How to Avoid Financial Hara-Kiri!

Uncategorized Jan 05, 2019

By Al Bartlinski, CPA, CGMA 

 

In my travels speaking at seminars, I have had the opportunity to meet many school owners. The successful ones were tuned in to the operational and financial details of running a school. They knew the numbers and their profitability and financial condition, and were frugal, but not cheap. They were willing to invest in their schools. They went to seminars, took meticulous notes, and implemented one thing at a time.

I would run into them a couple or more years later, finding that some, certainly not all, were facing tough times. When I asked, “What happened?” the reply used by more than a few was, “I took my eyes off the ball.”

I was curious as to what that meant and, more importantly, why it happened.

I found that it meant they stopped paying attention to the details of operations and finances — the very things that made them successful! Why did this happen?

For some, their success made them complacent. Others were simply burned out from doing it all themselves and let things slip. Some were caught off-guard by the unanticipated curve balls that life threw their way.

Throughout my 40 years in public accounting, the statistics about small business mortality have fluctuated a bit, but the survival rates have always been daunting. So, if I take the worst-case scenarios over that time, it might be something like this: On average, most small businesses (say 75%) don’t make it past the fifth year of operations. On top of that, after ten years, 75% of the survivors are gone; and just 25% of those survivors are doing it right!

By “doing it right,” I mean that the business runs well. It’s profitable and has good cash flow — with or without the owner(s) present — provides them with a good quality of life.

One of the top reasons small businesses of any type fail is poor business decisions caused by inadequate financial information. Specifically, inaccurate, incomplete and untimely information. This article will provide some tried-and-true tools to help school owners anticipate what the next pitch may be and keep their eyes on the ball. It will also address some tax-compliance issues that are important for martial arts school owners to be aware of.

 

Financial Awareness

 Making the “Necessary Evil” Painless!

Accounting is often looked upon by business owners as a “necessary evil.” It’s not fun (unless you’re a Certified Public Accountant!) and it doesn’t directly drive revenue. But, without an adequate accounting system, it is unlikely that your martial arts school will survive the long haul.

Software, such as QuickBooks, can streamline your bookkeeping requirements. A CPA knowledgeable about martial arts school operations can set up the system so that it provides the information you need to manage your school. If needed, he/she can likely provide training so that you are quickly up and running. (See sidebar story, “Choosing a CPA.”)

Once your accounting system is installed, you will be able to monitor the financial aspects of your school on a timely basis. You will have an accounting system that quickly and efficiently provides the financial information you need to run your school and is painless to operate

 

Financial Awareness

How am I Doing?

School owners sometimes ask me, “How am I doing?” To answer this question, there must be a benchmark, or a goal, to compare to. One of the reports that owners need to understand to effectively manage their school is the Statement of Income, or, as it is also known, the Profit and Loss Statement (P&L). It reflects the results of operations and is formatted as follows:

  • Gross Revenue
  • Less: Cost of Goods Sold
  • Equals: Gross Profit
  • Less: Operating Expenses
  • Equals: Net Income (Loss)

If you want to know how you’re doing compared to last year, you might compare current-period operating performance (the “Profit & Loss” or P&L) with the same period last year. This side-by-side comparison is referred to as horizontal, or trend, analysis.

Over time, seemingly imperceptible changes can occur in a business that result in profit leaks. For example, expenses may inch ever higher, without any awareness on the part of an owner. Horizontal analysis is a great technique to use in managing this phenomenon.

It’s simple to do. Presenting three to five years of P&Ls side by side allows for effective analysis in searching out these profit leaks. (QuickBooks allows you to easily download several P&Ls into a spreadsheet, such as Excel, to facilitate this process).

One caveat: It’s tempting to dismiss seemingly minor changes in each account as insignificantly small. You may find that your bottom line will increase substantially due to the cumulative effect of the “small” changes in various accounts. In more cases than not, it’s a game of singles, not home runs. 

 

Awareness

Managing Cash Flow

Cash flow is how money moves through your business. It has to do with amount and timing, when it comes and when it goes. It’s about having the money to pay bills when they become due.

Some school owners may make spending decisions based on their bank account balance without considering other obligations. I have seen some substantially increase their personal standard of living when the checkbook is flush with cash. When a downturn or other unanticipated event occurs, they find it virtually impossible to scale back, causing a financially stressful situation.

Become more aware of your financial condition. A good start could be to review and understand your balance sheet with your CPA. A balance sheet includes your assets (what you own) and liabilities (how much you owe). A strong balance sheet would reflect assets exceeding liabilities.

