Category: Management

Budgeting

~ C.O.R.E. Beliefs ~ Leave a comment

Happy Thursday and Mid Year!  It is almost the 4th of July weekend and we are so excited the boys are coming tomorrow to play Xbox and enjoy our homemade individual pizzas.  It is always a great time.

Kubae and I went shopping last night.  This in and of itself is nothing extraordinary, but it is the first time we went shopping based upon a budget.  Why a budget you ask?  It seems she reads my blog and felt that we should plan for the things we want.

Since we are like almost everyone else in the world (especially like most small businesses) we have limited resources – meaning that we cannot have everything we want.  So we sat down over the weekend and did some strategic planning.  She wants to take a trip out of the country next year.  This was our primary goal.

Now, the fun part became, how do we get there from here?  This is where budgeting comes in.  A budget is the plan to get from where you are to where you want to be.

First thing you have to do is have a good idea of where you are.  So, I downloaded 3 years of bank information, dumped it into Excel and started categorizing.  I actually use 4 overhead categories for our personal finances, similar to what I use for small business – Facility, Food, Entertainment and General.  After 3 hours, I had a good idea of how we spent money.  From here I crafted a few alternative budgets for our upcoming discussion.

Tuesday night we had our “Board Meeting” to review our expenditures and our plan.  It was very enlightening and Kubae immediately dug into the details.  Part of the historical review is that it really puts somethings in perspective, such as $500 a month on eating out.  Having the history made it much easier for us to ask questions like:

  • Why do we spend money on this category?
  • Is there an alternative?
  • Do we impact our quality of life if we redirect the funds to another purpose?
  • How does this spending get us to our goal?

Based on this conversation, we were able to move into the various budget proposals.  We reviewed each category, moved money from one area to another and made a commitment to the plan.  Which led us to last nights shopping trip.

We spent a few minutes creating the list and a rough idea of what we would spend.  We allotted ourselves $60 for last night’s shopping.  We completed the list and added a few things we had forgotten and the total came to $68.  Victory!

I know, you are thinking, but you exceeded your budget so how is this a victory?  The answer is, we typically would walk out with over $130 of food and goodies.  We were able to cut our typical shopping experience in half.  Besides, the $60 was a guess and a pretty accurate one if I say so myself.  This was, after all, our first shopping trip in a month’s worth of shopping.  I will let you know how well we did for July at our next “Budget Review Meeting” the first of August.

Budgeting is part of your planning.  If you want to grow your small business, then you need a goal which requires a plan to reach it.  Budgeting is your financial commitment to your plan.  so ask yourself where you want your small business to go and then plan how you are going to get there.

If you need help with budgeting and reviewing your past inflows and outflows, talk with your accounting professional and ask his help in understanding what is happening.  If you do not have an accounting professional or are looking for a new alternative, feel free to contact me to set up a free no obligation consultation.  I am here to help your small business meet your goals and dreams.

Have a great Thursday.

 

Owning versus Renting Continued

~ C.O.R.E. Beliefs ~ Leave a comment

Good morning and happy Monday!  I hope everyone had a great weekend.  Mine was filled with time in the gym, laundry and a walk around the Fort.  Plus lots of reading and the occasional show on Netflix.  A very nice weekend indeed.

For small business owners, there is one part of the own versus rent conversation that concerns them; and it has to do with their business property.  I share their concern.  On the one hand, it can be cheaper than leasing and you build equity, on the other, it potentially ties up a huge chunk of liquidity.  Lets dig into this a little bit.

On the use of the property, most business owners swear they use the property 24×7.  But do they really?  Even if your hours are 6am to 6pm M-S, that is only 72 hours a week out of a possible 168.  I know, the business parks the fleet there, has tools, etc. in the building that need to be protected 24×7.  It doesn’t really meet the 80% test, but it does fall squarely into the lease category.  If you still feel it best to consider buying the property, there are other things to be aware of.

The bigger concern is how to pay for the purchase of the property.  With a lease/rental situation, you may have to leave a deposit, perhaps first and last months rent plus $1,000.  For this conversation, lets say the rent is $5,000 per month so your initial out-of-pocket to move in is $10,000.  Coming up with $10,000 is not a real challenge for most small businesses looking for property.

