Archive for the ‘Up-and-running Business’ Category

As strange as it may seem, not many do. Financial statements are “ex post”. They reflect what has happened. They are (or should be) the basis for management action – going forward.

They should be compared to a benchmark (either a budget/forecast or prior year financials). You should be looking for:

  • Revenue changes (increase/decrease)
  • Gross profit margin changes
  • Extraordinary (one-time) items.
  • Trade receivable aging
  • Trade payable aging.
  • Debts to the CRA

The issue of whether or not the business makes any money should be supportable by client revenue actuals vs projections and the gross profit margin on this revenue.

There are businesses that don’t bother to generate or analyze financial statements. The bank balance is what they focus on.

Do you have financial statements prepared for your review on a monthly basis?


They are not the same but at times are used inter-changeably by business owners. Marketing is an activity that involves:

  • Researching a sector for a niche client
  • Finding the customer demographic -age, locale, income level, education level etc.
  • Finding why (the above) demographic buys and what are their buying habits
  • Determining where a potential customer is – geographically and their disposable income levels

There are more of course but those are a few important ones.

Selling involves closing the deal after you have determined what market you operate in. Selling can include: media advertising, direct sales, etc.

The key point to remember is: you can “sell” but don’t expect to have any success unless you know your market.

The other important point to note is that the market can shift. A “20 something” young urban adult will have different wants and needs in their 30s than they do in their 20s. Make sure that you analyze your market on a regular basis so you can target your selling activities.


A family business requires new blood. In most cases this occurs when a  younger family member joins the firm. I did this myself. I had just received my bachelor of commerce degree and joined my dad in the family retail business. He had many years of experience in the textile manufacturing business and had left his own family business in the early 1960s to start a retail fabric business. He had years of selling and buying experience but he was certain that I would be the person to drive the business to the next level. After all, I had a university degree.

Yes, I had 4 years of theory but absolutely no real life experience. I was immediately elevated to a managerial position with no experience in hiring, staff supervision or merchandising.  This seems unusual but it happens all the time in family owned businesses. One business analyst joked that family members get to where they are by dent of DNA not ability. It may sting a little hearing this but it is true.

There is absolutely nothing wrong with on-the-job training but what is the probationary period for the trainee and what are the qualifications of the trainer? I learned a lot in my nine years in our family business. The lessons learned I have applied to family businesses with whom I have been associated over the years as either an employee or a consultant.

Some issues that need to be considered:

  1. Is the new family member interested in this type of (intense) enterprise for the rest of their career? Most of us need money to survive but working for a salary is not the raison d’etre for a small business entrepreneur.  This may take 3 or more years to become obvious for both the scion of the family and the new arrival.
  2. In my experience, a new family member is an overhead position. Is there financial room to accommodate them? This, combined with #1 above could dig the business into a deep hole in the 3 year feeling-out period.
  3. It is harder doing business today than 40 years ago, when I started out. The trainee needs to get up to speed quicker and the trainer needs to provide on the job training that will achieve that goal.
  4. What true authority will be transferred as part of the training process? I considered making this #1 on my list but I have put it in #4 spot.

These are four key issues that haven’t changed during my tenure with family owned and operated enterprises. Many family businesses have survived from generation to generation. Many fail however and it wreaks havoc on immediate families as well as long term employers, customers and suppliers.

I want to start a small business mentorship group for Ottawa and area small business owners who have their own business and want to meet with their peers and discuss business ideas and have positive/non-judgemental feedback on ideas. The ideal business profile would be a business with 1-10 employees.

The size of the group would be limited to the number who could sit in a coffee shop or even around a dining room table. The venue isn’t as important as the people who attend and the topics on the agenda.

The discussions would be confidential and the attendees would have the opportunity to seek peer advice from people who have “been there and done that.”

We can discuss the following:

  • Financial issues
  • Financing issues
  • Marketing ideas
  • Management and personnel issues
  • IT issues

The onus is on everyone helping each other. No cost to join and no one is trying to sell anyone anything.


We all know about the standard (non-medical) definition of insanity: “.. doing the same thing over and over again and.. expecting a different result.” It seems logical to take this one step further: ” It didn’t work before, (and the time before )so, why do you think it will work now?”

Amazing as it may seem, this happens all the time. Here are a few business moves that I have seen business owners make in the face of contrarian results:

  1. Chasing revenue to cover bloated overhead.
  2. Using the same sales channels to chase non-existant revenue.
  3. Hiring salaried staff when hourly staff would be a better fit.
  4. Using revenue as the sole metric to evaluate business performance.

There are many others but, these are actions (reactions?) to a business that has problems and one in which management feels that more revenue alone will fix.  Small business management needs to have a clear understanding of their business model and regularly evaluate whether the business model works.  If the business is losing (accounting) income over a protracted period, the model is not working.

There is information that accountants must provide small business owners:

  1. Comparative metrics for both revenue and gross profit margins.
  2. Comparative metrics for (revenue) breakeven points.
  3. Fixed cash burn rate.
  4. Forecasts for profit and loss and cash flow.

Easier said than done unfortunately.



The formula is simple: Know your client + know how to make money = add to your net worth! It seems so simple doesn’t it? The businesses that make money on a year-over-year basis should have an amendment to this simple formula: monetizing your net worth.  This is the hard part.

I had a small business owner lament to me that: “I’ve invested about a hundred thousand dollars into this business and all I’ve done is bought myself a job.” How true!

Small business corporation shareholders receive a salary (and a T4 at year end) but I have seen only a couple receive T5s (investment income – specifically dividends).  Why not? Given that the sum of shareholder loans plus shareholder equity represents a large percentage of the total net worth of  shareholders,  why don’t shareholders integrate their payouts? (salary plus dividends).

