Money Second

Money Second is written for entrepreneurs. Your life, family, business, and passions come first. Money is a resource that follows those priorities and, when properly utilized, frees you to pursue the activities you enjoy and find meaningful. Here, you can quickly learn how to make the best use of your resources and get on to doing what you love.

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How can I manage my cash flow issues?

I haven’t found my blog routine yet, and I feel bad for how long it’s been since I last posted. It’s not that I don’t have genuinely useful things to share. I just let my life get so busy, I was distracted. Anyway, I have a handful of blog posts, half-written, and wanted to finish this one first for you because I think it’s so important.

How can I manage my cash flow issues?

The vast majority of small business failures is due to poor cash flow. Something in the realm of 90% of all failures are because of not having a handle on cash. It’s critical to the growth and success of your business to manage your cash flow.

The goal, obviously, is to build a cash cushion so there aren’t any cash flow issues. Easier said than done. Startups usually have to manage cash flow closely because expenses pile up before sales can cover all the costs. This doesn’t leave much room to build a cushion. It’s typical that, in the startup phase, total accounts payable is greater than total accounts receivable – which indicates a cash flow problem. Startups will often use a line of credit or a loan to help smooth the cash flow issues. But, other than borrowing money, what else can you do?

Here are a few ways to manage your cash flow and avoid putting your business in danger.

Write it down.

Projecting your cash flow can help identify existing problems much more effectively than making assumptions in your head and hoping it will all work out. A cash flow projection will help you see where to adjust planned expenses if sales aren’t picking up as quickly, or if your receivables ageing is climbing (meaning your customers aren’t paying as quickly as they used to). Use this projection when making decisions that will affect cash. Adjust your projections on a regular basis, at least monthly.

Be realistic.

When projecting your cash flow, avoid putting down pie-in-the-sky hopeful sales numbers and too-low costs. Base your assumptions on reality, such as past performance. When we make investments, we are constantly told, “Past performance is not indicative of future results”. However, the past is all we have – unless you have some super-human ability to see into the future. I don’t. So, using some critical thinking around last year’s performance, it’s a great basis to begin a projection. Then, armed with this year’s assumptions around market, product, or policy changes, layer in your adjustments. What if your business is so new that you don’t have a year of performance to form a basis? In this case, you should find an existing product or service that’s similar enough to yours and create your projection based on that.

Cash is king.

Beware of huge capital outlays too soon in your startup phase. Fixed assets are expensive and you need cash to pay the bills. And the inevitable unexpected costs will arise, whether from personnel issues, an equipment failure, an unhappy customer, or just being blind to the total cost involved. It makes sense to save cash by leasing or renting instead of buying. At least buy used instead of new. Limit in-stock inventory and find options for fast delivery if more inventory is needed. Hang onto that cash.

Acknowledge bad terms during startup.

From the sales side, it can be hard to keep your receivables current. Getting late payments from customers is a huge challenge. From the expense side, your landlord may ask for the first and last month’s rent along with a security deposit. You may need to put cash in escrow for certain costs, such as utilities. Your vendors may want immediate payment terms until you can establish good credit with them. These things put added pressure on your cash flow. Instead of feeling bad for doing collection calls when you’re just so happy to have made a sale, you must find friendly ways to connect with your customers while reminding them they missed their payment. Use a lockbox bank service to speed up getting receivables into your bank account. At first, you naturally want any and all customers. You’re just happy to be recording revenue. Eventually, you’ll be better off establishing a policy for collecting receivables (e.g. 1 ½% finance charge or work stoppage after 30 days past due) and keeping only your good customers. Offer discounts before you write off bad debt. Of course, you can sell your bad debt, but it’ll be for pennies on the dollar. Instead of wasting time chasing bad debt, focus on your good customers. And certainly don’t pay your bills before they’re due.

Even if your business is not in its startup phase, these are just a few ways you can manage your cash flow and reduce your exposure to any cash-flow surprises.

Do I Need a Bookkeeper or an Accountant?

What’s the difference between a bookkeeper and an accountant? And, which do I need?

When you started your business, you likely performed many of the day-to-day bookkeeping tasks yourself while occasionally utilizing an accountant for help with your business plan and for tax preparation. As a business owner, you may find managing your books easy to do, but it takes you away from more valuable work you could be doing with your business. At the same time, your tax planning has likely become more complicated. You know you need help. So, what are your options?

