How cash flow, appointments and leads correlate

I was talking to a guy who pitches vending machines today, soda and snack machines. Not Coke or Pepsi, but alternative machines with healthier snacks and options for energy drinks and such. I say pitch because for the business, there's no cost. This guy's company places the machine at your business and they maintain the machines and keep the profits.

As Mr. Snack Machine was leaving, I noticed he was driving an Audi A8. Nice car, but expensive. In looking at his marketing materials, I noticed the address on his business card looked like a nearby residential address. So, for fun, I looked it up on Zillow. $625,000. Let's say he was one of the few that put 20% down when he bought his house and guesstimate his mortgage at around $3,800 per month (incl. taxes & insurance). Now let's say Mr. Snack Machine got a great deal on the A8 at $40,000 and put that monthly payment around $800. A total of $4,600 between the two.

I don't know where I got it from, but I always say, “You gotta sell a lot of cups of coffee to pay the rent on a coffee shop.” Out of curiosity I decided to figure out not only how many snack machines Mr. Snack Machine had to place, but how many leads he needs just to pay for his car and house. For simplicity, we'll ignore the other bills or let's say Mrs. Snack Machine's income covers them.

So I did some research on the interwebs and see that an average snack machine costs $3,000 and grosses an average of $500 per month (after snack costs). He probably finances multiple machines at maybe 3 years for a monthly payment around $94 each. Mr. Snack Machine said they service the machines weekly, so I estimate about $20 per month per machine for the employee. $500 gross less loan and payroll leaves a net cash flow of $386 per machine. Notice, I'm not concerned with accounting profit right now, profit doesn't pay bills, cash does. At $386 net per machine, Mr. Snack Machine needs to place 13 units to pay for his A8 and McMansion.

On the face of it, 13 units doesn't sound all that bad, right? Place a couple of machines a week and you are there in no time. But, let's take it a step further. Assuming Mr. Snack Machine's close rate is 1 in 20 (not a bad rate for this type of sales) or 5%, he needs 260 appointments to place those 13 units. That's finding 260 business decision makers willing to meet with him. Again, going with 1 lead in 20 being willing to meet with him, he needs to develop 5,200 leads! That's 5,200 business decision makers with a company big enough to support a snack machine! AND, that's just to pay for his car and house, nothing else.

I'm not saying Mr. Snack Machine should quit, once he gets the revenue stream up and running, it can be a profitable business. My point was to simply walk you through the thought process of tying leads to how much cash flow you need. As a business owner you should always be thinking about cash flow. No matter what business you have (aside from government contractors), you should be able to start at how much cash you need and back into how many people you need to touch in your market. If Mr. Snack Machine wants to double his income, he better start thinking real quick about how he can get 10,400 (quality) leads instead of 5,200.

It doesn't matter if you are an author, artist, widget maker, app developer, or whatever, you should be able to walk through this same process for your business. If you've got questions, leave a comment or send me an e-mail. I can also send you the spreadsheet I used to do the rough calculations. Send me an e-mail and I'll send it to you.

Cash Flow Tip #1: Stretching Out Payables

Cash flow tips are a list of tips I'll be presenting on ways to improve the cash flow in your business. They will cover a wide range of topics. They are not pie in the sky ideas, but tried and true methods I've used with clients or the companies I've managed. I decided to pick a somewhat simple one today in talking about your accounts payable.

One way to improve your cash flow, especially in the short run, is to stretch out your accounts payable, in other words, taking longer to pay them. For example, let's say you purchased $100,000 of widgets from XYZ, Inc. with Net 30 day terms. XYZ expects payment from you in 30 days obviously, but if you take 45 days to pay, you've now used XYZ's money for an additional 15 days with (theoretically) no cost of money. When I discuss this with clients, I get two responses, either 1) you can't do that, it's unethical, or 2) of course you would, industry average is 45 days to pay anyhow. Both answers are wrong.

First, the unethical argument. I would not recommend stretching out a payment like this without talking to the vendor first. Especially in our example of a large invoice taking an extra 15 days over terms. Over the years, I've found most (not all, but most) vendors very willing to allow you extra time to pay an invoice whether you are in a cash flow crunch or your business is seasonal, IF (that's a big IF) you call them up front and talk about it. For some reason, most people are averse to this, but I highly recommend it. Calling up front helps you establish a relationship with the vendor and lays a groundwork should you attempt to renegotiate terms to 45 or 60 days.

