Should I borrow to fund my business growth?

Business owners often ask me whether or not they should borrow money to fund growth.
It’s an earnest question, but when you understand the bigger picture, there’s really no decision to make.

Every serious business owner should always be using debt to … (a) be ready for moments of poor cash flow; and … (b) maximize their ability to grow and build wealth.

So, YES, debt is a vital part of a small business strategy. To decide how it fits into your own strategy, ask these questions:

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Business Cash Crisis? Push your Cash Conversion Cycle

It’s OK, at some point, every business owner feels it. 

It starts with a tightening of the chest. Then there’s the ache in the pit of your stomach. And a fuzzy feeling in your head.Why? It’s almost payday and you’re short on cash.

First, breathe.  

Stressing out won’t put cash in the bank. Now, when you can see clearly, let’s get started fixing the problem:  Ask yourself this one simple question.

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Retirement is Dead: Retire in Entrepreneurial Style by Building Wealth Instead of Savings

I’ve accepted it: Retirement is dead. Anyone still working today might never be able to retire.

So why are we all putting money into retirement savings accounts?  Between IRAs, ROTHs, 401(k)s, SIMPLEs, SEPs and SOLOs, there’s no shortage of ways to save for a day that may never arrive.  And yet Morningstar reports that the average retirement account lost value last year!  (Mine certainly did!)

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Buying a Company Fleet? Drive the Right Financing Deal

As if managing your business wasn’t enough of a challenge, one day you wake up to find that your company needs a number of cars or trucks… and suddenly you are a fleet manager too.  Buying a fleet is no small task and deserves some careful thought.  Even having one car in the name of the business can trigger decisions and expenses you might not have imagined.

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5 Basic-but-Essential Financial Statements to Understand for Your Small Business

Small business owners have enough to do without spending hours poring over financial statements. It’s tempting to delegate all accounting tasks to a CPA or bookkeeper and rely on them to tell you what you need to know about your business’s financial health. That’s why you hired a specialist after all—isn’t it?

You should certainly have a trusted financial advisor not only for advice, but to handle the complicated things you’re not equipped to do. But as a responsible business owner, you can’t completely abdicate your role in understanding your business’s financials.

There are five basic financial statements every small business owner needs to understand in order to keep a finger on your company’s financial pulse. Sure, these might seem dense at first, but your accountant or bookkeeper can help you learn what information to pay the closest attention to, and how to distill it into meaningful metrics for your business.

1. Profit & Loss or Income Statement

Profit & Loss Statement or P&L—also called the “income statement”—is the financial statement you’re likely most familiar with. It’s the easiest to read and understand of the three core financial statements.

The Profit & Loss Statement reports the income brought into the business, the costs required to bring in that income (Cost of Goods Sold, or COGS,) and the expenses that were incurred to operate the business. It also reports other income and expenses, like interest and depreciation.

The P&L can be used to calculate important profitability ratios. These ratios boil down the dollar amounts on the P&L to percentages that can be used to compare your business to others in your industry, regardless of revenue size.

What the Profit & Loss statement does NOT do is accurately reflect your business’s cash flow. That’s important. As we’ll go into in more detail, certain payments—like business loan payments, for instance—are recorded in accounts that appear on the Balance Sheet. Though they may seem like expenses to you, these payments aren’t technically expenses for accounting or tax purposes, and so they aren’t included on the P&L.

2. Balance Sheet

Every small business owner should understand the Balance Sheet. Very simply stated, the Balance Sheet shows you three things:

  1. What your business owns, or assets. Assets include things like checking accounts, equipment, and inventory.
  2. What your business owes, or liabilities. Liabilities are loans, credit card balances, and payroll.
  3. Your investment in the business, aka equity. Equity includes capital investments and retained earnings (the money that stays in your business year over year,) less money you’ve drawn from your business.

Unlike the Statement of Cash Flows and the P&L, the Balance Sheet is cumulative for the entire life of the business.

3. Statement of Cash Flows

This is the most important financial statement. It’s also the one most business owners ignore.

The Statement of Cash Flows answers the often-asked question, Where did all my money go? It reconciles activity on the P&L or Income Statement to activity recorded on the Balance Sheet. This may sound like gibberish, but stick with me for a minute.

