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Business operations refers to the processes you put in place to run your company. From the development of your products to their marketing and sales, your teams use operations to execute ideas. 

There are 2 key parts of business operations: process development and optimization. When a business first forms, teams will focus on operations development, which addresses who does what within the company. Then, as the company grows, teams will optimize the operations processes to save money and grow sales. 

Your business operations have a big impact on your business. Learn more about this aspect of your company and how to improve it over time. 

Why Are Processes Important?

Processes are a key aspect of your business operations. Anything that needs to get done in your company follows a set process. Your processes range from making key deliveries to establishing office best practices. There are multiple reasons why you need to develop clear processes—and why these processes need to documented. 

1. Processes allow for standardization. When everyone does the same thing the same way, you and your customers will always know what to expect.
2. Processes prevent burnout. Your team members can know what is expected of them and won’t feel pressured to take on tasks outside of their set roles.   
3. Processes can streamline your onboarding. New team members can quickly learn their roles and requirements by following existing processes. 
4. Processes promote fairness. This way, one team member doesn’t follow a set of rules while other employees ignore them. 
5. Processes create opportunities for improvement. Rules are meant to be broken and improved upon. Once you have a process in place, you can start optimizing it. 

For example, say a startup e-commerce retailer wants to create a weekly newsletter with items that are on sale. However, without a clear process, there are no guidelines for which items are promoted and which ones aren’t.

There isn’t a template for sending out the newsletter, so creating it is time-consuming—and if an employee sends out the newsletter and quits before documenting the process, no one knows how to keep it running. There never was a clear process, so a potential revenue driver is forgotten or ignored.

What Happens During Business Optimization?

The first year of your business is often spent on process development. You want to add a new feature to your company, so you create a process to grow your business operations. However, as your company grows, you may want to change these processes through optimization. In large companies, there are entire departments dedicated to optimizing business operations. 

During the optimization process, teams review business processes to see how they can be improved. These employees are looking for ways to save time, money, and energy while also looking to reduce risk. 

For example, Amazon’s site speed plays a significant role in its revenue. If the website slows by even 100 milliseconds, sales will drop by 1%. When Google’s pages take an extra half-second to load, search traffic drops 20%. By keeping the business operations for Amazon and Google running at their best, the 2 companies can keep customers happy and increase sales. 

There are multiple reasons why a company will look at a specific process to improve business operations. However, one of the most common reasons is that something isn’t working: 

• A process that should take a few hours is taking weeks. 
• A system that is meant to help customers is frustrating them. 
• Employees are making more mistakes or experiencing injuries after a new tool is introduced.

All of these factors alert operations managers that something is wrong. By intervening to address weaknesses in the systems, managers can improve business operations to help employees—and the company’s bottom line. 

How Can You Audit Your Business Operations? 

There are multiple ways to audit your business operations—and multiple reasons to do so. Some managers start with a full business operations audit whenever they are hired to a new company or department. They want to know how everything works and what can be improved. Other leaders conduct operational audits when developing their annual budgets or when an employee leaves. 

Follow these steps to audit your business operations: 

1. Make a list of key processes within the organization. Each employee can make a note of their specific processes. 
2. Talk to employees about how processes are completed. Focus on how long each process takes and the number of people who are involved. 
3. Ask for feedback on these processes. Do your employees have any ideas for how they can be improved? What might help them to complete their work faster—or better?   
4. Remove steps or change how processes are done. Clearly create instructions documenting the new processes and ask your employees to follow them. 
5. Track the progress of the new processes. Make sure they make sense and aren’t affecting your team members or other operations methods in any way. 

These steps may seem simple in theory, but they’re more complicated in practice. While 1 change might benefit the company and help you save money, it could also hurt your brand or employee morale in multiple ways. 

For example, to save time, a company might cancel its weekly team meetings and opt for an internal email instead. This might seem like it saves an hour; however, it could cost team members in other ways.

One employee might lose 2–3 hours collecting updates from managers and sending out that email. Other employees might ignore the email and miss important messages that they would hear in an in-person meeting. As a result, business operations suffer even though the change was designed to improve them. 

