“Cash is King”

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Cash flow is generally a misunderstood concept but importantly it is the lifeblood of any business operation.  As the saying goes “Cash is King”, without it your business cannot pay its expenses on time and this can have a “credibility” effect on staff, suppliers and even the market place.  Without the ability to pay suppliers on time you can lose the negotiating edge and damage relationships that could have otherwise enhanced your competitive edge.

Why is cash flow misunderstood? Primarily because accounting reporting systems are “profit/loss” based reporting systems.  That is, it measures financial performance based on “Income” and “Expenses” as they are incurred, not necessarily as they the money is paid or received.  So you can look at your monthly or annual Profit and Loss Report, notice significant gains and scratch your head because the bank account tells another story.

 Stay tuned! Part 2 coming soon....

Are you a Start-up Business Owner or a small to medium scale thriving business?

You see, put simply, your business cash flow is determined by the amount or money you actually receive less the amount of money you actually spend.  Modern businesses run Accounts Receivables, Accounts Payables, hold Stock and buy equipment.  All these things are not readily noticeable in the calculation of Profit and Loss, yet this is the primary report that business decisions are based on.

For instance you can make a profit of, say, $10,000 for the month and throughout the month you have purchased large equipment of value $8000.  Clearly your bank account will reflect only $2000 yet your monthly profit will show $10,000.  Similarly your profit for the month is $10,000 however your bank is empty as you have increased your stock holdings by $10,000.  Without knowledge of the effect of the transactions on profit your perception on your businesses health with is misguided.

Clearly, in business management circles, reliance on Profit and Loss alone is not sufficient to make valued business decisions.  This is particularly important in growth business, that has accounts receivable and continually question why they have no cash reserves.  Always consider your cash flow, particularly forward cash estimates in subsequent months when looking to support your strategic goals.

Should I pay myself a wage? is a question often asked by small business people.  And the obvious answer is a great big “yes”.  There are actually two issues here:

       1.      How big or small should it be, and

       2.      The effect it has on perceived success or failure of the ongoing                       trading of the operation.

It never ceases to amaze me how little self employed people think they are worth.  How they don’t appreciate their own level of skills or don’t realize what they bring to the table. 

As a general observation the small business owner doesn’t quite realize that they are in fact the strategic guiders of the business as well as being in charge of operations, production, planning, marketing, warehousing, administration, financing and a range of day to day activities.  But when I ask the question how much you should be paid the answer is always, or pretty close to always, an amount significantly lower than what the market is paying. 

In fact when asked what you were earning in their previous paid employment the amount is generally more than what they are willing to pay themselves in their own business operation.  Beats me!!.  And they seem to find this acceptable.  Not only that, they will never take sick days, be lucky to have a holiday and will work considerably more than 40 hours per week.

Put Simply - ALL business owners should be rewarded for their efforts like any other employee in the market place at a rate that represents the market value of their roll.

The second issue that needs to be addressed is the effect it has on perceived success or failure of the ongoing trading of the operation.  Quite clearly if I don’t pay myself an acceptable wage, my profits will be increased.  And this increase is a false premise. 

Consider this, if I pay myself $20,000 per year and the profit from my business for the year is $20,000, have I have a good year.  On the face of it you would probably say yes!  But if I tell you that to hire someone to do your job you would have to pay $50,000 per year, would your answer be any different?

Of course... This business is actually not doing that well.  If the owner paid themselves the correct salary then their business profits would actually be negative, that is, a loss of $30,000.  And that’s not good.  Yes I hear all the business owners shouting... “But my business can’t afford to pay me that” well then - get out now, because you can go and work for someone else without the stress for more money.

Putting that aside, whether you actually take the money out or not, (we all know cash flow requirements from time to time), you should cost your operation on the basis that the wages represent fair market value.  This will ensure you have the correct breakeven point, you are selling your products with the correct markup and your costings and forward planning clearly present an expectation that you should be rewarded for effort.  The business needs to support that wages effort and produce a result in excess of that payment.  Correct wages is one thing, correct profit is another. Profit is calculated after correct wages - if you are losing money then you need to address it.

