Welcome to Covering You with Wealth blogs. Membership is free make sure you register please. Please be respectful to others as members and in blogs. Make sure you send the moderator a friends request after becoming a member. The blog section is an educational section of the website. Here we like to educate every visitor on the things we work with to help build a better financial future for our visitors.
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|Posted by Percy A Lowe on August 15, 2013 at 5:00 AM||comments (0)|
Who Cares? You should care since you fit the bill.
So far, you may be unimpressed. Who cares how each transaction is processed? You might not, but banks and retailers do. When you do an offline transaction and simply sign a charge slip, the retailer has to pay a small percentage of your total purchase – perhaps 2%. This fee goes to the bank that issued your debit or credit (card as an interchange fee).
What about online transactions? Retailers can get those done for a lot less. They might only pay 10 cents or so per transaction. Why would Retailers pay for my transaction fee? Have you even thought about that are you didn't know.
As you might imagine, 2% of every purchase adds up to a lot of money. The banks and credit card companies would love for you to choose credit because they get 2% of every dollar you spend. So, if the banks and credit card companies get 2% of all the debt card purchase fees. How much money would that add up to be? Remember you are also, using a pre-paid debt card with a visa or master card logo on it. Then you have a load fee and others fees. Have you just thought about sitting down and adding up all the money you pay out on fees. Retailers, on the other hand, beg to differ. They’d prefer that you choose debit so that they don’t have to pay a hefty interchange fee (but in some states they can add credit card surcharges that pass that fee back to you). There are ten states that doesn't use credit card surcharge fees. So, if ten states don't allow the retailer to charge you fees you need to ask yourself what is the retailer doing. Well I am glad that you are thinking they just mark the price up.
In order to maximize revenue, banks give you an incentive to choose credit (or a penalty for choosing debit, depending on how you look at it). They may charge you a fee for online transactions – usually in the ballpark of one to two dollars. Once you discover these fees, you’re more likely to choose credit next time. In addition, they may offer rewards (such as airline miles or entry into a sweepstakes) each time you choose credit.
Of course, somebody has to pay the 2% interchange fee. Some retailers don’t pass it on to you as a transaction cost, although in some states they are allowed to add a credit card surcharge. However, it has to come from somewhere – they have to build it into the price of the products and services you buy. So, all you debt card user who feel you have been alright not using a major credit card. Well you are getting the fees as a major credit card though. Now, let's change our thinking and get a secured credit card that reports to al three major credit bureau's. So, that now your monthly spending goes towards your credit score. So, the fees you are paying don't bother you know because you are using your money wisely. Now, you are getting a reward just like the banks, credit card companies, and retail stores. Your reward is a better credit score which means your credit character headed towards A paper client.
|Posted by Percy A Lowe on August 14, 2013 at 6:00 AM||comments (0)|
When you purchase with plastic you’re often asked if you’d like to make it a debit or credit transaction. What’s the difference? The choice you make determines how your purchase is processed, who pays the bill for that processing, how long it takes, and what your rights are. This page covers how interchange fees work and just how important your choice is.
When you use a debit card, you can sometimes choose how the purchase is processed. It can either be an online transaction or an offline transaction. If you punch in your personal identification number (PIN), it’s an online transaction – it gets completed electronically and it’s done pretty quickly. If you don’t use your PIN and you sign a charge slip instead, it’s an offline transaction. Offline transactions are processed much like plain-vanilla credit card purchases.
Even though you use a debit card, offline transactions are very much like credit card transactions. Your debit card might have a Visa logo on it, for example, so it runs through the Visa network. It’s not a credit transaction, but it uses the same infrastructure.
Click the link below and learn more about using a debit card:
|Posted by Percy A Lowe on July 22, 2013 at 6:30 AM||comments (0)|
by Frank Coker
Where the P&L tells you how well you are doing during a certain time period, the balance sheet shows how well you have done for the life of your company. The P&L gives you the score for an inning. The Balance Sheet gives you accumulative score for the whole game – plus a whole lot more.
Most business owners have a good feel for their P&L (Profit and Loss Statement, a.k.a., Income Statement). But very few use their Balance Sheet for anything more than just keeping track of what they have and what they owe (assets and liabilities).
One key performance indicator that is very important to understanding the financial strength of a company is Working Capital. Working Capital is simply short term assets minus short term liabilities. It tells you what kind of asset coverage you have for your current debts. Generally if you have less short term assets then short term debt, you are considered to be insolvent and would probably be unable to get bank or other external financing. With short term assets at 1.5 time current debt, you are generally considered to be in adequate shape and higher is better.
