Understanding Your Financial Position

Understanding your current financial position is a vital first step in developing your financial strategy. This means taking a close look at your financial statements, such as your balance sheet, income statement, and statement of cash flows. These statements provide valuable insights into your business’s financial health and performance, helping you track progress, identify areas for improvement, and make informed decisions about investments, expenses, and revenue generation.

According to a survey by QuickBooks, 61% of small business owners admit to not fully understanding their financial statements. This lack of understanding can lead to poor financial decisions and missed opportunities for growth and profitability. By taking the time to understand your financial position and develop a financial strategy that aligns with your goals, you can make better-informed decisions and set your business on the path to success.  Don’t let the numbers intimidate you, if your eyes glazed over on this section, consult a fractional CFO to translate your financial statements so you really understand your current financial position.

Aligning Financial Strategy with Business Goals

A well-crafted financial strategy aligns with your business goals and objectives. This means taking into account your business’s unique characteristics, such as its industry, size, and stage of growth, as well as external factors, such as the competitive landscape, regulatory environment, and economic conditions.

For example, if your goal is to grow rapidly, you may decide to invest heavily in marketing and product development. Alternatively, if profitability is your primary objective, you may focus on reducing expenses and optimizing your operations. By aligning your financial strategy with your business goals, you can prioritize your financial goals and allocate resources accordingly.

According to a survey by SCORE, only 40% of small business owners have a formal, written business plan. This lack of planning can lead to a lack of direction and focus, making it difficult to develop a financial strategy that aligns with your goals. By developing a clear business plan and financial strategy, you can set a course for success and ensure that your business is moving in the right direction.

Securing External Funding

Securing external funding is a critical step for small businesses that require additional capital to support growth and expansion. However, before providing financing, lenders and investors assess a small business’s financial position, performance, and prospects to determine whether they are a good investment.

A well-crafted financial strategy demonstrates that the business owner has a clear understanding of their financial position, has identified potential risks and challenges, and has a plan to mitigate them. A financial strategy can help small businesses communicate their financial goals and objectives, highlight their competitive advantage, and demonstrate their ability to manage risks effectively. Lenders and investors are more likely to support a small business that has a clear plan for achieving financial success and mitigating risks.

Additionally, a financial strategy can help small businesses determine the appropriate type and amount of funding they need. For example, if a small business needs short-term funding to cover cash flow gaps, a line of credit or working capital loan may be more appropriate than a long-term loan or equity investment. By having a clear understanding of their financial needs, small business owners can identify the right funding options and make informed decisions about financing.

Managing Cash Flow

According to a survey by JPMorgan Chase, 82% of small business failures are due to poor cash flow management. By prioritizing cash flow management and developing a solid financial strategy, small businesses can avoid this common pitfall and set themselves up for success.

By developing solid financial strategy that includes measures such as budgeting, forecasting, and a 12 week cash flow forecast, small business owners can ensure that they have enough money to operate their business day to day. And allows you to plan for critical investments in your business.  Rapid growth often creates a cash flow crunch so cash flow planning needs to be an integral component of your financial strategy.

Monitoring and Evaluating Financial Performance

Monitoring and evaluating financial performance is a crucial component of a small business financial strategy. Small business owners need to regularly track key financial metrics such as revenue, expenses, and profit margins, as well as non-financial measures such as sales pipeline, staff utilization rates, and customer satisfaction to stay informed about their business’s overall health.

Identifying and tracking key metrics also allows a small business to benchmark their performance against industry standards and competitors. to help business owners make informed decisions about their financial strategy. By tracking their performance and comparing it to others in their industry, small business owners can identify areas for improvement and make changes to achieve their financial goals.

Benchmarking against industry standards and competitors can also help small business owners understand how their business stacks up against others in their industry. By comparing their performance against industry benchmarks, small business owners can gain insights into their strengths and weaknesses and identify areas where they are lagging behind their peers and make changes to improve their performance.

By analyzing financial data, small business owners can assess the effectiveness of their financial strategies, respond quickly to market changes and make informed decisions about future investments and initiatives.

According to a survey by the Small Business Administration, only 40% of small business owners track their financial metrics regularly. This lack of monitoring and evaluation can lead to missed opportunities for growth and profitability and make it difficult to identify and address financial challenges.

By implementing a robust monitoring and evaluation process as part of their financial strategy, small business owners can stay informed about their business’s financial health and make data-driven decisions. This can help them identify areas for improvement, make adjustments to their financial strategies, and ultimately achieve their financial goals.

Conclusion

In conclusion, developing a financial strategy is essential for small business success. A well-crafted financial strategy can help small business owners understand their financial position, align their financial goals with their business objectives, secure external funding, manage cash flow, and monitor and evaluate financial performance. By taking the time to develop a solid financial strategy and regularly monitoring and evaluating financial performance, small business owners can set their businesses up for long-term success.

If you are ready for to create a robust financial strategy you may need a Fractional CFO to set your business on the right track.

References:

QuickBooks. “Small Business Financial Management Survey.” 2017.

SCORE. “The Megaphone of Main Street: Report on America’s Small Businesses.” 2018.

National Small Business Association. “2020 Small Business COVID-19 Impact Survey.” 2020.

JPMorgan Chase. “Small Business Cash Flow Infographic.” 2017.

Small Business Administration. “Financial Statements: The Foundation of a Business.” 2017.References:

QuickBooks. (2018). State of small business finances. Retrieved from https://quickbooks.intuit.com/content/dam/qb/quickbooks/campaigns/images/2018_State_of_Small_Business_Finances_Report.pdf

SCORE. (2019). The Megaphone of Main Street: Report on America’s Small Businesses. Retrieved from https://www.score.org/resource/2019-megaphone-small-business-report

National Small Business Association. (2021). 2021 Small Business Taxation Survey. Retrieved from https://www.nsba.net/wp-content/uploads/2021/02/2021-Small-Business-Taxation-Survey.pdf

JPMorgan Chase. (2019). Cash is King: Flows, Balances, and Buffer Days. Retrieved from https://www.jpmorgan.com/commercial-banking/insights/cash-is-king-flows-balances-buffer-days

Accounting Book Review

As January approaches, it’s essential to ensure that all your accounting books are accurate and up-to-date. As a business owner, you may cringe at the thought of these administrative and accounting tasks. Ideally, you should be checking your books monthly. If you have not done so, your financial reports may be inaccurate, and you may be missing an opportunity to proactively spot trends in your data. Reviewing your books throughout the year makes for a much easier end-of-year close.

