Many business owners believe they are so involved with their business, they know every intricate detail, and the last thing they need to spend their time on is a financial plan. They can keep track of all the financial issues their business faces in their head. Others believe that as long as their top line revenue number is growing, they will be fine. “What does a financial plan do for my business?” they say, “it’s outdated as soon as it’s finished”.
What many of these business owners don’t realize is that what may have worked for them when they started their business, may not work for them as their business grows. Their business becomes more complex, involves more employees and requires capital equipment and outside financing. There are many issues businesses face on a daily basis that can be resolved or minimized by a solid financial plan. Here are just a few to think about:
Financial Plans help business owners anticipate cash flow problems.
Many businesses complain of never having enough cash in the bank to make payroll, pay their suppliers or buy needed supplies for their business. Their business is generating more revenue each month; however, they never seem to have enough cash to pay their bills. What they do not realize is that many times as a business grows, it uses more working capital. If they do not plan for these increased working capital needs by establishing other sources of financing, they will continue to face these cash shortages.
A financial plan can provide business owners with a look into the future and enable them to anticipate increased cash flow needs today, secure necessary financing needed in the years to come, and avoid cash shortfalls and business interruptions down the road.
Financial Plans help business owners stay in compliance with bank loan or credit requirements.
Many businesses work with banks to get the capital needed to finance their growth. Oftentimes they do not realize that the bank has certain reporting requirements that accompany its loans. Many of those reporting requirements include such things as: monthly or quarterly financial statements, financial plans as well as maintaining certain financial ratios (i.e. debt coverage, profitability, liquidity, solvency) on an ongoing basis. The banks, as well as other business partners, want assurance that the business owner is mining the store on a regular basis. They need to know that their loan or the credit they extend is in good standing and the company is still in a position to pay it back.
A financial plan helps a company to more effectively manage its financial performance, to achieve its financial goals and required performance ratios. It also enables it to make commitments to its business partners and meet those commitments even in challenging times.
Financial Plans help business owners take advantage of opportunities to grow their business.
Opportunities for new business come along every day. However, many business owners do not have a good process for comparing those new business opportunities to their current business opportunities. Instead, they make a gut feel decision to take on the new business opportunity or pass. This oftentimes results in a suboptimal decision and in some cases can bankrupt the business.
A business with a financial plan will be able to compare those opportunities to its existing plans, financially evaluate the benefits and risks of the opportunity, and calculate the projected return on investment for the opportunity. As a result, the business will be better able to take on those opportunities that improve its overall financial performance and pass on those opportunities that worsen it.
Financial Plans give business owners something to measure their progress against.
Studies have shown time and time again, the more a business measures its performance against established goals, the more likely it is to improve its performance.
By establishing performance goals, business owners set achievement levels to work toward and a method of measurement to evaluate actual performance. Business owners can translate those goals into detailed individual goals for their employees, such goals might include: sales/month, bids/month, projects completed/month, output/month, designs/month etc. Performance toward these goals can then be reviewed on a weekly or monthly basis to identify success or failure.
Financial Plans allow business owners to get in front of their business and plan for softness in the market.
Many companies get surprised by softness in their market; they have not adequately planned for the downturn. Furthermore, they have not built up the necessary reserves and/ or established the necessary financing that their business will need when revenues decrease. As a result, softness in the market can put them out of business.
A financial plan enables a company to plan for the future and understand how their business will perform in an up or down market. Financial plans enable a business owner to look at various market scenarios and see how they impact their business before they happen. Armed with this information, they will be better able to establish a financial structure that can weather an upturn or downturn. They will also be better able to establish the necessary outside financing they need to support them during these soft periods.
A financial plan allows business owners to properly plan for growth.
Many businesses see revenues rising and immediately begin hiring more employees and buying expensive capital equipment, only to let those employees go and fire-sale their equipment a short time later to preserve cash flow. This approach can be very costly and time consuming, not to mention the devastating impact it can have on employees and company moral.
Utilizing a financial plan can help business owners plan for the market upturns and downturns and can help business owners smooth out those peaks and troughs in their business. It can also help business owners explore different options for supporting a significant increase in revenues such as subcontracting. A financial plan can help business owners: establish cash reserves to be used in a downturn instead of laying off staff or help business owners identify softness in certain months throughout the year that can be supported by additional sales in other markets. Planning for the future can also enable their company to negotiate volume discounts with its suppliers, thus lowering their costs and improving the company’s overall profitability.
There are many issues businesses face on a daily basis that can be resolved or minimized by a good financial plan. Financial plans help business owners anticipate cash flow problems, stay in compliance with bank loan or credit requirements, take advantage of opportunities, give them something to measure their progress against, allow them to get in front of their business and plan for softness in market, and enable them to properly plan for growth. Now is a good time to prepare your financial plan for 2020 and beyond. Please give us a call today at (480) 980-3977 to get started!
Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
Does this sound familiar? I know my business, why do I need a written plan? I have the plan in my head. My time is better spent running my business rather than writing about it. The plan will be obsolete the day after I write it.
While business and strategic plans are used regularly in many Fortune 500 corporations, there are still those small businesses who have yet to embrace them. It is surprising, given that studies show that 85% of the small businesses that developed business plans were in business after 3 years. This is not bad when you consider that 7 out of 10 businesses fail in the first 3 years of operation.
