Small Business Cash Flow and Business Net Worth
by Thomas H. Ward
This is an article about small business accounting, discussing tools that you can use every day. These are excerpts taken from my book "Small Business Accounting Tools" available at book stores or on line at Amazon Books. This is a simple system for small business operations to monitor profit and loss. These ideas are based on my 30 years of business experience. You can find more information on other articles I have written at: http://www.associatedcontent.com/user/866230/thomas_h_ward.html.
Check my books on Amazon at: https://www.amazon.com/stores/author/B002RAFCA4
The tools mentioned in this primer allow you to know the following: 1. You will know what the gross and net profit is at any given time. 2. You will know the breakeven point and the effect on profit. 3. You will be able to do sales forecasts. 4. You will have better control of cash flow. 5. You will know if your business is making money.
We all use accounting in our personal life. Accounting is used to make a household budget and to keep track of your own checkbook. How much do you have left at the end of each month? This is easy to calculate: just subtract the amount that came in from the amount you spent. Then, what is left is your profit. Unfortunately, it is not that easy in the business world. By using the "Small Business Accounting Tools" in this booklet, it will make it almost that easy.
Learn these fast and easy methods to keep track of how your business is running. Determine if you are making profits or not by using these fast and simple methods. You do not need to be an accountant to understand these methods. The "Small Business Accounting Tools" was developed for use by small business owners who do not have a large accounting staff to track and report company profits and sales.
This booklet gives you a "net value analysis" to determine the value of your company based on your assets. This "net value analysis" was developed to provide you, the small business owner, a fast; easy method to determine if your company is in the red or in the black. This analysis can also provide you a warning signal if your business is in trouble. These tools will help you became a better manager and understand how your company cash flow, sales, and expenses can affect your bottom line. But most importantly, you will always be able to know if your business is solvent.
I established my first company in 1986 with a $5,000 loan. That company is still in business and is still making money every month. It is an electronics material supplier to major international companies around the world. I started this business part-time, and in six months I was making more than my full-time salary. My first customer was in Korea with sales of $50,000 per month, with a 50% profit margin. I gained two more customers, and this pushed me to resign from my full-time job as vice president and director of a major international company.
I soon found out that for everyone in small business, the major problem, besides running the day-to-day operations, is knowing if the business is making money. Now, I don't know about you, but for me, accounting is voodoo. Accountants have their own language. Income statement, balance sheet, cash flow, and journal are a few of the normal accounting terms.
Accountants are very necessary and do serve a very important purpose, especially at tax time. So, you need a good accountant who can understand your business and work closely with you. I have had the same accounting firm for twenty years and the same accountant for fifteen years. The simple methods described in this primer will not replace your accountant.
What is accounting? As quoted by my accountant, "Accounting is needed to provide companies with information to be able to make financial decisions and in the preparation of filing necessary tax returns." Generally Accepted Accounting Principles (GMP) are standards used to present financial statements fairly and consistently in order for the users of financial information to be able to make proper judgments. We all use accounting in our personal life. We make household budgets and keep track of our own checkbooks. We need to know how much money we have left at the end of the month. Just as with your home budget, your business cash flow is the most important factor to watch for a new or mature business. The inflow of money from your customers, and outflow of money to your suppliers, vendors, inventory changes, or any monies owed to a creditor make it difficult to know how well your company is operating each month.
1. Weekly Sales Report. 2. Monthly Statement or Trend Analysis. 3. Breakeven Table. 4. "Net Value Analysis". These items show what your business is currently worth.
Using the above four tools you will be able to keep close track of company performance, most importantly; if your company is making money or losing money. These four tools also tell you what you have to do to keep your company profitable. To use the above four tools it is necessary to have a good computeraccounting program such as QuickBooks. Accounting programs like QuickBooks can be a lifesaver. Just enter the data and the program does all the work. This accounting program is used to generate the following reports and information: a. Weekly Sales Report b. Monthly Statement or Trend Analysis c. Unpaid Bills Report d. Open Purchase Orders Report e. Open Invoices Report f. Inventory list g. Breakeven Table h. Net Value Analysis Sheet. Later we will discuss how to use these reports.
BUSINESS NET WORTH OR NET VALUE ANALYSIS
The Exhibit below shows the format for the "net value analysis.” This analysis is a very important tool that you can use. It shows you if your company is making money. You can do this analysis each month, at the start or end of the month.
1. From your accounting program, obtain the total unpaid bills. This goes into unpaid bills in exhibit.
2. Print out your inventory list showing the cost.
3. Obtain your current bank balance by calling your bank. You need the most recent data on the day you do the "net value analysis.”
