Bank Alfalah | SME Toolkit

Cash Flow Triage

Adapted from content excerpted from the American Express® OPEN Small Business Network

It’s Monday morning and you don’t have enough cash on hand to make Friday’s payroll. What options do you have? Cash flow crunches affect every company. Ideally, you can weather these crises by accessing a line of credit or revolving loan you’ve already set up with your bank, or tapping into cash reserves you’ve put aside for such an occasion. But what can you do if you’ve failed to plan ahead? Here are some triage techniques to help get you through such an emergency:

Factors

Factors will quickly buy your receivables for cash — often within 24 hours. You pay a high price, often as much as 15 percent of the value of the receivables, but you can get cash literally overnight. And once factors purchase receivables, they generally take over all the paperwork and accounting aspects of managing them. Since sales to factors are usually confidential, you can keep your cash flow woes quiet. To find a factor, look in the yellow pages under “commercial finance companies.”

Target unpaid receivables

Turn first to reliable, long-term customers who have historically paid on time. Ask a couple of your best customers if they’d be willing to pay their bills, or a portion of them, early. Be upbeat and honest — tell them that you’re tight on cash and would appreciate it if they could pay you now. Consider offering the customer an incentive for early payment — perhaps 1 or 2 percent off the total bill.

For clients with very old debts, offer to forgive 15 or even 25 of their outstanding balance if they pay within the week. This is not a cheap solution, but no more expensive than some debt options. And it may net you money you’d never see otherwise.

Ask a supplier for a loan

Is your business a major account for any of its suppliers? If so, consider asking the supplier for a loan. Go to regular, longtime suppliers (who aren’t also competitors) first, and emphasize that this is a blip. Because you are a steady customer for their goods and services, suppliers have a built-in incentive to help you stay in business. Show your appreciation by paying them promptly once the crisis has passed.

Lease-back your assets

While your office furniture, computers, phone system or other equipment has cash value, you can’t just sell it off and still operate your business. What you can do, however, is find a leasing company that is willing to buy it and lease it back to you. The money you get will be based on the value of your assets, and you can expect the leasing company to charge you a high premium. Use this option carefully. Since the leasing company — not your business — will own the equipment, it probably won’t hesitate to take it back should you miss payments.

Credit cards

Skillfully managed, credit cards can eke you through a cash flow crisis. But be careful: entrepreneurs who have successfully bootstrapped their companies on credit card debt are more the exception than the rule. Credit card debt carries much steeper interest rates than bank loans or lines of credit. And unless you repay the money quickly, hefty monthly payments will put future cash flow in jeopardy. If you have no other choice, treat credit card debt as a short-term loan and repay it within a few weeks.

Juggle bills

If you fail to pay your employees, chances are they’ll quickly start to look for work elsewhere. Suppliers, on the other hand, may be quick to forgive a late payment or two. Call your creditors and ask for a grace period, or arrange to pay only a part of the outstanding balance this month. Closely examine your bills to determine which ones you must pay and which ones can wait. Pay those creditors who are most crucial to the continuation of your business first, and others later. Don’t, however, simply skip a payment; be sure to explain your predicament to the creditor first.

10 Ways To Help Increase Your Cash Flow

Adapted from content excerpted from the American Express® OPEN Small Business Network

As any small business owner knows, maintaining smooth cash flow requires juggling nearly every facet of a business, from staying on top of accounts receivable to extending lines of credit, to managing inventory. The essence of successful cash flow management is regulating the money flowing in and out of your business. Increasing your cash flow reduces the amount of fixed capital that you need to support the given level of your business. An increased, consistent cash flow also creates a predictable business pattern, making it easier to plan and budget for future growth. Here are 10 things you can do to increase your cash flow:

  • Organize your billing schedule
  • Stretch out your payables
  • Take advantage of early payment incentives
  • Balance your client base
  • Check your pricing
  • Don’t buy all in one place
  • Form a buying cooperative
  • Renegotiate your insurance and supplier policies
  • Tighten your inventory
  • Consider leasing instead of buying

Organize your billing schedule

The faster your receivables turn over, the more capital you’ll be able to spend on growing your business. To help you bill early and often, put yourself on a billing schedule with an accounting software program like Intuit’s Quickbooks Pro or Peachtree Software’s Peachtree Complete Plus Time & Billing. These two programs can automatically classify the age of accounts receivable — fewer than 30 days old, between 30 and 59 days, between 60 and 90 days, etc. This kind of automated flagging system allows you to act immediately on overdue accounts.

Stretch out your payables

Take the maximum amount of time allotted (often 60 or 90 days) to pay your suppliers. Think of these terms as an interest-free line of credit from your supplier. It gives you sufficient time to collect receivables without spending money on short term credit lines

Take advantage of early payment incentives

If your suppliers offer you a discount for paying early (usually within two weeks of receiving the bill), take them up on it. Think of it this way: a 2% on a 30-day invoice is equal to a 24% annual return if the money was invested. If your suppliers don’t offer this kind of incentive, ask for it; they may be willing to offer the discount in return for speeding up their receivables.

Balance your client base

Many service and professional companies — such as advertising or PR agencies, accountants, attorneys, real estate management firms, etc. — work with certain clients on a project-by-project basis. Look for ways to convert some of these clients to a retainer relationship, where they pay you a set amount of money per month for a certain number of services. You might want to offer them some kind of incentive — value-added services, a discount — to encourage them to shift to a retainer. This might reduce your profit margin, but it will help make your cash flow more predictable.

Check your pricing

Have your prices kept pace with your rising costs? When was the last time you raised your prices? Many small businesses hesitate to increase their rates because they’re afraid they’ll lose customers. However, customers actually expect their suppliers to institute small, regular price hikes. Also, be sure to check out your competition on a consistent basis. If they’re charging higher prices, you should too.

Don’t buy all in one place

You can save money by splitting your business between suppliers. Closely examine where you need to pay for added service, and where you can save money by paying commodity prices. For example, you might want to buy your computer hardware from a value-added reseller who can help you choose the right system to meet your business needs, while you can purchase other items — such as printer cartridges, cables, or off-the-shelf software — from a mail order catalog or other price merchant. To make certain you’re paying competitive rates, you can compare prices of typical office equipment (such as computers, printer supplies, or postage meters) at Beacon Research Group’s BuyerZone.

Form a buying cooperative

Save money on supplies by rounding up a few colleagues and buying supplies like floppy disks and printer paper in bulk, then divvying them up amongst yourselves.

Renegotiate your insurance and supplier policies

Are you getting the best possible deal on insurance, phone service, and other regular business expenses? Review each of your insurance policies annually and get three quotes for each to ensure you’re getting the most for your money. Keep a close eye on price sensitive services such as your long distance phone service or your Internet access service. Regularly examine these bills and call around to make sure you’re getting the lowest available rate.

Tighten your inventory

Overstocking inventory can tie up significant amounts of cash. Regularly gauge your inventory turns to make sure they are within industry norms. You can do this by calculating your inventory turnover ratio (cost of goods sold divided by the average value of your inventory). Avoid buying more than you know you need when suppliers lure you with big discounts; this can tie up cash. Periodically check your inventory for old or outdated stock, and either defer upcoming orders to use that stock or sell it at cost to improve your liquidity.

Consider leasing instead of buying

Leasing generally costs more than buying, but these costs often can be justified by the cash flow benefits. By leasing computer equipment, cars, or other tools you need to expand your business, you will avoid tying up cash or lines of credit that might better be used for running your business day-to-day. Lease payments are also considered a business expense, so the tax benefits are maintained even though the items are not purchased.

