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24 Posts authored by: Touchpoint

Overlooked_Tax_Deductions_body.jpgby Robert Lerose.

 

Specialists are fond of saying that tax planning should be done throughout the year, not just as April 15 hurtles toward us. Although some small businesses might rely on an outside tax preparer or accountant to guide them, business owners still need to stay informed about changes to the tax code to claim all the deductions they are entitled to, and to make prudent decisions regarding their business overall, such as hiring a new employee or buying a major piece of equipment. Some small business owners may unwittingly shortchange themselves when it comes to "obvious" tax deductions, like home office expenses, because they don't fully understand the requirements or are fearful of an audit. We consulted with a variety of tax specialists to find out about some write-offs that small businesses overlook or don't maximize.

 

Hire family members

"A home office deduction can be pretty valuable," says Damon Yudichak of Yudichak CPA PC, a Wake Forest, North Carolina-based full service tax and accounting firm. "In the past, there's been a lot of fear that the IRS would audit small business owners because they had a home office, but it's a legitimate tax deduction."

 

To be eligible for the deduction, a home office needs to meet certain requirements. For example, it must be the primary location where you conduct business and the space must be used exclusively for business purposes—eight to 10 hours a week at a minimum, Yudichak says. Small business owners who qualify can deduct a portion of their regular household expenses, such as mortgage interest, property taxes, homeowners insurance, and utility bills.

 

According to Yudichak, the IRS allows two ways for calculating how much of those monthly expenses you're entitled to deduct. One method is to figure out what percentage of the total square footage of the house is taken up by the office and use that percentage as a basis to deduct expenses accordingly. The second method is "where you take your square footage and multiply it [by an amount set by the IRS]. In 2013, it was $5 a square foot," he explains. "Make sure you take pictures and document everything," such as accurate copies of your monthly bills and other deductible expenses.

 

Another overlooked tax write-off is to employ members of your family in your business, particularly children. Yudichak says that you can hire your children over the age of 7 and pay no federal income tax on the first $6,200 of their earnings for 2014. State income tax varies, but small business owners can still come out ahead. In Yudichak's home state of North Carolina, the first $3,000 of wages is not taxed. Children that work for a sole proprietorship or a partnership are also exempt from paying Social Security, Medicare, or federal employment tax.

 

Since each business entity—a sole proprietorship, partnership, C corporation, or S corporation—has its own advantages and limitations, choosing the right set-up is essential for tax planning and should be made in consultation with a tax advisor. Yudichak begins by interviewing the small business owner "to know what their goal is and the type of business it is. Those are the big things that I look at. Otherwise they could choose the wrong business entity and pay unnecessary taxes."

 

Talk early and often

Sometimes a small business misses a tax write-off simply because they fail to maintain frequent contact with their tax advisor.

 

"There are a lot of little items—$100 here, $200 there—that add up to thousands that people don't realize they can deduct," says Jerry Michalowski of Gerald H. Michalowski, CPA, a Torrington, Connecticut-based firm providing accounting, tax, and payroll services. "They don't communicate with their tax people enough to tell us what they're doing so we can make suggestions." For example, when Michalowski had his own home office and his hot water heater had to be replaced, he was able to deduct 40 percent of the unit's cost—a sizable write-off that some home-based business owners might have overlooked on their own.

 

Overlooked_Tax_Deductions_PQ.jpg

Small businesses should consult with their tax experts whenever they're thinking about making a major financial decision. For example, one of his clients hired a veteran and then asked Michalowski if there were any tax breaks. There were—but because the small business had to file for them before the veteran was hired, they lost out on a $3,000 credit.

 

Michalowski cautions that "there are a lot of areas of gray" in the tax code that are open to different interpretations. Small business owners should work with a tax preparer that is informed and forthright about these issues and then decide between the two of you about the best way to go forward. 

 

Set up a SEP

Even otherwise astute small business owners may not be familiar with certain types of common or ordinary business deductions. "I've had people who tell me that they want to do a section 179 and other people who have not heard about it," says Brian Walsh of Brian Walsh EA, a Ramsey, New Jersey-based tax, payroll, and accounting service, with over 50 small business and self-employed clients.

 

In the case of section 179, it allows a business to deduct the full expense of a capital item—such as the purchase of a small truck by a construction firm—in one year, instead of writing it off over time, provided that the business made a profit that year.

 

Another strategy for small businesses that wish to lower their profits and cut their tax bill is to open up a Simplified Employee Pension Plan (SEP). Small business owners can put up to 25 percent of their compensation in the account, up to a certain limit that changes every year—but they are also required to make contributions to the SEP accounts of their employees as well. "They don't necessarily have to make the maximum contribution to the employees' accounts, but the contribution still ends up being a deduction for the small business," Walsh says.  

 

Small businesses that haven't set up a SEP account for 2014 can still put one in place for last year, Walsh says, by filing "an extension for the tax return and then setting the plan up during the extension time period to make a contribution. I think it makes the small business owner look like a hero in terms of making a contribution to the employees and basically saying to them that their services are valued.”

 

Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified financial planner and tax advisor.

 

DIY_Taxes_body.jpgby Erin O’Donnell.


Small business owners are used to juggling several roles at once. But financial experts say doing their own business taxes should not be one of them.


Do-it-yourself software such as TaxAct and TurboTax has simplified the paperwork and process of tax time for many Americans. The programs are good at walking taxpayers through the forms with plain language and checking for omissions.


But bookkeeping and taxes are time-consuming. And business owners who do their own taxes aren’t saving a tremendous amount of money. In fact, they might do just the opposite by chipping away at time spent on growing the business, or even triggering an audit because of mistakes, says small business tax expert Barbara Weltman.


“The thing with software is that it does take time, and many business owners don’t have the time,” says Weltman, author of J.K. Lasser’s Small Business Taxes. “Those people probably are better advised to use a professional just to get it done.”


Turning it over to the pros

The cost of tax preparation for business owners varies by the number and complexity of the forms they must file. According to the National Society of Accountants, these are the current national averages their members charge to file business-related tax forms:


  • $273 for an itemized Form 1040, with Schedule A and a state tax return
  • $174 for a Form 1040 Schedule C (business)
  • $634 for a Form 1065 (partnership)
  • $817 for a Form 1120 (corporation)
  • $778 for a Form 1120S (S corporation)


Compared to tax software that costs less than $100 and can be done on an iPad, the price can seem steep. So what do you get in return for using a professional?


For Brian Schutt, owner of Homesense Heating and Cooling in Indianapolis, it’s confidence that the job has been done right.


“While my partner had a finance degree, he wasn’t necessarily a tax professional,” Schutt says. “From day one we tried to recognize our blind spots and find strategic partners to help.”


When they launched Homesense in 2009, Schutt and his partner handled a number of tasks themselves to keep overhead low. But they didn’t want to risk making financial mistakes. So they hired a full-time bookkeeper, then added an outsourced CFO and tax accountant.


Being as accurate as possible when it comes to taxes takes priority, Schutt says. “You don’t have to be at 100 percent as a receptionist to be able to wear that hat for a while,” he says. “But you can’t get your taxes 80 percent right and expect it to be all right with the IRS.”


A DIY approach

Some small business owners prefer the control of doing their own taxes. Bryce Avery works out of his Denver-area home writing questions for quiz bowls and standardized tests, writing patents, and doing technical writing. Avery Enterprises, which he set up as an S Corporation, employs a handful of contractors; the only other employees are Avery’s children.


Avery has always done his own home and business taxes; recently he has used the fillable forms on the IRS website. He says his math and engineering skills are sufficient, and he kind of enjoys doing his taxes. “I hate to pay people to put numbers in boxes because I can do it myself,” he says.


Avery doesn’t have much overhead. He reports the same salary every year. And his business makes less than $100,000 a year, so doing his own taxes is easier than a business with a lot of inventory to track or equipment to depreciate. Still, he has made at least one major error. A mortgage broker was the first to notice that he hadn’t entered his S Corp income correctly on one year’s return.


That could have triggered and audit, which can be expensive. Accountants charge an average of $144 an hour to handle the audit, according to the National Society of Accountants. And that’s on top of additional taxes owed or penalties.


Get a second opinion

There is a middle ground that Weltman says appeals to a growing number of business owners. They like to enter their own data into their choice of tax software, but then turn to a tax professional for a review before filing.


This strategy can give you insights to adjust your tax situation or spending through the year to come, she says.


“You will be more engaged with your year-round spending by going through your taxes yourself,” Weltman says. “It brings home what you paid for things throughout the year. When someone else does it, you may just sign it without going through it line by line.”


Weltman, who is also a tax and business attorney, does do her own taxes. But she adds that she probably stays on top of tax law changes more than the average business owner in order to serve her own clients.


DIY_Taxes_PQ.jpg

Get tax advice all year long

Financial advisor Robert Palidora believes that developing a good relationship with an accountant or tax preparer gives you an advisor for all seasons, not just at tax time.


Palidora, a Pennsylvania-based financial consultant with AXA Advisors, owned a small retail business for 25 years before changing careers. He notes that even the most detailed software is only as good as the records you keep and the data you enter. An accountant can help a business set up bookkeeping software such as QuickBooks correctly to categorize expenses and income.


