Introduction to  Financial Record Keeping February 2008 Cecile E. Reid, CPA, MBA President, Flat Rock Financial Services, ...
What is Financial Record Keeping? <ul><li>Every business has a Unique story to tell. </li></ul><ul><li>A Profitability Sto...
What is Financial Record Keeping? Financial Record Keeping is the process of ensuring that your business’ story is  COMPLE...
Why do YOU need  Financial Record Keeping? <ul><li>Who needs the complete story? </li></ul>
WHO?
And he isn’t alone!
More Importantly
? Who are my best customers? If I have to give up a job which one should I give up? Will storage costs eat up my saving on...
What is Financial Record Keeping? Financial Record Keeping is the process of ensuring that your business’ story is  COMPLE...
Bookkeeping vs.. Accounting <ul><li>Every time one of the following activities occurs </li></ul><ul><ul><li>Money changes ...
Bookkeeping is…. <ul><li>… The process to record,  in a central location ,  ALL  of the money transactions a business make...
What is Accounting? <ul><li>A good bookkeeping system must be  set up  so that transactions recorded can be analyzed in MU...
What is Accounting? <ul><li>Information must be extracted from the system so that it can be used to make decisions about o...
What is Accounting? <ul><li>Timely reports have to be designed so that information is shown in a COMPARABLE manner. </li><...
Accounting is… <ul><li>The process of  organizing  and  analyzing  the centralized records. </li></ul>
Bookkeeping Recap <ul><li>All money transactions, whether they are actual cash transactions and guarantees of future cash ...
Accounting Recap <ul><li>The centralized bookkeeping system has to be designed to fit the needs of the business. </li></ul...
Titles <ul><li>Accountant </li></ul><ul><li>Bookkeeper </li></ul><ul><li>CPA (Certified Public Accountant) </li></ul><ul><...
Titles <ul><ul><li>Bookkeeper </li></ul></ul><ul><ul><li>Accountant </li></ul></ul><ul><ul><li>Tax Preparer </li></ul></ul...
<ul><li>Fundamental Fiscal Understanding </li></ul>
What we will review: <ul><ul><li>Bank Reconciliation </li></ul></ul><ul><ul><li>Cash and Accrual Accounting </li></ul></ul...
Bank Reconciliation <ul><li>Bank Reconciliation Report maps out the difference between your bank statement and your bookke...
Cash vs. Accrual Accounting <ul><li>Affects the recording of transactions of income and expenses  </li></ul><ul><li>Cash A...
Cash Accounting <ul><li>It’s Easy!!!! </li></ul><ul><li>Cash in, Cash Out. </li></ul><ul><li>Drawbacks </li></ul><ul><ul><...
Accrual Accounting <ul><li>Captures Income and Expenses based on the accrual method of accounting. </li></ul><ul><li>Essen...
Handling Assets <ul><li>When a purchase is made, an expense is usually recorded. </li></ul><ul><li>IF that purchase will b...
Hypothetical Purchase <ul><li>E.g. a tractor purchased for $30k will work well for 10 years.  </li></ul><ul><ul><li>Suppos...
Capitalization is… <ul><li>A system to record a major purchase in a way that spreads the expense involved over the time pe...
Depreciation is.. <ul><li>The process by which the capital asset is then converted to expense over the several years. </li...
But…..!
Expenses Influence Income <ul><li>The greater your expenses, the lower your income and the lower your tax burden by extens...
Depreciation Methods <ul><li>There are various “depreciation methods”, i.e. ways to convert a capital asset in one year to...
What you need to know  about Depreciation <ul><li>Depreciation can be calculated in various ways and each method has its p...
<ul><li>Land is a fixed asset that is not depreciated. </li></ul>
Fundamental Financial Reports <ul><li>Core Statements that tell the story </li></ul><ul><ul><li>Balance Sheet </li></ul></...
Fundamental Financial Reports <ul><li>Balance Sheet </li></ul><ul><ul><li>A snap-shot. </li></ul></ul><ul><ul><li>A pictur...
Balance Sheet As of DD/MM/YYYY
Assets <ul><li>Short Term and Long term Assets Separately </li></ul><ul><li>Short Term aka “Current Assets” </li></ul><ul>...
Liabilities <ul><li>Short Term and Long term Liabilities Separately </li></ul><ul><li>Short Term aka “Current Liabilities”...
Owner’s Equity <ul><li>Common Stock </li></ul><ul><li>Retained Earnings </li></ul><ul><ul><li>Owner Paid In Capital </li><...
Balance Sheet <ul><li>Shows the strength and potential of your business at a specific point in time </li></ul><ul><li>Must...
