Tips to Finance Growth
2018 has come to an end and it is time for a fresh start in 2019. It’s a time for new year’s resolutions, and, for many business owners, a time to think about their personal and business finances.
Brad Mewes, finance consultant for the automotive industry, says that the safest and most secure way for a shop to bring in money for the business is to start the year off right by forming the relationships with banks. It’s as simple as contacting a commercial banker, explaining the purpose for the new account and opening one.
A more difficult process in the new year might be how a shop owner makes sure the money in his or her shop stays secure, both for the shop customers and the owner.
Mewes, principal consultant for Supplement Advisory, details important tips to help shop operators save money in what is a “capital-intensive” industry.
As told to Melissa Steinken
Tip: Plan to finance growth.
There are different ways a business can finance growth and options include banks, cash flow lenders and asset lenders. There is a large and fragmented industry of capital providers that are lending into all types of businesses, but mostly small businesses. Some of those have very attractive rates, some have expensive rates and across the board, there is wide disparity.
In 2018, banks have really pulled out of funding small businesses. When they do fund small businesses, often it is an arduous process of forms and back and forth talks. So there are other non-bank entities coming out to fill in the gap.
Businesses will have accounts receivables and sometimes that will last 30, 60, 90 days depending on to whom you’re selling. So, if you have to sell 120 days, the business needs that money to be able to pay their employees and purchase their inventory now. For accounts receivables factoring, a company says they’ll provide the money for shops now and buy the accounts receivables. Instead of the customer paying you in 120 days, the company will pay the shop in 120 days. So, they buy the accounts at a discount and the company makes its money by only purchasing 90 percent or 95 percent of the accounts and will make the money through the extra 10 percent or 5 percent once the customer pays.
Tip: Have a good relationship with lenders.
There is a lot of equipment and moving parts in the automotive industry that makes it more capital intensive than others. It’s important to have good relationships with lenders who might not be banks. There are a lot of brokers and others who are lending money and financing deals.
Creating those relationships early on when you do have the need to ask for financing can prevent you from scrambling last minute, trying to find the person with the best rates or terms. You’ve already established those relationships.
Tip: Keep up with treasury management.
A lot of commercial banks will focus on treasury management, which is managing the day-to-day cash flow. This could be sweeping from one account to another account over night so you have a little bit of interest on it. Another example is managing electronic transfers and manual texts. Manual texts are an unsecure way of paying people, though.
For example, a paper check has the customer’s account number and routing number, which someone could easily take that and take money out of the bank before it’s caught. Banks are constantly wanting their customers to move away from paper checks into electronic forms of transfer because it is a much more secure way to transfer money.
Tip: If available, use electronic transfers.
For example, the clients I work with can either pay by electronic check or credit card. If they pay by electronic check then they hand their banking information into my portal, which I never see and it transfers from their account to my account. It’s a third-party platform that is encrypted and secure.
Tip: Do at least monthly reconciliations in terms of tracking money.
So, that means reconciling your bank statement to your accounting system and ensuring all the transactions in your accounting system appear properly. That’s just a good practice. This way you’re capturing all your expenses, payments and everything.
A bank statement comes out on a monthly basis, so a monthly routine is a good idea.
Tip: At the end of the year, a shop owner needs to look at Section 179 of the IRS code.
Section 179 of the IRS Code stands for depreciation deduction for certain assets, or capital equipment. So basically what a business owner can do is purchase a piece of equipment and, under tax law, there is an accelerated depreciation of which they can take advantage.
For example, you may have purchased a $100,000 spray booth or $100,000 welder. Under a normal account, you would have to depreciate that over time. You wouldn’t spend $100,000 now, you would have to spend that over seven years, for instance. Section 179 allows you to spend all those dollars right now.
The benefit to that is that rather than having $12,000 of deduction, you’d get back all $100,000 this year. So, if you have a $100,000 profit, then you’d have a profit of zero dollars to report to the IRS.