Before we get too far into 2017, let’s take a look back at 2016 results and five meaningful numbers you may want to discover about your business’s performance. To start, grab your 2016 income statement, or better yet, give us a call to help you compute and interpret your results.
Revenue per Employee
This number measures a company’s productivity with regard to its employees and is relevant and meaningful for all industries. If you have part-time employees, compute a full time equivalent total and use that as your denominator.
Compare this number to prior years to see if your company is getting more or less productive. Also compare this number to businesses in your same industry to see how your company compares to peer companies.
You may also want to compute other revenue calculations, such as revenue by geography, revenue by product line, or average sale: revenue by customer, if you feel these may be meaningful to your business.
Customer Acquisition Cost (CAC)
How much does it cost your business to acquire a new customer? That is the customer acquisition cost and is made up of marketing and selling costs, including marketing and selling labor. You’ll need the number of new customers acquired during 2016 in order to calculate this number.
Compare this number to prior years as well as industry peers. You can potentially do a lot to lower this number by boosting your marketing skills and implementing lower cost marketing channels.
Overhead costs are costs that are not directly attributable to producing or selling your products and services. They include items such as rent, telephone, insurance, legal expenses, and executive salaries. Although it’s not standard practice to break out overhead expenses from other expenses on an income statement, it’s valuable to know the numbers for performance purposes.
Compare your overhead costs to prior years and industry averages. You can actively manage your overhead cost by re-negotiating with vendors on a regular basis and trimming where it makes sense.
Your profit margin can help you determine which division of your business is most profitable. If you sell more than one product or service, you can compute a gross or net margin by product or service. You can also compute margins by geography, sales rep, employee, customer, or any other meaningful segment of your business.
Your accounting system may be able to generate an income statement by division if everything has been coded correctly and overhead has been allocated appropriately. Reach out if you’d like us to help you with this.
Seeing which service or product is most profitable can help you decide if you want to try to refocus marketing efforts, change prices, discontinue items, fire employees, attract a different type of customer, or any number of other important decisions for your business.
Do you know how many units you need to sell in order to start generating a profit? If not, the breakeven calculation can help you learn this information. The formula is Fixed Costs / (Sales Price per Unit – Variable Costs per Unit) which results in the number of units you need to sell in order to “break even” or cover your overhead costs.
The breakeven point helps you plan the amount of volume you need in order to ensure that you have healthy profits and plenty of cash flow in your business.
These five numbers can help you interpret your business performance on a deeper level so you can make better decisions that will lead to increased success in your business. If we can help with any of them, please give us a call any time.
If there is a period of time between when your customers receive your goods or services and when they pay for them, then several things are true:
- You have a balance in Accounts Receivable on your balance sheet that represents how much customers owe you
- You have an invoice process that you follow
- You have granted credit to customers
- You may have some that don’t pay as quickly as you’d like them to
Each invoice you send should have payment terms listed. A payment term is the period of time you expect the invoice to be paid by the customer. Your payment terms should be set by you, not your customers!
Payment terms are always measured from the invoice date and define when the payment should be received. Here are some common payment terms in accounting terminology, and then in English.
Payment is due 30 days from the invoice date.
2/10 Net 30
Payment is due 30 days from the invoice date. If you pay the invoice in 10 days, you can take a 2% discount off the total amount of the invoice as an early pay discount incentive.
Due Upon Receipt
Payment is due immediately
If you use Net 30 or Due Upon Receipt, then you may want to change your terms to get paid faster. When people see Due Upon Receipt, sometimes they translate it into “I can take my time.” A more specific term spelled out such as Net 7 or Net 10 will actually get you your money faster than Due Upon Receipt.
Do you have issues with people paying you late? If so, you might want to set consequences. Consider adding a line on your invoice that provides interest charges if the payment is late. Utility companies do it, and so do many businesses. A common percentage to charge is 1% – 2%, however, some states have laws that limit you to 10% or another percentage.
The wording would be something like this:
“Accounts not paid within __ days of the date of the invoice are subject to a __% monthly finance charge.”
You will also need to make sure your accounting system can automatically compute these fees.
If you have questions about payment terms, your invoicing process, or your accounts receivable, please reach out.
Positive Pay is a service offered by banks that is designed to reduce fraudulent check-cashing against your account. If you are writing checks on your bank account (as opposed to using ACH transactions), then the positive pay service, which usually has an extra charge, may be beneficial.
