Tag Archives: assets

3 Incredibly Common Credibility Killers in Business Plan Numbers

Business Financing, Business Mistakes, , ,

Business plans are about business decisions. When I read them — and I read hundreds of them every Spring — I’m looking for the concrete specifics, like dates and deadlines and tasks and milestones, that point towards execution. But part of that is reasonable, credible projections. And I am way too familiar, way more than I’d like to be, with these three very common mistakes. 

Credibility killer #1: unbelievable profits

Face it: startups aren’t normally profitable. Existing businesses, once they’re established, rarely make more than 10 or so percent profits on sales (that’s profits divided by sales). Some of the best businesses make 15 or 20 percent. 

Therefore, when you project 30, 40, 50 or more percent profits on sales, you’ve lost all credibility. That doesn’t make anybody think you’ve actually going to generate that kind of profitability. It does make people think you don’t know the real costs. 

Additional tip: nine times out of 10, you’ve underestimated the marketing costs. 

Credibility killer #2: ignoring sales on credit

Businesses that sell to other businesses don’t normally get paid immediately. They send invoices for products and services. They wait. Weeks or months later, they get paid. Sales accompanied by an invoice like that are called sales on credit. They count as a sale, but instead of adding to cash they add to accounts receivable, and then they get into the bank account later, when the receivables are paid off. 

If you don’t allow for sales on credit in your projections, you kill your credibility. So plan your cash to include the additional working capital it takes to support waiting to get paid.

Credibility killer #3: expenses vs. assets

We all use the word asset to refer to something good to have, like a friend, a second language, and a college degree. More to the point, we often refer to business advantages such as a product design, software code, a prototype, brand awareness and so on as assets. 

In financial terms, however, assets are specific. They are entries in a balance sheet. Assets are equal to capital plus liabilities. Cash, inventory, accounts receivable, equipment, office furniture, vehicles … those are assets. 

The most common problem with this is what happens when you pay salaries or project fees for software or web development. That’s an expense. It reduces your profits and lowers your taxes. So it’s a loss. Way too often people show those expenses as if they were buying an asset. Sorry, we hope that your programming expenses generate something good for your business; but they are expenses, not purchase of assets. 

Oh, and that land and those buildings your business owns? Those are assets, yes, but they should be on your books for what you paid for them, not what you think they’re worth. 

Summary: 

Finance and accounting have this annoying thing about them: things have to mean what the standard principles say they mean. You don’t get to redefine them back into what you think they ought to mean. 

(Image: shutterstock.com)

7 Financial Terms Every Entrepreneur Should Know

Business Financing, , , , , , , , , ,

This is a rewrite of an older post, but it seems like a good one to repeat. You don’t have to be an accountant or an MBA to do a business plan, but you will be better off with a basic understanding of these six essential financial terms. Otherwise, you’re doomed to either having somebody else develop and explain your numbers, or not having your numbers correct. financial words

It isn’t that hard, and it’s worth knowing.  If you are going to plan your business, you will want to plan your numbers.  So there are these six terms to learn.  I’m not going to get into formal business or legal definitions, and I will use examples:

  1. Assets: cash, accounts receivable, inventory, land, buildings, vehicles, furniture, and other things the company owns are assets. Assets can usually be sold to somebody else. One definition is anything with monetary value that a business owns.
  2. Liabilities: debts, notes payable, accounts payable, amounts of money owed to be paid back.
  3. Capital (also called equity):  ownership, stock, investment, retained earnings.  Actually there’s an iron-clad and never-broken rule of accounting: Assets = Liabilities + Capital.  That means you can subtract liabilities from assets to calculate capital.
  4. Sales: exchanging goods or services for money. Most people understand sales already, but the timing of sales is important. Technically, the sale happens when the goods or services are delivered, whether or not there is immediate payment, and regardless of how long ago you paid for what you’re selling.
  5. Cost of Sales (also called Cost of Goods Sold (COGS), Direct Costs, and Unit Costs): the raw materials and assembly costs, the cost of finished goods that are then resold, the direct cost of delivering the service. This is what the bookstore paid for the book you buy, it’s the gasoline and maintenance costs of a taxi ride, it’s the cost of printing and binding and royalties when a publisher sells a book to a store for resale. And timing is important for this one too: it gets into the books at the same time that the sale is made, regardless of when you bought it or paid for it.
  6. Expenses (usually called operating expenses): office rent, administrative and marketing and development payroll, telephone bills, Internet access, all those things a business pays for but doesn’t resell.  Tax and interest are also expenses. And the timing is supposed to be when you are committed to the expense, regardless of when you pay for it.
  7. Profits (also called Income): Sales less cost of sales less expenses. Expenses in this case includes depreciation, amortization, interest, and taxes. And if you don’t know what depreciation or amortization are, don’t sweat it, neither one of them belongs in my list of six essential terms.

Sure, you can spend a lifetime analyzing and getting to know the ins and outs of it, but these are basics every business owner and entrepreneur should know. In my opinion.

(Image: eyeidea/Shutterstock)