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Best Time to Make a Business Budget?

Posted by Linnea Blair on

11/08/2021

When is the best time to make a business budget?

I like to start planning in Q4 of my business year for the upcoming year. For most business who are on a calendar year, November is a great time. If your business operates on a fiscal year, then the month before the last month of your business year.

As a business coach, November is the month I coach my clients to start working on their Profit Plan for the coming year, which includes their Financial Plan, Hiring Plan and Marketing Plan. Its before the holiday rush and after the busiest season for many home improvement contractor businesses.

It’s a good idea to work through a vision and goal setting process first so you can be clear on where you want to go and how you want to grow in the next year.

I also suggest reviewing and reflecting on the current year that is nearly over to evaluate how your business performed in comparison to the goals you set a year ago.

Armed with that information, you can now embark on your planning and budgeting process for the coming year.

If you’ve missed doing your planning by the end of the year, the next best time is the very beginning of the year on which you are embarking. But, by doing your planning before the end of the current year, you can hit the ground running right after the new year with your plan in place.

For more information on budgeting and profit planning, download my Profit Planning Guide here.

Categories : Financial Management

Tags : Busget, Business Finance, Finance, Financial Management, Profit, Profit Plan

Know Your Numbers – What does it mean to you?

Posted by Linnea Blair on

10/28/2020

I often talk about the importance of “Knowing your Numbers”. But what does this really mean?

To start with, many business owners are not sure what their financial statements are telling them, or even how to make sense of those reports your bookkeeper sends you every month.

A lot of business owners feel a little embarrassed that they don’t know more about their financial results or how to tell if their business is profitable and solvent from looking at their Profit & Loss and Balance Sheet. I’m here to say, it is OK. You are on a path to learning. You don’t have to be an accountant to understand your numbers, but as a business owner, it serves you well to get some help to get clear on what you don’t know.

Here are some important things to think about:
You know what income and expense drive your business, right? I know you do because you’re a savvy entrepreneur.

You need enough sales to hit your revenue goals.
You need materials/resources and labor to produce or sell your service.
You need other expenses to keep the business running, like marketing, rent, utilities, auto, insurance etc.
You need to pay yourself a living wage, and you want to show a profit so you can reinvest in growth.
You need to have enough cashflow to pay the bills and cover debt payments.

Your financial statements need to help you make business decisions by showing you if you are on target with your planned income and expenses, and profit!

So how do you get there?
First you need a good layout and chart of accounts to be able to track the things that are important to track.

Second, you need to know that the information going into to the reports is accurate, so you need to have a detail oriented person recording your transactions in QuickBooks and that data needs to be reconciled with your bank statements and credit card statements every month.

Now, you have the foundation to move forward to not only analyze your results, but to do some real Profit Planning based on known data.

I offer Profit Planning classes and business consulting to help you move your business to the next level of growth and success. Feel free to contact me anytime.

To help get you started moving in the right direction, click here to download my free Best Business Practices Guide.

Categories : Financial Management

Tags : Business Finance, Finance, Financial Management, Financial Statements, Profit & Loss, Profit Plan, QuickBooks Tips

Paying yourself last is not a strategy for success

Posted by Linnea Blair on

01/16/2020

How Much to Pay Yourself and How

Paying yourself last is a strategy to get by, not a strategy for success.

Many small business owners end up paying themselves by what’s left over at the end of the month after other expenses are paid. That way, you often end up with a big swing in your monthly take home pay, with some months being very lean and some months being fat. This may work for a young single person with a more flexible lifestyle, but doesn’t work so well for the small business owner who has a family and a mortgage who needs more stability.
Besides, you started a business to make a good living, right?

Start with a plan
Everyone who knows me knows that I coach every business owner to create an annual profit plan or budget. Why is this so important? Creating a detailed annual plan that shows your projected income and expenses for each month helps you to see if what you are setting out to accomplish is reasonable to achieve, and if it will produce the results (profit and cash flow), that you need to compensate yourself appropriately, and invest in growing your company.

