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Small Business Tip: Projecting Income

One of the greatest challenges small business owners face is projecting income.

When providing financial coaching to small business owners, I ask, “How much are you paid by your business?”

The answer is usually some variation of: “Whatever I can take. It’s always up and down.”

This makes it extraordinarily difficult to manage household financial affairs and can literally drive the bill payer completely crazy.

Here’s solution to this problem.

  1. Stop “investing” (spending) all the extra money. When you have a great month of revenue, don’t view it as a ticket to spend money. Instead, view it as a ticket to stabilize your income! Save the extra money in an operating reserve account.
  2. Establish a monthly (or weekly, bi-weekly, or bi-monthly) salary. In your household budget, determine the amount of money your business needs to pay you each month in order to thrive. Ensure your household budget includes saving for Known Upcoming Non-Monthly Expenses (KUEs) such as Christmas, Special Days (birthdays, anniversaries, weddings, showers, etc), HOA, Insurance Premiums, etc.
  3. Pay yourself the set amount of money each payday – and leave the rest alone at the business! Even when the business is thriving, it is important to continue to draw only your salary. This is because the “down times” will be coming soon through the natural business cycle of your business. It’s not fun to leave the money in the business during times of plenty, but it sure is nice to have those reserves when the business is struggling!

It’s how I operate my businesses, and I’m confident it will work for you too!

My book, Oxen, is a great resource to help you establish a new business or acquire an existing one.

Small Business Tip: Importance Of Audits

Small business owners don’t lack for things to do. There is the endless work of creating new products and improving existing ones. Meeting with new customers and existing ones – local and abroad. Hiring employees and freeing up non-performing ones to “pursue other opportunities.” You get the thrilling task of managing payroll and cash flow. You get to deal with all of the wonderful governmental entities – federal, state, and local – regarding licensing, codes, rules, laws, and endless regulations. Then, of course, there are the meetings with your CPA around tax time.

The LAST thing you need is to wonder if your financial books are correct and accurate.

Unfortunately, we hear of cases of a modern-day Judas, where a rogue employee who has been entrusted with the money decides to help themselves to it and embezzle money. It can literally bankrupt a business.

This is why it is important to conduct financial reviews and perhaps even complete third-party audits. Annual financial reviews are instances where internal members of your organization are tasked with performing random “tests” of financial records and require those in charge of the finances to provide objective evidence that records are retrievable and accurate.

Third party audits take this process to an entirely different level. An outside organization is hired to put the financial team through a rigorous test of all critical financial systems – accounts payable and receivable, payroll, record-keeping, financial reporting (balance sheet, cash flow statement, and income statement), and separation of authorities (i.e. separating rights of who can print checks from check signers).

While no review and audit can completely eliminate the chance for fraud, it can reduce it tremendously. And it will allow you to make business decisions with full confidence in your finances and the financial team.

Here’s the statement I use: “Trust, but verify.”

This post is part of a Small Business Series here at the wildly popular JosephSangl.com. Click HERE to read more of the posts in the series.

Small Business Tip: Monthly Cash Flow Planning

Every single month, I sit down with Matt. Most of you don’t know him, but he is a key reason IWBNIN has continued to grow and expand. You see, Matt is our Financial Administrator. He manages all of the finances for our businesses. He and his team manage the regular financial management dealings of a business: payroll, accounts payable, accounts receivables, bank account reconciliation, credit card reconciliation, and governmental filings. However, Matt helps with a monthly task which we’ve found to be vital to our success – monthly cash flow planning.

For our two businesses with employees, we sit down at the beginning of each and every month to plan our financial decisions.

Here is the process we utilize:

  1. 12 month rolling plan  We have a rolling 12 month plan. This means at the end of each month, we add a new month at the end of the plan to ensure we are always looking forward for an entire year.
  2. Evaluate last month  We review last month’s plan to identify any major deviations – both positive and negative. This intelligence is utilized to continually improve our planning.
  3. Plan next month  We make changes to this month based upon known information.
  4. Review the next 12 months  We make changes to future months based upon known information.
  5. Make business critical decisions  We utilize the cash flow plan to determine when we can spend money for larger initiatives.
  6. Live by the plan throughout the month  Once the plan is finalized, the financial team follows it. If an unusual opportunity presents itself or major expense crops up, it generates a conversation amongst company leadership to determine an appropriate course of action.

Here’s how we’ve found the 12 month cash flow planning process to be helpful:

  1. Prepare for major financial challenges  As with any business, there are cycles. Some months are higher revenue while other months cause business owners to wonder if their business is going to fail. These cycles can create cash flow crunches if not carefully planned for. Viewing 12 months out allows our leadership to make better decisions.
  2. Prepare for known, upcoming non-monthly expenses  This type of planning forces a leader to think longer-term. As a result, known upcoming non-monthly expenses can be accommodated with ease by ensuring appropriate accrual accounts are established. Nothing makes me happier than to know the money is stored up for estimated quarterly tax payments, car repairs & replacement, annual software licenses, etc.
  3. Communication  Monthly reviews create a “trip point” that forces communication to happen regarding the financial and general affairs of the organization.

