Monday, November 24, 2003

Regarding the Assigned Paper

.…as long as it’s clear, the number of pages isn’t critical, but you need to cover the material well, and do it in a decent manner…

I’ve had papers that were six and seven pages, which were very well written and very well put together with a great source for resources and a nice table of contents, and a nice cover page…

{So some of us, here, are wondering about a title page…}

Oh yeah, you got to do a title page, and who’s got a sample? Anyone?

{Yeah, but it’s all wrong…}

No, it’s not all wrong. In my class…this is the world of business. There’s no “right” or “wrong,” is there? There are better ways to do than others, and there are some things that you want to include, but….

So he’s got the title, “Financing Your New Business,” And he has, “Introduction to Business 1101.” It might be nice to have the full section number, but that’s not required. It would be good to tell me that this is the day class, even though I only have one section, so it doesn’t matter.

[What about just using section 01?]

Yeah, section 01 is fine. You may want to put that the class meets Monday and Wednesday, and that you’re turning it in on 11/26/2003. So this is fine.

Now, could you improve upon this?

{No…}

Well, he could put on here that it’s submitted to Professor Mitchell, ok? And the date, because that’s really what you’re doing right? You are submitting it to Professor Mitchell… Now, if this paper were to get lost, and someone sees your name on there, Jonathan Lee, but how do I find you, ok? If I know that it’s Professor Mitchell’s class, then it could end up in my mailbox. Would that be an improvement? I think so. Are some teachers like, “Well, you shouldn’t put that on there?” Yeah, but they’re jerks…you know.

{_______________________}

Don’t ask, don’t tell…well, no, you have a table of contents; you want the subheads to match the table of contents.

{But they____________, right?}

Yeah. And, so, he’s got that. He’s got, “Starting Your Business,” as I look at this, and I see it in his table. I go down to the next one and it says, “Performa,” and he’s got it.

{But how do you want our name and then the number of the page on the bottom?}

Well, you need to number the pages, and in this case, he did footnotes. You can do a works cited section at the end, or a bibliography…he put in a bibliography, which is good. So it doesn’t matter.

This is not an English class, alright. On the other hand, you need to turn in college level material, don’t you. It’s an intro to business project, so yeah. And I’d say that you’re in pretty good shape.

{I was just curious… because on my paper I have _______________}

Yeah, that’s how your computer is set up to do it, right. So, yeah, that’s nice.

{And do we have to use footnotes? Because I was going to use the MLA format instead.}

No, you do not have to use footnotes. Some English papers, or some formal research papers, will require footnotes. So you should know how to do that, if you’re in college, right. But I just need a works cited section, bibliography, sources listed, you could call it. Because some of your information is interviews. Well, if you interview someone, I need to know how to get a hold of them; I need a name and a phone number. I don’t need an address, but it a title would be good, wouldn’t it. So I just need to know where your information came from, and I’m not real specific. However, if I’m looking at the two best papers in the class, and one is footnoted and has a bibliography, and the other one just has a bibliography, well, which one, by one point, is going to get the better score?

{The footnotes?}

Yeah, the person who took the extra time and attention… So is a part of what I’m looking at neatness and what work you put into it? Yeah. It doesn’t count for many points, but what really counts is that you got the topical material, or you got the career material, and that you knew how to do a college level paper, and you had a cover page, and you had a table of contents.

What I write the most about, on your papers, is “subheads to match table of contents.” That’s the thing I write the most, because people just start writing a paper, and they’re just going through and doing it in a paragraph format, and the paragraph format is fine, but it’s like, wait a minute, you’ve got separate sections, here, those should get some head lines, those should get some titles. So what you’re writing is kind of like a book, it’s not a real thick book, but it’s kind of like a book, so it’s your chapter, so to speak.

[Oh, I’ve got a question. You said staples only? ]

I prefer staples only. If you bind them in a plastic binder, and it’s got a spine, and I’m looking at that, and I’m laying on my back…because I’m going…it’s going to take me hours to read these papers, right.

And make a copy of it, because my copy…I’m going to write all over it, aren’t I. Your copy will not come back clean; I can guarantee it. You can’t use in another class, so make a copy of it. And I might drool on it—who knows—you never know what might happen. Plus, you always want to be able to back up your work, right. And you always save your original research. So what I’ve learned from the U of M, is that you always, when you are writing a paper, put all your original notes in an envelope, and then you organize this big envelope by chapters, and then that’s your paper. And then you’ve got your original notes. So if a teacher says, well, where did that source come from? I don’t believe that; that can’t be true… You can come back by saying, “Well, I have that.” And you can always go back and get your original work, right.

And are there students who will try to turn in papers that they did not write?

{No…}

[Oh, yeah, more and more every day…]

Not at Inver Hills, because we have faculty that have attended workshops on how to catch them. So, hopefully, nobody will do that. By the way, if you get caught doing that, what grade do you get for the paper?

{An F…}

An F. If it’s really good, you might sneak it by me…

[Wouldn’t there be issues with the Dean, as well?]

You may have issues with the Dean; although, it would have to be pretty flagrant for that.

Normally what happens, is that if I look at a paper, and it looks apparent that you bought that, or it’s not your work, I will challenge you on it, and I will expect you to produce your original work, and if you can’t do that then, you know….

