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Business Finance Resolutions for 2012

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Happy New Year!  Thank you for coming back in 2012.  The New Year is here and the time is ripe to take a fresh look at how you can bring more revenue and profit to your Freelance business.  The purpose of this blog is to inform and inspire readers to create the conditions that will generate a successful and rewarding Freelance consulting career.  Let’s get the ball rolling and look at how effective financial management promotes that goal.

Resolve to skillfully manage cash flow

Cash is king and cash flow is the life blood of every business.  Nothing flows unless the cash does.  Cash flow management means knowing how much money is expected to enter your coffers and when those checks are expected to arrive,  along with knowing how much money must be paid to creditors and when those checks must be sent. 

Even if you show a profit on your P & L,  it’s possible to have insufficient cash in hand to pay monthly bills and other accounts payable.  We all know that working as a Freelancer can be a cash flow nightmare,  so it’s vital to get arms around the accounts receivable,  or else sleepless nights will haunt.

Cash flow management actually begins in client meetings.  Once your project fee has been addressed and agreed upon,  diplomatically state that 15% – 20%  is paid at contract signing and that invoices are payable upon receipt.  Payment schedule for the balance will depend upon the length,  type and cost structure of the job. 

Whatever you do,  don’t allow more than 35%  of your fee to be payable at project conclusion  (unless it’s a small job).  Take steps to discourage the client from preserving his/her organization’s cash flow at your expense.  Write payment terms into the contract,  right along with the scope of your work,  deliverables and start date.

Resolve to get paid what you are worth

Establishing value and getting paid for same is the goal in every service business,  whether it’s teaching piano or being a nanny.  Your pricing strategy should reflect the value that your services bring to the client.  Needless to say,  pricing supports  cash flow and revenue.  To identify an appropriate fee range,  pricing experts recommend that you focus on four factors:

  • The perceived value of the services your provide
  • The demand for your services  (and your reputation as a purveyor)
  • What’s involved in the delivery of your service  (time = production cost = the Freelancer’s cost of goods sold)
  • Your mark-up / profit margin

Resolve to create and analyze the basic financial statements every quarter

Freelancers have a good idea as to how we’re faring financially,  because we either have the desired amount of money in the bank or we don’t.  We either have jobs in-house or we don’t.  We have either big jobs in or small jobs.  Like a balance sheet,  your bank statement provides the snapshot of your financial picture at a given moment.

There’s nothing like creating and then actually contemplating and analyzing one’s cash flow and income  (profit & loss)  statements to truly grasp your true financial picture and most importantly,  receive clues as to what would be advantageous for you to do about the business model,  sales and/or marketing segments of your consultancy.  Smart business decisions are invariably data-driven.

As you analyze your financials over the years,  you may identify regularly occurring busy periods and decide to hire temporary help or bring in a Freelance sub-contractor,  to give you another pair of hands at those times and allow yourself to make more money. 

Slow periods will likewise be identified.  You’ll be encouraged to find a way to either stimulate business during those times by incentivizing clients to hire you,  find temporary work,  find classes to teach (if that’s one of your competencies),  or engage in prospecting,  networking and professional development activities.

Next week,  I’ll return with more business-themed New Year’s Resolutions for 2012.

Thanks for reading,

Kim

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Face Your Financials

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Although you may have both an accountant and a bookkeeper on your payroll you, the business owner,  still bear the ultimate responsibility for maintaining the financial health of your enterprise.  Every business owner should be able to understand and make good use of business financial data.  Each financial statement has a story to tell and you the business owner must be able to decode the language and comprehend the information that the numbers relay.

There are three financial documents that are generated monthly  (and also compiled quarterly and annually): the Balance Sheet, the Cash Flow Statement and the Profit & Loss  (or Income)  Statement.

