Is Your Company Effectively Managing Its Debt?
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.
Plan effectively
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.
- Published in Newsletters
Is a High Deductible Health Plan with a Health Savings Account Right for your Company?
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!
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.
- Published in Newsletters
Stay in Business with Debt Restructuring
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:
Group 1
- 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
Group 2
- 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
Group 3
- 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.
Settlement offers
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.
Closing
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.
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.
- Published in Newsletters
Top Financial Challenges in the Manufacturing Industry
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.
Inventory
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).
Capital Equipment
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.
Profit
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.
Cash Flow
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.
Financing
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.
Solvency
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.
Conclusion
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.
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.
- Published in Newsletters
Top 5 Financial Challenges in the Printing Industry
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.
Profit Management
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.
Financing
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.
Solvency
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.
Conclusion
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.
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.
- Published in Newsletters
Business Process Improvement and Performance Monitoring
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.
Solution
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.
Benefits
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.
Program Characteristics
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.
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.
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Arizona’s Enterprise Zone Program
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!
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.
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Is Your Accounting System Up to Par?
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.
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.
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What is the Best Type of Financing for Your Business?
Finding the right financing for your business can be a challenging task. However, if you understand a few of the basics when it comes to your financing options, you can reduce the amount of time it takes to find that financial partner and increase your chances of getting the right financing for your business.
Just like any industry there are many different financial resources, each with a different area of focus or specialty. The financial resource that is right for you depends on several factors:
- The industry your business is in.
- The stage of your business.
- The amount of financing you need.
- The time you need the financing.
- The amount of control of your business you are willing to give up.
- Your business and personal qualifications.
- How much you are willing to pay for the funds.
In financing, the risk reward trade-off holds true; the greater the risk the financial resource is taking, the greater the return they are expecting to receive from their investment. Understanding where your company and your financial resource are on the financing spectrum will help you determine if there is a good match between debtor and creditor.
Debt vs. Equity
One of the first questions you need to ask yourself when determining your capital requirements, are you willing to give up some ownership or control of your company? If you are, than you may be a candidate for equity financing, if you are not, then you are more likely a candidate for debt financing. In general, with debt financing, there is a clearly defined: loan amount, interest rate and term, and you are required to make periodic fixed principle and interest payments over the term of the loan whether your company is profitable or not. However, the financing resource does not have ownership of your company or the ability to directly control the direction of the company. In general, with equity financing, there are no fixed periodic principle and interest payments, and there are no fixed terms as to when the investment needs to be paid back. However, in return for their investment, you give the investor, an ownership stake in the company, a share of the company profits, and the ability to control the overall direction of the company.
Debt Financing
There are many types of debt financing including: loans, lines of credit, factoring, and purchase order financing.
Loans
Loans are typically used for financing the purchase of fixed assets such as buildings and equipment. They are generally provided by banks and finance companies, have a fixed term 3+ years, a fixed annual interest rate, and a fixed monthly principal and interest payment. They are typically secured by the fixed asset being purchased. Loans are typically made for 50% – 80% of the value of the fixed asset being purchased. In general, this type of debt financing is usually provided to companies that are breakeven or profitable and have been in business for 3+ years. Interest rates currently range from approximately 7% to 12% per year.
Lines of Credit
Lines of Credit are typically used for financing working capital needs and are used on as needed basis. They are expected to revolve on a regular basis, that is, you borrow money one month then pay it back with interest the next. They are generally provided by banks and finance companies and have: an upper limit of dollars that can be used at one time, a fixed term of 1 year, a variable annual interest rate, and a variable monthly payment depending on the amount of funds being used. They are typically secured by such things as accounts receivable and inventory. In general, this type of debt financing is usually provided to companies that are breakeven or profitable and have been in business for 3+ years. Interest rates currently range from approximately 7% to 12% per year.
Factoring
Factoring also used for financing working capital needs, is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor or finance company) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset), not the firm’s credit worthiness. Secondly, factoring is not a loan, it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three. Factors usually factor a limited number of invoices, for a limited time (30-60 days), and charge a fixed interest rate which ranges from 1%- 3% per 30 days and is collateralized by the accounts receivable. Invoices may be factored with or without recourse. In general, this type of debt financing can be provided to new and established businesses.
Purchase Order Financing
Purchase Order Financing also used for financing working capital needs, is a financial transaction whereby a business which has orders for its product, can get a loan from a financing company to purchase the materials and labor needed to produce the product which is needed to fulfill those orders. Purchase order financing is usually provided by finance companies. It has a limited term (30 -90 days), has a fixed interest rate which usually ranges from 1%-3% per 30 days and is collateralized by the materials. In general, this type of debt financing can be provided to new and established businesses.
