We are coming to the end of another year, and of course all the predictions for 2010 and beyond are already upon us. As with the social media “experts’” forecasts, most of these will be wrong or else they will be stating the blindingly obvious. We really do not know what will happen in six months’ time or on a micro-management scale, even tomorrow. However the pundits earn their living doing this sort of thing and I have no more faith in them than I do in Mystic Meg (sorry, Meg!).

We hear forecasts that the economy will improve at the beginning / middle / end of 2010 or by 2011. One of these might be right, but it is akin to saying during a period of rainy weather that the sun will come out soon. Of course it will, but if you have a leaky roof or are under threat of flooding you should be prepared and take necessary measures.

In terms of your business, you may have a damaging cash flow problem. It needs to be dealt with now before you get swept away. Tighter and more forceful credit control (I don’t mean sending the boys round) may be the answer, or perhaps talk to your bank or a proper hands-on business adviser about short term help.

Marketing people will tell you that you should do just as much marketing or even more than you did when times were better. That is absolutely true, and they will also tell you to keep testing new ways of marketing and know what works and what doesn’t so that you do not waste your valuable time and worse, your money. Depending on your business, it may be online marketing, off line activities or networking. Take advice if you are not sure.

Make sure that your business is efficient as it can be. Cut your overheads including utility bills, and if you do not know anyone who can help you do this, then ask me or any business adviser with whom you feel comfortable.

The point of this piece is not to lecture about specific issues. You have enough on your plate, as we all do, to have to put up with someone going through the basics.

Relying on the economy improving is akin to Mr. Micawber saying “something will turn up ”. He went to debtors’ prison. We have to look after ourselves and our businesses now. The economic sunshine will come out, but we need to be there to enjoy it when it does.

© Jon Stow 2009

A factor that is driving the trend towards automating the sales department is the extent to which speed has become a strategic advantage in the selling process. Once, it was acceptable for salespeople to promise to get back to customers with answers to questions. Increasingly, those salespeople are finding that by the time they get back to their customers with the necessary information, the sales opportunity has evaporated. The ability to respond to customers quickly is crucial to success, and the tolerances are narrower than ever before.

Similarly, the ability to compress the sales order cycle is becoming an extremely significant factor in a competitive situation. Your customers, who are under the same competitive pressures as you, are placing more and more emphasis on increased cash flow and reduced inventories. Reducing your sales order cycle from four days to two can make an important and measurable difference, certainly enough of a difference to determine whether or not you get the order.

My Consultancy–Asif J. Mir - Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

Single Family 3 bedroom/1 bath ranch in a quiet family neighborhood in the NW suburbs of Chicago.
No rehab costs.
$35,000 in instant equity
Over $500 positive cash flow per month.
Cash on Cash Analysis = 43% return.
New appliances, carpeting and flooring with fresh paint.
Purchase price = $80,000
Contact me if interested; not a short sale or preforeclosure

One of our goals is to “Accelerate Your Journey To Home Ownership.”  This requires attention and discipline when it comes to monitoring your current credit score.  This in turn helps improve your chances of getting qualified with traditional mortgage lenders out there.

An important part of the rent-to-own program for our clients is to be aware of your own financial situation and how to improve it in order to become an equity building home owner sooner, rather than later.  A major part of your ability to qualify for a home will be your credit report and credit score.  You can pull the report yourself from many sources but we recommend Equifax Score Power which includes much of the information lenders and mortgage brokers need.

Here are some 3 quick things you can do right now to improve your credit score:

1. Pay Them! Obvious, right?  Repetition is also the mother of learning which is why we state this first.  Lenders need to see you can use credit responsibly.  The best time to begin rebuilding your good credit history is now!  We recommend three credit cards.  You MUST pay them on time every single month.  Also, make sure you keep balances low.  Once you increase the balance of your revolving debt it begins lowering your credit score dramatically. Get balances below 30 percent and you will see massive improvements in your credit score.
2. Keep Old Accounts Active. Your credit score is calculated using an algorithm based on information on your credit report compared to millions of others.  It likes long histories of wise credit use.  So if there is a credit card you have had for years, do not close it.  At the same time, make sure you are actually using it and paying it off every month. Active accounts are weighted more.  Sometimes with no activity on the account, credit card companies will not update it on your report.
3. Dispute Errors. People are not robots.  Sometimes mistakes happen or are overlooked leaving your credit score 20-30 points lower, or worse than it should be.  Look over your report carefully for any accounts that have been paid but are still showing a balance, a late payment that should not be there or any other errors that show up.  Deleting errors will help you big time!

There you have it.  Three quick steps you can take right now to begin dramatically improving your credit score.  A huge part of our client’s success with rent-to-own is that it gives them added responsibility and the long-term vision necessary in order to begin taking steps to manage and improve their finances.  These are just baby steps.  After all, we must all walk before we can run!

Start with tiny habits, implement and integrate them into your life.  Only then will you see results.  The results will motivate you to take it to the next level and you will soon realize that you can take on more and more habits that will lead you on the path to achieving your dreams of home ownership.

