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!
You just purchased a new asset for your business; wouldn’t it be wonderful if you never had to worry about it again? That piece of equipment or machinery never needed maintenance and never needed replacing ever again. Unfortunately, this isn’t the reality and organizations need to track accumulated depreciation to ensure operations continue to run smoothly. Accumulated depreciation is not to be confused with regular depreciation. However, the only difference lies in the fact that depreciation appears as an expense on the income statement, and accumulated depreciation is reported on the balance sheet. This article defines what accumulated depreciation is, how it is calculated, recorded and the importance of keeping track of this vital piece of accounting.
DefinitionAccumulated depreciation is the total depreciation of a fixed asset since it was placed in service. For every asset a business has in use, there are two numbers associated: the cost basis and accumulated depreciation. Cost basis or historical cost is how much the equipment or machinery originally cost. This number is documented and verified via the purchase receipt. Accumulated depreciation is how much value this asset has lost and now reduces the value of the asset on your balance sheet. This special type of account that impacts assets by reducing their value is called a “contra-asset” account. The purpose of tracking the accumulated depreciation is to spread the total cost of an asset over its useful life or for as long as the asset is used by the business. Since each asset loses value each year and that loss is treated as an expense, depreciation also affects net income.
Two Calculation MethodsDepreciation can be calculated on a monthly basis in two different ways. Either straight-line method or declining balance method are both recognized by the IRS. A business needs to calculate the depreciation of every asset each month over the course of three to twenty years. Straight Line Method - This method depreciates your property at an equal amount each year over the product lifespan. Straight line depreciation is used when there's no pattern to how the asset is used over time. This method is the most straightforward method of calculating depreciation. Declining Method - The declining depreciation method is a system of recording larger expenses during the earlier years of an asset's life and then smaller amounts during its later years. This method is based on the assumption that the piece of equipment such as a laptop will depreciate more quickly in the first few years versus at year 10. There are two commonly used forms of the declining balance method: the 150% declining method, and the double-declining method.
- The depreciation factor under the 150% declining method is 150% or 1.5.
- Under the double-declining method, the depreciation factor is 200% or 2.
ExamplesA small board game company called RealBlox needs to purchase an asset such as a cardboard printer to create board games on a commercial scale. This asset will cost $120,000 and is expected to last for 10 years, then, at the end of its life lifecycle, it will sell for around $2,000. Using straight line depreciation, our formula will look like this: RealBlox will need to recognize a yearly depreciation expense of $11,800. Shane is setting up his own power washing business and needs to buy equipment totaling $50,000. He expects the assets to last 4 years but doesn’t expect any salvage value after this point. If we use the 150% declining depreciation method our formula will look like this: After the first year, Shane will need to recognize a depreciation expense of $18,750 or $1,562.50 per month if the accounting periods are monthly. For year two, Shane will need to subtract the $18,750 from the historical price of $50,000. Therefore, his beginning book value for Year 2 will be $31,250, and repeat the equation for each year.
Importance of Accumulated DepreciationBusinesses track accumulated depreciation for each asset on the balance sheet. Each period, the depreciation expense increases accumulated depreciation and reduces the value of the asset over its lifecycle. When a company sees a number of critical assets on its balance sheet with high accumulated depreciation, that’s a good indicator that replacement may be required soon. For outside companies considering the purchase of a company with many pieces of critical equipment, a list that includes assets along with their accumulated depreciation is necessary to avoid surprises due to failing equipment or overpaying, thinking assets have many years of functional life left. FINSYNC helps combat the most common small business payments challenges and improve your cash flow, security, and overall efficiency.
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.
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 COGSWhen 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:
Operating Expenses vs COGSBoth 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:
- Office supplies
- Sales and marketing
- Legal costs
Calculating Cost of Goods SoldHere is the general formula for calculating COGS We will take a deeper dive into this formula as there are four steps involved to perform this calculation.
- Identify beginning inventory of raw materials and completed goods, which are the previous period's ending inventory.
- Determine the total cost of purchases for any raw materials and parts used in production.
- Find ending inventory - determine the total value of all items in inventory at the end of the period.
- Total up all other direct costs of production, including labor and shipping costs.
FIFO and LIFOInventory 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 to us 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 the 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.
OverviewTracking 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. 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. The FINSYNC profit and loss setting automatically compares periods such as monthly, quarterly, or yearly, so you can see trending reports.
When reporting out of the general ledger, business owners need to choose between two different accounting methods: cash accounting or accrual accounting. The difference between these two accounting styles is cash ignores receivables and payables and accrual uses receivables and payables. This article walks you through the advantages and disadvantages of each method, so you are better equipped to decide which is correct for your organization.
