business management and business operating basics for small business owners


in the beginning you as the owner will
perform all your startup’s chores or at least you will personally see to it that
they get done well you’ll personally take care of all the important tasks at
least those responsibilities that will down the road either make or break your
enterprise if they aren’t done correctly often however many of those early stage
duties fall under the category of grunt work the not so exciting to
entrepreneurs stuff that doesn’t involve dealing with customers creating new
products or generating much needed cash instead the duties are often yawn
inducing things like appeasing the government developing a bookkeeping
system and covering your behind in the event of adversity you know the kind of
stuff that if it doesn’t get done will come back to haunt you when we talk
about taking care of the early stage chores of starting a business we’re
assuming that you’ve already completed the big-picture tasks of the startup
such as writing a business plan finding a mentor determining the legal entity
that works best for you locating financing and developing the product or
service now you must dive into the nitty-gritty details one of the first things you need to do
when you start a business is to purchase insurance we’re talking about liability
insurance auto fire theft business interruption and so on as well as
workers compensation insurance unfortunately insurance is an expense
that never goes away and generally increases in price every year making
things worse is the fact that if you’re like most entrepreneurs after you sign
the original policies you’ll file them away and won’t consider shopping around
to get a better price for long periods of time because you’re so busy running
your business in other words unless you’re the exception the expenses
related to insurance policies will be etched on your profit and loss statement
as a fixed cost even though the expenses should be a variable cost meaning that
they should be reviewed every year don’t even think about entrusting the creation
and negotiation of your initial insurance package and the creation of
the costs related to it to anyone else you need to take care of this important
task yourself liability insurance in most cases insurance is a necessary
expense not unlike a host of other necessary expenses such as rent
telephone and salaries in some cases the justification for insurance is the
owners logic in other cases insurance is required by an outsider a bank or a
property leasing company following are the four main categories of liability
insurance every small business owner needs to consider one of them aptly
called liability insurance is a must if you don’t have liability insurance a
dissatisfied customer or even an on-premise passerby can shut your
business down for good generally speaking you can add the other three as
your business and its profitability grows to the points where you can afford
them liability insurance note selling what may happen on your business
premises in these litigious times our recommendation buy enough liability
insurance to protect at least twice your combined personal and biz
Net Worth theft insurance sooner or later someone is going to steal
something of value from you statistics show that this someone is
likely to be an employee our recommendation if you’re in the high
ticket resale or a wholesale business automobiles appliances and the like you
should purchase theft insurance you don’t need to purchase enough theft
insurance to cover all your inventory just by enough to cover what one person
can reasonably steal otherwise take your chances until you’re profitable
especially in the early stages of your business property damage insurance in
addition to the physical property you own rent or lease property damage
insurance covers your inventory similar to homeowners insurance property damage
insurance is often required by the terms of a lease or bank loan our
recommendation if you’re in a service business with little expensive equipment
and your leasing or renting in an office building take your chances if your lease
will allow you to do so until you’re profitable otherwise buy enough property
damage insurance to cover the cost of replacement business interruption
insurance this insurance covers the possibility of your business being
halted by any number of random events most of them being natural disasters
business interruption insurance reimburses you for the profits you don’t
make during your downtime our recommendation in your business is early
stages you probably won’t have much business to interrupt
spend your scarce money elsewhere however this situation we hope will
change when it does business interruption insurance is a must by your
insurance agent can help you determine how much to buy some businesses
especially capital-intensive ones will take a long time to open the doors after
an accident or act of god other businesses usually those that sell
services can get back on their feet relatively quickly workers compensation
insurance workers compensation his payments for insurance that provides
benefits in the of medical expense reimbursement and
replacement of lost wages to employees injured on the job workers compensation
is a state mandated no-fault insurance system and when you have employees it
appears as a hefty expense on your profit and loss statement shop around
for a trustworthy insurance agent used referrals from satisfied small business
customers set up a meeting with him or her along with a representative of the
state your prospective insurance agents can tell you how to locate that person
and find out what you need to do to keep your experienced modification factor to
a minimum the experience modification factor is a numerical expression of a
company’s accident and injury record compared with the average for the firm’s
industry the higher your experience modification factor the higher the cost
for workers compensation insurance in addition to the experienced modification
factor job classification plays an important role in determining the cost
of your workers compensation insurance the state assigns each job or employee
in your small business a particular rating and subsequently a particular
premium based on the estimated level of risk involved in the performance of that
job the higher the job classification the higher the cost for you because the
classification criteria are often fuzzy argue for the lower classification when
possible remember don’t take the job classification process lightly you can
choose from myriad job categories and a lot of overlap exists among various job
