True Wealth

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The Parable of the Rich Fool, Rembrandt, 1627.

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Money is a powerful force. We work for it, save it, spend it, use it to satisfy our earthly longings and then wish we had more. I believe Jesus was aware of its distracting danger as He taught more about money than any other topic. As far as I know, He never took an offering for Himself. I think it’s clear that He didn’t teach about giving to fill His own pockets. Instead, Jesus warned us that trusting in wealth and using it to gain power clogs our spiritual arteries more readily than most other impediments to spiritual development. In telling the story of the “rich fool” (Luke 12:13-21), He shamed His listeners for not being rich toward God, indicating that God has a far different definition of wealth than most of us.

 

So what does it mean to be rich towards God? Paul tells us that those who are rich should not be conceited about their wealth, “nor to trust in uncertain riches” (1 Tim. 6:17). Rather, we are to “be rich in good works, ready to give, willing to share” (v. 18).

 

I think that’s interesting! God measures wealth by the quality of our lives and our generous disbursement of wealth to bless others. That’s not exactly Wall Street insider talk, but great advice for those of us who think that our security and reputation are tied up in the size of our bank account.

 

Are you using your business to build “true wealth”? Is your business “rich in good works, ready to give and willing to share”? Focusing your business on building true wealth is an essential part of business prosperity. If you would like to learn more about how you can transform you business using the Bible as your guide, email me at info@commonsensecfo.com.

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Recipe for Success

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Joshua commanding the sun to stand still

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Following a recipe in the kitchen usually leads to success. Using the right combination of ingredients, the correct measurements, the exact temperature and cooking time results in a delicious meal that everyone will enjoy. But consider for a moment what that meal would be like if you didn’t follow those instructions. I don’t know about you but the best way for me to make a delicious, successful meal is to follow the recipe that I’ve obtained from someone else. Someone who has tried it and succeeded. Someone who is more of an authority than I am. Those times when I’ve tried to do things on my own, I’ve created a mess.

 

Joshua 1:8 says. “Study this Book of Instruction continually. Meditate on it day and night so you will be sure to obey everything written in it. Only then will you prosper and succeed in all you do.” (NLT) Without God’s instructions, Joshua would have failed at leading the Israelites into the Promised Land. The first step was to “be strong and courageous” (Joshua 1:6). Next, he was to continually study God’s Word. Finally, he was to do everything that it said. As long as Joshua followed the directions, God promised him “prosperity and success”.

 

God’s recipe for success can work for us in business too. His idea of success has little to do with money or popularity. In the original Hebrew, “then will you prosper and succeed in all you do” means “then you will act wisely.” Just as God called Joshua to walk in wisdom, He wants us to “be careful how we live, not like fools, but like those who are wise.” (Eph. 5:15)

 

Acting wisely, making wise business decisions, will produce peace and comfort for you, your family, and your team members and is essential for business prosperity. If you would like to learn more about how you can transform your business using the Bible as your guide, email me at info@commonsensecfo.com.

 

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10 Reasons to Avoid Debt, Part 2

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Credit cards

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Austin Pryor, in his book Sound Mind Investing, lists ten reasons to avoid debt. Though the list is directed towards individuals, I believe it is also very appropriate for businesses. Here are the last five:

