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How Do You Benefit From Making A Referral To A B2B CFO Partner? - Nov 29, 2011

Posted by: Steven D. Olson in Articles

What is the value to you for providing a referral to a B2B CFO partner? Like many professionals, a major source of customers is referrals from clients or other trusted business advisors such as bankers, attorneys, CPA firms, financial planners, brokers and others. When I make a referral, I trust that at some point the person will reciprocate and refer a potential customer to me. Perhaps you have the same expectation. I don’t know about you, but that hasn’t worked particularly well for me. How about you? Maybe there is better source of value.

If you refer a business to B2B CFO, what’s in it for you? While I believe most B2B CFO partners do try to reciprocate with referrals, I submit that there are more direct benefits to you for taking a step of faith that your client would benefit from a relationship with a B2B CFO partner. This article explores those benefits.

B2B CFO is a national partnership that helps business owners optimize their financial performance as a means of improving company value, increasing personal worth, providing security for loved ones, all while reducing the stress associated with growing a business. Achieving these and other objectives certainly helps the business owner and likely will resulted in some financial benefit to the B2B CFO partner. What might not appear obvious are the direct benefits to you and the referral source.

Suppose you have a customer that has revenues in the $2.5 million range. The financials, while adequate, are neither precisely accurate nor provided on a very timely basis. You suggest your customer talk to a B2B CFO partner and a relationship begins. Over the course of the next several months, the partner introduces the owner to a wide range of financial management tools designed to improve working capital, optimize cash flow, reduce expenses, and improve profitability. The B2B CFO partner also helps the owner implement a budget and create financial projections. These initiatives result in achieving the desired outcomes identified above – improved company value, increased personal wealth, security for loved ones, etc. Obvious benefits to the business owner, but you are likely to benefit as well.

If you are a banker, you can expect such an owner to increase the balances in existing accounts and take advantage of other services that you offer such as lines of credit, loans, and others. If you are with a CPA firm, you can expect that accurate and complete financials will make the preparation of taxes or audits faster and more risk free. As an investment advisor, you can expect that the increased personal wealth of the owner will make it more likely that he or she would increase their investment portfolio, provide a more solid retirement plan and have the peace of mind that security for loved ones brings. Regardless of your profession, doesn’t it make sense that if your customer is in a better financial position that they would take advantage of more of the services you have to offer?

We at B2B CFO appreciate the demonstration of trust you exhibit by referring your clients to us. In our view, it is important that we bring value, not only to your customer, but that you benefit as well. We do that by making your referral a better, more solid, customer for you.

Is There Such A Thing As "Good" Debt? - Nov 17, 2011

Posted by: Steven D. Olson in Articles

In his best selling series Robert Kiyasoki makes a distinction between "good" debt and "bad" debt. As he defines it, good debt is that in which the debt is used to generate a positive cash flow. Application of this definition results in the elimination of personal debt as good debt. Some error in believing that all business debt is good debt.

But is any debt, even business debt, really good? This article addresses three arguments frequently used to justify business debt. (1) Interest on business loans is deductible from the taxes of a business. (2) A mix of equity and debt is a prudent business decision and expected by lenders/investors. (3) Businesses in the early stages of growth don't have an option but to incur debt. Let's examine each of these arguments.

(1) Interest on business loans is tax deductible. Some seem to think that the interest deduction essentially means free money. Suppose you pay $10,000 in interest during the year for a business loan. Let's assume the business is a S-Corp or LLC and that the net income from business operations passes through to the owner. With the loan, the income from the business is $10,000 less then without the loan. If the owner is in the 35% tax bracket, the tax deduction is only $3,500. In order to take advantage of the interest deduction, the owner paid $6,500 for the privilege. So is it really prudent to pay $6,500 to write off $$3,500. Ah, let me think.

(2) A mix of equity (ownership) and debt is prudent and expected by lenders. If you were a lender and approached by a business owner for a loan, would you really be excited that other lenders had precedence over you? As a lender would you rather lend to a business that had no debt or one that had 50% equity and 50% debt. In the first instance, should the business default on the loan you as the lender are first in line to attempt to recover the unpaid amount. In the second case, all other lenders stand ahead of you. You my not recover any or all of the amount owed. Which position would you prefer to be in?

