Why your Profit & Loss StatementÂ is not worth the paper it is printed on
It is not uncommon for every business owner to start a discussion about their Profit and Loss Statement (P&L; Income Statement) with â€śwell, that net income number is not correct,â€ť then go on to list all of the things they would change, but their accountant makes them do it that way. Business owners need to take back responsibility and control of their financial reporting and follow these simple principles to make their P&L a useful document, again.
Distortion #1 â€“ Owner compensation distortion.
You should get paid a market-based wage for what you do, and a return (dividend) for what you own. Most entrepreneurs mix their ownership with their job role in the business, not realizing that it creates significant distortion in the true profitability of the business.
If you are an S-Corporation, you may be motivated to avoid payroll taxes on wages and just take distributions. Unfortunately, the Internal Revenue Service (IRS) knows about that and will eventually get around to you, giving you a nasty payroll tax bill and a headache to boot.
If you have multiple shareholders working in the business, make sure everyone is being paid for the â€śjobâ€ť they do and not getting a paycheck based on their ownership. As an owner, you get to pick any job you want to do, but the market picks your pay. You may choose to over- or under-pay yourself, but all that does is create distorted net income on the P&L.
Stop thinking small and pay yourself the right salary so your P&L tells you the true economic output of your business.Â If you need to take distributions beyond your wage, we need to discuss why you are consuming more than you make!
Distortion #2 â€“ Revenue is vanity!
When entrepreneurs get together, I notice that they all talk about revenue, but rarely about profit. I want you to stop talking about revenue internally and become a â€śGross Marginâ€ť talker. My definition of Gross Margin is Revenue minus any Direct Costs that do not include labor. Most direct costs are really â€śpass-throughâ€ť costs that you areÂ paid in advance, or get terms from the vendors such that you essentially do not pay for them until you get paid.
Think of a construction contractor. They may tell you they did $20 million in revenue, but they actuallyÂ had $17 million in material and subcontractor direct costs. Really, they are a $3 million services business. The same would be true for a marketing firm. I want them to celebrate a $50,000 services contract that uses no freelancers (so $50,000 Gross Margin) more than a $100,000 contract that uses $80,000 of subcontractors (only $20,000 Gross Margin).
It may hurt your pride a bit to talk about Gross Margin instead of Revenue, but you will start to realize that Gross Margin is the true top line of your business engine. If you identify yourÂ best customers as the ones yielding greatÂ Gross Margins, your marketing strategy will be much simpler and more effective.Â Most important, your team will understand their performance is measuredÂ in relation to Gross Margin, not Revenue.
Teach your team to think Gross Margin. If your accounting data does not report on Gross Margin now, adjust your bookkeeping process to never report on Revenue without Gross Margin, even if you have to use a ‘good-enough’ estimate.
Our guest contributor is Greg Crabtree, CEO of Crabtree, Rowe and Berger, and author of “Simple Numbers, Straight Talk, Big Profits!” www.SimpleNumbers.me .
When Ann and I help aÂ client to significantly scale up their organization, we must be able to count on their financials. If there is any doubt, we bring inÂ Crabtree, Rowe and Berger to help cut through financialÂ clutter and confusion to reveal theÂ undistortedÂ story, and help us calibrate just how fast the company can afford to grow. Â – Ann and Gary Ralston
Supercharge business growth! LearnÂ from 14 brilliant thought leaders in 2 days at the Scaling Up Summit presented by Fortune MagazineÂ May 23 and 24, 2017 in San Antonio, TX. Choose from in-person and live remote streaming options.
Learn more and register at https://gazelles.com/summits/scaleup-2017/Â Choose Ann Ralston or Gary Ralston as your coach for a significant discount.
I don’t know whether to laugh or cry. Is this new music video a comedyÂ or a tragic cautionary tale to corporate leaders, strategists and consultants?
Music parody master, Weird “Al” Yankovic, has loosedÂ his incisive wit onÂ corporate-buzz-speak, in a video from his just-releasedÂ album, Mandatory Fun.
