SMALL BUSINESS FINANCE TIPS: Maintaining Your P&L During a Down Economy

For any small business, managing revenues, costs and expenses comes with inherent challenges - especially in a down economy. For example, maintaining healthy profit margins – in the face of rising materials and labor costs – can be daunting, but is necessary for a small business to thrive and survive in today's economy.

I have developed the following tips to help small businesses best maintain their P&Ls that I hope you all find helpful:

Revenue:

- Create revenue plan & hold employees accountable for the plan
- Lock down clients with long term contracts if possible – to help revenue become predictable
- Plan to continually grow revenue (this will guard against client drop off)
- “Love” your existing clients/customers keep them happy, send thank you cards, buy them an occasional thank you present
- Grow revenue with existing clients/customers (these are your best opportunity)
- Get rid of undesirable clients (this will not help you in the long run)
- Use a sales tracking software/tool to help you find keep focused on new client opportunities
- Have action plan for growth & action plan for downturn and be ready to use (do not be caught off guard)

Expenses:

- Revisit P&L results on a monthly basis
- Ensure the expenses can easily be identified (i.e. make sure that there is not one vague line item where all expenses are booked)
- Continually compare results against income and expense benchmarks

For a professional services firm for example:
- The net margin of no less than 20% of revenue (note: ensure that the owner/officer salary is included as an expense before looking at the net margins)
- Employee costs should be about 50% of revenue; look at revenue per head as another metric – revenue per head should be no less than $150K; Greater than $200K per employee is preferable
- Rent should be no more than 3-6% range of company revenue
- Spend money (5-10% of revenue) on business development
- Incentivize appropriate employees around expense goals to ensure the company stays “lean”
- Ensure that the company is profitable and keeps a healthy margin (this will guard against down times)
- Keep and maintain projections which would include actual results PLUS forward looking projections for the year
- Include spending on assets/depreciation (a non-P&L item) in the monthly review…this is an area where spending can get out of hand and often gets overlooked
- Do a vendor analysis on an annual basis (keep good relations with your vendors but make sure that an expense is not widely out of whack)

I welcome all thoughts comments and feedback!

PLAN FOR THE FUTURE: DON’T GET CAUGHT “OFF GUARD”

As the Jim Morrison of The Doors once said, “the future’s uncertain, and the end is always near.” While he may have been referring to his short and rather debaucheries life, he was right about one universal thing: the future is uncertain.
Now, is the end always near? I will be the first to admit that I am not an expert on Nostradamus studies, so I will let the religious and academic scholars try to answer that question. I do know though that uncertainty about the future is a common feeling for most small business owners.

In fact, as soon as an entrepreneur loses sight of this, they can get very complacent and easily get derailed. And, from a financial planning perspective, I believe it is critical for any company to develop a strategic plan for the future. This plan could include planning for additional funding, an acquisition, or if they are ambitious an IPO. Either way, a plan is needed for the “end game,” or as many call it an “exit strategy.”

While many CEOs have studied finance, or have financial backgrounds, it is critical to get the right financial talent on board to help develop these strategic plans. Most people would not try to re-wire their houses would they? Of course not…they bring in an electrician to handle with this complex and somewhat dangerous task.

The same could be said for using the right talent to handle financial planning. It is the future after all. And, if Mr. Jim Morrison is right, the future is uncertain. So, why not bring in the right experts to make the future clear, bright and within reach.