It’s a good point. If a shareholder’s remuneration was $75K a year (in salary income) and it was changed to $50K in salary and $25K in dividends, the tax bite would be lower. The $25K is NOT earned income and as such would be excluded from contribution room to an RRSP but, seeing that a small business owner considers their business to be their RRSP,… well .. why not investigate the advantages of this remuneration split?

There must be sufficient equity to pay a dividend of course and no bank loan covenants preventing the declaration of dividends.

There must be billions of dollars tied up in the Shareholder Equity section of small business balance sheets across the country. This is the biggest dilemma facing baby boomers who own CCPCs and are trying to retire.

The old maxim holds: “.. use it or lose it.”


The last couple of posts illustrated some metrics that small business owners should be acutely aware of. All of these metrics will help you understand how your business performs and help you make the right kind of decisions to turn your business around, restore it to profitability or improve profitability.

The retained earnings section of the balance sheet is the location where the fruits of your labour should be seen. Hopefully, this will increase year-over-year. A business that adds retained earnings to the balance sheet will improve the balance sheet, make the balance sheet more attractive to lenders and will improve the capitalization of the business.

It seems intuitive – but it isn’t.  If the business generates good retained earnings it allows the business to add more external capital to put to work – that will increase profits in the future and further increase retained earnings. Many small business owners don’t understand this.

There is another challenge that small businesses with good retained earnings face – how to monetize these retained earnings.

This will be dealt with in a subsequent post.

The numbers that should be at your fingertips (or at the fingertips of your accountant) were summarized in the previous post. There are additional numbers that you should have or have your accountant prepare and explain for you:

  1. Does your business really generate a (cash) profit? The profit (or loss) that you see each month when you review your P&L statement contains many non-cash (but period) expenses. The cash profit is found by preparing the Statement of Changes in Cash Resources statement. The cash profit allows a business to repay loans, possibly pay a dividend or payback a shareholder loan. The cash profit is the acid test of the business model. Large accounting profits do not necessarily translate into large cash profits.
  2. Fixed Cash Burn Rate (FCBR). This is the total of all fixed cash commitments (rent, payroll, leases, PAC payments, CRA remittances, etc) that are charged to the business bank account regardless of whether one dollar of cash receipts is deposited.  This dollar figure could be surprising and scary but you must know what it is. If your accountant is spending the vast majority of their time on the phone collecting trade receivables – you have a problematic FCBR. If revenue goes flat or declines, your business will be in serious trouble.
  3. Revenue Breakeven Point (BEP). The BEP is found by calculating the Contribution Margin in dollars: Revenue – Variable Expenses. The Contribution Margin in dollars is divided into revenue to arrive at the Contribution Margin in percentage terms. The BEP is then found by dividing the Fixed Expenses / 1 – Contribution Margin(%). A growing business that adds fixed expenses to its income statement and levers its balance sheet could see the BEP rise on a year-over-year basis quicker than the revenue has increased. The BEP increase will foreshadow problems in the FCBR in Item 3.

There is another metric you need to have at your fingertips. I will discuss this and its importance in the next post.

Yes, business is a numbers game. All small business owners want to see a basic set of numbers – the bottom line. Unfortunately, the bottom line is never what they expect. Why? There are a number of reasons for this and numbers they should track each month:

  1. The gross profit margin (gpm). This is the quotient when gross profit (in dollars) is divided into revenue. The gpm is not a useful number unless it is compared to a prior year metric. All financial software packages have comparative reports. Have your accountant prepare this. A very small decline in gpm can have a massively negative impact on the bottom line.
  2. The net profit margin (npm). This is net profit in dollars (revenue less all expenses) divided into revenue. Hopefully there is a net profit? The net profit margin should be large enough to improve the retained earnings on the balance sheet and improve the business capitalization.
  3. Client count. Believe it or not, most small business owners only think about the number of clients that have been added to the roster – not the  ones who have left. Client count should be on a “net” basis. If your business has 35 clients, how does this compare to the same period last year?
  4. Extraordinary items. These items are usually factored out of any “normalized earnings” calculations. You should track these. Bad debt expense is one that needs to be analyzed. If a client goes bankrupt or you take this client to collections, you need to re-think your credit granting policies or setting limits on how much additional credit you grant.

These are four very basic metrics that need management attention and oversight. The next post will deal with metrics that accountants should provide.





I spent several posts discussing start-up businesses. I will devote the next few posts to businesses in trouble. A business that is “bleeding red ink” is not only losing money on a month-by-month basis but is in a deficit position in its Cash Flow From Operation (CFFO). This is bad news!

First of all – do not let it get this far. This statement seems intuitive but it happens a lot since most small business owners want to “wait it out.” Their attitude is that the customers will return.

When a business loses money (on paper) it won’t be too long before the cash flow is affected. Profit and loss statements contain accruals (both revenue and expenses) that are stripped out in computing the CFFO. Many business owners have a quick fix for this – “just collect the outstanding accounts receivable.” That will work – up to a point. If revenue is flat or declining the business will accrue less and less receivables. The impact will be felt starting 45 days into the future.

You need to have your accountant prepare a (going forward) breakeven point in revenue. The equation is:   FIXED EXPENSES/1-VARIABLE EXPENSES/REVENUE.  I have done this for clients and the breakeven point surprised them – it was so high. It should not really come as a surprise but, most organizations grow on the back of fixed expenses: more staff, more space, more fixed assets and amortization. Business owners fail to forecast the impact of fixed expenses on the price equation. Revenue might increase but gross margins may not. Revenue increase is not always accompanied by increases in net profit.

More on this in a later post.