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The 3 Financial Statements Every Leader Needs

The 3 Financial Statements Every Leader Needs

As a business owner, financial data is critical to your success — but only if you know how to interpret the meaning behind the numbers correctly. Most owners or leaders within an organization rely on the aid of an accounting team to accurately analyze and organize financial data. Still, when it comes time to make a big decision, it’s up to you to do so based on the gathered information.

There are at least three primary financial statements your accounting team will (read: most definitely should) be presenting to you regularly: income statements, balance sheets, and statements of cash flow.

With a solid understanding of each financial statement, you can unlock powerful insights to help you compete more effectively in the marketplace, achieve better terms from vendors and suppliers, and offer accurate projections to both internal stakeholders and lending companies alike.

Income Statement

The income statement (also called a profit and loss statement or P&L statement) measures the profitability of your business during a specified accounting period. This statement assesses all of your business’ revenue and expenses, and then reports a net profit or net loss.

By industry standards, this is the most influential of the three significant statements. This report shows where the money is allocated and breaks down business costs into categories.

Importantly notated are costs directly related to goods and services. It also calculates your company’s earnings from multiple viewpoints, reporting not only the net earnings (your bottom line) but also an assessment of the business’ productive efficiency before the impact of taxes and financing.

Read More: Understanding Your Financial Statements

It’s helpful to compare multiple income statements from different accounting periods to monitor whether your business is becoming more or less profitable over time — allowing you to adjust your spending and production processes accordingly.

Balance Sheet

The information on the balance sheet is monumentally more valuable when viewed in conjunction with your income statement. For instance, you can use the data from the balance sheet to determine how many investments are required to support the bottom line shown on your income statement.

While the income statement focuses on one specific accounting period, the balance sheet shows a snapshot of your overall financial health on a particular day by using a simple equation: liabilities + equity = assets.

These factors give you an idea of what the business owns (assets), what it owes (liabilities, including short-term expenses and long-term debt), and how much capital shareholders have invested (equity). As the name suggests, the two sides of the equation in your balance sheet should balance out.

Read More: Financial Tips From Successful Leaders

Statement of Cash Flows

The cash flow statement does just what the name implies — it reports on the flow of cash into and out of your business. Unlike the income statement, which breaks down earnings and expenses into more specific categories, the statement of cash flows focuses on the overall amount of money coming in (inflow), compared to the amount of money going out (outflow).

To find this data, it takes precise calculations using the following equation: starting cash balance + cash inflows – cash outflows = ending cash balance.

Cash inflows include sales, loans, and accounts receivable collections. Alternatively, cash outflows include equipment costs, inventory, and expenses paid. The statement of cash flows presents the most transparent view of a company’s cash variation. In other words, what caused the balance in your bank account to increase or decrease.

Read More: 10 Tips To Help Improve Your Company Cash Flows

Even Harvard Business School agrees that the number one finance skill a leader needs is an understanding of their financial statements and you can’t argue with Harvard right?

Once you have an understanding of these top three financial reports, we encourage you to have your accounting team run the Accounts Receivable and Accounts Payable, as well as Net Profit Margin Over Time.

Comprehensive knowledge of the financial side of your company will be incredibly helpful when it comes to making smart business decisions.

If your accounting team needs help or are not sure how to gather the information for these reports, have them contact us. Our expert team of accountants and business advisors are here for help in situations just like these.

Cash vs. Accrual Accounting: which method is best for your business?

Cash vs. Accrual Accounting: which method is best for your business?

The full financial picture of any company is like trying to solve a scrambled Rubik’s cube: it’s complicated. This makes proper accounting essential to both the financial health of your business and its overall potential for longevity.

There are two standard methods of business finance tracking: the cash method and the accrual method. Understanding the difference between these two methods will help you in determining which method is the best fit for your business.

What is cash accounting?