When reviewing your books, the first step is to check your balance sheet. Many business owners ignore this financial report, but it holds the key to making sure your books are accurate. You are looking for things that stick out, like assets or liabilities that show a negative balance, large accounts receivable that don’t match up to what you know about what customers owe you, loan or credit card balances that have not changed through the year even though you have made payments. Each of these items is an indication of incorrectly recorded transactions.

Now you can move on to looking at your detailed transactions. Ensure all proper documentation is saved and transactions are recorded with the payee, account, amount, and business purpose. If you find yourself unsure about a transaction, now is the time to reach out to your accountant to discuss how to record the transaction and how it will affect your tax return.

Once your transactions have been recorded and reviewed, double-check that all money is where it should be. Are you up to date on paying your vendors? Do any of your clients have unpaid invoices? Are all your accounts reconciled? It’s essential to have all accounts in good standing prior to year-end.

Vendor Review

As you prepare for year-end, you want to ensure that all your vendor information is accurate. Now is the time to update addresses and check that you have a W-9 on file for every vendor. You also want to identify which vendors will require a 1099. Generally speaking, you must issue a 1099 form to anyone you have paid $600 or more. This applies to your contractors, attorneys, accountants, consultants, website developers, coaches, and anyone else you paid for services rendered.

Employee Review

Just as you do with vendors, your employee information should be reviewed and updated so that all your W2s are delivered correctly. At this time, it is also beneficial to complete a compensation review. Employee satisfaction is an essential part of any company, so giving hard-working employees a raise is an integral part of your business. As you evaluate giving compensation reviews, consider market-based comparisons and cost of living adjustments. Year-end incentives are also a fun way to engage and reward your hard-working employees.

It’s equally important to reassess the staffing needs of your business each year. First, look at your employees. Are they fulfilling their roles? Do you have the right people in the right positions? Next, look at your business. What were your staffing needs like this year? Were they fulfilled? What do you need to plan for in the upcoming year?

Prepare for Tax Season

Even with proper planning, the inconvenience of tax season remains. Preparing the paperwork is often a significant pain point for business owners during this time. Paperwork preparations include gathering receipts, this year’s W-2s and 1099s, your tax return from the previous year, deductions, and more. Ask your tax preparer for a copy of their tax checklist to help you organize and collect all the records you’ll need to file your tax return. If you prepare your own return, QuickBooks offers a printable tax checklist here.

In addition to gathering all necessary documentation, there are four other necessary considerations when preparing for tax season.

1. Estimated tax payments – Have you made your estimated tax payments and adjusted payments for increased revenue/expenses? While “safe harbor” tax estimates keep you from incurring penalties, it does not lessen the shock of unexpected taxes due at filing time – use your up-to-date financials to determine if you need to set aside additional funds to pay taxes.
2. Year-end purchases – It’s never a good idea to spend money just to save on taxes. However, if it is something you need regardless, purchasing before the end of the year can help minimize your tax situation.
3. Retirement plan funding – Retirement plan options can be an excellent way to manage taxes and put aside funds for your and your employee’s retirement. As a small business owner, planning for your retirement is entirely up to you, but the good news is there are a variety of low costs, easy-to-administer plans available to small business owners outside the standard 401k or IRA. If you need help deciding what type of plan is right for your business, consult your investment advisor or, for a do-it-yourself option, check your Vanguard’s small business retirement plan guide. Generally, you have until you file your taxes to fund your retirement accounts but now is a great time to ensure you have the cash to do so.
4. Client invoicing – Review your current projects and your income expectations. Do you need to catch up with your client invoicing or perhaps wait until early next year to bill some accounts? Keep in mind most businesses pay taxes on a cash basis, so managing the timing of billing and collecting accounts can be a tax planning tool.

Reviewing 2022 Goals

As the fourth quarter is in full swing, you may start to reflect on this business year. Setting and reassessing annual goals are crucial for the success of a business. Ideally, you set measurable goals at the start of the year. Are you on track to meet these goals? If you feel you will be cutting it close, devise a strategy to still achieve these goals. If your key performance indicators(KPI) predict that you will fall short or exceed your 2022 goals, utilize this information to help set realistic targets for 2023. Additionally, use this time to re-evaluate your KPIs to ensure that you are tracking the most valuable data.

Set New Goals for 2023

Once you have gathered your tax documents, reviewed your books, updated necessary records, and analyzed your business, you may feel lighter. The tedious year-end work is almost complete. At this time, you can switch your focus to the future of your business.

Setting goals each year should be a non-negotiable task. Determine what overarching goals you would like to develop, create a budget and set your KPIs. To make your goals more digestible, divide them into manageable and measurable parts. Having a big goal might seem intimidating. However, if you approach things incrementally, even the biggest ones seem possible.

Minimize the Stress

By planning ahead, staying organized, and utilizing the various resources available to you can significantly lessen stress as the year comes to an end. At ClariFI Business Solutions, we can help you manage even those most complicated end-of-year prep and tedious tasks seamlessly.

As we move into 2023, make sure to plan ahead for success and ease, identify all new opportunities, and stay focused!

Sources:

https://quickbooks.intuit.com/r/taxes/small-business-tax-prep-checklist/ess

https://investor.vanguard.com/accounts-plans/small-business-retirement-plans

What is Strategic about Bookkeeping?

Strategic bookkeeping can be thought of as evolutionary, in a way. As your business grows, the depth of your accounting, financial tracking, and bookkeeping must grow too. When a business is new, it may only require the basic tracking of profit/loss statements and deductions primarily for tax purposes. As you add employees and your business grows, your accounting needs evolve with it providing the financial information you need to make informed business decisions.

