There are some basic concepts every business owner needs to understand. First: You and the company are not the same thing. All company money is not your money. It is important to have a life away from the company. The company can go on without you. The going concern means the company is expected to go on in the future. It is not expected to close at the end of the week. Thus we need to plan for the future. And the most basic accounting equation: Assets minus liabilities equals the owner’s equity.
When we ask what a can of soda costs it is typically 55 cents. But in reality there are other costs associated including gas to get to the store to buy the soda and the time you spent. For our purposes here, costs are the total change in what you own that takes place during an exchange. An expense is what you put in the books or records to indicate you have used goods or services. It may be a fee to an accountant for doing the taxes. It may be use of parts to in manufacturing. Managerial accounting records the uses of good and services for planning and purchasing.
Any information used in accounting must be accurate meaning correct and up-to-date. It must also be relevant- pertain to the situation at hand.
For those of us who do not enjoy accounting there is simple software which can help. You may want to check with your accountant and see which software is compatible with his or her system.
Which Accounting Software is Best for You? Two main types of accounting software: industry specific and generic Consider the following for choosing a package: The size of your business The industry you're in The components you need Available support Financial resources Professional recommendations Ease of use
Accounting software can be very useful for a variety of reasons. It can help you track sales, predict trends, plan purchasing, and notify you when it is time to reorder. It can help track employee times, time-off, and calculate employee taxes and payroll.
Many reports can be generated using software but in this case less may be more. Focus on five key reports- each of which are discussed in turn.
The difficulty with an income statement is in deciding when to recognize a revenue. With a cash sale, you recognize it immediately. But if credit is extended for a sale in December 2006 and payment is made on the account in January 2007, then when was the revenue earned?
A balance sheet is like taking a financial picture. Your balance sheet tomorrow will be different from the one produced last week. Current assets and liabilities are short term- generally under 12 months. Long-term is considered over one year in the United States.
A cash flow statement is very useful in small business because cash is a major issue. Operating activities are the daily activities required for running the company. These include sales, shipping, payroll, etc… Cash flows from investing may be minimal for a new company as there is not excess money to invest. Financing activities are covered on the next slide.
Building a Financial Budget Business budgeting is one of the most powerful financial tools available Most effective financial budget includes both a short-range month-to-month plan for at least a calendar year and a quarter-to-quarter long-range plan you use for financial statement reporting It is important to budget both the income statement and balance sheet You will have to make reasonable assumptions about your business in establishing your budget You will need to prepare the income statement budgets first, then balance sheet, then cash flow
There may be many outsiders requiring reports especially if other people’s money was used. Granting agencies, banks, investors, and partners all want to see how their money is being spent.
Answer: a
The business plan sets goals and methods for achieving them. The budget outlines the amount of money need to perform these action and reach these goals. The master budget is comprised of the smaller budgets in several areas.
The budget is a very useful tool to keep owners on track, however, few use it on a consistent basis. Budgeting for expenses such as marketing can help keep you on track to your goal, but when a business is very new, it may be difficult to estimate what it will take to achieve the desired results in the beginning.
In the direct labor budget, you must assume labor can easily be varied. Reality will tell you a 35 hour employee works 35 hours. However, overtime can be requested if necessary. Additionally, employees can be moved to other tasks if not necessarily needed in their normal position. Employee flexibility is key for a small business. Also, by budgeting labor, the owner can determine whether employees are working up to their potential.
As noted before, the master budget is made up of a series of smaller budgets. The master budget is a key component in the planning process.
Controlling is a very necessary step in a small business. Accounting information and reports can be used to determine where variances are occurring. This information leads into a investigation of why the variances occur, and how to fix the situation. The more carefully and frequently information is evaluated, the better control over the company.
Good information is timely, accurate, and complete. However, a semi-truck load of information is not helpful. Thus, reasonable ways of condensing information to a useable format or report are helpful. Additionally, when deciding between several options, accounting information can give you a factual basis on which to make your comparisons.
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