[Getting back to the binding, if you can’t get a staple through it, would a spiral binding be alright where you could actually…]

A spiral binding is better than a spine one. Because, what happens is, I’m looking at it, and it falls apart. And then I’m pissed, see. Do you want me pissed when I’m reading your paper? No you do not; you want me in a good mood.

[You’re not going to knock-off points for a binding, then. Or, are you?]

I don’t knock-off points for bindings, but here’s what happens: you need to understand why professors do what they do. When you turn in a paper in a great big three-ringed notebook, and I’ve got 30 papers…now, I’ve got to haul all of those home, and I have to haul of them back, right. So, that’s a lot of bulk, and that’s a problem. I’d rather that the paper not fall apart, and I would rather that it be protected, but the best way to turn in a paper is to staple it. If, indeed, you can find a commercial stapler, that works really good, if you think it’s too thick to do with your own stapler.

By the way, what happens if you don’t staple it? You lose a point or two, yeah. I’ve had papers that were perfect, they were beautiful, and they probably hired somebody to type it for them…is that ok? Sure, absolutely. So they hire someone to turn in the final version of their paper. I think it’s beautiful, but it’s not stapled together. So, then, I have to staple it myself. Then I draw a circle around the staple that I just put in, and then I write staple, and hopefully I’ll spell it right.

By the way, if you show your papers to someone else, and I’ve spelled some things wrong, tell them that, “Well, he was a gifted lecturer.” Or tell them, “Well he wasn’t very good at spelling, but he was a gifted lecturer.” My wife says, “You can’t write on a paper unless you spell-check it.” And I’m like, “Do I have time to spell-check every time I read a paper?” No, students want my comments, right? They want the feedback. And I will read every paper cover to cover. I will look at ever letter and every word that you wrote. And sometimes I’ll even circle some spelling or typing errors, because sometimes I can catch them…but a lot of times I can’t.

What else do you want to know about papers? Good, I’m glad we’re having this discussion.

{Are we going to get time in class today to get this going?}

No, but you might have a little time, because we have some accounting material we have to finish. And we were supposed to have make-up presentations today. Are you ready to go?

{Everybody got a 60 on their orals, right?}

Yeah, but two people, one who had a car accident needed to make it up, but he’s not here. And there was one who had something else going on in his life, who did talk to me in advance, and he needed to make it up. Well, he’s not here. So what kind of points are they going to get? Zero…too bad. So I had planned some time for that today. But what you really want are your tests…

{Are you still going to be on Wednesday?}

Wednesday…no class, I must put it on the board, so no one can say, “You didn’t tell us!”

{How are we going to turn our papers in, if they’re due on Wednesday?}

Turn them in on Monday.

[Is the 26^th on Wednesday?]

{Yeah.}

Do you think I thought about this? No… Well, actually, it was brought to my attention earlier, because I mentioned this earlier with another student. And I won’t be here, so you can turn the papers in on Monday. Or, you can put them in my mailbox on Wednesday. It’s up to you.

{So you’re not sure________________}

Well, yeah. So that will give you a couple of extra days. And if you’re all done with your paper, then you’re going to work on your take-home tests, right.

[Well, we’ve got until…]

You’ve got until the last week to turn those in.

I just have to have a couple of days to get them scantroned and brought back to you. So I don’t want you turning these in on the very last day.

{When are the tests due; are they due on Monday too?}

What I told people, when I handed these out to my marketing class, is that I want you to turn them in when you have all the answers right.

{Forever?}

Well, if you got all the answers right, I think you want me record your score, don’t you?

These are tests number 4 and number 5. And I would start on test 4.

So everybody got two of those. Now, you all ought to get 49s on these, right.

Well, it would be nice, but I don’t know that it’s possible to get fifty.

[I’ll bet that these are the more difficult test bank questions, aren’t they…because they’re take-homes?]

Actually, no, they’re not.

[Are they as…]

They’re from the same test bank as every other test you’ve had.

[Yeah, but in the second test, you had some pretty…]

Yeah, on the second test, I notched it up by just a bit. And for the 4^th and 5^th tests, I notched it down just a little bit. So these are actually a little easier. Because what I want, is I want good scores in the end, right. I want to give you a good grade, don’t I. I really want to give you a good grade. You have to earn that.

By the way, are there some people that have fallen by the wayside that aren’t going to get any grade? Is that the real world of business? Yeah. Is that the real world of college? Yeah. It’s glorified hurdle jumping. So basically what you’re saying is, “I can play by the rules, I can do what I need to; I can meet the minimum requirements; I can show up a certain number of days; and I can even put up with some of Mitchell’s stupid stories.” Are you going to have a boss who’s always going to want to tell you stories? Sure. And some of them will be valuable and some of them wont.

{What if you own your own business?}

If you own your own business, will you have clients that will always want to tell you stupid stories, and you have to listen? Sure.

So I can’t believe that I’m actually going to have to write, “not present twice.” That’s like really stupid. By the way, what have a lot of employers told me when we talk about what’s going on in the real world, and what’s the quality of the young workforce that they see?

[What are employers telling you?]

Yeah.

{________________________}

And I have to tell them that they’ll be great entrepreneurs. If they’re going to be shitty employees, they’re going to be great entrepreneurs. I get that a lot. They say, “Oh, you teach at the community college? Well, what the hell is with these young people. They don’t even call in to say they’re quitting.”

