Small Business Cash Flow: Strategies for Making Your Business a Financial Success

SMALLBUSINESSCASHStrategies for Making Your Business a Financial Success

FLOWDENISE OBERRY

John Wiley & Sons, Inc.

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SMALLBUSINESSCASHFLOW

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SMALLBUSINESSCASHStrategies for Making Your Business a Financial Success

FLOWDENISE OBERRY

John Wiley & Sons, Inc.

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Copyright 2007 by Denise OBerry. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying,recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the1976 United States Copyright Act, without either the prior written permission of thePublisher, or authorization through payment of the appropriate per-copy fee to theCopyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department,John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

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Library of Congress Cataloging-in-Publication Data

OBerry, Denise, 1955Small business cash flow : strategies for making your business a financial

success / Denise OBerry.p. cm.

ISBN-13: 978-0-470-04097-3 (pbk.)ISBN-10: 0-470-04097-1 (pbk.)1. Small businessFinance. 2. Cash flow. I. Title.

HG4027.7.024 2006658.15'244dc22

2006011036

Printed in the United States of America.

10 9 8 7 6 5 4 3 2 1

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Contents

About the Author vii

Preface ix

CHAPTER 1 Understanding Cash FlowYour Number-One Priority 1

CHAPTER 2 Your Business PartnerThe Accountant 9

CHAPTER 3 How Money Works in Your Business 25

CHAPTER 4 Finding and Keeping Cash in Your Business 37

CHAPTER 5 Record Keeping Isnt Drudge Work; Its Priceless History 51

CHAPTER 6 Charging the Best Price to Keep Your Business Healthy 69

CHAPTER 7 Using Your Hidden Cash Resources to Grow Your Business 81

CHAPTER 8 MarketingYour Cash Generator 115

CHAPTER 9 Resources 147

Recommended Reading 195

Web Sites to Visit 197

Index 199

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About the Author

A small business owner since 1996, Denise OBerry understands thechallenges facing small business. Shes lived them and has helpedcountless clients work through the same issues. She understands thefrustrations, the fears, and the joys of owning a small business. Withmore than two decades of operational and management experience,OBerry has developed a sharp eye for how businesses get bloated withinefficiencies, cross-purposes, and miscommunicationand how theycan retool for a sleeker, smoother, more strategically focused organiza-tion. An entrepreneur who quickly built her own successful consultingbusiness, she helps other small business owners set priorities, take ac-tion to grow their business, and create the balance they want betweenlife and work.

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Preface

Most small business owners hang out their shingles without having aclue about whats required to be successful on the money side of theirbusiness. They see a bunch of numbers on a sheet of paper and groanabout how they wish theyd paid more attention to math in school. Butcash flow in a small business is about much more than math. It tells thestory of your business and can be adjusted by simple actions you cantake to move your business from failure to success.

In the United States we dont raise business owners, we raise em-ployees. So its no wonder many small business owners who have a pas-sion for their business have no idea how to make it financially viablewith a healthy cash flow. But somehow youre making do.

There are millions of you in business. Most of you have fewer than20 employees. A good portion of you have only one or two employeesor manage to go it alone. But youre facing the same frustrating busi-ness issues every single day. You spend most of your day working andhave little to show for it. You own a business that is dependent on yourpresence and you can forget about taking a day off when youre sick orwant to have a little fun. You feel overwhelmed with the financial as-pects of your business and dont understand why youre always brokeeven though youre making a profit.

Dont despair, help is on the way. In this book, you will learn:

How to select the right accountant and get the maximum returnfrom that partnership.

How to get money from the right places to position your business forsuccess.

The simple strategy for keeping money moving in and out of yourbusiness.

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Why having a budget and keeping good records can mean success orfailure.

How to charge just the right price so customers keep coming back(and bring their friends and neighbors, too!)

How to squeeze the most out of every business relationship, market-ing campaign, lost sale, and business process to maximize the cashavailable.

Ive met hundreds of you over the years. And Im proud to becounted as part of the small business movement in this country. But wehave to work a bit smarter if were going to survive. I hear countlesscries time and again from small business owners who are struggling tosurvive. When I dig a bit deeper, the solution lies in action. Weve be-come an instant answer society. We want a quick fix for everything with-out doing anything. Thats not going to happen in your business. Itsgoing to take some work to get it on the right track. You have to be will-ing to commit the time necessary to do that.

Just about anyone can give you tools to fix your problems. This bookis your tool. Im hoping that it becomes a dog-eared copy lying withinyour reach on a daily basis until you get on the right track. Although Icant force you to take action, absolutely nothing different will happenuntil you do.

When I conducted a survey of more than 200 small business own-ers, they told me what they wanted to learn about how to manage cashflow. The overarching theme of their comments was help me smoothout the humps in my cash flow. There is no fast and easy way to dothat. It takes consistent action in every aspect of the business to make itwork. So I focused on the tasks you need to undertake to help you besuccessful.

Chapter 1, Understanding Cash FlowYour Number-One Priority,provides a brief overview of the whys behind business cash flow prob-lems. Its really very simple and describes those things you must under-stand and what you must look at to begin correcting your cash flow issues.

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Chapter 2, Your Business PartnerThe Accountant, delves intoselecting an accountant for your business. I was surprised when abouthalf of the small business owners who took the survey said they had noaccountant. An accountant as the financial expert and partner for abusiness owner is worth their weight in gold. They can help you takethe right actions to grow your business and prevent you from makingmissteps along the way. But its important to take the time to choosecorrectly. Wasting time with the wrong accountant doesnt help you abit. I give you a road map for making just the right choice.

Once youve got the right partner on your team, you need to know alittle about what theyll be sharing with you and how to use financial re-ports to understand what happens to the money in your business. InChapter 3, How Money Works in Your Business, you learn about themost important financial statements and key accounting terms that arecritical for your business.

Its easy to overlook places where cash could be hiding in your busi-ness. In Chapter 4, Finding and Keeping Cash in Your Business, I re-veal all the nooks and crannies you can explore to see if youre missingsomething. When youve found all the cash you can inside your busi-ness and are still on the short end of the cash flow stick, looking outsideis your best option. Youll learn about different types of financing avail-able too.

Having a cash flow budget will be a critical key to your success asyou move forward. It will help you decide what projects to take on,when you need to slow down cash outflows, and how to make adjust-ments to the way you do business. Chapter 5, Record Keeping IsntDrudge Work; Its Priceless History, may just become your favoritepart of this book. Once youve learned how budgeting can be such auseful business resource, youll wonder how you ever lived without one.

Have you struggled with pricing your products or services? Mostsmall business owners do. Plenty of them severely undercharge, too. InChapter 6, Charging the Best Price to Keep Your Business Healthy, youlearn what goes into setting a price for what you offer in your business

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and how to make your customers love paying you. It also helps you takea longer look at your customers and what opportunities you have fortheir lifetime of doing business with you.

Chapter 7, Using Your Hidden Cash Resources to Grow YourBusiness, gets into the meat of your business. Sometimes you have toradically change what you do and how you do it to make things work.Process and procedure adjustments can make a big impact. So can hav-ing a strategy to make your customers loyal to your business no matterwhat prices you charge.

Marketing is the lifeblood of your small business. Its what makesthe cash pour in. But its not a one-time activity. Using different strate-gies and tactics to cast the widest net will pay the biggest return for you.In Chapter 8, MarketingYour Cash Generator, you learn about thevarious strategies for making the most of your marketing dollars.

OPEN YOUR MIND

One major thing I ask of you as you read this book is to open your mind.As you progress, youll be reading about a fitness trainer or a restaurantowner or some other type of business owner and may think, Well, thatdoesnt apply to me. Although specific examples are used throughoutthe book, each of them could apply across any industry in any business.Think bigger.

xii PREFACE

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SMALLBUSINESSCASHFLOW

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C H A P T E R 1

Understanding Cash FlowYour Number-One Priority

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A small business owner is working 80 hours a week and he just discov-ered he doesnt have enough money in the bank to pay this monthsbills. Thats a story repeated time and again in small businesses aroundthe United States every single day.