When you activate positive pay, you must send a file of checks that you have written to the bank. The bank will not cash those checks against your account unless they match by check number, dollar amount, and account number. Your file may also include the date of the check and sometimes the payee. Some banks are also able to match payee, but not all of them, so be sure to ask about this.
If there is a mismatch among checks presented for payment, the check will be treated as an exception item and your company will be notified. A representative of your company will let the bank know whether to pay or exclude the exception check.
Positive pay helps to deter a couple of types of fraud:
- Checks where someone has changed the amount
- Stolen blank check stock, even if you don’t know about it being stolen
Positive pay is not designed to prevent the type of fraud that occurs when checks are written to a ghost vendor and erroneously approved by management.
If you use positive pay, you should separate the file creation process from the person who actually writes and/or signs the checks. This will give you better internal control.
The main challenge with positive pay is making sure the bank receives the file of checks before they are presented for payment, including any manual checks written. Another issue is the extra cost, although some banks offer this service at no extra charge.
For companies worried about check fraud, consider looking into positive pay with your local bank.
New I-9 Form Mandated After January 22, 2017
- Section 1 asks for “other last names used” rather than “other names used,” and streamlines certification for certain foreign nationals.
- The addition of prompts to ensure information is entered correctly.
- The ability to enter multiple preparers and translators.
- A dedicated area for including additional information rather than having to add it in the margins.
- A supplemental page for the preparer/translator.
An interesting way to fund your dream project, whether you are a startup or a more established business, is to consider crowdfunding. Crowdfunding is when many people provide the money in small amounts for a project.
Although crowdfunding is not new, it became much more popular when organizations like Kickstarter, Indiegogo, RocketHub, and GoFundMe created web platforms to enable this method of raising funds. The 2015 crowdfunding market is estimated at $34 billion and is growing exponentially.
In crowdfunding, the person who initiates the project receives the money that the people contribute. The web platform that supports the project usually gets a percentage of what’s raised. It varies as to what the people who contribute to the project receive in return. It can be the payback of a loan with interest, shares of stock, rewards, or a possible tax write-off in the case of a donation.
You probably hear about companies that get funded overnight, making it look easy to create a successful crowdfunding campaign. There is a lot that goes into the launch of a successful campaign. Here are some steps:
- Design your project and research how much money you need
- Choose your platform (Kickstarter, Indiegogo, etc.). This requires careful research about which platform is best for your type of project as well as a complete understanding of the rules and limitations of that platform. For example, on Kickstarter, if you don’t reach your goal, you don’t get any money, including what you have partially raised.
- Create a video that tells your story and makes the pitch. You must not only grab attention but appeal to both the rational and emotional sides of your followers. You must also provide an enticing reward for your followers.
- Count your followers. Do you have enough to raise the capital you need? If not, create the marketing you need to build your followers and make your numbers.
- Gain some big name backers if you possibly can.
- Develop a carefully orchestrated launch using multiple marketing channels, including social media and press.
With the explosive growth in crowdfunding, it’s here to stay. Consider how it may help your business grow.
If it’s been a while since you’ve adopted new marketing methods, it might be time, especially if you want to attract younger customers. Here are five ideas to do just that.
With YouTube as the second largest search engine, using video in your marketing is a slam-dunk return on investment. If there is an educational aspect to your sales cycle, a video is perfect to get the message across.
Even better news is that many companies still haven’t caught on to how powerful video can be in marketing, so you will have an advantage. There is no longer a financial barrier to entry as most videos are no longer professionally made.
There are so many ways to create video: using a webcam, capturing your screen with webinar software or TechSmith’s Camtasia®, or even using your cell phone. If you have a gmail address, you already have a YouTube account, and you can easily crate and customize your own YouTube channel.
The hardest part of adding video to your marketing is to simply take the leap.
2. Social Media
Social media is now one of the best places for a business to expand brand awareness. LinkedIn provides customers with a way to discover your background. It’s also a good source of new employees. Facebook and Google+ enable you to build community and learn more about the interests of your customers.
Twitter is perfect for announcing sales and boosting event excitement. YouTube enhances education and motivation. Pinterest for Business and Instagram are perfect for retail to showcase new products. Tumblr is a must if you market to teens.
If you’re new to social media, choose one or two sites and set up your profile. If you already have some social media profiles, consider expanding or increasing your activity.
