Liabilities

Liability A liability is simply an obligation to pay. When a company purchases something it creates a liability to pay for it. The liability remains until the company pays for it. Sometimes a company has a liability to its customers. One example of that is when a person pays for a subscription to a magazine, but has not yet received all of the issues. Each time the company sends the subscriber an issue of the magazine the company’s liability decreases. Liabilities are listed as either current liabilities (those bills that are due to be paid between now and one year from now), and long-term liabilities (those bills that come due a year from now or later). A current liability would be like our example of the magazine subscription or for office supplies or raw materials. Long-term liabilities would be like mortgages and equipment that are financed for more than a year. The portion of the mortgage or equipment payment that is due and payable during the present year is part of current liabilities and the part that comes due more than a year from now is a long-term liability.

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.
Please Visit McClendon Enterprises

Assets

Assets What is an asset? Basically, an asset is anything a company owns that has value. Cash that the company has on hand (whether in the bank or in the office), accounts receivable (this is money that is owed to the company and is likely to be received in a timely manner), real estate (buildings and/or land), equipment and inventory are all considered to be assets. It is usually assumed that an asset has value enough to be sold in the event that a company has to liquidate its assets. That is, if the company had to raise money whatever it is claiming as an asset would have enough value that a buyer could be found.

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances. Please Visit McClendon Enterprises

Inventory Turns

In the past I spoke to you about inventory turns. Like I mentioned then, it is important that you sell through your merchandise fairly often. How often you need to turn through your inventory to be profitable is pretty much industry specific. There is no one set rule of thumb for this.

In a small store, like a convenience store you really want to sell through your inventory at least once per month.  Some businesses can get by with fewer turns than that. The big thing here is to study your industry and determine what seems to be the industry standard. If that information isn’t available, then your best bet is to simply do your best to turn your inventory as rapidly as possible.

To calculate how often you are turning your merchandise you use the following formula:

Inventory Turns = Sales/Average Inventory

To determine average inventory you can take your inventory at the end of one fiscal year and add it to the inventory at the end of the next fiscal year and divide by two. If your company takes an inventory each month, then simply add up the inventory amounts for each month and divide it by the number of months you have figures for.

If your inventory on December 31, 2010 was $100,000 and on December 31, 2011 was $150,000, you simply add the two together and divide by two.

=$100,000 + $150,000

=$250,000

=$125,000

In this example the average inventory is $125,000. 

Let’s say that sales for the year are $750,000. To get our number of turns for the year, we simply divide our sales by our average inventory.

Inventory Turns =Sales/Average Inventory

= $750,000/$125,000

=6

This means that we are turning our inventory six times per year. This figure does not mean that you are selling everything completely out six times per year. You will still have to look to see what items are not moving as fast as this. You may wish to mark the slow moving items down and discontinue them. You may want to add more variety of your faster moving items to make even more sales. Calculating inventory turns is a tool. Use it wisely.

Can you think of a time when you had that one terrible item that just would not sell?  For us at the Western Auto in Iva it was a doughnut maker. We bought it as part of the opening inventory and finally, ten years later, we gave it away. No one wanted that doughnut maker. 

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances. Please Visit McClendon Enterprises

Return On Investment

In business we measure a lot of things. One of the most common measures is Return on Investment or ROI. The simple idea is that we show how much profit is made (or lost) in comparison to how much was invested to begin with.

This can also be called Return on Assets (ROA)

Our redneck example:

If Billy-Bob invests $500 in a still and pays $100 for ingredients and supplies, then his total investment is $600.

If Billy-Bob is able to produce and sell 1,000 gallons of white lightning at $5 per bottle his total revenue is $5,000. Therefore his gain on investment is

$5,000-$600= $4,400.

Revenues – Investment =Amount of Return

We then take that $4,400 gain on investment and divide it by the cost of investment

$4,400/$600

Amount of Return / Investment expressed as a percentage

This gives us an ROI of 733%. Obviously this is unusually high but then Billy-Bob is an unusual fellow. A more real world ROI is 10 to 15%. But one will find ROIs of negative amounts and into unlimited positive features. 

