Consider commitments, not just money

But heres the interesting point. Money is not the main indicator of a healthy business. It may seem strange, but the power business is not how much money he has and how he is able to create obligations.

A liability is something that you should have another and that other contract you. If you are working so that you have more than you need, is a profitable business. If Vice versa — unprofitable. How many do you have money in the account — not so important.

For example, you made a deal to create the application. Thats commitment. If the amount of your obligations to others less liabilities other than in front of you, it is a profitable business. If the business is unprofitable.

What is usually included in liabilities. Commitment doesnt always mean money in the account. In the trading business is a very common practice to postpone.

Suppliers deliver you the goods today and pay you after two or three months. A commodity, the money to pay for it, but it is not your money — you should, its creditory. If this money to spend now, then in two months there will be problems with repayment of the debt. And Vice versa.

If you are doing the job for which you are paid with a delay, after completion of the work the client is the obligation to pay for the service in a certain period. The obligation is there, but there is no money. For you, this is the accounts receivable for customer — kreditorki. There is a deferred kreditorki.

For example, if you give to the seller a guarantee of five years, with some probability, within five years, you may have obligations to provide this guarantee. For example, you paid three years ago, and today came with a warranty. Now you have to pay the staff, make this a warranty case to work. This creditorso little consideration.

Sometimes, customers delaying payment, and accounts receivable accumulated for months. On paper a profitable business and no money. The most spread example of a wrong relationship to money and commitments is the wasting of kreditorki. The easiest way to explain it to the business engaged in resale with large delays — for example, if you website of tickets.

And imagine. You have the eve of the season, people start to buy tickets to vacation with every month sales of more and more. You pay the carriers, but thanks to the growing revenue of account balance more.

Revenue have today, and the suppliers are calculated using month. As revenue grows, the account is more money. It seems that all is well. A lot of money, you start to buy cars, phones, rent expensive office, make a new website. And notice how you begin to “eat into” creditors to spend money not from profit but from the revenue, which you pay to the carriers in a month.

It is imperceptible, because the cash “pot” is constantly updated. In the accounts all the time — it seems that it is a profit and you spend. Then, when the season is on the decline, sales volume becomes less. And the volume of kreditorki — all the same, two months ago, when sales were at the peak.

Earlier in the month you paid much less than I received, now on the contrary, much more. Pretty quickly all the money spent on the settlement with creditors, they are not enough, and the company burns. Revenue falls, but every month you need to pay for the rescue last month. If “creditors” when it ate, then one day the money is not enough.

The error here is that the owner had assessed the health of the business, relying on money in the account, and not to obligations. If he saw how much profit the company generates in fact, hed been careful with spending. But when you have account is constantly growing mountain of money, its kind of hard to watch. The rules on liabilities is very simple.

Consider not only money, but also obligations and commitments in the first place. Look at the operating efficiency of the business. This is the difference between obligations that you create from others, and your obligations to other. If you owe more than you should, it means that that business potentially working “in plus”.

For operational excellence see how much money you can afford to pull out of the business, how much to invest in the site and the furniture and so on. If you have an accounts receivable, $ 100, and creditore $ 90, you cant spend 20 USD on ice cream. A few things that are useful to know for beginners.

Pre — pay is not your. If the client made an advance payment, its not your money. Payment obligations most often arise not at the time of signing the contract, and at the time of signing of acts of performed works. This means that if the client made an advance payment, but has not signed the bill, it can advance to challenge in court and get her back. So prepayment doesnt mean anything.

Here acts is another matter. Profit is not an end in itself. The business can be profitable if you know what youre doing. For example, a startup may the first ten years to accumulate a base of subscribers — and then, when the database is large, you can start to sell advertising.

There is nothing wrong in the fact that the business is unprofitable, it is important to realize. The accounts receivable by itself will not dissolve. If you accumulate the receivables, you need to start purposefully working with clients that you do not pay. Some companies hire special people, who lead claim work, is put a drop on the minds of those who do not pay.

If that doesnt work, you can sue. But if these are not engaged, then money may not come. Accounting — those who create the obligation. For example, if you design Studio, we take into account your obligations are managers who sell projects — and not only obligations of the customer, and your obligations to him.

To do this they must, in consultation with the team that will work to perform. Otherwise it will be so. The Manager promised a lot of things, gave a discount, got the bonus and quit. And then the company rakes that hed give.

Acts — our all. If you do the work and sign acts — make sure that there were many acts and to sign them was often, at least once a week. Each signed certificate is a fixed obligation of the client on payment of part of your work. Through these acts you in the event of a conflict will be able to get from customer payment.

Separately pay attention to how you contract you receive. Sometimes the contract stipulates some nonsense like “acceptance is done by passing the DVD drive, the responsible officer”, but in fact you sent by mail. If the acts are not signed, and the contract you have acceptance on DVD in your emails may not recognize. Well, nothing else can confirm the acceptance of the works as acts.

In following articles we will continue talking about the basic concepts of management accounting. All this is necessary, so you can see. At a basic level, this knowledge is logical, simple and do not require financial education, but help protect the business from being foolish. Take care of the finances.

Source: google.co.uk/blog/top-5-blockchain-startups/

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