Here are some ideas to evaluate for potential cost-savings in any business:

1. Insurance – whether it’s commercial, auto, or health insurance, if you haven’t shopped around in a few years, you need to. This area alone has saved my small business $9,000 over the past 2 premiums with slightly better coverage. Granted, it took a lot of time and energy to get to that point, but how can you argure with that level of savings?
2. Telephones – cell phones and land lines can both be EXTREMELY over-priced if you don’t shop around. Make sure you have the best group or individual or combination of the 2 for all of your cell phones. For land lines, if your internet is reliable enough, you seriously need to consider VOIP. VOIP stands for Voice Over Internet Protocol and simply means using internet data lines instead of phone lines for your phones. In my business this would save us about $250/month IF we had reliable internet. Our internet is very spotty, has little competition, and relatively slow so we’ve tested with VOIP several times and just can’t make it work. :-/
3. Vendors – When was the last time you renegotiated with current vendors OR shopped around to make sure you’re getting the best rates? Through buying in bulk, group purchases (with similar businesses), shopping around, and good old fashioned renegotiating (particularly on things like fuel charges and freight expenses) you should shoot to save 5-10% on all of your purchases. While your at it, double-check your retail price list and make sure your mark-ups are sufficient. We found a handful of items on our price list going for little to no mark-up as we performed this exercise.
4. Pre-payment discounts – While you’re calling to renegotiate prices with your vendors, be sure to find out if they offer pre-payment discounts. Those are simply discounts for paying early which could be within 10 days, or 10 days after the end of the month, or whatever their terms are. If you consider those discounts can range from 1% to 5% this can be VERY significant. If your business buys $200,000 in products each year, at 1% you would save $2,000 year or$167/month just by paying a few days earlier!
5. Meals & Entertainment – and all other “discretionary” spending. Are those meals, trips, expensive hotels, etc. etc. etc. really necessary? If they’re an integral part of your business recruitment strategy then fine. But make sure your deducted-meals are actually legit. Meals are only allowed for documented business purposes (i.e. names, place, and business discussed all have to be available to the IRS) and overnight travel. Even then, only a portion of those meals can be deducted. The upper-management of Walmart and Sam’s Club are still required to fly coach and book modest rental cars when traveling just like their founder always did.
6. Shop around for cheaper services – Every business needs the help of other businesses to get things done. This could be your IT firm, your accountant, lawyer, bottled water delivery company, tire and oil change business, uniform company, or even your payroll company. I’m well aware that it’s very hard and expensive to find a lawyer you trust, so if that’s something you already have, I’d leave that one alone, however the others can be done with relative simplicity. Just changing our payroll from Paychex to Quickbooks has saved us over $100/month (though QB prices have just gone up slightly so the gap is lessening).
7. Improve Efficiency and Productivity – This is probably the most important of all of them which is why I put them as a separate step in a separate category for fixing your business. This all boils down to basically 1 thing: Paying people for the results they deliver.

In a nutshell, that’s what an efficient, productive business will consistently do. It will pay people for their work. What a novel concept, huh? Now you need to determine if your business is a better model for a Results Oriented Working Environment (ROWE) like I discuss in my blog on Intrapreneurship and Entrepreneurship or whether your business simply needs to get away from paying everyone an hourly wage with no incentives.

Here are the steps to take to increase productivity for every employee in your business:

1. Make job descriptions – If your people don’t know exactly what their duties are, you as a leader aren’t even giving them a chance to succeed. Everyone needs a job description and possibly even a daily, weekly, and/or monthly checklist to make sure they’re taking care of all of their responsibilities.
2. Create processes, procedures, scripts, and checklists – This goes hand-in-hand with a job description. If you don’t have scripts to teach people how to handle customer inquiries, procedures for how to track those inquiries, and checklists to make sure nothing has gotten missed you will never ensure a consistent customer experience. Making this fundamental throughout your business is the key to successful franchising. If you want a successful, universally applicable, consistent business, this is your foundation. This will also help you determine who on the team needs to stay and who needs to go.
3. Know your numbers – My last blog dealt with this in detail so to just make the point quickly… If you don’t know the income and profit per person on your team it’s very hard to develop benchmarks, set goals, and recruit new people who you believe can achieve those goals.
4. Remove temptations to “cheat the system” – In my business this comes in 2 major forms. No temptation to play on the internet for the office people, and no temptation to take extra long lunches or sneak home early for our service guys. The first is temptation is removed but letting everyone know their internet usage is tracked and will result in dismissal if internet use is inappropriate. GPS systems on our service trucks take care of the latter temptation. Very rarely do I ever analyze either item. Basically it’s just there in case a problem develops.
5. Incentivize and create healthy competition – I still credit the doubling of our profit/day/technician in large part to converting a portion of technicians’ income to commissions. Find ways to incentivize everyone on your team to do their best.
6. Get rid of those who don’t stack up – If you’re the kind of guy who hates to let people go and so cuts everyone’s pay instead of just letting the weakest link go, you need to change your practice immediately! There is nothing worse for morale then to have everyone “punished” with lower pay when the low-hanging fruit needs to go (and everyone but you knows that). If you really feel that bad about letting an unproductive employee go, cut your income first before any one else’. To keep costs down, review my blog on how to let someone go without paying unemployment.

