Archive for category finance and accounting
If you don’t keep track of how much money you’re making, you have no idea whether your business is successful or not. You can’t tell how well your marketing is working. And I don’t just mean you should know the amount of your total sales or gross revenue. You need to know what your net profit is. If you don’t, there’s no way you can know how to increase it.
If you want your business to be successful, you need to make a financial plan and check it against the facts on a monthly basis, then take immediate action to correct any problems. Here are the steps you should take:
* Create a financial plan for your business. Estimate how much revenue you expect to bring in each month, and project what your expenses will be.
* Remember that lost profits can’t be recovered. When entrepreneurs compare their projections to reality and find earnings too low or expenses too high, they often conclude, “I’ll make it up later.” The problem is that you really can’t make it up later: every month profits are too low is a month that is gone forever.
* Make adjustments right away. If revenues are lower than expected, increase efforts in sales and marketing or look for ways to increase your rates. If overhead costs are too high, find ways to cut back. There are other businesses like yours around. What is their secret for operating profitably?
* Think before you spend. When considering any new business expense, including marketing and sales activities, evaluate the increased earnings you expect to bring in against its cost before you proceed to make a purchase.
* Evaluate the success of your business based on profit, not revenue. It doesn’t matter how many thousands of dollars you are bringing in each month if your expenses are almost as high, or higher. Many high-revenue businesses have gone under for this very reason — don’t be one of them.
It would probably be ideal if business and life were as simple as producing goods, selling them and recording the profits. But there are often circumstances that disrupt the cycle, and it's part of the accountants job to report these as well. Changes in the business climate, or cost of goods or any number of things can lead to exceptional or extraordinary gains and losses in a business. Some things that can alter the income statement can include downsizing or restructuring the business. This used to be a rare thing in the business environment, but is now fairly commonplace. Usually it's done to offset losses in other areas and to decrease the cost of employees' salaries and benefits. However, there are costs involved with this as well, such as severance pay, outplacement services, and retirement costs.
In other circumstances, a business might decide to discontinue certain product lines. Western Union, for example, recently delivered its very last telegram. The nature of communication has changed so drastically, with email, cell phones and other forms, that telegrams have been rendered obsolete. When you no longer sell enough of a product at a high enough profit to make the costs of manufacturing it worthwhile, then it's time to change your product mix.
Lawsuits and other legal actions can cause extraordinary losses or gains as well. If you win damages in a lawsuit against others, then you've incurred an extraordinary gain. Likewise if your own legal fees and damages or fines are excessive, then these can significantly impact the income statement.
Occasionally a business will change accounting methods or need to correct any errors that had been made in previous financial reports. Generally Accepted Accounting Procedures (GAAP) require that businesses make any one-time losses or gains very visible in their income statement.
If you have a checking account, of course you balance it periodically to account for any differences between what's in your statement and what you wrote down for checks and deposits. Many people do it once a month when their statement is mailed to them, but with the advent of online banking, you can do it daily if you're the sort whose banking tends to get away from them.
You balance your checkbook to note any charges in your checking account that you haven't recorded in your checkbook. Some of these can include ATM fees, overdraft fees, special transaction fees or low balance fees, if you're required to keep a minimum balance in your account. You also balance your checkbook to record any credits that you haven't noted previously. They might include automatic deposits, or refunds or other electronic deposits. Your checking account might be an interest-bearing account and you want to record any interest that it's earned.
You also need to discover if you've made any errors in your recordkeeping or if the bank has made any errors.
Another form of accounting that we all dread is the filing of annual federal income tax returns. Many people use a CPA to do their returns; others do it themselves. Most forms include the following items:
Income – any money you've earned from working or owning assets, unless there are specific exemptions from income tax.
Personal exemptions – this is a certain amount of income that is excused from tax.
Standard deduction – some personal expenditures or business expenses can be deducted from your income to reduce the taxable amount of income. These expenses include items such as interest paid on your home mortgage, charitable contributions and property taxes.
Taxable income – This is the balance of income that's subject to taxes after personal exemptions and deductions are factored in.
Most people probably think of bookkeeping and accounting as the same thing, but bookkeeping is really one function of accounting, while accounting encompasses many functions involved in managing the financial affairs of a business. Accountants prepare reports based, in part, on the work of bookkeepers.
Bookkeepers perform all manner of record-keeping tasks. Some of them include the following:
-They prepare what are referred to as source documents for all the operations of a business – the buying, selling, transferring, paying and collecting. The documents include papers such as purchase orders, invoices, credit card slips, time cards, time sheets and expense reports. Bookkeepers also determine and enter in the source documents what are called the financial effects of the transactions and other business events. Those include paying the employees, making sales, borrowing money or buying products or raw materials for production.
