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Friday, November 27, 2015

Sales Exceed $13,500 As Of This Week As Wildings Listings Continue and My First Neutral Feedback on E-bay

Well it had to happen sooner of later: I received my first neutral feedback ever on E-bay. After an unbroken streak of over 2,000 positive feedbacks, one customer left me a neutral. So what happened?

Well I went to check the mail yesterday and I saw that something I sold just under 2 weeks ago was returned to me due to "Incomplete Address" according to Canada Post. I was puzzled because the address looked very complete to me. So I contacted the customer to let him know that the item had been returned to me and could he please confirm his address. He replied and it turns out that his address contained a comma as in "32, 36" and the street name. I had "3236" on the envelope. The postal code was right, so in my mind the mail carrier should have been able to deliver it. I apologized profusely about what had happened and told him I would post it today. But it bothered me for the rest of the night.

So this morning I was all set to write him back and refund his money as a goodwill gesture and send him the stamps. It was a relatively small purchase and he is a new customer. When I went into my account I saw that he left me neutral feedback in French saying something to the effect that it took me 15 days to send him his stamps.

I can only surmise that people new to E-bay do not understand the effect that their feedback has on sellers. They think that it is harmless and constructive, when it is anything but. To me, and to a lot of other sellers, you just don't leave neutral or negative feedback unless your seller has been uncooperative, unresponsive, rude or it is otherwise warranted. It seems these days that if a buyer doesn't receive their merchandise right away, they think that is grounds for leaving less than positive feedback. Again I can understand that when a seller is unresponsive or does not notify a customer of the problem, but in this case I actually contacted him to tell him and put things right. I guess I should have offered him the refund right away. But at the same time, I don't want to have to make a regular habit of giving refunds to people just because their item is a few days late.

I have been hard at work trying to get through my listings of the 1954-1963 Wilding Issue, but it is taking FOREVER!. I have been working on the 2c green value all week long and expect to finish it today. But I still have the 3c, 4c, 5c, 6c, 10c, 15c, 20c and 25c still to go. Fortunately, all of them except the 4c and 5c are relatively quick to deal with, but the 4c and 5c will each take just as long as the 2c has. This is a very complicated set that has given me a whole new appreciation for these stamps.

On a good note, a new customer bought four stamps from me for $750,bringing my total sales since July 22 to just over $13,500 and my total for November to just over $5,500, which is amazing. I couldn't have imagined that I would be half way to my sales goal after just five months. It will really be interesting to see how this Elizabethan material performs. So far, it seems to sell just as well as the early material, albeit to different customers.


Wednesday, November 25, 2015

My Son is All Grown Up! Well Almost....

My son came over on Monday to start his job with me. He has been coming at 11 am because he has never been an early riser and has always been a night owl. So in that respect, he still has a bit of growing to do, but what has really impressed me so far is that he has come at the same time each day, when he said he would, and he has been keen to learn the job and to learn how to do it well.

I had him sorting out the rest of my mint Canada stock to get it ready to list when the time comes. It took him a little while to get the hang of it, but after a couple of hours he had developed his own system for sorting and he asked good questions.What was really interesting to me was that several times he commented that the skills I was asking him to use, he had never had to learn before - like looking things up alphabetically in a book. Children of his generation have grown up with search engines like Google. So they have never had to learn to look things up physically in books, or had to order information alphabetically.

He hasn't been nearly as bored with this as I thought he would be and he actually seems interested to finally understand what his old man has been interested in for so long. It has been really nice working alongside him these past two days and I am looking forward to working with him over the next two months!


Monday, November 23, 2015

Sales Top $12,750 And I Am Poised to Hire My First Employee

With November coming to a close, I am coming to the end of my 5th month as an independent entrepreneur and the prevalent feeling I have now is one of overwhelm. Sales just passed the $12,750 mark this weekend during the period from July 22 to November 22 (4 months). The Queen Elizabeth II material that I have been listing is selling just as well as the earlier material now that I am describing it to the level of detail that I am. So I am finding that between social media and daily orders, that I am not getting very much time at all on Mondays, Wednesdays and Fridays to list material, and with so much inventory still to list, it is clear that I badly need help to take the business to the next level.

With that, my sister in law's partner has expressed interest in coming to work with me part time starting in January. He used to collect stamps in his youth, so he has a comfort level in working with them. We met on Friday last week to discuss what it is I do and what I need help with. Our discussions went very well, and I can't wait for him to start. Also my son is back from the west coast for two months and will be working with me to help in the meantime. Last, but not least, it looks as though Steph and I will be working together soon as well - something that I am very much looking forward to.

I have been working on the Queen Elizabeth II issues for the last several weeks and the issue that I am working on right now is called the Wilding Issue, which is so named because the stamp designs were based on a photograph by Dorothy Wilding. The basic stamp designs are shown below:



         


      


        


  


             


I used to think these were very boring stamps, but after working with them for several weeks now, I have to say that they are growing on me.

I don't think  have much more to write about or report. I have been recycling menus for the past several weeks because I am so busy so no new recipes to share. Wedding plans are proceeding at a glacial pace and the business just continues to grow. I am feeling pretty optimistic, but a bit overwhelmed as I said at the beginning of this post.

I may start a series of posts about tax tips for small business until I have an updated progress report for the business or a new insight about my journey as an entrepreneur.

Until then, keep your optimism and continue to persevere towards your goals!

Thursday, November 19, 2015

What a Difference a Year Makes!

I just realized yesterday that November 18, is exactly a year ago that I returned from an international accounting conference in New Delhi, India. It just made me think about all that I have accomplished towards my life goal in this past year. I wanted to share it in order to continue to illustrate the importance of continuing to take the time to reflect upon your accomplishments and your progress when you are travelling down the long road of building your business.