Every business should have a strategic plan that identifies their vision for the future and defines goals that keep them on track.  Strategy driven accounting systems and processes allow you to capture the information you need to measure progress towards those goals, identify opportunities and get early indicators of problems. Accurate, strategic accounting also allows businesses to compare themselves to others in the industry to set benchmarks, control expenses and accelerate growth.

Why Should You Use Strategic Bookkeeping?

As the business grows, the business owner needs to evolve into a CEO, working strategically on the business instead of in the business.  They are no longer able to have their hands in every process and know every number off hand, they need to develop a system that filters up the important information.  Defining the financial information that is critical to your business growth and having systems in place to capture that information, evaluate progress and focus the CEOs attention where it is needed.

Having your financial information presented in a simple yet strategic way provides the hard numbers you need to put your strategic plan into action while getting everyone in the organization on the same page. Strategic bookkeeping allows you to create reports that help management make informed decisions about where the company is headed with its finances and resources.

When you are ready to get strategic about how your books are kept, the first step is structure your accounting systems and records so they deliver precisely the information you need to monitor your business. Well organized books allows you to track important metrics such as gross profit per customer or service offering and to calculate key ratios such as Gross Margin, Operating Margin or Return on Investment (ROI) alongside traditional financial measures like cash flow and profit. Your books need to provide insight into which products and services are performing well and which aren’t—so you can make informed decisions about where to focus resources moving forward.

In today’s business world, the ability to make smart financial decisions is critical to success. Bookkeeping is one of the first tasks business owners outsource; they hire a bookkeeper, hand over the information and forget about it.  Strategically that makes sense, a good bookkeeper can free up a lot of your time.  However, bookkeepers often are not trained accountants; they process transactions but don’t have the experience needed to review the financial information and identify measures to monitor the business.  A fractional CFO can help guide your bookkeeper to provide financial information to support the business’s long-term goals.

The American Institute of Certified Public Accountants agrees, saying that “strategic bookkeeping can be a valuable tool for businesses of all sizes.” For a small business, this not only means keeping track of expenses and revenue so you can know what’s coming in and going out but analyzing that information to identify trends and benchmark your businesses against others in your industry.

As we all learned at the outset of the pandemic, cash is king – cash flow issues are more likely to shutter a business than lack of profitability.  According to SCORE, 82% of businesses fail due to cash flow issues.  You may think cash has nothing to do with bookkeeping but having strategically designed books allows you to set up a system to monitor cash.  You will need to know how much money you have on hand, identify funds earmarked for future services (client deposits), project future sales (revenue), identify how much money you will spend to earn that revenue (cost of goods sold) and the day-to-day cost of running your business (overhead).  Creating a 12-week cash flow project, helps you plan for normal business fluctuations and respond to unexpected events.

The good news is there are steps to ensure that your accounting is in line with your business goals, and a good fractional CFO can help make it happen. They’ll be able to help you determine what kind of reporting needs to happen for you to reach your goals—and then work out the details so that those reports are happening automatically.

Let’s Get Started

ClariFI business solutions starts every engagement with a Financial Clarity Review.  We do a deep dive into your financial systems and processes to see if they are set up to deliver you good financial information.  Without this information, you are running your company blind.

Strategic bookkeeping is a critical tool for business owners who want to make wise, informed financial decisions. It involves having a financial expert looking at the big picture and helping you make decisions that will benefit the business in the short term and help it grow and succeed in the long term. If you’re ready to get strategic about your bookkeeping, ClariFI Business Solutions can support you in the transition. ClariFI Business Solutions is passionate about helping business owners grow more successful businesses through understanding and optimizing their finances. Contact ClariFI here to get the support you need.

If you find those lean months are turning into lean quarters, a loan could be the deciding factor that makes or breaks your business. So, choosing the right small business loan for your company is crucial.

Your first step in considering lending is identifying the type of funding you need. Do you need a line of credit that helps you deal with variations in cash flow or a long-term loan to help you purchase real estate or equipment, fund your startup or purchase a business? Business owners should not avoid debt, the right loan can help your business blossom to the next level and may provide a good return on your investment (ROI).

What Loan Types Are Available for Small Business Owners?

There are four main types of small business loans and funding options to choose from:

1. Small Business Administration (SBA) loans
2. Bank business loans
3. Online loans
4. Crowdlending

SBA Loans are often the best option for companies that don’t meet traditional banks stringent lending requirements. Don’t be confused by the term SBA Loan, these loans are still issued by traditional banks but are guaranteed by the Small Business Administration.

Established businesses with solid financials can apply for the SBA 504 loan and the flagship SBA 7(a) loan program. These loans are often best for companies that have significant collateral, such as real estate and manufacturing businesses. It can also be an excellent option for short-term and long-term working capital, refinancing current business debt, and purchasing fixtures, furniture, and supplies.

If your company is still in the startup phase, then an SBA startup loan is a better loan option for you. The SBA startup loans are for new businesses or business owners with poor credit. The SBA also offers Community Advantage loans in smaller amounts, and these smaller loans have more lenient requirements compared to the 7(a) loan and 504 loans.

Bank business loans tend to be lower in cost than SBA loans, but approval requirements can be rigorous. Generally, banks require a business to be established for two or more years, show positive cash flow, and show strong credit histories for both the company and its owners. Don’t expect to get a loan for your business without a personal guarantee unless you have hard collateral like real estate or equipment.

According to Nerdwallet, some of the best banks for small-business loans are name-brand banks like Bank of America, JPMorgan Chase, Citibank, Wells Fargo, PNC, and U.S. Bank. But, don’t overlook your community banks and credit unions, which are often able to provide more flexible terms, take the time to understand your business, and may provide more personal service.

Online loans have increased in popularity over the past decade. They are a good fit for business owners with low credit scores and companies in business for less than two years. Online lending can be fast, convenient, and easier to obtain; however, the borrowing costs may be higher, sometimes as much as 100%. Keep in mind that high borrowing costs can quickly eat into your business’s profitability so high-interest loans should only be considered after exploring other options.

