Accounting Solver

May 17th, 2008

ACCOUNTING FOR GAS FACES 3

Tisa Silver’s gas faces are about to increase exponentially.

Barbara Lewis & Peg Mackey of Reuters report:

On the first trading day of 2008, oil prices hit the $100 a barrel level, which once seemed unimaginable. The price topped $125 a barrel on Friday, making a rise to $150 probable and to $200 possible, according to OPEC ministers and investment bankers alike. “If current conditions continue, reaching a period when oil is supplied at $200 a barrel is not out of reach,” Iran’s Oil Minister Oil Minister Gholamhossein Nozari said this week.

Investment bank Goldman Sachs (nyse: GS - news - people ) said the possibility of $150-$200 a barrel over the next six-to-24 months was “increasingly likely.” The bank was one of the first to point to a triple-digit oil price more than two years ago.

Oil at $200 a barrel would mean roughly $6.50 a gallon for U.S. gasoline, according to figures from Standard Life. It makes the record $3.61 U.S. consumers are now paying seem cheap.

Already, the U.S. consumer has begun to retrench.

“I think we’ve reached the point now where we’re starting to see significant responses from consumers,” said Jim Hamilton, professor at the University of California in San Diego, adding oil prices were one of the factors that placed the U.S. economy at the risk of recession.

image from Microsoft Clipart

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May 16th, 2008

ACCOUNTING FOR GAS FACES 2

Tisa Silver, in her post “Who gets the Gas Face?” (Talk Stock Trading), observes “gas faces” when she loads up at the gas station. “We trade smiles through what I like to call ‘the gas face.’ It is a somewhat stressed look of displeasure induced by the pumping of expensive gas. I have seen a lot of gas faces and they are not pretty!” And, she asks who are responsible: oil companies, oil producing nations, gas station owners, the government, or consumers themselves with their gas guzzling SUVs.

In our previous post, we dug up statistics from the Energy Information Administration which showed that, based on each sector’s share in the retail price of gas, it is the crude oil which has caused most of the increase in price (from a 52% share in the retail price of gas in March 2007 to 70% in March 2008). The respective shares of the other sectors have actually gone down.

Contributing to the increased share of crude oil in the retail gas price is the depreciation in the value of the US dollar (i.e., you need more dollars to pay for the crude oil). The biggest source for the US of imported crude is Canada at 1.8 million barrels per day (Energy Information Administration). In March 2007, the exchange rate was US$ 0.8507 to one Canadian dollar; in March 2008, it took US$ 1.0135 to purchase one Canadian dollar (a 19% deterioration of the US dollar).

Who is to blame for this state of the US dollar and moregas faces?

exchange rate from http://www.x-rates.com / graphics by Ren Garcia / image from Microsoft Clipart

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May 15th, 2008

ACCOUNTING FOR GAS FACES 1

Tisa Silver of Talk Stock Trading asks “Who gets the Gas Face?”

On my most recent trips to the gas station I have made it a point to turn away from the pump. I have no desire to watch the price meter run up to $55 for a tank of low-grade gas. Turning away from the pump has allowed me to look at what other motorists are doing. Much to my chagrin, they are looking back at me!

We trade smiles through what I like to call “the gas face.” It is a somewhat stressed look of displeasure induced by the pumping of expensive gas. I have seen a lot of gas faces and they are not pretty!

. . . the name was actually coined by a rap group called 3rd Bass. Way back in 1989, “The Gas Face” was released. The basic concept behind the song is that anyone who says or does something dumb “gets the gas face.”

So, who is responsible for this face that I have to see once, sometimes twice, a week? Is it the oil companies, oil producing nations, gas station owners, our government (federal and/or local)…or should consumers be blamed for buying gas guzzling SUVs instead of hybrids?

There are historical statistics on gas prices from the Energy Information Administration which point to the culprit. From the figures, it looks like the oil companies have been kind (Refining), the gas station owners have not taken advantage (Distribution & Marketing), and the government has tried to help (Taxes). The guilty party appears to be OPEC (Crude Oil).

graphics by Ren Garcia / image from Microsoft Clipart

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May 14th, 2008

TAKING CHANCES 3: Betting on a sure thing

Whenever you use your credit card for a purchase or any expense payable through a credit card, the issuing bank or credit card company is betting that you will not pay your whole balance within the free 30-day grace period and they will earn revenues from your account. By paying the whole balance before the 30-day interest free period, YOU WIN THE BET.

The greatest income of issuing banks and credit card companies come from the interests and penalties they charge for outstanding amounts at the end of the 30-day period.

So, bet on a sure thing. Pay your whole credit card balance every time. You will be saving thousands of dollars. Thousands of pennies saved are thousands of pennies earned.

In addition, keeping an unpaid balance puts you at risk for penalties and the compounding of interest. You are endangering your credit standing and earning a higher credit risk rating.

image from Microsoft Clipart

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May 13th, 2008

TAKING CHANCES 2

There is a law of investments that is as immutable and unforgiving as the law of gravity: Investments with High Yields have High Risks. Focusing on the potential earnings and losing sight of the safety of the principal is what happened to many who were hit by the subprime tsunami.

The trick in taking chances in investments is to have a solid base of safe / low risk investments, so that you are not incapacitated if the worst happens. For better earnings and growth in your investment portfolio, maintain some in high yielding high risk investments. The thumb rule is: make sure that, if the reverse occurs in your earnings prospects on these high risk investments , you don’t lose your shirt. In other words, you can afford to lose the whole amount you placed in these high risk investments –something like betting on a 17 in blackack.

