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Cash Management

36 Posts authored by: Inc.

Financial-Help-Thumb.jpgFinancial professionals offer small business owners assistance that extends beyond performing bookkeeping and accounting transactions. By choosing the right resources for each stage of the company’s growth, owners can ensure that they’re supported by the financial expertise necessary to attain their goals.


Click here to read the Inc guide titled Getting a Handle on the Financial Help You Need.


Be the Squeaky Collections Wheel

Posted by Inc. Oct 15, 2013

The old adage “time is money” is not just a figurative saying; when it comes to collecting past-due invoices, it’s literal as well. According to the Commercial Law League of America, the longer you wait to go after money that’s owed to your business, the less likely you are to collect it. About a quarter of receivables become uncollectible at three months delinquent, more than 40 percent at six months, and fully three quarters at 12 months past due. “A small collection problem can become a large collection problem quickly if it is put on the back burner,” warns Jill S. Marks, an attorney at Sage Law Practice Group, PC, based in Hampton, Virginia.


Uncollectible receivables represent a total write-off to the creditor, the worst type of all collections-related losses. But there are also costs associated with invoices that are eventually paid but well past the due date. This is known as the time value of money, and the formula to determine it is PV=C / (1 – Cost of Capital); PV is the present value of the amount owed, C is the cash collected, Cost of Capital is the business’s annualized cost of money or expected return, and n is the number of periods in the future the collection occurs.


More detailed information on the time value of money can be found here, but what it really boils down to is that “cash is fungible—if it doesn’t come from one source (accounts receivable), it’ll have to come from another,” says Mitchell D. Weiss, adjunct professor of finance and a board member at the University of Hartford’s Barney School of Business.


Insufficient collection efforts often are the beginning of a company’s cash flow constraints, says Clint Sallee, president of Fidelity Creditor Service, a collection agency based in Glendale, California. Another old adage is “the squeaky wheel gets the grease,” and in this context it means businesses are more likely to get paid when they take a proactive approach to collections. “Once you know that the customer is not going to make prompt and complete payment, don’t wait for something magical to happen,” Sallee advises. “Get proactive. Escalate the issue internally or up the chain of command at the debtor’s company—or both. If that doesn’t work, consider your external options.”


Elliott M Portman, an attorney and partner in the creditor’s rights department at Roe Taroff Taitz & Portman, LLP in Bohemia, New York, suggests these best practices to improve collection efforts:

  • Speed up the payment cycle; for 30-day accounts, call on day 31.
  • Tone and tenor are essential; don’t apologize about asking for what is legitimately due you.
  • Get credit card information when an account is opened; faster payment can offset transaction costs.
  • Make sure invoices are correct and complete.
  • Understand client payment cycles; time your invoices to arrive a few days prior to the day they issue checks.
  • Add payment options such as online.
  • Get invoices out faster; on large jobs, invoice segments as completed.
  • Know your customer’s stress points; if you are their key supplier, remind them during the collection call.
  • Revoke credit privileges for customers who default on terms.


Of course, business owners don’t want to alienate or offend customers unnecessarily, and that can be avoided by using a customer service approach on the first delinquent account call, suggests Jeff DiMatteo, president of American Profit Recovery, a Marlborough, Massachusetts-based collection agency with additional offices in Michigan and North Carolina. “Let the customer know you care and want to know if there were any issues with the service or product.” However, if the customer cuts off communication, that’s a red flag signaling it’s time to implement a more assertive approach. “If diplomacy is important to your business on your aged debt, make sure the collection agency you have working on your behalf is in line with your business values,” adds DiMatteo, who is also president of the New England Collectors Association.


Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified CPA, tax advisor, and/or other financial professional.

Article provided by Inc. ©Inc.

Financial-Transparency-Thumb.jpgPracticing open-book management creates competitive advantages that have been shown to increase employee engagement, productivity, and profitability. Launching the strategy presents some challenges, but the result is an increased sense of ownership throughout the organization, which can become a driver for improved financial results.


Click here to read the Inc guide titled The Benefits of Financial Transparency.

BuildingAWall_Body.jpgEvery business has to make certain purchases in order to continue providing the products or services around which it is built. Some of those purchases come with an added bonus: a valuable tax deduction that is often overlooked. The concept is known as depreciation, and you can claim it on many different kinds of equipment, vehicles, real estate, and other business property.


“Depreciation is legislated, and therefore legal, tax avoidance,” explains Eric Chen, associate professor of business administration at the University of Saint Joseph in West Hartford, Connecticut. The policy reasoning behind allowing a tax deduction for depreciation is to encourage businesses to invest in themselves, thus freeing up funds for hiring, purchasing more equipment, and expanding. “This is a public good. Jobs are created, and jobs mean taxes and productive workers who have money to spend. There’s economic value here,” he says.


Like any other business tax deduction, depreciation is governed by a set of rules; some are fairly straightforward, others more arcane, so it makes sense to work closely with your banker, accountant, and/or tax advisor when considering your options here. A simple rule of thumb is that if the asset will be consumed during the process of generating revenue, then it can be amortized against the sales it helps to generate, says Gene Osekowsky, coordinator at the Tennessee Small Business Development Center. “From a business point of view, depreciation is a non-cash expense transaction reducing the book value of the profit for tax purposes; it lowers your tax liability without using cash,” he explains.                                                                                               


Without depreciation
With depreciation
Costs -40Costs -40
Pretax profit 60Depreciation-20
35% tax -21Pretax profit 40
Net income $3935% tax -14
Actual take-home$39Net income $25
Actual take-home$46

“If you focus on net income, it looks like a better scenario without depreciation—$39 versus $26. But the funny thing about depreciation is that you don’t pay it to anyone; that’s why it’s called a non-cash expense,” Chen explains. “When you add the $20 to the net income of $26 in the scenario with depreciation, your take-home is now $46, leaving you with an extra $7 you can use to support your business.”


