In my local paper today there was an article about a night club owner who is being sued by the neighboring businesses. As I was reading, I couldn’t help but lecture the business owner for not doing his research or more of it before spending ALL that money, $1million to be exact, and opening his doors. I feel bad for him, but at the same time it doesn’t appear that he did everything he needed to prepare the business for success.

When my husband and I noticed that a night club was opening in this particular area we both thought it was an odd choice for its location. However, the building is prefect for a night club/concert venue. While the building itself is perfect that doesn’t matter if it cannot attract clients or doesn’t meet city code/regulations. I wonder why type of research Sam did to determine the demographics and geographics of his target market. The night club would have to attract a decent population that does not reside in the area, mainly because it is a suburb with a lot of families.

According to the article the night club owner, Sam, was given a list of 10 things that the three neighboring businesses asked him to do so that his business didn’t impede upon their business. Sam said that he did “most” of the items on the list. This was one of his many mistakes. There either should have been an agreed upon compromise on the 10 items or Sam should have conceded to all 10. By not doing so he created an adversarial relationship, either intentionally or unintentionally, with others.

In the article it mentioned that Sam applied for a liquor license and signed some sort of agreement with the landlord acknowledging the type of business he was going to establish there. No where did Sam defend that he applied for the appropriate business licenses or followed the covenants of the strip mall location. So, I have to wonder if his business was doomed from the beginning. An agreement by the landlord is technically irrelevant if the business itself doesn’t meet the requirements of the covenants, codes, and/or regulations.

In addition, the article stated the neighboring businesses did not care for the type of “clientele” the night club served. Duh! What did Sam do to minimize their fears? It appears nothing, as he didn’t even fulfill the 10 items they asked him to. It does not appear that Sam took the time to build relationships with the other business owners. Sam owned another business for 20 years. Shouldn’t he have known better?

Even if you think a business plan is a waste of time, at least take the time to verify you can actually operate your business with no risk of being shut down shortly after opening your doors.

You need some new equipment or an new vehicle for your business. Do you lease or buy? The last blog post discussed the pros to leasing, which can be attractive when you don’t have idle cash available to make a down payment or the risk of obsolescence is high (i.e., when technology changes fast).

It makes sense to buy rather than lease an asset when:

1. You have the ability to use your cash reserves to pay for the asset. Or you have the ability to finance the asset through a bank or seller without hurting your debt covenants. You do not want to create too much debt for the business so take a look at the debt already outstanding before buying a new asset.

2. The asset will have a long estimated useful life and there is little risk of obsolescence.

3. You can take advantage of double-declining depreciation* in the early years of the assets useful life. This accelerates the benefit of tax deductions in the first few years of the asset life. *Double Declining Depreciation is a method commonly used for income tax purposes. Many businesses use Straight-Line for book purposes and Double-Declining for tax purposes.

4. You can afford the cash down payment or have the ability to obtain financing because the overall cash cost of the asset is less when you purchase vs. lease.

When you purchase an asset a few things happen from an accounting standpoint. The item is recorded on the Balance Sheet as an asset. The asset will be subject to depreciation so you’ll need to track the Depreciation Expense (which is reported on the Income Statement) as well as the Accumulated Depreciation (which is recorded on the Balance Sheet). In addition, as mentioned in point #1, you’ll have to record any related debt for the asset purchase as a liability.

The decision to lease vs. buy is not always an easy one. Compare the lists on the Lease blog post to this one and decide which option makes the most sense based on your current cash position.

Is it time to replace an outdated computer, piece of equipment or automobile? If so, are you going to lease or buy the new asset? There are pros and cons to both options. The blog post on June 3rd will discuss the pros associated with buying an asset.

When you lease an asset the transaction is fairly simple from an accounting standpoint. Since you don’t own the asset you are leasing there is no impact on the Balance Sheet, meaning you do not record the asset nor a corresponding liability for the debt (i.e., lease payments). You simply make monthly payments to the Lessor. Keep in mind, this is true for operating leases, not capital leases. With an operating lease you have no intent to own the asset at the end of the lease agreement along with a few other accounting tests to verify the lease is in fact an operating lease.

