However, a lot of times when people start businesses they aren’t thinking about some of the more boring aspects of it. For example, when you’re dreaming of starting your e-commerce business or your local service business, accounting probably isn’t the first thing on your mind.

Understanding how to keep track of your finances is essential to the success of your business though. In particular, there are three financial documents that are essential to understanding the financial health of your company: the balance sheet, income statement, and cash flow statement.

What is a cash flow statement? Let’s take a look at what you need to know.

What Is Cash Flow?

Before we get into how to read a cash flow statement, let’s talk a bit about what cash flow is. Basically, this is a term that describes the net amount of cash (and cash equivalents) that are coming into a business and leaving a business.

In any business, there is outflow in the form of money spent and inflow in the form of cash. The ability of a company to create value is, at a fundamental level, determined by its ability to produce positive cash flows. To put it more specifically, a company’s ability to create value is based on its ability to maximize long-term free cash flow, which is the money generated by normal business operations after subtracting the money they have spent.

What Is a Cash Flow Statement?

Now that we’ve learned a little bit about cash flow, we can start learning about cash flow statements. This is a financial statement that outlines the amount of money that your business had within a certain time period, such as a month, quarter, or year.

These statements indicate where your cash comes from and where it goes. They also highlight the flow of cash within your company, in particular in its investing, operating, and financing activities.

Any interest earned on investments, shares sold, or funds raised will be indicated on a cash flow statement.

The net cash flow (written as “net cash increase for period”) of your company is a representation of the true loss or gain of your business within the specific time period. On the statement, the cash at the end of period is a representation of how much cash is in your bank account at the moment.

Cash Flow Statement Example

Now let’s take a look at an example of a cash flow statement to give you an idea of what this document might look like.

Divided into operating activities, investing activities, and financing activities, this sample will be referred to later in the article as we learn how to read these valuable financial documents.

• Operating Activities
  • Net Income: $19,600
  • Adjustments to Reconcile Net Income to Net Cash provided by operations:
    • Credit Card: $1,000
    • Accrued Expenses $400
    • Payroll Liability: $6,000
    • Reimbursement Liability: $200
    • Total Adjustments to Reconcile Net Income to Net Cash provided by operations: $7,600
    • Net Cash provided by operating activities: $27,200
• Investing Activities
  • Equipment & Computers: -$2,500
  • Net Cash provided by investing activities: -$2,500
• Financing Activities
  • Preferred Stock: $6,000
  • Net Cash provided by financing activities: $6,000
• Net Cash Increase for Period: $30,700
• Cash at Beginning of Period: $45,000
• Cash at End of Period: $75,700

With this cash flow statement example, we can now continue exploring how exactly to read a cash flow statement and learn what they are used for.

What Is a Cash Flow Statement Used For?

When you have and use a cash flow statement for your business, it can help you make informed financial decisions for your company. It is amazing how illuminating it can be to understand where your money is coming from and where it is going within different periods of the year or years at a time.

Cash flow statements can help you understand which initiatives of your company were profitable, which are concerning, which are promising, and which are more costly than expected.

When you are just starting a business, one of the things you are likely most worried about is going through the cash you have more quickly than you can withstand. With a cash flow statement, you can reevaluate different aspects of your business and determine whether or not your current business strategies are worth the financial risk they imply.

Cash flow statements are also used by shareholders and investors in order to analyze how financially strong your company is. This statement is also used to understand whether or not the debts of the company are being managed effectively and if they can be repaid in a reasonable amount of time.

The actual cash position of your business can be read as a position of strength in these circumstances. On the other hand, when it seems like a company has collection issues it can raise some red flags.

How to Read a Cash Flow Statement

Your organization’s operating, investing, and financing activities are used as the three main categories on a cash flow statement. Let’s take a little bit more about each section to help you understand how to read a cash flow statement.

Operating Activities

The first thing listed underneath operating activities is the net income. This is a number that can be found on your income statement. In our example above, the business had a net income of $19,600 for the reporting period.

Next, you will see the “adjustments to reconcile your net income to net cash.” This is a list of revenue or expenses that haven’t yet been reflected in your bank account. In our example, there is money owed to payroll, a credit card, and other miscellaneous expenses.

Basically, this money is still in their bank account even though they will be paying it out in the near future. Once these adjustments have been taken into account, the net cash provided by operating activities shows how much cash is currently available due to operating activities.

Investing Activities

This section is also sometimes referred to as the capital expenditure section. This is where the investments that your company has made are recorded.

To be clear, this is money that your business invests elsewhere, rather than money that is invested into your business. The latter would end up being recorded under the next section entitled “financial activities.”

Some of the investment activities that you would want to report in this section include:

• Purchasing or selling physical assets, such as office equipment, computer software, or office buildings
• Merging or acquiring another company
• Selling or buying securities in other companies
• Sale proceeds from subsidiaries that were once owned by your business

In our example, the company spent $2,500 during the given period on equipment and computers.

Financing Activities

The last category on our cash flow statement is financing activities. This is where you deal with any cash that is involved with managing debt, borrowing money, or raising capital.

Any investments that other people make in your business will be recorded here. Examples of this include:

• Receiving loans from a bank or repaying loans
• Taking on or repaying debt
• Paying dividends to shareholders
• Buying back or issuing equity in your company

The total amount added up will be recorded in your “net cash flows from financing activities.”

This section offers insight that lets potential investors take stock of the financial health of your company. It can also help both you and investors assess whether you have a sustainable funding model.

