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What�s More Important, Where You�re Going or Where You�ve Been? - Apr 30, 2012

Posted by: Steven D. Olson in Articles

The Pain of Not Having a Succession Plan

I suspect that every business owner has a regret or two, wishing they had taken a different course of action or made a different decision. Failure to perform one action in particular can result in significant heartache and regret - that of not establishing a succession plan early on in the businesses life. While even sole proprietorships should have a succession plan, it is particularly important to have a succession plan when there are multiple active partners, each having a say in the way the business is operated.

When two or more people join forces to create a business entity, everyone is enthusiastic and cooperative. Early on, the parties tend to come to agreement on the issues as they come up, partly because everyone wants the business to succeed and partly because the early issues are relatively minor in nature. Agreements are typically not committed to in writing, as everyone is lulled into believing that the collegial atmosphere will continue forever. This is the honeymoon period and like the honeymoon of a marriage, it doesn’t take long for the cracks to form.

As the business matures and partners begin to settle into their roles, differences in personalities, management style, priorities, interests and a myriad of behaviors can begin to place a strain on the business. Unless the partners can develop a strategy for addressing the differences, cracks can grow into canyons. On more than one occasion I have encountered businesses in which the partners’ philosophy and approach to operations had diverged to the point they were polar opposites. The big losers in this are the employees. With conflicting direction being given them, they realize that regardless of which partner they obey, the other will be miffed. Employees can’t win.

The obvious solution to this nightmare is to avoid it in the first place by ensuring that a comprehensive succession plan is crafted when the business is formed. But what do you do when there is no succession plan and frustrations are growing?

Before addressing that question, perhaps it is useful to clarify what a succession plan or succession planning is and its application to the situation described above. Succession planning can have broad or narrow application as evidenced by a quick search of the internet. In its broadest sense, succession planning includes preparing for the unexpected by identifying key management, supervisory and general workforce personnel who are critical to the daily operation of the business and identifying others that could step into the position with minimal disruption to the organization. It can be very intense and include review of the company’s long-range strategies, identifying the talent pool that would be required to accomplish those strategies and grooming those individuals to step into positions of leadership or management in the future. (http://en.wikipedia.org/wiki/Succession_planning)

In a more narrow sense and the application intended for this article, is that succession planning is the formalization of a plan that specifies what will transpire should either something happen to one of the owners or one simply wants out. Such a plan would specify how the ownership of the business is transferred, provide specific instructions as to how the business would be valued and include provisions to purchase the share of the business from an estate or departing partner. This article focuses on the departure of one or more of the business partners.

So back to the question, wha....

Trapped Minding The Store? - Jun 30, 2010

Posted by: Steven D. Olson in Articles

I feel that I am indebted to the founder of B2B CFO, Jerry Mills, for a number of reasons. One is the clarity with which he described the roles that people fulfill in business as found in his book, The Danger Zone, Lost in the Growth Transition. Borrowing from the concept that Jerry developed, I want to address the implications for business owners that are in my circle of influence and for my fellow business advisors. Since not all readers are likely to be familiar with the roles Jerry has identified - Finder, Grinder and Minder - I will briefly describe them and then discuss the implications on businesses. This discussion is of particular application to privately held as opposed to publicly held companies.

Business Roles:

Finder: Finders are the visionary for the business. Usually this is the founder of the business but could be the lead officer in the company - President, CEO. Finders are the ones charting the course for the business, determining the products or services, and building the relationships with customers. Finders look to the future and encourage their employees to think of what could be.

Grinder: Grinders are focused on the present. They would ask the question, “what do I need to do to make some money to pay my rent and buy groceries?” They are the ones who perform the day to day activities that keeps the business functioning.

Minder: The record keepers of the business are the Minders. They would ask “what were the revenues last month?” “What expenses were incurred?” “What capital investments were made during the accounting period?" Minders attention is on the past.

Implications:

The business can operate very effectively as employees function within the roles for which they were hired. As a general rule, employees don’t change roles. However, there is one instance in which roles are switched which can have adverse implications for the business. That is when the Finder feels it is necessary for him or her to perform minding or grinding duties.

