An open invoice is a request for payment that you have sent to your customers, but they still haven't paid. In other words, they have an outstanding balance. Open invoices are also sometimes called outstanding or unpaid invoices. Invoices that stay open longer than intended impede cash flow, which can slow growth or cause downstream problems like the inability to pay vendors or worse, payroll! Monitoring open invoices to be sure customers are paying within the allotted time frame is a critical piece of running a growing business. To learn “What Is an Invoice?” visit this previous article that explores the fundamentals. This post details how to track and close your open invoices and how good accounting software will help you save time and money and set your business up for success.
Track Your Open InvoicesIf you are still using a manual or disconnected approach to invoicing, you will need to schedule time frequently to review your invoices, check them against payments received (perhaps in a bank ledger) and then close those that you can. If you’re letting customers slide too often, you may even be unable to pay your suppliers or employees due to insufficient liquidity or cash. To avoid these situations, it is vital to track all of your business invoices. An invoice tracking system can help you manage the due dates of each invoice and notify you when one is about to expire. This can save your company time and money and reduce the risk of having to actively collect from your customers. This tracking system is often associated with accounting software, which we cover in-depth below. If you consistently review a dashboard that automatically tracks open invoices and closes them automatically upon payment receipt, you are regularly aware of which accounts remain unpaid. Then you can work with your customers to receive the funds as soon as possible. From here there are several courses of action with which you can proceed.
Three Steps to Help You Close Your Open InvoicesThe first step in closing your outstanding invoices is to verify their accuracy. Make sure the numbers on each invoice match what was delivered or services provided, and then go from there with supporting documentation such as shipping receipts. An inaccurate invoice can be a significant obstacle to getting paid. Second, follow up with customers promptly. You can set up email alerts when an invoice is unpaid beyond a specific timeframe. Or use advanced tracking software to alert you and your customers automatically and sequentially. Also, a polite phone call can often elicit a timely payment as a final resort. Finally, be willing to negotiate payment terms with customers if necessary. If you have a customer struggling with cash flow, present them with a partial payment method or other forms of payment such as a credit card through ACH. By being more flexible on when and how you get paid, you may be more likely to collect quickly and efficiently. If closing your open invoices continues to be laborious, consider implementing new promotions. You can offer discounts for upfront payments, payment plans, free months of service, or other incentives. Furthermore, take time in the beginning when you create an invoice to include clear payment instructions, so your customers know exactly what they need to do to pay you.
How to Track Your Invoices Using Accounting SoftwareUsing accounting software like FINSYNC, each invoice created has an "unpaid" status by default until the payment has been accepted. When you log in and view your accounts receivable, you can quickly identify the still open invoices. An accounting platform can create reminders that are automatic and emailed on an ongoing schedule, daily, weekly, etc., until payment is received. This type of system enables you to be proactive. Sometimes the best way to tackle a problem is to address it right away before it becomes a bigger issue. In addition, the FINSYNC accounting platform can provide additional features such as the ability to create recurring, duplicate, and specific project-based invoices. Along with many other features to simplify your cash flow management.
SummaryOpen invoices can have a negative impact on your business's cash flow and revenue. Every business owner should have a tracking tool that helps them monitor their business' financial management and operational health. You can monitor open invoices by manually entering them into your ledger. However, the best way to close open invoices is with an automated accounting solution like FINSYNC. The good news is that you can reduce your outstanding receivables and improve your bottom line with just a few simple steps. FINSYNC provides a straightforward way to collect invoice payments directly from a customer's bank account. You maintain control over all your payments, saving you time and money.
As a small business owner, you wear many hats. In addition to managing your product or service, you also have to take care of the finances. It is common for owners to handle their accounting and bookkeeping, at least at the early stages of their businesses. However, as the business grows, it can become increasingly difficult to keep track of everything. At some point, it may make sense to hire an accountant or bookkeeper. But how do you know when you've reached that point? How do you find a bookkeeper or accountant who you can trust? This article addresses these questions and details FINSYNC's accountant and bookkeeper matching program. By the end, you will understand the benefits of these financial magicians and recognize the value of being matched personally to the most qualified individuals for your organization.