Small business owners like you work your fingers to the bone, nego-tiate the best deals for a huge profit, and have no cash to show for it. Itsnot ignorance; its just a misunderstanding of the simple steps that mustbe taken to ensure your business is the success you visualized.

You may be making big profits on the products or services you sell,but that doesnt mean youre in good shape. Its a good thing to haveprofit in your business, but most important is having cash. Profits dontequal cash. At any given time your profits can be tied up in inventory oraccounts receivable and could be completely inaccessible to you. Whatreally counts in your business is having cash on hand so you can take ad-vantage of opportunities to expand your business and deal with emer-gencies as they arise.

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Its essential that you understand how cash flow works in yourbusiness so you dont end up sending it in the wrong direction. Thebasics of cash flow include a few simple items. Cash coming into yourbusiness is called revenue, income, or sales. These all mean the samething. Cash going out of your business is called expenses. These arethe bills you have to pay to operate your business like your rent andtelephone. You probably already know that income minus expensesequals profit, but what you may not be aware of is that you cant counton that profit to run your business. Assets are the things that yourbusiness owns. You probably have a computer. That would be consid-ered an asset. Any invoices youve issued but have not received pay-ment for are also assets. Your company also has liabilities. These arebills that you owe to someone else; money you owe on any creditcards, bank loans, or outstanding bills. Assets minus liabilities equalsequity. This is what your business actually owns. If you financed thatcomputer and have paid 50 percent of the bill, you own half of thecomputer.

So how do you get a handle on what shape your business is in froma cash flow perspective? For starters, you need a good record keepingsystem. There are plenty of options for accounting software available tosmall businesses, but thats not a requirement. If youre more comfort-able keeping your records manually, thats fine, too.

In your record keeping system, whats important is knowing howmuch money people owe you, how much money you owe, and yourcash on hand balance. You also need to know the rolled up totals ofyour income and expenses for each month and year. Financial trackingand reporting is not a once a year event aligned with the ritual of doingyour taxes. Businesses that are successful know their financial positionand track it on a regular basis. Businesses that arent successful dont.Without fail this has held true in my experience working with smallbusiness owners over the years. You simply must know where yourbusiness is from a financial perspective.

4 UNDERSTANDING CASH FLOWYOUR NUMBER-ONE PRIORITY


If youre having cash flow problems, they more than likely stemfrom one of four key areas.

1. Your sales arent high enough.2. Youre not collecting money people owe you.3. Youre not charging enough to cover expenses.4. Youre spending too much money running your business.

Any of those look familiar? Sometimes cash flow problems in asmall business can be attributed to just one of those items. More of-ten, its a combination. One things for sure. If you dont step back andtake a look at each of these items, youll never know where the prob-lems lie.

WHATS THE PROBLEM?

You need to take a systematic approach to each one to find the problemand take action to correct it.

Your Sales Arent High Enough

The best way to get more sales is to get more customers or sell more tothe customers you currently have. The only way to do that is by using aconsistent marketing strategy that targets the right people for yourproduct or service. You absolutely must have a marketing strategy foryour business and a tracking system that tells you whats working andwhats not. There are numerous ways to market your business and in-crease your sales. How you do that depends on your business servicesand the customer you are targeting.

Whats the Problem? 5


Youre Not Collecting What People Owe You

Its really easy to get so caught up in the work of your business thatyou forget to bill for your services or forget to track what youre owed.But the simple truth is you must. Your survival depends on it. If you do work and dont get paid, what have you gained? Nothing ex-cept a bunch of lost hours. You dont have time for that. You simplymust have systems in place for making sure you get what is due to you.

Youre Not Charging Enough to Cover Expenses

One thing a small business cannot do is compete on price. Just ask allthose small business owners who tried to compete on price with Wal-Mart. You dont have the same buying power as the giants. What you dohave is the capability to appeal to a different segment of the market bymaking sure you offer extra value for the price they pay. That way youcan calculate your price to make sure each and every expense is cov-ered with some left over for your good work.

Youre Spending Too Much Money Running Your Business

Running your business isnt all about paying bills. How your businessoperates contributes in a big way to what you end up with as yourbottom line. Whether you have employees or outsource some of yourwork to contractors, how that work gets done can make the differ-ence between profit and loss. How and when you spend your moneyhas a big impact, too. You cant afford to spend haphazardly, notknowing from one day to the next how it will impact your bottomline. You may be flush with cash one month and not have enough thenext. Knowing in advance when that will happen will enable yoursuccess.

6 UNDERSTANDING CASH FLOWYOUR NUMBER-ONE PRIORITY


ITS ALL ABOUT ACTION

Knowledge alone wont change your business. Action will. You may beable to correct your direction and restart your business on the rightcourse. But my suggestion is dont go it alone. Theres plenty of helpavailable for small business owners in the form of experts and informa-tion to improve your cash flow. The main thing you have to do is getstarted. Youve taken the first step by purchasing this book. Now all youhave to do is put the ideas into action. Lets do it, shall we?

Its All About Action 7


C H A P T E R 2

Your Business PartnerThe Accountant

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The life of a small business owner can be a lonely one. Juggling a mil-lion things at once to keep your business on a successful track is no easyfeat. Add making sure the government is happy and you could end upwith a bunch of sleepless nights. So why spend them alone? An accoun-tant can be your best business advocate and your connection to sanityin a world of craziness. But you must select your accountant wisely. Amismatch can be your worst nightmare.

Im a perfect example. During my first three years in business, Iblazed through three different accountants. What a waste of time andmoney. I dont even remember how I found the first one though it wasprobably through the suggestion of a business colleague. I realized afterabout three months it wasnt the right fit for me and started lookingaround. I thought I did it right the second time. All was well until thataccountant decided to sell out to someone else and never bothered totell her clients. The person who took over was a very clear mismatch.After that a little legwork proved prudent and my current accountant

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has been with my company for about seven years. If you spend sometime going through the process outlined in this chapter, you can avoidthe headaches I encountered.

The good news is that technology provides you with plenty of op-tions for finding and working with an accountant. But thats the badnews, too. There are so many choices; it can be tough to narrow themdown. Services can range from completely virtual to totally hands-on.

Suzette Flemming of Flemming Business Services Inc. says 90 per-cent of her clients are 800 or more miles away from her physical loca-tion, yet she can enter and process all of their paperwork, monitoraccounts for red flags, and provide weekly and monthly reports. Formany clients, she will download data directly from online accounts. Allwithout ever meeting them face-to-face. Having this kind of businessarrangement with your accountant requires a high level of trust andcomfort with todays available technology.

However, thats not a good arrangement for Stephanie Chandler,owner of Book Lovers Caf, who likes to keep a little closer tabs on herfinancial matters even though she hates dealing with the paper. Chan-dler maintains a spreadsheet so she can keep an eye on daily sales. Shehas an onsite bookkeeper and a local accounting firm that takes care ofthe other details. Once a month she gets financial reports so she can beinformed about whats going on.

Your choice of business arrangement may be similar to these exam-ples or somewhere in between. Lets figure it out.

SEARCHING FOR YOUR ACCOUNTANT

What Do You Want?

Since youve decided its time to hire an accountant, that decision willbe the easiest part of your selection process. This is one choice youdont want to make by picking a name from the biggest ad in the yellow

12 YOUR BUSINESS PARTNERTHE ACCOUNTANT


pages. So where do you start? With yourself. You cant hire an accoun-tant until you know what youre looking for. That means you need totake the time to think through your requirements before you make thefirst call. Take a few minutes to answer the following questions beforeyou proceed. You will find this Requirements Worksheet in Chapter 9.

Requirements Worksheet. Answer each question with a simple yesor no.

1. Im comfortable having a business discussion via e-mail.2. Id rather have business discussions on the phone.3. Im more comfortable if I can be face-to-face with someone during

a business discussion.4. Im on top of my tax situation and fully aware of my obligations.5. Id rather not learn the ins and outs of the tax code; someone else

can do that for me.6. I hate organizing the financial papers that come with owning a

business.7. I get a lot of satisfaction from sorting through monthly receipts

and tracking how they impact my business.8. I prefer working with a large firm.9. Id rather do business with a small specialized firm.