(3) Businesses in the early stages of growth don't have a choice but to incur debt. While I don't deny that obtaining necessary capital is difficult during the early stages of growth, I believe too many business owners seek the easy path by incurring debt rather than aggressively seeking out investors. SBA loan guarantees have reduced / almost eliminated the risk to lenders and thus have made it considerably easier to obtain a loan. Business owners are also attracted to debt because the lender doesn't expect to have some degree of ownership in the business. What owners often forget is that there are required payments that must be paid on time. In contrast, partial ownership doesn't mean required payments nor that there is any involvement in daily business operation by the investor. In a young business, isn't it better to remove as many required cash outlays as possible.

So, is there such a thing as good debt? The intent of this article is to suggest that no debt is good debt. What do you think?

Avoiding Financial Suicide - Oct 30, 2011

Posted by: Steven D. Olson in Articles

What business owner would intentionally destroy their business? Yet, that is essentially what is being done when an owner intentionally neglects to use the key financial reports that are basic to their business. While I contend that an owner should master all of the financial statement triad, I have been shocked at the number of owners that don’t bother to use the cash flow statement. That, I believe, is tantamount to financial suicide. Perhaps you think that is a bit overzealous. Allow me to make my case.

Most businesses operate (or should operate) using an accrual basis for accounting. Under this method, income is recorded when an invoice is sent to a customer and expenses are recorded when a bill is received from a vendor. Neither have anything to do with cash coming in or cash going out. So what, you say? It’s all about timing. Let’s look at the revenue side of the business.

You sell a product to a customer, with the understanding that they will pay you in 30 days. You have a great bookkeeper and he/she bills the customer as soon as the product is shipped. This results in the recording of Income and the creation of a current asset called accounts receivable. Prior to the sale and up to the point at which you receive a payment from the customer you are incurring costs for labor, material, overhead, selling and administrative expenses. If this were your first customer, you would have had a lot of money going out and none coming in. However, your income statement would show that you had earned income. Your income statement might look like this.

Revenue from the sale 1,000

Less Cost of goods sold

Material 200

Labor 300

Overhead 100

Total COGS - 600

Gross Income 400

Less Selling expenses - 50

Less Administrative expenses -150

Net Income 200

So you made money, right? Luc....

5 Tips to Stop Employee Theft - Aug 31, 2011

Posted by: Steven D. Olson in Articles

In a previous article, I addressed the risk that an employer faces from employee theft. I also introduced Donald Cressey’s Fraud Triangle and noted that of the three factors common among fraud cases, only the Opportunity is controllable by the employer. This article provides 5 tips for stopping employee theft and thus enhancing the success and survival of the business.

So what can you do to stop employee theft? Susceptibility to fraud can best be minimized by the business maintaining a strong system of internal controls. Space precludes at complete description of an internal control system, but several principles can be identified.

Separation of duties - record keeping should be separated from physical custody of the assets. For instance, the person who receives money or writes checks should not keep the bookkeeping records. A person responsible for inventory should not have access to the inventory records, nor should they have the ability to ship or receive goods. The person who has custody of a tangible asset – computers, cell phones, and other equipment – should not have access to the property records.
Paper trail - Every transaction must be supported by documents authorizing the transaction such as sales invoices, shipping documents, and the like. No asset, tangible or intangible should be moved into or out of the business without supporting documentation.
Physical control - Tangible assets must controlled to prevent unauthorized removal. Sufficient physical security should be established to prevent easy removal of assets. A simple control is to limit employee comings and goings to a single entrance that is continually monitored during working hours. Access to intangible assets such as data should also be controlled. The use of unique user names and passwords and limitation of access will help prevent inappropriate to sensitive information.
System of Approvals - any transaction that may result in the movement of goods of services to outside the business must have a series of approvals by persons in authority. Policies and procedures should be set up that identify who has the authority to approve purchases and sales at various monetary thresholds. Purchasing staff must be aware of the thresholds and should be held accountable to make sure guidelines are followed.
Checks and balances - a system should be established in which persons not involved in the transaction are responsible to validating balances or verifying transactions by other departments. The results of these validations must be sent to persons in positions of authority and any discrepancy thoroughly investigated.

