Helping Business Owners Understand Their Financial Statements

There is no doubt that the current recession is as long and as hard as we’ve seen for many years. And hopefully we will not get to see again for quite some time. If you are a business owner whose business is not making a profit and you don’t have the capital to invest and keep the business going, you may be wondering about your options.

The first option is to take a real assessment of where you are at. One of the best ways of doing this is to talk with your accountant. Make sure your accountant is not simply filing your tax return to meet compliance but actually helps you look behind the numbers and understand how your business is performing.

What do you need to know?

Most business owners understand their gross sales. Some are adept at using this number to explain the success of their business. For example, have you spoken to a business owner that said “Sales are up 20% on this time last year.” They say this with great pride but that doesn’t tell the full story.

Some business owners can tell you the net profit of the business. Net profit is simply what they pay taxes on or gross sales less cost of goods less expenses. Some business owners like to say “Our bottom line was up 10% compared to last year.” This is good news but that doesn’t tell the full story.

A few business owners can get into their financial statements and understand what’s happening in their business. For this business owner it’s the Profit and Loss Statement. If they prepare this document themselves they know what’s going on, but most business owners have a resource such as a family member or at least a book-keeper to handle these details for them. However, that leads to a couple of points. The first point is that theft in small businesses, due to the recession, is at its highest in many years as the person handling the books is able to cook the books by stealing funds which the owner doesn’t know about. They can steal funds through a false invoice or buying certain goods, have the business pay for them and then take the goods back and get a refund and keep the money. There are many creative ways for someone to find money if they want to. So how does a business owner protect themselves? One of the ways is for the business owner to do a line by line check of the profit and loss statement at least on a monthly basis. Any item that appears and the owner can’t remember what the expense was for can be challenged to find an acceptable answer. It can then be wise to do random tests to make sure all expenses can be verified such as checking to make sure that new computer the sales person needed is still around or that special order of inventory was needed and did arrive etc. Testing the monthly profit and loss followed up with random checks creates good discipline and helps the owner stay on top of the critical aspect of the business but this doesn’t tell the full story of the financial health of the business.

The health of the business is really revealed by working with the Profit and Loss Statement and the owner that can read and understand the Balance Sheet. The balance sheet is the place that explains how the money coming into and going out of the business was used. It shows what’s owed and it shows what the business owns (or the assets of the business). It reveals the owner draw and investments and basic information about the Accounts Receivables and Accounts Payable and how they are tracking. If Accounts Receivables are growing then Accounts Payable may also grow but they should keep their ratio’s consistent.

If a business owner can understand a healthy balance sheet they are well on their way to maintaining and growing a successful business. Understanding a balance sheet doesn’t mean you need to become a CPA. It means you need to ask questions until you “get it.” Most business owners shy away from understanding the balance sheet as it’s too confusing. However, if you ask the same question month after month it will eventually makes sense.

Andrew is a 5-time business owner that helps entrepreneurs exit or enter business ownership. His services include helping owners sell and/or buyers purchase an existing business or consult on purchasing a franchise. He also provides certified machinery and equipment appraisals and business valuations.

The Difference Between Small Business Planning and a Business Plan

So, what’s your plan look like? You know, the plan for your business for the year? The quarter? The month? You do have one right? How will you know if you are successful?

Don’t panic. If you are like the majority of small business owners, you are not very good at planning. Not that you couldn’t be, you have just never taken the time to create a plan for your business. In fact, you wince at the thought of sitting down and trying to create a business plan. But that is where the problem is. There is a major difference between writing a business plan, and creating a simple plan for your business.

The traditional business plan is good for starting a complex business, or getting funding for a rapidly growing company, but for small and medium sized businesses, what they need is a simple business plan to run their business. A strategic, living document about what they expect to happen in the coming months or years, where they expect their business to go, and how they intend to get there.

Traditional business plans are all about theory, and possibilities and the unknown. They want you to spell out what you do know, so you can make a determination if you should start the business, or if the bank should give you the loan. But for an existing small business trying to make this year better than last year, all the while focusing on the actual running of the business, who has time to really think about all of the minutia that goes into a traditional business plan.

What most small businesses need when it comes to planning is a simple business plan that focuses on what they need to do now. It does not have to be a large, multi-page binder with appendices and graphs and charts, it can be a single page document that is all about the here and now.

There are some primary elements that your simple business plan should have. It should have a vision statement that describes what the business should look like, what it does and who its customers are or what market it serves. It should have detailed goals and objectives, or measurables, to help you measure the progress and success (or lack of…) of the business. It should also have a section on your strategies or tactics that you will employ, and it should also have a section that covers what the immediate projects or action plans are.

All of these elements should fit onto a single page. And the best part of a simple business plan like this one is that it can always be kept up to date. The plan should be used to run your business and when changes happen, and you know they will, update the plan to reflect those changes.

There is a difference between a traditional business plan and planning for your business. Use a simple business plan, on a single page to run your business, and see how much more focused your business can be.

Should You Choose a Multiple Level Marketing Home Business

As you are searching for a home based business, you will find multiple level marketing is a common platform for many of these business opportunities. This may cause you some concerns as this business model is often greatly misunderstood. It is my hope to show you some of the reasons you may want to consider MLM business model, so that you can make an informed decision.

The multi level marketing business model has been around for the past 60+ years. Many household names use this business structure for the retail distribution of their products. Some of these names include: Avon, Mary Kay, Tupperware, Fuller Brush and Watkins Products to name a few. At its core, MLM is a direct selling approach to retail sales. Direct selling simply means that sales are made outside of a traditional retail store setting. Sales are generally accomplished through independent business owners called distributors, representatives or consultants. This business structure provide an incredible opportunity for an individual looking to build a profitable home based business.

The first advantage of a multiple level marketing business is the low start up cost. When you join as an MLM distributor, you are essentially starting a “micro-franchise.” Most network marketing companies offer a start up cost of less than $200 and some are even free to join. When you consider that most traditional business franchises begin at $250,000 and go up from there, the low start up of a multi level marketing business becomes very attractive.

The next advantage of a multi level marketing business is the low cost of operation that is generally associated with this business model. In most network marketing businesses there are no inventory requirements. Product is shipped directly to the consumer from the manufacturer. Additionally, most companies are set up to take customer orders online, directly from the customer. These orders are placed through a coded website that allows the sale to be tracked to an individual distributor. This means that all billing and cash handling is performed by the company and the bookkeeping and accounting burden is removed from the small business owner. At the end of the sales cycle, which is typically on a monthly basis, a commission check is issued to the distributor for the previous month’s sales.

Another advantage of the the network marketing business model is the ability to build a sales team of your own. In a multiple level marketing company, you are encouraged to recruit and train other distributors, who then become a part of your sales force. You are compensated through overrides and bonuses on the sales production of your team members. A tiered compensation approach is common in most sales oriented businesses. The difference in MLM is the depth from which you are allowed to include sales production and draw overrides. Often times the depth of override compensation is allowed through 7 or 8 generational levels of distributors. The leverage on the production of others creates high earnings potential for the distributor who takes their business seriously.

These are just a few advantages found in an MLM business, but it is also necessary to address the primary drawback as well. A multi level marketing business is a business and it must be treated as such. When a home business owner doesn’t treat their business correctly, they will be very disappointed. Because of the low entry threshold, many people enter their MLM businesses with a hobbyist mentality. They lack the commitment that is necessary to make their business successful. If a home business owner is going to succeed they must make a commitment to invest time, energy and resources into their business, as would be the case with any other model of business. If you are unwilling to make a long term commitment to your network marketing business, you should not consider undertaking a home based business of this type.