneurs volunteer for Board service without a clear understanding of requirements and expectations. We get excited by an organization’s mission and then find out later it needs way more time than we can give or the fit is uncomfortable in some other way.

Doing some basic due diligence will help protect you and also the organization – the nonprofit needs to be able to depend on you as a Board member, so it doesn’t help to serve if you can’t fully step up to what it needs. That can result in bad feelings on both sides.

And one last piece of advice – think seriously before saying “yes” to Board service if your only reason for doing so is because a friend is “twisting your arm” to do it. To be a truly effective Board member, you will have to commit your time, ask your colleagues and friends for donations and be an advocate for the organization. All of that is much easier if you are actually attached to and believe in the organization’s mission.



Don’t Confuse Cash Flow with Profits

Old Accounting Ledger with alphabetical tagCash Flow and Profit are two concepts that can be confused, particularly by business owners who are unfamiliar with the accounting techniques used for recording Sales and “Accounts Receivable” when running a business.

It is possible to make a Profit and still be caught in a cash flow bind. And cash flow problems can put you out of business in spite of making a profit.

Cash Flow is Very Different from Profits

Profit represents the excess of your revenues over your expenses. Put simply, your Sales revenue in any given time period exceeds your business expenses for the same period.

Cash Flow represents the actual flow of sales receipts and cash disbursements in your business. You receive payments for your Sales and deposit those payments in your account. You then make disbursements for your expenses.

If your expense disbursements are less than your receipts, your cash flow is positive.

If disbursements are more than your receipts, your cash flow is negative & must be covered by borrowing or by some other means.

Keeping Both Profit and Cash Flow Positive

To succeed in business, you need to make a profit and you also need to have positive cash flow.

Actual business losses will ultimately create cash flow problems – that’s pretty obvious.

But here are some typical scenarios that can sneak up on you to create cash flow problems:

• Letting your Accounts Receivable aging get out of control will ultimately hamper your cash flow.
• Building up inventories that are paid for with current cash can be problematic if there is much of a time lag between the purchase of the inventory and the sale of the products.
• Investing in fixed assets such as capital equipment, tenant fit-out, office furniture or equipment expenses can use up significant amounts of current cash, so proceed carefully.
Not keeping accurate records about project and business expenses can make it seem as if there is more cash in the business than there actually is.
Incorrectly accounting for deposits on projects can also backfire. When you receive a deposit at the beginning of a job, your expenses for the job have not yet been recorded, so your cash balance includes money that is probably already committed to expenses that aren’t yet showing on the books.

Don’t Get Caught Short

To stay on top of cash flow:

• Keep accurate business records and remember that competent Bookkeepers are good business investments.
Be clear about your payment terms with your clients & stay on top of your collection process. A good bookkeeper can help with that too.
Run credit checks on your clients before extending them credit. If they can’t pay you, their cash flow problem will quickly become yours.


Avoid Cash Flow Woes

Managing your business’ cash flow is as important as watching your bottom line.  Small businesses and startups operate on tight budgets and sometimes shoestrings, so cash management is critical for survival.

Two of the most common pitfalls that occur with cash flow are:

Mistaking Cash Flow for Profit

This usually affects businesses that receive substantial deposit money upfront (e.g., construction), but that aren’t accounting for job costing and deposits correctly. When business is busy and a lot of upfront money is flowing in, owners can easily overspend and then be caught short of cash at the end of the project.

Mistaking Profit for Cash Flow

Focusing only on the bottom line without keeping a close eye on cash flow can destroy a business. A cash flow crunch happens when a business’ accounts receivable and accounts payable age on incompatible timelines. For example, if your collections from clients age substantially, but your payments to vendors are due quickly, you can end up in a cash flow squeeze that can bring your business to its financial knees.

Avoiding a Cash Flow Crisis

There are a number of ways you can stay on top of your cash flow. It starts with keeping accurate and up-to-date financial records and reviewing them at least monthly. Better yet, review your customer accounts receivable aging weekly to make sure customers are paying you on a timely basis. Keep an eye on your Accounts Payable aging too. If your accounts payable shows that your business is starting to accumulate a bunch of overdue bills, it indicates a cash flow problem.

Good record-keeping is critical to managing a healthy business. Hiring a bookkeeper to handle this task for you can be an excellent investment on two counts: you’ll have a timely and accurate financial picture and you can spend your time building your business, instead of attempting to keep up with collections, orders, purchases and job costing minutiae at midnight.


Crisis Management vs. Manufactured Crises

Politicians all proclaim that they are “friends” of small business. Clearly, they don’t know what being a friend means. If they were truly supportive of small businesses they would stop manufacturing crises and start dealing competently with the strategic issues facing the country. From immigration to taxes to defense to lending, they just keep on kicking the can down the road. If small business owners took that approach, we wouldn’t be business owners very long.

Congress keeps lurching from event to event, all of which have major economic consequences for consumers, taxpayers and businesses. The so-named Sequestration is only the latest manufactured crisis. Congress created this mess because they couldn’t reach agreement and, once again, chose to postpone governing.

So what’s the result?

Congress puts band-aids on serious tax and spending problems by making short-term and short-sighted policy decisions at the very last minute. Small businesses are casualties in this process. We can’t plan effectively; we don’t know if we should hire; we don’t know what the tax code will look like next year; and we certainly don’t think anyone is actually in charge in D.C.

No matter what your political perspective is, we’re all suffering from this chaotic approach to governing. “Just say no” wasn’t very effective with drugs and it doesn’t work well with financial and economic issues either. The point of negotiating is to come to agreement so that everyone can move forward. Business owners do it all the time. It’s not that difficult a concept to grasp.

Business vs. Government

I don’t subscribe to the idea that if you’re good at business, you’ll be good at governing. Maybe yes; maybe no.  The big difference that I see between politicians and business owners is that we try to avoid crises and they seem to enjoy them.

Maybe it is politicians’ love of sound bites that promotes this. After all, giving quirky names to bad policy and ineffective governance generates lots of air time. Terms like Fiscal Cliff, Federal Default, and Sequestration are handy short-hand for tweeting and banner headlines, but then we are all left holding the bag when reality hits.

Right now small businesses are trying to survive in a constant state of government-inspired crisis – with no real end in sight. Small businesses employ half the U.S. private labor force. Give us some stability and we just might be able to give this so-called recovery legs to stand on by creating more private sector jobs.


The Business Will Pay for It

expense report photoWhat a loaded statement that is, but I’ve heard it a thousand times. “The business” isn’t some disembodied entity with limitless cash resources. If you’re a small business owner, the business is you.
So, you’re paying for it…whatever “it” is.
For most people, the translation of this phrase means that it’s a deductible business expense and so therefore the true cost is somehow discounted. But just because “the business will pay for it,” doesn’t mean it’s a good way to spend money…and it is your money if you own the business. This line of reasoning is particularly prevalent among small business owners who came out of corporate and had a business expense account. In that case, the business was paying for it. Now that you are the business, you’re paying for it and it is important to understand that distinction.
When choosing which business expenditures to make, evaluate them in light of their absolute cost and decide if it’s worth it or not.  Just because something is tax deductible doesn’t make it a smart business move. Some business owners push the envelope on this business expense issue, especially around entertainment expenses. Don’t get caught in the trap of “letting the business pay for it” if the expense is actually a personal one and it doesn’t have a legitimate business purpose. If you’re audited and the deductions are disallowed, you could be facing a hefty tax bill along with penalties or interest.