Bookkeeper

A bookkeeper can do the day-to-day hands-on tasks: completing payroll, producing invoices, paying bills, recording asset purchases and disposals, maintaining and balancing general and subsidiary ledgers, etc. He or she can also ensure that all financial transactions are recorded correctly so the business is ready at tax time. A bookkeeper may have an associate’s degree or even a bachelor’s degree, but definitely must have meticulous attention to detail.

Accountant

An accountant can analyze the big picture of your financial situation and offer strategic advice. He or she can produce financial statements and prepare and file your taxes. An accountant can help you understand the impact of financial decisions. He or she will have a bachelor’s degree in accounting and typically will have one or more professional certifications (e.g. CPA, CMA, CFM, CFA, CIA).

So, which type of accounting professional do I need?

The short answer is: both. With the growth of your business, you have less time for bookkeeping; routine data entry, recording financial transactions, billing, etc. can be tasked to an employee. You also – hopefully – are recognizing the need for an accountant to help you take a strategic approach to your financial management. In order to create a sustainable competitive advantage, you must know where you are financially, where you want to be, and what action is needed to get there.

What if I’m growing even faster (or planning to)?

You might not be looking at hiring just one accountant. There are other people within the world of accounting and finance who can help you grow your business. The size and structure of your finance department should correlate with the total number of employees, revenue, industry, and overall business strategy. (Some businesses use the 50-employees-per-finance-person benchmark, but considering your industry and other factors, your ideal finance staff level could vary.) With a fully-staffed finance department, you could have a CFO at the head of the department overseeing a Controller (who manages the other accountants, the general ledger, fixed assets, and performs cost accounting functions), an Accounts Payable clerk, an Accounts Receivable clerk, a Budgeting/Forecasting Analyst, an Internal Audit & Compliance staff person, a Payroll specialist, and a Treasurer (who manages cash flow and investments).

From day-to-day management to long term strategy and planning, hiring the right accounting staff can help you keep your business on track to meet, or exceed, your goals.

Can a Trusted Employee Destroy Your Business?

Fraud happens everywhere, even in our home towns. Nearly half of all small businesses experience fraud at some point.

Here’s an example from my home town. Late this summer, a federal jury convicted Adam Martin for wire fraud, money laundering, and identity theft. He stole over $350,000 from his employer, Cold Spring Brewery, Minnesota’s third-largest brewery. Adam Martin, resided in a suburb of St. Cloud, and worked for Cold Spring Brewery as their Controller. During his 7 years of employment with the business, he wired ~$244,000 to an online business brokerage account he opened (using his sister-in-law’s identity as the “director” of the account), took company funds to make a $106,000 down payment on a new home for himself, used the company credit card for $78,000 in personal expenses, and it’s estimated he took $30,000 cash from the brewery’s weekend proceeds.

When I learned of his embezzlement, I wondered how he got away with it for so long. The typical employee fraud takes, on average, a year and a half before it’s detected (and longer, if the employee is an executive). Why wasn’t the Executive Management – or the owner – of Cold Spring Brewery more aware? It got me thinking about how important it is for business owners to identify risk areas within their operations and to develop strong internal controls and – most importantly – to take an active role in fraud prevention.

This is International Fraud Prevention Week, so let’s look at how fraud affects entrepreneurs and small business owners.

A small business owner faces an uphill battle to fight fraud. Small businesses are the most common victims (compared to mid- or large-sized businesses). The average loss incurred as a result of fraud is ~$150,000 regardless of whether the business is small or large, but smaller businesses don’t have the same resources as large ones do to focus on fraud prevention. These combined factors leave smaller businesses especially vulnerable to fraud.

Fraud also creates non-financial consequences such as bad publicity, decreased consumer confidence, increased scrutiny, inability to meet organizational goals, and low employee morale. In order to recoup the losses, the business owner may have to increase prices, reduce annual raises or employee benefits, or reduce staff levels.

It is important to note that fraud doesn’t occur only in Accounting and Finance departments. Conflicts of interest and abuse of influence or power with vendors or customers can occur in Operations, Sales, Purchasing, Warehousing and Executive Management. Fraud doesn’t only involve money, either; the loss of inventory or other asset misappropriations can happen.

What can a business owner do?

Don’t be an easy target! The next four action items are your best chances for preventing and detecting fraud:

1. Offer multiple channels for reporting fraud. This action item is, by far, the best fraud detection method you can employ. Many employees prefer to report fraud directly to their supervisor, while some go straight to an executive or HR. A minority prefer to report anonymously via online forms or through a fraud hotline or tipline.

