What’s Next When Your Business Grows Beyond a Start-Up?

Vigorous work is necessary to build a small business. When that tenacious effort pays off in a successful operation, you wonder what’s next for the enterprise. After achieving your maximum output, you can’t open the floodgates to new growth because your time is not unlimited. You need a plan that provides the foundation for a sustainable upward trajectory – one that addresses new opportunities to seize and the resources needed to do so.

When you move beyond the solo start-up phase, you already have some business history. You’ve proven that you have something to sell, and your experience delivering to customers gives you some financial data to measure performance.

Now you simply need a plan to judge expectations from new investment, whether from outside funding sources or by reinvesting some of your own profits.

Getting Started on a Business Plan

As the old expression goes, the best place to get started is the beginning. Summarize what your business has accomplished, where it stands regarding future prospects, and how you intend to achieve new goals. A business plan doesn’t need to become an unwieldy treatise. Rather, in a few sentences, you can state your market of customers, how much you have sold since starting, and the time and money that were required to attain those sales.

Describe the composition of your industry – whether it’s comprised of a few large organizations or is mostly numerous small enterprises. Convey whether the market is growing, shrinking, or stable. Do you expect your business to grow from an expanding market, or by attracting customers away from competitors?

Identify new products or services you intend to provide for the market, or simply give details about how you differentiate your business from the competition. What are your selling points to prospective customers? Explain how you attract customers, the amount of new business you seek over a specified future period, and the cost to accomplish that growth.

The Business Team

Growing organizations demand teamwork. Your business plan must convey who is focused on sales management, who manages delivery logistics, and who is tracking financial results. The latter may be outsourced to bookkeeping and accounting firms, but you need a system for timely examination and analysis of the financial reports produced.

Accounting professionals are also crucial to preparing the financial elements in your business plan. The capital and expense requirements necessary to attain your projected revenue are displayed in a cash flow forecast. In the future, this projection of cash flow will be compared with actual financial results compiled by your accounting pros.

Accountants, however, do not create the financial features in your business plan out of whole cloth. Your input is essential.

Only you know what your team can achieve with the available resources of money and time. You have the track record. You developed the product or service. You know the selling process. You know the risks and the ratio of costs to revenue.

The key factor moving forward is establishing strategic objectives that can be accomplished with a given amount of funds in a given amount of time.

Direct Costs Should Directly Affect Pricing Strategy

Entrepreneurs experience stark differences in costs among clients. The old 80/20 rule – that 20% of customers take up 80% of your time – may be an exaggeration, but it should not be ignored. It is integral to several factors that should be taken into consideration when developing your pricing strategy. Properly weighing and tracking each of these elements is essential to getting paid for every minute of work you do.

First, be sure to account for all costs directly associated with specific projects, to recapture them in client billing. Your fees should be high enough to recoup all costs for every single client. Don’t forget supplies, postage, and credit card fees, as well as travel costs, including local travel using your own vehicle.

A second, less obvious element is the time spent with a prospect identifying the scope of work and providing a cost estimate. Although this time is freely given until the engagement is agreed upon, you do want your fee to ultimately cover this time. Also, frequently overlooked is time spent researching and thinking about the optimal approach to a job. Projects of greater complexity call for greater fees.

Last, but certainly not least, is the overall mental anguish with which some clients burden you. These clients are the people who alter their demands after the project commences. They fill your inbox with new information and continual status update requests. By tracking client time history, you will uncover true cost.

By appropriately considering each of these aspects, you can bill accordingly and assure optimal earnings from each client.

Measuring and Controlling Customer Acquisition Costs

A large and expanding customer base is the foundation of success for any business.

The first step in laying this foundation is determining where to find prospects. The next is to understand the procedure for turning them into paying customers.

A key in this process is optimizing your costs for acquiring customers. After an initial period of upward growth during the early stages of business operation, obtaining new customers becomes more expensive.

Business owners must evaluate the costs of their endeavors to ensure the effort produces the desired results.

How is this accomplished? By measuring customer value. It is important to periodically take these measurements to understand your marketing effectiveness.

Too many business owners fail to make these calculations. Often, the lack of effort is simply due to lack of understanding, but the process is actually quite simple when broken down into five steps.

1. Calculate your revenue per customer sale. If you perform contract services, simply measure your average revenue per customer project. If you make sales to a variety of random customers, you may rely on a sales software application to identify the average sale per customer.

2. Determine your gross profit margin. This is the percentage of revenue that you retain after paying direct sales costs, such as inventory, materials, and labor. As an example, having a sales price that’s twice your direct costs renders a gross profit margin of 50%.

