While the current downturn in the economy has many lamenting their financial woes, it is possible for businesses to survive.  The Coeur d’Alene Press recently interviewed Bill Jhung , Region I SBDC coach, regarding the transition firms need to make to stay profitable.

 

The pressure businesses are feeling is a combination of decreasing revenues and increasing costs. However, this doesn’t automatically mean failure for all businesses. The majority of the strugglers are victims of other problems, which were harder to detect when the economy was strong.   Jhung observers that some businesses are blending in with the competition; the only distinguishing factor becoming price. And price competition only compounds the problems faced by declining revenues and increasing costs. Jhung recommends getting back to core strengths by getting rid of things that you are only doing because someone asked you to.  Jhung advises, “If you try to satisfy a lot of people you may not satisfy any group well”. He also reminds businesses to check their cash flows. “Cash is not the problem of a business, but can be the evidence of a problem”.  This goes back to giving the business a fiscal physical .

 

In summary, go back to what separates your business from the pack and be aware of your how your cash flows are moving.  To read the full article , visit the Coeur d’Alene Press online.

 

Of course, a big concern is the overall cost of the upgrade. The software will cost between $600-1,800 depending on which version, how many terminals are being set up, and where it is being purchased. The hardware will add roughly another $1,000-2,500 depending on what peripherals are required (assuming a touch screen monitor), number of stations, and will vary according to manufacture. HP and Dell both offer hardware packages that can be customized. New and used hardware/software packages can also be found at third party websites like eBay and craigslist or other independent resellers. 

 

Point-of-sale can be quite beneficial to small business owners, but it is easy to go above and beyond the actual needs.  As with any upgrade, a careful examination of the current and future business needs and capabilities of current staff should be undertaken before transitioning.

For some people it is easy to think of the idea for the perfect business, but they struggle evaluating the likelihood that it will survive and be successful. The Missouri Small Business Development Center has created an evaluation tool to help individuals analyze their idea.  The evaluation forms can be filled out online and then printed. The accounting sections even perform the calculations as the form is filled.

 

This tool forces the potential business owner to analyze many aspects of operating a successful business. These include the following:

The forms also include instructions and information that explains why the answers are important and the impact they will have on the survival of the business. These can be downloaded as one entire form (22 pages) or the expenses analysis can be separated out from the whole. There is also the Financial Projections worksheet in Excel format with instructions .

 

From a simplistic accounting viewpoint, it is a matter of emptying the balance sheet. Assets are liquidated, creditors are paid, and shareholders are given their respective portions of the liquidation. By state statute in Idaho, the dissolution must be filed with the Secretary of State. The necessary form is found on the Secretary’s website. And of course, the IRS must be settled with as well.

 

The IRS provides a checklist for businesses seeking to dissolve. Among others, this list includes:

 

 

 

 

 

 

As part of the Northwest Professional Development conference that was held earlier this month for SBDC’s in Oregon, Washington, and Idaho, Business Resource Services presented a portion of their Profit Mastery® lecture series on financial management. The day centered on ways to prevent business failure due to poor financial management. BRS noted seven “financial killers”. 

Carl Forssen, our presenter, said that it is often common for small business owners to assume that if they can make it and sell it, they will survive. The managing of and the decisions regarding the structure of finances are often left to the accountants and bankers. Now it is wise to use experts to aid in decision making and analysis, but the owner should be involved with the financial management. 

 

Mr. Forssen recommends giving your business a fiscal physical; look at things like contribution margins, variable vs. fixed expenses, break-even analysis, and simply using the balance sheet and income statement together to track the flow of cash. Business owners should go through this process at least semi-annually and preferably quarterly. 

 

BRS has developed a financial Road Map to aid in this process. After you have identified areas where your business may be weak, you can find the weakness and track back to potential causes or work forward to what will happen if the problem isn’t corrected. (Read more about the Road Map analysis).  Just like personal health, financial health is developed through consistent monitoring and careful attention to the details; crash diets, sporadic exercise, or quick-fix surgeries rarely work for physical or financial health. For more tools, visit BRS’s Critical Issues Toolkit . Or gather your financial statements, and visit your Idaho SBDC consultant to help you with your financial review.

A common metric for evaluating profitability or success of a project or business is net income. What is the bottom line? It turns out that the bottom line isn’t the best place to look. A more effective tool is the contribution margin. 

