Product pricing: reality check

June 9, 2010

You applied the markup factor in your financial model to the “all in” costs of your products, so now it’s time to see how things turned out.

Compare your company’s actual results to its financial model.

Gross profit was $70K higher than plan, and SG&A was $10K lower than plan, so Net Income was $80K higher than plan.

Look at percentages (of revenue), too. Note how gross margin actual was 3% lower than plan. Maybe this was intentional: you discounted some product to stimulate sales — that’s why revenues were so high. Or maybe it was unintentional, in which case it’s worthy of further investigation.

A rule of thumb:

a 1% variance in gross profit margin is significant.

Being able to do this analysis promptly after an accounting period closes is one of many reasons why a quick monthly close is so important. A shorter financial feedback loop lets you act more quickly to improve financial performance.


April

April 1, 2010

Take a look at your first quarter results: they’re a meaningful indicator of how the year’s shaping up.

  • Multiply Q1 sales and profit by four and see what your year would look like if Q2, Q3 and Q4 are exactly the same.
  • Pull a five-quarter Profit and Loss. How’s your company trending?

How’s your pipeline? Are you focusing on the customers and types of sales you care most about? What about customer retention? What percentage of last year’s customers have you engaged with again this year?

Book recommendation: Rework by the people at 37 Signals. It’s a quick read but has lots to think about (er, excuse me) act on.

You should have a pretty good handle on your income taxes by now:

  • 2009 returns filed
  • paying 2009 taxes due
  • having a preliminary 2010 tax plan in place
  • knowing when to check in again with your CPA re: 2010 tax planning.

A few monthly best practice reminders:

And FYI I’ve started a new Learning page on our website. Please let me know if you want to learn about any topics in particular.


The 8 ways to create wealth through your business

February 16, 2010

1. Profit

The one most people think of first. Active levers at your disposal: quantity sold, price, COGS, gross margin, controlling fixed overhead / SG&A, controlling other expenses (interest, taxes, depreciation).

2. Cash flow

There’s a dollar floating around: who has it? You, or someone else? The goal of cash flow is to get that dollar to flow into your business, and the sooner the better.

3. Balance sheet

This gets tricky, because you can make money on both a strong or a weak balance sheet. A strong balance sheet lets you borrow money less expensively, negotiate better pricing, and be more intelligently proactive vs. inefficiently reactive. On the other hand, a well managed weak balance sheet might mean you efficiently generate profit using other people’s money (OPM) in a highly leveraged company, which equals powerful Return on Equity (ROE).

4. Exit strategy

Build your company with an eye toward selling it — in whole or in part — and you’re likely to get a much higher valuation when you sell. This could be worth hundreds of thousands or millions of dollars. If you don’t think your business has significant resale potential, you’re setting too low a bar for yourself. Aim higher. Profitable, cash flow positive businesses with good systems are almost always in demand.

5. Turnkey systems

a la Michael Gerber and his E-Myth logic. Get the company to run without you. Creates short-term benefit (more profit per hour of time you work) and long-term benefit (higher valuation because whoever buys your company will be more confident that the “machine” will work without you).

6. Risk management

If the other strategies here are “offense”, this one is “defense”. You’ve made money, now protect it. Insurance is just the beginning. Diversification, tight contracts, regulatory compliance, financial controls…there are scores of effective, affordable risk management techniques to deploy. The goal here is to avoid unpleasant surprises.

7. Personal investments

I’ve seen entrepreneurs totally neglect the money they’ve taken out of their business; they let it languish earning negative returns (after inflation) in an anemic money market account. Make the money on your personal net worth balance sheet work for you — keeping up with inflation should be your minimum expectation, then go up from there based on your long-term investment plan.

8. Tax planning

Tax planning deserves a special mention, because it’s usually one of an entrepreneur’s top five expenses, totaling hundreds of thousands or millions of dollars over an entrepreneurial lifetime. Think income tax, payroll tax, sales tax, use tax, city business tax, property taxes, estate taxes, and more. Think long-term. Revisit your strategy at least annually with a qualified tax advisor.


