Money accounting in business is a system for analyzing the company’s financial performance, planning and reporting. This information is used to inform the management’s decisions based on numbers.
Why keep financial records
Accounting for money is necessary for an entrepreneur to answer questions at any time — what the state of the company is and how to allocate resources to increase sales and reduce costs.
Specific tasks which financial accounting solves:
- Calculating the profitability of business lines/projects
Let’s say you provide different types of services. A certain budget is spent on each business line, and each brings its own income. Which business segments are profitable and which ones need to be closed? Which employees or branches contribute to the company’s losses? How many people do you need to lay off to avoid going bankrupt? Financial accounting is designed to solve such problems.
- Planning of financial activities
You record your expected expenditure and income and understand how much money you can withdraw and invest in other projects and when. It’s always interesting to know when you can afford a brand-new Jaguar with no business consequences. Planning also allows you to predict and prevent a cash gap — a temporary shortage of money in your accounts. Have you ever had cases when pay day is fast approaching, but there is nothing to pay employees with?
Bertha Joseph, co-owner of a studio, narrated how cash gaps plagued the company:
“For as long as we did not keep financial records, we had problems with cash gaps: expenses were paid on a whim, without a plan. If there was money in the account — we paid it, if not, we agreed on a deferment. Our financial policies were just about plugging loopholes. It was very stressful.”
- Controlling accounts receivable and creditors
At any time, you will receive answers to the following questions: “What is the total amount of your clients’ debt and when will they pay it off?”, “How much money of other people’s money do you have in your accounts that you can’t spend?”
Teresa Sheppard, an expert in financial management and tax security, shares her experience:
“In Manchester, my client has 17 pharmacy outlets and a constant shortage of funds. He came to me with this problem, because he couldn’t figure out the cause. It turned out that out of 17 outlets, only 2 were profitable. He did not keep financial records, so he did not understand just how huge the losses were”
What reports are important for financial accounting
In mathematics, there are concepts of necessary and sufficient condition. You can create any reports that are convenient for you, but the 3 most important reports must be included in financial accounting:
- cash flow statement;
- Profit and Loss statement (P&L);
- balance sheet.
The Cash Flow statement shows what happens to money over a certain period: how much money there was at the beginning of the period, how much came in, where it came from and where it went, and how much money will be left at the end of this period.
Almost all entrepreneurs have a Cash Flow, and some have a P&L statement. It is used to understand how effectively the company or its business lines are working. It shows what the company’s revenue was, how many products, goods and services were sold in total, what expenses were incurred, and what the company’s profit was for the required period.
A balance sheet is an instant photo that shows the position of the business, what the company has, and where it comes from. The balance sheet is generated for a specific date, for example, on January 1st . Entrepreneurs almost never keep this report and needlessly underestimate it.
Types of financial accounting
There is no clear classification of financial accounting by type, since each company has its own characteristics and can set accounting methods based on their business goals.
Conventionally, it is customary to distinguish four types of financial accounting by department.
- Production accounting
It is aimed at calculating the cost of production, taking into account production costs. It answers the question: how much and what resources were spent on a particular type of product.
- Margin accounting
It is aimed at optimizing the volume of product sales, costs and final prices for maximum profit.
- Budget accounting
It is aimed at improving the performance and efficiency of departments and individual employees. It allows you to increase the manageability and predictability of financial results for managers in different departments and strengthen their responsibility for the work performed.
- Strategic accounting
It is aimed at providing the company with the finances and resources necessary for development, as well as at improving its competitiveness in the long term.
Implementing financial accounting in an organization
Usually, financial accounting starts with Excel or Google Sheets and a Cash Flow report. Sheets can only be used at the very initial stage, when the business is small and the owner has time to enter all the data themselves. But even for a small business, it’s not enough to just see how money moves. This is not an indicator of success.
As the business grows, owners introduce specialized programs or cloud services that can collect information from multiple sources and automatically build all important reports. It is also common for a business owner to acquire a financier or financial service provider.
Basic programs for financial accounting:
- Excel or Google Sheets;
- Specialized cloud services (Finiqa and others);
- ERP systems (for large enterprises).
Each of the programs will have both features that are suitable for any company in question, and those that aren’t. And this is logical, because developers cannot take into account all the specificities of every company and make universal software for businesses of different industries and sizes.
Automation of financial accounting based on Finiqa
When Excel takes up more and more of your time and effort split across several dozens of different tables, you need to automate data entry and reporting. Finiqa online service take care of this:
- Integration with banks and CRM saves you from spending a lot of time on manual data entry;
- Three reports — Cash Flow, P&L, and Balance sheet are automatically generated based on revenue and expenditure according to the double-entry principle.
- The following features are available – budgeting, tracking accounts receivable and payable, analyzing the profitability of departments/lines, and forecasting cash gaps.
