Finances

Thinking of expanding? Not so fast

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The driving force in many expansion plans is to generate higher sales, with the hope that profits, too, will rise.

But before making moves to buy new equipment, expand your plant or implement a new business idea, you need to grasp the profit angle.

In some cases, an expansion plan boosts sales but not profits. You wind up working longer and harder for nothing. You may think, “If we lose a little bit on each deal, we can make it up on volume.” That sounds good in theory, but may prove difficult in reality. To prevent problems, here’s a step-by-step guide.

  1. Fixed and variable costs. Break down your costs as either fixed or variable. Fixed costs don’t change over any reasonable time period while variable costs are related to sales. (The more sales, the more variable costs.)
  2. Contribution margin. This is what remains from sales after you deduct the variable costs. So if your product sells for $10 and your variable costs run $8, your contribution margin is $2. From that margin, you cover fixed costs and add to your profits.
  3. Breakeven. This is the amount of dollars and time it takes the contribution margin to match fixed costs. To calculate it, divide fixed costs by contribution margin. You don’t realize a profit until the contribution margin exceeds fixed costs. Until then, you’re in the red.

Once you calculate these factors, you’re ready to analyze the impact of expansion. Let’s say your company makes Belgian chocolates and sells them in quarter-pound boxes at $10 a piece. Your variable costs are $8, giving you a contribution margin of $2 on each box to cover fixed costs and provide a profit. Your fixed costs are $100,000, so you need to sell 50,000 boxes to break even.

If you expand, and fixed costs rise to $125,000, your contribution margin stays the same. Using the breakeven formula (fixed costs divided by contribution margin), you now have to sell 12,500 more boxes, or 62,500 total.

Have your numbers calculated? It’s a good idea to talk to your accountant about how cash flow, liquidity and profitability could change, depending on business conditions. But fundamentally, a solid grasp on these factors is critical to deciding whether you’re better off keeping the status quo or charging ahead with an expansion.

Why your business absolutely needs a budget

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Most business owners view a budget with utter disdain. They’ll use any excuse to not prepare a budget. Some of the excuses I have heard over my career:

“Who has time for that?”

“Our annual earnings don’t really change from year to year.”

“Sales are flat, why bother?”

Most business owners run their business based on the business’ history and the owner’s experience. Sometimes this works well, other times not so much. Remember the credit crisis of 2008? Our business clients who weathered the storm were the ones who had transparency into their business via a budget. They could model the effect it would have on their profitability and cash flow using their existing budget and adjusting their expenses or payroll accordingly.

So, why prepare a budget? As previously discussed, transparency into the effects business conditions have on cash flow and profitability. Another reason is to plan for growth, organic or merger. Growth creates its own challenges such as the need for financing. A merger needs to be modeled to attract possible financing. Yet another reason to create a budget is to see how pricing changes affect profitability.

What is a budget?

A budget is simply your estimated income and expenses for your business year, a pro forma document, meaning you’re using your knowledge to estimate the how you will see the year.  A budget typically reflects how your company expects to spend money in the future.

Let me say it again, it is your spend, meaning you have built into the budget hiring for growth, a new or larger facility, etc.  It will change as you move through the year and must be updated. I like to update each month of the budget with actual results, so trends can be spotted and profit and cash flow projections more accurate with the known adjustments. This is especially useful when communicating with a bank or investors.

How do I prepare one?

Depending on the size of the business the budget process can begin as early as August or September. If your business has a sales team, it is imperative you start with them. Have each sales person develop their sales budget by month and by customer. Do not just accept the numbers provided challenge them based on your expectation of reality, against their previous sales and the current economic environment. This will form the foundation of the entire budget.

Next, review your historical gross margin, listen to your sales team as to pricing pressures and project the gross margin. Finally, estimate your general and administrative expenses such as administrative salaries (accounting, HR, executives) insurance, utilities, rent, travel and entertainment.

Here again, you’ll reference history and change in operations and possible hiring patterns to estimate the expenses by month.  This becomes your plan for the year and if sales are not being obtained, or margin is lower than obtained, then changes will need to be made in personnel or expenses.

Of course, if you are satisfied with the ultimate operating margin, maybe nothing needs to be changed. The important thing to remember is this will hold your employees accountable to the plan, if you hold yourself accountable to developing, monitoring and taking action against it.

Where to start? Your accountant is a great place. Don’t have one? Fix that now and call Magone & Company at (973) 301-2300.

Bracing for impact: New employment initiatives hitting NJ businesses

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New Jersey Governor Phil Murphy took office earlier this year with an ambitious agenda regarding NJ employment laws. From a minimum wage increase to paid sick leave to companies’ drug and alcohol policies, Murphy’s agenda will impact the way you run your business, one way or another.

Minimum wage increase
New Jersey’s minimum wage currently stands at $8.60 per hour. During his campaign, Murphy vowed to boost it to $15 per hour. While many legislative leaders back this change, there’s still some uncertainty regarding its scope — just teenagers, or all minimum wage workers? It’s possible we’ll see a gradual implementation rather than an abrupt rise across the board. When this becomes effective, employers in minimum wage-heavy industries — fast food, retail, maintenance and personal care, to name just a few — will need to dramatically adjust their labor cost projections.

