Ask Gene: The Five Most Common Questions Business Owners Ask

By Gene Marks
The Hartford Small Biz Ahead
Originally Published: September 30, 2024

According to the U.S. Census Bureau, there are approximately 6 million employer-owned businesses with less than 500 employees. My clients are mostly this. Many of them are family businesses. Most of them have been in business for more than five years. They’re in all industries. They have payroll and insurance and office managers and sometimes human resources staff.  These are not startups. These are established firms.  And although most have been in business for more than five years, they still have lots of questions about running their businesses. It never ends!

If you’re running a business like this, then you’ve got questions too.  I can’t answer them all here.  But I can respond to the five that I get the most.  So here they are.

Q:  My tax returns show profits. But my bank balance doesn’t have nearly as much cash. Why?

A:  There’s a one word answer to this question: timing. Unless you’re in retail or strictly cash based, most of my clients carry accounts receivable for items that they sold to customer but are waiting on payment. They recognized the income from the sale, but they still don’t have the cash! However, the cost of that item – labor, materials, overhead – has already been spent. It’s a cycle that will continue as long as you operate your business.

Accounting rules want you to “match” your revenue with that cost, so you might be showing income even if you haven’t received the cash yet. Timing drives your cash flow and anything that becomes an asset – receivables, inventory purchases, prepaid expenses – are not expensed immediately which means you’ve spent the money but you haven’t realized the income from those items. This is why many companies finance these expenses – either through a bank or through their vendors – so that they can use someone else’s cash to offset these timing differences.

Q:  Should I be avoiding debt?

A:  Paying for your expenses with your own money – and not borrowed funds – is a great goal to have.  People that get in too much debt oftentimes have trouble getting out of it.  But some debt can be a good thing. For example, if your company is growing it is very possible that you won’t be able to pay for this growth with your own funds.  But that’s fine. It’s why working capital loans exist. You use borrowed funds to buy inventory because you know that you’ll ultimately turn that inventory into sales. Where people get into trouble is when they use debt to speculate on business ventures, investments, or out-of-the-ordinary purchases.  There’s nothing wrong with this as long as it’s balanced and thought through.

Financial lenders exist for a reason.  They provide capital to help businesses grow. Sometimes it’s to help businesses invest in the future too.  Debt, if used the right way, can be a very good thing.

Q:  How do I price my product or service?

A:  Pricing is part art, part science.  The art part is harder, of course, and generally involves knowledge of the marketplace and a sense of what the customer will pay. These are things that are hard to specifically quantify.

But the science part is easier to figure out. Each item that you sell has a cost and figuring out the cost isn’t that tough. Here’s a simple procedure I tell my clients:  You need to know the materials used (if there are materials) and how many hours it took to make that item (or perform that service). You need to then understand the price you’re paying for that labor and the overhead you’re incurring for each hour incurred. Add up these costs for an item and then bump it up by at least 20 percent for a profit margin. Now go back and see what the market will bear. If the prices of similar items are significantly lower than you’ve got to take a hard look at your costs. If they’re higher then you’ve got a chance to make even more profit.

Q:  Is my data secure?

A:  No.

Seriously, no. Most of us are now hosting our data with managed services companies and in the cloud.  These companies are of course much better at securing your data.  They have more resources than a typical business. Their entire business model is built around making sure that the data they’re hosting is secure.  They have the latest tools and the smartest people.  And yet…[MORE]

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To read the entire article by Gene Marks at The Hartford Small Biz Ahead website, visit: Ask Gene: The Five Most Common Questions Business Owners Ask