Small business owners are entrepreneurial spirits with a particular talent or trade. While passionate about their craft, the financial aspects of running a business often present new challenges they are unprepared for. Even experienced business owners encounter new aspects of financial management as their businesses grow and expand. In this presentation, we will cover the principles of effective financial management every small business should know.

1. Principles of
Effective Small
Business
Financial
Management

2. • Financial statements ACT: Accurate, Complete,
Timely
• Strong personal credit
• Understanding the cash conversion cycle
• Sufficient working capital
• Manageable debt-to-equity
• The financial formula for successful vendor
management
• Employee relations, the two-sided coin: hidden
value or hidden costs?
THE PRINCIPLES
.

3. Lessons in Business
.

4. • Breakdown expenses and income
• Understand cash flows.
• As business grows, so does reporting:
• Tax returns > internal reports > audited
statements
• If growth is part of your plan, can’t “worry
about it later” – you won’t be taken seriously
when it matters.
Financial Statements ACT:
Accurate, Complete, Timely
Watching your checking account
balance is not enough!

5. Financial Statements ACT:
Accurate, Complete, Timely
Watching your checking account go up
and down is not enough!Example
YTD sales and projections
Expenses with breakdown
Payables
Receivables
Proper inventory accounting
Interest payments
Depreciation
ACT = Balance Sheet AND Income Statement

6. • Make every effort to protect personal credit.
• If you’ve made mistakes, straighten them out
and have explanations ready.
• Take bills seriously – don’t pay late.
• Judgments/lawsuits
• Tax liens
Strong Personal Credit
Your personal credit will be seen as a proxy
for how you will handle business credit

7. Examples
Small business owner ready to scale – but
late mortgage payments showed on credit
report.
Small business with two owners denied
credit because one had bad personal
credit.
X
X

8. The Cash Conversion Cycle
The amount of time from when you spend
your first dollar to when you get it back
• Growth kills more businesses than lack of
business.
• CCC is especially important if you incur costs
before payment.
• All businesses need to understand:
• How long does it take to get paid?
• What work will be paid in the near future? What is
paid upon completion?
• Is there enough regular revenue to cover fixed and
variable expenses?

9. The Cash Conversion Cycle
Formula for growth
Sales growth x cost of goods
# of cash conversion cycles each year
• The number of cycles makes
a huge difference!
• Remember: Growth
produces profit in the
FUTURE
• While you’re growing, it is
costing money!
• New employees
• Office space
• Technology
• Raw materials

10. The Cash Conversion Cycle
Formula for funding growth
Projected growth ($) x cost of goods (%)
# of cash conversion cycles each year

11. Example
Company grew from $1.8 t0 4.2 million in
sales one year
Income statement that year → $500,000
loss.
High cost of goods, long time to get paid,
few CCCs
With advance calculation, could have asked
for additional $500,000 from bank up front –
not ideal to ask for additional loan when
showing losses.

12. • Why is working capital important?
• Temporary working capital – monthly gap between
income and expenses.
• Permanent working capital – longer-term funding
not for real estate, land, or assets.
• Hiring, inventory, marketing, etc.
• Often small businesses need permanent, but try to
solve with temporary
• Permanent is more difficult to finance – explore
Small Business Administration loans.
Sufficient Working Capital
Working capital is the money needed for
day-to-day business operations.

13. • Plan for investments required to grow:
• Employees, inventory, receivables,
• Understand how quickly customers pay, how
quickly you pay vendors
• Without proper preparation, growing your
company could put it out of business.
Sufficient Working Capital
It costs money to grow your business –
make sure to plan for it!

14. Example
$2M in growth with 10% margin =
$200k profit?
• 70% cost of goods = $1.4M
in materials
• 5 cash conversion cycles
• $300k to fund first cycle
• More focus on growth =
ordering more from vendors,
less focus on collecting
receivables
• Cash imbalances developed
Projected growth x cost of goods
# of cash conversion cycles

15. • For growing small businesses –
this ratio can be difficult to achieve.
• Even 20% or 25% down payments
put you outside of standards
• Review balance sheets (another
reason for ACT financial
statements!) and keep 3:1 as goal
Manageable Debt-to-Equity
Conventional lending standards:
3:1 ratio

16. • When your business becomes
profitable (or if it already is) –
retain some of the earnings.
• Resist the urge to spend all profits
– even if reinvesting in the
company.
• Higher leverage = higher priced
debt
• Higher leverage means you could
be denied a loan – even with a
good credit history.
Key Takeaways

17. Example
Company X is doing well and growing rapidly. They’ve
never missed a debt payment – or even paid late. They
are a good banking customer, but can’t get a loan.
Why?
• Franchise restaurant chain with high growth
• Open 2-3 new restaurants annually – fund build
out with loans.
• Profitable, but highly leveraged.
• Banks hesitant to lend money.
• Small Business Administration loan funded start-
up costs without assets.

18. • Good communication is key
• Sync up when you are paid
with when you pay vendors.
• Can the vendor work with your
timelines?
• Will they charge interest?
• Is this a relationship that can
grow with your business?
Vendor Management
Understand your cash conversion cycle and
the appropriate place in the cycle for vendors
Vendor Examples
Raw materials suppliers
Wholesaler
Distributor
Professional services
Marketing/Promotions
Subcontractors

19. Example
As a business grows, cash imbalances
can develop with increased focus on
paying vendors and reduced focus on
collecting receivables.

20. • Resist temptation to:
• Hire people who
always agree with you
• Hire people who will
do the job for less
• Hire nice people who
are underskilled
• Hire people who are
just like you.
Employee Relations
Good employees add a lot of value
Bad employees cost a lot of money

21. Good Re-Evaluate
• Skilled for the job
• Diverse personality traits
among employees
• Can operate efficiently without
you there
• Complement business owner
strengths/weaknesses
• Aren’t sufficiently skilled in
their area
• Good at “carrying out orders”
but can’t work without explicit
direction
• Always agrees with you
• They are just like you ☺
Employee Relations
(Management Employees)

22. Example
A Kansas business was doing very well. The owner
turned over management of the business to
employees while he focused on expanding to
Oklahoma.
• KS operation began to suffer
• Significant costs sunk into new operations
• After two years, entire business on verge of
collapse
• Had to abandon expansion
• Rehire and rebuild KS operations

23. TAKEAWAYS
.
• Actively manage cash cycles
• Understand how growth impacts cash
• Plan for growth
• Accurate, complete, timely financial statements
• Act responsibly and with integrity – both
personally and professionally
• Surround yourself with the right support

24. Mike Slater
mike.slater@vitalfs.com
www.vitalfs.com