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Often when a entrepreneur starts a business, he or she creates an income statement for the plan that is often built on unrealistic expectations and/or missing key elements. Understanding what goes into an income statement will help you create a realistic plan.

An income statement is separated into several parts. The first section is the revenue section, which can be one line or several lines if you want to break out your revenue by product or service. In general, your revenue can grow as quickly as you would like, but you must understand the drivers behind your growth.

For instance, if you have developed a new product for a semiconductor manufacturing process, it may be eighteen months before you see your first revenue because that is how long the semiconductor manufacturing cycle lasts, and your product will not become part of the process until the next cycle.

If you’ve created a revolutionary anti-aging skin cream, you may be to grow your revenues exponentially, but there will be a significant marketing and sales budget behind that growth that will have to be accounted for in your expenses. And note, those sales and marketing dollars will have to be spent before you see a dime of revenue.

The next section is the cost of goods sold (COGS). Historically, COGS are the costs directly related to the purchase or production of whatever your company sells. I have also seen a clever play on the acronym for service companies: cost of services generated.* If you sell time of your employees, you could list their time and allocated overhead as cost of services generated.

The next section is gross profit. This is your revenue minus your COGS. Your gross margin is the gross profit divided by your revenue times 100. This number can be compared with other companies in your industry to give you a sense of your competitiveness. If your gross margin is wildly out of line with your competitors, you need to figure out and understand why.

The following section shows your operating expenses. This is usually the section where novice entrepreneurs get into trouble. Included here would be your depreciation, your sales and marketing expenses, and your general and administrative expenses.

Sales and marketing

Personnel costs (with overhead of 20-30%): Sales, marketing and business development, plus any support personnel

Commissions

Collateral and promotional materials

Travel and entertainment costs

Trade shows

Advertising

Branding

General and Administrative

Personnel costs (with overhead of 20-30%): Executives, HR, IT, admin

Insurance costs aside from health care: property, liability, key man, umbrella, etc.

Rent: include both monthly and annual operating assessment

Utilities: power, telephone, internet, cell phone, cleaning services, garbage disposal

Non-sales related travel and entertainment

Office supplies, postage & shipping

Legal and accounting costs

Other misc

Note that overhead can be broken out separately, including such items as payroll taxes, workman’s comp, unemployment insurance, health and dental insurance, other employee benefits, etc.

Subtract the operating expenses from the gross profit to get your net profit or earnings before interest and taxes (EBIT). Divide your EBIT by your revenue to get your net profit margin.

You are unlikely to have extraordinary items when projecting an income statement, but if you do, they would go here, followed by the interest earned/paid section and the taxes section.

After subtracting out your interest and taxes, you would have the company’s net profit.

When creating your income statement, think of every cost you might incur. Compare your S&M and G&A sections with those of public companies. Try to determine why your percentages are out of line, if they are. There is no reason why you cannot come up with a better way to do things and gain several margin points doing so, but make sure that you have not gained those point because you forgot to pay your employees health insurance.

* Note: I am discussing this purely on a business planning basis. Do not use any definitions or expanations in this article for tax planning or reporting purposes. See a tax accountant for your tax reporting

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Profitability is important to every businessman. For this reason, they make sure that their finances are handled very well. The last thing they want is for their businesses to get bad reputation, which is why they find ways to effectively manage their finances. Among the things that companies do as a measure is hiring qualified individuals to do financial tasks. Another effective move is implementing the right metrics for finance.

Finance metrics are series of activities, mostly concerning finance, that are aimed at improving the growth of the company. Take note though that finance metrics may not be limited to finance alone. For instance, it can cover clients. Customer service is not only for marketing or advertising employees, but it is also an utmost concern, even for finance people. Metrics are usually referred to as a plan or program. There are effective metrics, and there are failures as well. To measure this, an analysis on the results of the implemented plan is required.

When speaking of the financial aspect of a business, these may include details about market share, revenues, cost, and many others. Thus, owners are challenged to come up with plans that would touch the different areas of finance. There are three important things to consider when creating a plan – goal, implementation, and analysis.

Members of a team assigned to create financial plans should determine the goals of their proposal. Goals are necessary for they dictate the direction of the plan. In finance, a common goal is to reduce cost. Finance professionals are at all times looking into ways on how the company can minimize expenditures. Doing so would normally result to increase in profit.

On the implementation stage, a thorough discussion should be made. All areas of the plan, from people to budget, must be taken into account. It is also relevant that policies for the implementation of the plan should be reviewed. Likewise, activities should be lined up in accordance with the goals of the plan. The team must be able to identify problems that may be encountered along the way. Likewise, ready solutions are needed.

The important part of the process is the analysis. Here, the effectiveness of the financial plan is being measured. Goals are used as bases to determine whether the plan is successful or not. Therefore, if the company is able to reduce cost then the plan can be qualified as effective. Also in this stage, finance metrics are applied. These metrics help assess both the good and bad points of the plan. The nice thing about having metrics is that companies are given the chance to address lapses of the plan.