Keep in mind, that the more drastic the situation the more drastic the cost-cutting measures required. Act quickly and decisively and move on. If you make a mistake in that process, learn from it.

To your cost-cutting success, Bryan

1. You have more free time - to devote to things other than “Where are we getting the money for payroll this week?” – In other words, you’re more free to work on your business instead of just in it. Or take a vacation and know money will still be coming in when you get back.
2. You can sell your business for more – any business that has consistent recurring revenue is always worth more than a business that does not. Go look at the going rates of laundry mats and car washes. Often they go for many times earnings and even more than 1 times annual revenue.
3. You can go that extra mile for your customers – this one is often overlooked, but when you NEED that next big check to pay this week’s bills you might just skip other things that were of higher priority but pay less to get that fat check. Beyond that, you can sometimes do services for customers for free or at a discounted rate to go that extra mile even though it’s a month past warranty simply because you can afford to.
4. You can sleep more easily – When you don’t know how you’re going to pay that next bill it can get a bit nerve-racking for any of us. It’s a lot easier when you know you have X amount of billing going out every week or month.

The list can go on and on. If it’s not obvious yet, then just take my word for it, every business wants recurring revenue. Before moving further, I’ll provide my definition of recurring revenue as “Consistent, repeated income from the same customer in a predictable time frame.” In other words, if you have an oil change business, I don’t consider oil changes recurring revenue unless your customer is tied into some sort of maintenance plan or agreement. That’s not recurring revenue because in 3 months, they can go somewhere else to get their oil changed very easily.

Recurring revenue can be broken down to 3 main areas:

1. Renting/Leasing Products – In this category would be automobiles, motorcycles and other gas powered vehicles along with any product designed to be very reliable for a long time. The top 2 that come to mind are copier machines and water softeners. Every city has a copier salesman with a lease program “perfectly tailored” to your business needs… We also all have the Culligan man. His business philosophy since 1936 has been “Rent one, Sell one.” What he’s renting and selling are water softeners and the reason he does that is to have cash by selling a softener to cover his costs for renting the next one. He rents the next one to build up reliable consistent recurring revenue that can continue for literally decades.
2. Services – The simplest way to think of this is subscriptions – magazines, newspapers, Netflix, Cable TV, internet, cell phones, insurance premiums – All those bills you have to pay each and every month.
3. Rent-to-own/Payment Plans – These are just like the “rent/lease” products above except eventually the customer will own them AND they generally don’t last as long. Think of “Rent-to-Own” stores like Rent-a-Center and Aarons. The products they rent-to-own have a relatively short shelf-life. In other words, 5 years from now we all want a bigger TV, newer computer, upgraded furniture, the latest gaming system, and the most advanced new sound system. So guess what the rent to own businesses try to do? They start renting you a new X when the rent-to-own plan for the last one is up so you’re always making a monthly payment. And the second time around it’s a much easier sale because the consumer already has that dollar amount budgeted every month.

Now it’s time to get creative, how can you incorporate those into your business?

If your business sells a product then you can easily incorporate 1,2 and/or 3. You just have to decide which ones will work best. Is your product prone to frequent and regular updates that your customers are going to want to replace in a few years? Every major electronics and computer store now has a price and a monthly payment next to each product. Those are rent-to-own or finance programs. There are subtle difference between finance plans and rent-to-own plans that normally come down to how the interest is calculated. Either one can be effective. Off the top of my head, I can only think of a few items that you would want to simply rent without your customer ever owning the product. Basically any major appliance in your home could fit into that category – Hot water heaters, air conditioning units, heat pumps…  All the things people only think about when they don’t work. Why rent those in addition to selling them? The benefit to the consumer is that with a rental, since your business technically owns the product, it’s your responsibility to fix it when it’s broke. In other words, the customer will never have to pay any bill except their monthly rental payment. The benefit to you is the recurring income.