Mission Statement, is composed in the style of Crosby, Stills, Nash and Young, playingÂ againstÂ an RSA-like whiteboard animation (which apparently took 10 months to produce!). The production quality is brilliant, and I found myself smiling and wincing in equal parts.
WARNING: This video is NOT recommended for anyone who has writtenÂ a mission statementÂ in the past decade. Showing this to yourÂ CEO or board chair may shorten your career.
But seriously, Ann and IÂ are notÂ fans of mission and purpose statements, even though we’ve had a hand in creating more than one in our day.
Our friend, colleague and mentor, Robert Fritz, writes:
“Which would we rather work for, a company that had a purpose statement but didnâ€™t have a purpose, or a company that had a purpose but didnâ€™t have a purpose statement?
Of course we would all choose the real thing over the propaganda. But even an organization that has a true purpose can rob that purpose of its power by reducing it to a slogan.” *
So please, enjoy the video, and then commit yourselves to eradicating corporate-buzz-speak wherever you can – we promise to do the same!
â€“ Gary Ralston
Â© 2014 Ralston Consulting Inc.
Â A special thanks to Jerry Marselle at our client, SMBH, for turning us on to this gem!
*Â Fritz, Robert (2011-01-04). The Path of Least Resistance for Managers. Newfane Press. Kindle Edition.
More Weird “Al”:
- Great background info in thisÂ post on the Wall Street JournalÂ
- Video: Word Crimes – a cry against bad spelling and grammar.Â (I liked this video even more, but then, my mom is an english teacher and editor -G)
My partner and I are looking at expanding our telephone coaching practice and would like to find some screen sharing and collaboration tools…. What are you using these days to coach / consult at a distance?
More and more, our globe-spanning customers need to collaborate from a residence or on the road. They do so to be more productive, to support balance between life and work, to access new markets, and to reduce the number of climate-heating airline flights they are responsible for. While collaboration tools have advanced and become more reliable, some of the basic services – voice, cellphone and Internet connections – are not. Further, today’s executives face many of these IT challenges on their own.
This summer we have conducted remote meetings with clients and colleagues who were participating from their offices and homes in Brazil, France, Switzerland, Canada and the US. We have hosted meetings from our own home office, in hotels, airport lounges and coffee shops, and on occasion, stuck in a rental car. In almost all cases, at least one attendee was relying on residential-grade broadband, Voice over IP (VoIP) or “found” WIFI access, and a few key tools.
If you plan to RELY on remote collaboration, it will take a bit more than the typical home network, but it can be done. Here are some observations about what works for us, in our home office or on the road, when conducting remote business meetings:
Make sure your voice connection is bombproof (or have a plan B)
VoIP. Cellular Phones. Skype. Compared to the Plain Old Telephone System (POTS lines), the new tools of voice communication can be, well, moody. Yes, you can save a bundle. Yes, you have many more features. Yes, you can make phone calls from far-off places. No, you cannot count on them. So what do you do?
- Use a high-quality telephone conference bridge. If all your other technology fails, as long as the voice bridge is up, and you circulated documents ahead of time, the meeting will continue.
- Look for an unlimited monthly plan, with optional per-minute fees for toll-free callers. Don’t over- or under-pay, and see if you can find one that complements your screen-sharing meeting application. Dedicated conference bridges, with live operators and per-minute, per-caller charges for access are very reliable, but in my opinion, overpriced – especially for their toll-free options. Now that almost all business users have mobile phones and near-unlimited long distance calling plans in their region, toll-free numbers are of most use to the traveler dialing from a hotel phone.
- Free bridges make you pay. On the other end of the spectrum, there are now many free conference bridges that are simply awful, in my experience. Skype, Gatherplace and GoToMeeting all bundle a version of freeconferencecall.com as bridges in with their entry-level offering. Meaning no disrespect, I have never had an incident-free meeting with them.
- When we are providing the bridge, we use either RingCentral Digital Office for three-way meetings, or for larger ones, WebEx Meeting Center orÂ GatherPlace Premium. All offer either 10,000 minutes or unlimited calling as part of their package for about $40 / month / concurrent meeting.
