Business Best Practices

Like many small business owners, you may plan on working until you are ready to retire. And, once you reach that point, you may expect to sell your business and live off the proceeds. Or, you may have partners or children who can keep the business operating once you are ready to step away.

However, smart business owners plan for all eventualities. They plan for success but they have a fallback plan in case their efforts don’t bear fruit. As a business owner whose business is probably by far your biggest asset, it makes sense to think about those things that could go wrong and take steps to protect yourself now.

What steps should you consider taking that can protect your future financial security? Consider these contingency strategies:

Put a Retirement Plan in Place

The only constant in business is change. And many changes can harm a business’s financial viability. What would happen to your retirement dreams if your business experienced a serious setback? New technologies come along and make some businesses obsolete. New competitors erase older, established firms and economic downturns impact consumer and business spending. Natural disasters can seriously damage a business’s operations and cause widespread financial loss.

Funding a retirement plan during your working years can help protect your future financial well-being. Additionally, a retirement plan can provide important tax benefits. For example, your contributions to your retirement plan are typically tax deductible while earnings on investments in your retirement plan account grow tax deferred until you begin taking distributions.

As a small business owner, you can choose from a variety of tax-advantaged retirement plans. Each option has distinct advantages and disadvantages when it comes to costs and the burden involved in plan administration. The input from your financial professional can be helpful when reviewing the appropriateness of a particular retirement plan with regard to your business’s specific situation.

Establish a Buy-Sell Agreement

If you have one or more partners or co-owners, it makes sense to have a buy-sell agreement. A buy-sell agreement helps ensure that you (or your beneficiaries) will receive fair compensation for your ownership interest. The agreement also facilitates the orderly transfer of ownership and management. A buy-sell agreement can be drafted among shareholders of an S corporation, partners of a partnership or an LLC, or even between an owner and a key employee.

When carefully crafted, a buy-sell agreement can:

• Help provide a smooth transition of control, management, and ownership to those who wish to continue running the business
• Spell out the financial aspects of the transition
• Establish a fair and reasonable price
• Help ensure the financial security of your family and other beneficiaries in the event of your unexpected death
• Create a built-in buyer for your interest in the business
• Establish, under certain circumstances, an estate tax value for the stock.

There are two basic types of buy-sell agreements: cross purchase and entity purchase (stock redemption). With a cross purchase agreement, the remaining owners agree to buy the departing owner’s interest in the business individually. With an entity purchase agreement, the business itself agrees to buy the selling partner’s ownership interest.

Life insurance is a common way of funding a buy-sell agreement. The proceeds of the policy are used to buy out the departing owner’s interest in the business.

Develop a Disaster Plan

No matter where your business is located, it is a wise precaution to assume that a natural disaster will impact it at some point. Adequate preparation can minimize damage to your systems, your equipment, and your physical plant, and may even protect you and your employees from harm. A key component in preparing for a natural disaster is a disaster plan.

Your disaster plan should include sections on personnel safety, management succession, and data preservation. It should outline the steps employees and managers must take in the event of a disaster.

Many owners of small businesses would love to see a family member take over their business. If you have children, grandchildren, nieces, or nephews that you think might be interested in running the business in the future, you can help lay the groundwork for that potential transfer of ownership in several ways. Use the following strategies and tips to encourage the next generation to become part of the family business.

See Who Is Interested

One or more of your children may already have shown some interest in the family business and asked about its operations. It’s important to encourage that interest. Talk about the company’s history and your vision for its future. Share the excitement you experience as a business owner.

Over time, you can teach an interested child more about the business’s operations. Consider putting the child to work doing various tasks around the business on weekends and over school holidays.

Education Is Key

Over the years, the child’s interest in the business may wane or it may become more intense. If the child (or children) continue to express an interest in working for the family business, you might want to bring up future education plans. You can suggest that the child should consider obtaining a degree that would be beneficial in running all or part of the family business. For example, a degree in engineering could be a huge asset if the family business is involved in property development, construction, or design/build. A degree in accounting or finance can be helpful for businesses of all types. In addition, a degree in a related field would give your family member credibility when it comes to interacting with clients, bankers, and employees.

Insist on Outside Experience

Promoting a family member to a leadership position within the family business when that person has little experience can be a recipe for trouble. It can cause discord among employees, especially those who have worked hard with the expectation that they could move up in the ranks. Additionally, it can undermine the family member’s credibility in the eyes of clients and other business owners.

It often makes more sense and can be hugely helpful to have the family member obtain a post-college job outside the family business. Working in a different company in a similar industry to yours can give your family member a level of experience, confidence, and credibility that would not be obtainable by simply transitioning to the family firm. The skill set established through working elsewhere may help propel your family business in a new, more growth-oriented direction. Family business experts suggest that a child expected to take the reins of a family business should spend at least five years working elsewhere before joining the family firm.

When Multiple Children Are Involved

What happens when more than one family member is interested in becoming part of the business? Encourage them to follow the areas of the business that interest them most. With the appropriate education and experience working for other firms, they may be ready to run their own areas of the business when they rejoin the family firm. This is when their talents can develop and shine.

