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The Top 5 Financial Reports Every Business Owner Should Review

The Top 5 Financial Reports Every Business Owner Should Review

There are several financial reports that will provide insight into the past, present, and future financial state of the business. As a business owner, it is critical to have an annual report of this financial data as it will allow you to more effectively run your company, enable you to better analyze operations, and help guide business decisions.

Of all the financial reports, below are five of the most essential accounting reports every business owner should be reviewing on a regular and annual basis to gain a better understanding of the company’s financial performance.

1. Balance Sheet

The Balance Sheet is a financial statement summarizing a company’s total assets (current, non-current and intangible assets), liabilities (financial obligations), and shareholders’ equity (investments and retained earnings) at a specific point in time, usually at the end of an accounting period. It provides a snapshot of a company’s financial position, including the economic resources the company owns, owes, and the sources of financing for those resources.

The Balance Sheet can be used to identify trends and make more informed financial accounting decisions. It is also important to lenders, as they will use it to determine a company’s creditworthiness.

2. Income Statement

The Income Statement is sometimes referred to as the Profit and Loss Statement (P&L), Statement of Operations, or Statement of Income. The Income Statement summarizes the total revenues and expenses incurred by the business, showing the profitability (net income or net loss) over a specified period of time, usually a month, quarter or year.

The Income Statement is used by internal stakeholders (such as the management team and board of directors) as well as external stakeholders (such as investors and creditors) to evaluate profitability and help assess the level of risk for an investor or creditor. In order to have a viable and valuable company, revenues must exceed expenses.

3. Cash Flow Statement

The Cash Flow Statement summarizes all cash inflows and cash outflows of a business over a period of time. This statement is different from the Balance Sheet and Income Statement because it only takes into account cash money activity; it does not account for non-cash activity such as sales or purchases on credit or depreciation.

The Cash Flow Statement is presented with three sections: operating, financing and investing activities, and indicates which areas of the business are generating and using the most cash. One of the best uses for the Cash Flow Statement is to estimate future cash flow which will assist with budgeting and decision making.

Read more: The Importance of Cash Flow Management for Small and Mid-size Businesses

The Cash Flow Statement, Balance Sheet and Income Statement together make up the standard financial statement package. These financial statements should be prepared by your accounting team on a monthly basis after the month-end close procedures have been performed. They can (and should) be used to calculate key performance indicators and monitor them over time.

4. Accounts Receivable Aging Report

The Accounts Receivable (A/R) Aging Report categorizes outstanding accounts receivable into groups based on the due date of the invoice, typically current, as well as 1-30, 31-60, 61-90 and >90 days overdue.

A common source of cash flow problems (especially for small and mid-size businesses) is poorly managed accounts receivable. The more cash you have tied up in receivables due to slow-paying customers and delinquent accounts, the less cash you have available for running your business. Reviewing the A/R Aging report will help companies proactively manage the receivable collections process immediately upon invoicing and create more accountability for the person responsible for collections.

Read more: Managing Your Revenue Cycle: 6 Accounts Receivable Best Practices

The A/R Aging Report can be generated out of most accounting systems and can be reviewed at any time. If collecting on accounts receivable is an issue for your business, a weekly review of this report may be necessary to assist in identifying past due accounts. Once these accounts are identified, collection procedures can be initiated to improve business cash flows.

5. Budget vs Actual

As the name suggests, this report is a comparison of actual results, primarily from the Income Statement, against the budgeted amounts that were projected at the beginning of the period. This report will allow the reader to assess how closely a company’s spending and revenue generation meets the financial forecasting projections included in the budget. It can help identify areas that were over and under budget, indicating the ability to hire additional employees or bringing attention to a gross profit margin not in line with financial reporting expectations, for example.

The Budget vs. Actual Report should be prepared on a monthly basis and reviewed with the financial statements to determine if any areas of the business are not meeting expectations and should be investigated further.

We Can Help

Our highly experienced accountants can complement your internal accounting employees, or act as your entire accounting department (CFO to staff accountant) on an ongoing basis. We will consistently provide you with timely and accurate financials and reports (like the ones mentioned above) on a monthly basis, as well as the actionable financial analysis you need to effectively run your company, analyze operations, and guide business decisions. If your business needs additional accounting support, contact us today to schedule a free consultation.

