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How to understand your balance sheet: A beginner’s guide

How to understand your balance sheet: A beginner’s guide

A balance sheet is a financial statement that provides an overview of the company’s assets, liabilities, and equity at a specific point in time. It is important to know what each one means in order to understand how well you’re doing. It can be difficult to understand all the information on this document, but there are ways to break it down into more manageable pieces.

 

What is a balance sheet?

The balance sheet is a financial statement that provides information about the assets, liabilities, and equity of a company.

The first section of the balance sheet lists the assets on hand. Assets are anything that can be turned into cash. Assets include cash, accounts receivable (money owed to you), inventory (goods waiting to be sold), and prepaid expenses (e.g., insurance that is paid annually in advance). Assets are usually broken up into short-term (less than one year) and long-term (one year and longer)

The second part lists liabilities, which are things you owe money for. Liabilities include loans payable or due for goods purchased on credit. Like assets, liabilities are usually broken up into short-term and long-term.

Finally, equity is calculated by subtracting what you owe from what you own. This is also referred to as net worth or the net value of the business.

 

The importance of the balance sheet

Balance sheets are a snapshot of what a company’s assets, liabilities, and equity look like at any given point in time. A balance sheet is a tool that can be used to find out if a company has enough money to cover its obligations and stay afloat or enough assets to cover its long term obligations.

The balance sheet can also be used to determine how a company is financing its operations. A company that is generating enough net income will have higher retained earnings from one year to the next. A company that is financed through debt will have an increase in long-term liabilities year-over-year.

 

How to read a balance sheet

Below is an example of a balance sheet.

balance sheet

We already explained assets, liabilities, and stockholder’s equity. The balance sheet must always “balance” because assets equal liabilities plus equity (known as the accounting equation). Understanding this equation helps you understand a company’s position. If the company has more liabilities than assets, then it will have negative equity, which is a potential major red flag especially with mature businesses.

Investors and creditors like to determine a company’s financial health using something called ratio analysis. To determine how liquid a company is, divide current assets by current liabilities. In the example above, 67,500 / 34,200 = 1.92. Whether that is good or bad depends on the industry. In general, anything near or over 2.00 is acceptable.

Other performance indicators include solvency ratios (also called financial leverage ratios), profitability ratios, efficiency ratios, and coverage ratios. Corporations also have market prospect ratios which are used to predict performance, which is imperative when valuing a company’s stock price.

 

How to use information from the balance sheet to improve your finances

Did you know the information found on a balance sheet can also be used to measure your company’s vulnerability to risk? A complete balance sheet includes key pieces of information like cash on hand, accounts receivable and inventory. By analyzing these numbers, you will be able to see where your business is strong or weak in relation to other companies in similar industries. If there are any areas for improvement (i.e., too much debt), it will allow you time to prepare so that when the unexpected happens.

If you want to take control of your finances and improve them, the balance sheet is a good place to start. Understanding what it includes and how to read one will provide insight into where you can make changes in order to get more money for yourself or avoid unnecessary expenses that are taking too much from your paycheck.

The best way to use this information is by comparing two different months side-by-side on paper so that you have everything at hand. Once you have done this, focus on adjusting only those areas which seem most important – like lowering debt payments or reducing inventory on hand – and see if there is an impact in your bottom line!

The balance sheet is a powerful financial tool that can be used to improve your finances. It’s important for you to understand how the information on the balance sheet works and what it means in order to make informed decisions about improving your money management skills. Let us know if we can help! Contact our team of experts today and let them show you how they have helped others grow their wealth with remarkably simple math.

QuickBooks Beginner Mistakes You Must Avoid

QuickBooks Beginner Mistakes You Must Avoid

If you’re familiar with QuickBooks Online, you know how spectacular it is in maintaining financial records for small and medium businesses. Whether you’re a business owner or an individual looking for reliable bookmaking software, QuickBooks is a great option.