Howard E. Hammer, a CPA with accounting and consulting firm Fiske & Company in Plantation, Florida, says it is important for business owners to be familiar with these depreciation basics:

  • Depreciation begins when the asset is actually “placed in service,” not when it is purchased.
  • It can be applied to tangible (assets with a physical form, such as equipment, buildings, inventory, etc.) and intangible (assets that are not physical in nature, such as patents, copyrights, business methodologies, etc.) property.
  • Assets with a useful life of five years or more can be depreciated; shorter periods apply to certain assets.
  • The Internal Revenue Code allows several different ways to calculate depreciation, subject to certain restrictions. Straight-line (divide the cost of the asset by its useful life in years and claim that amount each year) is the simplest and most common, but accelerated depreciation, which increases the deduction in the early years of an asset’s life, and bonus depreciation, an additional deduction that can only be taken in the first year of an asset’s life, are allowed for certain assets and leasehold improvements subject to dollar limitations.
  • When a capital asset is sold at a gain, previous depreciation taken is recaptured at ordinary income tax rates before capital gains treatment kicks in.


“For a business that is cash-strapped, depreciation can go a long way towards providing a boost to much-needed working capital,” Chen says. “For owners seeking to sell their business in the short term, it can provide a way to take cash out without affecting the income statement.”


Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified CPA, tax advisor, and/or other financial professional.

Article provided by Inc. ©Inc.


Liquidity as a Business Lever

Posted by Inc. Sep 5, 2013

BetterBudget_Body.jpgUnderstanding and managing cash flow is critical to any business, but it’s not the only measure of financial health that is important to the success of a small business. Liquidity—which is basically the ease with which an asset can be turned into cash—can be just as important for many businesses.


There can be many different reasons why liquidity is important to a particular business, but Paul J. Morrow, Sr., J.D., assistant professor of economics and law at Husson University’s College of Business in Bangor, Maine, says three common ones are:

  • To make payments on any borrowings. “Keep in mind that one missed payment is all that a creditor needs to declare default status on a loan,” Morrow warns.
  • To meet current cash needs.
  • Surprises.


Liquidity is the most important indicator of the overall financial health of any small or medium-sized business, says Manny Skevofilax, president of Portal CFO Consulting, Inc., a provider of outsourced financial services based in Baltimore, Maryland. “It’s pretty easy to tell if your business has poor liquidity because you are in a constant scramble to make sure you have enough cash in the bank to meet payroll and pay vendor bills on time,” he says.


The financial metrics most commonly used to measure liquidity are the current ratio (also called the working capital ratio) and the quick ratio. The current ratio (Current Ratio = Current Assets/Current Liabilities) tells you whether you have enough cash on hand to meet all your short-term financial obligations (vendor payments, overhead, payroll) on time. The quick ratio (Quick Ratio = [Current Assets – Inventories]/Current Liabilities) is considered a more conservative measure and is more applicable to businesses involved in retailing, wholesaling, or manufacturing. To determine your quick ratio, subtract inventory from your current assets, and divide the remainder by current liabilities. A quick ratio of 1-to-1 or higher is considered optimal because it means you can meet your current liabilities from assets on hand without having to sell off any inventory.


“Many SMB owners are so busy these days that they don’t have the time or the desire to calculate ratios,” Skevofilax says. “My recommendation to them is that they simply add up the total monthly overhead in their business and make it their prime directive to keep at least two times that number in the bank at all times. Of course, achieving that level of liquidity requires a deep focus on generating profits consistently.”


Is it possible for a business to have too much liquidity? There are varying opinions, but if you find yourself with a quick ratio that is consistently much higher than the optimal 1-to-1, it’s possible you may be missing out on opportunities to apply excess assets in ways that can grow or otherwise improve your business. One danger of too-high liquidity is the temptation to overspend in areas that are not strategically important to your core business mission, warn Doug and Polly White, principals in the business consulting firm of Whitestone Partners, Inc., in Midlothian, Virgnia.


Morrow advises that banks are a great resource for SMBs with liquidity challenges. “They are specialists at computing cash needs,” he says. It’s important to establish a good relationship with a bank, he adds, “because when the business needs quick money, banks have excellent products and expertise in cash management and investment management accounts.”


Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified CPA, tax advisor, and/or other financial professional.

Article provide by Inc. © Inc.

Selling-your-business2.jpgIt’s never too early for business owners to develop their exit strategies, and it’s essential to lay the groundwork at least three to five years in advance of succession or sale.  By thinking ahead, owners can maximize the company’s value and make the most of their business legacy. In this attached whitepaper, you will learn how to position your company for sale and how to cash out the right way.

To strengthen your focus and prospects for growth, commit your strategy to paper—and let it live off the page.


1. Introduction: Plan Because You Need To


Staff members at the Shenandoah Valley Small Business Development Center (SBDC) receive frequent calls for help in creating a business plan. The trouble is, the entrepreneurs who seek this assistance often aren’t launching new companies. They’ve been running existing companies without a business plan and sit down to write one only when forced to by banks or other lenders who need that document to process a financing application.


That approach deprives the company of a resource that can play an important role in driving and guiding growth. “The plan is really a management tool for the business owner,” says Joyce Krech, the SBDC’s director. “It’s a great piece of the lending package, as well, but we would prefer that they be doing it for their own purposes and not because they’re being asked to do it.”


2. Stay On Course and On Target


Capturing your business planning process in writing gives you a solid analysis of the company’s mission, income, financial obligations, and paths to growth. Companies that operate without a written plan run the risk of getting distracted and thrown off course by opportunities that may seem interesting but aren’t really germane to their core business and function.


“They lose their focus, which just deters them from growth,” says Gwen Moran, founder of Biziversity, an online information resource for small businesses, and co-author of The Complete Idiot’s Guide to Business Plans (second edition, Alpha). “A business plan acts as your touchstone to keep you on track, to make sure that your business is performing in the way that you expected it to perform. Without a business plan, it’s very difficult to gauge those metrics and to know exactly what your business needs are at any given time.”


Once the plan is written, how do you keep it in play and optimize its value to your business? Experts recommend that you revisit your plan each time you review the company’s performance—whether that means at annual or quarterly meetings or in regularly scheduled conferences with your financial advisor. That helps business owners to hold themselves accountable to their plans and look objectively at whether the company is on course in terms of liquidity, credit, human resources, pay scales, production capabilities, distribution and logistics systems, risk management, and marketing.