Good recordkeeping is especially important once you have employees, Palidora says. “The minute you have the responsibility of payroll and people working for you, it’s kind of a disservice to yourself and everyone else to think that you can handle this work over the Internet,” Palidora says.


Business owner Schutt says he likes having multiple layers of oversight on his finances. If only one person is watching the books, there’s a greater risk not only of mistakes but misappropriation. Plus, using an outside tax preparer helps shift liability away from yourself.


“Having that trust gives us the peace of mind to operate in our areas of greatest strength,” Schutt says. “When you’re a lean startup, that’s essential.”

Price_Increases_body.jpgby Erin McDermott.

 

How do you break the news to customers that you’re raising prices—and still keep them on board?

 

It’s an uncomfortable task, coming after every margin has been squeezed, every cost has been absorbed, and all alternatives are exhausted—and it’s especially tough for small business owners who know all too well that every penny counts when it comes to going up against the competition.

 

Yet companies of all sizes have had a lot of practice with this lately. Forecasters are predicting an increase of 3.5 percent in food prices for American consumers this year, up from 1.4 percent in 2013. Among the reasons: water shortages in California that are anticipated to push fresh vegetable prices up an additional 3.5 percent on top of last year’s 4.7 percent increase, according to the U.S. Department of Agriculture. (And bad news for many sleep-deprived entrepreneurs: coffee futures have surged nearly 70 percent since the start of 2014, largely because of drought conditions in Brazil.)

 

Combined with the rise in other agricultural commodities, industrial metals, new taxes on gasoline in several states, and the ups and downs of fuel prices, there’s plenty of angst among small business owners about how much more clients are willing to pay.

 

Here are a few tips on how to handle the leap:

 

Explain why you’re doing it

First, think about who your audience is. Is this a B2B relationship, in which a client might already be well aware of market changes that are affecting prices? Or is this a B2C situation, where customers aren’t necessarily steeped in your industry’s trends and might need some extra consideration? In either case, your wording needs to be clear and concise: Costs to produce a product or service have gone up, and you are forced to raise your prices. Then shift the conversation: Remind customers that even though your price has increased, the value of your product or service justifies the higher cost.

 

Price_Increases_PQ.jpgBe careful with the details

The best thing you can do is be honest, but pass on only relevant information. Steer clear of touchy issues that may have contributed to the decision, particularly anything involving politics, government policies, cultural issues, or anything that might turn off customers with opposing beliefs, including the divisive implementation of the Affordable Care Act or taxes. But if the reasoning is unavoidable, use neutral statements that don’t blame, complain, or urge action. One good example: Leck Waste Services, a suburban Philadelphia garbage hauler, told customers that Pennsylvania’s new increase in gas and diesel taxes meant a surcharge would appear on quarterly bills starting in January. Its announcement listed every effort at efficiency the company had instituted, directed users to a website with the text of the legislation—and actually helped educate customers, too: Did you know garbage trucks get an average of only 4.2 miles per gallon?

 

Think about sales psychology

Give customers a few options. Maybe set a date for when prices will rise and offer the “deal” of a lower rate up until that time. Another: Offer to lock in prices for a year if customers buy a specific number of products or commit to a certain time period for your service. Or aim the increase at new customers only.

 

With technology, you can test what the market might bear with actual clients. Jared Lazaro and his girlfriend are using that approach at the yoga studio they operate together in Grand Rapids, Mich. For example, for a beginner’s level class, they tested two price points in an email to customers: $69 and $79. Using Leadpages.com’ landing-page generator, they showed half of their email list one price and the other half the alternate price. “The same number of people clicked on both offers in the test, so we went up to the $79 offer for everyone else who looked at the page. If we hadn't tried the more expensive option, we would've left several hundred dollars on the table for one class and not even known it,” Lazaro says. “So many small business owners undervalue their work and products, that a simple price shift for new customers can produce a huge boost to a company.”

 

Choose your method wisely

A note on the door or menu or an email notice may not always suffice when communicating the news. In January 2013, Royce Leather Gifts had to implement not one but two rounds of price increases in a single month after the cost of cowhides skyrocketed after the previous summer’s crippling drought across the Midwest and West. To try to help soften the blow, Billy Bauer, marketing director for the Secaucus, N.J.-based leather goods maker, says he got on the phone with his biggest accounts himself. “There was going to be a big change that might affect their bottom line and they needed to hear that from me,” he says, adding that he faced a pushback from some clients. Talking directly gave him a chance to communicate what they stood to gain from the situation (they’d still be getting the best quality hides), and express the company’s wish to cushion the blow to keep their business.

 

“No one wants to be cornered with a ‘Take it or leave it’ ultimatum,” Bauer says, noting that clients did come around in the end. “When you can build a personal relationship over the years, there’s a sense of trust where I hope they know I’m not trying to mislead them to increase profitability. People want to know that you are committed to their profitability, too.”

Mother_Daughter_Business_body.jpgby Erin O’Donnell.


When Kit Seay retired, she thought she’d tour the country in an old camper. Instead, she found herself running a pie business with her daughter—and loving it.


Seay and her daughter, Amanda Wadsworth Bates, started Tiny Pies three years ago in Austin, Texas. Seay was retired from a career in state government and working as a sorority housemother. Wadsworth Bates was working unhappily in real estate. The mother/daughter duo had always baked together, but hadn’t considered doing it for a living until Wadsworth Bates’ son asked for a pie he could pack in his lunch.


After a few months of testing recipes, Tiny Pies was born. Their handheld pies come in signature and regional flavors, such as strawberry rhubarb and the family’s pecan pie recipe. The business was focused on catering and wholesale until last month, when Tiny Pies opened its first storefront.

Mother-daughter firms are a different type of family business. The women who run them say their businesses directly benefit from their unique bond. An estimated 2.3 million such companies are operating in the U.S., according to the National Association for Mothers and Daughters in Business (NAMDB), and their ranks are growing.


“There’s no competition between us. There’s no ego involved. There’s no lack of trust,” Seay says of the work arrangement with her daughter. “I never give a second thought to anything she says or does.”


Mother_Daughter_Business_PQ.jpg

Tiny Pies is typical of many mother-daughter businesses that NAMDB founder Jamie Kizer sees. The daughters tend to be in their 30s, with mothers in their 50s or 60s, often retired from a previous career. The younger generation wants more work-life balance, Kizer says, and the older generation is in a position to help them with that.


“In my generation, we worked, and our children were latchkey kids,” says Kizer, who lives in York, Pennsylvania. “We don’t want our daughters to be in that situation. We want to give them flexibility with their own business or self employment.”


Kizer has run a dozen businesses, from an art gallery to a teen magazine. After her daughter Jordan graduated college, she decided they should open a clothing store together. But they quickly found they didn’t work well together.


“I had to make the decision that this business is not worth jeopardizing our relationship,” Kizer says. “My daughter had to be very brave to speak up and say, ‘This is your dream, it isn’t mine.’”


When Kizer had trouble finding resources for their situation, she decided to coach other mother-daughter entrepreneurs through their challenges. It’s an intense bond, and that can be both a strength and a weakness.


Handling conflict

Alexandria Keener never dreamed she would open her own retail store, much less partner with her mother, Deborah Daugherty, to do it. In 2012 they launched My Girlfriend’s Wardrobe, a consignment clothing shop in York, Pennsylvania, as a website. A brick-and-mortar store followed last year.

Keener says she and her mother have always been close, but working together puts them on equal footing. They both have strong opinions on things such as how the shop windows should look or which outfits they should spotlight.


“One of us is always right, and it’s never the other person,” Keener says. “Sometimes I yell at my mom, and she knows I’m just frustrated about a whole bunch of other things. And she’ll do the same to me. But if you did that to an employee, they’d be out the door.”


They are learning to divide the labor. Keener says they share the retail operations, with only one other part-time employee. Daugherty, who also works full time with special needs teens, takes the lead on tasks like accounting. Keener handles the website and marketing. And Daugherty is able to step in when Keener can’t be there, because she’s also a full-time student at the Harrisburg University of Science and Technology. She’ll graduate in May with a degree in new media design and production.


At Tiny Pies, Wadsworth Bates and Seay say they discovered they have complementary strengths. Wadsworth Bates takes care of sales, marketing, and business development, while Seay oversees what’s happening in the kitchen. They now have a staff of 11.


Wadsworth Bates says it’s important for mother-daughter entrepreneurs to separate business and family. Starting a new business is inherently stressful, but they’ve learned not to bring conflicts home.


“If we get crosswise over a work issue, we can still go to dinner, and she can still hang out with the kids,” Wadsworth Bates says. “It’s not changing that side of our relationship.” 


Communicate openly and often

Communication skills are important in any business. But successful mother-daughter teams say it’s critical to their survival.


Kizer cautions them not to make assumptions and to check their expectations. Dedicate time to learning how to communicate in an emotionally healthy way, she says. “My motto is, ‘let’s put it all out on the table and clean it up later.’”


Sandy and Stevie Lynn D’Andrea say they almost never stop talking about their company, Jewels for Hope. They run their handmade jewelry business from their home in Stamford, Connecticut. Ten percent of the firm’s net profits go to charities such as the American Cancer Society and Labs 4 Rescue.


