I believe my small business is a rational expression of my core beliefs in freedom and service. I embrace free-market, entrepreneurialism, capitalism, the freedom of running a small business. The freedom to work to advance my own goals, which means freedom from working to advance someone else’s goals…Running my own life- instead of having my life run by others; a boss, big corporations, a big government, any who wish to make me subservient to serve their interests. I reject slavery in all it’s forms: corporate consumerism, personal consumer debt, or politician’s greed for power. Although an  independent person, I know that I am also part of a society. I don’t at all mind paying taxes when I know that I’m paying for infrastructure, a legal system with laws that protect me, police and fire protection- anything that supports the free environment in which we live and work and worship as we choose. Although I receive much from society, I don’t think I’m entitled to ask a lot  from society. We all benefit by the patriotism and the hard work of past generations, which we can only repay forward. We are also a naturally confident people. We need to be reminded that we can do anything we put our mind and hand to. We create and invent opportunities for the world. American SMALL business (20 and fewer employees) is the greatest economic wealth producing engine in the history of the planet! Politicians only seem to get in our way. I vote for a government which does not actively work against me and against those who do. I seek the protection from harm by my government as my birthright. Our system of self-government was designed to protect us FROM government, we need to limit it’s power over us before it’s too late. I fight those who serve only their own need for power at my expense. Remember, they work for us, not the other way around. I believe in the freedom to work and earn financial security, without being punished if you earn more than a figure some pinhead thinks is too much.

I believe we should each focus on our core, on the things that are important. I’m building my small business by helping others grow theirs. I serve my own self-interest by serving others. Taking care of my family, being a friend, having good and decent friends of my own choosing. I try not to imitate, or be lead by others. I try to think for myself in a cool and deliberate manner, not to act out of fear. I seek to be positive, not just find fault with everything as some do. I believe in the numerous benefits of hard work. I am conscientious. I pay my bills. I don’t seek to blame others for the misfortunes of life, I’d rather just get busy fixing. I know that to make my life bear fruit, not consume itself, to not waste it, I can only achieve this by learning how to give it. If these things make me a “square”, then I wear that badge with honor. I believe we each have something special to give to the world and it’s our job to find out what that talent is. Whatever your small  business does- do that!, with all your energy, and outsource the rest. Stick to your core. Strip away all the nonsense and distractions, all the superfluous crap. Lighten your baggage. Do what YOU do best. Be remarkable, conquer your fear. Serve your customer. Free yourself, free your limited time and energy, to grow and prosper. Our time here is short. It’s time to get busy living. It’s time to grow.

He would loan money to some customers so they could finally pay your invoices.

He would give your vendors/suppliers an IOU for product.

He would cut your employee’s wages in half in exchange for job security, thereby “saving” those jobs.

He would give away money to new customers so they would hopefully buy something from you.

He would completely piss off 52% of your customers who WERE paying their bills.

He would meet with your competitors and sign agreements not to compete anymore, getting nothing in return.

He would speak no more and ban the use of certain words, like “sale” “good customers” and that really dirty one, “profit”.

He would bring the competition in, show them around, so they would like us and know we mean them no harm.

He would have unlimited stock offerings, diluting the shares to worthless pieces of paper.

He would count the new hires at customers and vendors as jobs “HE” created.

He would remove all signs and stop all advertising so we don’t seem like braggadocios cowboys.

He would turn over a key territory to your biggest competitor as a sign of goodwill.

He would cancel certain patents and trademark rights you held, you know, to be fair.

He would change your invoice terms to 0% 10, net 365.

He would announce that we are no longer the lone supplier of your product, please go somewhere else, so do not rely on us.

He would visit your customers and apologize for taking advantage them in the past.

He would turn over the writing of a new policy manual to a stupid, vapid, lemir-eyed dunce of a woman.

Please add some of your own below. Please use the same format. I will eliminate duplications.

Open letter to Barry, Harry, Nancy and all our other employees…

2010 is a year I hope will change.

I’ve decided I’d like my country back. I don’t like what you guys are trying to change my country into. Freedom, personal liberty, and the opportunity to build our lives into whatever we really want, these have made our country into the best place to live on the planet. I get the distinct feeling now that you guys don’t like those things which made us prosper and you want us to become more equal to Canada or Norway. Well, sorry, and no thanks, we think we hit on something pretty damn good here and we’d like to keep it.