“A good accountant will be able to help you fine-tune your plan and see opportunities and pitfalls that you might not even see because you’re so in the day-to-day of your business,” Moran says. Other options include SBDCs, the Service Corps of Retired Executives (SCORE), or non-competing business owners who are interested in providing mutual support. “You’ll get insights from different industries and new ways of thinking about doing things.” Whichever option you choose, make sure you select advisors who are willing to stand up to you and make sure you engage in all the critical thinking necessary to maximize the company’s potential for success.


3. Know How to Answer, “What If?”


These reviews will help you to assess not only how well your company is performing, but how thorough the plan is in anticipating what could go wrong and how you’ll handle those scenarios. “It could be a resource issue. It could be a competitive issue. The law could change,” says management consultant and business planning specialist Jenifer Grant. “There should always be a risk section in the business plan. And then you can assess, what happens if a key person goes away? What happens if the costs of our main ingredients go up? What if I need to hire people, and I can’t find them? You need to assess all the different risks that could have an impact on your business.”


And those if-then analyses aren’t limited to worst-case scenarios. You should also consider what you’ll do if, for example, your product takes off so much faster than anticipated that you suddenly need to ramp up production and contend with cash flow issues and staffing shortages. “Fast growth can be as much of a stressor as slow growth, or even more so,” Moran says. “You have demands placed on your business, and if you can’t meet the demands of your customers, you’re ultimately going to disappoint them, and they’re going to turn elsewhere.”


Comparing what’s written in the plan with what’s happening day to day can even produce insights about entry into new markets or expansion of your customer base. “Then you start thinking, as one of my clients did, ‘I never thought about this particular type of customer for my product before, because I had one vision in mind, one road on my roadmap. I didn’t see this other parallel customer base that I can tap into at very little cost,’” Krech says. In that scenario, too, a business plan is an invaluable resource in helping the company to modify its course and take advantage of those additional opportunities.


4. Bring the Whole Team on Board


But the business plan is not just a resource for entrepreneurs and executives. It’s a big challenge, but to get the biggest return on your investment in the plan, you’ve got to look for ways to make it live throughout the organization and ensure that it is supported by every employee. “On a day- to-day basis, you come in, you do your job, whatever it is,” Grant says. “It has to resonate with what you do—you, the individual employee.”


As a business owner, part of your job is to communicate the plan’s importance through your actions and behavior. “As you begin to fulfill your plan, it’s your job to talk to your employees, to talk to your team members, to get them as excited about your business as you are,” Moran says. She advises business owners to make sure their employees understand the solution that the company offers in its market and also the strategy you’re pursuing to achieve your market share. In addition, all employees should know their roles in the business and how they are important to the overall corporate vision. “That’s how you get buy-in. You need to be excited about your plan. If you’re not, then you need to go back to the drawing board until you find what makes you excited about your business, something that you can communicate to the people in your organization to get them excited about the difference that they’ll make in this process.”


Moran offers the example of the CEO of a mid-sized manufacturing company who each month invites a small group of employees to his office for coffee, donuts, and conversation about the business. Giving employees that kind of access to a business owner who knows their names and asks after their families is a morale booster. It also gives staff members a chance to see how committed the boss is to the company. “When you see someone who’s truly excited or truly passionate about something, it’s hard not to care about that,” she says. “You get that great one-on-one face time. You get that opportunity to convey excitement, to convey enthusiasm, to let people know that they’re part of a winning team. And everybody wants to be part of a winning team.”


5. A Plan for Top Performance


Once you’ve integrated the plan into your company’s day-to-day operations, how often do you need to revisit and re-evaluate it? That depends on your business and its rate of growth. During periods of rapid growth or cash flow crisis, some entrepreneurs and venture capitalists find it necessary to review the business plan weekly to make sure the numbers are on track. And any time you pass a major milestone or hit a certain revenue target, it’s good practice to re-evaluate the plan and make sure that it’s still serving you well. At a minimum, experts say, you must review the plan annually, and a quarterly review is preferable.


“When you keep a microscope on those numbers, they’re going to tell the story of your business. And too many business owners don’t,” Moran says. “They let a few financial statement periods go by before they actually look at the numbers. Then they realize that their expenses are far too high and their incoming revenue is far too low, and they start getting into trouble. But when you start following the numbers monthly and then doing a very serious dive into what’s happening in your business according to the metrics on a quarterly basis, that’s when your business plan starts to become a living, breathing document.”


Ultimately, that shouldn’t come at the expense of a huge investment of your time. You can achieve these goals without creating a massive document; a few pages can suffice. The objective is to be equipped to compare current operations and numbers with a written projection or benchmark that points out any divide—positive or negative—between the company’s projected and actual performance. And over the long run, a resource that accomplishes that should save you time, keep your company on track, and help ensure that the business delivers on its potential for sustained profitability and growth.

Article created by Inc. © Inc.



Understanding Trade Credit

Posted by Inc. Aug 13, 2013

Trade credit is a means by which a business can purchase goods on account, laying out nothing up front but agreeing to pay the supplier at a later date. It is an “absolutely essential component” of the operating capital structure for both startup and growing businesses, says Jonathan B. Smith, founder and CEO of consulting firm ChiefOptimizer, and it is often the first extension of credit from a third-party source that is made accessible to a young business.


About 60 percent of U.S. small businesses use trade credit, according to The Oxford Handbook of Entrepreneurial Finance; the only other financial service with greater penetration in this market is checking accounts. However, trade credit remains an important capital management tool even as companies grow and expand. It is one of the most important sources of borrowing among all types of firms and throughout different economies. A 2008 survey covering businesses of all sizes in 48 countries found that an average of almost 20 percent of all investment financed through external sources was done using trade credit.


Trade credit terms are often expressed in a numeric format, such as “2/10/30” or “2/10, Net 30.” The first two numbers refer to the discount offered by the supplier for early payment, the last to when the entire outstanding balance must be paid. For example, if you purchase goods or services worth $5,000 on trade credit terms of 2/10/30, you qualify for a discount of $100 (2 percent of $5,000) if you pay within 10 days, but you must pay the entire balance within 30 days no matter what.


