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Linking it all Together with Tim Sernett

All right tim are you with us, sir? Well where is already my good how you doing good. What were you calling in from today? Where are you? We're in kansas city you coming at me? I'll be seeing you in uh in about I think about four, five weeks I'm coming out there so there better be a cold one waiting for me during out be sure to have it ready for good I set that up wherever I travel j k always have people getting drinks for me it's a tim we just went over the three core statements current statements right? And maybe you saw some of that um you have a cool chart I want I don't know if I can bring up on the screen to it's the next slide on on the screen here but this is something you provided with two may I don't know if you can see it but it shows how everything connects together could could you explain what this is for you? I should get back up just a little bit of course you can if I jumped the gun absolutely I want to go back to your cruel vs vs cash basis in I would contend that a cr...

uel biggs this is really the only way for for any of us to measure a business smaller being okay so we've been a solo preneurs you want to look at it from a predict productivity standpoint an efficiency standpoint what did I actually invoice last month and what were my actual expenses last month? You're going to feel better about what's happening in your business if you look at it on a cool basis and look at what events actually took place you might have some slow paying customers and you don't get paid on those things until this month if you're looking at it on a cash basis, you're not going to really see the true activity of your company for last month for this month before any period in time that's a great point so what one question have around that? Is there a way to identify that if we do a cruel basis we see the events that happened but the cash isn't flowing in is there a way to kind of pinpoint through these statements or to identify who were the clients? They're slow play players? Yeah, exactly and that's what that kind of leads us to this next slide um what what the slide shows is we're measuring our incomes given on the cruel basis and we end up with hopefully a net income not a net loss like you show, but sometimes that doesn't necessarily quaint to the cash basis, so if we can look at the slide mike yeah, so we start with net income and that's a cruel basis, net income and everything around the circle is that you're going to impede cash flow or enhance cash flow so if you look at the first three things on the right hand side accounts receivable inventory in accounts payable those seat three things are going to impact the net cash flow from our operations in accounts receivable are when we invoice our customers it's what they owe us right? So we want to be able to analyze accounts receivable and analyze our turnover in accounts receivable how fast our clients paying us from the point of sale and that's an important analysis as we look at the entire set of financial statements and what's kind of putting the brakes on cash flow and what's not putting the brakes on cash well, inventory is another big item if you've stocked up on inventory last month and all of a sudden your inventory levels are one hundred thousand dollars higher than normal that takes cash to pay for that inventory even though you haven't sold it yet accounts pay I heard once is like almost like cash on shelves like inventory the more stuff we stock up its freezing our money on a shelf effectively that's right there's no cash in inventory sitting in the warehouse so so what do you tell someone that's that has inventory you want to move it fast? We wanted little possible like how does that work but the biggest the best thing the measures for his inventory is your turnover okay? And look at your inventory turnover as compared to an industry standard. You know, if the standard inventory turnover is six times, you probably want to be a little bit better than that meaning that you're buying and turning your inventory six time they're more during the course of the year. Ok, so it's it's moving the inventory in and out of the warehouse is quickest possible building efficiencies and in for a service based business is a lot of businesses and here our service based is there an equivalent to inventory? Are man hours or anything like that? Is there something similar? Is that a moot point? Yeah, our inventory is our time and to a certain extent it is so you want to be measuring your time and you know that brings in the whole area do you want to have all your people tracking their time and turning in time? Cheese and some do and some don't but really your inventory is kind of your time gotcha and that's where you're looking for efficiency as well. Okay, okay. So it's, I understand the two things you have in your chart and initially now you have accounts payable right that's how fast we pay our vendor bills most of our vendors hopefully are giving us some sort of terms pretty day terms and that's the speed in which you make your cash disbursements to pay your vendor bills for that inventory that came in let's say it comes in today on august twenty six whatever it is, right, that za cost and it's a maturing your warehouse. But you may not have to pay that until thirty days from now, late next september eso accounts payable is measuring those unpaid bills to your vendors and there's a turnover factor there to see me and want to make sure you're taking care of your key vendors in turning your accounts payable over okay, so that that makes sense on a relationship level. But is there a financial reason to do that? Teo, you know, saying right, you want to take advantage of terms if you had of thirty days, thirty you know, you don't want to pay that next week because you're putting a restriction on cash flow by maybe pain aim that vendor bill sooner than what you'll come get coming in the door from your accounts receivable from your customer that you just invoice for that product so it all ties together. You want to take advantage of terms, make sure accounts payable are turning over according to the terms