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 Equation

The 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.

Assets

The 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. 

Liabilities

Liability 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’ Equity

Owners’ 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 Takeaway

An 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.

 

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As a business owner, one of the most important factors to ascertain is how many goods or services you need to sell to cover your expenses to become profitable. This accounting metric is known as the break-even point. 

 

In previous articles, we have conveyed the importance of a business’s cash flow and developing a system around cash flow management. This is the cornerstone of running a successful business.

 

In this article, we are still concentrating on an organization’s revenue and expenses; however, we are simplifying the process down to one number. Let’s explore the intricacies of this number and how to model it for your business. 

 

Understanding Break-Even Point

 

A company’s break-even point or break-even analysis is the point at which its sales equal the cost of doing business. The organization has not made a profit yet but is not operating at a loss. 

 

Every product a company sells or service offers carries an associated cost. Whether it is the cost of the raw materials or wages to implement new software, there are always costs incurred when running a business. 

 

These costs show up as the cost of goods sold (COGS) in a production environment. The more physical products you produce, the higher your COGS. 

 

By understanding how much output is required for the company to break even, adjustments can be made accordingly. A business can adjust output as well as the sale price of their products or services. 

 

Beyond the break-even point,  all incremental revenue beyond this point contributes to the organization’s gross profit. 

 

Break-Even Point Formula

 

A break-even analysis is a formula that shows how many units of phones, chairs, legal services, etc. you need to sell to cover your costs. 

 

Calculating the break-even point involves taking the fixed cost and dividing the amount by the contribution margin per unit. To find the contribution margin per unit, take the price per unit and subtract the variable costs per unit. 

 

 

Before calculating this formula, we need to pinpoint the following three variables.

 

1. Fixed Costs – these are costs independent of sales volumes, such as rent, insurance, and loan payments. These are commonly known as SG&A.

2. Variable Costs – are expenses that fluctuate up or down per sales volume. Examples are raw materials, manufacturing labor costs, and sales commissions, which are generally part of COGS.

3. The sale price of the product or service.

 

After you can establish these numbers, you can calculate the break-even point expressed in units produced or quantity of service sold.

 

Example

 

To illustrate the break-even point, let’s assume a sock manufacturer has fixed expenses that total $10,000 per month. Their variable cost (COGS) per unit is $5 per pair of socks, and the socks retail for $25 (sale price). 

 

We first find the contribution margin, which is $20 per pair of socks. Then by dividing the fixed costs by the contribution margin, you will know how many units of socks you need to sell to break even.

 

Analysis

 

A break-even analysis is helpful whether you are just starting a business or have been operating already for several years. It is never too late to start using this new tool, and there are also a few instances where this metric becomes increasingly valuable.

 

◦ Before starting a business – it is essential to conduct this financial analysis when developing a business plan. Then you will have a good idea of the risks involved. 

◦ New product or service – existing businesses should conduct this analysis before launching a new product to learn how it will affect profitability. You might discover you will need to sell too many units to cover your overhead. 

◦ Performing a break-even point for a new product may help determine the right price for the item. 

◦ Changes in manufacturing – a business is considering outsourcing a portion of their manufacturing. Suppose the organization can produce the same quality with a lower variable cost but isn’t sure if working with a partner would increase the fixed cost. In that case, this analysis will play a critical role in determining if the change would be cost-effective. 

 

All businesses want to be as profitable as possible. Calculating the break-even point is just one component of cost analysis, but it is often an essential first step in establishing a retail price point that safeguards a profit.

 

Conducting a break-even analysis is a powerful tool for planning and decision-making. Performing this calculation on a long-term basis can identify critical information like price variability, setting appropriate sales targets, and highlighting weaknesses in the current business model. 

 

How FINSYNC Can Help

 

FINSYNC allows you to run your business on One Platform. You can send and receive payments, process payroll, automate accounting, and manage cash flow. To learn more about how we can help your business start, scale, and succeed, contact us today.

All businesses need to track each and every cost within the organization meticulously. This is why understanding the cost of goods sold is such a vital component of your company’s success. 

 

Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a business. 

