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Building a successful business takes vision, passion, a viable product or service, and lots of hard work. Bankrupting a business is much easier. In fact, doing nothing to address systemic problems is often all that’s needed to drive a company off the cliff. Four pitfalls to avoid include the following:
Ignoring the numbers. If management lacks a basic understanding of the company’s financial statements, severe problems may not be addressed. For example, the balance sheet might be carrying obsolete inventory at inflated historical prices. If the asset section of the balance sheet is heavily weighted toward inventory, management may be given a false sense of the firm’s net worth. An unrealistic view of the firm’s financial health also may stem from faulty accounts receivable valuations. If uncollectible accounts aren’t routinely written off, management may fail to intervene with more stringent credit and collections policies — until it’s too late.
Disregarding customer complaints. No one likes criticism. But failing to listen to the grumblings of the folks who rent or buy your products and services can lead to adverse publicity, lost sales, and, eventually, bankruptcy. It’s crucial to determine why customer expectations haven’t been met, especially when the same complaints surface from different segments of your customer base. Perhaps your product line needs to be expanded, your existing products tweaked, or your prices lowered to a more competitive level.
Turning a blind eye to cash. Preparing a quarterly cash forecast shouldn’t be considered optional. Such a forecast will show expectations for each major source of cash, as well as detailed projections of expenses. Updating this forecast weekly, by comparing actual performance with original expectations, can help management adjust quickly to changing conditions. Managers need to routinely evaluate where cash is coming from, where it’s flowing, and how much is needed to keep the company afloat. Compiled financial statements prepared on a quarterly basis are a great tool for examining the financial health of your business.
Living beyond the company’s means. A penchant for fancy cars, fine dining, season tickets, and other corporate perks may not capsize a company if adequate revenues exist. But when business income is stagnant or declining, managers may need to take a hard look at costs. In some cases, payroll expenses may need to be reduced to better align with revenues. Superfluous real estate, luxury sedans, or outdated equipment may need to be sold to reduce debt and bolster cash balances.
Spending to avoid tax liability. Surprisingly, some small businesses spend purely to spend. There are many small businesses just starting up that spend their profits on things they don’t need right then simply to avoid tax liability. For example: If you made $50,000 in net profit, you’ll owe around $10,000 to $15,000 in taxes. Some businesses would rather spend their earnings than see their hard-earned money go to taxes, but sometimes this may not be the best choice for a small business. A business should absolutely make necessary investments, and take the tax deduction for it, but spending unnecessarily just to avoid taxes is not always the wisest decision.
Karin Langwasser, CPA and Cindy Agostini, EA have over 25 years of experience and are experts in financial planning and small business tax strategizing. If you’d like help assessing the financial health of your business, please feel free to contact Langwasser & Co., CPAs at (909) 931-9080.
Karin is a mentor to business owners, entrepreneurs, and startup companies on how to create successful business strategies in today’s economic environment, so they can thrive instead of just survive. Not only has she been a CPA for over 20 years, she also has experience as a successful managing partner. She has 5 active licenses in a variety of financial fields. She is a proactive, holistic accountant who truly cares about her clients. “Here at Langwasser & Co. we treat our clients like family.” Karin gets the big picture and thinks outside the box. She does more than crunch numbers…she is a trusted advisor who uses wisdom and experience to find ways to manage, save, and protect her client’s money. Langwasser & Company, CPAs has been in business for over 20 years. Our firm has exceeded our clients’ expectations with holistic solutions that are custom tailored to their specific needs. No matter how new or established a company is, or how large or small an individual’s needs may be, we have the experience and drive to satisfy every question with an answer and every problem with a solution. We invite you to give us the opportunity to provide you with the highest level of customer service and business knowledge to best cater to your needs. Experience the Langwasser & Company, CPAs difference by contacting our office today at (909) 931-9080.