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Not Just Numbers
Lynch pays as much attention to credit terms and inventory management, however, as to selling bikes. "We have excellent credit with suppliers," he says, noting that Action uses creditors' discounts as one way to manage cash flow. When cash is available, Lynch pays early to get the discount; if cash is tight, he takes full advantage of the creditors' grace period for payment.
That's just one example of Lynch's concentration on the financial nuts-and-bolts, a focus that has helped his business generate $500,000 in sales and the financial resources to buy a larger store.
Lynch relies on his accountant for the formal preparation of Action's financial statements, but with the growing popularity of computerized accounting systems, small businesses often can generate financial information on their own. Frequently, however, business owners know little about interpreting financial data and what red flags to look for in documents. Quips James Wessman, a certified public accountant with Thomas Craig & Company in Tampa, "There's a reason why accountants exist."
Indeed, most small-business owners can't get along without an accountant or CPA. With some basic accounting knowledge, however, an owner can improve financial decision-making and spot problems before they become too big to correct.
Analyzing Financial Statements
Accountants recommend small businesses prepare and review financial statements - a balance sheet, income statement and statement of cash flows - monthly, quarterly or at least semi-annually.
Balance sheets give business owners a snapshot of assets, liabilities and owner's equity for a given date, usually the last day of the month or quarter.
Income statements, often called profit and loss statements, provide a summary of revenues, costs of goods sold and expenses over an entire accounting period, such as a month or quarter.
Statement of cash flows shows cash going in and out of the business from operating activities, investing and financing.
With this information, a business owner can answer some important questions.
Can I pay my bills? Using balance-sheet data, an owner can calculate the "current ratio," a measure of the business' ability to meet short-term cash needs. "That, I can guarantee, is the ratio the bankers look at first," says Robert R. Harris, managing director with Berger Harris Toombs Elam & McAlpin in Vero Beach.
Current assets, such as cash, accounts receivable and inventory, are divided by current liabilities, such as accounts payable and short-term notes. The resulting ratio should be above 1, preferably in the 1.5 or better range. If the number is less than 1, it means that if revenues slowed, it would be hard for the business to pay short-term debts.
Are customers paying their bills? An owner should analyze the business' cash position by looking at cash compared to accounts receivable and accounts payable. "Watch the accounts receivable to see if the cash is going down," says Harris.
Businesses must know not only what their customers buy, but also how they pay. Wessman, the Tampa CPA, recommends making an "aging report," classifying receivables by the date of sale. In addition, the business should have a formal collections policy for past due accounts. He adds, "It's the squeaky wheel that collects."
"Every day we pull our receivables report," says Joe Webb, who with his wife, Karen, runs Formsystems Inc. in Pensacola. Webb uses QuickBooks Pro accounting software to keep track of customer payments. "Most pay within 20 days," he says, but he adds "Some companies take as much as 60 days."
Am I using credit wisely? Look at the relationship between cash and accounts payable. Business owners who pay bills as soon as they get them may be giving up interest income or just the availability of ready cash. Just as bike shop owner Lynch juggles his cash position by deciding whether to take the discount or pass it up, business owners should take advantage of any opportunity to make or save a little extra money. "Waiting until just a day or two before the discount period is about to elapse is generally good for the business," says Jeffry I. Gillman, a CPA with Gillman & Shapiro in South Miami, adding that banks often offer an overnight sweep into an investment account that can generate extra interest income.
Examine the balance sheet's short-term and long-term liabilities section to gauge whether the business is using credit appropriately when purchasing items. A truism of business or personal financial management is that long-term assets, such as equipment or real estate, generally should be financed with long-term borrowing.
Are my expenses in line with revenues? From the income statement, a business owner can calculate specific expenses, such as advertising and payroll, as a percent of sales and compare them to industry averages. John Schaefer, general manager of Coral Gables Lincoln Mercury, for example, compares gross sales and profit percentages with National Automobile Dealers Association statistics to track how well he's doing compared to the industry as a whole.
Whether a business prepares its own financial statements or relies on an accountant to do the work, the documents' numbers will give business owners insights they shouldn't ignore.
TAXES
A Break For Home Businesses
April 15 is a little less painful for home-based business owners who maximize business income by deducting qualified home and office expenses on their individual tax returns. The Florida Institute of Certified Public Accountants (FICPA) provides some details.
Automobiles. Deductions of 30 cents per mile plus parking fees and tolls may be taken for business purposes. Alternatively, the actual costs of gas, oil, tolls, parking, depreciation and maintenance expenses may be deducted. If an auto is leased, the actual costs of gas, oil, tolls, parking, maintenance and lease payments attributable to business usage may be deducted. The standard 30-cent-per-mile deduction doesn't apply to leased vehicles.
Equipment Costs. A business may deduct up to $17,500 for equipment (not including automobiles) in the year it is put in service, rather than depreciating the cost over a period of years. If equipment is leased, and it is used strictly for business purposes, virtually the entire leasing expense generally may be deducted.
