As promised, we’re giving you free copies of all the chapters in How to Turn Your Idea into a Multi-Million Dollar Business. Last week, we gave you the first part of Chapter 2. Now here’s Part 2!

You can buy a copy in hard copy or kindle version. But before it gets released to iTunes and to Audible, we’d like to give it to you as a free trial. We hope you look forward to some of the other things that we’ve got that you’re going to get absolutely free here and at www.moreprofitlesstime.com.

CHAPTER 2: CASH FLOW IS KING!

  • Step 4: Understanding Key Accounting Information
    • Assets
    • Liabilities
    • Equity
    • Balance Sheet
    • Income
    • Cost of Goods Sold (COGS)
    • Expenses
    • Profit and Loss Statement
    • Breakeven Analysis
  • Step 5: Cash Flow is “KING”
    • Cash Inflows and Outflows
  • Step 6: Budgeting
  • Step 7: Taxation

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TRANSCRIPT: BONUS EPISODE 3

Title: How to Turn Your Idea Into a Multi-Million Dollar Business (Chapter 2, Part 2)

Date Published: September 11, 2015

Running Time: 13:17 minutes

 

Hi, this is John Millar. I’m the Naked Business Coach, stripping business back to its bare basics. As a special bonus, we’re giving you a free copy of all the chapters in How to Turn Your Idea into a Multi-Million Dollar Business.

Now this is available in Amazon and you can buy a copy in hard copy or kindle version. But before it gets released to iTunes and to Audible, I thought I’d give it to you as a free trial. I hope you enjoy it, took me some years to write. And I hope you look forward to some of the other things that we’ve got that you’re going to get absolutely free.

Thanks so much and welcome to The Naked Business Coach Podcasting Channel.

The Entrepreneur’s Guide Series

How to Turn Your Idea into a Multi-Million Dollar Business (And Avoid the Mistakes that Send Most Business Owners into Bankruptcy)

By John Millar

Chapter 2: Cash Flow is King

Step 4: Understanding Key Accounting Information

To successfully operate your small business, you need to understand the following key accounting concepts before you take a single step further, so grit your teeth and hold on tight. This may be difficult, but I promise it will be worth it.

Assets

Assets are those items owned by your business that have a commercial value and are used to generate revenue, such as cash, inventory, production machinery, office equipment, vehicles, and buildings.

Liabilities

Liabilities are financial obligations that your company has to its creditors, such as loans and purchases made on credit.

Equity

Equity is the amount left over after you have deducted total liabilities from total assets. It is classified into two categories; capital contributions and retained earnings. Don’t worry too much about understanding all the nuances here for the time being; just think of it as your net worth, or how much the business is worth.

Balance Sheet

A balance sheet is made up of three sections: (1) assets, (2) liabilities, and (3) equity. It summarizes your company’s financial position at a point in time by providing a snapshot of what you own, what you owe to your creditors, and the difference between those two.

Income

Income represents the total amount of money that your business makes within a period of time. You can work out your business income by calculating your revenue, gains, and losses.

Cost of Goods Sold (COGS)

The cost of goods sold (COGS) are those costs directly attributed to the production of a product. This includes the total cost of purchasing materials and paying for the labor required to manufacture the product. Any indirect or downstream costs, such as marketing or distribution, are not included in COGS.

Expenses

Expenses are all of the financial outlays a business makes during a time period, such as the utility bills, wages, and distri­bution expenses.

Profit and Loss Statement

A profit and loss statement is a summary of the income and expenses of a business. It shows the profit made during a given period of time (usually annually, quarterly, or monthly). A profit and loss statement can be used to identify areas of high expenditure that are unproductive in generating profit, or potential cash flow threats.

Breakeven Analysis

Your business breaks even if it generates enough sales income to cover its operating expenses. Any amount above the breakeven point is a profit. If a business makes less than the breakeven point, it incurs a loss. The point at which your revenues exceed your expenses is when you start making money (you exceed “breakeven”); until then, it is costing you money to be in business.

I always encourage my clients to know what day of the month they break even so we can strategize on ways to reduce the time required to reach breakeven, even if it is by one day at a time. In some businesses, it may be appropriate to work out the exact time of day on the day you break even. This helps to give the business owner a deeper understanding of the revenues and expenses, and what drives them.

OK, we made it through the accounting, and I hope you are still with me and your eyes have stopped bleeding. You should have a better understanding about these critical financial concepts, and you will be pleasantly surprised later to discover how much you will use and rely on these.

Step 5: Cash Flow is “KING”

Why do I say “Cash Flow Is KING”?

The answer is simple: Cash flow is the single biggest cause of business failure in existence. Far too many very profitable businesses have gone under because they were asset rich but cash poor, meaning they had a negative cash gap or a cash flow cycle that was rampant and out of control. When this happens, you will often hear people say things like this:

“Sales are through the roof, and my accountant tells me I am profitable, but I don’t have any money in the bank…”

Let me explain. Cash flow is the measure of money flowing into and out of your business at any given time. In an ideal business cycle, you will always have more cash flowing in than flowing out. The reality, however, is that most businesses must produce or deliver goods/services to their customers while paying their staff and suppliers BEFORE they get paid themselves. This lag in payments in and payments out is often a major challenge for the business, and managing it correctly is critical to the immediate financial health and long-term financial sustainability of the business. This amount—cash coming in and cash going out—is commonly known as a “cash gap.”

