Why Cash is King
Unlike in a chess game, in finance, this King is the most versatile and easy to maneuver. It’s about liquidity.
HAVE YOU ever heard the expression “Cash is King”? I heard it in business classes and around the office for a while before I really understood what it meant. You’ve probably guessed that it either means that money is king—in the sense that it makes the world go ‘round—or that compared to other forms of business assets, paper money is king because it’s the easiest to convert into other things—equipment, investment accounts, expansion, tools, etc.
Although we talk about cash in everyday conversation to mean the wad of bills you carry around in your wallet or purse, for accountants and financial professionals it means your currency (including coins) on hand, bank account balances, negotiable money orders and checks. And, my friends, this kind of cash is king because it’s the most flexible form of asset and is the easiest to work with. It’s liquid. In general, if you have cash in your possession, you can always do something with it immediately, if the need arises.
Cash is important to businesses and especially to start-ups, for several reasons. As you probably don’t have a wealth of financial assets when you’re trying to start a new business, it is in your best interest to stretch those coins and make them count. With cash, you can purchase assets to run your business, pay employees, pay bills and other expenses, etc. without finance charges. The best part about cash is that if you have it, you clearly don’t have to wait for it to come in. That sounds a little silly, but let me explain.…
Imagine that you’ve recently started a business. You’ve built it from the ground up and have already hired an employee to assist in the growth and development of your new business. You even have a few regular customers who love your product and pay their bills promptly at the end of every month. You’re confident that your customers will keep bringing you their business, so toward the beginning of the month, you decide to go out and purchase new computers and printers for yourself and your employee to use for work. You want them to last for a while so you buy the top-of-the-line equipment. Since you trust that your customers will pay their bills at the end of the month, you aren’t uncomfortable using up the last of the cash in your monthly operating budget, since you paid all your bills on the first of the month. You did, however, remember to leave enough money in the operating account to pay yourself and your employee on the fifteenth of the month.
When you return to your office—in a funky old warehouse that you paid very little for—you walk in the door to a swampy mess all over the floor. Your tiny bathroom has flooded, leaving your office a horrible mess. You discover it will cost quite a bit to repair the pipe, get the floor cleaned up, and replace the carpet. And all the cleaning and carpet companies in your area only take cash. What are you going to do now? It’s too big a mess to try to tackle yourself. You can’t afford to get it cleaned up without spending the cash you allocated to your salaries, and you and your employee can’t afford to miss a paycheck.
This story could go on and on but the basic concept is already clear. If you can, always retain a cushion of cash resources. Why? Because cash is king. Some businesses don’t extend lines of credit, some don’t accept personal checks or credit cards, and some still don’t accept wire transfers. Truthfully, most businesses accept all of those things, but they charge a premium for processing and it often takes time to process, sometimes several days. The bottom line is that cash is king because everybody accepts it. And if you have it, you can use it immediately.
In fact, there are benefits for people who are willing to pay cash. During the handful of financial crises over the past century, cash became the leader in financial transactions because there was no need for any trust behind it. As the markets dipped, “I promise to pay” carried less and less weight. What businesses wanted was cash (paper currency), certified check, or direct transfer. In fact, most financial crises of the last century could be credited to people and businesses saying that they could afford to pay for things that they really couldn’t. They didn’t actually have the cash they claimed they had to back up their purchases. They defaulted on payments and that was that.
So cash is king because it’s there when we need it and it keeps us honest. In a world dominated by leverage, payables, receivables, etc., still the only real guarantee to fiscal stability is having cash. If you’re starting a business or growing a new one, always ensure that you have cash resources available.
S.G.
The True Cost of Money and Opportunity
Numbers aren’t always evident, especially when you need to finance some of your activity.
MOST SMALL BUSINESS OWNERS and entrepreneurs know that money isn’t free. But many don’t recognize that even when you have capital resources (money in some form) at your disposal, those resources have an opportunity cost.
Cost of money and opportunity costs
Given that your resources are limited, you will frequently have to make choices between two or more ways to spend a sum of money. Your opportunity cost in these situations is the cost of passing up the next-best cost when choosing between two or more alternative expenses.
