Accounting has been called the language of business. If you’re like most business owners though, you’ve probably wanted to learn as little as possible about this language. In my experience however, I’ve seen a high correlation between an owner having a basic knowledge of financial statements and operating a successful business. Remember, one doesn’t have to be fluent in a language in order to communicate. A few years ago a friend traveled to France and Italy and didn’t think it was necessary to learn a few phrases in these languages. After the trip though, he said that knowing how to say a few simple words such as “where’s the bathroom?” or “I want a beer” would have avoided a couple of minor emergencies and scored points with the locals. Likewise, learning a few key financial terms and ratios allows management to review past results and take corrective action as necessary. As one of my supervisors always used to say: ”you can’t manage what you can’t measure”.

First of all, it’s important to lay a good foundation. Everyone needs help in order to succeed. This includes assembling a strong financial team such as a good bookkeeper or accountant, a CPA and a banker. If you hire a financial professional make sure they are well trained and keep accurate records. If you’re company is looking to reach the next level consider bringing in a senior financial person and think of it an investment in your future.

Now, let’s briefly consider how your Balance Sheet and Profit & Loss Statement can help you to quickly analyze results and set future goals:

Balance Sheet: if a medical professional wants to make a quick assessment of your health they measure your blood pressure, temperature etc. Likewise, a Balance Sheet can provide an owner with the vital signs of a company with a minimal amount of effort. For example, your current ratio (current assets divided by current liabilities) can give you a quick snapshot of your liquidity. The current ratio should normally be at least 1:1 with a ratio over 1.5:1 being excellent. A ratio less than 1:1 is a cause for concern – especially if you do not have access to a bank line of credit for cash flow emergencies. The better your current ratio – the less strain on your financial resources.
Days Sales Outstanding (DSO) is another very useful financial ratio. It measures the amount of time it takes your company to collect account receivables from credit sales. The formula is: (total receivables/total credit sales X number of days in the period). If your standard credit terms are 30 days and your DSO is 40 days then you’re collecting your receivables 10 days late on average. If your credit terms vary by products or customers, you can calculate Best Possible DSO using only current receivables in the formula and then compare this number to your total DSO. Setting DSO goals and tracking this ratio allows you to follow-up on collection issues and maximize your cash flow.

Profit & Loss (P&L) Statement: the P&L provides the owner with much more data than the “bottom line”. For example, the gross margin (revenues minus cost of goods sold) tells the owner whether the company is generating sufficient profit to cover overhead expenses and leaving enough for “take home”. Tracking gross margin percentages and making needed adjustments is time well spent. For example, a decrease of only 3% in your gross margin on $1,000,000 of revenues results in a decrease of $30,000 in net income all other things being equal. Also, annually, budget and closely monitor your overhead expenses. Consider asking your employees for suggestions on reducing overhead expenses which can often result in quick improvements to net income. Also, your CPA or banker may be able to help you with standard ratios for your industry and size of business. You can also purchase data on financial ratios from credit rating agencies.

In summary, learning a few phrases in the language of business can help you succeed and avoid a “management by crisis” environment. Each month, or at least quarterly, management should review Key Performance Indicators (KPI’s) such as profitability, current ratio, DSO etc. in order to measure results versus goals and objectives. Keeping the process simple and holding yourself and your team accountable will create the right culture to drive high-performance.

In my next article we’ll discuss the importance of why your company’s cash flow should be budgeted and monitored.

Many times new helpers or electricians, take the home run circuit to a wall plug or to the ceiling mounted light fixture outlet box. This is fine and it works. But when years go by and you decide to do some remodeling or have an electrical problem, you end up moving furniture to check plugs trying to find the home run circuit because no one remembers where it is.

Here is a simple suggestion. First run the home run from the panel to the switch in the room then take it around the room as you need to. This way you will hardly ever have to move the furniture and you will always know where the home run is. Trust me, this will save you a lot of back pains.

1.    Will this company and their representative give me the personalized service I need on a daily basis?

2.    How much sales volume is the rep used to dealing with? Will I be a priority to them or will I be the little fish in a BIG POND?

3.    Does the supplier and its representatives have the knowledge needed to deal effectively with MY needs and those of MY customers?

4.    Will I be able to contact my sales rep easily and will I even have a sales rep I can regularly deal with?

5.    Will my sales rep be hands on? Able to visit me regularly?

6.    Does the vendor support and carry the line of materials I need and desire?

Although, there are other “business” issues to consider such as payment terms, billing departments, and overall reputation, none of those issues will have more of an impact on your daily success than finding someone to supply your needs when you request it and at a fair price.  Remember, you can walk in a very expensive pair of shoes made with the finest quality of material, but if they are too big, it won’t be long before you trade them in.  At that point, a less expensive, good quality shoe that fits “just right” will make you feel much better.

The problem is that when you start a motor across the line, it has unlimited current from the starter powering it—this current creates the high torque needed to start the motor with its associated load.

A VFD can only supply a limited amount of current. Current equals torque, hence less current less torque. While you may be able to run your load with that 10 hp drive you cannot start it up with that same drive. Many drives can only supply 150% of what they are listed for.

This means you may have to purchase a 25 hp (or larger) VFD to start your 10 HP motor.