Sandy D’Andrea started the company in 2009. She made jewelry to pass the time during her mother’s final months in hospice and gave pieces to the nurses in thanks. Eventually, D’Andrea opened a store on Etsy.com. Stevie Lynn, a graduate of Fashion Institute of Technology, joined the company a year later to handle advertising and marketing.


“I taught my mom how to use Facebook, and she taught me how to make jewelry,” Stevie Lynn says.


Jewels for Hope has been featured in coveted celebrity gift bags for events such as the Oscars, the Emmys, and the Golden Globes. Meredith Vieira, whose husband has multiple sclerosis, has been photographed often wearing her Jewels for Hope bracelet, created to benefit the National MS Society. Other pieces have been worn by stylist Stacy London and actress Jennifer Love Hewitt.


Living and working together can blur the lines between business and family, Sandy D’Andrea says. She had to remind herself to respect Stevie Lynn as an equal in business even when her instinct was to advise her as a mother. They also make a conscious effort to put business aside and have fun, together and separately.


Stevie Lynn D’Andrea says, “I don’t think the business would have done so well if we weren’t working together. We both complete the unit.”


Leaving a legacy

For younger daughters like Keener, it can be an ongoing struggle to convince other people that she is an equal partner with her mother. Sometimes customers and vendors assume it is Daugherty’s shop, and 22-year-old Keener is her employee.


“Mom has taken the approach of telling them ‘it’s her store,’ because she thinks people won’t respect my decisions if she doesn’t,” Keener says.

Kizer says she values how mother-daughter businesses provide both women involved with financial independence, a creative outlet, empowerment, and mentorship. And it builds a legacy that, like any family business, can be passed on.


In the days before Tiny Pies’ grand opening, Wadsworth Bates says, she was struck by how meaningful it was to be opening a shop with her mother, in a space designed by her sister, an architect, and to have her teenage son proudly helping with last-minute preparations, too.

Wadsworth Bates says of working with her mother, “Our relationship is so much better than it would have been. This is a priceless experience.”

Clearing_Inventory_body.jpgby Iris Dorbian.


If you're a small business owner who sells clothes, electronics or other products, there’s a good chance that from time to time you might be left with excess or unsold inventory from the previous year. You could try to clear out these items with a special sale, of course. But suppose the items are seasonal—such as ski equipment—or customers are simply indifferent, having moved onto the latest gadget or trend. What are the most efficient and cost effective ways to clear out last year's inventory?


Donate surplus items to charity

Rather than simply dispose of last year's products, you could consider earmarking them for charity. For instance, if you are a small fashion retailer saddled with last season's styles, your local Salvation Army might be interested in picking up these items. Not only will you be clearing space for current merchandise, you’ll be performing a good deed while also getting a tax write-off on these donated clothes.


And if you're confused about which charities will accept your extra inventory as donations, you can always consult a company like Zealous Good, which helps connect businesses to local organizations in need.


Brittany Martin Graunke, founder and CEO of the three-year-old Chicago-based Zealous Good, says her company frequently works with small businesses. Most donate office equipment, furniture and supplies, she says, but others also offer up excess inventory.

"We like to think of it as a new and easy way to give back to your community while also being savvy about your business needs," she says, explaining her firm’s mission.


She does offer a few caveats:


"Never donate something you wouldn't give to a friend," she advises. “At the same time, use common sense as well. If it’s 2014 and you have thousands of 2013 calendars, there is likely no reason to donate these.” Also, don’t assume that a charity is going to be interested in everything you deem dispensable.


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“Just because you're donating to a charity in need, doesn't mean they need everything,” says Graunke. For example, if you’re looking to donate excess sweatshirts, you might be surprised to learn that some shelters want only professional clothing or certain sizes. By determining in advance if a charity can actually benefit from your excess inventory, you'll save yourself the stress and frustration of giving a charity inventory they don't need, she adds.


Go paperless

If your excess inventory is in the form of old documents, some of which you have might have held onto longer than necessary, turn to technology to lessen the paper trail.


Donna David, a professional organizer in New York City, is a staunch proponent of this tip. “Use technology to help clear the clutter,” counsels David, who works with many small businesses on their spring cleaning. “Scan your documents and store online and in the cloud so you can shred most originals.” She urges small business owners to do this on a regular basis. “Discard the things you don't need: recycle, shred, or toss,” she says.

And if you've have an excess stack of business cards, David suggests that you eliminate them by using either the Camcard or Cardmuch app. “Just snap a picture of the card and data will be stored in your contacts,” she notes.


Recycle electronics for cash

Rather than discard old or excess items like cell phones, tablets, or other similar gadgets, you might consider using a company such as Gizmogul, which specializes in paying people for their old working or non-working electronics and excess furniture.


According to Barry Schneider, co-founder of Gizmogul, this is a great way for consumers and businesses to get the most value out of unwanted electronics or furniture. Not only does this afford business owners the opportunity to buy new equipment or furniture with the cash they receive via recycling, but it can also remove clutter and open up some much needed space.


However, if you consider this option, Schneider shares a few tips:


       --Trade in early. The longer you wait, the more your phone will depreciate in value.


       --Before taking your old cell phones to a recycling company like Gizmogul, make sure the device can be used with a difference service provider, suggests Schneider. “It will increase the value of your phone instantly,” he says.


       --Perform a basic data wipe on all electronics or gadgets. To completely delete any other data on your computer equipment or device, e-cycle your trash with a company that provides a certificate of data destruction. This allows you to be sure that sensitive information won’t end up in the wrong hands.


Clearing out excess or old inventory is a terrific way for a small business to make space for new merchandise. When done regularly it can help a company stay current with customer preferences and help out charitable organizations along the way.

Touchpoint

How to Get Paid Faster

Posted by Touchpoint Apr 14, 2014

Get_Paid_Faster_body.jpgby Erin O’Donnell.


Christiane Waldron once spent a month chasing $600. As president and CEO of Jenetiqa, a luxury skin care products company, she sells to salons, physicians, and boutiques on consignment. That means she’s often waiting to get paid.


One client dodged her for weeks, with a new excuse each time. She didn’t have her checkbook. She had a meeting. She needed to transfer money. Waldron drove back and forth across town time and again, trying to meet up with her in person.


“I told her, ‘I can’t extend credit. We’re both small businesses, and I have to get paid,’ Waldron recalls. “She asked for another discount.”


Waldron says clients make similar excuses with maddening regularity. Since she started Jenetiqa in 2011, she’s learned some lessons the hard way. “As a small business, you cannot operate on trust, but sometimes you don’t have a choice,” she says.


It’s common for small businesses to struggle with uneven cash flow. But business advisors say there are ways to even out the feast/famine cycle by getting paid faster. It takes planning, communication, and lots of follow up. Below, some small business owners explain how they get customers to pay on time.


Require some payment up front

Business consultant Shell Black advises business owners to require a percentage of payment up front for project-based work. His Dallas-based company, ShellBlack.com, is a Salesforce Cloud Alliance Partner that helps other small businesses set up and make use of Salesforce’s customer relationship management products.

 

Black says he’ll commonly ask for a 50 percent deposit of the total cost to schedule a consultant’s time. Then, he bills the rest at natural project milestones such as the completion of data migration or user training.


Ironically, the companies with the deepest pockets are the ones that seem to take the longest to pay. “Bigger companies throw their weight around a little bit. Small businesses understand the necessity of getting paid,” Black says.


Set expectations

Be direct with customers about when you need to be paid, says Neil Kristianson, founder of Only Sky Artist, a music management firm in Chicago.


In his current business, Kristianson finds himself using many of the same practices he did when he remodeled homes for a living. Back then, he would draw up a calendar for each project, laying out the work to be done, inspection dates, and so on. Payment dates were written right on the calendar, and every client received a copy. The effect was remarkable. “My accountant was amazed that my receivables rarely went past five days,” Kristianson says.


As a consultant to musicians, he still uses the calendar system. It’s adaptable to any project-based business, Kristianson says, especially those that don’t operate on monthly invoices. And it puts the responsibility on the client to manage his or her cash flow.


“Once I figured that out, I realized I had to do a better job of communicating when I need to get paid,” he says. “I got tired of them saying, ‘Can you wait while I move some money around?’”

 

Create an even stream of cash

Kristianson also timed his invoicing and due dates to his project costs, so that he wasn’t scrambling for cash. In construction, it’s easy to know when you’ll be buying lumber or paying a sub-contractor, so he made sure to structure his payment schedule accordingly. He learned to forecast break-even times, and that’s when he would make the next invoice due.


He also varied the number of payments based on project size. Smaller jobs were broken into three payments, but for bigger jobs he sent out up to seven invoices.


Black recommends more frequent invoices to smooth out the peaks and valleys of cash flow. Even though it means more paperwork, he says, it also means you can invoice for smaller amounts, and that can encourage clients to pay quicker.


Get_Paid_Faster_PQ.jpg

“It pulls the cash flow forward,” Black says. “If you’re waiting until the end of the month to bill, you’ve already paid the payroll or the cost of goods on that deliverable. You’re potentially waiting 30 days to get paid.”


Sending invoices for smaller amounts can also negate the need for the boss’s signature. Black knows of one company where invoices for more than $10,000 require the approval of the CEO, who is notorious for letting things languish on his desk.