As businesses grow, they pass through several stages and add infrastructure (capital equipment and employees) which places increased demand for cash. If the growth and consequent demand for cash exceed the availability of cash, the ability of the business to continue as an ongoing concern is at risk. Often, the reaction of the business leader is to cut expenses by performing roles other than the Finder role in an effort to control or eliminate those things creating the demand for cash. For instance, the Finder might begin to get more involved the the financial aspect of the company, believing it necessary for the company to survive. However this distracts the leader from that....

Part 2 What Successful Business Owners Do That Unsuccessful Don't - May 22, 2010

Posted by: Steven D. Olson in Articles

In my previous article, I explored the first half-dozen behaviors that I have observed in successful business owners. This article explores a second half dozen of those behaviors. As stated in the previous article, unsuccessful business owners may do some of these, but successful owners consistently perform all these behaviors.

Successful business owners:

7. establish a comprehensive system of internal controls. They understand that it is managements responsibility to create an environment that discourages employees from doing the wrong thing - such as stealing from the company, whether it be time, money or property. In particular, successful business owners NEVER, NEVER, NEVER allow persons with access to accounting records to handle cash or sign checks.

8. maintain focus. They concentrate on the areas in which they are skilled - looking to the future, determining the products and services to be provided, building relationships with customers, etc. Successful business owners hire others to do the jobs they don’t need to do, i.e. performing in the present those day to day tasks that support operations and monitoring the past to determine financial results of the outcome of business operations.

9. monitor Key Performance Indicators (KPIs). Gut reactions such as, “our membership is growing” or “our sales are increasing,” must be validated by relevant measures of performance. Often the “gut” intuition is wrong. Successful business owners establish key indicators for each significant aspect of the business.

10. establish clear guidelines for their company. They strive to ensure that all who perform work within of for their company have a clear understanding the standards of behavior. Successful business owners ensure that the guiding principles of the co....

Part 1 What Successful Business Owners Do That Unsuccessful Don't - May 22, 2010

Posted by: Steven D. Olson in Articles

Over the years, as a student of business and then as a advisor, I have noted varying degrees of success. While there is no one behavior or practice that has resulted in success or the absence of which has resulted in failure, I believe that successful business owners behave differently. This article explores a half-dozen of those behaviors.

Successful business owners:

1. are totally committed to their business. Running a business is often inconvenient and demanding. Successful business owners accept that it takes hard work, long hours and in the beginning, little pay. The are generally the first to arrive and the last to leave. They are focused on doing all that is necessary, within the bounds of moral, ethical and legal acceptability, to achieve success in their business.

2. accept responsibility for their business. Successful business owners don’t make excuses when things don’t go according to plan - they don’t play the victim card. As a President once stated, “the buck stops here.” But, if there is something that really goes well, they are quick to recognize employees that have performed in a superior manner.

3. pay their taxes when due - payroll, property, estimated, etc. There is a fiduciary responsibility to safeguard monies collected from employees and there can be severe criminal and financial penalties for failing to do so. Successful business owners are compliant with local, state, and federal tax requirements.

4.&nbs....

Financial Quicksand - What's that sinking feeling? - Feb 23, 2010

Posted by: Steven D. Olson in Articles

Have you ever watched an old movie in which a person is running through a swamp in an effort to escape from “the bad guys” and stumbles into a bog where he becomes stuck? Despite his determination, the more he struggles, the more firmly he is stuck. He survives only with help from outside the pit he is in - either a vine, just within reach or someone throwing him a rope. The last thing he would need is more sand and water. Yet that seems to be the solution that many businesses seek when they have trouble servicing their debt - they seek more debt.

It has been my unfortunate experience to encounter a growing number of businesses that are struggling in this difficult economy. The primary reason in virtually all instances was the difficulty or inability to meet their debt obligations. The demands of paying the normal day-to-day operating expenses, coupled with the difficulty of paying their long term loans becomes a downward cycle. Perhaps you have heard the expression, “you can’t save your way to wealth?” While I believe that is true, even more true is you can’t borrow your way to wealth.

