Salem Five OnBusiness – Finance Articles

Key Business Tax Dates: Part 2

Here are key tax filing dates for the upcoming quarter.

Key Business Tax Dates: Part 1

Here are key tax filing dates for the upcoming quarter.

Financial Ratios as a Road Map

Is a net profit of $200,000 on an income statement good? Look at the ratios. If it's earned on sales of $600,000, it could be. But if sales were $2.5 million, then the ratio is certainly less appealing. So how can ratios best be used to map growth?

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Get Paid Faster

Healthy cash flow is absolutely essential, so finding simple ways to get paid faster can have a big impact. Here are three ways to help speed payments.

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Cash Flow Fundamentals

Cash flow basically means, "Do I have enough cash in my bank account to cover my expenses?" Sounds simple, but you'd be surprised at how many people ignore this. So why is it the number-one killer of small businesses?

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Tracking EVA (Economic Value Added)

Economic Value Added (EVA) is a complicated formula that provides excellent insight into performance. The goal of calculating EVA is to determine true economic profit, after taking into account the opportunity cost of capital invested. Here's how it works.

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Strategic Cost Management

Cost-cutting and cost-containment tactics and techniques are common to any business. And, when tied to the budget, they're a necessity. Although it's often confused with those first two terms, "cost management" is another issue entirely.

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Figuring Out the Pricing Puzzle

Kate McGinley, founder of start-up McGinley Media, recently reached a tipping point in starting her mobile website and app creation business. "The trouble is," she writes in a query to Inc. contributor and entrepreneur Norm Brodksy, "I have no idea how to set pricing. My overhead is $7,044 a month, and it takes me about two weeks to develop each website or app. I have one client, a friend of the family, whom I charged $500 for a huge website, which I know was too little, but I'm worried about losing customers by setting my rates too high. Then again, I need to eat. What do you advise?"

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Vendor Discounts: You Don't Ask, You Don't Get

The number one principle involved in getting a discount is this: Ask for it. If you don't ask, you will never get a discount. There is nothing lost in asking. However, before you ask, think through the terms and what you're asking for.

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The Pricing Paradigm: How Low Is Too Low?

Tempted to cut prices? You're not alone. With slumping sales, many businesses have been quick to offer discounts. "Cutting prices is by far the easiest marketing technique you can use," says Frank Luby, a partner in Simon-Kucher & Partners, a pricing and marketing consultancy.

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Keep Exposures Covered

If you don't pay attention to your insurance coverages, you're missing out on the opportunity to save money and ensure that you're protected as well as you should be. If you don't account for structural property changes and even increases and decreases in business, you may be doing yourself more harm than good. An annual insurance assessment is one of the best ways to mitigate risk.

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Should You Fire Your Customer?

Fire your client? In this environment? Maybe. More than likely you have at least one, probably more, clients or customers that are more trouble than they're worth. For example, there are those who purchase only your lowest-margin services or products; complain about price and always ask for a discount; argue about the bill, claiming short shipments or defective products, when you know that's not true; or have other issues.

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Getting to Break Even

Getting to break even is the first step toward profitability. The calculations aren't difficult: If you can accurately forecast costs and sales, a breakeven analysis is a matter of simple math. You've broken even when your total sales or revenues equal your total expenses.

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Using Your Capital Structure
as a Hedge Against Risk

Companies are considering how their capital structures can protect against a broad range of catastrophic risks. But that's like a health plan that pays out only for the most costly, life-threatening diseases. Did BP envision a drilling accident that would shut off its access to short- and medium-term capital markets and result in worldwide condemnation? If it did, it certainly didn't prepare accordingly.

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When Does It Make Sense to Buy Your Business Real Estate?

With commercial real estate in a downturn, if you've been toying with the idea of buying a building for your business, this may be the right time. There are myriad advantages to buying. It's one cost you can control (e.g., no rent increases or lease negotiation) and it could be an excellent investment.

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Using Credit Cards the Right Way

If you operate a business, there are a million different things you need to manage and take care of on a daily basis. Unfortunately for many, managing your business credit rating, and in turn, your business credit cards, often gets pushed to the back of that list. But to succeed as a company, it is imperative to make sure your business is as reputable to creditors as it is to customers and vendors.