Crowdlending is a viable and fast-growing alternative to bank loans for startups or established businesses trying to launch a new product. Sometimes called peer-to-peer or P2P lending, crowdlending allows individuals to obtain loans directly from other individuals. Peer-to-peer lending platforms, such as Lending Club or Upstart, enable people to lend or borrow money from each other without using a bank to facilitate the process. These sites set the terms and rates and process the transactions. Some of the benefits of peer-to-peer loans are speed and efficiency. The underwriting process is often completed in one or two weeks and once approved, funds are usually disbursed within days.  Crowd lending is not regulated the same as banks so make sure you understand what you are signing up for.

How to Compare Small Business Loans

When you compare small business loans, you should pay particular attention to specific loan features and to lender reviews.

Compare how these features differ among lenders:

• Available loan amounts
• Annual Percentage Rates (APRs)
• Loan repayment periods

Similar to shopping for items on Amazon, look at the reviews and star ratings left by consumers for each loan provider. Some lenders may offer close to the same loans, but a review and rating can help you determine if it is a lender worth borrowing from.

The Process of Getting a Small Business Loan

Most small business loans have a similar step-by-step process for taking you from application to funding. Below is a typical five-step process of finding, applying for, and receiving your small business loan:

1. Determine the amount of money you need to borrow and how you plan on using it.
2. Compare the different loan features and which ones best suit your business goals.
3. Fill out and submit the business loan application and wait to hear back if you prequalify.
4. Share required documents, like financial statements, tax returns, licenses, photo ID, etc., with the loan lender.
5. Get approved, sign the contract, and receive your funds.

Before you jump into these five steps, it’s essential to have good financial statements (or financial projections if you are a start-up) that tell the accurate financial story of your business. You also need to look at your business budget to make sure you have optimized your business costs and that you have a plan for how to repay the loan.  Lenders will also want to see that you have a plan for profitability and understand what it takes to create a profitable business.

A financial advisor can also help you evaluate the long-term consequences of taking on debt and as Ruth Porat, Chief Financial Officer at Alphabet, advises, “Stick to your true north―build greatness for the long term.”

Using Loans as a Stepping Stone to Grow Your Small Business

ClariFI Business Solutions can help you navigate the different types of loans for small businesses. We care about the financial success of your company and are enthusiastic about helping you find the right financial solutions for your needs. We have a free business health test that can give you much-needed insights to support the growth of your small business. Please get in touch with me online or email me at jyaeger@clarifibusiness.com with any inquiries.

Financial ratios provide the insight you need to help you make better long-term financial decisions and improve the economic success of your business. The problem is your business expense sheets have so much information that it may be challenging to find the numbers that matter most. That’s where financial ratios come into play!

What are Financial Ratios?

A financial ratio is an equation using numbers from your business’s financial statements to help you understand your company’s financial health. The key documents to determine your financial ratios are your cash flow statement, balance sheet, and income statement. These ratios can then be used to determine your company’s growth, liquidity, return rates, leverage, valuation, and profitability.

The Importance of Financial Ratios

Why should you take time out of your already busy schedule to calculate your financial ratios? They can give you the critical information needed to make difficult business decisions. Financial ratios help you:

• Track and measure the financial performance of your business
• Make sound judgments regarding your business’s economic performance
• Set business goals that support profitable outcomes
• Compare your market position to your competitors
• Analyze market trends

Inc. Magazine’s February 2020 article also reminds us, “It is important to keep in mind that financial ratios are time-sensitive; they can only present a picture of the business at the time that the underlying figures were prepared.” You’ll want to check your financial ratios regularly to get a monthly or quarterly snapshot throughout the year. This will help you see seasonal trends and compensate for economic fluctuations.

Financial Ratio by Category

Financial ratios can be organized into four categories:

1. Liquidity
2. Profitability
3. Activity
4. Leverage

Although there are many types of financial ratios within these four categories, we list the ratios most commonly used by small business owners.

Liquidity

Liquidity measures your company’s ability to cover all its expenses. There are two main financial ratios small businesses use in this category:

• Quick Ratio = (Cash + Marketable Securities + Net Accounts Receivable) ÷ Current Liabilities
• Cash Flow to Debt Ratio = (Depreciation + Net Income) ÷ Debt

The quick ratio, or acid test, helps you assess your business’s cash position. In other words, it tells you if you have enough assets to cover your current liabilities. This ratio will help you assess whether your business will survive temporary setbacks and if you need a cash investment to grow your business.

The higher the quick ratio, the stronger your cash position. For example, if your quick ratio is 2.0, you have $2.00 in assets for every $1.00 in liability – this is good news. If your quick ratio is 1.0 or less, your debts are more than your assets. Even bad news is good to know so you can make corrections.

The cash flow to debt ratio helps measure how much debt your company can manage. This financial ratio gives essential information because it discovers a weak cash flow position, which is the prime reason small businesses fail.

For example, a cash flow to debt ratio of 1.0 or less means your business can’t afford its bills without additional income or funds. A 2.0 ratio means your company can cover twice the debt, leaving your company with a strong cash flow.

In the December issue of Forbes Magazine’s Forbes Women, a U.S. bank study showed that 82 percent of businesses fail because of poor cash flow management and notes, “That’s a high rate of failure for a system that can be controlled easily.”

Profitability

The financial ratios in this category determine how much profit your company generates. There are two profitability ratios that small business owners should use:

• Net Profit Margin = (Total Revenue – Total Expenses) ÷ Total Revenue
• Gross Profit Margin = (Sales – Price of Goods or Services Sold) ÷ Total Sales

A positive net profit margin shows your company is effectively converting sales to profit. The higher the profit margin, the more profit your company creates.

For example, a 15 percent profit margin means that the company keeps 15 cents of every dollar sold. If this ratio decreases over time, you may want to keep a closer eye on inventory and employee theft. It might be good to compare the number of office supplies bought to what is being used.

Gross profit margin determines how much is left over after goods are sold to pay for taxes, interest, and expenses. More money leftover gives you more flexibility to pay for other business expenses.

You can calculate this ratio by product or in total for your business. For example, a holistic retailer can measure gross margin by a single product, like herbal teas, or all of their products, like teas, lotions, spices, etc.

