Five Financial Management Tips for Small Businesses

Many small business owners are driven by entrepreneurial inspiration to start their own companies. Small businesses drive new jobs and innovative ideas. However, for all the "pros" which accompany running your own business - the thrill of bringing a new idea to market, fulfilling a goal, flexible schedules - there are also challenges. Owning the business may be the simple part. Running it smoothly and profitably often can prove difficult. Following are five financial management tips that should assist in running your small business more effectively so that you can enjoy all the "pros" that influenced the decision to own a small business in the first place.

1. Develop a Budget- This is critical to the success of any business. A budget that lists your projected revenue and expenses serves as a road map in guiding business decisions and making sure you carefully consider financial decisions with the "big picture" in mind. When you create a budget, you can see the cash inflows and outflows. A budget functions as a financial barometer, allowing you to project accordingly, optimize and manage cash flow, as well as anticipate future financial needs.

2. Stay Abreast of Your Financials- As a small business owner, implement a routine practice of reviewing your financial reports. Staying abreast of your financials also equates to maintaining up-to-date accounting and bookkeeping records, as well as managing your expenses, payables and receivables. Timely and accurate access to updated financials allows you to make informed decisions quickly that could significantly impact your company's profitability.

3. Retain the Expertise You Need- Recognize that running a small company or start-up does not require you to single handedly perform every function associated with that company. Focus your attention and efforts on growing your business. Establish partnerships with companies or contractors who possess expertise in areas at which you are not adept or those to whom you can outsource non-core tasks. This will be more efficient for you in the long run, as well as allow you to avoid costly mistakes that could occur by performing functions at which you have no experience. Leverage partnerships for CFO, CMO, IT or bookkeeping services to provide you with scalable access to expertise when you need it.

4. Invest in Technology- Recognize that investing in technology can significantly impact the infrastructure of a small business making it operationally more efficient. Use technology to automate processes wherever possible to reduce manual functions that take employee focus off of value added services. Accounting systems and software programs that assist with payroll, data entry or time and billing are examples of functions that can be automated with investments in technology.

5. Anticipate Changes- Above all, embrace the ability to be flexible and make pivotal decisions that can positively impact your business. One of the biggest "pros" of running a small business as well partnering with a small business is the ability to change directions quickly when deemed necessary. Anticipate and plan for change to remain competitive in the market.

As a small business owner or entrepreneur, implementing these five steps can assist in making your business run smoother and more effectively. We are currently offering a free analysis of your business processes and accounting system. If you would like to learn more on how Analytix Solutions can help move your business forward, please call me directly at 781.503.9004 or email me at sales@aixsol.com

Satish Patel, CPA
President, Analytix Solutions
Satish Patel, Founder-CEO of Analytix Solutions, has more than two decades of experience as a CPA. He has also advised small and mid-sized businesses on diverse matters such as valuation, accounting, and finance. His experience extends to raising capital and arranging for finance from angel investors.

Cash vs. Accrual Method: Which is Best for Your Business?

The cash accounting method is a type of accounting that takes into consideration both income and expenses, when payments are made in cash. This payment could consist of either cash received or cash given/paid. In contrast, the accrual accounting method records income as revenue earned while expenses are noted as liabilities. These transactions are noted in the accounting books, without the necessity of cash being paid out or received.

So, which method is best for your business? It depends.

A closer look at the cash method

The cash basis of accounting records the income or expense at the time the cash is exchanged. The cash method is considered an uncomplicated and simpler process. It is also easy to understand and is most often applied to individual or personal finances. Under the cash method, income received is taxable at the time of receipt, while deductions are made at the time of the expense.

This means that a transaction is not recognized until the payments are cleared. If the payment becomes delayed, the process of recording the transaction is also delayed. Thus, the cash method can prove to be an inaccurate measure of the company's accounts.

Although it seems easy to maintain, the cash method could also depict a company's income as being highly inconsistent. For example, if Company A follows the cash method, and it receives a high-value project, the company cannot record any revenue earned until they are paid for the project. This means that if it is a long-term project, the company's income records will not show any revenue as earned until the actual payment is made. This can result in certain periods showing limited income, while others show as high-revenue periods.

Unfortunately, this can lead to an inaccurate depiction of a company's financial status. These discrepancies could have repercussions when preparing tax returns or seeking loans and financing.

