Five Acronyms Every Small Business Should Know

P&L – Profit and Loss Statement

Your Profit and Loss Statement (or income statement) describes your company's overall performance. The P&L tells how much money you're making in your business and how you're making it. It measures revenues received and costs incurred over a certain period of time. It tells you if you're making money or not, and how much you're making or losing.

Go over each line item, and compare it with the previous month's P&L. If you don't understand what a line item represents, find out. The numbers should make sense to YOU, not to your accountant. And if you haven't already, organize the line items so that similar items are closer together. The default setting in most financial software usually lists the expenses alphabetically. For example, it makes sense to see "Product Packaging Materials" next to "Merchandise Purchased for Resale." Feel free to combine line items to make your P&L more concise, and/or break apart line items to show you more details so you can make some sound business decisions based on what the numbers are telling you.

COGS - Cost of Goods Sold

Also referred to as the "cost of sales," COGS are the direct costs attributable to the production of goods sold. This includes material cost and production (labor) costs but does not include indirect cost like advertising or R&D. COGS will show up on your P&L Statements. Watch the percentages, not the actual dollar amounts from one month to the next. The percentage should stay pretty much the same with regards to revenues.

EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization

This is the most complicated of the acronyms we're discussing today, but essentially EBITDA measures the core income that your company earns before your cover your debt payments and income taxes. It's an indicator of operating performance and profitability, but it's not a good measure of cash because it doesn't include changes in working capital.

EBITDA will be important if you want to sell your business; it allows buyers or investors to evaluate your operating profitability and profit trends without the unique variables that might distract from bottom line performance.

EBITDA is a good way to measure your profitability, but be forewarned: even businesses with a great EBITDA can go out of business due to cash flow. EBITDA leaves out the cash needed to fund working capital and the replacement of old equipment. Profits are great, but if you have no cash, your business will "bleed out" pretty quickly.

BEP – Break-Even Point

This is one of those numbers you want to know by heart and just like it says, this important indicator tells you at what point your business "breaks even." It is the dollar amount of revenues that exactly covers all your operating expenses (variable and fixed costs), with nothing left over for profit. It's an important indicator of risk because it shows you how close your business is to the "no profit" line. For instance, if your business is currently producing revenues at the level of $100,000 per month, and your break-even point is $60,000 per month, you are comfortably above your no profit line. You want your BEP swimming in your head at all times. It's your minimum target for slow months, and it's where emergency on your hands.

CR and QR: Current Ratio and Quick Ratio

Current Ratio = [Current Assets ÷ Current Liabilities]

The current ratio measures your ability to meet short-term obligations by determining if you have enough current assets to cover current liabilities. Ideally, your current ratio should be near 2.00, meaning your current assets are two times, or 200%, of your current liabilities. If your current ratio is below 2.00, your short-term debt-paying ability is reduced. This is an unstable financial position, and you should examine your finances to see where improvements can be made. If your current ratio is above 2.00, you have above average debt-paying ability; however, if it is too high, it may mean that you are not utilizing your assets effectively. If it's below a 1, then you've got an emergency on your hands.

Quick Ratio = [(Current Assets - Inventory) ÷ Current Liabilities]

Like the current ratio, the quick ratio measures short-term debt-paying ability. It is calculated without inventory because inventory is not as easy to turn into cash as your other current assets. Thus, the quick ratio examines assets that can be turned into cash in the least amount of time. Businesses that carry a lot of inventory need this important planning tool. Ideally, your quick ratio should be at 1.00 or higher. If it is lower than 1.00, you may have trouble meeting your current obligations. Below 0.5 is an emergency. Note that if you don't carry inventory, your current ratio and quick ratio will be the same.

This doesn't have to be complicated, or difficult to control

All it really takes is a commitment to two things: (1) understanding the relationship between money and your business activities and (2) creating and implementing—on a regular, ongoing basis—a few straightforward money management tools and strategies. When you understand how money flows in your business and you can control your money systems, you will make informed decisions about prioritization, management and investments.

