2 Valuable Lessons Learned About Business Acquisition Loans

 

During our first talk, the gentleman made quite an impression. Not even knowing much about the business he was looking to buy, my focus was on how polished this gentleman was.

I received his call cold one day. He called to inquire about getting a loan to buy a business. This would be my first business acquisition loan ever. I wasn't completely in the dark about business acquisition loans though. I had read a few 'How to Buy a Business' books before. Also, I was knowledgeable on underwriting a business loan.

Fast forward a year and the deal turned out to be a failure and here's a few reasons why.

• Character is more than the money you have in the bank.
• The gentleman and I met to discuss the deal more. Based on his personal net worth, he was able to afford the business loan to buy the business. I had failed to analyze his ability to operate a business though. He didn't even have a business plan explaining how he would operate the business.

• Lack of due diligence
• In my haste to do this deal, I failed to encourage the gentleman to do a complete review of the business. The gentleman trusted in the previous owner's opinion. He should have asked for:
• 3 Most Recent Years of Business Tax Returns
• 3 Most Recent Years of Balance Sheets and Income Statements
• Current Business Licenses
• Customer Lists
• Accounts Receivable Days Outstanding Report as of Most Recent Month End
• Accounts Payable Days Outstanding Report as of Most Recent Month End
• List of All Business Advisors (Insurance Agent, Banker, Accountant, Attorney, Consultants)
• Deed of Trust (the previous owner owned the building)

• Use of a Business Broker
• I failed to bring in an experienced business broker on the deal. Business brokers work with sellers and represent them in a business sale. Business brokers work with both seller and buyers. They help to structure a deal that lowers downside risk.
• The business seller in this deal owned the business for close to 20 years. In a little over a year, the business failed due to mismanagement.
• I would like to think that a business broker would've set up a deal with conditions of performance for the buyer. These conditions would have lowered the downside risk for both the buyer and the seller.

Although I would go on to do several more business acquisition loans, this first one left me with a few scars. But, I learned a couple valuable lessons:

• If a deal seems too good to be true, then it's a BAD DEAL more than likely.
• Money is a great tool to have, but you better have common sense and self discipline to go with it.

Are you looking to sale or buy a small business?

Searching for advice and guidance during the due diligence phase?

Please consider us at Guiding Light CFO.

We would love the opportunity to work with you. We make sure you don't end up in a bad deal.

3 Ways Business Financial Management Consultants Keep Your Small Business From Crashing

As I sat with her, I could feel the weight of her frustration and lack of clarity. With each passing second, I wanted to leave and never look back. For one, I didn't want to have to visit and give her the news anyway. I was hoping to send a letter (yes, this was over 15 years ago and we still sent letters in mail), an email, or leave a voicemail. Anything, but having to visit and talk with her face to face.

After getting to her place of business, I delayed as much as possible. I was full of fear and anxiety. After about 10 minutes of small talk, I jumped in with both feet. I told her that her business loan was in default and non-performing. Also, if she didn't make a payment to bring the loan current by the end of business day, I'd have to send her to collections. What happened next, I couldn't prepare myself for.

Guiding Light CFO

I would have expected her to become silent or even start crying. Instead, see became angry. She began telling me what I wasn't going to do. I wasn't going to take to her house (which she pledged as collateral for the business loan). I wasn't going to shut her business down no matter how much she was behind on payments. Luckily, I had already been through enough of these meetings to where I didn't take anything she told me . More than anything, I felt helpless. I wanted to switch sides and help her rather than being on the side that I was on.

My job was managing a CDFI loan fund. We focused on making microloans to minority and women owned businesses. 75% of the loans within all the funds I managed at the time were severe late pays. This means they were in the early stages of being non performing loans.

What's the point in telling you this story?

Remember, I wanted to help rather than harm this woman-owned small business. But, due to my job at the time, my hands were completely tied. Now, after some time and life experience, I'm on the other side and helping small business owners. I help small business owners overcome difficult business situations such as:

1) Improving Cash Flow

2) Having More Cash Available in the Bank

3) Growing the Business Based on the Owner's Goals

Guiding Light CFO

I'm a small business financial management consultant with 15+ years of experience. I provide value to small business owners in 3 primary ways:

1) Help to Make Sense of the Numbers in Plain English

2) Train You to Take Control of Your Business By Knowing Your Numbers

3) Encourage Motivation and Action to Grow and Expand Your Business Based on Your Goals

What motivates me to provide this value? I'm motivated to help those small business owners that have a good business, but they need help to make it great. What's a great business, you ask? A great business is a business that accomplishes the owner's goals.

