Good credit is an important aspect in both your personal life and in your business. Many people often assume that they are one in the same, but they are not.  There are different factors considered when it comes to figuring out your business versus your personal credit score. The organizations that report and monitor personal credit are separate and completely different from the organization that monitors business credit. Many new business owners do not establish business credit for their business and instead personally guarantee everything. In doing so, their personal credit is hurt and their business cannot stand on its own.
 
Personal credit scores are determined by a number of factors such as bill payment, debt to income ratios, and total credit card debt and history. If you are late when paying your bills, this will show up on a personal credit report. If you have many unsecured debts such as credit cards, it may negatively affect your credit score. Generally, it is recommended that you pay off credit cards and other debts on or before the due date to keep your credit score as high as possible. It is also important to keep a close watch on your debt to income ratio, which can be achieved by living within your means and by avoiding overspending. Try to pay cash for items rather than charge them on a credit card. 

Business credit is determined in a different manner. The business credit score is determined by the payment history of the bills that are specifically for the business. This can include utility bills, bank loans, and payments to vendors that report to the credit bureau (Dell is one company who reports your payment history to D&B).Your financial assets are also included in determining your credit worthiness. Financial history, current assets and liabilities are three important aspects that will help you to determine your score. It is a good idea to avoid revolving credit lines or the use of business credit cards when possible as these may lead to a lower score.

It is important to keep the two scores entirely separate. In the event that the business fails, you would not want to lose your home or your savings in the process. Try to avoid “guaranteeing” any bank loans that are for the business, when possible. The more you can separate your individual credit from the business the better. Otherwise, your risk negatively impacting your personal credit if the business is unable to pay its debts.
 
Good credit is something that everyone and every business should strive to achieve. To learn more about business credit visit the D&B website.

When you purchase supplies the transaction is an easy one from an accounting stand point. You use cash, credit card or vendor credit to make the purchase and report the supplies as an expense on your income statement. Most business transactions in accounting make sense. But one that trips up business owners and students is the concept of Depreciation.

Unlike the purchase of supplies the purchase of a large asset, such as a car, is “capitalized”. What this means is that you don’t recognize the full cost of the car as an immediate expense. Instead, you report the value of the car on the Balance Sheet as an asset. You should have a corresponding debt for the car in the liabilities section of the Balance Sheet, unless you paid cash for it. Then you determine the life of the asset, cars are generally considered to have a useful life of 5 years for depreciation purposes. As such, the cost of the car would be allocated to the income statement for each of the next 5 years. We’ll ignore the Balance Sheet aspects for now.

Depreciation is what we commonly refer to as a “non-cash” expense. Continuing with the car example, if we pay for the car with cash our cash outflow is in the first year, yet we allocate the cost of the car over 5 years. Which means that the profitability of your company is going to be impacted by the depreciation even if you no longer have any car payments because the payment of the asset and the allocation of depreciation expense do not take place simultaneously.

Depreciation allows you to better match the useful life of the asset with the revenue you are generating due to the benefits produced by that asset. If you were to expense the entire value of the asset in the year of purchase your profits in that year would be unnecessarily low and future years too high.

There are many ways to measure the profitability of your company. Income taxes are calculated based on net income, including all non-cash expenses. Whereas you can also look at cash basis profitability which would only include items that actually increase or reduce cash. Sometimes business owners like to see a line item on their income statement that is commonly called EBITDA (earnings before interest, taxes, depreciation and amortization). Another approach that I use for my clients is EBDA (earnings before depreciation and amortization) so that they can compare their net profits with non-cash expenses included to their net profits based mainly on cash only items. Figure out what works for you and use that as a measure to determine your monthly, quarterly and yearly goals.

Below are some words of wisdom from my friend Larry Barkan. It was in his email newsletter and I thought it was worth sharing. Enjoy.

I visited a friend the other day. He is a brilliant marketing
strategist who consults with and teaches marketing to companies all
over the world. In just the last month, he has worked in the United
States as well as Egypt, Istanbul and Moscow. I had lunch with him
while he was enjoying a brief respite before going to Paris.

I asked him what he saw as the differences between consulting and
teaching in Europe and Asia versus in the United States.