Want to get rid of a bunch of financial headaches? I highly recommending instituting a monthly cash flow planning meeting!

This post is part of a Small Business Series here at the wildly popular JosephSangl.com. Click HERE to read more of the posts in the series.

Small Business Tip: Sacrificing To Make The Dream Work

Having successfully started a few small businesses and acquiring another, I can confidently say that it takes sacrifice to make the dream of a small business come alive.

I worked the equivalent of two full-time jobs for an entire year while I Was Broke. Now I’m Not. launched. I would work all week and then jump into a car and drive to some distant place to speak about personal finances. Usually, I would end up spending more money on gas, hotel, and food than I would receive in income from the event!

As I share in my book, Oxen, you can’t load up a baby ox as soon as it is born, or it will die. Yet, many people do this very thing when birthing their small business. They finance the entire start-up costs and then quit their job as soon as they launch the business – forcing the business to pay them a salary from day one. They “load up the baby ox” with all of the costs of debt, salaries, and rent – causing even great business ideas to collapse before they really had a chance to succeed.

It takes sacrifice. Here are 3 key sacrifices you can expect to make when launching your small business dream.

3 Key Sacrifices Business Owners Make

  1. Time With Family  Starting a business is not a 9am to 5pm, 5 day a week job. Curb the impact of this by being very intentional in the time you do have to spend with your family. Another tip is to include them in the work and decisions of the business. For example, I bring my daughter along with me to help with speaking events. She manages the resource table. Better yet, we have the chance to talk during all of the plane and car rides.
  2. Money  People who are launching their small business venture will have to invest substantial amounts of money in the hopes of a financial return. There is no guarantee of success. I’ve found that investing my own money into the business helped me be very attentive to business expenses. It seems to be much easier to spend borrowed money.
  3. Other Dreams  Because of the enormous consumption of time that a new small business demands, many other hobbies and passions are placed on hold. Saying “yes” to starting a business will mean one must say “no” to other desires.

For those who have successfully started your own small business, what are some other sacrifices you have had to make? Please share in the comments?

This post is part of a Small Business Series here at the wildly popular JosephSangl.com. Click HERE to read more of the posts in the series.

Small Business Tip: Separate Business Accounts From Personal Ones

One of the top mistakes small business owners make is to intermingle their business expenses with their personal accounts. This can create many issues including:

  • Difficulty in identifying true business profitability. When personal and business expenses are in the same accounts, it becomes very difficult (impossible?) to readily determine the company profits or losses.
  • Misuse of company money for personal expenses. Whether intentional or unintentional, this can erode financial margin that is critical for the viability of the business.
  • Difficulty in selling the business. Even if the business is profitable, it can cause potential buyers to become wary of the true performance of the company.
  • Drive the tax preparer nuts. I’ve had conversations with tax preparers who find it nearly impossible to prepare a clean tax return because of intermingled business and personal income and expenses. This can lead to issues with the IRS later. That is never a good thing!
  • Frustrates the family bill payer. When the person in the family who is responsible for paying the bills must balance business bills with personal bills, it can cause them to become very frustrated. So frustrated that smoke may start coming out of their ears!

If you are running your business expenses through your personal accounts, invest a few hours to separate them. The bill payer and tax preparer will thank you, and you will be able to more readily assess the performance of your business!

This post is part of a Small Business Series here at the wildly popular JosephSangl.com. Click HERE to read more of the posts in the series.

Small Business Tip: Build Financial Margin For Your Business

If you want your business to thrive long term, you must establish financial margin. In fact, the lack of making saving a priority is one of the top reasons small business fail. Even profitable companies have failed because they failed to make savings a top priority.

Let me share a real-world practical example of “margin in action” – the Hoover Dam.

IMG_1574

Before the establishment of the Hoover Dam (and the entire system of dams and reservoirs), the West was subject to wild water calamities. At times, the river would flash flood and destroy everything in its path. At other times, drought would cause water supplies to dry up. It was very difficult for the area to inhabit the area until the establishment of the dams.

I took the above picture of the Hoover Dam, and it really shows how your business’s financial margin account should work. The dam was built very strong so it could hold back the raging river. As the Spring melt begins, the dam captures excessive water and saves it up. This helps prevent rampant and destructive flooding. During times of great drought, it allows the area to continue to thrive because the water was stored up!

Chances are your business has cyclical revenue – “good” times and “less than good” times of sales throughout the year. Apply this “dam principle” and be sure to “store up” during the good times. This will position your business to continue prospering during times of drought.

This post is part of a Small Business Series here at the wildly popular JosephSangl.com. Click HERE to read all of the posts in the series.

Small Business Tip – Conduct SWOT Analysis

One key activity that is important for every small business owner to do on at least an annual basis is to conduct a SWOT Analysis.

  • Strengths
  • W Weaknesses
  • O Opportunities
  • T Threats

I’ve prepared a free basic SWOT ANALYSIS FORM for you to download and use.