However, it is more important to know where your Working Capital is headed then it is to know your current status. That’s where trend lines come in. In particular, the Working Capital trend line can tell you a lot about the health of your business. Most importantly, it tells you whether a company is building or loosing financial strength.
For the purpose of the illustrations below, assume that the Target Minimum line is set at 1.5 times the company’s short term debt.
Working Capital trend lines are considered "healthy" as long as they are above the Target Minimum or on their way to being above the Target Minimum. Even a falling Working Capital line is healthy as long as it is above the Target Minimum because it implies that the company is using available resources to build for the future.
Working Capital trend lines are unhealthy when they are below the Target Minimum or have recently dropped below the Target Minimum. This simply indicates that a company lacks the resources to pay its bills. And if the Working Capital trend is below the Target Minimum and heading down, it shows that the condition is getting worse and is on its way to insolvency.
Companies that don’t have visibility of their trend lines are often surprised when they find out they are in deep financial trouble. It’s not enough to know that your financial ratios are fine as of your latest financial report. Good numbers that are headed in the wrong direction are not good! Way too many companies find themselves out of business because they just didn't see it coming.
|Posted by Percy A Lowe on July 20, 2013 at 6:30 AM||comments (0)|
by Frank Coker
If you have enough money to pay your bills plus take-home pay for the owner, isn’t that enough? Unfortunately it’s usually not that simple. Just covering monthly obligations is not enough. For most businesses, revenues bounce around from month to month, and so do expenses. Even a very profitable company is likely to have times when revenues dip below expenses. And that’s why we care about liquidity. If you don’t have adequate liquidity (weather proofing) you can get blown away when the big “financial storm” comes your way. And storms are inevitable.
Liquidity is all about your ability to pay your current debts with available resources. If you have more short term liabilities than resources to pay them with, your company is considered illiquid and you are seen as a bad risk by banks and investors. If you have more than enough current resources to cover current liabilities you are considered to have positive liquidity and probably a good candidate for financing.
Banks are often criticized because they don’t want to loan money to companies that need it the most and ironically all too happy to lend money to companies that need it the least. But this view actually misses the point. If you wait until you desperately need money to seek help from a bank, it’s the same as waiting until the storm arrives and then deciding to repair your roof. This raises a big question about the wisdom of the owner. The best time to fix a roof is when the sun is shining and the leak is not causing a problem. Not on a rainy day. It makes sense that banks don’t like to lend to companies that wait for a rainy day. They much prefer to lend to the smart companies that get their house in order when the sun is shining.
The best storm protection, from a business perspective, is to build financial reserve capacity when business is at its best. That’s the time to get bank credit lines established and if possible, pay down the most expensive debts. Think of this as fundamental money management.
Far too many companies simply ramp up operating expenses when things are going well and then discover that they can’t sustain these expense levels when revenues take a dip. In worst case, businesses get caught in a liquidity squeeze during revenue dips that they might not be able to dig out of even when the business returns to top performance. So this is where we need to apply some math to make sure that a good balance is being achieved.
An ideal liquidity goal for most businesses is a current ratio (total current assets divided by total current liabilities) that is greater than 1.5. Once it goes below 1.0 it is time to be concerned. If a company has a current ratio below 1.0 in “good weather conditions” it is highly unlikely that it can handle a storm that will drive this number even lower.
So far this discussion on liquidity has been very basic. To take this up a notch, there are several more layers in managing liquidity and storm proofing your company that should be considered. For example, there are several liquidity elements that do not live in your accounting system such as your company’s line of credit, credit cards and other available borrowing capacity. Technically, your available and unused credit is an available resource that is just as good as cash. We can add this to current assets to get a better understanding of available resources. But when we start including borrowing capacity in the liquidity calculation we also need to look at major payments that lie ahead that must be paid but may not show up yet as current liabilities. This could include up-coming tax payments, major credit installments, balloon payments, and other creditor payments that are not already included in current liabilities. This is the level of detail that some lenders will require in order to approve a loan.
We are in the process of adding a liquidity analysis capability to Corelytics so that we can see what a bank sees when they evaluate a company for a loan.
With this picture in mind, do you think your company is ready to handle the next storm? Are you monitoring your business metrics so that you know you have adequate resources to withstand a surprise storm?
|Posted by Percy A Lowe on July 19, 2013 at 6:30 AM||comments (0)|
by Frank Coker
There are 4 basic financial levers that business owners and entrepreneurs have to work with. Most owners and managers are aware of these, but rarely are they thought about as the “4 pillars” that need to be balanced in order to give their business a solid footing. Getting these right will not guarantee that your business will thrive, but getting one of these wrong will almost certainly pull you down or bring you to a halt.
