‘In the Black accounting’ covers the final three concepts in the book ‘In the Black’.
In the Black Accounting
The third and last segment in the book ‘In the Black’ by Allen Bostrom after Marketing and Production is Accounting.
We covered Marketing and Production in episodes 377 to 379.
In this episode, Roger Knecht of the Universal Accounting Centre in Utah will walk you through the three concepts of Accounting.
Please listen in as we don’t really cover the content of this episode but just give you a few hints.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
In the Black Accounting
Over 500 years ago, Fra Luca Pacioli, the father of modern Accounting, said that three things were necessary for a successful business:
- Adequate cash.
- An accountant or bookkeeper.
- An accounting system.
That wisdom remains true today. Yet, the accounting function is the most neglected in most businesses.
#`1 — Cash flow! Cash flow! Cash flow!
The lifeblood of a business is its cash flow. It is crucial for every business. In an accrual accounting system, you may have no cash but show a big profit. You could be living in one world, and dreaming in another.
A business can have cash, but still be bankrupt. Enron had millions of dollars in its bank account when it was forced to shut down.
Watch your Current Ratio, ie. divide Current Assets by Current Liabilities. A ratio of 2 to 1 is desirable. Most businesses never attain that position.
Cash should be earning interest if it is not being used otherwise. Careful monitoring of cash is critical. Even if your business is small, establish separate accounts for business and home. Businesses should work within budgets—leaving some cash in the bank at all times.
Watch the number of recurring bills and expected receivables. This will help you identify potential cash problems in the next couple of months.
#2 — Know Your Business.
Do score carding. “Score carding” is a term used to describe the important, even critical, numbers that a business owner or department manager can quickly scan to get a feeling for how the business is doing, and how it will be doing in the near future. These numbers are key leading indicators of the business, and, if they are in sync, then the rest of the numbers that follow during the month should be okay.
Choose four or five numbers that are real indicators of how the business is doing, and watch them carefully.
Because each business is unique, leading indicator numbers can be different. The scorecard numbers often used are cash balance, current ratio, sales commission percentage, number of leads generated, and percentage of sales financed.
Variance Analysis is a process developed to understand the differences between expected and annual numbers, or trends between time periods. Analyze changes and trends at five levels:
- This month vs. last month
- This quarter vs. last quarter
- This quarter vs. same quarter last year
- YTD this year vs. YTD last year
- Year to date vs. budget
# 3 —Plan for Tomorrow
Business managers have a tendency to work so hard IN the business that they never work ON the business. If you are not growing, you are dying!
This is just a short summary. Please listen in since Roger Knecht gives a much better insight.
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