So if a company is strapped for cash and more debt is not the path to take, what should a business owner do? Because an owner must generally pay for the materials or goods before they receive the cash from their customers, how does one cover the gap that exists? I believe there are a few strategies that might be employed.

• Stretch Payments: If timing of the cash flow is the issue, a business might negotiate with vendors to increase the terms for payment say from 30 days to 45 or even 60 days. I realize that some customers (particularly the big corporations) unilaterally inform their vendors that they now will make payment using 45 or 60 days. I personally feel that this is a violation of the vendor’s trust and is a dishonest business practice. If you can get vendors to agree, this would stretch out the cash flow demand and bring it more inline with the timing of receipts from customers.

• Eliminate non-essentials: Obviously, the company should eliminate ALL non-essential expenses. Sometimes companies incur expenses for good reasons, whereas they should focus on expense that result in GREAT outcomes. Postpone or eliminate as many expenses as possible to free up cash.

• Obtain an advance on Accounts Receivable: Companies might be able to obtain an advance on pending Accounts Receivable through a process known as factoring.It is a sales axiom that people buy things based on emotion and seek out facts to justify their decision. I wish I could say that the axiom were true ONLY for personal decisions, but my experience has shown that it is frequently true in the business realm as well. Perhaps we accountants are guilty of scaring off the novice with our intimidating terminology such as “time value of money” and “discounted cash flow” or acronyms such as NPV and IRR%. The purpose of this Part 1 article is to present a simple approach to evaluating investment decisions. Part 2 will present an example.

The ultimate goal of the investment analysis process is to organize everything that is known about the potential investment. You are simply comparing the costs you will incur (initial investment and costs of operation) against the benefits (revenue opportunities) that are reasonably assured to be available to you. Keep it simple and don’t over analyze the investment decision. As the saying goes, eat the elephant one bite at a time. I suggest that your break the analysis into bite size parts. The following categories can serve as an example:

The Opportunity: When someone is contemplating purchase of a piece of equipment, building or purchasing a building or other investment they are doing so because of an expectation that such a purchase will enhance the profitability of their business. A clearly defined opportunity with accurate estimates of revenues and costs is essential to making a wise business decision.

Investment: The purchase price for a piece of equipment is likely just part of the total cost. Other costs may include shipping, building alterations, electrical hookup, employee training, and similar costs.

Manufacturing costs: Manufacturing costs are essentially the variable costs of a product. There are at least five aspects of costs related to the manufacturing of a product:

Performance capacity: This is the production capability of the equipment you are contemplating purchasing. What will the equipment do for you? How much can it produce?

Set up: In order to begin using the machine, there is a certain amount of preparation and set up. There might be tools or dies, specific formatting or other preparation. These all come at a cost.

Material cost:Read more...

Financials The Gps Of Business Part 4 The Cash Flow Statement An Example - Aug 19, 2009

Posted by: Steven D. Olson in Articles

If you bought a GPS, would you read the manual? I'm one of those that read the manual as a last resort. This article is kind of like the manual for the GPS. Unlike the GPS and most other stuff, the Cash Flow Statement as designed by the Accounting Profession is neither intuitive or easily understandable. The intent of this article is to present an example of a simplified version of the Cash Flow Statement.
Attempts by the accounting profession to standardize the Cash Flow Statement have resulted in often complicating the simple. For instance the standard format has three categories of cash flow: cash from operations, cash from investing and cash from financing. Without getting into great detail, cash from operation is largely reflected in the current assets, current liabilities and the income statement. Cash from investing is reflected in changes in the non-current assets. And, cash from financing is determined by looking at the non-current liabilities and equity accounts. My suggestion is not to worry about this classification, just follow the cash - money coming in and money going out.
We begin the Cash Flow Statement by identifying the beginning and ending balance of cash and also determining the net change in cash for the desired period. Looking our comparative Balance Sheet, we note that the balance at the beginning of the week for the main cash account, which is a checking account, is $25,700. The balance at the end of the week for that same account is $19,400. The difference between the beginning and ending balances is $6,300. The purpose of the Cash Flow statement is to explain "where did the money that makes up this net of $6.300 come from and where did the money go"
Step 1: Determine the amount of the change in the cash balance.

