Finance Archives - Citadel Earth

Post COVID Reset of M&A – Q2

Jeffrey Kadlic — Mon, 07 Jun 2021 19:22:44 +0000

This year started off fast and its only going to get faster. In early May, the Atlanta Federal Reserve reported GDP growth in the first quarter of approximately 6.4% which was possible in large part due to a combination of the euphoria of the vaccine roll-out, ongoing government stimulus and the expectation that the cost of capital will remain at historically low rates for the foreseeable future. Even though 2020 was not as bad as it could have been in many parts of the economy, it seems everyone is trying to make up for lost time in 2021 and is operating at a frenetic pace. I have observed that private companies seem to be on or ahead of budget through the first four months of the year, while many public companies are greatly exceeding earnings expectations, pushing the stock market to even greater heights. The Biden Administration has extended unemployment benefits and is promising even higher levels of spending to support an economic recovery fully underway, as evidenced by GDP progress.

The combination of strong economic growth and expected tax increases, particularly on capital gains, is setting the stage for a frenzy in the M&A market for the second half of 2021. Business owners who delayed selling in 2020 are determined to exit in 2021. Those who have been considering selling in the next couple years believe now is the time to do so, before long term capital gains tax rates increase dramatically. Based on current proposals by the Biden Administration, long-term capital gains could more than double from the current high end of 15% to be more in-line with ordinary income rates which top out at about 39.6%. Once second quarter 2020 financials fall off the trailing twelve month calculation (because most businesses rebounded in Q3 2020), many companies will hit the market trying to thread the needle between maximizing trailing twelve month performance after June 30^th and any tax increases take effect on January 1st.

Targeted support for specific industries like travel and entertainment is clearly warranted because, even now, most of those businesses are still under some form of restrictions. Many of these are small businesses that will likely never rebound. Despite that, I would argue that continuing the widespread government intervention that was welcomed and needed in 2020 will have an increasingly negative effect on the normal functioning of our economy. One can notice instances of Allen Greenspan’s legendary euphemism “irrational exuberance” in many parts of the economy including shortages in building supplies, computer processors and low wage labor, and higher real estate prices, all of which historically have been harbingers of higher inflation. Further, we also have new-fangled assets created out of thin air like SPACs, Bitcoin, Dogecoin and NFTs (non-fungible tokens) as the newest path to wealth creation.

They say “Don’t fight the Fed,” but what if the Fed is fighting itself?

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Post COVID Reset of M&A – Q1

Jeffrey Kadlic — Tue, 11 May 2021 16:40:48 +0000

Like other industries, private equity adapted in 2020 in order to survive. But unlike many, adaptation is the private equity industry’s core competency. “PE People” tend to kick into overdrive when they feel there is an opportunity or a threat. COVID-laden 2020 presented both. This ability to adapt has served the industry well for decades and is in part reflected in their investment returns, historically exceeding returns in the public stock market.

I observed in a previous post last August that investors like predictability, and that negative shocks to the economy (like a recession) are not all bad because they tend to reveal the truly exceptional businesses as investment opportunities.

Activity levels

Using Citadel Earth has a micro example of the broader private equity market, the balance of 2020 played out as I expected it would. There was more activity than many would have anticipated considering the general economic turmoil and restrictions on travel. I had pointed to the fact that banks appeared to be functioning normally and had quickly facilitated financial relief through the SBA’s PPP program. In addition, private funds had over $1 trillion of committed capital waiting for investments.

During this period, Citadel Earth was able to acquire two platform companies and make four additional add-on acquisitions. Each of these companies was exposed as an exceptional opportunity because of their resilience. None of these companies came to market because they were “troubled” as a result of the pandemic, but rather owners’ retirement plans were accelerated by post-COVID challenges staring them in the face.

Valuations

I have been surprised that many of the opportunities we see are not getting any “COVID adjustment” to normalize earnings. Though they have been negatively impacted by the pandemic, they were not permanently damaged. A large percentage of acquisition targets are being valued as they always were, based on trailing twelve months earnings with adjustments. If anything, some of the COVID impact is being offset by lower travel and entertainment expenses.