Activity

Activity ratios, also known as efficiency ratios, measure how effectively your company manages its assets. Small business owners use three main ratios in this category:

• Accounts Receivable Turnover = (Total Accounts Receivable Outstanding ÷ Total Sales) x Number of Days
• Sales Per Employee = Annual Revenue ÷ Number of Employees

Accounts receivable turnover determines how long it takes your company to get paid after goods are sold. If this number starts getting high, it’s a signal for you to focus on speeding up the receivable process.

If high inventory turnover ratios indicate that your inventory typically runs low, you risk selling out of products. Food industries with perishable inventory will likely have a higher inventory turnover ratio.

The sales per employee ratio will show you how well your workforce is managed and the productivity of your employees. It helps you keep tabs on your company’s growth as you add or reduce the number of employees in your business.

Leverage

Financial ratios in this category help you decide whether your debt levels are appropriate. Leverage ratios are also known as debt, coverage, or solvency ratios. Although there are a few financial ratios in this category, there is one that is used most often:

• Debt to Equity Ratio = Total Liabilities ÷ Shareholder’s Equity

Debt to equity determines the percentage of your business finances coming from creditors and investors, generally a ratio of 1 to 1.5 is considered optimal. The higher the ratio, the more creditor financing or loans are used rather than investor financing or shareholders. Investors and  lenders tend to get nervous when the ratio exceeds 2 as a high ratio can indicate difficulty generating enough cash to repay debt obligations.  On the other hand, a low ratio may indicate the company is not taking advantage of financial leverage in growing the company. .

Financial Ratios Matter to You and Your Business

According to the Director of the Women’s Bureau at the U.S. Department of Labor, Dr. Patricia G. Greene: “ Financial ratios lead to a deep understanding of your business and allow for industry comparisons. Just remember that industry standards are a reference, not a recipe.” Your business is unique and financial decisions may be based on several other factors.

ClariFI Business Solutions can help you understand all your business statements and numbers used to calculate financial ratios. We care about your company’s financial success and are eager to help you with your small business finances. We offer a free business health test and can help provide you with the much-needed insights to help your business grow. Please get in touch with me online or email me at jyaeger@clarifibusiness.com with any questions.

Four Problems Women-owned Businesses Should Address

If you are making less money working in your business than you would be working for a competitor, it is time to take a closer look at your business. The problem could be one, or even all four, of these issues:

• Pricing
• Cost of Services
• Overhead Costs
• Planning for Profit

Pricing

When you are pricing your products or services, ask yourself if you are charging enough for the value you are providing. Finding the right price is critical. According to Harvard Business Review, for the average company a 1% increase in volume results in a 3.3% increase in profits while a 1% improvement in price can increase operating profits by over 11%. Finding the right price gives you serious leverage to business success.

There are three components to a good pricing plan:

• What value are you providing?
• What are your competitors charging?
• What is the cost to deliver your service?

All three need to be in line to create sustainable profitability. The first step is to research your competitors and see what prices they are charging for their services. Keep in mind, just because you own a smaller business, does not mean you need to offer deep discounts. There are plenty of benefits to working with a smaller firm that larger firms can’t offer, such as more personalized attention.

The next step is to know your value. When there is pressure to grow or perform, we are often inclined to discount, price below the competition, or otherwise promote through price. However, customers often view price as a proxy for quality. This means discounting can diminish your brand value – the perception of your service – and your profits.

Cost of Services

There are two types of service-related costs that women’s businesses often undercharge for:

• Contractor costs
• Time committed to deliver services

With contractor costs, are you taking into consideration that you are the one bringing in the clients? If you had a retail space, you wouldn’t purchase your inventory at retail price and resell it for the same price. Remember, professional services work the same way.  You should be paying “wholesale” to your contractors since they do not have to do their own business development. Consider negotiating better deals with your contractors and reminding them of the value you provide.

When you are calculating costs of your services, be sure to add in your own labor costs — the time you commit to ensure the product or service is delivered. Time is one resource you can never get back. Too often business owners forget to factor in their own compensation. You need to be paid for services you are providing and the risk you are taking in running your own business. The average employee marketing manager makes $76,000 per year while the average freelance marketer makes $69,000 per year.  If you can be making more money working for your competitor, you need to rethink your business plan.

Overhead Costs

Sometimes you need to make an investment to start or grow your business. The problem arises when your overhead cost is consistently higher than 30 to 40 percent of your revenue. Look into opportunities to help reduce overhead costs. Cut wasteful meetings or consider selling or writing off old inventory.

It’s easy to let overhead costs sneak out of control. There is always a new app, professional development program, or office supply that promises to save your business. The key is to set a budget for your business and stick to it. Consider each expense as a trade-off that is only worth it if it will increase your growth or profits.  Yes, expenses can increase your profits if they allow you to spend more time on activities that bring in or serve your clients. However, you don’t want to fall into the “It’s only a few dollars a month” trick. Over time even a ”few dollars” add up and cut into your profits.

Planning for Profit

Your pricing calculator should consider a contribution to overhead costs, owner compensation, and profit. If this is not built in from the start, it will not happen. Make sure to price your services to include fixed, variable, and semi-variable costs.

Creating a financial model to evaluate your current and long-term profitability can help ensure your business is sustainable. While you may need to forego some income to get your business started, you need to know that you have a solid financial structure and you should know at what level you become profitable.  A financial business model takes into account the price you can charge, your costs of service, and overhead costs to determine how many services or products you need to sell to achieve your financial goals.

Making Sure Your Business Is Profitable

At ClariFi Business Solutions, we care about your company’s overall success and are passionate about helping you plan for profitability. We provide a free business health assessment and can help you factor in your compensation while providing the insights you need to grow your business. To learn more, please contact me online or email me at jyaeger@clarifibusiness.com.

The Difference Between Bookkeeper, Tax Advisor, and Fractional CFO

What is the difference between these experts? The one you use depends on your budget and type of financial needs. You might get by with a bookkeeper for a while. They may not have any financial certifications, but they do have the knowledge to record business transactions, pay bills, track sales, and produce necessary financial reports.

Your tax accountant has extensive training and expertise as a CPA or Enrolled Agent to handle tax preparation, represent you during an IRS audit, and determine appropriate legal business entities. They come in handy quarterly or annually.