Account	Start of Period	End of Period	Difference
Cash (Current Asset)	$25,700	$19,400	($6,300)

Step 2: Review the changes in the Balance Sheet balance that result from money coming in or money going out. One way to do this is to compare the ending and beginning balances from all the balance sheet accounts and then determine how much of the change is a result of cash coming in or cash going out. For Instance, suppose the beginning balance of Accounts Receivable is $65,430 and the ending balance is $72,355, a net increase of $6,925. However, review of the account reveals that there were credit sales of $93,425 and payments received from customers in the amount of $86,500. We are only interested in the cash impact on the account so we will reflect the $86,500 on the cash flow statement. The below accounts are typical sources and uses of cash.

Cash Flow Statement

Account	Notes	Amount
Money Coming In
Accounts Receivable (Current Asset)	Collections from Customers	$86,500
Customer Deposits (Current Liability)	Good will deposit with sales order	$500
Equipment (Fixed Asset)	Sold a old piece of equipment	$2,945
	Total Money Coming In	$89,945
Money Going Out
Accounts Payable (Current Liability)	Paid vendor for inventory	($79,500)
Current portion of loan (Current Liability)	Paid loan for building	($4,370)
Employee Pay (Current Liability)	Payroll for the week	($10,375)
Owners Equity	Withdrawal by owner	($2,000)
	Total Money Going Out	($96,245)
	Net Change in Cash	($6,300)

Notice that the "Net Change in Cash" from our Cash Flow Statement matches the change in the Cash balance from the beginning of our period to the end of our period. The Income Statement generally does not have much relevance to the Direct Method of preparing the Cash Flow Statement. However, there could be some transactions that use cash that some companies may not record as a payable on the balance sheet. Suppose a phone bill is received and is paid without being entered into Accounts Payable. The Cash account is decreased and the telephone expense is increased. No other Balanc....

Financials The Gps Of Business Part 4 The Cash Flow Statement Overview - Aug 11, 2009

Posted by: Steven D. Olson in Articles

We men have a reputation for not asking for directions when we are lost – well not exactly lost - it just that the trail has just become a bit uncertain. Imagine having a GPS, one of those wonderful little machines that can track your location within a matter of feet, but not being willing to use it. That seems analogous to NOT including the Cash Flow Statement as a key tool for monitoring your business.

Most businesses operate on an accrual basis. Revenue is recorded when earned – not necessarily when received, and expenses are recorded when incurred – not necessarily when paid. This makes the use of the Cash Flow Statement particularly important. For instance, some of the revenue the business earns, doesn’t actually represent cash coming into the business - credit sales, for example. By the same token, some “expenses” recorded in the income statement don’t actually involve an outlay of cash - depreciation for instance. Consequently the flow of cash into and out of the business can be considerably different than reflected in the Balance Sheet and Income Statement. Having a profitable income statement is no guarantee that the business will succeed or fail. Cash is King, and the only way to determine the availability of cash in the business on a consistent basis is to include the Cash Flow Statement as a key financial reporting tool.

After years of working with small businesses, I can only conclude that business owners must find the Cash Flow Statement particularly hard to understand. Otherwise, why wouldn’t every one use it on a consistent basis? The purpose of this article is to take some of the mystery out of this critically important statement. Because on the desire to be thorough in the explanation of the Cash Flow Statement, this article will provide an overview of the Cash Flow Statement and a following article will provide an example of the preparation of the Cash Flow Statement.

There are two forms of the Cash Flow Statement – the Direct and the Indirect. The Indirect Cash Flow Statement, starts with the Income Statement and then is adjusted for several non-cash entries. The Direct Cash Flow Statement, as its name implies is much more direct. It is similar to the checkbook and I find it is generally less complicated. Because of the limit on space, this article will address the Direct Cash Flow Statement only.

