Archive for the ‘accounting’ category

Q: Is it me or is QuickBooks getting harder to use? A: Its you.

February 27th, 2016

Is it me or is QuickBooks getting harder to useAs a long time QuickBooks professional, I have to ask, “​Is anyone really saying that QB is getting harder to use?”

Everything you have learned over the years is pretty much the same. Sometimes the interface gets modified, but that’s an easy adjustment. You might not even need the newer features, and can almost certainly get by without them if nothing related has changed in your business. And unless to use payroll or other features that require an online interface, you might not ever need to buy the new version. I have clients still using QB 2010.

If you change to QB Online you will find the interface to be very different, but then of course, it’s a different program. None of my clients that made the switch had difficulty adjusting to it, maybe because I toured them through the features they need to use themselves. If you subscribe to one of the low end, less expensive versions, you might burn a lot of time looking for features and reporting that don’t exist. Frankly, it is my option that these limited low-end QBO versions are just a ploy to get you vested in the product. Intuit knows that you will upgrade before long, especially if you need common small business features such as being able to produce 1099s for your contractors.

The difference between finding QB easy or hard to use is all about learning the proper use of the program. Just like everything else you do. If you don’t learn how to use it, it will be hard for you to use properly.

The next issue is that even though you don’t need to be an accountant, it helps a lot to understand accounting/bookkeeping basics. If you don’t, then you will have some degree of difficulty using it, and even worse might be creating a mess out of your books. The best boost in business I ever received was back when Intuit ran advertisements (for many years) with the slogan, “With QuickBooks, you are only a click away from being your own accountant”. Thousands of small business owners believed that, bought QB, and proceeded to make a real mess out of their books.

Even to this day, I rarely take over the bookkeeping of a new client without having to start out by fixing a large amount of problems related to the miss-use of the program, and then proceed to edit their Chart of Accounts to make their QB a better reflection of the actual business and the kind of information the owner needs to make the best possible business decisions. That is the case even when they had a bookkeeper doing the work for them. So many bookkeepers have learned QB, but still don’t know basic accounting or how a business functions. There is a lot more benefit in the proper use of any accounting software than just keeping track of things so you can file tax returns. An awful lot.

 

Taking Action on Cash-Flow

December 28th, 2015

Cash Flow womanCash flow is the lifeblood of any business, and in any business there are cash flow dangers. There is a capacity for a business to accumulate costs. They gradually grow month-by-month and your cash flow gradually diminishes to a trickle and finally dries up. Your only defense is to watch, record, compare and trend your costs.

Understanding what the numbers mean is crucial to your cash flow. Are sales trending up or down? Are expenses rising faster than sales? Is one product more profitable or better selling than another? How much do I need to sell to meet expenses each month? The answers all lie in the numbers.

The best way to measure cost trends is by analyzing the expense categories in your accounting software, and ideally graphing them to get a better visualization of their impact. If your company’s chart of accounts is properly designed, you can produce the graphs for each cost item and quickly be able to see that your power bill, for example, is gradually rising. This new perspective can now lead to an informed change in behavior that will reduce those costs or at least reduce the increase in those costs.

Once you have established your costs, you should compare them against the industry average, or at least use your own common sense and business experience. If you keep your books accurate and up to date, you will be able to calculate the relationship between your gross sales and the expenditure in any category. For example, with the help of your historical accounting data, you may decide that your postage should be 2% or 3% of gross sales. When you look over your month-end reports, you may discover that it has risen to 5%. Catching it early, you can now take corrective action.

If you are able to control your expenses, you can develop a healthy constant cash flow. When your bills are greater than your sales/receivables, your first reaction is most likely that you need to increase sales and collections. Although that is always a good idea, even when there isn’t a cash flow problem, there is still very good reason to pay particularly close attention to your expenses. If when looking at your figures you see that it takes five dollars to put one dollar on your bottom line, it then takes $5,000 of sales to yield $1,000. This means that saving $1,000 in costs is exactly the same as generating $5,000 worth of sales.

You need to look at your cash flow from an informed perspective. Here are five areas to focus on:

1. Mismanaging Credit
There are two common ways to mismanage credit in small business; granting credit without specific credit policies, and using credit with no plan for how to pay for it.

Both have a huge impact on your cash flow and are often closely related. For example, you have an opportunity to work on a big project, for which you will need to order materials. Your supplier expects payment in 30 days, but you won’t receive cash for the project for 60 days. Right away you’ve put yourself into a cash flow crunch that could take months to recover from financially. In the meantime, you’ve passed on smaller jobs that would have provided quicker cash at less cost. And, if you’re unable to pay your supplier on time, you’ve endangered that relationship as well.