Is Your Business Ready for an Accountant or Bookkeeper?The decision to hire an accountant or bookkeeper should not be taken lightly. There are many variables to consider in making this critical choice, including how well you manage the finances on your own and if there is enough in-house experience. It is also critical to scrutinize your revenue stream, current and projected. A lot can change over just one quarter, so it is essential to think through the situation thoroughly. Here are some signs that it might be time for you to outsource your accounting:
- You are spending too much time on bookkeeping tasks and not enough time on revenue-generating activities.
- You are making errors in your financial reports.
- You are not keeping up with invoices and bills.
- You are not sure how to file your taxes.
FINSYNC’s Bookkeeper and Accountant Matching ProgramWhen finding a bookkeeper or accountant, you want to make sure you find someone who is a good fit for your business. FINSYNC is proud to partner with some of the country's most reputable CPA firms. Our proven criteria ensure that you'll be matched with the right person for your needs, whether you're a small business owner or a large corporation. And because we're free to use, getting started involves no risk. Start with a quick and easy 5-minute form that helps us to get to know your business. We then match you with someone who fits your criteria, including budget, location, industry, experience, accounting needs, business objectives, and bookkeeping requirements. This way, you can be sure you're getting someone who can help your business run smoothly and efficiently. We vet all the bookkeepers and accountants in our network to ensure they have a clean history, which helps protect your organization. We also perform background checks as it is crucial to choose a bookkeeper or accountant who is both competent and trustworthy. Above all, we make sure your financial records are in good hands and that your business is protected from unnecessary risks. By offering this free service, we can better serve our clients by connecting them with the right person at the right time. FINSYNC's matching program was developed from years of experience and research, and we are confident that we can provide the best possible match for your needs. There is no need to go through the time-consuming and expensive process of hiring a full-time professional.
Benefits of Hiring a BookkeeperHiring a bookkeeper may be a game-changer for your organization. You can review the differences between a bookkeeper and accountant in our previous article. For now, it is essential to understand that keeping accurate financial records is essential for any business, but it can be time-consuming and daunting, particularly for those who have not worked in the industry. A bookkeeper can handle all of the financial aspects of your business, including invoicing, payment-processing, debt collection, and tax preparation. Also, a bookkeeper can help you stay organized and track your spending, controlling your cash flow which is a valuable service, particularly if your business is growing. Overall, hiring a bookkeeper is an excellent way to support the success of your small business.
Benefits of Hiring an AccountantSmall businesses have a lot to gain from hiring an accountant. An accountant can help you manage your finances, maximize profits, and comply with tax laws. Navigating the appropriate write-offs can save the business money, and filing correctly will help you avoid costly penalties. An accountant can also provide valuable insights into your financial data, helping you to make better business decisions by supplying valuable insights into where the business is spending its money and where there may be opportunities for cost savings. An accountant can also help create financial statements and forecasting models to make important decisions about the future of the business. Hiring an accountant can give a small business the professional guidance it needs to succeed. Best of all, an accountant can create a cash flow management process to keep you organized and on top of your finances. This will free up your time to focus on other areas of your business, such as marketing and sales. If you're unsure whether you can afford an accountant, keep in mind that the cost of not having one can be much higher. Delinquent taxes, penalties for errors, and missed opportunities can quickly eat into your bottom line. So if you're serious about growing your small business, hiring an accountant is a wise investment.
ConclusionIf bookkeeping and accounting are taking up too much of your time, it might be time to hire some help. An accountant or bookkeeper can take care of all the details so you can focus on running your business. Whether you’re looking for someone to handle all your accounting needs or only need occasional help with bookkeeping, the Bookkeeper and Accountant Matching Program can help you find the perfect fit. Get matched today to a certified and vetted professional through FINSYNC.
When consumers purchase a product, many things happen behind the scenes before that box hits their front porch. Manufacturers need to order materials and components for producing the product, receive them, house them in a warehouse, and assemble and distribute the final product. During this process, there is a lot of data to keep track of, such as lot numbers, serial numbers, costs, quantities, expiration dates, etc. This data needs to be tracked and continually updated after every step to ensure efficient production. Inventory management is the process of tracking and managing inventory from the time it is acquired to the time it is sold. Inventory includes raw materials, work in progress, and finished products. Establishing an accounting system for inventory is essential to maximizing profit. In this article, we will discuss the entire inventory management process, from tracking raw materials and the benefits of implementing an inventory system. Additionally, we will walk you through selecting a system that works for you and your organization.