At this time last year, when I was at the conference:


  • I had only just completed the financial projections for my business plan while I was there. I had not presented to investors yet and thus had no financial commitments from anyone. 
  • I had no money saved up. In fact I owed about $25,000 on my credit cards for inventory I had purchased over the previous year. The reason I had that debt was that my divorce settlement took an extra year to finalize. 
  • I had not settled with  my ex, which meant I couldn't bring any investors into the business. 
  • My Canadian blog was essentially dead because I had no posts on it since 2011 or 2012. 
  • My Nigerian blog was still getting lots of hits, but had not had any new posts in over a year. 
  • This blog did not exist yet. 
  • I only had about 1,000 items listed in my E-bay store, with nothing new having been listed since 2012. As a result my sales dwindled to less than $200 a month because E-bay dropped me to the bottom of the search ranking as a result of not posting new material. 
  • My detailed seller ratings on E-bay were only 4.9 because I was not communicating with my customers when I sent orders out. 
  • My stock was a mess. The Canadian material was all over the place in my office. Most of it was not graded, and none of the stamps had been checked with respect to the paper fluorescence and other characteristics needed to identify them properly in the listings on e-bay. 
  • I had no material at all from Gambia, Ghana, Gold Coast, Morocco Agencies of Sierra Leone. 
  • My Nigeria blog was getting about 20 page views a day.
  • I had no Google Adsense account and no advertising revenue from my blog. 
  • I was not active on either Linked-in or Google Plus. 
  • I had not fully paid my 2014 income tax and it looked like I would owe $20,000 when I filed my tax return.
  • Steph and I were eating out a lot and not consistently getting to the gym. 
Now, at this time:

  • I have received the money promised from my first investor, an in-kind contribution from my other investor and the other two investors have indicated that they are still committed. I should receive between $75,000 and $100,000 of additional funding within the next year. 
  • Sales are better than projected in my business plan. Since July 23, 2015 I have sold over $12,600. In my original plan, I was going to organize everything first and then list. I changed my mind and started a sort-list cycle in order to start generating cash flow from the start. 
  • I managed to save enough money to live on until January 2017 and through smart tax planning I managed to pay all my income tax for 2014, 2015 and 2016! So I don't have to even think about CRA until 2017. 
  • I settled with my ex-wife, paid off my credit cards completely.
  • My Paypal and Moneybookers accounts have healthy cash balances.
  • My Canadian blog receives an average of 50-60 page views a day, and there are now 49 posts published. 
  • This blog has had 82 posts with daily readership hovering around 30-40 a day. 
  • I now have 1,914 items listed in my E-bay store and because I list material almost daily, I am ranking higher in their search engine. Consequently sales are more than 10 times what they were on a monthly basis last year. 
  • My detailed seller ratings are not a solid 5 stars across the board. I communicate with each customer now every time they place an order informing them of my latest blog post. 
  • My stock is now much better organized. There are no miscellaneous collections or large lots. Everything has been sorted together and 90% of the stamps are now identified and graded, so I can list them easily. 
  • Since introducing stock scans for post 1952 material, I have hundreds of scanned images that I can use over and over again to speed up the listing process in the future. 
  • I have an orderly spreadsheet to track my inventory so that I can get an exact cost figure for each stamp that I sell, which should help immensely when it comes time to prepare the financial statements for 2016. 
  • I have managed to acquire a good base stock of Gambia, Gold Coast, Ghana, Morocco Agencies and Sierra Leone, which I can expand once I start working on Nigeria. 
  • The Nigeria blog is now getting 50+ views a day, even though there have been fewer new posts than my other blogs. I am now sharing content from this blog on Facebook. 
  • My Google Adsense account is now operational and has been for almost 2 months. I only have about $7 of ad revenue, but it is better than nothing. 
  • I now have Hootsuite, which automatically posts everything from my blogs to Linked-In and Google Plus on a daily basis, including the weekends when I am not working.
  • Steph and I eat fresh food prepared daily at home and we get to the gym as least twice a week.

I must say that that really is a lot of progress in a year. It is really easy to forget about how much progress you have made unless you force yourself to make lists like I just did above. Why? because you grow accustomed to your new normal each time you take a step forward. 

So take the time every few months to go back and do a before and after so that you can savour your successes. You will feel better and more motivated if you do. 

Tuesday, November 17, 2015

Use of Social Media in Building Your Business and What to Expect

I have posted in the past about the power and potential of social media in business, but as I am still learning how to use this to promote and build my business, I wanted to share some more of my thoughts and observations about it and how you can navigate the immense quagmire to use it to profitably build your business.

My observations, that I will discuss in detail are:

1. Social media reflects the human condition to a "T", which has many implications.
2. Social media takes a huge commitment of time.
3. Consistency of content creation is key.
4. I suspect that organic growth is more effective than paid reach.
5. Likes and pageviews are not everything.

Social Media, The Human Condition and How to Reach People

As human beings, we are naturally lazy. We want to experience maximum results for as little effort as possible. This is why we have scams and so many useless products in the world today: because we buy into the empty promise that these things will make life easier for us. Over the last 30 years, technology has made us take for granted things that were absolutely impossible 30 years ago. So because of how instant technology is, we expect instant results without thinking about the fact that human nature has not changed, and the implications stemming from the ease that the technology affords.

Social media is wonderful because for the most part it is free (for now). I don't have to pay Google to write and publish the content on this post, and I can reach, potentially millions of people with it. This is something that would have been completely impossible before the internet. If I wanted to reach millions of people 30 years ago TV would have been the only way to do it and the cost would have been in the millions of dollars.

Of course a major implication of this ease of entry is that the internet is chock full of content, and because most of it is written to garner attention in the form of likes and pageviews, most of it is of very little value. So while the potential to reach millions of people with your value proposition and business message exists, it is nowhere near as easy to achieve now as it would be if there was a monetary cost to social media. In a sense, what we have now with social media is a kind of "Tragedy of the Commons". What is that you might ask? Well it is a term traditionally used by economists to explain a situation that arises when a group of people each pursue their own self-interest with the result that everyone is worse off because of it.

So in social media, we now have automated tools that promise to save you time in using social media by automatically posting your content on a pre-determined schedule to every single social media platform that you are a member of, whether it is relevant to your audience or not. Sounds pretty good, doesn't it? Well, it would be if all that content was useful content and not just advertising and attempts to get attention. But alas it isn't. The result was that many social media platforms such as Facebook groups were filling up with spam. So what Facebook has done to combat this is that they have forced these software tools to disable these automatic posting features and to limit them to channels that you are the administrator of. So that while these tools are helpful and will save you some time, they will not deliver the time savings they promise, in my opinion.

One of the most fundamental aspects of the human condition that has never changed, that has implications for your business is this:

People don't like being sold to. People don't like ads.

Every time you watch TV how often do you skip commercials? How much do you hate having to sit through ads when you go to the movies? Do you notice how you have the option to skip ads on Youtube. How often do you actually listen to an ad when you have the option to skip past it? My guess is almost never.