However, there are some common mistakes beginners tend to make in QuickBooks Online. In this post, we are going to look at the most common mistakes in QuickBooks and how to avoid them.

If you’ve already made these mistakes, it’s your time to correct them. And if it’s your first time using QuickBooks, you’re in luck because you rectify can your mistakes without even making them!

 

Forgetting to Update the Records

This is by far the most common mistake QuickBooks users make. If you’re guilty of the same crime, it’s a good thing you’re not alone. With the fast-paced nature of today’s business world and the stress of managing everything, it’s fairly normal to miss a few transactions here and there.

However, these mistakes might become costly if not fixed immediately. When your QuickBooks records don’t match up with your bank statements, it means you are not on top of your organization’s finances.

To avoid such a rookie mistake, build up the habit of recording transactions when they happen. If it’s too much to ask, at least update the records at the end of the day.

 

Double Charge

Believe it or not, double entries are also very common among beginners. If you’re the conscious kind, you are more prone to making this mistake. Let’s look at an example.

Suppose, you went on a business trip at the beginning of the month and you spent from

quickbooks transaction

 your credit cards only due to a short in company accounts. Being a good businessman, you logged everything in your expenses tab as a business trip.

However, at the end of the month, when you are paying the credit card bills, you are also considering the ‘business trip’ from before. So, there are effectively two entries for the same expense.

It can cause you a lot of headaches. So, it’s always better to be careful when making entries. Label them clearly so they don’t create confusion for yourself.

 

Write Checks for Payrolls

If you’ve been using QuickBooks as a business owner, there is a good chance you use it for employee payroll as well. So, how do you pay the payroll taxes? If you’ve been using the Write Checks window, you’ve been doing it wrong!

When you use the Payroll function in QuickBooks, the payroll taxes are automatically filed in the Payroll Liabilities window. When you pay them through the Write Checks, the tracking gets all messed up.

So, only use the Payroll Liabilities to pay off those taxes!

 

Deleting Transactions

It’s another huge mistake made by rookie QuickBooks users. As QuickBooks does the job of central bookkeeping for your business, all of the transactions are interconnected across different accounts.

So, when you delete a transaction from one account, it affects the whole ledger. And at the end of the month when you finally sit down to make sense of things, the deleted transaction will cause you a lot of headaches!

So, if you absolutely have to delete any transactions, look for other entries that it might affect. For example, if you delete a transaction in one account, it will effect another account. So keep this in mind before deleting transactions.

 

Making Too Many Accounts

The sub-accounts feature is quite handy in QuickBooks to further organize the books. However, some users take the concept too far and open up accounts and sub-accounts for each of their expenses. If you can keep track, it’s all good.

The problem arises when you can’t. Introducing too many variables is a surefire way to confuse things. For example, do you really need sub-accounts like electricity, gas, etc. under the bills account?

It brings extra stress on your organizing skills. So, what you can do is chalk out a plan for your accounts before you make them. Make a list of the information that you actually need to know and start accounts from there.

So, delete any unnecessary accounts you may have now to tidy up your QuickBooks account.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Financial Forecasting 101

Financial Forecasting 101

If you’re a business owner or been thinking about opening up a new venture, the thought of improving its performance must have crossed your mind. And that’s where financial forecasting comes into play. 

It’s simply the process of looking into the future of your business based on historical data and trends. In this post, you’re going to learn the basics of financial forecasting and how it can help you.  

What is Financial Forecasting?

The definition is literally in the name. Financial forecasting is forecasting a business’s financial status. 

More specifically, this is the processing, predicting, and estimating the future performance of a business based on current data at hand. Company revenue is used as the benchmark in most basic cases. 

The sales figure can say a lot more than how much profit your business made. Those data sheets are effectively a portal to your business’s future. But it takes a different set of capable eyes to capture the essence. 

Apart from the current sales figures, historical data is also used in financial forecasting. It helps analyze the performance with regards to the past, present, and hopefully a better future. This method is widely used by successful CEOs and entrepreneurs around the world for its accuracy. 