Bring in Outside Experts

The input of outside professionals who are skilled in different business areas, such as operations, finance, manufacturing, logistics, or marketing can be invaluable to the upcoming generation of family members joining the business. Mentors can guide and serve as a sounding board for the ideas of the child or children working for the family business.

Consider Staying on as an Advisor

You could consider making yourself available as an advisor to the incoming new generation of family members. Whether the arrangement is formal or informal, it should not be open-ended. Determine how long you will offer your services. The goal is to ensure that the new generation of leaders in the family business will be able to run the business independently.

Successfully transitioning a family business to the next generation takes time and planning. For planning assistance, consult an experienced financial professional.

Science fiction movies and books may portray artificial intelligence as a human-like giant brain with thousands of wires coming from it that control whole cities and their populations. The reality today is that artificial intelligence is unobtrusive, everywhere, and we are interacting with it multiple times daily without always recognizing that we are.

Artificial intelligence is being used by large corporations in a range of areas, including sales, marketing, customer service, employee training/coaching, and logistics. Small businesses can also employ artificial intelligence to improve customer service, reduce costs, and help drive revenues.

What It Is

Artificial intelligence (AI) is a branch of computer science that focuses on building smart machines capable of performing tasks that typically require human intelligence. Essentially, it endeavors to simulate human intelligence in machines. Examples of AI applications many people are familiar with include smart assistants (such as Siri and Alexa) and virtual agents that interact with customers and guide them to possible solutions. Looking ahead, self-driving trucks and cars are in various stages of development, and some vehicles already have self-driving features.

Customer Service

AI can be deployed through the use of chatbots to handle a variety of tasks, such as directing callers to the function they want (e.g., automatic payments). On a more complex level, AI can be used online to help customers with product search and discovery and respond to requests with relevant recommendations. Businesses can use data gathered from AI chatbot customer interactions to identify where in the process problems may arise and what these problems are so that they can be eliminated in the future.

Logistics

Moving goods from one point to another requires up-to-the-minute data so that what is being shipped is shipped in the most efficient and cost-effective way possible. Certain AI programs can predict points where congestion may happen and help redirect trucks and vans so that they avoid bottlenecks and slowdowns. AI essentially streamlines the supply chain. It can do something similar when it comes to warehouse management — identifying choke points that slow the movement of goods from point A to point B.

Marketing

AI marketing sets out to leverage customer data and machine learning to anticipate a customer’s next move and to nudge that customer toward either buying something or increasing his or her average order value. Businesses are using AI to attract, nurture, and convert prospects.

By tracking a customer’s online searches, AI programs can identify what products an individual might be interested in and may be considering buying. AI can target that individual with ads highlighting products or services previously identified as being of interest to the customer. This approach essentially uses machine learning to offer personalized product recommendations.

Sales Training

AI can be used to coach salespeople to improve their sales skills and help them increase their percentage of successful sales calls. AI programs exist that can analyze a number of variables that are used by the most successful salespeople and use that data to identify strategies that can be replicated and utilized by other salespeople within the organization.

As with any technology, there are costs involved in incorporating AI into a company’s operations. A financial professional can assist you in analyzing the costs and potential financial benefits of any new technological enhancements your small business may be considering.

Comparing a business’s key financial ratios with industry standards and with its own past results can highlight trends and identify strengths and weaknesses in the business.

Financial statement information is most useful if owners and managers can use it to improve their company’s profitability, cash flow, and value. Getting the most mileage from financial statement data requires some analysis.

Ratio analysis looks at the relationships between key numbers on a company’s financial statements. After the ratios are calculated, they can be compared to industry standards — and the company’s past results, projections, and goals — to highlight trends and identify strengths and weaknesses.

The hypothetical situations that follow illustrate how ratio analysis can give company decision-makers valuable feedback.

Rising Sales, Rising Profits?

The recent increases in Company A’s sales figures have been impressive. But the owners aren’t certain that the additional revenues are being translated into profits. Net profit margin measures the proportion of each sales dollar that represents a profit after taking into account all expenses. If Company A’s margins aren’t holding up during growth periods, a hard look at overhead expenses may be in order.

Getting Paid

Company B extends credit to the majority of its customers. The firm keeps a close watch on outstanding accounts so that slow payers can be contacted. From a broader perspective, knowing the company’s average collection period would be useful. In general, the faster Company B can collect money from its customers, the better its cash flow will be. But Company B’s management should also be aware that if credit and collection policies are too restrictive, potential customers may decide to take their business elsewhere.

Inventory Management

Company C has several product lines. Inventory turnover measures the speed at which inventories are sold. A slow turnover ratio relative to industry standards may indicate that stock levels are excessive. The excess money tied up in inventories could be used for other purposes. Or it could be that inventories simply aren’t moving, and that could lead to cash problems. In contrast, a high turnover ratio is usually a good sign — unless quantities aren’t sufficient to fulfill customer orders in a timely way.

