The following course covers the basics of financial management for your small business clients, and normally takes less than an hour to complete. We’ve included “talking points” but not a detailed script (we wanted to give instructors flexibility to present in the way that comes naturally and blend in their own perspectives and experience) Please feel free to expand, abbreviate or customize this course as you see fit. Course Introduction: A common goal among almost all small business owners is to maintain ownership and control of their business – the good news is research shows that people who take classes and continue to learn, are more likely to succeed, so you’re on the right path! Let’s get started.
Today we’ll cover: --What is Financial Management… and why do you need it? --What are accounts…and why do you need them as well? --Reports to understand how your business is doing – and make decisions for the future --A quick practice session, to put all you’ve learned into practice --Some tips and resources for getting started: Classes, online resources, and advisors who can help YOU manage YOUR business And then we have an appendix with additional concepts and terms, which we’ll get to as time permits.
What is Financial Management? Financial management is simply process of: Running your business (tasks you are already doing today) Accurately recording money coming in and out of business (you are probably already keeping track of this as well – so we’ll discuss how, as well as the possible benefits of a more systematic approach). Using reports to understand how your business is doing and make decisions
Why take the time to learn and use financial management methods? Accounting is the language of business, so you and other parties (banks, IRS, etc.) should all speak the same language. Stay on top of your cash flow: Track money in and out of your business. Even a profitable business can go bankrupt if it doesn’t track cash flow. Manage your customers and sales: Track what they are buying, keep records up-to-date so you can contact them Production & Inventory: Know how to obtain goods and services from your vendors and establish credit Once your records are centralized, you can create reports for a variety of important activities: Filing with the IRS Understanding how your business is doing (this will help on pricing products and services) Sharing your financial picture with third parties (banks, SBA, etc.) to secure loans And then of course, tracking the money going in and out of your newly larger business. All companies, even huge established one’s with billions in revenue and tens of thousands of employees rely on financial management for these six areas. Whatever your business, sound financial practices are a toolset that can help you get the greatest return from your efforts.
Participation Question: What are the key questions you have about your business to help you know where your business stands? (Note: create list of things clients would like to know about their business.) There are certain questions all business owners would like answered. Businesses that practice sound financial management and record-keeping will have the answers to these questions (and more) at their fingertips.
Participation Questions: How do you currently keep track of your business? Sales and invoices? Customer and vendor lists? Bills and checks? What are some of the challenges you face with record-keeping today?
Cash is King A healthy cash flow is critical to the viability of your business. The first step towards a positive cash flow is understanding your inflows and outflows: money in and money out. What does your business offer for sale? And then once your receive payment, what do you do with the money? Expenses. What type of products and services do you buy to keep your business running? Your money in from “sales” and money out from “expenses” create your cash flow. These are two main account categories.
There are five major account categories total. In addition to sales/income and expenses, the other major account types are assets, liabilities, and equity. Assets (what you have) = Liabilities (what you borrow/owe) + Equity (what you own) Assets Current (cash, inventory, accounts receivable, etc.) Fixed (property, vehicles, machinery, etc.) Liabilities Current (within one year) Long Term Equity Contributed Capital: What investors, stockholders, family members, partners, owners, etc. invest in the business Retained Earnings: The total cumulative net profit a business earns over its life, and not yet distributed Participation Question: Any questions? Now is a good time to ask! There are no bad questions. We’re all here to learn.
The master account list, or Chart of Accounts, contains all the different categories used to organize your transactions. Think of each subcategory as a file folder, divided by type (e.g., your expense accounts might include subfolders for advertising, car expenses, payroll, and office expenses). Quick Tip: Try to keep your Chart of Accounts as simple as possible w/o too many subcategories. Financial software programs like QuickBooks Simple Start can help you get started with a basic Chart of Accounts.