Guiding Light CFO

If Your Business is Less Than 2 Years Old With No Employees and Minimal Sales, Don't Get A Business Loan

Is Inflation Out of Control Or What? 

As I write this entry, we're on the cliff of the next economic recession. The Feds have raised the Federal Funds Rate exponentially within the past year or so, and we're beginning to feel the effects of these actions in making money more expensive to borrow. And I mean everything is costing more (gas, housing, cars, etc.). Now, let's turn our attention to small business financing (specifically start ups and early stage businesses) and see how this doesn't encourage confidence in getting a business loan. 

Now is Not The Time to Play Around With Borrowed Money

When I've had the urge to play a hand or two of Poker Texas Hold Em, I'll typically go into a hand with a predetermined amount of money that I'm ok with losing. Beyond this, I'll fold in a heart beat depending on the strength of my hand in conjunction with the calls and raises. In other words, you have to be able to know when to hold them and when to fold them (here's my shameless Kenny Rogers plug) 

Oddly enough, many small business owners don't know when to fold... I don't know... maybe it's because they're not Poker players. Here's what I mean. As a small business owner who has yet to make any real money (take the last year you earned a W2 income and double it), who hasn't hired at least one or two employees (either part time or full time), and at least earned between $100,000 to $150,000 in gross sales, then you're doing yourself REAL BAD if you obtain a business loan. Here's why: why create stress and worry for yourself about making monthly loan payments (principal and interest or even interest only) at high interest rates and you're barely holding the business together? Your time is best spent in creatively thinking and taking action of ways to earn more profit and sales with the resources you already have. 

Don't Fall For the New SBA Hype

I'm a huge fan of SBA loans for small businesses. Both the 7a and 504 programs; I think they're great and deeply needed. Within the last several months, the SBA has relaxed their lending standards for small businesses with the stated goal of increasing more loans to businesses that traditionally haven't had much access to capital. Again, I support this much needed change, but cautiously though. Business funding like most things in life typically work out well for those that have discipline and foresight in terms of managing and growing their businesses prudently and diligently. However, just as the recent PPP and EIDL fraud has shown, there are many out there that are just looking for a quick way to access money for purposes that aren't focused on managing and growing their businesses. Not here to hold anyone's hand or keep them from doing what they've already made up in their minds to do, but I offer some guidance in this regard: similar to marriage, it's easy to get in ,and hell to pay to get out. If you do decide to obtain a business loan for your business, make damn sure you've done your homework first. Ask yourself: 

• How will I pay this loan back if the business doesn't make it? 
• Am I willing to work at W2 job just to payoff this business loan? 
• Am I willing to give up whatever real estate or personal property I may have pledged to get the loan in order to pay it off? 
• Am I willing to be on the hook personally or someone I may have added to the loan as a guarantor be on the hook to paying the loan off? 
• Can the business really grow and make enough profit to pay me and my employees a livable wage while at the same time covering all other operating expenses, taxes (local, state, and federal), and loan payments? If so, how much margin for error do I really have? 

Before jumping headfirst into a business loan commitment, make sure you do the math, and make damn sure the math adds up right. 

Until next time... 

Do You Really Need Bank Financing to Start Or Grow a Small Business: Back To The Future Edition

 

As I sit here, I'm in shock and awe of how long it's been since I've updated a post on this blog... geez... 

A LOT HAS HAPPENED AND IS HAPPENING... It's a rather wet Saturday evening on a July 4th holiday weekend. Where should I begin? Sure, let's start with what I've been up to especially from a business perspective. 

For well over 10 years now, I've been operating a tax prep and advisory firm, Jericho Tax Consultants. For the most part, we service individuals and small businesses that need expert, yet affordable tax preparation and advisory services. We also provide tax resolution services at both the state and federal levels. I've been involved with the tax preparation, advisory, and resolution industry for damn near close to 20 years. I really enjoy it... weird, I know. 

