Tag Archives | gross profit

Taking Credit Cards for Business: Good or Bad?

taking credit cards for businessPeople, myself included, are generally more hesitant with taking credit cards for business on anything major… and I don’t blame them! There’s typically a 2% charge on sales. However, if you use your credit cards the correct way, it may be worth considering. To save you time and risk, here’s a few things that we learned from using a credit card in a business, and maybe you can, too.

Benefits of Taking Credit Cards

Why are credit cards useful in your company? Credit cards serve several purposes. At The Strategic CFO, we only cut a few checks per month due to the power of credit cards. Our accounting is automated, we experience a boost in productivity, and depending on your business, you might even free up enough liquidity to take advantage of discounts on payables.

Experience a Boost in Productivity

Daily sales outstanding (DSO) is a calculation used by a company to estimate their average collection period. The higher the DSO, the more problematic for a company because your liquidity is tied up in receivables. For example, let’s say you’re a plumber and your average DSO is 45 days. By accepting credit cards as payment, you could potentially reduce your average DSO from 45 days to 15 days… maybe less than that! An extra 30 days’ worth of liquidity can drastically improve a company. If a company averages sales of $2,000 a day, that’s almost $60,000 in your pocket earlier than it would have been! So what will you do with that extra cash? Now, you can pay off bills, invest the money, or take advantage of discounts on payables.

Take discounts on your payables

Certain vendors provide a discount on payables if you pay early. 2/10 net 30 is a popular discount given on payables. Specifically, you can get a 2 percent discount for a payment to a vendor in 10 days, or pay the full amount in 30 days with no discount. This reflects well on your supplier-consumer relationship, because the sooner you have your cash, the sooner they have their cash.

They’re a Good Source of Funding

It is recommended that you use a credit card when you need less than $50,000 and you cannot get a bank loan. One of the biggest benefits of having a credit card is that it is a flexible source of funding. You can buy as little or as much as you need, but only have to pay back a small amount monthly. Used responsibly, it can help establish your business’s credit as well making that next loan a little easier to get.

Dell

One of the best examples of how accepting credit cards can be a game-changer is Dell Computers. Back in 1984, when computer sales were gradually taking credit cards in businesspicking up pace, Michael Dell operated a computer-building business in his dorm room. He was funded $1,000, but how was he supposed to fund the rest? He strategically used the credit card cash to cover the expenses. Dell would take orders over the phone, gather the credit card information from the clients, and then make the computers. As a result, his cash conversion cycle was negative! This is one of many success stories for businesses who use credit cards as a source of funding.

This is one of many ways you can increase and optimize your cash flow. Read the rest in our free guide: 25 Ways to Improve Cash Flow!

Consequences of Credit Card Usage

So we’ve highlighted the benefits of taking credit cards, but be wary. Credit cards are still not universally accepted due to a few reasons. Not all businesses can take credit cards; in fact, some might have to pay more fees than others to even accept them. Here are just a few more reasons why people should be careful when taking credit cards for business…

Businesses Need to Have Reasonable Gross Profit

Let’s say the bulk of your sales are via credit card. If you want to stay in business, your gross profit must be substantial enough to cover the credit card fees. In this case, certain industries should not accept credit cards.

General Contract Work

Contract work such as painters, plumbers, and music teachers make only 3-5% of gross profit. Taking 2% of sales with credit would be too much. That would mean waiting on the customer to receive majority of gross profit. This can affect every other aspect of your business… especially overhead.

Real Estate

Another example of an industry where credit cards don’t make sense is real estate. There tends to be a 10% net operating income within the industry. If you’re generating 10% net operating income, it will hurt your business to have 2% credit sales. Taking a 2% hit would cut the investment down by 20%, which is why you sometimes can’t pay large sums (like rent) with credit cards.

Credit card tactics aren’t the only way to improve cash flow. Check out 24 other ways with this whitepaper!

Some properties do accept credit cards, but those tend to be the higher-end properties. Like suppliers, the landlords usually pair the early payments with benefits like points or discount on rent.

Where’s My Money?

taking credit cards for businessAnd of course… waiting for customers to pay, and depending on the customers’ credit terms, is an issue with accepting credit cards. Credit cards come with all sorts of issues technologically that are out of your control. If credit cards are canceled or stolen, that ultimately affects your automation system. Make sure you have a system in place when accepting a customer’s card, whether it be a contract or a secondary source of funding from the customer. Always be prepared for something to go sideways.

