Tag Archives: financial statements

5 Common Small Business Challenges

5 Common Small Business Challenges

In working with small, growing entrepreneurial businesses, I have discovered several common financial-related issues with which they struggle. When I first start working with these businesses, most if not all of these issues exist. All of them are critical to their success in managing and growing their businesses. The good news is that with time and focus they can be rectified.

In no particular order, here are five small business challenges that I see most:

1. Lack of Timely and Accurate Financial Statements

In today’s business environment, decisions are made at a fast pace. Information is readily available via the Internet, yet internal financial information to improve the decision-making process is sadly deficient. Most business decisions have financial implications, and without this basic financial information, it may be a shot in the dark. Many times the financial statements are put in a drawer and never reviewed because the information is too old (not timely); the business owner doesn’t believe the information is correct (not accurate); or the financial statements support the preparation of the income tax return, not running the business (not operational). They usually only become important when the business owner needs to meet with the bank.

2. No Cash Management

As we all know from operating a business, cash is king! It is the common denominator for all businesses: NO CASH = NO BUSINESS. Other than the current cash balance (most of the time determined by looking at the bank’s balance), most small businesses don’t manage their cash.

Cash management includes understanding your business’ “operating cycle” (i.e. cash-to-cash cycle). To improve your “operating cycle,” it is imperative you understand what it means, how to calculate it, and what influences it before you can improve it. Many times I will ask, “What do you expect your cash balance to be in six months?” Most of the time, they are fighting cash flow problems today and can’t think about the future past this week. Managing cash flow will provide a real sense of control over the business.

3. Poor Pricing Management

Setting the price of our products or services will drive revenues and, just as importantly, the “gross margin” for the business. Unfortunately, not enough time and attention is provided to this aspect of business. In working with small business owners, I find many have not revised their “pricing formulas” for some time, while others don’t really know their underlying costs to derive a sales price that provides profit. Many products are market-driven because of competition, so it is imperative to know not only the direct costs but also all costs necessary to produce a profit. Gross margin analysis by product line, products or customer is critical for small businesses.

4. Lack of Systems and Processes

Processes, whether documented or not, exist in all businesses. It is the way we perform the work necessary to produce our products or services. In most small businesses, the underlying processes to accomplish the work are rarely documented or reviewed as a whole (i.e. system). Developing efficient and effective systems and processes generally reduce costs and/or improve productivity. In businesses where there is a high turnover of people, documented processes are critical for training to ensure employees achieve higher productivity quicker.

5. Minding and Grinding Not Finding

I have developed a simplistic organizational model for small businesses. I have identified the three roles in small business as Finders, Minders and Grinders. Grinders represent the employees whose focus is about today. They generally work in the production side of the business. Most Finders start as Grinders. The Minders live in the past; their work is in the administrative, accounting, customer service or warranty departments. Minders are just as critical as Grinders to the success of the company and must be led. All Finders live in the future. They are the visionaries, innovators and relationship builders. They are the passion and the drive for the business to grow and succeed.

The entrepreneur is the Finder and must stay in the Finding role. Unfortunately, as businesses grow the Finder gets pulled into the company and works in Minding and Grinding activities. Without a change back to the Finding role, the entrepreneur/small business owner severely limits the business’ ability to grow. In working with small business clients, they almost always identify with this organizational model.

As I mentioned at the beginning of this piece, these challenges for the small business owner can be corrected. Most of them are fundamental changes. As with most challenges and the related changes, awareness is the first step.

For more information about the small business challenges discussed, visit B2BCFO.com.

financial statements

What Your Financial Statements Can Tell You About Your Company

You don’t have to be a CPA or rocket scientist to decipher the information on financial statements. If you have been intimidated or reluctant to take the time to learn to read your company’s financial statements, now is a great time to learn.

Below are a few quick and easy steps to untangle the web of financial reports like income statements, balance sheets and cash flow statements.