For the last 5 years or so, I've also been operating a CFO advisory firm, Guiding Light Financial, Inc. We focus on providing guidance and advisory services to small business owners to help them to grow profits and more importantly cash flow. This business really gained traction during the aftermath of the CV19 pandemic due to the many small businesses that were decimated due to lockdown orders and ultimately to the change in overall business environment. It's safe to say that we're living in the new normal. If anything, this just deepened my love and passion for helping and aiding small businesses to succeed, survive, and thrive. 

Last post on this blog, I was looking to ramp up the value I could offer the small business marketplace specifically those that are having trouble obtaining bank financing to grow and expand. Well, over the years, I've shifted my philosophy in this regard. I no longer believe it's prudent for small businesses to obtain bank financing (conventional, SBA, or private lending sources) especially in the start up or early stages. I'm of the mindset now that if the business model hasn't been vetted at least a year or so from bootstrapping (i.e. self funded), then switch up and pivot. Here's why...

After experiencing the ups and downs of life (wife, kids, mortgage, etc.) as well as the fragileness of it (see 2020 and 2021... need I say more), you better make damn sure that if you obtain bank financing or some fintech lender financing to start and operate a business, you better be damn sure you're working with a viable business model (i.e. you've figured out how to offer value to the marketplace and receive a profitable return for your efforts). How do you achieve this? You bootstrap and prove out the business model on your own dime and time. If you don't have the money to take this risk (either personally or borrowing from someone which I don't recommend), then I'm sure you have the time. I do strongly agree with putting together a business plan even if it's a one page business plan (see the $100 Start Up book). Once you have your one page business plan, then it's GO TIME!!! Pick up the damn phone, send an email or two, upload a Facebook, Twitter, TikTok, or  Instagram post, or buy some Google or Facebook ads. 

Before closing, let me say that I'm not completely against obtaining bank financing for small businesses... I guess that now with the passage of time and experiencing more than a few clients have some setbacks, I'm a little more selective about it. Just as most things in life, there's a time and place for everything. 

Hope to post more regularly now (at least, once a week). 

Oh yeah, you can provide more support by doing the following: 

• Like the Guiding Light CFO Facebook page (click HERE)
• Become a Twitter follower (click HERE) 

Stay tuned and thanks for supporting and reading :-) 

How the Tennessee - Alabama Game Proves that Management Failure is Business Failure

As I continued to cringe the auto updates I was receiving on my ESPN app on the Tennessee - Alabama football, I began to think about the many readings and experiences I've had in dealing with businesses that have gone out of business. Crazy to think that a college football game can inspire such thinking, but what can I say, Tennessee hurt me deep. 

In spite of hiring a new coach a little over a couple of years ago (Coach Jeremy Pruitt) from the SEC King himself, Nick Saban, there came a time of refreshing and hope. Hey, maybe we would live up to our legacy of being in the top tier of SEC football and no longer being bottom feeders... at least I thought. After watching yesterday's beating and thinking about the why and how business's fail, something became crystal clear to me. 

The Number One Cause of Management Failure in Business

One of my favorite books, The Business Doctor by Dr. Arnold Goldstein, talks a lot about what causes businesses to fail. To me, he's the goat on this topic. Going back to the TN-Ala game, I asked myself: is it the quality of players? is it the schemes and game plan? Heck, is it the mascots? It's easy to say it's the coach or the players, but I believe it goes deeper than these things. According to Dr. AG, the number one cause of management failure in a business is the failure to have the foresight to recognize the seeds of one's own destruction and to ultimately do something about them before it's too late!!! How does this relate to the game? Well, it goes all the way back to how we did Phil Fulmer in his last few seasons as head coach. Rather than help him into making a smooth transition by identifying a successor and allowing him to groom and mold him, we just dropped him like a bad habit. Because of this, we've been on the coaching merry go round and haven't even gotten close to experiencing true TN football. 

One of the glaring voids I've noticed with many small business owners is the lack of having a succession plan in place or even an emergency plan in case something terminal or at worst fatal happens to them. We get excited about starting and operating a business, but we hardly ever consider the possibility that we may not get the chance to see the business achieve the heights that we may have experienced in our dreams. Don't wait until it's too late... start with the end in mind. Plan for the end while at the beginning: are you envisioning a sale of the business or transferring the business to an heir? Do you have the proper commercial insurance packages in place especially key person life insurance? 