Consider TWO broadband connections at home â€“ NOT overkill
Our home town, Columbus, Ohio, was an early market for Time Warner’s broadband over Cable. As a result, we saw how a cable system ages in a neighborhood, and it isn’t pretty. In fact, over the past 10 years, we’ve seen both Cable and DSL broadband suffer significant disruptions. In 2007, for instance, our business-class cable service was unreliable for 6 months. It was JUST fixed, when our DSL line quit for a week. So there are two reasons to have BOTH a Cable and an alternateÂ connection in your house:
- When (not if) one service goes down, you can switch to the other.
- Video, screen-sharing and file downloads can interfere with Voice over IP (VoIP) – and remember, we need a bombproof voice connection.
Your alternatives are increasing, and in the U.S. include DSL, Fiber-Optic and Cellular Router. Satellite connections are not a good option for voice connections because of the lag.
- Isolate VoIP from other services. We have chosen RingCentral Digital Office VoIP service because it sounds good, and has great long distance plans. Still, we put the adapter on its own broadband connection. We put all other computers, video and screen-sharing on our other cablemodem connection.
- Competing for bandwidth. If you have teens or power users, you have yet another reason: iTunes video downloads and bit torrents. Download a whole season of a show at once â€“ a 2 to 5 Gigabyte package – and you trash your remote meeting in the process. (Remember when kids just wanted a car? Now they need their own cable modem! Sigh.)
- Tip: Let the VoIP adapter control your bandwidth. If you use a VoIP adapter, look for instructions to hook the VoIP adapter upÂ BEFORE your home router, like this:
[Cable or DSL Modem] <–> [VoIP Adapter] <– >[Router] <–> [Computers]
If you are the outsider, use the tools the client uses
Since we are the “outsiders” in our clients’ worlds, we must use what they do. That means I can be contacted through (big breath):Â AOL, MSN, Yahoo, Google, Skype, SMS, ICQ, Jabber, E-Mail, Facebook, Linked-In, Myspace, Cellular Phone, Telephone and Fax, and work with you using PPTP, IPSEC and Cisco VPN, Polycom, WebEx, GoToMeeting, Acrobat Connect, GatherPlace, Xerox Docushare, eRooms, Basecamp, several flavors of Microsoft’s collaboration tools (they really should stop re-branding the stuff!)Â and some more I can’t recall just at the moment.
This is a drag. Someone, hurry up and unify this stuff so we all can use whatever client we wish and not have to know (or pay for!) all these nearly-almost-but-not-quite-the-same services designed to lock us in.
The reality is that established corporations have policies about what they will and will not allow on their networks. They also choose by the reliability of the products, and these days, that means the service provider has invested intensively in a global network of servers in the hope that all participants get uninterrupted connection.
- My top enterprise-grade screen-sharing and presentation choices: WebEx (now owned by Cisco Systems) or GoToMeeting (from Citrix.com – a really smart company).
- Some of my colleagues speak highly of Microsoft LiveMeeting, but I don’t see a way for small businesses and workgroups to affordably adopt it, in comparison to the competition.
- I can’t recommend Adobe Acrobat Connect. Some may love it, but for me, it has frustrated and disappointed too often.
If you are the host, use what is compatible with your clientâ€™s platform – and screen size!
Being a good host means making your participants change as little about their computing environment as possible. Macs are now experiencing double-digit market growth, and are making ground in corporations. Linux is much more uncommon as a desktop, but it is out there. I don’t know anyone currently screen-sharing on their phone’s browser, but the technology exists, and I BET it might be possible on Apple’s iPhone. Bottom line: If any of your customers use another platform, then choose a solution that works for them, too.
- Know your roles. Each application may have a slightly different label, but the roles are:
- Host â€“ you set up the meeting;
- Presenter â€“ you display your screen;
- Participant â€“ you view a Presenterâ€™s screen.
- Not everyone needs to host or present. Many tools allow you to pass the role of presenter around, but NOT for all platforms. If your customers will ONLY watch YOUR screen, it is enough that the solution offer them a â€śParticipantâ€ť – often a simple Java client in a web browser.That said, when Ann and I collaborate with clients, we often reverse roles and have them work on their own files while we observe their screen. For our practice, we insist the solutions we use include cross-platform Presenter as an option. Webex and GatherPlace work well, offering Mac and Linux Host, Presenter and Participant. GoToMeeting works with Windows, and mostly with the Mac.Â Here’s a great comparison chart at GatherPlace.net. (Disclosure: We are in the referral program for GatherPlace.)