This takes us to what the basic end-goal is for your use of social media to promote and build your business and what it means to you. The basic end goal is:

To reach people. To inform them that you have a product or service they want.

How do you do that if people hate ads? You do it by giving them something they want for free. What is that thing? Information.

The best way to do that on social media is to have one or both of:


  • A business Facebook page where you can post all kinds of free content, which can include links to your blogs and your business website, and
  • A blog that you regularly post information to that your audience will find useful. 
For example, in the case of my stamp business, I am posting informative articles every day to my Canadian stamp blog. As I work on stamps from the other countries that I sell I will post informative articles to these blogs as well. The great thing about a blog is that it is permanent: your readers can come back and review the information in your posts again and again. What I am doing with these posts is threefold:

  • I am educating my potential customers and creating awareness about aspects of the various stamp issues that they may not be aware of. This information will allow them to make better purchasing decisions and better selling decisions. 
  • By doing this I am slowly building a reputation as someone who is knowlegeable in my chosen field. I am also building credibility and trust. 
  • By educating collectors about the possibilities that exist with certain issues, I am expanding the potential market for that material. 
The ultimate aim of doing the above is to increase sales, but I recognize that this takes a long time to happen. The posts I am working on today may take years to yield the bulk of the sales increase that will eventually result from them. However, my experience so far is that any customer obtained this way that trusts me will come back and buy more from me than he or she would if I only used paid advertising to reach him or her. 


So I believe the first thing you need to recognize about using social media to grow your business is that the majority of your sales growth will come from organic traffic that you grow by consistently posting relevant content related to your product or service that your target customers will be interested in, while including a link to your website. In this way you are not hard-selling your customers: they can access your website if they want to, but they don't feel like they have to. Paid I think will only work if your product is something that is highly specialized, and rare. In that case, then it should be fairly effective, as your potential customers will appreciate simply being informed on where to find what they are looking for. There is certainly no reason why you can't supplement some paid advertising on Facebook with creation of organic content. But I think you are going to be disappointed if you go into using Facebook by just running paid ads. I think most people will respond to paid ads on Facebook in exactly the same way they do to ads on TV or Youtube. That leads me to my next observation.

Social Media Takes a Huge Commitment of Time

If you want to build a following of potential customers, you have to get traffic to your blog posts or your Facebook page and have to convert those readers into people who go view your website. To do this you need to be posting content on a regular basis, and the content needs to be varied. The reason of course is that people get addicted to information and you don't know when someone has the time to read your posts.

This doesn't mean that you need to post every day, but it does mean that you need to post on a regular schedule, whether that be weekly, daily or monthly. Your readers, if they like your content will start checking back for more, and if they don't find it, they won't come back to your blog. They probably won't start exploring the pages on your blog like "about the author", or "links", until they have read enough of your content to decide they like you and are curious to know more about you or your business.

Of course your posts have to be contain quality information if you are hoping to build a loyal following of customers. This means it needs to be both accurate and useful. Because of this, you are going to find that it takes a lot of time to write a blog post. For instance, I have been writing this post now for just over an hour. I had to think for a good hour before that about what I wanted to say. For many of my stamp blog posts, I have to do research, which can take an hour or more. I also have to obtain scans of stamps to provide interesting and useful images to my readers. So an average stamp blog post can take me 3 or 4 hours to write.

Once you have written your post and published it, you need to promote it by sharing it to various social media platform, such as:


  • Your timeline on Facebook.
  • Your business page on Facebook
  • Any Facebook Groups that you are a member of.
  • Linked-in
  • Google Plus
  • Pinterest
and so on.

One of the most effective ways to dramatically increase the readership of your blog is to join as many groups as you can on Facebook that you can whose members will be interested in your blog. Once you are a member, you can share your posts manually to each of those groups. As I said before, there is no automatic way to do this, but if you have a tab open with your groups list you can do all this sharing in about half an hour to an hour, depending on how many groups you are sharing to. Many of these groups have thousands or tens of thousands of members. Think about that for a minute. Technology now allows us for free, to compose an informative message in a few hours and put it in front of tens of thousands of people in a matter of hours, and it is permanent. That is a phenomenally productive use of your time, even though it may not feel like it is because you are not getting immediate sales. 

The key is to be consistent and to remember that page-views and likes are not everything. They are important, but over the long-run, you will attract readers simply by virtue of the fact that over time, Google's search algorithms will push your posts to the top of the search engine's results. The way their algorithm works, the more content you have published that is relevant to readers, the higher your search ranking. So as long as you consistently post informative, quality articles, they will contain the keywords that place you in the forefront of Google's search engine. In this way you will attract traffic from social media, but also from outside social media as well. In the end, what you are looking for are prospects who convert to customers. Not everybody - in fact very few people on Facebook who like a page will buy anything. So don't get discouraged when you see only 100 page-views on your blog in a day, when some stupid Youtube video gets a million hits. Remember that those million people clicking on that video aren't buying anything directly, although if the video is of a new music artist's song then yes, they will likely attend that artist's concert or buy the record. If your product is in some specialized niche, even though you reach is small, as long as you are consistent you are going to become a known leader in your field pretty quickly. 

I have only been blogging 5 days a week for four months now and as of today I appear at the bottom of the first page in Google's search results when "Canadian Philately" is entered into the search. "Canadian stamps" doesn't bring me up at all, because it is too general. If I enter the name of a specific stamp issue that I have posted about like "The Karsh Issue of Canada 1953-1967", I'm now 5th from the top on the first page. The first four results are for Yousuf Karsh, the photographer who inspired the set design. I'm actually the first stamp result, outranking everyone else. Why? Because I have written 5 blog posts consisting of probably 15,000 words. So the more you post, the more consistently, the closer to #1 in Google search you will appear. That is crucial because it means now that any stamp collector interested in that set that searches for this issue in Google is going to find my blog. Because they are interested, they are going to read it. Eventually they will notice that I am a stamp dealer and then if they like what I have to say, they may look for the links to my E-bay store. 

That is how it works I think. You lay the foundation today for the traffic you expect to get tomorrow. 


Monday, November 16, 2015

Limitations of Financial Statements and Sales Pass the $10,000 Mark Last Week

In my last several posts, I attempted to shed some light on what each of the basic financial statements mean as well as explaining what lenders and investors look for when they are reviewing your financial statements.

Today I want to talk a little bit about the limitations of traditional financial statements. To talk a little about what they don't tell you.

