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Monthly Meeting With Your Accountant
Many ask what should they review during their monthly meeting with the
accountant. In addition to reviewing your various tax reports and financial
statements, I would suggest you specifically look at the following:
1. Current ratio. Get to a 2 to 1 and stay there. Assure your accountant has
classified your balance sheet into current and non-current on both the asset
side and the liabilities side. And make sure you measure this every month.
Current means within the next twelve months. So, bills which come due within
the next twelve months are current liabilities and items such as cash,
accounts receivable, inventory and others which turn into cash within twelve
months are current assets. The current ratio is current assets divided by
current liabilities. You should have a 2 to 1 ratio of current assets vs.
current liabilities. In other words, $2 of current assets for every $1 of
current liabilities.
Be sure your accountant classifies the notes payable properly. This is where
the ratio usually gets messed up. Many classify notes payable as completely
non-current. Wrong. All notes payable have a current portion with rare
exceptions. The current ratio is the most important measurement in the
financial statements including whether or not you have net income.
2. Net Income and Estimated Cash Flow. To your net income for the period, add
any depreciation and/or amortization and deduct note payments which have not
been expensed. Generally there will be a payment for each note listed on the
balance sheet. This will give you a good estimate of not only if you are
making money, but will show if you are making enough money to be building
cash.
Note: This assumes you are using an accrual basis for accounting. Should you
be using a cash basis, then have financials prepared on an accrual basis for
internal management reports. Accrual basis accounting is the only way to
measure how you are doing. Cash basis confuses and obfuscates. You may still
use cash basis accounting for income tax purposes. Your accountant will be
able to help you with this.
3. Check sales year-to-date and sales projection for the year. Where are you
and are you growing?. Sales increases should be averaging at least 5% per
year over a three year period. Sales growth isn t everything, of course, but
without a minimum amount of sales growth - you atrophy and die.
4. Review cost of direct materials as a percentage of sales - year to date
this year vs. year to date last year. The specific monthly amount is subject
to too much variance due to cut offs, etc. to be particularly meaningful.
However, a year to date amount is very meaningful. Typical shops will be in
the 25% cost of direct materials range. Larger commercial shops with a higher
percent of direct materials will be in the 30% range. If your direct
materials is running higher, it usually is a pricing problem, not a waste and
spoilage problem.
5. Cost of wages as a percentage of sales and as a flat dollar amount.
Year-to-date this year vs. year-to-date last year. Same reason as #4.
Normally see wages (excluding owner s wages) at 25% including benefits and
payroll taxes.
6. Overhead as a flat dollar amount. Year to date this year vs. year to date
last year. Here actual $ amounts are more rational. Again, 25% or less of
sales in overhead is typical.
7. Net owner s compensation: after 25% for direct materials; 25% for wages;
and 25% for overhead; 25% is left over for owner s compensation.
As you can see, I focus a lot on year-to-date amounts vs. monthly amounts.
Monthly totals, in my opinion, are very easily distorted by complications
such as cut-offs; inventory change; accruals of payroll; and other items. I
would use the monthly income statement to see if any items jump out at you as
being unusual. If they do, then compare year to date amounts before deciding
it is a problem and making changes.
Happy Trails. Tom Crouser
Crouser & Associates Performance Group program includes two on-site
evaluations by Tom Crouser each year along with two group meetings.
Management training is held during the group meetings along with
participation in a meeting with non-competing printers. Join others who have
decided to run their business instead of the business running them.
Applicants are currently being accepted for three availabilities. Reply to
this message for more detailed information or call Clark Workman at (304)
342-5100. Or fax (304) 342-5187 or contact crouser@ibm.net or
tomcrouser@aol.com.
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Tuesday, January 02, 1996 7:12:39