Income statement

Income statements can be used to make key decisions, such as whether to extend credit to new accounts; increase or decrease an existing line of credit; offer certain terms or discounts; and, most importantly, whether a company will get paid.

The income statement records a company’s performance over a set period of time and starts with net operating income, sales or revenue, and ends with the net income. The net income is what the company earns after deducting expenses like the cost of goods sold, overhead and interest.

Key metrics to look at on the income statement include the interest coverage ratio and gross profit margin. The interest coverage ratio or times-interest-earned ratio lets you know if the company has enough money to cover the cost of its debt. The gross profit margin shows the company’s relationship between revenue and the cost of goods sold. You can use the percentages to gauge whether a company is incurring insufficient volume or excessive purchasing or labor costs.

You want both the interest coverage ratio and the gross profit margin to be high so that your company is not carrying too much debt and there is enough money to pay expenses.

Balance sheet

A balance sheet captures a company’s financial position at a specific point in time. This shows the company’s total assets such as cash, short-term investments, inventories and equipment; total liabilities like accounts and notes payable; and shareholders’ or owners’ equity. The quick ratio and the debt-to-equity ratio are important to note in the balance sheet.

Quick ratios are considered to be a more conservative measurement than the current assets ratio because inventories are excluded. Inventories are “less liquid” than cash, and if a company needed to sell its inventories to pay debt, it could be difficult to arrange a quick sale.

A high debt-to-equity ratio could indicate a company has aggressively financed its growth with debt. On the up side, if the borrowed money assisted with increased or improved operations, the company might generate more earnings.

Each industry is different, and it is essential to compare to its peers. Some industries have low gross margins which could be considered bad, but if it is an industry norm and the fixed costs are low, it should be less of a concern.

Cash flow statement

Cash flow statements tell where a company is getting cash and how they are using it. Cash flow statements are divided into three sections: operating, investing and financing activities. Some key information contained in cash flow statements comes from income statements and balance sheets.

Operating activities — cash and non-cash

The first line item is consolidated net income. You can add certain line items like depreciation and non-cash transactions to net income and subtract other items, such as deferred income taxes, to calculate how much cash a company has generated during a specific time period.

Investing activities — inflows or deposits

A cash flow statement’s investing activities section details a company’s property, plant and equipment purchases, sales of short-term investments, or the acquisition of a business during a specific time period.

Financing activities — outflows or payments

Understanding significant changes in a company’s cash flow can help you make informed decisions. You want to know whether your company’s cash is increasing or decreasing. Gains may signal an organization financed its debt and investments and had more money remaining than in the prior period. Similarly, if a company’s cash flow is decreasing, the organization may experience future cash flow management problems.

While you may still need to hire a professional to help you maintain your financial statements and documents, it is always good to have a general understanding of what each financial statement is used for. As a business owner, it is important to know the financial trends to determine if the numbers are increasing, declining or staying flat. Then you can be proactive and steer you company in the correct financial direction.

For more information about financial statements and/or FSW Funding, fswfunding.com.

Brad Preber - Managing Partner - Grant Thornton

First Job: Brad Preber, Managing Partner Grant Thornton

Brad Preber, Managing Partner of Grant Thornton, discusses his first job selling seeds door-to-door, his mentors and what he learned along the way.

Brad Preber

Title: Managing Partner
Company: Grant Thornton

Describe your very first job.
When I was a teenager, I found an ad in the back of a magazine promoting the door-to-door sale of seeds. You earned points that you could convert into prizes or
cash. I used the money I earned selling seeds to my neighbors to buy a lawn mower that I then used to start lawn care business.

What did you learn from that first job?
I learned what it takes to sell and promote yourself. I experienced the courage it took to knock on someone’s door and the feeling of optimism that came when they actually did what I wanted them to do.

Describe your first job in your industry.
It was a summer job I took doing some bookkeeping for construction companies. I collected the transaction records, recorded them into the accounting books, and prepared financial statements.