To your financial education,

Oliver Manalese
RentBusting Specialist

Does a business start with the product or the order? Which comes first the service or the customer? It’s the old chicken and the egg debate and there is probably no universally correct answer. Regardless of where you stand on which came first for a business, there is no disagreement that money is the lifeblood of all businesses. Without cash for working capital and financing for capital investment, no business will last for long.

At every stage in their life cycle, all businesses need to obtain capital at a reasonable cost. The need for capital is most pressing when starting a business or when managing the growth of an established business. You need to have an awareness of the various financing alternatives available and a solid understanding of the advantages of each alternative.

Funding sources can be divided into two major categories. First, internal funds are those sources of funds that can be found within the business itself. internally generated funds are the business owner’s most readily available source of low cost funds. Secondly, external funds are those sources of funds that are obtained from a wide variety of outside parties. External funding can be further be subdivided into two categories, debt financing and equity financing.

Lets take a look at internal sources of funds.. A closer look at debt financing, the sources and lending practices of local financial institutions, and equity financing, where to find investors and what they are looking for, will be subjects for future discussion.

When we begin to look for internal sources of funds, we begin on the asset side of the balance sheet. If you don’t have a balance sheet, make one. If you don’t know how, get some help from your accountant. Good management of even the smallest of businesses requires a regular review of assets and liabilities presented in a balance sheet format. The balance sheet is organized from top to bottom by the liquidity of your assets. Liquidity is the theoretical ease with which assets can be converted into cash. Since cash for growth is what we are looking for, let’s start at the top.

Assume a business with an annual sales volume of $600,000., an accounts receivable balance of $50,000. ranging from 30 to 45 days old and inventory of $30,000. An opportunity arises to purchase some new equipment that will improve profit margins and allow the company to increase volume by 50% over the next two years. To purchase the new equipment the business needs to make a cash down payment of $15,000. Where’s the extra cash going to come from?

Try spending an extra half hour a day on the phone following up on the receivables. Get those payments down to thirty days or less. Never underestimate the power of a personal telephone call when collecting payments. I am consistently amazed how this readily available source of funds and this extremely effective collection mechanism go unused in even the largest companies. All it requires is a little effort, tact and persistence.

If profit margins are acceptable and immediate cash availability is the priority, consider giving your customers an incentive for early payment. A wide variety of incentives can be effective. Use your imagination. Consider extra merchandise, increased service or discounts on future orders as well as the traditional cash discount. Don’t just type your early payment discount on the bottom of the invoice and expect the customer to take action. Just like any other special program, you will have to sell it if you want it to succeed. Get on the phone again, call your best customers and tell them about it. Send out a special notice with the next billing and announce it as a feature that will benefit both you and your customers.

Don’t overlook inventory when you need short term funds. While it will be difficult to reduce inventory as you look to expand your business, periodic inventory review will generally present some opportunities. Look first at excess items. Check with your suppliers to see if they can be returned. Don’t be bashful because the items are old, they might be just what your supplier requires to meet another customers needs. Also give thought to a direct sale of excess items, modifying designs to consume inventory and discounting slow moving items. Call your employees together and see if over the short run they can work with shorter lead times on supply items that will permit fewer purchases and a resulting temporary inventory reduction.

Use your imagination and you should be able to free up that needed $15,000 until other financing becomes available. Don’t overlook other potential sources of internal funds on that balance sheet. The sale of unused fixed assets or the renegotiation of supplier terms that will let you extend your payments may take a little more effort than managing the receivables and inventory, but they remain a fertile source for internal funding.

Conventional wisdom dictates that internal funding is not available to the entrepreneur just starting his business. Not true! Two major consumers of cash in a start-up business are rent and payroll.

Find a location that hasn’t been occupied for awhile and has thus not produced any recent revenue for the owners. Propose that in return for their deferring your rent for three months you will take a years lease and pay the back rent in full at the end of three months. You end up with an internally generated interest free loan that helps you meet your capital requirements and your landlord stands a good chance of having a full years lease on an otherwise unproductive asset.

Similar arrangements can lessen the cash drain of payroll costs at start up. Find employees that either have other sources of income and can “moonlite” for deferred wages or find individuals who are currently unemployed and will accept deferred payment for the promise of future employment.

Cash is the life blood of any business. Because “It’s Your Business”, remember to make a regular review of your balance sheet for sources of readily available internally generated funds.

USX Corporation records a loss in excess of several hundred million dollars. The Bank of America and other corporate giants do the same. Not so long ago, the former International Harvester Company, now Navistar, recorded nearly a 1.5 billion dollar loss on a sales volume of approximately five billion. The independent businessman shakes his head and wonders how these big guys can do it and still be in business. He knows for sure what comparable losses of that magnitude would mean for his business. A large part of the answer lies in cash flow.

A small and successful company develops an innovative product that is well received by the market place. The company builds staff and gears up to meet the high demand for its new products. Floor space, equipment, personnel, inventories, receivables, payables and visions of limitless profitability all grow rapidly. Troubles soon follow, but why? All too often the answer lies in cash flow.