The cash accounting method tracks income when it is received and expenses when they are paid and is the most popular method for small businesses and personal finances. If you’ve ever balanced a personal checkbook or entered what you’ve spent and earned into a spreadsheet, then you have a good idea of how cash accounting works.

For example: you own a business that builds websites for companies and finish a website in August, but your company doesn’t get paid until October, then that income is recorded in October’s books. If the client never pays, then the income is never recorded.

The benefits of cash accounting

The cash accounting method accounts for real-time transactions, meaning that transactions are recorded when cash changes hands. For small businesses who are worried about overspending and want to know exactly how much cash they have on hand, the cash accounting method may be a good fit for your business.

There are also tax benefits to cash accounting. Finance and accounting professionals can work with your tax personnel to determine the most advantageous method for your situation. Since some companies are restricted from using< the cash accounting method, it’s important to consult with an accounting professional who can help to identify whether cash accounting is a viable option for your business.

The disadvantage

While cash accounting is essentially a “simpler” way of maintaining a business outlook, it can also produce an erroneous picture of your company’s performance since revenue isn’t recognized until the money is in the bank.

What is accrual accounting?

Accrual accounting takes a more hypothetical approach to your big-picture business finances; accountants or financial firms count income when it is billed and expenses when they arrive.

Unlike the cash method, the accrual method records the client invoice the day it is received, even if it isn’t paid until a month later. In the accrual method, accounting professionals will use a balance sheet to record the offsetting asset or liability so you can maintain a good sense of your business’ current financial status.

The benefits of accrual accounting

Since accrual accounting records transactions upon completion of a delivery or service, it allows a company to see how well it’s doing and have the ability to make better predictive decisions regarding the future.

Because you know how much is anticipated in the short-term (regardless of it being in your account yet), accrual accounting gives you a better sense of your cash flow needs as well as any outstanding expense liabilities that are due. Financial professionals will usually add another reporting function that lists actual cash available at any given time.  

The disadvantage

Since the accrual method records all transactions, regardless of the payment being received, your books could could reflect revenue even if your bank account is completely empty.

Which one is right for your business?

There are a few factors to consider when deciding whether to use cash or accrual accounting methods. Here are a few things to keep in mind:

Size and Industry

The size and industry of the company you run are major determining factors. For instance, C corporations who generate over $10 million and S corporations who generate over $20 million in average gross revenue over the past 3 tax years, are excluded from using the cash accounting method.

Inventory

The size and industry of the company you run are major determining factors. For instance, C corporations who generate over $10 million and S corporations who generate over $20 million in average gross revenue over the past 3 tax years, are excluded from using the cash accounting method.

Ease of Reporting

The accrual accounting method is more difficult to report from a tax perspective, though financial service experts can easily handle this aspect.

Insight into your business

Cash accounting doesn’t give much insight into the overall health of your business as far as sales, expected income, or expected expenses go.

Your bottom line is too important to track haphazardly, either by using the wrong method or not using one at all. Learn more about how to track your company’s income and expenses.

Financial experts can also give you more insight into which type of accounting method makes the most sense for your business and set it up for you so that you can keep focusing on the most important thing: running your company. Hiring a reputable financial firm can help your company reduce the risk of spending too much or straining vendor/contractor relations with late payments. Get expert advice now.

The Statistics You Need to Grow Your Business [Infographic]

The Statistics You Need to Grow Your Business [Infographic]

Building and growing a successful business requires a solid strategy grounded in facts. The shrewd business owner knows how vital it is to use accurate data to guide smart decisions.

 

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Building and growing a successful business requires a solid strategy grounded in facts. The shrewd business owner knows how vital it is to use accurate data to guide smart decisions.

Take a look at the enlightening statistics we’ve collected to help you plan realistically for your business’ future.

Capital Is King

82% of businesses fail for lack of money, and 55% of business owners peg cash flow as the number one challenge to growing their businesses.

Tip: Successful business owners are cash savvy and use tools to track and analyze cash flow. From choosing the right software and hiring the right talent, to simply understanding all costs associated with business processes, use tracking and analytics to maintain a tighter grip on your capital.