Honestly, I’m not at all familiar with those home appliances so it may make a lot more sense to simply sell the customer a new unit along with an extended warranty/maintenance program. That way you can get the up-front sale to cover cash flow and recurring revenue from the service plan forever. After all, if you sell them the plan up-front and get them used to an annual “plumbing inspection” or “air conditioning” maintenance they’re much more likely to continue that every year instead of waiting till 3 or 5 years down the road for maintenance. My last blog was all about creating, selling, and pricing these extended warranties to create another profit stream for your business so check it out for more details.

In my business we’ve incorporated all 3. We have rental options, rent-to-own options (we don’t call it financing for legal reasons), and Platinum Care Plans. Of course we also simply sell our product which is still the preferred method for most clients.

If your business simply provides a service such as computer support, accounting, legal advice, consulting, etc. etc. etc. the same rules still apply. For the computer company you may be able to lease/rent equipment (maybe even consider adding a copier lease division since those are so tied to computers with built-in network printers and scanners these days) or simply setup a monthly service fee where you verify backups, scan for viruses, maintain drives (i.e. defrags, scan disks, space requirements), and help spec out new equipment as needed for a flat monthly fee. Lawyers now provide pre-paid legal services (just google it) and most accountants still have a lot of monthly or quarterly services to supplement the April tax return cash influx. The point is, no matter what your business does, there’s a way to get people to come back again and again. Find those opportunities and in the next recession you’ll be in a much better position than today.

To your recurring success, Bryan

1. Immediate Cash – That’s right, increase your average dollar sale immediately and put more cash in the bank with virtually no expense (you will have to do some marketing, training, and have agreements to sign).
2. Recurring Income – Depending on how you set it up, you can bill your customer for the whole package all at once or every month, quarter, semi-annually, or annually. Whatever works into your game plan. (More on this below)
3. Your customer wants it! – When the economy is down, consumers rethink their purchases. One thing that they hate when they aren’t sure where their next check is coming from is large surprise repair bills. Whether that bill is for a refrigerator, computer, or pickup truck. There’s nothing worse than getting hit with an unexpected bill when your income is slow. Most will much prefer to trade a small monthly payment and the security that no other bills will come up, for the possibility of that “surprise bill” down the road.
4. It’s simple – I’m in the middle of this project right now and though I’m consulting dozens of colleagues, the vast majority have never done this so I’m figuring out a lot as I go and so far there isn’t a whole lot to it.

Do you really need any more reasons then that? If you were going to implement any new program can you think of 4 better reasons than those? Me neither…

So what are the pieces to a good Maintenance Program. First let’s consider some common versions of these and who’s using them…  Best Buy, Circuit City, and just about every electronics company offers them now and you pay for them all right up front and for a terms from 1-3 years. Dell computer does the same thing with various time frames and various levels of coverage. When you go to buy a couch you can even get an extended warranty plan that covers rips, tears, stains, etc. etc. etc.  All of these require an upfront payment for the full amount. So asking for that payment up front isn’t too uncommon and is actually the norm.  Car companies do the same thing except they wrap that additional “investment” into your monthly payment. The pitch goes, “for an extra $24 per month if your $4000 transmission fails it’s all completely covered and we give you a rental car while it’s in the shop.” Now can I see a show of hands from the people who believe that all of these major organizations are implementing these programs and losing money in the process. My point is that if your business isn’t doing this you’re missing out on additional revenue and more importantly additional profit.

So what do I recommend?

1. Keep it simple! Dell and the car companies have a complicated assortment of options from their basic to most advanced plan and they have dozens of people dedicated to creating, marketing, and tracking just those things. At your local car dealership they have a “business manager” who’s sole job is to sell you these add-ons. That’s a lot of complication. To start off simplify. This doesn’t mean that later on you can’t add more options to make sure you get every dollar, but keep in mind the more options, the more paperwork, the more training, the more tracking etc. etc. etc. To get started, keep it simple!
2. Make it a “no-brainer” My marketing even says just that. That it’s a “no-brainer” that shouldn’t be passed up. Why? Because I priced my Privilege Program to cost LESS than the cost if they just paid for service/maintenance as needed. Why? Because some times people forget when it’s time for service and when we remind them they could put it off for weeks or months. When people have already paid for something they tend to not forget to get it. Also, my costs for tracking people down for regular service and scheduling them become much less because now they are expecting (and wanting) to hear from us.
3. Have an easy way to track it. Without the ability to simply manage, the progam can cost way more than it can make. Is your billing software setup for monthly, quarterly, or annual billing? (Quickbooks honestly is not very good at this) Do your work orders have a way to let your service tech’s know it’s a Privilege Customer? Can your customer service people tell they’re a Privilege Customer? Can your business manager easily track progress, related Profit and Loss, implement price changes, and even track the reasons why someone is canceling? If not, look into software for your industry that can or consider hiring a programmer to write you a custom database.
4. Try for an up-front payment but have other options available. If you determine your Maintenance Agreement for your computer store, plumbing business, or bicycle repair shop is going to be $120 per year then allow them to pay $12/month (with a minimum term if necessary) or $35/quarter. Note that the further ahead they pay, the more discount the receive. Obviously only offer these options if your computer system can handle that kind of billing. After all, $12/month is better than $0/month.
5. Incentivize for your team. I’m a big fan of employee incentives so throw in an extra few bucks for each one they sign up. At the very least, tie their job description and performance to signing up X agreements per day or week.
6. Train your team (over and over again). One lesson I’ve learned from running a business is that your team members don’t quite retain everything or take it real seriously the first time around. You have to bring it up again, and again, and again. That’s OK. That is your job after all. Granted if you have an incentive program tied to each employee signing up these agreements you might not have to repeat it so many times.

