​As a business owner, have you ever felt left out of a conversation when others start to talk about their financial statement reports?  When you start to hear words such as, P&L, profit and loss, statement of earnings or income statement --- the conversation may start to feel a bit awkward and overwhelming. That’s why we’re going to dive into how to understand more these statements.
 
Understanding the income statement is essential to business owners and investors as it provides an overview of the profitability and future growth of your business.  All business owners should see the income statement as a simple and straight forward report on a business’s cash generating ability.  It is a scoreboard on the financial performance of your business that reflects when sales are made and expenses are incurred.
 
The official definition says an income statement is:
 
A financial statement generated monthly and/or annually that reports the earnings of a company by stating all relevant revenues (or gross income) and expenses in order to calculate net income.  Also referred to as a profit and lost statement.
 
The income statement is one of the five financial statements issued by a business.  It reports the amount a corporation has earned during the period between two balance sheet dates.
 
Here are 3 things you should know about an income statement:
 
Income Statements come with Accounting Jargon
One thing that can make entrepreneurs shy away from financial statement conversations is the jargon used.  The jargon can make it seem more complex than it really is.  For example, the term “sales” or “income” might be used instead of revenue.  “Expenses” and “costs” are also used interchangeably.  “Profit” is sometimes called “net income. 
 
Income Statements cover a period of time
The income statement reveals how much money your business made over a period of time.  Most often, the statement will reflect the performance over a month, a quarter or a year. 
 
For example, you might hear the words, year to date, or see “Y-T-D December 31”, indicating the period for Jan 1 to Dec 31. 
 
Income Statement follows a formula
Every income statement, no matter how complex, follows a very simple formula.
 
Revenue – Expenses = Profit
 
For the period specified on the income statement, it will show the revenue the business earned, the expenses it incurred and the profit it made.
 
If you want to understand how your business operations flows, the income statement can help give you a better picture of what makes your company profitable and where the losses are coming from.

Can you recall the last time you encountered a brain freeze? The thought of Accounting may cause brain freezes for new entrepreneurs but the basics I’m about to share with you will ease the pressure of what Accounting means to your business when getting started.

 Here are five ways to understanding Accounting in your business:
 
1.  The business structure must fit
It is up to you to choose which kind of structure is best for you and your business, but the importance to the process is not to guess with your selection.  This decision matters to the tax structure your business will be obligated to understand and to the amount of paperwork to complete. 
 
The most common forms of business are sole proprietorship, partnership, limited liability company (LLC) corporation and S corporation.  Each form comes with different tax consequences, you will have to make your selection wisely and choose the structure that best matches your business needs.
 
Below are some of the tax implications to the most common business tax structures:

• Sole Proprietorship: This is the simplest form of business entity, and is used by more than 70 percent of businesses in the United States according to Small Business Administration.  The tax aspects of a sole proprietorship are appealing because the expenses and your income from the business are included on your personal income tax return, Form 1040.  Your profits and losses are recorded on a form called Schedule C, which is filed with your 1040.

 

• S-Corporation: The S corporation is more attractive to small-businesses than a regular (or C) corporation.  With an S corporation, income and losses are passed through to shareholders and included on their individual tax returns.  As a result, there’s just one level of federal tax to pay.

 

• Limited Liability Company (LLC):  An LLC is a hybrid structure that allows owners, partners or shareholders to limit their personal liabilities while enjoying the tax and flexibility benefits of a partnership.  Under an LLC, members are protected from personal liability for the debts of the business, as long as it cannot be proven that they have acted in an illegal, unethical or irresponsible manner in carrying out the activities of the business.

 
2.  Business activity needs a bank account
The ability to maximize your business revenue starts with understanding what is required to be reported.  The separation of business income and expenses from personal is by far one of the most important actions to take first.  This can be accomplished with the setup of a new bank account exclusively for your business.
 
Many banks offer an introductory period of free banking which could be a few months or longer but it is key to understand what that means for your business after the introductory period.  Don’t feel obligated to open a bank account with your current bank, get the best deal and setup for you and your business.
 
In order to open a business account, you’re required to have a business name, which may be a DBA or one of the common business structures formed and registered with your State.  Do your research on bank requirement.
 
3.  Budget with the funds you have   
As a new entrepreneur you may see a budget as a future goal or task for your business but that is far from the truth.
 
