Cro-Magnon Lettuce

If you pinned me down and made me list, in the fewest and most concise words possible, the three most important functions essential to any small business (actually, these would apply to any size business), here's what I would have to say:

1. Buy low
2. Sell high
3. Keep track

Now the first two are so intuitive as to be almost primordial: Cro-Magnon bought wholesale from Neanderthal and sold retail to Alsatian.

The last one is different. Pretty much, keeping track is a relatively modern phenomenon, not having been around long enough to become instinctive. Indeed, ol' Cro didn't have to worry much about A/R, A/P, whether to FIFO or LIFO, cash or accrual, or any of that quarterly reporting stuff. Either Alsatian had the shells or he didn't. Period.

Doug Stives, CPA, isn't quite old enough to have done the books for Cro-Magnon, but like me, he goes back a ways. He's also a good enough friend of mine and The Small Business Advocate Community that I can not only kid him a little, but also can call on him to help us learn how to do a better job of "keeping track". As one of our Brain Trust Leaders, he's been an outstanding tax/accounting/financial resource. During a series of shows Doug and I talked about the importance of keeping track. Or more contemporarily, creating and maintaining regular financial statements, as well as how to read and understand them.

Jill Sobule wrote a song that I like titled, "Things Here Are Different." With regard to keeping track, compared to the pre-historic marketplace, things here sure are different. These days, if you want to be successful, you just can't operate your business out of a skin hanging from your belt. But you might be surprised at how many small businesses do essentially that: Manage their business' finances out of modern day "skins", the cash register and the checking account. Doug says, "unfortunately, the vast majority of the small businesses do not produce regular financial statements." I agree. Can you say Cro-Magnon?

Doug and I agree that there are three things to remember about your business' financial statements: Generate them regularly, Make sure they are accurate, and make sure you understand them. Let's develop these three.

1. Regular
Before I go any further, let me disabuse you of one notion: Getting a P&L and Balance Sheet as part of your annual tax return does not qualify as regular financials. To dramatize this, let's do the math.

If you get your business' tax return ready on time, Doug says March 15th if you are incorporated, April 15th for sole proprietors and partnerships, you are working with numbers that are as much as 15-16 months old. Don't ever forget this: financial information is like produce. the older it is, the less it's worth. And 15 months old numbers are worth about as much as a 15 month old head of lettuce. Any questions?!

So what is regular? Doug says monthly is best, but if you are a small company, quarterly will do. But regardless of which one you choose, the real key is to have your statements ready as soon after the end of the period as possible. Like the example above, if you get the first quarter's statements in the third quarter, how good is that lettuce going to taste?

2. Accurate
Do you know how a 35mm camera exposes film? In the simplest terms, the shutter and the aperture of the lens work in concert to let the correct amount of light in to provide an accurate exposure. On a manual camera, in order to get a properly exposed shot, you check the light meter inside the viewfinder to see that the needles lines up. If you don't have enough light, the needles will not line up. But guess what? You can fool the light meter. You can manually adjust either the aperture, the shutter, or the film speed setting until the light meter needles line up, and the camera won't know it. At that moment, according to your light meter, you're ready to fire. You're happy, the camera's happy, life is good. But in this case, the proof is not in the pudding, it's in the film, and you can't fool film. Your photos are going to be unacceptable.

If your numbers are not accurate, you will be like the guy who fooled his camera. He was happy right up to the moment his prints came back. While you are basking in unbelievable gross profit, your inventory may be piling up out back. You can fool your camera, but you can't fool film, and you can't fool inventory. While you are salivating over surprisingly low operating expenses, unpaid payroll withholding may be a train wreck waiting to happen. You can fool your light meter, but you can't fool the IRS. And while you are devouring your deliriously delicious bottom line numbers, your banker is calling to tell you that you are seriously overdrawn. You can't fool film, and you can't fool your cashflow.

3. Understand Them
Like the dog that caught the car, now that you have financial statements, what do you do with them? You need to know that inventory buildup, not just the price you pay for goods, affects your gross profit and your cashflow. You should realize that by setting aside something each month in an allowance account for stock loss and those quarterly/annual expenditures, that you will avoid a sudden shock when you take your real inventory count, or when payroll withholding is due. You should want your bottom line to be extra conservative in the interim statements so you don't spend profits during the year that you really don't have. Like the relationship between aperture and shutter speed, you should know the relationship between your accounts receivable and accounts payable on your balance sheet.

One last thing that is vital to your success: you MUST learn the difference between cash and accounting.

If you pay for everything with cash at delivery, you collect at the point of sale in cash (or shells), you don't have any employees, or inventory, and you don't intend to ever pay any taxes, forget all of the foregoing. You and Cro-Magnon. But if you have open accounts with vendors and customers, plus all of the other trappings most businesses have, like employees, inventory, checking accounts, etc., remember my third essential function: keep track; with regular, accurate financial statements.

Write this on a rock... You don't eat old lettuce, so don't manage with old numbers. That is, unless you accept shells.

Doug's accounting firm, Curchin and Company recently merged with Wiss and Company, LLC. Check them out at Wiss.com.