A long-time dream is about to come true. Life Lessons in Success Launching 3.21.21 My Book Launches March 21! After many years of dreaming, I took action and wrote a book with 35 friends! We each share a personal story with the lesson we learned. To inspire, support, and uplift the reader through storytelling. Each story is unique, and every reader will connect with at least one. I hope you will buy the book on launch day!  Follow us on Facebook for updates and chances to receive bonuses and other resources. https://www.facebook.com/LifeLessonsInSuccess   Follow us on Facebook

People use Google, the most popular search engine, to perform 3.5 billion searches a day! Today, if your consulting business doesn’t have a website, it might as well not exist to the millions of people using search engines to find products and services.

Search engine optimization (SEO) is the process of optimizing your website and creating content that ranks well on the Google search results pages. The higher you rank, the more traffic your website will get, and ultimately the more revenue you will drive.

There is no magic bullet to get the coveted top spots on Google (other than paid ads, of course). You have to earn it! The good news is, if you are willing to put in some work, you don’t need a big budget to see results.

Read these top 5 tips from an SEO consultant to learn more about search engines and the things you can do to improve your ranking on Google.

People Still Read

People constantly say to us, “No one reads anymore, so I don’t want my website to have a lot of text.”

While it’s true that video and audio content are growing in popularity (more on that later), certain types of long-form written content are still being read and ranking very well on search engines like Google.

Long-form content (typically 2,000 words or longer) on your website might include things like:

• Answers to Frequently Asked Questions
• How-to articles
• Case studies
• Behind the scenes / process
• Buyer’s guides
• Sales landing pages
• Lists and in-depth reviews (best of, top 10, etc.)
• Storytelling and long-form journalism

Your goal when creating long-form, high-ranking content is to create a combination of high-quality, trustworthy, useful, interesting, and remarkable content. Keep in mind if the article is long, it should also likely include images, videos, graphics, tools, downloads or anything else that the user might find useful. In addition, you’ll want to format the content with headers, bullets and other elements that will make it easy to skim.

When you create a piece of great content, users will stay on your page to read the in-depth content, which is a great signal for Google that your content is high quality.

Words on Your Website Matter

When designing your website, and also any content you create later such as blog articles, services pages, etc. keep in mind that the actual words you use on the site matter.

Keyword research is the process of using a data aggregation tool to learn what people are searching on the Internet and how many people are searching for it.

By using a free tool such as Neil Patel’s Uber Suggest, you can test your assumptions about what you think users would type into Google to find a business like yours.

Once you know the correct keywords to use on the site, you’ll want to optimize each page for a different keyword phrase. Use those words in the page title, the body copy, in links and in the meta title and meta description of the page.

Video Content is High Value

There is no doubt that consumer preference for video is rising, especially among Millenials. Video content is quickly becoming one of the most high value types of content you can have on your website to help you rank for Google.

Videos engage multiple senses and convey emotion better than plain written copy or still photos. Because of that, videos are simply more engaging and can hold people’s attention longer.

Videos help your SEO by keeping people on your website for longer (also known as “dwell time”), which is a signal to Google that your website has good content.

In addition to video content on your website, YouTube has quickly become the second largest search engine in the world with over a global billion users. So even if you never post the video on your website, your business can still get found on YouTube.

Video content may take more effort and resources to produce, but your effort will most certainly pay off in the way of search engine optimization.

User Intent is Intuitive 

Without doing a bunch of keyword research, it’s actually not difficult to try to guess what types of things people might type into Google, just by looking at your own user behavior when it comes to searching the Internet.

User intent is the concept behind understanding how people search on the Internet and why.

Think about the last time you went to buy a new laptop. Maybe you searched for “best laptops 2021.” The user intent of this query is pretty obvious. You are a potential buyer, but you’re not yet ready to buy. You’re still in the research phase. So Google’s top results are likely going to show you a review website that runs down the best laptops that came out in 2021. This is the type of content that will be most helpful to you at this phase in the buying process.

Once you have narrowed it down to a few laptops, you might search for “Inspiron 15 5000 Laptop reviews.” Then Google will likely show more in-depth reviews of this specific laptop from trustworthy sites (that’s where that long-form content will shine).

When you are ready to buy and you want to check prices, you might type in “buy Inspiron 15 5000 Laptop.” This is where the product page for the Inspiron laptop will likely be in the top results, as well as websites or marketplaces that sell that model such as Amazon or Best Buy.

When you do your keyword research for your own website, consider what the user intent is during each phase of the sales funnel or buying process, and create content that meets those needs.

SEO Takes Ongoing Work

The process of optimizing your website for Google or other search engines is not a one-time thing. There are many technical aspects to SEO that are performed when your website is created that happen only one time. However, to have truly good search engine optimization and ongoing benefits from SEO, it takes an ongoing commitment of time and/or money.

