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Real-World Finance 101 for Small Business. A few basics and a few things you probably didn’t know. Agenda. Performance analysis Accounting vs. Finance Accounting cycle Roles Software Chart of accounts Accrual accounting Management cycle Financial management.

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real world finance 101 for small business

Real-World Finance 101for Small Business

A few basics and a few things you probably didn’t know

agenda
Agenda
  • Performance analysis
  • Accounting vs. Finance
  • Accounting cycle
  • Roles
  • Software
  • Chart of accounts
  • Accrual accounting
  • Management cycle
  • Financial management
what are your numbers telling you about your biz
What are your numbers telling you about your biz?
  • Too fast when margins are shrinking
  • Too slow when not keeping pace with markets
  • Fat when there is no leverage
  • Vulnerable when revenues are erratic
trends to watch
Trends to Watch

Unhealthy

Healthy

Revenue

Revenue

$

$

Expense

Expense

Time 

Time 

Revenue

Revenue

$

$

Expense

Expense

Time 

Time 

Revenue

$

Expense

Time 

trends to watch1
Trends to Watch

Unhealthy

Healthy

Industry Benchmark

Revenue

$

$

Revenue

Industry Benchmark

Time 

Time 

trends to watch2
Trends to Watch

Unhealthy

Healthy

Revenue

Revenue

$

$

Cash

Cash

Time 

Time 

Revenue

Revenue

$

$

Cash

Cash

Time 

Time 

trends to watch3
Trends to Watch

Unhealthy

Healthy

Revenue

Revenue

COGS

COGS

$

$

$

Overheads

Overheads

Time 

Time 

Revenue

$

COGS

Overheads

Time 

trends to watch4
Trends to Watch

Unhealthy

Healthy

Revenue

Revenue

$

$

Time 

Time 

benchmarks
Benchmarks

What we see financially is that…

  • Business owners don’t know when they are off track
  • Opportunities go unnoticed
  • Markets fluctuate – its hard to ride a wave when you aren’t looking
accounting vs finance
Accounting vs. Finance

Accounting

Finance

Looks forward

Plan driven

Models / scenarios

Internal plus external data

Management cycles

  • Looks back
  • Tax driven
  • Transactions
  • Internal data
  • Cycles – mo/qtr/yr

Finance is about combining accounting information with business intelligence

accounting cycle
Accounting Cycle
  • Daily posting
  • Monthly closing
    • Reconciliations (balance against bank statements)
    • Adjustments (accruals and
    • Reporting
  • Annual closing
role of bookkeeper
Role of Bookkeeper
  • Posting
  • Reconciliation
  • Billing
  • Basic financial reporting

Principle of “Separation of Duties”

One person should not manage the books and handle receipts and deposits

accounting software
Accounting Software

Selection Checklist:

  • Is it easy to use & get help?
  • Does it interface with my operations management system?
  • Association or peer network preferences
  • Cost of systems & ops
  • Is there a hosted version?

Regional leaders:

US and Canada:

QuickBooks Pro

Microsoft Dynamics

Europe

Sage Peachtree

MAS

India

Tally

Australia and Pacific Rim

MYOB

Zero

chart of accounts lobs
Chart of Accounts & LOBs

Chart of Accounts: The naming convention for grouping accounting activity.

Lines of Business (LOB): are the tributaries to group the sources of revenue and expenses.

Example:

  • Products
  • Services
  • Special projects

Achieve a balance between:

    • Minimal detail for easier management
    • Granular enough for visibility on financial performance by LOB.

Where is your revenue coming from?