What were your salaries in your first job and first industry job?
Selling the seeds was a point system and the points were converted into prizes or cash. I was paid $300 a month for doing bookkeeping for the construction company. I also had an opportunity to apply for scholarship money from the company. I was a broke college student so any extra money helped.

Who is your biggest mentor?
I don’t really have a single individual that I see as a mentor. Instead, I looked to teachers, coaches, and friends’ parents for guidance. I took small pieces of each of them into consideration for what I wanted to be when I grew up. They combined to become big portion of what I am today.

What lessons did you take from your high school coaches?
It’s very clear that the principle of the seven Ps — Proper Planning and Preparation Prevents Pretty Poor Performance — is as applicable to life as it is to football. Like football, it takes a team to be successful in business. You have to know your role, set goals for the team, and execute strategies to achieve them.

What advice would you give someone entering your industry today?
The good news is that there are still plenty of jobs to be had in accounting and finance. One thing most people don’t recognize is that there are rarely any home runs in this business. It’s a series of small steps and steady improvement over a long career that allows you to advance and move into ownership.

If you weren’t doing this, what would you be doing instead?
If I had the time and the capital to pull it off, I would have become an artist. If I didn’t have the capital to pull it off, I would have become a fly-fishing guide.

Arizona Business Magazine March/April 2012

Financial Statements

How’s Your Business Doing? Check Your Financial Statements

Curious to know how your business is doing, financially? Look at your financial statements; here’s how.

You’re the owner of your business. You know how to sell; you know how to make your product; a you know how to find opportunities that will make your business grow.

But do you know how to determine if you’re doing well from a financial standpoint?

It’s Time to Be Honest With Yourself

Be honest. Do you really know how to look at your financial statements and determine if you are doing well? Do you really know what is most important when you look at those statements?

“What statements?” you may ask. The P&L (profit & loss statement), the balance sheet and the cash flow statement – those are the statements you need to look at each month. And they need to be prepared and given to you as soon as possible after the close of each month.

Now, I’m being a little facetious here, but it is not that unusual for me to speak with owners of businesses and get some interesting answers to questions like:

  • Are your financial statements prepared on a timely basis?
  • Are they free from error?
  • Does your controller tell you, when reviewing the October P&L, “Well, I had to make some adjustments to the September results, so September was a little better than we thought, but October isn’t so good”?

If you have heard this before, join the crowd. You are not alone. It’s not terribly unusual if you either don’t get routine, timely financial statements or if you don’t trust them. But you need to receive regular, reliable financial information each month that you can use to help you make decisions.

Think How Your Banker Thinks

And, while we’re on the topic, ask yourself another question:  “If I don’t trust my own financial statements, what must my banker think about them?”

You may remember when bankers didn’t always insist on seeing your financial statements or waited until you gave them the annual statements. Well, those days are over. All good bankers expect quarterly statements, at a minimum, and many also want to see how you are doing on a monthly basis, as well.

They want to see the statements so that they can determine if there are any causes for concern. You can understand that. But you need to know what areas would give rise to such concerns long before your banker identifies them. The only way you can do that is to have reliable financial statements and to analyze them as your banker (or a CFO) would:  What are the trends that offer opportunity, or are they cause for concern? How am I doing with respect to the covenants in the loan agreement? You need to be able to understand what is important to your banker and be able to explain how you are doing in concrete financial terms, using the statements as the basis for your conversation.

And You Need Even More Information

In addition to the basic financial statements, you also need to have a few reports that provide you with the important information you need. You know what’s critical to your business. It may be a little different for each company, but I’ll bet you want to know a few things every month:

  • Who’s my biggest customer, and how profitable is that customer?
  • Which customers are 10 percent ahead (or behind) last year?
  • What sales are in my pipeline?
  • What’s my cash position?
  • Where will my cash be at the end of the month, and will I have enough cash when my taxes are due?
  • What’s my gross margin this month, compared with where I thought it should be?
  • How am I doing compared with budget? (You DO have a budget, right?)

