Financial Health: Planning the Way to Success

by RaeAnne Marsh

Financial-HealthMaking a profit is the common goal for business owners. Determining how best to spend it is also a challenge. According to Bill Owens, principal of accounting firm Owens & Bondell, there are five main categories that business owners struggle with: funding their retirement plan, buying new assets for the business, paying down debt, paying taxes and personal spending. “The people who successfully manage those five areas are the people who are successful in the long-term,” he says.

A critical step is making a budget — and, perhaps surprisingly, it’s a step not all businesses do. “If you don’t have a budget, you don’t have a goal. Also, you don’t have a comparison to know whether you’re doing well or not,” says Chad Kunze, managing principal of the Phoenix office of CliftonLarsonAllen LLP. “A budget is also important to third parties, he points out. “They base their lending or funding on [your  company’s] past and what you budget for the future.”

It is also vital to understand the cash conversion cycle — how long it takes from beginning a marketing activity to generate leads, convert them to a sale, schedule a service and perform it, invoice for it, and collect. Or, in retail, not having invoices and receivables but needing to have an inventory. “Small-business owners often make decisions optimistically — spend the money this week and expect to get an influx next week or shortly thereafter,” says Steve Meisenheimer, management consultant and founder of business training program The Effective Leader. If cash flow expectations are not met, that impacts cash for operating expenses, including payroll.

According to Meisenheimer, the four critical financial statements in every business are the P&L, which shows the business’s past in identifying revenues, expenses and profits; the balance sheet, containing the business’s wealth or equity, including receivables, assets and liabilities against those assets; the cash flow forecast, which requires a clear understanding of how the P&L and balance sheet work together; and the operating budget, which resembles and P&L but indicates what the business owner expects to happen with sales, expenses and profit.

Says Owens, “If the business owner looks at the P&L every quarter, that’s long enough to take out some of the ebb and flow [of monthly statements], but short enough to respond if they see anything weird in the numbers.” Also, he observes, “The bigger decisions are less daunting.”

Without a budget and cash flow forecast, it’s impossible to come up with a good price-volume mix, because every decision has a ripple effect. And the goal is to optimize the price-volume mix for cash flow success. With an increase in price, the volume will go down; decrease, the volume will go up. A business owner may sacrifice price to get the volume going, but, Meisenheimer points out, “At some point there’s no recovery because he doesn’t take into consideration the cash conversion cycle.” And if a businessperson borrows money against a line of credit to carry the cash cycle, he still has the other expenses — plus the additional cost of interest.


Good financial performance is a cornerstone for having a loan approved, which is why start-ups often find themselves in a “Catch 22” situation, shares Chad Gosar, senior VP and senior relations manager at The Biltmore Bank of Arizona. “We probably can’t do anything for you because we need a couple of years’ history.” But also key, according to Tim Bruckner, BMO Harris Bank’s managing director for commercial banking for Arizona, are the financial projections of the budget, especially tied to tangible items.

Nor do receivables necessarily tell the whole story, as a bank will also take into account whether the business has credit-worthy customers or is struggling to collect. Underscoring the value of working with a banker who knows the individual’s business and industry, Gosar notes, “We’re more likely to lend to our customer if their customer’s credit is strong.”

There are alternative sources of financing, and Robert A. Stover Jr., tax partner and Southwest regional leader for private client services practice with accounting firm EY, notes that among changes in private equity in recent years is an increased interest in family/private businesses. “Several boutiques seek out family businesses because they feel they’re well run. They’re willing to give the family the ability to take some money off the table so they feel secure personally, and give those funds for the company to continue to grow, because it’s so well run.”

“Take capital when it’s available,” Kunze offers, suggesting businesses take advantage of low interest rates or other banking opportunities that may arise. “You may feel, ‘I may not need capital or a loan or other funding,’ but take advantage if it becomes available or has advantageous rates or terms.” This advice is especially applicable to businesses in emerging growth and technology that are putting a lot of resources into research and development. “Take the money when you can because once you have the product ready to go and it takes off, you’ll need that capital to be able to deploy it, whether from the production standpoint or hiring people to deliver the service.”

