Where the Wheels Come Off for Small Business

Often where a small business begins to fail is when the company is actually generating a lot of income ... but that income does not translate into profit.

As a small business owner, you are expected to wear a ton of hats. No matter how big of a fan of Michael E. Gerber and The E-Myth you are, small business owners are busy – building systems, growing the business, and, of course, making the actual business work in the day-to-day.

That makes it extremely hard to understand how good or bad things really are financially. You may be coming off the best month you’ve ever had and NOT realize that you are effectively out of money – and your reaction will be something like this:

“What! My account must have been hacked or my identity stolen! Where is the money?”

All too often, the tipping point where a business begins to fail is when the company is actually generating a lot of income… but that income does not translate into profit.

Why is that?

Well, it starts with sloppy cost controls. Generally, the two biggest cost centers in a production business are labor and supply cost and when order volume climbs at an uncharted – or unforeseen rate – those costs rise. You have more people doing the work at a faster pace, so mistakes are made, driving up the supply costs. Overtime and poorly managed delivery schedules can result in the company paying more for each item they produce and those costs can quickly spiral. Coupled with inevitable backtracking that is needed to correct customer issues and all that “extra” money disappears quickly because a company cannot effectively scale their growth.

That is one scenario, but another that is just as troublesome is when a company is growing – in most cases rapidly – and is having trouble recouping their expenses. They may have taken on new contracts or clients who are slower to pay than more established customers and that can create a cash crunch at any time in the month. The result? Stalled projects that could bring in the capital needed.

Both of these have wreaked havoc on many small businesses and are big contributors to the high failure rate of new companies. It’s ironic that in an age of information, the few small facts that we actually need to be able to effectively see how healthy our business actually is can be hard to locate and require another commodity that too many business owners have little of – time.

So how can you defend against this? The first thing that any business owner must do is to have firm rules about cash management. What exactly those are can be as personal as you need them to be, but how much credit you extend clients – and when they pay – should absolutely be high on the list.

The next step is to have expert help. That does not mean a borrowed copy of QuickBooks and your brother-in-law filing the taxes. If you choose to manage with software, that’s fine, but active management is critical. Don’t manage by abdication – take a proactive role in the cash management of your company.   Just as importantly, creating and scheduling time with an expert – a CPA or bookkeeper or even utilizing one of the new “part-time” CFO’s that are to be found – just makes good financial sense.

Of course, those are just two things, but in our experience, just managing these two small parts of the overall financial health of your business can result in company-saving data being collected and used. As always, my door is open to anyone who is looking for ways to not only put more cash in their pocket, but to ensure that their company is in good financial health.

About Steve Shapiro, EA Steve Shapiro grew up in a family owned business and understands the trials and tribulations of the small business owner.  He has extensive experience in credit, planning and helping people manage debt which led him to the tax industry.

Steve’s team of EA’s have helped hundreds of delinquent taxpayers settle their problems with the IRS. Find solutions to your business and personal IRS problems. Call today for a FREE Consultation. 888.490.9744 or visit www.steveshapiroea.com.