Getting Financial Controls in Place

Provided by My Own Business, Content Partner for the SME Toolkit

OBJECTIVE:

Growing your business will require establishing a solid foundation of internal controls including accounting, auditing, purchasing and damage control planning. This session will give you an overview of what you need to prepare for.

  • Cash flow
  • Accounting
    • Your accountant’s role
    • Check list of internal controls
  • Audits
  • Accounting controls
    • Growth requires more disciplined controls
    • Mission of internal controls
    • Financial reporting by profit centers
    • Frequency of reporting financial statements
    • Frequency of cash flow projections
    • Monitoring your leverage
  • How to buy checklist
  • Damage control plans
  • Top Ten Do’s and Don’ts

Featured Video: Business Planning: How to meet the future needs of your businessAs you grow, your cash flow will become more complex. This will surely be the case if your expansion includes creation of debt to fund your growth. Most business failures occur because the cash flow fails to cover debt created in acquisitions or other expansion costs.

Cash flow control is a simple method of projecting your future needs for cash. It is an income statement covering future periods of time that has been changed to show only cash: cash coming in and cash going out and what your balance of cash is at the end of designated periods of time.

In cash flow control, for each future intervals of time, make conservative estimates for your future sources of cash (IN) and future expenditures (OUT). Use low, conservative figures for IN items and use high estimates for OUT items. For the initial period, start with the cash you now have. To this you add IN items and subtract the OUT items, which results in the cash at end of the month. The cash at the end of month becomes the starting cash for the next month.

Your cash flow projections will furnish the information on how much debt you can safely take on. You may want to establish a guideline ratio to establish a margin of safety between your cash flow and your debt service. For example, limiting your outstanding debt service so as to maintain cash flow that is three or more times the debt service. To estimate a reasonable ratio for your particular business, your public competitors are a good place to look for industry norms.

Any time you were to run out of cash, you would have a potentially disastrous problem. So the number one safeguard in building your business is: never run out of cash. By having information of potential negative balances in advance, say six months, you have six months to make cash flow adjustments in sales, collections, expenses or financing to correct future negative balances.

The following simplified cash flow control spreadsheet shows that ending cash for this first period becomes the starting cash for the second period. The ending cash for the second period becomes the starting cash for the third period, and so on. The projection will also be a useful tool in arranging financing and demonstrate to your banker that you are sensitive to the importance of safeguarding liquidity as you grow your company.

Your accountant’s role

Internal controls are the safeguards to ensure all the information represented on your financial statements is accurate. Your internal accountant working with your CPA will be the key overseers in managing all internal controls.

  • Separation of income and expense functions. For example, have different people handle accounts payable and accounts receivable.
  • Separate authorization, custody, and record keeping roles. Your CPA can make recommendations that are appropriate for your business.
  • Have bank statements mailed to a separate (or home) address of a managing authority or yourself. Malfeasance occurs frequently with banking transactions. Bank statements and checks cashed can be independently reviewed.
  • Do not delegate signing of checks.
  • Establish maximum limits of purchasing authority.
  • Require all payments be supported by invoices.
  • Require bids on all purchases over a stated limit.
  • Inventory controls:
  • Inventory, similar to cash, can disappear very rapidly through carelessness or employee dishonesty. Require authorization for who can sign for goods and services and who controls the release of goods and services out the door after the processing has been completed. Separation of incoming and outgoing duties is recommended.
  • Rapid delivery firms such as UPS or FedEx and just-in-time assembly systems are great tools to use to minimize your inventories. The cash you free up can be put to uses that are more productive.
  • Verify that insurance policies are in force and premium payments are current. View our “Top Ten Do’s and Don’ts” of insurance coverage in the Start a Business Course.
  • Internet technology security management in place or outsourced. Your IT consultant or manager should write out the IT policies.
  • Edit log for website changes and updates. If your business deals with e-commerce, you need to establish a log procedure for control of who and how edits to your website are to be made. All changes or edits to the site should be made through a designated employee. Your computer technology consultant can show you how to administer this tool.

You will probably need more financing as you grow and your lenders will require a closer scrutiny of your financial statements. There are several levels of how audits are performed by your CPA. Starting with the most rigid and expensive one:

  • An audited financial statement is one prepared by a CPA who certifies that the financial statements met requirements of GAAP (Generally Accepted Accounting Principles) which covers a wide range of procedures. An audited statement is required of publicly owned firms. So if you are planning a future initial public offering it is a good idea to start publishing audited statements at least two years before your intended IPO date. Some banks will require audited statements.
  • A reviewed statement is the next down from audited statement and less costly as the auditor does less examining than the audited statements. Some banks will approve a reviewed statement of small and intermediate-sized companies.
  • The second step down from an audited statement is a compiled statement prepared by a CPA. But the CPA can not provide assurance that the statements are according to GAAP standards.
  • Internally prepared statements are prepared by the company and may or may not follow GAAP nor be prepared by a CPA. Any growing business should maintain a higher level of accounting scrutiny than relying on internally generated financial information.

Growth requires more disciplined controls

As you grow, your accounting and internal control systems must keep pace to insure that the higher levels of income you generate are not wasted or siphoned off by various forms of dishonesty. Take a moment to think about anyone you know of that has suffered a loss due to embezzlement or poor internal controls. Was the loss severe? How could it have been avoided?

So it becomes increasingly important for both your internal accounting management and your auditor to be adequately qualified and experienced in implementing firewalls against various forms of embezzlement, shrinkage and other criminal activities.

Mission of internal controls

To accomplish appropriate controls, consider:

  • Developing systems to maintain efficiencies and honesty on both the supply-side and the marketing side of your business.
    • Supplied side risks include ordering procedures, incoming and outgoing inventory controls and accounts payable accounting.
    • Marketing-side risks include shrinkage (stealing by your customers and/or employees) accounts receivable mismanagement and sales not being rung up at the cash register.
  • Work with both your internal accounting manager and CPA to upgrade financial controls as needed. If you have uncommon risks beyond ones your accountants can install and administer, you might consider getting an assessment from a loss control consultant.

Financial reporting by profit centers

Your expansion should provide that your overall financial statements are broken down by individual profit centers within the company. This practice will identify areas of strengths and weaknesses and also provide the basis for profit sharing incentives for key managers.

Frequency of reporting financial statements

Individual profit center income statements (P & L’s) should be reported on a very frequent basis, with a minimum of monthly reporting. Here’s why:

  • To disclose problems or losses early, before they become big and unmanageable. The early detection of losses should not only accelerate remedies but also be followed up by promptly shutting down an operation that proves to have incurable flaws so that a financial leak does not turn into a flow of losses.
  • Profit sharing incentives work best when they are paid in frequent intervals. In some food operations, P & L’s are pulled and incentive checks written on a weekly basis.

Frequency of cash flow projections

As referred to earlier in this session, the cash needs of a growing business will add more uncertainty to future liquidity and therefore must be closely monitored. Predicting future liquidity should be updated very frequently such as quarterly.

Monitoring your leverage

Financial leverage is the use of borrowed money to supplement the cash you invest in growing your business. The general objective is to borrow money to buy an asset with a higher return than the cost (the interest) on the debt. While the purpose is to maximize your earnings, the cost is running the risk of maximizing losses.