Business owners, when growing their company, will put personal guaranties on business loans, and, Stover says, this oftentimes is forgotten as the company begins to get bigger. Once a business is beyond the start-up phase, Stover says it’s “important to negotiate not to be tied up and responsible for everything in the business.” In fact, notes Buzzi Shindler, a shareholder with law firm Buchalter Nemer, “Signing a personal guarantee instead of signing on the part of the company potentially puts yourself and your family up to personal liability.”

Capitalization and Monetary Efficiencies

“The single most important thing small-business owners can do is properly capitalize their business,” Gosar says, pointing out the significant difference between supporting the growth of their business and supporting their lifestyle. “If you’re going to be in business, you need to have the money invested in the business to help it grow, not just peel the money out.”

Growth may be internal, accomplished by hiring additional work force and trying to grow the revenue. Or growth may be achieved through acquisition — which will require capital.

“Companies that were managed conservatively through the recession and are now sitting on a lot of cash are seeing opportunities with other companies that either weren’t managed well or hit a plateau,” says Travis Leach, partner with legal firm Ballard Spahr LLP. “And companies seeing their market flattening out — which may not be recession-related — are looking for growth.”

Financial restructuring may be an option for businesses looking to clean up their balance sheet. Says Leach, “A company can consider what it can give so as to get the other party to agree to restructure its obligation.” The other party may accept equity in exchange for washing away a piece of the debt. For instance, if a company borrowed $5 million from a financial institution, it might issue stock, and value the issuance similar to the debt level. “The financial institution might accept that stock in exchange, to wipe out the debt.” Leach cautions, however, that issuing new stock is not always the best alternative.

Stover notes that having an efficient tax structure could save a company dollars it could use to grow the company. “What’s often overlooked in a big way are indirect taxes, such as sales tax, excise tax and different jurisdictional taxes,” he says. “These are starting to become a significant increase of the tax burden on companies.”

When a company starts to expand into a new jurisdiction, Stover suggests the business owner consider additional aspects of that expansion, such as, if the company will be creating jobs, whether it got all the appropriate incentives, to mitigate the sales or other taxes it will pay, so as to have money to grow the business. “When you’re growing your business, you’re laser-focused on that. A lot of times, you only think about being compliant, without stepping back and considering what benefits or incentives the community might give you to bring jobs or bring expansion.”

Working with Professionals

“Most banks see a lot of businesses, so we can give an idea on industry trends,” says Candace Wiest, president and CEO of West Valley National Bank. “We have a lot of data, if they want it.”

Explaining, “We really try to understand where a business is and where they’d like to be in a year or three years — the capital they need, what the risk is to their business and their industry,” Wiest says the bank does projections on growth rates and figures out how much capital the business will need based on who their clients are and how fast their receivables are paid. And, she says, “We help them think about different scenarios that could impact their businesses.”

For instance, Wiest relates that a few years ago, when they first started hearing about the Patient Protection and Affordable Care Act, they contacted the medical practices they had financed and told them, “We’ve looked at your financials, and if reimbursements get cut any percentage, we can tell you what your income looks like based on your current financials.” Practices which took that “shock test” could look at their current expense structure and determine how they could be more efficient in the new reality.

A more positive example Wiest relates is counseling a business that “now is the time to buy your own building.” Pointing out that rental rates may be affordable now but that will change after the economy improves, she notes, “Prices are very affordable and there’s a decent selection of inventory.” Armed with a comparison of the business’s current rent with what, based on current interest rates, the business owner would be paying to own his own building, “they’ve been surprised, whether a small business or a doctor or dentist, at how affordable we can make it to own the building.”

Notes Bruckner, “All banks have a lot of different products that can be brought into a relationship. The key is understanding the business and the strategy of the owner well enough that we can bring the right product to the table at the right time, and suitable advice to help the business get to where they’re going.”

“We walk a fine line — wanting to do as much as we can, but limiting what we do, to help their business,” Gosar says. “We’re not just transaction, but relationship.”

To build that relationship, Bruckner says he encourages business owners to discuss their business in other than pure financial measures. “As bankers, we’re curious about that — it’s what gives us an understanding of subjective elements of your business.” And, he adds, “It’s surprising how much flexibility can be had by having confidence in those subjective items.”

Wiest also speaks to the advantage of working with an accountant, especially through the loan process, noting, “The loan request will go faster; it takes longer when the bank can’t get the answers to the accounting questions.”