Factoring and purchase order financing can be provided to new and established businesses.
Equity Financing
There are many types of equity financing including public stock and private stock.
Public Stock
Companies that issue public stock have the ability to raise large amounts of capital from a variety of investors all over the world. There stock is usually traded on a regular basis on public stock exchanges such as the New York Stock Exchange (“NYSE”) or the “National Association of Securities Dealers Automated Quotations (“NASDAQ”). They are regulated by the Securities and Exchange Commission (“SEC”). A publicly held company is required by the SEC to publicly disclose its financial performance in detail on a quarterly basis. As with equity financing, their investors, own a portion of the company, share in the company profits and can have control over the company direction by utilizing their voting rights.
Private Stock
Private Stock companies that issue private stock have the ability to raise capital from a limited number of accredited investors in the world. There stock is not traded on a regular basis on the public exchanges. However, they are regulated by the Securities and Exchange Commission. Unlike a publicly held company, a privately held company does not have to disclose its financial performance to the public. As with equity financing, their investors, own a portion of the company, share in the company profits and can have control over the company direction by utilizing their voting rights.
Angel Investment
Angel Investment is a private equity investment which is generally raised from a small group of accredited investors (high net worth individuals). This group of investors varies dramatically, but could be professionals, business owners or business executives. They could invest on their own or through angel investment groups. These investors usually invest in early stage companies that have the ability to grow rapidly. They usually invest between $25K and $1M and actively participate in management. In general, these investors concentrate their investments in industries they are familiar with. They may have previously worked in the industry, invested in the industry or owned businesses in the industry. In general, these investors prefer to exit their investment in approximately 5 years.
Angels invest between $25K and $1M in early stage companies that have the ability to grow rapidly.
Venture Capital Investment
A private equity investment which is generally raised from institutional investment groups. These investment groups vary in size from $50M to $5B. These investors usually invest in technology companies that have some initial sales and have the ability to grow rapidly. They usually invest between $1M and $50M and can actively participate in management. In general, these institutional investors concentrate their investments in certain industries they believe have the greatest potential for growth. These investors prefer to exit their investment in approximately 7 years.
Financial Partner Research
Before you begin contacting prospective financing sources, it is a good idea to do your research. Understand what industries your prospective financing resource has invested in, what type of financial products they have to offer, what size investments they generally make, what their investment risk profile looks like, and what other services they can offer such as management support and business development support. Much of this information can be obtained through referrals from your CPA, attorney or bank, by researching financial resource websites, by contracting your industry association and by interviewing your prospective financial resource.
Finance Package
Before you contact your prospective financing resource, you will also want to prepare your financing package, which usually includes: historical business tax returns, historical personal tax returns, historical business financial statements, interim business financial statements, aged accounts receivable and accounts payable reports, a personal financial statement, a business financial forecast, articles of incorporation, a use of funds statement and a business overview/plan. You only get one chance to make that good first impression on your financial resource, so take the time to do it right! Ensure you have a complete and accurate finance package that really presents your business in the best possible light. If you have never prepared a finance package before, get help from an expert! A good CFO or CPA firm can help you through the process.
Closing
Finding the right financing for your business can be a challenging task. However, if you understand the type of financing you need, how to locate that financial resource, and what information they will need from you, you can reduce the amount of time it takes to find that financial partner and increase your chances of getting the right financing for your business. A great financial partner can really have a positive impact on your bottom line!
Still need help determining the right type of financing for your business? Contact our experts at Pinnacle Business Solutions. Call us today (480) 980-3977.
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.
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Signs of Financial Weakness
Is your business financially weak? Is its financial position weakening each year? It may be surprising to learn that many business owners cannot answer these questions. If you would like to determine the financial health of your company, here are a few financial weakness indicators you will want to be on the look-out for:
1. Cash flow picture for business is unclear
Business owners need to understand how much cash flow their business is generating on a monthly basis. They also need to understand how much cash flow is being generated by day to day operating activities, investing activities and financing activities. This will help them determine, at the end of the day, if they are actually increasing or decreasing their cash in the bank. Furthermore, if their business is not increasing its cash in the bank, what areas need to be fixed.
