Tag Archives: cash flow

We hear from business owners constantly that they are making profits, but don’t have a lot of cash at the end of the year to show for it. One big reason is that they are constantly investing in their businesses. This concept of “reinvesting” profits frequently occurs, especially in growing businesses where the expected payoff is down the road. What often gets overlooked however is the importance of where, why, and how that investment is occurring. And the answers can be key to accelerating growth and managing cash and the business overall.

Why does this matter?

A key word we stress is intentionality in actions and choices within a business – in simple terms, telling money where to go. And, next, what should that investment result in? Sometimes the investment is long term in nature, meaning the ROI will be long term as well, but it can also be short term. Sometimes an investment feels like a simple cost of doing business, for example hiring a new team member, such as an inventory manager. However, that role should improve control over inventory, meaning a reduction in potential losses or inventory shrink. It may be indirect, but there is still an ROI on that investment. Business owners need to understand where they are investing in the business, and what they expect to generate as a result.

The ability to go back and revisit what actually happens relative to what was expected is an essential learning tool for further decision making. This is also critical in evaluating options. Small businesses operate with limited resources, and are all about choices, sometimes tough ones. So let’s look at some key areas where investment occurs:

CapEx – An obvious area of investment is capital expenditures. This could be new equipment or an upgrade to equipment, IT, real estate or vehicles. This won’t show up in the P&L directly. So how can you clearly bucket and track these investments over time? And before an investment is made, what is the business case? Is that a better use of funds than others?
People – People are a huge area of investment in businesses. This could be adding a key executive or operating role to allow for better efficiency or scale. It could be in accounting to handle additional sales volume. Maybe it is time to add a role in house, such as HR. These are all areas of investment in the business. The organization of tomorrow has to be built, and that building means investment. And whether direct or indirect, how do these investments impact profits, risk and asset growth?
Marketing – Marketing comes in many shapes and sizes, so a distinction here is key between ongoing and an investment. Marketing such as Google Ad spends are clearly ordinary course of business expenses, however, perhaps the business is exploring a new initiative such as building out a email marketing system, maybe there is a sizable upfront spend in imagery and physical materials, or even engaging an outside PR firm. There is an investment involved here for a longer term payoff.
Inventory – Many businesses in growth mode make investments in inventory. This could take the shape of a decision to carry larger amounts of in stock inventory to meet growth, or perhaps a buildup of inventory in a new product. This is a key use of cash that should have a tangible ROI. And while this will likely become the new norm, that initial buildup is an investment, and should be viewed that way.
Systems – Systems can take a lot of shapes and sizes. This could be a new cloud-based software platform. It could be more rigorous processes, such as a new manufacturing line configuration or the material addition of checks and balances. That spend is an investment. And while some will generate profitability and efficiency, they often reduce risk, protecting future profitability and assets. What capital needs to go to developing or upgrading systems?
Expansion – Some businesses choose to expand, whether geographically, horizontally, vertically or just by product or service offering. This category can be a catchall for multiple of the categories above like people and systems in addition to start up costs such as legal, compliance and testing.

The keys are to identify where money is going, track it over time and view the overall business to understand investment versus normal operations. Ask the questions, understand where things are headed and make educated decisions and evaluations. Years of high investment will often show lower cash balances and often lower profits as well to be followed up by higher profits in future years as the ROI is realized. Without a thought process around investment, how do you know if an investment is working? Should you do more or less?  Can you tell the difference in your business?  You want to.

Many companies find themselves with unexpected amounts of cash on hand as a result of PPP funds, stronger financial results and reduced spending over the last 12-18 months. While on the surface, that is an enviable position, many CEOs are struggling with the best decisions related to that cash, especially as there is still so much uncertainty in the global economy. It is highly likely there is no one right answer, but a combination that will strength the overall health of the business and its owners.

Here are a number of options to consider.

1. First and most importantly, understand any large pending uses of cash, the most obvious of which is taxes. Businesses that performed better than expected are likely to have higher tax liability as a result. What is the cash balance after that tax liability is paid? That number becomes the starting point.

2. Maintain reserves. Every business should have a minimum amount of cash on hand at all times as an internal insurance policy. This amount will vary by business based on the volatility of income, the amount of monthly expenses and how capital intensive the business is, but this should be a well thought out baseline.

3. While interest rates are historically low, there are still options to earn yield on cash balances. Talk to your bank about different programs that may increase returns without taking on unnecessary risk. More so in instances where future uses of the cash are expected, finding ways to earn even a minimal return for a period of time is better than a simple savings account.

4. Invest in the business. Are there options to invest in the business that will generate near term and/or long term returns. Perhaps an investment in new equipment, people, marketing initiatives or expansion opportunities. Key to this is an evaluation of the return, but this may be a time to reinvest in areas to propel further growth.

5. Stock up on inventory. Especially given a strained supply chain, purchasing larger quantities and/or carrying larger inventory balances could be critical to generating the revenue desired in the future. You can’t sell what you don’t have, and some suppliers are lowering per unit pricing for larger orders.

6. Pay down debt. Particularly in the case that reserves are sufficient and there are not areas of good ROI investment in the business, accelerating the payment of debt can make a lot of sense. Interest is a cost to the business even when rates are low. And companies with lower leverage are most often better positioned to take advantage of opportunities down the road because they have a greater margin for error.