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances. Please Visit McClendon Enterprises

Gross Margin

Gross Margin = The selling Price – cost to purchase or produce the item.

If a Bubba’s Convenience Store buys a candy bar for 75¢ and sells that candy bar for $1 then Bubba’s Gross Margin is 25¢.  This should not be confused with profit because Bubba still has to pay other expenses out of the 25¢ it made on the candy bar.

If Bubba wants to know his Gross Margin expressed as a percentage then he would calculate the following.

Gross Margin = ((Selling Price –Cost) X 100)/Selling Price

Selling Price – Cost

$1-75¢ = 25¢

25¢ X 100= 25

25÷ $1.00

Gross Margin is 25%

Bubba has a Gross Margin of 25¢ which just happens to be 25% in this case.

Let’s say that Bubba hasn’t sold the candy bar and he is afraid it will get old sitting on his shelf. So, he reduces the selling price to 90¢ and it sells. In this case his selling price is 90¢ but his cost is still 75¢. So

Selling Price 90¢ - Cost 75¢

Gross Margin 15¢

15¢ X 100= 15

15÷90=16.67%

So his Gross Margin is 15¢ and his Gross Margin Percentage is 16.67%

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances. Please Visit McClendon Enterprises

Accounts Payable

Accounts Payable are those bills that are due and payable when items are purchased on account. Normally speaking inventory that has not yet been paid for will be classified as an Account Payable.

Normal repairs, payments to vendors, inventory or anything else that is to be paid quickly is recorded under this category.

Usually when a company receives an invoice it doesn’t pay for it immediately. Some suppliers/vendors will provide for a company to pay for products or services within 30, 60, or 90 days. Until such time as the invoice is paid it is carried as an account payable.

Accounts Payable is recorded on the company’s Balance Sheet as a Current Liability. That is that the company expects to pay for this item within one year.

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances. Please Visit McClendon Enterprises

What is accounting?

Accounting is often called “the language of business.” By this people mean that the meat of the business is communicated through facts and figures. If one is speaking of how a business is performing it is helpful to have some scorecard to use to decide if a business is doing well or not.

There are many types of accounting and many sub-sets. Things like financial accounting, forensic accounting, cost accounting and others.

We are often confronted with the question of should a company choose cash basis accounting or accrual accounting.

Cash Based Accounting is probably the most basic of the two. Under this method a sale takes place when the payment is received. An expense takes place when payment is made. Most smaller businesses start out with cash accounting. Using this method if the company is making a profit then cash is available after all expenses are paid. If a company goes to pay for something and there is no cash then no profit has been made provided the owner has not put his hands in the till for things that are not business related.

Accrual Accounting is different. Under accrual accounting a sale takes place when an obligation is made to sell an item. If Billy-Bob signs a contract to purchase milk from Charlene in April but, the milk won’t be delivered until June and payment won’t be made until July then Charlene records the sale the day the contract is signed. No product or money has changed hands but Charlene has a sale on her books. She also has a liability to deliver the milk.

Since no cash has actually changed hands Charlene shows a profit but can’t pay her workers to work because there is no cash. This is how many companies show a great profit up until the minute they blow up and file for bankruptcy.

The bottom line to all of this is that it is all about the cash flow. Cash is king. If you don’t have the cash to continue to operate then no amount of paper profit is going to get your company through.

In Redneck terms, if you don’t have the money in your hand, you did not make the sale. Plain and simple, once you have the money in your hands and the product has been delivered, then a sale has taken place.

It would be so easy to balance the books if everyone would choose cash. An outside investor could see that cash came in, product went out and some cash was left over after paying for things. But, it doesn’t work that way in the real world.

What experiences have you had with accounting?  In your opinion, which makes mor sense accrual accounting or cash accouting?

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.
Please Visit McClendon Enterprises

What is accounting?

Accounting is often called “the language of business.” By this people mean that the meat of the business is communicated through facts and figures. If one is speaking of how a business is performing it is helpful to have some scorecard to use to decide if a business is doing well or not.

There are many types of accounting and many sub-sets. Things like financial accounting, forensic accounting, cost accounting and others.

We are often confronted with the question of should a company choose cash basis accounting or accrual accounting.

