EBITDA is the acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA represents (basically) the operating cash flow of the company. It is a good indication of the cash being generated by the company’s operations and is readily apparent in the P&L (as long as there is sufficient detail provided). Banks and others use this indicator as a barometer of the company’s ability to meet its obligations for loans or future operational requirements. Management should use EBITDA as an indication of its effectiveness in producing acceptable cash returns on the company’s operating activities.
There are two limitations that reduce the usefulness of EBITDA as a tool for closely managing the company’s operations. Since EBITDA only provides information related to the P&L, any activity on the balance sheet such as changes in accounts receivable, accounts payable, fixed assets, debt, etc. are not indicated. Therefore, large swings in cash will be missed if you are only looking at EBITDA as a cash management tool. Also, as with the Statement of Cash Flows, EBITDA is only available when the P&L is produced making it unusable for managing the daily or weekly business requirements.
Tuesday, October 11, 2011
Friday, July 8, 2011
Employee Turnover: The Most Misunderstood Expense in Business
The cost of turnover is a major problem. This could be the most misunderstood and under estimated expense in business. Depending on the capability to recruit, the length of the standard learning curve for new staff and the actual turnover rate, the numbers can be extremely large.
In addition to the direct cost of hiring and training new staff, the financial impact of lost efficiency and the stress induced on current employees resulting from the recruiting period and training requirements after a new hire is quite significant and it cannot be easily calculated. The problem is threefold.
1. The process of recruiting and hiring replacement staff can take weeks or even months to successfully complete. Until it is finished there is a need for existing staff to provide support in completing the tasks required of the vacant position while at the same time meeting the requirements of their own positions.
2. Once the process has been completed, the amount of time it takes the new employee to get through the normal learning curve can also take weeks or months. During that time there is a tremendous gap in productivity vs. compensation. Until the new employee is fully trained, there is a serious negative leverage working on the profitability of the company.
3. Training new employees has both a direct and an indirect affect on current staff members. Where time is required of the existing staff to train, it directly reduces the time available for them to respond to normal operating issues. Also, the need to cover gaps in efficiency caused by the learning curve indirectly affects the performance and morale of other staff. The existing staff members often find themselves in a position where they are unable to complete their own tasks on time while being required to assist in covering the requirements of the newly staffed position.
Each time these situations occur, the stress on the organization is significant and, depending on the specific circumstances, can continue for extended periods. The effects are more severe in smaller organizations where the absence of one individual can have a dramatic impact on the overall staffing and there are not as many other employees to cover the gaps in efficiency. The issues arising from these situations can have far reaching affects on the entire organization. The message here – serious consideration should be given to staff retention and the relationship to overall payroll costs.
One efficient way of augmenting your financial staff with senior-level expertise is by working with The Profit Experts.
In addition to the direct cost of hiring and training new staff, the financial impact of lost efficiency and the stress induced on current employees resulting from the recruiting period and training requirements after a new hire is quite significant and it cannot be easily calculated. The problem is threefold.
1. The process of recruiting and hiring replacement staff can take weeks or even months to successfully complete. Until it is finished there is a need for existing staff to provide support in completing the tasks required of the vacant position while at the same time meeting the requirements of their own positions.
2. Once the process has been completed, the amount of time it takes the new employee to get through the normal learning curve can also take weeks or months. During that time there is a tremendous gap in productivity vs. compensation. Until the new employee is fully trained, there is a serious negative leverage working on the profitability of the company.
3. Training new employees has both a direct and an indirect affect on current staff members. Where time is required of the existing staff to train, it directly reduces the time available for them to respond to normal operating issues. Also, the need to cover gaps in efficiency caused by the learning curve indirectly affects the performance and morale of other staff. The existing staff members often find themselves in a position where they are unable to complete their own tasks on time while being required to assist in covering the requirements of the newly staffed position.
Each time these situations occur, the stress on the organization is significant and, depending on the specific circumstances, can continue for extended periods. The effects are more severe in smaller organizations where the absence of one individual can have a dramatic impact on the overall staffing and there are not as many other employees to cover the gaps in efficiency. The issues arising from these situations can have far reaching affects on the entire organization. The message here – serious consideration should be given to staff retention and the relationship to overall payroll costs.
One efficient way of augmenting your financial staff with senior-level expertise is by working with The Profit Experts.
Wednesday, April 27, 2011
Sources of Financing: The Government
Federal, state and local governments have become progressively more active in business financing in order to facilitate growth in the local tax base, increase employment or accomplish certain other social goals. There are numerous programs available depending on the size of the company, the location of the business and the ownership profile. Small Business Administration (SBA) loans, economic development area incentives and specific bonds issues are some examples of this type of financing. Usually the funds are made available through low cost loans with or without government guaranties or certain specific tax incentives. Terms vary by program and individual application.