Fundamental Financial Reports <ul><li>Income Statement </li></ul><ul><ul><li>Tracking of Revenues and Expenses over a peri...
Income Statement
Income Statement
Operating Costs vs. Overhead Costs <ul><ul><ul><li>Operating costs are directly impacted by growth of the business. </li><...
Operating Costs <ul><ul><ul><li>Operating costs are directly impacted by Gross Margin. </li></ul></ul></ul><ul><ul><ul><ul...
Overhead Costs <ul><ul><ul><li>Overhead costs are  less  impacted by growth of the business. </li></ul></ul></ul><ul><ul><...
Income Statement Period (DD/MM/YYYY to DD/MM/YYYY) <ul><ul><li>Revenue  </li></ul></ul><ul><ul><li>Cost of Goods/Services ...
Fundamental Financial Reports <ul><li>Statement of Cash Flows </li></ul><ul><ul><li>Outlines the sources of cash for the b...
Statement of Cash Flows  Period (DD/MM/YYYY to DD/MM/YYYY) <ul><li>Cash Flow From Operations </li></ul><ul><li>Cash Flow F...
Statement of Cash Flows  Period (DD/MM/YYYY to DD/MM/YYYY) <ul><li>Cash Flow From Operations </li></ul><ul><li>Should star...
Statement of Cash Flows   Period (DD/MM/YYYY to DD/MM/YYYY) Cash Flow From Operations Net Income $15,000.00 Increases in C...
Statement of Cash Flows   Period (DD/MM/YYYY to DD/MM/YYYY) Cash Flow From Investing Increases in Cash <ul><ul><li>Proceed...
Statement of Cash Flows   Period (DD/MM/YYYY to DD/MM/YYYY) Cash Flow From  Financing Increases in Cash <ul><ul><li>Procee...
Statement of Cash Flows   Period (DD/MM/YYYY to DD/MM/YYYY) Net Cash From Operations $  23,000.00 Net Cash From Investing ...
Fundamental Financial Reports <ul><li>Core Statements that tell the story </li></ul><ul><ul><li>Balance Sheet </li></ul></...
<ul><li>These reports convey useful and reliable information only if they are based on  </li></ul><ul><li>accurate bookkee...
<ul><li>This creates a tension for  </li></ul><ul><li>owner- operated businesses. </li></ul><ul><ul><li>Owners hold manage...
<ul><li>Barriers to Recordkeeping </li></ul><ul><ul><li>Time Burden on management creates supply shortage of fiscal report...
<ul><li>Barriers to Recordkeeping </li></ul><ul><ul><li>Time Burden on management creates supply shortage. </li></ul></ul>...
Choosing Accounting Software <ul><li>Software should: </li></ul><ul><ul><li>Match the needs of your business </li></ul></u...
Choosing Accounting Software <ul><li>Some Options: </li></ul><ul><li>QuickBooks,  </li></ul><ul><li>Peachtree,  </li></ul>...
Recap and Review <ul><li>Key financial reports tell the story of your business’ present profitability and its potential in...
Recap and Review <ul><li>Financial professionals such as bookkeepers, accountants and tax preparers are resources to help ...
Your Instructor:  <ul><li>Cecile E. Reid, CPA, MBA is President of Flat Rock Financial Services, LLC a professional accoun...