There’s your maintenance program outline. Get started today and start making more money tomorrow while making your customer’s happier than ever.

To your “increased profits during a recession” success, Bryan

1. Have cash available – Check out my blog about cashflow first. In essence, if your receivables are high or you have an issue with billing or you just have a slow month, make sure you have access to cash so you don’t have to miss payroll. That doesn’t help team member morale much. Discipline yourself to build up a company savings account with at least enough money to cover 1 payroll. Another way to help cashflow is to pay for performance instead of just hourly or flat salary.
2. Improve Marketing – Don’t cut back on your marketing unless that marketing isn’t producing results. More and more people are skipping the Yellow Pages and going to the internet. Or they’re going to the yellow pages simply to get your phone number once they already know who they’re going to call. How much are you spending on yellow pages? Is it paying off? Invest time into making your website better if that’s an area that drives leads. Try some direct mail campaigns. Place an offer along with your radio and print ads to measure the response. If it’s working invest more money into it. If it’s not, cut or eliminate it completely. Focus on referrals!
3. Cut Expenses – Use better technology (VOIP, Quickbooks Payroll, Online bill-pay, online backups). Improve employee efficiency with detailed procedures and performance based incentives. Search for better deals before purchasing anything. Shop from multiple vendors and keep a database of vendors available for each part so you know where to get the best deals.  Find out from ALL of your vendors if they have quantity and pay-quickly discounts (i.e. pay in 10 days to receive 2% discount instead of in 30). Cut out some of the owner perks if necessary.
4. Ask your team for help – It’s a team and they’re all working with your customers every day. What can they bring to the table as potential cross-marketing, upgrade, and add-on opportunities that you’re not taking advantage of right now? Get everyone involved so they “buy into” new programs. At the same time, work to improve the productivity of your team.
5. Sell to your existing customers – They know and trust you so how else can you help them?
6. Know your numbers -Taking a page from Michael Masterson, each leader should only have 3 numbers to focus on.
   1. Your office leader needs to know total receivables, outstanding payables, and bank balances.
   2. Your sales leader needs to know # of outstanding leads, # of new sales, and average dollar sale.
   3. Your marketing leader needs to know # of leads coming in from each marketing project, # of sales from each project, and average dollar sale.
   4. Your service leader needs to know # of work orders completed, # of work orders outstanding, and # of customer complaints.
7. Acquire competitors and/or complimentary businesses – If you have the top 6 under control, it’s time to really take advantage of the economic climate by acquiring more businesses. Competitors are perfect since you can cut out nearly all of their overhead expenses by absorbing them into your business. Generally if they’re for sale they haven’t done as good of a job as you so they should be ripe for new marketing, cross-marketing, add-ons, up-sales, etc. A complimentary business can help you do the same thing. You may not get as many synergies as quickly, but with a complimentary business you can now sell the service your new business provides to your existing customer base and vice versa.
8. Avoid starting a business – When you start a new business, you have a lot of expenses up-front and NO customers. You have no immediate cashflow, no systems, no marketing, no referrals coming in, no name recognition. Nothing. By relying on an established business as your primary source of cash you don’t have nearly the time invested as starting from scratch. And on day 1 you have sales and money coming in.

There are lots of “little things” you can work on to improve your business to make sure it’s resilient in times of economic slow-downs. However, don’t get bogged down in the details! This was a quick overview of just the most basic things every business should be doing. Obviously all of this is true in good times and bad so when your business starts picking up, don’t forget to stick with it!

