As a business owner, you’re always busy. It’s easy to focus on putting out fires instead of working on your business. Unfortunately, not knowing your numbers is probably costing you a lot of money. A well-run business is both more profitable in the short term (= money in your pocket) and more valuable in the long-term (= more money in your pocket). It’s a win-win.
With that in mind, here are some ideas to help you whip your business into a well-oiled machine.
Master the Basics
Are your books a little messy? You’re not alone. Many business owners are experts in their field, but they don’t spend as much time understanding their numbers as they need to in order to run a highly profitable business. Dan Steiner, CEO of Steiner Business Services tells his clients that good books create a solid foundation for their business. “If you don’t have a good foundation, you are going to go around in circles.”
Too often we confuse gross revenue with profit. And how often have you gotten a profit and loss statement from your accountant but then you looked at your accounts and didn’t see nearly enough cash on hand?
Gross Revenue is everything your business brings in before you pay any expenses. Having a high revenue figure is a good start, it’s not the full picture.
Your Profit and Loss shows you what you made after you paid all of your bills. However, you can have a profitable business that’s also cash-poor, which leaves you vulnerable to shocks and also unable to capitalize on opportunities as they present themselves.
Say it with me: cash – cash – cash. How much cash do you have on hand? How much free cash flow does your business generate each month? Strong cash flow often means more money to the business owner and a higher valuation if you are looking to sell your company down the road. Strong, positive cash flow and a cash reserve also open up competitive advantages for your business.
If your competitors are in a poor cash position and they can’t ride out a recession, how will you get the word out that you’re open for business if you don’t have cash to pay for increased marketing and advertising?
If your competitor goes out of business and wants to liquidate their equipment, wouldn’t you love to be able to build out your fleet or replace your aging equipment at lower prices? What if you can’t access credit because your business finances aren’t in order?
If your competitor has to lay-off a key employee, could you afford to scoop them up?
Frankly, not a lot of small businesses have CPAs that are truly equipped to help them make savvy financial planning decisions for their business. Consider hiring a Fractional CFO to bring greater insight into your business decisions.
Create a Business Spending Plan
A 2014 San Francisco Fed analysis on the health of small businesses found that “More than 60% of businesses with excellent financial health always developed a budget and established a separate bank account for payroll.”
I use a business budget myself. I have a simple monthly and annual projection for my business that I created in Excel. Be sure to consider investments you would like to make in your business this year. Does your projected cash flow support it?
Here are 5 free business budget templates to get you started. I’ve used the Google Doc version with clients, it’s easy to use and simple to set up. You can also ask your CPA or Fractional CFO for a business budget they like to use.
Business Bank Account Structure
Do you have an appropriate bank account structure set-up for your business? Depending on your business, you may need a payroll account, an operating account, an account for taxes, a profit or profit-sharing account, etc. This will be unique to each business. Work with your CPA and bookkeeper to set up a system that works for you.
I have an operating account, tax account, profit account, and an emergency savings account, which is loosely based off of Mike Michaelowicz’s book “Profit First.” If you have a business emergency savings account, check the rates and fees being offered. I moved much of my savings to an online business bank because they offered a more competitive rate than the bank I use for my operating account.
Don’t want to open up multiple accounts? Your bookkeeper can also set up a similar system via your chart of accounts in your bookkeeping software.
Having multiple accounts can add a small amount of complexity but following a disciplined system can help reinforce your business budget and ultimately increase profitability.
Take It One Step Further
Once you clean up your books and you review your business budget, dig in a little deeper. As Dan Steiner, Fractional CFO, pointed out during our interview, “Do you know where your revenue is truly coming from?” Dan offered the following tips for business owners:
1. Take some time to look at your top selling items or services
What’s the true cost to deliver that product or service? Do you need to raise your prices? Should you stop carrying an item?
2. What is the profit margin that you want to make on each service or good?
If you aren’t going to make a profit then why run a business? Make sure it’s happening. After tracking my time, I realized I needed to increase the price of one of my offerings.
3. Review your employee productivity
Do you have one employee who handles a significantly lower client load? Do you have a team that takes longer to finish on-site work compared to other teams? Are your top performers getting burned out because they’re handling more clients or projects than they really should? Manage your employee productivity and capacity for a more profitable business.
Prevent and Detect Fraud
Even if you have a bookkeeper (internal or external), you need a second set of eyes to reconcile your bank statements at least every other month (monthly is ideal) in order to detect and prevent fraud. Internal controls can help reduce the incidence of fraud.
According to the Association of Certified Fraud Examiners, small businesses (firms with fewer than 100 employees) experience 30% of all fraud cases but they experience the same median fraud loss of $150,000.
Fraud in Small Business Infographic
Forced vacations are a way many larger businesses attempt to mitigate fraud losses. Once that individual is out of the office, fraud may come to light. If you have someone handling your books who’s refusing to stay home or never takes a vacation, get curious.
While you don’t have to become a financial expert, these small steps can help you increase the value of your business and detect fraudulent behavior. Invest in the financial management of your company and you will see better financial results.
Questions for Lauren?
Financial planner and advisor, Lauren Zangardi Haynes, CIMA®, CFP®, CEPA works with business owners and leaders in Richmond and Williamsburg, VA. She also works virtually with clients nationwide.
As a fiduciary, she offers comprehensive Fee-Only financial planning and investment advisory services so you can live your dreams with confidence.