Accepting the results derived from the finance metrics would also matter. Companies differ in the way they react to results. Some would take such as challenges while some may store these merely for statistics only and do nothing. However, the appropriate thing to do is accept the challenge. This means that companies should instead use the results to improve their performance.

Most business owners, however, see the importance of using metrics for finance for their company’s growth. Thus, they do not just ignore its results. Oftentimes, they use these to implement changes, either in their operations or the organization itself.

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Accounting is the system a company uses to measure its financial performance. Some even call it a separate language you can use to communicate and understand all financial operations of any given business. Transactions are recorded and classified into categories such as sales, purchases, assets and liabilities. This helps a company determine past performance, present condition and future calculations. There are three kinds of financial statements that give a company an idea of its position:

Balance Sheet

A balance sheet is a snapshot of the resources of a company, or its liabilities and equities.

Income Statement

An income statement is actually the breakdown of a company’s operating activities. It lists the firm’s revenue and expenses and the difference between them to show the income or loss over a period. It covers only the proceeds from goods and services.

Cash Flow Statement

A cash flow statement shows information about the company’s cash inflows and outflows over a period of time. Unlike the income statement, this report shows cash transactions only.

To help you with the different topics and terms here is a list of terms and their meanings:

Ledger: A group of accounts.
General Equation for Accounting: Assets equals Liabilities plus Owner’s Equity.
Assets: These are items owned by the business that have some value.
Liabilities: The debts of the business i.e. what it owes.
Owner’s Equity: Net value of the business.
Expenses: Running costs of the business.
Credit: Amount logged on the right side of a T-account.
Debit: Amount logged on the left side of a T-account.
T-Account: A tool used to show the relationships between accounts and also to show debits and credits.

If you are looking for accounting software, there are many programs to choose from. QuickBooks is one of the most popular programs on the market today. It is easy to set up and understand by the average individual. It can be configured to be as complex or easy as you need it. If you are using a Mac, you may want to try Goldenseal Software. There is also Peachtree; however, it is better suited for mid to larger-sized companies. You can also save money by downloading programs such as Quicken.

There are good online reviews of Intuit’s Quicken 2007 Deluxe and Quicken 2207 Premier. If you like Microsoft, you can try Microsoft Small Business Accounting 2007. For Windows operating systems, there is Money 2007 Deluxe, which falls just short of Quicken. This is a good choice if your bank only supports downloads in QFX format. It appears that Quicken is the leader in small business accounting software. If you use an older software program, you may want to see what’s out there lately and try an upgrade, especially if your program is 3 years old or older. Developers stop supporting software after 3 years and you don’t want to be left with a relic.

I hope this article has helped you understand the language of basic accounting. It is not as hard as it first may seem. With a little knowledge and organisation, you can take control of your accounting needs and be on the road to prosperity for you and your business.

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If you have a small business you know that you have to keep all of your financial records as organized as possible to ensure that you can make payroll accurately as well as file an accurate and timely tax return. There are many different programs for you to choose from, which can make the process of getting organized a bit overwhelming. Most programs today are very easy to use, and once you get the hang of it you can make payroll as well as tax payments very easy to deal with.

If you need help with payroll taxes you might want to look at a program such as QuickBooks. This program is manufactured by Intuit and is one of the leading programs for small businesses that need accounting software. There are several different versions available such as QuickBooks Basic, the QuickBooks Pro, as well as QuickBooks Premier. This online tax program has time tracking software that is nice, and the program is available for both Windows and Macintosh based computers. Many find that this has all of the features that they need because it allows them to do tracking, banking, invoicing, statements, and more all in one program.

Another great small business software is Small Business Money by Microsoft. This software has been created with business in mind and allows for users to create invoices, track spending, manage cash flow, handle payroll and so much more. There are different versions of this software available so that small business owners can find the version that best suits them and their specific needs. Many report that they like Money because it is very easy to use, without all kinds of extra bells and whistles that simply get in the way.

If you need help with payroll taxes and accounting you may also want to check out Peachtree. This is a great accounting software that will allow you to track spending, handle payroll, and do basic account management very easily. The software is meant to be used by small and medium sized companies and works much like Quicken and QuickBooks, though some prefer this program and its small differences that it has.

As you can see, there are many different programs on the market today that can help small and medium sized companies handle their payroll taxes and other day to day business maintenance. Many find that trial and error is the best way to find the program that works for them. Making a list of your basic needs will help you find the program that is best for you.

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For many small businesses, record keeping can be a nightmare. Worse still, can be when financial statements are required and limited information is available. Small businesses are compelled by tax and banking laws to furnish financial statements on request. So there is no getting away from financial statement preparation.

Financial statements are hundred percent reliant on accurate records. So a bookkeeping and accounting system is imperative. Full advantage is not taken, of bookkeepers and accountants offering their services, it has been proven that up to 25% to 30% of small businesses still don’t engage the available accounting services on the market.

