FutureVisionsSM
creating sustainable
results in growth and performance
The
Accountant Myth: I used to think that Accountants know a lot more
than you do about business. Nobody told me that many accountants are
nothing more than tax preparers. Even the best accountant probably can't
run your company. I used to think accountants knew everything about
business from working so closely with so many companies. Just because you
watch sports games every Sunday, however, doesn't mean you can actually
play a professional game yourself. Accountants, by the same token, can't
tell you how to make money just because they look at financial statements
every day. You have to figure out how to do that yourself. Good accounting
never has made a business, but poor accounting has ruined a lot of them.
Your accountant
is like a navigator on a ship. The accountant's job is to keep you appraised
of things like your longitude and latitude. You may be doing a phenomenal
job of steering the ship, getting through storms and narrow passages. But if
you're going in the wrong direction, it doesn't matter. You're the one who
has to pay the price if your accountant miscalculates your inventory or
fails to tell you that you're growing too fast or your budget is
unrealistic. You can't just leave financial matters in your accountant's
hands and assume everything will be OK.
You have to
hire an experienced accountant and ask that person to play a supporting role
in running your company. When you're interviewing prospective accountants,
ask them what they think are critical areas to watch. If they start talking
about trust funds and tax planning, they may not understand about growing
businesses. Those things are important but only after you’ve addressed
issues like cash flow and budgeting.
Budgets Are
Sexy: Careful budgeting
may not sound sexy, but making money is. I used to think that if you know
how to make money, you can dispense with budgets. Nobody told me that
running a lemonade stand is different than running Minute Maid. Budgets are
critical to a company's success. Operating without a budget is like baking a
cake by mixing up a lot of different ingredients, putting the batter in a
cake pan, and hoping it tastes good when you take it out of the oven.
I no longer
just hope to make money at the end of the year, I plan to make money by
careful budgeting. Unless you have a budget, it's difficult to monitor how
you're doing and make the necessary adjustments. I used to find out whether
I made money by taking inventory at the end of the year. By then, of course,
it was too late to change anything.
Now I
constantly monitor every dime that comes in and goes out of my company. I
look at my overhead in relation to my sales, for instance, so I can adjust
my markups if need be. I used to think more sales would fix everything.
That's one of the biggest fallacies in the business world. More sales
sometimes just mean more costs and do nothing for your bottom line.
Look before
you Lease: I used to think that, like the articles on leasing say, you
should lease what goes down in value and buy what goes up in value. Nobody
told me that most of those articles are written by leasing agents who have
a vested interest in telling business owners to lease what goes down in
value. Leasing is an easy but expensive way to borrow money.
Nothing you
will buy or lease for your business is likely to increase in value. Will you
ever buy a desk and sell it five years later for more than the purchase
price? No one will ever say to you, "That's a mighty good-looking desk. The
market's up on those desks. You paid $200. I'll give you $300." You will be
lucky to get $50.
So when you
talk about the advantages and disadvantages of leasing equipment, you really
are talking about things that depreciate in value. Say you need a computer
system but have no money. It costs $10,000, so if you want to buy it you
have to borrow money. If you borrow money from the bank, it costs $12,000
with interest. That may seem like a lot of money, but you'll pay even more
money if you lease it.
If you are
basically purchasing something through a lease, there aren't many tax
advantages to leasing, either. If the lease arrangement doesn't meet the
criteria of an operating lease, the Revenue considers it a capitalized
lease. That means you can't write it off as an expense over the term of the
lease. You can, however, write off the depreciation.
So why would
anyone lease anything? Cars are an exception because they have good resale
value, and many manufacturers offer attractive deals just to get their cars
on the street. But I'm talking about leasing things with little or no resale
value.
Well, there are
a couple of good reasons. Having a limited borrowing base is one of them.
You may need something but have limited access to borrowed funds. Say your
credit line at the bank is $50,000, and you have no more assets to pledge.
You may have to reserve your credit line for things like inventory and
receivables that can't be leased.
Leasing
basically enables you to increase your borrowing power. A lease is like a
high interest loan. You often are required to make two payments up front,
which obscures the amount of interest you're paying. Up front payments
reduce the amount of the loan but increase the actual amount of interest. So
leasing is more costly than borrowing from a bank. But if you have no other
options, it can help you maintain good cash flow.
You may want to
consider leasing if you need to borrow money for something else. When banks
determine whether to grant you a loan, one thing they look at is your debt
compared to your equity, or your debt-equity ratio. Say you borrow $20,000
from the bank to buy a car. That car shows up as an asset but has no effect
on your equity. The $20,000 loan, on the other hand, shows up as a
liability, which means you have increased your debt-equity ratio.
If you lease
the car, it's a true operating lease and won't show up as a debt on your
books. That's called off-balance-sheet financing, and it can be highly
advantageous if you're in a critical cash situation.
To
credit or not to credit: If you give credit, you have to manage your
receivables. I used to think that if you give people an open account, they
will pay you, if not because they're honorable, because they're afraid of a
bad credit reference. Nobody told me that you can count on getting screwed
if you give credit to your clients, but giving credit might still be the
right business decision.
Some credit
clients will try to stiff you. They won't pay their bills until they know
you're serious about collecting. Some people may never pay up, no matter how
many phone calls you or your collection agency make. You may hire a lawyer
and, if you're lucky, settle for half of what's coming to you. Or you can
take a deadbeat client to court and learn more about the legal system than
you want to know.
There would be
no problem if you could just decline to extend credit, but that's difficult
to do if you sell to other businesses. They aren't structured to pay C.O.D.
and can't do business with your company unless you provide them with an
account. I've gotten my receivables under control by checking credit
references thoroughly before giving anyone an account and by putting credit
limits on every new account. You also have to build deadbeat credit clients
into your cost structure. You have to pay someone, whether it's one of your
own employees or a collection agency, to call clients who fail to pay their
bills.
You may not
have the stomach for collections, but be prepared. You occasionally may hear
from delinquent clients who are unhappy about being asked to pay their
bills. Don’t buckle under to complaints from them. You’re entitled to ask
them for your money.
For the free top tips for small service-businesses, send an email to
bs@futurevisions.org
with
"free MWS top tips for small service-businesses" in the subject and nothing in
the body of the email.
