Expense Timing
August 26th, 2010
Copyright © 2010 Integrated Profitability TM
Accelerating the collection of revenue and postponing the paying of expenses have a positive, if temporary, impact on your cash-flow and profitability.
How much can your company affect the timing of expenses?
● Lagging payments
Pay as late as possible without incurring any fees or penalties
● Cash-discounts
When suppliers counter the first tactic above, consider taking advantage of discounts if you pay early; e.g., some jurisdictions offer discounts on property taxes; while some insurance companies tack on a 12% annual interest rate if you choose to pay via installments
● Payment terms
If you can, negotiate payment terms that let you pay bills within 30 (or more) days with no additional fees or finance charges
● Credit card statement cut-off dates
Know the cut-off or close date of your credit cards and, if possible, use the card just after that date and avoid using it during the days just prior to it. Depending on the terms of the card, doing so will give you an extra 30 days or so.
● Tax planning
Usually these provide temporary, one-time benefits. For example, the year I paid my whole property tax before December 31, I had more itemized deductions and, therefore, a lower tax liability. Of course, it was only a one-time timing benefit. Consult your tax accountant on any ideas in this area.
Bottomline:
● Expense timing events are only temporary and one-off
● Expenses that produce high returns are clearly a much better focus of management attention
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 77
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Equity-capital: Financial Definitions
November 2nd, 2009
Copyright © 2009 Integrated Profitability TM
The second in a series based on a request to cover “capital”:
“Good! Finally all of this is coming together for me. How about more on capital? What is it? where does it come from, is it actual & stored somewhere physically and separately or virtual like the net or sum of two or more numbers?”
The last article, Capital: An Introduction, painted a high-level picture of the arena in which one finds capital. To put some meat on those bare-bones, here are definitions for the main concepts—in a kind of reverse order:
● Revenue: money that comes into a business. This represents the value of what customers are paying for products and services provided by your business; a.k.a.: income.
● Expense: money that goes out of a business, particularly funds spent to make, deliver and support products and services purchased by customers; a.k.a.: cost.
● Net-Profit: what is leftover from revenue after all expenses are paid. “Net-profit” is merely a mathematical equation and depending on the two inputs, it can be positive (a good thing) or negative (not such a good thing).
● Income Statement: the summary statement that contains revenue and expense, and ends with the difference between the two (revenue minus expense). Net-Profit is either positive or negative. There may not be consensus on what the former is called, but the latter is universally known as “a loss.” Which is why the Income Statement is also known as The Profit and Loss Statement.
● Assets: what you own.
● Liabilities: what you owe.
● Capital: the difference between what you own and what you owe. Like with Net-Profit, this is a mathematical calculation. If Assets are greater than Liabilities, the company has positive capital. If, however, a company’s effort and investment haven’t worked out, Assets may be lower than Liabilities which leaves the company with negative capital.
● Balance Sheet: a summary statement that contains all of a company’s assets, liabilities and capital. In the wonderful world of T-accounts, double-entry bookkeeping, journals and ledgers, Assets are shown on the left half of a page (Note: as you are looking at it; not from the page’s perspective) while the Liabilities and Capital are on the right half of the page. The convention is that Liabilities are always on top—possibly in homage to the fact that if a company goes into a death spiral and splats into bankruptcy, the people holding Liabilities get paid before those holding Capital.
With perfect timing, The Contra Costa Times this morning (November 2, 2009), had an article covering the bankruptcy filing for the CIT Group (Morning Report; “Key Lender files for Chapter 11”; page AA1). Two pertinent points related to capital:
“…, CIT’s bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion.”
“Treasury Department spokesman Andrew Williams said the government will be closely monitoring the bankruptcy proceedings, but acknowledged that “recovery to preferred and common equity holders will be minimal.””
Apparently, good and bad news are twins.
Please let me know if there are other terms for which definitions would be beneficial, or helpful, or add clarity.
Next in the series: The Market & Other Names for Capital
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 44
Telephone: 925-202-6244
Copyright © 2009 Integrated Profitability TM
Equity-capital: An Introduction
October 26th, 2009
Copyright © 2009 Integrated Profitability TM
The “Small Business Finance & Profitability” (SBF&P) blog has received a request to cover “capital”:
“Good! Finally all of this is coming together for me. How about more on capital? What is it? where does it come from, is it actual & stored somewhere physically and separately or virtual like the net or sum of two or more numbers?”
“Capital” is a great topic and one the SBF&P blog hasn’t touched upon. Not even gotten close, although passing reference has been made to it from time to time. Capital is a critically important part of a company’s financial books. However, it can be somewhat esoteric; which means, it will take a few blogs to define, explain and clarify what capital is, why it is important and how it can be used.
This first article will be an introduction, providing a definitional foundation for more detailed articles in the future.
The prospect of a series of articles on financial capital will no doubt send some people screaming for any button on your keyboard that will return you to where you came from, close the browser or shut-down your computer. A pity.
To begin the discussion of capital, an introduction is in order. Of all the financial statements created to report on companies, two stand head-and-shoulders above the rest:
● The Income Statement
● The Balance Sheet
These may trigger big yawns for many, but do your best to stifle them. If these two reports don’t raise your heart rate, hang in there. Things get better. Trust me: I’m in finance.
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?
Numbers People in Action: Accountants & Bookkeepers
August 10th, 2009
Copyright © 2009 Integrated Profitability TM
A 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.
