Financial Health Checkup

We just passed the half-way point in the year. A perfect time for your organization to get a financial health checkup! Think about it…your personal health and your organization’s financial health are very similar. Serious problems could exist that you cannot see or feel without a checkup. A sudden loss of income or an unexpected expense can stop your organization, just like a medical crisis can stop your body.

Organizations should do a financial health checkup that covers these three areas:

Actual vs. Planned Finances

Financial performance should be compared to planned, or budgeted, performance to determine how actual events compare to what you thought would happen. Focus on variances in income and expense categories that most significantly impact achieving your organization’s goals. If the budget or plan was not met, figure out why. Did conditions change?  Were projections unrealistic? Focus on “why” and use that information to refine future budgets and plans.

Cash Flow

Project your cash inflows and outflows for at least three months, preferably for six months or more. Determine whether expected income will cover expected (and some unexpected) expenses. Sounds easy, but this projection and analysis will take some thought and effort. You need to know your payments receivable and payable, regular payments that are required no matter what, such as payroll and rent, and your reconciled bank account balances. Be realistic about payment timing and what it really costs to sustain your organization.

Expense Control

Spending control is the most important and most difficult part of running an organization. Demands to fund day-to-day operations, in addition to investing in technology and infrastructure, are constant. Prioritizing essential expenses and growth investments is a challenge that requires regular attention. This is particularly true in newer organizations where infrastructure investments are most crucial. Ensure that planned expenses are within established plans or parameters. Carefully consider unplanned expenses to ensure that they are aligned with the organization’s objectives.

Your organization’s finances, like your body, should undergo a periodic checkup to alert you to existing or impending problems. Monitoring a few key health areas can alert you to problems on the horizon, and give you an opportunity to act before it’s too late.

Want Clarity? Put Agreements in Writing!

Small businesses and nonprofits sometimes need a professional with specialized skills to help them out, like a human resources or financial consultant. Most organizations need to purchase materials or inventory items. Getting services or goods from a third party, or outsourcing, can add significant value to an organization, as long as it’s managed right. Outsourcing management starts with a clear, written agreement that both parties understand and follow.

A written agreement should address key components of both parties – the vendor’s responsibilities, as well as the organization’s. These four components should be addressed in all vendor agreements to clarify expectations and hold all parties accountable:

Objective and Scope

Clearly describe the results or accomplishments that the vendor should achieve on the organization’s behalf, as well as any requirements for the organization. Specifically describe what the organization expects to get when the vendor’s work is completed. For example, an agreement for an IT vendor to install and maintain a new system would describe, among other things, the end state after the system is installed, performance requirements and any ongoing maintenance.

Time Frame and Frequency

Specify delivery dates and how often your organization needs the goods or services provided. Clarify any unusual needs you have, such as nights or weekends, to avoid misunderstandings   that will prevent the organization from meeting its customers’ expectations. How would it look if a 24/7 café couldn’t get fresh food delivered on a Sunday? Highlight timing and frequency to make sure the vendor knows when she or he is needed.

Delivery and Acceptance

Describe the expected condition, appearance, format, or other requirements that are essential for the goods or services to achieve the organization’s objective. Do the flyers need to be blue with your logo? Does the training class need to be two-hours long and meet specific learning objectives? Should goods be delivered in a certain way? Don’t presume that the vendor will understand all specific needs. Put them in writing.

Cost and Payment

Last, but certainly not least, be clear about the vendor’s total cost and when payment will be made. Specify what is included in the total cost and how that cost is calculated. For example, is the cost for paper per box or per carton? Does the consultant cost an hourly rate plus expenses, or will she or he absorb those expenses? Hold vendors accountable by stipulating that payment will only be made after goods or services have been accepted, or when a specified objective is met.

All organizations need help with professional services or purchase from an outside source. That help can be great, but not if it doesn’t meet the organization’s needs. Having a written agreement that clarifies expectations and holds all parties accountable is the best way for organizations to successfully manage outsourced needs.