categories you and your business will waste a bunch of insurance money if you
don’t make the effort to properly classify your employees because workers
compensation insurance is a state-run program ask your insurance agent for the
telephone number and address of the applicable state agency if you have
questions about the program federal taxes income Social Security
unemployment and excise come in a mind-boggling array as do state and
local taxes income real estate sales and other assorted special levies depending
on your industry when you’re short on cash don’t kid yourself sooner or later
it’s bound to happen make sure that you pay any taxes you owe the government
first even if you have to put off paying your private vendors governments
especially the federal government have an enormous array of collection tools at
their disposal and they have the right to extract a dear price in the form of
onerous penalties and interest rates from those who don’t follow the letter
of the law so be sure to pay your taxes on time we hope we’re not the first
people to tell you this when you’re leasing space for a startup
aim for a two-year lease or three years as an absolute maximum if you think you
may want the space for a longer term consider negotiating and adding to your
lease agreement an escalation clause that stipulates upfront how much the
rental rate will increase should you choose to extend the lease for a
subsequent year or multi-year period tip unfortunately reading understanding and
creating a lease are tasks for lawyers not laypeople pay the legal fees and
don’t get locked into any long term leases with the lure of free rent or
equipment use warning long term leases are a no-win situation for the small
business owner if your business grows it will outgrow the long term lease and
you’ll pay a higher price for its cancellation if your business doesn’t
grow you’ll pay an even greater prize to get out of the lease what do we mean by
long term any lease for more than two years many landlords offer long term
leases three to five years with all sorts of exotic discounts don’t be lured
into taking them unless you can afford to pick up the final years out of your
own pocket should the business no longer wants need or be able to pay for the
space the day you hire your first employee is
the same day you must create and begin maintaining your first employee
personnel folder be sure to maintain a written record for every employee
covering such issues as employment agreements including salary history
performance reviews business goals commendations and of course reprimands
these records come in handy as you manage and motivate your employees such
key managerial and motivation tools as goal-setting and performance reviews
require that you keep detailed employee records for them to work also assuming
that you employ living breathing human beings you can count on the fact that
sooner or later you’ll have a conflict with one or more of those living
breathing human beings a conflict that in the worst case is likely to end up in
court when a legal battle occurs the party who can back up his or her claims
with the most information usually prevails don’t be the one who’s
handicaps by poor record-keeping and documentation getting licenses and
permits almost all businesses require filing certain licenses and obtaining
particular permits as we’re sure you already know checks
represent cash from the day you hang out your shingle until the day you close
your doors cash will be the lifeblood of your business the annals of small
business are filled with stories of $12 an hour bookkeepers who help themselves
to a hard-working entrepreneurs cash if your spouse is your bookkeeper you can
we hope rest easy but what do you do when your bookkeeper isn’t your spouse
you guard your cash like it’s your life because it is well it’s your business is
life anyway following is a list of tips on how to do exactly that schedule an
audit at the end of every year it doesn’t have to be a full-fledged
expensive cover every detail on it simply ask your certified public
accountant CPA to spend half a day reviewing your books your CPA knows the
sensitive areas to focus on make sure your bookkeeper takes a vacation every
year most bookkeepers who are siphoning their employees cash don’t want anyone
else probing their books even for short periods of time review and approve every
invoice yourself balance the bank statement yourself require two
signatures on every check will require one signature yours we define outsourcing as delegating
services you don’t want to do or don’t have time to do to someone outside your
company not an employee who can usually do them better and faster the concept of
outsourcing isn’t new businesses have been outsourcing in one form or another
for many years the following list tells you which small business functions are
most frequently out sourced accounting and bookkeeping accounting the beginning
to end process of collecting financial data generating financial statements and
preparing tax forms and bookkeeping the collecting of financial data function
only provide the gamut of outsourcing opportunities you can for example hire
someone to do all your accounting and bookkeeping or you can hire someone to
do only your payroll only your financial statements or only your tax returns
because the typical entrepreneur usually isn’t well versed in accounting and
bookkeeping skills we suggest that these functions be among the first you
consider for outsourcing Human Resources as your company grows the various
functions of Human Resources should be next in line for outsourcing
consideration Human Resources includes a wide variety of non product non customer
and non sales related issues such as new employee hiring procedures policies and
procedure manuals for employees payroll and related information gathering
systems employee training on human resource issues employee training on a
wide variety of sensitive issues such as ethics and sexual harassment
manufacturing the manufacturing process for most products is expensive
time-consuming and extremely detail-oriented for many entrepreneurs
especially the creative and or sales types who typically gravitate to this
career outsourcing the manufacturing function makes a lot of sense even if
your core business is manufacturing some elements of your product may lend
themselves to outsourcing their manufacturer to subcontractors even
behemoth manufacturers such as General Motors
and Apple subcontract a good deal of their work Internet technology IT most
startups including many in the technology sector themselves will