 

How to Avoid Chaos as a Small Business Owner

After watching the Lakers completely destroy the Heat in Game 1 of the NBA Finals, I was laying in bed before dozing off thinking about some of the small business owners that I've worked with in the past and how I could see that there were two very distinct types of owners: doers and thinkers. Very rarely have I encountered individuals that can both do and think at high levels. Let me clean this up a bit because I don't profess to be a high functioning doer AND thinker myself. You let my wife tell you, she'd say all I do is think and don't DO ENOUGH. And yes, I'd agree with her for the most part. 

Oddly, when we're coming up in age, the difference in being a doer and thinker impacts us in a sneaky way and before you know it, you're either labeled a doer or thinker but rarely both. In the arena of being a small business owner, you will often discover that you need to be both a doer and thinker or at least have the wherewithal to grow into these skill sets if you desire to have a business worth having.   

Action With A Purpose

While playing college basketball, my coach would often tell me to practice 'at game speed'. I was like, what do you mean, Coach? It wasn't until after my playing days were over (and after 2 ruptured patella tendons!!!) that I realized the deeper meaning of Coach's encouragement: don't just practice just to practice, practice with a purpose!!! In other words, I failed to realize at the time that I was practicing with the purpose of doing my role to help the team achieve our short and long term goals. It wasn't only about me and the improvement of my game only, but ultimately it was about the bigger picture. Again, I've observed over the last 20 years how the small business owners that worked with a purpose, with a bigger picture mindset, were the ones that not only survived, but thrived.

When you first get into running a business, you have no choice but to be a doer. Things have to get done and usually, you as the owner are the only person available to do them. As your business grows though you'll begin noticing that you have to start thinking things through before just jumping in to do them. This is when strategy and planning become important (asking yourself, why am I doing what I'm doing and to what end am I doing it?) and the charge of getting things done soon follows. 

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Fighting the Good Fight as a Small Business Owner

Last evening, I was looking up YouTube videos on "Top Business Ideas Post Pandemic" and I was able to find some great info... truly material content. I've had the privilege to work with small businesses in many industries over the last 20 years, and there's a certain kind of energy I get when working with small business owners to help improve and make their business better. Well, there's no shortage of helping small business owners during this pandemic because most are suffering in some way whether that's from a disruption in sales, the need for advice on financing, or maybe even being able to help provide some strategic consulting on both short and long term business plans. 

During this time, though, I've been intrigued by the small business owner's 'WHY"... in terms of starting and operating the business in the first place. I'm sure there're a lot of small business owners that have pondered this question over the last few months. I wanted to write a quick post to help those individuals that are thinking about jumping into the small business ownership arena either willingly or even for those that have been forced due to the pandemic. I hope this guide helps in making this choice a thoughtful yet actionable one. 

Know Your Why

First things first... you have to be clear on your "WHY". Before the pandemic, most of us were looking to jump into the small business ownership arena as an option rather than being the only choice you have to feeding your family, sustaining a certain way of life, or just plain ol' survival. In spite of these different reasons for starting a business, you still have to know your WHY. What do I mean? Simply, you must have a deeper purpose other than just saying I need more more or I want to buy a shiny, new toy such as a bigger home or luxury car. You have to tap into the deeper levels of yourself and implant a purpose that transcends both time such as operating a small business for not only the well being of my family, but for future generations once I'm worm food. Or maybe even founding a business to sustain the welfare of a family member or community that suffers from mental illness ailments that render these individuals unable to care for themselves and your business provides the resources necessary to take care of these individuals. Here's the lowdown: the purpose you have for starting an operating a small business has to be BIGGER THAN YOU!!!

Who Are You Serving? 