What is this thing called cash flow and why is my banker so interested in it? If sales and profits are on the rise, everything will turn out OK, right? Well maybe, but sales can be bought and and profits can be manipulated. But cash, cash is king. If your business is generating a positive net cash flow you have flexibility and you can survive forever. If you don’t have a positive cash flow, regardless of how impressive your sales and profits are, you must have a plan to meet the shortfall or big trouble lies ahead.

Peter Drucker, the foremost management scholar of our time, recently enunciated what he believes to be the five key indicators of corporate performance. Responding to the widely held concern that short term earnings are a grossly misleading indicator of a company’s health, Drucker suggests that how well a business is doing can evaluated by looking at market standing, innovation, productivity, cash flow and profitability. That’s right, cash flow right up there in the top five.

Concerning cash flow as an indicator of corporate health, Drucker notes that a business can run without profits indefinitely as long as the cash flow is adequate. However, the opposite is not true. He observes that there are far too many businesses, both large and small, that have to abandon their most profitable developments because they run out of cash. He warns that increased profits through rapid expansion of sales volume is a danger signal because it weakens rather than strengthens liquidity and cash position. The rapid expansion can be an indicator that the company has bought rather earned its additional sales. Bought sales, being accompanied by non-sustainable discounting and overly generous financing, can’t last for long.

In the closely held company, cash flow takes on even greater importance. With no outside investors to impress, the recording of profit is most favorably received by the tax collector. Management of the closely held corporation should nearly always place a higher priority on insuring a positive cash flow than on profitability.

Given the importance of cash flow, how do we calculate it and where do we find it? A company’s financial statement has three major sections, the balance sheet, the income statement and a statement of source and application of funds. It is the statement of source and application of funds that is commonly referred to as the cash flow statement.

The cash flow statement is generally divided into two parts. The first part looks at what sources provided funds for the business and the use of those funds. Net after tax profit plus non-cash expenditures such as depreciation comprises the majority of the cash generation. Other sources of funds can include new equity investments and additional long term debt. Uses of funds will include such items as dividends payed, capital expenditures, research and development expense and repayment of debts.

To determine the adequacy of your cash flow you subtract the total funds used from the total funds provided. The resulting answer will indicate whether you had an increase or decrease in working capital for the period. An increase in working capital indicates that your cash flow was sufficient to meet the cash requirements for your business. Regardless of what your income statement says, a net negative cash flow as indicated by a decrease in working capital is a situation which is non-sustainable and requires management attention.

The second section of this statement is an analysis of the changes in working capital. This section will tell you what items of working capital have changed during the current period. Regardless of whether your working capital is increasing or decreasing, this analysis will tell you where you are investing your money in the business.

The importance of cash flow is beyond question. Because its your business, make sure that your accountant regularly prepares a cash flow statement and that you spend as much time with it as you do with your income statement.

Joe Driscoll is a management consultant whose column appears regularly in the Monday Herald.

Single Family 3 bedroom/1 bath ranch in a quiet family neighborhood in the NW suburbs of Chicago.
Purchase price = $80,000
No rehab costs.
$35,000 in instant equity
Over $500 positive cash flow per month.
Cash on Cash Analysis = 43% return.
New appliances, carpeting and flooring with fresh paint.

Contact me for further details.

I was really put to the test this week at work.  To say there’s a heck of a lot of activity in commercial credit & collections right now is a complete understatement.  I have been in the commercial collection industry for almost 10 years and have never experienced what has hit our industry in the last year.  BAD DEBT ALL OVER!!!  However, recently I have entered the world of purchasing commercial bad debt in the form of non-performing, small ticket (avgerage balance of $25,000) general equipment leases.  As a memeber of the ELFA I have met a variety of new people this week. 

Good thing I love to learn new and interesting things because I picked the brains of some the industry’s finest.  Someone pinch me because I’m dreaming.  There is nothing more gratifying than finding, working, and closing a deal.  You should try it some time.  Have a fabulous weekend and stay classy San Diego.

Board members from two different nonprofits called me to express concern and surprise after learning in recent board meetings that their organizations were in financial distress or even crisis.  Both indicated that while they were seeing regular financial statements, they were not seeing anything that related to cash flow.  Both attributed the distress to a shortfall in foundation funding.  They each indicated that the boards were surprised by this news!

Boards should not be surprised by the financial status of the organization.  Given the impact of our nation’s financial crisis on funding sources, including foundations, there should be contingency plans in place.  The full board (not the Finance Committee, the Treasurer or the chief executive) is responsible for the financial statements and the financial viability of the organization.  So what can boards do to ensure that they are not surprised?  At BVU, we work with hundreds of boards each year, and find the following to be useful:

Establish a strong Finance Committee – Recruit more than one person with the relevant skills and expertise to work with staff to develop a realistic budget and financial forecasts at regular intervals (Quarterly? Monthly? Weekly?).  Ensure that the board’s financial reports are useful for forecasting and decision making.