Cash Basis or Accrual Basis – Which Accounting Method is Right for Your Business?

Cash Basis or Accrual Basis – Which Accounting Method is Right for Your Business?

Whether you own a small company or a large corporation it is important to maximize the value of your accounting records so you can make the most informed and appropriate decisions for your business. The accounting method your company uses can have an impact on your ability to make these financial decisions, so it is important to choose the best method for your business.

There are two primary accounting methods that companies use to track their income and expenses – cash basis or accrual basis accounting methods. Below we will review the advantages and disadvantages of each accounting method, discuss the impact they could have on your company, and assist you in evaluating which method is the most appropriate for your business.

Here are some important criteria to consider when performing this evaluation:

  1. Who are the users of the financial statements and information (management, investors, bank, tax advisors, etc.) and how will they use this financial information?
  2. What method of accounting is the company using for tax purposes?
  3. What is the vision of the company in the next 5 years?

Cash Basis Method of Accounting

With the cash basis method of accounting, transactions are accounted for based on the company’s cash inflows and outflows. For example, revenue is recorded by the company when the cash is received from customers and expenses are recorded when payments are made to vendors. Because all transactions are recorded based on the cash inflows and outflows, the company’s balance sheet will not include, or track, the accounts receivable or accounts payable. With this method, accounts receivable and accounts payable are usually tracked separately within the company’s accounting system or on the side.

Many small and start-up companies will use the cash basis accounting method because it is typically the simpler of the two methods from an accounting standpoint. At this point in a business, companies also tend to place a lower level of importance on the financial information of the company, so the cash method is sufficient for their purposes.

Accrual Basis Method of Accounting

Under the accrual basis method of accounting, transactions are accounted for when the transaction occurs or is earned, regardless of when the cash is paid or received. Income is recorded when the sale occurs and expenses are recorded when the goods or services are received.

Although it is slightly more complicated from an accounting and tax preparation standpoint, there are significant advantages for companies using the accrual accounting method. These advantages include:

  • The ability to “match” revenues and related expenses within the applicable periods so companies can appropriately analyze profitability margins.
  • Creating consistency as to when the revenues and the expenses of the company are recorded allowing for increased ease of budgeting and forecasting.
  • If the company is looking for additional financing opportunities, banks and other investors usually ask for the financial information in the accrual basis method of accounting.

In general, the accrual method of accounting provides a better picture into the financial results of the company. This allows users of the financial information to make more informed decisions, ultimately providing additional value to the company.

Which Accounting Method is Best for Your Business?

Based on the information above, let’s revisit our consideration questions to help you evaluate which method is best for your business.

1. Who are the users of the financial statements and information (management, investors, banks, tax advisors, etc.) and how will they use this financial information?

If the users of the financial information are strictly internal management and there are a limited number of transactions, the cash method may be appropriate; however, management will be limited to the financial information available when making decisions.

If the company has outside investors, bankers, or other advisors, it is highly recommended to utilize the accrual method. Not only will it provide substantially more insight and value to those users, it will also show that the company is sophisticated enough to take the next step as a company.

2. What method of accounting is the company using for tax purposes?

From a tax perspective, the accrual method MUST be used for the following companies:

  • Your company is a C corporation.
  • Your company has inventory.
  • Your gross sales revenue is greater than $5 million (there are some exceptions to this rule that you should discuss with your tax accountant).

If your company is required to report taxes on an accrual basis for any of the reasons above, then you should always account for your internal records on an accrual basis as well.

If your company does not meet the above criteria, then you have the option to report taxes on a cash or an accrual basis. Many times it is more advantageous to report taxes on a cash basis and these options should be discussed with your tax accountant. However, even if the cash method is the best option from a tax perspective, it may still be beneficial from a management perspective to use the accrual method for internal reporting purposes.

3. What is the vision of the company in the next 5 years?

If your company is small, has limited transactions, and there are no plans for growth in the future, then the cash basis method of accounting would likely be the preferred and most reasonable option.