Meals and Entertainment. If a business discussion with a client, customer or employee takes place immediately before, during or after a meal or entertainment, 50% of the reasonable expense can be deducted.
Home Office. When part of a residence is used solely for operating a business or meeting with customers, clients or patients, on a regular basis, the costs of operating and maintaining that part of the home may be deducted. It requires filing IRS Form 8829 - "Expenses for Business Use of Your Home."
Small Business Accounting Software
For many small businesses, computer programs have revolutionized how they track sales, pay bills, generate payroll and produce financial statements. The leader is Intuit's QuickBooks, which claims a two-thirds share of the small-business accounting software market. Programs described below are widely available at computer retail stores, through mail order or directly from the companies.
DacEasy (1-800-322-3279)
Accounting and Payroll 95 (For Windows 95), $149.95;
Instant Accounting for Windows, $49.95;
Accounting for DOS, Version 6, $249.95.
Comments: Windows 95 version includes check writing, accounts receivable, accounts payable, general ledger, fixed asset accounting, payroll, inventory management, mail-merge function and customer tracking, and customized reports; for DOS version, modules for payroll, point-of-sale tracking, order entry, job costing, estimating and executive information system (for presentation graphics) are sold separately; Instant Accounting includes check writing, invoicing, customer tracking and reports.
M.Y.O.B. (1-800-322-6962)
Accounting Version 6.0 for Windows, $79.95,
with payroll option, $124.95;
Accounting Version 6.0 for MacOS, $89.95,
with payroll option $139.95.
Comments: Designed for businesses under $5 million in annual revenues. Includes general ledger, checkbook, sales, purchasing, inventory, job management, customized reports and card file functions. Optional payroll function available. CD-ROM version due this fall. Accounting knowledge not needed.
Peachtree Software (1-800-247-3224)
Accounting for Windows/CD-ROM for Windows, Release 3.5, $99;
Accounting for Macintosh, Release 2.5, $99;
Complete Accounting for DOS, Version 9, $189;
First Accounting, Release 2.0, $49.
Comments: Includes general ledger, sales and receivables tracking function, accounts payable, inventory tracking, job/project tracking, payroll, account reconciliation, customized reports and forms. DOS version includes job costing and fixed asset accounting. Peachtree First doesn't include advanced payroll functions.
QuickBooks (1-800-624-8742)
4.0 for Windows, $99;
4.0 CD-ROM for Windows, $129;
4.0 for Macintosh, $119;
QuickBooks Pro 4.0 for Windows/CD-ROM, $189;
QuickBooks Pro 4.0 for Macintosh, $189.
Comments: Includes check writing, payroll, accounts receivable, accounts payable, inventory and purchase order tracking, Rolodex and mail-merge function to keep track of customers, customized reports and built-in Internet access. CD-ROM version includes business and legal articles and a 1996 ZIP code finder. QuickBooks Pro has job costing, time tracking and estimating. Accounting knowledge not needed.
FINANCING
Factoring In The '90s
Ready access to cash comes with a high price tag.
"If you generate invoices, you can sell receivables," says Deborah Bracknell, executive director of the Orlando-based National Association of Factoring Professionals (NAFP). For small businesses that want access to cash within 24 to 48 hours and none of the hassles of collecting from customers, the answer may be "factoring."
Factoring occurs when business owners sell accounts receivable at a discount to a "factor," an investment company frequently operated as a bank subsidiary. Traditionally used by large companies in the garment, transportation and furniture industries, factoring today is available to businesses that generate as little as $20,000 a month in invoices. Although factoring has a reputation as a financing device used by companies near bankruptcy, it often is used today by businesses that have difficulty qualifying for bank loans. An estimated $65 billion in receivables is factored annually, according to NAFP.
Immediate access to cash doesn't come cheap, of course. In Florida, factors' fees average 6% to 10% of the invoice's value, according to Bracknell. Business owners receive an advance of 70% to 75% against the invoice and once it is paid, the owner gets the balance, less the discount for the factor's fee.
For small businesses, the most common form of factoring is "non-recourse," in which the factor buys the invoice and owns it, whether it is collectible or not. Alternatively, "recourse" factoring allows the factor to return unpaid invoices to the business owner, who must pay the factor interest on the cash advanced.
"I've factored with two different companies," says Alan Freidel, president of Juvenile Products Corp. in Miami. "One was very good. One was not so wonderful and it was a nightmare." With the first company, most invoices were sold to the factor on a non-recourse basis and the factor didn't hesitate to go after accounts that didn't pay up. It was different with the second factor. "They were reluctant to take some borderline accounts," says Freidel, adding that many more invoices had to be sold on a recourse basis. Freidel doesn't factor any more. "I'm better able to finance it myself now."
Indeed, it's common for small to mid-sized businesses to use factoring for six months or a year to get established. Says Bracknell, "It's a bridge to becoming bankable."