2. If you’re not reviewing your business’ financial and operational activities with an eye for fraudulent activity, start now! You should be regularly reviewing bank statements, credit card statements, payroll reports, accounts payable batch reports, and budget to actual performance (with variance analysis). Expect account reconciliations from your Accounting department. Set the expectation that Executive Management will routinely perform reviews and establish an internal audit process.

3. About 80% of fraudsters will exhibit one or more of the following common behaviors. Look for these behavioral warning signs in your employees:

• living beyond his or her means

• going through financial difficulties, divorce, or other family problems

• having an unusually close relationship with a vendor or customer

• exhibiting excessive control issues

• using clever or ethically questionable methods to conduct business

4. Increase employees’ awareness of fraud in the workplace and its consequences. It’s critical to train employees at all levels so they gain a basic understanding of how fraud schemes work, what the warning signs are, and how to report suspected fraud.

I didn’t include background checks. Don’t background checks help?

Only ~5% of fraudsters have a prior criminal conviction that a background check would catch. The vast majority of workplace fraud is done by first-time offenders. So, background checks are of little use to identify potential fraudsters.

What about IT controls?

The passage of the Sarbanes-Oxley Act (SOX) – an act that requires public companies to establish adequate internal controls over financial reporting – increased the focus on IT controls. Improved IT controls is good business practice. However, the success of IT controls as a method of detecting fraud is about as successful as getting a confession.

Trust is not an internal control.

Fraudsters can commit their crimes because they’re trusted. They may be family members or friends, or be in good standing and have years of service. They are not your stereotypical criminal.

As a business owner, you have a responsibility to protect your business and the staff whom you employ by building strong internal controls. You can do this by implementing the four action items noted above. Strong internal controls are ones that a fraudster cannot override. Having a combination of effective internal controls reduces that risk.

6 Signs You Need an Accountant

Whatever growth stage your business is in, an accountant can do more than just help you file and pay your taxes.

So, when should you hire an accountant for your business?

As your business has grown, you’ve probably already spent a few hours with an accountant to help on certain projects. An accountant can help write your business plan, start the company formation process, keep it in good standing, suggest appropriate financing and help secure loans. Sometimes, just a few hours with an accountant can make your life a whole lot easier.

But, when should you consider employing an accountant full-time?

Hire an accountant when you’re not the subject matter expert.

If you aren’t really comfortable setting up a chart of accounts, reading a trial balance, and creating financial statements, you likely should hire an accountant. An accountant can get your business started on the right track and help prevent early mistakes that could cost you time and money down the road.

Hire an accountant if doing your taxes seems daunting.

Each year, the tax code gets increasingly complex. Not only will an accountant help you pay the right taxes for your business type, he or she can also find credits and deductions available to you. Additionally, an accountant can help you plan future tax payments, so you’re not surprised.

Hire an accountant when you don’t have time for bookkeeping.

Maybe you’re a business owner who understands accounting and you’ve been managing your books for years. At some point, you must realize this is not the best use of your time. Instead, you could be doing things that directly impact the growth of your business. Accept that your time is better spent acquiring new business or expanding into new markets or improving operational efficiencies. Let’s say it takes you 10 hours to do your taxes, and your time is worth $100 an hour. That’s a cost of $1,000 to do your taxes yourself. And that doesn’t count the risk that you’ve made errors, which is even more likely if, like most business owners, you’re multi-tasking.

Hire an accountant if you’re growing fast.

If you’re experiencing rapid growth, you need the infrastructure to support it. Rapid expansion means more customers to track, more employees to manage, increased vendor costs, etc. An accountant can provide valuable financial assistance in managing the evolution of your business.

Hire an accountant if you’re business is growing, but your profits aren’t.

An accountant can provide an independent, unbiased perspective on your finances. Perhaps your overhead costs are too high, you should be taking advantage of vendor price breaks, you have one product line or service that is dragging your profits down, you should get your receivables aging under control, or perhaps it’s time to increase prices. An accountant can provide a financial wellness check for your business.

Hire an accountant when you’re looking for investors to help grow your business.