Here are a few questions to help you start the process:

Strengths

  • What are your strengths?
  • What makes your organization so successful?
  • What differentiates your business?
  • Why do customers use your product or service?
  • What allows you to beat the competition?
  • Do you have any personnel that really give you a competitive advantage?
  • What is your current financial status? Is it a strength?

Weaknesses

  • What makes you lose sleep at night?
  • Where do you see opportunities for improvement?
  • What products or services do your customers ask for that you currently do not provide – and it causes them to go elsewhere?
  • Do you have any personnel that lack necessary training or skills?
  • What is your current financial status? Is it a weakness?

Opportunities

  • What products or services could you add?
  • Are there any similar businesses that you could acquire?
  • Could you serve new markets beyond your current service area – new geographic areas?

Threats

  • What move could the competition make that would jeopardize your business?
  • Do you have non-competes in place for “mission-critical” personnel?
  • What makes you lose sleep at night?
  • What economic conditions would greatly affect your ability to do business?

The overall goal of an annual SWOT analysis is to force “macro-level” thinking that challenges you to prepare for challenges and to identify and take advantage of opportunities.

Small Business Success Tips – Importance of Financial Margin

Every person who begins a small business usually does so because of a passion. They pour enormous amounts of energy, time, and money into making the dream become a success – both in its mission and financially. They dream of the day when the business is profitable.

Then, with hard work, determination, stout decisions, and some luck, the dream comes true! The business becomes profitable.

This is when a massive and critical decision is made that could ultimately dictate the entire future of the company: Should we SPEND all of the profits (to grow the business or on other personal dreams) or should we SAVE the profits?

Or is there an appropriate balance between SPENDING and SAVING?

I encourage you to chose to build FINANCIAL MARGIN by SAVING the majority of the first profits of the company! While I know you see incredible future opportunity that could potentially be realized by reinvesting (spending) the money back into the company, I believe financial margin is far more important to long term success of the company.

A great way to describe this savings is an “Obstacles & Opportunities Fund” (O & O Fund). Having this account fully funded allows you to encounter obstacles head on without it impacting your daily operations (not so fun) and to take advantage of tremendous opportunities when they appear before you (a lot more fun).

It is appropriate to place 4 to 6 weeks of operating expenses in a beginner O & O Fund. Long term, it is desirable to have at least 12 weeks of operating expenses.

Here’s what financial margin provides to you as the business owner:

  1. Long Term and Strategic Focus  When you are strapped for cash, all of your time will be consumed with tactical decision-making. You will constantly be plagued with liquidity and working capital issues.
  2. Happy Suppliers  Margin allows you pay bills on-time and early. Clients who pay on-time and early receive preferential treatment over slow-paying ones.
  3. Happy Customers  Companies that are strapped for cash can be tempted to cut corners which can lead to service or quality issues.
  4. Happy Employees  There is nothing that will make your best employees run for the exits like missed payroll. Margin ensures this isn’t EVER a problem.
  5. Restful Sleep  You will sleep better when you know the bills are paid and you are prepared for unplanned obstacles.
  6. Investment Opportunities  When you have financial margin, you will see opportunities you would NEVER see if you were broke. It’s an amazing phenomena I’ve witnessed many times.
  7. Better Profit Margins  Broke companies who are strapped for cash put valuable products and services on sale or issue major discounts for early payment – all done to generate immediate cash to solve cash flow problems. It is literally equivalent to mortgaging the future. Companies with margin won’t engage in such behavior – because they don’t have to!

It’s never easy to force your organization to save. There will always be competing priorities. Chose to make Financial Margin the top priority.

Your financial manager will thank you. And then you will thank me when you are able to jump on a major opportunity – all because you chose to build financial margin.

You’re welcome. :)

NOTE: Welcome to the “Small Business Success Tips” series here at the wildly popular JosephSangl.com! Click HERE to access all previous tips in this series.

The Go-Giver

Recently, Casey Graham (Founder of The Change Group) sent a book to me and told me that it had a major impact on his life.

It is a book called "The Go-Giver".   It is authored by John David Mann.

It took me a couple of months to sit down and read it, but I wish I would have read it sooner.

Seriously, it is a fictional story the relays POWERFUL business (and personal) concepts related to giving.  It could even be called a framework for how one can have an amazing life.

I LOVED this book.  Here are some of the reasons why:

  • It focuses on giving.  I love giving.  My wife loves giving.  I believe that everyone loves to give.
  • It is highly focused on a few principles.  This book does not attempt to share too much.  I read this book one chapter at a time over a period of several days.
  • It has caused me to reflect on how this applies to my crusade.  And I am making changes as a result of this book.
  • It was short and to the point.  For some reason, I have difficulty developing the willpower to pick up a four-inch-thick book.
  • I have seen it at work in my friend's life.  Casey (you should follow him on Twitter) has been applying this stuff as well.  He is FIRED UP about it!  So am I!

Have you read this book?

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