Cover your Assets

Sorry about the adult-themed title, but again, grabbing your attention early is important.

First, thank you to the many who have written and/or commented! We even have some non-business type among us. Welcome from the rest of us capitalistic idealists.

Now, onto your assets.

With a show of hands, who has heard the phrase "our greatest assets are our employees?" EVERYONE! Good!

It's a lie, of course.

At the risk of sounding cynical, your company's greatest assets are not the people that work with you, or even the people you bring in (consultants like me.)

Rather, the greatest assets your business possesses are those that are most easily converted into cash! Even my four year old daughter knows that "cash is king, baby." (That was one of her first sentences. I'm so proud.)

Sure, the people are important, and the technology, and the ideas, and the thinking, etc. But at the end of the day, are you in the people business or the profit business? I choose the latter, and you do to if you're still reading this post. If the people really are the focus of your business, I hope that you are self-employed as a counselor, psychologist, hypnotist or palm-reader. After all, people really are your business. Even outplacement firms are more concerned about cash than the employees they place at the end of the day!

For the rest of us, it needs to be about assets and the accumulation of assets. By doing so, every decision we make will ultimately be decided by answering two questions. 1) Is it legal? If the answer is "yes," continue onto question #2 which is: Is it profitable?

A "yes" answer here and all systems go!

A third question, "is it ethical?" needs to be answered, but I need to assume that all of you are acting ethically. Otherwise, I have surrounded myself with frauds and schemers, and I don't believe any of you are unethical.

Now, the asset portion of our discussion.

There are rules, of course.

1. Cash is king. This is self-explanatory. If you have cash, you have power. You have the ability to get into a price war with your competitor, so long as they have less cash than you do. You have the ability to pay for projects without borrowing (we'll discuss leverage in a later post.)

2. Inventory isn't cash. I have a friend that likes to show me all the "stuff" in his warehouse. Stuff in the warehouse equates to several things he doesn't understand. As his inventory sits there, it is taking up space and costing his company money. Lots of money. Additionally, if his inventory is perishable, the longer it sits, the cheaper it gets to his end customer. Valuing receivables can be a challenge. Turn inventory frequently. One of the ratios often overlooked is the "inventory turnover ratio." This is basically a number that tells you how often you sell out of your inventory on a yearly basis. The higher the figure, the better you're doing.



3. Receivables aren't a sure thing. While we might like to think that all of our customers are folks that like to pay on time, the reality is that some of them can't or won't. That creates headaches for us that often go beyond measurability. Sure, it's a tough call to make and say "Stan, I've known you forever and all, but I need paid." What we can't measure, however, is how much are you really losing by not having that money in your account for expansion, price wars, rising cost for fuel and production, etc? Remember, unless you are a bank, you ARE NOT A LENDER!

Many times you can arrive at this number by simply taking SALES/INVENTORY. Wow. That's hard math. A better method, however, might be to take your COST OF GOODS SOLD/AVERAGE INVENTORY. This second method is probably a better indicator, since Sales are recorded at MARKET PRICE, while COGS are recorded at COST. Additionally, using AVERAGE INVENTORY reduces the seasonality of your business.


4. Stocks/bond/securities aren't a sure thing. First, let me tell you that I am a big proponent of diversifying your personal portfolio so that all of your eggs aren't in one basket. However, business and personal are two different things.

I remember a case study I did on Intel back in 1999 and recall that over half of their income came from the sale of stocks and securities. This was INTEL, not Goldman Sachs or Lehman Bros. What in the heck was Intel doing buying and selling stock? Not surprisingly, they had a couple of rough years after that until they got back to focusing on their Core Competencies.

Remember, your company is in business to do "X." While I have no problem with a business that hedges risk through treasuries, derivatives or even businesses that have opposite business cycles, don't count on your investments to be easily liquidated in the future for the same value they hold today. There is a reason they are expected to have higher returns than that boring sweep account you have at the bank - they are riskier! As a result, they can, and will, rise and fall in value each day.

So how do we get to the cash?

First, do what you do best and rely upon your CFO/Banker/CPA when it comes to investments. Remember, you are not in the investment business.

Next, watch your inventory! Don't be proud of your warehouse facility unless you only have an empty warehouse that you are now leasing to your competitor since you've pushed back everything onto your vendors. For an example of his, just look at DELL. They are fairly successful, right? And they have no inventory.

Finally, and this is paramount, is if you must act as a bank to your customers, do so sparingly and cautiously! We will discuss payables in a later post, but the odds are good that you are more forgiving to your customers than you're suppliers are to you. Therefore, when you act as a credit facility, you are likely losing money.

I can't preach enough about this last point, folks. Too many great companies have gone down the tubes due to their inability to lend appropriately. Heck, even the big guys on Wall Street are having struggles right now, and they're supposed to be experts.

Receivables also create extra expenses in the form of a receivable clerk, mailing out billings, invoices, phone calls, collections, etc. Receivables can be a bad thing.

There are plenty of things to add to this, but I believe this is more than enough on a rainy Saturday. Can you tell that I had two glasses of iced-tea this morning at Suzie Q's?

Comments are always welcomed and appreciated, and please visit our sponsoring links provided at the top of this blog so that we can continue to move up Google's blog list!

Finance 101

The first question I ask students each semester is "who wants to be here?"

No hand ever goes up. The next, obvious, question is "who has to be here?"

All hands go up.

Such is the life of a Finance teacher and number junkie. My goal is to teach every person I come into contact with in an appropriate setting about numbers. There is no need to be afraid of numbers.

In fact, as business people, it is our job to EMBRACE numbers. This is the language of our business, folks! Regardless of what marketing people tell you, or your lawyers tell you, or your advertising department tells you, the bottom line for your business is, well, the bottom line!

Please understand something, though. Finance is NOT Accounting! Accounting is a tiny segment within Finance, kind of like being a quarterback is part of a football team or cheese is a part of pizza.

So why do we run from numbers?

The answer is simple - numbers paint an accurate picture. All the time. Everytime.

Reality is a hard thing to comprehend when we have plans for big things. Reality gets in the way of our dreams and desire to grow, grow, grow!

It's the same reason we don't write down our Mission Statement, Vision Statement, Business Plan or even a daily plan!

When we see it in writing, it becomes real to us. It reminds us that there are things left to do on our list - things we haven't accomplished yet, rather than things we have accomplished so far.

As business people, we don't like to be reminded of our failures, and finance does just that on a daily basis through our balance sheet.

Each week, I am going to discuss a different element of finance and why it is so important to simly learn the language of finance, whether you are the President of a billion dollar company or a sole proprietor doing part-time work to supplement your "real" job. Once you learn the language of business (finance) you will make smarter business decisions based upon increasing cashflow rather than simply focusing upon what is in the bank account each day. The difference between the two is like night and day, yet few business owners really "get it."

My job is to make you "get it," and I will utilize many means to get you there.

I urge you to write me with questions, comments or opinions, as I am a lifelong student of the game of business and finance. No topic is too small or too big, and I am also simply asking you to pass this site on to two people that you think could benefit from this site. I can also answer personal finance questions, although I am not a licensed financial advisor. (I am, however, in the process of trying to pass my series 6, 63 and 7 - but it's merely for my own skill set and not for profit right now.)

The blog will be updated weekly, most likely every Monday morning to get you started.

Thanks!