3. Identify repeat customers. Determine what percentage of your customers make repeat purchases. For instance, if three-fourths of your customers make future purchases, your repeat rate is 75%. Of course, this percentage is often a bit of a guess, especially if you deal with a large number of customers. But you only need to estimate the percentage of new customers who will make at least one more future purchase. Often, merely asking customers if they will return is sufficient to identify a degree of commitment.

4. Determine your gross profit per sale. Multiply the revenue per customer sale by your gross profit margin. Then multiply this figure by 1 plus the repeat customer percentage. The result is the value of each new customer. If none of your customers do repeat business, the value of each new customer is only your gross profit per sale.

That’s because you’re multiplying gross profit per customer sale by 1.0 rather than, say, 1.75 if your repeat rate is 75%.

Sample equation: Suppose your revenue per customer sale is $200 and your gross profit margin is 50%. You have a $100 gross profit per sale. If three-fourths of your customers do repeat business, each new customer brings you on average $175 of value ($100 multiplied by 1.75-since your repeat rate is 75%).

5. Apply the results. The pragmatic conclusion in this sample case is that spending up to $175 to acquire a single customer results in a break-even situation. That’s a sound general spending goal because repeat customers deliver ongoing profits. Regularly reevaluating these acquisition costs will keep marketing efforts and repeat business on track for long-term success.

Are Sales Increasing? Make Sure Funds Reach Your Bottom Line

An entrepreneur who only pays attention to cash inflow is like a driver who is alert on the freeway but closes his eyes on the exit ramp. Both are on a collision course with trouble.

Judicious oversight of cash outflow is vital. Monitoring the handful of variable expenses that tend to significantly contribute to cash drains can help uncover any spending zones that are getting out of control. Five areas in particular deserve focus.

  1. Travel expenses. Meals and travel are a category of frequent excess spending. Track these carefully. This assures that cash from rising sales is not thoughtlessly devoured by business meals or travel, including local transportation costs.
  2. Technology. You don’t need brand-new devices every year to operate your business efficiently. Reducing cash outflow for computers, smartphones, and software contributes substantially to profit.
  3. Office enhancements. You don’t need expensive furniture, especially if you seldom or never meet customers at your location. And spending a lot on finishing off rented space is a mistake that’s unfortunately quite common.
  4. Excessive outsourcing. Although legal and accounting work is best left to professionals, internal handling of many common tasks minimizes cost. Website maintenance, social media presence, document shredding, and office cleaning are duties every entrepreneur can allocate time to complete.
  5. Training expenditures. Training may be required to internally accomplish some activities. However, entrepreneurs should be selective about professional development. Avoid the temptation to attend multiple conventions and seminars. The fees can quickly eat away at your bottom line.

What You Need to Know about Buy-Sell Agreements

Business partnerships can be beneficial, but they can also be messy. When someone else shares in your business success, having a formal written partnership agreement is a proven avenue for avoiding stressful conflicts. One crucial topic to cover in these agreements: buy-sell events. It is essential to detail what happens when a partner separates from the partnership enterprise.

Buy-Sell Definition

A buy-sell agreement outlines transfer of a partner’s interest in the business. It describes when and how the departing partner redeems his ownership. A number of occurrences may activate implementation of the buy-sell agreement. Each of these events is expressed in the agreement.

The agreement should also specify conflicts that compel any partner to tender his ownership. Examples include failing to allocate a specified amount of time to the business, and taking excess draws of profits relative to ownership percentage.

Triggers of Buy-Sell Events

Most commonly, the death of a partner will trigger the buyout of the decedent’s business ownership from his heirs. In addition, buy-sell agreements often come into play in the event of disability or bankruptcy. A disability is generally defined as one that impairs the partner’s ability to perform his duties to the business. In bankruptcy situations, the solvent partners need protection against an unknown party suddenly becoming a partner by purchasing the liquidating business interest in the bankruptcy process.

Some buy-sell agreements become effective in the event of a partner’s divorce. This prevents an ex-spouse from becoming a partner with the remaining business owners. Additionally, a buy-sell agreement is often implemented simply because a partner retires or no longer wishes to participate in the business.

Buy-Sell Accounting

Essentially, buy-sell agreements identify how remaining partners acquire company shares owned by the departing partner. Purchase of an exiting partner’s ownership is typically not made by the partnership; rather, the individuals who will continue owning and operating the business make the acquisition. Company cash isn’t used unless it’s first distributed to the remaining partner, who then uses it to buy out the selling partner. Correctly accounting for these steps is essential, and the tax implications are tricky.

Price is usually determined by a business valuation conducted by an independent third party. The value determined for the departing partner’s ownership is often too expensive for the remaining owner to pay with cash. Consequently, seller-financing terms are commonly arranged.