You Constantly Need to Improve Your Business Operations 

There will always be room to improve your business operations. New tools can help you to automate processes or save employees’ time. Your staff can keep coming up with ideas that improve their workflow.

However, if you’re dedicated to understanding your processes thoroughly and finding ways to do them better, you can stay involved in your operations—and lead your company toward growth. 

If you want to run your own business, you have basically 2 options: start your own or take over an existing company. Operating an existing small business, either through purchase, franchising, or inheritance, can take the pain out of many of the challenges new businesses face, like building a customer base or having data on seasonal sales patterns.

Of course, the business you buy may not be running at an optimal level. Before buying a business, you should understand how to scrutinize existing businesses and how to strategize and leverage the strong elements of a business toward more growth.

In researching how to buy businesses, you’ve probably come across the concept of a “turnkey business.” This refers to a type of business for sale that’s ready for a new owner right away. Read more to learn what’s involved with turnkey businesses, why you might want to buy one, and what you should look for when comparing your options.

Understanding Turnkey Businesses

To be considered a turnkey business, a company must be fully functional and operating at full capacity. This doesn’t necessarily mean the business is profitable, but it can’t be majorly hindered by problems like broken equipment or missing infrastructure.

Of course, not every turnkey business exists in a physical space like an office or strip mall, but all are ready to continue operations upon purchase. Examples could include a restaurant under new management or a laundromat looking for a new owner. In some cases, the new owner might not change anything—one day, the business was making money for its previous owner, and today it’s turning a profit for you.

In many cases, though, there’s a reason that a business is put up for sale. Sales could be flagging, the seller might not want to run a business anymore, or the seller might need cash. Additionally, you might sense that there are ways you could expand the business better than the previous owner.

What Are the Benefits of a Turnkey Business?

Alongside this, another advantage of a turnkey business is that the company’s proof of concept usually works. There could be issues with profitability, management, and sales, but you typically aren’t reinventing the wheel when you buy a turnkey business—most turnkey businesses are either running well in the moment or in the very recent past, or else you might have a plan about how you can make the company profitable.

A disadvantage to turnkey businesses, especially franchise situations, is that the business might already be locked into contracts and obligations that you aren’t interested in maintaining. However, if you buy the business, you’ll then be a party to these pre-existing agreements.

How Do You Find a Turnkey Business?

Purchasing a franchise location is another common way to buy turnkey businesses, although it’s also one that comes with some major restrictions imposed by a corporate entity—which is both an advantage and a disadvantage. Franchises are known among the small business crowd for their lower failure rate compared to small businesses overall.

You might also consider multi-level marketing (MLM) businesses, where you sign some agreements and pay for inventory—a type of turnkey business—but these types of companies remain controversial and have a shaky rate of success.

Like with all other forms of shopping, a very popular way to find turnkey businesses is to browse online. A quick Google search will pull up several platforms with businesses for sale in your city, state, or region. In this situation, all the due diligence is on you to make sure the purchase is worth the investment.

“Look at the existing infrastructure and make sure you understand everything that comes along with the purchase,” the Small Business Administration recommends. “Don’t be afraid to ask questions about contracts, leases, existing cash flow, and inventory. The more you know, the better equipped you’ll be to make a sound decision.”

How Do You Buy a Turnkey Business?

When looking for a turnkey business, you should consider 3 key aspects: customer fulfillment, marketing, and sales ability. You should measure how well the company serves its customers so they’ll return with future business. Pay attention to how the company markets itself and how well its brand penetrates the marketplace. Finally, you should look at the sales ability of the company—how does it leverage its marketing toward actual sales?

Once you find a seller, you should hire a financial expert to do an appraisal so you get an accurate price for the company and its various assets, talent, customer networks, and other valuable elements. To make the sale, you will probably have to explore your funding options unless you have all the cash on hand. Online lending platforms like Lendio make finding loan options easy, so you can take your business to the next level. 

Choosing your business structure is one of the most important decisions you’ll make for your business. And—for better or for worse—it’s also one of the first decisions you’ll make. While it’s possible to adjust your business entity down the road, it’s easiest for you to start things off on the right foot.

