Tag: investing

Helping Employees Build Financial Security: A Guide to Employee Emergency Savings Accounts

As a small business owner, you have an opportunity to support your employees’ financial well-being in meaningful ways — and it doesn’t have to strain your budget. One increasingly popular option is offering an Employee Emergency Savings Account (ESA).

These accounts gained attention following the passage of the SECURE 2.0 Act in 2022, which updated retirement legislation and introduced Pension-Linked Emergency Savings Accounts (PLESAs).

PLESAs are simple to implement, require no employer contributions, and give employees a practical way to save for financial emergencies without tapping into their retirement funds.

What Is a Pension-Linked Emergency Savings Account (PLESA)?

A PLESA is a savings option tied to an existing retirement plan, such as a 401(k), allowing employees to automatically set aside money for emergencies via payroll deductions.

The key benefits include:

  1. Reduced employee financial stress
  2. Improved financial wellness
  3. Better employee retention and engagement

Employees can access these savings when unexpected expenses arise — without penalties or complicated processes.

Key Features and Requirements

Here’s a quick overview of how PLESAs work:

  1. Eligibility: Available to employees earning less than $160,000 in 2024 (classified as non-highly compensated for 2025).
  2. Contribution Limits: Maximum annual contribution is 3% of an employee’s pay, up to $2,500 per year.Contributions are made with after-tax dollars and held in a Roth IRA within the retirement plan.
  3. Withdrawals: Can be made at any time, penalty-free.
  4. Employer Contributions: Optional. If offered, employer matches must go into the employee’s main retirement account, not the PLESA.

Appropriate Uses for PLESA Funds

While there are no legal restrictions on how PLESA funds are used, the intended purpose is to help cover genuine financial emergencies, such as:

  • Medical bills
    • Car repairs
    • Emergency home repairs
    • Temporary loss of income
    • Essential living expenses during hardship

Employees should be encouraged to avoid using these funds for vacations, investments, or routine bills that should be part of a regular budget.

How to Set Up a PLESA for Your Business

If you’re interested in offering this valuable benefit, follow these steps:

  1. Confirm your retirement plan provider supports PLESAs. Contact your plan administrator to discuss setup, automatic enrollment, sub-account creation, and tracking procedures.
  2. Implement automatic enrollment, with an opt-out option.
  3. Clearly communicate program details to employees. Explain how it works, contribution limits, withdrawal procedures, and opt-in/opt-out options.
  4. Offer financial wellness education. Provide resources and workshops to help employees build money management skills.
  5. Track contributions and withdrawals for accurate reporting.

Final Thoughts

Providing your employees with tools for financial security is one of the most meaningful ways you can care for your team. Establishing a Pension-Linked Emergency Savings Account plan takes some effort but requires no employer funding — and the benefits to employee morale, wellness, and retention are significant.

If you have the means to offer a PLESA, I encourage you to explore it. Helping your team be financially prepared for life’s unexpected challenges isn’t just good for them — it’s good for your business too.

Comparing Your Financial Ratios to Industry Standards

Business woman studying her business's financial ratios

Knowing your financial ratios is critical to managing your small business successfully. If you are applying for a business loan, the lender will want to see that your net operating income is more than sufficient to cover your loan payments. In fact, most lenders expect net operating income to be approximately three times the required loan payment. This standard holds true across the industry.

However, other ratios can vary greatly depending on the type of business you have. For example, inventory turnover should be much faster in a restaurant or grocery store compared to a retail clothing or appliance store. Grocery stores often have low profit margins per item but sell a large volume of products, while appliance stores sell fewer items but need a higher margin per sale to stay profitable.

Fortunately, there are several sources of standard industry data that can help you assess how your business compares to industry averages. These resources include:

  • IBISWorld: Offers comprehensive industry analysis, financial statistics, and industry trends. It’s a fee-based service, but you may be able to access it for free through a university or public library. Many Small Business Development Centers (SBDCs) use these reports in client consultations.
  • ReadyRatios: This financial software allows business owners to input their financial statements and automatically calculate key financial ratios. It also compares your business’s performance to industry benchmarks. ReadyRatios offers both free and fee-based versions depending on your needs.
  • Statista: A platform providing a wide range of data, including industry-standard ratios, market trends, and consumer behavior. It also has both free and premium options.