  • The Balance Sheet resembles your checking account monthly statement.  This document details business assets and liabilities,  showing the monetary value of all the business owns and what it owes.
  • The Cash Flow Statement is the business budget and shows what sales revenue will flow into the business and what expenses will flow out.  This document helps you stay on top of how much money is available to cover expenses,  like payroll and rent.  Accounts payable  (the bills)  and accounts receivable  (sales revenues)  are listed on this statement.  If you’ve ever managed a household budget,  then you can master the Cash Flow Statement.
  • The Profit & Loss  (or Income)  Statement is similar to the Cash Flow Statement.  It contains many items that are also found on the IRS tax form Schedule C,  Profit or Loss From a Business.  Sales revenues and expenses are listed on this statement,  including labor,  taxes,  inventory  and the wholesale costs of products sold.  Net Profit (also known as the bottom line)  is  the last line of this statement and this figure represents the ultimate story of business financial health.

One does not need a degree in accounting or an MBA in finance to identify which numbers on financial statements are most critical to your business and understand the story that each one tells.  Keeping track of five or six key values,  including values called ratios,  will do wonders for your comfort level with financial analysis and in the process,  guide your business decisions in many ways.

  • Gross Profit  in the P & L tells how much money remains after selling and product production costs,  or the wholesale cost of products sold,  have been tallied.  Freelancers calculate this figure as time: how many hours were spent on your contract project,  networking to create new business,  developing a new workshop? Make a reasonable estimate of the wholesale cost of your labor.  This figure gives insight into how much money/time  it takes to make a sale.  Can you work smarter and faster,  or buy materials for products manufactured more cheaply? That’s how to increase gross profit.
  • Net Profit,  or the bottom line of the P & L,  tells the ultimate story.  Every line item that precedes it impacts it.  If you want that number to be larger (and don’t we all?),  look at all expenses to see what can be trimmed and also consider ways to generate new business through strategic partnerships,  referral relationships,  networking for client development,  PR,  etc.
  • Gross sales revenues  in the P & L may be tracked in two ways,  looking back over what occurred in previous months or years  (historical comparison)  and going forward  (projections, or forecasting)  to what you reasonably expect and want to sell in a given period,  guided by sales history and current demand for your product/service.  Are you achieving,  exceeding or failing your personal sales goals?

Finally,  see your Balance Sheet and calculate these ratios,  to expand your grasp of the financial data:

  • Quick Ratio = Accounts Receivable + Cash – Inventory divided by Accounts Payable    This figure indicates how much money is available to pay bills.  A 2:1 ratio represents a business in good shape.  However,  a big receivables number can mask clients who take longer than 30 days to pay,  thus signaling the owner to step up collection efforts.
  • Current Ratio = Assets divided by Liabilities   This figure measures resources available to pay debts over the next 12 months.  A value > 1.0 shows a business in good shape,  > 2.0 is a business in excellent shape.
  • Working Capital = Current Assets – Current Liabilities   This figure also demonstrates the ability to pay off short-term debts.  Obviously,  a positive number is what you want.
  • Debt to Equity Ratio = Total Assets divided by Total Liabilities   This figure indicates how much debt the business carries relative to its assets.  A value <0.5 is excellent and values > 0.5 mean the business is carrying rather heavy debt and is considered highly leveraged.

Thanks for reading,

Kim

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Seven Resolutions for 2011 Part 1 of 2

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Happy New Year!  You had to see this coming,  so here we go with the resolutions.  We’re at the top of the year and it’s a time-honored tradition to look forward and plan to succeed.  I hope the list that I’ve pulled together inspires you to get busy.

1.   Set financial goals  

Whether you’re 35 or 55,  financial goals are a must.  Establishing these goals as a Freelancer presents a  unique challenge,  because our incomes are often neither predictable nor secure.  A fickle revenue stream makes adequate planning even more of an imperative.  We must get our arms around the money thing and take as much control as possible.  Our ability to live a comfortable life throughout our lives depends on it.  The idea is to avoid going broke,  especially in the elder years.  Those with a  steadily employed spouse have a huge financial advantage,  while those who are single or married to a fellow Freelancer have more variables and hence  a more challenging mountain to climb.  Consider what you want your balance sheet to look like in five years and make an appointment to discuss your financial wish list with your accountant.