You guys are ramming all your changes through as rapidly as possible because you know that once we learn about it, we don’t want it. You know these things are political suicide which is why you seem hell-bent to shove it down our throats before we can do anything to stop you. People are wondering why you don’t get the message, oh, you got the message alright, you just don’t give a rat’s rear-end, you know you have a very small window here and you are not going to let it go un-used.

While we are waiting patiently for election day, we are deciding to change our lives. We are getting out of debt. We are taking classes. We are starting businesses. We are exercising freedoms to become more independent from you. We are like a sleeping giant, much bigger and way more powerful than you. A little groggy because we just woke up, the realization of what you guys are all about is sinking in, and we are now paying attention. We are a patient and tolerant people, peaceful by nature. The pioneer spirit is alive and well and we will be exercising freedom in 2010 like never before in recent history.

Those of us that you haven’t outraged, you’ve pissed off, and those you haven’t pissed off, you have profoundly disappointed. We are Americans and that means we don’t just take it, we act. We are re-grouping, doing a little community organizing of our own, we called them tea parties, you insulted that. We are realizing maybe our grandparents were on to something, so we’re getting debt-free and living a little more simply. We understand now to our core that there is no such thing as job security, and so we are building our own security and it does not involve you guys.

We are awake, we are aware, we are watching everything you guys do. Until election day rolls around, we are busy building our lives and new businesses, becoming stronger and more self-sufficient every day. Our confidence is growing. We’re not afraid of failing anymore, we are afraid of not really trying.

We want the future to be better than the past. We want to have hope for our children and grandchildren but we must have the freedom to pursue advancement and success, not accept what you offer, genuflecting to mediocrity. We want you to rein in big business to make it play fair, not handcuff small business to make it unprofitable. Small business creates real jobs, you need to get the hell out of our way. We love small business and true capitalism so much, we want to build one on the side, even while we have a job, it’s so easy to do now because of the internet, and we can get all the help we need right online. God, it’s a  good time to be alive!

A small, free business of my own! Genuine security. Real change. Hope for a brighter future. 100% pure American attitude.

Here’s hoping we can give you the same opportunity starting next year.

Companion and follow-up article to “Balance Sheet Debits and Credits Simply Explained.” by Bruce Van Cleve.

If a Balance Sheet is like a picture, a snapshot of a point in time, then the Income Statement is like a movie. Think of the statements going in this order: Balance Sheet snapshot, then Income Statement movie, then another Balance Sheet snapshot at the end of the movie, and so on. It shows you what went on in the business over a period of time, usually a month, quarter or year. Remember, the Balance Sheet’s left side (List of Assets) is the Debit side, and the right side (Liabilities & Equity) are Credits. The Income Statement’s (a.k.a. Profit & Loss or just P&L) job is to show a breakdown, by category, of how the equity in the company changed as a result of doing business that period. It shows that either the company made money, which increases equity (a credit), or it lost money, which decreases equity (a debit).

Knowing this allows you to figure out the debits and credits on the Income Statement. If the company made money, which we know increases equity, then credits must have exceeded debits, therefore, income is a credit, because we need more income (and credits) to increase equity on the balance sheet, and so expenses must be debits. If the company lost money, it’s expenses exceeded income, therefore, debits exceeded credits. Whatever the “bottom line” is on the income statement, profit or loss, flows through to add to, or subtract from, the equity on the end-of-the-period balance sheet.

All these statements are designed to answer the question, “what is going on in my business?” so that the owner is not guessing, or going on hunches and gut instincts. Another one I see a lot is relying on whatever the bank balance says, as a way to tell what is going on with the business. That is not good. The owner needs certain information to make better, longer-term decisions. A good bookkeeping system gathers this information efficiently and is able to give the owner these reports easily, quickly, and efficiently. If you think it’s good to operate a business based on how much cash is in the checking account, you really need to go back and learn the fundamentals of business accounting if you don’t want to be fooled by false information!

The Income Statement answers the question, “WHERE did we make or lose money”? This is why income and expenses are grouped into categories, or “accounts”. These accounts are further grouped by major category such as “Cost of Goods Sold”, which are the direct costs, such as materials and labor. Another major category of expenses are “Selling, General, and Administrative” or SG&A, which might be listed separately as Selling Expenses, then G&A. Again, when properly designed and setup, this quickly shows the owner which area of the business is OK and which ones are out of whack in relation to the others or in relation to your past history. Efficiency means, for instance, the owner can quickly see “General & Administrative” (your overhead) has been climbing over time, pinpoint a particular account that’s the culprit, and narrow the search to those bills that hit that account. Quick and efficient, and no guessing! That’s what a good accounting system does for you.