You are certainly spending money when starting a new business thus why not understand how much you can truly afford to spend.  The first three months of the business can be the most critical time frame to identify how much income is necessary to manage and maintain as well as how much you can afford to spend on business expenses.
 
Allow your budget to be your weekly or monthly resource to understanding your business cash flow.
 
4.  Track your expenses as they occur 
It’ s one thing to say you are in business and another to develop a habit of consistency to track your expenses.  More often than not you may find yourself meeting and building relationships with new clients, traveling to a speaking engagement or replacing supplies with the use of your personal debit banking card or credit card.
 
If you miss capturing these cost, not only will your business pay more tax than necessary but you also do not have a good record of how much your business is costing you.
 
5.  Get paid for your services
You are contracted to complete the work, now its time to get paid.  Have a payment policy in place which screams “professional” to clients and helps ensure that you and your clients are on the same page right front he outset, says John Rampton, VP from Entrepreneur Magazine.
 
You may also consider offering customers a discount for paying invoices early, can help you get paid more quickly too.  For instance, if you usually policy is to have payments due in 30 days, offer a small discount such as two percent to customers who pay within 14 days.

You don't have to build your business alone.  Allow us to eliminate the brain freezes you or your management team encounter when it come to planning for financial stability and growth.   Let's discuss a more efficient way to set your business financially apart!  We are scheduling consultations now, email [email protected].

​Well, maybe this blog will not make you snuggle up with an Accounting book at night and call it your BFF but I will go for making you two close friends.  Close friends because you need this person in your life for your business to be successful. 
 
There are millions of small business owners and startup entrepreneurs who are masters at creating products and services and winning over customers.  However, many of them are weak in understanding the accounting area of the business.  To be effective in grasping the concept of accounting, I find it useful to understand some of the commonly used terminology.  Essentially, accounting is about managing debits and credits.  Those debits and credit are recorded and managed by the business owner, consultant or bookkeeper of the business, mainly to ensure money is coming into the bank and expenses are being paid timely.

​The American Accounting Association (AAA) defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgement and decision by users of the information.”
 
The basic formula to accounting is: Assets = Liabilities + Equity (Owner’s equity)

Knowing the basics equation, outlined above, will assist in the understanding of accounting account types.
 
There are different types of accounts in which debits and credits are kept track of in accounting, let’s define some them,

• Assets are financially measurable resources that a company owns.  Some examples of those are cash, supplies, property and equipment.  While reputation may be important to an entrepreneur and valuable when it comes to gaining new customers, it is not measurable thus not accounted for as an asset in the business.

• Liabilities are the financial obligations of the company, basically debt.  Every business will have it but the key here is keeping track of it accurately. 

• Equity is the dollar value of the company’s worth. 

• Revenues are the dollar amounts of income that are earned whenever the business provides a service or sells a product. 

• Expenses are the cost associated with running the business, including bills. 

 
When managing your business, these definitions will be used quite frequently especially if you have hired a consultant or bookkeeping to manage the accounting area of your business.  Let’s say your current business is a hair professional in a Salon and at the end of the day your analyzing how much you made for the day. 
 
Your recording book shows:

• 2 Clients, $60 each    
• 6 Products sold
  • 3 Hair spray, $10 each
  • 1 comb, $5
  • 2 Conditioners $ 10 each (owner ‘s product)

 
The owner of the salon may generally record total earned revenues of $175.  However, to an accountant or bookkeeper they are also concerned with how much it cost (expenses) the Salon owner to make the two conditioners she sold for $10 each and how much was it to purchase the comb and hair sprays.  Understanding this information gives the true net revenue amount of how much the salon owner made for her one day of work.
 
The take away here, is to remember it takes more than developing marketing techniques and creating new products and services to manage a business.  As a business owner, your accounting processes and methods used to analyze should be your BFF in the business because without it, you can never know where it stands or how healthy or unhealthy it is.
 
If you understand the importance of accounting to your business and are ready to protect your business from financial risk, visit our website to schedule your consultation.

​It’s not every day entrepreneurs think about the accounting processes within their business.  Accounting is not all about just collecting revenue but more so about the steps it takes to ensure the process to collect money does exist and is clear to the leaders and staff.
 