Why is Financial Forecasting Important?

Any business with long-term objectives can definitely benefit from this process. It also helps to set new standards for the business as well as guide the decision-making process. 

Another very important reason why entrepreneurs use this process is to convince investors. 

Suppose, you own a winery and you wish to expand across different states. You know it will be a successful venture. But how do you attract more investors? 

That’s where financial forecasting comes to play. You can accurately determine the future of your winery by considering all the variables in your current model and projecting them into a future scenario. 

CEOs love this model because it can bring important insights such as how to spend business resources, what the industry holds for the future, how long the debts will hover over the business, how to pay the shareholders, etc. to light. 

And when you have at least an idea of what you’re diving into, making the right decisions at the right time becomes a lot less burdening to your shoulders. 

Types of Financial Forecasting

When venturing into the dynamic world of forecasting, you should know about the types as well. There are two major branches of forecasts. One is Qualitative while the other one is Quantitative. 

Qualitative Forecasts 

Qualitative financial forecasting does not rely on computers to analyze large data sets. It’s quite an unorthodox way of finding out the connection between events. Rather than following the sales figures, Qualitative Forecasts focus on decisions taken from experience and intuition. 

It starts with gathering opinions from major positions in each department. Analyzing their insights might be crucial for forecasting.

The next step might be taking a similar scenario from a different environment and projecting it onto the subject scenario. 

The Delphi Method is another important aspect of financial forecasting. It indicates that company professionals fill out a questionnaire. Based on it, another questionnaire is created and filled. Now, these are combined and presented to the participants to re-evaluate their answers. 

Scenario forecasting is another great method. The person tasked with the forecasting will project different results based on the consequence of scenarios. Your management team has the freedom to select any result you want. 

Quantitative Forecasts 

Unlike qualitative forecasts, quantitative financial forecasts solely depend on large historical data sets. These are used to find patterns and trends in the business space. These forecasts are more accurate in sectors where numbers speak louder than legacy. 

Pro-Forma Financial Statements is a great method used in this forecast where the sales data from the previous years are used to make the prediction. 

Another method is Time Series Analysis. For short-term goals and objectives, this the perfect method to use. It involves collecting data for a certain period and analyze it to find trends. 

Lastly, the Cause-Effect method dictates that every effect on the business is related to the cause. The consumer’s income, their confidence in the business, unemployment rate, etc. directly influences the sales figures. The goal of this method is to find the connection.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

Tax Preparation Enablement

We provide your organization a true end to end solution to all of your tax needs. Tax season is year round to Protea – if you aren’t preparing daily, it’s too easy to get behind. We are always working with your organization to streamline your businesses tax management.

5 Financial Reports You Should be Running

5 Financial Reports You Should be Running

There’s an assortment of financial reports involved in business accounting and bookkeeping. Each one contains the information you need to form an accurate and holistic view of your company’s financial health. There are five reports you should be running on a consistent schedule when you own any small business, especially wineries. Keep reading to learn why these reports are crucial to the success of your company.

 

Profit and loss

A profit and loss report, also called a statement of operations, provides an overview of your winery’s key performance factors. The frequency of P&L reporting varies – monthly, quarterly, and annual statements all have their place. The goal of P&L reporting is to track sale trends and profit ratios over time.

To complete the report, an accountant compares the income of your business against all sorts of expenses. These include how much it costs to sell your products, admin expenses, taxes, interest on loans, marketing budgets, and so on. The sum of your business expenses is then deducted from the sales revenue to determine your company’s net income.

It’s important to collect and review these reports over time. On report is a snapshot in time. Several forms a dynamic assessment of how well a business is doing. This data is invaluable if you want your small business to thrive for years to come.

 

Balance sheet

The process of fermenting, bottling, and selling wins is lengthy. Every winery depends on a mix of liquid accounts and long-term investments to support such time-consuming operations. A winery is also likely to have short-term and long-term liabilities and financial backing from shareholders.