The amount of resources you will have to invest is dependent on how competitive your industry is on Google and how much effort those competitors are putting in. It’s a bit of an arms race. If you are ranking one day for a particular keyword, but then your competitor creates a better piece of content, you’ll lose your position. But then you also have the opportunity to improve your position with more optimization or new content.

In the end, Google will always award the website that has the best, most relevant content to what the user is looking for.

Candy Phelps is the founder of Bizzy Bizzy, an innovative branding and web design agency in Madison, Wisconsin. Candy is also the author of “Grow Your SEO: Search Engine Optimization Concepts Even Your Grandma Can Understand.”

Working Capital is the excess of current assets (including cash, accounts receivable, and inventory) over current liabilities (including accounts payable and accrued expenses).

• Net Working Capital = Current Assets - Current Liabilities

It is a measure of both liquidity and operational efficiency. Ideally, you want to maintain your net working capital (NWC) so you have enough to invest and grow your business. However, too much net working capital can indicate you are not reinvesting cash, not collecting accounts receivable (A/R) efficiently, or over investing in inventory. An important point to note: Inventory is generally thought of as pertaining to businesses that sell products, not services. However, I have always told service providers to think of work completed but not billed as their inventory. A billable hour worked but not invoiced is essentially the same as a widget purchased but not sold. It is an asset that needs to be converted to cash.

Dollars tied up in accounts receivable and inventory are dollars not currently earning a return for your company. Keeping inventory at the optimal level will free up those dollars for investment elsewhere. Likewise, dollars you are entitled to but have not received represent an interest free loan to the party you have extended the payment terms to. The flip side of managing accounts receivable is managing your accounts payable (A/P). These are other firms' extensions of credit to you for the length the payment terms. These represent expenses you have incurred but have not yet outlaid the cash for. Ideally, you will pay these at the end of the payment term period because you want to delay the outlay of cash as long as possible. One possible exception to this is if the vendor offers a discount on early payment (ex. 2/10, net 30). Ordinarily, you should take the discount, especially if you have enough cash on hand and adequate buffer in your cash flow forecast. If you will have to borrow to take advantage of the discount, you will have to calculate the costs of not taking the discount (see equation 1 below) and compare that to the cost of the sources of financing you would utilize.

See original article for equation

Effectively managing your collections, inventory, and payments to outside vendors are essential for good working capital management. Specific working capital needs will vary from industry to industry. Different industries have significantly different payments terms (to both suppliers and customers), inventory values, inventory turn rates, etc. There are various metrics you can use to evaluate your firm compared to other players in your industry. Some of these include:

• Current Ratio - a measure of liquidity. Current Ratio = Current Assets/Current Liabilities

• Cash conversion cycle (CCC)- the number of days it takes to convert a dollar spent on inventory into a dollar inflow from sales, Calculating this number requires you to know your Days Sales Outstanding (a measure of A/R collection efficiency), Days Inventory Outstanding (a measure of inventory management efficiency), and Days Payable Outstanding (a measure of A/P management).

• Working Capital Turnover - measures the effectiveness in using working capital to generate sales. Working Capital Turnover = Net Sales / Net Working Capital

• Return on capital employed (ROCE) - while not strictly a working capital ratio, it provides a measure of efficiency of generating income from total capital. ROCE = Earnings Before Interest & Taxes / (Total Assets - Current Liabilities)

Finally, a lesser known fact about working capital management is that it often has substantial ramifications on the sale of a business. Commonly buyers of businesses include a NWC target in their agreement, normally based on the 12-month average of the NWC prior to sale (the target amount). This is because the sale price is often based on a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Thus, all items included in the EBITDA number need to be accounted for. A/R appears in EBITDA as revenue, and A/P shows up as expenses. The working capital needed to generate the selling EBITDA has to be maintained for the price to be fair. Normally the terms of the sale require an adjustment to the purchase price if the working capital varies from the 12-month average. If the NWC at the close of the sale is above the target amount, the seller's closing proceeds are increased by the difference. Conversely, if the NWC is below the target amount at sale, the seller's proceeds are reduced by the difference. Owners considering an outside sale have an additional incentive to manage their working capital, and they should begin managing it at least 18 months prior to going to market to find a buyer. Managing working capital effectively ensures owners (sellers) will have a true representation of the NWC required to run the firm when the buyer calculates the 12-month average, and they will have a strong negotiating position to argue it should be lower if an anomaly has driven it higher in the past few months.

Overall, the goal of net working capital management is to maximize the efficiency of your operations. Effective management of working capital will improve profitability and growth, while ensuring your ability to cover your obligations.

If you’d like to learn more about these topics, please visit Augelli Consulting for multiple other free resources related to value creation and business exit planning.