Viewed in isolation, a $100 discount may not seem very significant, but if you place that $5,000 order every month, it adds up to $1,200 over the course of a year. Since that savings flows straight through to the bottom line, it’s the equivalent of $1,200 in additional profit. A business working on a 20 percent profit margin would have to book an additional $6,000 in sales to match that performance. What’s more, by taking advantage of trade credit offers from suppliers, early-stage ventures can establish a history of repayment that may make it easier for them to secure bank financing as they continue to grow.


Startups and early-stage businesses can make themselves more attractive candidates for trade credit from vendors by being able to show a good personal credit history and a well-developed business plan detailing monthly revenue targets and anticipated cash flows sufficient to service trade credit debt, says Joel S. Mutnick, CPA, director of audit at accounting firm Fiske & Company. Growth businesses and those in later stages of maturity should stress their track record of success and their ability to adapt to changes in the marketplace.


The first thing any business should do to make it a better candidate for trade credit is “get on the map” by becoming listed with credit rating agency Dunn & Bradstreet and getting a D-U-N-S number, suggests Meredith Wood, director of community relations at Funding Gates, a developer of accounts receivable software. “Open a credit card under the business name, and start using it and paying off the balance right away,” she says. “Find other ways to show your business pays on time by opening up accounts with larger brand names, since they tend to report to the credit bureaus. Be willing to negotiate with vendors to prove you’re a good payer.”



Article provided by Inc. © Inc.


The New Bootstrapping

Posted by Inc. Aug 6, 2013

Pig.jpgBootstrap financing—relying on your own resources with maybe a little help from family and friends—is a fixture in the start-up world, often of necessity. Until your business has a proven track record, it can be tough to get outside financing. However, as the recent recession sometimes made it difficult even for more-established businesses to access conventional sources of financing, a growing number discovered that bootstrapping can be a viable ongoing financial strategy.


Greg Gianforte, managing director of the Bozeman Technology Incubator, says bootstrapping is a business philosophy that works at all levels, and his experience with the company he started in 1997 proves it. “We were still using bootstrapping at RightNow Technologies 15 years later, right up until we sold to Oracle for more than $1.8 billion and had 1,100 employees.” Among the strategy’s most important advantages in his view: “You only have one set of masters—your customers. You can’t make a fatal mistake, because you can’t spend money you don’t have. You don’t waste time trying to raise money; you just go determine if there is a viable market. You own the entire business when you are done.”


The single most important consideration for bootstrapped businesses is positive cash flow, says Allan Branch, co-founder of LessAccounting, a bootstrapped venture that makes simple accounting software for business owners. “You must constantly ask yourself if you are spending your money in the most effective places and your time on the most effective efforts,” he says. You also must accept limitations that come with bootstrapping relative to funded competitors, which often must attempt “big play” marketing efforts that cost a lot of money, such as sponsoring industry events. “You can’t compete with them on those terms,” Branch says. “You must focus on the things you can do that they cannot.”


“Cash is to a business as fuel is to an automobile—no cash, no go,” Gianforte says. Cash management is critical to the success of a bootstrapped business and requires an outside-the-box approach to financial statements. Most businesses focus on their balance sheet, income statement, and cash flow statement, but those documents are primarily backward-looking. “The most important statement for a bootstrapper is the cash flow forecast, which is forward-looking and provides a framework for making decisions about when you can and cannot spend your precious cash,” he says.


Anything you can do to boost your cash flow increases the odds of success for bootstrapping, says Adam Hoeksema, co-founder and CEO of ProjectionHub , a web app that helps entrepreneurs create financial projections for their business. Some strategies that have worked for other bootstrappers are requiring a deposit for your product or service, offering a discount for payment in advance, and limiting credit extended to customers to no more than 30 days. Kathy DalPra has bootstrapped her business, Bride Appeal Web Design & SEO, and says the experience has been “liberating.” She creates and sticks to a strict monthly budget; calculates exact expenses, including paying herself; and includes a percentage of revenue to invest back into the business for growth. “By doing this in advance, I am clear on the precise minimum income I need to generate in order to cover my expenses each month,” she says. “That gives me a firm goal to work toward from day one.”

Article provided by Inc. © Inc.

It’s a question almost every business owner confronts at one time or another: Does it make more sense to buy or lease your next piece of business equipment, vehicle, or facility? It’s a tough question because the answer is almost always, “It depends.” Both options offer various advantages, depending on your particular business situation.


In general, leasing is often the better option for a business with limited capital or that needs equipment which must be upgraded or updated frequently. An established business with substantial assets and a solid credit rating may be better served by buying, especially equipment that has a long, usable life.“Since our business is more labor-intensive than capital intensive, it relies more on infrastructure than production machinery or research equipment,” says Michael Mandala, CEO of BlueHill Strategic Relations. While his company does purchase some business assets outright, he’s opted to lease the backbone of its infrastructure—computers, telephony, copy machines, other office equipment—for financial reasons. “Leasing lets us deduct the cost from our top line and reduces our tax burden. If we purchased our equipment, we’d have to amortize our costs over several years.”


There are other advantages that make leasing especially attractive to early-stage and smaller businesses, says S.E. Day, a business and consumer finance advocate, host of the Legally Steal show, and author of Mastering the Business Credit Maze. These can include lower monthly payments, since you are simply renting a percentage of the equipment’s total value; conservation of capital, since down payments of 20 percent or more are often required when purchasing; and buy-out options, which are frequently offered on leased equipment and may allow you to acquire it at an attractive price at lease end.


Buying offers a different set of rewards, an obvious one being ownership. That’s a particularly significant advantage when the item being acquired is projected to have a long, useful life and is unlikely to become technologically outdated in the near future. “Purchasing increases the asset side of a smaller business’s balance sheet,” Mandala says. “That does wonders for us and 52 million other small and midsized businesses here in the U.S. by helping us establish an asset base that we have the potential to borrow against in the future for capital to expand our enterprise. In the current lending atmosphere, it is very hard for businesses with less than $10 million in revenue to obtain a meaningful loan. Lenders want to see collateral to help mitigate their risk.”


