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Get Your Ducks in a Row: Buckets of Expenses

People often think of accounting as some complicated math exercise. In truth, it’s really just a system for categorizing transactions in your business. A sale is a transaction. A check is a transaction. A deposit is a transaction. All accounting does is keep track of each transaction and total it up. Those totals tell you what you need to know about your business.

Keeping track of the expenses of your business is a critical matter. It’s not complicated, but it is easy to let slide the day to day tracking of those expenses. That’s when business owners get themselves into trouble.

Let’s think about accounting in terms of buckets. Let say you have a big green bucket to keep all your revenue or income in. You collect it like rain water. From that big green bucket, you start taking out the rain water in smaller cups, let’s say they’re red plastic cups. You dip out some cash in a red cup for electricity costs. Another red cupful for rent. Another cup for insurance. If at the end of all that dipping, you have rain water left in your big green bucket, you have a profit for the month or the year. That’s all accounting is. It’s just one big green bucket and a bunch of red plastic cups.

Money in  trash can, isolated on white Plastic red cups isolated on white background

The magical part is when you actually start using the information provided by the bucket and the cups to help you run your business. It all starts with a plan.

Let’s say you have a pretty good idea of how much rain water will come into the big green bucket. And let’s say you have a pretty good idea of how much each red cup will scoop out. You can begin to make some plans on how to ensure you have rain water left over (profit.) If your red cups need more to fill them then what’s in big green bucket, you end up having to borrow from someone else’s green bucket (the bank, your personal savings, your credit cards.) Or, if the big green bucket has exactly enough in it each month to satisfy the thirst of the red cups, you are at a breakeven point, but no profit! You can begin to look at increasing what goes into the big green bucket or decreasing what is needed for the red cups so your business can sustain itself.

Unfortunately, for most small business owners, knowing exactly how much rain will enter the big green bucket is often unpredictable. There may be a drought or a deluge. This is why planning and knowing your numbers are such an important part of running a business. What happens to your business if you have a slow month? Do you have a contingency plan? A rainy day fund (or in this case a drought fund)? What happens if your expenses increase unexpectedly? Thinking about these important questions before you have a slow down in revenue or an increase in expenses helps keep you in control of your business. It’s all part of getting your ducks in a row.

Get Your Ducks in a Row: Revenue Tracking

One of the major parts of getting your ducks in a row is tracking the money that comes in (or should come in) to your business. We’ll start with some best practices.

1. Invoice your customer as quickly as possible, like immediately.

When you sell an item or a service to a customer, don’t wait a month to send a bill. I’ve seen it over and over again with small businesses. Invoicing customers gets pushed aside to make room for doing the work to satisfy the next customer, or it gets buried on a crowded desk. The more time that passes between the delivery of goods and services and the invoice being generated, the more likely you are to NOT get paid, get paid late, or to send an inaccurate bill because time has passed and you don’t remember the order well, for example, an electrician forgetting to charge a homeowner for an additional repair while on the job.

A number of easy smart phone apps are available for on-the-go invoicing including QuickBooks Online and Xero, both of which are complete accounting solutions, and a host of other solutions that are invoicing only apps.

2. Whenever possible get paid before delivery of goods or services.

When you purchase an item online, it is commonplace to pay for that item at the time of purchase. The same goes for buying groceries. If you sell a product, it is usually possible to get paid at the point of sale. An exception might be a large ticket item that requires financing. If you sell a service that has a definite price tag, for example an oil change or a doctor’s office visit, getting paid at time of service is common practice.

It becomes more complicated if you are selling goods or services that vary depending on the problem or need being solved. A perfect example of this is setting a price for a tax return. How much does a tax return cost? It depends on how complicated the return is. Or if you are working in a repair business…How much does it cost to repair a car or a furnace? It depends on what’s broken.

One way around this is to develop package pricing for a typical sale. In the tax return example, a package price can be developed for a typical sole proprietor business return. An automobile repair shop can develop a package price for a typical brake job. Whenever you can systemize your pricing, you create an easier scenario for getting paid, and you take fear and anxiety away from your customer. It also allows an opportunity for upsells and extras.

Use technology for on-the-go payment collection. Take a look at companies like Paypal, Stripe, and Square.

3. Have a plan for granting credit.

If you do need to grant credit to a customer, for example, a payment plan or 30 day terms, be sure to decide ahead of actually granting credit, what your terms are and who will get credit with your business. Remember that a sale isn’t a sale until the money is in the bank. A promise to pay later has an impact on your cash flow now. Granting credit to people or businesses who may default on their payments puts your business at risk. Make sure you can afford to take that risk.

4. Have a plan for collecting cash from credit sales.

If you do decide to grant credit, be sure to have a plan in place to ensure the cash is collected as promised. When a customer’s bill is overdue, communicate quickly. The longer a bill goes unpaid, the less likely it is you will receive the cash. Tracking when an invoice is due is an important function of your system, whether it’s tracked in software or on your calendar. Without that critical piece of information, your cash sits in someone else’s pocket while you act as a bank for your customers.

With a solid revenue tracking system in place, you will be able to see how much your sales are this week/month/year. With that information you can begin to build data that will help you determine how much you need to do in sales to pay your bills (and take a paycheck), whether you are on track to do that, and to do comparisons between weeks/months/years to see how healthy your business is.
Rubber ducks in a row on sand with sky in the background

For more information on getting your ducks in a row, visit www.cashflowrollercoaster.com

Lean Times in the Bean Fields: Why Business Owners Should Earn Minimum Wage

I believe in the concept of a minimum wage. The minimum wage that I’m referring to is not THE minimum wage–federally or state mandated for employees. The minimum wage I’m talking about is a minimum wage for business owners. You see, for many small business owners the Federal minimum wage would be a raise in pay. For some, it would be an immense raise in pay.