To your success, Bryan

However cutting expenses isn’t as “straight-forward” as one would expect. If you had to explain and train a 19 year old with no experience on how to manage the payables, purchasing, inventory and cashflow for a business employing 13 people what would you teach them? How would you teach it?

These are the questions she needs to consider every day:

1. How can we improve Profits?
2. How can we improve Cashflow?

So let’s explain the difference between profits and cashflow first.

1. Profits – Profits are an income statement or financial and tax reporting number. They don’t have a direct influence on if you can pay your bills or when. This number simply tells us if you sold more then you spent.
2. Cashflow – This is money or cash you have available to spend. In other words, cash in the bank.

A quick example to illustrate the stark difference between profits and cashflow and why both need to be addressed is this: If I can order 100 widgets at a 10% discount and I ultimately sell all 100 widgets, then I just increased my profits 10% by cutting expenses. However if I order 100 widgets at a 10% discount and it takes me a year to sell them so I didn’t have the cash to pay the bill right away, the late charges and finance charges may out weigh the 10% discount. Or let’s say they only gave us a 3% discount, I could have put that money in a money market fund for the next year at a higher interest rate then 3% and been better off.

OK, so how do we systematize and simplify this concept? We created a spreadsheet listing all of our vendors along with the following columns with information: Vendor, Terms, Discount Terms (i.e if it’s due in 30 days but we pay the bill in 10 will we get a discount?), Late Fees, Finance Charges, Grace Period, Finance Policy.

That simple spreadsheet tells her, me, the person who replaces her if she quits, my business partner or anyone else who looks at it exactly who we need to pay and when. In other words, if cash is tight, we simply reference the spreadsheet to determine which bill we pay first and which ones we can pay late and with the “Finance Policy” we can even estimate who may credit off finance charges if we call and negotiate.

The “Terms” tell us about our cashflow options and the “Late fees”, “Finance Charges” and “Discount Terms” let us know how the vendors’ policies will affect our profits. It’s simple and straightforward, however it does take some work to collect all of this information from all of your vendors.

Keep in mind, your vendor may tell you something that experience tells you is not true. For instance, MOST billing systems where you are sent an invoice have a set term in days, however they don’t actually apply late charges until the end of the month. So you may receive an invoice on 10/25 that says Net 15. The invoice says it’s due 11/9 and that late invoices will accrue a finance charge of 1.5% per month. If you call and ask the vendor, they’ll tell you it’s due 11/9. However what that generally means is as long as you pay the bill before that company “closes their billing month” (which could vary from the 25th to the 31st of the month) you won’t be assessed any finance charges. In essence that mean the bill isn’t due until the end of the month.   In our spreadsheet we know which customers to pay exactly on the due date and which to pay before the end of the month because of the “Grace Period” field.

With QuickBooks Pro 2009
this process becomes even easier. You can setup custom terms along with applicable discounts so that when you put in the bill, Quickbooks automatically knows, and applies, your “Early Payment” discounts for the vendors who offer them. This is possible whether you receive discounts by paying exactly within 10 days from invoice date or if you just have to pay before the 10th day after the month-end in which you recieved the invoice. The custom terms in Quickbooks is quite powerful. It’s main limitation, and the reason for the spreadsheet, is you need to know the “Grace Period”, if any, as well as the “Late Charges”, “Finance Charges” and “Financial Policy”. You could probably put that information in the notes field on the vendor’s account but quickly referencing the spreadsheet seems to be easier.

In addition to the information and concepts I need to teach to my impressionable payables person, there are a few concepts that just my accountant and I need to understand. Those are the expenses I must depreciate and the goodwill I can amortize. Depreciation can either help with profits and hurt cashflow or hurt profits and help with cashflow. First off, helping or hurting your profits depends on whether you’re talking with your banker or the tax man. If you’re talking with your banker you obviously want to show lots of profit however with the tax man you want to show very little. Granted, we need to be honest, upfront, and ethical with both if we want the best for ourselves and business. Your banker will often look at EBITDA so that your non-cash expenses won’t hurt the “profits” they consider, but they’ll also look at your cashflow statement. Depreciation is usually a negative against your cashflow initially and a positive near the end of a product’s depreciable life. For instance, you may depreciate a computer over a number of years, however you need to pay for it all upfront. Since you have to pay for it immediately your cashflow is hurt. Yet, it’s now paid for so in a year the bills are all paid, but you can still take the depreciation expense on your books to minimize your profits and which helps minimize your tax burden. As a general rule, you expense everything immediately and forget about depreciation! Why? Because taking the immediate expense will help your cashflow by decreasing the taxes you’ll have to pay on your profit. There are exceptions…

Without going into a lengthy explanation of amortization, the rules are relatively the same as depreciation. The primary difference being that amortization NEVER effects cashflow. Amortization is simply an accounting number that has no bearing on your actual cash investment. I know accountants will disagree with me on this because they say it represents the difference between what you’ve bought something for and what it’s worth so your amortization deduction is equal to the cash you paid out of pocket. This is only true if you used your own money to buy the business. But why would you do that when 65% of businesses are sold with some sort of vendor financing?