Benefits to Managing InventoryThere are many benefits to managing inventory and putting a system in place that is consistently updated when changes are made. Inventory management systems can help businesses track their inventory levels and prevent stockouts. Inventory systems can also help businesses save money by reducing the number of raw materials and finished products that need to be stored while still ensuring enough product is on hand to meet demand. Creating a consistent process will help businesses maximize their income by ensuring that finished products are sold quickly while preventing a surplus of stock from being moved.
Initial StepsThe first step in inventory management is acquiring and tracking raw materials. Raw materials can be purchased from suppliers or extracted from the environment. Once raw materials are received, they must be stored until required for production. Inventory systems track all raw materials' quantity, location, and condition. After receiving materials, they need to be stored in a warehouse or facility until it is time to assemble the final products. During production, the process from storage to the assembly line is called work in process. Production can be done in-house or outsourced to manufacturers. In either case, inventory management systems track the progress of production and the finished products as they are completed. Once production is complete, the finished products must be stored until sold. It is essential to track all final products' quantity, location, and condition. When customers purchase products, the system is updated to reflect the decrease in inventory after distribution.
Selecting a SystemIf you are interested in implementing an inventory management system in your business, keep a few things in mind. The central place to start is determining what type of system you want to use. Inventory management systems can be either manual or automated. Manual methods are typically less expensive to implement, but they require more time and effort to maintain. Automated systems are the opposite, more expensive to implement, but they can save you time and money in the long run. Additionally, it would be best to establish how often to update your inventory levels. Inventory levels can be updated daily, weekly, monthly, or quarterly. Updating stock levels more frequently will require more time and effort, but it can help you track your inventory better.
Inventory AccountingOnce you have decided on a system, you need to track three things:
- Inventory Quantity - can be tracked through your method of choice, either manually or automated.
- Cost of Inventory - includes the purchase price, transportation costs, and storage costs.
- Value of Inventory - the inventory's selling price minus the cost.
ConclusionOverall, inventory accounting aims to keep track of the cost of goods sold (COGS), which includes the cost of acquiring, storing, and selling inventory. COGS is a crucial metric for businesses because it directly impacts profitability. As a result, companies must carefully track their inventory levels and monitor their COGS to ensure they are maximizing profits. Inventory management is an essential part of any business. Businesses must have an accurate picture of their inventory levels and costs to make informed decisions about purchasing, pricing, and selling products. This system is critical for any business that sells physical products; accounting for them consistently can be the difference between success and failure. Learn more about accounting with FINSYNC’s cloud-based accounting platform to help you better manage your business operations.
Regardless of your industry, data leakage happens everywhere. Cyber threats, security breaches, data scraping, or theft are just a few examples of potential security attacks within an organization. Now is the time to apply a straightforward but often underutilized tool - the audit trail. Electronic storage and data handling have revolutionized many markets within the technology sector, such as financial institutions, insurance, manufacturing, and healthcare. However, these same tools that have made workload more efficient have also left many companies vulnerable. The reason is that most or all of their data is now located in one place. This article answers the question, "what is an audit trail?" We also dive into the benefits, specific industries that rely on audit trails, and examples.
Defining an Audit TrailAn audit trail or log is a sequential record that details the transaction history, work event, financial ledger entry, or other data traced back to the user who performed the act. The purpose of this tracking is to construct evidence for regulators in cases of suspected fraud or illegal financial activity. Audit trails are used in accounting if an auditor needs to verify figures such as revenue, gross profit, and cost of goods sold (COGS). COGS is confirmed by reviewing the transaction logs captured at the time of record creation, alteration, or deletion carried out during the period. Below is a sample of FINSYNC's audit log. This report allows users to see a chronological list of changes to their financial management records. Any human user or system that updates a record or accesses the records becomes part of the complete audit trail. These individual data references are what an audit trail tracks and records sequentially to verify accuracy. A business can easily set up an audit log process to quickly identify improperly accessed information.