Get ahead of excuses

One of the most common excuses business owners hear for non-payment is “I didn’t see that invoice.” Now, technology is helping to eliminate that reason.


Waldron sends her invoices through QuickBooks, but she has also started following up via email, with the invoice attached as a PDF file. A week later, she follows up again with a phone call or text. And she now accepts payments on her mobile phone. “It takes perseverance, but it wears on you because the cash flow is so tight,” Waldron says. “You can’t afford to have $2,000 of accounts receivable out there.”


Software like Salesforce is pulling back the curtain on customers’ claims of ignorance, too, because it tells you when a client has viewed the invoice, Black says.


If you put your expectations in writing, Black says, it’s easy to remind customers about the terms of your agreement. For instance, you can reserve the right to stop work on an unpaid invoice after 30 days. Black says he recalls mentioning that to a client only once. “It’s there because it helps you have a little leverage, in case you get someone who doesn’t pay you for 60 or 80 days,” he says.


Finally, Black says, don’t wait for a bill to go past due. If a couple of weeks have gone by since you sent the invoice, it’s perfectly reasonable to call and remind the customer that it’s due soon.


Waldron says offering multiple ways to pay, including Paypal and wire transfer, also helps eliminate excuses. As much as she hates to lose business, she will also cut off delinquent clients unless they pay in advance.


Waldron says she has learned to be persistent and to set the right tone from the first transaction. “If a customer is late in paying you the first time, chances are it will be that way every time.”

QA_Good_Bad_Debt_body.jpgby Erin O’Donnell.


As an attorney with 18 years experience in consumer and business financial debt-related services, Leslie H. Tayne understands the power—and pitfalls—of debt. Her firm, Tayne Law Group, P.C., concentrates on debt management, debt resolution, and bankruptcy alternatives for consumers, small business owners, and professionals who require help managing their finances. Recently, writer Erin O’Donnell spoke with Tayne about the different kinds of business debt and how entrepreneurs can use it wisely to help grow their business.


EO: What kind of debt is good for a small business?

LT: All business debt can be considered good debt until it becomes unmanageable. When growing your business, borrowing from family, business expansion loans, and investor-related loans are all acceptable.


A small business loan is good debt, but you should understand what you’re getting for your money. What are the interest rates? What are the default terms? Often people can’t even tell me those things. As with any loan, you need to know what happens if you can’t repay the money. What happens if you default and your wife guaranteed it? The government can garnish her wages. They can take your tax refund money. If you don’t understand the terms, you don’t understand what the exposure is for your business.


Funding from private investors is considered good debt, and a good opportunity. It proves that someone is willing to invest in your business. Take the time to write a solid business plan if you’re going to seek out investment money. That means looking at your business health and having a backup plan financially. They’ll want to be repaid: how you plan to do that? And in what time period?


QA_Good_Bad_Debt_PQ.jpg

Consider what your debt will look like going forward, in case you plan to borrow more at a later date. Another creditor may look at those loans and see that there are priority lien holders against you. They may think, ‘I could get nothing if I lend you money and you’re unable to repay it.’


EO: Can lenders take a business owner’s personal finances into consideration?

LT: The truth is that banks are not just looking at the business but at the owner as well. They want to see that you’ve paid your own bills on time and that you’re not overextended with credit cards. Your available credit versus what you owe is certainly going to be an issue with creditors.


EO: How much debt should a business take on?

LT: You want to keep the debt for your business below 25 percent of what is available to you. But I don’t think you can expect to keep the percentage that low early on. When you’re starting out, especially if you took out a business loan, you may have significant debt, and that’s normal. For some businesses, like restaurants, it can be that way for a couple of years. Paying back those loans should be a top priority, so keep that ratio in the back of your head. As you expand, keep asking yourself if it makes sense to still have those loans. Are you being negatively impacted by the amount of debt? A few years down the road it might make sense to pay off an old loan that carries a higher rate or unfavorable terms. You could take out a new loan with better terms.


EO: Can a business borrow its way to growth?

LT: You have to break that strategy down as a business owner and decide how it’s going to impact you. What are your real costs? You can borrow to grow, but you have to delve into the cost for each item and each employee. How much will it decrease costs to train your employees and maintain your equipment? I don’t think people do the cost analysis as detailed as they should. That’s a mistake small business owners make a lot.


If you’re borrowing to grow your business, that’s different from borrowing to save or maintain your business. When you have a growth strategy that means you have a plan in place to pay back the loan. If you’re adding more debt to a strained cash flow process, you’re putting yourself into further risk. A business looking to grow is much healthier.

 

Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.

SeparatingPersonalBizFinances_body.jpgby Iris Dorbian.

It can be very tempting for small business owners to borrow from personal savings to keep their start-ups afloat. But to do so repeatedly would be a serious mistake that could ultimately result in an IRS audit. How then can business owners learn to separate business and personal expenses in ways that will lessen financial risk?

Determine your business entity
Before you establish your small business take the time to figure out what type of entity it will be. Is it a sole proprietorship, meaning you own and run your business by yourself? Or do you have partners? In that instance, your business could be designated as a limited liability company (LLC). Consult a business attorney to figure out what entity type best fits your business. It's important to note that each business structure has its own guidelines concerning specific legal requirements. Be aware of them and do your due diligence to make sure that you have selected the right one. Not taking the time to do this could potentially cause you to run afoul of the IRS. Bradford Hall, managing director of Hall & Co., a 25-member accounting firm in Irvine, Calif., knows this predicament all too well.

“I had just started with a new client that has been a C Corporation (a corporation that is taxed separately from its owners) since it was started 14 years earlier,” he explains. “They shouldn’t have been structured that way and wound up paying more taxes than they should have.”

Use different accounts for personal and business finances
This guidance may sound obvious but it bears repeating. Not only will this help you distinguish one account from the other, it might also prevent you from dipping into the personal well to feed the business coffers.

This same strategy also applies to credit and debit cards. Determine which card you will use for business and which will be used for personal expenses. This is also a good way to establish your business credit.

After launching her small business last March, Dana Manciagli, a Bellevue, Washington-based career consultant, admits she had a hard time distinguishing business and personal expenses.

“Once I started my LLC and realized that I needed to fulfill certain tax and legal requirements, I saw that it would be too time-consuming and potentially cause errors if I didn't have my finances separated,” she explains. Since she was writing off certain business expenses and needed to file 1099s for contractors, she needed to be able to summarize where her business expenses were. “Later, once I got an accountant, they confirmed that separate accounts was a smart move,” she says.

And to further facilitate this distinction, Manciagli advises small business owners to establish online access to those accounts.

Hall says that when his firm takes on a new small business client, he always asks whether they have opened a separate bank account.

“If they say no, we're just paying out of our personal account, I will explain to them that it will be difficult to maintain the deductions with the IRS in the case of an audit,” he cautions. “[In this instance], it's very difficult to distinguish what is personal and what is business when everything goes in and out of the personal account.”

SeparatingPersonalBizFinances_PQ.jpg

Hire a knowledgeable financial or business expert
To prevent combining personal and business finances, consult an experienced and knowledgeable outsider, such as a CPA or business attorney to review your financial records for discrepancies and other bookkeeping errors. Again, this tip may sound obvious, but Hall says it's something that many small businesses fail to do.

Maintain good records
Hall stresses the importance of keeping clear and organized records. “When you entertain clients or have meals with them, always write down who you met with and what you discussed on the receipts,” he urges. “Keep those receipts. Also, print out your Outlook calendar at the end of the year and keep that for your tax records for your business.”

Hall recalls a client who only kept a year-end credit card summary as documentation for taxes. According to Hall, the client was told by a prior accountant that if they had had this summary, then it was not necessary to keep other supporting documentation. An IRS audit proved otherwise, says Hall, whose firm handled the audit. Although the client did not lose the business, they did have to pay a hefty penalty fee, he says.

“They learned a hard lesson,” recounts Hall.

Still, if you're the kind of business owner who has an aversion to stockpiling receipts, Hall suggests using software programs such as NeatReceipts, which will scan your receipts and keep them in a digital file.

Launching your business from the ground up is a great accomplishment. But it can be undercut if business and personal finances are continually co-mingled. Audits, stiff penalty fees, and even the failure of your business can result if you don't take the proper safeguards to keep these two accounts separate.

Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.

Bizloans_Body.jpgby Iris Dorbian.

 

It's a question that besets many small business owners when applying for business loans: how much should I ask for? More so than deciding on which lender to approach, not having a sound estimate of how much capital you need to borrow could lead to cash flow problems—which could lead to your business shutting down.

 

How then can small business owners determine how much financing they need when approaching lenders? What factors should they take into account when calculating the ideal sum of their business loan?

 

Be clear on the reason for the loan

Are you launching a startup? Or do you need the loan as additional working capital to make improvements in your business? Answering yes to either question is critical when deciding on how much you need.

 

Denise Beeson, a small business-funding consultant who previously lent her services to a local SBA-administered Small Business Development Center, a provider of mostly free resources and training to small business entrepreneurs, in Santa Rosa, California, always asks her small business clients the previous questions whenever they come to her about wanting to apply for loans. For those with startups, she does issue a caveat: "If this is a start-up, I remind them that an SBA preferred lender does not fund startups," says Beeson "We then discuss where they may find funding, such as peer-to-peer lending options, tapping into their personal resources, or asking family and friends."