Legalization of marijuana
Nine states have already legalized recreational marijuana, with New Jersey poised to follow suit. Employers are not obligated to accommodate its use, and employees who test positive are still subject to termination based on your company policy. However, this may change if New Jersey passes an accommodation requirement for medical marijuana usage. Companies will have to review and update current drug and alcohol policies to follow the new law.

Mandated coverage of medication-assisted opioid addiction treatment
Drug addiction is covered under the New Jersey Law Against Discrimination (NJLAD). And employers are required to provide disabled employees with reasonable accommodations. If an eligible employee requests time off for drug treatment, you’ll be required to grant them leave for treatment, regardless of how business will be affected.

Statewide paid sick leave
The governor’s statewide paid sick leave ordinance, which becomes effective in late October 2018, requires employers to grant workers one hour of paid sick leave for every 30 hours worked, with an annual cap of 40 hours. Workers are entitled to time off to care for their own or a family member’s physical or mental illness or injury; when their child’s school is closed because of a public health emergency; or to address domestic or sexual violence. Employers are now in the process of modifying their leave policies to ensure compliance. Smaller companies, unfamiliar with sick leave laws, are more likely to encounter challenges along the way.

With major policy shifts like these poised to take place, it’s time to take a top-down look at how they could affect your HR policies, labor cost projections and cross-training efforts. And don’t forget compliance — failure to meet new requirements could result in severe financial penalties as well as a reputational black eye. Embrace the challenge and you just might uncover opportunities to strengthen your organization and become more competitive.

The connection between PR & profitability: How a proactive strategy can help your bottom line

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Sometimes how leaders react during a business crisis can have more of an impact than the crisis itself.

Remember when Equifax announced that the personal information of over 143 million Americans was compromised in a huge cybersecurity breach? The company claimed they learned about the attack in July 2017, but didn’t share that information with the public until September. They caught flak for not only failing to alert customers, but for a lack transparency in general — the result of a reactive, poorly executed public relations strategy.

So why are CPAs blogging about public relations? Ask Equifax CEO Richard Smith, who stepped down after 12 years at the helm. Shares of Equifax declined more than 23%, and the company logged over $87 million in costs related to the privacy breach.

PR is too often viewed as “feel good” marketing fluff. But when bad news hits the fan, a well-crafted PR strategy can help mitigate its impact on your bottom line — very much the purview of a CFO.

Not convinced? Here are four ways that first-rate PR can help protect your reputation as well as your earnings:

1. Managing media relations during a crisis. Let’s say your company is responsible for an accident that pollutes a local waterway. Now imagine that you’re in the middle of negotiating a major deal when the news breaks. The accident can hurt your company and put the deal in jeopardy. What can you do?

A skilled PR person — whether an employee of your organization or outside counsel from an established public relations firm — knows how to mitigate the potential damage to your brand and assist your organization in properly taking responsibility in a manner that engenders trust, restores brand confidence, stems sales attrition and re-establishes good will.

The problem? Many organizations first contact a PR firm in the midst (or the immediate aftermath) of a crisis, when significant brand damage has already occurred and public trust has eroded, according to Kathleen McMorrow, principal at The Communications Optic, a strategic communications and media advisory firm based in Chatham, NJ.

“The midpoint of a crisis is certainly not the ideal time to onboard a PR firm,” says McMorrow. “A far better strategy is to have established a relationship before a problem even occurs. That way, the firm can be a true partner to your organization, performing at an optimal level to contain the damaging effect of a negative incident far better than someone who just received your panicked call and knows nothing about your company.”

2. Overseeing relationships during litigation. Some types of legal actions, like those involving insurance coverage, for example, are between companies that have ongoing, profitable business relationships. A skilled professional can help balance your lawyer’s strong advocacy on your behalf with sensitivity to the business relationships that keep your company financially healthy.

Here’s where having an established relationship with a PR pro can also pay dividends, according to McMorrow. “When your PR firm is already your trusted advisor, fully engaged with your business strategy and market position, they’ll understand the nuances of your other business relationships and will act to protect them, along with your public image.”

3. Boosting employee morale during tough times. Sometimes, reaching out to the media can help with employee morale. Here’s an example: Your company is forced to make cutbacks, and remaining employees are losing confidence in their future with the firm.

Of course, establishing or maintaining professional development or other performance incentive programs can help keep staff engaged and productive. But think how much more effective your effort would be if a PR professional helped you relay this positive story to the media. Impartial media coverage would go a long way toward reassuring current employees and helping to attract talented candidates in the future. In addition, your strategic partners and vendors might have greater confidence and enthusiasm in their dealings with your organization.

4. Presenting a consistently positive image of your company. The court of public opinion is a powerful force in today’s justice system. Crisis management strategies can be enhanced by a consistently positive image of your company.

We’ve all seen the trend toward frivolous lawsuits and noticed the skepticism toward corporations in light of well-publicized abuses by a few firms. If people see that a company is investing in the community, giving back at charitable events or providing generous volunteer opportunities for employees, they might be less likely to sue for minor injuries or infractions. At the very least, they may accept a reasonable settlement if offered.