What will keep you going once you realize that running a small business is really hard and time consuming? Or what keeps you motivated to keep pushing when you have a string of bad sales days or maybe even weeks to the point that you don't get paid let alone having to worry about paying your employees? Or how about this one: you have to have a hard conversation with your spouse or partner about not being able to make the mortgage or car payment this month because you weren't able to close enough sales or maybe even had to refund an irate customer that threatened suit because your product or service delivery did not meet their expectations? What's keeps you going during this moments of absolute horror and shame as a small business owner? Quite simply, the customer, client, member, etc. Remember, you didn't get into business to serve yourself. Now, you may have came up with your product or service because of a personal dissatisfaction, but ultimately your small business exists to serve others and to serve them well. Thus, when you do encounter a day , week, month, or hell, maybe even a year like this, get outside of your own selfishness and remember who you're serving and to what end (hint here... it has to be more than just a transaction where you do just enough to get the customer's $$$). For more insight on the selflessness of business, check out an article I wrote CLICK HERE. 

What's the Solution? 

If you don't know, now you know... you are not only in business to serve others, but you do so in a way that helps to provide a solution to a problem that your client is having. Again, in watching the YouTube video the other night, it remembered me again that successful businesses are ones that provide relevant and actual solutions to problems that people are dealing with IN REAL LIFE!!! This ain't no game out here as if you needed reminding from how the pandemic as affected and impacted small business. Excuse my language here, but YOU BEST TO BE providing solutions and answers or you're going to get cancelled by the customer. Especially with the rise in artificial intelligence and automation, you may need to revisit the perceived and actual value that your product and / or service offering(s) provide to the client. Here's a lasting thought, your small business is only as good as the solutions / answers it provides to clients in terms of making their lives more fruitful, stress free, and overall more enjoyable. 

Hope you enjoyed this post. 

Please subscribe to my blog.  

Also, get ready for the new business planning course that I'll be releasing soon. 

THANKS!!!

How Small Business Owners Should Use a Profit and Loss Report - Gross Margins

Often you hear that one of the key ways that small business owners keep 'score' of their success is to observe how much cash reserve is generated. To a certain degree, I believe this to be true, but there's a pre-step though. How does one go about creating this cash reserve from business operations. Do we just close our eyes and hope that with each sale made we are able to earn a little profit to cover other operating expenses? If you like living on the edge and dancing around the fire, then by all means, please continue to operate your small business this way. However, if you're operating a small business in order to build a valuable asset, then you must become more calculated and focused in building and growing a cash reserve from business operations. How do you go about doing this, you ask? Glad you asked because that's the topic of today's post. Let's dig in.

I'm Making Sales, But I'm Not Making Any Money???

I've seen this scene far too many times while consulting small business owners. Sales are moderate to robust, but there's hardly no money in the bank in terms of a cash reserve. Why and how did this happen? We've been talking about the importance of learning how to use the profit and loss report to actively manage your small business to become more profitable and sustainable. The section we're talking about today is understanding and putting to use the information from the gross margin section of the profit and loss report. Let's get this idea of looking at this section of the report from a 'backwards perspective' out of our thinking. Here's what I mean. Don't make the mistake of waiting to receive this report a week or month too late because by then it's far too late to do anything about it. Instead, use projections rooted and derived from previous periods to develop a forecast of this section of the profit and loss report because the very existence of your small business depends on it.

Let's Hit the Bull's Eye!!!

Gross margins quite simply let you know if you're making money over and above the cost of sales for the products and / or services that your small business markets and sales. Of course, this assumes that you've done a decent job in understanding the cost of sales for your small business. What is it that makes the gross margin section so important, though? This section of the profit and loss report earns its weight in gold when you apply a minimum standard for achievement based on industry or market norms. Here's what I mean. You don't want to shoot in the dark for setting a minimum standard for gross margins because there's no significant basis to it other than your 'wishful thinking' For example, if you're operating a restaurant, you should know on average that overall gross margins should fall no lower than 50% to 60%. From here, you can continue to get specific with various product and service offerings to really discover the gross margins for each and every offering that your small business provides. Now here come's the magic. Once you've experienced a period of operations and have a pretty good set of data to generate projections (no less than a month factoring in seasonality, if it pertains to your industry) in combination to the minimum standards based on industry or market norms, you can gain a pretty solid picture of the cash reserves you'll be able to generate for up to a month or two. Here's the other key observation of conducting this type of gross margin analysis: you'll understand that you're in control (aside from the macro market factors that you or anybody can't control) of DRIVING THE ACTIVITIES that will manifest the increase in cash reserves by MONITORING GROSS MARGINS. Don't you see it now? By taking an active approach to managing and monitoring the gross margin section of the profit and loss report, you are able to drive both the sales and cost of sales sections with a eagle's eye approach. Remember, the devil is always in the details my friend.