And, remember Murphy’s Law: If anything can go wrong, it will.

graphics by Ren Garcia

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May 12th, 2008

TAKING CHANCES 1

Before taking a plunge into a significant change in your life (whether a career change, building a house, investing in a business, or buying stocks), you should consider your capacity for taking chances. You should, first of all, look into your income profile, i.e., what you are presently earning and your capability to grow your earnings in the future. Then, you should consider your age and your health –which modify your overall income profile.

The red area on the bar indicates a poor capacity to take chances, the green area an excellent capacity.

The income figures are benchmarks (where most American families are, in terms of annual income & net worth). Household income is the family gross income (e.g., if both spouses earn incomes), the disposable personal income is the take-home pay after personal income taxes, the net worth is the total of the family’s assets minus the liabilities (i.e., mortgage, loans, etc).

Income figures less than these benchmarks indicate a below-average capacity to take chances, while income figures more than these benchmarks are positive indicators to take chances. On the average, earning capacity is highest from the age 35 through 50, naturally declining with age.

data from http://www.bea.gov/briefrm/percapin.htm and http://www.businessweek.com/
graphics by Ren Garcia

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May 11th, 2008

HAPPY MOTHERS DAY!

The Chinese ideograph for THINK is . It is a combination of the ideograph for BRAIN and HEART . Don’t you think this is the best way to think?

Mothers think this way.

graphics by Ren Garcia / image from Microsoft Clipart

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May 10th, 2008

SYNERGY BETWEEN ACCOUNTS RECEIVABLE & ACCOUNTS PAYABLE 4

Accounts receivable and accounts payable are reciprocal accounts. Your business’ accounts receivable are the accounts payable of the community you serve and your accounts payable are the accounts receivable of the community (e.g., suppliers).

Specially for small businesses, it is best if the relationships are not just cold impersonal exchanges of goods and dollars. Beyond the trust that underlies business transactions, there should be some concern and consideration flowing into / from both ends of the transaction. Even huge multinationals see this and spend a lot of public relations dollars in creating an image of concern and consideration for their customers.

A previous b5media post in Home Biz Notes (of Mary Emma Allen & Yvonne Russel) brings home this point more dramatically. The post (http://www.homebiznotes.com/my-mother-the-country-grocersuccess-isnt-always-what-you-think/) was written by Mary Allen and cited in http://www.accountingsolver.com/the-one-must-read-post/.

image from Microsoft Clipart

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May 9th, 2008

SYNERGY BETWEEN ACCOUNTS RECEIVABLE & ACCOUNTS PAYABLE 3

AccountingSolver received an insightful comment from Mary Schaeffer, Author Controller & CFO’s Guide to Accounts Payable (John Wiley & Sons 2007) & 12 other business books, Editorial Director Accounts Payable Now & Tomorrow (http://ap-now.com/blog/):

“I just read a post on another blog recommending payment stretching as a way of improving cash flow. And, to be honest, it will do just that - at least temporarily.

But the pundits that recommend this tactic overlook a few things. First, it will annoy the you know what out of your suppliers. They have no interest in becoming your banker - they are worried enough about their own cash flow. And, if you happen to also sell to them, they will take similar action. After all, what’s good for the goose is good for the gander.

But there is an even more insidious problem. Most suppliers, if they have not been paid in 30 days will issue a second invoice. This may or may not be marked Copy or Duplicate. And, a small number of these duplicate invoices get paid. So, all the savings from the payment stretching are given back (and usually more). So, much for payment stretching improving cash flow!

I should note that there are times when an organization will have no choice but to stretch payments. If cash is tight then delaying payment may be the only alternative. In those cases extra care should be taken to ensure no duplicate payments are made.”

Mary Schaeffer’s observation is one very important reason why there should be synergy between accounts receivable and accounts payable.

Your Days Receivable should always be less than your Days Payable so that you are able to pay your bills on due date and you don’t fall into the quagmire that Mary Schaeffer warns about.

graphics by Ren Garcia / image from Microsoft Clipart

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May 8th, 2008

SYNERGY BETWEEN ACCOUNTS RECEIVABLE & ACCOUNTS PAYABLE 2

In order to avoid undue pressure on your cash (as the increase in Sales pushes up your Cost of Goods), you have to make sure that your accounts receivable & accounts payable are synchronized. You have to make sure that the number of days in which you collect your accounts receivable (i.e., credit sales) is always less than the number of days in which you have to pay your suppliers (i.e., cost of goods).

In a small business with not so many transactions, it is easy to track days receivable and days payable. If / when your credit program / accounts receivable results in a growth in Revenues, your Cost of Goods will also grow in step with your Revenues. The number of transactions will also grow and it may not be as easy to track days receivable and days payable.

A simple formula for determining days receivable is:

The formula for days payable is:

You get the amounts for your accounts receivable and account payable from your Balance Sheet; your Cost of Goods and Credit Sales from your Income Statement. “Days” is based on the period covered by your Financial Statements (i.e., for the quarter, the half-year, etc).

Your Days Receivable should always be less than your Days Payable.

If it is the other way around, you will need more Working Capital because your collections will not be adequate to meet all your bills.

graphics by Ren Garcia / images from Microsoft Clipart

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