Benefits of Hiring a Bookkeeper

There are a lot of good reasons to hire a bookkeeper for your business. Let’s take a look at some of the top benefits:

• It lets you focus on the core needs of your business
• It means you don’t have to learn the ins and outs of accounting and finance
• It helps you create a work-life balance
• It can offer a different perspective on your business
• It lets you avoid the tedious aspects of business
• It means everything gets paid on time
• It means your taxes will be filed correctly
• It helps maintain cash flow
• It helps reduce conflict of interest with business partners
• It reduces the cost of financial obligations

If you’re interested in learning more about the cost of hiring a bookkeeper, you can take a look at our pricing here.

Is It Time to Hire a Bookkeeper?

Now that you know the answer to “what is a cash flow statement?” you might be wondering if outsourced bookkeeping would be the best way for you to stay on top of your business’s financing. After all, cash flow statements are super useful but not particularly fun to do yourself.

If you think outsourced bookkeeping is the right thing for your business, you can learn more about our services here.

The post Understanding Cash Flow Statements appeared first on BooXkeeping.

If a person’s field is anything other than finance, financial documents can be daunting. Fortunately, anyone can learn the basics. The cornerstone of business financial literacy is parsing three key statements:

• a balance sheet
• a cash flow statement
• an income statement

This article is about that last document. We’ll walk you through the purpose of an income statement, how to read it, and how to use it to make wise financial choices. We’ll also go over common variations on an income statement’s structure. 

What Does an Income Statement Show?

Income statements show a company’s total revenue over the course of a year. Some financiers call income statements “profit and loss” statements, or P&L documents. 

You can compare income statements from different years to track your business’s growth. You can demonstrate growth to banks, shareholders, and investors with these documents. 

Income statements divide business expenses into disparate categories. This way, you can note expenses individually while making sense of how they fit into your finances as a whole. 

Creating an Income Statement (Tips)

Before you create an income statement, it’s wise to create a balance sheet first. To create both a balance sheet and an income statement, keep a record of all transactions. Consider using a free template.

This template enables you to record transitions, create a P&L sheet, and create an income statement simultaneously. All documents live within a single file. You build each sheet on different tabs using the same data. 

How to Read a Profit and Loss Statement

Learning how to read a P&L is not as challenging as it may seem. An income statement is like a chart. Read it from the top, then move down. 

The heading and title convey the time period the income statement covers. Typically, this is one year. 

The top line of an income statement is your total revenue. Each subsequent line is an expense that subtracts from that revenue. The bottom line notes what’s leftover: your profit. 

Using an Income Statement

Businesses often use income statements to calculate their profit margins. This conveys how profitable your business is in a single percentage.

You can also calculate the gross profit margin of a specific product. This lets you make evidence-based decisions about production.  

1. Total Revenue (Gross Sales)

The top line of your income statement is your total revenue. This is your gross sales. You might refer to it as your net revenue.

This line encompasses all income from sales during the time period. However, it does not include income from loans or investors.

The purpose of a P&L document is to determine your profit margin. A business that relies on loans to stay in the black is not yet profitable. 

2. Cost of Sales

The second section notes the total cost of sales. This is sometimes called “cost of goods sold” (COGS) or production costs. But, a business that sells services rather than goods will still create a cost of sales section.

The Cost of Sales section delineates the direct costs of creating and selling goods or services and only these costs. Overhead and loan repayment are in other sections. This section includes:

• Cost of raw materials to create goods
• Cost of tools to perform services
• Cost of labor (wages, fees, or salaries)
• Inventory cost
• Packaging cost
• Freight and shipping cost
• Production machinery (purchase and maintenance)
• The cost of rent, utilities, and energy for production + manufacturing 

The cost of labor can include an array of workers. You may employ a research and design team to develop a product. You may also expense the cost of purchasing a patent, which is an intangible asset. 

Then, you might pay the wages of those who manufacture the product directly. You also might pay contracting fees to a separate manufacturer.

If your business is service-oriented, you might pay the salary of service professionals. You must pay payroll taxes for every employee. Include these taxes in your cost of labor calculations. 

Each expense inherent to sales is one line item. Total the expenses at the bottom of this section. Then move on to the next section.

3. Gross Profit

Subtract the cost of sales from your total revenue. To do this, take the bottom line quantity from the “Cost of Sales” section, then subtract it from your top line.

The difference is your gross profit. This number is critical because you have the most control over total revenue and the cost of sales expenditures.  

4. Operating Expenses (SG&A)

The next segment details your operating expenses. Business analysts may call these “SG&A expenses.” That acronym stands for “sales, general, and administrative.” 

Typically, businesses divide this section into three sub-sections: selling expenses, general expenses, and administrative expenses.

You may also include income tax and interest expenses as a fourth sub-section. Or, you might note that in a separate segment. Selling Expenses

While the cost of sales stems directly from the goods or services, selling expenses stem from the act of selling. This includes your marketing and advertising budget. It can include:

• Ad campaign development costs
• Ad production costs 
• Sales content creation costs
• Marketing and sales teams’ salaries
• Payroll taxes on marketing and sales employees
• Trips and promotional events to land clients

Note all costs involved in selling here. General Expenses 

General expenses are what most businesses label “overhead.” Common general expenses include:

• Rent
• Utilities
• Insurance
• Office supplies
• Equipment
• Business software subscriptions
• Bank fees

Some general expenses are small costs that add up. Keep meticulous track of these costs. Administrative Expenses

Administrative expenses are costs inherent to administrative labor. These are expenses paid to business professionals who manage, organize, and oversee the various processes involved in running a business. Administrators may include:

• C-Suite executives
• Administrative assitants
• Outsourced bookkeeping
• Office clerks
• Lawyers, accountants, and IT professionals (either contracted or on staff)
• Management consultants

Administrative expenses include wages, salaries, and fees. They also include payroll taxes for all direct employees. Income Tax and Interest Expenses 

According to the IRS, filing an annual income tax return is mandatory for every business other than a partnership. Estimated taxes differ depending on the business’s revenue, size, market, and locations. 

