Heading Off Business FailurePosted on May 14th, 2017
Outsourced Accounting Department, Inc.
This article from Entrepreneur Magazine, “7 Crucial Money Tips to Failure-Proof Your New Business” reminded me of several real-life experiences I’ve witnessed with clients and former employers. Briefly, these are the author’s 7 tips:
1. Avoid unmanaged cash flow or sloppy books.
2. Obsess over accounts receivable and accounts payable.
3. Know your COGS and your margins.
4. Diversify your revenue.
5. Don’t overpay your taxes.
6. Don’t overpay for anything else.
7. Watch your time as closely as you do your money.
My previous article, “The Difference Your Method of Accounting Can Make,” is a perfect example of items 1 to 3 on the above list (and a few more not listed here). Not knowing where you are financially due to sloppy bookkeeping, or an inappropriate accounting method, can disguise the underlying causes of profitability and cash flow problems. In the case of the client my article was about, it disguised the fact that accounts receivable were running slow, and that below-market direct labor rates, NOT “operating losses” (based on its tax return), and NOT employee overtime, was the cause of both its cash flow issues and employee turnover.
Regarding item 4 on diversifying your revenues, having a major sales concentration with one or two customers is a cause for CPA firms to footnote this kind of threat in audited financial statements, and for good reason. Over the years, going all the way back to my bank commercial lending days, one of the most common reasons I’ve observed as to how businesses get into financial trouble is a major sales concentration with one customer. If anything happens to that customer, even if their payments on accounts receivable just slow up a bit, it can have a major impact on your company’s cash flow, not to mention what happens to your company if they go out of business completely.
Item number 5 is fairly obvious. It’s a matter of finding a tax accountant or CPA that does Tax Planning for Small Business Owners throughout the year, not just at year-end.
Item 6 I think should also be fairly obvious. But that said, again going back to my banking days and some client situations since, I’ve observed that for some engineering types, having the latest and greatest equipment is almost an addiction. And if that equipment is not supported by sufficient sales volume and production levels at an appropriate margin, it just adds to the company’s sales breakeven point, such that, the slightest dip in sales can create major disruptions in profit and cash flow:
And finally my favorite, item 7, watching how you spend your time. It’s amazing some of the things I’ve seen small business owners focus their attention on. Referring again to my earlier point about engineers, for some small business owners it’s all about the “toys,” while to others, it’s all about watching the pennies when the ship is headed right toward an iceberg. An expression I used to use as a financial consultant to emphasize what’s important is “revenue generating activities.” I’ll have more on item 7 in a future article.
Again, the appropriate method of accounting, and understanding your financial statements, your margins, and your cash requirements, are crucial to a small business’ ability to survive.