So, can you look really good just by showing up and figuring out what needs to be done and then doing it? Yeah! You could look really good.

By the way, my wife heard a funny thing at a restaurant a while back. This gal was bragging about how she was the most senior waitress at that particular restaurant. And then, this other person asked her, “Well, how long have you been working here?” And she said, “Three months.” Now, either, (a), that’s a management problem…that’s a restaurant that has some serious problems, or, there’s something about the labor pool that’s in issue.

{Who owns the restaurant?}

I don’t have the ability to tell you, because I don’t know. But it had to be in my wife’s little circle of territory, somewhere between Shoreview and Apple Valley, because that’s kind of her little world. She’s a friend in Shoreview and a friend in Lakeville. Those are the two extremes, to it’s Minneapolis, St. Paul, Apple Valley, those places.

[Will you excuse me for a minute?]

Yeah, because I have to set up my overheads, here, and that’s going to take me a minute.

Alright, we were talking about accounting stuff, last time. So I will open up this page. And these were done…. Alright, we’re going to use this one, but I’m going to start off with this one.

{Rusty, I have a question for you.}

Yeah.

{Will anything that we learn in this class be on the test?}

Not a thing—not one thing. Is anything that we’ve learned in this class going to be on the test? Not one thing, because what I do in the classroom is completely separate from what you’re studying, which is the book, right. So the test reflects what’s in the book. Now, do I talk about things that relate to the book, and augment the book? I hope so.

{I thought you were being sarcastic…}

Well, I was kind of. But it’s true; what’s in that thing…you could take those and not come to anymore classes this semester and get all of those maximum points. Hopefully, we’ll be talking about some good things, here. So it’s worth your while to come.

By the way, my philosophy is that this is college and not high school, where I don’t need to hold your hands, and you can figure stuff out on your own. Is that the way it is in the real world? Do your employers expect you to figure out stuff on your own? Yeah, absolutely.

Alright, we’ll finish up this accounting stuff, and as soon as we’re done with these overheads, you’re out of here, because I have some keys to make up to go with these tests, and I want to get those done, before I leave today. And I won’t be back until the following Monday, so I have to get that done today.

Profit and Loss Statement

Now, what we have here is a projected profit and loss statement, or projected income statement. So what we do is break this out over time, and we look at what are our dollars coming in, and what are our dollars going out.

Previous Year And Projected Profit And Loss Statement

                        Past Year  Jan. Feb.  Mar.  Apr.  May Jun. Jul Aug. Sep. Oct. Nov. Dec.  Total

So what we do is break this out over time, and we look at what are our dollars coming in, and what are our dollars going out. Now, how many of you have done a program like this on a computer?

{It’s a cost analysis statement, isn’t it?}

Well, it’s a projected profit and loss, or a projected cash flow analysis. So we’re showing all of our costs. I learned to do this at Mankato State by hand. In the old days, you had to do it by hand, unless you were a big company like ATT, which had a computer. You didn’t have a computer back then. But was that kind of tedious? Yeah. Now, we use a spreadsheet, and the computer does it for us. And the beauty of the computer and the spreadsheet is that I can predict out here, and then I can tell the computer to take this to 36 months, take this to 48 months, take this to 180 months. And it will show you when you are going to go out of business. Or, when you can expand, when you’re going to double in size, or when you’ll be at a certain point where you’ll have enough extra profit or money to buy that next franchise or to buy that next truck, or to buy the next set of lawn mowers. Is that beautiful? Yeah. So this is a critical tool in the management part of operating a business.

And, by the way, when I first came to Mitchell Advertising, my dad was not doing this. He said, “Na, it’s too much busy work…” He said, “All I need is a sales journal, and a general journal, and a general ledger, and an income statement, and a balance sheet, and that’s all I need. Just keep track of my expenses, and keep tract of where my sales are going.” And I said, “But, but, but dad, I learned at Mankato in an accounting class that you have to do this. And this will tell you how you are doing, and it’s what allows you to set goals. It tells you what’s my return on investment; it tells you what’s my return on sales? This is critical, and you’ve got all of this in your head.” And it’s true. Even though he’s dyslectic like me, and it’s often passed from parent to child, and my daughter also deals with it.

He was good with numbers, and his handwriting looked like hell, but his numbers were good. He knew… I would do, at the end of the month…I would do the income statement, the balance sheet, I knew what our accounts receivable was supposed to be and our accounts payable, and I’d say, “Ok, dad, give me a guess; what’s the total on this months accounts payable?” He would pop it off the top of his head. He had a running total in his head, much like a computer would do, right. And he’d say, “Ok, what’s the date today? Ok, it should be…” And he’d be within between 10 to 18 dollars. Is that amazing? Yeah. Did he know what was going on in his business? Yeah.

But as business gets bigger and more complicated with more players, you can’t keep it all in your head anymore, right. So you have to have something like this. And, so, I encouraged him to do that, and I said, “If I take over the business, eventually, I need it this way, because this is what I understand.” So he agreed and we went through this process.

                        Past Year  Jan. Feb.  Mar.  Apr.  May Jun. Jul Aug. Sep. Oct. Nov. Dec.  Total

But we look at our sales, our cost of sales, our gross profit. Controllable expenses, in this case, such as salaries, payrolls, security, advertising. And then we want to look at whether they are going up or down. Now, we might want to add another column as a percentage, right, and not just look at the actual figures. But when I look at a small business plan, do I look at these to see whether they’ve got most of the reasonable expenses? Yeah.