Finding Funding Is Tough

More than 60% of business owners worry about how they will finance continued growth.

Tip: There are a number of financing options available to medium-sized businesses. In addition to loans from banks and other financial institutions, you might consider accounts receivable factoring, purchase order financing, equity issuance, or using assets to secure a line of credit.

The Talent Pool Is Shrinking

77% of CEOs fear that a lack of available talent will stunt company growth.

Tip: Smart CEOs are looking for soft skills on top of credentials to ensure they’re hiring the right people. When they find what they are looking for, they go for it. The job-seeker may have a lot of negotiating power, but your business will end up with the talent it needs.

Growth Requires More Than Money

of the fastest growing companies fail to become self-sustaining.

Tip: While financial success is necessary, that alone will not sustain your business. Setting up processes for continuous innovation is essential to keep your business growing long-term.

As a business owner, your priorities should be to exercise mindful cash flow forecasting, explore your options for financing, make smart hiring decisions, and support innovation.

With these four tips in mind, your business won’t stay stuck on that bottom step — it will climb step by step into the future.

Brought to you by Signature Analytics | www.signatureanalytics.com  

3 Reasons Why Businesses Fail

3 Reasons Why Businesses Fail

Owning a business is hard, particularly in the first half-decade of its existence. In fact, 20% of businesses fail in their first year, and another 30% collapse by the end of year five. The good news is that with the right strategy and a watchful eye on your business income and expenses, you can avoid closing your doors. The key is to be aware of potential problems and to quash any existing issues.

Below you will find the 3 most common factors that determine the success or failure of a business, so you can start protecting the health of your company today.

Cash Flow Problems

Insufficient cash flow is one of the leading causes of businesses throwing in the towel. Proper cash flow management ensures that everything else in the business operates smoothly. This extends from stocking up on inventory to paying salaries and utility bills on time. It’s also important to keep records of who owes you money and when you should receive it.

Consistently analyzing cash flow statements will allow a business owner to stay on top of accounts. Whether you use a cash or accrual accounting system, it’s vital that you know how much you have in hand and what you expect to pay out in the near future. This will give you a broader idea of what to expect with your business, ultimately allowing you to keep afloat. If you don’t feel comfortable taking on this task alone, you should hire a firm to help you manage your business finances; there’s just too much at stake not to take action.

Poor Management

As a business starts to find its footing in a given market, it becomes crucial for management to have clear communication and expectations for its employees. Without adequate and efficient project management from the top, personnel aren’t able to efficiently handle the stresses of the required workflow.

By setting clear expectations on a day-to-day basis, employers are given a better chance at managing workflows utilizing the tools at their disposal. Consider allocating a time slot on a weekly or biweekly basis to touch base with your team. You can also arrange a more thorough meeting at the beginning of each fiscal quarter for long-term goal-setting. This approach increases workflow effectiveness by fostering healthy accountability standards within your team.

Expedited Growth

Losing the ability to adequately handle growth in your company is one of the most stressful situations a new business can fall prey to. By expanding operations too soon, companies run the risk of sacrificing efficiency as they are unable to keep up with production. At the same time, they lose capital from not fulfilling client needs and expectations.

As a business owner, your goal is, first and foremost, to create the best client experience possible. So take the necessary steps to make that happen. This may mean delegating many of the tasks you’ve always done on your own. By hiring people you trust, whose passions align with your business message, you can fill the void in the areas outside of your reach. It is also incredibly important to ensure that your staff are adequately trained for potential growth-related problems. Sometimes this is achieved through trial and error, but it’s always best to be prepared whenever you can.

With all the pitfalls lurking throughout the life of your business, it’s easy to get discouraged. But remember: for every 20% of businesses that fail within their first year of operations, another 80% succeed. By reflecting on these 3 factors of failure, your business can join the ranks of the majority and last for much longer than that one-year mark.