The  recording, classifying, and summarizing in terms of money, transactions and events 

à Accounting Software allows you to choose and switch between accrual and cash  accounting methods.

à Accrual accounting:  The  method of financial reporting for business that recognizes income when earned and expenses when  incurred.  Also known as GAAP accounting.

à Matching principle:  Revenue should be matched with corresponding expenses in a reporting period to properly evaluate financial results.

à Revenue recognition principle: Revenue should be recognized when earned, not when invoiced and not when  paid.

à Unearned Income: If payment is received in advance of when it is earned (when the work is actually done) it must be recorded as a Liability (i.e. Retainer) (money owed) . When the income is earned, the Liability is reversed and Revenue ( business income) is credited.

à Prepaid Expenses:  When bills are prepaid for expenses that occur in the future ( ie insurance is paid in one payment for 12 months) it is recorded as an Asset (positive economic value that could be converted into money if a refund were generated).  Prepaid expenses are reduced and expenses recognized  at their rate of usage at the end of each month.

à Accruals: Journal entries for sales earned or expenses incurred that are not immediately due and not included in day to day bookkeeping.  Examples are work not completed in the month, liabilities for vacation pay, or Errors & Omissions insurance that is calculated once a year based on revenue. This is the only way to properly calculate the net profit for the closing period.

à Cash-basis accounting: A method of bookkeeping that records financial events based on when cash is received and when cash is paid. This is how we pay our taxes.  Businesses need to manage with accrual accounting, and, if their organizational structures allow, and it is advantageous, to pay taxes with cash-basis accounting. (see your CPA)

à Balance Sheet: A Financial Statement that summarizes the financial result of every activity since inception.  It is what your bankers and investors look at first.  It shows how the assets have been financed with Liabilites (debt) and Equity (earnings) Assets = Liabilities+Equity.  It proves the value of the assets.  It also proves the accuracy of the Income Statement as the earnings from the P&L are part of the Balance Sheet.

à Income Statement or Profit & Loss: A Financial Statement that contains period reporting, one year at a time,  viewed by month or interval in which the books are closed and reconciled. The purpose of the Income Statement is to show whether the company made or lost money during the period being reported.

à Chart of Accounts:  A list of the unique accounts used in an organization’s Financial Statements.  A Chart of Accounts is organized  in order of liquidity (most liquid first) in the Balance Sheet and then is followed by the organization of the Income Statement.

à Sales Mix:  The percentage of revenue from each of your product groups.   Drill down and it is your average sale by product group. You want to also know your average sale by customer.

à Direct Costs: Costs that are exclusively related to revenue creation.  Rule of thumb, if there were no revenue, there would be no cost.

à Costs of Goods Sold are direct costs spent creating your product

à Costs of Sales are direct costs spent creating your services

à Overhead expenses/G&A/General & Administrative Costs:  These expenses can be categorized into two areas—Fixed Costs (price never varies such as your rent when you are on a lease) and Variable Costs (those that change every month such as a telephone plan where you pay on minutes used).  More fixed costs = more financial risk. 


         Cash management that evaluates time and risk

à Cash Flow Statement:  The cash results of operations over a period of time that shows earnings and does not show non-cash expenses such as depreciations, deferred taxes etc.  Cash is king.

à Incremental Cash flows:  Are you generating more cash or less?

à Hedging Principle:  The length of a loan should match the cash flow of the asset financed.

à Working Capital: Total investment in Current Assets (= Cash + Bank Deposits + Customer Invoices + Short Term Loans to Others + Inventory + Prepaid Expenses )

à Net Working Capital: Current Assets—Current Liabilities ( Unearned Income, Accounts Payable (vendor bills), Credit Cards, Loan payments and any other payments due within fiscal year or operating cycle)

à Current Ratio: The firm’s Current Assets divided by its Current Liabilities.  If you are breaking even, you need to see at least 1. The higher, the better.

à Cash Coverage Ratio: Can you pay back a loan? Cash Flow divided by # of payments on proposed loan.  Ratio should be 1.5 or higher.

à Debt to Worth or Equity Ratio: Divide Balance Sheet  Equity by Total Liabilities. Should not be more than 3 or 4.

à Friendly Debt: A party willing to sub-ordinate their loan to the bank such as a family member or friend. Friendly Debt will improve the Debt to Worth Ratio.

à Collateral value:  The discounted value a bank gives your assets before giving you a loan.  This value considers the liquidation value of the assets, not your purchase price.

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