Search Results for: operations

Avoiding the Debt Trap: Bad Financial Habits That Can Derail a Small Business

by

Starting a business requires a substantial investment from its stakeholders. But if you don’t see quick returns on your investment, debt can accumulate, crushing your plans of a successful venture.

According to a recent survey, 34% percent of small business owners report $5,000-$15,000 in personal debt related to business, while 28% report $15,000-$30,000 in debt. While some debt is unavoidable, there are notorious debt traps that can trap new entrepreneurs.

If you’re just getting started, beware of the following:

Failure to budget.  At Magone & Company, we recommend that most business owners have two to three different budgets — an internal planned budget, an overachievement budget and a budget that considers negative outcomes. Because even if your business is generating a profit, it’s easy to lose of track of where all your funds are going.

Sloppy bookkeeping. In the early stages of a new business, it’s critical to track all expenses, sales, operating costs and taxes. You need to know where your money is going and be prepared to make changes to operations if necessary.

Not separating personal and business accounts. Comingling accounts can mean big financial trouble. Why? Because you can’t get a true snapshot of the financial health of your business. Don’t mix business with personal — especially when it comes to your finances.

Credit card rewards. In theory, a business credit card may seem like a great idea for general business expenses — like supplies, office furniture, entertaining vendors or business trips — and earning points and rewards for every dollar spent. The catch is you have to spend a lot to earn a little. If you’re carrying a balance each month, you’re also accumulating interest, which means more debt owed. If you’re going to use a business credit card to take advantage of the rewards, be sure to pay your balance in full each month.

401(k) withdrawals. Tempted to borrow from your 401(k) until you generate more revenue? Remember, this hurts your retirement savings and long-term growth potential. And if you’re under age 59 ½, you’ll also have to pay taxes on the premature distribution.

Falling for high-cost loans. Business loans can come with interest rates as low as 3% — and as high as 150%. An ethical lender will only approve a loan that’s realistic to repay, but you can get lured into a bad deal. Be sure to read the loan contract, ask about origination fees and make sure you are clear on the annual rate before committing to the debt.

 Gain control over your bottom line

Take charge of your finances now — before it’s too late. The professionals at Magone & Company can help you navigate debt traps and implement smart debt management practices. Call us today at (973) 301-2300 for a specific evaluation of your situation.

A Chapter 11 Filing Doesn’t Always Mean the End

by

In a roller-coaster economy, a struggling company might decide to seek a fresh start under Chapter 11 bankruptcy proceedings — especially if its leadership believes the business could eventually become profitable through debt relief.

Generally, filing Chapter 11 is done voluntarily by a company to protect itself from creditors. It differs from Chapter 7, which involves liquidating or selling off the assets of a business that’s closing its doors. Debts aren’t simply absolved by filing Chapter 11 — though they’re likely to be reduced or paid off over a period of years.

Instead, Chapter 11 allows the business to continue day-to-day operations, as it undergoes downsizing and liquidation. The goal of a Chapter 11 filing is to implement a more sustainable solution to pay off debts and reorganize the business so it may survive this process.

What to expect

There are five major steps involved in the Chapter 11 process:

Step 1. Once the appropriate forms are filed in court, the company is provided immediate relief — called an automatic stay — from creditors. A bankruptcy filing doesn’t always affect business operations, but it will likely influence the stock price of a public company and the borrowing costs for any business. The company continues to pay employees and provide benefits. It’s also able to keep dealing with suppliers and customers so that it may continue earning money.

Step 2. The bankruptcy court appoints a committee to ensure that creditors are dealt with fairly. Notice is provided to parties who believe they’re owed money by the company.

Step 3. The business proposes a reorganization or recapitalization plan. By law, the company has the exclusive right to propose a plan during the first 120 days of the Chapter 11 process. If the business proceeds in good faith, the period may be extended.

Step 4. Once the court collects all claims against a company, hearings are held to estimate the value of any disputed claims. And once the total value is determined, the business can establish whether its reorganization plan is viable. Sometimes, litigation over the priority or handling of creditors arises.

Step 5. A disclosure statement pertaining to all assets and liabilities is presented to the court. If the statement is approved by the court, creditors vote on a reorganization plan and the company distributes payments according to the plan.

Restoring your rep

Even though a business can overcome a Chapter 11 filing and thrive over time, its reputation with customers, suppliers and employees may take a hit. If your company is thinking about filing Chapter 11, be sure to clearly understand what’s involved and the potential impact on critical business relationships. Be sure to consult with your attorney and CPA to help ensure bankruptcy is the right move for a better future.

Don’t already have a trusted CPA working on behalf of your organization? Magone & Company has 30 years of experience assisting organizations during financial challenges. Let’s chat.

Boosting Your Working Capital: Small Steps for Big Gains

by

The COVID-19 pandemic has had a drastic impact on the economy as the gross domestic product dropped nearly 33%. For small and medium-sized businesses, it created unprecedented cash flow challenges, as many struggled to maintain a steady stream of revenue.

But now, as the pandemic continues to ease, businesses should revisit their working capital plan to bolster their cash flow for the future.