Working Remotely

Remote working is working. Not traveling saves a lot of time for everyone, and also saves a tremendous amount of money typically allocated to meals, hotels, plane tickets and uber rides. We believe, as others do, that this will be a permanent change to the private equity industry, among others. We at Citadel Earth realized very quickly that we were minimally impacted in the short term by remote work and only moderately so over the long term. The use of video conferencing exceeds use for regular phone calls now, and has also brought a personal touch to these interactions, a level of humanization, that was not typical prior. Hopefully we will all absorb and embrace this new normal, using it to develop more meaningful working relationships.

While everyone was glad to see 2020 end, we all adapted during the year, either temporarily or permanently in our own way, and we will all be stronger for it.

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PE and the Pandemic

Jeffrey Kadlic — Wed, 19 Aug 2020 17:40:09 +0000

Normally when I write a blog post, I have a knowledge base about and experience with the topic. This post is different because this situation is unfolding in real time and is unlike anything that we have experienced in the US in at least 100 years. By the time you read this, outcomes could be more apparent and my viewpoints may be proven wrong. The pandemic and economic shutdown began negatively impacting businesses in early March, and even earlier if you were sourcing from Asia. The full effect of the pandemic on US and world economies will not be known for many months and possibly even years.

THE STOCK MARKET

Investors like predictability and this lack of certainty about the impact or timing of a recovery disrupts their usual processes. This uncertainty is reflected and measured every day in the wild swings in the stock market, which appears to react in extremes in both directions to any sliver of positive or negative news. It is also manipulated regularly by The Federal Reserve, who is taking a bare-knuckled approach to resisting a full recession, and by the programmatic trading computers that makes virtually every trading decision on Wall Street.

But that’s the public equity market. What I want to address is the private market. Its great virtues include that it is private, less efficient and managed by professional PEOPLE! As a result I believe it has been more rational, more steady and a better indicator of where the economy is going than the public equity market and Wall Street have.

THE PRIVATE MARKET

Nobody likes a recession and certainly no one likes a pandemic, but from a private equity perspective it is this type of event that resets rational behavior and sets the stage for the next new opportunity. Ten year record-breaking expansions are a wonderful thing. All boats rise! But when all boats rise it makes it more difficult for private equity investors to identify truly unique forward-thinking value propositions and outstanding management teams versus average ones. Why is it difficult? Because when all boats are rising, all are doing well, and the conditions aren’t such that they expose the true quality of an organization. An observer would be left evaluating varying degrees of corporate success, rather than success of some enterprises vs. failure of others.

The businesses many private investors want to invest in, many of whom did not exist 10 years ago before the last recession, are now battle-tested and that is worth a lot! There is still almost a trillion dollars of private capital waiting to be invested. Banks remain well-capitalized and ready to lend thanks to the “gloves off” approach taken by the Federal Reserve to resist a deeper recession. So the playing field is reset with different investment priorities needing to be matched with the tremendous amounts of capital still waiting to be invested. M&A activity took somewhat of a 2-month hiatus, and now will be bit backed up at least for a quarter as the supply of businesses winds its way through the pipelines on the M&A calendar. Many businesses that were in the market to be sold in Q1 could not obtain financing as banks took a wait and see approach. Businesses going to market originally in Q2 are waiting to maximize PPP loan forgiveness and to assess buyer appetite for new acquisitions. But the real winners are those newly-recognized, game-changing businesses that went a few rounds with the COVID pandemic and won. They will be found quickly and receive a well-deserved premium from opportunistic buyers with cash to burn. Sadly there are many businesses big and small, indeed entire industries, that may likely never recover and potential buyers will be standing by seeking to take advantage.

This pandemic-led recession is no different than any other recession from the perspective that it resets the M&A cycle. The true difference is that consumers, business professionals and economic prognosticators are not dealing with the same variables and economic indicators that have served them so well in the past.