If you have a greater vision for your company and want to grow, you need to develop a plan to know what that looks like. The Fractional CFO usually has extensive corporate finance experience and is often a CPA, which requires a Bachelor’s degree, is state-licensed, and goes through 40+ hours of training to maintain their certification each year. They have accounting skills and apply that knowledge to big-picture thinking for the future of your business. They understand business financial management,  Generally Accepted Accounting Principles (GAAP) adopted by the US Securities and Exchange Commission, and Federal and State tax regulations.  They also have the skills to identify potential problems and find ways to solve them. Fractional CFO services can include:

• Reviewing and helping you understand your financial statements
• Managing an annual budget and developing a yearly strategy
• Creating custom reports to identify and monitor key performance metrics
• Analyzing reports to interpret results and identifying areas of concern with cash flow
• Providing business insights and strategies for long-term objectives, including retirement and eventual sale of the business

If you have a bookkeeper, a Fractional or Virtual CFO (depending on whether they work in-person or remotely) interprets the data and results of their reports, so you know where, when, and how to focus your business efforts. They act as a sounding board and become a trusted team member who gets to know your company initiatives and holds you accountable to reach clearly-defined goals. You’ll uncover ways to cut waste, use cash efficiently, and find opportunities to grow and expand. A streamlined business puts you in a better position to compete with other organizations in your niche.

Every business decision you make has financial implications that affect areas like operations, marketing, sales, human resources, healthcare, and employee benefits. If you don’t have the budget for an in-house CFO and want to go beyond maintaining your existing business with a bookkeeper, you can outsource Fractional CFO services on a part-time or project basis to suit your budget. With their help, you’ll identify opportunities to strengthen or grow your company. That includes consulting for:

• strategic planning
• budgeting
• financial forecasting
• tracking cash flow
• analyzing strengths and weaknesses
• suggesting corrective action

When you don’t have the benefit of a full C-suite yet, a Fractional CFO sets up healthy financial processes with the right structure for your back office from the beginning. It may seem costly at first, but fixing it later costs much more. Many small businesses fail due to poor processes and an inability to measure and track financial activity.

When to Choose a CFO

If you struggle with your business finances, need advice on which metrics to track, or assistance interpreting the data, look to a Fractional CFO. When choosing your FCFO, think about which projects you want them to focus on, how you will interact (in-person or remotely), how often they’ll need to meet with your team, and if you want someone with subject matter expertise in your industry.

Fractional or Virtual CFOs advise all types of companies, from startups to large enterprises, but there are times when you’ll find them even more beneficial:

• Startups use a project-based FCFO to get set up correctly.
• Companies use them when raising capital to organize processes to appeal to investors.
• FCFO services determine why a successful business has revenue but no cash.
• They help business owners who don’t like math to focus on what they do best.
• Businesses replacing or choosing an accounting platform look to a Fractional Chief Financial Officer to audit different systems and find the right fit.

Questions to Ask Yourself

Do you understand what it will take to make your company profitable? What is your gross margin, and how does it compare to others in the industry? Do you have a dynamic plan that allows you to pivot when business conditions change? Are you chasing the bright, flashy things or those that create profitable growth?

To grow your business, you need answers to questions that give you a clear financial picture. Finance and accounting functions can be broken down into six categories:

• General accounting
• Treasury
• Financial reporting
• Financial planning and analysis
• Tax accounting
• Internal audit

If you are only focusing on vendor services, paying bills, and getting your taxes done, you are missing other critical areas of business finance. Managing your resources effectively allows your business to thrive.

At ClariFI Business Solutions, we offer FCFO services to guide you on a path to profits and growth. We believe there is a story hidden in the numbers that can help drive better decisions to grow your business and profit. We provide a free business health assessment and would love to help you understand that story. Your small business deserves to have a financial expert to nurture financially healthy habits and provide much needed insights. To learn more, please contact me online or email me at jyaeger@clarifibusiness.com.

ClariFI Business Solutions, LLC is an accounting and financial consultancy providing small to mid-sized businesses with holistic financial expertise and services that promote long-term success.

Terms Related to Balance Sheets

Balance Sheets are a fundamental financial statement developed by your business accountant. The following terms describe basic accounting terms that relate to them.

Accounts Payable (AP) 

When your business incurs an expense but has not yet paid it, it is recorded as a liability or debt on the Balance Sheet.

Accounts Receivable (AR)

If your company provides a product or service but has not collected payment yet, it is recorded on the Balance Sheet as an asset that will convert to cash.

Accrued Expense

An incurred expense that hasn’t been paid yet is reported under Accounts Payable but described as an Accrued Expense.

Asset (A)

Everything your company owns with cash value is listed on the Balance Sheet in order, from cash (immediate liquidity) to land (long-term liquidity).

Balance Sheet (BS)

A common financial statement that reports all of your business’s assets, liabilities, and equity is called a Balance Sheet. Often referred to as the statement of financial position, it quickly shows what a company is worth and when it is in financial trouble.

Book Value (BV)

Book Value describes an asset that has depreciated over time. It starts with the original value of an Asset and subtracts accumulated depreciation each year.

Equity (E)

When your accountant takes business assets and subtracts any liabilities, what is left over is your equity. This is what your company owns (or its investors).

Inventory

If your company purchases assets to sell, anything that hasn’t sold yet is considered inventory. The numbers adjust as inventory is purchased and sold.

Liability (L)

Liabilities are debts your company has not paid yet, such as Loans, Accounts Payable, and Payroll.

Terms Related to Income Statements

The Income Statement is more commonly known as a Profit and Loss Statement, another fundamental report generated by your accountant. The following terms describe basic accounting terms that relate to it.

Cost of Goods Sold (COGS)

This is what your business spends to create a product or service, such as materials, tools, and labor.

Depreciation (Dep)

Depreciation accounts for the loss of value in an asset over time. These are usually assets with a substantial value, such as vehicles and large equipment. It is reported on the Income Statement as an expense and categorized as “Non-Cash” that won’t directly affect your company’s cash flow.

Expense (Cost)

Costs for items and services used by your business are Expenses.

Gross Margin (GM)

By taking your Gross Profit and dividing it by Revenue in the same period, accountants get a percentage that represents profit after taking into account the cost of delivering your goods or service.

