Sunday, March 20, 2011

There apear to be some GAAPs in my knowledge

It used to be said that a person became an Accountant because they didn't have enough personality to be an Economist.  Now a person becomes an Economist if they do not have enough imagination to be an Accountant.

The "fancy" stuff that real accountants do for their real (rich) clients is quite different from the "fancy" stuff that I do in business plans for owner-operator small business start-ups.  Pro-forma financial statements are really models of how the new business is expected to operate over the next five years.  The model can be as simple or as complicated as information is available to create it.  But there are huge amounts of unknowns, the greatest one being for example, the number of billable hours on a monthly basis for the first year. My solution is to split the difference between what I think is probable and what the client thinks is likely.  I am terribly risk averse.  With my money and other people's.  Especially with other people's.

Cost of Goods Sold was another new term for me.  I was familiar with it and what it meant but had never used it. Which costs go in COGS and which go in General Expenses?  In my Livestock Specialist days they were called variable and fixed costs, so that helped a bit.  If one is totally familiar with the industry, filling in the blanks in operating costs is easier but what do I know about welding or plumbing?  Fortunately my colleague has been in this game many years and knows many of the standard numbers such as insurance - liability, vehicle, etc. 

When we don't know, we use the PFS system (Pulled From Sky).  I prefer to use SWAG in livestock financials (Scientific Wild Assed Guesses) but that is just because of my science background.  The amazing thing is that PFS numbers are usually close enough, given Robert's experience and that fact that a business plan to be really useful, is not dead but dynamic.  In other words, once the business gets going, the business owner needs to revise it fairly regularly if it is to serve as a guide.

The "number of billable hours" is a result of a gut-feel after completing the marketing plan.  Most of our clients are local people, with 20 years in the game working for someone else.  They have a network to die for and a reputation for quality work that has potential clients pleading with them to start their own business. So we do an inventory of the competition; the client tells us how they will differentiate themselves from the pack and get the word out they are in business and we write it up and put costs to it.

We have seen some pretty good people start their own business and succeed very well.  No-one gets rich but they have the benefit of any profits and as owner-operators they get to work longer hours than they did before (for less money if the economy takes a downturn).. What is not to like?

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