It’s easy to become daunted when faced with the intricacies of financial statements, especially when you’re a new business owner. Fortunately, you don’t have to have an MBA in order to make sense of your financial statements, and you don’t have to fear the challenges presented by this very important part of your business.
Week 2: What is an Income Statement?
An income statement is a financial statement that tracks revenues and expenses — money coming in and going out — so you can watch how your business operates over a set period of time. Its main purpose is to show and track whether your company made or lost money during the reported period. Sounds like worthwhile reading material, right? Read on to find out how to make sense of your own personal best seller.
Income statements should be helpful to small business owners in particular, who can use these statements to “find out what areas of their business are over budget or under budget,” says BusinessTown.com. “Specific items that are causing unexpected expenditures can be pinpointed, such as phone, fax, mail, or supply expenses. Income statements can also track dramatic increases in product returns or cost of goods sold as a percentage of sales. They also can be used to determine income tax liability.”
There are two types of income statement, the basic “single step” method, and the slightly more complicated, yet more revealing, multi-step method. Both have their merits; sometimes all you need is a bottom line, while other situations may call for an in-depth view.
The chart below, courtesy of Investopedia.com, compares the single-step side by side with the multi-step:
|Single Step Format
|Cost of Sales
|Material and Production
|Marketing and Administrative
|Selling, General and Administrative
|Research and Development Expenses
|Other Income and Expenses
|Other Income and Expenses
|Net Profit (after taxes)*
Investopedia then goes on to explain the charts, noting the differences and expounding on their uses: “In the multi-step income statement, four measures of profitability (*) are revealed at four critical junctions in a company’s operations – gross, operating, pretax and after tax. In the single-step presentation, the gross and operating income figures are not stated; nevertheless, they can be calculated from the data provided.”
What challenges have you faced in interpreting your income statement?
Everyone knows that starting your own business is not a piece of cake, and sometimes, the pinch at the beginning happens again in the middle of your business’ existence, and again at another point in the future. What isn’t always discussed is ways to get through these rough patches.
Week 3: Accounts Receivable Factoring
This week’s topic, accounts receivable factoring, (also known as factoring, or invoice factoring) is one of the more complicated topics to understand, but is a very useful tool for up-and-coming entrepreneurs. Basically, it is the selling of the business’ accounts receivable to a third party, known as a factoring company, at a discount.
It’s time to brush up on some accounting terminology – accounts receivable is money owed to a business by its clients; an account of money owed to you. So in laymen’s terms, it’s selling your IOUs. If your business is short on cash and in need of an immediate infusion, it’s a highly viable option for getting yourself out of a pinch.
Happily, accounts receivable factoring companies are specifically set up to deal with these types of transactions and help you through a rough patch. The key to success with accounts receivable factoring is to select the right business partner with whom to work. It is usually better to go with a company that is well established, has stood the test of time and one that has expertise in the specific industry your business is in. AccountsRecievableFactoringHQ.com says “With the amount of complexity and nuances involved in various industries, teaming up with a partner who understands what you do will usually turn out better for your business. Ask the accounts receivable factoring company you are evaluating if they have a client similar to you in their portfolio. If you are a retail business, ask if they have other retail clients. Industry experience is a key factor in determining your success with factoring.” Keep in mind though, the age of the receivables has a significant effect on the amount the company receives; the older the receivables, the less the company can expect.
Have you ever looked into selling your accounts receivable? What information did you come into when searching? Did it seem like a good investment?