Is Your Office Productive This Holiday Season?

Is Your Office Productive This Holiday Season? 
Angie Mohr CA CMA
www.numbers101.com


It's that time of the year again for most of us- the holiday season. Whether you celebrate Christmas, Hanukkah, Kwanzaa, or any of the other year end celebrations that happen at the end of this month, you will very likely be distracted from your business by many holiday activities such as gift shopping, attending lunches and parties, and mailing cards to distant friends and family.

Your employees will be similarly distracted. Recently, Workopolis (an online job search and recruitment website) posted a survey on its site that was responded to by over 14,000 employees. The survey question asked whether the employees are more distracted and have lower levels of productivity at work during the holiday season. 52% of those who responded to the poll admitted that their productivity levels at work during the month of December are lower. Almost two-thirds of respondents (61%) reported that the overall pace at work is slower and that they feel less motivated.

Employees who are de-motivated spend more time out of the office at lunches, surf the Internet for personal use, and chat with other employees more frequently. In the United States, there is a measurable level of Internet shopping on the first day back at work after the Thanksgiving holiday. It's called Cyber Monday and it's a day that sees millions of employees in holiday shopping mode with access to their employer's fast high speed Internet connections. This effect is strong enough to move the stock market.

How do you as an employer monitor and control productivity and use of your corporate resources? Here are some ideas to get you started:

Set realistic expectations. It isn't reasonable to expect that your employees will run at 100% for the seven or eight hours they are working for you a day. All employees have varying energy and work levels, just like you do. For example, 3 pm tends to be a time of low productivity as compared with early morning. Adapt your expectations to fall in line with what's reasonable to expect from your staff.

Formalize a clear and reasonable Internet usage policy. It's important to realize that there are benefits to you for allowing your employees to use your company's Internet connection. Example: your employees are likely to be more productive if they can take five minutes to do some online banking rather than have to fret for half a day wondering if they'll get out of work in time to get in their car and get to the bank. Outline what you are willing to accept in the way of amount of time spent surfing. Also, ensure that you have adequate virus protection on your Internet connections to prevent casual surfing infecting your corporate files.

Set unambiguous guidelines for lunches and breaks. Make sure that your employees understand the structure that you have set for their work time. It is possible to build flexibility into the plan lest you worry that you will come across like Scrooge. For example, you can set a flextime policy that allows employees to decide when they want to work as long as they put in the required number of hours per day.

Make sure that employees take their full lunch times and breaks. The reason that breaks are mandated by labor law is that they are important to the health and well-being of people. Everyone needs a little downtime on a daily basis. If your employees generally work through their lunch and breaks, they may burn out faster and become de-motivated more quickly.

Help to motivate your employees and make work fun. There are many ways for you to help your employees feel re-invigorated and motivated. Hold a year end party or write thank you letters to your employees for all of the great things they've contributed to the company over the year. Use your imagination and show your employees that they are valued.

It is possible to increase your workplace productivity without being the holiday grinch. Heck, you might even enjoy yourself at the same time! (670 words)



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Copyright 2011 Angie Mohr

Small Businesses: Getting a Jump on the Taxman

Small Businesses: Getting a Jump on the Taxman
Angie Mohr CA CMA
www.numbers101.com


As a small business owner, you have lots to do as you come closer to the end of the year. The last thing on your mind is most likely filing income taxes for your small business or corporation. Heck, they're not due for months yet. The sooner you put your mind to organizing your financial records for tax purposes, the smoother the process will be and, most likely, the more money you'll be able to keep in your pocket when it's all over.

Here are some things that you can begin to organize now to get a jump on the taxman:

Get caught up on your bookkeeping. Making sure that you have organized and recorded all of your sales and expenses you've incurred year to date will help you avoid any last minute faxing of receipts to your accountant. You can't claim expenses for which you haven't kept receipts.

Pull all of your receipts for home office expenses if you qualify. You are able to claim home office expenses in most cases if your home office is your main place of business or if you regularly and consistently see customers there. You will apply the percentage of your home that your home office takes up to your actual house expenses, such as heat, hydro, mortgage interest, and property taxes. Make sure you have copies of all of those bills for the year to assist in this calculation.

Organize receipts for business expenses that you have paid personally. Many small business owners end up paying for some business expenses out of their own pockets. For example, you might be at a hardware store and end up seeing the perfect storage bins for your office files. If you don't track the business part of these receipts, you can't claim them as business expenses.

Estimate your business net income to be able to do some proactive tax planning. Having a sense of what you will have to pay tax on will allow you to employ some tax minimization strategies, such as investing in IRA's. It also allows you to make sure that you set enough money aside to pay your taxes in April.

Have a preliminary planning meeting with your accountant. Accountants are busy overworked people in April. Take the time now to meet with them to discuss your business and personal tax issues and book an appointment early in the upcoming year so that you're not scrambling at the last minute to file on time.

Set up an efficient filing and tracking system for next year. If you find that you're always digging in your pockets or purse for business receipts or searching the archaeological layers of papers on your desk for important government forms, now is the time to change that for the upcoming year. Set up a filing system either by month or by vendor, depending on what works best for your business. Set deadlines for yourself to have each month's financial records entered into your accounting system. For example, a goal could be to have January month end completed by February 28th.

Set tax strategies and goals for the new year. Not only should you be finalizing your tax issues for this year, it's never too early to start off on the right foot for next year. Plan your company's net income for this year and review with your accountant the tax implications. This will be important not only for your business activities but for your personal taxes as well as your spouse's.

Being proactive is one of the qualities that sets successful businesses apart from those that struggle. Looking ahead and planning for tax season will give your small business an edge (and will make your accountant smile!). (620 words)



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Copyright 2011 Angie Mohr

Is Your Business Recession-Proof?

