From the Basement of Blue Ink Books

The need for Banking relationships

2007-12-07T18:22:00.000-08:00

With the credit markets the way they are these days, you can't discount the power of a good relationship. I've opened about a dozen business bank accounts over the past 2 years. Each time that I do, it gets easier and easier. The requirements aren't getting easier, the relationships are just getting stronger.

Tip of the Day: Open a bank account today. You never know when that relationship will pay off in the future.

Bloggers Aren't Business Owners!

2007-12-03T15:03:00.000-08:00

In a previous business of mine, we had a lot of clients that were real estate investors. They came to us looking for credit so they could put money down on their next property or have some working capital for their current projects. It became very apparent real quickly that most of them were “spending their nights and weekends fixing up the old place down the street”. (their words not mine.) This was a hobby to them. They had heard of people making good money in the Real Estate Game but this wasn’t their business. They work for "The Man" every morning at 8 and came home at 5. How could they be business owners?

In order for us to get them sufficient capital to accomplish their goals, their paradigm needed to shift. They had to start treating themselves as business owners. They were business owners in every sense of the word. There were just certain things they didn’t have in place to feel like business owners.

Here's my point - Real estate investors are business owners and SO ARE BLOGGER!

I knew my title would get some of you to read my post. I have spent the last few years trying to convince people like real estate investors AND bloggers to treat themselves as business owners.

So the question is, how do you treat yourself as a business?

The Right Entity. Choosing an entity is a tricky task and shouldn't be taken lightly. I would HIGHLY recommend consulting with a CPA or Legal Council before choosing a structure. (OK - there's my disclaimer). The most common entity structures are: Corporations, Limited Liability Companies (LLC), Partnerships and Sole Proprietors. Each type of structure offers the business and the owner certain tax advantages as well as legal protection. I imagine that most weekend bloggers are sole proprietors. There's nothing wrong with this. There's no major paperwork that has to be files with the state and no separate tax returns that have to be completed, just an additional Schedule. It's easy. If you are a sole proprietor, PLEASE, PLEASE keep good records. You want to make sure you can justify expenses that are truly business related and those that are personal. Enough said.

Bank Accounts. Make sure you set up a bank account IN YOUR BUSINESS NAME. This will help you from "co-mingling funds". (mixing personal and business money). this way you can get check with your business name and a debit card, maybe even a credit card. Your friends will think you are cool.

Licensing. If you are a sole proprietor and you want to get a business loan, in most cases you are going to need to show a business license as proof of your existence. Here's a side note - Lenders are also looking for history, typically 2 years in business. The earlier you can get a license, the "older" your company looks.

Accounting Records. Make sure you keep up with your bookkeeping. It might not be much when you first start out, but you will have some...especially expenses. Here's some examples, the money you spent on your domain name, your monthly hosting, memberships to "blogging related" groups, magazines and books for education (again, blogging related),your advertising, your car mileage, your monthly banking fees for your business accounts, your office space, your employees or 1099 writers, etc. The list goes on and on. It's extremely important for you to keep up with it. It might only take 10 minutes a day or 10 minutes a week. However long it is, just make sure it get's done. You can use bookkeeping software like Quicken or QuickBooks, OR you can just set up a simple spreadsheet until you grow a little.

Of course this list is far from being all-inclusive, but it's a start. I can't stress it enough that this is a business my friends and should be treated as one. You need to treat this as a business and take the necessary steps to make sure others view it as a business too. This will make your life a lot easier when tax time roles around or when you try to secure additional capital from banks. And of course, your friends will think you are cool. You're a business owner!

There's Another Way to Borrow

2007-11-29T16:39:00.000-08:00

What happens when you go to the bank down the street and ask for a business loan or line of credit? Chances are they will sit you down, help you complete an application, PULL YOUR CREDIT, and then either approve you on the spot or say, "It's under review. You should have a decision in 7-10 business days". This is just a polite way to tell you that your chances of getting approved are slim-to-none. You'll get a letter in the mail that confirms this.

Why would a banker take the time to gather all your information and put you through the system? Here's why...they work on commission! It's as simple as that. They are commissioned sales people just like any other sales rep.

