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Time for a financial tune-up

The first months of the year are an important time for small business owners to strategically evaluate their business operations. This includes taking an objective look at the business plan, including monthly and annual financial plans. There are key metrics such as capital levels, cash flow and reserves and operational expenses that can play an important role in the business’ future. Schedule time with a banker or other trusted financial services partner for a tune-up to make sure the business is well-positioned for the year ahead.

First, make certain the business is adequately capitalized. Small business owners should evaluate their balance sheet to ensure there is an appropriate amount of debt versus equity. This allows the business to be flexible and adapt their plan of action as market conditions change. If the business is running debt heavy, discuss this with a banker as they may be able to help with ideas for accelerating revenue collection. They can also help owners evaluate whether they are using the right kind of credit for the debt they hold. For example, an equipment purchase may be a better fit for a term loan rather than a line of credit.

Secondly, now is a critical time to conduct a detailed budget process and identify fixed expenses versus variable expenses. Business owners tend to work off the concept of “this is what I did last year.” However, adjusting this mindset can help improve cash flow. It is crucial for owners to pay careful attention to different business costs and how to manage and allocate for these various categories. Some are more flexible than others. For example, fixed expenses such as utilities and rent must be paid each month, while variable expenses like increasing inventory should only be done in conjunction with new revenue to support it.

After owners develop a budget, they need to commit to both following it and reviewing it on a consistent basis. A budget should be viewed as an educated estimate based on historical information and anticipated future activity. To help keep this as accurate as possible, the business owner should evaluate their actual revenues versus expenses at the end of each month to determine if the budget was on target. If not, the owner should determine why the numbers were higher or lower and make appropriate adjustments to the budget’s future periods. A consistent, proactive review will enable owners to be more nimble in navigating factors such as different business and sales cycles and challenging economic times.

Finally, owners should also consider opportunities to gain efficiencies. A common refrain from business owners is surprise at how much time they find themselves doing important administrative chores required to run the business and how little time they have to actually invest working in their business by doing the work they love. In some cases, it may make sense to look to third-parties or strategic partners to take on certain functions or roles to help free up time.

Additionally, outsourcing can help switch a fixed monthly expense to a variable, as-needed expense. An example of outsourcing is using a payroll company for processing payroll and employee benefits. Implementing time tracking and tax and benefits calculation tools can alleviate the pain of these tasks. Another timesaving example is outsourcing customer payment receivables processing. Many financial institutions offer services that allow small business to process customer payments directly into the company’s bank account. The bank can handle processing the receivables, saving handling time and effort.

While small business owners should always be mindful of their business and financial plans, the start of a new year with new tax and regulatory rules is a good time for a thorough annual check-up. This includes discussing plans with a trusted financial partner who can help provide objective and expert advice. Taking the steps to evaluate business needs, anticipated activity and other external factors, such as the economy, will help best position the business for future success.

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Kathleen Matthews

Kathleen Matthews is Vice President, Small Business, of UMB Bank // (303) 267-9486 // kathleen.matthews@umb.com // www.umb.com

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