Taxes are an unavoidable expense. Interest expenses are payments on any interest on a business loan. 

5. Net Profit (or Loss)

After noting all expenses, you can calculate your net profit, which is the number at the bottom line of the income statement.

Subtract all expenses from your total revenue. The difference is your net profit. If the difference is a negative number, your business is operating at a loss. 

Determine Your Profit Margin 

Once you’ve read through your income statement, you can determine your profit margin. It shows you how profitable your goods or services are. It’s conveyed as a ratio (a percentage).

To calculate your profit margin, look at your net profit on your income statement. Take that number, then divide it by your total revenue (gross sales). 

The quotient is your profit margin. This tells you how many cents your business keeps for every dollar you earn.

You can increase your profit margin by increasing sales, raising the sales price, or decreasing expenses. Businesses often decrease the COGS first when cutting back on expenses. 

Other Income Statement Formats

The income statement format above is the most common. It’s called a multi-step income statement. But, it’s not the only format available.

Single-step P&L sheets and common-size income statements are popular structures. The single-step format simplifies the information. The common-size income statement conveys additional information. 

Common-Size Income Statement

A common-size income statement is similar to a multi-step income statement. But, it includes three columns rather than two. The third column notes each line item as a percentage of your total revenue.

So, in a common-size income statement, the third column of the top line is always 100%. Your top line is your total revenue.

Each subsequent line is some smaller percentage. The sum of the third column in each subsequent line must be less than 100%. If it’s over 100%, you’re operating at a loss. 

Single-Step P&L 

A single-step income statement calculates profits and losses in one action. This P&L sheet notes all sales revenue for the entire year. The sales revenue is the top line.

Then, add up every single expense at once. Combine all wages, production costs, rent payments, taxes, and every other expenditure. This sum is the second line. 

Finally, subtract that total expense from total revenue. The difference is your bottom line. 

It’s easy to create a single-step P&L sheet if you’ve been recording transactions on Excel or Google Sheets. Google Support created a brief tutorial to find the sum (and average) of different data points in a spreadsheet. 

Master Finance Documents With The Pros

You’re smart and savvy. But, maybe you didn’t get into your field due to your love of financial documents.

Creating an income statement demands a focus on financial minutiae: creating daily transaction journal entries, budgeting for quarterly self-employment tax, and keeping meticulous records of every discount or promotion. It’s easy to feel overwhelmed. 

Fortunately, with proper bookkeeping and by choosing the right bookkeeping software, creating an income statement and other financial documents can be completely automated.

If you need professional help with your business’s financial statements, feel free to contact us and schedule a free consultation.

The post The Complete Guide to Understanding an Income Statement appeared first on BooXkeeping.

He created a subsidiary company to hide liabilities, so Enron’s balance sheet reflected falsely inflated earnings. This, in turn, elevated Enron’s equity value on pretenses, lining shareholders’ pockets with lies. 

You may not own a public company, but it’s good to keep a balance sheet no matter your company’s size. Learning how to read a balance sheet is a basic component of financial literacy.

Fortunately, understanding a balance sheet is straightforward. It just involves learning a few simple financial terms. 

What is a Balance Sheet?

A balance sheet is a financial document that delineates a company’s assets, liabilities, and equity. It’s called a “balance sheet” because the total value of all combined assets must balance (equal) the total value of all liabilities, plus equity.

If those two halves of the sheet don’t balance out, something’s off. Either there’s an error in the recordkeeping or the math. It could be an honest mistake–or it could be a sign a company is lying about its accounts. 

The purpose of a balance sheet is to track the company’s overall health. The IRS, financial analysts, and investigative journalists examine a company’s balance sheet to detect fraud and money laundering.

Small business owners typically use a balance sheet to calculate critical ratios about their own company. These ratios give you a snapshot of different financial health metrics.

Who is a Balance Sheet For?

A balance sheet is primarily for the people who make financial decisions within a company. But, some companies provide a balance sheet to the IRS when they file taxes. This is mandatory for all corporations that make over $250,000.

For smaller companies, only potential investors and shareholders will read the balance sheet. And, of course, the business owner keeps a balance sheet to keep track of their own company’s wellbeing. 

Financial Document Trio

A balance sheet is one of the three primary financial documents all businesses need. The financial document trio includes the balance sheet, the income statement, and the cash flow statement.

How to Read a Balance Sheet

A balance sheet is a list of rows called “lines.” You read a balance sheet from top to bottom.

A balance sheet is divided into the left and right sides. Typically, the left side names each unique asset, liability, and type of equity as a line item. The right side notes the value of each item.

Classified balance sheets have subcategories. To understand these subcategories, see “What Goes on a Balance Sheet?”

Recording Line Items

To record a line item, note every unique liability, asset, and type of equity your company has. Record it and its value on the balance sheet. If you don’t know the value of an asset, you might seek an asset valuation.

There are two general asset valuation methods. You can evaluate with an absolute valuation method, like a discounted cash flow model or a calculated intangible value.

Or, you can use a relative valuation. People can dispute a company’s valuation when different appraisers estimate the value of a specific asset or liability differently.

What Goes on a Balance Sheet?

Three categories make up a balance sheet. Divide your balance sheet into three components: assets, liabilities, and equity. You can further divide these sections into sub-categories.

Assets 

Assets are either “current” or “non-current.” You can convert current assets into cash within a year. You can’t turn non-current assets into cash easily. 