Does the banker really underwrite your file and make the decision? NO. The computer does. Regardless of your intentions, the computer cares about your credit score and a few other variables. You could have the next FaceBook or Google, but if your score isn't up to par, the chances of pulling down credit are just not that good. You could be full of passion (in my opinion, this is as important and credit history), but again, if you don't have the score, your chances are...well, you get my point.

I think it's amusing at times to see bankers who act like they are giving you their full attention and "will see what (they) can do.". Do you really think that giving the banker your Business Plan is going to help your case? Unfortunately, the answer is NO. Unless you are looking for a Large loan, you don't ever need a biz plan when you apply for under 100K at traditional lending institutions. The truth is, you don't need anything but your credit score. If you have a good credit score, you can get a loan. PERIOD.

Now, is there a solution? Of course there is. It's called Peer-to-Peer lending or Social Lending. These are platforms that allow the common folk like you and I to lend and/or borrow from other common folks. It takes the power out of the large institutions and puts in right in our lap. We underwrite the files and ultimately, we make the decisions as to who gets funding and who doesn't. It's a beautiful thing.

Stay tune for more information on P2P lending. I will direct you to some of the great Social Lending sites so you can try them out for yourself. I have!

A Lesson on Moving

2007-11-23T15:36:00.000-08:00

A few years ago I needed a moving truck. I went to U-Haul’s website and began the process of booking a truck for the weekend of my move. I was pleasantly surprised at the ease of reserving. It seemed as though their online “Reserve a Truck” system was state of the art and very user friendly.

When the day came around to pick up the truck, I had my wife drive me to the pick-up location. She waited in the car while I went inside to finalize the paperwork. After about 20 minutes she came in to see why I hadn’t driven away in our reserved truck. We found out that the location that was supposed to have my truck didn’t have one in stock. I didn’t expect this because I gave U-Haul my credit card number when I reserved the truck 2 weeks prior to that day.

This wouldn’t have been a major problem if I had lived in a big city and could have just gone to another pick-up location, but at the time I lived in a small town which was 2 hours from the next U-Haul site. This now became a major problem because I had arranged for laborers to help load the truck.

To make a long story short, 5 hours later I pulled up to my house with the truck.

The lesson I learned:

A seemingly “good system” doesn’t work if it’s not predictable. Predictability in systems instills confidence in employees, customers and all end users. In my case, U-Haul had an online system that was easy to use. However, their system for fulfilling on their orders was unpredictable. I lost confidence in their “easy system” because of the unpredictable outcome.

Does Your Neighbor Pay You?

2007-11-23T15:10:00.000-08:00

I was talking to one of my business colleagues last week who happens to own a CPA firm. We were talking about corporations and I brought up a situation I ran into a few days earlier with a client. I asked him how he would have structured the entity. His response was no surprise to me.

“I would structure it so that your client would pay as little as possible in taxes.” - CPA

Although not a surprise, I was intrigued. I wonder how an attorney would answer that question.

“I would structure it so that your client would be protected from lawsuits.” - Attorney

If you have ever attended an asset protection seminar, you probably have heard something like this.

“You need to set up one entity that owns another that owns another that is registered in Nevada and foreign filed in your state and has an agent in California who has another corporation that pays an LLC that your wife owns which distributes earnings to a 5th corporation which has your neighbors name on it and then he cuts a check once a week to your 6th and final entity and…” Well, you get the point right?

I heard a Business Credit consultant answer this same question.

“I would structure the corporation so that you can build credit on it.” – Credit Coach

Isn’t that interesting that different professionals could have such unrelated entity strategies? The basic frame work for each entity is going to be similar and yet different enough that forming it one way could affect your ultimate goal. Is your goal asset protection, tax savings, credit or a combination of all of these? Only you can answer that question.

What is your corporation doing for you?

Well Executed Plays

2007-11-23T15:00:00.000-08:00

When I think of teams, I automatically think of sports. I’m a sports fanatic. I especially like team sports such as basketball, baseball and football.

If you are a fan of sports, you can learn a lot of lessons that can be applied to your business. There are a lot of similarities with corporate teams and sports teams.

Structure is important. A team leader must emerge. Improvement of team practices happen by suggestions from within the team but also from the sideline. It’s important to get an outsiders perspective on operations. It’s the small victories (2 points) that make you a winner. Well executed plays and a strong strategy set you apart from your competition. A loss today doesn’t mean you can’t win tomorrow. Momentum is power. Dedication is addicting. Everyone plays an important role. Double plays or big sales, usually involve more than just you.

