Best Financial Practices Are Prudent Practices

Best Financial Practices Are Prudent Practices

By Diane M. Calabrese / Published January 2023

Photo by iStockphoto.com/Svetlana Ivanova

What do worn pump seals and weak bookkeeping have in common? They can both land a contractor in a great deal of trouble. No physical harm or property damage is likely to result from less-than-best practices on the financial front. But the results of a preventable incident can be just as devastating.

     Whether operating, selling, or manufacturing machines, members of our industry take safety seriously. Match the safety protocols in equipment use, maintenance, and design with methodical financial practices, and a business moves along on a steady path.

     How important is it for industry members to commit to following best financial practices? “It’s huge,” says Doug Rucker, owner of DougRuckerStore.com LLC in Porter, TX.

     “As we transitioned to being a vendor, we had to constantly stay on top of new trends and the newest hot items that customers were requesting,” explains Rucker. 

     His new store is focused on helping new exterior cleaning businesses get started with both training and equipment.

     Like the customers he serves, Rucker had to weigh choices carefully, and he still does. Financial best practices—just like machine maintenance—are incorporated as routine endeavors.

     “Decisions have to be constantly made for us not to overspend on inventory, equipment, and supplies that do not fit our business model,” says Rucker. Since the model is based on serving those new to the industry, that’s where the focus is.

     Yes, there is flexibility, says Rucker. “While we can also supply the experienced professional in the power wash business, we can take advantage of drop shipping and keeping limited supply of many items that are not ‘hot sellers’ but are requested on an as-needed basis.”

     To keep his business in equilibrium, Rucker makes certain that the very necessary financial tasks get the attention they deserve. Consider inventory and how it relates to financial best practices.

     “Inputting new stock promptly and accurately to stay on top of inventory levels is a must,” says Rucker. “Item quantities inputted wrong, or sometimes not at all, can cause serious issues with cash flow.”

     In other words, a business owner must know where his or her capital is at any given time. A vendor cannot be paid with parts and machines that are sitting in storage. But more parts and machines cannot be purchased without cash.

     “If your inventory system is telling you that you have 50 of something, or even 10, and an order is placed for that item only to find out you are out of stock, then that puts a huge inconvenience on your customer and your business,” says Rucker. The inconvenience is the direct result of an entry that was not placed in a tracking system in a timely way.

     Rucker emphasizes that lapses in best practices, no matter how small, also consume time. Time lost is money wasted.

     To correct serious inventory issues, a new order must be made. “It takes up time because you place an order you were not expecting to place and have to spend time on communicating with the customer about the issue, not to mention researching and figuring out how the mistake was made, or the input missed, so it does not happen again,” says Rucker.

     Best financial practices are prudent practices. Good judgement and caution (no hasty or rash maneuvers) are essential to getting and keeping any business on a strong foundation.

Two Wings

     Operating on a wing and a prayer may be the optimal way to land a compromised plane, but it is not the way to run a business. As the U.S. Small Business Administration (SBA) notes in its self-study course “Financial Management for a Small Business,” many benefits accrue to owners committed to quality financial management.

     First and foremost, quality financial practices enable an owner to know if a profit is being made. Beyond that, an owner has the information necessary to make decisions about purchases, employees, types of equipment, whether expansion is necessary, and so on. 

     Any move a business makes—small or large—incurs a cost. There’s a cost to even the short time it takes to prepare an estimate for a customer. 

     Sole proprietors (owner-operators) of a business have a particular challenge in practice: They wear all the hats. Nevertheless, they must commit to financial best practices to be able to evaluate their business and to comply with all tax requirements. 

     Business accounting software, a separate business checking account, and a separate business card are essential tools for a new business owner. Other must-do recommendations from SBA: deposit all sales payments, pay business expenses first, and track sales.

     Delayed billing means delayed payments and reduced cash flow. Invoice on the spot or as quickly as possible. Set terms for payment on the invoice—whether it’s digital or not.

     Owner-operators often mistake payments for sales as profit. They overlook the full array of expenses. Once all expenses are tallied and deducted, there may or may not be a profit. If there is a profit, owners can pay themselves (with an owner’s draw). 

     There’s quite a leap from a sole proprietorship to an employer with employees. Whichever business structure a cleaning contractor, distributor, or manufacturer chooses, though, the need for quality financial practices persists. Only the scale changes.

     All businesses have overhead (expenses of all kinds that make operation possible, such as fuel, rent, utilities, insurance). The more precisely expenses are monitored and recorded, the better an owner can understand profit. There’s a difference between gross profit (sales less cost of goods/services sold) and net profit (gross profit minus overhead). 

     With so many excellent choices in accounting software/systems, a business of any size can get the structural support it requires to organize and expedite its financial record keeping. Similarly, small companies can seek the regular help of an accountant—at least once a year, or better at quarterly intervals—an important player that larger companies have in house.

     Excellent record keeping is where financial best practices begin. Analysis of the records is what ought to follow.

     The better the financial records, the less the chance for self-deception. Even the owners of large companies can put on blinders and fail to see the big picture. That puts a company at risk. 

     Look for weak spots. Shore them up. To do anything less imperils a business in many ways.

     Good financials—just the evidence of sound management of debt—allows a business to borrow. They also demonstrate that a business is sustainable, making a profit and poised for growth. 

     Financial best practices ensure that a business owner knows whether there is a sufficiently good outlook to hire and retain new employees. A sudden burst in orders for services or goods is not the signal to rush to bring a new person on board. The cost of the employee (wages and benefits) must be weighed in the context of monthly and quarterly fluctuations in revenue. 

     Quality financial practices make it possible for an owner to answer a fundamental question: ‘What can I afford?’

     Is there sufficient cash flow or credit to purchase new equipment for an additional service line (contractor)? How many machines can be held in stock (distributor)? Can we ship by a faster method (manufacturer)? Should we change vendors to reduce cost, and will doing so diminish quality (general)? 

     In this complicated economic time, fastidious financials also provide the answer to a question—and its corollary—that now pervades the business sphere: Should I raise prices? And what would an increase in prices mean to the long-term outlook for the business?  No business can tell the future, but a solid understanding of the past and present provides the best basis for wise decisions.

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