Firms that are highly leveraged run the risk in bad times that their income may not be sufficient to make payment on their debt or even the risk of bankruptcy. The financial crisis of 2007 – 2009 was blamed largely on excessive leverage. Here are three ways you can monitor and thereby minimize your level of risk on an ongoing basis:

  • Work with your CPA to establish a maximum financial leverage ratio, also referred to as debt-to-equity ratio.
  • Work with your CPA to establish a minimum level debt-to-cash flow ratio. Cash flow is the cash you generate after eliminating non-cash expenses from your income.
  • Borrow for a longer term than you need. If you can repay in 3 years ask for 5 years. Be sure to include the provision permitting acceleration of your repayments.

As you grow in earnings and cash flow, your leverage should become less and less for two reasons:

  • Over time you will be growing your retained earnings and will have more cash to invest, lessening the need for borrowing.
  • The greater your net worth becomes, the less leverage risks you should be taking. This follows the Warren Buffett maxim: “you only need to get rich once”.

If your accounts aren’t in perfect shape, now is a great time to make sure they’re well-organized. A good piece of accounting software can make this a lot easier. The two best programs on the market are Quickbooks and Sage 50 (formally Peachtree).

Here is a checklist on purchasing to incorporate in your internal controls.

  • Never place an order without knowing the price and the terms.
  • Purchase orders must be in writing.
  • Have complete specifications.
  • Buy subject to your contingencies.
  • Have backup sources.
  • Be loyal to good suppliers.
  • Have promises and extras verified in writing.
  • Get price protection.
  • Try to award to the lowest bidder.
  • Don’t hesitate to repeatedly contact suppliers to expedite needed merchandise. “The squeaky wheels get the grease.”
  • Communicate complaints quickly and respectfully
  • Use internal controls for ordering and receiving.
  • Count and inspect everything as received.
  • Use an inventory control system.
  • Ask for and take term discounts.
  • Pay on time.
  • Pay only after verification.
  • Watch your cash flow.
  • Consider suppliers as a source of financing.

Ships at sea have no fire department to call for help. So damage control plans and training are important for survival. As a business owner you also need to be prepared for unexpected adversities. We recommend the following contingency plans be practiced and ongoing training provided:

  • Contingency plans for adverse cash flow. This could include back-up banking resources, or multiple sources rather than one. Always keep in mind that this event could happen and seek out your other resources to fund periods of need.
  • Insurance protection in place. It is foolish for an owner to look to saving money by not providing adequate insurance for all appropriate casualty events. It’s not a good idea to “bet the company” that adversities will not happen.
  • Determine if there are any special industry-related risks that apply to your business. Here are two examples:

Should you take precautions against power outages? Lights out may mean lost sales or lost computer data. Or, if you maintain frozen or refrigerated storage, would the expense of a stand-by generator be good insurance?

THE TOP TEN DOS

  • Adjust and readjust your cash flow projections.
  • Establish maximum limits of purchasing authority.
  • Require all payments be supported by invoices.
  • Use an inventory control system.
  • Work with your CPA to upgrade financial controls.
  • Require bids on all purchases over a stated limit.
  • Be loyal to good suppliers.
  • Pay on time, but only after verification.
  • Consider higher audit levels.
  • Implement an “edit log” for website changes and updates.

HTHE TOP TEN DON’TS

  • Run out of cash…ever.
  • Discount the importance of hiring an accountant and a CPA.
  • Overlook suppliers as sources of financing.
  • Disregard contingency planning.
  • Have same person handling payables and receivables.
  • Place an order without written price and terms.
  • Delegate signing of checks.
  • Assume that shipments are complete and in perfect condition.
  • Neglect to ask for and use term discounts.
  • Think that hand-shake agreements are best when buying.

Copyright © 1993, 1997-2016, My Own Business, Inc. All Rights Reserved.

Attracting FDI vs Reinvesting Profits

Business Recorder (BR) Research

The two-day Pak-US Business Opportunities Conference ended March 11, 2015, Reportedly, the plan was to attract foreign investments from the US as well as to boost exports by inviting those investors who can use Pakistan’s soil as an export base. This move is a part of the series of investor wooing efforts by the government; first an overall investor conference held in October 2014, followed a move to attract Turkish investors and now this conference for American investors.

American investors have invested about $1.5 billion since FY10 to date (till Jan 2015) or about 18 percent of the total during this period. In the ongoing fiscal year alone (7MFY15), inflows from the US are around $156 million or about 28 percent of the total FDI inflow in the year to date.

But check this out. Last year in FY14, the US had invested $212 million as net FDI inflows. However, the profit repatriation of US firms in the same year was $244 million – the second biggest profit repatriation after UK ($270 million) – according to central bank data, which BR Research had obtained a few months ago. In other words, US investors had taken out more money from the economy than they had invested.

This is not to say that Pakistan should not pursue a liberal FDI regime. But that reinvestment of profits is equally important for this country, given our weak forex reserves. Total repatriation in FY14 was about 20 percent of foreign reserves held by scheduled banks, whereas a percentage of total foreign reserves it was about 7.2 percent. The latter is nearly double over FY06 when foreign reserves hovered around $13 billion, repatriation as a percentage of total foreign reserves stood at 3.8 percent.

As a percentage of net FDI inflow, profit repatriation swelled to an average of 59 percent between FY11 and FY14 from an average of about 16 percent between FY06 and FY10. Admittedly this is because of low denominator as FDI inflows have been thin in recent years; and hence the steps to increase FDI in Pakistan.

But there is no confirmation that these conferences are yielding fruits or a guarantee that they will – for despite the many MoU and conferences and whatnot in all the preceding years all we have is a damp squib.

Even as all the drums that are being played, total FDI inflows in seven months ending January 2015 has, in fact, decreased by 1.4 percent year-on-year to $545 million. Contrast that with total profit repatriation during the same period, $707 million according to central bank data, and we are about $150 million in the deficit on that account.

The moral of the story is: while the government should continue with its efforts to woo investments, it needs to look at the total picture and therefore also needs to look at profit repatriation and see how it can convince investors to reinvest their profits.

Perhaps until such time when FDI inflows start thriving, some incentives or moral suasion for reinvestment of profits, beginning from those sectors and countries (such as the US) that have the highest repatriation ratios, wouldn’t be a bad idea to explore.

This article was originally published on March 12, 2015.

Accounting and Cash Flow

Provided by My Own Business, Content Partner for the SME Toolkit

OBJECTIVE:

Before you start your business, you will need to learn how to keep score (basic accounting), and how to maintain cash in your bank account (cash flow control). This session explains both in simple terms, and the advantages of hiring an accountant before you start.

  • Step One: Gain the knowledge
  • Step Two: Select an accountant
    • Methods of Accounting
      • Cash Basis Method
      • Accrual Method
    • Keeping Separate Business Records
    • Tax Liability Issues
      • Income taxes
      • Payroll taxes
    • Financial and Technical Assistance
    • Internal Controls
    • Quarterly Returns
    • Bank Account Reconciliation
    • Employee Benefits Policy
  • Step Three: Do your own bookkeeping!
    • The Three Major Financial Statements
      • The Balance Sheet
      • The Income Statement
      • Cash Flow Control
    • Accounting and Cash Flow Punch List
  • Top Ten Do’s and Don’ts
  • Business Plan


If you’re going to be in business, you must know how to keep score. To gain this knowledge will require that you go to school to learn both accounting and computer software that is used to support your particular business. With this knowledge, you can talk intelligently about your accounting needs with employees, bankers, and your own accountant.

The financial matters you will confront in your own business are little different than those of large corporations. Financial tools, coupled with an understanding of how to use them, will assist you in the proper management of your business. Without this understanding and without a dedicated commitment to using financial tools, you reduce your chances of success.

