Small Business CPAs – It’s All About Cash Flow and Not Taking Your Eye off the Ball

Sole Proprietor to S Corp Example

For example, as a small business CPA, we brought on a new client in Fort Collins this past week and they are a sole proprietor. We’ll just switch you to an S corporation and doing that, that alone, has paid for me. I’m free from here on out.

Well, now you can pay me some extra? Okay.

Just this one little thing. So everything else I do for you is free and not just this year, that’s the gift that keeps on giving for every year that you’re in business. That’s the beauty of it all.

There are local Fort Collins businesses? Yeah. Can you tell us what type of business it is?

CPA Service – A Local Small Business Example

It’s a service industry business, a pest removal business.

Is it residential commercial or both, or both?

It’s mostly residential where they work.

That’s a huge number of businesses like that. Sure. Is Fort Collins, particularly full of pests? I mean, if you’re in Florida or Southern California, you see this a lot. There are no alligators here, no…

Raccoons squirrels could be a lot of snakes.

But is not like Florida would be where you get termites or all kinds of insects invading everything all the time. Right?

Yeah. I mean, we do have termites and stuff, but not to the degree of Florida. No, we are not. It’s a drier climate, so it kind of limits it out ticks and fleas, and well, not even fleas really too much here, but yeah.

Different Businesses Different Challenges

So my experience with CPS and bookkeeping is particularly gaining an appreciation of different businesses, which have completely different challenges in terms of the way they need to manage their books. For example, for somebody like a dentist, it’s a very stable environment where you’ve got a process that is pretty much continuous week to week with similar clients. On the other hand, a builder can be, as in a contractor, doing different types of projects, will have a completely different set of challenges associated with having to pay subcontractors, winning a bigger deal, managing getting the revenue, from the client, paying the different contractors and getting the client to pay the balance. Characteristically. Those are two very different types of businesses with their own unique challenges.

Every Business Has A Few Vital Numbers

Yes any business and subset have its own special. What is important to them? Every business has four to seven numbers. It’s labor intensive, time, and talent versus a restaurant. A restaurant is the biggest number on their financial statement. Besides head counts like food costs and labor costs, everything else is relatively stable.

From Restaurants to Contractors

I imagine with a restaurant the biggest challenge is bums on seats or fill rate. If the restaurant is got a few clients, they’re probably making a loss, there’s probably a number with which they need to have every night, a certain number of people in the restaurant to make the restaurant break even. And then balancing that, with the costs associated with supporting that. I don’t know anything about restaurants, so bookkeeping and restaurants, but I’m just guessing. That’s the big challenge there is knowing what their break, even how many people they need to get in the door to break even for example.

That’s called headcount, and then there are also dollars per plate or dollars per table. What is your average? It’s just managing those numbers. A Take-Out or a McDonald’s type of place versus a sit-down restaurant. They’re vastly different animals because of the numbers and the speed, you know, construction, you brought that up. I have a lot of contractors in the contracting industry. If you’re a general contractor, there is, most of your projects are going to be six months to two years. So there’s a different way you have to account for those versus somebody who maybe is a plumber. And they’re just going to, they’ll be in and out in a week or a flooring guy will be in and out in a week. And there’s just a different accounting perspective for them. It really kind of comes down to labor and materials, whether that be a restaurant or a builder or some other manufacturer or certain numbers that you need to hit and go from there, there are inventory things that you’re always talking about and knowing how much inventory is too much and understanding the accounting process and the timeline that it goes through.

Small Business Owners Do Not Naturally Understand Financial Business Indicators – That’s Where CPAs Make Difference

Do you find that people who struggle with that, that business owners struggle with that?

Constantly? Yeah. Cash flow, it all actually comes back to cash flow. Most of the time you make something today, how long is it going to sit on your shelves before you sell it? As part of the accounting, cycle made it, I got payables, and I got vendors to pay. And then I got a receivable because I bill it. And then I finally received that money. How long is that? And are you a bank? That was a constant problem, a constant problem. And not understanding those things. One of my clients, right at the end of last month, he was doing great last year. And then all of a sudden, right at the end, he truly got his eye off the ball and lost a ton of money in the last six weeks. We talked about that a lot.

But why did he, what was the cause? How, what happened?

It was building a new showroom. So he was not out there bidding jobs, so it slowed it all down. And so it all starts with marketing. Always has, it starts there and makes sure the pipeline is constantly filled because if you get your eye off, the ball…

So he took his eye off the ball from the point of view of his pipeline of jobs? Right!

Work with savvy CPAs to help you understand the key business indicators that will make or break your business.

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