Setting Up Your Books

I get calls all the time from business owners asking me about QuickBooks and accounting in general.  A majority of the calls are around April 1^st….hmmm; I wonder why they call at this time of the year?  Yes, the tax man is at their doorstep and they are unprepared for what comes next.  They have spent the entire year running their business and they haven’t had a chance to do the financial side of their business.  They come to me with boxes full of receipts, accounting records that are wrong or with nothing but a long list of transactions.  As a business owner you cannot run your business without up to date financial information. 

 As a business owner you need to be proactive and not reactive.  Being proactive means keeping track of your finances as the year progresses, not the week before tax returns are due.  For some business owners it is a struggle to “keep their books” in order all year long.  The truth is it does not have to be so hard. Your financial records can be as easy or as challenging as you want.

The key is to do it correctly from the start. When you are setting up your company books or accounting you need to understand what you are doing.  This can be accomplished by hiring a bookkeeper or perhaps having someone from your accountant’s office help you.  While that is a great way to get started, you have missed the most important step….understanding what the hell you are doing.

Walking through the process of setting up your company financials is a great way to build your understanding of how your company operates behind the scene.  Understanding the financial side of your business is critical to profitability.  If you don’t know the true numbers of your business, how can you make a strong decision?  It is one thing to estimate numbers in your head, but it is another to see them on paper.

So what does all of this mean?  It means that you need to do a little homework.  You need to take the time to learn the basics about reading your financial statements, understanding what the numbers means, and most importantly understand how important it is that these numbers are accurate.  It is ok to hire someone to do all of this work for you, but remember that it is your responsibility to know when the numbers they are producing for you are WRONG.

SWOT Analysis

            Strategic planning is not just a big business tool; it is a successful business tool.  No matter how big or how small your business is, you should have a strategic plan.  One of the critical parts of strategic planning is a SWOT analysis.

            SWOT is short for Strength, Weakness, Opportunity, and Threats.  This analysis tool can be used before you start your small business, after you have started your business, or if you want to look at a department within your business.  The analysis is a very simple tool that anyone can use. 

Let’s say that we are using the SWOT analysis as part of our strategic planning for our business start-up which is a retail coffee shop.  We would start by using the diagram above to make an objective list of each area in the analysis.  The analysis works like this:

Strength = list here things that are part of your advantage in the industry such as experience in food service, experience in purchasing of products, understanding of the industry as a whole.  Anything that you think gives you an advantage in the marketplace.  This can also deal with your financing, such as unlimited funding for your business. (That is a great dream)

Weakness = this area should be a list of realistic weaknesses that you will need to overcome.  This could be things such as limited financial resources, aggressive competition in your ideal local area, or limited knowledge of experience in the industry

Opportunity = this is the area that should identify the things that you believe to be an opportunity to your business.  Opportunity can be the fact that you know the local university is looking for a coffee vendor to service their campus or be close to the campus or you know a local coffee shop is going to be put up for sale.  These could be seen as opportunity for you and your business.

Threats = this is the area were you identify threats to your business operation and success.  For our coffee shop start up, the distance from a large chain coffee shop can be a threat to business.  Threats can also be zoning restrictions, purposed construction, or anything that would interfere with your money making.

            By investing time in preparing a SWOT analysis you are taking a step forward in your overall strategic planning.  While many people start businesses on a whim or idea, there needs to be a level of planning involved.  It is important that you take the input of others when doing your SWOT analysis due to the fact that you already have your mind set on opening a business and that could create a level of bias in your objectivity.

Fraud Triangle

This past February I had the honor of speaking to a group of Private Investigators about Fraud, more specifically Embezzlement.  My presentation focused on "The Fraud Triangle", which is the creation of Donald R. Cressy.  This theory has served as the foundation of fraud investigation for years.  The theory of the Fraud Triangle is that a person will violate the trust of their employer if the three elements collide. 

The first element is the Pressure.  The Pressure is a problem or issue that the person is going through and they do not feel that they can share this problem with anyone else.  Since the issue is non sharable the person will try to find a way to solve the problem themselves.  These unsharable issues are usually debt from a failed investment or debt from a questionable activity. 


The second element is Opportunity.  The opportunity is what the employee or individual sees as a way to solve their unsharable problem.  So if the individual works in the accounting department they may see that there is a set of pre-signed checks for emergency use.  The opportunity the person sees is that no on keeps track of how many pre-signed checks there are and they are kept in an unlock draw.