It also saves time and communication when a business works with an accountant who knows the industry the business is in. Owens, whose firm specializes in dental practices, says, “We can communicate about equipment, supplies, how they deal with team members, the best sort of retirement plans.” Measurements specific to the dental industry, for instance, include how much a hygienist or a doctor produces and how that equates to how much that person earns. With the focus on industry-specific resources, Owens says, “I know the best banks to go to for an industry loan, the best consultant to help with practice management.” And there may be additional tax savings. “The tax code is so big. We’ve focused our practice on those parts of the tax code that dentists can use to save taxes.”

Stover raises another issue of financial health. “As the business grows, does the owner feel safe in his own financial security?” Being insecure in his own financial well-being, a business owner may even stop trying to grow. Noting the importance of balancing the two, Stover says, “It’s easier to take risks if you’re not worried about your own financial well-being.”

He recommends a risk check-up as a generally “low-cost way to insure away some of your risk.” But, he says, “Make sure the correct owner is the insured, so, if there’s an event, it pays off correctly.” Using car insurance as an example of a business owner trying to reduce cost but not managing risk, he says a businessperson might insure a car or a truck in his or her personal name because it is cheaper, but use the vehicle in the business — and it’s being used for work when it’s involved in an accident. “When the insurance company finds out it was being used for work and it was not disclosed or the proper riders were not in place, they won’t pay the claim and the owner has to pay it out of pocket.”

It’s a good practice to look at the whole portfolio and revise as the business expands. While a business owner likely insures each item individually as he adds it — whether a building or piece of equipment — Stover says to look at it all holistically. “You will have better pricing and better management of the overall risk of the entity — and best use of dollars to manage that risk.”

“From the legal perspective, the financial health of a company is not simply measured by balance sheets, income and cash flow statements, and assets and liabilities,” says Buzzi L. Shindler, a shareholder with Buchalter Nemer. The most important considerations are, rather, risk management, asset protection and day-to-day business operations. Explaining that lawyers are not in the business of telling clients how to invest, but to document and memorialize deals and transactions, he says, “The best way businesses can ensure their long-term financial health at the inception is to ensure they maintain their formalities — document and memorialize their intentions, whether with partners or other third parties.”

Corporate formalities include keeping bylaws and articles of incorporation up to date. Failing to honor the formalities and to document decisions allows a third party to reach the assets of the individual, Shindler notes, pointing out the reason for forming a corporation or limited liability company is to protect oneself from personal liability.

Having good legal counsel can also help businesses avoid issues or disputes further down the road. In addition to working with business owners to plan in advance and anticipate issues that might arise in the business, attorneys can help in overseeing business relationships, discussing and educating business owners on the best means of risk management in day-to-day operations.

That’s Financial?

There are a lot of business decisions and practices that may not sound financial, but they really are, Kunze observes. Networking, for instance, can keep a business owner connected with those who are influential to the business’s well-being, such as bankers, attorneys, CPAs, other business leaders, industry organizations and professional associations. “By staying connected with other professionals, you can gain knowledge, leverage ideas and bounce ideas off each other.” And this can often be free. “If you have those connections, you’ll know what might be coming; for instance, if interest rates are rising or the cost of capital is changing, or if you may need to find different vendors.”

And hitting the bottom line directly are benefits for the work force. Benefits plans — 401k’s or other types — “may cost a few more dollars, but they may help retain or attract talent.” And implementing a wellness program may be less expensive in comparison to the potential increase in premiums. Added benefits may be lower costs of claims and a healthier work environment. Says Kunze, “As a small-business owner, don’t think just of what’s best for you as an employer/owner, but also think of the benefits to your employees. If you tip the benefits to yourself, you may lose good people.”

Striving for operational excellence and looking for efficiencies will also impact a business’s financial health. Evaluate the processes at all levels — administrative, front-line production and those providing services — and look for efficiencies in the day-to-day operations. This does not mean to cut employees, Kunze notes. “You may keep the same number of people but do things more efficiently.” The business will be in a better position to grow if it has not slashed its work force.

“The commonality among those who do well is, they plan well,” says Bruckner, speaking with the experience of 25 years’ working with businesses, much of it in restructuring. “They translate their financial plan into two or three key items, and they clearly communicate within the company and with their financial partners and advisors.” This includes contingency plans of what to do if the business is not hitting the goals. “Planning is not a one-time item,” Bruckner says, “but an ongoing dialog with all the partners.”    

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