What General Purpose Financial Statements Do Not Tell You

1. The total value of the business at any given point in time.
2. Whether the business will continue to perform as it has.
3. Whether the business can survive and grow in the next 10 years, 5 years or 1 year.

General purpose financial statements are based on a historical reporting model. They tell you what the business paid for the assets that it owns, what profits it made and what its obligations are. But they won't directly give you any indication of how the business will perform in the future. In  addition to external environmental factors which are outside the control of the business and cannot be reliably predicted, the future performance is very heavily dependent on the strategic operating decisions implemented and executed by management. The general assumption a reader might make is that management will continue to operate the business in the way that it always has. However, this may not be the case, and very likely is not the case, and current disclosure standards do not require management to disclose major changes in its strategic operating decisions. The only exception to this is where management decides to discontinue a segment of the business and here special disclosures for "discontinued operations" are required.

The value of a business is often completely and dramatically different from what appears on its balance sheet. This is especially the case for businesses that have large real estate holdings that it has held for a long time. In addition, many manufacturing businesses may have specialized equipment that if properly maintained is worth just as much used today as it was when the business bought it, even though it may be fully depreciated down to zero on the financial statements. Conversely a software development business, which may have capitalized expenses of developing its products as an asset on the balance sheet may find that there is no external marketable asset.

Business valuation is a very specialized and complicated area which has its own certified professionals who practice it. As a general rule of thumb the minimum value for a business being discontinued and broken up is the fair market value of each of its individual assets, less its liabilities. However, a business that is being sold as a going-concern, that is a business that will continue to operate is usually valued at a multiple of its average normalized earnings over a period of time. The term normalized simply means that any transactions that do not reflect normal market conditions have been adjusted to reflect market conditions or removed entirely. Another possibility is that missing transactions are added. For example, take a business that is operated by its owner who does not take a salary. Well, if this business were to be sold, someone would have to be hired to operate it and that person would have to be paid a market salary. Therefore in evaluating that business, you would have to consider not the profits shown on the financial statements, but what the profit would have been if you had to hire and pay someone to run it, since that is the reality that will exist after it has been sold. Another example of normalization comes about where the owners have taken unusually large bonuses out of the business in past years. These bonuses have the effect of artificially depressing profits, which in reality are much higher. Thus in evaluating a business like that, you would add the bonuses back to the net income in determining the average earnings.

The multiple to be applied to annual average earnings is what business valuators are paid to determine. A lot of factors go into it, some of which are specific to the industry, some of which are specific to the point in its life cycle the business is at, and still others are specific to the management team. A good general rule of thumb though for many business is a multiple between 3 times and 5 times annual earnings.

So in a nutshell, the financial statements will tell you whether a business was solvent at year end, whether it performed profitably and generated sufficient cash flows to sustain the business during the period, while giving some clues as to whether it is adequately investing in its future growth. The past, in the absence of more detailed information, is usually the best predictor of the future, but what you really need to look at if you want to know how a business is expected to perform in the future is a set of projections.

So that concludes my discussion of financial statements.

On another note, I am very pleased to report that my total sales since July 23 are now over $10,000. So that is now an average of $2,500 a month. In reality though more than half of that total is this month alone, and today is the 16th. So my sales are growing daily as I list more material and reach more collectors with social media. I launched my Facebook page last week "Pristine Canadian and British West African Stamps and so far, I have managed to obtain over 200 likes in just over 2 weeks. Not bad! The link to my page is below, if you want to check it out:

https://www.facebook.com/Torontostampdealer/?ref=hl

Friday, November 13, 2015

What do My Financial Statements Mean? The Notes to the Financial Statements

My last three posts dealt with each of the three primary financial statements: the balance sheet, the income statement and the cash flow statement. Today's post will look at what in my opinion are often overlooked and ignored by many business owners: the notes.

One of the reasons why the notes are ignored so often is that business owners do not understand most of them and do not obtain useful information from them. It is indeed an unfortunate reality that the professional accounting standards often do not require disclosure of the information that would be most helpful to a user analyzing the financial statements. Most professional accountants prepare financial statements either for a specific user such as the bank manager or for use in filing tax returns. Usually in the latter case there are no notes, as they are not required for financial statements prepared on a Notice to Reader basis. In the former case, where the financial statements are prepared on an audited or Review Engagement basis, notes usually are prepared, but only  the minimum required disclosures are usually included.

So What Do The Notes Contain And Why Are They Important?

The notes contain three basic categories of information:


  • They explain the accounting policies being used to measure and report transactions and thus the entire basis of presentation.
  • They provide additional detail of items reported in the financial statements.
  • They provide qualitative information that would be considered important to a reader that cannot be adequately captured in the financial statements.
The first note is always the accounting policies note, and it is this note that is usually completely ignored by most business owners. Although business owners really should be involved in deciding what policies make the most sense for their particular business, for many small businesses this task is left to the accountant. Another thing that often happens is an accountant will acquire the client from another accountant and will simply follow whatever policies were used in the past. Consequently what can happen is that inappropriate accounting policies that do not reflect the economic reality of the business get used for years, resulting in statements that while useful for preparing the annual tax return, are of little more value. 

I'm not going to bore you with all the different accounting policies here, as your accountant can have that discussion with you. Instead, I want to alert you to the questions you should consider and answer for your accountant so that he or she can ensure that the appropriate policies are being used from the start:

  • When you decide to make an allowance for uncollectible accounts receivable, do you look at specific accounts, or do you provide a blanket, estimated allowance based on historical experience, like 1% of all accounts for example?
  • Does your inventory consist of individually identifiable, distinct units, or are they a large quantity of identical items?
  • When you sell inventory, what sells first? The oldest units you bought? The latest ones? Can't tell?
  • For each major category of asset, such as office equipment, premises, computer systems, software etc., how many years do you expect that the business will use the asset before it has to be upgraded or replaced?
  • For intangible, intellectual property assets, how long do you expect that they will have value to the business?
  • At what point do you consider a sale to have taken place? Is it when you deliver goods or render services, is it when you receive payment? 
  • For long-term construction or manufacturing contracts, how do you record the revenue during the contract? Do you attempt to determine the progress of the contract at year end and attempt to estimate the proportion of the revenue earned to that point? Or do you wait until the contract has been completed?
  • Do you make an estimate of inventory that for whatever reason will not sell for full price, or will not sell at all? How do you determine that? Do you look at a complete list of inventory and consider each item, or do you provide a blanket allowance based on experience?
Knowing the answers to the above will help your accountant ensure that your financial statements are the most meaningful they can be. 