Let me use some examples of this from my own long and interesting career. I started work at the tender age of ten or eleven. My first job was babysitting. My pay varied greatly and often amounted to whatever was left in a neighbor’s pocket after the bar closed. My second job was working on a farm where I earned my money based on productivity in the bean field. I well remember working all through August to earn my first $20 bill. My third job was a huge step up since I earned minimum wage and had regular hours. Minimum wage at that time was $2.30 an hour.

What I realized at that young tender age was some jobs paid better than others. So, I started figuring out how to get the jobs that paid better. And that led me to discover that the jobs that paid better required more skills. So, I learned more skills. And more skills. And more skills. Until finally I could make a good living.

And then I became self employed. My pay was whatever was left over after the expenses of the business were paid. Sometimes $2.30 would have been a very welcome pay increase. Obviously, this is not a sustainable existence. (It IS obvious, right?)

Flash forward many years.

In my accounting and consulting practice, I’ve worked with scores of business owners. Many of them were not making a living wage. They did a great job creating good paying jobs for their employees, but they did it at the expense of their own financial health and sanity. Let me give you an example of how that looks from a numbers perspective.

A starry-eyed man, we’ll call him Joe, decides to start a business. To cover his starting costs, he empties his 401k account, uses his house as collateral for a home equity line, and maxes out his credit cards. Let’s say he needed a modest $50,000 to get the business up and running. Here’s the financial impact of that business startup:

1. The money from the 401k account is now no longer producing any interest or dividends, and has a tax penalty and expense.
2. The equity in his house has disappeared, he’s worth less and has more debt.
3. His credit card has increased his debt, plus added interest expense.
4. His cash flow is impacted by the payments on the home equity line and credit card.
5. The $50,000 ends up costing far more due to lost income and increased debt and expense.

Now, check out the various percentages attached to business failure rates. Depending on the source, Joe has a 5-15% chance of succeeding. An 85-95% chance of failing. Frightening odds when everything Joe owns is now on the hook. And then, let’s say the cost of starting the business ends up being $55,000 factoring in lost income and increased debt and expense. Now, let’s say Joe wants to get back that money over a three year period. Joe needs to pay himself about $350 a week to make that happen. This is before he even begins paying himself a living wage.

Meanwhile, Joe’s credit score has dropped because of his added debt and his iffy income. This makes him less able to get more credit if he needs to buy a vehicle for the business (or himself.) And every time he does make a profit in the business, the government takes a chunk of it for taxes. It’s a bleak financial reality for many small business owners.

Now, does this mean that small business is doomed? Does it mean anyone starting a business is a fool? I’ll leave that to you to decide. What I do know is that there is a far better way of doing business. A way that makes sure the business owner’s financial situation pays better than picking beans and taking the leftover change from mother’s night at the bar.

It all starts out with the business owner making the right choices for his or her own financial health. Can your business provide you with the return on investment you need in addition to making the minimum wage you determine you’re worth? Owning and running a business is a very difficult job. A job requiring a variety of skills and a huge investment of time and money. Make sure you are adequately compensated by structuring your business to pay you your required minimum wage. Anything less than that is an exercise in futility, financially speaking. Without that sustaining level of income, you can quickly find yourself wishing you could work somewhere for “regular” minimum wage. A few years in you may well be heading for the bean field to make ends meet.

Want to learn more about how to build a business that is worth more than a hill of beans? Find out more about From Chaos to Control; my crash course in small business finances.

 

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Yeah, It IS Lonely At the Top

Sometimes when you run a business, you feel as lonely as the Maytag repairman. Loneliness and isolation are very common problems for business owners. You sit at your desk wondering if you are steering your business in the right direction. When faced with a decision, you worry that you may be making a mistake or missing an opportunity. You get frustrated because you have no one to talk to about all the problems and decisions you have to make every day. When you have a confidential matter you can’t discuss with employees, family members, or friends, you suffer in silence because you don’t have an advisor to turn to. And unless your spouse is an MBA, he or she probably doesn’t have the answers you need either.

Finding people you can trust to help you with your business is tough. You need someone knowledgeable. You want someone you feel comfortable with. Someone you can really take into your confidence.

Often business owners turn to their bankers or accountants for business advice. But, do you really want to tell your banker that you need guidance running your company? Does your accountant encourage you to sit down and chat about your business over a cup of coffee? Absolutely not. First of all, you don’t want to look like a dope in front of other professionals. You want to be seen as the competent professional that you are.

In my early days of running my business, I felt very lonely and isolated. Who could I talk to about my business? Not my customers certainly. They were looking to me for business advice. Not my family. They weren’t really sure what I do, and I deal with a lot of technical stuff that they’ve never even heard of. So, I spent an awful lot of time struggling. Struggling to learn. Struggling to make the right decisions. Struggling to choose directions for my business. And all the while, feeling like I needed someone to advise me, but I just didn’t know WHO!

Over the years, I have found the resources I need to help me move my business forward. I know who I can trust. I know who has the answers to my questions. Now, it’s a matter of picking up the phone or sending an email to the right professional. And almost magically, my questions are answered and my business moves forward. Sometimes, just getting a second opinion or a new perspective clears the fog and the confusion. The moral of the story is that no one (even business consultants with MBAs) has all the information and knowledge needed to build a successful business. We all do better when we can get by with a little help from our friends.

If you’re looking for a confidential, trusted advisor to give you apply-it-now practical advice, learn more about my consulting service and choose the consulting package that fits your business and budget at http://cashflowrollercoaster.com/consulting-packages.