 

This article concentrates on the accrual accounting method within production-based industries. Service industries are not considered as they do not retain inventory, and COGS mainly looks at the cost of inventory items sold during a given period. 

 

The cost of goods sold is recorded in the income statement, also known as the profit and loss (P&L) statement. We will learn what is included, how COGS differs from operating expenses, and how to calculate it. 

 

Included in COGS

 

When determining COGS, a good rule of thumb is to ask the question–Would the cost exist if no products were produced? If the answer is no, then there is a good chance that cost is part of the cost of goods sold. 

 

Cost of goods sold examples:

 

◦ Raw materials

◦ Electricity to run the assembly line

◦ Labor needed to make a product

◦ Storage of products

◦ Processing

◦ Other overhead costs for running the production facility

 

Do not factor things like administrative costs or other expenses into the cost of goods sold since our only focus is on production costs.

 

Operating Expenses vs COGS

 

Both operating expenses and cost of goods sold are expenditures a business incurs to create goods and services. However, unlike COGS, operating expenses are not directly related to the production of goods. 

 

Operating expenses are SG&A: selling general, and administrative expenses. These are costs to keep the business open that would occur regardless of how many products are produced. Here are some examples below.

 

Operating expenses examples:

 

◦ Rent

◦ Office supplies

◦ Sales and marketing 

◦ Insurance

◦ Equipment

◦ Legal costs

 

Businesses within the production industry need to budget for operating expenses even though they don’t directly affect production costs. 

 

Calculating Cost of Goods Sold

 

Here is the general formula for calculating COGS

 

 

We will take a deeper dive into this formula as there are four steps involved in performing this calculation. 

 

1. Identify the beginning inventory of raw materials and completed goods, which are the previous period’s ending inventory. 

2. Determine the total cost of purchases for any raw materials and parts used in production.

3. Find ending inventory – determine the total value of all items in inventory at the end of the period.

4. Total all other direct costs of production, including labor, shipping, and variable costs.

5. This calculation is based on the change in inventory between accounting periods. The result is the cost of the inventory made and sold by the company during the year.

 

FIFO and LIFO

 

Inventory is the biggest business asset within production-based organizations, which directly affects gross profit. Inventory valuation allows you to evaluate your Cost of Goods Sold (COGS) and your profitability. The most widely used method of inventory valuation is FIFO & LIFO.

 

Since COGS subtracts ending inventory from the beginning, any change in the value of products over time could drastically alter our final calculations. Here is where FIFO or “first in, first out” comes into play.

 

FIFO assumes that the oldest items in the inventory were the first to be sold for accounting purposes. This does not mean that the oldest items are always sold first, but this assumption simplifies the accounting process.

 

LIFO, or “last in, first out,” is the opposite of FIFO. Last in, first out assumes the newest items are the first to be sold. This inventory method can offer companies significant tax advantages if a company’s inventory costs are rising. 

 

An example of older inventory affecting valuation is seen with new car sales. A newly arrived car is worth more than a similar model that has been sitting on the lot for the past 8 months. Therefore, the longer a car is in inventory, the lower the value is over time. 

 

Using LIFO, an increase in the product’s value over the period would result in the cost of goods sold being skewed toward a higher value and vice versa if the product’s value dropped.

 

Overview

 

Tracking your cost of goods sold regularly will give you a lot of information about the productivity of your business. You will be able to tell if you are paying too much for raw materials or labor. You can also determine if you need to change the price of your finished product. 

 

Moreover, COGS determines the profitability of your organization and is subtracted from a company’s revenue to determine the gross profit. The cost of goods sold is a direct indicator of how efficient a company is in managing its labor and supplies in the production process.

 

Lastly, you can take advantage of the COGS deduction on your tax return. You will need to keep meticulous records throughout all manufacturing and inventory expenses incurred during the production or acquisition of sold goods.

 

How FINSYNC Can Help

 

FINSYNC allows you to run your business on One Platform. You can send and receive payments, process payroll, automate accounting, and manage cash flow. To learn more about how we can help your business start, scale, and succeed, contact us today.

 

Net income is the key metric to determine an organization’s financial health. Many consider this number the most significant of all financial indicators because it determines whether your company has made a profit.  