A closer look at the accrual method

The accrual method is the opposite of the cash method. Regardless of when the cash exchange occurs, a transaction is recorded in the accounting books. This method accounts for expected revenue, as well as credit payments. As a result, it is a more accurate record of a company's current status.

The accrual method is based on the principle that if a sale or economic transaction has occurred, then cash will exchange hands at some point. Records in the account books thus reflect the point at which the transaction took place. Typically, accrual method entries for income are noted in a column termed as accounts receivable. Regardless of actual cash changing hands, the entry in the account books indicates income received.

The accrual method, in contrast to the cash method, recognizes that long-term financial transactions can reflect upon a company's current financial status. Because of the accuracy required of this method in outlining the financial status of a company, it is more prevalent among larger businesses.

Satish Patel, CPA
President, Analytix Solutions
Satish Patel, Founder-CEO of Analytix Solutions, has more than two decades of experience as a CPA. He has also advised small and mid-sized businesses on diverse matters such as valuation, accounting, and finance. His experience extends to raising capital and arranging for finance from angel investors.

Ratios 101: Key Indicators for any Business

The health of any company depends on several factors. However, a single glance at earnings figures or expenses does not provide enough information to make a firm determination about that company's viability. For example, Company A shows $1 million in sales of computers during Year 1 of operation. In Year 2, this increases to $2 million, twice that of Year 1. So, an increase in sales is always good, right? Not necessarily. In the case of Company A, the business sold fewer units overall, incurred greater expenses, and therefore had overall lower profitability.

A better barometer to gauge the health of any business is the assessment of certain key financial ratios that check various aspects of a company's financial performance.

Debt/Equity:
Dividing a company's total liabilities or debt by the amount of shareholders' equity generates the Debt/Equity ratio of a company. This measures the amount of equity and debt incurred by a company to finance its assets.

A high debt/equity ratio could mean that the company uses a higher percentage of debt to fund operations, as opposed to funding operations through equity. Conversely, if the debt used to fund operations is less than the earnings generated by using it, then it is beneficial to the shareholders.

In addition, if debt financing costs prove to be higher than the cumulative returns, it can lead to an unstable situation for the company and affect future prospects.

Assets/Liabilities:
This is also called the Assets/Debt ratio. The assets/liabilities ratio measures the percentage of assets financed through debt. It is calculated by dividing the total debt or liabilities of a company by its total assets. It is different from the Debt/Equity ratio where debt is divided by the amount of shareholders' equity.

This ratio provides a measure of the company's short-term liquidity. A healthy asset to liability ratio is one where there are twice as many assets as liabilities. A higher proportion of debt indicates poor financial health.

Profit margin (Net Income/Sales):
The profit margin ratio reveals the profitability of a business or the amount of profit earned per dollar of sale. It is calculated by dividing net income by the total revenue, resulting in a percentage. Thus, a profit margin of 16% means that the company made a profit of $0.16 per dollar. In this ratio, net income is defined as the difference between revenue and cost.

This ratio is valuable when conducting comparisons of similar companies. Profit margin shows whether the company's pricing strategy is viable or not. Higher margins indicate better control over pricing. Also, profit margins are a better comparison metric than total earnings, as profit margins take into consideration operating costs and inventory expenses.

Inventory Turnover:
The inventory turnover ratio reveals the speed at which a company moves its inventory. To calculate inventory turnover ratio, divide total sales by figures of average inventory for the period you are evaluating.

A high turnover ratio indicates that the company is moving inventory at a rapid pace, or managing good sales, whereas as a lower ratio could point to inventory not converted to sales, or a poor return on investment. Inventory movement can also be dependent on particular seasons. Hence, average figures are considered when comparing financial health of different companies.

Return on Assets:
The return on assets ratio reveals the profitability of a company's total assets. The ratio proves useful when assessing the viability of using the company's assets in generating revenue. The return on assets is calculated by dividing net income, or revenue earned, by the total amount of assets owned. When evaluating this ratio, it is important to remember that it is dependent upon the industry in which the company operates. Also, if a company incurred a heavy initial investment, it will have a lower return on its assets.

Consistent monitoring of these key ratios should provide you with adequate information to assess whether or not your business is on the right track, financially.

Satish Patel, CPA
President, Analytix Solutions
Satish Patel, Founder-CEO of Analytix Solutions, has more than two decades of experience as a CPA. He has also advised small and mid-sized businesses on diverse matters such as valuation, accounting, and finance. His experience extends to raising capital and arranging for finance from angel investors.