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Structure Deals for Success

Jeffrey Kadlic — Tue, 19 May 2020 18:13:38 +0000

There are many factors that have a meaningful impact on the success or failure of a transaction, and the structure of a deal is certainly one of them. The deal structure begins to take shape as parties determine what is in their mutual interest and what the strategy of the investment is post close. They also consider what kinds of incentives the investors and managers are trying to create and what is financeable if they are looking for banks or other groups to participate.

Equity Classes

Equity investors use different classes of equity to arrive at a negotiated arrangement with all owners in a business. For instance, an investor may choose to have downside protection in an investment by negotiating an equity security with a “preference,” meaning their capital would be repaid sooner then the rest of the equity investors. Preferred equity can also have a return associated with it, so not only do the preferred investors receive their money first but they also achieve some level of return before more junior equity tranches or options. In this situation junior investors often times own a security with more economic upside to correspond to the additional risk of being junior in preference.

Options

Options play an important role in a deal structure too. Management teams are often the beneficiary of options to achieve an amplified upside if the outside investors receive downside protection. Ideally, these arrangements will be part of a broader, reasonable strategic plan. In this example, each side can win such that the preferred shareholders receive a return before they are diluted by the additions of the options to the capital structure.

Employment Agreements

To me, the structure of a deal includes employment agreements which detail salary, benefits etc. An employment agreement can provide the seller/executive the incentive they need to move forward with the partnership. The “cause” language around how the seller/executive can be terminated ties back to the shareholder agreement if he or she has ownership or options. Often these documents together detail how a seller/executive is paid out should they leave the organization under a number of different scenarios. For-cause terminations usually require that equity be repurchased by the company at the lower of cost or market and not-for-cause termination dictates equity is repurchased at the higher of cost or market. In almost all cases, the company is able to repurchase the equity in installments over a period of years.

Third Parties

Finally, third-party capital is a further consideration. Banks have capital in the investment just like investors do and should be treated as partners. If the situation requires more “patient” capital or deferred principal amortization because the company needs more cash to grow then banks will likely charge a higher interest rate and include other return enhancers to compensate for the risk. A buyer might simply need some excess financial capacity to manage working capital within the month or season to help the company get by. In this case, a line of credit is a useful tool. Regardless, banks will look at the company’s ability to service the debt and interest payments using different ratios including my favorite the fixed charge ratio, measuring the company’s capacity to cover its financial obligations with cushion. A measure of 1.0 to 1.0 means that your cash generation matches your cash obligations. Riskier deal structures will require a higher cushion, often times up to 50% or 1.50 to 1.00.

The appropriate deal structure creates the right incentives for all parties and compensates each participant for the risks and rewards of an investment. Each group should have something to offer whether its money or talent and, in the end, all parties need to feel respected and believe they have been compensated accordingly.

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Four Benefits to Closing your Books in a Timely Fashion

Jeff Mihalek — Wed, 09 Oct 2019 15:45:34 +0000

Accurate books are the starting point to understanding your small business’ profitability and financial position. And the quicker you get those numbers finalized each month, the easier it will be to make informed decisions that drive the company forward.

The problem is that while publicly traded organizations have the teams in place to close their books within a couple of days after month’s end, small businesses just don’t have the same bookkeeping resources. Maybe you’ve experienced this with your own business? Owners are in the trenches every day putting out fires and wearing multiple hats, and many times that means bookkeeping is the last thing on their mind – even as invoices and expense receipts begin piling up.

That doesn’t change the fact that this is critical work that needs to get done. Here are four activities you can progress with once books are closed in a timely fashion:

Identifying non-recurring transactions

By recognizing these occasional transactions, you can understand the current implications of those transactions on your small business and what the potential impact will be on the company moving forward.

Determining cash position

Cash is usually tight for many small businesses. If the books are completed quickly and accurately, you can determine what your cash position is, analyze payables to know what’s due, and quickly ascertain how long some of those payables have been outstanding. You can also analyze receivables to aid in the cash management process.

Comparing actual results to budgets

At Citadel Earth, we always want the companies we work with to compare their actual results to the budgeted numbers so they can see how they are actually performing versus what ownership had planned entering into a new month or year. This helps with the revenue side, expense side, and the balance sheet.