With the business model articulated, Accountants step in. Their job is to determine what all the different transactions mentioned or extrapolated from the Business Plan are–from a financial, general ledger perspective. This determination automatically dictates, in the accounting world, how these transactions need to be booked. The accountant will lay out treatment for both the Income Statement (revenue and expense) and the Balance Sheet (assets, liabilities and capital).
For example,
● buying the snacks is an expense
● selling the snacks to harried hungry people is revenue
● if you pay for the snacks with cash, the warehouse trip will decrease cash (an asset) and increase inventory (also an asset)
● if you pay with a credit card, the warehouse trip will increase your credit card debt (a liability) and increase inventory (an asset)
Isn’t double-entry accounting awe-inspiring?
Got Cash Flow? (Part 2 of 2)
July 20th, 2009
Copyright © 2009 Integrated Profitability TM
In the article before our regular blogging got interrupted with “Breaking News” (“Got Cash Flow? (Part 1 of 2)”), revenue and expense information was gathered in order to figure your company’s cash flow. For revenues and expenses, the method of payment was highlighted because it provides insight into ways to improve cash flow. Here is what the table of information might look like:
|
Payment Method |
Revenue ($) |
Rev (%) |
Expense ($) |
Exp (%) |
| Cash | ||||
| Debit Card | ||||
| Pay Pal (or similar) | ||||
| Check | ||||
| Credit Card | ||||
| Government Programs | ||||
| Invoice | ||||
| I.O.U. / Promissory Note | ||||
| Other (describe) | ||||
| Other (describe) | ||||
|
Totals |
($) |
(%) |
($) |
(%) |
The order of the “payment method” is from immediate-cash to much-later-cash. For your business, fill the chart in, adding and taking away payment categories to fit the way your company operates. As you fill in the information, jot down estimates of how long each payment method takes to convert to cash. For revenues, that is how long you are financing (carrying) your customers. For expenses, that is how long your suppliers and creditors are financing you.
As you compile these numbers, do you notice any changes happening over time? Unfortunately, the time it takes revenue to convert to cash naturally increases, while the time it takes expenses to be paid in cash decreases. If both of these trends are happening in your business, your cash flow is getting doubly squeezed. If your cash flow is getting squeezed too hard, let’s talk.
In the meantime, here’s a generic approach to assessing the state of your company’s Cash Flow:
Got Cash Flow? (Part 1 of 2)
July 9th, 2009
Copyright © 2009 Integrated Profitability TM
Is your company generating Cash Flow or Cash Dribble? Does your Cash Flow look like the Amazon? Or a dry wash?
Excellent Flow
If your business is firing on all cylinders and you are drowning in a flood of positive Cash Flow, then STOP READING! Go straight to your favorite sweet shop and treat yourself to your favorite dessert. Do not stop at the gym, do collect your “2-for-1” coupons. You deserve a reward for your outstanding success.
On the other hand, if your Cash Flow isn’t as much as you would like, or you think it should be more, then read on. If your Cash Flow is negative, then definitely continue reading.
If your business’ Cash Flow is:
● overwhelmingly positive,… why are you reading this? You’re supposed to be enjoying your favorite dessert. Get out of here. Unless you’re reading this over a banana split at Fenton’s or another fine establishment—then you’re off the hook.
● trickling along, then now is the perfect time to take action
No Flow
● negative, then late action is better than no action
And finally, if you don’t know your business’ Cash Flow, then you are starting at Square One; which, if you have been in business for some time, is not a good place to be.
In the News: Cash Flow
June 25th, 2009
Copyright © 2009 Integrated Profitability TM
Apparently, Cash Flow is an important topic for just about every type of organization. Including the government of our fair State of California. The lead headline in yesterday’s Contra Costa Times was about the current state budget crisis: “In state senate, it’s high noon.” (Note: the Contra Costa Times website has a different title for this article: “Democrat lays down gauntlet: vote for cuts”)
On Monday in “Cash Flow: Revenue (Timing),” the current series of the Small Business Finance & Profitability blog started on ideas for improving cash flow from the revenue side of the equation. The State of California is right there:
“Democrats have proposed about $9.8 billion in one-time revenues such as accelerating withholdings on personal, corporate and independent contractors’ earnings,…”
Sound familiar? It should. It’s a revenue timing move. As pointed out in Monday’s article, timing only temporarily helps cash flow. This proposal (which didn’t exactly sail through the legislature) doesn’t change the amount of revenue that is owed to California or how much the State is going to end up collecting for the year, but it does cause taxpayers to pay earlier. Which helps California’s cash flow as soon as the higher withholding goes into effect.
However, because it doesn’t really increase state revenue, I disagree with labeling this move a proposal of “…one-time revenues…”
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
Got Profit? TM
June 11th, 2009
If your business is going gangbusters and you are making more profit than you can possibly handle, then STOP READING! Go straight to your favorite coffee shop and congratulate yourself with your drink of choice for your outstanding success.
On the other hand, if you’re not making as much as you would like, or think you should be making more, then feel free to read on. If you’re losing money, then definitely continue reading.
If your business’ Net Profit is:
● overwhelmingly positive,… why are you reading this? You’re supposed to be enjoying your favorite beverage
● muddling along, then now is the perfect time to take action
● losing you money, then better late than never
And finally, if you don’t know your business’ Net Profit, then you are starting at Square One; which, if you have been in business for some time, is not a good place to be.
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