2.   Develop a budget  

You may be expert at monitoring and tracking expenses,  but developing a budget encourages one to anticipate the year’s fixed and variable financial obligations,  as well as revenue that is likely to be generated.  One budgeting objective can be to prepare for the inevitable peaks and valleys in a Freelancer’s revenue stream.  When do you typically bill the most hours and when the least?  Which annual conferences do you like to attend,  when and where are they held and what is the cost?  Where and when is it (or might it be) advantageous to advertise?  Have you been mulling over the idea of making upgrades in certain of your marketing materials?  What about your credit needs—do you need to apply for another card to help float strategic expenses,  or can you cancel one?  When can you make contributions to your retirement fund and what should that amount be?  Can you take a vacation this year,  when can you take it and how much can you spend?  The idea is to figure out how to pay for what you must do and also cover a couple of items from your wish list,  to reward yourself.

3.   Review business priorities  

Should you form a strategic partnership,  to give your business entrée to a new segment of your market?  Should you aim to sign more new clients,  or focus on obtaining repeat business from previous clients?  Or would it be wiser to try wringing more billable hours out of your current roster?  Which clients might be most amenable to which strategy?  Also,  should you do more teaching and/or speaking this year? Which institutions will benefit your reputation and client list the most?

I’ll be back to complete the list of resolutions next week. 

Thanks for reading,

Kim

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Starting A Business? Consider Your Financials Part II

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Learning to create the financial documents for your business  is a worthwhile endeavor.  Make yourself do it! You will gain a significant understanding of your business.  You will learn the art of financial analysis.

Retaining a bookkeeper and accountant to produce the monthly statements and prepare the taxes is not enough.   In most cases, they don’t know your business well enough to make important decisions.  They can tell you when to cut expenses, but they lack the hands-on overview that effective decision making requires.

That responsibility (and privilege) is yours alone.  Little by little, even those who may be intimidated by numbers can become comfortable with the process.  Every business owner is the company CFO.

THE PROFIT & LOSS (INCOME) STATEMENT

This statement demonstrates whether or not the business is making money.  It will be useful to generate  a P & L statement every month, to chart your progress and help you pay attention to what the numbers are telling you.  It is an excellent analytical and decision making tool.

Many entries from the Cash Flow statement will also be listed in the  P & L:  sales revenue generated from each product and service;  variable selling expenses such as raw materials, labor, equipment rental and advertising;  and fixed costs such as rent, office staff salaries and utilities.  When you’re financially able to do so the owner’s draw,  i.e. what you pay yourself, will be listed here as a fixed expense.

At the top of this statement, enter gross revenues (sales). There are also lines for beginning and ending inventory and cost of goods sold.  Subtract COGS from gross revenues to reveal the gross profit.

Fixed and variable  expenses are tallied and subtracted from gross profit earnings to give you the EBIT: earnings before interest and taxes.  Loan interest payments and all taxes are then entered and subtracted also, to reveal in the bottom line of the statement the net profit or loss.

THE BALANCE SHEET

The Balance Sheet shows the financial picture of your business on a particular date.  It demonstrates what the business owns and owes on a given date, usually at the end of the fiscal (or calendar) year.

The Balance Sheet is divided into 3 categories:  Assets,  Liabilities and Net Worth (owner’s equity).  All business assets such as cash in the bank,  equipment owned,  inventory, property owned, office furniture and accounts receivable are considered assets and are entered in the plus column.

Business debts and obligations, e.g. loans and loan interest payments, accounts payable and taxes owed are entered into the minus column.  Net worth emerges when liabilities are subtracted from assets.

THE QUARTERLY BUDGET REVIEW

The Pro Forma Cash Flow statement, which provides a projection of what cash can reasonably be expected to flow into and out of your business in a given month (or quarter), should be validated by a Quarterly Budget Review.   Also called the Cash Flow Statement, this document gives the actual cash flow numbers for your business and is created after the fact.

Now you can compare your best guesses to reality.  Are you over or under budget? What has been over- or underestimated? Do you need to trim or stagger certain expenses in order to pay the bills every month? How accurate were your sales projections? Moreover, how much are you spending to make the sale?

Needless to say it will benefit you to trim expenses wherever practical and control COGS by locating the lowest cost wholesalers and raw materials sources, to free up cash so you can comfortably pay the bills each month,  pay down business debts and  perhaps  allocate money for useful promotional and advertising campaigns. You will also want to take that owner’s draw as soon as possible!