You don't have to be a finance expert; you just have to understand enough to make the decisions that matter. You begin all of your budgeting and forecasting. At a minimum, your revenues (sales) should be at least as high as your BEP. The goal, of course, is to increase this number over time so that revenues (sales) are above the BEP.

If you don't know what your BEP is, you need to find out now. And how many customers does it take to hit your BEP this month? Per week? Per day? How many leads do you need to get that many customers? Also: if you want to lower the breakeven sales number, reduce your cost of goods sold or your operating expenses.

Co-Dependency in Life and Business

Sorry I have been distracted. I have been traveling lately. I've attended several meetings of small business owners and franchisors. I had an interesting moment yesterday. I started to think about relationships. Most lasting relationships start as a passion, and then grow into love. Interestingly many continue to evolve into co-dependence. This is not always a bad thing, but many times it is. As the relationship matures, lives get intertwined. There are bills and houses and cars and children. All of the sudden many couples find themselves needing each other. Neither is capable of supporting all the needs of the relationship alone. You hear terms like "stayed together for the children". In good strong relationships the passion may fade, but the love matures into a friendship that has many of the attributes of co-dependence without the baggage.  One party is willing to subordinate their need for the good of the relationship. They see this as a good thing, not a compromise. Bad relationships disintegrate into keeping score. Co-dependence becomes the ball-and-chain that bonds the relationship. Trying to control a co-dependence by keeping a ledger of who did what, when and how will only breed anger and resentment. The relationship either dissolves or continues in desperation (some quiet, some not so quiet).

So from a business standpoint what's the deal? Small business owners start a relationship with their business that is based on a passion that grows to love. Let me expand that by saying most working people start a career based on a passion that develops into a love for what they do.  Careers and businesses can continue to evolve (or dissolve) into co-dependence. People find as responsibility grows and expands there is a need to bring other players into the mix. Money is required to fund this expansion. The natural order of things becomes complex. Co-dependence is natural. The key, just like in human relationships, is to not let the co-dependence enable bad behavior out of fear of uncertainty.

When there is a co-dependence there is a loss of control. You can't run your business or your work group without other people. The co-dependence may not be on individuals, but processes that need staffing. This loss of control creates uncertainty. Uncertainty is the main driver to stress. This stress will suck the life out of any organization or individual. You want to reduce stress in your life, analyze and act upon the underlying uncertainty.

Letting people do things that are not good for them or the relationship out of fear of losing them is not the answer. Allowing a bad process or culture to continue because there is a fear that changing it will produce adverse reactions is compounding the problem. When bad relationships fall apart there is a retrospective understanding that bad behavior was enabled out of fear of loss.

If you are dealing with a lack of satisfaction in what used to be the passion of your life, accept the existence of a co-dependence. Get to the root of that co-dependence. Deal with the underlying uncertainty. Relying on others is how you leverage ideas. Living with the fear that accompanies loss of control is not the answer. Understand the co-dependence and reduce downside risk. Clarity is the by-product. Clarity reduces stress. Create a friendship with your business. Like all friendships there is give and take that creates trust.

 

Glen Campbell, "Wichita Lineman" "… I need you more than want you and I want you for all time…"

 

 

 

Do You Know How to Nail Jell-O to a Wall?

Do you know how to nail Jell-O to a wall? It can be done, really. The key is the concentration and consistency of the Jell-O. Double the amount of Jell-O powder and simultaneously cut the water in half. Jell-O.com calls this the "Jiggler Recipe". With care nail the Jell-O to a board without disturbing the tension of the surface any more than necessary. It's necessary because you have to drive nails through the Jell-o, just try not to smack the Jell-O with the hammer. Position the board vertically and the Jell-O should hold just fine….