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Digging Deeper with Cash Flow Sensitivity

Effectively managing cash flow is what keeps you in business. Understanding its sensitivity—the cash flow "what ifs"—and how it can affect your business, can help you better prepare for any eventuality.

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Building a Budget 101

Building a budget from the bottom up is the best way to help control expenses and channel income where it's needed most. Doing it from the ground up means starting at the lowest possible level of detail so that you can account for all the critical areas in your business: revenues, cost of sales, advertising, rent, maintenance, utilities, and other overhead expenses.

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Separating Business and Personal Finances

Separating your personal and business assets offers you a better sense of how your business is doing, and makes it easier to handle your taxes and get additional financing when you need it. And, should you ever come under IRS scrutiny in the form of an audit, the process will be made much easier.

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Get Help Playing the Numbers Game

Many small businesses don't have the volume of financial transactions that necessitate hiring a full-time, or even part-time, bookkeeper or accountant on staff. Then again, the financial situation of their business is such that they could benefit from more regular financial review and planning and up-to-date accounting—instead of leaving every invoice, receipt, and ledger to hand off to the tax preparer at the close of the fiscal year.

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Save Power, Save Money with an
Energy Audit

As fuel costs continue to rise, every business owner is seeking ways to curb increasing energy costs. If you're paying the utilities for your office space or you own your building, an energy audit can save you money in both the short and long term through minimal changes in lighting, heating, and air conditioning systems. And the audit is often provided inexpensively or at no cost from your energy supplier or utility company.

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Getting Ready for Financing

If you’re seeking additional funding—whether through a bank or other financial entity—there are steps you can take in advance to prepare and put yourself in the best position for approval.

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Look Before You Lease

Leasing might be just the right thing to help you improve your cash flow. But making sure you’re armed with the right information before you sign on the dotted line can help you make the best deal.

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Credit: Lines vs. Cards

Both lines of credit and borrowing money on your credit cards can be effective ways to finance small business operations. Both are revolving and charge interest only on outstanding balances, and both have predetermined borrowing limits. But there are differences in terms of cost, convenience, and risk.

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Cash Flow Projections in Four Steps

Cash flow projections provide you the visibility you need to avoid problems and create the financial success you deserve. It's impossible to run a successful business without them. Creating cash flow projections does not have to be a difficult process. It is really a matter of using a few basic principles together with your intuition and knowledge about the business.

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Understanding the Language of the Income Statement

An Income Statement is a standard financial document that summarizes a company’s revenue and expenses for a specific period of time, usually a quarter of a fiscal year and/or an entire fiscal year.

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What's Your Business Worth?

There are many reasons you’ll need to know the overall value of your business: to prepare for investment, potential sale or for personal reasons. Here are the two most common methods—Multiple of Discretionary Earnings Method and Discretionary Cash—and how they break down.

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Keep Your Credit Under Control

It may seem as though it’s tougher to get credit, but there are steps you can take to ensure that your current credit facilities are up to date, to make your company look better to financial institutions, understand how the lending climate has changed and prepare yourself appropriately. During the “Where to Get Credit Now” panel discussion at CFO magazine’s recent CFO Rising West conference, several experts outlined keys to ensuring that your credit facility is where it should be.

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Controlling A/R and A/P

Receivables are basically paper if they haven’t been turned into cash. In addition, any company needs to keep tight control on its outstanding invoices to get an accurate picture of the receivables situation and take steps to improve the turnover of those accounts. On the other hand, among the most important concepts in terms of managing cash flow is working your accounts payable, since one of the ways to improve cash flow is to decrease the speed in which you pay your payables.

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Budget for the Best, Plan for Any Eventuality

Budgeting in a down economy is a difficult task, particularly when truly accurate cash-flow projections can be tough to build. One way to be prepared for any eventuality is to build “budget scenarios,” or best-case, likely and worst-case budgets. On a more granular scale, accounting for cash flow “what ifs” through cash flow sensitivity analysis—the issues that impact not just revenues, but the ways cost streams and net cash flows are affected by the market at large (competitive issues, cost drivers, etc.)—can help you spot trends and circumvent issues before they become problems.