Can employee fraud be completely eliminated? While it’s unlikely that employee fraud will be 100 percent eliminated, the occurrence and magnitude of the loss can most certainly be reduced. Admittedly the tips are lacking in detail. You are invited to contact any B2B CFO partner to obtain detailed information on a system of internal controls.

3 Tips for Improving Cash Flow - Jul 31, 2011

Posted by: Steven D. Olson in Articles

In his book Danger Zone, Lost in the Grow Transition, B2B CFO founder Jerry Mills defines the “Danger Zone” as a condition when the cash needs of the business far exceed the cash availability. Well, how far is far? When do you stay the course and when do you throw in the towel? How bad do things have to get before they are too bad and how do you know? The questions are easy. The answers, not so much. This article attempts to provide some encouragement for those finding themselves in the Danger Zone.

Would it surprise you to know that you can have positive net income reported on the income statement and yet have a cash flow that can drive you into bankruptcy? It’s true. Lets look at some conditions that are suggestive of entry into the Danger Zone and then address some actions that can be taken to enhance the chances of a turnaround. Despite that this discussion is in somewhat conceptual terms, it contains principles that can be applied to businesses courting the Danger Zone.

The Symptoms:

Cash flow is reflective of cash coming in and cash going out of a business. Positive cash flow means that there is more cash coming in than going out and negative cash flow is the reverse. Cash flow is a function of three things: price, volume and timing. Cash flow problems begin to exhibit when the amount and frequency of the ins shrink to that of or less than the outs and the timing of the outs precede the ins by increasing measures of time. In other words, for a business to endure, the amount and frequency of the cash coming in must become increasingly greater than the amount and frequency of the cash going out. The third factor, timing, means that as the time between events causing the expenditure of cash and the receipt of cash resulting from those events increases, the risk to the company likewise increases.

The Treatment:

Price: While it may appear overly simplistic to state that the amount of cash coming in to a company must exceed that going out, it is a simple truth. A company must have a certain amount of revenues to cover the expenses of the business, the break-even point. As revenues increase beyond that point, profitability increases. However, it is a strange paradox that a company can increase revenues and yet suffer adverse cash consequences. One way to increase revenues is to increase the price of the product or service. How strange it is that companies have a tendency to decrease the price in order to stimulate sales volume.

Volume: Price and volume are unavoidably linked. Total revenues can be increased by holding price constant and increasing volume, increasing price while holding volume constant or increasing both. Obviously increasing volume requires the increase in sales. Companies cannot simply rely on increasing price; increasing the volume of sales must be a priority.

Timing: One symptom of companies in the danger zone is that they have a long time between sales and collection. Companies must reduce the time between the incurring of the cost of a making a product or rendering a service and the collection of cash resulting from the sale of those products and services. One technique for reducing the collection time is to sell products rather than services. When one buys a product, a hammer for instance, you pay for the product at the time of the sale. When one sell a service, the service is provided, cost is incurred, an invoice is sent and the customer pays some time - 30, 60, 90, days later.

Cash truly is king. Owners place themselves and their companies at great peril. This article has addressed three factors impacting cash flow - price, volume and timing. A wise owner will initiate solutions employing all three factors.

My Employees Steal from Me? What's the Risk? - May 31, 2011

Posted by: Steven D. Olson in Articles

What’s the most embarrassing thing that has ever happened to you? How about the thing that angered you the most. For a business owner, theft by an employee has got to be right up there. Couldn’t happen to me you say. A quick search of the internet reveals otherwise. For instance, one site states: "The chamber of commerce reports that 75% of employees steal from their employer; an article in the Denver post indicated that US companies lose over $400 Billion per year due to employee “time theft”; and the American Society of Employers estimates that 20% of every dollar earned is lost to employee theft." Still think is can’t happen to you?

