How to Make Sense of Your Small Business Financial Statements

How does your business assess its financial strength? No doubt you refer to your income statement and your bank account for the basics, but the truth is most businesses ignore the most powerful financial tools in the accounting arsenal: the balance sheet and the cash flow statement.

Combined with the income statement, these statements provide the most comprehensive financial view of any business. That’s why they’re consideredessential components of a business plan. But what role does each of these financial statements play and how do you interpret the data they produce?

Here’s an overview of the three key financial statements and how they can help you keep your finger on the pulse of your business’s fiscal position.

The Income Statement

Think of the income statement as your business’s report card.

The business income statement, also referred to as a profit and loss (P&L) statement, is a useful tool for providing an overview of how your business is doing over time and breaks down the revenue generated by your business and the expenses incurred.

A well-maintained income statement will show how profitable your business isand inform any steps that can be taken to increase profitability (i.e., whether you should focus on more profitable product lines or curb unnecessary expenses). It also shows you how much cash is left over to grow the business, pay your salary as owner, and cover any debt. When investors look at your business plan, they will use your income statement to assess the level of risk involved in extending credit or venture capital your way.

What your income statement won’t tell you is whether your overall financial condition is weak or strong (refer to your Balance Sheet for this), the money you owe or that’s owed to you (refer to your Cash Flow Statement), or list any assets you own or liabilities you owe (again, see your Balance Sheet).

An income statement is usually prepared monthly, quarterly or annually.

The Balance Sheet

Think of the balance sheet as a window into your business’s financial strength.

Although investors may pay attention to your income statement, the balance sheet is actually their preferred starting point for building a picture of your business’s fiscal health. Why? Because at its simplest level, the balance sheet summarizes key financial information on a given date (as opposed to the income statement, which shows profitability over a period of time) and is a good indicator of company stability and liquidity (both important factors in determining your business’s ability to fund its own growth without requiring outside financing).

The balance sheet is usually put together at the end of a particular time period—usually a month or quarter—and lists the following:

• Business assets – “What do we have?” Not just what your business owns, but what it controls or what is in its possession, such as a financed vehicle.
• Liabilities – “What do we owe?” Your debts, including loans, outstanding credit card payments, etc.
• Owner’s equity – “What is left over for the owner(s)?” How much of the business’s assets do you still own once you’ve paid off all your liabilities?

This information in your balance sheet can provide a view into the following:

• The net value of your small business (should you ever want to incorporate or sell your business).
• Current and long term debt.
• Asset management (how effectively you’re managing your assets) and liquidity ratios (your ability to turn an asset into cash).
• Comparative data so that you can see changes in cash, accounts payable/receivable, equity, inventory, and retained earnings.

A balance sheet can seem a little overwhelming and the format can differ wildly depending on your business type, so it’s a good idea to have an accountant help you set up and interpret your first one. Even if creating a balance sheet is intimidating, don’t shy away from it—it’s an essential part of your business plan and an extremely helpful tool for running your business.

The Cash Flow Statement

Does your business have the cash to stay afloat?

More businesses fail because of cash flow issues than for any other reason. That’s because cash doesn’t always flow into your business at the same rate that it exits it! In fact, your business can be profitable yet still have cash flow problems. While your income statement can tell you whether you made a profit,it doesn’t take into account delinquent or missing payments or help you determine whether you actually generated enough cash to stay afloat.

In order to understand and manage the flow of cash in and out of your business you’ll need to maintain a cash flow statement. Updated on a daily, weekly, or monthly basis, the statement can be a simple one-page spreadsheet or a more dynamic report created with accounting software like QuickBooks or FreshBooks.

Whichever template you use, you’ll rely on the following formula to calculate your end balance: Operational Costs + Asset Investments + Financing = Cash Balance. Let’s dig a little deeper:

• Operational Costs – This includes your net income and losses, minus your regular expenses, and is the one number that you’ll want to see growth in because it provides an accurate picture of the cash you are generating before any costs associated with financing or investments are taken into consideration.
• Asset Investments – This section reports both inflows and outflows from purchases and sales of long-term business investments such as property, assets, equipment, and securities.
• Financing – This is the cash you’ve received as a result of a business loan, line of credit, the sale of stock, or other capital infusions.