Unless you are a large bank in the U.S. and it’s back to 2011, then you probably don’t have access to interest-free capital (Ha-Ha!). Most of us, in our personal lives and in business, rely on borrowing needed funds from a lender like a bank or credit card company. These capital resources are usually lent to a borrower at a certain interest rate and repayment term. You may think, “What’s the big deal? Why do I care about 6, 7 or 8 percent interest, or even 15 percent interest?”
Well then, answer is simple: When you’re dealing with a very small amount of money, or a small amount with respect to the size and scope of your project, over a short period of time, then in fact it may not matter a lot. However, if you begin to grow and you start dealing in larger amounts as your equipment needs increase, your material supplies grow, etc., you may begin to notice a financial “sucking sound.” This is the proverbial drain working hard on your operating account. These types of expense can just kill a business without the owner even being aware of it.
Also, these types of circumstances commonly affect seasonal and cyclical businesses, no matter whether they are manufacturing companies, wholesalers, distributors or retailers. It doesn’t matter. The cost of money and the opportunity cost of money still exist.
Opportunity costs made simple
What about those opportunity costs? Business owners have a hard time admitting to the opportunity costs they have incurred by making certain decisions. Think about this for a second.
Let’s say your company really should exhibit at a trade show that has an exhibition fee of U.S. $2,500. But instead you decide to buy a much-needed new laptop for the company. The average person might say, “So what? I would have spent $2,500 either way, and I chose to buy the laptop over attending the show. Big deal.” However, this thinking is far from correct.
The actual ramifications of the choice may never be known, but we can loosely estimate them. Let’s say you skipped going to the trade show. That would have cost $2,500. So you didn’t pay that out. But by not going to the trade show you also didn’t attend any of the keynote presentations or workshops, potentially missing out on cutting-edge industry information and insight. Now what was the value of all of that information that you also by-passed?
Moving on, what about all of the relationships, business or otherwise, that may have come from you participating at the event? How many new contacts would you have made? How many of those contacts and relationships could have become new customers or could have referred you to new customers? And as a last and most important question: How much new business could have been generated by the industry information, contacts, relationships and referrals you would have accumulated from the trade show?
If you answer all of those questions and add up all of the values and potential revenues, you now have the opportunity cost of that $2,500 computer. If you take that probably extremely large number and add in the $2,500 you spent on the computer, you will have its true cost! It’s crazy when you see what you really spent. Really.
Cost of money counts
Now that we’ve explained opportunity cost in a very basic way, let’s shed some light on how the cost of money can really sneak up on a growing business.
Let’s say you are a small business, manufacturing a product halfway around the world for sale in your home market to wholesalers and distributors there. You have done all of the necessary legwork and you’ve been successful at creating a replacement widget to serve an already existing demand for a large wholesaler or distributor. You think you’re doing well. Maybe you took in a few million in revenue last year, your business is growing nicely, and you are on your way.
Now you’ve built this great new product and you have found a buyer. The buyer represents 800 retail stores and they want 20 units in each store right away. These units cost you roughly $62.50 and but your client has every intention of selling these units for $200. His number may not be important, but your cost is. Now, you will be lucky if the buyer is willing to put any money down (i.e., prepay a portion of the invoice upon ordering). Most of these buyers want favorable terms or they want you to store the product in your warehouse and pay you as it comes off your shelves. But, let’s assume you are a great negotiator and the buyer wants and needs your product. She agrees to pay you 25% down, with her order, but the rest is net 30 (the remainder of the invoice is due 30 days after delivery).
So you speak to the factory in that distant land. They say the cost to produce your 16,000 total units at $62.50 is $1,000,000. As you know, your customer has agreed to pay you 25 percent with her order, but the factory wants 50 percent pre-paid to start production and the remaining 50 percent F.O.B. (Freight On Board). That means the factory gets the rest of their money before the ship leaves with the product for your warehouse.
What do you do? Well, you will have to first fully understand the timeline for payments between all parties involved, plus production time and shipping. Let’s say production takes eight weeks, then shipping on a cargo ship takes five weeks to the port nearest you, then one week on a dedicated truck to your facility, then five more days to get from your warehouse to the buyer. Then there are 30 more days until you receive the remainder of your invoiced amount.