Having a comprehensive business plan is one of the keys to a successful business. It helps a business owner not only crystallize their thoughts and ideas about a business venture, but it also helps them maintain a focus for the business today and in the future. This can actually save the business owner time in the long-term, as the business grows and becomes more complex.
It is a useful document when communicating your business to outside investors, business partners, employees, customers and suppliers. It helps to educate these partners on your company goals, objectives and your plan to achieve success. It also lets them know how they fit into your plan and what’s in it for them.
It’s also not a bad idea if you are planning to buy or sell a business or obtain a Small Business Administration (SBA) loan (the SBA requires them). Although many lenders don’t require a formal plan, if you want to make a good first impression on the bank and effectively answer your lenders questions you will need to have prepared a business plan. In many cases, the business plan will help increase your chances of getting the financing you need for your business.
Pinnacle Business Solutions have prepared over 50 and reviewed over 500 business plans. These plans can take many sizes and shapes depending on the size and complexity of the company. However in general, the document should be a comprehensive one that covers the next 3 – 5 years and includes all the aspects of running your business such as:
- Executive Summary
- Market Analysis
- Competitive Analysis
The business plan should be a cohesive document with all its components aligned. For example, the marketing and sales plan should be aligned with the revenue projections included in the financial plan.
A business plan can usually be done in 20 to 40 pages. The executive summary included in the plan should be no more than two pages in length and should include the key information from the plan. This executive summary can be given to business partners and investors to introduce your business and give them enough information to determine if they should proceed further with you.
The business plan is a tool to help the business owner more effectively manage their business, so the business owner or management team should be actively engaged in the process of preparing it. The knowledge gained by the business owner when preparing the plan is extremely valuable and can help them to refine their business strategy.
Using outside advisors to help the business owner write the plan can be very helpful, especially if the business owner has never written a plan before or the plan is going to be used with outside investors or business partners. These advisors can also save the business owner time be doing a lot of the research and writing of the business plan. A business owner should know their business plan inside and out as this will enable them to be much more prepared to communicate this plan to outside investors and partners.
Once the plan is complete, it should be used as a living document and kept up to date. It should be updated for changes in the business, at a minimum annually. It should also be reviewed on a regular basis (i.e. monthly or quarterly) to determine whether or not the business is heading in the right direction and meeting its goals and objectives. Most Fortune 500 corporations go through the strategic planning process in Q2 and Q3 of each year. This allows them adequate time to complete the plan before the new year.
Having a good business plan is one of the keys to a successful business. Studies have shown that businesses with business plans are much more likely to be successful than those without plans. If you find yourself making those excuses for not having a plan, it’s not too late. Set aside some time to put your plan in place for 2019 and beyond. A good business plan will pay for itself many times over!
Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
For a growing business, having a manageable level of debt can be an effective way of doing business. While some small business owners are proud of the fact that they’ve never taken on debt, that’s not always a realistic or optimal approach. Significant growth often demands considerable capital, and getting that money may require you to seek a bank loan, a personal loan, a revolving line of credit, trade credit or some other form of debt financing.
The question for many small business owners is: How much debt is too much? The answer to this question will lie in a careful analysis of your cash flow and the specific needs of your business and your industry. The guidelines below will help you analyze whether taking on debt is a good idea for your company.
Explore your reasons for borrowing
There are a number of scenarios that may justify taking on debt. In general, debt can be a good idea if you need to improve or protect your cash flow, or you need to finance growth or expansion. In these cases, the cost of the loan may be less than the cost of financing these moves through ongoing income or external equity.
Some common reasons for seeking a loan include:
Working capital – when you’re looking to increase your company’s workforce or boost your inventory and sales.
Expanding into new markets – when companies enter new markets, they often face a longer collection cycle or must offer more favorable terms to new customers; borrowed funds can help weather this period.
Making capital purchases – you may need to finance new equipment in order to move your business into a new market or expand your product line.
Improving cash flow – if you have less than 10 years left on an existing long-term debt, refinancing can improve cash flow.
Building a credit history or relationship with a lender – if you haven’t borrowed before, taking out a loan can help in developing a good repayment history and can help obtain financing in the future.
Before taking out a loan or any other kind of debt financing, you should spend time planning your capital needs. This point cannot be emphasized enough. Many companies fail to do this planning and find themselves in a tight situation when they need the financing. The worst time to take on any kind of debt is during a crisis. A sudden loss of trade credit, the inability to meet a payroll or other emergency could force you to take on debt immediately, resulting in highly unfavorable terms. A plan forecasts your cash requirements, allowing you to determine what you will need and when you will need it. Planning ahead will give you time to explore all possible borrowing sources, negotiate the most favorable terms and allow you to determine if your company has the ability to make the principle and interest payments on the new debt.
A capital plan should consist of a complete review of your income statement, balance sheet and cash flow statement to help you analyze current cash flow, assets and liabilities. It should also consist of a 3 year financial statement forecast to evaluate how your business is projected to perform in the future with this new financing.
Examine short-term vs. long-term debt
Just as you need to be certain you’re taking out a loan for the right reasons, you also need to make sure you’re taking out the right kind of loan. Taking out a short-term loan when a longer term loan is required can quickly create financial problems. You may be forced to take unnecessary measures (such as selling a piece of the business) to meet the obligation. For instance, if you experience a temporary rapid increase in sales (such as that brought on by increased seasonal demand), then you should look at a short-term loan. In general, use short-term loans for short-term needs. This will help you avoid the higher interest expenses and more restrictive conditions of longer term borrowing.