Your business will be judged by the classic financial measures: the balance sheet, the profit and loss statement, and the cash flow statement. These three measurements will define the financial health of your company. In this session you will learn how:

  • The balance sheet tells how much the business is worth.
  • The profit and loss statement tells if your business is profitable or not.
  • The cash flow statement predicts your cash balances into the future.

As a business owner, you need to feel comfortable with the values portrayed by each measurement. Understanding these three measurements will whet your appetite to learn more, which in turn will lead to your strategic use of credit and ability to make choices tying operational activities to the best use of funds. They will help you make better decisions.

You will also need to gain knowledge of accounting in order to evaluate your competitors or businesses you might wish to acquire (or be acquired by). While information about companies may be obtained from stock brokers or interviews with key executives, the best source to learn about your most successful and publicly owned competitors is to read their annual reports. You will need to understand accounting to draw intelligent conclusions. Accounting courses at your local community college will give you most of what you need to know.
You should consult an accountant before you start. This could be a Certified Public Accountant (CPA) who is a sole practitioner or a large accounting firm that can offer expertise in many areas (and whose fees tend to be higher). Another type of accountant is an “Enrolled Agent” (EA). EAs must pass a taxation test administered by the Internal Revenue Service.

You will need to decide how your accountant will prepare your annual financial statement. There are several levels of audit to select from. They are listed in our Session 1 on Financial Controls in Business Expansion course.

At present, there are no national certification standards for bookkeepers like there are for CPAs or EAs. So, it may be best to look for referrals when selecting a bookkeeper. Many CPAs and EAs will refer you to people they have confidence in to help you with your accounting needs. Bookkeepers range from those who only pay bills or process receipts to “full charge” bookkeepers who can summarize bookkeeping activity for your CPA or EA to prepare tax returns.

On the other hand, if you want someone to advise you on business organization and prepare income and payroll tax returns, you will probably want a CPA or EA to help you. The more “routine” bookkeeping you know and do yourself, the better it is because you can then afford a higher level of expertise.

You will need to determine what accounting software program will work best for your business and your accountant can help decide this. Some good ways to determine this:

  • Ask others in your industry whose judgments you trust about their experience with software.

Payroll accounting and reporting is increasingly complex. If you will have employees, look up the “Payroll Accounting Service” providers in your area. Your accountant may have a recommendation. This complicated function can be outsourced at a reasonable cost.

Ways that your accountant can help in dealing with your banker:

Sooner or later, you will need financing in addition to your start-up sources. It is important to establish banking relations BEFORE future needs arise. Your accountant can help you:

  • Prepare cash flow control statements that will estimate what the cash needs of the business will be in months to come.
  • Prepare a personal financial statement, including a balance sheet of your personal assets and liabilities along with a statement of income and expenses showing how much cash flow you generate each month. Banks will usually require a personal guarantee.
  • Locate a banker. This can be helpful because the banker has had prior dealings with the accountant.
  • Polish your business plan for your banker.
  • Organize as much information as possible including financial statements in a neat and orderly fashion.

Methods of Accounting

Before you start, you will need to decide what form of accounting your business will use. There are two major types:

  • Cash Basis Method: This is what the name implies; you recognize income when you receive the cash and you recognize the expense when you pay the bill. Most service businesses operate on the cash basis because it is much simpler to understand.
  • Accrual Method: Here you match revenue with expense regardless when the cash may or may not be collected. If you sell a product to a customer and he doesn’t pay you for 30 days, the sale is recorded in the books on the day that you made the sale. When the money comes in the “accounts receivable” is then turned into cash. The same with expenses: if you incur an expense on one month but don’t pay until the next month, the expense will be recognized in the month in which you incurred the expense. If you’re in manufacturing or deal with inventory, the Internal Revenue Service generally requires that you be on the accrual basis.

Keeping Separate Business Records

Even in a small business, you should, before you start, set up a business account even if you’re a sole proprietor. It will be important to keep your business records separate from your personal records. This will make it easier for you and your accountant to pull records together for income taxes when the time comes. Your accountant can help you prepare and set up your company accounts, including establishing your checking accounts and or savings account for operating your business.

Keeping Separate Business Records

There will be a number of tax liability matters that you and your accountant will need to deal with:

  • Income Taxes. If you start as a sole proprietor you will be reporting your business activity on a schedule that is attached to your IRS form 1040, called Schedule C. Not only will the sole proprietor pay income tax on business income, but the sole proprietor will also pay social security tax on this income. This is reported as a separate item on the income tax return. The social security tax can be quite a surprise for the new small businessperson who does not expect to pay roughly 15% of net income for social security tax on top of the income tax. Operating as a partnership or LLC does not relieve a partner of the obligation of paying self-employment tax. Your accountant can help set up estimated tax payments that will lessen the burden of your final tax bills as well as avoid penalties for not paying taxes as you go along.
  • Payroll Taxes. If you have employees, your accountant can help you apply for necessary state and federal payroll numbers that you will need to file payroll tax returns. The federal number is called a “federal employer identification number” or FEIN, and these are obtained by form SS-4. Also, in every state, there are local and state taxes that are required. For instance, in California, you need to apply for a state identification number that will establish an account for you to pay the state withholding tax that you withhold from employees and the state disability insurance monies withheld. There is also a state unemployment tax that you pay. There may be other taxes that may be unique to your local situation.

Financial and Technical Assistance

Many times, there are sources of financing and technical assistance available to start-up businesses that are given by various organizations and agencies that wish to spur the development of small business. Your accountant may or may not be familiar with these sources, but this might be a question you would pose to a prospective accountant before you hire him or her. Financial and technical assistance may be available from:

  • The Small Business Administration (SBA)
  • SBA-guaranteed loans to businesses handled through banks
  • Local community banks, funded by the federal government
  • Tax incentives available for hiring minority employees
  • Trade organizations
  • Service Corps of Retired Executives (SCORE), which is a nonprofit organization whose goal is to help small businesses become successful. SCORE offers workshops and seminars on various business topics and may give you the opportunity to talk to someone who has been down the same road before.

Internal Controls

“Internal controls” refers to what is needed in the handling of funds, where money in the form of cash, checks or credit cards, is exchanged for goods and services. The goal is to make sure that the business receives all of its income without any of it being siphoned off by waste, fraud, dishonest employees or just through carelessness. Even a business that is healthy in all other respects can be very vulnerable to failing from the inside through lack of internal controls. Your accountant can help set up appropriate controls for your particular business.

Damage control planning is an important part of internal controls. You will need to be prepared for adversities.

If you are in a manufacturing or retail business you will need to set up inventory policies and controls because inventory, similar to cash, can disappear very rapidly through carelessness or employee dishonesty. You need to have safeguards in place very early on in the process by setting up controls as to who can sign for goods and services and who controls the release of goods and services out the door after the processing has been completed.

You are probably getting the idea by now that in your selection process of retaining an accountant, it is a good idea to get one with experience in your industry.

Quarterly Returns

Quarterly returns are primarily payroll tax returns and sales tax returns. Start-up businesses need to file quarterly payroll tax returns and send the money that has been withheld from the employee’s check as well as the employer’s share of social security taxes to the federal government. Likewise, state income taxes that are withheld and state unemployment tax that the employers pay to the state must be accounted for. These are matters you need to get right from the beginning so that these taxes are paid in the appropriate time frame and you’re not penalized for late payment or non-payment of your tax obligations.

