Get a Grip on Your Finances
31. When to Hire a CFO
Does your company have the adequate resources to handle tax planning, capital raising, cash management and all the other financial functions of a company? Or more simply: Is it time for your company to get a CFO? Of course, it varies from company to company, but answering some fundamental questions may indicate it's time to hire a CFO. Is the bill from your accounting firm surpassing the salary for a seasoned financial manager? Most entrepreneurial businesses turn to accounting firms for everything from taxes to raising capital, at a price tag of at least $150 an hour. "A good financial strategist will cost at least $90,000 a year, so do the math," says Steve Enright, president of SJE Partners, a Richmond, Virginia, HR consulting firm.
Do you need to raise equity capital to fund further operations? According to Hackeman, if your business wants to go beyond just regular bank loans for funding to the likes of VCs, private investors, the public markets or anyone else looking for a piece of the company, then it may be time to bring in a full-time financial expert.
Is your company beginning to do complicated financial transactions? While raising capital can certainly get complex, there are other financial factors that can drive an entrepreneur to seek out a full-time financial advisor. One may be that his or her company is in the process of buying other companies. Another is that your business is beginning to set up deals with suppliers, customers or both that demand financial structuring outside the realm of common sense.
32. Costly Cost-Cutting Errors
When times are tough, you may be tempted to cut every expense under the sun to keep your business afloat. Beware, though-cutting the wrong things could end up hurting your business in the long run. Here are the cost-cutting measures that could ruin your business: Mistake No. 1: Choosing cheaper materials for your product. Mistake No. 2: Cutting back on advertising and marketing. Mistake No. 3: Not doing inventory or financial reports when times are lean. Mistake No. 4: Cutting R&D during the start-up stages. Mistake No. 5: Cutting anything that keeps a customer satisfied.33. Smart Spending for Surplus Cash
If you find yourself with extra money, the first thing you should do is sit down with your CFO and accountant to do some serious projections. Look at the operating cycle of your business and how much cash you're expected to turn under normal circumstances. Make sure the extra money really is excess and not a one-time bump from an unusual sale or savings from a one-time cost cut. Then sock away enough money in an interest-bearing account or low-risk investment vehicle to last several months-anywhere from three to 12 months, depending on your industry-should the economy contract and customers be unable to pay. Then, if you have extra savings, pay down debt. Once that's done, look at improvements that won't add a fixed future cost, such as employee bonuses and one-time improvements to technology or other essential machinery.
If your business still has a surplus after putting away cash and making improvements without fixed costs, then consider making more significant changes, such as adding staff, expanding to another location, or purchasing a building for the business if you're currently leasing.
34. How Banks Can Help
If you've worked hard on preventing cash-flow issues, but still find yourself with an unexpected problem, what can you do about it? If you haven't been planning on this happening, you may face some painful choices: Borrow from your personal funds, delay paying some vendors, delay payroll, try to convince a customer to pay their bill early, etc.
A much better plan is to have a close relationship with your banker. Treat your banker as a partner, and send them frequent financial reports. The more a banker knows about your business, the more confidence he will have in you, and the more willing he will be to help out if you get in a cash crunch. Another important tool is a line of credit from your bank. Think of this as business overdraft protection for your checking account. If you've got that in place (and the time to look into this is not the day you need the money!) and a customer is slow to pay, you can draw on it until your invoices come in.
35. Basics of Cash-Flow Management
If there's one thing that will make or break your company, especially when it's small, it's cash flow. If you pay close attention to your cash flow and think about it every single day, you'll have an edge over almost all your competitors, and you will keep growing while other companies fall by the wayside.
Let's take a look at some basics. What does "cash flow" mean, anyway? For the moment, don't think about profits and losses, your balance sheet, gross margins, etc. Perhaps the simplest way to think about cash flow is to just think of the balance in your checking account. Will that balance be enough to pay your bills when they come due? That's the point of this whole concept-the further out you can predict your bank balance, the further out you can see a problem, and the longer you have to deal with it.
As you start to think about it, you'll realize that you can pretty easily forecast most of your expenses, at least for the next few months. Once you have that in mind, add the revenue that you believe you'll receive, and do the math.
Beefing Up Your Negotiation Skills
36. Good Things Can Come From Bad Deals
Have you ever made a really bad deal? Admit it. We all have. It may not be taught in any school, but deal-making is a core competency in life-particularly in the business world, where wealth and success are a fetish. Your negotiating ability directly affects your income, your relationships and, ultimately, your station in life. That's why making a bad deal can be so hard to live down.
