Business Alchemy 101 Lesson 15–Sales Growth Consistency (Part One)

Sales Growth Consistency is a very simple equation and does not contain any ratios.  The purpose of Sales Growth Consistency is simply to track the number of years that the sales of the company have grown.

The equation is an IF-THEN-ELSE statement.  If you do not know what this is, then I will explain: the meaning of this statement is that IF A occurs, THEN you will do B, otherwise (ELSE) you will do C.  Otherwise, no explanation is necessary. (In case you did not catch it, this paragraph is an IF-THEN-ELSE statement…)

So the equation is:

IF [Sales This Year > Sales Last Year] THEN [Sales Growth Consistency = Sales Growth Consistency Last Year + 1]

ELSE [Sales Growth Consistency = 0]

So a company with a Sales Growth Consistency of 7, would have had 7 years of consistent growth in the volume of sales.

Adversely, a company with a Sales Growth Consistency of 0 did not grow this last year.

As always…

…Your business THRIVES on a solid FOUNDATION!!!

Business Alchemy Lesson 8–How Much Pie Do You Get? (The constants)

I begin this post with two disappointing bits of news.  Number one, I will not be continuing the car analogy with this post and number two is that I think a little more background is important before we dive into the meat of analyzing and improving your business.

This thought came to me as I drove home a couple of evenings ago.  I was listening to Dave Ramsey on the radio (I am not a huge Dave Ramsey fan for reasons I would be happy to discuss with you, but I do think he teaches people to be very responsible citizens when it comes to money).

Anyway, a lady called in that had a business and she didn’t really understand what was going on with her business.  She struggled with understanding profit.  At this point, I realized that it would be beneficial to share an excellent tool you can use for budgeting and for understanding your profit.

For this conversation, I use Thanksgiving and, more specifically, pie.  My family loves my mom’s pies!  And since I am assuming that you love pie as much as me, I will break this conversation up into a couple of posts so as not to overwhelm you and save some pie for tomorrow, if you will.

Here is the problem with my mother’s pies, if I am waiting for everyone else to eat their pie before I serve myself, it varies each year how much I will end up getting to eat.  Some years we have more family there than other years.  Some years there are people that eat more or less than they did the previous year.  This changes the amount of pie left for me, assuming that I wait for everyone else to finish first.

The solution to the problem of how much pie I get begins with the things that are consistent.  Every year, my mother and father will both be at our dinner and eating pie.  My mother will eat one piece of pie.  If I am there, my wife and children will be there also.  My wife and each of my three children will eat one piece of pie.

I have two brothers and two sisters that may or may not be there and each will come with their spouses and children.  I can pretty much go through ahead of time and figure out which of my relatives will be there and which will eat the same amount of pie each year and separate those from the variable eaters.

When all is said and done, I know what my constant, or fixed, amount of pie is that will be consumed and therefore, I am one step closer to knowing how much pie I will get to eat.

I am building this analogy up to a final discussion on profit.  In order to give you all the tools you need to build budgets and understand your profit, it is important to understand the fixed costs of your business.

The constants discussed above are the fixed costs of my pie scenario.  You can look at your costs over the past year or month and pick out the costs that you have every month that are the same amount.  These are your fixed costs.  Now that you have picked these costs out, total them up and set them aside for the next part of our discussion.

Understanding profit takes some basic knowledge first and that is why all of the buildup because as you already know…

Without Foundation, your business fails!

Business Alchemy Lesson 6–Do You Have Any Idea How Fast You Were Going?

How fast is your company progressing toward its financial goals?

We have discussed your car in great detail.  I am going to add two other posts to our car analogy that will help to illustrate the importance of the different Financial Statements.

The Profit and Loss Statement—also know as the Income Statement—is your speedometer telling you how fast you are creating cash.  In order to determine this, you need more details.

The two main aspects of a Profit and Loss Statement are Sales and Expenses.  The format of the Profit and Loss Statement is a little more complex than that, but those are really the two basic items on the P & L.

The exciting part of this equation is the Sales.  This is like the gas pedal on a car.  The more sales you make, the faster you are heading toward your financial goals.  Your revenue is really no more complicated than that analogy.

The Expenses of your company are like your brake pedal.  The more expenses you have, the slower you are going toward your goal.  So it goes without saying that the fewer expenses you have, the faster you will go.

Some of the broad categories for expenses include Cost of Goods Sold, Administrative Expenses and Selling Expenses.  These are all subtracted from your Revenues to find your Net Profit.

When you subtract all your Expenses from your Sales, you end up with the total amount of money that you have made which is called your Net Profit.  Your Net Profit is your speed limit.  It tells you how fast you are heading toward your financial goals.

In summary, in order to progress toward you goal faster, your want your Net Profit to be as high as possible.  This means you need to back off on the brake pedal by lowering your expenses, and push down on the gas pedal by increasing sales.  As always,

Without Foundation, your business fails!