The Cash Flow Statement is beneficial in two regards. First, the Cash Flow Statement explains where the cash came from and where it went for the past period, say a week or a month. Second, the Cash Flow Statement is valuable as a projection tool, helping to anticipate the future cash demands of the business.

The Cash Flow Statement can be prepared for any period length desired. However, the longer the period used, the less meaningful the cash flow statement is for guiding the daily business decisions that impact cash. For companies that the availability of cash is a concern, I suggest that the Cash Flow Statement be prepared on a weekly basis and that the expectations for the sources and uses of cash be projected for at least eight to twelve weeks into the future.

My son-in-law is directionally challenged. My daughter did most of the driving because she wanted to get to her destination. With the loss of my daughter, it looked like my son-in-law was destined to spend most of his time lost. After one such wilderness experience he broke down and purchased a GPS. He knows with confidence that the GPS will guide him step-by-step to his desired destination. For the business owner, the Income Statement, like a GPS, monitors business progress throughout the fiscal period.

Where as the Balance Sheet is a snapshot of the Asset, Liability and Equity accounts at a particular time, the Income Statement is a cumulative record of the revenue earned and expenses incurred throughout a period of time, such as a month, quarter or year. I think of the Income Statement as a series of buckets that capture the inflow of revenue and the outflow of expenses for a business. Allow me to expand on this analogy a bit.

At the beginning of each business period (referred to as a fiscal period) all the buckets are empty. Throughout the period, monies flow into the business in the form of revenue from products sold or services performed. Monies flow out of the business in the form of expenses that are incurred to provide the products and operate the business. Imagine a record of this money flow being captured by a series of buckets.

Revenue flows into the business and is collected in a large bucket. It would be nice if the owner got to keep all this money, but unfortunately there are a few leaks and a spigot through which the monies flow into a series of other buckets. Examples of some leaks that might be encountered that reduce the total amount of revenue coming into the business are discounts applied to the sales price or the consumer’s return of products that are not suitable for resale.

The spigot attached to the side of the revenue bucket allows monies to flow into buckets that represent the cost (expense) of making or purchasing the products sold by the company. In the case of a retail merchandising company or a manufacturer, monies first flow into a bucket that represents the cost of making the goods sold or manufactured. This first expense bucket captures the direct material, direct labor and the overhead that are applied to the making or stocking of products that customers buy. Generally companies that perform a service do not have a cost of goods sold bucket. If the flow of monies exceeds the cost of making or stocking the goods that were sold, the excess flows over the top of the bucket and is captured by other expense buckets. The overflow is referred to as Gross Profit and represents the monies that are available to cover non-manufacturing/non-production costs and provide a profit from the business.

There are commonly two major categories of non-manufacturing/non-production buckets. One set of buckets is for Sales and Marketing expenses and another is for General and Administrative Expenses. Sales and Marketing buckets include labor (salaries and wages of the Sales and Marketing staff), advertising, market research, sales campaigns and other costs associated with making customers aware of the company’s products. General and Administrative buckets capture the costs necessary to support the retail or manufacturing operation but are not directly related to the production of a product. Examples include the office of the company president, the accounting operation, human resources (recruiting, training and supporting employees), benefit programs, professional advisors such as attorneys or tax CPAs, administrative supplies, information technology (phones, computers, software and local networks), depreciation of non-manufacturing equipment, vehicles and buildings, interest on loans, and the myriad of other costs incurred to support the company. If the company has performed well, there is a trickle of funds that remains after the diversion of the money flow into these many expense buckets. These left over monies represent the profit that the company has earned from the operation of the business. But, there is one more leak in the flow of funds –taxes. The government has decreed that it should share in your good fortune as a wise and profitable business own....

Financials The Gps For Business Part 2 - Mar 26, 2009

Posted by: Steven D. Olson in Articles

You are probably somewhat familiar with Global Positional System devices. Among the many uses, one takes the form of a nifty little device for determining one’s location or providing directions from point A to point B. In my last article I suggested that there are similarities between a GPS and a businesses financials. In that article, I presented a brief overview of each of the three financial statements. This article will dig a little deeper into the Balance Sheet.