1. Develop a one-page dashboard – Identify the key measures that board (and staff) must monitor on a regular basis to ensure that the organization is making progress towards financial, fundraising and programmatic goals.  For each category, track progress against budget-to-date and compare with numbers from the previous year.  Focus on key variances.  This is an excellent tool to help boards provide accountability, plan and make decisions, but it does not replace the need to provide financial statements to the board.
2. Create a culture of transparency and accountability – Share the financial forecast and the dashboard with the full board at each meeting.  Discuss options, priorities and realistic strategies for board and staff to help raise funds or reset the budget.  Access to this information should not be limited to the Finance Committee or the Treasurer.  The chief executive should feel comfortable that the board is a partner in addressing challenging financial issues.
3. Use meeting time to focus on important issues – View board and committee meetings as precious time where the organization’s board can focus on the issues that matter most.  Don’t waste time on details or reports that board members can read in advance or see in the dashboard. Use meeting time to discuss strategic issues and options.

BVU provides training and consulting to hundreds of nonprofit board members and boards each year.  Please contact Elizabeth Voudouris at evoudouris@businessvolunteers.org for a sample dashboard or to learn more about BVU’s services to strengthen your board.

The following was sent out yesterday from the Superintendent’s office to all school employees and parent teacher group representatives:

Yesterday, Mark Taylor, California’s Legislative Analyst released his department’s fiscal forecast for the remainder of the current fiscal year and next year.

“Our forecast of California’s General Fund revenues and expenditures shows that the state must address a General Fund budget problem of $20.7 billion between now and the time the legislature enacts a 2010-11 state budget plan.” The projected deficit consists of a $6.3 billion projected deficit for 2009-10 and a $14.4 billion gap between projected revenues and spending in 2010-11. The complete report can be found on the Legislative Analyst’s Office web site.

At this evening’s Board meeting our Unaudited Actuals will be presented, which detail our calculations of actual revenue and expenditures for the 2008-09 school year. The State has made numerous changes to school funding, both during the 2008-09 school year and two months after the fiscal year ended (adjustments to the 2008-09 fiscal year were made in August 2009). Due to these changes, we experienced a higher than expected ending fund balance, as did all California school districts.

The attached article is taken from a three part series from School Services of California. It is being forwarded to you to provide factual information, as it is critical to putting our current budget status in perspective. Please contact my office if you would like a copy of the entire three part series.

During the coming weeks as we move into developing our First Interim Report, and we learn what the State has in store for school finding for the current and next school year, we may once again be confronted with a significant loss of State revenue. It is and will continue to be our mission to work collaboratively with all of our employee groups to avoid loss or our valuable staff and programs.

The Frequently Asked Question page on our web site is sorted by topic (general, budget, personnel, necessary small schools and archived FAQ’s).  These FAQs contain a wealth of answers to a variety of issues of interest.  Please take a moment to look them over.

As always, please contact me if you have questions.

Please forward this article to other interested parties in Mariposa.

Thanks,

Randy

Randy Panietz, Superintendent
P.O. Box 85082 Old Hwy. N.
Mariposa, CA 95338Office # (209) 742-0250
Cell# (209) 456-4867

—-

Putting the 2008-09 Ending Balance in Perspective (This article is a condensed and edited version of a three part article from School Service of California.)

MCUSD is closing out its books for 2008-09. For MCUSD, like most school districts (SDs) in California, there is a sizeable jump in its ending balance. This is not a windfall or a reversal of fortunes, but rather a result of the timing of the state budget; a few one-time, state-approved accounting changes known as “sweeps” and “flexibility;” the late 2008-09 receipt of State Fiscal Stabilization Funds (SFSF); and required, multi-year fiscal planning.

Timing: In its May Revision of the governor’s draft 2008-09 budget, the state legislature had warned school districts to expect a reduction in revenue limit funding. Revenue limit is the funding model used by the state in which a per-student dollar amount is multiplied by a district’s average daily attendance (ADA). In light of this announcement, MCUSD, like most every other SD, began to scale back and implement cuts to address this anticipated revenue reduction for 2008-09. However, the 2008-09 revised budget was not ultimately passed until August 2009, which was too late to impose the reduction for the 2008-09 school year. As a result, the legislature voted to impose the reductions in the 2009-10 budget year rather than in 2008-09. In other words, the expected loss of approximately $500,000 for 2008-09 did not materialize in that budget year, but was pushed forward to affect this (2009-10) school year. The result is a revenue limit funding reduction of approximately $465,623 which is the result of an increase to the deficit factor from 17.967% to 18.355% ( Meaning, out of $100 promised we actually get $81.64) and a one-time reduction of $250 per ADA for the 2009-10 budget year.  Because MCUSD had prudently planned for the reduction in and for 2008-09, the district’s ending balance for that year reflects an inflated amount—it includes revenue limit funds that were not expected to be there. Those funds are not “extra” monies, however. They are needed to fund the 2009-10 school year when the budget is updated at First Interim. The state will implement these reductions by releasing smaller monthly apportionments to MCUSD.

