|Certificate Course: Login|
|home | start a business | accounting and cash flow|
If you're going to be in business, you must know how to keep score. To gain this knowledge will require that you go to school to learn both accounting and computer software that is used to support your particular business. With this knowledge, you can talk intelligently about your accounting needs with employees, bankers, and your own accountant.
The financial matters you will confront in your own business are little different than those of large corporations. Financial tools, coupled with an understanding of how to use them, will assist you in the proper management of your business. Without this understanding and without a dedicated commitment to using financial tools, you reduce your chances of success.
As a business owner, you need to feel comfortable with the values portrayed by each measurement. Understanding these three measurements will whet your appetite to learn more, which in turn will lead to your strategic use of credit and ability to make choices tying operational activities to the best use of funds. They will help you make better decisions.
You will also need to gain knowledge of accounting in order to evaluate your competitors or businesses you might wish to acquire (or be acquired by). While information about companies may be obtained from stock brokers or interviews with key executives, the best source to learn about your most successful and publicly owned competitors is to read their annual reports. You will need to understand accounting to draw intelligent conclusions. Accounting courses at your local community college will give you most of what you need to know.
You will need to decide how your accountant will prepare your annual financial statement. There are several levels of audit to select from. They are listed in our session 1 on Financial Controls in Building My Own Business course.
At present, there are no national certification standards for bookkeepers like there are for CPAs or EAs. So, it may be best to look for referrals when selecting a bookkeeper. Many CPAs and EAs will refer you to people they have confidence in to help you with your accounting needs. Bookkeepers range from those who only pay bills or process receipts to "full charge" bookkeepers who can summarize bookkeeping activity for your CPA or EA to prepare tax returns.
On the other hand, if you want someone to advise you on business organization and prepare income and payroll tax returns, you will probably want a CPA or EA to help you. The more "routine" bookkeeping you know and do yourself, the better it is, because you can then afford a higher level of expertise.
You will need to determine what accounting software program will work best for your business and your accountant can help decide this. Some good ways to determine this:
Payroll accounting and reporting is increasingly complex. If you will have employees, look up the "Payroll Accounting Service" providers in your area. Your accountant may have a recommendation. This complicated function can be outsourced at a reasonable cost.
Sooner or later, you will need financing in addition to your start-up sources. It is important to establish banking relations BEFORE future needs arise. Your accountant can help you:
Methods of Accounting
Keeping Separate Business Records
There will be a number of tax liability matters that you and your accountant will need to deal with:
Financial and Technical Assistance
"Internal controls" refers to what is needed in the handling of funds, where money in the form of cash, checks or credit cards, is exchanged for goods and services. The goal is to make sure that the business receives all of its income without any of it being siphoned off by waste, fraud, dishonest employees or just through carelessness. Even a business that is healthy in all other respects can be very vulnerable to failing from the inside through lack of internal controls. Your accountant can help set up appropriate controls for your particular business.
Damage control planning is an important part of internal controls. You will need to be prepared for adversities.
If you are in a manufacturing or retail business you will need to set up inventory policies and controls because inventory, similar to cash, can disappear very rapidly through carelessness or employee dishonesty. You need to have safeguards in place very early on in the process by setting up controls as to who can sign for goods and services and who controls the release of goods and services out the door after the processing has been completed.
You are probably getting the idea by now that in your selection process of retaining an accountant, it is a good idea to get one with experience in your industry.
It is a common occurrence for start-ups to be short of cash. And it is very tempting to hold off paying certain obligations to conserve cash. Yet, you should not fall into that trap with your government obligations because governmental agencies have little patience with delinquent taxpayers.
Similarly, the sales tax money that you collect, in states that charge sales tax, needs to be forwarded to the state, either on a monthly or quarterly basis depending on the volume of your sales. Quarterly reports will be required to show how much you have collected and that you have submitted this money to the state in a timely manner.
Bank Account Reconciliation
Reconciliation refers to taking the balance in your checkbook and reconciling or mathematically comparing it to the bank balance. You must also take into account any difference in those two balances that are due to checks that you have written that have not yet cleared the bank. If this is the case, your checkbook balance will be lower than the bank statement because the bank has not yet seen some of the checks you have written. So it is important that these outstanding checks get subtracted from the bank balance and the resulting number be compared to the number in your checkbook. When the two match, we say the account has been reconciled.
Employee Benefits Policy
There are a number of sources to give you some help in deciding these issues:
Making entries into a software program does not require a trained bookkeeper but it is important that you, the business owner, have a full understanding of double entry accounting.
There is one aspect of bookkeeping that you could consider delegating: payroll and payroll reporting, which can be handled by Payroll Service Providers at a low cost.
If you are in a partnership, it is especially important that you have knowledge of the accounting as well as what is happening in the other areas of the business. Remember that in a partnership, all the partners have authority to commit to the partnership. If a partner in charge of accounting doesn't do a good job, it can affect all the partners.
Major Financial Statements and Software
The general order of a balance sheet is to go from the most liquid to the least liquid. In other words, under "assets," you see the heading "current assets" and the first item is cash, because cash is the most liquid of your assets. After cash are receivables, representing money owed you from customers. When you receive the money, the receivable turns into cash. Next in assets are "inventories." Since inventory is not as liquid as either cash or receivables, this falls below them on your balance sheet. Following current assets are property and equipment that are typically carried at cost.
