Money Never Sleeps: Big Money Tips for Small Business Owners
Let’s start with a cold, hard fact: If you’re currently maxed out on your credit cards or find it hard to make payments on everything from your car to your rent to our mortgage, then you really need to get that handled first. Take some time to assess your own personal financial situation. Take care of yourself before you tend to your new business.
A business starts with a monthly budget – after you make a personal budget. If you don’t budget in your personal life, start now. There’s no way your business will survive, much less thrive, if you don’t make a budget and stick with it.
A Business Budget in 6 Easy Steps
1. Add up your revenue
Once you’ve mastered budgeting basics in your personal life, it’s easy to do a business budget. Let’s start at the beginning. First, you add up your monthly revenue sources – and remember, we said revenue. Not profit. You want to include all the ways you make money before expenses are deducted. Ideally, you’ve been in business for at least a few months, possibly a year. Why? Because you want to do this same calculation for several months, then take an average. Few businesses earn exactly the same each month, so come up with a monthly average because it’s important.
2. Subtract fixed costs
Now you want to do the same thing with your fixed costs, which is defined as any cost that doesn’t change with the output of your business. That includes line items like rent, taxes, and equipment. Depending on your business, you might have more or less fixed costs. Sometimes, new small business owners confuse this term to mean, “Costs that I can negotiate.” That’s not true, since you can obviously negotiate your rent. But these costs remain whether your business is doing well or poorly. So for example, if you leased a widget machine and now business is slow, you still have to make payments on the widget machine.
3. Determine variable expenses
Obviously, variable expenses are the opposite of fixed expenses. Here we’re talking about things like wages, supplies, and utilities. Why are these variable? Let’s go back to the widget machine. You need to keep making payments on it, but if business is slow, you’re using it less, which means your electric bill is cheaper. You can also save on the wages of the widget machine operator. Conversely, if business is booming, you might pay for an extra shift and run the widget machine night and day, driving up your wages and utilities but earning you more revenue. In other words, variable costs can fluctuate with business activity. Just like you did with revenue, estimate these costs over a series of months. While most variable costs are monthly (like utilities), others can be charged quarterly or annually (like marketing costs).
4. Set aside a contingency fund
A contingency fund for a small business is like an emergency fund for a family. Here again, if you handle your personal finances according to established principles, you’ll find that doing the same for your business will be a breeze. If you don’t have an emergency fund, and more than a quarter of Americans don’t, you need to start one pronto. A contingency fund is all about “unforeseen circumstances.” Your personal emergency fund can cover the financial costs of a sudden illness or job loss. But for a small business, a contingency fund is often used for more than just emergencies. For example, it can be used to replace that widget machine if it suddenly breaks down and is beyond repair, or it can be used to upgrade the technology of the widget machine. So while you’d use the contingency fund if, say, a natural disaster damaged your office, you’d also use it to generally repair or improve your business. The trick is to make sure you don’t dip into your contingency fund for typical business expenses. In other words, you don’t use this fund to cover your payroll. Your budget should already account for your fixed and variable expenses. We’re talking about big, one-time costs that either keep your business humming or can dramatically improve it.
5. Make a P&L statement – this is your business budget
Now that you’ve created a monthly budget you can stick to and a contingency plan for unexpected catastrophes and opportunities, it’s time for a profit and loss statement. If you’ve done the previous steps well, a P&L is simple addition and subtraction. This is your actual budget. Once you add up all your income and subtract all your expenses, you’re hopefully left with a positive number. If not, don’t panic. Many small business take a while to become profitable, and they’re not always profitable every month. But if you have a negative number, make sure it’s not a deal breaker or a heart-stopper. Otherwise, you might need to rethink your business model.
6. Create your projections
This is the strategic part of budgeting, and also the fun part. It requires more than just some basic math skills, because once you have all your business numbers in one place, you can make big plans. What months do you conduct the most business? Which months are slow? What can you do to deftly handle the busy times? What can you do to boost business during the lulls? Now you can devise a real business strategy supported by hard data.
Three Financial Statements You Need
Now that you’ve done your budget, you have the tools to create three key financial statements. That’s the P&L. Along with that are two other documents. These are the three you will need:
- Profit and loss statement
- Balance sheet (liabilities + owner’s equity = assets)
- Cash flow statements (cash inflow and cash outflow)
A balance sheet is simply a financial snapshot of your business. It’s an equation that looks like this: your liabilities plus your equity equals all your assets. As the U.S. Small Business Administration says, “the two sides of the equation must equal out.” Confusing? Hold that thought for a moment.