Sweeps and flexibility: At the end of the 2008-09 school year SDs were allowed to sweep the ending balances (unspent money) of many state categorical (restricted) programs and redirect those funds where needed elsewhere. This was done with the expectation that it could help SDs weather the economic crisis for the next several years. Additionally, the state temporarily eliminated more than 40 categorical programs, allowing those monies to be allocated, at the Board’s discretion, “for any educational purpose.” The state implemented this as another tool to support fiscal solvency in SDs. MCUSD operates 20 such programs. MCUSD’s Board of Trustees voted to take these steps, and these funds are also reflected in MCUSD’s 2008-09 unrestricted ending balance. From an accounting standpoint this means that funds which had been on the restricted side of the budget are now on the unrestricted side.

State Fiscal Stabilization Funds: The federal stimulus package, known as the American Recovery and Reinvestment Act (ARRA) of 2009, provided the state of California with funding for the State Fiscal Stabilization Fund (SFSF). MCUSD applied for and was granted federal SFSF funding, which was received late in the 2008-09 budget year. As such, MCUSD, like most SDs, ended up carrying over a significant amount into 2009-10. These are one-time funds with specific spending guidelines that are also reflected in the ending balance. These funds are intended to implement school reform and improvement efforts, while also saving and creating jobs. These one-time resources are to be spent in ways most likely to improve results for students, long-term gains and school system capacity. Districts are required to submit a quarterly expenditure report to ensure accountability.

Cash flow, deficit spending, and multi-year budget projections: The state is expected to make additional cuts to funding mid-year and to continue to delay payments to educational agencies. Furthermore, it is expected to take the state several years to restore lost funding to education. In addition, most of MCUSD’s unrestricted general fund 82.4% supports personnel costs. Typically these costs rise every year, due in part to salary and health benefit increases that deservingly come with years of service. Given these factors, MCUSD, like many SDs, slowed down spending and made cuts to build 2008-09 reserves. This was done in order to make required multi-year budget projections that show economic solvency for the current and two successive school years, plus ensure enough cash on hand (cash flow) to meet payroll needs, and other expenditures. Even so, the MCUSD, current year, 2009-10 budget reflects deficit spending (more expenses than income), which cannot continue indefinitely. Moreover, experts warn that seemingly high 2008-09 ending fund balances are unlikely to carry SDs through the next few years. Careful budget management is imperative.

MCUSD continues to investigate other cost saving measures, with a committee now formed to study the option of implementing a four-day school week and another soon forming to investigate school consolidation if it becomes a financial necessity.

The financial challenges facing SDs throughout the state will undoubtedly continue for the next few years. And while MCUSD’s budget reduction efforts in 08-09 have resulted in an ending balance that will help to address the 09-10 funding reductions, careful multi-year budget planning will continue to be a crucial element to the district’s ongoing success.

Board members from two different nonprofits called me to express concern and surprise after learning in recent board meetings that their organizations were in financial distress or even crisis.  Both indicated that while they were seeing regular financial statements, they were not seeing anything that related to cash flow.  Both attributed the distress to a shortfall in foundation funding.  They each indicated that the boards were surprised by this news! 

Boards should not be surprised by the financial status of the organization.  Given the impact of our nation’s financial crisis on funding sources, including foundations, there should be contingency plans in place.  The full board (not the Finance Committee, the Treasurer or the chief executive) is responsible for the financial statements and the financial viability of the organization.  So what can boards do to ensure that they are not surprised?  At BVU, we work with hundreds of boards each year, and find the following to be useful:

Establish a strong Finance Committee – Recruit more than one person with the relevant skills and expertise to work with staff to develop a realistic budget and financial forecasts at regular intervals (Quarterly? Monthly? Weekly?).  Ensure that the board’s financial reports are useful for forecasting and decision making.

1. Develop a one-page dashboard – Identify the key measures that board (and staff) must monitor on a regular basis to ensure that the organization is making progress towards financial, fundraising and programmatic goals.  For each category, track progress against budget-to-date and compare with numbers from the previous year.  Focus on key variances.  This is an excellent tool to help boards provide accountability, plan and make decisions, but it does not replace the need to provide financial statements to the board.
2. Create a culture of transparency and accountability – Share the financial forecast and the dashboard with the full board at each meeting.  Discuss options, priorities and realistic strategies for board and staff to help raise funds or reset the budget.  Access to this information should not be limited to the Finance Committee or the Treasurer.  The chief executive should feel comfortable that the board is a partner in addressing challenging financial issues.
3. Use meeting time to focus on important issues – View board and committee meetings as precious time where the organization’s board can focus on the issues that matter most.  Don’t waste time on details or reports that board members can read in advance or see in the dashboard. Use meeting time to discuss strategic issues and options.

BVU provides training and consulting to hundreds of nonprofit board members and boards each year.  Please contact Elizabeth Voudouris at evoudouris@businessvolunteers.org for a sample dashboard or to learn more about BVU’s services to strengthen your board.