Why bother with bank reconciliation?  Often a tedious task that most struggle with.  So why bother?  Actually you need to put a bank reconciliation into perspective, understand its purpose and then decide whether it is appropriate for you to undertake.  Can you run a business without doing a bank reconciliation? Sure, simple businesses can operate without this burden largely due to the owner’s knowledge of all transactions that occur.

To reconcile the bank means that the income and expenses that you record, for your business operation, is checked off your bank statement as being processed through your bank account.  In effect this process becomes a “control” to ensure that nothing gets missed.  The most common “missed” things are charges or income that hits the bank account without first going through your business.  Such things would include; bank fees and charges, loan repayments and other direct debit or direct credit transactions.

By methodically going through your bank reconciliation checking process you will ensure that all “bank” transactions are directly recorded into your cashbook.  This ensures your costings are correct, your expenses or overheads correctly account for use of funds and that you record all those expenses to claim taxation benefits in your particular country.

A word of caution though, if you receive or pay money by cash in your currency, without transacting through your bank account, then you need to make sure those “cash” transactions are duly recorded.  No amount of bank reconciliations with record or confirm transactions that occur outside the banking system.

We believe your data is very, very secure.  Our servers are stored in a large data center facility.  The facility is entirely N+2 redundant which means each server has its own dual backup generators, dual feed internet, and redundant network.  To access our servers you must pass Security Guards, Access Control Systems, provide valid Biometrics, use key cards; and all under the watchful eyes of security cameras.

So is your data secure - we think so.

And your personal information - kept safe and secure - and absolutely not provided to any unrelated third party.

So have peace of mind in the knowledge that your data is secure.

Breakeven is the level of sales you need to achieve in order to cover your costs.  So if your costs are $100,000 for the year - you can calculate breakeven beforehand and know that you need to achieve $100,000 in sales to make your business survive.  In fact in many respects it’s your “survival” number, that simple little number that can put things into a realistic perspective in the day to day running of your operation.

So for instance if you’re breakeven was $100,000 for the year, that means you need to sell $8,333 of goods or services every month.  It also means $1,923 per week or $384 per day (for a 5 day business).  Bring the number back down to a meaningful measure.  No use knowing your annual breakeven target if your mind thinks in weeks or months. 

For instance if you think in billable hours, as many tradesman or service providers do, and you know you charge out at $50 per hour then you will need to bill out 2000 hours for the year or 40 hours per week.  Weeks that you don’t achieve that will mean you need to catch up or you will not have enough at the end of the year to pay all your costs.  If that occurs, your lifestyle will have to make sacrifices.

So how do we calculate this?  There are fundamentally two types of businesses out there.  Those that sell goods, in which case they use a margin to price them, and those that don’t.

See...... Part 2 for the next exciting chapter in survival numbers.....

Continuing on from Part 1….

For those that don’t sell goods at a margin then simply knock out a budget for the next 12 months and “presto”, you’ll know what sales numbers you need to aim for. Just bring them back to a number you can readily understand and utilise.

For those that sell goods it gets a little trickier.  We’ll need to know two things:  firstly, what is our margin on the goods we sell.  If I sell something for $100 and it costs me $70 to buy it, then I make a profit on that item of $30.  So our margin (gross profit margin) is $30 divided by $100 or 30%.  30% is also written as .30 (point 30).  Now remember to average this.  This margin is across all goods not just a selected few.

Secondly, we need to add up all our NON goods costs - that is, to budget all our costs for the next 12 months excluding the amount you will pay for the actual goods you sell.  So you add up all those and they come to $100,000.  Don’t forget to add a market wage for yourself in this calculation.

To calculate your breakeven number simply divide your costs ($100,000) by the margin (.3).  So 100,000/.3 equals $333,333.  That means you will need to sell $333,333 worth of goods to cover your costs.