To buy that same property though, you may need a lot more than $10,000.  Let’s say the building is worth $500,000.  If you are fortunate, you may be able to put a down-payment of 3% (assuming you qualify for some sort of SBA guaranteed loan).  Most typically, plan for a 10% down payment.  That is $50,000 of liquidity you must have available to buy the property.  It is also liquidity you can’t get back quickly or easily.

But you cannot forget the other costs of ownership.  Remember, you still have property taxes which say runs about 1.5% of the value of the property.  And don’t forget, now that you own the building, you are responsible for its upkeep and maintenance.

If you have talked to some professionals about this (which I very strongly encourage), you set the building up in an LLC and are now renting it to your business.  Your business rents from you  at $5,000 per month, which is what you were going to pay in rents to begin with.

I know that there are tax benefits from the ability to take depreciation, but your business doesn’t see that, you do.  Don’t get me wrong, you may have other forms of income where having rental losses can be very helpful.  But if you are a typical small business owner, you have your income from the business and that is pretty much it.

I also realize that there is the potential for the gain on the investment.  But the net gain after realtor fees, lawyers and taxes might not be as great as you imagined.

There is nothing wrong with owning your business property and renting it to your business.  Remember though, it can suck down your liquidity and possibly slow your business growth.  Really analyze your current and future cash position and ask yourself if tying up your cash in real estate is the right investment.  If you need help or want to understand the impact of owning versus renting commercial property, talk with your accounting professional and ask her advice.  If you are not working with an accounting professional or are interested in a second opinion, feel free to contact me and enjoy a free no obligation consultation.

 

Imagine

~ C.O.R.E. Beliefs ~ Leave a comment

Happy Friday.  I understand there is a great deal of angst out there what with Britain leaving the E.U., our own political turmoil and the risk of another global recession on the horizon; but try to keep it in perspective.  What goes down goes back up.  People will save for a while and then spend.  Your primary role as a small business owner is to remain faithful to your Company and the value it brings to customers.  So again, Happy Friday!

Kubae and I were talking last night and this morning about a woman, lets call her Ann, who was an excellent baker and who decided to open her own bakery.  She quit after two months and Ann’s comment was, “Why would I want to go through the trouble of baking 30 dozen cookies if I only make $1.00 a dozen?”

To which I replied, “Why couldn’t she make $1.00 a dozen and sell 30,000 dozens?”

Kubae’s response to my answer was, “What point is there in making 30,000 dozen cookies if she couldn’t sell them?”

I have written about it before but it is worth repeating.  Most small business owner focus on the wrong parts of the business.  They are worried about the cookies and not about how to get more of the right customers.  The right customer will not find you by accident.  It takes hard work, dedication, and a willingness to extend yourself to get your ideal customer to come to your door.

One of the things I like to do with a client is walk through their “Imagination”.  Much like a therapist, I ask him to close his eyes and imagine his small business as perfection.

  • “What does it look like?”
  • “Who are the customers?”
  • Who is doing what jobs in the business?”
  • “How much profit is it doing?”
  • Where is the business located?”

Most small business owners cannot imagine these things.  They are busy baking the cookies and worrying about “the perfect cookie” instead of “the perfect business”.

Build the perfect business.  This starts with knowing your ideal customer and then finding ways to get them to give you a chance to wow them.  There are many books on the subject, but I like Michael Gerber’s “The E-Myth” series and also John Jantsch’s “Duct Tape Marketing”.

Both authors try to get us to understand that, perfect cookies aside, there must be some overarching vision.  Both call for small business owners to “Work on their business, not in their business.”  Both call for small business owners to create systems and processes that can allow your business to grow profitably without you, the owner, having to carry out every last aspect of the business.

How does a baker sell 30,000 dozen cookies?  One dozen at a time to 30,000 people.  The hard part isn’t making the cookies, it is finding the customers.

Go.

Find.

Customers.