Try calling to renegotiate terms with a vendor or ask for a favor if you've been paying 15 days late on all your invoices and there is no relationship and you are typically in for a big surprise. Which addresses the second response of 45 days being industry average. Yes, in most cases that's true and in some cases vendors don't care that you pay late, don't know you pay late or will ignore your late payments until it is time to renegotiate terms or pricing. With no relationship with your vendor and late payment history, you stand in a difficult position to renegotiate.

I've worked with numerous vendors to modify terms either temporarily or permanently. Most recently working with a manufacturer with very slow sales in the 1^st quarter due to seasonality. When you have regular conversation with vendors, they often anticipate the call and again, most are willing to work with you. Assuming you have an average payables balance of $500,000 and let's assume you are able to get all of your vendors to agree to temporary 45 day terms, that's $250,000 in cash or that you don't have to draw on your line of credit.

I'll repeat again how important that communication is, especially in this economy when many companies are stretching out their vendors to stay alive as a last ditch effort. That's not what I am talking about here and is a much different, urgent issue. You need to communicate to your vendor what you need and why so they don't assume you are in last ditch effort mode!

Returning to the basics

In firefighting, the success of an operation often comes down to the basic lessons a firefighter learns in Firefighting 101. Throwing ladders, pulling hose, carrying tools are all basics and critical whether you are a rookie or have 30 years in. It doesn't matter if you have the best chief on your fireground or brand new high tech tools, if water is not effectively being put on the fire, it's not going out.

Your business is no different. Constantly going back to the basics and being sure they are addressed are critical to your success. Are you overwhelmingly meeting the needs of your customers? Are you investing your time and money wisely? Is your focus on cash flow instead of profit? If you are not measuring and paying attention to these basics, your operations will suffer.

That's the purpose of this blog. I want to help you focus or learn the basics so you can be successful. It doesn't matter whether you are just starting out or 30 years in the game, the basics have to be there. I've worked with hundreds of business owners to focus their market, turn around cash flow, develop a strategy for investment, and generally be happier. You are living your dream, shouldn't happiness come with that?

Taxes on Cash for Clunkers Rebate

There are a number of e-mails that have been floating around for the last month or so claiming that you have made a terrible financial mistake if you took part in the CARS or Cash for Clunkers program. The main claim being that the rebate itself is taxable and can cause you pay more for the car by inflated prices and in taxes than you get the benefit of in the rebate.

I don't know much about the pricing or whether dealers inflated prices. And I can't tell you whether or not you can afford a new car instead of a running vehicle that is paid off. What I can tell you is that the rebate specifically is NOT considered taxable income on your Federal or state tax return. It simply is not true that you will owe taxes on the rebate. It is true that certain states charged sales tax on the rebate portion of the purchase price. Below is a resource for the states that did charge sales tax, but you paid the tax at time of purchase and can deduct the sales tax if you itemize your Federal return.

States Charging Sales Tax on CARS Rebate

Rules of the CARS Program

As always, if you have any questions or I can help you with your particular situation, please feel free to e-mail me at James(at)RainwaterCPA.com.

How to pay taxes – two mistakes that can cost you!

This is the second in a series of articles themed around the recession-preneur. Tight budgets leave little room for error for the recession-preneur so this series is designed to help you avoid some of the more common pitfalls when starting a new business.

Starting a business is difficult enough. Suddenly there are all kinds of new responsibilities depending on your business. Today I want to talk briefly about the smaller and micro businesses. There is a ton to discuss about the type of entity you choose, but this is primarily aimed at individuals (stay tuned, we need to talk more about that choice in another post) and single member LLCs. These are the entity types that are mostly reported on a Schedule C of an individuals tax return.

The confusion I see most often comes from the following logic that many new (and too many experienced) business owners have: All I have to do is pay taxes based on the percentage from my tax bracket and I have until April 15th to pay it.

The first surprise comes when you discover yes, you will pay regular income taxes on the net profit (revenue minus all expenses) of the business based on your tax bracket. But, you also will pay an additional 15.3% in self-employment tax which is effectively the FICA you pay as an employee, but now you are both employee and employer (this is IRS logic, not mine!) so you get to pay the entire 15.3% tax. Now luckily, you get to take half of that tax to reduce your income. If you have not been working with someone to estimate your taxes or you have not done it yourself (I’ve never met the business owner who has time to do it themselves) you are in for your first big surprise depending on how much you made in your business.

