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  • Aspire » Finance

    08 Jul
    photo by Steven Depolo via Flickr

    photo by Steven Depolo via Flickr

    If your company doesn’t have a handle on getting paid in a timely way, chances are your business will eventually fold, regardless of how great your products or services are.   That was the next message; #4 of 5 on the handwritten outline, thoughtfully drafted by a senior peer of mine at a time when failure was not an option. It would have meant bankruptcy, not only for my business, but personal bankruptcy as well. That proved to be strong motivation to follow this wise counsel.

    The first three pieces of this business puzzle focused on #1 employees, #2 customers, and #3 knowing your margins.   But #4 “Collections”; was all about getting paid in a timely way and not setting yourself up for a cash crunch.  This was about Accounts Receivable.  You know….the work you have done but haven’t been paid for.   Or to put it another way, the money that is now yours, but your customer still has it in their bank account.  Yes, that money, that’s what Winning Advice #4 focused on.

    As the three that preceded it, the words were limited, but the importance was significant.  Word-for-word it read like this…

    4. Collections

    A. Rent advance

    B. Machines as delivered

    C. Call-Call-When can we expect payment

    D. Adjust Credits limits often

    Simple…but critical.

    Do you want to improve “Your Collections”?    

    Rent Advance (payment).  Even if your company doesn’t rent equipment, every business is selling something.  The message in this: Focus on getting paid in advance or at the point-of-sale if at all possible.   If your product or service requires setup time or preparation before delivery, consider implementing at least a partial payment in advance.  Today it is easier than ever to use technology to shorten this payment cycle.  Are you using it?  This means having invoices prepared when the product or service is delivered; that can be a shift in procedures for a lot of companies.  Although this may not be possible for all your business transactions, think about where you can get paid in advance and start there.

    Machines as delivered.   Maybe you have widgets or provide a service.  This one is about documenting what you sell and getting paid for what you provided at the time they take possession of it.  If a customer orders an additional program, adds an option, wants to make changes other than what was originally agreed upon, keep those issues separate. Get paid for what your client has already received and don’t allow a small change to delay payment on a large invoice.

    Call-Call-When Can Expect Payment.   For those accounts that are extended terms or a credit line, you should have a plan or process to follow to get paid.   There is a lot of truth in the saying The Squeaky Wheel Gets the Grease.  So call…and call regularly.   Your accounts receivable department should have a process that includes getting actual dates to expect payment.  The other side of this is you must get invoices out as soon as the product is delivered or shipped; you can’t call and demand payment when the client doesn’t even have the invoice in their procession.   Remember if you haven’t been paid and your client has your widget, they have your money in their bank account.

    Adjust Credit Limits Often.  This only applies to accounts that have credit lines.  But for those that do have credit limits don’t neglect to monitor and adjust the limits.   There is no reason to give someone a $10,000 limit if they never spend more $1,000/mo.    Another suggestion to protect yourself on open accounts is to be clear on who can and can’t authorize purchases from your business.   Some companies will provide a list of approved names if you simply ask.   Clarify if purchase orders are needed; there is nothing more frustrating than to be told you aren’t getting paid for something that was purchased on a line of credit by someone who was not authorized to buy it and you have no PO or signature to back it up.

    The bottom line is poor management of accounts receivable is one of the biggest areas businesses get themselves in trouble.  Unfortunately, the faster your business is growing the more critical it is to manage your “collections”, because your expenses are typically growing with your business.  So how are your collections?  When was the last time you tried to shave 5 days off your outstanding accounts receivable average?

    As always, if you have any suggestions you would want to add to this list, please feel free to comment in the space below.

    Chris Steinlage  Kansas City Business Coach

    23 Jun

    profit-margins

    I’ve talked before about the great advice I got from a mentor of mine. Profit Margins were the focus of Winning Advice #3 on a list of 5 that became part of my blueprint for success in the spring of 1997.  In short, it said a business owner must understand the importance of establishing, understanding, and maintaining minimum Profit Margins.   And yes, this means you first need to know your costs!  This followed behind #1 Hiring Quality People and #2 Acquiring Customers which were previously shared.

    In less than 25 words, the directive was simply scribed as this.

