Things that Should Scare Small Business Owners

HalloweenWhen you’re running a business, there are a lot of things to consider. From payroll to people to marketing, you have a lot on your plate. In fact, we’re guessing there’s more than a few things that keep you up at night.

There are all sorts of scares lurking around the corner when it comes to owning and running a small to mid-sized business. Here are a few of the ones we find particularly frightening:

You hire without doing your research.

It’s true, you wear a lot of hats as a small business owner. It’s also true that quite a few of those hats are ones you don’t know anything about. Small business owners normally get into business because they have a dream to pursue, not to worry about the day-to-day details of running a business.

To solve that problem, you hire quickly for areas you don’t know anything about. Sounds good right? Not so fast …

  • Are they qualified? When you don’t know anything about the position you’re hiring for, you don’t know if the person (or consultant) is qualified to take on that role. For example, if you’re thinking about hiring someone to look at your financials, do you want a bookkeeper or a CFO? Or somewhere in between? There are several differences, including experience, duties and even pay.
  • How do you measure success? If you don’t know anything about the subject or position you’re hiring for, how do you measure success for that individual? How do you know your expectations and proposed timelines are reasonable?
  • Have you checked all the boxes when it comes to hiring? Another thing to consider is the entirety of the hiring process. Maybe you found the perfect candidate and you want them to start right away. But have you taken into account the necessary steps when it comes to hiring? There are several forms to fill out, items to consider and that pesky thing called onboarding. All of this has to be taken into account before you make that hire.

We’re all for hiring (whether it’s an employee or a consultant) to help you run your business. Just make sure you do the research and know what you want and need in order to help your business run more effectively.

You don’t take your financials seriously.

Having up-to-date, accurate financials is of paramount importance. If you don’t, you’re in for a world of hurt. Without it, you don’t know how much money you’re making (or losing), nor can you even begin to understand the basic state of your business.

Further, you won’t be able to make strategic business decisions and set a course for the future of your business. Plus, financial information is pretty important to creditors, investors and buyers.

Only 40% of small businesses say they are “extremely” or “very knowledgeable” in accounting and finance. (source)

Bookkeeping is not as simple as just throwing numbers into a spreadsheet. You need to understand basic accounting terminology in order to make informed decisions. For instance, just because your books say there’s money coming in, doesn’t mean you’re in the clear. Cash flow and profit are two different things.

The solution? Invest in accurately tracking your business financials. Find a consultant or hire an accountant (once you’ve done your research) who can help you navigate your current situation and also look out for potential pitfalls.

You don’t have accountability.

Success matters to small businesses, especially in the early stages of your company. But what does success mean? Can you define it in a measurable way? Can your employees?

Businesses work when roles are defined and individuals understand their performance expectations. That’s why it’s important to have KPIs (key performance indicators) in place for your company and your employees.

It’s here where we remind you that KPIs are quantifiable measurements for critical success. Quantifiable is key as it helps you track progress and whether or not you’re accomplishing your goals. If you’re not tracking, then you have no idea if it’s working or if you need to find ways to improve.

You don’t value your product … or yourself.

Let’s start with the basics … one of the keys to starting a business is that you have a product or service people actually want. Once you’ve got that, the next step is pricing it effectively.

Often, business owners play the cheapest option game to get their product into the market. This path undermines the real value of your product. Plus, it’s a lot of work to come back from under pricing your product.

Take the time, instead, to do some market research and really find a price point that shows the value of your product and also allows for market entry. Also, ensure the price point you’ve chosen will help your business financially … which is why it helps to have up-to-date financial information from the beginning.

But let’s not forget about YOU. In addition to your product’s value, you have value as the business owner. At the beginning you’re trying to do it all. It’s important to realize when you’re in too deep and you need help.