These are just examples of ratios that may be meaningful. Once key ratios are identified, they can be tracked on a regular basis.

Perhaps the number one action you can take to support the financial health of your small business is to stay on top of accounting. Make sure you’re aware of most small businesses’ accounting challenges and learn how to overcome them. We’ll tell you how here!

Banking

You’ve been banking for years, and you know how to manage the task. However, when you own a business, banking isn’t like managing personal checking and savings accounts. Unfortunately, many small business owners use their personal funds to pay for business expenses, especially when first starting out. Even small costs add up over time. This “cross contamination” of spending between personal and business accounts can lead to costly mistakes, not to mention headaches for your accounting team. Keep personal expenses, and business expenses separate all the time. Have dedicated bank accounts and credit cards only used for one or the other. If you need to track down an expenditure, you only need to look in one place.

Budget

When bank accounts are separated, budgeting becomes exponentially easier. You can even use an accounting software program to help you keep up with money coming and going to and from your business. However, recognize that simply entering information into a software program is not the end of the work when balancing a budget. Thinking that is true ends up being the downfall of many small businesses. Budgeting for a business means forecasting to ensure that unexpected expenses can be covered, managing inventory, taxes, and more. A shift in any direction can throw off any budget. That’s why many small businesses opt to outsource their accounting. The known upfront expense of doing so can far offset costly budgeting errors down the road.

Unexpected expenses

As mentioned above, you must consider the unexpected as part of your budget. Additional (new) taxes, payment delays from customers, rising costs of materials and supplies, new employee training, etc., are all possibilities. A qualified accountant is aware of these unexpected expenses and others that your business could face and knows how to prepare you for them. Awareness of what could financially happen in business is crucial to long-term profitability.

Payroll

While unexpected expenses are likely the most daunting for a small business, payroll is almost always the most significant. Payroll entails more than what you pay employees. New employee classification, if incorrect, could cost you a bundle in penalties. Other payroll-related accounting challenges are pay accuracy, proper tax filing, compliance, and paid time off tracking.

Unless you’re an HR professional, and chances are you’re not if you’re the business owner, consider recruiting a qualified accountant to help you manage payroll. It will save you headaches in the short term and money in the long term.

Taxes

A conversation about accounting and small business isn’t complete without discussing taxes. The tax struggle can be daunting, from filing to making sure you pay enough but that you don’t overpay. A significant challenge regarding taxes is merely keeping up with the ever-changing tax laws. A qualified accountant or CPA will be up-to-date on new regulations and guidelines so that you don’t have to be.

Overcoming accounting challenges like these is easy with a qualified accounting team on your side. Consider outsourcing your accounting needs so that your focus remains where it should – on running your business your way.

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Contact our accounting professionals now for help managing your small business finances.

Cash is critical to the functioning of every business. Maintaining a healthy cash flow not only allows a company to meet its financial obligations but also gives it the flexibility to take advantage of emerging opportunities.

All too often, however, small businesses find themselves in a cash crunch, struggling to pay the bills and stay afloat. The good news is that businesses can take various measures to manage cash flow more effectively.

Controlling Expenses

A good place to start is by reviewing expenses to determine if there are areas where you can shave costs by contracting with another vendor or renegotiating existing contracts. Costs for ongoing goods and services, such as utilities, shipping, and telecommunications, should be reviewed frequently to see if expenses can be reduced. And when paying suppliers, consider whether it makes financial sense to take advantage of any early payment incentives that may be offered.

Keeping Debt in Check

Debt can be a useful tool if used properly, so be sure to keep it at a manageable level. Before your business takes on a new loan, reach out to multiple lenders and compare the terms they offer. When acquiring equipment, consider whether leasing may be a better option than borrowing money to finance its purchase. For short-term financing needs, a line of credit is a helpful tool. The lender will base interest charges only on the amount your business draws from the credit line.

Managing Inventory

Maintaining excessive inventory can tie up cash unnecessarily. If your business carries inventory, avoid overstocking. Your inventory management system should be able to indicate the minimum quantities that you need to keep on hand in order to meet your customers’ needs.

Simplifying Billing and Collections

Employees who handle billing and collections should have specific, clear guidelines. By standardizing the process, you help ensure your business will be paid promptly. You can speed up payments by offering discounts for early payment or by encouraging your customers to pay using electronic funds transfer. To help minimize the problem of unpaid accounts, consider making follow-up calls or sending email or text message reminders within a set period after you have provided goods or services or when a bill’s due date passes. Minimizing Taxes When Possible

Deductions and credits can help your business limit its tax burden and boost its cash flow. A knowledgeable tax professional can keep you informed of any special tax breaks that may be of value to your business, such as the energy credit for the acquisition of various types of alternative energy property.

Make Planning a Priority

Identifying the causes of reduced cash flow and taking steps to rectify a cash flow crunch is critical to the ongoing success of your business. Proper cash flow planning can help you make better use of budgets and employ financing and capital more effectively to increase revenues as well as boost profits. If erratic cash flow is a recurring issue for your business, it can be helpful to gain the insights and the input from an experienced financial professional.