He said that, in the United States, unlike either Europe or Asia,
he is frequently asked if a four-day seminar can be completed in
two-days. Or, an executive will say to him, “I’ve got an open slot
of half-day at our meeting. What can you do?” Or, he might hear, as
he did from one seminar participant just before the start of a
Monday through Thursday seminar, “I can’t be there on Tuesday and
Wednesday. Will I miss anything?” (To which my friend was tempted
to respond, “Oh no. I always plan for nothing important happening
on Tuesdays and Wednesdays.”)

As someone who has worked in training and development with mostly
United States companies for the last 25 years, I can echo my
friend’s experience. Seemingly, what can’t be done quickly, won’t
be done.

Naturally, we are nostalgic for a simpler, slower time. By
definition, one is nostalgic for what one no longer has.

I believe there is a relationship between our “just do it quickly”
culture and our current problems.

When speed is a high value, it is difficult if not impossible to
consider the long-term consequences of one’s actions (credit
default swaps anyone? How about subprime mortgages?).

When one doesn’t take adequate time to learn what’s important about
a topic (“can you do it in two-days instead of four?”), one can
believe that one knows all one needs to know and will act based on
this faulty assumption.

When one lacks patience to do what’s right, one will do what is
expedient (after all, bonuses depend on it).

In a culture that demands instant “Google” answers, we are
commanded by “ready, fire, aim.”

In the absence of deep, meaningful relationships (“Yes, but I’ve
got 5,000 Facebook friends whom I’ve never met”), we’ll settle for
a consumer rather than a citizen culture.

Just because we can do everything faster doesn’t mean we should do
everything faster. Perhaps it’s time to slow down and really inhale those roses.

Have a great day,
Larry

Click to subscribe to Larry’s newsletter.

LEADERSHIP DEVELOPMENT? MANAGEMENT DEVELOPMENT?
TEAM DEVELOPMENT? PERSONAL DEVELOPMENT?
GO TO http://www.larrybarkan.com

With any business, especially during challenging economic times, it is important to understand what the current ratio is and how to use it. The current ratio is considered a liquidity ratio which measures a company’s ability to pay short-term loans. The formula for this liquidity ratio is: current assets over current liabilities. The result of this ratio is important because it tells you if you have enough cash, receivables and/or inventory to pay your short term debt. A result of 1:1 is okay, which means you have one dollar of current assets for each dollar of current liabilities. However, a good result would be 2:1 or better (a “good” result is different for every industry).

The higher the current ratio of the company, the better equipped they are at paying their vendors and any short term loans. If their current ratio is low it signifies to a bank, lender or vendor that the company has a lot of debt, but not necessarily that the company is going bankrupt. As there are many different ways to access financing so a low current ratio does not mean that a company will be unable to pay back their loans if they suddenly become due.

Current ratio is very similar to acid-test ratio, however, acid-test ratio does not include inventory. The acid-test ratio is much more focused on the ability to pay debt immediately with liquid cash or cash equivalents. The result of the acid-test ratio is the amount of liquid assets, that if sold, a company could use to pay its short-term debt on short notice.

So, what do you do with this information? That depends on why you are measuring your financial data. Maybe you are approaching a vendor for credit terms with their company. They may want to see your acid-test and current ratio results. If you are seeking a loan from a bank they will most definitely want to know the results of these two ratios. Maybe you are considering a marketing campaign or creating a new product line. Do you have enough cash or cash equivalents to be able to fund these efforts? Or you are operating on a very tight cash budget? If so, these ratios will give you a picture of where you stand at any given point in time.

Keep in mind that every company and business is unique and operates differently than another, so you need to locate the industry average that is most applicable to your business for a comparison point. If you can locate the ratio results of your competitors that is even better information. Even so, how you use this information is more important than how you compare to others in your same line of business.

The prolonged economic downturn has forced many entrepreneurs to reevaluate their businesses. Cutting expenses wherever possible, seeking new revenue sources, or creating unusual partnerships. But what happens to the business and to the entrepreneur’s family members when the unthinkable happens? What if the entrepreneur is an a devastating accident and cannot work or worse, he dies unexpectedly?

To manage cash flow the business owner might have let their insurance policy for short-term or long-term disability lapse. When an accident renders the entrepreneur unable to work for 3-6 months, who is available to run the business? For solo-preneurs, this could be a big issue. A lot of coaches, CPAs and general contractors might fall into this category. Do they have someone, a strategic partner, that can handle their client demands temporarily?