 

Fortunately, you don’t have to be a CPA to master the basics of net income.

 

In this article, you will understand the scope of net income, the calculations involved, and what it can tell you about your business’s bottom line. 

 

Understanding Net Income

 

Net Income (NI), also called net earnings or net profit, is the total amount earned in a period minus expenses. Examples of the types of expenses include:

◦ Salaries

◦ Insurance

◦ Equipment

◦ Rent 

◦ Utilities

◦ Advertising and Marketing

◦ Depreciation

◦ Taxes

 

All revenues and expenses are recorded at the top of the income statement, also called the Profit and Loss or P&L. Once all expenses have been subtracted from revenues, a company will see their profit remaining, the net income. 

 

NI is also used to calculate an organization’s profit margin. This metric is net income expressed as a percentage of revenue. Following this percentage month after month is a good way to track whether a business is becoming more or less profitable over time.

 

If your net earnings increase over each period, you are likely on the right track. However, if your NI is going down month after month, it might indicate you need to start cutting costs. 

 

Gross vs Net

 

The key to simplifying NI is by comparing and contrasting gross versus net. Whether you are looking at revenue or income, the gross number is always larger than the net. 

 

Gross profit signifies the total amount of money a company makes minus the cost of goods sold. COGS are expenses incurred to produce the goods that a company sells. These expenses include raw materials, labor, packaging, and utilities in a manufacturing facility.

 

Gross profit does not include other costs associated with marketing or selling activities, administration, taxes, etc.

 

Gross revenue is the aggregate sale price of goods and services over a period of time. Gross revenue is also known as total revenue or the top line, as this is the starting point from which other financial metrics are calculated in a P&L. 

 

Lastly, net revenue is how much gross revenue remains after deducting commissions, sales, losses, or returns. Knowing your net revenue can help you understand what discounts work in your business, for example.

 

Operating Income

 

The last of the three standard income calculations is operating income. Operating income is a more conservative approach than gross income as it also subtracts operating expenses. Like GI and NI, operating income is another way to view profitability and success.

 

All three forms of income are crucial when applying for financing. Banks and lenders typically look at your business’s income with and without expenses to predict a company’s future performance before approving a loan.

 

Calculations

 

Sometimes it is easier to differentiate between these terms by looking at the equations.

Net Income

Gross Income

Operating Income

 

You may need to do additional calculations to find your business’s total revenue. 

 

These equations give a different perspective of the business’s finances and differ depending on which analysis you are running.

Conclusion

 

Revenue alone will not give you a comprehensive representation of your finances. It would be best to incorporate NI to fully understand your organization’s profitability.

 

NI and GI reveal different perspectives and thus can affect actions you might take as a business owner. Gross income can indicate the revenue generated year over year and give a perspective on how your business is doing. However, net income will tell you a slightly different picture of how much you are making after expenses are factored into the equation.

 

Even though net income is a critical metric within all three financial statements, it is not an indicator of cash flow. NI includes non-cash items like depreciation and amortization. Therefore, creating a separate process for your cash flow management is highly recommended.  

 

How FINSYNC Can Help

 

FINSYNC allows you to run your business on One Platform. You can send and receive payments, process payroll, automate accounting, and manage cash flow. To learn more about how we can help your business start, scale, and succeed, contact us today.

 

All businesses operate with a major constraint: money coming in must equal or exceed money going out. It might take months or even years to accomplish this goal, which is why understanding your company’s cash flow is critical. 

 

There are two main methods of measuring cash flow in your organization: operating cash flow and free cash flow. Both are prominent metrics to compare your business with competitors within the same or similar industries. 

 

This article explains the difference between these two common metrics and how to calculate the cash flow for your own business. After all, understanding these measurements determines whether your company is generating the cash it needs to invest in its future.

 

Operating Cash Flow

 

Operating cash flow, or OCF, is the cash a company generates from normal business activities within a certain period. This measurement shows how much money is generated from business operations without considering factors such as interest or investments.

 

Normal business operating costs include the cost of goods sold or COGS, which are expenses that directly correlate with the income from selling those same goods. In addition, less directly correlated expenses such as marketing, advertising, rent, insurance, and administrative overhead are also part of operating costs and fall into a grouping typically referred to as Sales, General, and Administrative or SG&A. 