 

Contribution margin is equal to revenue minus variable costs. This can also be calculated on a per unit basis. Variable costs are costs that fluctuate each production cycle such as labor. A fixed cost is static. For example, insurance premium or building rent is going to be the same each period regardless of how much product is produced. Click to read more about variable and fixed costs.

 

There are two main uses of the contribution margin.  The first is to understand the actual profit added to the company. A product can have positive contribution margin, but a negative net income. In this scenario, there could be latent fixed costs that have been misallocated or can be controlled as opposed to the product being a dud. For example, rent on the storage warehouse will be a predetermined amount each period and will not be affected by the actual levels of production. Ideally, the budgeting process took both items into account. However, what is budgeted and what actually happens can be different things. If the business owner was able to use other storage space more efficiently and eliminate this rent expense or find cheaper rent, then net income would increase. The amount of profit the product is adding has not changed in either case, so just eliminating the product line can hurt net income. 

 

The second benefit is it allows break-even points to be calculated. The break-even point is the production level that revenue equals total costs. By dividing the fixed costs across the contribution margin per unit, the volume of production to cover the costs will be found. This formula can be grown to include the cost of taxes with a desired income level as seen below. This will allow the firm to set production or sales goals to reach a certain outcome beyond just covering the total costs of production. For example, let’s say total fixed costs are $150,000. The tax rate is 34%. The product has a contribution margin per unit of $1.11 and you have an operational goal of $1 million net income.

 

Benchmarking is the process of comparing an individual firm to the average of the whole industry or to specific competitors. This process can alert a firm to areas where it may be weak or to advantages that it may have been unaware of.  Benchmarking can help a firm that is trying to protect its market share by allowing the firm to “glance in the rearview mirror” to see how close the competition is. Or a firm that is a new entrant in the market can use benchmarking to find the minimum standards of the industry.

 

The difficult part of benchmarking can be finding the industry information. And if it is available, it often has to be researched and compiled. Entrepreneur Magazine has made the process much simpler. On their website, Entrepreneur.com, free access is provided to a database called the Business Performance Dashboard . The Dashboard pulls from a database of nearly 20 million businesses in over 20 industries that are broken into even narrower groups. The user simply selects the applicable industry. The website then retrieves data points ranging from annual revenue numbers to employee efficiency all of which can be sorted by number of employees.

 

For example, imagine I am starting a landscaping business. So I scroll down to Home Improvement and click on Landscaping. On the new page I can see that average revenue is $867,000. My projection was $1.1 million. I better double check my expense and sales forecasts to make sure I haven’t overlooked something. I also see a trend that the average revenue is decreasing over time. The industry may be getting more competitive. I scroll down further and see that the majority of firms have one to four employees. Small businesses are the norm here, but the few large firms are major players pulling in four times as much revenue. I better see if any of these giants are in my environment and if so, I may want to target a specific niche. The average age of firms in this industry is l3 years and there is a large revenue jump between the 1-3 years group and the 4-11 years group. This suggests to me that the first three years will be tough. But if I survive, at year 4 I should be able to reforecast and begin to enjoy the fruit of my labor. 

 

Other figures may have importance to you or you industry. The Business Performance Dashboard is a great starting place for benchmarking, but keep in mind it is exactly that, a starting point. More specific analysis of local or regional competitors and industry trends may be needed to get the best view of the market.

 

Many entrepreneurs often feel like the bureaucrats and big government are conspiring against them. The New York Times offers new hope for those feeling this angst. In the February 5 article, ”Government Help for Small-Business Owner (No Joke)” four different entities were highlighted including how they are helping.

 

The difference between an independent contractor and an employee is sometimes overlooked. While the difference is subtle, the reporting impact is not. An employee will have tax and insurance obligations that an independent contractor does not. There are also consequences of misclassification.

 

In general, the issue comes down to where the control of work lies. If the manner the work is done lies with the worker, then that individual is an independent contractor. If the hiring entity controls how the work is done, the individual is an employee of the hiring entity. The distinctions between the two are made clearer by examining the facts surrounding the behavioral and financial controls, and how the relationship between the two parties is structured.

 

As with every rule, there are special cases and exemptions to these rules. The IRS provides more detail and examples on their website , including a brochure specific to the topic.  The Department of Labor, in conjunction with the IRS, has a recorded webinar covering the topic also.