And, hopefully, they’ll have a column for miscellaneous and some reasonable dollars that they threw in there. And it’s nice if there’s a little addendum that says this is what those little miscellaneous items are. But if I look at one, and they don’t have legal or accounting, I’m like, wait a minute, they don’t have postage or express delivery. Those are expenses to doing a business. I might look at a business and say, “Well, gee, you’ve left off your utilities, so…” A banker will look to see that you’ve got all of these kind of covered, and then what he/she will do is go to a book that tells them, kind of, the normal averages for certain industries. And they’ll, kind of, determine whether you’re on track or not. So you want to do that in advance, up front and know what those are.

Ok, and then we have our fixed expenses, our depreciation, our insurance, our rent, our taxes, our loan payments and/or interest. And then we have our total fixed and total expenses. Then we can see our net profit or loss. And from the end of that, we’ll bring into this next cell, for the next month, the net amount from the previous month, whether it’s positive or negative, right. And as those go through, imagine that it’s kind of like the Titanic sinking, if the numbers are negative. Remember in the movie, Titanic, they talked about water entering continuously coming over those cells…

[Are you talking about the next sheet?]

Well, yeah, it moves, like this: from January into February, and if that’s a negative figure, you’re going to show that there, and if that trend continues, you’re going to have less and less and less. So, basically, you look at these trends and go, “I’ve got to cut some of these expenses. I’ve got to improve on sales. Or, I’ve got to improve sales as well as cut expenses.” So it shows you what’s going to happen. If it’s a positive number, at some point you can look at this and go, “Hey, I can buy a new truck…now, I can buy that new truck.”

I had a friend of mine who started a video business. When they opened a second store, did he have those numbers done? No. I said, “How can you justify opening another store?” He said, “Well, most of our customers are coming from Wayzata. More than half are coming from Wayzata.” I said, “Well, that’s fine. What that proves to you is that they are willing to travel a good distance to buy a big screen TV from the best guy in town, but you don’t have enough profit to support another store.” And he said, “Oh, but we’re going to get more of those clients, and then we’re going to concentrate on getting clients into the Edina store from this neighborhood.” I said, “Well, that’s fine, but when you open that second store, now you’re cutting your manpower in half that each of you are going to have to manage.” They were two individuals who were partners of that store. I continued by asking, “Now, who’s out selling to the bars and the schools?” And he said, “Oh, well, I’m still going to do that…” And I said, “Well, you’ll have less time for it, because you’re responsible for that store.” And I got to thinking that there was something wrong, here. This is a problem. But they went ahead and did it anyway.

Well, what happened? They went out of business. What’s amazing, though, is that the same guy went off with another partner, and instead of opening a new store with a different name, now, in Wayzata, and new financial backing, they opened right-off-the bat two stores. They had to hire a manager for each store. No, it doesn’t work that way. Well, what happened to that business? It too went down the tubes. Actually, they opened five stores in less than a year, and not one of those store ever made any profit.

[Ouch…]

And they were competing against Best Buy, Dick Schultz. One was a former rep, and the other guy was a former employee. That’s a problem. So, this is critical. And business that are well run will do this, and they’ll know, well, ok, I’ve got enough, now, to buy that next truck; I’ve got enough to expand; I’ve got enough to give myself a bonus. Honey, I’m going to double my salary.

[I have to mention, too, that if you’re starting your own business, and you have limited staff, this is really key, because using the proper software will cut your time by as much as a third. You’ll spend most of your time working with ledgers and all this other crap, and you won’t have the time for that, because you’ll been working for 16 and sometimes 20 hours a day. ]

Yeah, exactly. That’s how it plays out.

SBA Cash Flow Forecast

Name of Business                               Address                Owner

                                                   Startup

Year            Month                     Position          Month 1           Month 2

Alright, next we’re going to look at one that the SBA puts together. If you want to borrow from the Small Business Association, you have to do their paperwork their way. So this is their form. So this is for a startup business, and it’s your estimate and your actual, month to month. So when you start a business, and you do an income statement, and you figure out your costs, those are guesses, right? And hopefully, they are educated guesses and not what I call WAGs, wild-ass-guesses.

[Now, is this still a cash flow forecast?]

This is a cash flow forecast, a cash flow projection statement. It has some additional operating and essential operating data at the bottom…

[And is this a quarterly or a monthly?]

This is done on a monthly basis. Each of these cells are a month.

[Ok.]

The thing is, if you want to get SBA guaranteed bank loan money, you have to fill out their forms, and play their games, don’t you? It’s just like going to college; you have to play my game—it’s my class, right? So it’s the same thing. If you want to get their money, you’re going to have to do this.

SBA Cash Flow Forecast

Name of Business                               Address                Owner

                                                   Startup

Year            Month                     Position          Month 1           Month 2

Well, this is the form you have to fill out. Is it really that much different than the other one? No. It’s pretty much the same thing, except, here, they want a pre-startup position and they want an estimate and an actual. Well, when you’re running a business, and if you start with these educated guesses, as you begin to operate, you’ll get better and better at projecting what your sales are, right? …Well, we thought our sales would be more, but it’s actually been more, or it’s actually been less. Or, it goes up and then it goes down; here’s the trend. Pretty soon, you get better and better. So each time you go through this cycle, you get better and better at it. And that’s the beauty of a system like this.