Here’s a sample chart of accounts. Your accounts might differ slightly, but the accounts shown here cover the basic categories a business needs to properly record it’s transactions. Of the accounts listed above: Income comes from sales. Asset categories are: Accounts Receivable; Sales; Savings; Checking, Undeposited fund; etc. Expenses are extensive: advertising, car and truck expenses, commissions and fees, contract labor, etc. Assets are your bank accounts, cash on hand. Liability categories are mortgage, loans, payroll etc. and other current liabilities (sales tax payable). Equity categories are: Owner’s Capital, and Opening Balance Equity. Quick Tips: Avoid common mistakes: 1. Creating too many accounts 2. Setting up all accounts, including expense accounts, as bank accounts It is important to properly classify all transactions as the are entered – don’t classify anything as miscellaneous. It will take you much less time to classify accounts properly as they are entered than having to go back and reclassify later. To help you with your chart of account categories, you may want to have an expert consultation (FREE!) with an SBDC counselor or QuickBooks ProAdvisor (more details at end of presentation) We’ll come back to accounts later when we try a practice problem.
So the five major account types are: sales, expenses, assets, liabilities and equity. These accounts, broken down into sub accounts, are used to classify your transactions. The master account list – a chart of accounts –includes all the different categories used to organize and “file” your transactions. There is a record-keeping category or account that relates to each of the questions we discussed earlier (slide #5). If you keep track of information using those accounts, you’ll be able to answer all the questions, without any extra work. How can you measure your profits are? (“Sales minus Expenses”) What category tells you what you’re business is worth? (“Equity”) Etc.
If your business is a car – reports or financial statements are your dashboard. They allow you, as the business owner, the driver of the vehicle, to see how the systems are operating. Are you low on funds? Not earning a sufficient profit margin on your new product line? Reports will organize the information you’ve “filed” away to help you see where your business stands and keep your business running smoothly.
Reports help you answer questions, such as which products are selling, who is buying, and who owes you money. Reports can also show you how your sales compare to a previous period. Three important sales reports are: Sales by Item, Sales by Customer, and A/R aging (Invoices that Haven’t been paid). Quick Tip: An “unpaid invoices” report, for example, can make collections easier and make sure no jobs or payments slip through the cracks.
Participation Question: Do you currently produce a “Profit and Loss” report or “Income Statement” at your business? Why or why not? The income statement reports how your business performed over a certain period of time. Income statement is also know as “Profit & Loss,” or “P&L” The income statement shows whether or not your business was profitable over a certain period of time (normally either a full year or a period of three months).
A balance sheet is a snapshot of your business at a given moment in time. It shows all assets, liabilities and equity. “ Current” assets and liabilities include those that have been incurred within a year. Participation Question: Do you currently produce a “balance sheet” report for your company? Why or why not?
As a business owner, you need to understand the essential processes of tracking your money coming in and your money going out. Remember, your reports are only as good as your records! We’ll now walk through 6 common accounting tasks, so you can get a feel for the how to categorize a transaction, as well as understanding of how the transactions impact the reports. “ Hands-on” Option If students have computers they can try these tasks hands-on.
Participation Question: Before we begin the practice sessions, do you have any questions? If you’re unsure about any of the points we’ve discussed so far, let me know. We can talk it through, so you will feel more confident. [Begin Session] A sale is “money in.” When a customer pays in cash, what do you do? (Issue a sales receipt.) Participation Question: And what are the most important pieces of information you need to track about a sale? (Think about the sales receipts you get when you buy something in the store). “ Hands-on” Option: Go to “File/Open Company” and load the file “Training_Sample_File.qbw” (included with the training resources available for download) Click on “Sales Receipts” and Create a “New” receipt.
Quick Tip: Note that you record this “on-the-spot” transaction as a sales receipt, not an invoice. A common mistake is to record this type of transaction (on the spot sale) incorrectly. “ Hands-on” Option: Enter the following information on the sales receipt. Select “Cristina Andres” as the customer. Under “item”, select “Add New” and type in “Business Cards.” Make the price “$200” (notice that the account is “sales”) Enter “1” as the quantity Enter “Cash” as the payment method. “ Keep 12/15/2007 as the date.” “ Save and Close”
Participation Question: How would this sale affect your Profit and Loss report? “ Hands-on” Option: From the Home-Page, click on “Profit and Loss” Report in the middle of the screen. Click on the “Sales” to drill down deeper to see all the company’s sales in that time period. (You can see the recent sale to Cristina Andres at the bottom of the list.)