Most of the rest of the notes to the financial statements are usually additional details or breakdowns of items contained in either the balance sheet, income statement or cash flow statement such as:

  • Breakdown of inventory between raw materials, work-in-progress and finished goods, along with the allowance for obsolete inventory. 
  • Breakdown of which assets are included in property, plant and equipment - their original cost, the depreciation (amortization) taken to date and the remaining net book value.
  • Breakdown of assets acquired on long-term lease showing similar information.
  • Details of bank credit lines obtained whether used or not, including all significant terms and conditions and a statement as to whether those conditions have been complied with. 
  • Details of any warranty arrangements offered to customers.
  • Details of long-term bank loans other loans or lease obligations.
  • Details of issued shares and authorized but not issued shares.
  • Details of major components of revenue.
  • Details of sales made to or purchases made from related companies
  • Details of what makes up the income tax expense and how the income taxes shown on the financial statements reconciles to the tax return.
Most of these are understandable to most readers except for the last one. The last note is required under the professional standards in Canada. The reason it is required is that in some cases there is a significant difference between a company's taxable income and the income shown on the financial statements, due to special tax write-offs that the company is eligible for. If a reader were to simply apply the known tax rate to the financial statement income, the expense number they would calculate would be different from the expense shown on the financial statements, which of course would be confusing. So this note is meant to clear up the confusion by explaining what the differences are. 

The third category of information disclosure is qualitative information that is important to a reader that cannot be adequately disclosed in the statements. Usually this is related to events that have taken place after the date of the financial statements that could have a significant impact on the business, such as:

  • Acquisition of a business division or merger with another business.
  • Loss or acquisition of a major customer or key supplier.
  • A catastrophe that results in the destruction of corporate property.
  • A lawsuit that has been filed against the business. 
Occasionally, the disclosure can be similar to the above, but related to events that occurred before the date of the financial statements that was still unresolved as of that date. 

Most business owners, in my experience are reluctant to provide these disclosures. However, they are essential if you are going to provide financial statements to external parties. I'm also of the belief that many of them do not paint the negative picture that many owners think: things happen all the time in business, and the disclosure of the above will not necessarily hurt the business, although it may lead to questions from readers. 

That concludes my discussion of financial statements and what they mean. I hope you all found it useful. 

Have a great weekend everyone!

Thursday, November 12, 2015

What do My Financial Statements Mean? - The Cash Flow Statement


Image result for cash flow statement



The cash flow statement is probably the most important of your three primary financial statements. However, despite this it is probably the least understood of the three. Understanding what the line items on this statement mean and the overall significance of the numeric totals will enable you to spot many situations where a business is either in trouble, or could find itself in trouble in the future.

So What is the Purpose of the Statement? What Does it Mean?

The cash flow statement tells you whether the business is capable of generating enough cash from its operations to sustain the business. This is not the same thing as profit. Many times you will hear about profitable businesses that expand quickly and go bankrupt. The reason is insufficient cash flow to meet their obligations as they come due.

Actually, the statement tells you much more than that. It tells you what the net change was in the cash balance of the business - an increase or decrease. More importantly, it tells how how that increase or decrease came about, by disclosing information about the cash flows in three sections:

1. The operating section
2. The investing section
3. The financing section

The operating section is all about the day to day operations of the business. The cash flow statement will always contain a subtotal showing you how much cash was either generated by or used in operations. Except for a startup business, a healthy mature business should always have positive cash from operations. This means that the day to day operations are generating enough cash to pay the obligations of the business as they come due without having to resort to drastic measures like selling off assets or borrowing money.

The investing section contains transactions of a long-term capital nature that are outside the normal operations of the business and that occur infrequently such as buying new equipment or selling off old equipment. Buying or selling of marketable securities held over the long-term would also be disclosed in this section.

The financing section contains information about long-term capital transactions involving either shareholders or long-term creditors.

Understanding The Operating Section

The operating section is prepared in one of two ways by your accountant. Each way will result in different information being shown:

1. The Direct Method.

The direct method will look almost like a repeat of your income statement, except that it will not include any non-cash items. The amounts shown will also reflect the cash impact of increasesor decreases in your current assets and liabilities as explained below.

2. The Indirect Method

This the most common method used now. It starts with your net income or loss figure from your income statement and then adjusts this number for two major classes of items:


  • It removes any items that are non-cash in nature, such as gains and losses as well as amortization (depreciation) of capital assets. 
  • It adds or subtracts the cash flow impact of increases or decreases in current assets and liabilities. 
It is this second group of adjustments that most people struggle with. Have you ever heard someone say "I made a lot of money, but it's all tied up in inventory.". If you have, then this is what that refers to. Whenever you acquire additional assets or pay off additional obligations, you are using cash. Conversely, when you use up assets or take on additional obligations you acquire cash. The reason why this confuses people is because often an acquisition of cash or a use of cash is not accompanied by an actual cash payment. Often it is accompanied by a forgone opportunity to collect cash or an acquired opportunity to defer a payment that otherwise would have been made. For the purposes of the cash flow statement those forgone opportunities or acquired opportunities are treated as uses of and sources of cash. 

So in this second section, adjustments are made to add or subtract the cash flow effect of changes in the ending balances of all your current assets or liabilities, as listed on your balance sheet with those same balances in the prior year. 

After all these adjustments have been made, you will have a figure for total cash flow from operations. As I said above, this amount should be positive for mature businesses and as long as there has not been significant financing or investing activity taking place, it should be relatively stable from one period to the next. 

So a lender or prospective investor will be paying very close attention to this number, and it it is too low, they will probably turn down your requests for financing. 

How Do I Increase This Number?

If your cash flow from operations is low, there are steps you can consider taking that will improve it. These steps include:

1. Reducing your accounts receivable, either by being more aggressive in your collection practices or by reducing your payment terms. 

2. Reducing the amount of inventory carried by using a just-in-time ordering system and or drop-shipping. 

3. Taking as long as possible to pay suppliers without damaging your relationship with them. 

Those three things, done consistently over a period of a year can have a huge impact on the cash flow position of a business over than same period. 