 

If the small business owner is seeking to buy a business from another, Beeson notes that the seller may fund the loan.

 

Also, if the small business owner is seeking working capital for myriad reasons, which might include increasing the marketing budget, making renovations, or paying off debt, Beeson says she will ask clients if they can produce documentation verifying that the debt was accrued as a result of the business.

 

Bizloans_PQ.jpgWithout providing the necessary paper trail needed to accompany a loan application, small business owners could hurt their chances of getting financing from a lender, insists Beeson. To prove her point, she offers the following anecdote:

 

"Recently a restaurant client was interested in an SBA loan to consolidate debt based on improvements to the premises," she recalls. "They had almost $100,000 in debt including credit card debt that was claimed as accumulated to the business during the recession. However, when we looked at the statements, the entries were not clear when and what had been done. In addition they could not produce any paid invoices from contractors or suppliers linked to the credit card statements. Unfortunately, we could not move forward because the borrower could not provide the needed documentation to the preferred SBA lender."

 

Consult trusted financial professionals

If you are unsure or confused about how much you should ask for when applying for a business loan, it might behoove you to visit a financial expert such as a reliable bookkeeper or a CPA that regularly deals with small business clients. By reviewing your financials, he or she can then approximate how much financing you will need, taking into account existing debt obligations and operating revenue. And a word of caution: don’t be lax or lazy when it comes to understanding your financials. Sloppy bookkeeping or a lack of knowledge about your books or tax returns will prevent you from acquiring a loan.

 

Take into account your other non-related business expenses

To determine how much you’ll be able to repay and the length of the loan’s duration, small business owners need to do a cash flow analysis of all their expenses, including mortgage payments or auto loan payments. By doing so, a business owner will be able to develop a more viable estimate of how much they’ll need to borrow from a lender.

 

Rohit Arora, CEO of the six-year-old Biz2Credit.com, feels this is an imperative step for all small business owners to take when deciding on how much of a loan they should apply for.

 

“A lot of business owners don’t take [their miscellaneous non-business expenses into account when deciding how much money they should borrow,” he says. “Everything boils down to your repayment capacity. So if you feel that you can borrow some money and there’s some good opportunity that will help you make money off it, that’s good. But that calculation is not a certainty.”

 

Carefully consider payment terms

After you analyze your financial situation, both on a personal and business level, you will also need to decide on how long you want to pay off your loan. By following this best practice, you will be able to produce a rational figure as opposed to an amount that you will never be able to discharge in light of your finances and debts.

 

Arora agrees, offering a hypothetical scenario: “Let’s say a business owner is borrowing $100,000 and they have to pay back everything in one year,” he explains. “Then the amount of repayment they have to make in terms of speed is pretty steep. Typically for small businesses, the cash flow is their bloodline.”

 

Similarly, Arora says small business owners need to exercise extreme caution, particularly if they’re planning on borrowing from alternative lenders. “A lot of times they want their money back pretty quickly,” he warns.

 

Know the lender

When figuring out how much money you need to borrow, it’s vital that you research your lending options. Which banks or lenders are amenable to small business owners in your sector? Just conjuring up a random number for a loan will not help you if the lender is not open to your industry, says Beeson, who advises business owners to also explore nontraditional lending options.

 

If you need to figure out how much of a business loan you should ask for, you will need to know offhand all of your business and non-business expenses. Not only is this information essential for maintaining good credit—a prerequisite for getting a loan—but it will help you come up with a realistic number that will allow you to comfortably fulfill repayment terms and not disrupt your cash flow.

 

Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.


QAstephentaylor_Body.jpgby Iris Dorbian.

With over 30 years of experience as a chief financial officer/controller, Stephen Taylor prides himself on having the expertise and knowledge to help businesses identify problem areas and then craft solutions to address them. In his current role as partner at B2B CFO Partners, a 26-year-old business advisory firm comprised of former CFOs, Taylor says the bulk of his practice is helping small to medium-sized business owners devise a sound plan on how to sell or exit their business. Recently, Taylor spoke to business writer Iris Dorbian about why he feels it’s imperative that business owners should plot their end scenario right when they launch their business instead of right before retirement.

ID: How do you advise small business owners who want to exit their business? What's the first thing you do?

ST: I start with all my clients asking questions. In the case of an exit, I ask them, "What is it you want to accomplish?" Then the questions go toward assessing their financial and mental readiness to exit. Depending on where they’re at, one exit option might be better suited to their circumstances than another.

ID: When do you think it’s the right time for a small business owner to exit? And conversely, when should they stay?

ST: That’s really up to the business owner. In some cases, the business owner is nearing retirement age but there are other instances where younger entrepreneurs—we call them serial entrepreneurs—build a business and then want to sell it to build another business.

I worked recently with a business owner, close to retirement, about 64 years old, who had a third generation family-owned business. He was just tired and wanted to exit. One thing that all of my partners do when we start working with a client is a "discovery analysis." It's a seller’s due diligence. This gives you a quick snapshot of where the business is. In this case, the client had a manufacturing business but he had some other activities, which included real estate and some rental properties that he owned. By the time I finished my discovery analysis, I concluded that for the five quarters of good data I was able to get, he had very minimal earnings before interest, taxes, depreciation and amortization [also known as EBITDA]. He would not be able to get the price for the business he needed to retire. I helped him get more liquidity into the business. But he will have to spend the next three to five years trying to get some revenue back into the business and some profit. So he was ready to retire, but it just couldn’t happen.

ID: That’s unfortunate.

ST: It is. Typically these business owners have an unrealistic expectation of what their business is worth. I mean, people tell them things about how to value their business and they tend to listen only to the things that assign the maximum value in their mind for it. We’re able to look at it more objectively and give them a realistic gauge. That’s why it’s best to start this process early. It can take three to five years of planning to do it right.

QAstephentaylor_PQ.jpgID: What was the size of his business?

ST: His business was $7 million to $10 million in revenue. [The staff size was] probably 25 to 30 and probably half of those people were in the office doing various support functions.

ID: How often do you work with small businesses in this situation?

ST: I talk about exit strategies even when the business owner doesn’t bring it up. One of the things that happens a lot in a small business is that for the business owner, it becomes a job and not a business. And when he’s ready to retire, there’s really nothing there of value. If the business owner wants to build something of value, build a company—that’s one thing. But if he’s just in it for a job, he’s not going to have anything of value when he wants to exit.

ID: Based on your experience and insight, what would be your tips to small businesses owners seeking an exit strategy? What should they do and what should they not do?

ST: First of all, it takes a lot of planning obviously. One thing that a lot of small business owners do is run their businesses for tax efficiency and they take advantage of charging whatever they can for the business to save on their income taxes. It’s perfectly fine and legal to do that, but it creates a problem. Buyers will typically look back at the three years of EBITDA. It is important for a business owner to do everything possible to maximize EBITDA at least three years prior to an exit.  Some business owners continue to run their business for tax efficiency but that diminishes EBITDA and the perceived value of the company. If you know you’re going to exit the business in three years, you should start managing to maximize profits and not minimize taxes.

ID: Do you have another example with a small business client that you can share that illustrates one of your tips?

ST: Another one that I was indirectly involved with was when I helped a partner. In this case, the owner wanted to retire but was willing to stay on temporarily. We were able to engineer a plan whereby the manager, chief operating officer, and a group of senior managers were able to buy the business out over time with the seller taking a [promissory] note. That can be done when the business owner has done a good job of building his management team. If you have a strong senior management team, they’re always good candidates to acquire the business.

Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.


VentureCapital_Body.jpgby Jen Hickey.

 

Before taking on venture capital, entrepreneurs must ask themselves a fundamental question – “Do you want to be rich or be king?” As Harvard Business School Professor Noam Wasserman explains, it’s difficult for founders to maintain control over their businesses once they take on outside investors. However, without them, such businesses like Twitter and Facebook would likely have never have taken off. For those entrepreneurs who have developed a product with a large untapped market and a potential for rapid, high growth, venture capital (VC) funding makes sense if you’re willing to give up some control and most likely sell your business at the end of the investment period, or fund life-cycle (i.e. when the fund becomes due). However, if you would like to build a generational business, an angel investor may offer more favorable terms that will allow you to receive some equity while maintaining a degree of control.

 

Looking for that big return

“A VC firm does not invest in a business,” explains investment banker Jeff Koons of San Francisco-based Vista Point Advisors. Instead, it invests in a company that will sell for a lot more than it’s worth at the time of the initial investment. And such firms are looking for a big return (up to 20 times the initial investment) in a relatively short amount of time (3 to 10 years, depending on the fund life-cycle). “If your business is growing just 20 to 30 percent per year, VC funding is not for you,” notes Koons. Focusing primarily on the tech sector, Vista Point acts as a broker to bootstrapped entrepreneurs entering the VC world for the first time. “We help them think through the process from valuation to exit,” notes Koons.

 

Defending your interests 

Vista Point vets various VC firms for the best valuation and possible outcome for the entrepreneur. Unlike others in their field, Vista Point only works on the “sell side,” meaning their sole clients are entrepreneurs. They do not work with VC firms on other deals. “VC firms sometimes look for a break in the negotiations on these smaller deals for the promise of future work for the investment bank on more lucrative deals down the road,” cautions Koons. So a good rule of thumb is to ask any investment brokers if they work on the “buy side,” with VC firms, as well.