Is Your Business Recession-Proof?
 Angie Mohr CA CMA
www.numbers101.com


For most small business owners, it is difficult to keep up with the broader economic news while still trying to run a company. But as the headlines start discussing the possibility of recession more and more, it's important for entrepreneurs to pay attention to the writing on the wall and start protecting profits.

So what can you do to make sure that your business is "economy-proof"? Here are ten practical ways to strengthen your business:

1. Make sure your historical record keeping is up to date.Nothing can bog a business down like drowning in papers. Organize your company's records and make sure that you have recorded its historical performance so that you can forecast its future growth.

2. Have both a 12-month and a 5-year cash flow projection.Don't leave your business's future to chance. Have a plan and a budget to back it up.

3. Ensure that all processes and procedures in your small business are documented.Even if the business consists only of you right now, some day you will need to hire employees if you do not want to be forever tied down to your business. Having good documentation helps immensely in the hiring and training process.

4. Hire the best employees possible and invest in their training. The quality of your staff is critical to your company's success. Make sure they are well qualified for the task and give them extensive training in customer service as well as the specific tasks they have been hired for.

5. Continually evaluate growth opportunities, whether they arise by purchasing an existing business or customer list, or come from developing a new product or service.Growth opportunities will present themselves to you regularly. Train yourself in the art of recognizing them when they come along.

6. Formalize your business growth plan and make sure it encompasses all three ways to grow: attract more customers, sell to them more frequently, and sell them more every time they see you. Leverage your sales efforts. It takes much less time and expense to market to existing customers than bring new ones in the door.

7. Hold monthly management meetings, even if the business consists only of yourself.If you can explain out loud what happened in your business last month in a way that would make sense to others, you will have a much deeper understanding of your company.


8. Systematize your small business so that it will run effectively even when you're on vacation or sleeping.Ultimately, your goal as an entrepreneur is to either have the business run without your daily presence or to sell it for a tidy profit. Both goals require providing a consistent buying experience to your customers through systemization.

9. Test the changes you make in your business to make sure they are effective.An old business lament goes, "I know I'm wasting half of my advertising money. I just don't know which half." Make sure that you document the results of any changes you make in your business, such as advertising programs, product or service offerings, or other marketing strategies. Know where your money is going and what kind of a return you're getting on your investment.

10. Formalize the way in which you and your staff interact with customers to strengthen the relationship and increase sales. Customers return to franchises like McDonald's because they know exactly what the business transaction will be. There will be no surprises. They are treated consistently. For your business to succeed, you will have to define how you and your staff will interact with your customers and ensure that they have a consistently wonderful buying experience every time they come to see you.

While you can't control what happens to the larger economy, you can take some proactive steps to make sure your small business can weather the storm. (633 words)



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Copyright 2011 Angie Mohr

Manage Your Small Business Cash Flow More Effectively

Manage Your Small Business Cash Flow More Effectively
Angie Mohr CA CMA
www.numbers101.com

Understanding the flows and ebbs of cash in your business is critical to scouting for warning signs of impending cash crunches. Bookkeeping software like QuickBooks can tell you that you will be getting money in the door, but without knowing when, you're going to be left not knowing if you can pay the bills.

The activities that your business carries out can be broken down into several events. For a manufacturing business, these main events would be:

· Buying the raw materials
· Paying for the raw materials
· Manufacturing the product
· Selling the product
· Collecting cash from the customer

The events for service and retail businesses are similar. For ease of presentation, we will use a retail business in our examples.

Let's have a look at a simple example:

One day, you purchase inventory for your store for $100. You pay the bill to the supplier 30 days later. After 15 more days, a customer buys the product for $125. Your customer buys on credit so she does not actually pay you for another 45 days.

So, you know you're making a profit on the sale, however, you may miss the fact that it is a total (in this example) of 90 days between the inventory coming in the door and going out the door (the inventory holding period) and it is a 60-day span between cash going out the door and cash coming in the door (the cash float).
Why do we need to know the inventory holding period and the cash float? Because, we need to make sure that we can pay for the inventory when it's due. There's a 60-day cash flow gap between us paying suppliers and customers paying us. Now that we have that information, we need to ensure that we have the financial resources to "float" that inventory.

The Cash Flow Report

One way to pull all this information together is to prepare a Cash Flow Report monthly. This will let us predict the times when we will be short on cash and times when we will have extra cash that we will need to invest. If you have a bookkeeping program like QuickBooks, this will be an easy exercise.

The Cash Flow Report looks much like a budget, with the exception that it only cares about which period we will collect and disburse money.

Revenues

Let's just look at the revenue side for a moment. Our Monthly Budget Report shows us this information:

                   Jan      Feb    Mar      Apr   May   June
Revenue   1,250   1,095   2,470   1,750   975   1,645

Okay. So we know that we should be able to bill our customers those amounts. But what do we know about when we're going to get the money? We already know our average receivable turnaround time (refer to last month's column). If we get the money in on average in 37 days, is that enough information? Not quite.
We need to have an accounting of the percent of revenue we will receive in each month. We can do that by looking at our historical cash receipts and seeing what the patterns look like.

Let's assume the following: If we're looking at the month of March, we know that we will probably collect 15% of the March billings in that month. This tells us that 85% of all of our March revenues will be collected in the future. We know that we'll probably get 63% in the following month, in this case, April. This makes sense considering that on average we collect in 37 days. We have now collected 78% of all our March billings. A further 18% will be collected in May, and, assuming that we have no bad debts, the rest (4%) will be collected in June. Therefore, in June, we will be collecting 4% of March's billings, 18% of April's billings, 63% of May's billings and 15% of June's billings. We have now determined our expected cash inflows.