“Your new venture demands that every aspect is handled by someone who understands what they’re doing. And no amount of good intention will turn an IT specialist into a good bookkeeper.” (source)

The moral of the story here is to value yourself. Value your time, know your strengths and why you got into business. Let someone whose passion is for numbers or marketing or HR or whatever the subject may be handle the tasks you need done. And remember, if you don’t want to hire someone full time, you can always outsource it.

You’re not playing by the rules.

To say there are more than a few updates to rules and regulations affecting small businesses each year would be an understatement. Did you know, for instance, the General Services Administration annually updates the federal maximum per diem rates? This update would affect any business that has employees travel for work.

Or did you know that several states and cities are now introducing mandatory paid sick leave policies? If you have workers, your policies (if your business is in any of the affected areas) will have to align with this new ruling.

These are just a few examples of the rules and updates small business owners face on a regular basis. Many of these rules directly affect your financials, how you report information about your company and its customers and the benefits and rights your employees get.

That’s why it’s important to know what’s going on and ensure you’re in compliance. Find a consultant who can stay on top of these updates and regulations and ensure your business is following the rules.

 

 

 

 

 

 

Signs of a Financially Healthy Business

We’ve said it before and we’ll say it again: strong finances are important. After all, without good finances, how will you pay your employees, take care of debts and ultimately make a profit? Your business depends on finances to be successful, so making sure they’re healthy should be a top priority.

Here are six signs your business is financially healthy.

  1. Your revenue is growing – This one might seem a little obvious, but it’s important nonetheless. When looking at your financial statements, you want to see a relatively steady increase in your revenue, whether it be weekly, monthly or even yearly. It doesn’t have to be a big increase either – just a small, steady change can show good health. You know what they say, slow and steady wins the race! Not only do you want to see your revenue growing, but it’s also a good sign if your cash balance is showing growth. Cash is necessary for the operations of your business, so a growing balance can help ensure you’re prepared for any surprises that may pop up.
  2. Your expenses aren’t growing – In order to be profitable, you need your revenue to be in excess of your expenses. To do that, you want your revenue to go up, while your expenses remain the same or even decrease (bonus points if your expenses are decreasing – that’s no easy feat!). While expenses may increase with growth, it’s likely your revenue will increase as well. Growth in your expenses is healthy as long as it’s proportionate with your revenue growth.
  3. You’re gaining market share – Whatever you’re doing, it’s working. Whether you’re offering a product or a service, people like it and are likely telling others about you. Because of this, you’re gaining more customers and staking a larger claim in the market. You wouldn’t be able to see this remarkable growth if it wasn’t for your financial health allowing you to make changes and adapt to the ever changing needs of your market.
  4. Your ratios are looking good – There are multiple ratios to pay attention to that can determine if your business is financially healthy. You want your debt ratios, debt-to-asset and debt-to-equity, to be low. These ratios basically tell you how much you owe in comparison to how much your business is worth or how much cash you have available to pay off debt. Ideally you’d want a high profit margin or above average for your industry (not all business are striving for the same profit margin), as it shows your sales are resulting in a high amount of profit. Finally, you want high turnover ratios. A high inventory ratio can signify you’re efficiently and effectively pushing inventory out the door instead of keeping it holed up in the back, while a high asset turnover can signify effective asset management.
  5. You’re retaining the right employees – Your people are at the heart of your business, and they’ve helped your business become what it is today. However, they likely wouldn’t have been able to stay on board if your business was struggling financially. When your business is financially healthy, you’re able to pay your employees (which is pretty important) and can often times provide added perks and bonuses to keep them around. If you need some ideas for keeping employees engaged and coming back for more, check this out!
  6. Your strong cycles support you throughout the year – If your business is in retail, your busy season is likely during the holidays. If you’re a service provider, your busy season depends on what type of work you do. Your business shows strong financial health if the revenue from busy season can carry you through the slow times. How? If this revenue carries you through, you likely have high enough balances in your accounts to support you all year long, rather than waiting for (and desperately needing) busy season. Pro tip: just because you have a healthy balance doesn’t mean you should go spending all the proceeds from busy time – you’ll still want a cushion for emergencies or new expenditures.