Now, McDonald’s, they’ve got it all computerized, they know every restaurant in the world. They know exactly how many ounces of oil it takes for each French fry that you fry. Do they have all the numbers? Yes, they have all the numbers. The beauty is that they have a huge data base, right? So you need to create your own data base. And if you do that by doing something like this…

An Example of a Wild-Ass Guess

Ok, let me give you an example of a wild-ass guess, WAG. A Student turned in a small business plan to me. And he said he was going to make, something like, $750,000 per year on a racquet ball club…is gross sales. Well, I just did some quick math with my calculator and I figured out that if he has 8 courts, and he runs those 8 courts 24 hours a day, seven days a week…I take my 8 times the average game, 1 or two hours…he was going to bill, basically, by the hour right. And I do a simple multiplication. Well, guess what? He couldn’t come up with more than $300,000 no matter how I figured that at the rates he was talking about. Was that a wild-ass guess? He just plug a number in there that sounded good. You can’t do that, right? They have to be realistic forecasts.

So I wrote on there, “Here’s my tally of what I think you can make, if you’re lucky enough to have 100% operational sales.” Do we ever run at 100% capacity? No. So, you have to take that and factor it down: on these days, we’ll be at this capacity; on these days will be at this capacity. There’s some holidays that we’re going to throw in there, where no one is going to come. Now, you’ve got a more realistic forecast. It’s still a guess, isn’t it. But it’s an educated guess.

Another thing that he did is he said, “I’m going to build these courts for $12,000 each. Have any of you ever played racquet ball? Does that make sense? Not a chance. I’ve played racquet ball, and I’m like, that’s got to be a hardwood floor, you have to have certain ventilation going on; the lights are expensive as hell. They have to be shielded and protected. You have to have a hard wall, because big guys like me are going to hit that wall at their top speed….and it’s usually my head that hits it first. This guy needs a solidly constructed room. No, I don’t think that’s going to work. So I call my brother-in-law, who happened to be a builder, and I said, “Gary, I know you’re busy, but I just need a minute of your time. Just give me an off-the-top of your head guess, what do you think it would cost to build a racquet ball club.

[$200.00 a square foot.]

Is that what it is?

[At least.]

Well, it could be. He didn’t give me a per square foot figure. He said, “Well, you need the hardwood floor; you need the ventilation; you need the lighting; you have to have a solid back wall. It’s not just sheetrock, it’s probably plaster. God, you’d need an expensive door, there, with a little window. Are you going to have viewer’s boxes above or not?” And I said, “I think that he’s not going with that. I think his expansion plan calls for that in the next set of courts. But I think that initially, there wasn’t going to be any. So he’s like, “Ok, I’m thinking, probably, about $38,000 to $55,000 per courts.” Now, was that first estimate way under? Yeah. Can you find out what the industry averages are, by going to the trade association and getting the real numbers? Yeah. And, who knows, that might be the number.

I know one thing…what he had predicted for the expense of the bathroom facilities, the showers, water heater, and all of that. If his racquet ball court numbers are going to be low, that’s going to be low too. Because you have to have a heavy-duty commercial water heater, right. You have to have heavy-duty drains, and you have some sewerage expenses. Do you realize that every building pays by the amount of water that comes into your property and it’s based on what your sewerage costs are? Well, people are using a lot of water in a racquet ball club, right. That’s a major expense. Did he have that anywhere on there the cost of water? He had utilities, but his utility bill was like what you would have if you were running just the front desk, you know…a computer, and a telephone, and some lights. So you need to figure out some of those costs and try to get them as close as possible.

SBA Cash Flow Forecast

So, here, they’ve got purchases merchandise, gross wages including withdrawals, payroll expenses, outside services… Is this a pretty good list? Yeah.

…supplies, repairs and maintenance, advertising, car, delivery, delivery, travel accounting and legal, rent, telephone, utilities, appliances, taxes, and then other expenses, and they give you some places, because you might have some things that are particular to this business.

…and then, miscellaneous. Then we have our subtotal, our loan principle payment, our capital purchases, any other startup costs, reserve and/or escrow. You might have to put money up front for your credit card machine. And owner’s withdrawal. So we had payroll expenses, we had gross wages, plus owner’s withdrawal. Here, by the way, for owner’s withdrawal, what do you need to live. You heat, rent, taxes, food…you know, a little entertainment, transportation. What’s the bare minimum that it takes you to function? How many of you do a budget? If you want to be in business, you’d better start budgeting. You better get used to it. I hate it; I don’t do it; I delegate. My wife does the budgeting; she pays all the bills. My friend says, “You’re nuts, you’re not in control of your life.” But it’s like, how can I be in control of the business department and my family? I can’t, so my wife does all of that.

[Why wouldn’t owner’s withdrawal be listed as simply salaries to staff?]

