The best way to weather a storm is often by being prepared before the storm hits. In the case of small businesses, this means building a fortress balance sheet.
What is a fortress balance sheet?
This long-standing idea means taking steps to make your balance sheet shockproof by building liquidity. Like a frontier outpost or an ancient walled city, businesses that prepare for a siege—in the form of a recession, natural disaster, pandemic, or adverse regulatory change—can often hold out until the crisis passes or the cavalry arrives.
Consider these suggestions for building your own fortress balance sheet.
- Control inventory and receivables. These two asset accounts often directly impact cash reserves. For example, carrying excess inventories can deplete cash because the company must continue to insure, store, and manage items that aren’t generating a profit. Also take a hard look at customer payment trends. Clients who are behind on payments can squeeze a firm’s cash flow quickly, especially if they purchase significant levels of goods and services—and then fail to pay.
- Keep a tight rein on debt. In general, a company should use debt financing for capital items such as plant and equipment, computers, and fixtures that will be used for several years. By incurring debt for such items, especially when interest rates are low, a firm can direct more cash towards day-to-day operations and new opportunities. Two rules of thumb for taking on debt are don’t borrow more than 75 percent of what an asset is worth, and aim for loan terms that don’t exceed the useful life of the underlying asset. A fortress balance sheet also means that debt as a percent of equity should be as low as possible. So, total up your debt, equity and retained earnings. If debt is less than 50% of the total, you are on your way to building a stronger foundation for your balance sheet.
- Monitor credit. A strong relationship with your banker can help keep the business afloat if the economy takes a nosedive. Monitor your business credit rating regularly and investigate all questionable transactions that appear on your credit report. As with personal credit, your business credit score will climb as the firm makes good on its obligations.
- Reconcile balance sheet accounts quarterly. It’s crucial to reconcile asset and liability accounts at least every quarter. A well-supported balance sheet can guide decisions about cash reserves, debt financing, inventory management, receivables, payables, and property. Regular monitoring can highlight vulnerabilities in your fortress, providing time for corrective action.
- Get rid of non-performing assets. Maybe you own a store across town that’s losing money or have a warehouse with a lot of obsolete inventory. Consider getting rid of these and other useless assets in exchange for cash.
- Calculate ratios. Know how your bank calculates the lending strength of businesses. Then calculate them for your own business. For example, banks want to know your debt service coverage. Do you have enough cash to adequately handle principal and interest payments? Now work your cash flow to provide plenty of room to service this debt AND any future debt! But don’t forget other ratios like liquidity and working capital ratios. The key? Improve these ratios over time.
Remember, the best time to get money from a bank is when it looks like you don’t need it. You do this by creating a fortress balance sheet!
Virtual learning is a way of life again for many kids as we head towards winter.
Mayo Clinic psychologist Dr. Craig Sawchuk says that families will need to adapt to changing circumstances this school year.
“We’ve all been dealing with uncertainty,” Sawchuk said in a recent Mayo Clinic Q&A podcast. “We need to be flexible with the format of how our kids learn. It’s all going to look different, regardless of whether your kids are doing in-person, virtual or a hybrid learning model. And it’s subject to change.”
Here are some ideas shared by creative parents and experts to help maintain your family’s sanity, while trying to navigate virtual learning through the extended stay-at-home winter days.
- Keep your kids moving. An absence of in-person learning means no recess and no gym class. Keep your kids exercising by scheduling 30 to 60-minute blocks of time for them to do their favorite activity. These activities can include, but not be limited to, walking, jogging, biking, skateboarding, rollerblading or riding on a scooter.
Do it differently: Consider tracking student activity information on a spreadsheet, then teach them how to make charts and graphs. They can then see progress toward fun goals while learning how to work with spreadsheets.
- Get crafty. Kids love anything that involves glue, scissors and building stuff. Set aside a dedicated area for your kids to build whatever they can imagine. Give them some latitude to get messy (as long as they clean up!).
Do it differently: One of the more interesting phenomena of this year’s pandemic is our national coin shortage. If you have some spare change that you’re willing to part with, have your kids search online for DIY coin crafts.
- Put on the chef hat. Turn your kitchen over to your kids. Yes, it might get messy, and your meatloaf may end up a little dry, but getting your kids to cook can spark their creativity and get them into the habit of helping prepare food for the entire family.
Do it differently: Have your kids create their own cooking show. Set up a video recorder on a sturdy tripod and have them narrate what they’re preparing. If extra time allows, they can jump on a video editing software program and edit their TV show.
- Thumb through an actual book. Textbooks have been replaced by tablets. Newspapers have been supplanted by websites. Physical books have given way to e-books. While your kids are at home, consider reading through an actual book, while sitting on an actual chair or sofa.
Do it differently: After reading a book, have your children or grandchildren create their own story. Or have them create a different ending. You can record the story on your phone or be their scribe. They can then make their own book to share.
Getting audited by the IRS is no fun. Some taxpayers are selected for random audits every year, but the chances of that happening to you are very small. You are much more likely to fall under the IRS’s gaze if you make one of several common mistakes.
That means your best chance of avoiding an audit is by doing things right before you file your return this year. Here are some suggestions:
Don’t leave anything out. Missing or incomplete information on your return will trigger an audit letter automatically, since the IRS gets copies of the same tax forms (such as W-2s and 1099s) that you do.
Double-check your numbers. Bad math will get you audited. People often make calculation errors when they do their returns, especially if they do them without assistance. In 2016, the IRS sent out more than 1.6 million examination letters correcting math errors. The most frequent errors occurred in people’s calculation of their amount of tax due, as well as the number of exemptions and deductions they claimed.
Don’t stand out. The IRS takes a closer look at business expenses, charitable donations and high-value itemized deductions. IRS computers reference statistical data on which amounts of these items are typical for various professions and income levels. If what you are claiming is significantly different from what is typical, it may be flagged for review.
Have your documentation in order. Be meticulous about your recordkeeping. Items that will support the tax breaks you take include: cancelled checks, receipts, credit card and investment statements, logs for mileage and business meals and proof of charitable donations. With proper documentation, a correspondence letter from the IRS inquiring about a particular deduction can be quickly resolved before it turns into a full-blown audit.
Remember, the average person has a less than 1 percent chance of being audited. If you prepare now, you can narrow your audit chances even further and rest easy after you’ve filed.
A recent study found that 47% of American workers live “paycheck to paycheck”. The path to achieving financial milestones like paying for a college education, buying a car, owning a home or retiring at an early age always begins with one step – saving for the future. Based on this survey, many Americans aren’t saving – and are unprepared for the unexpected.
The survey also found that:
- More than half knew that an emergency fund should hold six months of living expenses
- However, two-thirds don’t have that amount in savings
- How many don’t have any emergency fund at all? 30%!
- Retirement planning – more than half don’t contribute to a 401K, IRA or other retirement plan
- Two-thirds of baby boomers carry their credit card debit into retirement
Start small and start NOW. Begin with a small goal – put away $10 each week. As that reserve grows, focus on building an emergency fund with three to six months of living expenses. The unexpected can and will happen to all of us – will you be prepared?