There are certain transactions—asset purchases, investments, loan payments, and draws or distributions—that affect cash flow but don’t appear on the P&L. That’s why the net income on your Profit & Loss statement does not match the amount of money in your bank account.

These transactions are aren’t on the P&L because they’re posted to accounts that appear on the Balance Sheet. But since the Balance Sheet shows cumulative numbers for the entire lifetime of the business, the cash movement isn’t immediately apparent.

That’s where the Statement of Cash Flows comes in. This statement takes the Net Income—your bottom line—on the P&L, makes adjustments for payments your customers owe and what you owe vendors, then further adjusts for loan payments you’ve made and money you’ve put into or taken out of the business.

The Statement of Cash Flows can be hard to interpret and understand—that’s why people skip it in favor of the P&L. But lean on your bookkeeper to help learn it in and out, since it’ll tell you so much about your business finances.

4. Accounts Receivable Aging Report

Accounts Receivable—or money owed to your business by customers—is reported as a number on your Balance Sheet. But you should also get in the habit of reviewing the Accounts Receivable Aging Report on a monthly basis. This report gives a detailed breakdown of the amount each customer owes, plus how long that balance has been outstanding.

Staying on top of your Accounts Receivable ensures your cash flow doesn’t suffer due to non- or slow-paying customers.

5. Accounts Payable Aging Report

Similar to the Accounts Receivable Aging Report, the Accounts Payable Aging Report is a detailed breakdown of the amount the business owes to vendors. Reviewing this report regularly ensures no bills slip through the cracks, jeopardizing your relationship with your vendors and suppliers. This report can also help you plan your cash flow by quickly showing you which bills need attention the soonest.

Use These 5 Essential Financial Reports to Get a Holistic Picture of Your Business

Although they can be compiled manually, the most efficient way to produce these five basic financial statements is through the reporting function in your bookkeeping software. Just take care to make sure your bookkeeping is up to date before running your reports— otherwise, vital information could be missing, causing you to make poor decisions about your business.

Most accountants and bookkeepers love it when small business clients want to learn more about their financial statements, so don’t hesitate to ask for help to leverage these reports for your particular needs. You’ll learn a ton about your business, and get insights you never had before.



Guest Blogger, Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.

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Why You may be Keeping Multiple Sets of Accounting Books (And How to Fix it)

As a CFO and accountant, I’ve created the books, cleaned up the books, and used the books to tell management about their company. To me, a company’s accounting books are sacrosanct. They contain 100% of the financial facts of the company—the truth, the whole truth, and nothing but the truth.

Until they don’t.

Lately, I’ve encountered client after client who keeps multiple sets of books. What’s worse…Some are not even aware that they are doing it.

Here are four reasons why your company might end up with more than one set of books (and what you can do to fix the problem).

Reason #1: You and your tax team are not in sync

Any company that pays income tax runs the risk of creating a second set of books. All tax preparers—even smart, well-meaning CPAs—make changes to the books they are keeping for you that will never be reflected in the books that you use to manage the company. To me, this is a terrible practice.

Take depreciation as a simple example. Tax law has all kinds of things to say about depreciation. It’s natural that your tax preparer would want to maximize your depreciation deduction each year, and they should. But they should also report back any adjustments so your bookkeeper can make the same adjustments.

And depreciation is just one example. A good CPA may find all kinds of mistakes, adjustments, and simplifications. But unless they are reporting them back in a few simple journal entries—and unless you are capturing and copying those entries—you’ll end up with two very different sets of books.

Too often a company’s management books and tax books drift apart—little by little, year after year—until they are so far apart that they have, literally, irreconcilable differences.

And frankly, YOU should care. Part of running a business is optimizing the tax impact and if your management books diverge from the numbers you report for taxes, you’ll have a rough time planning accurately. Furthermore, you may end up in a situation where only your tax accountant knows the real numbers and how to calculate them … a dangerous situation for lots of reasons.

What to do about it: To fix this, you’ll need to get the adjustments from your tax preparer. Then, ask your bookkeeper to make the same adjustments using a “13-period year.” Each month is one period (that’s 12!), and the last day of the year is period 13 by itself. The last period should include all tax adjusting entries so that on December 31 your books look just like the tax return. Be careful to put ONLY the tax adjustments into December 31 so you keep your operating results in the first 12 periods.