All in all, that process takes approximately four to five months in total. You had to pay the factory $500,000 up front and the remaining $500,000 when the vendor loaded the goods on the boat, three months before you would get paid the balance due from your customer.
What do you do? Let’s keep the math simple. One approach is to take out two loans. You could borrow $250,000, then come back 45 days later and borrow another $500,000. But you would have to pay a second round of loan origination fees that way. Instead, you would most likely take out one loan or line of credit after you collected $250,000 from the buyer. So you would have to borrow 750,000 from a lender for 5 months. Following me?
Suppose you borrow $750,000 at 8 percent interest annually. This means that just your interest expense for borrowing the money is $25,000. Most entrepreneurs fail to account for this additional expense when pricing the product for the buyer.
I’ve seen businesses attempt to operate on razor-thin margins and accidentally contractually commit to supply product at a price that causes them to lose money! How crazy is that! In this example you would have to add approximately $1.57 to the $62.50 to cover your interest on your loan, which is your “True Cost of Money,” making the actual sale price to the buyer $64.07.
The Annoying Ambiguity of Business Banking
As Bob Hope once said, “A bank will only lend you money once you can prove that you don’t need it.”
THIS SIMPLE YET BRILLIANT quote sums up the banking experience for all entrepreneurs and small business owners. Banks and their loan officers love to give a borrower’s leash a strong yank the minute business financials fall below expectations, or if receivables experience a downturn.
But what about an entrepreneur’s strategic efforts to grow a business via actions that temporarily depress short-term performance, or even growth? For example, let’s say you own a manufacturing plant, and your team has recently developed a new product with lower material costs, lower production costs, a higher gross margin and some sort of new competitive edge in the form of performance, market interest or innovation.
There is just one problem. Your plant is only so big, you’re limited on labor resources and you are hoping to replace an older, antiquated product line with the new one. Now you’ve made the choice to shut down the old line, retool that portion of the facility and make ready for larger volume and better quality control. But in doing so, you are incurring some irregular additional expenses as well as strategically shutting down a percentage of your regular revenue, causing you to run in the red for a short time. Your banker will flip, and most likely ask that you reduce your loan balance, if not pay it off, unless you can collateralize the line with PLENTY of assets. And presto! You’ve just proven Bob Hope was right.
As entrepreneurs and business owners, we often look at things with a polar opposite viewpoint from bankers. They love the TTM (Trailing Twelve Months) measuring stick. For them, everything is based on mitigating risk. That’s why past performance is the most common tool used by lenders when they review your current performance and future forecasts and projections.
We entrepreneurs see risk as a necessity for growth and expansion. As Jack Welch, former CEO of GE once said, “If you’re not constantly innovating and finding new ways to grow, you’re already dead.” This is why most entrepreneurs and small businesses that are in the ever-so-fun start-up phase tend to rely on personal lines of credit, friends, family, and private or angel investors rather than traditional lending resources such as banks and credit unions.
Crowd funding
One common misconception is that as a business owner looking to raise funds, you seek out only one or two individuals that could potentially provide the necessary capital for the project. If you take this route, it’s not bad, and it may be all the financing you will ever need. So if it’s easy to access, then great. Go ahead and get started. However, for those of us who may need multiple rounds of funding to grow the business to a certain size and scale, it may be smart to raise smaller amounts of funding from a larger, broader group of funders. This is sometimes called crowd funding.
Like anything, crowd funding has its advantages and disadvantages. Obviously, if you draw funds from a larger number of backers, you will multiply the time you spend on “investor relations,” e.g., calling, meeting, presenting and closing. But there’s a potential pay-back in this. If you can successfully spread the “raise” over a multitude of investors, and specifically those will lower net worth, you may be able to leverage these relationships in the future. If later you need additional capital, you can explain the risks of not re-investing to keep the business alive—and also keep their investments alive.
Now, we’re not urging you to raise money from those who can’t afford it or to mislead anyone on the prospective success of your business. We are simply saying that an individual with a higher net worth could provide a first round of funding to get you going, but later, if you need more money to grow or to finish the launch, build out, etc., hold back on investing additional funds. In these circumstances, a higher-net-worth individual may just say no thanks, accept the loss and most likely write it off at tax time.