  1. Debt evades the necessity of distinguishing wants and desires from real “needs”. Try making an “I Want” list. The “I Want” list has two rules. First, not more than five items are allowed on the list at one time. Second, you have to wait thirty days after the item is entered on the list before it can be purchased. You will be amazed how many “wants” and “desires” fade over the thirty days and the amount of impulse buying that is eliminated. This simple idea may help to transform you (your business) from a chronic impulse buyer into a much better steward of His assets.
  2. Debt encourages impulse buying and overspending. The Chief Financial Officer of a national credit card company said that consumers will spend 27% more on plastic than they would with cash or check. Any merchant who accepts plastic will verify that consumers will spend 25% to 30% more with plastic. That is why businesses pay a fee of 1% to 7% of every purchase you make on plastic for the privilege of accepting your credit cards. For your business, consider the potential effects of entertainment and travel costs.
  3. Debt and credit cards stifle creativity and resourcefulness. If we want something today, we charge it rather than “make do” with what we have. We feel entitled to what we want, when we want it, so we automatically head to the mall, never considering a simpler, less expensive choice: “doing without”. It is not fashionable today to resole our shoes, repair our cars, or mend whatever wears out; we simply replace them. For your business, consider the potential impact of maintaining the equipment you already have (without sacrificing safety) or using what you currently have in a new way to accomplish the task instead of buying something new.
  4. Debt and credit cards eliminate margin in our lives (our businesses). Plastic becomes our margin. Rather than planning what we need and allowing a margin for errors or overruns, we “charge” ahead and spend, thinking that if we must write a check that we don’t have sufficient funds to cover, we have overdraft protection with our credit line. Your credit card (or line of credit) is not an asset but a potential future liability which becomes a liability when you use it.
  5. Debt teaches your children bad habits. Your children will have a casual regard for using credit cards, obtaining car loans, and applying for student loans.

Review the first five items from yesterday as you consider these. Consider the negative (or potential negative) effects debt may or does have on your business. I encourage you to develop a solid business plan to eliminate your current debt and to prepare to operate without borrowing in the future.

Avoiding debt is essential for business prosperity. If you would like to discuss more about avoiding business debt or how you can transform your business using the Bible as your guide, email me at info@commonsensecfo.com.

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10 Reasons to Avoid Debt, Part 1

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Loan payment schedule of a 1-year, fixed-size ...

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Austin Pryor, in his book Sound Mind Investing, lists ten reasons to avoid debt. Though the list is directed towards individuals, I believe it is also very appropriate for businesses. Here are the first five:

  1. Debt presumes on the future. Scripture clearly says, “Do not boast about tomorrow, for you do not know what a day may bring forth” (Proverbs 27:1 NASB). When you commit yourself to payments over time, you are presuming: no pay reductions (i.e. no loss of customers/clients), no loss of job (i.e. you’ll be able to keep your doors open), and no unexpected expenses. That is a dangerous and improbable assumption.
  2. Debt lowers your standard of living in the future. Money that you borrow today must be repaid over time along with the cost of renting the money (interest). From a business perspective, think of it as an increase in opportunity cost – what opportunities does your business lose out on because of the repayment and interest?
  3. Debt avoids life-style decisions. It allows you to make the decision of whether you can afford to buy an item by focusing on the low payment rather than on the cost of the item. The question of whether you can afford it should include all the cost: purchase price, operational expenses, and finance charges. Credit is dangerous because it is too easy to say yes to low payments over time and ignore the real decision – can I (my business) afford it, and do I (does my business) need it?
  4. Debt places the awesome power of compound interest at work against you. Here is an example for credit card debt. If you borrow $100 on your credit card and make only minimum payments, it will take up to 30 years to repay the loan. Items charged on your MasterCard (or items purchased for your business via term debt) can cost you double, triple (or more) the purchase price!
  5. Debt may delay God’s plan for your life (for your business). Or it might cause you to forfeit a blessing God had planned to give. Before you obligate yourself (or your business) to payments, give God a chance to provide your needs.

I’ll post the next five tomorrow.

Avoiding debt is essential for business prosperity. If you would like to discuss more about avoiding business debt or how you can transform your business using the Bible as your guide, email me at info@commonsensecfo.com.

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Operations Manual

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Sample mission statement

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Business trips, vacations, illness or injury, family issues. There are many reasons you might be absent from your business. Whatever the reason, having an operations manual will provide vital information and step-by-step guidance so business can continue without interruption. If you don’t have one, you should.

Begin your operations manual with your mission statement or a brief description of your goals and values. List the products and services you offer. Depending on how large your company is, you may want to create an organizational chart with titles, job descriptions, and employee names. Include complete contact information for key employees, vendors, clients, insurance companies, security, and IT support staff.

