Category Archives: Successful Business

10 THINGS TO DO AS A STARTUP ENTREPRENEUR

startup(1) Be realistic: It’s great to be a cheerleader for your company when dealing with customers and clients, but you must be realistic when it comes to understanding the limitations of your business, making financial projections, accepting apparent weaknesses, etc. We’ve all heard the expression, “Don’t drink your own Kool-Aid.” This principle applies to new ventures as it can get a startup entrepreneur in real trouble. Be honest and realistic as you move forward. If not, trouble can come before success!

(2) Slow down: It’s a never-ending problem all founders and small business owners have. There is never enough time in the day to get everything accomplished. It’s either too much to do by yourself or a lack of delegation. Whatever the problem, you must find time to step back from the business to relax, enjoy, and think. Yes, think. Without some “down” time, you cannot properly plan, innovate, or make improvements. Work smarter, not harder and longer!

(3) Full energy: You can only be successful in a small business when you devote your full energy to your new venture. This doesn’t mean working yourself to death (see #2 above). It does mean, however, that whatever hours you devote to your new endeavor whether full-time or part-time, it needs to be with your full energy and devotion during those hours. Who wants to do business with you or, possibly, invest in your business when you’re not giving it your “100%” when needed? Work on your new business with partial energy and see only partial results!

(4) Hatch your eggs: Make sure your eggs hatch before moving forward. Every entrepreneur wants to make a big splash right out of the starting blocks. It would be wonderful if it works that way but most of the time, it doesn’t. Throw a small pebble, make a ripple, and see what works. Then you’re ready to throw a boulder and make a big splash. Make sure the eggs hatch before moving on!

(5) Competence counts: Entrepreneurs “think” they know best and, maybe, they do when it comes to the technical aspects of their businesses. When it comes to other areas such as taxes, accounting, insurance, or legal, it pays to obtain professional and competent advice. Don’t try to do something yourself today only to hire a professional tomorrow to undo your mistakes. Pay to get the competent advice right from the start. Pay now or pay later!

(6) Narrow your focus: It would be nice to be all things to all customers, but it usually doesn’t work that way. Narrow your focus and concentrate on what you do best. Determine your strategy, define your target market, and don’t deviate. New opportunities and new markets can be profitable, but they must match the internal resources and strengths of a business. Be a great business in a narrow market rather than a mediocre business in a broad market. Focus first, then expand!

(7) Market research: Of course you know that your product or service is going to be successful, but have you checked with prospective customers for what they want? Market research is a powerful tool that can help lead a new business in the right direction. You can do it yourself. Ask, talk, send surveys, read industry publications, search the Internet, have a “think tank” dinner with respected business colleagues. When so much information is available before you start your business, why not take advantage of it? Market research just might be an eye-opener!

(8) Be prepared: It’s exciting to get a new business off the ground, but you must be prepared. This means having everything in place, so there is no faltering when the “doors open.” Financing, employees, marketing, procedures, etc. must be in place and ready to go. Why stumble at the opening when you can start running? It’s all about being prepared!

(9) Be passionate but prudent: You can’t be a small business owner if you’re not passionate about what you do. Unfortunately, being passionate does not always equate to being successful. Be practical, wise, and sensible when making business decisions. New startups do not have the luxury of poor decision making…and survive. Take the opposite approach. Be prudent and succeed!

(10) Know your numbers: You’re not an accountant. You don’t want to be an accountant, but you still need to know the numbers of your business…inside and out. What is your estimated revenue, cost of goods sold, gross profit percentage, cash burn rate, or current ratio? If the numbers don’t work, then your business might not work. Don’t leave all the numbers to someone else. Perhaps, they can do the preparation, but you still need to understand the numbers!

Source: http://www.aasbc.com, 10/23/14.

TEN WAYS TO GUARD AGAINST EMPLOYEE THEFT

employeetheftAll companies need internal controls–an effective system requiring that employees adhere to company policies and procedures that will minimize possible errors in data and safeguard assets. Without a strong system of internal controls, it’s difficult to know for sure if financial information is accurate and assets actually physically present. Bottom line: When you have tighter controls, you have more reliable financial data and less chance of theft and fraud.

While paranoia and micromanagement are not attractive qualities that a small business owner necessarily wants, it’s nevertheless important for an owner to be aware that theft happens frequently in all businesses, and small businesses are not immune. It can occur with cash drawers, receivables or payables, or inventory. Routine controls can help prevent it.