How does that work you ask,  well we make sales of $333,000, to generate these sales you will need to buy $233,333 (70%) worth of goods.  That leaves you with $100,000 to pay your costs., so you end up with zero at the end of the year.  So as a minimum your sales targets should exceed $333,333.  You need to earn more to get some profits and to fund growth.  So remember this is only a survival number.

Hope that helps.  This is a simplistic view of breakeven but nonetheless it is a very necessary measurement to have in your back pocket.

There is often confusion as to what constitutes an expense.  And that confusion is usually a result of the paradigm that Taxation creates.   So as a general rule when we think of expenses we think of what taxation authorities allow us to deduct.  Foremost though, you need to conduct your business on what is actually an expense regardless of what local tax authorities dictate as being an expense or not an expense.

Fundamentally expenses are simply the costs of doing business.  An outgoing of money that is directly related to the earning of your income.  Sounds pretty simple? Well there are some tricky bits.  And those tricky bits are usually things like loan repayments, money you take for yourself (outside wages), or expenses that have a life beyond a year, such as a piece of equipment like a computer or machine.

Loan repayments generally comprise two components.  The interest component and the amount you are reducing your loan by each month.  It’s the interest bit that is the expense; the loan bit is simply paying back money you had borrowed.  So in the same way the borrowed money is not income when you receive it, the repayment is not an expense when you pay it.

Money you take for yourself, are just amounts you’re taking from the cookie jar, and you should pay back the cookie jar at some time, unless the cookie jar owe you.  Bear in mind that you should be taking a market wage for your services anyway.

Expenses that have a life beyond a year.  Well if you think about it, if something lasts you two years then obviously the expense part is ½ each year.  So to for three years, the expense is 1/3 each year for 3 years, etc. etc....

It is important to get the expenses right.  They should be matched to the income you earn.  So there is a direct relationship with the expenses and the income.  By getting this correct you will have a better measure of your profitability, your costing and your margins.  You’ll be able to readily identify when things aren’t going just right or whether there is scope for opportunity.

Why take all of your accounting information to the world wide web???,  that’s the question often posed to our office.  On the face of it, I would generally say “why bother”, but the reality is there are some considerable benefits for having your data “on the web”.  Subject too off course, acceptable Internet speeds and security.

Why take all of your accounting information to the World Wide Web??? that’s the question often posed to our office.  On the face of it, I would generally say “why bother”, but the reality is there are some considerable benefits for having your data “on the web”.  Subject too off course, acceptable Internet speeds and security.

Consider for example the time and effort it takes to make your data secure.  The daily backup (I’m sure you do that!!), the weekly backup or even the monthly backup takes time and even worse, there is always some doubt as to whether we have done it correctly.  I don’t know about you, but for me there have been times when I have needed to access a backup only to find, it wasn’t done properly or there has been some hardware glitch. 

Web based systems are automatically stored and backed up as the data is transacted.  Peace of mind is immediate. 

Consider for example the needs of other users of your information.  It could be your accountant, your banker, or even your tax preparer.  The days of copying data files (if they work) or printing numerous reports are long gone.  Simply allow the users to access your records and they can obtain the information they need without the usual backwards and forwards of communication to fulfill information requests.

Consider your yearend adjustments.  Inevitably your accountant has made changes to your records.  These changes need to be recorded in your in-house system.  Previously that involved your accountant coming out and making the adjustments or, your accountant sending you a list of adjustments that you need to decipher or, uploading changed transactions onto your system.  All these interactions are in fact error prone and time consuming.  Now it’s easily dealt with by approved users entering data directly into your system as they are interacting with your system.

Consider when you’re not in your office.  Access the data in real time anywhere you can access the Internet.  Stay in touch; stay on top, stay in control without any additional effort.  Going digital allows you to safely and securely interact with your business information from anywhere you like. 

In the past, being away from your business meant little to no real time information.  Now you can readily evaluate your performance without being in your office.