You may have started your company knowing what you needed to know. But if you’ve grown — or if you’re struggling to make a profit or improve it — chances are that the information you’re getting is not really helping you now.

If you need help with getting this information, stop kidding yourself. As the owner, you are probably not the best-equipped person to create this information — and you certainly have better things to do as the owner than to create financial statements. You need to find someone who can help you determine what information you need and who knows how to get it; you need someone who has developed such information in the past. This is not a place to skimp.

So the question — “How’s my business doing?”— is simple to answer. But the answer can be quite difficult, because you need to understand what you don’t know — and to find a way to get that information.

For more information about the topics discussed, including financial statements, visit B2BCFO.com.

Financial Statements

Using Financial Statements, Tools To Plan Your Future

Know what you have before planning the future using specific financial tools and financial statements.

There are many famous quotes about the importance of enjoying the present and not focusing too much on the past or the future. We do this in our personal lives and with many of our responsibilities, such as work, education and our finances. As a financial planner, I meet with many people seeking assistance with meeting specific financial goals and find that many times they have ideas of what they want and what they have already done. This is great, but before planning the future, it is important to know what you have now, a snapshot of your current situation. This is a critical piece, not only for individuals, but businesses, too.

Before focusing on investment news, what stocks are hot, politics and what might be a new trend in the investment world, investors should focus on understanding their current position. It is nearly impossible to determine the right mix of investments and what strategies may be appropriate without knowing this. Investors can use specific financial tools, including different financial statements, to help them identify what they have. These tools can apply to both individuals and businesses.

The first step is a data-gathering process. The second is imputing the information from various financial statements. For individuals, we would include a statement of financial position and a statement of cash flow. For business owners, we would include a balance sheet, income statement, statement of cash flow, and a pro forma statement. These are great tools that can help identify one’s financial position.

When creating a statement of financial position, one will clearly list his or hers assets and liabilities. Assets, such as real estate or other valuable items, should be considered at current market value (the price that one is willing to pay today for it). Assets should be categorized as cash and cash-equivalents, such as checking, savings, money market accounts, stocks, bonds, mutual funds and life insurance. Liabilities include credit cards, auto loans, unsecured loans, real estate mortgages, education loans and personal debts. This will provide individuals a balance sheet of assets at a particular point in time.

The next important piece is a statement of cash flow. Some of us may know this as an income statement. This statement will show inflow of income and outflow of income at a particular point in time. The inflow may include salaries, sale of assets, investment dividends, rent and bonuses. Outflows may include mortgage payments, auto payments, credit card payments, insurance, general living expenses and taxes. The statement of financial position and statement of cash flow are valuable tools to have before implementing an investment plan.

A pro forma statement is the last tool to use and includes future projections of the balance sheet and cash flow statement. This is important because as our economy and life situations change, we may need to adjustment our plan as needed. The same process also applies to business owners. However, the business entity will need to consider many more details regarding assets and liabilities, as well as inventory and staff.

Once the financial statement process has been completed, one will have a greater understanding of his or her position when beginning an investment plan. In addition, this process can improve the odds of success and allow more control in an investor’s decisions.

For more information about financial statements and financial planning, visit jacobgold.com.

Securities and investment advisory services offered through ING Financial Partners, Inc. Member SIPC. Jacob Gold & Associates, Inc. is not a subsidiary of nor controlled by ING Financial Partners, Inc.

This information was prepared by Michael Cochell of Jacob Gold & Associates Inc. and is for educational information only. The opinions/views expressed within are that of Michael Cochell of Jacob Gold & Associates Inc. and do not necessarily reflect those of ING Financial Partners or its representatives. In addition, they are not intended to provide specific advice or recommendations for any individual. Neither ING Financial Partners nor its representatives provide tax or legal advice. You should consult with your financial professional, attorney, accountant or tax advisor regarding your individual situation prior to making any investment decisions.