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You are running your business and making sure that you are servicing your customers in the manner that you know they deserve. You treat your employee with value and try to keep them challenged. Your sales are hot and growing but something is wrong. Every time it comes for paying bills there seems to be a shortage of cash. There are many things that can create this situation. Some are problematic and some are unique to running your business. This leads to the question of what reports to look at and what information do they give you?

The standard reporting for a typical financial statement is the Balance Statement, Income Statement, and Statement of Cash Flows. There are other reports, but these are the critical ones to be discussed in this article.

The Balance Sheet is made up of Assets, Liabilities, and Shareholder’s Equity. The Balance Sheet reports where things are as of a specific date such as year end 12/31. Assets are accounts that have a value such as Cash, Accounts Receivable, and Fixed Assets. Liabilities are amounts that you owe such as Accounts Payable and Accrued Expenses. Shareholder’s Equity is the differential which is made of stock, ownership contributions or draws and the earnings of the company. A negative number in this section denotes a business that overall is running a loss. Balance Sheets are looked at extensively by lenders and investors as it gives an overall feel for the health of a company and how they have been doing typically over a longer term then an income statement.

The Income Statement is also known as the P & L which stands for Profit and Loss. This report shows for a period of time how a business has been doing. A typical Income Statement would be reporting activity for the month or year for example. At its simplest it reports revenue and expense activity. This report is used the most extensively by the business themselves as it tells the clear story of whether you were profitable or not. This report can get more complicated as there are certain expenses such as depreciation that are not reflective of actual monthly expenses and are an allocation so there are alternative numbers that are sometimes reported other than Net Profit such as EBITDA which stands for earnings before income tax, depreciation and amortization to remove expenses that are not directly connected to the business operations.

The Statement of Cash Flow shows where did your cash go or come from. There is the obvious gain or loss on the P & L but then there are the changes that are not income statement based but come from, for example, receivables or payables being paid from prior periods. This report is helpful in that it will show you where those changes have occurred. You may have had a terrible month but you had lots of receivables from last month, so your cash ends up being net positive for the month. This report will show that activity and will allow you to pinpoint differences between actual profitability or loss and cash position.

These three reports are the core of what every business should look at on a monthly basis. The earlier you can get these reports the quicker you can make choices that may need to be made as far as allocation of resources, spending more or downsizing. A well-run company will have an accountant who has a consistent approach to month end closing and can get the financials prepared in a set time. On our next post we will discuss analytics and how to best use these reports and others to extract pertinent information to be looked at.

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Vendors quite often offer customers that have significant sales with them rebates and discounts. Should a customer take advantage of these opportunities and what are the down sides of these offers? A client of mine came to me to ask me to analyze what would be the most beneficial in their circumstance.

The definition of a discount is a deduction from the usual cost. This is typically given for paying earlier then terms. So, for example you will receive an invoice that will say 2/10 Net 30. That means the full amount needs to be paid within 30 days however if you pay within 10 days you can take a 2% discount off the price.

The definition of a rebate is a pay back of money already paid. This is typically given based on quantity of money spent. So, for example if you purchase 1-5 million dollars annually the company will get back 2% of all purchase and from 5-10 million you will get back 5% of all purchases and so on.

There are two primary discussions that need to be made regarding this decision. The first is cash flow, does the business have the capability to pay early? This may not be a uniform decision so may have to be made on a case by case basis depending on time of year and cash balances available.

The second point is more interesting and is a mathematical equation. Every time you take a discount, your sales is reduced by that amount and the amount available for rebates will be lessened. Is it worth it to minimize the discounts and focus on the rebates that will be received at the end of the year or vice-a-versa?

In the case of this client, cash flow was not an issue so taking a discount made sense. This vendor after calculations was more favorable to discounts versus rebate. In conclusion discounts should always be taken by this company with this vendor. Rebate would be less but not as much of a reduction as would be received on the discounts.

In conclusion a discussion with heavy volume vendors should occur to see if they offer discounts and rebates. Even if they do not, it would behoove companies to have that conversation especially if there is ample cash flow to take advantage of discounts. Rebates will be a win-win as they require no change in business and promote sales to specific vendors.

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As we continue to struggle with the consequences of the global pandemic of the novel coronavirus, there are many lessons that can be learnt from how we reacted and how ready we were to deal with this unique challenge. Most people regardless of current situation would say significant room for improvement regarding response and preparedness is warranted. There will be books written about this event and lengthy analysis of where things were done right and wrong. A first-time mistake in cases as life and death as this one is not easily forgiven. Fortunately, this is a financial blog and the worst thing we deal with are losses of a replaceable asset.

As we reach unemployment that is close to Great Depression numbers, many people look to the government for support. The CARES Act has given individuals and businesses some opportunities to be able to get by. Unemployment has offered additional payments to try and replace lost wages. However, we don’t know how long this will last or how long stimulus will be available.

Many workers live paycheck to paycheck, so it becomes difficult for them to try and build a reserve to cover situations where government assistance is not sufficient. This also becomes a difficult conversation to quite often have with people as the definition of necessity is very different for different people. Was is necessary to go out to eat or to have that vacation? As we see with the isolation, mental health quite often comes into the equation.

I feel one of the realities of every one of us is that there is some dollar amount that can be put away. If you look at putting away a dollar amount every paycheck as a necessity just like buying food, then it will happen. This then becomes more a matter of resolve and mind set then can it be done. Are the sacrifices easy, for many it is gut wrenching and hard choices need to be made. There is an immediate need versus putting away money that will sit in potential, what is the right choice?

Probabilities speak to this as most of us will have a point where we will be unemployed and most probably it will happen multiple times. If this is the case, then we can look at a rainy-day fund as not a potential situation but a circumstance that will happen to all of us. If this is so, we understand that we must do what we can to create some buffer for these situations. The preferred is six months cash reserve but two months or even one month is better than nothing.

We want to control out destinies and financial independence or at least some flexibility allows this to happen. I hope that this provides some insight and incentive to try and create a cash liquid fund that will be readily available in case some unforeseen setback occurs whether it is a layoff or a pandemic that we are going through now.