Current

Current assets are cash in the bank, or they’re something that can become cash soon (like a debt owed to your company.) The most common current assets are:

• Cash 
• Cash Equivalents
• Accounts Receivable
• Inventory
• Short-Term Investments

You can turn some of these assets into useable money faster than others. If it takes longer than one year, though, that’s a non-current asset.

Non-Current (Long-Term)

Non-current assets are valuable, but they aren’t useable money. They cannot be converted to cash in one year. Common non-current asset categories include:

• PP&E (property, plant, and equipment)
• Securities
• Long-Term investments (growth stocks)
• Intangible Assets (patents, IP, goodwill, client list)

These assets are often more valuable than current assets in the long run. But, it may take a while for these assets to pay off. 

Liabilities

Liabilities are debts. They detract from a company’s value: more liabilities, lower equity. Like assets, liabilities can be current or non-current.

Current

Current liabilities must be repaid within a year. Often, you must pay off these debts sooner than that. Common current liabilities include:

• Accounts payable
• Short-term debt (bank loan, company credit card, interest payments)
• Back taxes
• Outstanding wages and fees (unpaid invoices from contractors, consultants) 

Be careful if your company’s current liabilities outweigh its current assets. It may be in trouble. 

Non-Current

Non-current liabilities are debts that you don’t need to pay off in a year. Some non-current liabilities aren’t meant to be paid off for decades. These can include:

• A business line of credit
• Long-term business loan
• Asset-based financing

Keep track of all non-current liabilities. This ensures an accurate valuation.

Equity

Equity is the total value of a company. It’s the difference between assets and liabilities. Types of equity include:

• Initial capital
• Earnings
• Draw (owners)
• Stock (preferred or common)
• Shareholders’ equity

Combined equity and liabilities must not exceed the value of all assets. If it does, the company may be committing fraud. 

Examples

A small business balance sheet is a useful tool. Balance sheets can be simple or classified. Here are examples of both types.   

Classified Balance Sheet Example

A classified balance sheet creates sub-categories. It lets you aggregate your line items into classes (hence the term “classified”).

This article explored a classified balance sheet method. We sub-categorized our assets and liabilities into “current” and “non-current” classes.

Examine this classified balance sheet template from Score. The Score is the Small Business Administration’s non-profit arm. Use it to create a balance sheet for yourself. 

Simple Balance Sheet Example

A simple balance sheet does not classify assets or liabilities by subcategory. Instead, to fill out a simple balance sheet, simple use general categories.

Look at this simple balance sheet example to compare the difference. That template comes from Harvard Business School. 

Ratios: Understanding a Balance Sheet

Equations and ratios let you truly make sense of a balance sheet. Once you have the balance sheet, equations let you determine a company’s health.

Financial analysis can be complex. But, a beginner can get a solid start when they learn to calculate five critical ratio equations:

• The current ratio
• The quick ratio
• The cash ratio
• The debt-to-asset ratio
• The solvency ratio

Master these ratios. You’ll understand any company’s financial health status better. 

Current Ratio

The current ratio is simple. Take the total value of your assets. Divide it by the total value of your liabilities. The resulting fraction is your current ratio.

Write your current ratio as [assets] : [liabilities]. A higher ratio is better.

This is similar to the solvency ratio. If the resulting fraction is less than one, the company is almost certainly not solvent. 

Quick Ratio

This quick ratio is an acid test. Can you pay off all short-term liabilities with immediate assets? Take the value of your current assets. Ignore non-current assets.

Then, divide that number by the total value of your current liabilities. If the resulting value is higher than one, you’re in the clear. If the ratio is lower than 1:1, that’s a bad sign. 

Cash Ratio

Like the quick ratio, the cash ratio tells you how liquid a company is. 

To calculate the cash ratio, add up only cash and cash assets. Then, divide that by all current liabilities.

If the ratio is less than one, it’s a sign a company needs to move assets to get more cash on hand. If it’s significantly higher than one, a company may want to invest its cash better. 

Debt-to-Asset Ratio

The debt-to-asset ratio determines how much a company depends on equity. That is, does it run primarily off its own value, or is it significantly dependent on outside lenders? 

Add up all liabilities. Divide this by all assets (including intangible assets). The quotient is the debt-to-asset ratio. 

A “good” debt-to-asset ratio varies by industry. But, across the board, a company with a higher ratio is more leveraged. 

Solvency Ratio

A business begins in debt. But if it never becomes solvent or trending away from solvency over time, this ratio is an early alert. 

To calculate this ratio, you need your balance sheet and the income statement. You might call that the “P&L Sheet.”

First, calculate your net income. Subtract your total expenses from your total revenues. Then, take that difference (the net income) and add in depreciation. 

Take this sum, then divide it by all liabilities. A ratio over one means the business is solvent.

Remember that there’s a limit to any ratio’s utility. A ratio can only tell you about a company’s past. It can’t inform you about the present or the future. 

Balance Sheets by Bookkeeping Pros

Even after learning how to read a balance sheet, keeping up with all your financial documents can be challenging. Don’t let a struggle understanding a balance sheet become a barrier to your success.

Instead, get help from a pro. Expert accounts and bookkeepers can handle business finances, no matter your company’s size. Contact us today, and learn about services that can solve your problems. 

The post Understanding a Balance Sheet: A Guide for How to Read a Balance Sheet appeared first on BooXkeeping.

These finance troubles weren’t because they squandered their money foolishly. Instead, these novice entrepreneurs had no experience tracking financial information at scale.

Moreover, they didn’t know how to read financial statements and come to useful conclusions. Fortunately, this is an avoidable mistake. 

It takes years of professional training to become a certified accountant. But, it only takes a few days of focused study to master the basics. One basic accounting skill is learning how to read financial statements.

While financial statements seem daunting, they’re more straightforward than they look. In fact, if you can read a nutrition label, you can learn to read a financial document. 