Making strategic decisions

You need to have good numbers to see where you’ve been and where you are today, so you can then reasonably predict where you are going. The quicker you get your books done, the more time you will have to analyze those numbers and make strategic decisions such as implementing different initiatives or making changes within the company.

The work financial management personnel do each month impacts so many other departments within the organization. As small-business owners, it’s critical to look at who you have in those positions, if they are the right people for the job, if they can contribute to the balance of these activities, and if they are strong leaders. On top of that, having valuable documented policies and procedures in place as well as the right financial accounting software can help streamline the bookkeeping process.

Small businesses that maintain a professional bookkeeping schedule or a “close date” goal find that doing so allows them to move all related initiatives faster and to make better decisions overall. Interested in more business best practices as you grow Your Small Business and Personal Assets? Contact Citadel Earth today.

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What is the Difference Between Venture Capital, Private Equity?

Guest Contributor — Fri, 25 Jan 2019 17:50:04 +0000

Capital comes in many forms. Generally, it can take the form of debt (personal and bank loans, credit card debt) or equity (common stock, preferred stock, etc.). Debt is based on an obligation to repay; equity is a piece of the action.

In addition, capital can be short term (e.g., cash-flow assistance to accelerate cash from receivables) or long term (debt with a life tied to a capital asset, like equipment or real estate). There are also hybrid forms of debt and equity—e.g., convertible debt that can be turned into equity—or preferred stocks that track the value of certain distinct classes of assets on the balance sheet.

The next question is, who provides the capital? Friends and family, banks (which are loaning out depositors’ money, not making investments in equity), venture capital and private equity are well-known choices. But venture capital and private equity are fundamentally different and driven by different investment criteria. For these reasons, their view of the value of a company can be dramatically different.

Venture capital focuses generally on companies that are either pre-revenue (a company pursuing an idea, concept, product, service, etc., but not yet generating any significant revenue), or not generating enough cash flow to pay most, if not all, expenses.

The value a venture capital firm ascribes to a company is based on an assessment of its competitive advantage, including any intellectual property that creates a competitive barrier. A VC will evaluate a company based on its likely value at the time of sale (“exit”), generally five to seven years after investment. If a company has a great idea (e.g., Google) and it is hard for companies to compete with it (e.g., software that is secret or patented), the lack of cash flow will not deter a VC. And from a company perspective, it might actually be advantageous to NOT have cash flow, in order to avoid a private-equity valuation methodology.

Private equity invests in companies that are cash-flow-positive, i.e. generating enough cash from revenue to pay expenses, and have excess cash. PE firms evaluate cash flow and judge the ability to increase cash flow post-investment, by making additional capital investments and operational improvements and by making additional acquisitions to increase the company’s size and efficiency. These acquisitions are generally referred to as “bolt-ons.”

As companies grow to a certain size, there is an increase in the multiple that a buyer is generally willing to pay—so called “multiple expansion.” So a PE investor has an incentive to cause portfolio companies to grow, not only to improve economies of scale, but also to expand the multiple they are paid at exit.

PE values its investments based on cash-flow multiples and growth projections. Generally, valuation is a function of multiples of EBITDA—earnings before interest, taxes, depreciation and amortization. So if you are running a startup that is pre-revenue and certainly pre-cash-flow-positive, you actually are better off with the VC valuation approach. This is why people who raise VC capital generally think it is better to have no revenue (but lots of people begging to get your product).

If you are looking for a PE investor, however, your choices are more along the lines of sell out now, or stay invested in the company alongside the PE firm, betting that the firm will get the company to higher performance levels, through operations improvements and bolt-on acquisitions.

Most PE firms have no interest in companies with less than $5 million of EBITDA; they just don’t move the needle on fund returns, given the size of the fund, and generally require more time and effort to get to scale. A few PE firms, however, do invest in companies below $5 million.•

This article was provided by Matt Neff, a senior advisor to Citadel Earth, and was previously published with the Indianapolis Business Journal.