So, in May, even though we are billing $975, we are expecting to collect $1,737. You can also predict that June will have a significant bite out of its cash flow. Even though we billed a lot in June, we didn't in May and we are collecting 63% of May's billings in June. This is much more useful information for us as we now know what we expect to be in our bank account in any given month.

Expenses

The expense side of the Cash Flow Report is similar to the revenue side. We want to put expenses into the periods we expect to pay them, not the period to which they belong. So, for example, if we buy new stationary from our printer for $1,000 in May but we don't pay him until June, that expense would be in May on the Monthly Budget Report but in June on the Cash Flow Report.

Although, at first glance, it would seem onerous to track all of this information regularly, it is actually quite easy once you have set up the initial format. You can set up an Excel or Lotus spreadsheet to calculate your cash flows. Having an understanding of the money coming in and going out will give you better control over your business! (871 words)



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Copyright 2011 Angie Mohr

Your Small Business and Groundhog Day

Your Small Business and Groundhog Day
Angie Mohr CA CMA
www.numbers101.com

It's the beginning of another new month, and it's Groundhog Day. If the groundhog pops his furry little head out of his hole and sees his shadow, there will be six more weeks of winter. If it's overcast and he doesn't see his shadow, spring is around the corner.

How many of you small business owners out there feel like that groundhog? You think that the success or failure of your business is dependent upon environmental factors completely out of your control. If the government brings this tax break in, then you will be profitable. If that competitor sets up a showroom down the street, then your business will suffer financially. When you feel powerless to change your surroundings, you eventually stop popping your head out of your hole altogether. It seems safer (and less likely to induce an ulcer) to keep your eyes focused on the day-to-day tasks that will always eat up all available time if you let them.

It's important, however, to recognize that as a business owner, you do have control over most aspects of your company's strategy and operations. Poking your head out of the hole and looking around at the external environment in which your business operates can help you to predict opportunities and threats before they occur. This allows you to be proactive rather than reactive in facing these challenges.

The movie "Groundhog Day" also has lessons for your small business (although I doubt that the Harvard Business School will incorporate the movie into their curriculum any time soon!). In the movie, Bill Murray awoke each morning to find out that it was still Groundhog Day. He lived through the same day and reacted to the events of the day the same way each time. It was only when he realized that he had to break out of his comfort zone and change his actions that his external environment changed and he was able to move forward.

You may have started the year with the hope and determination that this was the year that your business would reach new heights of success and financial well-being. This was the year that you would have to do your bank deposits with a pillowcase to fit all the money into. The year that the bank called you and asked if you'd like to borrow some more money. Now it's February 2^nd and you wake up every morning realizing that nothing has changed. Your business is still on the same course it's always been on. Your sales are still the same. Your customer base is still the same. The cost of your inputs is still the same. The lack of excitement about going into work is still the same.

And you will be destined to repeat the same results until you actively do something different. Until you change your company's processes and the way it interacts with its environment.

Set aside time to poke your head out of the hole. I know that many of you are rolling your eyes right now, saying "I don't have time to do that." Keep in mind that ultimately, it takes less time to run a sea-worthy ship than to bail out a slowly sinking one. It doesn't matter where you carve out the time. You may choose to stop doing some of your less-productive operational activities. You may choose to get out of bed a half-hour earlier. But you need to find the time to strategize and to plan your business operations for at least the next year.

Start your planning by working on the answers to these questions:

1) who are my competitors?
2) why would customers buy from my competitors rather than from me?
3) what changes are going on right now in my industry that I need to be aware of?
4) how effective is my current tax planning strategy?
5) do I have a plan for extracting profits from my small business?

Once you have made notes on the above questions, revisit your existing business strategy and make sure that it's still consistent with the new environment. If not, make the course corrections needed so that you don't have to relive Groundhog Day every day. (699 words)



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Copyright 2011 Angie Mohr

Choosing the Best Bookkeeping Software for Your Small Business

Choosing the Best Bookkeeping Software for Your Small Business
Angie Mohr CA CMA
www.numbers101.com

It will happen eventually. As your business grows, you will at some point outgrow your current accounting system, whether you started out with a manual ledger, an Excel or Lotus spreadsheet, or simply a shoebox (or refrigerator box, depending on the number of receipts your business accumulates).

The need for a new accounting system may manifest itself in many different forms. You may find that payroll is becoming more onerous to calculate and track as you hire more employees. If you run a manufacturing or resale business, you may keep running out of stock on high-turnover items because you are out before you know it. If you run a service business, you may start losing track of how much time should be billed to each customer. Regardless of the various symptoms, the problem remains the same: your bookkeeping system is taking more of your time than it's worth.

There is always a balance in any small business enterprise between time and money. You can spend either time or money (or both). Scrimping on one will cost you more of the other. For example, if you decide to buy the least-frills accounting package that you can find on the shelves of your local office supply store, you may spend an extra 10 hours per week forcing it to do what you want it to do. If you could take that 10 hours and sell more to your customers, then it perhaps would be worth spending more on the bookkeeping software package.

Recently, Deloitte & Touche did a study of the top criteria used by businesses when selecting their bookkeeping software. It's quite interesting to see that first-time business owners and seasoned entrepreneurs have different priorities in this regard. This would suggest that experience teaches business owners what's really important when choosing financial software.

The top three criteria used by first time business owners are:

1) Price of software
2) Ease of implementation
3) Ease of use

These reasons make sense. They are all important things to consider in the purchasing decision. But now take a look at the top three criteria used by businesses selecting their second bookkeeping system:

1) Level of support provided by the local firm
2) Developer's track record of performance
3) Software's ability to fit the business

What do the experienced business owners know that the neophytes don't? Let's take a look at each point separately.