For some more specific ideas on the ways your payables person should be improving cashflow check out my other blog.

To your success, Bryan

If you’d like a copy of the spreadsheet email or comment.

1. Manage your receivables well – If you don’t have receivables and don’t believe in them, Wells Fargo makes an interesting mathematical justification for them here. If you do have receivables try some of these things:
   1. Have procedures in place to avoid billing errors. – Very simply, make sure you print out as many bills as you have customers with balances. Any billing program should be able to verify that.
   2. Implement Finance Charges AND Late Charges – Whether your credit card has a balance of $100 or $10,000 you always get hit up for at least a $35 late charge. Why should your bills be any different?
   3. Stay on top of past dues – Whether by faxing, mailing, emailing or calling, people know which companies they should pay first and which they should pay last. Part of that is based on your late/finance charges and part is based on how much you’re going to nag them.
   4. Offer reasonable terms – If you give someone 60 days to pay, you could run into some very tight cashflow periods. Thirty days or less is usually acceptable to most people.
2. Have credit available – We all run into tight times whether its for a day or a month. Make sure your business is credit worthy and then work on the following:
   1. Vendor Accounts – Just like you extend credit to your customers find other businesses who will do the same for you. Just beware that their products are more expensive because of that.
   2. Credit Cards – A quick way to give yourself an additional 30-60 days to come up with money for a payment. If you always pay off your credit card and/or know how to use cards with 0% interest this can be very helpful. If you are not good at managing money, then you probably want to avoid credit cards.
   3. Business Lines of credit - If you have a strong relationship with your bank and have decent personal credit, get started with one of these even if you don’t need it right now. Use it occasionally to build up a credit history with your bank so that when you need cash for a tight time or to expand you know it’ll be there.
   4. Savings – Create an interest bearing savings account for your business. Take a percentage of every sale and put it into that account.
   5. Personal Loans - If you have the ability personally to loan your business money that can be advantageous for a few reasons. You can charge a transaction fee and interest and make some passive income for yourself minimizing tax consequences (always check with your accountant first).
   6. Other lenders - Having access to the cash you need when you need it is important. It’s also important to have business credit separate from personal credit. With that in mind, I started working with BCS Credit services to help me achieve both. I’ve been working with the company for over 2 months and to date I would definitely NOT recommend them. The theory of what they provide is good and they have some great ideas, but so far they’re not delivering on their promises. We’ll see ultimately how it works out.
   7. Supplier financing – Car dealers do not buy cars and then sell them to you. They finance them and then pay a monthly payment to keep them on their lots until you or I buy them. Motorcycles, ATV’s, jet-skis, snowmobiles all work the same way. There are a lot of businesses where your primary supplier will allow you to either pay for something up front OR they’ll finance the purchase of that item for you. Make sure you see if your primary suppliers can do that for you.
3. Pay vendors early – This past week I finally made the time to review our payment policies in detail. Several of our top vendors offer anywhere from 1% to 5% discounts for paying early or on time! In my business that equates to about $330/month in savings. How much money could that save at your business? My Quickbooks is setup to tell me exactly who I can pay early and what discount I can take on that payment so it saves me a lot of time and effort to track.
4. Maintain “adequate” inventory – Since my background is in Mechanical Engineering and particularly in the auto industry I’m somewhat familiar with Just-In-Time (JIT) inventory management. With the cheap shipping rates and quick service of UPS and FedEx, if you stay on top of your inventory it’s not hard to always only keep enough on hand for a few weeks at a time instead of a few months. When you buy a business that has months and months of inventory on hand, you can quickly free up some cash by just slowing down your orders of new parts until current inventories are at the minimum level and then only ordering what you need. Obviously you need to take into account shipping costs compared to the late fees you’ll be charged if you don’t have the cash to cover all the extra inventory you just ordered. Like most things these days, the proper inventory management software can make this process a whole lot easier.
   