The entity type you choose doesn’t just add fun professional-sounding designations to your name, like LLC or Inc. Your business structure also impacts how you manage your business, pay taxes, keep records, find financing, and mitigate risk.

To put it in perspective, choosing a specific entity type could lower your taxes and reduce complexities. However, it could also open up your personal life to harmful debts and expensive lawsuits. These are the kinds of opportunities and consequences you’ll need to consider.

While we can’t make the hard decisions for you, we can give you all the information you need to make confident, educated choices regarding your business type.

However, due to the legal and tax ramifications surrounding choosing a business type, it’s always a good idea to involve an attorney and tax professional. These professionals will be familiar with your state’s specific legal nuances and help you make the best decision for your particular business.

This guide will walk you through the 6 types of business entities you should consider. We’ll talk pros, cons, and who benefits most from each entity type. First, let’s get on the same page with a brief overview of business entities and why they matter—then, we’ll get into the details behind each type.

What is a business entity?

There’s no “best” type of business entity. The right entity for your business will depend on your structure, size, scale, industry, comfort with risk, and personal preference. 

Before we dive into deeper terms, let’s define a business entity.

A business entity is an organization formed by 1 or more persons to facilitate business activities or to engage in trade (buying and selling). Businesses are created at the state level, meaning that you’ll need to register your organization with your state and comply with the laws, regulations, and fees required.

Pass-through entities.

Pass-through entities (or flow-through entities) are business types that treat business income as the owners’ personal income. Common pass-through entities include:

• Sole Proprietorships
• Partnerships
• Limited Liability Companies (LLCs)
• S Corporations

Most small businesses (around 95%) opt for the pass-through entity structure to reduce tax obligations and for their easy setup. However, owners will have to pay taxes on income they may never receive as individuals—for example, if the business’s profits remain in the business.

Why does your entity type matter?

Your entity type impacts everything from your business’s name to your tax obligations to your legal liabilities. Here’s what to consider when making your choice:

• Structure: Some types of businesses are structured for solo operations (sole proprietorships), while others are formatted for 2 owners (partnerships) or many more shareholders (corporations).
• Taxes: Pass-through entities pay income taxes for the business on their personal tax return, while corporations pay business taxes separately. However, corporation shareholders often face “double taxation“—first, the company must pay tax on profits distributed to shareholders, and shareholders must then pay dividend tax on their personal tax returns.
• Regulations: Government regulations at the federal, state, and local level vary based on your entity.
• Scale: Some entities are meant to be run by a single individual, while others support more owners and employees. If you plan on being the sole owner and operator of your business forever, a sole proprietorship is all you’ll likely need to consider. However, if you plan on scaling, you’ll
• need to weigh other entity types down the road.
• Financing: Your entity type impacts the way lenders consider and process your loan applications. For example, if you’re looking to sell shares (which is essentially ownership) of your business to raise capital, you’ll need to be a corporation.
• Legal risk: Different entity types limit your personal liability from business debts and lawsuits. This helps protect your personal assets.

The 6 types of business entities.

There are a variety of business entity types to consider: everything from sole proprietorships to corporations to nonprofits and beyond. It’s a lot to weigh, so we’re going to limit our coverage to the 6 most common (and likely most suitable for small businesses) entity types:

• Sole Proprietorship
• General Partnership
• Limited Partnership
• Limited Liability Company 
• S Corporation
• C Corporation

Below, we’ll break down the nuances of each entity type—the good, the bad, and the ugly.

Sole proprietorship

A sole proprietorship is the simplest and most popular business structure in the United States, with over 23 million currently in existence. It’s an unincorporated business owned by a single person (or a married couple). Because a single person owns it, you get complete control over every aspect of your business—you call all the shots. 

However, with this complete control also comes total liability. That means you and your personal assets are at risk for any debt or lawsuit issues. It’s scary, but some industries and natures of work are less risky than others.