About the Author:

Jon Augelli is a licensed Professional Engineer, Certified Management Accountant, Certified in Strategy and Competitive Analysis, Certified Financial Modeling and Valuation Analyst, and the founder of Augelli Consulting, LLC. He has a passion for helping business owners achieve their dreams by growing their businesses and preserving their legacy. He does this by offering Fractional CFO and Exit Planning Services to small to mid-sized business owners across Southern Wisconsin. He has advised companies in a variety of fields including engineering, legal, healthcare, fitness, and e-commerce, and has navigated multiple business ownership transitions. For questions regarding topics discussed or CFO & Exit Planning services contact him at: jaugelli@augelliconsulting.com or 608-352-3332

What drives value in a business?

Often times when professionals talk about business value, or what a business sold for they talk about it in terms of EBITDA multiples. EBITDA means Earnings Before Interest Taxes Depreciation and Amortization. The EBITDA multiples businesses sell for are usually stated in a range, and the range typically varies by industry. It might be, just as an example, that businesses within your industry sell for 5x EBITDA to 7x EBITDA. The question is, what causes some to sell for 5x EBITDA and another one to sell for 7x EBITDA? There are a number of factors at play, but we will talk about some of the major factors here.

A lot of the items we will discuss concern the perceived risk associated with the business’s future performance. Anyone who has operated a business knows that it is an inherently risky venture. Therefore, anything you can do in your business to reduce the risk to a potential buyer will help to increase the value to that buyer. Another key concept to consider as you think about and begin to prepare your business for exit is the level of autonomy your business has. Basically ask yourself, “can my business operate well without my involvement?” I always tell people that I talk to about preparing their business of exit that, “Nobody wants to buy your job. They can always find a job. They don’t want to buy one.” If your business requires constant attention from you, the owner, or else it will fall apart, that will not be as valuable as a business than can run smoothly with little to no involvement from you. These two key concepts are at the root of almost all the concepts we will explore here. Keep an eye out for them as we cover the specific value drivers and think about how each of the specific drivers connect back to these two overarching ideas.

Also, keep in mind that the value drivers we are discussing today are general guidelines. They aren’t necessarily achievable in all situations. However, just because you can’t achieve one, doesn’t mean you can’t still take steps to show a potential buyer that you’ve reduced risk in that area, which may still make your business more attractive to them.

Markets & Customers

We will begin our discussion reviewing a few items related to markets and customers and thinking about different aspects here that can increase the value of your business to a buyer. First, consider your customer base. How diversified is it?

Do most of your sales come from one or two key customers? If so, this increases risk from a buyer’s perspective because they would see the transfer of ownership as a potential risk to losing one of those key customers which would directly impact the revenues and thus the bottom line. Conversely, if you have a well-diversified customer base where most of your sales come from a large number of different customers, and none of them account for any more than 10% of the business, this is less risky from a buyer perspective.

Another good customer metric that buyers like to look at is, how high is your customer retention rate? Do you have a lot of repeat business? This indicates to a buyer that they will not have to spend as much effort generating new business because there will likely be quite a bit of old or repeat business coming in the door still when they take over. It also indicates that you likely have a high brand recognition and good reputation with your previous customers and within the communities you serve. This is another value driver: high brand recognition & good reputation.

Now let’s take a look at your competitive advantage. Obviously, a business with a clear, sustainable competitive advantage would be more valuable than a business that has no real competitive advantage or a poorly defined one. One thing you can do to help sustain your competitive advantage is to protect your intellectual property through the use of trademarks, copyrights, or patents. You should try to do this for key processes, procedures, or innovations that your company has developed over the years. This obviously will help keep other competitors out of your market and help you further define your reputation and brand. It also helps to create a barrier to entry for other competitors in your market space.

In the same vein, having barriers to entry that keep potential competitors out of your market or operating in a specialized niche market also increases your business value. It means there is less risk of other people coming in and stealing market share or customers away from you.

Operations

As we mentioned earlier, nobody wants to buy a messy, disorganized business from you. They do not want to buy a job. They want to buy a well run company. Knowing this, what can we do to increase value? Well, the first thing you can do is make sure that you are documenting your internal operational processes. They should be well written, thorough, and easily available. This not only helps you to train your current staff, but it also enables you to scale up more quickly. These documented procedures include having sound internal policies for HR (along with all appropriate documentation), sales and marketing processes, accounting processes, and any other processes that are critical to delivering your product or service to your customers.

You should also keep a record of past budgets or any other performance management tools that you’ve had in the past, and keep a record of actual performance compared to those targets. Companies that can show the ability to set a target and achieve it along with a strong, positive growth in key metrics over time, will be worth more than companies that do not have such strong, positive trends.

You’ll also want to make sure that your office and/or physical plant are in good, clean, orderly condition and that you are using reasonably current and effective technology. No one wants to buy an old decrepit building with machines that need to be replaced or should have been replaced years ago. They will quickly see that as a large cash investment that needs to take place now and should have been covered by the previous owner. They will likely reduce their price accordingly and thus a business like that will not be as valuable as a company that has all new state-of-the-art equipment and technology and new office buildings.