Some countries have regulations that control the number of investors that companies with a particular type of business structure can work with. For example, in the U.S., Limited Liability Companies (LLCs) can only have up to 100 investor members. Therefore, if you are based in the U.S. and anticipating more members/equity partners, etc., then you may need to choose a different type of business structure. It’s best to get professional advice on matters like this.
I once knew a gentleman who had a long-standing relationship with a bank in his home town. This gentleman’s business was founded by his father decades prior. After assuming control of the family business and growing it significantly, the gentleman decided to take out a loan to “grow the business.” Because this was years ago, he simply collateralized the loan with his business and its assets, something most business owners would think twice about doing (in case they couldn’t pay the loan back and would lose the business to the bank). The borrower then decided to issue himself a few bonuses over the next few years, while meanwhile the business suffered. Eventually, the business could no longer service the note and the owner defaulted. But that was okay with this individual. He happily gave the bank “the keys” and moved on with his millions in bonuses. No wonder banks are pretty serious in sizing up the risks they face when issuing a loan!
Just remember, if you are lacking credit, personal capital resources and/or collateral, then traditional bank issued debt financing probably won’t work. It is common nowadays for a bank to obtain personal guarantees and other types of collateralization in an effort to mitigate any or all of the risk associated with business lending. So think creatively when you go after funding and shake the money tree with care.
LIFO vs. FIFO
If you’re a fan of the Marx brothers, you might think LIFO and FIFO are sisters of Groucho, Harpo, Chico, Gummo and Zeppo. No way!
IF YOUR COMPANY DEALS IN GOODS, you need to get familiar with the LIFO and FIFO accounting methods and, depending on where you are based, decide which one is best for tracking and accounting for your inventory and the cost of goods you have sold. There are two methods: Last-In, First-Out (LIFO) and First-In, First-Out (FIFO). The names refer to the way you assign value to your stock on hand (your unsold inventory) in your bookkeeping. And as their names suggest, LIFO considers that the latest stock to arrive in inventory is the first sold, while FIFO assumes the oldest stock gets sold first.
A number of variables are important to consider. But before we take a look at them, we want to point out that this is certainly an issue you’ll want advice on from your accountant. So read on in the spirit of getting yourself up to speed for that conversation, not to take a decision based only on what you read here.
FIFO and LIFO basics
The primary issues to consider when evaluating these two methods of inventory accounting are:
• the impact to your business for the value of unsold inventory
• the cost of goods sold (COGS)
• the fact that both GAAP and IFRS accounting standards support the FIFO method, but IFRS standards do not permit LIFO (we’ll decipher that in a moment!)
If your business is based in the United States, your accountant follows GAAP: Generally Accepted Accounting Principles. It’s a set of rules that govern how your accounting data is created and reported. A second system, used in 110 countries, including those in the European Union, is called the International Financial Reporting Standard (IFRS). It’s based more on principles that you and your accountant can apply in your accounting activities. The U.S. Securities and Exchange Commission (SEC) currently uses GAAP, but plans call for a convergence between GAAP and IFRS by 2015. The importance of the foregoing is that both GAAP and IFRS permit FIFO, while LIFO is not permitted in IFRS-bound countries. In short, if you live in an IFRS country, you only really need to read half of this section!
Applying the principles and rules
Imagine a stack of goods arrives in your warehouse on Day 2 of your business. You ordered them on Day 1 at a certain price per unit, so they have a certain total value. One month later, you’ve sold half of them and re-ordered stock. It turns out that the new stock costs more, or less, per unit than your initial stock. So you add those goods to the top of your stack. What’s the value of that stack? Do you average the cost of goods? Do you sell your old, first stock first, or your new, restock first? How will your choice affect your tax bill and your profit? These are the questions that LIFO and FIFO address.
Obviously, value you assign to your unsold inventory and/or COGS will have a direct impact on your company’s profitability and tax liability. In order to get the big picture about how to determine the impact of LIFO vs. FIFO inventory accounting for your stock, we will walk you through three examples.
Example 1—The Shoe Store
Let’s suppose you are starting a shoe store. And suppose that each pair of shoes you buy as your start-up stock will cost less than the ones you’ll be buying next year as replenishment stock, due to inflation, increasing labor and transport costs, etc. In this case, your “First In” shoes cost less than the identical “Last In” inventory you will buy next year.