10. I could benefit from having a partner who can connect me to otherbusiness opportunities.

11. I like to bounce business growth ideas off an expert.12. Im willing to dedicate cash resources to get the results I need.

Lets take a look at what you said to help you decide where to startlooking for an accountant and what type of firm youll select.

Geographical Proximity. If you answered questions 1 and 2 with ayes, that means you are open to the possibility of having an accountantwho may not be in the same city as you. Your comfort level with tech-

Searching for Your Accountant 13


nology as a communication tool can be an asset you will put to work foryou once youve made your selection. If you simply must have your dis-cussions face-to-face, youll need to limit your search to your local area.

Service Level. A yes answer to question 4 indicates you may not needto hire a full-time accountant as long as youre willing to use your timefor tax issues. You may be comfortable with someone who providesminimal direction and support of the activities you complete. On theother hand, if just thinking about all the reporting requirements and taxregulations makes you sick to your stomach, youll need to considersomeone who can take on those responsibilities for you.

Paper Handling. Some people just love taking all the invoices, sales,and expense receipts and making sense of them. But most people dont.A yes to question 6 means you will need to seek out an accountant whocan complete those details for you.

Business Size. There are a variety of accounting firms, from small in-dependents to huge companies with hundreds of employees. If you of-ten feel lost in the crowd when working with large firms, then your bestchoice would be a small or mid-sized company. Although larger firmshave a wider breadth of knowledge, its tough to establish a personal re-lationship with the people in the firm who may be handling your ac-count. Sheer turnover can cause you frustration and wasted time andeffort. A smaller firm is typically more connected to their clients on apersonal basis and can provide specialized consulting and advice.

Service Fees. Typical fees for accounting services range from $75 anhour at the low end to more than $300 an hour at the high end. Payingmore doesnt necessarily equate to better service or better advice.Some accountants work strictly on an hourly basis and others prefer aretainer. Think about your cost tolerance by checking your budget be-fore you start interviewing.



Knowing what your requirements are will help you narrow downthe next step of your search so you end up with just the right person.

Find Out Whos Available

Lets begin with whom you know. Call your networking contacts andtalk about whom they use and why they use them. Make sure you findout what theyre paying in addition to customer service quality. You canuse the Accountant Data Sheet in Chapter 9 to keep track of what youfind out.

The next best place to find potential candidates is membership or-ganizations. Do you belong to a chamber of commerce or professionalgroup? Scour through the membership directory. And dont forget yourcyber network. Put a call out to your favorite discussion list or onlinebusiness forum.

By now you should have at least five names. Its time to act on allthe information youve collected. Review what youve discovered.You may have limited information on some, but thats okay; it willwork out in the next step. Look over each candidates data sheet andcompare it to your requirements. Eliminate any names that just dontseem to fit.

DIGGING DEEPER TO FIND THE RIGHT FIT

Its interview time. Plan on setting aside at least 30 minutes for each in-terview. Your interviews should be conducted in a face-to-face meetingunless youve chosen to consider an accountant who is not close to yourbusiness. Even if the accountant is local, you may choose phone inter-views just to save yourself time. But be careful doing that. Youre goingto be working with this person for quite some time on very confidentialissues about your business. A face-to-face meeting can help you clarifyhow easy this person will be to work with.

Digging Deeper to Find the Right Fit 15


Remember as you conduct your interview to stay on topic. Donttalk about tax issues. You are interviewing and trying to find out whattype of fit this person will be for your business, not trying to solveproblems.

When can you start? is the only question most potential clientsask Caroline Jordan of The Jordan Result LLC. Thats a big mistake.Shed rather answer questions that dig into her experience. Asking mewhat I did for a business like yours is a great question. You should alsoask what results I achieved and how Im different from all the other ac-countants available out there.

Your prospective accountant wants you to dig deeper, too. All set?Add what you find out to the Accountant Data Sheet you have for eachaccountant you interview. Heres what you need to ask.

Your Interview Checklist

Do You Specialize in Businesses Like Mine? Although this questionmay seem unimportant, its really one of the most critical. Retail has dif-ferent requirements from service or manufacturing. Businesses that sellto the government have special commitments. Rules and regulations canbe many or few. You want someone who is an expert on the tax issuesthat impact your business. If theyve never worked with a business likeyours, it could end up costing you more money in the long run.

What Have You Done for Others? If all this accountant has done isprovide reports and complete tax returns, that may be less than whatyou are looking for. Make sure they describe business results that arecomparable to those you may be seeking. This is a good time to getthree references to call.

How Will I Be Charged? Let them give you a rundown of what theyoffer and the corresponding fees for the services. Do they offer a bun-



dled package? Is everything a la carte? How does it compare to your re-quirements? Spend some time talking about exactly what you are look-ing for and what the exact cost will be. Discuss ways to minimize yourcost if possible.

Whats It Feel Like? Does this person seem to be genuinely inter-ested in your business and working with you? Will you feel comfortablequestioning them and asking for advice as your business grows? Dothey listen? Remember you will be spending a good bit of time commu-nicating back and forth. The relationship is a very important part of thisbusiness agreement.

What Is Your Education and Experience? How many years has theaccountant been doing what they do? How do they stay up-to-date oncurrent tax rules and regulations? Are they a general accountant or cer-tified public accountant (CPA)? Unless your business has certain re-quirements like regular audits or complicated loan applications, ageneral accountant should work fine for you. The key here is to makesure their knowledge isnt antiquated and that they are continuallylearning. The last thing you need is an expert whos working from aplaybook thats 20 years old.

Youre Almost Done

Time to pick your best choice. You probably already know whom youwant to select since youve come this far. But give yourself some timeto look over the information youve collected to see if youve missedanything. Make sure you contact the references each accountantgave you. Another few days wait wont hurt a thing. Once youvemade your final decision, get on the phone and congratulate the firmyouve chosen and schedule your first meeting to confirm your work-ing arrangement.

Digging Deeper to Find the Right Fit 17


WORKING WITH YOUR ACCOUNTANT

Will you be sending your accountant a box of papers every month orsomething a little more organized? How often will you meet? Whatreports will you receive and when will you receive them? What doyou have to supply and when, to get the information you need at theright time?

To ensure he has his finger on the pulse of his clients businesses,Bob Glasgow, CPA of Strombeck Consulting, Inc., requires that each ofhis clients meet with him four times a year; this is mandatory, no ex-cuses. Each meeting takes about four hours and covers a variety of top-ics from financial reports to coaching staff. In between those meetings,his clients are free to call him at any time. Whatever your agreement iswith your accountant, getting your company set up correctly will be thekey to a clear day-to-day financial picture you can work from to makethe cash flow properly.

Your First Meeting

During your first meeting, you and your accountant should review howyou are currently tracking your financial performance and make adjust-ments as needed. Then discuss expectations on both sides of this work-ing agreement. Depending on the depth of the work to be provided,your accountant will expect certain documents from you by a deadline.Set up a schedule for each item. Make a commitment to meet the dead-lines. Accounting is a very date driven activity, and you probably arentthe only client of this firm. Delay on your part could mean a big delayon theirs.

Discuss the current state of your business and your growth plans.Share new ideas you have planned for your company and get an opinionabout the best course of action. Talk about what cash flow issues con-cern you and the best way to smooth out the bumps. Make sure youlook at the big picture, too. What will your business look like in five



years? Your accountant can assist by helping you create a strategic planfrom the story your financial numbers tell about your business. Takesome time prior to your meeting to collect your thoughts about yourcurrent business state and where you want your business to grow, byanswering the following questions. You will also find this on the Busi-ness State of Affairs Worksheet in Chapter 9.

What Did You Accomplish This Year That Youre Most ProudOf? List those business actions that have made you feel good about theway your business is going.

What Was Your Most Difficult Experience This Year? Did youstumble over defining a target market for a new product or service?Did sales fall in a particular area? Did you end up with a flop with aspecial promotion?

What Was Your Biggest Discovery? Think of this in terms of an Aha!Did you accidentally find a new market for your product or service?Roll out a marketing strategy that worked really well? Make a new con-nection that helped grow your business?

