Often when an entrepreneur is running the business many accounting tasks take the back seat because there is only so much time in the day and these items may seem trivial to the core aspects of business operations.
Many entrepreneurs are very smart and driven people and they can figure out how to do most things. While many accounting software programs can help make accounting easier, the larger question a business owner should be asking is whether they should even be doing these tasks. What may only be a something that takes a “just” a couple of hours a week could be time better spent calling more customers and closing deals or working on larger strategic tasks.
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Something that many small business owners overlook is the preparation of financial statements like the income statement, cash flow statement and balance sheet. These are critical documents that provide business owners the financial reporting data they need to run their business. Not only can our in-house accounting team prepare these statements, they can help you understand the financial statements so you can make better decisions with your business.
This statement summarizes the historical financial results of a business’s revenues and expenses over a selected period of time.
The income statement equation shows the profits that were obtained through revenue and expenses. At its most simple, the calculation for an income statement is: Income = Revenue – Expenses
Unlike the balance sheet that looks at a particular point in time, the purpose of an income statement is to see how much a business earned and spent in a specific accounting period. The statement is often used at the end of a business period (monthly, quarterly or annually). After a business has been operating over several years, this statement can be used to evaluate financial performance over previous years to provide data and evaluate the year over year performance. This financial statement can also be used to track revenue and expenses to plan annual budgets and sales projections along with determining what areas of the business are over budget or under budget.
Businesses selling physical goods can use the income statement to track changes in returns, cost of goods or operating expenses as a percentage of sales to quickly fix issues in the business.
Last, the income statement can be used to estimate income tax liability as it includes depreciation, which is used as a business write-off.
An accounting balance sheet is a portrait of the financial standing of a business at a point in time. It shows what your business owns and what it owes. The balance sheet is similar to a personal financial statement that someone may fill out when applying for a loan to show their assets and liabilities.
A balance sheet will show a summary of a company’s assets, liabilities and owner’s equity at a specific point in time.
It is usually prepared at the end of the month, quarter, or year.
The balance sheet is one of the three primary financial statements that a business uses to evaluate its financial health. The balance sheet can be a very valuable tool in evaluating financial performance and making financial business decisions.
Every business, large or small, depends on cash. Dave owns a landscaping business and has a constant need for cash on hand to pay his employees and maintain his equipment. Borrowing money over the long term to meet these needs is unsustainable, so he must have a solid idea of what his cash situation will look like at various points in the near future if he is to be successful. Let’s take a look at how Dave creates and uses cash flow projections in his business.
A cash flow projection shows the expected amounts of money that will come into a business along with what will go out as expenses. This is a different concept than business profit; it is possible for a business to make a profit but still have a cash flow problem.
Financial Modeling is the task of building an abstract representation (a model) of a real world financial situation. This is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or portfolio of a business, project, or any other investment.
Feasibility Analysis is therefore,
An analysis and evaluation of a proposed project to determine if it (1) is technically feasible, (2) is feasible within the estimated cost, and (3) will be profitable. Feasibility studies are almost always conducted where large sums are at stake. Also called feasibility analysis. See also cost benefit analysis.
The project will be thoroughly analysed using various financial models and technical assumptions in order to determine the likely outcome of the project under various scenarios. This is also sometimes referred to as a Sensitivity Analysis.
A business valuation is a general process of determining the economic value of a whole business or company unit. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings. Owners will often turn to professional business evaluators for an objective estimate of the value of the business. In private equity transactions and Mergers and Acquisitions, Business Valuations are essential to establish the negotiating terms for all the parties involved.
Estimating the fair value of a business is an art and a science; there are several formal models that can be used, but choosing the right one and then the appropriate inputs can be somewhat subjective.
The topic of business valuation is frequently discussed in corporate finance. Business valuation is typically conducted when a company is looking to sell all or a portion of its operations or looking to merge with or acquire another company. The valuation of a business is the process of determining the current worth of a business, using objective measures, and evaluating all aspects of the business.
A business valuation might include an analysis of the company’s management, its capital structure, its future earnings prospects or the market value of its assets. The tools used for valuation can vary among evaluators, businesses, and industries. Common approaches to business valuation include a review of financial statements, discounting cash flow models and similar company comparisons.
There are numerous ways a company can be valued. You’ll learn about several of these methods below.
Market capitalization is the simplest method of business valuation. It is calculated by multiplying the company’s share price by its total number of shares outstanding. For example, as of January 3, 2018, Microsoft Inc. traded at $86.35. With a total number of shares outstanding of 7.715 billion, the company could then be valued at $86.35 x 7.715 billion = $666.19 billion.
Under the time’s revenue business valuation method, a stream of revenues generated over a certain period of time is applied to a multiplier which depends on the industry and economic environment. For example, a tech company may be valued at 3x revenue, while a service firm may be valued at 0.5x revenue.
Instead of the times revenue method, the earnings multiplier may be used to get a more accurate picture of the real value of a company, since a company’s profits are a more reliable indicator of its financial success than sales revenue is. The earnings multiplier adjusts future profits against cash flow that could be invested at the current interest rate over the same period of time. In other words, it adjusts the current P/E ratio to account for current interest rates.
This method of business valuation is similar to the earnings multiplier. This method is based on projections of future cash flows, which are adjusted to get the current market value of the company. The main difference between the discounted cash flow method and the profit multiplier method is that it takes inflation into consideration to calculate the present value.
This is the value of shareholders’ equity of a business as shown on the balance sheet statement. The book value is derived by subtracting the total liabilities of a company from its total assets.
This is the net cash that a business will receive if its assets were liquidated and liabilities were paid off today.
This is by no means an exhaustive list of the business valuation methods in use today. Other methods include replacement value, breakup value, asset-based valuation and still many more.