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Do you get a little anxious about the subject of financial management? If so,you're in good company. Many wood flooring business owners get uncomfortable when it comes to the money side of their businesses. After all, they're usually wood flooring experts, not MBAs. Take heart, because a lot of myths have contributed to this unease.
Regardless of your level of financial savvy, you can dispel the myths of financial management and learn the realities. By doing so, you will be armed with some easy-to-understand strategies that are simple to implement. What's in it for you. More confidence and a stronger business. Having a financially vital company is essential in order to grow and thrive in the years ahead, so take a look at the following myths and realities, and calm your financial management fears:
Myth: I don't have a background in accounting or finance, so I can't establish clear financial objectives for my company.
Reality: Everyone who is savvy enough to own a business intuitively knows the basics: You are selling products or services to make a profit. That is the essence, and everything else flows from there. You don't need to be proficient in accounting; you need to be clear about your goals. For example, you may want to:
- Increase the volume of what you sell
- Decrease the time it takes to collect your receivables
- Decrease debt
- Increase your profit margin
- Increase the number of projects.
Decide what is important at this stage of your business, and set up a system to monitor your progress. Of course, feel free to ask your CPA for help in how to easily track your targets.
Myth: I can let my accountant make the financial decisions for my company.
Reality: Your accountant is an important part of your extended team; however, you can't expect your accountant to make decisions for you. Although critical to long term profitability, the financial perspective is not always the only determinant in making business decisions. I'm not suggesting that you ignore your accountant, rather, factor his or her advice into your decision-making process. The role of the CPA is to make sure that your financial house is in order. Think of your accountant as a trusted advisor who is an important influence on you and your business.
Myth: I've never been successful working with a budget, so it won't work now.
Reality: The past does not equal the future! Create a budget and monitor it monthly or weekly so you can track the progress and success of your business. Establish two basic categories:revenue (i.e., sales of products/services) and expenses (cost of goods/services sold, marketing and administrative expenses, interest expense, taxes, etc.). Make a spreadsheet with these categories and project your monthly revenue and expenses over the course of the year. Then, check your progress weekly or monthly. Soon, you will identify patterns that will be extremely helpful in the planning process as your business grows.
Myth: Booking a big contract is money in the bank.
Reality: This is simply untrue until you have received payment and the check has cleared. Many companies receive orders or contracts of an impressive size and then spend money against these receivables to fulfill the order. Often, they are in a major cash squeeze until they receive payment. And what happens if the payment is late. Many find themselves in a real jam because they are not capitalized to handle large orders.
To avoid this, establish a clear payment policy for your business. Aggressively monitor your receivables and make sure you collect them when they are due. On large orders, you may want to have a policy of progress payments (e.g., one-third on signing the contract, one-third on delivery and one-third with terms). There are other ways to guarantee payment, including joint check agreements, bank drafts, secured payments, and UCC filings. Learn what is standard in your industry and work with your CPA or another financial professional to create a policy that works for your company.
Myth: We received an order from a large company that insists on its terms. If we want the job, we have to go by what they want.
Reality: Anything is negotiable. First, determine the credit-worthiness of your prospective client. Just because it's a big company doesn't mean that company pays its bills on time. Do you homework. Second, find out how other companies have dealt with this client. Third, if accepting the client's terms is just too overwhelming (e.g., you need to invest in so many resources that it will be an excessive strain on your finances), step back and evaluate whether your business can handle the account at this time. It may not be the best time for your business. Finally, if your product or service has a truly unique element (in other words, it is not a commodity), you have more negotiating power simply because the client may have difficulty finding the same thing elsewhere. This is a great reminder about the importance of having a unique selling proposition.
Myth: I have the world's greatest client who will always be my bread and butter.
Reality: Watch out! When a business becomes dependent on one key client, it can be a prelude to disaster. A business should have multiple customers so that it does not become dependent on any single entity for a large share of revenue. Scan your client list and imagine what would happen if any one of them disappeared. If you choke while doing this exercise, don't despair—the solution is to continue cultivating a diverse client base. Then, the loss of a single client won't be as painful.
Myth: OK, I understand how having only one major client is risky, but surely three or four key customers are enough.
Reality: Again, no. Here's a rule of thumb: An individual client should not represent more than 10 percent of your revenue.
