The Up and to the Right | Small Business | Practical, Actionable, Sustainable Improvements

Cash is king as they say and the Statement of Cash Flows is a key report that bridges the gap between the Balance Sheet and the Income statement.

In this episode of Up and to the Right I'll discuss how to get the most out of the Statement of Cash Flows without investing hours of time or going to night school to understand the accounting behind it.

I've provided some examples of both the entries on this report and the calculations used to arrive at the numbers. The point; however, is to understand that the Statement of Cash Flows is the best indicator of how cash works its way through your business.

Complete show notes & resources: http://b50p.com/2016w49

So much for reducing the time huh? I am committed to getting these down to bite size pieces!

Alright, I underestimated how much I had to cover when it comes to the Income Statement. Yeah... this episode is long... but the truth is that this is an important and probably the most widely talked about (if misunderstood) report of the three standard reports. What is an Income Statement? 

The income statement is, as its name suggests, a report that focuses on the sales (income) we receive from our customers and the effect of our expenses on our profitability.

Basically: Revenue (sales) - Expenses = Profit (loss)

There are three sections of a standard Income Statement (though your business may or may not require all three). Gross Profit 

The gross profit is the sales minus the cost of the material we sold (our cost). If we buy a square yard of cloth for $5 and sell it for $10 our gross profit is $5. Easy right?

Service based businesses that do not sell tangible products may not need to break this down since gross profit is 100% of sales.

My two cents here... most business decisions should not be based on gross profit. So, if gross profit isn't good enough... let's move on. Operating Profit 

Here's where the rubber meets the road as they say. We take our gross profit and subtract the expenses that aren't tied to a specific sale but are still required to operate the business. For example:

Rent Employee Salary/Benefits Utilities Advertising Office Supplies You get the idea... 

Once you've subtracted these expenses from our Gross Profit we get what we call operating profit or the profit after we pay for the materials to create our products and the expenses need to run the business.

Gross Profit is a great starting point for decision making because it reflects all of the income and expense related to manufacturing, selling and distributing your product to customers. Net Profit 

Finally we subtract taxes and add any interest earned on bank accounts to come up with Net Profit.

Honestly, I don't have much use for net profit. Taxes are a concern if you made operating profit already and the interest you earn on your bank account shouldn't be what makes your business profitable. Why Should I Review It? 

What items should you review on your income statement? Income 

Of course it's important to keep tabs on your sales. If you have more than one product line it can be helpful to see how each adds to your total sales.

If sales are not what you expect you can start focusing more of your attention to changes in your business that will increase your sales numbers. Expenses  

Cost of Goods Sold (COGS) - is very important because it is one of, if not, the largest expense and determines the Gross Profit which is the starting point for money used to run and grow our businesses. 

Operating Expenses - some operating expenses are fairly fixed (rent is a good example) but many can be managed with some thoughtful changes saving business owners money that can be put to work growing/building the company.

Utilities can be reduced by putting conservation minded improvements or processes in place (i.e. occupancy sensors that automatically turn office lights off in rooms that aren't in use).

Advertising is easily adjusted but care must be taken to ensure that reductions in advertising do not have a significantly negative impact on sales.

Employee Expenses can be managed by reducing hours, eliminating overtime etc. NOTE: this is an example of cost reduction. Actions that negatively impact employees should be taken only after all other reasonable options have been eliminated IMO.

Taxes only happen after you have made a profit. If you have the fortunate burden of paying 'too much' in taxes you'll want to speak with a tax professional to find out if there are ways you can reinvest in your business or find other ways tax reduction options or just be happy that you are making so much money! Takeaways  

The numbers are your friend! Yes, they can occasionally feel like a cold shower and the tough love may not always feel good in the moment but they are a great way to make objective improvements to your business.

How often do you review the three standard accounting reports for your business. Accounting gets a bad rap but the reports that they generate are the first place to go to find measured results that you can use to improve your business. The Balance Sheet, Income Statement and Statement of Cash Flows can be a wealth of information and a great place to start looking for ways to improve as well as a great mechanism to monitor the results of changes you make. Why should you review your Balance Sheet? 