It is a common occurrence for start-ups to be short of cash. And it is very tempting to hold off paying certain obligations to conserve cash. Yet, you should not fall into that trap with your government obligations because governmental agencies have little patience with delinquent taxpayers.

Similarly, the sales tax money that you collect, in states that charge sales tax, needs to be forwarded to the state, either on a monthly or quarterly basis depending on the volume of your sales. Quarterly reports will be required to show how much you have collected and that you have submitted this money to the state in a timely manner.

Bank Account Reconciliation

We suggested earlier that you set up separate business accounts to make it easier to track expenses and business income. This bank account needs to be reconciled at least once a month when you receive your bank statement. You can save money by learning to do this yourself, and your accountant can teach you if you don’t know how.

Reconciliation refers to taking the balance in your checkbook and reconciling or mathematically comparing it to the bank balance. You must also take into account any difference in those two balances that are due to checks that you have written that have not yet cleared the bank. If this is the case, your checkbook balance will be lower than the bank statement because the bank has not yet seen some of the checks you have written. So it is important that these outstanding checks get subtracted from the bank balance and the resulting number be compared to the number in your checkbook. When the two match, we say the account has been reconciled.

Employee Benefits Policy

As you add employees to your business, you will need to decide

  • How many hours people will work.
  • What holidays they are entitled to.
  • What your vacation policy might be.
  • For information regarding health insurance coverage for your employees, go to healthcare.gov or talk to your professional advisors.
  • What sick leave policy to offer. Will you pay employees when they are sick or will, this time, be considered unpaid time off? Be sure to refer to the Fair Labor Standards Act when making this determination. There are different requirements for hourly vs. salaried employees.

There are a number of sources to give you some help in deciding these issues:

  • Start with your accountant and lawyer.
  • Your own experience in your particular industry will help determine your policy. What has worked for similar companies in the past is very likely a good way to consider going with your own company so you are competitive with other firms in your industry.
  • Organizations such as SCORE can be helpful in determining policies and procedures.

Up to now, you have consulted with an accountant and have gone to school to learn basic accounting. The next step in getting to know how accounting and cash flow works is to do your own bookkeeping in your start-up mode. This is invaluable because as you do the bookkeeping and understand the records that are involved, you are in a much better position to bring in employees and train them as the business grows. You can then devote your time to more of a manager level. If you have a willing spouse or a trusted friend, they can be invaluable in doing the bookkeeping. If you are doing your own bookkeeping, it is very important that you choose the right software. A good program that’s easy to use can help make your life a lot easier.

Making entries into a software program does not require a trained bookkeeper but it is important that you, the business owner, have a full understanding of double entry accounting.

There is one aspect of bookkeeping that you could consider delegating: payroll and payroll reporting, which can be handled by Payroll Service Providers at a low cost.

If you are in a partnership, it is especially important that you have knowledge of the accounting as well as what is happening in the other areas of the business. Remember that in a partnership, all the partners have the authority to commit to the partnership. If a partner in charge of accounting doesn’t do a good job, it can affect all the partners.

Major Financial Statements and Software

Balance Sheet

The balance sheet is a “point in time” statement. Think of it as a snapshot. It is a listing of all of your assets as well as your liabilities, and the difference between these two numbers is your equity in your business. You will see in the example that the balance sheet is divided into two major sections. The first section is “Assets.” The second section is “Liabilities and Owner’s Equity.”

The general order of a balance sheet is to go from the most liquid to the least liquid. In other words, under “assets,” you see the heading “current assets” and the first item is cash because cash is the most liquid of your assets. After cash are receivables, representing money owed you from customers. When you receive the money, the receivable turns into cash. Next in assets are “inventories.” Since inventory is not as liquid as either cash or receivables, this falls below them on your balance sheet. Following current assets are property and equipment that are typically carried at cost.

You will also notice “depreciation” on a balance sheet prepared by an accountant. Depreciation is a non-cash expense and is nothing more or less than an attempt to record that these assets go down in value over time.

One reason this particular financial statement is called a “balance sheet” is that assets always equal your liabilities and owner’s equity. This is called double-entry bookkeeping and is the type done in nearly every business. The reason double-entry bookkeeping is the accounting gold standard is that it serves as a check to make sure a transaction has been properly recorded. For example, let’s say the first thing you buy is a desk. You have an asset of office equipment. If you paid cash, you don’t owe any liabilities so your interest in that desk is called your equity (on the other side of the ledger).

Similarly, other transactions will give rise to an increase in assets and/or an increase in liabilities or equity. For example, looking at our balance sheet example under current liabilities (again, from most liquid to least liquid) your account payables are the first item listed. After that, there are items called “accrued liabilities,” which usually refers to payroll taxes and sales taxes that may not be due for another month or two.

Also, under current liabilities is debt that is due within a year. So, the current 12 months of payments for equipment would be shown as a current liability. Following that, we have long-term debt, which are items that are due after the current year.

Following total liabilities is the section called “owner’s equity” which is the owner’s interest in the business. If we take all the assets of the business, $37,000, and subtract the total liabilities, $18,000, there is a difference of $19,000. Of this $19,000 amount, $13,000 is from past income and $6,000 is from income earned during the current accounting period, thereby balancing out $37,000 for both assets and liabilities and owner’s equity.

When bankers look at a financial statement, they are interested in various financial ratios. Ratios help indicate the financial strength of a business and how the business can handle payback of loans. For example, current ratio is current assets divided by current liabilities. If your current assets are less than your current liabilities, a red flag will go up because it would indicate a risk of insolvency during the present year. Various industries will have different levels of ratios. You can track your ratios with others in your industry to see how your business compares. Your banker will probably be most interested in your owner’s equity.

Income Statement

The income statement (also called the “Profit and Loss” statement), unlike the balance sheet, covers a period of time, usually monthly or quarterly. Usually, year-to-date figures are also presented to show how the business is doing during the current accounting year. In the example shown here, the financial statement covers a six-month period and shows the activity for the current month as well as the year-to-date total of the prior five months plus the current month, for a total of six months.

The income statement and the balance sheet tie together. Look back on the balance sheet and you’ll see current earnings of $6,000. The income statement shows this same $6,000, which was the profit for the last six months.

Your income statement will disclose valuable information. You will see a section for sales as well as a breakdown of all your expenses, leading down to the net profit for the period. The more current your financial statement, the greater will be its value. If you see a bad trend developing, you can take action at once.

Computer programs can produce financial statements with a keystroke, which is why you need to acquire the computer skills and software that are appropriate for your particular business.

Cash Flow Control

Just as jet fuel keeps a plane aloft, cash fuels business. A pilot is very careful to accurately predict the fuel requirements. You should place the same importance on cash flow control because if at any point in the future, you run out of fuel, like the pilot, you’ve got a BIG problem.

Cash flow control is a simple method of projecting your future needs for cash. It is an income statement covering future periods of time that has been changed to show only cash: cash coming in and cash going out and what your balance of cash is at the end of designated periods of time. This is a great tool because you can predict your future needs for cash before the needs arise.

In cash flow control, for each of a number of intervals of time, you make conservative estimates for your future sources of cash (IN) and future expenditures (OUT). Use low, conservative figures for IN items and use high estimates for OUT items. For the initial period, say a month, you start with the cash you now have. To this, you add IN items and subtract the OUT items, which results in the cash at the end of the month. The cash at the end of the month becomes the starting cash for the next month.