Below are 10 safeguards that are relevant to most businesses–actions you can take to find out if theft or fraud is taking place in your company…and then guard against it!

1. Check financial statements.

Review financial statements for abnormalities between the prior month and year-to-year. Never have just one individual who is responsible for both financial oversight and preparation of financial statements.

2. Review your budget.

Analyze actual to budgeted figures and review variances–what you budgeted for in each category versus what you spent. Big discrepancies are a red flag.

3. Mandate employee vacations.

Make employee vacations mandatory. This can highlight misappropriations or procedures not being followed, which become apparent when the employee is gone.

4. Monitor expense reports and reimbursements.

Require that all employee expenditures–on business trips and in the office–have to be approved and accompanied by documentation.

5. Establish payroll controls.

Every employee added to the payroll needs human resources or owner approval. Also, review the payroll to make sure duplicate checks are not paid to the same employee. The payroll clerk could be splitting the second check with the employee.

6. Check hourly employee hours.

Make it a practice that all hourly employees have approval of hours before wages are paid.

7. Review repair/maintenance and miscellaneous accounts.

Review the repair and maintenance account, as well the miscellaneous expense account, for any unusual items. You might be surprised how “miscellaneous personal expenses” show up here!

8. Segregate check writer and check signer duties.

The same employee should never perform these two functions. Segregation of duties is most important! In fact in many businesses, the check signer is not even in the accounting department.

9. Reconcile payments to vendors.

To prevent “fake” invoices being paid, reconcile invoices with purchase orders and receiving reports.

10. Control inventory and supplies.

Small items and supplies have a way of “walking off” and should be locked up. Periodic physical inventories should be taken and reconciled with book inventory. Order filling and shipping documents should be spot checked against actual physical goods.

Regardless of the amount of control measures, nothing is 100% foolproof. For every control measure, there can be an employee trying to figure out a way around the controls. The plan might be the theft of assets or completing a job below standards. Once controls are in place, they should be periodically reviewed and revised, if necessary, as operations change or weaknesses noted. Internal controls…always a work in progress!

Source: Association of Accredited Small Business Consultants (www.aasbc.com)

FIVE BASIC TAX TIPS FOR NEW BUSINESSES

newbusinessIf you start a business, one key to success is to know about your Federal tax obligations. Not only will you probably need to know about income taxes, you may also need to know about payroll taxes as well. Here are five basic tax tips that can help get your business off to a good start.

1. Business Structure. As you start out, you’ll need to choose the structure of your business. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or taxed as a Limited Liability Company. You’ll report your business activity using the IRS forms which are right for your business type.

2. Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.

3. Employer Identification Number. You may need to get an EIN for federal tax purposes. Give us a call to find out if you need this number. If you do need one, we are available to guide you through the process of applying for it online.

4. Accounting Method. An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.

5. Employee Health Care. The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.

Have a business idea? Call us first. We’ll make sure you have everything in place to make your new business a successful one.

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THE SIMPLE RETIREMENT PLAN FOR THE SELF-EMPLOYED

retirementplanOf all the retirement plans available to small business owners, the SIMPLE IRA plan (Savings Incentive Match PLan for Employees) is the easiest to set up and the least expensive to manage.

These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE IRA plans work well for small business owners who don’t want to spend a lot of time and pay high administration fees associated with more complex retirement plans.

SIMPLE IRA plans really shine for self-employed business owners. Here’s why…

Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings.

SIMPLE IRA plans calculate contributions in two steps:

1. Employee out-of-salary contribution
The limit on this “elective deferral” is $12,000 in 2014, after which it can rise further with the cost of living.

Catch-up. Owner-employees age 50 or older can make an additional $2,500 deductible “catch-up” contribution (for a total of $14,500) as an employee in 2014.

2. Employer “matching” contribution
The employer match equals a maximum of 3 percent of employee’s earnings.

Example: A 52-year-old owner-employee with self-employment earnings of $40,000 could contribute and deduct $12,000 as employee, and an additional $2,500 employee catch-up contribution, plus $1,200 (3 percent of $40,000) employer match, for a total of $15,700.

SIMPLE IRA plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business.

If living expenses are covered by your day job (or your spouse’s job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE IRA plan retirement investments.

A Truly Simple Plan

A SIMPLE IRA plan is easier to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules – in investment options, spousal rights, creditors’ rights – don’t have a lot new to learn.

Requirements for reporting to the IRS and other agencies are negligible. Your plan’s custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit easier than with other plans.

