Payment of historic / legacy debts

Paying historic or legacy debts is a very common place to see profits being swallowed up. Or worse, the debts you owe from better times.

Legacy debt can come in many guises. Revenue debt, Bank debt, creditor debt.All are pretty unforgiving.
Legacy debt is generally a result a decline in the economic environment.

And this decline can be rapid. As recently as 2008 Ireland saw its construction industry shut down overnight. And the rest is history.

For more information contact us today.

Capital Investment – Purchase of Fixed Assets

Capital Investment: In order to run a business we will require items of a capital nature.

For example, a restaurant will need to make capital investment in a kitchen and all the equipment required for a commercial kitchen as well as the tables, chairs, the soft furnishings and the rest of the items (lighting) that are required to create the atmosphere.

However, while we will have to pay for these items of equipment now, the cost of the capital investment in these items hit the P&L over a period of years via a depreciation journal. The reason for this is that these items will be of economic use for a period of greater than one year, or our average accounting period.

Therefore, while we pay for this now our P&L only gets to see part of this cost each year over it deemed useful economic life. And this decline can be rapid. As recently as 2008 Ireland saw its construction industry shut down overnight.

And the rest is history.

Timing Differences, created by our world our credit

We can have a super month in sales and yet no money.

We offer our customers, (clients, guests, etc..) credit, which means of course that while we work or supply product today, we do not get paid today.

We instead, we issue sales invoice and account for this sale as a plus in our Profit & Loss Account.

However, the “plus” will only come into our cash flow when we receive payment.

“Hey we had a great month of sales, but when we will get paid?” Sound familiar?

Of course, on the other side we buy the product(s) we are selling today, but we do not pay for them today.

Yet the cost of the products we sell are taken into the Profit & Loss Account.

(We will re-visit this topic from Credit Risk point of view later – for now I hope the timing differences are a little clearer and help us reconcile part of the difference between P&L and Cashflow.

Capital Repayments

In our profit and loss account we only account for the interest on our loans as this is the cost of “buying” money.

Paying the actual amount we borrowed back is not a cost, it is just repaying that which we received.

Just as the as cash flow improved the day we borrowed the money, so too does our cash flow recede as we pay it back.

But this payment is a repayment, not a cost.

As such does not reduce our profit, but it does reduce our liabilities.

 

 

 

Drop in next few days to see …. Timing Differences, created by our world our credit

Difference Between the Profit & Loss Account & The Cashfow Report

Many times when, as accountants, we report a profit our client legitimately ask why the balance in their bank doesn’t reflect my rather positive disposition.

And so, I have noted down the major items that we discuss with our client’s to help bridge the gap between what’s going on in the profit & loss account and what’s going on in the bank.

 

But to get started …. we need to …………

Understand the difference

Profit is what feeds our future, cashflow is what feeds us now!

Profit verses cash is a bit like the difference between man-made laws and natural laws.

Profit – is (to a point) manipulative.

Cash – is pretty real. We either have in the bank or we don’t.

Profit – if I speed down the road I might get caught.

Cash – if I jump off a ten storey building I will hit the ground.

A little strake, I know, but I think you get the point.

So the major differences  are  –

Capital payments on debt (loans)

Tax authorities payment for net sales tax (VAT)

Timing differences – as a result of credit given (taken by our customers) and credit received (taken by us)

Capital Investment – Purchase of Fixed Assets

Payment of historic / legacy debts

Introduction of new loan or owner capital (funds)

 

We will look at each of these in brief in next few days.

And then we will look at Managing them…………

 

 

Aurora – Understanding Financial Control – In Summary

Achieving Strong Financial Control

Seven Easy Steps

Annual Budget - using stretch budgeting process

Monthly Management & Operating Reporting - using individual designed to  reporting formats that suit your business that report on both performance and position

Monthly Performance Review - using the Monthly Management & Operating Reports to compare performance against budgeted performance leading to corrective actions

Monthly Position Assessment – using the Monthly Management & Operating Reports to assess financial position against budgeted performance leading to corrective actions

Monthly Performance Quarterly Forecast – using our time together as a management team to develop the Monthly financial review to look forward to and plan our financial performance  – Sales, Margins & Costs  – we look forward three months from now – every month.

Monthly Position Quarterly Forecast – using our time together as a management team to develop the Monthly financial review to look forward to and plan our financial position  – CapEx. Working Capital Management (Debtors Days, Stock-Turn, Creditors Days), Debt Management – we look forward three months from now – every month.