outsource their IT needs to a local business or independent consultant the
business or consultant you choose will help you purchase and maintain your
fleet of computers servers and related equipment help you install your software
systems help you make important technology decisions such as using the
cloud and/or determining which operating systems to use that will arise in the
everyday course of your business the best way to find the right firm or
consultant get referrals from other small business owners who are currently
outsourcing their IT sales outsourcing sales is certainly the most potentially
dangerous of the outsourcing options but some businesses including those that
employ manufacturers reps do it we say potentially dangerous because it’s
difficult to impart to outside salespeople the enthusiasm and knowledge
necessary to effectively sell your business’s product or service sales is
definitely the last of the responsibilities to consider outsourcing
although doing so works well for some small businesses how do you determine
which services to outsource and which ones to retain in-house each business
and owner is different of course but answering the following questions can
help you make the best decisions for your situation can I better manage my
available cash if I outsource the answer here primarily depends on how much cash
you have for example by outsourcing the manufacturing process you avoid the
costs associated with maintaining an inventory of raw materials and hiring
manufacturing employees by outsourcing your sales functions you avoid the costs
associated with maintaining a sales force what do I do best
because your time is finite why spend a lot of time doing the things you don’t
do well such as bookkeeping and IT when you can farm out those duties thereby
leaving you with more time to do the thing
you do well if your sales oriented or product oriented for example doing your
business’s bookkeeping yourself simply doesn’t make sense
well the cost of the outsourcing tasks include a product or service whose
quality is better than what I can produce at that same cost the answer to
this question is often yes given the fact that the best outsourcing sources
are almost always specialists in their areas of expertise of course you
shouldn’t outsource until you find a competent specialist what do I enjoy
doing the most we can guarantee you this if you choose to keep your bookkeeping
human resources or IT functions in-house you will over the years and up spending
no small amounts of time dealing with issues related to these functions is
this the way you want to spend your time in the final analysis the decision
whether to outsource should be based primarily on what you enjoy spending
your time doing and where your personal skill sets lie if this were a perfect world you
wouldn’t need an accounting system you’d simply let your business checking
accounts do the talking you’d pay your bills and deposit your receipts and
whatever was left over at the end of the year would represent your profit how
simple and inexpensive such a procedure would be alas this isn’t a perfect world
and your business checking accounts does the talking only when measuring one of
your assets cash furthermore your checking account only measures today’s
cash it doesn’t give you the foggiest idea of what tomorrow’s or next month’s
cash balance will be will you have enough cash in a bank to pay the month’s
bills to meet next Friday’s payroll or to pay the quarterly tax payments that
will be due in 30 days the problem is that your business’s checking account
can’t do any of the following things keep score of anything but cash give you
the information you need to pay your income taxes provide you with the
percentages and ratios you need to help you manage your business provide you
with the trends you need to determine the direction of your business
present you with the information you need to value your business like it or
not accounting is one of the most important functions of running your
business whether you intends to eventually outsource your accounting or
do all the work yourself at the startup stage accounting demands your undivided
attention introducing some common systems you have three options to
consider when determining which accounting system to employ an outside
accounting service an in-house manual bookkeeping system an in-house computer
based accounting system if you decide to go the outsourcing route using an
outside accounting service you need to make that decision before you open your
business’s doors manual bookkeeping systems maintaining a manual bookkeeping
system is certainly the quickest and easiest of the two in-house options all
you have to do is visit your local office supply store or its website
purchase one of the many mutual bookkeeping ledger and journal systems
available the entire package cost $25 or less and voila
before you can mutter the words green eyeshades you’re a bookkeeper you won’t
need to buy an expensive computer or the software to go with it
the only accessories required are a number 2 pencil or a pen and depending
on the complexity of your business no small amount of your or someone else’s
time in addition to the low cost of a manual bookkeeping system another
advantage of using such a system is that you learn the basics of the standard
double-entry accounting system from the ground up a skill that will hold you in
good stead as your business grows the downside of the manual entry system
especially when your business has a lot of activity is that it can be extremely
time-consuming and time is money in the small business
world also the information that you collect manually won’t always provide
you with the depth of financial data you need for making important business
decisions finally manual bookkeeping is more prone to human error intentional or
unintentional than computer-based systems are we can guarantee you this if
your business is successful and grows you’ll soon outgrow whatever manual
system you adopt after you purchase your manual system follow the step-by-step
directions inside the ledgers and journals to perform a relatively
uncomplicated connect-the-dots bookkeeping process during your fiscal
year make your entries and the general journal pages journals are where you
make the entries Ledger’s are where you total the journal entries the manual
system you buy will include definitions of each of the following categories
along with examples your disbursements according to their expense and/or
capital account category the receipts income of your business
various period ending adjusting entries designs to record such items as
depreciation accrued taxes and accrued payroll at the end of the year complete