 

OCF keeps track of all money coming in and going out and records it in the company’s cash flow statement. Sometimes, OCF is listed as “cash flow from operating activities” and represents the cash impact on a company’s net income. 

 

If your company requires a small business loan, many lenders will look at your OCF to ensure you bring in enough money to pay your bills and ascertain your ability to repay the loan. 

 

Operating Cash Flow Calculation

 

The operating cash flow formula can be calculated in two different ways under GAAP or Generally Accepted Accounting Principles. 

 

Direct Method

Indirect Method 

 

Net Income: Net income is how much your business earns from its operations. Find net income by taking the company’s total revenue minus all expenses. 

 

The indirect method is a lot more complicated, but it gives more information. 

 

Free Cash Flow

 

Operating cash flow has its limitations because it doesn’t take into account the cost of acquiring and managing fixed assets such as machinery, software, furniture, and vehicles. 

 

Free cash flow, or FCF, measures how much cash a company generates from normal operations minus any cash spent for long-term fixed assets.

 

Understanding how much money you have left over after paying for everything is valuable because you can assess how much money you may reinvest back into the company. 

 

It also has the potential to identify red flags in your accounts receivable process. For example, if revenue increases but free FCF does not, it could mean customers are not paying invoices on time.

 

Free Cash Flow Calculation

 

FCF can show you how much you have after paying interest expenses during a period. However, it will not reflect newly acquired debt or old debt recently paid off.

 

 

Free cash flow is a measure of financial performance, similar to earnings, and although it can be useful, it’s not a part of any of the core financial statements included in GAAP reporting.

 

Summary

 

Operating and free cash flow are essential metrics for financial health and sustainability. While they each tell you different information, together, they illustrate a more significant picture of your financial health.

 

As sales increase, so do your operating costs, which makes understanding cash flow more powerful. Without proper cost controls and tight cash flow management, increasing sales may not improve net income.

 

Regardless of which method you choose for your organization, it is vital for management to assess these metrics in order to have a clear awareness of the money generated. This data will help determine if a company can hire more staff, purchase better equipment or software, and invest in growth overall.

 

How FINSYNC Can Help

 

FINSYNC allows you to run your business on One Platform. You can send and receive payments, process payroll, automate accounting, and manage cash flow. To learn more about how we can help your business start, scale, and succeed, contact us today.

The world of accounting has many moving parts. Many businesses follow an accounting cycle to keep track of the books and remain on a consistent schedule.

 

There are eight steps involved in this cycle. Upon completion, a company can ensure that every dollar is accounted for and reflected properly in the financial statements. 

 

Here is a checklist to use every month or at the end of an accounting period. Once completed, you can move on to the next period with a fresh, clean slate.

 

1. Transactions

 

We kick off the process by identifying and analyzing the financial transactions. These transactions include all monetary movement in and out of the organization. 

 

Activities would include but are not limited to receiving payment for an invoice, paying for utilities, selling products, purchasing equipment, and payroll.

 

2. Journal Entries

 

Journal entries are records of the initial transactions. Often, a bookkeeper manages and records these daily transactions and puts them in chronological order. 

 

Journal entries are a comprehensive way to keep track of money in and out of the company.  

 

In double-entry accounting, there must be two entries for each transaction. When a credit occurs, there must be a resulting debit. 

 

3. Posting

 

Each journal entry is organized and summarized in the general ledger. The general ledger is a record that categorizes all of the transactions into one of the accounts (categories) listed below:

 

◦ Assets

◦ Liabilities

◦ Equity

◦ Revenue

◦ Expenses

 

When posting to a general ledger, it is crucial to match the transaction with the correct account and subaccount, such as rent, marketing, loan payments, etc.

 

4. Trial Balance

 

At the end of an accounting period, a trial balance assures that all debit and credit totals are equal. Therefore, running this common report makes discrepancies easy to identify. 

 

The trial balance brings to light the unadjusted ratios for each account and subaccount posted in the general ledger. 

 

When the total for all credits does not equal the total debits, a mathematical or recording error was made somewhere earlier in the process and must be fixed in order for “the books to balance.”