How Strong Is My Balance Sheet?

January 4, 2010

How strong is your balance sheet? In this new video, you’ll learn 12 ways to find out.

http://davidsterncfo.mindbites.com/lesson/7161-how-strong-is-my-balance-sheet

If you want to get a bank loan, attract investment capital, or make smart financial decisions, it helps to know how to evaluate and strengthen a company’s balance sheet.

Many entrepreneurs focus on the Profit & Loss statement, but lenders and investors scrutinize the balance sheet just as carefully, because it says so much about how a company is being run.

In this video you’ll learn how to quickly assess a company’s financial position by looking at 12 numbers:

  1. Net Income
  2. Total Equity
  3. Total Liabilities
  4. Debt-to-Equity Ratio
  5. Cash
  6. Accounts Receivable (A/R)
  7. Accounts Payable (A/P)
  8. Inventory
  9. Shareholder Loans Receivable
  10. Working Capital
  11. Current Ratio
  12. Quick Ratio.

This video is designed for bookkeepers and business owners who want to improve their ability to analyze small business financial statements.

We assume a working knowledge of financial statements (including the information in our Balance Sheet 101 series), QuickBooks, and Excel.

Software used in this video: QuickBooks 2009 Accountants’ Edition and Microsoft Excel 2009.


Balance Sheet 101: Equity Accounts (new video)

December 10, 2009

New video now available, Balance Sheet 101: Equity Accounts. Price = 99 cents. Here’s the link to this title:

http://davidsterncfo.mindbites.com/lesson/7117-balance-sheet-101-equity-accounts

All titles:

http://davidsterncfo.mindbites.com/

Description…

You (and prospective bankers and investors) can tell a lot about a company by looking at a few numbers way down at the bottom of a balance sheet: the equity accounts.

You can tell how much and what kinds of equity a company is carrying, and get one quick perspective on whether the company’s in a very strong financial position or in a (gulp) very weak position. In financial-speak you can tell if the company’s right side up or upside down!

In this video, the author, a small business CFO and financial expert, introduces you to this very important part of the balance sheet. You’ll be introduced to:

• The 4 types of equity accounts
• How equity is one measure of a company’s value, called “book value”
• How more equity is (usually) a good thing…
• …and why sometime’s it’s not, as measured by Return on Equity (ROE)
• Two other equally legitimate ways to value a company and how they differ markedly from “book value”.

This video is part of our Balance Sheet 101 series. It’s intended for bookkeepers and business owners who want to have more facility with financial statements so they can better manage the company(ies) they work for and/or own.

It assumes a basic knowledge of the balance sheet, and uses QuickBooks 2009 Accountants’ Edition and Microsoft Excel 2009.

http://davidsterncfo.mindbites.com/lesson/7117-balance-sheet-101-equity-accounts


November bookkeeping monthly close

December 5, 2009

It’s that time again.

Aim for a quick, clean close of last month’s books by the 15th of this month.

1. What should be done by now (the 5th)?

  • Bank and credit card reconciliations
  • Payroll entries
  • Customer invoicing
  • Most vendor bills
  • Work in Progress (WIP)
  • Physical inventory count (full or partial, depending on your policy)
  • Recurring journal entries (e.g. depreciation).

2. By the 10th:

  • Issue “soft close” financial reports; you should have a clear sense about last month’s financial performance
  • Complete your self-review of the books
  • Send the books to peer review.

3. By the 15th:

  • Finish peer review
  • Issue management reports
  • Carry forward open items
  • QuickBooks users: advance the closing date each month or quarter.

Warning sign

If you find yourself deep into the month before your books are closed (e.g. the 20th, 25th, etc.), that’s a symptom of accounting department problems that need to be corrected.

On the other hand, if you can finish the three steps above by the 1oth of each month instead of the 15th, even better.