In tough economic times, a young business owner might not see the need for key-man life insurance or life insurance for his family. This week my husband and I were reminded how precious life is and how quickly things can change after hearing about the death of one of his friends. He was only 53 years old, fairly young by most standards. Life insurance is a vehicle that could help a family, such as this one, survive financially without the on-going revenue stream from the spouse.

While we all hate to think bad things can happen to us or to our loved ones, proper planning makes the worst of times easier for those left to pick-up the work load or forced to create a new life without the one they love.

When you own or are starting a business, you need to implement benchmarking (aka Best Practices). This process helps to determine how your business is performing against your internal standards as well as your competition. Doing so will help you assess how effective or ineffective your business is performing in operations, customer services, sales, or other important areas. With this type of information a small business can make changes quickly, which could be the difference between thriving, surviving or closing the business.

There are many different methods of benchmarking. In this post we will discuss, financial, performance, and strategic benchmarks. With financial benchmarking you are reviewing how competitive and productive you are. Performance benchmarking is how well your product or services compares with competitors. And Strategic benchmarking is the process of reviewing how others are competing, and can include data from industries other than yours for comparison purposes.

The financial aspect includes doing a total financial analysis of your business. There are many accounting and financial ratios you can use, but the ones you choose should be meaningful to your daily operations. For example, a retail store would want to know the sales per square foot and a service business might want to know the profitability by client. The financial information will help you determine where you may need to adjust your spending, sales efforts, marketing campaigns or employee compensation in order to generate more profit or productivity.

Sometimes you may not care how your business compares with your competition, but you should be knowledgeable about how their product or service is performing in relation to yours. Are you loosing contracts to your competition? If so, have you found the one or two key reasons? Are your customers frequenting their store more often than yours? Or are customers spending more money with you or with your competition, i.e., how profitable is each customer? This process will help you to determine what you need to fix in order to be more competitive. This process can take a lot of time in order to complete because you have to gather the information, although some of it can be found within the numbers (i.e., your financial statements).

The last benchmarking aspect as to do with strategy. When you started your business you created a business plan which provided you with direction as to where you were going and how you were going to do it. Now that you have been in business for a few years, it is time to reassess your planning. This process will not only include the industry that your business is in, but other aspects from other industries that might be applicable to your business.

While benchmarking does take time, it can provide valuable information that you can use to improve your business. The different types/methods of benchmarking can be used together for a more accurate picture of where your company is in relation to your competitors, the industry, and your own internal goals.

A benchmark is an internal or external measure of how your business is performing. Benchmarking is also described as Best Practices and/or Ratios. Benchmarking is the most effective way to monitor and track the progress of how your business is doing, both good and bad. When you take a look at how you can make your business better or what is already working well within your business, information from the benchmarks will help you determine what should be your next steps.

You can use benchmarks to compare your business to itself or you can use them to determine how you compare to the competition. The type of benchmarks you use will be dependent on the type of business you are in, your industry and the information available about your competitors (i.e., is data available for free or low cost).

A great example of benchmarking is a yearly review for an employee. All employees have specific job functions in which need to be performed daily, weekly or yearly. Usually once-a-year a performance review is done with each employee to see how he or she is performing his/her job duties. The results will determine which areas need improvement as well as which areas the employee is excelling. This is much like benchmarking for businesses. By assessing your own company on a regular basis, you can determine what needs to be done to improve on the weak areas and capitalize on the strengths.

There are various ways to implement benchmarking into your business. Some ideas are to identify and address known problem areas, areas that can use improvements (these are not necessarily problem areas), and areas that are doing well. Establishing a plan for how frequently to preform benchmarking and which items to measure will help maintain consistency in your analysis.

Once the problems are identified, start with internal research to determine any possible establish quick fixes. Interviews with business owners or companies who are doing good in your area of weakness can be helpful for either establishing a new benchmark or for gaining ideas on how to improve upon a weak benchmark. Establish a positive relationship with a prosperous business to gain insight and ideas on how they overcame the obstacles your business is facing. Once this information is learned and collected, the most important step is to implement the information and continue to monitor results. A benchmark should be revisited at least annually, or as needed.

Benchmarking is an important role that the company leader should utilize to ensure the business is meeting goals and performing effectively. Adding benchmarks for different units or divisions of a business is good practice as well. Revisit your benchmarks yearly to ensure they are still relevant to your core business so that you can remain competitive and successful.

