In my years as a CPA, I am have been involved with literally hundreds
of businesses. They have been of every type from wholesale and retail
to professional to manufacturing. I have seen very successful businesses
and, unfortunately, I have witnessed companies go out of business. I
have also seen every type of business in between the two extremes. There
are many management styles,
innovations, inventions, businesses with many clients and customers and
businesses with few clients or customers. The one common denominator
between success and mediocrity or worse, failure is the ability of the
business to manage cash flow and taxes in accounting.
It is my experience, that most business owners believe that the
successful businesses have the most volume and customers. This is
certainly a key component to success. However, it is what and how the
business owner utilizes the cash flow from their revenues that
ultimately determines the long-term growth and stability of their
business. I think I can say this has surprised even me, and only through
my observation and experience have a seen how proper management of cash
flow is the key component to a business's future.
1) Unrealistic expectations regarding future results
2) No planning for current and future cash flows needs
3) No contingency plans and/or reserve for difficult situations of a specific business nature or an overall economic nature.
4) Lack of understanding of the overhead of the company Let's tackle
each pitfall and see how we can find a solution for the small business
owners
1) Unrealistic Expectations Regarding Future Results Many business
owners perceive future results will either meet current results or
exceed them. Business plans are then made based upon these expectations.
A restaurant owner will have a good restaurant business and think of
adding a second location, assuming things will go as well at the second
location as the first. A manufacturer will buy an additional piece of
equipment assuming sales are going to increase to require additional
capital investment. A real-estate developer will start a new project,
while working on a current successful project. The examples are endless.
Truthfully, the future results almost never meet the expectations of
the business owner. This inevitably leads to cash flow problems because
the successful business is being sapped of cash by the new venture. The
ONLY WAY to expand a business venture is to have a plan based upon ALL
POSSIBILITIES, riot simply that business will always meet or exceed past
results. A plan should be implemented that ensures there will be
sufficient cash flow if things do not work out as planned. Enough cash
should be available to withstand any type of economic or business
condition. If an expansion or addition cannot adequately withstand a
decrease in expected results, then more times than not, problems will
occur. The best method for evaluating cash flow needs is to use a cash
flow projection worksheet, which I have attached to this report. The
worksheet enables you to enter different scenarios into the worksheet My
favorite method is use a best, average and least favorable methodology
to determine what my future cash flow expectations will be. This will
allow you to be prepared for all future possibilities regarding your
business expansion.
2) No Planning for Current and Future Cash Flow Needs Most small
businesses operate by what I call "a seat of the pants philosophy", when
it to taxes and accounting. Namely, they don't utilize any planning
tools adequately anticipate and manage their cash flow needs. As an
example, take a business I am very familiar with, a CPA firm. Everyone
knows a CPA has their best months during tax season, namely March and
April. The end of the year is usually the slowest period because all tax
returns and audits have been completed for the previous year and the
following year's work has not begun. Clearly, strategy is needed to
build reserves of cash from tax season to maintain cash flow for the end
of the year. If we did not do this, we would run out-of money at the
end of the year. We are an example of a business that has a large
seasonality component. Most businesses have these high and low periods
during the year. A cash flow projection is the most useful way to
adequately plan for cash flow needs. I have attached an example of such a
worksheet in Appendix I.
3) No Contingency Plan and/or Reserve for difficult situations of a
specific business nature or an overall business nature. Every business
should a set-aside reserve for difficult or unforeseen situations. I my
experience, the businesses that have such a reserve are the ones that
have long-term sustainable success and those that do not continue to
struggle. In any industry, there will be ebbs and flows in the business
cycle. There will almost always be a consolidation of entities in an
industry during difficult times. The business's that can weather the
storms will be those that have long-terra success. They will even end up
more successful than they were before the downturn in business, because
after the consolidation they will get some of tine business from those
companies that fell by the wayside. Most businesses should keep a cash
reserve of 4 to 6 months at all times to pay for expenses and taxes. Not
only can these reserves be used during a cash crunch, but they also
enable a business owner to take advantage of business opportunities that
arise. For example, if your business uses commodities for production of
products, prices for this commodity will fluctuate throughout the year.
If prices drop during the year enabling you to purchase bulk amounts at
low prices, cash reserves will enable you to do so. It is hard to
believe, but when I get involved with businesses, all successful
businesses maintain an adequate cash reserve.
4) Lack of understanding of the Over head of the Company. In order to
foresee current and future cash flow needs business needs to have a
firm grasp of the their total costs. Many do not. They think they
understand their cost structure, but most of the time it is a loose
estimate of their costs that many vary from month to month and year to
year. It is very difficult to plan for future cash flow needs if a
business does not understand their payroll requirements, capital
expenditure requirements, insurance
expenses and most expenses the company incurs. If you want to increase
your profitability, you need to keep your eye on your overhead and look
to decrease them. In fact, decreasing overhead is often considered to be
the easiest way to increase net profit numbers.
Have your CPA review your insurance to determine if you are over or
under insured. Don't make a large capital expenditure or sell any part
of your business without consulting with a professional. Also, a CPA can
be valuable resource to review if your expenditures are in line with
your industry standards. Many business owners assume that many expenses
are necessary, when they are in fact not or can be significantly reduced
by alternative solutions. We often get so involved in our little world
that we need a third-party to help us analyze our business from the
outside, not the inside.
It is very easy to fall into these types of traps. Today's business
environment and loan companies won't hesitate for a business owner to
become so tempted by the "easy" credit of credit cards, home equity loans, accounts receivable factoring
that companies get into to trouble faster then they realize what
created the problem in the first place. Don't let this happen to your
business and personal life. Resist the temptation, because over time,
these decisions almost always backfire.
I have written this paper based on over thirty years of experience in
the accounting profession, as both a Chief Financial officer for a
private company and a practicing CPA in public accounting. The greatest
pleasure I get from what I do is helping businesses succeed and grow. I
look at myself as the doctor of businesses. When somebody goes to the
doctor they know they are dealing with a professional with a wealth of
experience by seeing patients and having an education in their field of
expertise. Doctors see problems that patients never experience. Don't
TRY TO BE YOUR OWN BUSINESS DOCTOR. CONSULT WITH A CPA WHO CAN GUIDE
THROUGH THE MAZE OF BUSINESS COMPLEXITY Andrew Brody is a Certified
Public Accountant located in Miami Lakes, Florida with a satellite
office in his hometown of Weston, Florida. He lives in Weston with his
wife and two daughters. He can be reached at asbcpa@cpaofmiami.com or
305-231-2150.
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