Day says the most important factors for businesses in the $100,000 to $1 million annual revenue range to consider in making the buy vs. lease decision are the length of time the equipment will serve its intended purpose before having to be upgraded; whether a lease is open-end (requiring the lessee to purchase the equipment at the end of the lease) or closed-end (no purchase requirement); and the type and use of the equipment being considered. Mandala stresses the importance of weighing the decision’s potential impact on cash flow. “Often, that’s more important than looking at what a purchase might add to the asset side of your balance sheet,” he says.


In some cases, a combination of buying and leasing is the best solution, and that’s just what Day does in his business, which requires travel with camera and computer equipment. “Buying the vehicle makes sense because of the high mileage and heavy usage, while leasing the camera and computer equipment gives me the most affordable access to updated technology.”


At the outset, be sure to consider all the potential impacts the buy-vs.-lease decision is likely to have on your business, and tap into whatever expert advice is available to you, such as your banker and accountant. They can help you decide whether the cash flow advantage and improved access to upgraded equipment that leasing often provides are more important to your business than the boost to your balance sheet that purchasing might deliver.

Article provided by Inc. ©Inc.

by Karl Stark and Bill Stewart


Those of us who have large investments in private businesses aren't like typical savers. We need a different strategy for our personal investments.


Most personal finance experts tell a fairly consistent story about the need to build a diversified investment portfolio focused on long-term growth. But that type of investment strategy doesn't necessarily apply to entrepreneurs and owners of private businesses, especially high-growth businesses.


We are a unique lot. Our concentrated investment in a risky but highly attractive company means that our overall investment portfolio is skewed differently than the average investor. One business owner once told us, "My business is my retirement strategy." This perspective underscores the importance of building a plan that's unique to your risk profile and your appetite for entrepreneurial opportunities.

Here are seven personal investment principles we have learned to keep in mind when your job is growing a business:

1. Build a "no touch" portfolio.

When you invest in stocks, bonds, and mutual funds, put them out of reach by creating "no touch" portfolios in accounts that you will never access. This will reduce the temptation to dip into long-term investments to address a short-term need for a cash infusion if your business is struggling. You can create more protection by loading up your retirement accounts and your kids' education accounts. These are places where there is a huge financial penalty to accessing those funds, which will keep you honest.

2. Protect your assets.

Structure your investments--and your company--so that creditors can't reach your money if the business runs into financial or legal peril. In addition to structuring your business appropriately, this also involves transferring assets to spouses and children where possible and investing within retirement accounts and real estate, which in some cases are out of reach.


3. Diversify away from your business.

Seek investments in your portfolio that are counter cyclical to your industry and business cycle. Investing in commodities may be risky in general, but if your business is heavily linked to the broader economy or public equity markets, a counter cyclical asset such as commodities may be attractive.

4. Invest more conservatively outside your business.

Most investment professionals recommend a heavy equity portfolio for younger professionals and a larger fixed-income portfolio for older individuals. Given that an entrepreneur's business may largely cover her "equity risk," she may be better off with a more conservative portfolio outside of her business.

5. Build a cash cushion for future entrepreneurial ventures.

Most of us can't pass up a good deal when it comes along. That's why we became entrepreneurs in the first place. If you have the luxury of cash outflows from your business, put a sufficient amount aside so that you can keep some dry powder when new opportunities present themselves.

6. Make smart business investments.

The best way to protect your personal finances is to ensure that your business has a sound, balanced approach to investing its capital. Our recent column on a growing business's investment strategy discussed this in some detail.

7. Build a great business model.

Of course, the best personal investment strategy may be your business itself. After all, your business can be your retirement strategy if it's successful. Building your business should be what you do best. So focus your time and effort there and leave the investing to a professional.


We should note that although we advise private investors on investing in growth companies, we aren't investment advisers. We can share our own thoughts and experiences, but for more targeted advice you should seek a professional investment adviser.

Article provided by © Inc.

7 Investment Principles for Entrepreneurs | Inc. 5000


When businesses need a short-term cash infusion, the first option to come to mind is often a traditional bank loan with repayment terms ranging several years or more. However, short-term financing, with repayment terms of less than a year—often as little as 90 or 120 days—can be a smart tool to help build your business and fill cash flow gaps without committing to several years of repayment.


Short-term financing has a wide range of applications, says business consultant Dave Lavinsky, co-founder of Growthink in Los Angeles, California. Seasonal businesses may need short-term funds to sustain them during slow periods. Other companies might need to purchase inventory or materials for sales or orders that won’t be paid for months. In some cases, the business investment necessary to sustain growth may leave a business temporarily cash-strapped, says Lavinsky. Short-term financing can also provide the immediate funds necessary for an acquisition or expansion that will lead to additional sales, revenue, or access to capital to meet the repayment terms.


There are several types of short-term financing options. Businesses may use credit cards to finance smaller expenses over a short period of time, says Lavinsky. That can be effective, but it’s important to track the cost of interest on this type of financing, which can be high. Small business credit cards in particular are not subject to the regulations passed in the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which restricted arbitrary interest rate increases and standardized payment dates and also provided other protections. However, some issuers have opted to extend these policies on their small business cards regardless of the requirement, so it’s important to read the fine print. These cards are also often issued based on the business owner’s personal credit, so late payments or high balances could damage the individual’s credit profile.


Traditional bank loans with shorter repayment terms and lines of credit are usually the most attractive option for many businesses seeking short-term financing. They may have slightly higher interest rates than longer-term loans, but cost less in the long run because the interest isn’t being paid over a longer period of time. In addition, they’re much less expensive than options like factoring, where businesses are paid a portion of their accounts receivable and hand over collection activities to the factoring firm at rates that are often “just short of loan sharks,” says Lavinsky. However, they do offer a way to get revenue in-house quickly, he says.


Qualifying for bank loans requires a track record in business of at least a couple of years, as well as demonstrated ability to repay, says Lavinsky. Be prepared to provide financial documents like profit and loss statements for the past two or more years, cash flow analyses, and others, as well as documentation of assets, inventory, cash on hand, or other assets the business owns that might be used as collateral. If you have contracts with or orders from large clients that show an ongoing relationship, that might be useful, as well. Depending on the amount of the loan and your business track record, you might be asked for a personal guarantee, where you pledge your personal assets as collateral to satisfy the loan.


