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.





Businesses file for Chapter 11 protection in the USA and CCCA protection in Canada all the time. Some successfully emerge from protection, others do not. Now we have the largest municipal filing in US history – Detroit. It’s decline has been continuous – since 2000 the population (ie tax base) has dropped 25%. At it’s peak in the 1950s, Detroit’s population was 1.8 million. The most recent census pegged the population at 700,000.

Detroit’s debt load is anywhere between $13-$20 billion.  The main concern is that the pension plans of municipal employees (that have been underfunded) will result in pension plans that will become insolvent.  Police, fire service and emergency responder costs have been slashed and the pathology on the community is evident: 300+ homicides a year and row upon row of boarded up businesses and homes.

There is a lesson here for municipalities all over North America. Your tax base is comprised of realty/business taxes and fees. Yet citizens demand all the services that can’t be afforded. The citizen can opt out – and move out. The City council has to deal with the mess that previous administrations have created. People place too little emphasis on municipal elections yet, this level of government is closest to us. In Canada, municipalities look for provincial support for infrastructure programs yet assume dangerous debt loads, and infrastructure maintenance costs as well as increased unionized labour costs. The notion that the costs that future generations of taxpayers will have to bear is pooh-poohed because “we are creating a great living environment.”

Stockton and San Bernardino California used Chapter 9 bankruptcy protection to stave off liquidation. Detroit’s mess will be year and years in cleansing.  It is ironic that companies (like Chrysler and GM) can get support but Detroit must go it alone.

There will be more to come…………………

There usually is never any question about succession in a family business. The newest (family) members will take over – some day! I’ve worked around family businesses most of my career and here are some of my observations:

  1. The new family members assume their positions by virtue of DNA, not ability. This isn’t a critique as much as a statement of fact.
  2. The new members may bring some new and fresh ideas but they are usually marginalized by the scion of the family.
  3. There isn’t a clear time frame for the current family ownership to transition out.
  4. The mantra is “follow my lead.”

The key issue in any family business transition is the preservation of the family business name. It should be to ensure the business can survive and prosper going forward. What worked for Dad or Grandpa’s era may not (and probably doesn’t) work in Junior’s era.  There is too much information and too much choice now.

It seems ironic that most well run businesses spend a lot of time scrutinizing the resumes of prospective hires for managerial positions yet don’t perform the same due diligence when a family member joins the firm?  There are different sets of rules of course and this could signal the end of the business.

I recommend that the newest family member “learn the ropes” by getting to know how the business operates. It could entail wearing blue jeans at the loading dock or getting dressed up in a suit to meet key clients. That’s the probationary period.

Then, I recommend assessing the shortcomings and making sure that they get proper training. This training could be expensive but it will pay dividends in the long run. The big issue is whether current family management thinks that training is an investment or a cost.

More in a future post.


The biggest challenge facing any small business today is… succession planning. Many business owners from the baby boom generation would like to be able to retire but, cannot.

They can’t because:

  • They haven’t given any authority to their kids who work in the business
  • They’ve made no (prior) succession plan.
  • They have equity in the business they can’t unlock so they feel they have to stay in the business longer to protect their own interest.

I guess it starts with the kids who work in the business. Ideally they should have 5 (or more) years of experience working for someone else. They would gain valuable experience seeing how other companies work (or fail) and would have been offered no special privileges while there. Hopefully they would gain experience in planning, budgeting, human resource management and possibly marketing.

I have heard a few stories of family members who worked for another company and then returned to the family business. They saw the business in a different light and were in a position to make some changes to streamline the business or improve management thinking.

The second challenge is – the position of the incumbent. The scion of the family has run the business their way for years and years and want no part of any changes. It has worked in the past so, it will work in the future… right?  No it won’t!

The family business that makes room for new (family) employees and has been only eking out a small profit before the new generation arrives can’t be expected to automatically soar to new heights. The only addition is overhead.

More on this in a future post.

It has been my experience that a family business gets into trouble when .. the business gets into trouble.  I have worked in a quite a few troubled businesses and the shortcomings of management become evident. Here are a couple of the usual disclaimers:

  • “I don’t know what has happened to the economy and our market?”
  • “I don’t have any more capital to put into this place.”