Industry ExamplesImplementing an audit trail is often a regulatory requirement in many financial sectors and accounting best practices. Without the use of audit logs to confirm financial information, there would be no ability to reference the legitimacy of a company's financial reports. The healthcare industry is considered one of the early adopters of audit logs. Hospitals and clinics must abide by HIPAA guidelines to protect patient confidentiality. Therefore, audit trails and logs are vital to accurately track who has access to a patient's private information. Healthcare audit trails also assist the insurance industry. Suppose a patient experienced a medical mistake such as a medication error, delay in treatment, missed follow-up, or inadequate patient monitoring. In that case, these are just a few examples of data that would be important for an insurance company to track to determine what part of the process led to the mistake. Another industry where audit trails proved very useful is cryptocurrency. Cryptocurrency spoofing is the process where criminals attempt to influence the price of a digital currency by creating fake orders. The object of the con is to trick investors into buying or selling so that cryptocurrency value is adjusted. Spoofing is highly illegal and traceable, thanks to audit logs.
Benefits of an Audit TrailAudit trails are highly beneficial for organizations that manage sensitive customer information. These companies are held to the highest confidentiality standards to prevent cybercrimes and illegal scraping of critical data. While many businesses employ software security tools such as firewalls, antivirus software, and encrypted password managers, these tools tend to focus on external attacks. However, current statistics show that over one-third of all security breaches reside internally. Additionally, a data audit trail can help an organization recover data and return it to its original state. Software logs that track a data history change will sometimes allow you to revert to a previous state, and this tool is vital if critical data is lost. With cybercrimes becoming more widespread, integrating an audit trail is the most effective step to ensure data protection. By incorporating this tool, an organization can prevent data theft before it causes irreparable damage. Try out FINSYNC's Complete Solution, and you will be well on your way to creating audit trail coverage in your organization.
Whether your company is merchandising, manufacturing, or service-based, keeping track of your production costs is vital. To optimize your total output and expenditures, you need to understand and track marginal cost and revenue. Whenever a company increases its production, there is always an increase in production costs that must be recognized. Marginal and variable costs consider these increases and determine the optimal amount of units or labor required to keep production costs as efficient as possible. We have already covered the importance of tracking variable costs within your organization. Now we will discuss the importance of marginal cost and marginal revenue and why they are critical concepts in managerial accounting.
Importance of Marginal CostMarginal cost refers to the additional cost to produce each additional unit. In other words, this cost shows the increase or decrease in the cost of making one more item in production. The formula for calculating marginal cost is below: For example, if the cost for a company to produce 10 units of a product or service is $5,000, and the cost to build 11 units is $5,010. In this case, the marginal cost for that additional unit is $10. Marginal cost plays a crucial role in an organization, especially when a company must decrease its costs. Fixed costs are constant regardless of production levels; higher production leads to a lower fixed cost per unit as the total expenses are allocated across more units. The marginal cost of production includes all expenses not fixed. For example, if a company needs to buy a new piece of equipment to produce more units, this is a marginal cost. The marginal cost varies according to the volume of the products constructed.
Marginal RevenueMarginal revenue (MR) is essentially the opposite of marginal cost. MR is the increase in revenue that results from the sale of one additional unit of product and is calculated by dividing the change in the total revenue by the difference in the quantity. While marginal revenue can remain constant over a certain level of production output, it follows the law of diminishing returns, which states that any production increase will result in smaller increases in output. It means the company has surpassed its optimal level. Example: A lava lamp business brings in $30 in revenue by producing its first lamp. Initially, its marginal revenue will be $30. If the same company makes a second unit and brings in another $25 in revenue for a total of $55, then the marginal revenue gained from that additional unit is $25. Over time as the demand for lava lamps increases, output increases, and eventually, there will be a point when the business incurs more significant variable costs. For example, if the company is now producing 1,000 lava lamps per day, they eventually need to hire extra staff to package or run quality control checks. Thus the marginal revenue decreases to $23, then $22. The curve begins to slope upward when operations become less efficient and profitability decreases.
Working TogetherBoth marginal cost and marginal revenue work in tandem to help businesses set their output target in production. These two metrics are adjusted as production costs fluctuate. The ultimate goal is maximum profitability when marginal cost and marginal revenue are equal. If marginal revenue were greater than marginal cost, then that would mean the company can continue making more units until the marginal cost is higher than marginal revenue. As we discussed previously, this diminishing returns point is where the company is losing money in producing more units and should scale back on output or increase the sales price. Although having a high marginal revenue over a long period is not always a good thing, this discrepancy shows that the company is continually not meeting its customer demand. On the other hand, when marginal revenue falls below the expected value, it is important to conduct a market analysis to determine the reason. Possibly there are too many competitors saturating the market, or the market trend for the product has peaked. Either way, the cause must be revealed in order to prepare for the next steps.