What’s an appropriate amount for owner compensation?
First, it starts with your needed and desired personal income. Do your personal financial planning and budgeting, so you’ll know what you need each month to provide for your personal lifestyle. Beyond your normal monthly needs, you may also have a desired income amount that you’d prefer to bring in from the business for investments, travel, etc. It’s important to know these numbers and to factor them into your budget/profit plan for the year.
Not every similarly sized business will have the same number. Your personal financial needs and desired income are your own. One business owner with a $600,000 business may be satisfied with $90,000 in compensation, while another needs $200,000. The business model and structure, not to mention future vision, may look very different for these two individuals.
Make a plan to pay yourself at least the necessary amount to meet your monthly personal income needs each month. Just like you pay your employees on a regular basis for their services to the company, you need to pay yourself. Then you can plan to pay yourself extra amounts in your most profitable months to make up the difference between your necessary income and your desired income.

Best Practices
I have a metric that I like to use called Net Operating Profit before Owner’s Compensation. I believe that 20-25% is a good result for most contracting businesses between $300,000 and $3,000,000 in revenue.
Out of this profit comes the owner’s compensation. In the middle of this revenue range, about 15% – 20% of revenue is reasonable for owner compensation. For example, at $1,000,000 in revenue, this would amount to $150,000 – $200,000 in owner’s compensation. A higher percentage is needed for the lowest revenue range to produce an adequate living compensation, and a lower percentage is needed for the higher end of the range since there is a larger need for bigger companies to invest in growth and infrastructure while still compensating the owner well for his or her investment in the business.

Methods for paying yourself
There are different requirements for how to take owner’s compensation from your business depending on what your legal entity is. It is a good idea to consult with your business attorney and tax advisor to understand the tax laws regarding how you take compensation, and to make the best decision for you.
Typically, if your company is an S-Corporation, you need to take a “reasonable” salary as a W-2 employee and then take the balance of your compensation in draws or distributions, while LLCs and Sole Proprietors usually take their entire compensation as a draw. There are tax ramifications for each, so be sure to consult with your CPA.

The real bottom line is that you started a business to create a better life for yourself, and usually that better life includes a comfortable level of compensation that enables you to live the lifestyle you desire and to provide for your retirement. Achieving this takes vision, planning and implementation of your strategy to grow a profitable and successful business, however you define success.

Categories : Financial Management

Tags : Business Finance, Entrepreneur, Financial Management, Owner Compensation, Small Business, Small Business Coaching, Small Business Consulting

Financing Options for your Business

Posted by Linnea Blair on

09/30/2019

With the seasonality of most home improvement contractor businesses it is not surprising that many business owners feel the pinch of slow cash flow and a smaller than comfortable amount of cash in the bank at some point or another. This is the time when you wish you had access to more working capital or credit. What are some of the ways that you can get access to funds when you need them? What considerations do you need to keep in mind when looking for funding?

One of the most common ways that businesses obtain funding is from the owner’s personal funds when this is a possibility. This is not necessarily a bad idea, but there are good and bad ways to go about it.

Business Credit vs Personal Credit
Many small businesses start out as a sole proprietor (Schedule C) business. It’s a better idea to create a formal business entity. Most contractors choose to set up their business as either an LLC or and S-Corporation. This does give the business owner a shield in terms of personal risk. This shield can be compromised by mixing personal and business finances, so it is prudent to keep separate bank accounts and credit card accounts for the business.

Rather than using personal credit for your business, consider lending money to your business if you need to personally add a cash infusion to the business. Treat this like any other short or long term loan on your balance sheet and make repayments. In some cases, you may need or want to charge interest to the business for the use of your money.

Credit from Banks
Credit from banks most commonly takes two forms: Business Credit Cards and Business Lines of Credit. When you are starting out or expanding, you may also qualify for an SBA (Small Business Administration) loan.

Apply for business credit before you need it. Most contractors have a busy season and a slow season. Your slow season is typically when you need to dip into your credit. I recommend building a relationship with a business banker who will be able to be a resource for you. Apply for a business line of credit when you are in your busier season and can show profitable results. Most bankers will want to look at your financial statements. So, it is good to have well organized financial statements and to be conversant with your financial results. If you have a budget and can show that you are meeting or exceeding your plan for this year and the prior year, that can be helpful. Banks like to lend to businesses that are making money and growing. In some cases, lenders do require a personal guarantee on credit cards or lines of credit for the business, so be aware of that.