U.S. Small Business Administration (SBA) loans are probably the best known and most widely accessed of the government programs. These loans are made by local banks and are guaranteed by the SBA. The SBA’s guaranty makes it easier for the bank to make loans on terms it would not otherwise be in a position to make available. There are several types of loans available ranging from $5,000 to $2,000,000 with varying purposes including commercial mortgages, equipment term loans, general purpose term loans, working capital lines of credit and business acquisitions. Successful applications will include a well developed plan with:
U.S. Small Business Administration (SBA) loans are probably the best known and most widely accessed of the government programs. These loans are made by local banks and are guaranteed by the SBA. The SBA’s guaranty makes it easier for the bank to make loans on terms it would not otherwise be in a position to make available. There are several types of loans available ranging from $5,000 to $2,000,000 with varying purposes including commercial mortgages, equipment term loans, general purpose term loans, working capital lines of credit and business acquisitions. Successful applications will include a well developed plan with:
- a narrative on the company background, the principals and the outlook,
- company historical financial information and financial forecast including cash flow with assumptions,
- a use of proceeds and,
- personal financial statements and tax returns for the principals.
Tuesday, January 4, 2011
Questions to Answer When Evaluating a Fixed Asset Purchase
Because a fixed asset requires such a large investment that will impact the operation well into the future, before making the purchasing decision, careful consideration should be given to its long-term usefulness, the business that will be generated from its use and the return on that business. Although quite different from company to company, the capacity for accumulating fixed assets is limited. Therefore, it is important to make your choices wisely when evaluating a capital expenditure. Here are a few questions to consider when making those decisions.
• What other opportunities will be eliminated or delayed significantly by the use of cash (or debt) for this expenditure? Are there other items that would provide a higher or faster return on the investment? Would a different decision facilitate increased operating efficiency more quickly or more effectively? Remember, there are opportunity costs with every decision. You can only spend the cash once and then it must be replenished.
• How does this item support the future objectives of the organization? It is important to be certain of the company’s strategic plan and the areas in which that plan will require the application of resources. Capital expenditure decisions will have an impact on the operation for years into the future.
• What is the possibility that an item will become obsolete before it has reached its useful life? Obsolescence is the loss of usefulness of an asset occurring through progress of technology or by changing laws or social customs. It is a reduction in the value of the item resulting from revolutionary inventions, unusual growth or development, radical economic changes or other factors that force retirement before the end of its useful life. The last thing you want to do is invest a large amount of cash in an asset only to find that a few years later (long before its 5-7 year life) its effectiveness has been significantly diminished because of the evolving needs of the company or business in general. Electronic equipment such as computers, telephone systems, copy machines, etc. is especially susceptible to this phenomenon.
There should be a periodic review of the company’s fixed assets to determine if there are under-performing items. Action should be taken as soon as it is feasible to dispose of any assets that are determined to be under-performing, or even worse, non-performing. Unless there is a probable future use for an asset, there is no logical reason to retain it in the company. Holding items that have no useful purpose causes the operation to be impacted by consuming otherwise usable floor space, increasing maintenance costs unnecessarily, and having cash tied up in assets that are not useful to the business.
• What other opportunities will be eliminated or delayed significantly by the use of cash (or debt) for this expenditure? Are there other items that would provide a higher or faster return on the investment? Would a different decision facilitate increased operating efficiency more quickly or more effectively? Remember, there are opportunity costs with every decision. You can only spend the cash once and then it must be replenished.
• How does this item support the future objectives of the organization? It is important to be certain of the company’s strategic plan and the areas in which that plan will require the application of resources. Capital expenditure decisions will have an impact on the operation for years into the future.
• What is the possibility that an item will become obsolete before it has reached its useful life? Obsolescence is the loss of usefulness of an asset occurring through progress of technology or by changing laws or social customs. It is a reduction in the value of the item resulting from revolutionary inventions, unusual growth or development, radical economic changes or other factors that force retirement before the end of its useful life. The last thing you want to do is invest a large amount of cash in an asset only to find that a few years later (long before its 5-7 year life) its effectiveness has been significantly diminished because of the evolving needs of the company or business in general. Electronic equipment such as computers, telephone systems, copy machines, etc. is especially susceptible to this phenomenon.
There should be a periodic review of the company’s fixed assets to determine if there are under-performing items. Action should be taken as soon as it is feasible to dispose of any assets that are determined to be under-performing, or even worse, non-performing. Unless there is a probable future use for an asset, there is no logical reason to retain it in the company. Holding items that have no useful purpose causes the operation to be impacted by consuming otherwise usable floor space, increasing maintenance costs unnecessarily, and having cash tied up in assets that are not useful to the business.
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