With Independence Day coming up, many are thinking about the “American Dream” and financial independence. Although many think of their personal finances, if you’re a business owner you’re probably thinking about your company. You may be wondering how to help your business become financially stable and independent or how to keep it that way in an ever-changing market. I have tips for you, regardless of which camp you fall into.
If you want to gain financial independence for your business, you first need to assess the situation, then make changes. Is the business using debt properly? Are business plans up to date? Do the daily tasks of associates match up to the yearly goals? Use the steps outlined below as a guide.
Take a look at your financial information. You should have three years’ worth of balance sheets, income statements, financial statements and tax returns, ratio analysis with appropriate comments, personal financial statement, pro-forma income statements, pro-forma balance sheet, cash budget and comprehensive cash-flow analysis. Once you have this collected, the important question is: do you know where your money is going and how to optimize it? If, sometime, you want to grow your business with a loan, you’ll need this same information.
Deal with default. If you are experiencing or may potentially experience loan default by missing regular payments, there are three critical steps you should take:
1. Talk to your lender. The worst thing you can do is keep your lender in the dark. Inform him or her of your situation and see if you can negotiate the terms of your loan contract. Some loan terms up for discussion could include changing the terms of payment (such as paying less per month but for a longer period of time with a higher interest rate), late-payment forgiveness with a promise that future payments will be on time or refinancing at a lower interest rate.
2. Make a plan. A key factor in helping your lender determine his or her willingness to work with you is a recovery plan that should be generated by you. This written plan should include a situational analysis of the current state of your business, as well as an outline for how you plan to improve operations in order to come current on any outstanding loan payments. This proves to your lender that you are serious about holding up your end of the bargain. It also gives the lender something tangible to provide to loan committee in order to advocate for you.
3. Cut costs. One of the most common elements of a recovery plan includes detailing how you will cut costs. Is it time to move to a smaller office, liquidate inventory or restructure? Reducing expenses is never easy, but is necessary to increase cash flow that can be redirected toward debt repayment.
Prepare or update a business plan. Do you have a plan for your business’ success? Create or update your company’s business plan, being sure to include the company’s goals and financial projections. You should also include the following elements outlined by the U.S. Small Business Administration (SBA):
• Begin with a statement of purpose. You should be able to explain your business in 25 words or less.
• Illustrate how your business will work and why it will be successful. List the owners.
• Describe the company’s products or services, the customers, the market and the competition. List the managers and their credentials.
• Supply three years of projected financial statements. Include income, loss and cash-flow projections.
• Provide supporting documents, such as references from creditors and potential clients and suppliers, and evidence of insurance.
Make changes. Take the steps you outlined in your business plan. If you are doing tasks that don’t fit into the plan, adjust.
After you go through these steps to gain financial independence for your business, it’s important to put measures in place to keep your company on the right track to profitability. If this is where your business is at, consider the following steps:
Create or update your budget. Figure out where you can cut spending by keeping a list of expenditures, including small overhead costs, like office supplies. You may be surprised at how small purchases add up. Figure out where you’re spending the most and make sure it fits with your company goals and values.
Get organized. Put all your financial documents in a central location. This may be an electronic or paper file. Organized paperwork helps keep you aware, on track and in control.
Build a reserve. Companies that last through recessions are the ones who think long-term when they consider growth. When rates are low—or just starting to head back up, like our current market conditions—it may be a good time for your company to spend some of the reserves saved for growth.
Buy your building. A few months ago I talked about how buying your office space can help you put away equity for yourself. There are different types of financing available, and talking to lender is a good step.
Financial independence is important for any business to stay in business. If you want your business to grow and hit those goals you’ve made, financial independence is the key.
Richard Gray is senior vice president of commercial lending and SBA lending at Bank of American Fork, Utah’s community bank leader, an Equal Housing Lender and Member FDIC. Richard also manages the bank’s Murray branch, and he has assisted local small businesses in obtaining SBA funding for more than 25 years. He serves on the board of directors for nonprofit Kostopolus Dream Foundation and was the chairman for nonprofit Utah Microenterprise Loan Fund, Salt Lake City.
This article first appeared in The Enterprise.