Archive for the ‘Accounting Factors’ Category
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Standard accounts reporting formats exist, but be aware that these are often modified by accountants to fit a particular business’s circumstances more precisely. The roots of all layouts used will be traceable back to the basic model, however, the form and content of accounts set out in this review. If financial statements that you see do not appear to fit the standard, always ask the person who prepared them to explain the layout and what it shows. Be fearless in this, if you do not understand, ask and ask again until you do understand. The process of forecasting future financial performance is a subjective process requiring estimates, sometimes guesstimates.
It is almost never an exact science. However by careful analysis of the information that is available, forecasts can be made that will if necessary stand up to the detailed scrutiny of potential investors and funders. Finally, forecasts also serve to provide a business with a measuring device, and targets to strive towards. They project the business’s future in financial terms, and in doing so show the rewards that are potentially available, the financial returns potentially achievable by investors. Forecasts must always be credible, but since the real world is a place where events do not always go according to plan, without a crystal ball it is impossible to predict the future with unfailing accuracy.
Accounts are never an end in themselves, though their role is vital one in supporting sound business decisions. The concept of cash flow is more important than the concept of profit, and fortunately the timing of cash flows can be managed and improved. Cash now is better than cash later. Businesses fail when they run out of cash, which can happen even when they are trading profitably. Make sure that you understand the difference between gross profit and net profit and understand the contribution principle explained. If accounts fail to communicate their messages clearly then they are pointless. A profit and loss account gathers together, for a defined period, total revenues generated, the sales figure, and the costs incurred in earning that revenue. Deduction those costs from revenues earned reveals whether an overall profit has been created, or whether a loss has been incurred. A balance sheet sets out a business’s assets and its liabilities all at a fixed point. The cash flow statement links the balance sheet to the profit and loss account, since it shows how streams of revenues and costs result in actual movements of cash.
Balance sheet is one of the final accounting statements which contain that “balance” word so beloved of accountants. At its most fundamental level, a balance sheet sets out the asset that a business owns and against those set its liabilities, the amounts that the business owes. Some real-world business plans dispense with the need to include forecast balance sheets, not least where the business unit is a department within a larger business entity. If, however, your business’s need is to raise significant amount of funding, then you will almost certainly need to produce projected balance sheets. These will allow the types of funding needed to be determined, in terms of both amounts required and type, so that they best fit your business’s anticipated needs.
If your business seeks significant external funding then you will need to produce balance sheets as well, and if you do not have some specialist financial background, your user-friendly accountant will be great source of help here as well. That said; always ensure that you understand what a balance sheet is and what it shows. As a minimum in business you should understand and feel confident in using the basic concepts underlying profit and loss accounts and cash flow forecasts. These are the minimum that every strong plan should include. Whether or not you will need to prepare forecast balance sheets as well depends to a large extent upon individual business plan circumstances.
Exactly the same principle applies when recognizing the existence of business costs as having been incurred. Costs are recognized, and a financial liability to suppliers is recorded, as soon as there comes in to existence a legally binding obligation to make payment to the supplier. The accounting treatment for both income and costs follows the same underlying principle. Both sales revenues, often called turnover in the jargon, and costs are recorded as soon as a legally binding obligation to pay come into existence.
It does not matter at all from a profit and loss account viewpoint when payment these are earned, and recording liabilities for business for costs as these are incurred. In summary a profit and loss account measures whether a business has made a profit or not by setting costs incurred against revenues are recorded when legally binding obligations to pay come into existence, not when the payments happen. There is indeed another business financial statement that concerns itself with the timing of movements of funds in and out of a business, when liabilities to suppliers have to be paid, and when customers are expected to pay their debts. That is known as the cash flow statement.
The accounting statement that people most readily understand is the profit and loss account. It is an account, a reckoning up, of whether a business, or an individual departmental unit within a larger business, has made a profit or not. The very straightforward logic is that if all revenues for a given period are added up, that provides the total income earned figure for that period. A parallel totaling process carried out for costs, the various items of expenditure incurred during the same period, gives the total costs figure. Setting the first total against the second is the essence of a business profit and loss account. If total revenues exceed total costs then a profit has been achieved, if costs exceed revenue then a loss has been incurred.
Understanding what a profit and loss is, and what it shows, is not complicated therefore. The issue that often confuses people however, is the question of timing. At what point is it correct for a business to claim to have generated a sale, to have generated revenue. When the customer pays the invoice? When the business originally raised it? The answer is that accounting practice follows the legal position, and if you remember this point then the principle should stick in your mind. Quite simply, a business will recognize a sale as having happened, record it as revenue earned and take credit for it, once there exists a legally blinding obligation upon the customer to pay. That point is generally the point at which the product or service has been successfully delivered, or otherwise provided to the customer’s satisfaction.
Once you have mastered the basic business financial jargon, you can start using the data provided by business accounts to supply useful management information. The next point has previously been mentioned, but it so important that it now receives a second airing. Having access to an accountant who has better knowledge about accounts is a very valuable resource indeed, and it is worth investing time to locate one. Ask around for recommendations, and do not necessarily rely on impressively glossy brochures or a comprehensive website, for such things can easily be purchased and simply re-branded with a given firm’s name.
The Three main financial statements
The principal accounting statements are these:
. The profit and loss account, which shows the amount of profit or loss that a business has produced, or expectations of what is forecast to produce, for a stated period.
. The balance sheet, which shows the business assets and its liabilities as they exist at a fixed point. How much are funds in the bank, for example, and how much is owed to the business by its debtors, anyone who owes it money.
. The cash flow forecast, which slows expectations of when cash funds will be received by a business, and when it will be paid out, measured against a timeline.
Tips about Recruiting Accountant
Meet the individual who would be your day-to-day contact, check that the personal chemistry works, and check whether they can explain financial matters in ways that you understand. A good test here is practical one: ask them to explain how your business’s accounts would show things if a computer were purchases, for example.
A good starting place is to dispel a few common misunderstanding, to explain what accounts can do and what they cannot. First, cannot only measure those aspects of business activities that can be measured readily. Conventional accounts do not measure the value of all business assets, for example such as the dedication, loyalty and general levels of morale of employees. In fact, for people and knowledge based businesses it can readily be argued that the largest asset of all workforces is not valued at all in conventional accounting terms. Another gap may be that environmental costs, particularly longer term ones, are not brought into the reckoning by conventional business accounts. The problems lies not so much with the ability of finance and accounts to handle, for example, a measure of morale, it lies with an inability to obtain that measurement in a way that would stand up to objective scrutiny.
In general, accounts measure only those things that can be measured in financial terms, and things that can be measured on the short to medium term time horizon. Thus, although it is rather difficult to place an objective valuation upon the level of employee knowledge, or skill, or loyalty within a business, in situations where such a measure is readily available then accounts will accommodate it easily. Football club accounts do it as a matter of course when it comes to the costs of signing players, for example. Business accounts have a few limitations at the edges then, but at the core of accounting expertise and accounting practice there exist techniques that are extremely useful to support business decision making. Accounting and financial techniques allow management to ensure the financial health and well being of their businesses, and determine what funding resources are needed, and when. They enable management to monitor progress against targets, to measure and improve business efficiency, and to optimize utilization of the limited resources available.