In addition to helping you gauge whether your business has enough money to cover its day-to-day activities, pay its bills on time, and maintain a positive cash flow, your cash flow statement also informs a number of other financial decisions, such as whether you need additional capital to fund seasonal fluctuations or purchase inventory to support a growth in sales.

For lending purposes, you’ll include the cash flow statement in your business plan to provide evidence to your bank that you can manage cash and have a plan for dealing with cash flow gaps when they arise.

The Bottom Line

While the cash flow statement is often considered the most important financial statement for a small business, the three main financial statements are interrelated. Viewing them holistically can help you make smart financial, investment, and management decisions for your business.

Of course, that’s easier said than done, so be open to getting help—whether from an accountant or from free resources such as the expert mentors at SCORE. Getting your arms around your financial data may be the most important thing you do this year.

Source : http://articles.bplans.com/how-to-make-sense-of-your-small-business-financial-statements/

5 Considerations Before Merging Businesses

It starts off as a brilliant idea. The small business owner is interested in buying another company or they want to sell theirs. Dollar signs and possibilities float around in their head. After a lot of hard work, the transaction is done and everyone celebrates. But then, it ends up hurting the future of the combined companies more than grow them. In fact, 70 percent to 90 percent of all mergers fail.

What goes wrong? Here is how to get the odds in your favor when merging businesses:

1. Product Offering Synergy
Determine if the two products or services really fit together. Will they compete or cannibalize customers when the companies are merged or are they complementary? Many times, the offers have less synergy than the two companies initially think.

How to test before the sale: Approach five current customers to see if they will buy the other product or service. Then, find out why or why not.

2. Management Match

Can the combined teams work together? Which executives will lead which functions? Many times there is overlap and certain managers and departments need to be eliminated. Remember, there should be clear leaders in the new company and not management by committee.

How to test before the sale: Have both management teams participate in making a few important decisions for the proposed new company. Hire a consultant to observe how well this works and report back.

3. Culture Blend

Can the cultures of the company work not only together, but will they blend over time? Often, one culture dominates the other and valuable employees can’t thrive in the new environment and leave.

How to test before the sale: Set up three teams of employees from the two different cultures and have them accomplish a task. It should be planning an event for the company or a new recognition program. Evaluate the results.

4. Setting Expectations

These are usually set too high for a short period of time. Many mergers actually push the company back in terms of profitability before it propels them forward. Assume no gains from synergies for at least the first six months.

How to test before the sale:Review the growth and profitability of the two companies before the sale and cut their future growth by 50 percent for the next six months to get a closer estimate of what will happened post-merger.

5. Market Assumptions

How will the other companies and customers in the market actually react to the merger? Many times the expected changes never come.

How to test before the sale: There is no way to test his since it is impossible to simulate what the market will do realistically. However, similar past transactions in the same or parallel industries may provide a clue.

How successful was the merger of your company?

Source : http://smallbiztrends.com/2016/02/merging-businesses.html

7 Things to Ponder Before Getting Small Business Financing

If you have a great idea for a business and your second thought is to immediately seek small business financing, hold your horses for a moment and ask yourself — why?

You need to get three different answers to some small business financing questions before moving forward. If you think that funding is the best option rather than bootstrapping it with your personal resources, be careful!

Outside funding brings its own crop of distractions. Here are things you need to know before pursing small business financing.

1. You Won’t Write the Deal

If this is your first business, then you don’t have a financial track record, which puts you in a beggar’s position. The investor you seek funding from has the power and may deploy an agreement that puts you at a disadvantage, either by valuing your company less than you think it should be valued at, or by charging you a higher cost of capital.