Invariably records would be incomplete in such a business. Creative methods, such as those used in forensic accounting or internal auditing will have to be enforced to reconstruct the records of a business. It is an arduous task but can turn out to be very fulfilling, when a clear picture emerges of the true state of the business.

Steps

1. Locate all the information of the businesses. Documentary proof of sales, purchases, bank statements, contracts, notes and correspondence.

2. Determine if a system of recording transactions is in place.

3. Verify if a computerized or manual system is being used for the recording of data.

Now the fun begins.

Opening and closing debtors, creditors and bank balances will be extracted. Should not be too difficult, since every small business owner knows exactly how much money he/she is owed (debtors), and how many outstanding bills he/she has (creditors), and off course how much money is in the bank.

By adding the debtors closing balance, and the verified debtors deposits and payments, and deducting the opening debtors balance (payments+ closing debtors-opening debtors) the periods credit sales are determined.

Similarly the creditors balances are used to determine credit purchases.

The bank statement is then evaluated to determine cash sales and cash purchases. Cash invoices and bills are also checked and added to sales and purchases.

All expenses are then verified by tabulating bills. Salaries are checked. If time is lacking, one-month verification on salaries, rent and other recurring items are sufficient. Just double check if no increment or escalation occurred during the period. The one-month verification multiplied by the amount of months would equate to the full expenses for the year. The income statement can now be concluded.

The balance sheet items can be verified by separating cash asset purchases from normal expenses. All assets purchased on lease can be split between the liability and asset portion. Debtor’s creditors, and cash/bank balances (from balances above) are added, and we will have an asset and liability statement. Asset less liabilities will produce an equity figure, and voila, the balance sheet can now be finalized.

Check again how equity (capital funds-less profits), tie up to income statement profits. Source third party opinions to verify the integrity of figures, i.e. creditors for balances due, deeds and motor vehicle registration offices for value of assets etc.

It is no easy task, and figures will not be 100% accurate, but a fair picture will emerge of the financial position of the business. This article is not conclusive, but can give the business owner some insight to the kind of procedures his accountant will follow. After preparing the first set of financial statements from incomplete accounting records, the business owner should be strongly advised, to invest in the services of a bookkeeper or an accountant

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It seems that more and more businessmen are engrossed into developing KPI or key performance indicators. But most, unfortunately, fail to acknowledge or determine the right ones. Often times, executives perceive KPI as the factors for success. But be reminded that indicators are just merely that – indicators and not factors. Moreover, KPI should be non-financially oriented. But what about those execs who are looking for money-based indicators, does financial KPI really exist?

The appropriate question perhaps is that “does this type of KPI always have something to do with money?” See, KPI is a tool. Think of it as a measuring stick. For analogical purposes, let us say the goal of a company is to fill an empty bathroom tub with water within three hours using a pail. By this time, the KPI does not yet exist. In order to determine the practicality of the goal, the company must be able to know how much water is to be filled into the tub. Given that the tub is equal to 20 pails of water and that there is only one pail to use, the KPI can now be drawn. So which is the KPI?

The KPI is the number of pails of water the person can pour into the tub. If, for instance, he can pour 8 pails of water per hour then he can definitely achieve his goal of filling the tub within three hours. If the number of pails is lesser, for example three, then he might consider revamping plans and increase productivity. As you may notice, the KPI here is not the success factor but the success yardstick. It tells you how far or near you are to achieving success.

The problem again comes when executives fail to see the real KPI. Most of the time, they look at the graphs of daily sales, monthly sales and quarterly sales as the key performance indicator. Remember, that these numbers are the results of the company’s activities – marketing, sales, product launch, advertising and etc. If the company goal is to reach this huge amount of money by end of year, then targeting 6 figures on the daily sales report is purely unhelpful.

Here is one way of figuring out the real financial performance indicator. Again, if the company’s aim is to increase sales within a given period, managers then should look into the activities that affect sales and not the actual sales figures. In the aspect of marketing for example, create a subordinate goal that reinforces the primary goal which is to increase sales. The marketing officers may intensify their activities, increase advertisement spending or formulate promotional activities that can help increase positive bottom lines.

The KPI in this case may be the number of turnovers or conversion of potential clients into customers or perhaps the number of returning customers who were enticed in joining a raffle promo.

Remember, then, that KPI is a metric tool not a factor. Financial KPI, therefore, is not all about having attractive bottom lines everyday. When it turns out like that, you are merely making a financial report, not indicators.

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www.theqbw.com for great free quickbooks Info http for great free ms excel info. June is of course the middle of the year and a perfect time to take srock of your product inventory if you have it, but also of your financial inventory. This means looking at your expected incomce and expenses and comparing that to how you actually performed. If you need a quickbooks expert you are in the right place. You are also in the right place for an excel expert. quickbooks and Microsoft Excel or the main tools for tracking and managing your financial information.

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