Financial Reporting – Give it to me in plain English please!
Financial reporting is the key important concept in summarizing your financial data. It reveals what you’ve done, right or wrong, and shows where your company is headed. Financial reports allow you to analyze your business to determine its proper course of action. From its information you’ll be able to create projections and what-if scenarios, calculate ratios, budget and forecast data. When compiled properly, the data within is a powerful tool for managing your company. Let’s look at some specifics of financial reporting.
THE BASIC STATEMENTS
Listed are the most commonly used statements and their key elements.
- Balance Sheet- this statement is generally referred to as the “Statement of Financial Position”. It reflects the position of a company on a specified date and is comprised of Assets, Liabilities, Owner’s Equity (Capital). Assets reflect ownership of tangible and intangible items. Liabilities reflect amounts that are owed to creditors. Owner’s Equity or Capital Accounts reflect the owner’s investment in the company. It includes owner’s contributions, withdrawals, and accumulated net profits in the business.
- Income Statement- Also referred to as the “Profit and Loss Statement” reflects all the income and expenses incurred for a specified period of time. It calculates the net ending result for the period, whether it’s a profit (positive ending balance) or loss (negative ending balance).
- Cash flow – this statement reflects the flow of cash for a period of time. It reveals where the cash comes from, who it will be paid to, and when it will be paid out. This is one of the key statements used in the budgeting process.
- Statement of Owner’s Equity – this statement summarizes the activity that occurred in the Owner’s Capital section of the balance sheet, which was mentioned earlier. Changes to this account involve owner’s investments, withdrawals, and net change to operations or net profit or loss.
WHO USES THESE STATEMENTS
- Banks and financial institutions – when your company needs capital (money) for expansion or for daily operations, requests for loans or lines of credit are made through banks and other financial institutions. These potential lenders are interested in your company’s ability to make timely payments of principal and interest on loans due. Their decision to lend or not to lend is dependent upon the analysis of the information in your financial statements. Essentially it must be determined that the expected debt does not exceed your expected receivables.
- Creditors/Suppliers – purchasing supplies and materials is not always done on a cash basis. Dependent upon your credit standing and payment history, your suppliers may allow you to purchase on account, or on credit. Suppliers may ask for your company statements to help them in their decision making process.
- Investors – when the time comes that you are looking to expand your operations, but don’t have the necessary funding to do so, another alternative is to turn to investors. Investors will want to know if your company’s financial position is viable. In other words, what’s the potential for profit? A sound well defined business plan with financial projections will reveal the expected potential success.
DON’T TRY THIS AT HOME UNLESS YOU’RE A BOOKKEEPER
With all the pertinent and sensitive information contained in these statements, it’s extremely important that they are accurate. But how do we know this? The typical small business person(s) become very confused with the input and output of data that’s needed to be reflected in these statements. Some may go as far as to educate themselves on basic accounting principles, while others will rely solely on their software program to organize it for them. As I always say, “NO, UNLESS YOU KNOW”. Posting entries without a good understanding of accounting will subject your company to many bookkeeping errors. Not knowing the ins and outs of entries can be more trouble than it’s worth. You will end up spending unnecessary time to correct them, which in the long run, will cost you valuable man hours. Do yourself the favor, if you have any doubts about posting bookkeeping entries, ask the experts, or outsource this function completely so you won’t have to worry about it.
Knowledge is power. Having a basic understanding of bookkeeping entries will give you the confidence needed to be able to ask the right questions when dealing with your statements.
Here’s to your knowing!
Jacqueline Ford
Financial Strategist
Basic Bookkeeping Strategies: Part 3
Posting transactions. But I’m not an accountant
Don’t allow yourself to become intimidated by the bookkeeping process. It can be easier than you think. Understanding the basics of accounting will help you to feel more comfortable with processing your transactions. If you remember in part 1, I gave you the basic categories of classifying your bookkeeping data; assets, liabilities, expenses and income. Go through each of your entries and determine which category to post your transaction to. The majority of your items will be posted as expenses. Simply put, all items paid for with cash, which you do not have ownership of, will be classified as an expense. Items purchased that represent ownership will be classified as an asset. Items purchased on credit, will have an offsetting entry to a liability account. Money received for payment of goods and services will be posted to an income account. These entries are generally posted into some sort of register, such as the check register or bank account register. From there, all the entries will be placed in their proper statements. Still confused? If you’re using software, refer to the tutorial section. It will give you more details on how to post the transaction. Although most software will claim that you don’t’ need to know accounting in order to use it, I prefer to know a little bookkeeping theory, to help make sense of what you’re doing. As an alternative, you might want to consider signing up for a basic bookkeeping training or software course. Even if you decide to outsource your bookkeeping, it’s still best to have a basic understating in order to discuss the status of your books with others.