Where is the risk for employee fraud? I suggest that it is employERs. Edward Demming, the guru of Total Quality Management, stated that management is 80 percent of the problem in business. Sound a little harsh? I contend that employee theft largely occurs due to the absence or failure of internal controls and that is the fault of management. Perhaps the company has grown from a small startup to a company of significance, yet the knowledge and implementation of a system of internal controls has not kept pace. Maybe management wants to create an environment of trust and therefore certain internal controls are avoided. There may be a belief that management has a firm handle on the company and that any employee fraud would be easily detected. There may be a host of reasons that a system of internal controls are not implemented, often to the detriment of the business.

Who’s the culprit? An Association of Certified Fraud Examiners study revealed that 67.8% of those committing fraud were employees, 34 percent were managers, 12.4 of which were owners. While men age 40-50 committed the highest number of frauds, college educated older men cause losses four times higher. Women create as many frauds a men, but the amounts are considerably less. Because management is so often involved in the fraud, it is especially hard to detect. Also fraud is most often initiated by persons that do NOT have a pervious criminal history. Clearly, fraud is not easily detected.

Why do employees commit fraud? In his article, Other Peoples Money, Donald Cressey presented the Fraud Triangle which depicts the three elements that every fraud had in common – Pressure, Rationalization and Motivation.

Pressure suggests that there is something that has occurred in a person’s life that has caused such a significant need for money that they are willing to consider stealing to relieve the stress. Rationalization is the employee’s means of justifying their actions. They are only borrowing. No one will get hurt. The company wastes far more money than I am taking. They deserve it. Opportunity is reflective of the knowledge that employees have of the company’s operation such that they know how to circumvent whatever internal controls do exist. The one factor that employERs can control is “Opportunity.” A strong system of internal controls will minimize the opportunity for employees to commit a crime.

So Why Attend A Exit Strategy Presentation? - Apr 22, 2011

Posted by: Steven D. Olson in Articles

Someday you WILL exit your business. While most business owners accept that intellectually, it is unfortunate that few take the initiative to act upon that realization. It may come as a surprise when the owner finds that it is easier to get INTO their businesses than it is to get out of it.

An unexpected event could result in an owners unplanned exit from their business. But for those who manage to survive the ups and downs of the economy and business cycles, advance preparation, the earlier the better, will greatly increase the chances of achieving their desired lifestyle after the business.

Why attend a seminar on Exiting Your Business, Protecting Your Wealth? For those that may exit their business in the next 5 to 10 years, the following may have an appeal:

I've thought about exiting my business and I'm concerned that I don't have a written plan.
Most of my net worth is tied up in my business and I'm frustrated that I don't know how to get it out.
I'm not really ready to sell my business but I would like to begin to reduce the time I have to spend at the business. I am a little troubled that I don't know what options are available to me.
I have employees that have stuck with me in the bad times as well as the good and I'm worried that they won't be protected if I sell my business. How can I ensure they are taken care of?
Frankly, I'm a little nervous that I won't be able to maintain my current lifestyle if I exit my business.
I'm worked hard and invested considerable time and money into my business. I would really be angry if taxes ate up my nest egg.
There may be other reasons that owners might benefit from this seminar.

For many it is sobering to find that 80% of the businesses put up for sale will NOT sell. Early preparation can enhance the chances of you being one of the 20% that do sell. But selling is just one option, not the only option. The best option for you is one that enables you to achieve your goals, whether it is travel, leaving a legacy, providing an opportunity for your children or other desires.

Consider a couple of questions:

If you could get a check in the mail every month, how much total net income AFTER taxes do you think you would need to be able to live comfortably?
If you could create the perfect calendar and you could live the lifestyle you really want; if you could spend you time , talent and resources doing whatever your want to do, whenever you want to do it; if you could get rid of all the activities that you don't want to do, what would that perfect calendar look like?

These are not easy questions, but these are exactly the kind of questions we help our customers work through ....