2. You’ll Be Chasing the Funding Instead of the Customer

At this stage of building a business, there are few things as important as your customer. Once you divert your interest from your clientele to pursue funding, you will distract yourself from building your business. Building a customer base requires focus and dedication; getting funding requires the same. Since you have limited time, it will be a real challenge. Customers are the linchpin of your success. Ignore them at your own risk.

3. You Could Undervalue Your Company

When you seek money from outside sources, you have to place a specific monetary value on your company based on its assets and intellectual property. It is easy to make a substantial mistake that you’ll only be able to determine after the fact. It is difficult to calculate the value of an emerging company, and this may make getting funding a challenge.

4. You Might Partner With the Wrong People

Partnerships are like other relationships. When you partner with an investor in haste, you put your business at risk. The offer to fund your enterprise rarely comes without strings, so make sure you understand your financier better than you understand your spouse. If that sounds like a tall order, then you may not be ready to take the leap with complete confidence. There is a lot at stake, so use caution.

5. You’ll Learn More Without Funding

Bootstrapping is a valuable exercise. A true entrepreneur builds a business to learn something: about the market, about the customer, about the product and himself. When you build your business without a cushion, you get to learn expensive lessons. They are often the most valuable. Running a business will build your instincts and help you hone your talent.

6. Funding Often Masks Underlying Problems

An excess of cash can hide critical deficiencies in a business model. An infusion of capital won’t fix all your problems. If your staff isn’t properly trained and you’re getting customer service complaints, money won’t remedy that; effort will. It’s sometimes easier to see these issues and fix them if you don’t have too much money between you and the problems.

7. You Could Lose Control of Your Company

Once you’ve put your most devoted efforts into building your company and secured outside funding, you’ll have to appoint a Board of Directors, but most likely your investors will have financial and board control. Investors like to work with executives they know. You, as a fresh entrepreneur, represent an unknown territory. Backers don’t know how you’ll react to success or difficulty and may want to remove you as the CEO.

If you see your business opportunity as a way to cash in quick, you may not have the stamina to bring your business venture to success. Investors rarely invest in an idea and they don’t invest quickly. It could take 18-24 months to secure a deal. The reality is that funding brings as many problems as it appears to solve.

While there are other options for small business funding, explore them carefully and avoid making commitments under duress.

Source : http://smallbiztrends.com/2015/10/small-business-financing-questions.html

How Well Are You Managing Your Business Cash Flow?

We’ve all heard the saying, “Cash is King.”

While the words may be cliché, they’re also true — particularly for the small business. Without a cushy safety net or direct line to a big bank’s lending department, survival often hinges on your ability to effectively manage the delicate balance of cash in and cash out.

When there’s no cash on hand, everything is tough. Paying salaries, paying bills, buying supplies, not to mention making the investments needed to grow to the next level. If you’re looking for tips on managing your business cash flow, below are seven to think about.

Tips for Managing Your Business Cash Flow
Get a Hold of Your Finances and Forecast

The key to managing your business cash flow is understanding how things stand now, and where they’re likely to go. Most businesses experience some kind of cyclical highs and lows; maybe your clients vacation in August, landscaping jobs drop off in the winter, your retail store peaks in December or leading up to a new school year.

Analyze your monthly sales over the past years to look for any trends, and put together a rolling 12-month forecast. You may want to enlist the help of a bookkeeper to offload these tasks. When you start mapping things out, you can better anticipate and plan for surges in expenses and times when sales are tight.

Separate Your Business and Personal Accounts

If you’re a sole proprietor or freelancer and have been pooling all your money matters in a single account, it’s time to separate your business and personal finances. It’s the only way you can get an accurate view of your business’ financial standing. Keep in mind that if your business is structured as a corporation or LLC, you’re legally required to keep separate accounts.

Pay Your Bills on Time (But Not Early)

You might think you’re the epitome of responsibility by paying your bills the minute they come in. However, it’s recommended to wait until your bill is due before paying. This way, you have cash on hand should an unexpected expense arise. Set up electronic bill pay to make the scheduling easier.