To avoid needless delays in the decision-making process, discuss your loan package with your bank representative to ensure it’s complete before submitting it. And while credit markets have been tighter in recent years, the 2012 Federal Reserve Bank of New York Small Business Borrowers Poll found that 63 percent of loan applicants in 2011 were able to get at least part of the credit they sought, although only 13 percent were approved for the full amount of the loan or line of credit they sought.


“I’ve always been of the mindset that a company that commits itself to raising capital will raise the capital,” Lavinsky says. “Don’t give up.”



What your company needs to know about credit, collections, and their impact on small business growth.

Understanding Risks and Rewards


Attractive credit terms can spark an increase in sales to consumers and business customers, support upselling initiatives by allowing them to budget for bigger purchases, and strengthen customer relations. Before small business owners extend credit to customers, however, they need to understand the risks relative to the potential benefits. That’s especially true in challenging economic times—but in any economic climate, credit extension and oversight require a commitment of time and attention that some small business owners may not be able to divert from running their companies.


To assess the net benefits that credit extension may offer to your business, begin by learning what credit terms are customary in your industry; terms vary from one industry to another. Trade associations are good resources for getting a grounding in the basics.


Once you know how credit extension will need to be structured for your business, the next step is to assess whether and how it will strengthen your value proposition and ability to compete in your market. A company that offers a unique product or service for which there is high demand won’t need to offer credit to attract customers or clients and achieve growth in market share. Conversely, a well-capitalized company that’s selling a commodity in a competitive industry may find that credit extension can generate an increase in market share.


Gaining Business—and Obligations


How many additional customers, and how much additional business, can the company gain by offering credit extension—and what business will the company forgo without it?


“You make that evaluation, and you determine whether you have to offer credit or not,” says Bob Seiwert, senior vice president of the American Bankers Association. “If so, are you going to offer it on the normal terms of the industry, or are you going to use it as a competitive tool and gather more customers and offer looser terms?”


He cautions business owners to recognize the real cost in the latter approach, which will make the company more attractive to slow-pay clients. “So you’d better be pretty good at evaluating credits, which most small business people are not. They’re so busy running their business. They don’t have time to focus on the creditworthiness—or know how to evaluate the creditworthiness—of customers. So you’ve got to figure out how this fits in the game plan.”


Setting Limits, Mitigating Risk

Another policy question is how much credit your company will extend to any one customer or to customers within a particular industry. The answer to that question depends on risk assessment: how much the company can afford to lose. Among the questions Seiwert encourages business owners to consider: “How much do I have to extend credit to be competitive? How much exposure can I have? And if I take a hit, will my business survive?”


One strategy for mitigating risk is establishing a payment schedule. However, in some circumstances, you may agree to extend terms in line with a customer’s seasonal business. In that scenario, Seiwert advises that your company must make sure it is paid when the customer is paid.

“Any time you wait longer than that, you’re really putting yourself at risk, because there are lots of demands for that money,” he says. “If you’re going to offer dating terms, you want to time the extension of credit and the payment of credit to when that customer is going to be receiving the cash from their customers. That’s critical.”


Another challenge, particularly for small businesses with limited staff resources, is monitoring the financial health of the customers to which they’ve extended credit. “One way you limit your exposure is by limiting the amount of credit you extend,” Seiwert says. “But you better keep your ear to the ground by joining trade associations, the chamber of commerce—the rumor mill can be very beneficial. You’ve got to be attuned to the grapevine.”


Know Your Legal Obligations


“You definitely need a lawyer to write up your sales contracts,” Seiwert stresses. Your trade association, accountant, and business banker can direct you to additional resources. It’s also essential to familiarize yourself with Federal Trade Commission (FTC) regulations and consumer and business lending laws.


The FTC’s Bureau of Consumer Protection Business Center (Bureau of Credit Consumer Protection Business Center) provides business owners with advice regarding credit and loans, payments and billing, and debt and debt collection. Resources on its website also include the Complying with the Credit Practices Rule guide and advice regarding the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act.


Timely Payment Strategies

Debt collection presents an ongoing challenge for small business owners who extend credit to their clients and customers. Some of those challenges arise owing to inefficiencies on the creditor side. Short of staff and in the middle of a marketing push, small companies can fall behind on invoicing, which can lengthen the pay cycle or create a billing pile-up that leaves the customer with a charge that’s too big to dispatch in a single payment. Competing priorities can also lead to delays and deficiencies in following up on delinquent accounts.


Many of these problem can be averted by establishing good invoicing and debt collection practices in advance.


“We make sure that we’re using all of our tools and all of our strategies in order to do what’s necessary to recover and enforce the debt. A lot of people don’t enforce the debt. They do collections somewhat—maybe a letter, maybe certified mail, maybe a few phone calls—and then they give up,” says Stephanie Williams, vice president of collection operations at Freedom Stores Inc., and a former member of the board of directors of ACA International, the Association of Credit and Collection Professionals. “If you have certain standards and tools in place, and you’re enforcing the debt and also counseling the consumer, I think you would be a little bit more successful.”


Credit and collections experts agree that if you haven’t established a bill payment expectation before the bill is due, you’re already a step behind. Best practice calls for stating terms at every step of the transaction. Include the payment terms on the prices quote. Restate the price and terms on the confirmation of receipt of the purchase order. Include the payment due date on the invoice. Offer the option, positioned as a convenience to the client or customer, of sending a reminder by email or text five days before the due date.


It’s all part of what Williams calls “enforcing the debt,” and it begins by qualifying clients and customers and making sure they understand the credit terms and repercussions of non-payment before the company extends credit.


Tim Collins, an ACA International attorney member who has worked in the debt collection industry since 1993, underscores this point. He is director of compliance at Hyundai Capital America, which sends a welcome package to new customers—a tactic whose benefits extend beyond building goodwill. Mail that’s returned as undeliverable gives the company an early opportunity to update its records so that billing can be sent to a correct and current address—and raises an early red flag about customers who may be a bad debt risk. The company also makes follow-up phone calls to new customers in the higher risk account pool, such as people with lower credit scores. The conversation offers a friendly welcome and asks if there’s anything the customer needs—but it also provides an opportunity to collect additional phone and other contact details that may be useful should a collections need arise.