What Would You Like Your Biggest Accomplishment to Be at theEnd of This Year? Looking forward is one of the toughest things forsmall business owners to do. You spend a lot of time taking care of day-to-day activities and problems from yesterdays issues. Yet its importantto think ahead and define what you really want so you can plan for it.

Where Would You Like Your Business to Be in Terms of Sales,Size, Number of Employees and Location(s) (1) at the end ofnext year? (2) in two years? More looking forward. Doing some soulsearching to figure out just what the future looks like will help you de-termine what actions you need to take now to get there.

Working with Your Accountant 19


Who Are Your Top Five Competitors and Why? Knowing who yourcompetitors are and why they are your competitors will help you setprices and differentiate your business.

What Arent Your Competitors Doing That Customers Need?Defining what needs of customers in your industry are not being metcan help you in forming new product and service offerings.

What Trends Do You See in the Market That Could Make YourProducts and Services Obsolete? Knowing how the trends in themarketplace impact your business can help you take action to proac-tively address issues before your business takes a financial hit.

What Are Your Competitors Doing to Push Themselves Aheadof the Pack? Watching your competitors can give you clues about whatyour business should be doing to increase sales and ultimately yourbusiness bottom line.

What Is Your Typical Day Like from Start to Finish? WhatWould You Like to Change About It? What activities are you spend-ing your time on? How many hours each day are you spending on yourbusiness? Can some of your tasks be outsourced or delegated to an em-ployee? Would you like to decrease/increase the number of hours youare spending?

Once youve answered each of these questions, take some time toput your thoughts into an organized one-sheet format so you can have alogical discussion with your accountant about your current and futurebusiness state. Include your general goals, time commitment, financialgoals, target market, and a service goal.

A small business owner who painted wall murals wanted to moveinto a more targeted market. She used the Business State of AffairsWorksheet to collect her thoughts and ideas about what she wanted herbusiness to be. Once it was complete, she organized her thoughts intoone sheet to help guide her discussion with her accountant.



Goals

Increase and cultivate market. Adjust pricing to ensure a profit. Organize the business side. Work a plan to achieve goals.

Time Commitment

Work 2830 hours per week. Twenty hours per week will be dedicated to fulfilling client commit-

ments. Ten hours per week will be used to market business and perform ad-

ministrative business activities.

Financial Goal

$50,000 gross salesrequires $4,166 per month in sales activity/$1,041.50 per week/$350 per day/$50 per hour.

Target Market

Stay at home mothers 3452 and working women 3650 with chil-dren between the ages of 0 and 18 living in a home that is valued at$250,000 or more.

Service Goal

To create a kids dream room from top to bottom including all acces-sories and furniture. Targeted groups of children: 05 newborn/tod-dlers; 612 tweens; 1318 teens.

Staying in Touch with Your Accountant

Set up a schedule to meet on a regular basis and discuss how your busi-ness is moving along. A monthly meeting schedule is a good way to getstarted. This meeting can be used to discuss your financial reports andtrack the progress of your strategic plan.

Working with Your Accountant 21


You can now rest assured that the survival of your businessfroma financial record perspectiveis in good hands. And you made thathappen.

AN ALTERNATIVE SOLUTION

You may want to consider hiring a bookkeeper to do the day-to-day fi-nancial tasks for your business. Todays bookkeepers are part accoun-tant, part tax whiz, and part financial analyst according to the AmericanInstitute of Professional Bookkeepers (AIPB).

The old stereotype that bookkeepers are reclusive people who shuf-fle papers all day in a dark corner of a business are gone. They are pro-fessionals who can handle most of the financial transactions for yourbusiness.

Bookkeepers fees are typically one-half to one-third of accoun-tants fees, so if youre looking to trim costs, a bookkeeper may be youralternative. They wont completely replace the need for an accountantbut can handle the day-to-day responsibilities. An accountant couldthen review their work on an occasional basis and perform the morecomplicated tasks such as tax returns, saving you a lot of money.

You should take the same approach to hiring a bookkeeper as youdid with your accountant.

USING ACCOUNTING TOOLS

Several tools are on the market to help you keep track of your financialrecords. You can choose to track manually using the plain old paperand pencil method, structured templates offered in spreadsheet pro-grams, or software specifically focused on keeping track of your busi-ness financials.



The key to your tracking program is to get it set up properly in thebeginning no matter what method you use. You must have a good foun-dation to build on. Software tools are definitely the biggest time saversonce you get over the learning curve of using them.

QuickBooks software by Intuit is easy to use and one of the mostpopular programs for small business owners according to my survey.The software is offered both as a computer program you can purchasefor a one-time fee and via an online Internet interface.

Peachtree by Sage Software SB, Inc. is another small business ac-counting program that you may want to consider. This software is of-fered for use on your computer and doesnt currently have an onlineversion.

MYOB accounting software offered by Acclivity LLC is another op-tion if you are looking for a desktop software product you can use onyour computer.

Your choice of product will depend entirely upon your businessneeds. Your best bet for selection is to work with your accountant andlook at the product features that will provide you with the financialstatements you need.

Using Accounting Tools 23


C H A P T E R 3

How Money Worksin Your Business

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Those monthly reports your accountant provides arent just a bunch ofnumbers on a piece of paper. They tell a story about your business.That means its important for you to take the time to understand whatthey mean, not just give them a cursory glance and then file them in adrawer. They explain the financial history of your business, which canbe used to improve future results.

The fact that reports are based on historical data is important to re-member when you are focused on the cash flow in your business. Al-though a cash flow statement will tell you how much money you have onhand right now, it wont tell you how much youll need in a month orthree months from now. You need a cash flow budget to see the reality ofyour cash. Youll find out how to create and use a cash flow budget inChapter 5, but for now lets focus on understanding what your accountingreports are telling you about your business. On your accounting reports,positive numbers are stated as the actual number and negative numbersare shown either preceded by a minus sign or enclosed in parentheses.

27


A small restaurant owner knew his business had cash flow prob-lems but didnt know quite how to go about fixing them. He had anaccountant who did his annual taxes whom he met with once a year.He kept all the paperwork for his business in a fileone file for salesand one file for bills. He did not keep any kind of monthly statementsto track the financial status of his company. But from looking at thebank balance every month, he knew his business was in trouble. Hekept track of his business cash balance by tracking deposits and with-drawals from his bank account. You can see an example of this inTable 3.1.

What an awful mistake to use bank statements to track business fi-nancials. But you knew that, didnt you? This was his idea of cash flowtracking. Whats wrong with it? Well, for one thing, its based on whatsalready happened and gives him no idea of what expenses he has orwhom his primary customers are. If he had proper financial statements,he could use that information to see exactly in what months his businesswould encounter a cash shortfall.

KNOW HOW YOUR ACCOUNTING SYSTEM IS SET UP

Its important to note how your company has its accounting system setup. It will be set up using the cash or accrual method. If you are using

28 HOW MONEY WORKS IN YOUR BUSINESS

Table 3.1 Tracking Sheet

Month Deposits Withdrawals Balance

July $25,434.21 $23,820.41 $1,613.80August 16,979.51 19,503.48 (2,523.97)September 20,548.64 21,330.90 (782.26)October 20,006.82 19,876.55 130.27November 28,001.36 26,804.47 1,196.89December 20,134.99 22,100.37 (1,965.38)


the cash method, enter a sale on your accounting system when the saleis paid. Enter an expense, such as rent, on your accounting systemwhen it is paid. Conversely, with an accrual method, sales are enteredwhen the sale is made. The payment for the sale may not be receivedfor weeks or months, but the sale is recorded in your books. Same thingwith your expenses. You may receive your rent bill on the fifteenth butnot pay it until the first. Enter it in your accounting system on the fif-teenth. If youre not sure how your accounting system is set up, checkwith your accountant. Its important.

STANDARD ACCOUNTING REPORTS

Whether you are using the cash or accrual method of accounting, thereports you will use to track your financials are the same. These arecalled statements. The three standard financial statements you need tounderstand are the income statement, balance sheet, and cash flowstatement.