I often find that business owners largely ignore the Balance Sheet or give it a cursory review, instead favoring the Income Statement. When I would inquire of owners as to why, the response was generally along the lines that they didn’t see much value in the Balance Sheet. While some might not agree, I believe the Balance Sheet to be the most important of the financial statements. The Income Statement is really a subset of the Equity account on the Balance Sheet and the Cash Flow statement reflects the difference between two different Balance Sheet snapshots in time. Both revolve around the Balance Sheet.

As the earlier article described the organization of the Balance Sheet, this article will focus on the kinds of information that can be derived from review of the Balance Sheet. Review may take the form of ratios, simple subtractions or monitoring trends over time and provides an indication of the use of operations, financing and investment dollars. As space limits the depth of discussion, a future article will delve into the details of financial statement analysis.

Indications of Liquidity: Liquidity refers to the ability of a business to meet the demands for cash on a short-term basis. It compares the current portion of what the business owns (operating assets) relative to what the business owes (operating liabilities). Obviously it is better for the business to own more than it owes and the larger the difference the more satisfactory the measure. Most liquid are cash and cash equivalents. Least liquid is inventory. Indications of Solvency: Solvency is similar to liquidity but looks at the long-term perspective of the businesses' ability to raise funds to pay its debts and provide for sustained growth. While liquidity measures focus on the operating aspect of the business, solvency measures involve relationships among fixed assets, long-term debt, equity and aspects of return on those investments. For instance, a comparison between long-term debt and equity is an indication of who really owns the business, lenders or the business owner.

Investment in Fixed Assets: The extent of capital investment (land, bricks and mortar and equipment) varies considerably among industries. An equipment manufacturing plant will have a much greater investment in a physical plant than service business such as a restaurant. I have seen many startups sink all their capital into the fixed assets part of their business only to find they don’t have enough cash to operate the business until a customer base is grown.

Working Capital Availability: While important, fixed assets alone will not result in sales. Business must have sufficient working capital to cover operation activities such as purchase of raw materials, attracting a labor force and producing a marketable product. While the difference between current assets and current liabilities is the amount of working capital, the difference in the amount of investment in short-term assets verses long-term assets is important as well. Too much investment in the physical plant may jeopardize the ability of the business to meet the cash requirements of operating the business on a daily basis.

Financing of the business: A business can be financed either through the contributions of the owners or by borrowing from lenders. The relationship between theses two sources of funds should be continually evaluated. Rare is the business that doesn’t use debt at some point. As a rule of thumb, short-term debt should be used for short-term purposes and long-term debt for long-term purposes. Businesses can get into trouble when they mix the type of debt with a different purpose. Financing the purchase of equipment (long-term purpose) with short-term money (under a year) may constrain cash needed for operations and could place the business at risk in repaying the loan. Financing the day-to-day operations of the business with long-term debt is an equally poor practice as capitalizing opera....

Financials The Gps Of Business 466 - Mar 16, 2009

Posted by: Steven D. Olson in Articles

Isn’t technology amazing? Imagine an electronic signal being exchanged between asatellite and a little handheld box that provides your exact location. Wikipedia records that the key to this capability is a globalnavigation satellite system developed by the US Department of Defense. Referred to as the Global PositioningSystem (GPS) it has become a widely used aid to navigation worldwide, and a useful tool for map-making, land surveying, commerce, scientificuses, and even hobbies. It is also, the precise time reference is used in many applications including thescientific study of earthquakes.GPS is also a required key synchronization resource of cellular networks. Formany business owners, the financial statements for their business seem equallyas technical, mysterious and complicated. The good news is that they don’t have to be pages of undecipherablenumbers.

There are three key financial statements that businessowners should use to – like a GPS – determine the (financial) position of theircompany. This article will providea brief overview of each of the three statements. Successive articles will lookat each statement in more depth.