Had an interesting conversation with a seller yesterday because I asked very open ended questions. We talked not only about her property for sale, but other investors, the real estate market for investors and various investor strategies.

You just have to ask the right questions and let the owners tell you everything you need to know about the property and more!

This is a newsletter published earlier this year, which I thought would make a perfect start to the blog.

The general consensus across the media is that the economic situation is improving – some industries are certainly fairing better than others.

One factor is certain however, if you are looking to source finance in order to take advantage of the brighter outlook, you will need up to date figures. Once the bookkeeping is up to date you can produce management accounts.

But, wouldn’t it be useful to run some quick calculations yourself each month to see how you are doing how your business is doing? The kind of figures your bank manager is likely to consider while reviewing your accounts to see if they are willing to lend.

Now there are lots of different kinds of ratios to run, but here are a few for you to monitor when you produce your management accounts monthly.

Break Even Point
Arguably the most important ratio of all.

This is how much you need to sell in order to cover your costs on a monthly basis.

If you know what your costs are, and this is relevant to a service and product based company, you can work out how much you need to sell and at what cost, in order to break even.

The text book answer is as follows:

“In economics & business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has “broken even”.

Not the most user friendly speak.

Essentially your break even point is when your gross profit = expenses

Gross Profit
This is calculated by knowing how much you sell your product/service for minus the direct cost of acquiring/making that product/ service.

Expenses
This is calculated by adding up your overhead costs, payroll, interest costs etc. They can be estimated fairly accurately, as quite a lot of costs are fixed – even the variable costs (utilities, wages, stationery etc) can be estimated quite tightly against historic levels.

If you are in a position where your gross profit is higher than your expenses, then excellent! If it is lower, then are there any ways in which you can reduce your expenses?

For a Break Even Point Calculator, click here.

Cash Flow
We are sure you know the phrase ‘Cash is King’, but it is true no matter what the economic cycle.

By looking at your debtor and creditor days, you can quickly work out if it is taking longer to collect money in and on average how long it takes you to pay people.

Debtors
By offering credit terms to customers, you are effectively lending them money, but at the end of the day that is how most businesses operate.

It is useful to know how long it takes to get the money in, as your suppliers, who provide you with credit terms, will also want paying.

To calculate the average length of time it takes for debtors to pay, simply perform the following calculation:

(Trade debtors ÷ Sales) x 365

If this figure starts to increase, then it is taking you longer to collect your debts in. Most modern accounting packages can be set up to issue reminders at specific intervals so your debt is at the forefront of your customers mind. The most effective tool is picking up the phone and talking to them however.

By improving your debtor collection, your bank balance can improve markedly – imagine how hard you can make that money work for your business!

Creditors
To calculate the average length of time it takes you to pay your creditors, simply perform the following calculation:

(Trade creditors ÷ Annual Purchases) x 365

If your figure for creditors is lower than your debtor figure, then you are paying money out faster than it is coming in!

If you are able to collect your money in faster, you may be in a position to pay your creditors quicker as well. Why would you want to do this? Well, some suppliers will give discounts for early settlement which will mean a greater gross profit margin for you.

Cash Flow Forecasting
Often considered a black art, cash flow forecasting is actually much easier than you might think and incredibly important. All large companies will have cash flow models running, not because they can, but the information that it provides them with is invaluable.

By spending the time forecasting your cash flow, you will be able to indentify months that are good, but more importantly if you have some tough months coming up so you can act now.

For a cash flow forecasting tool, please click here.

Other Ratios / Calculations
Once you start delving into the finer intricacies of your accounts, you can start to focus on specific areas where improvements can be made which should ultimately improve profitability.

The break even point and cash flow ratios are important so that you can see monthly trends and react quickly if matters need addressing.

There are plenty of other ratios that you can review too, some monthly, but others quarterly, half yearly or even yearly.

Solvency Based Ratios
A business is considered solvent if it can pay its debts as they become due. This means it can pay its suppliers by having enough working capital.

There are two equations, the latter being more important if you hold stock.

Current Ratio
This looks at the relationship between the current assets and current liabilities, which are detailed on the balance sheet.

Current ratio = current assets ÷ current liabilities

(current assets include stock, debtors and cash current liabilities include trade creditors, bank overdraft, VAT, PAYE etc)

The figure should ideally be 1:1 or anything above (ie 1.1:1), anything below would insinuate that you would not be in a position to meet all your debts.

Quick Ratio
This is more suited to companies carrying stock, as it is assumed that you would not be able to sell all your stock immediately (there is another ratio to calculate how long your stock sits around!).

Quick ratio = (current assets – stock) ÷ current liabilities

In this scenario the ratio may look very different – could it be you are carrying too much stock?

Profitability
You can see from your profit and loss account as to whether you are making a profit or indeed a loss. Only by analysing those figures can you then think about improving the position.

Gross Profit Margin
A very common ratio which looks at the gross profit as a percentage of turnover:

Gross Profit % = (gross profit ÷ turnover) x 100

Try working things through if you managed to increase your gross profit by1% – it has a marked effect on your bottom line!

