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Finishing Well ( Part 3 )

By on May 10, 2009 in business finance

For those of you that follow this blog you will know that we have a particular way of talking about the balance sheet.

We talk about Capital funded by Debt and Equity.

Also, Capital is represented by the colour green because we say that this is the garden where you grow things.

So in our endurance riding example for these three posts we have been looking at finishing well.

That means making sure the horse can continue another 40 kilometres and also complete the whole season. It also means in your business that the balance sheet is in great shape to go forward to the next period.

Over my work life I have seen many profit and loss accounts being manipulated to show a great profit for the period but all this does is make the closing balance sheet a little weaker for the future.

So how would this work in practice?

I might want to show a good profit so I bring sales forward for the month but my customers are going to take longer to pay.

This means that in my Closing Balance Sheet there are some items which are not collectible in the correct period and therefore my balance sheet is weaker.

Building the right Capital into my balance sheet is fundamental to how the next period will perform from a CASH point of view.

So why is that?

The next month’s cash in a business is going to come from the Accounts Receivable not the Sales for the next period (Unless your business is completely Cash Sales).

Therefore if I haven’t finished with a correct balance sheet my business may fall over in the next period.

The overall message in finishing well is about closing out each period of your business with a sound closing Balance Sheet and not simply a successful Profit and Loss account for the period.

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Finishing Well ( Part 2 )

By on May 4, 2009 in business finance, Mindset

Remember in the last post I was talking about endurance riding.

Remember the final visit to the vet and the fact that the horse had to be fit to do another 40 kilometres?

Many business owners in their haste to make profit forget to feed their business and it becomes run down. They take every piece of profit out and forget to leave some money in the business to sustain it.

Sustainability is about making sure you have a horse that you’ve kept hydrated throughout the ride; that you have not ‘run into the ground’ and that can take you throughout an endurance season.

To do this you must make sure that you look at two things while riding the endurance race.

  1. Keep an eye on how fast you’re running because remember it is a race and you’re trying to do your best time.
  2. Keep an eye on how the horse is doing so that you make sure it can go the distance.

So in your business you must keep an eye on your profit and loss account because that will help you make sure you’re progressing well and are not going backwards but also keep an eye on your balance sheet because that will tell about the sustainability of your business and whether you can go forward from this particular part of the journey.

Watch for my last entry in this series where I will look at the importance of the quality of your end Financial Fence post…….

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Finishing Well ( Part 1 )

By on April 29, 2009 in business finance, Mindset

I used to be an endurance rider which involved riding horses over long distances. The most popular distance was 80 kilometres and this would involve two sections of 40 kilometres each.

The ride would usually take place on a Sunday morning and we would travel to the location on a Saturday.

The programme would look like this:

  • Step One – Take horse to the onsite vet for a pre ride check.
  • Step Two – Ride first 40 Kilometres.
  • Step Three – Present horse to vet for second check.
  • Step Four – Ride second 40 Kilometres.
  • Step Five – Present horse to vet for third check and gain a completion certificate.

You may be asking, “Why all the vet checks? Surely it would simply be a matter of making sure you followed the course and got to the finish line”?

Well, the vets checked the horse for such things as heart rate and lameness but the most important part of their work was to ensure the horse was fit for the next leg.

So the check at the finish was to ensure the horse would, in their opinion, be fit to complete another 40 kilometres.

So how does that relate to a business?
Many business owners only think about their Profit and Loss Account. That’s like being out on the ride. But they never really think about their Balance Sheet which is like going to the vet and checking whether their business is OK to carry on.

Watch for my next post on this topic where I will expand this thought further…..

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What the heck is a balance sheet all about and why it doesn’t make sense?

By on March 6, 2009 in Management

Lots of people get confused by balance sheets because they have no idea what they’re meant to represent.

Have you ever done a project? What was more important; The project milestones or the project plan?

When you compare this to financial accounts, the milestones are balance sheets and the plan is the profit and loss account.

So you can see that a balance sheet shows you where you’ve got up to. It shows you what you’ve accumulated in your business.

So why don’t they make sense to most people? Because accountants often prepare them using the wrong format.

You may have seen a balance sheet that shows; Assets minus liabilities equals Equity.

This is the most common form of balance sheet and also the most unhelpful in the 21st Century.

Here’s how we do balance sheets in the 21st Century.
Working Capital Plus Fixed Capital equals Debt plus Equity.

Think about buying your first home.

Probably looked like this:

    Home (which equals Capital).
    Paid for by:
    Debt (borrowed from the banks),
    Plus
    Equity (contributed by you).

That’s how we do balance sheets because they make sense to the average person who has bought a home. It’s very easy for them to understand.

Think about your business for a minute:
You will have working capital (Inventory, accounts receivable, accounts payable, employee provisions etc.

You will have fixed capital (plant & equipment, motor vehicles etc).
And these will be paid for by:

    Debt (borrowed from a bank) and
    Equity (which is your wealth tied up in the business).

When you do balance sheets like this it becomes easier to understand what you’re accumulating and how you can use this to help you run your business.

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