The attached cash flow control spreadsheet shows that ending cash for this first period becomes the starting cash for the second period. The ending cash for the second period becomes the starting cash for the third period, and so on. Your projection should be made for an upcoming 12-month period. The projection will be a useful tool for you to arrange financing before it is required by showing your banker that you are sophisticated enough to provide for future cash in order to preserve liquidity.

You can use this simple cash flow format to make up your own cash flow projection for the business you have in mind. It is so simple, yet can be so valuable!

Accounting and Cash Flow Punch List

  • Prepare frequent financial statements, at least, monthly or even weekly.
  • Keep track of key income statement percentages. If you’re in manufacturing, your cost of goods sold percentage should be relatively the same as competitors in your industry.
  • Compare your income statement with prior periods.
  • To start with, you won’t need certified financial statements. Accountants have three levels of statements: certified, reviewed and compiled. For most startups, the compiled type will work; that is, your accountant prepares the financial statement with a letter stating that the numbers are based on the information you have provided.
  • From the beginning, maintain good internal controls. Learn from the practices used in your industry to prevent dishonesty and shrinkage. Shrinkage includes shoplifting and other types of stealing, which results in the “shrinkage” of your inventory.
  • Do not delegate the authority to sign checks or purchase orders.
  • Don’t use money that you have withheld for payroll taxes or sales taxes for other purposes. You will be a trustee of funds belonging to the Internal Revenue Service, Social Security Administration, and your state’s sales taxing authority. A “payroll service provider” can be used to manage these responsibilities.
  • Keep in mind that liquidity is not the same as making money. You can be making a profit and still go broke by running out of cash. Learn and practice cash flow control.
  • Look ahead and write out your list of projected financial requirements including premises, equipment, staff and working capital.</li

Arrange for financing well before the need arises.

THE TOP TEN DO’S

  • Learn basic accounting before you go into business. Go to school if necessary.
  • Consult and retain an accountant familiar with your industry before you start.
  • Determine what accounting software program works best for your business.
  • In the beginning, do your own bookkeeping to gain knowledge of your accounting.
  • Set up inventory policy and internal controls including safeguards against dishonesty.
  • Reconcile your bank account at least once a month when your bank statement is received.
  • Maintain and update your cash flow control spreadsheet monthly.
  • Plan to outsource your payroll and payroll reporting to a payroll service provider.
  • Prepare financial statements, at least, monthly.
  • Keep your business records separate from your personal records.

THE TOP TEN DON’TS

  • Delegate the authority to sign checks to anyone.
  • Use money withheld for payroll taxes or sales taxes for other purposes.
  • Commingle personal assets with your business assets.
  • Delegate cash flow projections–your lifeline to liquidity.
  • Be optimistic in sales projections or conservative in expense projections.
  • Rely on verbal agreements on any important matter including purchases.
  • Pay an invoice without matching it to your purchase order.
  • Delegate your relationship with your lending sources.
  • Wait to establish credit sources until you have a need for financing.
  • Overlook seeking advice from your accountant and lawyer on important financial matters.

You can now continue to assemble your business plan. We provided Microsoft Word template for this section below:

Session “Accounting and Cash Flow”

MS WordCopyright © 1993, 1997-2016, My Own Business, Inc. All Rights Reserved.

Alternatives for Capital Allocation

Provided by My Own Business, Content Partner for the SME Toolkit

OBJECTIVE:

The degree of your success through growth will depend on how good you are in making capital allocations from your retained earnings. This session will teach you how to financially analyze various acquisition opportunities….which to pursue and which to shun.

  • What are retained earnings?
  • How to calculate retained earnings
  • Managing retained earnings
  • Options for utilizing retained earnings
    • Retain the cash
    • Distribute to shareholders
    • Reinvest the cash
    • Buy back shares
  • How to evaluate return on retained earnings
    • The value of retained cash
    • Investing in the business to keep pace
    • Expanding your business
    • Acquire your real estate
    • Acquire businesses
  • Top Ten Do’s and Don’ts

Featured Videos: Investing the Retained Earnings of your BusinessThe purpose of this session will be to provide you with some different options on how to invest your retained earnings and how to evaluate these alternatives.

Retained earnings are the cumulative result of a firm’s operation from the start-up through the current operating statement. It is the earnings which have stayed in the business rather being taken out. If the business has lost money, it’s called retained losses. Retained earnings and losses are cumulative from year to year with losses offsetting earnings.

A growing business will need capital to undertake expansion plans. Expansion capital can come from either retained earnings or from borrowing or a combination of both. Keep in mind that “retained earnings” means that adequate amounts are being spent on maintenance, repairs, research, and taxes. Your retained earnings is the cash remaining after all these expenditures.

Some business can build up retained earnings more readily than others. A business requiring frequent replacement of expensive machinery will probably have less remaining cash left as retained earnings than a service business that operates with little or no machinery or equipment.

Keeping cost low and discounting heavily.

Throughout this session, we will use “Nifty Nail Salons” as our operating business example. Nifty Nails consists of ten operating stores with total annual sales of $2,000,000. Their beginning retained earnings (from previous periods) is $3,000,000.

Retained earnings will be the cash at the end of the year after provisions for all expenses including some accounting effects, depreciation, and taxes. Retained losses and earnings are netted out and carried forward from year to year.

Here’s Nifty’s year-end income statement to show how retained earnings in a profitable company are calculated:Throughout this session, we will use “Nifty Nail Salons” as our operating business example. Nifty Nails consists of ten operating stores with total annual sales of $2,000,000. Their beginning retained earnings (from previous periods) is $3,000,000.

Retained earnings will be the cash at the end of the year after provisions for all expenses including some accounting effects, depreciation, and taxes. Retained losses and earnings are netted out and carried forward from year to year.

Here’s Nifty’s year-end income statement to show how retained earnings in a profitable company are calculated:

Nifty Sales for the year $2,000,000
Less expenses:
Total operating costs $1,000,000
Depreciation 60,000
Total expenses $1,060,000
Income before taxes 282,000
Net income $658,000
Retained earnings from previous periods $3,000,000
Total retained earnings $3,658,000

In most cases, a growing company will manage retained earnings by investing back into the business or by buying other businesses. In either case, there is a two-step standard test you can use to objectively evaluate the prospects of a business.

  • Does it have a durable competitive advantage?
  • Is it reasonably priced with an attractive ROI or intrinsic valuation? If a potential business does have a durable competitive advantage, it will be possible to make a more accurate evaluation.

Businesses with a competitive advantage, as a rule, are in unique products or services where the advantage lies with the product rather than the people running the business. Examples include Hershey’s Chocolate and Coca-Cola. For smaller growing firms, the goal could be to grow into products or services which could be built into important brand names.

Not all businesses, even widely admired ones, possess a durable competitive advantage. Here are two examples:

  • Airlines are now a commodity service, where the lowest price gets the customer. In other words “you are only as smart as your dumbest competitor.”
  • In spite of high tech’s rapid expansion into worldwide applications, some high-tech companies are at risk due to the industry’s nature of frequently reinventing itself and, therefore, subject to the risk of overnight obsolescence.

So your business plan for managing retained earnings could be to grow your business by investing in situations that possess durable competitive advantages and are attractively priced. Products or services with wide moats around them are the ones that will deliver the greatest results. Here are some business characteristics to look for when investing retained earnings:

  • The product or service has had years of experience
  • They can be expected to make the same product in the future
  • They spend little money on research and development
  • Their product or service has a long life span
  • They serve a repetitive need (think razor blades)
  • They are fairly simple

Retain the cash

During periods of financial uncertainty such as the global economic collapse of 2008, corporations experience uncertainty and fear. As a result, retained earnings were allowed to build up until the expression “hoarding cash” became appropriate. In July of 2010 companies in the Russell 3000 index had hoarded $2.9 trillions of cash. In many cases, cash is hoarded in order to provide funds for potential acquisition opportunities.