Earning a Second Bag of Money

Every client is carrying two bags of money.  The first bag of money you will earn when you perform your services and/or supply your goods to your client.

The second bag of money you can only earn by improving efficiency within your business.

The Profit equation is quite simple: Revenue – Costs = Profit.  If you examine this equation, you will notice that in order to increase Profit on the right, you can increase Revenue and you can decrease Costs.

Most businesses focus on increasing sales-which is terrific-and understand that cutting costs is important, but are not sure how to decrease costs other than simply buying supplies for less.

The first rule of reducing costs is tracking what you are currently doing.  This requires bookkeeping practices beyond the normal scope of your typical bookkeeping.

Once the correct procedures and items are being tracked, you need to understand how to analyze what is going on with those numbers.  This is where managerial accounting comes into play.

Managerial accounting gives you the tools to be able to really diagnose your company and make decisions to help you earn that second bag of money.  This is the focus of the posts in the Business Alchemy 101 Series.

Start today to increase your profits by earning that second bag of money and remember…

without Foundation, your business fails!

Business Alchemy Lesson 5–Making Your Business Go Places

What is under the hood of your business?

Freedom is without argument the foundation for the American Dream.  The easy access to capital has led many Americans to achieve their greatest dreams here in America.

Capital is the private financing of a business and, in essence, the whole reason that businesses exist.  Without the lure of profit, there would be little reason to begin a business.  Altruism can only carry a person so far because at some point a person’s efforts to improve the world must feed, clothe and shelter him or her or else that person will not make it very far with the business.

So, in step the capitalists with their bags of money.  Okay, so if you started your own business without anyone else’s money, you may not have bags of money, but you have certainly invested your money and time into something you are hoping will turn a profit.

This investment, whether from you or from other individuals, is called your Capital or Equity.  This Equity is the engine that runs your whole company.

So back to our car analogy, you hopefully have the shiny exterior, you may or may not have all the fancy innovations of a luxury car in the interior, but what is under your hood?

You want your engine to be the premier in getting people places.  You want your car to be able to get you there safely, efficiently and in the quickest way possible.

The same can be said for your business.  The phrase that it ‘takes money to make money’ is perhaps overused and is not necessarily true, but access to capital to invest in your business sure can help you reach your goals sooner.

So if you have the opportunity to expand the capital for your business, consider the consequences carefully and discuss them with your Accountant, Business Coach, Lawyer and Financial Advisor.  But realize that capital used wisely will help you reach your goals sooner.

The second aspect to consider with your capital is your efficiency.  A large engine is great, but is likely to use up more gas as well.  You want to make sure your engine is as efficient as possible, so that you can get where you are going as quickly as possible, but also so it costs you as little as possible.

The profit of the business falls under the Equity category.  Consequently, all expenses fall under this category also.  Naturally, as you cut expenses, your profit increases and your business operates more efficiently.

The big engine is great and I recommend increasing your capital in most situations, just remember to operate efficiently also.  Keep good records and, as always remember…

Without Foundation, your business fails!

Business Alchemy Lesson 4–Heated Leather Seats

What are the negatives of your business?

Your Assets are, for the most part, your positives and your Liabilities are, for the most part, your negatives.  Your Liabilities are basically what you owe.

Back to the car analogy, your shiny exterior is your Assets and the interior components are your Liabilities.   A luxury car is going to go to extreme lengths to make sure your interior is very comfortable and convenient for your travel time.

The image of heated, leather seats and built-in GPS that are requisite in a luxury car summarizes your Liabilities.  These items are like your business debt.  Your debt can be revolving lines of credit, mortgages for property, credit cards, etc.

Arguably, these things are not necessary for your car.  Your car would function just as well if you were sitting on a plastic bucket with a dinner plate for a steering wheel and a couple of large potatoes for the gas and brake pedals.

Likewise, you do not need debt to operate your business; it just makes it more comfortable to travel from point A to point B.

Debt is a tricky topic.  I think everyone would agree that debt has been abused and, as a result has inspired many people, like Dave Ramsey,  to take up the standard against all forms of debt, regardless of the type of debt and the use for the debt.

Though I agree with Dave Ramsey that being shackled by debt is an awful way to live, I tend to ascribe more to Robert Kiyosaki’s philosophy in Rich Dad, Poor Dad that there is good debt and bad debt.

Kiyosaki explains that purchasing a pair of fancy shoes on a credit card is typically bad debt—you receive nothing in return.  However, if purchasing those shoes was somehow going to land you your next big job, which would provide additional income for you and then pay off the shoes as quickly as possible, perhaps you would agree that the debt incurred in this situation would be classified as good debt.

So bad debt you pay for and good debt pays for itself.  There is always risk involved in incurring this kind of debt, but that is the very nature of being an entrepreneur.  My belief is that being responsible about the debt you incur is most important.