that your aloud and then also measuring your receivables and make sure your customers are paying you on time. You know one analogy I heard once tim was that dollar bills are like little warriors and the only got so many in your war chest and you have to kind of deploy this little fighting team so what I'm hearing from you is you know accounts receivable gets us more of these little dollar worriers and accounts payable is we're dispatching them go out to take care of things but we want to keep his many available should something come our way that we need toe send him toward that affair yeah yeah that's that's very figure okay okay uh the last car we spoke to had a war chest literally a safe full of these little warriors we believe or guns were not sure that we don't know what he had him okay so back to our chart now we have so those three things on the right accounts receivable inventory in accounts payable this is affecting cash flow from regards to accounts receivable is inbound accounts payables outbound inventory sitting on the shelf of freezes money what's capital expenditures capital expenditures are purchases of fixed assets in your business if you're a manufactured equipment in the warehouse equipment in the manufacturing plant if your service based business all the latest and greatest new toys and computing office furniture those air capital expenditures on fixed assets that have more than a year's worth of added benefit to business well so this throws of another question for may capital expenditures I think physical things to him like a computer at you to suggest it or some technology. But you know, rick and I were talking earlier and he's considering of serious investment some software that he'll use for years it's a it's a relationship management package? Is that also a capital expenditure? Yeah, sure it is if it had if it's a piece of software that has a lifetime value of more than just the next few months yeah that's a capital expenditure okay? And those are things that don't show up on the incomes think they only show up on the balance sheet as a fixed asset as a capital asset on the balance sheet. Okay, so this is something I did not know it also, uh, if if I encourage expensive rick and I were by the same software I buy this software it cost five hundred dollars it's a this's a six thousand dollar piece of software in paying five hundred dollars a month for it to be buy it and I'll use it for for many years. I won't see that may income statement anywhere you won't shoot your front door. I did not know that really okay the actual thie actual sixth and this is where we're getting into the weeds a little bit and it's all logical to me and I'm trying to teo bring it out into you. Then there was a young guy in the room that actual six thousand dollar piece of software is a fixed asset that sits on your melon sheet. Okay? And you're paying it off in five hundred dollars a month. That's a liability on your ballot? She because you have terms for that purchase? Yes, right near one of the show up when your income statement, except for your advertise that piece of software because it might have a useful life of five years. Okay, so you take that six thousand dollars and you're expensing it out over the fire. You're useful lives on a monthly basis, so I'll see approximate amortization ah, thousand dollars a year, which means roughly ninety dollars a month or something. Well, more than that, but yeah, but all my income statement, I'll see that the organization right now, the the other thing you'll see on your income statement is you're probably paying some interest on those terms, right? Okay, that interest is another expense of putting that fixed acid on turner, so you'll see that interest expense on a monthly basis says you pay down that liability that's sitting on your balance sheet, okay, so that was not on my income statement is reflected my bound, she and my cash flow statement exactly. Okay, exactly think this is why you need a professional fault it's like ooh! Wow. Is this heady stuff? Okay, I think I'm still with you right now. What we have now loans and debts service what's this on their own. Your chart, right? Well, the six thousand dollar piece of software we were just talking about you have terms to pay that off of five hundred dollars a month. A certain portion of that five hundred is interest a pretty small portion on that amount of alone. The biggest chunk of that five hundred dollars a month payment is reducing the liability on your balance sheet, reducing your debt. That debt serviced doesn't show up when your income statement but it's certainly affects cash flow, so we need to understand what's happening from a standpoint of how are we paying down debt? How are we destroying death? So I understand that now and in tell me about owner equity in activity or did use down tillie confused what well owner equity is the equity of your company is the worst of your company assets minds liabilities equals owners equity when you actually take a profit distribution which we're doing through the prophet first system yeah that's a reduction of owners equity it's not an expense on the income statement so there's there's owner equity activity that affects cash flow uh that we need to understand this well, so is owners equity when when we take a dispersement of our business and the cia month have the owners pay eh account I've been putting money into I take that money out that's considered owners equity correct? Okay, uh do and I do not see that my income statement either you do know I do see it on my balance sheet, correct it's all captured on cash focus cash flow is the movement of money, right? Right. Ok. And the understanding castle in understanding the cash flow statement is that's what we're really trying to obey someone we're working with our small business letters because I want them to understand how everything does impact cash flow. We need to analyze the efficiency and the probability your business with the income statement but the cash flow statement helped this analyzed. How are we gonna build cast reserves and what are we doing with those cash reserves and the profit for system which I actually absolutely love don't