Daunted by balancing your business needs with your checkbook? Here are four common money management problems and how to solve them.
By Heidi Russell Rafferty
Most business owners are so busy achieving their business dreams that the minutia of monetary issues is an afterthought. But solve money issues on the fly and you may actually hurt your long-term financial goals, say experienced business owners.
“Many of us just shoot from the hip and hope for the best,” says Suzi Berman, owner of D Media Graphic Design in Dallas. “I have seen other business owners get in over their heads, and it’s scary. I grew my business on a slow and steady pace. I was able to pinpoint when it became too fast, too quick, and I pulled back before I suffered any financial damage. If you have to take risks to grow, then go ahead and jump. But carefully evaluate where you land before jumping again.”
Consider these solutions to four common money problems that might help you overcome your latest cash dilemma.
Problem #1: Clients don’t pay you in time to meet your vendors’ bills.
Cash flow is one of the biggest issues for small businesses, according to Linda Forman, a certified public accountant in Evanston, Ill., who specializes in advising entrepreneurs. People who lack adequate capital easily get into trouble, she says.
“They never think of the emergency money they’ll need,” Forman says. “They think that the minute they send out a bill, people will pay, but they don’t consider the time lag and don’t put a cushion in.”
Solution: Ask for a line of credit for more money than you think you’ll need. Then offer discount incentives to encourage clients to pay on time.
Christine Nelson, owner of Foam Industries Inc. in Champlin, Minn., suggests doubling your loan requests from what you think you’ll need. “It’s hard to get more money later. If you get approved for $100,000 and then find you need another $50,000, they won’t give you more until you pay back the $100,000. Plan on having it cost more than you think,” she says. Check out information on SBA loans.
Nelson also offers a discount to clients who pay her within 10 days. Because a 1 percent discount is standard within her industry, she upped hers to 2 percent. “It really helped us to keep our cash flow going,” she says. Nelson also factors in the discount when she establishes her original price. This offsets any potential losses.
Problem #2: You can’t decide between cash basis or accrual accounting methods.
Peter Georgatsos, president and co-owner of Fotis and Son Imports Inc., a Greek food and wine importing company in Huntington Beach, Calif. When he took over the business from his father, the business was using a cash-basis accounting method. This approach required him to record revenues when he actually received cash and the expenses when he actually paid them, regardless of when he billed. To keep inventory up, they had to rely on a line of credit from the bank.
Solution: Choose the method that best suits your business operation and use good accounting software, along with the counsel of a knowledgeable accountant.
Georgatsos recently switched to an accrual system. This requires him to report income in the fiscal period when he earns it and deduct expenses in the year he incurs them rather than the year he pays them.
He also set up his books with MAS90 accounting software. He inputs information into the system, and his CPA logs in remotely to make sure entries are booked into the right accounts. “With the old way, we took all the stubs to them and had to wait while they inputted them,” he says. “There was a lot of room for error. Now we have all the information at our fingertips and can see month-to-month and yearly trends.”
Good software for small business owners is QuickBooks, Forman says. “It’s easy to figure out and fairly universal,” she says, adding that you can pay a lower rate for a CPA’s assistant to periodically check your work for errors.
You’ll still need full-time CPA help, however, says Julie Gnerre-Bourgeois, who owns Giuseppe’s Pizzeria & Ristorante’ in Meredith, N.H., and relies on her accountant to do the clerical work she’s too busy to tackle.
“You could spend hours and hours doing [paperwork], and it takes away from what’s most important,” she says.
Unlike Georgatsos, she relies on cash-basis accounting because it best suits her business. “A restaurant is not the kind of business where you wait to get paid,” she says. “Your income is on-demand. What comes in, comes in, and what goes out, goes out. I like to know what I’ve got.”
Problem #3: You can’t decide whether to hire more staff.
Georgatsos remembers when he hired a delivery driver. Until then, he and his father and sister were making deliveries. The hire seemed painful at the time. “The driver wanted X amount of dollars, and I wondered if it would cut into my income,” he recalls.
Solution: If you’re wasting time on tasks unrelated to your strengths, you can afford it.
“Now I can see that it’s better to hire someone to do something that was occupying my time,” Georgatsos says. “Now, I have more than 35 employees.” He notes that when hiring, do so gradually. “Get to a point where you need the person to justify it, and then bring them on. Payroll is something you owe right away, so it could affect cash flow.”
You can cut costs by hiring help on an as-needed basis. Berman, the graphic designer, had a full-time staff of seven. Two years ago, she changed her agency into a virtual operation, got rid of office space and convinced her staff to work from home. “I still have seven employees, but they’re freelancing and paid per project,” she says.
When in doubt, use customer happiness as a barometer, Gnerre-Bourgeois says. “If the phone is ringing and no one picks it up, you’ve potentially lost business. It takes money to make money. Sometimes I overstaff a little bit to accommodate great customer service,” she adds.
Problem #4: You need a big-ticket item.
As Georgatsos’ business has grown, so has his overhead. He’s had to get trucks, property, even a new phone system.
Solution: Invest in your business by buying, not leasing.
Georgatsos is a proponent of buying good equipment, taking care of it and selling it when the time is right. “We own our own building and equipment. We control our destiny,” he says.
Forman says a lot of people make the leasing mistake. “Someone is making money on a lease deal, and it may not be you. Certain things make sense to lease because of maintenance or the fact that you can upgrade, like an expensive photocopy machine. But you wouldn’t want to lease a computer, and you’d be surprised at how many people do it,” she says.