Other sources include:

  • Trade Associations
  • U.S. Census Bureau
  • Bureau of Labor Statistics
  • Market Research Firms

Key Ratios to Compare

There are several important financial ratios you can use to assess your business’s performance. Here are a few to consider:

Revenue Growth

If your industry is experiencing strong revenue growth but your business is lagging behind, it’s important to investigate why. Ask yourself:

  • Are new competitors eating into your market share?
  • Have you cut back on marketing and advertising?
  • Are you failing to provide an exceptional customer experience?

Profit Margin

Before starting your business, you should research the industry’s standard profit margin and compare it to your projected margins. If you’re projecting a profit margin much higher than industry standards, you’ll want to carefully review your assumptions about costs and operating expenses. If your business is already running and your profit margin is too low, consider:

  • Are your costs rising faster than you’re able to increase prices?
  • Are you failing to collect receivables in a timely manner?
  • Have revenues fallen below the point where they can cover fixed costs?
  • Has the quality of your product declined, leading to returns and waste?

Cost of Goods Sold (COGS)

The COGS ratio varies widely by industry, and yours should align with the industry’s average. If it’s not, investigate the following:

  • Are your prices too high, leading to reduced sales?
  • Is your markup too low, cutting into profits unnecessarily?
  • Are you offering deep discounts to move inventory, suggesting a misalignment with customer demand?
  • Are you over-ordering perishable items, resulting in waste?

Inventory Turnover Ratio

Your inventory turnover ratio indicates how quickly you’re selling and replacing inventory. If your ratio is higher than the industry average, it may indicate that you’re turning over inventory too quickly, which could lead to lost sales on high-demand items. On the other hand, a lower turnover ratio could mean that you’re ordering too much or the wrong items. Striking the right balance between inventory levels and demand is key to boosting sales and minimizing excess investment.

Interpreting Industry Benchmarks

These are just a few of the key financial ratios you can compare. It’s important to remember that deviating from the industry standard doesn’t necessarily indicate a problem, but it should prompt further investigation. You may find that your business is more efficient than average, or you may uncover areas for improvement that could help you optimize operations and boost profitability.

Conclusion: Understanding Your Ratios in Context

By comparing your financial ratios to industry standards, you can gain valuable insights into how your business is performing. Regularly reviewing these ratios will help you stay on track, identify potential issues early, and make informed decisions about the future of your business. Industry benchmarks serve as a useful tool, but remember that each business is unique, and your financial strategy should reflect your individual goals and circumstances.

If you need help analyzing your business’s financial ratios or understanding how they compare to industry standards, feel free to reach out. I’m here to help you navigate your financial strategy and grow your business confidently! You can email me @ susan.ball5@aol.com

Know Your Financial Ratios: The Key to Understanding Your Business’s Profitability

Understanding your financial statements is crucial to managing your small business effectively. However, it’s just as important to analyze these statements to assess how your business is performing. One powerful tool to do this is financial ratios. These ratios can help you measure your business’s financial health and compare it to others in your industry.

Here’s an overview of key financial ratios every business owner should understand and know how to calculate.

What Are Financial Ratios?

Financial ratios are calculations that help business owners evaluate their financial performance. They allow you to measure things like liquidity, profitability, and leverage—giving you a clearer picture of your business’s financial health.

Measures of Liquidity:

Liquidity refers to how easily assets can be converted into cash to cover short-term obligations. To maintain financial stability, it’s essential for a business to have sufficient liquidity.

Current Ratio: The current ratio measures a company’s ability to meet short-term liabilities using short-term assets.

Formula: Current Ratio = Current Assets / Current Liabilities

A ratio greater than 1 indicates that the company can pay its short-term obligations using its assets. A higher ratio means more liquidity.

Quick Ratio: The quick ratio is another liquidity measure, but it excludes inventory from current assets, recognizing that inventory may take longer to sell and convert into cash.

