Now that the echoes of “Auld Lang Syne” have faded away, it’s time to get back to the business of building your business. As you’re making your list of New Year’s resolutions, consider these recommendations for the 15 priorities that will help keep your business healthy.
15 Business Finance Tips
- Plan now for your exit.Your business succession plan starts with understanding what you want to get out of the business, personally. Do you want to reap the maximum amount of profit from selling your business? Or are you more interested in passing on your legacy through a continuing family enterprise? This foundational question influences the many decisions you need to make as you build your business this year and in the years to come. Remember: The sooner you start planning to transition your business, the better positioned you will be to make intelligent decisions.
- Gain a realistic view of your business’ worth.If you haven’t undertaken a business valuation in the past couple of years, it might be time. For most business owners, the business’ value makes up the majority of their net worth. Having a clear and objective view of that value enables better decision-making about everything from your personal investment strategy to your business succession plan. If the value isn’t what you expected, then focus on the value drivers that you can control, such as establishing a strong, empowered management team. The business valuation also creates a baseline from which to start estimating potential tax liability when you sell or transfer your business
- Review buy-sell agreements and update as needed.People generally don’t like to think about negative outcomes. Reviewing your company’s buy-sell agreement is about as appealing as updating your will, but it could also be even more important to your family’s financial future. Does the agreement cover the most likely events that could impact the future of the business? Death or disability, as well as voluntary or forced departure, are addressed in most buy-sell agreements. But what if a major customer jumps ship or goes out of business? Or what if the business doesn’t have the cash flow to buy out an owner who wants to leave? A wait-and-see approach doesn’t protect your business (and your net worth), so review the buy-sell agreement with your legal and CRI accounting team this year.
- Rethink entity selection.That studio apartment you loved in college would probably be a poor fit for a growing family. In the same way, the entity structure that was right for your business in its early days might restrict your business’ options as it grows. Each entity type has its pros and cons, so review your current situation and growth goals with your CRI CPA and attorney to decide which structure is the best fit now.
- Review executive compensation.Setting salaries is a balancing act. You need to offer competitive compensation packages to recruit and retain the best talent. But as one of your largest expenses, it’s important to keep that line item in check. Perceived inequity among salaries also can breed resentment—especially between family and nonfamily employees. One way to address these competing priorities is to draw from objective sources of data. For example, salary.com and payscale.com both can provide a glimpse into competitive rates for different positions. Also look to your industry’s trade association for salary surveys. And be sure to pay attention to the demographic breakdown since compensation varies markedly according to the region and size of the market.
- Review insurance coverage.As long as businesses have risk, they will seek to transfer that through insurance. But are you covering the right risks? While general liability insurance covers accidents, injuries, and negligence, manufacturers might need product liability insurance to protect against losses as a result of a defective product. Commercial property insurance is another category that encompasses a number of “peril-specific” policies, such as business interruption insurance. Ask your financial adviser to conduct an insurance review to discover and fill the gaps in your coverage.
- Create a realistic budget.Forewarned is forearmed. Running a business is about more than producing and delivering products and services. It’s about managing the needed resources to grow those operations. By thinking through and committing to paper your anticipated revenues and the associated business expenses, you can spot potential problems before they become actual problems. Start the year right by creating a budget for the entire year—but don’t stop there. Revisit your budget every month to update sales forecasts and make adjustments based on unanticipated changes
- Maintain a reasonable level of debt.Are you carrying the right amount of debt for your situation? While overextending is a serious risk, the prudent use of outside capital can also launch your business to the next level. Determining the right debt-to-equity ratio requires a careful analysis of your cash flow and competitive conditions. A general rule is that businesses and industries that are highly volatile should rely less on debt for their growth than businesses that are more stable.
- Evaluate vendors.If a major vendor were to go out of business or fail to deliver a critical supply, what would be the impact on your business? Treat your vendors as partners in your success, but also remain objective and realistically evaluate their performance on a regular basis. Establish metrics that indicate quality—such as on-time performance and number of complaints—and review each vendor’s results at least annually. If the vendor is underperforming, have a conversation about how to bring their performance back in line with your expectations. In the meantime, line up back-up vendors as a contingency plan.
- Develop an emergency preparedness plan.Nearly one-quarter of businesses that suffer a major disaster never open their doors again, according to the Institute for Business and Home Safety. The U.S. Small Business Administration’s disaster preparedness guide can help you develop a plan that will get your business back up to speed quickly after a natural or man-made disaster.
- Establish employer sponsored retirement plans.Helping your employees save for retirement makes sense for you and for them. Not only do retirement plans make your company more attractive to potential hires, but they also can have significant tax benefits for you and the employee. In fact, the IRS’ retirement plan contribution limits for both defined-benefit and defined-contribution plans are increasing in 2015. If you haven’t already explored creating a retirement plan, then discuss your options with your CPA in 2015.
- Think in terms of opportunity cost.Every choice has multiple components: the one option you chose, and the many options that you missed out on as a result of that choice. By choosing to offer employees a retirement plan, for example, you reduce the funds available for capital improvements to the business. Every choice you make should be weighed within the context of the business’ strategic goals and objectives.
- Secure your data.If you think only major companies like Target, Home Depot, and Sony need to worry about data security, then think again. Even small businesses are becoming increasingly attractive to hackers—partly because they tend to have weaker controls protecting their data. Has your business established cybersecurity policies and procedures yet? Make sure your employees know what they can do to mitigate cyber risks. After all, while sophisticated encryption methods can help protect your data, the “human firewall” is the most important cybersecurity control.
- Strengthen financial controls.While cyber attacks are a growing possibility, small businesses still are much more likely to suffer from old-fashioned fraud. According to the Association of Certified Fraud Examiners’ 2014 Report to the Nations, small organizations (those with fewer than 100 employees) suffer disproportionately large losses due to fraud, and they are significantly more likely to suffer from schemes such as check tampering and cash larceny. One reason that small businesses are such easy targets is that they often lack the resources for strong financial controls. This year, focus your attention on low-cost and no-cost controls that are proven to be effective—such as creating and instituting formal management review procedures.
- Plan for long-term tax impact.Taxes are always top-of-mind this time of year, but typically we’re focusing on last year’s tax liability. While there may be certain steps you can still take to lower your 2014 tax bill, don’t forget about opportunities that will pay off in the longer run. Certain lucrative tax strategies take time to implement, such as conducting a cost segregation study to accelerate depreciation deductions. So don’t wait to seek sound tax planning advice that will balance your tax-minimization and business growth goals.
While these 15 areas are applicable to most businesses, one or more of them might not be quite right for you. If you need help creating your list of New Year’s resolutions, call CRI’s CPAs. We’ll help you start the New Year on the right note.