The third element is Rationalization.  The theory states that when the employee or individual has the unsharable problem, sees the opportunity to solve their problem, they then progress to rationalization.  When the individual can rationalize the act of taking the money or committing the act of embezzlement, that is when the three elements collide.

Embezzlement is usually a short term answer to a problem that an employee is struggling with.  With the current state of the economy and the hardship created by the collapse of the housing market many people have found themselves falling on hard times.  The unemployment rate and foreclosure rate are evidence that individuals are struggling financially and may see their situation as desperate.  These economic conditions are a stimulating factor in the rate of embezzlement cases. 

As a business owner you need to aware of your financial position and look for professional help if you suspect deviant behavior in your accounting department.

Financial Ratio's

As a small business owner it is critical that you understand how your business is performing financially.  Some times looking at financial statements when you are not a non-finance person can be such a headache.  The key is to know how to take specific information from your financial reports and calculate your financial ratio's. 

These ratio's are measuring the liquidity of your business. These ratio's deal with how you can meet all of your short term debt.

Current Ratio = Current Assets / Current Liabilities (this ratio shows your ability to pay short term debt)

Quick Ratio = Quick Assets / Current Liabilities (Quick Assets = Current Assets - Inventories)

Net Working Capital Ratio = Net Working Capital / Total Assets (NWC = Current Assets - Current Liabilities)

Know lets do some calculations. 

Current Ratio Calculation

Current Assets = $10,000.00
Current Liabilities = $6,500.00

Current Ratio = $10,000.00 / $6,500.00 = 1.53  So we express the ratio as 1.53 : 1.  This means for every $1.00 of debt, you have $1.53 of assets.  This is a good thing. This means that you have enough short term assets to pay your short term debts if the demand was made. 

Lets try another one

Current Ratio Calculation

Current Assets = $100,000.00
Current Liabilities - $123,000.00

Current Ratio = $100,000.00 / $123,000.00 = .83.  So what does this mean?  .83:1?  This means that for every $1.00 of debt, you only have .83 cents.  This is not so good.  This means that you cannot pay all of your short term debt if the demand was made.

Ratio's can help you understand the financial position of your business.  Try calculating your ratio's the next time you have your financial statements in front of you.

UP

"Never think down - always think up" - Norman Vincent Peale

Work-Life Balance

For six years I sat at a desk in exchange for a check.
For six years I gained weight, a lot of it.
For six years I was tired every day.
For six years my health was failing.
For six years I ignored my body crying out.

Today I sit at a desk, but take breaks to walk.
Today I am losing weight, a lot of it.
Today I have energy.
Today my health is improving.
Today I listen to my body.

Today I live for me and not the check.

Crisis Leadership

The true test of a leader is crisis.

How a leader responds to a crisis can illustrate their ability to lead, make decisions, and act in a manner that benefits others or can show us that they never should have been a leader in the first place.

Leadership is a position that should be held by those who can truly focus on the best interest of others. A leader should always want the best for those around them and should seek out ways to assist others.

There are two perfect examples to illustrate selfless leadership and selfish leadership, Captain Sullenberger and Captain Schettino.

Captain Sullenberger was the pilot of the US Airways Flight 1549 that landed safely on the Hudson after the plane’s engines failed as a result of ingesting birds. Captain Sullenberger and his co-pilot assessed the situation and responded. They landed the plane on the Hudson safely and it did not end there. As the plane began to submerge Captain Sullenberger walked the entire plan insuring that everyone had indeed been evacuated. It was only after he was sure that everyone was safe that the pilot then exited the sinking plane.

The complete opposite of Captain Sullenberger is Captain Schettino. Captain Schettino is the disgraced captain of the Costa Concordia that sank off the cost of Italy after running aground into the jagged rocks. The captain is being investigated for manslaughter and abandoning ship. This leader, when faced with crisis, did not respond in a manner that would be expected from a person in his leadership position. Captain Schettino was said to have left the ship during the crisis and chaos ensued.

What is the difference between these two leaders?

Selfless leadership and selfish leadership.

While these are two very dramatic and life threatening examples they serve as the foundation of leadership selection. When you are selecting leaders for your organization or you are selecting a leader to follow, you need to understand their true leadership philosophy. Are they a selfish leader? Will they serve their followers best interest? Will they use their followers and then abandon them just when they are needed the most?

A true leader is a selfless leader. They look for ways to serve others. A selfless leader is one that will work to develop others and finds satisfaction in knowing that they have made a positive impact on the lives of others.

Inspiration

"Just keep swimming" - Dory (Finding Nemo)