your journal entries to summarize the years activity then if you prefer you
can turn over your journals to a tax advisor or CPA wait a
few weeks and be rewarded with a professionally prepared profit and loss
statement a balance sheet and the balance due for your year-end tax
payment if on the other hand you’re that special entrepreneur who actually enjoys
the bookkeeping process you can expand the manual bookkeeping process to
include the year-end preparation of your profit and loss statement as well as the
balance sheet leaving only your taxes to be computed by a tax practitioner
finally in those cases where your business is a relatively uncomplicated
sole proprietorship or partnership you may decide to carry the manual process
through the preparation of Schedule C of IRS Form 1040 and on into the
preparation of your personal income tax return when it comes to how much of your
own bookkeeping and taxes you perform yourself the only limits are your time
skills and patience the primary issue to consider when determining how much or
how little of your accounting you should do is how best to utilize your finite
time in addition to the general ledger and journal functions previously
described most manual bookkeeping ledger and journal systems also include the
forms you need to maintain such subsidiary records as monthly payrolls
schedule of accounts receivable schedule of accounts payable and inventory
worksheets computer-based systems if you already have a computer using it to
accomplish your bookkeeping and accounting functions almost always makes
sense if you don’t have a computer you’re going to have at least two
strikes against you and as you work to grow your business
although the least expensive computerized software package available
is its add more expensive than a comparable manual system the
computerized system if you use it properly should save you time provide
you with more information and establish a base for you to grow into a more
sophisticated system and as your business we hope expands you can
consider four categories of computerized systems when shopping for your first
accounting package the system you ultimately select to
on the size and complexity of your business a description of the four
categories follows along with several basic questions and a collection of tips
intended to help you make the final choice category one quick and easy
category one includes those quick and easy accounting systems used by many
families and as well as by small businesses the cost of these systems is
usually around $50 they’re basically able to categorize and cumulate expenses
and generate both profit and loss statements and balance sheets most
category 1 systems also include the capability to pay bills electronically
the most often used example of category 1 is quicken the primary shortcoming of
category 1 systems is that the software allows for the deletion of bookkeeping
entries so if you’re interested in providing an audit trail for you or your
accountant you shouldn’t purchase a category 1
package an audit trail enables you to track every dollar of income and
expenses thus making theft much more difficult audit trails are required in
all publicly held companies for this reason most accountants don’t recommend
category 1 systems to small business owners who have prospects of future
growth these owners will eventually require the security that audit trails
provide when your business is small and you know it’s going to remain small and
you’ll be the only person writing the checks category 1 systems may be
satisfactory for you tip category 1 systems don’t include payroll systems if
you plan on eventually having employees and don’t want to figure your payrolls
or write your checks manually you may as well spend another $50 to $100 to
upgrade to category 2 if you’re interested in mastering a manual system
or if you just want to understand the basics of accounting no matter what
system you use here are the key accounting terms you need to know fiscal
year a fiscal year is the specific 365-day period that you have chosen to
begin and end your accounting period most businesses must choose a calendar
year as their fiscal year in other words their year begins January 1st and ends
December 31st all personal service businesses are required to use a
calendar year as are all partnerships and sole proprietorships some
corporations LLC’s and subchapter S corporations may decide to use a fiscal
year other than the standard calendar year for example many retailers choose
not to end their fiscal year on December 31st because they’re still too busy
winding up their holiday season as a result many retailers select an on
calendar fiscal year of February 1st through January 31st or any such non
calendar year 365 day period double entry accounting and bookkeeping all
accounting and bookkeeping systems are double entry for each entry made on the
expense side an offsetting entry must be made on the income side or for every
entry on the asset side an offsetting entry must be made on the liability side
every plus must be accompanied by an offsetting minus or in accounting speak
every debit to one account must be offset by a credit to another for
example when a retail business sells goods from its inventory for cash a
credit is made to cash and a debit is made to inventory because of this double
entry aspect such systems are always self-balancing the total debits will
always add up to equal the total credits hence the term balance sheet single
entry record-keeping the best example of single entry record-keeping is your
personal checking account 1 entry and the transaction is complete single entry
record-keeping systems aren’t self balancing cash registers and the
maintenance of internal Ledger’s are other examples of single entry
record-keeping systems cash basis accounting cash basis accounting
records income at the time its received and adducts expenses at the time they’re
paid in effect the date of the check and/or the deposit determines the date
of the applicable bookkeeping entry most sole proprietorships and partnerships
used the cash basis accounting system because it’s easier to understand and
requires fewer year-end adjusting entries however you get much less useful
information with which to manage your business accrual basis accounting
accrual basis accounting records income at the time it’s earned when a sale is
made as opposed to when cash changes hands and adducts expenses at the time
they’re incurred which may not necessarily be when cash changes hands
the IRS requires that businesses that have inventory use the accrual system as