2. Financial statements are not meaningful or inaccurate
It is very difficult to manage a business with inaccurate financial statements. It’s like driving your car in the dark without headlights. If your bank, investors or business partners are having trouble reading your financial statements, they may not be accurate. If your accounting staff has no formal education or training in preparing financial statements in compliance with Generally Accepted Accounting Principles (GAAP), there’s a good chance that your financial statements are not accurate. You may want to consider having a certified public accountant take a look at your financial statements so they can perform an audit or a review, and let you know what is not being done correctly.
3. Losing market share to your competition or unaware of position in marketplace
If your business is not growing as fast as your competitors, you may be losing market share. If you have no idea how your business is performing when compared to your industry, there is good chance your business is losing market share to your competition. It is important to take some time each year to benchmark your business performance against your competition. This will help you learn which business strategies are working and which ones are not. It will also help you ensure that you do not get surprised by changes in your competition and market.
4. Inefficient use of assets (people, capital equipment, intellectual property, inventory) or loss of assets
One way of measuring business performance is by measuring your business return on investment (“ROI”). This financial metric measures your business net income relative to the amount of investment you have in your business. There are two ways to improve this metric, increase the company net income by a greater amount than your investment, or reduce your investment by a greater amount than your reduction in net income. The key is to be regularly reviewing your business net income and investment. Is your company income increasing each year? Is your company efficiently utilizing all its assets? Is your business equipment being utilized greater than 90% of the time? If not, you may need to change your strategy to improve your business ROI.
5. Not getting paid on time
Is your business allowing customers to pay in the future for goods and services delivered today? If so, you will want to ensure you are regularly reviewing accounts receivable and making sure your customers are paying according to your business terms and conditions. If customers are not paying on time, this can very quickly have a negative impact on your business working capital. This can make it difficult to cover the necessary business expenses such as payroll, rent, insurance and utilities. Financially strong businesses measure and manage their accounts receivable turnover on a monthly sometime weekly basis.
6. No long term strategic plan for business
Small Business Administration (‘SBA”) studies show that 80% or more of businesses that have been in business for greater than 3 years have long term strategic plans. These strategic plans enable business owners to plan for growth, set goals, understand the market and competition and make the right investment in people and capital at the right time. These strategic plans can lead to faster growth, lower risk, increased profitability and a greater ROI for your business. If you do not have a plan for your business, you may be at a disadvantage.
7. No indicators in place to adequately monitor business performance
It is very difficult to improve something without measuring it first. Your business is no different. If you do not have indicators in place to track the key drivers of your business such as: sales, profitability, quality, customer service, R&D, cashflow, employees, you may find it hard to determine what is causing a downturn in your business or where the opportunities for future growth exist. The key is to identify those key drivers of your business, set goals for these drivers and monitor your performance relative to these goals, on a periodic basis.
8. Not achieving required return on business investments
Just like any other investment you might make, it is important that you get the required return on your business investments, one that is commensurate with the risk you as a business owner are taking.
For example, if you purchase a piece of equipment for $100,000, and your required annual rate of return is 20%, it is critical that the equipment is generating profit after paying all expenses of $20,000 or more each year. If you are not getting the required return on your business investments, you may be better off putting those investment dollars to use in a different area.
9. Not getting the lowest cost of capital or don’t have the capital needed to expand
If you are finding it difficult to find capital to grow your business or the capital you are able to obtain is very costly when compared to your industry averages, it may be because your business performance is trailing your industry. That is, your company’s profitability, liquidity and solvency ratios are weak. As a result, your business has increased risk associated with it. Increased risk translates into higher borrowing costs. Strengthen your business financial ratios to help reduce your cost of capital.
10. No strategic banking partner
Business owners need to ensure they have a solid team of business advisors to address their changing business needs as they grow. A business banker is a key member of that advisory team. Your business banker can help you plan for and manage the debt financing you will need for such things as working capital, equipment and building purchases, as well as banking and merchant solutions. If your business does not have a strategic banking partner, you may be at a disadvantage when compared to your competition.
11. Paying too much in taxes
If your business is paying more in taxes than your industry average. You may be missing out on a variety of federal and state business deductions and credit that apply to your business and industry. With tax laws changing on an annual basis it is even more important to have a tax advisor that understands your business, is helping you plan for your business growth and putting in place the appropriate tax plan to keep taxes at a minimum.
If your business is experiencing any of the financial weaknesses listed above, it is in your best interest to get the financial support you need to address these weaknesses as soon as possible! Your business can be financially strong and increasing its financial position each year! If your financial advisory team is not effectively managing these items, please let us know. We will get your business the results that it deserves. Call us today (480) 980-3977.
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.
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