2. The relationship between Receivables and Payables
In a perfect world, what customers owe you would be paid just in time for you to pay what you owe your vendors. But, as any small business owner knows “stuff happens”. The customer you thought would pay this week, doesn’t. So the bills you thought you’d pay this week, don’t get paid. Are your payables in balance with you receivables? If what you owe to others is far more than what is owed to you, then you have a cash flow problem. And if your receivables are particularly old, chances are you’ll never see that cash at all.

3. Focusing on profit instead of cash flow
Is profit the ultimate goal of every business? Did you know that many businesses that fail are operating at a profit? How can that be? For the small business, cash flow is the ultimate goal. No cash flow. No business.

The difference is mostly in the decision making process. If you take on this big job, it will earn you a huge profit, but if you take on five smaller jobs, you’ll have cash to pay your bills. Yes, you want to be profitable, but every decision has to be measured against the effect it will have on cash flow.

4. Don’t forget your debt to the Tax Man
Some bills are easy to forget. Bills like sales tax, payroll taxes, estimated taxes. They just sit out there, almost off the radar. They don’t have to be paid right away. It’s easy to forget about them. But when they’re due, they’re due right now. And you better have the money to pay them or you’re in hot water with the Tax Man. That is not a place anyone wants to be. Pay them late or not at all and you end up with penalties and interest on top of what’s already due. Using the money that needs to go toward taxes to solve cash flow problems results in even more, and probably worse, cash flow problems when those taxes come due. It can take months or even years to recover.

5. Spending your company’s future on a sailboat
Haven’t you always wanted a boat, a fancy car, or a trip to Tahiti? It might be tempting to try to pass your personal purchases off as tax-deductible business expenses. But, it’s a bad idea for two reasons.

The people at the IRS are over-worked, but they weren’t born yesterday. The last thing you need is an audit that could reveal your transgressions and result in an unexpected tax bill plus penalties and interest. No company’s cash flow should have to suffer that indignity.

The other reason it’s a bad idea is that you are spending your company’s future on unnecessary expenses. Small businesses operate close to the edge. Unless you have a reserve to see you through the tough times, you’re always in danger of being on the wrong side of that edge. You must take care of the cash flow first. Then, you can pay yourself a properly taxed bonus and buy all the toys you want.

Turning Dead Inventory into Cash

September 22nd, 2015

Dead InventoryMost small retailers struggle with dead inventory at some point. Slowly, gradually, almost imperceptively over time, the percentage of dead inventory grows. The problem is thought to be modest, because the rate of growth appears to be modest, so modest measures are taken to deal with it. An extra markdown here, a special promotion there, but still there seems to be more of it this month than there was last. Finally, when the sheer amount of inventory involved becomes inescapable, and the realization that the measures to deal with it aren’t close to being sufficient, the whole thing starts to feel overwhelming.

So if you’re looking at a buildup of dead inventory, here are a few ideas to help you get started turning it into cash.

1. Patience and persistence
You didn’t get into this situation overnight, and you’re not going to get out of it overnight (Unless, of course, getting 10 cents on the dollar from a jobber or liquidator makes sense to you, which it may in extreme cases). Build ups of dead inventory are frequently accompanied by a cash flow crunch, so the instinct to search for a quick fix can be strong. The solution, however, rests with a persistent, sustained effort designed to deliver consistent, incremental results. The first and most important step is establishing reasonable, attainable expectations for what can be accomplished in any given period of time.

2. Can you return it?
You never know until you ask. And if you ask firmly, and structure your request as a win/win proposition, most vendors will be reluctant to respond with a flat out “No.” What do you have that your vendor might find valuable in return for its help? Your next purchase order perhaps. A test order on that new item or program your vendor has been after you to try. Maybe an increased share of your business. Open the dialogue, show your vendor the inventory you’re sitting on, it might have outlets that it can sell it to. Make clear that your request is a one-time thing, not a new standard operating procedure. Maybe the best your vendor can do is offer markdown money, or an additional discount off your next purchase order. At a minimum, that would help with cash flow.

3. Segment your dead inventory

It is critical to recognize that dead inventory is made up of merchandise with dramatically different characteristics and market value. Break your dead inventory into three categories, which could be referred to as Still-Sellable, Not-Sellable, and everything else (or Who-Knows-If-It Might-Sell).

A. “Still-Sellable” is the most desirable inventory of the items you haven’t been able to move. It’s the most marketable, and appears to be the easiest to sell and turn into cash quickly. Start here. Break out a style or item, feature it, sign it, price it to move now, and get your cash. When that style sells through, break out the next style or item. If you’ve been struggling with tight cash flow, this will be your quick fix. Most importantly, if you can move this dead inventory you’ll feel like you’re finally making progress.