The task of managing cash flow increases in complexity as the number of transactions and volume of money involved grows. This complexity can adversely affect the business if not managed properly.

Here is a simple test to measure the “health” of the cash flow in a business. A company should always have enough cash available to pay all wages and bills on time. When businesses cannot do this, they can face a “cash crisis” and the overall cash flow health is not so good. A cash crisis can make it difficult for the business to access supplies and will potentially disrupt their operations and ability to generate revenue. This in turn can kill a business very quickly.

Cash Inflows and Outflows

To understand the concept of cash flow more deeply, let’s take a closer look at cash inflows and cash outflows. Cash inflows are any receipts of cash into a business. They can include:

  • Customer payments for goods or services
  • Receipt of a bank loan
  • Interest on savings and investments
  • Shareholder investments
  • Tax refunds
  • Proceeds from the sale of assets

Cash outflows are any cash outgoings and can include:

  • Purchase of stock, raw materials, or equipment
  • Wages, rents, and daily operating expenses
  • Loan repayments
  • Income tax, payroll tax, and other taxes
  • Asset purchases

Clear as mud? You really need to understand these cash flow concepts if you want your business to survive and thrive (obviously you do!). For further understanding, and access to some valuable tools to assist you, check out the online training we have developed at www.moreprofitlesstime.net.

Step 6: Budgeting

A budget allows you to plan, control, and make decisions related to the assets, resources, and financial commitments of the business. Without a budget, your business may run the risk of spending more money than it is generating in revenue, or not spending enough to allow your small business to grow.

Budgeting allows you to:

  • Manage your finances effectively
  • Monitor the performance of your business
  • Obtain funding for your business
  • Benchmark your financial goals
  • See potential problems earlier so you can take corrective actions

There are many different types of budgets you can prepare (or have a competent professional prepare) for your business. It is critical that you prepare a budget that best reflects the needs of your business. The following represent the main types of budgets:

  • Projected Profit and Loss Statement
  • Projected Balance Sheet
  • Cash Flow Budget
  • Marketing Budget

When preparing a budget, be sure to consider the following issues:

As a budget is used as a guide for the finances of your business, it is important to ensure that it is prepared properly. Set aside ample time to prepare your budget; then update it regularly, or whenever necessary.

Be realistic in your budgets. Use historical figures (if available) as a guide to help you budget costs and sales. However, always remember that historical data is only a guide, so you must try to anticipate any factors and changes that can influence the future and make it different than the past.

Allow for unforeseen expenditures. It is inevitable that your business may at some point be faced with expenses that were not originally planned for. It is a good idea to allow for some funds to be allocated as a contingency to meet unexpected costs.

Include input from other staff members when preparing the budget. They may be able to assist in determining more realistic figures. Further, when staff members are included in this process, they are more likely to be motivated to help achieve targets.

For more information on the budgeting process, and tools to assist you, visit www.moreprofitlesstime.net.

Step 7: Taxation

I have yet to meet anyone who likes the tax man; not even other tax men like tax men, but when starting a business, you will be obliged to register your business for tax purposes. You will need to check with the appropriate tax authority in your country or region. As an example, here are some things that you may need in order to register your business in Australia:

  • Australian business number (ABN)
  • Fringe benefits tax (FBT)
  • Goods and services tax (GST)
  • Tax file number (TFN)

The USA counterpart to this list would be:

  • Federal Employee ID Number (EIN)
  • State Registration of your business entity
  • Assumed Business Name (ABN) registered with the state

Depending on your location, you may also need to understand your obligations with respect to:

  • Capital Gains Tax (CGT)

FROM AN IDEA TO MAKING MILLIONS

  • Excise duties
  • Fringe Benefits Tax (FBT)
  • Goods and Services Tax (GST)
  • Income tax for business
  • International Tax
  • Land tax
  • Pay As You Go (PAYG) withholding
  • Payroll tax
  • Rates
  • Stamp duty
  • Superannuation for employees

This will vary based upon the country or countries you plan to operate in, but most countries have similar entities/ obligations. Always check with a competent accountant or financial planner (many are accountants also) in the venue you will operate in. Apart from these, there are a number of possible tax concessions and rebates that may be available for your business if:

  • You are an individual, partnership, company, or trust;
  • You are carrying on a business; and
  • You have an aggregated turnover of less than $2 million.

The benefits of these concessions include:

  • A choice to account for GST on a cash basis
  • Simplified trading stock rules
  • Simpler depreciation rules
  • Immediate deductions for certain prepaid business expenses
  • Entrepreneur’s Tax Offset (ETO)

This is where your accountant and bookkeeper should shine to keep you compliant and on the happy side of the tax man. Personally I speak to my bookkeeper weekly, and at least monthly to my accountant. This way I can make sure I keep abreast of my businesses and things don’t go too far astray before I can take corrective action to get things back on track if they have wandered.

Don’t limit using your accountant and bookkeeper for compliance issues only; they are usually involved with many other companies, so they can be knowledgeable business advisors. They can help you plan. In fact, you, your business coach, your accountant, your finance broker, your bookkeeper, and your financial planner should be the very best of friends and meet together as a team regularly so you get the most from their advice and services.

John Millar

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