 

5. Worksheet

 

Unfortunately, many times, the first calculation of the trial balance will produce a discrepancy. Meaning the credit total does not equal the debit total. Therefore, adjustments need to be calculated until these equate.

 

Adjusting these entries is also called the worksheet analysis. Here is where we can identify when payments aren’t received, or a transaction wasn’t recorded. These discrepancies must be identified and eventually corrected before the period ends.

 

6. Adjusting Journal Entries

 

Once discrepancies related to cash transactions have been identified and entry adjustments recorded, it is time to recalculate a new trial balance.

 

You’ll then want to add any journal entries for non-cash transactions, such as a deferral or depreciation.

 

Once the trial balance is complete and the credits and debits balanced, you can move forward with producing financial statements.

 

7. Financial Statements

 

Now that the accounts are adjusted and recorded correctly in the general ledger, we are ready to create the financial statements.  

 

Financial statements include the following:

 

◦ Income Statement

◦ Balance Sheet

◦ Statement of Cash Flow

◦ Statement of Retained Earnings (optional)

 

The insight you and the company’s management will gain from these financial statements will aid in planning the next steps.  

 

8. Closing the Books

 

The last step in the accounting cycle is closing the books. Closing ties up all loose ends and occurs at the end of each accounting period. Accounting periods could be every month, quarter, year, or other consistent timeframes.

 

After the books are closed out, the cycle starts all over again with the new period. New revenue and expense accounts start over with zero balances.

 

In the most basic terms, the accounting cycle is the process of ensuring the accuracy of the books. This process demonstrates all money going in and out is accounted for and balanced.

 

Errors made throughout this process typically occur. Therefore, having a procedure for identifying and examining these errors is recommended for all organizations. 

 

How FINSYNC Can Help

 

FINSYNC allows you to run your business on One Platform. You can send and receive payments, process payroll, automate accounting, and manage cash flow. To learn more about how we can help your business start, scale, and succeed, contact us today.

It is virtually impossible to run a successful business without a continuous supply of cash that is easily accessible. Here is why understanding your company’s working capital is pivotal to creating a powerful organization.

 

Management teams tend to focus on the profit and loss statements or P&L, which is a formidable picture of what has already happened. However, managing your cash flow requires you to predict the future consistently. If not, cash flow quickly becomes a stratified problem that can have devastating consequences. 

 

This article will discuss working capital definitions and concepts you can implement in your business to improve cash flow management and reduce volatility and future financial stress.

 

What Is Working Capital?

 

Working capital or net working capital (NWC) is the difference between current assets and current liabilities. A liquid asset can be bought and sold quickly without affecting its price. 

 

Current assets, such as cash, securities, inventory, and accounts receivables, are resources a company owns that can be used up or converted into cash within one year.

 

Current liabilities are the amount of money a company owes. Examples of liabilities include debt repayment, accounts payable (bills due), and operating expenses due within the year. 

 

In its most basic form, working capital is part of your cash flow management approach.

 

Business Uses

 

NWC can be both positive and negative. The amount an organization needs to run smoothly varies depending on the size of the business and the industry. Of course, the more working capital a company has, the better its financial position. However, this number changes over time.

 

Retailers, for example, will see higher working capital during the holiday season when sales are at their highest. During these same months, a pool manufacturer will likely have lower liquidity to run their business.

 

Financial industries will frequently lend money to organizations during these off-peak periods. This movement of funds often requires tight monitoring between the company’s management team and the bank itself.

 

Businesses watch both their accounts receivable and accounts payable to help forecast future earnings. A shortfall occurs when the amount of money owed by the company is greater than the revenue coming in.

 

Mistakes to Avoid

 

Having a positive NWC is the objective, as the company will not need to borrow money. At the same time, an organization doesn’t want too much cash or liquidity. Excessive working capital means funds remain idle, which aren’t earning a profit for the business. 

 

Regular, high NWC could be used to increase social media marketing or other marketing strategies, provide additional training, or purchase software that could increase efficiency. 