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The Do’s and Don’ts of Small Business Spending

Jeffrey Kadlic — Wed, 12 Sep 2018 14:34:22 +0000

While it’s true that sometimes you have to spend money to make money, there’s a fine line between smart purchases and reckless spending when it comes to growing your small business. It’s all too easy to fall into the trap of overspending on things that aren’t important or won’t provide a worthwhile return on investment, especially for first-time small-business owners. However, being too tight-fisted can narrow your opportunities for small business growth. To help you distinguish the difference between smart and reckless purchases for your small business, we’ve listed the do’s and don’ts for spending in the following five areas:

1. Human capital

DO invest in a hiring process, formal training and continuing education for your employees. Small-business owners short on time and resources are prone to making quick hires then throwing them straight into the fire. While hiring employees can be time consuming and expensive, losing them is even more devastating. The Work Institute’s 2018 Retention Report found that it costs employers 33% of a worker’s annual salary to hire a replacement. The report also concluded that 75% employee turnover cases are preventable, with the primary causes being:

Career development (22%)
Work-life balance (12%)
Managers’ behavior (11%)
Compensation and benefits (9%)
Well-being (9%)

Therefore, taking the time to find the right candidate and support their long-term growth can ultimately save your business money.

DON’T spend excessively on having a “cool” office with “unusual” perks. There are ways to build a positive work culture without spending lots of money on a bean bag lounge, cereal bar, arcade or other superfluous accommodations to attract top talent and foster collaboration. Focus on providing your employees with the bulleted items above rather than trying to “wow” them with toys or paid meals, for example. Investing in training and providing them flexibility and fair compensation will give them the fundamental tools for success and happiness at work. Besides, if employees want to work for you because of the random perks you provide, they’re in it for the wrong reasons.

2. Legal

DO protect your business. The extent of legal counsel you need is dependent on the nature of your business, however, most small businesses can benefit from basic assistance from a transactional lawyer. Professional counsel from a transactional lawyer can help you identify opportunities to use the law for business growth, avoid bad deals, create the language for your employee handbook and quickly resolve disputes. Being proactive with your contracts and decisions can end up saving your business lots of money should something go awry.

DON’T ignore legal formalities until your situation requires a litigator. It will end up costing you more to approach long-festering legal issues—such as breach of contracts, sexual harassment, ethical misconduct or hazardous working conditions—than the upfront expenses for developing preventative measures. And, if you find yourself in a legal battle, it could also harm your reputation, employees’ morale and relationship with investors.

3. Marketing

DO invest in a measurable strategy that’s shaped around your business’s short and long-term goals. New qualified leads don’t fall from the sky—most small businesses need some strategic marketing to shape its brand image, increase awareness and educate people about its products or services.

DON’T throw money at random marketing programs or advertising opportunities and hope it works. You need to research what strategies are best for your business goals and fully understand how to achieve results before executing any marketing initiatives. Otherwise, you could end up playing roulette with your cash flow and not see a return on your investment.

4. Trends

DO buy what you need. Whether it’s a set of paperclips, a new computer or a new shirt, go ahead and buy what you need to keep operations functioning smoothly or to feel confident going into an important meeting. It’s ideal to run a lean operation, but you still need to provide employees with ample office supplies and make sure customer response times aren’t affected by your lack of resources.

DON’T get wrapped in to the mindset that you need the best of everything at your office to perform well. In other words, if you need a new computer, invest in one that’s reliable, but understand that you probably don’t need a Mac just to surf the web and use Microsoft Office. Dress professionally, but don’t go overboard by buying expensive, top-brand clothing. Travel if needed but do so modestly rather than lavishly.

5. Technology

DO invest in a user-friendly, cloud-based software that’s right for your business. Consolidated software solutions can significantly reduce the overhead expenses and complexity associated with siloed tools and may even include automation systems that can reduce headcount. With cloud-based software, your business can function remotely with minimal equipment, and therefore minimal maintenance and support costs.