Income Statement

Your companys income statement (Table 3.2), also known as profitand loss (P&L), shows the income and expenses of your businessover a period of time. Income is money coming into your accounts in your business and provides totals for an at a glance look at whatsgoing on. Income statements are pretty basic. You take income minus expenses and get net income. Net income is whats left overafter the bills are all paid. But net income doesnt equal cash in thebank. Dont forget that. The income statement shows activities onyour account, not cash that has been deposited or withdrawn fromthe bank.

Standard Accounting Reports 29


Balance Sheet

Your balance sheet (Table 3.3) lists your assets, liabilities, and equity inthe business. Its like the big picture view of whats going on in yourbusiness. Its called a balance sheet because it shows a balanced view ofyour company. The key formula for the balance sheet is assets equal lia-bilities plus equity. Your company specifics may be different dependingon how your accountant set up your system.

There are three types of assets captured on the balance sheet.


Table 3.2 Income Statement (Profit and Loss)

IncomeConsulting income $ 8,000.00Project fees 74,997.11Reimbursed expenses 3,787.73

Total Income $86,784.84

ExpenseAdvertising $ 845.91Office supplies 9,466.71Bank service charges 471.47Dues and subscriptions 1,896.19Insurance 438.00Interest expense 492.43Licenses and permits 162.50Payroll expenses

Officer salary 31,000.00Payroll tax expense 2,493.86

Total payroll expenses $33,493.86Taxes 136.76Subcontract labor $11,137.50Telephone 3,864.12

Travel 6,419.79

Total Expense $68,332.81Net Income $18,452.03



Table 3.3 Balance Sheet

AssetsCurrent Assets

Checking/SavingsSavings account $41,029.26Checking account 3,544.57

Total checking/savings $44,573.83

Other current assetsOther current asset 993.80

Total other current assets 993.80

Total Current Assets $45,567.63

Fixed AssetsEquipment

Accumulated depreciation 9,051.42EquipmentOther 10,660.82

Total Equipment $ 1,609.40

Total Fixed Assets $ 1,609.40

Other AssetsOrganizational costs

Accumulated amortization 198.24Organizational costsOther 496.37

Total organizational costs $ 298.13

Total Other Assets $ 298.13

Total Assets $47,475.16

Liabilities and EquityLiabilities

Current liabilitiesCredit cards

MasterCard account 69.95

Total credit cards 69.95

Total current liabilities $ 69.95

(Continued)


Current assets are items that can easily be turned into cash. In addi-tion to the money you have in your bank account, current assets alsoinclude any item that is a cash equivalent such as accounts receivableor inventory items. Fixed assets include tangible items you use inyour business, like your computer, to produce income for your com-pany. Last, intangible (other) assets are included in the asset list.These are things like your web site domain, trademarks, businessmethods, and copyrights. Notice how the assets are listed on the bal-ance sheet as most liquid to least liquid. The most liquid items canbe converted to cash easily and the least liquid cannot.

This is the end of one side of the balance sheet.The other side of the balance sheet includes liabilities and equity.

Liabilities are obligations owed by the company. Current liabilities in-clude accounts payable and other short-term debts like taxes. Currentliabilities are always paid with current assets, so its important to haveenough assets to take care of the liabilities. A general rule of thumb isto have two and a half times more assets than liabilities. Long-term lia-


Table 3.3 (Continued)

Long-term liabilitiesPresident/CEO 10,000.00Vice President/COO 10,000.00

Total long-term liabilities 20,000.00

Total Liabilities $20,069.95

EquityAdditional paid-in capital 443.88Capital stock 1,000.00Retained earnings 25,961.33

Total Equity $27,405.21

Total Liabilities and Equity $47,475.16


bilities are those obligations that will be paid in a term longer than oneyear. Equity, also known as net worth, is determined by subtracting lia-bilities from assets. That amount is the equity of the company.

Cash Flow Statement

The cash flow statement (Table 3.4) is a report on the cash your busi-ness has available right now and shows the flow (in and out) of money inyour business. Its a snapshot in time of the cash available from yourbusiness minus any receivables or payables. There are three sections tothe cash flow statement. Operating activities are those that makemoney for the business. Financing activities are those that raise moneyfor the business. A third section, Investing Activities, though not shownin this table, shows how a company is leveraging its future growth by in-vesting its cash in assets for the business.


Table 3.4 Cash Flow Statement

Operating ActivitiesNet income $15,279.00Adjustments to reconcile net incometo net cash provided by operations

Accounts payable 1,986.34Credit card payments 1,954.10Payroll liabilities 112.00

Net cash provided by operating activities $11,226.56

Financing ActivitiesRetained earnings $ 1,626.13

Net cash provided by financingactivities $ 1,626.13

Net cash increase for period $12,852.69Cash at beginning of period 7,048.83Cash at end of period $19,901.52


ACCOUNTING TERMS YOU NEED TO KNOW

There are hundreds of accounting terms, but you dont need to know allof them. Other than the terms youve learned from the financial state-ments, there are a few more you should be familiar with.

Invoice

An invoice is a bill you generate when you sell your product or serviceto a customer on credit. The invoice is typically sent to the customer atthe time of sale or directly thereafter. Payment terms for invoices vary,but its common to bill Net 30, which means the customer payment isdue within 30 days. Invoices will age over time. The age is how manydays its been since the bill was created.

Receipt

A receipt is generated when you make a sale and the payment is madeat the time of purchase. Its a tangible record of what you sold and whatthe customer paid.

Accounts Receivable

Accounts receivable are outstanding invoices that have yet to be paid.Youve provided the product or service, sent an invoice to the customer,and the bill is waiting to be paid.

Accounts Payable

Accounts payable are bills you have received but not yet paid.

Inventory

Inventory includes those items you must have in stock in your businessto fulfill customer orders.



Cost of Goods Sold

Cost of goods sold is an amount that reflects the total cost of a productyou sell. This amount includes both direct cost, the hard costs for thetangible items that go into making or acquiring the product, and the ex-penses involved in turning the product into its final state. Cost of goodssold is also known as the cost of sales and is typically used in manufac-turing and retail businesses.

Breakeven Point

Your breakeven point is always zero. Its the point where total expensesequal total revenue. Amounts above your breakeven point are profit.Your breakeven point is one of the most critical numbers for your busi-ness. It tells you what you need in sales just to stay on the survival sideof the business equation.

HOW MONEY FLOWS IN A BUSINESS

Peg is a virtual assistant who sells her time to clients. She also has man-uals and e-books for sale on her web site for instant download; plusshes affiliated with another company that pays her a commission eachtime she refers a customer who buys their product.

This month Peg has worked with 5 clients and sold 14 e-books. Shegenerated invoices for her clients; one has already paid that bill. Shesbeen advised by her affiliate company that her customers have pur-chased eight of their products. Heres what her revenue looks like forthis month (Table 3.5).

Pegs monthly bills include rent, telephone, Internet service, andweb hosting, plus she pays herself a paycheck so she has taxes that willbe due. Pegs income statement for the month is shown in Table 3.6.Note how the flow of money is recorded as income or expense and theending net income.

How Money Flows in a Business 35


Peg would use this statement from month to month and pay atten-tion to whats coming in and whats going out. She should be able to an-alyze the historical data and track it to activities she is doing in herbusiness. This does not tell Peg how much cash she has available. Itshows only money coming in and going out of her business. Youll seehow this information transfers to the cash flow budget in Chapter 5.


Table 3.5 Pegs Sales

Accounts Receivable (AR) Cash Sales

Client #1 $ 326.50 E-books $378.00Client #2 1,239.00 Affiliate commission 295.20Client #3 427.00 Client #4 250.00Client #5 805.00Total AR $2,797.50 Total Cash $923.20

Table 3.6 Pegs Income Statement

IncomeConsulting income $3,047.50E-book sales 378.00Affiliate commissions 295.20

Total income $3,720.70

ExpenseRent $250.00Telephone 38.96Internet service 29.00Web hosting 10.00Payroll 965.25Payroll taxes 649.50

Total Expense $1,942.71

Net Income $1,777.49


C H A P T E R 4

Finding and Keeping Cash in Your Business

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At some point in the life cycle of your business, you are going to needmore cash. Whether you are trying to expand and need additional fi-nancial resources to capitalize that growth or are just trying to close thecash gap that has occurred because of a down business month, sooneror later a shortfall will occur.