Both of the above bullets are correct in: (a) management never watched the market very closely so, they certainly would have no idea what happened in their market (b) the scion of the family has ALL of his/her  livelihood tied up in their business.

There is a third bullet that I will now elaborate on: The newest (family) members in the business don’t have any experience running a business or in any of the key components of the business like: operations, sales and marketing or accounting and finance.

A family business that has been in business for 25-50 years has no guarantee that it will be around in the future. The weaknesses inherent in a family business become obvious when the business gets into trouble.

New competition, new technologies and better delivery of service is something that catches the family business off guard. The bromide of delivering great customer service misses the point. Customers expect great service from any business. Large corporations are adjusting to a new paradigm and small businesses must learn to do so as well. Unfortunately, the family business that refuses to get out in front of the market and their customer pays .. and pays dearly.

The family owned and operated business is one of the real gems of entrepreneurship. The reins are handed down from generation to generation and it might appear that this type of business will continue and succeed indefinitely.

This thinking it wrong. It takes moxy and chutzpah as well as skill to keep these businesses operating. Many small businesses are unprepared for the inter-generational challenges. After all, the new blood got there by virtue of DNA – not ability or experience. I do not say this to criticize all small business management. I started out, right after university in a family owned business – in management and with no prior business experience. I did not appreciate it at the time but I was getting the same kind of real-world training that many MBA programs offer.

I have been around many small businesses and they have a lot of similarities and (unfortunately) pitfalls:

  1. There is no business plan – just an assumption that the business will be around in the future for family members to join.
  2. The newest members don’t have much if any formal education or prior business experience.
  3. The newest members learn from the incumbents.
  4. Wealth does not automatically accrete. In fact many of these businesses are under-capitalized so the retirees cannot enjoy the fruits of their years and years of labor. This is one reason why small business owners delay retirement for so long – they can’t afford to retire.
  5. There is no real succession planning and as such, no estate planning. So, serious illness or death can have disastrous consequences for the family – not to mention the business itself.

There are many steps that the current generation of family business owners can take to preserve their wealth and help the succeeding generations of business owners.

More on this in a later post.

Yesterday I had the privilege and opportunity to participate in a “garage mentoring” session with a couple of Ottawa and area start ups. The two businesses that presented themselves were varied but have potential. They haven’t started active operations but have products for their markets.

The presenters were passionate and ambitious. The one shortcoming was their lack of understanding of their market. This is not a criticism just an observation. I was fortunate to be with a marketing consultant and he offered suggestions for the entrepreneurs to find their market niches.

The entrepreneurs who are behind both of these businesses are working on their business plans. It has been my experience with numerous local businesses that an understanding of a market is critical to the success of a business venture. Once you understand your market then you can direct your selling efforts to generate revenue.

I am an accountant by profession. However I advised these entrepreneurs to find their target markets and customers and establish a pricing strategy – then I can help them with the financial forecasts.

It was a great session. It is nice to see that entrepreneurship is thriving in Ottawa.


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.


The previous posts have all led to this post. Your “Google Map” is your business plan. It should be a written description of where you want your business to be in 3 years.  Why 3 years?

  1. The Canada Revenue Agency (CRA) has ruled that a business must have a reasonable expectation of profit. Simply put: one cannot use business losses continuously to offset other income. The CRA will reverse it.
  2. Most start-up businesses fail within 5 years of start-up. Unfortunately many fail within 3 years.
  3. If you are attempting to generate a full time living from a money losing venture, you will be destitute after 3 years if your business continuously loses money.

You must be a visionary when creating your plan. Your plan will place you on sounder footing than the business that starts without one. The business plan components should be properly researched, and with realistic financial forecasts. The financial forecasts are the acid test of a business plan. If the forecasts (income and cash flow) don’t look reasonable – well – reload and rethink your assumptions.

I have developed a very comprehensive 9 module “Starting Your Own Business 101” course. Check out the table of contents on the front page of this blog.