Here are a few of my favorite sport quotes about teams.

"Michael, if you can’t pass, you can’t play." – Michael Jordan’s 9th grade Coach.

"One man can be a crucial ingredient on a team, but one man cannot make a team." – Kareem Abdul-Jabbor

"The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don’t play together, the club won’t be worth a dime." – Babe Ruth

"Talent wins games, but teamwork and intelligence wins championships." – Michael Jordan

"Individual commitment to a group effort, that is what makes a team work, a company work, a society work, a civilization work". – Vince Lombardi

As the team captain of your organization, you are responsible for your team’s success. Make sure you know the playbook by heart. Utilize all the talent that has been recruited for the purpose of winning. Lead. Enjoy Victory.

Simple Systems

2007-11-23T14:47:00.001-08:00

Simple systems are the best systems. A lot of small business owners don’t have the money or the time to program or develop widespread systems. I have found that there are a lot of resources available at no cost and require virtually no time to implement.

One that I use frequently is the template section on Microsoft online. The web address is http://office.microsoft.com/en-us/templates. I literally have to monitor my time when I am on this site because there is so much to see. If you spend some time on the site, you will see that there are templates that can be downloaded for expense reports, time sheets, budgets, calendars and a hundred others.

You can create a number of small systems for your business by downloading some of these templates and putting them into place. Some of my favorites are those that can be downloaded into Excel. But they have templates that have created for any Microsoft product. I prefer Excel because it’s very easy to manage and create multiple worksheets within one file. It’s a great way to leverage someone else’s time to develop some effective and simple systems.

Financial Ratios

2007-11-23T13:22:00.000-08:00

Here is a very common ratio that a small business can start using right away.

The Current Ratio is used by short-term creditors to determine a company’s ability to meet short-term financial obligations. Short-term creditors prefer a high Current Ratio. Higher current ratios are an indication of lower risk and consequently, lower current ratios suggest higher risk.

The current ratio is calculated by dividing current assets by current liabilities:
(If you don't know what Assets or Liabilities are, Check this out).

Current Ratio: Current Assets
Current Liabilities

Here are two examples:

EXAMPLE 1
Current Assets: $250,000 (this includes cash, inventory, accounts receivables, etc.)
Current Liabilities: $75,000 (this includes financial obligations that will be paid within the year)

$250,000 / $75,000 = 3.33 (This situation is less risky for short-term creditors)

EXAMPLE 2
Current Assets: $100,000
Current Liabilities: $125,000

$100,000 / $125,000 = 0.80 (This situation is more risky for short-term creditors)

One reason that you need to understand about this ratio is that creditors prefer a higher current ratio because it reduces risk BUT owners tend to prefer a lower current ratio because this could be an indication that more of the firm’s assets are working to grow the business.

Accrual vs. Cash

2007-11-21T12:18:00.000-08:00

Before you being keeping "the books", There's a few things that you need to understand. I promise it's not that difficult.

Here's the first lesson.

There are two different methods of accounting for a company’s transactions: Cash and Accrual. You might have heard them referred to as Cash Basis or Accrual Basis. The only difference in these two methods is in the timing in which the transaction is recognized on the accounting books.

Here are two examples to help illustrate: (I told you I would make this easy)

Example 1

You are an electrician. You visit an office and install new lights in November. You leave an invoice for $500 to be paid in 30 days. The check arrives at your office in December and you make the deposit. If you are using a Cash Basis accounting method, you would recognize the $500 revenue in December, when you received the “Cash”. If you are using an Accrual Basis accounting method, you would recognize the $500 revenue in November when you performed the service.

Example 2 (the other side of the story)

You are an office manager. You receive a visit from an electrician who installs new lights in November. He leaves you an invoice for $500 to be paid in 30 days. You cut the check and put it in the mail in December. If you are using a Cash Basis accounting method, you would recognize the $500 expense in December, when you made the “Cash” payment. If you are using an Accrual Basis accounting method, you would recognize the $500 expense in November when you received the service.

Most small businesses use the cash basis accounting method. This is an easier method for companies that don’t have a lot of accounts or transactions.