Cash Based Accounting is probably the most basic of the two. Under this method a sale takes place when the payment is received. An expense takes place when payment is made. Most smaller businesses start out with cash accounting. Using this method if the company is making a profit then cash is available after all expenses are paid. If a company goes to pay for something and there is no cash then no profit has been made provided the owner has not put his hands in the till for things that are not business related.

Accrual Accounting is different. Under accrual accounting a sale takes place when an obligation is made to sell an item. If Billy-Bob signs a contract to purchase milk from Charlene in April but, the milk won’t be delivered until June and payment won’t be made until July then Charlene records the sale the day the contract is signed. No product or money has changed hands but Charlene has a sale on her books. She also has a liability to deliver the milk.

Since no cash has actually changed hands Charlene shows a profit but can’t pay her workers to work because there is no cash. This is how many companies show a great profit up until the minute they blow up and file for bankruptcy.

The bottom line to all of this is that it is all about the cash flow. Cash is king. If you don’t have the cash to continue to operate then no amount of paper profit is going to get your company through.

In Redneck terms, if you don’t have the money in your hand, you did not make the sale. Plain and simple, once you have the money in your hands and the product has been delivered, then a sale has taken place.

It would be so easy to balance the books if everyone would choose cash. An outside investor could see that cash came in, product went out and some cash was left over after paying for things. But, it doesn’t work that way in the real world.

What experiences have you had with accounting?  In your opinion, which makes mor sense accrual accounting or cash accouting?

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.
Please Visit McClendon Enterprises

Sales Per

In retail it is important that every item in the store “Pays Its Rent”. That is, that all items in the store not only pay for themselves by selling at a profit, but that they sell at enough profit to make it worth the store’s investment.

For instance, if a store determines that it has to sell $33 worth of merchandise per square foot of selling space each month, then each item in that selling space must contribute its fair share of that $33.

Let’s say that each square foot of selling space has a fixture on it that is four shelves high. Let’s further say that each shelf is one foot deep. Therefore, each square foot of floor space has four square feet of shelf space. That being said, each square foot of shelf space has to sell $8.25 per month of merchandise.

Let’s say that we put candy bars on each shelf. If we sell candy bars at $1 each, then we have to sell 8 ¼ candy bars per month from each shelf to break even. When we sell the ninth candy bar, we begin to show a profit for that area of shelf space. We have to do this throughout the store.

Sometimes we may calculate the average number of customers during a given period. We then determine how much our expenses are. We determine that we have $1,000 of expenses during a month. If we also determine that we have 500 customers in a month, then we find that we average $2 worth of expenses per customers. Ultimately, we need to make at least an average of $2 in profit from each customer to break even.

If we determine that we are not making enough sales per square foot or that we are not averaging enough profit per customer, then we need to take steps to improve our overall profit per sale or reduce our expenses or both. 

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.
Please Visit McClendon Enterprises

Accounting

If you are looking for someone to blame for all the confusion involved in accounting, you might want to blame Luca Pacioli. He was a Franciscan monk. Way back in 1494, old Luca developed the double entry system of accounting that is driving us all nuts today.

Pacioli’s system is called the “Method of Venice.” Basically, it involves a system for recording transactions within an entity. The whole idea is like one of those scientific laws of inertia that say for every action there must be an equal and opposite reaction. In the case of accounting, some entries will have several entries to balance it out.

Anyway, the whole idea behind accounting is to keep a scorecard for the business. Some people refer to accounting as “The Language of Business.” This is because what happens in a business can often be expressed in terms of numbers. When certain key indicators go up in a business, the business is seen as improving. When those indicators go down, the business is seen as declining.

In theory, accounting makes it possible to compare different companies to one another. Sort of an apples to apples comparison.

The idea behind financial statements issued by companies is so that people outside the company can have some basic idea of where the company stands financially speaking. These statements, which are audited by outside professionals, do not contain information that is used in running the business on a day-to-day basis.

Please note that this blog will not give you the basic skills to be an accountant. I will attempt, however, to explain a few financial terms so that you will be better able to understand things you read or hear from other sources. 

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.
Please Visit McClendon Enterprises