We’ll conclude the money portion next week with a look at what investors and lenders will also want to see.

Kim

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Starting A Business? Consider Your Marketing Strategy Part III

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Even if you will not seek financing for your business and the marketing plan is for your eyes only, you will thank yourself many times over if you take the time to thoroughly research and account for all aspects of marketing, especially sales expectations for your products and/or services.  Make sure that you  understand  exactly how you will  make sales contact with prospective customers.  In your plan, note whether your business will sell primarily  B2B,  B2C  or  B2G.

THE SALES STRATEGY–PROJECTIONS

Sales is the tactical manifestation of marketing.  The theories of marketing are brought down to earth to make contact with the customer and will be validated (or invalidated) by the sales revenue generated.

When planning a new business venture it will be necessary to make sales projections (also called forecasting), ideally for 36 months into the future, to give yourself an idea of the revenue potential of your business.  It’s sort of like fortunetelling, but there are resources available to help you make a reasonable estimate.

Marketresearch.com gives current industry profiles and other data, covering 16,000 lines of business in 300+ markets. You’ll need to become a registered user;  some (but not all) info is free.  Another excellent source for business data is Boston Public Library’s Kirstein Branch. You can access certain info online at bpl.org and most is free.

Example:  in your business, you are the only sales person during the first year.  If sales are promising, you may decide to hire 1-2 sales people in year two and maybe another 1-2 more sales reps in year three.

There is data that gives the average sales revenue per full time sales representative in nearly every industry. That data will allow you to chart your expected gross income for the year, based on the number of people selling for you.

However, bear in mind that a new business is unlikely to achieve the benchmark figures during the first 3-5 years of operation.  Remember also that gross revenue is not net revenue—there are expenses associated with selling like salaries, product brochures and office supplies.

Competitive intelligence data can help confirm the accuracy of your sales projections.  However,  Freelancers and those competing with privately held companies will not be able to ascertain how much revenue is historically generated yearly by those competitors since the data is not public.

What I’ve discussed here is known as the Comparative Method of projecting sales.  It is generally more useful to project for new businesses using this method. There is also the Build-up Method, where the entrepreneur identifies all likely revenue streams and then estimates the dollar volume that can be extracted from each source in a given month (or quarter).  The Build-up Method tends to work best for businesses that have been up and running for a few years and therefore have a sales history and documented revenue streams.

Finally, consider the impact of  sales trends for your industry (meaning consumer demand) and the relative strength of the local and regional economies on your products/services.   Sales projections will never be 100% accurate.  It will be wise to keep your forecasts conservative.

THE SALES STRATEGY–CUSTOMER CONTACT

How the business owner makes contact with prospective customers will be governed by a number of factors, one of the biggest being is this an online business or is it in real time?

If  you expect to sell online, be sure to have a website with a good shopping cart set up and secure credit card processing.  Your website will function like an ambassador and an employee,  so create  it with respect. The site must communicate your brand very well, must download quickly every time and must be user friendly.  A content management system will allow you to keep the site updated yourself.

Driving traffic to the site will be your #1 job and search engine optimization will be critical.  As was suggested in a  comment to last week’s posting, internet discussion groups are a very useful way to connect with customers and create buzz.  They are a great way to drive traffic to your website.

Catalogues do double duty, allowing customers to order by telephone or the website. They are expensive to produce (product photography is costly) and print, but they still catch the customer’s eye and are widely used by the likes of LL Bean and Staples. To the customer a good catalogue is a keeper, so you don’t have to print more than once a year.  Get a toll free phone number for customer convenience.

Next, decide whether the best way to sell to customers will be face to face or by telephone.  What is traditional for your business, meaning what do competitors do? Of course, you can create your own style.  Your sales may occur primarily by telephone, but a visit to prospects to introduce yourself to decision makers and gatekeepers can be a wonderful way to separate yourself from the pack and develop relationships.

Other selling methods include bid submission (e.g. the trades or selling to the government), referral arrangements and inclusion on preferred vendor lists (e.g. caterers and florists  at a function space).  For some businesses, two or more customer contact methods will be used to generate sales.

Next week we’ll start talking about money.

Kim