Equipment Financing
If you need to purchase big ticket items like equipment, it’s wise to explore options for equipment loans versus using your business credit card or line of credit for this type of expense. Often you can get better terms for this type of financing and you don’t tie up your credit line or business credit card in the process. There are companies who specialize in this service.

Alternative Lenders
Sometimes if your bank can’t help you, there are other lenders who are willing to lend to businesses that have short term difficulties or have special circumstances that make traditional bank lending not an option. Your business banker, CPA, business coach or advisor may have referral contacts for alternative lenders.

Internet Business Loans
In the short term, some businesses can take advantage of quick loans or lines of credit from companies that advertise online such as Kabbage and other similar companies. You can apply online with a minimal amount of information. Keep in mind that you may be paying a higher rate of interest for the privilege of using this type of service, and the repayment schedule is usually limited to a very short term, so you’ll want to carefully evaluate if you can make the monthly payments.

To summarize, keep in mind three things: Educate yourself on your options, develop a relationship with a good business banker, and apply for credit before you need it.

Categories : Financial Management

Tags : Business Finance, Finance, Financial Management

3 Compelling Reasons to make a Budget for your Business

Posted by Linnea Blair on

11/25/2014

I talk to a lot of business owners every week. It surprises me that more businesses don’t have a budget or as I like to call it, a Profit Plan.

I just spoke with a business owner this week and I was pleasantly surprised to hear him tell me that he had his budget all worked out for 2015. Further into our conversation however, it transpired that will he had listed all his expenses for overhead costs, marketing, salaries and so forth well thought out, he had not included his Revenue projections!

Budget What is a budget? The simple definition is an estimate of income and expenditure for a set period of time. A budget or profit plan includes both projected revenue and projected expenses.

Why should business owners have a budget? Here are 3 compelling reasons:

Achieving your revenue goals
If you don’t know where you are going, you could end up anywhere. If you are shooting for a specific target, you are more likely to achieve it.

It’s not enough to say, I’m planning to double my business next year, or increase by 10% or to have a goal of $1 Million in annual revenue.

How is that Million going to happen? Chances are that every month will not have the same goal, so to just divide $1 Million by 12 does not necessarily make sense unless your monthly revenue is relatively steady month in month out and you are only projecting a small increase in 2015.

What happens if you have a seasonal business? There are bound to be slower months and busier months. You’ll need to project accordingly.

What if you are planning to double your business in 2015? You’ll need to account for a ramp up from where you are performing now to where you project you will be and plan accordingly for increased marketing and increased staffing. Maybe you’ll need to add additional infrastructure in terms of office space, vehicles or equipment.

Planning ahead by making a Profit Plan or budget will also help you to see where you might need to infuse more capital into the business in the form of loans, Lines of Credit.

Profit Plan

Hitting your profit targets
It’s important to hit your revenue targets, but it’s even more important to achieve your profit targets. Creating a budget will help you project your profits, so you can evaluate if your plan will achieve the bottom line you need. After all, those profits are necessary to provide additional compensation to shareholders/owners as well as to provide capital for future growth, repayment of debt, etc. By the way, it’s a good idea to create a personal budget, so you’ll know how much you need each month from the business in terms of salary and draws or distributions.

Adding infrastructure to your business
As your business grows, you will need to invest in more infrastructure. This may take the form of adding overhead personnel, for example a sales person, administrative support or a supervisor. Other types of infrastructure could be leasing an office or shop (or increasing the size of your facility) or investing in additional equipment, vehicles or technology.

Creating a budget allows you to try out scenarios to see if your revenue projections will support the investment in overhead. You will also want to plan your marketing strategy (and create a marketing budget!) to support the revenue goals you’ve projected.

As you can see, there are many reasons why it makes sense to create a budget for your business. Beyond being sensible, it really is important in my view to do annual strategic planning for your business. Your budget/profit plan is an important piece of your annual strategic plan.

Categories : Financial Management

Tags : Budget, Business Planning, Financial Management, Profit Plan

Top 10 Ways to Improve Collections of Past Due Accounts

Posted by Sibylle Hauser on

08/31/2010

In today’s economy it is crucial for businesses to collect accounts receivables within 90 days. After 90 days the recoverability drops dramatically!

Unfortunately, many business owners facing current recession are worried more about their revenue growth than about their cash flow!