Rely on Relationships


That’s one illustration of the extent to which good credit collection practices go hand-in-hand with relationship building. That can be true even when it becomes necessary to initiate collection calls to a customer who is having trouble making payments on time. Small businesses, in particular, are likely to have personal relationships with their clients and customers, and Williams advocates trying to work with late payers to set up payment plans.


“We can offer a payment plan, but we can also refinance them or offer them a lower payment for a little bit longer term. So there are different ways that you can do it, but you have to educate, you have to listen, and you have to make them understand that ‘we’re helping you, and in order for us to help you, we’re going to take a little bit of a loss in the beginning, but we’re going to make it work out,’” she says. “From that point, you always communicate. I always tell our customers, don’t ever not call us.”


That outward show of support can also be turned on its head to pressure customers to meet their obligations. Small business owners can express sympathy for the personal or business problems that have caused the payment delay and then remind customers that they don’t want to compound those problems by having their credit ratings damaged. At that point, a friendly demand for payment is couched in terms of concern. “That’s perfect,” Collins says. “It puts you on the same side as that customer.”


Above all, don’t delay in acting on delinquent payments. “You have to start right away. The older the debt gets, the harder it is to collect, and that’s true for anyone,” Williams says. The same is true, she adds, of selecting a collections agency to pursue accounts from which your business has failed to receive payment. It takes time to do background research on agencies, ensure that they’re properly licensed for the states in which you need them to operate, and know which techniques they use in their collection process. Here, again, your company needs to complete that groundwork before it needs those services.


Credit extension is a complicated business that can place heavy demands on small companies—but in the right circumstances, and with proper management of these concerns, it can serve as a tool for sales growth.



If cash is king in business, ensuring that you have access to it is just as important


Introduction: Liquidity Is Your Best Hedge Against Risk


As a small business owner, you have a handle on the cash flow required to keep your business operating under normal circumstances. But how accurately have you assessed your ability to liquefy assets quickly in response to unforeseen circumstances?


To get a reliable answer to that question, you need to master an accounting balancing act, says Paul Stahlin, CPA, CGMA, and former chair of the board of directors of the American Institute of Certified Public Accountants (AICPA). In one column is “how much liquidity you need to have on your balance sheet.” In the other, how much you have in “assets that are close to liquid, and how quickly you can get them.” Together, these elements constitute “a stress test that happens whenever you have a natural or unnatural disaster.”


Small businesses are being subjected to that stress test more often in an increasingly global economy, he says. The March 2011 tsunami in Japan sent shock waves through the supply chains of some markets and industries in the U.S. More recently, tens of thousands of small business owners in the greater New York metropolitan area found their companies brought to a standstill for weeks following Hurricane Sandy.


That “superstorm” also demonstrated the limitations of crisis planning. Companies in areas left largely untouched by the storm had to remain closed for days when employees had no way to get to work. Small business owners who had invested in generators to see them through extended power outages found themselves unable to get the gasoline necessary to keep those generators humming. “You can’t calculate the risks precisely of what’s going to happen into the future,” Stahlin says. “And that’s why you need to have some liquidity in your balance sheet. I’m all about risk management, and risk management does play into liquidity needs.”


Create a Liquidity Plan


“Think forward,” says Craig E. Aronoff, chairman and principal of The Family Business Consulting Group and co-author of Financing Transitions: Managing Capital and Liquidity in the Family Business. “To plan for liquidity means you have to plan, and the first element of business planning is having a budget. If you have a budget, then you can make a better projection relative to your cash flow and your cash flow needs. And if you can do that, then you can do a better job of managing your cash flow, which is a liquidity issue.”


Next, he says, small business owners must probe longer term questions. “Do we want our business to grow? Is it growing? What do we need to make it grow? What kinds of investments do we need to make to support our growth? That’s called capital budgeting, and it’s a process of planning out: here’s our goals, here’s what we want to do, here’s what it’s going to take in terms of money. What other resources are required, and how do we work this out? It’s a thoughtful approach to thinking out the future. That can be translated into a capital budget that says, “In six months, we’re going to need X dollars. And in twelve months, we’re going to need Y dollars. Or here’s the list of things we need money for, and then we need to go backward and plan for that.”


Those projections can relate to anticipated business or personal needs, experts say. They can involve anything from heightened disaster preparation to planning for market or product line expansion, construction of new facilities, or growth in payroll. But they can also spring from, for example, the knowledge that a senior partner plans to retire in ten years and will have to be bought out at roughly the same time that the remaining partners want to take some distributions as their children enter college.


Inheritance and estate taxes introduce further potential tests of liquidity. “Transferring ownership of the family business to a new generation is often more complicated than it sounds,” the U.S. Small Business Administration (SBA) warns. “Additional tax implications, such as estate and gift taxes, generally arise for both parties. Proactive succession planning can help provide business stability, prepare for tax obligations, and make the ownership transfer as smooth as possible.”


Any of these issues can put challenges to liquidity on the company’s horizons. Even with months or years of advance warning, business owners can be blindsided by those challenges if they don’t have an accurate grasp of the value of assets they can liquefy and the time it will take to convert them to cash.


Capital Calculations

“Cash is king. Capital is queen. That’s what people have to look at, and small businesses often underestimate. They’re trying to do something on the margin. They’re trying to make the best they can out of what little they have,” Stahlin says. “That’s not a criticism of them, because that’s why they’re in business. They’ve got the entrepreneurial spirit. If it was easy, everybody would do it. But that is why businesses fail often, because there’s just not enough capital, there’s not enough liquidity, and there’s not enough ability to repay if there’s a little blip.”


What are some of the most common mistakes that small business owners make in assessing their liquidity? Do they over-invest in inventory? Overestimate the value of the assets they have on hand? Underestimate the time it will take to convert those assets to cash?


“They’re doing all of those,” Stahlin says. “They’re underestimating the time it takes to make things liquid. They’re underestimating how much they need. I can look at a small business’s checking account, and I can see the velocity of what goes in and what goes out, and the average balance, and you can tell that they don’t necessarily need a loan; they need another source of revenue.”


