Figuring Out If We’re Having An OK Year

We’re hitting our numbers in terms of new sales, but we’re still off in overall revenue and profit forecast. We’re trying to figure out what’s working and what’s not working. Is it mix? If the mix is OK, maybe our forecast was off? What about the time it takes to ramp up and show results?

THOUGHTS OF THE DAY: Delivering according to plan can be complicated. Coming up with a plan that makes sense can be just as challenging. Look at the puzzle from multiple points of view. Take a critical look at the timing of income and expenses.

Continue reading “Figuring Out If We’re Having An OK Year”


Good Accounting Practices Must Be a Top Priority

Office staff doesn’t know enough about our accounting system, or accounting in general. The accounting department says they’re overwhelmed. If anyone in that department is out sick, they get really behind. Space is very limited in accounting, and they’re dealing with a lot of interruptions. We could be doing a better job with the numbers side of the business. Any suggestions?

Thoughts of the day: Pay attention when accounting says they’re overwhelmed, as their performance is essential to a healthy business. Putting accounting in an area where they can’t be easily disturbed is a really good idea. Look for opportunities to involve people from around the company in accounting functions. The more your people understand what makes the numbers work, the more they can help ensure a profitable year.


Using the balance sheet as your company’s barometer

I don’t understand what’s going on, on the balance sheet.

Thoughts of the Day: The balance sheet takes a snapshot of the health of the company at a specific point in time. Most business owners concentrate on learning how to use the Profit and Loss Statement, but overlook how the Balance Sheet can help them. The balance sheet helps to set goals for how you, as a business owner, want things to change over time.

There are three parts to the balance sheet: assets, liabilities, and equity. Assets are broken into two or three major categories. Current assets are items that are already in cash, such as a checking account, and items that can be converted to cash within 12 months, such as accounts receivable.

Liabilities represent the debts of the company. Like assets, short term liabilities are liabilities you expect to pay off within 12 months. This includes credit lines and the current year’s portion of any term loans. Long term liabilities are debts that are expected to take more than a year to pay off.

Multi year term loans and multi year equipment loans are 2 examples of long term loans. With long term loans, ideally the amount of principal to be paid off during the year is moved from long term liabilities to current liabilities. Each month, as you make payments on your loans, part of that payment goes to reduce principal. This shows up on the balance sheet as a reduction in the current portion of the long term loan. This is a little bit of extra accounting paperwork, but gives the business owner a much more accurate picture of what’s happening to liabilities throughout the year.
Equity is what is left over when liabilities are deducted from assets. The equity section of the Balance Sheet is the sum of several items, including shares issued in exchange for investments made in the business, goodwill, and retained earnings among others.
Goodwill is meant to represent intangible values, for example the value of proprietary systems and brand equity. Setting its value is tricky, complicated and requires outside expertise.
Retained earnings represents the sum of all the net income that has been re-invested all the years. It doesn’t have to be cash. It can show up as cash, inventory, fixed assets, property, etc. Business owners have a choice to make at the end of each year. They can remove net income from the business and take it home, or they can leave net income in the business and use it to boost retained earnings and equity.

One of the ways to measure progress in a business is to monitor ratios. Debt to Equity and Current Assets to Current Liabilities are 2 keys ratios to keep on top of. A good rule of thumb is to keep Debt to Equity ratio below 250%, meaning that for every dollar of equity, the company has no more than $2.50 of loans and other debts.

A good rule of thumb for Current Assets to Current Liabilities ratio is to keep above 200%. In other words, for every dollar owed, that must be paid off in the next 12 months, the company has $2 or more dollars in current assets. Companies with high inventory and concerns about how quickly they can sell it off, may want to deduct inventory from current assets when calculating the Current Assets to Current Liabilities ratio. This is known as the Quick Ratio.

Planning to sell the business one day? Accurately attending to the balance sheet throughout the years of business, and focusing on building up assets and reducing liabilities leads to more options. Ability to leverage the company and staying on top of having enough cash through the years to build a healthy company helps you build long term exit value. Retaining earnings in the company, rather than taking everything home each year puts you in control of how the company grows and helps you to build sale value according to a plan.

Looking for a good book? How to Read a Balance Sheet: The Bottom Line on What You Need to Know about Cash Flow, Assets, Debt, Equity, Profit…and How It all Comes Together, by Rick Makoujy.


Time for a Mid-Year Check Up on Finances

Want to be sure that we show a profit this year. Know we can’t have both high profit and low taxes. Where is the balance? Need to be sure to show the bank improvement over 2012. What stats should we be watching?

Thoughts of the Day: Building a successful company means that it is growing both revenue and profitability. Focus on building reserves and getting ratio improvements when comparing assets, liabilities and equity. As long as your company needs to borrow money, think of the bank as a partner who needs to be kept informed.

When managing in a downturn, it’s essential to have an accurate picture of where the company is headed – immediately and mid-term. Define any shortfall, rather than ignoring the problem, by comparing revenue forecast to expense budget. Do everything possible to reduce the shortfall to zero by cutting expenses and focusing on profitable revenue. Identify use of lines of credit and other debt instruments to close any gaps. Figure out ahead of time if the company risks running out of cash. Be realistic.