An invoice is a bill for payment later (compare to a sales receipt). “ Hands-on” Option: Click on “Invoices” and Create a “New” invoice.
“ Hands-on” Option: Enter the following information on the sales receipt. Select “Senna Computers” as the customer. 2. Enter “Graphic Design” is the item purchased. 3. Enter “2” as the quantity. 4. The terms are “Net 60” 5. The date is “12/15/2007” 6.“Save and Close”
Participation Question: How would this sale affect your Profit and Loss report? What about your balance sheet? Notice that the A/R line on your Balance Sheet increases.
Senna Computers pays you for the graphic design services. So you “receive” the payment against the outstanding invoice. “ Hands-on” Option: Click on “Receive Payments” to Receive a “New” payment.
“ Hands-on” Option: Enter the following information on the sales receipt. Select “Senna Computers” as the customer. 2. Enter “Check” as the Payment Method. 3. Enter “$90” as the Payment Amount. (You’ll notice that the invoicing you created for Senna computers shows up on screen—this is the invoice you will credit) 4.“Save and Close”
Participation Question: How would this payment affect your Profit and Loss report? (no change) What about your balance sheet? Notice that the A/R line on your Balance Sheet decreases. Quick Tip: When you receive payments, don’t make the mistake of just “depositing” the money. It’s important to receive the payment against the outstanding invoice so you have an accurate view of how much customers owe you and who still owes you money.
Now you are ready to go to the bank and deposit the money you have received. “ Hands-on” Option: Click on “Deposits” to make a “New” deposit.
Undeposited funds include payments from customers that are not yet in your bank account. “ Hands-on” Option: You deposit several checks on this trip to the bank. You’ll notice the recent payment from “Senna Computers” is at the bottom of the list. Select “Check and Cash” as the payment types “ Select All” to select all checks and cash to deposit by (click the button in the lower left portion of the screen.) 3.“Save and Close”
Participation Question: How would this payment affect your Profit and Loss report? (no change) What about your balance sheet? Quick Tip: Your “profit and loss” in this case is not affected– you already recorded the sales when you issued your sales receipt and invoice.
Let’s say you are going to pay a telephone bill by check. “ Hands-on” Option: Click on “Write Check” to create a “New” check.
“ Hands-on” Option: Enter the following information on the check form: Select “Cal Telephone” as the Payee. 2. Your regular payment comes up as “$45” 3. Select “Utilities” as the Expense Category (or account) to file this transaction under. 4. “Save and Close.”
Participation Question: How would this payment affect your Profit and Loss report? (expense) What about your balance sheet? Quick Tip: Individual transaction may not make that large a difference on financial statements, but all together these reports are powerful in helping you see where you business stands.
Let’s say you are going to buy office supplies with a credit card. “ Hands-on” Option: Click on “Record Expense” to create a “Credit” transaction.
“ Hands-on” Option: Enter the following information on the check form: Select “Burge Hardware and Supplies” as the Payee. 2. Select “Supplies” as the expense account or category. 4. Enter “$95” as the amount. 5. “Record” the transaction
Balance Sheet: Increases your “Credit Card” liability and decrease “Equity.” When you eventually pay the credit card bill, you’ll decrease Liabilities and Assets (checking). By using credit cards, you are actually spending the money as soon as you make the charge. Your credit card company is just paying the bill for you and allowing your business to pay back later. Quick Tip: Many business choose to enter their credit card transactions several at a time, when they receive their monthly statement.
Now it’s time to get started using what you’ve learned and also find out about where you can get help if you need it.