New business owners who work in an industry with little-to-no liability and who don’t own significant assets that could be claimed in a legal dispute should consider a sole proprietorship. If you’re looking to launch a solo-operated business, consider starting as a sole proprietor and changing your business entity down the road.

Examples of sole proprietors often include:

• Freelancers
• Amazon businesses
• Consultants
• Accountants
• Bakers
• Tutors
• Fitness instructors

If you never register your business, then you’re considered a sole proprietorship. As a sole proprietorship, there’s no distinction between you (the owner) and the business—they are one and the same for all intents and purposes. You’ll report your business’s profit and losses on your personal tax return.

If you choose to remain a sole proprietor, you’ll never need to register your company unless you want to set up a retirement account or begin hiring employees. In that case, you’ll need to apply to the IRS for an Employee Identification Number (EIN)—the Small Business Administration (SBA) says “you need [your EIN] to pay federal taxes, hire employees, open a bank account, and apply for business licenses and permits.”

Pros of a sole proprietorship:

• Easy to set up—you may never need to register with your state
• Complete ownership
• Simple to report your business profit and loss on your personal tax return

Cons of a sole proprietorship:

• Personally liable for business debts and lawsuits
• Can be challenging to raise capital
• Business lives and dies with you—literally

General partnership

There are 2 main kinds of partnerships: general partnerships (GPs) and limited partnerships (LPs). A general partnership is essentially the same thing as a sole proprietorship, just with 2 or more owners. Each owner shares the business’s profits, debts, and liabilities.

As with a sole proprietorship, it’s not necessary to register a partnership—it’s the default entity type when multiple owners begin doing business together. This simplicity is often a big reason general partnerships form.

Business owners who trust each other and feel confident sharing profits, losses, control, and liabilities should consider a general partnership. If your business is young and you don’t have major personal assets to lose, a general partnership may make sense at the beginning. As you grow, you may want to consider changing your entity type in order to scale your business, reduce personal liability, and access equity financing.

All partners share a general partnership’s profit or loss and report them on their personal tax returns. They also share responsibility for debts and legal liabilities—this is known as joint liability. Joint liability means that each owner is responsible for the actions the partnership takes. For example, if your partner engages in illegal, criminal, or fraudulent activity within the business, you may be held responsible—even if you’re innocent and ignorant of the behavior.

Because each partner is considered equal in the relationship, they each have the authority to enter into contracts or deals on the business’s behalf. For this reason (and many others you may be imagining now), it’s crucial to choose a reliable partner you can trust.

Pros of a general partnership:

• Easy to set up—you may never need to register with your state
• Partners share ownership and control
• Simple to share the business’s profits and losses and then report them on your personal tax return
• Shared liability in the case of business debt or lawsuits (this could be a pro or a con)

Cons of a general partnership:

• Can’t raise equity financing
• Personal disputes can lead to business dissolution or failure
• Shared liability in the case of business debt or lawsuits (this could be a pro or a con)

Limited partnership

A limited partnership is a more secure version of a partnership, and it requires you to register your business entity with the state. Limited partnerships have 2 types of partners: general partners and limited partners.

• General partners: General partners are the partners who own and operate the business. They also share liability for the partnership.
• Limited partners: Limited partners (also known as “passive investors” or “silent partners”) are investors in the business who typically don’t manage day-to-day tasks, responsibilities, and decision-making. Consequently, limited partners lack control of the business operations, affording them significantly fewer liabilities.

Because limited partnerships are a more formal business entity, you’ll need to register your business, hold annual meetings, and create a partnership agreement.

If you’re looking for equity financing and don’t want to form a corporation, a limited partnership can help you maintain more control of your business while also enabling you to pool resources and raise capital. This makes limited partnerships a great option for family-owned businesses or real estate companies that need combined resources but whose investors may not want to share liability with the company.

A limited partnership is still a pass-through entity, so it doesn’t pay taxes on business income. Instead, each partner claims a share of the business’s profit and losses that they report on their personal tax return.

Pros of a limited partnership:

• Limited partners don’t have to pay self-employment taxes
• Raising capital for your business is easier since your investors have limited liability
• Simple to share the business’s profits and/or losses and then report them on your personal tax return

Cons of a limited partnership:

• Requires more paperwork than a sole proprietorship or general partnership
• General partners still have shared personal liability in the case of business debt or lawsuits

LLC (limited liability company).