Make sure you visit with a CPA or tax professional to determine which method to use when you are setting up your business...or you can just take my word for it and use the Cash method until you get big enough that it makes a difference.

Crappy Job on the Books!

2007-11-16T20:25:00.000-08:00

As promised, here is an expample of a business (actually 2 businesses) that didn't take the time to update their accounting records.

This is a repeat post...

It only takes 30 minutes to 1 hour a day MAX, for most small business owners, to update their accounting records. This pre-selected time will ensure you have accurate records and will help you make better business decisions during the year.

I had a bookkeeping client a few years ago that didn’t keep up with his records. He operated a very small retail shop in my home town and only recognized about 10-15K per month in revenue. His books were in shambles and it didn’t take long before I realized he had been losing money. When I started, he handed me 2 years of bank statements and a box full of receipts. Fortunately for me, he didn’t use cash for any of his purchases so the receipts were duplicated in the bank statements and I didn’t have to rummage through the box to try and make sense of the mess. After about a week I had his books updated.

When I sat down with him to go over the financial statements, he immediately noticed that one of his major reseller accounts wasn’t being recorded. After a little investigation, we realized that this reseller had been selling my client’s products for 2 years. My client would drop ship the product(s) and then was supposed to invoice the reseller. Once the invoice was received, it was paid and the cycle continued. My client hadn’t invoiced the reseller for 2 full years.

The amount of money that should have been collected was about 1K per month, which isn’t a staggering number by itself, but is mind-boggling when compared to the total revenue collected each month. It represented about 5-10% of his total revenue.

Lucky for me, I approached the reseller and brought this to his attention. He had no idea. I offered to clean up the mess and consequently got another bookkeeping client. If the accounting records for both parties had been maintained each month, my first client could have collected an additional 1K per month and my second client wouldn’t have been stuck with a 24K bill which was due in full and not spread over 24 months.

Chalk this up for a lesson learned and keep up with your bookkeeping.

Stay tuned for easy to understand lessons on bookkeep for the small business owner.

Bookkeeping 101

2007-11-13T16:54:00.001-08:00

Whether you want to admit it or not, every entrepreneur needs to learn some basic accounting procedures.

Here's why...

Accounting can be seen from 2 different views. The first is from the eyes of the non-accountant. Words that enter their minds are boring, mundane, an expense, required, structured, records, paperwork, confusing, taxes, CPA's, nerds (I can say that, I'm an accountant), etc. For the average free-spirited and creative entrepreneur, accounting rubs the wrong way.

The second set of eyes is from the accountant's point of view. Again, words that enter OUR minds are important, decision making tool, structure, decision making tool, analyze, decision making tool, accountability, decision making tool, etc. We are nerds. I will be the first to admit it. I'll also be the first to admit that all of us, in some form or fashion, have at one time, wanted to cross over to the dark side of entrepreneurship but our structured and nerdy ways of thinking won't let us. It's best if we leave that side of the biz to the creative type.

The non-accountants, however don't have that luxury. You have to cross over and see our world at some point. It's just the way it has to be. If you take some time to learn how to account for your transaction, you can literally turn your financial statements (the reports created from record keeping) into powerful... I really mean powerful decision making tools.

Here's how this blog is going to go from here on. In the next post, I'm going to share some examples of poor business decisions that could have been avoided if proper analysis had been done on the finance statements. After that, I'm going to teach about some bookkeeping essentials that will be easy to understand and apply. Believe me, you don't have to have a degree in this crap or be a genius to understand this. I'm going to make it easy. I'm going to make bookkeeping exciting and fun...okay maybe I've gone to far. I'm going to make it easy.

Stay tuned!

Ask Someone Who Knows

2007-11-12T13:09:00.000-08:00

Does my business add value?

In order to answer that question I first need to define value so I better understand what it is that I am trying to increase or add…otherwise it’s a shot in the dark. Simply stated, and with a little help from Wikipedia, value is how much a product or service is worth to someone relative to other things.

This is a pretty general definition and is open enough for multiple interpretations. What does the phrase “…relative to other things”, mean? Are we comparing my service to air? If that’s the case, I’m not very valuable. Are we comparing it to water? Again, I add no value. What if we compare my service to my competitors, or someone servicing the same customer base? I don’t know! Value can be measured differently depending on how you complete your interpretation of the definition.