In this piece, we’ll summarize the basic parts of a financial document. You’ll familiarize yourself with four types of financial statements. These documents are:

• Balance Sheet
• Income Statements
• Cash Flow Statements
• Share Holder Equity

We’ll unpack the purpose and key segments of each document type. Then, you’ll learn how to analyze what you’ve read. Finally, you can use financial information to your business’ advantage. 

Financial Statements: Components

All financial documents have four basic parts. These components form the document’s structure. These statement parts are:

• MD&A narrative 
• information grid
• ratios and calculations
• footnotes

Each component conveys a key set of information. All information is relevant to a company’s finances. 

MD&A Narrative

MD&A is an acronym for “Management’s Discussion and Analysis.” This is a narrative from the viewpoint of management. It describes the financial conduct and achievement of the company, as well as the company’s condition. 

In the MD&A, managers analyze both the financial condition of the company and the results of its operations. The SEC mandates a company disclose the MD&A. This segment must include information about trends and events likely to impact the bottom line. 

Information Grid

The information grid is the primary section of three of these four financial documents. Balance sheets, income statements, and cash flow statements convey quantitative financial information within the information grid. 

An information grid has a heading. It is primarily comprised of rows and columns. You read a grid-like a list or spreadsheet. 

Ratios and Calculations

Ratios and calculations convey a basic quantitative analysis of the information. They explain how different pieces of financial information affect each other. Ratios

Ratios convey the relative value of two quantities. You’ll often see some of these ratios in a financial document:

• ROI ratios
• liquidity ratios (current, quick)
• operating ratios (inventory turnover, accounts receiveable) 
• leverage ratios (debt to equity, fixed to worth, etc.)

Ratios improve your business analysis. Some ratios are the result of calculations. Calculations

Calculations are equations that enable financiers to parse information. The result of a calculation can lead you to useful conclusions. Financial documents will often calculate:

• Gross Profit Margin
• Operating Profit Margin
• Net Profit Margin

When you calculate a profit margin, you learn if your revenue exceeds your costs. You also learn to what degree it exceeds your costs. Various margin calculations convey this difference in distinct contexts. 

Footnotes

Footnotes convey clarifying information. They also note limitations and specifications on broad statements. Footnotes can contain information about:

• income tax deferment
• accounting policies and practices
• stock options

Accountants print footnotes at the bottom of a page. Typically they refer to an in-line citation, which is marked with a number or symbol.  

A Note on Journal Entries

Businesses derive financial statements from journal entries. Journal entries are daily notes.

A business records all transactions in a general ledger every day. These records are the heart of bookkeeping. Each journal entry notes the following, per transaction:

• transaction date
• description
• transaction amount
• affected accounts

Sales, rent payments, unexpected losses: enter every single transaction. Accurate, comprehensive journal entries are the key to creating useful financial statements. 

Financial Statement Examples

This guide describes the purpose, process, and structure of common financial statements. But, it can be useful to examine financial statement examples.

Fortunately, the United States’ Small Business Administration can help. The SBA sponsored a non-profit, SCORE, which maintains a library. It contains business document examples and templates.

You can find examples of every document we discuss. SCORE’s search is comprehensive. SCORE empowers small and independent businesses with resources and mentorship.  

Balance Sheets

A balance sheet is a bird’s-eye image of your company’s finances. It conveys a company’s assets, its liabilities, and any equity left over. 

A balance sheet is a statement of financial position. Most companies compose a balance sheet every quarter and every year. 

How to Read a Balance Sheet

Learning how to read a balance sheet is similar to reading a spreadsheet. It gives you a summary of a business’s finances at a glance. It’s broken into two parts: assets and liabilities.

A balance sheet’s assets show how much money the business has taken in total. The liabilities section demarcates the business’ total debts. 

Bookkeepers list assets and liabilities in order of their utility. When you read a balance sheet from top to bottom, you gain the most critical information first. 

A balance sheet’s bottom line tells you the current ratio. This equation takes your total assets and divides them by your liabilities. This tells you whether a business can pay all debts in twelve months. 

Assets

List assets by how liquid they are. That is, list assets in order of how soon you can turn them into cash. Cash is money you can spend to maintain expenses, pay off debts, or purchase new assets. 

Assets are not undifferentiated. A balance sheet divides assets into three categories:

• current
• non-current
• natural resources

List current assets first, as you can cash them with relative ease. Non-current assets and natural resources typically require over one year to become cash.  Current Assets

Business owners expect current assets to turn into cash within one year. There are five common types of current assets.

The first is inventory. These are the goods a business sells. Inventory converts to cash when you sell it. 

The second type is prepaid expenses. These are goods or services that a business has already commissioned.

Even though prepaid expenses are assets, a business only sees the value of this asset over time. Insurance is a common prepaid expense. 

The third current asset category is cash and cash equivalents. Cash equivalents are unique documents that work like cash. T-bills and bank CDs are cash equivalents.

U.S. Government T-bills note the government’s debt obligation to the bill holder. The Treasury Department backs this debt. 

Bank CDs are certificates of deposit. These guarantee a rate of return in exchange for leaving a lump sum banked for a set period of time.

The fourth type of current asset is an investment. Investments are typically stocks or bonds. Only short-term investments are bonds. 

Finally, accounts receivable are current assets. These are debts other entities owe to the business. 

Money from a debtor in the process of paying their account is a current asset. While this is similar to accounts receivable, it’s not identical. When money is transitioning from one account to another, this is money-in-transit. Non-Current Assets

Non-current assets cannot be sold or converted into cash within a year. Non-current assets are long-term, fixed assets. These assets are tangible or intangible.  