The moral of the story is that almost anything can be accomplished with the right knowledge, experience and tools. Taking a more traditional approach is, to many, like nailing Jell-O to a wall. But to someone with the right knowledge, experience and tools, it's not a big deal.

The American Institute of Accountants in 1931 published a book entitled "The Ethics of a Profession" on page 122 it makes this statement; "In the last few years there has been an effort to employ the services of accountants for prophecy rather than record, this is dangerous." Many bookkeepers and some accountants don't have the business experience and knowledge to extrapolate historic information, meld it with current knowledge and practices and draw reasonable conclusions concerning potential future events. With our litigious society, many won't even attempt it. Times change and so do attitudes. Many CPA's are qualified and willing to provide business advice based on your accounting and financial reporting information. But they will probably provide a disclaimer like this:

"The information presented is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed and therefore should not be relied upon as such. XXXXXX accepts no liability for any direct or consequential loss arising from any use of this information."

What a shame. Small business owners have to take on the risk of either hiring someone they intentionally won't take advice from or hiring someone who will make sure their advice is crafted with all of the legal caveats needed to make it useless. Most small business owners aren't willing to pay for useless advice so they hire someone they won't take advice from and think they are saving money.

Here is my suggestion…before you engage an accountant make sure you trust their knowledge, experience and tools. Don't be "penny wise and pound foolish". General accounting is a teachable skill. In many cases it's just a commodity. If the person you are about to hire treats it as a commodity, beware. True business knowledge and experience is where you find value in accounting. It's the application of accounting that builds value. Don't waste your money on a commodity. Buy value. Hire the company that has both the knowledge of accounting and the business experience and tools to translate it into meaningful value. In the long run you will be much better off.

Using Deferred Revenue to Control Cash

Deferred Revenue is revenue that is considered a liability until it becomes relevant to the business at hand. There are many forms of deferred revenue: gift certificates, software license, prepaid professional services and possibly some retainers when the service delivery schedule is not pre-determined.

Cash is an asset. Period. It is never a liability; never an expense; never anything but an asset. Cash is a current asset, and serves to increase the net worth of whoever is in possession of the cash. Deferred revenue provides cash, but it also establishes a liability because it represents a future event. All deferred revenue will become revenue at some point. You will have to pay sales tax, income tax and possibly royalties eventually.

If your deferred revenue has an expiration date, it becomes revenue on that date. If your deferred revenue does not have an expiration date you will need to develop a procedure for expiring unused services. Anything sold but not redeemed must become revenue at some point. The IRS will not allow you to carry deferred revenue on the book indefinitely. If you don’t have a procedure to recognize this unused revenue they will give you one. Their procedure will accelerate revenue recognition faster than you may want.

How can a business owner use deferred revenue to help their business? It comes down to cash management. During slow periods cash becomes a problem. Selling products or services in a slow period that will be redeemed at a later date is a way of evening out your cash flow. You might have to provide an additional incentive to buy now and collect later, but the discount might be worth the value to you of accelerating cash flow.

In these hard economic times, when banks are not as forthcoming as they have been, it might be wise to find a way to “float a loan” from your customers. Careful accounting is important. You don’t want to sell what you can’t deliver. Understanding the future consideration of your deferred revenue is critical to long term success. Using gift certificates or pre-paid services might be a way of getting over that financial hump in the middle of your down cycle.

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This Month's Quote

“Every successful person I have heard of has done the best he could with the conditions as he found them, and not waited until next year for better”" Edgar Watson Howe

People helping people make better decisions

We provide clarity. We are real people who care about you, your business and the decisions in front of you. We are not just score keepers or guardians of your financial history. We help you identify and understand business situations. We help you formulate potential courses of action. We help you understand the resources available to you to pursue these courses of action. Our goal is to make your path straight and level.

