Measuring productivity

I’ve written extensively about doing more with less – productivity.  Productivity is a very powerful tool, and it can allow youto dramatically increase your revenues and profits, without spending much more on assets or expenses.

How can you measure productivity?

Berlin SmartCar

Berlin SmartCar by Lori Greig, on Flickr

First, define your process.   What is it that you want to do more productively?

Second, define your inputs.  What does your process need to work?  Certain physical goods?  Hours?  Focus on an input that is constrained, i.e. that’s expensive or not easy to increase.

Third, define your outputs.  What does your process produce?  This should be a primary goal of your business.  It might be revenues, or the specific items that you make and sell.

Finally divide your outputs by your inputs.

For example, suppose I want to measure the productivity of my car.   The process is driving.  The input is gasoline (measured in gallons).  The output is miles driven.  My measure will be miles per gallon.

By continuously monitoring my mileage, I can measure how productive my driving is.

You can develop similar measures for other processes.  For example, for a website, “hits” might be inputs, and “sales” might be outputs.  Measure sales per hit.

For a restaurant, “tables” might be inputs and “meals served” might be outputs.  Measure meals served per table.

In baseball, “player salaries” might be inputs and “games won” might be outputs.  Measure “player salaries” per “games won,” to determine how much each winning game cost.

Once you can measure productivity, then you can think about how to improve it.  With a car, you might discover that highway mileage is more productive than city mileage.  You use less gas when you take the highway than when driving on side streets.  With a website, think about how you can squeeze more sales (or conversions) out of your hits.  With a restaurant, think about how you can serve more meals at your fixed number of tables.

 

January 2012 Report

I’m very excited to report that January 2012 was my first profitable month.  I made $1.20 on Amazon.com commissions.  Another $2.41 from AdSense.  Since I had no expenses in January, that makes $3.61 net income.  At this pace, I should cover my initial costs in about 30 years.  Maybe it’s a pride thing, but I’m not going to report an income statement showing $3.61 in net income.

Above are my stats: 223 visits and 1,105 page views.  Viewers look at 5 pages/visit (I’ll be generous and round up from 4.96), and spend 4 minutes and 22 seconds average time on site.  Bounce rate is a very low 4.93%.  Judging from these numbers, I am meeting my primary goal right now of producing quality content.  I now have 106 posts.

Most impressive is the You Tube video, How I set up my online business in GnuCash.  627 hits so far.  283 in the last month.  Also very popular is How to record a payment in GnuCash, with 246 hits so far, 189 in the last month.

I moved the site from Blogger to WordPress.com.  The newly designed website looks much more inviting and should attract more traffic.

WordPress.com only allows advertising on high- and medium-traffic sites  For now, I’m giving up the $3.61 in monthly income, in the hopes that my better-looking site on WordPress.com will attract such a huge audience that WordPress.com will let me advertise.  The real monetization should come with selling ebooks and courses.

I’m working on a new index page, which will include every post.

Thanks for following me.  Any other ideas or suggestions?

 

Accrued expenses explained

Accrued expenses are expenses which you have incurred, or used, but have not yet paid for.  They are a liability on your balance sheet.

For example, suppose that you have not yet received or paid your cell phone bill for last month.  As of the end of last month, that bill would be an accrued expense.  You used the cell phone, but you have not yet paid for it.

Accrued expenses follow the accrual accounting method.

You should pay careful attention to accrued expenses because (1) you have spent the money and (2) you owe it.  For tax purposes, unless your business uses the “cash method,” accrued expenses are usually deductible.

 

Accrual accounting explained

People generally think of accounting in terms of cash flows.  Money comes in and money goes out.  However, this is not how accountants measure revenues, expenses or net income.  They use a system called accrual accounting.

Accrual accounting records revenues when they are earned and expenses when they are incurred.

Revenues are earned when the seller provides the service, or delivers whatever products that it is supposed to provide in exchange for the revenues.  For example, a Department Store earns revenue from a sweater when it actually gives the sweater to the customer.  It does not matter if the customer pays for the sweater in advance (lay-away) or a month later (credit card sales).

