12 High Crimes against Cash Flow

There are 12 Crimes committed against many, if not most, small business every day across the US. These crimes cause tremendous financial stress, loss, and trauma to the victims (owners and team members), yet only a few can effectively defend themselves against these scoundrels. The crimes are:

  1. Failing to Measure and Forecast your Company’s 12-week Cash Flow
  2. Failing to Measure, Analyze and Mitigate Waste (Including Inventory)
  3. Failing to Measure, Analyze and Mitigate Overtime Paid each Period
  4. Failing to Measure, Analyze and Mitigate Non-Billed Work-hours Paid
  5. Failing to Measure, Analyze and Improve Productivity
  6. Failing to Measure, Analyze and Improve your 30-60-90-Day Accounts Receivable (AR) Accounts
  7. Failing to Develop a Purchasing Strategy, as well as a Well-defined Purchasing Process
  8. Failing to Measure, Analyze and Mitigate your Accounts Payable Accounts
  9. Failing to Review and Understand Your Financial Statements & how your Financial Ratios affect your business in Profound Ways
  10. Failing to Set Strategic and Tactical Plans that include S.M.A.R.T. Goals
  11. Failing to Measure Operations and/or Project Performance in Real-Time
  12. Failing to Validate Your Pricing Strategy & Methodology

1. Understanding the Crime: Fail to Measure and Forecast your company’s 12-week Cash Flow

  1. Struggle to Pay Bills on time
  2. Suffering from “Accrual” vs. “Cash” Confusion when planning to pay bills
  3. Lack of Knowledge on how the Income Statement & Balance Sheet affect cash
  4. No Measurement Method or Heuristics
  5. No Trend Record or Analysis is easily accessible
  6. Difficult to track in the Heat of Battle
  7. Lack of Capital Considerations
  8. Possible vs. Probable – Erroneous Assumptions
  9. “I’m making a profit, where is my Cash?”
  10. “Oops, how do I pay my Taxes?”

Mitigate the Crime: Measure and Forecast your company’s 12-week Cash Flow

  1. Establish Cash Accounts Beginning Balance for a given Week
  2. Determine Cash Inflows (Cash Received that week)
    1. Record incoming cash from Accounts Receivable in the current week, and forecast next 11-weeks
    2. Record Cash Sales Completed in the current week, and forecast next 11-weeks
    3. Record incoming cash from loans, sales of assets, added Capital, etc. for each of the 12-weeks
  3. Determine Cash Outflows (Cash paid out that week)
    1. Payroll to be paid the current week, and forecast next 11-weeks
    2. Payroll Taxes
    3. Accounts Payable actually paid that week and forecast what will be paid the next 11-weeks
    4. Loan payments to be paid the current week, and forecast next 11-weeks
    5. Recurring Overhead Bills paid current & other 11-weeks (insurance, utilities, office supplies, etc.)
    6. Calculate Sales Tax to be paid in the 12-week period
  4. Cash Reserve Considerations
    1. Capital Budget – for Equipment Purchases, Facilities Improvement, etc.
    2. Large Bills Pending & Purchase Opportunities to save you money (long-term)
    3. Human Capital – New Hires, Increasing Staffing Levels & Training Costs
    4. Scheduling shortfalls & Seasonality
    5. Stock Buy Back
    6. Taxes
  5. Create & Utilize a Cash Flow Management Calculator (Spreadsheet, Database, App., etc.) or learn to use existing tools embedded in your accounting or Enterprise software.
chart
chart

2. Understand the Crime: Fail to Measure, Analyze and Mitigate Waste

  1. Business Owners believe that waste in their company is minimal.
  2. The business owner may realize there was an event that caused a loss, but they rarely measure the exact cost and don’t keep any distinct record of it – soon it is forgotten in the ongoing heat of the competition battle.
  3. They don’t measure waste trends or actual (detailed/comprehensive) costs.
  4. They don’t have a systematic analysis method or historical record, therefore there are no “lessons Learned” opportunities.
  5. Labor Waste, Material Waste and Other common Waste are not separated in their accounting system, and therefore are difficult to identify or analyze.
  6. Thousands, Tens-of-thousands, Hundreds-of-thousands, even Millions of Dollars loss, caused by waste, often go un-noticed until it’s too late to effectively mitigate those losses.
  7. $1,000.00 waste a week results in $52,000.00 annual loss! $12,000.00 waste a week results in $624,000.00 annual loss! Need I go on? Do You Know what your Waste Costs You?

Mitigate Against the Crime: Fail to Measure, Analyze and Mitigate Waste

  1. Identify Sources of Waste
    1. Human Potential and/or Creativity
    2. Overproduction
    3. Waiting, Delays and/or Bottlenecks
    4. Transportation and Materials Handling
    5. Process and Methods
    6. Motion

Why is this Presentation Important?

The “12 Crimes against Cash Flow” presentation addresses essential principles that all small business must understand and eventually master if they are going grow prosperously and compete effectively.

The audience will gain insights into proven strategies that many professionals never achieve. Through their new knowledge, audience members may acquire a distinct advantage in their ability to help their businesses improve.

To be continued…

Want to learn more?

Email us at info@DIADconsulting.com and request our complete White Paper, “12 High Crimes Against Cash Flow”.

Fill out our contact form to receive 2-hours free consulting via ZOOM or Travel – pass-through travel costs charges may apply to locations outside the Cincinnati, OH area, plus the complete Paper.