Level of support provided by the local firm- many of the entry-level accounting systems are billed as being turn-key; you just load the software and you're up and running. However, it's never quite that simple. It's important to make sure that you can easily and economically access customer and technical support for your new system. Some bookkeeping software companies charge for support calls, which is fine as long as you can get hold of someone when you need them. You will also want to consider whether there are consultants based locally that can come into your business and provide customized setup and training. When you're looking at consumer reviews of the product, pay special attention to what they say about support.

Developer's track record of performance- a first-time software buyer may very well discount the importance of the how well the software has worked in the past, but seasoned entrepreneurs understand how much time it takes to work around bugs in the software or to install patches to fix problems as they arise. Keep in mind that bookkeeping software is generally updated annually, so there are many opportunities for programming errors to arise. Knowing that the company has been in business for several years with little incidence of major programming bugs can ease your mind in this area.

Software's ability to fit the business- entry level bookkeeping software systems try to be "one size fits all". They allow you to customize the chart of accounts to make sense with your particular type of business. For example, if your business is computer consulting, it doesn't make any sense to have inventory accounts showing up in your books. However, each software system has strengths and weaknesses for every type of business. Some handle real-time inventory better than others. Some track billable time better. Having a good understanding of what's important to track for your particular business will help you be able to assess which package is best for you.

There are more considerations than just price when purchasing accounting software. Spending time understanding all of the critical considerations will help. You should also ask fellow small business owners what they use and how it's working for them. Another important source of information is your accountant. One caveat is to make sure that your accountant is familiar and comfortable with all of the popular accounting packages. For example, if your accountant has worked with only QuickBooks, it is more than likely that it will be QuickBooks that he or she recommends. Not exactly an objective opinion! All of the major software websites have either screenshots of the program or downloadable test versions. This gives you the opportunity to "test drive" the package to make sure that you're comfortable with it.

Selecting your bookkeeping software is an important task in your small business and may seem daunting. Keep in mind however that most systems can be converted to other systems fairly painlessly. Mistakes are not terminal. Take your time up front in the selection process and you will be making the best decision regardless of the system you choose. (918 words)



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Copyright 2011 Angie Mohr

Communicate Effectively With Your Clients

Communicate Effectively With Your Clients
Angie Mohr CA CMA
www.numbers101.com

Have you ever dealt with a business owner who seems to speak a different language? Or one that appears disinterested or distracted? Have you continued to work with these businesses, or did you end up giving that business to another company?

The way you communicate with your customers and potential customers can have a huge impact on your customer retention and growth. Customers want to feel comfortable when meeting with you and they need to be able to understand what you're telling them without having to resort to looking words up in a specialized dictionary.

Here are some tips to improve your customer communications:

Replace jargon with common phrases.
An example from the accounting world might be the phrase "I need a list of your company's qualifying SR&ED expenses for ITC purposes". What a daunting concept. Even if it is translated afterwards, the use of jargon distances accountant and client. It can be difficult to think in layman's terms especially if all your reading and research is formal, but learn to translate technical terms into plain language. Big words won't impress your customers, it will only scare them.

Echo back your customers' words to them.
A common customer complaint is that they are not being listened to. Think back to a time when you have tried to purchase an item from a store and the clerk was distracted, perhaps talking to another clerk or doing other work. It most likely made you feel unimportant to the business, which is not a good impression to be left with when you're in the process of handing your money over. Disinterest is often a misperception, but if you frequently leaf through files or type on your BlackBerry when dealing with your customers, it gives the impression that you're inattentive. Make direct eye contact when your customers are talking and repeat back to them their questions, both to enforce the impression that you are attentive and also to ensure that you truly understand the question. Start with, "What I hear you saying is...is that right?"

Speak slowly and clearly.
In the upcoming week, be mindful of the way business owners speak to you as a customer. Do they rush through each customer interaction? Are you left feeling as if you'd look silly if you asked the person to repeat what they just said? Take what you learn about communicating and apply it to your own customer interactions. Make sure you are speaking slowly and clearly. Your level of comfort in dealing with your customers is displayed in the way you talk, so make sure you are projecting confidence and friendliness.
If the language you do business in is not your primary language, it's even more important to make sure that your customers can understand you.

Give your customers context when explaining technical concepts.
Some of your explanations to your customers might be very theoretical and could be difficult for customers to grasp. For example, if you are a lawyer and you are trying to explain the process of probate to your clients, it is most likely beyond their normal range of experience and may be hard for them to apply it to their particular situation. Enhance your explanations with examples and anecdotes. It will help solidify the discussion for your customers.

Put it in writing.
A good way to solidify your customers' understanding of what you are telling them is to put important information in writing for them. That way, they can ensure that what they understood from your conversation is really what you were trying to say. Not only will it help your customers, it will save you time that you would otherwise have spent on the phone clarifying what you have previously told your customers.

Communicating effectively with your customers is a skill that can be learned and improved upon by all businesses and it can have a huge impact on your bottom line.(652 words)



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Selling Your Services: Tracking Clients and Work-in-Progress

Selling Your Services: Tracking Clients and Work-in-Progress
Angie Mohr CA CMA
www.numbers101.com

Most businesses can be separated into two broad categories: those that sell a product and those that sell a service. Service businesses have some unique challenges in tracking the work flow and the clients themselves.

If your business sells a product, tracking your customers and sales is easy- the product has a defined price and your cost to sell the product is also defined, and includes things like your cost of purchasing the product (if you are a retailer or wholesaler) or your cost to build the product (if you're a manufacturer).

If you're selling a service, however, it becomes more difficult and more critical to track all of your inputs into providing that service to your clients.

Tracking the Work

Every successful service business has a work management system that tracks what work is in the door, what stage it's at, how long it's been in process, and when it has been promised to the client.