Investors like detailed, accurate financial reports. If you’re interested in attracting investment money from angel investors or venture capitalists, you need to show you’ve done your due diligence. Investors will want key financial assumptions, revenue projections, and pro forma financial statements. If you’re seeking financing from a financial institution, you’ll have to comply with the loan covenants. For example, the lending institution may require the borrower to stay below a set debt-to-equity ratio and require the borrower to report the ratio quarterly. In both situations, an accountant could help: whether ensuring you are well prepared to pitch to investors or monitoring and complying with investor covenants.

The Value of Your Time

How do you spend your time? Yes, spend. Your time has a value and each activity comes with a cost. Do you know what your time value is?

As an entrepreneur, whether you’re an owner of a fresh start-up or growing your established business, whether you’re self-employed, a freelancer, or a consultant, you may wonder what work you should be doing yourself and what should be hired out. For me, I like to be in control, so it’s tempting for me to try to do it all myself. However, I also know I have a finite amount of time and energy. As my business grows, I have less time to devote to every aspect of operations. So, regularly, I need to check myself with a question:

What is my time worth?

Getting a handle on the value of your time involves a couple finance concepts: the time value of money and opportunity cost. The time value of money is an established financial concept that money now (rather than later) is worth more due to its potential earning capacity. I’d say the inverse can also be true: the money value of time would mean my time spent in income-generating activities is more valuable than time spent on other activities. The second financial concept, opportunity cost, comes in to the picture when choosing to spend time on activities that don’t generate income. You could work a couple hours and earn income or sacrifice that income potential by going to a movie instead.

It’s easier to understand time’s value with examples, so let’s first imagine that it’s a Monday evening and I’m trying to decide what activities I can (or should) fit into the three hours I have before bed. My to-do list is long, but I’ll shorten it for the sake of the illustration: I need to make some adjustments to improve traffic to my website; I have an empty fridge and need to make dinner; The house hasn’t been cleaned in two weeks; I need to go for a run; and I need to set aside time with my family. How can I make better decisions about my “free time”?

The value of my time

To assess what I should do myself vs. hire out, I first need to know the value of my time. There are lots of online calculators to help you arrive at a number, but the easiest way to figure the value of your time is to take your annual income and divide it by the hours you work in a year. The result is an hourly rate that equals the value of your time.

Because I’m very busy, my free time is very valuable. I should delegate some tasks or hire them out in order for me to have more free time at my disposal. What it boils down to is: I should hire out all services that charge me less than my hourly value. Then, I should use the time I’ve saved on more productive activities.

With my Monday evening example, based on the value of my time, I should go for a run (I can’t pay someone else to exercise for me!), order take out or delivery for dinner with my family (since I don’t have time for grocery shopping tonight), and then work on my website (which is the best investment of my time for the future growth of my business). What about the rest of my to-do list? Here’s what I should do:

  • Sign up for an online meal planning service, like what’s offered by www.thefresh20.com and then hire someone (or use my local grocer’s delivery service) to deliver the items from my shopping list to my house
  • Hire a weekly cleaning service

Apply the same time value concept to purchasing goods

We’ve just discussed paying for services. What about when we’re considering whether to purchase a time-saving tool or machine? To get the maximum cost that should be paid for the item, we must calculate the number of hours that would be saved by purchasing the item and then multiply that number by your hourly value. If the item doesn’t exceed that amount, it’s a good purchase.

Consider an example. Let’s say I’m thinking about purchasing a riding lawnmower to save time mowing. I estimate I’d save an hour each time I’d use a riding lawnmower instead of a push mower. If we average 30 cuts per year (grass doesn’t grow year round where I live), I would save 30 hours per year. Estimating the lifespan of a residential riding lawnmower to be about 7 years, over the life of the mower, I’d save 210 hours. Let’s assume I’ve calculated my hourly value at $30. Multiply the hours saved by my hourly value and you get $6300. That means I should buy a riding lawnmower that costs no more than $6300.

  • Once you know the value of your time, you then know:
    What rate you would take on additional work, if any
  • At what point it’s worth it to hire a personal assistant
  • When to hire a consultant to help you organize and understand your finances
  • To make small purchase decisions quickly, considering your time may be more valuable than the item itself

I’m not saying generating income is the most important thing we should be doing in our lives. It’s not. But, as entrepreneurs, we need to be conscious of how we spend our time and make conscious decisions about what is most productive and meaningful. Please take two minutes right now to assess the value of your time and then make a plan to do what’s most valuable and then delegate/hire out the rest.

What have you done already to free up more of your valuable time?