My revised definition of value in a business context is this. Value is how much a product or service is worth to someone relative to their previous state when they didn’t have that product or service.

Do our products and services improve lives or deteriorate them? Untimely the answer to this question will tell us if our business adds value.

Now, with all this said, here is the fact about answering this much-sought-after question “Does my business add value?” As a business owner, you can try to convince yourself that the answer you came up with is right, but the truth is, your customers are the only ones that can answer this for you.

So if you want to know if your business adds value, ask someone who knows.

Burning Pancakes

2007-11-12T09:53:00.000-08:00

I got up early last week to cook my family some pancakes. I got out the box, poured some mix in to a bowl and added some water. It was an easy receipt and I chose it thinking that there was no way I could screw this one up. I turned on the griddle and poured the first pancake on it. I waited patiently for the little bubbles to form on the top of the batter, just like mama taught me. When this happened, I grabbed the spatula and flipped it. It was burnt! How could this be? I followed the instructions perfectly and had seen it done so many times before by others. I tried it again and again. By the fourth pancake they were golden brown just like the picture on the box.

The truth is, even the greatest chefs burn pancakes. The pan has to get to the proper temperature. The size of the pancake needs to be right. The flip needs to happen at just the right time. What seems like an easy task like cooking pancakes still requires practice. There's not much that can be done about burnt pancakes.

Entrepreneurs burn pancakes all the time. We usually do a lot of things for the first time. It takes practice to get it right. Don't worry about burning pancakes. The thing to remember is to have enough passion to continue working on a task even when you "burn" it. Practice makes perfect. Love what you do and your success will show by the end results.

Does your Partner Make Bad Decisions?

2007-11-12T09:16:00.000-08:00

How do you mend a broken team? That sounds like a country song. How do you reconcile a partnership that is on the rocks? How do you put the past behind you and move forward? A more common question is how do I keep my business partner from making so many bad decisions?

These are all valid concerns and questions that often surface in the startup phases of most businesses.

I know that in most cases, I’m preaching to the choir here but starting a business is stressful. It’s hard enough to deal with external issues like customer acquisition, customer service, marketing and messaging. The last thing you want to be forced into managing are internal conflicts with your own team.

Not in all cases, but in most, a mediator or conflict manager should be used as a neutral party that hears both sides and facilitates in the resolve of the issues that caused the conflict. More often than not, partners who try to go it alone, just end up spinning wheels and usually stir up more reasons to disagree. Consult with someone you trust, someone that both of you trust.

Allowing issues to fester, distracts from accomplishing the common goal you both had when you started your business – Success.

Lemonade For Sale

2007-11-12T08:34:00.000-08:00

My wife and I were out for a drive one evening and along the way we saw two young kids selling lemonade. I love entrepreneurs and am thrilled to see them follow their dreams…especially ones that are 5 years old. I pulled to the side of the street, rolled down my window and asked the boys what they were selling. Both of them wanted to answer my question so of course it was loud and hurried but the two of them managed to yell “LEMONADE”.

“I’ll take two,” was my response.

The older boy, clearly the “big brother”, took charge; dishing out orders and taking names. After a very short wait of only 45 seconds, we got two paper cup, half full of lemonade.

“That will be 50 cents.”

I pulled out a dollar and gave it to the older boy. I told him to keep the change.

“Whoa! A dollar! We got a whole dollar!” said the older brother. “Look at this! We made a dollar and he said we didn’t have to give him any money back!”

The younger, wiser brother, looked at his big brother and said, with a straight face, “It’s not all about the money.”

It’s not all about the money. This was a profound statement and what’s amazing is it came from the mouth of a 5 year old.

I have learned valuable lessons over the past few years. This was one of those moments. It’s really not all about the money. It’s about much, much more. Money is a byproduct of providing good service.

The team that I have placed around me, just like the team that this these two kids formed, is the most important part of my organization. Without my team, I’m not forced to grow, I don’t have advisors and I don’t have support. Without a team, my young lemonade friend would have to face the competitive lemonade world alone. Thanks to his little brother and wise advisor, he now knows that “It’s not all about the money.”