Formula: Quick Ratio = (Current Assets – Inventory) / Current Liabilities

Inventory Turnover Ratio: This ratio measures how often a company sells and replaces its inventory during a period. A higher turnover suggests that inventory is being sold quickly. Inventory turnover ratios vary greatly from one industry to another. Businesses whose inventory is perishable must turn over their inventory in a few days, whereas businesses whose products have long lives turn over their inventory just a few times a year.

Formula: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Measures of Profitability:

Gross Profit: Gross profit represents the revenue that remains after subtracting the cost of goods sold (COGS). It’s essential for understanding how much revenue is available to cover operating expenses.

Formula: Gross Profit = Revenues – Cost of Goods Sold

Gross Profit Margin: The gross profit margin shows the percentage of revenue available to cover operating expenses.

Formula: Gross Profit Margin = (Revenues – COGS) / Revenues

A higher gross profit margin indicates a more efficient business model.

Net Profit: Net profit is the remaining revenue after subtracting all expenses, taxes, and interest. It represents the business’s overall profitability.

Formula: Net Profit = Revenues – COGS – All Business Expenses

Net Profit Margin: The net profit margin calculates what percentage of revenue remains as profit after all expenses are paid.

Formula: Net Profit Margin = Net Profit / Revenues

Operating Profit (EBITDA): After taking out the cost of goods sold and paying all operating expenses you are left with the Operating Profit. It measures the funds available to meet obligations, such as loan payments and taxes. It’s also known as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Formula: Operating Profit = EBITDA = Gross Profit – Operating Expenses

Return on Assets (ROA): The return on assets ratio measures how efficiently a business is using its assets to generate profit.

Formula: Return on Assets = Net Profit / Total Assets

Return on Equity (ROE): The return on equity ratio shows how much profit a company generates with the money invested by its shareholders.

Formula: Return on Equity (ROE) = Net Profit / Shareholder’s Equity

Leverage Ratios:

Leverage ratios indicate the degree to which a company is financing its operations through debt, which is vital for evaluating financial risk.

Debt-to-Equity Ratio: The debt-to-equity ratio compares a company’s total debt to its total equity.

Formula: Debt-to-Equity Ratio = Total Debt / Total Equity

Interest Coverage Ratio: The interest coverage ratio measures a company’s ability to meet interest payments.

Formula: Interest Coverage Ratio = EBIT / Interest Expense

Debt Service Coverage Ratio: This ratio measures a business’s ability to cover its debt obligations (principal and interest payments).

Formula: Debt Service Coverage Ratio = Net Operating Income / (Principal + Interest Due)

A ratio of 2.5 to 3.0 or higher is often seen as a healthy benchmark by lenders.

How to Interpret Financial Ratios

Now that you understand the basic financial ratios, it’s essential to interpret what they mean. Some ratios, such as the debt service coverage ratio, are fairly standard across industries. Other ratios, such as inventory turnover or profit margins, can vary significantly between different industries.

In our next blog post, we’ll dive deeper into how to access industry data to benchmark your ratios and what variances in your ratios mean for your business’s performance.

Conclusion: Why Financial Ratios Matter

Understanding and calculating financial ratios is crucial for small business owners who want to assess their financial health. These ratios provide valuable insights into liquidity, profitability, and financial risk. By regularly tracking these ratios, you can make informed decisions about your business’s financial strategy and growth.

If you have any questions about how to calculate or interpret your business’s financial ratios, feel free to reach out in the comments below or email me at susan.ball5@aol.com. I’m here to help you manage your business finances with confidence!

Know Your Financial Statements—The Personal Financial Statement

The Personal Financial Statement (PFS) is an important document that every business owner should understand. Unlike other financial statements, the PFS reflects the financial health of the business owner rather than the business itself. Many business owners mistakenly believe their personal financial situation is separate from their business’s financial health. However, that is not the case.

A business owner’s personal finances play a crucial role in determining whether a lender will approve a small business loan. Lenders review the PFS to assess if the borrower:

  1. Is managing their personal finances well
  2. Has cash to inject into the business
  3. Has collateral to support the loan

Moreover, landlords and franchisors often require business owners to demonstrate financial responsibility before entering into lease or franchise agreements. Additionally, a PFS is necessary for certain SBA certifications and for securing SBA-backed loans.