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Financial Record Keeping w/ QuickBooks

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  • February 2008
  • Every business has a story to tell. Fortunately, the story follows the same plot. Money In, then Out then back In Again. Financial Record Keeping is the process of ensuring that your businesses story is COMPLETE and CORRECT. February 2008
  • Once upon a time. I got some money. Then I spent that money and some more money came back to me. I got back more money than I spent (or I spent more money than I got back). The END February 2008
  • February 2008
  • Tax Agencies in General are represented here. Income Tax, Payroll Tax agencies, Gross Receipts and Sales Tax agencies. All want reliable information on the business. The penalties for incorrect information are significant even when the mistake is accidental. This is where most businesses first decide to recognize the need for recordkeeping. February 2008
  • Investors and Co Owners. If you need to borrow money your potential creditor will need some explanation about how you would repay the loan. Your Financial story becomes very important. It is the main way to compare your ability to repay. Discuss how creditors are making comparable decisions. If your financials are stronger, then they are more inclined to lend to you. February 2008
  • You need to know what areas are making money. Which clients/jobs are most profitable? This isn’t possible to know from “gut” finances because often the relative profitability is obscured. Also, costs to find and mine clients often get overlooked. February 2008
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  • It is a mechanical function, data entry is the closest function to it. It differs from data entry because their needs to be some understanding of HOW to enter transactions correctly into the centralized system. Each transaction has a unique nature rather than a repetitious nature. February 2008
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  • There are also a variety of clerks. AP Clerk, AR clerk Payroll Clerk February 2008
  • Other accountants are Certified Internal Auditors (CIAs), Certified Management Accountants (CMAs) and Accredited Business Accountants (ABAs). These are not state licensed and so cannot serve the public, just management. February 2008
  • February 2008
  • These three areas require a general understanding of accounting’s role. So understanding them will increase the overall appreciation for what accounting is and why it is a critical management tool. February 2008
  • Most businesses use their check book as their centralized recording system. Bank Reconciliations are also great ways to catch double charges and errant bank fees. February 2008
  • Dates isn’t the best word here, but I want to convey that the transaction is recognizes February 2008
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  • Essential accrual accounting will record revenue when it is earned not when received. Also, it will accrue income when it is received but not yet earned as in deposits or retainers. February 2008
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  • Revenue less Expenses = Income And income is taxed, so Uncle Sam is very interested in what is depreciated and how depreciation is calculated. February 2008
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  • Straight Line Depreciation Method [Depreciation = (Cost - Residual value) / Useful life] Declining Balance Depreciation Method [Depreciation = Book value x Depreciation rate] Book value = Cost - Accumulated depreciation Depreciation rate for double declining balance method = Straight line depreciation rate x 200% Depreciation rate for 150% declining balance method = Straight line depreciation rate x 150% Sum-of-the-years&apos;-digits method [Depreciation expense = (Cost - Salvage value) x Fraction] Fraction for the first year = n / (1+2+3+...+ n) Fraction for the second year = (n-1) / (1+2+3+...+ n) Fraction for the third year = (n-2) / (1+2+3+...+ n) ... Fraction for the last year = 1 / (1+2+3+...+ n) n represents the number of years for useful life. February 2008
  • Depreciation expense is largely a tax item. However, you might want to use a different method. Make sure your accountant reconciles taxable income to recorded income if you use a depreciation method different from Uncle Sam’s February 2008
  • Everything else, it depends. February 2008
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  • Long Term assets are less liquid, if you needed a cash infusion unexpectedly, your current assets will apply. February 2008
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  • There is also a Statement of Retained Earnings but this doesn’t often factor in to creditor requests because it simply shows the change in ownership. For an owner-operated business ownership is pretty static. February 2008
  • Debits and Credits vs. Account Types Account Type Debit          Credit Assets             Increases       Decreases Liabilities          Decreases      Increases Income             Decreases      Increases Expenses         Increases       Decreases February 2008
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  • Discuss here how bad debt expense and Accounts Receivable relate Cost to acquire or produce NOT the cost to sell. These costs are generally not seen as controlled by management but they are the base of profitability. If there isn&apos;t a margin then the best mgmt will still lose money. February 2008
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  • Mainly selling costs but if you can allocate some of the overhead to this category it suggests better understanding of the intricacies of your business. If you threw money at this category, you should see an increase in margin. Conversely if margin grows you will suffer some expense increase here. February 2008
  • Rent Utilities Etc These are the costs you need to control closely because they do not necessarily mean that business is thriving. February 2008
