Financial Answers

With all of the downsizing and unemployment out there today, a lot a people have given up on corporate America.  They would like to start their own business but don’t quite know how to get started.  One of the first things that a person should do is talk to a knowledgeable accountant.  This basic move will get you pointed in the right direction right from the start.  Too many people start their business and then they seek professional help when they start heading for problems.  If you don’t want to be one of “those” people than read the informative article written by our guest author of In Simple Language, Mr. Mario Lomazzi, CPA.

Organizing and Running a Small Business: The Basics

by Mario Lomazzi, CPA.                                       

www.mariolomazzi.com

Keeping good records will make your business more profitable by helping you recognize problems early, maintain your cash flow at acceptable levels, and figure out how to manage your prices and costs. This article is focus on the basics of business accounting. 

1- Difference between accounting and bookkeeping

 In order to run a successful business, you have to keep supporting documents in a safe place and have a good accounting system. In addition, you need to understand the information so that you can maintain financial control of your business.

There are simple accounting solutions available to you. For example, there are inexpensive software accounting programs. However, it is recommended that you do not install the software by yourself, instead have a knowledgeable professional do it. Thus, you get the appropriate reports and charts customized for your accounts.

Yet, there is a difference between “accounting” and “bookkeeping.” Accounting provides quantitative information about the finances of a business entity. Accounting includes recording, measuring, interpreting, and communicating financial data. Bookkeeping is part of the accounting system; it refers only to the recording and maintenance of your financial records. If you are too busy, or just do not want bookkeeping, you would hire a bookkeeper to handle your numbers. Then, go over your financial reports on a regular basis with your accountant. CPA’s can help you to navigate today’s unstable business environment.

Some of the accounting reports that you need to understand are Income Statement, Balance Sheet, and Cash Flow Statement. In addition, a Financial Forecasting would be necessary.

2- Key financial reports for your success

 2.1 Income Statement

The Income Statement, which covers a period, includes revenues, expenses, and net income. If you need more details, you can sort revenues and expenses into subcategories.

The Income Statement shows key components: gross sales; returns and allowances; cost of good sold; selling and administrative expenses, income taxes; and net income.

You can use the Income Statement to evaluate the company, for projections, and for tax purposes. These analyses work best when you compare different periods, such as 2010 versus 2009.

 2.2 Balance Sheet

The Balance Sheet shows the business’s financial situation as of a specific date (typically at the end of the year). It gives you an idea about what the business owns (its assets) and what the business owes (its liabilities). The difference between assets and liabilities represents the business’s equity.

You can use the balance sheet to determine the company’s ability to pay its debts or the amount of cash available in the short term.

 2.3 Cash Flow Statement

The money that comes in and goes out of your business is your cash flow. Cash Flow Statement shows you what happens to your cash over a specific period. Higher levels of cash flow indicate improved cash earnings and liquidity. You can have good profits but still not have money in the bank to pay your bills!

As families are paying down credit-card debt and building up cash reserves, businesses – large and small – are learning to maneuver in an environment where cash once again is king. Small businesses have a critical need to know how much cash they have now and are going to need in the immediate future.

A reliable accounting system can predict and prevent many financial problems. That is why the cash flow statement, along with other monthly statements, should be the subject of a periodic review by you and your CPA.

2.4 Financial forecasting

Financial forecasting is a stuff of making educated guesses as to how much money you will take in and how much you will spend. Then, using these estimates you can predict, for example, how and when your business will be profitable. In addition, shifting these assumptions you can create “what if” scenarios that can help you taking better decisions.

Some of the financial projections you may want to make are the break-even analysis, the profit and loss forecast, and cash flow projection.

The break-even analysis tells you how much revenue you will need each week or month to break even. The profit and loss forecast is a worksheet that details your expected revenues and expenses on a month-by-month basis. Last, the cash flow projection attempts to predict your cash flow needs.

Financial forecasting helps you communicate, organize, and monitor your business. In addition, long-range financial forecasting can help you set up your business strategy.

3- All-purpose rule: separate business and personal

You have to keep careful records of your personal expenses and your business-related expenses. Many businesspeople pay their business expenses with a personal check or credit card or deposit business income into their household checking account. It creates unnecessary troubles. Keep your business account separate from your personal account, all the time!

In addition, if you are involved with more than one business, you should keep a complete and separate set of records for each business.

4- Summary

Whether you are starting your business for the first time or rethinking it for the twentieth, managing the basic of business accounting allow you to ensure your compliance with laws and to make valuable management decisions. 

Running a business can be a scary process, but these financial reports provide a starting point for organizing and controlling your company’s performance.

Please contact Mario Lomazzi, Certified Public Accountant, who authored this article, at (812)-285-1768 or email Mario at mariolomazzi@sbcglobal.net to discuss your business accounting and tax issues.  Mr. Lomazzi is licensed in both Kentucky and Indiana and is bilingual in both English and Spanish.  He is currently located at 304 Dalton Ct. in Jeffersonville, Indiana.  Call him today.