CFOs can’t afford to ignore reputation management in today’s litigious world. Rather than viewing a strategic PR plan as fluff, you might want to huddle with your marketing team and learn about the relationships and resources they have in place to prevent bad news from turning into a bottom-line nightmare.

Sleepless in the C-suite: What’s keeping CFOs up at night?

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A recent study by Robert Half found that the financial reporting process keeps 97 percent of CFOs awake at night. What’s more, three out of four CFOs expect their stress levels will rise over the next two years.

Why the insomnia? You’ve got more on your plate than managing your company’s financials. From unrealistic business expectations to increasing workloads to lack of staff, dealing with workplace stress is all in a day’s work for today’s CFOs:

  • Data management — With constant streams of data churning out of your organization, you’re expected to make sense of it all. The pressure is on to draw meaningful insights for critical business decisions, despite the massive data overload and margin of error for misinterpretation.
  • Resource drain — Staff woes and time spent on low-value administrative tasks divert many CFOs from tackling bigger goals. Without the right systems and processes in place, it may seem impossible to operate efficiently. The logical solution may be to outsource to a team with the expertise to handle specific finance-related tasks.
  • Cybersecurity — Regardless of your role within the IT department, CFOs deal with cyber criminals who are after company funds. To prevent cyber hacks, you’re expected to implement the tightest controls and most effective anti-fraud technology. But is it enough? CFOs everywhere are wondering.

Alleviating the pressure

As a CFO, there are steps you can take to help you rest easy. With the right people, technologies and processes in place, you might actually find time to focus on C-level strategic goals.

Recruit the right team
Play an active role in hiring and building a skilled finance team. It may be time to revisit your organization’s recruiting and hiring practices, fine-tuning specific job requirements, onboarding and training for each position.

Motivate staff
According to a recent Gallup poll, just 15% of employees worldwide are engaged in their work. So reward a job well done, and watch the effect it has on employee performance. Also, meet with your team regularly and listen carefully to the issues they raise. Think of these meetings as the foundation for making process improvements across your department.

Assess technology needs
What are the skill limitations of your team members? How effective is the software that you depend on daily? What manual processes can be automated? Take the time to analyze your finance and accounting operations to determine where change is needed.

Be proactive
Planning ahead will help your team anticipate challenges that can disrupt workflow. When your team is in a better position to handle the unexpected, you’ll feel more confident and less stressed as issues come your way.

Identify where you are…and where you want to be
How will your actions today impact the cash flow outcomes tomorrow? Financial forecasting capabilities will help to ensure your company’s viability in the future while giving you a strategic edge now.

Get the company on board
When every employee can understand how their role plays into the big picture, they’ll be more committed to helping the company achieve success.

It’s time to gain control of your role — and get some sleep at night. When positive changes are made, your company and your well-being will reap the benefits.

How will federal tax law changes impact your NJ business?

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The federal Tax Cuts and Jobs Act, which represents the first major U.S. tax code overhaul in 30 years, seems to provide small businesses everywhere with a break on their taxes. For NJ business owners and managers, it’s critical to understand how the new mandates will affect your organization.

Pass-through business deduction
Pass-through companies account for 95 percent of all U.S. businesses. These entities allocate corporate income among the owners, rather than paying income taxes at the corporate level. Effective this year, pass-through companies will receive a 20 percent tax deduction. This deduction lowers a business’s taxable income by 20 percent, providing small business owners with more financial breathing room and freeing up money for hiring new workers and expanding operations.

There is one limitation: Married individuals who own service-based businesses (e.g. law firms or doctor’s offices) can only claim the deduction if their annual income is below $315,000 ($157,500 if single).

First-year bonus depreciation
This depreciation deduction is increasing from 50 to 100 percent. This allows businesses to deduct the full amount of eligible equipment and property purchases, rather than writing off a portion. Lawmakers hope this change will encourage business owners to put more money back into their companies — increasing R&D, expanding staff or branching out into new geographic markets.

Net operating loss window
Previously, net operating losses (NOL) — when a business’s tax deductions are greater than its taxable income — could be carried back for two years. Now, they can be applied for an indefinite amount of time. Net operating losses occur when a business’s tax deductions are greater than its taxable income. While this can only be applied to 80 percent of taxable income, it can help businesses to take risks and spend more money, essentially lowering the cost of failure.

Elimination of transportation fringe benefits
Businesses must now do without the transportation fringe benefits and entertainment expense deduction — tax-free employee commuter plans and reduced-rate entertainment plans. These perks can still be provided by employers, but can’t be written off as business expenses.

Lower corporate tax rate
The corporate tax rate is decreasing from 35 to 21 percent. That means corporations may be more inclined to set up shop and stay put, and less likely to move overseas. The new tax rate gives companies an opportunity to make more money, and can give the U.S. a competitive edge on a global level.

Keep in mind, this is just a general summary of new tax laws and should not be considered financial or legal advice. Be sure to consult with your CPA or tax advisor for advice specific to your business.