P&L – Profit and Loss Statement
Your Profit and Loss Statement (or income statement) describes your company’s overall performance. The P&L tells how much money you’re making in your business and how you’re making it. It measures revenues received and costs incurred over a certain period of time. It tells you if you’re making money or not, and how much you’re making or losing.

Go over each line item, and compare it with the previous month’s P&L. If you don’t understand what a line item represents, find out. The numbers should make sense to YOU, not to your accountant. And if you haven’t already, organize the line items so that similar items are closer together. The default setting in most financial software usually lists the expenses alphabetically. For example, it makes sense to see “Product Packaging Materials” next to “Merchandise Purchased for Resale.” Feel free to combine line items to make your P&L more concise, and/or break apart line items to show you more details so you can make some sound business decisions based on what the numbers are telling you.

COGS – Cost of Goods Sold
Also referred to as the “cost of sales,” COGS are the direct costs attributable to the production of goods sold. This includes material cost and production (labor) costs but does not include indirect cost like advertising or R&D. COGS will show up on your P&L Statements. Watch the percentages, not the actual dollar amounts from one month to the next. The percentage should stay pretty much the same with regards to revenues.

EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization
This is the most complicated of the acronyms we’re discussing today, but essentially EBITDA measures the core income that your company earns before your cover your debt payments and income taxes. It’s an indicator of operating performance and profitability, but it’s not a good measure of cash because it doesn’t include changes in working capital.

EBITDA is a good way to measure your profitability, but be forewarned: even businesses with a great EBITDA can go out of business due to cash flow. EBITDA leaves out the cash needed to fund working capital and the replacement of old equipment. Profits are great, but if you have no cash, your business will “bleed out” pretty quickly.

BEP – Break-Even Point
This is one of those numbers you want to know by heart and just like it says, this important indicator tells you at what point your business “breaks even.” It is the dollar amount of revenues that exactly covers all your operating expenses (variable and fixed costs), with nothing left over for profit. It’s an important indicator of risk because it shows you how close your business is to the “no profit” line. For instance, if your business is currently producing revenues at the level of $100,000 per month, and your break-even point is $60,000 per month, you are comfortably above your no profit line. You want your BEP swimming in your head at all times. It’s your minimum target for slow months, and it’s where emergency on your hands.

CR and QR: Current Ratio and Quick Ratio
Current Ratio = [Current Assets ÷ Current Liabilities]
The current ratio measures your ability to meet short-term obligations by determining if you have enough current assets to cover current liabilities. Ideally, your current ratio should be near 2.00, meaning your current assets are two times, or 200%, of your current liabilities. If your current ratio is below 2.00, your short-term debt-paying ability is reduced. This is an unstable financial position, and you should examine your finances to see where improvements can be made. If your current ratio is above 2.00, you have above average debt-paying ability; however, if it is too high, it may mean that you are not utilizing your assets effectively. If it’s below a 1, then you’ve got an emergency on your hands.

Quick Ratio = [(Current Assets - Inventory) ÷ Current Liabilities]
Like the current ratio, the quick ratio measures short-term debt-paying ability. It is calculated without inventory because inventory is not as easy to turn into cash as your other current assets. Thus, the quick ratio examines assets that can be turned into cash in the least amount of time. Businesses that carry a lot of inventory need this important planning tool. Ideally, your quick ratio should be at 1.00 or higher. If it is lower than 1.00, you may have trouble meeting your current obligations. Below 0.5 is an emergency. Note that if you don’t carry inventory, your current ratio and quick ratio will be the same.

This doesn’t have to be  complicated, or difficult
You don’t have to be a finance expert; you just have to understand enough to make the decisions that matter. You begin all of your budgeting and forecasting. At a minimum, your revenues (sales) should be at least as high as your BEP. The goal, of course, is to increase this number over time so that revenues (sales) are above the BEP.

Deferred Revenue is revenue that is considered a liability until it becomes relevant to the business at hand. There are many forms of deferred revenue: gift certificates, software license, prepaid professional services and possibly some retainers when the service delivery schedule is not pre-determined.

Cash is an asset.  Period.  It is never a liability; never an expense; never anything but an asset.  Cash is a current asset, and serves to increase the net worth of whoever is in possession of the cash. Deferred revenue provides cash, but it also establishes a liability because it represents a future event. All deferred revenue will become revenue at some point. You will have to pay sales tax, income tax and possibly royalties eventually.

If your deferred revenue has an expiration date, it becomes revenue on that date. If your deferred revenue does not have an expiration date you will need to develop a procedure for expiring unused services.  Anything sold but not redeemed must become revenue at some point. The IRS will not allow you to carry deferred revenue on the book indefinitely. If you don’t have a procedure to recognize this unused revenue they will give you one. Their procedure will accelerate revenue recognition faster than you may want.

How can a business owner use deferred revenue to help their business? It comes down to cash management. During slow periods cash becomes a problem. Selling products or services in a slow period that will be redeemed at a later date is a way of evening out your cash flow. You might have to provide an additional incentive to buy now and collect later, but the discount might be worth the value to you of accelerating cash flow.

In these hard economic times, when banks are not as forthcoming as they have been, it might be wise to find a way to “float a loan” from your customers. Careful accounting is important. You don’t want to sell what you can’t deliver. Understanding the future consideration of your deferred revenue is critical to long term success. Using gift certificates or pre-paid services might be a way of getting over that financial hump in the middle of your down cycle.

Three Firehouse Subs® locations, founded by firemen and renowned for hearty, oversized portions and piping hot subs, are now looking to eProcess Pros for all of their transactional accounting and financial reporting. eProcess Pros completes daily sales posting, three way invoice matching for accounts payable processing, cash reconciliation and monthly reporting.

Chief financial officers (CFOs) should implement finance and accounting business process outsourcing (BPO) to allow them to spend more time on strategic activities, according to Gartner Consulting, a unit of Gartner, Inc.

Gartner Consulting recommends that CFOs consider delegating transactional tasks to a third party whose core business is finance and accounting BPO.

“Outsourcing some of the finance and accounting processes that are focused on tasks such as accounts payables, expense management, and payroll, frees up the CFO’s time,” said Michael Montonen, vice president for Gartner Consulting’s Strategic Sourcing Practice. “The CFO can then focus more on activities such as planning, activity-based costing, process metrics and decision support at the CEO and business unit leadership levels.” [...]