DON’T spend a lot of money on hardware. Servers, network routers and disk drivers take up space, require special power and need to be placed in a room that won’t get overheated. Hardware may also come with expenses for the people it takes to install, support and maintain the equipment. With a cloud-based technology infrastructure, many businesses can get away with just supplying a few computers and perhaps a printer. As a result, hardware is quickly becoming outdated.

Like every other aspect of growing a small business, finding an appropriate balance when it comes to spending requires diligent financial tracking, intuitiveness and consistency. If your tentative about making a purchase, consider:

What impact the purchase will have on your financial dashboard?
Is the expense a liability or an asset?
What is your entrepreneurial intuition telling you?
Is this a decision you’d be comfortable repeating?

Applying your knowledge and intuition to every single purchase you make for your business can help you to consistently make smart financial decisions and put you on the path to sustained growth.

Interested in more business best practices as you grow Your Small Business and Personal Assets? Contact us today.

Submitted: Jeffrey Kadlic

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5 Red Flags to Look for When Buying A Small Business

Jeffrey Kadlic — Wed, 22 Aug 2018 14:50:03 +0000

Acquiring or merging with another small business can significantly accelerate your growth strategy, or mark the beginning of an exciting new venture. At Citadel Earth, we’re all about leaping into enterprising opportunities and taking calculated risks. But we’re always sure to watch for the five red flags listed below when buying a small business. Otherwise, we could find ourselves in over our heads and unable to continue doing what we love: transforming small business with Citadel Earthary capital.

Whether you’re thinking about buying a small business to expand your current operation, or just beginning your journey into entrepreneurship, be wary of these five red flags:

1. Debt

Existing debt may seem like an obvious red flag when buying a small business. But it warrants noting, because even attractive business opportunities with high revenue and potential for growth can be tethered to debt. Some small-business owners are willing to sell their indebted businesses for a lower price just to be freed of the responsibility. While it can be tempting to imagine that all you’d need to do is trim some expenses to make the business profitable, the reality is that taking on someone else’s debt is a radical liability. If you acquire a small business with existing debt, you’ll have to work twice as hard to lift it out of the black and into the green.

2. High turnover

Small businesses that haven’t established effective hiring practices and employee training aren’t prepared for the growth stage. Growing businesses need to regularly hire new team members and smoothly transition them into their positions, which is unlikely to happen if they can’t keep current employees long-term. In addition, high turnover indicates that a business’s employees are unhappy, which has been linked to an average 10% decrease in productivity and significantly lower profit margins. Turnover is costly to a small business, but it may also be a symptom of poor management and operations procedures, which can be difficult to completely rebuild when buying a small business.

3. Withholding owners

It may be evident when a small-business owner looking to exit their business is blatantly dishonest, but less so when valuable information is withheld or downplayed. For example, the small business’s revenue may appear consistent, but if you look deeper into the owner’s discretionary income, it could reveal that they’re taking home a smaller paycheck to avoid reporting declining earnings. Also, be sure to find out why the owner wants to sell the business and what he or she plans to do after exiting. The answer could clue you in on whether to expect incoming industry changes, increasing competition or if there’s a need to include a non-compete clause in your purchase agreement.

4. Inaccurate financials

A business that’s truly in good financial standing will readily provide its financial statements and income tax returns. If the owner only offers a self-produced financial review, consider it a red flag. If you’re able to gain access to the business’s tax documents, review them at least 3-5 years back and make sure they mirror the owner’s financial reports exactly. There’s a lot of due diligence involved in this step, so you should outsource the auditing to a CPA firm if possible. Should something be overlooked, you could be held responsible for outstanding taxes.

5. You’re not passionate about the business

Buying a small business is an active investment, even if you plan on hiring managers to handle the bulk of the work. You need to be hands-on and willing to grind every day for it to achieve sustained growth. Most small-business owners work more than 50 hours per week, and 25% work more than 60 hours per week. If the idea of spending that much time working on the business doesn’t appeal to you, consider it a sign to seek a project your more passionate about.

