Decluttering Your Numbers

The first thunder of the day woke me up at 5 a.m. last weekend. A thunderstorm. On a Saturday. Rain was forecast off and on all day.

So much for the outdoor chores: washing windows, cleaning and hanging screens, and trimming the shrubbery outside the window would have to wait for another weekend. There really was no escape – it was time to spring-clean the home office.

Now even my wife would admit that I’m reasonably neat and well-organized, or at least the top of my desk is. But when things get stashed in the desk drawers or in paper files (not everything is electronic yet) or in the supply closet, retrieval is often something less than instantaneous.

So Saturday was a day to “declutter.” If I hadn’t accessed a file in a year, out it went. Old stationery – recycle bin. Dusty business books – rummage sale. Twenty years of fully documented tax returns – shredded, with a few recent exceptions.

I did stop short of replacing all my hanging file folders – a Staples run could easily have sidetracked me – but at the end of the day, when the dust had settled inside and the rain had stopped outside, viola! Everything was accessible. The remaining “stuff” was logically arranged, for the first time in a while. No more digging through a bunch of old power cords and outdated cell phones to find the one headset that works with my mobile phone. The overgrown bushes were still blocking my view out the window, but there are empty shelves in the bookcases and almost-empty drawers in the desk (well, maybe one or two). It’s perhaps just an illusion (or even a delusion), but Annie tells me that the office really looks under control.

Unfortunately, the same can’t be said for a prospective client to whom I was introduced a few weeks ago. A six-year-old software company that is emerging a bit compromised from the recession, the $5 million firm needs some supplemental funding to resume its historical growth and profit trajectory. The President shared his year-end financial statements with me showing a balance sheet with entries for six different bank accounts, detailed receivables balances for the dozen most significant customers, and multiple deposits for rent and utilities. The liabilities side of the ledger was even more extensive, including lists of balances owed to major vendors plus the roster (by name) of fifteen holders of the Company’s convertible debt.

The income statement appropriately led off with revenue, but instead of there being a single dollar total for the year, there were 15-20 lines showing total sales to each customer during the year. The list of expenses was even more detailed, starting with a line for net payroll (all departments rolled into one entry), a second line for withholding taxes, and successive lines for the various payroll taxes – FICA, MedFICA, SUTA, FUTA. Arrayed down the page after that was an alphabetical list of expense categories: accounting, advertising, auto, bank fees, conferences, etc. Some accounts were split by type – legal-patent was separate from legal-corporate – and others were identified with a department, e.g. travel-sales differed from travel-G&A, but were recorded on adjacent lines. To the reviewer, the overwhelming impression was one of clutter.

All of this begged my question to the President, “Do you find this useful?”

“Well,” he said, “it helps me keep track of who our money is coming from and where it’s going, but I really have no idea how to measure what’s appropriate to spend in any category. I also have no real sense of how to control it.”

I heard opportunity knocking, but it wasn’t the time for a lesson in Accounting 101. Instead, I made the following points:

  1. Financial statements vs. operating reports – Your two primary financial reports provide a convenient summary in a standard format of how your business is doing financially for a period (month, quarter, year) in the income statement and at a point in time on the balance sheet. Your accounting/finance team should produce supplementary reports to provide the detail on sales, accounts receivable, investors’ status, etc.
  1. Standard formatting – For comparability and ready understanding, it is helpful to organize the income statement in the basic categories indicated in the sidebar (Draining the Swamp).
  1. Expense groupingEach category above should be subdivided only to the extent that there are meaningful revenue or expense totals in each subcategory. For example, if product revenue and service revenue each is a significant number, they should be shown as separate subcategories. Also, to the extent that the major focus of an employee’s efforts is in one of the four expense categories (Direct, R&D, S&M, or G&A), his/her gross payroll and payroll taxes should be shown, respectively, as subaccounts in one of the four. And the same types of expense (e.g. travel, or depreciation) can be charged to more than one of the four major expense areas.
  1. Balance sheet accounts – Similarly, the balance sheet typically lists just the major categories of assets (cash, receivables, inventory, etc.) and liabilities (payables, loans, deferred revenue), with the total balance in each account.
  1. Quick analysis – For each item in the income statement, it is common to display the percentage that the item bears to net revenue (100%) to allow ready comparison to standardized norms for the industry.

As a first step in cleaning house, recasting your financial presentation in an Excel spreadsheet is a stopgap measure which will reassure your funding sources that you know what you’re doing in the financial area. It’s a lot like trimming the bushes outside my window – it lets in more light, but you have to keep trimming (converting to Excel).

By the way, on Monday, the skies were clear again, and a few hours later I had the bushes completely removed. It was the ultimate de-clutter exercise!

Alligator Bites

“Your Three-Minute Desk Test

“How to score: For each of the following statements, figure out which answer best describes you and write the corresponding number in the blank line next to the statement. Then add up the numbers and total them for your score!

“5 – Always; 4 – Nearly Always; 3 – Sometimes; 2 – Almost Never; 1 – Never

___ My desk is clear and unobstructed

___ I can find anything I need on it, in seconds

___ Others can find what they need there, in my absence

___ All the paperwork on my desk is current

___ I have no excess duplicates of anything

___ All fileables are filed

___ There’s plenty of room in my workspace for new projects

___ I use everything I have on, in, and around my desk

___ All broken or inoperable things are gone

___ Everything on my bulletin board is current

___ I feel totally in control in my workspace

___ Total

“50-40: You can feel good about yourself. It won’t be long til your promotion!

39-30: You’re an average, overjunked American

29-20: You’re not setting a good example. Stop misrepresenting the hard worker you know you are, and clean up your act!

20-11: Are you sure you still have a job? There’s still a flicker of hope for you…!”

– from The Office Clutter Cure, by Don Aslett

Draining the Swamp

Standard Income Statement Formatting (summary)

a.   Gross Revenue

b.  Less Returns and Allowances

c.  Net Revenue [a – b]

d.  Less Cost of Sales [direct costs]

e.   Gross Profit [c – d]

f.  R & D Expenses

g.  Sales and Marketing Expenses

h.  General and Administrative Expense

i.  Total Expenses [f + g + h]

j.   Operating Profit [e – i]

k.  Other Income [e.g. Sale of Assets] & Expense [e.g. Interest]

l.   Net Profit Before Taxes [j – k]