Why the Balance Sheet Should Matter to Small Business

Small Business Consultant with Balance Sheet and Paper Airplane

I started my career in accounting and finance in 1986 working for Peat Marwick Mitchell, a Big 8 Accounting firm, as an auditor. In that role, we were taught to examine the balance sheet accounts in detail and perform spot checks of the Income Statement accounts.

Why would you do this?

The answer is simple. Accounting is a process of recording your business transactions by creating debits and credits in your “books.” Every journal entry must balance or have the same value of debits and credits. If you prove out that the balance sheet accounts are correct, the Income Statement must be correct in total with, at most, a reclassification that might need to be made between revenue and expense accounts.

How to Use the Balance Sheet

As a small business financial consultant working with owners over the years, I found that a majority of them don’t pay any attention to their balance sheet and really only care about revenue and profits.

Putting myself in their shoes, I can understand why.

You are in business to make a profit, right? And the profit comes from generating more revenue than expenses. So, the logic makes sense. But I can tell you that I find countless issues when looking at the balance sheet.

Here’s how I do it.

If I receive an owners balance sheet for 2 years, I like to go to the liability section of the balance sheet to look for changes in the accrued liability accounts — accrued payroll, payroll withholdings, payroll tax liabilities etc. In many instances, I will see the same balance being carried from period to period or a balance that continues to grow and never become smaller. When I see that, I know there is an issue.

Depending upon the payroll cycle, these accounts should increase after processing a payroll then when the liability is funded, preferably within a few days, the liability is reduced by the payment to the various vendor — retirement account, tax agency etc. If these accounts are not showing the proper pattern of debits and credits, you can bet there is a problem that needs further investigation.

Accounts Payable and Accounts Receivable

I also like to look at the accounts receivable detail and the accounts payable detail. As a small business financial consultant, I like to ask myself some questions:

  • Are we collecting our money in a reasonable fashion?
  • Are we paying our vendors on time or are we paying them too soon?

Looking at this detail will give you a great idea of the cash flow cycle of the business.

Are we using a business credit card? If no, why not? All business owners should take advantage of reward credit cards that provide up to 2% cash back or miles/points for your purchases. It doesn’t take too long to accumulate $100,000 in charges which can provide for a free roundtrip flight or $2,000 in cashback rewards!

I once worked with a not so small business owner who had $50,000 in monthly expenses that he could have been putting on a rewards credit card and receiving $1,000 in monthly cash rewards!

Reviewing the Income Statement

I don’t ignore the Income Statement by any means, especially as a small business financial consultant. I will perform an analysis of gross margin (in total and by product line) and will review the various accounts to determine if they appear reasonable as a proportion of revenue for the company.

We may uncover some inefficiencies during this process, but it is less likely to uncover errors in the Income Statement (although it does happen). Most people know where to record revenue and understand where to record wages or rent paid to a landlord. But, more often than not, knowing exactly how to record payroll withholdings or how to record customer deposits received in advance can be difficult for a small business owner.

Do you think you may have errors in your financial statements? Want to make sure that your financials are in good shape before pursuing a Line of Credit or a business loan to expand your business?

A small business financial consultant can help!

Contact ChoiceFinance and we can do a review of your financials and let you know what we find.

How to Use ROI in Small Business

You have seen this acronym used many times, but let’s make sure you know what it means and how to calculate it.

What is ROI?

ROI means Return (what you have received) On your Investment (the amount you have spent to generate your return).

On the surface, this is a simple concept and can be calculated very easily. Let’s look at a couple of examples to reinforce this idea:

Someone invests $1,000 in the stock market and at the end of one year this investment is worth $1,225. The return (what we received) is $225 and the investment (what was spent to generate the return) was $1,000. Therefore the R.O.I. on this investment was 22.5% ($225/$1,000).

How to Calculate ROI

Now let’s take this concept and use it in calculating the R.O.I. of ABC Company’s marketing investment in customer acquisition.

In 2018, ABC Company invested $36,000 ($3,000 a month with a digital marketing company to manage its paid advertising campaign. This $36,000 included money spent on Ad Words with various platforms, Google, Facebook and LinkedIn).

