Why you need an accountant year-round

March 30, 2018 Finance Comments (0) 221

I hear this often from entrepreneurs and small business owners: "I have the popular accounting software to manage my business checkbook. I can use it to create invoices and pay suppliers. I even use it to manage my payroll. It is simple, and it is just like my checkbook. I think I have it all covered. I use an accountant for my taxes, but do I really need an accountant other than tax season?"

The answer is,yes. You should have an accountant who can support your business year-round.

An accountant offers much more than bookkeeping and taxes. In fact, an accountant’s area of expertise often goes far beyond that of your neighborhood bookkeeper. While undoubtedly a bit more expensive than a bookkeeper, you should be able to rely on an accountant to add value to your business operations.

For example, an accountant will:

  1. Help you read and understand your financial statements.  If you are just printing them off your accounting program each month without a thorough understanding of what you are reading, your business may be in trouble, and you may not even know it.  An accountant can help you decipher the numbers on your financial statements and determine how to use those numbers to determine the actual condition of your business.
  2. Advise you on Generally Accepted Accounting Practices (GAAP).  Like most business operations, accounting has a defined set of “business rules” or the “acceptable way to do things.”  Although most accounting software packages provide some safeguards to prevent you from making significant errors in bookkeeping process and they do provide an audit trail for what you have done, they will not force you to follow these standard business rules. Regardless of your business size, you will want to be able to justify your record-keeping and financial reporting by the accepted practices.
  3. Provide a dose of business reality.  As a business owner, one of the most challenging things to do is to look at the books objectively. An accountant will provide you with an objective outlook on how your business is really doing.  Moreover, an accountant can give you guidance on how to get back on track if you find your business is heading south.
  4. Provide finance-based business guidance.  Most accountants can also provide you with a variety of other businesses services and advice outside what you might consider being the traditional accountant role of bookkeeping and taxes. Some accountants have experience in other areas of business, too, and can also provide support for:
  • Financing options and sourcing
  • Loan proposal assistance
  • Cash Forecasting
  • Budgets and projections
  • Business valuation
  • Fraud investigations
  • Business succession planning
  • Strategic and long-range business planning (business plan development)
  • Accounting software systems review and set-up

This is not to say that you should turn these functions over to an accountant. As the business owner, you have a responsibility to understand the numbers that drive your business deeply. An accountant can serve as a financial mentor to help you better understand why the numbers are significant and how to use them better to make more intelligent business decisions.

Remember that while accounting software can help you manage your daily administrative tasks relative to accounting, the software is just a business tool. As such, the software is not a replacement for a knowledgeable accountant who can help you navigate the financial side of your business.

David Harkins is a serial entrepreneur with significant experience in branding, strategy, licensing and marketing.

In his spare time, he consults, coaches, speaks, writes, hikes, explores, and creates art. Although, not necessarily in that order.

Connect with him on social media below:

Continue Reading

Calculating Profitability Ratios

October 5, 2017 Finance, Resources Comments (0) 373

Profitability Ratios evaluate the financial viability of a business and provide a measure of comparison and performance to the industry in which the business falls.

These ratios include:

NET MARGIN RATIO

The Net Margin Ratio measures how much a company earns after taxes relative to its sales. The formula is as follows:

Net Profit Margin = Net Profit/Revenue

A higher net profit margin tells the investor the business is more efficient and flexible and capable of taking on new opportunities.

 

OPERATING PROFIT MARGIN RATIO

The Operating Profit Margin Ratio measures earnings before interest and taxes (EBIT). The formula is as follows:

Operating Profit Margin = Operating Income/Net Sales

This gives the investor an idea of whether they want to invest in a company and bankers an idea of whether they should consider providing additional debt financing.

 

RETURN ON ASSETS RATIO

The Return on Assets Ratio measures how well management is using the company’s resources. The formula is as follows:

Return on Assets = Net Income/Total Assets

This will vary widely by industry but it gives investors an idea of how well the company is leveraging its assets to benefit the investment return.

 

RETURN ON EQUITY RATIO

The Return on Equity Ratio measures how well the business as an investment is doing relative to the investment by its shareholders. The formula is as follows:

Return on Equity = Net Income/Shareholder’s Equity

This helps investors understand how much money the company is earning for each invested dollar and may be a good predictor of return for their investment.