Cash Flow Statement
A cash flow statement is simpler. This highlights how much money coming in (called cash inflows) and going out (cash outflows, of course). Cash inflows include not only cash sales, but also accounts receivables you collected, loans and other investments. Meanwhile, cash outflows include equipment you bought, expenses you paid and your inventory.
Know the SCORE (Service Corps of Retired Executives)
If this is sounding a little confusing, here’s the easiest way to make it crystal clear. Simply go to the website for SCORE, a nonprofit that was founded in 1964. It was basically a bunch of thoughtful and smart retired business leaders giving back by mentoring new business owners.
SCORE has complete but easy to understand templates you can download for all three financial statements we just talked about, plus lots of other helpful resources. We urge you to check out SCORE for those templates and other advice. The help is free.
Overcoming Cash Flow Problems
While solidly built budgets and financial statements are required to be truly successful, they can’t prevent the inevitable cash-flow problems many small businesses face at one time or another, such as:
- Not enough sales
- Not enough collections
- Too many expenses
There are several common causes for cash-flow issues. First and foremost is the obvious: You’re not selling enough of your product or service. This doesn’t mean your business is failing. Many businesses have a slow season where they’re just scraping by.
Many businesses also have a collections conundrum: Sometimes your best or newest customers are late with their payments, and you need to decide how to push hard. Sadly, that often means pushing very hard, because those payments simply never come.
Finally, there’s a situation much more within your control: Your own expenses. Are you buying items you don’t need, or can you get items you do need for a cheaper price?
Fortunately, cash-flow problems have more solutions than they have causes. Some are easier to implement than others. Let’s review your options.
7 Ways to Solve Cash-Flow Problems
1. Have a “flash sale”
In the old days, you had a sale. These days, you can host a “flash sale.” These are defined as ultra-brief sales that you advertise mostly through social media. They typically last only a day. If your financial statements are otherwise sound but you need a cash injection, a flash sale might be an easy way to do that quickly.
2. Hike your prices
This might seem to contradict the first point we just made. But if your sales are strong but you still have trouble with cash flow, it might be you’re charging too little for a valuable product or service. Experts who study pricing say you might lose your most price-conscious customers, but the majority will stick around if your business model is sound. And that will not only make up the difference, but it could also establish you as a quality product or service worthy of paying a little more for.
3. Crack down on collections
Ask most small business owners, and they have at least one horror story about a client who owes them and pays late. Just like trying to figure out the perfect price, small business owners have to balance pushing their late payers without pushing them to their competitors. If you need cash now, you need them to pay up. But you don’t have to harass them. Consider offering your customers incentives. If they pay early, perhaps they receive a 10 percent discount. Sure, you lose 10 percent, but you gain 90 percent. Do the math to make sure the tradeoff is worth the cost.
4. Accelerate your invoicing
Many small businesses invoice all at once, on a single day of the month. It’s easier for a harried owner to set aside that one block of time. But it’s not always the best practice if you have a cash-flow problem. Instead, invoice immediately following the delivery of your goods or service. The sooner you send that invoice, the sooner you get paid.
5. Delay payments to vendors, or negotiate with them
While you’re trying to speed up your customer’s payments, try slowing down your own. Figure out how late you can go without incurring a late fee or the wrath of your best vendors. Coupled with a speedier invoice, this might cover your cash-flow discrepancies. If not, you can always call your vendors and explain your situation. Trust me, you won’t be the first customer who’s told them they’re suffering a temporary cash-flow situation. For reliable and long-term customers, they’ll often cut some slack.
6. Slash expenses
If following all these steps doesn’t help, time to look inward. You need to consider cutting costs. That could mean layoffs. It could mean selling assets that aren’t making you money. It could even mean selling equipment and leasing the same equipment, to free up money in the short term, even if it costs you in the long term.
7. Get a loan
Finally, you have the option of using other people’s money. From small business loans to small business credit cards to complex procedures with names like “invoice factoring,” there’s probably a financing solution that suits your situation and comfort level. Let’s start looking at those now.
The Ins and Outs of Small Business Loans
Qualifying for a small business loan requires preparation, and there are so many variables, it’s difficult to spell them all out here. Whether it’s the amount of the loan, its length, or its interest rate, you really need to do your homework to make sure you get the best terms. So let’s cover the basics. And let’s start with SBA loans, which are backed by the federal government.