-Bookkeepers also make entries of the financial effects into journals and accounts. These are two different things. A journal is the record of transactions in chronological order. An accounts is a separate record, or page for each asset and each liability. One transaction can affect several accounts.
-Bookkeepers prepare reports at the end of specific period of time, such as daily, weekly, monthly, quarterly or annually. To do this, all the accounts need to be up to date. Inventory records must be updated and the reports checked and double-checked to ensure that they're as error-free as possible.
-The bookkeepers also compile complete listings of all accounts. This is called the adjusted trial balance. While a small business may have a hundred or so accounts, very large businesses can have more than 10,000 accounts.
-The final step is for the bookkeeper to close the books, which means bringing all the bookkeeping for a fiscal year to a close and summarized.
It might seem like a no-brainer to define just exactly what profit and loss are. But of course these have definitions like everything else. Profit can be called different things, for a start. It's sometimes called net income or net earnings. Businesses that sell products and services generate profit from the sales of those products or services and from controlling the attendant costs of running the business. Profit can also be referred to as Return on Investment, or ROI. While some definitions limit ROI to profit on investments in such securities as stocks or bonds, many companies use this term to refer to short-term and long-term business results. Profit is also sometimes called taxable income.
It's the job of the accounting and finance professionals to assess the profits and losses of a company. They have to know what created both and what the results of both sides of the business equation are. They determine what the net worth of a company is. Net worth is the resulting dollar amount from deducting a company's liabilities from its assets. In a privately held company, this is also called owner's equity, since anything that's left over after all the bills are paid, to put it simply, belongs to the owners. In a publicly held company, this profit is returned to the shareholders in the form of dividends. In other words, all liabilities have the first claim on any money the company makes. Anything that's left over is profit. It's not derived from one element or another. Net worth is determined after all the liabilities are deducted from all the assets, including cash and property.
Showing a profit, or a positive figure on the balance sheet, is of course the aim of every business. It's what our economy and society are built on. It doesn't always work out that way. Economic trends and consumer behaviors change and it's not always possible to predict these and what income they'll have on a company's performance.
Well, one thing they do that's terribly important to everyone working there is Payroll. All the salaries and taxes earned and paid by every employee every pay period have to be recorded. The payroll department has to ensure that the appropriate federal, state and local taxes are being deducted. The pay stub attached to your paycheck records these taxes. They usually include income tax, social security taxes pous employment taxes that have to be paid to federal and state government. Other deductions include personal ones, such as for retirement, vacation, sick pay or medical benefits. It's a critical function. Some companies have their own payroll departments; others outsource it to specialists.
The accounting department receives and records any payments or cash received from customers or clients of the business or service. The accounting department has to make sure that the money is sourced accurately and deposited in the appropriate accounts. They also manage where the money goes; how much of it is kept on-hand for areas such as payroll, or how much of it goes out to pay what the company owes its banks, vendors and other obligations. Some should also be invested.
The other side of the receivables business is the payables area, or cash disbursements. A company writes a lot of checks during the course of year to pay for purchases, supplies, salaries, taxes, loans and services. The accounting department prepares all these checks and records to whom they were disbursed, how much and for what. Accounting departments also keep track of purchase orders placed for inventory, such as products that will be sold to customers or clients. They also keep track of assets such as a business's property and equipment. This can include the office building, furniture, computers, even the smallest items such as pencils and pens.
If everyone involved in the process of accounting followed their own system, or no system at all, there's be no way to truly tell whether a company was profitable or not. Most companies follow what are called generally accepted accounting principles, or GAAP, and there are huge tomes in libraries and bookstores devoted to just this one topic. Unless a company states otherwise, anyone reading a financial statement can make the assumption that company has used GAAP.
If GAAP are not the principles used for preparing financial statements, then a business needs to make clear which other form of accounting they're used and are bound to avoid using titles in its financial statements that could mislead the person examining it.
GAAP are the gold standard for preparing financial statement. Not disclosing that it has used principles other than GAAP makes a company legally liable for any misleading or misunderstood data. These principles have been fine-tuned over decades and have effectively governed accounting methods and the financial reporting systems of businesses. Different principles have been established for different types of business entities, such for-profit and not-for-profit companies, governments and other enterprises.
GAAP are not cut and dried, however. They're guidelines and as such are often open to interpretation. Estimates have to be made at times, and they require good faith efforts towards accuracy. You've surely heard the phrase “creative accounting” and this is when a company pushes the envelope a little (or a lot) to make their business look more profitable than it might actually be. This is also called massaging the numbers. This can get out of control and quickly turn into accounting fraud, which is also called cooking the books. The results of these practices can be devastating and ruin hundreds and thousands of lives, as in the cases of Enron, Rite Aid and others.