 

Lastly, and perhaps the most severe working capital mistake is not having a proper cash flow management system in place. Although it may seem to be a good idea to pay bills as soon as they come, you may want to hold off until more invoices are paid. The consequence of paying a bill too soon might mean not having enough money for next month’s inventory or payroll.

 

Tips to Improve

 

Since NWC is current assets minus current liabilities, there are mainly two ways to improve your working capital. A business can increase existing assets or reduce liabilities.

 

A business can also tweak the dates that invoices are due. Companies can offer incentives to their customers to collect the receivables sooner. Conversely, an organization may negotiate a debt extension with creditors or suppliers.

 

Once you have a solid cash management process in place, you will be able to determine the best course of action for new spending. For example, in the long run, it might be cheaper to buy inventory in bulk; however, after plugging in the numbers, you may determine this would be sacrificing too much valuable working capital, which may result in inadequate NWC to package and ship. 

 

Overview

 

Working capital is one of the most critical metrics to running a business. Insufficient EWC amounts to a shortage of resources and even layoffs. At the same time, too much liquidity could mean the company is not reinvesting its money to improve the business.  

 

Most businesses fail, not because of a lack of profits but because of poor EWC management. Cash flow management is critical, and the sooner you can initiate a consistent process, the more flexibility you will have to expand and grow.

 

How FINSYNC Can Help

 

FINSYNC allows you to run your business on One Platform. You can send and receive payments, process payroll, automate accounting, and manage cash flow. To learn more about how we can help your business start, scale, and succeed, contact us today.

If you manage your business finances regularly, the most important thing to focus on is profitability. Understanding gross profit and calculating it consistently is key to building and growing your business.

 

This guide will explain what gross profit is, how to calculate it, what the “cost of goods sold” means, and why these concepts are important for your business’s future.

 

What Is Gross Profit?

 

Gross profit (GP) is the revenue from sales minus the costs to make those sales happen. The costs related to sales are called “Cost of Goods Sold” (COGS), which is usually shown as a separate line on your income statement.

 

GP tells you how much your company would make without considering administrative costs or other expenses not directly tied to the product or service you sell.

 

To understand gross profit better, you need to know about your expenses.

 

Expenses fall into two categories: fixed and variable costs. Fixed costs are operating expenses that stay the same each month. They’re often grouped under “Sales, General & Administrative” (SG&A).

 

 

Fixed cost examples (SG&A):

◦ Rent

◦ Office Phones

◦ Salaries

◦ Employee Benefits

◦ Insurance

◦ Payroll Taxes

 

Variable cost examples (COGS):

◦ Utilities Not Fixed

◦ Hourly Labor

◦ Packing and Shipping

◦ Equipment

◦ Depreciation

 

Cost of Goods Sold

 

COGS on an income statement includes all expenses a business incurs to produce, source, and deliver a product to customers. This total is subtracted from the company’s revenue to find the gross profit.

 

COGS covers everything from raw materials to shipping costs but does not include marketing expenses or overhead. However, it does include labor costs for those who make and assemble the final product.

 

Understanding COGS is vital because it represents the real cost of running the business. If COGS goes up, gross profit goes down. Knowing these costs helps managers and investors see the company’s financial health clearly.

 

 

Calculating GP

 

The gross profit calculation is one of five equations used to measure a company’s profitability. 

 

To find GP, subtract the cost of goods sold (COGS) from total revenue. 

 

 

For example, if you produce coffee beans, you’d add up all the COGS—like purchasing raw beans, utility costs for roasting, labor for packaging, and shipping costs to customers.

 

If your sales revenue for the month is $800,000 and your COGS is $600,000, your gross profit for that month would be $200,000.

 

The equation looks like this:

 

 

Gross Margin

 

Gross margin is the gross profit expressed as a percentage of revenue and is calculated by dividing the gross profit by the sales or revenue and then multiplying by 100.

 

 

Let’s use our coffee bean manufacturing example again. We would complete the formula by inputting the gross profit and dividing it by the revenue, multiplying it into a percentage. 

 

 

Therefore, every dollar of coffee bean sales generates about 25% gross margin. 

 

There are two ways to improve your gross margin. A business can increase its product price or lower the variable costs associated with producing these products. 