Finally, I will share with you a debit and credit secret insight. I hope it is obvious that every transaction involves an equal amount of debits and credits. After all, things must remain in balance! Knowing one side, leads you to figure out what the other side should be. OK, here’s the secret: most normal, daily transactions that are part of the business that the company conducts with the outside world, in other words, transactions which affect income or expenses, involve BOTH the Income Statement AND the Balance Sheet. You record a sale: Credit Sales (I/S) and Debit Accounts Receivable (B/S). Enter a bill: Debit an Expense (I/S), Credit Accounts Payable (a B/S Liability).

Receiving payments or paying bills are transactions but they don’t add to income or expense, because those were already recorded as such. You receive a payment: Debit cash and Credit Accounts Receivable (both B/S asset accounts). Pay a bill: Debit Accounts Payable (Liab) and Credit cash (again, both B/S accounts). Note the distinction, a transaction that is part of the normal business with the outside world affects both statements. That’s why if the business borrows $100,000 from the bank, that’s obviously not revenue from customers, even though it increases cash. In that case you would Debit cash and Credit Long Term Debt (both B/S accounts). Buying a piece of equipment with that $100,000 has nothing to do with customer transactions (normal expenses) so you would Debit Equipment (asset) and Credit Cash (also an Asset).

To summarize, only outside-customer-related transactions will end up as part of the Income Statement, with the other side of the transaction affecting a Balance Sheet account. This is why a properly done accounting system is essential to the owner. Cash in the checking account increased so we must be making money, right? Wrong! Where did the increase come from? That’s the question! Did you simply borrow money? Did you collect a lot of receivables (sales from past months) but you had few current month sales? Remember the fundamental question, did THE BUSINESS generate money? That is the question that the Income Statement, or Profit & Loss Statement will answer!

Let me know what you think by leaving a comment below.

So, what is a Balance Sheet and how do we make sense of these debits and credits? Relax. It is very simple once you learn a few simple rules.

First, what is a Balance Sheet? It is most easily understood if you think of a picture taken with a camera. It is a moment of time frozen in which you see what all the balances were. It always has a specific date associated with it. It is a snapshot of a business or of the financial position of an individual at a given point in time.

So, what’s the “balance” part of it mean? Simple. It has 2 sides and the 2 sides (or top and bottom) always balance each other. They are the same totals of the things listed in them, on each side. So, what are these two things? Easy! It’s the two “views” of the business. Like a coin that has two sides, a business or any other entity has two ways to view it: on one side (the left side, or the top half) are listed all the assets owned by the business or the individual.

The other side (the right or the bottom half) shows who OWNS the assets of the business. Another way of saying “who owns” the assets is who has a claim on those assets? The balance comes as a result of the common sense idea that for every asset, someone owns or has a claim on that asset.

Left side is the debit side, right side is the credit side. In other words, items on the left side, the assets, normally have debit balances, things listed on the right side (liabilities and equity) normally have credit balances. In total, there always has to be as many credits as there are debits.

Note: The right side has two parts; the liabilities and the equity. Either someone outside the company has a claim of ownership (bank loans, vendors) on the assets or the owner of the company has a claim on what’s left- the equity. It’s like your house; the house itself is the asset, the mortgage is the liability, the difference between what it’s worth and what is owed is your equity. Your house value is listed as a debit on the left side, the bank loan as a credit balance on the right, and the difference is your equity (also a credit). The total of both sides equal. Debits = credits.

So, any increase of an asset has to be a debit since the asset side is the debit side. Any increase in liability or equity has to be a credit to be consistent with it’s right side position. Conversely, to decrease an asset, you credit it, to decrease a liability or equity you would debit it. See how simple?

Let me know what you think by leaving a comment below.

I get calls all the time from small business owners who have all their help being paid as Independent Contractors and want to “go lejit” by putting their people on a payroll. They never bothered in the beginning because it was easier to just pay them and it saves on the employers half of the FICA taxes, on unemployment taxes, and on Work Comp insurance. I tell them what is involved to put their people on payroll. Almost without exception, I don’t hear from these people again, not because a payroll service is too expensive, but because people who take risky shortcuts in life generally don’t change. Business owners who are not interested in running their businesses within the law I’ve found don’t suddenly become interested in doing things the right way, unless they get caught. Well, they are running a very serious risk. Let me explain…All it takes for this to blow up in their face is one of the employees becomes disgruntled. And what are the odds of that? Let’s say the employee gets injured and files for Work Comp. Alarms go off! The employee is laid offl and go files for unemployment. Alarms go off! And when one Government agency sees what is going on, they will alert all the other agencies, including local, State, and the IRS. The business owner is in for Big Trouble.