Key drivers of healthy cash flow

By understanding all the ways you can increase your organization’s working capital and improve cash flow, you can best set your business up for long-term success. The following techniques can help:

  1. Carefully manage debt. Another side effect of the pandemic? High corporate debt. You can enhance your working capital by meeting your debt obligations in a timely manner, avoiding additional interest, fees and penalties. Find out if your organization qualifies for a more favorable interest rate to settle debt faster.
  2. Receive sufficient financing. Don’t let the fear of healthy debt keep you from making smart financing Short-term business loans can help supply enough liquidity to finance current operations without excessive risk. Take the time to determine your working capital needs, as well as your forecasted needs, before selecting any financing.
  3. Issue invoices on time. Limiting the time between your operating cycle (when you begin spending money on a project) and your capital cycle (when you finally collect money for a project) can help you earn a profit quicker and improve liquidity.
  4. Make sure you’re not overspending. Examine your budget, breaking down each component to see where you’re spending and what you’re spending. Are there areas of overspending or spending unnecessarily? Are business trips essential? By curbing the extras, you can improve your working capital.
  5. Take control of your inventory. Did you know that well-managed inventory is arguably the most powerful way to drive working capital increases? Avoid stockpiling product, improve turnover cycles and reduce slow-moving inventory.
  6. Grow your sales revenue. While this one may seem obvious, think about how you can generate more sales to earn higher profits. For example, examine your profit margin to determine if your prices are up to date. And explore new marketing channels to reach more customers.

 

The lifeblood of your business

Working capital is essential to your business — especially small and medium-sized businesses that often can’t raise funds as easily as large corporations. Reach out to the CPAs at Magone & Company to learn how we can help you maintain a healthy cash flow.

Financial Check-up: Is Your Organization Fiscally Fit?

by

Comprehensive financial statements can help tell the story of your organization’s financial health. Together, a balance sheet, income statement and statement of cash flows can be powerful diagnostic tools to help evaluate its financial well-being. Moreover, by carefully analyzing them, you may be able to uncover potential money-management problems or even fraudulent activity.

Assets vs. liabilities — The balance sheet

A balance sheet provides a snapshot of a company’s financial health at a moment in time. One side shows the assets owned by a company, such as cash, accounts receivable and inventory. The other side contains liabilities or claims on the assets, including accrued expenses, accounts payable and equipment loans.

Current assets (such as receivables) mature within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as payables) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Net worth or owners’ equity is the extent to which assets exceed liabilities. Because the balance sheet must balance, assets must equal liabilities plus net worth. If the value of your company’s liabilities exceeds the value of its assets, net worth will be negative.

A focus on profits — The income statement

The income statement reports revenue, expenses and profits earned (or losses incurred) over a given period. A commonly used term when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Another important term — “net income” — describes income remaining after all expenses (including taxes) have been paid.

Sales, general and administrative expenses (SG&A) are also indicated on income statements, reflecting business functions, such as marketing, that support a company’s production of products or services. The ratio of SG&A costs to revenue tends to be relatively fixed — no matter how well your business is doing. If these costs constitute a rising percentage of revenue, business may be slowing down.

The income statement can reveal other potential problems. It may show a decline in gross profits, as expenses rise quicker than revenue. Common causes include hiring more employees than needed or doing an excessive proportion of low- or no-margin business. In today’s business environment, many companies are reporting lower gross margins due to rising labor and materials costs — unless they’ve managed to pass along these cost increases to customers through higher prices.

Cash is king — The statement of cash flows

The statement of cash flows shows all the cash coming in and out of a company. Your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt. Ideally, a company will derive enough cash from operations to cover its expenses. If not, it may need to borrow money or sell stock to survive.

The statement of cash flows shows changes in balance sheet items from one accounting period to the next. It’s organized into cash flows from three primary sources:

  1. Operations
  2. Investing activities
  3. Financing activities

To complicate matters, non-cash investing and financing transactions are reported at the bottom of the statement of cash flows. These transactions don’t involve direct cash exchanges. For example, a machine that’s purchased directly with loan proceeds would be reported here.

Although this report may seem similar to an income statement, its focus is solely on cash. A product sale might appear on the income statement, even though the customer won’t pay for it for another month. But the money from the sale won’t appear as a cash inflow until it’s collected.

To remain in business, your company must continually generate cash to pay creditors, vendors and employees, watching your statement of cash flows closely.

 Ensuring tip-top financial shape

Financial statements can be valuable for many purposes — whether you’re evaluating the financial results of your own business or one that you’re considering acquiring, lending to or investing in. An experienced professional can help you assess your company’s financial health, including potential risks and areas of improvement.

Return to the Office: Managing Employee Pushback on In-person Work

by

The pandemic fueled a massive work-from-home trend that many non-essential businesses have maintained for the past 18 months or more. But despite the current surge in COVID-19 cases, more and more employers are asking employees to return — causing a fair share of anxiety and fear, especially among the unvaccinated. As employers receive pushback from their teams, what can be done to ease employee comfort and peace of mind around colleagues, customers and clients after an extended hiatus?

A heavy-handed request?

With the FDA fully approving the vaccine beyond emergency use, employers may increasingly be making vaccination a requirement for returning to the office.