B. “Not-Sellable” is all the merchandise (aka, junk) you know no one is going to pay a cent for. When you see it mixed in with or merchandised near the “Still-Sellable” items, it makes that look like junk too. So get that junk off the sales floor, away from the rest of your dead inventory, and most importantly, away from your customers. The truth is that since these items have no market value, it doesn’t merit the time and effort necessary to try to sell it. Think about donating it to charity. The resulting tax deduction is one tangible benefit you will receive; another benefit is that the rest of your dead inventory won’t look quite so bad and will likely be more highly valued by your customers. In the end, if you can’t find a charitable organization that will take it, donate it to your dumpster.

C. “Who-Knows-If-It Might-Sell” is everything in between, and can be segmented yet again. After you sell through the “Still-Sellable” items, slice off the next most desirable layer of inventory from this category, feature it, sign it, and price it to move. Understand that each successive layer of inventory is likely to require a greater discount to stimulate customer response. As you go along, in fact, the least desirable inventory in this category will likely start to look and feel more and more like junk, which is a good sign that you’re near the end of the process.

4. Selling dead inventory is not like running a clearance sale

Dead inventory is different than clearance merchandise; it’s generally older and lacking in current demand. If you find a layer of dead merchandise that customers aren’t responding to, pull it back and bring something else forward, then bring the first layer back forward at a later time at a greater discount. If you attempt to move it merely by taking an additional markdown without remerchandising it, as you might with clearance merchandise, you only reinforce in the customer’s mind that it may not be desirable even at that new, lower price.

5. Develop merchandising and selling strategies to minimize the impact on your regular business

The last thing you want is for your store to look like it’s going out of business. You want to protect the brand integrity of your store. This is why a slow, steady approach works best, so that your dead inventory never represents more than a small piece of your overall offerings. For some retailers, it may be a small feature just off the front of the store, or perhaps a dedicated table or rack on a traffic aisle further back in the store.

6. Price it to be irresistible

Forget what you paid for it, or what you are carrying it on your books for. It’s not relevant. Let me repeat this, because it’s an easy point to get hung up on: Forget what you paid for it, it’s not relevant; that was then, this is now. What is relevant now is the price your customers will pay for it, now. And like most everything else in retail, your customers will tell you very quickly whether you have it priced right or not.

7. And then there’s eBay

EBay has emerged as a viable avenue for retailers to sell off dead inventory, but not everything necessarily lends itself to eBay. If you are sitting on highly identifiable, branded items with an established market position, even if those items appeal to a very specific customer, eBay may work for you. The typical eBay shopper is sophisticated and well informed. They are usually looking for something specific, down to a manufacturer’s stock number. They understand the value of what they are looking for so you have to be priced sharply. It’s an absolute must that you competitively shop similar items on eBay before you post your items there.

When you are confronted with a buildup of dead inventory, it’s critical to make a clear headed but realistic assessment of what it’s going to take to move it through. It’s losing market value every additional day it’s sitting there. It represents cash that is likely needed for other critical business purposes, such as paying vendors, reducing debt, and/or fleshing out assortments or stock levels of key items or categories. The time to get started is now.

Business Profit & Loss

June 26th, 2015

Profit & Loss Dice

As a business owner you must continually focus on managing profit and loss to not only stay in business, but to grow and thrive. Profit is the money left over after paying all the expenses. A loss results from expenses exceeding the amount of sales a company makes in a specific period. Companies must manage their profit and loss statements, also known as income statements, to keep earnings positive, and expenses under control and in line with revenue.

Financial Assessment

Managing profit and loss begins with an assessment of your company’s current financial situation. Review the current profit and loss statement and compare it to the company’s last two or three years of historical data. An accountant can use this information to establish a set of performance benchmarks for the company’s average revenue and expense levels.

Analytical Tools

Have an accountant prepare analytical tools such as an income statement spreadsheet that shows every expense as a percentage of sales. This will allowing you to isolate costs that could contribute to decreasing profits. Perform this analysis for, ideally, three years of historical data. Expenses as a percent of revenue are compared for each year to reveal trends that show expenses raising or falling as a percent of sales over time. Some costs, such as the cost of goods sold, will rise with sales increases because they represent the raw materials and labor used to make the products you sell. Rent, administrative costs and some utility bills should remain the constant, regardless of increases in sales.