SBA Loans: Good News and Bad News
The U.S. Small Business Administration’s loan program has been a savior for many small businesses in this country. Think of SBA loans like federal student loans. In both cases, the government doesn’t actually lend you money. Instead, a bank gives you a loan, which the government backs. In both cases, this allows banks to take a bigger risk on someone than it might otherwise.
This is good news for a small business owner who might not qualify for a traditional bank loan. But of course, there’s a catch. A few, actually. First, there are several kinds of loans, all with unenlightening names like 7(a) and (CDC)504. Second, deciphering how to apply can be a chore. And third, most banks won’t issue one to a brand-new business.
SBA Loans: Where to Start
Unlike many other government agencies, the Small Business Administration has a website where you can shop for lenders and learn the crazy details. Check out https://www.sba.gov/ Better yet, peruse the entire SBA site for helpful tips, and try to understand how the SBA works and what it can do for you.
Traditional Business Loans: 5 Steps to Success
To make your small business loan process successful, follow these five steps that will be explained further below:
- Build up your credit score
- Learn the requirements
- Collect your documents and data
- Write up a business plan
- List collateral
To land a traditional bank loan, you need to do many of the same things you’d do for a personal loan. For instance, focus on your credit score. For small businesses, that means checking with the three business credit bureaus. If your score is high enough to apply for a loan, shop around – because just like a personal loan, banks offer many different products at different rates.
Once you’ve found one or more banks to target, assemble all your financial data, because they will ask. This includes everything from your articles of incorporation to your financial statements. Include a resume showing your relevant business experience and your financial projections if you don’t have much of a financial history. Again, we recommend you consult SCORE or the SBA websites for more details on this.
But if you want financing, you need that business plan, so lenders can gain some insight into what you plan to do with their money.
Finally, you need to list any collateral you have. Collateral is just a fancy word for assets, and that can include your widget machine, any real estate you own, and even your inventory. If you don’t have enough collateral, you probably won’t get the loan. If that happens, you still have some options. And that’s what we are going to discuss next.
Alternative Small Business Funding Solutions
Finance your business with a credit card
This sounds like a recipe for disaster, doesn’t it? Who in their right mind would fund their business with credit cards? But there’s a method to the madness. The secret is to secure the right credit cards. There are several that offer zero-percent APR for up to 15 months, because they’re intentionally designed for small business owners with irregular cash flow. Why would these cards forgo interest payments for so long? Because they want your business when you’re no longer small. The most popular cards are American Express Plum, Discover It Business, and Capital One Spark. Obviously, there’s a dangerous side to these cards. If you don’t pay off your balances within the zero-percent time period, you’ll face steep interest rates. But if you’re looking for an easy way to generate cash flow, study this.
Lines of Credit from OnDeck and Kabbage
What the heck are OnDeck and Kabbage? They’re the cutting edge in short-term financing. These are online companies that provide short-term funding through automated lending platforms. They’re competitors in this space, which is good — because it means more choice for you. You can borrow between $2,000 and $500,000 in just one to three business days. To qualify for Kabbage, you need a minimum credit score of 560, at least be one year in business and have annual revenue of at least $50,000. For OnDeck, you need to have been in business for at least one year, earn a minimum of $100,000 in annual revenue, and have a personal credit score of 500 or better, and have had no personal bankruptcies within the past two years. While it’s easier to get a loan through these platforms than from banks, you’ll pay more for that privilege. Check out their websites and do your research before applying.
Merchant cash advance
Now we’re getting into even more dangerous territory. A merchant cash advance isn’t a loan, although it resembles one. It’s an advance on your future earnings. A lender basically gives you a sum of money and then recoups that advance by taking a percentage of your daily sales (plus, of course, steep interest). So, the amount you repay fluctuates with your daily sales, which makes planning your payments nearly impossible. You can see already there are massive downsides to this. The upside? If you can’t qualify for more traditional financing, you can often get an MCA immediately.
In this variation, you don’t repay short-term loans with a percentage of your invoicing, you actually sell your invoices. A third party, called a “factor,” buys your accounts receivable for, say, 80 percent of their value. You get immediate cash, while the factor’s profit is the other 20 percent. The downsides here are obvious, starting with the fact that you no longer control your own collections process. The factor does. Two of the more popular factors are Fundbox and BlueVine, but there are others, each with their own set of rules.