Another item to consider is your supplier diversification. Having a few, concentrated suppliers that give you all the supplies needed to run your business can increase risk. So if you do have supplier concentration, either for a strategic reason or for other reasons, look to see if you can diversify or try to reduce risk if you can – for example consider signing a long-term contract with them if you have not already.

Documentation

There are several items you will want to have documentation for when you begin preparing your business for sale. The first thing that would be beneficial to have is documentation of high customer satisfaction. This can be done through customer reviews, testimonials, feedback and review forms, etc. These server to show that reputation and brand you have established that will likely lead to strong repeat business moving forward. This is very valuable to a potential buyer.

Also, and in-line with some of the items we discussed in the operations section, you’ll want to have a written business plan or strategic plan that spells out the direction of the business over the next three to five years. This is valuable to a buyer because it shows that not only do you have a plan to grow the business but also, that you will likely achieve that plan because of your documented history of achieving your budgets and growth goals.

You should also make sure you have your financial statements from past years readily available. You’ll want to make sure these are accurate. They should have already been reviewed internally for accuracy and ideally, audited especially when you are within the last few years of your intended selling date. You want to make sure there are no surprises on your financial statements or in your accounts before you start doing due diligence with the buyer. Any error uncovered here buy a potential buyer will make them nervous about what else might be misstated or misrepresented.

Ensure that all of your corporate records are up-to-date and filed in an orderly manner that can be readily accessed. This includes the meeting minutes, reports from Board of Directors meetings, etc.

You’ll also want to review your customer contracts to ensure they are transferrable. This must be done so that the contracts don’t have to be resigned or renegotiated when the new owners take control. Look over these contracts with your business attorney to make sure this is covered. Likewise, you’ll want to review and/or sign written agreements with your key vendors, suppliers, leasers, or other strategic partners. Make sure that these agreements are also transferrable to the new ownership. This is all done to reduce the risk to the potential new owners so they don’t have to renegotiate all these agreements.

People

You want to make sure that you have employee non-compete and non-solicitation agreements in place so your key people don’t leave and set up a competing firm as soon as you sell your business. This again reduces risk to the buyer during the transition. Also look at implementing retention based compensation plans to help ensure that they will stick around after you have sold the business. Make sure that the compensation plans don’t pay out when the business is sold, since this actually increases the likelihood of your top employees leaving since they just got a large payout at the sale of the business. Design them to pay out well after your sale to encourage key staff to stick around to assist with the transition.

Another value driver is to keep documentation of employee reviews and show a history of employee development. This demonstrates a history of reinvesting in your people and indicates the company is dedicated to growing its employees, which likely means they will stick around since you’ve created a good work environment. A great work environment is also essential to attracting future talent to the organization.

This next one is a big one and is one of the hardest items to address in this list for most owners to address. You must ensure you, the owner, is not essential to the success of the business. A lot of business owners love doing the work so much that they are reluctant to relinquish their duties to the next generation of management and employees. They tend to hold on to the tasks that they’ve always done. For example, maybe they’ve always been the primary salesperson but they are reluctant to transition those key client relationships, or maybe they have historically performed the final review and sign-off on the work performed and are reluctant to transfer that responsibility. If you are going to try to sell your business remember what I keep saying, “nobody wants to buy your job”. You need to make sure you have a strong successor management team in place and that they have been trained on the key processes and procedures, and have been brought in to those key relationships, both with customers and with vendors, so those relationships stay intact through your transition.

In the same vein, you want to make sure you have clearly defined organizational leadership, and have current, written job descriptions for all positions within the organization.

These steps help to document how things are done, which is what lead to your success in the first place, and makes sure that it will continue after your exit.

Conclusion

This is just a short list of some of the key value drivers that you’ll want to start working on now if you plan to sell your business in the near future. Now, some of these changes can take quite a few years to address. Getting key metrics to trend in the right direction or show growth in customers over the last 3 years obviously takes time. Also consider that trying to get the right management team in place can take several years as well. That's assuming you find the right leaders on the first try. If you realize through the training and development process that some of your hand-picked leaders end up not being right for the job you envisioned them for, it can set you back at square one. Even for seemly smaller changes, they can take time. Anyone who has tried to implement any change in a business knows it never goes as quickly or smoothly as you hoped. There always seem to be unforeseen bumps along the way. Plus, you still have to run the business while you are doing all of this work on the business. Thus, the earlier you can get started on this the better.

If you’d like to learn more about these topics, please check out Augelli Consulting for multiple other free resources related to Exit Planning and value creation.