Many business owners struggle with understanding how to complete the PFS. To help, I’ll guide you through the process, using the SBA’s Form 413 as the reference. While each bank may have its own version, most will accept the SBA version.

Guidelines for Completing the Personal Financial Statement

Assets:

  • Cash on Hand and in Banks: Total cash on hand and in your bank checking accounts.
  • Savings Accounts: Total of savings accounts, including CDs and money market accounts.
  • Retirement Accounts (IRAs, etc.): Total all retirement accounts. Though this money cannot be used as collateral, it’s still an important asset.
  • Accounts and Notes Receivable: Money owed to you, such as tax refunds, security deposits, or maturing CDs.
  • Life Insurance: Include only the cash surrender value of life insurance policies (the amount you’d receive if you cancel the policy, after administrative costs).
  • Stocks, Bonds, Real Estate, Automobiles, and Other Personal Property: List at current market values.
  • Other Property and Assets: Includes boats, trailers, collectibles, and jewelry.
  • Business Ownership: If you own a business, include its value, calculated by summing cash, equipment, and inventory. Enter this as “Other Assets.”

Liabilities:

  • Accounts Payable and Notes Payable: Includes unpaid bills, outstanding credit card balances, and bank loans (excluding mortgages, student loans, and auto loans).
  • Auto and Installment Loans: Include the total debt and the monthly payment for auto loans, student loans, or other installment loans.
  • Life Insurance Loans: If applicable, list any loans against life insurance policies.
  • Mortgage Liabilities: Include the total debt secured by any real estate, including first and second mortgages and home equity loans.
  • Unpaid Taxes: List any unpaid income tax, property taxes, and personal property taxes.
  • Other Liabilities: Include private loans from friends or family, legal judgments, and unpaid child support or alimony.

Net Worth: Net Worth = Total Assets – Total Liabilities

Additional Sections to Complete

Once you’ve filled in the basic table, additional details about your assets and liabilities are required in the sections below.

Section 1: Income

  • Salary: Include wages or salaries you regularly pay yourself from the business and any other employment.
  • Investment and Real Estate Income: Provide details of income from investments or properties.
  • Other Income: This might include disability income, foster care payments, and retirement income (but not alimony or child support).
  • Contingent Liabilities: Include any loans for which you co-signed, or set-aside funds for contingencies like lawsuits or IRS audits.

Section 2: Loans and Credit Cards

Provide details on all outstanding bank loans, credit card balances, student loans, auto loans, and personal loans.

Section 3: Stocks and Bonds

Provide details on stocks and bonds owned, including the number of shares and their current values.

Section 4: Real Estate

Include all properties owned—both free and clear, and those with mortgages. Use online sources like Zillow to estimate current property values.

Section 5: Other Assets

Describe the assets listed in Accounts Receivable, Other Personal Property, and Other Assets. Include the asset and its value, e.g., “2024 tax refund expected: $1,450” or “2018 fishing boat: $9,000.”

Section 6: Taxes Owed

Provide details on any unpaid taxes owed to the federal, state, or local government. If you’re on a payment plan, include the balance and payment terms.

Section 7: Other Liabilities

Provide details on any other liabilities not already covered in the previous sections.

Section 8: Life Insurance Policies

List the face value of your life insurance policies and the cash value you would receive if you cashed them out. If you’ve borrowed against any policies, include those details here as well.

Be sure to sign and date the form, and include your Social Security Number. If you are married, your spouse must also sign and date the form.

When lenders, landlords, or franchisors review your PFS, they’re evaluating whether you manage your personal finances responsibly, if you’ve taken on too much debt, and whether you can meet your financial obligations. Managing your personal finances well is critical, not only for your own peace of mind but also to demonstrate your ability to manage your business effectively.

Conclusion

The Personal Financial Statement is a key tool in securing financing for your business and demonstrating your financial responsibility to potential partners. By completing it accurately, you’ll be better prepared for any financial assessments that come your way. If you have any questions about how to complete your PFS or need further assistance, feel free to drop a comment below or email me at susan.ball5@aol.com! I’m happy to help you navigate this important aspect of your business finances.