Understanding the Investing Section

The investing section for most expanding businesses will show a negative overall position because the business is spending cash on investing in its expansion. A positive cash flow number in this section usually means that assets or investments are being sold off. This will usually trigger the curiosity of an astute reader, who will want to know why the business is doing this so that they can understand how this is likely to affect the future cash flow from operations. 

For example if there are large negative balances in this section then it means that the business is expanding, which in turn should lead to growth in cash from operations, although it may take 2 or three fiscal years for most of this growth to show up. A business that is able to do this without borrowing money will be able to hang on to most of this growth. Although an astute reader is going to look carefully at the next section to see how this expansion was funded. 

Understanding the Financing Section

The financing section for most mature, stable businesses will show moderate to low outflows as the business makes dividend payments to its owners. A business that has debt will show its annual repayments here. So most existing and lenders will immediately compare the sum of the repayments made with the cash from operations to see if the business is at least generating enough cash to make these repayments. 

Large positive inflows in this section mean that the business has either borrowed more money or has obtained additional investment from its owners. 

Like the investing section, this section can give you some clues as to what to expect in the future. If you see large inflows that have come from debt, then you know that greater repayments will be required in the future periods which will mean more negative outflows in this section in future periods. This in turn means that the cash flow from operations will have to be higher than it is now if the business is to stay afloat. Knowing this will allow you to focus your line of inquiry if you are looking at a company to invest in. On the other hand if you see a significant amount of debt repayment, then that is an indication that less repayment will be required in the future, and thus cash flow from operations can decrease a bit without threatening the future viability of the business.

Red Flags to Watch For

As I have stated in this post there is a way that the cash flow statement should look for certain businesses  depending on where they are in their life cycle. However, the following should alert you that potential problems could be looming on the horizon and that more investigation is necessary:

1. Large negative cash from operations in the current period, or smaller negative cash from operations over 2 or more reporting periods.

2. Large positive cash inflow from sale of assets or investments without a compelling reason as to why, especially if it appears that the sale was undertaken to cover a large operating shortfall. 

3. Large positive cash inflow from the acquisition of new financing that is either not currently sitting in cash on hand, or is not accompanied by an equivalent negative outflow in the investing section. In this case this means that the money has either been paid out to owners or it is being used to pay off existing debt. This isn't necessarily bad, but it could be if the income statement indicates that the business is losing money.

This concludes my post about the three primary financial statements. Tomorrow's post will look at the notes that often accompany the financial statements that your accountant prepares for you. 



Wednesday, November 11, 2015

What Do My Financial Statements Mean? - The Income Statement

This is the second post in a series of posts dealing with your year end financial statements and what they mean. In Monday's post, I talked about the balance sheet. Today, I am going to talk about the statement that most of you understand the best: the Income Statement, otherwise known as the P&L or Statement of Profit and Loss.

What Does the Income Statement Tell a Reader?

The most obvious piece of information that the statement conveys is how much money your business made of lost during the period. However, what is not obvious to many non-accountant readers is that this measure is not necessarily the amount of cash profit available for distribution. The reason will become more apparent as you read through the post. However, there are many other useful insights that can be communicated about a business with this statement:


  1. It can show whether or not the current performance was due to normal business events, or whether it was due to unforeseen, one-off events and circumstances outside the control of the business. 
  2. It will show what kinds of gross profit the business is generating on sales of goods or provision of services. 
  3. It can enable the reader to calculate the relationship between key expense items that can be compared to some objective standard to determine the viability of the business. 
  4. It can show the kinds of investment being made by the business in activities that are crucial to the long-term viability of the business, while not being immediately urgent. 
  5. It can show whether or not the profit or loss was significantly influenced by transactions with entities that the business is related to and is therefore not dealing with at arm's-length. 
I will now discuss each of the above in more detail with examples

Normal Business Events Versus Freak Occurrences

When a reader of the income statement sees an unusually high profit or an unusually high loss for the period being reported, they will naturally wonder whether or not such a performance is likely to be repeated. To determine this, they will want to know if there were any non-recurring events that occurred that were outside the normal course of business, not within management's control that had a significant financial impact on the performance of the business. 

This is accomplished by showing such items in a separate section of the statement. For example, a loss due to some catastrophic event, such as a fire, would be presented as an other item rather than simply being buried in income and expenses. The historical cost of the assets destroyed, as well as all the related costs of cleanup and reconstruction would all be reflected in one line item "loss from fire". In this way the reader can evaluate how the business has performed independently of these types of events. Other examples of events and circumstances that would lead to ordinary item disclosures:

  1. Legislative changes that render certain activities of the business illegal so that they must be immediately discontinued. In this case, the entire portion of the business operation that related to the now discontinued activity would be separated out from the rest of the statement and presented separately in this section. 
  2. Gains and losses on the disposal of capital assets of the business. Although these are at management's discretion, they only occur infrequently and would distort the annual performance of the business if not separated out. 
  3. Windfalls such as an unexpected damages award on a court case that the business was fighting. 
  4. Significant losses from theft.
  5. Significant losses from the bankruptcy of non-trade debtors - companies or individuals that the business advanced money to that they were not selling goods or providing services to. The inability to collect normal trade debts is considered a normal cost of doing business. So those types of losses would not normally be presented as other items. 

Gross Profit

Gross profit is simply the difference between revenue and:

  • Cost of sales for a business that sells inventory, and
  • Service delivery cost for a business that provides services
The reason why this measure is important is that a sophisticated user can use it to quickly determine the long-term viability of the business/ 

What does the user look for in this case?

Most of the overhead expenses that a business has that are not directly related to the product or service offered are fixed in the very short term. Some of the expenses can be curtailed over the medium term, but in the very short term they are all fixed. Gross profit is the only way that these expenses can be covered. 

So if a reader knows what the total overhead expenses of a business are, and they know what the gross profit is they can get a sense of how close the business is to breaking even. This provides some measure of the risk associated with the business. If the reader has some idea of what the volume of business is on a comparative basis, then they will be able to further determine whether a potential shortfall in profit is a problem that can be solved by increasing business volume, or whether it requires an increase in the gross profit percentage. 

A reader that is very knowledgeable about the industry you are operating in will know whether the market conditions are such that you can increase prices or reduce costs to achieve a better gross margin percentage. How? By analyzing the performance of your competitors. Thus they will be able tell whether a business facing losses can actually turn its situation around or not, or at least what it has to do for that to happen. 