Let’s look at the return this investment yielded.

The marketing campaign generated a total of 220 leads during 2018 from which ABC Company was able to turn 11 of those leads into paying customers. Here is where the analysis can get more complicated. More data is needed in order to calculate the ROI ABC Company generated in 2018.

We know the investment was $36,000. The 11 new customers spent $33,335 with the Company during 2018 (ABC sells annual subscriptions billed monthly). The return on this investment in 2018 was negative ($33,335 of revenue generated on $36,000 of investment resulting in a negative return of $2,665 or -7.4%).

On the surface, one might look at this as a bad investment. However, we need to dive deeper and understand the lifetime value of these customers.

We know our total investment is $36,000 and taking it a step further we uncover that our average customer stays active for 26 months and bills at an average of $461.81 per month. Our marketing efforts in 2018 generated lifetime revenue of $132,078 for these 11 customers (11 x $461.81 per month average x 26 months as a customer). Now we have the data we need to understand the real R.O.I. generated from our 2018 marketing activities.

The actual R.O.I. generated was 267% ($132,078 of revenue created on $36,000 of marketing spend generated a return of $96,077 or 267%).

Not a bad return! For every dollar invested in this marketing campaign, we received $2.67 of revenue.

Takeaways

This was a simple example and didn’t take into consideration the cost of any ABC Company staff working on the campaign or any sales related costs (if any) of obtaining these new customers. There are many factors that go into calculating ROI This calculation can be overwhelming for some.

In order to know how your investments are performing, start tracking your financial data. Tracking the data is the first step. Once you have several months of data you can start to analyze it and evaluate the success of your efforts or better put, know the Return on Your Investment!

If you need help, reach out to ChoiceFinance and schedule a meeting to review your information.

A Business Consultant’s Advice on Hiring Full-Time Employees vs. Contract Workers

Business Consultant

Many small business owners struggle with the decision whether to contract a business consultant or to hire a full-time employee. There are pros and cons of each decision, so let’s review them below:

Pros of hiring contract workers:

  1. Hiring a consultant or contractor avoids the headaches of complex tax and benefits tracking. In addition, if you can find a 1099 employee, you can avoid paying employer payroll taxes such as FICA, Federal Unemployment Insurance as well as State Unemployment Insurance. Be sure to issue these employees 1099’s for the payment of services at year-end.
  2. Outsourced roles are often much more affordable than hiring a full-time team member. If your business needs specific expertise (finance, marketing or legal) but cannot afford a full-time, experienced person, many experts in the later stages of their career are willing to contract out their services at a lower rate.
  3. A business consultant can provide business owners with maximum flexibility for many unique situations. When the workload is unpredictable week to week or you need assistance on a per-project basis, there’s no need to worry about providing a steady flow of work with a contractor.
  4. Part-time help can provide much-needed relief for small business owners, helping them remain focused on the customer. Small business owners are passionate about what they do, but that doesn’t mean that they should be laboring over the books at midnight or trying to answer non-urgent calls that could be handled by someone else.

Potential cons of choosing contract workers:

  1. Keeping part-time, contract-based workers engaged in their work can be difficult. If they are not a connected part of the company culture, they can sometimes become disconnected from your vision for the future.
  2. Finding a capable business consultant can be tricky. Usually, the best employees are seeking permanent employment, so only offering contract work may shrink your talent pool.
  3. Contract workers often lack company-specific knowledge or product knowledge. This can translate into an un-tailored, less impactful work product or under-whelming customer experience.
  4. Business consultant relationships are usually short-term. Given this situation, the owner can be in a position of constantly training someone on their products and spending a significant amount of time searching for the right relationship.

As discussed above, there are benefits and cons to hiring a consultant over an employee. Small business owners should weigh these carefully, remaining conscious of their unique culture, business goals, and even personal needs. Ultimately, your decision will be unique to the situation and should include research and exploration. If you’re ready to start exploring the most cost-centric hiring practices for your business, request a meeting from ChoiceFinance for some powerful business insights.