- Tip: Be aware of your screen size when presenting. That new 2560 x x1600 monitor looks drop-dead gorgeous on your desk, but when you go to present that report with WebEx, you run into a problem: Your participants (those with smaller monitors) might only see the top-left corner of the document, or get seasick scrolling around to see the whole of the presentation. And remember that guy on the iPhone? 480×320? Fahgeddaboutit!!! Screen-sharing software has a ‘fit-to-window’ function, but it might be better for you to reduce your monitor’s resolution for a more consistent experience. (Photo Credit – Apple, Inc.)
- Tip: Watch your own presentation. At times, Ann and I will connect to our own meeting with a second computer or via our iPhone / iPad just so we can have immediate feedback about our participant’s experience, and catch a stalled session before the participants even have a chance to notice.
Mix and Match for your needs and your budget
- Don’t buy more seats than you need. You can often add additional seats online, instantly, on the rare occasion you need them. For instance, we rarely have more than 5 computers in a meeting, even when we have 15 or 20 attendees – most people share a single connection in a board room.
- If you will need to conduct more than one meeting at the same time, buy concurrent meeting rooms. Ann and I cover this by having one meeting room with WebEx, and one with GatherPlace, but we could easily and affordably add a room to either service.
- In order of affordability (one year of operation):
Audio: How you sound is even MORE important in a remote meeting
Radio personalities and podcasters count upon the right microphone and studio environment to create a more intimate, right-there experience for the listener. Indie film producers also know that great audio can make weak video ‘look’ better. With a little care, you can increase both clarity and impact of what you say in remote meetings.
- Record yourself. Few go to the trouble of recording how they sound on their cellphone, bluetooth headset or computer microphone. At the very least, call and leave a voicemail on your own office system (not a cellphone).
- Get a decent phone. Some 2.4 GHz cordless phones interfere with your WIFI connection (try 5.8 GHz or DECT 6.0 models). Some phones interact poorly with VoIP and cheap conference bridges and trash your voice. Some phones just sound bad. We use Uniden cordless phones at present, and like them.
- Get a headset with a noise-canceling microphone. Plantronics, HelloDirect, Sennheiser and Logitech all make decent noise-canceling headsets for any common device or phone. I frequently get positive comments about voice quality when I’m using my Andrea headset, which was designed for voice recognition software.
- Bluetooth headsets and speakerphones usually suck. If you are NOT in the main conference room, avoid speakerphones if at all possible. If you must, ClearOne makes decent portable speakerphones for your computer. Likewise, Bluetooth headsets are a work in progress. Ann has gone through many supposedly top-of-the-line Bluetooth devices. I own one of the best noise canceling headsets currently on the market – the Aliph Jawbone. I can talk in normal tones 6 feet from a running lawnmower, yet Ann can’t stand the tinny, digitized sound when I’m in a quiet room. There you go.
- Just say no to background noise. Background noise is a double-whammy – you sound bad in the meeting, and you end up SHOUTING WHEN YOU DON’T HAVE TO. Stuck in a noisy location? Use the MUTE button on your phone to give relief to the other participants until you need to speak (from the background noise, that is!). If it is comfortable enough, consider sitting in your parked car – a virtual sound booth on wheels!
- Get your nose out of the mic! Okay, everyone knows what I’m talking about – the rumbling downdraft we hear when you exhale through your nose or mouth onto your microphone. Position your mic at the corner of your mouth, out of the ‘wind’!
Video: I’m ready for my close-up, Mr. DeMille…
I like video in my remote meetings. I think it adds an important element of presence, and a dimension of communication that minimizes misunderstanding. However, it can make things MUCH more complex.
