Tips & Tools

Practical Tools for Small Business...

Working with small businesses, Key Consulting, Inc. has developed some straightforward, practical tools to manage a business. Do not hesitate to reach out to discuss these tools. I would be happy to sit down with you.

Operate With a Formal Financial Plan

If your business has more than $1 million in sales and you operate without formal budgets, you are off the pace. Too often, companies that get into trouble moved forward totally blind. No financial map. No guidelines. No clear objectives.

This is a ticket for disaster.

Banks are increasingly requiring companies to provide budgets to renew existing loans or secure new financing. With the current crisis in the banking industry, standards will only get tougher.

Are you prepared to sit with your lender and discuss what the next few years look like?

Implement a Monthly Performance Scoreboard

Don't get blindsided. Do not assume all is well in your business. Take the time to develop a monthly scorecard. It can contain dozens of pieces of data but that may be impractical. Start out with something simple and build it into a more elaborate summary.

So start simple. Sales, gross profit margin, net profit margin, EBITDA, total debt, accounts receivable, accounts payable, working capital surplus or deficit, and total employees. Have the columns covering a rolling time period (IE December 2021 through February 2023). Look for trends, outliers, warning signs, or one-time items.

Catch the small issue before it becomes a large issue.

Develop Financial Guardrails

After 31 years of working with small companies, it is clear to me that very often companies that got into trouble overreached. They did something that put the "mothership" at risk. Not an indictment. Not an attempt to blame anybody. A simple fact.

Owning and running a business involves risk. Believe me, I know that. In the great recession, I thought one of our businesses might tip. How ironic? I was working on a $65 million turnaround when one of our own companies got slammed by the recession. Both companies made it and prospered. Thank God for that.

Growth is vital. Growth matters. Growth is absolutely necessary. Wait, let me correct that. Controlled growth is vital. Controlled growth matters. Controlled growth is absolutely necessary.

Protect you, your company, and your team. Put some limits in place regarding financial risk. It could be as simple as the following:

- Debt to equity never above 1 to 1 or perhaps 2 to 1

- Current ratio never falls below 2.5 to 1

- EBITDA Debt Coverage never falls below 2.0

If a company has predefined limits, it limits the ability of a company to get into trouble. Limits do not prevent growth and expansion. Limits make it less risky should trouble arise.

Stay focused. Be disciplined.

Develop A Capital Allocation Matrix

So a successful business generates EBITDA (cash flow) and must decide how to put that money to work. Too often, the process of allocating capital is a haphazard decision making process that involves everything from college tuition to someone loving the new Ram 3500 truck.

This is not how to conduct business. Capital is precious. Capital is hard earned. It MUST be protected and enhanced. If it is not allocated properly, capital can be destroyed. (Count that as a deadly sin for a small business...)

Take out a sheet of paper. Write the expected EBITDA generation for the year at the top. Next add line after line of priority categories. Taxes. Bank debt. Capital spending. Ownership distributions/dividends. Employee retention. Incentive plans. Retirement funding for ownership.

Think long and hard about how that money will need to be allocated for the company to continue to prosper. Think about the needs of ownership long-term. Is retirement secure or does funding need to be beefed up? How about allocating a portion of profits to employee incentives? What are the needs capital spending wise?

Each category will have different amounts and different urgency levels. The key is that a framework exists and can be used as a map going forward.

Will the matrix change? Undoubtedly. Perhaps an owner in their late 50's sees retirement funding as the priority. A younger owner might see equipment upgrades. A tough labor market may require one-time payments at Christmas.

Get a plan. Stay with the plan.

Take Action With 100-Day Plans

I will not be cliche and tell you "most people don't plan to fail, they fail to plan..." That is annoying beyond belief. Cliches do not make things happen.

What is the goal? What are we trying to achieve? What are the detailed critical steps we need to take to make this happen? What are the deadlines for each of the steps?

How many of us really do this? I know, I don't always do it.

The giant investment firm KKR operates on 100-day plans. They acquire a company and on the first day begin implementation of a detailed 100-day plan developed prior to closing on the purchase.

Rapid action with defined steps to achieve specific goals is the answer.

Implement A Plan for Organic Growth

Growth matters. Even slight growth matters. In today's economic environment you need to grow sales 7%-8% just to keep up with inflation.

Look at your profit and loss. Ask yourself what expenses on the 2022 profit and loss will actually go down. It is possible not one of them. Meanwhile, sales for many companies flatten out. This means revenue is flat and expenses are rising. That is a ticket for disaster long-term.

Think simple. Chop up some revenue goals into small bites. Here are a few simple examples:

- Sales to existing customers increase 5% this year

- Increase pricing 7.5% effective Q2 2023

- Add five new customers this year

- 10% of our business in 2024 will come from new customers

- Add one significant additional revenue stream 2025

Your business MUST grow to survive long-term.

Brainstorm Strategic Goals and Work Backward

Ever feel bogged down just making it through the day? Well, making it through the day is not exactly the kind of goal that gets us up early in the morning.

Take a few weeks and start thinking about goals 25 years out. Carry a notebook and pen in your vehicle (I do). When a goal strikes you, write it down and compile them on a single sheet of paper.

What is big picture? How do we double sales in 10 years. What is not big picture? Should we lease or buy the new copier.

I have worked with small companies for 31 years. Much of it has been tough sledding turnaround work. Like not make the payroll this week type work. That is not fun.

Strategic planning is fun. Nothing is off limits. It sets larger goals and gets us to focus on what matters. Create a scholarship plan for employees? Double the staff in ten years? Have 50% of your plant run on robotics in seven years? Create an ESOP? Plan for your successor?

Set big goals and mentally work backward to understand the steps required to move your company in that direction.

Include Your Team on Simple Goals

Set four or five simple, understandable goals for the year. Sales go to X. Margins remain at Y. Full staffed by year end. Revamp web marketing effort by Q3. Implement formal budgeting by year end. Purchase and install first robot on the factory floor.

People perform better when they are part of a team with clearly defined goals and objectives.

Always Maximize Retirement Options

I do not dispense investment advice. I have nothing for you on the future of Apple stock. Time has taught me that many small businesses grow and outperform the markets anyway.

One specific issue that owners need to address is security outside the business. Owning a business can be profitable AND totally exhausting. It is important that a business owner uses the tax and retirement options available to secure wealth OUTSIDE the business. SEP, IRA Simple, 401K, defined-benefit plan, or something like a cash-balance plan.

Get with your team and put the gear in motion. The tax savings alone can be 35% plus depending on your bracket.

Do it now. End of sentence. Full stop.