I hope that this series on using a profit and loss report to help your small business become more profitable and sustainable has been more than helpful because we're pushing on to the next section, putting to use the information found in the operating expenses of the profit and loss report. Till then, stay tuned... 

How Small Business Owners Should Use a Profit and Loss Report - Cost of Sales

We Made A Sale... That's A Good Thing, Right? 

Yes... and no. In continuing our conversation on how small business owners should use the profit and loss report as a key tool for operating their business, we're talking about the cost of sales section today. Sometimes, this section of the report is called the Cost of Goods Sold. Not to get too technical with the accounting terms here, but there are several ways to value the cost of what a business sells. Here's the important take away for this section of the profit and loss report: are you making a profitable (and hopefully sustainable) margin on the products and / or services you are selling? How do you know if you are or not? Remember, business's live or die on margin. 

What's All This Talk About Margin? 

By now you ought to know it doesn't mean a whole lot just to make a sale. Don't get me wrong; selling is a vital foundation of building and growing a great business, but it doesn't mean a whole lot when you're selling at a loss. In order for the sale to mean something, it has to come at a profit meaning that it has to cover its own cost in addition to leaving a cushion or margin for covering other expenses, growing a reserve for reinvestment, or at least a modest return on the invested capital of the owner(s) and / or investors. For example, when consulting restaurants, I've noticed that food costs (which are the primary costs in operating a restaurant) are typically marked up by a certain amount depending on the section of the menu the food item is found. Here's the key difference between a restaurant that thrives and the one that dies: thriving restaurants know their margins intimately incorporating this knowledge into their advertising and marketing plans while dying ones only guess at it. This key in understanding and knowing margins applies to every business no matter the industry. If you don't know your margins, you're doomed to fail BIG!!!

So, How Do You I Use the Cost of Sales Section to Operate My Business More Efficiently 

Similar to the Sales section of the profit and loss report, you have to ask several questions when observing the detail of the cost of sales section. First, let's start with the total amount reported. It's not enough to know the total amount sold for the period whether it's a day, week, month, quarter, or year. You need to know specifically what products and / or services sold and from whom or where these products and / or services were purchased? Were they made internally or externally? At what degree were they made internally or externally? Were purchase discounts given or earned and if so, why and how? Maybe not available on this section of the profit and loss report, but you could investigate a little deeper and be aware of the methods or processes of how the business goes about purchasing the products and / or services it sells. Ultimately, whenever you're analyzing the cost of sales section of the profit and loss report, you are conducting a cost analysis to ensure the business isn't losing any unnecessary money from having loose controls and a lack of monitoring just because hey, we're making sales, right? 

For our next post, we'll talk about gross margins and why when used in comparison to previous periods and even budget plans, can become a great indicator of your small business's future profitability and sustainability. Stay tuned... 

How Small Business Owners Should Use a Profit and Loss Report

Work Smarter... Not Harder

During my time in consulting with small businesses, I've observed that many very rarely use the information available to them by way of a profit and loss report. Often, these owners are too busy looking after employees or contractors; taking care of clients or customers; or taking time to produce products and / or services for delivery. Often, they are working just to survive. It's the American Way, right? An honest day's work for an honest day's pay. I still believe there's some merit to this blue collar working philosophy, but it largely fails to help the small business owner progress in achieving the ultimate goal of sustainable profits and growing cash reserves that are unrestricted. What's the one management tool needed to help these small business owners achieve these profits that lead to robust cash reserves? It's putting to use the information available in the profit and loss report to operate the business in the most efficient and focused manner possible But, how does one go about doing this?

Nothing Happens Until a Sale is Made

In learning to put to use the profit and loss report, the most important piece of information available are the sales numbers. When looking at a profit and loss report, the sales numbers are listed first at the top of the report. The sales section of the report shows how much product and / or services has been sold over a certain period of time such as a day, week, month, quarter, or year in a dollar amount. Although this dollar figure is important, it doesn't help you unless you understand the activities that are driving this amount. The more detailed the sales section of the report, the better use to the small business owner it is. For example, for a weekly profit and loss report, it's not enough to just notice that I've sold $10,000 worth of products or services. I need to know how this happened such as what product and / or service sold and how much of what specific product or service sold? At what price point did these sales occur? When did these sales occur? How was payment received for these sales such as cash or credit? Were there discounts and other allowances made in order to motivate these sales? Were there any refunds given or returns made? 