Conclusion

In conclusion, accepting credit cards in a business (no matter how big or small it is) is a risk. Then again, what new business decision doesn’t come with a risk? Like most decisions, it’s just a matter of preparation, research, and credibility. There are many contingencies associated with credit cards such as customer responsibility, and making sure your company generates enough gross profit. Conversely, there are benefits of taking credit cards such as discounts on your payables and a boost in productivity. Make sure to do your research, and be prepared for change.

Prepare yourself for change. Read our 25 Ways to Improve Cash Flow whitepaper and watch the company gradually grow with each step!

taking credit cards for business

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

taking credit cards for business

Connect with us on Facebook. Follow us on Twitter. Become a Strategic CFO insider

0

Net Profit Margin Analysis

See Also:
Net Profit Margin Ratio
Gross Profit Margin
Opportunity Profit Margin Ratio
Financial Ratios
Net Income
What is Profitability Index (PI)?

Net Profit Margin Definition

The net profit margin, also known as net margin, indicates how much net income a company makes with total sales achieved. A higher net profit margin means that a company is more efficient at converting sales into actual profit. Net profit margin analysis is not the same as gross profit margin. Under gross profit, fixed costs are excluded from calculation. With net profit margin ratio all costs are included to find the final benefit of the income of a business. Similar terms used to describe net profit margins include net margin, net profit, net profit ratio, net profit margin percentage, and more. To calculate net profit margin and provide net profit margin ratio analysis requires skills ranging from those of a small business owner to an experienced CFO. As a result, this depends on the size and complexity of the company.


NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)[/box]Download The 7 Habits of Highly Effective CFOs


Net Profit Margin Calculation

For example, a company has $200,000 in sales and $50,000 in monthly net income.

Net profit margin = $50,000 / $200,000 = 25%

This means that a company has $0.25 of net income for every dollar of sales.

Steve has $200,000 worth of sales yet his net income is only $50,000. By decreasing costs, he can increase net income. In conclusion, he evaluates his decision and decides to implement the online system he was thinking about.

Net margin measures how successful a company has been at the business of marking a profit on each dollar sales. It is one of the most essential financial ratios. Net margin includes all the factors that influence profitability whether under management control or not. The higher the ratio, the more effective a company is at cost control. Compared with industry average, it tells investors how well the management and operations of a company are performing against its competitors. Compared with different industries, it tells investors which industries are relatively more profitable than others. Net profit margin analysis is also used among many common methods for business valuation.

Easily discover if your company has a pricing problem. As you analyze your net profit margin, it’s an opportune time to take a look at you pricing. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

Net Profit Margin Analysis

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Net Profit Margin Analysis

Resources

For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.

2

Margin Percentage Calculation

See Also:
Margin vs Markup
Markup Percentage Calculation
Retail Markup
Gross Profit Margin Ratio Analysis
Net Profit Margin Analysis

Margin Percentage Definition

Gross margin defined is Gross Profit/Sales Price. All items needed to calculate the gross margin percentage can be found on the income statement. The margin percentage often refers to sales or profitability which may help lead to several key understandings about the company’s business model as well as how successful the company is at maintaining its cost structure to gain the proper amount of sales. Analysis of margins within a business is often useful in controlling the price in which you need to sale as well as a control on the cost associated to make the sale. Look at the following margin percentage calculation process.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)

How to Calculate Margin Percentage

In this example, the gross margin is $25. This results in a 20% gross margin percentage:

Gross Margin Percentage = (Gross Profit/Sales Price) X 100 = ($25/$125) X 100 = 20%

Not quite the “margin percentage” we were looking for. So, how do we determine the selling price given a desired gross margin? It’s all in the inverse…of the gross margin formula, that is. By simply dividing the cost of the product or service by the inverse of the gross margin equation, you will arrive at the selling price needed to achieve the desired gross margin percentage.

For example, if a 25% gross margin percentage is desired, then the selling price would be $133.33 and the markup rate would be 33.3%:

Sales Price = Unit Cost/(1 – Gross Margin Percentage) = $100/(1 – .25) = $133.33

Markup Percentage = (Sales Price – Unit Cost)/Unit Cost = ($133.33 – $100)/$100 = 33.3%

Margin Percentage Calculation Example

Look at the following margin percentage calculation example. Glen charges a 20% markup on all projects for his computer and software company which specializes in office setup. Glen has just taken a job with a company that wants to set up a large office space. The total cost needed to set up the space with computer and the respective software is $17,000. With a markup of 20% the selling price will be $20,400(see markup calculation for details). The margin percentage can be calculated as follows:

Margin Percentage = (20,400 – 17,000)/20,400 = 16.67%

Using what you’ve learned from how to calculate your margin percentage, the next step is to download the free Pricing for Profit Inspection Guide. Easily discover if your company has a pricing problem and fix it.