Yoked

2007-11-12T08:30:00.000-08:00

I've had experiences working with teams in the past and I've also had plenty working as an individual. My background is accounting and as an accountant, often times the work load is just individual work that I have to do alone. There's not a lot of need for a team in most cases. However, as I have transitioned and followed my entrepreneurial cravings I have learned the value of teams and how important teams can be within organizations in certain departments. So within the accounting department, as I had experienced in my career, teams are not as crucial as they would be in a sales department.

I would like to talk about sales departments specifically and how individuals can affect the entire team. Just this last week, the sales team for one of our clients experienced a couple of days where only one or two people produced any sales and consequently the morale of the team dropped significantly because the energy level was so down. When they had only one or two people on the entire team producing, it seems that it didn't create enough energy within the team as it does when everybody is contributing. If each team member can pull his or her own weight, even if it is a smaller number, typically it ends up being a larger overall number than each person could have produced individually.

Here’s a good example of what I’m trying to say. A team of oxen are stronger than the sum of each ox individually. If we had two oxen and each could pull 1,000 pounds individually, you would assume that if we yoked them together they would be able to pull 2,000. In actuality, that number would be larger. I don’t know the exact figure, but it would probably be 2,500 lbs. So as a team, these two animals are able to produce more than the sum of each individually.

Success will come when you build a team that works together to accomplish a common goal as opposed to a group of people in the game with individual agendas.

A Lesson on Moving

2007-11-12T08:28:00.001-08:00

A few years ago I needed a moving truck. I went to UHaul’s website and began the process of booking a truck for the weekend of my move. I was pleasantly surprised at the ease of reserving. It seemed as though their online “Reserve a Truck” system was state of the art and very user friendly.

When the day came around to pick up the truck, I had my wife drive me to the pick-up location. She waited in the car while I went inside to finalize the paperwork. After about 20 minutes she came in to see why I hadn’t driven away in our reserved truck. We found out that the location that was supposed to have my truck didn’t have one in stock. I didn’t expect this because I gave UHaul my credit card number when I reserved the truck 2 weeks prior to that day.

This wouldn’t have been a major problem if I had lived in a big city and could have just gone to another pick-up location, but at the time I lived in a small town which was 2 hours from the next UHaul site. This now became a major problem because I had arranged for laborers to help load the truck.

To make a long story short, 5 hours later I pulled up to my house with the truck.

The lesson I learned:

A seemingly “good system” doesn’t work if it’s not predictable. Predictability in systems instills confidence in employees, customers and all end users. In my case, UHaul had an online system that was easy to use. However, their system for fulfilling on their orders was unpredictable. I lost confidence in their “easy system” because of the unpredictable outcome.

A Notebook

2007-11-12T08:25:00.000-08:00

Congratulations, your business has grown in leaps and bounds since those early days when it was just an idea floating around in your head. You’re probably seeing more transactions per week now than you have at any other point in your business. Maybe you are even writing business daily! Again, congratulations on your success.

Now the fun begins. If you haven’t started already, you need to begin accounting for every penny that goes out, comes in or just sits there in your business bank account. In the beginning, this task can easily be done with a spiral-bound notebook. When you start acquiring customers everyday instead of once a week, then most likely that notebook just won’t cut it anymore. You need a good accounting package; a system that does most of the work for you.

My first company was an accounting service firm where I worked with startup’s and offered a wide range of accounting and financial consulting. I used a number of software packages to track both business and personal finances for my clients. If you are just beginning to track your income and expenses, I would recommend getting a copy of QuickBooks. It’s easy to use for “non-accountants”. It’s quick to learn the program and it’s affordable.

A simple system like this will save time and headache as your business grows

Increasing Your Cash Flow Through Outsourcing

2007-11-10T07:37:00.000-08:00

Due to the growing number of financially strapped small to medium sized businesses, the topic of cash flow has been a hot one in recent years (and rightfully so). If cash isn't available in a business, the business plateaus, and that means jobs get cut, disloyal employees cause problems, and most importantly: customers look elsewhere for products and services. THE BOTTOM LINE: Cash flow is a NECESSITY in business. Outsourcing is one of the many ways we have found to be a relatively quick fix to some cash flow issues.