To be effective, your operations manual should have step-by-step documentation (best practices) for all business procedures, from unlocking the doors in the morning, to running reports, processing checks, recording sales, and turning the lights off at night. Spell out important policies, especially those applying to such matters as discounts, returns, refunds, and the like.

Once your manual is written, all the details pertinent to running your business will be in one place. Make cross-training your employees a priority. Plan to review and update your manual regularly. Not only will you be able to be absent from your business, it will also help your business run more smoothly and improve profitability.

Maintaining a complete and current operations manual is essential for business prosperity. If you would like to learn more about preparing and maintaining an operations manual, or if want to learn how a part-time, virtual CFO can help transform your business using the Bible as our guide, email me at info@commonsensecfo.com or call Kirk at 402-658-7340.

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Buying Risk

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Polish Warszawa pickup truck at Muzeum Inżynie...

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I recently read a post on the Frugal Dad blog entitled, “Borrowing Money is the Same as Buying Risk”. Though the blog is all about the journey of getting out of personal debt and living on less than you make, I believe the topic is just as true for business.

In his post, the Frugal Dad discusses choices for purchasing a used pickup truck that will cost $18,000. He can finance the purchase through his local credit union at 2.99%, draw the cash out of his emergency fund savings, or purchase a new pickup for $25,000 at 0.00% interest. He elaborates on each of those choices listing the pros and cons of each option. He goes on to say that what is missing from the mathematical calculations is risk. Borrowing money always involves risk (even at 0.00% interest)! Drawing down from emergency savings also involves risk. As he states in his post, “What if I got sick and had to live on long-term disability?”

Jesus spoke similarly in Luke 12:16-21 regarding the rich man who tore down his barns and built bigger ones to store all his grain. In verse 20, God said to him, ‘You fool! This very night your soul is required of you; and now who will own what you have prepared?’. (NASB) Though this parable is often associated with Jesus’ teaching about greed, it also presents the point that we do not know what tomorrow will bring. If the rich man (business man) was borrowing to fund the building of his bigger barns (warehouse, office building, delivery vehicle, copier machine, etc.), and his soul were required of him before it was paid for, who will own what he has prepared?

Drawing the cash out of your emergency fund to make the purchase may drop the level of cash reserve to an uncomfortable level, thus increasing the risk of not being able to weather a slow period or crisis. If you’ve ever stayed awake at night wondering how you’re going to pay your bills, that’s stress you just don’t want to go through again.

So what’s the best option? The Frugal Dad gets it right – Do Nothing! Wait. Save up cash above and beyond your minimum cash reserves and pay cash for your purchase. If you need a new truck or piece of equipment because your current one is beyond repair, find a used one (that will get you by) for a lot lower price, pay cash, and move up later. It’s best to keep saving until you have enough to pay cash without touching your necessary cash reserves. You’ll also be able to get a better deal.

Even if you don’t have savings and a situation arises, consider all options and the potential risk involved. Check out short-term leasing options, auctions, or bartering to name a few. Just as increasing risk is not good for your personal finances, it is also harmful for your business.

Decreasing risk by eliminating interest charges is essential for business prosperity. If you would like to know more about reducing risk in your business, or if you want to learn how a part-time, virtual CFO can help transform your business by using the Bible as our guide, email me at info@commonsensecfo.com or call Kirk at 402-658-7340.

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Business Success in Today’s Economy

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United States gross federal debt as percentage...

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Today’s economic environment is certainly not a favorable one. Many believe that we have some potentially catastrophic financial problems facing us. Consider what an increase in interest rates of a few percentage points would do.

The federal government is the catalyst behind most of our current debt. The U.S. Government currently owes in excess of $13 trillion (and growing by the minute). Most Americans today work until mid-May (adjusted for the Federal Budget Deficit) each year just to pay their taxes. In spite of taking in more than $2 trillion a year in tax receipts, the government is currently borrowing another $1+ trillion!