a result nearly all corporations utilized the accrual system if you have
a choice for your business consult with a tax advisor for advice as to which
system will work best category 2 plus payroll and inventory for about $100
category 2 systems provide a number of services that category 1 systems don’t
for example category 2 systems can perform the
following functions compute write and compile employee payroll some small
business owners choose to outsource this function but for those who are watching
every penny managing your own payroll is a good place to start
track and age receivables monies your customers owe you and payables monies
you owe your vendors aging means determining the amount of time your
receivables have been due to you or your payables have been due to your vendors
establish customer receivable Ledger’s these Ledger’s are in effect a timed
listing of your customers statements maintain a basic inventory system
managing inventory is one of the small business owners most difficult
and thus most unpleasant tasks using an automatic system to keep track of your
inventory especially when you have many SKUs stock keeping units is the best way
to make sure you’re getting good numbers the primary disadvantage of category 2
accounting software programs is that similar to category 1 programs they
don’t provide an audit trail examples of category 2 accounting software packages
include the most popular QuickBooks as well as cashflow manager and manage your
own business my OB category 3 following the audit trail category 3 programs
provide their owners with all the benefits that category 2 systems provide
as well as the audit trail which is necessary for businesses in which
someone other than the owners will be paying bills writing checks and
maintaining the books additionally category 3 systems allow
for multiple users the bookkeeping department the accounts receivable
department the inventory department and so on prices vary depending on the
horsepower required but they’re generally in the range of $200 to $700
examples of category 3 packages include business works sage 50 accounting
QuickBooks Pro an upgraded version of QuickBooks and BPI category for modular
power unlike the software packages and categories one two and three which are
purchased in a single package category four systems are purchased in modules or
standalone units however category three and four programs overlap to some degree
because a few of the category three programs also come with modules thus
making the choice between the two a bit complicated because category 4 packages
have more horsepower bandwidth as well as more module options they work best
for larger companies more than 200 employees category 4 software has the
following module options basic system manager the module
that manages all the other modules general ledger otherwise known as the
chart of accounts the list of all the accounts titles that are tracked by
every accounting system including assets liabilities equity and expenses
financial reporting profit and loss statement balance sheet and so on
accounts receivable accounts payable payroll inventory job costing a system
that allows you to compute the exact cost of each of your products or
services for pricing purposes the cost of each of these modules is
approximately five hundred dollars but the total price for a complete system
can begin at two thousand dollars and run all the way up to ten thousand
dollars depending on the bells and whistles you select good programs in
this category are flexible and can support many types of accounting issues
and business processes examples of category for accounting software
packages include Microsoft’s Dynamics GP sage 100 Sage 300 ERP and QuickBooks
desktop Enterprise choosing the system that’s right for you the first two
questions you need to ask when choosing a computer-based system are how big is
your business what can you afford generally speaking the smaller the
business the more likely you are to use a category one or two system a home
office business can easily get by with a category 1 system while most non home
office businesses with 50 employees or fewer can use a category 2 system you
also need to consider how much inventory you’ll be managing and whether or not
you’ve decided to outsource your payroll in other words the more you ask of your
system the more horsepower you need tip when making your final system decision
consult with your CPA or computer professional and keep the following
reminders in mind don’t waste your time purchasing and figuring out a system
that are going to outgrow in six months or a
year we don’t want you wasting money on a system you’d get such little use out
of don’t buy a system that you think will take you three years or more to
grow into that’s too far out to accurately project by a system that you
think will work for you for the next two years in addition to considering the
software system itself consider the company behind the package or buying
consider the following criteria the support that the company provides the
history of its program updates as a general rule better companies provide
more frequent updates and the future of that company will it be around to
provide upgrades in future years in the likely event that you can’t answer these
questions yourself call the company look for a toll-free number on the package
and ask direct questions your tax advisor may also be able to give you an
educated opinion find out whether someone locally is trained to provide
implementation and support services for the product you are considering ask an
accountants tax advisor or check out the manufacturers website or call their
support line remember when in doubt buy the highest category that you can afford
and that you can picture yourself using within the next two years after all
companies grow even if you think you want to category one software package
now chances are you’ll be in the market for an upgrade soon enough the
additional investment required to switch software packages isn’t really the issue
the real damage comes from the time and staff retraining required to make the
switch the three ways to increase your
business’s profitability are increasing sales in which case those increased
sales may or may not have a positive impact on profitability increasing
prices in which case the entire amount of the increase will have a positive
impact on profitability assuming that you don’t lose customers due to the
price increase decreasing or controlling expenses in which case the entire
decrease will have a positive impact on profitability assuming that you don’t
lose business due to the impact of the expense reduction on your product or
