A Small business comes and goes every day, but what can they do to stay afloat when times get rough?
According to Gallup, it is statistically proven that 50 percent of small businesses fail within the first five years.
Because of that, it’s smart for small business owners to keep their bankers by their side. Bankers are great resources for advice on how to keep your company in the black. Bankers have seen their clients prosper and fail, so they know which actions to take in order to stay away from things that may send a company downhill.
Steven Cervantes, assistant banking center manager and banker at MidFirst Bank, has been working with an array of customers, including small businesses, for 10 years.
When asked about the common pitfalls of small businesses when they first start out in banking, Cervantes said, “a lot of people are not really hands-on with their account.” He said they come in with ideas and open an account, but don’t really understand the banking side of their business.
“Your banker today should be seen as a partner and not just someone that should help you get a loan,” said Sherri Slayton, executive vice president of Alliance Bank. A relationship with the banker is one of the essential factors to being a successful business.
“It is important to have a banker that knows you and knows your business,” Slayton said. You want to make sure you have a banker that cares and is interested in leading you to financial success.
“Most of the time when we are opening new accounts, we have a lot of questions to ask, just to kind of understand what their business needs are,” Cervantes said. And according to Cervantes, a lot of new business owners come into his office not understanding those questions.
To help avoid this, Cervantes says it is important to have a business plan because it helps prepare a small business owner for their financial needs now and in the future. It gives business owners a step-by-step strategy on what equipment they will need, how much money they will need to borrow, how much they will need to sell to make a profit, along with all the other components that go into making a successful business.
“It’s always a struggle at first,” Cervantes said. “You have to have a plan. Without a plan, it’s going to be hard to execute. You’re not going to know if you’re making any progress or if you’re staying stagnant. Just be very proactive as to what you’re doing and where you want to go.”
Slayton said another way to help a small business thrive is to make sure the accounts are secure and that everyone who should have access to the account does because fraud happens all the time.
“Paying attention to fraud and making sure that you have the verification information and the password stuff locked down is very very critical,” Slayton said.
If a small business stays in contact with its banker, it can reap the benefits of possibly having a more financially stable business and the owners can also acquire knowledge to better run their business.
“The first year is a big learning experience, especially if it is your first business,” Cervantes said. So, keep bankers in mind, they can answer many questions a small business may need to know.”
To help educate entrepreneurs, Slayton and Alliance Bank offered a list of common pitfalls of small business banking and how to avoid them:
Pitfall: Not having a relationship with your business banker. It is important to have a banker that knows you and your business to help make the best financial decisions. Your banker is well versed in all of the financing options available to your business and will be the best ally to get you up and running in the most efficient and financially responsible way.
How to avoid it: Whether you’re starting your business, thinking about expanding or just looking for sound advice, your first step should be to make an appointment with your banker. Be prepared to discuss previous financial information, current finances and the goals for your business. When your banker has all of the details, he or she will be able to point your business in the right direction, connect you with the right people within the bank and advise as necessary on the next steps. By involving your banker in a consulting role, you are given the best financial tools to manage your business.
Pitfall: Not having a business plan or anticipating cash needs for seasonality or growth. A business plan allows you as the owner to prioritize your objectives and plan accordingly for the future. This plan could include projected growth in revenues, employee needs and necessary cash needs that will impact the business. A business plan also allows the bank to have a perspective on the future plans and cash or capital needs of your business.
How to avoid it: Discuss with your banker the short and long term goals for your business. Look at different scenarios for growth or seasonality and how those scenarios will affect your need for cash. Your banker will be able to give you a better idea of the plans that should be put in place to meet your requirements. You should also talk to your banker about having a back-up plan should there be unexpected changes in your business to ensure the end-goal is still going to be attainable. Bringing your “intellectual capital” and financial capital together will increase the probability of success and provide sustainable options for your business.
Pitfall: Lack of quality accounting and financial information. As a business owner, you need to be able to track revenue, expenses, inventory and receivables, calculate profitability and generate financial statements, especially if you are applying for a loan. It is important to have access to and utilize qualified accounting or bookkeeping resources not only to help you have appropriate accounting and inventory control, but to maintain the accounts receivable and payable systems that track financial information and produce financial statements. Accurate financial statements are crucial to obtaining a loan and to managing your business.
How to avoid it: Invest in an accounting system or bookkeeping system at your business, or hire a bookkeeper or accounting service to produce periodic financial reporting including profit and loss statements and balance sheets. Secure online banking systems and bill pay systems that integrate with your accounting or bookkeeping systems are critical to seamlessly producing monthly, quarterly and annual financial statements and will assist with tax return preparation.
Pitfall: Internal or external bank account fraud. As a business owner, you should pay close attention to potential fraud on your bank accounts. By maintaining control on access and security to all accounts and transactions, fraud risk can be minimized.
How to avoid it: There are many options available to limit access to your business accounts. Meet with your banker to insure that you have the latest technology available to prevent unwanted access to your accounts and the appropriate level of approval authorities to generate transactions both within the company and prevent unauthorized access from external hackers. Diligent daily review of all your transactions is critical. Accurate and secure payment systems are crucial to the success of your business and their value cannot be overstated.
Pitfall: Managing the profitability of the business for tax purposes. One attractive income tax strategy is trying to reduce tax liability by reducing the taxable income of the business through various tactics. While this may result in lower tax liabilities in the current period it can also reduce or eliminate reported income which is typically the number used when qualifying for a loan.
How to avoid it: Talk to your accountant and banker when you are considering deferring recognition of income, pre-paying expenses, expensing items that could be capitalized or accelerating depreciation for tax purposes. These strategies should be considered in balance with the need to meet debt service coverage and other loan requirements.