Now that we’ve covered a few red flags, what are some traits of a small business that indicate it’s a good buying opportunity? The green flags for buying a business are: good financials, an effective business and growth plan, a strong team, transparent and accountable team members, and an effective sales process. These fundamentals are the foundation for small-business success, as demonstrated by our realized portfolio companies.

Want to learn more about our small-business investment process?

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8 Key Metrics Every Growing Business Should Track

Jeffrey Kadlic — Wed, 08 Aug 2018 03:31:35 +0000

When it comes to running your small business, knowledge is power. But it’s what you do with that knowledge that really counts.

As your business grows and evolves, it becomes increasingly important to track and analyze key metrics that reveal how your business is performing. But with all the data floating around out there, it can be a daunting task trying to figure out where to focus your time and energy. Luckily, there are several metrics that are relevant to nearly every business across the board.

By monitoring the right metrics, you gain valuable insight into the health of your growing business. Ultimately, a deeper look at this data can help you identify emerging trends, make informed decisions and create a game plan for the future of your small business.

Here are eight key metrics that every growing business should track:

1. Sales Revenue

At the end of the day, sales revenue is one of the most important metrics that should be routinely monitored by a growing business. It is calculated by simply adding up all income earned from customer purchases of your goods and/or services, and then subtracting any costs associated with returned or defective products.

This metric can help you clearly identify which products and/or services are generating the most revenue for your business and, ultimately, where to focus your sales efforts and make improvements in order to maximize your profitability. In addition, sales revenue can be tied to advertising campaigns, price changes, seasonal forces and more.

2. Cash Flow

Cash flow measures the money that flows in and out of your bank accounts. Cash that you pay out is called negative cash flow, while cash that comes into your business is known as positive cash flow.

Without routinely monitoring day-to-day cash flow, your business could end up in hot water financially. A cash-flow budget can help your growing business identify cyclical trends and anticipate when cash flow will peak and trough, making it easier to plan ahead for difficult periods when money will be tight and to capitalize on high cash inflow.

3. Operating Productivity

Another important metric to track is operating productivity. By taking a deeper look at how your employees are performing, you will better understand the inner workings of your small business. Employee discontent can put your company in serious jeopardy, while high productivity will be a huge asset.

Operating productivity ratios can be applied to nearly any aspect of your business – from sales and manufacturing, to marketing and customer support. For example, sales productivity is simply your actual revenue divided by the number of sales personnel.

4. Overhead Costs

In simple terms, overhead costs are fixed expenses associated with operating a business that can’t be linked to any specific business activity, product or service. They are the costs a company incurs to stay in business, regardless of its success level. Examples include rent, utilities, labor and insurance, to name a few.

In any growing business, overhead costs can creep up and out of control if not diligently tracked. Although they will never be eliminated, these expenses can be reduced to help your business remain lean. By regularly monitoring your overhead costs, you will have a clearer picture of where spending occurs in your business – insight that can be used when planning monthly and yearly budgets.

5. Customer Acquisition Cost

Customer acquisition cost (CAC) is a measure of the total cost associated with acquiring a new customer, including your marketing and sales efforts. It is calculated by dividing total acquisition expenses by total number of new customers gained over a given period.

This metric reveals your return on investment when it comes to marketing and advertising expenses. Over time, your CAC should decrease as your business growth and brand image increase. As a rule of thumb, the lower your CAC, the better – but this will ultimately depend on your business model and industry.

6. Customer Retention Rate

As a growing business, you will also want to track your customer retention rate on a regular basis. Simply put, this metric is the percentage of customers that stick with your small business over a given period. It is calculated by subtracting the total number of new customers from your total customers at the end of a given period, divided by the number of customers you had at the start of this period.

The goal is to keep your customer retention rate as high as possible, which can save you money in the long run. This metric also provides insight into how loyal your customer base is and how certain areas of your business are performing.

7. Website Analytics

If you aren’t already monitoring the analytics for your company website, you need to start. By routinely tracking and reviewing your website analytics, you will gain valuable insight that can be used to better serve your audience, assess how your marketing strategy is working and make improvements to your growing business.