Get Disciplined About Your Invoicing

Yes, there will always be ‘trouble’ clients who are notoriously slow to pay month after month. But more often, when managing your business cash flow, the biggest culprit in slow payments is your own slow invoicing. Many small business owners don’t treat their invoicing and administrative tasks as a priority compared to their client work and day-to-day activities. But the bottom line is if you don’t invoice, you don’t get paid.

Create a formal structure to make sure you invoice as soon as a project is complete or deliverable sent. Set aside time each week (could be 15 minutes every Friday morning) to review your invoices, make sure nothing has slipped through the cracks, and follow up on any past-due invoices.

Offer Discounts for Early Payers

Some businesses offer a small discount to those customers who pay their bills early — this can be a particularly effective strategy for encouraging those late-paying clients to start paying early. You can also check if some of your own vendors offer an early-bird discount.

Consider Long Term Lending, Even Leasing

Generally speaking, leasing or taking out a loan to purchase a piece of equipment or other item will cost more than buying it outright. However, longer term financing, even leasing, can be advantageous since it frees up your cash for other expenses. Vendors will typically offer attractive deals and low interest rates for larger purchases like vehicles, computer equipment, or tools. It’s much harder to get a loan with a similarly low interest rate to cover your day-to-day expenses or payroll.

Communicate ‘Cash Flow’ to Your Employees

If you have employees, make sure they appreciate the importance of cash flow to the health of the business. For example, sales staff should focus not just on making the sale, but also ensuring that invoices are paid on time and in full. Project team members should understand the importance of closing out a project in a timely manner in order to send out the final invoice and close the books.

Keep in mind that all businesses, no matter their size, struggle with managing business cash flow at some point. You can’t avoid challenges altogether, but you can take some proactive steps to better manage your finances and anticipate shortfalls.

What are some ways that you are managing your business cash flow?

Source : http://smallbiztrends.com/2015/10/managing-your-business-cash-flow.html

A Great Idea Can Only Get You So Far with Investors

A great idea can lead to a successful business. But it often takes a lot more than that. And it definitely takes more than a good idea to convince investors to take a chance on you.

No matter how great your idea is, you still need a comprehensive and well-written business plan to get investors on your side. Startup mentor and angel investor Martin Zwilling recently explained the importance of a good business plan in a post for Entrepreneur. He wrote:


“There are no guarantees, but various studies have found that entrepreneurs who create a good plan generally double their chances of securing funding and building a successful business. In any context, and especially in the high-risk world of startups where more than 50 percent fail, you need every advantage that you can get.”

Zwilling also explained some of the features of a good business plan. They generally don’t need to be very long. He said some of the best ones he’s seen have been around 25 pages. But they should all cover the relevant questions that an investor, partner, or team member might ask.

In general, he said, a business plan should include these ten sections:

• Executive summary
• Product and solution
• Company description
• Market opportunity
• Business model
• Competition analysis
• Marketing and sales strategy
• Management team
• Financial projections
• Exit strategy

There are also many books and websites that provide sample business plans for entrepreneurs to model their own from. That easy access to resources means that there should be no excuse for not having a well thought out business plan before meeting with any potential investors.

So even though technology has made it easier for entrepreneurs and startups to reach out to investors, you still need to present the same type of information. Investors today are still taking the same types of risks now as they were before the days of the internet.

And while crowdfunding has done a lot to help both investors and startups, alike, it is a completely different process than going after bigger investors. The people who you want to invest a lot of money in your company are going to need a lot more information than a person who donates $5 via Kickstarter. So while the idea is the backbone of your project, you need to back it up with a great plan.

Source : http://smallbiztrends.com/2015/02/importance-of-a-good-business-plan.html

5 Common Startup Financing Mistakes to Avoid

We all know that for most people who start businesses it is either necessary or extremely helpful to have access to financing. The lower the cost the better and the more cash-flow friendly it is, the better, because you don’t have any dang cash-flow. Or at least not much since you’re in your first year or two of starting the business.

We’ve worked with and helped thousands of entrepreneurs and small business owners who were in their first 2 years of business and these are the 5 most common mistakes I’ve seen made when it comes to financing and start-ups.