The LLC business type was created with small businesses in mind. It gives owners the option to become a little bit more official and protect their personal liability in the process.

An LLC is a hybrid business type that combines elements of general partnerships and corporations. With an LLC, you separate your business identity from you and any other owners. This means you’re no longer personally liable if any financial or legal issues arise.

Plus, registering your business as an LLC gives your business an air of professionalism. The abbreviation “LLC” will now be included in the legal title of your business—pretty cool, huh?

While an LLC is a little bit more complicated than a sole proprietorship or partnership, it’s certainly less complex than corporations. You’ll still need to register your business and fill out some basic paperwork for your LLC, but you won’t have to maintain the intensive record-keeping and meeting-heavy regulations that C corporations and S corporations have.

LLCs are taxed as pass-through entities, meaning the owners will split their share of the profits and losses to report them on their personal tax returns. You get to choose whichever tax method is most advantageous (and applicable) to your business: sole proprietorship, partnership, or even corporation. On the downside, the LLC members will have to pay taxes on the business’s earnings, even if they never personally receive them. 

Pros of an LLC:

• Owners no longer have personal liability for business debts and lawsuits
• You can choose to be taxed as a sole proprietorship, partnership, or corporation
• Fewer regulations than corporations

Cons of an LLC:

• Must register with the state, which requires a fee
• Owners of the LLC will have to pay taxes on business profits, even if the business keeps the money as retained earnings

C corporation (C-corp)

Now, we enter the realm of corporations. A C-corp is a separate entity apart from the owners, and stockholders share business ownership.

Each stockholder has limited liability in the business, but they also have limited control. Stockholders elect a board of directors, and this board is responsible for making key business decisions (including choosing leadership). Corporations are legally required to have board and shareholder meetings, keep meeting minutes, and maintain more intensive bookkeeping records.

As a separate entity, C-corps must pay their own business taxes (owners do not report business profits and losses on their personal tax returns). As of 2018, all C-corps pay a flat 21% federal income tax. Corporations offer additional tax deductions—and you also mitigate self-employment taxes—but you will face double taxation if you provide dividends.

Consider registering as a C-corp if you want to sell ownership of the company in exchange for capital and want to reduce personal liability.

Pros of a C-corp:

• Limited liability for business owners
• More available tax deductions and lower self-employment taxes
• You can sell shares to raise capital
• No limit to the number of shareholders

Cons of a C-corp:

• Control of the business is shared among stockholders
• More expensive business registration fees
• Business losses can’t be deducted from your personal tax return
• Must comply with additional regulations (meetings, minutes, bookkeeping, etc.)
• Double taxation

S Corporation (S-Corp)

An S-corp is similar to a C-corp except for a few tax and regulation nuances. S-corps have the same limited liability as C-corps, but they’re taxed as pass-through entities, meaning you’ll report business income and losses on your personal tax return.

If you want the protection, structure, and available equity financing of a corporation with the taxation of a pass-through entity, an S-corp is the right entity type for you.

Pros of an S-corp:

• Owners don’t have personal liability for business debts and lawsuits
• You can sell shares to raise capital
• No double taxation

Cons of an S-corp:

• Expensive to start
• Must comply with corporate rules (like board and shareholder meetings and bookkeeping standards)
• Limit to the number of shareholders—no more than 100

Choose the right entity type for your business.

There’s no best business entity. You’ll need to examine the types, evaluate the pros and cons, and make the most advantageous decision for your business.

If you’re struggling to choose, consult a legal or financial professional. The money they can save you now by making the right decision is worth much more than their consultation fees—a lot more.

And remember—you can always change later. It’s generally easy and straightforward to progress from a sole proprietorship or partnership into an LLC or corporation—although the inverse can be a bit more tricky—but don’t let choosing your entity type slow you down from starting your business!