margin percentage calculation, Calculate Margin Percentage, Margin Percentage

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

margin percentage calculation, Calculate Margin Percentage, Margin Percentage

 

49

How to Maintain an Effective Job Schedule

How to Maintain an Effective Job Schedule

Accounting’s main function in Construction is to properly manage the financial stability of the organization. One of the tools that accounting uses to do this is the construction job schedule. This schedule shows the performance of each construction job. Project management works with accounting to furnish the contract amount, change orders, and estimated total cost. Communication is key in keeping the job schedule accurate and correct. The accounting manager’s job is to review and analyze the numbers to determine the profitability of each individual job and maintain an effective job schedule. There are several ways to do this:

  • Over/under billing
  • Estimated total cost vs. actual total cost
  • Total Gross Profit (loss) recognized in current period

Over and Under Billing

Over/under billing needs to be determine by the accounting manager; it is his/her job to make sure that all change orders and contract amounts are correct. Problems arise when you have entered the costs and exceed the billing amounts to the client in any period. Cash flow issues are another problem that will affect your month to month financial stability. It may be the most single important accounting short term issue that you will come across in your job schedule and weekly cash flow.

To determine if you are under billed you must review the “Cost and Estimated Earnings in Excess of Billing” column of your spreadsheet. As you review each job, keep in mind that if you have a larger numbering in a job column, then it should send up a red flag. Your organization does not want to “finance” the project for the client. So it is your job as a manager to maintain balance regarding the amount you are billing. Then compare it to the invoice you receive from vendors and sub-contractors.

To effectively maintain that balance you must develop a system that will incorporate project management into your job schedule. Meet once a month to go over each job to determine what you need to change (i.e. executed change orders, additional jobs, etc…). Having meetings with your project management personnel will only help to eliminate the problem of having too little income to cover outstanding accounts payable invoices each month.

Cost Coding

Each month, input your actual cost incurred to date. It should always be less or at the same cost of the estimated total cost. To maintain an effective job schedule you must, as a manager, determine why your actual costs are not in line with your estimated costs. One way to determine that is to review what has been cost coded to the various jobs.

This will help because it will determine if there was a mistake in coding or a mistake in keying the information in by your accounts payable clerk/assistant. If a mistake has been made and then corrected, then check with project management to determine whether you need to execute a change order. Vendors and subs do not submit their invoices based on an executed change order to the client from your organization. Therefore proactively make sure the work has been done. Then you must issue a change order to the client immediately. This not only a project management or construction management issue. It’s a company issue each functional group within the company needs to address.

Job Profitability

If your company is a for-profit entity, your work as an Accounting Manager/Controller is to keep your bottom line black (profit). That should be your focus. You must be able review your job schedule to determine your job by job profitability. Keeping your overhead low will not solve the problem, if your jobs are not performing at the required level. Although job profitability is a project management function, effectively managing the job schedule by reviewing profits in a period is extremely important. It is also critical to recognize profits in the proper period if your company utilizes accrual based accounting.

If too much profit is taken in a period, then it could hurt you down the road when unforeseen costs hit. For example, one job could jeopardize the overall company profitability for the year. Ways to combat this is to determine a proper amount to reorganize in the period. If there seems to be a lot of revenue that a certain project could take on, then review and verify its accuracy. Sometimes previous costs have not been taken into account. It could require that you take a greater loss in addition to the cost that have currently hit the present job. Following up once you review the schedule could save you and the company down the road.

Conclusion

For Construction Accounting, the Job Schedule is the single most important factor pertaining to profitability and stability. When you are a good steward of the company’s finances and maintain an effective job schedule, you can only perpetuate the confidence of others in your organization. This leads to more profitable months in the years to come.

To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

maintain an effective job schedule

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to manage your company before your financial statements are prepared.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

maintain an effective job schedule

See Also:
Progress Billing for a General Contractor
Retainage Management and Collection
Work in Progress
How to manage inventory
Trade Credit

0

COGS and the Balance Sheets – Services Based Business

COGS and the Balance Sheets for a Service Based Business

If you are running a business with inventory, it’s easy to understand the G in COGS (Cost of Goods Sold). But if your Goods are employee time, how do you note your goods in the P&Ls? How do you list the time on your balance sheet? The answers to this questions depends upon what you are trying to do with your P&Ls and what you are trying to do with your balance sheet.

P&Ls

Here is a school of thought regarding P&Ls.