Make sure you don’t use business credit cards and accounts for personal items! Credit is nice to have and can be helpful personally, but if you do that, chances are a court of law would view no separation between your business and your personal assets. In other words, if the business is sued, and you mix and mesh your business and personal credit cards and charge accounts, then the court may find that you’re also personally liable since there’s no difference between your personal money and your business money. Then they come after your house, car, pension, IRA’s etc. Don’t make that mistake. It’s not a gamble worth taking.

Do you have any other creative methods for ensuring Cashflow is King? Looking back, it’s odd that I waited 6 months to write this blog since it’s so crucial to business success. In my next business, this will end up being one of my first areas to improve. Don’t make the same mistake I made and wait until your forced to review all of these things!

To your success, Bryan

In the last blog we discussed the 2 main criteria a bank looks at for approving a commercial (and theoretically personal) loan.

1. Cash Flow – do you make enough money to afford the payments?
2. Tangible Assets – if you don’t make enough money what can we sell to pay off what you owe us?

Since that blog was written a banker educated me concerning listing revenue and a customer list as an asset “There is no way to assign a value because that customer base can decide to go away on a moment’s notice. They are not required to do business with you. So that value in the business is actually a part of the “blue sky.”” So you know I’m not making this stuff up. To think that customers are just going to disappear when, on average, each one has been with you over 8 years AND new customers are going to stop buying from you when you’ve had a successful revenue generating strategy in place for nearly 40 years is kinda silly. For most people their business’ are their lives. With that kind of track record how/why in the world would they all of a sudden sabotage it. That just seems like a ridiculously minor risk.

Does anyone know if banks are “forced” to not consider revenue or customer base as an asset because of some strange banking or FDIC regulations?

At any rate, we’ve spent enough time on valuing a business based on tangible assets so let’s consider valuing a business based on EBITDA. Firstly, EBITDA and cashflow are NOT the same thing. If you’re buying a business, you should always value it by looking at profits. Secondly, EBITDA in no way approximates or represents profits. I only point that out because if you’re trying to buy a business and someone tells you that it’s worth $1 million because EBITDA is $200k and the standard multiplier is 5 then you should indicate that EBITDA doesn’t tell you anything about the business and you need to look at profits instead. Let’s look at each piece piece of EBITDA so we can see why its only helpful when you sell your business (because it’ll drastically inflate the business’ value).

1. Earnings – depending on who’s doing the evaluation this can be either Net Operating Income or Net Income. In essence, this is your “book” profits. Except there’s one problem. If your business is based on Accrual accounting (which over 95% are) then earnings are based on sales, not on deposits. Just because I made a $1000 sale, doesn’t mean I’ve actually collected $1000 and have that cash in my bank account to spend. In other words, this tells me what earnings should be but not how much of that is cash in my pocket.
2. Interest – The theory goes that when you buy a business you’re not buying the business’ debt so you have to pull out its interest. That makes sense as long as you add back in the interest you’ll now be paying for whatever loan you need. If you’re just using EBITDA to measure “free cashflow” in a public company, you definitely don’t want to pull out interest because they have to pay that every month and that certainly affects their cashflow.
3. Depreciation – The basic idea is that if you buy a truck, car, building, computer, or office equipment for your business, you can’t write-off that expense all at once and so have to depreciate it over 3,5,7, or 21 years depending on what it is. Well you had to pay for it upfront, so now you have a non-cash expense (i.e. an expense that shows up on your income statement that isn’t a part of payables) and more cash in your pocket every month, right? There are 2 problems with that.
   1. You generally still have mortgage or car payments to make that don’t show up on your Income Statement. So in this instance some portion of that depreciation IS actually decreasing your cash flow every month.
   2. Depreciation is designed to expense an item over it’s lifetime. However, at some point you’ll have to replace that item again. If its your habit to pay for everything up front without a loan then every month you’ll have to be setting some cash aside to replace that item when its useful life expires.
4. Taxes – This one is similar to Interest in that when you buy the business you’ll have a new accountant and and so the amount you pay in taxes is going to be different. That sounds reasonable to me. So figure out how much in taxes your super-accountant will be able to save you and subtract that. Don’t just assume taxes are going to disappear and base your business valuation on that assumption. One way or another you will pay taxes – or end up like Al Capone.
5. Amortization – The whole concept of amortization is probably the one I understand the least but here’s my explanation anyway. Admittedly, this one can be a very legitimate non-cash expense. I’ve discussed this one with business owners, accountants, lawyers, and bankers and, though they all seem to have a slightly different explanation, from what I can tell, it’s a GREAT accounting gimmick. Here’s how it works, it’s basically the same as depreciation except for non-tangible assets. For instance, let’s say you pay $1 million for a business but through certain accounting practices you can show the business is worth $600k. You now may have the ability to amortize that $400k “blue sky” asset, that has no “tangible” value, over the next 15-20 years. Now, if you are the one who is making payments on a $1 million loan then the amortization is just like the depreciation. It’s not really a non-cash expense since you’re making loan payments against it. However, if you buy a business where the previous owner was amortizing from his purchase, now you could potentially have 10-15 years left of that non-cash expense to write-off. This is most common when the previous owner bought the business when it was losing money (if you pay any money for a business that is losing money you should have some “blue sky” to amortize) and then made it profitable and sold it to you.