There are no shortages of details to consider when you’re a small business owner.  Getting the back-office basics of accounting in order can make or break a business as it exist in any phase -- start-up, growth or expansion.  Let's think about it, fees alone can be “atrocious” thus many experts recommend using an accounting software that will capture all accounting aspects of the business.  It is important to pick a software that will suit your business needs not those of a colleague or friend.  I say this because what is good for one business owner may not be good for another.  

However, if you are a business that cannot afford the cost of an accounting software and would rather maintain control in Excel worksheets then it's highly recommended a procedure guide is developed.  The guide will provide direction and transparency to an important process within your business.

Get your small business in order by starting with these tips:
 
1.  One of the obvious and repeated suggestions is separating business and personal expenses.  When it’s time to tally up deductible expenses, you want to be ready.  Start today! 

2.  Understand when it’s time to pay for support.  Choosing to hire a consultant or outsource a part of your business process can make a big difference.  Not only do you get some of your time back to use on bigger projects you are also investing someone who speaks the professional language in those specific areas. 
 
3. Dedicate time to update your records.  Many business owners may choose not to hire a professional consultant to support with updating their accounting records or performing data entry. However, this decision can make a difference in the business.   

4.  Follow Up on Invoices and Receivables.  Many business owners still invoice their customers and wait for payment.  It will be key to plan for necessary follow-up calls to ensure the expected revenue remains consistent as budgeted. 
​
These accounting tips are all great ways to make small changes.  Remember that proper, responsible time management of any task, especially accounting, is key.  If you need support to get transition roles, Fontenot & Associates Solutions LLC, can work one to one with you on getting started.  

When an idea is developed into a business, establishing the accounting processes to track the revenue and expenses is generally not on the top of the list. 
 
A chart of accounts short name is (COA) and is defined as “a listing of the names of accounts that a company has identified and made available for recording transactions in its general ledger.”  A chart of accounts has standard accounts you may see despite the industry of business you work in.  However, typically the order of the accounts are as follows:
 
Balance sheet accounts:

• Assets
• Liabilities
• Owner’s (Stockholders’) Equity

 
Income statement accounts:

• Operating Revenues
• Operating Expenses
• Non-Operating Revenues and Gains
• Non-Operating Expenses and Losses

Your account receivables are considered an asset, and so is your income but they are two completely different things.  Account receivables are created by the sale of goods or services but income is what you have received from the sale of goods or services.  You see, if you bill a customer and give them time to pay it is accounts receivable, and when you receive the money via deposit into your bank account then that is income.
Many business owners may be using an accounting software to manage their chart of accounts.  The software may provide a list of custom accounts to use but it will be the responsibility of the respective business owner to add custom accounts to ensure finances are recorded accurately.
 
Below is an example of the chart of accounts for a Salon professional:
 
Assets:

• Petty Cash
• Savings Account
• Supplies Inventory
• Employee Advances

Examples:  Assets ask the question of what does your company own?  They either are actual money (checking, savings) or they could be converted to money.
 
Fixed Assets:

• Furniture & Fixtures
• Equipment
• Land

Examples:  Fixed assets relate more to physical property.
 
Expenses:

• Advertising Expense
• Commissions and Fees Expense
• Licenses Expense
• Rent or Lease Expense

Examples:  Expenses ask the question of what do you regularly have to spend money on, no matter what?  Utilities? Telecommunications cost?
 
A chart of accounts generally serves as an outline for the business structure and is a tool for gathering and organizing financial information.
 
The chart of accounts example below is one sample guide.
 
It identifies the account name (A), this name will depend on your type of business and sub-group (B), is dividing the chart of accounts into groups for financial representation and normally (C), indicates whether the account is normally increased by a debit entry or credit.

For example, depending on the size of business the leader may have one individual responsible for reconciling all of the cash accounts to ensure online, in-store or one-time made purchases are all accounted for on a daily basis.  But, in another business the leader may assign cash and accounts receivable to one individual (not recommended, but could happen) and they would be responsible for ensuring all cashed is received and accounted plus for in addition,
 
The debit and credit column indicates whether the account is normally increased by a debit or a credit.  As an example, expense accounts are normally increased by a debit entry but income accounts are increased by a credit.
​
If your looking to strengthen the accounting processes of your business, Fontenot & Associates Solutions LLC has the skills and tools to get you started.  Even though your business may be a one person shop,  the organization of your finances should be accurate and organized from day one.

​Getting started is simple, let us show you how.