3. Content Marketing
Content marketing is another way to educate your customers before and during the sales cycle. With content marketing, you creates a report, white paper, or educational video that describes a topic congruent with your services. The content is typically “gated,” meaning the prospect needs to provide email address or phone number or both, so that you can follow up on the lead. The content should be enticing and educational and should also introduce the prospect to your brands and services without being heavy handed about it.
Content marketing is a great lead generator, especially if you have a sales staff that can deliver scripted follow-up calls.
4. Mobile and Wearables
Over a year ago, Google proclaimed there are now more mobile searches than desktop searches. For the last few years, it’s been increasingly important to make sure your website delivers a great experience via mobile technology.
Wearables are growing as fast as mobile did. Innovative companies are providing a rich customer experience through wearables. It’s now common to see wearables in health, sports, household automation, and virtual reality entertainment. But others are having fun with creative solutions, such as British Airways blankets that turn a color based on a passenger’s mood and Nivea’s children’s sunblock that comes with a GPS bracelet tracker so the kid doesn’t stray too far away.
5. Marketing Automation and Integration
Today, the entire marketing funnel can pretty much be automated, from SEO-enhanced social media posts to landing pages using content marketing to follow up emails, videos, and shopping cart links. Almost every business needs a website, list management system, shopping cart, social media automation app, and a CRM, Customer Relationship Manager. With this automation, you may be able to reduce sales labor as well as customer support expenses.
Integration of multiple marketing channels and methods is essential as the buying decision has become more complex and trust is built slowly over time. Successful marketers are integrating SEO (search engine optimization) with social media, video with content marketing, and email marketing with landing pages, to name a few.
Try any of these five trends to give your marketing a future-focused boost.
If you’re looking for more ways to bring in additional revenue, then a VIP revenue stream is one option for many businesses. Here are a couple of examples:
A plastic surgeon has a long waiting line of patients. The surgeon sets up a special membership fee of $3,000 per year for patients who wish to work with her. These patients get first access to her appointment schedule. They get priority surgery dates and personal care. Her other patients that do not pay are able to see her physician assistant. She earns an extra $300K — insurance-hassle-free — for the hundred patients who join her VIP group.
A pizza restaurant always has long lines during rush hours. The owner sets up a VIP membership of $75 per year for customers who want to bypass the long lines. He dedicates one of his cash registers to the VIP line and staffs it accordingly during rush hour. He sends specials by email and a birthday coupon to the VIP members. Five hundred customers sign up, grossing an extra $37,500 with little or no additional expenses.
A consultant has a couple of clients that want to have access to her 24/7. She sets up a special retainer of $1,500 per month for these clients and provides her cell number. Since they are busy CEOs, they only call a few times a year, but when they do, she drops everything to be of service. With four clients on retainer, it’s an extra $72K per year for a few days of work.
No matter who your clientele is, there are always a few who demand extraordinary service and are willing to pay extra for it. Capitalize on this by adding a VIP revenue stream to your offerings.
What you include in your VIP package will vary by industry, but here are a few thoughts:
- Increased access to you
- Special service, perhaps via another phone line or checkout lane
- Invitation to exclusive events or sales or previews
- Free gift wrapping
- Free shipping
- Special gifts
- Friends are free
- A richer experience
- Birthday acknowledgement
A VIP offering is not the same as a points program. A points program encourages volume sales, while a VIP program is all about special perks, exclusivity, and a higher level of service.
Does your business lend itself to a VIP offering? If so, give it a try.
Sometimes, the most telling numbers in your business are not necessarily on the monthly reports. Although the foundation of your finances revolves around the balance sheet and income statement, there are a few numbers that, when known and tracked, can make a huge impact on your business decision-making. Here are five:
1. Revenue per employee.
Even if you are a solo business owner, revenue per employee can be an interesting number. It’s easy to compute: take total revenue for the year and divide by the number of employees you had during the year. You may need to average the number in case you had turnover or adjust it for part-time employees.
Whether your number is good or bad depends on the industry you’re in as well as a host of other factors. Compare it to prior years; is the number increasing (good) or decreasing (not so good)? If it’s decreasing you might want to investigate why. It could be you have many new employees who need training so that your productivity has slipped. It could also be that revenue has declined.
2. Customer acquisition cost.
If you’ve ever watched Shark Tank®, you know that CAC is one of the most important numbers for investors. This is how much it costs you in marketing and selling costs to acquire a new client. Factors such as annual revenue, or even lifetime value of a client will affect how low or high you can allow this number to go.