 

Long-Term Effects

 

Using gross profit as a metric helps manage an organization’s labor and materials more effectively during production. It allows you to pinpoint areas to cut costs and boost revenue when planning.

 

“We look at gross profit margins on a weekly basis to be adaptable and pivot at speed while providing proactive leadership and fact-based decision making,” says Claude Compton, founder of Pave Projects. “This regularity allows the business to ride out changing tides and isolate any issues before they become a long-term problem.”

 

By regularly monitoring profit margins for each area of your business, you can gather valuable data to identify and scale the most profitable parts of your organization.

 

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Bookkeeping and Accounting are two very critical disciplines within any organization. Often, these two terms are used interchangeably as they share a common goal in handling a company’s finances.

 

Accounting is the process of recording, classifying, selecting, measuring, and communicating the financial data of an organization to enable users to make decisions.

 

Bookkeeping is a component of accounting that maintains and records all daily financial transactions. 

 

Let’s take a closer look at the distinctions between these two valuable professions and how working with both bookkeepers and accountants will benefit your organization. 

 

1. Bookkeepers Organize Financial Data

 

The primary role of a bookkeeper is to record the individual transactions for a business into the general ledger, which summarizes all the financial information you have about your business. 

 

Examples of these transactions are listed below:

 

1. Posting debits and credits such as sales or operating expenses

2. Reconciliations or matching the transactions to the bank ledger

3. Delivering reports such as the balance sheet or income statement

4. Calculating and preparing payroll checks

 

A bookkeeper inputs the financial data on a day-to-day basis. Ensuring the daily monetary transactions is what keeps a business running smoothly. 

 

2. Financial Statements

 

Accountants start with the records the bookkeepers create, sometimes changing categorizations and adding non-cash journal entries, to then look at the business from a larger perspective. These records enable an accountant to analyze and interpret the data in reports that become great resources for business managers.

 

In addition to more specific reports, these financial statements are typically included in a reporting package prepared by an accountant:

 

◦ Income statement

◦ Balance sheet

◦ Statement of cash flows

◦ Statement of retained earnings – optional

 

These main financial statements are audited by accountants, government agencies, and other firms to ensure accuracy for tax, financing, or investing purposes. 

 

3. Analysis

 

Accountants are proficient in taking the information from the financial statements and general ledger and extrapolating the data to reveal higher-level financial structuring and analysis for a business. 

 

Accountants will set, organize,  and analyze financial indicators while scrutinizing any inconsistencies or irregularities. 

 

The result is a better understanding of actual profitability and awareness of cash flow in your organization. This information is essential in forecasting and predicting a company’s future trajectory. 

 

4. Management Decisions

 

A business management team will use the data interpreted within the financial statements to make decisions that affect the organization’s future direction. 

 

Any accountant may summarize their analysis and make recommendations to these decision-makers. They also can investigate any out-of-the-box discrepancies or address complex accounting issues. 

 

Most importantly, your accountant is a crucial advisor that can help you analyze the future: the impact of purchasing new equipment, hiring new team members, switching vendors, etc.. Accountants can list the financial ramifications of these vital management decisions.

 

5. Skill Sets

 

The required credentials between a bookkeeper and an accountant are perhaps the most significant difference between the two roles.

 

While bookkeeping may require specific skills, software knowledge, and training, no formal education or certification is required. The basic requirements are to be detail-oriented, excel in basic math, and be highly organized.

 

Accounting positions generally require a bachelor’s degree in accounting or a related field such as auditing. 

 

In addition, many accountants have a CPA or Certified Public Accountant credentials. Most state boards require at least two years of direct experience before an accountant can sit for the CPA exam. This license should be continually renewed with additional classes and certifications.

 

Summary

 

There is a high level of overlap between a bookkeeper and an accountant. But for the most part, bookkeepers are concerned with the day-to-day maintenance of financial data. At the same time, accountants are focused on leveraging the company’s financial metrics to make wise business decisions. 

 

If you are a small or medium business owner, your finances need to be in order. Without procedures to track transaction activities, a business must guess where its money is coming and going.

 

It is up to you to decide which expertise your company is ready to employ, as both roles are critical to sustainable business success. However, many organizations can outsource these disciplines during the early stages of development. 

