I used to snicker in journalism school when our professor explained that the obituary section was one of the best read parts of a daily newspaper. The joke went that people check the column just to make sure their name isn’t in it. While I never developed that habit, I do find myself drawn to the obits in major newspapers because they offer some great lessons from the storied careers of business legends who have, sadly, passed on.
One such remembrance that ran recently was for Herb Kelleher, one of the co-founders of Southwest Airlines. Kelleher has long been admired for his maverick management and marketing personality and genius. Today it is America’s largest airline, but Southwest has Kelleher and his tenacity as an attorney to thank for its early survival. In the days of regulated air carriers, Southwest underwent four years of vicious courtroom fighting with competitors trying to strangle it in the cradle before it could ever fly its first passenger. Talk about small business determination.
I was a teenager living in the Dallas area by the time the airline got off the ground and I remember some of the brilliant, attention-grabbing TV ads and billboards. Years later the airline used to have a mini-museum at one of the unused gates at Dallas Love Field. Under glass was a cocktail napkin bearing the original business plan for the company.
This time of year small business owners who only infrequently take a glance at their financial statements may be getting a full year P&L delivered by their bookkeepers. If you put an ear to the wind, you can almost hear the moaning – “If I have this much profit, how come I don’t have any money in the bank?”
Assuming the profit is calculated properly, there are, of course, only three possible answers to this complaint. Understanding how financial statements work, may not make the answer any more pleasant but it can silence the frustration.
The first possibility is that the business spent money on assets. Capital expenditures don’t hit the P&L so cash is used up but, in return, the company has a shiny new widget machine, or more inventory, or perhaps (depending on the accounting basis) it made a sale on credit (thus generating a paper profit). And now it has recorded some accounts receiveable, A/R being another liquid asset (hopefully), just not as liquid as cash.
The company might have also reduced some liabilities. Again, this is a typical use of cash but it doesn’t show up on the P&L like payment of current expenses. The business owner may not have made a purposeful reduction of debt. It might be just the routine principal portion of a business loan or payment of certain kinds of taxes. For instance, making a sales tax payment shouldn’t normally impact the P&L because the best practice is to record net sales. A business owner with one eye on the checking account might be counting some of the collected sales as his own working capital – a terrible practice. When the payment is made -- whoosh – a bunch of cash is gone.
The third possibility is that cash went out of the company through the equity section as an owner’s draw. One would think the owner would have a fond recollection of withdrawing some of his hard-accumulated capital but sometimes memories are short. Or when personal cash was tight, the owner might have paid some personal expense and the bookkeeper dutifully booked it for what it was – an owner’s draw. Since most small businesses are “pass through” entities for income tax purposes, this contributes to mental confusion at tax return time. The entity might have no responsibility for income taxes but the owner certainly does. Guess which checkbook is used when the IRS payment is made? Again, a reduction of cash and an owner’s draw is taking place, not a reduction of profit by generating an expense.
Understanding the fundamental mechanics of small business bookkeeping is an essential skill for an owner that will lead to better planning, decision-making and less confusion and stress. Using the Statement of Cash Flows which QuickBooks can spit out in seconds is a good way to evaluate what’s happening in your business.
There’s a well-worn business story, likely worked over by the internet to the level of urban legend. The tale’s wisdom makes it much too good to debunk. Thomas J. Watson, the CEO of IBM supposedly is confronting an employee over a very expensive mistake. The employee naturally expects to get fired, but Watson is said to have replied, “Fire you? I just spent $$$$$$$ (legendary amount of your choice) educating you.”
Small business owners aren’t usually the victim of an employee’s million dollar mistake. Or at least none survive to recount the story. But serious and costly errors do occur. The question is how to respond. Retribution? Sanctions? The options may be limited by employment law, if not practicality.
It may be hard to take much of a leadership lesson from an executive who last worked for the corporate giant in 1956. A more contemporary and easily appreciated storycomes courtesy of Philadelphia Eagles quarterback Nick Foles. This article recounts how he counseled receiver Alshon Jeffery recently after he missed what could have been the game-winning catch. You don’t have to follow football or be familiar with the Cinderella story of the Eagle’s Foles to admire his reaction to his devastated teammate as he processed his own disappointment at losing the big game.
This episode allows business owners to ask themselves whether they could control their own anger and disappointment over a big loss and instead use compassion and long-term thinking in the recovery.
Devon Scanlon, owner/operator of Chick-Fil-A in Brookfield, CT, shares her methods for maintaining fidelity to the simplest of ideas -- how you make your customers feel -- and why this can make sales and profits soar. Thanks to Nelson Merchan of the CT SBDC for introducing his client.
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