3. Cash burn rate.
How fast do you go through cash? The cash burn rate calculates this for you. Compute the difference between your starting and ending cash balances and divide that number by the number of months it covers. The result is a monthly value. This is especially important for startups that have not shown a profit yet so they can figure out how much cash they need to borrow or raise to fund their venture.
4. Revenue per client.
Revenue per client is a good measure to compare from year to year. Are clients spending more or less with you, on average, than last year?
5. Customer retention.
If you are curious as to how many customers return year after year, you can compute your client retention percentage. Make a list of all the customers who paid you money last year. Then create a list of customers who have paid you this year. (You’ll need to two full years to be accurate). Merge the two lists. Count how many customers you had in the first year. Then count the customers who paid you money in both years. The formula is:
Number of customer who paid you in both years / Number of customers in the first or prior year * 100 = Customer retention rate as a percentage
New customers don’t count in this formula. You’ll be able to see what percentage of customers came back in a year. You can also modify this formula for any length of time you wish to measure.
Try any of these five metrics so you’ll gain richer financial information about your business’s performance. And as always, if we can help, be sure to reach out.
Running a small business is often about taking and managing risks. Market risks are normal but business and tax risks are another thing altogether. Most business and tax-related risks can be managed as long you know about them. Here are seven small business risks you will want to make sure are covered.
1. Best Choice of Entity
Are you operating as a corporation, limited liability company, partnership, or sole proprietor? More importantly, is the entity you are operating under providing you with the greatest tax benefits and separation from personal liability? If not, you might want to explore the alternatives to make sure you’re taking the amount of risk that’s right for you.
2. Employees or Contractors
Are your team members properly categorized when it comes to the IRS’s rules about employees versus contractors? Unfortunately, it’s not about what you and your team member decide you want. If you decide to hire contractors and the IRS determines they are employees, you could owe back payroll taxes that can cripple a small business. So you’ll want to do the right thing up front and make sure you and the IRS are in agreement, or be willing to take a future risk.
If you’d like to protect yourself from possible losses through a disaster, theft, or other incident, insurance can help. There are a lot of kinds to choose from, and you’ll likely need more than one. At the minimum, make sure you’re covered by:
- Business property insurance, renters insurance, or a homeowners rider to protect your physical assets.
- Professional liability or malpractice insurance, if applicable, to protect you from professional mistakes including ones made by employees.
- Workers compensation insurance, to cover employee accidents on the job.
- Auto insurance or a non-owned policy if employees drive their car for work errands.
You may also want personal umbrella insurance, life insurance, and health insurance. Check with an insurance agent to get a comprehensive list of options.
4. Sales Tax Liability
Are you sure you’re collecting sales tax where you should be? As the states get greedier, they invent new rules for liability. For example, if one of your contractors lives in another state, you may owe sales tax on sales to customers who live there even if you don’t live there or have an office there.
Nexus is a term that describes whether you have a presence in a state for tax purposes. Having an office, an employee or contractor, or a warehouse can extend nexus so that you’d need to collect and file sales tax for those states. If you’re in doubt, check with a professional, and let us know how we can help.
Most small businesses make the mistake of underpricing their services, especially when they start out. If you started out that way, it’s awfully hard to catch up your pricing to a reasonable level. Knowing the right price to charge can make the difference between whether the company last six months or six years. You can mitigate this risk by getting cost accounting help from your accountants who can help you calculate your margins and determine if you’re covering your overhead and making a profit.
6. Legal Services
Legal services can be expensive for a small business, so sometimes owners cut corners and take risks. Attorneys are needed most when it comes to setting up your entity, reviewing contractual agreements such as leases and loan agreements, settling conflicts, advising on trademark protection, and creating documents such as terms of service, employment agreements, and privacy policies. Just one mistake on any of these documents can cost a lot, so be sure it’s worth the risk.
7. Accounting Services
Doing your own accounting and taxes can be risky if they’re done wrong or incomplete. You could end up paying more than you should if you leave out deductions you’re entitled to. Worse, if you do your books wrong, you could end up overpaying taxes without realizing it. A common bookkeeping error results in doubling sales, and while it might look good, you certainly don’t want to pay more than what’s been truly received.
How did you do with these seven risks? If you need to reduce your risks in any of the areas, feel free to reach out for our help.