Explaining Expense Growth

Your accountant should perform additional analysis to investigate and explain the growth of expenses over time. This can reveal valuable information about the use of resources and their cost oversight. External factors such as the economy and rising prices also can contribute to cost increases. You need to find out which of these factors is involved in order to determine which might be controllable.

Sales Review

Next the accountant should review the company’s sales. Depending on various events and conditions, even when internal expenses have been well-managed and cut as low as possible, the company will still suffer a loss if its sales drop below its expenses in any given period. In this case, the company must make important decisions about how and why sales are generated, but may also need to consider discontinuing certain unprofitable product or service lines, selling off assets to free up capital and discontinuing investments in any projects that do not generate revenue.

 

Gross Profit, Profit Margin & Markup, OH MY!

April 27th, 2015

Gross Profit, Margin & Markup

The terms Profit Margin and Markup are often used interchangeably to mean Gross Profit Margin, but they are not the same. A clear understanding and application of these concepts and calculations can provide the information you need to better impact your bottom line.

First of all, a very valuable calculation you’ll want to perform for understanding your business is Gross Profit, and then, the tool that you use to maintain gross profit, called Markup.

The gross profit on a product is:

Sales – Cost of Goods Sold = Gross Profit

To understand gross profit, it is important to know the difference between the expenses we call Cost of Goods Sold and the expenses we call Operational Costs.

Cost of Goods Sold are those expenses that are incurred as a direct result of producing the product. They tend to be variable costs such as:

  • Materials used
  • Labor directly involved in production
  • Sales commissions
  • Packaging
  • Freight
  • Utilities, or power costs, for production equipment and or facilities
  • Depreciation expense on production equipment
  • Machinery

Operational Costs are the more fixed costs such as:

  • Rent
  • Insurance
  • Professional fees
  • Office expenses such as supplies, utilities, a telephone for the office, etc.
  • Salaries and wages of office staff, salespeople, officers and owners
  • Payroll taxes and employee benefits
  • Advertising, promotion and other sales expenses
  • Auto expenses

While the gross profit is a dollar amount, the gross profit margin is expressed as a percentage (Gross Profit as a percent of Sales). It’s very important to track since this allows you to keep an eye on profitability trends. This is critical, because a business can get into financial trouble with an increasing gross profit that coincides with a decreasing gross profit margin.

The gross profit margin is computed as follows:

Gross Profit / Sales = Gross Profit Margin

There are two key ways for you to improve your gross margin. You can either increase your prices, or you can decrease the costs to produce your goods. Or both, if you can.

An increase in prices can cause sales to drop. If sales drop too far, you may not generate enough gross profit to cover operating expenses. Price increases require a very careful reading of inflationary rates, competitive factors, and basic supply and demand for the product you are producing.

The second method of increasing gross profit margin is to lower the variable costs to produce your product. This can be accomplished by decreasing material costs, or making the product more efficiently.

Volume discounts are a good way to reduce material costs. The more material you buy from a supplier, the more likely they are to offer you discounts.

Another way to reduce material costs is to find a less costly supplier. However, you might sacrifice quality if the goods purchased are not made as well.

Whether you are starting a manufacturing, wholesale, retail or service business, you should always be on the lookout for ways to deliver your product or service more efficiently.

And all the while, you also must balance efficiency and quality issues to ensure that they do not get out of balance.

Let’s look at the gross profit of Rapid Printing & Copy Company as an example of the computation of gross profit margin. In Year 1, the sales were $1 million and the gross profit was $250,000, resulting in a gross profit margin of 25 percent ($250,000/$1 million). In Year 2, sales were $1.5 million and the gross profit was $450,000, resulting in a gross profit margin of 30 percent ($450,000/$1.5 million).

It is apparent that Rapid Printing & Copy earned not only more gross profit dollars in Year 2, but also a higher gross profit margin. The company either raised prices, lowered variable material costs from suppliers or found a way to produce its print jobs more efficiently (which usually means fewer labor hours per product produced).

Rapid Printing & Copy did a better job in Year 2 of managing its markup on the products that they print.

Business owners sometimes get confused when relating markup to gross profit margin. They are related in that both computations deal with the same variables. The difference is that gross profit margin is figured as a percentage of the selling price, while markup is figured as a percentage of the seller’s cost.

Markup is computed as follows:

(Selling Price – Cost to Produce) / Cost to Produce = Markup Percentage

Let’s compute the markup for Rapid Printing & Copy Company for Year 1:

($1 million – $750,000) / $750,000 = 33.3%

Now, let’s compute markup for Year 2:

($1.5 million – $1.05 million) / $1.05 million = 42.9%

While computing markup for an entire year for a business is very simple, using this valuable markup tool daily to work up price quotes is more complicated. However, it is even more vital.