The more staff you have, the more sophisticated the system needs to be to avoid confusion and having work slip through the cracks. However, when you're just starting out, and if there's only you in the business, the tracking system doesn't need to be elaborate. Let's take a look at the main types of information you need to track and plan.

Work In and Work Out

One of the most basic pieces of information to track is what has come in the door and what has gone out. For example, if you are an architect, your clients may have provided you with photographs, preliminary sketches, and other documents and pieces of information that belong to them. It's important to remember that these documents belong to the clients and that you are simply looking after them until you finish the work that the clients have retained you for. Therefore, it's critical that you know at any point in time exactly what documents you are holding for your clients.

Your tracking system doesn't have to be elaborate. It can simply be a sign in sheet where you chronicle the movement of your client-owned materials. You also need to document what client items are in your possession and get your clients to counter-sign. Although this may appear time consuming, it can prevent misunderstandings and confusion. When you return these items to your client, you want to ensure that you don't hear, "But I can't find the material swatches. I'm sure I gave them to you"- or something to that effect.

Having the client sign the "Client Sign In" form clarifies for both parties exactly what has been transferred to your temporary care and will help you to ensure that you return all records to the client when the work has been completed.

Tracking Progress

Your management system also needs to be able to track the inputs into the service that you are providing to the client. For example, if you are a lawyer who bills based on the number of hours you spend on a client's behalf, you need a system that will track the time you've spent to date. If you are an interior designer, your billing may include both the time you've spent and the items that you've purchased for your client's project. Make sure that your tracking system can handle more clients than you think you will have. It's better to have too much system capacity than not enough.

Tracking Turnover Time

The amount of time it takes you to get new work in the door, process it, and complete it is called "turnover time". Quick turnaround time can be one of the clearest (although certainly not the most accurate) indications to the client of the value that they are receiving. Minimizing turnaround time also allows you to be more efficient and therefore be able to process more work, which translates into more billings and higher revenues.

In order to minimize your turnaround time, you will have to track it. You can do this for all of your client work together (if you only provide a few services) or by type of work (if your turnaround time varies greatly depending on whether, for example, you are preparing a personal income tax return or recording a month's worth of transactions for a small business).

To calculate the average turnaround time for a specific type of work, take the total days between the date in and date out, and divide by the number of client engagements.

Understanding your historical turnaround time will help you to provide better completion estimates to clients and will be a starting point for actively working on reducing those turnaround times. (770 words)



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Retiring: What is Your Small Business Worth?

Retiring: What is Your Small Business Worth?
 Angie Mohr CA CMA
www.numbers101.com


Business valuation is not an exact science and depends substantially on the type of business and assets you have. There are many expert business valuators who can help you nail down a value when you're ready to pass over the reigns. However, having at least a sense of the value that you are building in your business is important.

You know that your business is worth at least the fair market value of the assets minus the payout value of the liabilities. If you have been working to systematize and grow your business, it will be worth substantially more. Undervaluing your business can have serious consequences on your retirement lifestyle, so it pays to do your homework and get professional help.

Getting ready for the sale

There are many things that you will have to do before putting any exit strategy in place, especially if you will be selling to outside buyers.

The first thing that you need to do is to assemble your team of experts. This will most likely include your accountant, lawyer, financial planner, and perhaps a business valuator and broker. Make sure that all parties know your goals for the buy out and that they are all working in tandem to meet those goals. Your accountant will help you to steer through all of your choices surrounding how to structure the sale and how to take payment. There will be practical decisions as well as taxation implications. Your lawyer will help you to structure the legal side of the sale and will help you interpret offers as they come in. Your financial planner will look at your post-business goals and will help you determine what income level you will need in order to maintain your desired lifestyle (margaritas can get expensive!).

Your accountant will most likely recommend that you prepare some financial information for the pending sale. Much like a real estate broker would suggest to you that you put a fresh coat of paint on your house and maybe plant some flowers outside before bringing buyers through, your accountant will recommend that you show potential buyers of your business what it might look like once they take over. You will have run your business in a way that suited you. You may have had the goal of minimizing tax or employing your family.

These decisions might not be made the same way by the new owner. Your accountant will get you to normalize your financial statements; in other words, recast them without all of the discretionary activity. If your spouse is on the payroll, remove the expense related to that. If you pay yourself high dividends, restate the financials without them. Keep in mind, however, that you need to be up front with potential buyers about the changes you have made and how those statements differ from ones you have prepared for taxation purposes.

The mechanics of the sale

A sale can happen in one of two basic ways: either through the sale of assets or the sale of shares.

If your business is unincorporated, you will be selling the assets of the business. The buyer may choose to take on some or all of the business's liabilities rather than coming up with a lot of cash up front. Your lawyer will ensure that your name is removed from those liabilities so that creditors cannot come after you later if the new owner stops paying them.

If you own a corporation, you can either sell the assets of the business or the shares of the corporation. Each has its own tax consequences and your accountant will help you weigh the pros and cons of each. If you are passing on your business to your children, there are many sophisticated ways to transfer shares and your accountant will advise you on the various methods. You may choose to structure the arrangement, for example, so that you are still a shareholder (albeit one who no longer works in the business) and will receive a monthly income for the rest of your life in the form of dividends.

Once you and a buyer agree on the nature of the sale, you must decide how you will receive the funds: either all up front or over time. Again, tax considerations come in to play here, but you must also consider the risk of financing part of the sale. If, for example, you agree to receive $50,000 up front and $5,000 a month for 12 months, you are betting the farm on the fact that the new owner will still be in business a year from now. What if he or she runs the business into the ground? Or declares bankruptcy? You will lose some or all of the sales proceeds and may find yourself having to start up another business rather than lying on the beach. Your lawyer can help mitigate some of that risk through the structuring of the agreement.