Know Your Financial Statements—The Income Statement

As a business owner, understanding your financial statements is key to making informed decisions. In this post, we’re diving into the income statement—a crucial report that shows how well your business is performing over a specific period of time, whether it’s a month, a quarter, or a year. Simply put, the income statement tells you how much revenue you’ve earned, how much you’ve spent, and—ultimately—whether you’re turning a profit.

Revenue: The Starting Point

The income statement starts with revenue, also known as sales or income. This represents the money your business earns before any expenses are subtracted. For most businesses, revenue can be broken down into different categories, depending on the nature of the business.

Common sources of revenue include:

  • Sales (products or services)
  • Fees and commissions
  • Rental income and interest income
  • For nonprofits, revenue also includes donations

You might also break down your revenue into specific categories to gain deeper insights into how your business is performing in different areas. Here are a few examples of how businesses typically organize revenue:

  • In-store vs. online sales
  • Food vs. beverage sales (for restaurants)
  • Restaurant sales vs. catering sales
  • Sales by department (women’s, men’s, and children’s clothing)
  • Sales by location (if you have multiple stores)

Cost of Goods Sold (COGS): Direct Costs Tied to Sales

Next, we have the Cost of Goods Sold (COGS), which represents the direct costs associated with producing or acquiring the goods you sell. COGS is often separated from operating expenses because it directly impacts your revenue.

The formula for COGS is:

COGS = Beginning Inventory + Purchases – Ending Inventory

For manufacturers, this cost also includes direct labor (the wages paid to employees who produce the product) and the raw materials used to create the product.

Keep in mind, determining your COGS accurately requires precise inventory management. Regular inventory counts—whether manual or tracked through software—are essential. Also, fluctuations in purchase prices can affect your COGS, especially if inventory items were bought at different prices.

Operating Expenses: The Cost of Running Your Business

Now, let’s talk about operating expenses—the costs involved in running your business day-to-day. These expenses can be fixed or variable:

  • Fixed expenses stay the same every month, such as rent, salaries, insurance, and depreciation.
  • Variable expenses change from month to month, such as wages (if you’re paying hourly employees), utilities, credit card fees, and supplies.

Some expenses can fall into both categories. Take advertising for example: while contracted services like digital ads might be a fixed cost, other components—like ad spend or promotional events—could fluctuate based on your business decisions.

Other Expenses: Beyond Operations

In addition to operating expenses, businesses also incur other expenses that are not tied directly to day-to-day operations. These are typically separated on the income statement.

Here are a few examples of “other” expenses:

  • Loan payments: The principal portion of a loan repayment isn’t deductible, but the interest portion is. Only the interest is accounted for here.
  • Capital expenditures (CapEx): While expenses related to property and equipment are legitimate business costs, they aren’t shown directly on the income statement. Instead, these are capitalized on the balance sheet and then depreciated over time.
  • Taxes: These include property taxes, sales taxes, and income taxes, and are generally listed separately from operating expenses.

The Bottom Line: Profit

After all expenses have been deducted, what’s left is your net profit (or loss). This is the amount that ultimately accrues to the owner(s)—and what determines if your business is financially healthy.

Final Thoughts

The income statement isn’t just a tool for accountants; it’s an essential document for any business owner. Understanding each section allows you to make smarter decisions about pricing, expenses, and growth. By regularly reviewing your income statement, you’ll have a clear picture of where your business stands and what adjustments might be necessary to hit your goals.

Here’s a template to show you what an income statement looks like:

Company Name
2025
Revenue
  Less:  Cost of Goods Sold 
Gross Profit $             –  
Expenses:
  Administrative Expenses
  Advertising and marketing
  Credit card fees
  Depreciation
  Insurance
  Interest expense
  Licensing and registration
  Professional Services
  Professional Memberships
  Office Expense
  Owner’s Draw
  Rent
  Supplies
  Telephone & Utilities
  Travel Expenses
  Wages
Total Expenses $             –  
Net Profit (Loss) $             –  

If you’d like a changeable balance sheet template, feel free to email me at susan.ball5@aol.com, and I’ll send it your way!

Know Your Financial Statements: Understanding the Balance Sheet

Many small business owners find financial statements intimidating, but they don’t have to be. Understanding your financial statements is key to managing your business’s health and growth. In this blog post, we’ll break down the balance sheet—one of the most essential financial statements you need to know.

