A series of Business Tips from the book:
The Little Big Small Business Book
by Micah Fraim
There is an old joke that if you ask an accountant any question, regardless of how rudimentary it may seem, he will always answer with “it depends”.
Gotta love it!
Having spent much training and work in the accounting field, I find this quote rather funny! It is also one of the reasons why I am no longer in the field.
Regardless, this little ebook sites some very important points and topics about starting and forming a business.
Micah used the beginning of the book explaining the differences between some of the business entities you might want to consider for your business:
• Wal-Mart, IBM, and other major corporations are C-Corporations. This is because business with: 1) more than one class of stock or 2) more than 100 shareholders are not given the option of S-Corp election.
• LLCs are probably one of the most popular entities for small business owners – and with good reason: They are easy to form. They give the owner the benefit of limited legal liability (as do the other entities). If there is only one owner, they can be treated as a “disregarded entity”.
• When possible and under the right circumstances, S-Corps are the “crème de la crème” of tax entities. They offer the same legal protection as the other entities but have one major advantage: Earnings in excess of the shareholder’s salary are not subject to self-employment tax.
So, let’s spend this coming week talking about the various tips, from an accountant’s perspective, on developing your small business.
Very closely related to profits in a business is the critical matter of cash flow. The two are related, but are not exactly the same thing…. CASH FLOW – it is the fuel that powers the engine of businesses and allows them to reach profitability.
— Micah Fraim
From what I have read, one of the biggest downfalls of new business is to forget cash flow planning.
Micah sites the story of a baseball card collector who spends all his money buying collectible baseball cards. After a period of time, these cards increase in value — making his business worth more — but in the meantime, the collector had no money to pay his rent, utilities and other expenses. Not a good business model!
Having a plan in place to deal with cash flow is important to take you through the times where people may not be buying your products (during the winter months after the holidays comes to mind for us).
If you are like us, we have other projects and businesses that we work on during the slow time of our product based business. What other ideas do you implement during your down times for your business?
I’m a firm believer that every business can benefit from a certain amount of debt. Borrowing fuels growth, can get you through lean months, and actually increases some measures of profitability.
— Micah Fraim
Most folks use credit cards to start or maintain their businesses at some point in time. Not a bad option if used wisely.
Micah outlines a couple ways to determine the best measures of how much debt a business can handle:
• Debt to Asset Ratio = (Total Debt / Total Assets) The debt to asset ratio shows how much you have borrowed compared to how much you own. This ratio should be below 40% in most industries.
• Debt to Income Ratio = (Annual Debt Payments / Total Income) The debt to income ratio shows how much of your income is eaten up by debt repayments and this ratio should also be below 40%.
• Acid-Test Ratio = [(Current Assets – Inventory) / Current Liabilities] The acid-test ratio measures how easily you could pay off your current debts. Ideally this should be 1 or greater.
To improve your debt to cash ratio, you can do several things such as higher commissionable sales people to sell your products (increasing income without incurring expenses), prioritize your loan payments by paying off the highest interest loan first, and, of course, looking at reducing your expenses.
You cannot go around cutting every expense possible. It ends up being a “penny wise and pound foolish” approach. There is a quote from Henry Ford I have always loved: “[a] man who stops advertising to save money is like a man who stops a clock to save time.”
Having worked with several small businesses and organizations, I am frustrated to find that once they start having cash flow issues, the first thing the do is stop advertising and/or marketing. Just the exact opposite of what should be done!
Although advertising is considered an expense, it is really an asset to a growing business. The more effective advertising you have, the more sales you will make.
Of course, the important word here is EFFECTIVE advertising.
With the internet, we can create all types of marketing and advertising for our business with little or no cost. Of course, this subject will fill another complete book, but if you are ineffective in this area, look online for some free information on internet marketing and go from there.
We all need outside advisers and opinions to make sure we continue on the right course. People who are not there to make us happy or tickle our ears, but instead can objectively analyze how things are being run.
Another opinion offers a fresh perspective on our business, our products, and the way we do business.
Fortunately, I am in business with my husband, Malcolm, who sees things from a very different perspective than I do. Because of this, we are a great team!
As a sales rep, I worked together with lots of new business owners to help them grow their business. Being out in the field, I could share new trends and products that would fit in with their line.
Attending trade shows can wet a person’s creative juices when viewing all the different trends, colors, products and displays of others.
And, of course, nothing can substitute for the help you can get from bookkeepers, online or off line craft support groups and various government agencies geared towards helping small business owners.