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 (Intro)
June 15th, 2009
© Copyright 2009 Integrated Profitability TM
“Cash flow” has been raised as a topic that might be of interest to small businesses. There are excellent textbooks on the different types of cash flow (from 1- ongoing operations, 2- investments and 3- finance activities). Use of an internet search engine is even a faster way to get as much, or as little, information as one wants on cash flow:
● what it is
● how is created
● how it is reported
● how to extract it from a company’s financial statements.
Most of the sources need to delve into the different financial statements that are used to analyze cash flow. One site I found with a lucid, short description of cash flow is at Investopedia®: A Forbes Digital Company.
Unfortunately, if you go much below the surface, there is a lot of accounting conceptual framework and financial statement reading that comes into play to accurately calculate a company’s cash flow; and what that cash flow might mean for the health and long-term sustainability of the company. A key point is that “cash flow” is most important, because it is most hidden, when the company’s accounting is on an accrual basis. For now, the important point here is that the accrual basis of creating financial statements is the best way to align revenue with expense. Accrual accounting is required for most financial reporting because it does give the best alignment of finance flows.
So, how to increase positive cash flow?
In the News: Expense
May 28th, 2009
Of the 45 articles relating somewhat to profit & profitability, six of them have a strong link to expenses. Of the six, four of them involve or are being driven by government actions (or inaction in one case). Well, five, if you include the personal article.
“Waiting for word from Nepal” (April 26, 2009; p. A25) shares the wrenching story of an Alameda family’s odyssey to adopt a Nepalese child. Their journey has been complicated because “…Nepal’s new government hasn’t yet completed developing its adoption laws.” The family has already spent $21,000 and estimates that another $15,000 will be needed. A very personal example of having to spend money before attaining anything worthwhile.
The articles “Firms anxious about new fuel standards” (April 26, 2009; p. A3) and “It’s cost vs. harm in plastic foam ban” (May 2, 2009; p. A3) cover proposed governmental actions that will result in higher costs for certain businesses. In both cases, the push behind the regulation changes are much larger issues: green house gases and the environmental impact of plastic foam containers. Both are examples of conflict between long-term social goals and short-term commercial realities. The better one knows the details of their expenses, the better equipped one will be to anticipate and deal with future events.
Introducing: Expense
May 25th, 2009
The outgoing part of the Profitability equation.
Generically, “expense” may be defined as anything of value given up in order to obtain resources, services or labor. Almost always, expense precedes revenue.
In the simplest terms, expense is cash given in payment for materials or services. There is a continuum of paying for expenses, ranging from “Cash-Near Cash through to Barter of Products or Services.”
How one pays for an expense shouldn’t be an issue. Whatever you receive in return for the payment is an expense to your business, whether you pay cash, use a credit card, exchange an asset or provide a service as payment.
Accounting for expenses, and when to book them, is relatively straightforward although some knowledge of basic accounting principles is helpful. If an expense is not paid in cash, then it is important to track when whatever was given (e.g., an I.O.U.) converts to cash (usually the “Near Cash” items, not the bartered products and services).
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