The Benefits Of A Debt Free Company

The Benefits Of A Debt Free Company

Benefits Of A Debt Free Company – Foreword How much debt financing is right for a business? In today’s low cost money environment, the ‘easy’ answer might be “as much as you need” because it is inexpensive (depending on a company’s financial situation). However, the credit environment has tightened significantly during the past two years due to the stress that has been placed on the financial markets. Low cost money really isn’t that easy to come by. Possibly the more important question may be, what would it take to run the business without any debt? As the B2B CFO® partner for a number of small and mid-sized businesses, I can attest to the fact that operating a business on the cash flow generated from operations is easier and lower stress than being saddled with a lot of debt. It also increases control over the company. With a good focus on cash flow and a deliberate plan to reduce debt, it is possible to achieve the objective of being debt free. The elements of a robust cash flow plan will likely include a sound understanding of the classic elements of the sources and uses of cash. In simple terms, you want to increase the sources of cash and reduce the uses of cash to the extent possible. Benefits Of A Debt Free Company – Sources of Cash Sources of Cash Improve the efficiency of revenue generating processes Collect customer receivables faster Turn inventory faster and reduce the inventory balance Lengthen supplier payment terms, request early pay discounts, or take full use of existing terms Reduce operating expenses Increase gross margin of...
When Employees Are Stealing Time Theft In A Service Environment

When Employees Are Stealing Time Theft In A Service Environment

Theft – Introduction A quick perusal of statistics coming out of this recession has been the rise in employee theft. From petty cash misappropriations to stock shrinkage, employee time theft is on the rise. A study published by the Chubb Group of Insurance Cos. found that executives at 60 percent of the companies surveyed expect employees may steal money or equipment from the company. Executives at 34 percent expect their employees will steal from their clients. A study released by the Association of Certified Fraud Examiners, estimates that the typical company loses 6 percent of its annual revenue to fraud, which can include theft of company property, corruption schemes and accounting trickery. For many companies, the 6% can make the difference between profit and loss. There are a number of tactics to prevent theft – restrict access to inventory, establish and maintain proper controls over cash, etc. But as the economy moves to a service economy, how do you prevent theft by service workers, where there is little tangible evidence of their “production”? In a service environment, what is often stolen is the most important asset – time! Time Theft – 1st Tactic: The Internet Time can be stolen in a number of ways. First and foremost – the internet. Time spent surfing, shopping, or just checking up on their Facebook can steal enormous amounts of billable time. One engineering company terminated an employee who was devoting over half his time to World of Warcraft play! The best way to prevent time theft is to eliminate the temptation. Restrict access to the internet whenever possible through the use of...
Financial Ratio Analysis For Dummies

Financial Ratio Analysis For Dummies

Ratio analysis.  Sounds like a fascinating topic.  Something I really need to spend my time on.  Right…. Most business owners react the same way.  And no wonder.  Ratio analysis can be dry as dust, impenetrable, complex and confusing.  But it’s also a really good way to perform an “Executive Physical” on your company.  If you don’t want to read about all the ratios, you can see what 6 top B2B CFOs told Inc. Magazine about ratios, or you can call me now for a free ratio analysis of your company – no strings attached, and a look at some simple ways to track this information.  Make the call.  Your banker will thank you… Inc. Magazine article on ratios for business, featuring six B2B CFOs on a variety of industry types: Inc Article   And for those who like to do it themselves, here are the top ratios you should be looking at: Financial Ratio Analysis – Net Profit Margin Net Pretax Profit ÷ Revenue The bottom line — the amount you have left after every other expense is taken out.  Varies with industry and over time, but should be at least 5%. Otherwise, you might just want to open a pass book savings account. Financial Ratio Analysis – Gross Profit Margin Gross Profit ÷ Revenue Gross profit is your revenue minus what it costs to make your product.  Maximize this because you’ve got to make enough to cover the overhead – or you might as well close the doors.  You cannot make it up on the volume! Financial Ratio Analysis – EBITDA Margin EBITDA ÷ Revenue Many companies use...
Break Even Analysis and Cash Flow Analysis is Critical

