Numbers People in Action: Finance Analysis
August 18th, 2009
Copyright © 2009 Integrated Profitability TM
A further continuation of the suggestion that came in to “…include a simple but meaningful scenario which you’d have the three Numbers People work through to posting, reporting and interpretation and planning…” The first article set up the simple scenario, the second dealt with Accountants & Bookkeepers, the third with basic Finance reporting. This article focuses on the analysis that Finance does.
The third step for Finance is to provide analysis and interpretation of the numbers. To the extent possible from the general ledger accounts, Finance will dig into changes in the numbers and provide explanations as to what is causing those changes, as well as identifying interconnected events. They use the information they have reported: what the number are and how they have turned out. The analytical stage focuses on explaining the numbers, and their movement, in terms of what is happening with the business creating the numbers.
For example,
● if the expense figure for the snacks has increased, it would be good if sales revenue has also increased. Even better if it has increased at a faster pace.
● if the amount in inventory is increasing, a fall off in sales would help explain what is going on
● if net profit is increasing, a decrease in expense or an increase in revenue would help explain the beneficial outcome
But what if things aren’t moving in expected, or at least hoped for, ways?
In the News: Two Faces of IOUs
July 16th, 2009
Copyright © 2009 Integrated Profitability TM
Regarding California’s IOUs, there are two more articles in the Contra Costa Times of interest, with the second one being particularly pertinent to the current “Small Business Finance & Profitability” (SBF&P) series on cash flow.
The first article, “Options dwindle for those holding California IOUs” was on page AA1 on Tuesday; July 14, 2009. Taking a more professorial approach, the spokesman for the California treasurer’s office sheds slightly more useful light on the sad financial plight of the State of California:
““The decision by most major banks to not accept IOUs makes them less liquid, makes it more difficult to turn them into cash,” said Tom Dresslar, spokesman for the state treasurer’s office.”
Both phrases say the same thing and he still manages to make it sound like the banks are somehow causing the problem. It would be nice to hear him say that the State of California….well, let’s be honest. It’s not really the State of California that’s the problem: it’s the elected officials who have the job to balance the state’s budget and to manage the state’s financial condition. They aren’t doing either.
In the News: Blame Games
July 13th, 2009
Copyright © 2009 Integrated Profitability TM
Given California’s financial and budget predicament, the press is full of articles about the crisis, its causes, status, what is happening and, more often, what is not happening.
One particular article has something so incredible that, in my opinion, it warranted an interruption in the current series on Cash Flow. It definitely affects cash flow. A short interruption for “Breaking News…”
The article, “Banks’ plan to refuse state IOUs takes heat,” was on page A9 of the Contra Costa Times on July 9, 2009 (Thursday). The focus of the article was on how and when certain banks were going to handle California State’s IOUs. The main thrust was that since the banks have benefited from government bailouts, if they didn’t participate in California’s IOUs then there would be a backlash.
Let’s set the playing field. Not level it—just make sure we know what game we’re playing and what the rules are.
Cash Flow: Revenue (Actual)
July 6th, 2009
Copyright © 2009 Integrated Profitability TM
This is the third in the “Cash Flow: Revenue” string of articles and the focus is on ideas to increase Cash Flow on a permanent basis. The first two articles covered temporary, timing ways to increase Cash Flow (“Cash Flow: Revenue (Timing)”) and the grey area between timing and actual improvements (“Cash Flow: Revenue (Grey Area)”).
As mentioned in “Cash Flow (Intro),” the only way to permanently improve Cash Flow over the long-haul is to widen the spread between Revenue and Expense (where both are on an “All-In,” net basis). As long as net-revenues (converted to cash) are increasing faster than net-expenses (paid in cash), the company’s cash flow is improving.
(Note: there are specific relative trends that can cause cash flow to behave counter-intuitively, but we’re going to ignore those for now and perhaps pick them up at a later time.)
How to increase revenue is an age-old question facing businesses, and the full topic is far beyond the scope of this article. While the thoughts below are limited specifically to the revenue side of the Cash Flow equation, the steps are very similar to those taken to increase sales and revenue overall. Here’s the first one:
Number Games
July 2nd, 2009
Copyright © 2009 Integrated Profitability TM
Any blog on finance and profitability must deal with numbers. Which can be tedious and boring. One of the main points behind the “Small Business Finance & Profitability” is that owners and other stakeholders in the business need to actively understand those numbers: which are reporting the direction and health of your business. You can hire others to do the tedious chores, as long as you hire trustworthy and conscientious people. But what can never be sub-contracted, at least not without major risk, is the knowledge of what the numbers are telling you.