Tangible assets are physical. Property (real estate), plant, and equipment resources (PP&E) are tangible assets. 

Intangible assets are non-physical. Intellectual property, Goodwill, patents, and long-term investments are all intangible assets. Natural Resources

Natural resources are derived from the Earth. They’re resources connected to the land.

These resources can be renewable, like a river. They can also be non-renewable, like coal. Natural resources require labor and equipment to make the resource useful.  

Liabilities

List liabilities based on due dates. List the debts owed soonest, first.

Liabilities are all of a company’s financial responsibilities. This includes debts and all other financial obligations. Financial obligations may include:

• wages owed for work done
• lease obligations
• accounts payable (for anything you’ve purchased on credit)
• taxes owed
• loans you need to pay back within one year

You can categorize liabilities into short-term and long-term obligations. This can give you the gist of a sensible repayment schedule. 

Shareholder Equity

Equity is the value of the company. It is a total. Subtract the liabilities from the assets to get the shareholder equity value. 

Balance Sheet: Practical Uses

A balance sheet enables comparisons between quarters or years. You’ll see how your business is doing over time. This lets you predict future changes, and you can adjust your business plan based on these predictions.

You can also recognize current assets and liabilities intuitively. This lets you stay on track to make payments. 

Income Statements

An income statement is a profit and loss statement. Some financiers abbreviate incomes statements as “P&Ls.”

Business leaders use the terms “net income statement” and “statement of earnings” interchangeably. Both are income statements. 

This document shows how profitable a business was within a set time period. The time period can be a single month, a quarter, or even several years. 

How to Read an Income Statement

Let’s unpack how to read an income statement. Like the balance sheet, you read an income statement like a list. You read from the top down. 

An income statement is a list of rows. These rows are divided into two columns.

The rows are segmented into four sections. The income statement’s four sections are:

• revenue (net sales)
• gross profit
• cost of sales
• operating expenses (SG&A)
• net profit (bottom line)

Each section notes revenue, earnings, and expenditures. Ultimately, an income statement tells you how much money the business has to work with at the end of the time frame. It also conveys whether or not the business is in the red. 

Revenue (Net Sales)

This is the top line. The first section of a P&L document notes a business’ total sales or its gross revenue. 

This is all the money that the business earned within the time period. After this top line, all subsequent sections subtract money. The bottom line, the net profit. It shows what’s left.

The top line conveys useful information. Increasing net sales is critical if you want to increase net profit.

Cost of Sales

The second section lists expenses inherent to sales. As sales increase, so do these costs. 

When a business sells tangible products, this section notes the cost of goods sold (COGS). These are expenses related to the production and distribution of goods: raw materials, manufacturing, labor costs, warehousing, or shipping.

A service-oriented business also has expenses inherent to sales. This business would list the cost of:

• wages
• tools necessary to perform the service
• any liability insurance purchased per sale

The bottom line of this section is the total cost of sales. Use this bottom line to calculate gross profit.

Gross Profit

Subtract the total cost of sales from the top line (revenue). This is the gross profit. 

Operating Expenses (SG&A)

Operating expenses are not directly linked to sales. Increased sales do not directly increase operating expenses. 

Instead, these are costs inherent to selling, general business, and administration. The marketing team’s salary and their payroll taxes are sales expenses. So is the advertising budget. 

General expenses are items like rent, utilities, and office supplies. Administrative expenses are IT staff wages, consultant fees, and executive salaries. Interest Expense and Income Tax

Some financiers lump interest expenses and income taxes in with operating expenses. But, technically, you should calculate these after subtracting operating expenses from the gross profit. 

Interest expenses are interest payments made on loans. Income tax is a return mandated by federal and state governments. 

Net Profit (Bottom Line)

Net profit conveys the total profit a company brought in. You learn the bottom line after you subtract all expenses from the original net sales. 

P&L Sheet: Practical Uses

Businesses use income statements to calculate their profit margins. Profit margins pare down information into two percentages. 

Gross profit margin demonstrates how much money a company makes for every dollar it spends. Operating profit margin is the percentage a business gets to keep of each dollar it earns. 

The Small Business Administration published a guide to calculate profit margins from income statements. Many spreadsheet programs, like Excel, can calculate these margins automatically. 

Cash Flow Statements

These documents show how much cash (useable money) your business received and spent within a set period of time. A business records each monetary receipt and expenditure during that time period in a separate row.

Losses that don’t require you to spend money directly aren’t counted against cash flow. Asset depreciation doesn’t impact cash flow, so don’t record it here. 

Ultimately, a business creates its cash flow statements from income statements and balance sheets. Accurate income and balance documentation lead to useable cash flow statements. 

How to Read a Cash Flow Statement

It’s easy to learn how to read a cash flow statement. Structure a cash flow statement like a list. You read it from top to bottom. 

The statement is a list of rows. The list is divided into three sub-sections. Each row notes cash received or cash paid.

So, for example, your business receives cash for every sale. But, you pay cash every time you make a payment on a loan. These are both line items on a cash flow statement. 

Each row is divided into two columns. The left-hand column names the specific expense or income. The right-hand column notes the numerical income or expense in USD.

Businesses will note expenses in parentheses. They may note expenses in red, while income is black. You’ll subtract expenses from the total. 

Creating a Cash Flow Statement

When you create a cash flow statement, you’ll begin with the heading, top line, and bottom line. The top line is how much cash you began with at the start of the time period. Your bottom line is how much cash you have at the end.

Then, you will break information into three middle segments. These are the three primary ways your business receives and spends money. The segments are:

• Cash Flow from Operations
• Cash Flow from Investing Activities
• Cash Flow from Financing Activities

Each of these segments begins with a row that titles that segment. The title row has no numerical information on the right-hand side. 

