Financial Best Practices

Financial Best Practices

By Diane M. Calabrese / Published June 2017

 

Products, services, personnel—which is the mainspring of a business? Many a keen student of economics would answer that it’s financial practices. Put another way, yes, a business must be about something, whether as a contractor tackling jobs, a distributor meeting the needs of end users, or a manufacturer developing and making equipment and ancillaries. Still, the driving force for all those activities is finance.

Without a reservoir of capital, even the smallest interruption in cash flow—a slow payment, an order that must be reshipped, a breakdown in the manufacturing line—can be fatal. A commitment to financial best practices keeps a business strong and growing. Begin with attention to the basics.

“You need to have a good accountant or financial advisor who is really good at reading P&L [profit and loss], income statements, etc.,” says Doug Rucker, owner of Clean and Green Solutions in Porter, TX. “The person should be someone who is experienced with small businesses and specifically service-oriented business.”

As for identifying best practices in financial matters, be open to all possible sources. There are books, consultants, and websites aplenty. Often, though, excellent recommendations come from an individual in the same or a similar industry.

Rucker says the best piece of advice he ever received came from his friend and colleague Ron Musgraves, the owner of ProPower Wash in Gilbert, TX.

What was the advice? “Keep track and stay on top of all expenditures, even the smallest ones,” says Rucker. “And watch for even the smallest changes or trends—your expense reports tell you a lot about what’s going on with the health of your business.”

Personal preferences and type of business can influence the choice an owner makes when shoring up financial practices. Most owners have a good sense of what they would like to tackle first.

“Accounts receivables [AR] is where I would start,” says Michael Hinderliter, president of Steamaway Inc. in Fort Worth, TX. “Look at the number of days AR are outstanding—30 days, 60 days, and 90 days. The longer AR go uncollected, the more likely they are to become uncollectable. Is there enough cash in the bank to sustain all expenses for 30 to 90 days?”

A piece of advice that Hinderliter took to heart early on focuses on being serious about securing payment. “It was to get aggressive about your collection practices,” says Hinderliter. ”Don’t be afraid to call and ask for your money.”

Keeping pace with best financial practices requires focus. “Send statements monthly,” says Hinderliter. “Have staff dedicated to AR and trying to reach collection goals.”

In addition, be sure to have the cash reservoir that business experts cite. “Maintain a strong bank account and maintain a line of credit,” says Hinderliter.

Be Strong

Gregg Brodsky, senior regional sales manager, Alkota Cleaning Systems Inc. in Alcester, SD, reckons there is sometimes foot dragging in the search for best financial practices. There should not be.

“A financial checkup or review of financial practices is something that many businesses seem to avoid,” says Brodsky. “It is like our personal medical exam or physical. Most procrastinate and complain, but statistics show approximately 44 million Americans want to know their numbers, such as weight and blood pressure. It is the same with business; you need to know your numbers.”

The bottom line is simple. “You cannot plan to improve until you know your numbers,” says Brodsky. “Your life may not depend on this crucial financial evaluation, but your livelihood does.”

In his almost 46 years serving the industrial cleaning industry, Brodsky has had the opportunity to observe a great deal. Every business should have a “complete accounting system to track and measure every facet of its activities,” he says. But some 20 percent of small businesses still use no financial or accounting software, he explains.

“I would estimate that another 50 to 60 percent of those using an accounting platform are not using it correctly,” says Brodsky. “Many are not running an inventory module and rely on an annual physical inventory count to adjust one of the most critical assets of a business.” Others do not have a chart of accounts that separates revenue and expense streams and payroll.

Be strong. Use software correctly. Determine the “fitness level” of a business and then plan for improved results, says Brodsky.

“Critical profit variables (CPVs), such as sales per employee, gross dollar margin per employee, sales to inventory ratio, gross margin percentage, operating expense percentage, inventory turns, average collection period of AR, will show a financial stability ratio,” explains Brodsky. “This ratio quickly determines the overall business ability to service debt—and what banks use to support operational lines of credit.”

The better CPVs are managed, the better the return on assets (ROA) will be. “ROA is simple pre-tax profit expressed as a percentage of total assets,” says Brodsky. “It reflects the economic vitality of the firm. Most analysts argue that a pre-tax ROA of at least five percent is needed to sustain the firm. An ROA of 10 percent is considered good and 20 percent is excellent.”

Getting a handle on the CPVs and figuring out where they place a business in the context of competitors is not difficult, once a decision has been made to get going on improvement. There are many benchmarking programs available to contractors, distributors, and manufacturers. Brodsky has worked with the Cleaning Equipment Trade Association (CETA) on its benchmarking program and recommends that benchmarking program to manufacturers and distributors in the industry. 

“CETA along with manufacturers such as Alkota, Mi-T-M, and Kärcher have made available to their distributors the CETA benchmarking program at no cost…The program is quite painless,” says Brodsky. A third-party entity does comparisons in strict confidence and provides each participant with a unique report. It’s a way “to compare your business model against others in the industry.”

Be Aware

From the owner-operator contractor to the large manufacturer, best financial practices must also include acute awareness of all the expectations set by regulators. Missing the mark on any regulation can be a costly or business-ending experience.

A contractor working alone to fledge a business may decide on a cash-only policy to start. But there are liabilities in doing so, including customers who want to pay via debit or credit cards looking elsewhere. There are also risks in carrying large amounts of cash (even a short distance). Accept a big enough amount of cash—$10,000 or more—and the Internal Revenue Service requires filing form 8300, which requests the name, address, and Social Security number of the buyer. The same form must be completed for cash equivalents (i.e., traveler’s checks, bank drafts, cashier’s checks and money orders) of $10,000 or more.

The foregoing is one of the many useful tips available at the U.S. Small Business Administration (SBA) resources website under Finances-
Accounting. (See www.sba.gov/managing-business/running-business/managing-business-finances-accounting.) Other topics include pros and cons of accepting checks or credit cards, migration to EMV chip technology, extending credit to customers, online payment, setting up a compliant payroll system (in 10 steps), and managing business credit. Each topic is considered in some detail, and reading the entries will surely give the most seasoned business owner at least one idea for improving financial practices. A few examples of things to mull over follow in the next paragraphs.

If checks are going to be accepted, have a written policy that’s followed scrupulously. For instance, unnumbered and non-personalized checks and out-of-state checks should send up red flags. Require identification. Get the check deposited as soon as possible (a less-than-honest customer may stop payment on a check and then make a false claim of a problem with service or product). Also, consider what will happen to a business account if the customer’s check bounces.

Regarding the extension of credit to customers, here’s the number one question: Can the business afford to do so? Recall Hinderliter’s advice to get aggressive about collections. Extending credit will in effect lead to slower payment.

As the United States continues to see the migration of credit cards to EMV technology (embedded chips intended to increase security), business owners should understand that being able to process EMV cards leads to not only greater security but also less liability. As of October 1, 2015, the liability for a transaction completed with a counterfeit card or in a fraudulent transaction shifted to the least-EMV compliant party. Consequently, a business not capable of directly processing cards with chips takes a substantial risk.

Smaller companies that sell via the web can use an online payment service to handle all parts of the payment process, including authentication. What a company must decide is whether the fee paid to the service is too onerous for the number of transactions. It’s a balancing act, to be sure.

And with that mention of balance, we are full circle. Every component of a business that involves the flow of money, or to which a positive or negative cost amount can be assigned, should be evaluated in the quest for achieving financial best practices.