It makes sense to lease an asset when (i.e., operating lease):

1. Your cash flow is fairly low. Since you don’t have the ability (or willingness) to make a large payment to purchase the asset outright, a lease allows you to have access to the asset you need via monthly lease payments.

2. The asset is one where the risk of obsolescence is high, meaning that the technology will be outdated quickly. For example, many businesses lease rather than purchase computers/laptops for their employees because technology changes so quickly. Rather than being stuck with outdated technology they replace their computers every 2-3 years through lease agreements.

3. The debt on your balance sheet is a little too high or you have exceeded debt covenants by your lenders. If the asset you want to purchase is expensive, you might pay for it using some cash and financing the rest either through a bank or the seller. If you buy the asset, then you will need to record the corresponding debt on the balance sheet. If you lease the asset, you do not record any debt on the Balance Sheet.

Leasing an asset can be a good business decision, especially if you like the idea of no down payments and replacing the asset at the end of the lease term. Generally the overall cash cost of a leased asset is higher than that of a purchased one. There is no correct answer, it depends on what is the best option for your business.

A few months ago my business coach asked me to make a list of strategic business partners. I used my contact database to evaluate who I knew in my local area that could be a good referral source for my business as well as my ability to refer business back to them. The criteria I used was based on the type of service they provide along with my perception of their professionalism and quality of work. I suspect we all do this during the process of referrals.

Our impression of someone is not always right. Sometimes we make judgments about people before we really get a chance to know them. Sometimes we might even change our perception of someone based on either a really good or really bad experience either directly or indirectly.

The other day I offered to make an introduction between two people, I’ll call them Bob and Sally. Sally discounted the possibility of a quality business relationship with Bob. Sally gave me a list of reasons of why Bob wouldn’t be a valuable referral for her without knowing anything about Bob or his business. Bob happens to be the type of professional that Sally targets for strategic business relationships. I shared with Bob that I was going to introduce him to Sally and how she discounted him without knowing anything about him or his client base. Bob laughed and stated that he could send her more business than she would probably ever send him. Sally made a huge networking mistake.

From my point of view, it never hurts to have a cup of coffee or a short phone conversation to see if there is synergy between two businesses. You might find that the person/business is not a good fit, but at least you took the time to find out. Or you could determine the two businesses are perfectly aligned to create a strategic relationship. Sometimes it is not a matter of who you know, but who knows you. In Sally’s case, Bob doesn’t know her and therefore will never send her any business. Too bad for Sally. Don’t be a Sally.

I’m currently reading a book called Parenting with Love and Logic Teaching Children Responsibility by Foster Cline, M.D., and Jim Fay. You are probably wondering what in the world this has to do with business, let alone a blog post here. In reading this book, I realized the concepts could be applied to any relationship.

The book Everyone Wins! that I posted about last week was about conflict resolution. The Love and Logic book is about teaching children how to think for themselves so that they can problem solve and make good decisions on their own. Sometimes letting a child fail teaches them more than if we were to forcing them to succeed. One of the examples in the book discusses letting a child miss the bus and being confined to their bedroom for the school day. Their parents inform them they need to explain to the teacher (and the school) why they missed class as the parent doesn’t write an “excuse” letter for them. Most children don’t miss the bus again.

What if you let one of your staff miss a deadline for a major project? Would you have the guts to let that person explain to the other employees why they missed the deadline or would you try to finish the project yourself so that the deadline could be met? If that staff had to take responsibility for failing to complete a project as promised and there were consequences (such as an CEO or deductions in pay/missed bonus opportunities) it is unlikely that they would miss a deadline again.

If these concepts were applied in the business environment it might be a little frustrating for the supervisors at first, but in the long run they would end up with better employees. Even though Love and Logic is not a business book, it is about creating positive and respectful relationships as well as teaching the “younger” (younger does not necessarily mean a young person) staff responsibility. Don’t we need these skills in business too?

Do you have a great business idea, but cannot find a bank or investor to give you any funds? Maybe you need a little extra cash for your business, but again, you cannot find a bank lend you an money. There are really few options when you are in these types of situations. Often friends and family are unwilling or unable to help. Mixing family and business isn’t always a good idea and if you do be sure to have a legal contract.