How you respond to that cash shortfall depends on how well youhave prepared. Youve probably heard the saying Get your money fromthe bank when you dont need it. In a small business, that couldnt betruer. You simply must prepare your business for a future cash emer-gency when it is flush with success. Theres no better time to obtain fi-nancial support than when your business is flourishing and your cashflow is steady. No lender will take the risk to loan you money when yourbusiness is already in financial trouble. Plan ahead.

Thats exactly what Carmela Styles, owner of Safety and Er-gonomics Consulting Services, LLC did. When Styles started her business, she knew she would be doing business with larger

39


companies, who have a tendency to take a long time to pay their bills.Although she had the cash to move forward in her business, sheknew it was critical to have a cash flow cushion. It paid off for her.During the first few months of a large consulting contract she tappedher loan funds to collect a paycheck from her company. Once herclient payments began, she was able to abandon using the loan pro-ceeds and could collect from the flow of cash coming into her busi-ness. Without the loan, it would have been necessary for her to forgothe paycheck or dig into her own reserve cash funds. Because sheused her loan proceeds wisely, Styles established a credit history forher business.

THE GOVERNMENT DOES NOT FINANCE SMALL BUSINESSES

There are many different ways to acquire funds for your business. Italk about those in a few minutes. But first I want to dispel a mythyouve probably heard. At least once a week, I get a call from a smallbusiness owner who is looking for cash from the government to starta business. Theyve heard about free money thats available and wantto get their fair share. Youve probably even seen the ads in the news-paper and on television. Well, heres the bad news. The governmentdoes not give away money to fund small businesses. So there youhave it.

WHERE TO FIND MONEY FOR YOUR BUSINESS

If the government wont give you money, just where do you find it?Knowing where to look is half the battle. We start inside your businessand spread out from there. Each option has its own share of risks. Somewill take longer than others. Your business situation will dictate theright option for you.

40 FINDING AND KEEPING CASH IN YOUR BUSINESS


Shut Off the Flow

The first place you should look to find money for your business is yourcompensation. Are you taking a paycheck? Are you taking distributionsfrom the company? Stopping your own paycheck and distribution offunds for the short term can often take care of immediate cash needsfor your business.

Collect Money Youre Owed

Whats pending on the cash side of your business? Would your cashcrunch be resolved if more customers paid their bills? Take a look atwhats outstanding in your accounts receivable. Are there invoices over-due? Start with these first. Contact the customer directly and makearrangements to get your money. Dont settle for The check is in themail. Offer to put the balance due on a credit card. Offer to stop byand pick up a check. Youll probably get only one shot at this since thepayment is already overdue, so make the most of it. Be firm but profes-sional. Your business survival depends on it.

Next, take a look at other outstanding invoices. Contact the cus-tomer and level with them by sharing a bit about your situation. Youdont need to spill your guts, just explain your temporary cash flowcrunch and ask if they could help you out by paying a bit before the duedate. Your goal is to get them to pay early. You may even want to offerthem a discount for making the payment right now. You could reducethe bill by 1 percent as an incentive and thank-you for working withyour business.

Sell Your Invoices

Theres an entire industry that exists to buy outstanding invoices fromcompanies. Its called factoring. When you sell your invoices to a factor-ing company, you get immediate cash. In a cash crunch or business witha long payment cycle, factoring may be the answer. Heres how it works.

Where to Find Money for Your Business 41


You sell your outstanding invoices to the factoring company for a per-cent of the balance owed. Factoring companies will typically advanceyou from 65 to 90 percent of your invoice amount. The factoring com-pany then notifies your customer that they own the invoice and in-structs the customer how to pay them. Once the factoring company ispaid, they pay you the balance of the invoice minus their fee, whichnormally ranges from 1 to 4 percent. Factoring is a good way to get cashflowing in your business without acquiring debt. Lets walk through anexample.

You have an invoice outstanding for $8,000. You sell it to a factor-ing company that pays 80 percent upfront. They buy that accountreceivable from you for $6,400 in immediate cash. Within a periodof time they collect the total invoice amount from the original cus-tomer. You receive an additional $1,280. They retain a 4 percentfee of $320. So you have collected a total of $7,680 for your$8,000 invoice and you had most of that cash right up front (SeeTable 4.1).

Do your research before taking action. If you decide that factoringmay be the way to solve your cash flow problems, shop around for justthe right company. Check with your banker or accountant to see if theyhave a recommendation for a local company. There are large factoringcompanies and small factoring companies. Some specialize in certaintypes of business or industries.


Table 4.1 Factoring Sample

Invoice Invoice without Factoring with Factoring

Sales invoice $8,000 $8,000Factoring fees $ 0 $ 320Net invoice amount collected $8,000 $7,680


Do a thorough check of fees and the factoring agreement. Onceyouve found possible companies, make sure you have full disclosure oftheir fees. Some companies require a deposit and a minimum amountof receivables before they will take your business. They may also re-quire you to sign an agreement for a specific time frame. Make surethere wont be any penalties associated with actions you might take onyour receivables. Since this is a business agreement, it may be a goodidea to get your attorney to take a look at it, too.

Verify treatment of your customers. Since the factoring companywill be dealing directly with your customers, its important to under-stand how they communicate with your customers and that they em-brace the same values you do for customer service.

Hire a Collection Agency

We all want to think the people who do business with us will paytheir bills. Unfortunately thats not always the case for whatever rea-son. If you have invoices youve given up collecting on, handing themover to a collection agency may be the answer. It may be better thanwriting the invoice off as uncollectible or expending additional effortchasing the money. A collections firm will charge you anywhere from20 to 50 percent of the invoice amount for their collection efforts.Getting half your money is better than nothing. Unlike factoring, col-lection agencies pay you when they get paid. This option is not aquick fix.

Lend Your Company Money

If you have personal cash to cover a temporary shortfall in your busi-ness, you could lend that money to your business for a short term.Make sure you dont put a burden on your personal finances by doingthis. Think long-term about the impact loaning this money will have onboth your business and personal life.



Ask Mom, Dad, or the Rich Uncle

Family members want you to succeed in your business. Sharing yoursituation with a family member and asking for a short-term loan is oftena good option. Make sure you handle the loan as a business transaction.Be professional about the loan agreement and payment schedule. Dontask for more than you need and make sure you pay it back.

Use Credit Cards

Credit cards are one of the easiest and most often used debt-financingoptions for small business owners. Companies that offer business creditcards are abundant. You may have even received an unsolicited offer inthe mail. Its a good idea to have at least one credit card for your busi-ness. It can get your business out of a cash pinch in an emergency andestablish a track record of good credit practices for your company. Butdont let it get out of hand. Remember this debt must be repaid. Shoparound for the best credit card option. Get a credit card with a low an-nual percentage rate and a minimum of other fees. You dont want acard that will take a huge chunk out of your profits. Educate yourself oncredit card terms by reading Choosing and Using Credit Cards inChapter 9.

Secure a Line of Credit

A line of credit can be your lifesaver during a cash crunch. Most banksalong with many credit card companies offer this type of service. A lineof credit is an unsecured, revolving source of funds for your companythat you can draw on when you need it. You wont have to provide col-lateral to the lender, but you will need to prove to the lender that youhave sufficient cash flow in your company to repay this debt. Somelenders allow interest-only payments on your line of credit to help youstretch the money a little further. Check the terms and agreements ofyour lender to see whether this option is available. Most line of credit



companies will provide you with checks to use that post as a chargeagainst your account. This option makes it easy to pay any bill yourcompany has due.

Use Your Home Equity

Are you willing to put your home on the line to save your business?Thats what you will be doing if you get a loan or line of credit from theequity in your home. Using your home equity to finance your businessputs both your business and personal life at risk by tying up your poten-tial cash resources. Make sure you crunch your numbers carefully andhave a specific plan for paying back any funds that you use. If youve de-cided this is your best option for solving your immediate cash flowproblems, educate yourself first by reading Putting Your Home on theLoan Line Is Risky Business in Chapter 9.