Get real (aka objective) insights into the performance and strength of your business. What gets measured gets managed. (Concept made popular by Peter Drucker) Breaking Down the Balance Sheet Assets 

Assets are simply what the company owns. We break these down into the following two categories: Current - This consists of items that are either cash or are expected to be converted to cash within one year. 

Cash Accounts Receivable Inventory Fixed - Expensive items that are expected to be used in the business for a number of years. 

Vehicles Machinery High Performance Computer Workstations Liabilities 

We use the term 'liability' to refer to what the company owes to outside organizations. Short Term - similar to our Current Assets, our Short Term Liabilities are debts that we expect to pay within one year. 

Accounts Payable - the bills we have to pay from vendors for services or items used or resold by our business. Credit Card or other short term debt Long Term - debts that are expected to be paid off over more than one year. 

Business Loans (startup or expansion loans) Automobile Loans Equity 

Equity is found by taking the Total Assets and subtracting Total Liabilities. By doing this we find that the Total Assets of a business are in balance with the sum of the Total Liabilities and Equity... and thus the name "Balance Sheet". Ack! I missed discussing most of these during the podcast after skipping some of my notes! Sorry about that - fear not they are listed below. The Key Elements 

The following elements of the Balance Sheet should be reviewed regularly. Cash - it may seem pretty obvious but it's important to monitor your cash regularly. 

Be sure you have a reserve amount of cash to provide a cushion during difficult times or cyclical sales periods. Maintain sufficient operation cash to ensure you can pay your vendors, operating expenses and employees on time. Accounts Receivable - it's important, if you're extending credit to customers, that you are getting paid on time. Inventory - in order to have inventory on hand you have to use cash which reduces your available cash. Watch inventory value for trends that might suggest you are tying up too much of your cash. Short Term Liabilities - watch these to make sure that your balances are not increasing beyond the strength of your cash flow (combine this with information from the Income Statement and Statement of Cash Flows). Long Term Liabilities - again we need to watch these values to ensure that our cash flow can cover the payments required. Equity - over time the Equity in your company should be increasing as net income (profit) adds to the amount you originally started your company with.

Are you a Windows or Mac? Are you iOS or Android? When it comes to finding solutions to getting work done, more and more these questions are becoming less relevant. What does it mean when an application or software package claims to be cross-platform? Why does it matter to your business? What does "cross platform" mean? 

We'll go over what it means that an application is "cross platform" or available not only for use on more than one operating system (Windows or Mac for example), but available to operate interactively on both operating systems. How does it work? 

Many people, both consumers and businesses alike, are not constantly steeped in the technology industry. A few minutes here should help cut through the technobabble surrounding "the cloud"... at least when it comes to cross platform applications. Is it Secure? 

Is the NSA going to watch your online notes could a competitor hack your account...? Let's talk about a more practical way to think about your cloud security. Why Does it Matter to My Business? 

By far the most important part. Why and how can you use cross platform technology to be more productive or get improved results in your business. Some Considerations to... well... Consider 

Download the worksheet for a way to analyze your systems and some hints to getting the most out of a cross platform workflow.

Have you ever lost valuable data on because of a hard drive failure? Lost a USB drive? Just accidentally deleted a file that you really needed?

Data loss happens!

It's actually easy to put together a working backup system that will give you good data protection and the piece of mind that goes along with it. The great news is that it doesn't have to be expensive or complicated and you probably already own most, if not all, of the equipment that you need. Why backup? 

Aside from simply wasting time recreating work you've already done here are several categories of documents that you should really consider having a backup for:

Tax/Accounting Legal/Business Customer Service Intellectual Property Production Compliance (ISO, FDA or OSHA to name a few) 

Losing data in these categories can be pointedly damaging to your business. How to backup? 

Download the worksheet in the resources section above and listen to the podcast and walk step by step how to put together a simple but flexible backup solution for your business.

What will you need?

Internet Service Printer/Scanner (if you need to backup paper documents) External hard drive Online backup solution such as Crashplan, Carbonite, iDrive or Backblaze (there are more) 

So that's about it folks... It's time to roll up our sleeves and get to work!