Life is full of stress. It comes from all directions. It's anchored in uncertainty. When we are faced with a problem we don't understand, or we can't envision a solution, or we are not sure we can execute it, stress builds in our lives. Most of the time if you take the time to identify the problem both in detail and in writing, itemize the potential outcomes of the problem, select the worst possible outcome and construct a plan to mitigate it, your stress drops exponentially. You don't have to believe you can overcome the problem to feel better. You just simply need to understand the true impact. More times than not the negative fallout of a problem is not as bad as we think.

What brought me to write this was the ongoing experience of new clients who have come to believe that uncertainty and stress are part of being in business. There are so many little things they don't quite understand, so they let it ride. One client had a very large deferred revenue balance that had never been reconciled. When it was pointed out, they responded "Why should I care?" One of the biggest reasons is that the IRS is going to ask and if you don't have a very good answer they are going to start digging into your books, not just this year, but previous years as well. We had another client that had a POS device problem that understated sales by a few thousand dollars. They hadn't reconciled their bank deposits for several months and didn't catch it. The issue became; understated sales tax reporting and understated royalty payment reporting. Both of these, although easy to correct, may cause future audits. Having someone helping you get the right information to make the right decisions is critical to lowering your stress.

Our business is not about numbers, it's about people. Accurate, timely accounting is just the foundation from which we build our practice. We pride ourselves on being people who want to help people make better decisions

It's not how many seeds in an apple – it's how many apples in a seed…..

http://www.eprocesspros.com

Pragmatic Advice for the Coming Year….

The winter solstice is a time for reflection and rejuvenation. Just as we look toward spring, we also look toward an improved new year. No matter how well or poorly we did in the last year, we want to improve.

How New Year's resolutions are maintained as time goes on:
- past the first week: 75%
- past 2 weeks: 71%
- after one month: 64%
- after 6 months: 46%

While a lot of people who make New Year's resolutions do break them, research shows that making resolutions is useful. People who explicitly make resolutions are 10 times more likely to attain their goals than people who don't explicitly make resolutions.

So although you may not actually achieve your stated goal, simply making a goal will improve your performance against it. The fact that you will take the time to review your financial performance throughout 2009 and set a goal to improve it will improve your chances of having more success in 2010. The review and subsequent goal setting doesn't have to be sophisticated. Many times a business makes the review and planning process so burdensome that the process itself renders the results ineffective.

I would set no more than five specific goals with measurable milestones. If you can't measure it, you can't manage it. Too many goals may drive your business toward fragmentation as employees work to achieve disparate objectives. Now make them public. Create a measuring rod, something that will display results against goals in an intuitive way. Pie charts and thermometers are usually very good graphical displays of performance. Update them regularly.

Here is a caveat to keep in mind… when you stop measuring it is a sure sign that you are not performing. People get discourage when things aren't going as planned. Rather than review the plan, make adjustments where required and move on, they abandon the plan as not useful. So if you find yourself not tracking your results, it just might mean that your original plan needs review. Don't give up… Reassess….

Here is one other helpful hint…. Many times investing in outside expertise can dramatically improve results. An impartial third party may see thing you don't. Look for the payback. If bringing in a third party isn't going to improve performance more than the cost, don't do it. But don't assume because you don't see the payback, it's not there. Understand the difference between data, information and intelligence.

Whatever you do, don't procrastinate. Even a poor plan put in action is better than a great plan that never sees the light of day. You can adjust a poor plan as new information becomes available.

 

Short Thesis on December 25th (Christmas)

Let me conclude something before I even start. Christmas is the celebration of the birth of Christ; it is not intended to be his birthday. This is significant for those who believe it is a made up holiday used to highjack pagan celebrations. As you will read, the winter solstice is commonly used by most cultures and religions to signify rebirth. I don’t believe Christian should be excluded from this practice.