Good accounting habits: 1. Record transactions regularly: Buying/Expenses: bills, checks, credit, paying employees, contractors Selling: estimates, invoices, sales receipts, collections Purchasing: Managing and adjusting inventory Credit card transactions (don’t forget these) 2. Accuracy and consistency are essential Don’t classify many items as “miscellaneous” 3. Fix mistakes as they happen Everyone makes mistakes, and they can be fixed. 4. Manage and reconcile bank account regularly Always make sure your bank account records are up-to-date
Help is available! You don’t need to go this alone. Class and coaching are a recipe for success. A Kauffmann Foundation study shows that business owners who take classes—particularly 3 or more classes—are significantly more likely to succeed. Don’t be afraid to seek professional help. A Small Business Development Center advisor or an accounting professional can help you review your Chart of Accounts. SBDCs offer free counseling and low-cost training Many QuickBooks Pro-Advisors offer 1 hour of free consultation to get business started on the right track
The SBA site offers news, online finance and management resources as well as links to local SBA offices. The IRS site is a good resource for what you’ll need to know for all taxation issues. Includes forms and other resources. The U.S. Chamber of Commerce site can help you locate a local Chamber of Commerce. And the Intuit QuickBooks site lets you evaluate if QuickBooks is the right tool for your financial management needs.
We’ve taught you the basics to get started with good record-keeping. There is always more to learn. Here are a few terms and concepts you may run across as your grow your business.
A study by Kauffmann Foundation suggests that the number of new businesses may even be as high as 2.5 million. This larger audience may not be incorporated or registered. Each type of business structure has advantages/disadvantages. Your tax accountant or other business advisor may be able to recommend which structure is best for your business.
You need to understand the difference between these two methods of accounting so you’ll know what to declare for tax purposes. You may need to consult a business advisor or accountant to determine the correct method of reporting for your business. The IRS requires businesses with inventory (e.g. retailers) to use the accrual method of accounting.
Do you have feedback, success stories or suggestions for improving this course? Email us at email@example.com.
A Simple Start to Managing Your Business Finances A Guide to the Essentials QB_10/2004_01
Six Ways Financial Management Helps Your Business Succeed 4. Compliance. Report your company’s incomes, expenses, and payroll accurately to the IRS. 5. Insight and Decision Making . Make informed decisions – and price your product or service for profitability – with financial reports 6. Funding. To be considered for a loan or investment, you’ll need complete financial statements. 1. Cash Flow. Track the money going in and out of your business. 2. Manage Customers and Sales. Know and understand your customers through consolidated records. 3. Production. Obtain goods and services. Apply for and establish credit with your vendors. YOUR BUSINESS
Information is Power What do you want to know about your business ?
Current (cash, inventory, accounts receivable, etc.)
Fixed (property, vehicles, machinery, etc.)
Current (within one year)
Contributed capital: owner’s investment
Retained earnings (profits)
Assets = Liabilities + Equity Everything your business possesses Everything your business has borrowed Everything your business owns
Categorize Your Transactions With a Chart of Accounts
Chart of Accounts
Master account lists – a chart of accounts – are used to sort your transactions into categories
Each account category contains sub-accounts
Chart of Accounts: Your Master List of Accounts and Sub-Accounts NAME TYPE NAME TYPE INCOME ASSET Sales Income Checking Bank Other income Other income Accounts Receivable Accounts Receivable EXPENSE Undeposited funds Other Current Asset Advertising Expense Equipment Asset Car and Truck Expenses Expense LIABILITY Contract labor / payroll Expense Loans Liability Cost of goods sold Expense Sales Tax Payable Other Current Liability Entertainment / meals Expense EQUITY Office expenses Expense Contributed Capital Equity Repairs and maintenance Expense (Owner’s invested funds) Supplies Expense Retained Earnings Equity Taxes and licenses Expense (Business’ profits) Utilities Expense Other expenses Other expenses
Small Business Development Center (SBDC) counselors
Take classes (either online or at local colleges)
Attend local business seminars
Build a network with other business owners
Use QuickBooks learning solutions
Expert help can make the process of setting-up and maintaining your books much easier. Be sure to look for a professional with knowledge of your industry – and of course, don’t be afraid to ask for references.
Accountants use “debits and credits” to describe how transactions are recorded in the general ledger
Each transaction increases one account and decreases another
System balances itself
You don’t need to be too concerned with the mechanics of double entry accounting, debits and credits, as software programs handle automatically. But as a business owner, you might run into these terms.
Mark’s Atomic Graphic Design: Journal Journal entries capture all cash in and all cash out activity.
Mark’s Atomic Graphic Design: General Ledger General ledger (GL) shows all activity by account type.