In order to increase cash flow, opportunity costs need to be managed. For instance, if you own and operate a small lawn care service, you most likely don't have the volume for a full time accountant (yet!). Many small businesses can keep records and make the necessary entries in their accounting software in about 5 hours a week. Unless you are running a bookkeeping firm, accounting probably isn't your core competency. If you were to outsource this task to a professional bookkeeper, he/she would be able to complete this same task in about 1 hour a week. Even if you pay this 'outsourced employee' $50 per hour, the chances are good that your cash flow will still increase. Why? Remember, by outsourcing your bookkeeping you are freeing up about 5 hours a week, which could mean an additional 2-3 new clients. In the long run, those clients, with referrals, can amount to an increase in paying customers, all because you decided to focus on what only you can do (get customers) and let someone else do the busy stuff.

Outsourcing is one of the greatest resources for small to medium sized businesses, because it offers a cost-effective solution to taking a business to the next level. The advantages to outsourcing are that it allows a business owner to focus on core activities and gives him/her access to professionals for everything else. As mentioned above, it also increases cash flow and in business, CASH IS KING.

In summary, outsourcing allows small and medium sized businesses access to large business resources at a small business budget.

Marking Your Path

2007-11-10T07:33:00.000-08:00

When Hansel and Gretel were left in the woods by their evil step mother, Hansel's sharp young mind thought quickly and left a trail of white pebbles behind so he and his sister could find their way home. The second time they were abandoned, he left a trail of bread crumbs. Even though the second attempt to mark the pathway failed, the concept is brilliant. Leave a trail!

Every transaction that happens in a business should have a supporting document(s). These documents are used as evidence that a particular business transaction actually happened. Supporting documents are used to make accounting entries. They also serve as support during an audit.

These documents should include the date, the amount, and a description of the transaction. These papers are known as source documents, supporting documents or are sometimes referred to as a paper trail.

Examples of supporting documents include but are not limited to:

Credit card receipts
Checks
Invoices
Purchase orders
Time cards
Deposit slips
Receipts

After a transaction has been entered, these documents should be kept for future reference. If a paper trail is not available, one should be created using a bank statement or another existing source.

When your business or an auditing firm needs clarification on a transaction, make sure that you have marked a visible trail that will justify your companies' position on the matter. This will also give you more information when making crucial financial decisions. Information gives you a solid understanding of where you are, which in turn helps you know where you want to go.

LEAVE A TRAIL!

Understanding the Balance Sheet

2007-11-10T07:29:00.000-08:00

A Balance Sheet provides a financial snapshot of a company at a specific date. This statement details the company's assets, liabilities and owner's equity.

Assets are things, that a company owns, that have value. An asset is also that which is owed to a company such as accounts receivables. Assets include tangible items such as buildings, vehicles, equipment, tools and inventory. However, tangible property is not the only thing that can be classified as an asset; intangibles such as trademarks, patents, research and development, and goodwill are also included in the category of asset. Remember that cash is an asset. So, anything of value that is owned or due to the business should be included as an asset on the Balance Sheet.

A liability is everything that a company owes others. This includes money that a company might owe a supplier, payroll that is owed to employees, taxes owed to local, state and federal tax agencies, and money owed to banks or other lending institutions for loans or credit card balances. This list is not all-inclusive as there are many financial obligations that fall in the liability category on the balance sheet. I have just included a few of the most common ones found on balance sheets of small businesses.

In a nutshell, Owner's Equity represents the money that would available to all the owners if the company sold all of its assets and paid off all of its liabilities. Equity increases when owners invest money into the company and/or when the company shows a profit and retains those earnings in the company instead of paying those earnings out in a dividend. Equity is often called owner's equity, shareholder's equity, capital or net worth.

The following formula represents the balance sheet:

Assets = liabilities + Owner's Equity

Understanding the balance sheet and monitoring its changes will help a business owner understand important trends in the business and help he/her make better decisions.

The Downside to Shopping

2007-11-09T15:39:00.000-08:00

Each time you apply for a business credit card or bank loan, the creditor (the institution issuing or extending credit), will look at your credit report to determine whether you are a low risk opportunity. Each time someone other than you pulls your credit, it shows up on your report as an inquiry. This is a mark on your report that shows you and other creditors how many institutions are issuing or will potentially issue you credit.

