Hope you had a great Thanksgiving Holiday. Mine was spent in Atlanta, GA with family and friends. It was very enjoyable and we all had a blast.

With the year end rapidly approaching, I have devoted this blog post and the next one to share with you the top five mistakes that I see many business owners make that you should be mindful of. Here they are:

1. Thinking that tax planning can wait until the following year

As we approach the year end, you should already be thinking about the following April 15. It is essential to schedule end of year meetings with your CPA and financial advisor to plan year end strategies and to determine the amount of your tax liability or tax refunds. In the event of a tax liability, it will allow you to prepare for the taxes owed well in advance. The mistake to avoid is to not defer meeting with your team of professional advisors until next year.

2. Ignoring December 31^st when making major purchases

If you are planning on making equipment purchases, either by buying new equipment or any other purchases, make sure you always have tax savings in mind. Purchases made before December 31^st may save you on your 2009 tax bill. However, if you make a purchase in January or February 2010, you will have to wait more than an entire year to see the tax benefits.

3. Making decisions based solely on “tax” consequences, not “economic” consequences

This is a big one. Although making purchases before the end of the year will save you on your taxes sooner, it is only worthwhile if you actually have the cash flow to afford it! Small business owners often apply for loans to purchase equipment, assuming they are justified by the tax write-off. But, if you don’t have the money to pay off the loan in a timely fashion, it will cost you more in the end. Tax benefits should always be considered secondary to your small businesses’ cash flow capabilities. (I see many small business owners not cognizant of this fact and thus have dedicated one of my upcoming emails to share with you ideas to enhance the cash flow in your business.)

The rule to consider is that 10% of your net income (or 1% of your gross income) should go towards financial investments for your future, no matter what your income is. While this may initially seem like a significant amount to those who are not currently saving, once you begin to pay yourself first, you will hardly notice that the money is missing from your cash flow. You can also start saving slowly. What I mean by that is you begin with say 2%, then increase to 5% and then within a few months, increase to 10%. For individuals and families who are currently spending their entire net cash flow, staggering the amount saved over a few months will ease the transition phase.

Don’t wait for the end of the year to add to your retirement accounts. If you do this, you are unlikely to set aside the same amount you would if you started early and made regular contributions. For example, if you wait until the end of the year to save for your retirement, it is very possible that you would have used the funds designated for your financial future for other purchases instead. In fact, most people have a hard time with financial discipline when they can see their savings in their bank account on a daily basis. It is important to remember that a small business is a cash generating asset to take wealth out of, not just to have wealth locked up in. You work hard for your cash and your cash should work just as hard for you.

You must not settle for whatever’s left over! Others get what’s left over after you are properly paid, and if the leftovers aren’t enough for the others, reduce staff and cut expenses. If that won’t cut it, do the mercy killing now, not later, and move on.  You must not con yourself into nothing now for later. If you can’t take at least 1% off the top now, there won’t be any later. Consider this statement strongly and review your current cash flow statement for areas that could be improved. Again, it should not be challenging to take 1% of your business’s cash flow for your future retirement savings.

Let me share with you an interesting fact you may not be aware of. The personal savings rate in the United States has been approximately 4% since the late 1980s. That is half of what it was in the 1970s, and substantially less than other developed countries. The Japanese save at least three times the U.S. rate, the Germans double. At this rate, our nation’s wealth will be considerably behind other nations over the next decade.

Many retirement plan options allow for deductions for either the small business owner’s gross annual income or for the business. This presents a tax benefit in addition to the benefit of building personal wealth. When determining which course of action is the best for you to take, you should outline the benefits of each retirement plan, the process of establishing them and the ultimate outcome of your financial planning. Similarly, your company flexible savings account can serve as a useful tool to pay medical expenses and dependent-care expenses with your pretax dollars.

Understanding your financial benefits as well as those of your business can often be enough to compel small business owners to pay themselves first. So, discuss savings concepts with your CPA in your next meeting and work to establish a regular savings program that works for you and your business. Before you know it, you will have begun to build your future financial freedom.