    3. Retain Whole  Goods Margin

    A. Increase parts margins on (Proprietary) Parts.

    B. Decrease parts margins on Fast Moving Parts to keep the will-fits out.

    ….and to clarify a couple terms:

    “Whole Goods” refers to a whole product: a car, a boat, a tractor, a house – in this case, a piece of heavy construction equipment.

    “Parts” would be the tires, a propeller, a fan belt, a door, a window, and so on.

    Putting the advice to work in your business…

    Retain Margins (on your Product or Service).   First of all to be able to retain a margin, you first need to know what the cost is.   Your fixed costs (what it costs to unlock the front door each day) and variable costs (those directly associated with the product or service) are the two categories of costs in running a business.   If you don’t know your costs, it’s worth the time to figure them out – this break even analysis may helpful.

    Once you know your costs you need to establish pricing that retains a margin high enough that it returns capital back into the business every time one it sold.  Does this mean you will always get the profit margin you want?  No.  But, it will clearly establish baselines so you know when you are no longer making profitable transactions.   Test:  If your actual net cost of an item is $100, to sell it at a 25% gross margin what it the selling price? ________ (answer below)  (Hint – the gross profit margin is different than the markup).

    Increase margins on Proprietary (Products or Services).   If your business sells something that is unique and they can only get it from you; you should get a higher margin for it.  You deserve to be compensated for the time it took to develop it, refine it, and perfect it.  So don’t give it away!   Should you be reasonable in your pricing? YES.  But treat it like a commodity?  No.   Take a look at your product offerings, if there are services or products that are uniquely yours and they provide real value (high Return on Investment) to your customers, don’t be afraid to put a higher profit margin on that product or service. This is an area that we see a lot of business owners struggle with.

    Decrease margins on (common items) to keep the (competition) out.   Think of this as the stuff your customers and clients can buy anywhere.  It is a commodity.  Even if you make it yourself, it is something that others make as well.   Price is king, the main driver for buying it from your company usually centers on convenience, loyalty, and brand preference as much as anything else.   You need to be competitive in your pricing on these items or services or you will not get the business.

    That said, one way to increase margins on these items is to group them with something proprietary to your business or create a process that adds value to the commodity.   An aggregate salesman (think crushed rock) once shared how they added significant margin to their bottom line by improving and streamlining the delivery options for their clients.   The rock itself is a commodity, but they added value and separated their company from the others by improving their delivery options and their customers were willing to pay a premium for the service.

    Profit margins, without them you do not have a viable business.   When is the last time you reviewed yours?   If you haven’t done so recently, it is probably time.  If you’re not sure where to start, feel free to contact us and we will do our best to point you in the right direction.   As always, we welcome any thoughts in the space below.

    Chris Steinlage Kansas City Business Coach

    Test Answer:  Sales Price (SP) is $133.00    Gross Profit margin is calculated as Gross Profit / Sales Price.  (And Gross Profit is Sales Price – Net Cost).  So in our example the equation is (SP – $100)/SP = .25  Which gives you an SP of $133.00.

    24 Feb

    taxshelter

    Tax season is shifting into high gear.   This is also the time of year we are most likely to think about the potential of being audited by the IRS.  Even though the potential for an Audit is only about 1% for  business owners,  the simple math says out of 100 of your business peers at least one of you are going have more intimate relationship with the IRS this year.

    For many business owners tax season is viewed as a dreaded time of the year when they are forced to sit down with their CPA and begrudgingly discuss the numbers of their business.   It should be noted our experience shows that businesses that meet more regularly with their CPA’s (at a minimum quarterly) have a much better handle on the finances of their business.  That discipline would be referred to as Tax Planning.   Tax Planning is a good thing; it is legal and highly recommended.   If your business has any level of complexity, seeking consultation from a tax professional is always good advice.  However, it’s sometimes tempting counterpart, Tax Evasion is another; Tax evasion is deliberately misrepresenting the state of your affairs to the IRS.

    Improper tax accounting is usually not viewed as tax evasion unless the IRS determines there was fraudulent intent by the business owner.

    In 2011, British accountant Richard Murphy estimated global tax evasion to be 5% of the global economy.  The USA led the way with 337.3 billion.   But because the US is the largest global economy, the amount as percent of GDP, was only 8.6%; the lowest of the top 10 countries.   So I guess as American Business owners, you can pat yourself on the back for that statistic!   Regardless of size, at its core, any number above 0% says something about the overall moral fiber and principles being practiced.

    taxchart

    With those numbers in mind, here are 4 discrepancies the IRS has been known to target should this be the year you are part of the 1% of audited businesses.