Did You Form Your Entity and Establish Ownership Percentages with Financing in Mind?

When you have a business partner, a spouse, or both, did you think about everyone’s credit profiles when you decided who would be the owners and what percentage their ownership would be? For example, according to Lendio, 59 percent of its site visitors need $50,000 or less for their businesses. Most people don’t need millions of dollars. But what if the majority owner has bad (or not-so-great) credit and his spouse or business partner has excellent credit? There are clearly other aspects to this decision but did you discuss that with your attorney or think about that in forming your entity?

Did you know that with many business loans you’ll need anyone who owns 20 percent or more to be part of the credit check and to personally guarantee the repayment of that loan you want to obtain? Is one of the partners or one of their spouses willing to utilize their excellent credit to help the business get started? If you’re like a lot of people and only need $50,000 to get things started, then did you know you could possibly get all of that with a few credit cards that have 0 percent rates and low monthly payments? Most credit card lenders just require the applicant to own at least 1 percent of the business or to have the authority to borrow on behalf of the business. You will even be better off if you choose the right business credit cards and maintain a separation between your personal and business credit.

Tell your attorney that you can solve your financing issue real fast if Joe’s wife can own 1 percent of the company (since she has the excellent credit) and that you want to figure out how to structure the business so that she is involved for that specific purpose. Remember, that’s one scenario and that doesn’t always work but it’s rarely thought about at the formation stage of the business so do your homework and ask the questions ahead of time and not after you’re in a pinch and the business can’t move forward because you can’t find your funding.

Did You Create a Plan for Your Credit Card Usage?

Since we mentioned credit cards, let’s talk about them. Depending on the source you rely on, anywhere from 60 to 85 percent of small businesses use them. They can be good or bad, probably like most financing solutions. Credit cards offer 0 percent interest intro rates. They provide buyer protection. You can buy now and pay later. There have been many a savvy business owner who has paid little or no interest but has cashed in nicely on the rewards offered … hello gift cards and free travel. No collateral is needed with credit cards, either.

On the other hand, if you don’t plan for when and how you’ll use credit cards they could become a crutch for unplanned spending and maybe – gasp – poor and undisciplined spending that will hurt your company. So don’t be afraid of credit cards because fear doesn’t help anyone make good decisions. Decide how you’ll use them. Heck, the Keybridge Research business credit card study (PDF) from a few years ago even showed that over a 5 year period that for every $1,000 in credit card use by start-up business owners, it resulted in a $5,500 increase in company revenue. Not a bad ROI. Should you live in fear of credit cards? Of course not. However, should you plan for how to use them wisely and think about separation between your personal and business credit? Absolutely.

Don’t Treat Your Investors (Your Friends and Family) Like They Aren’t Important

Your friends and family can be great sources of start-up funding. But there’s a reason why insiders refer to this as the Three Fs: Friends, Family, and Fools. Just because they are a friend or family member doesn’t mean you shouldn’t structure the transaction professionally and that you shouldn’t report to them and communicate with them responsibly.

Think about it like this. Maybe Uncle Louie isn’t Bill Gates or Michael Dell but how would you structure things if it was a business titan who invested their money with you? Would you have a written agreement with them? Would you provide monthly or quarterly reports to them with real data and not just a fluffy letter that avoids the bottom line production? There are tools out there like Zimple Money. Use them. Treat your Uncle Louie like the investor he is. Show him the respect he deserves. It’s not only the right thing to do but you might find that it makes you a better leader in the process.

Doing Nothing About Your Credit

I mean this one. You formed your entity. You labored and scoured the internet over whether you should have an LLC or a C-Corp. You put together an impressive business plan. You found a bank and even researched which bank would be best for you to use. You’ve spent hours planning and talking to people about your awesome and amazing business. Then when it comes to your credit you did nothing. Nada. Zero. Zilch. Goose eggs.

Really? How did you think that business loan application was going to work out for you?