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  • Cash Flow From Borrowing aka Cash Flow From Financing Less focus on the last two because they are largely outside of the every day management control. February 2008
  • Measuring the cash inflows and outflows caused by core business operations, the operations component of cash flow reflects how much cash is generated from a company&apos;s products or services. Generally, changes made in cash, accounts receivable , depreciation , inventory and accounts payable are reflected in cash from operations. Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue , expenses and credit transactions (appearing on the balance sheet and income statement) resulting from transactions that occur from one period to the next. These adjustments are made because non-cash items are calculated into net income (income statement) and total assets and liabilities (balance sheet). So, because not all transactions involve actual cash items, many items have to be re-evaluated when calculating cash flow from operations. For example, depreciation is not really a cash expense; it is an amount that is deducted from the total value of an asset that has previously been accounted for. That is why it is added back into net sales for calculating cash flow. The only time income from an asset is accounted for in CFS calculations is when the asset is sold. Changes in accounts receivable on the balance sheet from one accounting period to the next must also be reflected in cash flow. If accounts receivable decreases, this implies that more cash has entered the company from customers paying off their credit accounts - the amount by which AR has decreased is then added to net sales. If accounts receivable increase from one accounting period to the next, the amount of the increase must be deducted from net sales because, although the amounts represented in AR are revenue, they are not cash. An increase in inventory, on the other hand, signals that a company has spent more money to purchase more raw materials. If the inventory was paid with cash, the increase in the value of inventory is deducted from net sales. A decrease in inventory would be added to net sales. If inventory was purchased on credit, an increase in accounts payable would occur on the balance sheet, and the amount of the increase from one year to the other would be added to net sales. The same logic holds true for taxes payable, salaries payable and prepaid insurance. If something has been paid off, then the difference in the value owed from one year to the next has to be subtracted from net income. If there is an amount that is still owed, then any differences will have to be added to net earnings. February 2008
  • Each line should have you thinking about your income statement and how to make better decisions. Here the period is very important. IF this is an annual review, it can look very different by qtr or mth or even week. February 2008
  • Here we look at capital transactions and investments in instruments that are not cash equivalents. February 2008
  • Financing means &amp;quot;raising&amp;quot; money by issuing stocks and bonds. The third section shows how the company is spending cash, Investing in its future growth. (Financing causes problems: issuing new stocks will lower the value of each individual share; issuing bonds commits them to making interest payments which will punish future earnings). February 2008
  • Operations is throwing off enough cash to cover the extra investing spending. Also have some financing money for a cushion Change in cash and equiv is not the same as a bank reconciliation because the bank reconciliation is just making sure that all the items that haven&apos;t yet hit the bank statement are in the report. February 2008
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  • Software choices: QuickBooks, Peachtree, Microsoft Great Plains, Microsoft Solomon, MYOB, Netsuite, Accpac, Simply Accounting, AccountEdge If you have many different depreciation schedules, your software should offer depreciation in multiple ways. If you hold inventory, your software should be able to handle inventory. February 2008
  • Software choices: QuickBooks, Peachtree, Microsoft Great Plains, Microsoft Solomon, MYOB, Netsuite, Accpac, Simply Accounting, AccountEdge If you have many different depreciation schedules, your software should offer depreciation in multiple ways. If you hold inventory, your software should be able to handle inventory. February 2008
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  • Transcript of "Financial Record Keeping w/ QuickBooks"

    1. 1. Introduction to Financial Record Keeping February 2008 Cecile E. Reid, CPA, MBA President, Flat Rock Financial Services, LLC
    2. 2. What is Financial Record Keeping? <ul><li>Every business has a Unique story to tell. </li></ul><ul><li>A Profitability Story </li></ul><ul><li>Money In, then Out then back In Again. </li></ul>
    3. 3. What is Financial Record Keeping? Financial Record Keeping is the process of ensuring that your business’ story is COMPLETE and CORRECT.
    4. 4. Why do YOU need Financial Record Keeping? <ul><li>Who needs the complete story? </li></ul>
    5. 5. WHO?
    6. 6. And he isn’t alone!
    7. 7. More Importantly
    8. 8. ? Who are my best customers? If I have to give up a job which one should I give up? Will storage costs eat up my saving on this discounted material? Would I have turned a profit last month if that last minute job hadn’t come along? ? ? ? ? ? ?
    9. 9. What is Financial Record Keeping? Financial Record Keeping is the process of ensuring that your business’ story is COMPLETE and CORRECT. Financial Record Keeping consists of Bookkeeping and Accounting
