Finances

Payroll

  • A payroll is a list of a business’s employees and how they are to the compensated

  • The payroll register includes a description of employee earnings throughout their employment, tax deduction from their earnings, what benefits employees have received, whether they are paid wages or salaries, and more

  • Paying employees is a business expense that must be recorded in accounting procedures and considered in a company’s budget

  • Employee compensation should be recorded and executed efficiently to ensure businesses have the finances for continued operation

Balance Sheet

  • A balance sheet is used by all types of businesses to detail assets, liabilities, and owner’s equity at one’s specific moment in time

  • Balance sheets also include a statement of shareholder equity which is determined by assets minus liabilities

  • The nature of the balance sheet is to assess the business’s correct financial stability and aptitude

  • The balance sheet equation: Assets = Liabilities - Owner’s Equity

  • Working capital refers to the amount of money a business has for immediate use and is calculated by assessing the difference between current assets and liabilities

  • Liquid assets, also called current assets, are items that can be used immediately or can be used as cash in one year

  • Accounts receivable is also considered a current asset because a business will convert them to cash within a year by receiving payment.

  • C-Corp and LLC allow corporations to own

Assets and Liabilities

  • Assets are property, equipment/inventory, and accounts receivable.

    • Cash, accounts receivable, inventory.

  • Current liabilities are a business’s liabilities, such as loans, that are expected to be paid within one year

  • Liabilities may include trade credits or other types of short term loans used by a business

    • Loans payable, accounts payable, accrued expenses, deferred revenue (payments paid in advance), mortgage payable, credit lines

  • Working capital refers to the amount of money a business has for immediate uses and is calculated by assessing the difference between current assets and liabilities: current assets - current liabilities = working capital

Current Ratio

  • One financial ratio that is used in a balance sheet is current ratio, which shows how current assets and current liabilities are related. The current ratio can indicate how profitable a business is. It is calculated by dividing current assets by current liabilities. Current assets / current liabilities = Current ratio

Debt Ratio

  • Another type of ratio that may be featured on a balance sheet is debt ratio. The debt ratio shows the relationship between a business’s total assets and total liabilities. This means that all cash and debt is included in liabilities and assets, not just the ones that will be used within one year.

  • Total liabilities / total assets = debt ratio

  • The higher the number, the more leveraged (buyout) you are.

    • As a startup, your first 6 - 12 months, your debt ratio will be greater than one

    • Equity in the business

    • Investors will see the trends in equity

  • 40% (mortgage to income)

Income Statement

An income statement is another important financial tool used to evaluate a business’s financial position. Income statements detail a company’s financial performance by showing revenue and expenses over a period of itme. Income statements require companies to calculate total revenue and expenses to compute net or total income or loss. Revenue - Expenses = Net Profit (or loss)

Shows operating expenses.

Net Profit Ratio

A net profit ratio shows how much a business profit per one dollar of sales. Net profit ratio indicates how effective a business sales are in bringing in profit.

Net income / net sales = net profit ratio.

Operating Ratio

An operating ratio demonstrates the relationship of a company’s operating expenses to its net sales. It analyzes a business’s effectiveness in operations by determining how much of each dollar of sales goes to business operating expenses such as production, employee benefits, marketing costs, and other essential business tasks. An operating ratio is calculated by dividing operating expenses by sales. Operating Expenses / Sales = Operating Ratio

Budgeting for Profitability

Profit is the financial gain calculated by the difference between amount earned and amount spent by a business. Businesses must remain profitable if they hope to avoid failure. For this reason, it is important that business owners identify factors that affect their business profits, such as revenue expenses, and the entrepreneur’s roles.

Start-Up Budget

A start up budget is a financial statement that includes an outline of all equipment, supplies, and marketing expenses required to start a business. Many businesses that have high start-up costs seek their funds from banks in the form of a “start-up load”. Startup budges include the following items:

  • Cost of equipment required to start the business

    • Knowing equipment costs up front can save entrepreneurs from overspending in the future.

  • Cost of materials and supplies required to sart the business

    • Considering all of the materials and supplies before opening a business ensures entrepreneurs have every expense accountable for.

  • Advertising and marketing costs required to start the business.

    • Different advertising methods will have different prices.

Example

  • Loans: $10,000

  • Revenue: $3,000

  • Cost of Goods Sold: $1,000

  • Operating Expenses: $4,000

Current Assets: 10,000 + 3,000 - 1,000 - 4,000 = 8,000

Current Liabilities: 10,000

Current Ratio: 8000/100000 =0.08

Gross profit: Revenue - Cost of Goods Sold = $2,000

Operating Ratio: $4,000 / $2,000 = 2.0

For every dollar, it costs me $2 to run my business.

Debt Ratio: Total liabilities / total assets

$8000 / $10000 = 0.8

Good indicator is 40%, still invest in up to 60%

80% makes sense when you’re just in year 1

Net Profit Ratio:

Net profit: -$2,000

-$2,000 / $2,000 = - 1.0

For every dollar of gross profit I receive, I lose $1.

Not sustainable, likely to be seen in Year 1 business (advertising, making, etc. upfront costs)

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