Cash Inflow & Outflow
I want to do one more example. So critically important rolling through this cash over three months. I'm just going to do this one last time in the course because I think it's so critically important. I'm gonna call it cash inflow outflow by month. Now, we've seen this, but I felt like yesterday. Thank you. I don't think I rushed it, but it was at the end of the day. And I know that people start fading at the end of the day. And I'm just gonna do this one more time because it's critically important. January, I'm gonna put sales costs of sales profit. Okay, one more time with feeling you have sales of $50,000. I'm going to assume that you have a 10% profit margin. Well, let me do it over here. That means 90% now. I'm going to profit differently. Each time I want to do that. I'm gonna leave it 10% profit every year. Let me just I want to make it easy. Easy. All right. That means 90% of your caught that 90% of what you collect its cost. Okay. 90% of 50 is 45,000. I have a profit of dollar...
s. Dollars dollars. Dollars. Okay, sales go up in February. 70,000. Oh, and I got to start doing some math. My profit is 10% of 70,000 or $7000. 90% of seven is 63. 63,000 cost. Uh oh. Where am I going to get the extra 18,018 k question Mark. Oh, one way is to make sure that my beginning balance in cash plus, what I collect from these sales is enough to cash flow. This my beginning balance in cash. Plus, what I collect for January is at least this number from cover my costs. If you're sick of this, I apologize. But it's too important. And I just have to do it one more time. March 10% of 90,000. This is 7000. For one thing. I'd love to make 70 but 7010% of 90,000 is tempers. That means that $81,000 is our cost again. Where do I get plus $18,000? $18,000. Even higher. So now my increase from January to March, I have to get 36,000 more dollars than when I started with in cash to support the growth in sales. Okay, please consider this as you grow a business, please consider this as you grow your business so critically important. Okay, worry. Um, Guava Project online in our chat room was asking, How do you track perishable inventory, say, cupcakes or something that will have for a certain amount of time but won't be good forever. So let's talk about that. You have inventory and it's perishable. I use catering as an example earlier. Let's say it's $10,000 worth of goods. We debit to increase on acid account, hold inventory, but it's got a shelf life that short grocery stores, Same issue. Uh, let me talk about an accounting jargon, and then I'll specifically answer the question. What happens when it's spoiled? Obsolete? Hopefully, you time it. So that doesn't happen. If it is obsolete and or spoiled. In this case, let's say $1000 spoiled that $1000 is gonna become an expense. You're gonna you're gonna treat it as an expense, just as if you sold it. So what happened specifically is your cost of sales number, which is an expense E x p for expense is gonna go up. So what we're gonna do is we're going to reduce by crediting our inventory 1000 for this number. That's a one, by the way, and it becomes an expense. We debit to increasing expense. That's how the accounting works. My point being. If you have limited shelf life goods and you don't get him out the door before they before they spoil, it's an expense. So in your planning, you could do a couple of things. First of all, we've already heard that we've already heard this awful all day long about minimizing your inventory period. So how does somebody in the business words where there are cater and their cupcakes? How do we minimize inventory? As Jackie O's pointed out today, we only in the auto business. They called it just in time inventory, where we on Lee have a product. When we have an order for it. We have no inventory, so limit the amount of product you making advances what I'm saying, or maybe none at all. You're minimize your inventory by limiting limiting the amount of product that you make in advance. Um, another client of a friend of mine supplies thousands of goods, literally thousands of goods to the two biggest grocery store change in ST Louis. That business will pull your hair out because they're not only do they have to go out to 1000 vendors get their products and then get him to the grocery store, But they have to deal with the spoilage issue. Yes. Is there a functionality within QuickBooks that you can monitor trends over the years like so you can see in February at around the 14th? I sell twice as many cupcakes is I do normally and you can kind of forecast for years if you and this is a reason why you should even if you're doing it manually, where it would be great if you got on QuickBooks as soon as you did, you could so that that history is in there so you can run reports like that when we go in. Later today, we're going to see we will go into the next segment. Um, there is a budgeting field that I think you and I saw yesterday, but there's also there's also a place you could click that says trends, and that's where you find it. Okay, so that's how we deal with obsolescence, the one I always use in. What if it's not a perishable good, So the one I always used for obsolescence is and the supplies as you grow your business. Bankers lend money on assets. It's called asset based lending. They're gonna lend you money using your assets as collateral. Bankers sometimes lend money based on your inventory. That's your collateral for a loan. Okay called Asset Base Living. Take out a mortgage your house as collateral for your home loan. Take out an asset based loan. Your inventory might be collateral for the loan. Now here's the here's Here's the catch and here's how it relates to obsolescence. Your friendly neighborhood banker who, by the way, when he gets up in the morning, you what bankers do before they get out of bed. They look at all