Managing External Stakeholders - interacting with our external stakeholders with a planned approach that will ensure continued strong relationships

 

Let’s explore the above one by one  – I promise even if you just read it and never call us – It will help you

 

 

 

 

 

The Importance of Watching the Numbers

We can only MANAGE that which we MEASURE.

In order to do this we must set some financial targets.

Then, we must follow this up by looking at our numbers at least monthly, if not weekly or even daily.

In one company I worked with I insisted on a Daily Gross Profit.

The managing director loved the idea but as you can imagine the production director wasn’t overly happy.

His team had to stock count every day.

But guess what?

Our stock-turn reduced, waste reduced, lead time reduced.

In all, money invested in stock reduced.  Cash cycle shorten – ie. More of our money in our bank.

Just one example of how strong financial control can improve bottom line performance.

This is why I have always held the view that accountants must move from overhead to profit contributor.

In fact, I always renamed the accounts department – Financial Control Department.

Then I moved the Department from Cost Centre to Profit Centre.

Bold or what???

But it works.

Now we must be looking at our numbers – all the time

I read a great article by Senator Feargal Quinn – an Irish business icon that I had the pleasure of working for when I was a teenager.

This is what he said,

“I was never passionate about the financial aspect of my business; however, I recognised it would be critical in determining our success or failure.

I see many businesses with the same lack of passion in the financial area but who have not recognised that the business needs to employ someone who will drive
this end of the business in a very strong way and would be strong enough to stand up to the business owner on certain business critical issues.

…Someone needs to be watching the numbers all the time.” Feargal Quinn

Now, truer words have never been spoken.

I have spent most of my working improving performance at businesses I worked with, fixing broken businesses, bringing some of them back from the brink and then being on the winning team that leads to success.

Stronger sales, with stronger margins, stronger financial position  – leading to growth, easier access to credit, leading to even stronger growth.

Watch the numbers.  They force us to make decisions.

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Alan McGrath – Live with Pat Kenny

Joining Pat was financial consultant, Alan McGrath of Aurora Accounting & Business Services “It’s a long way since the heady days of 2006/2007 when the country at least seemed awash with cash and the environment for small businesses was one of available credit and willing consumers. Nowadays, many small businesses have moved from a position of how much profit they can amass, to one of survival. Over 25% of small businesses fail. So, as a small business, how do you avoid it?” – Pat Kenny

Listen in by clicking here » (move to 26.00)

We Must Measure That Which We Hope to Manage

Maintaining a clear view

An expression I use often

“you cannot manage what you do not measure”

immediately understandably – yet rarely implemented appropriately by SME businesses.

By its nature every business has one over-riding propose – it exists to make a profit.  It must, or it will die – this is serious then.

Profit is a measure of business performance.  Actual performance (achieved) is measured against our financial plans.  This comparison is the measure.  The common language is – numbers – understandable throughout the western world.

So what’s profit?

Profit is simply an equation.

Sales less costs = profit or (loss).

If sales are greater than costs then we make a profit.

If sales are less than costs then we make a loss.

Another very useful and often used measurement technique is to look at current years result and compare this to the same period in the previous year.

The real secret is to understand the differences that arise using the various comparisons.

For example, if our sales this year are €120,000 and this time last year were €100,000 the job is to understand the difference.

In other words, why are we €20,000 better off in sales this year when compared to last year.

Is it because we sold the same amount of product but increased the price by 20%?

Or

Is it because we held our price the same and sold 20% more product?

Or

Did we increase the selling prices by 50% but sell 20% less product?

Of course, the above examples applies to any element of the Profit & Loss account.

The key message here is to understand why certain results are achieved.

Only then can we take the appropriate corrective action.

Managing our Financial Health

Now that we understand performance measurement we need to focus on our position (Balance Sheet) management.  I am going to cover this is the third in my series next week.

Vision – Steve Jobs

Vision – Steve Jobs

“Stay hungry, stay foolish”

As I sit here tonight looking at an advertisement for an iPad on my iPhone with iTunes playing through my iPod, it struck me – the impact Steve Jobs has had on our lives.

Yet he,

Didn’t invent computer, Didn’t invent PC, Didn’t invent in smart phone, Didn’t the portable music device.

However,

He had a VISION and through this vision he has transformed the way we live, and so he transformed our lives…

Like Elvis, like JFK, like MLK…Steve Jobs, an American icon, died before his time, yet his legacy will live on.

His imprint on our lives is immeasurable, so much so that this imprint will be visible for generations to come.

Rest in Peace

“Your Time is limited, so don’t waste it living someone else’s life”