A lot of things go into making a small business a success: a solid tax plan; a cash flow strategy; marketing execution and more. It can become a little overwhelming to juggle everything and make it all work seamlessly. Below, you’ll find my perspective on how these things come together to help your small business grow and succeed.
Setting up your business
A common issue small business owners incur is they form their business as a Limited Liability Company, LLC. An LLC is not recognized for taxing purposes by the IRS so the owner must file a form to select how they want to be taxed, either as a sole proprietor, S or C corporation, or partnership.
If it is a sole member LLC, the IRS considers it a disregarded entity, which means the business is taxed as a sole proprietor on Schedule C. The business profits are subject to the self-employment tax in addition to an income tax on the profits.
If the single owner business chose to be formed as an S-corp. instead of a sole proprietor, the self-employment tax can be reduced significantly. S-corps do require a shareholder to take a reasonable salary, which will have employment tax liability associated with it.
The self-employment tax might not be significant when the business is starting and the business isn’t profitable or has minimal profits, but as the business grows and becomes incrementally profitable, the self-employment tax can become quite expensive to a business owner and in many cases the business does not have the cash to pay the tax liability.
There are additional considerations associated with LLC versus corporation versus partnership: formalities of existence, limited liability, continuity of life, etc., so be sure to get the advice of a professional advisor.
Maximizing cash flow in a small business
A common issue with a small business is the business focuses on sales growth, but does not understand its current and future cash flow.
As a business starts up, cash is often the most important factor for ensuring success. It is extremely important for businesses to predict and control cash properly. A great way to manage cash is to construct cash flow statements and other forecasting tools. Cash flow is a measurement of the amount of cash flowing into and out of a business during a specific period, such as a week or a month. At the end of the designated period, if a business has received more cash than it has spent, it will have a positive cash flow. By analyzing its projected cash flow statements and its actual cash flow statements, a business can devise ways of maximizing cash flow. A projected cash flow will serve as a major budgeting tool because it will give you an idea of your cash needs well in advance. This will help a business avoid running out of cash as it grows.
Cash flow should not be confused with sales or profits. It’s not uncommon for a small company to make a significant sale or be operating profitably and still go broke because of insufficient cash flow. This can happen, for example, when the company doesn't get paid for several months after its product has been delivered. In the meantime, the company may run out of cash when trying to pay current expenses. If you price your product too low and have high expenses, you may also run out of cash.
Having a cash projection and tracking tool will allow the business to manage toward having a cash reserve.
Maintaining a business cash reserve is like maintaining a personal savings account. Just as your personal savings can act as a hedge against unforeseen financial problems (such as job loss or the death of a spouse), a business's reserve cash can help the business get through changes in market demand and pay for unexpected business expenses. A cash reserve can also help your business be prepared for future new business opportunities.
Your business's ability to maintain a cash reserve will depend on its overall cash flow and the business life cycle stage at which it finds itself. Typically, businesses pass through four stages: start-up, growth, maturity, and decline.
Start-up companies generally have high expenses and little or no cash flow and cash reserves because the business has yet to make sales. If your business is at this stage, it is unlikely that you will be able to afford much of a cash reserve at first, but you'll want to establish one as soon as your firm starts to generate sufficient cash.
During the growth and maturity stages, maintaining a cash reserve will be important, both to hedge against unforeseen problems and to finance expansion through capital reinvestment.
Allocating time and funds to marketing
The success of your business depends largely on your marketing efforts. The market consists of customers and potential customers for your products and services. Marketing is the process of making your business and its products and services attractive to those customers and prospects. Marketing activities come in various forms and may include everything your business must do to get its products and services into the hands of your customers and prospective customers.
These activities might include: designing your products so they will be attractive to your customers, conducting market research and pricing and promoting your products and services so potential customers will know about them. Some of the tools you can use to promote your products and services are advertising, public relations, marketing communications, sales, and distribution.
Typically, marketing activities will be based on decisions and strategies you make about what products and services you will offer to your targeted market and how you will inform your customers.
Segment and target your market
You might have limited funds to spend on your marketing efforts. Rather than trying to be all things to all people in all places, you should consider segmenting your market. Generally, segmenting the market might occur in two ways.
First, you may want to target your market by geographic location (e.g., a city, state, or region) and thereby focus on the needs of customers within a defined area. This may also help keep your advertising and promotional costs down because you would be restricting those efforts to a specific area as well.
Second, you might target a specific customer group (for example dog owners, users of public transportation, or managers above a certain income level) by identifying and directing your promotional activity to those specific groups. You may narrow your target further not only by targeting your customer groups but also by focusing on those groups, within a geographic area. Segmenting and targeting your marketing efforts help your business in the following ways:
- Marketing your products and services to the wrong potential customers can result in increased overhead.
- Correctly targeting your products and services can result in increased sales.
- Identifying your present and potential customers might present opportunities for additional needs in the market.
Jim Bonvissuto is the co-founder of Business Improvement Group, Inc. and, with more than 30 years of domestic and international multi-industry experience under his belt, is a valued resource to his clients and members of the business community. He is also a member of the COSE Expert Network.