 

Having sound advice makes all the difference when entering the complex world of equity financing. Joshua Mag, CEO of SquareHook, a content management system provider, consulted a former professor who is an operating partner at a large VC firm before taking on equity from an angel investor in June 2012. “Potential investors want to know what market you’re targeting and its size,” notes Mag. “They’re not going to invest in something that doesn’t produce a large return, so there needs to be a big potential market for your product.” The angel investment allowed Mag to quit his full-time job to focus exclusively on building his business, which included hiring a few employees and seeking development assistance. “My decision to take on capital was a choice of acceleration,” explains Mag. “Had I not taken on the capital, this would have been a slower task.”

 

Equity comes at a price

Mag gave up 20 percent of equity of his company in exchange for the angel investment; however, a VC investor typically wants at least 20 percent ownership in addition to a board seat and the ultimate sale or IPO of your company upon exit. Nevertheless, how much ownership an entrepreneur gives up, whether to a VC or angel investor, is largely determined by the amount of equity the entrepreneur needs, the valuation of the business, and whether it’s the first, second, or third round of investment.

 

Aaron Skonnard, CEO of Layton, Utah-based Pluralsight, grew his company’s online training platform for software developers organically for about a decade before taking $27.5 million in Series A funding in 2012. “We saw periodic interest over the years from investors,” notes Skonnard. “But we thought it was too risky to give up too much control in case we needed to change direction.” It was only when Skonnard and his partners felt they had a solid business model and were set to enter a high-growth mode that they decided to take on VC funding.

 

VentureCapital_PQ.jpgShop around

“It wasn’t so much about the money as forging those strategic relationships,” Skonnard points out. “Once we decided, then it became a financial exercise –– how much do we take, how much do we want to sell, and who’s the right partner to go with.” Skonnard and his partners met with five or six VC firms several times before they decided on one they believed would add the most value to their business. “It was our comfort level with the people and personalities that drove our decision more than the financial metrics,” explains Skonnard. “Make sure you’re happy with the people that will be on your board of directors.”

 

Investors provide more than just cash

While the cash infusion helps grow your company, partnering with a VC firms also gives you access to new players in your industry, which in turn helps attract the top talent and increase your market presence. Pluralsight’s traditional model had been to work directly with content producers to build its online training library. But with the funding, it was able to finance the purchase of two online training companies, which doubled its content library in a matter of months. “The Series A really unlocked our ability to make those acquisitions,” Skonnard points out. “We would have never been able to consider that without such funding.”

 

Beyond their connections in financial and sector-specific industries, some VC investors have an entrepreneurial background as well. Brendan Anderson bought his first business in 1995 and has helped manage and invest in many more since then. In 2006, he co-founded Cleveland, Ohio-based Evolution Capital, which invests in $5- to $6-million companies that have at least $500,000 in free cash flow. “We are point-in-time investors looking for entrepreneurs/founders with a vision creating something compelling in the market,” explains Anderson. He and his partners then work with these entrepreneurs to implement the steps needed for growth.

 

These include getting the entepreneurs’ financials in order to develop a plan for growth, which in turn enables these businesses to attract the best people. Next is transparency, making sure the entrepreneur communicates his vision and shares day-to-day operational data with employees. Finally, holding the entrepreneur and employees accountable for tasks that will move their company forward. “Once these best practices are implemented, they’re happy with the results,” Anderson points out. “But the process of doing it is usually painful.”

 

“The founder/entrepreneur still owns a major piece of the business even after we invest,” Anderson points out. However, Evolution Capital typically controls the majority interest (more than 50%) and maintains the right to change management and control their exit (with a typical investment ranging from 3-7 years). “We want to build businesses that continue to grow long after our ownership,” he says.

 

Understanding terms, conditions, and valuation

If you’re considering taking on equity, it’s critical to understand the terms and conditions of any investment agreement. Whether the entrepreneur maintains some control is largely determined by how the deal is structured. Mag decided to go with an angel investor, who was looking for a longer investment with annual dividends rather than a large payout at the end of a VC fund life-cycle. “Taking on VC means you need to have an exit strategy: IPO, sell, or dividends,” notes Mag. “Most VCs want a full exit to collect on their return within a period that is reasonable.”

 

SBC newsletter logo.gifAnd that’s largely determined by when a business becomes part of the fund. “You want to be invested as soon as possible in the life of the fund,” explains Koons. “If there’s only two years left before the VC firm needs to return capital to their limited partners (i.e. investment occurs in year five of a seven year fund), a company could be sold for a loss or spun out even if it’s achieving its growth projections.” 

 

Typically, investors are looking for preferred terms that will position them better than other parties (e.g. paid first upon exit, right of first refusal, put option, liquidation preference). Pluralsight has a minority interest deal with their VC investment firm, which has allowed Skonnard and his partners to only give up two seats on their seven-seat board. “The founders still control the board and the ultimate direction of our strategy,” notes Skonnard. “While we have a very healthy relationship with our new board members, we didn’t want to give up too much control.” 

 

It’s also important to understand valuation, as you need to know what your company is worth in order to negotiate the best terms. “One way to valuate your business is to look at your competitors to see what they sold for upon exit,” explains Mag. There are a number of public sources and tools that list industry comparables. This will also help figure out how much equity you’ll need to put into your business to achieve your growth plans. “That investment defines what your business will be valued at,” explains Mag. “By taking on more than you need, your business is likely losing equity unnecessarily.”

 

Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.

QAmitchellweiss_Body.jpgby Jen Hickey.

 

 

Business writer Jennifer Hickey recently spoke with author and educator Mitchell Weiss about his latest book Business Happens: A Practical Guide to Entrepreneurial Finance for Small Businesses & Private Practices. Weiss is an adjunct professor of finance at the University of Hartford and co-founder of the University’s Center for Personal Responsibility. He has also owned and operated commercial finance companies, providing financing to businesses of all sizes for over 30 years.

 

JH: What was the inspiration for this book and how did you come up with the structure?

MW: It’s written from two perspectives: From my experience of running businesses as well as that of someone who’s provided financing to businesses. I tried to thread my personal experience along with putting out the basics of how to run a business. Part one goes over all you should do/know before founding a business. Part two covers organizing and managing a business. Part three details how a business seeks financing and how to overcome financial adversity. At the end of each section, there’s a list of questions meant for the reader to synthesize that information and apply it to their own businesses. At the end, I include anecdotes of my 30 years running businesses.

 

 

JH: Discuss the importance of “chemistry” and “cookies” when choosing legal/financial advisors for your business.

MW: I use the example of when one of my partners and I were looking for a law firm. We compiled a list of possible firms based on recommendations from colleagues after researching them. We then began the interview process, visiting these firms a number of times to meet with partners. The firm we ultimately chose was well established and the only one that offered us food! While feeding us didn’t hurt, we decided to go with this firm because we felt the most comfortable with them. Of course, there are costs to consider. But, after several meetings, we felt they could guide us through complex matters with our best interests in mind. They earned our trust. You need to get a sense of the people you’re working with to determine that level of trust. We ultimately went with our gut, and we weren’t disappointed.

 

Another point this story brings up is ‘assignment of credibility.’ We’re pre-disposed to trusting someone a family member/friend/colleague trusts. Those referrals carry a lot of weight and can, as a result of expanding your network, help you find other people you’ll need for your business over time.

 

JH: What are the primary risks and responsibilities every entrepreneur must stay on top of when running a business? 

MW: Business owners are responsible to five constituencies: customers, suppliers, lenders, investors, and employees. If you don’t treat your customers properly, they won’t come back and, worse, may go on Yelp or some other social media site to criticize your business. If you don’t pay your suppliers on time, they’re going to shut you down or raise their prices, which will eat into your profits. If you don’t manage your finances properly, your lender may call the loan. If your business doesn’t perform as promised, you won’t get investment capital, including from family/friends. Finally, if you don’t compensate your employees fairly, they’re not going to stick around long, and when you have high turnover this affects all the rest of your constituencies.

 

All the risks come down to financial risks in the end, as they all affect the bottom line. First, there are ‘market risks’—a market change that you didn’t see coming or worse didn’t respond to it. There are ‘hazard risks,’ which can be mitigated with various insurance products. Finally, the lack of available credit is a serious financial risk when you go into business. Money was easy to get until 2007 and 2008, and then banks reigned in their lending practices. I advocate having more than one way out of the room. Do you have access to other forms of capital? Do you have assets you can sell off? Your business might be harmed without another way out.

 

JH: Explain the difference between a business plan and strategic plan and why it’s necessary to have both?

MW: A business plan is your foundational document: your idea, the concept, why it’s an opportunity. It maps out how you plan to get your business off the ground, who will be involved and how you plan to accomplish this. The business plan is then modified through the strategic plan, which analyzes your business’ strengths, weaknesses, opportunities, and threats, also known as SWOT analysis. Strengths/weaknesses are internal—company’s strong/weak points—and opportunities/threats are external factors that affect your business. A SWOT analysis should be conducted routinely. You need to stay on top of the market to make sure you’re not missing anything. Talk to your sales people. Are there pricing or quality control issues? You should always be sizing up your businesses against others in your industry.