However, if your company forecasts growth in the future, especially if you plan to have revenues in excess of $5 million, it is important to begin accounting for the company’s transactions on an accrual basis as soon as possible. This transition is essential as you prepare your company to enter into discussions with other advisors and begin seeking out potential financing opportunities. It will give your company and management credibility and allow you to make the most appropriate and informed financial decisions for your business.

Making the Transition

If your company is currently using the cash basis method of accounting and feel it may be time to transition to an accrual method, we can help. Our experienced accounting team has assisted several companies with this change – some to facilitate the growth of their business and others to provide better insight into the financial health of their company. Contact us for more information or to receive a free consultation.

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Top 5 Questions to Ask When Closing Fiscal Year

Whether you are a new business owner or one that’s been in business for years, understanding requirements of a fiscal year close can be confusing. Keeping your financial information and records accurate year-round is critical to the success of your business, and it makes things that much easier during fiscal close.

Here are the top 5 questions you should ask, as you approach the process of closing your 2015 books:

  1. Have you recorded all your revenue for 2015?
  2. Do you have organized processes to record expenses in a timely manner?
  3. Does your accounting function have oversight, checks and balances to ensure your books are accurate on a monthly basis?
  4. Have you contacted your tax professional to schedule a meeting? Definitely try to avoid the March 15th and April 15th rush!
  5. Did you make quarterly estimated tax payments throughout 2015? If not, you should ask your tax professional if this is an option in 2016.

We Can Help

If you need assistance with your fiscal year end close, contact us today. Our outsourced accounting teams are locally based and nationally focused. We can help you with this effort, as well as other accounting and financial analysis needs of your business.

Using the Three P’s Concept from CNBC’s ‘The Profit’ to Evaluate the Accounting Function of your Business

Using the Three P’s Concept from CNBC’s ‘The Profit’ to Evaluate the Accounting Function of your Business

CNBC’s hit show, The Profit, provides viewers with a glimpse into some of the difficulties faced by business owners as successful investor, Marcus Lemonis, steps in to help them grow or rehabilitate their struggling businesses.

On the show, Marcus approaches each business with the same concept: Business success is about the three P’s: People, Process and Product. If a business has the right people, operates the business using the right processes, and has a strong product, then it has positioned itself to be successful.

While his concept is meant to assess a business as a whole, it can also be used to evaluate other aspects of a business as well, including its accounting.

With the New Year underway, now is an excellent time to evaluate the accounting and finance function of your business and using Marcus’ “People, Process, and Product” concept could help.

People

Without the right accountants, a business runs the risk that transactions are not posted timely or accurately and therefore do not produce reliable information upon which to make decisions. For that reason, it is important to have a strong accounting team; however, it is also important to ensure that those qualified accountants are being properly utilized.

In some cases, a business may employ a strong, experienced accountant and feel that their accounting department is in good hands; however, if that individual is tasked with performing basic accounting entries, as well as the more complex analysis, the business may be paying too much for the more basic processes which could be done by someone with less experience.

Alternatively, companies may have a strong staff accountant or bookkeeper who can perform most of the basic accounting processes; however, they may not be able (or qualified) to provide key financial analyses the executive team requires to analyze operations and guide business decisions.

Process

One common issue with the businesses appearing on The Profit is their lack of accurate financial statements which Marcus uses to evaluate the business and identify any concerns. To ensure financial statements are maintained correctly, the accounting department needs to establish the appropriate processes (daily, weekly, monthly, and annually). At a minimum the accounting department should be able to close the monthly financial statements within 15 days after month end so they are relevant for executives.

Aside from the typical close process, there are also processes that need to be established relating to approving bills, making cash payments, issuing invoices, and reimbursing employees for expenses, among others. Proper approvals and oversight are critical in these processes as businesses are at risk to errors and potential employee fraud without them – regardless how large or small the organization is.

Product

Within the accounting department, the “Products” include monthly financial statements, board/management reports, cash flow projections, and any other financial reporting or analyses used by others. Without these products from the accounting and finance departments, the executive team will not have visibility into the performance of the operations or be able to make critical decisions.

Evaluating Your Accounting Function Using the 3 P’s

Entrepreneurs and executives should periodically re-evaluate their company’s accounting and finance function (at least annually) confirming their accounting People, Processes and Products are appropriate to help manage the business.

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