    10. 10. Bookkeeping vs.. Accounting <ul><li>Every time one of the following activities occurs </li></ul><ul><ul><li>Money changes hands, e.g. a sale or a purchase </li></ul></ul><ul><ul><li>Money is promised, e.g. a loan made or an order is received </li></ul></ul><ul><li>A transaction is created. </li></ul><ul><li>In order to tell a complete story all of these transactions need to be in one, central place. </li></ul>
    11. 11. Bookkeeping is…. <ul><li>… The process to record, in a central location , ALL of the money transactions a business makes, whether cash or promises . </li></ul>
    12. 12. What is Accounting? <ul><li>A good bookkeeping system must be set up so that transactions recorded can be analyzed in MULTIPLE useful ways. </li></ul><ul><li>The system has to fit the business needs for information. </li></ul><ul><li>The system must also be monitored so that it is working as designed. </li></ul><ul><li>… </li></ul>
    13. 13. What is Accounting? <ul><li>Information must be extracted from the system so that it can be used to make decisions about ongoing business actions. </li></ul><ul><li>Monthly checks and balances need to be performed to ensure the information gives an accurate story about the business’ profitability. </li></ul><ul><li>… </li></ul>
    14. 14. What is Accounting? <ul><li>Timely reports have to be designed so that information is shown in a COMPARABLE manner. </li></ul><ul><li>Monthly/Weekly/Qtrly reporting has to be consistently compiled so analysis is useful. </li></ul><ul><li>This entire set-up, monitoring and reporting from the bookkeeping process is..Accounting. </li></ul>
    15. 15. Accounting is… <ul><li>The process of organizing and analyzing the centralized records. </li></ul>
    16. 16. Bookkeeping Recap <ul><li>All money transactions, whether they are actual cash transactions and guarantees of future cash transactions all need to be recorded. </li></ul><ul><li>Bookkeeping is the process to record, in a central location, all of these transactions. </li></ul>
    17. 17. Accounting Recap <ul><li>The centralized bookkeeping system has to be designed to fit the needs of the business. </li></ul><ul><li>The system needs to be monitored to ensure that it is functioning correctly. </li></ul><ul><li>The information in the system has to be reported regularly with comparable consistency. </li></ul><ul><li>The Accounting process designs, monitors and analyzes the centralized records. </li></ul>
    18. 18. Titles <ul><li>Accountant </li></ul><ul><li>Bookkeeper </li></ul><ul><li>CPA (Certified Public Accountant) </li></ul><ul><li>Tax Preparer </li></ul>
    19. 19. Titles <ul><ul><li>Bookkeeper </li></ul></ul><ul><ul><li>Accountant </li></ul></ul><ul><ul><li>Tax Preparer </li></ul></ul><ul><li>A CPA is licensed to perform the functions of a bookkeeper, accountant and tax preparer. </li></ul><ul><li>Anyone performing accounting functions is an accountant but CPAs are state licensed. </li></ul>Certified Public Accountant
    20. 20. <ul><li>Fundamental Fiscal Understanding </li></ul>
    21. 21. What we will review: <ul><ul><li>Bank Reconciliation </li></ul></ul><ul><ul><li>Cash and Accrual Accounting </li></ul></ul><ul><ul><li>Asset Capitalization and Depreciation </li></ul></ul>
    22. 22. Bank Reconciliation <ul><li>Bank Reconciliation Report maps out the difference between your bank statement and your bookkeeping records. </li></ul><ul><li>Bank Balances do not represent the following: </li></ul><ul><ul><li>Checks not yet presented </li></ul></ul><ul><ul><li>Deposits with holds </li></ul></ul><ul><li>Your Bookkeeping Records may not include </li></ul><ul><ul><li>Interest earned </li></ul></ul><ul><ul><li>Fees assessed by your financial institutions. </li></ul></ul>
    23. 23. Cash vs. Accrual Accounting <ul><li>Affects the recording of transactions of income and expenses </li></ul><ul><li>Cash Accounting recognizes transactions on the day when cash has actually changed hands. </li></ul><ul><li>Accrual accounting recognizes transactions when a commitment is made although no cash is transferred. </li></ul>
    24. 24. Cash Accounting <ul><li>It’s Easy!!!! </li></ul><ul><li>Cash in, Cash Out. </li></ul><ul><li>Drawbacks </li></ul><ul><ul><li>Poor matching of Cash In to Cash Out </li></ul></ul><ul><ul><li>Not acceptable to most users of your records. </li></ul></ul><ul><ul><li>Expenses show patterns that are misleading. </li></ul></ul><ul><ul><li>All the information you have is not in your reports. </li></ul></ul>
    25. 25. Accrual Accounting <ul><li>Captures Income and Expenses based on the accrual method of accounting. </li></ul><ul><li>Essentially, when it becomes reasonable to assume that cash will be transferred in the future, then the transaction is recorded. </li></ul>
    26. 26. Handling Assets <ul><li>When a purchase is made, an expense is usually recorded. </li></ul><ul><li>IF that purchase will be used beyond the end of the reporting year then the expense ought to be shared over the additional years. </li></ul>
    27. 27. Hypothetical Purchase <ul><li>E.g. a tractor purchased for $30k will work well for 10 years. </li></ul><ul><ul><li>Suppose, in the first year expense would be $30K. In the remaining years, expense would be zero. </li></ul></ul><ul><ul><ul><li>Misleading trending in data </li></ul></ul></ul><ul><ul><ul><li>Tremendous impact on annual incomes. </li></ul></ul></ul>
    28. 28. Capitalization is… <ul><li>A system to record a major purchase in a way that spreads the expense involved over the time period that benefit is derived. </li></ul><ul><li>It is a way to tell the profitability story more clearly by showing that the major expense has a long term payback. </li></ul><ul><li>Instead of Capital Expense $30K, we have Capital Asset $30K </li></ul>
    29. 29. Depreciation is.. <ul><li>The process by which the capital asset is then converted to expense over the several years. </li></ul><ul><li>Instead of Capital Expense $30K in the first year we have multiple years of Depreciation Expense. </li></ul><ul><li>So expenses are smoothed over a longer time period which is more in line with any revenue earned by the capital purchase. </li></ul>
    30. 30. But…..!