What’s Not So Good About SIMPLE IRA Plans

Once self-employment earnings become significant however, other retirement plans may be more advantageous than a SIMPLE IRA retirement plan.

Example: If you are under 50 with $50,000 of self-employment earnings in 2014, you could contribute $12,000 as employee to your SIMPLE IRA plan plus an additional 3 percent of $50,000 as an employer contribution, for a total of $13,500. In contrast, a 401(k) plan would allow a $30,000 contribution.

With $100,000 of earnings, it would be a total of $15,000 with a SIMPLE IRA plan and $42,500 with a 401(k).

Because investments are through an IRA, you’re not in direct control. You must work through a financial or other institution acting as trustee or custodian, and you will generally have fewer investment options than if you were your own trustee, as you would be in a 401(k).

It won’t work to set up the SIMPLE IRA plan after a year ends and still get a deduction that year, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE IRA plan effective for a year, it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE IRA plan must be set up as soon thereafter as administratively feasible.

If the SIMPLE IRA plan is set up for a sideline business and you’re already vested in a 401(k) in another business or as an employee the total amount you can put into the SIMPLE IRA plan and the 401(k) combined (in 2014) can’t be more than $17,500 or $23,000 if catch-up contributions are made to the 401(k) by someone age 50 or over.

So someone under age 50 who puts $9,000 in her 401(k) can’t put more than $8,500 in her SIMPLE IRA plan for 2014. The same limit applies if you have a SIMPLE IRA plan while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).

How to Get Started with a SIMPLE IRA Plan

You can set up a SIMPLE IRA plan account on your own, but most people turn to financial institutions. SIMPLE IRA Plans are offered by the same financial institutions that offer any other IRAs and 401k plans.

You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an “effective date” – the beginning date for payments out of salary or business earnings. That date can’t be later than October 1 of the year you adopt the plan, except for a business formed after October 1.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE IRA plan. You need such an agreement even if you pay yourself business profits rather than salary.

Printed guidance on operating the SIMPLE IRA plan may also be provided. You will also be establishing a SIMPLE IRA plan account for yourself as participant.

401k, SEPs, and SIMPLE IRA Plans Compared

 

401k SEP SIMPLE
Plan type: Can be defined benefit or defined contribution (profit sharing or money purchase) Defined contribution only Defined contribution only
Number you can own: Owner may have two or more plans of different types, including an SEP, currently or in the past Owner may have SEP and 401k Generally, SIMPLE is the only current plan
Due dates: Plan must be in existence by the end of the year for which contributions are made Plan can be set up later – if by the due date (with extensions) of the return for the year contributions are made Plan generally must be in existence by October 1 of the year for which contributions are made
Dollar contribution ceiling (for 2014): $52,000 for defined contribution plan; no specific ceiling for defined benefit plan $52,000 $24,000
Percentage limit on contributions: 50% of earnings for defined contribution plans (100% of earnings after contribution). Elective deferrals in 401(k) not subject to this limit. No percentage limit for defined benefit plan. Lesser of $52,000 of 25% of eligible employee’s compensation ($260,000 in 2014). Elective deferrals in SEPs formed before 1997 not subject to this limit. 100% of earnings, up to $12,000 (for 2014) for contributions as employee; 3% of earnings, up to $12,000, for contributions as employer
Deduction ceiling: For defined contribution, lesser of $52,000 or 20% of earnings (25% of earnings after contribution). 401(k) elective deferrals not subject to this limit. For defined benefit, net earnings. Lesser of $52,000 or 25% of eligible employee’s compensation. Elective deferrals in SEPs formed before 1997 not subject to this limit. Same as percentage ceiling on SIMPLE contribution
Catch-up contribution age 50 or over: Up to $5,500 in 2014 for 401(k)s Same for SEPs formed before 1997 Half the limit for 401k and SEPs (up to $2,750 in 2014)
Prior years’ service can count in computing contribution No No
Investments: Wide investment opportunities. Owner may directly control investments. Somewhat narrower range of investments. Less direct control of investments. Same as SEP
Withdrawals: Some limits on withdrawal before retirement age No withdrawal limits No withdrawal limits
Permitted withdrawals before age 59 1/2 may still face 10% penalty Same as 401k rule Same as 401k rule except penalty is 25% in SIMPLE’s first two years
Spouse’s rights: Federal law grants spouse certain rights in owner’s plan No Federal spousal rights No Federal spousal rights
Rollover allowed to another plan (Keogh or corporate), SEP or IRA, but not a SIMPLE. Same as 401k rule Rollover after 2 years to another SIMPLE and to plans allowed under 401k rule
Some reporting duties are imposed, depending on plan type and amount of plan assets Few reporting duties Negligible reporting duties

Please contact us if you are a business owner interested in exploring retirement plan options, including SIMPLE IRA plans.