As you can see, by having the proper level of detail from the sales section on the profit and loss report, you are able to see without seeing the activity that's driving sales in the business which is quite important because without sales there's no business. Also, by asking these questions about the sales section, you are able to concentrate your efforts on areas that need your attention such as investing time and resources in product and / or service development, restructuring pricing and offers based on customer's perceived value, increasing time and resources in marketing and advertising, hiring outside or inside sales help, looking for patterns or oddities especially when comparing to budgeted amounts, etc. Now, we're getting into the use of the profit and loss report as a real life management tool for operating the business and not just a do nothing report that's given to a banker or investor when money is needed or the tax authorities when you're audited or assessed a tax. 

Next post, we'll talk about the cost of sales section of the profit and loss report. Stay tuned... 

Why Profit and Loss Reports Are A Small Business Owners Best Tool In Running A Business

A little over six months ago, I attempted to record a webinar series called, 'Small Business Financial Literacy 101' and it was an epic fail. Don't get me wrong, I was rather encouraged that I had the wherewithal to discipline myself to screen record 3 videos and upload them to my LinkedIn page. Damn proud because I had been thinking about doing it for AT LEAST 2 YEARS. Yep... procrastination is a mother for sure. The reason I considered it an epic fail is that the response I expected did not happen.... and what response was that you ask? I wasn't looking to gain numerous likes or even shares; my aim was to connect to those small business owners that struggle to understand the operations of their business from a numbers perspective.

Seeing the Unseen

When I began working with small businesses in the early 2000's, I was trained in dealing with them from an accounting and financing book perspective. I hadn't operated a small business let alone help manage one. I only saw and understood small business from financial statements and annual reports. It wasn't until I got fired from my job at the bank in 2008 and began working for and consulting small businesses that I made the connection between numbers and real life activity. That's when I truly knew how valuable a small business financial reports are. Even if you're operating a small business with minimum staff (i.e. one or two people) and making less than $125,000 in sales per year, listen to me, you still need to utilize a profit and loss report, a balance sheet, and a cash flow statement. Getting by on just relying on bank statements especially when you're still using a personal checking account to run your business transactions through is a huge mistake from a planning, tax, and operations perspective. 

Do You Know Where You're Going and Do You Know Where You've Been?

This is the essence of having and using a profit and loss report to help in operating your small business. It helps you to make sense of where you've been and also provides guidance on how to get where you want to go. How, you ask? Profit and loss reports capture the important activities of your business in three buckets: Sales, Costs of Sales, and Operating Costs. In each one of these buckets, small business owners are given information that captures the essence of the business's activity over the last day, week, month, quarter, or year depending on the accounting system used. It's not just enough to be able to provide a profit and loss report to your bank or even the IRS when required, You need to learn to use the profit and loss report to help in managing and operating your small business to minimize the risk of failure and increase the chance of survival and profitability. 

The Question Every Small Business Owner Need to Ask About the PPP Relief Funds

It's Deja Vu...

It's gotten to the point now where I don't even want to open up my Google Business News feed anymore. Usually, I like to catch up first thing in the morning on all the latest business news stories both nationally and internationally before I really get into the day. Well, it's been pretty much the same story for the past month or so. I guess I know what it feels like to be Bill Murray in the movie Groundhog Day...

Not in anyway attempting to be insensitive or callous to the plight of small business owners far and wide during this Covid 19 pandemic. True, I get it. We're in unprecedented times for sure. Things are happening that no one has every seen or experienced before unless you're a time traveler of course. Ok, I digress. Seriously, though, if I had a dollar for every article on my feed that states how small business owners were screwed over the first tranche of the PPP SBA relief funds, I'd be a pretty wealthy guy. Where am I going with this, you ask? Well, I'm glad you asked. Small business owners need to ask themselves this one question about their frustrations in not getting in on the first round of the PPP funds:

Were You Receiving Help From Your Bank Before the Covid 19 Outbreak? 

Relationship First...