A buy-sell agreement may contain stipulations that the partner who’s leaving must provide financing to the buying partner, or a discounted price based on a present value calculation at the time of the partner’s departure can be embodied in the agreement. This makes procurement of outside borrowing easier on the remaining owner.

Frequently, insurance is obtained for funding the purchase price when executing a buy-sell agreement – especially in the event of a partner’s death.

With much to consider in the structure of these agreements, professional counsel in these matters is vital. It is highly recommended business owners contact their financial adviser before entering a partnership or arranging any buy-sell agreements.

Simple Budget-Reducers for the Micro Business

An entrepreneur’s competitive thirst isn’t quenched until every angle has been maximized. This includes control over expenses. Every cost-cutting measure results in more money for the business owner, and this is especially true for micro enterprises, where small expenditures represent substantial overhead percentages. Each business owner must examine the intricacies of his or her operations to determine how to trim the fat off the budget. Here are four list toppers:

Phone savings: Ditching your landline is an ideal expense reduction technique for solo operations providing remote or mobile services. Typically, a cell phone is the only line you need.

Storage savings: Switch to paperless documents. Storing electronic documents rather than cabinets full of paperwork saves space, ink, envelopes, stamps, and sheets of paper. Send invoices electronically, use accounting software to keep your bookkeeping in order, communicate via email, and save correspondence in virtual folders on your computer.

Marketing savings: Online marketing – often more effective than traditional advertising – is commonly a do-it-yourself endeavor. Free online guides and tutorials are available that provide instructions for website maintenance, blogging, and sending e-newsletters.

Rent savings: If your business has physical space for serving customers, rent is likely your largest recurring expenditure. A delicate balance of priorities is required to attain a convenient site for the public while reducing long-term cost. If you have flexibility with location, consider sharing space with other businesses or renting space away from pricey main boulevards.

Simple Steps to a Simplified Financial Forecast

Operating a small business is like a hike in the woods where the trail is mostly familiar, but sometimes referring to a compass is key.

The entrepreneur’s compass is the financial forecast. These projections guide you in the course you want to take. And when the path twists you in a different direction, the forecast shows where you’re offtrack and how to get your bearings back.

Your forecasts allow you to set goals and milestones. More importantly, they permit you to measure progress toward your objectives. Many entrepreneurs avoid making financial forecasts because the process entails a lot of numbers, which seem cumbersome to calculate. However, forecasting can be a simple process. Use a spreadsheet to identify a few basic factors, with which you’re probably already familiar. These factors create your financial forecast.

1. Resources

The top line in your financial forecast is sales revenue. But determination of this figure requires an initial step of identifying your available resources. These elements are cash and time.

Cash: Assess available funds for inventory and other costs that must be paid before you collect from customers. The money on hand for these things represents a curb on how much you can sell.

Time: Your revenue is limited by the time you have to contribute to the business. Selling more than you can deliver individually means adding staff, and that brings you again to a cash need.

2. Direct Costs

Once you’ve determined your resources, start identifying direct costs. Begin with all direct costs, such as inventory or materials. Labor cost is also commonly a major direct factor in generating sales. For solo-operated service providers, the only direct cost is typically the entrepreneur’s time. The key dynamics are how much output the individual can accomplish every month and the amount of personal income desired for the effort. This owner compensation target is the major direct cost in many basic business models.

3. Sales Revenue

When your direct costs are identified, sales revenue is projected as a multiple of those expenditures. All you need is your ratio of direct costs to sales revenue. This may be calculated using historical data. Or you might simply identify a markup you aim to achieve. For example, you might have prices that are twice your direct costs – yielding a ratio of 0.5, or 50%.

Divide your forecasted costs by the ratio. The product is your sales revenue forecast. Subtracting direct costs from sales revenue results in an amount for gross profit.

4. Overhead Expenses

Every business has general overhead expenses. Even the solo entrepreneur working from home must at least cover the cost of internet and cell phone use. Larger organizations of course incur expenses for rent and office administration. Don’t forget costs for advertising and marketing, even if that’s only website development and maintenance. Subtract these expenses from your gross profit to obtain net profit.

Over time, update your financial forecast. Poor results will necessitate cutting overhead and capital expenditures. On the flip side, beating expectations gives you extra funds for expansion.

Make Bookkeeping Changes to Comply with New US Tax Law

Few things in life are more complicated than US congressional attempts at making things simple. This principle holds true for the latest tax simplification. To adhere to newly established standards, business owners must make some straightforward adjustments and some less-than-clear changes.