Distribute to shareholders

Withdrawing retained earnings by making dividend distributions to the owners or stockholders of the company is an option. But be aware that there are different state and federal restrictions on dividend withdrawals as well as tax consequences, so you will first need to consult with your attorney.

Reinvest the cash

Well managed companies reinvest retained earnings in a way that the cash is used wisely to grow the business. Possibilities for reinvesting retained earnings could include:

  • An Internet technology firm might invest in research and product development with a long-term goal of avoiding technological obsolescence risks.
  • A retail chain might add new stores. See the Start a Business session on creating successful profit centers.
  • Retained earnings can be used to purchase businesses, either through making vertical integrations (see session on vertical integration), acquire businesses in their own field (see session on buying businesses) or buy businesses unrelated to their core activities (see session on The Berkshire Hathaway conglomerate model).
  • Retained earnings can be used to acquire real estate. For example, mature chains such as McDonalds and Walgreen’s own their real estate rather paying rent to landlords, thereby gaining a great advantage over smaller chains in occupancy costs.
  • If a company cannot find ways to reinvest retained earnings profitably, it can use the cash to buy back shares. Existing shareholders favor this alternative because fewer shares remaining outstanding will result in a higher value per share of the remaining shares.

The value of retained cash

The measurable value of holding cash is the earnings received from investments less the annual cost of living increases. The value of having cash to exploit opportunities or acquisitions is hard to measure.

Invest in the business to keep pace

Some businesses, notably manufacturing, find it necessary to spend their retained earnings just to keep up with their competitors who are installing more efficient equipment. It is not a good idea to be in a business that soaks up earnings just to stay alive.

Expand your business

The primary applications of retained earnings are to expand the business or purchase other businesses. In either case, the best way to measure success is to follow the guideline of renowned business manager Warren Buffett:

Unrestricted earnings should be retained only where there is a reasonable prospect – backed preferably by historical evidence or, when appropriate by a thoughtful analysis of the future – that for every dollar retained by the corporation, at least, one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors.”
While reinvesting in the business will most likely be your first consideration, calculations should be made to be sure that each dollar invested will increase the value of the company by at least one dollar and that a satisfactory return on investment is accomplished. Let’s use Nifty Nails decision to open another salon to determine both the potential market value created and also the return on investment:
Nifty Nail Salons is currently operating ten stores each of which produces $20,000 per year after tax net income. To open a new store will require a totalcashoutlay of $120,000.
According to industry standards in the salon business, the value of the company is calculated as ten times its annual earnings. The annual income added by the new store, $20,000, increases the value of the company 10 times or $200,000.

The $120,000 investment will add $200,000 value to the company, or 1.6 times each dollar invested. This meets the Buffett criteria that for every dollar retained at least one dollar of market value is created.

The return on investment (ROI) will be: $20,000 (annual income) divided by $120,000 (your investment) or 17%.Return on equity will vary from industry to industry. Consult with your CPA to determine the ROI history you business and industry has experienced. If you have a higher ROI than your competitors, it is an indication of effective management.

Acquire real estate

In the early phases of the Nifty Nails Company, owning its store’s real estate was not an option because all available cash was being invested in equipment and fixtures for new leased stores.

But let’s assume that over time Nifty Nails has grown to 200 stores. Now it is a large creditworthy business and can borrow money at 6% interest. Typically, shopping center landlords expect to receive a 12% return on their properties. Owning real estate rather than leasing becomes a desirable option. All major chains own the land and buildings where stores are located.

Acquire businesses

There is a session following that will give you some do’s and don’ts when you’re considering buying businesses. You will now have two essential tools to mathematically evaluate whether the use of your retained earnings is being put to most productive use:

  • Every dollar invested will create at least one dollar of market value.
  • The return on investment (ROI) will meet your established goal.

THE TOP TEN DO’S

  • Use retained earnings to build company value.
  • Maintain a frugal budget to enhance retained earnings.
  • Evaluate all investment options before committing retained earnings.
  • Keep accurate and current records of retained earnings.
  • Increase earnings by reinvesting retained earnings.
  • Understand that one dollar invested should produce more than one dollar in value.
  • Calculate return on investment before investing retained earnings.
  • Avoid a business where retained earnings are required to keep pace.
  • Consult your tax consultant when considering buying back stock.
  • Consider purchasing businesses as a good option for use of retained earnings.

THE TOP TEN DON’TS

  • Cut corners on maintenance and research to build retained earnings.
  • Invest retained earnings without considering all options.
  • Avoid keeping accurate and current record of retained earnings.
  • Tie up cash on real estate until financial benefits are justified.
  • Spend your retained earnings…ever.
  • Automatically distribute dividends to shareholders.
  • Buy back stock without checking all other options.
  • Think “hoarding cash” is always a bad choice.
  • Overlook the rule “a dollar invested should produce a dollar or more in value”.
  • Invest in real estate if you need operating cash for your business.

Copyright © 1993, 1997-2016, My Own Business, Inc. All Rights Reserved.

Balance Sheet Template

Provided by the International Finance Corporation

Some describe the balance sheet as a “snapshot” of the company’s financial position at a point (a moment or an instant) in time. For example, the amounts reported on a balance sheet dated December 31, 2012 reflect that instant when all the transactions through December 31 have been recorded. It summarizes the company’s assets, liabilities and shareholders’ equity at a specific point in time. The three balance sheet segments in the Excel file below give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. This is intended to be a simple and practical tool to be adjusted and used by SMEs working in all sectors. You may adapt it to reflect your business needs, type of clientele, products and services you offer. It provides the minimum information required by financial institutions for assessing loan applications, tax authorities and potential investors.

Although the template is an example of a balance sheet for a sole proprietorship, you can quickly modify it for a corporation or partnership. You can add or delete account titles, revise the format, or otherwise modify it to suit your needs.

File Description: The file contains a Microsoft Excel spreadsheet template. Once you’ve downloaded the file, you must copy it to your EXCELXLSTART directory in order to use it.


Special Features:

  • Download this balance sheet template just once, and be able to use it over and over again
  • The spreadsheet contains the essential items that need to be considered when preparing a balance sheet
  • The spreadsheet can be completely customized – you can quickly add or delete items or revise the format to meet your needs
  • The spreadsheet is easy to use. Just plug in your numbers and it will automatically compute all the subtotals and totals and even tell you if your balance sheet doesn’t balance

Attachments:

Balance Sheet Template


Copyright © 2000 – 2017, International Finance Corporation. All Rights Reserved.

2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433, www.ifc.org

The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.

Cash Flow Sensitivity Analysis Worksheet

Provided by the International Finance Corporation

The cash flow budget worksheet allows the sensititvity analysis of your cash flow. Insert your cash flow informations in the middle column “expected cash flow” and the tool will calculate pessimistic and optimistic scenarios assuming a variation of 25% in receipts and disbursements. This is intended to be a simple and practical tool to be adjusted and used by SMEs working in all sectors. You may adapt it to reflect your business needs, type of clientele, products and services you offer.

This worksheet lists all the descriptions of the cash inflows and outflows of the new business. If you need additional categories of expenses you can quickly modify it. Just plug in your amounts and the spreadsheet will automatically compute the totals.

