How A Business Owner Can Leverage New Financial And Other Administrative Initiatives

May 05, 2010

Significant state and federal legislative changes in 2009-2010 present opportunities and challenges for small-medium sized businesses.  While the new healthcare reform has been given a lot of press, we cannot forget about the increases in taxes that will be facing businesses as well.  This article will discuss best practices and strategies to offset the effects of the landmark legislation.

Before we analyze specific tools that can be used to offset health insurance costs, we must establish the basics.   A question that every business owner must ask him/herself first is: “Are you in control of your cash flow or is it controlling you?” 

All businesses should have tools in place to understand their cash position.  Examples of these tools are cash flow forecasting, gross profit optimization and a Balanced Scorecard. These basic tools must be in place in order to have their cash flow under control and understood.

Creating and updating a cash forecast is vital for an organization.  A good cash forecast estimates not only the cash generated from sales less expenses (an income statement), but also the amount of working capital needed to support operations.  This forecast will determine loan covenant compliance and how much cash is needed to meet obligations like federal taxes.

Optimizing a company’s gross profit helps a company avoid problems with prices that are too low and direct costs that are too high.  In addition, a company must have a margin comparable to their industry in order have adequate margins to pay for fixed costs.  When a company is generating adequate sales but gross profit margins are low, it signals an issue with a low selling price or higher cost than other business peers.  A lack of understanding often leads to decisions that only worsen the company’s position, such as attempting to increase sales via lower prices, leading to even smaller gross profit margins.

A Balanced Scorecard is about creating a business strategy where all your moves fit together in a simple to understand, cause-and-effect chain of events.  It's also about setting goals and measuring performance, and about how you communicate to keep everyone on your team up-to-date and give them a clear line of sight from their own actions to the company's end result.  Most importantly it's about taking your strategy and turning it into do-able action that everybody understands and can be held accountable for.

Healthcare legislation will have a huge impact for business owners.  Two programs that can help reduce costs are Professional Employer Organizations (PEO) and Direct health companies.

A PEO as a single source provider of integrated services which enable business owners to cost-effectively outsource the management of human resources, employee benefits, payroll and workers’ compensation and other strategic services, such as, recruiting, risk/safety management, and training and development. It does this by hiring for the client company thus becoming their employer of record for tax purposes and insurance purposes. It then leases them back under contract to the original employer. This practice is known as co-employment, employee leasing, or staff leasing.  PEOs benefit from aggregation of employee headcount: by combining the employees from multiple clients, they qualify for lower premiums on health insurance plans.

Another alternative a business owner can use is a direct health company.  These types of companies eliminate the middleman and maximize employer control over employee health care planning and related costs.  A direct health company eliminates the middle man by working with insurance companies for several clients thereby improving efficiency in claims processing and eliminating the need for a broker.

A company, no matter what size or number of employees must have these tools in place.  Business owners, regardless of the economic climate need to control their cash and not have their cash control them.  The above tools are examples of how companies can better understand and control their cash.

More from Christopher L. James…

About the Author

Chris joined B2B CFO® in July 2, 2009. His has served many companies, ranging from $500,000 to $90 million in sales, supplying CFO services on an as-needed basis. Industries served include manufacturing, distribution, retail, chemical, construction, and various service industries. While each company is very different, they all share the same goal of increasing profits and cash performance.

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