If the growth will continue over a long time, take a look at longer term options. Such options may include an expanding line of credit (based on sales), accounts receivables, inventory ratios or term loans between 5-10 years.
Base new debt on current needs
When interest rates are low and money is cheap, you may be tempted to take out loans to buy equipment or make other capital purchases. If that’s the case with your business, be sure to base your decision solely on your current needs. The possibility of rates increasing is not a rationale for spending money on something you don’t need.
For a growing business, having a manageable level of debt can be an effective way of doing business. Significant growth often demands considerable capital, and getting that money may require you to seek debt financing. Taking the time to plan for your growth needs and identify the right type of financing for your business, can really help to ensure your company is positioned for success.
Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
With the cost of healthcare increasing each year, should you be considering a High Deductible Health Plan with a Health Savings Account for your company?
A High Deductible Health Plan (“HDHP”) is a new health plan product, that when combined with a Health Savings Account (“HSA”) provides insurance coverage and a tax-advantaged way to help you and your employees save for future medical expenses. The HDHP/HSA gives you greater flexibility and discretion over how you and your employees use your health care dollars.
Who would benefit from an HDHP/HSA Plan?
If your medical expenses are generally limited to preventative care, you should definitely consider an HDHP; especially if you have the ability to make additional voluntary contributions to your HSA to accelerate the accumulation of funds for future medical expenses. However, If you have significant medical expenses that do not approach catastrophic limits, you are probably better off in a traditional plan. An HDHP plan has a higher annual deductible compared to traditional health plans. For 2006, an HDHP has a minimum annual deductible of $1,100 for single and $2,200 for family coverage. They also have maximum out-of-pocket limits of $5,000 for single and $10,000 for family.
Health Savings Accounts
An HSA account is a tax sheltered trust account that you own for purposes of paying qualified medical expenses for yourself and your family. Your HSA voluntary contributions are tax deductible. Additionally, interest earned on your HSA account is tax free. Furthermore, tax free withdrawals may be made for qualified medical expenses. Unused funds and interest left in the account at the end of the year are carried over, without limit, year to year. You own the HSA account, so all the dollars in this account are yours to keep – even when you change plans or retire. Your HSA is administered by a trustee or custodian who helps to manage the contributions and withdrawals from your account as well as manage the investments that the funds in the account are placed in.
How will the HSA save my company and employees money?
An HSA account will save you money through lower premiums, tax savings, and money deposited into your account that can be used to pay your deductibles and other out-of-pocket medical expenses in the current year and future. The funds in your HSA account can be invested in: bank accounts, annuities, certificates of deposit, stocks, bonds and mutual funds. However, your HSA custodian or trustee may offer only some of these types of investments, so you will want to understand these limitations before you choose your HSA custodian or Trustee.
What is the process for setting up an HSA?
First, you must elect a high deductible health plan. Generally, once the plan receives your company enrollment, the plan will mail you an information packet that includes banking forms for you to complete. When the plan receives the completed forms the plan will notify the administrator of the HSA (generally this is a bank). The administrator will then set up your employee accounts and your health plan will deposit pass through premiums payments into the account. Keep in mind that not all employees are required to use the same plan administrator, the employee can choose their administrator and what type of investments they will make with their contributions. Any investment allowed for IRA’s is allowed for HSA accounts.
With the cost of healthcare increasing each year, you may want to consider a High Deductible Health Plan with a Health Savings Account for your company. These HDHP/HSA accounts can lower your insurance premiums, reduce your tax bill and give you more flexibility to determine how your health care dollars are used. They can also be one additional benefit you can offer your employees!
The U.S. Small Business Administration reports that approximately 40,000 businesses close their doors or file for bankruptcy each month. Many of these businesses were buried in debt without a viable plan to dig themselves out and had hopes that things would get better. Getting a business out of, or in control of its debt requires a plan that can be executed with discipline and patience. It requires spending time and effort to properly repay your creditors to the extent your business is able.
Debt restructuring is a process of negotiating new payment terms with existing creditors with a purpose of satisfying your creditors based on a budget you can afford in an effort to avoid lawsuits and bankruptcy. Restructuring includes reducing the amount owed and/or stretching out the time period for making payments to creditors. Debt restructuring can keep you in business, extend your payments over time and possibly save you money. If a true hardship is properly presented to your creditors, many will go outside of their normal collections procedures. Furthermore, many creditors can save money (collection fees, legal fees) by working a deal out with you. We should note that debt restructuring does not preserve your credit score. Most likely your business credit score will decrease during this process.
Here are some of the key components of debt restructuring
- Determine how critical your debt problem is
- Identify which debt needs to be restructured
- Project how much you can afford to pay toward these debts on a monthly basis
- Consider the future profitability of your business
- Determine how much time and effort you can devote to the restructuring process
- Create affordable settlement offers
- Negotiate with creditors and collectors and reserve funds
Signs that you need to restructure your debt
- Having difficulty paying current bills as well as past due debts
- Putting off debts you had planned to pay
- Already negotiated payment terms with creditors, but can’t afford them
- Paying smaller creditors while dodging larger creditors that potentially pose a bigger threat
- Being contacted by a collection agency or being sued
- Bouncing checks
- 30% or more of your payables are over 90 days past due
Which creditors should be restructured?
