1. Managing Your Cash Flow Ken Cone, CPA August 17, 2010 408-859-3109 ken@order-from-chaos.com 1

3. My goal for today is to help you learn that understanding the accounting function empowers you. Through this empowerment, you can attain your purposes.

6. That person is routed to the proper place, by a receptionist, host, or customer service, for example:

7. Prospects (a prospect is something in view as a source of profit; Random House.) In our case, prospects refer to potential customers.

8. Customers

9. Vendors (a person or agency that sells, Random House.)

10. Others (Such as legal, police, people asking for the restroom, etc.)3

11. 4

14. Collecting on sales

15. Paying bills

16. Accounting for assets and liabilities

17. Assets are resources that are or should be available to the business for use in creating profits and other activities. Cash and inventory are assets. Some assets are treated as balance sheet items while others are expended directly to profit and loss. For example, a stapler might last for five years. However, its value is too small to bother to keep track of.

18. Liabilities are moneys owed that provided assets or represented losses of the enterprise.

20. In your field, you need to learn to predict future activity so that you can have the right amount of resources for your customers.6

24. What is produced or served?

25. The corporate culture.

26. The logistics of the entity, itself. We will discuss choice of entity later.7

28. The successful entrepreneur works on their business.

29. The employee works in a business.

30. It is okay to work in your business, but to be successful, you must work on your business.8

32. Understanding the flows of a business will help you establish successful systems.

33. With successful systems in place, you can take time off to recharge, vacation, and/or put your money to work for you.

34. With successful systems others are empowered to make decisions in your abscense.9

36. The income and sales tax folks love accountants because accountants record activity. And, the tax folks can tax what they can measure.

37. Businessmen hate accounting because the government can tax what they can measure.

38. Businessmen hate accounting because it costs money and doesn’t increase profits when they don’t understand what the numbers mean.

39. Businessmen hate accounting when they don’t understand it. Typically, they won’t deal with it. They turn the function over to a bookkeeper; and, then they run the risk that their bookkeeper embezzles from them. 10

40. Accounting - the Asset The purpose for managing cash flow is to achieve your dreams. The accounting function produces reports. Two important reports are the following financial statements (see sample statements) : Profit and loss, (or income statement) and The balance sheet. 11

42. The balance sheet is a statement of the amounts of assets, liabilities, and owner’s equity at a point in time. It is like measuring the level of the river at a point in time.

43. Assets are resources that are or should be available to the business for use in creating profits and other activities. Cash and inventory are assets. Some assets are treated as balance sheet items while others are expended directly to profit and loss. For example, a stapler might last for five years. However, its value is too small to bother to keep track of.

44. Liabilities are moneys owed that provided assets or represented losses of the enterprise.

45. Equity is the portion of a balance sheet that is left over after measuring assets and liabilities. It is the result of money invested by the owner, money withdrawn by the owner and the sum of profits and losses over the years. In a corporation, owner withdrawals are called dividends.12

47. If you know how much inventory it takes to support your sales, then you can order the optimal amount to save money and maximize sales.

48. If you sell on credit, knowing how long people take to pay their bills helps you manage cash flow.

49. When you buy on credit, knowing how long you can make vendors wait to get paid will help you manage relationships.

50. The ratio of costs of goods necessary for your sales should be well understood. Food should be 1/3 of your restaurant’s sales price; labor another 3rd.13

52. When you can use the software, you can control your bookkeeper.

53. Do not be your own bookkeeper any longer than is necessary. A good bookkeeper will cost you $15 to $50 per hour. The time you spend getting customers, refining systems, producing, and assuring high quality controls should be much more valuable than that.14

54. Accounting’s Purpose With all this information in place, you improve your ability to spend marketing dollars wisely and to coordinate marketing with production activities. When production, marketing, and accounting work together, your profits improve and you can better manage cash flow. 15

56. Some businesses are unprofitable but have great cash flow.

57. Profit is the sum of a flow of activity over time.

58. Cash flow is the cash portion of that activity.

59. In commercial activity it is common to sell a product or service today, and get paid later.

60. In many businesses it is common to purchase something today and pay for it later.

61. These differences cause profit statements to differ from cash flow statements.

62. *Incurred means that the activity is complete such that the vendor has the right to be paid.16

64. Demanding cash from customers can cost you business. The credit card industry exists on this issue.

65. Also, factoring companies and banks can help accelerate cash flow. Each solution comes with a cost. A factoring company buys the right to collect unpaid invoices that a company has earned but not collected. For example, I sell a widget for $500. The factoring company pays me $400 for the right to collect the $500 from my customer. If in 30 days the factoring company collects the $500, they will reimburse me $80. I get $480 out of the $500 original invoice. If, however, the factoring company has to wait 60 days to collect the $500, then I only get a total of $460. That is because the factoring company is earning 4% per month. I remain liable to the factoring company in the event that the invoice proves to be uncollectible.

66. Slowing cash flow to vendors can cost money or cost you your vital supply of goods or services.

67. The key is to manage cash flow timing to optimize your situation. 17

69. Put procedures in place that create accountability

70. Know how to control your cash:

71. Who has access?

72. Who counts it?

73. Who reconciles your bank statements?

74. Controlling sales:

75. What gets sold for cash goes into the cash register.

76. All money that you collect (cash, checks, credit charges, etc.) goes into the bank.

77. Controlling expenses:

78. Employee compensation goes to real employees for actual services rendered. There have been cases of phony employees getting paid. The checks are then cashed by someone else in the organization.

79. Vendor compensation goes to real vendors who provided legitimate goods and services at an agreed upon price.18

81. Sole proprietorship – see explanation on next page

82. Partnership (2 or more owners)

83. General (All partners are liable for the debts of the partnership. This can be a problem if Partner A takes on debts that the other partners (B and C) eventually have to pay off.)

84. Limited (one partner is personally liable for all debts of the partnership. Limited partners can only lose their investment. However, limited partners may not participate in the management of the partnership.)

85. Corporation

86. C Corporation (Pays taxes, can have complex ownership)

87. S Corporation (No income taxes to pay, must be owned by US citizens or limited types of trusts)

88. Limited Liability Company

89. Taxed like a sole proprietorship, partnership, or corporation - your choice

90. The legal protection of a corporation

91. Complex extra set of taxes in California once gross income exceeds $250,00019

93. Corporations are a separate legal entity. The purpose of incorporating is to protect yourself from losses of the corporation (in excess of your investment). If you are disorganized, this may not be a good choice. The co-mingling of your personal activity with your corporate activity can make you personally liable for losses of the corporation. Before incorporating seek the council of a knowledgeable lawyer and CPA. The CPA will explain the different benefits of setting up as a C or an S Corporation. The lawyer will help you set it up to protect you against creditors going after your personal assets.20

96. Ken enjoys running, educating, and spending time with his family.

97. He is a member of Sacramento Metro Chamber.22