Reimbursable expenses are charges that you accrue when working for a client or an employer. They are the costs that come with completing a job or task. Instead of paying for those charges out of pocket, you will submit the costs to your employer or client for repayment—often with copies of the receipts.

Keeping track of reimbursable expenses is important if you want to save money and manage your business effectively. Let’s review some common reimbursable expenses and how to get paid for them.

What Does Reimbursable Mean?

You may encounter many examples of reimbursable expenses within your business. For example, if an employee travels to a conference for work, they can report the hotel stay and airfare as a reimbursable expense if they pay for those travel costs with their personal accounts. If an employee visits a print shop or picks up catering ahead of a staff meeting, these charges may also be reimbursable expenses. 

Companies need to set clear guidelines for what counts as reimbursable. For example, most companies have guidelines for reimbursing mileage rates when employees use personal vehicles for business purposes. They also set per diem amounts for what employees can spend when they travel. These guidelines prevent team members from spending $200 at a steakhouse and then asking their employer to pay them for it. 

Most businesses will ask employees to gain approval on costs before charging them. This prevents conflict between employees who have already spent the money and employers who didn’t approve the costs. Pre-approval can also speed up the reimbursement process.  

How Do You Invoice for Reimbursable Expenses?

Typically, each reimbursement invoice will have the same pieces of information for company review. These can include:

• The purpose of the charges (ex. February conference)
• The category of the expense (ex. Hotel stays, gas mileage, printing costs, etc.)
• The cost of each expense (ex. $250 for hotel stays, $50 for gas, etc.)
• The date of the expense
• Receipts for each of the charges confirming the amount, the items purchased, and the date.

If you operate a business where you frequently reimburse employees, or if you seek out reimbursements from clients, consider downloading an app that specifically records business expenses. 

There are tools like BizXpenseTracker and Expensify where you can scan receipts and record expenses while you are on the road. You can even auto-generate invoices and send them to clients from the app. This can save money and reduce the frustration of filling out invoices after a trip. 

Are Reimbursable Expenses Income?

For example, let’s say you ask an employee to order business cards with a plan to reimburse them. The employee doesn’t profit from the business cards and doesn’t get any money from the process of buying them. They essentially loan your business money by paying for it out of pocket. You are not paying them a salary to purchase the business cards but rather repaying them for the cost of doing business. 

Reimbursements should not be recorded as income because it will have tax implications if that is how it’s organized. Your employee is not earning higher wages because of the reimbursement, so it shouldn’t be considered income.

Are Reimbursable Expenses Taxable?

First, this is not actual income. You are simply paying employees back for your cost of doing business. Next, employees use their already-taxed income to pay for your business expenses. Adding taxes to that is double-taxation. 

As an employer, it’s up to you to make sure you separate your reimbursable income from your wages. It may be convenient to combine invoices or include reimbursements in payroll, but this can make your taxes more complicated when you submit them. You can’t expect to remember which income is reimbursed, and your accountant won’t know either. 

Instead, continue to pay employee wages as you normally would, even if your team members are owed reimbursements. Then, create a separate accounts payable account for team reimbursements. 

Your accounting department can write checks to your employees (or deposit them directly from your account) in order to keep the funds separate. This way when you submit W-2 or 1099 forms in the spring, the business expenses won’t be part of the income. 

Keeping separate accounts can also protect your business. If you are audited by the IRS, you can prove that your wages are accurately reported and your reimbursable expenses are organized and paid out. 

Categorize Your Expenses With Lendio's Software

With Lendio's software, we have auto-categorization features that can help you sort through your expenses. With just a few minutes each day, you can stay on top of your books. Try our service out to see how you like it—it’s free for small businesses. 

As a business owner, you have a lot of financial matters to balance. Maintaining financial health, stability, and growth involves calculating many different metrics to make sure your business is on the right track to hit the goals you’ve set for yourself.

An important metric to track within this process is your business’s cash conversion cycle. This number can help you understand how well you’re managing the process of buying inventory, collecting payments from customers or clients, and then paying your vendors for that inventory. 

Getting a better grasp of the cash conversion cycle and how it demonstrates the financial health of your business can help you stay on top of cash flow and inventory management, among many other important facets of your operations. 

