As we approach the first anniversary of the Affordable Healthcare Act’s implementation, more and more small business owners are looking at their options for themselves and their employees. Here in New Hampshire, consumers will have more choices and with more choices often comes indecision. If you are looking at healthcare options for your employees and feel confused or indecisive, read on.
- Healthcare costs can be a significant budget line item especially if you haven’t covered healthcare costs in the past. You wouldn’t be the first small business owner to exclaim, “HOW much is it going to cost me?” While cost is certainly important, start with a broader view and look at it from a philosophical standpoint: do you believe that you have a responsibility to your employees to provide health insurance? What part do you think you should play in your employees’ health?
- If you’re not sure what your role should be in providing health insurance, consider these statistics: A 2012 monster.com survey revealed that prospective employees consider healthcare as the most important benefit a potential employer could offer. More recently, MetLife’s 2014 annual benefits summary reports that benefits are an important reason that 50% of employees stay at a job.
- If you’ve decided that you want to pay for some part of your employees’ healthcare costs, start by contacting an experienced benefits agent. The ACA healthcare environment is confusing; rather than trying to navigate alone and potentially making a costly mistake find someone who has been in the market for years and stays current in the market. These agents are paid through fees from the insurance companies, not by you. They are knowledgeable about options as well as what your competitors are offering.
- Healthcare coverage can vary by employee class, allowing you to provide a higher level benefit to owners or based upon position. For example, one client is offering three levels; owner, professional staff, and hourly staff.
- Healthcare is costly and if you haven’t been offering any coverage, adding the cost can be overwhelming. Look at the cost as a percentage of revenue, in addition to actual dollars. Costs relative to your revenue can be enlightening (both good and bad!).
- If you choose to offer healthcare, education is key for everyone involved. Your employees are probably confused about the new healthcare market and will soak up any information available to them. Rely on your agent to provide this (discuss their employee education plan up front).
More and more small business owners are looking at healthcare options not only for their own family but also for their employees. If you are one of those entrepreneurs, start the decision making process by considering your values – they will never steer you wrong. If you decide to look into your options, save yourself from confusion and overwhelm and get help from an expert.
There is an awful lot to get done in the early stages of a business: there’s the product or service development, your online presence, customer definition, marketing message, videos, blogs, networking, and the building of your business systems. And, oh yeah, eventually you actually need to sell something. It’s easy to get bogged down and we sometimes forget that what we really need to do is generate revenue. I love clean systems and on-point marketing, but there are times you just need to ask:
What’s my shortest path to revenue?
My clients know that I like to cut to the chase and get right to the core, and this is never more true than when a business needs or wants more revenue. I once chose to work for a company that was close to bankruptcy because I wanted to see if I could help turn it around. They had some pretty cool products in development, and when I asked about how we would cover expenses in the next few months, I heard a lot of “well, if this happens….” Or “when we figure out this issue….” I don’t think I was making friends in those early days, because I would say “that sounds great, but what do we have to sell tomorrow?” “Which customers are most likely to want what we have right now?”
Being short on revenue is one of the most frustrating stages of business ownership and owners often feel powerless: that there’s nothing else they can do. We have to cut to the chase and ask key questions:
- What’s the shortest path to revenue?
- Is there a shortcut to revenue (without shortchanging service or quality) we can take?
- What steps can we bypass to get straight to revenue? Perhaps eventually we will add additional features or build out the missing elements, but when it’s crunch time you need to take the shortest line between where you are and what will produce revenue.
- The objection I usually hear is that it’s not ideal, it’s not what was planned. Taking a shorter path does not tie us to that path for ever, it’s just a path we choose for a period of time.
Keep building new products and services, keep filling your pipeline, but by determining the quickest path to revenue can keep you afloat while your are building your business, making changes, and growing your customer base.
Last week we discussed two very important financial statements. This week, we are going to take a look at an equally valuable statement, cash flow. Small business cash flow, or the lack of it, is what most often causes a small business to fail. It’s easy to believe that if revenue is up, that your cash level will be, too, but that’s not always what happens. On your balance sheet, remember that assets equal your liabilities and owner’s equity. As any one balance sheet item changes, another element must change to keep the balance sheet balanced. Remember these basic rules (assuming no other changes occur):
- In order for cash to increase, some other asset must decrease.
- Cash levels will decrease if another asset increases, such as inventory or receivables.
- If your liabilities increase, cash will also increase. If you pay down your debts (liabilities decrease), your cash levels will decrease.
Looking at specific balance sheet items, here are the top three items you must watch to keep your cash position strong:
- Inventory. Increased inventory levels may cause a decrease in cash levels or an increase in accounts payable; either way, an increase in inventory that doesn’t turn quickly will cause a decrease in cash.