If you are tracking inventory using FIFO, you are selling the lowest COGS first and maintaining the highest potential profit. The value of your ending-period inventory will be the highest as well, because it is the most recently acquired at the highest cost.
If, however, you are using LIFO for inventory accounting, you are selling the highest COGS first and achieving the lowest profit margin. The value of your ending-period inventory will be the lowest because it was purchased at the oldest and lowest cost.
Example 2—The News Stand
Suppose now that you are opening a tiny news stand outside a train station. Your business plan calls for you to start out buying a small number of copies of each magazine and newspaper you will sell to begin with, but due to your marketing efforts, you can expect to purchase higher volumes per item after the first three months. And you feel confident and that you’ll continue increasing your orders each quarter thereafter for two years. Your suppliers offer better pricing based on the volume you buy, so you can plan on decreasing your per-unit costs of goods over time. Therefore your First-In newspapers and magazines will cost more than the Last-In items.
If you are using FIFO inventory accounting here, you are selling the highest COGS first and achieving the lowest profit margin. The value of your ending-period inventory will be the lowest as well, because it is the most recently acquired at the lowest cost.
If, however, you are using LIFO for inventory accounting, you are selling the lowest COGS first and maintaining the highest profit margin. The value of your ending-period inventory will be the highest as well, because it was purchased at the oldest and highest cost.
Example 3: Comparing the impact of the two methods
In an article entitled “Rules for Changing From FIFO to LIFO,” John Cromwell of Demand Media makes an elegantly simple calculation.*
To illustrate the difference in methods, assume that you started your business this year with no inventory and acquired three lots of goods during the financial year. The first 1,000 units cost $3, the second lot of 1,000 cost $2 and the last lot cost $3. Prior to this year, you had no inventory. If you sold 2,500 units, your ending inventory balance per LIFO would be $1,500 and $500 under FIFO.
Financial reporting strategies
If your company’s location allows you to choose between FIFO and LIFO, then based on the primary audience you need to address, there may be financial reporting strategies that influence your choice. The first step is to identify who your primary audience is for your company’s financial reporting. Once you know that, you will be able to determine the method of inventory accounting that best reports the targets they are expecting you to meet. For example,
• Tax liabilities may vary, depending on the location of your business, the structure of the business’s ownership, and your inventory accounting.
• Lenders may place specific performance requirements on the businesses that favor one method over the other.
• Investors and investor analysts may have certain expectations for your company’s financial performance over a specific period of time that matches best with one or the other method as well.
In addition, there may be an audience for a period of time that prefers to pursue lower inventory levels and lower tax liabilities because of a specific financial or tax plan. There could be lenders that require maximum inventory value and maximum profitability for the immediate period to establish confidence for a major capital funding or refinance initiative.
And in case you’re wondering if you can hop back and forth between the methods, either from year to year or from product to product, the simple answer is “No, not easily,” and sometimes just “No.” Again, consult with your accountant to get complete, specific answers.
Tracking and reporting issues
Another factor that enters into this discussion is your available resources for inventory accounting. The LIFO method can often lead to some significantly aged inventory items that you need to track and report on for an extended period of time. This becomes more complex than the FIFO method, where there is much less aging of inventory. If your business has lots of individual items that need tracking and you have limited bookkeeping resources, FIFO might make more sense, all things considered.
Market issues
Your choice of method will also come into play as you monitor and forecast the economic stability of your business sector and the overall market. In a more stable market, the LIFO vs. FIFO choice is pretty straightforward. The complexity comes in when you consider the dynamics of international business and the international economy.
If your business is locally focused (say, you grow tomatoes for the local farmer’s market), you should be pretty well insulated from global situations and your accounting decision will be fairly obvious. But if your business buys and/or sells internationally, things get more complex. The impact of inflation on your COGS coming from one part of the world may be completely different than a deflationary impact to your selling price in a different international market. Your strategy about where you purchase and where you sell internationally may show very different results, depending on your method on inventory accounting. Also, if you picked your method of inventory accounting to be consistent with a specific financial goal, you must closely monitor and adjust international purchasing sources and customer sales outlets that respond to changes in inflationary or deflationary impacts to your plan.
