Deciphering Your P&L
Q: I've recently been asked to show working capital movement (WCM) in my profit and loss analysis. Could you please explain what WCM is and how I calculate it? I'm not an accounting genius so please treat me like a fool and don't baffle me."
A: Thanks for the great question, but I can't really make you feel like a fool. Working capital movement is not a term I'm familiar with-neither is my bookkeeper or accountant. We're assuming it has something to do with cash flow. Here's what I recommend:
Ask the person requiring this information exactly what he or she is looking for. Don't allow yourself to feel inadequate for your financial literacy level. This stuff isn't taught in school, and the term WCM isn't commonly used. You can learn to be a financial whiz, and you're on your way by asking questions.
Certainly cash flow management along with tracking current assets and current liabilities is necessary. You can record current assets (cash, accounts receivable and inventory) and compare them to current liabilities (accounts payable-bills that are due.) This is called current ratio. It tells you how solvent you are-how easily you can pay your bills. I suggest calculating this ratio on a weekly basis.
Take the inventory out of the equation and try it again. This is called the quick ratio or acid test. You're looking for a 2:1 or better acid test to really sleep well at night. If you're too tight on this ratio or if you have more in current liabilities than you do in current assets, then you could be going deeper into debt just to pay bills.
I've created short, simple explanations of the balance sheet and the income statement in my book, Where Did the Money Go? Check it out at www.BareBonesBiz.com. Also look for the glossary on the site-it's got lots of simple explanations of common accounting and finance terms.
The financials are just the scorecards in the game of business. Don't be intimidated by the lingo. Frankly, I think a lot of accounting and finance professionals use fancy words to impress people. The jargon is confusing. By asking great questions like this, you're well on your way to financial literacy.
Author Ellen Rohr nearly starved in her family's small contracting business-until she learned how to manage money. "Do what you love, certainly," she says, "but the money won't just take care of itself." Ellen's pricey college education didn't prepare her for real-world business. "Financial business basics aren't that difficult...but where do you learn them? Unfortunately, business literacy isn't taught in school. I teach the basics and take the mystery out of making money." Ellen's mission as an author, columnist and seminar leader is to help people make a living doing what they love.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.
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