  • Businesses may no longer deduct expenditures primarily connected to entertainment or recreation (ballgames, theater tickets, fishing outings).
  • Manufacturing businesses no longer receive a domestic production activities deduction.
  • Enterprises with $25 million or more of gross receipts now have a limit on deduction of interest expense to 30% of taxable income.

The good news is that businesses will also benefit from new allowances in 2018. Specifically, bonus depreciation of 100% is allowed on purchases of both new and used assets placed in service from 2018 through 2022. Additionally, the Section 179 deduction for property purchases is now allowed for items costing up to $1 million. When applying these deductions, entrepreneurs would be wise to rely on the judgment of their tax professionals for accurate reporting.

Tax experts will certainly aid in handling the new 20% deduction of pass-through income from business entities. Company owners must navigate income threshold limitations, disregard shareholders’ salaries, and weigh business assets and wages paid-all to determine deduction limitations. Accurate accounting is now more crucial than ever for tax planning. To keep up with congressional efforts, business owners should stay in close communication with their accounting professional.

What You Need to Know about Capital Gains

No one likes to pay taxes, especially on an appreciated investment.

With careful planning, you could avoid or minimize capital-gains taxes. Here are three tips.

Hold investments for at least 366 days

How long you keep investments in your portfolio before selling them determines the taxes you pay on your gains. Short-term capital gains are taxed as ordinary income. Long-term capital gains are taxed at rates of 0%, 15%, or 20%, depending on your tax bracket.

Invest in a low-turnover fund

Mutual funds realize capital gains just as individual investors do. Any time your fund sells a security at a gain, that gain is taxable. Since the law requires mutual funds to pass most of their net gains on to investors, you realize a capital gain. This is either long-term or short-term, depending on how long the mutual fund held the securities. You can avoid these types of gains by investing in a low-turnover mutual fund.

Use capital losses to offset capital gains

Do you have a losing investment in your portfolio? You might want to sell it and use the loss to offset gains. For example, if you have $4,000 in capital gains, and you take a $4,000 capital loss, the two will negate each other, and your tax liability on the gains will be eliminated.

Plus, if your investment losses for the year exceed your gains, you can use the balance to offset your ordinary income, up to a $3,000 limit.

Business Expenses: Get Reimbursement Right

If a business owner is the main or only employee of the company, it’s important to implement a judicious policy of expense reimbursement that’s similar to that of major organizations. Solo enterprises are, in fact, the most likely operations to incur business expenses paid with personal funds. This often occurs when the owner uses a personal credit card for company purchases.

The business should treat reimbursed expenses as if it had paid for them directly. The reimbursement is recorded in an expense category of the company’s accounting system that describes the type of expenditure. Creating nebulous categories with such names as “Reimbursements” or “Credit Card Payments” obscures the actual business purpose. Instead, use an expense account that classifies the cost exactly as you would for nonreimbursed, directly paid expenditures.

A sound reimbursement policy ensures that you don’t miss claiming valuable tax deductions, improperly classify business expenses, or suffer cash drains of uncertain origin.

Limit the Episodes

It’s best to limit the occurrences of expense reimbursement. The easiest solution is to have a single credit card devoted entirely to business purchases. Bookkeeping accounts for each credit card charge as it occurs. Since all the charges are company costs, the credit card bill is simply paid by the company. The bill payment is allocated to the credit card liability account on the balance sheet to which the charges were applied.

A credit card provider that supports a business account will issue secondary cards if you have employees. This allows tracking of charges by each worker.

In an era where almost anything may be purchased with a credit card, cash advances are generally unnecessary. Company policy should prohibit cash advances – even to the owner. If you must spend cash for a small item, place the receipt in the business records and collect a reimbursement. This is the same procedure you would utilize with an employee. In these cases, bookkeeping should record the expense in the same category it would have if the expense had been directly paid by the business.

Avoid Complications

Personal expenditures inadvertently charged on a company credit card are not business expenses. An owner may easily make the mistake of charging something like a personal dry-cleaning bill on the company credit card. Account for these charges as owner distributions. With all credit card charges recorded on the books – even these owner distributions – the liability balance in the bookkeeping system will match the eventual credit card bill.

Setting a standard of recording every charge exactly as it will appear on the credit card bill ensures easy reconciliation of the books to the credit card statement. Avoid the temptation to make a bookkeeping entry for a group of charges. This technique is suitable only when reimbursing multiple expenses paid with cash or a credit card not dedicated exclusively to business. A single charge may be divided into multiple expense categories. For instance, meals while traveling for business must be distinguished in the company’s accounting from lodging and transportation. Additionally, personal entertainment during a business trip is not tax-deductible, despite the allowable deduction of travel costs.