By the end, you’ll have a clearer understanding of how your business’s assets, liabilities, and equity come together to tell the story of your company’s financial health.

What Is a Balance Sheet?

A balance sheet provides a snapshot of your business’s financial position at a specific point in time. It outlines three core components:

  • Assets: What your business owns
  • Liabilities: What your business owes
  • Equity: The owner’s stake in the business

The fundamental equation behind a balance sheet is:

Assets = Liabilities + Equity

This equation shows that all assets are financed either by the owner’s investment, debt (liabilities), or retained earnings (profits that remain in the business).

Assets: What Your Business Owns

Assets are the resources your business owns or is owed. They can be divided into two main categories: Current Assets and Fixed Assets.

Current Assets

These are assets that can be converted into cash or used within one year. They include:

  • Cash: Money in bank accounts and on-hand
  • Accounts Receivable: Money owed to the business, typically due within a year (e.g., unpaid customer invoices, credit card balances)
  • Inventory: Goods held for sale or used in production

Inventory Valuation Tip: Inventory can fluctuate in value over time. A common method is the FIFO (First In, First Out) method, where older inventory is sold first. This helps ensure the most recent purchases are valued accurately.

Fixed Assets

Fixed assets are long-term investments that have a stable value and are expected to last for more than one year. These include:

  • Furniture, fixtures, and equipment
  • Property and real estate
  • Vehicles

Depreciation: Fixed assets lose value over time due to wear and tear. Your accountant will help determine the most beneficial depreciation method for your business, as set by the IRS.

Liabilities: What Your Business Owes

Liabilities represent debts your business is obligated to pay. These are also categorized into two types: Current Liabilities and Long-Term Liabilities.

Current Liabilities

These are debts that need to be paid off within a year, including:

  • Accounts Payable: Money owed to suppliers for purchases made on credit
  • Accrued Expenses: Unpaid expenses like utilities and payroll
  • Short-Term Loans: Loans due within the next 12 months
  • Taxes Payable: Unpaid taxes, such as sales tax or payroll taxes

Long-Term Liabilities

These are debts that won’t be paid off within the next year, including:

  • Bank loans
  • Mortgages

Equity: The Owner’s Investment and Retained Earnings

Equity represents the value of the owner’s investment in the business. It shows how much of the company’s assets belong to the owner after liabilities are subtracted.

Owner Investment vs. Retained Earnings

  • Owner Investment: Money the owner invests to fund the business’s start-up or operations (also known as Owner’s Injection).
  • Retained Earnings: Profits that are kept in the business rather than taken out by the owner for personal use. These earnings are used to fuel growth and expansion.

If your business is incorporated, the value of the owner’s investment is shown through stock shares issued to the owner. For sole proprietors or LLCs, the investment is recorded directly as part of the business’s equity.

How to Create a Balance Sheet for Your Business

To create your own balance sheet, start by listing all your assets and liabilities. Here’s a simple balance sheet template you can use:

Balance Sheet 
Company Name 
  
 2025
Assets: 
  Cash 
  Account Receivable 
  Furnishing 
  Equipment 
 Net Fixed Assets 
Total Assets $                 –  
  
Liabilities and Equity: 
  Accounts Payable 
  Notes Payable 
  Long-term Debt 
Total Liabilities                    –  
  Owner’s Injection 
  Retained Earnings 
Total Equity                    –  
  
Total Liabilities + Equity  $                 –  

If you’d like a changeable balance sheet template, feel free to email me at susan.ball5@aol.com, and I’ll send it your way!

Final Thoughts: Why the Balance Sheet Matters for Your Small Business

Your balance sheet is more than just a snapshot of your business at a specific point in time. It’s a valuable tool that helps you:

  • Understand the financial health of your business
  • Track your growth and plan for future investments
  • Make informed decisions about spending, borrowing, and retaining earnings

By regularly reviewing your balance sheet, you’ll be better equipped to manage your finances and maximize your profits. Have questions about your business’s balance sheet? Or need help understanding your financial statements better? Drop your questions in the comments below, and I’ll get back to you as soon as possible.