Gross Profit (GP)

The amount your business makes in dollars before subtracting overhead expenses is your Gross Profit. Your accountant subtracts the Cost of Goods Sold from Revenue in the same period.

Income Statement (Profit and Loss) (IS or P&L)

The Income Statement is commonly called a Profit and Loss (P&L). It describes your company’s revenues, expenses, and profits over a specific period. The report begins with Revenue earned and subtracts various costs (expenses). What is left over is called Net Income.

Net Income (NI)

Net Income is strictly profits. Your accountant takes Revenue and subtracts Expenses, including Overhead, COGS, Depreciation, and Taxes, within a specific period.

Net Margin

When you want to compare your business profits in relation to Revenue, your accountant takes Net Income and divides it by Revenue in a given period.

Revenue (Sales) (Rev)

This includes any money earned by your business.

General Terms

These basic accounting terms don’t relate to any particular financial statement.

Accounting Period

An Accounting Period describes the time frame reported on any Financial Statements (Balance Sheet, Income Statement, or Cash Flow).

Allocation

When your business assigns funds to different accounts or periods, costs can be Allocated over many monthly payments or across multiple departments and divisions.

Business (or Legal) Entity

Your Legal Business Entity is how your company is formed in structure or type of business, including S-Corp and C-Corp, Limited Liability Corp, Partnership, Limited Liability Corp, and Sole Proprietor. Different entities have specific legal and tax requirements.

Cash Flow (CF)

Your business receives a certain inflow and outflow of cash over periods of time. By taking your Cash Balance at the beginning of a stated period and subtracting the Cash Balance at the end of the period, you determine if you have a positive or negative cash flow period.

Certified Public Accountant (CPA)

A CPA is a certified professional accountant who fulfills state requirements for education and experience.

Credit

When your business increases liability or equity or decreases assets or expenses, it is expressed on financial statements as a credit.

Debit

If your company increases assets or expenses or decreases liability or equity, it is described as a debit.

Diversification

Diversification reduces risk by allocating capital across many assets so that a single asset doesn’t dictate the performance of your total assets.

Enrolled Agent (EA)

An Enrolled Agent is a professional who successfully passed tests for expertise in business and personal taxes. They complete business tax filings according to IRS requirements.

Fixed Cost (FC)

Costs that don’t change along with sales volume are fixed, such as rent and salaries.

General Ledger (GL)

A complete record of all your business’s financial transactions that are used to prepare all Financial Statements is your General Ledger.

Generally Accepted Accounting Principles (GAAP)

These are the rules established by the US Securities and Exchange Commission so that it is easier to compare a business’s financial reports.

Interest

When taking out a loan or line of credit, the repayment exceeds the principal balance. The extra cost is called interest.

Journal Entry (JE)

Changes to financial statements are Journal Entries. Each entry has a unique identifier such as a date, a debit/credit, an amount, and an account code to determine which account is affected.

Liquidity

How quickly assets can be converted into cash refers to liquidity. For example, stocks can be sold faster than a house. That makes a stock easier to turn into cash (liquidate) than real estate.

Material

If information influences financial decisions, it is considered material. For example, a business with a million-dollar revenue would not deem an expense of 50 cents as material. Material considerations used in reports and calculations must be disclosed according to GAAP requirements.

On Credit/On Account

An On Credit or On Account purchase is enjoyed by the buyer now but will be paid later.

Overhead

Business Expenses or costs related to running the business but not involved in the making or delivering of a product service are called Overhead. It includes things like rent and salaries.

Payroll

Your business has a separate account that tracks employee wages, salaries, deductions, and bonuses. These Expenses may appear on the Balance Sheet as a liability if the company owes accrued vacation pay or unpaid wages.

Present Value (PV)

The assets in your business have a Present Value as of today. This value will change at different points in time. Cash today usually has more value than cash tomorrow due to inflation.

Receipts

Every business produces receipts for its product or service, and it receives receipts for purchases from other businesses to record payment. Accountants explain why you need to save your purchase Receipts to prove your incurred expenses are accurate.

Return on Investment (ROI)

This term refers to your business profit, divided by your Investments. It is also used to describe profit on different projects or objectives. For example, hiring a Fractional CFO to go over some bookkeeping reports might cost you, but the savings from improved processes go beyond the service’s cost to achieve ROI.

Trial Balance (TB)

Your business should have a list of all account balances (debit or credit) in a General Ledger. The debit totals must equal the credit totals to balance them.

Variable Cost (VC)

Business costs that are affected by your sales volume vary. They are the opposite of Fixed Costs. Variable costs increase with sales because they are incurred produce and deliver the sale, such as raw materials.

Doing a Small Business Year-end Financial Review 

An annual review begins by evaluating your company’s financial statements, including:

• Balance sheet – summarizes what your business owns and owes (assets and liabilities)
• Income statement (profit and loss) – itemizes expenses and revenue and shows if you are making a profit or losing money
• Cash flow statement – explains where your money goes, such as operating expenses, loan payments, and investments

Conducting monthly or quarterly financial reviews enables you to identify cash flow problems or operational concerns and make corrections before your profit goals get off track. If you haven’t been reviewing your financial reports regularly, now is the time to run a year-to-date report to make sure you are maintaining a healthy ratio between revenue and expenses. Your success depends on knowing where the majority of your income is coming from, identifying cash flow patterns, and finding ways to reduce operational costs. 

Calculating financial ratios such as Gross Profit Margin, Operating Expense Margin, and Owners Compensation as a percent of gross revenue allow you to quickly identify when your business is going off track.  

• Gross Profit Margin (Revenue less cost of goods sold) tells you when your contractor or inventory costs are creeping up and may indicate your need to adjust your prices or renegotiate vendor contracts
• Operating Expense Margin (all expenses except cost of goods) helps you identify when the cost of operating your business is going up. A regular review of credit card statements and vendor payments will help you identify rising costs and potentially unnecessary expenses. Review your recurring expenses at least annually to make sure they are all necessary and determine if there are less expensive options available
• Owners Compensation as a percent of Revenue allows you to evaluate your own financial value to your company. No matter your passion for running your business, you need to make a reasonable (or hopefully even better) salary and be paid for the risk of running your own business. If your compensation isn’t high enough, your accountant can help you identify ways to move toward better profits.