What processes do you have in place and how do you deal with customers who pay their bills late or not at all?

It is a problem faced by virtually every business. Accounts not paid within terms can severely impact the cash flow of a business. A clearly defined and carefully communicated, yet diplomatic payment policy, is a virtual part of running a successful business while retaining a good professional relationship with your customers.

These 10 simple steps can dramatically improve your results:

Have a defined credit policy
Make sure that your business’s terms of payment are clearly stated in writing to each customer.
Invoice promptly and send statements regularly.
Use “address service requested”
Print or stamp on the envelop just below your business return address. USPS will locate a change of address and send you a form # 3547 with the correct address for a small fee. Do not only rely on e-mail statements!
Contact overdue accounts more frequently: Sent past due notices and follow up with phone calls in a tight cycle of 5-7 business days in a 1-2 months time frame.
Use your aging sheet not your feelings
Many businesses have let an account age beyond the point of ever being collected because he or she “felt” the customer would pay eventually or they don’t want to upset the customer. While there certainly are isolated cases of unusual situations, the truth is that if your business isn’t being paid, someone else probably is. You are not on their priority list!
Make sure your staff is trained
Make sure your staff is firm, yet courteous when dealing with debtors. Does your business accept credit cards? If not talk to a merchant! If you have a debtor on the phone, try to get a credit card payment there and then. Promised checks might never be mailed.
Admit and correct any mistakes on your part
Follow the collection laws in your state
In many states, businesses are governed by the same collection laws, as are collection agencies.
Use a third party earlier
The time and financial resources budgeted for internal collection efforts should be focused within the first 60-90 days when the bulk of accounts can and should be collected.
Remember that nobody collects every account

Sibylle Hauser is a Profit Recovery Specialist at Transworld Systems, Inc. If you have questions, you may contact her via email.

Categories : Financial Management

Top 10 Cash Flow Tips

Posted by Linnea Blair on

06/30/2010

Know your business’ balance sheet thoroughly. This may sound obvious, but, as your accountant can confirm, many business people don’t know how cash flow works and its significance to keeping their operation afloat. Many owners focus on their business’ profit and loss statement alone. It’s a potentially fatal mistake because healthy profits can mask an impending cash flow crisis. Profit and loss statements don’t usually contain the information required to make an adequate cash flow projection. For that, you’re going to need a structured balance sheet that includes all the influencing factors including debts, interest payments, inventory and so on. This is the basis for your cash flow projection which represents an “educated guess” at the likely inflows and outflows over the period of time you have selected to map out.
Set up a cash flow budget. You need to focus on forward planning to generate a “best guess” about likely future sales and expenses. There are some cash flow software tools around, but you can also set up your own program in Excel. You can also ask us for help. We have financial monitoring tools to help you stay on top of your numbers.
Review and update cash flow budgets regularly. It’s your best insurance against potential cash shortages. If your business has a predictable cash flow, then cash flow budgeting on a quarterly basis is often enough. If you’re already visiting your accountant for other tax related matters, then you can get a cash flow budget prepared at the same time. The rule of thumb is that the greater the cash flow uncertainty a business faces, the more often a new cash flow budget should be prepared.
If cash is really tight, you might need to move to weekly projections, and decide which invoices you’ll pay and whom you need to get payment from as soon as possible. Watch bank balances and make sure you don’t have checks sitting on a desk waiting to be deposited. This can be time consuming, but you won’t be the first business that has had to do that from time to time.
Rapid growth sounds good but, ironically, too much of this good thing can bring on a cash crunch – which takes many business owners by surprise. A sudden spurt in sales is often accompanied by depletion in inventory or an increase in receivables that is not being monitored for overdue collections. Strong sales one month often means a cash shortage next month. By monitoring the business’ cash status you can arrange credit from suppliers and banks to cover the temporary shortfalls. However, these arrangements take time to set up so you need to be prepared in advance.
Set your credit terms carefully. If the nature of your business requires offering credit, then it is important to set clear limits to your terms of credit.
Get payments in quickly. Master the art of receivable management. Let customers know how much time remains before due dates. Stay in close touch with major debtors as payment deadlines approach. Offer small discounts for early payment as an incentive.
Pay your creditors strategically. Take advantage of credit terms and prioritize payments according to the consequences involved in going overdue. Wages, taxes and direct debits are at the top of the list for on-time payment; key suppliers may be prepared to wait a while to keep your business. Don’t pay early just to get a discounted price unless getting the discount is better than being without the cash.
Plan for the ups and downs. Be aware of when lean cash flow periods are coming up and plan accordingly. Avoid funding major purchases from your business’ working capital unless you are sure you have the cash to cover it.
Get finance products working to your benefit. Overdrafts, premium funding, lease facilities and cash flow funding products can all be excellent tools to help match a business’ cash supply with planned outlays. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in.
Don’t incur tax and other statutory penalties. Save yourself the money and the stress!
Keep your hands out of the till. Make cash drawings for personal purposes according to conservative cash flow forecasts.