It's possible you did everything right. Sometimes, bad deals just happen, even to the best. But more often than not-and whether or not you're big enough to admit it--you probably had something to do with it. Don't avoid the post-game wrap-up. It's the only way to shave strokes off your score. Ask yourself the tough questions: How did you contribute to the problem? Did you miscommunicate? Did you forget something? What will you do differently next time?
It's important to think deeply and introspectively. Why did you make the mistakes you did? Were you too arrogant to ask for help? Were you too easily cowed by this opponent? Were you too greedy? Did you let things get too personal? If you can, find a good friend to help you debrief.
37. Get Tough
Toughness is partly about your game face, but it's also about technique. When you're called on, or choose, to take the hard line, here are some ways to strengthen your game:
- Don't talk too much. Be terse. The less you say, the less you reveal about your own position. The less you say, the more you can listen for weaknesses or opportunities.
- Be stingy with your concessions. It can really grind your opponents down. If you must give, give just a little, and get something back in return-even if it's their agreement to take an issue off the table.
- Be firm. No means no. If you don't want to give a point, make your opponents feel like they just hit the wall. You will not be perceived as a jerk, so long as you offer a plausible explanation for your position.
- Keep things moving. Don't let your opponents backtrack on you. Once an issue is settled, it's settled. Be supremely efficient and businesslike. Your opponents must feel that your time is precious and that you do not suffer fools at all.
- Stay focused. In detailed negotiations, mental stamina is a tremendous asset. Victory goes to the dogged. The last person standing at the bargaining table is the one with the greatest power of concentration.
- 38. The Ugly Side of Negotiation
For whatever reason, deal making often brings out the ugly side of commerce. At the drop of a hat, parties polarize, one side vilifying the other. Principal players are overcome by fear and greed. Egos clash as the insecure become blustery, then arrogant, then insufferable.
Problems like these are unavoidable. As with medicine, early screening and detection are key. What vibe do you get from your opponent at first contact? Of course, some will fool you, but your gut is often smarter than you are. Watch for goofy or unreasonable demands early on. Listen carefully to what their own professionals say about them-and especially look for that omnibus euphemism "difficult personality."
Think of difficult negotiations not as a hassle but as a challenge. The experience will only make you better at handling others, but better at handling yourself. Don't become distracted by your opponent's antics, however outrageous. Stay focused on your goals and on the actual issues. Don't escalate hostilities, lest you get caught in a senseless cycle of verbal violence. Let it roll off you. After all, it's not about you; it's about them. You should also remember that "craziness" can be feigned as a tactic to manipulate you. If that's the case, consider calling your opponent on it, whether tactfully or bluntly.
39. Getting Your Fair Share
Whether it's a commission, a participation, a royalty or equity, when deal makers talk about taking "a piece of the action," they usually mean some kind of percentage. It may sound simple, but in the real world, cutting someone a fair slice is not. Here are some things to think about:
- Is it justified? Percentages can mean big upsides. Reserve these rewards for those who really bring value to the table-usually the people or companies that are key to the venture, or those taking an unusual amount of risk.
- Would an hourly rate or a flat fee be less expensive than a percentage? This is a common theme when professionals are involved. If they'd perform the same service either way, run the numbers to see which is better for you.
- What's the percentage based on? Is it on everything or just a part? Is it on gross or net? If it's net, what comes off the gross to get there? Make sure you understand how a percentage is calculated. Crunch some numbers. If your opponent has any skills, he's good not only at counting the beans, but also at hiding them.
- Is equity involved? Stock is complicated, so you must get professional help. The formalities are legion, and the pitfalls nasty. The actual number can mean little without taking into account voting rights, classes of stock, buyouts, vesting schedules, conversion rights, registration rights, dilution and the like.
- For how long is it payable? Certain deals can go on for years. That percentage income stream can be well-deserved passive income or a total boondoggle, depending on who is getting it and why. Ask yourself: Should these payments go on forever? If not, when do they stop?
- Who's rushing me? The percentage players in a deal often have a strong incentive to close quickly. No deal, no percentage; and the faster they get there, the better. This is a predictable current in many negotiations-it's up to you to swim with or against it.
40. Overcoming Your Resistance to Negotiation
An entrepreneur who doesn't like to negotiate is like a chef who doesn't like to handle knives. Bargaining ability is a key business skill. If you resist learning and using it, you have a serious deficit-not just at the bargaining table, but also in life.
Some people feel it's degrading, like they're begging the other side for scraps. For a few, the problem is systemic. These are the pathologically shy, who wilt at the prospect of any kind of confrontation-they can't get to yes, and they can't just say no. For most people, however, the problem is not about some organic weakness in their psyches. It's the natural awkwardness of facing a new opponent or a new situation. The solution is simple: Learn and practice new skills. Ask a colleague to coach you. Thumb through one of the many good books on negotiation. Take a seminar. Bring someone along to pump you up or step in if you get stuck. Make an ongoing commitment to become a better negotiator. Even the average consumer can save many thousands of dollars over a lifetime if he or she has a few good moves at the bargaining table.