An earlier blog, “Numbers People,” provided an introduction to types of jobs and careers that are involved with company numbers. At the end, it was stated that some functions should be separated to some extent as a matter of prudent “checks & balances.”
Here’s an example from a large company. Let’s say the company is experiencing a squeeze on profitability because of a very tough market. Sort of like the one we are in right now. Further, a mandate comes down from management that the whole company has to cut expenses.
Cash Flow: Revenue (Grey Area)
June 29th, 2009
Copyright © 2009 Integrated Profitability TM
In “Cash Flow: Revenue (Timing),” we covered ideas on how to improve revenue by making changes in the timing of the receipt of cash. The last example in that article, about influencing the type of payment mode customers use when making purchases, was crossing the line from temporary timing changes into permanent cash flow improvements.
There is a grey area between “Timing” and “Actual” ideas when it comes to improving Cash Flow.
For example, if credit cards cost 5% on average to convert a sale into cash, you might consider offering a discount if the sale is paid for in cash. In this example, a 2% discount would provide a good benefit. Some businesses already do this. Traveling around the country, there are gas stations that differentiate prices based on whether one is paying with cash or with credit. As far as your business is concerned, it all depends on the paying-willingness and flexibility of your unique customer base. How to go about it?
Cash Flow: Revenue (Timing)
June 22nd, 2009
Copyright © 2009 Integrated Profitability TM
As mentioned in “Cash Flow (Intro),” the only way to increase cash flow consistently in the long-run is to ensure that revenues are growing faster than the underlying expenses. For this to happen, “net revenue” is what counts: gross revenue (e.g., sales made) less discounts, processing fees, rebates, returns and anything else that prevents the sale from getting converted into hard cash that you can hold in your hand.
For both revenue and expense, there are two ways to improve cash flow:
● timing changes
● actual changes
The first primarily helps temporarily. The second helps permanently.
For revenue, timing changes help cash flow when the receipt of incoming cash is accelerated; actual changes help when incoming revenue from business activities increases. Focusing on the revenue portion of cash flow, here are some ideas:
Timing:
● Tighten up terms of payment for your sales (examples follow)
● Shorten the amount of time between billing the customer and receiving their payment. Most companies list standard terms on their invoices, stating how long the amount has been outstanding and at what point finance charges kick up (e.g., after 60 days).
● Add finance charges to late paying accounts
Numbers People
June 18th, 2009
Copyright © 2009 Integrated Profitability TM
Several blogs ago, I made a light-hearted distinction between accountants and finance managers (Finance is zzzzz….). We received a request for more differentiation between the two professions. In my mind, there is a big difference between the two; but I might be like the Eskimo who has many words for snow, each one dependent upon the physical characteristics of the white, cold stuff covering the ground. Above the Artic Circle, some types of snow are your friends while others might kill you.
Let me hasten to clarify: different “numbers people” won’t kill you. But the right ones might keep you out of bankruptcy court or jail. The best ones might help launch you in the opposite direction and really benefit your company.
While I was thinking about the request, it dawned on me that the World of Numbers is inhabited by a number of strange creatures (what? I can’t slip some word play? Contrary to popular belief, numbers people have been known to engage in humor: it’s just different. Takes getting used to. Like wasabi).
I hope it’s clear, but here’s the disclaimer: what I am about to write is my personal view of the various types of people and jobs associated with financial numbers. Others will no doubt have different views but that is the beauty of a diverse and dynamic world.
In the arena of financial statements, there are three main job functions: accountants, bookkeepers and financial managers. These three work together to create and report on a company’s financial position.
The BIG Question
June 4th, 2009
Over the past two months, we’ve covered the basics of profit and profitability.
We’ve touched on the concept of profit and how to calculate profitability. We’ve looked at the two components that drive net-profit: revenue and expense. Examples have been taken from the Contra Costa Times relating to current examples of each. And we touched on how individual businesses are part of a vast world that impacts commercial success, or not, every day throughout the year.
Now’s the time for the BIG QUESTION: how does all this high-level, definitional “stuff” relate to you? To paraphrase Rob Zazueta, the owner of TechKnowMe TM: “let’s cut to the chase.”
What is your business’ Net-Profit? More importantly, what is its trend? Is it going the way you want it to? Like the stock market, there are only three choices: up, sideways, down.
Everybody likes good news, so let’s say it’s going UP. Great! That’s fantastic given the current state of the economy.
What’s driving your higher net-profit? Is it increasing revenue? Decreasing expense? A combination of the two? What opportunities do you have to increase net-profit even more? What issues or problems do you need to work on to continue increasing your net-profit?
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