Assets might include a strong cash-reserve balance to weather any future, unknown, storms. Which leads to the next element of a sound financial-management strategy: anticipation.

 

Anticipation

Financial Forecasting

Income and cash-flow forecasting is a great way to get a sense of business performance under various conditions. It’s an essential tool in helping a business to survive and thrive under various economic conditions.

Consider forecasting income, expense and cash flow each month over the course of a rolling 12-month period. A good start would include reviewing the results of the horizontal and vertical analysis of past year’s activity, to get a sense of how the business is travelling. This will help you make reasonable estimates.

Then, do “what if” scenarios that consider significant reductions in income (25%), increases in expenses (25%), or both. Evaluate the impact on cash flow. Could you survive it? For how long? This will help you avoid being caught flat-footed by unforeseen events.

This same model is used for business growth and development planning. Forecasting income, expenses and profit provides benchmarks to measure against actual results. Reviewing the comparison of actual results with expected results allows for adjustments to the activities that drive growth and profitability to keep the plan on course.

This may seem tedious, but once the spreadsheet has been created, it’s relatively simple to “brainstorm” the financial effects of various courses of action. And, it stimulates “creative juices,” sparking winning business strategies.

 

Anticipation

Emergency Reserve Fund

As previously mentioned, a strong balance sheet would include an emergency cash-reserve fund. But how much cash should you retain for this purpose? Well, the answer to that is, “It depends!”

Your cash flow forecast is the starting point. If you wanted maximum protection, refer to your forecast’s “worst-case” scenario cash low point. It may be that a safe balance would be more than you would care to self-finance. In that case, you could consider working with your bank.

 

Anticipation

Working with your Banker

Develop a relationship with your bank’s commercial lending officer. Educate him/her on what you are about. Share your financial statements and financial forecasts with him/her. Just having these would lend to your credibility as a knowledgeable businessperson. This will increase their respect for you.

To shore up your cash reserves, you could apply for a commercial line of credit to provide cash if a downturn suddenly occurs. Many businesses apply for these during a rough patch. The ideal time is when things are going well. It’s easier to get approved. It’s more difficult to secure funding when the hard times are upon you. Further, a banker may question your business acumen for not anticipating and preparing for such an event.

 

Price

A Tried-and-True Way to Increase Profits, Cash Flow and Financial Strength.

In past years, I’ve met many school owners who were just not making it happen financially. I believed many were undervaluing themselves and simply weren’t charging enough for their services. So, I presented a seminar on “value-pricing.”

I opened my first presentation with a question. “What would happen if you doubled your prices?” Several hands went up. The first person that I called upon said, “I’d lose half of my students!” That’s the answer I had been hoping for!

I told the attendees “Think about it. Working half as hard for the same money!”

Although possible, the odds are that he wouldn’t have lost half of his students.

Pricing your services must take into consideration your marketing strategies, so it must be approached thoughtfully. But, if you want to immediately increase your gross revenue, bottom line and cash flow, consider raising your price. I find many school owners, as well as owners of other businesses, have an aversion to raising prices. They believe they will lose customers for having done so. However, studies have shown that a surprisingly low percentage (15%) don’t buy or stop buying because of price alone. Other factors come into play.

 

I strive to be in the upper tier of price within my market. I’ve developed meaningful, verifiable reasons to drive value to justify the rate, such as student/teacher ratio, state-of-the-art equipment, well-trained staff, and good product/service mix, to name just a few.

I’ve found that when I raised prices over 47 years as a school owner, my active count, profitability and cash flow increased! I’m willing to bet that many of you have experienced that same phenomenon. 

 

Final Thoughts

Awareness and anticipation are essential elements of any competitive engagement, including self-defense and business. Implementing the tools and concepts presented in this article will make you aware of where you’ve been, how you got to where you are now, and better help you predict the effects of future alternative courses of action. You’ll be better positioned to have the resources, assets and people to provide the financial strength and agility, and be empowered to take your martial arts school to new heights! 

 


Al Bartlinski, CPA, Chartered Global Management Accountant, has been helping martial arts school owners nationwide with accounting, tax, and financial and business-management needs for over 30 years. In addition to owning a CPA firm, he has owned a full-time martial arts school in Glen Burnie, MD, for 47 years. Al can be reached at [email protected] albartlinski.com or at (410) 761-4417.

Stay connected with news and updates!

Join our mailing list to receive the latest news and updates from our team.
Don't worry, your information will not be shared.

Subscribe

Share this blog article:

Close

50% Complete

You're Almost There

Fill in your information below and we'll get started on a growth plan for your school.