The Winter Solstice occurs exactly when the earth's axial tilt is farthest away from the sun at its maximum. Though the Winter Solstice lasts an instant in time, the term is also colloquially used like Midwinter to refer to the day on which it occurs. For most people in the high latitudes this is commonly known as the shortest day and the sun's daily maximum position in the sky is the lowest. The seasonal significance of the Winter Solstice is in the reversal of the gradual lengthening of nights and shortening of days. Worldwide, interpretation of the event has varied from culture to culture, but most cultures have held a “recognition of rebirth”, involving holidays, festivals, gatherings, rituals or other celebrations around that time. 45 BCE December 25th was established as the winter solstice of Europe by the Julian calendar. (http://en.wikipedia.org/wiki/Winter_solstice

Johannes Kepler, with backing from Tycho Brahe, in 1609 published the First and Second Laws of Planetary Motion and ten years later, the Third Law. These are still used by astronomers, NASA, the European Space Agency and everyone else studying the stars today. These laws do not change. With the advent of computer we are able to calculate sky maps showing the exact positions of all of the stars and planets in the night sky. Not just for that evening's observations, but for any day in history, as viewed from any place on the surface of the Earth.

Flavius Josephus (37 AD-95 AD), was a member of the Jewish Pharisee sect and interpreter for Titus (39 AD-81 AD), commander of the Roman expedition in Judea. Titus had ordered the destruction the Jewish temple. In one of Josephus works, Antiquities, he mentions Jesus, John the Baptist and other New Testament characters, including the murderous King Herod of the Gospel of Matthew, Chapter 2. The Bible recounts that Herod learned of the Messiah's birth from astronomers who had seen the Star of Bethlehem.

Using this information, Kepler’s calculations and passages in the bible, three dates can be scientifically calculated. The first is in September 3 BC when the heaven revealed the right astrophysical phenomena that the bible predicted as the conception of Christ. Nine month later, June 2 BC would have been the birth of Christ and the Magi from the east would have arrived around December 25 of 2 BC as Jupiter entered retrograde, reaching a full stop in its travel through the fixed stars. Magi viewing from Jerusalem would have seen it stopped in the sky above the little town of Bethlehem.

So the birth of Christ would have been around June 2 BC with the celebration of that birth potentially in December. (www.bethlehemstar.net )

The earliest identification of the 25th of December with the birthday of Christ is in a passage, otherwise unknown and probably spurious, of Theophilus of Antioch (A.D. 171-183), preserved in Latin by the Magdeburg centuriators, to the effect that the Gauls contended that as they celebrated the birth of the Lord on the 25th of December, whatever day of the week it might be.

"Year 1 after Christ, in the consulate of Caesar and Paulus, the Lord Jesus Christ was born on the 25th of December, a Friday and 15th day of the new moon." Here again no festal celebration of the day is attested.

Christmas - 1911 Encyclopedia

An early reference to the date of the nativity as December 25 is found in the Chronography of 354, a manuscript compiled in Rome in 354. In the East, early Christians celebrated the birth of Christ as part of Epiphany (January 6), although this festival emphasized celebration of the baptism of Jesus.

Christmas was promoted in the Christian East as part of the revival of Catholicism following the death of the pro-Arian Emperor Valens at the Battle of Adrianople in 378. The feast was introduced to Constantinople in 379, and to Antioch in about 380. The feast disappeared after Gregory of Nazianzus resigned as bishop in 381, although it was reintroduced by John Chrysostom in about 400. Puritans strongly condemned the celebration of Christmas, considering it a Catholic invention and the "trappings of popery" or the "rags of the Beast.

In Colonial America, the Puritans of New England shared radical Protestant disapproval of Christmas. Celebration was outlawed in Boston from 1659 to 1681. The ban by the Pilgrims was revoked in 1681 by English governor Sir Edmund Andros.

In 1870 Christmas Day (December 25th) became a federal holiday in the United States.

In all of this let us not forget why this is important. Christ was born so that he may live and die for our sin. Whether you believe Christ died for your sins or not, you have to admit he is probably the best known historic figure of all times. There has to be a reason for that. It might be worth finding out why……