File Description: The file is a Microsoft Excel spreadsheet template. Once you’ve downloaded the file, you must copy it to your EXCELXLSTART directory in order to use it.


Special Features:

  • Download this spreadsheet template just once, and be able to use it over and over again
  • The spreadsheet contains the formatting for a cash flow sensitivity analysis
  • The spreadsheet can be completely customized — you can quickly add or delete items or revise the format to meet your needs
  • The spreadsheet is easy to use. Just plug in your inflows (income) and outflows (disbursements) and it will automatically show you what will happen to your cash flow when actual results are not what you expected

Attachments:

Cash Flow Sensitivity Analysis Worksheet


For more resources


Copyright © 2000 – 2017, International Finance Corporation. All Rights Reserved.

2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433, www.ifc.org

The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.

Cash Flow Worksheet

Provided by the International Finance Corporation

The cash flow statement provides aggregate data regarding all cash inflows and outflows of a company. The cash flow is determined by looking at three components by which cash enters and leaves a company: core operations, investing and financing. It allows investors to understand how a company’s operations are running, where its money is coming from, and how it is being spent. The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit. Therefore, cash is not the same as net income.

The Cash Flow Worksheet template in the file you can download below was designed to make it easy for you to calculate your cash flow. It is intended to be a simple and practical tool to be adjusted and used by SMEs working in all sectors. You may adapt it to reflect your business needs, type of clientele, products and services you offer. It provides the minimum information required by financial institutions for assessing loan applications, tax authorities and potential investors.

Start with filling in your beginning cash balance for month 1 in cell C5. Then fill in your cash inflows and outflows as applicable for each month. Totals will be calculated automatically.

File Description: The file contains a Microsoft Excel spreadsheet template. Once you’ve downloaded the file, you must copy it to your EXCELXLSTART directory in order to use it.


Special Features:

  • Download the worksheet template just once, and be able to use it over and over again to create as many worksheets as you need
  • Worksheets are easy to use. Just plug in your numbers and print or save
  • The worksheet already contains the essential cash inflow and outflow categories
  • The worksheet can be modified to suit your needs

Attachments:

Cash Flow Worksheet Template


For more resources


Copyright © 2000 – 2017, International Finance Corporation. All Rights Reserved.

2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433, www.ifc.org

The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.

 

Bookkeeping and Record Keeping Basics

Adapted from content excerpted from the American Express® OPEN Small Business Network

Proper bookkeeping is important to sustaining and expanding a business. Without it, you run the risk of hitting cash flow crunches, wasting money, and missing out on opportunities to expand. When you are devising or revising your bookkeeping routine, remember that the purpose of bookkeeping is to help you manage your business and to enable tax agencies to evaluate your business activity. As long as your bookkeeping achieves both of these objectives, it can – and should – be as simple as possible.

The general guidelines here outline what you must take care of and provide ideas for how to keep your books in an orderly manner. But before making any decisions regarding bookkeeping, check with your accountant or tax preparer because bookkeeping needs vary dramatically by business.

Many small business owners choose to use software to keep track of various aspects of their business, and resources are provided here to help you institute computer automation. The key to taking full advantage of bookkeeping software is to determine if it saves you time and frees you up to concentrate on running your business. In many cases it will, but be careful not to fall into the trap of wasting time setting up computer bookkeeping that could be more efficiently handled on paper. The paper bookkeeping forms mentioned here can be obtained from most stationary stores.

Some bookkeeping functions are best relegated to an accountant. While it is essential to retain a thorough knowledge by reviewing your books frequently, an accountant or bookkeeper can free you up to concentrate on expanding your business. Even a bookkeeping task that takes only a few hours a week may be better relegated to someone else if that time can be better spent.

Click on the topics below to learn more about what basic records need to be kept by a small business:Your business will use either a Revenue and Expense Journal or a Ledger to keep track of how much money is going out, where it is going, and what is coming in.

A Revenue and Expense Journal is used by most small businesses and is single-entry accounting — recording receipts and expenditures only. Double entry accounting involves a ledger and necessitates that each activity be recorded as a debit and a credit on your books. In the past it was thought that all businesses needed to use the more cumbersome method of double-entry, but the single entry system is now used for many small business owners. Single-entry accounting can be kept on paper or computer. Programs that perform single-entry accounting include Quicken by Intuit and Microsoft Money among many others.

A ledger is used to record every transaction twice based on the idea that each transaction has two halves that affect your business. For example, if you sell an item, your books would reflect a decrease in inventory (a credit) and a inflow of payment (debit). If you use double-entry accounting you may want to use a computer program or a bookkeeper to keep your ledger up to date. If you allow anyone else to keep your books be sure you review them regularly. Programs that do double-entry bookkeeping include: M.Y.O.B by Teleware, Peachtree Accounting by Peachtree Software, and Quickbooks by Intuit.

Your accountant can advise you on which type of recordkeeping you should choose. Also consult your tax advisor about whether you should use a cash or accrual-based bookkeeping system.Cash spent in your business needs to be accounted for if you want to record all business expenses in a given year. There are at least two ways to do this: write yourself reimbursable checks or keep a petty cash record.

If you choose to pay yourself back with a check, simply keep track of all cash receipts and total them weekly, biweekly or monthly, depending on your volume of expenses. Keep a log of each category of expense, for tax purposes and write yourself a check for the total. Write cash reimbursable in your check register to differentiate this from taxable income. Alternatively, you can keep a petty cash record by writing a check to petty cash and keeping a log of each expense paid out of petty cash.Keeping on top of your inventory records will enable you to prevent pilferage, keep inventory holdings to a minimum, and track buying trends, among other things.

If you sell a large number of small-ticket items — for example, as in a stationary store — you might want to use a computer system to track inventory or tie your computer system into your sales by having a POS (point of sale) inventory system. If you sell larger ticket items you may be able to do it yourself on paper.

The crucial inventory information you need to capture is: date purchased, stock number of item purchased, purchase price, date sold, and sale price.If your products or services are paid for at time of delivery, you will not need an accounts receivable tracking system. However, if you provide services or products for which people pay you at a later date, your accounts receivable records keep track of what is owed to you. You can monitor accounts receivable by holding on to a copy of all invoices sent out or by keeping an accounts receivable record. Either way, the information you need to capture includes: invoice date, invoice number, invoice amount, terms, date paid, amount paid, and the name of the entity being billed.

Many software programs are available to help you generate invoices and track hours and expenses incurred for each client. These programs can save hours of time for a business owner and create professional-looking invoices. But, according to Ed Slott, author of “Your Tax Questions Answered”, (Plymouth Press) keeping your accounts receivable on computer is sensible if it enables you to collect payment more quickly or get a better handle on where your money comes from. Otherwise a paper system is very effective. Software programs that will create invoices or track hours include: QuickInvoice by Intuit software; Timeslips and WinInvoice by Good Software; and PerForm Pro Plus from Delrina.Accounts payable are debts owed by your company for goods and services. Keeping track of what you owe and when it is due will enable you to establish good credit and hold onto your money as long as possible.

Business owners with few accounts payable items use accordion file folders labeled with dates to keep track. Other small firms simply pay bills twice per month and keep all bills in a “To Pay” folder. Larger companies use accounts payable paper records organized by creditor. Regardless of the system you choose, you should retain the following information about accounts payable: invoice date, invoice number, invoice amount, terms, date paid, amount paid, balance (if applicable), and clients names and address.Copyright © 1995-2016, American Express Company. All Rights Reserved.