As the owner of the CPA firm Haga Kommer, Aspire Bank, and Aspire Insurance, Toby Kommer knows numbers. He has helped countless businesses scale, balance budgets, and overcome financial disasters.
Of course, you never want to face a financial disaster, but what if you do? We asked Toby that very question.
Q: What are some typical financial disasters businesses face?
A: It almost always comes down to cash. Cash flow is the root of almost all financial disasters and cash flow issues can come from a few different areas. A company could lose a top client. Or, the most common thing I see is a top client running into financial issues. There have been many situations where a top client is a great payer for 20 years and then all of a sudden, they can’t pay—that can put a cash flow crunch on a business.
Q: What are some things companies can do to avoid this?
A: A lot of people, when it comes to personal finance, will have 2-4 months of expenses saved in the bank in case something happens. I think from a business perspective, it’s wise to do the same thing. Obviously, each business is unique in terms of the overhead they have and all of the other factors at play. But overall, it’s a good practice.
Q: If a business does find themselves in a financial crisis, what are the first steps they should take to address it?
A: In the technology realm, I think almost every business has a disaster recovery plan. They have a plan for what to do if they get hacked. They have a plan for if their technology is down for two days. They have a plan for if their server is damaged. Even companies that aren’t in the technology space will have their data backed up or they’ll have a second server.
I don’t see enough businesses that plan for that and are prepared in that way for a financial disaster. One thing they could do is have a line of credit readily available from the bank. I think the first step should be accessing a line of credit.
Before that even, businesses should have plans in place for both short-term and long-term issues and a healthy amount of cash reserves. Businesses should also have a plan for restructuring the company in place.
Q: How common is it for businesses to not have a plan in place?
A: I would say it’s extremely common. I would say it’s almost uncommon to see somebody who’s actually given some thought to a plan.
Q: As a business owner yourself, have you always had plans in place? Or is that something you came to later in your business career?
A: I think I’m a little bit of an anomaly being a finance guy and an accounting person who is very numbers driven. I’ve always lived off of what I call the financial Bible, and that is my annual budget, my cash flow projection, and my forecast. I’ve got a set of reports that I get on a monthly basis that is probably about an inch thick.
Q: When trying to direct the severity of an event that occurs, what are some numbers and metrics you should look at?
A: Cash is king. It’s all about cash flow. That’s one of the reasons I really push budgeting for a lot of our clients. However, I would say 80-90% of the business owners that I run into out there don’t have a budget. They maybe manage based on last year and feel like they’ve been doing this a long time so they don’t need it. But it’s surprising to me that most mid-sized and small business owners do not have a budget.
If you do have a budget and something comes up, you can quickly adjust that budget and see what the impact is going to be. This can help you determine if you need to restructure. This can help you determine if you need to work with your banker or landlord.
I think the most important thing when you’re in that situation is to not hide from it. Don’t try to pretend that you’re not going through it. Don’t try to hide it from your key partners, your banker, your accountant—whoever it is.
Q: If cash flow is an issue, what are the first things a business should prioritize as far as their financial obligations?
A: Payroll is the biggest one because you can run into a lot of legal issues if you don’t pay your employees or your taxes. I’m not saying there aren’t issues if you can’t make a rent payment either, but that’s a lot different from not making required payroll tax deposits and those types of things.
Then, it’s about paying vendors. When it comes to this, communication is key. Most business owners want to work with other business owners that are experiencing something like that, whether that be restructuring a lease, or something else. I just think communication is key.
Q: As a business owner facing a financial disaster, how open and transparent should you be with your employees and stakeholders?
A: Luckily, I’ve never been in that situation, and very few of our clients have been either. But, I think you have to be very transparent with the partners you have. Especially your bankers because they’ve helped you build the business. I will say from being in the banking industry myself, nothing irritates a banker
I think for your employees, it’s kind of a case-by-case situation.
By The Numbers
- Around 23%of small business owners report that lack of capital or cash flow is their number one challenge (The Zebra)
- 70% of small businesses hold less than four months’ worth of cash reserves (PYMNTS.com)
- 45% of U.S. small business owners have forgone their paychecks to address cash flow shortages (The Zebra)
- A study found that 82% of businesses fail due to poor cash flow management or a lack of understanding of cash flow (Preferred CFO)
Q: What common mistakes do you see businesses making when they’re trying to recover from a big financial hit?
A: I think the biggest mistake is not asking for help.
Another mistake I see business owners make is not recognizing their situation soon enough. There are very few situations that come up where there is truly an out of nowhere disaster. Most of the time there are some signs. Sometimes that well paying client of 20 years starts paying slower and slower and slower. You just need to be proactive with forecasting and budgeting.
Haga Kommer
hagakommer.com
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Aspire Bank
aspirebanks.com
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Aspire Assurance
aspireinsagency.com
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