service quality remember when you increase prices or cut expenses a one to
one leverage factor goes to work on your bottom line profits this is why
successful small business owners always look to the expense and pricing
categories first when they’re in a profitability crunch results can be
instantaneous and the impact is usually dollar on dollar whether you’re starting
a new company or running an existing one you must remember that controlling
expenses is a cultural issue and cultural issues begin at the top we’re
talking about the old practice of leading by example if you have
overstuffed chairs in your office and idle secretaries in your foyer your
employees are going to demonstrate a similar penchant for spending
unnecessary money as a small business owner you have to control two kinds of
expenses fixed expenses those expenses that don’t fluctuate with sales
including such categories as insurance rent equipment leases interest and taxes
you usually negotiate them in the startup stage and then leave them alone
until the original negotiations lapse and you have to renegotiate them such
periods may be anywhere from one year to five years effective control of fixed
expenses requires your skillful negotiation because after they’re
established negotiation time probably won’t come around for a while which
means you’re stuck with them variable expenses those expenses that fluctuate
with sales as sales go up variable expenses go up as well and vice versa
these expenses include cost of goods sold sales commissions and outbound
Freight you can delegate the determination of the prices to be paid
for variable expenses as long as you remember that the responsibility for
controlling them in the early stages of a business anyway should always rest
with you the owner you need to approve all purchase orders and sign all checks
that relate to variable expenses as the company grows you may choose to delegate
the responsibility for controlling expenses to other responsible
individuals inside the company or you may choose to maintain control by
continuing to sign the checks and questioning the invoices that support
those checks definitely our recommendation tip a key to controlling
expenses as keeping your employees cost conscious if your employees know that
you and other key managers will question unreasonable or unnecessary expenses
they too will be motivated to be cost conscious you can also use incentives to
help you cut costs if you give your employees a reason bonus perks
recognition to look for unnecessary costs they’re sure to find them as you
manage your expenses always be aware of the 80/20 rule which says that you can
find 80% of your wasted expense dollars in twenty percent of your expense
categories for businesses that have a significant number of employees the
wages and salary accounts is usually the largest expense category and thus the
most often abused we don’t mean to say that you shouldn’t challenge expenses in
every category you can usually find some wasted dollars by rooting around in such
expense accounts as utilities travel insurance and of course the compost heap
the miscellaneous expense account remember a
affective expense control is not only a profitability issue but also an
important element for controlling cash flow because lack of cash is usually the
number one warning signal of a small business’s impending troubles or failure
one of the best ways to build a solid foundation for your business is by
controlling your expenses from the very beginning budgeting also known as forecasting is
the periodic usually annual review of past financial information with a
purpose of forecasting future financial conditions if you’ve completed your
business plan you in effect prepared your first budget when you forecasted
your profit and loss statement for the upcoming year the only difference in
preparing a budget for your ongoing business is that you now enjoy the
advantage of having yesterday’s figures to work with incidentally the process of
budgeting is one that should apply not only to your business but also to your
personal finances especially if you have trouble saving money if you aren’t
currently budgeting your personal revenues and expenses start doing so now
after all there’s no better way to prepare yourself for running a business
than to begin at home in your small business you have two ways to budget
expenses from year to year the first we call this adjusted for inflation
budgeting is to assume a percentage increase for each expense category both
variable and fixed for example say that you decide that your telephone expense a
variable expense will increase by 5% next year your rent a fixed expense will
remain the same and your advertising and promotion a variable expense will
increase by 10% the other way to budget expenses is called zero based budgeting
if you use this type of budgeting you assume that last year’s expenses were
zero and begin the budgeting process from that point
for example the zero based formula assumes that your supplies expense
account begins at zero thus you must first determine who consumed what
supplies last year who will be consuming them this year and how much will be
consumed then you must determine what price you’ll pay for this year’s
supplies in this manner zero based budgeting forces you to annually manage
your consumption at the same time that you review your costs the effect of
based budgeting is that you no longer include prior years mistakes in the
current year’s budgets for example when you budget telephone expenses for the
year instead of increasing them by a flat percentage zero based budgeting
demands that you make sure your prior year’s bill was the lowest it could be
this assumption forces you to determine who’s using your phones for what kind of
activity and also to reprice your rates with telephone carriers instead of
forecasting a five percent increase you may well end up projecting a five
percent decrease the zero based method also assumes that you’ll check out
prices with other vendors besides the ones that you’re presently using
remember far too many small businesses don’t budget expenses at all furthermore
of those small business owners who do few use zero based budgeting despite its
many advantages not budgeting is truly one of the most expensive mistakes you
can make as a small business owner sure zero based budgeting may take more time
than using a percentage but it can pay big dividends in increasing bottom-line
profitability at home or in your business a small businesses most underrated
priority is working with its vendors suppliers think about it without a good