The basic financial levers are:
When you drill into these topics, there are mountains of theories, analytical processes and management techniques to consider. The drill-down can be an endless process. The real challenge for business owners and business leaders is to make sure that all 4 of these levers are getting the right amount of attention such that they work together to support a successful business – not pull the business apart.
For example, in the past week I have looked at several businesses that are using debt financing to keep their business going when the real issue is that their cost structure is simply too high. They are pulling the wrong lever and will not get onto a solid footing until they address their costs. Another example was a company that has priced their products and services incorrectly. On the surface it looked like they were making a good margin and all they needed to do was increase volume. But the sinister truth was that they were not making an adequate margin. They were not including all their direct costs in the margin calculation. As a result, growth was very damaging to the business. For them, growth drained cash, caused them to go heavily into debt and depleted the equity value of their company. There are countless variations on these themes, but in the end, the 4 levers must be on the right setting or the business engine will burn out.
Of course these levers do not live in a vacuum. They live inside a bigger picture made up of less measurable but highly important items such as vision, mission, philosophy, markets, and perceptions. But here again, if the financial levers are not being managed correctly, all the other parts of the picture will fall apart or just simply go nowhere, no matter how cool, important or valuable they are.
I will be drilling further into these topics in future blogs and in my upcoming book titled: PULSE: Managing the Heartbeat of a Business. The goal of the blog and the book is not to answer all the questions surrounding these topics, but rather to provide a meaningful framework for the 4 Financial Levers within the bigger picture. Getting clarity on the big picture can make it much easier to see how the parts work together to build a successful outcome.
|Posted by Percy A Lowe on July 18, 2013 at 6:30 AM||comments (0)|
Anyone building a business knows that the key to success is good disciplines. One of the biggest reasons for organizational failure is – well – the lack of organization. Without good structure things fall apart. But wait - there is an important counterintuitive piece to this picture.
There are times when structure and discipline can actually get in the way. I realize that some will see this as a sacrilegious idea. We know that all successful companies rely on process and discipline to drive growth, profitability and quality. But in spite of the many experts who are famous for their advice on structure and discipline, let me explain the situation in which discipline is damaging and can get in the way.
Most new innovation and creative process requires a suspension of conventional reasoning. In fact, nothing new would happen if we stayed with the learnings of the past. New ideas usually defy current logic or are a departure from conventional wisdom. Most new ideas require new thinking, new approaches and potentially painful changes that we would all like to avoid.
In fact, one of the most pathetic ways to create new innovation is to have a formalized and structured program for new innovation. It usually doesn't work. Formalized programs for fostering innovation and creativity often simply smother it. You can bet with high certainty that a lot of time and money is going to be wasted when people try to hook discipline and creativity together. Many new innovations don’t get off the ground because established formal processes are the “way we have always done it” and they are “what made is successful in the first place.” It took major shock treatment to get companies like Ford, IBM, and many others, to break with their old success formula and catch up with the rest of the world. Many other companies never turned the corner and we have forgotten their names.
Now that I have advocated for entrepreneurs and the need to make space for new ideas, I must confess that I have seen many creative people destroy good businesses with ideas that didn’t work. So what is the real answer? Well, it’s much like politics, too much red or too much blue can really create distorted perspectives. The problem is no single perspective has an absolute corner on all truth; they all have flaws and some elements of truth. In much the same way, companies that are highly optimized for innovation tend not to have long-term stability (excluding Apple – it’s a freak of nature – oops, just got a message on my iPhone). And companies that have highly optimized operating processes can cease to be agile and can have big problems turning the corner when the market shifts.
So we have to make room for both – discipline and entrepreneurship, structure and creativity. There will be tensions, but hey, that’s why we have high paid managers and business owners! (smirk)
|Posted by Percy A Lowe on July 17, 2013 at 5:30 AM||comments (0)|
by Frank Coker
Goals and budgets are not the same thing. They serve very different purposes, but they overlap and often get confused.
When a goal for financial performance is defined for a company or a business unit, it is generally thought of as a destination. There are usually multiple ways to reach a goal, so there is usually very little about the goal itself that tells you how to get there. In fact, high performance managers intentionally leave room for the team to figure out how they are going to achieve their goals. Achieving a goal should make room for creativity and allow for responses to changing realities on the ground. Rarely do conditions stay the same from the time a goal is set to the time that the goal is to be achieved, so it almost always requires adjustments along the way. And of course if conditions change enough, the goal may need to be changed also.
