Financing

The Latest is Not Always the Greatest

We live in a time of constant change. As a result of this and effective marketing, some companies get people to buy things they don’t really need. What do I mean by that? Read the rest of this entry »

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Accounts Payable is Not Long-Term Debt

This will be a very short article. It is a follow up to Current or Long-Term Debt that discussed the appropriate use of various kinds of debt.

Accounts Payable

A comment made in a forum about accounts payable is what prompted this brief update on debt and how it is used. The commenter noted that a company was reclassifying some of its accounts payable to a note payable. When I heard this all kinds of bells and whistles went off. This is usually an indication of Read the rest of this entry »

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Actual Company Debt

Do you really know your actual company debt? This may seem like a silly question, but there is more to it than you may think. Let me explain.

Leases

There is a proposal from U.S. and international accounting regulators to change how a company should record and account for what is referred to as operating leases. Here I just want to consider the impact on the lessee. First, let’s look at some Read the rest of this entry »

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Understanding the Debt Ratio

Most of my recent postings have concerned how businesses are financed and how to measure the returns on those investments. Understanding the debt ratio will help you better understand the financing of a business.

What is the Debt Ratio?

The formula for calculating the debt ratio is:

Debt Ratio = Total Liabilities / Total Assets

(Note that this is expressed as a percentage)

Using a sample balance sheet from an earlier posting, let’s see that calculation. Read the rest of this entry »

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Importance of Free Cash Flow

In some previous posting I discussed how important it was to convert profits to cash. See Cash Flow – The Bottom Line for more on this. Now let’s look at cash from a different perspective.

Free Cash Flow Defined

Generally free cash flow is considered to be operating cash flow minus capital expenditures. This recognizes that capital spending for things like equipment is necessary if a company is to remain competitive. These capital expenditures help a company become more efficient or even allow them to Read the rest of this entry »

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Talk to Your Vendors

Ever found your company unable to get products to sell or services needed to operate? If so, you’re not alone, but it is not hopeless.

Don’t Keep Me in the Dark

Probably one of the worse things you can do in dealing with vendors is to not keep them apprised of Read the rest of this entry »

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3 Business Startup Essentials

If you’ve ever started a business or been involved in a business startup, you know the excitement it can produce. That excitement is a good thing as it helps energize those involved and promotes enthusiasm that is critical to the early life of a business. On the other hand, that same excitement can cloud peoples’ thinking and cause critical mistakes. In order to remove that risk and still keep the positives, there are some steps or business startup essentials that will help immensely.

Recognize a Reality

As much as we may like to think we do, we really have quite limited ability to visualize how our Read the rest of this entry »

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Excessive Debt

If you have not already heard, the city of Detroit, Michigan is planning to default on a large portion of its debt and probably reduce pension payouts. So what is the lesson for your business?

Borrow Carefully

There are times when a business really does need to borrow to continue growing. However, there are also times when a business may borrow for the wrong reasons. In the case of Detroit and many other municipalities, commitments were likely made that far exceeded reasonable expectations of tax collections. One reason this could have happened was to avoid the Read the rest of this entry »

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Two Dangerous Financial Illusions

Sometimes when a company gets into financial trouble management is being deluded by things they thought were indicating financial health.

The Sales Illusion

It is not uncommon for a company’s management to see growing sales and think this is a clear indicator that everything is going fine. Increasing sales can be an indicator of financial health, but not when taken alone. If you read the posting Cash Flow – The Bottom Line you would have read about Read the rest of this entry »

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Current or Long-Term Debt

There are many ways for a company to get into financial difficulties. One that is very common is misuse of debt. In a past blog, the risk of allowing accounts receivable to become overdue was discussed (see 3 Reasons Past Due Receivables May be Worthless). Also, in the blog posting 80/20 Rule for Receivables Management a way to help manage receivables was discussed. Another leading cause of financial distress is the mismanagement of inventory. See 3 Low Cost Sources of Cash – Part 1 for an example of the impact of this.

The problems of excess receivables and inventory are relatively easy to understand. But, the misuse of debt is a little more hidden.

What Kind of Credit Problem?

When people think of credit problems they are normally thinking in terms of Read the rest of this entry »

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