ConclusionEvery organization must focus on increasing revenue and net income to improve profitability. Therefore, businesses need to concentrate on how each sale affects the bottom line to produce stable sales revenue flows. To do this, you must track marginal revenue and marginal cost. Ultimately, analyzing these two numbers and how they impact each other is critical to maximizing your profit, optimizing your team's performance, and overall your company's productivity. Now that you are familiar with marginal cost and marginal revenue, it is time to put this into action. Signup for a FINSYNC free trial to experience financial harmony with your business.
We are all part of a societal landscape that tracks everything. How many steps we take, how many calories we eat, and how many miles we have driven. If only there was a space to transfer and analyze all of this data in one place. In the accounting world, this place is called the general ledger. We recently explained how to document your business transactions via journal entries. The most common method of presentation of that “journal” is the General Ledger, where all of these transactions are housed. The General Ledger or GL is the backbone of any accounting system. The GL breaks out all of the transactions by category and then within each category, transactions are listed chronologically. This article covers the purpose of a general ledger, identifying each of the five different sections and how they operate within a double-entry bookkeeping system.
Purpose of a General LedgerA General Ledger aims to help track and evaluate every financial transaction for your small business. This information is the foundation of the organization's financial statements. You can equate a GL to a computer database. All the code/systems run off the information within this database. Performing individual tasks will reanalyze and ultimately update the systems within the database. By comparing transaction data from one period to the next, you can identify trends, unusual behavior, or areas of concern. In addition, the GL is helpful when filing taxes since all income and expense transactions are categorized in one location.
Ledger AccountsThe five sections of a General Ledger break out individual transactions mirrored in the Balance Sheet and Income Statement.
- Assets (Balance Sheet) - Assets represent what a business owns and produce value. Examples of assets include cash, land, buildings, and equipment.
- Liabilities (Balance Sheet) - GL liability accounts represent the financial obligations that a business entity owes to outside parties. Examples include amounts due to suppliers or bank loans.
- Equity (Balance Sheet) - Equity is the difference between total assets and total liabilities. If a business was to sell its assets to pay all its liabilities, the cash remaining is known as equity or what is left over for owners. The equity balance consists of retained earnings, common stock, and additional paid-in capital.
- Revenue (Income Statement) - Revenue is the business's income derived from the sales of its products or services. Revenue or income is measured from one period to the next and provides economic benefits to the company.
- Expenses (Income Statement) - Expenses consist of the money paid by the business in exchange for a product or service. Expenses can include rent, utilities, travel, and meals.
Double-Entry BookkeepingA fundamental principle in accounting is the “Accounting Equation”: Assets = Liabilities + Shareholders' Equity. These numbers are documented via the balance sheet. The double-entry accounting system ensures that this principle equation always stays in balance. A debit is an accounting entry that increases an asset or expense and decreases a liability or equity account, and a credit does the opposite. If your debits and credits do not balance, you know a mistake was made and must be identified. Therefore, for debits and credits to balance, an entry on the debit side must be accompanied by a corresponding entry on the credit side and vice versa. For example, when a bookkeeper enters a credit entry into the general ledger, this increases the equity and positively impacts the liabilities account. At the same time, the debit account will decrease because there is now more cash in the bank. Implementing a double-entry system is like utilizing a system with built-in checks and balances.
Bottom lineFinancial reports consist of a balance sheet, profit and loss account, and statement of cash flows; however, this data doesn't tell the whole story because these statements are all summary data (transactions are summed during the period). On the other hand, you can see every individual transaction within a general ledger. Sometimes, it is necessary to dig into dozens of journal entries to identify the core issue. Thus, all of this data must exist in one place. Overall, general ledgers are master records that house the financial transactions of your business. Once you understand and start using a general ledger, you will soon realize how powerful and vital it is within your small business. With FINSYNC your General Ledger is updated in real-time as you run your business. Take control of your cash flow management today!
