Financial Check Up with Professor Hasse

Many Small businesses struggle with their finances whether they are first starting out or if they have been in business a while. Having a firm understanding of your business finances is the key to a successful business, how do you keep track of that? Professor Rick Hasse is a professor in finance and accounting here at the University of La Verne, College of Business and Public Management. In this interview, you'll find out how finances affect your business and how to perform a financial check-up. 

How important are finances to the health of the business?

Well, I think it could be a very simple answer or it could be very complicated. I'll give you a simple answer. Naturally, finance is the blood of a company. You can have the best idea, the best product, the best service, but if you don't have the necessary capital to get that off the ground and get it to your customers, you ain’t got nothing. So having capital, having access and understanding of capital is key.

I like to think of business and small business as a triangle. Naturally, you need your core culture or core business model. Naturally, you need a marketing strategy, but also what you need that is just as important is capital. You need to have cash flow and available capital to develop your product and develop your marketing strategy. You need to have the capital to go into new markets, you need to spend money on advertising, develop employees, develop relationships. So, I think the bottom line is finance is needed to supply the blood of the business.

What is a small business financial check-up and why is it important?

For any business, you need to make sure you have good data. It can be as simple as having a quick books software or as complicated as hiring a public accounting firm to do your books or hiring someone you trust to be a business manager/financial manager of the business. But you need good data just like any business. You need good marketing data, you need good data about your employees, you need good data about your competitors.

To just have the basic financial statements: statement of cash flow, income statement, or a balance sheet and be able to produce those every month so you can get a snapshot and understand basically where your money is coming from and where it is going. Try to keep it as simple as possible but at the same time provide you with adequate data.

You might say to yourself, “Oh geez, next month we are going to be running out of cash. I better make sure I have my line of credit at the bank or next month we are going to be cash-rich, maybe I can put that money away in a short-term investment with my banker.” Just have an idea of the flow of the money and capital through your business. It doesn’t have to be complicated, you don’t have to do fancy net present value analysis or internal rate of returns. Just keep it simple and understand when the money is coming in and when it’s going out and when in the course of a year these patterns change. In some businesses, in the summertime, cash flow tends to dry up and you have to have reserves or capital balance that hold you through these low-capital times. Maybe you’re rich with cash, you may want to invest that and put it into a CD to earn some extra money. So Just understand that and keep it as simple as possible.

When I started my business way back in the 1980s, I had a business idea. I had clients,  I had a great business model, but I had to spend maybe a quarter of my time on the money! I had to make sure I had enough money when I hired my first employee: could I meet the payroll, the tax schedule, and meet all the benefit schedules? It took up a lot of my time and I was getting frustrated because I couldn't spend time getting new clients and customers and marketing, but you have to balance that. If you don't pay attention to it, you are not going to be able to do any marketing because you're not going to have any money. That's the key to small businesses: finding that balance to understand where your money is and at the same time deal with the other issues you have to deal with in your company. 

What are the steps involved in the financial check-up?

I think the first thing is to have a good relationship with the bank. That’s number 1. Have a good relationship with the bank. Being able to have the banker trust you and you trust the banker. In other words, they can provide you with timely online cash management systems. It’s very simple, Wells Fargo, Bank of America, all the major banks have small business online services. Yea, they may cost a little bit, but boy it could save a lot of time if just every morning you can go online and see what your cash position is. Be able to pay bills online or be able to manage and move money around. That’s the first thing: have a relationship with a banker that you trust that is reasonably priced, and where you both trust each other. Remember, you are going to be using that banker to get lines of credit or be able to get short-term investments or even just credit cards, and to get the best rates and the best relationship, that banker will develop a relationship with you to get those decent rates.

The second thing is to develop a good relationship with whoever you are going to have to do your financials. That could be somebody you hire as a full-time employee, but for a lot of small businesses, we can’t afford that, so develop a financial manager that you can hire at 10-15 hours a week. Over that week you can enter in a check, pay bills or deposit money and someone can come in and put it all together in a format that provides you with all the information. You can have a public accounting firm that you trust, that’s another relationship. Maybe when you are first starting out you can't afford that, you are going to have to hire someone to do your taxes, but at the same time develop a relationship. 