actually hate getting nervous. Okay, it's my friend ok? It sits on top of all this and forces us to deal with cash as it comes in the company and decide where is the best where place to put this right from one of the beauties of the prophet for system is it helps us build the health of our business it helps us build equity because we're building that profit account, but then every every quarter we're only taking a portion of that out you suggest thirty percent half of it right as we on a quarter by quarter basis leave half of that profit money in the accounts in her company were building the health of our business. We're building equity in our business who are building cash reserves to help us deal with emergencies or seasonality or what happened. And is that that money that stays inside the businesses that consider retained earnings when it comes to that? Yes ok and that's also that's reflected on the about the balance sheet on the balance sheet in the equity. Okay, right. I'm learning myself as we go along here. Is this a heady stuff I want to go back to now that I understand what all these it's our on the chart you have, what can we do? We're the actions we can do to put our company and the most healthy positive cash flow position that's out there starting with accounts receivable were the actions we should take to make those more favorable? Well, everything on the right hand of that circle we need to manage you need to manage accounts receivable, you need to manage your inventory, you need to manage your accounts payable and even even that long term debt you need to manage your debt and that means having a good system in place to measure it, making sure we're keeping up to date accounts big accounts receivable and there are several other things you could do to impact the turn over on your accounts was capable so it's managing those assets in managing the death that impacts cashflow ok, ok the next best thing you can do is work with a profit first professional preferably damn straight brother thanks for saying that work with your accountant on building some projections and I don't mean just a budget to me a budget is projecting out the income statement I'm talking about full financial statement projections projecting up the balance sheet, projecting out the income statement detailed planning is the best way that I could explain it in understanding everything that impacts cash flow and where you expect to be six months down the road twelve months down the road huh in understanding the things you can do to release some of the breaks from cash flow and improve the turnover and catch what gotcha gotcha and then with the accounts payable is their strategies their to uh in how to get more favorable terms or how that could affect cash flow or is in our best interest to maybe not purchase things and from the get go how do you address that? Maybe the any answer could be right here how do you manage accounts payable working on terms with your with your vendors and your key vendors thin the best thing you could do is identify who your key vendors are in making sure you're paying them on their terms so that you're taking care of them and once you've established a good history and their relationship, if you need to, you can talk to them about maybe longer terms in certain times of the year of your seasonal business so that you're not drawing on a line of credit to survive seasonality but really it's just you don't want to get strung out too far and pay everything in sixty days because you're going to create maybe a falsehood of what positive cash flow is and when I'm okay, I got you to and what I'm hearing tuesday if you have key vendors, that means you have vendors that are not key vendors, maybe there's a why is those air cost you should consider getting rid of exactly that's probably the best do the drive by theory drug buy office depot's every day I actually have to buy. Okay, okay by yourself for an extra day? Yeah, even question john question. He said, uh, one of the things you said was, uh, be careful about utilizing your line of credit to deal with seasonality why? Why? What do you what should you use your line of credit for uh if I said that it may be came across room, I think what I was saying was instead of using a line of credit, maybe talk to some of your key vendors to help you get through seasonality, but you make a good point. Seasonality is probably one of the best reasons to use your landing strip or any other debt instruments you might have dad in and of itself is not a bad thing. Credit cards in and of themselves are not a bad thing, but they have to be properly managed if you are a seasonal business understand when you're drawing on that line of credit and if you have projections in place, you can understand when we can pay it back and make sure you're following those plans in the profit for system helps us do that as cash comes in, we're allocating the right amount to our operating expense account and in a seasonal business it becomes obvious when you use that operator expense account to pay down a line of credit because if you're borrowing a line of credit and you never pay it back, all you've done is is a cz game turned out and so some businesses are obviously they're seasonal businesses, I think like, you know, uh, if you have a pumpkin farm, october clearly is gonna be your big sales period on december not so great, but is the truth? Or could every business be seasonal? And what I'm trying to get to tim is? How do we know? How do we find out our own businesses? Unique seasonality, probably looking at the financial history of your company and looking at it on on a month by month basis, going back twelve months, twenty four months and just looking at it on a month by month basis? There's some seasonality and my business were our highest revenue time is in the first quarter of the year, or when we're helping everybody close out the end of the year, you get ready for taxis so it's just understanding and looking at the financial history your business, I'm one month basis, and if we're a new business, I guess you could even look at your industry trends to some somehow, yeah, yeah, and and there may be even seasonality and different