It’s no secret understanding your finances and making sure they’re in tip top shape can help your business grow and become what you dreamed for it. Check in on your business and see how your business is doing with these six pointers – we bet you’re doing great!

Finance is Important – but Don’t Just Take Our Word for It!

It’s no secret that having healthy finances in your business can help your business be successful. We believe in the importance and power of finances so much that we may have written about it a time or two. While we’ve shared some pretty great info about the importance of finances, don’t just take our word for it!

Here are some other posts that believe in the importance of healthy finances that we think are really neat!

Without Financial Management, You Won’t Get Far

In this post by the Small Business Administration (SBA), the author discusses how you can have a unique selling point, but without strong financial management, that selling point won’t take you far.

The Importance of Planning

Having a financial plan in place can act as a roadmap for your business. From where you want to be next week to what you want your business to look like in five years, financial planning can help you get there. This article shares reasons why financial planning is a necessity for small businesses.

Am I Profitable?

The most common goal of any business is to be profitable. It seems easy: sell enough of your product or service to overcome your expenses and you’ll make a profit. That’s not always the case. Sometimes, certain pieces of your business just aren’t as profitable as others. Having a strong understanding of your finances can help you see where your business is making profits, and where there might be some issues.

Keeping Everything in Order

Sometimes your finances get out of hand, and getting them back in check can be difficult. Further, when finances get out of hand, even bigger messes can show up for your business. Before things get too crazy, consider these tips for keeping your finances in order.

Survival of the Fittest

No matter the type or size of business you operate, if you don’t understand your finances, you simply won’t survive. This post shares some tips to help you understand your business’s finances, and where to go if you need help.

No Man’s Land: Outgrowing Your Model

Thanks for joining us as we continue our discussion on No Man’s Land. Last week, we focused on the struggles of outgrowing your management and how to get your management back to tip top shape (look here for a refresher.)

Along with any growth will come change and challenges, and your business venture is no different. The model adopted by your business is likely to face the consequences of these changes, and your business may outgrow this model altogether.

“Most entrepreneurs attract their first customers by running their businesses according to a ‘high performance, cheap labor’ economic model,” says Doug Tatum, author of No Man’s Land. As the company grows, this economic model crumbles as the company must begin to adjust to a normal cost structure and venture away from cheap labor costs. To make it through No Man’s Land, companies need to develop a new business model that allows them to continue to provide their value proposition (what brought customers in the first place), but modified in order to maintain success and continue growth.

Before entrepreneurs are able to secure their companies’ financial stability, they need to understand what lies within the business model, what changing the model would include and what effect this rapid growth and change can have on the company’s financial performance.

Maybe you’re wondering what exactly we mean by “business model.” To be specific, the business model is a financial analysis of how a business makes its money. Analyzing a business model includes considering revenue produced from selling your company’s product offerings, as well as changes in this element of revenue. It also includes cost and capital under different scenarios, as well as capital employment.

In order to perform this business model analysis, there are two helpful accounting tools to guide you through. The first tool is the balance sheet, which acts as a still photo of the business’ assets and liabilities at the end of each month. Accounting is also able to provide a view of how the balance sheet changes over time. This tool is known as the income statement, which provides a glimpse of the new assets gained by the business (revenue), and the assets that have left the business (expenses).

However, neither of these tools give rise to a company’s economic model. This is because both of these tools are actually backward-looking, meaning the information they provide focuses on how the company performed in the past. An economic model is the opposite, forward-looking. It projects to the future, speculating on what a company’s economic picture will look like based on a possible scenario. However, both tools are extremely helpful in predicting future scenarios by measuring where the company has grown, struggled and succeeded in the past.

There are two reasons why it is important to forecast a company’s business model:

  1. It helps entrepreneurs decide if they actually want to commit to the strategy under consideration.
  2. It gives the company a basis for evaluating how the business is actually performing against the projected model once the journey is underway.