SMALL BUSINESS OPTIMISM CONTINUES TO GROW

smallbusinessownerby Isaac M. O’Bannon, CPA Practice Advisor, August 13, 2014

More small business owners say their company’s current financial situation is good, yet their outlook for the next year has not changed significantly, according to a new survey.

The latest Wells Fargo/Gallup Small Business Index score increased slightly to positive 49 (+49) in July, up two points from positive 47 (+47) in April. The score, which measures small business optimism, has increased six of the last seven quarters. Small business optimism is now at its highest point in more than six years, however it remains well below pre-recession levels.

The present situation – how business owners rate current conditions for their businesses – is the main contributor to increased optimism in the latest survey. The present situation score is now at a positive 18 (+18), up four points since the April survey and 14 points from the same period a year ago. Specific factors that contribute to the improvement include:

  • Small business owners are feeling better about their current business financial situation, with 62 percent rating it as very or somewhat good, up from 57 percent in the second quarter 2014.
  • More business owners report their company’s revenues have increased, with 43 percent indicating revenues are up in the past 12 months compared with 36 percent in April.
  • Cash flow over the past 12 months also is at a six-year high. In the survey, 55 percent of business owners report their cash flow has been very or somewhat good over the past year, up from 50 percent in the second quarter of 2014.
  • Ease of obtaining credit in the past 12 months is up significantly – 32 percent of small business owners say that it has been very or somewhat easy to obtain credit in the past 12 months.

At the same time, the future outlook for business owners in the July survey was relatively unchanged, down two points to positive 31 (+31) from positive 33 (+33) in the second quarter. In three surveys conducted in 2014, the percent of business owners who think their businesses’ cash flow, financial situation and revenue would improve over the next 12 months has not moved significantly. The percent of business owners who expect to increase capital spending in the year ahead is the same as those who plan to decrease (25 percent).

“The latest Index scores show small businesses have made gradual progress since the economic downturn –with modest improvement in the economy, healthier small businesses are growing revenue and have stronger cash flow today,” said Lisa Stevens, head of Small Business for Wells Fargo. “However, we know many businesses still face challenges in the marketplace and it’s reflected in the survey results. Many continue to wait for more improvement in their businesses and the economy before they express confidence in the year ahead.”

Business owners report that the biggest challenge they face is attracting customers and finding business (13 percent), followed closely by government regulations (11 percent), financial stability of their business (11 percent) and the economy (11 percent).

When it comes to generating new business, small business owners said the toughest part is marketing and advertising (14 percent), and competition (13 percent). Ten percent of business owners said the costs of running a business make it difficult to attract customers and grow. Another 10 percent said making product improvements or having the latest products is the biggest challenge to growing sales.

LEAVING A BUSINESS? WHICH EXIT PLAN IS BEST

exitSelecting your business successor is a fundamental objective of planning an exit strategy and requires a careful assessment of what you want from the sale of your business and who can best give it to you.

There are only four ways to leave your business: transfer ownership to family members, Employee Stock Option Plan (ESOP), sale to a third party, and liquidation. The more you understand about each one, the better the chance is that you will leave your business on your terms and under the conditions you want. With that in mind, here’s what you need to know about each one.

1. Transfer Ownership to your Children

Transferring a business within the family fulfills many people’s personal goals of keeping their business and family together, but while most business owners want to transfer their business to their children, few end up doing so for various reasons. As such, it’s necessary to develop a contingency plan to convey your business to another type of buyer.

Transferring your business to your children can provide financial well-being for younger family members unable to earn comparable income from outside employment, as well as allow you to stay actively involved in the business with your children until you choose your departure date.

It also affords you the luxury of selling the business for whatever amount of money you need to live on, even if the value of the business does not justify that sum of money.

On the other hand, this option also holds the potential to increase family friction, discord, and feelings of unequal treatment among siblings. Parents often feel the need to treat all of their children equally. In reality, this is difficult to achieve. In most cases, one child will probably run or own the business at the perceived expense of the others.

At the same time, financial security also may be diminished, rather than enhanced, and the very existence of the business is at risk if it’s transferred to a family member who can’t or won’t run it properly. In addition, family dynamics in general, may also significantly diminish your control over the business and its operations.