Once the business has been sold, financial planning becomes a key issue, especially if you plan to retire. You are now dealing with a fixed amount of funds (which can grow through prudent investing) and you and your financial planner will have to make sure those funds plus your other sources of savings will last you for the rest of your life and be able to provide you the retirement lifestyle of your dreams. (896 words)



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Copyright 2011 Angie Mohr

Retiring From Your Small Business in Style

Retiring From Your Small Business in Style
Angie Mohr CA CMA
www.numbers101.com


It may seem very strange to you to be thinking about leaving your business when you put so much effort into starting it up and growing it. But there will come a time when you will want to move on, and the earlier you plan for that eventuality, the better off you will be. Even if you plan on working until you drop, you will indeed drop someday and you need to have planned out what happens to the business then.

Many exit strategies require months or years to implement, so it makes sense of map out the strategy that's best for you as early as possible.

Your personal goals


Ask yourself: What do you want to do after running your business?

The answers to that question are as unique as each entrepreneur. You may decide that there's nothing more appealing than lying on a faraway beach sipping margaritas. You may want to start another business, perhaps in a different industry. You may choose to mentor young entrepreneurs as they face the same pitfalls you have over the years. It's important to define your goals because they will affect how you will transfer your business and how you will structure payments.

Heading for the exits

There are many ways to transfer your business to others. Let's look at the most common.

Pass the business on to your children

This is also known as succession planning. Many small business owners want to keep the business empire that they have created in the family to provide their children (or grandchildren) with a secure source of income. However, this form of selling the business can be the most difficult.

The first decision that has to be made is whether your children are truly interested in owning the business. Many small business owners get quite the shock to find out that their kids really don't want all the hassles of running a business. Even if they do want to take over the reigns, they must go through the same decision process as you did when you started your business: defining business and personal goals, outlining a vision, and setting a growth plan.

A decision that you as the business owner must make is to define what is acceptable to you in how the business is run in the future. What if your children have a very different vision of the business and make substantial changes? Will you be comfortable with that? The more thought put into this type of succession up front, the more likely the transition will be successful.

Selling the business to an outside party

If you don't have a family member who wants to take on the business, you may choose to sell your business to someone outside your family. It might be an employee, a competitor, or someone who wishes to purchase an existing business rather than start one from scratch.

It is more difficult to sell a business than you might think. That's why it's critical to plan ahead so that you can make sure that your business looks great on paper, is growing consistently, and will be attractive to potential buyers.

Brokers are frequently used in this type of sale. A broker's job is to match up buyers and sellers of businesses, much like a real estate broker's job is to match up buyers and sellers of houses. A broker may bring potential purchasers to the table whom you may not have otherwise met.

When selling to an outside buyer, timing is important. Ideally, you will want to sell your business when the economy is hot, your business's performance looks outstanding, and its reputation is stellar. The worst thing that you can do as a small business owner is to run your business until you can't stand it for another five minutes and then try to dump it for whatever you can get. You'll maximize the business's value (and price tag) if you sell when things are looking up rather than down.

Liquidate

If you have built a business that is completely dependent upon you and have not systematized your operations, liquidation of the business is probably your only option. Liquidation involves selling off the assets of the business and using those funds to pay the liabilities. This will only work if there are more assets in the business than liabilities. If the situation is reversed (i.e., there are more liabilities than assets), you may have to declare bankruptcy in order to get out of your business, otherwise you will have to continue to run it until the liabilities are paid.

The benefit of liquidation is that it tends to be easier than selling a business as a going concern. There are more potential buyers for individual assets than for an entire operation. The downside (and it's a big one!) is that you will almost always end up with less cash in your pocket at the end of the day by liquidating. There are two reasons for this:

Equipment and other assets are generally valued higher if they are part of a continuing business.

It is impossible to sell the goodwill of your business if you are liquidating.

Generally, this is the least favorable option for you to pursue.

These are some of the issues that you will need to contemplate before selling your business. (887 words)



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Copyright 2011 Angie Mohr

Surviving the Small Business Debt Trap

Surviving the Small Business Debt Trap
Angie Mohr CA CMA
www.numbers101.com

Debt. It's the word many small business owners hate to hear. It's a reality for most businesses, however, to incur debt to finance operations, at least in the start up years. Although many small businesses are denied credit in the first few years, others have bankers and credit card companies begging for their business, especially those companies whose owners have substantial personal assets to attach.

I hear the following from small business owners every day:

"It doesn't matter. I get to write it off."
"You can't operate in this industry without a big line of credit."
"I need a corporate credit card to take my customers out to lunch."
"You have to spend money to make money."

All of these arguments are quite superficial and speak more to our penchant for overspending than anything else.

The first statement, "It's a write off..." is the most tenacious argument of the lot. Many small business owners think that because something is tax-deductible, it's free. If you look at it on paper, however, you will see the foolishness of the premise. Let's say, for example, that you spent $1,000 in interest on a loan. The $1,000 is certainly deductible from your income. At a 25% corporate tax rate, this would give you $250 in tax savings. But you still had to fork over $1,000! You are still out of pocket by the difference, or $750.
It's critical to get a grip on your debt picture and how much interest you are paying. This will help you plan and grow more effectively in the future.

Understanding Debt Service

Debt service represents the amount of money it costs a business to maintain or "service" its debt. It includes both interest and principal payments required for a company to remain on-side with its lenders' covenants or agreements.

Some of your debt may require interest-only payments while some might be a blend of interest and principal repayments.