Get a Bank Loan

The best way to get a bank loan is to be prepared with all the necessarypaperwork. Dont assume what the bank will need to process your re-quest. Take a minute to answer the 14 questions on the Bank LoanQuestionnaire in Chapter 9 before you begin.

Business banker John Balestrieri says the amount you are request-ing dictates what the bank requires. So do your homework first. Ac-cording to Balestrieri, The bank will want to know what the money isgoing to be used for and will match product (type of loan) to purpose.

You may find it easier to secure a bank loan through one of thesmaller community banks than a large mega bank. Shop around to de-termine where you can get the best deal.

Dont expect to get one hundred percent of the amount you areasking for. Do expect to provide some type of collateral for the loan.Your bank will not assume all of the risk. They expect to share that riskwith you. Cash businesses, those with no inventory or little collateral,



are considered a higher risk by banks and may require additional paper-work to secure a loan.

When youre ready to ask for the loan, make sure you have prac-ticed what you will say and have a good case for your business. Thebanker must be convinced of your ability to succeed and have confi-dence you will repay the loan. In many banks, this person will be theone to go to bat for you in front of a loan committee or underwritersgroup. Help them help you be successful.

Pamela Elsaadi, director of operations for Saadi Investments,LLC, has been in business since she was a young woman. In her lineof business she knows its critical to have capital to thrive, plus, El-saadi says, it gives your business additional credibility when you havea credit history. She thinks its essential for small business owners tobe very detailed with the bank to prove you have a solid history. Beprepared to present financial reports demonstrating potential prof-itability. Above all else, your request needs to make sense to the per-son who will approve your loan. Do the best you can to anticipatequestions that may be asked by doing a dry run with a trusted friendor colleague.

Bring in Equity Partners

You may need to share part of your business to get the money you need.Thats called equity funding. The trade off with equity funding is thatthe person or company providing the funds not only owns a part of yourbusiness, but they can manage it, too. If you have a good business caseand can talk a friend or colleague into funding your business, this maybe a good option. Your equity partner may be a completely silent part-ner or they may want to run the business. You need to know and agreeto this before accepting any funds. Make sure you determine the busi-ness arrangement up front. Document the funding package in a legalagreement so you know who does what and where responsibility lies forwhat aspect of the business.



Apply for a Grant

The options for getting a grant vary by business. Grants are offered bydifferent businesses at different points in time depending on marketneeds and often are driven by government regulation. If you would liketo check the possibility of a federal grant for financing your business,visit grants.gov, which operates a central database of all federal govern-ment grants available. At the grants web site, you can view, search, andapply for active grants. They also offer an e-mail notification list thatanyone can subscribe to for free.

The charter of grants.gov is to provide a simple, unified electronicstorefront for interactions between grant applicants and the federalagencies that manage grant funds. There are 26 federal grant-makingagencies and more than 900 individual grant programs that award morethan $400 billion in grants each year. Grants.gov provides:

A single source for finding grant opportunities. A standardized manner of locating and learning more about funding

opportunities. A single, secure, and reliable source for applying for federal grants

online. A simplified grant application process with reduction of paperwork. A unified interface for all agencies to announce their grant oppor-

tunities, and for all grant applicants to find and apply for those opportunities.

If you are serious about pursuing grants to improve your cash flow,plan to spend a good bit of time searching out opportunities, monitor-ing available grants, and completing the application process. Mostgrants are created to fill a very specific need.

Two examples of grants available at the time of this writing are theConservation Innovation Grant Program, which provides grants tostimulate the development and adoption of innovative conservation



approaches and technologies, and the Brownfields Economic Develop-ment Initiative (BEDI), which is designed to help local governmentsredevelop brownfields, defined in the Program notice of funds available(NOFA) as abandoned, idled, or underutilized real property, includingcommercial facilities, where expansion or redevelopment is compli-cated by the presence or potential presence of environmental contami-nation.

There are also state resources that may have grant opportunitiesavailable based on certain criteria. For a comprehensive list of linksby state, visit the About.com U.S. Government Information site atusgovinfo.about.com/library/weekly/blstategrants.htm.

Grants typically require a proposal and plan for consideration andcome with a lot of baggage. Reporting how grant money is used may bemore trouble than its worth for your company. One small company de-cided to forgo getting a grant they had been awarded because theywould need to hire an additional person just to administer the paper-work that came with the grant. Make sure you look at the long-term im-pact on your business if you decide to go the grant route.

BEFORE YOU APPLY FOR A LOAN

Taking steps to get ready before approaching a financial institution for aloan will increase your chances for success.

Check Yourself

How is your credit? If you have a track record of missed payments andoverdue bills, the likelihood of banks lending you money is slim. Thesaying Past history is an indication of future results applies here. Alender will look at your past history as a determining factor of your abil-ity to repay a loan. If youre not sure what your credit looks like, theFair and Accurate Credit Transactions (FACT) Act allows you to obtain



your credit report free once a year. Take advantage of that. You can or-der your free annual credit report from annualcreditreport.com.

Check Your Business

Are your financial reports up-to-date? What about your tax returns?What do they say about how you have managed your business? Theserecords need to demonstrate a clear message of responsibility in man-aging your business. Be prepared to share at least two years of reportswith a potential lender.

What Assets Do You Own?

Most likely any loan you secure will need to be backed by one of yourassets. Thats to protect the lender just in case you default. What do youown? Are you willing to put it on the line to get the cash you need?

Whom Do You Know?

It doesnt hurt to know your banker. This will help make you more com-fortable asking questions and stating the case for your business. Haveyou taken the time to build a relationship with the key person at yourbank? Do they know about your business? If not, find out right awaywho the key business banker is at your financial institution. Introduceyourself and find out what the requirements are for getting a loan. Thisperson may have to speak for you after you have applied for your loan.Having a personal connection and a clear understanding of your situa-tion will be a big benefit.

How Much Do You Need?

No, gobs is not the right answer. You want to make sure you ask forenough, but not too much to hinder your chances for getting the loan.The amount you request is determined by your need for the money.Are you purchasing equipment or proactively seeking a cash cushion?

Before You Apply for a Loan 49


What is the absolute minimum you need? What would be ideal? Walkthrough your reasoning behind acquiring this debt to come up with anacceptable amount.

How Will You Pay It Back?

Any lender will want to know what steps you will take to ensure thattheir money is returned to them. Put together a realistic plan of actionfor improving the cash flow in your business and paying back the debt.Identify your marketing strategy and projected sales results over an ex-pected time frame.



C H A P T E R 5

Record Keeping Isnt Drudge Work;

Its Priceless History

s


Great news! You just secured that huge contract youve been waitingfor. Now all your cash flow worries are over and you can move your com-pany into profitability. This is the answer to your dreams. Or maybe not.

A web services company thought their problems were over whenthey snagged a contract with a huge Fortune 500 company. But itjust created more problems than they already had. In all the excite-ment they forgot to think about the resources needed to service thecompany. It almost sent them into financial ruin.

The same thing happened to a small flooring contractor, wholanded in the middle of a building boom. Tons of work was sent hisway but the ability to pay the people who completed the work wasbeyond his reach.

Promises of financial returns can force even tiny one or two personcompanies to take too large a risk, like the business consultant who

53


spent thousands preparing to be part of a large companys bid for gov-ernment work that never materialized.

In the excitement of doing business, its easy to forget aboutwhat it takes to get work done. Everything costs money. If yourcompany doesnt have the necessary cash resources on hand to getover the initial humpfrom contract award to paymentyou couldbe in trouble.

But how are you supposed to know when a new business deal isgood for your business? Believe it or not, a budget is your best friend. Abudget can tell you when money is coming into your business, when itis going out, and when you have enough to cover those purchases youneed to make. Its a living document that provides the vision necessaryto help you reach your sales goals, time your marketing messages, andpurchase that hot new gadget you absolutely must have. A budget canalso help you prevent peaks and valleys in your cash flow. If your busi-ness suffers from buyer seasonality a budget can help you predict andplan for the lean times so your business doesnt suffer. Without a bud-get, your business is running blind.

Sadly, thats the way most small business owners run their business.But thats everyone else. Its certainly not you. Right?

WHY BUDGET?