Project Cash Flow to Meet Objectives

Objectives are the goal posts for moving your organization forward – adding staff, expanding locations or increasing capacity. Cash makes all of that happen. Reliably projecting when cash will come in and when it goes out may seem like an unnecessary exercise while you are busy running your organization. Not true! Cash flow projections are an essential tool for meeting your objectives.

Can you afford that new position or storefront? When will that new equipment pay for itself with added income? Answering these and other important questions depends on reliable and realistic cash flow projections. That’s great to know, but how in the world do you project your cash flow?

Three tips for projecting cash flow to meet your organization’s objectives:

Payment Commitments

Start by projecting payments that you know are going to happen. Some expenses, like payroll and rent, happen at a specific time, no matter what. Scheduled income payments, like retainers, are also known in advance. Plot out when those payments will come in and go out. Add other payments that are seasonal or occasional in the month or week that you expect or estimate that they will occur.

Past Experience

Past years’ payment history is a gold mine for projecting cash flow. What unexpected items have happened in the past? How likely is that to happen again this year? Timing when payments come in and go out highlights periods when you might be in danger of running low on cash. Seeing in advance that cash your cash will be tight gives you opportunities to make adjustments.

Invest to Keep Up and Grow

After plugging in all the known income and expenses, estimating the variable amounts and adjusting the timing, sit back and examine the results. Is there cash available to invest in technology, improvements or growth? Can you afford that new piece of equipment that you need just to keep up with the competition? Cash flow projections will help you answer those and other important questions.

Meeting objectives requires planning. Organizations need to reliably project when cash will come in and go out to successfully meet objectives, and to make adjustments when projections indicate that cash is about to get tight. Answer important questions about sustaining and growing your organization with reliable and realistic cash flow projections, and meet your objectives.

Retirement and Tax Savings with a SEP IRA

Entrepreneurs and small business owners are constantly on the hunt for ways to reduce their tax bills. I know because my tax clients ask about it regularly. Some tax clients also ask me about saving for retirement. Super good news – they can do both!

When you work for someone else, your employer may set up a retirement plan where you can contribute and reduce your taxable income. When you work for yourself, you can set up a retirement plan for yourself (and your employees, if you have any). Retirement plan types vary, and there are quite a few options. If you want to explore them all, knock yourself out at this IRS website – .

Many entrepreneurs and small business owners choose a retirement plan called a “Simplified Employee Pension Individual Retirement Arrangement,” commonly called a SEP IRA. Here are three reasons why:

Easy and Flexible

A SEP IRA is easy to set-up with your bank, your investment advisor or a mutual fund. Just get it done by the end of the calendar year and fund the account by the tax return due date, including extensions. Annual contributions amounts are flexible, which is good if your business cash flow varies from year-to-year.

Generous Contribution Limits

A SEP IRA allows you an annual contribution of up to 25 percent of net business profits, after netting out the deductible half of self-employment taxes. That calculation is a little tricky so you’ll need some help to get it right. There is an annual dollar limit, too. For 2019, it’s up to $56,000. Contributions must be made for eligible employees.

No Costs

A SEP IRA has no start-up or operating costs that can be required for a conventional retirement plan. However, any investments selected to fund the account may have a management or investment advisory fee. It’s important to get a clear understanding of any fees or charges that will defray your retirement funds.

Other costs need to be considered when deciding if a SEP IRA if for you, like taxes and early withdrawal penalties. Distributions from a SEP IRA works just like a traditional IRA – any funds taken out before age 59½ are subject to a 10% early withdrawal penalty. That’s on top of the federal and state income tax.

Entrepreneurs and small business owners on the hunt for ways to reduce their tax bills can save on taxes and for retirement by setting up and funding a SEP IRA. Saving for today and tomorrow at the same time could be the best news that you get all year.