It is important to remember that the method of inventory accounting you use is a tool that reports financial information in a specific way. So work closely with your accountant to determine both your strategy and the method that works best for you.
Trade Show Tips and Tricks
Many business people think trade shows are still worth attending, even in our digital era. The associated costs, however, can kill you. Think smart if you exhibit.
AS COMMERCE is conducted more and more via the Internet, people question the value of attending or exhibiting at conferences and expos in their business sectors. So much of it is just schmoozing and hype, or dry slide shows in drafty ballrooms. If you are in a line of business that features an annual or seasonal event, you’ll need to decide if it’s smart to be there. The math is not just about money.
Despite the digital marketplace, many feel that the chance to meet, talk, snoop, and even do business is still worth it. Before you make an impulsive decision, write down a specific list of goals you hope to achieve by going. Get the full costs: travel, lodging, entertainment, space, décor, materials, time spent away from the office, and anything else that applies. Then ask yourself if you think you’ll make enough back (in orders or connections or visibility or whatever) to justify the time and expense. And look into cheaper ways of attending, like renting a table or panel in the small business section, sharing space with a compatible company, etc. If you’ve never attended before, maybe just walking the show this year will help you decide what to do in the future.
I’m not trying to bash conventions, trade shows, or the invaluable support required from countless services and hard-working people when operating every facet of a trade show, convention or symposium. However, I want to offer vitally important information regarding the hidden costs of exhibiting at these events. As an entrepreneur or small business owner, you may not have been involved in the financial planning or bill-paying associated with such events.
• Do not scan—READ CAREFULLY—through exhibitor paperwork, set-up regulations, or any other documentation pertaining to the event before you sign up. Last year, it cost one of us less to fly round trip, halfway across the U.S. and back, to attend a trade show than it cost to have the television we rented for the show pushed on a cart for 200 yards (or meters) from storage to our exhibit space. We were victims of hidden mandatory labor charges, wouldn’t you say?
• Sometimes, it actually isn’t the exhibit space or the trade show booth that is the most expensive. Depending on the show location, a business can spend more money on mandatory set-up fees, handling charges, delivery expenses, disposal, carpet, etc., than they would ever reasonably expect. Be aware that moving in equipment, renting it, even the tape you buy to pack up boxes afterward are outrageously overpriced.
• And if you’re thinking, “I’ll just carry my own TV!” No, you won’t. Because the fine print in your exhibitor contract prohibits that.
So what’s the answer? When attending shows that allow for some flexibility, try a few simple steps:
• Find out if you can carry items for your exhibit space. Quite often, the mandatory labor fees only apply to items that cannot be carried by one person or to items that require the use of the venue’s loading dock.
• Next, research different exhibit tools that can be broken down and carried. There are numerous trade show resources that specialize in lightweight marketing aids such as stands, banners and booth enhancements that come with special carrying cases that can be checked as luggage or brought onboard as a carry-on. This can save a small business a ton of money over time, especially if the business plans on exhibiting at multiple shows during a year.
• If you decide to follow the tips above and ship items to the location ahead of time to avoid the hassle, simply call your hotel—“Good morning, this is (Your Name) with (Company Name) and I will be arriving on (Date/Time). I was wondering if I could send a package to myself, ahead of time.” They will likely say, “No problem. We can hold it in our luggage room.” This is extremely helpful because now, even if you splurge for shipping, you can still save on the handling charges found at most venues. Just take your package with you to the exhibit hall and carry it in on your own. That could pay for your plane ticket!
And now a word about trade show etiquette and follow-up. All of this seems blindingly obvious, but you’d be surprised at how many exhibitors fail to do the simple things that can make attending pay off.
• Ensure that your personnel at your exhibit know their job is to greet attendees and present your offering, not catch up on emails, eat lunch, or joke around with each other like they’re on vacation. Make clear what the dress code will be, have a schedule of who covers what and when, and line up your appointments well in advance, also allowing time (if possible) to cruise around and collect industry intelligence.
• Equip everyone with suitable meeting report forms (which could be templates in their laptops or tablets) that clearly capture the essentials of each meeting and define what and when the follow-ups are. After saying goodbye, your colleague should mark a priority code on each form for post-show processing.