As an employer, you have options up to and including termination (in some circumstances) if employees refuse to return to the office or get vaccinated. But will on-site work directly impact or negate your success?

Here are some potential reasons to reconsider a blanket return-or-quit policy.

  • Employees may be genuinely reluctant for legitimate health reasons.
  • It may cause more stress for employees whose lives have already been turned upside down by COVID-19.
  • You risk damaging morale across the workforce.
  • You may have wrongly assessed the legal risks of doing so.
  • It might be harder than expected to recruit replacements for terminated employees.

The first step in formulating a return-to-work strategy is uncovering why your employees are reluctant to stop working from home. Consider conducting a survey, but avoid giving the impression that simply preferring to work at home is a compelling enough reason to allow it.

Coaxing tips

Reassuring employees of your commitment to maintaining a safe environment may help alleviate concerns. Here are some tips to help them get on board:

  • Give a generous heads up. Set the onsite work deadline a month or two into the future to give employees time to adjust and plan head.
  • Have a conversation. If feasible, have one-on-one conversations with employees who express worry about returning to work. They’re more likely to come around if they know you respect their concerns and want to understand them. A reasonable compromise might emerge.
  • Educate, educate, educate. Inform employees about the Centers for Disease Control and Prevention (CDC) workplace safety standards and the scientific basis for those practices, as well as your compliance practices.
  • Enact a policy phase-in period. Instead of setting an all-or-nothing date of return, allow employees to slowly acclimate. You may ask them to return for one or two days a week initially, adding more days over time.
  • Be flexible and fair. Cutting deals with individual employees may create resentment from others. While doing your best to accommodate individual needs, it’s important to ensure that your practices are reasonable for everyone.

Help from Uncle Sam

If you’re considering a mandatory vaccination policy to accompany your return-to-work policy, you may consider incentivizing hesitant employees to get their jab.

One possible solution is to offer paid time off for COVID-19 vaccine appointments. Some employers take this a step further, offering a financial bonus on top of regular pay.

A little compassion goes a long way

No matter how you approach the task at hand, be aware of the many health conditions that may make people more vulnerable to contracting or having an acute case of COVID-19. The CDC’s list includes cancer, chronic kidney disease, COPD, heart conditions, obesity, pregnancy, smoking and diabetes. And some employees with these conditions might worry about COVID-19-related health risks at the workplace, even if they’ve been vaccinated.

In all cases, be sure to review how federal, state and local statutes may impact the approaches you can take.

When Uncertainty’s the Norm, Plan for the What ifs

by

Uncontrollable factors can have a profound effect on business operations. Circumstances can change overnight, directly impacting your employees, your customers and your business decisions. When unforeseeable events occur — COVID-19, anyone? — what can you do to keep your business afloat financially and practically?

Risk or uncertainty: What’s the difference?
Business risk is when the odds of future events can be measured and factored into your plans. When you don’t know the probability that something may happen, you’re dealing with business uncertainty.

Unlike calculated risk, business uncertainly cannot be controlled, making it even harder to prepare for. For example, if a competitor sets up shop a few blocks away, do you have a strategy in place to retain your sales? If there’s another mass shutdown, can your business model adapt and carry on?

An astounding three out of every 10 U.S. small businesses report they likely won’t survive 2021 without additional government assistance — that’s nine million small businesses at risk of closing for good as a result of the pandemic. The past year has demonstrated the need for a flexible business plan that confronts all the what ifs. Forward-thinking businesses have a greater chance of growing and thriving in even the most uncertain environments.

What causes uncertainty — and what can you do about it?
Business disruptions can arise from anywhere, but they’re commonly attributed to the following:

  • Whether it’s the stomach bug making its rounds around the office or a global pandemic shutting the entire office down, unexpected illness can shake up your workforce productivity, deadlines, inventory and more.
  • Economic conditions. Sudden shifts in economic activity (good or bad) can have a huge effect on your sales, inventory and cash flow.
  • Consumer behavior. Anything that changes a customer’s needs or how they go about filling those needs can alter the way you do business.
  • From taxes to minimum wage to employee rights, the government can play a key role in who you hire, who you fire and everything in between.

While you can’t plan for everything, you can take steps to safeguard your business:

  • Strategize for various possibilities. Acknowledge the unknowns and be flexible. Think about how your business model would adapt if XYZ were to happen.
  • Develop worst-case scenarios. Face your biggest fears. How would your business work through them to come out on the other side?
  • Educate yourself on the state of the economy. The more you know about how your business can be adversely affected, the better you can brainstorm the potential risks and solutions.
  • Reevaluate your resources. Are you confident in your team, vendors and suppliers? Can your cash reserves carry you through an emergency? Build a strong defense before you actually need one.
  • Remain guided by your vision. Remember why you went into business in the first place. Ensure that your whole team’s goals and efforts are aligned to bring your organization success.

Start planning for tomorrow, today
Uncertainty affects businesses of all types and sizes. That’s why you need solid contingency plans to adapt to the changing variables. NJ CPA firm Magone & Company’s advisory services can help position your business ahead of the challenges to come. Contact us today at (973) 301-2300 to learn more.