The purpose of incurring debt in any business (both the corner store and General Motors) is to generate more revenue. This is called leverage. The theory is that with more capital available to a business, it can buy more equipment or invest in more promotional activities in order to bring more customers in the door. In many cases however, a lack of understanding of these principles hides the fact that debt is simply being used to prolong the agony of an unprofitable business. Understanding your total debt service will help you to determine whether your indebtedness is helping you earn revenues.

How do I calculate my cost of borrowing?

Another useful measure of your company's debt is to look at the overall cost of borrowing. Comparing the blended cost of borrowing over time tells you whether it is becoming more or less expensive for the company to acquire capital.

You may have financing from several different sources:

Bank loans
Lines of credit
Credit cards
Capital leases
Suppliers
The government

It's important to understand the total cost of your debt from all sources. You can do this by calculating a blended interest rate from all of your current debt.

Let's look at an example:

A company has several different sources of financing:

A bank loan with a current balance of $14,912 and an interest rate of 8.5%
A capital lease for computer equipment. Balance $5,387. Interest rate 11.4%
Payroll arrears owed to the government in the amount of $6,754. Interest rate per the statements is 10%
A corporate credit card with a balance of $12,769. Interest rate 18.5%

In order to calculate the blended cost of debt, we simply divide each interest rate by the proportion of its related debt to the total debt. In the above example, it would look like this:

Type                   Amount    % of Total      Interest Rate   Blended
Bank loan             14,912        37.5                      8.5                3.2
Capital lease           5,387        13.5                     11.4                1.5
Payroll arrears        6,754       17.0                     10.0                1.7
Credit card             12,769       32.0                     18.5                5.9
Total                    39,822     100.0                                         12.3  


The weighted average cost of debt is 12.3% in this example. So, what does this tell us? Not much, by itself. It's only when we look at the weighted average cost of debt over time that we are able to see if our interest rates are going up or down. If our blended rate is going up, for example, it could mean that we are beginning to have solvency issues. It means that our newer debt is at a higher rate than our existing debt. Lenders may be more hesitant to lend to us and we may be seeking financing from more unconventional (and more expensive) sources.

The Danger of Leverage

Many "Make Millions with Your Small Business" books will talk about leverage and "good" debt versus "bad" debt. They argue that it takes money to make money and that virtually all companies borrow. "Good" debt (they say) allows you to leverage your funds to earn more income. For example, if you can attract $50,000 worth of new business by buying a $30,000 machine on credit, you would be farther ahead to do so.
What these "gurus" don't tell you is this simple fact:

DEBT = RISK 

Not exactly rocket science, I grant you, but critical information to keep in mind, nonetheless. In our above example, what happens if you don't get the increase in business you were expecting? The debt is still there. You can't tell the bank "Sorry, I can't pay you back until I get this new business in the door." When your business is indebted to a bank, mortgage company or other lender, there is the risk of default and of the debt being called and company assets seized. Think of it this way: it's only companies that have debt that declare bankruptcy. If you didn't have any debt and you wanted to wind up your company, you would simply close the doors.

Another danger that many small business owners don't think about is that many lenders require the personal guarantees of company owners and may even require you to put up your home as security. Now, not only are your business assets at risk but everything you own personally as well. Clearly, this increases the risk of entering into credit agreements.

I'm certainly not recommending that you never borrow money. However, you need to understand the following every time you engage in credit:

What is the purpose of this borrowing?
Am I getting the best interest rate possible?
What does the revised stream of cash flows look like with the new debt?
Do I have a plan to retire this debt?
Do I have to pledge any personal assets to get this credit?

Once you have satisfied yourself that you have done the required background work to understand your business strategy, then you can enter into the agreement with confidence. (1,133 words)



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Copyright 2011 Angie Mohr

Small Business Critical Success Factors

Small Business Critical Success Factors 
Angie Mohr CA CMA
www.numbers101.com

What is the purpose of your business? What do you need to do absolutely correctly in order for you business to succeed? What are the activities that you absolutely cannot screw up without losing significant amounts of business?

These questions are answered by examining your Critical Success Factors or CSF's. Critical Success Factors are defined as those activities that a business undertakes that allow it to succeed.

It's more than just the numbers on your financial statements. Some CSF's relate to measures of quality, customer satisfaction, and how efficiently you are using your resources.

However, before you can do any analysis on your company's Critical Success Factors, you need to examine your business strategy.

Ask yourself the following questions: Why is my business better than my competitors'? What do my customers tell me that they like about my business? What don't they like? What action could I take that would make my customers go elsewhere?

Note that two of the four questions relate to your customers' perception of your company, not your impressions on what they think. It's an important distinction as your customers may have a very different view on you and your business than you think. How do you know what your customers think? Ask them! Set up a procedure where they are asked to fill out a feedback form when they purchase your product or service. Ask them what they like and don't like. Ask why they might choose to shop elsewhere. Ask what you are doing well and what you could be doing better. You may be surprised by the results.

The answers to the four questions above give you a list of those activities that you need to make sure your business is doing regularly and consistently. Review your list. You will most likely find that the items on it relate more to your customers' perceived value in your product or service, not just its cost. Companies that compete only on cost will always suffer in the long run as there will always be someone else that can do it cheaper.

Now that you have defined your Critical Success Factors, you need to be able to make sure you are on track. But how to measure them, especially when some are non-financial?

The measurements of Critical Success Factors are called Key Performance Indicators or KPI's. To recap the jargon, Critical Success Factors are things your company must do to thrive and Key Performance Indicators are the measures of those things.

Here is a typical list of Critical Success Factors:

1. Personal service- making sure the customer gets to speak with a staff member when the purchase is made.

2. Product quality- making sure the product does what you say it will do and is durable.

3. Quick problem resolution- making sure all customer complaints are handled quickly and in a manner that impresses the customer.