You don’t have to renegotiate with all creditors. Some creditors will do business with you on a COD or cash basis while you negotiate the past due balance with them. If they refuse to do business with you, their competitors may take advantage of the opportunity to get your business. First, you should put your creditors into 3 groups:
- No longer want to do business with you
- You no longer need to do business with them
- Have stopped giving you credit
- Are not critical to your survival
- Have threatened or placed you in collection
- Are still willing to sell to you
- Are not pushing for any past due balance
- Their products or services may be important, but can be repurchased somewhere else
- Are critical to your survival. Without their products or services, you would be forced to close your doors. There is absolutely nowhere else you could get those products or services
Once you have classified your creditors, add up the amounts you owe each group. The first thing to make sure of is your ability to pay Group 3 according to their terms. All of Group 1 should be restructured; review Group 2 to determine how much should be restructured. The tighter your cash flow is the more of Group 2 should be restructured. Add up all the debts that should be restructured.
A complete settlement proposal to your creditors should include a discussion of your hardship (i.e. personal tragedy, disaster, serious business problems etc.), your proposed payment plan and your business history which gives the creditor a summary of your historical financial performance and the basic reasons for the hardship. Don’t expect your creditors to settle quickly and easily, they won’t. Each will react differently. The goal of restructuring is to satisfy creditors with what you can afford. This will be done with combination of reducing debts and extending payments out over time.
Negotiate with creditors and reserve funds
The day you send out your first set of offers is the day you should set aside the amount of your monthly budget. These funds are sacred and should not be used for anything else. Keep records of how much has been set aside and how much has been paid out. Your creditors won’t necessarily take your first settlement offer. However, the longer it takes for a creditor to settle, the more money you can accumulate for future settlement purposes. Use your reserve funds prudently. Just because a creditor makes an offer that sounds good, doesn’t mean you can or should take it. In some cases, a generous offer from a creditor may still be unaffordable, especially if it requires all the funds to be paid immediately. Lastly, realize that things don’t always go as planned. An unexpected business problem can arise and derail your repayment promises. Stay on track by having a plan and retaining your credibility with creditors and business partners by keeping them informed of any changes that may affect them.
If your business is: starting to have difficulty paying current bills and past due debts, being contacted by a collection agency, bouncing checks or has 30% or more of its payables are over 90 days past due, you may want to give serious consideration to debt restructuring. It could be the difference between staying in business or having to close your doors.
Don’t become a statistic! If your business is experiencing problems with debt please give us a call at (480) 980-3977.
The manufacturing industry can be significantly impacted by changes in such things as commodity prices, labor rates, technology, tariffs and duties. This industry can present challenges from a financial perspective to its participants. Some of these challenges include management of inventory, capital equipment, profit, cash flow, financing and solvency.
One of the larger challenges manufacturers can face is effectively managing inventory. Not holding enough inventory can result in stock-outs and missed sales opportunities. On the other hand, holding too much inventory can result in increased carrying costs and risk of obsolescence. Manufacturers need to stay on top of and monitor their inventories at all times to ensure they are building the right product at the right time. They should also look for ways to reduce the manufacturing cycle time; from sourcing raw materials to completing finished product. The shorter this time, the less inventory that has to be carried. Manufacturers that are able to turn over their inventory more frequently, are able to quickly respond to changes in the market and demand. They are also able to minimize the working capital they need for their business. Keeping inventory fresh reduces risk (should the market change directions or the overall economy slow down).
From equipment to robotics to software, these items have a significant impact on a company’s performance. For example, manufacturers are increasingly leveraging the Internet of Things (IoT), which entails the interconnection of unique devices within an existing Internet infrastructure, to achieve a variety of goals including cost reduction, increased efficiency, improved safety, meeting compliance requirements, and product innovation. Roughly 63% of manufacturers believe that applying IoT to products will increase profitability over the next five years and are set to invest $267 billion in IoT by 2020. Nearly a third (31%) of production processes and equipment and non-production processes and equipment already incorporate smart device/embedded intelligence.
Manufacturers are continually challenged with maintaining up to date capital equipment to remain competitive in the marketplace. If you hold manufacturing equipment too long it will be become obsolete and inefficient. However, buying new equipment prematurely and it may become difficult to install, run, manage and maintain. It can also be under-utilized. Manufacturers need to ensure they have the have the right equipment for the job today and in the future. They could benefit tremendously from a well thought out capital purchase plan that enables them effectively plan for growth.
The manufacturing industry is very competitive, which puts pressure on product pricing and can result in low bottom-line profit margins. It is critical that businesses in this industry operate as efficiently as possible. This includes effectively managing capital equipment, ensuring that you have the right equipment for the job, that the equipment is utilized 95%+ of the time and that it is well maintained. It also includes utilization of subcontract manufacturers for certain types of work that require special equipment. Maintaining good controls over indirect spending is also important. These indirect spending areas include: people, utilities, rent, supplies and insurance. Maintaining highly productive employees is key. Taking the time to hire the right people for the right position is critical. Also, ensuring they are well trained, motivated, have clear expectations and that they are delivering the desired results for the company. Reviewing insurance coverages on a regular basis is also important. Making sure you have the right insurance for your business today and into future and working with your insurance carrier to do everything you can to reduce your risk of loss with solid business processes. Many businesses in this industry have significant rent expense for buildings. Business owners need utilize their building efficiently and ensure unused space is not excessive. This will help keep rent expense, property taxes, insurance and utility costs at a minimum.