Balance Sheet – Thebalance sheet reflects how much a business “owns” and how much the business“owes” as of a particular date. It is a snapshot in time. The balance sheet atthe end of one period (ending balance sheet) becomes the beginning balance sheetat the start of the new period. One side of the balance sheet – generally theleft –presents the assets or what the business owns. The other side of thebalance sheet – the right side – reports what the business owes to peopleoutside the business (creditors) and people inside the business (owners). Theyare referred to as liabilities and equity, respectively. Assets and liabilitiesare further divided in current and long term sections. The current portionreflects a belief that the particular item will turn over within a years time,i.e. inventory will be sold or liabilities will be paid within a years time.The long-term portion is expected to extend into the future over a years time. Various relationships among the balancesheet categories provide an indication of the financial health of the business.

Income Statement – Theincome statement is a cumulative record of revenue and expense transactionsfrom the start of an accounting period – which may be a month, quarter or year– until the end of the accounting period. Business may choose to be on anaccrual basis or cash basis of accounting. These will be discussed at length ina later article. Suffice for now to state that even if a business uses the cashbasis of accounting, the income statement does not completely reflect the flowof cash in or out of the business because of various non-cash entries such asdepreciation. Most income statements have at least a revenue section andvarious expense sections such as cost of goods (service businesses an exception),selling and administration. Revenues minus expenses equal the bottom line – netprofit from operations. There mayalso be other revenues and expenses for activities that are not part of thegeneral operation of the business and these are shown below the net profit fromoperations. More will be said when the income statement is discussed in depth.Obviously the owner wants net profit to be a positive number.

Cash Flow Statement – Themost important (my belief), yet least used statement is the cash flowstatement. This statement reports the cash coming into the business and wherethe cash goes from the business. Every transaction has a cash implication whichif often missed by simply reviewing the other two statements. For instance, ifa business were to sell a product to a customer on credit, the business hasbecome a banker for the customer by providing a item from inventory for apromise to pay and has actually foregone the cash to which they are entitled. Therefore they have taken cash from the businessin the form of inventory and given it to a customer. This statement provides anindication of the businesses ability to pay its obligations. A negative cashflow statement indicates that the business is insolvent. Action is needed ifthe company is to meet its commitments.

These statements will be explained in more depth in futurearticles.

Isn’t technology amazing? Imagine an electronic signal being exchanged between a satellite and a little handheld box that provides your exact location. Wikipedia records that the key to this capability is a global navigation satellite system developed by the US Department of Defense. Referred to as the Global Positioning System (GPS) it has become a widely used aid to navigation worldwide, and a useful tool for map-making, land surveying, commerce, scientific uses, and even hobbies. It is also, the precise time reference is used in many applications including the scientific study of earthquakes. GPS is also a required key synchronization resource of cellular networks. For many business owners, the financial statements for their business seem equally as technical, mysterious and complicated. The good news is that they don’t have to be pages of undecipherable numbers.

There are three key financial statements that business owners should use to – like a GPS – determine the (financial) position of their company. This article will provide a brief overview of each of the three statements. Successive articles will look at each statement in more depth.

Balance Sheet – The balance sheet reflects how much a business “owns” and how much the business “owes” as of a particular date. It is a snapshot in time. The balance sheet at the end of one period (ending balance sheet) becomes the beginning balance sheet at the start of the new period. One side of the balance sheet – generally the left –presents the assets or what the business owns. The other side of the balance sheet – the right side – reports what the business owes to people outside the business (creditors) and people inside the business (owners). They are referred to as liabilities and equity, respectively. Assets and liabilities are further divided in current and long term sections. The current portion reflects a belief that the particular item will turn over within a years time, i.e. inventory will be sold or liabilities will be paid within a years time. The long-term portion is expected to extend into the future over a years time. Various relationships among the balance sheet categories provide an indication of the financial health of the business.