Any way that you look at the philosophy of incurring debt, it equates with the interior of the car and increases the comfort of your business travels.  So do you really want the luxury interior?  You can decide on that with help from your Business Coach, Financial Advisor and Accountant, but make sure to consult this team before acquiring more debt.

Either way you go,

Without Foundation, your business fails!

Business Alchemy Lesson 3–Does My Asset Look Good in This?

What are the positives of your business?

I say positives because with the exception of some Capital accounts, the accounts that add positive value to your company are asset accounts.  Assets are things that you own and are valuable to your company and its operations.

Assets can be tangible items like a computer, car, salon chair or cash.  They can also be intangible like accounts receivable and goodwill.  Goodwill includes things like ideas, market branding, a unique purchase appeal and the fact that you have been in business for forty years.  These are hard to value and sometimes hard to define or recognize, but frequently are a major contributor to your success.

Your Assets appear on the Balance Sheet and are in balance with the Liabilities and Capital.  In other words, if you were to stick all of your assets into one side of a giant balance scale, then Liabilities and Capital would go into the other side of the scale and the two would weigh the same.

The reason for this is because of double-entry bookkeeping, for which we can thank some Italian gentleman from the 1400’s.

Also important to note is the fact that Assets, for the most part, are taxable.  Some Assets, like land, buildings and vehicles are taxed on a recurring basis.  So naturally you want to get rid of Assets to spare you from taxes, right?

This is not necessarily true.  The correct answer here is to have a good relationship with your Accountant to help you decide the best ways to reduce taxes and yet keep a healthy amount of Assets, especially since when you go to the bank for a loan the banker wants to see as much value in your Assets as possible.

So to continue with the car analogy from last lesson, if the balance sheet is a car then the Assets could perhaps be compared to the body of the car—the shiny nice packaging for all of the other components of the car.

Just like the body of the car contributes less to the overall comfort of your ride, so do the Assets contribute less to the health of the company.  The body has to be large enough to accommodate all of the necessary components for the smooth operation, but outside of that it is mostly for appearing good to others who are looking at your car.

As mentioned earlier, some of those people who might be looking at your business might be the banker offering you the loan or the investor who wants to invest his or her money in your business.  So make sure to keep those Assets waxed and shiny!

As always…

Without Foundation, your business fails!

Business Alchemy Lesson 2–Upgrading from a Compact Car to a Luxury Car

Why are numbers important outside of requesting loans from banks and preparing taxes?

The answer to this question is vast, but I would like to use an analogy to summarize the answer to this question.  Would you rather travel across the country in a compact car or a luxury vehicle?

I certainly hope your answer is the luxury vehicle, because if not, I wonder if you are being honest with yourself.  Your balance sheet is your business vehicle and you will be driving that vehicle for countless hours each week, month, and year upon year.  So what kind of vehicle do you want to spend that much time driving?

Naturally you will want to be in the luxury vehicle equivalent for business.  This requires a healthy balance sheet.

In the lessons to follow I will explain the different major components of the balance sheet—Assets, Liabilities and Capital— and go over some basic philosophies for upgrading your vehicle from a compact car to that coveted luxury vehicle.  For now I will end with the basic equation of the balance sheet which is that Assets equal Liabilities plus Capital (A = L + C ).

I like to end each lesson with the reminder that:

Without Foundation, your business fails!

Business Alchemy Lesson 1–Introduction

What lead do you have weighing down your business and preventing your success?

Years ago, it was believed that through the artistic process of manipulating the structure of lead, the dull and lifeless mass could be turned into gold.  This process of changing matter was referred to as alchemy and was, perhaps, the beginning of modern chemistry.

Science has since proven that, through a very expensive, scientific process, lead can actually be turned into gold.  The trick for future science is to figure out an economical way to turn lead into gold.

With the help of Managerial Accounting, which I like to call Business Alchemy, there are ways to find the lead in your business that can be turned into gold.  This gold is increased profits through more efficient operation.

In order to survive, the lead in your business must be found and turned into gold one way or another.  You can either follow the way of modern science for turning lead into gold and proceed down the very expensive path of trial and error, or you can discover the art of Business Alchemy and put to practice Managerial Accounting strategies to convert the lead in your business into golden profits.

The book 101 Business Ratios by Sheldon Gates goes through 101 ratios to use as a beginning for discovering the lead in your business and transforming it into gold.  My series Business Alchemy 101 will begin with the three most basic financial reports and then continue through the 101 ratios covered by Gates in his book with practical applications for your business.

Keep in mind that, though I will make several suggestions on solutions to the problems you discover through creating and analyzing reports for your business, I always recommend working with a mentor or coach to help you design and implement your strategy for turning that lead into gold.

I am here to help, so feel free to contact me and remember…

Without Foundation, your business fails!