I know this has nothing to do with accounting, but there is no fun in accounting if there is no revenue and profit.  So, if you feel that making the cookies is driving your business, I strongly suggest you talk with a professional or work with a coach on how to improve your lead generation, prospect education and closing.  If you like, you can contact me for a free consultation to discuss how you might be able to generate excitement about your business.  And read the books!  You will be glad you did.

Have a great Friday and an awesome weekend.

 

Owning Versus Renting

~ C.O.R.E. Beliefs ~ Leave a comment

Good morning and happy Thursday.

Today’s blog is brought to you by Kubae’s insistence.  It was brought on by our being guests of Jeff Taylor with Key Bank at the Portland Thorns match last night.  It was our first visit to the Key Box at Providence Park and she fell in love with it.  By it, I mean the food and the opportunity to watch the match while also enjoy some interesting conversations with the other guests.  It was a great evening and my thanks again to Jeff and the team at Key Bank.

The decision to rent or buy is often a very challenging decision.  You would think that it would be pretty logical – I will generate X dollars of revenues (or cost savings) by spending Y dollars on equipment.  Sadly, it hardly ever is given that level of scrutiny.  Most rent versus buy decisions come down to an emotional “Ownership” decision where I look at the fact I can call it my own instead of admitting to the world I rent.

For you lovers of logic and numbers, I do have a spreadsheet which will help you through this part of the analysis.  I also have a spreadsheet (actually it is just a blank workbook) for you to list out and quantify all the emotional reasons to own.  If you are interested in my Rent versus Buy spreadsheet, shoot me an email and I will send you a copy.

When asked if a small business owner should rent or buy, My first question is about utilization.  How much will it be used over the useful life of the item?  There are a few rules of thumbs out there but the one I work with is:

  • Rent if used less than 20% of its useful life
  • Lease if it is used between 20 and 80% of its useful life
  • Buy if used over 80%

An example:  A contractor needs a new work truck.  It can be driven about 350,000 over 10 years before it starts to run into trouble and should probably be disposed.  The contractor estimates she will put on 210,000 miles over a 7 year period.  First pass answer is  Buy.

The truck is designed to handle about 35,000 miles per year.  The contractor will use the truck 30,000 miles per year.  This comes out to 85% of the useful life of the truck.

I would not stop there though because the important question is, does it make financial sense?  My spreadsheet helps with that as it calculates the Net Present Value (NPV) of the investment in equipment and forces us to think about all the costs of owning the new item.  For instance, with a truck (like above) there are oil changes, maintenance, tire changes, axle replacement, etc. that one needs to consider.  I also consider potential revenue benefits for the investment as well since in most cases that is the main reason for buying an asset!  If all of these items generate a positive value then the decision is supported.

So back to why Kubae suggested that Owning versus Renting would be a good topic for today.  First, we lease our condo.  When we really do the math on the Rule of Thumb, we only  use the space about 62% of the time – since we both work in other offices and we typically spend our alternate weekends exploring; but to be sure we ran it through the Net Present Value calculation.  It actually calculated out with a better return on investment for us to lease a Condo rather than purchase it.

By the way, the same for the Subaru that Kubae drives.  We put on less than 1,000 miles a month so we definitely fell into that Lease category.  We didn’t even bother with the calculation as the answer felt right.  Plus we are excited about the changes to automotive technology which will reduce our dependence on driving even more, but that will come in a future article.

Key Bank did the exact same thing when it came to that Box at Providence Park.  They knew it would generate more than sufficient revenues to offset the cost and ran it through their own NPV calculation system.  Emotionally it might have made sense to invest in that Box but it only happened because it added value to their business.  Have you ever wondered why there are no Apple Fields or Intel arenas?

In business, especially in a small business where every dollar counts, I would strongly encourage you to try to take as much emotion out of the Buy versus Rent decision as you can.  If you insist on owning it even though all the logic says rent, then purchase it personally (or though a separate LLC) and then rent/lease it back to the Company.  If it can generate positive NPV for you that way, then your emotional hunch paid off.

I strongly encourage you to talk with your accounting professional about how to go about buying equipment and other assets for your business.  If you do not have an accounting professional or would like a second opinion, feel free to contact me.  I offer a free no obligation consultation to help us get acquainted and for you to see if we are good fit.

Have a great day.