The second big surprise is you have your taxes prepared on time, mail them and pay any taxes due by April 15th…but, you get a bill from the IRS and your state a few weeks later with penalties and interest on it! What, I thought I paid on time! Well, most likely what happened is you violated what is called the Safe Harbor Rule which basically says (I’m over-generalizing for a moment) that if you did not pay in at least as much tax during the tax year as you did in the previous tax year and you owe taxes on your return, you are subject to interest and penalties. Yep, the treasury wants to count on getting at least as much as last year from as many people as possible and this is where estimated tax payments come in. I found a great, not too technical synopsis of the actual Safe Harbor Rules if you are interested in reading them.

My advice for any business owner is to work year round with an experienced CPA tax preparer to avoid these and many other issues. As always, if I can answer any questions or help you, feel free to e-mail me at James(at)RainwaterCPA.com

The one simple mistake that can sink your new business from the start

This is the first in a series of articles themed around the recession-preneur. Tight budgets leave little room for error for the recession-preneur so this series is designed to help you avoid some of the more common pitfalls when starting a new business.

So for one reason or another, you’ve decided to start your own business. Congratulations! You’ve taken a big step. Whether you’ve been laid off, starting something while still working full time or planning a big new venture this one mistake can sink your business faster than most any other mistake. I have helped hundreds of businesses get started and this mistake consistently gets new business owners in more trouble than any other. And when I tell you what it is you’re likely to say, “well, duh”. But I said it was simple, but you would be amazed at how difficult it can become.

When you start your business you’ve made a big decision and a very exciting decision. And most people get very wrapped up in that emotion and excitement, so what is the first thing they start going…spending money. And they end up spending too much money too soon, often before they have even made their first dollar. Combine this with an aggressive sales projection in your cash flow plan (you do have a cash flow projection in your business plan, right?!?) and you can see how easy it is to get sunk real quick.

But I see it time and time again and no amount of advice will dissuade some people’s misdirected enthusiasm. I have a friend (not a client) who had a tremendous idea for a web 2.0 business. And it is a good idea and could still be a profitable one. But, my friend sunk $80,000 into development before testing the waters in more affordable ways. Now he has an $80,000 dysfunctional website and never a dollar of revenue. The best way to avoid the trap is to have a solid business plan and let someone review who isn’t afraid to criticize it, then listen to their feedback. Now the worst part of being an entrepreneur is the discouragement from others, but don’t be so blind that you turn away good advice, preferably from someone who has been down this road before you.

Also, remember that you are excited! Your sales forecast is probably optimistic and your expense forecast not conservative enough. Keep thinking it over until you can figure out how to do more with less. Keep thinking of creative ways to test the waters before sinking cash into the idea. It doesn’t matter if you are starting your business with $200 or $2,000,000. This principle is consistent. Only spend what you need to generate revenue. As long as you are in startup phase, it is not negotiable. Once you are stable as a business, the other perks can come, but till then, only spend what you need to generate revenue and apply that test to every dollar you spend.

Finally, there’s a real tax consideration behind all this too. Technically, the IRS requires that any costs you incur prior to the first dollar of revenue you earn are considered start up costs. Start up costs must be amortized over five years! So now 4/5ths of everything you spend before earning any revenue has flipped and become taxable income in a sense. Some forethought and planning can avoid this predicament in a lot of cases. Sometimes it’s just unavoidable because of your business model, but wouldn’t you like to have the option at the start? Me too.

As always, if you have questions or would like help with your business or taxes, feel free to e-mail me at James(at)RainwaterCPA.com.

First Time Homebuyers Tax Credit

There are just over two months left to take advantage of the first time home buyers tax credit signed into law earlier this year. The credit is worth $8,000 to home buyers buying a house before the November 30, 2009 deadline. It is important to note that the IRS requires a closing prior to November 30 to be eligible for the credit. So, while the deadline is two months away, if you are not already in the process of buying a house, you may already be running out of time.

The definition of a home can include a house, townhouse, condo, RV, etc. It just has to be a primary residence. Second homes, investment property or vacation homes do not qualify. "First time buyer" is a bit of a misnomer as the only requirement for qualifying as a first time buyer is that you have not owned a primary residence in the last three years. So, if you have owned a house in the past, but have been renting an apartment for the last three years, you would still qualify as a first time buyer.

There are several ways to claim the credit. The law allows you to claim the credit in 2008 if you want, which means you can ammend your 2008 return claiming the credit and receiving a refund immediately (well, as immediately as the IRS processes your return and refund), you can claim the credit on your 2009 return, or, if you have FHA financing you can take the credit directly against closing costs at closing.

Hope that helps make the credit a little more understandable. If you have questions or I can help you claim the credit, feel free to e-mail me at James(at)RainwaterCPA.com