If that sounds like it will mess up the way you like to see your books, simply run your reports for the year without the tax adjustments (i.e., January 1 – December 30 only). Note: Do NOT let your bookkeeper “reverse” the entries in the new year without consulting the tax preparer, as this could eliminate the changes and put you right back where you started: with two diverging sets of books.

Why should you care? You need to care because banks do, and will want to see that you can “tie” your management books to your tax returns. Every time you go for a loan, they will want to know why there are differences. And the IRS will ask the same question if they ever audit your taxes.

Reason #2: You’re keeping a second set of books just to comply with GAAP

Like their tax prep cousins, some especially strict CPAs will insist that your books be GAAP compliant. GAAP, or Generally Accepted Accounting Principles, uses a book-full of rules that dictate how income and expenses get recorded.

Why should you care? While GAAP is very helpful for public companies, it is neither a requirement nor a best practice for most small businesses. A number of CPAs will likely send me angry comments about this advice, but I believe firmly that you should shape your own books in a way that makes sense to you. As long as you adhere to basic accounting principles, you are free to make your financial statements tell you whatever you want. And if that is contrary to the finer points of GAAP, no one should care.

What to do about it: No matter how you keep your books, do NOT let someone else keep a second set simply to comply with GAAP. It’s a waste of resources and will probably serve only to confuse you. If you’re already a victim of an over-zealous accountant, my advice is to simply stop. Stop spending money on separate GAAP reporting and find a new accountant who will give you the tools and advice you need to run the company with the one set of books you have.

Reason #3: You have security concerns

Some executives and business owners believe that keeping some records “off the books” will prevent the staff from seeing sensitive financial details (like payroll, perks, or ownership details). Hogwash. Once an executive starts keeping spreadsheets—or, as I have seen in the past, complete QuickBooks files full of “secret” details—the integrity of financial reporting goes out the window. (And unnecessary complexity sets in!)

Why should you care? Keeping a second set of books will always result in mistakes, duplicate data entry, and a general lack of both clarity and precision. You need your books to be clean, clear, and complete. You should not have to consult three spreadsheets and two QuickBooks files to figure out whether you made a profit this month!

What to do about it: Let go of the reins a bit. If there is not a single person at the company who you can trust to do the books honestly and with a full, clear view of the expenses, then try outsourcing your bookkeeping to a reputable firm. As an added benefit, you may find that when you stop doing extra accounting work yourself, you’ll have more time to focus on much more important tasks.

Reason #4: You’re using too much software

Having just one set of books means having just one piece of software at the heart of the accounting process. Unfortunately, some companies use an ERP system that, for example, makes invoices but does not track collections or deposits. Or they have a Point of Sale (POS) system that tracks inventory quantities but does not report the cost of the items sold. There are a hundred stories like this—multiple systems in a company that do not tightly integrate. Watch out!

Why should you care? Anytime you have two systems running the business, you will end up with two sets of books that can never be pieced back together. Each may be correct and give a part of the story, but you’ll miss the granular details that come from combining all your data in one place—things like customer profitability, detailed cost of goods sold, or annual inventory turns.

What to do about it: This is the stickiest problem on our list. If you’ve got multiple people and multiple software platforms each producing just a piece of the finance picture, it is imperative that you work toward a tighter integration. Fortunately, there are often technology solutions—synch tools and cloud platforms that bring multiple data streams together. If your systems are not working together, however, it may be time to scrap them and start over.

It’s time to come together

No matter why you have multiple sets of books, the time to do something about it is now. Commit to having one set of clear, concise, and complete accounting records as soon as possible. There is simply no other way to know what you need to know about your business: the truth, the whole truth, and nothing but the truth!

David Worrell



About FUSE Financial Partners

FuseCFO is here to help you take action on these and many other important business initiatives.

Marketing Budgets: Getting Your CFO To Pay For Your Creativity

Marketing and finance are entirely different disciplines, so it’s no surprise that the CFO and the marketing team have an often contentious relationship. To the CFO, the marketing budget seems poorly planned and out of control; to the marketer, the budget is an unwelcome constraint on creativity. 

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