    1)      Discrepancies in Accounting. 

    • The amounts on the financial statements should match what is on the corporations return.
    • Any irregularities raise questions.

    2)      Not reporting significant amounts of Income.  

    • Business owners not accurately reporting business receipts.
    • Shareholders not reporting dividends they pay themselves.

    3)      Deduction Claims

    • Grossly overstating travel expenses
    • Fictitious deductions
    • Stating personal expenses as business expenses
    • Overstating charitable contributions.
    • Lack of Verification

    4)      Improper distribution of income

    • An example of this would be a stockholder directing income to a lower income bracket family member(s) to reduce their tax liability. (paying the kids)

    The list above is not meant to be a complete list.  It would be logical to assume that during an audit, if something is uncovered that doesn’t add up, the auditors will naturally dig deeper in the area of the discrepancy.   And the goal of this post is not to sound like a tax expert, but to remind you as a business owner this is serious stuff and it should not be taken lightly.

    Have you ever been audited?  If anyone has some additional thoughts on this subject, please share them in the space below.   Without a doubt as business owners this is a common thread that binds us all so your input and suggestions would be greatly appreciated.

    Chris Steinlage Kansas City Business Coach

    Photo by JD Hancock via Flickr

    03 Feb

     

    photo by Tax Credits via Flickr

    photo by Tax Credits via Flickr

    I met with a business owner last week who had a record year for revenue last year.  He worked really hard, he spent a lot of time and effort on sales and marketing, he aggressively went after any opportunities he could find and if any customers wavered on sticking around he gave them a great deal so they would stay…even the ones that complained all the time and required a lot of extra work.

    Final result for the year?  He was up 25% to 30% in Revenue during a tough year.

    Great success, right?

    If you dig a little bit deeper, it turns out that his bottom line…the money that he actually was able to take home was basically flat from the year before.

    He worked a lot more hours, hustled more than ever, sold more than ever, but none of that translated to his personal bank account!  On the Effort vs. Success chart – he basically just went straight up…more effort but no additional success.

    Focus on Profitability…

    This business owner fell into the trap of focusing (almost exclusively) on revenue growth.  Revenue is easy to track, it generates the illusion of success and it’s easy to talk about. But it’s not a good measure of success…unless your goal is to work more and make less per hour!

    Here’s a quick exercise to help make the point. Let’s keep the math simple and look at a business that has a flat $1 Million in revenue and a profit of 5% – so the business owner is taking home $50,000 on that $1 Million worth of work.

    However…let’s imagine that this business owner opts to try something different and they cut their revenue by $100,000 and now they are only making $900,000 for the year…but their profitability is 10% – which means they are taking home $90,000 and doing 10% less work than they were before!

    In fact in this example, the business owner could do ½ the revenue / work and still earn the same $50,000 (10% of $500,000) – it’s an extreme example, but it’s not crazy.

    Maybe you’re making more than $1 M in revenue, or less…or maybe your business or industry can’t support 10%, 20%…30% profit, the numbers change based on your situation, but the overall principle is the same – higher profitability is always going to be a better indicator of success than revenue growth.

    How to Drive Higher Profits

    Driving higher profitability is simple…although definitely not easy. There are only a couple of levers you can pull that will translate into higher profits, here’s the high level view:

    1. 1.       Raise your prices – if everything else stays the same, any time you raise your prices that extra money you’re charging will flow directly to your profitability…your bottom line.  Raise the price of a product by 10% and every penny of that becomes more profit for you. Note – by raising prices, you may sell less, but the odds are good that you’ll still be ahead in terms of bottom line (see example above).
    2. 2.       Cut cost of delivery – Almost all businesses have some sort of variable costs. If you’re making widgets, your variable cost includes the raw materials, some labor costs, etc. If you’re delivering a service, then your primary variable delivery cost is going to be labor. Can you find a cheaper way to deliver your product or service? If so, those savings will flow through as more profits.
    3. 3.       Cut your overhead costs – Your final option to drive higher profits is to cut your fixed costs…your monthly overhead. This includes stuff like your rent or mortgage, any staff that aren’t directly involved in delivering your service, office supplies, etc.

    That pretty much sums up your options – again it’s simple but not easy.

