Monday, March 26, 2012

Reading Accounting and Bookkeeping Reports

Accounting and bookkeeping functions play a large role in deciding the financial viability of a business.

In the case of the small or mid-size companies, this holds all the more true. When every little decision and operation is determined based on budget, it makes sense to understand whether all your hard-earned money is allocated correctly.

In a typical small-sized business, the focus is concentrated on fulfilling client requirements and meeting deliverables. Manpower is often limited, with one individual managing multiple responsibilities. Opportunities for error in such situations increases, and therefore so does the significance of understanding your finances and correctly reading reports. Financial reports have a significant bearing on the future of your company. The golden rule for all small businesses remains constant: if you are not adept at financial reporting or uncertain about how to read them, hire professionals for conducting accounting-related work instead of trying to do it yourself.

However, if you do choose to review them yourself, there are several key elements that you should evaluate when reading them.

Income Statement

Your income statement will reflect your profits and losses. This is performed via columns on revenue and expenses. A summary of your revenue compared against the expenses incurred will indicate whether your business is performing well or not. The income statement typically reflects the growth or reduction in a company's assets over the accounting period which could be a single month, several months, or one year.

The income statement is also a comparative document for evaluating how your company has fared previously. It contains other factors such as net sales, gross income, operating income, operating expense, taxes, etc. When you read income statements for consecutive years side by side, you can calculate the percentage change in your company’s net sales, operating expenses, and operating income. This helps you establish a budget and to decide where you need to reduce expenses and allocate additional funding.

Balance Sheet

The balance sheet lists the company's assets, liabilities, and owner's equity. The owner's equity is the difference between the assets and the liabilities. The balance sheet is also an indicator of your company's financial health. When you evaluate a balance sheet, you should be able to assess whether your debt is in control.

Elements of a balance sheet include:

Assets: Assets are what the company owns, which may include movable and immovable properties, such as land or machinery equipment. There are two kinds of assets- current and fixed. Current assets are converted into money within a period of one year, while fixed assets refer to property that generates income and are not expected to be sold within a year.

Liabilities: Balance sheets also list liabilities which are debts owned by the company. These are categorized into current liabilities, those that need to be paid off within one year, and long-term liabilities, those that are not bound by the 1-year limit.

Owner's Equity: Once there are funds invested into a business, it is viewed as a sum of assets and liabilities. A business must be funded to make it operational before it can start acquiring assets. The owner's equity is the value that remains in a business after removing the liabilities from the assets.

Statement of Cash Flow

How does your company use its cash? Your cash flow statement will provide you the answer to this question. Cash flow statements assign cash expenses within a specified accounting period to one of three categories-, Operations, Financing, and Investing. These are then added to determine a figure which is further tallied with cash reserves in the beginning of the accounting period. Examples of elements within a statement of cash flow can include cash given to employees (operative expense), cash allocated to purchasing machinery or equipment (investing), and cash provided by owner (financing).

All business owners should have a thorough understanding of what these statements mean in determining the success of their company.

Satish Patel, CPA
President, Analytix Solutions
Satish Patel, Founder-CEO of Analytix Solutions, has more than two decades of experience as a CPA. He has also advised small and mid-sized businesses on diverse matters such as valuation, accounting, and finance. His experience extends to raising capital and arranging for finance from angel investors.

Wednesday, March 14, 2012

Five Bookkeeping Tips

Irrespective of the size of a business, bookkeeping is one of the most basic responsibilities within a company. It involves tracking expenses and financial transactions that have occurred on a daily basis.

Bookkeeping differs from Accounting in that an accountant is dependent on the bookkeeper's records. The bookkeeper is responsible for making accurate records of sales, purchases, payments made, etc. These entries are recorded in designated ledgers or books that are then balanced to insure that the financial figures match.

A small business may perform its own bookkeeping to defray expenses. However, without a trained bookkeeper performing this function in-house may turn out to be a very expensive decision.

Bookkeeping is often confused with accounting work. They are different in that bookkeeping involves maintaining records of financial transactions that have taken place. Different records are maintained in different, designated books. Thus, there are separate sales ledgers, ledgers for payments receivables, and record books for functions such as sales and purchases made, as well as records of issued bank checks.

These books further contain multiple columns to indicate payments due or made, together with the balance noted at the time of the transaction.

All of these functions define a bookkeeper's areas of responsibility.

Because the bookkeeper deals with matters that reflect the financial health of the company, there is very little room for error. Finally, the company's accountant depends on the bookkeeper's work to prepare financial records and communication.

As with other business functions, there are several bookkeeping "best practices", which when implemented can significantly impact a company's overall productivity and efficiency.

1. Maintain records diligently.
It helps to maintain different records for different transactions in a timely and exact manner. When you have multiple daily transactions, it is essential that they are all recorded. The bookkeeper's work determine show easily an accountant can file the related income statements and communicate expenses to the company's shareholders.

2. Hire a trained bookkeeper.
Performing this function by assigning it to another staff member or having the business owner perform the bookkeeping may work in the beginning when your business is small. However, as your client base increases, this can become unwieldy to the untrained bookkeeper. Without a knowledge of bookkeeping practices, you run the risk of recording errors which could have long lasting negative implications.

3. Invest in high quality accounting software.
High caliber accounting software is essential to your company's financial infrastructure. Poor bookkeeping can lead directly to loss in earnings and worst cases loss of clients. For small businesses, this domino effect can be fatal. Although several off-the-shelf accounting software solutions exist, if you cannot afford to make this type of investment for your business, tap into a provider who offers you high quality bookkeeping services.

4. Keep your forms and records handy.
Make sure you are audit-ready and not remiss in filing important forms etc. When you are ready with the essentials, your bookkeeping will be better organized.

5. Back up all your data.
This is one of the most important rules. As a small business, if you are finding it difficult to maintain safe and dependable back-ups, then you should consider choosing a vendor who can manage your bookkeeping functions. Ensuring data security in times of crisis or accidents is an important factor for both your business and your clients' businesses.

Satish Patel, CPA
President, Analytix Solutions
Satish Patel, Founder-CEO of Analytix Solutions, has more than two decades of experience as a CPA. He has also advised small and mid-sized businesses on diverse matters such as valuation, accounting, and finance. His experience extends to raising capital and arranging for finance from angel investors.