Heading and Top Line

Cash Flow Statements can record cash flow over the course of a month, a quarter, a year, or more than a year. The Cash Flow Statement’s heading states:

• the document type
• the business’ name
• the time period it records

After writing the heading, write the top line. The top line is the topmost row in the statement. It states, “Beginning Cash at_____.” Then, it notes the start date of this cash flow record.

This is in the left column. The right column of the topmost row notes the cash total your business began with on that date. Record this numerically.  

Cash Flow from Operations

Operations are the tasks your business executes to get revenue. So, operations activities often make up the bulk of a small business’ cash flow. 

This section begins with your net income. Take this straight from the income statement. Cash Earned 

Factor all income from sales into cash flow from operations. Note any accounts receivable payments as line items in this section.

If debtors owe your business money but haven’t received it yet, do not count it towards your cash flow. Instead, subtract accounts receivable from your income. Cash Spent

Then, you would record all business expenditures under cash flow from operations. Line items might include what you spend on labor, rent, utilities, raw materials, or producing goods in a given time period.

If your business owes money but hasn’t paid it yet, the cash has not left your account in this time period. So, do not count it against your cash flow from operations. Add not-yet-aid debt back into your cash flow (net income).

Then, calculate your total net cash from operations. Subtract cash spent from cash earned. Note the sum on the bottom line of this segment.

Cash Flow from Investing Activities

A business can invest in tangible and non-tangible assets. When you spend cash on investment within a set time period, record it in this segment.

Likewise, when you liquidate an investment, record that in this segment. Liquidating an asset turns the asset into cash.

This can mean selling it, or it can mean cashing it in. Common investments for small businesses include:

• equipment
• land
• real estate
• cash equivalents (like bank CDs)

A monthly cash flow statement may not have any notable investment activities every month. Some investments are fixed, so you cannot liquidate them often. 

Cash Flow from Financing Activities 

Financing activities are loans, lines of credit, or investments from VCs in exchange for equity. When you make a payment on a loan or line of credit, that’s outgoing cash. 

When you take out a new loan, that’s an influx of cash. New investors also bring in cash. 

Cash Flow Statement: Practical Uses

In the present, cash flow statements tell you how much you have to spend. This way, you know what new expenses you can afford.

Over time, cash flow statements let you recognize cash input and output patterns. This lets you prepare for future shortages. It also helps you predict surpluses. 

Lastly, these statements clarify how much cash your business has one hand. You can contrast this with revenue, which includes accounts that haven’t yet been paid. If the contrast is significant, you can adjust your operations.  

Statement of Shareholder Equity

The Statement of Shareholder’s Equity is a report that enables a business to transparently to its shareholders. This financial statement records the changes to the value of stakeholders’ shares in the company. 

A company has a legal obligation to report all account changes to investors. A Statement of Shareholder Equity must meet reporting guidelines mandated by the International Financial Reporting Standards (IFRS). 

A business only needs to create a Statement of Shareholder Equity if it has sold equity shares. Many small businesses have never sold equity shares. So, they do not need to create a statement. 

Financial Statement Expertise

Learning how to read financial statements is critical to successful bookkeeping. Mastering the basics is a solid start. But there’s always more to dig into. 

If you have questions about financial documents or want help developing your own, why not talk to us? Your free consultation is only a click away. 

The post Financial Statements 101: Everything You Need to Know About How to Read Financial Statements appeared first on BooXkeeping.

Here are a few ideas to get your business’ finances on the right track:

Key Idea No. 1: Don’t Delegate Your Accounting Too Soon

When you start a business, don’t outsource the accounting tasks of your business into the hands of a third party too soon. You may have been told to focus on your purpose and leave the rest to a professional but this could be dangerous for a start-up business. If you manage your own accounting at the start, you will have proper understanding of whatever you are delegating when outsourcing your accounting in the future. Doing your accounting in the early days will help you to educate yourself on the fundamentals of business finances & accounting prior to making a hire or finding an outsources service. 

Key Idea No. 2: Build A Team

Yes, I know I just mentioned that you shouldn’t be delegating duties too soon. But after getting educated, you should employ the services of a third party. In the grand scheme of things, bookkeeping and accounting belong to those actual people who enjoy doing it and have experience doing it everyday. Because you have educated yourself, you are now positioned to know what to look for and can easily select a professional who has proper understanding of what you need. 

What should you be looking for?

1. Bookkeeper: Having someone stay on top of the numbers and figures will ensure proper documentation of all your financial activities. BooXkeeping is America’s #1 company for small business outsourced bookkeeping.
2. Tax planner: Preparing tax payments will help to seal loopholes in your financial statements. You won’t have to worry or fear tax period because your tax planner would have it all looked after in advance. 

Key Idea No. 3: Create Time to Analyze Your Financial Reports

You must spend time assessing and analyzing your reports. Having reports won’t do you any good if you don’t take the time to look at them. Reports keep your business intact. You can evaluate your reports monthly and yearly by breaking down the reports into different units for easy comprehension.

Here are some reports that you may consider using:

1. Current year-to-date profit and loss
2. Current month profit and loss
3. Month-by-month breakdown of your P&L
4. Detailed transaction P&L for a given month
5. Balance sheet
6. Statement of cash flows
7. Your business metrics to help you determine how well your company is performing

Key Idea No. 4: The Goal Isn’t Merely to Pay Less in Taxes

Business owners often look to save taxes at the end of the year.  They start buying things for their business even when they don’t need them. As your business expands, you make extra cash which means you pay more tax. Employ the services of a tax professional to assist you and watch how creating intention around your money will help grow your business!

The post Four Keys to Creating Winning Financial Habits for Your Business appeared first on BooXkeeping.