About the Author:

Jon Augelli is a licensed Professional Engineer, Certified Management Accountant, Certified Financial Modeling and Valuation Analyst, and the founder of Augelli Consulting, LLC. He has a passion for helping business owners achieve their dreams by growing their businesses and preserving their legacy. He does this by offering Fractional CFO and Exit Planning Services to small to mid-sized business owners across Southern Wisconsin. He has advised companies in a variety of fields including engineering, legal, healthcare, fitness, and e-commerce, and has navigated multiple business ownership transitions. For questions regarding topics discussed or CFO & Exit Planning services contact him at: jaugelli@augelliconsulting.com or 608-352-3332

Richard Branson famously said, “Never take your eyes off the cash flow because it is the life blood of business”.  This is great advice from an accomplished entrepreneur. Unfortunately, many business owners do heed it. Many companies do not regularly forecast cash flows. While it may not seem important if everything is going well, there are a multitude of benefits from this simple exercise that can help your company regardless of your overall business health. Not only does it give owners a better understanding of their company’s liquidity over the short to medium term, but it has a host of other benefits as well. These include reduced costs, increased efficiencies, better coordination within the organization, and several others.

Why Create a Weekly Forecast

Many owners are skeptical of creating cash flow forecasts. They think, “We aren’t in trouble and don’t foresee any issues”. Well, did you foresee Covid-19? Did you know exactly when the 2008 financial crisis was going to happen? There is always uncertainty in the future. If you wait until you are in a distressed situation to create a cash flow forecast, it may already be too late for you to affect it. Furthermore, your forecast will likely be hastily thrown together, and will not include any of the wisdom or insights into your business gained from long history of forecasting, comparing, and revising your cash flow estimates. No matter how much liquidity you have now, there are always limits on liquidity. It is wise to know these limits and keep an eye on them.

Many owners also think, “We can’t afford it” or “We do not have the time, staff or resources to put a cash flow forecast together”. The truth is you cannot afford not to forecast. The understanding gained from forecasting your cash flows does not just help prevent a liquidity crunch, it can lead to greater integration across the business, lower costs, and more effective deployment of capital.

Lastly, a lot of owners ask why they have to do it weekly? Why not monthly? Monthly forecasts are fine for looking for overall trends in cash position but the sampling rate is too low. Monthly forecasts will not catch drops in cash mid-month, which is especially important if you know you have a significant expense due mid-month (ex. Payroll). A more granular, or higher frequency, forecast will capture this kind of fluctuation. Daily forecasts would be great, but revising forecasts daily is just too onerous. Weekly forecasts achieve the right balance.

What are the Benefits of a Weekly Forecast

As I mentioned before, the main reason is to gain a deeper understanding of your company’s liquidity over the short to medium term. A cash flow forecast will give you an early warning of an impending cash crunch and allow you time to react. However, an increased understanding of your liquidity is not the only benefit of weekly cash flow forecasting. There are a number of others.

It instills a “Cash Flow” is reality mindset

Accrual accounting and GAAP can conceal the actual changes in the cash balance of a business (as I discussed in my Financial Statement Fundamentals post). This is especially true for seasonal businesses, business with large, deferred revenues, or business using various revenue recognition methods that do not align with cash inflows. Focusing on the actual cash flows can uncover near-term issues quickly and allow you time to react. Furthermore, focusing strictly on the cash flow forces discipline.

It enhances your understanding of the cash required for growth

Growth often constrains cash flow because you are required to outlay cash to increase your inventory before you can sell it and collect cash. It is possible to grow yourself into bankruptcy. Regular forecasting helps you to understand, anticipate, and plan for these cash constraints, and obtain adequate financing when required.

It enhances Your Understanding of your External Business Relationships

Focusing on cash inflows and outflows forces you to examine when you actually receive cash from customers and when payments are actually due to suppliers. This helps you identify which customers always pay on time, or even early, and which ones usually need a little reminder.

NOTE: When you reach out to them to remind them of their upcoming payment, or to check in on why you have not received it yet, take advantage of the call as an opportunity to generate more business (assuming you want to keep doing business with them). This obviously depends on your relationship with your customer (or contact there) and your industry. I have successfully used this technique in the past in the construction industry when speaking to project managers. 

On the supplier side, one advantage of forecasting is that it requires you to review the payment terms of your suppliers. In general, you don’t want to pay suppliers earlier than you have to. If they do not expect payment for 30 days and don’t offer discounts for paying early, then just pay them at 30 days. On the flip side, some suppliers may offer discounts for early payment. If your forecast shows you’ll have enough cash, you should normally take the discount. In our earlier article on managing working capital I cover the costs of not taking a discount – you’d be surprised. As you review your suppliers, also consider which (if any) you have a good enough relationship to maybe stretch the payment terms in a pinch.

It enhances your understanding of your internal business relationships

Accurate forecasting requires communication between departments and individuals across the organization. If you want accurate estimates, you must talk to accounts payable, accounts receivable, purchasing, sales, HR, etc. and incorporate their insights into your model. Repeating this practice each week allows you to understand their operating patterns and cycles and can give you insights into your business.