four corners of the bed and they make sure it's OK to get out of bed. They're very cautious, looked all four court. Is it all right? And then they get out of bed. Did you know that? Ask a banker. All bankers do that they're cautious. After all, they're not letting their money. So your banker is going to probably come out and want to do What if this is collateral? Was he gonna want to do? See if you really have the inventory, which means he's gonna count it. Now let's say that you again, I don't go to stores other than when I had to go to Macy's on Tuesday. Let's say they go in and they're gonna count Macy's inventory because Macy has alone with a bank and the men's furnishing department. Inventory is the security for the loan. It's the collateral, and they go in there and they know my examples getting past, say, but I will use it any way they up. They noticed that in the men's store inventory that they have ah, Bell bottom Rhinestone jeans, and they also still mood rings. If people are buying bell bottom Rhinestone jeans and mood rings, that inventory might be considered to be obsolete, obsolete, not sellable. And if it's not sellable, it's not an asset obsolete, not sellable, not an asset. And if that's the case you've got expensive. Is the cost of sales, not an asset. If you can't sell it to make money. Pet rocks. They might ask you to write off the pet rock inventory because people don't want pet rocks really showing my age. Okay, does that make sense on the inventory? Literally. You may discard it, or you may be able to find a vendor who will take it. And maybe I can make it into something else, disassemble it, make it into something else. So if it's denim and you've got the bell bottom jeans, you may have ah, manufacturer who's willing to take it and use the denim to make something else. And maybe it's so expensive to do that. You wouldn't do it yourself, but they could make money doing it. There was a situation. Who was it? This is a good example of this Martha Stewart clothing line. Okay, J. C. Penney, I believe, bought up Aton of Martha Stewart clothing in inventory to promote, and they were going to do a huge marketing promotion and sell a bunch of Martha Stewart living close. The problem is, they didn't legally have the trademark to do it. Another store did. I think it was J. C. Penney. I can't remember exactly So what happens? JC Penney? The department store has bought all this inventory that they could no longer that they can't legally sell. I read the headline twice, and I'm like, That can't be There was a trademark dispute over who could sell it. And the judge decided, J. C. Penney. You can't sell tens of millions of dollars in merchandise. They're stuck with it. What do they do with it? Well, about all they could do was sell it to the people that had the trademark. Who could sell JC Penney's Martha Stewart close? What do you think? They were willing to pay for it Not very much as little as they could, because it was either sell it to the people who had the right to sell it or throw it away. Crazy is in the Wall Street Journal within the last 6 to 9 months. Crazy. They didn't have the right to sell it. What else? How would that look on the tea accounts? If Okay, you find a buyer for it, but you've already expensed it. You would undo this and you would put it back an inventory, okay, and then you would take it out of inventory and it would become a true cost of sales. I would undo it that you'd have to You have to put it back in and say, OK, it is inventory because I do have a buyer and then moving to Costa sales other things on that. Okay, questions come in in the chat room one in terms of tracking estimates. But they were kind of asking how to do that via QuickBooks. Or if that's something you even should dio. You can put a budget into QuickBooks certainly, and I'll try to remember. I know the Jackie O wants to see it. You can certainly create a budget in QuickBooks, and we're gonna talk. I think I'm gonna talk. I should be talking now about budgeting versus actual results. This bleeds over a little bit to the other segments, but this budgeting process, because you need to see it here before you see it in QuickBooks. So I'm all for budgeting. There's a term called variance, and it's defined for accounting as the difference between your budgeted results. Your budget less your actual results budget less your actual results. Now that's the definition. So I would recommend QuickBooks somewhere that you create a budget. When I just went through the cash flow and I did a couple of different examples of that, that was budgeting. What if What if do that? What if analysis? Okay, the reason why here we do variance is to find and fix problems in your business, find and fix problems in your business. I'm gonna hit upon a couple just to get your mind kind of thinking about that. I'm actually not going to set up one, but I'm gonna talk about some specifics and the fallout from the decision that you make about the variance labour say your labor costs are higher than you budgeted. Well, there's some very there. Some things to consider here. Maybe it was higher. Maybe you had to pay a higher rate hourly rate because of the demand for the people that you hired. So if you're making film, Christine's got to go on the road and hire a new assistant producer. And her labor costs are higher than she thinks, because the market to get somebody that she needs is higher than she thought. So she budgeted a lower number for the assistant than she actually paid. She actually has to pay more. Okay, another one less obvious. Maybe the person was poorly trained. Or maybe the person lacks experience, and it takes them longer to do what she asked him to do. I got to come back from Creativelive. I think I finally figured it out. Got to come back. I finally figured out how to do it right. If people are poorly training, you think it's going to take him three hours and it actually takes five hours. Your budget for that expense is gonna be less than how much you actually spend. Another example. Friend of mine does H V A C contract he puts in heating and cooling and buildings were heavily unionized. City in ST Louis in Missouri generally were like more like an East Coast city in that regard, and he works with union pipefitters. 