Your AR is your cash in someone else’s bank account.

In the over 50 clients I worked with over the past three years, not one did not have a problem with receivables. (Receivables are those invoices for work or services you have performed or delivered, but have not yet been paid.) The common response to the question was “They are such a good customer, we don’t want to upset them.”

My response to that is “Why should it upset them if you ask for your money”. But be that as it may, the real issue is that getting paid is part of the job. It is part of customer service and if it is viewed that way it is so much easier. The key therefore is not to wait till an invoice is past due, by then it is getting too late. Before due date make a customer service call and ensure there are no problems.

If you do that, when the invoice becomes due, there are no excuses for it not to be paid.

Much more on this subject in the CEO training you get here.

Why use QuickBooks?

I'm not out there trying to sell you on QuickBooks, but I am an advocate mainly because it is so simple. I have been able to get a small business with no current accounting system up and running, writing checks, and collecting cost data in less than a day. (Now in fairness, there was a bunch of clean up to do later, but for some businesses just being able to keep the cashbook current is a major advance.)

Now remember, no accounting system has everything you want, and QuickBooks is no exception, but I am sure most businesses doing less than $1,000,000 a year will be quite happy with what it does for you.

One word of warning, if you already do computerised accounting, think twice before changing systems. It is easy to say you will get better results with another system, but the disruption can be traumatic.

The Power of the Percentage!

As you will begin to realise as we proceed down this road together, I advocate getting your accounting in order not because I want to see history but because I want to use the data to project the future, and thereby help us manage the business.

Let us use the numbers we have developed in the last few posts to create an example. Let us say our business was just breaking even at $40,000 sales per month, GM% is 25% and overheads $10,000. No point in that continuing, so we say to ourselves, "Gotta make $2,500 a month profit!". We saw that one way to do this was to increase sales by $10,000 per month. But there are two other ways as well. The first is to cut overheads by $2,500. (Usually it is possible to trim overhead by some amount.)

The third and final way to achieve the desired profit is to increase gross margin. If we get the gross margin up to 31.25% with sales remaining at $40,000 per month we achieve the same result, achieving our $2,500 profit.

The net result of all this is that we have quantified what possible actions we could use to create the change we need. Now we use our experience to select between the options.

So next time you talk to your accounting staff don't ask "How did we do last month?" Ask instead, "What do we have to do to do better next month?" Do this and you start to turn accounting into a resource not an expense.

Using Break-even to set Targets.

Targets! Why? Well, if you don't tell your people what you expect them to do, don't be surprised if they don't do it. So set targets.

In the last post we showed how you calculate break even for a month. The same calculation can be used to set targets. Let us use the same figures as before, $10,000 a month fixed cost, and GM% of 25%. But let us now add the fact you want to make $2,500 profit. Profit is also a fixed cost. So we now divide $12,500 fixed cost by our GM% of 25%, to get $50,000.

So the sales target becomes $50,000 per month at GM% 0f 25%. If we achieve that target, we automatically achieve our profit goal.

Say it again Sam, "If you don't tell your people what you expect them to do, don't be surprised if they don't do it."

Back to Break Even

One of the early posts to this blog was how to calculate break even. The formula is:

Break-Even = Fixed Cost/Gross Margin %

So now we see the key metrics beginning to help us manage. Let us say your fixed costs per month are $10,000, your GM% is 25%, you calculate your monthly break even is $40,000. So you now know that you must sell more than $40,000 each month Before You Start To Make A Profit.

It doesn't make it any easier, but at least you know what you have to do.

What is Gross Margin?

If you run a toy store, you buy a game for $3.00, sell it for $4.00, you have a gross margin of $1.00. Business used to use the term "Gross Profit" instead of "Gross Margin", but this has the connotation that the business has made money. This may not be true! More about that later.

So from our accounting process, how do we determine "Gross Margin". The example above should give us a clue! The formula is:

Gross Margin = Gross Revenue from Sales - Direct Costs of Sales.

From this we get the most important metric in business, Gross Margin Percent, or GM%. The formula is:

GM% = (Gross Margin/Gross Revenue from Sales) X 100.

In our toy store example that gives us a GM% of 25%. You should ensure that you know your GM% of your monthly P&L, of your year to date P&L, of your last weeks operations, of each and every department, of each and every job. Simply put, you need to know the GM% of every single thing you do in your business.

And you need to know it today!

New Seminar Schedule Announced!

The"Train me to be a CEO" website has announced the fall season seminar schedule. Seminars are available in Toronto, ON in October and December, and Fort Myers, FL in November. For details of the schedule go to Seminar Schedule.

Let's talk about your P&L

In the last post we introduced you to the Profit and Loss account or P&L.

The three items which make up the main divisions of your Profit and Loss Account are:

1. Revenue or Sales. You can subdivide this into several categories such as product and service etc.

2. Direct cost of Sales. Direct cost of sales, sometimes called variable cost or simply cost of goods (COGS). They are called variable costs because they go up and down as your sales go up and down. In a store, direct cost of sales is easy to recognize as the amount you pay for the items you sell, but in most businesses it is not so simple. The easiest way to look at it is any cost that you would not have incurred if you had not made the sale. It includes things like materials, direct labor, sales commissions etc.

3. Fixed or overhead Costs. As it sounds, these costs do not change as your sales change. They include such items as rent, accounting salaries and fees, insurance etc.

As stated before, it is most important that you clearly define these categories, and use them consistently. In fact consistency is the most important part. If you include gasoline as a direct cost one month or on one job, you must do the same on every month and every job. Only by doing this will your numbers be comparable, and trends will be found.