Cash Basis AccountingCash basis accounting represents the most commonly used method for small businesses because it is straightforward. In cash accounting, revenue and expenses are recorded during the period in which the money changed hands. Therefore, income is recorded as soon as the business acquires the cash. In the same respect, expenses are paid as soon as the money goes out, not when the bill is received. For example, a landscaping company bills one of their customers $4,000 for services on December 1st. But doesn't receive the money until the following year, on January 15th. On a cash basis, this income would be recorded in January so no taxes on it would be owed for the year ending December 31st. Let's take a look at the differences in accrual accounting.
Accrual AccountingThe accrual accounting method is when transactions are recorded as they occur, even if payment has yet to be exchanged. Typically, revenue and expenses are recorded before any money changes hands such as when an invoice or bill is received. The use of accrual accounting is particularly helpful for businesses that offer credit on a majority of their sales, which means there’s a gap between invoice creation and receipt of payment. When using either the cash or accrual method, you must employ double-entry accounting. Double-entry is a system of accounting that requires a two-sided book entry that “balances” for every transaction: the credit and debit sides must match in amount. The double-entry system safeguards your organization as it protects your business against costly accounting errors. In addition, it provides a larger perspective of the money going in and out of the company. Most modern accounting software uses double-entry accounting when entering an invoice or deposit into the system.
DisadvantagesDespite being more challenging to implement, the main disadvantage of accrual accounting involves tax payments. It is possible to pay taxes on the income you haven't received yet. If a customer’s payment is delinquent and you have already paid taxes on it, this creates more paperwork to implement a tax refund. Per the IRS, cash accounting is only available if the business earns less than $5 million in average sales. Beyond $5 million in earnings, a company will need to implement the accrual method. Organizations that earn less than this can choose to do either cash or accrual accounting. Additionally, if your company needs to perform an internal or external audit, the only method accepted is the accrual method. Cash basis accounting has a few disadvantages. First, the cash method doesn't factor in accounts receivable or accounts payable. Since these businesses are recording transactions when they receive them, it doesn't forecast money coming in or future bills that are almost due. Another setback with cash accounting is that it may not provide an accurate picture of the organization's financial health. Let's say a business just completed a large project for which they are still awaiting payment. Presently, this business would look less profitable in the period after which bills related to the project were paid but before the customer payment was received. Therefore, cash accounting can both overstate or understate the condition of a business depending on collections or payments being high within a certain period.
Making a ChoiceAccrual accounting better indicates business performance because it shows when revenue and expenses occurred. If you want to see if a particular month was profitable, this is easy to assess with the accrual method. In real-time, accrual accounting provides a clear picture of your company's profitability along with the ability to identify areas for improvement. To have a firm grasp of your business's finances, you need to understand what your numbers mean and how to use them to answer specific financial questions. Start your financial management process off right with FINSYNC's automated cash flow manager.
Nothing prepares us when a loved one passes away. The grief and sadness that accompany this death can feel overwhelming, making it difficult to perform our duties, which is why many companies provide bereavement leave. A small business may not already have a policy regarding bereavement. Therefore, it is crucial to be prepared before a tragedy strikes. This article covers definitions, challenges, and a list of family members typically covered under bereavement leave.
What Is Bereavement Leave?Bereavement leave or compassionate leave is a paid-time-off category that employees can use following the death of a close friend or family member. Employees must deal with the emotional distress of the loss. They often need to communicate with other family members, make funeral arrangements, and work out any legalities that require their attention. Compassionate leave is designed to give staff the time they need to focus on their tragedy. There are no laws that an organization must pay bereavement leave to their employees. Oregon was the first state to require companies to pay for this leave. Other states like New York and Illinois are following suit. However, most states are not required to provide paid or unpaid time off. Nevertheless, a majority of businesses do have a policy in place that provides payments during this challenging time. The last thing an individual in mourning wants to worry about is getting paid during this much-needed respite or their job stability once they return.
Those Included in Bereavement PayCompanies are encouraged to determine which family members are covered by their bereavement leave policy. Immediate family members and loved ones frequently included in the guidelines include:
- Parent, including:
- biological parent
- adoptive parent
- foster parent
- parent of a same-gender domestic partner
- a person with whom the employee has or is in a relationship in loco parents or the individual or organization legally responsible to take on some of the functions and responsibilities of a parent.