Excess inquiries will lower your chances for future approvals. Here’s the reason. If I want to grant you credit, I am going to make a decision that you can or cannot service debt for 25K. If I see that you have 10 other recent inquiries on your credit report, in my eyes, as a lender, I see that there are 10 other creditors that “will potentially issue you credit”. If each of these creditors issue you 25K that means you are going to have to service debt for 250K instead of 25K. I want to make sure my money is safe so I only want to lend it to borrowers who can pay back 25K and not 250K. This is the only way I can make sure you can afford the payments. Nine times out of ten, this scenario will translate into a decline.

Borrowing From Grandma

2007-11-09T15:38:00.000-08:00

A client of mine is struggling to find a lender that will offer him credit so he can purchase a car. He is very young in the credit world and therefore hasn't established much of it. The question he asked me is, “How can I build credit if now one will issue me any?”

That’s a great question and one that is real concern for a lot of young credit seekers. One factor in establishing a credit score is making payments on existing credit lines. So how do you establish a good credit score if no one will issue you credit?

One resource I have found is called Circle Lending, which is now virginmoneyus.com. This is a platform that’s easy to use and allows you to set up loans between relatives and friends. You can have your parents, a sibling, a neighbor or even grandma lend you money and Circle Lending will take care of all the paperwork, collect the payments AND report activity to the credit bureaus. This is great way to establish a presence on the bureaus.

What if you have burned too many bridges and you can’t convince anyone to lend you their money? Here’s an idea. Have them lend you YOUR money. That’s right. Give your mom $500 and then have her lend it back to you. You are going to pay some interest…of course you decide what the interest payment is and in the end you get that interest back. It’s a small price to pay for good credit and good credit is key to accessing capital.

A Changing World

2007-11-09T15:30:00.000-08:00

Banks don’t have concrete loan policies. Banks do have some general lending guidelines but they change frequently based on a number of factors. One factor is the past performance of loans. If a bank has been burned by a large percentage of their clients on certain loan products, they will either tighten the underwriting requirements or they will discontinue the program all together.

Case in point – A bank in Tennessee offered an unsecured line of credit to every business owner that had been in business for 1 year and had a personal credit score of at least 660 from Equifax. Very little additional verification went into the approval decision. Approvals were being dished out quicker and easier than at any other bank I had ever worked with. When word leaked into the “broker world”, the bank was inundated with loan requests…most of which were lead by brokers. After a few months of this, the defaults starting happening. The bank investigated and discovered that the requirements were too loose. It was too easy for brokers to misrepresent client’s information on applications and consequently it affected the portfolio performance. Today, you can’t get an unsecured business line of credit with this bank unless you are a current client AND have a home equity line of credit with them.

My Point – the lending world changes daily. Consult with professionals to make sure you don’t waste your time applying for loans you will be declined for.

Stay tuned for my thoughts on Biz Lending 2.0

Managing Cash Flow

2007-11-09T15:25:00.000-08:00

A cash flow statement is one of the more common financial statements which shows a company’s flow of cash during a period of time. It’s an important statement to understand AND to use.

One of the most common mistakes young entrepreneurs make is thinking that their Net Income (income minus expenses) represents the amount of cash that should be in their bank. This is wrong. Net Income and actual cash in the bank are not always the same. The sure way to determine the actual cash available in your bank is to properly prepare and analyze the statement of cash flow.

As the chief accountant for your small business you can use this financial statement to determine your ability to service your short-term obligations – BILLS. (Most of you entrepreneurs are accountants whether you like that title or not.)

Another person that would enjoy seeing your statement of cash flow is your lender. If a loan or line of credit is issued to you, the monthly repayment will fall into the category of “short-term obligations”. If the lender or investor knows that you have a strong cash flow, and will be able to service the debt, he/she will more likely agree to grant financing to your company.

A simple way to prepare this statement is using the Direct Method. This is done by listing the major categories of cash income and cash expenses. Add the column and there you have it!

Example:
Cash sales from X product: $50,000
Cash sales from Y product: $15,000
Labor Expenses: ($10,000)
Loan Repayment: ($5,000)
Materials Purchased: ($20,000)
Total Cash Flow: $30,000

By preparing a simple statement like the example above shows us that we have 30K available cash for growth or additional future short-term obligations. This is exactly what lenders want to see.