- Start small. If you plan to experiment with video, Skype video is very good, easy, and free. Apple has built FaceTime into every iPhone 4 for video chat over WiFi.Â Logitech provides decent external webcams. Pay a little more for their high-end models to get better optics. All recent Apple computers have excellent little webcams built in. WebEx offers good presenter video, and now offers a panel of up to 6 locations at the same time in even their basic product. Most of the instant messaging services offer video, but they can be a pain to configure. Polycom provides GREAT multipoint videoconferencing, but suffers from even more demanding network and firewall setup requirements.
- Set the stage. Most workspaces are designed to light your work, and not you, so out of the box, most people look ghastly, if the face can be seen at all. (Think: videos of informants on a current events expose…) A professional who chooses to use video often should really re-think their office, furniture, lighting, wardrobe and background so they can send a presentable image. A doorway or a window in the cameraâ€™s line of sight can alternatively distract and blow out the image. New video software offers the option to put in virtual backdrops, but again, this requires even more control of lighting and camera vibration. Or, you can get a pop-up backdrop, as seen here. For an EXCELLENT, accessible introduction to making your cheapo-webcam look great, visit this article at Strobist. (Photo Credit: David – strobist.blogspot.com)
- Stay tuned for TelePresence. You like Skype Video? Have between US $50,000 and $500,000 to invest per location? (I wish I were kidding…) Check out the latest telepresence suites from Cisco, HP and Polycom. For somewhat less ($5,000), the Polycom CX5000 works with Microsoft Live Meeting or Office Communications Server for a panoramic 360Â° view of the room and its participants, with auto-switching close-ups to the current speaker.
Bringing it all home
So yes, it is possible to achieve great remote collaboration on a budget, but it requires a whole new suite of products, services, choices, skills and sensitivities. Start with the premise of a bombproof voice connection and reliable telephone bridge. Add redundant Internet service, then select a remote collaboration tool compatible with your colleague’s environment, and with a reputation for reliability. Tune up your audio quality, and add properly-lit video when all else is solid.
Hard work? Sure it is. But when it all comes together, we’ll be more productive, form better remote relationships, and hopefully do it with fewer carbon-spewing airline flights! See you online…
Updated extensively 2010-10-19 – GKR
RALSTON CONSULTING INC.’S BUSINESS ADVISOR SERIES: CFO
Do you need a Chief Financial Officer for your business? To get the straight goods, we interviewed two highly regarded colleagues, Brad Martyn and Bruce Collen, partners at FOCUS Business Solutions. They offer outsourced or contract Chief Financial Officer (CFO) services for small-to-midsize business in central Ohio.
Ann and I have had the pleasure of working with CFOs from FOCUS, and we have found the combination of our firms to be a powerful force for our clients. Ralston Consulting Inc. provides the business insights, strategic planning and organizational structure, while FOCUS validates the business model, assists with scenario planning and helps business owners implement financial management controls necessary to bring the strategic plan to life.
Join us for some “CFO-Talk” as we shed light on this vital member of a businessperson’s advisory team.
Q: As a business owner, how do you know you need a CFO?
Brad: It depends on the size of the organization, to start with. In most large organizations, they’ve had a CFO in the past. In contrast, I don’t think a small business owner is necessarily educated about what a CFO is. They tend to think that a CPA fills the void.
Q: So what is the most crucial difference between a CPA and a CFO, for the small business owner -for the guy paying the bill?
Bruce: A CFO is a strategic business partner, really…
Brad: Yes – CFOs are focused on working inside the business helping it generate wealth – ensuring proper capitalization, fostering the right banking relationships, addressing compliance issues – focusing on the company as a whole. Often CPA’s tend to be more focused on specific tasks. Is the year-end audit done? Is the tax return done? They add value, but it is in a much different way than a CFO.
Bruce: While both are vital to a business, a distinction we see is that the CPA’s dominant focus is historical – looking back to prepare tax returns and financial statements. The CFO, though, needs to be a forward-looking, integral part of the management team. Often the CPA works for the business, while the CFO works in the business. Big difference.
Brad: It’s like the difference between your fitness coach and your doctor. You visit the doctor for the annual checkup and you try to keep them informed during the year as you see them, but the fitness coach is there, weekly and monthly helping you achieve your goals. A CFO is a financial fitness coach for your business.
