Know Your Numbers

Know Your Numbers
January 7, 2017 Shauna Wortinger

The failure to know your accounting numbers could easily result in the total failure of your business.  #000004

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Know Your Numbers

By Gary Shotton

This text is in Extreme Rough draft and will be edited in the near future.

Hi, my name is Shawna Wortinger and I’m from Florida in the United States of America, I am a business consultant, accountant, bookkeeper, a tax preparer, and basically working with various types of businesses. I have about a hundred clients that I work with and helping them manage our finances. I also teach a QuickBooks class, it’s an accounting program here in the United States. I believe, actually sold all over the world now too. Where it helps with organizing your finances. So, just wanted to share kind of today a question I get a lot from people, my own clients, about a thousand students that I teach each year on QuickBooks is, I don’t know how to read my reports. I don’t know how my business is doing. They a lot of times are very successful businesses that are doing very well, but they’re just kind of flying by the seat of their pants, if you want to call it that, I mean, they’re making it through every day, just trying to get people paid and just kind of making the world move around, but still don’t know if I’m making money. I don’t even know if I’m losing or making money in my business. And so what I kind of want to share the two main financial reports, there’s also a third one I’ll mention, that I think all business owners need to understand, need to know how to read, know where to find the information off their system. I think it’s very important that you have an accounting program. There are very various programs out there the one I know the most is QuickBooks, and they’re very inexpensive, I think every business office should learn that software or whatever program you choose and make sure that data is up to date and is consistently provided to you as an owner. Have a bookkeeper do it for you, you learn it yourself, whatever it may take for you to have consistent financial reports. The main report I want to bring up first is it’s called a balance sheet. You should be able to pull that out of any accounting program, the one main thing that you’ll notice on that report is there’s only one date that is showing on the report, so you know, I call it like a snapshot picture, like you’re taking a snapshot, a picture of your office one day and time, and so as you look at that report at the very top section of it, it says “Assets”. What assets are, I would call what you own. What is in your possession. So assets include your bank account, that would include if you deal with inventory, what you have in your possession, land, furniture, building, vehicles, all your fixed assets, things that you own that are valuable to you. That report should add that all up together and that should be total assets within your possession. The next section of the report is called “Liabilities, I’d like to refer to this as what you owe, so assets are what you own, liabilities are what you owe to other people. So this would be debt, debt outstanding, like bills that have come in that you haven’t paid on yet, that are referred to as accounts payable, you probably will see on there credit cards, if you have a credit card you charge on it, it’s not your money, you owe that, you owe back to the credit card company, lines of credit, loans at the bank, all of the outstanding third parties that you owe money to. Again the report should total that together as of a set date. Let’s say today as you look at your report whom you owe and how much you owe to others. And then the last section of the report is called “Equity”. This is probably the more confusing part of the report and I don’t want to go into depth to all the kinds of accounts you might see in there, but I like to call this your net worth, what your business or nonprofit is worth. So if I was to take my assets, it equals your liabilities plus your equity, and that’s the formula on that report. Now another way to kind of modify that formula is to kind of focus a little bit more on the equity section. If I was to sell everything I own, let’s say liquidate all my assets, sell my land, furniture, building, get it all in cash at the bank, use that money to pay off all my debt, whomever I owe. Hopefully there’s money left over in that big transaction, but the end of that, that’s your equity, what you’re worth, if I was to sell my assets, pay off all my debt, what’s left over. Now that’s a book value, obviously market value could be different on that but that equity section should give you a pretty good standpoint of what you’re worth, what the business, nonprofit again is worth. So that’s that first report, again called your balance sheet. The second report that I think is very important that you understand on how to read, it’s called a profit and loss or you may see it or heard called an income statement and one main difference of this report it always has two dates on it so balance sheet reflects one day, profit and loss always will reflect two dates and in any accounting program Should be able to pull that report up and adjust those dates accordingly. So let’s say we’re taking a picture of our business for the first six months of the year, or you could probably change your dates you know, month two months if you want to see monthly how your your business is doing trend wise, You know trend wise monthly, but the top of that report would be called income or revenue, basically money coming in over that timeframe. I’d like to call this like a movie, so as you look at your reports that there’s a start date and then it end date. The same would be true, like you go to a movie. You know, there’s a starting time and ending time and so as you view this, thinking through the lens of a movie, you’re watching, so money coming in is our income or revenue. You’ll see or might not have, may have cost of goods sold section, depends on your industry, but a lot of these expenses are directly related to your income, meaning I wouldn’t buy materials I wouldn’t pay labor costs without having related income to it. So that’s again cost of goods sold, that gets subtracted from your income, giving you a gross profit amount and from there, below is gonna be then, all be all your other types of expenses. I like to call these general, overhead, administrative type costs. The formula there at the bottom is your income (money coming in) minus your cost of goods sold minus your other expenditures the end result is your profit for that time frame whether it be a month, six months, whatever date range you’re looking at that information on. So that is the second report. I think very important, probably the one of the more important reports to be looking at regularly, at least once a month. I think it’s very important to have those reports visible. And then a third report. I’ll just mention I won’t go into depth about is called a cash flow statement or a report. So don’t confuse a profit and loss that we just spoke about, is money in the bank. So let’s say you show a $10,000 profit at the bottom of your financials, your profit and loss. That’s not always cash sitting in your bank. A lot of times we use our profits to buy equipment, we use our profits to pay down debt. There’s other purposes that our profits are tied to that we’re using that money for and so the third report would be a cash flow projector or statement you know, some financial reports and systems project out four to six weeks in the future, as to what cash reserves you have currently at your bank, what you have expenses coming up, money coming in and knowing financially what your cash projection is because in some cases you have set costs like labor There’s no doubt that your payroll has to be ran every two or three weeks or every week depending on your payroll cycle. There’s no doubt rent has to be paid every month at a set time, and so knowing those dates as you are projecting cash at the bank knowing when those financial expenditures have to be paid for and recognizing that income coming in, making sure those timeline that timeline hits there properly to have money in the bank to pay those related expenses. So that is again the three main reports that I think all accounting programs will provide to you. I do encourage, if you don’t have somebody that you’re working with or you know yourself how to use your accounting system, it is worth it. I again teach a class that I am very glad that owners and businesses come to my class, actually have many owners that will just sit in my class. They don’t, they don’t do the work. They don’t like actually hand punch in all the transactions, all the financial work, but they understand their system. And I think it’s very important especially the reporting’s data that these reports we’ve just spoken of that all owners understand them and look at them regularly.


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