vendor what would happen to your business say you own a computer retail
store where would you be without Apple hewlett-packard and Microsoft on your
shelves not into computers say you run a restaurant where would you be without a
reliable Baker meat supplier and fresh vegetable resource to depend on every
successful business owner has learned the importance of having a cadre of
loyal vendors standing behind his or her business yet few small businesses have
the muscle or the clout to demand any significant degree of vendor loyalty
which means that they must build strong vendor relationships the old-fashioned
way by earning them the following tips provide information on how to earn
favored relationships with your vendors don’t nickel and dime your vendors agree
on the details of your business arrangement price delivery and terms and
then try to work within those parameters for the agreed-upon timeframe occasional
exceptions will occur whatever you do don’t use the lowball pricing of the
latest vendor on the street as leverage against the longtime reliable vendor
unless you are prepared to lose or greatly annoy the longtime reliable one
pay your bills on time paying your bills within the designated period of time
helps maintain favored customer status after all isn’t prompt payments what you
expect of your customers save your special favor requests for when you need
them don’t cry wolf on requests for out-of-the-ordinary service save those
requests for crunch time treat your vendors representatives sales or
customer service employees as you want your own employees to be treated the
golden rule is alive and well when it comes to maintaining vendor
relationships remember that relationships matter
everyone these days is preaching relationships relationships
relationships dealing with customers right well the
same thing applies with vendors work to build a solid relationship with yours if
your vendor is a national supplier build a relationship with its local or
regional sales person or representative or the person at the other end of the
phone line if your vendor is a local supplier get to know him or her
personally just as you would a local customer and remember your bankers our
vendors – perhaps the most important ones of all remember vendors especially
the good ones can provide you with more than just a product or service for
instance vendors can be a great source of new business referrals they can also
provide training to both your employees and on some occasions your customers a
form of assistance that typical small businesses can’t get enough of
dealing with bankers lawyers and other Outsiders bankers ask the typical small
business owner what she thinks about bankers and you’ll usually get a
reaction somewhere between a roll of the eyes and a hair tearing tantrum as a
rule bankers get a bad rap from the small business community especially
since the banking problems of the 2008 financial crisis
remember when bankers say no they’re only doing what they’re trained to do
protect their depositors money a key part of the bankers job description is
not taking big risks think about it if bankers were creative and optimistic and
prone to take risks they’d be entrepreneurs not bankers everyone has a
role in a capitalistic system being safe and conservative just happens to be the
role of the banker make no mistake about it
startups are the riskiest of risks which is why bankers don’t usually consider
financing them unless the collateral is right meanwhile especially in recent
years a variety of small business below market lenders have appeared on the
scene and today numerous viable alternatives exist for finding startup
capital although bankers may not play an
important role in the startup after the business is up and running their role
can become more crucial especially when the small business experiences rapid
growth expansion often requires operating capital in the form of outside
financing which is where bankers come in on occasion of course the entrepreneur
may go back to her original source of operating capital more typically however
she gets her financing through bank loans here’s how we recommend that you
work with bankers help your banker do her job call her more often than she
calls you not just with the good news but also with the bad bankers don’t like
surprises especially bad ones always ask for more money than you think you need a
little insurance never hurt anybody and you usually won’t get everything you
asked for anyway besides go back to the well a second time can be
difficult as well as embarrassing prepare in advance for your bankers
visits no matter what she says your banker isn’t paying Social calls on you
she’s kicking your tyres include an agenda and a tour of your facilities and
then review your financial results before she asks you for them finally
follow up your bankers visit with a letter outlining your discussion and
thanking her for her time recognize that you’re probably going to have to
personally guarantee legally obligates as collateral your business’s loans
after all you’re asking your banker to in effect deposit her firm’s money into
your business if you were in your banker shoes wouldn’t you ask for such a
guarantee remember however that your guarantee is only one of many issues
that are up for negotiation when you’re borrowing money try to use your personal
guarantee to get an offsetting concession something in return for your
benefit in the lending agreement don’t lose sight of the fact that a bank’s
interest rate the collateral it requires and the terms and outlines are
negotiable what you settle on depends on the strength of your bargaining position
don’t blindly accept everything the banker offers shop around among various
banks that do small business lending be prepared to answer the bank’s tough
questions especially where your assets are concerned the banker will want to
know more about such hard assets as inventory receivables and equipment than
you ever thought possible but remember those assets are the bank’s insurance
the better your business assets look to the bank the better your negotiating
position will be when the time comes to work out the terms of the loan remember
bankers and their conservative close to the best ways are a fact of life
you can either learn to live with them or face life without being able to
borrow their money tip look at your local community banks first because
they have historically taken the lead in small business lending lawyers
consulting a lawyer has a time and a place
lawyers provide protection often against other lawyers and force you to make
plans to guard against the downsides that your entrepreneurially optimistic