Place all your service oriented employees salaries in COGS. What this does in a sense is place a debited amount against the income that you have coming in so when you look at the Gross Profit, you can tell your profit just based on the services that you are performing for your customers. You can now use this as a guide for hiring new employees that directly influence income. Through your gross profit, you will be able to tell whether or not you have enough GP to pay for more resources just as you would to determine if you have enough to buy certain quantities of inventory.

The important thing to note is that you have to be acutely aware of what your Expense ratio is. What that means is that if you add employees and it affects your GP, you will need to leave enough GP to pay Expenses so your net number is positive.

All of this said, if your goal is to have a high GP so that it looks good on your P&Ls, don’t do this! Leave all your service salaries in Expenses. This is just a different way to do tracking of Cost of Resources on your P&Ls. This can all be done outside of accounting in some type of operational cost reporting.

Categories of Assets

With the Balance Sheet, the problem often becomes, “how do I value an employee time on my balance sheet as an asset.” The answer is, “you can’t”. The categories of assets as understood by GAAP are:

1. Cash

2. Short Term Investments

3. Receivables

4. Inventory

5. Prepaid Expenses

Inventory comes close to being able to placing resource time on the books. But once again, “you can’t”. Coming close does not count in accounting. Accurately adhering to GAAP is vital.

So that you can increase your company’s worth on the balance sheet, there are a couple ways that you can place the money that the resources will make on the Balance Sheet:

1. Long Term Contracted Revenue – Asset/Receivables from income invoices generated for the life of the contract.

2. Equity/Goodwill

The first one (Receivables) is an easily understood principle. The second (Good Will) is much more difficult.

All of the practices noted are ones that you should deeply consult with a seasoned and professional CPA and Valuator before you try and tackle on your own. Generate ideas using this article, and do not use it as accounting advise.

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

cogs and the balance sheets

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

cogs and the balance sheets

See Also:

Cost Driver
Cost Center
Step Method Allocation
Direct Method Allocation
Cost Volume Profit Model

0

Are You Collecting Business Data?

See Also:
Value Drivers: Building Reliable Systems to Sustain Growth
Mining the Balance Sheet for Working Capital
Inventory to Working Capital
How to Run an Effective Meeting
How to evaluate IT systems

Are You Collecting Business Data?

It seems simple enough. You’re making a decent gross profit. You know who your customers are, you know how much you are charging them for your product and you know how much they are buying. So no worries, right? Well, do you know how much it costs you to sell to each customer? What if you are generating substantial sales from one customer, yet find yourself spending a large amount servicing that customer in terms of custom orders and/or shipping costs? The biggest question is… Are you collecting business data?

Not only must you know how much you are making by product line, but you should have an idea of what your gross profit looks like for each customer, especially your key large customers. Perhaps you are missing out on opportunities to reduce shipping costs through aggregating shipments. Maybe you are missing out on opportunities to head off costly service calls through greater communication with the customer up front.

What You Need to Know

In addition, you need to know how you make money. As simple as it sounds, many entrepreneurs don’t figure this out. Are you making a larger margin on the product sale itself or on the sale of complementary products and/or services?

How long does it take you to collect receivables? Do you find yourself spending an inordinate amount of time trying to collect on a relatively small customer? What are your credit terms?

Greater detail can help you wring more costs out of your business plus identify opportunities for additional sales. You need to be able to put together realistic, detailed projections of your future monthly performance in terms of your gross profit as well as your working capital in order to gauge future capital requirements so you can plan for them today.

Do not wait. Start collecting that business data and build that model today!

Download your free Internal Analysis worksheet to start developing and enhancing your strengths as well as start reducing and resolving your weaknesses.

are you collecting business data, business data

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

are you collecting business data, business data

0

Are You Collecting the Data You Need to Run Your Business?

“It seems simple enough. You’re making a decent gross profit. You know who your customers are, you know how much you are charging them for your product and you know how much they are buying. So no worries, right?

Are You Collecting the Data You Need to Run Your Business?

Well, do you know how much it costs you to sell to each customer? What if you are generating substantial sales from one customer, yet find yourself spending a large amount servicing that customer in terms of custom orders and/or shipping costs?

Not only must you know how much you are making by product line, but you should have an idea of what your gross profit looks like for each customer, especially your key large customers. Perhaps you are missing out on opportunities to reduce shipping costs through aggregating shipments. Maybe you are missing out on opportunities to head off costly service calls through greater communication with the customer up front.

In addition, you need to know how you make money…”

More at WikiCFO.com

collecting the data you need to run your business

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

collecting the data you need to run your business

1

LEARN THE ART OF THE CFO