Now we’re back on more familiar territory. Most folks have heard about crowdfunding sites like GoFundMe and Kickstarter, most likely for charitable causes. But those sites are even more popular for raising equity for business ventures. There are so many to explore that it might suit your particular business, including Indiegogo and Kiva. If you have a compelling story or product, this is a low-risk way to raise money.
Finally, we end where many small business owners start. It’s common for new owners to finance their own businesses in the beginning. If their personal credit score and credit history are more established than their business’s, they can apply for a personal loan. You can often secure a better interest rate if you’ve done like we said in the beginning of this presentation: improved your personal finances so you can focus on your business. Here’s a perfect example why that’s so important. You can access additional financing for traditional risk, instead of delving into MCA and factoring.
Small Business Loan Scams: Five red flags to look out for
So far, we’ve talked about all the productive things you can do to help your business thrive. Now we’re warning you about things not to do. There are many unsavory characters out there trying to separate your small business from its capital. They’ve devised a handful of clever schemes that you need to watch out for. Luckily, knowledge is power, so here’s how to identify those schemes – and avoid them.
Advance fee scams: application fee, processing fee, one-time fee
This popular scam and is typically aimed at not only small businesses, but also individuals facing huge debts. It’s a simple premise: We’ll give your business access to low-cost loans – or we’ll personally help you settle your credit debt – and all you have to do is pay us a small fee up front. It can be called an application fee or a processing fee or even a special one-time fee. But once you pay that fee, you receive nothing. It succeeds because these scammers throw around such big numbers that it seems ludicrous they’d run off with your $100 or $500 up-front fee. But they deal in volume, so the more people they rip off quickly, the more they make. Here’s what you need to know: NO REPUTABLE LENDER charges you an upfront fee.
Peer lending scams
When you start a small business, scammers somehow find you online. You’ve probably received unsolicited emails that sound like this: “Get a low-interest rate loans for up to $100K! Low credit score and bankruptcy not a problem. All borrowers eligible. Peer loans available, apply NOW!”
Those emails – which can also be found on Facebook Messenger and sites like Reddit and Craigslist – usually explain that they’re a “peer-to-peer lending platform.” And there are some legitimate ones out there, like Lending Club and Prosper. These websites that gather thousands of small investors who can decide to buy a portion of a loan if they earn a good rate of return.
But these sites are phony, and if they don’t charge you an upfront fee, they ask you to fill out a form with all your personal information – which they’ll then use to steal your identity and run up big bills in your name. NEVER reveal personal data until you thoroughly research who’s asking for it.
Funding kit scams
Here’s another kind of email you’re likely to get. It usually goes something like this:
“You have been selected to receive an INTEREST-FREE Government Grant. This Grant Kit could put thousands of dollars in your pocket. Many grants go unclaimed every year – because most people don’t know about these programs. Don’t let this happen to you!”
Basically, this scam plays upon your suspicion that securing a business loan is so complicated, there must be a shortcut. Maybe you’ve heard the federal government is somehow involved in small business loans. So yeah, this makes sense, right? But as we said earlier, the federal government backs SBA loans but doesn’t make them. Never respond to such emails.
Here’s another email to ignore: “Starting a small business? Need a Consultant or Agent to work for YOU? We can help! Best fees in the industry!”
Again, this preys upon your fear that you’ll need to hire an expert to find you the best small business loans out there. And indeed, there are reputable loan brokers. But they seldom solicit you via email, and they never charge an upfront fee like these scammers – and of course, they’ll also require all your personal info. If you want to find a loan broker, consult your local SBA office or SCORE office for advice on how to do it the right way.
One more shady email: “We have a potential investor lined up for your business. Over $1 million of funding, in your bank account within 24 hours! No need to give up ownership! Just send in your $1,000 transaction fee!”
By now, you can recognize the variations on the theme. But this one is particularly alluring because it seems to answer all your prayers. But think it through: What investor is willing to put up their money for someone they’ve never even met? Resist the temptation and ignore these emails.
Small Business Success: Be profitable, comfortable, and knowledgeable in no time!
So that’s it. We reviewed some complicated topics and things you need to be aware to avoid falling victim of a scam.
The most important thing you need to remember is that you should treat your business’ budget and finances in general separately from your personal finances. That may not be as easy as it sounds but that should be the goal.
Setting up your records properly is sometimes the hardest part, so, if you heed this simple advice, you have the tools you need to be successful.