WHAT IS A CHART OF ACCOUNTS?

A Chart of Accounts is a listing of all your accounts used in the general ledger of your organization. The data then aggregates information into a unit’s financial statements and is typically sorted in order by an account number to simplify the task of locating definitive accounts.

In other words, it groups and organizes your transactions into certain categories, such as a collection of boxes that holds each transaction that make up the influx and out-flux of currency in your business.

WHY IS A CHART OF ACCOUNTS NEEDED? When it comes to your accounting system, this chart of accounts is the cornerstone of your business. Depending on the type of account, your accounting system knows exactly where to put each balance and financial statement. Every part of your financials has a system and it all starts with this chart of accounts.

CUSTOMIZING YOUR CHART OF ACCOUNTS

Do I need to customize? When should I customize?

Are you flooded with useless categories and your reports seem like your reading in a foreign language? This is where it makes sense to bring in a professional as your chart of accounts should reflect your specific business. As one of the leading San Diego Franchise Bookkeeping Services, we will work side by side with you to customize your chart of accounts.

Our San Diego Franchise Bookkeeping services will keep each franchisee’s chart of accounts up to date and will customize each branch to its needs. We will set it up so that you have parent accounts that run an expanded or collapsed report, so that you can keep track of your franchises’ business. We will keep your chart of accounts simple and coded properly.

For more information on how you can get started click here today!

The post Are Your Chart Of Accounts Customized? appeared first on BooXkeeping.

When looking for red flags on your financial statement its important to understand your financial statement first. We have created this unique infographic to see how your financial statement can be broken down into key areas so that red flags are easy to spot and determine the best action to take to eliminate any threat to your business success.

The post How to Spot Red Flags On Your Financial Statement appeared first on BooXkeeping.

Do It Another Day

There are those who claim that procrastination can be a good thing. According to some authors and psychologists, procrastination helps the person avoid committing a worse mistake. However, for someone recording voluminous accounting data into the general ledger under a fast-approaching deadline, putting off the task could spell disaster for the company.

Accounting 101

The general ledger is the repository of all the financial transactions made all way back to the very first day that the company opened for business. It serves as the backbone of the company. The very life of the business and the staff hangs on it. The ledger holds all information relevant to the company’s finances such as:

Assets
Revenues
Owner’s Equity
Liabilities
Expenses

The ledger must constantly be updated with the latest accounting data to make it easier for the accountant to come up with a reliable financial report. If someone in the accounting department delays and then eventually forgets to log entries in the books, the financial report will definitely be compromised. Prompt and timely recording of accounting data, therefore, must be observed.

The Business of Procrastinating

A faulty financial statement would wreak havoc not just within the accounting department but also would inadvertently cause the manager to make bad business decisions. It will also adversely affect cash flow, cause alarm and confusion among the staff, and damage the reputation with customers and suppliers.

Time is Gold

Procrastinating leaves the company with little time to accomplish the daunting task of reconciling its financial statements and meeting its goals. Time is a very valuable business asset. Businessmen and entrepreneurs should adopt measures to save and make the most out of it.

For more information on how you can save time, money and make the best business decisions for your company get your quote today!

The post General Ledger Tasks You Dread = PROCRASTINATION appeared first on BooXkeeping.

With all this in mind, many business owners are now choosing to outsource their bookkeeping to a bookkeeping expert. One of the main reasons for this is that it reduces the potential for error, as while expert bookkeepers are highly trained and up to date on all the latest financial legislation, most business owners  simply do not have the time to learn the ins and outs of their finances. Bookkeeping experts also know how to use different types of cloud accounting software which, as well as streamlining essential processes and making your accounts easy to understand, keeps all your data remotely so that it’s accessible and up to date in case of loss or damage.

Outsourcing your accounting to a bookkeeping expert is a simple and worthwhile process which dramatically reduces the frustration and feeling of overwhelming pressure felt by many business owners when confronted with bookkeeping. Instead of spending hours poring over the accounts, you will be able to spend time building and expanding your business. The best part is that with outsourced bookkeeping, you’ll be able to do your job safe in the knowledge that your bookkeeping is secure, up to date, and expertly managed.

For more information on how you can save up to 80% on your bookkeeping contact one of our bookkeeping experts today!

The post Be ‘In The Now’ With Your Financials appeared first on BooXkeeping.

The “Cash is King” phrase is used to denote that cash is more valuable than any other type of investment due to its stable buying power. When the price of securities and the market are high, it is recommended to build up the cash you have as you wait for a break in the market to begin investing. Although though the presence of a lot of cash is a positive sign, it is even more important to have a positive cash flow since that can offer further flexibility in a business.

Minimize Debt

Having cash allows a business to operate. As businesses grow, they set aside sufficient funds to cover bills and expenses. The problem starts when credit is involved in problem starts when credit is involved in payment, whether it be with customers or vendors. Suddenly, cash flow is limited, and not as much money will be moving into the business.

Benefits of a Positive Cash Flow

Make sure that the business accurately writes up accounting records in a timely manner. It will allow the business to find out what money is unpaid to vendors and what money is owed from customers. It will also provide the basis for a cash flow forecast that lists current known commitments and monthly expenses. Then the business can write in predictions of future receipts, regular sales, and potential purchases more accurately.

This will help with growth as a business can clearly consider what it wants to invest in, and most importantly, if they have the excess cash flow to allocate into future ventures. It will also allow a business to be more flexible in their buying power. A cash flow can give a business the confidence to make unplanned, necessary purchases without having to wait for more money. For more information on how you can know exactly where you stand month after month click here.

The post Cash is King but you don’t have to be it’s Jester! appeared first on BooXkeeping.