While the finance department is usually focused on reporting on historical performance, and keeping controls in place, its greatest value comes from creating a go-forward picture. Planning out the forecast of revenue and building an accurate expense budget is a way of showing everyone where the company is going, in financial terms.

Set revenue targets that everyone can agree on. Don’t over or under forecast. Use the budget to plan out critical expenditures needed to boost sales and marketing, in order to get the company back on track for profitable growth.

Look at crucial ratios that will determine whether or not the company can obtain additional financing. Compare current assets (cash, accounts receivable, inventory) to current liabilities (accounts payable, lines of credit, current year’s portion of long term debt). The ratio needs to be 2:1 or higher.

Next take a look at debt: equity ratio. That needs to be under 2.5: 1. Companies with the greatest difficulty meeting that ratio tend to be young, under capitalized firms, and companies that have been taking losses for a long time.

If the company is at or above 2.5, and there are no funds available from the owners, the company is going to have to make do with what it has available. It may also be at risk of having it’s lines called by the bank. Treat this situation very seriously by building a plan to boost profits and sales immediately, without taking on additional debt.

Many times the debt: equity ratio is okay, but the current assets: current liabilities ratio is too low. If that is the case, consider terming out some of the credit line, thereby moving debt out of current liabilities, into long term. This move won’t impact the debt: equity ratio, but it will improve the ca: cl ratio.

Once the company starts to produce profits, use the money to pay down debt and build reserves at the same time. $1goes to debt service, $1 into cash reserves. Building up cash reserves will give the company more room to manoeuver than paying down debt alone.

If the company is struggling, keep the bank informed. Banks don’t like surprises. They want to see an owner who is knowledgeable, forthright, and working to solve problems with the resources available. Demonstrate that by sharing plans and reporting with timely data.

Ask the bank to meet with you, to review existing reports. Ask for their suggestions. What additional reports do they think you should be looking at? What ratios would they like to see? How often? They can be helpful, if you open the door to a cooperative relationship, and they may see things that you don’t. The best part: their advice is usually part of the package of services they offer, you might as well make use of it.

Looking for a good book? Never Run Out of Cash, The 10 Cash Flow Rules You Can’t Afford to Ignore, by Philip Campbell

Want to print this article? Time for a mid year check up on finances


Making Time for Finance

We have a billing accuracy and timeliness issue. It’s hard for me to tell what’s going on with our income, expenses, profits, loans and bank accounts. I don’t trust what I’m looking at, but I’m not sure how to fix it.

Thoughts of the Day:

As data gets entered into the accounting system, it is subjected to interpretation. In addition many companies have employees doing data entry who have not been formally trained in accounting practices, potentially leading to misclassification of expenses. Errors can pop up in unpredictable ways and lead to misrepresentation of what’s going on.

When it comes to data entry, there is potential for error everywhere:

  • prices to charge to clients
  • acceptance of bills from vendors and credit card companies
  • assignment of costs to proper cost categories
  • recording of expenses against cost centers
  • use of balance sheet versus income statement accounts

It is essential to make sure that reports are accurate and meaningful to the people who rely on them to interpret how the business is doing.

Start with approvals for entry into the accounting system. So often the accounting staff gets blamed for errors when the problem lies further up the chain.

As transactions become more automated, they move faster, with less of a paper trail. Charges from credit card firms and bank accounts get dumped into accounting systems as part of the reconciliation process. Vendors can send in bills that slip past traditional controls. A clerk in accounting may not know what’s legit and what’s in error.

Look at the steps bills go through. Decide who gives approval and who indicates what accounting categories are to be used. Make sure that both line management and accounting experts are involved in oversight.

Proof entries by category: revenue, cost of goods sold and overhead for the Income Statement; assets and liabilities for the Balance Sheet. Assign people responsibility to review sections of transactions. Correct transactions that double up – 2 months of rent in one month, nothing in the next.

In many companies invoices to customers automatically generate as soon as products are shipped, or as billable hours are input. Make sure sales and customer service oversee charges going to customers. Set up a system to of line management review in order to identify red flags, to catch and fix problems before they hit customers’ desks.

Separate reconciliation from data entry. When doing reconciliations formally record all questions for review and correction. Treat errors as teaching opportunities. Reduce errors by setting up memorized transactions. Identify and routinely focus on high-error rate categories.

Educate staff involved with data entry. If they do not have accounting training, make that part of their development plan. Once they have the basics down, encourage additional courses to increase their ability to contribute. Promote people who are persistent about getting reports to be accurate, weed out people who are just going through the motions.

Turn to accountants and business analysts for help setting up routines. Ask them to show you how to use the General Ledger, Transaction by Account and Reconciliation reports to proof entries. Set up periodic audits to spot check data.

Share reports with line managers and ask them to send in questions. They can spot things that, “don’t make sense” from their perspective. Create a form that managers can use to send back inquiries, which will allow people in accounting time to review questions and make corrections.

Don’t send the company down a path doomed to failure because plans are based on inaccurate information. Encourage people to question reports, rather than standing pat that once a report is printed it’s correct.  Insure that everyone up and down the line believes that the numbers are correct. Then you can confidently use historical data as a foundation for planning the future of the business.


Looking for a good book?  Financial Statements, A Step-by-Step Guide to Understanding and Creating Financial Reports, by Thomas R. Ittelson.

Want to print this article? Making Time for Finance