nature may overlook remember yes lawyers definitely have a time and a
place the place is always in the lawyer’s office you can’t afford to pay
a lawyer to travel to your office or on the phone and the times are when forming
your corporation or LLC when taking in a partner or partners
when creating shares of stock in your company for you and for others when
signing a lease contract or binding agreement when buying or selling a
business when dealing with someone else’s attorney on a conflictive issue
when creating an employee handbook when designing employee bonus programs that
result in company ownership for the employees when dealing with a situation
that can result in expensive litigation such as terminating a longtime or
problematic litigious employee when considering bankruptcy we hope that
never happens no matter how much you want to avoid the expense of consulting
with a lawyer you should definitely hire one at the startup stage and on the
preceding occasions throughout the life of your business
when these occasions present themselves we suggest you follow these tips for how
best to find and utilize your lawyer when you absolutely positively have to
find a lawyer don’t shop just for price shop for quality and price as with cars
and quarterbacks lawyers differ greatly in the way they perform and that
difference usually translates into winning or losing check references
closely just as you would when hiring a key employee get a quote on your
prospective lawyers hourly fees and ask for an estimate of the total tab in
advance the estimate may not hold up but the lawyer will know
you’re washing always ask for itemized invoices a lump sum invoice includes
only time and rate while an itemized invoice includes the date and time of
each segment of work the specific subject of each charge and then the
hourly rate an itemized invoice also indicates work that was done by others
paralegals for example along with their hourly rates and charges for related
materials don’t let lawyers chitchat about
anything other than the business at hand if their meters are running even though
you enjoy talking about the latest sports or TV news as much as the next
person keep your discussions with your lawyer
focused on your business after all we’d hate for you to pay $250 an hour to talk
football keep in mind that lawyers are human beings too which means they aren’t
always right lawyers work in a gray profession not a black-and-white one the
power of logic theirs and yours working in unison with their knowledge of the
law will play a significant role in your business you’re capable of logic too
don’t be afraid to use it in their presence if your lawyers won’t listen to
you or ask for your input with important
decisions then find another lawyer don’t be afraid to fire lawyers when they fail
to perform up to your expectations they’re no different from employees
accountants or anyone else you hire to provide a service tip lawyers aren’t the
only resource for settling disputes many small businesses today utilize mediation
to resolve contentious issues with customers suppliers and employees
mediation is significantly less expensive than litigation and can take a
fraction of the time no court dates no judges and no miles of red tape tax
advisers tax advisers like lawyers are professionals the services they provide
are intruded in conflict but hiring and paying them can be equally discomforting
and almost as expensive the role of tax advisers in essence is to
provide you with the information you need to pay your taxes make tax wise
business decisions keep score of your progress and manage your business
consultants hiring a consultant is akin to playing wild card poker meaning that
fates will be a factor in determining whether you select the right one that’s
not to say your success or failure is entirely in faiths hands because the
more effort you put into the hiring process the better your chances will be
to get the job done right consultants can provide a wide array of services
several of the areas where consultants can help the most include computer and
information systems tax issues human resources sales and marketing you’ll
find more than one way to use and pay consultants some consultants offer their
clients advice only other consultants dive headfirst into their clients
business and get their hands dirty some consultants are paid by the hour
others by retainer a fixed fee every month it all depends on what you want
and what you can’t afford here are a few tips for how to get the most out of your
consultant search for a consultant as if you were hiring a key staff employee
network to find the best one and always check references carefully avoid
consultants who have had only big corporate as opposed to small business
experience despite what they tell you most don’t understand what running a
small business is like hire only consultants with plenty of small
business experience whatever you do don’t hand over to your consultants the
responsibility of making key decisions also never bet the house on the
suggestions they make make your consultants prove themselves on smaller
issues before you make the bigger changes they recommend and never forget
that you’re in charge don’t offer any long-term contracts build in a quick
exit option in the all too likely event that you don’t get what you expect it
and hesitate to show consultants the door
when they aren’t doing the job or as the old adage goes hire them slowly fire
them quickly understand that their fees are only part of the ultimate cost of
engaging ineffectual consultants ad misdirection upset employees and time
lost and consultants can run up monumental tabs in surprisingly short
periods of time governments if only entrepreneurs understood that
the government is often an uncontrollable random event like a fire
or a flood or a competitor moving in next door this is especially true of the
federal government where the small business owner may find it quite
difficult to so much as talk to those officials who are the actual
decision-makers let alone get their problems resolved remember come to terms
with the fact that you’ll sometimes have to comply with the government’s unwieldy
and often unfriendly rules and regulations don’t antagonize government
employees especially those who work for the IRS they can make your life
miserable do what needs to be done to satisfy those sometimes disagreeable
government employees you’d probably be disagreeable too if you had to spend
your life in their environment treat the agreeable ones like you’d want your own
employees to be treated and don’t shoot the messenger most government employees
are only trying to do their jobs you