Do you treat your money like a hammer?

How do you feel about hammers?

What about money?

Over time, money has gone from being treated simply as the common medium of exchange for goods and services to something people desire, hoard, and use to measure their success. Money doesn’t deserve your love and adoration. Having, or not having, money is not what determines your worth as a person. Furthermore, constant focus, stress and worry over acquiring more money can negatively affect your happiness and health.

On the flip side: money is not the root of evil. This is a mindset that will obstruct growth. Do you feel guilty about having money – as if you don’t deserve what you have – or that your gain is someone else’s loss? Then that guilt will manifest itself in some form of self-sabotage. You should not feel bad about having (or spending) money if it accomplishes your mission. Do you feel guilty when you use a hammer to pound a nail? Of course not.

This is the point: Money is a tool. Rather than loving and obsessing over money or fearing it out of guilt, it’s best to be emotionally detached. Why have an emotional attachment to a tool?

Money is a follower. It doesn’t lead. A carpenter knows a hammer doesn’t pound a nail by itself. The carpenter drives the hammer and focuses on the nail that needs to be driven into the wood. From an entrepreneurial perspective, money shouldn’t be the main focus. Instead, the successful entrepreneur focuses on innovation, optimization, social and environmental impact, and personal fulfillment. The money is just the tool to get those things done.

Like any tool, money has no value unless it’s being put to use. When properly used, money can help you achieve your goals. Of course, one still needs to know how to operate the right tool for the job. Being an entrepreneur or business owner (even if you’re still in the planning stages), you probably want to know how to be smart with your money. Here, you can learn how to make the best use of your resources so you can get on to doing what you love.

6 Things To Do with Extra Monthly Income

My husband and I were having a conversation the other evening about an acquaintance of ours who complained about the evil-ness of having a mortgage. Two things immediately ran through my mind: 1) Isn’t having a mortgage just part of growing into adulthood? And 2) It sure seems like more and more people are anti-mortgage.

Yes, I know, it’s shocking when I run the amortization schedule on my own mortgage and see the total amount of interest we will pay the bank over the term of our loan. It’s pretty much like saying I will devote two years of my income to the bank. No income left for anything else. Not even groceries. Just send my paycheck to the bank. For. Two. Years.

Then, I think about paying income taxes. If I retire at 65, I’ll have given 11 years of my income to the government. Suddenly, the two years I’ll have given to the bank doesn’t seem so bad. There’s some perspective for me.

Okay, I’m done with the tangential thinking for now. Back to the conversation we were having.

The conversation I had with my spouse revolved around whether having a mortgage is really so awful. No, we weren’t attempting to justify the existence of ours to feel better about our current position. We enjoy having conversations about financial policies for our family (we treat our family a bit like a business, yes) and it’s natural for us to revisit those policies and assess whether a change is needed. So, the question we raised is: Should we use our extra monthly income to quickly pay down our mortgage, like our acquaintance is doing?

(I’m not going to use the tax deduction for mortgage interest as a reason to keep the mortgage. While the deduction is available for those who itemize, it’s not a significant benefit for us when compared to the total cost of the interest paid over the life of the mortgage.)

The first thing I thought we should consider is the time value of money. This is a financial concept that assumes money can earn interest and, therefore, is worth more in your pocket now than later. Of course, this concept assumes you’ll do something invest-y with that money in your pocket (and not blow it on a shopping spree to Nordstrom). Let’s say our mortgage interest rate is 3.5%. If we pay down our mortgage early, it’s basically like earning 3.5% on our investments. So then, what else can we do with our money to earn more than 3.5%?

That got us thinking about other things we could do with that extra monthly income. We could invest in our homesteading operations, such as create a bigger chicken coop for increased egg sales. Or, we could make improvements to the homestead that would save money over time. Better insulation, maybe? Heating costs in the winter are high despite the fact that we also use our wood-burning fireplace.

Of course, other people who aren’t thinking of homesteading investments may have other financial priorities to consider. They may be building an emergency savings, or saving for college or a home purchase. Others may realize they’d prefer to put some money aside for retirement. The value of having peace of mind in your financial decisions should be considered. If you’re on track to pay off your mortgage before you retire and you’re nervous about your retirement account balance, you know what to do with that extra monthly income to ease that anxiety.

For us, we are choosing to keep our mortgage and invest in our homestead. For now. What about you? What are your financial priorities right now? What would you do with extra monthly income?

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