Money
Issues in Small Business
Keeping
Records
Do
I have to keep records? YES!
There
are various levels you can work towards in your bookkeeping
system. Someone needs to do it. Period. That need not be you.
In fact, if you have trouble working with numbers, it should
not be you because you'll never get to it. Find someone with
a passion for sorting data, control their tendency to over-complicate
or seek detail, and you're on your way. However, you as principal
of the company need to understand the system, even if you're
not the one doing it. Also, if you hire someone else to do the
basics for you, make sure that you have some checks and balances
in place.
Organization
& Preparation
The
basic building block to good books is data entered in the right
place. Bookkeeping is merely recording expenses and income.
Whoever is entering the data needs to understand the true nature
of each and every expense, and be able to put it in its right
place.
Get
your routine established, and stick to it. This is a critical
step. If you don't pay attention, and set up a workable system,
you will end up with meaningless information.
Bookkeeping
Language
The
second step in getting your system organized is learning a little
about the rules to follow when you are dealing with bookkeeping.
A bit of time spent with your accountant is the first step toward
saving yourself time and money.
As
you enter information in your books, you will always make two
entries, which exactly balance one another. Each entry has a
left side -- these are called debits, and a right side -- these
are called credits. These two terms have mystified more people
in the history of the world than any other. Just accept that
they are part of the language of business and as you begin to
use them the mystery will evaporate.
For
each entry you must enter at least one debit and one credit,
and the total of the amounts on the right must equal the total
on the left. Another "rule" is that debits are positive
and credits are negative and if you add them all together, the
total is "zero." Really, it's just that simple.
For
more details take the SBA's Basic Bookkeeping Tutorial.
Financial
Statements
To
enjoy bookkeeping and accounting, you need to understand why
you are doing what you're doing with these numbers, and what
knowledge your work will give you. The result you are working
toward is good information that which will be available to you
from your financial statements.
Financial
statements come as a pair: a balance sheet and an income statement.
These are really two ways of looking at generally the same information.The
income statement (also called profit and loss statement) tells
you how much money you've made (or lost!) in a period of time
which you can specify. (This month, this quarter, this year).
The
balance sheet tells you where your business stands as of the
date you specify. How much cash you have, the value of your
tools, how much you owe, on a given day. Although there is an
early tendency to want to see the income statement and ignore
the balance sheet, you need to use both together to see all
of the facts. Over time, you might even become a balance sheet
fan, as you begin to understand what it's telling you. So don't
ignore, your balance sheet. What makes accounting interesting
is the relationship between the numbers on the financial statements,
and the things you can learn when you understand them. I can
almost promise you that the better you understand what knowledge
can be extracted from your financial statements, the better
job you will do of keeping your books, which will start you
on an upward spiral of great financial record keeping.
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Pricing
- Understanding Cost & Pricing for Profit
- Cost
is the total of the fixed and variable expenses (costs to
you) to manufacturer or offer your product or service.
- Price
is the selling price per unit customers pay for your product
or service.
So,
when customers ask, "How much does it cost," your
answer is your price.
You
are in business to make a profit. That’s the bottom line.
Before
you can decide upon a fair price for your product, you need
to know how much it's costing you! Once you've identified costs,
you can determine your break-even point. This is the point at
which you neither make nor lose money in producing a product
or delivering a service.
For
example, you would be at the break-even point if it cost you
$100 to produce a product that you sell for $100.
A
break-even analysis is the process you use to uncover those
break-even numbers. To begin your break-even analysis, add up
all fixed costs and determine what your variable costs are at
different production volumes. Fixed costs, sometimes referred
to as overhead, are expenses that don't vary according to production
amounts–such as rent for office space (and storage space
if you store inventory), office equipment (telephones, faxes,
computers, etc.), insurance, utilities, etc.
Variable
costs are expenses that do vary with the amount of service provided
or goods produced. They include costs such as hourly pay for
a contractor on a specific project, raw materials, etc. Some
variable costs don't depend specifically on the number of products
produced but are still variable, such as advertising or promotion
expenses.
You must know the cost of your overhead (fixed costs) as well
as the incremental cost-per-unit (variable costs) before you
can determine your break-even points.
After
you've determined your break-even points which establish "floors"
for your price, there are strategies for establishing pricing
based upon additional financial objectives, this is called Cost-Based
Pricing.
How
high can a price be before the product or service is priced
out of the market? Think of customer "perceived value"
as the ceiling–this is the maximum price customers will
pay based upon what the product is worth to them. This is sometimes
described as "what the market will bear." Perceived
value is created by an established reputation, marketing messages,
packaging, sales environments, etc. An obvious and important
component of perceived value is the comparison customers and
prospects make between you and your competition.
To
understand the customer's perception of the value of your product
or service, look at more subjective criteria such as customer
preferences, product benefits, convenience, product quality,
company image and alternative products offered by the competition.
Once
you understand your cost floor and your value price ceiling,
you can make an informed decision about how to price your
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Cash
Management
“My
business is growing, but I never have cash in the bank.”
Running
out of cash
In
the excitement of starting your business, you lose sight of
the real amount of money that you will need to run your business
effectively during the first few months of operations. Often
entrepreneurs wait too long when they get into the cash flow
crunch and then it becomes too late.
What
is cash flow?
Cash
flow simply refers to the flow of cash into and out of a business
over a period of time. Watching the cash inflows and outflows
is one of the major management tasks of an owner. The outflow
of cash is measured by those checks you will write every month
to pay salaries, suppliers, and creditors. The inflows are the
cash you receive from customers, lenders, and investors.
POSITIVE
CASH FLOW
If the cash coming "in" to the business is more than
the cash going "out" of the business, the company
has a positive cash flow. A positive cash flow is very good
and the only worry here is what to do with the excess cash.
Like good health, a positive cash flow is something you're most
aware of if you don't have it.
NEGATIVE
CASH FLOW
If the cash going "out" of the business is more than
the cash coming "in" to the business, the company
has a negative cash flow. A negative cash flow can be caused
by a number of reasons. For example: too much or obsolete inventory
or poor collections on your accounts receivable (what your customers
owe you) can cause you to be short of cash. If the company can't
borrow additional cash at this point, the company may be in
serious trouble.
A
lesson that all entrepreneurs learn is the difference between
profit and cash. Profit is the amount of money you expect to
make if all customers paid on time and if your expenses were
spread out evenly over the time period being measured. However,
it is not your day-to-day reality. Cash is what you must have
to keep the doors of your business open, while you are busy
trying to make a profit. Over time, a company's profits are
of little value if they are not accompanied by positive net
cash flow. You can't spend profit; you can
only spend cash.
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