Where is your profit coming from?

chart of accounts
Chart of Accounts

Two categories of accounts:

  • Balance Sheet accountsRunning totals; account balances as of the end of a reporting period.
  • Income Statement accountsPeriod activity totals; total amount of activity during a reporting period.
chart of accounts1
Chart of Accounts

Balance Sheet

Assets

Current assets

Cash/checking

Accounts receivable

Inventory

Long-term assets

Furniture/equipment

Organization costs

Liabilities

Short-term liabilities

Credit cards

Accounts payable

Long-term liabilities

Long-term loans

Equity

Capital stock

Retained earnings

Assets = Liabilities + Equity

chart of accounts2
Chart of Accounts

Income Statement(a.k.a., P&L; profit & loss)

Sales

Cost of goods sold (COGS) Product costs

Service costs

Gross Profit (Gross Margin% = gross profit/sales)

Expenses (a.k.a., SG&A, sales, general and admin)

Salaries

Benefits

Incentives / bonuses

Rent

Legal

Operating Income

Other Income

Net Income Profit% = net income/sales

principle of revenue and expense recognition gaap
Principle of Revenue and Expense Recognition (GAAP)
  • Revenue received before it is earned should be booked as a prepaid asset and not recognized as income until it has been earned.
  • Expenses owed but not paid should be recorded as expenses in the period incurred regardless of when they are paid
accrual accounting
Accrual Accounting
    • Accrual-Basis Accounting: revenues and expenses that have been received and paid in cash plus revenues and expenses that have been earned and incurred
      • Accounts payable or receivable, depreciation
  • Cash-Basis Accounting: revenues and expenses that have been received and paid in cash
    • Cash payments and receipts
accrual accounting1
Accrual Accounting

Your choices:

  • Accrual Basis
  • Cash Basis
  • Combination

Most small businesses choose “combination”

  • Pay taxes based on “Cash Basis”
  • Management reporting based on “Accrued Revenue” and “Cash-based Expenses”
  • Financial analysis based on Full Accruals
adjustments
Adjustments
  • Depreciation and amortization
    • Recognizing expense in the period where you use it. Can impact analysis if not reflected.
  • Accrued earnings
    • e.g. Multi-month projects
  • Accrued expenses
    • e.g. prepaid software license, contractor payments
maybe you didn t know

Balance Sheet doesn’t reveal the market value of a business

If you were looking to buy or sell a business, assets and liabilities don’t tell the story. Value is driven by trends, future potential, market comparables, ability to generate “free cash”.

Income Statement (P&L) does not reveal where your business is headed

Trend analysis tells the bigger story

Performance analysis tells the detailed story

Maybe you didn’t know…
financial management
Financial Management
  • Business planning
  • Goal setting
  • Budgeting
  • Progress analysis
  • Communications to management team
    • Goals
    • Actual performance
    • Collaboration on needed improvements
  • Monthly, quarterly and annual cycles
financial management resources
Financial Management Resources
  • Professional association standards or recommendations
  • Integrated systems (financial and operations)
  • Financial dashboard (“business intelligence”)
  • Business advisor / consultant
  • Board of directors or advisory board
performance analysis
Performance Analysis

Ratios

Trends

Goals

Benchmarks

performance analysis1
Performance Analysis

Combined Business Analysis: growth, profitability

Line of Business (LOB) Analysis: growth, profitability

Services

Growth

GM

Profitability

Product Sales

Growth

GM

Profitability

Other

Growth

GM

Profitability

kpis key performance indicators
KPIs (key performance indicators)
  • Ties operating data to financial data
  • Example– product sales and service
    • Revenue or Expense per employee
    • Quick Ratio (Current Assets/ Liabilities)
    • Support calls per sale
    • etc.
the process
The Process
  • Need to do it every month
  • Don’t let it take too much time (30 min monthly management)
  • Use analyzed data to find “the big 3 priorities”
  • Share with your team – get everyone on the same page
how do you know when you ve got it
How do you know when you’ve “got it?”

Checklist for success:

  • Taxes submitted on time (not too much, not too little)
  • Goals are set & tracked
  • Routine monitoring
  • BI shared with team
  • Course-corrections
  • Tools to monitor
long term goals
Long Term Goals
  • Sustainability
  • Long-term growth
  • Market position
  • Owner’s return on investment (ROI)
  • Equity value
  • Liquidity event (sell, acquire, investment)
  • A good night’s sleep
free financial health check
Free Financial Health Check

Your Company, Inc.

https://healthcheck.corelytics.com/pub/sign_up.aspx