As fall is upon us, now is as important a time as ever to think about how to position your business for the future. While being in the present matters for business owners, planning for success gets results in the long term. In these times of COVID restrictions, rising inflation, fierce competition for talent, and talks of a looming economic recession, business owners in all industries arguably face more obstacles than ever before. This article will discuss some opportunities for business owners in the professional services industry to help navigate this uncharted territory and keep business running smoothly.
Increase Cash Collections at Time of Service
- In an environment of both inflation and rising interest rates, collecting cash in a timely manner is more critical than ever. The longer you wait to collect receivables, the less valuable the cash you receive will be. Timely collection of production receivables from both clients and insurance payers will help in managing business loans as interest rates are on the rise. Timely cash collections provide more flexibility to buy new equipment, pay salaries, and fund any incidental expenses.
Consider How Frequently You are Billing
- Consider evaluating your cash flow by reviewing and challenging your billing practices to determine if there is an opportunity to improve your cash flow. For example, if you are typically billing twice per month but find yourself in a cash crunch, consider transitioning to weekly billing. Getting in this habit could put cash in your hands faster, allowing for better predictability of cash flow. Changing your billing practices can help you make more timely and effective financial decisions as a business owner.
Evaluate Your Vendors
- In uncertain economic conditions, it is more important than ever to take a good look at the vendors you are using to ensure that you are receiving quality services and products at a fair price. Don’t be afraid to ask for discounts – often vendors will allow for some flexibility with long-time loyal customers, especially in such a competitive market. Seek value pricing with all your products and services.
Are Your Staff Performing Up to Par?
- No business or industry has been immune to the staffing shortages we have seen over the past few years, but it’s still important to make sure you are hiring and retaining quality employees. As hiring and retention become more important and expensive, it becomes more critical than ever to make sure you are seeing a return on your investment in your employees. For example, a typical payroll-to-production ratio for a hygienist in the dental industry is about 33%, or 3 times the amount. Quality staff are often what makes or breaks a business, so ensure that you have good metrics to evaluate your employees, and that you are holding them accountable for their performance.
Be Mindful of “Quiet Quitting”
- Quiet quitting is a new phenomenon based around the idea of employees “unofficially” quitting at work. These employees aren’t handing in a two week notice and heading to another job, but rather slowly start to decline in effort, attitude, and performance. This may be due to several potential factors including dissatisfaction with the job or boss, confidence they could find another job quickly if they needed to, or just general burnout and fatigue. Check in with your employees on a regular basis, compensate them well, and make them feel valued in order to keep morale high and prevent quiet quitting. Not all retention strategies require extra cash to help people stay at your organization.
Meet With Your Tax Adviser
- The last 5 years have seen more tax legislation passed into law than at any other time in American history. Now more than ever, it is critical that you are speaking with your accountants and tax advisors regularly to ensure that you are taking advantage of all tax planning opportunities available to you as a business owner. Minnesota passthrough entities have a new election available that allows them to deduct more of their state income taxes, and many professional service firms have been able to take advantage of government money in the form of PPP loans, Employee Retention Credits, EIDL loans, and many other programs. If your accountant isn’t discussing these opportunities with you, it may make sense to evaluate your adviser.
Make Quarterly Estimated Tax Payments
- If your practice is a passthrough entity, (LLC or S Corporation) the government will want to collect income tax on your earnings quarterly, in order to avoid underpayment penalties and interest. This keeps you in good standing with the taxing authorities, and also helps budget for cash flow management, as a surprise tax bill in April can put a lot of strain on your business, as well as your personal funds.
Budget for Equipment Purchases
- Business owners understand that investing in quality and up-to-date equipment can be critical for their business in a competitive environment. This comes at a price and the cash outlay can be significant. Make sure to discuss with your accountant when it may be best to make a purchase for tax or financial statement reasons, and whether it is best to fund a purchase with cash or to take on debt. Depreciation of these assets can have a significant impact on your tax return and financial statements, and it is critical to consult your tax adviser to properly utilize depreciation. Don’t buy equipment for the sole purpose of saving taxes, make sure there is a smart business reason for doing so.
Look Into Your Method of Accounting
- Many professional service practices and firms are small enough businesses where they are not required to use accrual accounting for tax purposes. Utilizing the cash method allows taxpayers to align their taxable income with the cash receipts of the business, which helps avoid issues with timing of collections and tax payments. It may be wise for your business to have two sets of books – accrual basis for internal reporting and financial statement preparation, and cash basis for tax reporting. If your business has excess cash at the end of the year, you can aggressively pay down any amounts owed to vendors by year-end to lower your tax liability.
Evaluate Your Pricing Structure
- Everything has become more expensive over the last year, and professional services are no exception. As costs of doing business such as staff wages, benefits, rent, supplies, and other incidental costs increase, make sure your fees are increasing enough to support this. Educate your clients and be transparent about why services are becoming more expensive. This also may require an assessment of your client base and determining if you are focusing your time on the right clientele.
Are You Wearing too Many Hats?
- Many in professional services went into the industry because of a passion for the work they do, not necessarily the desire to be a business owner. Sometimes owning your own practice or firm means spending a lot of time on administrative duties such as billing, bookkeeping, even down to keeping your office clean. Consider how much of your current workload could be outsourced by either hiring additional staff or part time-employees, allowing you to focus on what you do best. It might seem like a cost-effective move to take on a lot of these roles yourself, but it may be costing you money if it takes you away from chairside production of other more valuable training opportunities.
Have a Succession Plan in Place
- The past few years have taught us that life can change in a hurry. Priorities both in work and in life can change quickly, and health issues can arise seemingly overnight. Make sure you are discussing a plan for the next generation with your advisers. Have a plan for your retirement. Consider if you have a family member you would like to see take over your practice or position yourself to be able to sell to an outside party. Many business owners wait until their old age to start planning for their exit, but this is really something that should be done on a continuous basis.
As we head into a time of uncertainty in the professional services industry and the economy as a whole, it is more crucial than ever to evaluate every facet of your business and find opportunities for improvement. Staffing shortages seem to be here to stay, and priorities of younger employees are shifting. Business owners who stay ahead of the curve will be well positioned for what the future holds. Tough it out in these tough times, for a more enjoyable work life balance equation and a more robust financial future.