It goes without saying that companies stuck in No Man’s Land struggle when their previous business models break down, thus leaving an unclear understanding of the company’s financial health. To get out of this phase of No Man’s Land, companies have two options:

  1. Return to a size where their model works well
  2. Attempt to grown their way out of No Man’s Land

To proceed down the second path, companies must develop an understanding of how their current business model will change as it moves forward. It is important to keep in mind that the business’ value proposition must be scalable to navigate through No Man’s Land.

You’ve laid out an economic model for growth, and you’ve figured out how large you need to grow in order to stay profitable. So what’s the next step on this path through No Man’s land?

  1. Monitor your company’s financials to be sure your company is performing according to the model. The balance sheet and income statement are helpful here – these allow you to see where your business is relative to the model.
  2. Create and assess weekly operational reports that let you know where you are on your path to growth. These reports let you guess with accuracy what the financial state of the business will be at the end of the month. Ask your financial staff this question: What kind of operational report can you create that will allow you to predict, with accuracy of within +/- 10 percent, the company’s net income, prior to creation of the end of the month financial statements?
  3. Create future scenarios based on your company’s business model. Although you can’t run your company looking backwards, you can look to the past to help predict the future.

Creating a business model that is able to grow along with your company is not only important, but also necessary for the success of your business. Following these guidelines for growing your business model will help you smoothly transition out of No Man’s Land.

 

 

Meet the Team: Jenni Huotari (@huotarijenni)

JenniWhat’s my role?

I’ve been given the awesome opportunity and responsibility of leading the Possibilities Center. I’ve been with EB for nearly 14 years, and spent almost all of that time as an auditor (don’t be afraid, I’m really nice).

So, why the transition? While verifying numbers is fun (no seriously, it can be), I have a strong desire to spread the love of numbers a little broader. Plus, I have a crazy curiosity about business, which causes me to want to know as much as possible about our clients, and keeps my mind churning with ideas of how we can positively impact your business.

Why are numbers so important?

When numbers nerds get out and about (not too often, as we’re mostly introverts) and tell others what we do all day, the usual response is “I don’t know how you do that for a living.” We find that people are either intimidated by accounting or in no way interested (usually our artistic, creative friends).

Here’s the honest truth: I could look at financial statements all day. To me, they read like a book and tell the story of a company. They clearly show the increase in revenue you’ve worked so hard for, how volatile your cost of goods sold can be, how you’ve managed to keep those operating costs in check (even with revenue growth) and so much more.

Each one plays in to the total and affects the ending of the story. Understanding what they’re are trying to tell you, and how they impact each other is essential for a business to be as healthy as possible.

Why do I want you to succeed?

Let’s face it, there’s plenty of outside factors beyond your control that impact your business. Having quality financial information, and knowing how to understand it, is not one of them. In fact, it’s completely attainable.

The Possibilities Center team and I have a strong desire to make business owners and other decision makers comfortable with your company’s financial statements. You shouldn’t have to rely on your accountant/bookkeeper to prepare all of the financial information and interpret it for you. We want you to know what the numbers mean, where different things are presented and how business decisions can/will impact your financials. We want you to have strong financials and I guarantee we even have a few ideas to help you get there!

#ILoveFargo

We’re very fortunate to work in such a great place. This area is filled with unbelievable talent, including colleges and universities with eager graduates ready to get out and make a difference.

We are blessed by strong business allies. I personally know several people at numerous community organizations (the SBDC, SBA, EDC, Emerging Prairie, etc.) who come to work every day with the goal of helping businesses be successful, including those just starting out.

And if that wasn’t enough, there’s an uprising of peer support. As nice Midwesterners, I think we’ve always rooted for each other, but we’re continually finding ways to be more impactful. Collaboration is the key to success here, and we’re proving there’s more than enough success to go around.