    31. 31. Expenses Influence Income <ul><li>The greater your expenses, the lower your income and the lower your tax burden by extension. </li></ul><ul><li>So the calculation of Depreciation Expense is very important to the IRS because their “income” is directly impacted. </li></ul>
    32. 32. Depreciation Methods <ul><li>There are various “depreciation methods”, i.e. ways to convert a capital asset in one year to depreciation expense in subsequent years. </li></ul><ul><ul><li>Depreciation methods based on time </li></ul></ul><ul><ul><ul><li>Straight line method </li></ul></ul></ul><ul><ul><ul><li>Declining balance method </li></ul></ul></ul><ul><ul><ul><li>Sum-of-the-years'-digits method </li></ul></ul></ul><ul><ul><li>Depreciation based on use (activity) </li></ul></ul>
    33. 33. What you need to know about Depreciation <ul><li>Depreciation can be calculated in various ways and each method has its pros and cons based on your particular business. </li></ul><ul><li>Each asset type should have its own depreciation method determined by your accountant. </li></ul><ul><li>Your tax preparer should determine how to depreciate to calculate taxable income </li></ul>
    34. 34. <ul><li>Land is a fixed asset that is not depreciated. </li></ul>
    35. 35. Fundamental Financial Reports <ul><li>Core Statements that tell the story </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Statement of Cash Flows </li></ul></ul>
    36. 36. Fundamental Financial Reports <ul><li>Balance Sheet </li></ul><ul><ul><li>A snap-shot. </li></ul></ul><ul><ul><li>A picture of your business’ financial strength at ONE point in time. </li></ul></ul><ul><ul><li>All Assets = All Liabilities + All Equity </li></ul></ul>
    37. 37. Balance Sheet As of DD/MM/YYYY
    38. 38. Assets <ul><li>Short Term and Long term Assets Separately </li></ul><ul><li>Short Term aka “Current Assets” </li></ul><ul><ul><li>Cash </li></ul></ul><ul><ul><li>Receivables </li></ul></ul><ul><li>Long Term aka “Fixed Assets” </li></ul><ul><ul><li>Land </li></ul></ul><ul><ul><li>Buildings </li></ul></ul><ul><ul><li>Accumulated Depreciation </li></ul></ul>
    39. 39. Liabilities <ul><li>Short Term and Long term Liabilities Separately </li></ul><ul><li>Short Term aka “Current Liabilities” </li></ul><ul><ul><li>Accounts Payables </li></ul></ul><ul><ul><li>Line of Credit </li></ul></ul><ul><ul><li>Accrued Payroll Liability and Withholding </li></ul></ul><ul><li>Long Term aka “Long Term Liabilities” </li></ul><ul><ul><li>Mortgage Payable </li></ul></ul><ul><ul><li>Vehicle Loan Payable </li></ul></ul>
    40. 40. Owner’s Equity <ul><li>Common Stock </li></ul><ul><li>Retained Earnings </li></ul><ul><ul><li>Owner Paid In Capital </li></ul></ul><ul><ul><ul><li>Cash Infusion to the business </li></ul></ul></ul><ul><ul><ul><li>Personal Equipment given to the business </li></ul></ul></ul><ul><ul><li>Net Income for the current year </li></ul></ul>
    41. 41. Balance Sheet <ul><li>Shows the strength and potential of your business at a specific point in time </li></ul><ul><li>Must be in balance </li></ul><ul><ul><li>i.e. (Assets = Liabilities + Equity) </li></ul></ul><ul><li>Assets and Liabilities expressed separately based on their life span </li></ul><ul><li>Assets shown at capital cost with depreciation shown separately </li></ul><ul><li>Must have an AS OF Date </li></ul>
    42. 42. Fundamental Financial Reports <ul><li>Income Statement </li></ul><ul><ul><li>Tracking of Revenues and Expenses over a period of time. </li></ul></ul><ul><ul><li>Answers two questions. </li></ul></ul><ul><ul><ul><li>Has Management accessed/developed a profitable customer base? </li></ul></ul></ul><ul><ul><ul><li>Does Management know how to extract that profit? </li></ul></ul></ul>
    43. 43. Income Statement
    44. 44. Income Statement
    45. 45. Operating Costs vs. Overhead Costs <ul><ul><ul><li>Operating costs are directly impacted by growth of the business. </li></ul></ul></ul><ul><ul><ul><li>Overhead costs are less impacted by growth of the business. </li></ul></ul></ul>
    46. 46. Operating Costs <ul><ul><ul><li>Operating costs are directly impacted by Gross Margin. </li></ul></ul></ul><ul><ul><ul><ul><li>If sales go up, these costs go up. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>If sales goes down, these costs go down. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Predominantly Sales Expense. </li></ul></ul></ul></ul>