The sad fact is most business owners have no idea what their numbers are. And that means there’s no good reason they should expect their business to improve – because they lack a way to measure the results!

Perhaps the most important financial indicator to know is the net cash flow of your business on a monthly basis. When cash runs out, the business most likely has to resort to closing its doors. If cash is termed by many as “king” then net profit certainly deserves the title of “queen.” To illustrate its importance, here’s a personal example. I work really hard, but I stopped working for free a long, long time ago. I insist on generating profit. I track and measure it constantly. I’m very big on keeping score.  I’m also very aware that bigger is rarely better, unless running a company up for sale or a public offering.

Very few small business owners spend enough time analyzing, what parts of their businesses…what services….what clients….what geographic territories….etc., are most (net) profitable vs. least (net) profitable. They let low profit stuff consume the same resources as high profit stuff. They over spend money in overly fancy offices, addresses, staff, etc to impress people without profitable purposes.

The two important questions that should be asked are:

•    How does this contribute to NET?
•    How much does this contribute to NET?

Every justification I hear for wanting to do things with little or no net profit are invalid.

The other financial indicator that many small business owners don’t do an adequate job of understanding and tracking is the lifetime value of the customer. The lifetime value of a customer is one of the most valuable things you as a business owner can know. It is the total profit of an average client over the lifetime of his or her patronage.

Example:  Let’s say that your average new customer brings you an average profit of $100 on the first sale. He or she repurchases three more times a year, with an average profit of $150 on each reorder. Now, with the average patronage lasting two years, every new client is worth $1,000: {$100 + (3 x $150) + (3 x $150)} = $1,000.

Why is this calculation so important?

By knowing what the value of an average customer is, you can then determine two things:
- How much you can afford to spend to acquire a new customer
- How much you can afford to spend to keep an existing customer from leaving you and purchasing from a competitor.

The other extremely important number is the total cost per lead. Most small business owners don’t know what this amount is for their business.

Let me give you an example: If you spend $500 on an advertisement in a magazine and that ad generates 5 qualified leads, then your cost per lead is $500/5 = $100 per lead. Once you know this number, it enables you with the ability to measure and compare the ROI from each advertising initiative you do.

From the above example, if you convert two customers, a 40% closing, then your cost per sale is $500/2 = $250. The cost per sales is the other indicator most small business owners don’t keep track of. If the lifetime value of your customer is $1,000, would you spend $250 to get that customer? How about $500? How about $750?

The response should be a resounding “yes.”

You would find all the media out (some examples of which are coupon advertising, direct mail, newspaper, Internet, etc,) that would allow you to do that.

Here are three other financial indicators that you should measure and keep track of:

1.    Average transaction size or average client fees per year: Once you know this number, you can find ways to increase it through up-sells, cross-sells, price adjustment, etc.
2.    Number of customers for the day / revenue of the day:  Another important number to keep track of.
3.    Capture of names/addresses/birthdays of new customers: A prospect may not purchase from you today but because their name is in your database and you are keeping in touch with them, they may become your customers in the future. By collecting pertinent information, you can keep in touch with your new customers and prospects.

Unfortunately many small business owners I talk have not identified the key financial indicators in their business, hence can’t measure and improve on them.

Even if you have a strong customer base that produces re-orders for your business regularly, there is a natural amount of attrition that occurs within a client base. So, if you are not replacing customers and growing with the addition of new ones, your business is at risk of sliding backwards in sales figures and overall revenue numbers.

Marketing is all about future sales. You plant the seed today to reap the benefits tomorrow. If you want a long-term successful business you can hand off to your children, don’t neglect marketing. Every month, set aside at least twenty percent of your time to dedicate toward marketing activities.

Marketing activities include:

-studying and knowing the difference between “good marketing” vs. “bad marketing”

-deciding to expand an existing product line

-dumping unprofitable products or adding new products

-determining where your advertising can generate the biggest return for the investment

-planning your marketing materials and activities for the year ahead

-nurturing your existing customer relationships via a “touch plan” to regularly stay in contact with your customers (I teach my client that an ideal touch plan should have at least 24 “touches” in the course of the year, other than the “touches” when you are servicing them.)