2. Employee Stock Option Plans (ESOP)

If your children have no interest or are unable to take over your business, there is another option to ensure the continued success of your business: the Employee Stock Ownership Plan (ESOP).

ESOPs are qualified retirement plans subject to the regulatory requirements of the Employee Retirement Income Security Act of 1974 (ERISA). There’s one important difference however; the majority (more than half) of their investment must be derived from their own company stock.

Whether it’s due to lack of interest from your children, an economic downturn or a high asking price that no one is willing to pay, what an ESOP does is create a third-party buyer (your employees) where none previously existed. After all, who more than your employees has a vested interest in your company?

ESOPs are set up as a trust (complete with trustees) into which either cash to buy company stock or newly issued stock is placed. Contributions the company makes to the trust are generally tax deductible, subject to certain limitations and because transactions are considered stock sales, the owner who is selling (you) can avoid paying capital gains. Shares are then distributed to employees (typically based on compensation levels) and grow tax free until distribution.

If your company is a stable, well-established one with steady, consistent earnings, then an ESOP might be just the ticket to creating a winning exit plan from your business.

If you have any questions about setting up an ESOP for your business, give us a call today.

3. Sale to a Third Party

In a retirement situation, a sale to a third party too often becomes a bargain sale–and the only alternative to liquidation. But if the business is well prepared for sale this option just might be your best way to cash out. In fact, you may find that this so called “last resort” strategy just happens to land you at the resort of your choice.

Although many owners don’t realize it, most or all of your money should come from the business at closing. Therefore, the fundamental advantage of a third party sale is immediate cash or at least a substantial up front portion of the selling price. This ensures that you obtain your fundamental objectives of financial security and, perhaps, avoid risk as well.

If you do not receive the bulk of the purchase price in cash, at closing, however, your risk will suddenly become immense. You will place a substantial amount of the money you counted on receiving in the unpredictable hands of fate. The best way to avoid this risk is to get all of the money you are going to need at closing. This way any outstanding balance payable to you is “icing on the cake.”

4. Liquidation

If there is no one to buy your business, you shut it down. In liquidation the owners sell off their assets, collect outstanding accounts receivable, pay off their bills, and keep what’s left, if anything, for themselves.

The primary reason liquidation is considered as an exit plan is that a business lacks sufficient income-producing capacity apart from the owner’s direct efforts and apart from the value of the assets themselves. For example, if the business can produce only $75,000 per year and the assets themselves are worth $1 million, no one would pay more for the business than the value of the assets.

Service businesses in particular are thought to have little value when the owner leaves the business. Since most service businesses have little “hard value” other than accounts receivable, liquidation produces the smallest return for the owner’s lifelong commitment to the business. Smart owners guard against this. They plan ahead to ensure that they do not have to rely on this last ditch method to fund their retirement.

If you need assistance figuring out which exit strategy is best for you and your business, please don’t hesitate to contact us. The sooner you start planning, the easier it will be.

CASH FLOW: THE PULSE OF YOUR SMALL BUSINESS

cashflowCash flow is the lifeblood of any small business. Some business experts even say that a healthy cash flow is more important than your business’s ability to deliver its goods and services! While that might seem counterintuitive, consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. If you fail to have enough cash to pay your suppliers, creditors, or employees, then you’re out of business!

What is Cash Flow?

Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers, but keep in mind that inflow only occurs when you make a cash sale or collect on receivables. It is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.

Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.

Note: An accountant is the best person to help you learn how your cash flow statement works. Please contact us and we can prepare your cash flow statement and explain where the numbers come from.

Cash Flow versus Profit

While they might seem similar, profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.

Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place.

In theory, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.

Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.

Analyzing your Cash Flow

The sooner you learn how to manage your cash flow, the better your chances for survival. Furthermore, you will be able to protect your company’s short-term reputation as well as position it for long-term success.

The first step toward taking control of your company’s cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.

Some of the more important components to examine are:

  • Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes for your customers to pay on their accounts, the more negative the effect on your cash flow.
  • Credit terms. Credit terms are the time limits you set for your customers’ promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.
  • Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy – neither too strict nor too generous – is crucial for a healthy cash flow.
  • Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
  • Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable at some point in the near future – “near” meaning 30 to 90 days. Without payables and trade credit, you’d have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule.

Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.

For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.

Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.

Need assistance? We can help you analyze and manage your cash flow more effectively and make sure your business has adequate funds to cover day-to-day expenses.

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