The manufacturing industry has historically been a very high-volume business with very low gross margin and profit margins. The industry can also be characterized by long lead times and shipment times for parts and products. This can result in large accounts receivable and account payable balances on an ongoing basis. If customers are slow to pay their invoices (i.e. >30 days), this can quickly present challenges from a cash flow perspective. If a product does not get completed correctly there can be a claim regarding the product, and collection can be delayed. Manufacturers should consider taking deposits from customers upfront to cover hard costs. They should also maintain aggressive accounts receivable collection processes to ensure that clients receive invoices quickly, acknowledge receipt of outstanding invoices, and pay within payments terms. Providing invoices and receiving payments electronically is highly recommended. Maintaining a positive relationship with vendors is also critical and ensuring that vendors are paid according to payment terms is key. Matching payment terms with vendors and customers can really help to maintain positive cash flow.
The manufacturing industry is challenged is several areas. Some participants have Beta’s of 1.25 or more which indicates that they are more volatile than the overall stock market. Industry participants need to continually upgrade their equipment to remain competitive, which drives up capital spending and fixed assets. Many participants are small-businesses that are not well capitalized. When the overall economy slows, many industry participants become unprofitable and find it hard to make their equipment loan payments. All of these characteristics make it challenging to obtain low cost working capital and equipment financing. Business owners should work to position their business over time for traditional bank financing by improving business profitability, liquidity and solvency ratios. They should also consider increasing cash reserves. Improving business efficiency, increasing bottom line profit, strengthening the balance sheet and driving growth will make your business more attractive to traditional lenders. It can also positively position the company to weather any downturn in the economy, cyclicality in the market, and impact from changing: commodity prices, labor rates, tariffs and duties.
As previously mentioned, the manufacturing industry is evolving rapidly, technology is changing and this industry is challenged with effectively managing capital equipment. New equipment can also saddle a small manufacturer with a large amount of debt and large debt service payments. This increased debt can have a significant impact on the manufacturer’s solvency ratios such as its Debt-Equity Ratio (long term debt / shareholder’s equity) and its Interest Coverage Ratio (income from continuing operations + interest expense + income tax expense)/interest expense). If these solvency ratios fall below industry averages, the manufacturer can be in default on its loans, making it difficult to maintain its financing or qualify for additional financing. These large debt service payments can have a large impact on a manufacturer’s working capital, making it difficult to meet current liability payments on-time. This can result in damaged vendor relationships making difficult to do business in the future. A solid financial plan can help ensure that the right financing is in place for equipment. It can also ensure the business owner understands the impact to solvency ratios prior to making any capital equipment purchase.
The manufacturing industry can be significantly impacted by changes in such things as commodity prices, labor rates, technology, tariffs and duties. This industry can present challenges from a financial perspective to its participants. Some of these challenges include management of inventory, capital equipment, profit management, cash flow, financing and solvency. Business owners that are able to effectively manage these challenges can really improve their bottom line and position their company for growth!
If you have any questions regarding the financial issues discussed above or any other financial issues, please give us a call at (480) 980-3977.
The overall market in the commercial printing industry generated a combined revenue of approximately $84 billion in the United States among approximately 25,000 establishments and 447,000 employees. The industry has also been experiencing consolidation, as the larger printers acquire the smaller printers in the market. Of these revenues, approximately $920 million was from Arizona alone among 390 establishments and 4,950 employees. This results in an average revenue per printer of $2.3M.
The commercial print industry is experiencing a reduction in the use of printed material as more and more information is being distributed via electronic means through the internet and email. Consumers are increasingly favoring digital alternatives, such as online media, over printed materials. There has also been a shift towards shorter print runs with less volume and tighter deadlines. Additionally, there has been an increase in demand for paper finishes or laminates such as soft touch on printed material. As a result, commercial printers have been continuing to invest in new technology and equipment to remain competitive.
The industry can be significantly impacted by changes in such things as paper prices, fuel prices, technology. This industry can present challenges from a financial perspective to its participants. Some of these challenges include: profit management, cash flow management, financing, solvency and uncollectible accounts receivable.
The printing industry is very competitive, which puts pressure on product pricing and can result in low bottom-line profit margins. It is critical that businesses in this industry operate as efficiently as possible. This includes effectively managing capital equipment such as printing, cutting and folding equipment, ensuring that you have the right equipment for the job, that the equipment is utilized 95%+ of the time and that they are well maintained. It also includes utilization of subcontract printers for certain types of print work that requires special equipment. Maintaining good controls over indirect spending is also important. These indirect spending areas include: people, utilities, rent, supplies and insurance. Maintaining highly productive employees is key. Taking the time to hire the right people for the right position is critical. Also, ensuring they are well trained, motivated, have clear expectations and that they are delivering the desired results for the company. Reviewing insurance coverages on a regular basis is also important. Making sure you have the right insurance for your business today and into future and working with your insurance carrier to do everything you can to reduce your risk of loss with solid business processes. Many businesses in this industry have significant rent expense for buildings. Business owners need to ensure they are utilizing their building efficiently, that they do not have excessive unused building space. This will help keep rent expense, property taxes, insurance and utility expenses at a minimum. Use of technology in the printing industry is also very important. Businesses should be evaluating the latest technology that can be used to more efficiently produce its printed materials. This could be items such as: new printers that offer higher quality customized printed material in both large and small format. Printers that allow for 1 to 1 marketing. Enhanced computer technology that enables electronic transfer of information with customers and vendors. It could also include the use of alternative sources of energy, such as solar energy, to lower utility costs.