Well, you can do the staff and that would be payroll expenses, or gross wages. Actually, the payroll expenses would include workman’s compensation, you’re share of the social security, all of that stuff. But you need to live if you’re an entrepreneur. You don’t want to be taking money out as you feel like it. It needs to be regular. Then, at the end of the year, and if you had a good year, can you give yourself a bonus? Yeah. But, by the way, give your employees a bonus first. Oh yeah. My company, when I start it, will be employee owned, managed, and operated. I’m out, I’m just the head guru. I’m just the guy who had it in my brain. I’m the visionary, the founder. Those people make the company work, right? And, so what every profit they get, I’m going to get equally, right. But you’ve got to figure in for your owner’s withdrawal. That’s critical.

By the way, always keep your personal expenses separate from your business. The IRS has no right to look in your personal checkbook. But they have every right to look into your business checkbook, and they will. I guarantee you that at some point you will be audited. So my wife’s like, “Well, why can’t I just run this out of my checkbook?” And I said, “No, no. You’re not screwing up our family with your business. You have a separate accounting for your business. You have your own credit card, your own checkbook. You keep your own books.

[That’s called commingling, right?]

Yeah, and you don’t want to do that. At the end of the year, if you’ve taken out x number of dollars, we have to show that as personal income on our personal income taxes.

Ok, whether your business pays taxes or not, that’s your business. Hopefully, eventually, my business will pay more taxes than her business. But we’ll see how that plays out over time.

Anyway, we total up our cash paid out. Then we can show what our current cash position is. And that’s why they call it a cash flow projection statement, or cash position statement. Then we have some essential operating data, here. They have our sales volume, ok. And you might want to record on a sales journal what it is that is selling, and when, individually. This is so I can go back and say, “Hey, this is when we sell calendars, here’s when we sell kites. Pens and pencils are sold all year long. Here’s Hoover’s sales too; you can break a sales journal down into a number of different categories. That gives you information to run your business.

Then we have accounts receivable at the end of the month. Accounts receivable…well, what does that mean? It’s people who owe you money? And oftentimes, people will want to know the dating of your accounts receivable. What does that mean? Well, yeah, my account who owes me money, is going out with Jill, and she’s hot. No. What it means is how old is that. I asked a guy, one time, a small business consulting client, about the aging of his accounts receivables. And he goes, “Yeah, some of my customers, especially the good ones, are getting pretty old; they’re starting to get gray hair, and stuff…” It’s like, did he understand what I was saying at all? He didn’t have a clue. It’s like no, wait a minute, aging of accounts receivable…if something is 90 days past due, you’re likelihood of getting is like zero. If it’s 45 days past due, you might collect it, yet, right? But now, if it doubles and goes to 90, it’s almost impossible. If it goes to 120…. So you need to know how old each of those accounts receivables are and how many of those that you have in those categories.

By the way, the best thing is to not grant credit, right. Everything is on a cash basis or credit card. “Well, I’m not going to pay VISA their 5 percent!” Hey, listen, they’re saving you money. Pay it. People say to me, “Gee, should I take the VISA?” And I say, “Well, are you going to take personal checks?” And they say, “Well, yeah…” But it’s the most dangerous thing in the world, the personal check. VISA is a guarantee that you’re going to get paid.

Gee, he’s even on time!

{I’m having a really shitty day, so…}

Don’t get in my face, he says…well, I won’t.

{But I’m ready, if you want me to do it…}

[Cool…]

Well, we’ll see where we’re at when I’m done with this thing.

{Ok, sorry to interrupt…}

Oh, we’ve gotten used to it. Oh, wait a minute, I’m not supposed to be in his face, am I. I want to see people finish my class; that’s important to me. I’ve always told students, I’d rather have you here and be late than not at all. Although, it is a little rude to come in late.

Alright, where were we? Let’s see, we were talking about accounts receivable, the aging, keeping track of that…. Bad dept, how many of those are you going to write off? Are you actually going to have debts that you can’t collect.

Oh, I remember, we were talking about the credit card thing. If I have a credit card machine, I get paid as long as it was authorized and approved, no matter what. If Visa gets screwed, that’s Visa’s problem, right, but I get paid as long as I follow their rules and their guidelines. If you give me a check, I not only get don’t get the amount from the sale, but my bank is going to charge me. And each time I submit the check through, they’re going to charge me again, aren’t they. So you don’t want to deal with checks. But in some businesses, you have to take credit, because some people say, “Well, just put it on my account. I’ll buy from you, but you have to extend me some credit. So just put it on my account.” Well, then you want to set up a policy and procedure, so that if they don’t pay their bill, they pay one percent on the unpaid balance each month, right. And if they skip one month or three months, that grows and you get to keep the interest, right.

By the way, my dad would never allow us to do that. And I would say, “But sometimes you have to do that…” And he says, Nope, nope, payable due in 10 days. That’s it.” And I would say, “No penalty? No discount for early payment?” And he would say, “ I’m not giving them any money. They owe me in 10 days. I’ve gave them creativity, and I gave them product, and I deliver on the spot. I always deliver promptly; and we’re the best in town. They owe me in 10 days.”

[What’s that phrase on the bottom of most invoices that goes “net 10 days”?] The average norm is net due in 30 days, and if you pay in advance, they give you a one, two, three, or four…some suppliers give us as much as a five percent discount if we pay it in 10 days or 15 days. So my dad, every year, would take a vacation on the discounts that he claimed, because he always had cash. His business….