    47. 47. Overhead Costs <ul><ul><ul><li>Overhead costs are less impacted by growth of the business. </li></ul></ul></ul><ul><ul><ul><ul><li>If sales reach a certain level, these costs often go from zero to some set level. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>If sales goes down, costs stay put. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Often the Bulk of Total Expense. </li></ul></ul></ul></ul>
    48. 48. Income Statement Period (DD/MM/YYYY to DD/MM/YYYY) <ul><ul><li>Revenue </li></ul></ul><ul><ul><li>Cost of Goods/Services Sold </li></ul></ul><ul><li>Gross Margin </li></ul><ul><ul><li>Operating Expenses </li></ul></ul><ul><ul><li>Overhead Expenses </li></ul></ul><ul><li>Income before Taxes </li></ul><ul><ul><li>Tax Expense </li></ul></ul><ul><li>Net Income After Tax (sent to Balance Sheet) </li></ul>
    49. 49. Fundamental Financial Reports <ul><li>Statement of Cash Flows </li></ul><ul><ul><li>Outlines the sources of cash for the business during a specified period. </li></ul></ul><ul><ul><li>Shows the cash usage of the business during a specified period. </li></ul></ul><ul><ul><li>Categories these cash flows. </li></ul></ul>
    50. 50. Statement of Cash Flows Period (DD/MM/YYYY to DD/MM/YYYY) <ul><li>Cash Flow From Operations </li></ul><ul><li>Cash Flow From Investing </li></ul><ul><li>Cash Flow From Financing . </li></ul>
    51. 51. Statement of Cash Flows Period (DD/MM/YYYY to DD/MM/YYYY) <ul><li>Cash Flow From Operations </li></ul><ul><li>Should start with Net Income </li></ul><ul><ul><ul><li>+ and – adjustments like </li></ul></ul></ul><ul><ul><ul><li>Receivable, and Payables, and if no investing activity, Depreciation </li></ul></ul></ul>
    52. 52. Statement of Cash Flows Period (DD/MM/YYYY to DD/MM/YYYY) Cash Flow From Operations Net Income $15,000.00 Increases in Cash <ul><ul><li>Decrease in Accounts Receivable during the period </li></ul></ul><ul><ul><li>Increase in Accounts Payable during the period </li></ul></ul>20,000 3,000 Decreases in Cash <ul><ul><li>Increase in Accounts Receivable during the period </li></ul></ul><ul><ul><li>Decrease in Accounts Payable during the period </li></ul></ul><ul><ul><li>Increase in Inventory </li></ul></ul>0 0 (15,000) Net Cash From Operations $23,000.00 This shows an important phenomenon about customer payments!!
    53. 53. Statement of Cash Flows Period (DD/MM/YYYY to DD/MM/YYYY) Cash Flow From Investing Increases in Cash <ul><ul><li>Proceeds from Sale of Equipment during the period </li></ul></ul><ul><ul><li>Proceeds from Sale of Land during the period </li></ul></ul><ul><ul><li>Proceeds from Sale of Stock/Securities during the period </li></ul></ul><ul><ul><li>Accumulated Depreciation for the perid </li></ul></ul>500 20,000 3,000 2,000 Decreases in Cash <ul><ul><li>Purchase of Equipment during the period </li></ul></ul><ul><ul><li>Purchase of Land during the period </li></ul></ul><ul><ul><li>Purchase of Stock/Securities during the period </li></ul></ul>( 13,500) ( 15,000) ( 17,000) Net Cash From Investing ($ 20,000.00)
    54. 54. Statement of Cash Flows Period (DD/MM/YYYY to DD/MM/YYYY) Cash Flow From Financing Increases in Cash <ul><ul><li>Proceeds from Mortgage arranged during the period </li></ul></ul><ul><ul><li>Proceeds from Line of Credit arranged during the period </li></ul></ul><ul><ul><li>Proceeds from Stock Offerings </li></ul></ul>2,000 60,000 0 Decreases in Cash <ul><ul><li>Interest Payments on Mortgage made during period </li></ul></ul><ul><ul><li>Pay down on Line of Credit </li></ul></ul><ul><ul><li>Dividend Payments </li></ul></ul>( 500) ( 55,000) ( 0) Net Cash From Financing $ 6,500.00
    55. 55. Statement of Cash Flows Period (DD/MM/YYYY to DD/MM/YYYY) Net Cash From Operations $ 23,000.00 Net Cash From Investing ($ 20,000.00) Net Cash From Financing $ 6,500.00 Change in cash and equivalents during period $ 9,500.00 Cash and Equivalents, beginning of period $ 20,137.00 Cash and Equivalents, end of period $ 29,637.00
