Tag: A/R

Using accounting to deceive

~ C.O.R.E. Beliefs ~ 1 Comment

I have received a few google alerts recently about companies that are being accused of using their accounting and financial statements to deceive readers.   It is sadly a far too common occurrence.  For readers of financial statements – like those who are owners in a homeowners or condominium association – knowing what to look for can help you determine if the information could be incorrect and maybe even fictitious.

First up on the balance sheet is cash.  While it is difficult to determine if the amount of cash is bogus there are things to look for, especially in associations.  If the financial statements show lots of cash but you are receiving messages from the board saying that they are worried about having to increase assessments – ask how that can possibly be.   There could be a logical explanation but every once in a while something is just flat our wrong.

Accounts receivable is one of the places where potential problems may really lurk.  Accounts receivable are sales that have not been collected – i.e. an IOU from the buyer.  For most businesses, one month’s sales in receivable would be expected, but watch out.  I once worked on an engagement for a hotel chain where the accounts receivable kept increasing and was approaching almost 10 days of revenue.  The a/r was used to hide the theft of cash sales and the controller didn’t catch it.  Ask yourself, if you owned a business like that, would you let someone promise to pay you later?

Inventory is another big area where accounting irregularities can show up.  Ask yourself, does the inventory seem excessive?  An easy way to tell is to divide the cost of goods sold by 12 and then compare that number to the amount reported as inventory.  Is it close to or less than 1:1?  That would mean that inventory is turning every 30 days.  If it is over 1.5:1, or more than 45 days, be careful.  Inventory goes obsolete quickly these days so lots of inventory may mean lots of write-offs coming soon.

Fixed assets, or property, plant and equipment can be gimmicked as well.  WorldCom tried to pull off this method of lying to their investors.  This is one of those areas that is harder to tell if something is wrong but the best thing to do is look at how fast the investment in fixed assets grow.  If sales have grown on average 3% over the last 5 years and fixed assets grew 12% this year, it may be worth questioning.  It is definitely worth looking at when fixed assets grows consistently at 12% year over year and sales isn’t going anywhere.  That is a sign of trouble.  We performed a review this past year where we required management to write down their asset value because we felt that the fixed assets were overstated.

Keep in mind that most entities that want to fool you will want you to focus on their profits – which means that revenues exceed expenses.  The easiest way to do that is to move expenses to the balance sheet; the receivables, the inventory, the fixed assets.  Look at expense trends and if you see an expense, like cost of goods sold, drop as a percentage, and then check if inventory went down that same percentage.  If it went up, it could be a sign something is wrong.

The vast majority of financial statement issuers are above board and honest.  To help keep them that way, remember to read the statement critically and be willing to ask questions, especially if you have a financial interest in the issuer.

Have a great day.

Taking Credit Card Payment

~ C.O.R.E. Beliefs ~ 1 Comment

Good morning.

It is still a little early and I am supposed to keep this is secret from Brendan, but today he is receiving the President’s Education Award.  And on top of that, this is officially his last week of the 5th grade and is moving onto middle school next school year.  I am extremely proud of Brendan for his accomplishments at school and at home as he is just a super-awesome young man to hang around with.  Congratulations Brendan, I love you!

I have updated this post for a picture of Brendan after receiving his award.  He also received recognition for his hard work in band and in their Pride Group.  You are awesome Brendan!

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Small Business and Selling on Terms

One of the more challenging choices a growing small business faces is how and when to sell on terms.  The fact is, the simplest way to run your business is on cash – that is, getting paid with cash or possibly a check when you do something or sell something.  Any other sale is on terms; this includes taking credit cards (as I will explain in a moment).

The closer you are to selling to the end-using person, Business-to-Consumer (B2c) sales, the closer you can get to collecting cash on delivery.  There are 2 key parts to a  cash-based B2C transaction – 1) relatively low unit price and 2) ability to take ownership of the goods/service at the time of sale.  If you are a Food Truck in a downtown area, I would encourage you to stick to a “Cash Only” policy.

“What about accepting credit cards?”, you ask.  “Isn’t that the same as cash?”

No, accepting credit cards is not the same as cash, no matter how much the credit card industry wants you to believe otherwise.  But it can be very beneficial to your small business to accept credit cards from customers.  Now, I am going to apologize because this might get a little confusing but bear with me.

When someone wants to buy from you but doesn’t have the right amount of money on-hand, they have to ask to pay for it later. (Think Whimpy from Popeye’s cartoons where – he will gladly pay you Tuesday for a hamburger today) You are taking them on faith that the payment will be coming when they promised.

From an accounting standpoint, you have created an Account Receivable (A/R) from Whimpy.  The sale of the burger happens today and you collect Tuesday (unfortunately you never seem to sell on a Tuesday so you can collect same day).  Now, the sooner you collect that A/R, the better your cash flow will be.  But what to do when you have other bills to pay and the money won’t be in for some period of time?

You Sell your Receivable

A few years ago, there was a very large industry which specialized in buying – or loaning against – A/R.  This is known as factoring.  These company’s would give you money for your A/R and then collect the face value from the Customer.  You would receive a little less than face value but you had cash today to pay your bills.

This is exactly how taking credit card payments works.  Let’s walk through the Whimpy hamburger sale.

Whimpy buys $50.00 worth of hamburgers a week.  He always pays on Tuesday for the hamburgers bought Wednesday to Sunday.  You still have other bills to pay, so you are wondering what you can do about this.

  • Does it make sense to deny Whimpy his $50.00 of hamburgers if he can’t pay for them daily?  That could be a good percentage of your weekly sales so that might not be a great idea.
  • If you could find someone willing to give you $45.00 every Friday who would then collect the $50.00 from Whimpy on Tuesday, would this help your cash flow?
  • Or, if Whimpy has a credit card, he can buy his $7.00 hamburger every day and we can pay the Credit Card Company $0.25 per transaction (hamburger) and they can worry about collecting from Whimpy on their terms.  Over the course of a week, your this $50.00 of sales costs you $1.75 so you actually net $48.25.  Would this be even more helpful to your cash flow?

For today’s small business selling B2C, selling on Credit Card terms can offer a substantial boost to revenues and profits.  The truth is, most people are not running around with lots of cash in their pockets so your ability to sell to them can be limited on a cash-only basis.  Accepting their ability to essentially “Pay you tomorrow for the hamburger today” may beat “Sorry I would buy from you but I don’t have any cash”.

Now, I am not suggesting that the fees charged by credit card companies are fair or reasonable, or even that they are not as it depends on what you want and need. I honestly believe though, your first consideration as a small business owner is what you can do to increase sales.  Offering a new term to current and potential customers might be an easy solution to get you access to new business.  But remember there is a cost.

Every credit card offered has different fees they charge a merchant and it can be confusing.  You will need to have a conversation with several different merchant services providers and even your bank.  It might also be helpful to bring your accounting professional into that conversation so you get an unbiased, independent evaluation of your credit card acceptance options.  If you do not have an accounting professional or would like a second opinion, contact us at Currie & McLain and we would be happy to have a free no obligation conversation with you about your business and if offering to accept credit cards (or other terms) is right for you.

Have a great Tuesday.