Summary Steps: Subtract the total amount due out from the total amount due in to obtain the net gain or loss. Total amount due out is cash required to pay current outstanding invoices or unpaid bills and open purchase orders. The example shows $164,940:90 and $44,833.32, respectively. So, the total due out is $209,774.22. Obtain the total sales due in, or total invoiced amount. For this example, we will use a total invoiced amount of $204,199.66. Subtract these two and you have a net loss or net gain. In this example, it is a net loss of $5.574.56. This means your sales are slightly less than the amount owed by the company. Add in your cash on hand from your bank account of $111,410.67. This gives you a total balance amount of $105,836.11. Subtract any loans and outstanding credit card amounts that may not be in your QuickBooks program.
In this example, we have no outstanding loans. Now you need to take into account any inventory, or stock, at your cost as shown in exhibit 5. Assuming you can sell this inventory, then add it to the bottom line at your cost. If you cannot sell it, then subtract the amount. In this example, we add the stock at cost to the bottom line, since it will most likely be sold at cost or above. This gives a total net value of $123,431.11. In this example, we assume the business has no other assets such as property.
In this "net value analysis" we can conclude the approximate net value of this business on this given date is $123,431.11. We can also conclude that we need to increase our sales dollars to move the net loss to a net gain. When one has a net loss, this is a warning signal that sales could possibly be dropping. As a manager or owner, you need to investigate this loss. The net difference should usually be a positive number.
The total net value is what your business is worth on any given day when you do this analysis calculation. This analysis does not take into account all your monthly expenses that may have to be paid out for that month, such as phone bills, etc. To account for this, just subtract the estimated expenses from the total net value.
NET VALUE ANALYSIS EXHIBIT
UNPAID BILLS: 0
CASH REQUIRED: $164,940.90
OPEN PURCHASE ORDERS: $44,833.32
TOTAL DUE OUT: $209,774.22
OPEN INVOICES: $204,199.66
NOT INVOICED: 0
TOTAL DUE IN: $204,199.66
NET GAIN OR LOSS: LOSS OF <$5,574.56>
BANK BALANCE: $111,410.67
TOTAL BALANCE: $105,836.11
LOAN AMOUNTS DUE: 0
BOTTOM LINE: $105,836.11
INVENTORY: $11,259.00
GRAND TOTAL NET VALUE: $123,431.11
CONCLUSION In conclusion, using the tools mentioned in the primer will allow you to really gain control of your business and know how it is performing.
Key points are: You will know what the gross and net profit is at any given time. You will know what the breakeven point is and the effect on profit. You will be able to forecast sales. You will have better control over cash flow. Most importantly you will know if your business is making money and have a good idea what your business is worth by use of the net value analysis.
by Thomas H. Ward
This is an article about small business accounting, discussing tools that you can use every day. These are excerpts taken from my book "Small Business Accounting Tools" available at book stores or on line at Amazon Books. This is a simple system for small business operations to monitor profit and loss. These ideas are based on my 30 years of business experience. You can find more information on other articles I have written at: http://www.associatedcontent.com/user/866230/thomas_h_ward.html.
Check my books on Amazon at: https://www.amazon.com/stores/author/B002RAFCA4
The tools mentioned in this primer allow you to know the following: 1. You will know what the gross and net profit is at any given time. 2. You will know the breakeven point and the effect on profit. 3. You will be able to do sales forecasts. 4. You will have better control of cash flow. 5. You will know if your business is making money.
We all use accounting in our personal life. Accounting is used to make a household budget and to keep track of your own checkbook. How much do you have left at the end of each month? This is easy to calculate: just subtract the amount that came in from the amount you spent. Then, what is left is your profit. Unfortunately, it is not that easy in the business world. By using the "Small Business Accounting Tools" in this booklet, it will make it almost that easy.
Learn these fast and easy methods to keep track of how your business is running. Determine if you are making profits or not by using these fast and simple methods. You do not need to be an accountant to understand these methods. The "Small Business Accounting Tools" was developed for use by small business owners who do not have a large accounting staff to track and report company profits and sales.
This booklet gives you a "net value analysis" to determine the value of your company based on your assets. This "net value analysis" was developed to provide you, the small business owner, a fast; easy method to determine if your company is in the red or in the black. This analysis can also provide you a warning signal if your business is in trouble. These tools will help you became a better manager and understand how your company cash flow, sales, and expenses can affect your bottom line. But most importantly, you will always be able to know if your business is solvent.
I established my first company in 1986 with a $5,000 loan. That company is still in business and is still making money every month. It is an electronics material supplier to major international companies around the world. I started this business part-time, and in six months I was making more than my full-time salary. My first customer was in Korea with sales of $50,000 per month, with a 50% profit margin. I gained two more customers, and this pushed me to resign from my full-time job as vice president and director of a major international company.
I soon found out that for everyone in small business, the major problem, besides running the day-to-day operations, is knowing if the business is making money. Now, I don't know about you, but for me, accounting is voodoo. Accountants have their own language. Income statement, balance sheet, cash flow, and journal are a few of the normal accounting terms.