- Child, including:
- biological child
- adopted child
- foster child
- child of a same-gender domestic partner
- Domestic Partners
- Aunts and uncles
- Nieces and nephews
- Individuals with whom the employee had an extended close relationship
- Individuals who live in the same home
Length of TimeThe amount of paid bereavement leave varies among organizations and employee pay grades. For example, salaried employees may have more benefits than hourly or contract employees. A common length of time off in the United States is 3-5 days. The International Foundation of Employee Benefits Plan, or IFEBP, conducted a study and determined that 94% of companies provide some bereavement leave option. The length of time offered fell into three separate groups. The number of days and percentage of organizations that offer these types of benefits are listed below.
1. Death of a spouse:
- Two days – 2%
- Three days – 56%
- Four days – 5%
- Five days – 29%
- Six or more days – 5%
2. Death of a child or parent:
- Two days – 3%
- Three days – 60%
- Four days – 5%
- Five days – 27%
- Six or more days – 3%
3. Death of an extended relativeThe IFEBP reported that most businesses offered one day of bereavement leave to attend the funeral of an aunt, uncle, niece, or nephew.
ChallengesIf an employer does not offer bereavement leave, employees have a few other options to explore. An individual can use their paid time off if available, take an unpaid personal leave of absence, or consider working remotely. Fortunately, many companies understand the importance of their employee’s mental health, which brings forth an opportunity for business owners to step up and show compassion for their team members. As a business, if you do not have a formal bereavement policy, it is time to consider one. These guidelines ensure that leave is granted fairly and equitably among employees. Managers will be able to offer immediate support by explaining the procedures and circumstances involved. Once a bereavement policy is established, the business can operate without too much interference, while the valued co-worker can take off the time they need to move through their grief. Implement FINSYNC’s payroll platform and pay your employees and contractors with ease and accuracy.
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 UsesNWC 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 AvoidHaving 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 ImproveSince 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 spendings. 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.
OverviewWorking 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. Start your financial management process off right with FINSYNC's automated cash flow manager.
If you manage your business finances on an ongoing basis, the central concept you need to establish is profitability. Understanding gross profit and calculating it on a continuing schedule is a cornerstone to building and growing your organization. This discussion defines gross profit, cost of goods sold, how to calculate gross profit and gross margin and why this is important to the future of your business.
What Is Gross Profit?Gross Profit or GP is the revenue from sales minus the costs to achieve those sales. The cost associated with sales is known as “Cost of Goods Sold” or “COGS” and is often in its own section on your income statement. GP tells you exactly how much your company would have made if you didn’t have administrative or other expenses that weren’t directly associated with the product or service you provide. To better understand gross profit, we must also look at our expenses. Expenses or costs are divided into two categories: fixed and variable cost. Fixed costs are counted as operating expenses and remain consistent month to month. They are often grouped into a section called “Sales, General & Administrative” or “SG&A.” Variable costs (COGS) cover all other expenses.
Fixed cost examples (SG&A):
- Office Phones
- Employee Benefits
- Payroll Taxes
Variable cost examples (COGS):
- Utilities Not Fixed
- Hourly Labor
- Packing and Shipping
Cost of Goods SoldCost of goods sold or COGS on an income statement represents all of the expenses a business pays to manufacture, source, and deliver a product to the customer. This amount is subtracted from the organization’s revenue to determine gross profit. COGS are everything from raw materials to freight charges. Costs like marketing expenses and overhead are not included. However, cost of goods sold does include paying the labor force that makes and assembles the final product. Cost of goods sold is crucial because this is the true cost of doing business. If COGS increases, gross profit will decrease. Knowing these costs help managers and investors understand the company’s bottom line.
Calculating GPThe gross profit calculation is one of five equations used to measure a company’s profitability. GP is calculated by subtracting the cost of goods sold from the revenue. For example, let’s say you manufacture coffee beans. You would first total the COGS, including buying the raw Cacao beans, utility costs for roasting the beans and labor costs for assembling the beans for packaging, and finally, the cost of shipping the beans to the customer. If the total sales revenue for selling the beans for the month is $800,000 and the cost of goods sold totals $600,000, then you made a $200,000 net profit for that month. The final equation would look like this:
Gross MarginGross 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 EffectsUtilizing gross profit will encourage managing an organization's labor and supplies in the production process. It will help you identify critical sectors to reduce costs and increase revenue in the planning process. "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." In addition to making changes, monitoring your business's profit margins on each line of business will give you useful data to identify the most profitable areas within your organization and scale them. Make use of accounting software that automatically generates your firm's gross profit with FINSYNC's all-in-one accounting platform.
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