Of What Value Is A CFO? - Mar 1, 2011

Posted by: Steven D. Olson in Articles

Are you more than a bit confused over the roles of accounting professionals? Do you scratch you head when it comes to clearly knowing whether you need a Controller, a Chief Financial Officer or both?

Having dealt with numerous business owners over the years, it’s apparent that the distinction between the role of a CFO and that of a Controller has become blurred. This seems to be more of an issue among small business owners than large privately held companies and corporations.

CFO, Controller, bookkeeper - are they not the just a rose by another name? If the objective is to retain a person by giving them status by granting them a title, then it doesn’t much matter what you call them. But, if you desire to employ a person with a specific skill set, then the title definitely makes a difference.

In order to keep things simple, lets limit our discussion to the roles of Chief Financial Officer and Controller. While there are a great many differences that will be explored, I think two key distinctions encapsulate the difference of the two functions. First, the CFO is the strategist, focusing on the long term future. The Controller is the doer whose attention is focused on the immediate past performance.

Second, the Chief Financial Officer’s efforts are directed at interpreting the financial story of the company for the decision makers within the company and for the lenders/investors from without. While the Controller may develop financial projections, primarily for budget purposes, he or she largely presents the numbers rather than interpreting the results. At the risk of over simplification, the Chief Financial Officer is future oriented and the Controller is concerned with the past.

Based on this characterization, would you say that a Chief Financial Officer and a Controller play different roles? Do you need a Chief Financial Officer, a Controller or both. The answer is - it depends . . . on you, the business owner.

Do you desire to build your company as a competitive force in your city, state or region or are you content to be a small but profitable company sufficient in size to provide for you and your family?

Here are a couple of examples of the different perspectives between the Chief Financial Officer and the Controller.

CFO - Reviews monthly financial statements for unusual activity. Performs trend analysis and ratio analysis to identify situations requiring investigation before they become problems.
Controller - Prepares monthly financial statements based on the transactions recorded.

CFO - Develops a process over cash receipts including an appropriate separation of duties. Reviews credit card transaction level and work with owner to renegotiate terms with merchant bank when fees become higher than industry standards.
Controller - Receives cash and credit card transactions and posts to customer records.

CFO - Reviews accounts receivable aging to determine which accounts have become delinquent. Identifies any ongoing work for customers who have become delinquent. Develops a plan of action to guide Controller in pursuing the older accounts.
Controller - Prepares monthly billing for customers.

While quite incomplete, the above examples should provide a sense of the differences between the Chief Financial Officer and the Controller.

Of what value is a CFO? The CFO provides a strategic perspective of the financial position of the company and interprets this perspective for the companies decision makers.

You Built It, But Can You Sell It? - Jan 31, 2011

Posted by: Steven D. Olson in Articles

I doubt there is any one who has started a business that didn’t expect their creation to provide a decent life style and felt that eventually the business would be sold to fund their dream retirement. Sadly, however, not all businesses will be sold. In fact, only about 20% of business owners will experience a successful sale of their business. That percentage could be higher if owners would follow a few simple guidelines focused on crafting a business that is Built to Sell, the title of a book by John Warrillow.

Throughout my years observing and consulting with small businesses, I have noticed a vast difference among owners in their preparedness for exiting their business. Built to Sell is an engaging tale that confirms some of my observations of businesses. This article addresses only three of several very important principles that can help owners grow a business that is suitable for sale.

Principle 1: Grow a management team. Who gets the customers, oversees the sale, manages fulfillment and makes the decisions? If the business is dependent on you, there is no business to sell. A buyer wants to know the business can run successfully without you. If you can go on vacation for a month and the business just gets better, then there is a good chance you have something to sell.

Principle 2: Focus on what you do best. It is very easy for the business to get spread too thin as owners are distracted from what they do best in hopes of capturing a little extra revenue. No business can be everything to everybody. Businesses that are focused on being the best, delivering superior products or services will find that they are able to differentiate themselves from their competitors. It is better to excel at delivering a few products or services than providing a wide range of average quality products or services.