4. Same-day shipping- making sure that your product gets shipped out to your customer the day the order is received.

All four of these CSF's can be measured, even though some of them are non-financial.

Those are some of the ways that non-financial indicators can be measured and tracked. Once the measures have been determined, it's important to set your expectations to measure against. For example, if your target is to ship 100% of your products same-day, then you would gauge the actual against the standard (100%).

What would happen if your Key Performance Indicators start to slide?

Let's say you've been tracking your key performance indicators for months and this month, several of the indicators seem to show problems. What do you do?

When this happens (as it inevitably will), you need to discover the source of the problem. A business could face many problems that would impact its key performance indicators including employee illness, cash flow crunch, breakdown in processes, and inattentiveness to customer needs. If the problem is short term, such as employee illness, there is no need to take drastic action. However, you will want to see if there is a way to make your operations less vulnerable to the illness of a single employee.

If the problem seems to be in the underlying processes, it's time to put new procedures in place to make sure the critical success factor is being met. Have there been changes in the external business environment? New competitors in the industry? Quality control problems with the inventory? These are all situations that need a rethinking and reformulation of your business plan. If you can see the icebergs, you will have a much better chance of being able to steer around them. (771 words)



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Copyright 2011 Angie Mohr

Managing a Small Business: Are You Paying Yourself What You're Worth?

Managing a Small Business: Are You Paying Yourself What You're Worth? 
Angie Mohr CA CMA
www.numbers101.com


In the start up years of a small business, the owner is generally concerned with some of the more urgent issues, such as whether he or she can make payroll next week, whether that new customer is going to place an order soon, and whether an employee needs to be formally disciplined. But there's another critical aspect of your business- you. As owner and manager of your business, your time and investment are valuable and worthy of compensation, even in the start up years.

You wear many hats in your business but the two main ones are that of manager and investor. We'll look at each of these roles separately.

The Small Business Manager

This is the role you are most familiar with. You are in this role when you work IN your business. Some of the main management functions are: business planning, human resource management, supply management and sales.
You could hire a manager to perform these functions for you, but most small business owners do it themselves out of financial necessity. Say, for the time being, that you will keep the manager job. How well does it pay?
Let's look at your situation. Fill in the following information:

(A) Amount of income from your business that you were taxed on last year: _____________
(B) Number of hours you worked in your business last year:  ____________
(C) A divided by B = ___________

Are you at least making minimum wage? If you're like most owner/managers, you are making between $1 and $3 per hour. Hardly a sustainable wage!

Why is it that small business owners are willing to put up with such a low hourly wage? Because they believe they are building something for the long term. The problem is that 80% of all businesses fail in the first five years, and 80% of the rest fail in the next five. Odds are, there will be no long term, especially for those businesses that fail to plan well.

Time and time again, I see clients in my practice who slave away at their businesses ten and twelve hours (or more!) a day for years without getting paid. Any money they do make gets farmed back into the business to keep it going. The toll that this takes on the business owner's morale, health and family is astronomical. How long would you work for someone else and not get paid? Not very long.

You must plan for your own compensation. Not enough money in the cash flows for that? That indicates a problem. It means you are under-capitalized. It also means that you are permanently chained to your business. You couldn't hire a manager for free, so you will have to continue to do it forever. Not very heartening!
How do you know how much you're worth as a manager? Look around your industry. Look at what your competitors are paying their managers. Look in the Help Wanted section of your local newspaper. What are the salaries being offered to managers in similar roles?

Once you have a sense of what you're worth to your business, put your pay in the cash projections and make it work. If you're in the start up phase, you may have to borrow from a lending institution in order to cover your salary. The business must be able to cover the principal repayments on the debt as well as the interest. If it can't, you will need to look at new ways of attracting increased business.

When you have planned out your salary, PAY YOURSELF FIRST! This is critical. Like any other area of your life, if you leave yourself until last to get paid, there's a good chance you will run out of money before you get around to it. You will make sure all other suppliers get paid because they will pick up the phone and yell if they don't get paid. You have to treat yourself just like any other supplier- worthy of prompt payment.

The Small Business Investor

You wear another hat in your business. You are an investor in your business. You have most likely invested personal resources (cash, equipment) into the company, and like any other investment, you should receive a financial return.
This has nothing to do with the hundreds of hours you spend working. This only relates to the financial resources you have expended.

Let's say that when you started your company, you took $5,000 out of your savings account for start up costs. What else could you have done with that money?

• Invest it in the stock market

• Buy a bond

• Put a downpayment on investment real estate

• Loan it to another start up company

What would have been the benefit of doing those things? If you had invested in the stock market, you might have income on your investment in the form of capital gains or dividends. A bond would have generated interest income. Real estate will provide capital gains and rental income. A loan to another company would generate interest. In all these cases, you would be making a financial return on your $5,000.
You didn't do any of those things however. You invested in your own company. Was it a good investment decision? It is if you are making a return on that investment that is similar to other investments that carry similar levels of risk.

For example, when you invest your money in the stock market, you expect to be compensated for the risk that you won't get your money back out.

When you buy a bond, you bear the risk that the underlying bond issuer will not be able to repay the principal or the interest to the bondholders. The issuer needs to compensate the bondholders for that risk.
Investing in your own small business has risks too. In general, you know that the money is illiquid. In other words, you cannot take it back whenever you want. It is needed for the operation of your company for a certain length of time. You also know that the small business failure rate is extremely high. These are risks that should be offset by financial return.

So, how much return should you receive on your investment? Probably more than a government guaranteed investment and less than a junk bond.

Your accountant will be able to help you navigate through the owner compensation issues and set up a system that gives you the maximum return with the minimum tax consequences.



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Copyright 2011 Angie Mohr