    Strategically I’d suggest you try these 3 ideas…and sooner rather than later:

    Drop your worst clients – Almost every business has a bottom tier of clients who are difficult to deal with, pay late, complain and constantly push for the best deals.  These are the clients that are killing your profitability and if you could lose the bottom 10% you will be better off in a lot of ways, including profitability.

    Do a cost audit – Do a line by line view of your expenses…compare them to previous years and see if there’s any big line items that jump out at you as not being critical or necessary.  What can you cut?

    Raise your prices – I know it’s obvious, but I also know most business owners need to do this more.  If you haven’t raised your prices in a year or two, then you likely need to bump them up – unless you are consistently losing business due to your price, then you have room to grow…and even then you could look into increasing the value of what you offer.

    What can you do to improve your profitability? Is it something you’re consistently focused on? We’d love to hear your thoughts – share them in the comments below.

    Shawn Kinkade  Kansas City Business Coach

    24 Sep
    Photo by amagill via Flickr

    Photo by amagill via Flickr

    Few things stress a business owner more than running out of cash. It really is the lifeblood of your business and when you’re out of cash, you’re probably out of business.

    Considering how important cash is to your operation, you’d expect business owners to be pretty sophisticated when it comes to tracking it. Truth be told there are a large percentage of small business owners who measure success based only on how much money is in their business bank account.   There is also a large percentage that measure how well they are doing solely based on top line sales.  To run a healthy successful business you need to know your numbers. Striking the proper balance of cash flowing through the business and building up an adequate reserve to weather soft periods is critical if you want to have a business designed to seize opportunities when they arise.

    Your company may have a net worth of several million, but if you only have $10,000 in the bank with little or no revenue coming in you will be out of cash in no time just paying salaries and utilities. Typically the faster a business is growing the more they tend to struggle with cash flow and having cash reserves on hand. But established businesses can fall into the same trap as high growth companies if they don’t take the time to watch their numbers.

    There are many areas in a business that can tie up cash.  Knowing where to look and setting a few parameters will help keep your business running smooth in good times and be better prepared for slow times.  These are 4 that every business should focus on.

    Invoice Promptly:  Most businesses pay invoices at a minimum 30 days, some companies only pay a couple times a month.  The bottom line is the clock does not start ticking until your customer receives the invoice.  If you invoice 2 weeks after the fact, you just gave your customer 2 extra weeks to enjoy whatever was purchased from you and you are getting nothing for it.  If that work included your business spending money (cost of goods sold) you have unnecessarily strained your business for 2 weeks.  What would it take to get that invoice out right away?

    Cash Reserve to cover 3 months of fixed expenses:    Depending on your business this may take time, but building cash reserve that pays the fixed expenses even if your business doesn’t sell a thing allows you to not have to borrow money just because your business has a slow month.   It puts you in a position of power to establish a business line of credit (for bigger emergencies), because you aren’t in a panic to get it.  In the event of a “fire sale” you can be the buyer and not the seller.

    Manage your Inventory: If your business requires it, you have to manage it.   Overstocked inventories can tie up substantial amounts of cash in a business.  You need to know the turnover ratio for your industry – it’s easy to calculate (COGS / total inventory value)  Holding on to old inventory, obsolete inventory will only guarantee the price you sell it for tomorrow will be less than today.   Also don’t be tempted to buy bulk, if the excess doesn’t help you with inventory turns. They money you get saving in bulk may actually be costing you.   Ever end up throwing out food you bought from a warehouse grocery store?

    Review all your expenses:  Start by printing a report of your vendors and reviewing them one at a time.   Expenses also include employee reimbursement, auto expenses, suppliers and benefit packages.   Depending on the circumstances, having clearly defined guidelines for your employees regarding expenses and timely report submitting can make a dramatic impact on cash flow.    When is the last time you asked a vendor to review their pricing?   To get discount terms for early payment?  Compared insurance rates?  100% of the money you reduce in unnecessary expenses is additional profit and cash to your business.

    What about your business?  Where are some of the areas you have found that focusing additional effort has improved your cash position and overall business health?    Managing your cash is just one component of running a successful healthy business, but it’s an important one and it won’t happen on it’s own. Managing cash flow can be challenging, but be assured it is always rewarding.

    What do you think? We’d love to hear your thoughts in the comments below.

    Chris Steinlage Kansas City Business Coach