Net Profit Margin
Similar to the gross margin, this looks at the bottom line figure after all your expenses:

Net Profit % = (net profit ÷ turnover) x 100

Analysing this figure on a monthly basis means you can spot any trends. If your net profit ratio is declining but your gross profit ratio is static, your costs are increasing somewhere so you need to identify which and then react to get back on an even keel.

Lots and lots more
There are lots of different areas that you can look at, from analysing supplier relationships, return on assets, borrowing, stock turnover……every number tells a story.

For more information on analysing your figures, contact Paul Smalley on 0844 826 0579 or email p_smalley@papermountainsolutions.co.uk.

Queries
If you have any queries relating to this newsletter, why not call Paul Smalley for an informal chat on 0844 826 0579.

Paul used to be a credit insurance underwriter for a Lloyds Underwriting Agency, analysing the financial data from companies across all industry sectors and deciding whether to issue credit against them.

If you would like to receive future newsletters providing informative content like this, please email pmsenquiries@papermountainsolutions.co.uk with the title ‘Subscribe’.

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Do you remember the last time you were at the end of a tube of tooth paste and how you squeezed every last drop out?  Well, I imagine this is the way many companies treat their A/R’s.  How are you supposed to get more when your capital has completely run out?  I’ll tell you how, by selling your non-performing accounts receivables! Presto! Cash money, right here, right now, just in time for the end of the year! 

Rarely, if ever, would I ever tell my clients, much less myself, to throw good money after bad money.  The thing is I am in a rare position to purchase non-performing receivables such as business credit cards, fleet fuel cards, and general equipment leases among other types of bad debt.  This is the last chance to cash in your non-performing A/R’s for cold hard cash before the end of the year. 

Please contact Joel LeBlanc with Collect America Commercial Services for more information.  You may reach Joel at joel.leblanc@collectamericacsi.com or by calling 866-424-8300 ext. 1635

Joel is an ARM consultant and Director of Business Development for Collect America Commercial Services, Inc. He has over 9 years of experience in the accounts receivable management industry and has worked for CACSI for over 3 years.

Photo: Rodolfo Clix | Stock.xchng

This is just a brief recess before I continue with my Dragons’ Den lessons and insights.

I had to pause a bit because I was amazed at the work I was busy with this morning: video uploads, VAT return filing, email replies, research, blogging, e-zine follow-ups, coordination of courier pick-up, etc. Everything was happening on the Web and I didn’t even have to get out of my home office to do all that. The only downside to heavy Internet use is cracked fingernails from banging on the keys all day long, but that’s what manicures are for. And even as I’m all agog over the Internet, that doesn’t at all mean that I’ve fallen away from any human contact. On the contrary, it has enhanced my work environment because “absence makes the heart grow fonder”. When I do meet up with the people involved with CAN-DO! and spend some face time with them, it’s always with gladness and a lot of bonhomie.

It’s astounding how much work I’m able to accomplish from where I am, at the lowest cost possible. At a time when entrepreneurs like me watch every single cent’s movement in the cash flow structure, I’m a first-hand recipient of the Internet’s power to raise my level of productivity without spending a sum equivalent to Brunei’s national budget.

I wish SMEs, especially in developing countries such as Kenya, would start looking at the Internet as a friend. They’d be very surprised at how they can possibly turn their corner shops into viable online grocery stores — movie DVD rentals and some restaurants are already trading that way in Nairobi. The Internet is a friend to entrepreneurs.

When making an investment in anything, be it gold, stocks, bonds, Beanie Babies, etc, it’s always good to know why you are investing in such items. What is the personal goal for those funds and that particular investment vehicle? The same is true for peer lending because it is a new kid in school. Peer lending is an age old concept, but has seen the internet bring it into a modern forum for all to use and interact with. Places such as Lending Club provide a friendly harbor to store your precious bounty without hassle.

The basic mechanics behind peer lending is the idea of someone like me lending money to someone like you with stated terms such as time frame for repayment, interest rate, etc; and purposes such as debt consolidation, new car, pet parrot, etc. As a lender, just like with a stock, I can analyze your credit history, employment information and decide if I want to buy into that ‘Talk Like A Pirate” school idea you have (not likely, matey). As a lender I have to do some pretty defined research before deciding to purchase a piece of a loan note (like a stock certificate showing proof of ownership of a piece of the loan, but defines the loan terms like a bond note would).

So what is in it for me? What am I looking for from my investment capital in the peer lending world? Peer lending, specifically focusing on Lending Club as a prime example of the industry gold standard (more Pirate booty is found here) offers several important attributes to me…

Cash flow- Loans repay monthly which offers up to me currently around $140/month in potential cash to pull out for bills, weekend trip, etc. Or I can just reinvest it and watch it cycle into a larger and larger cash cow each month (my plan).

