Are credit card receipts part of my cash balance?

July 2007

"Most of our sales come from credit card payments on our Web site. We put those payments in for processing with our bank every day, but it's often a week before the payments show up in our account. So when do we record them as 'cash' on our balance sheet?"

Mike: You can consider your credit card deposits as cash the moment you deposit them. If you want to show them separately in your internal financial statements, set up a new account in the general ledger for "cash in transit." Think of these in-transit deposits as similar to checks you've written that haven't yet cleared the bank. When you reconcile your bank account at the end of the month, you'll clearly see which items--checks and deposits--haven't cleared. Simple.

What does CAGR stand for?

February 2007

"My CEO insists that CAGR means 'cumulative annual growth rate,' and he keeps telling our board that our CAGR is 30%--10% a year for the past three years. I know CAGR really means 'compound' growth, which would give us a much lower rate. I show him accounting books, and he shows me Google links that seem to support his theory. We've agreed to let you be the referee."

Mike: Do a search on “CAGR”, and you'll see that by far the most common definition is “compound annual growth rate.” This is a measure of revenue growth, year over year, and is significant to investors since a company’s selling price is often based on a multiple of revenues. So, a higher CAGR will yield higher proceeds to the stockholders if the company is sold.

If your CEO is telling the board that a 10% annual growth in sales produces a "cumulative" CAGR of 30%, he's drastically misleading them about a key metric for valuing the company. In reality, a 10% annual increase in sales for three years translates into a CAGR of 9.2%. This isn't just a war of the words--it's a serious issue of honest financial reporting.

Should non-profits open their books?

September 2006

"I just became treasurer of a small non-profit arts organization. It's a
pretty well-run group, but I'm troubled by the fact that we keep our
financial statements a secret from our major donors. To me, our financial
supporters are like investors--they deserve to know exactly how we're
spending their money. Or am I off base here?"

Mike: Well, strictly speaking, your donors aren't investors. But I agree
that you should disclose all significant financial activities to your major
donors, if only as a matter of good faith. And if the board of directors
refuses, you should consider resigning.

This kind of transparency is also great discipline for the organization
itself. Non-profits often announce that they've "raised" a lot of money--
from a gala dinner party, for example--but in reality much of this money
gets spent on event production and fund-raising activities. A little
pressure from donors can do a wonderful job of reining in excessive costs in
these areas.