I thought one of the best things I had was that I developed a 30-year relationship with a small public accounting firm that serves small businesses here in the San Gabriel Valley that was just like gold for me. He saved my “you know what” many times because of tax implications and cash flow management. Try to find people or someone who will work that you trust and then once they come on board, you can put together a system that every month you get a statement of cash flow. Income statements and a Balance sheet are important but a Statement of Cash Flow shows you where your cash is going and how it's coming in. Develop a timeline for cash management. You know you send out invoices or collect money at certain times during the course of the month when you have rent due or bills due. You develop a schedule or timeline and you can meet that schedule by knowing when your cash is coming and when it's going out.

What information does a small business need for the financial check-up?

The reason why I say a Statement of Cash Flow is because there are so many things that are going on in that statement that can help you and manage your business. The statement of cash coming and the statement of cash going out naturally uses and sources of cash. If you are not collecting receivables, that's a use of cash. Let’s say you have a lot of clients who are behind in their payments to you, that negative cash flow and you can see that very quickly in your Statement of Cash Flow.

So, you want to develop knowledge, line by line, of that Statement of Cash Flows and know what's going on. Besides that, one of the most important things is to have a system where every morning you can go online and see your cash position. Banks offer a cash position today but they can go out 5 days, 10 days, or 20 days knowing your schedule and history of cash deposits, withdrawals, or checks being paid and it gives you a nice little quick timeline of your cash availability.

Another important set of numbers or information is to make sure if you do have debt or investors that require monthly distributions and have some kind of schedule of when payment has to be made. Fixed costs are the key part that breaks or makes your business because if you have a handle on your fixed costs, from payments to debt service or whatever, to have a schedule knowing in 30 days I have to pay these obligations. Variable Costs, you can control those, if you have people coming in working hourly, sometimes you can lay them off and tell them I don't need you this week. If you have advertising expenses, you can push those around and move them around, but the fixed costs are key to understanding.

At a practical level, how does a small business owner use this information for their business?

If you are managing and you get these statements regularly, you understand your cash flow statement, you know when your fixed expenses are due, you know when your vendor payments are due. Just having all that information under your belt and as you expand your business, you are going to need more capital and hire more people. The best thing I knew that I was successful is I got another building and another place to do business, I thought something was going right! If you develop that relationship with that bank or whoever is supplying the capital and you're paying your bills, you are going to get capital a lot easier and a lot cheaper.

Inflation is beginning to rise again in America, especially in Southern California. If you don't have your financial affairs in order you are going to pay more for your money. If you have things in order and a good handle on your banking relationships and investor relationships it's going to give you cheaper money and give you a leg up on the competition.

When I was growing my business, I had difficulty hiring employees because they were afraid to come on board and they didn’t know if they were going to get a paycheck or not because I was so new. By having a system, a relationship, and all this information handy, people will be loyal to you. I can't tell you how many horror stories I've heard in my lifetime of people running businesses losing good people because they have no clue how their business is running. So some of the people say “I'm out of here. I don't want to be involved in this. Nobody knows what’s going on. Nobody knows when we have to pay bills or what is happening!” One of the toughest things for small businesses is keeping good people because once they have experience and you can afford to pay them a higher wage they are leaving. One of the ways of keeping good people is knowing they hooked their wagon to a sound business that is growing and they can grow with that company. 

What is the best advice for the small business owners who are out there?

The best piece of advice is to trust in yourself, trust why you're in business. Well, why am I in business? I have a good product or service and good clients that trust me. Trust that. A lot of times people start a business and at first, they are pretty successful because people say “I know this guy” and they do some business. Over time, you have to get return customers and new customers, you can't go off your same base of business. If you don't have confidence in yourself and develop new revenue streams or new markets or add to the business, then you doubt yourself and you hire the wrong employee who thinks they can help your business but it turns into a disaster.

I can't tell you how many times I've had friends who own businesses and get a little behind in certain aspects of the business and they hire some guru who thinks they know everything and ends up being a total disaster who costs you tons of money. I would not start a small business today unless I knew I had great confidence in what I was going to do. If I was a little uneasy about my product or uneasy about my business model, I would stay away from that. You have to have 100% confidence in yourself because you are going to hit downtimes and months when it didn't go as expected. If you keep to that confidence and if you can change and confidence that you make changes that are the key. It really doesn't have anything to do with money and it has everything to do with yourself. You have to be a fighter. I don't want to use athletic terms, but you have to be able to get knocked down and get right back up and learn that "No" is not an option in your business and your service or product is the best.

Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.