Expenses are recorded when incurred.  As I’ve written before, expenses provide some benefit to the company – otherwise the company would not bother to have any expenses.  Usually expenses will cause something to happen that will increase revenues or profits.  Most expenses, therefore, are recorded when the company actually gets the benefit from them.  For example, your utility bill expense is recorded when you use the heat and lights, and not necessarily when you actually pay for the expense.

Some expenses are recorded as soon as a loss occurs.  For example, if your uninsured building was destroyed by a flood, you would need to record the loss immediately.

As I’ve stated before, net income is just the difference between revenues and expenses.

Not that you should ignore cash flow, but net income provides a more accurate measure of your performance than cash flow.  In fact, a company with negative cash flow can be profitable, and a company with great cash flow can be unprofitable.  For example, you might have high sales which you will not collect until the future – this would cause robust profitability, but poor cash flow.  Alternatively, liquidating your inventory will improve cash flow, but hurt future sales and profitability.

 

Accounts payable explained

Accounts payable are bills due to suppliers for inventory items already purchased.

To compete for your business, many suppliers will extend you credit and flexibility to pay for purchases 30 more days after you receive them.  You can use this interest-free credit to help fund your operations.  Most suppliers will offer their customers easy credit – find out how to apply.

Many suppliers offer a discount for early payment. Budgeting your cash flow can help you know when to take advantage of these discounts.

Sealey Power Products Warehouse
Sealey Power Products Warehouse by toolstop, on Flickr

Accounts payable are the inverse of accounts receivable.  Your accounts payable is, on the books of your supplier, an accounts receivable.

 

Prepaid assets explained

[Image source: We Love Costa Rica, at: http://www.welovecostarica.com/watching/]

Prepaid assets are expenses, such as rent or insurance, that you paid for in advance.  For example, suppose you paid three months’ rent in advance on January 1.  This would be an asset for the three months that you would be entitled to use the rented space, and would appear on the balance sheet with other assets.

George is Keeping an Eye On You!

We Love Costa Rica, at: http://www.welovecostarica.com/watching/

Prepaid assets are sometimes referred to as prepaid expenses.

As they expire, prepaid assets become expenses.

When prepaying expenses, carefully weigh the pro’s and con’s of paying earlier, rather than later.  Is there a discount for prepayment?  Is there a penalty or interest charge for paying for a service in installments?

 

Depreciation explained

If you buy a long-lived asset, you will expense the cost of that asset over its useful life.  This is called depreciation.

For example, suppose that Your Airline buys an Airbus A380 for $400 million dollars.  You do not need to record an expense for the cost of this aircraft in the year that you buy it.  Instead, you can spread out the cost over its useful life.

taken with my dads pockets casio camera
Airbus A380taken with my dads pockets casio camera by Daz /SWAN MAN, on Flickr
You estimate that the A380 has a useful life of 25 years.  Using a system of depreciation called “straight-line,” you would record depreciation expense of $16 million per year ($400 million/25 years), reducing your net income by $16 million per year.
There are many different depreciation methods.  Most common is “straight-line,” which takes equal amounts of depreciation ever year.  Another approach is called “accelerated,” which takes more depreciation when the asset is newer, and less depreciation when it is older.
To compute depreciation for US income taxes, businesses usually use a system called MACRS.  When the asset is newer, MACRS usually allows you to record more depreciation than you might record under straight-line or even accelerated.  It would then increase your depreciation expense deductions, decrease your taxable income, and decrease taxes due.  On your taxes, you can’t depreciate an asset already written off with a Section 179 deduction.
When depreciating for financial statements (rather than for taxes), you will need to estimate the useful life of the asset and also its salvage value, which is your estimate of the asset’s fair value at the end of its useful life. Then the formula for annual depreciation would be:
(Cost – Salvage Value)/Useful life in years = Depreciation expense
Land is never depreciated.

Accounting Trivia: For accountants, “depreciation” does not mean “decline in value.”  We call that “impairment” or “unrealized loss.”  Rather, depreciation refers to this system of allocating the cost of a long-lived asset to the time periods when it is used.