Cash Flow Management
The printing industry has historically been a very high-volume business with very low gross margin and profit margins. This results in large accounts receivable and account payable balances on an ongoing basis. If customers are slow to pay their invoices (i.e. >30 days), this can quickly present challenges from a cash flow perspective. If a print job does not get completed correctly there can be a claim regarding the printed material, and collection can be delayed. Printers should consider taking deposits from customers upfront to cover hard costs such as paper, ink and printing plates. They should also maintain aggressive accounts receivable collection processes to ensure clients receive invoices quickly, clients acknowledge receipt of outstanding invoices, and payments are received within payments terms. Providing invoices and receiving payments electronically is highly recommended. Maintaining a positive relationship with vendors is also critical, ensuring that vendors are paid according to payment terms is key. Matching payment terms with vendors and customers can really help to maintain positive cash flow.
The industry has an average beta of 1.75 which indicates that it is more volatile than the overall stock market. Industry participants need to continually upgrade their printing equipment to remain competitive, which drives up capital spending and fixed assets. Many participants are small-businesses that are not well capitalized. When the overall economy slows, many industry participants become unprofitable and find it hard to make their equipment loan payments. All of these characteristics make it challenging for industry participants to obtain low cost working capital and equipment financing. Business owners should work to position their business over time for traditional bank financing by improving business profitability, liquidity, solvency ratios. They should also consider increasing cash reserves. Improving business efficiency, increasing bottom line profit, strengthening the balance and driving growth will make your business more attractive to traditional lenders. It can also put the company in a good position to: weather any downturn in the economy, cyclicality in the market, or impact from changing fuel prices.
As previously mentioned, the printing industry is evolving rapidly, technology is changing and this industry is challenged with effectively managing capital equipment. Hold printing equipment too long and it becomes obsolete and inefficient. Buy new equipment too early and it can be difficult to install, run, manage and maintain. It can also be under-utilized. New equipment can also saddle a small printer with a large amount of debt and large debt service payments. This increased debt can have a significant impact on the printer’s solvency ratios such as its Debt-Equity Ratio (long term debt / shareholders equity) and its Interest Coverage Ratios (income from continuing operations + interest expense + income taxes)/interest expense. If these solvency ratios fall below industry averages, the printer can be in default on its loans, making it difficult to maintain its financing or qualify for additional financing. These large debt service payments can also have a large impact on the printer’s working capital, making it difficult for a printer to make its current liability payments on-time. This can damage vendor relationships and make it difficult to do business in the future. Printer could benefit tremendously from a well thought out capital purchase / financial plan. This will help ensure they are buying the right equipment at the right time. It will also help to ensure they have the right financing in place for the equipment and that they understand the impact to their solvency ratios.
Uncollectible Accounts Receivable
The printing industry is also characterized by many small and medium sized customers, from individuals to businesses to government entities. The individuals and small businesses can be underfunded. The medium sized businesses and government entities can take 60 – 90 days to pay for their print work. Printing business owners need to recognize this risk and take measures to limit their exposure in this area. Some things that can be done to reduce this risk include regular credit checks on all customers, establishing tight credit limits on all customers, and aggressive collection efforts on all outstanding balances. They should also consider taking security deposits from some or all customers who are new or have a history of poor performance, especially for the larger print jobs. Once the business owner has extended credit to one of these customers, they have put themselves into a challenging position. Collection and legal actions can be expensive and time consuming and even if you are successful in a getting a judgement, it still has to be collected. If the customer does not have the funds to pay or declares bankruptcy, the business owner is still not going to receive payment.
The commercial printing sector is an exciting and fast paced industry. It is a cyclical industry that is capital intensive and contains many large and small industry participants. It is a high-volume business with relatively tight gross margin and profits margins. The industry can be significantly impacted by changes in such things as fuel prices, tariff and duties and changes in US Gross Domestic Product. This industry can present challenges from a financial perspective to its participants. Some of these challenges include: profit management, cash flow management, financing, solvency, uncollectible accounts receivable. Business owners that are able to effectively manage these challenges can really improve their bottom line!
If you have any questions regarding the financial issues discussed above or any other financial issues, please give us a call at (480) 980-3977.
In today’s competitive marketplace, almost every category of product or service is characterized by accelerating changes, innovation, and massive amounts of new information. Much of this rapid evolution in markets is fueled by changing customer needs. Significant customer behavior and market changes happen almost overnight. Changes in market preference or technology, which used to take years, may now take place in a few short months. For example, the product life cycle for new consumer computer technology and computer printers is estimated to be as little as six months. Computer marketers must carefully plan one or two new product introductions each year, with contingency plans for making design changes with current product lines as they are being manufactured.
As the pace of change accelerates, it becomes more difficult to maintain profits, growth and stable relationships with suppliers, customers, brokers, distributors – and even your own company personnel. “Putting out fires” and reacting to new emergencies is unfortunately the norm for many large and small companies caught in the crossfire of technological change. Are competitors stealing your best customers while you are out looking for more? Does your company have limited financial, personnel, and capital resources which make it especially vulnerable to instability brought on by rapid changes in customer behavior? One way to help ensure your business success is to make quality, customer satisfaction and process improvement a top priority for your company. It is essential for a small business to compete against both smaller and larger competitors.