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What Not to Cut

In a difficult economy, it simply makes sense to look for areas in which you can efficiently cut costs. However, some cost cutting may lead to the creation of bigger problems than it solves. As far as intelligent trimming goes, Virgin Money USA CEO Asheesh Advani puts it this way: “The natural thing for business owners to ask is, ‘Do you cut marketing, overhead or staff?’ I think the right answer is to do a little bit of all three, but to be very careful on cutting what actually protects you on the downside.” In essence, cost savings should never come at the expense of the ability to execute on your long-term vision. As you make cuts in the following areas, consider these points:

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Proactive A/R Management

Maintaining low accounts receivable is a difficult task, yet it plays such a vital role in the overall success of any company. And successfully managing your accounts receivable—particularly the pivotal aspect of collections—can be a great boon to your company, while the reverse will probably be true if you neglect them. While there are no specific right or wrong rules regarding accounts receivable and collections, consistency is critical, regardless of your size. Consistent monitoring translates into more consistent cash flow. Several factors go into customers paying their bills late.

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Critical Numbers and Your Company’s Financial Fitness

Most CEOS and their management teams focus on the concrete, basic “blocking and tackling” issues (i.e., increasing sales, cost control and shortening receivables cycles) that drive financial fitness, but too few pay enough attention to the critical measurements and month-to-month/quarter-to-quarter trends that can define financial fitness across the operation. When your critical numbers are healthy, your business is healthy and you’re closer to achieving your goals. Those numbers are different for each business, depending on its situation. Critical numbers might fall into the following four categories:

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The Critical Ratios: A Short List

Monitoring these critical ratios can offer a shorthand look at what’s going on in your business.

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Choosing Cash-Flow Management Tools

Before you decide on any type of cash-flow management tool, consider its performance and characteristics.

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An Expense Control Audit Reigns in the Overhead

Even if your ratios are in line with the competition, there’s always room for improvement on the cost side. Approaching expense control can be a daunting task, but implementing an “expense control audit” can help you identify the key areas and issues you’ll need to address.

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A Road Map to Healthy Cash Flow

Poor Cash Flow can be the death of an otherwise healthy business. If a small business has more obligations than it has cash, it’s in trouble. In fact, “not managing cash flow is the number-one reason that small businesses fail,” says Gene Fairbrother, President of MBA Consulting Inc. Poor cash flow can happen to any business, especially those in growth mode. While they stock up on inventory and pay employees, they can end up waiting for customer payments.

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Building Your Credit Safety Net

Great business credit should be considered a business tool not a crutch. It can be a financial safety net that you can tap into if, for example, you get awarded a project for which you need to quickly buy equipment or obtain resources, if you have a slow period or need to hire quickly. When you’re ready to build your business, having credit in place can help you get there. However, statistics show that 95% of all businesses that apply for a business loan are declined. Those who are rejected for a small business loan may not understand the importance of building business credit.

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Financing: What Lenders Want

There have been a variety of reports regarding the ever-tightening credit market, but that doesn’t mean funding isn’t available for the equipment you need, an expansion or any other growth opportunity you might have. The key is to make a compelling case to lenders. Most important, say financial experts: Be prepared.

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Estate Planning for Non-Financial Assets

When it comes to estate planning, families often focus on the transfer of financial assets such as stocks, bonds and real estate. But it’s often personal possessions—items with sentimental and monetary value—that can make it difficult to amicably settle an estate.

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Lowering Your Liability

What if you were involved in an auto accident and you’re sued under your auto insurance policy? What if your neighbor slips and falls on your property, and you’re sued under your homeowners insurance? What if you experience a natural disaster in which another person’s property is damaged by a tree from your property?

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Paying off the Mortgage vs. Paying Into 401 (K)

Paying off the mortgage before you retire may not be the best move from a tax standpoint. Take the example of a 50-year-old couple in the 33% marginal tax bracket who wants to retire in 10 years. They have $400,000 left on their 30-year, 6% mortgage and each is eligible to contribute $20,500 a year to their 401(k)s. After 10 years of maxing out their 401(k)s, earning a 6% return, they would accumulate $559,922 (about $625,066 with an 8% return). That’s enough, even after taxes, to pay off the remaining mortgage debt of about $175,000.

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