The Bottom Line

EBITDA has it’s place. In fact, it’s great when you want to sell your business. Most people in the business and banking world use EBITDA multiplied by some arbitrary number (generaly 3-9) to come up with the value of a business. Since that value will always be higher than valuing the business based on profitability, then why wouldn’t you try to sell your business based on that?

On the other hand, I’m not sure I can think of one solid business reason to evaluate a business based on an EBITDA, EBITA, or EBIT number. Maybe that’s why EBITDA is not a GAAP (generally approved accounting practice) calculation.

Nonetheless, you have to give it to the first guy who invented EBITDA by highlighting it in a corporate report to show how well his business was doing. We all bought into it and now he even has the banks and accountants using his inventive, creative, and pointless calculation.

Just make sure the next time you’re looking to buy a business or just some stocks, you’re not spending too much time on EBITDA.

To your success, Bryan

So after years of reading books on real estate, investing, business building, sales, marketing, and psychology here are the ones that offer the BEST advice for wealth building in the order of importance.

1. Billionaire In Trainingby Brad Sugars: If you don’t know this guy then you need to. He retired with $10 million in the bank at age 26 for a few years. Then got bored and launched what is now the largest business coaching business in the world, Action Coach International. Now at age 34 he’s been involved in over 50 businesses and is using the formula in this book to become a very young billionaire. The best book of its kind.
2. Ready, Fire, Aim: Zero to $100 Million in No Time Flatby Michael Masterson: Masterson’s approach is a bit different than Sugar’s which is why I liked it. Masterson talks in detail about starting and growing a business step-by-step, whereas Brad says don’t waste your time starting one, just buy one. Regardless, Masterson has turned himself into a hundred millionaire and retired for the first time at age 39. He provides some excellent tools particularly his insights into marketing and back-end sales.
3. The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About Itby Michael Gerber: One of the best business books ever according to Inc. magazine. Gerber breaks down the reason most businesses fail to the owners misunderstandings about business. The greatest misunderstanding – that because I’m a good plumber, electrician, accountant, lawyer, etc. I’m gonna be great at running a business that will allow me to use my sweet skills.
4. First, Break All the Rules: What the World’s Greatest Managers Do Differentlyby Marcus Buckingham: After interviewing 80,000 managers in 20,000 different organizations over 20 years Buckingham has broken down the best way to measure employee productivity and happiness to 12 simple questions. If 12 is too many he even gives you ways to shorten that list depending on your goals. If you EVER plan on doing a performance review or have employees, read this book.
5. Built to Last: Successful Habits of Visionary Companiesby Jim Collins and Jerry Porras: The greatest lesson I took away from this book was that Gerber and Sugars are right. Even the greatest businesses over the last 100 years were founded to be great businesses from the start NOT to provide a great product. That’s a VERY important distinction. Sorry to dissapoint all those high-ranked business schools that say you need the product first.
6. The Millionaire Mindby Thomas Stanley: This book is a compilation of data from survey’s answered by over 1300 millionaire’s. Some of his findings are quite interesting. The most important 2 were that the number 1 thing millionaire’s attribute to their success is “Being honest with all people.” The second is that most millionaires were at or below average according to our fine education system. They were mostly college dropouts , C students, and averaged less than 1000 on their SAT’s.

Though I’ve read Robert Allen’s Nothing Down for the 90sand Hagstrom’s The Warren Buffett Way and Peter Lynch’s Beating the Street along with dozens of other books and online services related to real estate and investing, I have very purposely left those out. I’m not saying they’re poor books, because they are all VERY good (Robert Allen inspired me to buy my first rental property at 21) – however, as Brad Sugars points out in “Billionaire in Training” you don’t climb the capital ladder (i.e. real estate and stocks/securities) until you’ve climbed the cash flow ladder. In other words, until you have cashflow to backup your real estate investments and securities in case of trouble, you’re wasting your time with those. I know in the instance of both my real estate investments and stocks/mutual funds I NEEDED cashflow (from my job) to cover them.

To your success, Bryan