You will also notice "depreciation" on a balance sheet prepared by an accountant. Depreciation is a non-cash expense and is nothing more or less than an attempt to record that these assets go down in value over time. IRS Publication 946 "How to Depreciate Property," contains information that will give you a better understanding of depreciation.
One reason this particular financial statement is called a "balance sheet" is that assets always equal your liabilities and owner's equity. This is called double-entry bookkeeping, and is the type done in nearly every business. The reason double-entry bookkeeping is the accounting gold standard is that it serves as a check to make sure a transaction has been properly recorded. For example, let's say the first thing you buy is a desk. You have an asset of office equipment. If you paid cash, you don't owe any liabilities so your interest in that desk is called your equity (on the other side of the ledger).
Similarly, other transactions will give rise to an increase in assets and/or an increase in liabilities or equity. For example, looking at our balance sheet example under current liabilities (again, from most liquid to least liquid) your account payables are the first item listed. After that there are items called "accrued liabilities," which usually refers to payroll taxes and sales taxes that may not be due for another month or two.
Also under current liabilities is debt that is due within a year. So, the current 12 months of payments for equipment would be shown as a current liability. Following that we have long-term debt, which are items that are due after the current year.
Following total liabilities is the section called "owner's equity" which is the owner's interest in the business. If we take all the assets of the business, $37,000, and subtract the total liabilities, $18,000, there is a difference of $19,000. Of this $19,000 amount, $13,000 is from past income and $6,000 is from income earned during the current accounting period, thereby balancing out $37,000 for both assets and liabilities and owner's equity. In order to create your own starting balance sheet, we have provided a Balance Sheet Template which can be updated and expanded over time.
When bankers look at a financial statement, they are interested in various financial ratios. Ratios help indicate the financial strength of a business and how the business can handle payback of loans. For example, current ratio is current assets divided by current liabilities. If your current assets are less than your current liabilities, a red flag will go up because it would indicate a risk of insolvency during the present year. Various industries will have different levels of ratios. You can track your ratios with others in your industry to see how your business compares. Your banker will probably be most interested in your owner's equity.
The income statement and the balance sheet tie together. Look back on the balance sheet and you'll see current earnings of $6,000. The income statement shows this same $6,000, which was the profit for the last six months. An Income Statement Template is provided and can be your starting point in organizing and refining your own income statement.
Your income statement will disclose valuable information. You will see a section for sales as well as a breakdown of all your expenses, leading down to the net profit for the period. The more current your financial statement, the greater will be its value. If you see a bad trend developing, you can take action at once.
Computer programs can produce financial statements with a keystroke, which is why you need to acquire the computer skills and software that are appropriate for your particular business.
Cash Flow Control
Cash flow control is a simple method of projecting your future needs for cash. It is an income statement covering future periods of time that has been changed to show only cash: cash coming in and cash going out and what your balance of cash is at the end of designated periods of time. This is a great tool because you can predict your future needs for cash before the needs arise.
In cash flow control, for each of a number of intervals of time, you make conservative estimates for your future sources of cash (IN) and future expenditures (OUT). Use low, conservative figures for IN items and use high estimates for OUT items. For the initial period, say a month, you start with the cash you now have. To this you add IN items and subtract the OUT items, which results in the cash at end of the month. The cash at the end of month becomes the starting cash for the next month.
The attached cash flow control spreadsheet shows that ending cash for this first period becomes the starting cash for the second period. The ending cash for the second period becomes the starting cash for the third period, and so on. Your projection should be made for an upcoming 12-month period. To prepare your own 12-month cash flow the Cash Flow Template can be a very useful tool. The projection will be a useful tool for you to arrange financing before it is required by showing your banker that you are sophisticated enough to provide for future cash in order to preserve liquidity.
You can use this simple cash flow format to make up your own cash flow projection for the business you have in mind. It is so simple, yet can be so valuable!
We heartily recommend that you download the individual business plan template for this session and complete it now:
Instructions on filling in the business plan template:
as you proceed through the course.
The full template for all sessions 1-15 can also be downloaded into your computer as a single document:
Include sufficient research findings and background materials. Make it interesting by the use of background data, your biography, charts, demographics and research data. When your business plan is completed, print off and assemble the 15 sections.
Many other business plan formats are available in libraries, bookstores and online.
Deciding on a business | The business plan | Home based businesses | Financing the business | Business organization | Licenses and permits | Business insurance | Communication tools | Buying a business or franchise | Location and leasing | Accounting and cash flow | E-Commerce | Opening and marketing | Managing employees | Expanding and handling problems
Getting financial controls in place | Getting your team in place | Customer feedback | Achieving lowest expenses | Develop negotiating skills | Alternatives for capital allocation | E-commerce | Growth by duplication | Vertical integration | Franchising your business | Global expansion | Buying businesses | Public ownership | Selling your business | Considerations for family succession
© 2003-2013 My Own Business, Inc. All Rights Reserved