The IRS recently has been cracking down on small businesses who have employees incorrectly classified as IC’s. Now cash-strapped States are getting into the act too. I’m not going to explain the difference between an employee and an I/C here, go look it up yourself on IRS.org, Pub 15.

I’ve found that people that start businesses who are determined to do things right, right from the start, are the kind of people who actually succeed and go on to build good businesses. These are the kind of people I am proud to know. The ones who think they are saving money- don’t in the long run, and the nice folks at the IRS (and now more and more States) are coming after them!

Please let me know what you think by leaving a comment below.

I recently attended my Keystone Business Forum’s semi-annual Keynote event, which launched the Erie, PA branch of the Drucker Society, a non-profit devoted to education of business ethics as written about by the late, great Peter Drucker. The branch will be run by Kevin Smith, who also manages Vie Associates, a training and education company devoted to helping local small businesses grow and succeed.

The first question to be answered about business ethics is, given the directive to “first, do no harm“, is this, is your business living up to this standard and what are you doing to ensure that it is?

Although we cannot guarantee that what we do in business always helps our customers and clients, we can at least make a pledge that we will never knowingly do harm to our customers and clients. By committing to do no harm, we make a statement about the main intention of our business. We are giving assurance that the customer or client will, at minimum, not lose as a result of doing business with us. That goes a long way to build trust, which is ultimately all we must have, if we plan to stay in business for any length of time. Without trust, words are just items of propaganda which do not serve the customer’s interest. If your word cannot be believed, they certainly won’t trust your product, or your service.

To commit to doing no harm, the business owner or the manager needs to take a fresh look at every part of the business, find out what actually goes on, randomly call customers, and basically protect the asset of trust, which is easier to build than it is to re-build. Find ways to find out what goes on when the boss is not looking.

Effort and resources spent on adding to the customer’s experience are wasted if the basics are mishandled and trust is broken or is not consistent. So, is your business living up to this standard and what are you doing to ensure that it is? Get to work ON your business, hire people to work IN it.

Please let me know what you think by leaving a comment below.

The following is an explanation of how to put together a cash flow statement that shows you cash flows on a month by month basis. I’m assuming you have read my other article explaining the rationale for making a profit and cash flow forecast for your small business. I won’t repeat myself here. I promised to get to the nuts and bolts of actually doing a forward-looking plan. Let’s get started.

First, of course, is SALES. In order to come up with good numbers, you should approach the issue from several angles, long-term history, short-term history, trends in the economy, seasonal trends, and sales by customer. Each of these perspectives will combine to give you a consensus monthly pattern for the next 12 months.

Look at the last 2-3 years, what were the annual sales? Was there any detectable seasonal pattern through the year? What is the short-term trend, up or down? What is the very near term look like, what are the quoting trends, ordering trends of late, what is your backlog telling you? Knowing what type of economy we are in, and knowing that things probably won’t pick up much before the 3^rd or 4^th quarter, how will that impact sales? Finally, list your major customers that make up the bulk of your sales. What do you anticipate from each of them in the coming 12 months? Add that up. Put numbers to each of these questions and you can now aggregate them into a month-by-month sales forecast that you can be reasonably certain about.

Now COST OF SALES. For this, we don’t want your gut feelings; we want pure, historical facts. Pick a good, long-term time frame, like the last full year and also pick the last 3 months in case something has changed recently. Print out those P&L’s (Income Statements). Calculate the percentage of sales of materials, labor, and anything else directly used in the product or service you sell. These are called direct or variable expenses, or cost of goods sold, they vary directly with the level of sales and are expressed as a percentage of sales- always. If you are building a spreadsheet or use specialized software like my company uses for our clients, make sure these are percentages tied to sales. If you change the sales number, these will change too.

Sales minus cost of goods sold equals gross profit or gross margin. What is the total COGS as a percent of sale, and gross profit or gross margin as a percent of sales? Is it accurate based on your history? If not, go back and correct your work until it is.

