Like a character in a drama, yet another alphabet soup personality appears and takes center stage.

Oh, EBITDA, where for art thou? In other words, who the heck are you and why should I tune in?

All kidding aside, if you want to provide a really clear picture of your company’s financial health, you need to not only know what EBITDA is, you should understand how to calculate it.  The acronym stands for earnings before interest, taxes, depreciation and amortization.  It is a great tool to help understand a company’s ability to generate cash flow and judge overall company operating performance.

Whew!

So how do I calculate it? All of the elements are found in a company’s operating statement within their annual SEC Form 10K. Those elements are:

• Earnings (net income or net loss)
• Interest expense
• Income tax expense
• Depreciation and amortization

The basic calculation is done by adding up all the expenses, subtracting all of the line items that are income (such as interest income).  This number is then added to the net income.  The result is the basic earnings of the company, unencumbered by the expenses.

What’s it mean?

It is an evaluation tool that allows comparisons between companies and tells a story of how profitable a company is (or isn’t).

If you would like to learn more about EBITDA, give us a call or write to us. TFO Solutions is dedicated to helping entrepreneurs and business owners with their finances from the back office to the boardroom.

Like a river flows on, so should your company’s cash.  While there are multiple ideas on the source of the term, the fact remains it all has to do with money (payments) coming into and out of your enterprise.

It is the net amount of cash an enterprise receives and disperses during a given period of time.

So, why should I care about cash flow? It really is the picture of how well a company manages its cash.  That is, paying its debt as well as funding operations. A cash flow statement is a complement to the balance sheet and the income statement.

In other words, cash flow is a component of the self portrait of your company’s financial health. Cash flow is about value and liquidity.

If you need or want to tell a clear picture of your company and its financial health, you need to know its cash flow.

The cash in cash flow comes from three activities:

• Operating
• Investing
• Financing

Operating cash is that which is spent on the day-to-day operation of the company.   It comes from sales of the company’s goods and services.  It also reflects where that cash is going for things like rent, salaries, supplier expenses and taxes.

Cash from investment activities includes the sale or purchase of a fixed asset, loans paid to others or payments made into investment vehicles.

Financing activities cash includes that from banks and investors as well as payments made to investors.

The bottom line on cash flow is just that: the bottom line.  It is a valuable measure of the strength, profitability and long-term future of the company.

Understanding cash flow is key to understanding and plotting out a strategy for your company.

For more on cash flow, call or write to us.  TFO Solutions is dedicated to helping entrepreneurs and business owners with their finances from the back office to the boardroom.

Yes, you do.  If you are running your business on the fly without a plan and just spending what comes in, you aren’t do yourself any favors.

Would you build a house without knowing what you could afford to buy and then keep? No, I’m sure you wouldn’t.

Having a budget for your business is as simple as wanting to know your revenue and cash flow.  But there’s more– having a budget will help you in a number of areas, including:

• Improving your enterprise’s efficiency.
• Identifying funds for reinvestment.
• Predicting slow periods.
• Estimating profitability.
• Giving a view into the future.
• Helping you maintain control.

Like we’ve discussed in earlier posts, the more you know about the day-to-day operation of your company and being able to take its pulse at any given moment, the better chance you will have to grow and thrive.

Where should you start in creating a budget?  Consider these items as you begin to formulate your initial and on-going budget:

• Examine your revenue. Knowing your income will help you understand the strengths of your company.
• Subtract fixed costs. Rent, cost of goods sold, debt repayment, payroll depreciation, taxes and insurance to start.
• Determine variable expenses like your salary, utilities, marketing, equipment upgrades.
• Create a contingency fund. This will help you with emergencies.
• Create a profit and loss statement or a balance sheet.
• Outline a budget that looks ahead.

With these elements in hand you can start down the road of producing and managing a budget.  Don’t be a stranger to your company’s operating profile.

For more on how to develop and implement an overall financial strategy, call or write to us.  TFO Solutions is dedicated to helping entrepreneurs and business owners with their finances from the back office to the boardroom.

The TFO Team

We’ve all seen the TV show Shark Tank and watched avidly as Mark, Daymond, Barbara, Robert, Lori and Mr. Wonderful smiled and politely (most of the time) grilled the presenters.

But do you know my favorite part of the program? When the Sharks ask the critical questions about the profitability and financial health of the company.

Could you succinctly answer these questions if asked by a banker, potential buyer or a partner?

• What are your year-over-year sales?
• What’s your average profit margin?
• How much inventory do you have?
• What are your costs?
• Do you have any debt? How much?
• Why do you need our money?

If you don’t have a handle on sales, you can’t possibly put a value to your company.  Simply put: know what cash is coming in the door.

Profit is what’s left after paying the bills.  Don’t have any? You have a problem.

We’ve railed on about inventory in this space before.  It has a direct impact on your bottom line.

Cost of goods sold is integral to any discussion about cash, inventory and the present health of the company.  Costs will help you answer the profit question.

What you owe and to whom will tell any interested party the character and condition of your company. Debt can reveal a lot.  And you should have a plan on how to mitigate it.

Being able to justify why you need an inventor’s money really can help you shape your answers to the first five questions above.  And your balance sheet will really help tell that story.

At the end of the day, to know these details about your company really isn’t hard and, with proper help and guidance, can help you maintain your company’s health and even grow the company substantially.

Call us if you are interested in finding that help and guidance.

(photos courtesy of Upsplash and ABC-TV)

We’ve all watched old TV programs featuring a small business owner.  At some point someone needs cash for ice cream and old dad, the proprietor, hits the “No Sale” key on the upright NCR cash register, the drawer dings open and he takes out some bills for the kids.

Sure, this is (or was) real life.  But if you are raiding the till of your family-owned business for personal spending money, you might be in or are in more trouble than you know.

Treating your company’s cash as your own is financial suicide. By removing cash in an unaccountable fashion, you are setting yourself up for an accounting and bookkeeping Armageddon.

Whether you are a sole proprietorship, an LLC, or an S- or C-Corp, accountability for expenses, particularly cash, is critical.  Especially in the last three types: you have to answer to either yourself, your partners and/or your CFO.

For more on how to develop and implement an overall financial strategy, call or write to us.  TFO Solutions is dedicated to helping entrepreneurs and business owners with their finances from the back office to the boardroom.

The TFO Team

(photos courtesy of Upsplash)

While accounts receivable (A/R) is a mystery to many, it shouldn’t be.  It really is the script your banker will be reading from so she knows your story.

Let’s face it, knowing who you owe and who owes you money is critical to the operation of your enterprise.  That second part is especially important as if you don’t have income you can’t pay the outgo.

Your banker wants to know several things that they can discover from you’re A/R sheet:

• Who owes
• For what
• How much they owe
• How frequently or faithfully they pay
• The last time they paid
• How many customers
• How long you’ve been in business

This record of payment reassures the banker that you are a good risk as well as have the resources to repay your line of credit or outstanding loans.

For more on how to develop and implement an overall financial strategy, call or write to us.  TFO Solutions is dedicated to helping entrepreneurs and business owners with their finances from the back office to the boardroom.

The TFO Team

(photos courtesy of Upsplash)