    56. 56. Fundamental Financial Reports <ul><li>Core Statements that tell the story </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><ul><ul><li>What Resources does your business have and how much of that is free from prior commitments? </li></ul></ul></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><ul><ul><li>Does this business have a profitable customer base and does management extract that profit? </li></ul></ul></ul></ul><ul><ul><li>Statement of Cash Flows </li></ul></ul><ul><ul><ul><ul><li>Where are the sources of cash for this business? How vulnerable is it to fluctuations in cash? Can cash needs be met internally? </li></ul></ul></ul></ul>
    57. 57. <ul><li>These reports convey useful and reliable information only if they are based on </li></ul><ul><li>accurate bookkeeping </li></ul><ul><li>and </li></ul><ul><li>careful accounting . </li></ul>
    58. 58. <ul><li>This creates a tension for </li></ul><ul><li>owner- operated businesses. </li></ul><ul><ul><li>Owners hold management accountable for good financial record keeping. </li></ul></ul><ul><ul><li>When the owner is the manager, this discipline can be overlooked. </li></ul></ul>
    59. 59. <ul><li>Barriers to Recordkeeping </li></ul><ul><ul><li>Time Burden on management creates supply shortage of fiscal reports. </li></ul></ul><ul><ul><li>Owners not using the report results in reduced demand. </li></ul></ul>
    60. 60. <ul><li>Barriers to Recordkeeping </li></ul><ul><ul><li>Time Burden on management creates supply shortage. </li></ul></ul><ul><ul><ul><ul><li>Accounting Software and Contract Workers </li></ul></ul></ul></ul><ul><ul><li>Owners not using the reports so there is reduced demand. </li></ul></ul><ul><ul><ul><ul><li>Regular review of financials as a part of strategy setting. </li></ul></ul></ul></ul>
    61. 61. Choosing Accounting Software <ul><li>Software should: </li></ul><ul><ul><li>Match the needs of your business </li></ul></ul><ul><ul><ul><li>For contractors, your software should be able to track costs to specific jobs; handle subcontractor billing and invoicing etc. </li></ul></ul></ul><ul><ul><ul><li>Create estimates and convert to invoices. </li></ul></ul></ul><ul><ul><li>Offer Expandability </li></ul></ul><ul><ul><ul><li>If you don’t accept credit cards right now but want to in the future, your software should have that capability. </li></ul></ul></ul><ul><ul><ul><li>Ideally, that function should be purchased only when needed. </li></ul></ul></ul><ul><ul><li>Create reports easily </li></ul></ul><ul><ul><ul><li>Once properly designed by your accountant, your software should offer ease of accept to timely reports. </li></ul></ul></ul><ul><ul><ul><li>Capable of minor report modifications without needing your accountant. </li></ul></ul></ul>
    62. 62. Choosing Accounting Software <ul><li>Some Options: </li></ul><ul><li>QuickBooks, </li></ul><ul><li>Peachtree, </li></ul><ul><li>Accpac, </li></ul><ul><li>and many more. </li></ul>An accountant setting up the system for you, can help with selection. But the choice is YOURS.
    63. 63. Recap and Review <ul><li>Key financial reports tell the story of your business’ present profitability and its potential in the future to your owners and other interested parties. </li></ul><ul><li>These reports are based on having all financial transactions captured in a central location (bookkeeping) that has been properly designed and monitored (accounting). </li></ul>
    64. 64. Recap and Review <ul><li>Financial professionals such as bookkeepers, accountants and tax preparers are resources to help management satisfy the owner’s need for complete and accurate recordkeeping. </li></ul><ul><li>Accounting software is also an excellent resource to simplify functions and create reports. </li></ul><ul><li>Choosing the right accounting software decision requires matching the needs of the business with the capability of the software program. </li></ul>
    65. 65. Your Instructor: <ul><li>Cecile E. Reid, CPA, MBA is President of Flat Rock Financial Services, LLC a professional accounting firm providing Fortune 100 fiscal thinking to organizations of all sizes, by serving as their financial services partner. </li></ul><ul><li>Ms. Reid earned her MBA from The Wharton School at the University of Pennsylvania. She also has Bachelor of Science in Accounting and Actuarial Science. Cecile is a licensed CPA and has served on the Board of Directors of a conglomerate with ~$1Billion in assets for over 5 years. </li></ul><ul><li>(215) 991-6261 [email_address] </li></ul>
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