Bank Balance Barry. 

No offense to any Barry’s out there - but this is the term I use for business owners to who use “Bank Balance Accounting”.

Bank Balance Accounting is when you use the balance of your bank account to determine how your business is doing. High balance? Business is GREAT. Low balance? Business is TERRIBLE. The problem with using your bank balance to determine the health of your business is that it doesn’t, in itself, give you insight into the cash flows of your business. 82% of businesses fail due to cash flow problems, not profitability issues.

You can show a net profit on paper (along with the taxes you’ll have to pay on that profit), and have no cash leftover to support your business. So what are a couple things you can do to move away from being a Bank Balance Barry , and actually start monitoring your cash position in your business?

1. Look at cash income and expenses for the past 6-9 months (this is strictly cash coming in from revenue and cash going out to cover business expenses, not including loans or credit cards) >> Note: this will not necessarily be the same as what shows on your P&L if you have a credit card and/or loans

2. See what cash goes out to cover loans or credit card payments each month

3. See what cash goes out to cover asset/inventory purchases each month

4. See what cash goes out to cover owner draws/distributions

5. Now, see WHEN the cash comes in and goes out - is it at the beginning of the month? Middle? End?

6. From that - you should be able to create a map of how much cash you can expect to come in and out of the business and on what cadence each month. You can also see if you have enough cash to cover your current obligations, or if items need to be cut, or more revenue brought in. It will also help you start to see if you have enough cash for future larger purchases, or if it’s time to start looking for capitalization if you’re needing some extra cash to expand.

Three Beginner Financial KPIs. 

KPI’s - or Key Performance Indicators, are metrics used in businesses to evaluate performance. Most KPI’s you can benchmark against similar types of businesses in your industry to see how you stack up. Here are some simple financial KPI’s I suggest ALL business keep track of on a monthly basis and owners should be able to answer when looking back at prior periods:

1. Revenue Growth: At what rate is your revenue increasing or decreasing over time? To get even more detailed - this can be done at a service-level or product-level as well.

2. Gross Profit Margins: I personally like these on a service or product level, but this is the profit you’re left with after you deduct any direct costs of delivering/making the service or product.

3. Net Profit Margins: This is your net profit after you’ve subtracted from gross revenue the cost of goods sold and overhead, interest and taxes. This one is especially important to watch because it’s not uncommon to see this start to shrink when a business scales (and especially as the number of employees grows), so business owners need to keep a close eye on this.

1031 No Nos. 

A 1031 Exchange is an exchange of property you can do when trading one investment property for another, and allows you to defer any gain you would have had upon the sale of the first investment, and roll it forward into the new investment.

But - the key here is, it has to be an INVESTMENT property - a primary residence or vacation homes are not eligible for a 1031 Exchange. If you try and do this - that gain is taxable.

Additionally, there are strict timelines associated with it - the property with which the exchange is occurring has to be identified within 45 days of the sale of the first property, AND you have to close within 180 days of the first property. If you don’t - yep, now that gain is taxable.

Last - you need to use a QUALIFIED intermediary - meaning the funds from closing on the first property that are going toward the second property, are not allowed to touch the taxpayer's hands. If they do? You guessed it - that’s now a taxable gain.