Basic Bookkeeping Strategies: Part 2
Deciding how and when to track your transactions can be a task within itself. Typically this decision is made before hand, but I’ve know quite a few business owners to make spur of the moment judgments about how to manage their data. The best approach, of course, would be to create a system and adhere to it. But what is that system, and how do you determine what it should be?
How do I track this stuff? Manual, software or online.
Most businesses prefer to have ownership of their financial data, meaning they maintain full access at their own location. This method would require the purchase of expensive software, knowledge of its use, and maintenance of the system. At least two individuals would be needed to fully operate this system, one to manage the input of data and the other to manage its function. Or perhaps only one overworked individual is needed to manage everything (smile). However, this scene is changing with the convergence of virtual businesses. Most realize the cost savings of having someone manage their files for them completely remote (via the internet). Company data is delivered by fax, email or courier, and updated at the location of the service provider, or the files are managed through remote access, directly linking computers through the internet. The industry is favoring the latter because it’s cost effective. Savings on the cost of office space, employee wages, training, and system maintenance, all contribute to the popularity of the virtual process. At this point can you imagine anyone still using manual spreadsheets? Let’s hope not.
Basic Bookkeeping Strategies: Part 1
Bookkeeping involves the systematic process by which you gather and record financial data. This may appear very simple, but actually it can become a very complex process. The setup and management of your files will be determined by the level of expertise of the individual(s) involved. My goal through the next three articles is to share some of the basic steps in creating an effective system of bookkeeping.
Organize your data-why can’t I use the shoebox method?
The days of the shoe box method are long gone. With current technology trends, there really is no excuse for today’s business person to be disorganized. Simply put, your first responsibility is to make sure that all items are properly categorized. For example the major components of a business’s finances are assets, liabilities, revenue, and expenses. Keeping it very basic, I’ll explain each category:
Assets = what you own
Liabilities = what you owe
Revenue = what you’ve earned (income)
Expenses=what you’ve paid
Congratulations! You have just passed accounting 101.
Now in knowing this basic information, an effective bookkeeping system will make sure that all transactions are properly recorded in its appropriate category. Depending upon what type of system you use, before you begin entering any data; separate all your items into categories. You can use the above list as a guide. Most likely your source documents will consist of receipts, bank statements, check stubs, & invoices. This will save you time in advance to entering your data.
5 COMMON BOOKKEEPING BLUNDERS TO STAY AWAY FROM
No one likes to deal with errors, but we must. My approach is to acknowledge the error, find a solution, and document to prevent future mistakes. But let’s face it, most like to play the “blame game”, where we get stuck in the cycle of the error itself. So, this article will deal with 5 of the most popular bookkeeping blunders you should watch out for.
Blunder #1 – Stop mixing personal and business expenses in the same checking account. I think this one speaks for itself. As much as we would like to argue to the contrary, that vacation you took to Brazil was not a business trip.
Blunder #2 – Do not post date checks. Don’t write that check if you don’t have the money. Rubber money does not bode well with banks and vendors.
Blunder #3- Don’t pay your bills late if you can help it. Try to keep a good credit standing. If you’re in a cash crunch, call your vendors and work out an alternative plan. They will be more apt to work with you as long as you keep the lines of communication open. Trust me, they will appreciate your honesty. In this case SILENCE IS NOT GOLDEN!
Blunder #4- Everyone is not an independent contractor. Educate yourself on the difference between independent contractors versus employees. You could save yourself a lot of time and heartache during tax season.
AND THE BIGGEST MISTAKE OF ALL…………………………….
Blunder #5- CASH TRANSACTIONS. If at all possible, please don’t make any cash transactions in your business account. This is an accounting nightmare, because generally you will not keep the receipt or properly categorize the transaction. All transactions should be made by credit card, check, money order or other method. Documentation is a must, and it’s hard to trace cash transactions without the proper receipts.
Partnering for your success!
Jacqueline E. Ford
Financial Strategist