…because a lot of times, in the retail environment you have merchandise that’s rolling in over time, and you need to know what you’ve committed to, not just what you’ve actually paid for, but what you’ve committed to. So that’s critical. So that’s the SBA form. And it’s probably a little bit different today. This is an old one, but my guess is that it’s basically the same.

Next we’re going to look at a budget. When I asked how many of you do a budget…you know, you can probably live pretty simply, now. But it’s a good exercise to go through to make yourself budget. When I was in college, the accounting instructor made us do this. Was this good for me? Yeah, especially being a dyslectic kid. The more organized I am, the less stress I’m under. The more on top of stuff I am, the less stress I have. So that was a good thing. I went through four years of college, than after that, for about 3 and a half years, budgeting. And in my first few years being single, I did that. Once I was married, then I didn’t do the same kind of budgeting that I did previously.

Fortunately, my first wife, she didn’t like doing it. She let me do it. But I couldn’t do it in the same way, because now she wanted to write checks, right. So it actually became more complicated, didn’t it. But she didn’t want to do the budgeting thing, so I kind of did what I could do on my own. Now, my wife works the budget for the both of us, and it works out pretty well.

But in a business, do you have to budget? The employees might say, “Hey, I need some money to do such and such.” Well, if there’s no budget, how are you going to answer their questions? And they might say, “Well, when am I going to get the money, boss, to do this?” You have to be able to plan, right? So this is a critical thing.

Functions of a Budget

So here we have the process of developing projected income statements, projection income statements as standards, aid to management in planning for the next period, aid to management in controlling operations during the next period, aid to management in evaluating performance of individual subunits… You can see which units are the most costly. Nursing, at this campus, is huge. Business costs them nothing. We’re all profit; we don’t have any expenses. The computer people, downstairs, do they soak down huge dollars? Yeah, they do. But then, partly the reputation of the college depends upon our ability to work with business and to be up to date, and what not. So sometimes you just have to have to pay those. But you can make comparisons in terms of months for the subunits.

Then we have, aid to management in the rapid identification of potential trouble spots. So, ok, what are the trends, who’s in trouble, what’s going on. Fortunately, for us, our enrollment numbers have been dropping in the business department, in terms of our daytime students. But what’s happening to our costs? They’ve also gone down. We have people who have retired, and we haven’t replaced anyone. So as long as our costs and our expenses stay in a good ratio, we’re ok. Unfortunately, what that means is that they’re not building to invest in the future; they’re not growing anything. So, basically, this business department, in the last 7 or 8 years, has been riding on its reputation. How long can you do that?

[Not very long; it’s probably on its death throws by now.]

It’s a concern…it’s a big concern of mine. Why I want to raise money for the foundation is so we can find the money to pay a coordinator, and not use state money. Because, right now, Cheryl says we can’t have any state money for leadership. You can’t do it; the state won’t allow it. Is that stupid on their part. But that’s an issue that she’s going to have to work out, or that someone’s going to have to work out. Hopefully, I can hang in there long enough. But this is a concern.

So it’s like, if you see an area that never spends any money, is that a problem? Because you have to spend money to make money, right? So that should be an issue. By the way, when Roy retired…he was the guy who did our budgets, and he taught financial accounting and stuff, he liked doing that stuff. But nobody has filled his role since he’s retired. Dan Underwood isn’t going to do it. I’m not going to do it; it’s not my strength. The dean’s not going to do it.

[Larry?]

Larry’s not going to do it, he’s running the whole college. So you begin to realize how you make management decisions based on what we see in the numbers, and where you see problems. Can you see how I’m looking at that from a consultant’s point of view? I come in and look at your books and know so much about your business instantly. You need to be able know as much about the business from your books as I would as a consultant coming in and looking. It’s critical.

Ok this is the next thing that we have to look at, and, actually, the last thing that we have to look at. Now, we looked at what’s in a balance sheet right? Yeah, I think we did too, so we should be done with that one.

Financial Ratios

Ok, here we have current ratio, ROI, which is return on investment, return on sales, and earnings per share. This is what you see quoted in the Wall Street Journal, right. If you’re going to buy a stock, you want to buy a stock based, often, based on its earnings per share. What that tells you is the profitability of the business on a per share basis. A key figure influencing the dividends per share of common stock. So we take our net income after taxes over the number of common shares outstanding. The number of common shares outstanding comes from our balance sheet, doesn’t it. Income after taxes comes from where? The income statement. This accounting stuff is simple, addition, subtraction, multiplication, division. It’s not a lot of complicated math.

Financial Ratios

It’s simple division that tells you a ratio, a percentage. And what’s important is what that percentage means, how does it compare? So it’s the comparative analysis that’s critical. That’s the management part of these numbers, right. So I can have a current ratio and it tells my ability to meet debt, but if I don’t know what that figure represents, I don’t have anything. If I know that it’s better than my industry average, now I have something. If I know that it’s a higher or lower number that a bank will talk to me, what it says is whether they will loan you money or not. So do you want to know that before you go into the banker? Yeah, and, hopefully, when you go into the banker, you’ve got some reasonable numbers and they’re based on real figures, where you haven’t cooked the books.

Financial Ratios

But our current ratio is our current assets over current liabilities. That comes from where? The balance sheet. Then there’s ROI, return on investment, you’re net income after taxes over your owner’s equity. This is probably your most common form of profitability figure. It’s like, how profitable were we? And it changes over time, because your net income changes, right. So are you going up or down? Do you want your ROI to go up or down? You want it to go up, yeah. You want your net income to be increasing, hopefully, your owners equity will at least stay the same.

