Four Bad Moves That Are Hurting Your Business

Business owners’ optimism is at its highest since February, with more than a quarter of owners saying now is a good time to expand, according to the latest survey from the National Federation of Independent Businesses

Photo: © Depositphotos.com/pyotr021

Data from Sageworks, a financial information company, also show that sales and profitability continue to grow for privately held firms.

But as businesses hire more, invest more and grow into new areas, it’s a good idea to maintain a focus on some of the fundamentals that underpin a company’s financial performance.

“When you’re running a business, you get so busy just running the business and the operations that you sometimes lose track of finances,” says Brian Hamilton, chairman of Sageworks. “And most people who start companies are not super interested in finance, so they kind of lose track of money, which is definitely one point of running a company -- to make some money.”

Nevertheless, business owners need to know basic financial information – what the business cash flow is, how much profit is expected, what the revenue will be this quarter -- in order to not only pay bills but also expand in a way that makes financial sense. In addition, there are several common business practices to avoid so that the “good times” of this economic cycle don’t end prematurely for the business.

Here are four habits to guard against:

Extending credit automatically

Failing to manage cash is one of the most common causes of business failures, and the trouble can start when a company offers credit indiscriminately to customers and then cannot collect. Business owners may be convinced they must offer credit to everyone and on the same terms, but if they truly consider their clients individually, they may reconsider.

“When you offer credit, you are now a bank and a service or product provider rather than just a service or product provider,” Hamilton says, estimating that in many cases, businesses truly need to offer credit to only about 25 percent of customers. Grant credit when it will increase revenue and income, and vary credit terms based on the overall relationship and creditworthiness. Is now the time to review the credit policy and implement changes for 2018?

Sageworks, a financial information company, collects and analyzes data on the performance of privately held companies and provides accounting, financial analysis and risk management solutions.

Keeping too much inventory

When a business is humming along, the combination of new staff and pre-occupation with other issues can make it easier for inventory controls to slip. Remember that inventory ties up cash and takes up retail, warehouse or manufacturing space that could be used for a higher return, even without considering the costs of obsolescence, spoilage or shrink. Accountants can provide advice on how to better assess and manage inventory, and many can provide industry benchmarks or describe what their other clients in your industry or other industries are doing related to inventory management.

Letting receivables age

In addition to reviewing the company’s credit policy, business owners during growth periods should be mindful of receivables that, as a whole, are slowly getting older. If a business is continuing to remit payments on the same schedule but is gradually getting paid later and later by customers, it will eventually chew up more cash and require even higher sales to make up for the shortfall. As Hamilton says, “There is an old inventory management maxim: ‘Inventory kills.’ This is wrong; it should be: ‘Inventory hurts, but accounts receivable really kill.’“ In addition, money tied up in collections is money that’s unavailable for expansion, which can lead a business to borrow unnecessarily or decide against growth. Review procedures for collecting receivables and either offer small incentives for quick payment or enforce penalties for late payments.

Focusing exclusively on sales

When sales are increasing, businesses might begin looking for new loans or other credit to help finance operations supporting that growth. But according to Hamilton, there are two questions every business owner should answer before investigating new borrowing:

  • Is your business profitable?
  • Can you easily service the debt?

It can be easy to focus exclusively on sales during a growing economy, but as the housing market showed, when a two-income household goes to one income, bad things can happen with repaying credit. Make sure the business is profitable or that it is improving its profit margin, or at least maintaining it. Despite currently strong performances, businesses can often do even better by examining their financial statements and targeting improvements with an advisor, such as an accountant.

Sageworks, a financial information company, collects and analyzes data on the performance of privately held companies and provides accounting, financial analysis and risk management solutions.

Mary Ellen Biery, Contributor

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