It improves your use of cash

More accurate forecasting and management of your cash position means less frequent borrowing, which reduces your interest expense. Knowing how much cash you need on hand to cover expenses allows for better use of excess cash. Instead of sitting in a bank account earning no interest, you can put the excess cash to work. This can include further investment in growth opportunities, debt reduction, increased distributions to owners, etc.

How to Create a Weekly Forecast

Now that we’ve seen that weekly cash flow forecasting is essential for all businesses, how do you go about creating one?

First you need to decide how far out your forecast will extend. You must project far enough out to give yourself time to react to issues your forecast uncovers. However, the further out your forecast extends, the more effort it takes to update each week, and the more speculative your numbers become. Try to strike a balance.  Within one month most firms can use their actual accounts receivable and accounts payable aging reports to create their forecast. However, past one-month, most companies must rely on estimated future sales and expenses, which are less accurate. Again, this varies between companies and industries. 13 weeks in advance (the number of weeks in one quarter) is the industry standard.

Next, you’ll want to create a spreadsheet. Across the top create columns for the weeks you want to include in your forecast. I also recommend including the last four to six weeks of actual historical numbers for reference. Along the left-hand side, create two sections, one for cash receipts and one for cash disbursements. See the example below.

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Then fill in the table. Remember that you need to record when cash actually hits your bank account for cash receipts and when the cash actually leaves your bank account for cash disbursements.

NOTE: One common point of confusion, when you pay an expense with your company credit card, the cash has not left your company yet. It leaves your company when you pay your credit card off. Make sure to account for this nuance in your forecast.

When completing this exercise, remember, it is a cash flow forecast so do not include non-cash items in your estimates. You have to break the accrual and GAAP reporting mindset. Don’t think about revenue, think about cash receipts, especially if you are in a business that takes payment upfront and recognizes revenue over several months, or if you use various revenue recognition over time methods. Don’t think about Cost of Goods sold, think about the purchase of inventory. Leave out depreciation, monthly journal entries reducing prepaid expenses (ex. Prepaid insurance with monthly entries made), goodwill impairment, etc. We are just focusing on cash. Cash moving in, and cash moving out.

When you are finished, subtract the cash outflows from the cash inflows. The result is your change in cash for the week. Finally, add two additional lines at the bottom of the excel file: one for beginning cash balance, and one for ending cash balance which is simply the beginning balance plus the forecasted change in cash.

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If you are showing a deficit consider ways to increase cash receipts, delay or decrease cash disbursements, or figure out how to gain access to additional funds.

NOTE: Quick point about treasury management. If you need additional funds in one account, always draw from the least expensive funding option. If you need cash in your business checking account and have to draw money from a business savings accounts paying 0.25% interest and a money market account paying 0.40%, take the money from the 0.25% interest account since you are foregoing less interest income. If you must choose between a line of credit that charges 5.25% and drawing from a savings account that pays 0.25% interest, draw money from the savings account.

Tips & Tricks

Like anything else, cash flow forecasting takes practice. Your accuracy should increase as you continue week after week and become more familiar with the nuances of your firm. To help get you started, here are some tips and tricks I’ve found useful:

• Sort your expenses from largest to smallest. According to the 80/20 rule, roughly 80% of your cash outflows probably come from 20% of your payables (or vendors). These are the large items you will want to spend the most effort trying to accurately estimate because they can throw your whole estimate off if you get their timing wrong. In almost every company this includes payroll as one of the top items. Many companies also have inventory purchases up here. By the time you have listed these top 20% of vendors it is usually ok to group the smaller remaining outflows into a few line items and spread them across the forecast. It isn’t really worth spending as much time trying to pinpoint when you have to pay a $100 expense as it is for a $100,000 expense. You can always make it more detailed in the future if you need to.
• • Some companies also find it helpful to sort by critical and non-critical vendors or to do this instead of sorting by largest to smallest. I find the critical vendors are often the same as the vendors in the top 20%. I usually recommend sorting by size and then indicating the critical vendors if you wish to either by color coding, or some other method.
  • Depending on your customer diversification and sales structure, it might also be helpful to breakdown your cash inflows in a similar manner. Determining exactly when you will receive payment for invoices can be challenging. Be realistic with your forecasts. Don’t just assume every customer will pay within your payment terms.
• Create a feedback mechanism so you can learn from your mistakes. Save a copy of your forecasts, and then compare it to the actual results when you update your forecasts. Note differences between the two, dig into things for clarification if needed, and write down notes. Often you will realize patterns, such as certain customers always pay late or payroll taxes are higher in the beginning of the year before the wage caps are reached. You may also identify costs you forgot to account for (ex. Property taxes paid once per year) and you will gain a better understanding of how things like holidays affect the timing of expenses. Maintain this practice even after you feel like you have a solid handle on things. In business, as in life, change is the only constant.
• • It can be helpful to create a calendar to go with your notes so you don’t forget those once-per-year or once-per-quarter expenses.
• Develop a network of people in other departments you check in with for information that could affect the forecast and make a habit of doing so weekly. Not only will this improve your forecasts, you’ll be surprised by the other benefits of this increased, interdepartmental communication.
• Update your forecast to incorporate management’s response to it. If you are forecasting a cash crunch and management decides to delay some expenses or draw on the line of credit, update your forecast accordingly. This may result in two versions, the initial, and the one incorporating management’s response. Save the second version for future comparison and forecasting.
• Follow through on the response to the forecast. If management decides to delay some expenses, make sure to tell that to whoever normally makes those purchases. Otherwise they will carry on with business as usual.
• Be sure to account for all the locations you have cash. If you have multiple bank accounts, or a PayPal and/or a Stripe account with a balance, include those in your cash balances.
• Garbage in, Garbage out. (G.I.G.O.) I’ve said it in every post I have related to financial modeling and analysis. If your information is junk, your forecasts will be too. Make sure you have accurate accounting records which include all revenues, expenses, and relevant transactions.