 

Ultimately, these two disciplines are made to work in tandem. Hiring a bookkeeper can bring peace of mind, knowing your finances are organized and ready for tax season. In addition, a qualified accountant can see financial and tax loopholes that can save your business money. 

 

How FINSYNC Can Help

 

FINSYNC allows you to run your business on One Platform. You can send and receive payments, process payroll, automate accounting, and manage cash flow. To learn more about how we can help your business start, scale, and succeed, contact us today.

The word “error” is a somewhat triggering word for bookkeepers and accountants alike. Locating an unexpected error in a balance sheet can sap hours and hours of valuable time from a day. Fortunately, today, we will only discuss a predicted error, the Margin of Error. 

 

Using the tips outlined in this article, you will understand and use margin of error calculators while also increasing your knowledge of the methods and procedures needed when looking at your clientele.

 

Margin of Error Validity

 

Let’s say you flip a coin 100 times. Since there is a 50% chance that a coin will land on “heads,” the average statistical results will be 50 times heads and 50 times tails. However, it is not likely you will get this exact result. 

 

Therefore, mathematicians in the field of statistics developed a separate label to account for the degree of error that the solution will deviate. This is also known as the Margin of Error. 

 

Having the ability to recognize and calculate the margin of error is a necessary skill for any small business owner. This metric comes in handy when deciphering survey data and asking for input from your customers.

 

Define Your Population

 

In statistics, a population is a pool of individuals from which a statistical sample is drawn within a study. A population represents every member who is grouped by a common trait or characteristic.

 

Understanding a business’s population parameters is necessary to determine decisions or predictions based on your survey data. 

 

For example, say you want to determine the most popular social media platform your subscribers use. You may send a survey to your subscribers (your defined population) and ask them to select an answer from a specific set of selections.

 

While it would be wonderful if 100% of your survey recipients responded, that’s uncommon. In this example, you will use your responses as your sample and infer that the patterns in their responses hold for the rest of your subscribers.

 

In other scenarios, you may not be able to survey the entire population due to cost and time constraints. Instead, you’ll attempt to pick a representative subset to survey and use those results to draw conclusions.

 

In either case, the margin of error determines how accurate the sample is to the entire population.

 

Simple Margin of Error Calculator

 

Using this quick formula allows calculating the margin of error to be simple and easy.

 

 

Let’s say you received 2000 responses to your query about social media platforms. In this case, the margin of error would be .022. Therefore, there is a 2.2% margin of error in your sample. 

 

Extended Margin of Error Calculator

 

Here is the universal formula for calculating the margin of error for a sample.

 

 

Z = Z score; this is already calculated. You can reference the following Z Score Table.

p̂ = sample size proportion

n = sample size

 

Step 1: Calculate p̂ by calculating the number of respondents that you are selecting. Ex: you can look at each social media site individually and then compare it to the entire sample. The p̂ value is represented by a percentage of respondents. See the example below for more details.

 

Step 2: Find Z Score corresponding to a 95% confidence level, or 1.96 in this case.

 

Step 3: Calculate and convert to a percentage.

 

Using the social media example again, let’s say the company conducted a survey and found that 30% of their customers prefer Facebook as their social media platform. Since you are comparing the 30% of users who preferred Facebook to the 70% who preferred a different platform, here is how the equation would look:

 

 

When we input these numbers, our answer is 2.0%, slightly different from the easy formula. 

 

Conclusion

 

Using samples of a population for survey data will always provide a range, not a specific number. Therefore, the margin of error reveals the imprecision within the sample. 

The only real way to reduce your margin of error and improve your cash flow is to increase your sample size and get more respondents. The smaller the margin of error, the more confidence you may have in your results. The bigger the margin of error, the farther they can stray from the views of the total population.

Finally, the margin of error calculators offer a certain statistical way of predicting the accuracy and reliability of your survey results compared to the entire population.  

 

How FINSYNC Can Help

 

FINSYNC allows you to run your business on One Platform. You can send and receive payments, process payroll, automate accounting, and manage cash flow. To learn more about how we can help your business start, scale, and succeed, contact us today.