7. Reward your people. Success is a team effort and this could be a great opportunity to share the benefits of the success, especially given the tight labor market. Profit sharing and bonuses are great, but there may also be meaningful rewards that cash can buy – experiences, thoughtful gifts or extra benefits and perks throughout the year.

Regardless of the amount of cash in a business, having a plan on where it goes is key, and for every business that plan is unique. Don’t just let cash sit there, take action on where it goes to best support the business and its growth.

As a business owner, when was the last time you talked to your tax accountant? Hopefully the answer is very recently, and if not, it needs to be a priority. Tax planning is one of the more critical, but too often unutilized tools in a company’s financial arsenal. For many business owners, recovery from the pandemic has been better than expected, but uncertainty due to potential legislation and continuing supply chain issues and an extremely tight labor market is still very real. Having a good proactive tax advisor is critical for a business, and dialogue should be frequent, providing business updates to them, and answering key questions they have.

Here's why it matters:
1. First and foremost, every business is unique, and tax implications for one can be very different from another. A solid tax accountant takes a customized approach, helping create the most favorable tax outcomes short term and long term for your business.
2. Critical decisions may need to be made before year end. Particularly for businesses with substantial profit and cash, an investment in assets before year end could result in tax savings. Depending on the type of retirement plans in place, contribution amounts may need to be made before year end as well.
3. Many tax provisions are expiring at the end of 2021, including the Employee Retention Credit that was part of the CARES Act. The 2021 tax year will also usher in changes to the treatment of net operating losses, business interest expense, and business meals. Understand how each of these items and others may affect your business and what you need to do before year end to be sure and take advantage.
4. For businesses who performed ahead of expectations and generated substantial profits, that likely means a much larger tax bill as well. Is ample cash available to pay the liability? Understanding the potential implications may affect investment plans in the new year.

What you need to do:
1. Ensure you have a solid tax accountant that understands your business – you don’t have to be the tax expert yourself. But if they aren’t asking you questions throughout the year, you may want to seek one who will. There are countless horror stories of businesses that made hefty tax mistakes because key context was not discussed.
2. Have good financial records. Your tax accountant can only work with the information provided to them. Before year end, the ability to provide year-to-date financial info plus an estimate of the remainder of the year will be crucial in allowing for effective planning conversations.
3. Don’t let the headlines cause panic. Much has been made of proposed tax legislation. Until it becomes law, it will not affect your business. Act on factual information with the guidance of your tax accountant.
4. Have at least a rough picture on what the new year might look like financially. That could make a huge difference in deciding the timing or whether to go forward at all with certain decisions. If substantial growth is expected next year, it may be beneficial to defer some expenses accordingly.
5. Start having the conversation – today.

A knowledgeable tax accountant is one of the strategic partners every business needs.  Ensure you have one, talk to them regularly and look forward to the new year with confidence.  It saves money, improves peace of mind and lowers risk. 

Disruption in the supply chain is nothing new, and you don’t have to look hard to find new data on a daily basis. Overseas manufacturers are still unsettled from the pandemic, ports are full and there are not enough truckers to move the necessary loads of goods. This disruption has affected small businesses particularly hard as they don’t often have the resources to hoard inventory well in advance. And unfortunately, recent trends are suggesting that the supply chain may not return to normal levels until well into next year. Like many disruptions we have seen over time, this also creates an opportunity and here are some ways to lay the foundation to do so.

1. Diversify – This is a great opportunity to diversify sources of supply, both suppliers and the geography of suppliers. Having multiple sources of the same product could dampen the blow of availability and potential for pricing shocks. Geographically, companies are for example successfully moving to suppliers in Mexico and Latin America where they once depended solely on China. Even if a new supplier cannot be spun up right away, this practice will help in the short run while also serving a beneficial long-term purpose. Just don’t forget to carefully assess quality control.

2. Down the chain – What is the downstream impact on your suppliers? Do you understand their supply chain? How much “raw” inventory do they carry and how are they managing the disruption? Could one of their suppliers tip the apple cart? Have these conversations if you are not doing so already.

3. Plan for It – It is a great idea to reforecast throughout the year, and we are not too far off from annual planning season for most businesses. Be conservative and budget for higher costs. What does this picture look like? It may well be a reality for the foreseeable future, but regardless it is a very valuable planning exercise. What impacts would alter decision making?

4. Pricing – How much price control do you have with your customers? Many companies have raised prices already, just following the inflationary wave. Perhaps this is limited by larger competitors or by the market however, or it will only apply to a subset of products. Understand the levers you can pull and where the ceilings are so options can be thoroughly evaluated.

5. Alternatives – This has also been a window of time where companies are re-examining what they make and how it is sold. Does product mix need to shift due to supply issues? Is this the right time to consider a product redesign or tweak, or one step further to create more in house? Disruptions create great opportunities to pause and explore alternative solutions that might not have been needed or even possible in more normal cycles.

6. Pull Back – Does it make sense to operate at lower sales levels for a period of time? Labor is tight, maybe that extra shift does not make as much sense. Could marketing spends be pared back? A good profit level may still be attainable. This is not a one-size fits all solution, but for some companies, a shrunken but stable version may be the best way to ride out the disruption and be positioned for success in the future. The key here again is to understand the what if’s and make decisions accordingly.

The supply chain disruption is real and likely not subsiding any time soon. There are steps that businesses can take. This is a time for nimble decision making, exploring creative options and looking ahead. The competition could already be doing so. Disruption can be your friend or your enemy. The choice is yours.