Many business owners want to improve their business performance, who doesn’t? However, when asked what processes they use to improve their business performance, the response is often we don’t have a defined process we just try to do better every year or, our sales are increasing each year, we must be doing well or, these processes take too much time or cost too much money. In many instances, they spend no time monitoring performance and instead, make decisions purely on gut feel. Many business owners really have no idea how their business is performing on a periodic basis, what the key drivers of their business are, or if they are creating additional business value. What they don’t realize is that it is very difficult to improve your business in a particular area if you don’t know where you currently stand. Furthermore, many don’t realize they could be growing faster, reducing more risk or generating even more profit and return on investment, if they only had a good process improvement and performance (operational and financial) monitoring program.
Most companies, small and large, operate well below 100 percent of their potential efficiency. Some of this underutilized potential may be measured in quantitative terms, such as plant capacities, the ratio of parts meeting standard to the number of rejects, or the turnaround time for orders to delivery. However, much of this underutilized potential is more subtle, difficult to see, and difficult to correct. What is your evaluation of operating efficiency for your company? 50 percent? 75 percent?
Most companies survive with large inefficiencies and unnecessary costs because they have reached a point with large enough sales and margins that these problems may not be readily apparent. In successful process improvement programs every employee in the company can provide examples where efficiency can be improved. If employees are encouraged and rewarded for process improvement participation, with higher job satisfaction and perhaps even financial incentives, customer satisfaction, production, efficiencies, sales, and profits will increase – often with fewer people than before. Costs and customer problems will decrease.
What are the cost-savings for increased goodwill or customer loyalty? These intangibles can lower costs and yield tangible gains in productivity, sales, and ultimately profits. When each employee is personally committed to quality and customer satisfaction, people will be doing more things right and better the first time. This results in lower costs, less waste, and higher productivity. These process improvement programs are a tried and tested approach to managing the organization’s processes so that they consistently turn out products and services that satisfy customers’ expectations.
Process Improvement Programs such as ISO 9000 have several key characteristics, these characteristics are listed below.
Customer focus – Organizations depend on their customers and therefore should understand current and future customer needs, should meet customer requirements and strive to exceed customer expectations.
Key benefits: Increased revenue and market share obtained through flexible and fast responses to market opportunities.
Leadership – Leaders establish unity of purpose and direction of the organization. They should create and maintain the internal environment in which people can become fully involved in achieving the organization’s objectives.
Key benefits: People will understand and be motivated towards the organization’s goals and objectives.
Involvement of people – People at all levels are the essence of an organization and their full involvement enables their abilities to be used for the organization’s benefit.
Key benefits: Motivated, committed and involved people within the organization.
Process approach – A desired result is achieved more efficiently when activities and related resources are managed as a process.
Key benefits: Lower costs and shorter cycle times through effective use of resources.
System approach to management – Identifying, understanding and managing interrelated processes as a system; contributes to the organization’s effectiveness and efficiency in achieving its objectives.
Key benefits: Integration and alignment of the processes that will best achieve the desired results.
Continual improvement – Continual improvement of the organization’s overall performance should be a permanent objective of the organization.
Key benefits: Performance advantage through improved organizational capabilities.
Factual approach to decision making – Effective decisions are based on the periodic analysis of data and information.
Key benefits: Better, more informed decisions.
Mutually beneficial supplier relationships – An organization and its suppliers are interdependent and a mutually beneficial relationship enhances the ability of both to create value.
Key benefits: Increased ability to create value for both parties.
These process improvement techniques can be applied to every area of your company such as: sales, marketing, manufacturing, operations, customer support, engineering, product development, finance/accounting, legal, human resources. Furthermore, they usually lead to: setting challenging goals and targets, regularly monitoring performance toward those goals, holding people accountable for their actions, rewarding good performance, continually improving the system through measurement and evaluation, and improved, consistent predictable results.
Quality Improvement Exercise
Try a quality improvement exercise. Every company, regardless of size, can improve quality and customer service. A simple exercise to improve quality is to track an order from its inception to final delivery. Try this checklist and see if any improvements can be made:
- How are products and services sold (with what materials)?
- How and by whom is the order obtained from your customer?
- How is the order recorded for your company and your customer?
- How is the order processed within your company?
- Is there a system to check for any order discounts to customers?
- How long does it take to process and deliver the order to the customer?
- Do you have any accuracy checks for the order, with the customer and internally?
- How is the final product or service delivered to your customer?
- Have you checked customer relationship “manners” with everyone who has direct contact with your customers?
- Have you allowed everyone associated with order processing to meet periodically and discuss improvement possibilities?
- Do you have a customer follow up procedure for orders?
- Do you review your order and service satisfaction level at least quarterly with each customer?
If your competitors are stealing your best customers or you have limited financial, personnel and capital resources to compete in this rapidly changing marketplace, one way to help ensure your business success is to make quality, customer satisfaction and process improvement a top priority for your company. The more participation by company employees in process improvement programs and the more ways they think up to improve customer satisfaction, the better the results! A solid process improvement and performance monitoring program can get your company growing faster, reducing more risk and generating even more profit and return on investment.
The primary goal of the Arizona Enterprise Zone Program (or “EZ” program) is to improve the economies of areas in the state with high poverty and/or unemployment rates. The program does this by enhancing opportunities for private investment in certain areas that are called enterprise zones. Increased investments in such areas tend to strengthen property values, and encourage quality job creation to promote the vitality of the local economies. These enterprise zones cover a large part of the valley including all or a portion of cities such as Phoenix, Tempe, Chandler, Mesa, Glendale, Buckeye and Goodyear.
The program offers two types of tax benefits to business owners: property tax reduction, and income tax credits.
