Sunk Costs and Costly Decisions

Want to know why some people lose so frequently at poker? It’s not because they’re unlucky. It’s because they’ll often add chips to the pot generously during the early bets while they’re figuring out if they have a good enough hand to play… but by the time they realize they DON’T have a good enough hand to play, they feel that they’ve paid so much already, they should keep playing just in case (even though the odds of winning are now largely stacked against them).

This happens in business, too. A business owner will invest in something (a tool, a piece of software, an employee, or a new asset, just to name a few) in order to help their business. Things go well for a while, but sooner or later that thing is no longer useful, but the entrepreneur keeps using it because they feel that they’ve paid for it so they should try to derive as much value as they can out of it.

Although it’s a common practice, it’s a mistake… and it’s often a costly one.
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Tags: Bets, Business Owner, Chips, Costly Decision, Costly Decisions, Entrepreneur, Mistake, Money, Odds, Poker, Pot, Resale Value

Proceed With Caution: When NOT to Change

If your business is just starting out, there’s a challenge that you’re about to face that you might not even realize. Yes, there are numerous business challenges you’re already going to be wrestling with over time, but here’s one that you need to figure out early.

Fortunately, this decision is a “set it and forget it” decision because once you’ve decided, you shouldn’t change.

I’m talking about depreciation. When you buy an asset, you spend a lot of money all up-front but it won’t always be worth that amount. To use a really simple example, if you bought a $25,000 car and kept it for 10 years, you know it wouldn’t be worth $25,000 in the asset column of your balance sheet the entire time. Cars depreciate just as all assets do.

So here’s the “set it and forget it” decision you have to make:

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Tags: 10 Years, Assets, Balance Method, Balance Sheet, Business Challenges, Cars, Caution, Depreciation, Face, Graph, Money, Straight Line, Wrestling

How Raising Capital Impacts Your Financial Statements

Businesses need money to operate and unless your business has retained some earnings to draw from, you might need to go out and raise capital. Although there are complexities that blur the lines, you can broadly think of all capital as falling into two categories:

• Loan-based funding
• Ownership-based funding

Loan-based funding includes borrowing money from the bank or offering a bond or promissory note to private lenders. Ownership-based funding is essentially where you sell a piece of the ownership in the company as a share or stock. You’re probably already familiar with these concepts. But what I want to talk about in this blog post is how each type of funding impacts your financial statements. Knowing this will help inform you about the best choice for your situation when it comes time to raise some capital.

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Tags: Balance Sheet, Best Choice, Borrowing Money, Cash Flow Statement, Complexities, Creditor, Debt Repayment, Dividends, Financial Statements, Income Statement, Liabilities, Liability Side, Net Profit, Operating Expenses, Private Lenders, Proceeds, Promissory Note, Selling Shares, Share Issues, Shareholders

Income Statement Breakdown (Part 4): Finding the Bottom Line

We’ve been taking apart the income statement to help you better understand it and so that you can find money-saving, profit-increasing opportunities inside of it. This is the fourth and final step in the process and here we are getting close to the bottom line!

So far we’ve…

• Looked at Revenues and came away with Net Sales
• Looked at Cost of Goods Sold (either accrual or cash-based) and came away with Gross Profit
• Looked at Operating Expenses and came away with Net Profit

But those are not the only people who have their hand in the cash register! Let’s not forget banks and the government. In this fourth and final section of the income statement breakdown, we need to make sure they get their share.

Like the other sections, you add up the various expenses you have here and subtract it from Net Profit. This section is sometimes called “Non-Operating Expenses”. If you have shareholders, some of their payouts go here, too.

Now let’s look at this part of the income statement and we’ll compare how the accrual and cash-based system work so you can see both in action:

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Tags: Accrual, Banks, Bottom Line, Cash Register, Gross Profit, Income Report, Income Statement, Money, Net Income, Net Profit, Net Sales, Operating Expenses, People, Shareholders, Statement Numbers

New design & We re-started our blog!

New Year and new ideas. As most of you know, we used to have a pretty nice blog and last year we took it down (why I don’t know). We plan on starting it up again – and this is it.

What better time to re-start a blog than with a whole new logo and design?

Stay tuned for application reviews, bookkeeping tips, and the whole nine yards.

Tags: Application Reviews, Better Time, Blog, Bookkeeping, Logo And Design, Logo Design, New Year, Whole Nine Yards