While these formulas are straightforward, I have created a spreadsheet calculator for readers to use an explore. If you’re interested, you can download the Efficiency Ratio Calculator using the button below. If you would like to learn more about Financial Ratios and how they may be used, read the post, Financial Ratio Analysis and the Entrepreneur.

 

 

 

A few notes on this calculator:

  • This calculator is an example and is for use as is. It is not supported in any way. It is not intended to be a tool to use without customization based on the specifics of an entrepreneurial venture and its unique financial statements.
  • This calculator is only an example to give the reader an idea of how such a tool can be developed. The numbers within are not based on a real business. I compiled this as an offshoot of work in a graduate class, but I have created developed similar models for entrepreneurial ventures. Each business venture is different, and so is the ratios used and considered for that enterprise.
  • Financial Ratio calculations are done annually using actual numbers. This model can be used in that way. It can also be used to calculate and review ratios monthly. Monthly numbers would allow the reader to track improvements over time.
  • All of the “Bold Blue” text areas can be changed to demonstrate how the interactivity might work. No other data can be changed.
  • Formulas can be seen in each of the cells (mouse over it), but only the values in the “Bold Blue” text area can be changed.
  • By downloading you acknowledge this is for personal use only. It is not to be sold or distributed in any way.

 

Reference

Rogers, S. (2014). Entrepreneurial Finance: Finance and Business Strategies for the Serious Entrepreneur. New York: McGraw Hill Education.

David Harkins is a serial entrepreneur with significant experience in branding, strategy, licensing and marketing.

In his spare time, he consults, coaches, speaks, writes, hikes, explores, and creates art. Although, not necessarily in that order.

Connect with him on social media below:

Continue Reading

Calculating Efficiency Ratios

October 5, 2017 Finance, Resources Comments (0) 437

Efficiency Ratios provide additional insights into business operations. These are useful in helping an investor or lender spot key problem areas related to inventory management, cash flow, and collections.

These ratios include:

INVENTORY TURN-OVER RATIO 

The Inventory Turn-Over Ratio measures how long it takes for inventory to be sold and replaced during a period (typically a year.) The formula is as follows:

Inventory Turnover = Cost of Goods Sold/Average Inventory*

The longer inventory sits on the shelf, the more it costs the company because gross profit is not realized from the sale. Sales and inventory management are key measures for investors.

*Average Inventory = (Beginning Inventory+Ending Inventory)/2

 

AVERAGE COLLECTION PERIOD RATIO

The Average Collection Period Ratio measures the average number of days customers take to pay for products or services. The formula is as follows:

Average Collection = Account Balances for the Year/Net Sales for the Year

A short average collection period compared to industry standards is preferred by investors.

While these formulas are straightforward, I have created a spreadsheet calculator for readers to use an explore. If you’re interested, you can download the Efficiency Ratio Calculator using the button below. If you would like to learn more about Financial Ratios and how they may be used, read the post, Financial Ratio Analysis and the Entrepreneur.

 

 

 

A few notes on this calculator:

  • This calculator is an example and is for use as is. It is not supported in any way. It is not intended to be a tool to use without customization based on the specifics of an entrepreneurial venture and its unique financial statements.
  • This calculator is only an example to give the reader an idea of how such a tool can be developed. The numbers within are not based on a real business. I compiled this as an offshoot of work in a graduate class, but I have created developed similar models for entrepreneurial ventures. Each business venture is different, and so is the ratios used and considered for that enterprise.
  • Financial Ratio calculations are done annually using actual numbers. This model can be used in that way. It can also be used to calculate and review ratios monthly. Monthly numbers would allow the reader to track improvements over time.
  • All of the “Bold Blue” text areas can be changed to demonstrate how the interactivity might work. No other data can be changed.
  • Formulas can be seen in each of the cells (mouse over it), but only the values in the “Bold Blue” text area can be changed.
  • By downloading you acknowledge this is for personal use only. It is not to be sold or distributed in any way.

 

Reference

Rogers, S. (2014). Entrepreneurial Finance: Finance and Business Strategies for the Serious Entrepreneur. New York: McGraw Hill Education.

David Harkins is a serial entrepreneur with significant experience in branding, strategy, licensing and marketing.

In his spare time, he consults, coaches, speaks, writes, hikes, explores, and creates art. Although, not necessarily in that order.

Connect with him on social media below:

Continue Reading