A company called Auto Equity Loans offers loans on motor vehicles (cars, trucks, vans, motorcycles and farm equipment) that are owned outright. The loan amount is a percentage of the fair market value of the vehicle. The loan interest rate is not cheap, yet it can be a lifesaver at a time when you need cash now and do not have any other options available.

Auto Equity Loans is accredited by the Better Business Bureau. The offer loans for both personal and business needs. If you are in need of immediate funds and do not have anywhere else to turn this could be an option for you. Be sure to review all of the terms and understand the rate you are paying so that you are not caught off guard when the loan comes due.

To learn more about Auto Equity Loans visit their website. Please note that I have not used their services before. I am just informing small business owners about some additional options for quick cash or “seed” money to start their business. Be sure to check out any company before you sign any documents or agree to any financial terms.

A friend of mine wrote a booked called: Everyone Wins! Playing the Game of Conflict Resolution In All Your Relationships. I’m embarrassed to say that I’ve had his book sitting on my bookshelf for a while now. I just finished reading Good to Great and was looking for another business book to read. Many times I had passed over Everyone Wins!, but for some reason I decided to give it a try.

This book is a MUST read. I am not saying this because I know the man who wrote it. It is full of great advice, stories and exercises. Yes, exercises. If you have any type of conflict in your life, business or personal, you need to get a copy of this book.

As Larry mentions at the very beginning of the book you need to read it with an open mind. If you are going to resolve any conflicts you are currently experiencing, you will need to be flexible and willing to change. Otherwise, you’ll continue to remain in conflict with the person you are trying to get along with.

Chapter 2 is titled “Give Up Your Need to be Right, Not Your Needs.” When I was a teenager, still in high school and soon to graduate I decided that I was going to stop fighting with my Step-dad, who I call Dad. We would argue about anything and everything. We both needed to be right. Not knowing how to resolve this conflict, I just decided to give up the need to be right. Whenever I noticed my Dad and I getting into a debate I would stop arguing. I didn’t tell him I thought he was right, but I didn’t tell him I thought he was wrong. Our relationship started to change. We didn’t fight anymore and our relationship is very positive now. I wanted to get along with my Dad, not fight with him. My need was about getting along, not about being right.

I have used a similar approach in other relationships and it works. As do the many other concepts in Larry’s book. Check it out for yourself, visit Larry Barkan’s website.

When you started your business hopefully you wrote a business plan. If you did not, you can create a short version of a business plan now. While writing a business plan helps you prepare for the initial start-up phase and the first few years of operations at some point it becomes outdated. Many business owners will update their business plans once a year, which is a great exercise. However, if you did not write an initial plan or do not want to take the time to update your entire plan, there is another option – a shorter version, generally one or possibly two pages.

This shorter-version business plan can include items that are important for your business. There are many templates available, but I recommend creating a document that makes sense for your business so that you will actually use it on a regular basis.

When writing this short business plan consider the following sections:

1. Vision/Mission. When you started your business did you create Vision and Mission statements? If so, copy/paste them into this document so you can easily refer to them. Does the Vision or Mission need to be updated? Or do you need to re-evaluate how your business is following the original Vision and Mission? If you did not write a Vision or Mission, go ahead and create them now. The Vision Statement is more about the big picture – what do you want to accomplish.

The Mission Statement is about why the company exists, i.e., what is it that you are trying to accomplish with the services or products the business offers. Many Mission Statements include a brief declaration regarding employees, customers, and/or the community.

2. Product/Service Summary. Since many businesses are constantly changing their business offerings, it would be a good idea to include 2-3 sentences within the document that summarize the product/services you are offering. A business plan Executive Summary includes this information too, it is the basis for everything else in your document.

3. Target Market/Competitors. In this competitive environment it might make sense to re-evaluate your target market. Are the demographics of your customers the same as they were 18-24 months ago? If not, how would you describe your current customer? What about your competition? Have new competitors entered the market? How have they changed the way you attract or retain your customers? Have any competitors left the market or changed their focus? What were some reasons for them doing so? Can you gain insights as to how their exit might impact your business, either good or bad?