These factors are tabulated and compared when your accountant prepares a balance sheet. You’ll find that there are two sections to any balance sheet: one, a summary and breakdown of all company assets, and two, a summary and breakdown of all company liabilities.

The assets section will include the cash you have to spend, the value of your inventory, the equipment you own, and any accounts receivable on your books. The liability section includes accounts payable, unearned revenue, and long-term debts. The final calculations reveal your company’s net worth. Reviewing yearly balance sheets is an excellent tool to track the growth of your winery.

 

Statement of cash flow

The revenues and expenses of a business fluctuate frequently. And while P&L reports and balance sheets provide immense data sets, they don’t always offer the precision you need. A statement of cash flow allows you to record, track, and predict the actual amount of cash your business has on hand during a given time period.

For example, a winery needs to invest money in multiple pieces of bottling equipment. The cost of the initial purchase, interest owed, and the depreciation of value are all accounted for in monthly expense reports. However, the depreciating value of machinery doesn’t actually remove money from your account.

Instead, a cash flow statement only tracks your liquid assets. Regular cash flow reporting will show you the amount of cash you have on hand throughout each week, month, or quarter. Wineries can use these reports to predict how much cash they’ll have at a future point and enables them to make long-term plans.

 

Net profit margin over time

The net profit margin of your company is crucial to seeing and developing success in the long term. The basis for this type of report is the net profit margin ratio. The ratio divides your business’s net profit by the amount of revenue earned. To phrase it another way, this report explains how much your net worth grows with every dollar of revenue you earn.

A net profit margin report should be completed frequently. It provides an inside look at how effective your investments in inventory and labor are at producing money from your company. Knowing the profit margins for your company is the first step to course correction when you start losing money.

 

Accounts receivable versus accounts payable

Reporting accounts receivable versus payable is vital for daily operations and long-term financial planning. These types of reports document either your liabilities or your assets in real time. This information is needed to pay debts on time, budget for upcoming expenses, and ensure your books are accurate as well.

Accounts receivable reports detail outstanding money that your business is owed. In a winery setting, you might have receivable assets because a local market purchased several cases of wine to stock their shelves. Payable accounts are liabilities you are expected to pay. This includes expenses like rental space and raw goods inventory.

 

Conclusion

These five reports are the pillars of your business’s financial health. They require the utmost accuracy and need to be completed on a frequent basis, which is why Protea Financial can help. As a small business owner, it’s difficult to find time to manage all accounting and bookkeeping. Compiling and reviewing reports on a regular schedule is a challenge.

Additionally, few business owners have the training and expertise required to prepare reports correctly. Protea’s certified accountants and bookkeepers are ready to help. Your dedicated team will ensure that every transaction, asset, and liability is accurately reported. This means you can focus your attention on reviewing the big picture and deciding how best to grow your business.

The Basics of Financial Statements

The Basics of Financial Statements

A key aspect and skill in managing a company is the ability to understand financial statements. Because we operate in a competitive business environment, it is important to be able to identify a company’s financial position/health, business trends and risks at an early stage. The ability to analyze your company’s financial statements forms a key part in cultivating overall growth.

 

Let us dig into the basics of financial statements:

 

The Balance Sheet

The foundation of the balance sheet reflects the “book value” of a company at a specific date, also known as the reporting date. The balance sheet provides a clear overview of the company and can be divided into three components namely, assets, liabilities, and owners’ equity.

Assets: Anything that the company owns or is owed, and represents an accurate quantifiable value can be attributed to this asset.

Liabilities: Any legal obligations owed by the company to third parties. In a simplistic term, liability can be seen as the opposite of an asset.

Owners’ Equity: this refers to amounts invested by or owed to shareholders. If you had to subtract all the liabilities from all the assets you should effectively arrive at the owners’ equity value. The amount reflects the net worth of the company that belongs to the shareholders.