80% of his costs, sometimes 90% is labor cost. To hire these pipefitters, the maker break on the job. Whether he earns a profit of 5% or loses 5% is how efficiently the guys work on the job. So it's critically important to him. Toe. Always hire the same guys you know what they're doing. Because if you get a bad Apple whose poorly trained or you know doesn't work quickly or efficiently, doesn't ask questions, he's gonna have a higher labor costs than he budgeted, and he's gonna lose money. Guys been doing this business for 25 years. Tough business. Now there is a risk ivory sleep because Christine hires on assistant production person and decides that they're too expensive and goes out and hire someone else for a couple reasons. Number one. Maybe you, Christine or anybody else out there, you are gonna have to retrain somebody new. That's an investment of your time. Is that person going to be as good as the other person you had? There's There's a quality question here. There's a quality question, so critical quality is the quality Gonna be is good. So for people here, because most of you who are creatives this is a people driven. This is an expertise, people driven industry. You got to carefully consider people. What about material materials? A little easier to understand. I think material costs and I could pick on Christine again, and I can say that she's considering a new camera and she's budgeted 500. She's budgeted $2000 for it. The camera that really that will get the best results is 2500 but she decides to buy the slightly lower in camera cause it fits your budget and the question is quality. Will it do what it really needs to do? So we stayed within our budget. But are we hurting ourselves from a quality standpoint? Because the good it just doesn't do what we thought it would do? That could be film equipment, a website at a Web application. I know we had a question. I think it was on the first day about Is there open source accounting software? And I said I wasn't really sure. Well, the question there is, I'm not knocking it, but compare how much you're willing to pay for a piece of software with what it could do. Is it supported? You know, Will it go down? Is it easy to understand those kinds of considerations? Is a lot of you in the creative world are looking at technology tools? I asked for all my really for my son, what equipment they used to edit here, and they said it was Adobe premiere, which he is used in that they used to use There was another one that they used to use that Steve told me, I don't remember, but that's a quality consideration. You don't want to go cheap on the on the software where you edit and have your editing take longer than you think, which is a bigger, more labor cost and look bad on the web. So you better go, you know, get what you need, even if the actual cost is more than you budgeted. So I would suggest that you budget. Certainly. I would suggest that you look at the budget in the actual results because that is a red flag to find a problem and try to fix it. But if you do fix it by going with something that's cheaper, I'm suggesting that there are some quality issues there. Okay, One last thing on budgeting these air budgeting costs. You're also gonna budget sales. And this is so closely tied again with something that is not a budget issue, which is cash collection, cash collection. Uh huh. You budget $500,000 in sales. You actually sell 600,000. That's great, but again, the other than the other consideration. Oh, you sold more, you thought. Then he budgeted. That's great. But the other consideration is again because it's so critical. Are you collecting money at the same rate that you were when your sales were lower? And if you're not collecting us fast, you're going to need more money. Any questions? I'm just thinking about how much of this actual exercise should you do with your actual clients? Because a lot of what to budget has to do what their budget is and what their expectations around the result will be. And I can think of like for even for video production. If you think of somebody may say they have a budget of, let's say, 10 grand and they want X, Y and Z, which, you know in your mind is not possible with 10 gram, that's gonna be a $30,000 budget, and they can. There's different things they can manipulate on there, but if we have ah, lower lower labor costs, right, the person may not be as good, and it may, in the end, cost them more abs. You just completely nailed something that I should have covered long ago, which is in creative fields. Your clients are gonna have their budget, so there's two issues. The first issue is your client has a budget, and I know accountants and, boy, we love budgets. So there is a problem that you either need to come within their budget. And if that's not realistic, you need to explain to them in order for you get you to get the results you really want. You need to increase either increase your budget or I can't meet your needs. And this is true for everybody out there watching this because you guys air creatives and it's difficult for you to communicate the value off what you do. And this is why you No, I'm begging my son to finish his personal website, which many of you have, because that's your way to communicate where you can say you see this. If you want this video film project, it's going to cost you this, and it's more than your budget. But if you'll pay mawr, you'll get this. That's critically important