41. Off to a Good Start
One of the most aggravating aspects of being in business is taxes-understanding them, keeping up with them and, worst of all, paying them. But there are some things you can do as a new business owner to make the process a little less painful, including these four tips:
- Understand the various taxing entities. All levels of government-local, state and federal-impose taxes. Be familiar with the requirements of each.
- If appropriate, preserve your independent contractor status. If you operate as an independent contractor, protect that status by using written contracts and controlling how and when you do your work.
- Keep good records. Good records help avoid trouble with the IRS and give you an accurate idea of how your business is performing.
- Understand what's deductible and what's not. A deduction is an expense or the value of an item that you can subtract from your gross income to determine your taxable income and reduce the amount of tax you pay. Even if you have someone else prepare your tax returns, take the time to learn what you can deduct so you keep the right records and file an accurate return.
42. Before Midnight
Take steps to increase deductions. The larger the number of deductions you claim, the smaller your taxable income will be and the less taxes you'll owe. One of the best ways to boost deductions for cash-basis businesses is to pay as many of your business expenses as possible during this year. With the cash method of accounting, income is taxable when you receive it, and expenses are deductible when they are paid. To beef up those deductions, stock up on business supplies or get equipment or vehicle maintenance done in November or December if you planned to incur these expenses in 2004 anyway. You also will want to consider prepaying some deductible business expenses, including any rent, taxes and insurance due on the first month of the new year.43. Seven Deductions to Consider
Here are seven major opportunities to make your life tax-deductible as an entrepreneur:
- Your home: As a small-business owner you may qualify to take a home office tax deduction if you use your home office regularly and exclusively for your business.
- Your car: If you use your car in your business, you can deduct the costs of operating and maintaining your car. However, you can only deduct the portion of your car that pertains to business only.
- Your equipment: You can convert personal assets into business assets by contributing them to your business. You can do so by giving them to your business either in exchange for a loan document or as contributed capital.
- Your travel and entertainment: Travel expenses are expenses you incur for your business while away from home. You are traveling away from home if both the following conditions are met: (1) your duties require you to be away from the general area of your "tax home" substantially longer than an ordinary day's work and (2) you need to get sleep or rest to meet the demands of your work while away from home.
- Your retirement: You may qualify to participate in certain retirement plans that are available to small-business owners, depending on certain factors, such as your business's form of organization, other retirement plans in which you already participate, your earned income and whether you are functioning as an employer (owner) or an employee of your business.
- Your family: As a small-business owner, you have an opportunity to hire your spouse, children and even your parents as a way of minimizing your family's tax burden.
- Your self: As a small-business owner, you are able to take advantage of tax-free owner benefits. This allows you and your family to enjoy benefits that are paid by your business and that are also tax-deductible to the business-the best of both worlds.
44. Home Sweet Home
There are three ways a small-business owner can consider qualifying for a home-office deduction: (1)If the business is operating as either a sole proprietorship or as a one-member Limited Liability Company (LLC); (2)if the business is operating either as a partnership or a multimember LLC, electing to be taxed as a partnership; or (3)when the owner of the business is also considered an employee of the business-as in the case of C and S corporations or an LLC, electing to be taxed as a corporation.
The next consideration in qualifying to take a home-office deduction is that you must be using a portion of your home for your business, and be doing so on both a regular and exclusive basis. The final element in qualifying is that this home office is your principal place of business-used regularly and exclusively for business, and that you have no other fixed location where you conduct substantial administrative and management activities of your business.
45. Be Tax Smarter
Though the tax code is complex, it's not impossible for the common entrepreneur to use it and take the best advantage of it. Here are three important considerations for your business expenditures that can help you get the best return possible at tax time:
- Match allowable ordinary and necessary expenses of your business for each tax year against taxable income. Ordinary and necessary business deductions include all the expenses that are required to operate your business, including: accounting, legal and bank services, office expenses, your car, equipment, travel, entertainment, retirement, wages and salaries, employee benefits, marketing, insurance and payroll taxes.
- You must allocate expenditures between personal and business use. An expenditure does not have to be either entirely deductible or nondeductible, i.e. business or personal. The personal portion is not tax-deductible: however, the business part is fully tax-deductible as a business expense.
- Avoid the IRS's "hobby rule." You are presumed by the IRS to be in business with the intent to make a profit. If you do not show a profit in three out of five years, you may be required to demonstrate and defend the fact that you are operating with the genuine intent of making a profit.