Is your business spending too much money on materials? Can you afford to hire a new engineer? Good financial statements will help you answer those questions and more. Journal entries are the fundamental building blocks that financial statements summarize to help you understand your company's profitability and other financial metrics. Learning how to create a journal entry is one of the essential steps to ensuring a company's accurate financial record keeping. In addition, these transaction entries keep tight controls around the most important financial metric, an organization's cash flow. Since the 15th century, many companies have employed the accrual accounting system to track their debits and credits. Even though numerous businesses continue to follow a cash basis system, it is crucial to understand journal entries within the double-entry system for both types of accounting.
What Is a Journal EntryA journal entry (JE) is a way to record or correct a financial transaction in a company's accounting system. These transactions are recorded in the company’s book/journal, called the general ledger. JE's consist of header and row information, are the first step of the accounting cycle, and record the detailed transaction on a specific purchase, for example. For taxes and other external stakeholder requirements, businesses use double-entry accounting. This bookkeeping system involves debits and credits, and each side must match or “balance” exactly. There’s a specific report to check for “out of balance” transactions called the trial balance. Maintaining consistent records of your transactions helps keep your company information organized. Recording this data chronologically makes it easy to locate important information, identify potential accounting errors, and simplify your cash flow management. Since journal entries are the first step in the recording process, it is a precursor to creating financial statements such as the income statement, balance sheet, and statement of cash flows. In addition, auditors use the information contained in the journal entries to monitor company performance and profitability.
Debits and CreditsMoney doesn’t just disappear or appear out of nowhere. It has to come from somewhere, and go somewhere. Here is where debits and credits become valuable. Debits and credits are bookkeeping entries that balance each other out. These two terms signify actual accounting functions, both of which cause increases and decreases in accounts, depending on the type of account. An example of a debit and credit is purchasing a piece of equipment such as a laptop for your company. Economically, one asset (cash) has been traded for another (equipment). In this scenario, we would credit cash to reduce it and debit equipment to increase it by the value of the laptop.
Recording Journal EntriesTo record a journal entry, begin by entering the date of the transaction in the journal's date column. In the rows, list each account affected by the transaction on a separate line. Identify if the transaction is a debit or credit. You can use this acronym for guidance: DEA-LER DEA represents the debits that go on the left side: dividends, expenses, assets, and LER represents the credits on the right: liabilities, equity, revenue. An example of a journal entry within the service industry would be payroll. If you pay someone $5,000 this period, this transaction is considered a business expense under the debit entry, and the credit entry must equal the $5,000 under cash or liability.
Automation to the RescueAn automated journal entry system saves you time and reduces the amount of duplicate work accountants, and bookkeepers often need to endure. As accounting systems grow in complexity and the number of journal entries increases exponentially, at some point, it only makes sense to employ an automated accounting software system. Transactions like the examples provided in this article are automatically entered into the correct account when paying a bill or invoicing a client. Invoices are credited, payments are processed, and bills are paid automatically according to your dictated parameters. Even with automation software, accountants still need to make a few manual journal entries, such as adjusting accruals, depreciation, and amortization sometimes referred to as “non-cash” entries. Try FINSYNC's accounting software with no upfront cost. The all-in-one platform allows you to create, review and approve journal entries while simplifying your cash flow management.
The statement of cash flows, or the cash flow statement, is one of the three primary financial statements used to determine a company's financial health. The other two statements: the balance sheet and income statement, have already been addressed in previous articles. This article centers on the statement of cash flows under the accrual accounting method, where transactions are recorded in the general ledger as soon as they are earned or incurred. This recording happens even if the cash has not yet changed hands. This process of regulating the cash coming in and going out over a period of time is vital to the success of a business. We will cover the importance of developing a cash flow statement, the components, and how to calculate and interpret this valuable data.
Why Do We Need a Cash Flow Statement?The cash flow statement (CFS) takes the previous period's ending cash or net income. It compares this to the closing amount of the current period while tracking the precise cash movement throughout the entire period. An important factor from a business perspective is the CFS can verify that the revenues and expenses reported on the income statement are consistent with the actual cash movement in and out of the organization. Because of this, the CFS acts as a bridge between the income statement and the balance sheet. Another important factor in creating a cash flow statement is liquidity. Regardless of your company's revenue, you must ensure enough liquid cash to cover necessary expenses like taxes and payroll. Finally, one can use the cash flow statement to create cash flow projections. These projections allow you to plan for the future and understand how much money your business has 6-12 months down the road. If you are secure in your cash flow projections a year from now, you can be more confident in making purchases now.