Income Statement – The income statement is a cumulative record of revenue and expense transactions from the start of an accounting period – which may be a month, quarter or year – until the end of the accounting period. Business may choose to be on an accrual basis or cash basis of accounting. These will be discussed at length in a later article. Suffice for now to state that even if a business uses the cash basis of accounting, the income statement does not completely reflect the flow of cash in or out of the business because of various non-cash entries such as depreciation. Most income statements have at least a revenue section and various expense sections such as cost of goods (service businesses an exception), selling and administration. Revenues minus expenses equal the bottom line – net profit from operations. There may also be other revenues and expenses for activities that are not part of the general operation of the business and these are shown below the net profit from operations. More will be said when the income statement is discussed in depth. Obviously the owner wants net profit to be a positive number.

Cash Flow Statement – The most important (my belief), yet least used statement is the cash flow statement. This statement reports the cash coming into the business and where the cash goes from the business. Every transaction has a cash implication which if often missed by simply reviewing the other two statements. For instance, if a business were to sell a product to a customer on credit, the business has become a banker for the customer by providing a item from inventory for a promise to pay and has actually foregone the cash to which they are entitled. Therefore they have taken cash from the business in the form of inventory and given it to a customer. This statement provides an indication of the businesses ability to pay its obligations. A negative cash flow statement indicates that the business is insolvent. Action is needed if the company is to meet its commitments.

These state....

Speaking Accountant - Jan 17, 2009

Posted by: Steven D. Olson in Articles

Accountants, like many professionals, have their own word speak. While most have heard of the Income Statement, Balance Sheet and Cash Flow Statement, knowing about them and understanding them are different stories. Then there’s Pro Forma, Net present value, working capital, cash equivalents, current assets and liabilities, operating statements, funds flow analysis, capitalization, gross margin, and sweat starts to form of the brow. Things get more deice when words such as solvency, current ratio, acid test ratio, inventory turned, burden, accrual, annuity, discounted, yield, sunk cost, Leverage, EBIT, EBITDA, GAAP, FASB and so on are bantered about.

Terminology that is foreign to us can be disconcerting and intimidating – until we develop the understanding. There are a variety of ways to gain understanding. We can muddle through on our own, take a class or call on someone with greater insight.

We at B2B CFO welcome the opportunity to help increase the financial intelligence of business owners and executives. We are accustom to simplifying the complex without confusing accountant speak and remain aware that the terminology of our profession can be intimidating. But don’t take my word for it. If you are confused by some of the jargon tossed around by your accountant or bookkeeping staff, give us a call and we will take the mystery out of the terminology

Its The Relationships - Jan 6, 2009

Posted by: Steven D. Olson in Articles

While there is some value to be gained from simply looking over the Balance Sheet, Income Statement and Cash Flow Statements, it is only by looking at the relationships among the various data elements that true insight into the health of the business can be gained. For example, the relationship of the Balance Sheet current assets to current liabilities – referred to as the “Current Ratio” - provides an indication of the company’s ability to pay it’s short term obligations. The relationship of Income Statement Cost of Goods Sold or Manufactured to Total Revenues – COGS divided by Total Revenues – indicates the extent to which revenues are consumed by the cost of the product that is sold. Revising the presentation of the data slightly – Total Revenues less COGS – tells the owner the monies available to pay selling and administrative expenses and provide for a profit from operations. B2B CFO Partners are skilled at helping business owners identify key metrics that are useful in monitoring the financial wellbeing of their company.

Don't Ignore The Cash Flow Statement - Jan 2, 2009

Posted by: Steven D. Olson in Articles

Over my years consulting with businesses, I am amazed at the number of owners who ignore the cash flow statement. Most seem to think that if the income statement shows they have been profitable, they are in good shape. A few years ago, a news article reported the closing of the doors of a business due to insolvency. The owner stated that he didn’t see it coming as the income statement showed him to be making money. Had he been reviewing a cash flow statement along with his other statements, he would have seen trouble on the horizon and could have taken steps to avoid the death of his business. My advice is to (1) have a knowledgable person prepare a simple Direct format Cash Flow Statement and (2) include the Cash Flow Statement as part of your monthly financial review.

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