What does the term net worth mean? And why is it something a business owner should pay attention too? The actual definition of net worth is: total assets minus any total liabilities. Unfortunately, this is not helpful to those unfamiliar with accounting terminology.

Let’s take a closer look at this. Net worth is a combination of money invested by the business owner and an accumulation of profits over the life of the business. In general, net worth can be described as the overall difference between what a company owns versus what it owes.

Sometimes a company may need an influx of money in order to buy new equipment, purchase a new building or develop a new product. Or perhaps they need money for advertising. Whatever the reason, the owner can either put more of his own personal money into the business, which increases his equity in the business, borrow funds from a bank, or seek an outside investor. If a company has reached its borrowing capacity they may need to add a partner/shareholder rather than seeking money from a bank.

The net worth of a business should increase each year. This assumes that the business is generating positive net income (i.e., sales are greater than your expenses). Even if your net income is increasing each year, your net worth could be decreasing. There are a few reasons for possible decreases, such as the owner taking distributions out of the business or an increase in debt (which can decrease net worth as a percentage, not dollar amount). But the important thing for any business owner to keep in mind is, a positive net worth does not a guarantee success, but a negative net worth could be reasons to assess your business and make immediate changes.

Debt is a word that many business owners do not want to use to describe their financial position, yet managing and monitoring debt is a task that small business owners tend to avoid. In general, debt that is due and payable within the next 12 months is called Current Liabilities. Paying these debts will probably require converting some assets into cash, such as collecting Accounts Receivable or selling Inventory.

Current Liabilities are generally monies owed to employees or suppliers. In addition, you should record reserves for taxes and short term loans, when applicable. 

Why is the classification of Current Liabilities important? In order to extract a true picture of the company’s ability to pay the debts you need to consider what is due now and what is due later. While your long-term debt require payments on a on-going basis, you have more flexibility to renegotiate the terms on long-term loans than you do on short-term items.

Comparing your Current Assets to your Current Liabilities will let you know how much liquid cash you may have if, for some reason, you needed to pay your short-term debt today. Formula note: divide Current Assets by the Current Liabilities to get the Current Ratio result; this result should be greater than 1 to 1. If your Current Ratio result is too low, you might not be able to pay your short-term obligations.

To determine the amount by which your Current Assets exceed your Current Liabilities subtract these two amounts to determine your Working Capital. Working Capital is basically your operating liquidity, i.e., the amount available to satisfy short-term obligations and upcoming operational expenses.

When you compare trends of the Current Ratio and Working Capital for your company over time you will get a sense of how well, or poorly, you are managing your short-term debt. Whether or not you want to, you must become comfortable with reading your company’s balance sheet in order to make good business decisions. Otherwise, ugly words like debt may become unmanageable.

Potential investors, lenders, stock holders, and business owners all like to know how well a company is doing financially. One way to determine the financial performance of a company is to review the Balance Sheet. The Balance Sheet is basically a snap shot of the items a company owns, owes and the difference between the two, called net equity. Every section of the Balance Sheet is important, but this post will focus on the current assets.

Current assets are defined as the items that will be used by the business or converted into cash within a 12 month period, generally the calendar or fiscal year. Assets include items such as Cash (or cash equivalents), Inventory, Accounts Receivable, Prepaid Expenses, and Marketable Securities.

Two accounts to track on a regular basis are Accounts Receivable and Inventory. How quickly you collect payments your customer owes you will depend, in part, on the industry you are operating within. For most businesses, you should be collecting payment in full from your customers at least every 30 days. Failure to collect money on a timely basis will tie-up this much needed cash, which could lead to cash flow problems. Use the Receivables Turnover Over ratio to determine how often you “turn” your collections each year. Convert that information into the Average Collection Period to get the number of days your Accounts Receivable are outstanding.

It is important to monitor the balance in your inventory account too. Too much inventory will tie-up cash unnecessarily. Yet too little inventory will cause you to miss out on possible sales. Use the Inventory Turnover ratio to determine how often you are “turning” your inventory per year. Again, you can convert this information into the number of days inventory sits on the shelf.

The saying “Cash is King,” has merit, but if you don’t use the Balance Sheet as a tool to figure out where your cash is going or where it is tied up, you’ll never have enough cash to run your business effectively. While a Balance Sheet does not give you the entire picture, the current assets section of the Balance Sheet can be a great starting point to assess how you are doing and what you need to do next.