Principle 3: Redesign services to be products. If your business is service oriented, look at crafting the service such that it is more product-like in nature. In his book Built to Sell, John uses the example of changing the designing of a logo from a service to that of a product. The principle advantage of this change is the impact on cash flow. People are used to paying for products up front – phone, computer, toothpaste, etc. and services after the fact - cable, phone service, tax preparation, etc. I recently suggested that the owner of a small newspaper consider that her ads were a product rather than a service and that she have her customers pay up front rather than billing them as was her current practice. The difference is about 60 days improvement in cash availability and the elimination of almost all of her accounts receivable. Why should she print the ad only to have a customer not pay or pay 60 days after the ad has appeared?

This article has presented three tips to help business owners grow their business such that it is suitable for sale. I encourage you to read Built to Sell, a very engaging tale, for a great many other tips on crafting a marketable business.

Tax Tidbits - Do It Now - Dec 25, 2010

Posted by: Steven D. Olson in Articles

Tax simplification? Not this year. The pages of tax regulations continue to grow, bringing added complexity and confusion. Even tax preparers have reason to scratch their heads. This article contains a few reminders of tax deductions that may be available to you provided you act before January 1, 2011.

Do before January 1, 2011.

Charitable Deductions - If you itemize deductions, make sure cash contributions are post marked by December 31, 2010 or non-cash contributions are delivered before midnight. It’s not a bad idea to get a receipt for non-cash donations. Charities seldom provide an estimate of value of the contribution. Programs are on the market that can help determining the value of items within IRS guidelines.

Residential Energy Credits - You may be eligible for a 30% credit for installation of energy saving devices such as exterior doors and windows, insulation, heat pumps, furnaces, central air conditioners and water heaters. The device(s) must be installed by December 31, 2010. The maximum credit allowed is $1,500.

Alternative Motor Vehicle Credit - Taxpayers are encouraged to improve the fuel efficiency of automobiles and help the environment by purchasing vehicles that qualify for the alternative motor vehicle credit. Several factors come into play for this credit, so contact your automobile dealership as to which vehicles qualify and validate that information with your tax advisor.

Mortgage payments - Several parts of your mortgage payment are deductible if paid to the relevant institution before January 1, 2011. You might consider making your January mortgage payment before December 31, 2010. The interest portion of the payment is deductible in the year paid. Property taxes are deductible whether paid out of an escrow account or self paid. Pay any property taxes due before January 1, 2011. You can also prepay your 2011 property taxes should you desire, although that is only beneficial for one tax year. Payments of mortgage insurance for residence are likewise deductible if made before January 1, 2011. The amount qualified for deduction is subject to AGI (Adjusted Gross Income) limits. See your tax advisor for specifics.

Retirement Plans - You may make contributions to an IRA or a Roth IRA up to $5,000. If you are at least 50 you may make a catch-up contribution of up to $1,000. There are income limitations for contribution to the Roth IRA with phase out provisions beginning at $105,000 adjusted gross income for an individual and $167,000 for joint filers. Consider whether it may be to your advantage to convert your IRA into a Roth IRA if there are better long term tax results. Talk to your tax preparer to determine whether this is beneficial to you. If you have reached the age of 70 1/2 make sure to take the required minimum distributions as the penalty for failure to do so is a severe 50% of the amount not withdrawn.

Health Savings Accounts - You may establish a health savings account (HSA) through an employer’s cafeteria plan. To be eligible you (1) must be covered by a high deductible health plan, (2) must not be covered by any other health plan that is not high deductible, (3) must not be enrolled in Medicare and (4) cannot be claimed as a dependent on another person’s tax return. You may want to adjust the amount set aside or 2011 if you did not set aside enough in 2010. Over-the-counter drugs (non-prescription drugs) are not qualified for reimbursement from an HSA in 2011.

Estimated tax payments - You may want to increase the amount of your estimated payments if you have been assessed a penalty in the past for under payment of the tax. For individuals, the fourth quarter estimated tax payment is due January 18, 2011.

