If management is proactive and addresses the fundamentals, the chances of retaining a profitable business increase exponentially.
Economic markets fluctuate, pandemics occur, extreme weather is becoming a constant, and supply chains ebb and flow. These are some of the factors that are beyond the control of ownership, but they will impact the profitability of a business venture. These factors force managers to evaluate the options within their control, and consider operational adjustments that will minimize risks during times of uncertainty. Unfortunately, the operational decisions that impact success or failure and that are under the control of business management are often overlooked until ownership is faced with a crisis.
Be proactive. Plan for Success.
The fundamentals never change, but they become more important in times of uncertainty. Wise financial management decisions have nothing to do with the size of the business, the industry, or the products and services offered, or whether you are a manufacturer, a wholesaler, or a retailer. They relate to the back-room operations and procedures. Once they are established, management has the time to concentrate on income producing procedures that result in revenue. If management is proactive and addresses the fundamentals, the chances of retaining a profitable business increase exponentially.
All shareholders who hold a position of 20% or more, should retain FICO scores of not less than 680.
Note: Owners’ FICO scores of 680 or higher will assure a lender’s interest, the lowest interest rate, and the best terms available. Pull your own credit score before you apply for a third-party loan. Review the report to make certain there is nothing in it that might impact credit approval. A high-debt ratio or a recent bankruptcy will probably result in a declination. Read the full report before you apply for a business loan. There may be an error on the report that can be corrected.
Rule # 1: Establish a bookkeeping system that works for your specific industry and business. Make certain that the general ledger line items match your actual sources of revenue and expenditures (income and expenses).
Note: Keeping the bookkeeping entries relevant will simplify the process and ease the training of new employees.
Rule #2: Keep all your records up to date – every month. If your company is expanding or changing policies, you may need to access capital for inventory, equipment, or expanding the payroll. If the financial records are up to date, and are managed internally, one click can make it happen. If the bookkeeping and accounting are contracted out to a company, ownership must review all entries and schedule a periodic conversation with the CFO or a financial business consultant.
Note: A delay in keeping up-to-date records translates to a delay in accessing capital. This is a very common error made by small businesses. They have a need for additional capital, but they are not ready to fulfill the loan application requirements.
Rule #3: Do not comingle personal and business expenses.
Note: The underwriting department of a bank will pick this up and it will affect their decision making. Tax avoidance should not be a primary consideration; profitability is the #1 priority of every well managed business.
Rule #5: Management must understand the balance sheet of the company and review possible options of how some of the long-term liabilities should be recorded.
Note: Management should seek advice from an experienced CPA on how to handle certain items on a balance sheet, with consideration given to business evaluation and funding requirements.
A Solid Banking Relationship
Rule #1: Shop for the right banker. What banking services will you require? If you need capital to expand or to survive, you need to have an established banking relationship.
Note: A relationship with a commercial banker is much more than a depository relationship. Consider the need for a merchant service account, a business credit card, possible loans or lines of credit, the ease of making deposits, and the cost of all banking services. Provide the interested banker with a list of your current and future requirements. Shop to compare both the costs and the services provided by banks that like your business model.
Rule #2: Speak with your banker at least twice a year.
Note: Develop a relationship with the banker so that when you need a new service, he or she is readily available. Always speak with your current banker before you consider loans or relationships with other lending institutions. Changing banking services is not a simple matter and most banks that provide loans will want a depository relationship. Keep informed about current changes in lending policies and changes in local banks’ policies.
Rule #3: Do not use credit cards to purchase machinery or equipment. Seek long term financing for any item that has long term use.
Note: If you are carrying a high balance on your credit card, your score will be impacted, even if you make timely monthly payments. Credit cards should be used for working capital expenditures; not for expenditures for company expansion, unless the net income can support these additional expenses.
Marketing Policies in a Changing Market
Rule #1: Review your options and what the company can afford. Small businesses may have to redefine their markets in order to maintain their profit margins. If digital marketing is new to your business, learn about it before you commit.
Note: Do you have experienced staff who can oversee the new marketing campaign effectively, or should you consider contracting with an experienced marketing company that understands your industry and your market?
Rule #2: If you plan to sign a contract, review the contract to be certain there are no additional costs that were not discussed.
Note: Social media marketing has costs that need to be defined. Consider their effectiveness for your business enterprise and the possible long-term impact on the company. Will you need more inventory, more warehouse space, more staff?