Tag Archives: accounting

Use Business Lines to Read Warnings in Numbers

Are you minding your business? I’ve found through the years of minding my business that most of the important insight in the numbers comes in lines, not dots. I mean that tracking the change in key indicators over time, with lines, is much more valuable than looking at them at any specific point, as a dot.

For example, if your business sells to other businesses, you probably deliver the goods or services along with an invoice that establishes what your customer or client owes you. We call that money your customer owes you Accounts Receivable. The sales you make like that, delivering an invoice instead of getting paid immediately, are called sales on credit.

For business that deal with sales on credit the Accounts Receivable balance can be critical to a healthy cash flow. Every dollar in that balance is a dollar that’s already in sales, but not in the bank. You are waiting to get paid. The higher the Accounts Receivable, the more the danger.

You can’t measure Accounts Receivable with a single number. $32,812 in Accounts Receivable might be way too much or way too little, depending on how long it’s been there, how it’s trending, how that compares to other balance items, and the original sales amounts.

I like to watch the number as a line chart so I can see how it’s trending. Your accounting or bookkeeping software might be able to do this, and if not then any of the leading spreadsheet software applications can. I recommend you generate a line chart showing sales on credit on one line and Accounts Receivable on the other. If sales go up quicker than Accounts Receivable, that’s good. That’s the case in the second line chart here. If Accounts Receivable go up quicker than sales, that’s bad. That’s the case in the second line chart here.

The sales in both line charts are identical, but the behavior of the Accounts Receivable balance is different. In one, there might be reason to worry. You start with the line chart, which is like an alert. Then you go into the details, like who owes your business how much, and how long have they owed it to you. You call, you ask, you investigate, you deal with a problem. In the second case, seeing how Accounts Receivable is behaving, you probably look at the chart and go on to deal with something else.

With most of your business numbers the trends — the line — tell you much more than the specific numbers — the dot — at any one point. If you manage inventory in your business, draw the line of inventory turnover. Every business should watch the lines of the trade payments you have to make (called Accounts Payabe), and of course sales vs. costs, sales vs. expenses, sales vs. profits, sales vs, employees, and so on.

It’s not the numbers you watch as much as the change in numbers. Draw your line charts. Every month.

Planning vs. Accounting: 2 Different Dimensions. And Why You Care.

Just as the stargate in the picture was a gate between two different dimensions (from the 1994 movie), today is also the stargate between planning and accounting. Accounting starts today and goes backwards in time in ever-increasing detail. Planning, on the other hand, starts today and goes forward in time in ever increasing summary and aggregation.Stargate Movie Poster

The catch that causes many misunderstandings is that the tables look very similar.  Your accounting system produces an Income statement (alias Profit or Loss), a Balance Sheet, and a Cash Flow statement.  A good business plan has at least the same three statements as “pro-forma” (meaning projected) statements. The form, presentation, and order of appearance of these financial statements are almost identical, but their information content is quite different.

Why do you care? Because the two concepts don’t mix well. And people who approach planning from an accounting point of view suffer. Accounting is reporting off of a database of transactions. Each transaction is recorded and kept, and the accounting sorts and selects and reports. Instead of guessing future monthly totals, they want to figure out an imaginary database of imaginary transactions, and then report results from them. They sweat, the suffer, they get digestion problems, and it doesn’t work.

Planning is to help steer the business. It helps with decisions, tracking progress, and managing change. Accounting is also for information and management, of course, but there are legal obligations related to taxes. Accounting must necessarily go very deep into detail. Planning requires a balance between detail and concept, because there are times when too much detail is not productive.

Accounting can never be wrong. It’s about taxes and governments and actual money transactions. Business plans, however, are always wrong, which is fine, because they’re about setting down assumptions so you can manage and track results, and steer the company. Steering is a matter of constant corrections. So is planning.