All the activities listed above are crucial functions for your success.

Every year I come across small business owners who throw thousands of dollars into bad, ineffective advertising methods.

For example, I will meet a business owner who advertises in the Yellow Pages and after getting little or no business from it, concludes that the Yellow Pages does not work for his business. Or, I talk to a business owner that just printed 2,500 of their nice, 4 colored brochures and mailed them out to businesses in their area. After not getting much response they conclude that this method does not work. That is simply not true and you will see why in a second.

One of my marketing mentors is John Carlton, one of the leading and highest paid marketers in the world. He says that “America sorts their incoming mail over their trash can.” Anything that looks like junk will end up in the trash. What this means is that the small business has to invest the time to understand the difference between “good marketing” and “bad marketing,” in order to gain the attention of the prospects they are targeting.

What is “bad marketing”? (also known as “Institutional ads”) Institutional ads represent the most common form of advertising. These ads talk specifically about you, the business owner. Yellow Page ads are good examples of this form.  But institutional ads don’t direct the potential buyer to a buying decision.  Thus, they can be a waste of money.

What is “good marketing” (also known as “direct response ad”) Direct response advertising, on the other hand, makes a complete case for the company, product or service. It overcomes sales objections. It answers all major questions. It promises results, backing up the promise with a risk-free warranty or money-back guarantee. Direct response advertising is all about your customer and his or her needs. Its purpose is to stimulate a phone call, letter or a visit. Best of all, unlike an institutional ad, it is trackable so you can make every dollar you spend on it accountable. This then helps to measure the effectiveness of each ad.

So, spend time with professionals who can give you financial insight into which marketing strategies will produce the best possible results for your business. Dedicate at least twenty percent of your week to marketing your business’s products and services. Track your results and make adjustments accordingly on an ongoing basis to ensure that your business is experiencing the levels of success needed to meet your needs.

Not all cash coming into a business must come from operations. Investments, both debt and equity, can provide intermediate cash to run a business. However, it is critical to know in advance what your cash needs will be to find the best source of funds. Sitting down each quarter or at least on an annual basis to review these concepts is important for generating cash flow for your business.

When you imagine a new business, you think of what it would cost to make the product/service, what you could sell the product/service for, and what the profits might be. We are trained to think of a business as sales minus costs and expenses, which are profits. Unfortunately, we don’t spend the profits in a business; we spend cash. In fact, many businesses discover that they have little cash flow at the end of the year even though their profit and loss statement shows a decent net profit.

Profitable companies go broke when they have all their money tied up in assets and can’t pay their expenses. Working capital is critical to the health of your business. Unfortunately, we don’t see the cash implications as clearly as we should, which is one of the best reasons for proper cash planning. Businesses have to manage cash, as well as profits to be successful both in the short term and in the long term.

Cash flow and profit are two concepts that are very different from each other and very often misunderstood by many business owners. Hence, adequate attention is not given to cash flow and cash reserves. A company should make all efforts to have enough of a cash reserve to pay bills, salaries and other expenses for several months (or longer, ideally) during cash-flow fluctuations.

You should create a program that will enable your business to build cash reserves which include the amount needed. The program should show how to build it and where to invest it so that it works as hard for you as you did to build it. My rule of thumb and advice to my small business clients is to maintain between 4 to 6 months of a cash reserve at all times. These cash reserves will then be available in the event of a cash crunch or an opportunity that arises.

Business opportunities arise on a daily basis that cannot be taken advantage of due to poor cash flow and lack of a cash reserve. For example, if your business runs on commodities such as sugar for production of products, prices for this commodity fluctuate throughout the year. If the price of sugar dropped substantially, offering your business the opportunity to boost net profits by lowering operating costs, this would be a prime opportunity to take advantage of. But, if your business does not have the cash flow to take advantage of this opportunity, it will miss out on this chance to boost profits.

Cash is king. Simply put “no cash equals no business.” Tracking the amount of cash in your small business is a vital function that you can never lose a handle on.