Over the last few years, there has been an increased effort to use A.I. and automation to help reduce the burden of weekly forecasting. While I am all in favor of leveraging technology to reduce workload, I am always a little leery of any automated forecasting programs. In my experience they analyze previous data looking for patterns to generate a forecast for the future. This is fine for identifying trends, and it can shed some light on patterns or cycles in your business. However, it is a poor substitute for your foresight and does not replace a forecast based on input from various departments across your business. You should not drive a car by looking only in the rearview mirror, nor should you create a forecast by looking only at historical information. Always review automated forecasts and incorporate your knowledge and experience into them.

Lastly, the most important tip I have is this: just start. That is the most important piece of advice. Even if it is just with a simple 30-day forecast. As you continue to build the habit, you can add more details, and extend your forecast. But the most important step is to just start.

Conclusion

Growing your business without careful cash management can create cash flow shortages, and in severe cases, bankrupt your company. Conversely, intelligent management of cash gives you an edge for daily operations, handling crises, and growing your business to new heights. Cash flow forecasting is essential to sound cash management. It can give you new insights into your business, give you more time to react to crises, and can lead to more efficiencies and reduced costs. Once you’ve gotten into the habit of weekly forecasting and see the benefits for yourself, you wonder why you didn’t start sooner.

About the Author:

Jon Augelli is a licensed Professional Engineer, Certified Management Accountant, Certified Financial Modeling and Valuation Analyst, and is the founder of Augelli Consulting, LLC. He has a passion for helping business owners achieve their dreams by growing their businesses and preserving their legacy. He does this by offering Fractional CFO and Exit Planning Services to small to mid-sized business owners across Southern Wisconsin. He has advised companies in a variety of fields including engineering, legal, healthcare, fitness, and e-commerce, and has navigated multiple business ownership transitions. For questions regarding topics discussed or CFO & Exit Planning services contact him at: jaugelli@augelliconsulting.com or 608-352-3332

GUEST BLOG POST: We know a lot about small business here at Rescue Desk, but there are some topics that we quickly defer to an expert. Since we work with a ton of number-loving businesses, we have lots of folks to turn to when accounting questions pop up. Thanks to our long-time friend Kari Apel — CEO and President of Apel Associates, Inc — for sharing her wisdom and penning this post on how to handle business Website costs when it comes to tax time.

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The business use of websites is widespread. But surprisingly, the IRS hasn’t yet issued formal guidance on when Internet website costs can be deducted.

Fortunately, established rules that generally apply to the deductibility of business costs, and IRS guidance that applies to software costs, provide business taxpayers launching a website with some guidance as to the proper treatment of the costs.

Hardware or software?

Let’s start with the hardware you may need to operate a website. The costs involved fall under the standard rules for depreciable equipment. Specifically, once these assets are up and running, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break.

In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2020, the maximum Sec. 179 deduction is $1.04 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount of qualified property is placed in service during the year. The threshold amount for 2020 is $2.59 million.

There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).

Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.

Was the software developed internally?

An alternative position is that your software development costs represent currently deductible research and development costs under the tax code. To qualify for this treatment, the costs must be paid or incurred by December 31, 2022.

A more conservative approach would be to capitalize the costs of internally developed software. Then you would depreciate them over 36 months.

If your website is primarily for advertising, you can also currently deduct internal website software development costs as ordinary and necessary business expenses.

Are you paying a third party?

Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.

What about before business begins?

Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.

Need Help?

An experienced accountant can determine the appropriate treatment of website costs for federal income tax purposes. Rely on an expert to help you navigate the proper deductions and expenses at tax time.

I talk about the value of time quite a bit with colleagues and clients. We talk about what’s eating away the hours, the benefits of delegating, how it works to have a “virtual” team, and the goals we are all trying to achieve.