 

JH: What is a cash conversion cycle and why is it important to track?

MW: A cash conversion cycle is an end-to-end evaluation—from production to collection. It helps you figure out how much cash you’ll need to float your business until you can collect on your receivables. As you do that, you’re examining three key areas of your business:

 

  • Inventory-to-sale conversion period: how long it’s taking to produce your product.
  • Sale-to-cash conversion period:  how long it takes to sell the product.
  • Purchase-to-payment conversion period: how long it takes to collect on the product once it’s sold.

 

It gives you a snapshot of so many areas of your business. You can see whether there’s been a slowdown in the product cycle or maybe you’re not collecting from customers as quickly as you should or paying your bills too quickly, which leads to a cash flow shortfall. Maybe too much cash is going toward operating costs or your products are underpriced. It forces you to look at all these different aspects of your business, which are also the same metrics a lender/investor will be evaluating if you seek outside financing.

 

QAmitchellweiss_NEW_PQ.jpgJH: You go into great detail about the ins/outs of taking on debt vs. equity. What should be considered by those seeking cash to grow their business?

MW: Whether you’re considering borrowing from a lender or seeking investor equity, all money has to have a way out. Because debt has a higher priority of payback, it comes at a lower cost than investment capital. Equity costs more because investors are taking on more risk. Suppliers, lenders, employees all get paid first. Because there’s a greater risk, investors want a bigger return, which also includes a percentage of your business. From an entrepreneurial standpoint, you want to borrow as much money as you can so you don’t have to dilute ownership in your company.

 

Lenders will be looking at the overall story arc of your business. That’s where the ‘5c’s of credit’ come into play—capital, capacity, collateral, conditions, and character. Earnings will be assessed to determine your company’s capacity to pay back the loan and collateral available in case you can’t. The condition of your company to weather any shocks or downturns will also be assessed. And because most business loans require a personal guarantee, lenders will not only be looking at your credit scores but also running a Lexis/Nexis search to find out if they can trust you to pay them back.

 

You should also consider the terms and conditions of the loan to make sure you can live with them. What happens if volume falls off? Will you still be able to make your monthly payments? If a security deposit or additional collateral is required, negotiate for a release once you’ve paid down the loan to a certain value. If there are certain guarantees put in place because of a limited operating history, negotiate to have your business reviewed once you’ve paid down the loan to a certain extent so those provisions can be modified or released.

 

JH: What are some of the pitfalls a business can encounter if there’s no clear organizational structure in place?

NM: It’s important to have the right people in the right positions and the appropriate responsibilities for the positions they’re in. You need to make sure the workload is properly distributed when you’re building up the business. I prefer more horizontal organizations, with working managers that have more than one or two people reporting to them. That’s how I ran my businesses. If the hierarchy is too steep, then you run the risk of having to reduce your staff if business drops off.  Such disruption causes instability and fear among your work force, which in turn impacts productivity and can lead to even more turnover. You want to manage your business tightly. It’s more stressful for workers to have too little work than too much. Hire when you need it. Not in advance.

 

You also should have good checks and balances to ensure there’s another set of eyes looking over important matters. This is called ‘segregation of responsibilities.’ While you need to have your people running checks on their own areas, you also need them to cross-check others. This prevents bad things from happening, including fraud. For example, when I was CEO/chairman, I couldn’t authorize payment on my expense reports; my CFO had to sign off, but not until after they’d been audited and approved by our accountant. Likewise, I had to sign off on my CFO’s expenses once audited and approved.

QAcharlesgreen_Body.jpgby Susan Caminiti.


For many small business owners, debt is a four-letter word and something to be avoided. But is that always the smartest way to view it? No, says Charles Green, executive director of the Small Business Finance Institute, an Atlanta-based non-profit that provides financial education to entrepreneurs. Business writer Susan Caminiti recently spoke with Green about the smartest ways SBOs can use debt, how it can help to facilitate growth, and when it’s not a good idea.

 

SC: Let’s start with the big picture: Is it getting easier for small business owners to get debt financing?

CG: I would cautiously say yes, not because of the environment, but because of all the choices that are out there. I’m actually writing a book that will look at different financing sources for small businesses, including the private equity money that is now available through different technology platforms. In the past, private equity rarely connected to a small business unless that business had the potential to scale up and go public. Now you can get a $5,000 working capital loan through a technology site such as IOU Central.

 

SC: Why then do you believe that so many small business owners have such a negative view of debt?

CG: It’s a value judgment and I don’t criticize it. A lot of people want to build a business from the floor up and they don’t like the idea of being indebted and therefore obligated to a third party for anything. And so they are very cautious about using any kind of leverage to extend their business opportunities or to step out and grow. My father was the same way. He was a child of the Depression and very cautious about money. He used to lose sleep over a $92-a-month house payment.

 

SC: What are some of the reasons why a small business owner should consider taking on debt?

CG: If there is an opportunity to expand the business, financing basically allows you to move forward in a more timely or bigger manner without having to wait for accumulated profits. If you have customers lining up to buy your goods or services and you need financing to provide the labor or the raw materials, then that’s a good reason for taking on debt. The challenging part is measuring what that growth really is and not letting it overwhelm you.

 

SC: In what regard?

CG: Growth can put a company out of business as fast as insufficient sales can. If you have a manufacturing company, for example, that has to order raw materials, you typically have to pay for those materials shortly after they arrive at the plant. Then there are labor costs in the form of workers who have to be paid every week to convert those raw materials into product. Now once those products are complete, you may not get paid until 30 days to 60 days after those goods are delivered to the customer. That gap—the time between what you have to pay your vendors and when you actually get paid—has to be managed correctly or a business will run into trouble.

 

SC: Is that where debt financing can help?

CG: Yes. If a business can cover say, 25 percent of costs from the cash they have in the company and they can obtain a line of credit that can handle the other 75 percent, that’s a pretty good ratio. Then once the payment is received from the customer, the business pays down the line of credit.

 

QAcharlesgreen_PQ.jpgSC: If a business has a line of credit but needs to increase it because of new orders, what is that conversation like?

CG: A small business owner would want to have that conversation with their banker. But the banker is also going to want to see that the owner is going to hold some of those profits in the business and reinvest them rather than just rely on the bank to put up the additional money.

 

That simply means that the owners are not taking money out of the business when they see that there’s been a significant increase in sales. Too often you’ll see an owner run out and buy a new car or lake home with that extra money rather than let the cash accumulate in the business.

 

SC: When is it not a good idea for a business to use debt?

CG: If a company owns a piece of real estate or some other asset and the owner starts borrowing against that for general purposes, that’s not a good idea. If the owner loans the money to himself, it serves no economic purpose for the business.

 

SC: If a business is in good financial shape, should it consider a line of credit just in case?

CG: I would say so. It’s a contingency against any number of factors that might come up that have nothing to do internally with the business. It could be that a weather event shuts your company down or the business is a victim of financial fraud. Think of it the way you think of an insurance policy. When you’re in that position you don’t want to go hat in hand to get capital to survive. You want the resources to get up and move on and have the financing issue behind you. The best time to ask for money is when you don’t need it.

 

SBC newsletter logo.gifSC: Should you have a specific number in mind when you meet your banker to inquire about a line of credit?

CG: I think the more important thing is for you to understand what your business can handle in terms of paying it back. If I have a net profit of $100,000 a year, I don’t think I can get a line of credit for $100,000. It will probably be something smaller than that. But then again, I shouldn’t need much more than that. Start the conversation with your banker and simply ask how they would approach a loan for a business like yours.

 

This interview has been edited and condensed for clarity.

 

Disclaimer: The opinions expressed are solely those of the author and interviewee. Since the details of your situation are unique, you should always seek the services of a financial planner, CPA, or other qualified professional.

Troubledcredit_Body.jpgby Iris Dorbian.

 

It’s a Catch-22 situation that many small business owners, particularly those adversely affected by the recent recession, have faced. To successfully apply for a loan from a bank or another accredited lender, it’s important to have excellent credit. Yet suppose your business was hit hard by the economic downturn and as a result, your credit report is less than stellar? What then?

 

You certainly aren’t alone. According to a July 2012 study released by the Small Business Administration, the number of U.S. small business loans, characterized as $1 million or under, dropped by almost 5 percent in 2011, compared to three years before. Factoring into that decline was the low number of approved small business microloans, defined as $100,000 and below.

But that dismal picture could be fading. A recent report by Experian and Moody Analytics revealed that in the first quarter of 2013, small business credit improved markedly from the final quarter of 2012, jumping to a 4.5-percent increase.

However, such welcome tidings may not be of much use to small businesses plagued with bad credit scores. How then can they obtain the financing they need to stay afloat and survive?

1. Review your credit report and correct errors on it.

Before you even think of scouring nontraditional sources for financing, you must first review your credit report to check for errors. Rectifying them could help you hike up your credit score. And if this is the case, you certainly have plenty of company. According to a study released earlier this year by the Federal Trade Commission, the U.S. consumer watchdog agency, 42 million Americans have errors on their credit report.

In addition to correcting outdated information, you will need to remove duplicate or erroneous accounts, which according to Jeffrey Strickfaden, CEO of Improve Credit Consulting, a provider of financial management and credit improvement services, can magnify negative credit items. Strickfaden, who estimates nearly half of his clients are small business owners, also adds that “for any accounts that you may have closed in the past, make sure to verify that they are listed as voluntarily closed, and not closed by the creditor.”