Let’s explore the cash conversion cycle, how to calculate it, what a good cash conversion cycle looks like, and why this metric matters to your business.

What Is the Cash Conversion Cycle?

In other words, the cash conversion cycle tells you how much time is between paying for inventory and/or supplies and getting paid by customers or clients.

Typically, you only calculate your CCC if you run a business that regularly handles inventory or materials, such as a retail business or construction company.

You may also know this metric by its other names—cash cycle, cash-to-cash cycle, or net operating cycle. However, it shouldn’t be confused with the operating cycle, which is a different metric altogether. 

Operating cycle refers to the total number of days between when you purchase inventory and when customers pay for the inventory. In contrast, net operating cycle (aka CCC) is the length of time between actually paying for the inventory and collecting the payments from customers who’ve purchased inventory. This timeframe can include net-terms with you and vendors or your customers.

How Do You Calculate Cash Conversion Cycle?

• Revenue
• Cost of Goods Sold (COGS)
• Starting and ending Accounts Receivable (AR)
• Starting and ending Accounts Payable (AP)

Here are the 3 elements that make up the CCC formula and how to calculate them:

Days Inventory Outstanding (DIO): This number is the average time it takes to convert inventory into goods you then sell. Find the DIO by taking your average inventory for the period you’re measuring, divide it by the COGS, and then multiply by the number of days in the period you’re measuring.

• (Beginning inventory + ending inventory) / 2 = Average inventory
• (Average inventory/COGS) x number of days in period = DIO

• (Beginning AR + Ending AR) / 2 = Average AR
• (Average AR / net sales) x number of days in period = DSO

• (Beginning AP + Ending AP) / 2 = Average AP

• (Average AP / COGS) x number of days in period = DPO

• Beginning inventory + Purchases - Ending inventory = Cost of Sales
• Average AP / (Cost of Sales / number of days in period)

• DIO + DSO - DPO = CCC

What Makes a Good Cash Conversion Cycle?

That means the goal is to have as low of a CCC as possible to ensure the best possible financial health of your business. Having a negative CCC is even better because it means your cash isn’t tied up for long at all. In fact, there’s no time spent waiting to get paid. 

However, it’s important to note that online retail businesses are more likely than others to have a negative CCC. That’s because these businesses typically use drop shipping, meaning they don’t hold inventory and don’t have to pay for inventory until customers pay them first. This process also helps e-commerce stores manage a lot of the working capital problems that come with traditional brick-and-mortar retailers.

Here are some elements that make up a good CCC:

• Lower inventory turnover
• Correctly forecasted inventory needs
• Collecting outstanding payments on time
• Paying bills more slowly than collecting payments

Why Your CCC Is Important

You also can use your CCC to compare your business’s financial state to that of your competitors. It can give you a better idea of where you stand in terms of business practices and market share.

When your CCC is solid, it often means that you are managing your business operations, including inventory acquisition, turnover, and client or customer payments, well. That can make you feel more confident about the state of your business.

The Paycheck Protection Program (PPP) effectively kept the small business economy afloat over the last 15 months, pumping nearly $800 billion into an estimated 12 million businesses across the US. But the PPP loan money ran out just a month after the program’s deadline was extended in March, and those crucially important potentially forgivable loans are no longer available to help small businesses.

Recent months have still not been easy, even with the lifting of restrictions. While many businesses are reopening, the costs of reopening are making for anything but business-as-usual. Supply chains are broken, staffing is tremendously difficult, and this is not the dream reopening business owners had hoped for during the long slog of COVID-19 closures. 

PPP is no longer available, but other forms of loans, microloans, grants, and debt relief are available to your small business. Most of these are administered by the government agency US Small Business Administration, and many are COVID-19 relief programs that offer loan forgiveness or other cost-cutting accommodations that take into account the current economic challenges. Let’s look at some PPP alternatives that could still offer your small business economic aid for any loss of revenue you’ve suffered under COVID-19. 

