By: Shawn A. Myers
Financial Analyst
Integrity Advisors

Whether you currently own a business or
are thinking about starting one,
you will want to have some fundamental understanding of
accounting and financial management concepts.

For many years I was curious about why more than half of all new businesses fail within the first five years. After doing a little research I found a consistent pattern of reasons that included something to do with finances, whether it was a lack of capital, poor sales or trying to expand too fast. I came to the conclusion that there are three concepts that every business owner should thoroughly understand; profit, revenue and cash flow.

Before we define what each of these financial terms mean, let’s look at business failure from a slightly different perspective. Let’s say you start a business and experience a modest amount of success. Since you are a business owner you don’t mind working 60 to 70 hours per week and paying yourself a low salary, at least in the beginning. Here’s the problem; ten years later you may still end up working the same amount of hours per week, paying yourself a low salary and now you are ready to sell the business. The potential buyer doesn’t see evidence of steady business growth and is only willing to pay you half of your asking price; not a good situation, because you can end up working in a business for years and have very little to show for it.

Notice that when I described revenue I said that it is the amount of money that your customers agreed to pay you! There are many, many businesses that have failed even after reporting strong revenue growth. The challenge here is the timing of when revenues will actually turn into cash that you can deposit into a bank account. This scenario comes into play anytime a business is “extending credit” to its customers by not receiving a full payment immediately after the product or service has been delivered. The challenge is when the business is faced with having to meet payroll and pay operating expenses every thirty days but their customers are taking forty-five days or longer to pay their invoices. Profit can also affect cash flow when a business owner feels pressured to lower their prices or they find that their expenses are increasing faster than their profits.

Steps to Improving Cash Flow

1. Know your numbers
How much cash is coming in and out of the business? Companies will need to be mindful of how they are going  to bill their customers and when they can expect full payment for the service being provided.

Based on past experience, this business owner estimates that they will only receive about 70% of its billed sales revenue in cash within 30 days; the remaining 30% will be received next month. The real test as to whether or not this estimate is accurate is when they compare the forecast to actual results:
Notice that the actual sales revenue amount was higher than expected but the amount of cash that they collected was lower, making their cash collection forecast $246 lower than expected. Are customers receiving their bills? Does the company require deposits? Are customers dissatisfied with the service? Making improvements in one or more of these areas can have a significant impact on increasing cash collections.

2. Increase Sales
Businesses that don’t have to deal with invoicing their customers will want to focus their attention on increasing sales and controlling expenses. Here is what I like to call the “blueprint for a successful small business”:
This business became profitable because sales continued to increase, monthly expenses did not exceed $3,000 and the Cost of Goods Sold amount did not exceed 70% of their monthly sales revenue.

3. Reduce expenses
Take a close look at bills for utilities, cell phones and other services to try to find opportunities to take advantage of discounts and incentives to renew contracts. Most, if not all service providers will do whatever they can to keep you as a customer. You can also see if suppliers would be willing to offer you a discount for paying off the bill before the due date.

Thinking About Starting a Business?

Here’s an illustration I like to show to anyone who is thinking about starting a new business, buying a franchise or expanding an existing business:

As you follow the math you will see that we are simply adding negative numbers to positive numbers; the green flag indicates the point at which the business becomes profitable. The key here is to make sure the net income projections are justified and legitimate.

Shawn Myers has several years of experience in the Information Technology field where he developed skills in the areas of job costing and financial analysis. In 2009 Shawn started his own consulting practice called Integrity Advisors and has created and implemented training classes for the Federal Highway Administration, the Christina School District and the Delaware Economic Development Office. Shawn also provides accounting and financial management consulting services for small business owners.

Shawn has a Graduate School Certificate in Financial Management and is a Microsoft® Certified Specialist in Excel®. He is currently pursuing a Master of Science in Management degree from the University of Maryland University College.

Integrity Advisors is a training and consulting company whose purpose is to help small businesses achieve and maintain a strong sense of financial stability, strategic direction and long term success. This is accomplished by following a five step consulting process, which includes a needs assessment, research, delivery of results, plan revisions and the presentation of a final plan.

Testimonials
“Mr. Myers has facilitated several training workshops for the BOWD program under the umbrella of the Federal Highway Administration and in particular, DelDOT. He is very knowledgeable about several business practices, especially in the area of financial planning and management.”

“I would recommend using Mr. Myers when you are in need of an instructor or facilitator that can break down the topic of finances and share the best business practices with an audience. We would not hesitate to utilize his services again.”     ~ Mechell Burgette, Project Assistant – The BOWD Program Delaware Business Assistant Resource Center

“Mr. Myers recently participated in our Entrepreneurial Boot Camp and Small Business Plan Competition as an instructor and speaker. He is very professional in his teachings, engages and involves the participants, and provides exceptional informational resources geared toward the event and audience. I trust his expertise and will not hesitate to utilize his services again for future events.”     ~ Kenneth R. Anderson, Director, Entrepreneurial and Small Business Support – Delaware Economic Development Office

Call today to schedule a free consultation by calling 302-419-8175
or sending an E-mail to smyers@integrityadvisors.info

98 Blue Ridge Circle Newark, DE 19702
302-419-8175
www.integrityadvisors.info