God’s Word is never wrong. The Lord gave His people two principles nearly 3,000 years ago. He promised that if the people who were called by His name would obey His statutes and commandments, “Then all the nations of the world will see that you are a people claimed by the LORD, and they will stand in awe of you. The LORD will give you prosperity in the land he swore to your ancestors to give you, blessing you with many children, numerous livestock, and abundant crops. The LORD will send rain at the proper time from his rich treasury in the heavens and will bless all the work you do. You will lend to many nations, but you will never need to borrow from them.” Deuteronomy 28:10-12 (NLT)

He also warned that if His statutes and commandments were ignored, the foreigner would become the lender and they would become debtors. That is exactly where our nation is today! More than $4 trillion of our total debt is now held by foreign lenders (in excess of 30% of our total debt).

The cycle can be reversed, but only if God’s people will turn to His way and be willing to be counted in His camp – without compromise. Each of us at every level must be willing to live by the statutes and commandments of our Lord to make a difference. The bottom line is not “Are we able to make a difference?” It is “Are we willing to make a difference?”

Committing to, and following God’s statutes and commandments without compromise is essential for business prosperity. If you would like to know more about using God’s Word as your business manual, email me at info@commonsensecfo.com or call Kirk at 402-658-7340.

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Managing the Cash Gap

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Understanding the factors that affect your Cash Gap will help you reduce your risk and improve your profitability. In my previous post, I presented a scenario where the Cash Gap was 56 days. With average daily sales of $10,000 and an assumed 30% margin on sales, the business must cover $392,000 [56 days x $10,000 x (1-.30)]. Typically, this is done with bank financing. Ideally, you would have a cash reserve sufficient enough to not require bank financing. But assuming you’re not there yet and financing is necessary, at a 10% interest rate (for ease of illustration), the interest on the financing would amount to $39,200.

If you increase your inventory turnover to 18 times per year instead of only 6, your days in inventory would drop from 61 to 20, and your Cash Gap would decrease from 56 days to 15. Again, assuming financing at 10% is necessary, and a 30% margin on sales, your business now must cover $105,000 [15 days x $10,000 x (1-.30)]. This results in interest of only $10,500, a savings (increased profits!) of $28,700. This is also a much easier scenario to manage with your cash reserve.

The key to managing your Cash Gap, then, is to reduce your Receivables Period and Days in Inventory and/or increase your Payables Period. In other words, get cash out of inventory quickly all-the-while avoiding payment to suppliers as long as possible. Here are some ways you can do just that:

Receivables Period

  • Provide incentives for customer prepayment or early payment (discounts)
  • Provide incentives for customers to pay for their purchases using a credit card (be careful here, though, as you don’t want to cause your customer to use credit cards when they can’t afford it)
  • Send out invoices as soon as a sale is complete
  • Use a lockbox account, in which customers mail payment checks directly to a PO box set up by your bank (this is also an excellent internal control)
  • Institute stricter collection procedures

Days in Inventory

  • Move towards a “just-in-time” inventory system (producing inventory to fulfill orders rather than accumulating stock)
  • Negotiate a better price for your inventory and materials – without sacrificing quality
  • Concentrate purchasing efforts on fast moving inventory

Payables Period

  • Negotiate longer payment terms with your vendors

Understanding and managing your Cash Gap is essential for business prosperity. In cases where sales grow rapidly and the cash gap is large, a company can quickly run out of cash. If you would like assistance in analyzing your company’s Cash Gap, or if you would like to learn how a part-time, virtual CFO can help transform your business using the Bible as our guide, email me at info@commonsensecfo.com or call Kirk at 402-658-7340.

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Cash Gap

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The Bank of England in Threadneedle Street, Lo...
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Do you know your business’ Cash Gap? If you do, I applaud you. It is my experience you would be the exception. If you don’t, I encourage you to read on and begin to implement this important metric.

The Cash Gap refers to the time interval between the date when a company pays cash out for the inventory it purchases and the date it receives cash from customers for the same inventory. It involves three different financial measurements: the Receivables Period, the Days in Inventory, and the Payables Period. The formula is as follows: Receivables Period + Days in Inventory – Payables Period = Cash Gap (in days). The longer the time interval, the greater the likelihood it must be financed – which adds business risk and reduces profitability via interest expense.