• When you get back to the office, debrief and make follow-up lists. Continue to meet regularly to review progress (and dead ends) for all the leads you identified.
• If you want, you can chart what business you won, what contacts you made or made new progress with, etc. and monetize the results. That will help you determine whether it was a good investment to attend and make it easy to decide whether to do it again next year.
In the end, the message is simple. Industry events are often hugely beneficial and can be a great source for leads, relationships and education. Run a trade show appearance as a marketing campaign with its own P&L, then plan and execute your campaign accordingly. And go for it!
M.O.
Time Is Money—How to Get More of Both
Efficiency, smart prioritizing, discipline and focus are best practices for financial success.
IN DAILY BUSINESS, there are always reports, charts, spreadsheets, emails, meetings and other things that can consume significant hours of your day if you let them dictate where you focus your mind and energy. The key to effectively managing your daily business is to correctly identify the most important pieces of information you need to monitor, and to organize a method for handling and acting on that information daily. After all, time is money.
That’s why it is all about being efficient and focused. The financial success of your business radiates from the efficiency of your own daily routine. Your work habits for optimizing your phone for calls and texting, handling email, conducting or attending meetings and exchanging information set the tone and present an example for your associates. It’s essential to be well-organized and efficient, beginning with your daily routine.
An effective business manager also knows how to distinguish between those issues and events that are merely important from those that are truly urgent. It is far too easy to be drawn into the vortex of apparently urgent things which pull you off course, away from items you know you should have focused on first.
So do a little self-assessment, starting with a diagnosis of your current state. For several days, log your work life. Begin each day with a specific to-do list for the day. Note what you do with your time, roughly hour by hour. At the end of the day, total up the time you spent on various categories of activity: sending or reading emails; talking or texting by phone; sitting in meetings; searching the web; entertaining; preparing for upcoming events; and creating, reading or reviewing various reports. Compare your actual activity and results with your planned activity and goals for that day and give yourself a score. You may be surprised to learn how much time you spent doing things that sabotage your daily plan.
As you go through this exercise you will identify time wasters, those unproductive activities and habits that keep you from effectively leading, monitoring and managing the relevant drivers of your business. Are you writing long, vague emails that require cycles of back-and-forth clarifications? Are you micro-managing or not delegating effectively? Do you know how to get the most from the software tools you use? The challenge is to eliminate these obstacles. There are books, workshops, online courses and consultants who can help you develop or improve disciplined, efficient work habits. You probably have a few that work for you already, but you can always gain from fresh ideas and techniques.
And by the way, if your work log exercise reveals that you are indeed micro-managing, putting off decisions, and if you feel frustrated, overwhelmed, exhausted, scared or pessimistic, ask yourself if you are suffering from burn-out. It could be that your inefficiencies are tied to this common threat to entrepreneurs. We can’t get into a long discussion of burn-out and how to deal with it here, but we suggest that if you suspect that’s part of your picture, you deal with it as well as seeking to improve your work and thinking habits. You can find help in books, online, and from consultants and coaches. One quick tip: try to STOP, then CHALLENGE, then FOCUS to break out of the burn-out trap.
Work habits per se can only take you so far. In addition, you must develop the habit of focusing on the key drivers and goals of your business and relentlessly give them your top priority attention. You actually can afford to skim semi-important documents, not attend every meeting you are invited to, and dismiss non-essential matters that have less impact on your business. Knowing how many office supplies your company uses daily is far less important than knowing how many key products were sold and at what profit margin.
By developing these efficiencies and prioritizing ruthlessly, you will both free up time and become a better strategist and manager. That will directly and indirectly impact your business financially. You will want to check on certain key drivers every day, even if on some days you merely glance at the bottom line or scan an online report. Make yourself a list of the things that fall into this category. It may include:
• Sales and profit margins
• Inventory and production planning
• Labor (hours worked, capacity, productivity, etc.)
• Receivables
• Payables
• Human resource and employee issues
• Bank, tax and other financial issues or data
• External factors that affect your business (weather, current events, industry trends, etc.)
• Planning
• A weather forecast: is there anything brewing or exploding that needs your immediate attention which is not covered in the rest of your key driver list?