Relationship Between Key Income Statement Items

It is generally accepted within the restaurant industry that food and labour should generally not exceed two-thirds of revenue for a viable restaurant operation. So as long as the income statement for a restaurant discloses non-owner labour and food separately, it will be very easy for a bank or a prospective investor to determine whether the restaurant represents a good risk or not. 

Each industry has its own key performance indicators that investors look at when evaluating a business. Many of them will be a cost expressed as a percentage of revenue, such as salaries, or total fixed overhead. 

The key here is to ensure that your statements contain enough line detail to enable a reader to calculate these relationships. Your accountant should be able to tell you what these relationships are that your bank or investors are looking at and then work with you to make sure that your financial statements are set up in such a way that this information can be provided. 

Non-Urgent But Crucial Activities

There are many activities that are important to the long-term viability of a business that nonetheless are not immediately urgent. Some examples include:

  1. Adequately maintaining equipment and buildings.
  2. Carrying adequate insurance.
  3. Investing in professional development and training of staff. 
  4. Advertising and business development.
  5. Research and product development.
  6. Offering warranties to customers on the product sold. 
The easiest way for a banker or investor to tell whether or not a business is doing the above things is by looking at what they are spending in each of the above areas. If the related expenses do not appear on the income statement then that tends to suggest to a reader that a business is cutting corners in these areas. 

Still there are other activities that are considered to be desirable from a social point of view and many investors look for evidence that a business is engaging in these activities. Examples would include:

  1. Making donations as a way of giving back to the community.
  2. Making provisions to clean up or restore a property after use for some hazardous activity such as a mine or a refinery. 

Consequently it is important if you are having external financial statements prepared by an external accountant to ensure that the statements present the following separately if you are having other parties looking at your financial statements:

  • Repairs and maintenance costs. 
  • Insurance expense.
  • Professional development and training expenses.
  • Advertising and business development costs.
  • Research and product development expenses should not be buried in labour, materials and overhead as is so often the case. 
  • All donations should be reflected, not just those made in cash. 
  • Amounts set aside to honour warranties. 

Related Party Transactions

Sometimes a business will conduct transactions with businesses that are related to it, usually because both businesses have the same owners. In these cases, one would expect that the terms and conditions of the transactions would or could be significantly different than what they would be if the business were dealing with an unrelated party. Sometimes the concern is with whether the transaction would have occurred at all in the absence of the relationship. 

For example take a business that has $100,000 profit for the year. Sounds pretty good right? What if you found out that the day before year end the business made a $200,000 sale to a company that it owned. All of the sudden things don't look so rosy do they? In this example the business likely would have had a loss were it not for this 11th hour transaction that it essentially controlled. As an investor or banker you would want to know about these kinds of transactions so that you could determine what the true performance of the business was outside of these types of transactions. 

A well prepared income statement will either show these transactions separately on the face of the statement, or they will be disclosed in a note to the financial statements that is referenced back to the relevant line items on the statement. 

Cash Versus Non Cash

I said at the beginning of this post that the profit or loss shown in the income statement is not necessarily the amount of cash available to distribute, or the amount of cash lost during the period. There are several expense items included in most income statements that are non-cash in nature. They are non-cash in the sense that the cash outlay for them will come at some future point in time. Examples of such non-cash items are:

  • Amortization of capital assets, otherwise known as depreciation. The cash outlay will come when the related assets are actually replaced. 
  • Gains and losses on disposals of assets or investments. Gains and losses are simply the difference between the amount of cash received and the historical cost of the item disposed of. Therefore gains and losses are non-cash items. 
  • Provisions made for warranties. The cash outlay comes when the warranty is actually honoured.
  • Provisions made for legal costs in a court case. 
  • Provisions made for site cleanup or restoration. Again the outlay comes when the site cleanup or restoration is actually carried out. 
That concludes my post about the income statement. Tomorrow, I will move on to the Statement of Cash Flows and then on Friday, I will talk about the notes to the financial statements. 



Monday, November 9, 2015

What Do My Financial Statements Mean? - The Balance Sheet

Today's post is going to be the first in a series of posts that looks at those things you pay your accountant to prepare every year: your historical financial statements.

If you are like most small business owners, you probably feel that they tell you next to nothing about your business that you do not already know, and consequently, you have trouble seeing the value in having them prepared. But do they? Is it possible that they do contain valuable information that has simply never been explained to you in a manner that makes sense.

If you read this and my subsequent four posts, you will discover that your financial statements, while they do have their limitations, do indeed contain useful information that you as a business owner should understand and be aware of. The most compelling reason why you should understand them is that your banker and investors, if you have any use them to evaluate their investment in and loans to your business. So it only makes sense that you should at least understand what they are looking for when they look at your financial statements. Having a basic understanding of them will also help you work more effectively with your accountant at year end as well.

Today's post looks at the first financial statement that is usually prepared, called the balance sheet.

What is a balance sheet? 

A balance sheet is a statement that tells you what assets your business owns at a particular point in time, and how those assets have been funded. A typical balance sheet looks like this:

Image result for balance sheet images


Usually, the liabilities and owner's equity that is shown on the right is presented at the bottom of the balance sheet so that the entire statement is usually a three column statement, with the first column containing the description of all the line items and the second column containing the dollar amounts both at period or year end and at the same time in the prior year.

What Does a Balance Sheet Tell Me or Another Reader?

There are generally three major pieces of information that a balance sheet tells a reader:

1. How much liquidity your business has.
2. How much skin you have in the game, i.e what your equity to debt ratio is.
3. How capital intensive your business is.

What is Liquidity?

Liquidity is a measure of how quickly a business can generate cash to pay its immediate liabilities as they fall due. A business that is highly liquid will have a lot of assets that are either equivalent to cash or can be converted to cash relatively quickly like accounts receivable, or treasury bills for example. Its ratio of these liquid assets relative to it's current liabilities will be higher than 1:1 when a business is highly liquid.

On the other hand, a business that is illiquid will have a lot of assets that are not easily convertible to cash like equipment or inventory, or it will have current liabilities that vastly outstrip its liquid assets.

How Does the Balance Sheet Present Liquidity?

One of the ways that the balance sheet presents or highlights the liquidity position of the business is to clearly separate the current assets from the long-term assets, and the current liabilities from long-term liabilities. Current items are simply those that will be fully realized by the business within a year of the balance sheet date. Long terms items will remain outstanding for over 1 year.

Secondly the assets and liabilities are usually presented in order of their ease of conversion to cash in the case of assets, or how quickly they are expected to be paid in the case of liabilities.

