4. Underlying Themes
• The Importance of a Basic Understanding
of Accounting
• Having Accurate Accounting Information is
Critical
• Being Able to use Your Accounting
Information to Make Business Decisions
5. What is Financial Accounting
• Production of Financial Statements
– Income Statement
– Balance Sheet
• Bookkeeping
• Used for Tax Returns
• Designed for External Audience
– Bankers
– Tax Collectors
– Creditors and Investors
• Backword Looking
6. What Is Management Accounting
•
•
•
•
•
•
•
Analysis of Costs - Breakeven
Projection of Cash Flows
Budgets
Ratio Analysis
Designed for Internal Audience
Forward Looking
The Information comes from your
Accounting System and Reports
8. Financial Statements-Compass
For Your Business
• Think of Your Business as a Small Plane
• Think of Your Accounting System as an
Instrument Panel
• Two Potential Problems
– Your Accounting Info is Wrong
– You Don’t Use Your Accounting Info
9. Categories of Financial
Statements
•Income Statement
– Where You Have Been
•Balance Sheet
– Where You Are Now
•Cash Flow Projection & Budgets
– Where You Are Going
• Statement of Cash Flows
• Do You Have a Viable Company
13. Statement of Cash Flows
Increase
Increase
Increase
Decrease
Decrease
14. Analysis of Costs - Breakeven
• Sales Price Per Unit or Service
– How much Gross Income per product or
service.
• Variable Cost Per Unit or Service
– What are the Directs Costs associated
with the product or service
• Fixed Costs (Overhead)
– Costs that need to be paid whether you
make a Sale or not, e.g. Rent, Insurance
15. Breakeven - Example
•
•
•
•
•
•
Sales Price Per Unit
$10
Variable Cost Per Unit
7
Contribution Margin Per Unit
$3
Fixed Costs
$15,000
Units Sold
5,000
Contribution Margin Ratio
– $3/$10 = 30%
• Sales to Breakeven = Fixed Cost/CM Ratio
• $15,000/30% = $50,000
• $50,000 - $35,000-$15,000 = $0
18. What is Ratio Analysis
• Comparing different line items of the
Balance Sheet and Income Statement to
each other.
• For example, Current Ratio = Current
Assets/Current Liablilities
19. Ratio Analysis – Why Care
• Banks use Ratio Analysis in deciding to
extend Credit
• Ratio Analysis can serve as an Early
Warning System for your company
• It is useful to compare your Ratios to
Industry Standards
20. Ratio Analysis - Categories
•
•
•
•
Profitability – e.g. Return on Equity
Activity – e.g. A/R Turnover
Leverage – e.g. Debt to Equity
Liquidity – e.g. Current Ratio
30. Windish RV - Colorado
•40 Year Old Billing Clerk
•Embezzled $951k
•Fraud Lasted Three Years
•Created a Shell Company
– Wrote duplicate checks
– Deposited into Shell Business Account
•Plead guilty to felony theft
•Sentenced to 5 years
32. Payless Hardware-California
• 36 Year Accounts Receivable Clerk
– Worked from 2002 to 2009
– Embezzled $1.43 Million
• Skimmed Receivables
– Handled bank deposits
– Laundered money
• Convicted on 58 Felony Counts
– 1 count of grand theft
– 3 counts of filing fraudulent tax returns
– Sentenced to 10 years
– Husband sentenced to 1 year for money
laundering
33. Solutions to Improve Cash Flow
• Have a Basic Understanding of Accounting
and Taxes
– If you want to play the game, you need
to know how to keep score
• Have Accurate and Up to Date Accounting
Information
– Use Cloud Accounting
– Don’t Manage Your Business out of Your
Checking Account
34. Solutions To Improve Cash Flow
•
•
•
•
•
•
•
Get Deposits Upfront
Be Careful in Incurring Fixed Costs
Don’t Pay Early Unless You Get a Discount
Credit Reports on Customers
Background Checks on Employees
Reconcile Your Bank Account
Don’t Spend Trust Funds – Payroll and
Sales Taxes
• Use Budgets
• Purchase Commercial Theft Insurance
35. Budgets
• Why Budget?
– Forces you to think strategically about
your business and goals
– Can help you anticipate problems
– Can help detect Fraud
– Sets Expectations for Employees
39. If I Am Making So Much Money, How
Come I Don’t Have Any Cash?
•
•
•
•
•
•
•
Looking at Accrual Financial Statements
Collection Problem with A/R
Not All Cash Expenditures are Expenses
Embezzlement of Cash
Not Making Cash Flow Projections
A Large Proportion of Expenses are Fixed
Your Profit Margins are Shrinking