In the early stages of your business your character and credit might be the only thing a lender can look at or cling to. Don’t strike out before you get to take a few whacks at it. Learn about treating your credit as an asset. It’s okay if you don’t understand credit. It can be intimidating but it’s really not rocket science. Remember this, there’s only two ways you can improve a credit profile. You can add some good stuff or correct and remove some bad stuff. There’s a lot that goes with each of those but don’t let it become more complex than it is. If you learn the basic differences between FICO scores and FAKO scores you’re on the right track!

Not Knowing Your Best Start-up Financing Options

It all starts with knowing your options. Then, once you know your options, it’s much easier to make a decision and proceed with confidence. As Theodore Roosevelt said, “in any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” Check out these financing options for start-up entrepreneurs if you aren’t sure.

It’s never too late to course-correct. It’s okay if you didn’t think through some of these aspects of your business. Learning and taking action is what running a successful business is all about. Best of luck to you and let us know what we missed.

Source : http://smallbiztrends.com/2015/02/startup-financing-mistakes.html

Creative Ways to Get Funding Without Going to the Bank

Are you having a tough time finding financing for your small business or just don’t know where to turn?

Today there are more financing opportunities out there than ever before — if you know where to look.

We tapped into the expertise of Linda Jenkins (pictured), CEO of the Gold Alliance Group, for some advice. She is the author of “Creative Financing: How to Get a Small Business Loan Without a Banker” and provides consulting for business owners seeking creative financing ideas.

According to Jenkins, “If you are trying to finance a startup or grow your business, don’t be afraid to approach a bank. Just realize that less than 30 percent of businesses are actually funded that way.”

Don’t get discouraged with those kinds of odds. This is where you have to get creative.

Don’t limit yourself to traditional banks. Instead, dig deeper. Find today’s new sources of capital and off-the-beaten-track places to find funding, Jenkins said.

In her book, Jenkins points out the differences between traditional loans and the new kind of funding today: peer-to-peer lending and crowdfunding.

Peer-to-peer lending is literally one person or peer loaning money to another. No banks.

Popular websites like Kiva, Lending Club and Prosper are dedicated to fostering peer-to-peer loans. This kind of lending has been successful in countries all around the world including England and New Zealand, but it still just catching on in the United States.

Another type of funding is crowdfunding. Crowdfunding goes to the potential customers or users of a product or service and asks for their financial support. Crowdfunding sites like GoFundMe, Kickstarter and Crowdfunder offer an even lower risk alternative for entrepreneurs, according to Jenkins.


Linda Jenkins, Founder, Gold Alliance Group

Jenkins recommends a free resource, “Crowdfunding: An Introduction.” She points out that crowdfunding doesn’t involve loans. The money need not be paid back. It is given to complete a project or create a product. Investors are buying into the end result.

Crowdfunding and peer-to-peer lending are becoming more popular avenues to access funding for your business. And the market is becoming quite competitive.

Here are three sites Jenkins recommends looking into, depending on your circumstances:

She recommends a resource for businesses owned by women called PlumAlley.co. It has a reputation for educating and supporting business owners during the entire funding process.

Jenkins says, “It’s definitely an important resource for any female entrepreneur, and since women are starting businesses at twice the rate of males according to the Harvard Business Review, they are definitely serving a growing niche.”

Kabbage.com caters specifically to online merchants. They are an underserved niche that often has trouble getting financing through traditional methods. Kabbage provides cash advances at a flat rate based on monthly revenue, business credit rating, and your Amazon, Yahoo or eBay store rating.

And there’s Dealstruck.com, too. This is an online crowdlending platform which provides a quick turn-around on term loans. It could be a viable option if you run an established small business and need less than $250,000.

Jenkins emphasizes that your choice really depends on the profile of your business and its goal for more capital. A loan will lead you in one direction. If you’re looking to exchange equity for funds, there are sites and resources for that, too.

Of course, when in need of capital to grow your business, it’s natural to think first about going to a bank. But there are alternatives today.

Source : http://smallbiztrends.com/2015/02/creative-financing.html