The Receivables Period

The Receivables Period represents the average number of days it takes to collect invoices from your customers. This is typically calculated as Accounts Receivable divided by Average Daily Sales (annual sales divided by 365 or monthly sales divided by 30). For example, if your accounts receivable balance is $200,000 at the end of the year and your sales for the year amount to $3,650,000, your Receivables Period is 20 days [$200,000/($3,650,000/365) or $200,000/$10,000].

Days in Inventory

The Days in Inventory represents the average number of days worth of sales are in the inventory your currently have on hand. This is typically calculated as 365 days (or 30 days if that is your measurement period) divided by inventory turnover. Inventory turnover is typically calculated as cost of sales divided by average inventory. For example, if your cost of sales for the year amount to $2,400,000 and your average inventory (beginning inventory plus ending inventory divided by 2) is $400,000, your inventory turnover is 6 times. Your Days in Inventory would be 61 [365 days divided by 6 (inventory turnover)].

The Payables Period

The Payables Period represents the average number of days it takes to pay your vendors for your inventory. This is typically calculated as Accounts Payable divided by Average Daily Purchases (annual purchases divided by 365 or monthly purchases divided by 30). For example, if your accounts payable balance is $125,000 at the end of the year and your purchases for the year amount to $1,825,000, your Payables Period is 25 days [$125,000/($1,825,000/365) or $125,000/$5,000)].

Given the circumstances of this example, your Cash Gap would be calculated at 56 days (Receivables Period of 20 days plus Days in Inventory of 61 days minus Payables Period of 25 days). In other words, you are paying for the inventory 25 days after receiving the invoice but not collecting the receivable until 56 days later. Next, I’ll discuss ways to improve your Cash Gap, reduce your risk, and improve your profitability.

Knowing and understanding your Cash Gap is a great way to reduce your risk and improve your profitability. If you would like assistance in analyzing your company’s Cash Gap, or if you would like to learn how a part-time, virtual CFO can help transform your business using the Bible as our guide, email me at info@commonsensecfo.com or call Kirk at 402-658-7340.

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Gap Analysis

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A Gap Analysis is a visual examination of the current state of your business compared to your desired state. It starts with an honest assessment of where you are today. It also helps capture a clear vision of your business’ future. (1)

Here are 9 Practical Steps for preparing a Gap Analysis:

  1. Describe, in writing, the problem, issue, or area that you want to make progress on.
  2. Describe, in writing, the benefits or reasons that you need to solve this problem and why you need to create an action plan for getting there.
  3. Focus on a particular aspect or element of your desired state. The best way to eat an elephant is one small bite at a time.
  4. Define your deadline for achieving your desired end state. This is actually the point in time you expect to arrive at your destination.
  5. Describe your current state of affairs as it relates to the end state or dream. Be sure that there is a balance of both your assets or positives and the areas that you are deficient. Keep your focus of today’s status or reality on those things that contribute or detract from your desired end state. Work to remain honest and grounded.
  6. Describe what your destination will look like. Ask yourself:  a)  What will you have?  b) What will it look like?  c) How will it feel?  d) How will you know when you have arrived?
  7. In as detailed a manner as possible, identify specific actions or steps that must take place so you can go from “today” to “tomorrow”. Often, the bridges between the two will pop out clearly.
  8. Use the information you’ve listed as your missing links to create a specific formalized action plan. Set a priority to each of the major action steps, often asking the question, “What has to happen before you take this step?
  9. Review and update your Gap Analysis on a regular basis. Use it to check your progress and see if there are other items in the missing links that were overlooked.

Performing a Gap Analysis is a great way to move your company to the next level. If you would like assistance in preparing a Gap Analysis for your company, or if you would like to learn how a part-time, virtual CFO can help transform your business using the Bible as our guide, email me at info@commonsensecfo.com or call Kirk at 402-658-7340.

(1) Where there is no vision, the people perish: but he that keepeth the law, happy is he. Proverbs 29:18 (KJV)

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