When you have identified your key drivers, you can set up a disciplined daily regime that will help you manage your business’s daily and longer-term performance. It will give you a far more pro-active point of view plus the time to plan and think as a business leader, rather than being an anxious hamster on a wheel. And as a bonus, the example you set with this approach will ripple out through your company’s evolving culture, and will instill confidence, efficiency and pro-active thinking in your associates.
What is Your Business Really Worth?
If you’re planning on selling your business, the first step is determining its value.
FOR MANY ENTREPRENEURS, it’s the start-up phase of business that they truly love (and often, are truly best at—these types are not so good at guiding the day-to-day, plodding growth that other entrepreneurs dream of). For others, the time has come to move on to another new venture, or to retire. And still others decide that running a business is just not for them. For these and a variety of other reasons, they all start thinking of selling their businesses.
But it’s hard to start planning to sell if you don’t know your company’s worth. You need to have a notion of this number to be sure it’s smart to sell. And of course you want to get a fair price for the business, according to its current market value. You hope to get enough money to help you make another investment, retire or move back into the life of an employee.
To learn the monetary value of your business, there are three techniques you can use.
• The first technique is dependent on your assets. This means that the value of your business may be equated to the value of your tangible assets. These include buildings, machinery, equipment, motor vehicles, and any other assets that your business owns.
• Another technique compares your business’s profile with that of other similar businesses that have sold, and adjust for significant differences. For instance, there is a market value for coffee roasting businesses. If you own a coffee roasting business, your tangible assets may not be factored into the valuation, but instead, your annual sales, customer base, and so forth will be considered.
• The third technique is income-based. Your business will be valued according to how much income and profit it generates. The higher the income and profit, the higher the value will be.
One of the factors that may affect the value of your business is the number of years you have been in operation. A reputable, established business will sell for a lot more than a business that has only been in operation for a few months. If you have been operating the business for a number of years, you’ve likely developed a solid reputation in your area and industry. The reputation you have and the clientele you built all equate to value when it comes time to sell your business.
Depending on the nature of your business, you might be able to handle the sale yourself, or with the help of the attorney you have consulted with over time. Larger or more specialized businesses may be better off being sold via a business broker. Such a person can help establish a price and locate interested buyers for you.
Either way, you need to prepare up-to-date data about your company’s performance, products or services, assets and employees. Gather all the records related to these things, including data on the number of employees you have and their levels of experience. This information, taken as a whole, will help establish the value of your business in the marketplace. In general, the higher the number of well-trained, highly qualified employees you have, the higher the value will be.
The extent and condition of all your assets will also affect your sales proposition of your business in the marketplace. If you have sophisticated, expensive, working machinery, the value of your business will be higher.
It is always good to ensure that all your machinery, equipment and company vehicles are serviced and in good working condition before you sell your business. If they are in poor condition, they may affect your ability to find buyers or reduce the amount of money that you will get from the sale. Ensure that you have proper documentation and sales agreements for your assets. If you have any standing manufacturer’s warranties, provide these during the valuation process. In our digital age, proprietary software can be just as valuable as tangible property owned by the business.
More than the total assets and equipment your company has, however, it’s your company’s performance and potential that will make it valuable. A company that has lots of “stuff,” isn’t nearly as valuable as a company that is bringing in tons of money and can demonstrate upward trends in sales performance. The longer your company’s trends, the safer, and thus the more valuable, your company will be to a buyer.
Internet businesses can be worth more than you’d ever imagine. When we first started ExpertBusinessAdvice.com, our web developer kept telling us about ways to increase our viewership and about the dramatic increase in our company’s value we could get by increasing its volume of unique viewers (read: customers). In theory, for an Internet business, when it comes to marketing, people visiting your website are the same as people buying something from you. The trick is, though, they all have to be different people. You can’t just have your 10 closest friends visit your website over and over all day long. Once we started focusing our marketing initiatives on bringing more people to the site, the value of ExpertBusinessAdvice.com skyrocketed, due to the mass influx of unique visitors.
Determining your business’s worth is an intriguing exercise. A certain number of entrepreneurs go through it now and then, only to conclude that it’s not the right time to sell, for any number of reasons. But you don’t get to that fork in your decision path without knowing what price you can get for it, so it’s a fruitful exercise, whatever the outcome.