and respects your business. There may be some seasonality in opportunities to buy inventory at the best cost, and that would be a good reason to use your line of credit if I'm stocking up on inventory this month because there's an incredible deal out there and I can get inventory at a lower cost this month, but I'm not going to sell that off, maybe over the next four or five months. And the cat flow from those sales will come in over the next four or five months. That might be another good reason to use my line of credit. Okay, kind of the final question haven't it's very open ended, but you know, everyone in this room, folks watch, and we all are looking to increase the profitability in our business. What are the biggest things? Our biggest opportunities, you see, and the businesses that you've consulted in moving toward better and better profitability? You know, my huer on, by the way, I'm honored to be on this. I've been listening and there's so much insight and great business advice coming from them brain in your head, but you were talking on, and I forget the name of her name in your audience. You were analyzing her type line, written a new and her costs in gross profit. Yeah, as carrots you call you what you call real income? Yeah, a lot of times that has the biggest impact on the bottom line is doing a deep analysis of your revenue by by product, line by customer type by location, whatever it is for your business and really analyzing what are my direct costs related to each of those types of products, services, what's, my gruff it, and you're going to find the eighty twenty well there you can't find that twenty percent of what you're selling that's driving eighty percent of your gross profit that has a bigger impact on your bottom line than cutting office supplies expense you know and one thing I found two is when uh when when I'm facing challenge my business or other intrusions I've worked with the best thing is to do with it with tim suggesting is just to get the baseline where do we stand now there's this propensity to say I want to fix it to start doing to start doing but to sit down analyze where we are and the best thing about working with tim or jaff or any accountant bookkeeper or outsider even if it's just another business acquaintance there not emotionally attached the business in the perspective becomes radically different so right yeah right good good I just wanted to wrap up with you saying right right right I love it tim thank you so much for your time is good connection with you brother thank you can't city I'll expect my beer I expect way looking online there's actually got some good questions coming in I don't know really they were intended for tim whether you can answer but for example teacher is asking what do you say to customers who were always asking for longer terms? Yeah so this is it it's the yin and yang right? So if customers looking for you longer terms um that simply means you're looking to use us as the bank right? Uh the answer can be no you don't have to do it and just cause you're industry because your competitors offer thirty day terms doesn't mean you have to so we have to consider what's healthy for our business the trade off of course they may say I want to go to do business with people that are doing terms now here's a trick I like to use if someone is asking me for terms and I don't want afford them terms but they're demanding it I accept credit cards uh I let a third party finance it and we can all do this uh you've given offer credit cards it's actually collections technique the collections process is when someone's not paying their bills I'll say well, hey I also accept credit cards and then I'll get my money quicker now credit card companies if you're a merchant for that means you research received the proceeds you're going to get a three percent or four percent total feet maybe uniting that high but you're going to charge for it but you're getting your money now so if a customer ask for terms we have understand the consequence to our business we're we have now become a bank and maybe it's not the business we want to be in, so can we find ways for a third party to finance it corey advice a couple questions also the same thing one from being up on one from technology consulting there asking other acc rules if you have membership site monthly fees or indeed annual mental maintenance fees or where do they go in terms of your accounting actually jeff let me throw it to you if you provide me with accounting services right uh itt's a five thousand dollar fee but you agree too uh for me to pay installments on my accounting tractors do I write down five thousand dollar expense or do I write down the installments as they occur? Where's it depend on a cruel fate depends on a cruel christmas it is a cruel since I provided the service to you and you're paying me slowly you would accrue the experience I recognize the entire expense right? But if you're paying me off slowly than you'd pay on a cash basis yes okay okay so yes so cruel the rule of thumb again not rule the rule is a cruel is the event occurs and you recognize the transaction money when the event occurs caches when the cash exchange hands so an expense bases they were doing a cruel you render the service the event has occurred the charges five thousand of my cruel counting up a five thousand dollar expense then the cash actually flows out over time and that this is where it gets to me is really heavy and that's, the whole reason I developed profit first is a system, because for ten years I was trying to do this, and I didn't pass. I didn't have one month. I got this right. I always go to my accountant. She would fix everything I'm like. I don't know, I'm doing wrong, she's, like you're just an idiot, mike, and over and over and over again. And so I say, there's got to be a better way, so profit first all suffer. Been teaching sits right on top of this, as tim was suggesting, but when it comes to figure out the nitty gritty of our business, like kirsten was going through, this is when these accounting report's become absolutely critical. We have haven't released a basic knowledge of this, but we should work with someone, understands it.