COVID-19 EIDL

The COVID-19 Economic Injury Disaster Loan (EIDL) “provides economic relief to small businesses and nonprofit organizations that are currently experiencing a temporary loss of revenue” because of the pandemic, according to the SBA. EIDLs had existed before COVID-19, but the program was recently bolstered to provide more economic help for small businesses. Traditionally providing loans of up to $150,000, EIDLs can now potentially triple in size to $500,000, and your first repayment date won’t be for another 18 months. While interest is charged on these loans, it’s a low fixed rate of 3.75% for businesses and 2.75% for nonprofits.

Other relief funds in the EIDL program may be available if you’ve already applied for an EIDL. The Targeted EIDL Advance Grant provides up to $10,000 to businesses with 300 or fewer employees, that can show a 30% loss in revenue for any 2-month period of the pandemic, and are located in a low-income community (you can use this map to determine your community’s status). Similarly, the Supplemental Targeted Advance could provide an additional $5,000 that does not have to be paid back, but it’s only for businesses with 10 or fewer employees.

Other SBA Loans

• SBA Express Loan - The quickest, easiest, and most flexible of these loans, and the SBA responds to SBA Express Loan applications within 36 hours. The funds can be used on working capital, a line of credit, or a commercial real estate loan.
• 7(a) Loans and Microloans - These SBA loans are primarily intended for purchases involving real estate but can also be used for working capital, refinancing debt, or buying furniture and supplies.
• SBA 504 Loan - The SBA 504 Loan is intended to finance large projects that create additional jobs. Funds are meant to finance purchasing or constructing buildings and buying or modernizing facilities. 

Shuttered Venue Operators Grant

This program has worked out pretty well, and most of the fund is still waiting to be awarded. According to the SBA’s mid-July figures, only $5 billion of the total has been awarded, though the SBA has received nearly $12 billion requested in applications. The funds may start to disappear fast.

Restaurant Revitalization Fund

It’s a reminder that as helpful as government relief programs can be, they can still be thwarted by legislative uncertainty. Private lenders may offer less confusion and red tape, and an online lending marketplace can help you find the right small business loan.

Online Small Business Loans

There are a number of factors you may want to consider before taking out a loan. Consider your business’s creditworthiness, whether you’ll be willing to offer collateral, and what your specific plans are for the loan. And do be ready to dig up and present a fair amount of bookkeeping documentation. But you may find other COVID-19 relief for your small business—and maybe without the headaches of previous loan programs.

Along with the growth and diversification of the US economy came the need for more organization and data relating to tracking registered businesses. The Department of Labor, Chamber of Commerce, and Census Bureau were all curious about the trends of businesses within different industries.

With these goals in mind, the government developed codes for company identification. Learn more about SIC codes and NAICS codes below. 

What Is a SIC Code?

SIC stands for Standard Industrial Classification and refers to a 4-digit coding system that categorized businesses based on their activities. These codes differentiate macro industries (like mining versus agriculture) along with smaller differences (like soy farming versus corn farming).   

SIC codes were created by the United States government in 1937 to better analyze economic activity across the country. 

What Is a NAICS Code?

NAICS codes are very similar to SIC codes. In fact, NAICS (North American Industry Classification System) replaced the SIC system for the most part in 1997. The NAICS code was developed as part of the North American Free Trade Agreement with the United States, Canada, and Mexico. 

NAICS codes are 6-digit codes that identify your business type. You will use your NAICS code for a variety of purposes to identify your industry.

How Do I Find My Company’s SIC Code?

The US Department of Labor has a SIC code lookup tool you can use. You can either search by SIC code or enter a few keywords to find the SIC code you need. This database uses the 1987 version of SIC guidelines.  

How Do I Find My Company’s NAICS Code?

The NAICS Association has a code lookup tool and a company lookup tool. You can identify your newly formed company with this search system or look up codes for your existing business. The website starts with high-level categories and lets you drill down to specific industries and business types. 

Know Your SIC and NAICS Code

If you work for a modern business, you might not have a SIC code. You might just use the NAICS system. This is a self-identification system, so you can label your business as you choose. It is important to know your NAICS code to set up certain financial accounts and to report your business to the government.