So how can your budget be your friend? By simply providing you withenough information to make informed decisions about the action youwill take in your business. To do that, your budget needs to project far enough into the future to give you time to plan and react to accom-modate those things that impact your business and allow you to adjustaccordingly.

If youve never completed a budget before, it can seem like a

54 RECORD KEEPING ISNT DRUDGE WORK; ITS PRICELESS HISTORY


daunting project. But remember, its the road map for your businesssuccess and will pay off for you in the long run. Its key to ensuring thatyou have money for future activities and are making good financial de-cisions. Its pretty simple, really. Your budget will show the reality ofwhere your money is going. The best way to remember how it works isto think of this simple statement: Sales minus expenses equals cashavailable. Thats not hard, is it?

Remember were talking cash here. The sales and expenses on yourbudget are those items where cash has exchanged hands, not those thatare expected to.

An important distinction to remember is that a budget is not a fore-cast, which is a prediction of some future activity. A budget is a plannedor expected outcome that you want to achieve. It identifies wheremoney will come from and where it will go, presenting a perfect pictureof your breakeven point and cash availability. Keep that in mind as wego through the budget creation process.

YOUR BUDGET TIME FRAME

When do you complete your budget? A good place to start is with anannual budget at the beginning of your fiscal year. Most small busi-nesses work on a fiscal year that mirrors the calendar year so that meansyour budget would run from January through December. You shouldbe preparing your budget for the next year in October of the previousyear. Its a good idea to have at least a three-month view of your budgetdata. Dont forget your budget is a living document that you will use asyour guide. Youll be reviewing your budget daily, weekly, or monthlydepending on the needs of your business and your business objectives.Your budget can be adjusted if you identify trends that are differentfrom the original budget calculations.

Your Budget Time Frame 55


GATHERING YOUR BUDGET DATA

The best way to get information for preparing your budget is to look atthe past history of your business. If you have your financial records,this will be easy for you. Lets take a look at the three critical compo-nents of your cash flow budget: Cash Inflows, Cash Outflows, and CashBalance.

Cash Inflows (Sales)This is the stuff that makes every small busi-ness owners heart sing: money coming into your business becauseyouve sold your product or service to a customer.

Cash Outflows (Expenses)It costs money to be in business. Thereare a variety of expenses that youll have to pay to stay in business.

Cash BalanceThis is what is left over after you have subtractedyour expenses from your sales. If your balance is positive, thats agood thing. If your balance is negative, you need to take quick ac-tion by adjusting sales or expenses to make it a positive number.

You can create your Cash Flow Budget by first identifying the datayou need to capture. Its very simple. Just take out two pieces of paper.Label one Sales and the other Expenses.

Cash Inflows (Sales)

So what qualifies as a sale? Any product or service your company pro-vides to its customers where money is exchanged. Sales can come in theform of products such as books or other hard goods, service fees, pro-ject fees, consulting fees, or jobs completed. Whatever you call it inyour company, if youre providing something to someone else formoney thats a sale. Look at the past history of your company. Gatheryour income statements and balance sheets. What have you sold? Col-lect all of your sales receipts and paid invoices if you need them; group



them into common themes and write them on the Sales sheet. Your listmight look like this:

Services

Consulting Service calls Membership fees

Projects

ABC Group Warren Industries Scoot Pro International

Items

Workbooks Accessories

Cash Outflows (Expenses)

Expenses can be few or many depending on the size of your busi-ness. Youll have monthly expenses, quarterly expenses, and annualexpenses. Some expenses will be exactly the same every month andothers will vary depending on what is happening in your business.The point for this section is to make sure you collect every singleitem so you have a true picture of what it costs you to be in business.You can get this information from your income statements and bal-ance sheets, too.

To make this a less overwhelming task, first list your monthly ex-penses like rent, utilities, web hosting, payroll, marketing, and loan pay-ments. Then list your occasional expenses (quarterly/annual) such asinsurance, accountant, attorney, training, and subscriptions. Once youhave all your receipts collected, group them into common themes andenter them on the Expenses sheet.

Gathering Your Budget Data 57



Table 5.1 Sample Cash Flow Budget

Jan Feb Mar Apr May Jun

SalesConsulting services $3,000 $2,800 $5,600 $8,500 $1,600 $2,200Book sales 635 245 852 476 210 345Affiliate sales 380 400 250 600 250 300

Total Sales $4,015 $3,445 $6,702 $9,576 $2,060 $2,845Expenses

Licenses and $150 $0 $0 $0 $150 $0permits

Payments to 100 100 100 100 100 100creditors

Payroll (salaries 2,000 2,000 2,000 2,000 2,000 2,000and wages)

Meals and 75 75 75 75 75 75entertainment

Payroll taxes 642 642 642 642 642 642Affiliate commissions 55 55 55 55 55 55Subcontractors 0 0 0 1,200 0 0Office expense 25 150 25 25 25 25Internet expense 49 49 49 49 49 49Printing 0 0 0 0 345 0Insurance 0 0 450 0 0 438Utilities 150 150 150 150 150 150Office supplies 175 175 175 425 175 175Advertising 725 0 0 0 250 0Marketing/Promotion 100 100 100 100 100 100Professional fees 0 0 0 0 225 0Training and education 0 3,000 0 0 0 0Tax payments 0 0 86 0 0 86Dues and subscriptions 0 90 0 0 0 29

Total Expenses $4,246 $6,586 $3,907 $4,821 $4,341 $3,924Cash Flow Surplus/ $(231) $(3,141) $2,795 $4,755 $(2,281) $(1,079)

Deficit ()Opening Cash Balance $6,000 $7,819 $5,678 $9,173 $16,128 $15,192Closing Cash Balance $5,769 $4,678 $8,473 $13,928 $13,847 $14,113Minimum Cash Target $6,000 $6,000 $6,000 $6,000 $6,000 $6,000


CREATING YOUR CASH FLOW BUDGET

Transfer your sales and expenses to the Cash Flow Budget worksheetyou will find in Chapter 9. Dont forget to include your January openingcash balance. Take total Sales and subtract total Expenses. This will giveyour cash flow surplus or deficit for the month. Add to that your openingcash balance and the result will be the closing cash balance. Thats it.Now you need to do the same thing for every single month of the year.The result is a clear picture of whether your business will be cash flowpositive or cash flow negative for each month. This will help you decidewhat you need to do as you conduct your day-to-day business.

On the Cash Flow Budget worksheet youll notice another item la-beled Minimum Cash Target. Its a really good idea to enter a numberin this field. The amount entered is the minimum cash you want tokeep on hand in your business for emergency situations. A good rule ofthumb here is an amount equal to three to six months of expenses.

In Table 5.1 is a six-month view of a Cash Flow Budget for a con-sulting firm. Pay special attention to the Cash Flow Surplus, and theClosing Cash Balance in relation to the Minimum Cash Target.

MONITORING YOUR BUDGET

So what do you do with your budget once its complete? Dont stick itinto a book to collect dust. To get the most from your cash flow budget,you need to monitor it on a regular basis by plugging in actuals as theyear progresses. At a minimum, take the monthly financials your ac-countant provides and compare to your budget. Youll want to checkwhether your sales are as you planned and that expenses are in check.Major fluctuations, up or down, in sales or expenses should be a red flagfor you to take action.

Late in the year, my companys phone costs had risen quite a bitabove the projected amount. A little digging found the culprit: increased

Monitoring Your Budget 59


faxing due to a new project. I looked at alternatives and chose an onlinefaxing service that will save roughly $500 a year.

A budget isnt all about bad news. You can use your budget to showthe results of a marketing promotion or new product or service youverolled out. Just make sure when you project your numbers that you doso conservatively. We small business owners are an optimistic lot. Welike to think that everyone in our target market will seize the opportu-nity to buy something as soon as we offer it. But thats not always thecase. If you ambitiously think that one hundred people will buy yournew product, knock the estimate down a notch when it comes to yourbudget. Its better to underpredict your sales than it is to overpredict.

One enterprising entrepreneur created an online business aroundhis favorite pastimesports video games. He self-published strategyguides that turned into a consistent moneymaking machine, but

Documents

Small Business Cash Flow: Strategies for Making Your Business a Financial Success