Financial Ratios

Then there’s return on sales, ROS, net income after taxes over sales. Again, this is profitability. Net income after taxes and sales both come from the income statement, it’s pretty easy to see where those come from. That tells you, are you actually making a profit or are you spinning your wheels? So I remember my brother-in-law bragging about, “Yeah, last year we did a million five in volume. What did you guys do, Rusty?” And I’d say, “Well, we did just a little $500,000. And he’s say, “Oh, so I beat you by a million.” And I’d say, “No, you didn’t beat me by a million, I want to know what your return on sales is?” You see, he can do a lot of volume, but if his expenses equate to his sales, what has he done? Nothing, he hasn’t gone anywhere. He’s spinning them wheels like a dragster; he’s just smoking. It gets a lot of attention, it looks really good, but he didn’t go anywhere, right. I’d rather have a little scooter that got to the end of the track, and go, “Wow, that was a fun ride…” I actually got somewhere.

Actually, what I did then, when he would say that, is I would challenge him, “Ok, Gary, tell me your ROI and your ROS, weighted average over 10 years, big shot!” He’s the accounting professor and an economics professor, right. We’re at the family dinner table; I have to stand up, because my dad’s there. “Tell, me Gary…” He was in the real estate business.

What’s the real estate business look like? Peak and valley, peak and valley, peak and valley. What’s the add business look like? It’s as solid as a rock; it’s steady year after year after year. Yeah, we do $500,000. Of that $500,000, we get to keep half. It’s pretty much the same. Last year we did $488,000; next year we’ll do $510,000. The percentage of what we take out of that when it’s all done, is pretty much the same all of these years. Who’s got the better business? Well, he can make big money if he can manage his expenses and continue to ride the highs. But can you ride the highs? No.

By the way, every time you hit a high, you buy another building, so you can leverage yourself more. Now, you want to leverage, right, because you can depreciate things; you want to leverage, but you want to make it controlled leverage. My dad always used to say, “I’m worried about Gary, it’s not going to be controlled leverage, like you and I talked about.” Eventually, he had too much leverage and the whole thing came out from under him, like a house of cards. You pull out one thing, and it all falls down. And that one thing was the 100 year flood.

[Your brother-in-law?]

My brother-in-law, he went bankrupt. Fortunately, for him, just when his kid was going to Columbia, and he needed to get some school loans, and it’s good to have mom and dad bankrupt when you’re going for school loans, right? Yeah. Kind of sad, but yeah.

He had no way of anticipating that 100 year flood. That’s a thing of nature, right. But he had basements and foundations that blew out. And he had one house that he actually had to move. He had to move it from one side of the street to the other, because it was bad soil. Had they tested the soil? No. Should they have? Yeah. It had cost him a fortune, right when he didn’t need it. Then, unfortunately for him, and he’ll tell you this story—he tells this story to his accounting students—his mother-in-law gets Alzheimer’s and goes into the hospital. Now, had he planned for that? No. Could he have planned for that? Well, maybe. But she had lent him money. Well, when you go into the hospital, do you have show all family loans? Yeah. Now, he has no source of borrowing money anymore. He can’t go for the next high. Wow, he’s got to pay those loans back. It, like, took the wind out of his sails. It’s like he was down on the ground, and like he was stamped on, and then he got stamped on again; and then somebody threw a brick at his face (Wasn’t that horrible, what happened to those soldiers? Oh, my God.) What was the brick in the face? Well, at the time all this was going on, the bank credit situation had turned around. Remember the deregulation, where the banks got tight, a few years back. Well, he got caught; he had a half a million dollar line of credit—a signature line of credit—with my good friend’s dad’s bank, Andrew Darling Park National Bank. All of a sudden, can he give that line of credit anymore? It’s like, no, with the new regulations, we can only loan you money based on what your books look like at the moment, not what you think you can do or what you should do.

But he had really liberal credit before; now, his credit tightens. So it was those three things that all came together at the wrong time. So when you look at these ups and downs, where would you rather be, in a steady business?

And the add business does well in the boon times, and it does well in recession times. During recession times, people, more often than not, will take money from other areas and put it into advertising and promotions, and customer good will, because they don’t want to lose customers. And when things are rolling, then their budgets free up a little bit and they will spend a little extra money. So you have to figure that out.

But I remember being at a bar one night, and this guy was bragging about how good his company was doing, and how much he was making. And I said, “Well, I’m really glad to hear all that, but what’s your ROS?” And he didn’t have a clue about what I was talking about. He couldn’t give me a number. He didn’t really understand what I was talking about. It’s like, ok, you just told me you don’t really know really anything about business and business operations. You don’t really know what’s going on.

And if we’d of looked at, it probably wouldn’t have been very good. So know and understand what those accounting ratios are. Is ratio analysis the management part of a manager’s job. Here at Inver Hills, we train for management; we train management stuff. Well, yeah, that’s what you have to know. And so you’re going to be looking at those cash flow projection statements, you’re going to be doing those ratio analysis, and hopefully your business will grow and grow from there.

So, somebody wants to give a presentation. I’ll shut up for a few minutes.