What Does a Lender Look for When Assessing Liquidity?

Most conventional banks want to see a ratio of liquid assets to current liabilities of at least 2:1. In measuring this they will usually count inventory as a liquid asset, since very few businesses that sell inventory will have a ratio of 2:1. Thus you should monitor your ratio on a regular basis, especially if you have bank financing, since your bank will often attach a covenant condition to your bank loan which will allow them to call it for repayment if you are not in compliance. It is an easy calculation to do: simply divide your total current assets by total current liabilities.

Skin in the Game or Equity

Most lenders and investors want to minimize their risk in either investing in or lending to your business. One measure of risk is how much investment you have made yourself in your business relative to how much of the funding has come from other people. Another term for this is leverage. A leveraged business will have been funded by mostly debt and very little equity (investment by owners).

Equity, Shareholder's Equity, or Owner's Equity consists of four components:

1. Share Capital
2. Contributed surplus
3. Due to shareholder (s)
4. Retained Earnings

Share capital is the amount of money that was initially obtained by the business from investors when the business issued its shares to the shareholders. Contributed surplus is not seen that often on financial statements, but it represents monies that shareholders have contributed to the business that are intended to remain with the business as permanent investments. It cannot be repaid unless the shares held are redeemable for an amount greater than their face value.

Due to shareholder simply represents monies that you have lent the business. Every single time you pay a business expense using your own cash, a personal cheque, or your own credit card, you are creating of increasing the amount of money your business owes you. Every time you pay a personal expense with a company cheque or a company credit card, or otherwise withdraw cash you decrease this balance, thus it can be negative where you owe the company money.

Because the amount due to shareholder(s) is a loan, it follows that it can be repaid by the business with no tax consequences whatsoever to the shareholders who lent the money in the first place. However, the same does not hold true for negative loans. The reason is the Canada Revenue Agency wants to stop business owners from taking money from their businesses that would normally be taxable to them and avoiding tax by calling them loans from the business. Under current Canadian tax rules, you must either repay any loans taken by the next balance sheet date of the business, or you must include the amounts borrowed in income, either as a dividend or as a salary.

On the balance sheet, amounts due to shareholder are always presented as assets or liabilities, but lenders almost always include them in their calculation of equity.

Retained earnings represents the total after-tax profits earned by the business since inception, that have not been distributed out to shareholders as dividends. Because most of the retained earnings will have been re-invested in other business assets as the business grows, this amount does not generally represent amounts that are available to be distributed in cash, but rather it represents the maximum amount that could be distributed to shareholders if the business had the cash to do so.

These four items when added together give a measure of how much skin you have in the game to to speak. The more you have, the more comfortable a lender feels in either continuing to hold existing loans to the business or in making additional loans.

What Do Lenders Look For In Assessing Equity?

Most lenders want to see a debt to equity ratio of no more than 3:1 for a successful, established business and 2 or 2.5:1 for other businesses. The lower this ratio is the better will usually be your interest rate on borrowed funds.

Comparing the balances in equity from year to year will tell investors and lenders how much money you took out of the business during the year. This is important as many loan agreements will contain restrictions on how much money you can take out in a year. So you have to read your loan agreements carefully and if you are off-side in this regard, you should either make arrangements to replace the funds taken out or alert your bank before your financial statements are due. Often if you tell them beforehand and show them how you intend to restore compliance, many banks will waive the breach of this condition on their loans.

How Capital Intensive the Business Is

The balance sheet presents capital assets such as property, plant and equipment separately, which allows a reader to see how capital intensive the business is. This is important because capital intensity requires capital maintenance for the business to be sustainable. Equipment depreciates over time and must be repaired, maintained and replaced regularly. Thus a reader is alerted to additional considerations that they must take into account when evaluating a business. If a business is very capital intensive then a reader knows that they have to look at what the annual maintenance costs of those assets are, and whether the business has been maintaining its assets, as well as whether the equipment is in need of expensive overhauls or replacements.

That concludes my post about the balance sheet. On Wednesday, I will go over the second statement, that most of you will understand, called the Income Statement, or Statement of Profit or Loss.




Friday, November 6, 2015

My Largest Sale Ever and My Facebook Page Pristine Canadian and British West African Stamps is Launched!

November is off to an amazing start! Sales are already approaching the $2,000 mark for the month after only 5 days. This is largely due to the sale of a fantastic stamp to a local Ontario collector:


This is the 20c olive green from the 1898-1902 Numeral issue. It was issued on December 24, 1900 and a mere 540,000 stamps were printed and issued. This pristine, never-hinged example was in my store for all of about 5 weeks before it sold for $1,250 US against my asking price of $1,500. The buyer was a repeat customer who had purchased from me about six months ago. This is an excellent sign as it shows that I can sell the expensive stamps as well as the cheaper ones. 

Pristine Canadian Stamps on Facebook is Launched!

I have been struggling for a while to figure out how to automate the sharing of my blog posts with groups on Facebook for a while. It seems that none of the automated sharing tools like Hootsuite allow you to automatically post content to multiple Facebook groups. I guess it makes sense: it is to prevent such a large volume of spam from choking up the newsfeeds of those groups. But sharing my posts manually to each and every group is very time consuming. However, I think I may have come up with a solution: I launched a Facebook page:


I then shared all of my blog posts with this page, so that they are all now accessible on my timeline. This makes it very easy for visitors to find the posts they want to read. I find navigating the posts on Blogger to be a pain in the neck. This hopefully should make it easier to find the posts viewers want to read.

Once this was done, I invited all 3,000+ friends on my Facebook page to like the page. So far, I have 38 likes and I have seen the traffic on my blog double this morning. Another great thing about the pages on Facebook is they give you quick tracking of how many people have been reached by your posts, how many engaged, how many responded to your call to action and how many website clicks you had. So the goal has now shifted towards trying to make friends in these groups and then sharing the page with them. We'll see how this works.

In the meantime, I have signed up for Mail Chimp and Hootsuite because I do think that I can still benefit from the automated sharing of messages that these programs provide and I do think that it makes sense to start designing an e-mail marketing campaign. It does appear though, that I will need to start obtaining explicit permission from my customers to add them to my mailing list.

Well I'm off to go finish listing the 1953-1967 Karsh Issue of Canada as I want to try to complete the listings by the end of today, so that I can start on the next set on Tuesday next week.

Have a great weekend everyone!