Estate taxes - If there was ever a good year to die (from a tax stand point) 2010 is the year. Due to Congress’ attention being focused on health care legislation, and perhaps a little oversight on their part, there is no limit on the Estate Tax Exemption and the Maximum Estate Tax Rate is 0% for 2010. There may be a real problem next year, however. Unless Congress acts, the Estate Tax Exemption will drop to $1 Million from the $3.5 Million in 2009 and the Maximum Estate Tax Rate will leap to 60%. Just to be clear, the government would get 60 cents of every dollar from a persons estate. How fair....

Cooking the Books - Dec 21, 2010

Posted by: Steven D. Olson in Articles

If you have been in business any time at all, you have probably heard the expression "cooking the books." Usually it is said in jest, but sometimes the joke becomes reality as corporate leaders take actions or give directions which are clearly unethical. While creative accounting has merits, actually cooking the books, crosses the line. Recall the behaviors of the leaders of companies such as Enron, Worldcom, Healthsouth and others, behaviors that were so egregious that they demanded intervention by Congress, often not a favorable event for business. One of the principle results was the Sarbanes-Oxley Act of 2002 and the belief by many that government needed to place a tighter reign on the financial reporting of publicly traded companies.

The subject of this article is Cash Flow, specifically on introducing the concept of the monitoring of cash flow such that misreported or misclassified amounts might be identified, thus yielding more meaningful cash flow reporting. In short, the objective is to detect the "cooking of the books."

Why might one be inclined to place more reliance and trust on cash flow verses the other financial statements? The short answer is that it is far more difficult to create a misleading view of cash flow than it is to manipulate the financial information contained in the balance sheet and income statement. While that statement may cause one to suspect deceit, it is actually the vagaries of GAAP that permits manager a great deal of latitude in classifying transactions so that the business might be cast in the most favorable light. This is not to suggest that it is impossible to manipulate the classification of cash inflows and outflows, just that change in cash flow and the balance of the cash account is not a prime candidate for manipulation.

While I have a strong opinion of the validity of the Cash Flow Statement as an extremely useful tool for business owners or managers, I am amazed at how infrequent the Cash Flow Statement is used. I can't help but wonder if one of the reasons for its lack of use is because we "professional accountants" have managed to make it too cumbersome and confusing.

To my simple mind, cash flow is "money coming in" compared with "money going out." Perhaps this is too simple for the accounting profession. We, in the profession, have determined that the flow of cash needs to be categorized further and have chosen the labels of Operating, Investing and Financing, categories which have questionable meaning to the majority of business owners. It is my hope that I can make some progress in demystifying these categories and help business owners achieve a greater level of comfort with the AICPA (American Institute of Certified Public Accounts) endorsed format for the Cash Flow Statement. I will conclude this article with a brief description of the three categories of the sources and uses of cash - Operating, Investing and Financing.

Operating cash flow: Most business owners are familiar with the term "operations" as it applies to their business. Cash flow as provided from operations applies to transactions associated with the generation of net income. Those transactions which affect the current assets and current liabilities sections of the Balance Sheet are also of an operational nature and are usually repetitive in their occurrence. For instance, the purchase of inventory which is paid for with cash is a use of cash, although only Balance Sheet accounts are affected. In comparison, a sale to a customer for which cash is received affects both the Balance Sheet (current assets) and the Income Statement. It may be helpful for the reader to remember that every transaction on the Income Statement must have a corresponding entry on the Balance Sheet and the account affected on the Balance Sheet is virtually always a Current Asset or Current Liability.

Investing Activities: The perspective that may be useful to the reader in understanding Investing Activities is the answer to the question, "How is the money entrusted to the business used to continue the business entity on a long term basis?" An example of the use of cash for an investing activity would by the purchase of durable equipment, plant or property assets. The sale of these assets would be a source of cash. Investing activities only involve the purchase or sale of long....

Succession Regrets - Nov 28, 2010

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....

Olson's Observations - Part II 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....

Olson's Observations - Part I, 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 5 - (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 - 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

IT'S 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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