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Category Archives: Small Business Issues

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Building a Fortress Balance Sheet
June 16 2021 RgKAdmin14 Small Business Issues 0 comments Tags: balance sheet, inventory control, non-performing assets, calculate ratios

The best way to weather a storm is often by being prepared before the storm hits. In the case of small businesses, this means building a fortress balance sheet.

What is a fortress balance sheet?

This long-standing idea means taking steps to make your balance sheet shockproof by building liquidity. Like a frontier outpost or an ancient walled city, businesses that prepare for a siege—in the form of a recession, natural disaster, pandemic, or adverse regulatory change—can often hold out until the crisis passes or the cavalry arrives.

Building a fortress balance sheet isn’t just a good idea for mitigating risk. Healthy cash reserves can also enable your firm to capitalize on opportunities, expand locations, or introduce new products.

Consider these suggestions for building your own fortress balance sheet.

  • Control inventory and receivables. These two asset accounts often directly impact cash reserves. For example, carrying excess inventories can deplete cash because the company must continue to insure, store, and manage items that aren’t generating a profit. Also, take a hard look at customer payment trends. Clients who are behind on payments can squeeze a firm’s cash flow quickly, especially if they purchase significant levels of goods and services—and then fail to pay.
  • Keep a tight rein on debt. In general, a company should use debt financing for capital items such as plant and equipment, computers, and fixtures that will be used for several years. By incurring debt for such items, especially when interest rates are low, a firm can direct more cash towards day-to-day operations and new opportunities. Two rules of thumb for taking on debt are don’t borrow more than 75 percent of what an asset is worth and aim for loan terms that don’t exceed the useful life of the underlying asset. A fortress balance sheet also means that debt as a percent of equity should be as low as possible. So total up your debt, equity, and retained earnings. If debt is less than 50% of the total, you are on your way to building a stronger foundation for your balance sheet.
  • Monitor credit. A strong relationship with your banker can help keep the business afloat if the economy takes a nosedive. Monitor your business credit rating regularly and investigate all questionable transactions that appear on your credit report. As with personal credit, your business credit score will climb as the firm makes good on its obligations.
  • Reconcile balance sheet accounts quarterly. It’s crucial to reconcile asset and liability accounts at least every quarter. A well-supported balance sheet can guide decisions about cash reserves, debt financing, inventory management, receivables, payables, and property. Regular monitoring can highlight vulnerabilities in your fortress, providing time for corrective action.
  • Get rid of non-performing assets. Maybe you own a store across town that’s losing money or have a warehouse with a lot of obsolete inventory. Consider getting rid of these and other useless assets in exchange for cash.
  • Calculate ratios. Know how your bank calculates the lending strength of businesses. Then calculate them for your own business. For example, banks want to know your debt service coverage. Do you have enough cash to adequately handle principal and interest payments? Now work your cash flow to provide plenty of room to service this debt AND any future debt! But don’t forget other ratios like liquidity and working capital ratios. The key? Improve these ratios over time.

Remember, the best time to get money from a bank is when it looks like you don’t need it. You do this by creating a fortress balance sheet!

Have questions? Call our office at 610-296-2500.

This blog provides summary information regarding the subject matter at the time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten, or redistributed without permission, except as noted here. This blog includes, or may include, links to third-party internet websites controlled and maintained by others. When accessing these links the user leaves this blog. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does ROBERT J KRATZ & CO have any control over, or responsibility for, the content of any such Websites. All rights reserved.

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How to Walk the Tightrope When Raising Prices
November 17 2020 RgKAdmin14 Small Business Issues 0 comments Tags: Small business, Raising Prices

How to Walk the Tightrope When Raising Prices

Raising prices can be fraught with risk during good economic times. So what happens if you try to raise prices during bad economic times?

As Hamlet would say, “Ah, there’s the rub.” If you raise prices, you risk losing clients to competitors. If you don’t, decreasing revenue or rising costs can capsize your company. So what’s a small business supposed to do?

The Art of Pricing

Raising (and, sometimes, even lowering) prices can be a balancing act. As with any major business decision, pricing should take into account various factors. Here are several to consider.

Analyze costs. First, you need to carefully analyze the costs needed to bring your products or services to market. Such expenses might include raw materials, storage, personnel, advertising, delivery, rent, equipment, taxes and insurance. Failure to cover all these costs in your price will inevitably lead to shrinking profits.

Establish profit margin. Next, it’s important to establish an acceptable profit margin. This is where the art of pricing begins. To find your company’s sweet spot with regards to pricing, consider researching competitors in your region to determine their pricing for comparable products, raising your finger to the wind to discern the business climate and asking your customers about their preferences.

Listen to your customers. Your customers will tell you if you raised prices too high. They’ll either continue to buy your product or seek out a competitor.

Consider incremental price increases. Small, incremental price increases tend to be more palatable to customers than a few large changes. We see this every day in the rising cost of gasoline, utilities and taxes. Many customers can handle incremental inflation…just don’t shock them with a huge increase all at once.

When considering pricing, it’s important to take a long, hard look at both your costs and the quality of your products and services. Customers will generally pay a premium for goods and services that provide greater value. Successful business owners endeavor to increase both the actual quality of their products and the perception of that quality in the minds of customers. Do both well, and a price increase may be in order.

This blog provides summary information regarding the subject matter at the time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten, or redistributed without permission, except as noted here. This blog includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this blog. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does ROBERT J KRATZ & CO have any control over, or responsibility for, the content of any such Websites. All rights reserved.

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