Critical elements help MBEs secure financial house

There are several basic elements required to get your financial house in order and to operate a successfully sound business plan: 1) obtaining the proper type of financing for your business, 2) having proper budgeting tools, 3) generating timely and accurate financial statements, and 4) taking the time to analyze and capitalize on tax-planning opportunities for your company.

Obtain the proper type of financing

Many business owners make the mistake of obtaining the incorrect type of financing for their business. The most common error occurs when a company borrows on a short-term basis to acquire long-term assets. For example, short-term borrowing (one year or less) should be reserved for inventory and accounts receivable, while long-term financing (three to five years) should be obtained when financing equipment or other long-term assets. Matching short- and long-term assets with a corresponding debt will allow you to better manage your company’s working capital requirements. Lastly, keep in mind that arranging for financing will generally take several weeks or months; therefore, seek financing well in advance of when you anticipate the need for the funds may arise.

Proper budgeting tools

Executing a business plan requires that you have proper budgeting tools. Detailed budgeting by department, product line, geographic region or other categories requires a great degree of discipline that will allow a business owner to better manage resources. More importantly, it is essential to take corrective action in a timely manner when actual results are not favorable. Additionally, it is critical to obtain input from your management team because managers should be held accountable for their own budgets.

Timely and accurate financial statements

Ultimately, all of the company’s efforts and results need to be reconciled back to the financial statements. Accordingly, it is imperative that business owners learn how to analyze and interpret their companies’ financial statements. During my public accounting career, I have experienced time and time again that business owners can manage short-term cash flow; however, they

run into financial challenges because of their inability to properly analyze their financial statements. Negative trends such as shrinking margins and high labor costs are difficult to detect unless you have detailed accounting and reporting. This is particularly true if you are operating a multi-office operation.  Learn to manage the PIE formula: Profit (P) = Income (I) - Expense (E).

Tax planning

Proper tax planning plays a significant role in today’s competitive environment. Tax-planning opportunities will vary depending on your business goals. You may want to sell your company in the near term, develop a succession plan for your employees or pass the business to other family members. All of these options have different tax attributes with related financial and tax ramifications. Accordingly, incorporate short- and long-term tax planning into your annual operating business plan.

Getting your financial house in order requires a substantial investment of time, commitment and discipline. Over time, applying these principles in a consistent manner will yield financial rewards to the business and its owner.

Roland Rodriguez is managing principal and co-founder of Houston, Texas-based Mir, Fox & Rodriguez, P.C. To learn more about Rodriguez and the firm’s certified public accounting services, visit their Web site: www.mfrpc.com