For instance, it may be helpful to monitor the most popular content, traffic sources and page views for your business. By keeping tabs on your most popular content, you will get a better understanding of your audience and its content preferences. Your traffic sources can tell you how your social media and email marketing strategies are performing, while your page views reveal how many people are coming to your site.

8. Gross Margin

Another key metric to track is gross margin. After all, your bottom line is everything when it comes to business. The formula for calculating gross margin is sales revenue minus the costs of goods sold, divided by sales revenue, and then multiplied by 100.

Gross margin represents the percentage of every dollar of revenue that your business retains and can potentially invest back into the company to drive growth. As a rule of thumb, the higher your gross margin, the more your spending power will be.

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The 5 Biggest Cash-Flow Mistakes Made by Small-Business Owners

Jeffrey Kadlic — Wed, 11 Jul 2018 03:48:21 +0000

It’s no secret that cash flow is one of the most important aspects of running a successful business – and, yet, that’s where many small-business owners fall short. In fact, a recent study by U.S. Bank revealed that 82% of startups and small businesses fail as a result of poor cash-flow management.

No matter how solid your business model is, how much profit your company generates or how many investors are knocking on your door, the key lesson here is simple: your business will not survive if you aren’t properly managing its cash flow.

To be better prepared, here are five of the biggest cash-flow mistakes that every small-business owner should avoid:

1. Overestimating Your Future Sales Volume

As small-business owners, we all have high hopes that our businesses will thrive. This propensity for optimism – even in the face of countless obstacles – is a key trait of successful entrepreneurs. However, it can also pose a major risk to your cash flow.

Overestimating how much capital your small business will bring in can skew your budgeting and harm your cash flow. That’s why it’s important to develop a realistic sales forecasting model based on historical evidence and real numbers. This will provide you with actual past revenue data from your own business, as well as other companies in your industry, that can be used as a basis for tracking trends and projecting future sales.

2. Impulse Spending During Your Startup Phase

We’ve all heard the expression, “It takes money to make money.” And although this is true in many ways, it can be a dangerous game to play, leading small-business owners to overspend on impulse purchases – particularly during the early stages of operation.

It’s important to keep your eye on the bottom line by taking the time to consider the cost-benefit of each expense and assess the value it will bring back to your small business. After all, every dollar you spend is a dollar that is ultimately taken away from your profit margin.

You can then tie those calculations into your budget and revenue forecast to determine when you’re projected to hit your break-even point on the purchases, as well as how soon they will begin contributing to overall profits.

3. Being Too Passive About Overdue Invoices

One of the quickest ways that small-business owners – particularly those in the B2B space – can destroy their cash flow is by not being proactive enough when it comes to collecting payment for unpaid invoices from clients.

Without solid late-payment penalties and collections policies in place, small businesses are often taken advantage of by clients. To avoid this issue, it’s important to set – and enforce – clear policies for how overdue invoices will be handled, such as a late-payment penalty after five days and a work stoppage after 30 days past due. In addition, create an internal timeline for when initial invoices will be mailed out, payment reminders should be sent and collections calls will be made – and stick to it.

4. Not Tracking Your Cash-Flow Budget

Without routinely monitoring day-to-day cash flow, you may end up landing your small business in hot water financially. A cash-flow budget is a great planning tool that can help small-business owners track their inflow of revenue and outflow of expenses during a set period of time – usually on a monthly basis.

This approach allows small-business owners to identify cyclical trends and anticipate when their cash flow will peak and trough, making it easier to plan ahead for difficult periods when money will be tight. It also provides an opportunity to capitalize on any periods of high cash inflow.

5. Lacking a Cash Cushion

No matter how many safeguards you have in place, hiccups in cash flow are an inevitable part of running a business. If your company is working from a zero-dollar account balance, one slow month can spell instant disaster. However, this won’t be nearly as big of a hit if your small business has a cushion of savings to fall back on.

As a general rule of thumb, small-business owners should maintain an account balance of at least three months of operating expenses. That way, if sudden cash-flow issues do pop up, you will have cash reserves on hand to protect your business until it’s back on track.

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