Equine Business - September 2009
Mind Your Own Business:
Think - plan - organize - execute - make/save money
In this column we will discuss identifying specific current asset accounts that reflect how we want to measure our horse business.
In previous columns we have discussed primary account categories that are used in a business's financial statements and to a limited extent, the type of information that is contained in these categories. It is now time to get specific so that we know how we are tracking our money, where we are spending it, if we are getting the results we expect and how we can make improvements. Having this detail will let us know what changes we need to make, if any, to better manage our business.
We have previously discussed Current Assets. Current Assets are Cash (real money), Credit Cards (virtual cash - be careful, your credit cards have to be paid off) and those assets that are expected to be turned into cash in the next 12 months. Our Cash Accounts are our most liquid Current Assets (the water analogy - June 2009 Column). Our Cash Accounts are Checking Account, Saving Account and Credit Cards - yes credit cards are considered cash. It is recommended that you keep your business separate from your personal financials. Therefore, you should have separate checking, saving and credit card accounts for your horse business. This avoids any questions about comingling your financials if you are audited by the IRS. I do not recommend multiple checking accounts unless they are specific to a particular area of your business that is financially unique to any other area. By defining subaccounts within an account you can get the measurement and management you need with one checking account.
The next level of Current Assets is Investments and Receivables. Investments are generally certificates of deposits and money market accounts. Your Receivable Account is the money owed to you by your customers for products or services. You should consider having a receivable subaccount for each customer so that you can measure the cost of acquiring and keeping a customer. Many times we neglect to consider the true cost of a customer. You may think a customer is providing profit to your business when they are not. High maintenance customers can be expensive. You will not realize it unless you are comparing the income you get with the expense associated with acquiring and keeping a customer. We will explore this further once we have our customer expense accounts and subaccounts identified. Knowing the cost associated with a non profitable customer will give you the opportunity to correct the problem, keep the customer and make the relationship profitable. The rule of thumb is that it cost ten times more to get a new customer than it does to keep the one you have. Investment and Receivables are relatively liquid (the ketchup analogy - June 2009 Column). However, when assessing their liquidity you need to consider all the cost associated with converting them to cash. You definitely need to be aware of the cost if you are liquidating an investment. Many investments have an early withdrawal penalty and some have significant tax consequences. The liquidity of your receivables is tied to the payment terms you give your customers. There is also the risk associated with slow paying customer and customers that do not pay at all. You need to be careful if you are depending on your customers for quick cash. Some customers may be willing to pay early, but at a significant discount. In future columns we will explore the measurement and decision process associated with receivables turnover and days sales outstanding, commonly referred to DSO. Strict adherence to the 'horsemen's ratio' (August 2009 Column) will help keep your cost for cash minimized. I am sure you have heard the expression, 'collect in 10 and pay in 90'.
The last Current Asset we will explore is Inventory. Inventory is the least liquid of all the Current Assets (molasses analogy - June 2009 Column). Frankly, Inventory is evil. It is 'cash at rest' and if it can spoil or is subject to poor management and waste it is 'cash in comatose'. Turning inventory into cash is very difficult and can be costly - 10 cents on the dollar. Good inventory management is essential. Good inventory management can significantly help your available cash and profitability. Inventory can be divided into supplies and material. The difference being supplies are generally less expensive and are consumed more quickly where material inventory is more expensive and consumed over a longer period of time. Supplies examples are reproduction pipettes, sterile gloves, vaccines, etc. Materials are forages, grain, supplements, etc. You need to account for both supplies and materials. If you do not believe it just run out of something when you are breeding a mare or vaccinating your herd. Inventory accounts and subaccounts should be setup to match what you think will benefit the operation and financial management of your business. A good horse management and business system is recommended for inventory control. Although an Excel spreadsheet will work for listing your inventory it does not provide the decision capability necessary to manage replenishment and cash minimization. The majority of accounting programs fall short in managing inventory. Knowing how much you have on hand is not management. In future columns we will explore the measurement and decision process associated with how to value inventory, inventory turnover and days inventory on hand.
In our next column we will work on defining the accounts and subaccounts associated with our Fixed Assets. Remember, you need to make sure all your fixed assets are producing, and furthermore producing at a level where they are providing you with a Return on Investment (ROI), (May 2009 Column). I suggest you list all your current assets by cash accounts, investments, receivables and inventory classifications. Then think about the management time and expense associated with each one. Is there anything that can be eliminated, adjusted or improved? Remember, spending your time and money wisely may provide the opportunity to enjoy your business more while making more money. Think - plan - organize - execute - make/save money.
'If you can't measure it, you can't manage it.'
Bob Valentine, Ph.D.