Q: If many owners are unclear about the distinction, what is the wake-up call that highlights to the businessperson that they are flying blind toward the future? What triggers them to seek a CFO?
Brad: Likely an advisor – their banker, or attorney, or CPA – will tell them. Someone who understands the business and the owner will see the need. Often the business owner does not know how a CFO can help or what they really are. Once an advisor helps them see the need, the owner quickly sees the benefits and how critical it is that they consider taking the step.
Bruce: There may be working capital needs, and the Banker will arrive and say: “Your financial house is not in order, and must be put in order before you get any consideration.”
Brad: Be a banker, for a second. If you are trying to lend money to somebody who wants $500,000 for their business, you are trying to figure out what they are going to do with the money, and how they will service the debt, long-term.
People don’t understand that banks only make about 2 % on any deal that they do. If you are paying 6 %, they probably pay 4 % for that money. Figure 2 % on a million dollar loan – the bank is maybe making $20,000 a year. It’s a hard business where they must evaluate what the payback and the risk is for the bank.
So the banker says: “Let me see your budget. Let me see your projections. Let me see last month’s financials.” If the business owner says: “I don’t really have that…” the banker may be less comfortable lending, especially if the money is for future growth plans and there of no evidence of what the plan really is. Many bankers will tell the business owner that in order to grow, they need stronger management reporting and better internal controls – to advance beyond business by intuition into business by forecasting and reporting. Often at that point, they will recommend a CFO.
Bruce: Another wake-up call is when a spouse or an advisor points out that they have been consumed by administrative and financial tasks, and have long lost sight of the things that let them grow their business in the first place.
Brad: The typical “E-Myth” problem of working in your business rather than on your business.
Q: After, say, a year of working with a CFO, what do small business owners discover that they really value?
Brad: As a small business owner, a lot of times what you want is someone to discuss key business issues with, over time. It’s a combination of an advisor, and a partner, and a confidant, and a friend – someone who understands your business that you can have an adult conversation with. Not about debits and credits, or what the balance sheet is, but it’s about: “This is my business. This is my life.”
Q: So with a CFO they get a trusted, credible advisor?
Bruce: Yes, and that’s possible in part because we’re onsite on a regular basis. We are truly part of their management team. We understand their business. We develop the relationships there that let us be most effective.
Q: As strategists, Ann and I are shocked to find many businesses operating with strategic goals but no operational measures of progress or success for management decisions – truly running blind. How can a CFO help?
Brad: In every business there are, say, 3 to 10 measures – ‘metrics’ is the buzzword – that effectively give you insight on how your business is doing. A lot of people try to run their business with a financial statement, and it doesn’t tell you those things. To begin with, it’s too late, and it’s historically focused. Metrics come out every day. What were my store sales yesterday? What was my profit margin yesterday? What was my gross margin on a project yesterday? What is it going to be in the future? What is on your dashboard?
Bruce: An aircraft pilot needs a clear view of the horizon and out the side windows. They don’t fly the plane with a rear-view mirror. They also need up-to-date instrument readings – altitude, heading, speed, and fuel. As CFOs, it’s our job to help owners build a concise but informative instrument panel for their business.
Q: What is your parting tip for our readers with regard to financial management?
Brad: Business owners can make decisions thoughtfully, with the numbers; arbitrarily, by the numbers; or blindly, without numbers. Make sure you have good information as the basis for good decisions, as opposed to making decisions without.
Bruce: In the search for financial support, from either a full-time or a contract CFO, it is critical to ensure uncompromising integrity and ethical standards. This person will be representing your business and your future to many, both inside and outside your firm.
Brad Martyn and Bruce Collen can be reached in Columbus, OH at 614-944-5760 or at firstname.lastname@example.org
Â© 2005 Gary Ralston
About the author: Ann and Gary Ralston founded Ralston Consulting Inc. to help accelerate business growth for their clients – from startups to global corporations – across North America. Based in Columbus, Ohio, Ann and Gary can be reached at 614-761-1841, email@example.com, or through www.ralstonconsulting.com.