Four Time Tested Tips to Business Economic Survival
These time tested techniques will do much to enlighten you to discover “hidden information” and relevant data as you prepare your 2008 Year-End Income Tax Returns. Whether you are a C Corporation, S Corporation, in Ministry, an LLC or LLP, Partnership or proprietorship looking beyond the numbers is the best way to discover critical and insightful news to help make wise and informed financial and business decisions. Whether you have a CPA prepare the return for your business or you chose to “go it alone” seeking out and utilizing this data will make you a wiser and more dutifully informed owner and entrepreneur. Evaluating and staying abreast of these key ratios, components and insights well help you steer clear of financial disaster:
Limit Debt Payments
We are continually exhorted to limit our debt payments but our society and now even our government has gotten on the band wagon of debt is good. In fact even the recent $15,000 “tax credit” announced by the IRS is not really a credit at all but a loan, as these monies will have to be ultimately repaid. By limiting your debt payments, you allow yourself to both have discretionary spending, to take advantage of opportunities, and to fulfill your mission statements and dreams. For the only way to have money, is not to spend it. A good general rule of thumb goes back to the old days of mortgage lending when debt could not exceed 25% of aggregate income and cash flow. In a bad economy a better goal would be 15% and when it is anticipated that interest rates are going to rise, then limiting your total debt payment to less than 10% would be prudent and advantageous. If we do not limit our debt then we will certainly become its slave.
If there is a key item on this list, it would be to avoid credit in its entirety. Often the biggest fixed expense of any business, institution or ministry is its debt payments. After these payments are set into motion then they are often a permanent “financial resident” or fixture that will not easily go away. Car payments often now span for years frequently well beyond a vehicles useful life with overall debt frequently exceeding their value leaving owners “upside down,” often owing more than the car is actually worth. The financing of land and buildings is even much more problematic, especially in a declining market, as financing for these items will often have terms of thirty years or longer. For those who are able to foretell the future this is fine, but for the other seven billion of us, this remains a untenable and unpredictable time horizon.
Rainy Day Fund
There will always be unexpected contingencies that arise and it is up to us to be prepared for it. Failing to do so will certainly derail our efforts and preclude us from achieving our original mission. Certainly there can be no doubt by events in today’s economy of the adverse consequences of “living on the financial edge” as plans, business’s and ministries are uprooted. In fact, a rainy day fund in today’s economy should be even more substantive than in a more “normal economy.” A general rule of thumb for individuals would be to save at least six months of cash flow available at all times and nine months in a down economy. For business owners and ministry I suggest that having a six weeks of supply of cash in a good economy might be adequate but to have double this amount in more uncertain economic times. The ultimate goal of cash management should be to ensure that adequate funds are always available if the need should arise and to be able to continue on the missions path without a break or hiccup in our original plans.
Long Range Mission
Knowing who you are and where you are going is the best way to get there. Without a final destination in mind and a plan to get there, you will not arrive. For it is “better to aim at something and miss than to shoot at nothing and hit it.”
Knowing your long range mission will determine all of your short term decisions as each and every part of your day and every decision ultimately will bring your either closer to or further away from your goal. To this end, often a corporate mission statement, will provide a good bench mark on which to gage decision making and operational decisions.
Having the will and the stamina is a good start to overcoming financial woes. However, there is no substitute that will prevail like good planning, prudence, avoiding debt and contingency planning. Keeping these precepts in mind and working with wise mentors, CPA’s and financial planners are a good defense against loose spending. Also getting into the habit of seeking advice and counsel before larger financial decisions are made and contracted to will add a extra layer of defense to ensure sound financial decision making.