Then we talk numbers.

I have this handy little chart I’ve used for years. It’s admittedly very elementary, but it’s effective at showing where you’re leaving money on the table by not getting the support you need. This is especially easy to determine if we’re working with billable-hour business models.

Let’s say your billable time is worth $100 an hour (which I’m only using to keep the math simple … I can practically guarantee your billable time is worth a lot more) and you spend 4 hours a week on non-revenue-generating tasks. You’re basically giving up potentially $400 a week in billable hours… or $20,800 a year!

$100/hour
x 4 hours/week
$400 per week

Otherwise looked at like:

$400 per week
x 52 weeks/year
$20,800/year

You’ll never bill for those hours because, unfortunately, nobody will ever pay you for those tasks.

Now…

Say you outsourced some of those tasks to a service provider who specializes in business support – a bookkeeper, a virtual assistant, a copywriter, a Website expert, a virtual receptionist, etc. You pay that specialist $50 an hour to tackle those 4 hours of non-revenue-generating tasks every week (or roughly 16 hours every month).

At the end of the month, they will send you an invoice for $800.

$50/hour fee
X 4 hours/week
X 4 weeks/month
$800/month

If your time is worth $100 an hour, and you just gained back potentially 16 hours of billable time in a month, you’ve just earned a minimum of $800 in potential revenue after paying for some much-needed support.

$1600 in potential revenue
– $800 fee for services
$800 in potential revenue

That $800 per month … or almost $10,000 a year …. will remain out of reach until you have support because you’ll continue doing it yourself. Nobody will ever pay you for that time or those tasks.

As I mentioned, I used these numbers to keep the math easy. Now do the math using what your billable time is really worth. $150/hour? $200/hour? $400/hour?

If your typical billable hour is $150/hour, for example, and you hire an expert for the same $50 an hour to do those 4 hours worth of work, you potentially opened up more than $20,000 in annual revenue.

Now consider the work you do that’s arguably worth even MORE than your typical billable hour … strategic planning, business development, product or service innovation, etc.

The bottom line is the cost of your support team remains the same, but your potential revenue increases significantly.

Business owners need to spend their time growing their business, generating revenue, strategizing, innovating, and exceeding customers’ expectations. They don’t need to spend time managing marketing touch points, or updating their Websites, or researching vendors, or maintaining their social media, or reconciling their books, or answering their phones, or any number of other process-driven, systems-based tasks.

Invest in growing your team and stop bumping your head against the ceiling of capacity.

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Rachel Rasmussen is the owner of Rescue Desk Virtual Assistant Services. Since 2008, and she and her team have been an "executive assistant for hire," helping overworked business owners make their to-do lists more manageable. Read more of Rachel's musings on business, life as an entrepreneur, and making the most of all of it on the firm's blog.

As business owners, we’re often up against challenges we aren’t sure how to figure out.  So, what do we do?

We find an expert and ask.

Many of us have partnered with experienced consultants, business coaches and executive advisors, and it’s often one of the best investments we can make in our companies ... and ourselves.

Without the expert guidance of an experienced business consultant or coach, we might never build our perfectly-suited teams. We may struggle to learn truly effective finance-based decision making. We might never be pushed to make meaningful stretch goals. It might take us longer than we’d like to understand how to pull ourselves out of the day-to-day operations when our long-term strategy needs some attention.

It’s like the old adage: “Just because you can, doesn’t mean you should.” It’s the same premise working with an expert business consultant. Nobody doubts that you can teach yourself how to reach the next level of success. But, if someone has already “been there, done that” and has the training and expertise to teach others, wouldn’t it be more efficient and cost-effective to simply ask them?

Finding a consultant, coach or advisor is easy. Finding the right coach takes some effort. You need to know what you don’t know, you need to be open to feedback and guidance, and you need to have the self-awareness to understand where the gaps are in your learning.

Do you need tactical guidance in a very specific area? Do you need to evolve your role to match your succession plans? Do you need a sounding board and someone to challenge you to think bigger and ask better questions? Do you need help evaluating growth strategies that balance growing customer demand without diluting service? Do you need someone who can expertly advise both you AND your leadership team?

Making the right investment in the right consultant can pay back exponentially in time, resources, revenue, and most importantly, knowledge. It’s difficult to go wrong in partnering with an advisor who can help you push your organization to the next level.

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Madison Area Business Consultants, Inc. is a professional association of business consultants located in and around Madison, Wisconsin. Our members specialize in providing an objective point of view to help you and your organization spot and analyze problems you might not be able to see or recognize.

Here's a great LinkedIn article by Trey Fischer of KatLanTat Services.  Click the link below for more information.

https://www.linkedin.com/posts/tim-fischer-1877447_contactcenter-contactcenters-contactcentersolutions-activity-6696806540713713664-Nioy

Check out this great Focus Matrix handout from Tina Hallis Ph.D!