Components of a Statement of Cash FlowsThere are three main sections within the statement of cash flows. Each examines a different source and uses for the cash. These are operating activities, investing activities, and financing activities. Together, all three comprise the basic structure of the cash flow statement and are detailed below.
- Operating activities - are the main revenue-generating activities of the business. These transactions monitor when a company has delivered its goods or services.
- Investing activities - are set outside of the business' core activities. This group includes selling or purchasing property, stock in other companies, patents, etc.
- Financing activities - are related to funding the business. This cash involves repayment or equity to third-party banks or business owners.
Calculation MethodsTo calculate your organization's cash flow, you need to apply either the direct or indirect method.
- Direct method: this method mirrors the income statement. Under operating activities, the cash receipts from customers reflect revenue, and cash paid to suppliers, employees, loan interest, and taxes mirror expenses. The company needs to produce and track cash receipts for every cash transaction. For that reason, smaller businesses typically prefer the indirect method.
- Indirect method: The indirect cash flow method is more straightforward, as it doesn't require details of every cash movement, such as the date and amount of cash received and when a customer pays for goods. All the figures needed are on the income statement and the balance sheet.
Final ThoughtsCash flow statements reveal to investors and lenders which phase the business is currently operating. Analyzing the numbers indicate if a company is a rapidly growing startup or a mature and profitable company. It can also reveal whether a company is going through transition or in a state of decline. The CFS shows a different aspect of your business that the other two financial statements overlook. You can see how much cash a specific product or service generates or if a business is spending too much on its investments. This information allows owners and managers to make appropriate changes to the organization as necessary. A company's understanding of its cash inflows and outflows is critical for meeting its short-term and long-term obligations to its vendors and suppliers, employees, and lenders. In addition, seeing how your cash changes over time, rather than an absolute dollar amount at a specific point in time, is a solid metric to recognize for your company's financial well-being. With FINSYNC's network of independent financial professionals, you can hire a vetted bookkeeper or accountant to manage your cash flow for your business.
Out of the three primary financial statements, we have already covered the balance sheet, which represents the value of your business at a specific point in time. This article focuses on the income statement, which outlines the profitability of your organization over a period of time. As a business owner, it is critical to read and analyze data from the income statement. Not only can you determine your company's current financial health, but this understanding can also help you predict future opportunities, optimize business strategy, and create meaningful goals for your team.
Understanding the Income StatementThe income statement or profit and loss (P&L) illustrates how much income your business makes or loses during a period. The result is either a profit or a loss by subtracting expenses, possibly including cost of goods sold (COGS), from the total revenue. The core function of the income statement is to disclose the company's net income by comparing these profits and losses. Business owners can refer to this statement to reveal if the business is spending more than they earn and the effectiveness of new strategies. Based on their analysis, owners can determine if they will generate more profit by increasing revenue or decreasing costs.
Income Statement FormatAn income statement should include all of the following line items:
- Total revenue: Revenue or operating income is your company's income from its normal business operations.
- Cost of goods sold (optiona: COGS is the direct cost your company pays to make the product it sells, including the raw material and labor costs. Service companies don’t typically include this section.
- Gross profit: Gross profit is the net sales minus the total cost of goods sold. This metric shows how much a company would have made had it not incurred other expenses.
- Gains: Gain results from selling appreciated assets that cause an increase in an organization's income. This number differs from regular revenue and is often found in a separate section near the bottom called “Other Income.”
- Itemized expenses: All income statements should have a detailed list of individual expense categories. To calculate their operating profits, some companies separate their expenses into operating costs and non-operating expenses.
- Earnings before tax (EBT): This measures a company's financial performance prior to paying tax. EBT is calculated by subtracting non-tax expenses from income.
- Net profit: Your company's net profit is the gross profit minus expenses and is the final line on your income statement.
AnalysisIt's important to know how to analyze an income statement as it can reveal the profit structure of your business and can highlight which line items need more attention. From top to bottom, reading an income statement can be divided into three sections: top, middle, and bottom. The top section is related to revenue and sometimes includes costs directly associated with generating that revenue. The middle section provides information on the money going out, and this section lists expenses like marketing, depreciation, and research that aren’t necessarily direct inputs for what is sold. Finally, the income statement's bottom section is the net income, which represents your company's financial performance during a specific reporting period. Finally, lenders or investors can analyze an income statement by completing a vertical and horizontal analysis.