Let's think about this question for a minute? First, let's set the context? Around mid March 2020, the U.S. shut down literally due to the projections and conversations about the coronavirus and it's pending impact and devastation. Again, I'm not making light of any of this. What happened next was something quite unthinkable. The U.S. government along with state and local governments began shutting down 'non essential' businesses which included a large portion of small businesses that employ a vast number of the U.S. population. What's the engine that keeps small business operational and in accounting verbiage a 'going concern'? It's money... and where does money come from? Here's a hint? It doesn't grow on trees. No, money comes from people (consumers) and other small businesses that spend money in order to make money. Plain and simple, right? Let's go back to our question for a moment and let me come from another angle. I wonder how many of the small businesses that are frustrated about the first round of the PPP SBA relief funds either had an existing credit relationship with their bank let alone had the wherewithal to entertain having a credit relationship. Not trying to be ugly here in any shape, form, or fashion. Logical and objective in a compassionate and empathetic approach. 

Here's the reality: even with the pending second round of PPP SBA relief funds coming, I don't foresee many small businesses being able to obtain these funds and there's a good reason for this. The banks are lending their own money with a guarantee from the SBA in the event of default. In other words, the banks are in this to make money (i.e. earn interest even if it's fixed at 1% although they are earning fees for lending out these funds as well), not lose it. Unless you have an existing credit relationship with a bank that's satisfactory, don't get your hopes up. Not being a downer here; naturally, I'm a pretty optimistic person, but I perceive what's about to go down and it's not going to be good. 

Are You Looking For Another Small Business Lending Option? 

Despite this reality, there are still available small business funding sources in the market that small business owners aren't aware of. For the PPP funds, I didn't even begin to talk about the restrictions and guidelines that you have to abide by in order to ensure there's no recapture of the funds or even worse penalties assessed for improper use of the funds. One specific source of small business funding available is from Innovative Capital Strategies through their Capital Ready Package program. Through this program, small businesses are guaranteed a minimum of $100,000 with no minimum personal credit score or minimum time in business. Prior to doing my homework on this firm, I thought it was just another fly by night hoax, but I was wrong. Again, as a realistic and viable alternative to waiting around to see if you and your small business will get in on the second round of the PPP SBA relief funds, hedge your bets and look into obtaining funds for your small business to help you to not only weather the current storm we're in, but to also position yourself for max market growth. If your small business is in need of funding, you need to check out the Innovative Capital Strategies website. 

Small Business Financial Literacy 101 - Sales

Why are Business Financial Models Important for Small Business Owners

Why Are Business Financial Models Important?

Significant Pain Points of Not Having and Comprehending the Business Financial Model

• Lack of Direction
• Sales and Marketing Efforts are Not Fully Maximized
• Business Owners / Principals Have No Focus on Building or Extracting Wealth for Retirement or Family Estate

Benefits of Having A Business Financial Model

• Yields a Logical Thought Process for the Business
• Provides a Comprehensive Model for Planning and Executing the Operational and Financial Components of the Business
• Gives Investors and Bankers a Way to Quickly Evaluate and Assess the Value of the Business

What is A Business Model? Laying the Ground Work...

Business Model Definition - "A business model (also called a business design) is the instrument by which a business intends to generate revenue and profits. It is a summary of how a company means to serve it employees and customers, and involves both strategy (what a business intends to do) as well as implementation (how the business will carry out its plans)" Source: Wikipedia


Business Financial Model Definition - "Financial models are not about absolute values; they are about relationships. A good financial model demonstrates the relationships and the business tradeoffs that compose the profitability potential of the business idea. If you understand the relationships, the drivers of revenue, drivers of cost, and the critical success factors, you understand the core of the business." Source: Pro Excel Financial Modeling by Tom Y. Sawyer


Major Components of a Business Financial Model

• The Staffing Model
• Sales and Revenue Model
• Cost of Goods Sold and Inventory Model
• Cost of Sales and Marketing Model
• Operating and Capital Expenditures Model
• Statements of Profit and Loss and Cash Flow

Who Needs A Business Financial Model? 

Start up and early stage entrepreneurs and business owners (1 to 5 years of operations) use Business Financial Models as a tool to create a dynamic business; it is a building block that leads him or her to a strong, profitable business.