Myth: I want to build this business quickly, so I'll do anything to create sales volume.
Reality: If you'll do anything to build volume, chances are, you're not thinking in terms of profitability. You need a full understanding of how you are pricing your jobs to know whether the revenue you book is profitable. Selling your installations at razor-thin margins could ultimately be detrimental to the business. Think of it this way: It's not just what you make, it's what you keep that counts.
Myth: OK, I got it! But what about cutting an estimate just this one time so that we can do business with this client?
Reality: Usually, when you cut price to buy business, you may win that project, but you won't get the relationship. By cutting price from the beginning, they'll always think they can squeeze you. It's even possible that the word will get out that your company will do anything to buy business, and you get the reputation of being a price-cutter. Obviously, the choice is yours. The bottom line, though, is that this usually is a bad strategy—no matter what the short term gain.
Myth: It's no big deal to pay my employees "off the books."
Reality: Paying employees "off the books" is a big deal. By doing so, you become a partner in tax evasion and therefore are breaking the law. Plus,you eliminate an important deduction for your business. Many people request to be paid off of the books, but it isn't your responsibility to help them skip out of paying income taxes. It's your job to grow a profitable, legitimate company, and to have steady, reliable employees who are committed to your company's success.
Myth: Since payroll is our biggest expense, we can manage it by paying nominal wages and benefits.
Reality: A fundamental principle is that when you pay your employees fairly,they will treat you fairly. Shortchanging salaries usually results in high turnover,unless you're in a market where you're the only real employer in town. (And in that case, you're simply being abusive by taking advantage of your employees' geographic misfortune.) Successful companies tend to pay their people more than their less successful competitors do. This can be a competitive edge for your business, so remember not to be penny-wise and pound-foolish.
Myth: I don't want my employees to know about my company's financial condition.
Reality: In the age of transparency,that's a difficult premise to uphold. It's interesting to note that companies with an "open book" management style tend to have employees who are more engaged and more sensitive to the financial issues that the company faces. If you have to temporarily cut expenses—even payroll—a more open policy demonstrates that you really had no choice other than to make such a decision. In many cases, your people will rally and come up with ideas as to how you can generate more business.
Myth: It's bad to have debt.
Reality: It's bad when you have too much debt that you can't repay. Just as we all have debt in our personal lives, incurring debt is a natural part of the business cycle, whether it's borrowing under a line of credit while awaiting receivables or borrowing to expand your facility. The key is to be prudent and borrow within the capacity of your business.
We have revealed and dispelled some of the biggest financial myths,and, now that you know the fundamental concepts behind managing small business finances, it's time to take a couple of ideas that you got from reading this and apply them to your business. And, more importantly, don't be intimidated from learning more about the principles of financial management. Small business owners who are proactive about educating themselves about financial details and who actively participate in their company's financial management can end up ahead of their competition—and well-positioned for the future.
Your Financial Team
Your financial team is a vital entity that can help boost your business growth. Think about how you use the following financial professionals in your business:
CPA: Hire a CPA who has experience with companies like yours. Determine how much time will be devoted to your company in the course of a year, and take advantage of those meetings. Your CPA will tend to know more about you than just about any other financial professional, so be sure you’re comfortable with your choice.
Insurance broker: An insurance broker can assist you with evaluating everything from health insurance for your employees to property and casualty insurance to protect your physical assets to business interruption insurance. A broker’s job is to find you the best value for your needs.
Financial planner: A certified financial planner or CFP can help you with everything from your personal investment strategy to helping you choose the best retirement plan for your company. Make sure you use someone who will look at the big picture of your business, not someonewho is compensated primarily by commissions from selling particular insurance or securities.
Banker: Your banker can be a wealth of information and an advocate for you. Keep your banker informed about your company’s progress on a regular basis. By knowing more about your business, the banker’s role can extend beyond conventional bank products to introductions to key resources or prospective clients.
Business consultant: Your consultant has the broadest view of your business and, as a result, can offer you a wide scope of services. When your consultant is financially savvy, this adds another dimension to strategic financial decisions that you will make as your business grows.
None of these professionals work in isolation. By functioning as a team, they can bring the best resources, ideas and strategies to help you grow your business.