Categories : Financial Management

Tags : Cash Flow, Finance, Financial Management

Avoid Cash Flow Woes with Good AR Management

Posted by David Barnier on

10/07/2009

Recent economic trends have caused many contractors and other businesses to deal with accounts receivable issues. Five years ago, when the economy was better as a whole, there was less concern with enforcing a contractual right to payment because bills were being timely paid.

For those contractors dealing with collection issues, not much can be done to “squeeze blood from a turnip”—if your customer has no money, collection efforts are often futile.

But to best assure your ability to collect debts, a few steps can be taken at the contract stage and during your work to best assure your ability to collect.

As a litigation attorney, I can advise you that these are the circumstances that best allow me to collect debts owed to my clients:

Clear and certain scope of work terms set forth within a signed contract, including signed change orders confirming any revisions to the scope of work or the contract price (don’t forget to make sure your home improvement contract meets the legal requirements of Business & Professions Code section 7159, otherwise collection will be even more difficult);

Attorneys’ fees provisions in a contract that help you leverage payment short of incurring attorneys’ fees;

Service charge provisions in a contract that further help you leverage payment of at least the principal balance owed; Read More→

Categories : Financial Management

Tags : Accounts Receivables, Cash Flow, Cash Management, Collections

Protect Yourself From Internal Fraud

Posted by Linnea Blair on

08/01/2006

Smaller enterprises are at the greatest risk from fraud, particularly from within the organization. They’re the least likely to have dedicated security personnel, and most likely to lack adequate internal systems and controls to prevent fraud. You can minimize your exposure to fraud by learning how it’s perpetrated in businesses like yours. There are also policies you should put in place to prevent fraud from occurring. We’ll start with the two most common types of fraud, fake invoicing and cheating on expense accounts.

Fake invoicing

These common frauds are usually along the lines of an employee sending his own company a false invoice which is approved for payment. The employee receives payment that is thought to have gone to a legitimate supplier. The employee simply sets up a company as the fraudulent supplier, establishes a bank account for that business, and then begins sending invoices to his employer.

Frequently the employee has signature authority over the invoices that are sent, so approval is easily accomplished! It’s also possible that the employee is working corruptly with another employee to get the invoices approved. In any event, the company pays for something it never received.

There are variations to this type of fraud in which goods are actually supplied but the ‘vendor’ (the employee’s company) is overpaid for what is delivered. There are also instances where a third party colludes with the employee to overcharge for goods and refund a portion of the price to the employee.

Expense account frauds

In any business there are likely to be a number of employees with the authority to incur expenses on behalf of the company for which they will be reimbursed. These can vary from insignificant amounts, such as for postage and stationery items, all the way up to airfares and accommodation costs for sales staff.

Expense account cheating usually takes the form of wrongly describing the expense incurred or overstating it. Some expenses may have never happened, or were for personal use and not business related at all. Because it’s fairly easy these days to create ‘dummy’ invoices on a home PC, simply having a receipt doesn’t necessarily prove that expenditure actually took place. It’s also possible to copy a genuine invoice and increase the amount or change the details on it.

Well administered policies are the best defense

Fraud is difficult to prevent and often very hard to detect. The best way to combat workplace fraud in a smaller enterprise is to have suitable policies in place and to unfailingly enforce them.

To deter employees from submitting fake invoices, payments should never be made to suppliers that aren’t approved by the owner, nor should a sudden increase in the amounts purchased from any supplier be allowed to happen without a valid reason.