Property Tax Benefits
A manufacturer or commercial printer in an enterprise zone is eligible for a reduction in its property tax assessment ratio from as high as 24% to 5% on all personal and real property in the zone for five years. What does this mean to you? As much as a 75% reduction in annual property tax paid by the business owner for the next five years! A significant savings! At the end of the five-year reclassification period the property reverts to the standard assessment ratio.
If the business meets the following criteria it can qualify:
- Either minority-owned, woman-owned or small (a small business has fewer than 100 employees or gross sales of $4 million or less).
- Independently owned and operated (not owned more than 50% by another company unless the ultimate ownership is primarily family owned or closely held).
- Makes an investment in fixed assets at the zone of $500,000, $1 million or $2 million, depending upon the location of the facility. In Maricopa County the investment limit is $2M.
Please note that the investment in fixed assets can be aggregated from 1/1/2001 to today, as long as the enterprises zone was in place during that time. This really helps those businesses that made smaller investments over the last seven years qualify!
Income or Premium Tax Credits
A business owner can receive an income tax credit for net increases in qualified employment positions at a site located in an enterprise zone – except for those business locations where more than 10% of the activity is retail sales. The Tax credits can total up to $3,000 per qualified employment position over three years for a maximum of 200 employees in any given tax year. So, if you have a business with 200 qualifying employees, your tax credit could range from $100K to $300K per year! Not bad!
If the following criteria are met, the business can qualify:
- Position is a full-time permanent job (1,750 hours per year).
- Position pays an hourly wage above the “Wage Offer by County” (currently between ~$8 and ~$16 depending on the county in which the business is located).
- Employer offers health insurance to employees for which the employer pays at least 50 percent.
- Employee works at least 90 days in the first tax year.
- Employee cannot have worked for the employer within 12 months from current date of hire.
The enterprise zone credits for qualified employment positions are equal to:
- First year: one-fourth of wages paid to an employee up to $500.
- Second year: one-third of wages paid to each previously qualified employee up to $1,000.
- Third year: one-half of wages paid to each previously qualified employee up to $1,500.
Please note that 35% of the net new eligible employees on whom the business is claiming a credit must live within an enterprise zone in the same county as the business on the date of hire.
As with any government program, there is a little paperwork involved. The law requires that, for the property tax benefit, company reports need to be filed with the Arizona Department of Commerce by October 1st of each calendar year to be eligible for reclassification in the next valuation year. The law also requires that for the Employer Tax Credit program that EZ Income/Premium Tax Reports be filed with the Arizona Department of Commerce by the earlier of either six months after the end of the tax year in which the credits were earned or by the date the original tax return is filed for the tax year in which the credits were earned.
There are exceptions to these general rules, so please contact us for advice on how this information applies in your specific situation. If you are planning to start or expand a business in the greater Phoenix metropolitan area, consider Arizona’s Enterprise Zone Program, it can be well worth your time!
Have you taken a good look at your accounting system recently? If not, it’s probably a good time for a review. Many companies think that their accounting system is in good shape, until they begin trying to use it as a tool to better manage their business. Experience clearly indicates that a good accounting system increases the chances of survival for the startup business and increases the chances of earning a large profit for the established business.
A good accounting system is made up of several components: robust accounting software, efficient accounting processes with the right checks and balances, educated accounting team, solid financial statements, and critical business indicators. Implementing a system that has all the major components can help to ensure your business gets accurate, reliable and consistent accounting information on a timely basis.
Accounting software is critical to a good accounting system
A software platform must not only be able to handle your business needs today but it must have the capability to grow with your changing business. Using an established software platform that is updated regularly by the software provider will help ensure the software can handle the needs of your changing business. It can also make it easier to transfer your accounting information to other software platforms and services for such things as payroll and taxes. A robust software platform can really help streamline your accounting processes reducing the time and resources needed to get the information your need.
Efficient Processes with Checks and Balances
Having efficient processes for data entry will help to reduce the time needed to complete your monthly financial close as well as help eliminate the chances of accounting fraud. Ensure you have the necessary data ready to perform the monthly close. Also, ensure you have the right number of accounts set up to adequately breakdown the business activity, use different accounts for frequent or substantial expenditures, use miscellaneous accounts for small expense items. Ensure you have processes in place to follow up on such things as outstanding accounts receivable. Separate accounting responsibilities such as accounts receivable, accounts payable, general accounting and disbursements. Having the right checks and balances in place by separating accounting responsibilities can help eliminate accounting errors and reduce the chances of accounting fraud.
Having a well educated accounting team is critical to getting accurate financial information
An educated accounting team is critical to getting accurate financial information. The team must have the critical accounting knowledge necessary to make the right accounting entries at the right time. They must be able to comprehend changes in the business and accounting regulations that impact the company’s financial statements. Additionally, the team must be able to understand the accounting software such that they can make the correct adjustments to the accounting structure for changes in the business.
Solid Financial Statements and Indicators
Most business owners are looking for financial information to help them more effectively manage their business. Having the right financial statements that are accurate, easy to understand and highlight the most important information are critical to the success of the business. Also, having a good set of indicators that accompany the financial statements helps highlight the key issues for the business owner to focus on. This dashboard of indicators is key to the business owner understanding business performance relative to company goals and the competition.
So take a closer look at your financial system, if it is not giving you the information you need in a timely manner, it’s time to make a change. Experience clearly indicates that an accurate accounting system helps increase the chances of business survival and earning a large profit.