New videos: Balance Sheet 101

December 3, 2009

Quick note to let you know we’ve got two new videos, just released:

  1. Balance Sheet 101: Basic Structure
  2. Balance Sheet 101: Negative Numbers.

These are part of our four-part Balance Sheet 101 series. The next two videos will be:

  • Balance Sheet 101: Equity Accounts
  • Balance Sheet 101: 12 Ways to Analyze.

To learn about new releases, sign up here:

Be notified of new releases



Introduction to Accounting – free SBA lesson

November 30, 2009

Here’s a good introductory video course on small business accounting for both bookkeepers and new business owners. Presented by the U.S. Small Business Administration, it explains financial statement basics and why they’re important to running a successful business.

http://www.sba.gov/training/finandacctg/index.html

While we’re on the subject of free accounting help, here’s a reminder about another one of my favorite resources: http://www.accountingcoach.com/.


Borrow money, tank the economy?

November 19, 2009

Here’s a somewhat contrarian view to the many calls for “more lending, more lending” to small businesses. Yes, more lending to small businesses that represent a reasonable risk i.e. those with solid fundamentals. But more lending to small businesses with little collateral, negative cash flow, and a high debt-to-equity ratio? I’m not so sure that’s a path toward long-term economic recovery. Seems like more of what got us into trouble in the first place, because underlying structural problems aren’t being addressed.

As a small business CFO I tend to be on the conservative side when advising companies how much debt to take on, and this recent article called The Debt Economy by James Surowiecki extends this caution to a macroeconomic level. He traces the line of excessive debt from individuals businesses and consumers to the economy as a whole, and the bust cycle that follows as a natural correction.

Most interestingly, however, he drives home the point that the tax deductibility of business loan interest isn’t a given; it’s constructed to meet social, economic (supposedly), and political (definitely) goals. His point is that if we remove the inalienable right to take a tax deduction for household mortgage interest and interest on business debt, how do we feel about such debt?

Being a fiscal conservative, I expected to view this article as support for my cautious approach to taking on more small business debt — keep your current ratio at 2.0 or higher, your debt-to-equity ratio at 2.0 or lower, etc.

And I still feel that way. Mostly. But I’m also intrigued by the financial engineering behind running a highly leveraged small business. If the tax deductions are there, and lenders are willing to take the risk, why not? You increase your risk of losing it all, but if you’re comfortable with that trade off — more risk to achieve more return — why not try it?

The problem I see is that many companies take on a lot of debt, but then don’t engineer the company to generate the above average returns necessary to justify the risk of being highly leveraged.

So where do I end up on the issue?

For the majority of small businesses, keep your balance sheet in a range that commercial lenders are comfortable with.

But for the minority who are comfortable with lots of debt and want to make a fast run for outsized earnings or a quick exit strategy, be very clear on your plan, because it’s a different business plan. Build in some downside protection to minimize the collateral damage if things don’t work out. But most importantly, set your targets high and run all aspects of the company (sales, operations, and finance) to meet those targets. Engineer the company to run hot, essentially, and be ready to sell it when the right opportunity comes along.


October monthly close

November 5, 2009

It’s that time again.

Aim for a quick, clean close of last month’s books by the 15th of this month.

1. What should be done by now (the 5th)?

  • Bank and credit card reconciliations
  • Payroll entries
  • Customer invoicing
  • Most vendor bills
  • Work in Progress (WIP)
  • Physical inventory count (full or partial, depending on your policy)
  • Recurring journal entries (e.g. depreciation).

2. By the 10th:

  • Issue “soft close” financial reports; you should have a clear sense about last month’s financial performance
  • Complete your self-review of the books
  • Send the books to peer review.

3. By the 15th:

  • Finish peer review
  • Issue management reports
  • Carry forward open items
  • QuickBooks users: advance the closing date each month or quarter.

Warning sign

If you find yourself deep into the month before your books are closed (e.g. the 20th, 25th, etc.), that’s a symptom of accounting department problems that need to be corrected.

On the other hand, if you can finish the three steps above by the 1oth of each month instead of the 15th, even better.


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