All suppliers should be qualified before any orders are placed with them or payments made to them. This includes having full details of ownership and trading references that verify a history for the business.

Expense account frauds aren’t easy to stop, but once again having appropriate policies and enforcing them will help reduce the possibility of fraudulent claims being submitted. The most basic policy is to pay only for expenses supported by original receipts; photocopies or reprints should never be allowed.

Review the amounts of all expenses and be alert for overcharging or duplication. Be aware of every employee’s responsibilities and their need to incur expenses to meet them. If an employee’s claims show a sudden increase, be sure to query them for the reason as quickly as possible. Experience shows that if they get away with a fraudulent claim once, they’ll almost surely try it again.

Information in this article is sourced from RAN ONE, Inc.

Categories : Business Operations, Employees, Financial Management

Tags : Employee Fraud, Financial Management, Internal Fraud

Retirement – What’s Cash Flow Got To Do With It?

Posted by Linnea Blair on

02/17/2006

Retirement – you may already have a date in mind, a particular birthday or after a certain number of years in the CEO’s position, but will the money be there to support your retirement needs when the date rolls around? Many people get to their hoped for retirement date only to find their finances are insufficient and their dreams need to be put on hold. Planning for your retirement from the business should be a long term and well thought out process so that it can happen when you want it to. There are a number of steps you can take to set a realistic retirement date.

First, you must determine what your financial needs will be during your retirement, and that means budgeting for an unknown number of years. Some financial planners use 70 percent to 75 percent of pre-retirement income as a general rule, but this only applies if your financial needs actually decrease after your retirement.

Similarly, a little forward planning can allow you to minimize your expenses and reduce or eliminate many debts by the time you expect to retire, for example, by paying off existing mortgages and other long term debt obligations.

Regardless of the post-retirement income you think you’ll need, experience shows that most retirees find they need more than they originally anticipated, so it’s always wise to include a contingency in your estimates of the income required.

Still, for many business people what they are really relying on is a good sale price for their business as the major contributor to their retirement income. That means some expert advice from an evaluator. But there is still a piece of the jigsaw missing – you could be taking the opportunity of the years between now and your retirement to actually improve the value of your business by improving its cash flow. As an experienced business owner you’ll have an appreciation of the importance of cash flow. It’s always referred to as the ‘lifeblood’ of a company and rightly so, and it will also have a major bearing on the value of the business at time of sale, and therefore on when you can actually retire from your company.

Cash flow is what buyers want

The first consideration is that when you’re looking for someone to buy your business they’ll be looking carefully at its cash flow. The cash flow generated by the organization is what gives the business its real value. To put it another way, nobody pays for ‘potential’; what they purchase is a machine that makes money.

It’s cash flow that will enable the buyer to pay you for the business, and that’s equally important if you’re selling out to employees or expecting a member of the younger generation to take over and provide an income flow for your years of retirement. It’s absolutely essential that you have a forecast of your cash flow up to the time of your projected retirement – and as far beyond as estimates can be made. If the forecast indicates that the firm’s cash flow won’t be sufficient to cover all your objectives then you may have to do one of the following:

Set a later retirement date
Phase out your departure from the business
Find a purchaser with cash instead of financing a relative into the business
Find ways to increase the value of the business so it brings a higher sale price
Reduce your retirement lifestyle expectations

Take steps to improve your cash flow

It might prove a painful reality check, but preparing an estimate of the business’ future cash flow is an essential part of retirement planning and a reminder that your long term dreams rely on how well you manage the business’ operations to maximize it.

Information in this article is sourced from RAN ONE, Inc

Categories : Business Strategy, Financial Management

Tags : Cash Flow, Exit Strategy, Retirement

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Archive for Financial Management

Best Time to Make a Business Budget?

Know Your Numbers – What does it mean to you?

Paying yourself last is not a strategy for success

How Much to Pay Yourself and How

Financing Options for your Business

3 Compelling Reasons to make a Budget for your Business

Why should business owners have a budget? Here are 3 compelling reasons:

Top 10 Ways to Improve Collections of Past Due Accounts

Top 10 Cash Flow Tips

Avoid Cash Flow Woes with Good AR Management

Protect Yourself From Internal Fraud

Retirement – What’s Cash Flow Got To Do With It?

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