Tradeable- All notes issued now are filed with the SEC as registered securities and are fully tradeable on the secondary marketplace. So if disaster strikes and I need more cash than the cash flow can currently provide, I can bail on a couple of notes (worst case scenario). My experience on the tax side when selling is that I get dinged on any earnings on the note when sold and any mark-up I sell it for (I tend to sell just above the 1% sales fee to attract buyers quickly).

Shoots & Ladders- I can swoop in quickly and buy/sell notes in about a day or two (shoot) and make a profit on the trades or plan a strategy based on interest rates and long term needs for income (ladder). Laddering of notes can be done like CD’s or Bonds which I hope to cover in a later post with some setup tips and strategies.

Low default rate- Right now Lending Club has a low overall marketplace default rate (3.05% as of today). So if I have a large portfolio of notes (100+) I can more or less accurately predict return based upon a larger pool of notes and historical data that is readily available on the Lending Club Statistics page. So if I build up a good spread of notes across several credit grades and create a portfolio with a weighted average rate of say 13.87% I can subtract out overall estimated defaults and arrive at a rather robust 10.82%.

No Vomit Comets- With lending on Lending Club I don’t have to worry about market swings, what is the Federal Reserve doing today, what are the talking heads on CNBC screaming for me to buy today, etc. I will have a portfolio of notes which are pretty boring in comparison and will return to me profits annually and predictably year after year after year. No 35% UP, 40% DOWN, 7% UP, 19% DOWN to worry about. I can sleep better at night and know that annualized and through compounding I could bet the crap out of the stock market (especially with how certain things are these days, don’t be fooled by current uptrends).

This brings me to my personal plan for lending is to create and grow a stable, predictable cash flow source that will allow me to do the things I love, with the people I love within the timing and manner which I choose to execute it. I don’t plan on retiring and what in the Hell is that anyway?! Sounds like a bunch of old folks sitting around talking about the good ol’ days while pooping their pants. No thanks, Mr. Geezer! I plan to live life now AND later to the fullest. Work, play, live, love, learn, innovate… And remember to pillage (talk to a tax advisor) before you burn (invest in anything mentioned here)!

How many dealerships have insurance to cover penalties for late or incorrectly filed payroll tax reports or sales tax reports.  Do you have insurance for late payment of real estate or personal property taxes.  What part of your insurance covers sending misleading financial statements to your  lenders, floor plan source or to the factory?

During these difficult economic times when dealerships are cutting expenses to almost “bare bones” operations, have you stopped paying your insurance premiums that cover your buildings, your employees, your inventory?

Of course you have not stopped paying your premiums.  You have not stopped paying premiums or dropped coverage on your home or your personal cars either.  I would guess that your health insurance and disability premiums are paid also.

All this money spent yearly to make sure that some unanticipated event such as a fire or illness or accident or lawsuit will not cause losses to your pocketbook sufficient to put you out of business.

And all these premiums paid year after year and really most of us never have to call the insurance company for a loss. 

And yet there are still dealers that do nothing to ensure the accuracy of their financial statements.  They gamble that their controller or office manager and the office staff are 100% knowledgeable, adhere to all the recommended accounting practices and are 100% trustworthy.  But those same dealers will buy fire and other insurance to protect their building.  These dealers will pay people to make sure they are OSHA compliant, follow the privacy rules.  They pay for someone to teach their employees about workplace harassment!

My definition of insuring auto dealership books is the use of an outside person, experienced in automobile dealership accounting, to periodically analyze the dealership accounting records and control procedures.  This person would probably be a CPA.

Would having an outside “inspector” absolutely guarantee that the books are perfect and that there is no theft? Absolutely not!

But having outside inspection of your financial records and operations plays a major part in the overall internal control structure designed to ensure the accuracy and reliability of your accounting data.

What is the cost and how much time does it take? That depends on the size of the dealership and the number of times per year the books are checked.  The cost is far less than what someone can steal from you in a week, or what a late payment penalty can be on a large sales tax return.

Contact: dworkcpa@aol.com

I came across this great article over this past weekend. I thought I would share it with you here.

Most customers will focus on only one or two key factors before deciding to buy your product or service. Identify those key factors & focus your prospect on the key points. Keep it simple & avoid overselling. Going on & on will only dilute your key points and force the prospect to drift. Listening to the customer is key. Increase your sales by limiting your words & focusing only on the key selling points.

Do you currently monetize your any of your portfolio of leases?  Have you ever considered selling any of your portfolio?  A strategically positioned ELFA member with capital is looking to purchase equipment lease portfolios.  Please contact me for seller’s survey and confidentiality agreement.
866-424-8300 ext. 1635 or joel.leblanc@collectamericacsi.com

All contents © copyright 2009 by Charles Pavia. All rights reserved. No part of this document or the related files may be reproduced or transmitted in any form, by any means (electronic, photocopying, recording, or otherwise) without the prior written permission of the publisher.

All contents © copyright 2009 by Charles Pavia. All rights reserved. No part of this document or the related files may be reproduced or transmitted in any form, by any means (electronic, photocopying, recording, or otherwise) without the prior written permission of the publisher.