And now you will list all your other items from your P&L that typically fall into the categories of General and Administrative and Selling Expense. These TEND to be fixed costs (or overhead). Rent is fixed. Utility bills will vary with the weather. Sales commissions will be variable with the level of sales so it’s a percentage. You might have a cost that’s a percentage of another cost; so, you’ll have to build that in. You will want to generally use longer-term average monthly dollar amounts (NEVER use percentage of sales for fixed costs!) for most of these numbers.

Finally, to forecast cash flow, which is really what you are after in this whole process. It is cash flow that matters most to you. It’s YOUR business. First, you need to establish the collection pattern of your sales. The method I like best is figure out historically how much is collected (percentage) in the month of sale, the month following, 2^nd month following, etc. Then you will apply those percentages to each month’s forecasted sales to tell you how cash will come in. Next figure the pattern for how bills are paid. Payroll will always be an immediate cash outlay; vendors would be paid in the month following or longer. That will show how cash will flow out from your company.

Finally, the payoff for all this hard work! Put all this together and you will have a plan for the sources and uses of cash. You might see cash crunches in certain months but you can now plan accordingly to deal with it ahead of time. You will be well armed to meet the next 12 months knowing what you need to do, where you might need to cut costs, to make a profit and have adequate cash when you need it.

Congratulations! You will have put your business on a much stronger financial footing because you will be looking at the future, not the past!

I hope this has been helpful.

Please let me know what you think by leaving a comment below.

What could possibly be more important to your small business than profits and cash flow, especially in our current economy?  Almost everyone’s sales are off, and so it’s how we manage the money flow through the business (what happens after the sale) that makes the difference between profit and cash crunches. Your company’s survival depends on it. And after all, isn’t cash profit the reason you went into business in the first place?

You likely keep books with QuickBooks or Peachtree or some such software, and let’s say you, or your bookkeeper, does a really good job of categorizing all the transactions, does good month-end work and is able to give you a P&L or Income Statement that you can feel is accurate and complete. Wonderful. There’s just one problem. What you’re looking at has already occurred. You can’t change the past. It’s too late.

The one thing you can control is the future. The decisions you make today will affect what happens next. Once you fully grasp the idea of only being able to control the future by making correct decisions today, you realize that you need to look forward, not backwards. You need to see as clearly as you can, and plan for profits. Just hoping profits come about just doesn’t cut it. If you want to look forward, you need a plan.

Another name for this is a cash flow and profit forecast. This is not a budget. Budgets are useless for your small business. Budgets have their usefulness, but typically not in small, entrepreneurial businesses. Budgets are used by big companies as a way of providing financial accountability of lower level management. In a big company, it wouldn’t do to have everyone running around spending money that upper management didn’t plan for and approve. But chances are you, the owner, make all the major decisions in your company. What good is a budget to you? None. What you do want is to be in control. After all, part of why you started a business was to control your own destiny, right? A solid, well done cash flow and profit plan gives you greater control. It allows you to think more strategically, more long term.

Budgets are static. A cash flow plan changes. It has to change to be useful. After the month is over, actual numbers get plugged in. Conditions change, you find you were wrong on some estimates and so you change the plan! The idea here is to increase the predictive value. It starts out somewhat crude and gets better as you go. We are not used to looking to the future, we usually just wait and see what happens and deal with it then. Survival in today’s economy demands we do the best we can to see what lies ahead and take steps to avoid cash crunches.

Do you know why businesses fail? Although there can be many causes, at the heart of what happens at the end, no matter what the cause, is that they run out of money. A business closes up when it runs out of money. Not managing the finances of the business well is preventable because decisions can be made to correct problems, if they are recognized in time and if they are acted on in time.

Armed with a good plan you will think more strategically, you will begin to be more proactive. Heck, you may even sleep better at night! You will, at the very least, be more assured of the future because you will be able to spot trends, see the cash crunch months in advance. You will know things, in time to do something about them. In other words, you will not be caught off guard. Helplessness is not a good feeling.

The beauty is that an excellent predictor of the future is the past. You have a history to draw from. In the next article, I’ll write about the nuts and bolts of gleaning useful information from your accounting system to use when developing your forward-looking cash flow plan.

Please let me know what you think by leaving a comment below.

The latest thing to start catching on here will be cell phones that can read bar codes. Already up and running in Europe and Japan, you will be able to get more information from ads and signs by just pointing to the bar code, and your (smarter) phone will take you to the website for more information. You’ll get freebies, like coupons, free ring tones, etc. Think of it, anywhere a bar code will fit is a potential to push out information to customers, and of course they gather info on you.