Accountants are very necessary and do serve a very important purpose, especially at tax time. So, you need a good accountant who can understand your business and work closely with you. I have had the same accounting firm for twenty years and the same accountant for fifteen years. The simple methods described in this primer will not replace your accountant.
What is accounting? As quoted by my accountant, "Accounting is needed to provide companies with information to be able to make financial decisions and in the preparation of filing necessary tax returns." Generally Accepted Accounting Principles (GMP) are standards used to present financial statements fairly and consistently in order for the users of financial information to be able to make proper judgments. We all use accounting in our personal life. We make household budgets and keep track of our own checkbooks. We need to know how much money we have left at the end of the month. Just as with your home budget, your business cash flow is the most important factor to watch for a new or mature business. The inflow of money from your customers, and outflow of money to your suppliers, vendors, inventory changes, or any monies owed to a creditor make it difficult to know how well your company is operating each month.
1. Weekly Sales Report. 2. Monthly Statement or Trend Analysis. 3. Breakeven Table. 4. "Net Value Analysis". These items show what your business is currently worth.
Using the above four tools you will be able to keep close track of company performance, most importantly; if your company is making money or losing money. These four tools also tell you what you have to do to keep your company profitable. To use the above four tools it is necessary to have a good computeraccounting program such as QuickBooks. Accounting programs like QuickBooks can be a lifesaver. Just enter the data and the program does all the work. This accounting program is used to generate the following reports and information: a. Weekly Sales Report b. Monthly Statement or Trend Analysis c. Unpaid Bills Report d. Open Purchase Orders Report e. Open Invoices Report f. Inventory list g. Breakeven Table h. Net Value Analysis Sheet. Later we will discuss how to use these reports.
BUSINESS NET WORTH OR NET VALUE ANALYSIS
The Exhibit below shows the format for the "net value analysis.” This analysis is a very important tool that you can use. It shows you if your company is making money. You can do this analysis each month, at the start or end of the month.
1. From your accounting program, obtain the total unpaid bills. This goes into unpaid bills in exhibit.
2. Print out your inventory list showing the cost.
3. Obtain your current bank balance by calling your bank. You need the most recent data on the day you do the "net value analysis.”
Summary Steps: Subtract the total amount due out from the total amount due in to obtain the net gain or loss. Total amount due out is cash required to pay current outstanding invoices or unpaid bills and open purchase orders. The example shows $164,940:90 and $44,833.32, respectively. So, the total due out is $209,774.22. Obtain the total sales due in, or total invoiced amount. For this example, we will use a total invoiced amount of $204,199.66. Subtract these two and you have a net loss or net gain. In this example, it is a net loss of $5.574.56. This means your sales are slightly less than the amount owed by the company. Add in your cash on hand from your bank account of $111,410.67. This gives you a total balance amount of $105,836.11. Subtract any loans and outstanding credit card amounts that may not be in your QuickBooks program.
In this example, we have no outstanding loans. Now you need to take into account any inventory, or stock, at your cost as shown in exhibit 5. Assuming you can sell this inventory, then add it to the bottom line at your cost. If you cannot sell it, then subtract the amount. In this example, we add the stock at cost to the bottom line, since it will most likely be sold at cost or above. This gives a total net value of $123,431.11. In this example, we assume the business has no other assets such as property.
In this "net value analysis" we can conclude the approximate net value of this business on this given date is $123,431.11. We can also conclude that we need to increase our sales dollars to move the net loss to a net gain. When one has a net loss, this is a warning signal that sales could possibly be dropping. As a manager or owner, you need to investigate this loss. The net difference should usually be a positive number.
The total net value is what your business is worth on any given day when you do this analysis calculation. This analysis does not take into account all your monthly expenses that may have to be paid out for that month, such as phone bills, etc. To account for this, just subtract the estimated expenses from the total net value.
NET VALUE ANALYSIS EXHIBIT
UNPAID BILLS: 0
CASH REQUIRED: $164,940.90
OPEN PURCHASE ORDERS: $44,833.32
TOTAL DUE OUT: $209,774.22
OPEN INVOICES: $204,199.66
NOT INVOICED: 0
TOTAL DUE IN: $204,199.66
NET GAIN OR LOSS: LOSS OF <$5,574.56>
BANK BALANCE: $111,410.67
TOTAL BALANCE: $105,836.11
LOAN AMOUNTS DUE: 0
BOTTOM LINE: $105,836.11
INVENTORY: $11,259.00
GRAND TOTAL NET VALUE: $123,431.11
CONCLUSION In conclusion, using the tools mentioned in the primer will allow you to really gain control of your business and know how it is performing.
Key points are: You will know what the gross and net profit is at any given time. You will know what the breakeven point is and the effect on profit. You will be able to forecast sales. You will have better control over cash flow. Most importantly you will know if your business is making money and have a good idea what your business is worth by use of the net value analysis.
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