4. Tactical Goals. What are some tasks or projects that you want to complete within the next 9-12 months? For example, obtain XX number of new clients or XXX number of quality Twitter followers. Maybe you want to open XX number of new locations or add XX number of new products to your retail mix. The objectives should be measurable and realistic. You’ll use this information to create your strategies and plans.

5. Long-term Strategies. What are the long-term goals of your business? What types of activities will help you move from where you are today to that goal in 3-5 years? If you are a sole-preneur, would you like to add employees? If so, what would that look like for you and your business. If you have a retail operation, have you considered moving to a bigger location or adding stores? Think about what your business should look like in 3-5 years and create both long-term and short-term objectives to help you get there.

Remember to include a summary of the action steps you will take to achieve your objectives. For example, let’s say you want to attract 10 new clients for your coaching program. What types of activities could you engage in that might drive clients to your program? Establish Teleseminars, create a referral program or book speaking engagements/seminars. Where do you currently find your clients? Use that information to determine what activities you should be participating in to drive business to your door.

A short (or single page) business plan is easy to create. When you don’t have time to update your regular business plan, this is a great alternative. You can create these types of plans for different divisions, departments or product/service lines. Update your business plan at least once per year or when a major change occurs in your business or marketplace.

Consider the book by Jim Horan, the One-Page Business Plan to create this type of document for your business.

Most business owners are not accountants and know enough about Net Income and/or Cash Flow to get by. Your financial statements are full of a wealth of information and each statement tells its own story of what is happening in your business.

While cash is King, the balance in you checking account doesn’t tell you what you are doing right or wrong in your daily operations. The Income Statement (aka Profit and Loss Statement) does. Sometimes Net Income is mistaken for cash flow. While the two items are related, they are not the same, especially if you use the accrual method of accounting or have depreciation and/or amortization expenses.

Net Income is the profit generated by your daily operations. This figured includes all of your sales (aka revenues) and expenses (such as rent, utilities, auto, meals, travel, depreciation, interest, etc.). Some of the expenses used to calculate Net Income are considered “non-cash” items, such as depreciation and amortization. However, depreciation and amortization do not impact cash flow.

If you use the cash basis method of accounting usually the only difference between your Net Income and Cash Flow will be the non-cash items. However, if you use the accrual method of accounting the difference between Net Income and Cash Flow will be a little more complicated to calculate because you have to take into consideration the changes in your Accounts Receivable, Inventory, Accounts Payable and many other accounts.

There is no general rule that says Net Income is always higher than Cash Flows or vice versa. It is a good idea to ask your bookkeeper to prepare both the Income Statement and Statement of Cash Flows each month so that you can track the trends of your operations and how those items impact how much cash you have in the bank.

A Pro Forma is an estimated financial statement, usually the Income Statement (aka Profit and Loss Statement). Entrepreneurs prepare a pro forma for many reasons, but the main one is to obtain financing either from a bank or an investor. As with most everything, the pro forma is only valuable if the information used to create it is good and accurate.

I just finished helping two business owners prepare projections for their business ventures. The problem with an estimated projection of the future is that it is rarely 100 percent accurate. Generally you will not earn as much in revenues as you anticipate and your expenses will be higher. The expenses will be higher in part because items were left out, either intentionally or unintentionally.

Creating a pro forma is not a waste of time because it forces the business owner to really think about what the business can achieve. Can you really sell 100,000 widgets with only 1 sales person, i.e., yourself? When you put numbers on paper you have take an honest look at what needs to happen from a financial perspective to create and sell your products or services.

The real challenges for business owners is not the time it requires to create a pro forma/projection, but creating one that is realistically achievable. Does it really do you any good to underestimate your expenses or overstate your revenues? Do you think the bank or investor won’t doubt your numbers? They will, even if your numbers are totally realistic.

The problem with pro forma financial statements isn’t that they are unrealistic or unachievable, it is that often times the data used to create them isn’t accurate or there are too many unknowns. Yearly projections are a good business practice. These exercises can help you and your business be more profitable as long as the information used to create them is considered high-quality and items are not left off in order to make the numbers “look” good.