- Accounts Receivable. Increased sales may become an increase in customer balances due you (Accounts Receivable). You’ve paid for inventory or payroll but haven’t yet received cash from your customers, which causes a decrease in cash levels. In a desire to increase sales, be careful not to unusually extend credit; this can cause a cash crunch not easily resolved.
Inventory levels and customer receivables often grow as sales increase; cash levels can decrease quickly if you don’t keep a close eye on them all.
- Accounts Payable. Slowing down payments to vendors can help cash in the short term, until vendors demand cash on delivery. You then are paying for new stock without having paid for inventory on hand. Be careful not to build inventory levels for which you don’t have the cash to pay for.
Don’t let this basic financial statement, your Statement of Cash Flow, confuse or overwhelm you. This is basic math: as any asset or liability changes, another item, such as cash, must also change. As revenues increase, watch your inventory, receivables and payables especially and cash will remain strong.
Reading and understanding your small business financial statements is right up there with root canals for many business owners. If you don’t regularly review your financial statements, though, disaster can be right around the corner and you may not even know it.
I’ve wanted to provide a Small Business Financial Statement 101 review for quite a while now, but how do I do it without you nodding off? And besides, the SBA has explained the elements quite well already (see http://www.sba.gov/ombudsman/7046 for detailed descriptions of balance sheet and income statement elements). So instead, let me give you a broad view with quick tips on what you need to be paying attention to.
Income Statement, or Profit and Loss Statement
If you review any of your financials, chances are this is the one you look at. Basically, this is it:
Revenue – expenses = net income.
So, where is the starting point for reviewing this statement? Give every line item a critical review, understanding that if you want to increase net income, one of the other two items – revenue or expenses – must change. You should be looking at it
monthly, compared to the same month last year and to your budget; also review it on a year-to-date basis (and compared to YTD last year and your YTD budget).
That’s a start, but this limited view has its downfalls. Your income statement is historical and has little to do with a critical small business need: cash.
Your balance sheet is a snapshot in time, and shows what you own, what you owe, and what’s left over AT A GIVEN POINT IN TIME. Key items to pay attention to:
- Current Assets compared to Current Liabilities. If necessary, could you cover all of your short term liabilities (what you are required to pay within one year) with your short term assets (what you can turn into cash relatively quickly)? Watching this ratio (called your Current Ratio) will prevent excessive debt, which can quickly turn a business into a mess and even non-existence.
- Accounts Receivable. Consider accounts that owe you money as your customer loan department. If you have provided a service and have not yet been paid for it, you are basically loaning your cash to others. Make sure the business transactions warrant that “loan”.
- Inventory. It’s easy to fall into the trap your distributor reps often set: buying more of an item, giving you a better unit price, is not always a good thing. Inventory is equivalent to dollar bills sitting on your shelf. Make sure inventory will turn quickly enough to provide the income needed to pay bills, provide for you and your staff, and invest further in your business’s long term health.
- Accounts Payable/Loans Payable. This represents what is due to vendors and lenders in the short term, keep this balanced between maximizing the “loan” you take from your vendors with too much debt and keeping your vendor relationships strong. Avoid letting this number creep up without increased sales and cash flow.
To most business owners, small business accounting is like eating your veggies; you don’t really enjoy it, however you know it is good for you, and you feel better after it’s done. It isn’t the most fun or exciting thing to do, so it is easy for the task to but pushed aside for another day. Small business accounting can be confusing, time-consuming and downright frustrating (isn’t that why you hired a CPA?). However, it doesn’t have to be as hard or painful as you think! You can discover a ‘wealth’ of information if you know where to look and how to read the statements. (Need more help on this topic? Check back next week for tips and tricks on reading statements)
Let’s start by breaking down what is most important in small business accounting analysis. Your time is valuable, and in short supply, so let’s focus on the statements that will yield the biggest bang for their buck. Below is a list of financial statements that I want you to see, and review, regularly:
- Income Statement, (also called Profit and Loss)
- Balance Sheet
- Operations Dashboard
Like to Have
- Statement of Cash Flow
- Customer List sorted by Revenue
- Product/Service Line Profit and Loss by month
- Key Financial Data by Month since Inception, recorded to allow reporting of year over year data (comparing same month, different years)
- Key Operating Data by Day, to allow comparison of operating data by day of week, by week. What I really want is for you to see your key items sliced in any possible way you can imagine. This requires some up-front thinking and analysis and someone good with a spreadsheet.
- Key Ratio report showing monthly trend
This list may seem overwhelming at first, but once you get into the groove of reviewing statements, it becomes painless and eye-opening. Don’t know what to look for when reviewing these statements? Check back later for the next post detailing more small business accounting tips and how you can use statements to grow, prevent disasters, and increase your cash.