Aronoff underscores that point. “When small businesses get into a liquidity crunch, it’s because they’re doing something else wrong, not because they haven’t watched their cash draining out of their checking account.” One example is a source of increased liquidity that some business owners overlook: their accounts receivable. “If you have a liquidity problem, and you need to be told that you need to be more aggressive in collecting your accounts receivable, then you’ve got a different problem, which is that you’re not collecting your accounts receivable,” he says. “But that is another source of liquidity, and of course it can be used for factoring and other ways of generating cash.”


Avoiding Collateral Damage


Rejected credit applications can serve as a wake-up call for small business owners who make some of these mistakes, Stahlin says. “Particularly when they’re real estate rich, they say, ‘I’ve got plenty of collateral. How could you be classifying my loan as substandard if I’ve got all this collateral?’ Well, collateral, unfortunately, in a quick sale, diminishes very quickly.” That’s especially true in the current environment when business owners are overconfident in their ability to convert real estate assets to cash. “People think, ‘I’ve got this piece of property; I could sell this in three months.’ Well, that’s not the case anymore. So they overvalue that collateral on the basis of the time that they have to disburse it, or liquefy it.”


An excess of caution can be equally harmful to the company’s health. “It can stifle growth,” Stahlin warns. “If you’re too conservative, you’re not reinvesting in the business. There’s got to be a formula that you develop within your business on how much you put back into the business. You can’t be shortsighted. One of the biggest issues if people are too conservative is that they’re not thinking out three to five years into the future on the vision for growth. Sometimes that will constrain growth in operations.”


Increasing Liquidity, Reducing Risk


Best practice for ensuring an accurate read on liquidity before there’s a need to tap the assets, calls for input from at least three parties. “You need the business owner, the banker—who you have to have a relationship with; it’s all based on relationships—and somebody with financial acumen. That’s usually where the CPA comes in,” he says. It’s usually advisable to include the company’s legal counsel in the discussions, too. 


The process is not a one-time exercise but one that requires attention at least monthly. “It depends on how fluid your business is and how much tie to high turnover there is. There’s a definite correlation to the velocity of money going in and out of the business. The correlation should be, the higher the velocity, the more often you should be looking at the liquidity balance,” Stahlin says. “Business owners have to balance out running the business and the back office operations. I ask them, ‘What is the most critical point to you in your business?’ To be a good businessman, you can’t just run your business. You’ve got to own a piece of that banking expertise, a piece of that CPA expertise, and the legal expertise, and it’s all got to be wrapped around, because that’s how you develop your risk tolerance.”


by Bill Harris

If you're like most entrepreneurs, you've invested everything you have into your business. And that's a huge mistake.


In a recent survey by the American College, about three-quarters of entrepreneurs admitted they didn’t have a formal written retirement plan. Shocked? Don’t be. The dominant entrepreneurial mindset goes like this: Take care of the business today, and it will take care of you down the line. Don’t lose focus.

Many entrepreneurs become so passionate about what they’ve built and where it’s headed that the thought of thinking a bit more about their own well-being--taking a bigger salary, for instance, or selling some equity or stock options to redeploy in personal accounts--seems at odds with their goals for building the business.

That’s precisely the thinking that can bring on huge risks to business owners and their families and heirs. The problem with all that passion, focus, and confidence is that it makes a lot of brilliant business minds either oblivious to or dismissive of the single most important factor that will guarantee--yes, guarantee--lasting wealth: diversification.


Having every penny of your net worth riding on one investment is lunacy--even if that investment is your thriving, growing business. No matter how great everything is going today, can you tell yourself with 100% certitude that the good times are guaranteed to continue? That's not me betting against your success. I’m just suggesting you protect yourself and your family. And the only way to do that is to diversify some of your assets away from your business.

You’re dangerously naïve if you think diversification is some pedestrian concept for rank-and-file regular folk. It’s no less vital for every entrepreneur--including Facebook’s new millionaires. I’d bet good money that your personal finances are lacking in the diversification department. If you think I’m wrong, here’s a checklist of investment strategies to think about. See how you measure up.


1. Fund a dedicated retirement account.

This sounds stupidly obvious--and yet only a fourth of the entrepreneur population follows through. If you don’t already offer a retirement plan at work, you need one, and so do your employees. If you work only with contractors, you may be eligible for an individual 401(k), which allows you to sock away up to a maximum of $50,000 this year for retirement. (If you’re over 50 years old, you can put away even more.) And fund it to the maximum allowed. If that means pulling more salary from your baby, so be it. I hope your business remains so successful that what you end up socking away in retirement accounts becomes a superfluous footnote on your net worth years from now. But in the meantime, this account is insurance against any number of possible outcomes that don't follow your script. Besides, there are some tax advantages to doing some smart retirement planning.

2. Don’t overload that account with your own stock.

Your retirement account should not be filled up with company stock. Period. This is where your overconfidence and passion can kill you. You need to invest outside of your business. And you need to invest outside your circle of competency. Sound crazy? Well, what I see all too often are successful entrepreneurs whose idea of diversification is to buy stock or invest in start-ups that are all in the same industry. That’s like suggesting a wine cellar is well stocked because it has 100 cases--of the same wine and vintage.

3. Sell some equity; diversify; repeat.

Exercise some options; sell some equity--because you can’t tell me (or, more important, yourself) that you know with 100% certainty that your business will never suffer a setback. Besides, diversify now, and you’ll never find yourself having to sell under pressure in the event you need to raise some cash when you can’t extract maximum value from your options or equity.

4. Consult a personal finance team outside the business.

The person or team handling the books for your company is not the ideal tax advisor for your personal wealth. You want a tax pro who specializes in tax strategies for entrepreneurs. Task No. 1 is to devise a long-term strategy for handling options and equity; there are major IRS potholes that can seriously erode your net profit when you exercise.

Lastly, an estate-planning attorney is another must-have. You’re working so hard to build your business; aren’t you equally passionate about making sure the wealth you accumulate will be shared exactly as you want? Setting up the proper trusts, perhaps a foundation, is how you ensure your business success continues to pay off for you, your loved ones, and the causes you are passionate about.


Disclaimer:  The opinions expressed are solely those of the author.  As always, you should receive the advice of a qualified retirement plan professional, CPA and estate-planning attorney regarding the content of this article.

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