Intuitive reports and graphs allow business owners to make decisions based on numbers, rather than on a hunch.
Finiqa is a financial accounting system used by thousands of companies. These are businesses of various industries and sizes — from online schools to construction companies.
Balance sheet and its benefits for the company
Keeping a balance sheet is a useful healthy lifestyle, but not everyone likes it. Why? Maybe it seems too complicated or unnecessary, or there’s something related to accounting in the name, and as you know, it is better not to go there.
In reality, a balance sheet consisting of hundreds of lines can be left to specialists, while managers need a simpler and more transparent report. You can learn a lot about your business from it:
- it shows what the company owns and the amount of its debts;
- where the profit is “hidden”;
- how much money can be withdrawn from the business.
Jennifer Finlay, Owner and Director of an audit and accounting company:
“The balance sheet is the pinnacle of financial reporting, which reflects the company’s performance for the year, taking into account its assets and liabilities. It shows the growth or decline of the company’s capital, the structure of assets (what the company owns) and liabilities (who the company owes). If the business owner is able to “read” such a report, they can perform important analytics for strategic planning. Analytical coefficients are also calculated based on the balance sheet. They characterize investment attractiveness, solvency of the business, the ability to fulfill financial obligations to banks and other creditors”
Assets
Assets are what an organization owns and can generate a profit. Stock of goods, money on the account and in the cash register, property, website, licenses. Assets are divided into two groups: current and non-current.
Current assets change their shape during the financial cycle. These include money, inventory, and accounts receivable.
Accounts receivable — money that customers owe the company. If the company works with post-payment, customers receive the product first, and pay after some time. This money can no longer be considered finished products — it has left the warehouse, but it can’t be spent yet. The buyer can pay later.
The second group of assets is non — current. These are assets which maintain their form throughout the financial cycle, their distinctive features:
- they are used for a long time, have a service life of at least one year;
- they are expensive, but the company itself can determine which acquisitions are considered expensive and fix this in its policy.
Non-current assets are divided into two groups:
- fixed assets — tangible assets that can be “touched”: buildings, premises, equipment, transport;
- intangible assets that do not have a physical form, but they can be evaluated: licenses, websites, patents.
Assets don’t automatically bring profit. Finished products in the warehouse do not guarantee revenue, they still need to be sold. Every businessman hopes that the investment will pay off, but no one can guarantee it.
If a company is caught in a cash gap, you can always look at the balance sheet and see where the money is “hidden”. Large accounts receivable? Work with clients and reduce delays in payments. Too much stock? Conduct an inventory of your warehouses, optimize production, and give discounts on finished products. If all the funds are invested in non-current assets, you need to think about what you can part with.
Liabilities
Liabilities are the funds used to purchase assets and the sources that finance them. They consist of two large groups: equity and debt capital.
Equity — the company’s money: the founders ‘ investments and retained profits.
The Founders’ investments are what a business starts with.
Retained profits are the final result of the company’s operations for the reporting period.
The owner must decide where to spend this money: on paying dividends, paying off losses of previous years, creating a reserve capital or developing the company. If there are several owners, a meeting is held, usually once a year or quarter, and the decision is made collectively.
The second part of liabilities is borrowed or pledged capital. They can be long-term, for a period of one year or more, or short-term. Short-term liabilities also include accounts payable — the company’s debt to suppliers. The ratio of accounts receivable and payables helps to understand whether the company manages its own and borrowed funds correctly.
K = Total sum from accounts receivable / Total sum from accounts payable
The ideal coefficient value is one. If the ratio is higher, this indicates an outflow of money from circulation, as a result of which you may need borrowed funds. If it is less, the company’s financial position is threatened.
Andrew Mylott, A partner at a consulting company in the industrial and mining sector:
“The balance sheet shows:
— structure and dynamics of movement of assets and liabilities: the amount of funds “frozen” in accounts receivable, how much free money the company has, whether the company’s equity is growing, how much debt it has;
— comparability of the structure of assets and liabilities: whether the company has enough working capital to ensure the repayment of “short” accounts payable, whether the balance sheet structure allows attracting additional financing.
In addition, there is a set of important financial indicators that are calculated using data from the balance sheet, for example, net assets, liquidity, turnover”
To summarize
Assets are things that can make money. They can be current (cash, accounts receivable, inventory) and non-current (premises, transport, equipment).
Liabilities are what assets are financed from. These are equity and liabilities.
The most important balance sheet rule is that assets are equal to liabilities. This allows you to check that it is compiled correctly. Accountants sometimes joke that if the balance sheet doesn’t match up, there’s an error, and if it does, there are two. To avoid these errors, you can create a balance sheet in Finiqa. Assets and liabilities always match there, which saves the owner time and makes the business a healthier one.