Budgets are different. Budgets are all about constraints and spending limits. It would be unusual to see the words budget and creativity in the same sentence. But when you do, creative means “how do I get money from one budget area to fill a need in another area.” In other words, gaming the system, or, getting around internal spending barriers. Budgets are not about achieving results that drive the big picture or move a business forward.
Goals, on the other hand, generally are intended to create a common focus that motivate and move the team forward. Budgets are usually constraints and barriers. Both are important, but they play a very different role.
It can be very confusing when a budget is expected to motivate action and a goal is used to constrain spending, but this often happens. When used for the right purposes, goals and budgets can live side-by-side and can be mutually reinforcing to the team and the organization.
Most managers can easily describe how a budget works. There is often a lot of debate around how a budget gets set, but once a budget is set, they are pretty easy to understand. The budget tells you how much you can spend during some period of time, how much you have already spent and what you have left. But things get a bit messy when budgets get revised. If budgets get revised too often you loose the ability to hold anyone accountable for achieving the budget. In the extreme, budgets can be changed so much that they just become a reflection of actual spending and in the end you really don’t have a budget. In worst case, the budget is just another report on actual spending that everyone can use to celebrate that they “came in on budget.” And once this gets started, cynicism sets in and no one believes the budget process has meaning and then controls and accountability get lost.
Goals, on the other hand, should have more flexibility. Whether you get a touchdown in 5 plays or 10 plays is less important than getting the touchdown. And moving from a passing game to a running game should not be perceived as a failure if it gets the job done; it is part of the creative process for overcoming barriers.
A revenue growth goal, for example, should be a simple declaration of what you are trying to achieve over some period of time. It’s less about how many plays it takes to get to the goal and more about the direction you are heading in. The goal should allow the team to constantly see if they are on track to achieve the goal and if not, how far off are they. When they can see that they are off course, they can focus on actions needed to get back on course. If they don’t know they are off course, nothing is likely to happen to cause a correction. Without the ability to see the difference between today’s progress and the path to achieving the goal, there is no ability to see the “gap” and no one is going to even know that they need to make course adjustments.
Ideally, goals should be expressed as a trend line that connects some starting point to a destination. The goal trend line needs to sit side-by-side with the actual performance line and the actual performance trend line. With this picture everyone can easily see if they are on track or not. Now the real story can emerge. Now you can easily see if you are headed in the right direction. You can see if you are over or under the line that takes you to the goal, you can see if you are on or off track and this becomes the basis for meaningful conversations with the team about what they can do to get back on track. There is no more important conversation than the one with the team that is expected to actually achieve the defined goal. If they don’t see the picture, it is unrealistic to expect them to achieve the goal. The simple trend line picture is the basic ingredient for clear communications. Unfortunately it is missing for many organizations and as a result, teams often lack a "directional" perspective. When performance is off track and it finally becomes clear it is often too late to make needed adjustments. And last minute adjustments made in desparation usually produce ragged results and the opportunity to achieve a higher purpose is usually lost.
It is the trend lines that make the picture clear and simple. Trend lines can show small deviations early. This makes it possible for small corrections early and often. Hitting a goal becomes much more likely because the trend line and the goal line together show you if a gap exists.
In the end, the thing that makes a manager stand out is how well they set and achieve goals. Managers may get applause for hitting a budget, but rarely do they get career enhancing spotlights because of their budget management skills. It’s the goals and goal achievement that really matter.
|Posted by Percy A Lowe on July 16, 2013 at 5:30 AM||comments (0)|
by Frank Coker
Understanding your financial performance as a collection of trend lines changes everything. The invisible will come to light.
I am just returning from a couple of days of presentations at the Tech Data conference in Orlando. I was sponsored by CompTIA to present sessions on finance and business management. As always, I find ways to highlight the many benefits of understanding financial data in terms of trend lines. This can be a challenge because most people think they are already doing this, and it’s nothing new.
I often start by saying that financial management similar to steering a car. It’s important to observe and adjust on a constant basis. It takes constant monitoring. To make steering adjustments every 5 minutes, and closing your eyes in between just doesn’t work. Bad things will happen when you aren’t looking. In finance, course adjustments need to be made every month at a minimum or things can get off track and cause serious damage. To do monitoring and analysis, you need to compute trends every month on a rolling 24 month basis. Then look at both long-term trends and short-term trends (“leading indicators”) to see how they are working together and where conflicts lie. This needs to be done for all major account categories and for all LOBs.