The term “balance sheet” is indicative of one important accounting principle which is that it should always balance according to the well-known formula: Assets = Liabilities + Owners’ Equity.

 

The Income Statement

The income statement (also referred to as the profit & loss statement) is an accurate record summary of revenue, expenses and other transactions over a given period. This is a particularly important document that allows you to analyze the progress and performance of your company. You can easily determine if your company is making a profit or loss, analyze expenditure/costing, identify business trends, etc.

The Income statement typically includes the following basic information:

Revenue: The amount that the company earned from sales.

Costs of goods sold (COGS): This figure is the cost of what it took to produce your goods. A simple way to put it, for each product that you sold, how much did it cost to make and get it into the hands of the customer.

Gross profit: This is the total revenue less the cost of goods sold.

Operating expenses: These are costs incurred to keep your company operating but aren’t direct materials or labor related to producing your goods or services. Examples of operating expenses include property insurance and taxes, building repairs and maintenance, utilities, administrative staff wages, etc.

Operating income: This is the income amount that reflects the gross profit less the operating expenses (other than COGS).

Net income: This is the company’s profit after all expenses and taxes.

The income statement provides you with a good indication of how well your company is performing. You will also be able to analyze financial trends on profitability, excess expenditure, cost-saving and if there is any excess cash to invest back into your company.

 

The Cashflow Statement

This cash flow statement provides a detailed overall view of what has happened to the company’s cash and the movement of cash over a given period. It is vital that a company has enough cash on hand to meet its obligations. A cash flow statement is typically broken into three sections namely, operating activities, investing activities, and financing activities. This allows for the reader to determine the following:

  • Operating activities indicate whether a company can generate cash from their normal operating activities (selling their goods or services).
  • Investing activities indicate the cash earned or spent from investments. This can include buying/selling physical property, vehicles, fixed deposits, patent rights, etc.
  • Financing activities indicate the cash raised/spent to settle debt and/or equity financing.

 

A positive cash flow figure reflects more money coming in than going out. A negative cash flow figure reflects more money flowing out (being spent) than flowing in. A negative cash flow figure is not necessarily a bad indication and this can relate to various strategic cash flow expenditure by management. The cash flow statement is vital when it comes to decision-making pertaining to the company’s cash position. It portrays the ability of a company to operate in the long term and short term based on the in and outflow of cash. Knowing this not only allows you to plan and budget in the long term, but also allows for better short-term strategical decision making.

 

Bringing it all together can provide meaningful information

 

Whilst accountants work with financial statements on a daily basis and for them it is second nature, the same cannot be said for all business professionals and it sometimes becomes difficult to understand the financial jargon. You can however learn the basics of understanding financial statements and the benefits it can yield when it comes to analyzing the statements. Financial analysis of the balance sheet, income, and cash flow statements can provide useful information such as:

 

  • The financial health of the company
  • Assist with financial forecasting, budgeting, and cash flow planning
  • Maximizing gains or minimizing losses
  • Identifying trends and new opportunities to grow the company
  • Identifying and avoiding undue risk
  • Improving and visualizing strategic business decisions
  • Allows investors to analyze the profitability and market value of the company and decide whether they would like to invest

 

The possibilities of financial analysis and the usefulness of metrics are endless. It is important to have accurate financial statements prepared by experts that will provide you with invaluable data to analyze. The data itself won’t save your businesses – only you can.

 

Protea Financial is Your Outsourced Bookkeeping and Management Accounting Services:

 

The good news is that you can learn how to interpret financial statements even if you do not have a financial background. At Protea Financial we match our solutions to the needs of the customer. Protea Financial can support you with everything from bookkeeping services, preparing financial statements, order processing, inventory tracking, handling management accounts, and tax schedules in order to support your tax accountant. Protea’s goal is to provide timely, accurate, and high-quality financial information on which a business can act. We can work with you to provide an evaluation and find the best solution for your business.