Break Even Analysis and Cash Flow Analysis is Critical

Break Even Analysis and Cash Flow Analysis is Critical – Today’s Economy In this tough economy, it is important for the business owner to review two critical analytical tools to ensure the success of his/her firm. Break Even Analysis and Cash Flow Analysis is Critical – Break Even Analysis Let’s take a look at how increases and decreases in sales and expenses affect your bottom line. It is very helpful to breakdown expenses into “fixed” and “variable” categories to better understand how each expense category is affected by an increase/decrease in sales. Fixed expenses are those that remain level/constant regardless of the sales level. Variable expenses are those that will go up or down in relation to a change in sales. Some expenses have both fixed and variable aspects to them. Examples of “fixed” expenses are rent (not tied to a percentage of sales), telephone, depreciation, most utilities and administrative salaries. Examples of “variable” expenses are sales commissions (tied solely to a percentage of sales), cost of goods sold, shipping expenses and supplies. Examples of expenses that have both fixed and variable aspects to them include rent (which may have a fixed portion and a portion based on a percentage of sales, license/franchise fees, sales commissions (commissions paid once sales reach a certain level) and insurance (premium based on sales). Sales $1,000,000 Variable Expenses $750,000 75% of sales Profit left over to offset fixed expense $250,000 Fixed Expenses $200,000 Profit $50,000 Break-even point of company is $800,000 in sales: Sales $800,000 Less: Variable Exp ($800,000 x .75) $600,000 Profit left over to offset fixed expense $200,000 Fixed Expenses $200,000...
Net Working Capital – The Lifeblood of Any Business

Net Working Capital – The Lifeblood of Any Business

Net Working Capital – Introduction Working capital (also known as net working capital) is a financial metric which represents the amount of day-by-day operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. A company can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash.   (Definition from WikiAnswers.com) Working Capital (WC) is as essential for business operations of your company as blood is essential for the operation of your body.  You and your company can not live without either blood or working capital. You will be in serious danger if you don’t have enough in your system.  Cash is critical and the King, but working capital is the measure of liquidity of assets that can be converted into cash within an annual operating cycle. Without the ability to convert assets to cash via the sale of inventory, collection of accounts receivable or short term notes, liquidation of investments or other form of conversion the working capital will not become cash. If assets or liabilities are considered current (meaning convertible within 12 months for creation of cash or use of cash) they are taken into account for computing working capital.  The net excess of Current Assets minus Current Liabilities equals working capital.  If Current Assets minus Current Liabilities yields a negative number, there is no working capital (there is a deficit of working capital). What does this mean to business owners and what can they do about...
Key Operating Indicators

Key Operating Indicators

How does a company monitor and measure its financial goals and performance? Generally the answer to this question is through its financial statements. However, monthly financial statements are not enough once your business becomes large in size. There is too much going on within the business that impacts cash and will need to be tracked and watched. Hence, the use of key operating indicators. Over the years we have learned that companies that do not use them are generally in trouble. What is a key operating indicator (KOI)? A key operating indicator (KOI), also known as a key performance indicator (KPI), is a measurement that allows you to evaluate whether you are meeting certain goals or criteria. KOIs should be the key factors that will ensure the success of your company. These numbers will be compared to budgets and/or industry standards. How do you pick key operating indicators? Key operating indicators will be different for the most part from company to company. Usually KOIs revolve around company goals and plans. Examples of KOIs would be daily production units, scrap units, units sold, inventory turns, day sales outstanding, etc. KOIs should be specific, measurable, timely, and easy to read and understand. How can key operating indicators be used to improve efficiency? KOIs are used in many companies to evaluate and improve efficiency, which will ultimately generate more cash and profits. The nursery industry for example uses KOIs to monitor crop production. How long will it take to make containers of plants? How much material was used to make a container? The nursery industry knows what needs to be accomplished to...