Basic Accounting Principles

1.0 Introduction

This operating procedure on Accounting Principles is not intended to make you an accountant, but rather to provide a basic understanding of some accounting terms, basic principles and commonly used financial reports.

Table of Contents

1.0 Introduction 1
2.0 The Accounting Entity 3
3.0 Accounting Concepts 3
Chart of Accounts with Sub Account Examples, with Classic Numbering 4
5.0 Accounting Reports to Remember 9
The Accounting Equation 9
6.0 The Balance Sheet 9
6.4 Sample Balance Sheet 9
6.5 Read the Balance Sheet 12
6.6 Analyze the Balance Sheet with Ratios 12
6.7 Balance Sheet Conclusion 13
6.8 Financial Ratios 13
6.8.1 Efficiency Ratios 13
6.8.2 Solvency Ratios 15
Solvency Ratios Continued 16
7.0 Debits and Credits 17
7.2 Debits and Credits in the Accounts 19
Accounting Equation Can Help 20
8.0 The Income Statement – Measuring Revenue & Expenses 25
8.3 General Terminology and Format Clarifications 25
8.5 Income Statement Accounts (Multi-Step Format) 26
8.7 Income Statement Conclusion 28
9.0 Relationship of Income Statement to Balance Sheet 28
9.1 Statement of Cash Flows Definition 28
What Can the Statement of Cash Flows Tell Us? 29
Here are a few ways the statement of cash flows is used 29
A Cash Flow Report or Cash Flow Management Report 29
10.0 Explanation of Accounting Terms 30
Assets 30
Liabilities 30
Owner’s Equity 30
The Balance Sheet 30
Current Assets 30
Fixed Assets 31
Current Liabilities 31
Where do you account for payroll taxes on the income statement? 32
Break-Even Point Analysis 32
The Break-Even Point 32
Break-Even Analysis 33
Types of Costs 33
Break-Even Point Formulas 33
Graphing the Break-Even Point 34
Markup Policy 36
Break Even Summary 37
Margin vs. Markup, what’s the difference and proper use 37
Historical definitions 37
So, what’s the big difference? 38
Common misconceptions using margins and markups (back to basics) 39
Markups, margins and G&A overhead cost recovery 39
Margins and the year-end financial statement 40
So what’s the problem? 40
When to use markups and margins 41
Markups and margins Conclusion 41
12.0 Accounting Basics Conclusion 42
12.0 Glossary of Accounting Terms 42
Recommended Reading 53

2.0 The Accounting Entity

  • 2.1 The accounts are kept in terms of money, and the only math used in accounting is addition, subtraction, multiplication, and division.
  • 2.2 The common denominator for all accounting is money.
  • 2.3 Accounting can’t tell you everything about your organization, but it can tell you more about the performance and financial well-being of the operation than any other source of information.

3.0 Accounting Concepts

  • 3.1 There are three important concepts to remember about accounting. They are:
    • 3.1.1 Keep accounting records of your business separate from your personal ones.
    • 3.1.2 Money is the common denominator of accounting.
    • 3.1.3 Every transaction or every accounting event affects at least two items; accounting is properly described as a double-entry system.
  • 3.2 The third notion as listed above has made possible the following rule, to which there is absolutely no exception: for each transaction, the debit amount must equal the credit amount.
  • 3.3 The debit and credit arrangement used in accounting provides a useful means of checking the accuracy with which the transactions have been recorded. Some say that this is a difficult notion to understand, especially if you have not had an accounting course, but don’t worry too much about that.
  • 3.4 When you make entries into your accounting software, the debit/credit difficulty will normally be transparent to you.
  • 3.5 The basic purpose of accounting systems is to organize your financial information in a manner that tells you a story about your financial well-being, or status at a given moment (as in the Balance Sheet) and as a trend (as in your Income Statement (or Profit & Loss Statement)), as well as your Statement of Cash Flows (Where incoming cash comes from and how cash going out is distributed (this is on a “Cash Basis” instead of “Accrual Basis” and includes both the Balance sheet and Income Statement cash transactions.
  • 3.6 The classic organization groups data into:
    • 3.6.1 Assets – a thing of some known value owned by the organization.
    • 3.6.2 Liabilities – an obligation of an entity arising from past transactions or events.
    • 3.6.3 Capital or Equity – the retained value that the entity represents
    • 3.6.4 Revenue or Income – incoming money or “Sales”;
    • 3.6.5 “Variable Costs,” often called “Direct Costs,” that are titled as “Cost of Sales” or “Cost of Goods Sold” – these are costs directly related to producing your products or delivering your services (“Goods” refers to Products and/or Services);
    • 3.6.6 “Fixed Costs” – these are costs that you will have regardless of how much you sell; these are usually called “Overhead Costs” or “General & Administrative Expenses” (things like rent, utilities, administrative/office wages, etc.).
    • 3.6.7 And finally “Profits” – Money coming in, less costs (money paid out), i.e. what’s left after you pay all your bills.

4.0 Generally Accepted Accounting Principles (GAAP) Organization of Accounts

Chart of Accounts with Sub Account Examples, with Classic Numbering

To be continued…

Want to Learn More?

Email us at info@DIADconsulting.com and request a complete copy of our White Paper, “Basic Accounting Principles.”

Fill out our contact form to receive the paper, plus 2-hours free consulting via ZOOM or In-person (Pass-through travel costs may apply to locations outside the Cincinnati, OH area).

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