- Vertical Analysis - This method compares one line item to another. For example, you can determine how a specific product may affect cash flow. Using vertical analysis, one can observe where a business may be overspending and which line items most contributed to profit margins.
- Horizontal Analysis - This analysis compares the same figures across two or more time frames, which is useful in spotting trends. For instance, reviewing a company's consistent growth over time can predict how well that business will perform in the months or years to come.
The Bottom LineAn income statement provides valuable insights into various aspects of a business. As a business owner, you can understand the organization's operations, the efficiency of its management, and potentially spot problem areas. The income statement is also an excellent benchmarking tool to see how your business stacks up to other companies within the same industry. You can determine if your costs are high for the revenue you bring in, and you can also ascertain if your profitability is worse, better or similar to other firms who sell the same goods or services. In conjunction with the statement of cash flows and the balance sheet, income statements help management understand the complete picture of a company's financial results to determine its value and forecast its trajectory. Ready to increase the efficiency of your business by automating your financial statements? Take FINSYNC for a test drive with a free 7-day trial.
The three primary financial statements: balance sheet, income statement, and statement of cash flows, work together to provide a financial report of a company's profitability during a period. The income statement is a business's income within a certain period. The cash flow statement shows how much cash a business generates and where it spends that cash during a period. However, the balance sheet is a statement of a financial position at a single point in time (a particular calendar day). This article dives deeper into the balance sheet and details its components and significance to understand your business's profitability and overall financial value.
What Is a Balance Sheet?The balance sheet provides a picture of what a business owns and owes and how much is invested. The balance sheet is commonly used for a great deal of financial analysis, focusing on a company's assets, liabilities, and equity. By looking at these three numbers, banks, auditors, owners, or investors can learn a lot about your organization. In order for your balance sheet to balance, it must be divided into two sections. On the left are the company's assets, and on the right are liabilities and equity. Shortly, we will get more granular in the differences among these critical metrics. First, we will look at how a balance sheet works in tandem with the accounting equation in uncovering a company's viability.
The Accounting EquationThe balance sheet adheres to the accounting equation where everything a business owns (assets) equals everything they owe (liabilities), plus the owner's equity in the company. The accounting equation states that a company's total assets are equal to the sum of its liabilities and its shareholders' equity. These sections of the balance sheet being “in balance” are considered to be the foundation of the double-entry accounting system.
AssetsThe business owns assets that have a monetary value and are listed in order of liquidity or how readily they can be converted to cash. Assets are divided between current and fixed. Anything you expect to convert into cash within a year is called a current asset. Examples of current assets are cash balance, accounts receivable, pre-payments on future orders, and inventory. On the other hand, fixed or long-term assets may be more difficult to turn into cash within the year. Examples of fixed assets include land or buildings, office furniture, equipment, and goodwill. Fixed assets are recorded as the original purchase price of an item. A business must subtract the accumulated depreciation from these assets.
LiabilitiesLiability is the money owed to 3rd parties. These funds owed are also broken down into current and long-term categories. Current liabilities are expected to be paid within a year and include accounts payable, employee wages, taxes, and insurance payments. In contrast, long-term liabilities would consist of deferred tax liabilities, long-term debt such as mortgages, and pension fund liabilities.
Owners’ EquityOwners’ equity or net assets is the amount that remains after subtracting liabilities from the assets. One way to think about equity is if all assets were sold and the proceeds were used to pay all liabilities, what’s leftover would belong to owners. Equity can be in capital, private or public stock, and retained earnings for larger corporations.
Final TakeawayAn analyst can generally use the balance sheet to calculate many financial ratios that help determine how well a company is performing, how liquid or solvent a company is, and how efficient it is with its cash. Although the balance sheet is an invaluable piece of information, it is not the complete picture. Since it is just a snapshot in time, it can only use the difference between the current point and another single point in the past. Or in other words, this number is static. Therefore, it is beneficial to also draw on data within the income statement and statement of cash flows to paint a fuller picture of what's going on with a company's business. Experience a better way to manage cash flow and grow with less time and better results with FINSYNC.
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