Gathering Data for Financial Statements

Your financial reports include data from all relevant business-related records organized throughout the year to reference when you need them. If you haven’t done it already, start sorting through the following:

• Operating Expenses
• Bank Statements
• Invoices and Receipts
• Equipment and Inventory
• Payroll
• Vendor Contracts
• Rent or Mortgage
• Loan and Credit Card Payments
• Insurance Premiums
• Tax Forms and Records

Once information is transferred to spreadsheets or an accounting program, review your financial reports, save the necessary documents, and purge the rest. Your accountant or financial advisor can explain what to keep, for how long, and why. Most records are kept between three and ten years, either in their original form or scanned and saved on your computer. 

Preparing in Advance for Tax Season 

Most business owners outsource tax preparation because it is time-consuming, and it takes some tax code knowledge to be sure you are filing correctly. Your accountant can help reduce your taxes by taking advantage of relevant business deductions that you might not be thinking about. They use the information on your balance sheet, income, and cash flow statements that contain records of:

• Major purchases used for business purposes that may qualify for immediate expensing or may need to be depreciated over time
• Identifying hidden expenses such as home office deductions, use of personal vehicles, and other business expenses paid directly by the business owner
• Identifying the right type of retirement plan for your specific business and maximizing deductible retirement plan contributions 
• Determining the deductibility of health insurance premiums or Health Savings Account (HSA) payments that may reduce your tax liability

Keeping your financial reports up to date allows you to estimate annual taxes in advance to make quarterly payments or set aside money in a separate account until the tax filing date. 

Evaluating Your Staffing Needs

Fourth quarter is also the time to audit employee and vendor records to make sure you have the correct contact information and tax ID numbers for your required year-end filings. You are responsible for providing W2s to all your employees,1099’s to anyone you paid during the year, and filing this information with the IRS.  

While you have these records handy, it’s a good time to start thinking about your future needs. Will you be adding a new full or part-time employee shortly? Do you have contractors that really should be paid as employees? Looking back on the previous year should offer some insight. Ask your accountant or CFO how to build hiring costs into your budget. You are likely to have a few options.

As you review your current year results, take the time to determine your financial goals for the next 12 months. Small business owners who set aside time to evaluate their business performance and strategize ways to meet financial goals are more likely to see their businesses thrive. Seeing the big picture allows you to discover where your business could improve and identify the additional resources needed to meet your goals.  Now is the time to consider making changes, such as: 

• Applying for a business loan for working capital
• Hiring more people
• Expanding locations, products, or services 
• Assessing your inventory to adjust capital investments 
• Evaluating service contracts for potential renegotiation 

As a business owner, you may have initially taken on finance and accounting roles and let bookkeeping and reporting slide to handle other pressing business matters. But if you want to scale or grow your company, rely on a professional accountant, CPA, or CFO to answer financial questions impacting current and future business plans. 

Contact us to learn how we help clarify your business goals with a small business year-end financial review! From setting up your accounting records to preparing financial forecasts, you’ll have the information you need to make significant business decisions that improve your operations and allow you to scale successfully in the new year.

Good news, it is available to you right now – it’s called a budget. Operating without one is like driving from Denver to San Francisco without a map, you know you need to go west and eventually you will reach the Ocean, but it’s probably not going to be the most efficient route.   Putting together a budget does not have to be painful or time consuming (at least not as much as you might expect) and it can help you make more strategic decisions for your business.

You wouldn’t set out on a road trip without consulting a map, planning the most efficient or interesting route, identifying stops along the way for food and sleep and estimating how long it will take you to get there.  A budget is just like a good road trip plan – it helps you figure out where you want to get, how much is it going to cost and how to respond to the unexpected.

You have probably spent a lot of time thinking about your services or products and how to generate revenue but, you also need to think about what you need to spend to support that plan and how to respond to unexpected events.  A strategic spending plan (aka budget) is a tool to guide your business and prioritize the use of your limited resources.  Here are a few things to keep in mind as you put together a budget.

• Profit targets are just as important as sales targets, after all, you are in business to make money.  Profit doesn’t just happen; you must make a plan or at the end of the day there will be nothing left for you.  You may have passion and a reason unrelated to money that you are in business but without a good income it isn’t sustainable.
• Be strategic about how you use your money.  Look at your growth plan and decide what you need to invest in to support the plans for the coming year.  Identify a wish list and then ask yourself:
  • Is it necessary?
  • How will it contribute to my growth or support my clients?
  • What are the alternatives for obtaining this service? Can I get it elsewhere cheaper?
• Review your current spending and make sure you are getting a good bang for your buck.  Evaluate each of your expenses by asking yourself how each is contributing to business growth or supporting client relationships.  Make sure you consider alternatives and reprice services periodically, you may be able to get a better deal by shopping around for basic services.
• The budget is not a one-time thing you create and then put away.  Monthly budget reviews are similar to checking Google Maps along the way.  They allow you quickly see when something looks out whack:  Profit looks low? –  maybe you missed and invoice. Operating expenses looks high? – did you accidentally pay rent twice or were there subscription changes you weren’t aware of?  When you catch rising expenses early there are often adjustments that can be made to bring them in line before it gets out of hand
• Income and expenses can be lumpy, and surprises happen.  Use the budget to create a cash flow projection to identify expected cash fluctuations and plan for any expected shortfalls.  You may need to set aside reserves for taxes and annual insurance premiums and equipment that keeps your business running.  The budget also helps you identify ahead of time when you might need financing and it improves your chances of getting the loan. Bankers want to know you have the resources available to repay the loan and a disciplined plan for spending money available to you.
• Last, but not least, Involve your people.  As you grow a budget allows you to delegate responsibilities without giving up financial control.  It gives your employees an opportunity to have input on how the business spends money and use it as a tool to guide spending decisions.

Think of the budget as your roadmap to get your business from where it is to where you want it to be. Creating and monitoring your budget allows you to be strategic about utilizing your business resources to drive you towards your goals. Fall is the perfect time to start planning for the next year so let me know if you need help setting up your company budget.