However, it is very difficult to make the leap from traditional financial statements to trend line analysis. It is especially confusing when a financial manager says “we graph our data and are able to see exactly what is happening in our business.” Even if the person knows how to create a linear regression trend line, if the time frames are not sufficient to smooth out periodic spikes, the results can be misleading. And while graphs of actual performance show patterns of performance, they are not helpful to understanding more subtle questions about how various account categories are working together – for good or ill. A graph of actual performance can certainly give you a sense as to whether business is improving or not, but you won’t get a metric that will help you understand direction and trajectory. For example, it is unlikely that a graph of actual performance would help you see that your COGS payroll is growing just a few percentage points faster than revenue which means that your pricing is not keeping up with cost increases. Basic graphs just don’t tell the subtle story that determines whether a company is building earnings over the long term.
So as I discuss the basics most people usually acknowledge that they really aren’t doing trend analysis. Most people acknowledge that it would take way too long, the math is a bit crazy-complex and their data is not set up to make this practical. Typical estimates are that it would take 4 to 12 hours to do this by hand each month assuming they had an organized process in place. Of course I always mention that it takes Corelytics 14 seconds to do the analysis of 3 years of historical data and create high-probability 12 month forecasts of future performance. But I don’t want to sound like a sales guy, so I tread lightly. Besides, these are educational presentations and it is important not to stray.
Several people commented after the presentations that the discussion gave them a whole new way to understand their business. It’s always gratifying when the light bulb comes on. It just makes more sense when you look at your trend lines to see if they are either working together to strengthen the business or are in conflict and need to be adjusted.
In the world of trend analysis, it is important to understand how trends move in concert. For instance, if revenue is trending up by 15% over the long term and expenses are trending up by 17%, you can easily see that you have a problem. Just looking at static numbers or traditional graphs would probably not show this subtle difference. But this difference can wipe out profits and shut a company down in the long term.
The cool thing about trends is that you can see problems coming early. It is far less expensive to make small adjustments early rather than big knee jerk reactions when the problem is discovered late in the game. Unfortunately most business owners do not take the time to dig in to see problems early on – especially if they need to crank a lot of calculations that can lack the right precision. A simple 5% error can erase all profit.
But wait, there’s more! (Am I sounding like a sales guy?) In my next blog I will discuss an important “best practice” in using trends lines to see precisely where the greatest problems are and where your best business results are coming from. And this can be done with minimal additional time investment and at a level that traditional reports and graphs cannot do.
|Posted by Percy A Lowe on July 16, 2013 at 1:00 AM||comments (0)|
Often times in our lives we are goingto go through a down time. Just because we do that still don't mean our rights as a consumer should be violated. If you are having any of these issues please please visit the site that this blog came from and fill out an inquiry form to explain your problem.
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|Posted by Percy A Lowe on July 15, 2013 at 6:30 AM||comments (0)|
by Frank Coker
When you go in for a routine physical exam, the doctor has a short list of items to check to get a quick picture of your current health status. This quick check tells him with a high degree of certainty how healthy you are and where there might be problems. Some routine items are pretty easy to check such as blood pressure, weight, and pulse. Others are more complex like cholesterol and blood sugar; it takes a lab expert to get at this data.
The first thing the doctor wants to know is if any measurements are outside of normal limits. Secondly, where are changes occurring. Even if a measurement is in normal range, if the pattern from prior visits show that you are headed for a problem, the sooner you can get on top of the potential problem the better. The statistics on “preventative healthcare” are pretty dramatic. The cost of preventing a problem is typically a tiny fraction of the cost for treating a problem.
The parallels between healthcare and business management are quite obvious and very helpful. Here is my punch-list of business health management that comes right out of my doctor’s office:
Check business vital signs early and often (more in an upcoming blog)
Look for metrics that are outside of normal ranges
Treat high-priority problems immediately – don’t let them get worse
Look for trends that show a problem is ahead and where preventative action is needed
- Take care of the most pressing problems first
- Prevent problems from occurring in the future
Set goals in high priority areas
Define corrective or preventative actions
Monitor progress toward defined goals
Repeat process on a regular basis
The biggest problem with this proposed process is that entrepreneurs are generally resistant to routine and repeatable processes. Entrepreneurs generally respond to new opportunities and bright and shiny objects. I know this is true because I am one. It is one thing to know about a process and a totally different thing to actually execute it. But I do know that building discipline and structure into a business is the only way that businesses grow and stay healthy.
So, let’s eat our fruits and vegetables, minimize sugars and carbs, and stay healthy!