Book Basics

IN OUR LINE of work as coaches, advisers and trainers to business owners, we see a lot of ugly financial statements. Not ugly in the sense that the business is performing poorly (well, we see some of those too!) but ugly in the sense that they contain glaring bookkeeping errors.

We suspect there are several reasons for this. One is the proliferation of software that makes doing the books yourself attainable for almost anyone with basic computer skills.

Answer a few interactive questions, choose from the drop-down list of industry choices and you’re off and running with your very own profit-and-loss statement. Press a few more buttons, and voila, instant balance sheet.

The other reason is that many business owners consult accounting professionals only at year-end to figure out how to reduce taxes.

While we’re usually all for saving money (and paying no more taxes than absolutely necessary), this approach can cost dearly in the long run. First of all, if you’re waiting until year-end to do tax planning, you might be waiting too long to take proactive steps.

In addition, if you do the books in-house, you’ll mostly save a lot of time (and not a little heartache), if you bring in a professional to help get you set up correctly from the start and periodically review your statements to ensure accuracy.

And finally, most business owners, if they’re not doing the bookkeeping themselves, are most likely in the difficult position of having to hire, train and then manage a person in a position about which they might have little or no knowledge. Not an ideal situation. Then, periodically, you get to review the output of this person, again not really knowing what you should be looking for (or at).

We have workshops on reviewing the numbers part of financials statements to use them to diagnose the financial performance of your business.

Here, however, is a brief primer for the “non-numbers” business owner on how to review statements to help determine if they are, at the very least, an accurate reflection on what’s happening in your business:

Balance Sheet

Look for any unusual balances, such as:

• Negative amounts (only accumulated depreciation and amortization should be negative).
• Negative cash — should be in the form of a note payable (or bank overdraft) on the liabilities side.
• Inventory — amount should vary from month to month according to actual inventory levels (if inventory is off, then your cost of goods, net profit and retained earning amounts will be off as well).
• Accounts receivable — should have a balance (assuming you sell on account).
• Accounts payable — should have a positive balance (unless in the unlikely event that you’ve paid off every one of your suppliers by month’s end).

Profit and Loss

• Sales and cost of goods sold detailed for each category.
• Sales should be greater than cost of goods sold for each category.
• Cost of goods should vary every month to reflect actual expense, not estimate.
• Estimated depreciation should be entered monthly, and then reconciled to actual amount at end of year.

Overall Look

• Profit-and-loss expenses should be grouped by expense category, for example: sales and advertising expenses, employee expenses, general and administrative, and not just listed in alphabetical order.
• Add a column that shows expenses as a percentage of sales, along with year-to-date and year-to-date from prior year so you can see trends and determine real changes in your expenses, not just changes due to sales increases or decreases.

And Finally

• Be curious, don’t be afraid to ask questions, and if it doesn’t seem right to you, get to the bottom of it! If you (or whoever you use to do your books) can’t produce both an accurate profit-and-loss and a balance sheet on a monthly basis, think about outsourcing or upgrading your bookkeeping services.
• If your accounting professional isn’t available for large portions of the year due to tax work or isn’t capable of providing this type of advice, find one who is. We promise they’re out there.
  • MONEY MATH

If your vendor offers a 2 percent discount for paying in 10 days, what’s it costing you not to take it?

By not taking the discount it costs you an effective annualized interest rate of 36 percent. Here’s how it works:

If you had paid within the first 10 days, you would have earned 2 percent. But, since you didn’t pay within 10 days, it cost you 2 percent to not take the discount. There are 20 days between the discount due date (the 10th day) and the net payment due date (the 30th day). That means you were using your creditor’s (supplier’s) money for 20 days beyond the standard discount due date, and it cost you 2 percent for the use of that money for those 20 days. To annualize the cost, you ask yourself: “How many 20-day opportunities are there in a year to use someone else’s money at the cost of 2 percent per 20-day use?” (360 days/20 = 18 x 2% = 36%.)

• LUCKY NUMBERS[/componentheading]
• The Figure: 71[/contentheading]

WHAT IS IT? 71 days. That’s the average amount of time it took the companies in our 2005 FIT Jewelers Financial Benchmark Study to pay their vendors. Our Top 25 percent (as measured by owners discretionary profit plus net profit before tax divided by sales) took a marginally shorter time to pay theirs, at 68 days. What’s the right amount? You need to balance cash flow, vendor relationships and possible vendor discounts in your decisions. What else could you be using the cash for if you pay early? Vendor relationships: If the stuff hits the fan, who do you think gets better service — fast or slow payers? Vendor discount: Is the deal worth the cash out of my business?

This story is from the March 2007 edition of INSTORE.