 

2. Stop borrowing on your personal credit cards

Although often thought of as a viable short-term solution for financially pinched small business owners, the consequences of excess credit card use may hurt you in the long run, particularly if you’ve been borrowing way too much. Avoid this desperate measure at all costs.

Rohit Arora, CEO of Biz2Credit, an online resource for small business finance, agrees. “If you owe more than 50 percent of your outstanding credit limits, your credit score drops,” he says. “It is better to use multiple credit cards than maxing out one card.”

 

3. Document your business investments

Troubledcredit_PQ.jpgIf a small business owner can produce an extensive trail of documentation proving that she has invested in her own business, then it might be easier to obtain financing, even with a poor credit score, says Arora.

“It’s easier to tell banks that the reason you have debt is because you are spending to try and grow your business,” he explains. “This is especially true if you are trying to get lower financing, such as an SBA loan.”

4. Make credit card payments on time

This might sound like personal finance 101 but it’s a truism when it comes to maintaining good credit. If you want to clean up a spotty credit history, then it’s imperative you pay your credit card debt on time. Nothing will make your score plummet faster than late payments.

 

5. Use merchant cash advances

For small businesses that have been unable to repair their credit for whatever reason, merchant cash advances, which are funds provided to small business owners via their merchant provider for a percentage of credit and/or debit card sales, could be a viable financing option. The only drawback is the risk it incurs. According to Wanda Strickfaden, president of Improve Credit Consulting, becoming delinquent with monthly repayments “can lower your scores with the business bureaus and eventually cause further damage with a business rating.” But even with this risk, the option can still be a good alternative for small business owners exploring nontraditional avenues of financing.

 

Jeff Strickfaden cites an example to bolster his point. “One of our colleagues that is a certified public account was interested in this option because it afforded him the freedom of having cash flow on hand if needed,” he recounts. “It also gave him other opportunities with different resources for lending.“

 

6. Seek out community organizations or microlenders that provide nontraditional financing

For many start-ups or existing small businesses that have either nonexistent or poor credit history, going to the route of traditional lending is not an https://smallbusinessonlinecommunity.bankofamerica.com/servlet/JiveServlet/downloadImage/4542/Image-CTA-v2.1.gifoption. However, there are a plethora of alternative organizations that can help small business owners secure the financing they need.

 

Rohit suggests ACCION, a microlender, which according to its website, issued its first microloan 40 years ago, as an option. Another alternative is SBA’s microloan program, which provides loans of up to $50,000 to help small businesses.

 

And, according to Dawn Reshen-Doty, president of Benay Enterprises, Inc., a Connecticut-based provider of services to both small and large businesses, there might be development organizations in your state that provide non-traditional financing, loans and/or grants. “They also often provide small business training so that companies can learn how to better manage their money, watch their cash flow, and become more viable in the long run,” she adds.

 

As an example, Reshen-Doty refers to Community Economic Development Fund (CEDF) in Connecticut, which she says provides between “6 to 10-year low interest rate loans and even matching grants that do not have to be repaid.”

 

A caveat is issued with this recommendation. “Of course they require several years’ financials,” she notes. “Applicants have to show that with the infusion of loans and grants, their business will remain at the break-even point or become more economically successful. They even have programs to subsidize payroll costs for new hires so that businesses are incentivized to hire more employees.”

 

Other examples from Reshen-Doty:

 

  • The Massachusetts Growth Capital Fund, which does provide low-interest financing to small business that are “able to demonstrate potential” but have been denied financing through traditional outlets; and

 

Although the paperwork that these community organizations require might seem daunting to some small business owners, Reshen-Doty explains that “the process is worthwhile, as you can learn what your business truly needs to succeed as well as gain invaluable information and support from agencies that want local businesses to grow and thrive.”

 

For small businesses that have been unable to obtain financing due to poor credit scores, there are positive solutions in lieu of closing shop. Just do some research and you will find a wealth of alternative financing options at your disposal.

 

 

Disclaimer: The opinions expressed are solely those of the author and interviewees.  You should consult a qualified professional to assist you in determining the most effective funding options for your business.

OptimizeCash_Body.jpgby Iris Dorbian.

 

For a small business owner, managing your cash flow, (the movement of cash to and from your business as opposed to cash deposited in a bank) may be your most important responsibility. In fact, in a recent poll conducted by CPA2Biz, the marketing and technology services subsidiary of the American Institute of CPAs, 83 percent of the 500 small businesses surveyed reported that their prime concern is maintaining adequate cash flow.

 

And according to the Small Business Administration, the federal agency that provides support and resources to small business owners and entrepreneurs, the failure to manage cash flow is a significant reason why so many small businesses close their doors each year. Make no mistake about it: Even if it’s unintentional, just a mere oversight or misstep in your handling of the company coffers can cause untold damage to your reputation, brand, and credit rating. How then can you prevent such errors from happening while optimizing your cash flow? Here are five cash flow best practices that can steer you in the right direction.

 

1. Negotiate with vendors

This takeaway can be a great method for pre-empting future financial headaches. If you’re experiencing a fiscal pinch, talk to your vendors about extending due dates. Or try re-negotiating payment terms. Remember, your vendors are also in business and they, like you, want to get paid on time.

 

John Burger, owner of the online toy company Playfully Ever After, has made this tip a key underpinning of managing his company’s cash flow. And based on his experience, most vendors are willing to be flexible if it guarantees payment. 

 

To bolster his point, Burger, whose company is based outside Dallas and has seven employees, recounts an experience where re-negotiating with a vendor garnered positive results.

 

“We hit a cash-flow crunch after spending quite a bit of money at the Toy Fair 2013 expanding into new toy lines,” he recalls. “There was no way we could place the large orders we needed to make to sustain our top-selling brand. I called and talked with our rep and they were more than willing to work with us. In fact, they even offered us special terms. From now on, we only have to spend $3,500 to get the same 10 percent discount or $1,500 to get a 5 percent discount. This meant we could reorder more frequently and keep items in stock, which increased sales for both of us.”

 

OptimizeCash_PQ.jpg2. Build yourself a cushion

Almost every business goes through an up-and-down cash cycle. Such fluctuations can often be dictated by myriad factors that range from seasonal trends to the overall health of the economy. During periods when your cash flow is booming, don’t get complacent and risk your business with extravagant or unnecessary expenses. Be prudent in your spending and start saving for those periods when money might not be flowing like champagne.

 

Adrienne Polk, operations and strategy manager of the Washington, D.C-based Ross Business Management, a provider of financial and operational solutions to small businesses, agrees. “You want to create a buffer along the way, not just once in a while,” she says. “This will allow you flexibility and more breathing room in your business. When you are down to the wire all of the time, it can be completely paralyzing. Although you may need to spend money to make money, if you are paralyzed by fear or lack of funds, your business will suffer.”

 

3. Trim unnecessary expenses

If you want to attain a strong grasp of your cash flow, then it behooves you to make a thorough and detailed assessment of the items that can be cut from your balance sheet and what can stay in. Scrutinize your expenses. Figure out what is essential and what can be excised. 

 

You
don't have to buy the employees lunch, take a client golfing, or spend money on a birthday cake,” Burger explains. “Those types of things can wait. It's more important that your employees get paid and you have money to buy product.” 



 

4. Request prompt payment of services

This might sound like a no-brainer solution to cash flow problems, but it bears repeating when dealing with vendors and/or clients.

 

Andrew Schrage, co-owner of Money Crashers, a personal finance website, agrees, but notes that debtors might need to gain an incentive to ensure prompt payment. “To motivate debtors to pay quickly, offer a small discount for prompt payment,” he says. “So even though you may take a bit of a hit on profits, it's ultimately worthwhile.”

 

5. Tighten up employee hours during slow times

To better optimize your cash flow, you might consider reducing hours for employees during the slow periods. This tip has worked wonders for Burger’s Playfully Ever After staff. When his business was experiencing the doldrums, Burger had his hourly staff start work one hour later. And on days that were especially slow, staffers were told to go home earlier than expected.

 

“This saved an extra $600 a month in payroll,” he explains. “Every bit helps.”

 

Along the same lines, if your cash flow problems are growing increasingly dire, short of terminating your staff, you might also want to change employees’ salary status to an hourly basis. “Most employees hate this and it can be a tough sell,” admits Burger. “But it allows you to save money on slow
times when employees may not be working as much. If your business is in jeopardy, this is an option you should think about.”

 

Other ways to solve your cash flow problems courtesy of Burger are as follows:

 

  • Offer one free vacation day instead of pay raises. “To improve cash flow for the next year, give everyone in the company an extra day off each month in lieu of pay raises,” he says. “I had an employer do this once, and at first people were upset, but then we learned to love having the first Friday off of every month.”
  • Establish a line of credit. “Talk with your banker,” advises Burger. “Most banks are more than willing to help you establish a line of credit for your business. You don't have to use it all the time, but this can help when cash gets
tight.”

 

To maintain the longevity of your business operations, it’s imperative to manage your cash flow as wisely as possible. In this area, there’s no room for carelessness or irresponsibility, especially if you want your business to survive the long haul.


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

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